Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 5 - Dividend imputation and RSAs
Overview
5.1 Schedule 6 of the Bill amends the Income Tax Assessment Act 1936 (the Act) to prevent franking credits or debits arising from the payment or refund of tax where those amounts are attributable to the Retirement Savings Account (RSA) business of a life assurance company.
Summary of the amendments
5.2 The purpose of the amendments is to ensure that no franking credit or debit arises from the payment or refund of tax where those amounts are attributable to the RSA business of a life assurance company.
5.3 The amendments are to apply to franking credits and debits arising for life assurance companies after the date of introduction of this Bill. [Item 28]
Background to the legislation
Scheme of imputation provisions affecting life assurance companies
5.4 Under the imputation system non-mutual life assurance companies receive franking credits and franking debits on the same basis as other companies with shareholders.
5.5 However, franking credits and franking debits that are attributable to statutory fund income are reduced by offsetting franking debits and credits to take into account that there is a limit on the portion of statutory fund income that can be distributed to shareholders because of various prudential rules.
5.6 Reducing franking debits and credits (eg. sections 160AQCCA and 160APVA of the Act) are calculated using formulas which exclude from the franking credits and debits so much of the credit or debit as is attributable to the statutory fund income. The formulas also distinguish the statutory fund income from other income components so that the franking credits and debits attributable to the statutory fund income can be calculated by reference to the special life company tax rate of 39 per cent (eg. subsections 160APVH(2) and 160AQCN(2)).
5.7 Until an assessment of tax payable for an income year is made, a life assurance company will not know the actual tax payable on its statutory fund and other components of taxable income. For franking credits and debits that arise before this time there is an interim reducing credit or debit based on the previous years assessed tax. When the actual tax payable on the statutory fund and other components becomes known, the interim reducing credit or debit is reversed (eg. sections 160APVB and 160AQCCB) and the permanent reducing credit or debit is calculated.
5.8 The Government announced in the 1996 Budget that it would allow the establishment of RSAs by banks, building societies, credit unions and life assurance companies to provide superannuation products to customers directly without the need for a separate trust structure. The Government also announced that RSAs would, broadly speaking, be taxed in the same way as complying superannuation funds. Legislation to give effect to the tax element of these changes was contained in the Retirement Savings Account (Consequential Amendments) Act 1997 (the RSA Act).
5.9 As part of the tax treatment of RSAs, no franking credit or debit arises in a companys franking account where the tax is attributable to the RSA business of the company. However, although the amendments introduced in the RSA Act prevent franking credits and debits arising for ordinary companies where the tax is attributable to the RSA business of the company, the same outcome is not achieved for life assurance companies.
Explanation of the amendments
5.10 Schedule 6 of the Bill replaces references to the term general fund component in the formulas that are relevant to life assurance companies in the calculation of franking credits and debits with references to standard component. As a result, no franking credit or debit arises from the payment or refund of tax where those amounts are attributable to the RSA business of a life assurance company. [Items 4 to 13 and 15 to 26; amended sections 160APVA, 160APVC, 160APVD, 160AQCCA, 160AQCD, 160AQCE, and subsections 160APVBA(2), 160APVBB(2), 160AQCJ(2), 160AQCK(2), and 160AQCL(2)]
5.11 Schedule 6 of the Bill also amends the operation of the formulas to ensure the appropriate calculation of franking credits and debits for tax attributable to the statutory fund component of taxable income. [Items 14 and 27; new paragraphs 160APVH(2)(c), 160APVH(5)(c), 160AQCN(2)(c), and 160AQCN(2AB)(c)]
5.12 To apply the formulas that calculate franking credits and debits for life assurance companies it may be necessary to apply rebates against components of taxable income in a certain order. Schedule 6 of the Bill will make two consequential amendments to ensure that the order in which rebates are applied is appropriate. [Items 2 and 3; amended section 160APHB]
5.13 Schedule 6 of the Bill will also insert a definition of standard component. The term standard component will have the same meaning as provided in Division 8 of Part III of the Act. That is, the standard component is the amount remaining in the general fund component of a life assurance companys taxable income after deducting the RSA component. [Item 1; amended section 160APA]