Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
1998-1999-2000-2001
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
TAXATION LAWS AMENDMENT BILL (No. 4) 2001
REVISED EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon Peter
Costello, MP)
THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED
Table of contents
The following abbreviations and acronyms are used throughout this revised explanatory memorandum.
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Abbreviation
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Definition
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ADF
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approved deposit fund
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Commissioner
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Commissioner of Taxation
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DDT
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deficit deferral tax
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FDT
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franking deficit tax
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ITAA 1936
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Income Tax Assessment Act 1936
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ITAA 1997
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Income Tax Assessment Act 1997
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MLA 1986
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Medicare Levy Act 1986
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General outline and financial impact
Schedule 1 to this Bill amends the imputation rules in the ITAA 1936 to take account of the reduction of the company tax rate from 34% to 30%.
Date of effect: The amendments apply from 1 July 2001.
Proposal announced: Assistant Treasurer’s Press Release No. 25 of 25 June 2001.
Financial impact: The financial impact of this measure has been factored into the revenue estimates for the reduction in the company tax rate made by the New Business Tax System (Income Tax Rates) Act (No. 1) 1999.
Compliance cost impact: The franking account conversion legislation will impose a small, generally once only, compliance burden on those taxpayers affected.
The franking account conversion legislation will impose a small, generally once only, compliance burden on those taxpayers affected. The conversion process that a taxpayer will be required to follow will be substantially similar to that required when the tax rate was reduced last year, so taxpayers are familiar with the conversion process.
The taxpayers affected by these rules are those resident taxpayers that are required to maintain franking accounts. They are:
• all resident companies (including non-mutual life assurance companies);
• all resident public trading trusts;
• all resident corporate unit trusts; and
• all limited partnerships.
Schedule 2 to this Bill amends the ITAA 1997 to defer the commencement date of the Review of Business Taxation proposals to tax friendly societies on investment income received that is attributable to funeral policies, scholarship plans and income bonds sold after 30 November 1999. Friendly societies will remain exempt from tax on that investment income until 30 June 2002.
Schedule 2 also defers the commencement of the new methodology for working out the capital component of ordinary life insurance investment policies until 1 July 2002.
Date of effect: 1 July 2001.
Proposal announced: Not previously announced.
Financial impact: The cost to revenue of the deferral is expected to be $1 million in 1999-2000, and $2 million per annum in 2000-2001 and 2001-2002.
Compliance cost impact: Nil.
Schedule 3 to this Bill amends the ITAA 1936 to make corrections so that:
• the intercorporate dividend rebate is not available in respect of any unfranked dividends paid to or by a dual resident company, including dividends paid within a wholly-owned group; and
• the deduction allowed to certain non-resident owned companies to offset the removal of the rebate from 1 July 2000 is not available in respect of unfranked dividends paid to or by a dual resident company.
Date of effect: These amendments will apply retrospectively to dividends paid on or after 1 July 2000. These are the dividends in relation to which the rebate and deduction would otherwise be allowed in error.
Proposal announced: Not previously announced.
Financial impact: Nil. There could be a significant cost to revenue if the amendments were not made.
Compliance cost impact: The amendments are corrections and will not have any impact on compliance costs for taxpayers.
Schedule 4 to this Bill amends the ITAA 1997 to deny refunds of excess imputation credits to non-complying superannuation funds and non-complying ADFs.
Date of effect: The amendments will apply to assessments for income years ending on or after 22 May 2001.
Proposal announced: Assistant Treasurer’s Press Release No. 19 of 22 May 2001.
Financial impact: The measure will protect the revenue. The gain to revenue from denying refunds of imputation credits to currently lodging non-complying superannuation funds and non-complying ADFs would be less than $1 million.
Compliance cost impact: Nil.
Schedule 5 to this Bill will make technical corrections to:
• the franking rebate provisions in the ITAA 1936 to clarify that registered charities and gift-deductible organisations which are trusts are eligible for refunds of excess imputation credits in respect of distributions attributable to franked dividends received indirectly through another trust; and
• the MLA 1986 to correct references to the ITAA 1936.
Date of effect: The amendments to the franking rebate provisons will apply to trust amounts that are attributable to dividends paid on or after 1 July 2000, that is, from the commencement of the refund of imputation credits measure. The amendments to the MLA 1986 will apply to assessments for the 2000-2001 income year and later income years.
Proposal announced: Not previously announced.
Financial impact: Nil.
Compliance cost impact: The proposed amendments are corrections and will not have any impact on compliance costs for taxpayers.
Chapter
1
Company rate changes
(franking account consequentials)
1.1 Schedule 1 to this Bill amends the dividend imputation rules in the ITAA 1936 to take account of the reduction in the company tax rate from 34% to 30%.
1.2 This Bill inserts Division 15 into Part IIIAA of the ITAA 1936 which deals with the conversion of the franking accounts of companies and similarly taxed entities so that the balance of their franking accounts reflects an underlying tax rate of 30%. These conversions are to occur on 1 July 2001.
1.3 This Bill also introduces other necessary amendments to various provisions in Part IIIAA that rely on the prevailing company tax rate for their correct operation.
1.4 The reduction in the company tax is provided for in the New Business Tax System (Income Tax Rates) Act (No. 1) 1999. The reduction in the company tax rate is a key component of the New Business Tax System announced in Treasurer’s Press Release No. 58 of 21 September 1999.
1.5 The reduced company tax rate will provide Australia with an internationally competitive company tax rate. The reduction of the company tax rate to 30% brings the Australian rate into line with rates in other countries in the Asia Pacific region.
1.6 In broad terms, the amendments to the imputation system will:
• convert existing class C franking account balances (which are currently based on an underlying company tax rate of 34%) so that they are based on the new company tax rate of 30% from 1 July 2001;
• generally convert franking credits and debits arising on or after 1 July 2001 to reflect the 30% company tax rate where those credits and debits are based on another underlying company tax rate;
• ensure that franked dividends paid on or after 1 July 2001 carry underlying imputation credits reflecting a 30% tax rate;
• modify the operation of the required franking amount and equal franking rules to take account of the conversion process so as to ensure that these structural anti-dividend streaming provisions operate correctly; and
• modify the operation of the estimated debit determination rules to take account of the conversion process.
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New law
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Current law
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Franking account entries made to a company’s franking account will be
calculated by reference to the 30% tax rate.
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Franking account entries made to a company’s franking account are
calculated by reference to the 34% tax rate.
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Franking rebates will be calculated by reference to the 30% company tax
rate.
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Franking rebates are calculated by reference to the 34% company tax
rate.
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The balance of the class C franking accounts of companies and similarly
taxed entities will be converted so that their balances reflect an underlying
company tax rate of 30%.
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The balance of the class C franking accounts of companies and similarly
taxed entities are based on an underlying company tax rate of 34%.
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Franking account entries based on an underlying rate other than the 30%
rate are to be converted to equivalent entries based on the 30% rate.
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Franking account entries based on an underlying rate other than the 34%
rate are converted to equivalent entries based on the 34% rate.
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1.7 Companies are required to convert their class C franking account balances (including venture capital sub-account balances) on 1 July 2001 to take account of the new tax rate of 30%. The purpose of the conversion is to ensure that the value of any existing franking credits and debits that accumulated at a higher rate of tax are preserved.
1.8 For a company with a franking year that commences on 1 July 2001, the conversion of the class C franking account (or venture capital sub-account) occurs immediately after any franking credit arises which carries forward a surplus from the previous franking year. [Schedule 1, item 10, subsection 160AUA(2)]
1.9 Companies with a standard franking year, that is, one which commences on 1 July 2001, can only have a surplus or a nil franking account balance on 1 July 2001. Companies that have a non-standard franking year may, however, have a surplus or deficit balance on 1 July 2001.
1.10 The conversion process involves cancelling any existing surplus or deficit in the franking account and reinstating the cancelled deficit or surplus with an equivalent surplus or deficit based on the 30% rate. [Schedule 1, item 10, section 160AUB]
1.11 The following 2 steps are necessary to carry out the conversion (a similar process applies for venture capital sub-accounts):
Step 1: Cancel the existing class C franking surplus or deficit.
• in the case of a surplus, an offsetting franking debit is posted to the franking account equal to the surplus.
• in the case of a deficit, an offsetting franking credit is posted to the franking account equal to the deficit.
Step 2: Reinstate the class C franking surplus or deficit.
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where a surplus is to be reinstated, a franking credit is posted equal to the amount of the offsetting debit in step 1 multiplied by the conversion factor:
• where a deficit is to be reinstated, a franking debit is posted equal to the amount of the offsetting credit in step 1 multiplied by the conversion factor:
Example 1.1
Leong’s Landscape Supplies Ltd maintains a class C franking account and has a standard franking year of 1 July to 30 June. On 1 July 2001, the company has a carry forward franking surplus from the previous franking year of $10,000. The company converts its franking account balance to reflect the new company tax rate as follows:
class C franking account balance $10,000
offsetting class C franking debit –$10,000
reinstating class C franking credit $12,020
Example 1.2
Hoa’s Haberdashery Ltd is an early balancing company. It maintains a class C franking account and has a franking year of 1 April to 31 March. On 1 July 2001, the company’s franking account has a deficit balance of $5,000. The company converts its franking account balance to reflect the new company tax rate as follows:
class C franking account balance –$5,000
offsetting class C franking credit $5,000
reinstating class C franking debit –$6,010
1.12 All franked dividends paid on or after 1 July 2001 will carry imputation credits reflecting the 30% company tax rate. Accordingly, franking rebates claimed by shareholders in respect of class C franked dividends paid on or after 1 July 2001 will be based on the 30% company tax rate. This change also applies to franking rebates claimed by beneficiaries and partners because a class C franked dividend is paid to a trust or partnership on or after 1 July 2001.
1.13 This result is achieved by omitting the reference to 34% in paragraph (cb) of the definition of ‘applicable general company tax rate’ in section 160APA of the ITAA 1936 and replacing it with 30%. [Schedule 1, item 2, section 160APA]
Example 1.3
Sandra is a shareholder in XYZ Ltd. On 15 July 2001, XYZ pays a $100 class C fully franked dividend to Sandra.
The applicable general company tax rate for the purposes of the payment of the franked dividend is 30%. This means the additional amount included in Sandra’s assessable income under subsection 160AQT(1AB) is equal to $42.86 (i.e. $100 × 30 / 70). Sandra is also entitled to a franking rebate (i.e. a tax offset) of the same amount under section 160AQU.
1.14 The amendments will also ensure that shareholders receive clear information from companies in relation to franked dividends that they receive. The shareholder statement in relation to a dividend paid on or after 1 July 2001 must include the gross up amount for the dividend (calculated under subsection 160AQT(1AB)) and specify that the applicable company tax rate used to calculate the gross up amount is 30%. [Schedule 1, item 4, subparagraph 160AQH(1)(b)(iva)]
1.15 Once franking account balances are converted to reflect the 30% company tax rate, it is necessary to ensure that franking credits and debits arsing on or after 1 July 2001 reflect the 30% rate. Accordingly, special rules are required to ensure that where franking credits and debits arise based on an underlying rate other than the 30% rate, those credits and debits are converted to equivalent credits and debits based on the new rate. [Schedule 1, item 10, section 160AUC]
1.16 The process for converting franking credits and debits is a 2-step process. Firstly, where a franking credit or debit arises based on a rate other than the 30% rate, the credit or debit is cancelled by an offsetting credit or debit of the same amount and, secondly, an equivalent credit or debit is then posted based on the 30% rate.
1.17 The table in subsection 160AUC(1) sets out the conversion processes to be followed in cases where:
• class A franking account entries arise based on a 39% rate;
• class B franking account entries arise based on a 33% rate;
• class C franking account entries arise based on either a 34% or 36% rate; and
• venture capital sub-account entries arise based on either a 36% or 34% rate (note this only applies to pooled development funds).
1.18 In summary:
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class A franking credits and debits are converted into equivalent class C franking credits and debits using the factor:
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class B franking credits and debits are converted into equivalent class C franking credits and debits using the factor:
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class C franking credits and debits (based on a 34% rate) are converted into equivalent class C franking credits and debits using the factor:
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class C franking credits and debits (based on a 36% rate) are converted into equivalent class C franking credits and debits using the factor:
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venture capital sub-account franking credits and debits (based on a 34% rate) are converted into equivalent franking credits and debits using the factor:
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venture capital sub-account franking credits and debits (based on a 36% rate) are converted into equivalent franking credits and debits using the factor:
1.19 Some franking credits and debits that arise on or after 1 July are not to be converted. Those that are not converted include:
• franking credits and debits arising under this Division. These franking credits and debits arise as part of the conversion to reflect the new company tax rate. To convert them again would frustrate the conversion;
• franking credits arising under sections 160APL and 160ASEE. These franking credits, which carry forward franking surpluses from previous franking years, are already taken into account in the conversion process (see paragraph 1.8); and
• franking debits arising under sections 160APX (underfranking debits), 160AQB (payment of franked dividends), 160AQCB, 160AQCBA, 160AQCNA or 160AQCNB (dividend streaming or franking credit trading arrangements), 160AQCC (on-market share buyback arrangements) and 160AQCNC (private company distributions treated as dividends). It is unnecessary to convert these franking debits because they would have been calculated by reference to the 30% rate if they arise on or after 1 July 2001.
[Schedule 1, item 10, paragraph 160AUC(1)(b)]
1.20 The new company tax rate of 30% applies to the 2001-2002 income year. For most companies, this rate will apply from 1 July 2001. In the case of early balancing companies, however, franking credits and debits may arise prior to 1 July 2001 based on a 30% tax rate.
1.21 In order to ensure that the conversion of franking account balances on 1 July 2001 does not cause anomalous results, it is necessary to convert any franking credits or debits that arise prior to 1 July 2001 that are based on a 30% rate to equivalent franking credits based on a 34% rate.
1.22 Accordingly, any class C or venture capital sub-account franking credit or debit arising before 1 July 2001 that reflects an applicable company tax rate of 30% is to be converted to the equivalent 34% credit or debit. [Schedule 1, item 10, section 160AUD]
1.23 Where class C or venture capital sub-account franking credits or debits arise based on the 30% rate, the credit or debit is cancelled by an offsetting credit or debit of the same amount and an equivalent credit or debit is posted based on the 34% rate.
1.24 The table in subsection 160AUD(1) sets out the conversion processes to be followed in cases where:
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class C franking credits and debits (based on a 30% rate) are converted into equivalent class C franking credits and debits using the factor:
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venture capital sub-account franking credits and debits (based on a 30% rate) are converted into equivalent franking credits and debits using the factor:
1.25 The following franking credits and debits are excluded from the conversion:
• franking credits arising under sections 160APL and 160ASEE. These franking credits, which carry forward franking surpluses from previous franking years, are already taken into account in the conversion process. A franking credit under this section will reflect a 34% company tax rate if it arises before 1 July 2001.
• franking debits arising under sections 160APX (underfranking debits), 160AQB (payment of franked dividends), 160AQCB, 160AQCBA, 160AQCNA or 160AQCNB (dividend streaming or franking credit trading arrangements), 160AQCC (on-market share buyback arrangements) and 160AQCNC (private company distributions treated as dividends). These debits will reflect a company tax rate of 34% where they arise before 1 July 2001.
[Schedule 1, item 10, paragraph 160AUD(1)(b)]
1.26 The operation of the required franking rules is to be modified as a consequence of the franking account conversions. This modified operation is only relevant to situations where dividends are paid both before and after 1 July 2001 under a single resolution.
1.27 The required franking amount rules are designed to prevent dividend streaming arrangements by ensuring that dividends are franked to the maximum extent possible having regard to the company’s franking account balance. Further, the rules ensure that where 2 or more dividends are paid under a single resolution, those dividends are franked to the same extent.
1.28 The required franking amount of a dividend is calculated by reference to the franking surplus on the reckoning day for that dividend. For a dividend paid under a resolution, the reckoning day is the day on which the first dividend under the resolution is paid.
1.29 Anomalies could arise where dividends are paid under a single resolution both before and after 1 July 2001. This would occur because a dividend paid on or after 1 July 2001 will carry imputation credits based on a 30% rate, where as the required franking amount of the dividend is calculated by reference to the franking surplus on the reckoning day which is based on the 34% tax rate.
1.30 Three specific amendments have been made to address this situation:
• providing for resolution splitting for dividends straddling 1 July 2001;
• allowing variations to dividend declarations; and
• providing modifications to the rules relating to overfranked earlier dividends.
1.31 Where a company pays a number of class C franked dividends under a resolution made before 1 July 2001 and some of the dividends (first series dividends) are paid before that date, while other dividends (second series dividends) are paid after that date, the first series and second series dividends will be taken to have been made under separate resolutions. [Schedule 1, item 10, subsection 160AUE(1) and paragraph 160AUE(2)(a)]
1.32 The effect of this rule is that the second series dividends will have their required franking amount worked out on the basis of a franking surplus that has been converted on 1 July 2001 to reflect a 30% tax rate.
Example 1.4
Julia’s Junkyard Ltd makes a resolution on 1 December 2000 to pay dividends on 1 May 2001 (first series dividend) and 1 November 2001 (second series dividend). Under the existing law, the reckoning day for these dividends is therefore 1 May 2001.
Under the new rules, however, this resolution will be split into 2 separate resolutions – one dealing with the first series dividend and one dealing with the second series. The reckoning day for the first series is still 1 May 2001 and the calculation of the required franking amount remains substantially unaltered. The required franking amount will be calculated based on a class C franking account balance that reflects the 34% tax rate. The franked dividends received by shareholders will carry imputation credits that reflect the 34% tax rate.
The reckoning day for the second series dividend will now be 1 November 2001. The required franking amount will be calculated based on a class C franking account balance that reflects the 30% tax rate just as the imputation credits underlying the franked dividend will be based on a 30% tax rate.
1.33 If a company has already made a declaration under section 160AQF or 160ASEL in relation to the dividends, the second series dividends may be franked to a different extent than that set out under the new required franking amounts for those dividends.
1.34 To deal with this, the original declaration made will be taken to have applied to the first series dividends and the company will be permitted to make a further declaration in respect of the second series dividends. [Schedule 1, item 10, paragraph 160AUE(2)(b)]
1.35 However, if the company makes no declaration in respect of the second series dividends before the reckoning day for those dividends, the dividends will be taken to be franked to the same percentage as the first series dividends. [Schedule 1, item 10, paragraph 160AUE(2)(c)]
Example 1.5
Continuing from Example 1.4.
Julia’s Junkyard Ltd may make a new resolution for the second series dividend before 1 November 2001 if it had previously made a declaration in relation to the first and second series dividends. If the company does not make a new declaration for the second series, the declaration originally made for both the first series and second series dividend will stand for the second series.
1.36 Circumstances may also arise where, before 1 July 2001, a company declares dividends under a resolution to be franked based on the 34% company tax rate, but no dividend will be paid under that resolution until on or after 1 July 2001.
1.37 Ordinarily, section 160AQF declarations cannot be varied however, an exception will be made where a resolution is made before 1 July 2001 but no dividends under the resolution are paid until on or after that date. In these cases, any declaration can be varied before the reckoning day of the dividend to take into account the 30% company tax rate. [Schedule 1, item 10, section 160AUF]
1.38 When a dividend is to be paid, the required franking amount for that dividend is calculated under section 160AQE. If the dividend is franked to a greater extent than the required franking amount for that dividend, the dividend is said to be overfranked. This means that the dividend has been franked to a greater extent than can be supported by the franking account surplus.
1.39 The required franking amount provisions in section 160AQE contains a special rule that provides that if a company overfranks an earlier franked dividend and there is a committed future dividend at the time of the earlier franked dividend, that committed future dividend must be franked at least to the same extent. This rule is set out in subsection 160AQE(3).
1.40 The rule in subsection 160AQE(3) effectively provides a formula in paragraph 160AQE(3)(c) that ensures that the franked amount of the earlier dividend is factored into the calculation of the required franking amount of the current dividend.
1.41 It may arise that the committed future dividend (called the current dividend in subsection 160AQE(3)) may have a reckoning day on or after 1 July 2001, but the earlier franked dividend has a reckoning day before that time. This means that the required franking amount of the current dividend may be affected by the franked amount of the earlier dividend.
1.42 The franked amount of the earlier dividend would have been determined on the basis of a franking account balance based on the 34% tax rate. The required franking amount of the current dividend with a reckoning day on or after 1 July 2001 must be determined having regard to franking account balance that reflects a 30% tax rate.
1.43 As the earlier franked amount is to be used in the calculation of the required franking amount for the current dividend, a modification to subsection 160AQE(3) is necessary to convert the earlier franked amount into an amount that reflects a 30% tax rate. This will prevent any unintended distortions in the calculation of the required franking amount of the current dividend. [Schedule 1, item 10, section 160AUG]
Example 1.6
Jaimie’s Jet Propelled Cycles Ltd pays a franked dividend (the earlier dividend) of $20,000 on 1 May 2001. At the time, the required franking amount of the dividend was determined to be $10,000 but the company decided the franked amount of the dividend would be $15,000 (i.e. the dividend was overfranked). At that time the company had a committed future dividend to be paid on 1 October 2001.
On 1 October 2001, the company pays a dividend of $12,000 and at that time the company has a franking surplus of $6,000. In determining the required franking amount of the current dividend (i.e. what was a committed future dividend on 1 May 2001), the company must have regard to the earlier franked amount of the dividend paid on 1 May 2001.
In applying the rules in section 160AQE, the company must make 2 calculations of the provisional required franking amount. A calculation is made under subsection 160AQE(2) and another is made under subsection 160AQE(3).
The required franking amount for the current dividend will be the greater of the 2 provisional required franking amounts calculated below:
Amount calculated under subsection 160AQE(2):
current dividend × (amount of the franking surplus / current dividend)
$12,000 × [$6,000 / $12,000] = $6,000
Amount calculated under subsection 160AQE(3):
current dividend × (earlier franked amount / earlier franked dividend)
$12,000 × [$18,030 / $20,000] = $10,818
where the earlier franked amount is calculated as:
franked amount of the earlier dividend × ( 34 / 66 × 70 / 30)
$15,000 × (34 / 66 × 70 / 30 ) = $18,030
Therefore, the required franking amount of the current dividend is $10,818.
1.44 Section 160AQG effectively provides that dividends that are part of a combined class of dividends must be equally franked. If this is not the case, then the dividends will all be treated as though they had been paid under the resolution relating to the first dividend of the class to ensure that those dividends are equally franked. The purpose of this section is to prevent blatant dividend streaming arrangements.
1.45 A new subsection has been inserted into section 160AQG to ensure that companies are not inappropriately caught by section 160AQG where a combined class of dividends paid during the year straddles 1 July 2001. The provision splits the franking year (other than one starting on 1 July 2001) into 2 separate franking years – the first ending on 30 June 2001 and the second starting on 1 July 2001. [Schedule 1, item 3, subsection 160AQG(5)].
1.46 The effect of this amendment is that section 160AQG will apply separately in respect of the two split franking years. This rule means that companies will not be subject to section 160AQG if dividends are not equally franked only because of the rules relating to the conversion of franking accounts to reflect the new company tax rate.
1.47 Notwithstanding these amendments, companies that enter into a strategy to stream franking credits can still expect to attract the operation of the various anti-streaming rules in Part IIIAA.
1.48 A company can request an estimated debit determination if it can foresee a refund of company tax in certain circumstances. An estimated debit determination will give rise to a franking debit. This means that dividends can be franked to take account of the estimated debit.
1.49 Under the current law, a taxpayer may apply to the Commissioner for a class C estimated debit determination under section 160AQDAA. However, if the Commissioner does not make a declaration within 21 days, the Commissioner is deemed to have made a determination of the amount requested in the application.
1.50 The period of 21 days means that applications made by companies between 9 June 2001 and 30 June 2001 may have been based on a 34% tax rate. If that were the case, the actual debit that arises as a result of the determination may be inappropriate where the 21 day period ends on or after 1 July 2001.
1.51 A special rule has been introduced to provide for this situation. Essentially, the rule provides that if a debit arises on or after 1 July 2001 under section 160AQC(3) or section 160ASEI as a result of an estimated debit determination, and the amount of the debit is based on a 34% tax rate, that debit will be reversed out and an equivalent debit based on the 30% tax rate will arise in the company’s franking account. [Schedule 1, item 10, paragraph 160AUC(2)(b)]
1.52 Sections 160ATA and 160ATD which deal with franking account conversions to the 34% company tax rate will no longer apply after 30 June 2001. Where franking credits or debits arise after 1 July 2000 but before 1 July 2001, however, these provisions still have effect. [Schedule 1, items 6 to 9, subsections 160ATA(3) and 160ATD(1), paragraphs 160ATD(1)(a) and 160ATDA(2)(b)]
1.53 The following references in the imputation provisions that rely on a company tax rate of 34% will be replaced by references relying on the new rate of 30%:
• in paragraph (baa) of the definition of ‘applicable general company tax rate’ (which applies in relation to a company’s liability to pay class C FDT) in section 160APA [Schedule 1, item 1, section 160APA]; and
• in the formula in subsection 160AQJC(4) which calculates the ‘gross class C deficit deferral amount’ for the purposes of working out liabilities to class C DDT [Schedule 1, item 5, subsection 160AQJC(4)].
1.54 The following amendments apply to relevant dividends paid on or after 1 July 2001:
• item 2 of Schedule 1, which provides for the change in the applicable company tax rate for a payment of class C franked dividends and for trust amounts and partnership amounts related to the payment of class C franked dividends [Schedule 1, subitem 11(2)]; and
• item 4 of Schedule 1, which modifies the requirements for dividend statements [Schedule 1, subitem 11(3)].
1.55 The amendments in items 1 and 5 of Schedule 1 that reflect the new company tax rate of 30% for the purposes of FDT and DDT apply to:
• FDT for franking years ending on or after 1 July 2001 [Schedule 1, subitem 11(1)]; and
• DDT in relation to company tax instalments paid during a franking year ending on or after 1 July 2001 [Schedule 1, subitems 11(1) and 11(4)].
1.56 There are no other consequential amendments.
1.57 Companies (and similar taxpayers) will convert their franking account balances on 1 July 2001 to reflect the reduction of the company tax rate from 34% to 30%.
1.58 The policy objective is to convert the franking account balances of companies. This will ensure that the value of franking credits accumulated prior to the rate change is preserved whilst minimising compliance costs for corporate taxpayers.
1.59 This measure is substantially similar to the conversion process that was implemented last year when the company tax rate was reduced from 36% to 34%.
1.60 The franking account conversion legislation will impose a small, generally once only, compliance burden on those taxpayers affected. The conversion process that a taxpayer will be required to follow will be substantially similar to that required when the tax rate was reduced last year, so companies are familiar with the conversion process.
1.61 The taxpayers affected by these rules are those resident taxpayers that are required to maintain franking accounts. They are:
• all resident companies (including non-mutual life assurance companies);
• all resident public trading trusts;
• all resident corporate unit trusts; and
• all limited partnerships.
1.62 The rules are generally beneficial to taxpayers in that they preserve the value of franking credits that accumulated at a higher tax rate. The measure imposes a small compliance burden on affected taxpayers, generally involving a simple calculation and simple accounting entries.
1.63 There is no need for consultation in relation to this measure because it is consistent with previous conversions and therefore with taxpayers’ expectations.
1.64 There are no other options for implementing this policy objective.
2.1 Schedule 2 to this Bill amends the ITAA 1997 to defer the commencement date of the Review of Business Taxation proposals to tax friendly societies on investment income received that is attributable to funeral policies, scholarship plans and income bonds sold after 30 November 1999. Friendly societies will remain exempt from tax on that investment income until 30 June 2002.
2.2 The amendments also defer the commencement of the new methodology for working out the capital component of ordinary life insurance investment policies until 1 July 2002.
2.3 Under paragraph 320-35(1)(f) of the ITAA 1997, friendly societies are exempt from tax on:
• all investment income received that is attributable to funeral policies, scholarship plans and income bonds issued before 1 December 1999; and
• investment income received before 1 July 2001 that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999. Friendly societies will be taxed on this income from 1 July 2001 in the same way that life insurance companies are taxed on investment income that is attributable to life insurance investment policies.
2.4 The changes to the tax treatment of investment income received by friendly societies that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999 is integrally linked to the Review of Business Taxation life insurance policyholder reforms. Those reforms have been deferred until 1 July 2002, to allow further consultation with industry. Therefore, friendly societies will continue to be exempt from tax until 1 July 2002 on investment income received from funeral policy, scholarship plan and income bond business issued after 30 November 1999.
2.5 Section 320-75 allows a deduction to life insurance companies for the capital component of premiums paid in respect of ordinary life insurance investment policies. The methodology for working out the deduction depends on whether the policy is issued before or after 1 July 2001:
• if the policy issued before 1 July 2001, the amount allowed as a deduction is the net premiums less the amount that an actuary determines to be attributable to fees and charges; or
• if the policy issued on or after 1 July 2001, the amount allowed as a deduction is the lesser of:
− the amount specified in the policy to be the capital component (less any adjustments for reinsurance); and
− the net premiums less the amount that an actuary determines to be attributable to fees and charges.
2.6 Currently, the capital component of premiums is not required to be specified in life insurance policies. However, it was expected that this situation would have changed from 1 July 2001 as life insurance companies developed new policies in response to the Review of Business Taxation life insurance policyholder reforms. As those reforms have been deferred until 1 July 2002, the change in the methodology (see paragraph 2.5) for working out the deduction for the capital component of premiums paid in respect of ordinary life insurance investment policies will also be deferred until 1 July 2002.
2.7 Schedule 2 to this Bill will amend the ITAA 1997 so that:
• investment income that friendly societies receive that is attributable to funeral policies, scholarship plans and income bonds issued after 30 November 1999 continues to be exempt from tax until 1 July 2002; and
• the change in methodology for working out the deduction allowed to life insurance companies for the capital component of premiums paid in respect of ordinary investment life insurance policies is deferred until 1 July 2002.
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New law
|
Current law
|
|---|---|
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Friendly societies will be exempt from tax on income received that is
attributable to all funeral policy, scholarship plan and income bond business
until 30 June 2002.
Friendly societies will be taxed on income received after
30 June 2002 that is attributable to funeral policies, scholarship
plans and income bonds issued after 30 November 1999.
|
Friendly societies will be taxed on income received after
30 June 2001 that is attributable to funeral policies, scholarship
plans and income bonds issued after 30 November 1999.
|
|
The deduction allowed to life insurance companies for the capital component
of premiums paid in respect of ordinary life insurance investment policies is
worked out as follows:
• if the policy issued before 1 July 2002, the amount
allowed as a deduction will be the net premiums less the amount that an actuary
determines to be attributable to fees and charges; or
• if the policy issued on or after 1 July 2002, the amount
allowed as a deduction will be the lesser of:
− the amount specified in the policy to be the capital component
(less any adjustments for reinsurance); and
− net premiums less the amount that an actuary determines to be
attributable to fees and charges.
|
The deduction allowed to life insurance companies for the capital component
of premiums paid in respect of ordinary life insurance investment policies is
worked out as follows:
• if the policy issued before 1 July 2001, the amount
allowed as a deduction is the net premiums less the amount that an actuary
determines to be attributable to fees and charges; or
• if the policy issued on or after 1 July 2001, the amount
allowed as a deduction is the lesser of:
− the amount specified in the policy to be the capital component
(less any adjustments for reinsurance); and
− net premiums less the amount that an actuary determines to be
attributable to fees and charges.
|
2.8 Paragraph 320-35(1)(f) will be amended so that it exempts a life insurance company that is a friendly society from tax on:
• amounts received on or after 1 July 2001 but before 1 July 2002 that are attributable to income bonds, funeral policies or scholarship plans irrespective of the date of issue; and
• amounts received on or after 1 July 2002 that are attributable to income bonds, funeral policies or scholarship plans issued before 1 December 1999.
[Schedule 2, item 1, subparagraphs 320-35(1)(f)(ia) and (ii)]
2.9 Amounts received before 1 July 2001 that are exempt from income tax under section 50-1 will continue to be exempt from tax under subparagraph 320-35(1)(f)(i).
2.10 Section 320-110 allows a deduction to a life insurance company that is a friendly society for interest credited to the holders of income bonds issued after 30 November 1999 where the interest accrues on or after 1 July 2001. As a consequence of friendly societies continuing to be exempt from tax until 1 July 2002 on amounts that are attributable to income bonds issued after 30 November 1999, the deduction for interest credited by friendly societies to the holders of income bonds issued after 30 November 1999 will only apply where the interest accrues on or after 1 July 2002. [Schedule 2, item 4, section 320-110]
2.11 Section 320-75 allows a deduction for the capital component of premiums in respect of ordinary life insurance investment policies. The basis for working out the amount of the deduction will depend on whether the policy was taken out before or after 1 July 2002.
2.12 If the policy issues before 1 July 2002, the amount allowed as a deduction will be the net premiums less the amount that an actuary (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) determines to be attributable to fees and charges. [Schedule 2, item 3, subsection 320-75(3)]
2.13 If the policy issues on or after 1 July 2002, the amount allowed as a deduction will be the lesser of:
• the amount specified in the policy to be the capital component (less any adjustments for reinsurance); and
• net premiums less the amount that an actuary (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) determines to be attributable to fees and charges.
[Schedule 2, item 2, subsection 320-75(2)]
2.14 The amendments apply from 1 July 2001.
Chapter
3
Prescribed dual
residents
3.1 Schedule 3 to this Bill amends the ITAA 1936 to make corrections to the intercorporate dividend rebate provisions so that:
• the intercorporate dividend rebate is not available in respect of any unfranked dividends paid to or by a dual resident company, including dividends paid within a wholly-owned group; and
• the deduction allowed to certain non-resident owned companies to offset the removal of the rebate is not available in respect of unfranked dividends paid to or by a dual resident company.
3.2 A drafting error in amendments made last year to deny the intercorporate dividend rebate to unfranked dividends paid to all companies, other than those paid to resident companies within a wholly-owned company group, inadvertently extended the rebate to unfranked dividends paid to or by dual resident companies within wholly-owned groups on or after 1 July 2000. Before these amendments, dual resident companies were denied the rebate for unfranked dividends in all circumstances.
3.3 Also, a deduction allowed to certain non-resident owned companies to offset the removal of the rebate from 1 July 2000 was inadvertently made available in respect of unfranked dividends paid to or by a dual resident company.
3.4 The explanatory memorandum to the New Business Tax System (Miscellaneous) Act (No. 1) 2000, which contains the relevant amendments, explicitly stated in paragraphs 1.2 and 1.17 that there would be no change to the tax treatment of dividends paid to or by dual resident companies.
3.5 A dual resident company is a company that is a resident of both Australia and another country for income tax purposes that:
• is treated in effect as a non-resident of Australia for the purposes of a double taxation treaty; or
• qualifies as a resident of Australia solely under the central management and control test in subsection 6(1) of the ITAA 1936, but also has central management and control outside Australia.
3.6 The intercorporate dividend rebate will not be available in respect of any unfranked dividends paid to or by a dual resident company, including dividends paid within a wholly-owned group. Nor will a related deduction allowed to certain non-resident owned companies under section 46FA be available in respect of unfranked dividends paid to or by a dual resident company.
3.7 Subsection 46F(2) denies the intercorporate dividend rebate for unfranked dividends received by most resident companies. However, subsection 46F(3) preserves the rebate for unfranked dividends paid within wholly-owned groups by providing that subsection 46F(2) does not apply in respect of such dividends.
3.8 Subsection 46F(3A) excludes unfranked dividends paid to or by a dual resident company within a wholly-owned group from the operation of subsection 46F(3). Consequently, all unfranked dividends paid to or by a dual resident company will be denied the rebate under subsection 46F(2). [Schedule 3, item 2, subsection 46F(3A)]
3.9 Section 46FA provides a deduction for a resident company that receives an unfranked non-portfolio dividend and on-pays the dividend to the company’s non-resident parent. Paragraph 46FA(1)(ba) will ensure that the deduction is not available in respect of dividends that are paid to or by a dual resident company. [Schedule 3, item 3, paragraph 46FA(1)(ba)]
3.10 These amendments will apply to dividends paid on or after 1 July 2000. These are the dividends in relation to which the rebate and deduction would otherwise be allowed unintentionally because of a drafting error. [Schedule 3, item 4]
Chapter
4
Non-complying
superannuation funds and non-complying ADFs
4.1 Schedule 4 to this Bill amends the ITAA 1997 to deny refunds of excess imputation credits to non-complying superannuation funds and non-complying ADFs.
4.2 Resident individuals and certain entities, including superannuation funds, are eligible for refunds of excess imputation credits in respect of dividends paid on or after 1 July 2000. If these taxpayers receive a franked dividend from a company and they are taxed at a rate which is lower than the company tax rate, they will receive a refund of excess imputation credits reflecting the difference between the relevant tax rates.
4.3 All superannuation funds, including non-complying superannuation funds and non-complying ADFs, are currently eligible for refunds of excess imputation credits. Non-complying superannuation funds and non-complying ADFs are taxed at the top marginal tax rate rather than the concessional 15% rate generally applicable to complying superannuation entities. Therefore, they would rarely be in a position to claim a refund.
4.4 Since commencement of the refundable imputation credits measure from 1 July 2000, it has become apparent that non-complying superannuation entities may be used as a vehicle to access tax benefits inappropriately. It is possible for such funds to enter into artificial schemes so as to produce surplus imputation credits in respect of which they would be entitled to a refund.
4.5 The income tax law will be amended to ensure that non-complying superannuation funds and non-complying ADFs are not eligible for refunds of excess imputation credits.
4.6 The tax offsets relating to franked dividends that are subject to the refundable tax offset rules are listed in subsection 67-25(1) of the ITAA 1997. Subsections 67-25(1A) and (1C) will make tax offsets – that is, franking rebates – allowable to trustees of non-complying superannuation funds and non-complying ADFs no longer subject to the refundable tax offset rules. This means that trustees of non-complying superannuation funds and non-complying ADFs will no longer be eligible for refunds of excess imputation credits under section 67-30 of the ITAA 1997. [Schedule 4, item 2, subsections 67-25(1A) and (1C)]
4.7 Item 3 inserts a definition of ‘non-complying ADF’ in subsection 995-1(1) of the ITAA 1997. This term will have the meaning given by Part IX of the ITAA 1936. [Schedule 4, item 3, subsection 995-1(1)]
4.8 Schedule 4 to this Bill also makes a consequential amendment which replicates part of the existing subsection 67-25(1) that relates to franking rebates allowed to trustees under section 160AQY of the ITAA 1936. [Schedule 4, items 1 and 2, subsection 67-25(1B)]
4.9 The amendments to section 67-25 of the ITAA 1997 will apply to assessments for income years ending on or after 22 May 2001. [Schedule 4, item 5]
Chapter
5
Miscellaneous
amendments
5.1 Schedule 5 to this Bill makes technical corrections to:
• the franking rebate provisions in the ITAA 1936 to clarify that registered charities and gift-deductible organisations which are trusts are eligible for refunds of excess imputation credits in respect of distributions attributable to franked dividends received indirectly through another trust; and
• the MLA 1986 to correct references to the ITAA 1936.
5.2 Certain registered charities and gift-deductible organisations are entitled to a refund of imputation credits in respect of franked dividends paid on or after 1 July 2000. Entities which are eligible for the refund are described in section 160ARDAB.
5.3 The entitlement to refunds is intended to arise in relation to franked dividends received by relevant entities, whether the dividends are received directly as a shareholder or indirectly as a beneficiary of a trust. However, there is some uncertainty regarding the eligibility of charitable trusts to refunds of imputation credits in respect of distributions received indirectly through another trust because of a technical issue relating to the franking rebate provisions.
5.4 The amendment will remove any uncertainty about the entitlement of registered charities and gift-deductible organisations which are trusts to refunds of excess imputation credits in respect of distributions attributable to franked dividends received indirectly through another trust.
5.5 These amendments correct references in the MLA 1986 to the ITAA 1936.
5.6 As part of the legislative mechanism for making registered charities and gift-deductible organisations eligible for refunds of imputation credits, these tax exempt entities are given an entitlement to franking rebates under section 160AQU in respect of dividends and under section 160AQX in respect of indirect distributions received through another trust.
5.7 Registered charities and gift-deductible organisations are currently eligible for a franking rebate under subparagraph 160AQX(1)(b)(iii), provided that they are not trustees. This exclusion is consistent with the exclusion of trustees from each category of taxpayer entitled to a rebate under section 160AQX, because the rebate is intended to be available once only to the final beneficiary. It has been argued that charitable trusts may not be entitled to a franking rebate. The exclusion of trustees under subparagraph 160AQX(1)(b)(iii) is not intended to deny the franking rebate to a charitable trust.
5.8 Subparagraph 160AQX(1)(b)(iii) will be amended to remove the express exclusion of trustees from eligibility for the rebate to clarify that a charitable trust is entitled to a franking rebate, and therefore to a refund of imputation credits, in respect of an indirect distribution attributable to a franked dividend. [Schedule 5, item 1, subparagraph 160AQX(1)(b)(iii)]
5.9 The treatment under section 160AQX of an indirect distribution to a charitable trust will therefore be the same as that of a direct dividend paid to the same entity under section 160AQU.
5.10 Where there is a chain of charitable trusts, existing subsection 160ARDAB(8) would operate in circumstances of both direct and indirect distributions to ensure that only the first charitable trust to receive the dividend or distribution would be entitled to the rebate.
5.11 Schedule 2 of the Taxation Laws Amendment (Changes for Senior Australians) Act 2001 raised the Medicare levy low income threshold for senior Australians and certain pensioners. A minor technical error was made when making reference to section 160AAA of the ITAA 1936. This technical correction changes the existing reference to section 160AAA, in the MLA 1986, to subsection 160AAA(2). [Schedule 5, items 3 and 4]
5.12 The policy intention of the 2001-2002 Federal Budget measures was to ensure that certain senior Australians and pensioners who are not liable for income tax will also not be liable for any Medicare levy. This technical correction gives effect to that policy.
5.13 The franking rebate amendments are to apply to trust amounts that are attributable to dividends paid on or after 1 July 2000, that is, from the commencement of the imputation credit refunds measure. [Schedule 5, item 2]
5.14 The amendments to the MLA 1986 apply to assessments for the 2000-2001 income year and later income years. [Schedule 5, item 5]
