Bills Digest No. 124 2001-02
Taxation Laws Amendment Bill (No. 2) 2002
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
Endnotes
Contact Officer & Copyright Details
Passage History
Taxation Laws Amendment Bill (No. 2)
2002
Date Introduced: 14 March 2002
House: House of Representatives
Portfolio: Treasury
Commencement: The provisions of
the Bill have numerous commencement and application dates. The
application dates of the various measures described in this Digest
are discussed below.
Purpose
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
-
- deny a refund of excess imputation credits for non-complying
superannuation funds and approved deposit funds
-
- implement technical changes to the low income aged persons
rebate to clarify who is eligible to receive the rebate, and
-
- amend the capital gains tax rules so that the demutalisation of
Tower Corporation does not cause a capital gains tax event.
As there is no central theme to the Bill the
background to the various measures will be discussed below.
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).
The amendments are the same as those contained
in Taxation Laws Amendment Bill (No. 4) 2001 which lapsed when
Parliament was prorogued for the 2001 general election.
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 include 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.
The amendments are the same as those contained
in Taxation Laws Amendment Bill (No. 4) 2001 which lapsed when
Parliament was prorogued for the 2001 general election.
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%.
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 6 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 8).
The amendments are the same as those contained
in Taxation Laws Amendment Bill (No. 4) 2001 which lapsed when
Parliament was prorogued for the 2001 general election.
Low Income Aged Persons Rebate
This rebate, also known as the seniors rebate,
is available to people who:
-
- are in receipt of a pension, allowance or other benefit under
the Veterans Entitlements Act 1986 and have reached
pension age under that Act (for 2000-01 this is 60 years for males
and 57 for females the later age is being increased by increments
to 60), or
-
- have reached pension age under the Social Security Act
1991 (for 2000-01 65 for males and 62 for females again the
later age is being increased to 65), have 10 years qualifying
Australian residence or a residence exemption and are not in goal,
and
-
- satisfy the income requirements.
For eligible single people in 2000-01 the
maximum rebate available was $2230 for taxable income of
$20 000 or less and the rebate decreases by 12.5 cents for
each dollar in income above this amount, so that the rebate ceases
to be available when income reaches $37 840. The income
amounts are indexed for later years.
For a member of a couple, the maximum rebate for
2000-01 was $1602 for income of $16 306 or less (each member
of a couple is deemed to earn half of their combined income when
determining eligibility for the rebate, although actual taxable
income is used in determining the amount of the rebate). For
incomes above this amount the rebate again decreases by 12.5 cents
in the dollar with the rebate ceasing to be available when income
reaches $35 202.
On 8 April 2002 the Australian Taxation Office
(ATO) announced that it had reviewed returns for people who may be
eligible for the rebate in 2000-01 and found that while
approximately 170 000 people correctly claimed the rebate, many had
not. The review found that:
-
- about 57 000 who had not claimed the rebate were eligible
and that the ATO had enough information to assess the amount
payable to these people
-
- approximately 2000 people were wrongly denied the rebate due to
a processing error . These peoples entitlements would also be
assessed automatically, and
-
- approximately 13 000 additional people may be eligible for
the rebate but the ATO lacks sufficient information to assess
eligibility. More information would be requested in regard to these
people.
It was estimated that approximately $60 million
would be paid to the 59 000 people assessed as eligible for
the rebate.(5)
As noted above, one of the criteria for
eligibility for the rebate is the receipt of a pension, allowance
or benefit under the Veterans Entitlements Act 1986,
compared to eligibility to receive a pension under the Social
Security Act 1991. Amendments contained in Schedule
6 of the Bill will remove this difference so that those
eligible, but not in receipt of, a veterans pension, benefit or
other allowance will also be able to receive the rebate.
Application: For the 2000-01 and later income
years (item 3 of Schedule 6).
Tower Corporation had its origins in the New
Zealand Government Life Insurance Office which was established by
an Act of Parliament in 1869. This body was corporatised in 1983
and from 1 October 1989 the life insurance body and its
subsidiaries became know as Tower Corporation. From July 1990 Tower
Corporation became owned by the policyholders rather than the
government and legislation also provided for Tower to be converted
into a limited liability corporation listed on the stock
exchange.
Since 1990 Tower has expanded its operations
from life insurance and now operates general insurance and
financial and investment management in New Zealand, Australia,
China and the South Pacific, although not all of these services are
provided in Australia. Tower was demutualised on 1 October 1999
with shares in the new entity being distributed to policy holders
and listed on the stock exchange in New Zealand and Australia.
There are provisions in the ITAA36 and ITAA97 to
protect taxpayers from possible taxation consequences of
demutualisation, principally to prevent a capital gain from arising
on the surrender of the mutual interest and the acquisition of
shares. The calculation of the cost base for capital gains tax
(CGT) purposes for any subsequent disposal of the shares is also
dealt with. For Australian life and general insurance organisations
these rules apply from 9 May 1995, while for other Australian
organisations the rules apply from 12 May 1998. On 23 September
1999 the Assistant Treasurer announced that similar rules would
apply to the demutualisation of non-resident mutual companies which
have an Australian subsidiary. The announcement specifically stated
that the move would address the position of Tower
Corporation.(6)
Item 2 of Schedule 7 of the
Bill will insert new subdivision 118-H into the ITAA97 dealing with
the CGT implications of the demutualisation of Tower Corporation.
Proposed section 118-550 provides that no capital
gain or loss will arise from membership rights in Tower Corporation
ceasing to exist and that the cost base for any shares acquired
will not include any amount paid to acquire the membership rights
in Tower Corporation.
Application: To all income years (item 3
of Schedule 7).
-
- Review of Business Taxation, p. 419.
- Explanatory Memorandum, p. 23.
- Assistant Treasurer, Press Release, 22 May 2001.
- ibid.
- Australian Taxation Office, Media Release 02/20, 8
April 2002.
- Assistant Treasurer, Press Release, 23 September
1999.
Chris Field
6 May 2002
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 2002
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