House of Representatives

Supplementary Explanatory Memorandum

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

General outline and financial impact

Friendly societies

The amendments to Schedule 2 to Taxation Laws Amendment Bill (No. 2) 2002 will:

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extend, from 1 July 2002 until 31 December 2002, the exemption from tax that applies to investment income received by friendly societies that is attributable to funeral policies, scholarship plans and income bonds sold after 30 November 1999; and

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ensure that life insurance companies do not have to change the basis for working out the deduction for the capital component of ordinary life insurance investment policies.

Date of effect: 1 July 2001.

Proposal announced: Minister for Revenue and Assistant Treasurer's Press Release No. C46 of 14 May 2002.

Financial impact: The proposed amendments will have a marginal but unquantifiable revenue cost.

Compliance cost impact: Nil.

Chapter 1 - Friendly societies

Outline of chapter

1.1 The amendments:

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extend from 1 July 2002 until 31 December 2002, the exemption from tax that applies to investment income received by friendly societies that is attributable to funeral policies, scholarship plans and income bonds sold after 30 November 1999; and

•

ensure that life insurance companies do not have to change the basis for working out the deduction for the capital component of ordinary life insurance investment policies.

Explanation of amendments

Amendments 1 and 2

1.2 Schedule 2 to the bill proposes to amend the Income Tax Assessment Act 1997 (ITAA 1997) to extend from 1 July 2001 until 1 July 2002, the exemption from tax that applies to the investment income received by friendly societies that is attributable to funeral policies, scholarship plans and income bonds sold after 30 November 1999.

1.3 The Review of Business Taxation reforms affecting the taxation of funeral policies, scholarship plans and income bonds sold by friendly societies after 30 November 1999 have been deferred, with some modification, until 1 January 2003.

1.4 Therefore, amendments 1 and 2 further extend the exemption from tax that applies to investment income received by friendly societies that is attributable to these products until 31 December 2002. That is, the amendments ensure that friendly societies are exempt from tax until 31 December 2002 on:

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income that is attributable to funeral policies and income bonds; and

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income that is attributable to scholarship plans provided that the income would have been exempt from tax if it had been derived before 1 July 2001 - that is, provided that the friendly society that issued the scholarship plans is a friendly society that is not carried on for profit or gain to individual members.

Amendments 3 and 4

1.5 Section 320-75 of the ITAA 1997 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.

1.6 The proposed change in methodology for working out the deduction for the capital component of premiums on ordinary life insurance investment policies was linked to the introduction of the Review of Business Taxation reforms affecting life insurance policyholders. The rationale for this link was that the policyholder reforms would have required life insurers to develop new products. Therefore, it was proposed to require the capital component of premiums to be specified in the policy rather than being based on an actuarial determination.

1.7 Schedule 2 to the bill reflects the deferral of the policyholder reforms until 1 July 2002. However, due to concerns about compliance costs associated with the proposed reforms, the Government has decided not to proceed with those reforms. This was announced in Minister for Revenue and Assistant Treasurer's Press Release No. C46 of 14 May 2002.

1.8 Therefore, amendments 3 and 4 ensure that life insurers will continue to use an actuarial basis to work out the deduction for the capital component of premiums on ordinary life insurance investment policies.

Amendment 5

1.9 Section 320-110 of the ITAA 1997 allows friendly societies a deduction for amounts credited to income bonds where those amounts accrued after 1 July 2001. Schedule 2 to the bill proposes to amend the ITAA 1997 so that the deduction will be available for amounts credited by friendly societies to income bonds where those amounts accrued after 1 July 2002.

1.10 As the amendments propose to extend the exemption that is available to friendly societies on income that is attributable to income bonds until 31 December 2002, amendment 5 ensures that the deduction for interest credited by friendly societies to policyholders is available only where the interest accrues on or after 1 January 2003.