Bills Digest No. 36 2001-02
Taxation Laws Amendment Bill (No. 4) 2001
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Taxation Laws Amendment Bill (No. 4)
2001
Date Introduced: 28 June 2001
House: House of Representatives
Portfolio: Treasury
Commencement: Royal Assent, other than Schedule
1 which commences on 1 July 2001. However, the measures have
differing application dates which are dealt with in the Main
Provisions section.
To:
-
- provide for the conversion of franking credits to reflect the
30% company tax rate
-
- defer the commencement date for certain changes relating to
friendly societies, and
-
- deny a refund of excess imputation credits for non-complying
superannuation funds and approved deposit funds.
As there is no central theme to the Bill the
background to the various measures will be discussed below.
Franking Account
Franking forms part of the dividend imputation
system under which resident individuals and certain other
institutions, such as superannuation funds, can receive a credit
for tax paid by a resident company which pays a dividend. When a
resident company pays tax an equivalent amount is credited to its
franking account and when dividends are paid there is a debit to
the account. Dividends may be unfranked, partly franked or fully
franked. In the case of a fully franked dividend the shareholder
receives an imputation credit equal to the company tax rate and
this can be claimed as a tax rebate or, if there are excess credits
(ie credits exceed tax payable) the excess has been refundable
since 1 July 2000.
As a result of changing tax rates, companies
kept a number of different franking accounts. Prior to 1995-96
companies maintained separate accounts which reflected the company
tax rate, class A accounts reflecting the 39% rate, class B
reflecting the 33% rate and class C reflecting the 36% rate. Except
for a small number of cases, principally life insurance companies,
it was required in 1995-96 that all accounts be converted to class
C accounts reflecting the current company tax rates. This involved
the mathematical conversion of class A and B balances to retain
their value relative to the new company tax rate. With the
introduction of the 34% tax rate in 2000-01 class C franking
accounts were converted to reflect the new rate.
In the Review of Business Taxation (Ralph
Report) it was recommended that franking accounts be based on the
actual dollar value of tax paid rather than the current system
which relies on the company tax rate and the income of the company.
Such a change would remove the need for adjustments to franking
accounts when the rate of company tax is changed.(1)
While it had been anticipated that this change would apply to
2001-02 when the 30% company tax rate was introduced this has not
occurred, so that it is necessary to convert the existing class C
franking account balances to reflect the new company tax rate.
Schedule 1 of the Bill provides
for the conversion of existing franking accounts to the new class C
franking accounts. The amendments are of a mathematical nature and
deal with the range of franking accounts which can exist in various
types of institutions. They all aim to achieve the same result and
do not implement any change from previous occasions where there has
been such adjustments.
The amendments will apply from 1 July 2001
(item 11).
Friendly Societies
Friendly societies are associations originally
established for the relief of members in cases of sickness and to
assist surviving spouses and children in the case of the death of a
member. Their role expanded in the areas in which members could be
assisted to included areas such as life insurance, funeral policies
and scholarship plans. Members contribute to the society and their
entitlements are based not only on their own contributions but also
on the society's earnings on the money held. Over time friendly
societies have gone from a tax free basis to having the investment
income on certain of their products, particularly life insurance,
taxed in the same manner as other institutions offering similar
products. Member's contributions remain exempt.
The Ralph Report contained a number of
recommendations regarding the taxation of life insurance companies
and the life insurance business of friendly societies. While many
of the measures were implemented from 1 July 2000, the proposal
that policyholders be able to receive imputation credits in respect
of certain tax paid by the life insurance company or friendly
society was not to operate until 1 July 2001. Part of this process
involves determining the capital component of a policy so as to be
able to determine the investment earning component, and removing
the exemption for friendly societies in respect of earnings on
income bonds, funeral policies and scholarship plans to bring their
taxation into line with similar products offered by other
institutions. In a previously unannounced measure, the explanatory
memorandum to the Bill states that due to the need for further
consultation with industry the commencement date for the above
measures will be extended to 1 July 2002.(2)
Paragraph 320-35(1)(f) of the Income Tax
Assessment Act 1997 (ITAA97) provides that investment income
relating to funeral plans, scholarship plans and income bonds
issued after 30 November 1999 will cease to be exempt from tax from
1 July 2001. Item 1 of Schedule 2 will extend the
latter date to 1 July 2002.
Non-complying superannuation funds and
Approved Deposit Funds (ADF)
Non-complying superannuation funds and ADFs are,
basically, funds and ADFs which do not comply with the rules
contained in the Superannuation Industry (Supervision) Act
1993 and its regulations. Non-complying funds and ADFs receive
no taxation concessions and are taxed at the highest marginal tax
rate of 47%.
As noted above, from 1 July 2000 refunds have
been available where there are excess imputation credits. As the
company tax rate on which imputation credits are based is
considerably lower (34% or 30%) than the rate paid by non-complying
funds and ADFs, it would appear that non-complying entities would
not be able to claim a refund of excess imputation credits. In a
recent Press Release the Assistant Treasurer stated:
However, it might be possible for such funds to
enter into artificial schemes so as to produce surplus imputation
credits.(3)
The Assistant Treasurer then announced that
amendments would be made to deny refunds to non-complying funds and
ADFs and that this was in line with the policy of providing 'tax
concessions only for complying superannuation entities, where
prudential controls provide some certainty that the concession will
generate retirement income for individual fund
members'.(4) It was also announced that the amendments
would apply to the financial year of an entity containing the date
of announcement (22 May 2001), thus for most entities which end
their financial year on 30 June the changes will apply from 1 July
2000.
Item 2 of Schedule 4 will amend
sub-section 67-25(1) of the ITAA97, which deals with the entities
eligible to receive a refund, to specifically exclude non-complying
superannuation funds and ADFs.
Application: For income years ending on or after
22 May 2001 (item 5).
In what is otherwise a non-contentious Bill, the
main point of note is the potential retrospective operation of the
provisions dealing with non-complying superannuation funds and
ADFs.
-
- Review of Business Taxation, p. 419.
- Explanatory Memorandum, p. 23.
- Assistant Treasurer, Press Release, 22 May 2001.
- Ibid.
Chris Field
27 August 2001
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 2000
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Published by the Department of the Parliamentary Library,
2001.
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