Explanatory Memorandum
(Circulated by the authority of the Treasurerthe Hon John Dawkins, M.P.)This Memorandum takes account of amendments made by the House of Representatives to the Bill as introduced.Chapter 5 LIFE ASSURANCE POLICIES AND CAPITAL GAINS
Overview
5.1 The Bill will amend the capital gains tax provisions so that they do not apply to gains or losses on the disposal of life assurance policies held by complying superannuation funds, complying approved deposit funds or pooled superannuation trusts [Clause 24] .
Summary of the proposed amendments
5.2 The Bill proposes an amendment which will exclude from the capital gains tax provisions gains and losses realised on the disposal of life assurance policies by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust.
5.3 This amendment will apply to disposals of life assurance policies taking place in the year of income in which 1 July 1988 occurred, and subsequent years of income. It will therefore apply with effect from the income year in which the current basis of taxing superannuation and related business commenced.
Background to the legislation
5.4 The provisions relating to capital gains and losses in Part IIIA operate by taxing capital gains and losses realised on the disposal of assets. Section 160M generally provides that, for the purposes of the capital gains and losses (CGT) provisions, a disposal of an asset occurs where a change takes place in the ownership of the asset.
5.5 Section 160ZZI relates specifically to the application of the CGT provisions to the disposal of policies of life assurance.
5.6 Subsection 160ZZI(2) provides a general exemption from CGT for gains and losses realised on the disposal of policies of life assurance, or rights under policies of life assurance. This general exemption is limited by subsection 160ZZI(3) as being available only where the person making the disposal is the "original beneficial owner" of the policy (or rights under the policy) or a person who did not acquire the rights or interest for money or other consideration.
5.7 Subsection 160ZZI(4) specifies that certain acts, transactions or events will result in the disposal of a policy of life assurance, and is expressed to apply "without limiting the generality of section 160M". Subsection 160ZZI(4) merely clarifies the application of section 160M and does not have the effect of limiting "disposals" for the purpose of section 160ZZI to those listed in subsection 160ZZI(4).
5.8 Representations have been made that there is some uncertainty as to the correct application of section 160ZZI to the disposal of life assurance policies held by "Complying Superannuation Funds" (CSFs).
5.9 As discussed above, the general CGT exemption provided by subsection 160ZZI(2) is not available unless the person disposing of the interest or rights in the policy is the "original beneficial owner" of the policy (or did not acquire the rights or interest for consideration). The term "original beneficial owner" is not defined in the Act, and has no legal meaning in trust law. However, it is arguable that, by implication, an "original beneficial owner" of a policy of life assurance must be a person who is a beneficiary under the policy. The trustee of a CSF has only a legal interest in the policies held on behalf of members, and for this reason may not fall within the scope of the CGT exemption provided by section 160ZZI. This result would be inconsistent with the general concessional taxing treatment of CSF's as reflected in subsection 26AH(7) and section 282A which provide an exemption from income tax for bonuses received by CSF's from life assurance policies.
Explanation of the proposed amendments
5.10 The Bill proposes new subsection 160ZZI(3A) [Clause 25] , which will provide that the capital gains and losses provisions do not apply to disposals of life assurance policies, or rights under life assurance policies, by:
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- complying superannuation funds;
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- complying approved deposit funds (ADFs); or
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- pooled superannuation trusts (PSTs).
5.11 The terms "complying superannuation fund", "complying ADF" and "pooled superannuation trust" are defined in section 267.
5.12 For these purposes, the term "policy of life assurance" is defined in subsection 160ZZI(1) to mean:
"a policy of assurance on the life of a person and includes an instrument securing the grant of an annuity, whether or not for a term dependent on the life of a person".
Commencement date
5.13 The exemption proposed by new subsection 160ZZI(3A) will apply to disposals of policies of life assurance taking place during or after the year of income in which 1 July 1988 occurred. It will therefore apply with effect from the income year in which the current provisions relating to the taxation of superannuation and related business contained in part IX took effect [Clause 26] .