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Tuesday, 19 August 1980
Page: 447

Mr Short (BALLARAT, VICTORIA) asked the Treasurer, upon notice, on 21 May 1980:

(   1 ) Are companies transacting life assurance business subject to income tax and friendly societies transacting this business exempt from tax; if so, why.

(2)   Are co-operative companies transacting not less than 90 per cent of their business with their own members exempt from Tax under Division 9 of the Income Tax Assessment

Act; if so, why is this principle not applied in the case of life assurance companies.

(3)   Is there a conceptual difference between the basis used when taxing (a) the net gains after expenses being made by individuals who invest their own money directly and (b) corresponding gains being made by a group of individuals who invest their own money through a fund administered by a life assurance company; if so, what (i) is the nature of this conceptual difference and (ii) are the reasons for its introduction.

(4)   What (a) is the annual amount of tax currently collected from life assurance companies in Australia (other than in respect of shareholders' funds) and (b) sum would be collected by the introduction of the same principles as now govern the taxation of net gains by individuals.

Mr Howard - The answer to the honourable member's question is as follows:

(1   ) Companies transacting life assurance business are subject to income tax. Friendly societies, whether or not they transact such business, are exempt from tax provided they do not function for the purposes of profit or gain to their individual members and provided they are not friendly society dispensaries. Special provisions governing the basis of assessment of tax payable by life assurance companies and provisions exempting the income of friendly societies from tax have been in the income tax law for over 60 years and, apart from some amendments concerning the basis of assessment for life assurance companies, successive Governments have considered them to be appropriate, in view of the special nature of these types of organisation.

(2)   Companies which are co-operative companies are not exempt from income tax, whether they transact more or less than 90 per cent of their business with their own members. However, special provisions apply for the assessment of tax payable by companies which are co-operative companies as defined in the Income Tax Assessment Act. A company is deemed not to be a co-operative company for income tax purposes in any income year in which less than 90 per cent of its business is with its own members.

(3)   (i) The bases used differ in the following respects:

A life assurance company is exempt from tax on the investment income relating to superannuation business;

A life assurance company is allowed a special deduction under section 1 1 5 of the Income Tax Assessment Act of 1 per cent of 'calculated liabilities';

A resident life assurance company is eligible for the section 46 rebate on intercompany dividends which it receives;

Profits made by a life assurance company on resale of investments are assessable. Profits which an individual makes on resale of investments may or may not be assessable, depending on the facts of the situation. If the individual is in a business of buying and selling the investments in question, the profits are,of an income nature in accordance with the general principles of the income tax law. Where section 26 (a) or section 26aaa of the Income Tax Assessment Act applies, the profits are also of an income nature and are, accordingly, subject to tax. In other cases such profits may be of a capital nature in which case they are not taxed; and

Expenses, such as agent's commission, incurred by a life assurance in gaining premiums (which are not assessable) are not deductible. General management expenses which are not exclusively incurred in gaining either exempt or assessable income, and are not of a capital nature, are divided proportionately between exempt and assessable income, and the latter part is deductible along with the expenses incurred exclusively in gaining assessable income.

(ii)   The exemption of income of superannuation business puts that part of the life assurance company's income on a basis similar to that of separately constituted superannuation funds which are exempt under sections 23F, 23 (ja) or 23 (jaa);

The section I IS deduction was introduced in 1933 to free from tax a part of the company's assessable income set aside as necessary reserves to meet contractual obligations to policy-holders. Following the questioning of that basis for the deduction, it was reduced in 1973 and 1974 to its present level of I per cent from a former level of 3 per cent;

The section 46 rebate is allowed to all companies although the arguments for its extension to life assurance companies are more complex;

The treatment of profits on resale of investments depends on whether they are of an income or a capital nature. When received by a life insurance company in the course of its business they are of an income nature;

The treatment of expenses depends on whether or not they are incurred in producing assessable income.

(4)   (a) Tax collected from or payable by life assurance companies other than in respect of shareholders' funds is not recorded separately. However, the total tax payable by companies included in the industry classification that relates to life assurance for the 1 977-78 income year was S93.9m.

(b)   From income tax statistics for the 1976-77 income year it is estimated that life assurance companies' taxable income, increased by the amount of the special deductions allowed under section 1 1 5 of the Income Tax Assessment Act and by a component representing expenses referable to exempt superannuation business, would have been $334m. The tax payable on this adjusted taxable income at the standard rate of 32 per cent applicable to individuals would have been approximately S 1 07m; if, as seems probable, the average marginal rate of the individual taxpayers whose funds are involved in the production of the income of life assurance companies were higher than the 32 per cent standard rate, this amount would have been commensurately greater. The net tax actually assessed to life insurance companies in respect of the 1976-77 income year was $79.3m.

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