Supplementary Explanatory Memorandum and Correction to the Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)General outline and financial impact
Income tax-related transactions
The amendments to Part 3 of Schedule 1 to the bill, which allows entities to transfer certain income tax amounts without attracting goods and services tax, will:
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- ensure that the provisions apply where entities are no longer members of the same wholly-owned group at the time of the transfer; and
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- apply the measure from 1 July 2000.
Date of effect: The amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting (or that started) on or after 1 July 2000.
Proposal announced: Not announced.
Financial impact: Negligible.
Compliance cost impact: Nil.
General insurance
The amendments to Schedule 2 to the bill ensure that net premium income is effectively spread over the relevant period of risk of a general insurance policy and that the measures in the bill apply to all companies that carry on general insurance business.
Date of effect: As per explanatory memorandum.
Proposal announced: Not previously announced.
Financial Impact: Nil.
Compliance cost impact: Nil.
Chapter 1 - Correction to the explanatory memorandum
Chapter 2 - Special transitional credits for rental cars
1.1 Insert after car has the meaning given by subsection 995-1(1) of the ITAA 1997. That is,.
1.2 Delete the word means.
1.3 Delete or after 1 tonne and replace with and.
Chapter 4 - General insurance
1.4 In the general outline and financial impact, the reference on page 5 under the heading Date of effect to the 1997-1998 income year should be changed to the 1996-1997 income year.
1.5 In paragraph 4.3, the reference to the 1997-1998 income year should be changed to the 1996-1997 income year.
1.6 In paragraph 4.72, the reference to the 1997-1998 income year should be changed to the 1996-1997 income year.
Chapter 2 - Income tax-related transactions
Outline of chapter
2.1 Part 3 of Schedule 1 to the bill amends the A New Tax System (Goods and Services Tax) Act 1999 to ensure that companies are able to transfer tax losses, net capital losses and excess foreign tax credits without attracting goods and services tax (GST). The amendments will:
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- ensure that the provisions apply even where entities are no longer members of the same wholly-owned group at the time of the transfer; and
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- apply the measure from 1 July 2000.
Explanation of amendments
Entities no longer members of the same wholly-owned group
2.2 The bill applies to transfers of certain income tax amounts made by a member of a wholly-owned group to another member of the wholly-owned group. However, in some circumstances a transfer may occur in relation to the 2001-2002 income year between companies that satisfy the transfer requirements within the income tax legislation, but are no longer members of the same wholly-owned group at the time the transfer agreement is entered into and the supply occurs. In these situations, the transfer would inadvertently be subject to GST. The time delay occurs because entities are not required to make the transfer agreements until the date of lodgement of their tax returns which may be some months after the end of the income tax year.
2.3 The amendments will ensure that entities are able to transfer tax losses, net capital losses and excess foreign tax credits without attracting GST, even where they are no longer members of the same wholly-owned group at the time of the transfer. The amendments will also remove definitions that are no longer required. [Amendments 1 to 6]
2.4 As introduced, the measure relating to income tax-related transactions applies prospectively (i.e. to transfers relating to the 2001-2002 income year and later income years). Representations have been received from industry requesting that the measure apply from the start date of GST. Because it was never the Governments intention that GST would apply to transfers of tax losses, net capital losses and foreign tax credits, the bill is being amended to apply the measure from 1 July 2000. [Amendments 1, 2 and 7]
2.5 Amendments 1 and 2 remove the requirement that the transfer relate to the 2001-2002 or later income year. Amendment 7 ensures that the amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting (or that started) on or after 1 July 2000.
Chapter 3 - General insurance
Outline of chapter
3.1 The amendments to Schedule 2 to the bill ensure that net premium income is effectively spread over the period of risk coverage of a general insurance policy and that the measures in the bill apply to all companies that carry on general insurance activities.
Explanation of amendments
3.2 Amendments 8, 9, 13 and 14 amend the application provisions in Schedule 2 to the bill to clarify that they apply to assessments for the respective income year and all later income years.
3.3 A general insurance policy typically straddles 2 or more income years. Therefore, the premium income needs to be apportioned over the risk period for income tax purposes into the income years in which it is derived.
3.4 Schedule 2 to the bill outlines the basis that must be used by general insurance companies to spread premium income over relevant income years. That is, gross premium income is included in assessable income in the year it is received or receivable. Net premium income that relates to risk exposure in subsequent years is allocated to the unearned premium reserve. The value of the unearned premium reserve at the end of the income year is compared with the value of that reserve at the end of the previous income year:
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- increases in the value of the unearned premium reserve over the income year are allowed as a deduction - this ensures that net premiums that relate to risk exposure in subsequent years is appropriately deferred; and
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- decreases in the value of the unearned premium reserve over the income year are included in assessable income - this ensures that net premiums that relate to risk exposure in the current year are included in assessable income.
3.5 Amendments 10, 11 and 12 remove concerns that have been raised that the provisions in Schedule 2 to the bill do not appropriately spread net premium income if a single, up-front premium is paid in respect of a general insurance policy that covers a period of risk extending over several years. This situation typically arises, for example, in the case of mortgage insurance policies and credit insurance policies. The amendments ensure that, in these circumstances, net premium income is effectively spread over the relevant period of risk.
Example 3.1
Sam borrows money to buy a car and is required by the lender to take out consumer credit insurance. Sam pays a premium of $200 to the Jasper Insurance Company to cover the 5 year term of the loan.
Jasper Insurance incurs $30 in acquisition costs and pays out $50 in relevant reinsurance premiums. Therefore, Jasper Insurance receives net premium income of $120.
The amount of net premium income that Jasper Insurance determines, based on experience in previous years, to relate to risk exposure in subsequent years is allocated to the unearned premium reserve. Therefore, assuming that Jasper Insurance determines the risk exposure in each year of the policy to be same, the value of Jasper Insurances unearned premium reserve and the premium earned each year will be the amount set out in Table 3.1.
Table 3.1 Year 1 2 3 4 5 Value of unearned premium reserve $96 $72 $48 $24 $0 Premium earned $104* $24 $24 $24 $24 * Gross premiums ($200) less increase in the value of the unearned premium reserve ($96). Acquisition costs are deducted from this amount.
3.6 Amendments 15 and 16 add appropriate references to the checklists in the Income Tax Assessment Act 1997 (ITAA 1997) which assist users of the legislation to find specific items of assessable income and allowable deductions.
3.7 The provisions in Schedule 2 to the bill apply to companies that are authorised under the Insurance Act 1973 (Insurance Act) to carry on insurance business (as defined in the Insurance Act). Concerns have been raised that some companies that carry on general insurance business, such as companies that are licensed under the Workers Compensation Act 1987 (NSW), are not required to be authorised under the Insurance Act.
3.8 Therefore, amendment 17 ensures that the measures in Schedule 2 to the bill apply to all companies that carry on general insurance activities.
Application and transitional provisions
3.9 The date of effect for the amendments is outlined in paragraphs 4.65 to 4.72 of the explanatory memorandum to the bill.