Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Hon Peter Costello, MP)Chapter 2 - Complying funds - expenses of investing in pooled superannuation trusts or life assurance policies
Overview
2.1 The amendments in Part 2 of Schedule 1 of the Bill will allow complying superannuation funds and complying approved deposit funds (ADFs) to claim deductions for expenses relating to investments in pooled superannuation trusts (PSTs) and life assurance policies issued by life assurance companies and registered organisations.
Summary of amendents
2.2 The amendments to the Income Tax Assessment Act 1936 (the Act) will make expenses of superannuation funds and ADFs deductible irrespective of whether they relate to a direct investment in an asset which gives rise to taxable income or an indirect investment in a PST or a life assurance policy which gives rise to exempt income.
2.3 Expenses that relate to current pension liabilities will continue to be non-deductible because income on assets used to pay pension liabilities is exempt when derived by superannuation funds, ADFs, PSTs, life assurance companies and registered organisations.
2.4 The amendments only apply to complying superannuation funds and complying ADFs, that is, those funds which satisfy the prescribed standards of the Superannuation Industry (Supervision) Act 1993 .
2.5 The amendments will apply from the year of income in which 1 July 1988 occurred. This is the date when the income of superannuation funds and ADFs became subject to taxation. [Item 32]
Background to the legislation
2.6 The profits or gains derived by superannuation funds and ADFs from investments in PSTs and life assurance policies are exempt from tax. That is because tax is paid by the PST, life assurance company or registered organisation on the share of the income that is distributed to the superannuation funds or ADF. It would be inequitable to tax the income twice.
2.7 As the income is exempt in the hands of the superannuation fund or ADF, they cannot claim a deduction for expenses relating to investments in PSTs and life assurance policies, even though that income has been subject to income tax. If the superannuation fund or ADF had invested directly in the assets in which the PST, life assurance company or registered organisation invests, a deduction would be available.
2.8 Where a superannuation fund or ADF makes a direct investment in a product which is taxable in its hands, it is allowed a full deduction for related expenses. The amendment is being made to enable the same taxation treatment in respect of expenses incurred in earning income from investments in PSTs and life assurance policies, which is also taxable, albeit in the hands of the PST, life assurance company or registered organisation. In practice, it is understood that superannuation funds and ADFs have generally claimed deductions although not entitled to under the existing law.
Explanation of the amendments
2.9 Item 30 inserts new section 279E into the Act. It deals with the expenses of a complying superannuation fund.
2.10 New subsection 279E(1) applies to expenditure by a superannuation fund in relation to an investment in a PST [new paragraph 279E(1)(a)] , or an investment in a life assurance policy issued by a life assurance company or registered organisation [new paragraph 279E(1)(b)] . It also covers arrangements where a superannuation fund invests in a life assurance policy by way of an investment in a 'custodian trust' [new paragraph 279E(1)(c)] . Such trusts allow small superannuation funds to invest in group life policies by way of investment in the 'custodian trust'. In these cases the investment in the 'custodian trust' will be treated as an investment in a life policy.
2.11 Where a superannuation fund incurs expenditure in relation to an investment covered by the new subsection 279E(1) , for the purpose of being allowed a deduction for that expenditure, any profits or gains of a capital nature from the investment are considered to be of an income nature [new paragraph 279E(2)(a)] . For example, where a superannuation fund acquires units in a PST, the gains that may accrue from an increase in the units' value will, for the purposes of claiming a deduction, be treated as income.
2.12 In a similar manner, the new paragraph 279E(2)(b) treats reversionary bonuses and non-reversionary bonuses from life assurance policies (which are ordinarily exempt under paragraph 26AH(7)(b) and section 282A, respectively) as being assessable income for the purposes of claiming a deduction for expenditure in relation to an investment in a life assurance policy.
2.13 This overcomes the problem, in the absence of new subsection 279E(2) , of the expenses not being deductible because the profits, gains or income from such investments are either exempt income or are of a capital nature.
2.14 Item 31 inserts new section 289A into the Act. It is a parallel provision to the new section 279E and covers the expenses of a complying ADF.
2.15 New subsection 289A(1) applies to expenditure by a complying ADF in relation to an investment in a PST [new paragraph 289A(1)(a)] , or an investment in a life assurance policy issued by a life assurance company or registered organisation [new paragraph 289A(1)(b)] . It also covers arrangements where an ADF invests in a life assurance policy by way of an investment in a 'custodian trust' [new paragraph 289A(1)(c)] . Such trusts allow an ADF to invest in group life policies by way of investment in the 'custodian trust'. In these cases the investment in the 'custodian trust' will be treated as an investment in a life policy.
2.16 Where an ADF incurs expenditure in relation to an investment covered by the new subsection 289A(1) , for the purpose of being allowed a deduction for that expenditure, any profits or gains of a capital nature from the investment are considered to be of an income nature [new paragraph 289A(2)(a)] .
2.17 In a similar manner, the new paragraph 289A(2)(b) treats reversionary bonuses and non-reversionary bonuses from life assurance policies (which are ordinarily exempt under paragraph 26AH(7)(b) and section 291A, respectively) as being assessable income for the purposes of claiming a deduction for expenditure in relation to an investment in a life assurance policy.
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