Senate

Explanatory Memorandum

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

Chapter 8 - Rate of tax for friendly societies

Overview

8.1 Schedule 8 of the Bill will amend the Taxation (Deficit Reduction) Act (No 2) 1993 so that the rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations will be retained at 33% for the 1997-98 and 1998-99 income years. Similarly, the rebate available to policyholders who receive assessable bonuses on life insurance policies issued by friendly societies and other registered organisations will be retained at 33% for the 1997-98, 1998-99 and 1999-2000 income years. The trustee rate will be increased to 39% from 1999-2000 and the rebate rate will be increased to 39% from 2000-01.

Summary of the amendments

Purpose of the amendments

8.2 The amendments will implement the 1997-98 Budget announcement to freeze the rate of tax applying to friendly societies and other registered organisations and the rebate that applies to policyholders.

Date of effect

8.3 The amendments will commence with effect from 1 July 1997.

Background to the legislation

8.4 Paragraph 23(4)(b) of the Income Tax Rates Act 1986 declares that the rate of tax on the eligible insurance business component of the taxable income of a company that is a registered organisation (that is, a friendly society, a trade union or certain employee associations) is 33%. Section19 of Taxation (Deficit Reduction) Act (No2) 1993 increases that rate to 39% for the 1997-98 and later years of income.

8.5 Section 26AH of the Income Tax Assessment Act 1936 (ITAA) includes in the assessable income of a policyholder bonuses on life insurance policies that are surrendered within 10 years. If such an amount is included in a policyholder's assessable income, a rebate is available under section160AAB to compensate the policyholder for the tax paid by the insurance company or registered organisation.

8.6 The rebate on bonuses paid from life insurance policies issued by friendly societies and other registered organisations is currently 33% of the amount included in assessable income under section26AH (see paragraph (a) of the definition of statutory percentage in subsection160AAB(1)). Section 15 of Taxation (Deficit Reduction) Act (No.2) 1993 increases the rebate to 39% for the 1997-98 and later years of income.

8.7 In the 1997-98 Budget the Government announced that, in keeping with the competition objectives of the Financial System Inquiry that reported in March 1997, it would recommence the review of the taxation treatment of life insurance that was initiated in the 1995-96 Budget, but not completed by the former Government prior to the election. The main objectives of the review are to improve the efficiency of the taxation treatment of life insurance companies and friendly societies, and the equity of their investors, to ensure a more neutral taxation outcome for competing investment products.

8.8 The review will be undertaken by the Treasury and the Australian Taxation Office through ongoing consultation with the life insurance and friendly society industries. The taxation review should be completed in time for a decision to be announced prior to, or in, the 1998-99 Budget.

8.9 The proposed increase in the trustee rate of tax for the eligible insurance business of friendly societies and other registered organisations and the rebate rate for taxable policyholders will be deferred for the duration of the review.

Explanation of the amendments

Rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations

8.10 The rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations will be retained at 33% for the 1997-98 and 1998-99 years of income. [Items5and6]

8.11 The rate will increase to 39% for the 1999-2000 and later years of income. [Items7and8]

8.12 The provisions to increase the rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations to 39% in the 1997-98 and later years of income will commence on 1July1999. [Item 1; new subsection 2(4) of Taxation (Deficit Reduction) Act (No.2) 1993]

Rebate on bonuses paid on the surrender of a life assurance policy issued by a friendly society or other registered organisation

8.13 The rebate available to policyholder's of friendly societies and other registered organisations under section 160AAB of the ITAA will be retained at 33% for the 1997-98, 1998-99 and 1999-2000 years of income. [Item2]

8.14 The rebate will be increased to 39% in the 2000-2001 and later years of income. [Items 3 and 4]

8.15 The provisions to increase the rebate to 39% will commence on 1 July 2000. [Item 1; new subsection 2(3) of Taxation (Deficit Reduction) Act (No.2) 1993]