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House of Representatives

New Business Tax System (Miscellaneous) Bill (No. 2) 2000

Supplementary Explanatory Memorandum & Correction to Explanatory Memorandum

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

General outline and financial impact

Company losses and bad debts

Schedule 1 makes amendments to Part 1 of Schedule 1 to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 (the Bill) to ensure that the continuity of ownership test and unrealised loss measures operate as intended.

The continuity of ownership test will be amended to:

·
extend the same share or interest rule to interests held by an interposed entity in a loss company;
·
clarify the saving provisions so that the provisions are concerned only with losses that are recognised as deductions or capital losses; and
·
extend the saving provisions to take into account a deduction or capital loss arising from any capital gains tax (CGT) event.

The unrealised loss measures will be amended to apply the same business test in certain circumstances to a trading stock loss that may arise when an item is revalued under Division 70.

Date of effect: These amendments do not affect the date of effect of the company losses and bad debts measures in the Bill

Proposal announced: The original proposals were announced in the Treasurer's Press Release No. 69 of 21 September 1999 and No. 74 of 11 November 1999.

Financial impact: The amendments clarify and refine the current provisions in the Bill and do not affect the costings for the measures.

Compliance cost impact: Reduced compliance costs are expected from clarifying the saving provisions. In the absence of these amendments, taxpayers would be required to quantify the amount of losses even where the losses have no tax consequences. There are no additional compliance costs associated with the other amendments.

Life insurance companies

Schedule 2 to the Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 to ensure that life insurance companies are taxed on all the profit made from their different activities in broadly the same way as activities in other entities that are similar in economic substance. The amendments also ensure that the current pension business of complying superannuation funds and exempt units of pooled superannuation trusts is taxed consistently with the immediate annuity and other exempt superannuation business of life insurance companies.

Schedule 3 to the Bill amends the dividend imputation provisions in the ITAA 1936 that affect life insurance companies.

Date of effect: The measures contained in Schedule 2 and Schedule 3 to the Bill generally apply from 1 July 2000.

Proposal announced: The original measures were announced in Treasurer's Press Release No. 58 of 21 September 1999 (refer to Attachment N). The amendments have not previously been announced but are consistent with the original announcement.

Financial impact: The amendments to provide transitional relief for small superannuation funds have a cost to revenue as follows:

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005
- -$10m -$7m -$5m -$3m

The remaining amendments do not alter the original estimates contained in the explanatory memorandum to the Bill.

Compliance cost impact: There will be no change to the compliance costs as outlined in the explanatory memorandum to the Bill.

Chapter 1 - Company losses and bad debts

Outline of Chapter

1.1 Part 1 of Schedule 1 to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 (the Bill) contains amendments to the Income Tax Assessment Act 1997 (ITAA 1997) to make changes to the continuity of ownership test and the unrealised loss measures applying to companies. The technical amendments to the Bill are necessary to ensure that the measures operate as intended.

1.2 Part 1 of Schedule 1 to the Bill also contains amendments to the company loss transfer provisions and the linked group measures. The amendments now being made also make corrections to those provisions in the Bill.

Context of reform

1.3 The Bill was introduced into Parliament on 13 April 2000. The Bill gives effect to changes in the continuity of ownership test as announced in Treasurer's Press Release No. 69 of 21 September 1999 and No. 74 of 11 November 1999. The amendments generally relate to changes proposed by the Bill to the continuity of ownership test and the unrealised loss measures applying to companies.

Summary of new law

1.4 The amendments will:

·
apply the same business test in some cases to a trading stock loss that may arise when an item is revalued under Division 70;
·
extend the same share or interest rule to interests held by an interposed entity in a loss company;
·
clarify the scope of the existing saving provisions so that they are concerned only with losses that are recognised as deductions and capital losses;
·
extend the saving provisions to apply to deductions and capital losses arising from any capital gains tax (CGT) event; and
·
make miscellaneous technical corrections to the company loss transfer provisions and the linked group measures.

1.5 The amendments are summarised in Table 1.1.

Table 1.1
Provision What the amendment will do What the provision does
Amendment 5 The definition of trading stock loss will be extended to cover the case where a loss is available on the revaluation of trading stock under Division 70.

Where an item of trading stock is revalued, the trading stock loss amount will be defined as the deficiency between:

·
the value under the revaluation; and
·
the item's value under an immediately prior Division 70 revaluation or, in the absence of a prior revaluation, its cost.

The unrealised loss rules apply the same business test to a loss on an item of trading stock held at changeover time when the item is disposed of or when the item ceases to be trading stock. The measures do not currently apply where the item is revalued.

There is no provision for a trading stock loss amount where an item of trading stock is revalued.

Amendment 10 For the purposes of the same share or interest rule, shares held by an interposed entity in a loss subsidiary are taken into account provided that they are exactly the same shares and are held by the interposed entity. The current same share or interest rule takes into account the holding company's shares in a loss subsidiary and an interposed entity, or an interposed entity's interests in another interposed entity. The rule does not, however, include an interposed entity's shares in a loss subsidiary.
Amendments 1 to 4, 6 to 9, 11 and 12 For the purposes of determining the percentage of an underlying tax loss (or realised/unrealised net capital loss or bad debt) that has been duplicated, the saving provision will now take into account not only disposals of equity interests in a loss company but also other CGT events where deductions or losses may be available.

The saving provision will only take into account deductions and capital losses reflecting an underlying tax loss. A deduction or capital loss will be included even where the availability of the deduction or loss is deferred.

The saving provision only takes into account losses on the disposal of equity interests. The provision does not cover other situations where losses may be available.

The saving provision could include an economic loss that for whatever reason would not attract a deduction or capital loss. The provision is also unclear on whether a deferred deduction or loss would be taken into account.

Amendment 17 The amendment alters the application date of certain amendments to the loss transfer provisions. The amendments clarify the factors to be taken into account in making cost base adjustments under Subdivision 170-C. The relevant provisions specify that certain factors are to be taken into account in making increasing adjustments to the cost bases and reduced cost bases of equity or debt interests in a company which has had a loss transferred to it.

Comparison of key features of new law and current law

1.6 For a comparison of key features of new law and current law refer to the comparison table in the explanatory memorandum to the Bill.

Detailed explanation of new law

Unrealised loss measures

1.7 The unrealised loss measures apply to a company that fails the continuity of ownership test and at the time of failure (changeover time), has an unrealised net loss in respect of the company's assets held at that time. The unrealised loss rules have been amended in the Bill to apply the same business test to a loss on an item of trading stock held at changeover time.

1.8 It is necessary to amend certain aspects of this provision because it only applies to a trading stock loss arising when a relevant item of trading stock is disposed of or when the item ceases to be trading stock. The provision does not currently apply where there is a loss on revaluation. The amendment provides that a company makes a trading loss in respect of an item of trading stock where the item is disposed of, the item ceases to be trading stock or where the item is revalued under Division 70. [Amendment 5, Schedule 1, item 8, subsection 165-115A(1D)]

Modified same share or interest rule

1.9 Division 166 of the ITAA 1997 contains a modified continuity of ownership test that applies special tracing rules to listed public companies. Schedule 1 of the Billintroduces a same share or interest rule to determine whether a 100% subsidiary of a listed public company satisfies the continuity of ownership test.

1.10 Under the current provision there is no substantial continuity of ownership unless any direct or indirect equity interests held by the holding company in the entity interposed between the holding company and the subsidiary, that are to be taken into account, are exactly the same interests held by the same person throughout the test period. The amendment is necessary to ensure that shares held by an interposed entity in the subsidiary are taken into account provided they are exactly the same shares and held by the interposed entity. [Amendment 10, Schedule 1, item 34, paragraph 166-170(2)(a)]

Saving provisions

1.11 The Bill introduced a saving provision to apply in certain circumstances to prevent a company's tax loss from being subject to the same business test where the continuity of ownership has failed. A condition that has to be satisfied for the saving provision to apply is that the company must be able to prove that less than 50% of the tax loss has been duplicated on the disposal of any equity interest in the company. Saving provisions also apply in relation to a company's net capital loss (realised or unrealised) or bad debt deduction.

1.12 Amendments are necessary to clarify the scope of the saving provisions. Firstly, the saving provisions will be amended to take into account not only disposals of equity interests in a loss company but also other CGT events where losses may reflect the company's loss.

1.13 Secondly, the amendments will ensure that only an economic loss on the disposal of equity interests resulting in a deduction or capital loss is taken into account. Such a deduction or loss will be taken into account even where the deduction or loss is deferred.

1.14 The current saving provisions in the Bill could take into account all economic losses, including an economic loss that would not attract a deduction or capital loss. The provisions are unclear on whether a deduction or loss would be taken into account where the loss or deduction is deferred.

1.15 Finally, the exclusion of interests to which Subdivision 165-CD has applied has been removed in the amended provisions. The exclusion is no longer necessary because the amended provisions are concerned only with CGT events that result in deductions or capital losses that reflect the underlying tax loss. The interests to which Subdivision 165-CD has applied have therefore already been excluded because Subdivision 165-CD ensures that those interests will not result in such deductions or capital losses.

[Amendments 1 to 4, 6 to 9, 11 and 12, Schedule 1, item 3, paragraph 165-12(7)(b) and subsection 165-12(8); item 5, paragraph 165-37(4)(b) and subsection 165-37(5); item 15, paragraph 165-115C(4)(b) and subsection 165-115C(5); item 20, paragraph 165-123(7)(b) and subsection 165-123(8); item 34, paragraph 166-170(8)(b) and subsection 166-170(10)]

Miscellaneous corrections - loss transfer provisions and linked group measures

1.16 The following amendments make technical corrections to the loss transfer provisions (Subdivision 170-C):

·
The existing application dates for paragraphs 170-215(3)(aa) and (ab) and 170-225(3)(aa) and (ab) are incorrect. The correct application dates for these paragraphs are as follows:

-
paragraphs 170-215(3)(aa) and 170-225(3)(aa), which specify certain factors to be taken into account in making increasing adjustments to the cost bases and reduced cost bases of shares or debts, are to apply where the agreement transferring the relevant tax loss or net capital loss was made on or after 22 February 1999;
-
paragraphs 170-215(3)(ab) and 170-225(3)(ab) are to apply where the agreement transferring the relevant tax loss or net capital loss was made on or after 13 April 2000. The application date of these amendments is changed to the date of introduction of the Bill into the House of Representatives because the amendments may, in some cases, disadvantage taxpayers. [Amendment 17, Schedule 1, item 68, paragraphs 170-215(3)(aa) and (ab) and paragraphs 170-225(3)(aa) and (ab)]

·
Paragraph 170-220(3)(ab) has been incorrectly inserted and is to be removed. [Amendment 13, Schedule 1, item 48 subsection 170-220(3)]

1.17 Minor corrections are made to the linked group measures (Subdivision 170-D) to correct the following typographical errors:

·
in item 62 of the Bill the heading 'paragraphs 170-275(1)(a) to (c)' is changed to 'paragraphs 170-275(1)(a) to (e)' [Amendment 14, Schedule 1, item 62, subsection 170-275(1)] ;
·
in item 65 of the Bill the heading 'paragraphs 170-280(1)(a) to (c)' is changed to 'paragraphs 170-280(1)(a) to (e)' [Amendment 15, Schedule 1, item 65, subsection 170-280(1)] ; and
·
in subsection 170-280(3) 'new event' is changed to 'further event' [Amendment 16, Schedule 1, item 68, subsection 170-280(3)] .

Application and transitional provisions

1.18 There are no application and transitional provisions arising from these amendments.

Consequential amendments

1.19 There are no consequential amendments arising from these amendments.

Chapter 2 - Life insurance companies

Outline of Chapter

2.1 Schedule 2 to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 (the Bill) amends the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) to ensure that life insurance companies are taxed on all the profit made from their different activities in broadly the same way as activities in other entities that are similar in economic substance. The amendments also ensure that the current pension business of complying superannuation funds and exempt units of pooled superannuation trusts (PST) is taxed consistently with the immediate annuity and other exempt superannuation business of life insurance companies.

2.2 Schedule 3 to the Bill amends the dividend imputation provisions in the ITAA 1936 that affect life insurance companies.

2.3 The amendments:

·
clarify the provisions relating to the transfer of assets to the exempt assets of complying superannuation funds or PSTs when a member commences a pension or a unit becomes an exempt unit;
·
allow the Commissioner of Taxation (Commissioner) a discretion to extend the period of time for complying superannuation funds to segregate current pension assets and to annually reconcile current pension assets and current pension liabilities;
·
provide transitional relief for self-managed superannuation funds and small Australian Prudential Regulation Authority (APRA) funds to reduce the capital gains tax (CGT) impact arising on the commencement of a pension where a member of the fund commences a pension between 1 July 2000 and 30 June 2005;
·
as a transitional measure, exclude defined benefit superannuation schemes that are closed before 1 July 2000 to new members whose current pension liabilities are less than 1% of the scheme's total liabilities from the requirement to segregate current pension assets. These funds will be able to use the segregated assets approach or a formula approach to determine their exempt current pension income;
·
ensure that specified management fees that are exempt from tax under the transitional arrangements are treated as assessable income for the purpose of claiming deductions under the general deduction provision of the taxation law;
·
ensure that, unless the transitional arrangements apply, part of an asset cannot be a segregated asset of a virtual PST or of an exempt pool of assets;
·
ensure that the segregated assets relating to exempt life insurance policy liabilities of a life insurance company and the current pension liabilities of a complying superannuation fund can include a reasonable provision for tax on unrealised gains in respect of those segregated assets;
·
change the definition of a 'continuous disability policy' so that it is consistent with the definition in the Life Insurance Act 1995;
·
ensure that if an asset (other than money) is transferred from a virtual PST that results in the company being able to claim a deduction as a consequence of the deemed disposal of the asset at the time the asset is actually disposed of by the company, the deduction is allocated to the virtual PST component of taxable income;
·
as a transitional measure, extend the period of time for friendly societies to reconcile segregated exempt assets and exempt life insurance policy liabilities for the 2000-2001 income year; and
·
make some technical drafting amendments and remove some unintended consequential impacts.

Context of reform

2.4 The amendments in Schedule 2 to the Bill ensure that life insurance companies are taxed on all the profit made from their different activities in broadly the same way as activities in other entities that are similar in economic substance. That is:

·
risk business will be taxed on broadly the same basis as for general insurers;
·
investment business will be taxed on broadly the same basis as for other investment entities (other than collective investment vehicles); and
·
complying superannuation business held in a virtual PST will be taxed on broadly the same basis as for PSTs.

2.5 The assets relating to the complying superannuation business will be segregated and held in a virtual PST. Ordinary income and statutory income generated on those assets will be taxed at a rate of 15%.

2.6 Income derived from immediate annuity and other exempt superannuation business will be exempt from tax if the assets relating to that business are segregated. This will apply only for assets necessary to fund that business.

2.7 The remaining business of life companies will be taxed at the company tax rate.

2.8 Schedule 2 to the Bill also amends the ITAA 1936 to tax the current pension business of complying superannuation funds and exempt units of PSTs consistently with the immediate annuity and other exempt superannuation business of life insurance companies.

2.9 Schedule 3 to the Bill contains amendments to the dividend imputation provisions in the ITAA 1936 that affect life insurance companies.

Summary of new law

Purpose of the amendments

2.10 The purpose of the amendments is to:

·
provide transitional arrangements for superannuation funds;
·
clarify some aspects of the Bill to overcome concerns raised by industry and reduce compliance costs; and
·
make some technical drafting corrections and remove some unintended consequential impacts.

Date of effect

2.11 The measures contained in Schedule 2 and Schedule 3 to the Bill generally apply from 1 July 2000.

Detailed explanation of new law

Amendment 18

2.12 Section 121 of the ITAA 1936 applies to determine the taxable income of mutual insurance associations that are not life insurance companies. Amendment 18 ensures that premiums received by these mutual insurance associations are included in assessable income. [Amendment 18, subsection 121(2) of the ITAA 1936]

Amendments 19, 53 and 60

2.13 Section 273A of the ITAA 1936 allows the trustee of a complying superannuation fund or PST to segregate assets relating to its current pension business or exempt superannuation business. Income derived on those segregated assets is exempt from tax.

2.14 Amendment 19 ensures that, except as provided for under the transitional arrangements in new section 273J, an asset can be included in the segregated assets only if the whole of the asset is segregated. [Amendment 19, subsection 273A(1A) of the ITAA 1936]

2.15 Similarly, new sections 320-170 and 320-225 of the ITAA 1997 allow a life insurance company to:

·
segregate assets relating to a complying superannuation business into a virtual PST - income derived on those segregated assets is taxed at a rate of 15%; and
·
segregate assets relating to immediate annuity, current pension business and other exempt business into segregated exempt assets - income derived on those segregated assets is exempt from tax.

2.16 Amendments 53 and 60 ensure that, except as provided for under the transitional arrangements in new sections 320-170 and 320-225 of the Income Tax (Transitional Provisions) Act 1997 (ITTP 1997) respectively, an asset can be included in the segregated assets only if the whole of the asset is segregated. [Amendments 53 and 60, subsections 320-170(1A) and 320-225(1A) of the ITAA 1997]

2.17 The purpose of the amendments is to remove any doubt that, subject to transitional arrangements, a segregated asset does not include part of an asset.

Amendments 20, 23, 24, 28, 29, 54 and 61 to 65

2.18 The segregated current pension assets of a complying superannuation fund cannot exceed the current pension liabilities of the fund. Similarly, the segregated exempt superannuation assets of a PST cannot exceed the exempt superannuation liabilities of the PST.

2.19 In response to concerns raised by industry, amendments 20, 23, 24 and 28 ensure that the value of assets segregated can include any reasonable provision for liability for tax on unrealised gains that relates to those segregated assets. Amendment 29 ensures that the subsequent tax liability can be paid out of those segregated assets. [Amendments 20, 23, 24, 28 and 29, subsections 273A(3), 273C(1), 273C(2), 273D(1), paragraph 273G(2)(c) and subsection 273G(4) of the ITAA 1936]

2.20 Similarly, the segregated exempt assets of a life insurance company cannot exceed the exempt life insurance policy liabilities of the company. Amendments 54 and 61 to 64 ensure that the value of assets segregated can include any reasonable provision for liability for tax on unrealised gains on assets transferred from the company's virtual PST to its segregated exempt assets under subsection 320-195(1). Amendment 65 ensures that the subsequent tax liability can be paid out of those segregated assets. [Amendments 54 and 61 to 65, subsections 320-195(1), 320-225(3), 320-235(1), 320-235(2), 320-240(1), paragraph 320-250(2)(c) and subsection 320-250(4) of the ITAA 1997]

Amendment 21

2.21 If the trustee of a complying superannuation fund or of a PST segregates assets relating to current pension liabilities or exempt superannuation liabilities, subsection 273A(4) allows the trustee until 1 October 2000 to segregate assets with effect from 1 July 2000.

2.22 Amendment 21 gives the Commissioner a discretion to extend the period of time allowed for complying superannuation funds and PSTs to segregate assets. The purpose of the discretion is to permit the Commissioner to allow additional time for funds (particularly self-managed funds) to segregate assets. [Amendment 21, subsection 273A(4) of the ITAA 1936]

Amendments 22, 67 to 70

2.23 Section 273B requires the trustee of a complying superannuation fund or of a PST to value the segregated current pension assets or segregated exempt superannuation assets annually for the purpose of ensuring that the value of the assets held in the segregated pool does not exceed the value of current pension liabilities or the value of exempt superannuation liabilities. Subsection 273B(2) currently requires the fund or PST to value the segregated assets no later than 60 days after the end of the income year.

2.24 In response to concerns raised by industry, and having regard to the reporting obligations of superannuation funds and PSTs, amendment 22 extends this period to 90 days after the end of the income year and gives the Commissioner a discretion to further extend this period in appropriate circumstances. The purpose of the discretion is to permit the Commissioner to allow additional time for funds (particularly self-managed funds that do not have to comply with the reporting obligations imposed on larger superannuation funds) to value assets held in the segregated pool. [Amendment 22, subsection 273B(2) of the ITAA 1936]

2.25 Similarly, sections 320-175 and 320-230 require a life insurance company (including a friendly society) to value the virtual PST assets and segregated exempt assets annually for the purpose of ensuring that the value of the assets held in the segregated pools do not exceed the value of virtual PST liabilities and the exempt life insurance policy liabilities respectively. Currently, the life insurance company must value the segregated assets no later than 60 days after the end of the income year.

2.26 In response to concerns raised by the friendly society industry, and having regard to the current transitional reporting obligations of friendly societies that carry on life insurance business, amendments 67 to 70 will allow friendly societies up to 90 days after the end of the 2000-2001 income year to determine the value of assets in the segregated pools as at the end of the 2000-2001 income year. [Amendments 67 to 70, subsections 320-170(2) and 320-230(2) of the ITTP 1997]

Amendments 25 and 26

2.27 Section 273D outlines the circumstances in which a complying superannuation fund or PST can transfer assets to the segregated current pension assets or segregated exempt superannuation assets other than as a result of an annual valuation.

2.28 Subsections 273D(2) and (3) currently allow assets to be transferred to the segregated pool if:

·
a current pension begins to be paid to the member of a complying superannuation fund other than because of the roll-over of an eligible termination payment (ETP); or
·
a unit in a PST that is held by a complying superannuation fund or life insurance company becomes an exempt unit because of subsection 273D(2) of the ITAA 1936 or subsection 320-195(1) of the ITAA 1997 respectively.

2.29 Amendment 25 ensures that:

·
if a current pension begins to be paid or a unit in a PST becomes an exempt unit in the above circumstances and the trustee of the fund or PST elects to have that liability discharged out of the segregated assets, then the trustee must, at the time of the election, transfer assets to the segregated pool; and
·
the assets transferred to the segregated pool must have a total transfer value equal to (rather than a value not exceeding) the value of the liabilities attributable to the current pension or the value of the unit, as the case may be.

2.30 The amendment is required because the consequences of transferring assets when a current pension begins to be paid or a unit becomes an exempt unit are different to the consequences that arise when an asset is transferred in other circumstances. [Amendment 25, subsections 273D(2) and (3) of the ITAA 1936]

2.31 Amendment 26 effectively removes subsection 273D(5)(a) to ensure that where a current pension begins to be paid to a member of a complying superannuation fund other than because of the roll-over of an ETP, subsection 273D(2) will apply. [Amendment 26, subsection 273D(5) of the ITAA 1936]

Amendments 27 and 30

2.32 Section 273F defines the exempt superannuation liabilities of a PST. Amendment 27 replaces an incorrect reference to a PST's exempt superannuation assets in subsection 273F(1) with a reference to the PST's segregated exempt superannuation assets. [Amendment 27, subsection 273F(1) of the ITAA 1936]

2.33 Section 273J provides a transitional rule that allows complying superannuation funds and PSTs to certify part of an asset as being a segregated asset that can be held in the exempt pool of assets. Amendment 30 replaces an incorrect reference to a life insurance company in subsection 273J(3) with a reference to the trustee of a complying superannuation fund or of a PST. [Amendment 30, subsection 273J(3) of the ITAA 1936]

Amendments 31 to 34, 39 and 40

2.34 Subsections 281A(2) provides that, if an asset that is transferred to the segregated current pension assets of a complying superannuation fund because a pension commences to be paid to a member other than because of the roll-over of an ETP (i.e. under subsection 273D(2)) is disposed of by the fund, the assessable income of the fund includes the lesser of:

·
the amount (if any) that would have been included in assessable income if the asset had been disposed of at the time it was transferred to the segregated assets; and
·
the amount (if any) that would be included in assessable income because of the actual disposal of the asset if the asset was not a segregated asset at the time of disposal.

2.35 Subsection 281AA(1) allows a deduction if the lesser of the 2 amounts calculated above is negative.

2.36 Similar rules apply:

·
if an asset is subsequently transferred from the segregated current pension rather than disposed of by the fund (subsection 281A(3) and subsection 281AA(3)); or
·
if an asset is transferred to the segregated exempt superannuation assets of a PST under subsection 273D(3) (subsections 296A(2) and (3) and subsections 296AA(1) and (2)).

2.37 Amendments 31, 33, 39 and 40 make a minor technical change to subsections 281A(2), 281AA(1), 296A(2) and 296AA(1) to clarify the operation of the provisions. [Amendments 31, 33, 39 and 40, paragraphs 281A(2)(b), 281AA(1)(b), 296A(2)(b) and 296AA(1)(b) of the ITAA 1936]

2.38 Amendments 32 and 34 provide a transitional rule for complying superannuation funds that:

·
have fewer than 5 members as at 1 July 2000 - that is, that are self-managed funds or small APRA funds; and
·
transfer assets that were acquired by the fund before 1 July 2000 to their segregated current pension assets between 1 July 2000 and 30 June 2005 under subsection 273D(2) - that is, because a pension commences to be paid, to a member of the fund other than because of the roll-over of an ETP where the trustee elects to have that liability discharged out of the fund's segregated current pension assets.

2.39 The rules in subsections 281A(2) and (3) and subsections 281AA(1) and (2) applying to the transfer of an asset under subsection 273D(2) do not apply to a complying superannuation fund that qualifies for this transitional relief. Instead, the assessable income of the fund will include the amount calculated as follows:

·
the amount that would be included in assessable income if section 273H applied to the asset at the time of transfer to the segregated current pension assets,

less

·
the amount that would be included in assessable income if the asset had been transferred to the segregated current pension assets on 1 July 2000 and section 273H applied to that asset.

2.40 If the amount calculated is positive, the fund will include the amount in its assessable income of the fund at the time the asset is disposed of by the fund or is subsequently transferred out of the segregated assets. [Amendment 32, subsections 281A(4) and (5) of the ITAA 1936]

2.41 Similarly, if the amount calculated above is negative, the fund will be entitled to a deduction for that amount at the time the asset is disposed of by the fund or is subsequently transferred out of the segregated assets. [Amendment 34, subsections 281AA(3) and 281A(4) of the ITAA 1936]

2.42 The purpose of the amendments is to alleviate the immediate impact of the measures on members of self-managed superannuation funds and small APRA funds who are close to retirement. The amendments will also give other members of these funds a reasonable time to adjust their retirement plans having regard to the new taxation arrangements.

Example 2.1 A member of a self-managed superannuation fund commences a pension on 1 July 2004. The trustee of the fund transfers assets on that date to the segregated current pension assets to support the pension. One of the assets transferred has:

·
a cost base of $41,000 at both 1 July 2000 and 1 July 2004;
·
a market value of $50,000 as at 1 July 2000; and
·
a market value of $56,000 as at 1 July 2004.

The amount that would be included in assessable income if section 273H applied to the asset at the time of transfer to the segregated current pension assets (assuming that the fund would have made a discount capital gain and has no capital losses) is $10,000 (i.e. 2/3 of $15,000 ($56,000 less $41,000)).The amount that would be included in assessable income if the asset had been transferred to the segregated current pension assets on 1 July 2000 and section 273H applied to that asset (assuming that the fund would have made a discount capital gain and has no capital losses) is $6,000 (i.e. 2/3 of $9,000 ($50,000 less $41,000)).Therefore, the fund will include $4,000 in its assessable income at the time the asset is disposed of by the fund or is subsequently transferred out of the segregated assets.

Amendment 35

2.43 Currently complying superannuation funds can elect to calculate the amount of income that relates to current pension liabilities using either a segregated assets approach or an arbitrary formula approach. The Bill modifies the segregated assets approach and removes the arbitrary formula approach.

2.44 As a transitional measure, amendment 35 will allow certain defined benefit superannuation schemes to use the segregated assets approach or a formula approach to work out the amount of exempt income relating to current pension liabilities. The transitional rule will only apply to a defined benefit scheme (as defined in the Superannuation Guarantee (Administration) Act 1992) that:

·
is a complying superannuation fund for the purposes of the Superannuation Industry (Supervision) Act 1993;
·
at the end of the income year, has current pension liabilities that are less than 1% of it's total liabilities;
·
is closed to new members as at 1 July 2000; and
·
does not, before or during the income year, choose to use the segregated current pension assets approach.

2.45 The exempt income of defined benefit superannuation schemes that qualify for this transitional measure will be worked out applying the formula:

Normal assessable income * (average value of current pension / average value of total liabilities during the income year)

[Amendment 35, section 282C of the ITAA 1936]

Amendments 36, 37, 41 and 42

2.46 Section 283 provides a transitional rule that exempts complying superannuation funds from tax on certain amounts transferred from their segregated current pension assets until 30 June 2005. Section 297BA provides similar transitional relief to PSTs. Amendments 36, 37, 41 and 42 replace incorrect references in these sections to Division 1 with references to Division 1A. [Amendments 36, 37, 41 and 42, sections 283 and 297BA of the ITAA 1936]

Amendments 38, 43 and 51

2.47 As a transitional rule, section 320-40 exempts life insurance companies from tax on one-third of specified management fees on certain life insurance policies taken out before 1 July 2000. The exemption will cease to apply from 30 June 2005. Sections 283 and 297BA provide similar transitional relief to complying superannuation funds and PSTs respectively.

2.48 The rationale for the transitional relief is that, currently, a full tax deduction is not allowed for policy acquisition expenses to the extent that associated management fees are not taxed at the company tax rate. These acquisition expenses are recovered from fees charged on the policy in its initial years - fees that will now be taxed at the company tax rate.

2.49 In these circumstances it is not appropriate to deny a deduction for expenses incurred by the company as a consequence of the transitional relief being in the form of an exemption.

2.50 Therefore, amendments 38, 43 and 51 ensure that income that is exempt under the transitional arrangements is treated as assessable income for the purpose of claiming deductions under section 8-1 of the ITAA 1997. [Amendments 38, 43 and 51, subsections 283(4) and subsection 297BA(4) of the ITAA 1936, subsection 320-40(8) of the ITAA 1997]

Amendment 44

2.51 Section 50-20 ensures that the income of friendly societies is exempt from tax provided that they meet certain conditions - this exemption will be removed with effect from 1 July 2001. Section 50-72 ensures that the exemption does not apply to income derived from life insurance business. Life insurance business includes the business of issuing income bonds, funeral polices and scholarship plans.

2.52 Income derived by friendly societies relating to income bonds, funeral polices and scholarship plans is intended to be exempt from tax until 1 July 2001. Income relating to this business will then be taxed as life insurance business unless the income is attributable to income bonds, funeral policies and scholarship plans taken out before 1 December 1999 (paragraph 320-35(1)(f)).

2.53 Amendment 44 ensures that income derived by friendly societies relating to income bonds, funeral polices and scholarship plans is exempt from tax until 1 July 2001. [Amendment 44, subsection 50-72 of the ITAA 1997]

Amendments 45 to 49

2.54 Items 71 to 83 of Schedule 2 to the Bill make consequential changes to the CGT provisions of the ITAA 1997 arising from the new taxation regime for life insurance companies.

2.55 Amendments 45 and 46 replace incorrect references to virtual CGT assets with references to virtual PST assets. [Amendments 45 and 46, paragraphs 102-3(2)(d) and 115-10(d) of the ITAA 1997]

2.56 Amendments 47, 48 and 49 ensure that, to avoid any unintended consequences, the references to a life insurance policy in sections 118-300 and 152-20 are restricted to those policies that qualify as life insurance policies under the current law. [Amendments 47, 48 and 49, subsection 118-300(1) and subparagraph 152-20(2)(b)(v) of the ITAA 1997]

Amendment 50

2.57 Paragraph 320-35(1)(c) exempts life insurance companies from tax on amounts received from the disposal of units in a PST. Amendment 50 makes a technical change to ensure that the exemption applies to amounts of ordinary income and statutory income received from the disposal of units in a PST. [Amendment 50, paragraph 320-35(1)(c) of the ITAA 1997]

Amendments 52 and 58

2.58 If a life insurance company transfers an asset (other than money) to or from a virtual PST in certain circumstances, the company is deemed to have disposed of the asset.

2.59 Paragraph 320-15(e) includes in the assessable income of a life insurance company any assessable amount that arises as a consequence of the deemed disposal of an asset (other than money) that is transferred to a virtual PST:

·
to make up a shortfall in the virtual PST that is identified on the annual valuation of virtual PST assets - that is, a subsection 320-180(2) transfer;
·
to make up a shortfall in the virtual PST that is identified at a time other than on the annual valuation of virtual PST assets - that is, a subsection 320-185(1) transfer;
·
in exchange for an amount of money equal to the transfer value of the asset - that is, a subsection 320-185(2) transfer:

-
this might occur if, for example, the company holds a parcel of shares inside the virtual PST assets which is no longer consistent with the investment strategy for that part of its business. The company may wish to transfer the shares to another part of its business. To save transaction costs, the shares could be transferred to the virtual PST for consideration equal to the transfer value; and

·
in respect of premiums paid to the company for the purchase of virtual PST life insurance policies - that is, a subsection 320-185(3) transfer.

2.60 In addition, paragraph 320-15(e) applies if an asset (other than money) is transferred from a virtual PST:

·
to reduce an excess amount held in the virtual PST that is identified on the annual valuation of virtual PST assets - that is, subsection 320-180(1) transfers;
·
in exchange for an amount of money equal to the transfer value of the asset - that is, subsection 320-195(2) transfers;
·
to pay fees or charges imposed on the virtual PST or to reduce an excess amount held in the virtual PST that is identified at a time other than on the annual valuation of virtual PST assets - that is, subsection 320-195(3) transfers.

2.61 If an asset is transferred from the virtual PST under subsections 320-180(1), 320-195(2) or 320-195(3), then paragraph 320-205(3)(c) applies to allocate the assessable amount to the virtual PST component of the complying superannuation class of assessable income.

2.62 Amendment 52 allows the company to deduct any amount that is deductible as a consequence of the deemed disposal of an asset where an asset is transferred to or from the virtual PST under subsections 320-180(1) or (2), section 320-185 or subsections 320-195(2) or (3). Subsection 320-200(3) ensures that the deduction can be claimed only when:

·
the asset ceases to exist; or
·
the asset, or a greater than 50% interest in it, is acquired by an entity other than an entity that is an associate of the company immediately after the transfer.

[Amendment 52, section 320-87 of the ITAA 1997]

2.63 Amendment 58 ensures that if the asset is transferred from the virtual PST under subsections 320-180(1), 320-195(2) or 320-195(3), then the amount allowed as a deduction under section 320-87 will reduce the virtual PST component of the complying superannuation class of assessable income. [Amendment 58, paragraph 320-205(4)(ca) of the ITAA 1997]

Amendment 55

2.64 Subsection 320-195(4) allows a life insurance company to pay benefits and expenses that relate solely to virtual PST assets directly from a virtual PST.

2.65 Amendment 55 ensures that any PAYG instalments relating to the virtual PST component of the complying superannuation class of taxable income can be paid directly from a virtual PST. [Amendment 55, paragraph 320-195(4)(c) of the ITAA 1997]

Amendment 56

2.66 Subsection 320-200(3) prevents a life insurance company from claiming a deduction arising from the deemed disposal of an asset as a consequence of the transfer of the asset to or from the virtual PST until:

·
the asset ceases to exist; or
·
the asset, or a greater than 50% interest in it, is acquired by an entity other than an entity that is an associate of the company immediately after the transfer.

2.67 Amendment 56 ensures that this restriction does not apply to deny the company a deduction under section 320-55 for a life insurance premium that is transferred to the virtual PST. [Amendment 56, subsection 320-200(3) of the ITAA 1997]

Amendments 57 and 59

2.68 Section 320-205 allocates appropriate amounts of assessable income and allowable deductions of a life insurance company to the virtual PST component of the complying superannuation class of taxable income - the complying superannuation class of taxable income is taxed at a rate of 15%.

2.69 Amendment 57 replaces an incorrect reference to subsection 130-185(3) in paragraph 320-205(3)(e) with a reference to subsection 320-185(3). [Amendment 57, paragraph 320-205(3)(e) of the ITAA 1997]

2.70 Amendment 59 clarifies the operation of paragraph 320-205(4)(e) which applies to reduce the virtual PST component by the amount that the company can claim as a deduction under subsection 115-215(6) that is attributable to capital gains that the company is taken to have under subsection 115-215(3) in respect of virtual PST assets that are interests in trust estates. [Amendment 59, paragraph 320-205(4)(e) of the ITAA 1997]

Amendment 66

2.71 Section 320-85 allows a life insurance company a deduction for increases in the value of liabilities under the net risk components of policies over an income year. If there is a decrease in the value of those liabilities, that decrease is included in the company's assessable income under paragraph 320-15(h).

2.72 Subsection 320-85(4) provides that the value of liabilities of the risk component of policies (except for policies that are disability policies other than continuous disability policies) is the sum of the policy liabilities (as defined in Actuarial Standard 1.02 or Actuarial Standard (Friendly Societies) 1.01) in respect of the net risk components of policies less the sum of any cumulative losses for the net risk components of policies.

2.73 Section 320-85 of the ITTP 1997 provides that, as a transitional rule, the value of policy liabilities for disability policies (other than continuous disability policies) as at 30 June 2000 will be the value actually used for taxation purposes as at the end of 30 June 2000.

2.74 Amendment 66 ensures that, as a transitional rule, the value of policy liabilities for risk policies (other than disability policies covered by the existing transitional provision) as at 30 June 2000 will be the value of those liabilities as at the end of 30 June 2000 as calculated under subsection 320-85(4) of the ITAA 1997. [Amendment 66, subsection 320-85(2) of the ITTP 1997]

Amendments 71 to 75

2.75 Schedule 3 to the Bill amends the dividend imputation provisions in the ITAA 1936 that affect life insurance companies. Amendments 71 to 75 replace incorrect references to section 320-15 of the ITAA 1997 with references to section 320-35 in:

·
paragraph 160AQT(4)(b);
·
paragraph 160AQU(2)(b);
·
paragraph 160AQWA(b);
·
subparagraph 160AQZB(1)(c)(ii); and
·
subparagraph 160AQZC(1)(c)(ii).

[Amendments 71 to 75, paragraphs 160AQT(4)(b), 160AQU(2)(b), 160AQWA(b), subparagraphs 160AQZB(1)(c)(ii) and 160AQZC(1)(c)(ii) of the ITAA 1936]

Amendments 76 and 77

2.76 Schedule 9 to the Bill amends the Dictionary in the ITAA 1997.

2.77 Amendment 76 amends the definition of 'continuous disability policy' to ensure that a continuous disability policy has the same meaning given by section 9A of the Life Insurance Act 1995. [Amendment 76, subsection 995-1 of the ITAA 1997]

2.78 Amendment 77 amends the definition of 'virtual PST life insurance policy' to ensure that a virtual PST life insurance policy includes a policy that is held by an individual in the benefit fund of a friendly society, where that benefit fund is a regulated superannuation fund under the Superannuation Industry (Supervision) Act 1993. The amendment will ensure that a friendly society can hold these policies inside its virtual PST. [Amendment 77, subsection 995-1 of the ITAA 1997]

Correction to explanatory memorandum

2.79 Page 114, paragraph 5.25:

·
change 'section 8-10' to 'section 8-5'.

2.80 Page 120, paragraph 5.48:

·
insert 'and other fees that are currently exempt from tax' after 'premium-based fees'.

2.81 Page 133, paragraph 5.122:

·
change 'section 320-120' to 'section 320-170'.

2.82 Page 154, Example 5.3:

·
after 'Tax' insert '(including tax on transfer)'.

2.83 Pages 159 and 160, Example 5.5:

·
fifth dot point - replace the words in the brackets with 'i.e. the gross gain without indexation ($400) reduced by the amount referable to eligible policies as calculated under section 112A ($40)';
·
sixth dot point - replace the dot point with '$180 - that is, the amount calculated applying subsection 116CB(2) to the non-exempt modified capital gain (60% divided by 90% $270)'; and
·
last dot point - replace the dot point with '$160 - that is,

-
the amount calculated applying subsection 116CB(2) to the non-exempt modified discount capital gain (60% divided by 90% $360 = $240)

less

-
a one-third CGT discount ($80) - the result of applying new paragraph 116CD(7)(b)'.

2.84 Page 179, paragraph 5.319:

·
change '2000' to '2001'.

2.85 Page 185, Appendix 5A:

·
change 'p320-205(4)(f)' to 'p320-205(4)(a)'.

Index

Schedule 1: Company losses and bad debts

Bill reference Paragraph no.
Amendments 1 to 4, 6 to 9, 11 and 12, item 3, paragraph 165-12(7)(b) and subsection 165-12(8); item 5, paragraph 165-37(4)(b) and subsection 165-37(5); item 15, paragraph 165-115C(4)(b) and subsection 165-115C(5); item 20, paragraph 165-123(7)(b) and subsection 165-123(8); item 34, paragraph 166-170(8)(b) and subsection 166-170(10) 1.15
Amendment 5, item 8, subsection 165-115A(1D) 1.8
Amendment 10, item 34, paragraph 166-170(2)(a) 1.10
Amendment 13, item 48 subsection 170-220(3) 1.16
Amendment 14, item 62, subsection 170-275(1) 1.17
Amendment 15, item 65, subsection 170-280(1) 1.17
Amendment 16, item 68, subsection 170-280(3) 1.17
Amendment 17, item 68, paragraphs 170-215(3)(aa) and (ab) and paragraphs 170-225(3)(aa) and (ab) 1.16

Schedule 2: Life insurance companies

Bill reference Paragraph no.
Amendment 18, subsection 121(2) of the ITAA 1936 2.12
Amendment 19, subsection 273A(1A) of the ITAA 1936 2.14
Amendments 20, 23, 24, 28 and 29, subsections 273A(3), 273C(1), 273C(2), 273D(1), paragraph 273G(2)(c) and subsection 273G(4) of the ITAA 1936 2.19
Amendment 21, subsection 273A(4) of the ITAA 1936 2.22
Amendment 22, subsection 273B(2) of the ITAA 1936 2.24
Amendment 25, subsections 273D(2) and (3) of the ITAA 1936 2.30
Amendment 26, subsection 273D(5) of the ITAA 1936 2.31
Amendment 27, subsection 273F(1) of the ITAA 1936 2.32
Amendment 30, subsection 273J(3) of the ITAA 1936 2.33
Amendments 31, 33, 39 and 40, paragraphs 281A(2)(b), 281AA(1)(b), 296A(2)(b) and 296AA(1)(b) of the ITAA 1936 2.37
Amendment 32, subsections 281A(4) and (5) of the ITAA 1936 2.40
Amendment 34, subsections 281AA(3) and 281A(4) of the ITAA 1936 2.41
Amendment 35, section 282C of the ITAA 1936 2.45
Amendments 36, 37, 41 and 42, sections 283 and 297BA of the ITAA 1936 2.46
Amendments 38, 43 and 51, subsections 283(4) and subsection 297BA(4) of the ITAA 1936, subsection 320-40(8) of the ITAA 1997 2.50
Amendment 44, subsection 50-72 of the ITAA 1997 2.53
Amendments 45 and 46, paragraphs 102-3(2)(d) and 115-10(d) of the ITAA 1997 2.55
Amendments 47, 48 and 49, subsection 118-300(1) and subparagraph 152-20(2)(b)(v) of the ITAA 1997 2.56
Amendment 50, paragraph 320-35(1)(c) of the ITAA 1997 2.57
Amendment 52, section 320-87 of the ITAA 1997 2.62
Amendments 53 and 60, subsections 320-170(1A) and 320-225(1A) of the ITAA 1997 2.16
Amendments 54 and 61 to 65, subsections 320-195(1), 320-225(3), 320-235(1), 320-235(2), 320-240(1), paragraph 320-250(2)(c) and subsection 320-250(4) of the ITAA 1997 2.20
Amendment 55, paragraph 320-195(4)(c) of the ITAA 1997 2.65
Amendment 56, subsection 320-200(3) of the ITAA 1997 2.67
Amendment 57, paragraph 320-205(3)(e) of the ITAA 1997 2.69
Amendment 58, paragraph 320-205(4)(ca) of the ITAA 1997 2.63
Amendment 59, paragraph 320-205(4)(e) of the ITAA 1997 2.70
Amendment 66, subsection 320-85(2) of the ITTP 1997 2.74
Amendments 67 to 70, subsections 320-170(2) and 320-230(2) of the ITTP 1997 2.26
Amendments 71 to 75, paragraphs 160AQT(4)(b), 160AQU(2)(b), 160AQWA(b), subparagraphs 160AQZB(1)(c)(ii) and 160AQZC(1)(c)(ii) of the ITAA 1936 2.75
Amendment 76, subsection 995-1 of the ITAA 1997 2.77
Amendment 77, subsection 995-1 of the ITAA 1997 2.78


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