House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon. J. Kerin, M.P.)

Chapter 9 Life Insurance Protection Levy

[Clause: 40, 42]

Overview

Creates a legislative framework for the taxation treatment of various payments associated with the measure to assist policyholders of Occidental Life Insurance Company of Australia Limited and Regal Life Insurance Limited.

LIFE INSURANCE PROTECTION LEVY

Summary of proposed amendments

9.1. The proposed amendments establish the taxation treatment of various payments associated with the legislative framework introduced to enable the imposition of one-off levy arrangements on registered life insurance companies. These arrangements will provide a measure of financial protection for policyholders of Occidental Life Insurance Company of Australia Limited (Occidental Life) and Regal Life Insurance Limited (Regal Life).

9.2. The protection levy payments will be tax deductible to life insurance companies, and will be taken to relate exclusively to non-fund assessable income. Grants paid from the Life Insurance Policy Holders' Protection Fund (Protection Fund) to Occidental Life and Regal Life will be exempt from income tax.

9.3. Any winding-up advance payments or final winding-up payments from the Protection Fund to life insurance companies will be treated as non-fund assessable income. If there is a remission or a refund of an overpayment of protection levy, then an assessment may be amended to reflect the proper liability of a company with no time limit impediment.

9.4. If one life insurance company transfers or amalgamates with another in accordance with the Life Insurance Act 1945 , then any consideration paid or given by the transferee for the transferor's equity in the Protection Fund will be deductible when incurred. The deduction will relate exclusively to the non-fund assessable income of the transferee. The amount or value of the consideration received by the transferor will be non-fund assessable income of the transferor in the same year as the transferee is allowed a deduction.

Background to legislation

9.5. On 21 January 1991 the Government announced that it would introduce legislation to provide for one-off levy arrangements to be applied to registered life offices. These arrangements are to assist in meeting the obligations of Occidental Life and Regal Life to their policyholders. The Life Insurance Policy Holders' Protection Levies Bill 1991 and the Life Insurance Policy Holders' Protection Levies Collection Bill 1991 (the Collection Bill), introduced into Parliament on 6 June 1991, give effect to the announced arrangements. The amendments to Division 8 contained in this Bill need to be read together with that legislation.

Brief overview of the taxation of life insurance companies

9.6. Life insurance companies are subject to the special tax regime set out in Division 8 of Part III and the general provisions of the Principal Act. Division 8 assesses income of a life company to tax on the basis of the class to which it relates. The following is an overview of the taxation treatment of life insurance companies so far as is relevant to the present amendments.

9.7. The legislative framework requires a life insurance company's business to be divided into five classes:

(i)

non-complying superannuation class (taxable at 47%);

(ii)

complying superannuation and rollover annuity class (taxable at 15%);

(iii)

non-fund class (taxable at 39%);

(iv)

accident, disability and residual life assurance class (taxable at 39%); and

(v)

exempt class (not taxable).

9.8. For the purposes of determining the components of taxable income, the assessable income of a life insurance company is allocated to the four classes ((i) to (iv) above) of assessable income. Where assessable income cannot be directly related to a particular class it is allocated between classes of fund assessable income. That allocation is calculated by reference to the ratio that the liabilities for the class in question bears to the total liabilities of the fund of which that class forms part.

9.9. Broadly an allowable deduction to a life company is either allocated to a particular class of assessable income or apportioned between the various classes of income. Where an outlay does not relate exclusively to a particular class of assessable income it is apportioned.

Explanation of the proposed amendments

9.10. New Subdivision B of Division 8 sets out the legislative framework for dealing with the taxation treatment of protection levy and other payments made by or to life insurance companies under the Collection Bill. [Clause 42]

Who Pays The Protection Levy and Why?

9.11. The protection levy is payable by life insurance companies registered under the Life Insurance Act 1945 . The purpose of the levy is to provide a measure of financial protection to policyholders of Occidental Life and Regal Life. The timing and amount of the protection levy will be dependent on the judicial management of Occidental Life and Regal Life.

Is The Protection Levy Tax Deductible?

9.12. Yes. The protection levy is an allowable deduction in the year in which the levy is incurred [new section 116DB] . The levy is due and payable not later than the 28th day after the day it is imposed (clause 10 of the Collection Bill).

9.13 . The deductible protection levy payment will relate exclusively to the non-fund class of assessable income (taxable at the 39% rate). [New section 116DC]

9.14. The implications of new section 116DC are:

•

Section 111C of the Principal Act does not apply. Section 111C requires that a deduction allowable other than under section 51 or 113 of the Principal Act and that does not relate exclusively to the assessable income of a company is reduced to take account of exempt income derived by the company. As new section 116DC provides that the allowable deduction relates exclusively to the non-fund class of assessable income, the test in subsection 111C(1) which triggers the application of the section is not satisfied; and

•

As new section 116DC deems the deduction to relate exclusively to the non-fund class of assessable income, subsection 116CF(1) of the Principal Act applies. Section 116CF operates to allocate deductions to the various classes of assessable income. In particular, subsection 116CF(1) provides that deductions that relate exclusively to a particular class of assessable income are allocated to that class of income.

9.15. If there is a deficit in the non-fund class, the income tax law will operate in the normal fashion. A deficit in the non-fund class will be offset against surpluses in other classes in the order set out in section 116CG of the Principal Act. That is, if there is a deficit in the non-fund class, then that deficit will be applied in reducing current surpluses of the other classes in the following order:

•

accident, disability and residual life assurance class;

•

complying superannuation and rollover annuity class; and

•

non complying superannuation class.

How Are Winding-Up Payments From The Protection Fund To Life Insurance Companies Treated?

9.16. Winding-up advances may be paid from the Protection Fund to a life insurance company provided:

•

they have a credit balance in their separate notional account; and

•

it is unlikely that further grants are to be paid for a considerable period (clause 20 of the Collection Bill).

9.17. Where the Protection Fund is to be wound up, final winding-up payments may be made to life insurance companies where the company has a credit balance in their separate notional account (clause 21 of the Collection Bill).

9.18. Where surplus moneys are repaid under clause 20 or 21 of the Collection Bill, those amounts are assessable income of the taxpayer in the year of income in which the credit balance in the separate notional account is payable by the Commonwealth. [New section 116DD]

9.19. Winding-up advances and final winding-up payments will be treated as non-fund assessable income of the taxpayer (new section 116DE). This has the effect that subsection 116CE(2) of the Principal Act captures any such payments and includes them in the non-fund class. Under section 116CE, the assessable income of a life insurance company is allocated to the four classes of assessable income, for purposes of determining the components of taxable income under section 116CJ of the Principal Act.

9.20. New section 116DE is not to be taken as widening the scope of the meaning of 'fund assessable income' when used in Subdivision A, Division 8. Section 116DE has been enacted for the avoidance of doubt. [New section 116DJ]

What Is The Tax Treatment Where There Is A Transfer Of Equity In The Protection Fund?

9.21. A scheme confirmed by the Court under Division 9 of Part III of the Life Insurance Act 1945 may make provision for the transfer of the whole or a part of the separate notional account of a company and the entitlements of a company under clause 20 or 21 of the Collection Bill (clause 19 of the Collection Bill).

9.22. If the transferee pays or gives consideration to the transferor for the transfer, then the amount or value of the consideration will be deductible to the transferee in the year in which it is incurred (new paragraph 116DF(e)). The deduction will relate exclusively to the non-fund assessable income of the transferee. [New paragraph 116DF(f)]

9.23. Similarly, the amount or value of the consideration will be assessable income to the transferor in the year of income the transferee is allowed a deduction [new paragraph 116DF(c)]. The amount included in a transferor's assessable income will be non-fund assessable income of the transferor [new paragraph 116DF(d)] . New paragraph 116DF(d) is not to be taken as widening the scope of the meaning of 'fund assessable income' when used in Subdivision A, Division 8. Paragraph 116DF(d) has been enacted for the avoidance of doubt. [New section 116DJ]

9.24. No capital gains tax consequences will arise as a result of a scheme covered by clause 19 of the Collection Bill (see comments on new section 116DK which treats this Subdivision as a primary code in respect of certain events).

What Is The Taxation Treatment Of Grants By The Protection Fund To Occidental Life and Regal Life?

9.25. Grants may be made to Occidental Life and Regal Life from the Protection Fund (Part 4 of the Collection Bill). These grants will be exempt from income tax (new section 116DG). This amendment avoids the necessity to increase the gross amount of levy payments required to meet the shortfall were such payments assessable. Similarly any repayments from Occidental Life and Regal Life to the Commonwealth (in accordance with Part 5 of the Collection Bill) are not deductible to Occidental Life and Regal Life under the existing law - subsection 51(1) and section 113 of the Principal Act.

What Is The Taxation Treatment Of Remissions, Overpayments and Underpayments of The Protection Levy?

Remissions of the protection levy

9.26. There may be cases where the whole or a part of the protection levy is remitted. In these cases, the amount remitted is taken never to have been incurred [new subsection 116DH(3)] . This means that the amount correctly deductible under section 116DB is the amount of the protection levy that has not been remitted.

Example

9.27. If the amount of protection levy originally calculated was $1 million and subsequently $150 000 of that amount is remitted, then the amount correctly deductible under section 116DB is $850 000.

9.28. The remission of protection levy incurred in a year of income may occur after the life insurance company has lodged its tax return for that year.

9.29. Section 170 of the Principal Act allows the Commissioner of Taxation to amend an assessment within certain time limits by making such alterations or additions that the Commissioner considers necessary, even though tax under that assessment has been paid. The time limit specified in section 170 is overridden by new section 116DH which will allow an assessment to be amended at any time so that the correct amount of protection levy is deductible.

Overpayments and underpayments of the protection levy

9.30. The amount of the protection levy payable by a life insurance company is determined by a formula (clause 7 of the Life Insurance Policy Holders' Protection Levies Bill 1991 ). The formula requires the application of a specified rate to the Australian proportion of the value of the assets in the statutory funds of each life insurance company.

9.31. Where an overpayment or underpayment of protection levy occurs, the amount that is properly incurred is deductible under new section 116DB. An overpayment or underpayment may arise, for example, where the amount of the protection levy has been incorrectly calculated.

9.32. When an overpayment or underpayment of the protection levy is subsequently recognised, the relevant assessment may be amended with no time limit impediment [new section 116DH] to ensure that the correct amount only is deductible under section 116DB.

How Does New Subdivision B Interact With Other Provisions Of The Principal Act?

9.33 . New section 116DK provides that Subdivision B is the primary code for the tax treatment of matters relating to the protection levy.

9.34. Where any of the prescribed events happen [new paragraphs 116DK(a) to (f)] the event is ignored in relation to any taxation consequences that may arise under another provision of the Principal Act.

9.35. However new section 116DK has no effect on late payment penalties which are covered by clause 11 of the Collection Bill. That is a liability distinct from the protection levy and continues to be covered by subsection 51(4) of the Principal Act which denies a deduction under subsection 51(1) for penalties or fines imposed as a result of breaches of the law.

9.36. Two important examples of the consequence of new section 116DK are:

•

the capital gains tax provisions of Part IIIA of the Principal Act will not apply in relation to the specified events;

•

subsection 72(2) of the Principal Act will not apply to assess refunds of the protection levy.

Commencement date

9.37. New Subdivision B of Division 8 commences or is deemed to have commenced on the day on which the Collection Bill receives the Royal Assent. [Subclause 2(3)]

Clauses involved in the proposed amendments

Clause 40: Renames the existing Division 8 of Part III of the Principal Act as Subdivision A - General Provisions.

Clause 42: Inserts new Subdivision B which deals with the tax treatment of matters relating to life insurance policyholders' protection levies.