Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)Chapter 1 - Life insurance companies
Overview
1.1 This chapter explains two measures that concern life insurance companies. Section 1 deals with the removal of a double taxing effect on bonus shares issued in satisfaction of certain assessable dividends. These amendments are contained in Part 1 of Schedule 1 of the Bill. Section 2 deals with the increase in the rate of the inter-corporate dividend rebate applicable to non-fund dividends. These amendments are contained in Part 4 of Schedule 1 of the Bill.
Section 1 - Bonus shares and life insurance companies
Summary of the amendments
1.2 The amendments proposed will amend the Income Tax Assessment Act 1936 (the Act) in respect of the cost of bonus shares received in satisfaction of assessable dividends where the shares are included in the insurance funds of a life insurance company. The amendments will include the amount assessed in the cost of shares when determining any subsequent profit or loss on disposal.
1.3 The amendments will apply to bonus shares within the meaning of subsection 6BA(1) of the Act that are disposed of on or after 1 July 1994. Any amount included in assessable income in the past or before these shares are disposed of will form part of the cost of the shares in relation to that subsequent disposal. [Item 6]
Background to the legislation
1.4 Assessable dividends payable to companies and satisfied through the issue of bonus shares generally receive the inter-corporate dividend rebate. Therefore, they are effectively not taxed in the hands of the receiving company. Because of this, they are excluded from the cost of the shares in determining any profit or loss on their subsequent disposal (subsection 6BA(2)). However, shares included in the insurance funds of a life insurance company are not entitled to the inter-corporate dividend rebate. The life insurance industry has pointed out that companies are doubly taxed in respect of the amount of assessable dividends satisfied through the issue of bonus shares. Double taxation occurs first on dividend income and subsequently on profit on sale. On 30 June 1994, the Assistant Treasurer announced that the matter would be rectified by amendment of the legislation.
Explanation of the amendments
1.5 Part 1 of Schedule 1 of the Bill amends section 6BA of the Act in a number of areas. The first substantive amendment inserts new subsection 6BA(4A) which operates to allow dividends that are included in the fund assessable income of a life insurance company to be taken into account in determining any profit or loss on disposal of bonus shares received in satisfaction of the dividends. These dividends are not eligible for the inter-corporate dividend rebate because of the operation of subsection 46(10) of the Act. As a result they are effectively subject to income tax. [Item 2]
1.6 Another substantive amendment inserts new subsection 6BA(8) which is to operate in a similar manner to existing subsection 6BA(7). The subsections are relevant where a profit on sale only is included in assessable income, rather than the amount of proceeds on disposal. They ensure that the amount payable in respect of shares (referred to in section 6BA as the 'relevant amount'), where the amount has or is to be used in determining profit or loss on disposal, is taken to be an amount that has been or will be included in the assessable income of a life insurance company. [Items 4 and 5]
1.7 A further amendment applies to paragraph 6BA(6)(d) of the Act. It ensures that subsection 6BA(2) remains applicable when an amount attributable to a dividend is included in other than the fund assessable income of a life insurance company through an interposed trust or partnership, but not when such an amount is included in the fund assessable income of a life insurance company. Paragraphs 6BA(4)(a) and (b) exclude from the operation of subsection 6BA(2) relevant amounts paid to trustees or partnerships. Subsection 6BA(6) already reverses this where relevant amounts paid to a trust or partnership are ultimately received by a resident company. The subsection will now operate in relation to life insurance companies only where relevant amounts are ultimately included in the non-fund of a life insurance company. [Item 3]
1.8 The net effect of the above amendments is that they are relevant only in relation to shares which form part of the assets of the insurance funds of a life insurance company and which do not fall for taxation treatment under the capital gains tax provisions of Part IIIA of the Act. Consequently, the amendments will not be relevant to profits or loss on disposal of assets supporting the liabilities of life insurance policies owned by trustees of complying superannuation funds, as they fall for treatment under the capital gains tax provisions.
1.9 Section 160ZYHC of the Act already provides for dividends received as bonus shares to be included in the cost base when determining any capital profit or loss on disposal. The amendments will operate in a similar manner to include amounts already assessed as dividend income but received as bonus shares in satisfaction of those dividends in the cost of the shares when determining the profit or loss on disposal of the shares for the purposes of subsection 25(1) or subsection 51(1) of the Act.
1.10 New subsection 6BA(9) provides that the terms 'fund assessable income', 'life assurance company' and 'the insurance funds' which are used in these amendments have the same meaning as those terms in Division 8, Part III of the Act which concerns the taxation of life insurance companies. [Item 5]
Section 2 - Dividend rebates and life insurance companies
Summary of the amendments
1.11 The amendments proposed will amend the Income Tax Assessment Act 1936 (the Act) to provide for life insurance companies, in determining the inter-corporate dividend rebate applicable to dividends included in their non-fund component of taxable income, to use the average rate of tax payable on that component rather than the lower overall rate paid by a company. The overall rate is lower because it includes the effect of the concessional rate applicable to superannuation business. The effect of the amendments will be to match the rate of rebate with the rate of income tax actually paid on the rebatable income.
1.12 The amendment will apply to inter-corporate dividend rebates in assessments for 1994-95 and later years of income. [Item 35]
Background to the legislation
1.13 Life insurance companies pay tax at different rates on the various components of their taxable income. For example, the rate for the component of ordinary life insurance business is 39%, superannuation business is 15%, and non-fund income is 33% or 39%. This generally results in the average rate of tax for the company as a whole being less than the rate at which dividends in the non-fund component are taxed (33% or 39%). The present allowance of the inter-corporate dividend rebate at the average rate of tax paid on total taxable income rather than the rate actually paid on non-fund dividends results in some double taxation of dividends. Dividends included in the insurance funds of a life insurance company are not affected as they are not eligible for the inter-corporate dividend rebate. On 30 June 1994, the Assistant Treasurer announced that the Government proposed to rectify the situation by amendment of the legislation.
Explanation of the amendments
1.14 Part 4 of Schedule 1 of the Bill amends sections 46 and 46A of the Act by introducing new subsections 46(1A), 46(6AA), 46A(6A) and 46A(8AA) . Section 46A applies only in relation to dividends paid as part of dividend stripping operations. Sections 46 and 46A, as amended by the new subsections, will allow life insurance companies to use the rate of tax actually payable on the non-fund component of taxable income, instead of the lower average rate of tax payable on all taxable income, in determining the inter-corporate dividend rebate for dividends included in the non-fund component of taxable income.
1.15 New subsection 46(1A) is necessary to make it clear that, in relation to life insurance companies, the usual operations of section 46 apply only to the non-fund component of taxable income. This is because only dividends included in that component can receive a rebate under section 46 due to the effects of subsection 46(10). [Item 26]
1.16 New subsection 46(1A) and existing subsections 46(2) and 46(10) together will mean that, under existing subsection 46(7), the only dividends that will be eligible for the inter-corporate dividend rebate will be dividends actually included in the assessable income of the non-fund class of a life insurance company. Where non-fund dividends exceed the amount of non-fund component of taxable income, the amount of rebatable dividends will be limited to the non-fund component of taxable income by existing paragraph 46(7)(b). [Item 26]
1.17 New subsection 46(6AA) applies only to life insurance companies. It provides that, for the purposes of calculating the inter-corporate dividend rebate, the rate of tax payable is the rate set out in the Income Tax Rates Act 1986 as the rate applicable to the non-fund component of taxable income of the life insurance company. Previously, the lower average rate determined under subsection 46(6) was applicable. [Items 27 and 28]
1.18 New subsection 46A(6A) is necessary to limit any rebate otherwise allowable under section 46A to the amount of the non-fund component of taxable income of a life insurance company. The rebate entitlement provisions of subsections 46A(5) and (6) refer to net income derived from dividends rather than dividends included in taxable income as used in section 46. Without this provision, section 46A may have allowed a life insurance company an inter-corporate dividend rebate in respect of an amount greater than the amount of dividends that had actually been taxed at the non-fund rate. [Item 31]
1.19 New subsection 46A(8AA) operates in a similar manner to new subsection 46(6AA) to provide the rate of inter-corporate dividend rebate to be the rate of tax actually paid under the Income Tax Rates Act 1986 . [Items 32 and 33]
1.20 Existing definitions of 'insurance funds' and 'life assurance company' contained in subsections 46(11) and 46A(18) have been moved to subsections 46(1) and 46A(1) respectively. This has been achieved by repealing subsections 46(11) and 46A(18) and the insertion of the definitions in the appropriate subsections. A new definition of 'non-fund component' has also been inserted in subsections 46(1) and 46A(1). The opportunity has been taken to make a technical adjustment to the existing definition of 'insurance funds' to change it to 'the insurance funds'. This will align the wording with the actual wording used in the definition in Division 8 which concerns the taxation of life insurance companies. [Items 25, 29, 30 and 34]