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Wednesday, 26 April 1961


Mr HAROLD HOLT (HigginsTreasurer) . - by leave - I move -

That the bill be now read a second time.

In the statement which I made to the House on 23rd March, I set out the background to the Government's decision to review the Income Tax and Social Services Contribution Assessment Act in the manner which is now provided in this bill. I also foreshadowed some of the principal features which would be included in the new legislation. Honorable members will recall that I outlined in that statement the difficulties we have faced in recent years in financing Commonwealth and State works programmes. I pointed out that, over the last ten years, more than 60 per cent of Commonwealth and State capital works expenditure has had to be financed ultimately from Commonwealth taxation revenue. For this financial year, the proportion looks like being nearly two-thirds.

The reduced support for public authority loans by the life companies, and the privately managed superannuation and1 provident funds, has been a major factor adding

A rather similar pattern is shown in the investments in public authority securities made by the privately managed superannuation and provident funds. Figures available for a number of the larger funds indicate that, whereas they held 50 per cent. of their assets in public authority securities in 1956, this proportion had dropped to 39 per cent. in 1959. In this case, too, the major portion of the decline was attributable to Commonwealth securities, as these funds actually reduced their holdings of Commonwealth securities by approximately one-quarter between 1956 and 1959.

My statement of 23rd March was necessarily couched in general terms when it referred to actual details of the proposed legislation. I think that honorable members would now appreciate a slightly more detailed account of the effect which this bill will have on the income tax arrangements for privately managed superannuation and provident funds on the one hand, and for life companies on the other hand. A memorandum is being circulated for the information of honorable members, which sets out with some precision the implications of each clause of the bill, and I shall therefore endeavour at this stage to give only a general outline of the bill as a whole. The new taxation arrangements for privately managed superannuation and provi

Privately managed funds which retain their 1st March, 1961, holdings of Commonwealth and other public authority securities, but which do not achieve the 30/20 per cent. ratio in relation to their new investments, will continue to be eligible for exemption from tax on an amount equal to the 1960-61 level of their investment income. While the present scale of income tax rates is in operation, it is proposed that the income of these funds in excess of the 1960-61 level will be taxed at the rate of 5s. in the £1 on the first £5,000, and 7s. in the £1 on the remainder - that is, the rates applicable to mutual life assurance companies. However, tax will not become payable on these funds until the 1961-62 income year and, according to established practice, the legislation to impose this tax will be incorporated in a separate bill which will be introduced during the Budget session.

It will be remembered that the Government's original intention in relation to the privately managed superannuation funds, as set out in my statement of 15th November dealing with the proposed economic measures, was that these schemes would be required to maintain a 30/20 per cent. ratio in relation to their total assets. For reasons which I explained last month, we have now modified this provision so that the maximum requirement for the privately managed funds to retain full exemption from tax will be to achieve the 30/20 per cent, ratio in relation to increases in their total assets.

As I have indicated, our general intention in this bill is that, even if increases in assets are not invested in accordance with the 30/20 per cent, ratio, the funds will be exempt from tax on an amount equal to the level of their 1960-61 investment income. It has nevertheless proved desirable to include a provision that, unless holdings of Commonwealth securities and other public authority securities are maintained at least at the level of 1st March, 1961, or, of course, if the 30/20 per cent, ratio is maintained in relation to total assets, privately managed superannuation and provident funds which do not attain the 30/20 per cent, ratio in relation to increases in their assets will in normal circumstances be taxed on the full amount of their annual income. Unless we made a provision of this nature, existing schemes would be able to remain fully exempt from taxation even though they limited the amount of their assets to present levels and transferred all of their present holdings of public authority securities to newly set up funds to enable those funds to qualify for taxation exemption as well. lt is realized that some superannuation funds may fail to achieve the 30/20 per cent, ratio and the other investment requirements through force of circumstances more or less outside their control, while other funds may in special circumstances suffer temporary hardship in main.maining the prescribed ratios. For these reasons, the legislation provides that the Commissioner of Taxation may disregard any failure to maintain the 30/20 per cent, ratio if he is satisfied that the trustee of the superannuation fund concerned has made a genuine and bona fide attempt to achieve that ratio or if he is satisfied that the failure was by reason of a temporary delay in investment. Again, if the Commissioner of Taxation is satisfied that the maintenance of the 30/20 per cent, ratio would be likely to endanger the financial stability of a privately managed superannuation fund, he may inform the trustees that, notwithstanding the fact that the 30/20 per cent, ratio is not maintained, the fund will continue to be exempt from income tax for a period which he will determine in the circumstances of each case.

Life companies which wish to make themselves eligible for the taxation concessions which will be available under the new legislation will need to maintain a 30/20 per cent, ratio in relation to their total Australian life assets or, if they are now below the 30/20 per cent, ratio, they will need to enter into an undertaking to achieve it as soon as practicable, but not later than June, 1971.

The legislation places limitations on the extent of the investments which life companies may be required to make in order to fulfil this undertaking. Thus, unless a life company could otherwise not achieve the 30/20 per cent, ratio by 1971, it will not be required in any year to invest more than 40 per cent, of that increase in public authority securities nor more than 25 per cent, of that increase in Commonwealth securities.

As is the case with the privately managed funds, the Commissioner of Taxation will be authorized to disregard any failure on the part of a life company to maintain the 30/20 per cent, ratio, or to comply in any particular year with the undertaking it has given, if the Commissioner is satisfied that the company has made a genuine and bona fide attempt to do so, or that its failure was due to temporary investment delays. Life companies which conform to this investment pattern will be exempt from tax on approved superannnuation income, which will thus be on a similar footing to privately managed superannuation funds which also make the requisite investments in public authority securities.

These life companies will also be eligible for an important taxation concession by way of an increase in the deduction at present permitted under section 115 of the act. This is a deduction which has the effect of freeing from tax an amount ranging from 2i per cent, to 3 per cent, of each company's Australian policy reserves. For companies which decide to set up separate statutory funds in relation to their Australian ordinary life business and to their Australian superannuation business, this section 115 deduction will be increased, for their ordinary life business, by 1 per cent, for every percentage point in excess of 30 per cent, in the proportion of their Australian ordinary life assets which is held in public authority securities. It will also be increased by one-half of 1 per cent, according to the excess over 20 per cent, of those assets held in Commonwealth securities.

However, the bonus for holding Commonwealth securities in excess of 20 per cent, will apply only if the holdings of public authority securities other than Commonwealth securities are at least maintained during the year concerned at the amount so held at 1st March, 1961. This bonus for holding Commonwealth securities will also be offset by a reduction of one-half of 1 per cent, for every percentage point below 10 per cent, in the proportion of the Australian ordinary life assets which is held in public authority securities other than Commonwealth securities.

An essential feature of the concessions I have just outlined is that they will be available only to a life company which is prepared to set up a separate statutory fund for its superannuation business. By setting up such a fund, the company will have a precisely identifiable group of superannuation assets, the income from which will be tax-free provided the 30/20 per cent, ratio is maintained in relation to those assets, and in relation to other Australian life assets, or an undertaking is given to achieve that ratio as soon as practicable.

After the 30/20 per cent, ratio had been attained for superannuation assets there could be no further taxation advantage in maintaining more than that ratio for those assets, as the superannuation income would already be tax-free. Any additional investments in public authority securities made by the company would no doubt be allocated to the ordinary life assets in order to increase the section 115 deductions.

After learning the general nature of these proposed1 amendments from the statement which I made on 23rd March, several companies made representations asking me to explore the possibility of introducing an alternative scheme which would achieve roughly the same results without necessitating the establishment of separate statutory funds in respect of their overseas business and their superannuation business This request by the companies seemed one which might reasonably be met to some extent, and a new section 115a has been included in the legislation to enable an approximate apportionment of assets to be made between overseas and Australian business, for the purpose of determining public authority security holdings as a percentage of total Australian assets.

While most of the possible benefits, including exemption from tax on their estimated income from superannuation business, will be available to such companies if they maintain the appropriate investment pattern, they will be at a slight disadvantage, compared with companies which set up separate statutory funds, if they exceed the 30/20 per cent, ratio in relation to their total assets. Because there will be no complete identification of the assets held in connexion with their superannuation business, the section 115 deductions for these companies will be calculated on the ratio of their total public authority securities to the estimated total amount of their assets referable to Australian life business, instead of the ratio of public authority securities in a separate ordinary life statutory fund to total assets in that fund. The latter ratio would often be higher for companies which set up separate funds, because their superannuation statutory fund would be unlikely to do more than maintain the 30/20 per cent, ratio.

In view of what I shall say later, I should mention here that resident life companies eligible for the benefits I have described will continue to receive section 46 rebates on dividends included in their taxable income in accordance with the provisions ruling from time to time under that section.

Companies which decide not to avail themselves of the tax concessions will not need to set up separate superannuation statutory funds, as their superannuation income will be assessed on the same basis as their other Australian life income. These companies will have adjustments made to their section 115 deductions, which will be based on the proportion of their total Australian assets held in public authority securities and in Commonwealth securities. Their section 115 deductions, which in this case will apply to their combined Australian ordinary life and superannuation business, will be no higher than they would otherwise have been, but not less than three-quarters of that amount. The deduction will be reduced by 1 per cent, for every percentage point below 30 per cent, in the proportion of their total Australian assets held in public authority securities, and by one-half of 1 per cent. for any deficiency below 20 per cent. in the proportion of those assets held in Commonwealth securities.

Honorable members may remember that, in the statement which I made on 23rd March,I pointed out that, as with all other resident companies, life companies are entitled to dividend rebates under section 46 of the Income Tax Act.I mentioned at the time that, whereas dividends received by other resident companies bear tax in the hands of shareholders when they are distributed in due course, dividends received by the life companies can be distributed to policy holders tax-free, since reversionary bonuses on life policies are not subject to tax. With the increased holdings of company shares by the life companies, this has become an increasingly valuable privilege. It produces a sort of in-built discrimination against government securities, the income from which is taxable, and it thereby tends to increase the attraction of company equity investment. This is a consequence certainly never intended when the provision was introduced, and the Government has now decided that the privilege of full section 46 dividend rebates will be limited in the future to those companies which conform with the investment pattern in public authority securities which I have outlined earlier.

For companies which decide not to conform with the prescribed investment pattern, the rebates payable on dividends included in their life insurance income will, in the future, be limited to the amount of rebate which would then be payable on the amount of dividends included in their life insurance income in 1960-61.

As with the proposed taxation arrangement for the privately managed funds the amendments relating to the life companies will have effect for the first time in assessments based on the 1961-62 income year, and the exemption from tax of the superannuation business of companies which follow an appropriate investment pattern will apply in respect of income derived on or after 1st July, 1961.

I readily recognize that the details will be difficult to follow, as I am presenting them now, but the memorandum that has been circulated will assist honorable members to follow the meaning of this speech when they have it in written form. What I have said, however, should be sufficient to give a general picture of the new legislation insofar as it relates to the revised tax arrangements for the life companies and the privately managed superannuation and provident funds.

There is one additional matter which I should bring to notice. Up to the present, the quite generous taxation concessions which have been allowed on life insurance business have been limited to companies whose principal operations have been in the field of life insurance. There are, however, several companies whose business is predominantly in other fields of insurance but which nevertheless transact a significant amount of life insurance business. These companies have heretofore been liable to pay tax on their life insurance business on the same basis as their other insurance business. The new legislation will, in effect, provide for similar tax arrangements for the life business of all insurance companies, whether or not life insurance constitutes their principal insurance business.

Several sections of the new bill will necessitate modifications of a machinery nature to the Life Insurance Act. These are at present being drafted and will be introduced as soon as practicable. I commend the bill to honorable members.

Debate (on motion by Mr. Crean) adjourned.

Sitting suspended from 5.51 to 8 p.m.







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