Senate

Explanatory Memorandum

(Circulated by authority of the Minister representing the Treasurer, Senator the Hon. Shane Paltridge.)

Introductory Note

The effect of the Income Tax Assessment Bill 1961, in its original form, has been explained in detail in an Explanatory Memorandum that was issued by authority of the Treasurer when the Bill was introduced in the House of Representatives. The purpose of this memorandum is to explain the effect of three changes in the Bill that have since been made by amendments in the House of Representatives.

Notes on Clauses

Definition of Public Securities

The operation of a number of the proposed provisions will be dependent upon whether a life assurance company or a superannuation fund holds public securities amounting to not less than 30% of its total assets (including Commonwealth securities amounting to not less than 20% of total assets). The expression "public securities" was defined in Clause 3 of the Bill (in its original form) as including bonds, debentures, stock and other securities issued by the Commonwealth, the States or the Commonwealth Territories, or by municipal corporations, local governing bodies or public authorities.

Clause 3 has now been amended to include as "public securities" any securities issued in respect of a loan to a company the principal business of which is the supply and distribution of gas, water or electricity, by a system of reticulation, in Australia or the Territories of the Commonwealth.

This change is designed to ensure that privately owned public utilities will not be placed in a less favourable position (as regards borrowing from life assurance companies and superannuation funds) than their publicly owned counterparts.

Taxation of Life Assurance Companies

One of the main features of the Bill is that a life assurance company that maintains the "30%-20% ratio of public securities" in the assets held in connection with its Australian life business, or builds up to that ratio over an approved period, is to be granted -

(1)

exemption of that part of its investment income that is referable to certain classes of superannuation business; and

(2)

a proportionate increase in the deductions under section 115 of the Principal Act, if the holdings of public or Commonwealth securities exceed what is needed to maintain the "30%-20% ratio".

The legislation envisages that companies will be able to set up separate statutory funds for their exempt superannuation business and their overseas business, so as to identify the income that is entitled to exemption and the assets referable to overseas business (in respect of which the "30%-20% ratio" need not be maintained).

Provision is also made for similar results to be achieved by processes of apportionment where companies do not wish to segregate the various classes of their business by setting up separate statutory funds.

The amendments now proposed in relation to life assurance companies are concerned with the details of these apportionment processes, and are designed to ensure that a life assurance company that does not set up separate statutory funds in respect of its superannuation business and its overseas business will be placed as nearly as possible in the same position as a company that does so.

Clause 7 has now been amended by omitting the original sub-section (2.) of section 112A and inserting new sections (2.),(3.) and (4.). Clause 9 has been amended by omitting sub-section (3.) of the proposed section 115A and inserting new sub-sections (3.) and (3A.).

The new procedures will be of an optional nature and will only operate where a life assurance company elects that the relevant provisions shall apply.

Amendment to Clause 7.

The effect of Clause 7 in its original form is explained on pages 12 - 13 of the original Explanatory Memorandum. The purpose of the clause is to insert in the Principal Act a new provision - section 112A - which will provide for the exemption from income tax of that part of the income of a life assurance company that is referable to its superannuation business. Broadly speaking, the effect of the section is that the Commissioner of Taxation is to make an apportionment for the purpose of determining the part of the income of each statutory fund that is entitled to exemption.

Sub-section (1.) of the proposed section 112A requires the Commissioner to ascertain, in respect of each statutory fund of the company, the proportion which the "calculated liabilities" referable to superannuation policies bears to the total amount of "calculated liabilities" referable to all policies included in that particular fund. That proportion of each amount of income derived from the assets of the fund will then be excluded from assessable income.

Three new sub-sections have now been inserted in the proposed section 112A in place of the original sub-section (2.).

Sub-section (2.), as now proposed, will provide at the company's option an alternative basis on which the Commissioner of Taxation is to make the apportionment described in sub-section (1.). Where a company elects that sub-section (2.) shall apply, the expressions "superannuation policies" and "policies" shall be taken not to include policies that are not Australian policies.

The effect of this provision will be that the apportionment of the income of a fund between exempt income referable to superannuation business and assessable income referable to ordinary business will be made by reference to the proportion of superannuation policies in the company's Australian business conducted through the fund, rather than by reference to the proportion of superannuation business calculated over the company's world wide activities.

This is designed to produce a result that will correspond more precisely to what would probably have been achieved if the company had set up separate statutory funds for its Australian and overseas business.

Sub-section (3.) is designed to protect the revenue in cases where a statutory fund is maintained primarily in respect of overseas business. In these circumstances, anomalous results might arise if a company were permitted to make an election under sub-section (2.). It is accordingly provided that that sub-section does not apply in relation to a fund in respect of which the Commissioner is of opinion that less than one-third of the "calculated liabilities" under that fund is referable to Australian policies.

Sub-section (4.) is a machinery provision and repeats with a minor drafting change the provision originally proposed as section 112A(2.). It formally provides that, for the purposes of section 112A, a policy will be deemed to be included in a particular statutory fund if, in the opinion of the Commissioner, liabilities under that policy would be payable from that fund.

Amendment to Clause 9.

The effect of Clause 9 is described in detail at pages 15 - 23 of the original Explanatory Memorandum. Its primary function is -

(1)

to re-enact section 115 in a form that will provide deductions to life assurance companies that will vary according to the proportions of public and Commonwealth securities in a company's assets referable to its Australian business; and

(2)

to enact a new section 115A that will provide an alternative procedure by which assets referable to overseas business may be excluded from the calculation of the various proportions of Commonwealth and public securities, in cases where a company does not wish to exclude all its overseas business from its Australian statutory funds.

In its original form, sub-section (3.) provided, in effect, that for the purposes of ascertaining the proportions of Commonwealth and public securities held by the company at the end of the year of income, public or Commonwealth securities issued in respect of loans raised outside Australia and the Territories of the Commonwealth are not to be taken into account.

As now proposed, sub-section (3.) repeats this provision and, in addition, provides that for the purposes of section 115(1.) the values of d, e or f (the meanings of which are explained at page 17 of the main Explanatory Memorandum) shall be multiplied by

(a)/(b)


, where

a

is that part of the "calculated liabilities" of the company that, in the opinion of the Commissioner, relates to Australian policies (other than policies included in a superannuation statutory fund); and

b

is that part of the "calculated liabilities" of the company that, in the opinion of the Commissioner, relates to Australian policies (other than policies included in a superannuation statutory fund) that are not superannuation policies.

This additional provision makes allowance for the fact that if a life assurance company that is entitled to exemption of its income referable to superannuation policies sets up separate statutory funds for its superannuation and ordinary business, it would have no incentive to keep public securities or Commonwealth securities in its superannuation statutory fund in excess of what is required to maintain the "30%-20% ratio of public securities". In practice, therefore, any securities in excess of what was needed to maintain the ratio would be held in the company's statutory fund for its ordinary business, and so would tend to increase the deductions to which the company would be entitled under section 115.

The additional adjustment now proposed will have the effect of increasing the section 115 deduction allowable to companies that do not set up separate statutory funds to what might be expected to have been the allowable deduction if separate funds had been maintained and any surplus of public securities had been held in the fund for ordinary business.

The effect of the provision, accordingly, is that a company may, if it so desires, segregate its exempt superannuation business in a separate fund and arrange its affairs accordingly. If it does not do so, however, the processes of apportionment will be such as to achieve, so far as possible, the results that would have been obtained if separate funds had been established.

Sub-section (3A.), as now proposed, is a machinery provision formally providing that, for the purposes of sub-section (3.), a policy shall be taken to be included in a particular superannuation statutory fund if, in the opinion of the Commissioner, liabilities under that policy would be payable from that fund.