House of Representatives

Explanatory Memorandum

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

Chapter 1 - Consolidation: life insurance companies

Outline of chapter

1.1 This chapter explains amendments to ensure that the provisions in the income tax law that apply to life insurance companies apply to the head company of a consolidated group that has one or more subsidiary members that are life insurance companies.

1.2 This chapter also explains:

•

modifications to the membership rules for consolidated groups that have life insurance company members;

•

modifications to the tax cost setting rules for life insurance companies that join or leave a consolidated group;

•

circumstances where virtual PST losses can be transferred from the head company to a life insurance company that leaves a consolidated group; and

•

transitional arrangements that will allow life insurance companies to rearrange assets of the group so that wholly-owned subsidiary entities can become a member of the same consolidated group as the life insurance company without attracting any immediate taxation consequences.

Context of reform

1.3 The income tax law contains special provisions for taxing life insurance companies. Those provisions need to apply appropriately to the head companies of consolidated groups that have life insurance company members.

1.4 In particular, under Division 320 of the ITAA 1997 a life insurance company can segregate assets into:

•

virtual PST assets - which are broadly used to support liabilities relating to complying superannuation policies; and

•

segregated exempt assets - which are broadly used to support liabilities relating to immediate annuity and current pension policies.

1.5 The segregation of assets ensures that income relating to the different types of business of life insurance companies is identified and taxed at the appropriate rate:

•

the ordinary class of taxable income is taxed at the company tax rate;

•

the complying superannuation class of taxable income is taxed at the 15% complying superannuation rate; and

•

income relating to segregated exempt assets is exempt from tax.

1.6 Division 320, which is complemented by special provisions in other parts of the income tax law, ensures that the different types of business of life insurance companies is taxed consistently with income derived on similar types of business carried on by other entities.

Summary of new law

1.7 The amendments will ensure that the provisions in the income tax law that apply to life insurance companies apply appropriately to the head companies of consolidated groups that have life insurance company members.

1.8 The amendments will also:

•

modify the membership rules for consolidated groups that have life insurance company members to exclude certain wholly-owned entities from a consolidated group;

•

modify the tax cost setting rules for life insurance companies that join or leave a consolidated group so that certain assets are treated as retained cost base assets and to specify the basis of valuing certain life insurance policy liabilities;

•

in certain circumstances, allow virtual PST losses to be transferred from the head company to a life insurance company that leaves a consolidated group; and

•

as a transitional arrangement, allow life insurance companies to rearrange assets of the group so that wholly-owned subsidiary entities can become members of the same consolidated group as the life insurance company without attracting any immediate taxation consequences.

Detailed explanation of new law

1.9 The amendments insert new Subdivision 713-L into the ITAA 1997. Subdivision 713-L sets out special rules for:

•

a life insurance company that becomes, or ceases to be, a member of a consolidated group; and

•

the head company of a consolidated group where a life insurance company is a subsidiary member of the group.

[Schedule 6, item 1, section 713-500]

Consolidated groups with members that are life insurance companies

Head company taken to be a life insurance company

1.10 A life insurance company is defined under section 995-1 of the ITAA 1997 to mean a company registered under the Life Insurance Act 1995 . Therefore, if the head company of a consolidated group is a life insurance company, the special provisions in the income tax law that apply to life insurance companies will continue to apply to the consolidated group.

1.11 The head company of a consolidated group that has one or more subsidiary members that are life insurance companies at any time during the income year will also be taken to be a life insurance company for the purposes of applying the income tax law. [Schedule 6, item 1, section 713-505]

1.12 This will ensure that the special provisions in the income tax law that apply to life insurance companies apply appropriately to the head company of a consolidated group that has subsidiary members that are life insurance companies.

1.13 That is, for example:

•

the provisions in Division 320 of the ITAA 1997 will apply to the head company to, among other things:

-

identify statutory income, exempt income (including management fees that qualify for transitional relief under section 320-40) and specific deductions;

-

allocate taxable income into two classes - the complying superannuation class and the ordinary class;

-

establish and maintain virtual PST assets;

-

allocate assessable income and allowable deductions to the virtual PST component of the complying superannuation class of taxable income; and

-

establish and maintain segregated exempt assets;

•

the dividend imputation rules that apply to life insurance companies will apply appropriately to the head company; and

•

the provisions of the Income Tax Rates Act 1986 that apply to life insurance companies will apply to the head company:

-

this will ensure that the head company will be taxed at a rate of 15% on the complying superannuation class of its taxable income.

Application of the single entity rule

1.14 The income tax treatment of a consolidated group flows from the single entity rule in section 701-1 of the ITAA 1997. Under that rule an entity is treated as part of the head company while it is a subsidiary member of a consolidated group. Actions of the subsidiaries are treated as actions of the head company, as this is the only entity that the income tax law recognises for the purposes of working out the income tax liability or losses of a consolidated group.

1.15 A consolidated group may have two or more members that are life insurance companies - each of which has their own virtual PST and segregated exempt assets. In these circumstances, the single entity rule will ensure that the head company has a single virtual PST and a single pool of segregated exempt assets.

1.16 In addition, assets and liabilities of a subsidiary member are treated for income tax purposes as if they were owned by the head company. Therefore, a consequence of the single entity rule is that:

•

the virtual PST assets of the head company will include assets held by subsidiary entities where all the membership interests are virtual PST assets; and

•

the segregated exempt assets of the head company will include assets held by subsidiary entities where all the membership interests are segregated exempt assets.

Modification of the membership rules

1.17 Under the consolidation membership rules, all of a resident holding company's eligible resident wholly-owned subsidiaries (whether companies, partnerships or trusts) must be included in the consolidated group - that is, an 'all in' principle applies. A significant difficulty arises with the application of the 'all in' principle if a life insurance company becomes a member of a consolidated group.

1.18 Life insurance companies are required to segregate assets relating to complying superannuation business (virtual PST assets) and immediate annuity business (segregated exempt assets). Income (including capital gains) derived on the segregated assets is then taxed at the appropriate rate. Transactions between the segregated assets are taxing events.

1.19 To manage these requirements, life insurance companies often hold assets in wholly-owned unit trusts or wholly-owned companies. Consequently, the virtual PST assets and segregated exempt assets are the membership interests in those wholly-owned unit trusts or companies.

1.20 The application of the 'all in' principle would cause the membership interests in wholly-owned unit trusts or companies to cease to be recognised for tax purposes. That is, the practical mechanism that is used to determine income (including capital gains) that should be taxed at 15% or that should be exempt from tax will no longer be effective.

1.21 Therefore, the 'all in' principle will not apply to a consolidated group that has a member that is a life insurance company. Rather, a wholly-owned subsidiary of a life insurance company that has membership interests that, directly or indirectly, are a mixture of virtual PST assets, segregated exempt assets and/or ordinary assets will be precluded from being a member of a consolidated group. [Schedule 6, items 1 and 5, subsection 713-510(1); note to section 703-20]

1.22 Transitional measures, which are discussed later in this chapter, will allow a life insurance company that is joining a consolidated group to rearrange assets of the group so that subsidiary entities can become a member of the same consolidated group as the life insurance company without attracting any immediate taxation consequences.

1.23 If an entity is a subsidiary member of a consolidated group that has a life insurance company as a member, the entity will cease to be a member of the group if, after joining the group, its membership interests change and become, directly or indirectly, a mixture of virtual PST assets, segregated exempt assets and/or ordinary assets of a life insurance company. [Schedule 6, item 1, subsection 713-510(2)]

1.24 However, if a wholly-owned subsidiary entity of a life insurance company is excluded from being a member of a consolidated group under section 713-510, that entity can be the member of another consolidated group provided that all the membership requirements in section 703-15 are satisfied.

Example 1.1

Head company is an ordinary Australian resident company that beneficially owns 100% of the membership interests in Life company (another ordinary Australian resident company).

Life company, in turn, beneficially owns 100% of the membership interests in A Co. and B Co. (each of which are ordinary Australian resident companies) and in A Trust, B Trust and C Trust (each of which are Australian resident fixed trusts).

In addition:

•

B Trust beneficially owns 100% of the membership interests in C Co. (which is an ordinary Australian resident company); and

•

B Co. owns 100% of the membership interests in D Co. (which is also an ordinary Australian resident company).

Head company chooses to consolidate. Under the modified membership rules that apply to consolidated groups that have life insurance company members, the following entities will be subsidiary members of the consolidated group:

•

Life company (which is 100% beneficially owned by Head company);

•

A Co. (which is 100% beneficially owned by Life company and all its membership interests are assets supporting ordinary business);

•

B Trust (which is 100% beneficially owned by Life company and all its membership interests are virtual PST assets);

•

C Trust (which is 100% beneficially owned by Life company and all its membership interests are segregated exempt assets); and

•

C Co. (which is 100% beneficially owned by B Trust so that all its membership interests are indirectly virtual PST assets).

Although Life company beneficially owns 100% of the membership interests in A Trust, A Trust is not a subsidiary member of the consolidated group because those membership interests are a mixture of assets supporting ordinary business and virtual PST assets.

Similarly, although Life company beneficially owns 100% of the membership interests in B Co., B Co. is not a subsidiary member of the consolidated group because those membership interests are a mixture of virtual PST assets and segregated exempt assets. However, B Co. can be the head company of another consolidated group with D Co. as a subsidiary member.

Modification of the tax cost setting rules

1.25 When an existing consolidated group completes the acquisition of an entity that is eligible to become a member of a consolidated group, the acquired entity becomes a subsidiary member of the consolidated group and the cost of acquiring the entity (the ACA) is treated as the cost to the group of the entity's assets. The group's cost for each of the assets is worked out by allocating the ACA for the acquired entity among the entity's assets. This provides the basis for determining the 'cost' of the asset to the group for CGT, trading stock and capital allowance purposes.

1.26 A consolidated group's ACA for a joining entity consists of the group's cost of acquiring the membership interests in the joining entity and the liabilities of the joining entity at the joining time. The ACA also reflects certain retained earnings, distributions, losses and entitlements to future deductions of the joining entity.

1.27 The tax cost setting rules will be modified to:

•

specify certain assets of life insurance companies to be retained cost base assets; and

•

specify the basis of valuing life insurance policy liabilities for the purposes of working out the ACA.

[Schedule 6, items 4, 6, 7 and 9, definition of 'retained cost base asset' in subsection 995-1(1), notes to section 701-60 and subsections 705-25(5) and 705-70(1)]

Virtual PST assets and segregated exempt assets

1.28 Under Division 320 of the ITAA 1997 life insurance companies are required to segregate assets that support certain policy liabilities:

•

assets segregated to support virtual PST life insurance policy liabilities (i.e. broadly, complying superannuation policies) are known as virtual PST assets; and

•

assets segregated to support exempt life insurance policy liabilities (i.e. broadly, immediate annuity policies) are known as segregated exempt assets.

1.29 The assets segregated must be valued annually. If the transfer value of segregated assets exceeds the value of relevant liabilities, the company must transfer the excess assets out of the segregated assets. Similarly, if the transfer value of segregated assets is less than the value of relevant liabilities, the company may transfer additional assets to the segregated assets. This mechanism ensures that the correct amount of income is taxed at the 15% rate or is exempt from tax.

1.30 The transfer value of an asset is the amount that could be expected to be received from the disposal of the asset in an open market after deducting any costs expected to be incurred in respect of the disposal (see subsection 995-1(1)).

1.31 If a life insurance company joins or leaves a consolidated group, the joining time or leaving time, as the case may be, will also be taken to be a valuation time for the purposes of Division 320. [Schedule 6, items 1 to 3, section 713-525; notes to subsections 320-175(1) and 320-230(1)]

1.32 Consequently, life insurance companies will need to value both virtual PST assets and associated liabilities and segregated exempt assets and associated liabilities immediately prior to joining or leaving a consolidated group to ensure that the transfer value of those assets at the joining time or leaving time, as the case may be, is equal to the value of relevant liabilities:

•

if the transfer value of virtual PST assets or segregated exempt assets exceeds the value of relevant liabilities, assets having a transfer value equal to the excess must be transferred from the virtual PST or from the segregated exempt assets (as the case may be) within 30 days of the date of valuation; and

•

if the transfer value of virtual PST assets or segregated exempt assets is less than the value of relevant liabilities, assets having a transfer value equal to the shortfall can be transferred to the virtual PST or the segregated exempt assets (as the case may be) within 30 days of the date of valuation.

1.33 In practice, this valuation may be done on the day before the life insurance company joins or leaves a consolidated group. Such a valuation would satisfy the requirements of section 713-525 provided that value of the assets and associated liabilities was substantially the same on both the day of valuation and the day the life insurance company joins or leaves a consolidated group.

1.34 To ensure that the value of virtual PST assets and segregated exempt assets are not affected by cost base adjustments, those assets will be retained cost base assets. [Schedule 6, item 1, paragraph 713-515(1)(a)]

1.35 For the purposes of working out the ACA:

•

the value of the virtual PST liabilities of a life insurance company that joins a consolidated group will be the amount worked out under section 320-190 at the joining time; and

•

the value of the exempt life insurance policy liabilities of a life insurance company that joins a consolidated group will be the amount worked out under section 320-245 at the joining time.

[Schedule 6, item 1, subsections 713-520(2) and (3)]

1.36 In addition, for the purpose of working out the tax cost setting amounts of reset cost base assets under section 705-35, the tax cost setting amounts for virtual PST assets and segregated exempt assets will be the transfer value of the assets just before the joining time. This will ensure that the value of virtual PST assets and segregated exempt assets will be offset by the value of virtual PST liabilities and exempt life insurance policy liabilities. [Schedule 6, item 1, paragraph 713-515(2)(a)]

1.37 For all other purposes, the tax cost setting amounts for virtual PST assets and segregated exempt assets will be the terminating value of the assets. The terminating value for an asset is set out in section 705-30. This will ensure that virtual PST assets and segregated exempt assets will, for example, retain their original cost base for CGT purposes on subsequent disposal. [Schedule 6, item 1, paragraph 713-515(2)(b)]

Assets held to support the net investment component of ordinary life insurance policies

1.38 The net investment component of ordinary life insurance policies is the component of ordinary life insurance policies that has not been reinsured or is not the net risk component (as defined in subsection 995-1(1) of the ITAA 1997) of those policies. Ordinary life insurance policies are life insurance policies that are not exempt life insurance policies or virtual PST life insurance policies (as defined in subsection 995-1(1) of the ITAA 1997). [Schedule 6, items 1 and 8, subsection 713-515(4) and the definition of 'net investment component of ordinary non-participating life insurance policies' in subsection 995-1(1)]

1.39 To ensure that the value of assets held on behalf of ordinary policyholders is not affected by cost base adjustments, assets held by life insurance companies to support the net investment component of ordinary life insurance policies (other than policies that provide for participating benefits or discretionary benefits (as defined in subsection 995-1(1) of the ITAA 1997) under life insurance business carried on in Australia) will be retained cost base assets. [Schedule 6, item 1, paragraph 713-515(1)(b)]

1.40 For the purposes of working out the ACA, the value of liabilities under the net investment component of ordinary life insurance policies will be the amount worked out for those liabilities under subsection 320-190(2) as if those liabilities were virtual PST liabilities. [Schedule 6, item 1, subsection 713-520(6)]

1.41 That is, the value of liabilities under the net investment component of ordinary life insurance policies (other than policies that provide for participating benefits or discretionary benefits under life insurance business carried on in Australia) for the purposes of working out the sum of the joining life insurance company's liabilities will be:

•

for policies that provide for participating benefits or discretionary benefits under life insurance business carried on overseas, the value of supporting assets (as defined in the Valuation Standard) and the policy owners' retained profits in respect of the net investment component of those policies; and

•

for all other policies, the current termination value (as defined in the Solvency Standard) of the net investment component of those policies.

1.42 The joining life insurance company may also have a deferred tax liability in relation to unrealised gains on assets held to support the net investment component of ordinary life insurance policies. That deferred tax liability is included in the joining life insurance company's liabilities under step 2 of the table in section 705-60 for the purpose of working out its ACA. Therefore, the joining life insurance company's ACA will be the sum of the current termination value of the net investment component of those policies plus the deferred tax liability in relation to unrealised gains on assets held to support those policies.

1.43 In addition, for the purpose of working out the tax cost setting amounts for reset cost base assets under section 705-35, the tax cost setting amounts for assets held to support the net investment component of ordinary life insurance policies (other than policies that provide for participating benefits or discretionary benefits under life insurance business carried on in Australia) will be the transfer value of the assets just before the joining time. This will ensure that the value of assets held to support the net investment component of ordinary life insurance policies (other than policies that provide for participating benefits or discretionary benefits under life insurance business carried on in Australia) will be offset by the value of liabilities for those policies plus the value of any deferred tax liabilities in relation to those policies. [Schedule 6, item 1, paragraph 713-515(2)(a)]

1.44 For all other purposes, the tax cost setting amounts for assets held to support the net investment component of ordinary life insurance policies (other than policies that provide for participating benefits or discretionary benefits under life insurance business carried on in Australia) will be the terminating value of the assets. The terminating value for an asset is set out in section 705-30. This will ensure that these assets will, for example, retain their original cost base for CGT purposes on subsequent disposal. [Schedule 6, item 1, paragraph 713-515(2)(b)]

1.45 Assets supporting policies that provide participating or discretionary benefits under life insurance business carried on in Australia are not retained cost base assets because they are owned jointly by policyholders and shareholders. However, for the purposes of working out the ACA, the value of liabilities under the net investment component of those policies will be the amount worked out for those liabilities under subsection 320-190(2) as if those liabilities were virtual PST liabilities - that is, the value of supporting assets (as defined in the Valuation Standard) and the policy owners' retained profits in respect of the net investment component of those policies. [Schedule 6, item 1, subsection 713-520(6)]

Goodwill of life insurance companies that have demutualised

1.46 Goodwill accruing to the group as a consequence of its ownership and control of the joining entity is generally a reset cost base asset that is deemed to have been purchased by the head company at the joining time. Consequently, the tax cost setting provisions will generally result in goodwill having a cost base broadly equal to its market value.

1.47 In the case of a life insurance company that has demutualised, Division 9AA of the ITAA 1936 sets the cost base of demutualisation shares based on the embedded value of the company rather than the appraisal value (or broadly, the market value). Therefore, the income tax law has effectively established a cost base for goodwill in relation to a life insurance company that has demutualised.

1.48 Consequently, the goodwill asset of a joining entity that is a life insurance company that has demutualised will be a retained cost base asset provided that the ownership of the company has not changed between the time immediately after the company demutualised and the time of joining a consolidated group. [Schedule 6, item 1, paragraph 713-515(1)(c)]

1.49 The tax cost setting amount of a goodwill asset of a life insurance company that has demutualised will be the embedded value (as defined in subsection 121AM(1) of the ITAA 1936) at the time of demutualisation of the life insurance company concerned reduced by the net value of shareholders' assets held by the company on that day. This amount represents the goodwill component of the embedded value (as defined in AASB Accounting Standard 1038) of a life insurance company at the time of demutualisation. [Schedule 6, item 1, subsection 713-515(3)]

Net risk component of life insurance policies

1.50 Section 320-85 of the ITAA 1997 prescribes a basis that must be used by life insurance companies for valuing the liabilities under the net risk component of life insurance policies. The net risk component of a life insurance policy is defined in subsection 995-1(1) to mean the risk component in respect of that part of the policy that has not been reinsured under a contract of reinsurance.

1.51 The amendments will ensure that the value of liabilities under the net risk components of life insurance policies for consolidation purposes is the current termination value (as defined in the Solvency Standard) of that component at the joining time as calculated by an actuary. [Schedule 6, item 1, subsections 713-520(4) and (5)]

Transfer of virtual PST losses on leaving a consolidated group

1.52 The taxable income of a life insurance company is divided into 2 classes:

•

the complying superannuation class which is taxed at a 15% rate; and

•

the ordinary class which is taxed at the company tax rate.

1.53 The complying superannuation class of taxable income is made up of 3 components - the virtual PST component, the RSA component and the specified roll-over component.

1.54 In practice, the only component that can be negative is the virtual PST component. If the virtual PST component is negative, the life insurance company effectively makes a virtual PST loss. In these circumstances, the income tax law operates to ensure that these losses can only be applied to reduce future virtual PST income.

1.55 In addition, life insurance companies can have a net capital loss from virtual PST assets. These losses can only be offset against future capital gains from virtual PST assets.

1.56 These loss quarantining rules will continue to apply when a life insurance company joins a consolidated group. That is, the head company will only be able to apply virtual PST losses and net capital losses on virtual PST assets against future virtual PST income or future capital gains from virtual PST assets. However, if a life insurance company subsequently leaves the group (and no other member of the group is a life insurance company that has a virtual PST), the head company will not have any future virtual PST income or capital gains that can be used to absorb the virtual PST losses. That is, the losses will be unable to be used.

1.57 Therefore, if a life insurance company leaves a consolidated group and no other member of the group is a life insurance company that has a virtual PST at the leaving time, any virtual PST losses and net capital losses on virtual PST assets of the head company will be transferred from the head company to the leaving life insurance company. [Schedule 6, item 1, section 713-530]

Application and transitional provisions

1.58 In general, these amendments will apply to groups that consolidate on or after 1 July 2002.

1.59 As a transitional rule, a group of entities that includes a life insurance company will be given an opportunity to rearrange assets of the group for the purpose of allowing one or more of them to become members of a consolidated group in a way that does not attract any immediate taxation consequences. [Schedule 6, item 10, section 713-500 of the IT(TP) Act 1997]

1.60 The purpose of the transitional relief is to allow consolidatable groups with life insurance company members to maximise the number of wholly-owned subsidiary entities that can be members of the consolidated group despite the departure from the 'all in' principle. The transitional relief is available for a limited period of time (see paragraphs 1.70 and 1.87).

1.61 The transitional relief will apply where:

•

an asset is transferred from one entity to another within the wholly-owned company group - the section 713-505 case; and

•

an asset is transferred between the segregated pools of assets of a life insurance company - the section 713-510 case.

Assets transferred between entities - the section 713-505 case

1.62 Transitional relief will apply where an event (the deferral event) involving an entity (the originating entity) and another entity (the recipient entity) happens in connection with a life insurance company becoming a member of a consolidated group. The transitional relief will defer the taxation consequences that would occur as a result of the deferral event. [Schedule 6, item 10, subsection 713-505(1) of the IT(TP) Act 1997]

1.63 To qualify for transitional relief in a section 713-505 case, the originating entity must be:

•

a life insurance company that has virtual PST assets or segregated exempt assets and that is a member of a consolidatable group;

•

an entity that is unable to be a member of the same consolidatable group as a life insurance company because its membership interests consist partly, directly or indirectly, of virtual PST assets or segregated exempt assets of the life insurance company; or

•

an entity that is, directly or indirectly, a subsidiary of a life insurance company and is a member of the same consolidated group as the life insurance company.

[Schedule 6, item 10, paragraph 713-520(1)(a) of the IT(TP) Act 1997]

1.64 In addition, the transitional relief will apply only if:

•

the originating entity and the recipient entity are members of the same consolidatable group, or would be members of the same consolidatable group if the all in principle applied;

•

any asset transferred by the originating entity to the recipient entity is transferred at its transfer value - that is, the amount that could be expected to be received from the disposal of the asset in an open market after deducting any costs expected to be incurred in respect of the disposal (see subsection 995-1(1));

•

the total transfer value of virtual PST assets of the member life insurance company immediately before the transfer is the same as the total transfer values of those assets just after the transfer; and

•

the total transfer value of segregated exempt assets of the member life insurance company immediately before the transfer is the same as the total transfer values of those assets just after the transfer.

[Schedule 6, item 10, subsections 713-520(1) and (2) of the IT(TP) Act 1997]

The deferral event

1.65 In a section 713-505 case, if the originating entity is a company, the deferral event will be a CGT event that happens to an asset where, if the transitional relief did not apply, the CGT event would cause:

•

an amount (other than a capital gain) to be included in the assessable income of the originating entity - this would arise, for example, because the asset is held on revenue account or is a traditional security taxed under section 26BB of the ITAA 1936; or

•

the originating entity to make a capital gain.

[Schedule 6, item 10, subsection 713-505(2) of the IT(TP) Act 1997]

1.66 If the originating entity is a trust, the deferral event will be a CGT event that happens to an asset where, if the transitional relief did not apply, the CGT event would cause:

•

an amount (other than a capital gain) to be included in the net income of the trust; or

•

the trust to make a capital gain.

[Schedule 6, item 10, subsection 713-505(3) of the IT(TP) Act 1997]

1.67 Section 104-5 lists the various CGT events. Transitional relief will apply to the following CGT events:

•

CGT events A1, B1, D1, D2, D3, E2, F1 and F2; and

•

CGT event C2 provided that the asset that ends is a unit in a unit trust that is replaced by an equivalent membership interest in a company or in another trust - that is, a membership interest that is of equivalent value to the units in the unit trust.

[Schedule 6, item 10, subsection 713-505(4) of the IT(TP) Act 1997]

When transitional relief applies

1.68 The transitional relief will apply only if the originating entity chooses to apply the relief. The choice must be made:

•

by the day the originating entity, or the head company of the consolidated group of which it is a member, lodges its income tax return for the income year in which the deferral event happened; or

•

within a further time allowed by the Commissioner.

[Schedule 6, item 10, section 713-515 of the IT(TP) Act 1997]

1.69 If both the originating entity and the recipient are companies, they can choose roll-over relief for the assets transferred under Division 126-B of the ITAA 1936. If the originating entity chooses Division 126-B roll-over relief, it cannot also choose to obtain the transitional relief.

1.70 In addition, the transitional relief will apply only if the deferral event happens on or before the later of:

•

30 June 2004; and

•

if the head company of the consolidated group of which the member life insurance company is a member, the end of the head company's income year in which 30 June 2004 occurs.

[Schedule 6, item 10, subsection 713-520(3) of the IT(TP) Act 1997]

1.71 However, assets to which the transitional relief applies will be taken to have been transferred immediately prior to the member life insurance company becoming a member of the consolidated group. [Schedule 6, item 10, section 713-525 of the IT(TP) Act 1997]

Nature of the transitional relief

1.72 The nature of the transitional relief in a section 713-505 case will depend upon whether the originating entity is a company or a trust.

1.73 If the originating entity is a company, any amount that would have been included in the originating entity's assessable income (either as a gain on revenue account or as a capital gain) as a result of the deferral event is deferred until a new event happens to the asset. [Schedule 6, item 10, paragraph 713-530(1)(a) of the IT(TP) Act 1997]

1.74 When a new event happens to the asset, the originating entity (or, because of the single entity rule, the head company if the originating entity is a member of a consolidated group) must include the deferred amount in its assessable income for the income year in which the new event happens or is taken to have made a capital gain equal to the deferred gain. [Schedule 6, item 10, subsection 713-535(2) of the IT(TP) Act 1997]

1.75 If the originating entity is a trust, any amount that would have been included in the member life insurance company's assessable income (either as a gain on revenue account or as a capital gain) as a result of the deferral event is deferred until a new event happens to the asset. [Schedule 6, item 10, paragraph 713-530(1)(b) of the IT(TP) Act 1997]

1.76 When a new event happens to the asset (see paragraph 1.79), the member life insurance company (or, because of the single entity rule, the head company if the member life insurance company is a member of a consolidated group) must include the deferred amount in its assessable income for the income year in which the new event happens or is taken to have made a capital gain equal to the deferred gain. [Schedule 6, item 10, subsection 713-535(3) of the IT(TP) Act 1997]

1.77 In addition, if the originating entity is a life insurance company or a trust and the deferred amount relates to an asset that was a virtual PST asset at the time of the deferral event, that amount will be included in the virtual PST component of the complying superannuation class of assessable income for the income year in which the new event occurs. [Schedule 6, item 10, subsection 713-535(4) of the IT(TP) Act 1997]

1.78 The deferred amount will be a discount capital gain (provided it is a CGT event that qualifies as a discount capital gain) if:

•

the deferred amount is a capital gain;

•

the deferral event happens to a virtual PST asset of a life insurance company within 12 months of the date of acquisition of the asset; and

•

the new event occurs at least 12 months after the asset was acquired.

[Schedule 6, item 10, section 713-545 of the IT(TP) Act 1997]

A new event

1.79 A new event will occur when a subsequent taxing event happens to the asset. That is, a new event will occur if:

•

a CGT event happens to the asset or, if the deferral event was CGT event C2, the replacement asset;

•

the recipient entity ceases to be a member of the consolidated group of which the life insurance company is a member;

•

if the recipient entity is a life insurance company, the asset is transferred to or from the recipient entity's virtual PST or segregated exempt assets; or

•

if the originating entity is a company, the originating entity ceases to exist.

[Schedule 6, item 10, subsection 713-535(1) of the IT(TP) Act 1997]

1.80 In addition, in a section 713-505 case, if the recipient entity is not a member of the same consolidated group as the originating entity when the new event happens, the recipient entity must notify the originating entity when a new event occurs to the asset. Notification is not required if the new event is the originating entity ceasing to exist. The notification must be within 60 days after the new event happens. The notification will be a trigger for the originating entity to include the deferral amount or deferred CGT amount in its assessable income or capital gains. [Schedule 6, item 10, section 713-540 of the IT(TP) Act 1997]

1.81 An administrative penalty will apply if the recipient entity fails to notify the originating entity when a new event occurs to the asset within the specified time period. [Schedule 6, item 11, subsection 286-75(4) of Schedule 1 to the TAA 1953]

1.82 The amount of the administrative penalty is one penalty unit (currently $110), for each period of 28 days or part of a period of 28 days starting on the day when notification is due and ending when notification is made of the happening of the event (up to a maximum of 5 penalty units). However, under subsections 286-80(3) and (4) of Schedule 1 to the TAA 1953, that penalty is multiplied by 2 for medium size taxpayers and by 5 for large taxpayers. [Schedule 6, item 11, paragraph 286-80(2)(c) of Schedule 1 to the TAA 1953]

1.83 Notification of the new event is not required if the recipient entity is a member of the same consolidated group as the originating entity due to the operation of the single entity principle.

Assets transferred within a life insurance company - the section 713-510 case

1.84 Transitional relief will also apply to defer the taxation consequences that would occur because of an event (the deferral event) happening involving the transfer of an asset by a life insurance company:

•

to or from its virtual PST where, if the transitional relief did not apply, section 320-200 of the ITAA 1997 would apply to the transfer; or

•

to or from its segregated exempt assets where, if the transitional relief did not apply, section 320-255 of the ITAA 1997 would apply to the transfer.

[Schedule 6, item 10, subsection 713-510(1) of the IT(TP) Act 1997]

1.85 To qualify for transitional relief in a section 713-510 case:

•

the total transfer value of virtual PST assets of the member life insurance company immediately before the transfer must be the same as the total transfer values of those assets just after the transfer; and

•

the total transfer value of segregated exempt assets of the member life insurance company immediately before the transfer must be the same as the total transfer values of those assets just after the transfer.

[Schedule 6, item 10, subsection 713-520(2) of the IT(TP) Act 1997]

When transitional relief applies

1.86 The transitional relief will apply only if the life insurance company chooses to apply the relief. The choice must be made:

•

by the day the life insurance company, or the head company of the consolidated group of which it is a member, lodges its income tax return for the income year in which the deferral event happened; or

•

within a further time allowed by the Commissioner.

[Schedule 6, item 10, section 713-515 of the IT(TP) Act 1997]

1.87 In addition, the transitional relief will apply only if the deferral event happens on or before the later of:

•

30 June 2004; and

•

if the head company of the consolidated group of which the member life insurance company is a member, the end of the head company's income year in which 30 June 2004 occurs.

[Schedule 6, item 10, subsection 713-520(3) of the IT(TP) Act 1997]

1.88 However, assets to which the transitional relief applies will be taken to have been transferred immediately prior to the member life insurance company becoming a member of the consolidated group. [Schedule 6, item 10, section 713-525 of the IT(TP) Act 1997]

Nature of the transitional relief

1.89 The nature of the transitional relief in a section 713-510 case is that:

•

any amount that would have been included in the life insurance company's assessable income under paragraph 320-15(e) or (g) of the ITAA 1997 and allocated to the company's virtual PST under section 320-205 as a result of the deferral event is deferred until a new event happens to the asset; and

•

any capital gain that the life insurance company would have made as a result of the deferral event is deferred until a new event happens to the asset.

[Schedule 6, item 10, subsection 713-530(2) of the IT(TP) Act 1997]

1.90 An amount is included in a life insurance company's assessable income under paragraph 320-15(e) or (g) of the ITAA 1997 when an asset is transferred to or from the company's virtual PST or segregated exempt assets in certain circumstances. Certain amounts included in the company's assessable income under paragraph 320-15(e) are allocated to the company's virtual PST under section 320-205.

1.91 When a new event happens to the asset (see paragraph 1.93), the member life insurance company (or, because of the single entity rule, the head company if the member life insurance company is a member of a consolidated group) must include the deferred amount in its assessable income for the income year in which the new event happens or is taken to have made a capital gain equal to the deferred gain. [Schedule 6, item 10, subsection 713-535(5) of the IT(TP) Act 1997]

1.92 The deferred amount will be a discount capital gain (provided it is a CGT event that qualifies as a discount capital gain) if:

•

the deferred amount is a capital gain;

•

the deferral event happens to a virtual PST asset of a life insurance company within 12 months of the date of acquisition of the asset; and

•

the new event occurs at least 12 months after the asset was acquired.

[Schedule 6, item 10, section 713-545 of the IT(TP) Act 1997]

A new event

1.93 A new event will occur when a subsequent taxing event happens to the asset. That is, a new event will occur if:

•

a CGT event happens to the asset or, if the deferral event was CGT event C2, the replacement asset;

•

the life insurance company ceases to be a member of the consolidated group;

•

the asset is transferred to or from the life insurance company's virtual PST or segregated exempt assets; or

•

the life insurance company ceases to exist.

[Schedule 6, item 10, subsection 713-535(1) of the IT(TP) Act 1997]