House of Representatives

Explanatory Memorandum

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

Chapter 6 - Rate of tax for friendly societies etc.

Overview

6.1 Schedule 6 to this Bill will amend the Taxation (Deficit Reduction) Act (No. 2) 1993 so that the rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations will be retained at 33% for the 1999-2000 income year. The trustee rate will increase to 39% from the 2000-2001 income year unless other relevant amendments to the taxation treatment of friendly societies are made prior to that time.

Summary of the amendments

Purpose of the amendments

6.2 In Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System , the Government announced changes to the taxation treatment of life insurers that are proposed to commence from the 2000-2001 income year. The details of the changes to the taxation of life insurers are being developed as part of the Review of Business Taxation. The main objectives of the proposed changes are to improve the efficiency of the taxation treatment of life insurance companies and friendly societies, and the equity of their investors, to ensure a more neutral taxation outcome for competing investment products.

6.3 The rate of tax on the eligible insurance business of friendly societies is scheduled to increase from 33% to 39% for the 1999-2000 and subsequent income years. Therefore, to ensure that the present taxation treatment of friendly societies is undisturbed prior to the commencement of the new arrangements for taxing life insurers, the Government also announced that the trustee rate of tax for the eligible insurance business of friendly societies and other registered organisations would be retained at 33% for the 1999-2000 income year. Subject to the recommendations of the Review of Business Taxation, that rate will be changed so that it is the same as the company tax rate for the 2000-2001 and subsequent income years.

Date of effect

6.4 The amendments will apply to the 1999-2000 income year.

Background to the legislation

6.5 Paragraph 23(4)(b) of the Income Tax Rates Act 1986 declares that the rate of tax on the eligible insurance business component of the taxable income of a company that is a registered organisation (that is, a friendly society, a trade union or certain employee associations) is 33%. Section19 of the Taxation (Deficit Reduction) Act (No.2) 1993 increases that rate to 39% for the 1999-2000 and subsequent income years.

6.6 Section 26AH of the Income Tax Assessment Act 1936 (ITAA1936) includes in the assessable income of a policyholder bonuses on life insurance policies that are surrendered within 10 years. If such an amount is included in a policyholders assessable income, a rebate is available under section 160AAB of the ITAA 1936 to compensate the policyholder for the tax paid by the insurance company or registered organisation.

6.7 The rebate on bonuses paid from life insurance policies issued by friendly societies and other registered organisations is currently 33% of the amount included in assessable income under section26AH (see paragraph (a) of the definition of statutory percentage in subsection 160AAB(1)). Section 15 of the Taxation (Deficit Reduction) Act (No.2) 1993 increases the rebate to 39% for the 2000-2001 and subsequent income years.

Explanation of the amendments

6.8 The rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations will be retained at 33% for the 1999-2000 income year. [Items2and3]

6.9 The rate will increase to 39% for the 2000-2001 and subsequent income years. [Items4and5]

6.10 The provisions to increase the rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations to 39% in the 2000-2001 and subsequent income years will commence on 1July2000. [Item1]