Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 6 - Technical corrections to the franking rebate provisions for superannuation funds and other entities
Outline of chapter
6.1 Schedule 5 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to make technical corrections to the franking rebate rules so that complying superannuation funds, pooled superannuation trusts and life assurance companies continue to be entitled to the franking rebate and refunds of excess imputation credits for dividends and distributions covered by certain exemptions.
6.2 A further correction will ensure that registered charities and gift-deductible organisations are not denied refunds of imputation credits in respect of indirect distributions received through a trust.
Context of reform
6.3 Amendments to implement changes to the tax treatment of life companies inadvertently removed the entitlement of complying superannuation funds, pooled superannuation trusts and life assurance companies to the franking rebate, and consequently to refunds of excess imputation credits, in respect of dividends and distributions covered by certain exemptions. These are the exemptions for current pension income under sections 282B, 283 and 297B of the ITAA 1936 or paragraph 320-35(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) and for payments received by friendly societies attributable to friendly society income bonds, funeral bonds and scholarship plans which are exempt under subparagraph 320-35(1)(f)(ii) of the ITAA 1996.
6.4 The same amendments also unintentionally repealed a provision necessary to provide refunds of imputation credits to registered charities and gift-deductible organisations in respect of indirect distributions received through a trust.
Summary of new law
6.5 The amendments restore the entitlement of complying superannuation funds, pooled superannuation trusts and life assurance companies to the franking rebate in respect of dividends and distributions paid from 1 July 2000 that are exempt current pension income or certain other exempt income.
6.6 The amendments also ensure that registered charities and gift-deductible organisations are not denied refunds of imputation credits in respect of indirect distributions through a trust.
Detailed explanation of new law
6.7 These amendments make 3 corrections to the franking rebate provisions. The first 2 corrections restore the entitlement of superannuation funds, pooled superannuation trusts and life assurance companies to the franking rebate in respect of dividends and distributions that are exempt current pension income or certain other exempt income. The other correction will ensure that registered charities and gift-deductible organisations are eligible for refunds of excess imputation credits.
Franking rebate for superannuation funds, pooled superannuation trusts and life assurance companies
6.8 For a taxpayer to be entitled to the franking rebate in respect of a distribution attributable to a franked dividend received indirectly through a trust or partnership, the distribution (i.e. the trust amount or partnership amount) must be included in the assessable income of the taxpayer. Subsection 160AQWA(1) provides that, for the purpose of working out the rebate, certain exempt income is to be assumed to be not exempt. Otherwise taxpayers would not be entitled to the franking rebate in respect of exempt income.
6.9 Subsection 160AQWA(1) is amended so that it will apply in calculating rebates under section 160AQYA, which is the relevant provision for complying superannuation funds and pooled superannuation trusts, or section 160AQZA, which is the relevant provision for life assurance companies. [Schedule 5, item 3, subsection 160AQWA(1)]
6.10 Note that amended subsection 160AQWA(1) will not apply in respect of sections 160AQX or 160AQZ. These sections formerly provided the franking rebate for registered organisations, among other taxpayers, in respect of distributions from trusts or partnerships that were exempt current pension income.
6.11 The concept of registered organisation was removed with effect from 1 July 2000 as part of the amendments to implement changes to the tax treatment of life assurance companies. Friendly societies were the only category of registered organisation which carried on life assurance business. Following amendments to the Life Insurance Act 1995 (Cth) , friendly societies carrying on life assurance business are now required to register under the Act and, once registered, become life insurance companies. Consequently, friendly societies that were previously allowed the rebate under sections 160AQX or 160AQZ would now be entitled to the rebate under section 160AQZA.
6.12 The second correction inserts references to section 283 in paragraphs 160AQT(4)(a), 160AQU(2)(a) and 160AQWA(1)(a). Section 283 exempts current pension income of complying superannuation funds that is calculated on an apportionment basis. These amendments ensure that complying superannuation funds will be entitled to the franking rebate in respect of dividends received directly and distributions received indirectly that are exempt income under section 283. [Schedule 5, item 1, paragraph 160AQT(4)(a); item 2, paragraph 160AQU(2)(a) and item 3, paragraph 160AQWA(1)(a)]
Refunds of excess imputation credits for registered charities and gift-deductible organisations
6.13 Subsection 160AQWA(2) has been reinserted so that exempt institutions (i.e. registered charities and gift-deductible organisations) are not denied refunds of imputation credits [Schedule 5, item 3, subsection 160AQWA(2)] . These tax-exempt entities are made eligible for refunds by giving them a hypothetical entitlement to the franking rebate. To overcome the technical problem of providing a franking rebate to a tax-exempt entity, subsection 160AQWA(2) provides that the income tax exempt status of these entities is ignored for the purposes of determining entitlement to a franking rebate.
6.14 Subsection 160AQWA(2) was possibly repealed by item 80 in Schedule 3 to the New Business Tax System (Miscellaneous) Act (No. 2) 2000 , which amended section 160AQWA to reflect changes to the tax treatment of life assurance companies. Subsection 160AQWA(2) was originally inserted by item 6H in Schedule 2 tothe New Business Tax System (Miscellaneous) Act (No. 1) 2000 . Both amendments commenced on 30 June 2000, when the Bills received Royal Assent, and both amendments applied in respect of income derived on or after 1 July 2000. This amendment clarifies the previously uncertain status of subsection 160AQWA(2).
Application and transitional provisions
6.15 The amendments are to apply to income derived on or after 1 July 2000, the income to which the unintended changes would otherwise apply.