Bills Digest no. 10 2008–09
Tax Laws Amendment (2008 Measures No. 4) Bill 2008
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
Schedule 1—Demutualisation of private
health insurers
Schedule
2—Family Trusts
Schedule
3—Minor amendments
Concluding comments
Contact officer & copyright details
Passage history
Date introduced:
26 June 2008
House: House of Representatives
Portfolio: Treasury
Commencement: The
Act commences on Royal Assent. The commencement and application of
the Schedules are dealt with in the Main Provisions section of this
Bills Digest.
Links: The
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
There are three
Schedules in the Bill and the purpose of the amendments in each
Schedule is briefly set out below.
- Schedule 1 amends the Income Tax Assessment Act 1936
(ITAA 1936) to make private health insurance policy holders,
demutualising private health insurers and certain other entities
exempt from capital gains tax (CGT) if they receive shares or cash
when their not-for-profit insurer demutualises to a for-profit
insurer.
- Schedule 2 amends the Income Tax Assessment Act 1936
(ITAA 1936) to limit the definition of family by changing lineal
descendants to children or grandchildren of the test individual or
the test individual s spouse. Schedule 2 also limits the ability
for family trusts to make a variation to the test individual other
than specifically in relation to the 2007-08 income year or in the
case of marriage breakdown.
- Schedule 3 makes a variety of minor amendments to remove such
things as incorrect terminology, ambiguities in the law,
inoperative material and typographical errors.
As there is no
central theme to the Bill, the background to the various measures
and the related main provisions will be considered under the
amendments proposed by each Schedule.
A mutual association, such as a private health
insurer, involves the policy holders and members of a fund
associating together for the common purpose of meeting expenses
arising from specified adverse health conditions. Mutual health
insurers are not for profit associations. The Private
Health Insurance Act 2007 (PHIA 2007) requires that entities
carrying on business of health insurance must be registered with
the Private Health Insurance Administration Council (PHIAC).
Demutualisation is the process of converting a
not for profit mutual or cooperative association into a
for profit public company insurer. In the context of
private health insurers, the interests of policy holders or members
would be converted on demutualisation into interests in the
shareholdings of the public company. The consequence of
demutualisation is that the accumulated surplus of the health
insurer is distributed to the participants. Under the PHIA 2007 it
is a requirement that on demutualisation the financial benefits
must be distributed equitably between policy holders and other
persons with interests in the health insurer.
Demutualisation of private health funds has
been a growing trend in Australia. NIB demutualised on 1 October
2007, followed by MBF which demutualised on 16 June 2008.[1] The board of AHM is
currently in talks with Medibank Private whereby the former would
demutualise and be acquired by the latter.[2] The proposed amendments will come into
affect from 1 July 2007 so these demutualisations would be covered
by the CGT exemption.
Division 9AA of the ITAA 1936 provides that
any capital gains and losses that arise on the demutualisation of
life insurers and general insurers are disregarded. Schedule 2H to
the ITAA 1936 gives similar relief to members of other mutual
entities that demutualise. This relief does not extend to policy
holders and members of health insurers. The measures in the Bill
seek to extend this exemption from capital gains and losses to
policy holders and persons with other interests on the
demutualisation of private health insurers.
The intent to make policy holders exempt from
CGT when private health insurers demutualised was announced by
former Treasurer the Hon Peter Costello on 17 October 2007.[3] After the change of
government, the policy was announced by Assistant Treasurer the Hon
Chris Bowen on 26 February 2008.[4]
The changes to CGT in relation to
demutualisation of health funds come at a time where consolidation
of funds is an increasing occurrence, as reported in The
Age on 23 July 2008:
Consolidation of the fragmented $11 billion
industry is on the cards, and the changes to the Medicare surcharge
announced in last month's budget could hasten the process. Just
last week the new face of Bupa Australia was launched after the HBA
and Mutual Community owner completed its $2.41-billion buy-out of
MBF, and there are whispers of other deals in the pipeline. It's
the long tail of the 37 health insurance funds - those specific to
a particular region or occupation - that have the bigger players
salivating.[5]
When originally announced, the CGT changes
were welcomed by the only listed health insurer at the time:
In an announcement made less than an hour
before the government went into caretaker mode yesterday, Treasurer
Peter Costello said the government intended to amend income tax
laws to "provide certainty" to policyholders.
NIB chief executive Mark Fitzgibbon welcomed
the announcement. "We believe if a member is giving up a right, he
or she should get a cost base equivalent to the value of that
share." he said.[6]
Source: Explanatory Memorandum to the Bill,
page 3.
Item 11 of Schedule
1 inserts Part 3.32 titled Co-operatives and mutual
entities - to the Income Tax Assessment Act 1997 (ITAA
1997). Proposed Division 315 of Part 3.32 sets out
the taxation consequences of the demutualisation of private health
insurers.
Proposed Subdivision 315-A
provides that policy holders, demutualising health insurers and
certain other entities can disregard capital gains and losses
arising under a demutualisation.
Proposed section 315-5
provides that a capital gain or capital loss of an individual from
a CGT event that happens in relation to a CGT asset be disregarded
if:
- the CGT event happens under a demutualisation to which this
Division applies; and
- the individual is, or has been, a policy holder (within the
meaning of the Private Health Insurance Act 2007) of, or
another person insured through the demutualising entity, ie the
demutualising health insurer, and
- the CGT asset is covered by proposed section
315-20.
Proposed section
315-20 covers the following CGT assets:
- an interest in the demutualising health insurer as a policy
holder,
- a membership interest in the demutualising health insurer,
- a right or interest of another kind in the demutualising health
insurer, and
- a right or interest of another kind that arises under the
demutualization.
In the case of CGT assets of a deceased person
proposed section 315-10 extends the CGT concession
to a legal personal representative of a policy holder or
beneficiary in respect of a health insurance policy.
Proposed section 315-20
provides that Division 315 applies to the demutualisation of a
private health insurer that satisfies the following conditions:
- Prior to its demutualisation, the private health
insurer was a tax exempt entity by virtue of being a tax exempt
private health insurer whose business was for non-profit
(proposed subparagraph 315-15(a)(i)).
- The private health insurer is not registered under Part 3 of
the Life Insurance Act 1995 (proposed subparagraph
315-15(a)(ii)).
- The private health insurer does not have capital divided into
shares.
In addition, the demutualising private health
insurance entity must have applied and become registered as a for
profit insurer under the PHIA 2007 (proposed paragraphs
315-15(b) and (c)).
Proposed section 315-25
provides that that the capital gain or loss of an entity from a CGT
event be disregarded if:
- The CGT event happens under a demutualisation to which
Division 315 applies, and
- The entity is a demutualising health insurer.
Other entities established for the purpose of
participating in a demutualisation to which Division 315 applies
and which are not trusts for lost property holders can also
disregard capital gains and losses in certain circumstances
(proposed section 315-30).
Proposed Subdivision 315-B
deals with the ascertainment of the cost base and acquisition time
of demutualisation assets.
Proposed section 315-85
defines the type of assets covered by proposed Subdivision
315-B. They include:
- a share or a right to acquire a share in the demutualising
health insurer (proposed subparagraphs
315-85(1)(a)(i) and (ii) respectively) ,
or
- a share in an entity that owns all of the shares in the
demutualising health insurer or a right to acquire a share in such
an entity insurer (proposed subparagraphs
315-85(1)(a)(iii) and (iv)
respectively).
In addition, proposed paragraph
315-85(1)(b) requires that the share or right must be
issued under a demutualisation to which proposed Division
315 applies. Further, such a share or right must be issued
in connection with:
- the variation or abrogation of rights attaching to or
consisting of a CGT asset covered by proposed section
315-20 (proposed subparagraph
315-85(c)(i)) or
- the conversion, cancellation, extinguishment or redemption of
such a CGT asset (proposed subparagraph
315-85(c)(ii)).
Proposed subsection 315-85(2)
excludes a right to acquire a share in an entity if the holder must
pay an amount to exercise the right.
Proposed subsection 315-85(3)
also excludes assets that are not issued simultaneously to an
entity that is a participating policy holder or to a trustee of a
lost policy holders trust.
A participating policy holder as defined in
proposed section 315-90 is an individual who is or
has been a policy holder within the meaning in PHIA 2007 or another
person insured through the demutualising health insurer and is
entitled under the demutualisation to an allocation of
demutualisation assets.
The cost base and reduced cost base will be
the market value of the asset on the day of issue, and will be
taken to have been acquired on that day (proposed
subsections 315-80(1) and (2)).
Proposed Subdivision 315-F
covers the non-CGT or general taxation consequences ie whether the
amounts received by entities on demutualisation will be taxable
under the other provisions of the ITAA 1936 or the ITAA 1997.
Proposed subsection 315-310(1) provides that on a
demutualisation when a private health insurer distributes its
mutual surplus in the form of a demutualisation asset or a cash
payment to an entity, such distributions are not assessable and not
exempt income if:
- the amount would otherwise be ordinary income or statutory
income, or
- the amount is paid in connection with:
- the variation or abrogation of rights attaching to a CGT asset
covered by proposed section 315-120, or
- the conversion, cancellation, extinguishment or redemption of
such a CGT asset.
The Dictionary
definition in subsection 995-1(1) of the ITAA 1997 provides that
the expression non assessable and non exempt income has the meaning
in section 6-23 of the ITAA 1997. The Australian Taxation Office
(ATO) fact sheet
on non-assessable non-exempt income (NANE) states:
Income tax law had always recognised two
categories of income assessable income and exempt income.
Amendments to the income tax law have now explicitly recognised a
third category of income called non-assessable non exempt income
(NANE income).[7]
NANE income is what the law expressly says is
neither assessable income nor exempt income as in proposed
subsection 315-310(1). NANE income is ignored in working
out taxable income and tax losses. NANE income is listed in
Subdivision 11-B of the ITAA 1997.
Application
Item 12 of Schedule
1 provides that the amendments made by this Schedule apply
in relation to demutualisations occurring on or after 1 July
2007.
Schedule 2F of the Income Tax Assessment
Act 1936 (ITAA 1936) deals with the trust loss measures.
Basically, the trust loss measures prevent the transfer of tax
benefits on the recoupment of a trust s tax losses to persons who
did not bear the economic loss when it was incurred.
Family trusts are considered as excepted
trusts for the purposes of the trust loss measures in Schedule 2F.
To be eligible to be a family trust the trustee must make a family
trust election in respect of an individual (the test individual).
When a family trust election is made, distributions can be made to
the family group without penalty tax which is currently imposed at
the rate of 46.5 per cent.
The Explanatory Memorandum to the Bill at
paragraph 2.3 on page 333 states that the changes proposed in the
Bill in relation to family trusts was a pre-election commitment of
the Government which had been modified subsequently.
As a pre-election commitment, the Government
announced that it would reverse the family trust changes made by
the previous government in the Tax Laws Amendment (2007
Measures No. 4) Act 2007. However, as some of the amendments
introduced in 2007 were largely technical improvements to the trust
loss measures, the Government decided not to reverse all of the
changes. Instead, only two of the changes will be reversed.
Amendments made in 2007 by the Tax Laws
Amendment (2007 Measures No. 4) Act 2007 (the 2007 amendments)
expanded the definition of family to include any lineal descendant
of a nephew, niece or grandchild of the test individual. These
amendments in the Bill will change the definition of family to
limit lineal descendants to children or grandchildren of the test
individual or the test individual s spouse.[8]
The 2007 amendments also allowed a one-off
variation to the test individual specified in a family trust
election. The amendments in the Bill will restrict family trusts
from making a one-off variation to the test individual only when
there is a marriage breakdown from the 2008-09 income year.
However, they will not apply to the 2007-08 income year as
announced by the Assistant Treasurer Chris Bowen on 21 July
2008.[9]
The major criticism of the changes to family
trusts has been that they are revoking changes only recently
introduced by the Howard government to simplify the system, meaning
that people who have changed over will have to revert to their
original arrangements.
The Age reported on 21 June 2008:
The Rudd Government has revoked changes made by
the Howard government, which allowed the revenue collected by
family trusts to be distributed to "lineal descendants". That
means, anyone outside the immediate family will have to pay tax of
46.5% on distributions. For those in the know, this is the most
controversial change in tax law this year, a change that will
affect millions of people who have family trusts attached to small
businesses.[10]
Pitcher Partners have been quite vocal about
the issue:
The [former government s] changes followed
significant and long standing concerns raised by Pitcher Partners
and professional bodies relating to the inequity inherent in the
previous provisions and the practical difficulties in complying
with them. The representations were not intended to facilitate tax
benefits. Rather they were to ameliorate inequities and unfairness
flowing out of the provisions. For example it hardly seems fair to
effectively preclude trusts distributing to great-grandchildren.
Even then it was the view of ourselves and others that the
amendments passed through Federal Parliament fell well short of
those which were necessary.
The practical difficulties that already remain
in these provisions are set to be considerably exacerbated, if and
when the ALP amendments are implemented.[11]
Originally, there were concerns about the
amendments being backdated, as the Australian Financial
Review reported on 17 May 2008:
This rule has been backdated to July 1 last
year, if budget legislation passes unopposed, so there is no scope
to make a quick adjustment to the test person before the above
change comes into effect. This also means that people who acted on
the basis of the existing law and varied test individuals for the
current income year will get a family trust distribution tax
liability if they have made distributions outside the family group
of the original test individual. Ouch.[12]
However, pressure from industry resulted in
changes being exempt for the 2007-08 financial year, as the
President of the Taxation Institute of Australia Sue Williamson
suggests in the following press release:
It is encouraging that the Government moved
away from its original intent of introducing retrospective
legislation, as many small business people and farmers had acted to
the letter of the law regarding Family Trust Elections would have
been exposed, Ms Williamson said.
However we remain disappointed that the
Government did not completely rethink its decision in this area and
scrap the changes all together. [13]
This measure will have these revenue
implications:
Source: Explanatory Memorandum to the Bill,
page 4.
Subdivision 272-D of Schedule 2F of the ITAA
1936 deals with family trusts. Item 5 of
Part 2 of Schedule 2 changes the
definition of family in section 272-95 of Schedule 2F of by
repealing subsection 272-95(1) and substituting proposed
subsection 272-95(1) to limit lineal descendants to
children or grandchildren of the test individual or the test
individual s spouse. This change restores the definition of family
for the purposes of the trust loss measures that applied prior to
the 2007 amendments.
Item
8 of Part 2 of Schedule
2 provides that the amendments made by Part 2 apply to
assessments for the 2008-09 year of income and later years. This
means that the amendments will not be significantly
retrospective.
Changes to the variation of a test individual
Subsection 272-80(5A) of Schedule 2F of the
ITAA 1936 deals the variation of a test individual. Item
1 of Part 1 of Schedule
2 amends subsection 272-80(5A) to limit it to the income
year 2007-08.
Subsection 272-80(5B) of Schedule 2F will be
repealed by item 2 of Schedule 2
and substituted by proposed subsection 272-80(5B)
to provide that a variation under amended subsection 272-80(5A) can
only be made once and has no effect in respect of the 2008-09
income year or later income years. It also provides that in respect
of the 2008-09 income year and later income years, the individual
whose family group is to be taken into account in relation to the
election is the individual originally specified in the
election.
Subsection 272-80(5C) of Schedule 2F provides
that a trustee of a trust may vary an election so that a different
individual (the new individual) is specified as the test individual
under subsection 272-80(3) if an order, an agreement or an made in
relation to a marriage breakdown making the individual in control
of the trust.
Item 3 of Part
1 of Schedule 2 alters the definition of
specified individual in section 272-140 of Schedule 2F by repealing
paragraph 272-140(2)(b) in Schedule 2F and substituting
proposed paragraphs 272-140(2)(b)
and(c). It now refers to:
- if the family trust election has been varied under
proposed subsection 272-80(5A):
- in respect of the 2007-08 income year the new individual
specified in the variation; or
- in respect of later income years the individual originally
specified in the election, or
- if the family trust election has been varied under section
272-80(5C), because of a marriage breakdown, the person most
recently specified under that subsection.
Item 4 of Schedule
2 provides that the amendments made by Part 1 apply to
assessments for the 2007-08 year of income and later years.
The Explanatory Memorandum to the Bill at
paragraph 3.3 on page 39 states that the minor amendments made in
Schedule 3 are part of the Government s commitment to the care and
maintenance of the taxation laws. Paragraph 3.4 of the Explanatory
Memorandum on page 39 states that these amendments deal with issues
such as:
- incorrect terminology,
- grammatical or punctuation errors,
- missing asterisks from defined terms,
- inoperative material,
- ambiguities in the law, and
- adding non-operative notes to help readers navigate their way
through the law.
It is not within the scope of this Bills Digest
to cover the general amendments to ten tax laws made by
Part 1 of Schedule 3 and the
asterisking amendments made by Part 2 of
Schedule 3. The reader is referred to pages 40 to
54 of the Explanatory Memorandum for details of these minor
amendments.
There has been long debate over time on the
complexity of Australia s tax laws. The scope of the minor
amendments proposed in Schedule 3 illustrate how incorrect
terminology, ambiguities in the law and the difficulty of readers
navigating through tax law must add to the compliance burden on
taxpayers in a self-assessment regime.
The Explanatory Memorandum to the Bill at
paragraph 3.2 on page 39, referring to the context of the minor
amendments in Schedule 3, succinctly states how these minor
amendments might go a fair way to ease this compliance burden.
Tax legislation is complex and wide-ranging.
Therefore errors can occur. Even minor errors can detract from the
readability of the taxation laws and can confuse readers, so these
errors need correcting.
In the 2008-09 Budget, the Australian
Government announced a comprehensive review of Australia s tax
system. The first report released by the Review Panel headed by Ken
Henry, the Secretary to the Treasury, entitled "Architecture of Australia's
Tax and Transfer System" was released on 6 August 2008. The
issue of reducing tax system complexity and compliance costs has
been highlighted in the discussion paper.
Bernard Pulle
26 August 2008
Bills Digest Service
Parliamentary Library
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