Tax Laws Amendment (2004 Measures No. 7) Act 2005 (41 of 2005)
Schedule 6 Consolidation
Part 5 Insurance companies
Income Tax Assessment Act 1997
25 Sections 713-525 and 713-530
Repeal the sections, substitute:
713-525 Obligation to value certain assets and liabilities at joining time
Division 320 has effect as if the time when a *life insurance company becomes a *subsidiary member of a *consolidated group were a *valuation time for the purposes of sections 320-175 and 320-230.
Note: This means that there must be a valuation of the virtual PST assets and virtual PST liabilities under section 320-175 (with the consequences set out in section 320-180), and a valuation of the segregated exempt assets and exempt life insurance policy liabilities under section 320-230 (with the consequences set out in section 320-235), as at that time.
Losses of life insurance companies joining consolidated group
713-530 Treatment of certain losses of life insurance company
(1) This section applies if:
(a) a *life insurance company becomes a *member of a *consolidated group at a time (the joining time ); and
(b) just before the joining time, the life insurance company had either:
(i) a *tax loss of the *complying superannuation class; or
(ii) a *net capital loss from *virtual PST assets.
(2) This Act operates (except so far as the contrary intention appears) for the purposes of income years ending after the joining time as if:
(a) the *head company of the *consolidated group had made the loss for the income year in which the joining time occurs; and
(b) the *life insurance company had not made the loss for the income year for which it made the loss.
(3) The *head company is not prevented from *utilising the loss for the income year in which the joining time occurs merely because this Act operates as if the head company had made the loss for that year.
(4) Division 707 does not apply in relation to the *net capital loss or the *tax loss at the joining time.
Losses of life insurance companies' subsidiaries joining consolidated group
713-535 Losses of entities whose membership interests are virtual PST assets of life insurance company
(1) This section applies if:
(a) a *life insurance company becomes a *member of a *consolidated group at a time (the joining time ); and
(b) at the joining time, the life insurance company owns, either directly or indirectly through one or more interposed entities, all the *membership interests in yet another entity (the life insurance subsidiary ) that becomes a *subsidiary member of the group at that time; and
(c) all the following membership interests are *virtual PST assets of the life insurance company:
(i) the membership interests (if any) that the life insurance company owns directly in the life insurance subsidiary;
(ii) the membership interests (if any) that the life insurance company owns directly in the interposed entities; and
(d) the *head company of the group makes a *tax loss or *net capital loss under Subdivision 707-A because of a transfer from the life insurance subsidiary.
(2) This Act operates for the purposes of income years ending after the transfer as if:
(a) the *tax loss were of the *complying superannuation class; or
(b) the *net capital loss were from *virtual PST assets.
(3) Subdivisions 707-B, 707-C and 707-D do not affect the *utilisation of the loss by the *head company of the *consolidated group.
713-540 Losses of entities whose membership interests are segregated exempt assets of life insurance company
(1) This section applies if:
(a) a *life insurance company becomes a *member of a *consolidated group at a time (the joining time ); and
(b) at the joining time, the life insurance company owns, either directly or indirectly through one or more interposed entities, all the *membership interests in yet another entity (the life insurance subsidiary ) that becomes a *subsidiary member of the group at that time; and
(c) all the following membership interests are *segregated exempt assets of the life insurance company:
(i) the membership interests (if any) that the life insurance company owns directly in the life insurance subsidiary;
(ii) the membership interests (if any) that the life insurance company owns directly in the interposed entities.
(2) A *tax loss or *net capital loss of the life insurance subsidiary for an income year ending before the joining time cannot be *utilised by the life insurance subsidiary for an income year ending after that time.
Note: This prevents the loss from being transferred to the head company of the consolidated group under Subdivision 707-A (because it means the life insurance subsidiary could not have utilised the loss for the trial year). As a result, section 707-150 prevents any other entity from utilising the loss for an income year ending after the joining time.
Imputation rules for life insurance companies joining consolidated group
713-545 Treatment of franking surplus in franking account of life insurance subsidiary joining group
(1) This section applies if:
(a) a *life insurance company becomes a *member of a *consolidated group at a time (the joining time ); and
(b) at the joining time, the life insurance company owns, either directly or indirectly through one or more interposed entities, *membership interests in yet another entity (the life insurance subsidiary ) that becomes a *subsidiary member of the group at that time; and
(c) the life insurance subsidiary's *franking account is in surplus just before the joining time.
(2) Paragraph 709-60(2)(b) does not apply in relation to the life insurance subsidiary.
(3) A *franking credit arises at the joining time in the *franking account of the *head company of the group. The amount of the credit is the amount worked out under subsection (4).
(4) The amount is equal to the amount of the *franking credit that would arise in the *life insurance company's *franking account just before the joining time under item 5 of the table in subsection 219-15(2) if:
(a) the life insurance subsidiary made a *franked distribution to the life insurance company just before the joining time; and
(b) the amount of the franking credit on the distribution were equal to the surplus mentioned in paragraph (1)(c).
(5) The *head company of the group is entitled to a *tax offset for the income year in which the joining time occurs. The amount of the tax offset is:
(a) if all the *membership interests (if any) that the *life insurance company owns directly in the life insurance subsidiary, and all the membership interests (if any) that the life insurance company owns directly in interposed entities, are *segregated exempt assets of the life insurance company - the surplus mentioned in paragraph (1)(c), reduced by the amount worked out under subsection (4); or
(b) if all the membership interests (if any) that the life insurance company owns directly in the life insurance subsidiary, and all the membership interests (if any) that the life insurance company owns directly in interposed entities, are *virtual PST assets of the life insurance company - the amount worked out under subsection (6); or
(c) otherwise - nil.
(6) The amount is worked out using the following formula (or is nil if it would otherwise be negative):
[[Surplus mentioned in paragraph (1)(c) - Amount worked out under subsection (4)] * [Complying superannuation class tax rate / Ordinary class tax rate]]
where:
complying superannuation class tax rate means the rate of tax in respect of the *complying superannuation class of the taxable income of a *life insurance company for the income year in which the joining time occurs (see paragraph 23A(b) of the Income Tax Rates Act 1986).
ordinary class tax rate means the rate of tax in respect of the *ordinary class of the taxable income of a life insurance company for the income year in which the joining time occurs (see subparagraph 23A(a)(ii) of the Income Tax Rates Act 1986).
713-550 Treatment of head company's franking account after joining
Sections 709-70 and 709-75 do not apply in relation to a *subsidiary member of a *consolidated group if:
(a) the subsidiary member is a *life insurance company; or
(b) a life insurance company that is a *member of the group owns *membership interests, either directly or indirectly through one or more interposed entities, in the subsidiary member.
Annuity payable by life insurance company to another member of a consolidated group
713-553 Special rules relating to segregated exempt assets
Conditions for sections 713-555 and 713-560 to apply
(1) Sections 713-555 and 713-560 apply only if both the conditions in subsections (2) and (3) are met.
Note: Each of those sections sets out extra conditions that must also be met for the section to apply.
(2) The first condition is that there is a time (the fusion time ) when it starts to be the case that both these entities (the fused entities ) are *members of a single *consolidated group:
(a) a *life insurance company;
(b) an entity (the policyholder ) holding an *exempt life insurance policy (the fused entities' policy ) that:
(i) was issued when the policyholder and the life insurance company were not both members of a single consolidated group; and
(ii) provided for the life insurance company to pay an *immediate annuity to the policyholder.
(3) The second condition is that the *head company of the *consolidated group determines the following amounts:
(a) the total *transfer value of the head company's *segregated exempt assets;
(b) the amount of the head company's *exempt life insurance policy liabilities;
as at a time (the determination time ) that is the fusion time or, if the head company does not determine those amounts as at the fusion time, the first time after the fusion time as at which the head company determines those amounts.
Note: If the life insurance company becomes a subsidiary member of the consolidated group, that company's segregated exempt assets become segregated exempt assets of the head company of the group because of section 701-5 (Entry history rule) and section 713-505 (Head company treated as a life insurance company).
Object of sections 713-555 and 713-560
(4) The object of sections 713-555 and 713-560 is to ensure that the *head company of the *consolidated group:
(a) does not have excessive amounts included in its assessable income because section 701-1 (Single entity rule) treats the fused entities as one so liabilities under the fused entities' policy do not contribute to the amount of the head company's *exempt life insurance policy liabilities as at the determination time; and
(b) has amounts included in its assessable income, or is allowed deductions, to reflect what would have happened to the fused entities if they had not both been *members of the group at any time between the fusion time and the determination time when they were both members of the group.
713-555 Transfer from segregated exempt assets because policyholder and life insurance company are in group
Application
(1) This section applies if:
(a) as at the determination time, the total *transfer value of the *segregated exempt assets of the *head company of the *consolidated group exceeds the amount of that company's *exempt life insurance policy liabilities, wholly or partly because:
(i) those assets include assets out of which exempt life insurance policy liabilities attributable to the fused entities' policy were to have been discharged; and
(ii) while both the fused entities are members of the group, the liability to pay the *annuity is taken not to exist for the head company core purposes set out in section 701-1 (Single entity rule), because one or more applications of that section treat the fused entities as one entity; and
(b) because of that excess, the head company transfers under subsection 320-235(1) or 320-250(2), from its segregated exempt assets, assets (the policy assets ) whose total transfer value equals the amount of the excess attributable to the matters described in subparagraphs (a)(i) and (ii).
However, this section does not apply if the policyholder ceases to be a *member of the consolidated group between the fusion time and the determination time.
Note: Subsections 320-235(1) and 320-250(2) require a life insurance company to transfer assets from its segregated exempt assets if, at certain times, the total transfer value of the segregated exempt assets exceeds the amount of the company's exempt life insurance policy liabilities.
Policy assets' transfer value not included in assessable income
(2) Paragraph 320-15(1)(f) does not apply to the transfer of the policy assets.
Note: Paragraph 320-15(1)(f) includes in a life insurance company's assessable income the transfer values of assets transferred by the company from the company's segregated exempt assets under subsection 320-235(1) or 320-250(2).
Extra assessable income if policy is not a qualifying security
(3) If the fused entities' policy is not a qualifying security (as defined in section 159GP of the Income Tax Assessment Act 1936), the assessable income of the *head company of the *consolidated group for the income year in which the company transfers the policy assets includes the amount worked out using the formula:
Total transfer value of the policy assets - Reduced purchase price of the annuity
where:
reduced purchase price of the annuity means the reduced purchase price of the *annuity as at the determination time worked out under Subdivision AA of Division 2 of Part III of the Income Tax Assessment Act 1936 as if the determination time (rather than the fusion time) had been the first time at which both the fused entities were *members of the *consolidated group.
Assessable income or deduction if policy is a qualifying security
(4) If the fused entities' policy is a qualifying security (as defined in section 159GP of the Income Tax Assessment Act 1936), section 159GS (Balancing adjustment on transfer of qualifying security) of that Act applies as if:
(a) the *head company of the *consolidated group:
(i) had been the holder (as defined in section 159GP of that Act) of the policy; and
(ii) had transferred the policy when it transferred the policy assets; and
(b) the transfer price had equalled the total *transfer value of the policy assets; and
(c) the determination time (rather than the fusion time) had been the first time at which both the fused entities were *members of the consolidated group.
Note: If the policyholder becomes a subsidiary member of the consolidated group, section 701-5 (Entry history rule) treats the head company as if anything that had happened to the policyholder before it became a subsidiary member of the group had happened to the head company.
713-560 If valuation of segregated exempt assets is delayed
Application
(1) This section applies if there is a period (the gap ) between:
(a) the fusion time; and
(b) the determination time or the time at which the policyholder ceases to be a *member of the *consolidated group, whichever is earlier;
when the fused entities are both members of the consolidated group.
Continuation of exempt life insurance policy during the gap
(2) For the head company core purposes mentioned in section 701-1 (Single entity rule), Division 320 applies in relation to the fused entities' policy as if it continued to be an *exempt life insurance policy during the gap, even though both the fused entities were *members of the *consolidated group.
Transfer from segregated assets to provide for annuity payments
(3) During the gap, the *head company of the *consolidated group may transfer an asset from the head company's *segregated exempt assets to provide for payments of the *immediate annuity under the fused entities' policy.
Effect of transfer
(4) If the *head company of the *consolidated group transfers an asset under subsection (3):
(a) section 320-255 applies to the asset in the same way as that section applies to an asset transferred under subsection 320-250(2); and
(b) whichever one of subsections (5) and (6) is relevant affects the *head company of the *consolidated group for the income year in which the gap occurs.
Income if policy is not a qualifying security
(5) If the fused entities' policy is not a qualifying security (as defined in section 159GP of the Income Tax Assessment Act 1936), the *head company's assessable income includes the amount that, if the fused entities had not been *members of the *consolidated group:
(a) would have been included in the policyholder's assessable income under section 27H of that Act in connection with the policy; and
(b) would have been derived in the gap.
Income or deduction if policy is a qualifying security
(6) If the fused entities' policy is a qualifying security (as defined in section 159GP of the Income Tax Assessment Act 1936):
(a) the *head company's assessable income includes the amount (if any) that, if the fused entities had not been *members of the *consolidated group:
(i) would have been included in the policyholder's assessable income under section 159GQ of that Act in connection with the policy; and
(ii) would have been attributable to the gap; or
(b) the head company may deduct the amount (if any) that, if the fused entities had not been members of the consolidated group:
(i) would have been a deduction allowable to the policyholder under section 159GQ of that Act in connection with the policy; and
(ii) would have been attributable to the gap.
Liabilities for life insurance companies leaving consolidated group
713-565 Treatment of certain liabilities for income year when life insurance company leaves consolidated group
(1) This section affects how paragraph 320-15(1)(h) and section 320-85 apply if:
(a) a *life insurance company ceases to be a *subsidiary member of a *consolidated group at a time (the leaving time ); and
(b) at the leaving time, the *life insurance company has one or more liabilities under the *net risk components of life insurance policies.
Note: Paragraph 320-15(1)(h) and section 320-85 both operate on the basis of a comparison of the value of a life insurance company's liabilities under the net risk components of life insurance policies at the end of the current year with the value of those liabilities at the end of the previous year, so that:
(a) that paragraph includes an amount in the company's assessable income for the current year if the value at the end of the current year is less than the value at the end of the previous income year; and
(b) that section allows a deduction for the current year if the value at the end of the current year is more than the value at the end of the previous income year.
(2) The object of this section is to ensure that:
(a) the *head company of the *consolidated group bears the income tax consequences relating to a change in *value of the liabilities before the leaving time; and
(b) the *life insurance company bears the income tax consequences relating to a change in value of the liabilities after the leaving time.
Head company's income or deduction from liabilities
(3) For the head company core purposes set out in section 701-1 (Single entity rule) relating to the income year in which the leaving time occurs (but not later income years), paragraph 320-15(1)(h) and section 320-85 have effect as if:
(a) the *head company of the *consolidated group had the liabilities at the end of that income year; and
(b) the *value of the liabilities at the end of that income year had been the amount that was actually the value of the liabilities (for the *life insurance company) at the leaving time.
Life insurance company's income or deduction from liabilities
(4) For the entity core purposes set out in section 701-1 (Single entity rule) relating to the *life insurance company and the income year in which the leaving time occurs, paragraph 320-15(1)(h) and section 320-85 have effect as if the *value of the liabilities at the end of the previous income year had been the amount that was actually the value of the liabilities (for the life insurance company) at the leaving time.
Losses for life insurance companies leaving consolidated group
713-570 Certain losses transferred to leaving company
(1) This section applies if:
(a) a *life insurance company ceases to be a *subsidiary member of a *consolidated group at a time (the leaving time ); and
(b) ignoring section 713-505, at the leaving time, no other *member of the group is a life insurance company that has a *virtual PST; and
(c) at the leaving time, the *head company has either:
(i) a *tax loss of the *complying superannuation class; or
(ii) a *net capital loss from *virtual PST assets.
(2) This Act operates (except so far as the contrary intention appears) for the purposes of income years ending after the leaving time as if:
(a) the *life insurance company had made the loss for the income year in which the leaving time occurs; and
(b) the *head company had not made the loss for the income year for which it made the loss.
Note: Section 707-410 (Exit history rule does not treat entity as having made a loss) does not prevent the life insurance company from having the loss under this section, because that section merely states that the company is not taken under section 701-40 (Exit history rule) to have made a loss.
(3) The *life insurance company is not prevented from *utilising the loss for the income year in which the leaving time occurs merely because this Act operates as if the life insurance company had made the loss for that year.
Tax cost setting rules for life insurance companies leaving consolidated group
713-575 Terminating value of certain assets where life insurance company leaves group
(1) This section applies if a *life insurance company (the leaving entity ) ceases to be a *subsidiary member of a *consolidated group at a time (the leaving time ).
(2) For the purposes of applying section 711-25 in relation to the leaving entity, the *head company's terminating value for an asset that it holds at the leaving time because the leaving entity is taken by subsection 701-1(1) to be a part of the head company is the *transfer value of the asset at the leaving time, if the asset is:
(a) a *virtual PST asset, or a *segregated exempt asset, of the head company; or
(b) held by the head company for the purpose of discharging its liabilities under the *net investment component of ordinary life insurance policies (except policies that provide for *participating benefits or *discretionary benefits under *life insurance business carried on in Australia).
713-580 Valuing certain liabilities where life insurance company leaves group
(1) Despite section 711-45, if the leaving entity mentioned in step 4 in the table in section 711-20 is a *life insurance company, the leaving entity's liabilities mentioned in this section are to be valued as mentioned in this section.
(2) To avoid doubt, those liabilities are the liabilities that become those of the leaving entity because section 701-1 (Single entity rule) ceases to apply to the leaving entity when it ceases to be a *subsidiary member of the group.
(3) The value of the leaving entity's *virtual PST liabilities (if any) is the amount worked out under section 320-190 at the leaving time.
(4) The value of the leaving entity's *exempt life insurance policy liabilities (if any) is the amount worked out under section 320-245 at the leaving time.
(5) Subsection (6) applies to a liability of the leaving entity if:
(a) the liability is under the *net risk component of a *life insurance policy; and
(b) the leaving entity could deduct under section 320-80 an amount for the *risk component of claims paid under the policy on or after the time it ceased to be a *member of the *consolidated group.
(6) The value of that liability is the *current termination value of the *net risk component of the *life insurance policy at the leaving time (calculated by an *actuary).
(7) The value of the leaving entity's liabilities under the *net investment component of ordinary life insurance policies is the amount worked out for those liabilities under subsection 320-190(2) as if those liabilities were *virtual PST liabilities.
713-585 Obligation to value certain assets and liabilities at leaving time
Division 320 has effect as if the time when a *life insurance company ceases to be a *subsidiary member of a *consolidated group were a *valuation time for the purposes of sections 320-175 and 320-230.
Note: This means that there must be a valuation of the virtual PST assets and virtual PST liabilities under section 320-175 (with the consequences set out in section 320-180), and a valuation of the segregated exempt assets and exempt life insurance policy liabilities under section 320-230 (with the consequences set out in section 320-235), as at that time.