House of Representatives

Taxation Laws Amendment (Superannuation) Bill 1989

Taxation Laws Amendment (Superannuation) Act 1989

Income Tax Rates Amendment Bill (No. 2) 1989

Income Tax Rates Amendment Act (No. 2) 1989

Explanatory Memorandum

(Circulated by authority of the Acting Treasurer, the Hon J.S. Dawkins, MP)

GENERAL OUTLINE

TAXATION LAWS AMENDMENT (SUPERANNUATION) BILL 1989

This Bill will amend the Income Tax Assessment Act 1936 -

Superannuation and other retirement benefits

·
to introduce with effect from 1 July 1988 a new legislative framework for the taxation of eligible termination payments (ETPs), superannuation pensions and roll-over annuities as a consequence of taxing contributions to superannuation funds, rolled-over unfunded ETPs and formerly tax-exempt income of superannuation funds, approved deposit funds, life offices and registered organisations; the changes will -

·.
reduce tax on ETPs to the extent they are paid from taxed sources;
·.
ensure that the after-tax amount of an ETP is not diminished as a result of the tax on superannuation contributions; and
·.
allow a rebate of tax on certain superannuation pensions and annuities purchased with rolled-over ETPs where the pension or annuity commences to be payable on or after 1 July 1988 (proposals announced in the Economic Statement of 25 May 1988 and in statements dated 20 June 1988 and 11 August 1988).

Life assurance companies

·
to introduce new arrangements for the taxation of the superannuation business of life assurance companies, effective from 1 July 1988 (proposal announced in the Economic Statement of 25 May 1988 and in further statements dated 20 June 1988, 29 June 1988, 1 July 1988 and 11 August 1988);
·
to apply these arrangements to State and Territory government insurance offices also from 1 July 1988;
·
to allow franking rebates for the franked proportion of dividends derived from assets included in the insurance funds of a life assurance company, and withdraw the intercorporate dividend rebate for those dividends paid on or after 1 July 1988 (proposal announced in the Economic Statement of 25 May 1988);
·
to ensure that life assurance companies cannot claim a deduction for general management expenses, incurred after 25 May 1988, which are denied deductibility under other provisions of the Act (measure announced in the Economic Statement of 25 May 1988);
·
to allow deductions for expenditure incurred in gaining superannuation premiums from 1 July 1988 proposal announced on 20 June 1988);
·
to apportion all expenses of a life assurance company between exempt and assessable income with effect from the 1988-89 income year (measure announced in the Economic Statement of 25 May 1988);
·
to exempt from withholding tax, dividends derived from assets included in the Australian insurance funds of a non-resident life assurance company, and to allow the non-resident to claim franking rebates in respect of the franked proportion of those dividends, with effect from 1 July 1988;
·
to increase, from 1 July 1989, the rate of rebate for bonuses received in respect of certain short-term life assurance policies, to 30 per cent in the case of friendly society policies and 39 per cent in the case of life assurance company policies (proposal announced in the Economic Statement of 25 May 1988);

Registered organisations

·
to introduce new arrangements for the taxation of the superannuation business of registered organisations, with effect from 1 July 1988 (proposal announced in the Economic Statement of 25 May 1988 and in further statements dated 20 June 1988, 29 June 1988, 1 July 1988 and 11 August 1988);
·
to tax the life assurance and accident and disability business of registered organisations other than friendly societies, in the same manner as friendly societies, from 1 July 1988;
·
to allow franking rebates to registered organisations for the franked proportion of dividends paid to the organisations on or after 1 July 1988 (announced in the Economic Statement of 25 May 1988);

Gains and losses on disposals of assets

·
to modify the application of the Income Tax Assessment Act, in particular the capital gains and capital losses provisions, to disposals of assets by trustees of complying superannuation funds, complying approved deposit funds, pooled superannuation trusts and the complying superannuation business of life assurance companies and registered organisations (measure announced in the Economic Statement of 25 May 1988);
·
to disregard gains and losses on the disposal of units in a pooled superannuation trust by a complying superannuation fund, a complying approved deposit fund, a pooled superannuation trust or, in certain circumstances, a life assurance company or a registered organisation (proposal announced on 20 June 1988).

Superannuation funds, approved deposit funds (ADFs) and pooled superannuation trusts (PSTs)

·
to modify in several respects the operation of provisions introduced in the Taxation Laws Amendment Bill (No.6) 1988 for the taxation of superannuation funds, ADFs and PSTs, including -

·.
to provide an alternative method for determining the tax exemption for income of a complying superannuation fund that is referable to its current pension liabilities;
·.
to exempt from tax the income of a PST, life office or registered organisation that is referable to the current pension liabilities of unitholders or policy holders that are complying superannuation funds;
·.
to allow deductions to superannuation funds for amounts repaid to employers;.
·.
to expand the options available to superannuation funds in deducting the cost of providing death and disability cover to members and to ease certain restrictions on the operation of the deduction;
·.
to modify the rules governing the taxing of contributions and the transfer of taxable contributions to other entities;
·.
to ensure that payments by superannuation funds on the death of a member to dependants of the deceased are not diminished by reason of the taxation of superannuation contributions;
·.
to exclude non-reversionary (i.e. cash) life assurance bonuses from the assessable income of complying superannuation funds, complying ADFs and PSTs;
·.
to facilitate the timely processing of tax returns by authorising the Commissioner of Taxation to make assessments (subject to amendment) of complying superannuation funds, complying ADFs and PSTs in anticipation of the giving of various notices to the fund or trust by the Insurance and Superannuation Commissioner; and
·.
to exempt from tax contributions to complying superannuation funds that

-
match end benefits deemed by the fund to be paid from an untaxed source; or
-
are in respect of unfunded liabilities of the fund that had accrued at 30 June 1988
(proposals announced on 11 August 1988).

The Bill will also amend the Occupational Superannuation Standards Act 1987 -

·
to establish the basis on which the Insurance and Superannuation Commissioner may authorise the amount of a pre-1 July 1988 unfunded accrued liability - and variations to that amount - for use in attracting a tax exemption for employer contributions; and to authorise the making of related regulations (proposal announced on 11 August 1988);
·
to facilitate the application of the operating standards for public sector funds; and
·
to require the Insurance and Superannuation Commissioner to advise the Commissioner of Taxation of the review of certain decisions.

Assuming enactment of the Taxation Laws Amendment Act (No.2) 1989 (which was introduced as the Taxation Laws Amendment Bill (No.6) 1988 and had not been enacted as at the date of introduction of the present Bill), the Bill will also amend that Act -

·
to insert application provisions for amendments being made by this Bill to provisions being inserted by that Act in the Income Tax Assessment Act and for related amendments; and
·
to amend transitional provisions contained in that amending Act to -

·.
provide for the valuation of trading stock and depreciable property held by formerly exempt superannuation funds and ADFs when their exempt status ended; and
·.
make some minor technical corrections.

The Bill will also amend the penalty provisions of the Taxation Administration Act 1953 to extend its application to false or misleading statements made to the Insurance and Superannuation Commissioner in relation to authorisations of pre-1 July 1988 unfunded accrued liabilities of superannuation funds.

INCOME TAX RATES AMENDMENT BILL (NO. 2) 1989

This Bill will amend the Income Tax Rates Act 1986, with effect for the year of income in which 1 July 1988 occurred and for subsequent years, to impose tax on the components of taxable income of life assurance companies and registered organisations - ascertained under the amendments contained in the Taxation Laws Amendment Superannuation) Bill 1989 - at the following rates:

·
the component referable to policies held by complying funds, or in respect of rollover annuities - 15%
·
the component referable to policies held by non-complying funds - 47% (48% for the 1989-90 income year and 49% for the 1988-89 income year);
·
the component referable to other life assurance and to accident and disability insurance

·.
life assurance companies - 39%
·.
registered organisations - 30%; and

·
the non-statutory fund component (life assurance companies only) - 39%

FINANCIAL IMPACT

TAXATION LAWS AMENDMENT (SUPERANNUATION) BILL 1989

As stated in the May 1988 Economic Statement, the proposal to tax formerly exempt superannuation funds and approved deposit funds (amendments contained in the Taxation Laws Amendment Bill (No.6) 1988) together with the proposal to tax the Superannuation and rollover annuity business income of life assurance companies and registered organisations is expected to generate additional revenue of $980 million in 1989-90 and $1400 million in 1990-91. The net revenue gain will be smaller because of the reductions in tax payable on superannuation and other retirement benefits and the increase in the ceiling for deductible superannuation contributions by the self-employed and unsupported employees (amendments contained in the Taxation Laws Amendment Bill (No.6) 1988).

The changes to the taxation treatment of life assurance companies, (other than to tax the superannuation business of such companies), including the changes made in the Taxation Laws Amendment Bill (No.6) 1988, the lower rate of company tax and the increased rebate for bonuses received in respect of short term life policies, are estimated to cost $50 million in the 1988-89 year due to the effect on tax instalments paid by early balancing companies. It is estimated that revenue gains of $35 million will be made in the 1989-90 year.

The revenue gain from the changes to the taxation treatment of registered organisations, other than the changes to tax the superannuation business of such companies, are estimated at $30 million per annum commencing in the 1989-90 year.

INCOME TAX RATES AMENDMENT BILL (NO.2) 1989

This Bill will impose the tax on the taxable income of life assurance companies and registered organisations. It complements the relevant measures introducing the liability to tax in the Taxation Laws Amendment (Superannuation) Bill 1989, the financial impact of which is noted above.

MAIN FEATURES

The main features of these Bills are as follows:

TAXATION LAWS AMENDMENT (SUPERANNUATION) BILL 1989

Amendment of the Income Tax Assessment Act 1936 Taxation of eligible termination payments (ETPs) (Clauses 5 to 8 and 26)

This Bill will give effect to the proposal, announced in the 1988 May Economic Statement, to reduce the maximum rates of tax that apply to the post-June 1983 components of certain ETPs. The proposal complements the measures in the Taxation Laws Amendment Bill (No.6) 1988 ("the No.6 Bill") taxing for the first time the income of complying superannuation funds and approved deposit funds (ADFs) and certain contributions and rolled-over amounts (taxable contributions) paid to such funds, and taxing the formerly exempt income derived by life assurance companies and registered organisations from their complying superannuation and rollover annuity business. The proposal applies to ETPs paid on or after 1 July 1988 to the extent that they are attributable to one or more of these taxed sources.

The existing maximum rates of tax for post-June 1983 components of ETPs are, generally, to be reduced by 15 percentage points to the extent that the post-June 1983 component of an ETP is attributable to a taxed source (the taxed element). Existing rates will continue to apply to ETPs not attributable to a taxed source. The 15 per cent fall in the rates for taxed ETPs corresponds to, and is intended to compensate ETP recipients for, the 15 per cent rate of tax proposed to apply to taxable contributions. Reflecting the fact that the effect on end benefits of the contributions tax will be gradual, the reduction in the rates of tax is to be phased in over a period of up to 5 years commencing on 1 July 1988.

Under the existing law, two rates of tax may apply to the post-June 1983 component of an ETP paid to a person aged 55 or more. The low rate, presently 15 per cent, applies to the first $55,000 of post-June 1983 components received by a person over his or her lifetime. The high rate, presently 30 per cent, applies to any amount of post-June 1983 component exceeding the $55,000 low rate threshold. This Bill will increase the low rate threshold to $60,000 for the income year ending 30 June 1989. In addition, from 1 July 1989 the threshold will be indexed annually to movements in average weekly ordinary time earnings. The low and high rates are to be reduced to zero and 15 per cent respectively from 1 July 1992, with effect for all taxed elements, subject to the phasing in provisions referred to in the previous paragraph.

During the transitional period, the maximum rate of tax applicable to a taxed element or part of a taxed element (in the income year ending 30 June 1989 there are 10 possible rates) will depend on the age of the ETP recipient, the size of the taxed element and, broadly, the period during which the taxed element accrued in a taxed source. The longer an ETP accrued before 1 July 1988, when the relevant entity was exempt from tax, the longer is the transitional period and the higher is the transitional rate of tax applying to that class of taxed element.

The Bill will put these measures into effect by:

·
identifying whether the post-June 1983 component of an ETP is attributable to a taxed source or to some other source (an untaxed source), or is attributable to both taxed and untaxed sources;
·
to the extent that the post-June 1983 component of an ETP consists of a taxed element, further identifying the class of taxed element, by reference to its accrual period, and the relevant maximum rate or rates of tax applicable to that element; and
·
providing a rebate of tax to ensure that the rate of tax paid in respect of the taxed and untaxed element of the post-June 1983 components of ETPs does not exceed the maximum rate or rates applicable to those elements.

Rebates for superannuation pensions and rollover annuities (Clause 26)

The Bill also gives effect to the announcements in the 1988 May Economic Statement and the statement of 20 June 1988 that superannuation pensions and rollover annuities taken from age 55 or as a death or disability benefit are to be subject to a 15 per cent rebate (phased in uniformly over 5 years according to the date on which the pension or annuity commences) on the part of the pension or annuity that is attributable to post-June 1983 service. The rebate, which is the counterpart of the proposed reduction in the rates of tax applying to ETPs, is intended to compensate superannuation pensioners and annuitants for the effect of the tax on taxable contributions which applies from 1 July 1988.

The rebate will ordinarily be calculated as a percentage of the amount of the pension or annuity that is included in assessable income. However, the rebatable amount of a pension is to be reduced by any amount specified in a notice from the fund as being, in effect, funded by employer contributions for the year in respect of which the fund is claiming a tax exemption, as announced in the statement of 11 August 1988.

The rebate percentage will be determined at the time the pension or annuity first commences to be payable and will apply in all subsequent income years. To deter exploitation of the phase-in of the maximum rebate, where a rebatable superannuation pension or annuity is commuted or a residual value is paid and the commutation amount or residual value is rolled over in whole or in part in purchasing a replacement annuity or into another superannuation fund, the rebate percentage of the original pension or annuity will carry over to the part of the replacement pension or annuity that is attributable to the roll-over payment. Similarly, where a reversionary pension or annuity is paid to a person after the death of the original pensioner or annuitant, the rebate percentage that applied to the original pension or annuity will continue to apply. Where a component of a rebatable pension or annuity is attributable to the roll-over of the post-June 1983 component of an unfunded ETP that was taxed at 15 per cent on roll-over, the component will carry entitlement to a rebate at 15 per cent, with no phase-in. Any other component will attract the applicable transitional rebate percentage, reduced where necessary to ensure that only the part of that component that accrues after 30 June 1983 attracts a rebate.

Gains and losses on disposal of assets - complying superannuation funds, complying ADFs and pooled superannuation trusts (PSTs) (Clauses 37, 38 and 62)

The Bill proposes amendments that will modify the application of the income tax law - in particular the capital gains and capital losses provisions contained in Part IIIA of the Income Tax Assessment Act 1936 ("the Act") - to disposals of assets by complying superannuation funds, complying approved deposit funds and PSTs ("complying entities").

Generally, the capital gains and capital losses provisions apply to the disposal of assets acquired after 19 September 1985. The provisions also apply in such a way that, if a gain or loss is taken into account under another provision of the law, it is not also treated as a capital gain or capital loss. Broadly, the existing law achieves this by excluding assets from the operation of Part IIIA or by reducing the gain or loss by amounts that have otherwise been taken into account. For disposals of certain assets by complying entities, these rules are to be modified.

All assets owned by complying entities at the end of 30 June 1988 will be taken to have been acquired on 30 June 1988 for Part IIIA purposes. Accordingly, Part IIIA will potentially have application to most assets owned by complying entities regardless of the actual date of acquisition of the asset.

To prevent the application of these provisions to gains or losses that accrued up to 30 June 1988, this Bill also proposes rules for determining the cost base of assets owned by complying entities on 30 June 1988. An asset will be deemed to have been acquired for an amount equal to either the costs incurred before 1 July 1988 in respect of the asset or the market value of the asset on 30 June 1988, whichever produces the smaller gain or loss. For example, if the market value of an asset exceeds the costs incurred in respect of the asset, market value will be used to determine if a capital gain has accrued on the disposal of the asset and costs will be used to determine if a capital loss has been incurred.

For assets owned on 30 June 1988, indexation of the asset's cost base will be available if the asset has been held at the time of disposal for at least 12 months from the actual acquisition date of the asset. Accordingly, indexation from 30 June 1988 will be available if an asset is sold during the 1988-89 financial year provided the asset has been owned for at least 12 months at the time of disposal.

This Bill also proposes amendments which will give Part IIIA a more dominant role in the application of the Act to the disposal of an asset (including one acquired after 30 June 1988) by a complying entity where Part IIIA applies (or would apply but for certain excluding provisions) in respect of the disposal of the asset. No amount will be included in the assessable income of a complying entity under section 25 of the Act or allowed as a deduction under section 51 unless the asset is a security (as defined) or the amount is a gain or loss attributable to currency exchange rate fluctuations. Apart from these exceptions, the capital gains and capital losses provisions will operate to the exclusion of section 25 and section 51 for the purpose of determining whether a gain or loss is taken into account in calculating taxable income.

The definition of security is based on the definition in Division 16E, but is modified to make it clear that it does not refer to shares in a company. The exclusion of securities and gains and losses attributable to currency exchange rate fluctuations from these modified Part IIIA rules does not mean that section 25 or section 51 will necessarily apply in these cases. However, their exclusion means that it is possible for those sections to apply, in the same way as they would for other taxpayers, according to the ordinary interpretation of what is assessable and allowable as a deduction - for example, receipts in the nature of interest received upon disposal of a security.

In addition, the Bill provides that if Part IIIA applies to the disposal of an asset, sections 25A and 52 of the Act will not apply. Section 25A and section 52 apply to profits or losses arising from the sale of property acquired for the purpose of profit-making by sale or from carrying on any profit-making undertaking or scheme other than those arising from the sale of property acquired after 19 September 1985.

As mentioned, the operation of sections 25, 25A, 51 and 52 can be overridden only if Part IIIA applies (or, but for certain exclusions, would apply) to the disposal. This means, for example, that the operation of those sections is not overridden if the asset disposed of by a complying entity constituted trading stock of the entity. This is because in its existing operation Part IIIA already provides that it does not apply to the disposal of trading stock.

The Bill also contains various transitional provisions in respect of assets owned by complying entities as at 30 June 1988.

Units in pooled superannuation trusts (PSTs) (Clause 39)

The Bill proposes amendments which will mean that disposals on or after 1 July 1988 of units in a pooled superannuation trust (PST) by certain taxpayers will not be subject to the capital gains and capital losses provisions of the Act or to sections 25, 25A, 51 and 52. The taxpayers affected by this are trustees of complying superannuation funds, complying approved deposit funds and PSTs and, in the following circumstances, life assurance companies and registered organisations. For a life assurance company, the exemption will apply if the unit in the PST is included in an insurance fund that consists solely of policies in respect of exempt annuity business or in respect of superannuation and rollover annuity business that is taxable at the rate of 15 per cent. For registered organisations, the unit needs to have been held solely in respect of business of the kinds just mentioned. These requirements are intended to be consistent with proposed regulations under the Occupational Superannuation Standards Act 1987 defining approved unitholders of PSTs.

Deduction for costs of death or disability cover (Clauses 43, 51 and 52)

This Bill proposes changes to ease the operation of the provision of the Act - being inserted by the No.6 Bill - which allows tax deductions in respect of premiums paid for insurance policies relating to the liability of a complying superannuation fund to provide death or disability benefits for members of the fund. The Bill will also provide an optional alternative basis for deducting the cost of providing for that liability. The new option adopts the actual death or disability benefits paid during the year as the base for calculating a "future service element" of those benefits and allows a deduction equal to that future service element. Once used, the optional basis must continue to be used by the fund unless the Commissioner of Taxation approves a change to a different basis.

The new provisions will have effect in relation to the taxable incomes of complying superannuation funds for the year of income in which 1 July 1988 occurs.

Exemption of income attributable to current pension liabilities (Clauses 47 and 54)

This Bill will also make changes to the provisions of the Act being inserted by the No.6 Bill which provide exemption from tax on that part of the income of a complying superannuation fund which is attributable to the fund's liabilities in respect of pensions which are currently payable. The existing proposed provision does this by way of a formula which calculates the proportion of a fund's total liabilities which are current pension liabilities. That provision is to be repealed and replaced with 2 optional methods for determining the exemption. It will be open to a fund to use either method or both, provided that the following conditions are satisfied.

The first option for a complying superannuation fund is available only where the fund segregates some of its assets so that those assets are invested, held in reserve or otherwise dealt with solely for the purpose of meeting the fund's current pension liabilities. If that occurs, the income derived from those so-called "segregated current pension assets" is exempt from tax.

The second option applies to the income derived from assets which are not segregated either solely to meet the fund's current pension liabilities or solely to meet the fund's liabilities which are not current pension liabilities. As with the existing provision, the extent of the exemption is determined by a formula. The new formula, however, excludes from the components any liabilities in respect of which assets have been segregated.

Both options will be available in respect of income derived by a complying superannuation fund on or after 1 July 1988.

Exemption of the income of PSTs, life assurance companies and registered organisations attributable to the current pension liabilities of superannuation funds (Clauses 14, 22 and 59)

The Bill includes provisions which, broadly speaking, entitle PSTs, life assurance companies and registered organisations to a "vicarious" exemption from tax in respect of the part of their income that is derived from their business with complying superannuation funds which, to the Commissioner's satisfaction, had it been derived directly by the funds would have been exempt under either of the options discussed in the previous section of this memorandum. PSTs will be entitled alternatively to claim the exemption in the proportion that the unitholdings of complying superannuation funds that are segregated current pension assets (see the explanation in the previous section) bear to the total unitholdings in the PST.

The amending provisions will apply to the income of PSTs, life assurance companies and registered organisations derived on or after 1 July 1988.

Provisions to ensure that certain persons will not suffer a detriment as a result of the taxation of superannuation contributions (Clauses 6 and 52)

Provisions are to be included in the income tax law by this Bill to ensure that the after-tax amounts of superannuation benefits will not be diminished as a result of the taxation of contributions to complying superannuation funds.

The principal groups of cases in which a detriment is possible and the corresponding proposed legislative treatment are as follows:

·
death benefit cases: lump sum benefits paid to the dependants of a deceased person are not taxable under the existing law and, accordingly, the contributions tax cannot be compensated for by the 15 per cent reduction in the tax rates applicable to the post-June 1983 component of the benefit; the superannuation fund is to be allowed a special deduction designed to provide the fund with a sufficient tax saving to enable it to pay a benefit equal to what the benefit would have been had there been no tax on contributions.
·
service mismatch cases: the rate at which contributions are made in respect of a taxpayer after 30 June 1988 may be disproportionately large compared with the rate prior to that date so that the taxpayer may not be able to derive the full benefit of the 15 per cent reduction in tax on a lump sum end benefit; the Commissioner of Taxation is to take such steps as are necessary (including allowing rebates and credits of tax) to compensate taxpayers aged 55 and over for the reduction in after-tax end benefits caused by the tax on contributions to complying superannuation funds.

The anti-detriment provisions are to apply to lump sum superannuation benefits received on or after 1 July 1988.

Anticipation of notices under the Occupational Superannuation Standards Act 1987 (Clause 61)

The status of a superannuation fund, approved deposit fund or pooled superannuation trust, so far as eligibility for the concessional 15 per cent tax on income is concerned, is conditional upon the relevant entity receiving, in relation to the year of income, a notice under the Occupational Superannuation Standards Act 1987 (OSS Act) to the effect that the entity has satisfied certain standards required by that Act or should be treated as having satisfied them. In addition, employer contributions made to a complying superannuation fund after 30 June 1988 may be exempt from tax if they are made in respect of a funding shortfall that existed at 30 June 1988. A fund with such a shortfall may seek a notice under the OSS Act that it has "pre-1 July 88 funding credits".

A fund or PST may not have received one or more of the relevant notices when the Commissioner of Taxation is ready to issue its tax assessment. Provisions are being inserted by this Bill to allow the Commissioner to anticipate the giving of the relevant notices for the purpose of issuing an assessment. Where an assessment has been issued by the Commissioner on the basis of an anticipated notice and the notice is not applied for within the time specified in the law, the Commissioner will be able to amend the assessment to give effect to the law as it applies in the absence of the relevant notice or notices.

Transfer of taxable contributions (Clause 49)

The No.6 Bill inserted provisions in the law which permitted complying superannuation funds and complying ADFs to transfer taxable contributions and the associated liability to tax to a life assurance company, registered organisation or PST. This Bill replaces those provisions and, in particular, removes the limitation that the liability could only be transferred to the extent that the contributions were applied in the purchase of units or policies of the transferee. The new provision allows a transfer of contributions tax liability to any PST, life assurance company or registered organisation in which the fund has an investment, up to an annual limit based on the highest value of the fund's investment in the transferee in the year of income concerned.

Transfers to life assurance companies and registered organisations are permitted, notwithstanding that the fund's investment is by way of a 'custodian' trust, an arrangement that permits small superannuation funds to invest in group life policies of a particular life assurance company.

Exemption for contributions funding pre-1 July 1988 accrued liabilities (Clause 49)

The Bill provides for the trustee of a complying superannuation fund to elect that an amount of employer contributions made to the fund is to be excluded from assessable income if the fund has a notice from the Insurance and Superannuation Commissioner (ISC) recognising the existence of an unfunded liability of the fund for benefits accrued prior to 1 July 1988. The amount of the unfunded liability is described in the legislation as a pre-1 July 88 funding credit. The amount specified in an election for a year of income is not to exceed the lesser of:

·
the outstanding pre-1 July 88 funding credit balance just prior to the end of the year of income; and
·
the total employer contributions for the year, reduced by the amount of any contributions that have already attracted an exemption as funding certain untaxed components of end benefits and the statutory proportion of the taxed elements of the post-June 1983 components of end benefits for the year.

The outstanding pre-1 July 88 funding credit balance will be indexed annually.

Provision will be made for the ISC to approve transfers of pre-1 July 88 funding credit balances in certain situations where members are transferred from one complying superannuation fund to another. The pre-1 July 88 funding credit balance may also be reduced upon the occurrence of events prescribed in regulations to be made under the Occupational Superannuation Standards Act 1987.

Taxation of the superannuation business of life assurance companies (Clauses 13 to 20)

This Bill will give effect to the proposal announced in the May 1988 Economic Statement to tax the formerly exempt superannuation business of life assurance companies, with effect from 1 July 1988. These amendments complement the proposed taxation of superannuation funds, ADFs and PSTs.

The superannuation business of a life assurance company consists of income derived by the company in respect of both life assurance policies owned by the trustees of superannuation funds, ADFs or PSTs and life assurance policies in relation to rollover annuities. The income referable to rollover annuity policies and policies held by a complying superannuation fund, complying ADF or PST is to be taxed at the rate of 15 per cent. Income referable to policies held by a non-complying superannuation fund or non-complying ADF is to be taxed at the top marginal rate of personal income tax (49 per cent for the 1988-89 income year).

The taxable income of a life assurance company referable to its superannuation business is to be determined generally in the same way as for other taxpayers, subject to certain exceptions:

·
any part of a life assurance company's income relating to superannuation or rollover annuity policies that accrued before 1 July 1988, even if derived after 30 June 1988, is to be exempt;
·
expenditure incurred in deriving superannuation premiums is to be deductible;
·
where assets are disposed of by an insurance fund which contains superannuation or rollover annuity policies special capital gains tax rules apply to the part of any gains derived and losses incurred after 30 June 1988 which are referable to those policies; those rules are explained more fully earlier in these main features under the heading "Gains and losses on disposal of assets";
·
where a complying superannuation fund or complying ADF has arranged for the transfer to a life assurance company of the liability to tax on all or part of the taxable contributions made to the fund or ADF during a year, the assessable income of the life assurance company is to include that amount of taxable contributions; and
·
the assessable income of a life assurance company is also to include the post-June 1983 components of rolled-over unfunded ETPs paid by employers (eg. payouts known as golden handshakes) that are used to invest in annuity policies of a life assurance company.

In order to apply different tax rates as appropriate to the elements of the taxable income of a life assurance company, the Bill contains provisions which apportion the total taxable income of the company between the following components of taxable income:

·
the component referable to policies held by complying funds or in respect of rollover annuities - taxed at 15%;
·
the component referable to policies held by non-complying funds - taxed at the top marginal rate of personal income tax (49% in the 1988-89 year of income, 48% for 1989-90 and 47% for the 1990-91 and subsequent income years);
·
the accident and disability insurance and residual life assurance component - taxed at the company tax rate (39%); and
·
the non-statutory fund component - taxed at the company tax rate (39%).

In order to facilitate the division of the taxable income of a life assurance company into the above components, the Bill contains provisions for the apportionment of assessable income and allowable deductions into classes which correspond to those components. Assessable income referable to an insurance fund is to be apportioned between classes based on the proportion that the calculated liabilities for each class of policy included in the fund bears to the total calculated liabilities of the fund. Non-statutory fund income is to be allocated on a factual basis. Gains and losses on disposals of assets are also to be allocated to classes on a calculated liabilities basis. Allowable deductions are to be apportioned based on the proportion that the assessable income of a particular class bears to the total assessable income of the company. Deficits within a class (i.e., where deductions exceed assessable income for the year) and prior year losses of the company are to be deductible from the classes of assessable income in a specified order.

Application to State and Territory government insurance offices (Clauses 4 and 13-20)

The above arrangements are also to apply, from 1 July 1988, to the superannuation business (both complying and non-complying) of a public authority established by a law of a State or Territory which carries on life assurance business (described in the legislation as an SGIO). An SGIO will continue to be exempt from Commonwealth income tax on the income derived from its non-superannuation life assurance business. Under the State Acts covering SGIOs, the State Governments collect an amount equivalent to the Commonwealth income tax that would be payable on such business.

Other changes to the taxation of life assurance companies (Clauses 9, 10 and 13 to 20)

The Bill gives effect to proposals announced in the May 1988 Economic Statement to withdraw the intercorporate dividend rebate in respect of dividends derived from assets included in the insurance funds of a life assurance company and instead to allow franking rebates for the franked proportion of those dividends paid on or after 1 July 1988.

Dividends received by the insurance funds of a life assurance company will be treated as if they were received by an individual shareholder. That is, the amount included in assessable income in respect of a franked dividend is to be grossed up to include the amount of company tax attributable to the dividend (ie. the imputation credit), and the life assurance company will be entitled to a tax rebate equal to the amount of the imputation credit. Unlike other taxpayers, however, a life assurance company will be able to claim franking rebates in respect of franked dividends which are exempt (being income that is referable to exempt immediate annuity policies of an insurance fund).

The intercorporate dividend rebate will continue to be available to a life assurance company in respect of dividends derived from assets which are not included in its insurance funds (eg. assets included in the company's shareholders' funds). Franking rebates will not be available in respect of those dividends.

The Bill will also implement the proposal, announced in the May 1988 Economic Statement, to prevent a life assurance company from including in deductible general management expenses, expenses which would not be deductible for purposes of the general deduction provision of the Act, section 51. This will prevent a life assurance company from claiming a deduction for entertainment expenses, fringe benefits tax and other expenses for which deductions are denied under section 51 to other taxpayers. The amendment is to apply to expenditure incurred after 25 May 1988.

In the May 1988 Economic Statement it was announced that all expenses of a life assurance company are to be apportioned between exempt and assessable income with effect from the 1988-89 income year. This Bill contains provisions which implement that proposal. The law is to be amended so that deductions which do not relate exclusively to assessable income - that is, those deductions which have been determined without reference to the extent to which the relevant expenditure was incurred in deriving assessable income - are to be reduced by the proportion that the exempt income of the company bears to the total income of the company.

Non-resident life assurance companies (Clause 25)

The Bill will amend the existing income tax law to exempt from withholding tax all dividends derived from assets included in the Australian insurance funds of a non-resident life assurance company that is carrying on business at or through a permanent establishment of the company in Australia. At present, withholding tax is imposed on the unfranked amount of such dividends if, but for the withholding tax, the amount would be included in the assessable income of the non-resident company. Withholding tax is generally imposed at a rate of 30 per cent unless the dividend is paid to residents of countries with which Australia has a double tax treaty, in which case the rate is 15 per cent.

Under provisions in this Bill, dividends derived from assets included in the Australian insurance funds of such a non-resident life assurance company will be taxed by assessment. These companies will, however, be entitled to a franking rebate in respect of the franked proportion of dividends received from a resident company, in the same way as resident life assurance companies are.

The above amendments are to apply to dividends paid on or after 1 July 1988.

Rebate on life assurance bonuses (Clause 27)

The Bill will amend the Act to increase the rate of the rebate for bonuses received in respect of certain short-term life assurance policies. The rebate applies to assessable bonuses, being bonuses and other amounts in the nature of bonuses, received under life assurance policies issued by a life assurance company, friendly society or certain State government insurance offices, after 27 August 1982 which, depending on the date of commencement of the policy, are received either during the first 4 years or first 10 years of the policy.

It was announced in the May 1988 Economic Statement that the rate of the rebate is to be increased from 29 to 30 per cent in the case of bonuses received under a life assurance policy issued by a friendly society, and from 29 to 39 per cent in the case of bonuses received under a life assurance policy issued by a life assurance company. The new rates apply to all bonuses received on or after 1 July 1989.

Registered Organisations (Clauses 21 to 24)

The Bill will give effect to the proposals announced in the May 1988 Economic Statement to make the following changes to the taxation treatment of registered organisations:

·
to tax the formerly exempt superannuation business of a registered organisation with effect from 1 July 1988; and
·
to allow registered organisations franking rebates for the franked proportion of dividends paid to the organisations on or after 1 July 1988.

The arrangements for the taxation of the superannuation and rollover annuity business of life assurance companies, as outlined earlier, are generally to apply in the same manner to registered organisations. Similar to life assurance companies, a registered organisation's total taxable income is to be divided into components:

·
complying superannuation and rollover annuity business component - taxed at 15%;
·
non-complying superannuation business component - taxed at the top marginal rate of personal income tax (49% for 1988-89); and
·
non-superannuation life assurance business and accident and disability business - taxed at 30%.

Unlike the treatment of life assurance companies, however, in order to determine the taxable income components for registered organisations, the assessable income, allowable deductions, and gains and losses on disposal of assets are to be apportioned between classes on the basis of the income arising from the particular class of business rather than on the basis of calculated liabilities. Deficits within a class and prior year losses of the organisation are to be set off in an order specified in the Bill.

Again as for life assurance companies, the Bill provides for a registered organisation to receive franking rebates for the franked proportion of dividends paid to the organisation on or after 1 July 1988, in place of the intercorporate dividend rebate.

The Bill will also extend with effect from 1 July 1988 the application of Division 8A of the Act, which contains the provisions for the taxation of registered organisations, to cover the taxation of all the life assurance business and accident and disability business of registered organisations other than friendly societies, in the same manner as it currently applies to friendly societies. Under the existing law, non-friendly society registered organisations are taxed only on their annuity business.

INCOME TAX RATES AMENDMENT BILL (NO.2) 1989

This Bill will amend the Income Tax Rates Act 1986 to set the rates of tax which are to apply to the components of taxable income of a life assurance company or registered organisation with effect for the year of income in which 1 July 1988 occurred and for subsequent years. The rates are set out in the notes above dealing with the new arrangements for taxing life assurance companies and registered organisations.

A more detailed explanation of the provisions of the Bills is contained in the following notes.

Notes on Clauses

TAXATION LAWS AMENDMENT (SUPERANNUATION) BILL 1989

PART I - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment (Superannuation) Act 1989.

Clause 2: Commencement

Subject to subclause 2(2), the amending Act is, by subclause 2(1), to come into operation immediately after the commencement of the Taxation Laws Amendment Act (No.2) 1989 (introduced into Parliament as the Taxation Laws Amendment Bill (No.6) 1988 - "the No.6 Bill").

By subclause 2(2) the amendment to be made by paragraph (o) of clause 5 is to be taken to have commenced on 18 December 1987. The amendment simply updates an incorrect reference in subparagraph 27A(14)(c)(ii) of the Principal Act to a definition that was altered with effect from 18 December 1987 (see notes on clause 5).

PART II - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 3: Principal Act

This clause facilitates references to the Income Tax Assessment Act 1936, in this Part referred to as "the Principal Act".

Clause 4: Interpretation

Clause 4 will insert a definition of "SGIO" in section 6 of the Principal Act, which contains definitions which apply throughout the Act unless a contrary intention appears from the context. An "SGIO" is a public authority that is constituted by a law of a State or Territory and carries on life assurance business within the meaning of that expression in subsection 4(1) of the Life Insurance Act 1945.

The term 'SGIO' will be used in subsection 27A(1) (clause 5), and Division 8 of Part III of the Principal Act (clauses 13 to 20).

Clause 5: Interpretation

Section 27A of the Principal Act contains definitions for the purposes of Subdivision AA of Division 2 of Part III of the Act which deals with the assessment of superannuation, termination of employment and kindred payments. A number of amendments to section 27A are proposed by the Bill. Notes on each of those amendments follow.

Paragraph (a) of clause 5 will amend subparagraph (a)(i) of the definition of "eligible termination payment" (ETP) to make it clear that certain lump sum payments from a superannuation fund to a fund member or a deceased fund member's estate that were never intended to be ETPs cannot be considered to be ETPs within the meaning in paragraph (a) of the definition of ETP in subsection 27A(1). Existing subparagraph (a)(i) already excludes from the paragraph (a) meaning of ETP payments covered by paragraph (b) of the definition, which generally covers lump sums paid from a superannuation fund to a member or the trustee of a deceased member's estate. However, superannuation fund payments to which subsection 26AF(1), 26AFA(1) or 26AFB(2) or (3) apply are excluded from the paragraph (b) meaning of ETP. Although not intended, it may have been possible to argue that such a payment was a paragraph (a) ETP in certain circumstances. The proposed amendment will put it beyond doubt that such a payment is not to be so treated. That is needed in determining the post-June 83 component of a paragraph (a) ETP under the Table of Taxed Elements in new section 27AB since it is presumed for that purpose that such an ETP cannot be paid from a superannuation fund (see notes on clause 6).

Paragraph (b) of clause 5 will amend a cross reference in subparagraph (a)(iiia) of the definition of ETP in subsection 27A(1) to 'a non-complying superannuation fund, within the meaning of Part IX'. The words 'within the meaning of Part IX' are no longer necessary since a definition of 'non-complying superannuation fund' is being inserted in subsection 27A(1) by paragraph (j) of this clause.

Paragraph (c) of the clause will amend paragraph (aa) of the definition of ETP for the same reason that paragraph (a) of that definition is being amended by paragraph (a) of clause 5 (see earlier note). Paragraph (aa) presently excludes a payment to which paragraph (ba) of the ETP definition applies. The amendment will ensure that subsection 26AF(1), 26AFA(1) or 26AFB(2) or (3) payments, which are excluded from the paragraph (ba) meaning of ETP, could not be considered to be paragraph (aa) ETPs.

Paragraph (d) of clause 5 will perform a similar role to paragraph (b), i.e., it will delete the words 'within the meaning of Part IX' from a cross reference to a non-complying superannuation fund in sub-subparagraph (aa)(iv)(D) of the definition of ETP. The alteration is consequent on paragraph (j) of this clause inserting a definition of 'non-complying superannuation fund' in subsection 27A(1).

Paragraph (e) will amend the definition of 'immediate annuity' to omit the words "to a natural person". This amendment is consistent with the amendment to the definition of 'immediate annuity' in section 110. For a further explanation see the notes on clause 13.

Paragraph (f) of clause 5 will amend the definition of 'life assurance company' by replacing existing paragraph (b) with a new paragraph (b) which refers to an 'SGIO'. The definition of an 'SGIO' in section 6 (clause 4) has the same meaning as a 'life assurance company' in existing paragraph (b).

Paragraph (g) of clause 5 deletes the words 'within the meaning of Part IX' for the subparagraph (a)(iaa) (being inserted by the No.6 Bill) of the definition of superannuation fund in subsection 27A(1). The reference is no longer needed because the term "complying superannuation fund" is being defined in the subsection to have the meaning it has in Part IX.

Paragraph (h) will amend the definition of 'undeducted purchase' price in relation to an annuity or superannuation pension to reflect the amendment being made by clause 7 to section 27D of the Principal Act. Paragraph (b) of the definition of undeducted purchase price excludes any amount to which sub-subparagraph 27D(1)(b)(iii)(A) applies, i.e. any part of the purchase price of an annuity or superannuation pension which consists of a rolled-over post-June 83 component of an ETP. Clause 7 will amend section 27D so that the post-June 83 component of an ETP may be split into two parts, covered by subparagraphs 27D(1)(b)(iii)(A) and (B). Paragraph (h) simply adds a reference to sub-subparagraph (B) in the exclusion in paragraph (b) of the definition of undeducted purchase price.

Paragraph (j) of clause 5 inserts a number of new definitions in subsection 27A(1). Since many of the terms are self-explanatory, this note only covers those definitions which warrant further explanation.

'actual net benefit'
is defined for the purposes of new section 27CA and describes the after-tax amount of an ETP. The amount of tax payable on the ETP is the tax that would be payable on the taxpayer's taxable income (including any amounts included in assessable income in respect of the ETP) less the tax that would be payable on the taxpayer's taxable income without those ETP amounts.
'equivalent old system ETP'
, a term used in section 27CA for determining whether the amount of an ETP has been diminished as a result of the tax on contributions to superannuation funds, is the amount that would have been the amount of a particular ETP if there had been no tax on such contributions.
'old system net benefit'
is defined for the purposes of section 27CA as the amount that would be the after-tax amount of an ETP, if it were equal to the 'equivalent old system ETP' (also defined in subsection 27A(1)), under the law as it applied prior to 1 July 1988. The tax payable in respect of an 'equivalent old system ETP' is calculated in the same way as the tax payable in respect of the actual ETP (see the note on the term 'actual net benefit') but assuming that the post-June 83 component would have been included in assessable income under paragraph 27B(1)(b) (and therefore subject to tax at the higher rates payable in respect of ETPs from untaxed sources) and that the part of that component entitled to, the 15 per cent tax rate were limited to $55,000.
'taxed superannuation fund'
is defined for the purposes of new section 27AB which will identify the taxed element of an ETP (see notes on that section). A taxed superannuation fund is one subject to tax under new Part IX being inserted by the No.6 Bill. The term covers eligible superannuation funds within the meaning in new Part IX other than constitutionally protected funds (which are not taxable).

Paragraph (k) of the clause will omit subsection 27A(10) of the Principal Act and insert a new subsection (10) in its place. The new subsection serves the same role as the existing provision, i.e., broadly, it truncates the eligible service period in relation to a rolled-over ETP if the whole of the pre-July 83 component of the ETP is not rolled over. The only reason for replacing subsection 27A(10) is to link the subsection to other changes being made to Subdivision AA, e.g., new subsection 27A(10) picks up the terms pre-July 83 component and post-June 83 component being inserted in new section 27AA by clause 6.

Paragraph (m) of clause 5 will omit present subsection 27A(13) of the Principal Act and put in its place a new subsection (13). The new subsection will perform the same role as the existing subsection. The amendment is only being made as a consequence of other amendments being made to Subdivision AA, for instance, the insertion of the terms 'rolled-over' and 'roll-over' by paragraph (k). Those new terms are referred to in new subsection 27A(13).

Paragraph (n) will replace the reference in paragraph 27A(14)(a) to paragraph 27C(1)(d) with a reference to new subsection 27C(1A). The amendment is consequential upon the repeal of existing section 27C and its replacement by a new section 27C. New subsection 27C(1A) serves the same role as the existing paragraph 27C(1)(d).

Paragraph (o) of the clause will update a reference in subparagraph 27A(14)(c)(ii) to paragraph (a)(ii) of the definition of superannuation fund in subsection 27A(1). The relevant part of the definition of superannuation fund was amended by the Taxation Laws Amendment Act (No.4) 1987, with effect from 18 December 1987. But the cross reference in subparagraph 27A(14)(c)(ii) to that definition was not corrected. The amendment made by paragraph (o) of this clause is to have effect from 18 December 1987.

Paragraph (p) will insert new subsections 27A(17) and (18) in the Principal Act. Both subsections are designed to assist in the identification of taxed elements under new section being inserted by clause 6. Subsection (17) is also relevant for the purpose of subparagraph (b)(i) of new section 27CA which helps to identify ETPs to which that section may apply.

Subsection 27A(17) will identify the part of an ETP not paid from an eligible superannuation fund but which is funded from an eligible superannuation fund. That is relevant for the purposes of section 27AB because some ETPs, although derived from a superannuation fund taxable under new Part IX, will not be paid direct from the relevant fund. For example, under a statutory superannuation scheme part of the benefits payable under the scheme may be funded through a superannuation fund while another part of the benefits might be paid directly out of Consolidated Revenue. The Commonwealth Superannuation Scheme is an example. If the superannuation fund of such a scheme is taxable under new Part IX the post-June 83 components of any ETPs derived from the fund should ordinarily be treated as taxed elements and, therefore, obtain the benefit of the reduced tax rates for taxed elements. But if an ETP, or part of an ETP, derived from such a taxed fund is not paid to the recipient out of the fund then, apart from subsection 27A(17), the ETP or relevant part would not be recognised by section 27AB as having been paid from a taxed superannuation fund. While the Table of Taxed Elements in subsection 27AB(1) uses the term taxed superannuation fund for the purpose of identifying payments that potentially have a taxed element, it should be noted that the term is simply a subset of the term eligible superannuation fund used in subsection 27A(17).

Subsection 27A(17) also ensures that a payment from a continuously complying superannuation fund as described in Subparagraph 27CA(1)(b)(i) includes a payment derived from such fund but paid indirectly in the manner described above (complying superannuation funds are a subset of eligible superannuation funds).

Proposed subsection 27A(18) has a similar role to subsection 27A(17) insofar as that subsection assists in the process of identifying taxed elements of post-June 83 Components. Subsection 27A(18) helps to identify whether a payment in commutation of, or of the residual capital value of, a superannuation pension has a taxed element even though the pension is not payable from a taxed superannuation fund. The Table of Taxed Elements in subsection 27AB(1) will only treat such an ETP as having a potential taxed element if the pension is payable from a taxed superannuation fund. It is appropriate to treat such a payment as having a taxed element to the extent that the superannuation pension (and consequently the commutation or residual capital value payment) is actually derived from a taxed superannuation fund. An example would be a case where a superannuation pension payable under a statutory superannuation scheme is wholly or partly funded through a taxed superannuation fund but is paid to the pensioner from Consolidated Revenue. In such a case subsection 27A(18) will allow the Commissioner to treat the relevant pension or part of the pension as if it was payable from the eligible superannuation fund from which it is actually funded.

Clause 6: Repeal of sections 27B and 27C and substitution of new sections

Clause 6 will repeal sections 27B and 27C of the Principal Act which deal with the identification and assessment of the components of ETPs. In place of those sections clause 6 will insert new sections 27AA, 27AB, 27B, 27C and 27CA. The amendments will serve two purposes. First, they will provide a new basis for the taxation of ETPs in consequence of the tax imposed on contributions to superannuation funds and rolled-over unfunded ETPs. Secondly, they will rearrange existing provisions of the law to simplify the way in which the components of ETPS are determined and assessed. The amendments have application in respect of ETPs paid on or after 1 July 1988.

Section 27AA : Components of an ETP

Proposed new section 27AA is designed to identify the various components of an ETP. The five possible components are listed in paragraphs 27AA(1)(a) to (e). They are -

·
the concessional component, a term already defined in subsection 27A(1) to mean, broadly, so much of an ETP as consists of an invalidity payment, a bona fide redundancy payment or an approved early retirement scheme payment;
·
the undeducted contributions, also a defined term which covers non-deductible superannuation contributions made after 30 June 1983 by a fund member;
·
the non-qualifying component of an immediate annuity ETP, i.e., broadly the income component of an ETP that is made on commutation of, or is the residual capital value of, an immediate annuity not purchased with a rolled-over ETP;
·
the pre-July 83 component, which is the lesser of the amount determined under the formulas in subparagraphs 27AA(1)(d)(i) and (ii); and
·
the post-June 83 component, which is simply the amount of the ETP reduced by the other components.

Subsection 27AA(2) provides the Commissioner of Taxation with the same discretion as is given by existing subsection 27B(2). It will allow the Commissioner to substitute a larger pre-July 83 component for the component determined under paragraph 27AA(1)(d) in appropriate circumstances.

New section 27AA will not cause the components of an ETP to be any different to what they would have been if determined under sections 27B and 27C of the Principal Act which are being repealed by clause 6. But the layout of section 27AA is simpler since it deals only with the job of identifying the ETP components. The assessment of those components will be dealt with by new sections 27B and 27C being inserted by this clause (see notes on those sections).

Section 27AB : Taxed and untaxed elements of post-June 83 component

Section 27AB will identify the extent to which the post-June 83 component of an ETP is eligible for the new reduced maximum rates of tax that are to apply to certain ETPs paid after 30 June 1988. In broad terms a post-June 83 component will qualify for one of the new maximum rates to the extent that it is attributable to a taxed source, i.e. a taxed superannuation fund, a taxed ADF or a roll-over annuity contract. The part of a post-June 83 component not attributable to a taxed source, to be known as an untaxed element, will remain taxable at the same rates that applied up to 30 June 1988.

Proposed section 27AB provides the foundation for the operation of proposed new Subdivision AAA of Division 17 of Part III which will provide a rebate, where needed, to ensure that the tax payable on the post-June 83 component of an ETP does not exceed the relevant maximum rate or rates of tax applicable. Because different maximum rates of tax apply to taxed and untaxed elements, the first step in calculating a rebate under Subdivision AAA is to identify the extent to which a post-June 83 component included in a person's assessable income consists of a taxed element or an untaxed element.

Generally the Table of Taxed Elements set out in new subsection 27AB(1) will identify the extent to which a post-June 83 component consists of a taxed or untaxed element. Subsections 27AB(3), (4) and (5) also identify the different types of elements in particular cases. The categories of post-June 83 components covered by the Table are:

·
wholly taxed elements - i.e., those covered by Items 2, 5 and 7 of the Table;
·
wholly untaxed elements - i.e., those covered by Items 1 and 9 of the Table; and
·
potential composite taxed/untaxed elements - i.e., those covered by Items 3, 4, 6, 8 and 10 of the Table.

Only ETPs paid from superannuation funds may have both a taxed and untaxed element of the post-June 83 component. The whole of the post-June 83 component of an ETP will be a taxed element if the ETP is paid by:

·
an approved deposit fund; or
·
a life office or registered organisation under a qualifying annuity contract.

On the other hand, golden handshakes paid by employers will always produce post-June 83 components that are wholly untaxed elements.

The treatment of ETPs paid from superannuation funds is governed by subsections 27AB(1), (3), (4) and (5). Prima facie, the post-June 83 component of an ETP will consist of a taxed element if the payment is made from a taxed superannuation fund (see Table of Taxed Elements in subsection 27AB(1)). Subsections (3), (4) and (5) deal with exceptions to this general rule. On the other hand, the whole of the post-June 83 component of an ETP paid from an untaxed superannuation fund (e.g., a constitutionally protected fund) would ordinarily constitute an untaxed element.

Item 10 of the Table in subsection 27AB(1) deals with an exception to the ordinary treatment of payments out of untaxed superannuation funds. It covers payments from a superannuation fund (within the meaning in subsection 27A(1)) that is not a taxed superannuation fund. A taxed superannuation fund is a fund that is an eligible superannuation fund for the purposes of new Part IX other than a constitutionally protected fund. The types of ETPs covered by Item 10 are:

·
payments from a constitutionally protected fund; and
·
payments under a superannuation scheme that constitutes a superannuation fund within the meaning of that term as defined in subsection 27A(1) of the Principal Act but where the payment is not made from a fund within the ordinary meaning of a fund e.g., where a payment is made out of Consolidated Revenue in respect of a person's entitlements under a statutory superannuation scheme;

where the ETP (the current ETP) is, to some extent, attributable to the taxed element of an earlier ETP that was rolled over into the relevant superannuation fund. In such a case the amount of the taxed element rolled over is to be treated as a taxed element of the post-June 83 component of the current ETP, notwithstanding that the ETP is paid from an untaxed superannuation fund.

Subsection 27AB(3) deals with one class of ETPs paid from a taxed superannuation fund that may nevertheless have an untaxed element. The relevant ETPs are those covered by Items 3, 4, 6 and 8 of the Table of Taxed Elements in subsection 27AB(1), i.e., payments made directly as the result of the death of a superannuation fund member or in lieu of a pension or annuity entitlement that arose because of the death of a fund member (death benefits). The reason for treating such an ETP as having a potential untaxed element is linked to the fact that a deduction is to be available to taxed superannuation funds under new sections 279 and 279B in respect of the cost of insuring against the need to pay such death benefits (see notes on those sections). The deductions are designed, broadly, to offset the effect of contributions tax on death benefits, and thus to allow a fund to pay a gross benefit similar to the amount that would have been paid before the new arrangements that apply from 1 July 1988 operated.

Although the deductions are principally aimed at allowing funds to pay tax-exempt death benefits at pre-1 July 1988 levels, because there would not be a corresponding reduction in tax on such benefits to compensate for contributions tax levied on the fund, they will also allow taxable benefits to be kept at levels higher than would otherwise have been possible. For that reason, the insured part of the post-June 83 component of a death benefit ETP is to be taxed at the same rates as applied up to 30 June 1988, i.e. it is to be treated as an untaxed element.

In calculating the taxed element of a death benefit, subsection 27AB(3) first looks to whether the fund paying the benefit received a deduction under either section 279 or 279B. Paragraph 27AB(3)(a) deals with death benefits paid from taxed superannuation funds which have not been entitled to deductions under either section 279 or 279B in respect of the relevant ETP. The whole of the post-June 83 component of such an ETP is to be a taxed element.

Paragraph 27AB(3)(b) deals with those cases where a deduction has been allowed to the fund in respect of the death benefit. In such cases the calculation of the taxed element is to be based on the approach adopted in proposed new section 279B (see detailed notes on that section) for calculating the deduction available under that section. In broad terms, that section assumes that the insured component of a death benefit, if any, is the future service element of the payment calculated by the formula in new paragraph 279B(1)(b). A deduction is allowable to a fund paying a death benefit for the amount of the future service element if the fund is not entitled to a deduction under new section 279. Paragraph 27AB(3)(b) works on the assumption that there should be an untaxed element equal to what would have been the post-June 83 component if the relevant ETP was the amount of the future service element potentially deductible under section 279B. Paragraph 27AB(3)(b) adopts this approach even where the fund making the payment obtained deductions under section 279, because this is simpler.

Paragraph 27AB(3)(b) does not, however, positively identify the untaxed element. Instead it identifies the taxed element as the amount that would have been the post-June 83 component if the ETP was equal to the death benefit reduced by the future service element (the current service element of the death benefit). By paragraph 27AB(1) (b) the untaxed element is the remainder of the post-June 83 component.

Subparagraph 27AB(3)(b)(i) deals with any ETPs that are net of unused undeducted purchase price, i.e., those covered by items 6 and 8 of the Table of Taxed Elements. Before calculating the current service element the amount of the relevant unused undeducted purchase price is added back to arrive at the "Grossed-up ETP", i.e., the actual amount of the death benefit. The taxed element is the amount that would have been the post-June 83 component if the ETP was the current service element reduced by the unused undeducted purchase price. That assumes that the unused undeducted purchase price should be applied against the current service element which, broadly, represents the part of the payment accrued in the superannuation fund.

Subparagraph 27AB(3)(b)(ii) covers the remaining types of taxable death benefits. In these cases the taxed element is simply to be the amount that would have been the post-June 83 component if the ETP was equal to the current service element. If the ETP contains an undeducted contributions component it is to be assumed that the current service element includes that component, since a member's contributions would not be part of the insured element of an ETP.

Proposed subsection 27AB(4) deals with ETPs paid from a superannuation fund that gives a notice to the Commissioner under proposed subsection 274(7) (see notes on that subsection) in respect of otherwise taxable contributions paid in the year of income. The effect of giving such a notice is that the specified contributions will not be treated as taxable contributions. Where a fund takes advantage of this option the ETPs that it pays will, at least to some extent, not have to be reduced in amount as a result of contributions tax. To that extent, the post-June 83 component of the ETP is to be treated as an untaxed element and ineligible for the reduced maximum tax rates for taxed elements. Subsection 27AB(4) identifies the relevant untaxed element.

The law will effectively ensure that amounts are appropriately treated as untaxed elements by placing a limit on the amount of contributions to be made exempt by subsection 274 (7). The limit is to be linked to the amounts of untaxed elements of ETPs paid by the fund in the year of income to which subsection 27AB (4) relates (see notes on proposed subsection 274 (8)). The amount of the untaxed element under subsection 27AB(4) is to be the amount nominated by the trustee of the fund paying the ETP. By paragraph 27AB(4)(c) the trustee is to notify the ETP recipient within the time and in the manner approved by the Commissioner. It can be expected that notification on the Statement of Termination Payment given to the ETP recipient would be sufficient for this purpose.

Subsection 27AB(6) provides a basis for calculating the taxed element of certain ETPs to which new subsection 27A(17) applies (see notes on clause 5). Subsection 27A(17) applies to ETPs that, at least to some extent, are funded from an eligible superannuation fund but are not paid from such a fund. To the extent that the ETP is funded from an eligible superannuation fund it is to be treated as if it was paid from that fund. If the relevant fund is a taxed superannuation fund the post-June 83 component of the ETP may have a taxed element.

Subsection 27AB(6) covers ETPs that, because of subsection 27A(17), are to be taken to have been partly paid from a taxed superannuation fund and partly from an untaxed fund. In such cases the taxed element is to be calculated under paragraph 27AB(6)(c) by treating the amounts so identified as separate ETPs, calculating the separate taxed elements of those notional ETPs and adding together the taxed elements (the notional ETP not paid from a taxed fund may still have a taxed element if the payment is one to which Item 10 of the Table of Taxed Elements applies).

In calculating the taxed elements of the notional ETPs some assumptions are necessary about the makeup of those amounts. It is to be assumed that:

·
any undeducted contributions in the actual ETP are contained in the part of the ETP deemed to be paid from an eligible superannuation fund;
·
if the actual ETP is net of unused undeducted purchase price, the unused undeducted purchase price reduced the amount of the notional ETP deemed to have been paid from an eligible superannuation fund, e.g., if the actual ETP was $60,000 after deducting unused undeducted purchase price of $10,000 and $20,000 of the gross payment of $70,000 was funded from an eligible superannuation fund, the notional ETP deemed to have been paid from the fund would be $10,000 (i.e., $20,000 - $10,000);
·
any concessional components of the notional ETPs are to be calculated in the ordinary fashion as if each notional ETP was an actual ETP.

Section 27B : Assessable income to include certain superannuation and kindred payments

New section 27B will perform the same role as existing subsections 27B(1) and (3), i.e., to include in assessable income so much of the post-June 1983 component of each of the taxed element (paragraph (1)(a)) and the untaxed element (paragraph (1)(b)) of an ETP as is not rolled over, and to assess the amount of the non-qualifying component of an immediate annuity ETP (subsection 27B(2)). The new section has been simplified by moving the role of identifying the post-June 83 component to new section 27AA.

Section 27C : Assessable income to include 5% of certain amounts

Proposed section 27C is a simpler version of existing section 27C and will takeover that section's role of including in a taxpayer's assessable income 5 per cent of the pre-July 83 component or concessional component of an ETP. Subsection 27C(1A) will allow the Commissioner to continue to include a smaller amount of a pre-July 83 component in assessable income where that is appropriate.

Section 27CA : Anti-detriment provision for service mismatch cases

Section 27CA applies to ETPs paid on or after the 55th birthday of the recipient from a complying superannuation fund or complying ADF or as the result of the commutation of an annuity purchased with a rolled-over ETP and which attracts a tax rebate. It is intended to overcome detriments that could arise where the reductions in tax on ETPs being brought about by this clause and clause 26 do not compensate taxpayers for the effect of the tax of 15 per cent on fund contributions. A detriment could occur where:

·
the person has a long period of non-contributory service prior to 1 July 1983;
·
the benefit accrued after June 1983 at a much higher rate than it did before that time; or
·
under the existing law, the person would have been taxed on the ETP at a rate lower than the applicable 15 or 30 per cent rate.

Where the Commissioner is satisfied that the taxpayer's after-tax benefit is less than it would have been without contributions tax, the Commissioner is required to take such steps as are necessary to compensate the taxpayer. The steps can include a reduction in tax payable by the taxpayer, either by way of a rebate or increased rebate, or the granting of a tax credit which, after being set off against any tax payable by the taxpayer would be refunded to the taxpayer.

Subsection (1) sets out the characteristics of an ETP that can attract the operation of the section. The ETP must be received by the taxpayer on or after the taxpayer's 55th birthday (paragraph (a)) and be paid by a continuously complying superannuation fund or continuously complying ADF (subparagraph (b)(i)) (these expressions are defined in subsection 27A(1) but, in short, have the effect that the section does not apply to any ETP that is attributable to any superannuation fund or ADF that, after 1 July 1988 was not a complying superannuation fund or a complying ADF in respect of any period), or paid as a consequence of the commutation of a rebatable ETP annuity (subparagraph (b)(ii)).

Subsection (2) is the operative provision, requiring the Commissioner to take steps to compensate a taxpayer where the Commissioner is satisfied that the taxpayer has suffered a detriment as defined, that is, that the "old system net benefit" for the "equivalent old system ETP" would have exceeded the "actual net benefit" for the ETP actually received (paragraph (a)) and that the detriment to some extent is attributable to the fact that contributions to the fund were taxable (paragraph (b)). The terms 'old system net benefit', 'equivalent old system ETP' and 'actual net benefit' are defined in subsection 27A(1) - a detailed explanation of the terms may be found in the notes to that subsection.

It will be the responsibility of the taxpayer to satisfy the Commissioner that a detriment has been suffered, and of the amount of the detriment. The Commissioner will, however, generally accept -

·
a calculation that is accompanied by a statement from an actuary as to the amount of detriment, having regard to the terms of section 27CA; or
·
a calculation of the "old system net benefit" made by the taxpayer by

(a)
grossing up the actual ETP amount by an amount calculated according to the formula

((0.15P) / (T - 0.15P)) * A

where:

-
T is the total number of days in the accrual period of the ETP, as defined in Subdivision AAB of Division 17 of the Principal Act, being inserted by clause 26;
-
P is the number of days in the accrual period (component T) that occur after 30 June 1988; and
-
A is the amount of the taxed element of the post-June 83 component of the ETP plus the amount of the pre-July 83 component; and

(b)
reducing this "grossed-up ETP" amount by the tax that would be payable by the taxpayer on the grossed-up ETP if the whole of the post-June 83 component of the grossed up ETP amount had been included in the assessable income of the taxpayer under paragraph 27B(1)(b) and the rebate under Subdivision AAA of Division 17 had been calculated as if the threshold for the 15 per cent rate of tax were $55,000;

Calculations of detriments based on other methods will be considered by the Commissioner on a case by case basis.

The Commissioner is required to compensate a taxpayer only for those detriments that have arisen as a consequence of taxable contributions having been included in the assessable income of a taxpayer in relation to taxable contributions made to a complying superannuation fund. Where no part of the benefit is attributable to taxable contributions (i.e. where no employer or deductible member contributions were made to a fund after 1 July 1988) section 27CA will not apply. Detriments that may arise as a result of other changes to the taxation system (such as the taxing of the earnings of superannuation funds) or as a result of any reduction in other tax concessions that may have been available to a taxpayer do not attract the application of the provision. The reference in paragraph (2)(b) to amounts having been included in the assessable income of any taxpayer takes account of the fact that tax on the relevant taxable contributions made to a complying superannuation fund may not have been paid by the superannuation fund, ADF, life assurance company or registered organisation by which the ETP is paid and that liability to the tax on the contributions may have been transferred by the superannuation fund to another taxpayer, such as a pooled superannuation trust, life assurance company or registered organisation.

Subsection (3) provides that the steps that the Commissioner may take to compensate a taxpayer for a detriment include reducing the taxpayer's tax liability, by way of a rebate or otherwise (paragraph (a)) or by granting the taxpayer a tax credit (paragraph (b)). Where a credit is provided to the taxpayer, subsection (5) sets out the order in which the credit is to be applied - first to the payment of any tax payable by the taxpayer in respect of the year of income in which the ETP is paid (paragraph (a)) and then against any other liability of the taxpayer to the Commonwealth arising under the Principal Act or any other Act administered by the Commissioner (paragraph (b)). Any unused credit will then be refunded to the taxpayer.

In determining whether to grant a tax credit or a rebate, consideration will be given by the Commissioner to whether the taxpayer will be able to fully utilise a rebate, taking into account the taxpayer's income, deductions and any other rebate entitlement. Where a rebate could not be fully utilised or would result in the loss of some other benefit, it is intended that the Commissioner will compensate the taxpayer by way of a tax credit.

Subsection (4) specifies that sections 160AI to 160AL of the Principal Act apply in relation to a decision of the Commissioner to grant a credit under this section. These sections require the Commissioner to notify a taxpayer of a determination in respect of a claim for certain credits, and specify the evidentiary value of a notice, the powers of the Commissioner to amend such a determination and the taxpayer's rights of review and appeal in respect of such a determination. Where the Commissioner provides compensation by way of a rebate, the taxpayer will have the normal rights of appeal etc. that apply to an assessment.

Clause 7: Roll-over of eligible termination payments

Clause 7 will amend section 27D of the Principal Act in consequence of other amendments being made by the Bill. Sub-subparagraphs 27D(1)(b)(iii)(A) and (B) refer to existing sections 27B and 27C of the Principal Act which are being repealed by clause 6. The references are to the ETP components identified by sections 27B and 27C. Clause 7 will insert new sub-subparagraphs 27D (1)(A), (B) and (BA) that refer to the same ETP components, i.e., the post-June 83 component and pre-July 83 component, and also recognise that the post-June 83 component may now consist of taxed and untaxed elements. This amendment has effect in relation to assessments for the 1988-89 year of income and later years.

Clause 8: Assessable income to include annuities and superannuation pensions

Clause 8 will update paragraph 27H(3A)(b) so that it refers to the post-June 83 component of an ETP rather than the amount referred to in existing subsection 27B(1) as the relevant amount. This amendment is consequent on the repeal of existing section 27B and first has effect in relation to assessments for the year of income that commenced on 1 July 1988.

Clause 9: Rebate on dividends

Section 46 of the Principal Act contains rules governing the entitlement of shareholders that are resident companies to a rebate of tax for dividends included in their taxable income. Clause 9 proposes the insertion of two new subsections into section 46.

Proposed subsection (10) will prevent a life assurance company from obtaining a rebate of tax under section 46 for dividends included in its taxable income, where dividend is derived from assets included in the insurance funds of the company at any time during the period from the beginning of the year of income of the company until the time the dividend was paid. A life assurance company which would previously have been entitled to a section 46 rebate is now to be entitled, under section 160AQU (see clause 33), to a franking rebate for franked dividends derived from assets included in the insurance funds of the company. (No rebate will be available in respect of unfranked dividends.) A life assurance company will continue to be entitled to a rebate under section 46 for dividends derived from assets not included in its insurance funds (e.g., assets included in shareholders' funds).

By proposed subsection (11), the terms "insurance funds" and "life assurance company" used in subsection (10) are to have the same meaning as in Division 8 of Part III of the Principal Act.

By subclause 63(7) the amendments proposed by clause 9 will apply to dividends paid to a company on or after 1 July 1988.

Clause 10: Rebate on dividends paid as part of dividend stripping operation

Where dividends are paid in the course of a dividend stripping operation, section 46A of the Principal Act overrules section 46 in setting rules which govern the entitlement of shareholders that are resident companies to a rebate of tax for the dividends they receive. It effectively provides a rebate of tax for the net amount of dividends received in a dividend stripping operation, that is, after the cost of shares to the shareholder has been deducted.

The amendments to section 46A proposed by clause 10 are to have a similar effect to the amendments proposed by clause 9. Section 46A will be amended by the insertion of two new subsections - subsections (17) and (18) - so that a life assurance company will be prevented from obtaining a rebate of tax under section 46A for dividends included in its taxable income, where the dividend is derived from assets included in the insurance funds of the company at any time during the period from the beginning of the year of income of the company to the time the dividend was paid.

By subclause 63(7) the amendments proposed by this clause will apply to dividends paid on or after 1 July 1988.

Clause 11: Deductions for superannuation contributions by eligible persons

Section 82AAT of the Principal Act allows a deduction of up to $3000 for contributions made to a complying superannuation fund in a year of income by an eligible person. "Complying superannuation fund" and "eligible person" are defined in section 82AAS of that Act. Under amendments to section 82AAT proposed by the No.6 Bill a taxpayer may give the trustee of a fund a notice in relation to the whole or a specified part of a contribution to the fund. The effect of such a notice is twofold: the contributions become non-deductible under section 82AAT and are not included as taxable contributions (cf section 274 of the Principal Act) of the fund.

Subsection 82AAT (1C), as proposed by the No.6 Bill, requires that the notice be in the prescribed form and given in the prescribed manner. Under the amendments made by paragraphs (a) and (b) of this clause the notice will now be required to be in the form and manner approved by the Commissioner of Taxation in writing.

As with the originally proposed provision, the amendment applies to notices in respect of contributions made on or after 1 July 1988.

Clause 12: Interpretation

This clause will effect a consequential amendment to section 102M of the Principal Act which contains the definitions and interpretative provisions of Division 6C of Part III of the Principal Act. Under Division 6C the income of certain public trading trusts is taxed as if the trusts were companies. Specifically excluded from Division 6C is any "exempt entity", which includes the trustee of an "exempt life assurance fund". Under existing section 102M an "exempt life assurance fund" is, broadly, a fund of a life assurance company maintained solely in respect of life assurance business in relation to "eligible policies". The latter term has the same meaning as in section 110 of the Principal Act.

As a consequence of the amendment to the definition of "eligible policies" in section 110 proposed by clause 13 of this Bill, clause 12 will amend section 102M to redefine "eligible policy" to mean an "eligible policy", a "CS policy" or an "RA policy" within the meaning of Division 8 of the Principal Act (see notes on clause 13).

The effect of the amendment is that the new definition of "eligible policy" includes the same types of policies that are eligible policies under the existing definition.

The amendment made by this clause will apply in the same manner as the amendments to Division 8 as outlined in the introductory note to clauses 13 to 20.

Clauses 13-20: Taxation of life assurance companies

Introductory note

Clauses 13 to 20 amend Division 8 of the Principal Act which provides a legislative basis for the taxation of income derived by a life assurance company. The amendments introduce a legislative framework for the taxation of the superannuation and rollover annuity business of a life assurance company from 1 July 1988, and also include other changes to the taxation of such companies as announced in the May 1988 Economic Statement.

As a consequence of that Statement the taxable income of a life assurance company will be broken into four components taxable at separate rates of tax as follows (the rates shown are those for the 1988-89 income year):

·
the CS/RA component - that is, the component referable to policies held by complying superannuation funds, approved deposit funds (ADFs) or pooled superannuation trusts (PSTs) and policies in respect of rollover annuities - taxed at 15%;
·
the NCS component - that is, the component referable to policies held by non-complying superannuation funds or non-complying ADFs - taxed at 49%;
·
the AD/RLA component - that is, the component referable to accident and disability policies and residual life assurance policies - taxed at 39%; and
·
the non-fund component - that is, the non-statutory fund component - taxed at 39%.

The amendments proposed in this Bill will restructure Division 8 to enable the separate components of taxable income to be ascertained. Each component is calculated under new section 116CJ and is the amount remaining after the assessable income allocated to a particular 'class of assessable income' under section 116CE has been reduced by deductions allocated to that class under sections 116CF, 116CG and 116CH. The classes of assessable income correspond to the four components of taxable income, and in certain cases also correspond to certain types of policies (refer section 116CA).

The method of allocating the assessable income of a life assurance company between classes of assessable income depends upon the nature of the income and the source from which it is derived. Three sources of assessable income derived by a life assurance company need to be considered, namely:

·
gains on disposal of assets - termed "notional Part IIIA disposals income";
·
fund assessable income other than notional Part IIIA disposals income, that is:

·.
income derived from assets included in the insurance funds of the company (i.e., funds in respect of life assurance and/or accident and disability policies);
·.
specified roll-over amounts (defined in section 110);
·.
accident and disability premiums;
·.
any liability to tax on taxable contributions transferred from a superannuation fund or ADF section 275); and

·
non-fund assessable income which is any other assessable income of the company.

As a consequence of the special capital gains tax rules which are to apply to the disposal of assets referable to complying superannuation and rollover annuity policies, gains on disposal of assets will be treated for tax purposes according to the class to which the assets relate. Sections 116CB and 116CC provide the basis for determining those gains and allocating them either to section 116CD in the case of capital gains (and capital losses), or direct to a particular class of assessable income in any other case. Section 116CB provides for the apportionment of gains on disposal of fund assets (i.e. assets included in the insurance funds immediately prior to disposal), between classes of fund assessable income (i.e. the CS/RA class, the NCS class and the AD/RLA class) using a formula based on the calculated liabilities of the fund. Section 116CC allocates gains on disposals of non-fund assets direct to the non-fund class. The net capital gains for each class of assessable income are determined under section 116CD.

Section 116CE provides for the allocation of fund assessable income and non-fund assessable income. Under that section, certain income is allocated direct to a class (e.g. specified rollover amounts are allocated direct to the CS/RA class). Amounts of income which have not been allocated direct to a class of fund assessable income are allocated under subsection 116CE(5) using a formula based on the calculated liabilities of the company. Non-fund assessable income is allocated to the non-fund class on a factual basis. Section 116CE aggregates the assessable income of each class from the different sources in order to arrive at the total assessable income for each class.

In determining the assessable income of a life assurance company the following provisions apply:

·
section 112A continues to exempt the portion of assessable income referable to exempt policies;
·
CS/RA assessable income derived after 1 July 1988 but accrued prior to that date is not assessable (section 110B);
·
the portion of CS/RA assessable income referable to current pension liabilities is exempt (section 110C); and
·
gains on disposals of units in PSTs held by certain insurance funds are exempt (section 111B).

For purposes of allocating deductions to classes of assessable income there are three types of deductions to consider:

·
losses on disposals of assets - "notional Part IIIA disposals deductions";
·
prior year loss deductions; and
·
current year deductions, which are all other deductions available to the company.

The amount of notional Part IIIA disposals deductions, like gains on disposals of assets, are determined and attributed to classes of assessable income under section 116CB. The actual allocation of deductions is made under section 116CF.

Section 116CF allocates to a particular class of assessable income notional Part IIIA disposals deductions and current year deductions that relate exclusively to that class. Any other current year deductions (i.e., the non-exclusive deductions) are allocated to the various classes according to the proportion that the assessable income of a particular class bears to the total assessable income of the company (subsection 116CF(2)).

Before allocating prior year loss deductions, any deficits for a class of assessable income (i.e., any excess of deductions allocated to a class over assessable income of that class) are applied in reducing any surpluses of other classes (section 116CG). This ensures that a component of taxable income cannot be a negative amount. Section 116CH then allocates any prior year losses in a specific order in reducing any remaining surpluses. If the sum of the deficits for classes and prior year losses exceeds the total of any surpluses for classes, the company will have a loss for the year which may be carried forward for deduction in subsequent years.

In determining deductions for a life assurance company the Bill contains the following special provisions:

·
expenditure incurred in deriving exempt or assessable superannuation premiums is deductible sections 111A and 112);
·
deductions which have not been reduced by the exempt income of the company are to be so reduced (section 111C); and
·
certain expenditure is not to be deductible as general management expenses (subsection 113(4)).

The amendments made to Division 8 by clauses 13 to 20, other than clause 19 and new sections 111B and 111C are, by virtue of subclause 63(4), to apply to assessments in respect of income of the year of income in which 1 July 1988 occurred and of all subsequent years. Clause 64 ensures that the amendments only apply from l July 1988 in the case of a life assurance company or registered organisation with a substituted accounting period which included 1 July 1988 but commenced before that date. For convenience, clause 64 is explained in this note.

Subclause 64(1) sets out the meanings of terms used in the clause. Most of the definitions are self-explanatory. However, the following definition warrants explanation:

"pre-1 July 1988 deductions" in relation to the 1 July 1988 year, means the total deductions allowable to the company, or the deductions that would be allowable if the amendments to Division 8 applied to income derived prior to 1 July 1988, reduced by deductions taken to relate to the post-30 June 1988 income by paragraphs, (2)(e) and (f) of clause 64. The term is used in paragraph (2)(g) of the clause to calculate the pre-1 July 1988 component of taxable income.

Subclause 64(2) contains transitional rules. Paragraphs (2)(a) and (b) state that the subclause applies to a life assurance company or registered organisation any part of whose 1 July 1988 year occurred before 1 July 1988.

If the conditions in paragraphs (a) and (b) are satisfied, paragraphs (c) to (j) of subclause 64(2) apply. Paragraph (c) limits the operation of the amendments to Divisions 8 and 8A to income derived on or after 1 July 1988, while paragraph (d) limits their effect to disposals assets that occur on or after 1 July 1988. Paragraphs (e) and (f) allow for the apportionment of deductions for the 1 July 1988 year between the new and old taxing regime as the Commissioner considers reasonable.

Paragraphs (g) to (j) of subclause 64(2) set out rules for determining the pre-1 July 1988 component of taxable income. By paragraph (g) the pre-1 July 1988 component is the amount remaining after the assessable income derived by the company prior to 1 July 1988 is reduced by the pre-1 July 1988 deductions (as defined in subclause 64(1)). For these purposes subclause 64(4) requires that pre-1 July 1988 income derived under Part IIIA of the Principal Act is not to include a disposal of an asset on or after that date. Paragraph (h) provides that the total taxable income of the taxpayer is the sum of the pre-1 July 1988 component and the components of taxable income ascertained under section 116CJ, or section 116HE in the case of a registered organisation. Where a net capital loss arises for the pre-1 July 1988 period, paragraph (j) allows the Commissioner to reduce any "overall 160Z gain" (a term defined in section 110) for the post-1 July 1988 classes of assessable income. The order for applying the net capital loss will in most cases be the same as for subsection 116CD(5), or subsection 116GB(5) in the case of a registered organisation.

Subclause 64(3) requires the Commissioner to decide whether certain income is derived before or after 1 July 1988 in the first year of operation of the new taxing regime by a company that has a substituted accounting period. Where the income is derived as a share of the net income of a partnership or trust estate (paragraph (a)), the Commissioner is able, for example, to treat a company that is a partner in a partnership as having derived its share of the partnership net income of that commencing year at the same rate throughout the partnership year as the partnership derived its income, notwithstanding that it might otherwise have been regarded technically as having been derived at the time partnership accounts were taken (paragraph (c)). In the cases of that kind of income and income without an identifiable time of derivation (including where an amount is simply included in assessable income in a year of income, such as under Division 16E of Part III of the Principal Act) (paragraph (b)), the Commissioner is to have regard to such other matters as may be relevant in making his decision (paragraph (d)). A relevant matter would be whether the income accrued during periods that fall both before and after 1 July 1988.

Subclause 64(5) will prevent former sections 57AH and 57AL (the 5/3 accelerated depreciation provisions), from applying to a unit of property that was used or installed ready for use prior to 1 July 1988 for the purpose of producing non-assessable income, but on or after that date the unit of property begins to be used or installed ready for the production of assessable income. Sections 57AH and 57AL will not apply whether or not the property was acquired on or before the date of the May 1988 Economic Statement (25 May 1988).

Subclause 64(6) applies to a life assurance company or registered organisation whose 1 July 1988 year commenced on 1 July 1988. Under that subclause, a net capital loss incurred by the company or organisation for the year of income ending on 30 June 1988 is to be taken as a prior year Part IIIA loss for purposes of calculating the net capital gain or net capital loss for the 1 July 1988 year under proposed sections 116CD and 116GB.

Clause 13: Interpretation

Clause 13 will amend section 110 of the Principal Act which contains the definitions and interpretive drafting provisions of Division 8 of Part III of the Principal Act.

Paragraph (a) of clause 13 will amend the definition of "immediate annuity" to ensure that a life assurance policy in relation to an immediate annuity acquired by a superannuation fund or other entity, like those acquired by natural persons, may be an 'eligible policy' for purposes of the exemption under section 112A.

Paragraph (b) of this clause will omit the definitions of "exempt superannuation fund" and "exempt superannuation scheme". These definitions are referred to in the definition, also in section 110, of a "superannuation policy" which is also being amended (see the notes on the amendments to the definition of "superannuation policy").

Paragraph (c) will replace the existing definitions of "eligible policy", "life assurance company" and "superannuation policy" with new definitions.

Under the existing law, an 'eligible policy' is defined to mean a superannuation policy and policies relating to certain types of annuities. Section 112A (as amended by clause 18) exempts from tax that part of the income derived from assets included in the insurance funds of a life assurance company that is referable to exempt policies. An exempt policy is an 'eligible policy' in the case of an ordinary life assurance company. As a consequence of the taxation of the income referable to superannuation and rollover annuity policies, the income which is exempted under section 112A will be referable to a much narrower group of policies, namely, certain immediate annuity policies. Under the new definition an "eligible policy" means a life assurance policy in relation to an immediate annuity, being an immediate annuity that satisfies any of the following conditions:

·
the annuity was purchased on or before 9 December 1987 and none of the purchase price consists of a rolled-over amount or rolled-over amounts;
·
the annuity was purchased on or before 9 December 1987, the purchase price consists wholly or partly of a rolled-over amount or rolled-over amounts, and the approved annuity conditions (a defined term explained in these notes) are satisfied; or
·
the annuity was purchased after 9 December 1987 whether or not with a rolled-over amount and the approved annuity conditions are satisfied.

The existing definition of a "life assurance company" refers to a company the sole or principal business of which is life assurance, including a company that is registered under the Life Insurance Act 1945 and carries on such business. The present provisions of Division 8 apply only to a life assurance company. In order to apply Division 8 so as to tax the superannuation and rollover annuity portion of the life assurance business of an SGIO, the definition of "life assurance company" in section 110 is to be extended to include an SGIO. A company which is a life assurance company under the existing definition is being defined as an "ordinary life assurance company."

Under existing section 110 a "superannuation policy" is, in effect, either a policy vested in the trustee of an "exempt superannuation fund", or a policy that was effected or accepted for the purposes of an "exempt superannuation scheme". The income derived by a life assurance company from the investment of premiums referable to superannuation policies is exempt from tax under the existing law.

From 1 July 1988, under the proposed amendments to Division 8, the investment income referable to superannuation policies will no longer be exempt from tax, but will be taxed at a rate of 15 per cent in respect of income relating to complying superannuation policies and 49 per cent (reducing to 47 per cent by 1990-91) in respect of income relating to non-complying superannuation policies. As a consequence of this change in taxation treatment, the references in the definition of superannuation policy to "exempt superannuation fund" and "exempt superannuation scheme" are no longer relevant. Under the new definition, a "superannuation policy" is a life assurance policy that is a "CS policy" or an "NCS policy" (see notes on these definitions below). This takes account of the fact that income related to superannuation policies is no longer exempt. The term superannuation policy is used in the definitions of "superannuation premium" and "AD/RLA policy".

Paragraph (d) of clause 13 sets out the meanings of new terms used in Division 8. Many of the definitions are self explanatory. This note accordingly only deals with those definitions that warrant further explanation:

"AD/RLA component" is defined as the component of the total taxable income of a life assurance company which relates to the AD/RLA class. That component is determined under section 116CJ (clause 20) and is used for purposes of assigning a rate of tax under the Income Tax Rates Amendment Bill (No.2) 1989.
"AD/RLA policy" means an accident and disability policy ("AD policy") and the residual life assurance policies of the company (i.e., a life assurance policy other than an eligible policy, a superannuation policy or an RA policy - all defined terms). The purpose of this term is to describe the types of policies that relate to the AD/RLA class of assessable income. The calculated liabilities referable to AD/RLA policies are used in proposed sections 116CB and 116CE for the purpose of allocating gains and losses on disposals of assets, and other assessable income of a life assurance company, to the AD/RLA class of assessable income. Such assessable income is taxable at the company tax rate.
"approved annuity conditions", which must be satisfied for certain immediate annuities to be eligible policies, are the same as the conditions in subparagraph (b)(iii) to (vi) of the existing definition of "eligible policy".
"complying superannuation scheme" is a term used to define schemes that were previously exempt superannuation schemes, apart from non-complying superannuation schemes. The term is used in the definition of "CS policy" (see notes below).
"CS policy" means a life assurance policy (other than an eligible policy) that is vested in the trustee of a complying superannuation fund, complying ADF, or PST (all defined terms), or a life assurance policy that was effected for the purposes of a complying superannuation scheme (also a defined term) or was accepted by the person maintaining such a scheme for the purposes of the scheme. A 'CS policy' is, in effect, a policy in respect of the complying superannuation business of the company. The purpose of this term is to describe the types of policies which, together with RA policies, relate to the CS/RA class of assessable income. The calculated liabilities referable to CS policies are used in proposed sections 116CB and 116CE for the purpose of allocating gains and losses on disposals of assets, and other assessable income of a life assurance company, to the CS/RA class of assessable income. Such assessable income is taxable at the rate of 15 per cent.
"CS/RA component" has a similar meaning to 'AD/RLA component' (see the notes on that definition).
"current surplus" means:

·
the amount by which the assessable income of a class exceeds the deductions allocated to that class under section 116CF (clause 24); or
·
if a deficit for another class has been applied to reduce a surplus calculated in paragraph (a) under proposed section 116CG (clause 24), the amount by which the previously calculated surplus exceeds the portion of the deficit allocated to the class. A 'current surplus' is calculated for each class of assessable income and is to be used in section 116CG for setting off deficits between classes of assessable income.

"current year deduction" means all the allowable deductions of a registered organisation other than a "notional Part IIIA disposals deduction" or a 'prior year loss deduction' (see the notes on these terms). The "current year deductions" of an organisation are allocated to classes of assessable income under proposed section 116HB (clause 24). Both types of deductions excluded from current year deductions have their own allocation provisions.
"deficit" means the amount by which the 'current year deductions' and 'notional Part IIIA disposals deductions' allocated to a class under section 116CF exceeds the assessable income allocated to that class. Where there is a deficit for a class of assessable income, section 116CG will allocate that deficit to the other classes of assessable income.
"exempt policy" is defined as an 'eligible policy' (see the notes on that definition) in the case of an ordinary life assurance company and any life assurance policy other than a CS policy, an NCS policy or an RA policy in the case of an SGIO. The term exempt policy is used in subsection 112A(1), which exempts that portion of the income derived from assets included in the insurance funds of a life assurance company that is referable to exempt policies. Exempt policies are also excluded from total calculated liabilities of a company for purposes of apportioning assessable income, and gains and losses on disposal of assets, between classes of assessable income (subsections 116CE(5) and 116CB(2)).
"fund asset" means an asset, which has been disposed of and which was included in any of the insurance funds of a life assurance company immediately before the disposal. This term identifies assets which have been disposed of by the insurance funds of the company and therefore enables proposed section 116CB to allocate any gain or loss on disposal of the asset between classes of assessable income based on the calculated liabilities of the company.
"modified 25/25A amount" means the amount which would (apart from sections 116CB and 116CC) have been included in assessable income under section 25 or section 25A in respect of the disposal of an asset if Division 10 of Part IX applied. Under that Division those sections will only apply to a gain on disposal of an asset that is a security or a gain attributable to currency exchange rate fluctuations. Under proposed section 116CB the portion of a modified 25/25A amount that is distributed to the CS/RA class will be included in the assessable income of that class.
"modified 51/52 amount" similarly applies to losses on disposal of an asset that is a security or a loss attributable to currency exchange rate fluctuations which would have been deductible under section 51 or section 52. The amount of a modified 51/52 amount distributed to the CS/RA class under section 116CB will be deductible from the assessable income of that class.
"modified 160Z gain amount" means the amount of a capital gain on disposal of an asset that would be deemed to have accrued under Part IIIA subject to the special capital gains tax rules in Division 10 of Part IX and regardless of any provision in Division 8 of Part III, reduced by the portion of that gain calculated using the formula in section 112A. Division 10 of Part IX provides the special capital gains tax rules that apply to complying superannuation funds, ADFs and PSTs. By applying the formula in section 112A, the portion of the gain referable to exempt policies included in the fund in which the asset was held immediately prior to disposal is exempt. Under proposed section 116CB, the portion of the 'modified 160Z gain' distributed to the CS/RA class is included in determining the net capital gain or net capital loss for that class under section 116CD.
"modified 160Z loss amount" has a similar meaning to 'modified 160Z gain amount' except that it applies to capital losses, and is not reduced by applying the formula in section 112A to the loss.
"NCS component" has a corresponding meaning to 'AD/RLA component' (see the notes on that definition).
"NCS policy" means a life assurance policy (other than an eligible policy) that is vested in the trustee of a non-complying superannuation fund or non-complying ADF (both defined terms), or a life assurance policy that was effected for the purposes of a non-complying superannuation scheme (also a defined term) or was accepted by the person maintaining such a scheme for the purposes of the scheme. An NCS policy is, in effect, a policy in respect of the non-complying superannuation business of the company. The purpose of this term is to describe the types of policies that relate to the NCS class of assessable income. The calculated liabilities referable to NCS policies are used in proposed sections 116CB and 116CE for the purpose of allocating gains and losses on disposals of assets and other assessable income of a life assurance company to the NCS class of assessable income. Such assessable income is taxable at the maximum marginal rate of personal income tax (49 per cent for the 1988-89 income year).
"non-complying superannuation scheme" is a term used to define schemes that were previously exempt superannuation schemes, apart from complying superannuation schemes. The term is used in the definition of 'NCS policy' (see notes on that term).
"non-fund assessable income" means the assessable income of a life assurance company which is not derived from assets included in the insurance funds of the company, other than assessable income relating to accident and disability premiums ('AD premiums'), 'specified rollover amounts' (see notes on that term) and amounts included in assessable income under section 275 (i.e., the liability to tax on taxable contributions transferred from a superannuation fund or ADF). The non-fund assessable income of the company is in effect income derived from any business of the company other than life assurance business (including superannuation business) and accident and disability business. The non-fund assessable income is allocated direct to the non-fund class under proposed section 116CE. The three types of assessable income excluded from the definition are excluded because, although they are not derived from assets included in the insurance funds, they do relate to policies which correspond to the classes of fund assessable income and are therefore appropriately allocated to those classes and not to the non-fund class of assessable income.
"non-fund assets" means, in effect, any asset which has been disposed of other than a fund asset (as defined). The term 'non-fund asset' identifies those assets which were not included in the insurance funds of the company immediately prior to disposal, and therefore enables proposed section 116CC to apply to any gain or loss on disposal of the asset.
"non-fund component" has a corresponding meaning to 'AD/RLA' component' (see the notes on that definition).
"notional Part IIIA disposal" is defined to mean:

·
any disposal of an asset to which Part IIIA applies; or
·
any disposal of an asset to which Part IIIA would apply if the rollover provisions in section 160ZZF and Divisions 5A and 17 of Part IIIA of the Principal Act were disregarded, and subsection 306(1) of the Principal Act applied. Under subsection 306(1) an asset acquired prior to 1 July 1988 is to be taken to have been acquired on 30 June 1988 (clause 62). The term 'notional Part IIIA disposal' is used in proposed sections 116CB and 116CC in determining the asset disposals to which those sections apply.

"notional Part IIIA disposals deduction" means the amount of any 'ordinary 51/52 amount' or 'modified 51/52 amount' as is allowable as a deduction under proposed sections 116CB and 116CC. By proposed section 116CF notional Part IIIA disposals deductions are treated as deductions which relate exclusively to the class of assessable income to which they were allocated under sections 116CB and 116CC.
"ordinary life assurance company" this is explained in the notes on the new definition of "life assurance company" in paragraph (c) of this clause.
"ordinary 25/25A amount" means the amount which would have been included in the assessable income of a life assurance company under section 25 or 25A, in respect of a notional Part IIIA disposal (a defined term) of an asset, if the general provisions of the Act applied without regard to proposed sections 116CB and 116CC. Under those sections the portion of an ordinary 25/25A amount that is distributed to a class of assessable income other than the CS/RA class is included in the assessable income of that class. This ensures that the special capital gains tax rules which apply to the complying superannuation business and rollover annuity business of a life assurance company do not apply to disposals of assets which were held in respect of other business of a life assurance company (i.e., the AD/RLA, NCS and non-fund classes of assessable income).
"ordinary 51/52 amount" has a similar meaning to 'ordinary 25/25A amount' except that it applies to losses on disposal of an asset. Under sections 116CB and 116CC the portion of an ordinary 51/52 amount that is distributed to a class of assessable income, other than the CS/RA class, will be deductible from the assessable income of that class under section 116CF.
"ordinary 160Z gain amount" is defined to mean the amount that would be deemed to be a capital gain of the company for purposes of Part IIIA of the Principal Act on disposal of an asset, had the life assurance company provisions of Division 8 not applied, reduced by the portion of that gain calculated using the formula in section 112A. By applying the formula in section 112A, the portion of the gain referable to exempt policies included in the fund in which the asset was held immediately prior to disposal is exempt. Under proposed sections 116CB and 116CC, an ordinary 160Z gain amount is distributed to each of the classes of assessable income, other than the CS/RA class. The portions distributed to the classes of assessable income are used in determining the ' overall 160Z gain amounts' and 'overall 160Z loss amounts' for the classes of assessable income.
"ordinary 160Z loss amount" has a similar meaning to 'ordinary 160Z gain amount' except that it applies to capital losses, and is not reduced by applying to the loss the formula in section 112A.
"overall 160Z gain" is, in effect, the net capital gain for each of the classes. The net capital gain is the amount by which the capital gains allocated to the class (i.e., the sum of the 'ordinary 160Z gain amounts' for the non-fund class, the 'total modified 160Z gain amount' for the CS/RA class and the 'total ordinary 160Z gain amount' for the other classes) exceed the capital losses allocated to that class (i.e., the loss amounts which correspond to the gain amounts for each class). If an overall 160Z loss for another class has been applied to reduce that gain under subsection 116CD(3), the overall 160Z gain is the amount determined after applying the overall 160Z loss. An overall 160Z gain for a class is included under section 116CD in assessable income of the class, being a part of the net capital gain for the company for the year.
"overall 160Z loss" is, in effect, the net capital loss for each class of assessable income (i.e. the amount by which the capital losses allocated to each class exceed the capital gains allocated to that class). If a class has an overall 160Z loss that amount is applied under subsection 116CD(3) to reduce overall 160Z gains for other classes.
"prior year loss deduction" means a deduction allowable to a life assurance company under the prior year loss provisions of the Principal Act sections 80, 80AAA and 80AA. Proposed section 116CH contains rules for the deductibility of prior year losses against the classes of assessable income.
"prior year Part IIIA loss" means, in effect, the amount (if any) of the net capital loss of the life assurance company. A prior year Part IIIA loss will arise where the sum of the overall 160Z losses for all the classes for the year and any prior year Part IIIA loss for a previous year exceeds the sum of the overall 160Z gains (before any application of section 116CD) for all the classes. By subclause 64(6) a net capital loss incurred for the year of income ending on 30 June 1988 will be a prior year Part IIIA loss for the 1 July 1988 year.
"RA policy" means a life assurance policy (other than an eligible policy) in relation to:

·
a roll-over annuity; or
·
an immediate annuity that is an eligible annuity (as defined in section 27A of the Principal Act) and whose purchase price consists wholly or partly of a rolled-over amount or rolled over amounts.

An 'RA policy' is, in effect, a policy in respect of the rollover annuity business of the company. The purpose of this term is to describe the types of policies which, together with CS policies, relate to the CS/RA class of assessable income. The calculated liabilities referable to RA policies are used in sections 116CB and 116CE for the purpose of allocating income of a life assurance company to the CS/RA class of assessable income. Such assessable income is taxable at a rate of 15 per cent.

"residual current surplus" is defined in paragraph (a) as the amount of the 'current surplus' (a defined term) of a class remaining after the allocation of deficits from other classes under section 116CG. Under paragraph (b) of the definition, the residual current surplus is the amount of any surplus remaining in a class of assessable income after each allocation of the three types of prior year losses (i.e., section 80, 80AAA and 80AA losses) under proposed section 116CH. The effect of the definition is that a surplus in a class is successively reduced by each application of the prior year loss provisions.
"specified rollover amount" is a term explained in the notes on clause 43.
"superannuation premiums" is defined as premiums in respect of superannuation policies, (i.e., both CS and NCS policies). Expenditure incurred in deriving such premiums will be deductible as a consequence of sections 111A and 112 of the Principal Act.
"total modified 160Z gain amount" means the total of the modified 160Z gain amounts allocated to the CS/RA class of assessable income under proposed section 116CB. The 'total modified 160Z gain amount' is used in ascertaining the 'overall 160Z gain' or 'overall 160Z loss' (see notes on those terms) for the CS/RA class of assessable income.
"total modified 160Z loss amount" has a similar meaning to 'total modified 160Z gain amount', except that it relates to modified 160Z loss amounts.
"total ordinary 160Z gain amount" means the total of the ordinary 160Z gain amounts allocated to classes other than the CS/RA and non-fund classes of assessable income under proposed section 116CB. The term is used in ascertaining the 'overall 160 gain' or 'overall 160Z loss' for those classes.
"total ordinary 160Z loss amount" has a similar meaning to 'total ordinary 160Z gain amount' except that it relates to ordinary 160Z loss amounts.

Paragraph (e) of clause 13 inserts in section 110 two new subsections. New subsection 110(3) is similar to subsection 112A(4) which is being deleted by paragraph (d) of clause 18, and will determine which policies are included in an insurance fund of a life assurance company for purposes of Division 8. A policy will be taken to be included in an insurance fund if the Commissioner considers that the liabilities under that policy would be payable from that fund.

Subsection 110(4) ensures that amounts of assessable income which may not be derived from assets included in the insurance funds but are in respect of those assets are treated as fund assessable income. An example is an amount included in assessable income under section 160AQT in respect of a franked dividend paid to the company.

The amendments proposed by clause 13 will apply in the manner outlined in the introductory note to clauses 13 to 20.

Clause 14: New sections 110B and 110C

Clause 14 inserts new sections 110B and 110C. These sections will apply in the manner outlined in the introductory note to clauses 13 to 20.

Section 110B : Exemption of CS/RA income that accrued before 1 July 1988

Section 110B excludes from assessable income of a life assurance company so much of any amount of income derived after 30 June 1988 that accrued prior to 1 July 1988 where the amount accrued would have been included in the CS/RA class of assessable income. As a general rule, a life assurance company derives its income on a due and payable basis and therefore is assessed on its income when it is received rather than when it accrues. This section will ensure that income which accrued prior to 1 July 1988 in respect of the CS/RA class, which was exempt prior to that date, continues to be exempt even if derived after 30 June 1988.

Section 110C : Current pension liabilities exemption

New section 110C allows a life assurance company an exemption from tax for income derived by the company in respect of life assurance policies purchased by a complying superannuation fund, complying ADF or PST to meet current pension liabilities. Under subsection 110C(1) the amount exempt is the percentage of the 'notional CS/RA amount' that the Commissioner considers would have been exempt from tax under section 282B or 283 if the notional CS/RA amount had been derived by the holders of the CS policies (i.e., a complying superannuation fund etc.). Subsection 110C(2) defines 'notional CS/RA amount' as the amount of the CS/RA assessable income had this section not applied.

Clause 15: Premiums not assessable income

Section 111 of the Principal Act exempts from the assessable income of a life assurance company premiums received in respect of life assurance policies.

Clause 15 will amend section 111 by inserting a new subsection (1A) which prevents the exemption under section 111 from applying to a specified roll-over amount. A "specified roll-over amount" (a term explained in the notes on clause 13) is a premium paid to a life assurance company in respect of a life assurance policy acquired with a rollover of some or all of the untaxed element of the post-30 June 1983 component of an eligible termination payment (e.g. a 'golden handshake'). Consistent with the treatment of specified roll-over amounts paid to a complying superannuation fund or complying ADF (section 274 of the Principal Act), these amounts are to be taxed at a rate of 15 per cent, and are therefore included in the CS/RA class of assessable income of a life assurance company under proposed subsection 116CE(4).

The amendments proposed by clause 15 will apply as outlined in the introductory note to the clauses amending Division 8.

Clause 16: New sections 111A to 111E

Clause 16 inserts proposed sections 111A to 111E. These sections will apply in the manner outlined in the introductory note to clauses 13 to 20.

Section 111A : Deductions to be allowable for expenditure incurred in gaining superannuation premiums

Under the income tax law deductions or expenditure are allowable to the extent that the expenditure is incurred in the gaining or producing of assessable income. Under section 111 of the Principal Act, premiums received by a life assurance company in respect of life assurance policies, including superannuation policies, are exempt income. The exempt premium income therefore reduces the deductions otherwise available to a life assurance company.

Proposed section 111A will allow a life assurance company to treat superannuation premiums as assessable income for purposes of determining allowable deductions, even though the premiums may be exempt income. The receipt of exempt premiums will no longer reduce the amount deductible. This is consistent with section 277 of the Principal Act which ensures that the receipt of non-taxable contributions by a superannuation fund or ADF will not reduce the extent of the deductibility of expenditure incurred in gaining contributions.

Section 111B : Disposal of units in PSTs by life assurance companies

Section 111B ensures that a life assurance company which disposes of a unit in a PST is exempt from income tax on any gain on disposal of that unit where the unit was included in a 'tax-advantaged insurance fund' of the company. This exemption is consistent with proposed Division 7A of Part IIIA which exempts such gains from the capital gains tax provisions.

Paragraphs (1)(a) to (c) set the following conditions which must be satisfied for this section to apply:

·
the life assurance company disposes of a unit in a unit trust;
·
the unit trust is a PST in the year of income in which the disposal occurred; and
·
immediately before the disposal the unit was included in a tax-advantaged insurance fund of the company.

If the conditions in paragraphs (1)(a) to (c) apply, paragraphs (d) to (f) allow the company to exclude from its assessable income any amounts in respect of the disposal under sections 25 or 25A, and no deduction is allowable in respect of the disposal under section 51 or 52.

Subsection 111B(2) provides that a tax advantaged insurance fund of a life assurance company is an insurance fund of the company which at the end of the year of income in which the disposal of the asset occurred consisted solely of CS policies, RA policies or eligible policies.

Section 111C : Reduction in deductions that are not exclusively related to producing assessable income

Under proposed section 111C a life assurance company will be required to reduce all its deductions to take account of exempt income derived by the company, unless a deduction relates exclusively to producing assessable income.

Subsection 111C(1) sets out the deductions to which this section applies, namely, deductions which would be allowable to the company apart from this section, other than deductions allowable under sections 51 and 113, not related exclusively to the assessable income of the company. Any deduction which is reduced on account of the exempt income of the company will be taken to relate exclusively to assessable income (e.g., depreciation).

By subsection 111C(2) a deduction which satisfies subsection (1) is allowable only to the extent calculated using the formula:

(Deduction) * ((Assessable income) / (Total income))

where:

"Deduction" means the amount of the deduction concerned;
"Assessable income" means the total assessable income of the company;
"Total income" means the total assessable income of the company apart from any exempting provisions.

By subclause 63 (5) section 111C will apply to assessments in respect of the year of income commencing on 1 July 1988 (i.e., the 1988-89 income year) and of all subsequent years of income.

Section 111D : Division has effect subject to the Constitution

By new section 111D, Division 8 will not apply to a life assurance company, including an SGIO, if its application would infringe section 114 of the Constitution. This is a safeguard in case of constitutional challenge. Although Division 8 is considered to be within constitutional powers, section 111D ensures the continued general application of the Division even if it were found inapplicable in particular situations.

Section 111E : Application of Act to SGIOs

Clause 16 will insert new section 111E, which provides that paragraph 23(d) of the Principal Act does not apply to an SGIO (as defined in subsection 6 - see clause 4). Paragraph 23(d) exempts from income tax the income of local governing bodies and public authorities constituted under a Commonwealth, State or Territory Act. An SGIO is to be taxable on income from its superannuation and rollover annuity business under Division 8 from 1 July 1988. All other income of an SGIO will continue to be exempt from income tax by the operation of section 112A (see the notes on clause 18).

Clause 17: Deductions not allowable for expenditure incurred in gaining certain premium income

Clause 17 will repeal existing section 112 of the Principal Act and substitute a new section. Currently, section 112 denies a deduction for expenditure incurred by a life assurance company exclusively in gaining premiums in respect of life assurance policies. Such premiums are exempt from tax under section 111 of the Principal Act.

New section 112 will broadly have the same effect as the existing section 112 except that the section will not apply to expenditure exclusively incurred in gaining superannuation premiums.

Proposed subsection (1) has broadly the same effect as the existing section 112 but, by limiting non-deductibility to expenditure incurred exclusively in deriving premiums exempt under section 111, expenditure exclusively incurred in deriving assessable specified roll-over amounts (refer to notes on clause 13) will be an allowable deduction.

Proposed subsection (2) prevents section 112 from applying to superannuation premiums and therefore a life assurance company will be able to claim a deduction for expenditure incurred exclusively in deriving superannuation premiums, in respect of both complying and non-complying superannuation policies, even though those premiums may be exempt income of the company.

This clause will apply in the manner outlined in the introductory note to clauses 13 to 20.

Clause 18: Exemption of income attributable to certain policies etc.

Section 112A of the Principal Act exempts from tax that portion of the income and capital gains derived from the assets of an insurance fund of a life assurance company that is referable to eligible policies.

As a consequence of the proposal to tax SGIOs, clause 18 will amend section 112A to provide for the determination of the exempt income of an SGIO. For that purpose, references to 'eligible policies' in subsections 112A(1) and (2) will be changed by paragraphs (a) and (c) of clause 18 to refer to 'exempt policies'. An exempt policy is defined in section 110 (see the notes on clause 13) as a policy other than a CS policy, an NCS policy or an RA policy in the case of an SGIO, and an eligible policy in the case of an ordinary life assurance company.

Paragraph (b) of clause 18 will replace existing subsection 112A(1A) with a new subsection (1A). The existing subsection includes capital gains for purposes of Part IIIA as income to be apportioned between exempt and assessable income under subsection 112A(1). The exempt portion of capital gains is now to be determined in calculating the "ordinary 160Z gain amount" and "modified 160Z gain amount" (for an explanation of those terms see the notes on clause 13) for purposes of new section 116CD, rather than being determined under subsection 112A(1).

New subsection 112A(1A) sets out the amounts of income of an SGIO that are not to be assessable, namely, all amounts other than:

·
income derived from assets included in the insurance funds;
·
specified roll-over amounts (explained in the notes on clause 13); and
·
amounts included in assessable income under section 275 (i.e. any liability to tax on taxable contributions transferred to an SGIO).

New subsection 112A(1A) ensures that an SGIO is only taxed on income derived in respect of its superannuation and rollover annuity business.

Paragraph (d) will omit subsection 112A(4) which provides for a policy to be taken to be included in a fund for purposes of section 112A if the Commissioner considers that liabilities under that policy would be payable from the fund. New subsection 110(3), inserted by clause 13, is a provision similar in effect to subsection 112A(4), which will apply generally to Division 8.

The amendments proposed by clause 18 will apply in the manner outlined in the introductory note to clauses 13 to 20.

Clause 19: Expenses of general management

Section 113 of the Principal Act provides for the determination of the deductible portion of the general management expenses of a life assurance company. General management expenses are those expenses of a life assurance company other than expenses -

·
of a capital nature;
·
incurred exclusively in gaining or producing assessable income; or
·
exclusively incurred in gaining or producing non-assessable income.

The deductible portion of general management expenses can be determined either on a factual basis or on a formula basis.

Clause 19 proposes to insert a new subsection 113(4) which will prevent a life assurance company from including in general management expenses, expenses which are denied deductibility for purposes of the general deductibility provision, section 51. This amendment will ensure that a life assurance company cannot claim a deduction for entertainment expenses, fringe benefits tax and other expenses denied deductibility to other taxpayers for the purposes of section 51 of the Principal Act.

By subclause 63(6) the amendment proposed by Clause 19 will apply to expenditure incurred after 25 May 1988.

Clause 20: New sections 116CA to 116CJ

Clause 20 inserts proposed sections 116CA to 116CJ into the Principal Act. These sections provide for the apportionment of assessable income, allowable deductions, capital gains and capital losses into classes of assessable income for purposes of determining the components of a life assurance company's taxable income. The sum of these components will equal the total taxable income of the company. The new sections will apply in the manner outlined in the introductory note to clauses 13 to 20.

Section 116CA : Classes of assessable income and policies

Proposed section 116CA describes the classes of assessable income of a life assurance company and, where applicable, relates those classes to a corresponding type of policy. As a consequence of the definition of 'class' in the amendments to section 110 of the Principal Act (clause 13), any reference in Division 8 to a class of assessable income will mean a reference to the class as set out in section 116CA.

The order of the classes as determined under subsection 116CA is used in new sections 116CD and 116CG for the setting off of an overall 160Z loss or deficit for one class against other classes of assessable income.

Subsection 116CA (1) sets out for the purposes of subsections 116CD(3) and 116CG(1) the four classes of assessable income and the corresponding classes of policies of an ordinary life assurance company (a defined term meaning any life assurance company other than an SGIO), working from the highest to lowest classes.

Subsection 116CA (2) sets out the two classes of assessable income and the corresponding classes of policies for an SGIO. An SGIO has only two classes because only income from its complying superannuation business and non-complying superannuation business is subject to income tax.

Section 116CB: Notional Part IIIA disposals of fund assets

New section 116CB provides for the apportionment of gains and losses on disposal of assets of a life assurance company between classes of assessable income. The section applies to a notional Part IIIA disposal of a asset. A 'notional Part IIIA disposal' (defined in clause 13) is a disposal to which Part IIIA applies or would apply if the rollover provisions of that Part were disregarded and the special capital gains tax rules in Division 10 of Part IX applied. A fund asset is also defined in the new definitions inserted by clause 13 as an asset which, immediately before its disposal, was included in an insurance fund of the life assurance company. Gains or losses on disposal of assets which are not included in the insurance funds are dealt with in new section 116CC.

Subsection 116CB(1) describes the core amounts for a notional Part IIIA disposal of an asset. The core amounts are defined in section 110 and are, broadly, any possible gain or loss, for tax purposes, that could arise on such a disposal. The core amounts are the amounts apportioned in subsections (2) and (3).

Subsection 116CB(2) contains the formula for distributing core amounts between classes of assessable income, so that the taxpayer can determine, under subsection (3), whether the amounts distributed will be assessable income, allowable deductions, or capital gains or capital losses of the class concerned. The formula for distributing the core amounts is:

Core amount * ((Liabilities for class)/(Total liabilities))

where:

"Core amount" is a core amount as described in subsection (1);
"Liabilities for class" is that portion of the calculated liabilities of the company as, in the opinion of the Commissioner, are referable to policies of the class concerned that are included in the insurance fund in which the asset was included immediately before disposal;
"Total liabilities" is the amount of the calculated liabilities of the company at the end of the year of income which are referable to all policies included in the fund in which the asset was included immediately before disposal (other than exempt policies).

Subsection 116CB (3), sets out the application of the core amounts as distributed to classes of assessable income under subsection (2).

By paragraph (a) an ordinary 25/25A amount distributed to any class, other than to the CS/RA class, is to be included in the assessable income of the class.

By paragraph (b) an ordinary 51/52 amount distributed to any class, other than the CS/RA class, is to be allowable as a deduction exclusively against assessable income of the class, for purposes of the allocation of deductions under proposed section 116CF. No ordinary 25/25A amount or ordinary 51/52 amount will be included in CS/RA class as all gains or losses on disposal of assets referable to CS/RA policies other than modified 25/25A amounts or modified 51/52 amounts (see paragraphs (c) and (d) below), will be subject to the capital gains tax rules in proposed Division 10 of Part IX of the Principal Act.

Paragraph (c) includes in the assessable income of the CS/RA class the portion of the modified 25/25A amount allocated to that class under subsection (2). By paragraph (d) a modified 51/52 amount distributed to the CS/RA class is to be allowable as a deduction exclusively against the assessable income of that class, for purposes of the allocation of deductions under proposed section 116CF.

The modified 25/25A amount or modified 51/52 amount (as defined in subsection 110) are the gains or losses on disposal of a security, or gains or losses attributable to currency exchange rate fluctuations. Such gains or losses are included as ordinary 25/25A amounts or ordinary 51/52 amounts for other classes of assessable income. All other gains or losses on disposal of assets referable to CS/RA policies will be subject to the special capital gains tax rules in proposed Division 10 of Part IX of the Principal Act.

Any amounts that are taken to be assessable income by virtue of paragraphs (a) to (d) are included in the assessable income of the classes under proposed section 116CE. Amounts allowable as deductions under those paragraphs are defined as 'notional Part IIIA disposals deductions' and are deductible from the assessable income of the classes under proposed subsection 116CF(1).

By paragraph (e) of subsection 116CB(3) an ordinary 160Z gain amount or ordinary 160Z loss amount distributed to any class, other than the CS/RA class, is to be a capital gain or capital loss of the class concerned. These capital gains or capital losses are to be totalled in calculating the total ordinary 160Z gain amount or total ordinary 160Z loss amount, which in turn are used in determining the overall 160Z gain or overall 160Z loss for each class. An ordinary 160Z gain amount or ordinary 160Z loss amount (see notes of those terms in clause 13) are in effect the capital gains or capital losses calculated under the ordinary capital gains tax rules which apply to other taxpayers.

By paragraph (f) any modified 160Z gain amount or modified 160Z loss amount distributed to the CS/RA class is to be a capital gain or capital loss of the CS/RA class. These capital gains or capital losses are to be totalled in calculating the total modified 160Z gain amount or total modified 160Z loss amount, which in turn are used in determining the overall 160Z gain or overall 160Z loss for the CS/RA class. A modified 160Z gain amount or modified 160Z loss amount are the capital gains or capital losses calculated under the special capital gains tax rules in Division 10 of Part IX which apply to the complying superannuation business and rollover annuity business of a life assurance company.

Example

On 1 January 1989 a life assurance company sold an asset for $1000, which had been purchased on 1 December 1984 at a cost of $600 and had a market value of $900 at 30 June 1988. The asset was included in an insurance fund of the company of which 60% of the calculated liabilities of the fund were referable to CS policies, 30% to AD/RLA policies and 10% to eligible policies.

The core amounts for the disposal are:

·
ordinary 25/25A amount (i.e., the gross gain ($400) reduced by the amount referable to exempt policies as calculated under section 112A ($40). $360
·
modified 160Z gain amount (i.e., the gross modified gain ($100) reduced by the amount calculated by applying the 112A formula ($10). $90

The amount to be included in the AD/RLA class of assessable income is one-third (i.e., 30%/90%) of the ordinary 25/25A amount, i.e., $120. The amount to be included in the CS/RA class of assessable income is two-thirds of the modified 160Z gain amount, i.e., $60.

By subsection 116CB(4) a reference to a policy in this section is a reference to a life assurance policy or an AD policy.

Section 116CC : Notional Part IIIA disposals of non-fund assets

Section 116CC provides for the allocation of gains and losses on disposals of assets not included in any of the insurance funds of a life assurance company immediately before disposal, to the non-fund class of assessable income. The section applies to a notional Part IIIA disposal of a non-fund asset. A "notional Part IIIA disposal" is explained in the notes on new section 116CB. A "non-fund asset" is a new definition inserted by clause 13, and means any asset disposed of by a life assurance company being an asset which was not included in any of the insurance funds of the company immediately before the disposal.

Subsection 116CC(1) describes the core amounts for notional Part IIIA disposal, which are broadly any possible gain or loss for tax purposes that could arise on such a disposal of a non-fund asset by applying the provisions of the Principal Act in the same way as for any other taxpayer. The core amounts are all defined in section 110.

Subsection 116CC(2) sets out how the core amounts are to be applied. By paragraph (a) the whole of any ordinary 25/25A amount is assessable income of the company and is included in the non-fund class of assessable income for purposes of section 116CE. By paragraph (b) the whole of any ordinary 51/52 amount is allowable as a deduction exclusively against assessable income of the non-fund class, for purposes of the allocation of deductions under proposed section 116CF. In that section, a deduction in respect of an ordinary 51/52 amount is included as a notional Part IIIA disposals deduction.

Paragraph (c) of subsection 116CC(2) provides that the whole of any ordinary 160Z gain amount or ordinary 160Z loss amount is to be a capital gain or capital loss in respect of the non-fund class. The sum of these capital gains and capital losses is used in calculating the overall 160Z gain or overall 160Z loss for the non-fund class.

Section 116CD : Assessable income etc. in relation to 160Z gain amounts

Section 116CD provides for the determination of the amount of the net capital gain of the company which is to be included in the assessable income of each of the classes of assessable income. This is determined firstly by calculating the overall 160Z gain or overall 160Z loss for the year of income for each class. If a class has an overall 160Z loss that loss is applied in reducing overall 160Z gains for other classes. Those reduced gains are termed residual overall 160Z gains. Prior year net capital losses are then applied to reduce any residual overall 160Z gains for the classes. Any overall 160Z gain of a class remaining after the above reductions is included in the assessable income of that class under proposed section 116CE. If the overall 160Z gains of all the classes are reduced to nil, any remaining loss will be able to be carried forward as a prior year Part IIIA loss, for reduction against capital gains derived in subsequent years.

Subsection 116CD(1) ensures that no net capital gain derived by a life assurance company is included in assessable income other than under Division 8. It precludes section 160ZO (i.e., the provision which includes net capital gains in assessable income for all other taxpayers) from applying to a life assurance company.

By subsection 116CD(2) the overall 160Z gain for a class (if any) remaining after that gain has been reduced under subsections (3), (5) or (6), is to be included in the assessable income of that class. That amount is included in determining the total assessable income of the class under section 116CE.

Where there is an overall 160Z loss for a particular class of assessable income, subsection 116CD(3) requires the loss to be applied successively in reduction of overall 160Z gains for the remaining classes. Any loss is to be applied against gains of the remaining classes successively from the lowest remaining class with an overall 160Z gain to the highest remaining class with an overall 160Z gain. Section 116CA sets out the order of the classes of assessable income.

As an example, if an ordinary life assurance company has an overall 160Z loss for its CS/RA class and all the other classes have overall 160Z gains, the overall 160Z loss is to be applied in reducing the gains for the other classes in the following order:

1.
AD/RLA class;
2.
non-fund class;
3.
NCS class.

By subsection 116CD(4) if there are overall 160Z losses for two or more classes the order for applying those losses in reducing overall 160Z gains for other classes is the same as in subsection (3).

Subsections 116CD(5) and (6) set out the order for applying any "prior year Part IIIA loss" (this term is explained in the notes on clause 13), which is in effect any net capital loss brought forward from a previous year, in reducing residual overall 160Z gains for the classes of assessable income. A "residual overall 160Z gain" is defined in section 110 to mean the amount of any overall 160Z gain remaining after it has been reduced by overall 160Z losses for other classes under subsection 116CD(3). In the case of an ordinary life assurance company, a prior year Part IIIA loss will reduce the residual overall 160Z gains for the classes of assessable income in the order:

1.
non-fund class;
2.
AD/RLA class;
3.
CS/RA class;
4.
NCS class.

In the case of an SGIO, the prior year Part IIIA loss will be first applied in reducing any residual overall 160Z gain for the CS/RA class and then in reducing any such gain for the NCS class.

By subsection 116CD(7) a reference in section 51AAA of the Principal Act to section 160ZO includes a reference to subsection 116CD(2). This ensures that section 51AAA applies to a life assurance company, even though section 160ZO does not apply to such a company.

Subsection 116CD(8) ensures that no net capital loss incurred by a life assurance company can be applied to reduce capital gains other than under Division 8, by preventing section 160ZC of Part IIIA of the Principal Act from applying to a life assurance company.

Section 116CE : Amount of assessable income in particular class

Under new section 116CE all the assessable income of a life assurance company is allocated to the four classes of assessable income, for purposes of determining the components of taxable income under proposed section 116CJ.

Under subsection 116CE(1) the NCS class of assessable income consists of:

·
any assessable income allocated to that class under subsection 116CB(3) (i.e., sections 25 and 25A gains on disposals of assets) or section 116CD (i.e., any net capital gain for the class); and
·
any assessable income allocated to that class under subsection 116CC(2) (see notes below on that subsection).

By subsection 116CE(2) the non-fund class of assessable income consists of:

·
any assessable income allocated to that class under subsection 116CB(3) or section 116CD;
·
any other non-fund assessable income (i.e., any assessable income of a life assurance company that is not derived from assets included in the insurance funds of the company, but not including AD premiums, specified rollover amounts or amounts included in assessable income under section 275 (see the notes on the definition of 'non-fund assessable income' in clause 13).

Subsection 116CE(3) provides that the AD/RLA class of assessable income consists of:

·
any assessable income allocated to that class under subsection 116CB(3) or section 116CD;
·
any assessable income allocated to that class under subsection 116CE(5); and
·
AD premiums (i.e., premiums received in respect of accident and disability policies).

Under subsection 116CE(4) the CS/RA class of assessable income consists of:

·
any assessable income allocated to that class under subsection 116CB(3) or section 116CD;
·
any assessable income allocated to that class under subsection 116CE(5);
·
amounts included in assessable income under section 275 of the Principal Act (ie. any liability to tax on taxable contributions paid to a complying superannuation fund or complying ADF, where the fund or ADF has arranged for the transfer of the liability to the life assurance company); and
·
specified roll-over amounts paid to the company in the year of income (see notes on the definition of 'specified rollover amount' in clause 13).

Subsection 116CE(5) allows allocation of the assessable income of a life assurance company derived from assets included in the insurance funds of the company, other than notional Part IIIA disposals income (a defined term meaning, in effect, any amount allocated to assessable income under subsection 116CB(3) or section 116CD), between the classes of fund assessable income (i.e., between the classes other than the non-fund class). The subsection effectively allocates any assessable income derived from the assets of the insurance funds that is not allocated under another section of the Principal Act. The assessable income is allocated by applying the following formula:

(Income) * ((Liabilities for class) / (Total liabilities))

where:

"Income" means the amount of assessable income to be allocated;
"Liabilities for class" and "Total liabilities" have the same meanings as in subsection 116CB(2) - for a further explanation see the notes on that subsection.

Subsection 116CE(6) limits a policy in this section to a life assurance policy or an AD policy.

Section 116CF : Apportionment of current year deductions between classes

By section 116CF all the deductions of a life assurance company, other than prior year loss deductions, are allocated to the classes of assessable income for purposes of determining the components of taxable income under proposed section 116CJ.

Subsection 116CF(1) allocates current year deductions and notional Part IIIA disposal deductions (both defined terms - see clause 13) that relate exclusively to the assessable income of a particular class direct to that class. A current year deduction is any amount allowable as a deduction to the company other than a notional Part IIIA disposals deduction or a prior year loss deduction. A notional Part IIIA disposals deduction means, in effect, any amount allowable as a deduction to the company for the year of income under sections 51 or 52 in respect of the disposal of an asset, as is determined under subsections 116CB(3) or 116CC(2). By those subsections all notional Part IIIA disposals deductions are taken to relate exclusively to a particular class of assessable income.

Under subsection 116CF(2) all other deductions, that is, the non-exclusive current year deductions of the company, are allocated to classes of assessable income using the formula:

(Residual current deductions) * ((Income of class) / (Total income))

where:

"Residual current deductions" means any current year deductions of a life assurance company other than those that have already been allocated to a class under subsection 116CF(1) because they relate exclusively to the assessable income of that class;
"Income of class" means the amount of assessable income of the class concerned, as calculated under section 116CE, excluding any net capital gains allocated to the class under section 116CD;
"Total income" means the amount of the total assessable income of the company excluding the amount of any net capital gains included in assessable income under section 116CD.

Section 116CG : Application of deficit arising for a particular class

Section 116CG sets out the procedure for applying deficits in one class of assessable income to reduce current surpluses in other classes. A current surplus (a term defined in section 110) will arise where the assessable income of a class, as determined under section 116CE, exceeds the deductions allocated to that class under section 116CF. A deficit (also defined in section 110) will arise where the allowable deductions exceed the assessable income allocated to a class.

Subsection (1) requires a deficit that arises for a particular class of assessable income to be applied successively in reduction of current surpluses from the lowest remaining class with a current surplus to the highest remaining class. Section 116CA sets out the order for the classes of assessable income. For example, where an ordinary life assurance company has a deficit for the non-fund class, that deficit will be applied in reducing current surpluses of the other classes in the following order:

1.
AD/RLA class;
2.
CS/RA class; and
3.
NCS class.

By subsection 116CG(2), if there is a deficit for two or more classes, the order for applying those deficits in reducing current surpluses of the other classes is the same as in subsection 116CG(1).

Section 116CH : Deduction of prior year losses

Section 116CH specifies the order for applying prior year loss deductions in reducing residual current surpluses for the classes of assessable income. A residual current surplus, which is defined in section 110, for a class of assessable income will be the amount remaining after current surpluses for the classes have been reduced by deficits for other classes of assessable income under section 116CG. A prior year loss deduction is defined in section 110 to mean a deduction allowable to the company under sections 80, 80AAA or 80AA - the prior year loss provisions relating respectively to general losses, film losses and primary production losses.

Under subsection 116CH(1), in the case of an ordinary life assurance company (i.e., a life assurance company other than an SGIO) a prior year loss deduction will be applied to reduce current surpluses for the classes of assessable income in the following order:

1.
non-fund class;
2.
AD/RLA class;
3.
CS/RA class;
4.
NCS class.

Under subsection 116CH(2) the order for SGIOs is first the CS/RA class and second the NCS class.

By subsection 116CH(3) if there are prior year loss deductions of two or more kinds (e.g., a section 80 loss and a section 80AA loss) those deductions will be taken into account, for purposes of this section, in the same order as in section 80AB of the Principal Act (i.e., section 80AAA first, followed by section 80 and then section 80AA).

Section 116CJ : Components of taxable income

Under this section a life assurance company will be able to ascertain the component of taxable income for a particular class of assessable income. The component of taxable income for a particular class is the amount remaining after the assessable income of the class, as allocated under section 116CE, is reduced by deductible amounts allocated to that class under section 116CF, 116CG and 116CH. The sum of the components of taxable income for the classes will equal the amount of the total taxable income of the company. The components of taxable income are relevant for purposes of applying income tax rates, under the Income Tax Rates Amendment Bill (No.2) 1989, to the different classes of assessable income of a life assurance company.

Clauses 21-24: Taxation of registered organisations

Introductory note

Clauses 21 to 24 amend Division 8A of the Principal Act which provides a legislative basis for the taxation of income derived by registered organisations. The amendments introduce a legislative framework for the taxation of the superannuation and rollover annuity business of a registered organisation from 1 July 1988, and also include other changes so as to tax registered organisations other than friendly societies in the same way as friendly societies.

As a consequence of the announcements in the May 1988 Economic Statement the taxable income of a registered organisation will be divided into three components which are taxable at specific rates of tax as follows (the rates below are for the 1988-89 income year):

·
the CS/RA component - that is, the component referable to policies held by complying superannuation funds, approved deposit funds (ADFs) or pooled superannuation trusts (PSTs) and policies in respect of rollover annuities - taxed at 15%;
·
the NCS component - that is, the component referable to policies held by non-complying superannuation funds or ADFs - taxed at 49%; and
·
the EIB component - that is, the component referable to accident and disability policies and residual life assurance policies - taxed at 30%.

The amendments proposed in this Bill will restructure Division 8A to allow each of the components of taxable income to be ascertained. Each component is calculated under new section 116HE and is the amount remaining after the assessable income allocated to a particular class of assessable income under section 116GD has been reduced by deductions allocated to that class under sections 116HB, 116HC and 116HD.

The provisions for allocating the assessable income and allowable deductions of a registered organisation between classes of assessable income are similar to those in Division 8 for life assurance companies. Those provisions are discussed in an introductory note to the clauses amending that Division. The main difference in the methods of allocation is that registered organisations allocate income and capital gains and capital losses on a factual basis rather than on a formula basis as in the life assurance company provisions.

The amendments made to Division 8A by clauses 21 to 24 are, by virtue of subclause 63(4), to apply to assessments in respect of the year of income in which 1 July 1988 occurred and of all subsequent years of income. Clause 64 ensures that the amendments only apply from 1 July 1988 in a year in which that date occurs where a registered organisation has a substituted accounting period that commenced before that date. Clause 64 is explained in the introductory note to the clauses amending Division 8 of the Principal Act.

Clause 21: Interpretation

Clause 21 will amend section 116E of the Principal Act which contains the definitions and interpretative provisions of Division 8A of Part III of the Principal Act.

Paragraph (a) of this clause will amend the definition of "eligible insurance policy" in subsection 116E(1) by excluding from that definition an RA policy and superannuation policy (both defined terms). An 'eligible insurance policy' is used to describe the particular types of policies which, when issued by a registered organisation, will comprise the "eligible insurance business" of the organisation. Such business is taxable at a rate of 30%. The amendment will exclude from eligible insurance business, policies referable to superannuation and rollover business, which are taxed at rates of 15 per cent or 49 per cent.

Paragraph (b) of clause 21 will amend the definition of "immediate annuity" to ensure that a life assurance policy in relation to an immediate annuity acquired by a superannuation fund or other entity may be an 'eligible policy' for the purposes of exempting income in respect of such policies.

Paragraph (c) will replace the existing definition of "eligible policy" with a new definition having the same meaning as the term has in Division 8 (refer to the notes on that definition in clause 13). Income referable to eligible policies is excluded from the definitions of eligible insurance policy, CS policy, RA policy and NCS policy and is therefore exempt.

Paragraph (d) of clause 21 sets out the meanings of new terms used in Division 8A. Many of the definitions are self explanatory and others are explained in the notes on clause 13 which amends the definition section in Division 8. This note accordingly deals only with those definitions that warrant further explanation.

"CS/RA assessable income" means so much of the total income (other than exempt premiums) of the organisation of the year of income as is derived from the CS/RA business (a defined term) of the organisation. The 'total income' of the organisation is a term defined in existing section 116E as the income, profits or other amounts that would, but for any exempting provisions, be assessable income of the registered organisation. The CS/RA assessable income is the assessable income derived by the organisation from its complying superannuation business and rollover annuity business. The CS/RA assessable income is allocated to the CS/RA class under section 116GD for the purpose of determining the CS/RA component of taxable income under new section 116HE.
"CS/RA business" means the complying superannuation and rollover annuity business of the organisation. The component of taxable income referable to such business is taxable at the rate of 15 per cent.
"CS/RA component" is defined as the component of the total taxable income of the registered organisation which relates to the CS/RA class. That component is determined under section 116HE (clause 24) and is used for purposes of assigning a rate of tax under the Income Tax Rates Amendment Bill (No 2) 1989.
"current surplus" means:

·
the amount by which the assessable income of a class exceeds the deductions allocated to that class under section 116HB (clause 24); or
·
if a deficit for another class has been applied to reduce a surplus calculated in paragraph (a) under proposed section 116HC (clause 24), the amount by which the previously calculated surplus exceeds the portion of the deficit allocated to the class. A current surplus is calculated for each class of assessable income and is to be used in section 116HC for setting off deficits between classes of assessable income.

"current year deduction" means all the allowable deductions of a registered organisation other than a notional Part IIIA disposals deduction or a prior year loss deduction (these terms are explained in these notes). The current year deductions of an organisation are allocated to classes of assessable income under proposed section 116HB. Both types of deductions excluded from current year deductions have their own allocation provisions.
"deficit" means the amount by which the current year deductions and notional Part IIIA disposals deductions allocated to a class under section 116HB exceeds the assessable income allocated to that class. Where there is a deficit for a class of assessable income, section 116HC will allocate that deficit to the other classes of assessable income.
"EIB assessable income" means so much of the total income (other than premiums) of the organisation for the year of income as is derived from the eligible insurance business (a term defined in existing subsection 116E(1)) of the organisation. 'Total income' is explained in the notes on the term CS/RA 'assessable income'. The EIB assessable income is the assessable income derived by the organisation from its accident and disability business and life assurance business other than its superannuation and rollover annuity business, and business referable to eligible policies. The EIB assessable income is allocated to the EIB class under section 116GD for the purpose of determining the EIB component of taxable income under new section 116HE. The EIB component of taxable income is taxed at the rate of 30 per cent.
"EIB component" has a similar meaning to CS/RA component (see the notes on that definition).
"exempt premium" means a premium other than a specified rollover amount (a defined term). All other premiums received by a registered organisation are not assessable income.
"modified 25/25A amount", "modified 51/52 amount", "modified 160Z gain amount" and "modified 160Z loss amount" are all terms explained in the notes on the definitions inserted in the life assurance company provisions in Division 8 by clause 13. These terms have similar application to registered organisations. However, the modified 160Z gain amount is not reduced by the amount of the gain calculated using the formula in section 112A. Under proposed section 116GA the amount of any modified 25/25A amount in respect of the disposal of a CS/RA asset will be included in the assessable income of that class, while any modified 51/52 amount in respect of the disposal of a CS/RA asset under section 116GA will be deductible from the assessable income of that class. Under section 116GA the portion of the modified 160Z gain amount or modified 160Z loss amount, in respect of the disposal of a CS/RA asset is included in determining the net capital gain or net capital loss for that class under section 116GB.
"NCS assessable income" means so much of the total income (other than premiums) of the organisation for the year of income as is derived from the NCS business (a defined term) of the organisation. The NCS assessable income is the assessable income derived by the organisation from its non-complying superannuation business. The NCS assessable income is allocated to the NCS class under section 116GD for the purpose of determining the NCS component of taxable income under new section 116HE.
"NCS business" means the non-complying superannuation business of the organisation. The component of taxable income referable to such business is taxed at the top marginal rate of personal income tax.
"NCS component" has a similar meaning to CS/RA component (see the notes on that definition).
"notional Part IIIA disposal" is a term explained in the notes on the definitions inserted in the life assurance company provisions in Division 8 by clause 13. The term is used in proposed section 116GA for determining the asset disposals to which that section applies.
"ordinary 25/25A amount", "ordinary 51/52 amount", "ordinary 160Z gain amount", and "ordinary 160Z loss amount" are all terms explained in the notes on the definitions inserted in the life assurance company provisions in Division 8 by clause 13. These terms have a similar application to registered organisations except that the ordinary 160Z gain amount is not reduced by the amount of gain calculated using the formula in section 112A. Under section 116GA the amount of any ordinary 25/25A amount in respect of a disposal of an NCS asset or EIB asset is included in the assessable income of the NCS or EIB class, while any 'ordinary 51/52 amount' in respect of a disposal of an NCS asset or EIB asset will be deductible from the assessable income of the NCS or EIB class. Under section 116GA the portion of the ordinary 160Z amount or ordinary 160Z loss amount in respect of the disposal of an EIB asset or NCS asset will be included in determining the net capital gain or net capital loss for the NCS or EIB class under section 116GB. The difference in treatment between CS/RA assets and other assets ensures that the special capital gains tax rules which apply to the complying superannuation business and rollover annuity business of a registered organisation do not apply to disposals of assets which were held in respect of the EIB business and NCS business of a registered organisation.
"overall 160Z gain" is, in effect, the net capital gain for each of the classes. The net capital gain is the amount by which the capital gains allocated to the class (i.e., the total modified 160Z gain amount for the CS/RA class and the total ordinary 160Z gain amount for the other classes) exceed the capital losses allocated to that class (i.e., the loss amounts which correspond to the gain amounts for each class). If an overall 160Z loss for another class has been applied to reduce that gain under subsection 116GB(3), the overall 160Z gain is the amount determined after applying the overall 160Z loss. An overall 160Z gain is used in section 116GB for calculating the net capital gains to be included in assessable income.
"overall 160Z loss" is, in effect, the net capital loss for each class of assessable income (i.e., the amount by which the capital losses allocated to each class exceed the capital gains allocated to that class). If a class has an overall 160Z loss that amount is applied under subsection 116GB(3) to reduce overall 160Z gains for other classes.
"prior year loss deduction" means a deduction allowable to a registered organisation under the prior year loss provisions of the Principal Act sections 80, 80AAA and 80AA. Proposed section 116HD contains rules for the deductibility of prior year losses against classes of assessable income.
"prior year Part IIIA loss" means, in effect, the amount (if any) of the net capital loss of the registered organisation. A prior year Part IIIA loss will arise where the sum of the overall 160Z losses for all the classes for the year and any prior year Part IIIA loss for a previous year exceeds the sum of the overall 160Z gains (before any application of section 116GB) for all the classes. By subclause 64(6) a net capital loss incurred for the year of income ending on 30 June 1988 will be a prior year Part IIIA loss for the 1 July 1988 year.
"residual current surplus" is defined in paragraph (a) as the amount of the current surplus (a defined term) of a class remaining after the allocation of deficits from other classes under section 116HC. Under paragraph (b) of the definition, the residual current surplus is the amount of any surplus remaining in a class of assessable income after each allocation of the three types of prior year losses (i.e., section 80, 80AAA and 80AA losses) under proposed section 116HD. The effect of the definition is that a surplus in a class is successively reduced by each application of the prior year loss provisions.
"residual overall 160Z gain" means the amount of any overall 160Z gain remaining after the gain has been reduced by overall 160Z losses under subsection 116GB(3). A residual overall 160Z gain is reduced by prior year Part IIIA losses under subsection 116GB(5).
"specified rollover amount" is a term explained in the notes on clause 43.
"superannuation premiums" is defined as premiums in respect of superannuation policies, (i.e. both CS and NCS policies). Expenditure incurred in deriving such premiums will be deductible as a consequence of new section 116HA of the Principal Act (clause 24).
"total modified 160Z gain amount" means the total of the modified 160Z gain amounts allocated to the CS/RA class of assessable income under proposed section 116GA. The total modified 160Z gain amount is used in ascertaining the overall 160Z gain or overall 160Z loss (see notes on those terms) for the CS/RA class of assessable income.
"total modified 160Z loss amount" has a similar meaning to total modified 160Z gain amount, except that it relates to modified 160Z loss amounts.
"total ordinary 160Z gain amount" means the total of the ordinary 160Z gain amounts allocated to classes other than the CS/RA class of assessable income under proposed section 116GA. The total ordinary 160Z gain amount is used in ascertaining the overall 160 gain or overall 160Z loss for those classes.
"total ordinary 160Z loss amount" has a similar meaning to total ordinary 160Z gain amount except that it relates to ordinary 160Z loss amounts.

Clause 22: New sections 116FA and 116FB

Clause 22 inserts new sections 116FA and 116FB which apply in the manner outlined in the introductory note to clauses 13 to 20.

Section 116FA : Exemption of CS/RA income that accrued before 1 July 1988

Section 116FA excludes from assessable income of a registered organisation so much of any amount of income derived after 30 June 1988 as accrued prior to 1 July 1988 where the amount accrued would have been included in the CS/RA class of assessable income. As a general rule, a registered organisation derives its income on a due and payable basis and therefore is assessed on its income when it is received rather than when it accrues. This section will ensure that income which accrued prior to 1 July 1988 in respect of the CS/RA class, which was exempt under the law applying prior to that date, continues to be exempt even if derived after 30 June 1988.

Section 116FB : Current pension liabilities exemption

New section 116FB exempts a registered organisation from tax on income derived in respect of life assurance policies purchased by a complying superannuation fund, complying ADF or PST to meet its current pension liabilities. Under subsection 116FB(1) the amount exempt is the percentage of the notional CS/RA amount that the Commissioner considers would have been exempt from tax under section 282B or 283 if the CS/RA amount had been derived by the holders of the CS policies (i.e., a complying superannuation, fund, etc.). Subsection 116FB(2) defines the 'notional CS/RA amount' as the amount that would have been CS/RA assessable income had this section not applied.

Clause 23: New sections 116G to 116GD

Clause 23 inserts proposed sections 116G to 116GD into the Principal Act. The new sections will apply in the manner outlined in the introductory note to the clauses amending Division 8.

Section 116G : Assessable income of registered organisations

Proposed section 116G describes the classes of assessable income of a registered organisation. Each of the classes of assessable income are defined in the notes on the amendments to section 116E (clause 21). As a consequence of the definition of 'class' in the amendments to section 116E, any reference in new Division 8A to a class of assessable income will mean a reference to the classes set out in section 116G.

The order of the classes as determined under subsection 116G(1) is used in new subsections 116GB(3) and 116HC(1) for the setting off of an overall 160Z loss or deficit for one class against the other classes of assessable income.

Subsection 116G(2) limits the assessable income of a registered organisation to assessable income that comes within the classes of assessable income in subsection (1). All other income of a registered organisation is exempt by virtue of paragraphs 23(f) and (g) of the Principal Act.

Section 116GA : Notional Part IIIA disposals of assets

New section 116GA provides for the apportionment of gains and losses on disposals of assets of a registered organisation between classes of assessable income based on the class to which the asset relates. The section applies to a notional Part IIIA disposal of an asset. A 'notional Part IIIA disposal' (defined in clause 13) is a disposal to which Part IIIA applies or would apply if the rollover provisions of that Part were disregarded and the special capital gains tax rules in Division 10 of Part IX applied.

Subsection 116GA(1) sets out the core amounts for a notional Part IIIA disposal of an asset. The core amounts are defined in section 110 and are broadly, any gain or loss for tax purposes that could arise on such a disposal. The core amounts are the amounts apportioned in subsections (2) and (3).

Under subsection 116GA(2) the core amounts for a disposal of an asset related to the organisation's CS/RA business (a CS/RA asset) are dealt with as follows:

·
ordinary 25/25A amounts, ordinary 51/52 amounts, ordinary 160Z gain amounts and ordinary 160Z loss amounts are disregarded;
·
a modified 25/25A amount is included in assessable income and is allocated to the CS/RA class for purposes of section 116GD;
·
a modified 51/52 amount is deductible exclusively against the CS/RA class of assessable income for purposes of section 116HB;
·
any modified 160Z gain amount or modified 160Z loss amount is taken into account in determining the overall 160Z gain or overall 160Z loss for the CS/RA class under section 116GB.

Under subsection 116GA(3) the core amounts for a disposal of an asset related to the organisation's 'eligible insurance business' (an EIB asset) or NCS business (an NCS asset) are dealt with as follows:

·
an ordinary 25/25A amount is included in the assessable income of the class concerned for purposes of section 116GD;
·
an ordinary 51/52 amount is deductible exclusively against the assessable income of the class concerned for purposes of section 116HB;
·
any ordinary 160Z gain amount or ordinary 160Z loss amount is taken into account in determining the overall 160Z gain or overall 160Z loss for the class concerned under section 116GB;
·
modified 25/25A amounts, modified 51/52 amounts, modified 160Z gain amounts and modified 160Z loss amounts are disregarded.

By subsection 116GA(4) if an asset relates to more than one class, a registered organisation is required to apply this section to each portion of the asset that relates to a specific class.

Section 116GB : Assessable income etc. in relation to 160Z gain amounts

Section 116GB provides for the determination of the amount of the net capital gain of the organisation which is to be included in the assessable income of each of the classes of assessable income. This is determined by firstly calculating the overall 160Z gain or overall 160Z loss for the year of income for each class. If a class has an overall 160Z loss that loss is applied in reducing overall 160Z gains for other classes. Those reduced gains are termed residual overall 160Z gains. Prior year net capital losses are then applied to reduce any residual overall 160Z gains for the classes. Any overall 160Z gain of a class remaining after the above reductions is included in the assessable income of that class under proposed section 116GA. If the overall 160Z gains of all the classes are reduced to nil, any remaining loss will be able to be carried forward as a "prior year Part IIIA loss", for reduction against capital gains derived in subsequent years.

Subsection 116GB(1) ensures that no net capital gain derived by a registered organisation can be included in assessable income other than under Division 8A. It does this by preventing section 160ZO (i.e., the provision which includes net capital gains in assessable income for other taxpayers) from applying to a registered organisation.

Subsection 116GB(2) provides that the overall 160Z gain for a class (if any) remaining after that gain has been reduced under subsections (3) and (5), is to be included in the assessable income of that class. That amount is included in determining the total assessable income of the class under section 116GA.

Where there is an overall 160Z loss for a particular class of assessable income, subsection 116GB(3) provides that the loss will be applied successively in reduction of overall 160Z gains for the remaining classes. Any loss is applied against gains of the remaining classes starting from the lowest remaining class with an overall 160z gain to the highest remaining class with an overall 160z gain. Section 116G sets out the order of the classes of assessable income.

As an example, if a registered organisation has an overall 160Z loss for its CS/RA class and all the other classes have overall 160Z gains, the overall 160Z loss will be applied in reducing the gains for the other classes in the order, EIB class first then NCS class.

By subsection 116GB(4), if there are overall 160Z losses for two or more classes the order for applying those losses in reducing overall 160Z gains for other classes is the same as in subsection (3).

Subsection 116GB(5) sets out the order for applying any "prior year Part IIIA loss" - in effect any net capital loss brought forward from a previous year - in reducing residual overall 160Z gains for the classes of assessable income. A "residual overall 160Z gain" is defined in section 116E to mean the amount of any overall 160Z gain remaining after it has been reduced by overall 160Z losses for other classes under subsection 116GB(3). In the case of a registered organisation, a prior year Part IIIA loss will reduce the residual overall 160Z gains for the classes of assessable income in the following order:

1.
EIB class;
2.
CS/RA class;
3.
NCS class.

Subsection 116GB(6) provides that a reference in section 51AAA of the Principal Act to section 160ZO includes a reference to subsection 116GB(2). This ensures that section 51AAA applies to a registered organisation, even though section 160ZO does not apply to such an organisation.

Subsection 116GB(7) ensures that no net capital loss incurred by a registered organisation can be applied to reduce capital gains other than under Division 8A, by preventing section 160ZC of Part IIIA of the Principal Act from applying to a registered organisation.

Section 116GC : Disposal of units in PSTs by registered organisations

Section 116GC ensures that a registered organisation which disposes of a unit in a PST is exempt from income tax on any gain on disposal of that unit where the unit was held solely in respect of tax-advantaged business of the organisation. This is consistent with proposed Division 7A of Part IIIA which exempts such gains from the capital gains tax provisions.

Paragraphs (1)(a) to (c) set the following conditions which must be satisfied for this section to apply:

·
the registered organisation disposes of a unit in a unit trust;
·
the unit trust is a PST in the year of income in which the disposal occurred; and
·
immediately before the disposal the unit was held solely in respect of tax-advantaged business of the organisation.

If the conditions in paragraphs (1)(a) to (c) apply, paragraphs (d) to (f) provide that the organisation is not to include in its assessable income any amounts in respect of the disposal under section 25 or 25A, and no deduction is allowable in respect of the disposal under section 51 or 52.

Subsection 116GC(2) declares the tax advantaged business of a registered organisation to be business in relation to policies other than eligible insurance policies and NCS policies (i.e., CS/RA business and exempt business).

Section 116GD : Amount of assessable income in particular class

Under new section 116GD all the assessable income of a registered organisation is allocated between the three classes of assessable income, for purposes of determining the components of taxable income under proposed section 116HE.

Under subsection 116GD(1) the NCS class of assessable income consists of:

·
any assessable income allocated to that class under section 116GA (i.e., section 25 and 25A gains on disposals of assets) or section 116GB (i.e., any net capital gain for the class); and
·
any other assessable income (each class of assessable income is defined in section 116E).

By subsection 116GD(2) the EIB class of assessable income consists of:

·
any assessable income allocated to that class under section 116GA or 116GB;
·
any other EIB assessable income.

Under subsection 116GD(3) the CS/RA class of assessable income consists of:

·
any assessable income allocated to that class under section 116GA or 116GB;
·
amounts included in assessable income under section 275 of the Principal Act (i.e., any liability to tax on taxable contributions paid to a complying superannuation fund or complying ADF, where the fund or ADF has arranged for the transfer of the liability to the registered organisation);
·
specified roll-over amounts paid to the organisation in the year of income (see notes on the definition of specified rollover amount in clause 13); and
·
any other CS/RA assessable income.

Clause 24: New sections 116HA to 116HE

Clause 24 inserts proposed sections 116HA to 116HE. These sections will apply in the manner outlined in the introductory note to clauses 13 to 20.

Section 116HA : Deductions to be allowable for expenditure incurred in gaining superannuation premiums

Under the ordinary operation of the income tax law, deductions for expenditure are allowable only to the extent that the expenditure is incurred in the gaining or producing of assessable income. Under Division 8A of the Principal Act, premiums received by a registered organisation in respect of life assurance policies, including superannuation policies, are exempt income. The existence of exempt premium income would require reductions to be made in determining deductions allowable to a registered organisation.

Proposed section 116HA will allow a registered organisation to treat superannuation premiums as assessable income for purposes of determining allowable deductions, even though the premiums may be exempt income. This means that in determining deductions under the Principal Act, the receipt of exempt premiums will not reduce the amount deductible. This is consistent with section 277 of the Principal Act which ensures that the receipt of non-taxable contributions by a superannuation fund or ADF is not to reduce the extent of the deductibility of expenditure incurred in gaining contributions.

Section 116HB : Apportionment of current year deductions between classes

By section 116HB all the deductions of a registered organisation, other than prior year loss deductions, are allocated to the classes of assessable income for purposes of determining the components of taxable income under proposed section 116HE.

Subsection 116HB(1) allocates current year deductions and notional Part IIIA disposals deductions (both defined terms - see clause 13) that relate exclusively to the assessable income of a particular class direct to that class. A current year deduction, is any amount allowable as a deduction to the registered organisation other than a notional Part IIIA disposals deduction or a prior year loss deduction. A notional Part IIIA disposals deduction means, in effect, any amount allowable as a deduction to the company for the year of income under sections 51 or 52 in respect of the disposal of an asset, as determined under section 116GA. By that section all notional Part IIIA disposals deductions are attributed exclusively to particular classes of assessable income.

Under subsection 116HB(2) all other deductions, that is, the non-exclusive current year deductions of the registered organisation, are allocated to classes of assessable income using the formula:

(Residual current deductions) * ((Income of class)/(Total income))

where:

"Residual current deductions" means any current deductions of a registered organisation other than those that have already been allocated to a class under subsection 116HB(1) because they relate exclusively to the assessable income of a class;
"Income of class" means the amount of assessable income of the class concerned, as calculated under section 116GD, excluding any net capital gains allocated to the class under section 116GB;
"Total income" means the amount of the total assessable income of the company excluding the amount of any net capital gains included in assessable income under section 116GB.

Section 116HC : Application of deficit arising for a particular class

Section 116HC sets out the procedure for applying deficits in one class of assessable income to reduce current surpluses in other classes. A current surplus (a term defined in section 116E) will arise where the assessable income of a class, as determined under section 116GD, exceeds the deductions allocated to that class under section 116HB. A deficit will arise where the allowable deductions exceed the assessable income allocated to a class.

Subsection (1) provides that where a deficit arises for a particular class of assessable income, the deficit will be applied successively in reduction of current surpluses working from the lowest remaining class with a current surplus to the highest remaining class. Section 116G sets out the order for the classes of assessable income. For example, if a registered organisation has a deficit in its NCS class, the deficit will be applied in reducing current surpluses of the other classes first against the EIB class and secondly against the CS/RA class.

By subsection 116HC(2), if there is a deficit in two or more classes, the order for applying those deficits in reducing current surpluses of other classes is the same as under subsection 116HC(1).

Section 116HD : Deduction of prior year losses

Section 116HD specifies the order for applying prior year loss deductions in reducing residual current surpluses for the classes of assessable income. A residual current surplus, defined in section 116E, for a class of assessable income is the amount remaining after current surpluses of the classes have been reduced by deficits for other classes of assessable income under section 116HC. A prior year loss deduction is a deduction allowable under sections 80, 80AAA or 80AA - that is, the prior year loss provisions relating respectively to general losses, film losses and primary production losses.

Under subsection 116HD(1) a prior year loss deduction for a registered organisation will be applied to reduce residual current surpluses for the classes of assessable income in the order:

1.
EIB class;
2.
CS/RA class;
3.
NCS class.

By subsection 116HD(2) if there are prior year loss deductions of two or more kinds (e.g., a section 80 loss and a section 80AA loss) those deductions will be taken into account for the purposes of this section in the same order as in section 80AB of the Principal Act (i.e., section 80AAA first, followed by section 80 and then section 80AA).

Section 116HE : Components of taxable income

This section will enable a registered organisation to ascertain the component of taxable income for a particular class of assessable income. It is the amount remaining after the assessable income of the class, as allocated under section 116GD, is reduced by deductible amounts allocated to that class under section 116HB, 116HC and 116HD. The sum of the separate components of taxable income for the classes is equal to the amount of the total taxable income of the company. The components of taxable income are relevant for purposes of applying income tax rates, under the proposed Income Tax Rates Amendment Bill (No. 2) 1989, to the different classes of assessable income of a registered organisation.

Clause 25: Liability to withholding tax

Section 128B of the Principal Act sets out the circumstances in which withholding tax is payable in respect of dividend and interest income derived by non-residents and also authorises specific exemptions from withholding tax.

Paragraph (a) of this clause will insert new paragraph 128B(3)(gb) which will exempt from withholding tax dividends derived from assets included in the insurance funds of a non-resident life assurance company that carries on business in Australia at or through a permanent establishment in Australia. Such dividends will be taxed on assessment in the same way as for residents. The non-resident company will, however, be entitled to a franking rebate under section 160AQU in respect of franked dividends received by the company.

As a consequence of the amendment in paragraph (a), paragraph (b) will omit subsection 128B(3A) which provides for exemption from withholding tax for such part of a dividend received by a life assurance company as is exempt income by the operation of section 112A.

Clause 26:

Clause 26 proposes the insertion of two new subdivisions in the Principal Act. These subdivisions - subdivision AAA and subdivision AAB - provide for a rebate of tax in respect of annual leave, long service leave, eligible termination payments and certain superannuation pensions and qualifying annuities.

Subdivision AAA - Rebate for Annual Leave, Long Service Leave and Eligible Termination Payments

Clause 26 will insert new Subdivision AAA in Division 17 of Part III of the Principal Act which will take over the role of existing section 160AA of that Act, i.e., to provide rebates to recipients of ETPs and lump sum employment termination payments in lieu of annual leave or long service leave so as to ensure that the rate of tax on such payments does not exceed the maximum rates applicable to these types of payment. The new Subdivision will apply to assessments for the income year that commenced on 1 July 1988 and later years in respect of relevant payments made after 30 June 1988.

Under the existing law, the rate of tax on lump sum payments made on termination of employment in lieu of annual leave and long service leave entitlements is restricted to a maximum of 30 per cent. Maximum rates of tax also apply to the fully taxable post-June 83 components of ETPs. The appropriate rate for any given post-June 83 component is dependent on the size of the post-June 83 component and the age of the person receiving the ETP. Where an ETP is received by someone under 55 the maximum rate is 30 per cent. If the ETP recipient is older than 55 there are 2 maximum rates that may apply, i.e., a low rate of 15 per cent and a high rate of 30 per cent. The low rate applies to the first $55,000 (section 159SG will increase the low rate threshold to $60,000 for 1989-89) of post-June 83 components paid to a person after age 55. The maximum rates are given effect to by section 160AA which provides a person with a rebate of tax if the tax payable at ordinary rates on one or more of these rebatable lump sum payments is more than the tax that would be payable if the appropriate maximum rate applied to that part of the person's taxable income. The rebate is equal to the excess.

While the rebate provided by new Subdivision AAA will be determined by the same principles as apply now, there are complicating factors which required a more general drafting approach to be taken rather than to amend section 160AA. As explained in the notes on clause 6, new reduced maximum rates of tax are to apply to the taxed elements of post-June 83 components of ETPs paid after 30 June 1988. The existing maximum rates will continue to apply to untaxed elements. In addition, during the 5 year transitional period in which the reduced tax rates are being phased in there are also a number of transitional tax rates that may apply - in 1988/89 there are 11 such possible rates of tax - to 16 different classes of eligible assessable income. A more detailed description of the method to be adopted in calculating a rebate is contained in the notes on new section 159SA. Those notes and notes explaining the other sections which make up Subdivision AAA follow.

New section 159S sets out the meanings of terms used in new Subdivision AAA. Since many of the definitions are self-explanatory, this note only discusses those definitions that warrant further explanation.

"eligible assessable income" describes the different types of receipts that may be included in a person's assessable income that are eligible for the rebate provided under Subdivision AAA. The relevant receipts are those assessable under -

·
section 26AC - i.e., lump sums paid in lieu of annual leave entitlements;
·
section 26AD - i.e., lump sums paid in lieu of long service leave entitlements; and
·
subsection 27B(1) - i.e. the post-June 83 components of ETPs.
Subdivision AAA will only have application if a person has one of these items of eligible assessable income included in his or her assessable income.

"golden handshake ETP" is a term used in proposed new section 159SD (see notes on that section) which, in conjunction with proposed new sections 159SB and 159SC (see relevant notes), is to be used to determine the appropriate maximum rate of tax to apply to the taxed element of a post-June 83 component of an ETP. The term means any payment that falls within the meaning of either paragraph (a) or (aa) of the definition of ETP, i.e., broadly, a lump sum payment made by an employer to a retiring employee or to another person as a result of the death of an employee.
"superannuation-related ETP" is another term used in proposed new section 159SD and has a similar role to the definition of golden handshake ETP. The term covers all ETPs paid from a superannuation fund to a person who was a member of the fund or to any person because someone else was a member of a superannuation fund.
Between them the definitions of superannuation - related ETP and golden handshake ETP cover every type of what might be called, original source ETPs. That is, every ETP is either one of these ETPs or can be traced back to one of these ETPs that was rolled over into a superannuation fund, an ADF or an annuity.
For the purposes of determining the appropriate maximum rate of tax on the taxed element of a post-June 83 component of an ETP it is necessary to identify the period over which the ETP accrued in a tax-free environment. That is because the new reduced maximum rates of tax generally apply to post-June 83 components of ETPs that have been affected by the tax on superannuation contributions and certain rolled-over post-June 83 components of ETPs but, during the transitional period covering the 1988-89 to 1992-93 income years, the rates vary according to the time before 1 July 1988 when the payment accrued in an exempt source. To find the appropriate rate it is first necessary to identify whether the ETP is itself an original source ETP or, if not, the original source ETP to which it is attributable (see notes on section 159SD).
"taxable part of the taxable income " means the part of a person's taxable income that is actually subject to tax. For residents it is the part of taxable income that exceeds the tax-free threshold (generally $5,100 at present). For non-residents it is the whole of the taxable income, since non-residents do not receive the benefit of a tax-free threshold.
The term is used in proposed new section 159SE and is relevant for the purpose of determining whether a particular class of eligible assessable income (see also notes on section 159SC) is actually subject to tax. For instance, if a resident had eligible assessable income of a class amounting to $10,000 and a taxable income of $14,100, only $9,000 ($14,100-$5,100) of the eligible assessable income would actually be taxed. It is to be assumed that any eligible assessable income forms the top slice of taxable income (see also notes on section 159SE). Only the amount of $9,000 would be relevant for the purpose of determining whether the person should get a rebate under Subdivision AAA.

Section 159SA : Entitlement to rebate

Proposed new section 159SA is the operative provision of new Subdivision AAA. Under section 159SA a taxpayer who has eligible assessable income is entitled to a rebate to limit the tax payable in respect of any rebatable amounts to the appropriate maximum rate or rates specified in the Tables set out in proposed new section 159SB. The precise manner of determining the rebate is explained in the following notes.

To determine whether a person is entitled to a rebate under section 159SA it is first necessary to identify whether there are any rebatable amounts in the taxable part of the taxable income. Proposed new section 159SE identifies the relevant rebatable amounts. As explained in the notes on that section any potential rebatable amounts are presumed to form the top slice of taxable income and to fall within that slice in the order, working from the highest to the lowest, shown in the Table of Rebatable Amounts set out in those notes. In determining the rebate, if any, available under section 159SA any rebatable amounts are presumed to fall in the same order.

The steps to be taken in calculating a person's rebate entitlement are:

1.
Determine the part of the taxable income filled by each rebatable amount.
2.
Calculate the tax on the taxable income.
3.
Calculate the tax on the taxable income reduced by the rebatable amount that fills the top slice of taxable income.
4.
Deduct the amount in 3 from the amount in 2.
5.
If the amount in 4 is more than zero, calculate the tax that would be payable on the rebatable amount at the lower of the corresponding rate of tax shown in Table 1 or 2 in section 159SB and the relevant marginal tax rate.
6.
Deduct the amount in 5 from the amount in 4.
7.
If the amount in 6 is more than zero the taxpayer is entitled to a rebate of that amount. If there is only one rebatable amount the amount in 6 is the rebate to be provided under section 159SA.
8.
If there is more than one rebatable amount, repeat the steps in 2 to 6 in respect of each other rebatable amount, working down the order. But each time substitute for the amount of taxable income referred to in steps 2 and 3 an amount that is equal to the taxable income reduced by the sum of the higher franked rebatable amounts.
9.
The rebate to be allowed under section 159SA is the sum of the amounts calculated in step 6 for each rebatable amount.

An example of the operation of section 159SA is:

A person has a taxable income for the 1988-89 year of $20,000 that consists of two rebatable amounts, i.e., a Table 1 Item 2 amount of $9,000 and a Table 2 Item 2 amount of $5,000 (see notes on section 159SE for basis of determining rebatable amounts), and other assessable income of $6,000.

The steps in calculating the person's rebate are:

1.
Using the Table of Rebatable Amounts in section 159SB, the part of taxable income occupied by the Table 1 Item 2 rebatable amount is the part of taxable income from $11,101 to $20,000. The Table 2 Item 2 amount would fall in the range of taxable income from $6,001 to $11,000.
2.
Tax on taxable income of $20,000 = $4001.00
3.
Tax on taxable income, less Table 1 Item 2 amount, i.e., $11,000 = $1416.00
4.
2, less 3 = $2585.00
5.
Tax on Table 1 Item 2 amount at 12 per cent = $1080.00
6.
$2585.00 - $1080.00 = $1505.00
7.
The minimum rebate is $1505.00
8.
Tax on reduced taxable income of $11,000 = $1416.00
9.
Tax on reduced taxable income, less Table 2 Item 2 amount, i.e. $6000.00 = $216.00
10.
8, less 9 = $1200.00
11.
Tax on Table 2 Item 2 amount at 15 per cent = $750.00
12.
$1200.00 - $750.00 = $450.00
13.
Rebate is $1505.00 plus $450.00 = $1955.00

Section 159SB : Tables of rebatable amounts

Section 159SB contains two tables which list the various classes of eligible assessable income and set out opposite each class the relevant maximum rate of tax applicable to that class. The classes of eligible assessable income are identified by section 159SC. For each class of eligible assessable income there is one or two corresponding rebatable amounts derived under section 159SE. For ETPs paid to people younger than 55 there is one rebatable amount derived under section 159SE. There may be two amounts derived in respect of ETPs paid to people older than 55, i.e. the low rate part, which covers post-June 83 components not exceeding the low rate threshold (to be $60,000 for 1988-89) and the high rate part (described in the law as the remaining part), i.e., the amount of post-June 83 components exceeding the low rate threshold (see also notes on section 159SE).

When a rebatable amount corresponding to a particular class of eligible assessable income is identified the Tables can be used to find the appropriate rate of tax for the rebatable amount. Table 1 covers the various classes of taxed elements of post-June 1983 components of ETPs. The rates of tax applicable to taxed elements may vary over the 5 year transitional period during which the tax on these elements is being reduced. The Table, therefore, sets out relevant rates for the income years 1988-89 to 1992-93 inclusive. The 1992-93 rates apply in later years as well. Table 2 covers the untaxed elements of ETPs and amounts paid in lieu of annual long service leave. Only one set of tax rates applies to these rebatable amounts.

Section 159SC : Classes of eligible assessable income

Proposed subsection 159SC(1) will determine the amount of the taxed element of an ETP that comes within any classes referred to in Table 1. When a class of taxed element is identified its corresponding rebatable account may be determined (under section 159SE) and then matched with the relevant maximum tax rate for that amount. If the actual tax payable on that slice of taxable income exceeds the tax that would be paid if the maximum tax rate applied, the taxpayer is entitled to a rebate equal to the amount of the excess, as explained in the note on section 159SA.

Each of the paragraphs 159SC(1)(a) to (h) works in a similar way to identify a particular class of taxed element of an ETP. The need for most of the classes arises from the 5-year phasing in of the reduced rates on taxed elements of ETPs. In each case the identification requires a determination of:

·
the taxpayer's age at the time when the ETP was made, i.e. whether the taxpayer was less than 55 years old or older than 55. That is relevant because, while only one rate of tax applies to the taxed element of an ETP received by someone under 55, two rates of tax may apply to the taxed element of an ETP received by someone older than 55, i.e. a low rate and a high rate. The low rate applies to that part of the taxed element of an ETP that does not exceed the balance of the low rate threshold determined under new section 159SF. The high rate applies to the excess; and
·
the period during which the ETP accrued in an exempt source before 1 July 1988 i.e., by focussing on the earliest date on which exempt fund membership (to which the ETP is attributable) commenced. The method for determining the period of fund membership is governed by proposed new section 159SD. This calculation is relevant because, under the transitional scale of maximum tax rates for taxed elements, the new lower rates are phased in more quickly the shorter the period of accrual in an exempt source (see Table 1).

Examples of the operation of subsection 159SC(1) as it interacts with section 159SB and 159SD are set out after the notes on section 159SD.

Proposed new subsection 159SC(2) will identify the three classes of eligible assessable income covered by Table 2 in section 159SB. The three classes are

·
untaxed elements of post-June 83 components of ETPs received by people under 55;
·
untaxed elements of post-June 83 components of ETPs received by people older than 55; and
·
lump sums received by persons on termination of employment in lieu of annual leave or long service leave.

As in Table 1 there is a corresponding rebatable amount or amounts for each class of eligible assessable income. The relevant maximum rate of tax is set out on the right hand side of the Table opposite the rebatable amount to which it applies.

Section 159SD: s.27B(1)(a) amounts attributable to fund membership

Section 159SD is designed to identify whether the taxed element of the post-June 83 component of an ETP accrued in an exempt source or fund (i.e., a tax exempt superannuation fund or ADF or the exempt superannuation or rollover business of a life office or registered organisation) before 1 July 1988 and, if so, the time when the exempt fund membership commenced. The need for this identification arises because the transitional rates of tax for taxed elements of post-June 83 components reduce as the period of accrual in an exempt fund becomes smaller. New section 159SC refers to the fund membership and commencement date identified under section 159SD for the purpose of determining the relevant class of eligible assessable income into which a taxed element falls.

Table 1 in new section 159SB shows the relationship between the maximum rates of tax for the various classes of elements and the period of accrual of a taxed element in an exempt source before 1 July 1988. The classes of eligible assessable income are listed down the Table in order from the class with the longest period of accrual in an exempt source to the class with the shortest accrual period. Similarly, the rates of tax shown on the right hand side of the Table that apply to particular classes of eligible assessable income fall as they move down the Table.

Proposed section 159SD works by finding the source or sources of the taxed element of the post-June 83 component of an ETP ( subsection 159SD(1)) and then determining the date when the taxed element commenced to accrue in a particular source (subsection 159SD(2)).

Subsection 159SD(1) calculates how much of a taxed element is attributable to exempt fund membership that commenced in a particular year of income. The amount is the sum of:

·
the amount, if any, attributable to an earlier golden handshake ETP with a start date in a particular year of income;
·
the amount, if any, attributable to an earlier superannuation-related ETP, that is not itself attributable to an earlier ETP, with a start date in the same year of income; and
·
if the ETP is a superannuation-related ETP with a start date in the same year of income, the amount, if any, not attributable to an earlier ETP.

The calculation just described identifies the origin of an ETP. Every ETP with a taxed element is either a superannuation-related ETP itself or is derived from an earlier superannuation-related ETP or golden handshake ETP that was rolled over into a superannuation fund, an ADF or an annuity. The three dot points above, therefore, cover the entire spectrum of ETPs with taxed elements. Examples of how the identification would work in practice are set out after the notes on subsection 159SD(2).

Subsection 159SD(2) determines the start date of an ETP for the purposes of subsection 159SD(1). The start date is, broadly, the time when an ETP commenced to accrue in a superannuation fund, an ADF or in the rollover annuity business of a life office or registered organisation. The start dates for the various types of ETPs are determined by paragraphs (a), (b) and (c) of subsection 159SD(2).

Paragraph 159SD(2)(a) fixes the start date for golden handshake ETPs. Since section 159SD is only relevant to taxed elements of ETPs, paragraph 159SD(2)(a) only deals with golden handshake ETPs that are rolled over, i.e., because golden handshake ETPs can never have a taxed element (see notes on new section 27AB). The start date for all golden handshake ETPs rolled over, by payment to a superannuation fund or ADF or purchasing an annuity, before 1 July 1988 is deemed to be 30 June 1985. The result is that the highest scale of transitional tax rates applies to the taxed element of an ETP to the extent it is attributable to such a golden handshake ETP (see example 2 below). If a golden handshake ETP is rolled over after 30 June 1988 the start date is the date on which it was paid to a superannuation fund or ADF or the date on which the annuity contract was entered into, whichever is relevant. A subsequent ETP attributable to the rolled-over ETP will not be referable to an exempt source at all. In addition, the post-June 83 component of the rolled-over ETP will be a taxable contribution in the hands of the relevant fund or annuity issuer. For that reason the taxed element of the later ETP will attract the lowest transitional rate of tax (see example 3 below).

Paragraph 159SD(2)(b) sets the start date for superannuation-related ETPs. In such cases the start date is the date when the person who was a member of the fund to which the payment relates last became a member of a fund (in cases of broken fund membership only the most recent period of membership is relevant). Paragraph 159SD(2)(b) is broken down into subparagraphs (i) and (ii) as a drafting device. Subparagraph 159SD(2)(b)(i) deals with lump sum payments made directly as a result of a person's membership of a fund, whether to the person or someone else after the member's death. Subparagraph 159SD(2) (b) (ii) deals with payments that are made on commutation of, or are the residual capital values of, superannuation pensions where the entitlement to the pension arose because of a person's superannuation fund membership, whether the pension was payable to the member or to some other person because of the member's death.

Examples of the combined operation of section 1595B, 159SC and 159SD are: Example 1.

On 31 January 1989 a person aged 60 received an ETP with a post-June 83 component of $5,000 from a taxed superannuation fund that the person has been a member of since December 1985.
Paragraph 159SC(1) (d) would identify the post-June 83 component as belonging to the 27B(1)(a) - A55-F85 class, i.e., a taxed element of an age 55 ETP attributable to fund membership that commenced between 1 July 1985 and 1 July 1986 (see notes on section 159SD which determines whether a taxed element is attributable to fund membership that commenced at a particular time).
Table 1 in section 159SB shows that a 27B(1) (a) A55-F85 class amount is covered by items 5 and 6. The amount of the taxed element does not exceed the low rate threshold so that Item 5 covers this particular rebatable amount. The appropriate maximum rate of tax for the income year commencing 1 July 1988 is 10 per cent as shown on the right hand side of Table 1.

Example 2.

On 3 May 1990 a person aged 50 receives an ETP with a post-June 83 component from an ADF. The money on deposit with the ADF represents an ETP paid to the person by his former employer on 1 February 1988.
Paragraph 159SC(1)(a) would identify the post-June 83 component as belonging to the 27B(1)(a) - B55-F84 class, i.e., a taxed element of a non-age 55 ETP attributable to fund membership that commenced before 1 July 1985 (subparagraph 159SD(2)(a)(i) deems the fund membership to have commenced on 30 June 1985 in every case where a golden handshake ETP was rolled over to an ADF before 1 July 1988).
Table 1 in section 159SB shows that a 27B(1)(a) - B55-F84 class amount is covered by Item 1. The appropriate maximum rate of tax for the income year commencing on 1 July 1989 is 26 per cent as shown on the right hand side of Table 1.

Example 3

On 20 June 1989 a person aged 62 enters into a contract to buy a deferred annuity by rolling over a golden handshake ETP. In May 1990 the person receives an ETP with a post-June 83 component after commuting part of the annuity. The post-June 1983 component does not exceed the low rate threshold. Paragraph 159SD(1)(a) would identify the taxed element as being attributable to a golden handshake ETP. By paragraph 159SD(2)(a) the start date of the ETP would be fixed as 20 June 1989, i.e. the date when the annuity contract was entered into. Therefore, the ETP just paid would be treated as attributable to fund membership that commenced on or after 1 July 1987 (relevant for the purposes of section 159SC).
Paragraph 159SC(1)(h) would then identify the taxed element as belonging to the 27B(1)(a) A55-F87 class i.e. a taxed element of an age 55 ETP attributable to fund membership that commenced after 1 July 1987.
Table 1 in section 159SB shows that a 27B(1)(a) A55-F87 class amount that does not exceed the low rate threshold is covered by item 11. The rate to apply to this class of taxed element is zero.

Example 4

On 30 May 1989 a person aged 55 receives a lump sum superannuation payment referable to fund membership that commenced on 1 July 1960. The person rolls over the ETP into his new employer's superannuation fund on 1 June 1989. In May 1990 the person has to retire and receives an ETP with a taxed element that does not exceed the low rate threshold. Paragraph 159SD(1)(b) would identify an amount of the taxed element as being attributable to the first ETP rolled over into the fund paying the current ETP. The start date fixed by paragraph 159SD(2)(b) would be 1 July 1960. According to paragraph 159SC(1)(b), the relevant part of the taxed element would be a class 27B(1)(a) - A55-F84 amount. The appropriate rate of tax opposite Item 2 in Table 1 in section 159SB is 6 per cent.
A part of the taxed element would also be identified as being attributable only to membership of the fund making the payment. The start date for this part, per paragraph 159SD(2), would be 1 June 1989. This part of the taxed element would be a class 27B(1)(a) - A55-F87 amount for which the appropriate rate of tax is zero.

Section 159SE : Rebatable amounts

Proposed section 159SE identifies whether a class of eligible assessable income or part of a class of such income is actually subject to tax, i.e. whether that income falls in the taxable part of the taxable income (the part of taxable income exceeding the tax threshold). An amount so identified is referred to in the Tables in section 159SB as a rebatable amount. That is relevant for two purposes. First, it is relevant in determining whether a rebate should be given to a taxpayer under section 159SA since a rebate is available only in respect of eligible assessable income that is subject to tax. Secondly, it is relevant for the purpose of calculating the appropriate amount of Medicare levy for a taxpayer in a case where the rebatable amount is subject to a zero rate of tax (see notes on clause 42).

To identify any relevant rebatable amounts it is first necessary to break down a person's taxable income into its components. For that purpose the possible components of taxable income are:

·
eligible assessable income; and
·
any other assessable income, e.g., pre-July 83 components of ETPs, salary and wages, interest and dividends, etc.

In many cases a person's total assessable income will exceed the taxable income, i.e. because tax deductions are allowed against the assessable income. In determining the components of taxable income it is to be assumed that taxable income consists of an eligible assessable income component in preference to the other possible component. For example, if eligible assessable income is $10,000 and taxable income is $15,000, the taxable income would be considered to be made up of $10,000 eligible assessable income and $5,000 other assessable income. It could occur that the amount of eligible assessable income exceeds the taxable income. In such a case the taxable income is to be assumed to consist solely of eligible assessable income.

Eligible assessable income itself is broken down into different classes (see notes on section 159SC). That is necessary because different rates of tax apply to the different classes of assessable income. In identifying rebatable amounts the classes that cover ETPs paid to people older than 55 have to be further dissected because two different rates of tax may apply to such a class of eligible assessable income, i.e., a low rate applies to so much of the post-June 83 component of an age 55 ETP as does not exceed the part (the residual amount) of the low rate threshold ($60,000 for 1988-89) not already used up in an earlier application. The high rate applies to the excess.

The process just described will identify the potential rebatable amounts in a person's eligible assessable income. They are:

·
each class of eligible assessable income identified by section 159SC in respect of a non-age 55 ETP;
·
the low rate parts of classes of eligible assessable income identified by section 159SC in respect of age 55 ETPs; and
·
the high rate parts of classes of eligible assessable income in respect of age 55 ETPs.

In determining the low rate parts of classes of assessable income where a person's assessable income includes more than one such class there needs to be an order for application of the residual amount (defined in section 159SF). The greatest advantage will be given to a person if the residual amount is first applied to a class of eligible assessable income that potentially may attract a zero rate in respect of its low rate part. That is because such a low rate part is not subject to the Medicare levy, which applies to all other taxable income. The order of application of the residual amount is to be:

Order of classes of eligible assessable income

1. 27B(1)(a) - A55-F87
2. 27B(1)(a) - A55-F86
3. 27B(1)(a) - A55-F85
4. 27B(1)(a) - A55-F84
5. 27B(1)(b) - A55

At this point subsection 159SE(1) sets out to derive the rebatable amounts referred to in Tables 1 and 2 in section 159SB from the potential rebatable amounts. The "derived amount" for a particular class of assessable income is so much of that class as falls in the taxable part of taxable income. That determination assumes that the potential rebatable amounts fall on the scale of taxable income in a particular order. For example, if the taxable income of a person consisted only of two potential rebatable amounts of $6,000 each, to which different maximum rates of tax would apply, the derived amounts would be $6,000 of one of the potential rebatable amounts and $900 of the other ($6,900 is the taxable part of the taxable income, i.e. $12,000 - $5,100). For that purpose, and for the purposes of section 159SA explained in the note on that section, the order in which potential rebatable amounts are to be assumed to fall (within the top slice of taxable income) is set out in the following table working from the highest to the lowest. The table refers to the Item numbers for corresponding rebatable amounts in Tables 1 and 2 in section 159SB. The order may change over the transitional period when the maximum rates of tax applying to some taxed elements change from year to year.

Table of rebatable amounts
1988-89 1989-90 1990-91 1991-92 1992-93 or later
1. Table 1 Item 11 T.1 Item 11 T.1 Item 11 T.1 Item 11 T.1 Item 11
2. Table 1 Item 8 T.1 Item 8 T.1 Item 8 T.1 Item 8 T.1 Item 8
3. Table 1 Item 5 T.1 Item 5 T.1 Item 5 T.1 Item 5 T.1 Item 5
4. Table 1 Item 2 T.1 Item 2 T.1 Item 2 T.1 Item 2 T.1 Item 2
5. Table 1 Item 12 T.1 Item 12 T.1 Item 12 T.1 Item 12 T.1 Item 12
6. Table 2 Item 2 T.1 Item 9 T.1 Item 9 T.1 Item 9 T.1 Item 9
7. Table 1 Item 10 T.2 Item 2 T.1 Item 6 T.1 Item 6 T.1 Item 6
8. Table 1 Item 9 T.1 Item 10 T.2 Item 2 T.2 Item 2 T.1 Item 3
9. Table 1 Item 7 T.1 Item 7 T.1 Item 10 T.1 Item 3 T.2 Item 2
10. Table 1 Item 6 T.1 Item 6 T.1 Item 7 T.1 Item 10 T.1 Item 10
11. Table 1 Item 4 T.1 Item 4 T.1 Item 4 T.1 Item 7 T.1 Item 7
12. Table 1 Item 3 T.1 Item 3 T.1 Item 3 T.1 Item 4 T.1 Item 4
13. Table 1 Item 1 T.1 Item 1 T.1 Item 1 T.1 Item 1 T.1 Item 1
14. Table 2 Item 3 T.2 Item 3 T.2 Item 3 T.2 Item 3 T.2 Item 3
15. Table 2 Item 1 T.2 Item 1 T.2 Item 1 T.2 Item 1 T.2 Item 1
16. Table 2 Item 4 T.2 Item 4 T.2 Item 4 T.2 Item 4 T.2 Item 4

Paragraph 159SE(1)(a) specifies that the derived amount of a class of eligible assessable income is so much of that class as is included in the taxable part of the taxable income. The derived amount is determined in accordance with the principles established above. For non-age 55 ETPs the derived amount is a rebatable amount.

Paragraphs 159SE(1)(b) and (c) allow derived amounts that relate to ETPs paid to people older than 55 to be split into the parts eligible for the relevant low rate of tax and high rate of tax that may apply to post-June 83 components of such payments. Paragraph 159SE(1)(b) identifies the "low rate part" of the derived amount. It is the part of the derived amount that does not exceed the residual amount. Under paragraph 159SE(1)(c) the "remaining part" is determined simply by deducting the low rate part from the derived amount.

Subsection 1595E(2) is relevant for the purposes of paragraph 159SE(1)(b). The subsection sets a limit on the amount of derived amounts that may be treated as low rate parts. The total of the low rate parts of any classes of eligible assessable income in a year of income are not to exceed the low rate threshold, or residual amount, for that year (the residual amount may vary from year to year because it is to be indexed to movements in average weekly earnings and since part of the residual amount may have been used up in an earlier year - see notes on section 159SF and 159SG).

Section 159SE will identify the rebatable amounts specified in Tables 1 and 2 in section 159SB in the manner described above. Each rebatable amount corresponds to a particular class of eligible assessable income and an Item number in one of the Tables. On the right hand side of the Tables opposite an Item number is the appropriate maximum rate of tax for a rebatable amount. Examples of the operation of section 159SE follow.

Example 1

A person aged 54 has a taxable income of $20,000 and an amount of eligible assessable income of $10,000. Because the eligible assessable income is considered to be the top slice of taxable income the whole $10,000 of eligible assessable income is a derived amount that will be taken into account in calculating whether the person is entitled to a rebate under Subdivision AAA (if the eligible assessable income were assumed to be the bottom slice of taxable income only $4,900 would be the derived amount used in determining the person's rebate entitlement).
Another result is that a person will be given the largest possible amount of rebate. The rebate calculation compares the tax payable on the eligible assessable income at ordinary rates with the amount that would be paid if that income was taxed at the maximum rate applicable to the relevant rebatable amount. If the tax at ordinary rates is higher, a rebate equal to the difference will be allowable. Treating eligible assessable income as the top slice of taxable income means that the highest marginal rate or rates applying to the person's taxable income are used for the purpose of the comparison.

Example 2

A person has a taxable income of $20,000 and two amounts of eligible assessable income, an amount of $10,000 in the 27B(1)(a) - A55-F87 class and an amount of $6,000 which is a 27B(1)(a) - A55-F86 class amount. Assuming that the person's residual amount exceeds $16,000 each class of eligible assessable income would constitute a single potential rebatable amount, i.e. each would be a low rate part of the relevant class. In determining the derived amounts the 27B(1)(a) A55-F87 class would be assumed to be the top slice of taxable income, i.e. it is potentially a Table 1, Item 11 rebatable amount. The Table 1, Item 11 amount would be $10,000. The taxable income would also include a Table 1, Item 8 rebatable amount of $4,900.

Sections 159SF and 159SG : Residual amount

The residual amount is, broadly, what is left of the lifetime threshold that limits the total amounts of post-June 83 components received by a person after age 55 that qualify for the lowest relevant maximum rate of tax for post-June 83 components of age 55 ETPs. Formerly, there was only one low rate, i.e., 15 per cent. Under amendments proposed by the Bill, the basic low rates are to be zero for taxed elements of post-June 83 components and 15 per cent for untaxed elements. A number of other low rates may apply to taxed elements during the transitional period during which the zero rate is being phased in (see earlier notes on section 159SB).

For the first year in which ETPs were taxed, i.e., the 1983-84 income year, the low rate threshold was $50,000. The threshold was changed to $55,000 with effect for the 1985-86 income year and has remained at that amount until the 1987-88 year. For the 1988-89 income year the low rate threshold is to become $60,000 and in later years it is to be indexed to increases in average weekly earnings. Thus the residual amount, or balance of the low rate threshold, in relation to a person may change in two ways. First, the residual amount is reduced by any post-June 83 components of age 55 ETPs included in the person's assessable income, which are then entitled to low rate tax treatment. Secondly, the residual amount may be increased by indexation of the threshold.

Together proposed sections 159SF and 159SG fix a base residual amount and accommodate any changes that need to be made to that amount in the particular circumstances of individuals. Paragraph 159SF(1)(a) sets the base residual amount as $50,000 for the 1983-84 income year. For that year the residual amount is, of course, the same as the low rate threshold (referred to in sections 159SF and 159SG as the upper limit) set by paragraph 159SG(1)(a). Paragraph 159SF(1)(b) and subsection 159SF(2) then provide for changes to the residual amount in either of the two sets of circumstances described above. By paragraph 159SF(1)(b) the residual amount for a year of income after the 1983-84 year is the sum of the closing balance for the previous year and any increase in the upper limit. The closing balance for a year is determined under subsection 159SF(2) by deducting from that year's residual amount any post-June 83 components included in assessable income in that year. It is what would be the residual amount for the next year if there were no increase in the upper limit in that year. The upper limit for a year of income is determined under section 159SG. Until the income year 1985-86 the upper limit was $50,000 (paragraph 159SG(1)(a)). Paragraph 159SG(1)(b) increases the limit to $55,000 for the 1985-86, 1986-87 and 1987-88 years of income. The limit is to be $60,000 for 1988-89 (paragraph (c)).

For later years of income paragraph 159SG(1)(d) indexes the upper limit to the factor calculated under subsection 159SG(2). That indexation factor is based on increases in estimates of average weekly ordinary time earnings made by the Australian Statistician. The indexation factor is simply determined by dividing the estimate for the month of February in the March quarter before the year of income by the estimate for the previous March quarter. If the factor so determined would be less than one the factor is one. This ensures that the upper limit cannot reduce from one year to the next.

The operation of sections 159SF and 159SG can be illustrated by the following example.

Example 1.

A person born on 1 July 1929 receives the following post-June 83 components of ETPs on the dates shown and elects not to roll over any of the payments:

·
10 July 1983 - $10,000
·
30 November 1984 - $1,000
·
30 September 1987 - $20,000
·
1 August 1988 - $40,000

The residual amount in each year of income would be calculated as follows:

·
1983-84

-
residual amount is $50,000
-
closing balance is $50,000, i.e. since the person is not 55 years old yet no part of the $10,000 post-June 83 component is in respect of an age 55 ETP;

·
1984-85

-
residual amount is the closing balance for 1983-84, i.e. $50,000
-
closing balance is $49,000, i.e. residual amount of $50,000 less $1,000 post-June 83 component (the person turned 55 on 1 July 1984);

·
1985-86

-
residual amount is $54,000, i.e. 1984-85 closing balance of $49,000 plus increase in upper limit of $5,000 (from $50,000 to $55,000)
-
closing balance is $54,000, i.e., since no post-83 components are included in assessable income in that year;

·
1986-87

-
residual amount and closing balances are the same, i.e. $54,000, since no post-June 83 components received and no increase in upper limit;

·
1987-88

-
residual amount is the closing balance for 1986-87, i.e. $54,000
-
closing balance is $34,000, i.e. residual amount of $54,000 less $20,000 post-June 83 components;

·
1988-89

-
residual amount is $39,000, i.e. closing balance for 1987-88 plus increase in upper limit of $5,000 (from $55,000 to $60,000)
-
closing balance is nil, i.e. residual amount less assessable post-June 83 components;

·
1989-90

-
assuming that average weekly earnings increase by 5 per cent, the residual amount is $3,000, i.e. nil closing balance for 1988-89 plus increase in upper limit (i.e. 5 per cent of $60,000).

Section 159SH : Treatment of s. 27B(1) amounts assessed under section 101A

Where an amount is to be taxed in the hands of a trustee of a deceased estate as the post-June 83 component, proposed section 159SH will ensure that the amount is taxed in the same way as it would have been if the amount had been taxed in the hands of the deceased person. To enable the trustee to obtain the benefit of a low rate of tax where the deceased person was over 55, paragraph 159SH(a) sets up the hypothesis that the trustee is the same age as the deceased person. By paragraph 159SH(b) the residual amount to be taken into account in such a case is to be calculated on the presumption that any age 55 ETPs included in the deceased person's assessable income when alive were paid to the trustee and included in the assessable income of the deceased estate for the same years of income.

Subdivision AAB - Rebate for certain superannuation pensions and qualifying annuities

Clause 26 also inserts subdivision AAB, which provides a legislative framework for the calculation of rebates of tax on superannuation pensions and rollover annuities (ie annuities purchased with the rollover of an ETP) paid to taxpayers over the age of 55 or on death or disability. The rebate is to be available only where the pension or annuity commences after 30 June 1988.

The rebate percentage will be determined at the time the pension or annuity commences to be payable and will apply in all subsequent years for which payments continue. Where a rebatable pension or annuity is converted to a lump sum and rolled over in purchasing a replacement pension or annuity, the rebate percentage of the original pension or annuity will carry over. Similarly, a reversionary pension or annuity paid to a person after the death of the original pensioner or annuitant is treated as a continuation of the pension or annuity payable to the deceased person, and the original rebate percentage will continue to apply.

The amount of the rebate is calculated by multiplying the amount included in the taxpayer's assessable income under Section 27H in respect of that particular pension or annuity (reduced in the case of a superannuation pension by any amount specified in a notice from the trustee of the fund as being a non-rebatable amount) by the 'final percentage' for the pension or annuity. Charts 1 and 2 outline the calculations.

The final percentage for a rebatable annuity is calculated by dividing the purchase price of the annuity into its components. An intermediate percentage is calculated for each component and the intermediate percentages are aggregated as the final percentage.

As a superannuation pension will not have a purchase price, the net present value of the pension at the time it commences to be payable is to be used as the basis of dividing the pension into components. The intermediate percentages of the pension are then calculated in the same manner as the corresponding components of a rebatable annuity. In the case of a death or disability pension, the rebate is reduced to take account of the fact that the 'future service component' of the pension has been effectively funded from untaxed income of the superannuation fund concerned.

Section 159SJ : Interpretation

Subsection 159SJ(1) sets out the meanings of terms that are used in Subdivision AAB. Many of the definitions are self explanatory. This note accordingly only deals with those definitions that warrant further explanation.

'applicable fund'
is defined for the purposes of the definition of "rebatable superannuation pension" and subsection 159SM(2). Where an annuity is payable in respect of a member or former member of a superannuation fund under a life assurance policy (within the meaning of Division 8) that is vested in the trustee of the superannuation fund, paragraph (a) defines the applicable fund to be the fund in which the policy is vested. This, together with the proposed wide definition of "superannuation pension", facilitates treating the annuity under the pension rebate provisions. For ordinary pensions, the applicable fund is the fund paying the pension (paragraph (b)).
'commutation type ETP'
is used to describe any ETP that arises on or after 1 July 1988 as a consequence of the commutation of, or as the residual value of, a superannuation pension or an annuity. The term is used as in sections 1595N and 159SV in identifying commutation components of the purchase price of a pension or annuity.

Chart 1:  Calculation of rebate for rebatable supurannuation pensions
              

Chart 2:  Calculation of rebate for rebatable ETP annuities
              

"death or disability benefit" is defined for the purposes of the definitions of 'rebatable ETP annuity' and 'rebatable superannuation pension'. It means a benefit payable to a person in the event of that person becoming permanently disabled (paragraph (b)) or in the event of the death of another person (paragraph (a)). The term does not include reversionary pensions and annuities. Such reversionary benefits will be treated as being a continuation of the pension or annuity payable to the deceased and will carry the same rebate percentage as applied to the deceased person.
"first payment date", taken together with the definition of "first commenced to be payable", means the beginning of the first payment period of the pension or annuity, except in the case of a deferred annuity which becomes payable after the 65th birthday of the first payee, where the first payment date will be deemed to be the person's 65th birthday.
"notional purchase price" is used in sections 159SN and 159SQ in the determination of the components of a superannuation pension and in the calculation of the intermediate percentages of a superannuation pension. It is defined as being equal to the net present value of the pension on the first payment date. The net present value of the pension should take account of the assumed earning rate for the pension, any specified level of indexation for the pension, the period over which the pension is expected to be paid, any residual value payable and any reversionary and ancilliary benefits included in the pension. It is expected that the Insurance and Superannuation Commissioner will be issuing guidelines for calculating the lump sum equivalent values of pensions and annuities at their commencement dates. Once these guidelines are available, they will be accepted by the Commissioner of Taxation for the purposes of this Subdivision.
"rebatable ETP annuity" identifies annuities in respect of which a rebate is to be allowed under Subdivision AA B. The conditions set out in the definitions must all be satisfied. They require that the annuity be a qualifying annuity (a term defined in section 27A) purchased wholly with the roll-over of an ETP or ETPs (paragraph (a)), that it commences on or after 1 July 1988 (paragraph (b)), that either the first payment date be on or after the 55th birthday of the first payee (paragraph (c)) or that the annuity be a death or disability benefit of the first payee and that the annuity not be a rebatable superannuation pension (paragraph (d)). This final test is to ensure that the definitions of rebatable ETP annuity and rebatable superannuation pension do not overlap in the case of certain annuities which are vested in the trustee of a superannuation fund and which are deemed to be superannuation pensions.
"rebatable superannuation pension" identifies superannuation pensions in respect of which a rebate is to be allowed under Subdivision AAB. Paragraph (a) requires the applicable fund (see the note on that definition) to be a complying superannuation fund for the year of income in which the first payment occurs. (By proposed section 159SM the fund must also be a taxed superannuation fund - also a defined term - in the year in which a rebate is sought). Paragraphs (b) and (c) mirror paragraphs (b) and (c) respectively of the definition of 'rebatable ETP annuity'. Paragraph (d) requires that the person to whom the annuity is paid not be the trustee of the applicable fund. This is necessary because annuity policies vested in the trustee of a superannuation fund are included in the definition of 'superannuation pension' so that payments under such policies in respect of fund members are treated as pensions, not annuities. This paragraph ensures that payments under such policies to the trustee of the applicable fund are not rebatable.
"superannuation pension" is defined to extend the ordinary meaning (paragraph (a) - which is, broadly, a pension payable from a superannuation fund or scheme) to certain annuities. Paragraph (b) includes in the definition all annuity that is payable under a life assurance policy that is vested in the trustee of a superannuation fund. The purpose of the extension of the definition is explained in the note on "applicable fund".
"taxed superannuation fund" has the same meaning as that expression has in the ETP Subdivision. This means that a pension will not be rebatable (cf subsection 159SM(2)) if the fund paying the pension is a constitutionally protected fund, within the meaning of Part IX of the Principal Act, in relation to the year of income in which the pension is paid.

Subsection 159SJ(2) applies in sections 159SR(2) and 159SY(2) to explain that references to certain years in the tables in those sections are references to the relevant years of income.

Section 159SK : Purchase price or notional purchase price attributable to ETP etc.

This section explains what is meant by the expression "attributable to" in its use in sections 1595N and 159SV. Those sections have the function of identifying components of a rebatable pension or annuity by reference to the parts of the notional purchase price (pensions) or purchase price (annuities) which are attributable to particular rolled-over ETPs. In the case of annuities, attribution is deemed to exist to the extent the purchase price consists of the relevant rolled-over amount (paragraphs (a) and (b)).

For a superannuation pension, because section 159SN attributes notional purchase price (a defined term) to rolled-over amounts, paragraphs (c) and (d) extend the concept of attribution to deem the notional purchase price of the pension to be attributable to a rolled-over ETP or specified rollover amount to the extent that the notional purchase price may reasonably be regarded as consisting of that amount. The amount of the notional purchase price that is attributable to a rolled-over ETP or specified rollover amount would ordinarily be an amount equal to the amount rolled over.

Section 159SL : Accrual period for an ETP or superannuation pension

This section sets out rules for determining the period over which an annuity or superannuation pension has accrued prior to its commencing to be payable. The accrual period is used in sections 159SP, 159SQ and 159SX in determining a taxpayer's entitlement to a rebate. Because a pension or annuity can accrue in a succession of funds, the section identifies segments of the total accrual period by reference to accrual periods for intermediate ETPs, which themselves may have included accrual periods for pensions or annuities that have been commuted. The accrual periods for these intermediate ETPs feed into the accrual period for the pension or annuity by way of either subsection (2) of this section (pensions) or subsection 159SX(2) (annuities).

Subsection (1) defines the accrual period for an ETP to which any part of the purchase price of an annuity or notional purchase of a superannuation pension is attributable. As explained above, those intermediate accrual periods feed into the accrual period for the relevant pension or annuity. Paragraph (a) defines the accrual period for a golden handshake ETP (i.e., one that is not paid from a superannuation fund, ADF or as a consequence of the commutation or payment of a residual value of a pension or annuity) as the eligible service period of the ETP - i.e. the aggregate of the periods of employment to which the benefit relates.

Paragraph (b) of subsection (1) defines the accrual period for an ETP paid from a superannuation fund the aggregate of the period for which the relevant person was a member of the fund and the accrual periods of any rolled-over ETPs to which the current ETP is attributable. Paragraph (c) defines the accrual period for an ETP paid from an approved deposit fund as the aggregate of the period for which the relevant person was a member of the ADF and the accrual periods of any rolled-over ETPs to which the current ETP is attributable.

Paragraph (d) defines the accrual period for an ETP paid on the commutation of, or as the residual value of, a superannuation pension as the aggregate of the accrual period for the pension to which the ETP relates (see subsection (2)) and the period during which the pension was payable. Paragraph (e) defines the accrual period for an ETP payable as a result of the commutation of, or as the residual value of, an annuity as the aggregate of the period from the time the annuity was purchased to the time the ETP was paid and the accrual period or periods for any earlier ETPs rolled over into the purchase price of the annuity.

Subsection (2) defines the accrual period for a superannuation pension. As mentioned, it is used in sections 159SP and 159SQ and for the purpose of determining the accrual period of commuted etc., superannuation pension in paragraph (d) of subsection (1). The accrual period for a superannuation pension is the aggregate of:

·
the period of fund membership of the pensioner or, in the case of a pension payable on the death of a member, the member up to the first payment date for the pension; and
·
where the pension is attributable in part to a rolled-over ETP or ETPs, the accrual period or the aggregate of the accrual periods for the earlier ETP or ETPs.

Subsection (3) formally applies the tests used in the ETP Subdivision of the Principal Act to attribute an ETP to earlier rolled-over ETPs for the purposes of section 159SL.

Subsection (4), like subsection 27A(9), eliminates overlaps in the calculation of an accrual period formed by more than one such period.

Section 159SM : Entitlement to rebate - superannuation pension

Section 159SM provides that, subject to subsection (2), a taxpayer is entitled to a rebate for each amount of rebatable superannuation pension included in the taxpayer's assessable income, reduced by any part of the amount declared by the trustee of the fund not to be rebatable. A rebate is available only where the amount is paid from a fund that is a taxed superannuation fund (as defined) in the year of income (subsection (2)). The rebate entitlement is calculated using the formula in subsection (1), by multiplying that reduced amount by the "final percentage" (see section 159SP) for the pension.

Section 159SN : Components in respect of superannuation pensions

This section identifies the three categories of components of the notional purchase price of rebatable superannuation pensions. Each type of component has a different "intermediate percentage" calculation applied under section 159SQ. The three types of component are:

(a)
The commutation components: the components of the notional purchase price "attributable to" (within the meaning of section 159SK) an ETP that is the commutation of, or the residual capital value of, a qualifying annuity or superannuation pension, excluding any amount that is a specified component (see below). A component will not be a commutation component if it arises from the roll-over of an ETP that is paid prior to 1 July 1988 (see the definition of "commutation type ETP").
(b)
The specified components: the components of the notional purchase price attributable to specified rollover amounts, that is, the amount of an untaxed element of a post-June 83 component of a rolled-over ETP other than an ETP of a kind referred to in (a).
(c)
The ordinary component: the part of the notional purchase price that remains after deducting the commutation and specified components. This component would include, for example, the amount of an ETP rolled over from another superannuation fund (not covered by (a) above) as well as amounts that have accrued as contributions and earnings in the fund.

While the notional purchase price of a superannuation pension may have any number of commutation or specified components it will only have one ordinary component.

Section 159SP : Final percentage for superannuation pension

The "final percentage" for a superannuation pension is used in section 159SM to determine the taxpayer's entitlement to a rebate. In the case of a pension that is not a death or disability benefit in respect of the first payee (subsection (1)), the final percentage is the sum of the intermediate percentages derived under section 159SQ.

In the case of a pension that is a death or disability benefit, subsection (2) calculates the final percentage by multiplying that which would be calculated for a normal pension benefit (the 'normal percentage') by the ratio of the number of days in the accrual period for the pension to the sum of those days and the number of days in the period from the first payment date to the date the fund member would normally have been expected to retire. This reduction for the "future service" element reflects the availability of a deduction to a fund under section 279 or 279B for the cost of providing death or disability benefits.

Section 159SQ : Intermediate percentages for components in respect of superannuation pensions

The intermediate percentages, when aggregated, constitute the final percentage used in section 159SM to calculate the pension rebate. Subsection (1) determines the intermediate percentage for a commutation component by multiplying the final percentage for the pension or annuity underlying the ETP to which component relates (underlying percentage - paragraph (a)) by the proportion that the component bears to the notional purchase price. Where the underlying pension or annuity was not a rebatable superannuation pension or a rebatable ETP annuity, the final percentage for that pension or annuity is deemed to be zero (paragraph (b) of the definition of underlying percentage). This subsection is intended to ensure that once a superannuation pension or annuity commences to be payable, the rebate percentage determined at that time (including where a zero percentage applies because the underlying pension or annuity was not rebatable) applies over the life of the pension or annuity and cannot be increased by, for example, commuting the pension and purchasing a replacement pension or annuity with a higher rebate percentage.

Subsection (2) determines the intermediate percentage for the ordinary component of a rebatable superannuation pension. The formula uses the "base percentage" for the component, as set out in section 159SR, instead of the underlying percentage used in subsection (1). The ratio of the number of post-June 1983 days in the accrual period of the pension to the total accrual days is then applied to ensure that only that part of a pension that is referable to post-June 1983 membership of a fund receives a rebate. This subsection is intended to give effect to the phasing in of the rebate for those components of the pension which do not have a previously determined underlying percentage and which are not attributable to amounts which have been taxed on rollover. The base percentages set out in section 159SR phase in the 15 per cent rebate over a five year period.

Subsection (3) determines the intermediate percentage for a specified component of a rebatable superannuation pension. As the specified components of a pension will have been taxed in full on rollover (at 15 per cent where rolled over to a complying superannuation fund) these components attract the relevant proportion of 15 per cent as the intermediate percentage, even during the five-year phase-in referred to in the note on subsection (2).

Section 159SR : Base percentages for ordinary component in respect of superannuation pensions

This section sets out the base percentages to be used in determining the intermediate percentages in respect of the ordinary component of a superannuation pension under subsection 159SQ(2). It phases in, for pensions commencing over a 5 year period, the full 15 per cent rebate.

Section 159SS : Non-rebatable amount for superannuation pension

This section provides that the trustee of a superannuation fund may give a person a notice, stating that the whole or a part of a pension payment is a non-rebatable amount. The amount specified in such a notice is then deducted in arriving at the part of the pension that attracts a rebate under section 159SM. The section, together with subsections 27AB(4) and 274(7) ensures that, where a fund elects to have certain fund contributions exempt from tax under subsection 274(7), that reduction in tax is matched by an increase in tax on end benefits. That increase consists of the reductions in the amounts of rebatable pensions paid by the fund in the year and other increases in tax on ETPs that are the subject of similar notices under subsection 27AB(4).

Section 159ST : Certain superannuation pensions to be regarded as being payable from funds

This section provides that where a superannuation pension is not payable from a fund but is effectively funded from a fund, it will be treated as if it were paid from that fund. Like proposed subsection 27A(17) for ETPs, this will ensure that where a benefit payable under a pension scheme accrues in a taxable superannuation fund but the pension benefit, once it becomes payable, is paid from another entity, the pension is able to be treated as a rebatable pension as long as the fund in which the benefit accrued up to the first payment date remains a taxed superannuation fund (the requirement that the fund in which the benefit accrued should remain a taxed superannuation fund follows from subsection 159SM(2)).

Section 159SU : Entitlement to rebate - rebatable ETP annuity

Section 159SU is the counterpart of subsection 159SM(1), providing that a taxpayer will be entitled to a rebate of tax for each amount included in the taxpayer's assessable income in a year of income in respect of a rebatable ETP annuity. The rebate will be obtained by multiplying that amount by the final percentage for the annuity. There is no equivalent of the reduction under subsection 159SM(1) on account of non-rebatable amounts.

Section 159SV : Components in respect of rebatable ETP annuities

This section identifies the three categories of components of the purchase price of a rebatable ETP annuity. The section is the counterpart of section 159SN for pensions. The commutation and specified components are identified in the same way, except that they are components of the purchase price of the annuity, not of the notional purchase price.

An ordinary component is so much of the purchase price as is attributable to so much of an ETP, that has not provided a commutation component or specified component.

Section 159SW : Final percentage for rebatable ETP annuity

The final percentage for a rebatable ETP annuity is the sum of the intermediate percentages for the components of the annuity calculated in accordance with the formulae in section 159SX. The section does not have the equivalent of the final percentage reduction for death or disability pensions under subsection 159SP(2).

Section 159SX : Intermediate percentages for components in respect of rebatable ETP annuities

Subsection (1) determines the intermediate percentage for a commutation component of a rebatable ETP annuity. Except for the substitution of purchase price for notional purchase in the formula, it is the direct counterpart of subsection 159SQ(1). Subsection (2) determines the intermediate percentage for the ordinary component of a rebatable superannuation pension and, again, is the direct counterpart of subsection 159SQ(2).

Subsection (3) determines the intermediate percentage for a specified component of a rebatable ETP annuity. It, too, has a counterpart in subsection 159SQ(3).

Section 159SY: Base percentages for components in respect of rebatable ETP annuities

This section sets out the base percentages to be used in determining the intermediate percentages in respect of the ordinary component of a rebatable ETP annuity. It mirrors section 159SR, which applies to superannuation pensions.

Clause 27: Rebate in respect of amounts assessable under section 26AH

This clause will amend section 160AAB of the Principal Act to increase the rate of the rebate for bonuses received in respect of certain short-term life assurance policies.

Section 160AAB authorises a rebate of tax in respect of bonuses, and other amounts in the nature of bonuses, received under life assurance policies and included in assessable income by virtue of section 26AH of the Principal Act. Section 26AH includes as assessable income bonuses and similar amounts paid on certain life assurance policies issued by a life assurance company, friendly society or certain State government insurance offices, after 27 August 1982 and, depending on the date of the commencement of the policy, applies to such amounts received either during the first 4 years or during the first 10 years of the policy. The rebate is currently set at 29 per cent of the amount assessable under section 26AH.

Clause 27 proposes amendments to section 160AAB to increase the rate of the rebate as follows:

·
where the bonus is received under a life assurance policy issued by a friendly society the rate of the rebate will be 30 per cent of the amount assessable under section 26AH;
·
where the bonus is received under a life assurance policy issued by any other institution, the rate of the rebate will be 39 per cent.

Paragraphs (a) and (b) of clause 27 will amend subsection 160AAB(1) to insert the following definition:

"statutory percentage", meaning:

·
where a bonus is received under a life assurance policy issued by a friendly society - 30 per cent; or
·
in any other case - 39 per cent.

This amendment effectively sets the new rate of rebate for purposes of section 160AAB.

Paragraphs (c) and (d) of this clause will amend section 160AAB by omitting the references to a 29 per cent rate of rebate in subsections 160AAB(2), (3), (4), (5), (5A) and (6) and substituting in those sections a reference to the "statutory percentage".

By subclause 63(8) of this Bill, the amendments to section 160AAB proposed by clause 27 are to apply to assessable bonuses received on or after 1 July 1989.

Clause 28: Repeal of section 160AA

This clause will repeal section 160AA of the Principal Act which provides a rebate of tax to limit the amount of tax payable on ETPs and certain other employment termination payments. With effect for assessments for the income year 1988-89 the role of section 160AA is to be performed by new Subdivision AAA of Division 17 of Part III being inserted by clause 26.

Clause 29: Interpretation

Section 160APA, defines terms used in the imputation provisions contained in Part IIIAA of the Principal Act. The amendment proposed by clause 29 is a drafting measure to insert in section 160APA a definition of "registered organisation". A "registered organisation" is to have the same meaning as in Division 8A of Part III of the Principal Act - that is, it is a trade union registered under a State or Territory law, an association of employees registered as an organisation under the Conciliation and Arbitration Act 1904, or a friendly society. The term "registered organisation" is used in sections 160APP and 160APQ of Part IIIAA.

Clause 30: Receipt of franked dividends

As a consequence of the new definition included under clause 29, clause 30 will amend subsection 160APP(4) to omit the explanation in that subsection of the term "registered organisation".

Clause 31: Receipt of franked dividends through trusts and partnerships

The amendment proposed by clause 31 will similarly omit from subsection 160APQ(2) the explanation in that subsection of the term "registered organisation", as a consequence of the amendment proposed in clause 29.

Clause 32: Extra amount to be included in assessable income where franked dividend paid

Clause 32 will amend section 160AQT so that a life assurance company or registered organisation is entitled to a franking rebate for the franked proportion of dividends derived from assets included in the insurance funds of a life assurance company or, in the case of a registered organisation, for the franked proportion of dividends derived by the organisation. Section 160AQT of the Principal Act sets out the circumstances in which an imputation credit (i.e., the imputed company tax attached to a dividend) is included in the assessable income of a shareholder, and the amount to be so included. Where an amount is included in the assessable income of a shareholder under section 160AQT, the shareholder is entitled under section 160AQU to a franking rebate equal to that amount.

Paragraphs (a) and (b) of clause 32 will amend paragraph 160AQT(1)(b) to include a "registered organisation" as a shareholder to which section 160AQT applies. The effect of these amendments is that a registered organisation will include an imputation credit in assessable income where -

·
a franked dividend is paid to the organisation; and
·
the dividend is not exempt income of the organisation.

Where these circumstances exist the registered organisation is required to include in assessable income an amount calculated by applying to the franked amount of the dividend the fraction 39/61, given the general company tax rate of 39 per cent.

Paragraph (c) of this clause will insert a new subsection (1A) which sets out the circumstances in which an imputation credit is included in the assessable income of a life assurance company and the amount of that imputation credit. The circumstances are -

·
a franked dividend is paid in a year of income to a shareholder (paragraph (a));
·
the shareholder is a resident life assurance company, or a non-resident life assurance company (paragraph (b));
·
the dividend is not exempt income of the shareholder (paragraph (c));
·
the dividend was not paid as part of a dividend stripping operation (paragraph (d)); and
·
the dividend was derived from assets included in the insurance funds of the company at any time during the period from the beginning of the year of income of the company until the time the dividend was paid (paragraph (e)).

Where these circumstances exist, the life assurance company is required to include in assessable income an amount calculated by applying to the franked amount of the dividend the fraction 39/61.

Subsection 160AQT(1A) is limited to franked dividends derived from assets included in the insurance funds of the company. A life assurance company will also not be entitled to a franking rebate for dividends derived from assets not included in the insurance funds of the company (e.g., assets included in shareholders' funds). The company will, however, be entitled to a section 46 rebate in respect of those dividends.

Paragraph (d) of clause 32 will insert new subsection 160AQT(4) which will provide certain exceptions to the condition, in existing paragraph 160AQT(1)(c) and proposed paragraph 160AQT(1A)(c), that section 160AQT does not apply where the dividend received is exempt income of the shareholder. Subsection 160AQT(4) provides that in determining whether a dividend is exempt income for the purposes of section 160AQT:

·
sections 110C, 116FB, 282B, 283 and 297B, which exempt income referable to current pensions, and section 112A, which exempts the portion of the assessable income of a life assurance company referable to exempt policies, are to be disregarded; and
·
in the case of a registered organisation, the definition of 'eligible insurance policy' is to be read omitting the references to 'a sickness policy, a funeral policy, or an eligible policy' (i.e., dividends derived in respect of those exempt policies will not be exempt income for purposes of section 160AQT).

By subclause 63 (7) the amendments made by clause 32 will apply to dividends paid to a life assurance company or registered organisation on or after 1 July 1988.

Clause 33: Franking rebate

Clause 33 will insert a new subsection 160AQU(2) which corresponds to new subsection 160AQT(4) to ensure that a life assurance company or registered organisation is entitled to a franking rebate for certain dividends which are exempt income of the company or organisation.

Clause 34: Franking rebate for certain beneficiaries

By section 160AQX of the Principal Act, a beneficiary in a trust estate, being a natural person other than a trustee, is entitled to a franking rebate in respect of franked dividends received by the trust. The amount of the rebate to which the beneficiary is entitled is based on the proportion of the net income of the trust to which the beneficiary is presently entitled.

Clause 34 will replace existing paragraph 160AQX(b) with a new paragraph (b) so that a registered organisation, other than a trustee that is a beneficiary of a trust estate, is entitled to a franking rebate in respect of franked dividends received by the trust, in the same manner as a beneficiary who is a natural person.

By subclause 63(7) the amendment proposed by clause 34 will apply to dividends paid to a trust on or after 1 July 1988.

Clause 35: Franking rebate for certain partners

Section 16OAQZ operates, in much the same way as section 160AQX, so that a partner in a partnership is entitled to a franking rebate in respect of franked dividends received by the partnership. Clause 35 will replace existing paragraph 160AQZ(b) with a new paragraph (b) so that a registered organisation, other than a trustee, that is a partner in a partnership is entitled to a franking rebate in respect of franked dividends received by the partnership, in the same way as an individual partner.

By subclause 63(7) the amendment proposed by this clause will apply to dividends paid to a partnership on or after 1 July 1988.

Clause 36: Franking rebates for certain life assurance companies

Clause 36 will insert new section 160AQZA. That section ensures that a life assurance company that is a beneficiary in a trust estate, or a partner in a partnership, is entitled to a franking rebate in respect of franked dividends received by the trust or partnership, in the same way as an individual or a registered organisation (see sections 160AQX and 160AQZ).

Section 160AQZA applies where a life assurance company would have been entitled to a franking credit under section 160APQ, but for subsection 160APQ(3), in respect of a dividend included in the calculation of the company's share of income from a trust, or income or loss from a partnership, for a year of income. Subsection 160APQ(3) denies a franking credit for dividends derived from assets included in the insurance funds of a life assurance company. Where subsection 160AQZA applies, the company is entitled to a franking rebate equal to the potential rebate amount. The potential rebate amount is the company's portion of the imputation credit attached to the dividend received by the trust or partnership, where that portion is based on the proportion of the net income of the trust, or partnership, to which the company is entitled.

By subclause 63(7) the amendment proposed by clause 36 will apply to dividends paid to a trust or partnership on or after 1 July 1988.

Clause 37: Other interpretative provisions

Subsection 160K(1) of Part IIIA - Capital gains and Capital losses - of the Principal Act defines certain terms for the purposes of that Part. The definition of "relevant exempting provision" in subsection 160K(1) is called on in determining those persons who because of their income tax exempt status are also not subject to tax on capital gains.

Clause 37 proposes to amend the definition of "relevant exempting provision" consequent on the proposed repeal of paragraph 23(jaa), section 23FC and section 23FD of the Principal Act by the Taxation Laws Amendment Bill (No.6) 1988 ("the No.6 Bill"). Paragraph 23(jaa) exempted from tax the income of certain statutory superannuation funds and sections 23FC and 23FD exempted the income of superannuation funds and approved deposit funds. These provisions are being repealed with effect from 1 July 1988, since such funds will be taxable in accordance with the terms of new Part IX being inserted by the No.6 Bill.

Paragraph (a) of this clause proposes to omit the reference to paragraph 23(jaa) from paragraph (a) of the definition of "relevant exempting provision". It also proposes to replace existing paragraph (bb) (which refers to sections 23FC and 23FD) of the definition with a reference to paragraph 23(jaa) and sections 23FC and 23FD as in force before the amendments proposed by the No.6 Bill.

Clause 38: Asset bequeathed to tax-advantaged person

Existing section 160Y applies where an asset acquired after 19 September 1985 that formed part of the estate of a deceased person is left to a tax-exempt person. For the purposes of Part IIIA, the asset is taken to have been disposed of by the deceased person, and acquired by the tax-exempt beneficiary, immediately before the death of the person for a consideration equal to the market value of the asset at the date of death.

Clause 38 proposes to amend section 160Y so that it also applies where the beneficiary is the trustee of a complying superannuation fund, a complying approved deposit fund (ADF) or a pooled superannuation trust (PST) within the meaning of new Part IX.

Subsection 160Y(2) sets out the circumstances in which section 160Y deems a disposal of an asset to have been made by a deceased person. Paragraph 160Y(2)(c) which requires the beneficiary to be a tax-exempt person is to be replaced. The proposed new paragraph 160Y(2)(c) will refer to a beneficiary who is a tax-exempt person in relation to the year of income (subparagraph 160Y(2)(c)(i)) or who is the trustee of a complying superannuation fund, a complying ADF or a PST within the meaning of Part IX of the Principal Act in relation to the year of income (subparagraph 160Y(2)(c)(ii)).

By clause 76 this amendment has effect in relation to the 1 July 1988 year of the fund or PST and all subsequent years.

Clause 39: Units in Pooled Superannuation Trusts

Division 7A proposed to be inserted in Part IIIA of the Principal Act by clause 39 will exclude from the application of Part IIIA disposals by certain taxpayers of units in a PST.

By section 160ZYEB, Part IIIA will not apply to the disposal of a unit in a PST within the meaning of Part IX, in relation to the year of income of the PST in which the disposal occurred (paragraph 160ZYEB(a)). The exclusion only applies if the taxpayer is:

·
a trustee of a complying superannuation fund, a complying ADF or a PST within the meaning of Part IX, in relation to the year of income of the taxpayer in which the disposal occurred (subparagraph (b)(i));
·
a life assurance company (within the meaning of Division 8 of Part III) and, immediately before the disposal of the unit, the unit was included in a tax-advantaged insurance fund (within the meaning of section 111B) of the life assurance company (subparagraph (b)(ii)); or
·
a registered organisation (within the meaning of Division 8A of Part III) and, immediately before the disposal of the unit, the unit was held solely in respect of tax-advantaged business (within the meaning of section 116GC) of the registered organisation (subparagraph (b)(iii)).

Subsection 111B(2) (see notes on that subsection proposed to be inserted by clause 16) gives meaning to the reference in subparagraph 160ZYEB(b)(ii) to a tax-advantaged insurance fund of a life assurance company. It is an insurance fund of the company where at the end of the year of income in which the disposal of the unit occurred, the only policies in the fund are eligible policies, complying superannuation policies or roll-over annuity policies.

Subsection 116GC(2) (see notes on that subsection proposed to be inserted by clause 23) defines the term tax-advantaged business of a registered organisation used in subparagraph 160ZYEB(b)(iii). This means business of the registered organisation other than business involving eligible insurance policies or non-complying superannuation policies.

By subclause 63(9), Division 7A will apply to disposals of assets on or after 1 July 1988.

Clause 40: Superannuation and approved deposit funds

The operation of Part IIIA - Capital gains and Capital losses - of the Principal Act is excluded by section 160ZZJ from applying where a member of a superannuation fund or an approved deposit fund receives certain kinds of payments from the fund.

For this purpose, superannuation fund is defined in subsection 160ZZJ(4) to mean either a superannuation fund within the meaning of Division 9B of Part III (paragraph (a)) or a scheme for the payment of benefits upon retirement or death constituted by or under a law of the Commonwealth or of a State or Territory (paragraph (b)). The reference to Division 9B of Part III is no longer appropriate as it is to be repealed with effect from 1 July 1988 by Schedule 1 of the No.6 Bill. From 1 July 1988 all superannuation funds and ADFs will fall to be taxed under new Part IX.

Clause 40 proposes to replace paragraph (a) of the definition of superannuation fund in subsection 160ZZJ(4) with a reference to an eligible superannuation fund within the meaning of Part IX. Eligible superannuation fund in that Part, means either a complying superannuation fund or a non-complying superannuation fund.

Clause 41: Application of deductions in payment of tax

Clause 41 will amend subsection 221H(5A) of the Principal Act. Subsection 221H(5A) allows the Commissioner to refund some or all of any PAYE deductions made from the post-June 83 component of an ETP where all or part of the post-June 83 component is rolled over into a superannuation fund, an ADF or an annuity.

By subparagraphs 221H(5A)(b)(i) and (ii) the Commissioner must first be satisfied that the post-June 83 component or part of it has already been applied in accordance with section 27D (i.e., has been rolled over) or, after the refund has been made, will be so applied. Paragraph (a) of clause 41 will replace existing subparagraph 221H(5A)(b)(i) with a new subparagraph that uses the simpler terms being inserted in Subdivision AA of Division 2 of Part III by this Bill. The new subparagraph requires the Commissioner to be satisfied that the relevant amount is taken to have been rolled over. Paragraph (b) of the clause will amend subparagraph 221H(5A)(b)(ii) to reflect that subparagraph (i) refers to amounts rolled over rather than applied.

Clause 42: Medicare Levy

Clause 42 will insert new subsection 251S(1A) in the Principal Act. Subsection 251S(1A) will ensure that any taxed element of the post-June 83 component of an ETP which qualifies for a zero rate of tax and, therefore, is free of tax, will also not be subject to the Medicare levy. That will be done by reducing the taxable income used for the purpose of calculating the levy by any rebatable amounts identified by new section 159SE in respect of which the appropriate maximum rate of tax specified in Table 1 in new section 159SB is nil. The amendment is to apply to assessments in respect of the 1988-89 year of income and later years.

Clauses 43-62: Amendments of Part IX of the Principal Act

Clauses 43 to 62 propose a series of amendments of Part IX of the Principal Act as introduced by the No.6 Bill. The following notes are written as if that Part already formed part of the Principal Act. Unless otherwise specified, the amendments made by these clauses will apply in accordance with the application of the provisions of Part IX under proposed section 14 of the No.6 Bill (as amended by clause 77 of this Bill).

Clause 43: Interpretation

Section 267 of the Principal Act sets out the meanings of terms used in Part IX. Clause 43 amends some of those definitions and inserts new ones.

Paragraph (a) of the clause will omit the words "to a dependant of the member" from paragraph (a) of the definition of "death or disability benefit" in subsection 267(1). This recognises that such benefits may be paid to persons who are not dependants of the taxpayer as defined in section 267 - for example, they may be paid to the trustee of the estate of the deceased person.

Section 279 of the Principal Act allows a superannuation fund deductions in respect of the cost of providing for its liabilities to pay death or disability benefits. The amendments made by clauses 51 and 52 (see later notes) will offer an alternative basis of deductibility. The term "death or disability benefit" is defined in section 267, and paragraph (b) of clause 43 proposes to amend that definition by substituting a new paragraph (c) which recognises that approval may be given by the Insurance and Superannuation Commissioner of a period longer than 2 years for which disability benefits may be paid (other than permanent disability benefits - to which paragraph (b) of the definition refers).

A "specified roll-over amount", which is a taxable contribution under section 274 of the Principal Act, is, broadly speaking, the rolled-over amount of a post-June 83 component of an ETP paid from sources not subject to tax under the new arrangements taxing superannuation business income. The existing definition of specified roll-over amount recognises only amounts which have their source in an amount paid either direct by an employer (paragraph (a) or (aa) of the ETP definition) or from a fund which is a "constitutionally protected fund" (as defined in subsection 271(2) of the Principal Act).

As indicated in the notes on the proposed new section 27AB of the Principal Act, an ETP may consist partly of taxed and partly of untaxed elements. Accordingly, paragraph (c) of the clause will substitute a new definition of "specified roll-over amount" which covers the cases referred to in the existing definition but which in broader terms identifies all such untaxed elements of ETPs.

Paragraph (d) inserts further definitions of terms which are used in Part IX. Most of these are self-explanatory. This note accordingly deals only with those definitions which warrant further explanation.

"approved form" and "approved manner" relate to certain notices given by taxpayers for the purposes of that Part. For example, a notice under subsection 274(4) of the Principal Act given by an approved person to the trustee of a complying superannuation fund must be in the form and given in the manner approved in writing by the Commissioner of Taxation - as required by the amendments of subsection 274(5) being made by clause 48 of this Bill.
"continuously complying ADF" and "continuously complying superannuation fund" are used in section 279D to determine in respect of a payment from a fund, whether the fund was complying at all times at which it was in existence after 30 June 1988 and up to the time the relevant payment is made.
"current pension liability" is used in provisions which exempt from tax the income of complying superannuation funds which relates to their current pension liabilities and the income of PSTs which relates to the current pension liabilities of superannuation funds investing in the PST. The term includes contingent liabilities in respect of pensions which, at the particular time, have commenced to be payable.
"foreign approved deposit fund" is a term used in connection with amendments of section 272 of the Principal Act (see notes to clause 46). The definition mirrors the concepts in the definition of "foreign superannuation fund" in subsection 6(1) of the Principal Act. It requires that the fund -

·
was established outside Australia;
·
was established and is maintained and applied for the purpose of receiving rolled-over ETPs derived from sources outside Australia by non-residents; and
·
is centrally managed and controlled outside Australia by non-residents.

"last retirement date" is a term used in new section 279B and is given the same meaning as in subsection 27A(1). It means -

·
where there is a date on which the taxpayer's employment must cease by virtue of his or her attaining a particular age or completing a particular period of service - that date; or
·
in other cases - the 65th birthday of the taxpayer.

"life assurance policy", which is used in section 275, includes an instrument securing the grant of an annuity, whether or not for a term dependent upon human life (this is the same meaning as the definition has in subsection 110(1) of the Principal Act).
"non-current pension liability" is defined for the purposes of section 283 as a superannuation liability (see the definition note below) of a complying superannuation fund which is not a current pension liability (also a defined term).
"post-June 83 component" and "pre-July 83 component" are terms used in proposed subsection 274(8) and section 275B to limit exemptions for otherwise taxable contributions. They are given the meanings they have in Subdivision AA of Division 2 of Part III (see the notes on clause 6).
"superannuation agreement contribution", which is defined for the purposes of proposed new subparagraph 274(1)(a)(ii), refers to a contribution made by a taxpayer to a superannuation fund in relation to a person under the terms of a superannuation agreement ratified by an industrial tribunal or a similar agreement in relation to persons in an industry. The full terms of the definition are contained in subsection 82AAS(1) of the Principal Act.
"superannuation liability" is a term used in the definition of non-current pension liability (see note above) and describes a liability at a particular time, including a contingent liability to pay a pension or other superannuation benefit in respect of which contributions, by that time, have been made or are liable to be made.
"tax-exempt entity" is a term inserted, in connection with amendments being made to section 274 by clause 48 to ensure that an amount paid to a superannuation fund by an exempt life assurance fund, a complying superannuation fund, a complying ADF or a PST does not result in the amount being construed as a taxable contribution for the purposes of section 274.
"termination of employment" for the purposes of proposed section 279B has the same meaning as in subsection 27A(11).

Paragraph (e) of clause 43 will omit subsection 267(2) from the Principal Act. The subsection applied in connection with paragraph (c) of the definition of "death or disability benefit" and was relevant where temporary disability benefits provided for a period extending beyond 2 years required the approval in writing of the Commissioner of Taxation. As explained in the notes on paragraph (b) of this clause, recognition is now proposed to be given in the law to any approval by the Insurance and Superannuation Commissioner of a period longer than 2 years.

Clause 44: Issue, revocation etc of OSS notices

This clause amends section 269 which deems there to be certain consequences for Part IX of the Principal Act of the issue or revocation by the Insurance and Superannuation Commissioner of certain notices (called "OSS notices") under the Occupational Superannuation Standards Act 1987 ("the OSS Act").

Paragraph (a) of the clause changes the operation of subsection 269(1) so that the reference in that subsection to an OSS notice does not include any of the notices which may be issued under section 15D of the OSS Act (proposed to be inserted in that Act by clause 71).

Paragraph (b) inserts a new subsection 269(2) which deals specifically with notices given under new section 15D of the OSS Act, or under regulations made for the purposes of that section. If a notice under section 15D is revoked or the decision to give the notice is set aside, the notice is to be deemed never to have been given.

Paragraph (b) also inserts a new subsection 269(3) to permit the amendment of an assessment at any time for the purposes of giving effect to any of the provisions of section 269.

The amendments made by this clause will have effect in relation to OSS Act notices in respect of superannuation funds, ADFs and PSTs in relation to the 1988-89 and subsequent years of income.

Clause 45:

This clause inserts two new sections to Part IX of the Principal Act.

Section 269A : Exempting laws ineffective

But for the enactment of this section, there would be a possibility of conflict between Part IX of the Principal Act and existing or future Commonwealth legislation - other than the Principal Act (subsection 259A(1)) - which might otherwise purport to confer tax exemption in respect of particular entities.

Subsection (2) ensures that existing Commonwealth legislation, other than the Principal Act, that would otherwise confer a general exemption from liability to pay taxes does not exempt a superannuation fund, ADF or PST from liability to tax under Part IX. Subsection (3) applies in a similar way in relation to any future other Commonwealth legislation, permitting only a law that expressly exempts an entity from liability to tax under Part IX to have that effect.

Section 269B : Certain exempting provisions ineffective

Section 269B is a technical measure which will ensure that none of the paragraphs in the section listed in it could be construed as conferring on the trustee of a superannuation fund exemption from tax on the fund's income. For example, if a local government body were a trustee of a superannuation fund, paragraph 23 (d) of the Principal Act, which exempts from tax the income of such bodies, will not exempt the income of the superannuation fund.

Clause 46: Assumption to be made in calculating taxable income

Section 272 of the Principal Act, by treating trustees as residents, ensures that income of a superannuation fund, or other entity to which Part IX applies, derived from sources outside Australia is not excluded from tax by the installing of a non-resident as trustee. The amendment of that section by this clause guards against the unintended result that a fund which meets the definition of "foreign superannuation fund" in subsection 6(1) or the new definition of "foreign approved deposit fund" (see above) might otherwise be subject to tax under Part IX on overseas-sourced income.

Clause 47:

Two further new sections are inserted in Part IX of the Principal Act by this clause.

Section 273A : Segregated current pension assets

Under proposed section 282B - being inserted by clause 54 - any normal assessable income (as defined in section 267) derived by a complying superannuation fund from assets which, at the time the income is derived, are segregated current pension assets is exempt from tax. New section 273A introduced by this clause defines "segregated current pension assets".

The requirements of the definition are that the assets are invested, held in reserve or otherwise dealt with exclusively for the purpose of enabling the fund to satisfy its liability to discharge all or some of its current pension liabilities as they fall due (paragraph 273A(a)). In addition, by paragraph (b), the fund must provide with its annual return of income an actuarial certificate in the approved form to the effect that the assets in question, if accumulated at the earning rate on those assets achieved during the preceding year of income, would provide an amount which would allow the fund to meet its current pension liabilities, or the part of those liabilities referred to in paragraph (a), as they fall due.

While section 273A would allow assets to be transferred to and from the segregated current pension assets portfolio to meet movements in the level of current pension liabilities and changes in investment returns, it would be contrary to the intention of section 282B for assets to be transferred into the segregated current pension assets portfolio to avoid the imposition of capital gains tax. The general anti-avoidance provisions of Part IVA of the Principal Act stand as a barrier against any arrangements for asset transfers for capital gains tax avoidance.

Section 273B : Segregated non-current pension assets

New section 273B complements the previous section and applies to assets that are specifically set aside, invested, etc., to meet all or a specified part of the fund's non-current pension liabilities (as defined in section 267). It calls for an actuarial certificate that the assets in question, together with future contributions, if accumulated at the earning rate on those assets during the preceding year of income, would provide the amount needed for the fund to meet the non-current pension liabilities, or the specified part of them, as they fall due.

Clause 48: Taxable contributions

Section 274 of the Principal Act contains provisions relating to the assessability of contributions made to superannuation funds and ADFs. This clause proposes several amendments of the section.

Paragraph (a) of the clause proposes a reconstruction of, and an addition to, the provisions of subsection 274(1). The former paragraph (1)(a) of the section has been divided into two parts, paragraphs (a) and (b). The new paragraph (1)(a) excludes the former subparagraph (ii) which now constitutes paragraph (b). Subparagraph (a)(i) is unchanged. The new subparagraph (ii) includes as taxable contributions superannuation agreement contributions (defined in section 82AAS of the Principal Act) where a deduction in respect of the contributions is allowable to the contributor under section 51. An example would be where a person is required, under an industrial agreement, to make contributions to a superannuation fund for the benefit of self-employed contractors to the contributor rather than employees. Subparagraph (a)(iii) is changed to apply only to "tax-exempt entities", as defined in section 267 to exclude complying superannuation funds, complying ADFs, PSTs and exempt life assurance funds within the meaning of Division 6C of Part III.

As mentioned, the former subparagraph 274(1)(a)(ii), which treated a person's own contributions as taxable contributions where those contributions are tax deductible to the person, has been moved to new paragraph 274(1)(b). Whereas paragraph (1)(a) may apply to all eligible superannuation funds (including non-complying superannuation funds), paragraph (b) will apply only to complying superannuation funds, reflecting the fact that tax deductible personal contributions may only be made to such funds.

New paragraph 274(1) (c) is in the same terms as the former paragraph (b).

The amendments made by paragraph (b) of clause 48 to subsections 274 (2) and (3) are consequential upon the reconstruction of subsection (1) and do not change their practical operation.

The requirement that a notice under subsection 274 (4) be given in the prescribed form and manner has, as a result of paragraph (c), been modified to require that such notices be given in the form and manner approved by the Commissioner of Taxation.

Paragraph (d) of the clause adds four new subsections to section 274. The first of these - subsection (6) - is in recognition that, where personal superannuation contributions are made to a fund by a person eligible for deductions under section 82AAT, that deductibility is limited under subsection 82AAT(2) (currently the limit is $3000 in any one year). Contributions in excess of this, not being tax deductible, can be treated as not being taxable contributions if made to the one fund, without the giving of a notice under subsection 82AAT(1A). Accordingly, subsection (6) will produce that result. In its application to contributions made to a particular fund, amounts paid to other funds are not taken into consideration.

The other new provisions introduced by paragraph (d) of clause 48 - subsections 274(7), (8) and (9) - allow a trustee and contributor to agree to have an amount of contributions made to a complying superannuation fund not to be treated as taxable contributions. The exemption is limited by reference to certain benefits paid in a year of income.

Subsection 274(7) specifies that the exemption applies to contributions that are taxable under subparagraphs (1)(a)(i), (ii) or (iii) (see notes above) and requires that a notice be given by the trustee, with the consent of the contributor (of the contributions taxable under the above subparagraphs), to the Commissioner seeking the application of this subsection to the contributions.

Subsection 274(8) sets a limit on contributions covered by notices under subsection 274(7). That limit is the aggregate of:

·
the amounts of the post-June 83 components of ETPs specified in notices under subsection 27AB(4) (explained in the notes to clause 6) (paragraph (a));
·
the proportion of the pre-July 83 components of ETPs that corresponds to the proportion of post-June 83 components of the ETPs represented by the subsection 27AB(4) notices (paragraph (b)); and
·
the amounts of pensions paid in a year which do not qualify for a rebate as specified in a notice under section 159SS being inserted by clause 26.

Subsection 274(9) requires that the notice be in the approved form and manner. The notice given by the trustee is irrevocable and should be given on or before the time the tax return is lodged although the Commissioner may allow a later time for the notice.

Clause 49: Repeal of section 275 and substitution of new sections

Clause 49 of the Bill will repeal section 275 of the Principal Act (being inserted by the No.6 Bill) and replace it with a new section 275 and insert new sections 275A and 275B.

Section 275 : Transfer of taxable contributions

The new section 275 does not contain the former requirement that the liability to tax on taxable contributions made to a complying superannuation fund or a complying ADF could be transferred to a PST, life assurance company or registered organisation only to the extent that the contributions were applied in the purchase of units or policies in the transferee. Instead, it will allow the trustee of a complying superannuation fund or a complying ADF, with the consent of the transferee, to transfer an amount of taxable contributions specified in a notice given to the Commissioner, up to an amount calculated by reference to the highest value of the fund's investment in the transferee in the year of income concerned. A further limitation on the operation of the section is that the total amount that can be excluded from a transferor's assessable income in a year of income under this section cannot exceed the total taxable contributions made to the transferor in that year.

The new section 275 also accommodates arrangements whereby funds invest in life assurance policies by way of 'custodian trusts'. Such trusts allow small superannuation funds to invest in group life policies of a life assurance company by way of investment in the custodian trust. In these cases, the investment in the custodian trust will be treated as an investment in the life office concerned.

Subsection (1) requires, as did the repealed provisions, that a separate notice be given in respect of each transferee, that a notice may only be given by the trustee of a complying superannuation fund or a complying ADF and that it may only be given in respect of, and with the consent of, a particular life assurance company, registered organisation or PST to which the transfer of liability is to be made.

Subsection 275(2) sets out the consequences of an amount of taxable contributions being specified in a notice under the section. Paragraph (a) includes the amount of taxable contributions specified in the notice in the assessable income of the transferee while paragraph (b) excludes the same amount of taxable contributions from the assessable income of the transferor. To take account of the possibility that a transferor and a transferee may have different accounting periods for tax purposes, the amount specified in the notice is excluded from the assessable income of the transferor for the year of income for which the contributions would otherwise be included in assessable income, but included in the assessable income of the transferee of the year of income in which the end of the transferor's year of income falls.

Subsection (3) limits the total amount that may be excluded from the assessable income of a particular transferor fund to the total amount of taxable contributions made to the fund in the year of income. It follows that, if the total amount specified in notices under this section exceeded the total taxable contributions for the year paragraph (2)(b) would not apply to the excess.

Subsection (4) sets out the method for determining the maximum amount that may be specified in a particular notice under section 275. This limit is calculated by dividing the highest value of the transferor's investment in the transferee at any time during the transferor's year of income by the rate of tax that applies to the standard component of the transferor's taxable income (this term is defined in section 267) of the year of income concerned. The formula therefore provides a limit that is an appropriate measure of the transferee's capacity to apply the investment in payment of the tax on the transferred contributions. The value of the transferor's investment in the transferee will be taken to be the market value of the investment. Where an investment in policies of a life assurance company or registered organisation is held through an interposed trust whose assets consist wholly of life assurance policies issued by the transferee, proposed subparagraph 275(5)(b)(ii) has the effect that the value of the transferor's investment in the transferee will be taken to include the highest value of the transferor's investment in the interposed trust.

Subsection (5) defines what is meant by the transferor's investment in the transferee in subsection (4). The foregoing notes explain the extension of the notion of investment in the case of an interposed trust.

Subsection (6) permits only one notice to be given by the transferor to a particular transferee in relation to a year of income. Subsection (7) requires that a notice be given by the date of lodgment of the transferor's return of income for the year of income (paragraph (c)). A notice must be given in the approved form and in the approved manner and, once given, is irrevocable (paragraphs (a), (b) and (d)).

Sections 275A and 275B - pre-1 July 88 funding credits

Introductory note

Clause 49 also proposes the insertion of new sections 275A and 275B which, together with proposed section 15D of the Occupational Superannuation Standards Act (the OSS Act) being inserted by clause 71, provide a legislative framework for establishing, varying, writing-off and monitoring the outstanding balance of a superannuation fund's unfunded liability for benefits accrued prior to 1 July 1988. Section 15D of the 0SS Act will set up a supervisory role for the Insurance and Superannuation Commissioner, who will be authorised to give notices to funds approving a pre-1 July 88 funding liability and variations to the outstanding funding credit balance in certain circumstances. Section 275A will provide for a funding credit balance to be kept for the purposes of the income tax law which reflects the debits and credits in the notices given under section 15D of the OSS Act and any application of the balance under section 275B. Section 275B permits the exemption from tax of certain employer contributions to a complying superannuation fund if the fund has an available funding credit balance under section 275A at the end of the relevant year of income.

Provision is being made in proposed section 300B (being inserted by clause 61) for the Commissioner of Taxation to make an assessment in certain circumstances where the section 15D notices under the OSS Act have not yet been received (see the notes on that clause).

Section 275A : Pre-1 July 88 funding credit balance

Section 275A sets out the manner in which a pre-1 July 88 funding credit balance is to be determined from time to time by providing for notices given under section 15D of the OSS Act, applications of the balance under section 275B to be deemed to be taken into account in a specified chronological order and for the balance at the end of a year of income to be indexed. The purpose of the ordering is to facilitate application of the balance under section 275B or under subsection 275A(4) (which gives effect to subsection 15D(4) of the OSS Act). The former application is the last to occur in the year and the latter the second last.

Subsection 275A(1) defines the pre-1 July 88 funding credit balance at a particular time as the excess of "pre-1 July 88 funding credits" over "pre-1 July 88 funding debits" deemed to have arisen during the year up to that time. The circumstances giving rise to funding debits and funding credits, and the times at which they are taken into account, are explained below.

Subsection 275A(2) provides that an opening pre-1 July 88 funding credit arises at the beginning of the year of income in which 1 July 1988 occurs where the trustee of the fund has received a notice under subsection 15D(2) of the OSS Act. The conditions for the giving of such a notice are set out in subsections 15D(2) and (3) and are explained in the notes on those provisions. In particular, the Insurance and Superannuation Commissioner (ISC) will have to be satisfied that the amount specified in the notice is, in accordance with regulations to be made under the 0SS Act, an unfunded liability in respect of a benefit accrued prior to 1 July 1988.

Subsection 275A(3) provides for a pre-1 July 88 funding debit to arise where the fund elects to apply all or part of the funding credit balance in consideration of treating certain employer contributions as exempt (see the notes on section 275B). The debit under this subsection is deemed to be the last to occur in a year of income.

Under subsection 275A(4) a funding debit arises where a notice is given under subsection 15D(4) of the OSS Act because the trustees of the fund have failed to inform the ISC of a prescribed event within the prescribed time. A prescribed event under OSS Act regulations is to be one related to changes in the membership of the fund or the benefits provided by the fund which affect the fund's right to income tax benefits in respect of the pre-1 July 88 funding balance. The amount of the debit is the amount required to reduce the pre-1 July 88 funding credit balance to zero. Subsection 275A(5) provides for a pre-1 July 88 funding debit to arise where the trustees of the fund receive a notice under subsection 15D(6) of the 0SS Act in relation to a prescribed event of a kind just mentioned that has been notified to the ISC as required under those regulations.

Subsection 275A(6) gives effect to the notices given under subsection 15D(7) of the OSS Act approving transfer of a pre-1 July 1988 funding credit from one fund to another, in accordance with OSS Act regulations, where members have been transferred. Paragraph (a) creates a pre-1 July 88 funding debit for the transferor fund equal to the amount transferred and paragraph (b) creates an equal pre-1 July 88 funding credit for the transferee.

Subsection 275A(7) provides for a carry forward of a pre-1 July 88 funding credit balance from one year to the next, indexed according to the movement in the index number for average weekly ordinary time earnings of fulltime employees published by the Australian Statistician (see the notes on section 159SG being inserted in the Principal Act by clause 26).

Section 275B : Application of pre-1 July 88 funding credits

Section 275B permits a complying superannuation fund that has a pre-1 July 88 funding credit balance (as defined in subsection 275A(1)) at the end of a year of income to elect that so much of the fund's contributions for the year which would otherwise be taxable under paragraph 274(1)(a)(i), (ii) or (iii) (generally contributions made by employers) as is specified in the election is to be exempt from tax.

Subsection 275B(1) sets down the two prerequisites to the application of the section, namely, that a complying superannuation fund must have a pre-1 July 88 funding credit balance at the end of the year and that the trustee of the fund must elect to have the section apply.

Subsection 275B(2) places a limit on the amount that can be specified in the election. The limit is the lesser of the amounts described in paragraphs (a) and (b). Paragraph (a) limits the exemption to the amount of the pre-1 July 88 funding credit balance that is deemed by section 275A to exist at the beginning of the last day of the year of income. This is the balance remaining after the opening balance for the year has been adjusted for all of the pre-1 July 88 credits and debits arising from notices given under section 15D of the OSS Act. Paragraph (b) limits the exemption to the sum of the (employer) contributions to the fund for the year referred to in subparagraphs 274(1)(a)(i), (ii) and (iii), reduced by the amount of any contributions already made exempt from tax in accordance with notices given by the fund to the Commissioner under subsection 274(7) (see the notes on that provision) and by an amount, calculated in accordance with a formula, that is a proportion of

-
the taxed element of the post-June 83 components of any ETPs paid in the year of income (the component "Taxed ETP components" in the formula); and
-
the notional post-June 83 components of the lump sum value (excluding post-June 83 undeducted purchase price) of any pensions which begin to be paid by the fund in the year of income (the component "Total pension components" in the formula).

The proportion - component R in the formula - is to increase from 0.2 to 1 over a 5 year period to reflect the phase-in of the lower rates of tax applying to the taxed element of post-June 83 components of ETPs from 1 July 1988 (see clauses 6 and 26) and the phase-in of the 15 per cent rebate for superannuation pensions (see clause 26).

Subsection 275B(3) defines by way of a formula the "pension component" of a pension for the purpose of the component "Total pension components" in subsection (2), which is explained in the note on that expression.

Subsection 275B(4) gives effect to the election made under subsection 275A(3) by excluding the specified amount from the assessable income of the fund. Subsection 275B(5) requires that the Commissioner be notified in writing of the election on or before the return for the year of income is lodged or before such later time as the Commissioner allows. Subsections (6) and (7) define terms used in various parts of the section.

Clause 50: Contribution notices or eligible person notices given after return lodgment date

Section 276 of the Principal Act presently facilitates adjustment of the taxable income of a superannuation fund where a notice under subsection 82AAT(1A) is given to the trustee of the fund after the date of lodgment of the fund's tax return for the year in which a contribution was treated as assessable income (under subsection 274(2) the contribution would not have been taxable had the notice been lodged in time). Generally, adjustment will be effected by allowing a deduction in the year in which the notice is received but, in cases where a fund is unable to utilise the deduction fully, the Commissioner of Taxation may amend the earlier assessment.

Clause 50 will amend section 276 by omitting subsections (1), (2) and (3) and inserting replacement subsections (1) and (3). New subsection 276(1) is being inserted with an expanded application. Paragraph (a) has the same operation as it had under the former paragraph (a). By paragraph (1)(b), the section will now also have effect where a notice is given in relation to contributions in a year of income (the "contribution year") under subsection 274(4) of the Principal Act by an approved person but where the notice is received by the trustee of the fund in a subsequent year (the "notice year").

Where either a subsection 82AAT(1A) notice or a subsection 274(4) notice relating to contributions is received by the trustee of a superannuation fund in the notice year, and the assessable income of the contribution year included an amount (referred to as the "clawback amount") which would not have been included had the notice been received prior to lodgment of the fund's tax return, the clawback amount is allowable as a deduction from the fund's assessable income for the notice year.

The new subsection (3) restates the operation of the former subsection (3) - paragraph (a) of the new subsection and, by paragraph (b), gives similar treatment to the contributions made in respect of the person specified in a subsection 274(4) notice. That is, the contributions are deemed never to have been taxable contributions. In both cases where subsection (3) applies no deduction is allowable under subsection (1) for the clawback amount. The relevant assessment would then be amended accordingly.

Clause 51: Deduction for premiums for death or disability cover

Section 279 of the Principal Act allows for two bases of deduction for the cost to a complying superannuation fund of providing for death and disability cover in respect of its members. A deduction is not allowable under the existing section unless an actuary's certificate is furnished in the prescribed form with the return of income in which the deduction is claimed (subsection 279(3)).

By this clause, subsection (3) is to be omitted and four new subsections added. Replacement subsection 279(3) requires the furnishing of an actuary's certificate in the approved (rather than prescribed) form in relation to those deductions under subsection 279(1), where the premium paid for an insurance policy is only partly in respect of a fund's liability to provide death or disability cover, i.e., where the remainder of the premium is used to fund the investment or endowment aspects of the relevant insurance policy (paragraph (3)(a)). An actuary's certificate is also required in respect of deductions under subsection (2), which applies where the fund does not insure against the liability. A deduction is allowable under that subsection of an amount equal to the lowest arm's length premium (a defined term) to insure against the liability. The reference to "lowest" does not impose an obligation on a fund to seek out the lowest possible premium, but rather to ensure that the amount of the premium chosen as the benchmark against which the deduction is determined is the lowest premium available to the fund which a prudent fund would pay for proper coverage of the liability.

New subsections 279(4), (5) and (6) are all related to the taxpayer electing to forgo deductions for premium-based costs of providing for death and disability benefits coverage in favour of the "benefit-based deduction" for the future service element of death or disability benefits under new section 279B (see notes to clause 52).

Subsection 279(4) denies a deduction under section 279 where an election is made that the section not apply to the trustee in relation to the year of income. Where an election under subsection (4) is made in relation to a year of income, subsection 279(5) operates, unless the Commissioner otherwise determines, so that the trustee is taken to have elected that the section also not apply for later years. Requiring the Commissioner to determine otherwise is a safeguard against manipulation, e.g., so that funds will be unable to switch from one basis to another merely to maximise deductions according to the circumstances of the fund year by year.

Subsection 279(6) states that the election under subsection (4) must be made by notice in writing to the Commissioner of Taxation lodged on or before the date of lodgment by the trustee of the fund's return of income for the income year to which the election relates, or before such later date as the Commissioner allows.

Clause 52:

This clause will add four further sections to Division 3 of Part IX of the Principal Act. Three of the new sections provide new deductions to trustees of complying superannuation funds and the other claws back certain deduction.

Section 279A : Clawback of rebates or refunds of deductible premiums

Subsection 279A(1) puts beyond doubt that, where the trustee of a complying superannuation fund receives in a year of income a rebate or refund of a death or disability insurance premium, which has been allowed or is allowable as a deduction under subsection 279(1), the amount of the rebate or refund attributable to the deductible premium is assessable income of the fund of the year of income. In the case of taxpayers carrying on business, such rebates or refunds would ordinarily be included in assessable income as an ordinary business receipt. To overcome any argument that a superannuation fund does not carry on a business, subsection (1) resolves the matter.

Subsection 279A(2) ensures that subsection (1) cannot be construed as limiting the circumstances under which other rebates or refunds are included in the assessable income.

Section 279B : Deduction for future service element of death or disability benefits

This section provides an alternative basis to that in section 279 for deductibility of the cost of meeting the liability of a complying superannuation fund to provide death or disability benefits to fund members.

The first requirement of the provision - contained in paragraph 279B(1)(a) - is that the trustee has made an election under subsection 279(4) in relation to a year of income. The second requirement (paragraph 279B(1)(b)) is that the trustee pays a death or disability ETP (defined in subsection (3)) in relation to a member of the fund in consequence of the termination of any employment of the member (see also subsection (4) which extends this concept).

Where these requirements are met, a deduction is allowable under subsection (1) in respect of the year of income of an amount calculated according to a formula which identifies a "future service element" of each "death or disability ETP" paid during the year. The term "death or disability ETP" is defined in subsection (3). The future service element of a payment is the proportion represented by the number of days in the person's expected service period to expected retirement that are not served as a result of the death or disablement. The term "days in future service period" is the number of whole days in the period commencing on the day the termination of the member's employment occurs and ending on the member's last retirement date. "Last retirement date" is explained in the notes on that definition in section 267. The term "days in total service period" is the sum of the number of days in the eligible service period (a term defined in section 27A) in relation to the death or disability ETP and the days in future service period.

Subsection 279B(2) deals with the case where, upon the termination of employment of a member of a complying superannuation fund because of death or disability (paragraphs (b) and (c)), a superannuation pension (an annuity within the meaning of section 27H of the Principal Act) commences to be paid by the fund (paragraph (a)). In those circumstances the trustee is treated as if a death or disability ETP (see notes to subsection (3)) had been paid from a superannuation fund (a payment to which paragraph (b) of the eligible termination payment definition in section 27A refers) in lieu of that annuity (paragraph (d)) and the amount of that ETP is taken, for the purpose of calculating the deduction under subsection (1), to be the net present value of the annuity at the date on which the annuity commences to be paid.

The meaning in the section of death or disability ETP is set out in subsection 279B(3). It extends the meaning of eligible termination payment for the purposes of this section to certain payments made after the death of the member to a dependant of the deceased, which are not in fact ETPs. It covers a payment which is a death or disability benefit (as defined in section 267 as amended) paid in relation to a member of a complying superannuation fund (paragraph (a)). The payment must also either be an ETP or one that would be an ETP if payments made after the death of a taxpayer to a dependant of the deceased were ETPs (subparagraph (b)(i)) and payments made to trustees of deceased estates for the benefit of dependants of the deceased were not made reduced ETPs under subsection 27A(4) of the Principal Act (subparagraph (b)(ii)).

Subsection 279B(4) deals with the application of the future service element calculation in subsection (1) in cases where disability benefits are paid in respect of a temporary disability only - that is, where employment of the member is not terminated but there is a period where he or she is unable to perform the normal duties of employment. The subsection treats the amount of the benefits paid to the member as a death or disability ETP equal to the total amount of the benefits paid in the year of income (paragraphs (a) and (b)). So that the formula in subsection (1) can apply, subsection (4) deems the employment to have been terminated on the day the member became unable to perform the normal duties of that employment (paragraph (d)), and takes the deemed ETP to have been paid in consequence of that termination of employment (paragraph (c)).

Under amendments being made by clause 77 of this Bill, the deduction provided by section 279B applies, subject to any limitation imposed by paragraph 14(2)(g) of the No.6 Bill, to the future service elements of death and disability benefits paid during the 1 July 1988 year (defined in subsection 14(1) of the No.6 Bill).

Section 279C : Deduction for section 82AAQ assessable amounts

This section, which has its counterparts in other Divisions of Part IX, allows a complying superannuation fund a deduction in respect of the year of income for payments, including the value of benefits provided but not paid in cash, by the fund to an employer that are included in the employer's assessable income under section 82AAQ of the Principal Act.

Section 279D : Deduction for certain potential detriment payments made after the death of a fund member

Clause 52 also inserts section 279D which, together with sections 279 and 279B, is intended to ensure that the level of death benefits that can be paid from a complying superannuation fund or complying ADF or by a life office or registered organisation in respect of certain annuity policies are not reduced as a result of the tax on taxable contributions. The entities mentioned are called in the section "paying entities". Section 279D provides that, where one of these paying entities pays a lump sum death benefit that is not an ETP and that would be exempt from tax under the existing law, that entity will be allowed a deduction sufficient, given the rate of tax payable by a complying superannuation fund, to compensate the fund for increasing the funded component of the benefit to that which would have been paid, assuming the same level of contributions and earnings of the fund, had there been no tax on contributions. The deduction is only available where the Commissioner is satisfied that the paying entity has passed on to dependants of the deceased person the full benefit that would accrue to the paying entity if the deduction were allowed. The complementary function of sections 279 and 279B, by allowing a deduction to a complying superannuation fund for the cost or providing (whether by insurance or otherwise) for the unfunded components of death benefits, is to enable the fund to pay unfunded components of death benefits undiminished by contributions tax.

Subsection (1) sets out the circumstances in which a deduction is allowable under this section. A deduction will be allowable to a paying entity where a lump sum payment of the kinds mentioned is made after the death of a person and by reason of the person's membership of the paying fund (subparagraph a(i)) or entitlement to receive the relevant annuity (subparagraph (b)(ii)). Secondly, by paragraph (b), the benefit must be paid to a dependant of the deceased person, either directly or by way of a trust estate. Finally, the Commissioner must be satisfied that the paying entity has passed on to the recipient the whole of the tax saving that would accrue as a result of a deduction being allowed (paragraph (c)). The section does not apply to a payment from a superannuation fund or ADF that was not a complying fund at all times during which it was in existence on or after 1 July 1988.

Subsection (2) provides a formula for calculating the deduction. The amount of the deduction is outlined by dividing the reduction in the benefit due to contributions tax by the rate of tax payable on the taxable income of complying superannuation funds (15% at present). The benefit reduction is defined in paragraph (2)(a) as the difference between the benefit that would have been payable had no tax been paid on relevant contributions to a complying superannuation fund (subparagraph (a)(i)) and without the deduction under this section (subparagraph (ii)) and the benefit (the "actual payment") that would have been payable without the deduction under this section (paragraph (b)). The contributions may have been included in the taxable income of any fund in which the benefit may have accrued or of any entity to which liability to tax on those contributions may have been transferred under section 275 - that is, a PST, life assurance company or registered organisation.

The following will generally be accepted by the Commissioner as amounts of benefit reduction due to contributions tax -

·
where the benefit accrued in a defined benefit superannuation fund - an amount certified by an actuary as being the amount of benefit reduction due to the tax on taxable contributions;
·
where the benefit accrued in a fund other than a defined benefit fund - an amount certified by the fund's auditor as being the amount of benefit reduction due to the tax on taxable contributions; or
·
an amount calculated according to the following formula:

((0.15P) / (T - 0.15P)) * A * ((T) / (T + (Future service days)));

where:

-
T is the total number of days in the accrual period of the benefit, defined in the same way as in Subdivision AAB of Division 17, being inserted by clause 26;
-
P is the number of days in component T that occur after 30 June 1988;
-
A is the amount of the 'actual payment' referred to in paragraph (2)(b) less the undeducted contributions of the deceased member as defined in subsection 27A(1);
-
'Future service days' has the same meaning in respect to the payment as it has in section 159SP, being inserted by clause 26.

Subsection (3) ensures that where a recipient of the payment is the trustee of a trust estate, a deduction is allowable only to the extent that the payment is caused not to be an ETP by the operation of subsection 27A(4) of the Principal Act.

Clause 53: No deduction in respect of benefits

Section 280 of the Principal Act ensures that no deduction is allowable to a complying superannuation fund for benefits paid. By this clause, that section is to be amended to allow deductions to a complying superannuation fund under new section 279C where an amount of superannuation benefits is paid to an employer.

Clause 54: Repeal of section 283 and substitution of new sections

Under this clause, existing section 283 of the Principal Act is repealed and three new sections including two which effectively replace the repealed section - are inserted.

Section 282A : Exclusion from assessable income of non-reversionary bonuses on policies of life assurance

This section is inserted to ensure that double taxation of superannuation income does not occur where a complying superannuation fund invests in life assurance policies and non-reversionary (cash) bonuses are paid. Paragraph 26(i) of the Principal Act includes in the assessable income of a taxpayer any amount received as, or by way of, a bonus other than a reversionary bonus on a policy of life assurance. As a result of the enactment of the provisions of this Bill, life assurance companies are now to be subject to tax on income from their complying superannuation fund business (see notes to clause 20) whereas such income had, prior to 1 July 1988, been exempt. If distributions of non-reversionary bonuses were included in the assessable income of complying superannuation funds that income would, but for new section 282A, be subject to a second level of tax.

Exemption of income attributable to current pensions

Introductory note

Section 283 of the Principal Act allows a complying superannuation fund tax exemption on that part of its normal assessable income (defined in section 267) which is attributable to its current pension liabilities. The section does so by virtue of a formula which calculates the proportion of "total liabilities" that are "current pension liabilities" (both of these terms are defined in subsection 283(2)) and applies that fraction to the fund's normal assessable income.

Section 283 is to be repealed and replaced by two sections offering different bases for exemption of income attributable to current pension liabilities. The two bases are not mutually exclusive in the sense that both methods may apply to the same fund: a fund may segregate certain assets to meet some or all of its current pension liabilities (segregated current pension assets - defined in section 273A) or to meet some or all of its liabilities other than current pension liabilities (segregated non-current pension assets - defined in section 273B). Where such segregation occurs, the income from the segregated current pension assets is exempt from tax under new section 282B. Both segregated current pension assets and segregated non-current pension assets are excluded from the calculation of the exemption (if any) available under new section 283. Income which is derived from segregated non-current pension assets, because those assets are not taken into account in calculating the exemption under either of the exempting sections, is assessable in full.

Section 282B: Exemption of income derived from segregated current pension assets

As discussed in the notes on new section 273A, assets may be invested, held in reserve or otherwise dealt with exclusively for the purpose of enabling the fund to discharge the whole or part of its current pension liabilities as they become due. Where a complying superannuation fund has such segregated current pension assets, any normal assessable income (defined in section 267 as not including non-arm's length income or taxable contributions) derived from those assets at the time they are segregated is exempt from tax under section 282B.

Section 283 : Exemption of proportion of income attributable to current pension liabilities

New subsection 283(1) applies to exempt a proportion of the normal assessable income (as defined in section 267) of a complying superannuation fund which includes assessable income other than the following:

·
income which is exempt from tax under the segregated current pension assets provisions of section 282B (see previous notes); and
·
income which is derived from assets which, when the income was derived, were segregated non-current pension assets of the fund (see the notes on proposed section 273B).

The proportion referred to in subsection (1) is calculated under subsection 283(2) as the ratio of "unsegregated current pension liabilities" to "total unsegregated superannuation liabilities" of the fund. Both of these terms are defined in subsection (2) by reference to the average liabilities of the fund of the year of income. Liabilities in respect of which any segregated assets are held are excluded from both components of the formula.

Subsection 283(3) sets out the basis for ascertaining the value of particular liabilities of a fund for the purposes of the formula in subsection (2). The value is the amount which, together with any future contributions to fund the relevant superannuation benefits, if accumulated from the time of valuation at the earning rate on assets other than segregated assets during the preceding year of income, would provide the amount required to meet the particular liabilities as they fall (i.e. The valuation is to be made in accordance with an actuary's certificate, in the approved form, which must accompany the fund's return of income. That certificate should establish the basis and assumptions upon which the valuation is made.

Given that it may not be feasible for a fund to have its total superannuation liabilities revalued by an actuary every year, subsection 283(4) provides a basis for an interim valuation of those total liabilities in years between actuarial valuations, but only where the fund has no segregated assets. That interim valuation applies the proportionate increase or decrease in the value of all of the assets of the fund since the last valuation to the value of the fund's liabilities at the last actuarial valuation. A fund is not, however, released under this subsection from having actuarial valuations of its current assets and its average current pension liabilities in relation to the year of income.

Clause 55: Deduction for section 82AAQ assessable amounts

New section 286A introduced by this clause provides, in the same form as section 279C (see above), a trustee of a non-complying superannuation fund with a deduction for payments by the fund to an employer that are included in the employer's assessable income under section 82AAQ of the Principal Act.

Clause 56: No deduction in respect of benefits

The amendment made by this clause to section 287 of the Principal Act recognises that a deduction is to be allowable (under new section 286A) for superannuation benefits paid to an employer.

Clause 57: Exclusion from assessable income of non-reversionary bonuses on policies of life assurance

The new section 291A inserted by this clause has the same purpose in relation to complying ADFs as section 282A (see notes to that section above) has for complying superannuation funds - that is, to avoid double imposition of tax on income arising from complying superannuation business of a life office.

Clause 58: Liability to taxation

This clause will amend section 296 of the Principal Act by omitting the reference in subsection 296(3) to liability to tax arising under Division 6 of Part III. The amendment will make it clear that the subsection does not include in the assessable income of a unitholder in a PST (other than unitholders who are complying superannuation funds, complying ADFs or other PSTs) amounts of income derived by the trust to which the non-complying entity is presently entitled. The non-complying entity will eventually be taxed on that income either by virtue of the capital gains tax provisions applying to disposals of units or on distribution of the income. The amendment preserves the intention underlying the insertion of section 296 in the Principal Act.

Clause 59:

Two additional sections are inserted into the Principal Act by this clause.

Section 297A : Exclusion from assessable income of non-reversionary bonuses on policies of life assurance

This provision (like sections 282A and 291A) ensures that PSTs are not subjected to a double imposition of tax on income arising from the complying superannuation business of a life office.

Section 297B : Exemption of income attributable to current pension liabilities of complying superannuation funds

This section provides a PST with two methods of gaining exemption from taxation on that part of its income which is attributable to the current pension liabilities of its unitholders. The first method, dealt with in subsections (1) and (2), requires firstly that the PST distinguish between units in the PST that are treated as segregated current pension assets of the unitholders concerned and units that are not so treated. The ratio of the average number of units of the PST held as segregated current pension to the average number of total units assets is then determined and that proportion is applied to the normal assessable income (defined in section 267 of the Principal Act) of the PST to give the amount exempt under subsection (1).

Subsection (3) provides the second method of calculating the exemption under this section and is available at the election of the PST (paragraph (a)). Other requirements of the subsection are that the PST must provide such information as the Commissioner may require in order to substantiate the basis of application of the subsection (paragraph (b)). The Commissioner must be satisfied from the information that the amount sought to be treated as exempt is the proportion of the PST's income that, had the assessable income of the PST been derived instead by the unitholders of the PST in proportion to their unitholdings during the year of income, would have been exempt income of the unitholders under section 282B or 283 (see notes to those provisions above) - paragraph (c).

In order to have the subsection (3) basis apply in preference to that in subsection (1), a PST needs to make arrangements with each of its complying superannuation fund unitholders during the year of income to provide the PST with details of the exempt proportion calculated in respect of each fund under subsection 283(2) or, if the units are held as segregated current pension assets, an advice to that effect. The PST would then usually be expected to have calculated the weighted average of the exemptions of its unitholders in relation to their unitholdings in the PST in order to satisfy the Commissioner of the matters in paragraph (c).

Where the above requirements have been met, the proportion of the PST's income calculated under paragraph (c) is exempt from tax under paragraph 297B(3)(d) and subsection 297B(1) has no application to the PST in relation to the year of income - paragraph (e).

Clause 60: Heading to Division 8 of Part IX

Division 8 of Part IX of the Principal Act contains two sections - one relating to rebates and provisional tax and the other to assessments. As new provisions relating to the making of assessments are to be inserted in the Part by clause 61, Division 8 is to be divided into two Divisions and section 300 is to be preceded by the new heading "Division 8 - Rebates and Provisional Tax" in substitution for the present heading "Miscellaneous". Section 301 will be included in the new Division 9 of Part IX which is having new sections inserted in it by clause 61.

Clause 61:

This clause will insert new sections 300A and 300B and a heading to the newly created Division 9 of Part IX "Assessments". The present section 301 of the Principal Act will also be included in Division 9.

Section 300A :

New section 300A enables the Commissioner of Taxation to make an assessment of a superannuation fund, ADF or unit trust for a year of income treating the entity as a complying superannuation fund, complying ADF or PST even though the fund or trust has not, at the time of making the assessment, been given a notice under section 12 or 13 (for complying superannuation funds), 14 or 15 (for complying ADFs) or 15B or 15C (for PSTs) of the Occupational Superannuation Standards Act 1987 - "the OSS Act" by (paragraph (1)(a)). The provision can have effect only if the Commissioner considers it likely that the relevant notice will be given to the fund or trust in respect of the year of income (paragraph (1)(b)).

Subsection 300A(2) applies where an assessment has been made under subsection (1) in expectation of an OSS Act notice of compliance (paragraph (2)(a)) but, within 12 months, the fund or trust has not applied for a notice or otherwise satisfied, the requirements of the Insurance and Superannuation Commissioner (ISC) for obtaining the notice (subparagraph (2)(b)(i)). It also applies if the Commissioner of Taxation otherwise becomes satisfied that the relevant notice of compliance will not be given (subparagraph (2)(b)(ii)). The subsection authorises the Commissioner in those circumstances to amend that assessment at any time to treat the fund or trust as if no notice of compliance with the relevant OSS Act standards had been given in relation to the fund or trust. Subsection (2) could be applied, for example, where a favourable notice was anticipated but, in the event, the ISC notifies the fund that it has not satisfied the relevant standards.

Section 300B : Assessment on basis of anticipated pre-1 July 88 funding credit balance

Section 275B, being inserted by clause 49 of this Bill, exempts an amount of taxable contributions to a complying superannuation fund specified in a notice given by the fund to the Commissioner of Taxation where the fund has an outstanding balance of an unfunded accrued liability as at 1 July 1988 (a "pre-1 July 88 funding credit balance"). The outstanding pre-1 July 88 funding credit balance at a particular time is kept under section 275A (also being inserted by clause 49). The function of granting approval of original amounts of pre-1 July 88 funding credits and of granting approval of transfers of pre-1 July 88 funding credits is given to the Insurance and Superannuation Commissioner (ISC) under new section 15D of the OSS Act being inserted by clause 71 of this Bill.

Section 300B is being inserted to enable the Commissioner of Taxation to, in effect, apply section 275B even though, at the time of making the assessment, the ISC has not given the relevant notice granting approval of a pre-1 July 88 funding credit (a notice under subsection 15D(2) of the OSS Act) or a notice granting approval of transfer under subsection 15D(7) of that Act.

The first of the requirements for the application of the Commissioner's discretion to anticipate the relevant notice is the giving by the trustee of the complying fund of a notice to the Commissioner specifying the amount of the pre-1 July 88 funding credit balance the trustee expects there to be "as at the beginning of the last day of the year of income" (for a full explanation of this drafting expression see the notes on section 275A - clause 49) - subparagraph (1)(a)(i). In addition, the trustee's notice must state that, if there were such a balance, the trustee would elect for subsection 275B(1) to apply for the year of income in relation to a specified amount of taxable contributions made to the fund subparagraph (ii)).

The trustee's notice must be lodged with the Commissioner on or before the day of lodgment of the fund's income tax return for the year of income or before such later date as the Commissioner agrees (paragraph (b)). Where the Commissioner considers that it is likely that the Section 15D notice will be given and that the anticipated specified amount of pre-1 July 88 funding credit balance will be available as at the beginning of the last day of the year of income (paragraph (c)) then (under paragraphs (d) and (e)) the Commissioner may make the assessment as if the specified amount of pre-1 July 88 funding credit balance was available and the trustee had made the election under subsection 275B(1) to have that section apply to a specified amount of taxable contributions, being no greater than the least of the following amounts:

·
the amount of the pre-1 July 88 funding credit balance expected to be available as at the beginning of the last day of the year of income (subparagraph (e)(i));
·
the amount of that balance that the trustee has indicated in the trustee's notice to the Commissioner would be the specified amount in the election under subsection 275B(1) (subparagraph (e)(ii));
·
the maximum amount of taxable contributions able to be exempted under section 275B by virtue of the provisions of paragraph 275B(2)(b) (subparagraph (e)(iii)) - see the notes on section 275B for an explanation of the limitation imposed by that paragraph.

The Commissioner is also entitled to assume for the purposes of subsection (1) that the amount specified by the trustee in that notice under paragraph (1)(a) does not exceed the limit imposed by subsection 275B(2) (paragraph (f)).

Subsection 300B(2) which is the counterpart of subsection 300A(2) (discussed above) enables the Commissioner to amend an assessment made on the basis of anticipated notices under section 15D of the OSS Act. This may occur where the trustee of the complying superannuation fund has not taken all the necessary steps to obtain the relevant notice within 12 months of the assessment or by 31 December 1991, whichever is the earlier, (in the case of a subsection 15D(2) notice) or, in the case of notice under subsection 15D(7) of the OSS Act within any time specified in the regulations for the purposes of that subsection (subparagraph (2)(b)(i)). An amendment may also be made where the Commissioner becomes satisfied that the anticipated notice will not be given or, that there will not be a pre-1 July 88 funding credit balance of the fund of the specified amount referred to in paragraph (1)(c) for example, if a notice issued by the ISC authorises a smaller pre-1 July 88 funding credit than expected.

The Commissioner is authorised under subsection 300B(2) to amend the assessment to give effect to the provisions of the Principal Act, including the new section 275B, as if the relevant expectation of the trustee and the Commissioner did not exist. This means, for example that where a trustee's notice under paragraph 300B(1)(a) anticipates the making of an election under subsection 275B(1) based on an expected subsection 15D(7) notice, the election will, in the event that the notice is not sought by the trustee, be given as much effect as; the limitations imposed by subsection 275B(2) will allow.

As with the notice anticipated by the Commissioner to which section 300A refers (see the note on that section), if the ISC refuses to issue a notice under subsection 15D(2) or 15D(7) of the OSS Act, such a refusal would constitute grounds for the Commissioner becoming satisfied that a notice will not be given and the power of amendment under subsection 300B(2) would be available to the Commissioner to amend the assessment.

Clause 62: Tax Treatment of Gains or Losses on Disposal of Assets Owned by Complying Superannuation Funds, Complying ADFs and PSTs

Clause 62 proposes to insert a new Division, Division 10, in Part IX - Taxation of Superannuation Business and Related Business - of the Principal Act.

The new Division will modify the application of the Principal Act to disposals of assets by a trustee of a complying superannuation fund, a complying approved deposit fund and a pooled superannuation trust.

Broadly, Division 10 will deem all assets owned by these entities as at the end of 30 June 1988 to have been acquired on that day for the purposes of Part IIIA - Capital gains and Capital losses - of the Principal Act. This will allow Part IIIA to have application to most assets owned by such taxpayers regardless of the actual date of acquisition of an asset. However, in calculating whether a capital gain or a capital loss arises on a subsequent disposal of such an asset, the asset will be deemed to have been acquired for an amount equal to its actual costs or the market value of the asset on 30 June 1988, whichever produces the smaller gain or loss. This prevents the application of the provisions to gains or losses that accrued on or before 30 June 1988.

This Bill also proposes amendments so that where Part IIIA applies to the disposal of an asset (including one acquired after 30 June 1988) by a complying superannuation fund, complying ADF or a PST then, generally, no amount will be included in the assessable income of the taxpayer under section 25 or section 25A, or allowed as a deduction under section 51 or section 52. However, this will not be the case for section 25 or section 51 if the asset is a security (as defined) or the amount is a gain or loss attributable to currency exchange rate fluctuations.

Section 302 : Division applies to trustees of complying superannuation funds, complying ADFs and PSTs

By section 302 Division 10 will apply to a taxpayer in relation to a year of income if the taxpayer is the trustee of a complying superannuation fund (paragraph 302(a)), a complying ADF (paragraph 302(b)) or a PST (paragraph 302(c)). These terms are defined in subsection 267(1) proposed to be inserted by the No.6 Bill.

Section 303 : Interpretation

Subsection 303(1) sets out the meanings of terms that are used in Division 10.

"security" is a term used in proposed section 304. That section provides generally that Part IIIA of the Principal Act is to be the primary provision for determining the taxation of gains and losses on the disposal of an asset by a taxpayer to whom Division 10 applies. However where the asset is a "security", section 304 does not operate to preclude the application of section 25 or section 51. A security for these purposes is defined in a similar way in Division 16E. The only difference is that in the Division 10 definition of security reference is made to "debenture stock" instead of "stock" as in Division 16E. This is to make it clear that shares do not fall within the definition of security for the purposes of section 304.
"30 June 1988 asset" is defined to mean an asset that is owned by a taxpayer at the end of 30 June 1988.

Although, new Division 10 applies only to taxpayers being trustees of complying superannuation funds, complying ADFs and PSTs, it is possible such a taxpayer may not always have had that status. Subsection 303(2) enables a reference in Division 10 to a time before the beginning of a year of income to include a reference to a case where the relevant fund or unit trust was not a complying superannuation fund, a complying ADF or a PST at that earlier time.

Subsection 303(3) gives expressions used in Division 10 and also in Part IIIA the same meanings as in that Part. This is relevant, for example, in determining whether a taxpayer owns an asset as at the end of 30 June 1988 (see definition of "30 June 1988 asset" in subsection 303(1)).

Section 304 : Part IIIA to be primary code for taxation of gains and losses

Generally, section 304 makes Part IIIA the primary code for determining whether an amount is included in assessable income or allowed as a deduction on the disposal of an asset by a complying superannuation fund, a complying ADF or a PST.

Section 304 applies where Part IIIA applies or, would apply apart from the effect of section 160ZZF or Division 5A, 7A or 17 of Part IIIA, in respect of the disposal of an asset owned by a taxpayer to whom Division 10 of Part IX applies (see notes on section 302).

Section 160ZZF and Divisions 5A and 17 of Part IIIA operate to allow "rollover" relief, that is, deferral of the taxing point, in respect of certain disposals of assets. Section 160ZZF applies to allow rollover relief in respect of prospecting rights and mining rights. Division 5A applies to Crown leases while Division 17 applies to various other situations where rollover relief is available.

Generally where rollover relief is available, any capital gain or capital loss that would have arisen at the time of disposal of the particular asset is transferred to the corresponding new asset of the taxpayer. In addition, if the original asset was acquired before 20 September 1985 (the date of first effect of Part IIIA) the replacement asset is deemed to have been acquired before that date. However, this latter consequence will not apply to taxpayers subject to new Division 10 as proposed subsection 306(1) will deem assets owned at the end of 30 June 1988 to have been acquired on that date for Part IIIA purposes.

Division 7A proposed to be inserted in Part IIIA by clause 39 (see notes on that clause) excludes from the application of Part IIIA a disposal of a unit in a PST. The reference to Division 7A in section 304 means that a disposal of a unit in a PST by a taxpayer subject to Division 10 will not give rise to an assessable amount or an allowable deduction under sections 25, 25A, 51 or 52.

It should be noted that section 304 only operates if Part IIIA applies in respect of the disposal of an asset. It would not operate, for example, in the case of trading stock because under section 160L Part IIIA does not apply to a disposal of trading stock.

Paragraphs 304(a), 304(b) and 304(c) specify the consequences where section 304 applies.

By paragraph 304(a) an amount is not included in the assessable income of the taxpayer under section 25 of the Principal Act in respect of the disposal of an asset unless the asset is a security or the amount is a gain attributable to currency exchange rate fluctuations. Section 25 is the general provision which includes income derived by a taxpayer in assessable income. A security for this purpose is defined in subsection 303(1). In the case of a security or an amount attributable to currency exchange rate fluctuations, paragraph 304(a) does not necessarily mean that an amount will be included under section 25. However, it does mean that the application of section 25 is not precluded by section 304.

Paragraph 304(b) prevents section 25A and section 52 from applying in respect of the disposal of an asset. Section 25A and section 52 include in assessable income or allow as a deduction respectively profits or losses arising from the sale by a taxpayer of property acquired for the purpose of profit-making by sale or from the carrying on or out of any profit-making undertaking or scheme other than those arising from the sale of property acquired on or after 20 September 1985. Paragraph 304(b) means that section 25A or section 52 will not apply where a taxpayer to whom Division 10 applies acquired property before 20 September 1985 and the disposal is subject to Part IIIA.

Section 51 allows deduction for losses and outgoings incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for that purpose except for losses and outgoings of a capital, private or domestic nature. Paragraph 304(c) has the effect that an amount will not be allowed as a deduction under section 51 in respect of the disposal of an asset unless the asset is a security or the amount is a loss attributable to currency exchange rate fluctuations.

Section 305 : Division to be treated as a provision of Part IIIA

Section 305 is a drafting measure which allows the expressions "provision of this Part" or "provisions of this Part" when used in Part IIIA to be taken to include a reference to any of the provisions in Division 10 of Part IX.

This is relevant, for example, in determining the time of acquisition of an asset for Part IIIA purposes. Subsection 160U(1) is expressed to be "subject to the provisions of this Part other than this section" in requiring the time of acquisition to be ascertained in accordance with section 160U. Proposed subsection 306(1) (see notes on that subsection) deems certain assets to have been acquired on 30 June 1988, thus overriding the normal operation of section 160U.

Section 306 : 30 June 1988 assets deemed to have been acquired on that date

Subsection 306(1) deems a 30 June 1988 asset of a taxpayer to have been acquired on 30 June 1988 for the purposes of Part IIIA of the Principal Act. A 30 June 1988 asset is defined by subsection 303(1) to mean an asset owned at the end of 30 June 1988. Although the application of Part IIIA is generally limited to the disposal of an asset acquired on or after 20 September 1985, subsection 306(1) allows Part IIIA to apply to assets owned by a taxpayer subject to Division 10 of Part IX, regardless of the actual dates of acquisition of the assets.

However, subsections 306(2) and (3) qualify the effect of subsection 306(1). Subsection 306(2) operates where a provision of Part IIIA refers to the cost base of an asset instead of its indexed cost base - generally where the asset is disposed of within 12 months of its acquisition date. This is relevant because indexation is taken into account in calculating a capital gain on disposal of an asset only where the asset has been owned for at least 12 months. In relation to such a provision in Part IIIA (for example subsection 160Z(3)), subsection 306 (2) specifies that subsection 306(1) is not to operate for the purpose of determining the acquisition day of the asset.

This means that if an asset deemed by subsection 306(1) to have been acquired on 30 June 1988 is later disposed of, that asset's cost base will be indexed provided the asset has actually been owned by the taxpayer for at least 12 months. In this respect Part IIIA has its ordinary operation for the purpose of determining the date of acquisition of an asset. To illustrate, a bonus share that is deemed to have been acquired on 30 June 1988 by virtue of paragraph 160ZYG(b) because that is the deemed acquisition date of the original shares to which the bonus relates, will be taken to have an acquisition date for indexation purposes the same as the ordinary Part IIIA acquisition date of the original shares. However, proposed paragraph 308(1)(b) limits indexation so as to apply only from 30 June 1988.

Subsection 306(3) specifies that the deemed date of acquisition of 30 June 1988 under subsection 306 (1) does not apply for the purpose of determining the cost base of an asset. This is relevant in ascertaining an asset's cost base as at 30 June 1988 for the purposes of Division 10.

Section 160ZH of the Principal Act sets out what amounts may be taken into account for the purpose of determining an asset's cost base, indexed cost base and reduced cost base respectively. For example, where a taxpayer has given property other than money in respect of the acquisition of the asset, paragraph 160ZH(4)(b) treats the acquisition consideration as the market value of the property at the time of acquisition. The effect of subsection 306 (3) is that market value will be ascertained at the time of actual acquisition and not at the deemed date of 30 June 1988.

Section 307 : Disposal of taxable Australian assets

By subsection 160L(2) of the Principal Act, Part IIIA applies to a disposal on or after 20 September 1985 of a taxable Australian asset which was owned immediately before the disposal by a person who was not a resident of Australia or by a trustee of a trust estate or of a unit trust that was not a resident trust estate or a resident unit trust respectively, where the asset was acquired on or after 20 September 1985.

Section 160T details the circumstances in which the disposal of an asset is deemed, for the purposes of Part IIIA to have been the disposal of a taxable Australian asset. Paragraph 160T(d) and 160T(g) refer to a share in a resident Australian public company or a unit in a resident unit trust. These assets are taxable Australian assets if at any time during so much of the period of 5 years immediately prior to the disposal as occurred after 19 September 1985, the taxpayer or associates of the taxpayer (as defined in section 160E) were the beneficial owners of not less than 10 per cent of the issued share capital of the company or the issued units of the unit trust.

For taxpayers subject to Division 10 of Part IX, section 307 applies so that the reference to 19 September 1985 in section 160T is instead a reference to 30 June 1988.

Section 308 : Cost base of 30 June 1988 asset

Section 308 sets the basis for determining what amount a taxpayer is to be taken as having paid or given as consideration in respect of the acquisition of a 30 June 1988 asset for the purposes of Part IIIA of the Principal Act. Subsection 303(1) defines a 30 June 1988 asset to mean an asset owned by the taxpayer at the end of 30 June 1988. The effect of section 308 will be that in calculating a capital gain or capital loss on a disposal of a 30 June 1988 asset, the cost base of the asset as at 30 June 1988 or the market value of the asset as at the end of 30 June 1988 will be used whichever produces the smaller gain or loss.

Subparagraph 308(1)(a)(i) deems the taxpayer to have paid or given as consideration in respect of the acquisition of a 30 June 1988 asset an amount for the purpose of ascertaining whether a capital gain accrued on a disposal of the asset. The amount is the market value of the asset as at the end of 30 June 1988 (sub-subparagraph (A)) or the cost base of the asset as at 30 June 1988 if that cost base is greater than the market value (sub-subparagraph (B)).

For these purposes, and subject to the operation of proposed section 310 in relation to shares or an interest or unit in a trust (see later notes), the cost base is to be determined in accordance with Part IIIA as though Part IIIA had always applied to the asset. Market value is to be ascertained according to ordinary valuation principles unless the asset is subject to proposed section 309 (see later notes on that section).

Subparagraph 308(1)(a)(ii) specifies the acquisition cost for the purpose of ascertaining whether a capital loss has been incurred on a disposal of a 30 June 1988 asset. The acquisition cost is the market value of the asset as at the end of 30 June 1988 (sub-subparagraph (A)) or the cost base of the asset as at 30 June 1988 if that cost base is less than the market value (sub-subparagraph (B)). This amount is subject to further adjustment in accordance with section 160ZK of the Principal Act to determine the reduced cost base of the asset at the time of disposal. It is only if the reduced cost base of an asset exceeds the consideration received on disposal that a capital loss arises.

By paragraph 308(1)(b) the deemed amount of consideration is to be taken to have been paid on 30 June 1988. This will ensure that the June 1988 quarter is the base for determining the indexation factor to be applied in calculating the indexed cost base of a 30 June 1988 asset.

Subsection 308(2) ensures that liabilities, costs or expenditure incurred before 1 July 1988 in respect of a 30 June 1988 asset are not taken into account other than under subsection 308(1) in determining the asset's cost base, indexed cost base and reduced cost base.

Section 309 : Market value of stock exchange listed assets

For certain assets, section 309 specifies how market value as at the end of 30 June 1988 is to be calculated. This is relevant for proposed sections 308, 311, 312, 313 and 314. For other assets, market value is to be determined according to ordinary valuation principles.

Subsection 309(1) applies where a 30 June 1988 asset was listed on an Australian stock exchange at 30 June 1988 (paragraph (a)) and on that date identical assets were either computer traded on a national market (subparagraph (b)(i)) or traded on a State capital city market (subparagraph (b)(ii)). In these circumstances the market value of the asset as at the end of 30 June 1988 is to be taken (for the purposes of Division 10) to be the average of the highest and lowest trade prices for identical assets on 30 June 1988 that were recorded:

·
where the identical assets were computer traded on a national market on 30 June 1988 - on that national market (paragraph (c));
·
on a State capital city market (but not the Sydney market) if, on 30 June 1988, that market recorded a higher volume of trading in identical assets than the Sydney market (paragraph (d));
·
in any other case - on the Sydney market (paragraph (e).

Under subsection 309(2) an asset will be taken to have been listed on an Australian stock exchange on 30 June 1988 if the asset had official quotation status on that date by a securities exchange within the meaning of the Securities Industry Act 1980 or a corresponding law of a State or Territory.

Section 310 : Adjustment of cost base as at 30 June 1988 - return of capital

Both section 160ZL and section 160ZM of the Principal Act operate in certain circumstances to reduce the appropriate cost base of shares in a company or an interest or units in a trust. Section 160ZL applies where a company pays an amount that is not a dividend in respect of shares acquired after 19 September 1985 (not being a payment in respect of the disposal of the shares). Section 160ZM applies where the trustee of a trust pays an amount that is not assessable income of the owner of an interest or units in a trust acquired after 19 September 1985 (not including a payment in respect of the disposal of the interest or units or an amount attributable to a deduction allowed under Division 10C - Deductions for Capital Expenditure on Traveller Accommodation or Division 10D - Deductions for Capital Expenditure on certain Income-Producing Buildings, of Part III of the Principal Act). Section 310 operates in a similar way for 30 June 1988 assets being shares or an interest or unit in a trust, for the purposes of Division 10 (subsection 310(1)). This adjustment is to ensure that in ascertaining the cost base of an asset, reductions are made for amounts of the types to which section 160ZL and 160ZM apply. The receipt of such amounts would also be reflected in the market value of the asset.

Subsection 310(2) applies where 30 June 1988 assets of a taxpayer include or consist of shares in a company (paragraph 310(2)(a)) and during the period commencing at the time of acquisition of the shares and ending at the end of 30 June 1988, the company paid to the taxpayer an amount in respect of the shares that was not a dividend (paragraph 310(2)(b)). In these circumstances the cost base of the shares as at 30 June 1988 is reduced by the amount paid.

Subsection 310(3) applies where:

·
a 30 June 1988 asset of a taxpayer consists of an interest or unit in a trust (paragraph (3)(a)); and
·
at any time during the period commencing when the taxpayer acquired the interest or unit and ending at the end of 30 June 1988, the trustee of the trust paid an amount to the taxpayer in respect of the interest or unit, being:

·.
where the taxpayer was exempt from tax for the year of income in which the payment was made - an amount that would not have been assessable income if the taxpayer had not been exempt from tax (subparagraph 310(3)(b)(i)); or
·.
where the taxpayer was not exempt - an amount that would not have been assessable income (subparagraph 310(3)(b)(ii)).

In these circumstances, subsection 310(3) requires the cost base of the interest or unit as at 30 June 1988 to be reduced by so much of the amount as is not attributable to a deduction allowed under Division 10C or Division 10D.

Sections 311 to 314

Section 311 : Rights to acquire shares or share options

Section 312 : Rights to acquire units or unit options

Section 313 : Company-issued options to acquire unissued shares

Section 314 : Unit trust-issued options to acquire unissued units

Introductory note

Part IIIA contains provisions which deal with rights to acquire shares or units in a unit trust (Division 10 or Division 10A) and company-issued options to shareholders to acquire unissued shares (Division 11) or unit trust-issued options to unitholders to acquire unissued units (Division 11A). Each of these Divisions contains a provision which states that where a shareholder or unitholder exercises rights or options that were acquired after 19 September 1985, the shareholder or unitholder is deemed to have paid or given as consideration in respect of the asset acquired, an amount equal to the exercise price of the rights or options. This would mean that, in the case of rights or options being 30 June 1988 assets of a taxpayer and exercised after 30 June 1988, the acquisition cost of the new asset would only be the exercise price although those rights or options could have an acquisition cost by virtue of section 308.

Section 311

Section 311 deals with cases under Division 10 where rights are issued to acquire shares in a company or to acquire an option to acquire shares in a company.

Section 311 stipulates a different acquisition cost in these circumstances to that which would be obtained under existing subsection 160ZY0(2).

Paragraph 311(1)(a) applies for the purpose of ascertaining whether a capital gain accrued to the taxpayer on a disposal of the new shares, the option or the shares to which the option relates (where the option has been exercised). In this case the acquisition cost of the new shares or the option is the sum of the exercise price of the rights and the market value of the rights as at the end of 30 June 1988 (subparagraph (a)(i)) or the cost base of the rights as at 30 June 1988 if it is greater than the market value (subparagraph (a)(ii)).

Paragraph 311(1)(b) applies for the purpose of ascertaining whether a capital loss arises on a disposal of the new shares, the option or the shares to which the option relates. The acquisition cost of the new shares or option is the sum of the exercise price and the market value of the rights as at the end of 30 June 1988 (subparagraph (b)(i)) or the cost base of the rights as at 30 June 1988 if it is less than the market value (subparagraph (b)(ii)).

By subsection 311(2) the amount in subparagraph (a)(i) or (a)(ii) or subparagraph (b)(i) or (b)(ii), whichever is applicable, is deemed to have been paid on 30 June 1988. This parallels the operation of paragraph 308(1)(b) described earlier.

Section 312

Similarly, section 312 deals with cases under Division 10A where rights are issued to acquire units in a unit trust or to acquire an option to acquire units in a unit trust.

Sections 313 and 314

Section 313 applies in respect of Division 11 which refers to the case of an issue by a company of an option to acquire other shares in the company. Section 314 applies in a similar way to cases under Division 11A where a unit trust issues options to unitholders to acquire unissued units in the trust.

Section 315 : Options

Section 160ZZC of the Principal Act sets out rules for the treatment of options, where those options are not already dealt with in Division 10 (rights to acquire shares), Division 10A (rights to acquire units), Division 11 (options to acquire shares) or Division 11A (options to acquire units). Generally, the grant of an option will be treated as the creation and disposal of the option, and may result in a capital gain. When an option is exercised the grant of the option and the transaction entered into as a result of the exercise are treated as a single transaction.

Subsection 160ZZC(3A) applies where, on or after 20 September 1985, a company grants an option to acquire shares in a company or debentures of a company or the trustee of a unit trust grants an option to acquire units in the unit trust or debentures of the unit trust. In these cases the grant of the option is not taken as a disposal of the option - a disposal of the option occurs only if the option expires without being exercised or is cancelled, released or abandoned.

Subsection 315(1) is to the effect that subsection 160ZZC(3A) applies to an option granted by a taxpayer (that is, a taxpayer who is subject to Division 10 by virtue of proposed section 302) as if the reference to 20 September 1985 were a reference to 1 July 1988 (the date from which the new superannuation arrangements apply).

Subsection 315(2) states that subsection 160ZZC(9) does not apply to an option granted to a taxpayer. Subsection 160ZZC(9) is relevant for those cases where an option granted before 20 September 1985 is exercised on or after that date and operates to include the market value of the option at the time of exercise as part of the acquisition cost of the asset. The subsection is not relevant for taxpayers who are subject to Division 10 because all such options owned as at 30 June 1988 are taken to have been acquired on 30 June 1988 (by subsection 306(1)) and to have been acquired at that date for an amount depending upon the cost base and market value of the option at that time.

Clause 63: Application of amendments

This clause, which will not amend the Principal Act, contains provisions that specify the date on which, or the year of income for which, certain of the amendments proposed in Part II of the Bill will apply.

By subclause 63(1) the term "amended Act", as used in the clause, means the Income Tax Assessment Act 1936 as proposed to be amended by this Bill.

Subclause 63(2) provides that the amendments made by clauses 6, 7, 8, 26, 28 and 42 and the amendments made by clause 5 (other than paragraph 5(o)) are to apply to assessments in respect of the year of income commencing on 1 July 1988 and later years. Further explanations of the dates of application of the relevant amendments are contained in the notes on each of those clauses.

Subclause 63(3) provides that the amendments made by clause 11 apply in relation to contributions made on or after 1 July 1988.

Subclause 63(4) provides that the amendments made by clauses 12 to 24 inclusive which relate to the taxation of life assurance companies and registered organisations apply to assessments in respect of income of the year of income in which 1 July 1988 occurred and of all subsequent years of income.

By subclause 63(5) new section 111C of the amended Act applies to assessments in respect of the year of income commencing on 1 July 1988 and of all subsequent years of income.

By subclause 63(6) new subsection 113(4) of the amended Act applies in relation to general management expenses incurred after 25 May 1988.

Subclause 63(7) provides that the amendments made by clauses 9, 10, 25 and 29 to 36 inclusive apply in relation to dividends paid on or after 1 July 1988.

Subclause 63(8) ensures that the increase in the section 160AAB rebate (clause 27) applies to assessable bonuses received on or after 1 July 1989.

Subclause 63(9) has the effect that proposed section 111B (to be inserted by clause 16), section 116GC (to be inserted by clause 23) and Division 7A of Part IIIA (to be inserted by clause 39) which will exempt from tax disposals of units in a pooled superannuation trust, apply to disposals of assets on or after 1 July 1988.

Clause 64: Transitional - life assurance companies and registered organisations

This clause is explained in the introductory note to clauses 13 to 20.

Clause 65: Amendment of assessments

Clause 65 will allow the Commissioner of Taxation to amend an assessment made before the amendments of the Income Tax Assessment Act 1936 proposed by this Bill, to give effect to those amendments.

PART III - AMENDMENT OF THE OCCUPATIONAL SUPERANNUATION STANDARDS ACT 1987

Clause 66: Principal Act

This clause facilitates reference in Part III of the Bill to the Occupational Superannuation Standards Act 1987 as the "Principal Act".

Clause 67: Interpretation

This clause amends a definition in section 3 of the Principal Act and inserts a new definition. By paragraphs (a) and (b) of the clause, paragraphs (c) and (d) will be added to the definition of 'reviewable decision' to include decisions of the Insurance and Superannuation Commissioner under subsections 15D(2) and (6) in relation to the availability of funding credits in respect of pre-1 July 1988 accrued liabilities of a superannuation fund. The significance of a decision being a reviewable decision is that the fund may ask the Commissioner to reconsider the decision. The Commissioner's decision on the review can be reviewed by the Administrative Appeals Tribunal. The nature of the decisions under section 15D in question is explained in the notes on that section. Regulations under the Principal Act dealing with transfers of pre-1 July 1988 funding credits will also allow the Insurance and Superannuation Commissioner to make decisions: these decisions will also be reviewable under the proposed Regulations.

Paragraph (c) of clause 67 inserts a definition of 'governing rules' to cover the possibility that a fund in the public sector may not be constituted under a trust deed. By complementary amendments of the Principal Act, the term 'trust deeds' in sections 7, 8 and 8A has been replaced by 'governing rules' which will facilitate the application of the operating standards to these funds.

Clauses 68-70: Operating standards for superannuation funds, approved deposit funds and pooled superannuation trusts

These clauses make the amendments of sections 7, 8 and 8A of the Principal Act referred to in the notes on paragraph (c) of clause 67.

Clause 71: Pre-1 July 88 funding credits and debits

By this clause section 15D will be inserted into the Principal Act to provide a supervisory role for the Commissioner in connection with the establishment of pre-1 July 88 funding credits (within the meaning of proposed regulations under the Principal Act). Such credits are available to be used by a superannuation fund under section 275B of the Income Tax Assessment Act to exempt from tax certain contributions to the fund. Section 15D also provides for the making of regulations in relation to the granting and varying of pre-1 July 88 funding credits.

Subsection 15D(1) provides for fund trustees to make an application for a pre-1 July 88 funding credit to the Commissioner. Where the fund is not constituted as a trust then the manager of the fund may, by way of the definition of trustee in subsection 3(1) of the Principal Act, be deemed to be the trustee under section 268 of the Income Tax Assessment Act.

Subsection 15D(2) requires the Commissioner to give a notice to an applicant approving a specified amount as a pre-1 July 88 funding credit if the Commissioner is satisfied that the amount is a "pre-1 July 1988 funding amount" - that is, that the amount meets the requirements set out in regulations (which are to provide for calculation of the amount) - and that one of the former provisions of the Income Tax Assessment Act exempting superannuation funds from tax, i.e., paragraph 23(jaa) or section 23FC, applied to the fund in the 1987-88 year of income.

Subsection 15D(3) requires that the application be in an approved form and accompanied by the required information and documentation required by the form and any fee which is prescribed. The application must be made on or before 31 December 1991. A fund which seeks exemption from tax on contributions under section 275B of the Income Tax Assessment Act and which has not obtained a notice under subsection 15D(2) may nevertheless be able to have its assessment processed because of the effect of proposed section 300B of the Income Tax Assessment Act, which gives the Commissioner of Taxation a discretion in certain circumstances to make an assessment as if the notice had been given.

Subsections 15D(4) and (5) provide for the giving of notices where a prescribed event occurs in relation to a fund. Events to be prescribed for those purposes will relate to changes in circumstances concerning membership of, or benefits provided by, the fund. An example of a prescribed event may be a change in the form of benefits from pensions to lump sums. Where the trustees of the fund fail to notify the Commissioner of the event within the prescribed time and manner, the Commissioner is required to issue a notice under subsection 15D(4). The effect of this notice under subsection 275A(4) of the Income Tax Assessment Act will be to reduce the pre-1 July 88 funding credit balance of the fund to zero. Subsection 15D(5) provides for regulations to prescribe information to be given by funds when notifying the Commissioner of prescribed events and allowing the Commissioner to extend the time for lodging notices.

Subsection 15D(6) requires the Commissioner to issue a notice where the trustees notify the Commissioner of a prescribed event within the prescribed time and manner and the Commissioner is satisfied that prescribed circumstances apply to the fund. This notice will give rise to a pre-1 July 88 funding debit that accords with the regulations.

Subsection 15D(7) provides for the Commissioner to approve transfers of pre-1 July 88 funding credits between funds. Details of the application of this facility and the conditions which will need to be satisfied will be set out in regulations.

Subsections 15D(8), (9), (10) and (11) are similar to the provisions in other sections of the Principal Act which give the Commissioner the power to revoke a decision and require that the reasons for a revocation or refusal are set out in writing. By subsection (12) the Commissioner of Taxation is to be advised of all notices given in relation to pre-1 July 88 funding credits and debits or under regulations for the purposes of subsection (7), which allows for transfers of credits. Subsection 15D(13) expands the meaning of the occurrence of an event for the purposes of subsections (4) to (6).

Clause 72: Review of certain decisions

A new subsection 16(5A) is to be added to section 16 to require the Commissioner to provide particulars to the Commissioner of Taxation of a notice revoking or varying a reviewable decision, including a decision concerning the giving of a notice under subsection 15D(2) or (6).

PART IV - AMENDMENT OF THE TAXATION ADMINISTRATION ACT 1953

Clause 73: Principal Act

This clause facilitates reference in Part IV of the Bill to the Taxation Administration Act 1953 as the "Principal Act".

Clause 74: Court may order payment of amount in addition to penalty

This clause amends subsection 8W(1A) of the Principal Act to include a reference to section l5D of the Occupational Superannuation Standards Act 1987, being inserted by clause 71. The amendment will have the effect that a court will be able to order payment of an amount in addition to a penalty where a false or misleading statement is made to the Insurance and Superannuation Commissioner in relation to the operation of section l5D.

PART V - AMENDMENT OF THE TAXATION LAWS AMENDMENT ACT (N0.2) 1989

Clause 75: Principal Act

This clause facilitates reference in Part V of the Bill to the Taxation Laws Amendment Act (No.2) 1989 (which was introduced as the Taxation Laws Amendment Bill (No.6) 1988 - "the No.6 Bill" -) as the "Principal Act".

Clause 76: Application of superannuation and related amendments

Section 12 of the Principal Act sets out the application of the superannuation and related amendments being made by sections 9 and 10 of that Act. Clause 76 will make a number of amendments to section 12 of the Principal Act. The amendments are explained in the following notes.

Paragraph (a) of clause 76 will insert a definition of 'amended Act', a term to be used in subsection 12(2A), in subsection 12(1). The term means the Income Tax Assessment Act 1936 as amended by the Principal Act (i.e., the No.6 Bill).

Paragraph (b) of the clause will insert new subsection 12(2A) which provides for the application of amendments made by this Bill to Part IX of the amended Act to assessments in respect of the income year in which 1 July 1988 occurs and later years (see also the notes on clauses 43 to 62).

Paragraph (c) will omit the reference in subsection 12(3) to section 110 of the Income Tax Assessment Act. An application provision for the amendment proposed to section 110 by the (No.6) Bill is no longer necessary since the amendment is being omitted by clause 79 of this Bill. The amendment would have changed the definition of 'exempt superannuation fund' in section 110 but that definition is now being omitted altogether by clause 13 of this Bill.

Subsection 12(3) of the Principal Act lists various sections of the Income Tax Assessment Act 1936 proposed to be amended by section 10 of that Act in Schedule 1. Each of the amended sections (sections 102M, 121G, 121H and 124ZA) applies in relation to a fund (of the relevant kind) in relation to the 1 July 1988 year of the fund and in relation to all subsequent years of income.

By paragraph (d) of clause 76 a reference to the amendments of sections 160Y and 160ZZJ of the Income Tax Assessment Act 1936 proposed to be made by the Taxation Laws Amendment (Superannuation) Bill 1989 is inserted in subsection 12(3) of the Principal Act. This means that the amendments of section 160Y (asset bequeathed to tax-advantaged person) and section 160ZZJ (superannuation and approved deposit funds) by clause 38 and 40 of the Taxation Laws Amendment (Superannuation) Bill 1989 will apply in relation to the 1 July 1988 year of the fund and all subsequent years of income.

Paragraphs (e) and (f) of the clause insert a reference to a PST (pooled superannuation trust) in subsection 12(3) so that the application provision also applies in relation to the 1 July 1988 and subsequent years of income of a PST.

Clause 77: Transitional - superannuation and related amendments

The main function of section 14 of the Principal Act is to ensure that Part IX (being inserted in the Income Tax Assessment Act 1936 by section 9) and the amendments being made by section 10 and Schedule 1 apply only from 1 July 1988 in circumstances where the fund or trust in question has a substituted accounting period which included 1 July 1988 but commenced before 1 July 1988. The need for the clause arises essentially from competing demands of the Income Tax Assessment Act 1936 (that amendments of these kinds apply in respect of income of a year of income, as reflected by section 12 of the Principal Act) and the requirement that the changes as announced apply from 1 July 1988. Clause 77 will amend section 14 of the Principal Act. Notes on each of the amendments proposed to be made to section 14 are set out below.

Paragraph (a) of clause 77 amends the definition of 'amended Act' in subsection 14(1) to ensure the term covers the Income Tax Assessment Act 1936 as amended by both the Principal Act and this Bill.

Paragraph (b) of the clause simply corrects a reference to Part IX so that it refers to Part IX of the amended Act. There is, of course, no Part IX in the existing Income Tax Assessment Act.

The amendments proposed by paragraphs (c) and (d) of clause 77 are consequential on the fact that paragraph 23(jaa) and sections 23FC and 23FD of the income tax law, being repealed by the No.6 Bill, continue to apply to funds with substituted accounting periods in relation to the year of income in which 1 July 1988 occurred, i.e., in respect of income derived before 1 July 1988. References to that paragraph or those sections, or funds to which they apply, in sections 124ZA and 121F of the amended Act are to continue to be relevant insofar as paragraph 23(jaa) or section 23FC or 23FD continue to apply to a relevant fund.

Paragraph (e) preserves to 30 June 1988 the effect in section 160K of the Income Tax Assessment Act of a reference to paragraph 23(jaa) or sections 23FC or 23FD being repealed by the Principal Act.

Paragraph (f) will insert new subsections 14(5) and (6) in the Principal Act which deal with any trading stock of a formerly exempt superannuation fund or ADF that was on hand at the beginning of the 1 July 1988 year (i.e., the year of income in which 1 July 1988 occurred). Subsections 14(5) and (6) are to apply to superannuation funds and ADFs that are taxable in the 1 July 1988 year but were exempt from tax by virtue of paragraph 23(jaa), section 23FC or section 23FD in the previous year of income.

Under section 29 of the Income Tax Assessment Act the value of trading stock at the beginning of a year of income is ordinarily the value taken into account at the end of the preceding income year. But tax exempt superannuation funds and ADFs have not had to take into account tax considerations when valuing any closing stock in the past. Subparagraph 14(5)(a)(i) will effectively allow a formerly exempt fund to value its opening stock for the 1 July 1988 year on the bases available under section 31, paragraph 32(5)(c) or (d) or subsection 32(6) in respect of closing stock for a year of income. The subparagraph allows a fund to exercise any option and give any notice under those provisions in respect of trading stock on hand at the end of the year of income in which 1 July 1987 occurred (the 1 July 1987 year). By subsection 14(6) any such option or notice is generally to be exercised or given in the fund's income tax return for the 1 July 1988 year. Nonetheless, the Commissioner may allow a longer time if appropriate.

By subparagraph 14(5)(a)(ii), where a fund does not elect to value any trading stock at the end of the 1 July 1987 year under one of the options given under subparagraph (i), that trading stock is to be valued at cost. The value of any trading stock ascertained under paragraph 14(5)(a) will be the value to be taken into account under section 29 of the income tax law.

Paragraph 14(5)(b) of the Principal Act is a precautionary measure to prevent abuse of the options available under subparagraph (a). If a fund chooses to value its closing stock for the 1 July 1987 year at market value it will, effectively, push back into its exempt period any profit component in that stock figure. If that trading stock was still on hand at the end of the 1 July 1988 year and was valued at cost at that time, that would, effectively, give the relevant fund a deduction in respect of that stock (equal to the difference between the market value and cost). To prevent that from happening, paragraph 14(5)(b) deems the cost price of any trading stock on hand at the end of the 1 July 1988 year that was also on hand at the end of the 1 July 1987 year to be the value at which it was taken into account under subparagraph 14(5)(a)(i).

Paragraph (f) will also insert new subsection 14(7) in the Principal Act to deal with another transitional issue, i.e., how to calculate depreciation deductions in respect of plant owned by complying superannuation funds and ADFs that has been used to produce exempt income. The depreciation provisions of the income tax law have always had to deal with cases where plant is converted from a non-assessable income producing use (often private use) to assessable income producing use. Section 61 of the Income Tax Assessment Act allows the Commissioner of Taxation to determine the appropriate depreciation deductions in such cases. It has broadly been the Commissioner's practice, in determining appropriate deductions, to assume that the relevant plant has always been used for the purpose of producing assessable income. Deductions under the diminishing value method of depreciation are, therefore, calculated on the presumption that the depreciated value of the plant is its cost reduced by the notional depreciation deductions that would have been allowable in the past. Deductions under the prime cost method are simply a proportion of the cost but based on the assumption that the plant's effective life commenced when it was first used for non-assessable income producing purposes. Any relevant accelerated rates of depreciation are presumed to have applied. Subsection 14(7) will have the effect that sections 57AH and 57AL (the 5/3 depreciation provisions) are not to apply to plant owned by complying superannuation funds and complying ADFs.

Subsection 14(7) is to apply in respect of depreciable plant owned by a complying superannuation fund or ADF that is first used, or installed for use, in producing assessable income in the 1 July 1988 year or a later year of income. By paragraph 14(7)(b) sections 57AH and 57AL are to be deemed not to apply to relevant depreciable plant. That should generally result in higher depreciation deductions being available to formerly exempt funds.

Clause 78: Repeal of section 18

Section 18 of the Principal Act provides for the application of certain amendments made under Schedule 2 of that Act to the Superannuation Act 1976. As discussed under the note on clause 80 below, those amendments are to be omitted. Section 18 is therefore to be repealed by this clause.

Clause 79: Schedule 1

Clause 79 will omit the amendment to the definition of 'exempt superannuation fund' proposed by Schedule 1 of the No.6 Bill. The proposed amendment is redundant since the relevant definition is now being omitted from section 110 of the Income Tax Assessment Act altogether by clause 13 of the Taxation Laws Amendment (Superannuation) Bill 1989.

Clause 80: Schedule 2

Schedule 2 of the Principal Act had the effect of making various consequential amendments of other Acts in connection with the amendments of the Income Tax Assessment Act 1936 relating to superannuation business and related business. Among the amendments made by Schedule 2 were amendments of the Superannuation Act 1976. Clause 80 amends the Principal Act by omitting the amendments of the Superannuation Act. Although this has the effect of reinstating certain provisions of that Act which would otherwise exempt the Commonwealth Superannuation Fund from income tax, that is not the case because of the operation of new section 269A of the Income Tax Assessment Act being introduced by clause 45 of this Bill (see the notes on that clause above).

INCOME TAX RATES AMENDMENT BILL (No.2) 1989

Introductory Note

This Bill will amend the Income Tax Rates Act 1986 which declares the rates of tax payable by taxpayers generally, including life assurance companies and registered organisations.

The Bill will declare the new rates of tax applicable to the components of taxable income of life assurance companies and registered organisations. The relevant components will be identified under amendments proposed to be made by the Taxation Laws Amendment (Superannuation) Bill 1989.

Clause 1: Short title etc.

The proposed Act is to be cited as the Income Tax Rates Amendment Act (No.2) 1989. Clause 1 also provides for the Income Tax Rates Act 1986 to be referred to in the amending Act as "the Principal Act".

Clause 2: Commencement

Subclause 2(1) provides that, generally, the amending Act is to come into operation on the day it receives the Royal Assent.

By subclause 2(2), however, the amendments to be made by clauses 5, 6, 7 and 9 will have effect immediately after the commencement of the Income Tax Rates Amendment Act 1989 (introduced as the Income Tax Rates Amendment Bill (No.2) 1988).

Clause 3: Interpretation

Clause 3 will insert a number of definitions in subsection 3(1) of the Principal Act which identify the different components of taxable income of life assurance companies and registered organisations. The same definitions are also being inserted in Division 8 and Division 8A of Part III of the Income Tax Assessment Act 1936 by the Taxation Laws Amendment (Superannuation) Bill 1989. Explanations of the definitions can be found in the notes on clauses 13 and 21 of that Bill.

Clause 4: Rates of tax payable by companies

Clause 4 will amend section 23 of the Principal Act which sets the rates of tax for companies other than companies in the capacity of a trustee. Section 23 at present treats life assurance companies in the same way as other companies but sets a special rate of tax, under subsection 23(4), for registered organisations.

The effect of clause 4 is to treat both life assurance companies and registered organisations differently from other companies. New subsections 23(4) and (4A), being inserted in place of existing subsection 23(4), set separate rates of tax for the various components of taxable income of registered organisations and life assurance companies respectively. The rates are:

·
for the component referable to policies held by complying funds, or in respect of rollover annuities - 15%
·
for the component referable to policies held by non-complying funds - 47%
·
for the component referable to other life assurance and to accident and disability insurance

·.
life assurance companies - 39%
·.
registered organisations - 30%; and

·
for the non statutory fund component (life assurance companies only) - 39%

The rate for non-complying fund business is 49 per cent for the 1987-88 and 1988-89 years and 48 per cent for the 1989-90 year of income.

New subsection 23(4B) simply preserves the 50 per cent rate of tax that applies to undistributed profits under section 104 of the Income Tax Assessment Act where relevant in relation to a life assurance company that is a private company.

Clauses 5-7: Rates of tax payable by trustees of superannuation funds, ADFs and PSTs

These clauses will amend sections 26, 27 and 27A respectively to reduce the rate of tax in respect of the taxable income of non-complying superannuation funds and ADFs and the special component of a complying fund's taxable income from 49 to 47 percent, with effect from the 1989-90 year of income (subclause 9(2)). Those sections are being amended or inserted, as applicable, in the Principal Act by the Income Tax Rates Amendment Bill (No.2) 1988, with effect from the 1988-89 income year. The rate that applies to special components is linked to the highest marginal rate of tax for individuals and the reduction reflects the reduction in the top personal tax rate to 47 per cent. The 49 per cent rate is to fall in two steps. For the 1989-90 income year the rate is to be 48 per cent (see note on subclause 9(3)). The 47 per cent rate will apply with effect from the income year 1990-91.

Clause 8: Application and transitional - life assurance companies and registered organisations

Subclause 8(2) provides that the amendments made by clause 4 are to apply in respect of the year of income in which 1 July 1988 occurred (the 1 July 1988 year) and all subsequent years of income.

Subclause 8(3) deals with registered organisations that have a substituted accounting period. Special rates of tax are to apply to the part of such a registered organisation's taxable income for the 1 July 1988 year that, in broad terms, was derived before 1 July 1988. The manner of determining the pre-1 July 1988 component of taxable income is dealt with by paragraph (g) of subclause 64(2) of the Taxation Laws Amendment (Superannuation) Bill 1989 (see notes on that paragraph).

Paragraph (a) of subclause 8(3) sets out the rate of tax to apply to the pre-1 July 1988 component for a registered organisation whose substituted accounting period for the 1987-88 income year is the 1 July 1988 year. The relevant rate is 20 per cent. Paragraph (b) of the subclause fixes a rate of 30 per cent where the 1 July 1988 year of a registered organisation is the period substituted for the 1988-89 year of income.

Subclause 8(4) has a similar role to subclause 8(3) but applies to life assurance companies with substituted accounting periods rather than registered organisations. The rates for relevant life offices in respect of the pre-1 July 1988 component of taxable income are fixed by paragraphs (a) and (b) of subclause 8(4). Paragraph (a) sets a rate of 49 per cent for a life assurance company, whose substituted accounting period for the 1 July 1988 year is the 1987-88 year of income. By paragraph (b) of the subclause a rate of 39 per cent is fixed if the substituted accounting period is in place of the 1988-89 income year.

Subclauses 8(5) and (6) effectively fix the rates of tax for the NCS component of taxable income of a registered organisation or life assurance company for the 1987-88, 1988-89 and 1989-90 years of income. The rate for the NCS component set by subsection 23(4) or (4A) is generally, 47 per cent. By subclause 8(5) the rate is to be 49 per cent for the 1987-88 and 1988-89 income years. By subclause 8(6) the rate is to be 48 per cent for the 1989-90 year.

Subclause 8(7) ensures that the rate of tax to apply to the EIB component of a registered organisation's taxable income for the 1987-88 income year will remain at 20 per cent (the 30 per cent rate set by new section 23(4) is only to apply from 1988-89).

Subclause 8(8) sets the rate to apply to the ordinary life assurance and non-fund components of a life assurance company's taxable income at 49 per cent for the 1987-88 income year. That is the same as the general corporate tax rate for that year of income.

Clause 9: Application and transitional - superannuation funds, approved deposit funds and pooled superannuation trusts

Subclause 9(2) provides that the amendments proposed by clauses 5, 6 and 7 (see relevant notes) are to have effect for the 1989-90 income year and later years. Those clauses change the rate of tax to apply to the special component of taxable income of a superannuation fund, an ADF or a PST from its present rate of 49 per cent to 47 per cent.

Subclause 9(3) complements subclause (2). It ensures that in the 1989-90 year of income the rate of tax to apply to special components is 48 per cent. The 1989-90 year is a transitional year when the rate lies between the existing rate of 49 per cent and the proposed new rate of 47 per cent.


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