House of Representatives

Explanatory Memorandum

Circulated by the authority of the Treasurer, the Hon Wayne Swan MP

Chapter 6 - Taxation

Outline of chapter

6.1 Schedule 1 to the First Home Saver Accounts (Consequential Amendments) Bill 2008 (FHSA (Consequential Amendments) Bill 2008) amends the Income Tax Assessment Act 1936 (ITAA 1936), the Income Tax Assessment Act 1997 (ITAA 1997), the Taxation Administration Act 1953 (TAA 1953) and the Income Tax Rates Act 1986 to establish the tax treatment of First Home Saver Accounts (FHSAs), which has the following main features:

•

individual contributions to FHSAs are not taxed because they can only be made out of post-tax income;

•

Government contributions into accounts are not taxed;

•

earnings on FHSAs are taxed to the account provider at the statutory rate of 15 per cent rather than to the individual account holders at their marginal income tax rates; and

•

withdrawals to purchase a first home are not taxed and other withdrawals are generally not taxed.

6.2 There is also a tax, called the FHSA misuse tax, which applies to clawback benefits obtained by individual account holders who improperly use the accounts. The tax is imposed by the Income Tax (First Home Saver Accounts Misuse Tax) Bill 2008 (Income Tax (FHSA Misuse Tax) Bill 2008).

Context

6.3 Under the existing law, where an individual invests money while saving for a first home, the earnings on the investments are normally assessable income of the individual investor and consequently taxed according to the normal rate scale applying to the individual. The amounts that an individual puts in (or contributes) to an investment such as a bank account are, under ordinary income tax principles, normally capital in character and not deductible. Similarly, the amounts that an individual withdraws from a mere investment are also normally capital receipts and, therefore, not assessable income.

6.4 The Government proposes that earnings on FHSAs be taxed in a similar way to the earnings of superannuation funds. The earnings of superannuation funds are generally taxed to the trustee of the fund at a rate of 15 per cent. Authorised deposit-taking institutions (ADIs) and life companies are currently taxed on a similar basis to superannuation funds on their superannuation or retirement savings account business.

Current taxation of authorised deposit-taking institutions and life companies

6.5 ADIs do not currently conduct superannuation business but may provide retirement savings accounts, which are accounts that provide benefits on retirement or death and that are treated, for various purposes, similarly to superannuation funds. The earnings on the retirement savings accounts that ADIs offer are taxed in a special way that has the object of treating retirement savings account activities similarly to those of superannuation funds. The retirement savings account earnings are calculated separately from earnings from standard activities and taxed to the ADI, instead of the retirement savings account holder, at 15 per cent.

6.6 The superannuation activities of life insurance companies are taxed under special provisions that have the object of treating those activities in a broadly comparable way to those of superannuation funds. The complying superannuation class of taxable income is calculated separately and taxed at 15 per cent. The special provisions segregate the assets of the superannuation business from the other business of the life insurance company through a feature called the virtual pooled superannuation trust (virtual PST).

Summary of new law

6.7 Schedule 1 to the FHSA (Consequential Amendments) Bill 2008 sets out the taxation treatment of FHSAs.

6.8 Individual contributions into accounts are only from post-tax income and consequently are not taxed to the account provider. A Government contribution for an individual account holder, is not assessable income and is not exempt income.

6.9 The earnings on the account are not assessable income and are not exempt income in the hands of the account holder. An amount withdrawn from an FHSA to purchase a first home is also not assessable income of the individual account holder. Finally, an FHSA holder does not make any capital gain or loss from a capital gains tax (CGT) event happening to their interest in the account.

6.10 The earnings on FHSAs are taxed to FHSA providers at 15 per cent. For each of the three types of providers - trustees of FHSA trusts, ADIs and life companies - this is done by applying broadly the same rules that currently apply to superannuation or retirement savings account activities.

6.11 Accordingly, the earnings of an FHSA trust are taxed similarly to those of superannuation funds. The FHSA earnings of ADIs are taxed like their earnings from retirement savings account activities. The FHSA earnings of life companies are taxed like their superannuation earnings, on a 'virtual PST' basis.

6.12 Where an account holder does not meet conditions of eligibility, withdrawal or occupancy of the home they purchase, a misuse tax applies to ensure that they do not improperly benefit from their use of an FHSA. The tax claws back Government contributions paid for their benefit. It also includes a component that is designed to broadly neutralise the maximum benefit they may have obtained from having the earnings of the FHSA taxed at 15 per cent instead of at their own individual tax rates.

Detailed explanation of new law

Individual contributions into accounts

6.13 During the 2007 Federal election campaign it was proposed that individuals would be able to contribute to FHSAs through 'salary sacrifice'; that is, by making pre-tax contributions. After the election the Government formally approved the establishment of FHSAs. It also decided to deliver a streamlined up-front Government contribution directly into accounts rather than through a more complex system of salary sacrificing. (The Treasurer's and Minister for Housing's joint Press Release No. 004 of 4 February 2008; and the Treasurer's Press Release No. 040 of 13 May 2008.)

6.14 All individual contributions are post-tax. That is, an individual is not able to reduce their income tax by making contributions to an FHSA through salary sacrificing arrangements.

6.15 No amendment of the income tax law is necessary to produce this result. The constructive receipt rule in subsection 6-5(4) of the ITAA 1997 is designed to ensure that if an amount is applied or dealt with in any way on an entity's behalf or at an entity's direction, the entity is taken to have received the amount (ordinary principles of tax accounting are not limited by subsection 6-5(4) and would ensure the same result). This provision ensures that money paid to an individual's bank account (at the individual's direction or on the individual's behalf) are treated as received by the entity and therefore as ordinary income if the money is a reward for employment. Similarly, if any money was paid to an FHSA under a salary sacrifice agreement, they would be treated as received by an entity and therefore as ordinary income.

6.16 Nor is any amendment to the fringe benefits tax law necessary. The definition of fringe benefit in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 excludes (in paragraph (f)) '...a payment of salary or wages...'. The definition of salary or wages includes a payment from which an amount must be withheld under section 12-35 (payment to an employee) of Schedule 1 to the TAA 1953. The pay as you go (PAYG) withholding provisions include a constructive payment provision (section 11-5) that corresponds to the constructive receipt rules in Division 6 of the ITAA 1997. The result is that an amount paid by an employer to an employee's FHSA as a reward for employment would be subject to PAYG withholding and not be a fringe benefit - even if it purported to be by way of salary sacrifice.

6.17 Where the FHSA is a bank account or FHSA trust, individual contributions are not assessable income in the hands of the account provider. No amendment is needed to achieve this result. Under ordinary principles the contributions are capital receipts.

6.18 For individual contributions where the FHSA is a life policy, the existing law produces an equivalent result, so again no amendment is needed. All premiums received by a life insurance company are included in assessable income (paragraph 320-15(1)(a) of the ITAA 1997). In the case of policies held in the life insurance company's virtual PST, this amount of assessable income is allocated to the complying superannuation/FHSA class of taxable income (paragraph 320-137(2)(a)). However, for investment-type policies, a deduction is allowed for the capital component of the premium. In the case of a policy that is held in the life insurance company's virtual PST, the amount of the deduction is equal to the amount of the premium that is transferred to the virtual PST, less any risk component of that premium (section 320-55). This deduction is allocated to the complying superannuation/FHSA class of taxable income (paragraph 320-137(4)(a)).

Government contributions

6.19 As explained in Chapter 3 - Government Contributions, the Commissioner of Taxation (Commissioner) may pay a Government contribution to an individual's FHSA, to their interest in a complying superannuation plan, to the individual themselves or to the individual's legal personal representative. In all these cases the amount of the contribution is neither assessable income nor exempt income of the individual. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; subsection 345-50(3) of the ITAA 1997 ]

6.20 Government contributions are also not assessable income of an FHSA provider. No specific provision is needed to produce this outcome because the contributions are not ordinary income of the account provider.

Withdrawals

6.21 A payment from an FHSA is neither assessable income nor exempt income of the individual account holder. The amount withdrawn is essentially the accumulated capital of the account holder and, therefore, not ordinary income. However, it is possible that the amount could be assessable by virtue of a specific provision about assessable income (eg section 26AH of the ITAA 1936, which is about bonuses and other amounts received on certain short-term life insurance policies). Consequently, a specific provision has been included to ensure that a payment from an FHSA is non-assessable non-exempt income. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; subsection 345-50(2) of the ITAA 1997 ]

6.22 In some circumstances (eg, where the FHSA is in the form of an interest in a trust), the withdrawal of money from an FHSA may involve a CGT event. No capital gain or capital loss is brought to account in those circumstances. To ensure that result, there is a specific rule that any capital gain or loss which the holder of an FHSA makes from a CGT event happening to the FHSA is disregarded. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; subsection 345-50(4) of the ITAA 1997 ]

6.23 However, if the account holder has used an FHSA to obtain benefits to which they were not properly entitled and an amount is paid from the FHSA to the account holder, an FHSA misuse tax may apply (see discussion of the FHSA misuse tax later in this chapter).

Payment from a First Home Saver Account contributed to superannuation

6.24 A payment made from an FHSA as a contribution to a superannuation fund is not assessable income of the recipient superannuation fund. The amounts in an FHSA are all post-tax, so there is no justification to include contributions from the FHSA in the superannuation fund's assessable income. Also, any Government contributions paid directly to a superannuation interest of the holder in a superannuation fund are not assessable income of the superannuation fund. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 24; section 295-171 of the ITAA 1997 ]

6.25 A contribution from an FHSA to a superannuation fund is included in an individual's non-concessional contributions (under section 292-90 of the ITAA 1997). This follows automatically from excluding the contributions from assessable income, so there is no need for further amendment.

6.26 No deduction or tax offset is available to either the account holder or the FHSA provider for a contribution from an FHSA to a superannuation fund. The existing law may already achieve this result without amendment, but Division 290 of the ITAA 1997 (contributions to superannuation funds) is amended to put the matter beyond doubt. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 22; paragraphs 290-5(d) and (e) of the ITAA 1997 ]

6.27 Amounts contributed from FHSAs to superannuation funds are not eligible for the superannuation co-contribution for low income earners. These amounts may already have benefited from a Government contribution, so it would not be appropriate for the individual to receive another. The definition of eligible personal superannuation contribution in the Superannuation (Government Co-Contribution for Low Income Earners) Act 2003 is amended to exclude a payment made from an FHSA as a contribution to a superannuation fund and any Government contributions. [ Schedule 3 to the FHSA (Consequential Amendments) Bill 2008, item 37; section 7 of the Superannuation (Government Co-Contribution for Low Income Earners) Act 2003 ]

Earnings

6.28 Earnings on FHSAs are taxed to the account provider at the statutory rate of 15 per cent rather than to individual account holders at their marginal income tax rates. Accordingly, an amount of earnings on an FHSA is not assessable income and is not exempt income of the individual account holder. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; subsection 345-50(1) of the ITAA 1997 ]

6.29 Each of the three types of account providers (FHSA trusts, ADIs and life companies) has their own set of rules about taxation of earnings. The provisions tax the earnings of an FHSA trust similarly to those of superannuation funds. The FHSA earnings of ADIs are taxed like their earnings from retirement savings account activities and the FHSA earnings of life companies are taxed like their superannuation earnings, on a virtual PST basis.

First Home Saver Accounts trusts

6.30 The trustee of an FHSA trust is liable to pay income tax on the taxable income of the trust. The tax payable is worked out under the core income tax rules (section 4-10 of the ITAA 1997) making two assumptions. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; subsections 345-5(1) and (2) of the ITAA 1997 ]

6.31 The first assumption is that the trust is an Australian resident. Consequently, ordinary and statutory income from sources both within and outside Australia are taken into account and any tax offsets dependent on being an Australian resident are also taken into account.

6.32 The second assumption is that the trust is liable to pay income tax (under the main liability provision in section 4-1 of the ITAA 1997) for the financial year. Without this assumption it would be doubtful that the core income tax rules could apply to work out the tax payable by a trustee on the trust's taxable income - a specific provision setting out how to work out the liability would be needed. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; subsection 345-5(2) of the ITAA 1997 ]

6.33 This approach produces a similar result to the provisions for superannuation entities but is more streamlined because, unlike superannuation entities, there is only one component of taxable income. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; subsections 345-5(2) and (3) of the ITAA 1997 ]

6.34 In working out the FHSA trust's assessable income and deductions it is necessary to take into account the special rules for FHSA trusts. The gross tax payable on the taxable income is worked out by applying the applicable rate, currently 15 per cent. The total tax offsets of the FHSA trust are subtracted from the gross tax payable on the taxable income to give the tax payable by the trustee. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; subsection 345-5(3) of the ITAA 1997 ]

6.35 There are far fewer special rules for FHSA trusts than there are for superannuation funds. A major reason for this is that, unlike superannuation funds, there are no assessable contributions to an FHSA.

6.36 However, there is an important special rule, which also applies in calculating the liability of the trustee of a superannuation entity. The capital gains and losses provisions are to be the primary code for calculating gains and losses on CGT assets owned by the FHSA trust. There are the same specified exceptions from the primary code as for superannuation entities, which include foreign exchange gains or losses, bank deposits, securities and loans. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; section 345-10 of the ITAA 1997 ]

6.37 A trustee of an FHSA trust is added to the list of entities in section 9-1 of the ITAA 1997 that work out their liability to pay income tax in a special way. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 8; section 9-1 of the ITAA 1997 ]

Relationship with other trust provisions

6.38 The trustee of an FHSA trust is not liable to pay tax under the standard trust rules in Division 6 of Part III of the ITAA 1936. Similarly, those standard trust rules do not apply to include amounts in the assessable income of an account holder that is a beneficiary of an FHSA trust. Also, the trust loss rules in Schedule 2F to the ITAA 1936 do not apply to FHSA trusts. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, items 4 and 7; sections 95AA and 272-100 of Schedule 2F to the ITAA 1936 ]

CGT discount

6.39 Assets held by an FHSA trust are eligible for the CGT discount of one third. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, items 10 and 11; section 115-100 of the ITAA 1997 ]

6.40 Where an FHSA trust is a shareholder in a listed investment company it will obtain a similar benefit to the discount capital gain (through a deduction). [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, items 12 to 16; section 115-280 of the ITAA 1997 ]

Dividend imputation

6.41 Subdivision 207-A outlines the effect of receiving a franked dividend for most taxpayers (including complying superannuation funds). If the Subdivision applies, the taxpayer must include the amount of the franking credit in its assessable income and is entitled to a tax offset equal to the amount of that franking credit (section 207-20).

6.42 Subdivision 207-B outlines the effect of receiving a franked dividend for most trusts (other than complying superannuation funds) and partnerships. If the Subdivision applies, franking credits essentially flow through to the partners of the partnership or the beneficiary of the trust.

6.43 Subject to some specified exceptions, a tax offset available under Division 207 is a refundable tax offset (section 67-25).

6.44 For an FHSA trust, amendments are necessary to ensure that Subdivision 207-A applies and Subdivision 207-B does not. To ensure that Subdivision 207-A applies, paragraph 207-15(2)(a) is amended so that it covers the trustee of a trust that is an FHSA trust. Paragraph 207-35(1)(c) and section 207-45 are amended so Subdivision 207-B does not cover the trustee of a trust that is an FHSA trust. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, items 19 to 21; paragraphs 207-15(2)(a) and 207-35(1)(c) and section 207-45 of the ITAA 1997 ]

6.45 Section 67-25 operates appropriately to make a tax offset available under Division 207, a refundable tax offset.

Income Tax Rates Act 1986

6.46 The Income Tax Rates Act 1986 is amended so that the taxable income of the FHSA trust is taxed at 15 per cent. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008; item 52, section 30 of the Income Tax Rates Act 1986 ]

Other amendments for First Home Saver Account trusts

6.47 To ensure that FHSA trusts receive treatment similar to superannuation funds, there are also amendments to:

•

the pooled development fund provisions [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 5; section 124ZM of the ITAA 1936 ];

•

the tracing rules for tax losses of companies [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, items 17 and 18; section 166-245 of the ITAA 1997 ]; and

•

the PAYG instalment provisions [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, items 58 to 61; subsections 45-120(2), 45-290(2), 45-330(2) and 45-370(2) in Schedule 1 to the TAA 1953 ].

Authorised deposit-taking institutions

6.48 FHSA activities of ADIs are to be taxed on a similar basis to retirement savings account activities. The earnings on the retirement savings accounts that ADIs offer are taxed in a special way that has the object of treating retirement savings account activities similarly to those of superannuation funds. The retirement savings account earnings are calculated separately from earnings from standard activities (the retirement savings account component of taxable income) and taxed to the ADI, instead of the retirement savings account holder, at 15 per cent.

6.49 Similarly, an ADI that is an FHSA provider needs to calculate an FHSA component of taxable income, to be taxed at 15 per cent. The FHSA component is a separate component from the retirement savings account component, although both are taxed at 15 per cent.

6.50 For an ADI that is a retirement savings account provider the method of working out the liability of the retirement savings account provider is modified to include the working out of the FHSA component (as well as the retirement savings account and standard components). [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 23; subsection 295-10(2) of the ITAA 1997 ]

6.51 For an ADI that is an FHSA provider but not a retirement savings account provider, the income tax liability is worked out by reference to its taxable income under the core provision of the income tax law (Division 4 of the ITAA 1997). The ADI's taxable income has two components, the FHSA component and standard component of taxable income. The gross tax payable is calculated by applying the applicable tax rates from the Income Tax Rates Act 1986 . A 15 per cent rate is applied to the FHSA component and the standard company tax rate (currently 30 per cent) applied to the standard component. Finally the ADI's tax offsets are subtracted from the gross tax payable to give the tax payable by the ADI. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; section 345-15 of the ITAA 1997 ]

Calculating the First Home Saver Account component

6.52 The method of calculating the FHSA component is similar to that for calculating the retirement savings account component but is simpler because there is no need to include any contributions in assessable income (for FHSAs, contributions are not taxed to the provider because there are only post-tax contributions). The object of this method is to work out the net earnings of the FHSA account holders, so that they can be taxed at the rate of 15 per cent. The calculation of the liability of the ADI on its normal activities - including investing the funds obtained from FHSAs - is done in the normal way.

6.53 The first step in working out the FHSA component is to add up all the earnings (normally interest) credited to the FHSAs provided by the provider during the year. It is then necessary to calculate total fees and then subtract them from the total earnings to give the FHSA component. Total fees are intended to cover any fee or charge that the account holder must pay the ADI on the FHSA, whatever its description or form, but not to cover taxes. The standard component is the remaining part to the provider's taxable income. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; section 345-20 of the ITAA 1997 ]

6.54 The ADI's FHSA component cannot exceed its taxable income. If the amount worked out would otherwise exceed the provider's taxable income, the taxable income is equal to the FHSA component. Any excess is treated as a tax loss of the ADI. An effect of this is that the FHSA provider cannot offset losses against its FHSA income. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; subsection 345-15(2) of the ITAA 1997 ]

6.55 Consistent with the retirement savings account approach, ADIs do not get a CGT discount in relation to their FHSA activities. No amendment is needed to achieve this result. The gains and losses that ADIs make on investments in the ordinary course of their banking business are on revenue account.

Income Tax Rates Act 1986

6.56 The Income Tax Rates Act 1986 is amended so that the FHSA component is taxed at 15 per cent. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, items 49 to 51; section 23 of the Income Tax Rates Act 1986 ]

Life insurance companies

6.57 The FHSA earnings of life companies are to be taxed like their superannuation earnings, on a virtual PST basis. There is one virtual PST for both superannuation and FHSA business. Earnings from both FHSA activities and superannuation activities are to be taxed at 15 per cent. The major objective of the virtual PST is to separate assets relating to the activities taxed at 15 per cent from those taxed at normal company rates (currently 30 per cent).

6.58 This approach avoids having to create a separate virtual PST for FHSA activities but requires significant amendments to Division 320 (life insurance companies) of the ITAA 1997. A separate virtual PST for FHSA activities would have imposed high compliance costs on life companies providing FHSAs. The approach does require numerous changes in terminology in Division 320, including a change in the name of the virtual PST (see detailed explanation under Consequential amendments).

6.59 The substantive changes needed to various Subdivisions in Division 320 are described below. In Subdivision 320-E (No-TFN contributions of life insurance companies that are retirement savings account providers), Subdivision 320-H (Segregation of assets) and Subdivision 320-I (Transfers of business), no substantive changes are needed, only changes in terminology.

Subdivision 320 - D - income tax, taxable income and tax loss of life insurance companies

6.60 The central provisions for working out a life insurance company's liability are in Subdivision 320-D. These still operate in the same way. However, the complying superannuation class of taxable income becomes a single composite class - complying superannuation/FHSA class. This name reflects the two different types of activities that are covered by the class.

Subdivision 320 - F - virtual PST

6.61 The key concept underlying the operation of the virtual PST rules in the current Subdivision 320-F is the definition of virtual PST life insurance policy in subsection 995-1(1). That definition is replaced by a new definition, complying superannuation / FHSA life insurance policy , which includes a life insurance policy that is an FHSA. This amendment allows a life insurance company to segregate assets in its virtual PST (renamed as the complying superannuation/FHSA asset pool) for the purpose of discharging FHSA liabilities. [ Schedule 7 to the FHSA (Consequential Amendments) Bill 2008, item 28; subsection 320-170(6) of the ITAA 1997 ]

6.62 Another key concept in the current Subdivision 320-F is the concept of virtual PST liabilities in section 320-190. This section specifies the amount of liabilities that can be supported by virtual PST assets. For most types of life insurance policies, the amount of virtual PST liabilities is the current termination values of those policies (as worked out by an actuary). The current termination value is defined in subsection 995-1(1) by referring to prudential standards. In practical terms, the current termination value at a particular time is generally the amount standing in a policy holder's account at that time, and therefore is appropriate for FHSAs. The replacement of the definition of a 'virtual PST life insurance policy' and the consequent expansion of the concept of virtual PST allows section 320-190 to apply without substantive amendment.

Subdivision 320 - C - Deductions and capital losses

6.63 An FHSA policy does not have an insurance (risk) component - that is, in the event of the policyholder's death, the amount payable to the estate or beneficiary is limited to the balance in the FHSA. Consequently, an amendment is necessary to ensure that no amount relating to an FHSA policy is deductible under section 320-80 or 320-85, which specify the deductibility of certain amounts relating to risk policies. This is achieved by amending paragraph 320-80(2)(b) and subsection 320-85(2) to include a reference to an FHSA policy. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, items 29 and 30; sections 320-80 and 320-85 ]

6.64 Otherwise, this Subdivision is able to continue to apply in the same way, with necessary terminology changes.

Guide to Division 320

6.65 Two amendments are required to the Guide. First, the dot point relating to the taxable income of the complying superannuation class is modified to reflect the new term for the composite class and to refer to FHSA business. Second, the dot point relating to segregating assets that relate to complying superannuation business is modified so that it also refers to assets that relate to FHSA business.

CGT discount

6.66 Assets held in the virtual PST to meet FHSA liabilities are eligible for the CGT discount of one third. No amendment is needed to achieve this result. Paragraph 115-10(d) already accords a CGT discount treatment to '...a *life insurance company in relation to a *discount capital gain from a *CGT event in respect of a *CGT asset that is a*virtual PST asset.'.

Income Tax Rates Act 1986

6.67 Amendments to paragraph 23A(b) of the Income Tax Rates Act 1986 are needed to accurately describe the class of taxable income to be taxed at 15 per cent.

Dividend imputation

6.68 Life companies are eligible for refundable imputation credits in relation to their FHSA business and no amendments are needed to the imputation provisions to achieve this result.

First Home Saver Accounts misuse tax

6.69 If an individual account holder improperly uses an FHSA and money is paid from the FHSA to the individual for the purchase of a first home, the individual is liable to pay a tax called the FHSA misuse tax. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; section 345-100 of the ITAA 1997 ]

6.70 The Commissioner assesses the FHSA misuse tax. So, neither the account holder nor the account provider is required to calculate it.

Purpose of the tax

6.71 The purpose of the tax is to deter people from improperly using FHSAs by ensuring that individuals do not benefit in those circumstances. Individuals can obtain two main benefits from improperly using an FHSA: Government contributions and a lower rate of tax on earnings than their normal individual marginal rate(s). The FHSA misuse tax is designed to:

•

clawback all the Government contributions improperly obtained; and

•

neutralise the maximum benefit the individual may have obtained from having earnings taxed at 15 per cent. This can be greater than the actual benefit for an individual on less than the top marginal tax rate.

6.72 Importantly, criminal or administrative penalties may also apply to the individual subject to the FHSA misuse tax. For example, if an individual made a false or misleading statement in applying to open an account or to withdraw money from an account, they may commit an offence or be liable to an administrative penalty under the TAA 1953. There is a range of offences under the Criminal Code that could also apply.

Circumstances in which the tax applies

6.73 For the tax to apply, the account holder must withdraw money from their FHSA on the basis that they are to use the money to purchase a first home in Australia. The tax does not apply if the money is transferred from the FHSA to superannuation, or paid in other specified circumstances (eg, to another FHSA or because of family law obligations). The rationale for the tax not applying to transfers to superannuation is that if the individual had originally made their contribution to superannuation by way of salary sacrifice instead of to an FHSA they would, in most cases, have obtained similar or greater benefits to that obtained under the FHSA. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; section 345-100 ]

6.74 Where there is a payment as described, the two types of improper use that attract the tax are:

•

failing eligibility conditions - in this case the payment is called an FHSA ineligibility payment ; and

•

failing payment conditions - called FHSA payment conditions , about the use of the payment or the occupancy of the home purchased.

[ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; section 345-100 ]

FHSA ineligibility payment

6.75 An individual account holder fails the eligibility conditions if they are not eligible to open an account or if they become ineligible and do not notify the account provider (and thus have the money transferred to superannuation). The eligibility conditions (discussed in Chapter 1) are that the individual be aged at least 18 and under 65 years, not previously have owned their home in Australia and (except in limited circumstances) never held another FHSA. It is not intended that an individual fail the eligibility conditions if, as part of the process of acquiring their first home, they acquire a qualifying interest in a dwelling and move into it shortly before receiving a payment from their FHSA. [ First Home Saver Accounts Bill 2008 (FHSA Bill 2008), section 16 ]

FHSA payment conditions

6.76 The individual fails the FHSA payment conditions if, within six months of the payment, the individual does not use an amount equal to the payment in acquiring a qualifying interest in a dwelling. The individual makes a declaration in the approved form when withdrawing money about the purpose for which they will be used. Under the approved form mechanism, the Commissioner has the power to ask for evidence and further details about that usage. It is not necessary to trace whether the actual payment is used to acquire the home. [ FHSA Bill 2008, section 17 ]

6.77 The individual also fails the FHSA payment conditions if they fail to occupy the acquired dwelling as their main residence for a continuous period of least six months starting within a designated period. For a dwelling that is complete when the payment is made, the designated period starts when the person acquires the dwelling (see Chapter 1 for a discussion of when an individual acquires a qualifying interest in a dwelling). For a dwelling that is not complete when the payment is made, the period starts when the construction is complete. Whether a dwelling is complete is a matter of evidence and a building completion certificate (eg, a certificate of occupancy) would be relevant (and normally sufficient) evidence. [ FHSA Bill 2008, section 17 ]

6.78 The period ends 12 months after the period starts or at a later time that the Commissioner considers reasonable in the circumstances. [ FHSA Bill 2008, subsection 17(2) ]

6.79 The individual also fails the FHSA payment conditions if they withdrew the money to construct a dwelling and the construction is not complete with a reasonable period after the payment is made. This ensures that the individual cannot defeat the occupancy rules by delaying the completion of their home. The FHSA payment conditions are discussed in more detail in Chapter 2. [ FHSA Bill 2008, subsection 17(1) ]

Re-contributing an amount to an FHSA

6.80 An individual is treated as satisfying the FHSA payment conditions even though they would otherwise fail the conditions if, within six months of the payment, the individual contributes to an FHSA, an amount equal to the payment or, if it is reasonable in the circumstances, a lesser reasonable amount. In some circumstances it would be reasonable for the individual not to re-contribute any amount. In determining whether it is reasonable to pay a lesser amount, it is necessary to have regard to:

•

whether the failure to satisfy a condition was beyond the individual's control;

•

whether the failure was reasonably foreseeable;

•

any previous failure by the individual; and

•

any other relevant matter.

[ FHSA Bill 2008, subsections 17(3) and (4) ]

Example 6.1

Wendy is the holder of an FHSA and withdraws the balance and uses the whole balance to purchases her first home. After living in the home for two months Wendy is unexpectedly transferred in her work to another city for a term of two years. Although Wen

Example 6.2

Danny and Mary are a married couple who each has an FHSA. They both withdraw the balance of their accounts to purchase a first home jointly. After living in the home for four months, the couple separate with Mary leaving the home permanently. Although

Example 6.3

Kate is the holder of an FHSA and orally agrees to purchase a dwelling that she intends to live in. Kate withdraws the balance of her account to pay as a deposit on the purchase. However, before paying a deposit Kate changes her mind about purchasing t

Example 6.4

Kim withdraws $20,000 from her FHSA to purchase her first home. The vendor withdraws the home from sale. Kim has already incurred $4,000 in legal costs in attempting to acquire the home. Six weeks after withdrawing the money, Kim contributes $16,000 to an FHSA. In the circumstances, it was reasonable for Kim to contribute an amount less than $20,000, and $16,000 was a reasonable amount for her to contribute. So, she satisfies the FHSA payment conditions and is not liable to the misuse tax.

The amount of the tax

6.81 The FHSA misuse tax is designed to clawback all the Government contributions improperly obtained and broadly to neutralise the maximum benefit the individual may have obtained from having earnings taxed at 15 per cent (ie, if they were on the top marginal tax rate).

6.82 If the payment is an FHSA ineligibility payment (but satisfies the FHSA payment conditions), the tax payable by the individual is the sum of two components:

•

the clawback tax amount , which approximates the maximum earnings benefit of the individual to be taxed; and

•

the sum of the non - recognised Government contributions payable for the FHSA holder for a financial year that begins before the payment was made.

[ Subsection 5(1) of the Income Tax (FHSA Misuse Tax) Bill 2008) ]

6.83 A Government contribution that is payable for a financial year is a non - recognised Government contribution if the holder of the FHSA did not satisfy the eligibility requirements for the FHSA throughout that financial year. Thus, if an account holder becomes ineligible part-way through a financial year (eg, because they bought their first home in Australia), any Government contribution that is payable for that financial year is a non-recognised Government contribution and therefore subject to the misuse tax. However, any Government contribution payable for an earlier year is not affected. [ Section 7 of the Income Tax (FHSA Misuse Tax) Bill 2008 ]

6.84 The Income Tax (FHSA Misuse Tax) Bill 2008 was this approach because reporting of personal FHSA contributions to the Commissioner is to be for the whole financial year. On the basis of that reporting the Commissioner would not know whether particular contributions were made before or after the account holder became ineligible.

6.85 If the payment fails the FHSA payment conditions (whether or not it is an FHSA ineligibility payment), the tax payable by the individual is similarly the sum of two components:

•

the clawback tax amount; and

•

the sum of all the Government contributions that the account holder has obtained.

[ Subsection 5(2) of the Income Tax (FHSA Misuse Tax) Bill 2008 ]

6.86 The difference between the two formulas is that where FHSA payment conditions are failed, all the Government contributions are taxed (and thus clawed back) whereas for an FHSA ineligibility payment Government contributions are taxed (and clawed back) for those years starting when the individual first failed the eligibility requirements.

The clawback tax amount

6.87 The clawback tax amount is calculated by multiplying the earnings component by the payment fraction and then multiplying by a grossing-up factor. The final step is to multiply by a percentage. [ Section 6 of the Income Tax (FHSA Misuse Tax) Bill 2008 ]

6.88 The earnings component is designed to be a proxy for the individual's earnings on the FHSA and is calculated by subtracting from the balance of the FHSA the total of personal contributions, Government contributions and contributions paid under a family law order. To save compliance and administration costs, the earnings component does not attempt to precisely calculate or trace earnings. For example, it does not add fees charged to the balance, which favours the individual being taxed. [ Section 6 of the Income Tax (FHSA Misuse Tax) Bill 2008 ]

6.89 In the usual case where the whole of the balance is paid to the individual, the payment fraction is one. Otherwise, it is the balance of the earnings component just before the payment is made divided by the balance of the FHSA just before that time. [ Section 6 of the Income Tax (FHSA Misuse Tax) Bill 2008 ]

6.90 Multiplying by the grossing-up factor reflects that the earnings component has already been reduced by tax paid on FHSA earnings. The grossing-up factor is 1 divided by (1-FHSA tax rate). The FHSA tax rate is the tax payable on FHSA earnings, which is 15 per cent. [ Section 6 of the Income Tax (FHSA Misuse Tax) Bill 2008 ]

6.91 The percentage is the top marginal tax rate for Australian resident individuals plus the Medicare levy less the FHSA tax rate. The percentage represents the maximum tax rate advantage the individual could have obtained by having their earnings taxed at the FHSA earnings rate instead of individual rates. This is currently equal to 31.5 per cent. [ Section 6 of the Income Tax (FHSA Misuse Tax) Bill 2008 ].

Example 6.5

Litsa opened her account while eligible to do so. However, one year later, she purchased a house and moved into it without notifying the account provider and closing her account. Four years later, Litsa made a false declaration to withdraw her entire account balance, and used it to buy shoes and clothes.

Her final account balance was $15,000, her personal contributions were $12,000, and total Government contributions were $2,000.

As the payment to Litsa has failed the FHSA payment conditions (although the payment is also an ineligibility payment), the amount of the tax is equal to the sum of the clawback tax amount plus the total of Government contributions payable for a financial year that begins before the payment was made.

In the formula for the clawback tax amount, the amount of the payment is $15,000.

The 'earnings component' is the balance of the FHSA reduced by personal and Government contributions and family law payments paid to the account. In Litsa's case, this is simply:

$15,000 ? $14,000 = $1,000


As Litsa withdrew the whole of her balance the 'payment fraction' is 1.

The formula is then $1,000 × 1 × [ 100/(100 - 15) ] = $1,176.47.

This amount is then multiplied by the percentage, which is currently 31.5 per cent.

So $1,176.47 × 31.5 per cent = $370.59, the clawback tax amount.

The sum of Litsa's Government contributions is $2,000.

Litsa's total misuse tax is therefore $2,370.59.

Nature of the First Home Saver Account misuse tax

6.92 The FHSA misuse tax is an income tax, and is formally imposed in respect of a payment from an FHSA to the individual account holder. Consistent with the general nature of income tax, the tax is a tax on a gain, being the gain made by the individual from the improper use of the account. To ensure that the misuse tax is constitutionally valid, the tax is imposed by a separate imposition Bill called the Income Tax (FHSA Misuse Tax) Bill 2008. [ Section 4 of the Income Tax (FHSA Misuse Tax) Bill 2008 ]

6.93 The Commissioner assesses the FHSA misuse tax; it is not self assessed. The Commissioner's assessing power is in existing section 169 of the ITAA 1936, which contains the power for the Commissioner to assess income tax where the liability is calculated on a basis other than taxable income. The definition of 'assessment' in subsection 6(1) of the ITAA 1936 is amended so that it covers ascertaining the amount of FHSA misuse tax payable. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 2; subsection 6(1) of the ITAA 1936 ]

6.94 As the FHSA misuse tax liability is income tax assessed under section 169, the standard rules in Part IV of the ITAA 1936 applying to assessments apply automatically. For example, the rules about service of notice of assessment (section 174), objections (section 175A), validity not affected by not following procedures (section 175), conclusive evidence (section 177) and amendment of assessments (section 170).

6.95 The due and payable date for the misuse tax is 21 days after the Commissioner gives the individual notice of the assessment. The general interest charge applies in the standard way if the individual does not pay the assessed tax on time. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 31; sections 345-110 and 345-115 ]

6.96 Liability to pay the misuse tax is a tax-related liability within the definition in section 255-1 of Schedule 1 to the TAA 1953, allowing the generic tax collection and recovery rules to apply. The non-operative list of tax-related liabilities in the generic collection and recovery provisions is amended to include the FHSA misuse tax. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 63; subsection 250-10(2) of Schedule 1 to the TAA 1953 ]

Consequential amendments

Income Tax Act 1986

6.97 The main imposition Act for income tax, the Income Tax Act 1986 , is amended to ensure that it does not cover the FHSA misuse tax, which is imposed by the Income Tax (FHSA Misuse Tax) Bill 2008. The trustee is taxed at the rate of 15 per cent rather than at the top marginal rate, which usually applies where the trustee of a trust estate is liable to pay the income tax. [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 1; subsection 5(2B) of the Income Tax Act 1986 ]

Life insurance companies - terminology

6.98 As explained above, the FHSA earnings of life companies are to be taxed like their superannuation earnings, on a virtual PST basis. There is one virtual PST for both superannuation and FHSA business. Earnings from both FHSA activities and complying superannuation activities are to be taxed as a single class of taxable income at 15 per cent.

6.99 The extension of the virtual PST to cover FHSA business and the creation of the 'composite' class of taxable income for complying superannuation/FHSA activities require changes in terminology to better reflect the new scope of the concepts. Accordingly:

•

the virtual PST is renamed the complying superannuation/ FHSA asset pool [ Schedule 5 to the FHSA Bill 2008, items 1 to 26 ];

•

the complying superannuation class of taxable income is renamed the complying superannuation/FHSA class [ Schedule 6 to the FHSA Bill 2008, items 1 to 21 ];

•

references that incorporate the words 'virtual PST' as part of a longer term (eg, virtual PST assets) are changed by substituting 'complying superannuation/ FHSA' for 'virtual PST' [ Schedule 4 to the FHSA Bill 2008, items 1 to 64 ]; and

•

there are various other related consequential amendments flowing from these changes in terminology (eg, to various definitions and formulas) [ Schedule 7 to the FHSA Bill 2008, items 1 to 56 ].

Inclusion of definitions

6.100 The amendments to the taxation law discussed in this chapter have necessitated the inclusion of various new definitions in the taxation law and the amendment of some others. The substantive effects of these changes are discussed in the course of this chapter. The definitions included (or amended) are in the:

•

ITAA 1936 [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, items 2 and 3; subsection 6(1) of the ITAA 1936) ];

•

ITAA 1997 [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, items 32 to 44; subsection 995-1(1) of the ITAA 1997 ]; and

•

Income Tax Rates Act 1986 [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, items 45 to 48; subsection 3(1) of the Income Tax Rates Act 1986 ].

Amendment of checklists

6.101 The amendments to the taxation law discussed in this chapter have necessitated the amendment of various checklists in the taxation law. Some of the notable changes are discussed in the course of this chapter. Other changes are in the:

•

ITAA 1997 [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, item 9; section 11-55 of the ITAA 1997 ]; and

•

TAA 1953 [ Schedule 1 to the FHSA (Consequential Amendments) Bill 2008, items 53, 54, 62 and 63; subsection 8AAB(5) and subsection 250-10(2) of Schedule 1 to the TAA 1953 ].