House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)

Savings banks

Overview

11.1 The Bill will remove the exemption from income tax and withholding tax for certain savings banks.

Summary of the amendments

Purpose of amendments

11.2 The current exemption from income tax for savings banks conducted exclusively for the benefit of depositors is to be repealed. The corresponding exemption from dividend, interest and royalty withholding tax for certain non-resident savings banks will also be repealed.

Date of effect

11.3 For income tax, from the 1994-95 year of income.

11.4 For withholding tax, from 1 July 1994.

Background to the legislation

11.5 Currently, paragraph 23(i) of the Income Tax Assessment Act 1936 (the Act) exempts from income tax the income of a savings bank conducted exclusively for the benefit of depositors. This exemption will be removed because of the recent integration of savings bank activity into trading bank business under the Bank Integration Act 1991 . Since this integration, the distinction between savings and trading banks is no longer valid.

11.6 Paragraph 128B(3)(a) of the Act exempts from withholding tax the income of a non-resident savings bank that is exempt under paragraph 23(i) and is exempt from income tax in its country of residence. As a result of removing the income tax exemption for savings banks, the exemption from withholding tax is no longer necessary.

Explanation of the amendments

Income tax exemption for savings banks

11.7 Paragraph 23(i) of the Act provides an exemption from income tax for a savings bank conducted exclusively for the benefit of depositors. This paragraph will be deleted [Clause 58] .

Withholding tax exemption for certain non-resident savings banks

11.8 Paragraph 128B(3)(a) of the Act provides an exemption from dividend, interest and royalty withholding tax for a savings bank that is exempt from Australian income tax under paragraph 23(i) and is also exempt from income tax in its country of residence. The reference in this paragraph to paragraph 23(i) will be deleted [Clause 62] .

Provisions containing a reference to paragraph 23(i)

11.9 Section 102M of the Act refers to paragraph 23(i) in its definition of "exempt entity". This reference to paragraph 23(i) will be deleted [Clause 59] .

11.10 Section 121F of the Act refers to paragraph 23(i) in its definition of "relevant exempting provision". This reference to paragraph 23(i) will be deleted [Clause 60] .

11.11 Section 124ZA of the Act refers to paragraph 23(i) in its definition of "exempt body". This reference to paragraph 23(i) will be deleted [Clause 61] .

11.12 Section 160K of the Act refers to paragraph 23(i) in its definition of "relevant exempting provision". This reference to paragraph 23(i) will be deleted [Clause 63] .

11.13 Section 269B of the Act refers to paragraph 23(i). This reference to paragraph 23(i) will be deleted [Clause 64] .

Application of amendments

11.14 The amendments made to the Act by this Division, other than to paragraph 128B(3)(a), apply from the 1994-95 year of income.

11.15 The amendment to paragraph 128B(3)(a) applies to income derived on or after 1 July 1994. This commencement date is subject to the transitional arrangements [Clause 65] .

Transitional arrangements

11.16 The withholding exemption provided by paragraph 128B(3)(a), in respect of interest which is exempt under section 23(i), will continue to apply in respect of those borrowers who had a contractual obligation to borrow before 1 July 1994 [Clause 66] .

11.17 The transitional arrangement will not be available in the following circumstances:

•

The interest was paid on funds borrowed by the borrower on or after 1 July 1994 and the borrower was not required to borrow the funds under a contract entered into before that date.

•

The interest was paid on funds borrowed under a "roll-over" of a previous loan on or after 1 July 1994. A "roll-over" is generally an agreement between a borrower and lender to renew a loan on the expiry of an existing loan.

•

The interest was paid on funds borrowed under an extension occurring on or after 1 July 1994 of a loan.