House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 5 - Life insurance companies

Outline of Chapter

5.1 This Chapter explains the amendments which insert new Division 320 into the ITAA 1997. New Division 320 will provide a new basis for taxing life insurance companies and will replace Division 8 and Division 8A of the ITAA 1936. The new Division will ensure that life insurance companies are taxed on all their profits including:

•

all management fees (except for management fees that are exempt from tax under transitional arrangements);

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underwriting profit; and

•

profit on immediate annuity business.

5.2 New Division 320 also enables the segregation of certain assets of a life insurance company into:

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'virtual' PST assets that is, assets relating to complying superannuation business:

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income generated on those assets is taxed at a rate of 15%; and

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segregated exempt assets that is, assets relating to immediate annuity and current pension business;

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income generated on those assets is exempt from tax.

5.3 This Chapter also explains amendments to the ITAA 1936 and the ITAA 1997 to:

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tax the current pension business of complying superannuation funds and PSTs consistently with the immediate annuity and current pension business of life insurance companies;

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change the section 275 transfer mechanism for complying superannuation funds; and

•

ensure that the CGT provisions that apply to complying superannuation funds apply to the complying superannuation business of life insurance companies.

Context of Reform

5.4 The Government announced in ANTS major reforms to the taxation of the life insurance industry. The details of the proposed reform were developed by the Review and announced as part of the New Business Tax System.

5.5 Existing taxation arrangements for life insurers are very complex with income and expenses being allocated to up to 4 classes of business.

•

Each class is subject to a different rate of tax.

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Some classes include components which are exempt from tax or subject to different rates of tax.

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Different calculations are required to determine assessable income for each class of business.

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Tax planning opportunities can arise from internal dealings that exploit differences in the taxation rates of each class of business.

5.6 In addition, existing taxation arrangements for life insurers are inconsistent with the treatment of similar activities carried on by other entities.

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The income tax base does not include all income.

•

Similar economic activities are subject to different rates of tax depending on whether the business is carried on by a life insurer or a general insurer. For example:

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unlike general insurers, life insurers are not taxed on underwriting profit; and

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management fees embedded in premiums are not included in the assessable income of life insurers. However, all management fees are included in the assessable income of banks, public unit trusts and general insurers.

5.7 The reforms ensure that life insurance companies will be taxed on a more rational basis in line with the treatment of similar activities by other entities.

5.8 Discrepancies in treatment between life insurance companies and other entities are removed so that:

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the taxable income from the risk business of life insurance companies is calculated on the same basis as the taxable income of the risk business of general insurers; and

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the taxable income of the investment business of life insurance companies is calculated on the same basis that applies to calculate the taxable income of the investment business of other investment entities.

5.9 Life insurance companies will be able to maintain their current role in respect of superannuation through the establishment of virtual PSTs.

Summary of new law

5.10 The new provisions ensure that life insurers are taxed in a comparable way to other entities with similar types of income. The provisions contain special rules for working out the taxable income of life insurance companies. Those rules:

•

include certain amounts in assessable income;

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identify certain amounts of exempt income; and

•

identify specific deductions.

5.11 The taxable income of life insurance companies is divided into 2 classes:

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the complying superannuation class this class contains taxable income that relates to a life insurance company's complying superannuation business and is taxed at the rate of tax that applies to complying superannuation funds; and

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the ordinary class this class contains the rest of the company's taxable income and is taxed at the company tax rate.

5.12 The new provisions also enable the segregation of certain assets of a life insurance company into:

•

'virtual' PST assets - that is, assets relating to complying superannuation business;

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income generated on those assets is taxed at a rate of 15%; and

•

segregated exempt assets that is, assets relating to immediate annuity and current pension business;

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income generated on those assets is exempt from tax.

5.13 This Bill also amends the ITAA 1936 and the ITAA 1997 to:

•

tax the current pension business of complying superannuation funds consistently with the immediate annuity and current pension business of life insurance companies;

•

change the section 275 transfer mechanism for complying superannuation funds; and

•

ensure that the CGT provisions that apply to complying superannuation funds apply to the complying superannuation business of life insurance companies.

Detailed explanation of new law

What is a life insurance company?

5.14 A life insurance company is defined in section 995-1 of the ITAA 1997 to be a company registered under the Life Insurance Act.

5.15 Companies that are registered under the Life Insurance Act include:

•

life insurance companies;

•

life reinsurance companies; and

•

friendly societies that carry on life insurance business.

5.16 The definitions of life insurance entity and SGIO in section 995-1 are being repealed as they are no longer required. New Division 320 does not apply to registered organisations because there are no registered organisations (other than friendly societies) that carry on life insurance business. [Schedule 9, items GK19 and GK30, subsection 995-1(1)]

What is a life insurance policy?

5.17 A life insurance policy is a policy that is:

•

a life policy as defined in section 9 of the Life Insurance Act;

•

a policy that is declared to be part of life insurance business under section 12A or section 12B of the Life Insurance Act; and

•

a sinking fund policy as defined in the Dictionary in the Schedule to the Life Insurance Act.

[Schedule 9, item GK20, subsection 995-1(1)]

5.18 That is, a life insurance policy will be any business that a life insurance company is permitted to carry out as life insurance business under the Life Insurance Act.

5.19 A 'life policy' as defined in section 9 of the Life Insurance Act is:

•

an insurance contract that provides for the payment of money on the death of a person of the happening of a contingency dependant on the termination or continuance of human life;

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an insurance contract that is subject to the payment of premiums for a term dependant on the termination or continuance of human life;

•

an insurance contract that provides for the payment of an annuity for a term dependant on the termination or continuance of human life;

•

a contract that provides for the payment of an annuity for a term not dependant on the termination or continuance of human life but exceeding the term prescribed in the Life Insurance Regulations;

•

a continuous disability policy as defined in section 9A of the Life Insurance Act;

•

a contract (whether or not it is an insurance contract) that constitutes an investment account contract as defined in section 14 of the Life Insurance Act; and

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a contract (whether or not it is an insurance contract) that constitutes an investment-linked contract as defined in section 14 of the Life Insurance Act.

5.20 Policies declared to be part of life insurance business under section 12A or section 12B of the Life Insurance Act are policies which do not clearly fit the explicit definition of a life policy under section 9 of that Act but which are still appropriately undertaken by life insurance companies. Examples of the types of policies which are declared to be life insurance business include:

•

fixed term annuities that have a term of less than 10 years; and

•

income bonds and scholarship plans issued by friendly societies.

5.21 A sinking fund policy is a contract under which a life insurance company undertakes to pay money on one or more specified dates that is not dependant on the death or survival of the person to whom the policy is issued or of any other person.

What is the taxable income of life insurance companies?

5.22 Section 4-15 of the ITAA 1997 provides that the taxable income of a taxpayer consists of:

Assessable income - Deductions.


Assessable income

5.23 Section 6-1 provides that assessable income consists of:

•

ordinary income that is, income according to ordinary concepts (section 6-5); and

•

statutory income that is, amounts included in assessable income by a specific provision of the Act (section 6-10).

5.24 Section 6-25 ensures that:

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amounts that are included in assessable income by more than one provision of the Act are included in assessable income only once; and

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unless the contrary intention appears, the specific provisions of the Act prevail over the rules about ordinary income.

Deductions

5.25 Division 8 of the ITAA 1997 categorises deductions as:

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general deductions - broadly, expenses incurred in carrying on a business for the purpose of gaining or producing assessable income (section 8-1); and

•

specific deductions - that is, amounts allowed as a deduction by a specific provision of the Act (section 8-10).

5.26 The Bill inserts new Division 320 into the ITAA 1997. [Schedule 2, item 84, Division 320]

5.27 The Division contains special rules for working out the taxable income of life insurance companies. Those rules:

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include certain amounts in assessable income;

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identify certain amounts of exempt income; and

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identify specific deductions of life insurance business.

5.28 The Division divides the taxable income of life insurance companies into 2 classes:

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the ordinary class of taxable income which is taxed at the company tax rate; and

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the complying superannuation class of taxable income which is taxed at a rate of 15%.

5.29 The Division also contains rules for segregating the assets of life insurance companies:

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assets that relate to complying superannuation business that are held in a virtual PST; and

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assets that relate to immediate annuity and other exempt business.

[Schedule 2, item 84, section 320-1]

What is the object of new Division 320?

5.30 The object of new Division 320 is to ensure that life insurance companies are taxed in a broadly comparable way to other entities that derive similar kinds of income. [Schedule 2, item 84, section 320-5]

What is included in the assessable income of a life insurance company?

5.31 New subsection 320-15 specifically includes certain amounts in the assessable income of life insurance companies. [Schedule 2, item 84, section 320-15]

5.32 The assessable income of a life insurance company will include:

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life insurance premiums paid to the company in the income year;

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a life insurance premium is any amount paid by a policyholder for a life insurance policy and includes the amount paid to purchase an annuity (including a deferred annuity) [Schedule 9, item GK20A, subsection 995-1(1)] ;

•

amounts received under a contract of reinsurance to the extent that they relate to the risk components of claims paid under a reinsurance policy;

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for this purpose a contract of reinsurance does not include a reinsurance contract in respect of life insurance policies that are held in the virtual PST or in segregated exempt assets of the reinsurance company [Schedule 9, item GK7, subsection 995-1(1)] ;

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the risk component of claims paid under a reinsurance policy is that part of the claim that is allowed as a deduction to the reinsurer under new section 320-80;

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the investment component of claims paid are currently assessable under section 26AH of the ITAA 1936;

•

refunds, or amounts in the nature of refunds, of reinsurance premiums paid under a contract of reinsurance;

•

amounts received under a profit-sharing arrangement under a contract of reinsurance;

•

the amount included in assessable income under section 320-200 where an asset other than money is transferred:

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from or to a virtual PST under new subsection 320-180(1) or (2);

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to a virtual PST under new section 320-185; or

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from a virtual PST under new subsection 320-195(2) or (3);

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the transfer value of assets transferred from segregated exempt assets under new subsection 320-235(1) or subsection 320-250(2);

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the transfer value of an asset is the amount that could be expected to be received from the disposal of the asset in an open market after deducting any costs expected to be incurred in respect of the disposal [Schedule 9, item GK37A, subsection 995-1(1)] ;

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if the asset transferred from segregated exempt assets is money, the transfer value is the amount of the money [Schedule 2, item 84, paragraph 320-170(7)(b)] ;

•

the amount included in assessable income under section 320-255 where an asset other than money is transferred to the segregated exempt assets under new subsection 320-235(2) or section 320-240;

•

amounts representing a decrease in the value of the net risk components of risk policy liabilities worked out under new subsection 320-85;

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section 275 transfers;

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section 275 transfers are taxable contributions transferred from a complying superannuation fund or complying ADF under section 275;

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taxable contributions are, generally, employer and tax deductible member contributions made to a complying superannuation fund that are included in the fund's assessable income under section 274 of the ITAA 1936 [Schedule 9, item GK34, subsection 995-1(1)] ;

•

specified roll-over amounts;

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specified roll-over amounts are the untaxed element of the post-June 83 component of an ETP rolled-over to purchase a deferred annuity or an immediate annuity [Schedule 9, item GK32, subsection 995-1(1)] ;

•

fees and charges imposed on life insurance policies that are not otherwise included in assessable income; and

•

taxable contributions made to RSAs provided by the company.

[Schedule 2, item 84, subsection 320-15]

5.33 The assessable income of life insurance also includes amounts that are assessable under the other provisions of the income tax law (such as the ordinary income provisions and the capital gain tax provisions).

Management fees included in assessable income

5.34 The assessable income of a life insurance company will include all explicit and implicit fees charged by life insurance companies.

5.35 Examples of management fees that will be included in assessable income are premium based fees, establishment fees, time based account fees, asset fees, switching fees, surrender penalties, buy/sell margins, exit fees and interest on overdue premiums.

5.36 All premium-based fees, regardless of their type, will be taxed in the period the premiums are paid - this arises as a consequence of including total premiums in assessable income and allowing deductions for certain components of those premiums based on the entitlement of the policyholders.

5.37 For example, surrender fees and exit fees designed to recover acquisition costs will be recognised in the year the premium is received and those fees are reflected in the termination value of the policy.

5.38 Fees derived on life insurance policies held in a virtual PST or in segregated exempt assets are included in assessable income and taxed at the company tax rate. This is a consequence of provisions relating the amount of segregated assets to liability values that reflect the policyholders' entitlements, the provisions relating to the transfer of amounts from the segregated assets and the mechanism for working out the virtual PST component of assessable income.

Amounts transferred from a virtual PST to its segregated exempt assets

5.39 If an asset other than money that was transferred from a company's virtual PST to its segregated exempt assets under new subsection 320-195(1) is disposed of by the company, the assessable income of the company includes the lesser of:

•

the amount (if any) that would have been included in assessable income if the asset had been disposed of by the company at the time of transfer of the asset to the segregated exempt assets if section 320-255 applied at that time; and

•

the amount (if any) that would have been included in assessable income if the asset were an asset of the virtual PST at the time of disposal.

[Schedule 2, item 84, section 320-20]

5.40 Similarly, if an asset other than money that was transferred from a company's virtual PST to its segregated exempt assets under new subsection 320-195(1) is transferred from those segregated exempt assets under subsection 320-235(1) or section 320-250, the assessable income of the company includes the lesser of:

•

the amount (if any) that would have been included in assessable income if the asset had been disposed of by the company at the time of transfer of the asset to the segregated exempt assets if section 320-255 applied at that time; and

•

the amount (if any) that would have been included in assessable income because of section 320-255 if the asset had been an asset of the virtual PST at the time of its transfer from the segregated exempt assets.

[Schedule 2, item 84, section 320-25]

Decrease in the value of policy liabilities for continuous disability policies

5.41 New section 320-85 allows a deduction to life insurance companies for the increase in the value of risk policy liabilities. The section specifies that the Valuation Standard is to be used as the basis for valuing risk policy liabilities relating to long term policies, including continuous disability policies. Life insurance companies currently work out the profit made on disability business, including continuous disability business, based on the change in the value of policy liabilities calculated using the Solvency Standard or some similar basis. A decrease in the value of policy liabilities is included in assessable income under new paragraph 320-15(h).

5.42 As the value of liabilities calculated using the Solvency Standard is usually higher than the value of liabilities calculated using the Valuation Standard, the change in basis of calculating policy liabilities for continuous disability policies will result in a significant amount being included in assessable income for the income year in which 1 July 2000 occurs. ^[F1]

5.43 Therefore, as a transitional measure, one fifth of the amount representing the difference in the value of policy liabilities for continuous disability policies will be included in assessable income each year for a period of 5 years. This will spread the impact of the change in the basis for calculating risk policy liabilities on continuous disability policies over a period of 5 years. [Schedule 2, item 84, section 320-30]

What income is exempt income of life insurance companies?

5.44 New sections 320-35 and 320-40 specify the exempt income of life insurance companies.

5.45 Life insurance companies will be exempt from tax on:

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amounts of ordinary income and statutory income accrued before 1 July 1988 on assets that have become virtual PST assets;

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this ensures that income derived before 1 July 1988 on assets supporting complying superannuation business is exempt from tax;

•

amounts of ordinary income and statutory income derived on segregated exempt assets;

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segregated exempt assets are assets that support immediate annuity and current pension business and business from constitutionally protected superannuation funds;

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capital gains derived from this business are exempt from tax under new section 118-315 [Schedule 2, item 81, section 118-315] ;

•

amounts received from the disposal of units in a PST;

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capital gains derived from the disposal of units in a PST are exempt from tax under section 118-350;

•

the non-resident portion of foreign source income derived by an Australian/overseas fund or an overseas fund that is attributable to policies issued by foreign permanent establishments;

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the non-resident proportion of foreign establishment amounts is worked out using the formula in subsection 320-35(2);

•

amounts that are credited to an RSA that is paying out an immediate annuity; and

•

income derived by friendly societies that is:

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received before 1 July 2001 and is exempt from tax under section 50-1; or

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received after 30 June 2001 and is attributable to income bonds, funeral policies and scholarship plans issued by friendly societies before 1 December 1999.

[Schedule 2, item 84, section 320-35]

Exemption of specified management fees

5.46 As a transitional rule, life insurance companies will be exempt from tax on one third of specified management fees on certain life insurance policies taken out before 1 July 2000. The exemption will cease to apply from 30 June 2005.

5.47 The rationale for the transitional relief is that, currently, a full tax deduction is not allowed for policy acquisition expenses to the extent that associated management fees are not taxed at the company tax rate. These acquisition expenses are recovered from fees charged on the policy in its initial years - fees that will now be taxed at the company tax rate.

5.48 Broadly, transitional relief will apply to exempt from tax one third of:

•

all fees on complying superannuation policies held in a virtual PST;

•

all fees on immediate annuity policies held in segregated exempt assets; and

•

premium-based fees on other policies.

5.49 Transitional relief does not apply to management fees in respect of:

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policies under which benefits are payable only on the death or disability of a person; or

•

policies that provide for participating benefits or discretionary benefits that are not held in a virtual PST or in segregated exempt assets.

5.50 Specified management fees are the fees and charges made by the company (being fees and charges the company was entitled to make under the terms of policies as at 30 June 2000) being the sum of:

•

for virtual PST life insurance policies the total amount transferred from the virtual PST in the income year under subsection 320-180(1) or subsection 320-195(3) less:

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the total amount transferred to the virtual PST under subsection 320-180(2) or subsection 320-185(1); and

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any amount of those premiums that relate to the company's liability to pay amounts on the death or disability of the person;

•

for exempt life insurance policies held in the segregated exempt assets the total amount transferred from the segregated exempt assets in the income year under subsection 320-235(1) or subsection 320-250(2) less the total amount transferred to the virtual PST under subsection 320-235(2) or subsection 320-240(1);

•

for other policies the sum of premiums received in respect of those policies in the income year less the total of:

-

the amount deductible under section 320-75;

-

the risk component of the claims paid under those policies; and

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1.5% of the current termination value of those policies in the income year.

5.51 The amount calculated under any one of subsections 320-40(5), (6) or (7) cannot be negative.

5.52 A policy will be regarded as having been taken out before 1 July 2000 if the contract is entered into before that date. If a policy is restructured or if the terms of the policy change after that date to change the fee structure of the policy, the policy will be considered to be a new policy that does not qualify for transitional relief. An example of a policy that is restructured is a policy that is converted to a different policy table (such as converting from a whole-of-life policy to an endowment policy).

[Schedule 2, item 84, section 320-40]

What specific deductions will be allowed to life insurance companies?

5.53 Life insurance companies will be entitled to specific deductions for:

•

certain components of life insurance premiums;

•

the risk component of claims paid under life insurance policies;

•

the increase in the value of risk policy liabilities;

•

reinsurance premiums;

•

amounts transferred to segregated exempt assets; and

•

amounts paid after 30 June 2000 by friendly societies to holders of income bonds issued after 30 November 1999.

Premiums transferred to virtual PSTs

5.54 New subsection 320-55 allows a deduction for the part of the life insurance premiums transferred to a virtual PST.

5.55 The amount allowed as a deduction is the amount of the premium received that is transferred to the virtual PST less the death and disability component of the premiums.

5.56 The death and disability component of the premium is:

•

if the policy specifies the death and disability component of the premium the amount specified; or

•

if the policy does not specify the death and disability component of the premium and:

-

if the policy provides participating benefits or discretionary benefits nil;

-

if the policy is an endowment policy 10% of the premium;

-

if the policy is a whole-of-life policy 30% of the premium; or

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otherwise so much of the premium that an actuary determines to be the death and disability component of the premium.

[Schedule 2, item 84, section 320-55]

Premiums transferred to segregated exempt assets

5.57 A deduction is allowed for the amount of a premium that is transferred to segregated exempt assets. Segregated exempt assets are primarily assets to support immediate annuity and current pension business of life insurance companies. [Schedule 2, item 84, section 320-60]

Premiums in respect of policies that provide participating or discretionary benefits

5.58 A deduction is allowed for premiums in respect of policies (other than virtual PST policies or exempt life insurance policies which are covered by other sections) that provide participating or discretionary benefits. [Schedule 2, item 84, section 320-65]

5.59 Policies that provide participating benefits are policies that provide benefits that are not non-participating benefits as defined in section 15 of the Life Insurance Act [Schedule 9, item GK23, section 995-1] . Generally, participating benefits are benefits that include a share in the profits or surplus of a life insurance company such as benefits provided under traditional whole-of-life and endowment policies.

5.60 Non-participating benefits are defined in section 15 of the Life Insurance Act to mean, generally, benefits that are set out in a policy document that do not include a share in profits or surplus. Investment-linked policies and some investment account policies are examples of policies that provide non-participating benefits .

5.61 Discretionary benefits are investment account benefits (as defined in section 14 of the Life Insurance Act) that are regarded as non-participating benefits for the purposes of the Life Insurance Act solely because of the operation of Prudential Rules No. 22 of that Act [Schedule 9, item GK9, section 995-1] . These policies are credited interest according to a prescribed formula but with an element of discretion or smoothing over time that generally requires the establishment and maintenance of a smoothing reserve. The actuarial management of this business is undertaken on bases similar to those for participating business.

5.62 The deductibility of premiums on policies that provide participating or discretionary benefits recognises that the structure and administration of existing life insurance business has not required the separate identification of the capital, risk and fee components of premiums or benefits.

5.63 Therefore, the deductible component of the premium for policies that provide participating benefits or discretionary benefits is the whole of the premium paid by the policyholder. This recognises that under these policies, policyholders are entitled to share in the profits of the business, including underwriting and expense profits. Therefore, the component of the premiums attributable to risk and expenses is part of the entitlement of policyholders until the profit (or, more particularly, the share of that profit allocated to shareholders) is determined.

Premiums in respect of policies that provide benefits only on death or disability

5.64 A deduction is not allowed for any part of premiums in respect of policies that provide benefits only on death or disability, except where those policies are participating or discretionary policies. [Schedule 2, item 84, section 320-70]

Premiums in respect of other policies

5.65 New section 320-75 allows a deduction for a component of premiums in respect of ordinary non-participating investment policies that is, life insurance policies other than:

•

premiums that are transferred to a virtual PST;

•

premiums that are transferred to segregated exempt assets;

•

premiums in respect of policies that provide participating or discretionary benefits; and

•

premiums in respect of policies that provide benefits only on death or disability.

5.66 If the policy is taken out after 30 June 2001, the amount allowed as a deduction is the lesser of:

•

the amount specified in the policy to be the capital component of the premium adjusted for any part of the premium that is reinsured;

-

the capital component of the premium is that part of the premium that is to be returned to the policyholder when a benefit is paid. The amount specified under the terms of the policy could be a fixed dollar amount or an amount capable of calculation by a formula such as a fixed percentage of the premium or, in the case of a group policy, a fixed amount for each member of the group covered by the policy; and

•

the sum of the net premiums less the amount that an actuary determines (having regard to the change over the income year in the sum of the net current termination values of the policies and the movements in those values during the year) to be attributable to fees and charges.

5.67 If the policy is taken out before 1 July 2001, the amount allowed as a deduction is the sum of the net premiums less the amount that an actuary determines (having regard to the change over the income year in the sum of the net current termination values of the policies and the movements in those values during the year) to be attributable to fees and charges. [Schedule 2, item 84, section 320-75]

5.68 Net premiums are the amount of the premium reduced by any part of the premium that is reinsured. [Schedule 9, item GK21B, subsection 995-1(1)]

5.69 Net current termination value is the current termination value that relates to that part of the policy that is not reinsured. [Schedule 9, item GK21A, subsection 995-1(1)]

5.70 Current termination value is the current termination value as defined in the Solvency Standard that relates to that part of the policy that is not reinsured. [Schedule 9, item GK7A, subsection 995-1(1)]

5.71 Generally, the change over the income year in the sum of the net current termination values of the policies is the sum of those values at the end of the income year reduced by the sum of those values at the start of the income year. However, if a company ceases business during the income year or significantly changes the nature of its business, the change over the income year in the sum of the net current termination values will be based on the sum of those values immediately before that event.

5.72 In this regard the change in the sum of the net current termination values of the policies should be considered in the context of other cash flows which have occurred during the income year.

The risk component of claims paid

5.73 As the risk component of life insurance premiums is included in assessable income, a specific deduction is allowed for the risk component of claims paid under life insurance policies (including claims paid by reinsurers). [Schedule 2, item 84, section 320-80]

5.74 The risk component of a claim paid under a policy is:

•

if the policy is a pure death or disability policy that does not provide participating benefits or discretionary benefits and is not an exempt life insurance policy the whole of the amount paid under the policy;

•

if the policy provides for participating benefits or discretionary benefits nil;

-

the risk component of claims paid for policies that provide for participating benefits or discretionary benefits (such as traditional whole-of-life and endowment policies) is nil because an appropriate deduction is effectively allowed through the calculation of the deduction for the premium component of these policies. The deduction for the premium component and risk component of these policies is combined because of the practical difficulty in breaking the premium into its separate elements;

•

if the policy is an exempt life insurance policy nil; or

•

otherwise the amount paid under the policy on the death or disability of the insured reduced by the current termination value of the policy (calculated by an actuary) immediately before the death, or the occurrence of the disability, of the insured person.

[Schedule 2, item 84, subsection 320-80(2)]

5.75 The risk component of claims paid can never exceed the total claim paid that is, for taxation purposes the risk component of claims paid can not be a negative amount.

5.76 A deduction is not allowed for claims paid in any other circumstances for the investment component of the claim as the life insurance company pays tax on investment income. The policyholder is compensated for that tax by the rebate available on policies taken out before 1 July 2001and by the imputation system on policies taken out after 30 June 2001. [Schedule 2, item 84, subsection 320-80(3)]

Increases in the value of liabilities under the net risk component of policies

5.77 New section 320-85 allows a specific deduction for increases in the value of liabilities under the net risk component of policies over an income year. If there is a decrease in the value of liabilities under the net risk component of policies over the income year, the decrease is included in the statutory income of the company under new paragraph 320-15(h). [Schedule 2, item 84, section 320-85]

5.78 The net risk component of a life insurance policy is the risk component of the policy in respect of that part of the policy that is not reinsured. [Schedule 9, item GK21C, subsection 995-1(1)]

5.79 The change in the value of risk policy liabilities is relevant for working out the profit or loss made on the risk component of a life insurance company's business that is, its underwriting profit or loss and its appropriate release over the life of the policy.

5.80 A deduction is not allowed for increases in the value of risk policy liabilities if the company is not entitled to claim a deduction for the risk component of claims paid under new section 320-80. That is, if the risk component of a claim paid under a policy is nil, the risk component of the policy (and the liability in respect of that component) is also taken to be nil. This is because an appropriate deduction is effectively allowed through the calculation of the deduction for the premium component for these policies. The deduction for the premium component and risk component of these policies is combined because of the practical difficulty in breaking the premium into its separate elements. [Schedule 2, item 84, subsection 320-85(2)]

5.81 Generally, the value of liabilities of the risk component of the policies will be the sum of the policy liabilities (as defined in the Valuation Standard) in respect of the net risk component of policies less the sum of any cumulative losses for the net risk component of policies. [Schedule 2, item 84, subsection 320-85(4)]

5.82 Policy liabilities for this purpose will include appropriate amounts for outstanding claims and claims incurred but not reported.

5.83 However, if the policy is a disability policy (other than a continuous disability policy) the value of liabilities of the risk component of the policy will be the current termination value as defined in the Solvency Standard of the policy (calculated by an actuary). [Schedule 2, item 84, subsection 320-85(3)]

5.84 As a transitional rule, the opening balance of policy liabilities for disability policies (other than continuous disability policies) as at 1 July 2000 will be the value of liabilities actually used for taxing purposes for the period ending 30 June 2000. [Schedule 2, item 87, section 320-85 of the Transitional Provisions Act]

5.85 A disability policy (which includes a trauma policy) is a policy under which a benefit is payable in the event of:

•

the death, by accident or by some other cause stated in the contract, of the person whose life is insured;

•

injury to, or disability of, the insured as the result of accident or sickness; or

•

the insured being found to have a stated condition or disease.

[Schedule 9, item GK8A, subsection 995-1(1)]

5.86 A continuous disability policy is a disability policy that:

•

by its terms, is to be of more than 3 years duration; and

•

the terms of which does not permit alteration, at the instance of the life insurance company concerned, of the benefits provided by the contract or the premiums payable under the contract.

[Schedule 9, item GK6, subsection 995-1(1)]

5.87 The difference in the basis of valuing risk policy liabilities for disability policies (other than continuous disability policies) and all other policies relates to the impact of the different valuation methods on the spreading of acquisition costs in relation to the policies.

5.88 The policy liability, which is used as the value of risk policy liabilities for policies that are long term in nature, appropriately spreads the acquisition expenses over the life of the policies.

5.89 The current termination value, which is used as the value of risk policy liabilities for policies that are short term disability policies, appropriately allows acquisition expenses to be written off in the year that the policy is written.

5.90 It needs to be recognised that the valuation of policy liabilities may result in a minimal liability in relation to some regular premium risk policies when those policies are first issued because, at that time, the expected cash outflows from the policy are greater than inflows that is, the acquisition and other expense payments exceed the premium inflows. This results in a decrease in the value of policy liabilities that should appropriately be included in assessable income. However, the position reverses over time once the present value of future claim and expense outflows exceeds the present value of premium inflows.

Assets transferred from the virtual PST to segregated exempt assets

5.91 If an asset other than money that was transferred from a company's virtual PST to its segregated exempt assets under new subsection 320-195(1) is disposed of by the company, the company can deduct the lesser of:

•

the amount (if any) that could have been deducted if section 320-255 applied at the time of transfer; or

•

the amount (if any) that could have been deducted if the asset were an asset of the virtual PST at the time of disposal.

[Schedule 2, item 84, section 320-90]

5.92 Similarly, if an asset other than money that was transferred from a company's virtual PST to its segregated exempt assets under new subsection 320-195(1) is transferred from those segregated exempt assets under subsection 320-235(1) or section 320-250, the company can deduct the lesser of:

•

the amount (if any) that could have been deducted if section 320-255 applied at the time of transfer to the segregated exempt assets; or

•

the amount (if any) that could have been deducted because of section 320-255 if the asset had been an asset of the virtual PST at the time of its transfer from the segregated exempt assets.

[Schedule 2, item 84, section 320-95]

Reinsurance premiums

5.93 A life insurance company will be entitled to a deduction for premiums paid under contracts or reinsurance. [Schedule 2, item 84, section 320-100]

5.94 A contract or reinsurance does not include a reinsurance contract in respect of liabilities that are held in a virtual PST or in segregated exempt assets. [Schedule 9, item GK7, subsection 995-1(1)]

5.95 A deduction is allowed for premiums paid under reinsurance contracts only if the contract provides for the transfer of risk of loss from the occurrence of contingent insured events. The transfer of risk is made through the indemnity to the life insurance company that enters into the reinsurance contract in respect of losses that it suffers as a consequence of carrying on risk business.

5.96 If the arrangement does not transfer the risk to a reinsurer (such as under a financial reinsurance contract), the premiums paid are not deductible as the arrangement is not considered to be a reinsurance contract.

Transfers to segregated exempt assets

5.97 A life insurance company will be entitled to a deduction for the transfer value of assets transferred to segregated exempt assets under subsection 320-235(2) or subsection 320-240(1). [Schedule 2, item 84, subsection 320-105(1)]

5.98 The transfer value of an asset is the amount that could be expected to be received from the disposal of the asset in an open market after deducting any costs expected to be incurred in respect of the disposal. [Schedule 9, item GK37A, subsection 995-1(1)]

5.99 In addition, if an asset (other than money) is transferred to the company's segregated exempt assets under subsection 320-235(2) or section 320-240, the company can deduct the amount (if any) that it can deduct because of section 320-255. [Schedule 2, item 84, subsection 320-105(2)]

Amounts credited by friendly societies to income bonds

5.100 The investment income derived by friendly societies on income bonds issued after 30 November 1999 will be included in assessable income from 1 July 2001.

5.101 An income bond is a life insurance policy issued by a friendly society under which bonuses are regularly distributed. [Schedule 9, item GK17, subsection 995-1(1)]

5.102 Therefore, friendly societies will be allowed a deduction for the amounts credited after 30 June 2001 to income bonds issued after 30 November 1999 where the interest accrued after 1 July 2001. [Schedule 2, item 84, section 320-110]

No deduction for amounts credited to RSAs

5.103 A life insurance company is not entitled to a deduction for any amounts credited to RSAs. [Schedule 2, item 84, section 320-115]

Two classes of taxable income for life insurance companies

5.104 From 1 July 2000 the taxable income of a life insurance company will be calculated on broadly the same basis as for other taxpayers. However, a life insurance company's taxable income will be divided into 2 classes:

•

the ordinary class which is taxed at the company tax rate; and

•

the complying superannuation class which is taxed at a rate of 15%.

[Schedule 2, item 84, section 320-135]

What is the ordinary class of taxable income?

5.105 The ordinary class of taxable income of a life insurance company will be the total taxable income less the complying superannuation class of taxable income. [Schedule 2, item 84, section 320-140]

5.106 Any capital losses on ordinary assets that is, assets that are not virtual PST assets or segregated exempt asset can only be applied against capital gains from ordinary assets. [Schedule 2, item 84, section 320-120]

What is the complying superannuation class of taxable income?

5.107 The complying superannuation class of taxable income of a life insurance company will consist of:

•

the RSA component;

•

the virtual PST component; and

•

the specified rollover component.

[Schedule 2, item 84, section 320-145]

The RSA component of the complying superannuation class

5.108 The RSA component of the complying superannuation class of taxable income relates to the RSA business of a life insurance company.

5.109 An RSA is defined in section 995-1 of the ITAA 1997 to have the same meaning given by the Retirement Savings Accounts Act 1997 .

5.110 The assessable income of a life insurance company that is an RSA provider includes all taxable contributions made during the year of income to RSAs provided by the company (see new paragraph 320-15(l)). Investment income derived by RSA providers is included in the RSA provider's assessable income under the ordinary provisions of the income tax law.

Taxable income allocated to the RSA component

5.111 The taxable income allocated to the RSA component of the complying superannuation class is the sum of all amounts (other than contributions that are not taxable contributions) credited to RSAs during the income year less amounts (other than benefits) debited to RSAs during the income year.

5.112 In calculating this amount:

•

any amount of tax paid in respect of an RSA is taken not to be an amount paid from the RSA; and

•

any amount credited to an RSA in respect of a period during which the RSA is paying out an immediate annuity is taken not to have been credited to the RSA as it is exempt from tax under new paragraph 320-35(1)(e).

[Schedule 2, item 84, section 320-155]

Preventing losses from being applied to reduce the RSA component

5.113 New section 320-160 operates to ensure that a life insurance company that is an RSA provider cannot offset losses against RSA income. [Schedule 2, item 84, section 320-160]

5.114 This section applies if:

•

the life insurance company has no taxable income;

•

the life insurance company has no complying superannuation class of taxable income; or

•

the complying superannuation class of taxable income is less than the RSA component.

5.115 New subsection 320-160(2) applies if the life insurance company has no taxable income or the complying superannuation class of taxable income is less than the RSA component. In these circumstances:

•

the life insurance company is taken to have both a taxable income and a tax loss for the year of income;

•

the taxable income is equal to the RSA component;

•

the tax loss is taken to be the amount that would have been the company's tax loss if the RSA component were not income derived by the company;

•

the complying superannuation class is taken to be equal to the RSA component; and

•

the ordinary class is taken to be nil.

5.116 New subsection 320-160(3) applies if the company's taxable income is equal to or greater than the RSA component. In these circumstances:

•

the complying superannuation class is taken to be equal to the RSA component; and

•

the difference between the RSA component and that amount would, but for new subsection 320-160(3), have been the complying superannuation class is applied in reducing the ordinary class of taxable income.

[Schedule 2, item 84, section 320-160]

The virtual PST component of the complying superannuation class

Establishment of a virtual PST

5.117 Life insurance companies will be able to segregate assets to be used for the sole purpose of discharging its virtual PST liabilities on or after 1 July 2000. The segregated assets will be known as a virtual PST. [Schedule 2, item 84, subsection 320-170(1) and (6)]

5.118 A virtual PST will effectively be treated as a separate entity within a life insurance company. The taxable income of virtual PSTs will be determined consistently with the taxable income of PSTs and will be taxed at the rate of 15%.

5.119 To ensure that the division of assets between the virtual PST and ordinary business is carried out on a fair and equitable basis, the assets that can be placed in the virtual PST on establishment must be a representative sample of all the life insurance company's assets supporting its virtual PST liabilities immediately before the establishment of the virtual PST. [Schedule 2, item 84, subsection 320-170(2)]

5.120 The assets segregated to establish a virtual PST must have a transfer value that does not exceed the sum of:

•

the company's virtual PST liabilities;

•

any reasonable provision made by the company in its accounts for deferred tax in relation to unrealised gains on those assets; and

•

the total amount of any unpaid PAYG instalments relating to the virtual PST component of the complying superannuation class of taxable income.

[Schedule 2, item 84, subsection 320-170(3)]

5.121 The transfer value of an asset is the amount that could be expected to be received from the disposal of the asset in an open market after deducting any costs expected to be incurred in respect of the disposal. [Schedule 9, item GK37A, subsection 995-1(1)]

5.122 As a transitional rule, if a life insurance company segregates assets in accordance with new section 320-120 between 1 July 2000 and 30 September 2000, the virtual PST will be taken to have been established on 1 July 2000. [Schedule 2, item 84, subsection 320-170(4)] The purpose of this transitional rule is to allow life insurance companies sufficient time to establish a virtual PST.

5.123 The segregated virtual PST assets must be maintained for the sole purpose of discharging the company's virtual PST liabilities. [Schedule 2, item 84, subsection 320-170(5)] This does not prevent the virtual PST assets from being used to pay fees and expenses relating to the carrying on of the virtual PST business.

An asset includes money

5.124 A transfer of an asset to or from a virtual PST includes the transfer of money to or from the virtual PST. If an asset transferred to or from the virtual PST is money, the transfer value of the asset transferred is the amount of the money. [Schedule 2, item 84, subsection 320-170(7)]

Transitional rule for certain assets held as at 1 July 2000

5.125 A segregated asset is an asset that belongs solely to the virtual PST. However, as a transitional rule, segregated assets will include the share of certain existing assets that a life insurance company certifies before 1 October 2000 to be included in the virtual PST. The part of the asset certified will be treated as a separate asset for taxation purposes. This transitional rule will apply to an asset if:

•

the asset was acquired before 1 July 2000;

•

the asset is held in an Australian Fund or an Australian/Overseas Fund (as defined in section 74 of the Life Insurance Act) of the company;

•

the market value of the asset exceeds the lesser of:

-

$50 million; or

-

the greater of 2% of the value of the Fund in which the asset is held or $5 million.

[Schedule 2, item 86, section 320-170 of the Transitional Provisions Act]

5.126 If part of an asset is certified to be a virtual PST asset, the same proportion of any deductible expenses incurred in relation to the asset will be allocated to the virtual PST component. For example, if 75% of an asset is certified to be a virtual PST asset, then 75% of expenses incurred in relation to the asset will be allocated to the virtual PST expenses.

Transitional rule for liabilities held as at 1 July 2000

5.127 The taxation consequences of transfer of assets to the virtual PST assets are disregarded if the life insurance company had a liability before 1 July 2000 under a life insurance policy and that liability is discharged out of the company's virtual PST assets. [Schedule 2, item 86, section 320-175 of the Transitional Provisions Act]

5.128 Consequently, when an asset that is included in the virtual PST assets with effect from 1 July 2000 is disposed of by the company, the cost base of the asset will not be adjusted to reflect the transfer value at the time of segregation.

Transitional rule for certain friendly societies

5.129 Some friendly societies currently carry on complying superannuation business directly in a benefit fund of the friendly society rather than indirectly through a complying superannuation fund. Those friendly societies will need to transfer that business to a complying superannuation fund which, in turn, will be able to invest in the virtual PST of the friendly society. This will ensure consistent treatment between those friendly societies and other life insurance companies.

5.130 To facilitate the transfer of this business so as not to disadvantage complying superannuation investors, friendly societies will be entitled to CGT and other taxation relief on any taxation consequences arising from the transfer of assets held by the benefit funds for the purpose of providing superannuation benefits to its members to a complying superannuation fund provided that:

•

the assets are transferred before 1 July 2001; and

•

the persons who had interests in those assets immediately before the transfer had substantially the same interests in the assets after the transfer.

[Schedule 2, item 86, section 320-5 of the Transitional Provisions Act]

Annual valuation of virtual PST assets

5.131 A life insurance company that establishes a virtual PST must determine the transfer value of the virtual PST assets annually as at the end of the company's income year. The valuation must be made within 60 days of the end of the company's income year. [Schedule 2, item 84, section 320-175]

Consequences of annual valuation

5.132 If the total transfer value of the virtual PST assets exceeds the sum of:

•

the value of the company's virtual PST liabilities;

•

any reasonable provision made by the company in its accounts for deferred tax in relation to unrealised gains on those assets; and

•

the total amount of any unpaid PAYG instalments relating to the virtual PST component of the complying superannuation class of taxable income,

then assets with a transfer value equal to the excess must be transferred out of the virtual PST within 30 days of the annual valuation. [Schedule 2, item 84, subsection 320-180(1)]

5.133 A transfer of assets under new subsection 320-180(1) will be deemed to have been made in the income year at the end of which the valuation time occurred. [Schedule 2, item 84, subsection 320-180(3)]

5.134 If the total transfer value of the virtual PST assets is less than the sum of:

•

the value of the company's virtual PST liabilities;

•

any reasonable provision made by the company in its accounts for deferred tax in relation to unrealised gains on those assets; and

•

the total amount of any unpaid PAYG instalments relating to the virtual PST component of the complying superannuation class of taxable income,

then assets with a transfer value not exceeding the difference may be transferred to the virtual PST. [Schedule 2, item 84, subsection 320-180(2)]

5.135 A transfer of assets under new subsection 320-180(2) that is made within 30 days of the annual valuationwill be deemed to have been made in the income year at the end of which the valuation was made. [Schedule 2, item 84, subsection 320-180(4)]

Transfer of assets to the virtual PST other than as a result of an annual valuation

5.136 There are 3 circumstances in which a life insurance company can transfer assets to the virtual PST other than as a result of an annual valuation.

5.137 First, if the company determines at a time, other than the annual valuation time, that the total transfer value of the virtual PST assets is less than the sum of:

•

the value of the company's virtual PST liabilities;

•

any reasonable provision made by the company in its accounts for deferred tax in relation to unrealised gains on those assets; and

•

the total amount of any unpaid PAYG instalments relating to the virtual PST component of the complying superannuation class of taxable income,

then assets with a transfer value not exceeding the difference can be transferred to the virtual PST. [Schedule 2, item 84, subsection 320-185(1)]

5.138 Second, the company can at any time transfer assets of any kind to the virtual PST in exchange for an amount of money equal to the transfer value of the asset at the time of the transfer. This might occur if, for example, the company holds a parcel of shares outside the virtual PST that is no longer consistent with the investment strategy for that part of its business. The company may wish to transfer the shares to the virtual PST. To save transaction costs, the shares could be transferred to the virtual PST for consideration equal to the transfer value. [Schedule 2, item 84, subsection 320-185(2)]

5.139 Third, the company can transfer to the virtual PST assets of any kind having a total transfer value not exceeding the amount of premiums paid to the company to purchase virtual PST life insurance policies. [Schedule 2, item 84, subsection 320-185(3)]

What is a virtual PST life insurance policy?

5.140 A virtual PST life insurance policy is a life insurance policy (other than an excluded virtual PST life insurance policy) that is:

•

held by the trustee of a complying superannuation fund, complying ADF or PST;

•

a deferred annuity policy purchased out of a rolled-over eligible termination payment that are held by an individual; or

•

held by another life insurance company where the policy is a virtual PST asset of that other company.

[Schedule 9, item GK45, subsection 995-1(1)]

5.141 An excluded virtual PST life insurance policy is a life insurance policy that:

•

provides only for death and disability benefits (other than participating benefits or discretionary benefits) within the meaning of Part IX of the ITAA 1936; or

•

is an exempt life insurance policy.

[Schedule 9, item GK11, subsection 995-1(1)]

5.142 An exempt life insurance policy is a life insurance policy that:

•

is held by the trustee of a complying superannuation fund and is a segregated current pension asset within the meaning of Part IX of the ITAA 1936;

•

is held by the trustee of a PST and is a segregated exempt superannuation asset within the meaning of Part IX of the ITAA 1936;

•

is held by the trustee of a constitutionally protected superannuation fund;

•

provides for an immediate annuity; or

•

is held by another life insurance company where the policy is a segregated exempt asset of that other company.

[Schedule 9, item GK12, subsection 995-1(1)]

What are virtual PST liabilities?

5.143 The virtual PST liabilities are the liabilities of a life insurance company under virtual PST life insurance policies where those liabilities are to be discharged out of virtual PST assets.

5.144 The virtual PST liabilities of a life insurance company are the sum of the following amounts:

•

for policies that provide for participating benefits or discretionary benefits, the amount determined by an eligible actuary as the sum of:

-

the values of supporting assets as defined in the Valuation Standard for those policies; and

-

policy owners' retained profits for those policies the policy owner retained profits are the Australian policy owners' retained profits, or overseas policy owners' retained profits (as defined by section 61 of the Life Insurance Act) in relation to the statutory fund (as defined in section 29 of that Act) to which the business of issuing policies relates [Schedule 9, item GK24, subsection 995-1(1)] ; and

•

for all other policies, the sum of the current termination values as defined in the Solvency Standard for those policies.

[Schedule 2, item 84, section 320-190]

5.145 The sum of current termination values includes any provisions for outstanding claims that relate specifically to policies held in the virtual PST.

Transfers of assets and payments of amounts from a virtual PST otherwise than as a result of an annual valuation

5.146 There are 3 circumstances in which an asset can be transferred from a virtual PST other than as a consequence of the annual valuation.

5.147 First, if a policy issued by the company that is held in the company's virtual PST becomes an exempt life insurance policy, then the company can transfer, from the virtual PST to the segregated exempt assets, assets of any kind having a transfer value not exceeding the company's liabilities in respect of the policy. [Schedule 2, item 84, subsection 320-195(1)]

5.148 An example of when a policy issued by the company that is held in the company's virtual PST becomes an exempt life insurance policy is when a deferred annuity policy becomes an immediate annuity policy.

5.149 Second, the company can at any time transfer assets of any kind from the virtual PST in exchange for an amount of money equal to the transfer value of the asset at the time of the transfer. This might occur if, for example, the company holds a parcel of shares in the virtual PST which is no longer consistent with the investment strategy for that part of its business. The company may wish to transfer the shares outside the virtual PST. To save transaction costs, the shares could be transferred from the virtual PST for consideration equal to the transfer value. [Schedule 2, item 84, subsection 320-195(2)]

5.150 Third, if the company:

•

imposes fees or charges in respect of virtual PST assets;

•

imposes fees or charges in respect of virtual PST life insurance policies other than policies that provide death or disability benefits that are participating benefits;

-

for example, risk rider premiums withdrawn on a regular basis from a policy held in the virtual PST; or

•

determines, at a time other than the annual valuation time, that there are excess assets in the virtual PST;

-

an example of a situation where a life insurance company would identify excess virtual PST assets at a time other than the annual valuation time would be if the company ceased to carry on business during the income year,

then the company must transfer from the virtual PST assets (at the time fees or charges are imposed or the excess is identified) assets having a total transfer value equal to the fees, charges or excess.

[Schedule 2, item 84, subsection 320-195(3)]

5.151 Amounts will be considered to have been transferred from a virtual PST when fees and charges are imposed or the excess is identified provided they are transferred within a reasonable time having regard to normal business practice.

5.152 In addition, a life insurance company must pay from a virtual PST:

•

any benefits relating to virtual PST liabilities held in the virtual PST at the time the benefit is payable;

•

any expenses incurred directly in respect of virtual PST assets;

-

examples of expenses incurred directly in respect of virtual PST assets include stamp duty, brokerage costs, expenses relating to a rental property that is a virtual PST asset and joint venture expenses where the interest in the joint venture is a virtual PST asset;

-

an expense can be incurred directly in respect of virtual PST assets even if it is included in an invoice that relates to similar types of expenses incurred by different parts of the company's business; and

•

the amount of any PAYG instalments relating to the virtual PST component of the complying superannuation class of taxable income.

[Schedule 2, item 84, subsection 320-195(4)]

Consequence of transfer of assets to and from a virtual PST ^[F2]

5.153 New section 320-200 applies if:

•

an asset (other than money) is transferred from a virtual PST under new subsection 320-180(1) or new subsection 320-195(2) or (3); or

•

an asset (other than money) is transferred to a virtual PST under new subsection 320-180(2) or new section 320-185.

[Schedule 2, item 84, subsection 320-200(1)]

5.154 If these provisions apply, then for the purposes of determining whether:

•

an amount is included in assessable income or is an allowable deduction in respect of the transfer of the asset; or

•

the company made a capital gain or capital loss in respect of the transfer;

the life insurance company is taken to have:

•

sold the asset immediately before the transfer for consideration equal to its market value; and

•

purchased the asset again at the time of transfer for consideration equal to its market value.

[Schedule 2, item 84, subsection 320-200(2)]

5.155 In addition, if a life insurance company could deduct an amount or makes a capital loss as a result of the transfer of the asset to or from the virtual PST, the company must disregard the deduction or capital loss until:

•

the asset ceases to exist; or

•

the asset, or a greater than 50% interest in it, is acquired by an entity other than an entity that is an associate of the company immediately after the transfer.

[Schedule 2, item 84, subsection 320-200(3)]

Taxable income allocated to the virtual PST component

5.156 The virtual PST component of the complying superannuation class of taxable income is worked out as follows.

Table 5.1 Virtual PST component of the complying superannuation class of taxable income

[Schedule 2, item 84, subsections 320-205(1), (3) and (4)]

Quarantining losses from the virtual PST component

5.157 If the virtual PST assessable income is less than the virtual PST reductions, the life insurance company can only apply the difference to reduce the virtual PST component of the complying superannuation class of taxable income of a later year of income. [Schedule 2, item 84, subsection 320-205(2)]

5.158 Similarly, capital losses from virtual PST assets can only be applied to reduce capital gains from virtual PST assets. [Schedule 2, item 84, section 320-125]

CGT treatment on the disposal of virtual PST assets

5.159 Division 10 of Part IX of the ITAA 1936 applies for the purposes of working out any capital gain or capital loss that arises from a CGT event that involves a virtual PST asset. [Schedule 2, item 84, section 320-45]

5.160 Division 10 of Part IX of the ITAA 1936 provides that CGT rules are the primary code for the treatment of gains and losses unless the asset is a security or the amount is a gain or loss attributable to foreign exchange rate fluctuations.

5.161 In addition, Division 114 and Division 115 of the ITAA 1997 apply to capital gains arising from CGT events involving assets held in a life insurance company's virtual PST in the same way that they apply to complying superannuation funds and PSTs. [Schedule 2, items 77 to 79, section 114-5, section 115-10 and section 115-100]

5.162 The Bill amends the CGT provisions to ensure that life insurance companies are entitled to the concession for discount capital gains from CGT events in respect of CGT assets that are virtual PST assets. [Schedule 2, item 71, section 102-3]

5.163 Section 110-25 allows the company to elect to have capital gains from a CGT event happening after 30 June 2000 in respect of CGT assets that are virtual PST assets to be calculated using a cost base that includes indexation worked out to the end of the September 1999 quarter. [Schedule 2, item 74 and 75, section 110-25]

5.164 Section 115-10 allows the company to make a discount capital gain in relation to a CGT event happening after 30 June 2000 in respect of CGT assets that are virtual PST assets. [Schedule 2, item 78, section 115-10]

5.165 If the company makes a discount capital gain in respect of a CGT asset that is a virtual PST asset, only 2 -thirds of the capital gain remaining after the application of losses under subsection 102-5(1) is included in the company's net capital gain. [Schedule 2, item 79, section 115-100]

The specified roll-over component of the complying superannuation class

5.166 The specified roll-over component of the complying superannuation class of taxable income consists of specified roll-over amounts included in ETPs rolled-over to purchase immediate annuities. [Schedule 2, item 84, section 320-215]

Segregated exempt assets

Segregation of assets relating to exempt life insurance policies

5.167 Life insurance companies will be able to segregate assets to be used for the sole purpose of discharging its liabilities under exempt life insurance policies on or after 1 July 2000 [Schedule 2, item 84, section 320-225] . The segregated assets will be known as segregated exempt assets [Schedule 9, item GK29, subsection 995-1(1)] .

5.168 An exempt life insurance policy is a life insurance policy that:

•

is held by the trustee of a complying superannuation fund and is a segregated current pension asset within the meaning of Part IX of the ITAA 1936;

•

is held by the trustee of a PST and is a segregated exempt superannuation asset within the meaning of Part IX of the ITAA 1936;

•

is held by the trustee of a constitutionally protected superannuation fund;

•

provides for an immediate annuity; or

•

is held by another life insurance company where the policy is a segregated exempt asset of that other company.

[Schedule 9, item GK12, subsection 995-1(1)]

5.169 Income generated on the segregated exempt assets will be exempt from tax under new paragraph 320-35(1)(b). Capital gains derived from segregated exempt assets are exempt from tax under new section 118-315.

5.170 The segregated exempt assets at the time of initial segregation must be a representative sample of all the life insurance company's assets supporting its exempt life insurance policies immediately before the segregation of assets. [Schedule 2, item 84, subsection 320-225(2)]

5.171 The total transfer value of the segregated exempt assets must not exceed the company's liabilities under exempt life insurance policies. [Schedule 2, item 84, subsection 320-225(3)]

5.172 As a transitional rule, if a life insurance company segregates exempt assets in accordance with new section 320-225 between 1 July 2000 and 30 September 2000, the company will be taken to have segregated those assets on 1 July 2000. [Schedule 2, item 84, subsection 320-225(4)]

5.173 The purpose of this transitional rule is to allow life insurance companies sufficient time to segregate assets relating to exempt life insurance policies.

5.174 The segregated exempt assets must be maintained for the sole purpose of discharging the company's liabilities under exempt life insurance policies [Schedule 2, item 84, subsection 320-225(5)] . This does not prevent the segregated exempt assets from being used to pay fees and expenses relating to the carrying on of the exempt life insurance business.

An asset includes money

5.175 A transfer of an asset to or from the segregated exempt assets includes the transfer of money to or from those assets. If an asset transferred to or from the segregated exempt assets is money, the transfer value of the asset transferred is the amount of the money. [Schedule 2, item 84, subsection 320-225(6)]

Transitional rule for certain assets held as at 1 July 2000

5.176 A segregated asset is an asset that relates solely to the life insurance company's exempt life insurance policy liabilities. However, as a transitional rule, the segregated assets will include the share of certain existing assets that the company certifies before 1 October 2000 to be included in the segregated exempt assets. The part of the asset certified will be treated as a separate asset for taxation purposes. This transitional rule will apply to an asset if:

•

the asset was acquired before 1 July 2000;

•

the asset is held in an Australian Fund or an Australian/Overseas Fund (as defined in section 74 of the Life Insurance Act) of the company; and

•

the market value of the asset exceeds the lesser of:

-

$50 million; or

-

the greater of 2% of the value of the Fund or $5 million.

[Schedule 2, item 87, section 320-225 of the Transitional Provisions Act]

Transitional rule for liabilities held as at 1 July 2000

5.177 The taxation consequences of the transfer of assets to the segregated exempt assets are disregarded if the life insurance company had a liability before 1 July 2000 under a life insurance policy where the income of the company attributable to that liability was exempt from tax prior to that date, and that liability is discharged out of the company's segregated exempt assets. [Schedule 2, item 86, section 320-230 of the Transitional Provisions Act]

5.178 Consequently, when an asset that is included in the segregated exempt assets with effect from 1 July 2000 is disposed of by the company, the cost base of the asset will not be adjusted to reflect the transfer value at the time of segregation.

Annual valuation of segregated exempt assets

5.179 A life insurance company that segregates exempt assets must determine the transfer value of the segregated exempt assets annually as at the end of the company's income year. The valuation must be made within 60 days of the end of the company's income year. [Schedule 2, item 84, section 320-230]

Consequences of annual valuation

5.180 If the total transfer value of the segregated exempt assets exceeds the company's exempt life insurance policy liabilities, then assets with a transfer value equal to the excess must be transferred out of the segregated exempt assets within 30 days of the annual valuation. [Schedule 2, item 84, subsection 320-235(1)]

5.181 A transfer of assets under new subsection 320-235(1) will be deemed to have been made in the income year at the end of which the valuation time occurred. [Schedule 2, item 84, subsection 320-235(3)]

5.182 If the total transfer value of the segregated exempt assets is less than the company's exempt life insurance policy liabilities, then assets with a transfer value not exceeding the difference may be transferred to the segregated exempt assets. [Schedule 2, item 84, subsection 320-235(2)]

5.183 A transfer of assets under new subsection 320-235(2) made within 30 days of the annual valuation will be deemed to have been made in the income year at the end of which the valuation time occurred. [Schedule 2, item 84, subsection 320-235(4)]

Transfer of assets to the segregated exempt assets other than as a result of an annual valuation

5.184 There are 3 circumstances in which a life insurance company can transfer assets to the segregated exempt assets other than as a result of an annual valuation.

5.185 First, if the company determines at a time, other than the annual valuation time, that the total transfer value of the segregated exempt assets is less than its exempt life insurance policy liabilities, then assets with a transfer value not exceeding the difference can be transferred to the segregated exempt assets. [Schedule 2, item 84, subsection 320-240(1)]

5.186 Second, the company can at any time transfer assets of any kind to the segregated exempt assets in exchange for an amount of money equal to the transfer value of the asset at the time of the transfer. This might occur if, for example, the company holds a parcel of shares outside the segregated exempt assets which is no longer consistent with the investment strategy for that part of its business. The company may wish to transfer the shares to the segregated exempt assets. To save transaction costs, the shares could be transferred to the segregated exempt assets for consideration equal to the transfer value. [Schedule 2, item 84, subsection 320-240(2)]

5.187 Third, the company can at any time transfer, to the segregated exempt assets, assets of any kind having a total transfer value not exceeding the amount of premiums paid to the company to purchase exempt life insurance policies. [Schedule 2, item 84, subsection 320-240(3)]

What are exempt life insurance policy liabilities?

5.188 The exempt life insurance policy liabilities are the liabilities of a life insurance company under exempt life insurance policies.

5.189 The exempt life insurance policy liabilities are the sum of the following amounts (as calculated by an actuary):

•

for policies that provide allocated benefits (other than participating benefits or discretionary benefits) the current termination values;

•

for policies that provide for participating benefits or discretionary benefits the sum of:

-

the values of supporting assets as defined in the Valuation Standard for those policies; and

-

policy owner's retained profits for those policies;

•

for all other policies the policy liabilities as defined in the Valuation Standard for those policies.

[Schedule 2, item 84, subsection 320-245(2)]

5.190 An exempt life insurance policy provides allocated benefits if:

•

the policy is a segregated current pension asset (as defined in Part IX of the ITAA 1936) of a complying superannuation fund that supports an allocated pension;

-

an allocated pension is a pension that satisfies the requirements of subregulation 1.06(4) of the Superannuation Industry (Supervision) Regulations [Schedule 9, item GK2, subsection 995-1(1)] ;

•

the policy provides for an allocated annuity;

-

an allocated annuity is an immediate annuity that satisfies the requirements of subregulation 1.05(4) of the Superannuation Industry (Supervision) Regulations [Schedule 9, item GK1, subsection 995-1(1)] ; or

•

the policy is a segregated exempt asset of another life insurance company that supports an allocated annuity or an allocated pension.

[Schedule 2, item 84, subsection 320-245(3)]

Transfers of assets and payments of amounts from segregated exempt assets otherwise than as a result of an annual valuation

5.191 There are 2 circumstances in which an asset can be transferred from segregated exempt assets otherwise than as a result of an annual valuation.

5.192 First, the company can at any time transfer assets of any kind from the segregated exempt assets in exchange for an amount of money equal to the transfer value of the asset at the time of the transfer. This might occur if, for example, the company holds a parcel of shares in the segregated exempt assets which is no longer consistent with the investment strategy for that part of its business. The company may wish to transfer the shares outside the segregated exempt assets. To save transaction costs, the shares could be transferred from the segregated exempt assets for consideration equal to the transfer value. [Schedule 2, item 84, subsection 320-250(1)]

5.193 Second, if the company:

•

imposes fees or charges in respect of segregated exempt assets;

•

imposes fees or charges in respect of exempt life insurance policies; or

•

determines, at a time other than the annual valuation time, that there are excess assets in the segregated exempt assets;

-

an example of a situation where a life insurance company would identify excess segregated exempt assets at a time other than the annual valuation time would be if the company ceased to carry on segregated exempt insurance business during the income year;

then the company must transfer from the segregated exempt assets (at the time fees or charges are imposed or the excess is identified) assets having a total transfer value equal to the fees, charges or excess.

[Schedule 2, item 84, subsection 320-250(2)]

5.194 Amounts will be considered to have been transferred from the segregated exempt assets when fees and charges are imposed or the excess is identified, provided they are transferred within a reasonable time having regard to normal business practice.

5.195 In addition, a life insurance company must pay from the segregated exempt assets:

•

any annuities or pensions, or any other benefits, relating to exempt life insurance policy liabilities held in the segregated exempt assets at the time the benefit is payable; and

•

any expenses incurred directly in respect of the segregated exempt assets;

-

examples of expenses incurred directly in respect of the segregated exempt assets include stamp duty, brokerage costs and expenses relating to a rental property that is a segregated exempt asset.

[Schedule 2, item 84, subsection 320-250(3)]

Consequence of transfer of assets to and from segregated exempt assets ^[F3]

5.196 New section 320-255 applies if:

•

an asset (other than money) is transferred from the segregated exempt assets under new subsection 320-235(1) or new subsection 320-250(1) or (2); or

•

an asset (other than money) is transferred to the segregated exempt assets under new subsection 320-235(2) or new section 320-240.

[Schedule 2, item 84, subsection 320-255(1)]

5.197 If these provisions apply, then for the purposes of determining whether:

•

an amount is included in assessable income or is an allowable deduction (other than under the depreciation provisions) in respect of the transfer of the asset; or

•

the company made a capital gain or capital loss in respect of the transfer;

the life insurance company is taken:

•

to have sold the asset immediately before the transfer for consideration equal to its market value; and

•

to have purchased the asset again at the time of transfer for consideration equal to its market value.

[Schedule 2, item 84, subsection 320-255(2)]

5.198 In addition, if a life insurance company could deduct an amount, except an amount that the company can deduct under subsection 320-105(1), or makes a capital loss as a result of the transfer of the asset to its segregated exempt assets, the company must disregard deduction or capital loss until:

•

the asset ceases to exist; or

•

the asset, or a greater than 50% interest in it, is acquired by an entity other than an entity that is an associate of the company immediately after the transfer.

[Schedule 2, item 84, subsection 320-255(3)]

5.199 A life insurance company cannot deduct an amount or apply a capital loss as a result of the transfer of an asset from its segregated exempt assets. [Schedule 2, item 84, subsection 320-205(4)]

5.200 Finally, if an asset that is a unit of plant is transferred from the segregated exempt assets, the company must assume, for the purposes of the depreciation provisions (Division 42), that:

•

the unit had at all times been used by the company wholly for the purpose of producing assessable income; and

•

deductions for depreciation in respect of the asset had been allowed to the company during the period using the diminishing value method (subsection 42-160(3)) or the prime cost method (subsection 42-165(2A)).

[Schedule 2, item 84, subsection 320-255(5)]

5.201 If an asset that is a unit of plant is transferred to the segregated exempt assets of a life insurance company, then, in determining for depreciation purposes whether an amount is included in, or can be deducted from, the company's assessable income as a result of the transfer, the company is taken:

•

to have, at the time immediately before the transfer, sold the asset for a consideration equal to its market value at that time; and

•

to have, at the time of the transfer, purchased the asset again for a consideration equal to its market value at that time.

[Schedule 2, item 84, subsection 320-255(6)]

5.202 If an asset that is a unit of plant that has been included in the segregated exempt assets of a life insurance company since the initial segregation of those assets is transferred from those assets, then, the company must assume for depreciation purposes that:

•

if the asset's market value at the time of the transfer is greater than its notional undeducted cost ^[F4] at that time, the company is taken:

-

to have, at the time immediately before the transfer, sold the asset for a consideration equal to its notional undeducted cost at that time; and

-

to have, at the time of the transfer, purchased the asset again for a consideration equal to its notional undeducted cost at that time; or

•

if the asset's market value at the time of the transfer is equal to or less than its notional undeducted cost at that time, the company is taken:

-

to have, at the time immediately before the transfer, sold the asset for a consideration equal to its market value at that time; and

-

to have, at the time of the transfer, purchased the asset again for a consideration equal to its market value at that time.

[Schedule 2, item 84, subsection 320-255(7)]

5.203 If an asset that is a unit of plant that was previously transferred to the segregated exempt assets of a life insurance company is transferred from those assets, then, the company must assume for depreciation purposes that:

•

if the asset's market value at the time of its transfer from those assets is greater than its market value at the time when it was transferred to those assets, the company is taken:

-

to have, at the time immediately before the transfer from those assets, sold the asset for a consideration equal to its market value at the time when it was transferred to those assets; and

-

to have, at the time of the transfer from those assets, purchased the asset again for a consideration equal to its market value at the time when it was transferred to those assets; or

•

if the asset's market value at the time of its transfer from those assets is equal to or less than its market value at the time when it was transferred to those assets, the company is taken:

-

to have, at the time immediately before the transfer from those assets, sold the asset for a consideration equal to its market value at that time; and

-

to have, at the time of the transfer from those assets, purchased the asset again for a consideration equal to its market value at that time.

[Schedule 2, item 84, subsection 320-255(8)]

Example 5.1

An asset that is a unit of plant that was purchased by a life insurance company for $1,000 is transferred to the company's segregated exempt assets. At the time of transfer:

•

the market value of the asset is $650; and

•

the undeducted cost of the asset is $400.

The company is deemed to have sold the asset immediately before the transfer and repurchased the asset at the time of transfer for consideration equal to its market value at the time (subsection 320-255(6)) that is, $650. Therefore, $250 is included in the company's assessable income at that time as a balancing adjustment amount under section 42-190.

The asset is transferred from the segregated exempt assets 2 years later. At that time:

•

the market value of the asset is $500; and

•

the notional undeducted cost of the asset is $450.

The company is deemed to have sold immediately before the transfer from the segregated exempt assets and repurchased the asset at that time of transfer for consideration equal to its market value at that time (paragraph 320-255(8)(b)) that is $500. No amount is included in the company's assessable income because the asset has been held in the segregated exempt assets (paragraph 320-35(1)(b)).

The company uses the asset for the purposes of producing assessable income and claims deductions for depreciation based on a cost of $500. It subsequently disposes of the asset for $200. The undeducted cost of the asset at that time is $350. Therefore, the company is allowed a balancing adjustment deduction of $150 under section 42-195.

Examples illustrating the application of Division 320 to life insurance companies

5.204 These illustrations set out the cash flow transactions for the policies in the year of income, and the tax treatment of those transactions.

Example 5.2: Non-Participating, unbundled life insurance policies, where the liabilities are to be discharged from virtual PST assets

Note in this example, there is no transfer to or from the virtual PST at the annual valuation date due to a mismatch in asset and liability values.

As a variation on this example, consider the same policy but where investment management fees are not explicitly deducted a net return is allocated. In this case the transfer value of assets at the end of the year would increase by $196 (the $230 investment management fees adjusted for the tax effect) resulting in a mismatch between the asset and liability values at the annual valuation. A $230 transfer from the virtual PST would be required to rebalance assets and liabilities in the virtual PST. This transfer would be deductible to the virtual PST, giving exactly the same tax outcome.

Example 5.3: Participating life insurance policies, where the liabilities are to be discharged from virtual PST assets

In this example, the deduction for life insurance premiums is defined to be equal to the premium transferred to the virtual PST. Note also that the transactions for expenses and total claims (including risk component) occur within the virtual PST. This is in accordance with the nature of participating business and the practical difficulty in unbundling the components of premiums and claims.

The gross profit transfer to the shareholder emerges as the transfer from the virtual PST (to rebalance assets and liabilities at the annual valuation).

Example 5.4: Non-participating, unbundled life insurance policies

In this example, the deduction for life insurance premiums is defined to be equal to the premium less all fees and charges this is the mechanism for bringing all fees and charges into assessable income for the company.

Life insurance bonuses paid to superannuation entities

Bonuses paid to complying superannuation entities

5.205 Life insurance companies and registered organisations are currently taxed on investment income relating to complying superannuation business at a rate of 15%. Life insurance bonuses are exempt from tax if they are paid to:

•

complying superannuation funds;

•

complying ADFs;

•

PSTs; and

•

another life insurance company in respect of policies held in relation to complying superannuation business.

5.206 As the complying superannuation business of life insurance companies will continue to be taxed at a rate of 15% if it is held in a virtual PST, bonuses paid to complying superannuation entities will continue to be exempt from tax. [Schedule 2, item 5, paragraph 26AH(7)(b)]

Bonuses paid to non-complying superannuation funds

5.207 Life insurance companies and registered organisations are currently taxed on investment income relating to non-complying superannuation fund business at a rate of 47%. Life insurance bonuses paid to non-complying superannuation funds are currently exempt from tax (see paragraph 26AH(7)(b) of the ITAA 1936).

5.208 From 1 July 2000 life insurance companies will be taxed on non-complying superannuation fund business at the company tax rate. Therefore, life insurance bonuses paid to non-complying superannuation funds will be included in the fund's assessable income. [Schedule 2, item 4, subsection 26AH(6)]

5.209 If a policy is taken out before 1 July 2001, the fund will be entitled to a rebate under section 160AAB of the ITAA 1936 to compensate for the tax paid by the life insurance company.

5.210 If a policy is taken out after 30 June 2001, the imputation system will apply to amounts paid out to non-complying superannuation funds.

Losses on the disposal or redemption of traditional securities

5.211 Section 70B of the ITAA 1936 allows a deduction for losses on the disposal or redemption of traditional securities. However, it is not appropriate to allow a deduction for such a loss where the security is held in the exempt assets of a life insurance company, complying superannuation fund or PST as any gains on such securities are exempt from tax.

5.212 Therefore, new subsection 70B(2A) prevents a deduction from being allowable for losses on the disposal or redemption of traditional securities that are:

•

segregated exempt assets of a life insurance company;

•

segregated current pension assets of a complying superannuation fund; or

•

segregated exempt superannuation assets of a PST.

[Schedule 2, item 6, subsection 70B(2A)]

Partnership losses

5.213 Section 92 of the ITAA 1936 includes the net income of a partnership in the assessable income of a partner and allows a deduction for a share of partnership losses. However, it is not appropriate to allow a deduction for such a loss where the partnership interest is held in the exempt assets of a life insurance company, complying superannuation fund or PST as any net income of the partnership is exempt from tax.

5.214 Therefore, new subsection 92(2A) prevents a deduction from being allowable for partnership losses where the partnership interest in the partnership is:

•

a segregated exempt asset of a life insurance company;

•

a segregated current pension asset of a complying superannuation fund; or

•

a segregated exempt superannuation asset of a PST.

[Schedule 2, item 7, subsection 92(2A)]

CGT treatment of existing CS/RA business of life insurance companies and friendly societies

Life insurance companies

5.215 Under the current law income relating to the complying superannuation business of life insurance companies is allocated to the CS/RA class of assessable income and taxed broadly consistently with complying superannuation funds. These arrangements will change with effect from 1 July 2000 when assets relating to this business will need to be transferred into a virtual PST.

5.216 Therefore, the amendments ensure that the CGT provisions apply appropriately to the CS/RA business of life insurance companies for the period before 1 July 2000.

5.217 That is, the amendments ensure that Division 114 and Division 115 of the ITAA 1997 apply to notional capital gains of life insurance companies. To the extent that the notional capital gain is allocated to CS/RA class of assessable income, the life insurance company will have the same one third reduction in relation to discount capital gains as applies to complying superannuation funds.

5.218 Section 116CB requires life insurance companies to calculate the amount included in assessable income for notional CGT events on a number of different bases and allocates the appropriate amount of capital gains to the 4 different classes of income.

5.219 This Bill identifies a new class of capital gain the non-exempt modified discount capital gain and allocates that gain to the CS/RA class (i.e. the complying superannuation/roll-over annuity class) of assessable income. [Schedule 2, items 13 and 14, section 116CB]

5.220 The non-exempt modified discount capital gain for a notional CGT event is the discount capital gain (including any discount capital gain taken to arise under Subdivision 115-C in respect of an interest in a trust) that would arise from the event if Division 10 of Part IX applied in respect of the event. [Schedule 2, item 9, subsection 110(1)]

5.221 Division 10 of Part IX of the ITAA 1936 provides that CGT rules are the primary code for the treatment of gains and losses unless the asset is a security or the amount is a gain or loss attributable to foreign exchange rate fluctuations.

5.222 Consequential amendments are made to the definitions of:

•

non-exempt modified capital gain;

•

non-exempt ordinary capital gain; and

•

total non-exempt modified capital gain.

[Schedule 2, items 8, 10 and 11, subsection 110(1)]

5.223 This Bill amends sections 110-25 and 114-5 of the ITAA 1997 to ensure that, for a CGT event happening after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 and before 1 July 2000, the life insurance company can elect to have capital gains worked out using an indexed cost base. [Schedule 2, items 85 and 86, sections 110-25 and 114-5 of the Transitional Provisions Act]

5.224 Section 115-10 of the ITAA 1997 allows the company to make a discount capital gain in relation to a non-exempt modified discount capital gain for a notional CGT event happening after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 and before 1 July 2000. [Schedule 2, item 86, section 115-10 of the Transitional Provisions Act]

5.225 Section 116CD of the ITAA 1936 contains rules for allocating capital losses against capital gains for each of the classes of assessable income. The company chooses the extent to which the losses applicable to the CS/RA class are offset against non-exempt modified capital gains and non-exempt modified discount capital gains respectively. To the extent that the remaining part of the overall non-exempt capital gain for the CS/RA class is attributable to:

•

non-exempt modified capital gains the whole amount is included in assessable income of the CS/RA class; or

•

non-exempt modified discount capital gains two thirds is included in assessable income of the CS/RA class.

[Schedule 2, item 15, section 116CD]

Example 5.5

On 1 January 2000 a life insurance company sold an asset for $1,000. The asset had been purchased on 1 January 1998 at a cost of $600. The indexed cost base of the asset was $700. The asset was included in an insurance fund of the company:

•

60% of the average calculated liabilities of the insurance fund were referable to CS/RA policies;

•

30% of the average calculated liabilities of the insurance fund were referable to AD/RLA policies; and

•

10% of the average calculated liabilities of the insurance fund were referable to eligible policies.

The core amounts for the disposal are an unmodified ordinary income amount $360 (i.e. the gross gain ($400) reduced by the amount referable to eligible policies as calculated under section 112A ($40)) and, depending on whether the company chooses to use an indexed cost base, either:

•

a non-exempt modified capital gain $270 (i.e. the gain net of indexation ($300) reduced by the amount referable to eligible policies as calculated under section 112A ($30)); or

•

a non-exempt modified discount capital gain $360 (i.e. the gross gain without indexation reduced by one third of the gross gain ($400) and by the amount referable to eligible policies as calculated under section 112A ($40)).

The company will include $120 in AD/RLA class of assessable income that is, one third (30%/90%) of the unmodified ordinary income amount.

Depending on whether the company has a non-exempt modified capital gain or a non-exempt modified discount capital gain (and assuming that there are no reductions in respect of losses) the company will include in CS/RA class of assessable income either:

•

$270 that is, the whole of the non-exempt modified capital gain; or

•

$240 that is, two thirds (60%/90%) of the non-exempt modified discount capital gain.

Friendly societies and other registered organisations

5.226 Under the current law income relating to the complying superannuation business of friendly societies and other registered organisations is allocated to the CS/RA class of assessable income and taxed broadly consistently with complying superannuation funds. These arrangements will change with effect from 1 July 2000 when assets relating to this business will need to be transferred into a virtual PST.

5.227 Therefore, the amendments ensure that the CGT provisions apply appropriately to the CS/RA business of friendly societies and other registered organisations for the period before 1 July 2000.

5.228 That is, the amendments ensure that Divisions 114 and 115 of the ITAA 1997 apply to notional capital gains of friendly societies and other registered organisations. To the extent that the notional capital gain is allocated to CS/RA class of assessable income and will have the same one third reduction in relation to discount capital gains as applies to complying superannuation funds.

5.229 Section 116GA requires the amount included in assessable income of friendly societies and other registered organisations for notional CGT events to be calculated on a number of different bases and allocates the appropriate amount of capital gains to the 4 different classes of income.

5.230 This Bill identifies a new class of capital gain the modified discount capital gain and allocates that gain to the CS/RA class of assessable income. [Schedule 2, items 20 and 21, section 116GA]

5.231 The modified discount capital gain for a notional CGT event is the discount capital gain (including any discount capital gain taken to arise under Subdivision 115-C) that would arise from the event if Division 10 of Part IX applied in respect of the event. [Schedule 2, item 17, subsection 116E(1)]

5.232 Consequential amendments are made to the definitions of:

•

modified capital gain;

•

ordinary capital gain; and

•

total modified capital gain.

[Schedule 2, items 16, 18 and 19, subsection 116E(1)]

5.233 This Bill amends sections 110-25 and 114-5 of the ITAA 1997 to ensure that, for a CGT event happening after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 and before 1 July 2000, the friendly societies can elect to have capital gains worked out using an indexed cost base. [Schedule 2, items 85 and 86, sections 110-25 and 114-5 of the Transitional Provisions Act]

5.234 Section 115-10 of the ITAA 1997 allows the friendly society to make a discount capital gain in relation to a modified discount capital gain for a notional CGT event happening after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 and before 1 July 2000. [Schedule 2, item 86, section 115-10 of the Transitional Provisions Act]

5.235 Section 116GB of the ITAA 1936 contains rules for allocating capital losses against capital gains for each of the classes of assessable income. The friendly society chooses the extent to which the losses applicable to the CS/RA class are offset against modified capital gains and modified discount capital gains respectively. To the extent that the remaining part of the overall capital gain for the CS/RA class is attributable to:

•

modified capital gains the whole amount is included in assessable income of the CS/RA class; or

•

modified discount capital gains two thirds is included in assessable income of the CS/RA class.

[Schedule 2, item 22, section 116GB]

Repeal of current provisions for taxing life insurance companies

5.236 Division 8 of the ITAA 1936 contains special provisions for the taxation of life insurance companies. Division 8 will be repealed with effect from 1 July 2000. Therefore, as a transitional rule, the period in a life insurance company's year of income ending at the end of 30 June 2000 will be treated as a year of income for the purposes of applying Division 8. [Schedule 2, items 12 and 23, section 110A]

5.237 Division 8A of the ITAA 1936 applies similar provisions to tax the life insurance business of friendly societies and other registered organisations. Division 8A will be repealed with effect from 1 July 2000. [Schedule 2, item 23]

Mutual insurance associations

5.238 Section 121 of the ITAA 1936 applies to determine the taxable income of mutual insurance associations that are not life insurance companies. This Bill amends section 121 so that premiums received by mutual insurance associations are included in assessable income. This will ensure that mutual insurance associations are taxed consistently with other insurance companies. [Schedule 2, item 24, section 121]

Rebate on assessable life insurance bonuses

5.239 Section 160AAB of the ITAA 1936 allows a rebate for taxpayers who are assessable on life insurance bonuses under section 26AH. The purpose of the rebate is to compensate taxpayers for tax paid by the life insurance company. The rate of the rebate is set at the same rate that applies to the insurance business of life insurance companies. If that rate changes, the rebate rate also changes but with a one year delay.

5.240 The current rates of rebate are:

•

39% if the bonuses are paid from a life insurance company; or

•

33% if the bonuses are paid from a friendly society or other registered organisation.

5.241 The rebate rate will be amended to reflect the change to the rates of tax of life insurance companies and friendly societies in respect of ordinary life insurance business.

5.242 Therefore, the rebate rate for life insurance bonuses paid from life insurance companies (other than friendly societies) that are included in assessable income under section 26AH will be:

•

39% in the 2000-2001 income year;

•

34% in the 2001-2002 income year; and

•

the company tax rate of 30% in the 2002-2003 and subsequent income years.

5.243 The rebate rate for life insurance bonuses paid from friendly societies that are included in assessable income under section 26AH will be:

•

33% in the 2000-2001 and 2001-2002 income years; and

•

the company tax rate of 30% in the 2002-2003 and subsequent income years.

[Schedule 2, items 25 and 26, section 160AAB]

Current pension business of complying superannuation fund and exempt superannuation business of PSTs

5.244 Income derived on the segregated current pension assets of a complying superannuation fund or the segregated exempt superannuation assets of a PST will be exempt from tax.

Segregation of assets of a complying superannuation fund or PST

5.245 A complying superannuation fund will be able to segregate assets to be used for the sole purpose of discharging its current pension liabilities on or after 1 July 2000 [Schedule 2, item 43, subsection 273A(1)] . The segregated assets will be known as segregated current pension assets [Schedule 2, item 38, subsection 267(1)] .

5.246 Income generated on the segregated exempt superannuation assets will be exempt from tax under section 282B. Capital gains derived from segregated assets are exempt from tax under new section 118-320 [Schedule 2, item 81, section 118-320] .

5.247 Similarly, a PST will be able to segregate assets to be used for the sole purpose of discharging its liabilities under exempt superannuation liabilities on or after 1 July 2000 [Schedule 2, item 43, subsection 273A(1)] . The segregated assets will be known as segregated exempt superannuation assets [Schedule 2, item 39, subsection 267(1)] .

5.248 Income generated on the segregated exempt superannuation assets will be exempt from tax under new section 297B [Schedule 2, item 52, section 297B] . Capital gains derived from segregated assets are exempt from tax under new section 118-355 [Schedule 2, item 82, section 118-355] .

5.249 The segregated assets at the time of initial segregation must be a representative sample of all the assets supporting the current pension liabilities of the fund or the exempt superannuation liabilities of the PST immediately before the segregation of assets. [Schedule 2, item 43, subsection 273A(2)]

5.250 The total transfer value of the segregated assets must not exceed:

•

the current pension liabilities of the fund; or

•

the exempt superannuation liabilities of the PST.

[Schedule 2, item 43, subsection 273A(3)]

5.251 As a transitional rule, if a complying superannuation fund or PST segregates assets in accordance with new section 273A between 1 July 2000 and 30 September 2000, the fund or PST will be taken to have segregated those assets on 1 July 2000 [Schedule 2, item 43, subsection 273A(4)] . The purpose of this transitional rule is to allow sufficient time to segregate assets relating to current pension liabilities or exempt superannuation liabilities.

5.252 If a complying superannuation fund currently has segregated current pension assets, those segregated assets will continue to be segregated current pension assets as at 1 July 2000. [Schedule 2, item 43, subsection 273A(5)]

5.253 The segregated assets must be maintained for the sole purpose of discharging the current pension liabilities of the fund or exempt superannuation liabilities of the PST [Schedule 2, item 43, subsection 273A(6)] . This does not prevent the segregated assets from being used to pay fees and expenses relating to the carrying on of the current pension business.

An asset includes money

5.254 A transfer of an asset to or from the segregated current pension assets or the segregated exempt superannuation assets includes the transfer of money to or from the segregated assets. If an asset transferred to or from the segregated assets is money, the transfer value of the asset transferred is the amount of the money. [Schedule 2, item 43, subsection 273A(7)]

Transitional rule for certain assets held as at 1 July 2000

5.255 A segregated asset is an asset that relates solely to segregated current pension liabilities of a complying superannuation fund or the segregated exempt superannuation liabilities of a PST. However, as a transitional rule, the segregated assets will include the share of certain existing assets that the fund or PST certifies before 1 October 2000 to be included in the segregated current pension assets or segregated exempt superannuation assets. The part of the asset certified will be treated as a separate asset for taxation purposes.

5.256 If the fund is not a self managed fund (as defined in the Superannuation Industry (Supervision) Act 1993 ), this transitional rule will apply to an asset if:

•

the asset was acquired before 1 July 2000; and

•

the transfer value of the asset exceeds the lesser of:

-

$50 million; or

-

the greater of 2% of the value of the fund or PST or $5 million.

5.257 If the fund is a self managed fund, this transitional rule will apply to an asset if:

•

the asset was acquired before 1 July 2000; and

•

the transfer value of the asset exceeds 50% of the value of the fund.

[Schedule 2, item 43, section 273J]

Transitional rule for liabilities held as at 1 July 2000

5.258 The taxation consequences of a transfer of assets to the segregated current pension assets of a complying superannuation fund are disregarded if the fund had a liability before 1 July 2000 to a member of the fund in respect of a current pension where the income of the fund attributable to that liability was exempt from tax before that date and the liability in respect of that pension is transferred to the segregated assets.

5.259 Similarly, the taxation consequences of a transfer of assets to the segregated exempt superannuation assets of a PST are disregarded if the PST had a liability before 1 July 2000 to the holder of a unit in the PST where the income attributable to that liability was exempt from tax before that date and the liability is transferred to the PSTs segregated assets. [Schedule 2, item 43, section 273K]

5.260 Consequently, when an asset that is included in the segregated current pension assets or segregated exempt superannuation with effect from 1 July 2000 is disposed of by the fund or PST, the cost base of the asset will not be adjusted to reflect the transfer value at the time of segregation.

Annual valuation of segregated current pension assets

5.261 The trustee of a complying superannuation fund or PST that segregates current pension assets or exempt superannuation assets must determine the transfer value of the assets annually as at the end of the income year of the fund or PST. The valuation must be made within 60 days of the end of the income year of the fund or PST. [Schedule 2, item 43, section 273B]

Consequences of annual valuation

5.262 If the total transfer value of the segregated current pension assets of a complying superannuation fund exceeds the fund's current pension liabilities, then assets with a transfer value equal to the excess must be transferred out of the segregated current pension assets within 30 days of the annual valuation. [Schedule 2, item 43, subsection 273C(1)]

5.263 Similarly, if the total transfer value of the segregated exempt superannuation assets of a PST exceeds the PSTs exempt superannuation liabilities, then assets with a transfer value equal to the excess must be transferred out of the segregated exempt superannuation assets within 30 days of the annual valuation. [Schedule 2, item 43, subsection 273C(1)]

5.264 A transfer of assets under new subsection 273C(1 ) will be deemed to have been made in the income year at the end of which the valuation time occurred. [Schedule 2, item 43, subsection 273C(3)]

5.265 If the total transfer value of the segregated current pension assets of a complying superannuation fund is less than the fund's current pension liabilities, then assets with a transfer value not exceeding the difference may be transferred to the segregated current pension assets. [Schedule 2, item 43, subsection 273C(2)]

5.266 Similarly, if the total transfer value of the segregated exempt superannuation assets of a PST is less than the PSTs exempt superannuation liabilities, then assets with a transfer value not exceeding the difference may be transferred to the segregated exempt superannuation assets. [Schedule 2, item 43, subsection 273C(2)]

5.267 A transfer of assets under new subsection 273C(2 ) made within 30 days of the annual valuationwill be deemed to have been made in the income year at the end of which the valuation time occurred. [Schedule 2, item 43, subsection 273C(4)]

Transfer of assets to the segregated current pension assets or segregated exempt superannuation assets other than as a result of an annual valuation

5.268 There are 4 circumstances in which a complying superannuation fund or PST can transfer assets to the segregated current pension assets or segregated exempt superannuation assets other than as a result of an annual valuation.

5.269 First, if a complying superannuation fund determines at a time, other than the annual valuation time, that the total transfer value of the segregated current pension assets is less than its current pension liabilities, then assets with a transfer value not exceeding the difference can be transferred to the segregated current pension assets. [Schedule 2, item 43, subsection 273D(1)]

5.270 Similarly, if a PST determines at a time, other than the annual valuation time, that the total transfer value of the segregated exempt superannuation assets is less than its exempt superannuation liabilities, then assets with a transfer value not exceeding the difference can be transferred to the segregated exempt superannuation assets. [Schedule 2, item 43, subsection 273D(1)]

5.271 Second, if a current pension begins to be paid to the member of a complying superannuation fund other than because of the roll-over of an eligible termination payment, the fund can transfer, to the segregated current pension assets, assets of any kind having a transfer value not exceeding the current pension liabilities of the fund attributable to the pension. [Schedule 2, item 43, subsection 273D(2)]

5.272 Similarly, if:

•

a unit in a PST that is held by a complying superannuation fund becomes an exempt unit because of subsection 273D(2); or

•

a unit in a PST that is held by a life assurance company becomes an exempt unit because of subsection 320-195(1) of the ITAA 1997;

then the trustee of the PST can transfer, to the segregated exempt superannuation assets of the PST, assets of any kind having a total transfer value not exceeding the value of the unit. [Schedule 2, item 43, subsection 273D(3)]

5.273 Third, a complying superannuation fund or PST can at any time transfer assets of any kind to the segregated current pension assets or segregated exempt superannuation assets in exchange for an amount of money equal to the transfer value of the asset at the time of the transfer. This might occur if, for example, the fund or PST holds a parcel of shares outside the segregated assets which is no longer consistent with the investment strategy for that part of its business. The fund or PST may wish to transfer the shares to the segregated assets. To save transaction costs, the shares could be transferred to the segregated assets for consideration equal to the transfer value. [Schedule 2, item 43, subsection 273D(4)]

5.274 Fourth, a complying superannuation fund must transfer to its segregated assets, assets having a total transfer value equal to:

•

the amounts required to pay current pensions that begin to be payable on or after 1 July 2000 that is, where the first day of the period to which the pension relates is on or after 1 July 2000; and

•

any eligible termination payments made to the fund for the purchase of current pensions.

[Schedule 2, item 43, subsection 273D(5)]

5.275 Similarly, a PST must transfer to its segregated exempt superannuation assets, assets having a total transfer value equal to the amounts paid to the PST in respect of exempt units. [Schedule 2, item 43, subsection 273D(6)]

Current pension liabilities

5.276 The current pension liabilities of a complying superannuation fund are worked out for current pensions ^[F5] only to the extent that the liability for those pensions are to be discharged from the fund's segregated current pension assets. Current pension liabilities of a complying superannuation fund are the sum of:

•

the withdrawal benefits (as defined in the Superannuation Industry (Supervision) Regulations) held by the fund in respect of members who are being paid allocated pensions; and

•

the present values (calculated by an actuary using best estimate assumptions as to future experience in the payment of current pensions other than allocated pensions) of the future payments to be made by the fund of current pensions (other than allocated pensions).

[Schedule 2, item 43, section 273E]

Exempt superannuation liabilities

5.277 Exempt superannuation liabilities of a PST are the sum of:

•

the values of exempt units that are held for the sole purpose of providing allocated pensions or allocated annuities ^[F6] ;

•

the present values (calculated by an actuary using best estimate assumptions as to future experience in the payment of current pensions and immediate annuities other than allocated pensions or allocated annuities) of exempt units that are held for the sole purpose of providing for future payments of current pensions or immediate annuities (other than allocated pensions or allocated annuities); and

•

the present values (calculated by an actuary using best estimate assumptions as to future experience) of any other exempt units.

[Schedule 2, item 43, section 273F]

5.278 Exempt units of a PST are:

•

units held by the trustee of a complying superannuation fund that are segregated current pension assets of the fund;

•

units held by the trustee of a constitutionally protected superannuation fund;

•

units held by a life insurance company that are segregated exempt assets of the company; and

•

units held by another PST that are exempt units of that PST.

[Schedule 2, item 33, subsection 267(1)]

Transfers of assets and payments of amounts from segregated current pension assets or segregated exempt superannuation assets otherwise than as a result of annual valuation

5.279 There are 2 circumstances in which an asset can be transferred from segregated current pension assets or segregated exempt superannuation assets.

5.280 First, the fund or PST can at any time transfer assets of any kind from the segregated assets in exchange for an amount of money equal to the transfer value of the asset at the time of the transfer. This might occur if, for example, the fund or PST holds a parcel of shares in the segregated assets which is no longer consistent with the investment strategy for that part of its business. The company may wish to transfer the shares outside the segregated assets. To save transaction costs, the shares could be transferred from the segregated assets for consideration equal to the transfer value. [Schedule 2, item 43, subsection 273G(1)]

5.281 Second, if the fund or PST:

•

imposes fees or charges in respect of segregated current pension assets or segregated exempt superannuation assets;

•

imposes fees or charges in respect of amounts paid to the segregated assets; or

•

determines, at a time other than the annual valuation time, that there are excess assets in the segregated assets,

then the fund or PST must transfer from the segregated assets (at the time fees or charges are imposed or the excess is identified) having a total transfer value equal to the fees, charges or excess.

[Schedule 2, item 43, subsection 273G(2)]

5.282 Amounts will be considered to have been transferred from the segregated assets when fees and charges are imposed or the excess is identified provided they are transferred within a reasonable time having regard to normal business practice.

5.283 In addition, a complying superannuation fund or PST must pay from the segregated current pension assets or segregated exempt superannuation assets:

•

any pension payments or other benefits relating to exempt current pension liabilities of the fund or exempt superannuation liabilities of the PST; and

•

any expenses incurred directly in respect of the segregated assets. Examples of expenses incurred directly in respect of the segregated assets include stamp duty, brokerage costs and expenses relating to a rental property that is a segregated asset.

[Schedule 2, item 43, subsection 273G(3)]

Consequence of transfer of assets to or from segregated current pension assets or segregated exempt superannuation assets ^[F7]

5.284 New section 273H applies if:

•

an asset (other than money) is transferred from the segregated current pension assets of a complying superannuation fund or segregated exempt superannuation assets of a PST under new subsections 273C(1) or 273G(1) or (2); or

•

an asset (other than money) is transferred to the segregated assets under new subsections 273C(2) or 273D(1), (4), (5) or (6).

[Schedule 2, item 43, subsection 273H(1)]

5.285 If these provisions apply, then for the purposes of determining whether:

•

an amount is included in assessable income or is an allowable deduction (other than under the depreciation provisions) in respect of the transfer of the asset; or

•

the fund or PST made a capital gain or capital loss in respect of the transfer;

the fund or PST is taken to have:

•

sold the asset immediately before the transfer for consideration equal to its market value; and

•

purchased the asset again at the time of transfer for consideration equal to its market value.

[Schedule 2, item 43, subsection 273H(2)]

5.286 In addition, if a complying superannuation fund or PST could deduct an amount, except an amount that the fund or PST can deduct under subsection 281B(1) or 296B(1), or make a capital loss as a result of the transfer of an asset to the fund or PST to the segregated assets, the deduction or capital loss is disregarded until:

•

the asset ceases to exist; or

•

the asset, or a greater than 50% interest in it, is acquired by an entity other than an entity that is an associate of the company immediately after the transfer.

[Schedule 2, item 43, subsection 273H(3)]

5.287 A complying superannuation fund or a PST cannot deduct an amount or apply a capital loss as a result of the transfer of an asset from its segregated current pension assets or segregated exempt superannuation assets. [Schedule 2, item 43, subsection 273H(4)]

5.288 Finally, if an asset that is a unit of plant is transferred from the segregated assets, the fund or PST must assume, for the purposes of the depreciation provisions (Division 42 of the ITAA 1997), that:

•

the unit had at all times been used by the fund or PST wholly for the purpose of producing assessable income; and

•

deductions for depreciation in respect of the asset had been allowed to the fund or PST during the period using the diminishing value method (subsection 42-160(3)) or the prime cost method (subsection 42-165(2A)).

[Schedule 2, item 43, subsection 273H(5)]

5.289 If an asset that is a unit of plant is transferred to the segregated current pension assets of a complying superannuation fund or to the segregated exempt superannuation assets of a PST, then, in determining for depreciation purposes whether an amount is included in, or can be deducted from, the assessable income of the fund or PST as a result of the transfer, the fund or PST is taken to have:

•

at the time immediately before the transfer, sold the asset for a consideration equal to its market value at that time; and

•

at the time of the transfer, purchased the assets again for a consideration equal to its market value at that time.

[Schedule 2, item 43, subsection 273H(6)]

5.290 If an asset that is a unit of plant that has been included in the segregated current pension assets of a complying superannuation fund or the segregated exempt superannuation assets of a PST since the initial segregation of those assets is transferred from those assets, then, the fund or PST must assume, for depreciation purposes, that:

•

if the asset's market value at the time of the transfer is greater that its notional undeducted cost at that time, the fund or PST is taken to have:

-

at the time immediately before the transfer, sold the asset for a consideration equal to its notional undeducted cost at that time; and

-

at the time of the transfer, purchased the asset again for a consideration equal to its notional undeducted cost ^[F8] at that time; or

•

if the asset's market value at the time of the transfer is equal to or less than its notional undeducted cost at that time, the fund or PST is taken to have:

-

at the time immediately before the transfer, sold the asset for a consideration equal to its market value at that time; and

-

at the time of the transfer, purchased the asset again for a consideration equal to its market value at that time.

[Schedule 2, item 43, subsection 273H(7)]

5.291 If an asset that is a unit of plant that was previously transferred to the segregated current pension assets of a complying superannuation fund or the segregated exempt superannuation assets of a PST, is transferred from those assets, then, the fund or PST must assume, for depreciation purposes, that:

•

if the asset's market value at the time of its transfer from those assets is greater than its market value at the time when it was transferred to those assets, the fund or PST is taken to have:

-

at the time immediately before the transfer from those assets, sold the asset for a consideration equal to its market value at the time when it was transferred to those assets; and

-

at the time of the transfer from those assets, purchased the asset again for a consideration equal to its market value at the time when it was transferred to those assets; or

•

if the asset's market value at the time of its transfer from those assets is equal to or less than its market value at the time when it was transferred to those assets, the fund or PST is taken to have:

-

at the time immediately before the transfer from those assets, sold the asset for a consideration equal to its market value at that time; and

-

at the time of the transfer from those assets, purchased the asset again for a consideration equal to its market value at that time.

[Schedule 2, item 43, subsection 273H(8)]

Taxable income of a complying superannuation fund

Assessable income

5.292 The assessable income of a complying superannuation fund will include:

•

the transfer value ^[F9] of assets transferred from segregated current pension assets under new subsection 273C(1) or subsection 273G(2); and

•

the amount included in assessable income under section 273H where an asset other than money is transferred to the segregated current pension assets under new subsection 273C(2) or subsection 273D(1), (4) or (5).

[Schedule 2, item 49, subsection 281A(1)]

5.293 In addition, if an asset other than money that was transferred to the fund's segregated current pension assets under new subsection 273D(2) is disposed of by the fund, the assessable income of the fund includes the lesser of:

•

the amount (if any) that would have been included in assessable income if section 273H applied at the time of transfer; and

•

the amount (if any) that would have been included in assessable income because of section 273H if the asset was not a segregated current pension asset at the time of disposal.

[Schedule 2, item 49, subsection 281A(2)]

5.294 Similarly, if an asset other than money that was transferred to the fund's segregated current pension assets under new subsection 273D(2) is transferred from those segregated current pension assets under subsections 273C(1) or 273G(1) or (2), the assessable income of the fund includes the lesser of:

•

the amount (if any) that would have been included in assessable income if section 273H applied at the time of transfer to the segregated current pension assets; and

•

the amount (if any) that would have been included in assessable income because of section 273H if the asset were not a segregated current pension asset at the time of its transfer from those assets.

[Schedule 2, item 49, subsection 281A(3)]

Allowable deductions

5.295 If an asset other than money that was transferred to the fund's segregated current pension assets under new subsection 273D(2) is disposed of by the fund, the fund can deduct the lesser of:

•

the amount (if any) that could have been deducted if section 273H applied at the time of transfer; and

•

the amount (if any) that could have been deducted because of section 273H if the asset was not a segregated current pension asset at the time of disposal.

[Schedule 2, item 32, subsection 281AA(1)]

5.296 Similarly, if an asset other than money that was transferred to the fund's segregated current pension assets under new subsection 273D(2) is transferred from those segregated current pension assets under subsections 273C(1) or 273G(1) or (2), the fund can deduct the lesser of:

•

the amount (if any) that could have been deducted if section 273H applied at the time of the transfer to the segregated current pension assets; and

•

the amount (if any) that could have been deducted because of section 273H if the asset were not a segregated current pension asset at the time of its transfer from those assets.

[Schedule 2, item 32, subsection 281AA(2)]

5.297 In addition, a complying superannuation fund can deduct the transfer values of assets transferred to the fund's segregated current pension assets under subsections 273C(2) or 273D(1). [Schedule 2, item 49, subsection 281B(1)]

5.298 In addition, if an asset (other than money) is transferred to the fund's segregated current pension assets under subsection 273C(2) or 273D(1), (4) or (5), the fund can deduct the amount (if any) that it can deduct because of section 273H. [Schedule 2, item 49, subsection 281B(2)]

5.299 Finally, a complying superannuation fund is not entitled to a deduction (other than under section 279) for fees and charges incurred in respect of:

•

virtual PST life insurance policies;

•

exempt life insurance policies; or

•

exempt units in a PST.

[Schedule 2, item 48, subsection 279E(3)]

5.300 The reason for the denial of a deduction for these expenses is that the life insurance company or PST effectively gets a deduction for these fees and charges.

Exempt income

5.301 The income derived by a complying superannuation fund on segregated current pension assets is exempt from tax under section 282B.

5.302 In addition, as a transitional rule, a complying superannuation fund will be exempt from tax on one third of certain amounts transferred for the segregated current pension assets that relate to current pension liabilities as at 1 July 2000. The exemption will cease to apply from 30 June 2005.

5.303 The transitional relief will apply to exempt from tax one third of amounts transferred under the following provisions (reduced by the amounts transferred under subsections 273C(2) or 273D(1)):

•

subsection 273C(1);

•

paragraph 273G(2)(a);

•

paragraph 273G(2)(b); and

•

paragraph 273G(2)(c).

[Schedule 2, item 50, section 283]

Taxable income of a PST

Assessable income

5.304 The assessable income of a PST will include:

•

the transfer value of assets transferred from segregated exempt superannuation assets under new subsection 273C(1) or subsection 273G(2); and

•

the amount included in assessable income under section 273H where an asset other than money is transferred to the segregated exempt superannuation assets under new subsection 273C(2) or subsection 273D(1), (4) or (6).

[Schedule 2, item 51, subsection 296A(1)]

5.305 In addition, if an asset other than money that was transferred to the PSTs segregated exempt superannuation assets under new subsection 273D(3) is disposed of by the PST, the assessable income of the PST includes the lesser of:

•

the amount (if any) that would have been included in assessable income if section 273H applied at the time of transfer; and

•

the amount (if any) that would have been included in assessable income because of section 273H if the asset was not a segregated exempt superannuation asset at the time of disposal.

[Schedule 2, item 51, subsection 296A(2)]

5.306 Similarly, if an asset other than money that was transferred to the PSTs segregated exempt superannuation assets under new subsection 273D(3) is transferred from those segregated exempt superannuation assets under subsections 273C(1) or 273G(1) or (2), the assessable income of the PST includes the lesser of:

•

the amount (if any) that would have been included in assessable income if section 273H applied at the time of transfer to the segregated exempt superannuation assets; and

•

the amount (if any) that would have been included in assessable income because of section 273H if the asset were not a segregated exempt superannuation asset at the time of its transfer from those assets.

[Schedule 2, item 51, subsection 296A(3)]

Allowable deductions

5.307 If an asset other than money that was transferred to the PSTs segregated exempt superannuation assets under new subsection 273D(3) is disposed of by the PST, the PST can deduct the lesser of:

•

the amount (if any) that could have been deducted if section 273H applied at the time of transfer; and

•

the amount (if any) that could have been deducted because of section 273H if the asset was not a segregated current exempt superannuation asset at the time of disposal.

[Schedule 2, item 51, subsection 296AA(1)]

5.308 Similarly, if an asset other than money that was transferred to the PSTs segregated exempt superannuation assets under new subsection 273D(3) is transferred from those segregated exempt superannuation assets under subsections 273C(1) or 273G(1) or (2), the PST can deduct the lesser of:

•

the amount (if any) that could have been deducted if section 273H applied at the time of the transfer; and

•

the amount (if any) that could have been deducted because of section 273H if the asset were not a segregated exempt superannuation asset at the time of its transfer from those assets.

[Schedule 2, item 51, subsection 296AA(2)]

5.309 In addition, a PST can deduct the transfer values of assets transferred to the funds segregated exempt superannuation assets under subsections 273C(2) or 273D(1). [Schedule 2, item 51, subsection 296B(1)]

5.310 In addition, if an asset (other than money) is transferred to the PSTs segregated exempt superannuation assets under subsection 273C(2) or 273D(1), (4) or (6), the PST can deduct the amount (if any) that it can deduct because of section 273H. [Schedule 2, item 51, subsection 296B(2)]

Exempt income

5.311 The income derived by a PST on segregated exempt superannuation assets is exempt from tax under new section 297B. [Schedule 2, item 52, section 297B]

5.312 In addition, as a transitional rule, a PST will be exempt from tax on one third of certain amounts transferred for the segregated exempt superannuation assets that relate to exempt superannuation liabilities as at 1 July 2000. The exemption will cease to apply from 30 June 2005.

5.313 The transitional relief will apply to exempt from tax one third of amounts transferred under the following provisions (reduced by the amounts transferred under subsections 273C(2) or 273D(1)):

•

subsection 273C(1);

•

paragraph 273G(2)(a);

•

paragraph 273G(2)(b); and

•

paragraph 273G(2)(c).

[Schedule 2, item 52, section 297BA]

Section 275 transfers

5.314 Complying superannuation funds and complying ADFs are specifically required to include taxable contributions in assessable income under sections 281 and 290 of the ITAA 1936. Taxable contributions are defined in section 274 to mean, broadly, superannuation contributions made by an employer and tax deductible superannuation contributions made by an individual.

5.315 Section 275 allows the trustee of a complying superannuation fund or a complying ADF (the transferor) to enter into an agreement with a life insurance company or PST (the transferee) to transfer taxable contributions to that company or PST. The effect of the agreement is that taxable contributions covered by the agreement are included in the assessable income of the transferee rather than in the assessable income of the transferor. The transferor can enter into only one agreement with a particular life insurance company or PST. The agreement must be in writing and, under the current law, is irrevocable.

5.316 This Bill amends section 275 so that:

•

the amount specified in the agreement is excluded from the assessable income of the transferor and included in the assessable income of the transferee only if the transferor has given the transferee a certificate, signed by an auditor who is independent of the transferee, stating that the amount specified in the agreement meets the requirements of section 275 [Schedule 2, items 44 and 45, subsection 275(2A)] ; and

•

section 275 transfer notices can be varied by giving a written notice to the Commissioner signed by both the transferor and the transferee. The effect of the variation is that the Commissioner will amend the taxation returns of both the transferor and the transferee for the year to which the section 275 notice relates provided that the variation is made within the time limits for requesting amendments to assessments (i.e. generally within 4 years from the due date for payment of tax under an assessment). [Schedule 2, items 46 and 47, subsections 275(7), (8) and (9)]

Controlled foreign corporation provisions

5.317 This Bill makes amendments to the controlled foreign corporation provisions as a consequence of the repeal of the current provisions for taxing life insurance companies in Division 8. [Schedule 2, items 55 to 60, sections 317 and 446]

Taxation of friendly societies

5.318 This Bill makes consequential amendments to ensure that the income of friendly societies, other than income relating to life insurance business, is exempt from tax under section 50-1 of the ITAA 1997. [Schedule 2, items 66 and 69, sections 50-20 and 50-72]

5.319 This exemption will be removed with effect from 1 July 2000. [Schedule 2, items 66, 67 and 70]

Amendments to the Income Tax Rates Act

What rate of tax will apply to life insurance companies?

5.320 Subsection 23(4A) of the Income Tax Rates Act 1986 specifies the rates of tax that apply to life insurance companies. Subsection 23(4) specifies the rates of tax that apply to registered organisations (including friendly societies).

5.321 The change to the rates of tax on the insurance business of life insurance companies and the change to the basis for calculating taxable income will apply from 1 July 2000. However, the changes to the rate of tax on the non-insurance business of life insurance companies (which is taxed at the company tax rate) apply to the 2000-2001 income year see the Income Tax Rates Act No. 1.

5.322 Therefore, if the life insurance company has an ordinary accounting period, the rates of tax in respect of its taxable income for the 2000-2001 income year will be:

•

in respect of the complying superannuation class 15%; and

•

in respect of the ordinary class:

-

if the company is a friendly society 33%; or

-

in any other case 34%.

5.323 The rate of tax in respect of the ordinary class of taxable income of life insurance companies (including friendly societies) will be reduced to 30% (consistent with changes to the company tax rate, from the 2001-2002 income year.

[Schedule 2, item 111, section 23A of the Income Tax Rates Act 1986]

5.324 Transitional rules will apply to life insurance companies and friendly societies that have substituted accounting periods.

Early balancing life insurance companies

5.325 If the life insurance company is an early balancing company, the rates of tax in respect of its taxable income for the 2000-2001 income year will be as follows:

Rates of tax for early balancing life insurance companies in the 2000-2001 income year

5.326 The rates of tax in respect of its taxable income for the 2001-2002 income year will be:

•

in respect of the complying superannuation class 15%; and

•

in respect of the ordinary class 30%.

[Schedule 2, item 111, subsections 23B(2) and (3) of the Income Tax Rates Act 1986]

Late balancing life insurance companies

5.327 If a life insurance company is a late balancing company, the rates of tax in respect of its taxable income for the 1999-2000 income year will be as follows:

5.328 The rates of tax in respect of its taxable income for the 2000-2001 income year will be:

•

in respect of the complying superannuation class 15%; and

•

in respect of the ordinary class 34%.

5.329 The rates of tax in respect of its taxable income for the 2001-2002 income year will be:

•

in respect of the complying superannuation class 15%; and

•

in respect of the ordinary class 30%.

[Schedule 2, item 111, subsections 23B(4) and (5) of the Income Tax Rates Act 1986]

Early balancing friendly societies

5.330 If a friendly society is an early balancing company, the rates of tax in respect of its taxable income for the 2000-2001 income year will be as follows:

5.331 The rates of tax in respect of its taxable income for the 2001-2002 income year will be:

•

in respect of the complying superannuation class 15%; and

•

in respect of the ordinary class 30%.

[Schedule 2, item 111, subsections 23C(2) and (3) of the Income Tax Rates Act 1986]

Late balancing friendly societies

5.332 If a friendly society is a late balancing company, the rates of tax in respect of its taxable income for the 1999-2000 income year will be as follows:

5.333 The rates of tax in respect of its taxable income for the 2000-2001 income year will be:

•

in respect of the complying superannuation class 15%; and

•

in respect of the ordinary class 33%.

5.334 The rates of tax in respect of its taxable income for the 2001-2002 income year will be:

•

in respect of the complying superannuation class 15%; and

•

in respect of the ordinary class 30%.

[Schedule 2, item 111, subsections 23C(4) and (5) of the Income Tax Rates Act 1986]

Amendments to the Income Tax Act

5.335 Items 87 and 88 make a consequential amendment to the Income Tax Act 1986 to reflect the removal of the definition of registered organisation in the Income Tax Rates Act. [Schedule 2, items 112 and 113, subsections 23C(4) and (5) of the Income Tax Rates Act 1986]

Amendments to the Taxation Administration Act 1953

PAYG

5.336 This Bill makes consequential amendments to provisions in the TAA 1953 relating to the collection of tax instalments from life insurance companies to reflect the new classes of business of life insurance companies.

5.337 The instalment income of a life insurance company will include:

•

any part of its statutory income that is reasonably attributable to a period that is included in the complying superannuation class of taxable income of the company; and

•

any part of its statutory income (other than net capital gains) that is included in the ordinary class of taxable income of the company.

[Schedule 2, item 114, subsection 45-120(2A) of the TAA 1953]

5.338 Consequential amendments are made to the formulae to work out the adjusted taxable income of a life insurance company to reflect the new classes of assessable income. [Schedule 2, item 116, subsection 45-330(3) of the TAA 1953]

5.339 In addition, as a transitional rule, the Commissioner will be able to take into account the amendments to the law affecting base assessment instalment income for the purposes of working out the instalment rate for life insurance companies for the 2000-2001 income year. [Schedule 2, item 115, subsection 45-330(3)]

5.340 Finally, section 45-370 is amended to insert a special rule to work out the adjusted assessed taxable income of life insurance companies. [Schedule 2, item 117, subsection 45-370(3)]