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HOUSE OF REPRESENTATIVES

Taxation Laws Amendment Bill (No. 2) 2002

EXPLANATORY MEMORANDUM

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation Definition
ADF approved deposit fund
Agreements Act Social Security (International Agreements) Act 1999
CGT capital gains tax
Commissioner Commissioner of Taxation
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
MLA 1986 Medicare Levy Act 1986
SATO Senior Australians Tax Offset
SSA 1991 Social Security Act 1991
VEA 1986 Veterans Entitlement Act 1986

General outline and financial impact

Company rate changes (franking account consequentials)

Schedule 1 to this bill amends the imputation rules in the ITAA 1936 to take account of the reduction of the company tax rate from 34% to 30%.

Date of effect: The amendments apply from 1 July 2001.

Proposal announced: Former Assistant Treasurers Press Release No. 25 of 25 June 2001.

Financial impact: The financial impact of this measure has been factored into the revenue estimates for the reduction in the company tax rate made by the New Business Tax System (Income Tax Rates) Act (No. 1) 1999.

Compliance cost impact: The franking account conversion legislation will impose a small, generally once only, compliance burden on those taxpayers affected.

Summary of regulation impact statement

Regulation impact on business

Impact: The franking account conversion legislation will impose a small, generally once only, compliance burden on those taxpayers affected. The conversion process that a taxpayer will be required to follow will be substantially similar to that required when the tax rate was reduced previously, so taxpayers are familiar with the conversion process.

Main points:

The taxpayers affected by these rules are those resident taxpayers that are required to maintain franking accounts. They are:

-
all resident companies (including non-mutual life assurance companies);
-
all resident public trading trusts;
-
all resident corporate unit trusts; and
-
all limited partnerships.

Friendly societies

Schedule 2 to this bill amends the ITAA 1997 to defer the commencement date of the Review of Business Taxation proposals to tax friendly societies on investment income received that is attributable to funeral policies, scholarship plans and income bonds sold after 30 November 1999. Friendly societies will remain exempt from tax on that investment income until 30 June 2002.

Schedule 2 also defers the commencement of the new methodology for working out the capital component of ordinary life insurance investment policies until 1 July 2002.

Date of effect: 1 July 2001.

Proposal announced: Introduced in Taxation Laws Amendment Bill (No. 4) 2001.

Financial impact: The cost to revenue of the deferral is expected to be $1 million in 1999-2000, and $2 million per annum in 2000-2001 and 2001-2002.

Compliance cost impact: Nil.

Prescribed dual residents

Schedule 3 to this bill amends the ITAA 1936 to make corrections so that:

the intercorporate dividend rebate is not available in respect of any unfranked dividends paid to or by a dual resident company, including dividends paid within a wholly-owned group; and
the deduction allowed to certain non-resident owned companies to offset the removal of the rebate from 1 July 2000 is not available in respect of unfranked dividends paid to or by a dual resident company.

Date of effect: These amendments will apply retrospectively to dividends paid on or after 1 July 2000. These are the dividends in relation to which the rebate and deduction would otherwise be allowed in error.

Proposal announced: Introduced in Taxation Laws Amendment Bill (No. 4) 2001.

Financial impact: Nil. There could be a significant cost to revenue if the amendments were not made.

Compliance cost impact: The amendments are corrections and will not have any impact on compliance costs for taxpayers.

Refundable tax offsets

Certain trustees and beneficiaries

Part 1 of Schedule 4 to this bill amends the ITAA 1997 to make a correction to the refundable tax offset rules so that double claiming of a refund of excess imputation credits by both a trustee and a beneficiary will not be possible. It also makes a consequential amendment to the ITAA 1936.

Date of effect: The amendments will apply to all refunds of excess imputation credits, which are payable in respect of dividends paid on or after 1 July 2000.

Proposal announced: Introduced in Taxation Laws Amendment Bill (No. 4) 2001.

Financial impact: None. There would be a cost to revenue if these amendments were not made.

Compliance cost impact: Some beneficiaries who currently do not have to lodge a tax return will now have to lodge in order to receive a refund of excess imputation credits.

The alternative would be to maintain the existing law and give the refund to the trustee except where the beneficiary is entitled to claim the refund, for example, where the beneficiary is a beneficiary in another trust estate or has income from other sources. This alternative would place an unacceptable burden on trustees because they would not know in many cases whether a beneficiary was a beneficiary of another trust or had income from other sources and therefore whether they or the beneficiary should claim a refund.

Non-complying superannuation funds and non-complying ADFs

Part 2 of Schedule 4 to this bill amends the ITAA 1997 to deny refunds of excess imputation credits to non-complying superannuation funds and non-complying ADFs.

Date of effect: The amendments will apply to assessments for income years ending on or after 22 May 2001.

Proposal announced: Former Assistant Treasurers Press Release No. 19 of 22 May 2001.

Financial impact: The measure will protect the revenue. The gain to revenue from denying refunds of imputation credits to currently lodging non-complying superannuation funds and non-complying ADFs would be less than $1 million.

Compliance cost impact: Nil.

Franking rebate on indirect distributions to exempt institutions

Schedule 5 to this bill will make technical corrections to the franking rebate provisions in the ITAA 1936 to clarify that registered charities and gift-deductible organisations which are trusts are eligible for refunds of excess imputation credits in respect of distributions attributable to franked dividends received indirectly through another trust.

Date of effect: The amendments to the franking rebate provisions will apply to trust amounts that are attributable to dividends paid on or after 1 July 2000, that is, from the commencement of the refund of imputation credits measure.

Proposal announced: Introduced in Taxation Laws Amendment Bill (No. 4) 2001.

Financial impact: Nil.

Compliance cost impact: The proposed amendments are corrections and will not have any impact on compliance costs for taxpayers.

Senior Australians Tax Offset and minor amendments of the MLA 1986

Schedule 6 to this bill amends the ITAA 1936 to extend the eligibility criteria for SATO to ensure that all seniors who are eligible for either an age or service pension (whether or not they receive one) are entitled to receive SATO.

Schedule 8 to this bill makes a technical amendment to the MLA 1986 to correct references to the ITAA 1936.

Date of effect: The amendments will apply to assessments for the 2000-2001 year of income and later income years.

Proposal announced: Governments 2001-2002 Federal Budget.

Financial impact: Nil.

Compliance cost impact: Nil.

Demutualisation of Tower Corporation

Schedule 7 to this bill amends the ITAA 1997 to:

ensure that taxpayers who received shares in Tower Limited as a consequence of the demutualisation of Tower Corporation (a former New Zealand resident mutual company) in October 1999 are not subject to CGT at the time their membership rights ceased to exist; and
specify the cost base for shares received in Tower Limited as a consequence of giving up those membership rights.

Consequently, depending on the circumstances, the CGT taxing point for taxpayers who received shares in Tower Limited as a consequence of the demutualisation of Tower Corporation is deferred until a CGT event happens to the shares in Tower Limited.

Date of effect: The amendments will apply from 23 September 1999. The amendments are beneficial to taxpayers because they defer the CGT liability that arises as a consequence of giving up their membership rights in Tower Corporation. The Tower Corporation demutualised on 1 October 1999 and relied on the announcement of these measures to advise Australian taxpayers about the consequences of accepting the demutualisation proposal.

Proposal announced: Former Assistant Treasurers Press Release No. 43 of 23 September 1999.

Financial impact: The financial impact is outlined in the following table:

2000-2001 2001-2002 2002-2003 2003-2004
-$16 million $4 million $2 million $1 million

Compliance cost impact: Nil.

Income tax deduction for gifts

Schedule 9 to this bill amends the ITAA 1997 and the ITAA 1936 to allow income tax deductions for certain gifts of $2 or more made to the new organisations listed below. This bill also amends the names of some organisations, extends the period of deductibility for 2 organisations and ends the period of deductibility for another organisation.

Date of effect:

Gifts to new organisations:

National Breast Cancer Centre Gift Fund after 24 September 2001.
The Bionic Ear Institute after 4 October 2001.
Australian Primary Principals Association Education Foundation after 1 October 2001.
Australian Human Rights Education Fund after 24 September 2001.
Sir Hughie Edwards VC Foundation Incorporated after 21 August 2001 and before 23 August 2003.
Warringah, Australia Remembers Trust after 8 November 2001 and before 9 November 2003.
Bowral Vietnam Memorial Walk Trust Incorporated after 15 August 2001 and before 16 August 2003.
The Albert Coates Memorial Trust after 30 January 2002 and before 31 January 2004.
Tea Gardens/Hawks Nest War Memorial Committee after 30 January 2002 and before 31 January 2004.
Australian Red Cross Society American Disaster Fund after 9 September 2001 and before 11 September 2003.
Young Endeavour Youth Scheme Public Fund after 24 September 2001.

Gifts to organisations that have changed their name:

H.R.H. The Duke of Edinburghs Commonwealth Study Conferences (Australia) Incorporated changes to Commonwealth Study Conferences (Australia) Incorporated after 19 February 2001.
The Australian Administrative Staff College changes to Monash Mt Eliza Graduate School of Business and Government Limited after 21 July 1994 and further changes to Mt Eliza Graduate School of Business and Government Limited after 4 April 2000.
Amnesty International changes to Amnesty International Australia after 30 June 1985.
National Safety Council of Australia changes to National Safety Council of Australia Limited after 13 September 1993.
Royal Queensland Society for the Prevention of Cruelty changes to Royal Society for the Prevention of Cruelty to Animals, Queensland Incorporated after 22 December 1999.
Victorian National Parks Association changes to Victorian National Parks Association Incorporated after 17 March 1985.

Gifts to organisations that have ceased to exist:

Katherine District Business Re-Establishment Fund ceases after 17 November 2000.

Gifts to organisations whose period of deductibility has been extended:

Australian Ex-Prisoners of War Memorial Fund for an additional 2 years until 20 October 2003.
Royal Australian Airforce (RAAF) Memorial Trust Fund for a further year until 18 November 2002.

Proposal announced: Gifts to new organisations and extensions to the period of deductibility for the specified organisations were announced by the Minister for Revenue and Assistant Treasurer and the former Assistant Treasurer in press releases during 2001 and 2002.

If an organisation has changed its name only or has ceased to exist, no public announcement was made.

Financial impact: Unquantifiable, but insubstantial, cost to the revenue.

Compliance cost impact: Nil.

Demutualisation of mutual entities other than insurance companies

Schedule 10 to this bill amends the income tax law to recognise a new demutualisation method for non-insurance mutual entities. Members of non-insurance mutual entities that demutualise using the new method will qualify for the concessions in Schedule 2H to the ITAA 1936.

Date of effect: 17 November 1999.

Proposal announced: Former Assistant Treasurers Press Release No. 56 of 17 November 1999.

Financial impact: This measure is expected to result in a small but unquantifiable gain to revenue as it will facilitate the demutualisation of non-insurance mutual entities that elect to use the new demutualisation method.

Compliance cost impact: Nil.

Same asset rollover

Schedule 11 to this bill amends the ITAA 1997 to allow CGT rollover for a policyholder/member of a mutual insurance company who becomes absolutely entitled to a share held on trust as part of a demutualisation and exchanged by the trustee under scrip for scrip rollover for another share.

Date of effect: The rollover applies to CGT events happening on or after 10 December 1999, being the relevant date for scrip for scrip rollover.

Proposal announced: The proposal was announced in former Assistant Treasurers Press Release No. 9 of 21 March 2001.

Financial impact: Nil, given the amendment is directed at ensuring the scrip for scrip rollover applies as intended.

Compliance cost impact: It is expected there should be no impact on compliance costs, as trustees have to keep the same records under the current law.

Technical amendments

Schedule 12 to this bill makes a number of technical amendments to the ITAA 1936, the ITAA 1997 and other tax-related legislation.

Date of effect: The amendments have various dates of effect.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: Nil.

Chapter 1 - Company rate changes (franking account consequentials)

Outline of chapter

1.1 Schedule 1 to this bill amends the dividend imputation rules in the ITAA 1936 to take account of the reduction in the company tax rate from 34% to 30%.

1.2 This bill inserts Division 15 into Part IIIAA of the ITAA 1936 which deals with the conversion of the franking accounts of companies and similarly taxed entities so that the balance of their franking accounts reflects an underlying tax rate of 30%. These conversions are to occur on 1 July 2001.

1.3 This bill also introduces other necessary amendments to various provisions in Part IIIAA that rely on the prevailing company tax rate for their correct operation.

Context of amendments

1.4 The reduction in the company tax is provided for in the New Business Tax System (Income Tax Rates) Act (No. 1) 1999. The reduction in the company tax rate is a key component of the New Business Tax System announced in Treasurers Press Release No. 58 of 21 September 1999.

1.5 The reduced company tax rate provides Australia with an internationally competitive company tax rate. The reduction of the company tax rate to 30% brings the Australian rate into line with rates in other countries in the Asia Pacific region.

Summary of new law

1.6 In broad terms, the amendments to the imputation system will:

convert existing class C franking account balances (which are currently based on an underlying company tax rate of 34%) so that they are based on the new company tax rate of 30% from 1 July 2001;
generally convert franking credits and debits arising on or after 1 July 2001 to reflect the 30% company tax rate where those credits and debits are based on another underlying company tax rate;
ensure that franked dividends paid on or after 1 July 2001 carry underlying imputation credits reflecting a 30% tax rate;
modify the operation of the required franking amount and equal franking rules to take account of the conversion process so as to ensure that these structural anti-dividend streaming provisions operate correctly; and
modify the operation of the estimated debit determination rules to take account of the conversion process.

Comparison of key features of new law and current law
New law Current law
Franking account entries made to a companys franking account will be calculated by reference to the 30% tax rate. Franking account entries made to a companys franking account are calculated by reference to the 34% tax rate.
Franking rebates will be calculated by reference to the 30% company tax rate. Franking rebates are calculated by reference to the 34% company tax rate.
The balance of the class C franking accounts of companies and similarly taxed entities will be converted so that their balances reflect an underlying company tax rate of 30%. The balance of the class C franking accounts of companies and similarly taxed entities are based on an underlying company tax rate of 34%.
Franking account entries based on an underlying rate other than the 30% rate are to be converted to equivalent entries based on the 30% rate. Franking account entries based on an underlying rate other than the 34% rate are converted to equivalent entries based on the 34% rate.

Detailed explanation of new law

Conversion of the class C franking account balance on 1 July 2001

1.7 Companies are required to convert their class C franking account balances (including venture capital sub-account balances) on 1 July 2001 to take account of the new tax rate of 30%. The purpose of the conversion is to ensure that the value of any existing franking credits and debits that accumulated at a higher rate of tax are preserved.

1.8 For a company with a franking year that commences on 1 July 2001, the conversion of the class C franking account (or venture capital sub-account) occurs immediately after any franking credit arises which carries forward a surplus from the previous franking year. [Schedule 1, item 10, subsection 160AUA(2)]

1.9 Companies with a standard franking year, that is, one which commences on 1 July 2001, can only have a surplus or a nil franking account balance on 1 July 2001. Companies that have a non-standard franking year may, however, have a surplus or deficit balance on 1 July 2001.

1.10 The conversion process involves cancelling any existing surplus or deficit in the franking account and reinstating the cancelled deficit or surplus with an equivalent surplus or deficit based on the 30% rate. [Schedule 1, item 10, section 160AUB]

1.11 The following 2 steps are necessary to carry out the conversion (a similar process applies for venture capital sub-accounts):

Step 1: Cancel the existing class C franking surplus or deficit.

In the case of a surplus, an offsetting franking debit is posted to the franking account equal to the surplus.
In the case of a deficit, an offsetting franking credit is posted to the franking account equal to the deficit.

Step 2: Reinstate the class C franking surplus or deficit.

Where a surplus is to be reinstated, a franking credit is posted equal to the amount of the offsetting debit in step 1 multiplied by the conversion factor:

(34 / 66) * (70 / 30)

Where a deficit is to be reinstated, a franking debit is posted equal to the amount of the offsetting credit in step 1 multiplied by the conversion factor:

(34 / 66) * (70 / 30)

Example 1.1 Leongs Landscape Supplies Ltd maintains a class C franking account and has a standard franking year of 1 July to 30 June. On 1 July 2001, the company has a carry forward franking surplus from the previous franking year of $10,000. The company converts its franking account balance to reflect the new company tax rate as follows:class C franking account balance $10,000offsetting class C franking debit -$10,000reinstating class C franking credit $12,020

[$10,000 * (34 / 66) * (70 / 30)]

Example 1.2 Hoas Haberdashery Ltd is an early balancing company. It maintains a class C franking account and has a franking year of 1 April to 31 March. On 1 July 2001, the companys franking account has a deficit balance of $5,000. The company converts its franking account balance to reflect the new company tax rate as follows:class C franking account balance -$5,000offsetting class C franking credit $5,000reinstating class C franking debit -$6,010

[$5,000 * (34 / 66) * (70 / 30)]

Franked dividends paid on or after 1 July 2001 will reflect the 30% company tax rate

1.12 All franked dividends paid on or after 1 July 2001 will carry imputation credits reflecting the 30% company tax rate. Accordingly, franking rebates claimed by shareholders in respect of class C franked dividends paid on or after 1 July 2001 will be based on the 30% company tax rate. This change also applies to franking rebates claimed by beneficiaries and partners because a class C franked dividend is paid to a trust or partnership on or after 1 July 2001.

1.13 This result is achieved by omitting the reference to 34% in paragraph (cb) of the definition of applicable general company tax rate in section 160APA of the ITAA 1936 and replacing it with 30%. [Schedule 1, item 2, section 160APA]

Example 1.3 Sandra is a shareholder in XYZ Ltd. On 15 July 2001, XYZ pays a $100 class C fully franked dividend to Sandra.The applicable general company tax rate for the purposes of the payment of the franked dividend is 30%. This means the additional amount included in Sandras assessable income under subsection 160AQT(1AB) is equal to $42.86 (i.e. $100 30 / 70). Sandra is also entitled to a franking rebate (i.e. a tax offset) of the same amount under section 160AQU.

1.14 The amendments will also ensure that shareholders receive clear information from companies in relation to franked dividends that they receive. The shareholder statement in relation to a dividend paid on or after 1 July 2001 must include the gross up amount for the dividend (calculated under subsection 160AQT(1AB)) and specify that the applicable company tax rate used to calculate the gross up amount is 30%. [Schedule 1, item 4, subparagraph 160AQH(1)(b)(iva)]

Converting franking credits and debits arising on or after 1 July 2001 which do not reflect the 30% company tax rate

1.15 Once franking account balances are converted to reflect the 30% company tax rate, it is necessary to ensure that franking credits and debits arsing on or after 1 July 2001 reflect the 30% rate. Accordingly, special rules are required to ensure that where franking credits and debits arise based on an underlying rate other than the 30% rate, those credits and debits are converted to equivalent credits and debits based on the new rate. [Schedule 1, item 10, section 160AUC]

1.16 The process for converting franking credits and debits is a 2 step process. Firstly, where a franking credit or debit arises based on a rate other than the 30% rate, the credit or debit is cancelled by an offsetting credit or debit of the same amount and, secondly, an equivalent credit or debit is then posted based on the 30% rate.

1.17 The table in subsection 160AUC(1) sets out the conversion processes to be followed in cases where:

class A franking account entries arise based on a 39% rate;
class B franking account entries arise based on a 33% rate;
class C franking account entries arise based on either a 34% or 36% rate; and
venture capital sub-account entries arise based on either a 36% or 34% rate (note this only applies to pooled development funds).

1.18 In summary:

class A franking credits and debits are converted into equivalent class C franking credits and debits using the factor:

(39 / 61) * (70 / 30)

class B franking credits and debits are converted into equivalent class C franking credits and debits using the factor:

(33 / 67) * (70 / 30)

class C franking credits and debits (based on a 34% rate) are converted into equivalent class C franking credits and debits using the factor:

(34 / 66) * (70 / 30)

class C franking credits and debits (based on a 36% rate) are converted into equivalent class C franking credits and debits using the factor:

(36 / 64) * (70 / 30)

venture capital sub-account franking credits and debits (based on a 34% rate) are converted into equivalent franking credits and debits using the factor:

(34 / 66) * (70 / 30)

venture capital sub-account franking credits and debits (based on a 36% rate) are converted into equivalent franking credits and debits using the factor:

(36 / 64) * (70 / 30)

1.19 Some franking credits and debits that arise on or after 1 July are not to be converted. Those that are not converted include:

franking credits and debits arising under this Division. These franking credits and debits arise as part of the conversion to reflect the new company tax rate. To convert them again would frustrate the conversion;
franking credits arising under sections 160APL and 160ASEE. These franking credits, which carry forward franking surpluses from previous franking years, are already taken into account in the conversion process (see paragraph 1.8); and
franking debits arising under sections 160APX (underfranking debits), 160AQB (payment of franked dividends), 160AQCB, 160AQCBA, 160AQCNA or 160AQCNB (dividend streaming or franking credit trading arrangements), 160AQCC (on-market share buyback arrangements) and 160AQCNC (private company distributions treated as dividends). It is unnecessary to convert these franking debits because they would have been calculated by reference to the 30% rate if they arise on or after 1 July 2001.

[Schedule 1, item 10, paragraph 160AUC(1)(b)]

Converting franking credits and debits arising before 1 July 2001 which originally reflected a 30% company tax rate

1.20 The new company tax rate of 30% applies to the 2001-2002 income year. For most companies, this rate applies from 1 July 2001. In the case of early balancing companies, however, franking credits and debits may arise prior to 1 July 2001 based on a 30% tax rate.

1.21 In order to ensure that the conversion of franking account balances on 1 July 2001 does not cause anomalous results, it is necessary to convert any franking credits or debits that arise prior to 1 July 2001 that are based on a 30% rate to equivalent franking credits based on a 34% rate.

1.22 Accordingly, any class C or venture capital sub-account franking credit or debit arising before 1 July 2001 that reflects an applicable company tax rate of 30% is to be converted to the equivalent 34% credit or debit. [Schedule 1, item 10, section 160AUD]

1.23 Where class C or venture capital sub-account franking credits or debits arise based on the 30% rate, the credit or debit is cancelled by an offsetting credit or debit of the same amount and an equivalent credit or debit is posted based on the 34% rate.

1.24 The table in subsection 160AUD(1) sets out the conversion processes to be followed in cases where:

class C franking credits and debits (based on a 30% rate) are converted into equivalent class C franking credits and debits using the factor:

(30 / 70) * (66 / 34)

venture capital sub-account franking credits and debits (based on a 30% rate) are converted into equivalent franking credits and debits using the factor:

(30 / 70) * (66 / 34)

1.25 The following franking credits and debits are excluded from the conversion:

franking credits arising under sections 160APL and 160ASEE. These franking credits, which carry forward franking surpluses from previous franking years, are already taken into account in the conversion process. A franking credit under this section will reflect a 34% company tax rate if it arises before 1 July 2001.
franking debits arising under sections 160APX (underfranking debits), 160AQB (payment of franked dividends), 160AQCB, 160AQCBA, 160AQCNA or 160AQCNB (dividend streaming or franking credit trading arrangements), 160AQCC (on-market share buyback arrangements) and 160AQCNC (private company distributions treated as dividends). These debits will reflect a company tax rate of 34% where they arise before 1 July 2001.

[Schedule 1, item 10, paragraph 160AUD(1)(b)]

Consequential modifications to the required franking amount rules

1.26 The operation of the required franking rules is to be modified as a consequence of the franking account conversions. This modified operation is only relevant to situations where dividends are paid both before and after 1 July 2001 under a single resolution.

1.27 The required franking amount rules are designed to prevent dividend streaming arrangements by ensuring that dividends are franked to the maximum extent possible having regard to the companys franking account balance. Further, the rules ensure that where 2 or more dividends are paid under a single resolution, those dividends are franked to the same extent.

1.28 The required franking amount of a dividend is calculated by reference to the franking surplus on the reckoning day for that dividend. For a dividend paid under a resolution, the reckoning day is the day on which the first dividend under the resolution is paid.

1.29 Anomalies could arise where dividends are paid under a single resolution both before and after 1 July 2001. This would occur because a dividend paid on or after 1 July 2001 will carry imputation credits based on a 30% rate, where as the required franking amount of the dividend is calculated by reference to the franking surplus on the reckoning day which is based on the 34% tax rate.

1.30 Three specific amendments have been made to address this situation:

providing for resolution splitting for dividends straddling 1 July 2001;
allowing variations to dividend declarations; and
providing modifications to the rules relating to overfranked earlier dividends.

Resolution splitting

1.31 Where a company pays a number of class C franked dividends under a resolution made before 1 July 2001 and some of the dividends (first series dividends) are paid before that date, while other dividends (second series dividends) are paid after that date, the first series and second series dividends will be taken to have been made under separate resolutions. [Schedule 1, item 10, subsection 160AUE(1) and paragraph 160AUE(2)(a)]

1.32 The effect of this rule is that the second series dividends will have their required franking amount worked out on the basis of a franking surplus that has been converted on 1 July 2001 to reflect a 30% tax rate.

Example 1.4 Julias Junkyard Ltd makes a resolution on 1 December 2000 to pay dividends on 1 May 2001 (first series dividend) and 1 November 2001 (second series dividend). Under the existing law, the reckoning day for these dividends is therefore 1 May 2001.Under the new rules, however, this resolution will be split into 2 separate resolutions - one dealing with the first series dividend and one dealing with the second series. The reckoning day for the first series is still 1 May 2001 and the calculation of the required franking amount remains substantially unaltered. The required franking amount will be calculated based on a class C franking account balance that reflects the 34% tax rate. The franked dividends received by shareholders will carry imputation credits that reflect the 34% tax rate.The reckoning day for the second series dividend will now be 1 November 2001. The required franking amount will be calculated based on a class C franking account balance that reflects the 30% tax rate just as the imputation credits underlying the franked dividend will be based on a 30% tax rate.

Declaration variations

1.33 If a company has already made a declaration under section 160AQF or 160ASEL in relation to the dividends, the second series dividends may be franked to a different extent than that set out under the new required franking amounts for those dividends.

1.34 To deal with this, the original declaration made will be taken to have applied to the first series dividends and the company will be permitted to make a further declaration in respect of the second series dividends. [Schedule 1, item 10, paragraph 160AUE(2)(b)]

1.35 However, if the company makes no declaration in respect of the second series dividends before the reckoning day for those dividends, the dividends will be taken to be franked to the same percentage as the first series dividends. [Schedule 1, item 10, paragraph 160AUE(2)(c)]

Example 1.5 Continuing from Example 1.4.Julias Junkyard Ltd may make a new resolution for the second series dividend before 1 November 2001 if it had previously made a declaration in relation to the first and second series dividends. If the company does not make a new declaration for the second series, the declaration originally made for both the first series and second series dividend will stand for the second series.

1.36 Circumstances may also arise where, before 1 July 2001, a company declares dividends under a resolution to be franked based on the 34% company tax rate, but no dividend will be paid under that resolution until on or after 1 July 2001.

1.37 Ordinarily, section 160AQF declarations cannot be varied however, an exception will be made where a resolution is made before 1 July 2001 but no dividends under the resolution are paid until on or after that date. In these cases, any declaration can be varied before the reckoning day of the dividend to take into account the 30% company tax rate. [Schedule 1, item 10, section 160AUF]

Modifications to the rules for overfranked earlier dividends

1.38 When a dividend is to be paid, the required franking amount for that dividend is calculated under section 160AQE. If the dividend is franked to a greater extent than the required franking amount for that dividend, the dividend is said to be overfranked. This means that the dividend has been franked to a greater extent than can be supported by the franking account surplus.

1.39 The required franking amount provisions in section 160AQE contains a special rule that provides that if a company overfranks an earlier franked dividend and there is a committed future dividend at the time of the earlier franked dividend, that committed future dividend must be franked at least to the same extent. This rule is set out in subsection 160AQE(3).

1.40 The rule in subsection 160AQE(3) effectively provides a formula in paragraph 160AQE(3)(c) that ensures that the franked amount of the earlier dividend is factored into the calculation of the required franking amount of the current dividend.

1.41 It may arise that the committed future dividend (called the current dividend in subsection 160AQE(3)) may have a reckoning day on or after 1 July 2001, but the earlier franked dividend has a reckoning day before that time. This means that the required franking amount of the current dividend may be affected by the franked amount of the earlier dividend.

1.42 The franked amount of the earlier dividend would have been determined on the basis of a franking account balance based on the 34% tax rate. The required franking amount of the current dividend with a reckoning day on or after 1 July 2001 must be determined having regard to franking account balance that reflects a 30% tax rate.

1.43 As the earlier franked amount is to be used in the calculation of the required franking amount for the current dividend, a modification to subsection 160AQE(3) is necessary to convert the earlier franked amount into an amount that reflects a 30% tax rate. This will prevent any unintended distortions in the calculation of the required franking amount of the current dividend. [Schedule 1, item 10, section 160AUG]

Example 1.6 Jaimies Jet Propelled Cycles Ltd pays a franked dividend (the earlier dividend) of $20,000 on 1 May 2001. At the time, the required franking amount of the dividend was determined to be $10,000 but the company decided the franked amount of the dividend would be $15,000 (i.e. the dividend was overfranked). At that time the company had a committed future dividend to be paid on 1 October 2001.On 1 October 2001, the company pays a dividend of $12,000 and at that time the company has a franking surplus of $6,000. In determining the required franking amount of the current dividend (i.e. what was a committed future dividend on 1 May 2001), the company must have regard to the earlier franked amount of the dividend paid on 1 May 2001.In applying the rules in section 160AQE, the company must make 2 calculations of the provisional required franking amount. A calculation is made under subsection 160AQE(2) and another is made under subsection 160AQE(3).The required franking amount for the current dividend will be the greater of the 2 provisional required franking amounts calculated below:Amount calculated under subsection 160AQE(2):current dividend * (amount of the franking surplus / current dividend)$12,000 * [$6,000 / $12,000] = $6,000Amount calculated under subsection 160AQE(3):current dividend * (earlier franked amount / earlier franked dividend)$12,000 * [$18,030 / $20,000] = $10,818where the earlier franked amount is calculated as:franked amount of the earlier dividend * ( 34 / 66 * 70 / 30)$15,000 * (34 / 66 * 70 / 30 ) = $18,030Therefore, the required franking amount of the current dividend is $10,818.

Modifications to the equal franking rule in section 160AQG

1.44 Section 160AQG effectively provides that dividends that are part of a combined class of dividends must be equally franked. If this is not the case, then the dividends will all be treated as though they had been paid under the resolution relating to the first dividend of the class to ensure that those dividends are equally franked. The purpose of this section is to prevent blatant dividend streaming arrangements.

1.45 A new subsection has been inserted into section 160AQG to ensure that companies are not inappropriately caught by section 160AQG where a combined class of dividends paid during the year straddles 1 July 2001. The provision splits the franking year (other than one starting on 1 July 2001) into 2 separate franking years - the first ending on 30 June 2001 and the second starting on 1 July 2001. [Schedule 1, item 3, subsection 160AQG(5)]

1.46 The effect of this amendment is that section 160AQG will apply separately in respect of the two split franking years. This rule means that companies will not be subject to section 160AQG if dividends are not equally franked only because of the rules relating to the conversion of franking accounts to reflect the new company tax rate.

1.47 Notwithstanding these amendments, companies that enter into a strategy to stream franking credits can still expect to attract the operation of the various anti-streaming rules in Part IIIAA.

Estimated debit determinations

1.48 A company can request an estimated debit determination if it can foresee a refund of company tax in certain circumstances. An estimated debit determination will give rise to a franking debit. This means that dividends can be franked to take account of the estimated debit.

1.49 Under the current law, a taxpayer may apply to the Commissioner for a class C estimated debit determination under section 160AQDAA. However, if the Commissioner does not make a declaration within 21 days, the Commissioner is deemed to have made a determination of the amount requested in the application.

1.50 The period of 21 days means that applications made by companies between 9 June 2001 and 30 June 2001 may have been based on a 34% tax rate. If that were the case, the actual debit that arises as a result of the determination may be inappropriate where the 21 day period ends on or after 1 July 2001.

1.51 A special rule has been introduced to provide for this situation. Essentially, the rule provides that if a debit arises on or after 1 July 2001 under section 160AQC(3) or section 160ASEI as a result of an estimated debit determination, and the amount of the debit is based on a 34% tax rate, that debit will be reversed out and an equivalent debit based on the 30% tax rate will arise in the companys franking account. [Schedule 1, item 10, paragraph 160AUC(2)(b)]

Division 14 not to apply after 30 June 2001

1.52 Sections 160ATA and 160ATD which deal with franking account conversions to the 34% company tax rate will no longer apply after 30 June 2001. Where franking credits or debits arise after 1 July 2000 but before 1 July 2001, however, these provisions still have effect. [Schedule 1, items 6 to 9, subsections 160ATA(3) and 160ATD(1), paragraphs 160ATD(1)(a) and 160ATDA(2)(b)]

Changing other references to a 34% rate in the imputation provisions

1.53 The following references in the imputation provisions that rely on a company tax rate of 34% will be replaced by references relying on the new rate of 30%:

in paragraph (baa) of the definition of applicable general company tax rate (which applies in relation to a companys liability to pay class C FDT) in section 160APA [Schedule 1, item 1, section 160APA] ; and
in the formula in subsection 160AQJC(4) which calculates the gross class C deficit deferral amount for the purposes of working out liabilities to class C DDT [Schedule 1, item 5, subsection 160AQJC(4)] .

Application and transitional provisions

1.54 The following amendments apply to relevant dividends paid on or after 1 July 2001:

item 2 of Schedule 1, which provides for the change in the applicable company tax rate for a payment of class C franked dividends and for trust amounts and partnership amounts related to the payment of class C franked dividends [Schedule 1, subitem 11(2)] ; and
item 4 of Schedule 1, which modifies the requirements for dividend statements [Schedule 1, subitem 11(3)] .

1.55 The amendments in items 1 and 5 of Schedule 1 that reflect the new company tax rate of 30% for the purposes of FDT and DDT apply to:

FDT for franking years ending on or after 1 July 2001 [Schedule 1, subitem 11(1)] ; and
DDT in relation to company tax instalments paid during a franking year ending on or after 1 July 2001 [Schedule 1, subitems 11(1) and (4)] .

REGULATION IMPACT STATEMENT

Policy objective

1.56 Companies (and similar taxpayers) will convert their franking account balances on 1 July 2001 to reflect the reduction of the company tax rate from 34% to 30%.

1.57 The policy objective is to convert the franking account balances of companies. This will ensure that the value of franking credits accumulated prior to the rate change is preserved whilst minimising compliance costs for corporate taxpayers.

Implementation options

1.58 This measure is substantially similar to the conversion process that was implemented last year when the company tax rate was reduced from 36% to 34%.

Assessment of impacts

1.59 The franking account conversion legislation will impose a small, generally once only, compliance burden on those taxpayers affected. The conversion process that a taxpayer will be required to follow will be substantially similar to that required when the tax rate was reduced last year, so companies are familiar with the conversion process.

Impact group identification

1.60 The taxpayers affected by these rules are those resident taxpayers that are required to maintain franking accounts. They are:

all resident companies (including non-mutual life assurance companies);
all resident public trading trusts;
all resident corporate unit trusts; and
all limited partnerships.

Analysis of costs/benefits

1.61 The rules are generally beneficial to taxpayers in that they preserve the value of franking credits that accumulated at a higher tax rate. The measure imposes a small compliance burden on affected taxpayers, generally involving a simple calculation and simple accounting entries.

Other issues - consultation

1.62 There is no need for consultation in relation to this measure because it is consistent with previous conversions and therefore with taxpayers expectations.

Conclusion and recommended option

1.63 There are no other options for implementing this policy objective.

Chapter 2 - Friendly societies

Outline of chapter

2.1 Schedule 2 to this bill amends the ITAA 1997 to defer the commencement date of the Review of Business Taxation proposals to tax friendly societies on investment income received that is attributable to funeral policies, scholarship plans and income bonds sold after 30 November 1999. Friendly societies will remain exempt from tax on that investment income until 30 June 2002.

2.2 The amendments also defer the commencement of the new methodology for working out the capital component of ordinary life insurance investment policies until 1 July 2002.

Context of amendments

2.3 Under paragraph 320-35(1)(f) of the ITAA 1997, friendly societies are exempt from tax on:

all investment income received that is attributable to funeral policies, scholarship plans and income bonds issued before 1 December 1999; and
investment income received before 1 July 2001 that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999. Friendly societies will be taxed on this income from 1 July 2001 in the same way that life insurance companies are taxed on investment income that is attributable to life insurance investment policies.

2.4 The changes to the tax treatment of investment income received by friendly societies that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999 is integrally linked to the Review of Business Taxation life insurance policyholder reforms. Those reforms have been deferred to allow further consultation with industry.

2.5 Section 320-75 allows a deduction to life insurance companies for the capital component of premiums paid in respect of ordinary life insurance investment policies. The methodology for working out the deduction depends on whether the policy is issued before or after 1 July 2001:

if the policy issued before 1 July 2001, the amount allowed as a deduction is the net premiums less the amount that an actuary determines to be attributable to fees and charges; or
if the policy issued on or after 1 July 2001, the amount allowed as a deduction is the lesser of:

-
the amount specified in the policy to be the capital component (less any adjustments for reinsurance); and
-
the net premiums less the amount that an actuary determines to be attributable to fees and charges.

2.6 Currently, the capital component of premiums is not required to be specified in life insurance policies. However, it was expected that this situation would have changed from 1 July 2001 as life insurance companies developed new policies in response to the Review of Business Taxation life insurance policyholder reforms. As those reforms have been deferred, the change in the methodology (see paragraph 2.5) for working out the deduction for the capital component of premiums paid in respect of ordinary life insurance investment policies will also be deferred until 1 July 2002.

Summary of new law

2.7 Schedule 2 to this bill will amend the ITAA 1997 so that:

investment income that friendly societies receive that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999 continues to be exempt from tax until 1 July 2002; and
the change in methodology for working out the deduction allowed to life insurance companies for the capital component of premiums paid in respect of ordinary investment life insurance policies is deferred until 1 July 2002.

Comparison of key features of new law and current law
New law Current law
Friendly societies will be exempt from tax on income received that is attributable to all funeral policy, scholarship plan and income bond business until 30 June 2002.

Friendly societies will be taxed on income received after 30 June 2002 that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999.

Friendly societies will be taxed on income received after 30 June 2001 that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999.
The deduction allowed to life insurance companies for the capital component of premiums paid in respect of ordinary life insurance investment policies is worked out as follows:

if the policy issued before 1 July 2002, the amount allowed as a deduction will be the net premiums less the amount that an actuary determines to be attributable to fees and charges; or
if the policy issued on or after 1 July 2002, the amount allowed as a deduction will be the lesser of:

-
the amount specified in the policy to be the capital component (less any adjustments for reinsurance); and
-
net premiums less the amount that an actuary determines to be attributable to fees and charges.

The deduction allowed to life insurance companies for the capital component of premiums paid in respect of ordinary life insurance investment policies is worked out as follows:

if the policy issued before 1 July 2001, the amount allowed as a deduction is the net premiums less the amount that an actuary determines to be attributable to fees and charges; or
if the policy issued on or after 1 July 2001, the amount allowed as a deduction is the lesser of:

-
the amount specified in the policy to be the capital component (less any adjustments for reinsurance); and
-
net premiums less the amount that an actuary determines to be attributable to fees and charges.

Detailed explanation of new law

Exempt income of friendly societies

2.8 Paragraph 320-35(1)(f) will be amended so that it exempts a life insurance company that is a friendly society from tax on:

amounts received on or after 1 July 2001 but before 1 July 2002 that are attributable to income bonds, funeral policies or scholarship plans irrespective of the date of issue; and
amounts received on or after 1 July 2002 that are attributable to income bonds, funeral policies or scholarship plans issued before 1 December 1999.

[Schedule 2, item 1, subparagraphs 320-35(1)(f)(ia) and (ii)]

2.9 Amounts received before 1 July 2001 that are exempt from income tax under section 50-1 will continue to be exempt from tax under subparagraph 320-35(1)(f)(i).

Deductibility of interest credited to income bonds

2.10 Section 320-110 allows a deduction to a life insurance company that is a friendly society for interest credited to the holders of income bonds issued after 30 November 1999 where the interest accrues on or after 1 July 2001. As a consequence of friendly societies continuing to be exempt from tax until 1 July 2002 on amounts that are attributable to income bonds issued after 30 November 1999, the deduction for interest credited by friendly societies to the holders of income bonds issued after 30 November 1999 will only apply where the interest accrues on or after 1 July 2002. [Schedule 2, item 4, section 320-110]

Capital component of premiums in respect of ordinary life insurance investment policies

2.11 Section 320-75 allows a deduction for the capital component of premiums in respect of ordinary life insurance investment policies. The basis for working out the amount of the deduction will depend on whether the policy was taken out before or after 1 July 2002.

2.12 If the policy issues before 1 July 2002, the amount allowed as a deduction will be the net premiums less the amount that an actuary (having regard to the change over the income year in the sum of the net current termination values of the policies and the movements in those values during the year) determines to be attributable to fees and charges. [Schedule 2, item 3, subsection 320-75(3)]

2.13 If the policy issues on or after 1 July 2002, the amount allowed as a deduction will be the lesser of:

the amount specified in the policy to be the capital component (less any adjustments for reinsurance); and
net premiums less the amount that an actuary (having regard to the change over the income year in the sum of the net current termination values of the policies and the movements in those values during the year) determines to be attributable to fees and charges.

[Schedule 2, item 2, subsection 320-75(2)]

Application and transitional provisions

2.14 The amendments apply from 1 July 2001.

Chapter 3 - Prescribed dual residents

Outline of chapter

3.1 Schedule 3 to this bill amends the ITAA 1936 to make corrections to the intercorporate dividend rebate provisions so that:

the intercorporate dividend rebate is not available in respect of any unfranked dividends paid to or by a dual resident company, including dividends paid within a wholly-owned group; and
the deduction allowed to certain non-resident owned companies to offset the removal of the rebate is not available in respect of unfranked dividends paid to or by a dual resident company.

Context of amendments

3.2 A drafting error in amendments made last year to deny the intercorporate dividend rebate to unfranked dividends paid to all companies, other than those paid to resident companies within a wholly-owned company group, inadvertently extended the rebate to unfranked dividends paid to or by dual resident companies within wholly-owned groups on or after 1 July 2000. Before these amendments, dual resident companies were denied the rebate for unfranked dividends in all circumstances.

3.3 Also, a deduction allowed to certain non-resident owned companies to offset the removal of the rebate from 1 July 2000 was inadvertently made available in respect of unfranked dividends paid to or by a dual resident company.

3.4 The explanatory memorandum to the New Business Tax System (Miscellaneous) Act (No. 1) 2000, which contains the relevant amendments, explicitly stated in paragraphs 1.2 and 1.17 that there would be no change to the tax treatment of dividends paid to or by dual resident companies.

3.5 A dual resident company is a company that is a resident of both Australia and another country for income tax purposes that:

is treated in effect as a non-resident of Australia for the purposes of a double taxation treaty; or
qualifies as a resident of Australia solely under the central management and control test in subsection 6(1) of the ITAA 1936, but also has central management and control outside Australia.

Summary of new law

3.6 The intercorporate dividend rebate will not be available in respect of any unfranked dividends paid to or by a dual resident company, including dividends paid within a wholly-owned group. Nor will a related deduction allowed to certain non-resident owned companies under section 46FA be available in respect of unfranked dividends paid to or by a dual resident company.

Detailed explanation of new law

3.7 Subsection 46F(2) denies the intercorporate dividend rebate for unfranked dividends received by most resident companies. However, subsection 46F(3) preserves the rebate for unfranked dividends paid within wholly-owned groups by providing that subsection 46F(2) does not apply in respect of such dividends.

3.8Subsection 46F(3A) excludes unfranked dividends paid to or by a dual resident company within a wholly-owned group from the operation of subsection 46F(3). Consequently, all unfranked dividends paid to or by a dual resident company will be denied the rebate under subsection 46F(2). [Schedule 3, item 2, subsection 46F(3A)]

3.9 Section 46FA provides a deduction for a resident company that receives an unfranked non-portfolio dividend and on-pays the dividend to the companys non-resident parent. Paragraph 46FA(1)(ba) will ensure that the deduction is not available in respect of dividends that are paid to or by a dual resident company. [Schedule 3, item 3, paragraph 46FA(1)(ba)]

Application and transitional provisions

3.10 These amendments will apply to dividends paid on or after 1 July 2000. These are the dividends in relation to which the rebate and deduction would otherwise be allowed unintentionally because of a drafting error. [Schedule 3, item 4]

Chapter 4 - Refundable tax offsets

Outline of chapter

4.1 Part 1 of Schedule 4 to this bill amends the ITAA 1936 and the ITAA 1997 to remove scope for double refunds of excess imputation credits to both a trustee and a beneficiary.

4.2 Part 2 of Schedule 4 to this bill amends the ITAA 1997 to deny refunds of excess imputation credits to non-complying superannuation funds and non-complying ADFs.

Context of amendments

4.3 Resident individuals and certain entities, including superannuation funds, are eligible for refunds of excess imputation credits in respect of dividends paid on or after 1 July 2000. If these taxpayers receive a franked dividend from a company and they are taxed at a rate which is lower than the company tax rate, they will receive a refund of excess imputation credits reflecting the difference between the relevant tax rates.

Removal of scope for double refunds to trustees and beneficiaries

4.4 Due to a defect in the current law, both a trustee and a beneficiary may be entitled to a refund in respect of the same imputation credits. This may occur, for example, where a trustee is assessed in respect of dividend income under subsection 98(1) of the ITAA 1936 because a beneficiary is a minor, and therefore under a legal disability, and the beneficiary is a beneficiary in another trust estate or has income from other sources.

Denial of refunds to non-complying superannuation funds

4.5 All superannuation funds, including non-complying superannuation funds and non-complying ADFs, are currently eligible for refunds of excess imputation credits. Non-complying superannuation funds and non-complying ADFs are taxed at the top marginal tax rate rather than the concessional 15% rate generally applicable to complying superannuation entities. Therefore, they would rarely be in a position to claim a refund.

4.6 Since commencement of the refundable imputation credits measure from 1 July 2000, it has become apparent that non-complying superannuation entities may be used as a vehicle to access tax benefits inappropriately. It is possible for such funds to enter into artificial schemes so as to produce surplus imputation credits in respect of which they would be entitled to a refund.

Summary of new law

Removal of scope for double refunds to trustees and beneficiaries

4.7 These amendments will make a correction to the refundable tax offset rules in Division 67 of the ITAA 1997 so that double claiming of a refund of excess imputation credits by both a trustee and a beneficiary will not be possible. In addition, a consequential amendment will be made to Division 6 of the ITAA 1936.

Denial of refunds to non-complying superannuation funds

4.8 The income tax law will be amended to ensure that non-complying superannuation funds and non-complying ADFs are not eligible for refunds of excess imputation credits.

Detailed explanation of new law

Removal of scope for double refunds to trustees and beneficiaries

4.9 Refunds of excess imputation credits are provided for by Division 67 of the ITAA 1997. Subsection 67-25(1) sets out the tax offsets that arise from franked dividends that are refundable. The franking rebate allowed to trustees under section 160AQY of the ITAA 1936 is currently refundable where the trustee is assessed under section 98 of the ITAA 1936.

4.10 Item 3 will amend subsection 67-25(1) so that a franking rebate allowable to a trustee under section 160AQY will not be refundable where the trustee is assessed under section 98. Trustees assessed under section 99 will continue to be eligible for refunds of excess imputation credits.

4.11 The amendment to the refundable tax offset provisions will apply to refunds of tax offsets (i.e. franking rebates) that relate to dividends paid on or after 1 July 2000. This means that there will be no scope for double refunds of excess imputation credits. [Schedule 4, subitem 4(2)]

4.12 Beneficiaries will continue to be eligible for refunds of excess imputation credits. If a beneficiary is a beneficiary in another trust estate or has income from other sources, the income assessed to the trustee under subsections 98(1) or (2) is also included in the assessable income of the beneficiary under subsection 100(1) and the beneficiary is given a credit under subsection 100(2) for any tax paid by the trustee. A franking rebate is allowable under section 160AQX.

4.13 Consequential amendments will be made to Division 6 of the ITAA 1936 to overcome a complication that arises where a trustee is assessed under subsections 98(1) or (2) but the income is not also included in the assessable income of the beneficiary under subsection 100(1). This could arise where the beneficiary has no other income and is not a beneficiary in another trust estate. A beneficiary is entitled to a franking rebate in respect of a distribution attributable to a franked dividend, and therefore to a refund of excess imputation credits, only where the distribution is included in the assessable income of the beneficiary.

4.14 Item 1 inserts new subsection 100(1A) to include the distribution in the beneficiarys assessable income in this case. The amount will be included only where there is a potential refund of excess imputation credits. Item 2 amends subsection 100(2) so that the beneficiary will be given a tax credit for any tax paid by the trustee.

Denial of refunds to non-complying superannuation funds

4.15 The tax offsets relating to franked dividends that are subject to the refundable tax offset rules are listed in subsection 67-25(1) of the ITAA 1997. New subsections 67-25(1A) and (1C) will make franking rebates allowable to trustees of non-complying superannuation funds and non-complying ADFs no longer subject to the refundable tax offset rules. This means that trustees of non-complying superannuation funds and non-complying ADFs will no longer be eligible for refunds of excess imputation credits under section 67-30 of the ITAA 1997. [Schedule 4, item 6, subsections 67-25(1A) and (1B)]

4.16 The insertion of new subsections 67-25(1A) and (1C) necessitates a consequential amendment to subsection 67-25(1). New subsection 67-25(1B) will replicate the qualification relating to tax offsets described in paragraph (c) of subsection 67-25(1) as amended by item 3. The relevant offsets are franking rebates allowed to trustees under section 160AQY of the ITAA 1936. [Schedule 4, items 5 and 6, subsection 67-25(1B)]

4.17 Item 3 inserts a definition of non-complying ADF into subsection 995-1(1) of the ITAA 1997. This term will have the meaning given by Part IX of the ITAA 1936. [Schedule 4, item 7, subsection 995-1(1)]

Application and transitional provisions

Removal of scope for double refunds to trustees and beneficiaries

4.18 The amendments to Division 6 will apply to assessments for years of income starting on or after 1 July 2000. [Schedule 4, subitem 4(1)]

4.19 The amendments to the refundable tax offset rules will apply to tax offsets that relate to dividends paid on or after 1 July 2000. This means that the law will be corrected from the commencement of refunds of excess imputation credits. [Schedule 4, subitem 4(2)]

Denial of refunds to non-complying superannuation funds

4.20 The amendments to section 67-25 of the ITAA 1997 will apply to assessments for income years ending on or after 22 May 2001. [Schedule 4, item 8]

Chapter 5 - Franking rebate on indirect distributions to exempt institutions

Outline of chapter

5.1 Schedule 5 to this bill makes technical corrections to the franking rebate provisions in the ITAA 1936 to clarify that registered charities and gift-deductible organisations which are trusts are eligible for refunds of excess imputation credits in respect of distributions attributable to franked dividends received indirectly through another trust.

Context of amendments

5.2 Certain registered charities and gift-deductible organisations are entitled to a refund of imputation credits in respect of franked dividends paid on or after 1 July 2000. Entities which are eligible for the refund are described in section 160ARDAB.

5.3 The entitlement to refunds is intended to arise in relation to franked dividends received by relevant entities, whether the dividends are received directly as a shareholder or indirectly as a beneficiary of a trust. However, there is some uncertainty regarding the eligibility of charitable trusts to refunds of imputation credits in respect of distributions received indirectly through another trust because of a technical issue relating to the franking rebate provisions.

Summary of new law

5.4 The amendment will remove any uncertainty about the entitlement of registered charities and gift-deductible organisations which are trusts to refunds of excess imputation credits in respect of distributions attributable to franked dividends received indirectly through another trust.

Detailed explanation of new law

5.5 As part of the legislative mechanism for making registered charities and gift-deductible organisations eligible for refunds of imputation credits, these tax exempt entities are given an entitlement to franking rebates under section 160AQU in respect of dividends and under section 160AQX in respect of indirect distributions received through another trust.

5.6 Registered charities and gift-deductible organisations are currently eligible for a franking rebate under subparagraph 160AQX(1)(b)(iii), provided that they are not trustees. This exclusion is consistent with the exclusion of trustees from each category of taxpayer entitled to a rebate under section 160AQX, because the rebate is intended to be available once only to the final beneficiary. It has been argued that charitable trusts may not be entitled to a franking rebate. The exclusion of trustees under subparagraph 160AQX(1)(b)(iii) is not intended to deny the franking rebate to a charitable trust.

5.7 Subparagraph 160AQX(1)(b)(iii) will be amended to remove the express exclusion of trustees from eligibility for the rebate to clarify that a charitable trust is entitled to a franking rebate, and therefore to a refund of imputation credits, in respect of an indirect distribution attributable to a franked dividend. [Schedule 5, item 1, subparagraph 160AQX(1)(b)(iii)]

5.8 The treatment under section 160AQX of an indirect distribution to a charitable trust will therefore be the same as that of a direct dividend paid to the same entity under section 160AQU.

5.9 Where there is a chain of charitable trusts, existing subsection 160ARDAB(8) would operate in circumstances of both direct and indirect distributions to ensure that only the first charitable trust to receive the dividend or distribution would be entitled to the rebate.

Application and transitional provisions

5.10 The franking rebate amendments are to apply to trust amounts that are attributable to dividends paid on or after 1 July 2000, that is, from the commencement of the imputation credit refunds measure. [Schedule 5, item 2]

Chapter 6 - Senior Australians Tax Offset and minor amendments of the MLA 1986

Outline of chapter

6.1 Schedule 6 to this bill explains the extended eligibility conditions for SATO which will allow senior Australians to benefit from SATO. Schedule 8 to this bill makes a technical correction to the MLA 1986 to correct references to the ITAA 1936.

Context of amendments

6.2 The amendments will ensure that the following senior Australians also benefit from SATO in the same way as other eligible senior Australians:

persons who did not actually receive a pension, allowance or benefit but were eligible to receive one under the VEA 1986; and
persons who did not satisfy the residency criteria but were eligible for an age pension under the SSA 1991 on alternative grounds.

Summary of new law

SATO

6.3 The eligibility test for SATO for veterans will now be based on a veterans eligibility rather than on receipt of a pension, allowance or benefit. The condition which required a veteran to be actually receiving a pension, allowance or benefit under the VEA 1986 is removed.

6.4 Similarly, the eligibility test for SATO for other senior Australians will be based on a persons eligibility to receive an age pension. The condition which required a person to satisfy a residency test is removed.

Amendments to the MLA 1986

6.5 This amendment corrects references in the MLA 1986 to the ITAA 1936.

Comparison of key features of new law and current law
New law Current law
SATO eligibility for veterans:

must be eligible to receive a pension, allowance or benefit under the VEA 1986;
must have reached pension age as defined in the VEA 1986; and
not be in gaol.

SATO eligibility for veterans:

must be in receipt of a pension, allowance or benefit under the VEA 1986; and
must have reached pension age as defined in the VEA 1986.

SATOeligibility for other senior Australians:

must be eligible to receive an age pension under the SSA 1991;
must have reached pension age under the SSA 1991; and
not be in gaol.

SATOeligibility for other senior Australians:

must meet the residency test - 10 years qualifying Australian residence, or has a qualifying residence exemption for an age pension under the SSA 1991;
must have reached pension age under the SSA 1991; and
not be in gaol.

Detailed explanation of new law

Veterans

Eligibility conditions for SATO

6.6 To be eligible for SATO, a veteran must:

be eligible to receive a pension, allowance or benefit under the VEA 1986;
have reached pension age as defined in the VEA 1986; and
not be in gaol.

[Schedule 6, item 1, paragraph 160AAAA(2)(a)]

6.7 A veteran, although eligible to receive a pension, allowance or benefit may not in fact receive one of those payments due to the application of the assets test or the income test or simply because a veteran chose not to receive a payment. Such veterans (i.e. those that satisfy the eligibility criteria but are not in receipt of any pension, allowance or benefit) will now be eligible for SATO. This ensures that veterans will be entitled to SATO on a consistent basis as other senior Australians of age pension age.

6.8 A veteran may not receive a pension, allowance or benefit under the VEA 1986 if the veteran is in gaol. Since the actual receipt of a pension is now removed from the eligibility conditions, the requirement that the taxpayer not be in gaol is included to maintain the original intention of the law.

Other senior Australians

Eligibility conditions for SATO

6.9 To be eligible for SATO, a person must:

be eligible to receive an age pension under SSA 1991; and
not be in gaol.

[Schedule 6, item 1, paragraph 160AAAA(2)(b)]

6.10 The residency test is removed as a condition for receiving SATO. Senior Australians who do not satisfy the residency test contained in the SSA 1991 but qualify for an age pension on alternative grounds will now be eligible for SATO. These senior Australians include:

age pensioners who received a widow B pension, a widow allowance, a mature age allowance or a partner allowance immediately before reaching pension age; and
age pensioners who became residents of Australia after ceasing residency of a country which had a social security international agreement with Australia under the Agreements Act.

6.11 The Agreements Act overrides the residency provisions of the SSA 1991. The Agreements Act has a different residency test to that contained in the SSA 1991. As such, those senior Australians do not necessarily have to satisfy the residency criteria in the SSA 1991 to be eligible to receive an age pension.

6.12 The requirement that other senior Australians be of pension age within the meaning of the SSA 1991 is no longer required since it is contained in the qualification for an age pension.

Trustees assessed under section 98

6.13 The amendments also apply to situations where a veteran or an age pensioner is a presently entitled beneficiary of a trust estate and is under a legal disability. [Schedule 6, item 2, paragraphs 160AAAB(2)(a) and (b)]

Amendments to the MLA 1986

6.14 Schedule 2 to the Taxation Laws Amendment (Changes for Senior Australians) Act 2001 raised the Medicare levy low income threshold for senior Australians and certain pensioners. A minor technical error was made when making reference to subsection 160AAA(2) of the ITAA 1936. This technical correction changes the existing reference to section 160AAA, in the MLA 1986, to subsection 160AAA(2). [Schedule 8, items 1 and 2]

6.15 The policy intention of the 2001-2002 Federal Budget measures was to ensure that certain senior Australians and pensioners who are not liable for income tax will also not be liable for any Medicare levy. This technical correction gives effect to that policy.

Application and transitional provisions

SATO

6.16 The amendments apply to assessments for the 2000-2001 year of income and later income years. During the processing of the income tax returns for the 2000-2001 year of income it was discovered that some senior Australians did not qualify despite being low income earners. The amendments are retrospective so that those veterans and other senior Australians who were not eligible for SATO in the 2000-2001 year of income can claim SATO by requesting an amendment to their income tax returns. [Schedule 6, item 3]

Amendments to the MLA 1986

6.17 The amendments to the MLA 1986 apply to assessments for the 2000-2001 income year and later income years. [Schedule 8, item 3]

Chapter 7 - Demutualisation of Tower Corporation

Outline of chapter

7.1 Schedule 7 to this bill amends the ITAA 1997 to:

ensure that taxpayers who received shares in Tower Limited as a consequence of the demutualisation of Tower Corporation (a former New Zealand resident mutual company) in October 1999 are not subject to CGT at the time their membership rights ceased to exist; and
specify the cost base for shares received in Tower Limited as a consequence of giving up those membership rights.

7.2 Consequently, depending on the circumstances, the CGT taxing point for taxpayers who received shares in Tower Limited as a consequence of the demutualisation of Tower Corporation is deferred until a CGT event happens to the shares in Tower Limited.

Context of amendments

7.3 Tower Corporation was a New Zealand mutual insurance company which demutualised on 1 October 1999. As part of the demutualisation scheme, Tower Corporation changed its name to Tower Limited. Under the demutualisation scheme, members of Towers Australian subsidiary company, Tower Life (Australia), were entitled to partly paid shares in Tower Limited (the demutualised company) as consideration for giving up their membership rights. Entitlements of members who did not take up their rights to shares in Tower Limited prior to the time of the share issue were transferred to the Tower Safe Trust until those members could be located. Members who were verified by the trustee of the Tower Safe Trust could elect to receive partly paid shares in Tower Limited or could direct the trustee to sell the shares on their behalf and receive a cash distribution.

7.4 Under the current law, special rules apply to taxpayers who receive shares in Australian resident life insurance companies that demutualise. Those rules do not apply to non-resident life insurance companies that demutualise. Therefore, taxpayers who had membership rights affected by the demutualisation of Tower Corporation would be subject to CGT on the surrender of their membership interests, even though they did not actually receive shares at that time or may never receive shares, or the proceeds from a direction to sell the shares, because they do not identify themselves to the Tower Safe Trust.

7.5 A significant number of Australian resident taxpayers had membership rights in Tower Corporation because they were policyholders of Tower Life (Australia). Those members became entitled to shares in Tower Life as a consequence of the demutualisation of Tower Corporation, and therefore had membership rights in Tower Corporation at the time that it ceased to be a mutual entity.

Summary of new law

7.6 The amendments will ensure that:

taxpayers who received partly paid shares in Tower Limited directly as a result of giving up their membership rights in Tower Corporation are not subject to CGT until a CGT event happens to the shares after the acquisition of those shares;
taxpayers who receive, or have received, partly paid shares in Tower Limited from the Tower Safe Trust as a result of giving up their membership rights in Tower Corporation are not subject to CGT until they are absolutely entitled to receive those shares; and
the cost base of shares received on the demutualisation of Tower Corporation only includes amounts paid to actually acquire the shares.

Comparison of key features of new law and current law
New law Current law
Taxpayers who received partly paid shares in Tower Limited directly as a result of giving up their membership rights in Tower Corporation arising under the demutualisation will be liable to CGT only when a CGT event happens to the shares in Tower Limited after their acquisition. That CGT event will usually be the disposal of the shares (CGT event A1). Taxpayers who received partly paid shares in Tower Limited directly as a result of giving up their membership rights in Tower Corporation arising under the demutualisation would be liable to CGT:

when their membership interests in Tower Corporation were surrendered (CGT event C2);
when their right to receive shares in Tower Limited was cancelled on subscribing for shares (CGT event C2); and
when a CGT event happens to the shares after their acquisition.

Taxpayers who receive partly paid shares in Tower Limited indirectly from the Tower Safe Trust as a result of giving up their membership rights in Tower Corporation arising under the demutualisation will be liable to CGT only when they are actually entitled to an asset of the trust - that is, when they are absolutely entitled to receive shares in Tower Limited (CGT event E5). Taxpayers who receive partly paid shares in Tower Limited indirectly from the Tower Safe Trust as a result of giving up their membership rights in Tower Corporation arising under the demutualisation would be liable to CGT:

when their membership interests in Tower Corporation were surrendered (CGT event C2);
when their right to receive shares in Tower Limited was cancelled in exchange for an interest in the Tower Safe Trust (CGT event C2); and
on becoming absolutely entitled to shares in Tower Limited (CGT event E5).

Detailed explanation of new law

No CGT event on ending of membership rights in Tower Corporation

7.7 Any capital gain or capital loss from a CGT event happening when taxpayers give up membership rights in Tower Corporation, a New Zealand resident mutual company, at the time it ceased to be a mutual entity, will be disregarded. [Schedule 7, item 2, subsections 118-550(1) and (2)]

7.8 Tower Corporation demutualised on 1 October 1999. Under the demutualisation scheme, members of Towers Australian subsidiary company, Tower Life (Australia), were entitled to partly paid shares in Tower Limited (the demutualised company) as consideration for giving up the membership rights acquired in Tower Corporation under the demutualisation. Entitlements of members who did not take up their rights to shares in Tower Limited prior to the time of the share issue were transferred to the Tower Safe Trust until those members could be located.

Partly paid shares received directly from Tower Limited

7.9 Taxpayers who received partly paid shares in Tower Limited directly as a result of surrendering their membership rights in Tower Corporation will not be liable to CGT:

at the time their membership interests in Tower Corporation were surrendered (CGT event C2); or
at the time their rights to receive shares in Tower Limited were cancelled on subscribing for shares (CGT event C2).

7.10 Rather, a CGT consequence will arise only when a CGT event happens to the shares in Tower Limited after their acquisition. For example, a CGT consequence will arise on the actual disposal of the shares (CGT event A1).

Example 7.1 Gabbie was a member of Tower Life (Australia) in September 1999 and received 50% paid up shares in Tower Limited in consideration for giving up her membership rights in Tower Corporation. Gabbie applied for shares prior to the time of the share issue and therefore received her shares directly. Gabbie will not have any CGT consequences as a result of surrendering her membership rights in Tower Corporation. Rather, Gabbie will be liable to CGT only when a CGT event, such as the sale of the shares, happens to the shares in Tower Limited after she acquires them.

Partly paid shares received from the Tower Safe Trust

7.11 Taxpayers who received partly paid shares in Tower Limited indirectly from the Tower Safe Trust as a result of surrendering their membership rights in Tower Corporation will not be liable to CGT:

at the time their membership interests in Tower Corporation were surrendered (CGT event C2); or
at the time their right to receive shares in Tower Limited was cancelled in exchange for an interest in the Tower Safe Trust (CGT event C2).

7.12 Rather, a CGT consequence will arise only when a taxpayer becomes absolutely entitled to an asset of the trust - that is, when he or she becomes absolutely entitled against the trustee of the Tower Safe Trust to receive shares in Tower Limited (CGT event E5).

Example 7.2 Chantilly was a member of Tower Life (Australia) in September 1999 and was entitled to receive 50% paid up shares in Tower Limited. Chantilly did not subscribe for those shares prior to the time of the share issue and, consequently, her share entitlement was transferred to the Tower Safe Trust. Chantilly subsequently applied for shares from the Trust and received her partly paid shares. Chantilly will not have any CGT consequences as a result of surrendering her membership rights in Tower Corporation or when her right to receive shares was exchanged for an interest in the Trust. Rather, a CGT event (CGT event E5) will happen only when Chantilly is absolutely entitled to receive shares in Tower Limited from the trustee of the Tower Safe Trust. Chantilly will make a taxable capital gain at this time.

Cost base of shares in Tower Limited

7.13 The cost base and reduced cost base of the shares in Tower Limited received as a result of surrendering membership rights in Tower Corporation does not include any amounts paid in acquiring or maintaining those membership rights or any membership rights in Tower Life (Australia). [Schedule 7, item 2, subsection 118-550(3)]

7.14 Therefore, the cost base and reduced cost base of the shares in Tower Limited received as a result of surrendering membership rights in Tower Corporation will only include:

any amount actually paid by a taxpayer to make the shares fully paid up; and
any incidental costs, as defined in section 118-35, associated with the acquisition of the shares.

Application and transitional provisions

7.15 The amendments will apply from 23 September 1999. The amendments are beneficial to taxpayers because they defer the CGT liability that arises as a consequence of surrendering their membership rights in Tower Corporation. The Tower Corporation demutualised on 1 October 1999 and relied on the announcement of these measures to advise Australian taxpayers about the consequences of accepting the demutualisation proposal.

Consequential amendments

7.16 The CGT cost base rules are generally set out in Divisions 110 and 112 of the ITAA 1997. Subdivision 112-B contains a guide for special cost base rules that apply in particular circumstances. A consequential amendment is made to insert a signpost to the special cost base rules set out in new section 118-550 for taxpayers who receive shares in Tower Limited as a result of surrendering membership rights in Tower Corporation. [Schedule 7, item 1, section 112-92]

Chapter 8 - Income tax deductions for gifts

Outline of chapter

8.1 Schedule 9 to this bill amends Division 30 of the ITAA 1997 and section 78 of the ITAA 1936. These amendments will allow an income tax deduction to a donor for certain gifts to the value of $2 or more to a number of funds and organisations listed in Table 8.1.

8.2 The amendments also make minor changes to give effect to certain organisations change of name, to extend the period of deductibility for certain organisations and to terminate the period of deductibility where an organisation has ceased to exist.

Summary of new law

8.3 The amendments will allow income tax deductions for certain gifts to the value of $2 or more made to the funds and organisations listed in Table 8.1 from, and including, the day of announcement.

Table 8.1

Name of fund Minister for Revenue and Assistant Treasurers or former Assistant Treasurers Press Release No. Date of press release
National Breast Cancer Centre Gift Fund 44 of 2001 25 September 2001
The Bionic Ear Institute 51 of 2001 5 October 2001
Australian Human Rights Education Fund 45 of 2001 25 September 2001
Australian Primary Principals Association Education Foundation 50 of 2001 2 October 2001
Sir Hughie Edwards VC Foundation Incorporated 37 of 2001 22 August 2001
Warringah, Australia Remembers Trust 54 of 2001 9 November 2001
Bowral Vietnam Memorial Walk Trust Incorporated 38 of 2001 16 August 2001
The Albert Coates Memorial Trust C4/02 31 January 2002
Tea Gardens/Hawks Nest War Memorial Committee C5/02 31 January 2002
Australian Red Cross Society American Disaster Fund 47 of 2001 26 September 2001
Young Endeavour Youth Scheme Public Fund 43 of 2001 25 September 2001

8.4 The amendments also change the name of a fund, authority or institution, as listed in Table 8.2, where that organisation has changed its name. This will ensure the organisation continues to qualify for gift deductibility status from, and including, the date of effect.

Table 8.2

Former name of organisation New name of organisation Date of effect of change of name
H.R.H. The Duke of Edinburghs Commonwealth Study Conferences (Australia) Incorporated Commonwealth Study Conferences (Australia) Incorporated 20 February 2001
Australian Administrative Staff College Monash Mt Eliza Graduate School of Business and Government Limited 22 July 1994
Monash Mt Eliza Graduate School of Business and Government Limited Mt Eliza Graduate School of Business and Government Limited 5 April 2000
Amnesty International Amnesty International Australia 1 July 1985
National Safety Council of Australia National Safety Council of Australia Limited 14 September 1993
Royal Queensland Society for the Prevention of Cruelty Royal Society for the Prevention of Cruelty to Animals, Queensland Incorporated 23 December 1999
Victorian National Parks Association Victorian National Parks Association Incorporated 18 March 1985

8.5 In addition, the amendments terminate the tax deductibility status of an organisation, as listed in Table 8.3, that has formally ceased to exist. This will ensure the organisation no longer qualifies for gift deductibility status.

Table 8.3

Name of organisation Date fund was dissolved
Katherine District Business Re-establishment Fund 17 November 2000

8.6 Further, the amendments extend the period of tax deductibility for 2 organisations as listed in Table 8.4. This will ensure the organisations continue to qualify for gift deductibility status for the periods shown.

Table 8.4

Name of organisation Minister for Revenue and Assistant Treasurers or former Assistant Treasurers Press Release No. Date deductibility ends currently Date deductibility will end after extension
Australian Ex-Prisoners of War Memorial Fund 53 of 2001 19 October 2001 19 October 2003
Royal Australian Airforce (RAAF) Memorial Trust Fund C1/02 17 November 2001 17 November 2002

Detailed explanation of new law

8.7 The funds, authorities and institutions mentioned in paragraphs 8.8 to 8.18 have been included in the tables in the gift provisions of the income tax law. Gifts of $2 or more to these organisations will allow the donor to claim that gift as an income tax deduction.

8.8 The National Breast Cancer Centre Gift Fund has been established to work directly with women, health professionals, cancer organisations, researchers and governments to improve breast cancer outcomes for women. It will also strive to reduce the mortality from breast cancer and improve the wellbeing of women who are diagnosed with the disease. [Schedule 9, item 9, subsection 30-20(2)]

8.9 The Bionic Ear Institute will raise funds to undertake research into understanding the hearing system, hearing loss and to develop clinical therapies that help hearing impaired people. [Schedule 9, item 9, subsection 30-20(2)]

8.10The Australian Human Rights Education Fund has been established to raise funds to maintain and provide human rights education programs at the national, regional and local levels. These programs will strengthen respect for human rights and fundamental freedoms in Australian society. [Schedule 9, item 12, subsection 30-25(2)]

8.11 The Australian Primary Principals Association Education Foundation has been established to raise funds to assist primary and middle school principals and their communities to help students improve learning outcomes, to improve the students quality of life and to enhance their successful contribution to Australian society and future Australian generations. [Schedule 9, item 12, subsection 30-25(2)]

8.12 The Hughie Edwards VC Foundation Incorporated will raise funds for the construction of a monument in the city of Fremantle to the memory of Sir Hughie Edwards VC, the most highly decorated Australian airman of World War II. [Schedule 9, item 20, subsection 30-50(2)]

8.13 Warringah, Australia Remembers Trust has been established to help perpetuate the memory of the deeds of Australians who participated in World War II. To achieve this objective, this Trust will produce a high quality educational video recording World War II experiences of past and present Warringah residents. It will also fund a permanent prize for a competition amongst students on a theme relating to World War II. The funds collected by this Trust will also be used to erect a new memorial or monument expressly commemorating the contribution of Australians to World War II. [Schedule 9, item 20, subsection 30-50(2)]

8.14 The Bowral Vietnam Memorial Walk Trust Incorporated has been established to raise funds to provide a memorial for the recognition, comfort and benefit of the veterans of the Vietnam War and their families. [Schedule 9, item 20, subsection 30-50(2)]

8.15 The Albert Coates Memorial Trust has been established to raise funds to establish living memorials to honour Sir Albert Coates who served in 2 World Wars with distinction. This Trust has constructed a statue of Sir Albert in the city of Ballarat. This Trust will now fund scholarships each year to medical graduates and/or assist a student in Ballarat, as well as establish other memorials appropriate to honouring the legacy of Sir Albert Coates by the education and inspiration of young people in Australia. [Schedule 9, item 20, subsection 30-50(2)]

8.16 The Tea Gardens/Hawks Nest War Memorial Committee has been established to raise funds to build a war memorial in the town of Tea Gardens, NSW. This Memorial will honour those who gave their lives in the service of Australia and those who gave their lives in the service of humanity, starting from Federation and following on in perpetuity. [Schedule 9, item 20, subsection 30-50(2)]

8.17 The Australian Red Cross Society American Disaster Fund will provide funds to provide relief to the victims of the disaster in the United States of America where, on 11 September 2001, 4 passenger planes were hijacked by terrorists and crashed into 3 buildings killing thousands of people. The victims of the disaster include the persons directly involved in the disaster and the persons indirectly involved such as families, friends and colleagues. [Schedule 9, item 22, subsection 30-80(2)]

8.18 The Young Endeavour Youth Scheme Public Fund offers a challenge to our youth through structured sail training programs that create a difference in their lives and, through them, their communities. [Schedule 9, item 23, section 30-105]

Change of names

8.19 This bill updates the tables in Subdivision 30-B to reflect the change of name of 7 organisations.

8.20 H.R.H. The Duke of Edinburghs Commonwealth Study Conferences (Australia) Incorporated has changed its name to Commonwealth Study Conferences (Australia) Incorporated from 20 February 2001. [Schedule 9, item 11, subsection 30-25(2)]

8.21 Australian Administrative Staff College has changed its name to Monash Mt Eliza Graduate School of Business and Government Limited from 22 July 1994. [Schedule 9, items 2, 3 and 5, subsections 78(3) and (4) of the ITAA 1936]

8.22 Then, Monash Mt Eliza Graduate School of Business and Government Limited changed its name to Mt Eliza Graduate School of Business and Government Limited from 5 April 2000. [Schedule 9, items 10 and 12, subsection 30-25(2)]

8.23 Amnesty International changed its name to Amnesty International Australia from 1 July 1985. [Schedule 9, items 1 and 6, subsections 78(3) and (4) of the ITAA 1936; item 13, subsection 30-45(2) of the ITAA 1997]

8.24 National Safety Council of Australia changed its name to National Safety Council of Australia Limited from 14 September 1993. [Schedule 9, items 4 and 7, subsections 78(3) and (4) of the ITAA 1936; item 14, subsection 30-45(2) of the ITAA 1997]

8.25 Royal Queensland Society for the Prevention of Cruelty changed its name to Royal Society for the Prevention of Cruelty to Animals, Queensland Incorporated from 23 December 1999. [Schedule 9, items 15 and 17, subsection 30-45(2) of the ITAA 1997]

8.26 Victorian National Parks Association changed its name to Victorian National Parks Association Incorporated from 18 March 1985. [Schedule 9, item 8, subsection 78(4) of the ITAA 1936; item 21, subsection 30-55(2) of the ITAA 1997]

Cessation of period of deductibility

8.27 This bill terminates the deductibility status for the Katherine District Business Re-establishment Fund from 18 November 2000. [Schedule 9, item 16, subsection 30-45(2)]

Extension of period of deductibility

8.28 This bill extends the period of deductibility for 2 organisations.

8.29 Donations to the Australian Ex-Prisoners of War Memorial Fund are currently allowable for gifts made before 19 October 2001. Deductibility of gifts is being extended for a further 2 years and can now be made until 19 October 2003. [Schedule 9, item 18, subsection 30-50(2)]

8.30 Gifts made to the Royal Australian Airforce (RAAF) Memorial Trust Fund have been extended for a further one year. Currently, the donation had to be made before 18 November 2001. Gifts made until 17 November 2002 will now be deductible. [Schedule 9, item 19, subsection 30-50(2)]

Update to index

8.31 The index to the Division is also updated to include the new funds, authorities and institutions. [Schedule 9, items 24 to 40, section 30-315]

Application and transitional provisions

8.32 The amendments apply from the dates shown in Tables 8.1 and 8.4.

8.33 The amendments contained in Tables 8.2 and 8.3 apply from the date of effect of the change of name or from when the fund was dissolved.

Chapter 9 - Demutualisation of mutual entities other than insurance companies

Outline of chapter

9.1 Schedule 10 to this bill amends the income tax law to recognise a new demutualisation method for non-insurance mutual entities. Members of non-insurance mutual entities that demutualise using the new method will qualify for the concessions in Schedule 2H of the ITAA 1936.

Context of amendments

9.2 Schedule 2H provides a generic framework for the taxation consequences of non-insurance mutual entities that demutualise. Broadly, the Schedule:

ensures that members of a mutual entity who receive shares as a result of the demutualisation of that entity are not subject to CGT until they dispose of those shares; and
specifies the cost base for shares issued to members as a result of the demutualisation of a mutual entity.

9.3 Members of non-insurance mutual entities that demutualise get the benefit of the concessions in Schedule 2H only if the entity uses a demutualisation method specified in the Schedule. The Schedule currently recognises 3 different demutualisation methods for non-insurance mutual entities.

Summary of new law

9.4 The amendments recognise an additional demutualisation method - the combined direct and holding company method - for non-insurance mutual entities in Schedule 2H. Under the combined direct and holding company method of demutualisation, shares in the demutualising entity can be issued to members of the mutual entity and to a holding company. Shares in the holding company must then be issued to members of the demutualising entity.

9.5 Members of non-insurance mutual entities that demutualise using the combined direct and holding company method will qualify for the concessions in Schedule 2H.

Comparison of key features of new law and current law
New law Current law

Non-insurance mutual entities that demutualise will be able to use an additional demutualisation method - the combined direct and holding company method. Under the combined direct and holding company method of demutualisation, shares in the demutualising entity can be issued to members of the mutual entity and to a holding company. Shares in the holding company must then be issued to members of the demutualising entity.

Members of non-insurance mutual entities that demutualise using the combined direct and holding company method will qualify for the concessions in Schedule 2H.

Schedule 2H provides a generic framework for the taxation consequences of non-insurance mutual entities that demutualise. Broadly, the Schedule:

ensures that members of a mutual entity who receive shares as a result of the demutualisation of that entity are not subject to CGT until they dispose of those shares; and
specifies the cost base for shares issued to members as a result of the demutualisation of a mutual entity.

Members of non-insurance mutual entities that demutualise get the benefit of the concessions in Schedule 2H only if the entity uses a demutualisation method specified in the Schedule. The Schedule currently recognises 3 different demutualisation methods for non-insurance mutual entities.

Detailed explanation of new law

Combined direct and holding company method of demutualisation

9.6 Subdivision 326-B outlines the methods of demutualisation that can be used by a non-insurance mutual entity that demutualises. The amendments recognise an additional demutualisation method - the combined direct and holding company method - for non-insurance mutual entities in Schedule 2H. Members of non-insurance mutual entities that demutualise using the combined direct and holding company method will qualify for the concessions in Schedule 2H. [Schedule 10, item 4, section 326-40]

9.7 The combined direct and holding company method of demutualisation is a hybrid of the 2 existing demutualisation methods in Schedule 2H. Under the combined direct and holding company method of demutualisation:

all membership rights in the mutual entity are extinguished;
the demutualising entity becomes a company with share capital (the demutualised entity);
shares of one class in the demutualised entity are issued within the limitation period (i.e. 2 years from the demutualisation resolution day or a longer period allowed by the Commissioner) to:

-
existing members of the demutualising entity in exchange for the members giving up their membership rights in the mutual entity;
-
a holding company; and
-
new members of the demutualising entity (if any);

shares of one class in the holding company are issued within the limitation period to:

-
existing members in the demutualising entity as a result of the extinguishment of their membership rights in the mutual entity; and
-
new members of the demutualising entity (if any);

the total number of ordinary shares issued by the demutualised entity to the holding company must be equal to the total number of ordinary shares issued by the holding company to the existing and new members - this is to ensure that the adjusted market value of the ordinary shares issued by the demutualising entity is the same as the adjusted market value of the ordinary shares issued by the holding company to the members; and
if a resolution is passed by members of the mutual entity to list the ordinary shares of the demutualised entity on the Australian Stock Exchange, the shares must be listed within the limitation period.

[Schedule 10, item 5, section 326-52]

9.8 Diagram 9.1 illustrates the combined direct and holding company method of demutualisation.

Diagram 9.1

Diagram illustrating the combined direct and holding company method of demutualisation

Application of Division 326

9.9 Division 326 applies to the demutualisation of a non-insurance mutual entity only if the conditions in section 326-5 are satisfied. Those conditions include, among other things:

if the resolution by the members of a non-insurance mutual entity to demutualise is on or after 4 February 1999, a requirement that the members of the entity pass a resolution that the Division is to apply to the entity (paragraph 326-5(1)(a)); and
a requirement that the demutualisation of the entity be completed on or after 12 May 1998 (paragraph 326-5(1)(e)) - subsection 326-5(2) specifies when the demutualisation of an entity is taken to be completed for these purposes.

9.10 Any non-insurance mutual entity that has demutualised on the basis of the announcement of these measures would have been unable to comply with the requirement that the members of the entity pass a resolution that the Division is to apply to the entity. Therefore, that requirement will need to be satisfied where a non-insurance mutual entity has demutualised using the combined direct and holding company method of demutualisation only if the demutualisation resolution day was on or after 14 March 2002. [Schedule 10, item 1, paragraph 326-5(1)(a)]

9.11 In addition, the demutualisation of a mutual entity that is implemented using the combined direct and holding company method of demutualisation is taken to have been completed on the later of:

the day when all the shares in the demutualised entity that are to be issued in connection with the demutualisation have been issued; and
the day when all the shares in the holding company that are to be issued in connection with the demutualisation have been issued.

[Schedule 10, item 2, paragraph 326-5(2)(c)]

Demutualisation shares

9.12 Section 326-25 defines the demutualisation shares in relation to a demutualised entity. The demutualisation shares in relation to a demutualised entity that uses the combined direct and holding company method of demutualisation are the ordinary shares issued by the demutualising entity and the holding company within the limitation period to:

existing members in exchange for the members giving up their membership rights in the mutual entity; and
new members.

[Schedule 10, item 3, paragraphs 326-25(ba) and 326-25(bb)]

Continuity of beneficial interest test

9.13 The concessions in Schedule 2H are available to members of a non-insurance mutual entity that demutualises only if the continuity of beneficial interest test in section 320-60 is satisfied. The continuity of beneficial interest test will be satisfied under the combined direct and holding company method of demutualisation if:

90% or more of the total number of ordinary shares issued by the demutualised entity to members other than the holding company are issued to existing members; and
90% or more of the total number of ordinary shares issued by the holding company are issued to existing members.

[Schedule 10, item 6, paragraph 326-60(2)(ba)]

Example 9.1 Members of a mutual entity (Victor Harbour Cooperative) passes a resolution to demutualise under the combined direct and holding company method of demutualisation. 100 shares are issued in the demutualised entity (Victor Harbour Limited). Victor Harbour Limited issues 40% (40 shares) of its shares to members and 60% (60 shares) to a holding company (Victor Harbour Holdings Limited). The continuity of beneficial interest test will be satisfied if:

at least 36 of the shares in Victor Harbour Limited that are issued directly to members (other than Victor Harbour Holdings Limited) are issued to existing members; and
at least 54 of the shares in Victor Harbour Holdings Limited are issued to existing members.

CGT consequences of demutualisation

Extinguishment of membership rights

9.14 Section 326-65 ensures that any capital gain or capital loss that arises as a result of the extinguishment of membership rights of a member of a non-insurance mutual entity that demutualises using a specified method of demutualisation is disregarded. The amendments ensure that section 326-65 applies to the extinguishment of membership rights of a member of a non-insurance mutual entity that demutualises using the combined direct and holding company method of demutualisation. [Schedule 10, item 7, subsection 326-65(1)]

Disposal of demutualisation shares

9.15 The CGT consequences on the disposal of demutualisation shares by a member of a mutual entity depends on whether:

the entity or a holding company becomes a listed public company (Subdivision 326-D); or
the entity or a holding company becomes a company that is not a listed public company (Subdivision 326-E).

9.16 The amendments ensure that Subdivisions 326-D and 326-E apply appropriately where a non-insurance mutual entity demutualises using the combined direct and holding company method of demutualisation. [Schedule 10, items 8 and 9, paragraphs 326-70(1)(a) and 326-135(1)(a)]

Disposal or extinguishment of rights to receive shares

9.17 Subdivision 326-G outlines the CGT consequences from the disposal or extinguishment of rights to receive shares in the demutualised entity or a holding company. The amendments ensure that Subdivision 326-G applies appropriately where a non-insurance mutual entity demutualises using the combined direct and holding company method of demutualisation. [Schedule 10, items 10 to 12, paragraph 326-185(1)(a), subsection 326-190(2) and paragraph 326-195(1)(a)]

Application and transitional provisions

9.18 The amendments apply from 17 November 1999. A non-insurance mutual entity has demutualised on the basis of the announcement of these measures.

Chapter 10 - Same asset rollover

Outline of chapter

10.1 Schedule 11 to this bill amends the ITAA 1997 to insert Subdivision 126-D, which allows a CGT rollover for a policyholder/member of a mutual insurance company who becomes absolutely entitled to a share held on trust after the trustee replaces demutualisation shares with other shares under a scrip for scrip rollover.

Context of amendments

10.2 The insurance demutualisation provisions in Division 9AA of the ITAA 1936 provide CGT relief in certain circumstances. However, relief under those provisions is not available where, for example:

a trust holds shares on behalf of policyholders/members who cannot be located at the time of the demutualisation; and
the demutualisation shares are exchanged for shares in another company as part of a scrip for scrip transaction before the policyholders/members become absolutely entitled to the shares as against the trustee.

10.3 Currently, there is a CGT event when the policyholder/member becomes absolutely entitled to the shares. This may inappropriately give rise to a capital gain or loss to the trustee, and result in an inappropriate outcome for the policyholder/member.

Summary of new law

10.4 These amendments will ensure that a CGT rollover is available where, following a demutualisation of an insurance company:

a trustee holds shares on behalf of a policyholder/member;
the shares are exchanged by the trustee for new shares, and the trustee chooses scrip for scrip rollover for the transaction; and
the policyholder/member later becomes absolutely entitled to the new shares.

Comparison of key features of new law and current law
New law Current law
The trustee will not have any CGT consequences when the shares are transferred to the policyholder/member. The trustee may have a CGT liability when the shares are transferred to the policyholder/member.

Detailed explanation of new law

10.5 These amendments include in the CGT provisions of the ITAA 1997 a new same asset rollover. The new rollover applies when a CGT event happens as a result of a policyholder/member becoming absolutely entitled as against the trustee to certain shares as part of a demutualisation of an insurance company.

10.6 The current law does not disregard a capital gain or loss made by the trustee if there has been a scrip for scrip rollover before the policyholder/member becomes absolutely entitled to the shares. The new shares acquired by the trustee are not demutualisation shares for the purposes of Division 9AA of the ITAA 1936. If there is no scrip for scrip transaction, section 121AS of the ITAA 1936 disregards a capital gain or loss arising from that CGT event.

10.7 The new rollover applies if:

as a result of a demutualisation of an insurance company, a trustee holds shares on behalf of a policyholder/member;
before the policyholder/member becomes absolutely entitled to the shares, the trustee exchanges those shares for new shares and chooses a scrip for scrip rollover; and
the policyholder/member later becomes absolutely entitled to the new shares.

[Schedule 11, item 4, section 126-190]

10.8 If these conditions are met, any relevant capital gain or loss the trustee makes is disregarded. In addition, the first element of the cost base and reduced cost base of the new shares to the policyholder/member equals the cost base and reduced cost base of those shares to the trustee just before the relevant CGT event happened. [Schedule 11, item 4, section 126-195]

10.9 For the purposes of claiming the CGT discount the policyholder/member is treated as acquiring the new shares when the trustee is taken to have acquired them (see subsection 115-30(1), item 1 in the table of the ITAA 1997).

Application and transitional provisions

10.10 The amendments are beneficial to the affected policyholders/members and apply from 10 December 1999, being the date of effect for the CGT scrip for scrip rollover provisions.

Consequential amendments

10.11 An item is added to the table of same asset rollovers in section 112-150 of the ITAA 1997. Also, a signpost is inserted in the demutualisation of insurance companies and affiliates provisions in Division 9AA of the ITAA 1936 and in the scrip for scrip rollover provisions in Subdivision 124-M of the ITAA 1997. These signposts alert readers to the new rollover. [Schedule 11, items 1 to 3]

Chapter 11 - Technical amendments

Outline of chapter

11.1 Schedule 12 to this bill makes a number of technical amendments to the ITAA 1936, the ITAA 1997 and other tax-related legislation.

Detailed explanation of new law

11.2 A number of minor technical amendments are made to:

the Crimes (Taxation Offences) Act 1980;
the Fringe Benefits Tax Assessment Act 1986;
the ITAA 1936;
the ITAA 1997;
the International Tax Agreements Act 1953;
the Taxation Administration Act 1953; and
various amending Acts.

[Schedule 12, items 1 to 94]

11.3 The amendments, which are self-explanatory, primarily:

correct typographical errors;
renumber incorrect section references;
correct incorrect cross-references;
repeal redundant provisions; and
correct asterisks.

Application and transitional provisions

11.4 The amendments have various dates of effect which are detailed in section 2 of this bill.


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