SENATE

REPLACEMENT Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE House of Representatives TO THE BILL AS INTRODUCED

Chapter 8 Company Tax Rates Reduction

Summary of proposed amendments

Purpose of amendment: Amendment of the Income Tax Rates Act 1986 to lower company and related tax rates.

Date of Effect: To apply in respect of assessments for the 1993-94 and subsequent years of income.

Background to the legislation

At present the following entities are subject to the company tax rate of 39 per cent on their taxable income:

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public companies;

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private companies;

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corporate limited partnerships;

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the non-fund component of non-mutual life assurance companies;

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trustees of corporate unit trusts;

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trustees of public trading trusts; and

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trustees to whom subsection 98(3) of the Assessment Act applies (non-resident companies as presently entitled beneficiaries).

A life assurance company is required to keep certain amounts of assets in the insurance funds of the company. These are "fund" assets and the remainder are "non-fund" assets. These non-fund assets may produce assessable income.

In regard to the non-fund component of the taxable income of life assurance companies, the relevant companies can be considered in two classes:

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non-mutual, where the assets of a company belong to the shareholders, who are entitled to a percentage of the profits, and to policy holders; the non-fund component of such companies belongs to the shareholders; and

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mutual, where the assets of a company are wholly owned by the policy holders alone; the non-fund component of such companies, which is relatively small, belongs to the policy holders.

Because the non-fund component of taxable income of a non-mutual company accrues generally to shareholders the appropriate rate of tax is currently that applicable to companies generally, 39 per cent.

Because the non-fund component of the taxable income of a mutual company is divisible only among policyholders the appropriate rate of tax is the "trustee" rate. This rate is derived on the basis that a life assurance company pays tax on behalf of policyholders whose average marginal rate of tax has been determined to be 39 per cent. Currently,the trustee rate is only coincidentally the same as the rate of tax applicable to companies generally.

As the rate of tax applicable to the non-fund component of taxable incomes of both non-mutual and mutual companies is coincidentally the same, the Principal Act does not distinguish between these two classes of companies to which the income accrues.

At present the following taxable entities are not subject to the tax rate applicable to companies of 39 per cent but to various rates:

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registered organisations;

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non-mutual life assurance companies on other than their non-fund component;

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mutual life assurance companies;

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Pooled Development Funds, (PDF component);

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trustees of superannuation funds;

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trustees of approved deposit funds; and

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trustees of pooled superannuation trusts.

Note that the Accident Disability/Residual Life Assurance (AD/RLA) component of taxable income of both a non-mutual and a mutual life assurance company is taxable at 39 per cent but this rate is only coincidentally the same as the rate generally applicable to companies. This rate, known as the "trustee" rate, is the same as that applicable to the non-fund component of the taxable income of mutual life insurance companies and based on the average marginal rate of tax of policy holders (see earlier discussion on the non-fund component of mutual companies).

A company that is a Pooled Development (PDF) is taxed on its taxable income at the concessional rate of 30 per cent from the time it becomes a PDF until the last year of income in which it is a PDF. In any year of income in which it is not a PDF on the last day it is not taxed as a PDF and the rate reverts to 39 per cent.

Currently, a non-profit company which is not a registered organisation is not taxable if its taxable income is $416 or less. On taxable income in excess of $416 a rate of 55 per cent is payable until the shading in threshold is reached. The threshold is determined as the point where the tax calculated at the rate of 55 per cent is equivalent to the tax that would be calculated if the whole of taxable income was subject to a rate of 39 per cent. At present that threshold is $1,429. On taxable income above this upper threshold this type of company is taxable at the rate of 39 per cent generally applicable to companies.

Explanation of proposed amendments

Company Rate

The rate of tax imposed on companies generally will be reduced from 39 per cent to 33 per cent to be effective for assessments in respect of the 1993-94 and subsequent years of income [Clause 60 (a) and Clause 64] . The lower rate will apply to all payments of company tax in respect of companies balancing on 30 June 1994, or payments made after 30 November 1993 in respect of companies balancing after that date in lieu of 30 June 1994.

The rate of tax on the non-fund component of the taxable income of non-mutual life insurance companies will be reduced from 39 per cent to 33 per cent, the new rate applicable to companies generally [Clause 60(b)] . The rate of tax on the non-fund component of mutual life insurance companies will remain unchanged at the "trustee" rate of 39 per cent.

The concessional rate of tax applied to a company that is a PDF will be reduced from 30 per cent to 25 per cent [Clause 60(c)].

The shading in threshold that applies in respect of non-profit companies, other than registered organisations, will be reduced from $1,429 to $1,039 to take account of the reduction in the company tax rate from 39 per cent to 33 per cent. [Clause 60(c)]

Other entities whose rate of tax is affected by the company rate

The rate cut will also apply to corporate limited partnerships [Clause 60] , corporate unit trusts [Clause 61] , trustees of public trusts [Clause 62] and trustees to whom subsection 98(3) of the Income Tax Assessment Act 1936 applies [Clause 63]

Generally, the rates of tax in relation to the taxable income of companies taxable at rates other than the company rate of 39 per cent, for example, registered organisations, will not change. The exception is that the concessional rate on PDFs will be reduced from 30 per cent to 25 per cent. The rate of tax of 39 per cent on the AD/RLA component of taxable income of life assurance companies and the non-fund component of taxable income of mutual life assurance companies will not be reduced. These details are summarised in the following table: