Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Exemption for Certain Life Insurance Business
Overview
Life insurance is not an eligible activity for the purposes of the active business exemption (ABE). The opportunity to invest in a foreign life assurance company without attracting FIF taxation will be provided on a restricted basis through a specific exemption.
Explanation
The life insurance exemption in Division 5 applies to a taxpayer's interest a foreign company that is engaged in life insurance business.
A foreign company will only be considered to be engaged in life assurance business at the test time if the company is authorised in its country of residence to carry on life business and the balance sheet of the company shows that at least 50 per cent of the gross value of the company's assets were for use in carrying on life assurance business as defined in section 4 of the Life Insurance Act 1945 .
Definition of 'life insurance business'
Section 470 defines 'life insurance business' by reference to section 4 of the Life Insurance Act 1945 .
Life insurance business means:
- ife business, including
- ife insurance business under ordinary policies,
- ife insurance business under industrial policies,
- uperannuation business;
- ontinuous disability insurance;
- inking fund business;
Life insurance business does not include:
- usiness in relation to the benefits provided by a friendly society or trade union for its members or their dependants;
- usiness in relation to the benefits provided for members or their dependants by an association of employees;
- usiness in relation to any scheme or arrangement whereby superannuation benefits, pensions or payments to employees or their dependants upon retirement, disability or death, are provided by an employer or his employees, or by both, wholly through an organisation established by the employer or his employees or by both;
- n the case of a person who issues policies to his employees, and not to any other persons, the business of, or in relation to , the issuing of, or the undertaking of liability under, those policies; or
- usiness in relation to a scheme or arrangement for the provision of benefits consisting of -
- i)
- he supply of funeral, burial or cremation services, with or without the supply of goods connected with such services; or
- ii)
- he payment of money, upon the death of a person, for the purpose of meeting the whole or part of the expenses of, and incidental to, the funeral, burial or cremation of that person,
- and no other benefits, except benefits incidental to the scheme or arrangement.
Sinking fund business means business in relation to the issuing of, or the undertaking of liability under sinking fund policies which ensure payment of a sum, or series of sums, of money on a future date or dates in consideration of one or more premiums.
Superannuation business means life insurance business, being business of, or in relation to , issuing of, or the undertaking of liability under, superannuation policies.
Fifty per cent assets test for FIF
One of the requirements for exemption is that the gross value of the foreign company's assets for use in carrying on life insurance business was 50 per cent or more of the gross value of all the companies assets (50 per cent assets test). [Paragraph 507(2)(b)]
Authorised to carry on life insurance business
In addition, the foreign company must be authorised under the law of its country of residence to carry on life insurance business. [Paragraph 507(2)(a)]
Principally engaged in life insurance business
If the 50 per cent assets test, and the authorisation requirement is satisfied, the foreign company is taken to be principally engaged in carrying on life insurance business. As a consequence, any interest that a taxpayer holds in a foreign company principally engaged in carrying on life insurance business is exempt from the FIF measures [section 506] regardless of whether or not that interest consists of a share in a publicly listed company.
The life company may have an interest in a subsidiary company. It is therefore necessary to provide a 'look-through' rule to the subsidiary's assets to determine whether the foreign life insurance company passes the 50 per cent assets test. The rule is applied in a similar manner to the 'look-through' rule which is applied under the balance sheet test in the ABE.
Subsections 507(3) and (6) will allow the 'look-through' rule to be applied where the foreign life insurance company has a direct, indirect or direct and indirect interest of 50 per cent or more in the paid-up share capital of a lower-tier company. The shares that the foreign life insurance company (first-tier company) holds in the lower-tier company are ignored under the test and the first-tier foreign company is considered to own its proportionate share of the underlying assets of the lower-tier company.
The interest which the foreign life insurance company holds in the lower-tier company is calculated by multiplying the direct interest each company interposed between the first-tier company and the bottom-tier company holds in the succeeding company. [Subsections 507(3) and (6)]
[Subsection 507(7)] will allow the 'look-through' rule to be applied to a lower-tier company incorporated in any country including Australia. This corresponds with the provisions in the balance sheet test in the ABE.
Assets for use in carrying on life insurance business
The assets that may be taken into account for the 50 per cent assets test [(paragraph 507(2)(b))] and the look-through rule (subsection 507(3) and (6)) are:
- he assets of the company directly engaged in life insurance activities such as office furniture, computers etc;
- hose assets used to support the life insurance activities, such as real property owned by the company in which the life insurance business is conducted; and
- ssets that represent the life insurance statutory funds.
The gross value of an asset for the purposes of the 50 per cent asset test in paragraph 507(2)(b) or the 'look-through' rule in subsections 507(3) and (6) is determined by reference to the value of that asset shown in the balance-sheet of the company which owns the asset. Under [subsection 507(8)] the balance sheet must be prepared in accordance with commercially accepted accounting principles and give a true and fair view of the company's financial position. This valuation requirement is in accordance with the provisions in the ABE.
Currency for valuation of assets
For the purposes of the 'look-through rule' in subsections 507(3) and (6) the valuation of an asset is to be undertaken in the currency in which the foreign life insurance company's (referred to in subsection 507(1)) balance-sheet is prepared. Where the accounts of a lower-tier company are prepared in a different currency from that of the foreign life insurance company (first-tier company) the value of the lower-tier company's assets must be converted to the currency used by the life insurance company as at its balance date at the rate of exchange prevailing at that time. [Subsection 507(10)]
For the purpose of this exemption only, the interest that a foreign company holds in a foreign funds management company will be considered to be an asset used in the life insurance business.
Therefore, for the purpose of Division 5 only, where a foreign company owns shares in a FIF which is a funds management company that:
- s not a resident of Australia; and
- anages funds of the foreign life insurance company which are similar to statutory funds defined in Division 3 of Part III of the Life Insurance Act 1945,
then the gross value of those shares are to be included in the numerator and the denominator of the 50 per cent assets test in paragraph 507(2)(b). [Subsection 507(11)]
A company is considered to 'manage funds', or be a funds management company, where it accepts pools of capital from investors and conducts discretionary investment activities on their behalf.
A 'statutory fund' of a life insurance business is a basket of monies, liabilities and assets which are demarcated from the company's other monies, liabilities and assets. A particular 'statutory fund' is the sum of all amounts received by the company in respect of a particular class or classes of life insurance contracts entered into by the company.
The amount of assets within a particular 'statutory fund' is designated to meet the liabilities and expenses in relation to the particular class or classes of life insurance policies for which the statutory fund was established. In addition, each statutory fund includes any assets that provide security for the writing of the life insurance contracts under which the company has undertaken liability.
Assets used jointly for life insurance activities and other activities
Where a company's asset is used in the carrying on of a life insurance business and also for some other purpose the value of the asset to be included in the 50 per cent assets test in paragraph 507(2)(b) and the 'look through' test is proportional to the use of the asset in the carrying on of a life insurance business. This aligns with the balance sheet test in the ABE.
An Australian resident must look at the end of the notional accounting period of the foreign company that ends during his or her year of income to determine if the exemption applies to the taxpayer's interest in the foreign company.
The definition of a notional accounting period is set out in section 486. Generally, it is the year of income of the taxpayer unless the taxpayer elects for the company's accounting period.
Treatment of a foreign life insurance company that is a controlled foreign company under Part X
Under Division 2, where a taxpayer has an interest in a FIF which is also a controlled foreign company ( CFC) and the taxpayer is an attributable taxpayer of the CFC as defined under Part X of the Principal Act, the CFC measures will apply to the exclusion of the FIF measures. However, the FIF measures may apply to a non- CFC FIF held by the CFC.
[Subsection 402(2A)] will be inserted into Part X of the Principal Act. It provides, subject to the conditions below, that income of the CFC from a FIF that is a funds management company will be exempt from the FIF measures. The conditions are:
- hat the CFC was authorised under the law of its country of residence to carry on life insurance business; and
- he CFC has 50 per cent or more of the gross value of its assets for use in carrying on a life insurance business; and
- he FIF was principally engaged in the management of funds of other persons; and
- he FIF managed funds of the CFC similar to statutory funds in Division 3 of Part III of the Life Insurance Act 1945 .
The phrase life insurance business is defined by section 470 by reference to section 4 of the Life Insurance Act 1945 .
Valuation of assets under the 50 per cent assets test for CFC
For the purposes of applying the 50 per cent asset test in subsection 402(2A) to the CFC, the assets to be taken into account are those disclosed on the balance sheet prepared for the relevant statutory accounting period of the CFC.
The valuation of the assets taken into account for the purposes of the 50 per cent asset test are to be as shown in the balance sheet for the relevant statutory accounting period of the CFC.
The phrase 'management of funds' reflects the same meaning as the phrase 'manage funds' in subsection 507(11) and as discussed under the same subheading above.
A FIF will be 'principally engaged' in the management of funds where a large majority of its activities are funds management.
The term 'statutory funds' has the same meaning as in subsection 507(11) and as discussed above under the same subheading.
Assets used jointly in funds management activities and other activities.
Where a company's asset is used in the carrying on of a life insurance business and also for some other purpose, the value of the asset to be included in the numerator of the 50 per cent assets test in paragraph 507(2)(b) and in the 'look through' rule under subsections 507(3) and (6) is proportional to the use of the asset in the carrying on of a life insurance business.
Clauses making the amendments
Clause 25: Inserts subsections 402(2A) to (2C) which exempts from the FIF measures an interest of a CFC in a funds management company.
Clause 27: Inserts Part XI which contains the exemption for certain life assurance business.