TAXATION LAWS AMENDMENT BILL (NO.6) 1997 SUBMISSION BY THE TAXATION INSTITUTE OF AUSTRALIA

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1 TAXATION LAWS AMENDMENT BILL (NO.6) 1997 SUBMISSION BY THE TAXATION INSTITUTE OF AUSTRALIA This submission is made on behalf of the members of the Taxation Institute of Australia. It sets out our observations and submissions on Taxation Laws Amendment Bill (No 6) SCHEDULE 1 - DENIAL OF CERTAIN CAPITAL LOSSES 1.1 The structure and approach to these anti-avoidance measures are unnecessarily complicated and inappropriate. The Treasurer s Press Release No 35 of 1997 (29 April 1997) states that the measures proposed in Schedule 1 are intended to deny certain artificially created capital losses. The scheme of Schedule 1 is to adopt two distinct and new measures to attack one mischief. Determining which of the two new rules will apply will depend upon whether a net capital loss was incurred before or after 29 April the date of the relevant media release. The specific rule in new s160zpa will apply only to net capital losses incurred before the material date. After the material date a general anti-avoidance rule has been enacted by amendment to the general anti-avoidance rule in Part IVA. This is unnecessary duplication which can only add complexity to the measures. It is noted also that the Treasurer s Press Release indicates that the ATO is of the view that in its present form the general anti-avoidance provision in part IVA can apply where [a] scheme has as its sole or dominant purpose the creation of artificial CGT losses. It is submitted that the approach should be simply to reinforce the general anti-avoidance provision in Part IVA to apply to circumstances where the mischief as disclosed by the Explanatory Memorandum is clearly artificial, blatant, and contrived as contemplated by Part IVA. The general drafting trend towards the broadening of Part IVA is a source of uncertainty for taxpayers and the professions. However given the application of the specific rule (s160zpa) to ordinary commercial situations beyond the scope of the Treasurer s Press Release, it is submitted that in this case the appropriate response to the perceived mischief is to reinforce Part IVA and apply sanctions only where taxpayers act under a sole or dominant tax avoidance purpose. Consistent with this submission it is submitted that in any event any anti-avoidance measures in Schedule 1 should be confined to a single enactment which operates regardless of when a net capital loss was incurred (subject to appropriate transitional/commencement rules). t:bills\submissions\tlab697

2 1.2 Taxation laws should not be retrospective nor arbitrary. It is submitted that only in exceptional circumstances should retrospective tax legislation be enacted. The potential impact of these measures is to disallow reliance on and use of an unused net capital loss incurred after 19 September 1985 up until the date of the media release and beyond. It is submitted that this is unreasonable, in particular as the specific anti-avoidance rule in s160zpa makes no reference to any tax avoidance purpose on the part of the taxpayer or any party to a scheme. The retrospective impact of s160zpa is made even more arbitrary in that early balancing companies (eg year end 31 December 1996) could be subject to the announced measures for the year of income to December 1996 as a result of a media release issued in April Similarly, it is wholly arbitrary to base the timing of the application of the proposals depending upon whether or not a taxpayer has lodged an income tax return for the income year before the relevant date. A further arbitrary aspect of s160zpa is that the calculation of the unused amount of a capital loss to be disqualified depends upon the time when the loss was incurred. All other factors being the same, a different result ensues depending upon whether a capital loss was incurred in the same year as the capital gain against which it is off-set as compared with being incurred in a year prior to the capital gain. This different treatment goes beyond a sensible transitional measure and cannot be justified on equity grounds or on any grounds related to the perceived mischief. Importantly, companies which have prepared audited accounts and announced annual results may be forced to review those accounts based on retrospective tax laws. As the ATO have expressed the view that in certain cases Part IVA in its present form could apply to artificially created capital losses including those created prior to April 1997, it is submitted that fairness and the interests of confidence in the tax system require that the announced changes be prospective only. Capital losses created prior to the material date should remain subject only to Part IVA as presently expressed. 1.3 The specific rule goes beyond the proposal announced in the Treasurer s Announcement - retrospectivity beyond the proposal is unreasonable. The proposed s160zpa applies under circumstances beyond those set out in the Treasurer s Announcement. In each case the result materially disadvantages the taxpayer for the following reasons: Section 160ZPA applies where there is a reduction in market value of what? Page 2 of 13

3 In the relevant press release it is stated that the new provision [s160zpa] will apply if five criteria are satisfied. One of these criteria is: as a result of the reduction in the market of the asset rolled over under s.160zzo the market value of an interest in the disposer, which is held by another member of the same group, has fallen below the relevant cost base of that interest. (our emphasis) However, where this criteria emerges in the draft legislation in s160zpa(3)(e) as follows: immediately after the rollover disposal, the market value of the interest, right or debt was less than its reduced cost base or what would be its reduced cost base if the interest, right or debt were an asset to whose disposal this Part applied; The Treasurer s statement clearly defines an artificial capital loss in terms of a loss resulting from the reduction in market value of an asset which has been rolled over under s160zzo. Section 160ZPA(3)(e) merely contains a timing link to the rollover in that the reduction in market value of the [interest] in a company must occur immediately following the rollover - there is no causal link as foreshadowed in the Treasurer s Announcement. It is submitted that this approach departs materially from the Treasurer s statement. The section will apply where a reduction in market value in the relevant asset is in no way related to any reduction in value of a rollover asset. For example, the rollover transfer of an asset may result in a genuine realisable net capital loss to a transferee company. However, this transaction may not itself cause the reduction in market value of the transferee s interest in the transferor below its reduced cost base. At the same time external factors (eg international market forces, changes in government policy, seasonal factors) could overlay the rollover loss further reducing the market value below the reduced cost base and causing s160zpa to apply. In the example set out above, the economic loss to be realised on the ultimate disposal of the rollover asset will be genuine. However, the event which creates the further capital loss by reducing the market value of the transferee s interest in the transferor is not related to the rollover asset and may even be temporary. Despite this, s160zpa(3) will apply Section 160ZPA is not limited to the artificial component of any capital losses but will also deny any genuine component of the loss. It is only when the loss in respect of the underlying rollover asset is replicated (exponentially according to the example in the Explanatory Memorandum) in the depressed market value of a company interest (eg shares in a subsidiary) that artificial capital losses are said to be created. Section 160ZPA(2) provides that it is the unused amount of any eligible rollover loss as described in s160zpa(3) which is to be disallowed. Under the proposal the eligible rollover loss is the entire amount of the capital loss realised in respect of the disposal of a rollover asset. The proposed legislation makes no allowance for any genuine component of a capital loss or real Page 3 of 13

4 economic loss. The specific rule is in no way confined to the artificial replicated component of capital losses. This aspect of s160zpa means that a minor loss in respect of a transferee s interest in a transferor could disqualify a much larger genuine (ie truly economic) loss in respect of the disposal of a rollover asset. For example: A subsidiary company acquires an asset when asset values are high. It intends to use the asset in its business. Its business requirements change - it will sell the asset but prices have fallen. Any capital loss will be large and real in an economic. Before 29 April 1997 the asset was transferred to the parent for market value consideration. Rollover relief was taken under s.160zzo. The asset is to be sold to a third party and a capital loss will be realised. However, if immediately after the rollover just one post-cgt share which the parent held in the subsidiary had a market value below its reduced cost base - for whatever reason - the entire capita loss on the external sale of the rollover asset will be forfeited. This result will ensue even though: The potential loss on one post-cgt share in the subsidiary is minuscule in proportion to the real loss on the sale of the rollover asset. The parent may eventually make a significant gain on any disposal of the equity in the subsidiary, should such a disposal occur. The shares in the subsidiary may not be disposed of. The reduction in value in the share in the subsidiary may be unrelated to the rollover asset. External factors which could cause the reduction in value have been referred to previously. This example highlights several deficiencies in s160zpa, some of which have already been referred to: the departure from the need for any nexus between the relevant reduction in market value of a company [interest] and that of a rollover asset; that the rule makes no allowance for real economic loss and denies the whole loss regardless of the extent of any potential duplicate or artificial loss; Page 4 of 13

5 the rule does not require that any duplicate or artificial loss actually be realised - it operates if such a loss is merely realisable which then compounds other defects in the rule; and the rule (s160zpa(3)(c) read with s160zpa(6)) considers separately each interest of the transferee in the transferor of the relevant rollover asset. This makes possible the absurd situation of a single reduced value share disqualifying large capital losses, while this is conceivable, the prospect of small classes of reduced value shares causing the forfeiture of losses is highly probable. Similar problems will arise where an asset is rolled over with an unrealised loss but subsequently further reduces in value while it is held by the transferee. The post rollover reduction in value will not affect the value of any interests held by the transferee in the transferor company. There is a potential replicate loss only in respect of the unrealised pre-rollover loss, yet the entire loss will be disallowed. This is another example of s160zpa applying to a genuine capital loss and not being limited to any artificial component. The TIA is aware of other submissions in which difficulties have been identified in relation to the interaction between s160zpa and the Debt Forgiveness Rules, in the case of liquidations, and on degrouping where s160zzoa would apply. It is unnecessary to repeat those submissions here. However, such issues do reinforce the TIA s view and our submission that s160zpa is seriously flawed and does not operate as announced in the Treasurer s media release. It is further submitted that s160zpa should either be withdrawn in favour of a general anti-avoidance rule or at least be re-drafted so as to address the technical and equity issues raised in this and other submissions. 1.4 The draft amendment to Part IVA ( s177c(2a) amendment in Part 2 of Schedule 2 of the Bill) is deficient. The requirement that a Part IIIA rollover will be excepted from the Part IVA tax benefit amendment only if the rollover (which is a Part IVA scheme ) consists solely of the making of the rollover agreement or the rollover election, is far too narrow. It is commercially impractical, such that very few, if any, true non-tax avoidance scheme rollovers will ever pass this exception test. Almost every asset transfer within a corporate group where CGT rollover relief is sought under s160zzo and every capital loss transfer effected within a corporate group under s160zp will involve more steps being taken than just the rollover election. or agreement. As there will be more elements in the scheme, than the mere making of the election (under s160zzo(1)(d)(ii) or (1AB)) or election under s160zp(7)(c)) the cumulative requirement for the agreement or election to receive the s177c(2a) exception in subsections (2A)(a)(ii) and (b)(ii) will not be satisfied and Part IVA can apply to the rollover. An example will serve to show just how impractical this requirement is, and just how it will ensure that just about every s160zp agreement and every s160zzo election will constitute a s177c(1)(ba) tax benefit because it will not pass the s177c(2a) criteria for the availability of the exception from the application of Part IVA. Assume that Spotted Limited enters into a s160zp capital loss transfer agreement with its subsidiary, Spotted Services Pty limited, or it makes a s160zzo rollover election together with Page 5 of 13

6 that subsidiary. Before doing so it seeks advice from Senior and Junior Counsel, from its solicitors and from its chartered accountants. It also seeks valuations of the assets transferred or which are expected to give rise to a capital loss on an eventual sale. Each of these schemes comprising the election or agreement do not consist solely of the making of the agreement or the election (s177c (2A)(a)(ii) and (b)(ii)). Each scheme comprises many aspects. If there be any doubt about the Commissioner s reliance on the various legal opinions as being steps in the scheme or as parts of the scheme, one need look no further than 96 ATC at p5208 where the High Court referred to the Stephen Jaques opinion given to the taxpayer as part of the memorandum explaining the Certificate of Deposit scheme before the High Court in FCT v Spotless Services Pty Limited 96 ATC The proposed amendments to Part IVA are too broad. In particular, as the intended effect of a s160zzo rollover is to defer the realisation of a capital gain it would automatically have the necessary tax avoidance purpose so as to enliven Part IVA. This is contrary to the policy of the exception to s177c(2) and contrary to the policy of capital gains tax rollover relief. In summary, it is submitted that amendments to Part IVA in Part 2 Schedule 2 of the Bill are appropriate and reasonable in order to overcome the mischief referred to in the Explanatory Memorandum. However this should be subject to the broadening of the s177c(2a) exception to take account of the commercial realities of what taxpayers either attend to as a fact or need to do in order to undertake a scheme which involves their entry into an effective s160zp capital loss transfer agreement or an effective s160zzo asset transfer rollover relief election. The Tax Office has held and expressed the view that Part IVA in its present form can be used to strike down a scheme to reduce assessable income (including artificial capital loss creation) where a rollover transfer is a part of that scheme. As such while the change to s177c(1)(ba) is appropriate to reinforce Part IVA, the remainder of the changes are strictly unnecessary and go far beyond the mischief identified in the Treasurer s Press Release. It is submitted that the thrust of the change to Part IVA should be to identify a scheme which has its sole or dominant purpose the creation of a capital loss and that the concept of creation means that it is artificial or duplicates a real loss previously realised. SCHEDULE 2 - CONCESSIONAL TRACING RULES FOR COMPANY LOSS ETC. PROVISIONS Where the proposed amendments refer or relate to measures contained in the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 (the Trust Loss Bill), the Taxation Institute of Australia and other professional bodies have made submissions in respect of that bill which need not be repeated. Practical and technical difficulties arising out of the Trust Loss Bill have been identified by the professional bodies. These issues remain relevant where a trust holds a shareholding interest in a company and the company is seeking to carry forward and deduct tax losses. 2.1 Notices issued by the Commissioner under s50p are potentially oppressive Page 6 of 13

7 Section 50Q empowers the Commissioner to compel a company to provide certain information in respect of non-resident family trusts which hold certain interests in the company. Importantly, a notice under s50q would be valid even though the information is not within the knowledge of the company at the time the notice is give (s50q(2)). This implies that in order to comply the company must obtain the requested information. The consequence of the company failing to provide requested information (s50(4)) will be the denial of tax loss or bad debt deductions, or the application of current year loss disqualification rules. Such a provision assumes that the company will be able to obtain the relevant information referred to in the Commissioner s notice. This may not be the case and the company will then be denied the benefit of tax losses to which it would otherwise be entitled. Given the Commissioner s existing powers to obtain information under s264 and s264a of the ITAA it is submitted that the notice power under s50p is unwarranted. Section 50P circumvents the safeguards for taxpayers which operate in respect of the existing statutory powers of summons, discovery and interrogation (s264, s264a). While notices under s264a have been found to be limited in that they cannot compel third parties (eg entities related to the Australian recipient of the notice) to provide information, s50p provides an arbitrary alternative which may lead to a denial of tax benefits even where a taxpayer is simply unable to provide requested information. This is a real penalty and it is not to the point for the rules to provide that failure to comply with a s50p notice will give rise to no offence or penalty (s50q(6)). Similar observations and submissions apply in relation to the Commissioner s proposed notice powers under s63ca and Division Item 17 is potentially an oppressive extension of the tax liability of a non-resident family trust to directors of Australian companies in which such trusts hold a shareholding interest This Bill amends the Trust Loss Bill (s271-60(3) of Schedule F). The Trust Loss Bill contains rules which provide that under certain circumstances the tax liability of certain non-resident family trusts can be attributed to certain Australian residents including companies in which the nonresident family trust holds the necessary substantial interest. Referring to the Commissioner s power to determine that certain residents, including resident companies, will be liable for Family Trust Distribution Tax, proposed s271-60(3)(d) extends liability for tax to any person who is a director of such a company when the determination is made. This is an extreme measure. There is no requirement for any knowledge, complicity or even recklessness on the part of the Director. as one would expect when a Director is to be made liable for tax on behalf of the company - and in this case the tax liability is that of an entity other than the company itself. Page 7 of 13

8 It is submitted that the liability of Directors for the taxes of entities with which they are associated should remain the domain of legislation such as the Tax Administration Act, the Crimes (Taxation Offences) Act, or the Corporations Law where appropriate. Such Acts generally provide for defences and a level of conduct on behalf of Directors which justifies their personal liability for the debts of another entity. Alternatively, it is submitted that the proposals be amended to provide for a defence to such liability. These proposed measures do not provide any defence or requirement for culpability on the part of the Director, they amount to the imposition of an absolute liability and as such they are unfair and oppressive. Similar comments would apply to measures contained in the Trust Loss Bill. SCHEDULE 3 - FRINGE BENEFITS TAX 3.1 Car parking fringe benefits It is submitted that the threshold of $10m income (referred to at s58ga(1)(d) and subsequently) be indexed in line with CPI for years following the FBT year ended 31 March Taxi travel The changes do not deal with the situation where an employee leaves from work to travel to a function. Whilst this will be exempt from FBT, it will result in the fare being non-deductible under entertainment deductibility rules. The compliance cost is not reduced under such circumstances as all taxi travel will need to be monitored for the purpose of the entertainment rules. 3.3 Arranger provisions The provisions are still extremely broad and almost impossible to apply in practice. The provisions still place a heavy onus on the employer to show that they could not reasonably have been expected to have known about the benefit given to the employer by a Third Party. The duty, if any, of the employer to enquire will be problematic. Arguably if the employer gives an employee time off work, with or without pay, to enable an employee to accept/use/enjoy a benefit - the employer could be liable for FBT even though there was no further role in the provision of the benefit. Is the employer under an onus to ask an employee what they will be doing in their time off work? SCHEDULE 7 - DEDUCTIBLE EXPENDITURE AND CGT COSTS BASES 7.1 The amendments deny the full tax benefit of intra-group rollover relief in respect of depreciable assets Previously, where depreciable assets were rolled over, the Act allowed the transferee entity to assume all of the tax attributes of the asset for the purposes of both depreciation and CGT. This is not reflected in the transitional provisions in Clause 8 Schedule 7 of the bill. Page 8 of 13

9 There may be many commercial reasons for the rollover transfer of depreciable plant. The new rules apply to all assets acquired after 13 May As such there is a tax disincentive to transfer and rollover depreciable assets acquired before 13 May 1997 whereas the scheme of the legislation previously has been to prevent any such effect. It is submitted that assets acquired under CGT rollover relief (not limited to s160zzo) should not be subject to the proposed changes if originally acquired before 13 May The interaction of Schedule 7 rules and s160zzs The inequity of this problem can be best illustrated by an example. Assume that the taxpayer company acquired an income producing property in From 1983 to 1997 the taxpayer has claimed building allowance deductions in respect of the property. In July 1997 a s160zzs event occurred and the taxpayer company is deemed to have acquired the property at that time with a cost base equal to its market value at that time. Proposed s160zja means that the market value consideration which is the mid 1997 cost base of the asset, will be reduced by the amount of building deductions previously claimed by the company - going back to Section 160ZZS is premised on a majority change in underlying economic interests in company assets. As such the benefit of the pre-s160zzs event tax deductions would have accrued to different economic stakeholders. However such deductions are now calculated to reduce the cost base of the new stakeholders and so increase their eventual capital gain. It is submitted that the proposed rules to adjust the cost base of assets for CGT purposes be amended so that the cost base adjustment only impacts upon the same group of economic stakeholders who enjoyed the benefits of tax deductions in respect of the cost of the asset. In the context of s160zzs one solution might be to reduce the cost base only by amounts which were deducted for tax purposes after a s160zzs event. 7.3 The amendments should clarify the tax treatment of non-deductible expenditure in respect of assets Paragraph 7.2 of the Explanatory Memorandum states that: In principle, an item of expenditure should either be deductible for income tax purposes or included in the cost base of an underlying asset for CGT purposes, but not both. Page 9 of 13

10 With this principle in mind it is submitted that the legislation ought be amended so as to either allow an income tax deduction or allow inclusion in the cost base of a CGT asset (or to put such tax treatment beyond doubt) for items such as the following: Expenditure incurred for the purpose of enhancing the value of an asset which arguably is not reflected in the state or nature of the asset at the time of its disposal. For example, the cost of improvements to CGT land which do not qualify for Div 10D deduction (that is, non-building improvements commenced prior to 26 February 1992) and which are subsequently removed from the land prior to the disposal of the land. Likewise, the cost of clearing or levelling CGT land where the land is subsequently further improved so that the clearing or levelling is not evident at the time of disposal of the land. Incidental costs of an attempted disposal of a CGT asset, where the disposal is, for whatever reason, not completed. These comments apply equally to Part IIIA of the 1936 Act as well as proposed Tax law Improvement Project rewrite section SCHEDULE 8 - PASSIVE INCOME OF INSURANCE COMPANIES The EM in relation new the amendments contained in Schedule 8 purports that the amendments are designed to correct deficiencies in the current formulae used to calculate the passive income of CFCs of Australian life and general insurance companies. It is submitted that the Treasurer s statement is not an accurate reflection of the position. As outlined at Paragraph 8.6, the formula within Part X dealing with a CFC that is a life insurance company, reduces the passive income of that company by the proportion of calculated liabilities related to policies owned by unrelated non-residents. That is to say, only passive income derived from the portion of assets applicable to the calculated liabilities of policies issued to associates of the Australian company or to Australian residents would be treated as passive income for the purposes of Part X. The purported deficiency is that the formula excludes passive income derived from assets that are held by the CFC which are in excess of those needed to meet the calculated liabilities. If assets are held for the benefit of non-resident and non-associated policy holders then no amount should be attributed to an Australian shareholder. These measures fundamentally change that underlying assumption. The problem with the amendments is it seeks to compare apples with oranges. In the new subsection 446(2), what would otherwise be passive income is multiplied by a formula that takes the total assets and reduces them by untainted liabilities and divides that number by the total assets. Depending on what the accounting and actuarial requirements of the country in which the CFC life insurer operates, the calculated liabilities number could vary from jurisdiction to jurisdiction. Assuming however, that the definition of the untainted liabilities sufficiently overcomes this Page 10 of 13

11 problem (ie by adopting the Australian standards) there is further requirements as to the operation of the life company in the first place, such as solvency standards and capital adequacy requirements in relation to the policies that are issued. The effect of the amendment is that those solvency and capital adequacy requirements are being attributed solely to associated parties or Australian residents who hold policies with the CFC life insurer. This proposal seeks to legislate what the ATO have sought to do in relation to s112c of the 1936 Act by way of ruling (refer TD96/29). That Determination has been much criticised by the industry. For example, it excludes assets held to meet prudential requirements and capital guaranteed commitments in respect of foreign policies for the purposes of determining the liabilities referrable to those foreign policies. Were the life insurer not to maintain such reserves (as well as other reserves), the life insurer may not be permitted to continue carrying on business in the foreign jurisdiction. Similar principles apply here and the error by the ATO in relation to s112c should not be perpetuated in legislative form by the amendments proposed in Schedule 8. If the Government is concerned that there may be excessive assets held by the CFC life insurer as purportedly backing policies where there is no requirement to do so, then it would be better to amend s446(2) to a formula that compared applies with apples. That is, the formula should have total calculated liabilities less tainted liabilities over a total calculated liabilities as the premise for determining so much of these CFC life insurers income which would be treated as passive. SCHEDULE 9 - AVERAGE CALCULATED LIABILITIES OF LIFE ASSURANCE COMPANIES While accepting the broad thrust of the amendments and the drafting thereof, a few issues arise: 1. The concept of categories of policies is introduced by virtue of these amendments. It is not clear whether these categories are meant to follow the classes of policies outlined in s116ca of the 1936 Act. If the concept of categories is meant to mean something different to classes of policies, then a definition should be provided in Division 8. If it is meant to mean the same as classes of policies in s116ca, then it would be easier to use the existing concepts in the Division. 2. The definitions following on from the formulas in Items 2, 4, 6, 7, 8 and 9 have been listed alphabetically under the formulas. This is inconsistent with the drafting of the 1936 Act and is confusing. It is easier to follow a formula and the definitions if the definitions occur in the same order as they arise in the formula. 3. Current s114 deals with the calculated liabilities for policies on a company wide basis. Proposed s114a and s114b perpetuate this approach. The concept of calculated liabilities is utilised in determining the amount of exempt income of a fund (eg refer s112a) or in allocated the income between classes of a fund (eg refer s116cb and s116ce). As can be seen, the proportion of liabilities of a fund is what is important for the Page 11 of 13

12 purposes of Division 8 in its operative sections. Accordingly, this may be the opportunity to deal with the deficiency in s114 which is perpetuated by s114a and s114b. That is, rather than dealing with the policy liabilities of the company as a whole, it may be better to look at the policy liabilities on a fund by fund basis. The company wide approach can give rise to significant difficulties where there is more than one statutory fund in the company. Unfortunately, the example, at paragraphs 9.3ff of the Explanatory memorandum oversimplified the issue by dealing with the company with only one statutory fund. As presently drafted, if there is a significant event in relation to one of the statutory funds (for example, a company sells a particular type or line of business to another company), then the formula in s114a of average calculated liabilities will be determined across all statutory funds of the company rather than just the statutory fund which has been affected by the significant event. It is submitted that this is contrary to the policy intent. Clearly, only a fund that has had a significant event occur in relation to it, should be affected by the amendments. It would be inappropriate to have to recalculate the calculated liabilities across the whole of company at the time of changeover - or indeed, go to the expense of obtaining valuation of statutory funds that are unaffected by the change - simply because of inappropriate drafting. Accordingly, it is recommended that proposed sections 114A and 114B be amended to refer to calculated liabilities of a statutory fund. 4. Despite the policy intent of the changes, they do not deal with a perennial problem that companies have experienced in the past when going out of business or transferring their operations from, for example, an Australian branch to an Australian subsidiary of a foreign parent. In the current climate, this issue is probably more relevant to the rationalisation of the industry and consolidation of business of both the acquirer and the target life company. The problem being referred to relates to whether or not, a company that has ceased to carry on life insurance business as at the end of the year of income (despite the fact that for a significant part of the year it may have been carrying on life assurance business) should be subject to Division 8 at least for the period that it carried on life insurance business. The problem lies in the provisions and the definitions of Division 8. The provisions seek to allocate income or exempt income according to the liabilities of a fund of the taxpayer company. For example, in s112a, the assessable income of a life assurance company excludes a certain proportion referrable to exempt policies. Similar in s116ca, the classes of assessable income for life assurance companies are set out. Life assurance company is defined in s110 as meaning, inter alia, an ordinary life assurance company. That term is defined as meaning: a company the sole or principal business of which is life assurance and includes a company that is registered under the Life Insurance Act 1995 and is carrying on life assurance business, but does not include an SGIO: Page 12 of 13

13 The problem with the definition is that it does not specify whether the company should be carrying on life assurance business for the whole of the year of income as at the end of the year of income, for a significant part of the year of income or at any time during the year of income. On one, and arguably the better, approach, the provision is meant to operate in respect of a company in relation to the period that it was in an ordinary life assurance company. It is suggested that the provisions be amended to make this interpretation abundantly clear. Were any other interpretation adopted, it could give rise to unintended results either in favour of the taxpayer or of the Revenue. Thus, if a company ceases to carry on life assurance business part way through the year by transferring its business in accordance with the scheme under the Life Insurance Act 1995, it should be subject to Division 8 for that part of the year that it carried on business as a life assurance company and the income f the statutory fund should be taxed accordingly. Were this not the case, the company, or more correctly the policyholders, would suffer tax at either too high or too low a rate (assuming that the corporate rate was imposed instead). A similar problem obviously arises for a company that starts up business part way through the year. The new provisions can only operate if a company is, in fact, subject to Division 8 and to be so subject requires a company to be a life assurance company during the year. Without that requirement, the amendments may, in some circumstances, be made redundant. Page 13 of 13