Explanatory Memorandum
(Circulated by authority of the T reasurer, the Hon Ralph Willis, MP)Chapter 2 - Taxation of friendly societies and other registered organisations
Overview
2.1 The amendments contained in Schedule 2 of the Taxation Laws Amendment (Budget Measures) Bill 1995 propose to freeze the rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations at 33% for the 199596 and 199697 years of income. The rebate applying to taxable bonuses paid on life insurance policies issued by friendly societies will increase to 33% from 1 July 1995 as scheduled and will be maintained at that level for the year beginning 1 July 1996.
Summary of the amendments
2.2 In the 199596 Budget the Government announced a review of the taxing arrangements that apply to the life insurance business of friendly societies and life assurance companies. The review will consider alternative taxation arrangements for life insurance which improve equity, efficiency and certainty and will provide an opportunity to resolve a number of issues that have been raised with, or by, the industries.
2.3 The review will be conducted by Treasury and the Australian Taxation Office in consultation with the industries and is expected to be completed in time for a decision to be announced prior to, or in, the 199697 Budget.
2.4 The Government is concerned that the review not interfere with the conduct of life insurance business. Accordingly the trustee rates that applied during the 199495 income year to the eligible insurance business of life assurance companies (39%) and friendly societies and other registered organisations (33%) will be maintained until the 199798 year of income while the review is undertaken. The tax rates that apply to the life insurance business of life assurance companies and friendly societies and other registered organisations will be aligned as an outcome of the review.
2.5 The proposed amendments are necessary to defer the scheduled increase in the rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations to 36% in the 199596 income year and to 39% in the 199697 income year. Consequently, the rebate applying to taxable bonuses paid on life insurance policies issued by friendly societies will increase to 33% from 1 July 1995 as scheduled and will be maintained at that level for the year beginning 1 July 1996.
2.6 The amendments will commence with effect from 1 July 1995.
Background to the legislation
2.7 Paragraph 23(4)(b) of the Income Tax Rates Act 1986 declares that the rate of tax on the eligible insurance business component of the taxable income of a company that is a registered organisation is 33%. A registered organisation is defined to include trade unions, friendly societies and certain employee associations. Section 19 of the Taxation (Deficit Reduction) Act (No 2) 1993 increases that rate to 36% for the 199596 year of income. Section 20 of that Act further increases the rate to 39% for the 199697 and later years of income.
2.8 Section 26AH of the Income Tax Assessment Act 1936 includes bonuses received on life insurance policies that are surrendered within 10 years in the assessable income of the policyholder. If such an amount is included in a policyholder's assessable income, a rebate is available under section 160AAB to compensate the policyholder for the tax paid by the life assurance company or registered organisation.
2.9 Currently, if the life insurance policy was issued by a friendly society, that rebate is 30% of the amount included in assessable income under section 26AH (see paragraph (a) of the definition of statutory percentage in subsection 160AAB(1)). Section 13 of the Taxation (Deficit Reduction) Act (No 2) 1993 increases the rebate to 33% for the 199596 year of income. Section 14 of that Act increases the rebate to 36% for the 199697 year of income. Section 15 further increases the rebate to 39% for the 199798 and later years of income.
Explanation of the amendments
Rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations
2.10
10 The proposed amendments will freeze the rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations at 33% for the 199596 and 199697 years of income while the review of the taxing arrangements that apply to life insurance business is undertaken.
2.11 To achieve this outcome, the Bill will amend the Taxation (Deficit Reduction) Act (No 2) 1993 to:
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- remove the scheduled increase in the rate of tax imposed on the eligible insurance business of registered organisations to 36% in the 199596 year of income [item 6] ;
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- defer the scheduled increase in the rate of tax imposed on the eligible insurance business of registered organisations to 39% until the 199798 and later years of income [items 4, 5 and 6; new section 19 of Taxation (Deficit Reduction) Act (No 2) 1993] .
2.12 The provisions to increase the rate of tax imposed on the eligible insurance business of registered organisations to 39% in the 199798 and later years of income will commence on 1 July 1997. [Item 1; new paragraph 2(3)(b) of Taxation (Deficit Reduction) Act (No 2) 1993]
Rebate on bonuses paid on the surrender of a life assurance policy issued by a friendly society
2.13 The rebate available to policyholders under section 160AAB of the Income Tax Assessment Act 1936 will increase to 33% from 1 July 1995 as scheduled and will be maintained at that level for the year beginning 1 July 1996. [Items 2 and 3]
2.14 The provisions to increase the rebate to 33% will commence on 1 July 1995 [item 1; new subsection 2(2) of Taxation (Deficit Reduction) Act (No 2) 1993] . The provisions to increase the rebate to 39% in the 199798 and later years of income will commence on 1 July 1997 [item 1; new paragraph 2(3)(a) of Taxation (Deficit Reduction) Act (No 2) 1993] .