House of Representatives

Explanatory Memorandum

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

Chapter 6 - Eligibility rules for farm management deposits scheme

Outline of chapter

6.1 Schedule 6 to this bill amends Schedule 2G to the ITAA 1936 to make it easier for primary producers to determine if an entity is eligible to issue FMD. The Schedule also protects the tax status of certain pre-1 July 2003 deposits and transfers that were made in good faith with non-complying entities offering products described as FMD.

Context of amendments

6.2 The FMD scheme allows eligible primary producers to set aside pre-tax income in profitable years to establish cash reserves to help meet costs in low-income years.

6.3 Subject to certain eligibility criteria being met, FMD are deductible from assessable income. Any withdrawals of the deposits are included in assessable income, but only to the extent that they have previously been claimed as a deduction.

6.4 One of the requirements for deposits to be FMD is that they must be made with a 'financial institution', as defined in the FMD provisions.

Summary of new law

6.5 The new law clarifies which entities are eligible to issue FMD, by replacing references to "prudential supervision or regulation under a law of the Commonwealth, a State or a Territory" with a requirement that the entity be an authorised deposit-taking institution.

6.6 The amendments will also protect primary producers who in good faith made deposits with, or transferred deposits to, non-complying entities offering products described as FMD before 1 July 2003.

6.7 To effect this protection, non-complying entities will be deemed to be 'financial institutions' in relation to certain pre-1 July 2003 deposits and transfers. Provided all other requirements of the FMD scheme are met, these deposits will be treated as FMD. The deposits will retain this tax status into future years if they are transferred to a financial institution within a specified period. If a deposit is not transferred to a financial institution within this period, the deposit will be treated as if it had been repaid immediately before the end of the period.

Detailed explanation of new law

Clarification of the definition of financial institution

6.8 For deposits to be FMD, those deposits must be made with a 'financial institution', as defined in section 393-25 of Schedule 2G to the ITAA 1936.

6.9 The definition of this term will be clarified to make it easier for primary producers to determine whether the entity they are dealing with is eligible to accept FMD. This will be achieved by replacing the requirements of "prudential supervision or regulation under a law of the Commonwealth, a State or a Territory" in the current definition of the term 'financial institution' with a requirement that the entity be an authorised deposit-taking institution for the purposes of the Banking Act 1959.

6.10 Authorised deposit-taking institutions are prudentially regulated by the Australian Prudential Regulation Authority. All banks, building societies and credit unions are authorised deposit-taking institutions.

6.11 Persons that carry on in Australia a business of banking or taking money on deposit, and which have a State or Territory guarantee in relation to deposits, will continue to meet the definition of 'financial institution'.

6.12 However, the proposed amendments will remove references to entities with a Commonwealth guarantee in relation to deposits, because there are no such entities.

6.13 The amendment applies from 1 July 2003. [Schedule 6, items 1 to 3]

Entities taken to be financial institutions for pre-1 July 2003 deposits and transfers

6.14 This amendment is intended to protect primary producers who have in good faith made deposits with ineligible financial institutions offering products described as FMD. This will be achieved by treating certain entities (non-complying entities) as financial institutions, in relation to certain pre-1 July 2003 deposits and transfers (eligible deposits).

6.15 Treating these non-complying entities as financial institutions will mean that eligible deposits are within the definition of FMD, provided all other requirements of the scheme are met.

6.16 Primary producers that wish to retain the tax status of these deposits into future years will have until at least 30 June 2004 to transfer those deposits to entities that are authorised deposit-taking institutions, or entities with a State or Territory guarantee. For some fixed-term deposits, the transfer period will be extended to the date of maturity of the deposit, up to a maximum of four years.

Eligible deposits

6.17 The provision will apply in relation to certain pre-1 July 2003 deposits and transfers (eligible deposits).

6.18 Specifically, the provision will apply in relation to a deposit where:

•

the deposit was made before 1 July 2003 with an entity that was not a financial institution;

•

the deposit is made in good faith; and

•

if the deposit was made after 17 June 2003 (the date the measure was announced), the non-complying entity was offering agreements of that type on 17 June 2003.

[Schedule 6, item 4, subsection 393-52(2)]

6.19 The provision will apply in relation to a transfer of a deposit where:

•

a written request was made before 1 July 2003 to a financial institution to have a deposit transferred from a financial institution to a non-complying entity;

•

the financial institution transferred the deposit to the non-complying entity within a reasonable time after the request;

•

the request was made in good faith; and

•

if the request was made after 17 June 2003 (the date this measure was announced), the non-complying entity was offering agreements of that type on 17 June 2003.

[Schedule 6, item 4, subsection 393-52(3)]

6.20 Restricting the operation of these provisions to pre-1 July 2003 deposits and transfers recognises that the definition was clarified with effect from 1 July 2003.

6.21 The additional requirements for deposits and requests made after 17 June 2003 prevented non-complying entities commencing to offer FMD after this measure was announced.

Non-complying entity taken to be a financial institution

6.22 A non-complying entity will be treated as if it were a financial institution in relation to an eligible deposit throughout the period:

•

starting when the eligible deposit was made or transferred; and

•

ending when the eligible deposit is transferred to a financial institution, actually repaid or in any other case, immediately before the relevant deadline.

[Schedule 6, item 4, subsection 393-52(4)]

6.23 This means that pre-1 July 2003 deposits or transfers will be treated as FMD, provided they meet all the other requirements of the FMD scheme (i.e. all conditions except that they were made with or transferred to an entity that was not a financial institution).

Deposits taken to be repaid in certain circumstances

6.24 Deposits will be taken to be repaid to the depositor if:

•

the depositor, before the deadline, fails to make a written request to the non-complying entity to transfer the deposit to a financial institution; or

•

if such a request is made, the non-complying entity fails to transfer the deposit in a reasonable period of time.

[Schedule 6, item 4, subsection 393-52(5)]

6.25 This means that deposits that are retained with a non-complying entity, after the relevant deadline, will be treated as if they were FMD when made, but were then repaid immediately before the relevant deadline expired. Such amounts are included in the assessable income of the owner, except to the extent that any such amount has been previously included in the owner's assessable income.

Deadline

6.26 The deadline for eligible deposits to be transferred to a financial institution, if they are to retain their FMD status, depends on the term to maturity of the deposit as at 30 June 2003.

6.27 Specifically:

•

for those deposits with a term maturity of less than or equal to 12 months as at 30 June 2003, the deadline is 1 July 2004; and

•

for those deposits with a term maturity exceeding 12 months as at 30 June 2003, the deadline is 1 July 2007 or the date of maturity of the deposit (whichever comes first).

[Schedule 6, item 4, subsection 393-52(6)]

6.28 This transfer period means that there is no requirement for primary producers to withdraw fixed term deposits before they mature. In addition, the transfer period will allow for a managed transfer of funds to authorised deposit-taking institutions and institutions with a State or Territory guarantee.

Application and transitional provisions

6.29 The amendments will apply from the commencement of the FMD scheme.

Clarification of eligibility rules for farm management deposits

6.30 The new definition of 'financial institution' will take effect from 1 July 2003.

Transfer period

6.31 The amendments will apply from the commencement of the FMD scheme.