Senate

Explanatory Memorandum

(Circulated by authority of the T reasurer, the Hon Ralph Willis, MP)

Chapter 1 - Company tax rate change

Overview

1.1 The Income Tax Rates Amendment Bill 1995 will amend the Income Tax Rates Act 1986 (the Rates Act) to increase the rate of company tax from 33 per cent to 36 per cent for taxable income of the 1995-96 and subsequent income years.

1.2 The increased rate will apply to most companies taxable in Australia (including non-residents) and extend to public trading trusts, corporate unit trusts, corporate limited partnerships which are taxed as companies, and the non-statutory fund income of non-mutual life assurance companies.

1.3 The change in tax rate will not apply to the statutory fund income (including life insurance and superannuation business) of non-mutual life assurance companies, to mutual life assurance companies, to pooled development funds (PDFs), to registered organisations, or to trustees of superannuation funds, approved deposit funds (ADFs), or pooled superannuation trusts (PSTs).

1.4 The Income Tax Rates Amendment Bill 1995, together with the Taxation Laws Amendment (Budget Measures) Bill 1995 (which will amend the Taxation (Deficit Reduction) Act (No.1) 1993 ), ensures that the concessional rates of tax that apply to recognised medium credit unions and recognised large credit unions for the 1995-96 and 1996-97 years of income are preserved.

Summary of amendments

Purpose of the amendments

1.5 To increase the company tax rate.

Date of effect

1.6 The increase in the company tax rate will apply for taxable income of the 1995-96 and subsequent income years.

Background to the legislation

1.7 Currently under the Rates Act the following entities are subject to the company tax rate of 33 per cent on their taxable income:

•

public companies;

•

private companies;

•

corporate limited partnerships;

•

trustees of corporate unit trusts;

•

trustees of public trading trusts; and

•

trustees to whom subsection 98(3) of the Income Tax Assessment Act 1936 (the Assessment Act) applies (where a non-resident company is a presently entitled beneficiary).

1.8 The rate of tax on these entities is to be increased to 36 per cent.

1.9 In addition, the non-fund component of non-mutual life assurance companies which is currently subject to the company tax rate of 33 per cent will be subject to tax at 36 per cent.

1.10 The increased rate will not affect the various rates that apply to the entities listed below:

•

registered organisations;

•

non-mutual life assurance companies on taxable income other than in respect of the non-fund component;

mutual life assurance companies;

•

PDFs (SME and unregulated investment component);

•

trustees of superannuation funds;

•

trustees of ADFs; and

trustees of PSTs.

Explanation of the amendments

Companies generally

1.11 Subsection 23(2) of the Rates Act provides the rate of tax for companies generally. This rate is to be increased from 33 per cent to 36 per cent, effective in respect of the taxable income of the company for 1995-96 and subsequent income years. Section 94J of the Assessment Act ensures that this rate will also apply to corporate limited partnerships. [Item 1; amended subsection 23(2)]

1.12 Paragraph 23(3)(a) of the Rates Act provides the rate of tax for taxable income of private companies. This rate is to be increased from 33 per cent to 36 per cent, effective in respect of the taxable income of the company for the 1995-96 and subsequent income years. [Item 2, amended paragraph 23(3)(a)]

Life assurance companies

1.13 Subparagraph 23(4A)(c)(ii) of the Rates Act provides that the rate of tax on the non-fund component of the taxable income of non-mutual life assurance companies is 33 per cent. This rate will increase from 33 per cent to 36 per cent. The rate of tax on the non-fund component of mutual life insurance companies under subparagraph 23(4A)(c)(i) of the Rates Act will remain unchanged at 39 per cent. [Item 3, amended subparagraph 23(4A)(c)(ii)]

Pooled development funds

1.14 Under paragraph 23(4C)(c) of the Rates Act a company which is registered as a PDF during the year and remains a PDF at the end of the year will be taxed as an ordinary company at 33 per cent up to the day it is registered as a PDF. The tax rate applicable to the period up to the day on which it becomes registered as a PDF will be increased from 33 per cent to 36 per cent. Where a company is not a PDF at the end of a year of income, it is taxed at the ordinary company tax rate for the whole of the income year. [Item 4, amended paragraph 23(4C)(c)]

Non-profit companies

1.15 Subsection 23(5) of the Rates Act phases in the full company tax rate for non-profit companies (other than registered organisations) where taxable income is between $416 and $1,039 by ensuring tax payable does not exceed 55% of the excess over $416. The phasing-in threshold will be increased from $1,039 to $1,204 to take account of the increase in the company tax rate (tax payable on $1,204 at 36 per cent is the same as tax at 55 per cent on the excess over $416). [Item 5, amended subsection 23(5)]

Credit unions

1.16 Subsection 23(6) of the Rates Act phases in the full company tax rate for medium credit unions where taxable income is between $50,000 and $150,000 by ensuring tax payable does not exceed 49.5 per cent of the excess over $49,999. The amendments will increase 49.5 per cent to 54 per cent to take account of the increase in the company tax rate (tax payable on $150,000 at 36 per cent is the same as tax at 54 per cent on the excess over $49,999). [Item 6, amended subsection 23(6)]

1.17 The amendment to subsection 23(6) will not apply to recognised medium credit unions until their 1997-98 income year. The increased company tax rate will also not take effect for recognised large credit unions until the 1997-98 income year. For prior years the concessional rates of tax that were introduced by the Taxation (Deficit Reduction) Act (No.1) 1993 apply. Subitems 10(2) and 10(3) of the Income Tax Rates Amendment Bill 1995 and the amendments to the Taxation (Deficit Reduction) Act (No.1) 1993 to be made by Schedule 1 of the Taxation Laws Amendment (Budget Measures) Bill 1995 will preserve these concessional rates. [Subitems 10(2) and 10(3) of the Income Tax Rates Amendment Bill 1995; Schedule 1 of the Taxation Laws Amendment (Budget Measures) Bill 1995, amended subsections 37(3) and 37(4) of the Taxation (Deficit Reduction) Act (No. 1) 1993]

Other entities

1.18 The rate increase will also apply to:

•

trustees of corporate unit trusts [item 7, amended section 24] ;

•

trustees of public trading trusts [item 8, amended section 25] ; and

trustees to whom subsection 98(3) of the Assessment Act applies [item 9, amended section 28] .