House of Representatives

Tax Laws Amendment (2009 Measures No. 2) Bill 2009

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 1 Application of the income tax law to financial claims scheme entitlements

Outline of chapter

1.1 Schedule 1 to this Bill amends various Acts to ensure there are no adverse taxation implications arising from a payment made by the Australian Prudential Regulation Authority (APRA), or by a liquidator, under the financial claims scheme (the scheme).

1.2 It achieves this in general by amending the law to treat payments made under the scheme in the same way as if they had been made by the failed institution to which the scheme applies.

1.3 Specific amendments cover capital gains tax (CGT), farm management deposits (FMDs), retirement savings accounts (RSAs), first home saver accounts (FHSAs), reporting obligations and withholding obligations.

Context of amendments

1.4 The Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 , amended the Banking Act 1959 (Banking Act) and the Insurance Act 1973 (Insurance Act) to establish the financial claims scheme.

1.5 That scheme allows APRA to pay depositors in failed financial institutions some part of their deposit, subject to a global limit determined by the Treasurer when he or she activates the scheme in a particular case. To the extent that APRA makes a payment, that part of depositors' rights to recover their deposit is assigned to APRA. The scheme provides a similar arrangement for APRA to pay claimants under a general insurance policy the insurance amounts to which they are entitled when their insurer has failed.

1.6 The original legislation did not include the consequential amendments of the tax law that ensure appropriate tax outcomes in relation to the scheme.

Income tax and capital gains tax

1.7 General deposit holders in an authorised deposit-taking institution (ADI) are assessable on any interest or gains paid, payable or credited on financial deposits. If interest or a gain has been paid or credited to the deposit holder then the amount is already derived and assessable to the deposit holder. Payments under the scheme in respect of these amounts would not alter the tax outcome compared to payment by the ADI.

1.8 Where interest has accrued but not been paid or credited by the failed ADI to the depositor, the existing law may not treat the payments under the scheme in respect of these amounts in the same way as interest payment by the ADI.

1.9 There are two rights arising from the scheme in relation to ADI deposits to which the CGT rules can apply:

·
the right of the depositor to receive a payment from the scheme administrator; and
·
a deposit with an ADI is a CGT asset. The right to a portion of the funds in the ADI deposit (part of the original deposit debt) is transferred to the scheme administrator following payment by the scheme administrator to the depositor.

1.10 Where a payment is made under the scheme, the part of the depositor's right to recover their deposit is transferred to the scheme administrator. A receipt for a transfer in respect of an amount of uncredited interest may not have the character of interest or income in the hands of the depositor.

1.11 Payments under the scheme to a general insurance policy holder in settlement of a general insurance claim may be assessable as ordinary or statutory income or included in the calculation of ordinary or statutory income. For example, where the insurance payment is in respect of the loss or destruction of a depreciating asset, the payment would be taken into account in working out the capital allowance balancing adjustment under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997).

1.12 The existing law would provide equivalent taxation treatment where the rights to recover amounts from the general insurer that are transferred to the scheme administrator are in respect of a policy for a building, CGT asset or depreciating asset. However, where the rights transferred to the APRA scheme administrator are in respect of a policy for personal injury, loss of income, interest or trading stock, the existing law may not treat the payments under the scheme by APRA in the same way as the payments they replace.

Farm management deposits

1.13 Schedule 2G to the Income Tax Assessment Act 1936 (ITAA 1936) contains the provisions for FMDs. An FMD is a tax-linked, financial risk management tool for eligible primary producers. It is designed to allow eligible primary producers to set aside income in profitable years for subsequent withdrawal in low-income years. This reduces the risk to eligible primary producers of income variability owing to factors such as drought.

1.14 The following requirements exist for the deposits:

·
The taxpayer's taxable non-primary production income for the year of income must be less than $65,000 in the year of deposit (paragraph 393-10(1)(b) of Schedule 2G to the ITAA 1936).
·
The FMD balance cannot exceed $400,000 at any time (subsection 393-35(6) of Schedule 2G to the ITAA 1936).
·
The minimum deposit must be $1,000 or more (subsection 393-35(5) of Schedule 2G to the ITAA 1936).
·
The owner can only hold FMDs at one financial institution (subsection 393-35(7) of Schedule 2G to the ITAA 1936).
·
The FMD must not be withdrawn or reduced to less than $1,000 within the first 12 months unless the withdrawal is made in exceptional circumstances. However, transferring an FMD to another institution is not treated as a withdrawal (section 393-37 of Schedule 2G to the ITAA 1936).
·
Transfer of an FMD to another institution does not constitute a 'repayment' of the deposit for the purposes of working out an amount assessable on repayment of an FMD (paragraph 393-50(5)(a) of Schedule 2G to the ITAA 1936).
·
Transfer of an FMD to another institution does not constitute 'making' a deposit for the purposes of working out an amount deductible for making of an FMD (paragraph 393-50(5)(b) of Schedule 2G to the ITAA 1936).

1.15 Under the scheme, taxpayers who hold an FMD with an ADI which becomes a declared ADI are eligible to be paid certain amounts to maintain their liquidity, before they receive payment in a winding up of the ADI.

1.16 Under Division 2AA of Part II of the Banking Act, APRA may automatically transfer all or part of an FMD from the old ADI to a new ADI.

1.17 In the event that APRA transfers only a part of the old FMD, a liquidator of the old ADI may pay a distribution from the liquidation of the old ADI, by making a new deposit into a new ADI.

Retirement savings accounts

1.18 Within the superannuation system, complying superannuation funds are subject to restrictions which do not apply to other forms of saving. Accounts are maintained within these entities for the purpose of providing retirement or death benefits for the member or account-holder, or their dependants.

1.19 An RSA is capital guaranteed and can be provided to the general public by an ADI. For income tax and superannuation purposes, RSAs are treated in a similar manner to superannuation products offered by complying superannuation funds.

1.20 As benefits in an RSA are generally preserved until retirement, it is not appropriate for payments by APRA or a liquidator under the scheme to be made directly to individuals. Consequently, payments are to be made into an RSA established with a new ADI. However, changes are required to the ITAA 1997 to ensure the payments receive the appropriate treatment for tax purposes.

First home saver accounts

1.21 Generally, because there are restrictions on when an individual can get their money out of an FHSA, it is not appropriate for an individual who has an FHSA in a failed ADI to receive their entitlement directly in their hands. As such, APRA or the liquidator will open a new FHSA and transfer the guaranteed funds to it on the individual's behalf.

1.22 As part of the scheme, where an account-holder's entitlement to be paid an amount includes an entitlement in relation to an FHSA, the entitlement relating to the FHSA is to be met through the application of the relevant amount to an FHSA in an ADI that is not a declared ADI.

1.23 APRA or the liquidator can open an FHSA in such circumstances regardless of any other laws. In the case of an FHSA, this is necessary because there are eligibility requirements in the First Home Saver Accounts Act 2008 (FHSA Act) which would otherwise prevent an FHSA from being opened.

1.24 However, some other changes need to be made to ensure the scheme works appropriately with FHSAs.

Reporting obligations

1.25 Under the current law, an investment body (including ADIs) is required to give the Commissioner of Taxation (Commissioner) a written report relating to investments with the body (an annual investment income report).

1.26 There are no reporting obligations that require APRA to report amounts that are paid under the scheme (Division 2AA of Part II of the Banking Act and Part VC of the Insurance Act).

1.27 These amendments require APRA to report amounts paid under the scheme, aligning with the current reporting obligations that apply to ADIs. This reporting requirement will assist those receiving payments under the scheme in determining their tax related liabilities and entitlements and also assist the Australian Taxation Office (ATO) in conducting data-matching and compliance activities.

Withholding obligations

1.28 Under the pay as you go (PAYG) withholding provisions (Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)), an ADI or a general insurer is required to withhold, report and remit to the Commissioner amounts from certain payments, including:

·
payments for work and services;
·
payments in respect of investment or payment for a supply where a tax file number (TFN) or Australian Business Number (ABN) is not quoted; and
·
dividend, interest and royalty payments to an overseas person or a foreign resident.

1.29 The purpose of the PAYG withholding provisions in Part 2-5 of Schedule 1 to the TAA 1953 is to ensure the efficient collection of income tax during the year in anticipation of the payee's income tax liability on assessment.

1.30 It is not clear whether the existing PAYG withholding provisions will apply to payments made under the scheme where the same payment, if made by the ADI or general insurer, would attract the application of the PAYG withholding provisions. These amendments ensure they do.

Summary of new law

1.31 Various Acts are amended to provide equivalent taxation treatment for any payments by the Administrator of the scheme to (or for the benefit of) an ADI deposit holder or a claimant under a general insurance policy as if the payments had been made by the ADI or general insurer.

Capital gains tax

1.32 Capital gains and capital losses arising from the rights under the scheme are disregarded. This ensures that the scheme does not trigger any CGT consequences that would not have arisen if the scheme was not activated.

Farm management deposits

1.33 This measure ensures that there are no adverse taxation implications for holders of FMDs arising from the scheme where FMDs are held with failed ADIs. This measure covers the actions of both APRA and the liquidators of failed ADIs.

1.34 The establishment of a new FMD by APRA will not result in a withdrawal of the original FMD and the making of a new FMD for tax purposes. The establishment of a new FMD will instead be treated as a transfer of the old FMD from a tax perspective.

1.35 Similarly, the establishment of a new FMD by a liquidator will be treated as a transfer of the old FMD for tax purposes.

Retirement savings accounts

1.36 A payment by APRA of a scheme entitlement, or a distribution by a liquidator of a failed ADI declared under the scheme, in respect of an individual who held an RSA with a failed ADI, where made to another RSA, is to be treated for tax purposes as if the payment is a roll-over superannuation benefit from the failed ADI.

First home saver accounts

1.37 The payment of a scheme entitlement into a new FHSA is essentially a transfer of an FHSA from one provider to another. For the avoidance of doubt, this is being expressly stated. This means that the payment will fit within paragraph 11(3)(a) of the FHSA Act, which stops a transfer from one FHSA provider to another FHSA provider from being eligible for the government contribution.

1.38 There is the possibility that there could be a delay between the declaration of an ADI and a new FHSA being opened on behalf of an individual. Similarly, a person's entitlements could be paid in instalments which could be paid some time apart.

1.39 In these situations, there is the possibility that when an FHSA is opened on their behalf the individual will no longer be eligible to have an FHSA because they have acquired a qualifying interest in a dwelling.

1.40 An amendment is made to ensure that where this is the case, an individual will have to notify the new FHSA provider of their ineligibility. The time for doing so will be the same (in most cases 30 days) but will start to run from when APRA advises the FHSA holder that their new FHSA has been opened. This will ensure that the tax and penalty consequences of ineligibility will be as similar as possible to what they would have been if the old FHSA provider had not become a declared ADI.

1.41 Given that the extent of the Government's deposit guarantee may change in the future, future payments may also be made by the liquidator of the declared ADI.

1.42 Accordingly, an amendment is made to allow the liquidator to pay those amounts into a new FHSA, even if the eligibility requirements are not met, in the same way as APRA will be allowed to.

1.43 The FHSA Act limits the ability of account providers to make payments from an FHSA and enforces those limits with criminal penalties. APRA has a right to reimbursement from the declared ADI for amounts it pays into a new FHSA provider under the scheme.

1.44 Accordingly, an amendment is made to ensure that the liquidator of an account provider is not prevented from paying APRA any monies it is entitled to as a result of becoming a substituted creditor under the financial claims scheme.

Reporting obligations

1.45 In relation to payments made under the scheme, APRA is required to give:

·
an annual statement to account-holders or recipients about the amounts paid to, or applied for the benefit of, the account-holder or recipient in the previous financial year; and
·
an annual report to the Commissioner about all amounts paid to, or applied for the benefit of, account-holders or recipients in the previous financial year.

1.46 APRA may require certain entities to give information relevant to preparing or giving those statements or reports or to comply with an obligation under a law relating to taxation.

Withholding obligations

1.47 The amendments to Part 2-5 of Schedule 1 to the TAA 1953 apply to payments made under the scheme.

1.48 The amendments ensure that the PAYG withholding provisions apply to payments made under the scheme:

·
to meet (wholly or partly) an entitlement of an account-holder of an insolvent ADI; or
·
to meet (wholly or partly) an entitlement in connection with a general insurance policy issued by an insolvent general insurance company,

in a corresponding way to the way in which the PAYG withholding provisions would apply to the payments if they were made by the ADI or general insurance company.

1.49 The amendments clarify the application of the PAYG withholding provisions to the meeting of an entitlement under the scheme. This will help to ensure that taxpayers do not have unanticipated tax liabilities on assessment which they may have difficulty paying.

Comparison of key features of new law and current law

New law Current law
A payment under the scheme in respect of an ADI deposit or general insurance policy is treated as if the payment had been made by the ADI or general insurer. The existing law may not treat payments under the scheme by APRA, where the rights assigned to the APRA scheme administrator are in respect of a policy for personal injury, loss of income, interest or trading stock, in the same way as the payments they replace.
A capital gain or capital loss arising from an entitlement under the scheme in relation to an ADI deposit or a general insurance policy is disregarded. A right in relation to an ADI deposit or under a general insurance policy may be a CGT asset and may give rise to a capital gain or capital loss on disposal.
The right to an entitlement under the scheme is a CGT asset. The satisfaction of that right due to a payment from the scheme will trigger a CGT event.
The transfer of rights to APRA under the scheme will trigger a CGT event.
This measure will ensure there are no adverse taxation implications for holders of FMDs arising from the scheme where FMDs are held with failed ADIs. This measure covers the actions of both APRA and the liquidators of failed ADIs. No equivalent.
This measure will ensure the appropriate treatment for tax purposes where payments in respect of an RSA held with a failed ADI are made to a new ADI. The measure also requires the paying entity under the scheme to be subject to certain reporting obligations. This measure covers the actions of both APRA and the liquidator of failed ADIs. No equivalent.
If an ADI fails, APRA or the liquidator will be empowered to open an FHSA in another ADI and transfer the funds guaranteed by the scheme into the new FHSA for the affected person. No equivalent.
APRA is required to report all amounts paid to, or applied to the benefit of, account-holders and recipients under the scheme in a financial year in an annual statement to account-holders and recipients and in an annual report to the Commissioner. No equivalent.
The PAYG withholding provisions apply to payments under the scheme in a corresponding way to the way in which the PAYG withholding provisions would have applied to the payment had it been made by an ADI or general insurance company. The current law is unclear if the PAYG withholding provisions apply to payments made by APRA under the scheme.

Detailed explanation of new law

Capital gains tax

General deposits accounts in ADIs

1.50 New rules are inserted to specify the taxation treatment of the operation of the scheme for account-holders with insolvent ADIs.

1.51 There are two rights arising from the scheme in relation to ADI deposits to which the CGT rules can apply:

·
the right of the depositor to receive a payment from the scheme administrator; and
·
the right to the portion of the funds in the ADI deposit that is transferred to the scheme administrator following payment by the scheme administrator to the depositor.

1.52 A new provision is inserted to provide that the income tax law is applied to a taxpayer if an amount is paid to the taxpayer under the scheme in the same way as if the amount was paid by the ADI under the terms and conditions of the agreement for keeping the account. [ Schedule 1, item 20, section 253-5 ]

1.53 Under the current law a capital gain or capital loss will be realised where there is a disposal of either of the rights arising from the scheme. The intention is that the scheme will not create any income tax consequences that would not arise if the scheme was not activated. A new section is inserted to disregard a capital gain or a capital loss a taxpayer makes because of the operation of the scheme. [ Schedule 1, item 20, section 253-10 ]

1.54 The existing law will apply to determine the CGT treatment of capital gains and capital losses in respect of the ADI deposit subsequent to the administration of the scheme and once the liquidation of the ADI is completed.

1.55 Where the scheme covers only part of an ADI deposit, a payment made under the scheme will result in a partial disposal of the ADI deposit. The CGT provisions in Division 112 of the ITAA 1997 modify the cost base of the remainder of a CGT asset where there is a partial disposal of the asset. Subsection 112-30(3) modifies the cost base with reference to the capital proceeds and the market value of the remainder of the asset. This could result in a capital gain or capital loss arising from the operation of the scheme, which is not intended.

1.56 A new section is inserted to specify that the cost base of the part of a deposit which is covered by the scheme is equal to the payment under the scheme. The cost base of the remainder of a deposit following a payment from the scheme is equal to the cost base of the deposit reduced by the amount that has been paid under the scheme. [ Schedule 1, item 20, section 253-15 ]

Example 1.1 A deposit holder has a deposit of $100,000 with an ADI. The scheme is activated for the ADI. Under the existing law if a payment of $20,000 is made by the scheme administrator, the cost base of the part of the deposit covered by the scheme is worked out using the formula in subsection 112-30(3). If the market value of the remaining $80,000, based on the market's expectation of the outcome of the liquidation of the ADI, is only $10,000 then the cost base of the amount covered by the scheme would be $66,666. That cost base is calculated as $100,000 × $20,000 / $20,000 + $10,000). A capital loss of $46,666 would arise from the operation of the scheme.Under the existing law the cost base of the remainder of the deposit would be $33,334. This cost base would be used to determine whether a capital gain or capital loss arises for the taxpayer at the conclusion of the administration or liquidation of the ADI.Under the new law, the cost base of the part of the deposit covered by the scheme will be equal to the payment, $20,000, and the cost base of the remainder of the deposit will be $80,000.

General insurance policies

1.57 New rules are inserted to specify the income tax treatment of scheme payments in respect of general insurance policies. Payments by the Administrator under the scheme in relation to a general insurance claim payable by a general insurer to a policy holder are to be treated for income tax purposes as if they were:

·
paid directly by the general insurer to the claimant under the general insurance policy; and
·
made under the terms and conditions of the general insurance policy to which the claim relates.

[ Schedule 1, item 26, section 322-25 ]

1.58 Section 62ZZM of the Insurance Act provides that when an amount of a person's entitlement under the scheme in relation to a general insurance policy is met, the person is taken to have been paid the amount by the general insurer.

1.59 In order to ensure that the taxation laws apply to payments under the scheme in the same way as if the payments were made by the general insurer, the payments under the scheme must be described in such a way that they will have the same character as payments by the general insurer. Section 62ZZM is amended to treat the payment as being under the terms and conditions of the policy. [ Schedule 1, item 32, section 62ZZM ]

1.60 An entitlement to receive a payment under the scheme is a right which is a CGT asset. The payment of an entitlement under the scheme triggers a CGT event as it is a disposal or other ending of the right to the entitlement. A new rule is inserted to disregard a capital gain or capital loss a taxpayer makes from the ending of an entitlement under the scheme in relation to an ADI deposit or a general insurance policy. This ensures that the operation of the scheme does not give rise to any capital gain or capital loss that would not arise if the scheme has not been activated. [ Schedule 1, item 26, section 322-30 ]

1.61 Notes are included in a number of provisions of the existing law to provide cross referencing to the new provisions inserted. Also, a reference to a new cost base modification provision is added to the finding table in section 112-97 of the ITAA 1997 for the cost base modification rules outside the CGT provisions. [ Schedule 1, items 17 to 19, subsections 104-10(5 ) and 104-25(5 ) and section 112-97 ]

Farm management deposits

Eligible taxpayers

1.62 These amendments apply when an entitlement under Division 2AA of Part II of the Banking Act in connection with an account containing an FMD is met, wholly or partly, by the making of a new deposit at a new ADI. They also apply in the case of liquidation, the liquidator making a new deposit for the taxpayer. [ Schedule 1, item 15, subsection 393-80(1 ) in Schedule 2G to the ITAA 1936 ]

1.63 In cases where amounts paid into a new account at an ADI can be attributed to multiple FMDs an allocation rule will be needed. Where the entitlement is met via instalments:

·
If the entitlement only relates to one FMD, then 100 per cent of the instalment should be attributed to that FMD.
·
If the entitlement relates to multiple FMDs, then each instalment should be apportioned based on each FMDs respective proportions of the total amount held in the original account(s). That is if an FMD is 10 per cent of the account(s)' total, then 10 per cent of the instalment should be attributed to that FMD. If a different FMD is 30 per cent of the account(s)' total, then 30 per cent of the instalment should be attributed to that FMD.
·
The same rules apply when that entitlement is met by a single payment but relates to multiple FMDs.

[ Schedule 1, item 15, subsection 393-80(1 ) in Schedule 2G to the ITAA 1936 ]

Example 1.2 A taxpayer has an account containing two FMDs worth a total of $100,000. The first FMD was deposited three years ago worth $10,000. The second FMD was deposited six months ago worth $90,000. As such, the first FMD is worth 10 per cent of the account and the second FMD is worth 90 per cent.APRA meets the taxpayer's entitlement via instalments. The first instalment is $30,000 and the second is $70,000.When the $30,000 is paid into a new account, the taxpayer must apportion the $30,000 between the two FMDs. The first FMD was 10 per cent of the old account and therefore 10 per cent of the new payment should be attributed to that FMD (ie, $3,000). Similarly, the second FMD should have 90 per cent of the instalment attributed to it (ie, $27,000).When the $70,000 is paid into a new account, the taxpayer must apportion the $70,000 between the two FMDs. The first FMD was 10 per cent of the old account and therefore 10 per cent of the new payment should be attributed to that FMD (ie, $7,000). Similarly, the second FMD should have 90 per cent of the instalment attributed to it (ie, $63,000).

Tax treatment of actions taken by APRA or a liquidator

1.64 When the actions of APRA or a liquidator result in a new deposit, this is treated as satisfying the requirements for the transfer of deposits between financial institutions, set out in subsection 393-40(5) of Schedule 2G to the ITAA 1936. The effects of this are:

·
the applicable depositing day for the old FMD is maintained under paragraph 393-37(7)(c) or (d) of Schedule 2G to the ITAA 1936 for the new deposit (which affects whether a withdrawal of the new deposit prevents it from being an FMD);
·
the new deposit is not regarded as a repayment of the old FMD that may give rise to assessable income (see subsection 393-50(5) of Schedule 2G to the ITAA 1936); and
·
the new deposit is not regarded as the making of a new FMD that may give rise to a deduction (see subsection 393-50(5) of Schedule 2G to the ITAA 1936).

[ Schedule 1, item 15, subsection 393-80(2 ) in Schedule 2G to the ITAA 1936 ]

Example 1.3 A taxpayer made a $10,000 deposit into an FMD on 1 July 2001 and a $10,000 deduction is claimed in the taxpayer's tax return for the 2001-02 income year.On 28 June 2009 the ADI which holds the FMD is declared to be covered by the scheme and the taxpayer is entitled to receive a new FMD at a new ADI. This entitlement is met by establishing a new FMD of $10,000 at a new ADI on 1 July 2009.The creation of the new deposit at the new ADI will be treated as a transfer of the old deposit rather than a withdrawal and making of another deposit. As such, the FMD is not considered to have been withdrawn and no amount is included in assessable income in 2009-10. Furthermore, the new deposit will not allow a deduction for the taxpayer in the 2009-10 income year.The applicable depositing day will remain 1 July 2001 to allow the taxpayer to withdraw the FMD without being considered to have withdrawn the FMD within 12 months of deposit.

1.65 The new deposit cannot lose its status as an FMD even if it is less than $1,000 (despite subsection 393-45(1) of Schedule 2G to the ITAA 1936 which outlines that an FMD can lose its status if the deposit is less than $1,000). This ensures that taxpayers are not disadvantaged if the new deposit can only be $1,000 or less due to the functioning of the scheme. [ Schedule 1, item 15, subsection 393-80(3 ) in Schedule 2G to the ITAA 1936 ]

Example 1.4 A taxpayer made a $10,000 deposit into an FMD on 1 July 2001 and a $10,000 deduction is claimed in the taxpayer's tax return for the 2001-02 income year. On 28 June 2009 the ADI is declared to be covered by the scheme. As such, the taxpayer has an entitlement under the scheme to receive a new FMD at a new ADI. This entitlement is met via two payments: $900 on 29 June 2009 and the residual $9,100 on 1 January 2010.This amendment ensures that the new deposit created on 29 June 2009 cannot lose its status as an FMD despite the deposit being less than $1,000.

1.66 Amendments are also made to ensure that the old FMD and the new deposit do not lose their status as FMDs because they are held with more than one financial institution. Furthermore, any new FMDs made between the time the entitlement arises and the first time a new deposit is made by APRA to meet that entitlement will not lose their status as an FMD. [ Schedule 1, item 15, subsection 393-80(4 ) in Schedule 2G to the ITAA 1936 ]

Unrecouped FMD deduction for new deposit less than old FMD

1.67 When an FMD is withdrawn in a year of income, the owner is required to include as assessable income, any amount that equals the deductible amount previously allowed. The amount assessable is limited to the amount previously deductible by the use of the unrecouped FMD deduction.

1.68 The unrecouped FMD deduction will generally be that part of the deposit for which a deduction has been claimed but which has yet to be included in assessable income on repayment. If the FMD contains both deductible and non-deductible deposits, withdrawals are considered to have been made from the non-deductible part first.

1.69 If the new deposit is less than the old FMD at the time (the declaration time) the old ADI became a declared ADI under the Banking Act, the unrecouped FMD deduction in respect of the new deposit is the amount worked out using the formula:

Unrecouped FMD deduction in respect of old FMD just before declaration time x (New deposit / Old FMD just before declaration time)

Example 1.5 A taxpayer made a $10,000 deposit into an FMD on 1 July 2001 and a $10,000 deduction is claimed in the taxpayer's tax return for the 2001-02 income year. As such, the unrecouped FMD deduction for that deposit is $10,000. On 28 June 2009 the ADI is declared to be covered by the scheme and the taxpayer has an entitlement under the scheme to receive a new FMD at a new ADI. This entitlement is met via two payments: $900 on 29 June 2009 and the residual $9,100 on 1 January 2010.This amendment provides a way of attributing the unrecouped FMD deduction to each of the new deposits. Using the formula in relation to the first instalment of $900 yields an unrecouped FMD deduction of $900.$10,000 x ($900 / $10,000) = $900Similarly for the second instalment, the unrecouped FMD deduction will be $9,100.$10,000 x ($9,000 / $10,000) = $9,100

[ Schedule 1, item 15, subsection 393-80(6 ) in Schedule 2G to the ITAA 1936 ]

1.70 However, the total of the unrecouped FMD deduction attributable to the new deposits can not be greater than the original unrecouped FMD deduction. Therefore the taxpayer must work out the total unrecouped FMD deduction attributed to new deposits in relation to that old FMD.

1.71 To work out the unrecouped FMD deduction the following process must be followed. First the difference between the unrecouped FMD deduction just before declaration time and the total of the amounts worked out under all previous applications of the above formula in relation to that old FMD must be calculated.

1.72 If the unrecouped FMD deduction as calculated using the above formula for that instalment is greater than the difference calculated in paragraph 1.71, then the difference (if any) will be the unrecouped FMD deduction. [ Schedule 1, item 15, subsection 393-80(7 ) in Schedule 2G to the ITAA 1936 ]

Example 1.6 A taxpayer has an FMD in an account worth $100,000. The unrecouped FMD deduction attributable to that FMD is $100,000. An entitlement arises under the scheme to receive $100,000 and APRA meets the taxpayer's entitlement via three instalments: $70,000, $25,000 and $10,000 (while greater than $100,000, the excess may be interest that has not been received by the taxpayer prior to the ADI failing). The apportionment rule should work as follows:For the first instalment, the calculation yields the following unrecouped FMD deduction for that new deposit:$10,000 x ($70,000 / $100,000) = $70,000

·
The unrecouped FMD deduction just before declaration time was $100,000. The total of the amounts worked out under all previous applications of this formula in relation to that old FMD is zero as its never been used before. Therefore the difference between the two is $100,000.
·
The value of the unrecouped FMD deduction calculation is $70,000. As this is less than the original $100,000 unrecouped FMD deduction, the $70,000 can be attributed to the new deposit.

For the second instalment, the calculation yields the following unrecouped FMD deduction for that new deposit:$100,000 x ($25,000 / $100,000) = $25,000

·
The unrecouped FMD deduction just before declaration time was $100,000. The total of the amounts worked out under all previous applications of this formula in relation to that old FMD is $70,000 ($70,000 from the first instalment). The difference between the two is $30,000.
·
As the amount calculated by the formula is less than $30,000, the whole $25,000 can be attributed to the second deposit as the unrecouped FMD deduction.

For the third instalment, the calculation yields the following unrecouped FMD deduction for that new deposit:$100,000 x ($10,000 / $100,000) - $10,000

·
The unrecouped FMD deduction just before declaration time was $100,000. The total of the amounts worked out under all previous applications of this formula in relation to that old FMD is $95,000 ($70,000 + $25,000). The difference between the two is $5,000.
·
The amount calculated by the formula above is $25,000. The difference between the unrecouped FMD deduction just before declaration time and the total of the amounts worked out under all previous applications of the above formula in relation to that old FMD is $5,000. As the $25,000 is greater than $5,000, the $5,000 is the unrecouped FMD deduction in relation to that deposit.

Repayment if the owner of an FMD with an insolvent ADI is bankrupt, dies or ceases to be a primary producer

1.73 An FMD must be repaid if the owner dies, becomes bankrupt or ceases to be a primary producer for at least 120 days (subsection 393-40(3) of Schedule 2G to the ITAA 1936). Furthermore, the FMD is deemed to be repaid in these circumstances even if the FMD is not withdrawn (subsection 393-15(4) of Schedule 2G to the ITAA 1936). This results in taxpayers being assessed on their FMDs even when they have taken no action to withdraw the money.

1.74 To ensure that the taxpayer is not assessed on an unpaid FMD under the scheme, amendments are made to ensure that the taxpayer is not deemed to have repaid their FMD in the case of death, bankruptcy or ceasing to be a primary producer for 120 days for that part of the FMD which has not been paid by APRA or the liquidator. [ Schedule 1, item 15, section 393-85 of Schedule 2G to the ITAA 1936 ]

Example 1.7 A taxpayer made a $10,000 deposit into an FMD on 1 July 2001 and a $10,000 deduction is claimed in the taxpayer's tax return for the 2001-02 income year. On 30 June 2009 the taxpayer has ceased being a primary producer for 120 days and therefore the $10,000 should be included in assessable income for that year (the 2008-09 income year).However, on 28 June 2009 the ADI is declared to be covered by the scheme. As such, the taxpayer has an entitlement under the scheme to receive a new FMD at a new ADI. This entitlement is met by establishing a new FMD of $10,000 at a new ADI on 1 July 2009. As such the taxpayer will have an unmet entitlement of $10,000 at the end of the 2008-09 income year.This amendment ensures that the taxpayer is not assessed on the $10,000 in the 2008-09 income year.

1.75 This amendment only applies to that proportion of the old FMD to which an unmet entitlement with APRA or unmet claim against the ADI (in the case where the claim is against the winding up of an ADI) applies. [ Schedule 1, item 15, section 393-85 of Schedule 2G to the ITAA 1936 ]

Retirement savings accounts

1.76 Division 306 of the ITAA 1997 sets out the tax treatment of payments made from one superannuation plan to another superannuation plan, and of similar payments. It includes a definition of 'roll-over superannuation benefit'. Division 307 defines concepts such as 'superannuation benefit', 'superannuation lump sum', and the 'tax-free component' and 'taxable component' of such benefits.

1.77 Amendments to Division 306 provide the treatment, for tax purposes, of a payment of an entitlement arising under the scheme, or a distribution by a liquidator of a failed ADI declared under the scheme, where the payment or distribution is in respect of an individual who held an RSA with a failed ADI, and is made to another RSA. [ Schedule 1, item 21, subsection 306-25(1 )]

1.78 Part 3-30 of the ITAA 1997 applies to the payer of the entitlement or the liquidator as if they were the failed ADI. Consequently, a payment or distribution is treated as if it were a superannuation member benefit and a superannuation lump sum. The payment or distribution will be treated as a roll-over superannuation benefit where it is paid from the original RSA to the new RSA.

1.79 The paying entity is also subject to the reporting obligations under Part 3-30 for the purposes of the payment. For example, the paying entity is required to report details of the amount effectively rolled-over to both the receiving ADI and the account-holder under Division 390 in Schedule 1 to the TAA 1953. The uniform administrative and criminal penalty regime for non-compliance prescribed in the TAA 1953 applies. [ Schedule 1, item 21, subsection 306-25(2 )]

1.80 As part of its reporting obligations, the paying entity is required to report to the receiving ADI the value of the superannuation interest and the amount of the tax-free and taxable components of the interest. For an RSA in the accumulation phase, the value of the superannuation interest and the amount of each of those components are determined at the declaration time as defined in the Banking Act. For an RSA in the pension phase, these amounts are determined as at the time the income stream commenced with the failed ADI. [ Schedule 1, item 21, subsections 306-25(3 ) and ( 4 )]

1.81 The operation of these amendments is not affected by other amendments dealing with the application of CGT to the failed ADI, and the treatment of entitlements relating to insolvent ADIs and general insurers. [ Schedule 1, item 21, subsection 306-25(5 )]

First home saver accounts

Special provisions applying if financial claims scheme entitlements arise in relation to FHSAs

1.82 The amendments provide that the payment of a scheme entitlement into a new FHSA is treated as a transfer between FHSAs as described in paragraph 11(3)(a) of the FHSA Act, which stops a transfer from one FHSA provider to another FHSA provider from being eligible for the government contribution.

1.83 The effects of this include the contribution not being considered a personal FHSA contribution, not counting against the limit on contributions set by section 27 of the FHSA Act and not counting for working out the amount of a Government FHSA contribution for the person under section 38. [ Schedule 1, item 9, subsection 128A(2 ) of the FHSA Act ]

1.84 The amendments provide that the eligibility rules in paragraphs 15(1)(e) and (f) of the FHSA Act are disregarded to ensure that the holding and closure of the old FHSA after the entitlement arises cannot prevent the person from meeting the FHSA eligibility requirements in relation to the new FHSA being established by APRA. [ Schedule 1, item 9, subsection 128A(3 ) of the FHSA Act ]

1.85 The amendments provide an exemption from the criminal offence in subsection 19(1) of the FHSA Act that an FHSA provider might otherwise face for opening an FHSA for someone who has not applied in an approved form, quoted their TFN and stated that they meet the eligibility requirements for opening an account.

1.86 The FHSA provider has the onus of proving that the new exemption applies. This is appropriate because the information about the matter is peculiarly within the knowledge of the provider. The ATO would bear significant costs if it were required to obtain the information needed to negate the exemption, and the provisions are likely to be used only infrequently and where used the information is easily available to the provider. In addition, drafting the provisions in this way promotes simpler, clearer legislation.

1.87 The amendments ensure that APRA or the liquidator will not be prevented from meeting their obligations under the financial claims scheme to open a new account for the FHSA holder. [ Schedule 1, item 9, subsection 128A(4 ) of the FHSA Act ]

1.88 The amendments cover the instances when an FHSA holder would have to give a notice that they do not satisfy the FHSA eligibility requirements, except that the old FHSA is in liquidation. Given it is uncertain when APRA or the liquidator will complete a transfer into a new FHSA, provision is made so that any tax or penalty consequences are merely deferred until a new account has been established in a new FHSA provider. [ Schedule 1, item 8, subsection 128A(4 ) of the FHSA Act ]

1.89 The amendments provide that the person must give notice within 30 days after he or she is advised that a new FHSA has been opened in his or her name with a new FHSA provider. [ Schedule 1, item 9, subsection 128A(5 ) of the FHSA Act ]

1.90 The amendments provide that APRA's right to be reimbursed out of money held in the declared ADI is not affected by the limits on payments out of FHSA accounts outlined in section 31 of the FHSA Act. [ Schedule 1, item 9, subsection 128A(6 ) of the FHSA Act ]

Reporting obligations

1.91 In relation to payments made under the scheme (under Division 2AA of Part II of the Banking Act or Part VC of the Insurance Act), APRA is required to give both:

·
an annual statement to an account-holder or recipient about the amounts paid to, or applied for the benefit of, the account-holder or recipient in the previous financial year; and
·
a separate annual report to the Commissioner about all amounts paid to, or applied for the benefit of account-holders and all amounts paid to, or applied for the benefit of recipients in the previous financial year.

[ Schedule 1, items 1 and 30, sections 16AHA of the Banking Act and 62ZZKA of the Insurance Act ]

1.92 The term 'recipient' is used in the amendments to the Insurance Act rather than the term 'policyholder', because a third person can receive a payment under Division 3 of Part VC of the Insurance Act.

1.93 APRA is only required to provide the annual statement and report to the Commissioner in the situation where one or more amounts are paid to, or applied for the benefit of, one or more account-holders or one or more recipients in a financial year to meet (in whole or in part) the entitlements under the scheme. Therefore, if no payments are made under the scheme, APRA will not be required to give the statement or report. [ Schedule 1, items 1 and 30, subsections 16AHA(1 ) of the Banking Act and 62ZZKA(1 ) of the Insurance Act ]

1.94 Current provisions in the Banking Act and the Insurance Act give APRA the power to delegate the functions and powers it has in regard to administering the scheme. In the situation where a delegate of APRA makes a payment under the scheme, APRA will need to provide the statement and report.

APRA to give information to account-holders and recipients

1.95 If a payment is made to an account-holder or recipient under the scheme, then APRA will be required to provide that account-holder or recipient with a statement that:

·
is in the approved form;
·
names the account-holder or recipient;
·
states the account-holder's or recipient's TFN (if known to APRA);
·
states the total of the amounts, and the total of the amounts withheld from the amounts, paid to the account-holder or recipient; and
·
specifies the financial year to which the statement relates.

[ Schedule 1, items 1 and 30, subsections 16AHA(2 ) of the Banking Act and 62ZZKA(2 ) of the Insurance Act ]

1.96 The information provided in the statement given to an account-holder or recipient includes that account-holder's or recipient's TFN, if APRA knows it. As the TFN information is only quoted in the statement going to that TFN holder, it is not divulged or communicated to a third person within the meaning of section 8WB of Part III of the TAA 1953 (relating to penalties for divulging or communicating TFN information). Therefore, no offence is committed.

1.97 The annual statement must be provided to the account-holder or recipient within 14 days after the end of the financial year in which the amounts are paid. [ Schedule 1, items 1 and 30, subsections 16AHA(2 ) of the Banking Act and 62ZZKA(2 ) of the Insurance Act ]

1.98 The requirement for APRA to provide the statement within 14 days after the end of the financial year is so that account-holders and recipients can use the information provided in the statement to help calculate their end of year tax position, which will therefore assist them in complying with their taxation obligations.

1.99 The approved form rules in Division 388 in Schedule 1 to the TAA 1953 apply to the requirements to provide those statements as if the requirements were taxation laws. This ensures that the approved form rules apply to the statements APRA must provide without having to reproduce those rules in full. [ Schedule 1, items 1 and 30, subsections 16AHA(4 ) and ( 5 ) of the Banking Act and 62ZZKA(4 ) and ( 5 ) of the Insurance Act ]

1.100 An 'approved form' is a form approved by the Commissioner that contains the information the Commissioner requires and is provided in the manner the Commissioner requires.

APRA to give information to the Commissioner

1.101 If a payment is made to an account-holder or to a recipient under the scheme, then as well as making a statement to the account-holder or recipient, APRA will also be required to give the Commissioner a report in the approved form about all amounts paid to the account-holders or recipients. [ Schedule 1, items 1 and 30, subsection 16AHA(3 ) of the Banking Act and 62ZZKA(3 ) of the Insurance Act ]

1.102 APRA is required to provide the report to the Commissioner within four months after the end of the financial year, in which the payments are made. [ Schedule 1, items 1 and 30, subsection 16AHA(3 ) of the Banking Act and 62ZZKA(3 ) of the Insurance Act ]

1.103 As the law currently stands, investment bodies, such as ADIs, are required by Regulation 56 of the Income Tax Regulations 1936 to give the Commissioner a written report (an annual investment income report) regarding all payments (and the details of those payments) made to investors in a financial year. The report that is required to be given to the Commissioner includes TFN information of the investor where the investor has quoted that information to the investment body. As APRA, being the administrator of the scheme, will be making payments in regard to certain failed ADIs, it is appropriate that APRA provide information, such as TFN information to the Commissioner that would have otherwise been provided by the ADI.

1.104 Providing TFN information to the Commissioner assists the ATO with compliance and data matching activities.

Purposes for which information can be obtained

1.105 The Banking Act is amended to allow APRA, by written notice, to require a certain entity to give a specified person specified information about an account-holder relevant to preparing or giving a statement or report required by section 16AHA and relevant to complying with an obligation under a law relating to taxation. [ Schedule 1, item 3, paragraphs 16AK(4 )( ea ) and ( eb ) of the Banking Act ]

1.106 A 'certain entity' that APRA may require to give information includes:

·
an ADI (whether or not it is a declared ADI);
·
an administrator appointed to take control of an ADI's business; or
·
a liquidator (including a provisional liquidator) appointed in connection with the winding up, or proposed winding up, of an ADI.

1.107 Offence and civil penalty provisions in the Banking Act apply to an entity mentioned in paragraph 1.106, if the entity fails to give the specified information to the specified person in the written request provided by APRA.

1.108 The Insurance Act is amended to allow APRA, by written notice, to require a certain entity to give a specified person specified information relevant to preparing or giving a statement or report required by section 62ZZKA and relevant to complying with an obligation under a law relating to taxation. [ Schedule 1, item 33, paragraphs 62ZZP(4 )( da ) and ( db ) of the Insurance Act ]

1.109 A 'certain entity' that APRA may require to give information includes:

·
a general insurer (whether or not it is a declared general insurer); or
·
a liquidator (including a provisional liquidator) appointed in connection with the winding up, or proposed winding up, of a general insurer.

1.110 Offence and civil penalty provisions in the Insurance Act apply to an entity mentioned in paragraph 1.109, if the entity fails to give the specified information to the specified person in the written request provided by APRA.

Withholding obligations

1.111 The TAA 1953 is amended to ensure that the PAYG withholding provisions apply to payments made to meet an entitlement under the scheme in a way corresponding to the way that the PAYG withholding provisions would have applied if the payment was made by an ADI or general insurance company. [ Schedule 1, item 34, section 21-1 of Schedule 1 to the TAA 1953 ]

1.112 Therefore, APRA, as the administrator of the scheme, will be required to withhold amounts from payments made under the scheme and then report and remit these amounts to the Commissioner.

1.113 The terms 'general insurance policy' and 'general insurance company' are defined terms for the purposes of the TAA 1953 and are used in the amendments instead of the terms 'protected policy' and 'general insurer', that are used in the provisions relating to the scheme in the Insurance Act ('protected policy' and 'general insurer' are not defined terms for the purposes of the TAA 1953).

1.114 The use of the terms 'general insurance policy' and 'general insurance company' cover, for the purposes of the amendments, the same scope as the terms 'protected policy' and 'general insurer', because the amendments apply to specific payments made by a general insurance company under the scheme.

1.115 The amendments apply if an entity's entitlement under:

·
Division 2AA of Part II of the Banking Act to be paid an amount by APRA in connection with the entity's account with an ADI; or
·
Part VC of the Insurance Act, to be paid an amount in connection with a general insurance policy issued by a general insurance company,

is met wholly or partly. [ Schedule 1, item 34, subsection 21-5(1 ) of Schedule 1 to the TAA 1953 ]

1.116 Therefore, the entitlements do not necessarily have to be met by APRA for the amendments to apply.

1.117 Division 2AA of Part II of the Banking Act entitles account-holders that have certain accounts with certain ADIs to be paid amounts by APRA worked out by reference to the balance of those accounts.

1.118 Part VC of the Insurance Act entitles policyholders and other persons to be paid amounts by APRA in relation to certain policies with an insolvent general insurer.

1.119 Part 2-5 in Schedule 1 to the TAA 1953 (the PAYG withholding provisions) applies in relation to APRA and the meeting of the entitlement in a corresponding way to the way in which it would have applied in relation to the ADI or general insurance company doing, in connection with the account or policy, whatever was done in meeting the entitlement. [ Schedule 1, item 34, subsection 21-5(2 ) of Schedule 1 to the TAA 1953 ]

1.120 This means that APRA needs to take steps corresponding to those an ADI or general insurance company would have taken, when an entitlement is met under the scheme.

1.121 The reason payments are treated in a 'corresponding way' to the way those payments would be treated if paid by an ADI or general insurance company, is because payments made under the scheme will not be made by an ADI or general insurance company and therefore will not strictly be of an identical nature.

1.122 The phrase 'whatever was done in meeting the entitlement' simply refers to how the entitlement was met and usually this would be a payment. Therefore, in relation to the PAYG withholding provisions, the same outcome should result in relation to APRA and the meeting of the entitlement under the scheme as would have resulted if the ADI had made the payments to the account-holder.

1.123 Current provisions in the Banking Act and the Insurance Act give APRA the power to delegate the functions and powers it has in regard to administering the scheme.

1.124 In the case where a delegate makes a payment to meet an entitlement under the scheme, the PAYG withholding provisions will apply in relation to APRA and the meeting of the entitlement by the delegate in a corresponding way to the way in which the PAYG withholding provisions would apply to an ADI if they made that payment.

Example 1.8 The PAYG withhold provisions require ADIs to withhold amounts on certain payments, such as when interest is paid to an account-holder and the account-holder has failed to quote their TFN.In the situation where APRA, as the administrator of the scheme, makes a payment to meet the entitlement of an eligible account-holder of a failed ADI, then that payment will be treated, for PAYG withholding purposes, in a corresponding way to the way the payment would have been treated if it were made by the ADI.Once APRA withholds an amount from the payment made to the eligible account-holder, APRA will need to remit and report the withheld amount to the Commissioner in line with the PAYG withholding provisions.

Application and transitional provisions

1.125 The amendments to disregard capital gains or capital losses in respect of ADI deposits or general insurance policies apply to CGT events after 17 October 2008, after the commencement of the scheme. This ensures that the CGT rules can apply immediately if the scheme is activated. [ Schedule 1, items 27 and 29 ]

1.126 The amendments to the FMD provisions apply to assessments for the year of income including 18 October 2008 and later income years. This aligns the application date for the tax treatment of the payments with the commencement of the scheme. The retrospective commencement will ensure no taxpayer is adversely affected should an ADI be declared before Royal Assent. [ Schedule 1, item 16 ]

1.127 The amendments relating to RSAs apply in relation to entitlements arising under the scheme after 17 October 2008. This aligns the application date for the tax treatment of the payments with the commencement of the scheme. [ Schedule 1, subitem 22(1 )]

1.128 The amendments to impose the RSA reporting obligations under Division 390 of Schedule 1 to the TAA 1953 on APRA (or other paying entities) apply from the date of commencement of this measure. [ Schedule 1, subitem 22(2 )]

1.129 The amendments relating to FHSAs apply in relation to entitlements arising under the scheme after 17 October 2008. This aligns the application date for the tax treatment of the payments with the commencement of the scheme. The retrospective commencement will ensure no taxpayer is adversely affected should an ADI be declared before Royal Assent. [ Schedule 1, item 10 ]

1.130 The amendments to the Banking Act and the Insurance Act that impose annual reporting obligations on APRA apply in relation to amounts paid or applied before, on or after the commencement of those amendments. [ Schedule 1, items 2 and 31 ]

1.131 As the amendments will require APRA to give an annual statement to an account-holder or recipient, or a report to the Commissioner after the end of a financial year about payments made during the financial year, the amendments need to apply to payments that may be made prior to the commencement of the amendments. Therefore, as long as the reporting obligations commence before the end of the 2008-09 financial year, then the reporting obligations will apply with respect to any payments made under the scheme during the 2008-09 financial year. (Note that the main scheme legislation received Royal Assent on 17 October 2008.)

1.132 The amendments to Part 2-5 of Schedule 1 to the TAA 1953 apply in relation to things done before, on or after the commencement of the amendments to meet entitlements arising after 17 October 2008 under the scheme. [ Schedule 1, subitem 35(1 )]

1.133 The amendments ensure that (as required under Part 2-5 of Schedule 1 to the TAA 1953), APRA will include in its annual statements to account-holders, recipients and the Commissioner, withholding payments made under the scheme after 17 October 2008.

1.134 However, APRA is not required to comply with the PAYG withholding provisions before the commencement of amendments and therefore the amendments do not make APRA liable to a criminal or administrative penalty for an omission occurring before the commencement of the application provision. [ Schedule 1, subitem 35(2 )]

Consequential amendments

Farm management deposits

1.135 Notes are inserted at the end of subsections 393-15(3) and (4) of Schedule 2G to the ITAA 1936 to indicate the amendments in this Bill interact with the core FMD provisions in section 393-15 of Schedule 2G to the ITAA 1936. [ Schedule 1, items 11 and 12, subsections 393-15(3 ) and ( 4 ) of Schedule 2G to the ITAA 1936 ]

1.136 Amendments are made to the definition of 'ADI' in section 393-25 of Schedule 2G to the ITAA 1936 to accommodate the required amendments needed for the scheme. [ Schedule 1, items 12 and 13, section 393-25 of Schedule 2G to the ITAA 1936 ]


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