Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Chapter 1 Continuously Complying Fixed Interest Approved Deposit Funds
Summary of proposed amendments
Purpose of amendment: To ensure that approved deposit funds (ADFs) will be able to take into account profits from the disposal of securities to determine whether they qualify as continuously complying fixed interest ADFs.
Date of effect: 1 July 1988
Section 290A of the Income Tax Assessment Act 1936 exempts from tax certain income derived by continuously complying fixed interest approved deposit funds (ADFs).
The purpose of section 290A is to relieve certain depositors in complying ADFs from some of the impact of tax otherwise payable by ADFs on investment income. In general terms, income of the ADF that is attributable to those depositors investments with the ADF as at 25 May 1988 is exempt, so long as the ADF passes the benefit of the exemption onto relevant depositors.
The exemption applies to income that is derived on deposits held in ADFs as at 25 May 1988 by two groups of depositors. Namely:
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- people who were aged 55 or older as at 25 May 1988; and
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- people who were aged 50 or older at that date and who had deposits in an ADF consisting of an approved early retirement scheme payment, a bona fide redundancy payment or an invalidity payment.
The exemption is only available to ADFs that qualify as continuously complying fixed interest ADFs as defined in subsection 290A(4). Section 290A does not apply to exempt any income derived by superannuation funds. A fixed interest ADF is defined in subsection 290A(4) to be a complying ADF where both the following conditions are satisfied:
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- not less than 90% of the ADF's normal assessable income consists of interest, or payments in the nature of interest, or income that is assessable under the accrual rules for deferred interest securities in Division 16E of Part III; and
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- the assets of the ADF do not consist of units in a pooled superannuation trust or of CS policies issued by a life insurance company or registered organisation.
If an ADF breaches the conditions for exemption in any year, the exemption is lost forever.
Explanation of proposed amendments
Paragraph (a) of the definition of fixed interest complying ADF in subsection 290A(4) is being extended to include profits on the disposal, redemption, cancellation or maturity of a security in the categories of income that qualify for inclusion in the 90% test. The term security is defined in subsection 303(1) to include, among other things, bonds, debentures, bills of exchange, deposits with banks or other financial institutions and other loans. [Clause 4]