House of Representatives

Explanatory Memorandum

(Circulated by authority of the Acting Treasurer, the Hon J.S. Dawkins, MP)

GENERAL OUTLINE

TAXATION LAWS AMENDMENT (SUPERANNUATION) BILL 1989

This Bill will amend the Income Tax Assessment Act 1936 -

Superannuation and other retirement benefits

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to introduce with effect from 1 July 1988 a new legislative framework for the taxation of eligible termination payments (ETPs), superannuation pensions and roll-over annuities as a consequence of taxing contributions to superannuation funds, rolled-over unfunded ETPs and formerly tax-exempt income of superannuation funds, approved deposit funds, life offices and registered organisations; the changes will -

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reduce tax on ETPs to the extent they are paid from taxed sources;

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ensure that the after-tax amount of an ETP is not diminished as a result of the tax on superannuation contributions; and

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allow a rebate of tax on certain superannuation pensions and annuities purchased with rolled-over ETPs where the pension or annuity commences to be payable on or after 1 July 1988 (proposals announced in the Economic Statement of 25 May 1988 and in statements dated 20 June 1988 and 11 August 1988).

Life assurance companies

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to introduce new arrangements for the taxation of the superannuation business of life assurance companies, effective from 1 July 1988 (proposal announced in the Economic Statement of 25 May 1988 and in further statements dated 20 June 1988, 29 June 1988, 1 July 1988 and 11 August 1988);

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to apply these arrangements to State and Territory government insurance offices also from 1 July 1988;

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to allow franking rebates for the franked proportion of dividends derived from assets included in the insurance funds of a life assurance company, and withdraw the intercorporate dividend rebate for those dividends paid on or after 1 July 1988 (proposal announced in the Economic Statement of 25 May 1988);

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to ensure that life assurance companies cannot claim a deduction for general management expenses, incurred after 25 May 1988, which are denied deductibility under other provisions of the Act (measure announced in the Economic Statement of 25 May 1988);

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to allow deductions for expenditure incurred in gaining superannuation premiums from 1 July 1988 proposal announced on 20 June 1988);

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to apportion all expenses of a life assurance company between exempt and assessable income with effect from the 1988-89 income year (measure announced in the Economic Statement of 25 May 1988);

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to exempt from withholding tax, dividends derived from assets included in the Australian insurance funds of a non-resident life assurance company, and to allow the non-resident to claim franking rebates in respect of the franked proportion of those dividends, with effect from 1 July 1988;

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to increase, from 1 July 1989, the rate of rebate for bonuses received in respect of certain short-term life assurance policies, to 30 per cent in the case of friendly society policies and 39 per cent in the case of life assurance company policies (proposal announced in the Economic Statement of 25 May 1988);

Registered organisations

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to introduce new arrangements for the taxation of the superannuation business of registered organisations, with effect from 1 July 1988 (proposal announced in the Economic Statement of 25 May 1988 and in further statements dated 20 June 1988, 29 June 1988, 1 July 1988 and 11 August 1988);

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to tax the life assurance and accident and disability business of registered organisations other than friendly societies, in the same manner as friendly societies, from 1 July 1988;

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to allow franking rebates to registered organisations for the franked proportion of dividends paid to the organisations on or after 1 July 1988 (announced in the Economic Statement of 25 May 1988);

Gains and losses on disposals of assets

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to modify the application of the Income Tax Assessment Act, in particular the capital gains and capital losses provisions, to disposals of assets by trustees of complying superannuation funds, complying approved deposit funds, pooled superannuation trusts and the complying superannuation business of life assurance companies and registered organisations (measure announced in the Economic Statement of 25 May 1988);

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to disregard gains and losses on the disposal of units in a pooled superannuation trust by a complying superannuation fund, a complying approved deposit fund, a pooled superannuation trust or, in certain circumstances, a life assurance company or a registered organisation (proposal announced on 20 June 1988).

Superannuation funds, approved deposit funds (ADFs) and pooled superannuation trusts (PSTs)

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to modify in several respects the operation of provisions introduced in the Taxation Laws Amendment Bill (No.6) 1988 for the taxation of superannuation funds, ADFs and PSTs, including -

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to provide an alternative method for determining the tax exemption for income of a complying superannuation fund that is referable to its current pension liabilities;

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to exempt from tax the income of a PST, life office or registered organisation that is referable to the current pension liabilities of unitholders or policy holders that are complying superannuation funds;

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to allow deductions to superannuation funds for amounts repaid to employers;.

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to expand the options available to superannuation funds in deducting the cost of providing death and disability cover to members and to ease certain restrictions on the operation of the deduction;

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to modify the rules governing the taxing of contributions and the transfer of taxable contributions to other entities;

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to ensure that payments by superannuation funds on the death of a member to dependants of the deceased are not diminished by reason of the taxation of superannuation contributions;

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to exclude non-reversionary (i.e. cash) life assurance bonuses from the assessable income of complying superannuation funds, complying ADFs and PSTs;

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to facilitate the timely processing of tax returns by authorising the Commissioner of Taxation to make assessments (subject to amendment) of complying superannuation funds, complying ADFs and PSTs in anticipation of the giving of various notices to the fund or trust by the Insurance and Superannuation Commissioner; and

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to exempt from tax contributions to complying superannuation funds that

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match end benefits deemed by the fund to be paid from an untaxed source; or

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are in respect of unfunded liabilities of the fund that had accrued at 30 June 1988

(proposals announced on 11 August 1988).

The Bill will also amend the Occupational Superannuation Standards Act 1987 -

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to establish the basis on which the Insurance and Superannuation Commissioner may authorise the amount of a pre-1 July 1988 unfunded accrued liability - and variations to that amount - for use in attracting a tax exemption for employer contributions; and to authorise the making of related regulations (proposal announced on 11 August 1988);

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to facilitate the application of the operating standards for public sector funds; and

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to require the Insurance and Superannuation Commissioner to advise the Commissioner of Taxation of the review of certain decisions.

Assuming enactment of the Taxation Laws Amendment Act (No.2) 1989 (which was introduced as the Taxation Laws Amendment Bill (No.6) 1988 and had not been enacted as at the date of introduction of the present Bill), the Bill will also amend that Act -

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to insert application provisions for amendments being made by this Bill to provisions being inserted by that Act in the Income Tax Assessment Act and for related amendments; and

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to amend transitional provisions contained in that amending Act to -

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provide for the valuation of trading stock and depreciable property held by formerly exempt superannuation funds and ADFs when their exempt status ended; and

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make some minor technical corrections.

The Bill will also amend the penalty provisions of the Taxation Administration Act 1953 to extend its application to false or misleading statements made to the Insurance and Superannuation Commissioner in relation to authorisations of pre-1 July 1988 unfunded accrued liabilities of superannuation funds.

INCOME TAX RATES AMENDMENT BILL (NO. 2) 1989

This Bill will amend the Income Tax Rates Act 1986, with effect for the year of income in which 1 July 1988 occurred and for subsequent years, to impose tax on the components of taxable income of life assurance companies and registered organisations - ascertained under the amendments contained in the Taxation Laws Amendment Superannuation) Bill 1989 - at the following rates:

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the component referable to policies held by complying funds, or in respect of rollover annuities - 15%

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the component referable to policies held by non-complying funds - 47% (48% for the 1989-90 income year and 49% for the 1988-89 income year);

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the component referable to other life assurance and to accident and disability insurance

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life assurance companies - 39%

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registered organisations - 30%; and

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the non-statutory fund component (life assurance companies only) - 39%