House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Rt. Hon. Harold Holt.)

General Introduction

The purpose of this Bill is to amend the Income Tax and Social Services Contribution Assessment Act 1936-1960 (referred to in these notes as the Principal Act) so as to alter the basis of assessment prescribed in relation to life assurance companies and to modify the conditions under which superannuation funds are exempted from liability to income tax.

The main features of the Bill are -

1.

In relation to life assurance companies -

Exemption from tax of that part of the income of a life assurance company that is referable to policies issued in connection with superannuation schemes eligible for tax exemption, provided that the company invests specified proportions of its assets in Commonwealth and other public securities;

Provision for the amount of certain deductions and rebates allowable to a life assurance company to vary according to the proportion of public securities in its assets;

Extension to all companies engaged in life assurance of the special basis of assessment that has hitherto applied only to companies the sole or principal business of which is life assurance;

2.

In relation to superannuation funds -

Continuation of the present exemption of the income of a provident, benefit, superannuation or retirement fund, conditional upon the fund investing specified proportions of its new moneys in public securities;

Provision of a special basis of assessment under which tax will be levied on such funds if the specified ratios are not maintained.

The amendments will have effect for the first time in assessments based on the 1961-1962 income year. The exemption of the income of life assurance companies referable to superannuation business will apply in respect of income derived on or after 1st July, 1961.

The operation of a number of the proposed provisions will be dependent upon whether a life assurance company or a superannuation fund holds public securities amounting to not less than 30% of its total assets (including Commonwealth securities amounting to not less than 20% of total assets). For convenience of reference, these proportions will be referred to throughout these notes as the "30%-20% ratio of public securities".

Notes on Clauses

Clause 1: Short Title and Citation.

This clause formally provides for the short title and citation of the Amending Act and the Principal Act as amended.

Clause 2: Synopsis of Act.

Section 5 of the Principal Act lists the Parts and Divisions of the Act. The amendment proposed by Clause 2 will insert in the list a reference to the proposed new Division 9B, which Clause 11 will insert in Part III. of the Principal Act, and alter the reference to Division 8 of Part III. consistently with the changes in that Division as proposed by Clauses 5 to 10.

Clause 3: Definitions.

Section 6 of the Principal Act contains a number of definitions for the more convenient interpretation of the Act. It is proposed to amend section 6 to include two new definitions to facilitate drafting of the proposed changes in the Principal Act relating to investment by life assurance companies and superannuation funds in public authority and Commonwealth securities.

"Commonwealth securities" will include bonds, debentures, stock or other securities issued under an Act of the Commonwealth Parliament. Securities in respect of loans raised outside Australia will not, however, be classed as Commonwealth securities unless the Treasurer otherwise directs by a notice published in the Gazette.

"Public securities" will include Commonwealth securities (as defined) and will also include bonds, debentures, stock or other securities issued by States or Territories of the Commonwealth or by municipal corporations, local governing bodies or public authorities set up under the laws of the Commonwealth, the States or the Territories of the Commonwealth. Securities in respect of loans raised outside Australia and the Territories of the Commonwealth will not, however, be classed as public securities unless the Treasurer otherwise directs.

Clause 4: Rebate on Dividends.

This clause will insert a new sub-section in section 46 of the Principal Act, which provides for resident companies to be allowed a rebate of the tax payable as a result of dividends received from other companies being included in taxable income. The new sub-section formally provides that section 46 is subject to section 116A of the Principal Act (a new section which it is proposed, by Clause 10 of the Bill, to insert in the Principal Act). The effect of the new section 116A is explained in the note on Clause 10.

AMENDMENTS RELATING TO LIFE ASSURANCE COMPANIES.

Clauses 5 to 10 are designed to alter the provisions of Division 8 of Part III. of the Principal Act to give effect to the proposed changes in the basis on which life assurance companies will be assessed, and to extend that basis to all companies registered to carry on life assurance business.

Division 8 at present contains a number of provisions that modify the effect of the general provisions of the Principal Act insofar as they relate to companies that carry on life assurance as a sole or principal business.

The main features of the present Division may be summarised, very briefly, as follows -

(1)

Income from premiums is ignored in calculating the tax payable by a life assurance company and no deductions are allowed on account of outgoings relating to premiums (payments under policies, collection expenses, etc.).

(2)

Other income (mainly income from the investment of moneys received from policy holders) is generally subject to tax on the same principles as apply to ordinary taxpayers, except that -

(a)

a formula is provided (in section 113) for ascertaining the deductions that are to be allowed in respect of expenses of general management (i.e. expenses that relate partly to the gaining of assessable income and partly to the gaining of income that is exempt from tax); and

(b)

a special deduction is allowed (under section 115) which has the broad effect of freeing from tax the first 3% of that part of a company's income that is derived from the investment of its necessary reserves.

The changes proposed in Division 8 may be summarized under three broad headings -

Companies holding approved proportions of public securities

A life assurance company that maintains the "30%-20% ratio of public securities" in its life assurance assets (or gives an undertaking to build up to this ratio over an approved period ending not later than the commencement of the 1971-1972 income year) will be granted -

(1)

exemption from tax in respect of that part of its investment income that is referable to policies issued for the purposes of superannuation schemes that qualify for tax exemption; and

(2)

an increase in the special deduction under section 115 of the Principal Act, which is allowed to life assurance companies in respect of their actuarial liabilities, proportionate to any excess of the holdings of public securities over what is needed to maintain the "30%-20% ratio".

The proposed adjustment in the section 115 deduction will mean, in effect, that -

(1)

for every one per cent by which a company's holdings of public securities at the end of the year of income exceeds thirty per cent, there will be a one per cent increase in the total amount of the deduction; and

(2)

for every one per cent by which the company's holdings of Commonwealth securities exceeds 20% there will be a one-half per cent increase in the amount of the section 115 deduction; and

(3)

for every one per cent by which the company's holdings of public securities other than Commonwealth securities is less than ten per cent, there will be a one-half per cent reduction in the amount of the section 115 deduction.

The third of these adjustments is designed to ensure that the new basis of calculating section 115 deductions will not encourage companies to sell their holdings of semi-Government securities and replace them by Commonwealth securities. With the same object, it will also be provided that companies that do not maintain their holdings of public securities (other than Commonwealth securities) at least as high as the level as at 1st March, 1961 will not receive any increased section 115 deduction on account of holdings of Commonwealth securities above the twenty per cent level.

Companies will not be expected to maintain the "30%-20% ratio of public securities" in respect of their overseas business, and if a company maintains separate statutory funds for its Australian and ex-Australian policies, the assets of the overseas funds will not be taken into account in calculating the various proportions that will affect the company's liability to income tax. (Under the Life Insurance Act, provision is made for a company to set up separate statutory funds for particular classes of life insurance business. The setting up of a separate statutory fund in effect results in a complete segregation in the company's accounts of the relevant sector of its business and of the assets held in connection with that sector. The company is required to pay into the statutory fund any premiums it receives in respect of policies of the class for which the separate fund is maintained, and assets of that fund are only available to meet liabilities referable to that class of business.)

An alternative procedure will, however, be available for companies that keep Australian and ex-Australian policies in the same statutory fund. Such companies will have a right of electing that the Commissioner of Taxation, in calculating the various ratios, shall exclude from the total assets of each Australian statutory fund, the proportion of assets that is referable to policies that are kept on registers outside Australia and the Territories of the Commonwealth, and owned by non-residents. Where a company adopts this procedure, any Commonwealth or public securities issued in respect of loans raised outside Australia will also be excluded from the various calculations.

Similar procedures will apply for ascertaining the part of a life assurance company's income that is eligible for exemption as being attributable to exempt superannuation policies. If a company sets up a separate statutory fund and keeps it exclusively for such policies, the whole of the income derived from the assets of the fund will be exempt from tax in the hands of the company. Where a fund consists partly of exempt superannuation policies and partly of other policies, the Commissioner of Taxation will determine, by means of an apportionment, the part of the income of the fund that is exempt from tax.

It may, however, be in a company's own interests to set up a separate statutory fund in respect of its exempt superannuation policies because the increases in its section 115 deductions, based on the excess of Commonwealth and other public securities over what is needed to maintain the "30%-20% ratio of public securities", will be calculated by reference to the proportions of such assets in the company's Australian statutory funds other than those maintained solely for exempt superannuation business.

Companies not holding appropriate proportions of public securities

In the case of a life assurance company that does not maintain the "30%-20% ratio of public securities" and does not give an undertaking to build up to that ratio, investment income referable to superannuation business will remain subject to tax as under the present law. In addition, the basis of assessment will be varied, in that -

(1)

the amount of the deduction allowable to the company under section 115 will be reduced by one per cent for every one per cent by which the holdings of public securities as at the end of the year of income are less than thirty per cent, and by a further one-half per cent for every one per cent by which the amounts of the Commonwealth securities are less than twenty per cent (subject to a maximum reduction of 25%); and

(2)

the rebate under section 46 of the Principal Act, which is at present allowed to all resident companies, and which has the broad effect of freeing from tax that part of a company's income that consists of dividends received from other companies, will be limited (so far as it relates to the company's life assurance business) to the amount that would be allowable if the dividends received in connection with the company's life assurance business did not exceed the dividends so received during the 1960-61 income year.

Where companies fall into this category, assets referable to ex-Australian business will be excluded from the various calculations by the procedures that have already been described in relation to companies that maintain the approved proportions of public securities.

Companies engaged in life assurance otherwise than as a sole or principal business.

Under the present law, the special basis of assessment under Division 8 applies only to companies carrying on life assurance as a sole or principal business. In recent years, however, a number of companies have been carrying on life assurance as a subsidiary activity, particularly in association with general insurance. Income derived from the life assurance business of such companies is assessed to tax under the general provisions of the Principal Act and, for a number of reasons, this can place such companies at a disadvantage when compared with other companies engaged in life assurance that are assessed under Division 8.

It is accordingly proposed that the provisions of Division 8 apply in relation to the life assurance business of all companies registered under the Life Insurance Act. This will be done by altering the definition of "life assurance company" and by modifying certain other provisions to ensure that they will operate in an appropriate manner when extended to companies whose business consists only partly of life assurance activities.

Clause 5: Definitions.

Section 110 of the Principal Act contains a number of definitions of terms used in the special provisions relating to life assurance companies in Division 8 of the Principal Act. Clause 5 will insert a number of new definitions in section 110 and alter the present definition of "life assurance company".

"Australian policy" will mean a policy that is registered by the company in a registry in Australia or a Territory of the Commonwealth.

"Australian statutory fund" will mean any statutory fund maintained by the company under the Life Insurance Act, other than a fund maintained by the company solely in respect of a class of business that does not include the undertaking of liability under Australian policies (as defined). The definition will thus include not only statutory funds that are maintained exclusively in respect of Australian policies but also mixed funds into which the company pays premiums received under both Australian and ex-Australian policies.

"Exempt superannuation fund" is an expression used to define the classes of superannuation fund in relation to which a life assurance company may issue policies and, if certain conditions are satisfied, obtain freedom from tax on any income earned in connection with those policies.

Exempt superannuation funds will include -

(a)

provident, benefit or superannuation funds set up by an employer for the benefit of his employees, being funds that would be entitled to exemption from income tax under section 23(j) of the Principal Act if the "30%-20% ratio of public securities" were maintained in any assets of the funds;

(b)

provident, benefit, superannuation or retirement funds for self-employed persons that would be eligible for exemption from income tax under section 23(ja) of the Principal Act if the "30%-20% ratio of public securities" were maintained in any assets of the funds.

A fund that satisfies these tests will not, however, be classed as an exempt superannuation fund for the purposes of Division 8, unless the terms and conditions of the fund also make provision for payments being made from the fund by reason of injury, sickness, retirement or death of the employees or self-employed persons (as the case may be). In the case of funds for employees, a further requirement will be that some or all of the contributions to the fund be made by the employers.

"Exempt superannuation scheme" is defined as meaning a provident, benefit, superannuation or retirement scheme in respect of which there is an exempt superannuation fund (as defined) or in respect of which the Commissioner of Taxation is of opinion that the terms and conditions of the scheme are such that, if a fund were set up, it would be an exempt superannuation fund.

"Life assurance company" is defined, under the existing law, as meaning a company the sole or principal business of which is life assurance.

This definition will be amended so as to include, in addition to those companies already covered, any company that is registered under the Life Insurance Act. This will enable special provisions of Division 8 to be applied to all companies that carry on life assurance business in Australia.

"Overseas policy" will mean a policy that is not registered by the company at a registry in Australia or a Territory of the Commonwealth, and that is owned by a person resident outside those areas.

"Superannuation policy" is a term that will be used to describe those classes of life assurance policy in relation to which a life assurance company will be able to obtain exemption of its investment income. It will include a policy that is vested in the trustee of an exempt superannuation fund (as defined) and also any policy that is currently being used for the purpose of an exempt superannuation scheme (as defined). The definition will include not only policies that were originally effected as superannuation policies, but also ordinary life assurance policies that are transferred or otherwise applied for the purposes of an exempt superannuation scheme.

"Superannuation statutory fund" is defined as meaning an Australian statutory fund (as defined) or any other fund maintained by the company solely in respect of exempt superannuation policies (as defined).

"The insurance funds" will include all the Australian statutory funds of the company and any other funds maintained by the company in relation to its life assurance business. This term will thus include, in addition to Australian statutory funds (as defined), any other statutory funds maintained by the company under the Australian Life Insurance Act, and similar funds maintained under the legislation of overseas countries.

Clause 6: Companies to which certain provisions apply.

By this clause it is proposed to insert in Division 8 a new section - section 110A - which sets out the conditions to be satisfied by a life assurance company in order to qualify for exemption of income from investments held in connection with superannuation business, and to have the benefit of other changes in the law that are proposed in relation to life assurance companies which maintain the "30%-20% ratio of public securities" in the assets of their Australian statutory funds, or undertake to do so within a reasonable time. In the new provisions, a company that satisfies one or other of these conditions is referred to as a company to which section 110A applies, and it will be convenient to use this terminology throughout these notes.

Sub-section (1.) states alternative ways in which a company may become eligible for the special basis of assessment that is to be provided for a company to which section 110A applies.

Firstly, a life assurance company may qualify as a company to which section 110A applies, in relation to a particular year of income, if, throughout that year, it maintains the "30%-20% ratio of public securities" in each of its Australian statutory funds. In order to meet this test it will be necessary for the company to make a bona fide and genuine attempt to maintain the appropriate proportions of Commonwealth and other public securities in its assets at all times during the year but, in applying this provision, the Commissioner of Taxation will be empowered to ignore lapses due to temporary delays in investment of funds, or other accidental or unavoidable variations in the holdings of public securities (see sub-section (9.)).

Until the 1971-1972 income year, there will be an alternative basis upon which a life assurance company may qualify as a company to which section 110A applies. This will apply where the company -

(1)

has given an undertaking to progressively increase its holdings of public securities, on a basis approved by the Commissioner of Taxation under which the "30%-20% ratio of public securities" will be reached over a period approved by the Commissioner ending not later than 1st July, 1971; and

(2)

has complied with that undertaking, insofar as it relates to the current year of income.

Sub-section (2.) specifies the conditions to be accepted by a company in an undertaking in order that it may satisfy the last preceding sub-section. The tests of the sub-section will be complied with if a company undertakes that -

(1)

as from the commencement of an income year approved by the Commissioner of Taxation and specified in the undertaking, and at least until the end of the 1971-1972 income year, the "30%-20% ratio of public securities" will be maintained in the assets of each Australian statutory fund of the company;

(2)

at all times during each year of income before the year which is specified in the undertaking as the year in which the "30%-20% ratio of public securities" will be reached, the company will maintain such lesser proportions of public securities and Commonwealth securities as are specified in the undertaking with the approval of the Commissioner;

(3)

at all times during those intervening years, the company will hold public securities the cost of which is not less than the cost of the public securities included in all its life insurance funds on 1st March, 1961 (except where this would involve holding public securities the cost of which was more than 30% of the cost of the assets of all the Australian statutory funds of the company); and

(4)

at all times during those years, the company will also hold Commonwealth securities the cost of which is not less than the cost of the Commonwealth securities held on 1st March, 1961 (unless this would involve holding Commonwealth securities the cost of which was more than 20% of the cost of the assets of all the Australian statutory funds of the company).

Sub-section (3.) places limits on the discretion of the Commissioner of Taxation to approve, for the purposes of an undertaking under sub-section (2.), the year of income by which a company will be expected to build up to the "30%-20% ratio of public securities". The Commissioner of Taxation is required to approve the earliest year of income that he considers to be reasonable in the circumstances but, in any case, he is not to approve a year of income later than the income year 1971-1972.

Sub-section (4.) places limits on the discretion of the Commissioner of Taxation to approve the proportions of Commonwealth and public securities that a company giving an undertaking will need to hold in a particular statutory fund while it is building up to the "30%-20% ratio of public securities". The proportion approved for each intervening year in relation to public securities is to be not greater than 30% and, except in special circumstances, is to be not less than the percentage of public securities held by the company over the whole of its Australian statutory funds on 1st March, 1961 (if the latter percentage was less than 30%); the approved proportion of Commonwealth securities in these years is to be not greater than 20%, and, except in special circumstances, is to be not less than the percentage of Commonwealth securities held by the company on 1st March, 1961 (if the latter percentage was less than 20%).

Sub-section (5.) makes provision for the case where a company that has given an undertaking is unable to adhere to it because of a change in circumstances outside the company's control. The sub-section provides that the Commissioner of Taxation may, in his discretion, vary any approval given under section 110A(2.) (i.e., as to the year by which the "30%-20% ratio of public securities" is to be reached or as to the proportions of public and Commonwealth securities that are to be held in intervening years). However, the Commissioner may not vary the terms of an undertaking in this way unless he is requested to do so by the company.

The effect of sub-section (6.) and (7.) is to place limits on the additional investments in public or Commonwealth securities that the company will be expected to make in any one year. Even though an Australian statutory fund of a company has not included the proportions of public securities specified in the company's undertaking for a particular year, the company will be treated as if it had complied with the undertaking, so far as it relates to that statutory fund, when not less than 40% of the increase in the assets of the fund during the year represents investment in public securities including investment of not less than 25% of that increase in Commonwealth securities.

This departure from the undertaking will be permissible, however, only if the company complies with other terms of its undertaking that have already been described and which require that the holdings of public securities (including Commonwealth securities) contained in its insurance funds (i.e., all funds in respect of its life assurance business) will not fall below the amounts held at 1st March, 1961 unless the "30%-20% ratio of public securities" is achieved in the combined assets of all the Australian statutory funds of the company.

The Commissioner of Taxation is empowered to vary the effect of sub-sections (6.) and (7.) if it appears that a company will not be able to reach the "30%-20% ratio of public securities" before the commencement of the 1971- 1972 income year unless it invests more than 40% of the annual increase in its assets in public securities, or more than 25% in Commonwealth securities. If the Commissioner determines that a higher percentage needs to be invested in public or Commonwealth securities in a particular year of income, he will notify the company before the commencement of that year.

Sub-section (8.) provides that the Commissioner of Taxation shall not make a determination under sub-section (6.) or (7.) requiring a higher percentage of the annual increase in assets to be invested in public securities or Commonwealth securities unless he is satisfied that that higher percentage is reasonably necessary to ensure that the company will reach the "30%-20% ratio of public securities" by the commencement of the 1971-1972 income year.

Sub-section (9.) empowers the Commissioner of Taxation to disregard the failure of a company to comply with an undertaking in certain circumstances. He is required to do so if he is satisfied that -

(a)

the company made a genuine and bona fide attempt to maintain the specified ratios of public or Commonwealth securities; or

(b)

the failure was by reason of temporary delay in investment,

and that, in all the circumstances, it would be reasonable to disregard the failure.

Sub-section (10.) provides that where a company has failed to comply with an undertaking, and the breach is of such a nature that the Commissioner of Taxation is not able to disregard the failure under sub-section (9.), the undertaking shall have no effect as regards any subsequent year of income. The company may, however, lodge a new undertaking at this stage to take effect as from the beginning of a subsequent year of income. The practical effect of this sub-section is simply to give the Commissioner the power to require a revised programme of investment when it is clear that as a result of the breach of its original undertaking a revised programme will be necessary for the company to build up to the "30%-20% ratio of public securities" over a period ending not later than the commencement of the 1971-1972 income year.

Sub-section (11.) is a machinery provision formally providing that where a company was a life assurance company during part only of a year of income, section 110A has effect as if the various references to "at all times" during a year of income were references to "at all times during the part of that year of income during which the company was a life assurance company". This will ensure that a company which commences or ceases business in the course of a year will not be deprived of the opportunity of giving an effective undertaking.

Sub-section (12.) formally provides that section 110A has effect subject to the proposed new section 115A. Section 115A, which is explained in detail in the note on Clause 9, lays down a procedure under which assets referable to ex-Australian business may be excluded in calculating the various ratios for the purposes of section 110A.

Clause 7: Exemption of income attributable to superannuation policies.

This clause will insert in the Principal Act a new provision - section 112A - which will provide for the exemption from income tax of that part of the income derived from the assets of any Australian statutory fund or other statutory fund of a life assurance company that is referable to superannuation policies.

A life assurance company will not qualify for this exemption unless it is a company to which section 110A applies - that is to say, unless it is a company that has maintained the "30%-20% ratio of public securities" or is building up to that ratio under an agreement approved by the Commissioner of Taxation.

Under Clause 5, it is proposed to insert definitions of "Australian statutory fund" and "superannuation policy" in section 110 of the Principal Act, and the meanings of these expressions have already been explained at pages 7 and 8 of these notes. Broadly speaking, "Australian statutory fund" means any statutory fund maintained by the company under the provisions of the Life Insurance Act other than a fund maintained solely in respect of ex-Australian business; "superannuation policy" means a policy held in connection with a superannuation scheme that is entitled to exemption of its income under section 23(j) or (ja) of the Principal Act, and that satisfies certain other conditions.

Sub-section (1.) of section 112A authorises the Commissioner of Taxation to make an apportionment for the purpose of determining the part of the income of each statutory fund that is entitled to exemption. It is provided that the Commissioner shall make his apportionment by reference to "calculated liabilities", a concept that is used in the assessment of life assurance companies under the existing law and means, broadly speaking, the present actuarial value of the company's expected future liabilities under policies. The method of ascertainment of "calculated liabilities" is explained in the notes to Clause 9 at page 16 below.

In respect of each statutory fund of the company, the Commissioner is to ascertain the proportion which the calculated liabilities referable to superannuation policies bears to the amount of calculated liabilities referable to all the policies included in that particular fund. That proportion of each amount of income derived from the assets of the fund will then be excluded from assessable income.

Sub-section (2.) is a machinery provision and formally provides that, for the purposes of sub-section (1.), a policy will be taken to be included in a particular statutory fund if, in the opinion of the Commissioner, liabilities under that policy would be payable under that fund.

Clause 8: Expenses of General Management.

This clause will repeal section 113 of the Principal Act, which provides a more or less arbitrary formula for determining the deduction allowable to a life assurance company on account of general management expenses, and replace it by a new section 113 which will make appropriate provision for companies carrying on life assurance as a subsidiary activity. It has already been mentioned, in the notes on Clause 5, that it is proposed to amend the definition of life assurance company, so that the special basis of assessment under Division 8 will apply to those companies in the future.

Section 113 relates to what is described in the law as "expenditure incurred in the general management of the business" of a life assurance company. However, it is expressly provided that, for the purposes of section 113, such expenditure does not include expenditure incurred either exclusively in gaining or producing assessable income or exclusively in gaining or producing income that is not assessable. In practice, therefore, the expression includes only such expenses as are incurred partly in earning income that is subject to tax and partly in earning premium income or other exempt income.

Under the present law, the deduction allowable under section 113 is ascertained according to the formula -

(Expenses of general management) * (Assessable income of company)/(Total income of company)


(Total income includes income from premiums and exempt income, as well as income that is subject to tax.)

The present section was enacted many years ago at a time when most life assurance companies confined themselves almost exclusively to the business of life assurance. The results obtained under a rigid formula of this nature would not necessarily be appropriate if it applied in relation to a company carrying on life assurance as a subsidiary activity, such as a general insurance company engaging in the business of life assurance in a relatively small way.

With the proposed extension of Division 8 to all companies engaged in life assurance activities, it has been found necessary to modify the operation of the existing section 113.

In the case of a company engaging in life assurance as its sole or principal business, the deduction for general management expenses will continue to be ascertained by means of the formula provided in the existing section 113, unless the company elects to change over to a new basis that will apply to companies engaged in life assurance as a subsidiary activity, and which are now to be assessed under Division 8 for the first time.

Where the section 113 deduction is to be calculated under the new basis - i.e., where a company is engaged in life assurance as a subsidiary activity, or where a company carrying on life assurance as a sole or principal business adopts the new procedure, the expenditure incurred in the general management of the company's business will be an allowable deduction to the extent that it is incurred in gaining or producing assessable income. This will mean, in effect, that the proportion of general management expenditure that is to be an allowable deduction will be determined according to the facts of each individual case. The apportionment will be made according to the general principles of the income tax law, which have hitherto applied in relation to taxpayers (other than life assurance companies assessed under Division 8) where it is necessary to determine the deduction allowable in respect of an outgoing that relates in part only to the production of assessable income that is subject to tax.

In practice, this will mean that companies now brought under the provisions of Division 8 for the first time will have their deductions for management expenses determined according to the same general principles as apply to them under the existing law.

Sub-section (1.) of section 113 provides that, in the case of -

(a)

a company carrying on life assurance otherwise than as the sole or principal business; or

(b)

a company that is carrying on life assurance business as its sole or principal business and has made an election that this sub-section shall apply,

expenditure incurred in the general management of the company's business shall be an allowable deduction to the extent that that expenditure was incurred in gaining or producing assessable income of the company.

In the course of making an assessment, the Commissioner of Taxation will determine the proportion of management expenditure that is attributable to the gaining of assessable income and this proportion of the total expenditure will be an allowable deduction. A company that is dissatisfied with the Commissioner's determination will, of course, have the usual rights of objection, reference to a Board of Review and appeal to the courts.

Sub-section (2.) provides for the case of a company carrying on life assurance as its sole or principal business which has not made an election for the application of sub-section (1.). The proportion of the company's general management expenditure that is an allowable deduction will then be calculated by means of the formula -

(Expenses of general management) * (assessable income)/(total income)


In effect, this sub-section re-enacts section 113(1.) of the present law.

Sub-section (3.) re-enacts the provision which is at present contained in sub-section (2.) of the existing section 113 and states that, for the purposes of section 113, expenditure incurred exclusively in gaining or producing assessable income of a company or exclusively in gaining or producing non-assessable income shall be deemed not to be expenditure incurred in the general management of the company.

One of the general principles underlying the income tax law is that deductions are not normally allowable on account of outgoings of a capital nature (such as the cost of erecting buildings). Deductions are not allowed under the present section 113 in respect of capital expenditure but, to avoid any doubts that might arise because of the drafting changes in the proposed section, the new sub-section (3.) will expressly state that such expenditure is not to be regarded as part of the expenses of general management.

Clause 9: Deductions in relation to calculated liabilities.

By this clause, it is proposed to repeal section 115 of the Principal Act and re-enact it in a somewhat different form. A new provision - section 115A - will also be inserted.

In the present law, section 115 provides for a life assurance company to be allowed a deduction calculated on the basis of the following formula -

3% of (value of assets producing assessable income)/(value of total assets) of ("calculated liabilities")


The amount of the "calculated liabilities" for these purposes is ascertained under sections 110 and 114 of the Principal Act. From time to time, a life assurance company's actuaries make estimates of the current value of the company's liabilities under policies after taking into account expected future premiums and investment income, probable mortality experience, etc. However, it is common for life assurance companies to estimate future earnings conservatively (e.g. by assuming a future earning rate on investments of, say, 2 1/2% or 3% per annum). Section 114 accordingly provides that the company's own valuation of its liabilities is to be adjusted, for income tax purposes, by a procedure which is designed to arrive at the valuation that would have been obtained if the company had assumed an interest rate of 4% per annum. This adjusted valuation is referred to in Division 8 as the "calculated liabilities" of the company.

The broad intention underlying the present section 115 deduction is to free from tax an amount corresponding to the first 3% of income earned on what might be regarded as the company's necessary reserves. The deduction, which has been allowed to life assurance companies for many years, recognises that some part of the investment income of a life assurance company will be absorbed in meeting liabilities on policies, and is not, therefore, an appropriate subject for taxation.

The revised section 115 retains the basic concept of a deduction based on 3% of the assessable income derived from necessary reserves. However, provision is made for an elaboration of the formula which will result, in relation to a company to which section 110A applies, in an increase in the amount of the deduction proportionate to the excess (if any) of the company's holdings of public and Commonwealth securities over what is needed to maintain the "30%-20% ratio of public securities" in the company's Australian statutory funds. In the case of a company to which section 110A does not apply, the expanded formula will result in the amount of the deduction being reduced proportionately to any deficiency in the company's holdings of public securities below what is needed to maintain the "30%-20% ratio".

Sub-section (1.) of section 115 sets out formulae to be used in the calculation of the section 115 deduction. Separate provision is made for three classes of life assurance company.

The most general formula is that set out in paragraph (a) of the sub-section which will be used to calculate the section 115 deduction in the case of a life assurance company that -

(1)

is a company to which section 110A applies (i.e., a company that maintains the "30%-20% ratio of public securities" or has entered into an agreement to build up to that ratio over an approved period); and

(2)

has held, at all times during the year of income, public securities (other than Commonwealth securities) the cost of which was not less than the cost of such securities held by the company on 1st March, 1961.

A company will be regarded as having complied with (2) if it has maintained its holdings of public securities (other than Commonwealth securities) at the March, 1961 level either in all its Australian statutory funds (taken as a whole) or over the whole of its insurance funds (i.e. including funds maintained in respect of overseas business). The alternative tests are provided because a company might set up a statutory fund for its overseas business after 1st March, 1961, and a comparison of the holdings in the Australian statutory funds at the relevant dates might then be misleading.

For companies that meet these tests, the section 115 deduction will be ascertained by the formula -

(3 * a * b * (1 + d + e - f))/(100 * c)


or the formula -

(3 * a * b)/(100 * c)


whichever produces the greater amount.

The procedure for ascertaining the values of the letters a, b, c, d, e and f is set out in detail in sub-section (2.) of section 115, but their meanings may be summarised as follows:-

a

is the "calculated liabilities" of the company as at the end of the year of income;

b

is the value, as at the end of the year of income, of the assets in "the insurance funds" of the company (as defined) from which assessable income is derived;

c

is the value, as at the end of the year of income, of all the assets of the insurance funds of the company;

d

is the fraction (if any) by which the proportion of public securities to total assets (valued at cost) in the Australian statutory funds of the company, other than superannuation statutory funds, is greater than three-tenths;

e

is one-half of the fraction (if any) by which the proportion of Commonwealth securities to total assets (valued at cost) in the Australian statutory funds of the company, other than superannuation statutory funds, is greater than two-tenths; and

f

is one-half of the fraction (if any) by which the proportion of public securities (other than Commonwealth securities) in the Australian statutory funds of the company, other than superannuation statutory funds, is less than one-tenth.

It will be noticed that the section 115 deduction allowable to a company that satisfies the tests of section 115(1.)(a) will be not less than the amount ascertained by the formula -

(3 * a * b)/(100 * c)


which corresponds to the section 115 deduction allowable under the existing law. The only change from the basis of calculation that applies under the present section 115 is that, with the extension of Division 8 to companies that carry on life assurance as a subsidiary activity, it has been thought necessary to specify that assets having no connection with the company's life assurance business are not to be taken into account in determining the values of b and c, in the formula. This has been done by providing that the values of b and c are to be ascertained by reference to "the insurance funds" of the company. This term, which is defined in section 110, will include not only the Australian statutory funds of the company but also any statutory funds maintained in respect of overseas business or similar funds maintained under the laws of overseas countries.

On the other hand, such a company may qualify for a greater section 115 deduction than under the present law if its holdings of public securities represent more than three-tenths of total assets, or its holdings of Commonwealth securities amount to more than two-tenths of total assets. The entitlement to an increased deduction will be wholly or partly lost, however, if the public securities (other than Commonwealth securities) held by the company amount to less than one-tenth of total assets.

Where a company's section 115 deduction is to be calculated under paragraph (b) of sub-section (1.) (i.e., where a company maintains the "30%-20% ratio of public securities" or is complying with an undertaking to reach that ratio over an approved period, but has allowed its holdings of semi-Government etc. securities to fall below the level as at 1st March, 1961), the formula will be -

(3 * a * b (1 + d))/(100 * c)


The difference between this formula and the formula that applies under paragraph (a) is, of course, that no adjustment will be made on account of increased holdings of Commonwealth securities or any deficiency in public securities other than Commonwealth securities.

Paragraph (c) of sub-section (1.) will apply where a life assurance company is not a company to which section 110A applies (i.e., a company that has neither maintained the "30%-20% ratio of public securities" nor complied with an undertaking to build up to that ratio over an approved period). In this case, the formula will be -

(3 * a * b (1 - g - h))/ (100 * c)


or

(9 * a * b)/(400 * c)


(whichever formula produces the greater amount) where -

g

is the fraction (if any) by which the proportion of public securities to total assets (valued at cost) in the Australian statutory funds of the company is less than three-tenths; and

h

is one-half of the fraction (if any) by which the proportion of Commonwealth securities to total assets (valued at cost) in the Australian statutory funds of the company is less than two-tenths.

The meanings of a, b and c are the same as in paragraphs (a) and (b).

Broadly speaking, the effect of this formula will be that the section 115 deduction allowable in the case of a company to which section 110A does not apply will be reduced proportionately to the deficiencies of public and Commonwealth securities below what is needed to maintain the "30%-20% ratio", but will not be less than 75% of the deduction that would be allowable under the existing section 115.

Sub-section (2.) sets out precisely the calculations that are to be used in ascertaining the various amounts taken into account in the formulae contained in sub-section (1.). The results obtained under the various formulae have already been explained and it is not proposed to describe in detail the mechanical processes by which these results are to be reached.

It will be noted that, in the case of a company to which section 110A applies, and which has set up a separate statutory fund for its exempt superannuation business, the proportionate increase in the section 115 deduction based on the excess of its holdings of public securities above the "30%-20% ratio" is to be calculated by reference only to the proportions of such securities in the statutory funds relating to the company's ordinary life assurance business. This places such a company on the same basis as a private superannuation fund. (The proposed provisions relating to private superannuation funds, which are explained at a later stage in these notes (with reference to Clause 11), will not result in a private fund obtaining any income tax advantage through holding public securities in excess of the "30%-20% ratio").

In the case of life assurance companies to which section 110A does not apply, the adjustments to the section 115 deduction on account of holdings in public securities will be calculated by reference to the ratios of public securities in all the Australian statutory funds of the company (including funds maintained in respect of superannuation business).

Sub-section (3.) is a machinery provision which will ensure that an appropriate adjustment will be made in the calculation of the section 115 deduction where a part of the income derived from assets included in a statutory fund is exempt from tax under the proposed section 112A as being referable to superannuation policies.

In these circumstances, the value b, for the purposes of the various formulae in sub-section (1.), will include only so much of the assets of the fund that produce assessable income as is ascertained by means of the calculation -

(Actual value of assets of fund producing assessable income) * (Assessable income derived from assets of fund)/ (Amount that would be the assessable income derived from assets of fund if section 112A did not apply)


This adjustment is designed to maintain a principle that has always been incorporated in section 115 - i.e., that the deduction, although based on 3% of "calculated liabilities", is to be reduced to the proportion which the value of the company's assets producing assessable income bears to the value of total assets.

Sub-section (4.) provides that in ascertaining the cost of the company's assets or various classes of assets for the purposes of the calculations that have been described, the values shall be taken as at the end of the year of income.

The sub-section also contains a machinery provision designed to provide that if, in the calculations that have been explained, the value of d, e, f, g or h should prove to be a minus quantity, "nil" shall be substituted for that value in the calculation. This qualification is necessary to ensure that the formulae will operate in the way that has been described.

Sub-section (5.) is designed to avoid the anomalous results that might be obtained if, on the last day of the year of income, the proportions of public or Commonwealth securities were abnormally high or abnormally low, having regard to the company's normal holdings.

In sub-section (2.), to which reference has already been made, a number of elements that are used in the intermediate stages of the calculation of the section 115 deductions have, for convenience of drafting, been described by the symbols i, j, k, l, m and n. The primary meanings of these symbols are as follows -

i

is the cost of the assets of all the Australian statutory funds of the company;

j

is the cost of the assets of all such funds other than superannuation statutory funds;

k

is the cost of the public securities included in i;

l

is the cost of the public securities included in j;

m

is the cost of the Commonwealth securities included in i; and

n

is the cost of the Commonwealth securities included in j.

The effect of sub-section (5.) is that, where the Commissioner of Taxation is of opinion that the value of i, j, k, l, m or n as at the end of the year of income is abnormally high or abnormally low, having regard to all the circumstances, and in particular to the history of the value over the period of twelve months ending six months after the last day of the year of income, the Commissioner is given a discretion to determine the value of that symbol, that should have effect. In exercising this discretion the Commissioner will have regard to the value of the symbol on such days during that period of twelve months as, in his opinion, are appropriate in the circumstances.

A company that is dissatisfied with the Commissioner's determinations under this section will have the usual rights of objection and reference to a Taxation Board of Review. A Board of Review may, of course, substitute its own opinion for that of the Commissioner.

Sub-section (6.) is designed to qualify the operation of sub-section (5.) by formally providing that a determination may be made in respect of all or any of the values, i, j, k, l, m and n.

Sub-section (7.) is designed to protect the revenue by ensuring that a company will not be able to avoid the need to maintain the "30%-20% ratio of public securities" in respect of part of its business by transferring policies owned by Australian residents to an overseas register, and paying the premiums into a statutory fund kept in respect of overseas business.

If a company adopts such a practice, the Commissioner of Taxation will be empowered to increase the values of i and j (i.e., the values of the total assets included in Australian statutory funds) for the purposes of calculating the section 115 deduction by an appropriate amount in respect of the proceeds of Australian policies carried to the overseas fund.

It is provided that the amount to be added to the values of i and j will be that portion of the "calculated liabilities" of the company, as at the end of the year of income, that is referable to the Australian policies kept in the overseas fund. This amount will provide a reasonable indication of the cost of the assets included in the overseas fund which, as a result of the practice described, have been withheld from the Australian statutory funds.

This sub-section has been drafted in such a way that it will apply only where the company has adopted a practice by means of which amounts that are, in fact, proceeds of its Australian business are included in its overseas fund. The sub-section will not apply where a company in isolated cases issues policies to Australian residents through its overseas branches without any intention of influencing the amount of the section 115 deduction.

Sub-section (8.) is a machinery provision designed to make equitable provision for the case where, for any reason, e.g., the commencement or cessation of business at some time during a year of income, a company is a life assurance company during part only of the whole of a year of income.

It is provided that, in such circumstances, the amount of the section 115 deduction that would be allowed shall be reduced by the same proportion as the period in which the company was not a life assurance company during the year of income bears to a full year.

It is further provided that, where a company ceases to be a life assurance company before the end of the year of income, the last day during the year of income on which the company was a life assurance company shall be deemed, for the purposes of calculation of the section 115 deduction, to be the last day of the year of income.

Section 115A: Adjustments of cost of assets of Australian statutory fund in relation to overseas business

The new section 115A will provide an alternative procedure by which assets referable to overseas business may be excluded from the calculation of the various proportions of Commonwealth and public securities, if the company does not wish to exclude all its overseas business from its Australian statutory funds.

Sub-section (1.) provides that a company may elect that section 115A shall apply in relation to the company. The operative provisions of section 115A (as set out in sub-sections (2.), (3.) and (4.)) will not apply to a life assurance company unless such an election has been made by the company.

Sub-section (2.) provides that in determining whether a company is a company to which section 110A applies (i.e., a company that maintains the "30%-20% ratio of public securities" or has complied with an undertaking to do so) the expressions "Commonwealth securities" and "public securities" in section 110A and in any undertaking given by the company will be deemed not to include any securities issued in respect of loans raised outside Australia or the Territories of the Commonwealth.

Sub-section (3.) provides, in effect, that for the purposes of ascertaining the proportions of Commonwealth and public securities held by the company at the end of the year of income (i.e., for the purposes of ascertaining any increases or decreases that will be made in the standard section 115 deduction on account of any excess above or deficiency below the "30%-20% ratio of public securities") public or Commonwealth securities issued in respect of loans raised outside Australia or the Territories of the Commonwealth will not be taken into account.

Sub-section (4.) provides that, where a company that has invoked section 115A satisfies the Commissioner of Taxation that liabilities under overseas policies would be payable from an Australian statutory fund of the company, the cost of the assets of that fund shall for the purposes of Division 8 and any undertaking given under section 110A, be reduced to an amount ascertained by means of the formula -

(a * (b - c)) / (b)


where -

a

is the cost of the assets of the particular statutory fund;

b

is that part of the "calculated liabilities" of the company that, in the opinion of the Commissioner, relates to all the policies included in that fund; and

c

is that part of the "calculated liabilities" of the company that, in the opinion of the Commissioner, relates to the overseas policies in that fund.

The broad effect of this sub-section is that, in any calculation which is based on the cost of all the assets of a statutory fund, no account will be taken of that part of the cost of the assets of the fund that is attributable to overseas policies. The adjustment will also indirectly reduce "the cost of the assets of all the Australian statutory funds of the company" where this amount has to be ascertained with reference to an undertaking given by the company under section 110A.

The expression "overseas policies" will be defined in section 110 as meaning policies that are not kept by the company on a register in Australia or a Territory of the Commonwealth and are owned by persons resident outside those areas. The meaning of "calculated liabilities" has already been explained in connection with section 115.

Clause 10: Modification of section 46.

Section 46 of the Principal Act provides for a rebate to be allowed, in the case of a resident company, which has the broad effect of freeing from tax that part of the company's income that consists of dividends received from other companies. This rebate will continue to be allowable, as at present, to companies to which section 110A applies.

Clause 10 will insert in the Principal Act a new provision - section 116A - which is designed to place an upper limit on the section 46 rebate that may be allowed in respect of dividends that form part of the life assurance business of a company to which section 110A does not apply (i.e., a company that is not maintaining the "30%-20% ratio of public securities" and has not complied with an undertaking to build up to that ratio).

If the dividends received from shares that form part of the assets of the insurance funds of the company (i.e., the company's Australian statutory funds and other funds maintained by the company in respect of its life assurance business) exceed the dividends so received during the 1960-1961 income year, the rebate to be allowed will be no greater than it would have been if the dividends received from shares included in the company's life insurance funds were no greater than the dividends so received during the income year 1960-1961.

Because section 46 is expressed in such a way as to allow a single rebate in respect of all the dividends included in a company's taxable income (including dividends that form part of the proceeds of any business other than life assurance carried on by the company), it has been found necessary, in sub-section (1.), to express the calculation needed to bring about the desired result by means of the formula -

((a * c) - (b * (c - d)))/ (c)


where -

a

is the amount of rebate to which the company would be entitled under section 46 if section 116A did not apply;

b

is (broadly speaking) the part of that rebate that is referable to the company's business of life assurance;

c

is the amount of dividends from insurance funds included in the company's assessable income during the current year of income;

d

is the amount of such dividends that were included in the company's assessable income of the income year 1960-1961.

Sub-section (2.) will apply only where a company has incurred expenditure on shares for its life assurance business during the period between 1st March, 1961 and the close of the 1960-61 income year. If the Commissioner of Taxation is of the opinion that the amount so expended was abnormally great having regard to all the circumstances, and in particular to the expenditure of the company in the acquisition of shares during the period of twelve months immediately prior to 1st March, 1961, he may determine that all or part of the dividends from insurance funds received during the 1960-1961 income year from shares bought after 1st March shall be disregarded in applying sub-section (1.).

Sub-section (3.) is a drafting measure and states that the expression "dividends from insurance funds", as used in sub-sections (1.) and (2.) means dividends derived from shares included in the assets of the insurance funds of the company. The term "the insurance funds" is to be defined in section 110 as meaning all the Australian statutory funds of the company and all other funds maintained by the company in respect of its life assurance business.

Section 116B: Election to substitute value for cost of assets

This section will enable a life assurance company to elect that, for the purpose of determining the various proportions of assets invested in public securities or Commonwealth securities in applying the proposed new provisions of Division 8, calculations be made by reference to the "value" of the various assets. If the right of election is not exercised, the cost price of those assets will apply in the calculations.

It will be recalled that, in the various ratios that affect the operation of the proposed sections 110A and 115 of the Principal Act, it is the relationship of the cost of Commonwealth (or public) securities to the cost of total assets that is required to be taken into account. However, other calculations that are made in the course of determining the taxable income of a life assurance company under the present law take into account the "value" of a company's assets.

A life assurance company that does not wish to bring assets to account on two different bases for income tax purposes will be given the option, under section 116B, of having all of the ratios calculated by reference to the "value" of the various assets rather than to the cost of those assets.

Sub-section (1.) formally provides that a company may elect that the provisions of section 116B shall apply in relation to the company.

Sub-section (2.) provides that, on a company electing that the provisions of section 116B be applied, wherever it is necessary to ascertain, as at a particular time, the cost of an asset of the company, that cost shall be taken to be the value of that asset as at that particular time.

Section 116C: Cost of an asset not acquired for money

This section is a machinery provision designed to ascribe a "cost" to a particular asset that has been acquired wholly or partly for a consideration other than cash. In these circumstances, the cost of that asset is to be taken to be such amount as, in the opinion of the Commissioner of Taxation, is reasonable in the circumstances. Where the Commissioner makes a determination for these purposes, a company that is dissatisfied with his decision will have the usual rights to have the Commissioner's decision reviewed by a Taxation Board of Review.

Section 116D: Manner of election

This section provides the administrative machinery under which a company may make an election for the purposes of section 113, 115A or 116B.

Sub-section (1.) provides that an election shall be made by notice in writing signed by the public officer of the company and delivered to the Commissioner of Taxation. An election also needs to specify the year of income from which it is to take effect and (unless the Commissioner otherwise determines at the request of the company) each election has effect in relation to the specified year of income and all subsequent years of income.

Under sub-section (2.) an election may be delivered to the Commissioner of Taxation on or before the last day for furnishing the income tax return of the year specified in the notice of election, or within such further time as the Commissioner allows.

AMENDMENTS RELATING TO SUPERANNUATION FUNDS

Clause 11: Superannuation Funds.

It is proposed by this clause to include in the Principal Act a new Division - Division 9B, consisting of sections 121B to 121E - which will prescribe the circumstances in which privately managed provident, benefit, or retirement superannuation funds qualify for exemption from income tax. The new Division also provides a basis on which such funds will be assessed to tax on income not qualifying for exemption.

Under the present law the income of the great majority of private superannuation funds is exempt from tax. The income of a provident, benefit, superannuation or retirement fund established for the benefit of employees is exempt under section 23(j) of the Principal Act, provided that the fund is being applied for the purpose for which it was established. The income of a provident, benefit, or retirement fund for the benefit of persons other than employees is exempt under section 23(ja) if -

(1)

the number of members is not less than twenty; and

(2)

the terms and conditions applicable to the fund have been approved by the Commissioner of Taxation, having regard to the classes of persons who are eligible for membership, the reasonableness of the benefits provided for, the amount of the fund in relation to those benefits and such other matters as the Commissioner thinks fit.

Broadly stated, the effect of the proposed Division 9B will be to make continuance of the exemptions under paragraphs (j) and (ja) of section 23 conditional on the funds holding specified proportions of their assets in Commonwealth and public securities. The main proposals may be summarised as follows -

(1)

Funds which would qualify for exemption under the present law will continue to be exempt if either -

(a)

the "30%-20% ratio of public securities" is maintained in the assets of the fund; or

(b)

the fund holds Commonwealth and public securities the amounts of which are not less than the amounts held on 1st March, 1961 and, in addition, maintains the "30%-20% ratio of public securities" in respect of any increases in assets since that date.

(2)

Funds which do not satisfy these tests will be subject to tax in respect of any investment income derived by the fund in excess of the amount of such income earned during the income year 1960- 1961.

(3)

Such funds will not be liable to tax on so much of their investment income as does not exceed the amount of such income earned in 1960-1961 unless either -

(a)

their holdings of public securities are allowed to fall below -

(i)

the level as at 1st March, 1961; or

(ii)

30% of total assets,

whichever is the less;

(b)

their holdings of Commonwealth securities are allowed to fall below -

(i)

the level as at 1st March, 1961; or

(ii)

20% of total assets,

whichever is the less.

Funds that are not at present exempt under section 23(j) or 23(ja) will not be affected by the proposed amendments.

Section 121B: Definitions

Section 121B contains two definitions designed to facilitate the drafting of the proposed Division.

"Investment income" is a term used to define the net income of superannuation funds that may be subject to income tax, wholly or in part, if the company does not hold specified proportions of Commonwealth and public securities.

The expression means, broadly speaking, an amount ascertained by calculating the amount that would have been the assessable income of the fund if it were not exempt under section 23(j) or (ja) (calculated as if the trustee of the fund were a resident taxpayer who had received that income) and deducting from this amount all expenses, etc., that would be allowable deductions (other than concessional deductions).

It is also provided, in ascertaining the "investment income", that contributions to the fund will be ignored in calculating the assessable income. Conversely, deductions will not be allowed in respect of benefits paid from the fund, nor will deductions be allowable under section 79 if such benefits are paid indirectly by means of contributions to other superannuation funds.

"Superannuation fund" is an expression used to identify those funds that will be subject to the provisions of Division 9B. Primarily it will mean a provident, benefit, superannuation or retirement fund the income of which would, but for the enactment of the proposed Division 9B, be exempt from income tax under paragraph (j) or paragraph (ja) of section 23 of the Principal Act.

There are, however, a number of exclusions from the definition. The funds that will not be regarded as "superannuation funds" for the purposes of Division 9B are -

(a)

Funds established by the laws of the Commonwealth, a State or a Territory of the Commonwealth;

(b)

Funds established by municipal corporations, local governing bodies or public authorities constituted under such laws;

(c)

Hospital benefit funds, medical, sickness or dental benefit funds, and funeral benefit funds.

Funds falling into these categories will not be affected by the present legislation.

Section 121C: Taxation of Investment Income of Superannuation Funds

The main function of the proposed section 121C is to determine the circumstances in which the present exemptions under paragraphs (j) and (ja) of section 23 is to be continued and the extent to which exemption is to be available to superannuation funds that do not hold specified proportions of Commonwealth and public securities.

As in the comparable provisions relating to life assurance companies, the operation of the provisions is related to the "30%-20% ratio of public securities". In the case of a superannuation fund, this ratio will be achieved if, at a particular time, the cost of the public securities in the assets of the fund is not less than 30% of the cost of all the assets of the fund, and if these securities include Commonwealth securities the cost of which is not less than 20% of the cost of all the assets.

It will be noted, however, that (as in the life assurance provisions) the effect of sub-sections which require specified ratios of securities to be held "at all times" during the year of income is modified in practice by the discretionary powers given to the Commissioner of Taxation to disregard temporary or accidental departures from the ratios, or to exempt a fund from the investment requirements where its financial stability might otherwise be endangered. (See sub-sections (4.) and (5.).)

Sub-section (1.) will apply to funds that are established after 1st March, 1961.

The effect of this sub-section is that the "investment income" (as defined) of such a fund established after 1st March, 1961 will be exempt from income tax for the 1961- 1962 and subsequent income years if the Commissioner of Taxation is satisfied that, at all times during the year of income, the fund has maintained the "30%-20% ratio of public securities" in its assets.

Sub-sections (2.) and (3.) will apply to superannuation funds established on or before 1st March, 1961.

Sub-section (2.) will provide that so much of the investment income of a superannuation fund as exceeds the investment income derived by the fund during the 1960- 1961 income year will not be exempt from tax under section 23(j) or section 23(ja) unless the Commissioner of Taxation is satisfied that, at all times during the year of income -

(a)

the "30%-20% ratio of public securities" was maintained; or

(b)

the fund held -

(i)

public securities the cost of which was not less than the cost of public securities held on 1st March, 1961, plus 30% of any increase in the cost of all the assets of the fund since that date; and

(ii)

Commonwealth securities the cost of which was not less than the cost of Commonwealth securities held on 1st March, 1961, plus 20% of any increase in the cost of all the assets of the fund since that date.

Sub-section (3.) will permit exemption under section 23(j) or (ja) of investment income of a fund to be continued only if the Commissioner is satisfied that, at all times during the year of income, the fund held -

(a)

public securities, the cost of which was not less than the cost of the public securities held by the fund on 1st March, 1961 (or 30% of the cost of all the assets of the fund, if that is a lesser amount);

(b)

Commonwealth securities, the cost of which was not less than the cost of the Commonwealth securities held by the fund on 1st March, 1961 (or 20% of the cost of all the assets of the fund, if that is a lesser amount).

The usual rights of objection and reference to a Taxation Board of Review will be available against a failure by the Commissioner of Taxation to be satisfied that the appropriate level of public securities investment has been maintained.

Sub-section (4.) will modify the operation of sub-sections (1.), (2.) and (3.). It empowers the Commissioner of Taxation to disregard a failure of the assets of a fund to include the appropriate amount of public securities at any point of time within a year of income if he is satisfied that -

(a)

the trustee of the fund made a bona fide and genuine attempt to maintain the appropriate assets; or

(b)

the failure was the result of a temporary delay in investing the moneys of the fund.

Sub-section (5.) is a further qualification to sub-sections (1.), (2.) and (3.). It is designed to permit a trustee of a superannuation fund to make application to the Commissioner of Taxation for exemption from tax even though investments have not been made on the basis already described.

If the Commissioner of Taxation is satisfied that inclusion of the appropriate amounts of public and Commonwealth securities in the assets of a fund would be likely to endanger the financial stability of the fund and would be unreasonable in the circumstances, he will be authorised to inform the trustee of the fund by notice in writing that the exemption to which the fund would otherwise be entitled under section 23(j) or (ja) will continue in respect of such year or years of income as are specified in the notice.

Sub-section (6.) has the effect of excluding certain overseas funds from the operation of section 121C.

Certain overseas superannuation funds have no connection with Australia except that they invest moneys here. It is not proposed to interfere with the long-standing exemption of the income that those funds derive from investments in Australia. On the other hand, the sub-section will not enable a superannuation fund for the benefit of Australian residents to remain exempt from tax merely by appointing a non-resident trustee or transferring its management to an overseas company.

Sub-section (6.) is designed to apply only to the former type of fund that has no connection with Australia other than as a place of investment.

Sub-section (7.) is designed to cover the intermediate case that has some connection with Australia but which nevertheless has an overseas element in that benefits are provided for both residents and non-residents.

As it would be impracticable to lay down a rigid formula that would deal fairly with all such cases, it is proposed that the Commissioner of Taxation shall have a discretion to reduce by appropriate sums the amounts of total assets and investment income to be taken into account for the purposes of sub-sections (1.), (2.) and (3.). If, for example, the Commissioner found that a fund was an overseas fund to the extent of 50%, he would have regard to that fact in applying those sub-sections.

The Commissioner's determination under sub-section (7.) will be subject to the usual rights of objection and reference to a Taxation Board of Review.

Sub-section (8.) is designed to meet the situation where a superannuation fund is entitled to a portion of the income from certain assets. Where, for example, a number of funds are jointly entitled to the income derived from a common pool of assets, or where a fund is entitled to a percentage of an employer's income, it might be impracticable, in the absence of this sub-section, to determine the public securities maintained by the fund. To deal with this type of situation, it is proposed that all the assets from which the income of the fund is derived will be deemed, for the purposes of Division 9B, to be assets of the fund and that any Commonwealth securities or other public securities included in such assets will be deemed to be securities of that class included in the assets of the fund.

The cost of the various classes of assets to be included as assets of the fund will be such respective amounts as, in the opinion of the Commissioner of Taxation, are reasonable in the circumstances. Where the Commissioner has exercised a discretion under this provision the usual rights of objection and reference to a Board of Review will be available.

Sub-section (9.) is designed to enable a cost to be ascribed to assets acquired gratuitously or for an inadequate consideration by a superannuation fund, or acquired for consideration not consisting of money. In any such case the cost of the asset will be the amount that, in the opinion of the Commissioner of Taxation, is reasonable in the circumstances.

Where this provision is invoked, the trustees will be entitled to object against the Commissioner's decision and to have the decision reviewed by a Taxation Board of Review.

Sub-section (10.) will apply where the Commissioner of Taxation is of the opinion that the investment income derived by a superannuation fund during the period from 1st March, 1961 to the end of the 1960-1961 income year is abnormally great having regard to all the circumstances and, in particular, to the investment income derived during the twelve months ended on 28th February, 1961. The Commissioner will, in such cases, have a discretion to reduce the investment income of the 1960-1961 income year, for the purpose of determining the amount by which the investment income of a subsequent income year exceeds the investment income of 1960-1961, by such amount as he considers reasonable.

A trustee dissatisfied with any determination of the Commissioner of Taxation under this sub-section may exercise the right of objection and reference to a Taxation Board of Review.

Sub-section (11.) is a drafting measure to cover the case where a fund exists for only a part of a year of income. Reference throughout the proposed provisions to all times during a year of income will in such cases mean all times during the relevant part of the year of income.

Sub-section (12.) will exclude from the assets of a superannuation fund a life policy as defined by sub-section (1.) of section 4 of the Life Insurance Act 1945- 1949. Some funds make provision for benefits by taking out life policies with an assurance company. In these circumstances, the complementary provisions of Division 8 are expected to ensure that, after the premiums are paid to the life assurance company, appropriate proportions will be reinvested in public securities.

Section 121D: Assessment of investment income of superannuation funds

Section 121D contains machinery provisions to facilitate the imposition and collection of tax where superannuation funds fail to qualify for exemption.

Sub-section (1.) designates the trustee of a superannuation fund as the person who will be assessed and liable to pay tax on any non-exempt part of the investment income of a fund.

The sub-section also provides that tax will be assessed at the rates declared by Parliament. If the usual practice is followed, the rates applicable to the 1961- 1962 income year will not be determined until after the commencement of that year.

Sub-section (2.) is a drafting provision complementary to sub-section (1.) and provides that the investment income of a superannuation fund will not be subject to income tax except in the manner prescribed by sub-section (1.). This will ensure that, where tax in respect of the income of a superannuation fund is payable by some person who is deemed to be the trustee, tax will not also be payable, under the general provisions of the Principal Act, by some other person.

Sub-section (3.) will ensure that the rebate of 2/-in the Pd for each pound of Commonwealth loan interest included in taxable income, as provided by section 160AB of the Principal Act, will be allowed if a superannuation fund is subjected to tax on income that includes Commonwealth loan interest.

Sub-section (3.) will also declare that, if any dividends are included in investment income that becomes liable to tax, no rebate will be allowed in respect of those dividends under section 46 of the Principal Act.

Section 46 of the Principal Act provides for the allowance of a rebate of tax, where dividends are included in the income of a resident company, of the amount of tax attributable to dividends included in taxable income. The broad effect of this rebate is that dividends assessable to such a shareholder do not bear tax.

The provision contained in sub-section (3.) of the proposed section 121D is designed to avoid any possibility that dividends included in the non-exempt income of a superannuation fund will be effectively free of tax because of the fortuitous fact that the trustee assessable in respect of such income, and who holds the shares from which the dividends are derived, happens to be a company resident in Australia.

A further provision of sub-section (3.) is that there will not be any liability for provisional tax in respect of the investment income of a superannuation fund.

Section 121E: Trustees

Sub-section (1.) of section 121E will apply where the assets from which the income of a superannuation fund is derived are not vested in a trustee (for example, where an employer has established a fund to provide superannuation benefits for his employees but has not formally transferred the assets of the fund into the ownership of a trustee). In such circumstances, the person in whom the assets are vested is deemed, for the purposes of the Act, to be a trustee of the superannuation fund.

Sub-section (1.) also contains a drafting provision to ensure that section 254 of the Principal Act will have effect as if the deemed trustee in fact stood in a representative capacity to the fund.

Section 254 of the Principal Act, broadly stated, imposes on a trustee a duty to lodge income tax returns etc., and authorises him to retain out of moneys coming to him in his capacity of trustee sufficient to pay tax assessed to him in that capacity. He is not personally liable for the tax so assessed except to the extent of the trust moneys coming into his hands.

Sub-section (2.) is a drafting provision designed to ensure that property held in trust for the trustee of a superannuation fund will be included in the total assets of the fund. The provision will, for example, have effect where the assets of a superannuation fund are, for the convenience of the fund, held in the name of a nominee company rather than in the names of trustees.

Clause 12: Liability to dividend (withholding) tax.

By this clause, it is proposed to insert in section 128B of the Principal Act a new sub-section (1A.), which is a drafting amendment to ensure that the existing exemption from dividend (withholding) tax available to superannuation funds is not disturbed.

Clause 13: Application of amendments

Clause 13 provides that the amendments effected by the Bill shall apply in relation to the 1961-1962 income year and subsequent years of income and that the exemption of the income attributable to superannuation policies issued by a life assurance company (see Clause 7) shall not apply to income derived before 1st July, 1961.