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Submission No. 275 Back to full list of submissions
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NATIONAL MUTUAL HOLDINGS LIMITED

SUBMISSION TO THE REVIEW OF BUSINESS TAXATION

A PLATFORM FOR CONSULTATION

16 April, 1999

 

Contents

Executive Summary
Black Hole Expenditure
Goodwill
Financial Assets & Liabilities
Capital Gains
Entity Distributions
Collective Investment Vehicles
Conduit Investment
Foreign Tax Credits
Interest Deductibility
Life Insurance

Taxable Income
Accounting Principles
Reinsurance
Superannuation
Annuities
Franking Credits
Transitional
Deductions
Policyholders

Pooled Superannuation Trusts

 

Executive Summary

National Mutual is one of Australia’s oldest financial institutions; it was established in 1869 as The National Mutual Life Association of Australasia limited. National Mutual is part of the worldwide AXA group, one of the world’s leading insurance and asset managers.

Through our partnership with AXA, National Mutual is responsible for developing and implementing AXA’s life insurance strategy in the Asia-Pacific region. We are represented in Australia, Hong Kong, Indonesia, Japan, Macau, New Zealand, People’s Republic of China, Philippines, Singapore, South Korea, Taiwan and Thailand.

National Mutual’s operations include a full range of life, health and disability insurance products, as well as superannuation and investment products, funds management and lending. We have approximately 3 million policyholders and clients in Australia, New Zealand and Hong Kong and more than 800,000 health insurance customers in Australia and New Zealand. We have over 500,000 shareholders.

National Mutual supports the objectives, framework and benchmarks - established by the Review of Business Taxation - that are central to the process of business tax reform.

The fundamental objective of business tax reform is to design a business tax system that does not impede, but encourages, economic growth. In the context of increasing interaction between national economies, economic growth and international competitiveness go hand in hand.

We fully endorse the proposal to reduce the corporate tax rate to 30% and propose that this should be achieved sooner rather than later. A 30% corporate tax rate would be competitive with corporate rates imposed by our close regional competitors.

National Mutual is generally supportive of many of the Review’s options put forward in the discussion for the taxation of financial arrangements, the tax treatment of goodwill and the tax deductibility of ‘black hole’ expenditure.

We agree, in principle, with the proposals to broaden the tax base of life insurers. However, National Mutual is concerned that the implementation of these proposals may have inequitable consequences for our policyholders and shareholders. The inevitable consequence of a sudden change to the tax regime will be reduced benefits to existing policyholders and reduced profits to existing shareholders unless adequate transitional measures are put in place.

National Mutual proposes transitional measures that protect the status of existing business for both policyholders and shareholders. Appropriate transitional arrangements will avoid any knee-jerk market responses that would otherwise be disruptive to policyholders, shareholders and investment markets.

We have major concerns that the proposed implementation date of the final reforms is July 1, 2000. Australian businesses are already confronted with the burden of Year 2000 compliance and the prospect of GST implementation. To impose the same start date for business tax reform is unfairly onerous – particularly for life insurers where the reform proposals are explicitly suggesting change to the design of our products.

We propose a start date of July 1 2001.

The Review has proposed some major changes to the taxation of the superannuation business of life insurers and pooled superannuation trusts (PSTs). National Mutual strongly believes that business tax reform should not seek to change the current tax regime for superannuation. The reform proposals, if implemented, would only serve to disrupt and diminish the superannuation savings of millions of Australians. PSTs and the superannuation business of life insurers should remain ‘tax paid’ investments rather than be subjected to the proposed entity regime.

In respect of the taxation of Collective Investment Vehicles (CIVs) we are of the view that the appropriate benchmark to apply is to compare the tax outcome of an investor in a CIV with that of an individual investor with a ‘direct’ portfolio of investments. Once this benchmark is accepted, it is evident that the entity tax regime is inappropriate for CIVs.

National Mutual is concerned that the Review has not fully addressed the tax issues of foreign investment. Whilst we agree with the proposals designed to extend the application of the Foreign Dividend Account regime and the recognition of foreign withholding tax for Australian imputation purposes, there remain fundamental deficiencies in the regime for taxing international investment that the Review has not addressed. In particular:

  • Foreign sourced profits are subject to double taxation – once in the country where the profits are earned and again when the dividends flow through to Australian shareholders;
  • There is generally no tax relief for interest on borrowed funds that are applied for non-portfolio foreign investment.
  • There is very little discussion of the need to reform the CGT regime as it applies to businesses – although the proposal to reduce the general rate of corporate tax to 30% must be recognised in this context. Reduced rates for individuals are put forward as an option, and are supported, however there are no proposals to reduce the rates applying to corporations. Many of our regional competitors have more lenient regimes for taxing capital gains at the corporate level. Without reform of the CGT regime as it applies to businesses, Australian investors will continue to be at a competitive disadvantage when seeking to invest offshore and foreign investors will continue to find Australia an expensive place to invest.

Given Australia’s desire (and need) to become a regional financial centre, we find the punitive regime for taxing foreign investment puzzling.

National Mutual does not support the proposed Deferred Company Tax regime as foreign shareholders will be adversely affected and reported corporate profits will be reduced by the amount of any deferred company tax which becomes payable. We do, however, support the Resident Dividend Withholding Tax option as it achieves the objectives of the Review without the aforementioned limitations.

We acknowledge that the Review is being conducted within a framework of revenue neutrality. Many of our proposals and suggestions have a cost to revenue. We point out, however, that adopting a status quo for superannuation, PST, and CIV investments has a very small ‘cash flow timing’ cost to the revenue. Some of our other proposals will be more expensive to implement, however this should not prevent serious consideration of their merit – from the perspective of economic growth considerations and/or on equitable grounds. Inevitably, trade-offs will need to be made within the revenue constraint – we would like to participate in any discussion of what those trade-offs might be.

National Mutual would welcome any feedback or comments the Review may have in respect of any aspect of our submission.

We look forward to participating in the development of the detailed policy and legislation as business tax reform enters its next phase and trust we will be given the opportunity to participate. In this regard we make the observation that National Mutual is one of few life insurance and financial services groups with a majority of foreign shareholders. We are therefore uniquely placed to offer foreign perspective in developing the final detail of reform.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: How should black hole expenditures be treated?

Chapter Reference: 1

Preferred Option: National Mutual supports the proposed regime of deductibility included at table 1.1 of the Discussion Paper (page 101). The regime should be extended to include other forms of "black hole" expenditure.

Discussion:

The current non-deductibility of expenditures such as: relocation costs, feasibility studies and prospectus costs represents a significant cost burden to business. We therefore support the proposal to allow some form of deductibility – either in the form of an up-front deduction or an amortisation over a statutory period.

National Mutual believes that table 1.1 at page 101 is not a comprehensive list of black hole expenditure. There are other forms of expenditure that are undertaken for the purposes of earning assessable income and although arguably having an enduring benefit, a write-off over 5 years would be appropriate. An example is advertising costs associated with the launch of a new brand. This type of cost is similar in nature to prospectus or pre-incorporation costs – although a faster write-off than those items can justified on the basis that the enduring benefit is of shorter duration.

Costs incurred by Australian companies in conducting feasibility and market studies in foreign countries should be available as a deduction over a statutory period of 5 years. The long-term nature of foreign investment, particularly ‘green field’ start-up operations, means that the relief provided by including such costs in the cost base of the asset is negligible. As discussed elsewhere in our submission, the current tax regime is particularly harsh on foreign investment, some modest relief in this regard would therefore be welcomed by Australian corporations eager to expand offshore.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: Determining the appropriate treatment of goodwill

Chapter Reference: 4

Preferred Option: Option 1 - Provide a tax deduction for amortisation of the cost of acquired goodwill, including goodwill emanating from international acquisitions.

Discussion:

Option 1 is supported for the following reasons:

  • Acquired goodwill is a legitimate business expense which should be written-off in the same way as acquired plant and equipment ;
  • The write-off of goodwill for tax purposes would align with current accounting standards and therefore contribute to a simplification of the tax system;
  • National Mutual suggests that the write-off be extended to goodwill emanating from international acquisitions. This would enhance the competitiveness of the Australian economy by encouraging offshore acquisition - particularly offshore services companies where goodwill is often a large part of the purchase price paid.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: A new policy framework for financial assets and liabilities.

Chapter Reference: 5,6 & 7

Preferred Option: As a broad matter of principle, we do not accept the taxation of unrealised gains and losses.

We support the general thrust for the reform to the taxation of financial arrangements.

We support an elective mark-to-market approach applying a combination of transaction and asset class approaches.

Life insurance products and interests in superannuation funds and PSTs will be taxed under their own specific regime and should be excluded from the regime that will apply to financial arrangements.

Taxpayers should be able to elect to grandfather existing assets so that the new rules only apply to new transactions.

We support the ‘bifurcation’ of hybrid instruments.

Discussion:

The taxation of financial arrangements under the existing law is both inequitable and uncertain for taxpayers. We therefore support the thrust of the proposals for reform subject to the new regime adopting certain basic premises:

  • Transactions with the same set of cash flows and economic outcomes should be taxed in a similar manner;
  • The new regime should have the flexibility to cope with the development of new products;
  • The tax outcome of a transaction should be known with certainty in advance;
  • The new system should be clear so as to reduce compliance and administration costs.

The harmonisation of tax and accounting treatment is not appropriate on the basis that it creates:

  • Cash flow difficulties as unrealised gains are taxed;
  • Valuation difficulties for certain more complex arrangements;
  • Equity difficulties as tax may be levies on gains that are never realised.

We have reservations about the application of the mark-to-market & accruals regimes on the basis of the potential taxation of unrealised gains. However, an elective mark-to-market approach that can be applied at either a transaction level, asset class or entity level would allow for any otherwise inequitable outcomes to be avoided.

Earlier Consultative Documents released by Treasury in respect of the taxation of financial arrangements made clear that life insurance policies, interests in superannuation funds, pooled superannuation trusts and approved deposit funds were to be excluded from any new regime. The new regime should confirm this policy.

We have already entered into particular financial arrangements after taking into account the existing tax treatment of those arrangements. It would in many cases be inequitable to change the tax basis of those arrangements during the term of the arrangements. There may cases, however, where any new taxing basis does not prejudice the economic outcome of the arrangement. For compliance simplicity, therefore, an election to apply the existing tax basis to existing arrangements would be appropriate.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: A more competitive regime for taxing capital gains.

Chapter Reference: 11

Preferred Option: The proposals for reform focus on measures to reduce the CGT impost on individuals. Whilst this is to be applauded, the design of the reform measures must be cognisant of the potential competitive disadvantage for superannuation funds, Collective Investment Vehicles and Life Insurance companies.

The proposed removal of indexation would be especially harmful for superannuation funds unless replaced by a lower rate.

There is nothing in the reform proposals for the CGT regime that encourages long term investment by corporations.

Discussion:

National Mutual believes that individuals undertaking pooled investment strategies by investing in CIV’s, superannuation funds and life companies should not be put at a competitive disadvantage vis a vis those investors with sufficient wealth to undertake risk diversification strategies within their own direct portfolio.

CIV’s and life companies should be able to pass through the ‘capital’ status of gains earned within the pooled environment so that individuals can enjoy the proposed lower tax rates on such gains at their respective marginal rates. If the ‘capital’ status of gains is lost upon distribution by a CIV or a life company, individuals will be encouraged to undertake their own direct investment rather than invest in these specialist funds management vehicles.

Indexation is one concession currently in place which could be removed in order to fund reductions in CGT rates. Removal of indexation would further erode the attractiveness of superannuation as a long-term savings product.

Proposed reductions in the bottom personal tax rate to 17% will result in the contributions tax rate of 15% now almost matching the bottom marginal rate. Taking away the concessional treatment of CGT within the superannuation environment will further erode the attractiveness of superannuation.

National Mutual believes that superannuation funds should be taxed on capital gains at a lower rate than the 15% that currently applies. If the capped CGT rate for individuals is set at 30%, this would represent a reduction of 37% from the current top marginal rate of 47%. The superannuation fund rate for capital gains should therefore be reduced to 9% in order to maintain parity with individual rates and for superannuation to maintain its current attractiveness.

Capping the CGT rate at 30% for individuals does not address the competitive issue of the CGT rate applying to corporations. Malaysia, Singapore and New Zealand – three of our close regional competitors – do not tax capital gains in most circumstances. Serious consideration should be given to exempting corporations from CGT on non-portfolio investments held for more than 5 years. This would significantly improve Australia’s ability to attract foreign capital and boost the competitive position of Australian corporations expanding offshore.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: Treatment of Entity Distributions – What are the options for achieving integrity through the entity chain while recognising the impact on foreign investors?

Chapter Reference: 15

Preferred Option: Option 2 - apply a resident dividend withholding tax.

Discussion:

National Mutual does not support option 1 – Deferred Company Tax (DCT) for the following reasons:

  • The making of DCT payments in respect of unfranked distributions will result in reduced reported company profits. This will have a detrimental impact on the share prices of Australian listed companies and make Australia a less attractive country for foreign investment.
  • DCT will not be allowed as a credit against mainstream company tax. This has the potential to result in a double tax liability where there are significant reversals of timing differences;
  • The distribution of tax preferred income to non-resident shareholders will result in withholding tax of 36% being levied on such distributions compared to a rate of 15% which applies under the current system. The mechanisms for flowing underlying credits back to foreign shareholders are complex and would require changes to Australia’s tax treaties;

National Mutual supports option 2 – a resident dividend withholding tax (RDWT) for the following reasons:

  • As the RDWT is a ‘withholding’ tax, there will be no impact on corporate reported profits;
  • In respect of unfranked distributions, only Australian residents will be subject to the additional withholding at the corporate rate. On the assumption that Australian individual and superannuation fund shareholders will be entitled to a refund of excess imputation credits (a proposal we fully support), Australian shareholders should not be adversely affected.
  • Despite some increase in complexity, the RDWT is much preferred to the DCT proposal.

Option 3 – the taxation of unfranked inter entity distributions, is not supported as we believe that there would be an increase in the overall tax liability of Australian corporations and a resulting diminution in Australia’s international competitiveness.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: Whether Collective Investment Vehicles (CIVs) should be taxed on a flow through basis?

Chapter Reference: 16

Preferred Option: National Mutual believes that CIVs should continue to be taxed on a flow through basis.

Discussion:

CIVs perform a specific role in investment markets as a passive pooling mechanism for small investors and superannuation funds. Under the current regime, investment in a CIV results in broadly the same tax outcomes as direct investment by either an individual or superannuation fund. Investors achieve the following advantages from investing in CIVs:

  • Pooling of funds to participate in large scale investments such as infrastructure, office buildings and shopping centres which would otherwise not be available to the small investor;
  • Greater diversification of risk and increased security from participating in a wider spread of portfolio investments;
  • CIVs provide cost efficient investment management expertise. The management of a large pool of funds is much cheaper as a percentage of the pool than managing a single small portfolio.

Taxing CIVs as companies would make investment in CIVs much less attractive and lead to more direct investment by individuals and superannuation funds. The reasons for this are as follows:

  • The delay in receiving a refund of excess franking credits will reduce the yield from CIVs compared to direct investment;
  • The character of the CIV distribution would be lost. For example, upon distribution from the CIV, a capital gain earned by the CIV would revert to the status of a dividend. The investor would be disadvantaged by this change in status;
  • Indexation benefits would be lost when the CIV makes a distribution to unitholders;
  • Foreign tax credits would be lost upon distributions to unitholders. This means that the effectiveness of foreign investment would be reduced.
  • Tax preferences available in respect of property investment would be "washed out" upon distribution to unitholders. This makes property investment conducted via a CIV less attractive than direct property investment.

National Mutual therefore, applauds the government’s announcement to apply the flow-through tax treatment to cash management trusts and the in principle decision to extend that treatment to other CIVs.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: How would ‘widely held’ be defined?

Chapter Reference: 16

Preferred Option: The current definition of a public unit trust needs to be widened to encompass the case where units are held by superannuation funds and life insurers. Trusts that own buildings for deriving rental income should not be classified as active businesses.

Discussion:

The government has acknowledged the flow-through tax status that should apply to ‘widely held’ investment vehicles. It is important that all CIVs that are beneficially ‘widely held’ be incorporated in the definition so as to avoid inequitable treatment of similar vehicles. It would be inequitable, in our view, for a property trust with only 5 members to be taxed as a company when in fact those 5 members were large life companies or superannuation funds. It is the beneficial ownership that is relevant, not the bare membership numbers.

The Review has suggested that some of the provisions of Division 6C apply (see definition of public unit trust) to determine when a vehicle is widely held. To be consistent with the objectives of allowing flow-through treatment to CIVs, the definition of widely held should be extended to units/shares held by entities which are themselves widely held. In addition to the tests contained in section 102P(1) of the Act, where 75% or more of the units/shares are held by, or a combination of, the following entities, ‘widely held’ status should apply:

  • The statutory funds of life assurance companies;
  • Trustees of complying superannuation funds, other than excluded funds;
  • Trustees of PSTs;
  • Trustees of other ‘widely held’ CIVs;
  • Trustees of Approved Deposit Funds;
  • Listed public companies;
  • Non-resident superannuation funds;
  • Charities;
  • Government agencies and statutory corporations.

We believe that the definition of ‘widely held’ should include vehicles that are formed for the purpose of achieving ‘widely held’ status but require time to establish the required spread of unitholders. We submit a period of two years be available to attain a wide membership.

Similar transitional relief is required to deal with the situation where a trust (or company) which has previously been classified as ‘widely held’ is in the process of winding up. Providing formal wind-up procedures have been initiated, a two year moratorium from the ‘widely held’ definition would be appropriate. This would enable an orderly disposal of trust assets and termination of the trust.

The Review, at page 374, questioned whether a controlling interest in a shopping centre or office building was in fact an active business that should be outside of the eligible investment activity of a CIV. In this regard we note that a very large percentage of widely held trusts have controlling interests in real property of some form or another.

Property trusts should fall squarely within the definition of a CIV. The existing provisions of the Act contained in Division 6C deal adequately with the distinction between active business and eligible investment business. Derivation of rental income has historically been classified as passive investment business – we see no reason to alter this definition.

Property trusts offer the small investor the means of attaining direct property exposure in a liquid form. Excluding these trusts from the definition of a CIV would be unnecessarily disruptive to property markets and reduce our international competitiveness as investors exit property trusts and undertake direct property investment. Property investment is a typical passive investment of trust structures in many foreign countries. Australia needs to retain the existing status of property trusts to remain competitive internationally, and to continue to provide large pools of capital for Australian property and infrastructure development.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: How would tax preferences be treated?

Chapter Reference: 16

Preferred Option: Option 1 - a full flow through of tax-preferred income.

Discussion:

The appropriate tax benchmark for a CIV, as for all entities undertaking passive investment activity, is with individual investors, not a corporation. Unlike the trading or enterprise of a company, passive investment is not undertaken in a pooled environment in order to obtain the benefit of limited commercial liability. Rather, the benefits of pooling by spreading risk and reducing per capita investment costs are paramount in the investor’s mind. The investor has a choice of whether to invest via a pooled arrangement, or to undertake that investment directly. In selecting the appropriate tax benchmark of a CIV, therefore, the level playing field can only be identified by comparing the tax outcomes of the direct investor, not the outcomes of a corporate enterprise.

The Review correctly identifies the potential competitive disadvantage to life offices if CIVs are able to pass through tax preferences to unitholders. We have, however, made submissions to the Review which address the potential uncompetitiveness of life office superannuation products by suggesting an alternative to the entity system proposed for that business. Our submissions also suggest ways of retaining tax preferences for our ordinary business policyholders.

Our view is that tax preferences should flow through to unitholders. To deny this flow through would be to bestow a competitive advantage on the direct individual or superannuation fund investor. Pooled investment becomes less competitive. Small investors may be exposed to unnecessary risk as they recoil into their own smaller investment pool. Their ability to participate in large scale investment options such as property and infrastructure will be diminished. National savings objectives will be undermined.

The cost to revenue of tax preferences needs to recognise the flow through to individual unitholders/shareholders. Tax preferences are designed to encourage certain economic activity. The cost of the preference being given needs to be properly matched against the national benefits being derived – a proper cost/benefit analysis; rather than a withdrawal of the preference from sectors of the economy undertaking that preferred activity via, for example, unit trusts.

In the case of depreciation of buildings, we intuitively believe that a large proportion of this tax preference is being claimed by public unit trusts and then flowed through to unitholders. The preference seems to be doing its job – encouraging new building activity. The policy decision should be whether the preference should continue, not whether certain individuals and super funds should be denied the incentive.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: Conduit investment through Australia

Chapter Reference: 31

Preferred Option: We support the option to modify and extend the current Foreign Dividend Account (FDA) arrangements to relieve more types of foreign source income passing to non-resident shareholders of Australian companies from dividend withholding tax (DWT). However, we disagree that active income received from unlisted country operations should be excluded from these measures.

In terms of the operation of the proposed Foreign Investment Account (FIA), we support option 1 – record total income.

Discussion:

National Mutual welcomes and supports the proposals to extend the FDA provisions, particularly the inclusion of foreign branch income into the regime.

In respect of foreign source income that has been lightly taxed in the country where the income is derived, we do not agree with the view (and current treatment) that Australia should ‘top-up’ this tax to the Australian corporate rate before it flows on to non-resident shareholders. The existing CFC provisions are sufficient to prevent deferral of Australian tax on foreign passive and tainted income. Top-up tax is unnecessary in respect of active income. Such income should be able to flow through to foreign shareholders under the conduit model.

National Mutual would like any feedback the Review may have in respect of the comments at paragraph 31.13 as to the likely criticism from Australia’s treaty partners should active income from unlisted countries be incorporated in the FDA provisions.

In terms of the operation of the FIA, option one has the attraction of being simple to administer. In addition, this treatment would make Australia’s regime more attractive to foreign shareholders in a way which is consistent with the national policy objective of making Australia a major regional financial centre. The Review correctly identifies, at paragraph 31.26, that Australian businesses would be valued more highly under the proposal to record total foreign income in the FIA account – compared with the more limiting proportional approach.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: Should foreign tax credits flow through entities to resident taxpayers?

Chapter Reference: 32

Preferred Option: National Mutual supports the proposal that imputation credits be provided for foreign dividend withholding tax. However, these proposals do not go far enough in addressing the double taxation that occurs in respect of foreign dividends flowing through to Australian shareholders.

Discussion:

Under the current regime, Australian based multi-nationals cannot pass onto shareholders a credit for foreign dividend withholding tax paid on dividends derived from a foreign subsidiary. This can and does discourage multi-nationals from repatriating profits to Australia.

National Mutual supports the proposal to allow Australian imputation credits in respect of foreign dividend WHT as it will provide Australian shareholders with the same tax outcome as individuals directly investing in foreign companies.

We believe the proposal to extend the imputation system does not, however, go far enough in redressing the high effective tax rates applying to foreign (compared with domestic) investment. As an example, profits derived in New Zealand incur local tax at the rate of 33%. Repatriation of after tax profit to an Australian multi-national is not subject to additional company tax in Australia, however upon flowing the dividend through to Australian individual shareholders, additional tax of up to 48.5% is payable. The total tax paid in Australia and New Zealand is therefore 66% of the original profit.

National Mutual believes that non-refundable franking credits should be allowed for foreign underlying taxes. We acknowledge that there would be a significant cost to revenue, however the current system militates against foreign expansion of Australian companies. This is a serious policy issue that requires further debate.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: Should Australia allow deductibility of interest for offshore investments?

Chapter Reference: 33

Preferred Option: A deduction for interest incurred in respect of foreign investment should be allowed where the lender is an Australian resident.

Discussion:

The current regime prevents a tax deduction for interest incurred in acquiring a greater than 10% interest in a foreign company.

The reason for the non-deductibility is that most dividends received from foreign companies are exempt from tax in Australia. However, the principal reason for the exemption is that the profits from which the dividends derive have already borne tax at comparable rates in the source country. The exemption is to prevent double tax.

It is submitted that the tax exemption for foreign dividends should not have the by-product of denying interest deductibility on borrowed funds used to acquire the foreign asset. This is particularly relevant where the funds have been borrowed from an Australian institution. In this case, the interest paid by the borrower is returned as Australian assessable income by the lender. There is no leakage in allowing the borrower a deduction for the interest.

The attached spreadsheet illustrates that the effective tax rate for an Australian investor borrowing funds to acquire a significant interest in a New Zealand company is 72%. This is double the tax rate that applies to Australian investment.

This is not a desirable outcome in an environment where Australian businesses should be encouraged to invest offshore in order to restore some balance to Australia’s large net deficit of dividends and interest.

The Review has not proposed any change to this policy. Rather, a complex set of rules are proposed to deal with the situation where there is a perceived over-gearing of the Australian operations relative to the gearing levels of foreign owned subsidiaries.

The current tax regime results in Australian businesses having to finesse the tracing rules so that internally generated funds are employed to undertake offshore investment and borrowed funds are only employed in Australian operations.

National Mutual cannot identify the policy rationale for this treatment, particularly where an Australian institution is the lender.

One could perhaps argue that equity funding is to be preferred for foreign investment, however we don’t believe the tax system should dictate the form of funding.

National Mutual believe that where the lender is an Australian resident, full tax deductibility should be available in respect of foreign investment.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: How should taxable income be calculated for life insurers?

Chapter Reference: 34

Preferred Option: A combination of methods should be employed in calculating taxable income – option 3 is therefore preferred, however National Mutual would like an ongoing dialogue in developing the detail of the approach. The taxation of previously exempt income presents a major challenge to our business in terms of ‘transitioning’ to the new basis. The discussion below therefore includes some proposals for a phase-in approach to the new basis.

Discussion:

National Mutual acknowledges that the current taxation arrangements for life insurers are too complex and that the profits of a life insurance company should be taxed at the corporate rate.

The method for taxing pure risk business should be aligned with the method currently applying to general insurers:

  • Risk premiums assessable;
  • Realised investment earnings assessable
  • Claims paid deductible;
  • Increase in claims liabilities deductible
  • Change in capital adequacy requirement;
  • Policy acquisition costs deductible;
  • Management expenses deductible;

The method for taxing pure investment business should be like other investment entities:

  • Fee income assessable;
  • Realised investment income assessable;
  • Change in capital adequacy requirement;
  • Acquisition and procurement costs deductible;
  • Management expenses deductible;

The majority of our business would be taxed using the above two approaches.

Complexities arise when we examine the appropriate basis for taxing bundled business. That is, policies with both investment and risk elements.

Our view is that bundled business, including life annuities, be taxed on a similar basis to risk business as there is no explicit fee income in respect of this business. Profits are derived from a combination of mortality risk and investment income. Option 1 is therefore appropriate for this type of business.

We have made submissions in this document (see page ) in respect of transitional relief that we believe should apply to the existing business of life insurers. We have also made submissions (see page) that the superannuation business of life insurers should remain a ‘tax paid’ product.

In view of these additional submissions, we believe the appropriate tax base for life insurers should be as follows:

  1. At the superannuation tax rate – investment income less expenses attributable to complying superannuation and deferred annuity business;
  2. At the corporate tax rate – all non-superannuation investment income less expenses;
  3. At the corporate tax rate – all accident & disability underwriting profit;
  4. At the corporate tax rate – fee income less expenses in respect of new investment business (ie policies commencing after the reform start date - 1 July 2001);
  5. At the corporate tax rate – underwriting profit on all new life insurance risk contracts;
  6. At the corporate tax rate – non-investment profits from new ‘bundled business’ and life annuity contracts;

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: Can accounting principles apply for tax purposes in calculating policy liabilities?

Chapter Reference: 34

Preferred Option: ‘Margin on services’ (MoS) liabilities are inappropriate for tax purposes. National Mutual does, however, believe that the taxable income of life insurers should be effectively reconcilable to reported MoS profits.

Discussion:

The Margin on Services methodology requires a ‘best estimate’ to be made of policy liabilities. This best estimate, whilst subject to rigorous actuarial and accounting standards, represents a departure from established concepts of calculating taxable income for the following reasons:

  • For many types of investment and bundled policies, unrealised gains are included in the valuation of the liability;
  • MoS liabilities for some products are determined after making a number of assumptions about future cash flows and investment earnings – careful consideration is required before accepting that perspectives on the future form part of a taxing basis;
  • The MoS methodology uses ‘after tax’ investment earnings and expenses in crediting policyholders;
  • The ‘starting point’ for ‘opening retained earnings’ assumed when implementing the MoS methodology will differ for each company – there could be a bias in subsequent released profits depending on those commencement assumptions;
  • The treatment of capitalised losses and the reversal of any previously recognised losses would create an anomalous outcome for tax purposes;

National Mutual recognises that the integrity and simplicity of the tax system warrants a close alignment of accounting profit and taxable income. We are concerned about possible inequities emerging from fully taxing MoS profits and believe a tax basis that can be effectively and efficiently reconciled to MoS profit can be developed.

In the context of determining the taxable profits for life (risk) insurance, accident and disability insurance, life annuities and bundled risk/investment insurance, we believe that liabilities adjusted for capital adequacy purposes are appropriate.

Under the regulations applying to life insurers appropriate levels of ‘capital adequacy’ must be retained within statutory funds at all times – not just at balance date. Shareholders of life insurers do not have access to capital adequacy reserves. The calculation of capital adequacy reserves is performed by the company’s appointed actuary. The actuary is bound to follow the valuation principles prescribed in Actuarial Standards. These standards are administered by the Life Insurance Actuarial Standards Board. We believe the capital adequacy reserves therefore have a high degree of integrity and are appropriate for tax purposes for the following key reasons:<

The reserves reflect the claims experience of the company;

The reserves exclude capitalised acquisition costs.

An alternative approach would be to adopt ‘solvency reserves’. The main problem with ‘solvency reserves’ is that they are prescriptive – a prescribed, percentage based margin – and do not reflect the actual claims experience of the company.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: How would life reinsurance be taxed?

Chapter Reference: 34

Preferred Option: We agree that the same principles that apply to life insurance should apply to re-insurance.

Discussion: None.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: What are the tax rate implications for the superannuation and deferred annuity businesses of life insurers?

Chapter Reference: 34

Preferred Option: We have major concerns about the proposed reforms. Our view is that life insurers should retain the existing basis for taxing superannuation and deferred annuities. We have suggested some modifications to the current tax basis in the discussion below to address the concerns of Review about the integrity of the tax base of life insurers.

Discussion:

The reform proposals would require life insurers to pay tax on all investment income at the corporate rate and to frank the bonuses assigned to policyholders. The Review correctly identifies that superannuation fund policyholders will be significantly disadvantaged by this arrangement unless a speedy refund mechanism for excess imputation credits can be put in place. A life insurer tax at (say) 30% on investment income means that super fund trustees are likely to prefer direct investment as the tax rate on investment income would only be 15%. This puts life insurers at a competitive disadvantage.

Under the reform proposals, superannuation funds are unlikely to acquire superannuation policies issued by life insurers, and are likely to exit existing policy arrangements, for the following reasons:

  • One of the key attractions of superannuation policies offered by life insurers is that they are a "tax paid" product. The complexities of the superannuation taxation and regulatory regimes can be largely ceded to the life insurer in a secure and well capitalised environment. The reform proposals will remove much of the attraction of life insurer superannuation products by requiring policyholders to complete tax returns which are not required under the current regime in instances where life policy investments are the only assets of the fund;
  • The mechanism for granting early refunds of imputation credits to superannuation funds in respect of life insurance policies will add another administrative requirement to their already onerous compliance regime;
  • The taxation of investment income at the corporate rate will mean that assets supporting superannuation policy liabilities will need to be sold to fund tax payments. Only upon crediting of the bonus to the policyholder does a refund to the life company become available. Once the refund is received additional investment assets can be acquired. The time delay in the cash flow, however, increases the transaction costs and reduces the investment earnings – all costs which will be borne by the policyholder;
  • The refund mechanism only applies at the time ‘bonuses’ are assigned to policyholders. A large proportion of policies we sell only assign bonuses at the time of redemption – unit linked policies for example. This means that the super fund may wait many years before being eligible for the refund of excess imputation credits;
  • Amounts assigned to policies always include elements of unrealised asset appreciation/depreciation. Franking the bonus will therefore bring forward the taxation of unrealised gains (and losses). Realising this deficiency of investing via a life insurer, fund trustees will be obliged to seek more effective investment options on behalf of their members. This will cause massive disruption and result in enormous cost to the members of superannuation funds;
  • Amounts assigned to policyholders will include realised gains on assets. Taxable gains in respect of superannuation business are currently calculated after allowing for the effect of indexation – only realised gains are subject to tax. If policy bonuses are fully franked, the client superannuation fund loses the benefit of indexation. This provides further encouragement for the fund to exit life insurer based products and undertake direct portfolio investment.

We propose that the existing basis for taxing the superannuation and deferred annuity business of life insurers be retained. In order to address the perceived tax planning opportunities available to life insurers identified by the Review and to contribute to a simplification of the regime applying to life insurers, the following modifications to the existing tax basis are proposed:

  • A strengthening of the statutory fund mechanism for ring-fencing superannuation business by creating a complying superannuation sub-fund (within a statutory fund) and making transfers of assets into and out of this sub-fund a taxable transaction. The sub-fund would be taxed in a similar way to a PST;
    • More rigorous regulation of the amount of reserves which can remain in the ‘PST’ environment. We would suggest that earnings on capital adequacy reserves required by the life office regulator should continue to be taxed at the superannuation rate. In addition, earnings on smoothing reserves held within the ‘PST’ should be taxed at the rate applying to superannuation generally. This is because such reserves can be shown to be unavailable to shareholders but are yet to be allocated to specific policyholders. Earnings on reserves not referable to capital adequacy or supportable smoothing reserves should be taxed at the corporate rate;
    • Ensure that all profits that emerge from this business are regularly transferred out of the superannuation ‘sub-fund’ to the statutory fund where they will be taxable at the corporate rate. Transfers would be required at least annually.

Should these proposals appeal to the Review as a possible solution, we would like to participate in an ongoing dialogue to develop the concepts in more detail.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: How should the profit on immediate annuity business be determined?

Chapter Reference: 34

Preferred Option: We favour the administratively simple approach that we understand will be proposed by the Institute of Actuaries. This will value the annuities on an Option 1 basis (for how should the taxable income of a life insurer be calculated) with one small exception – the liabilities are valued on a current interest basis with the movement in unrealised gains on the separately identifiable block of assets backing this basis being used as an offset to the liabilities.

Discussion:

  • The basis is easy to apply and is consistent with normal actuarial valuations.
  • The basis can be used for all annuities both lifetime and fixed annuities and will mean unrealised gains are not taxed on either the asset or liability side.
  • This avoids detailed record keeping at the individual policy level and has an added bonus to the taxation authorities of taxing the underwriting profit as well which does not occur in the basis proposed by the RBT.

We are happy to elaborate on this further on this method.

Existing annuitants have the expectation of agreed annual payments under their contracts. In some cases, the agreed payments to the annuitant cannot be changed. In cases where payments can be changed, the annuitant is likely to have payments reduced for the impact of the new tax. It is the policyholder that will bear the cost of the proposed reforms. Self-funded retirees will be affected if life companies are forced to reduce agreed annuity payments to take account of increased taxes.

Our view, therefore, is that existing business should be quarantined from the new tax due to the long term nature of the existing contracts.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: How would franking credits be allocated between shareholders and policyholders?

Chapter Reference: 34

Preferred Option: The apportionment suggested at paragraphs 34.83 does not recognise the impact of unrealised gains and tax preferred income included in bonuses. Nor does it recognise the fact that new bonuses will be credited out of existing reserves which have already borne tax under the existing regime. This would therefore be an inequitable apportionment. An appropriate apportionment could be developed in conjunction with the Review/Treasury.

Discussion:

Given that our preferred option is that existing policyholders continue to have the current tax treatment of bonuses apply, we concur with the Review that the franking account of life insurers needs to be reduced by the franking credits which will be referable to existing policies.

A possible method of apportionment could be to debit the franking account based on a percentage derived from the assessable investment income referable to existing policyholders as a proportion of total investment income of the statutory fund. Policy liabilities could be the basis of apportioning assessable investment income.

For participating policyholders, franking credits should be allocated according to the principles used for allocation of profits.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: General Transitional Measures for Life Insurers.

Chapter Reference: 34

Preferred Option: 1. A start date of 1 July, 2001.

2. In terms of taxing life underwriting profit and fee income embedded in premiums, we strongly believe existing business should be excluded from the new regime.

Discussion:

The reform proposals for life insurers are far reaching – more so than for any other sector of the business community. We believe a start date of 1 July 2000 is unacceptable for our business for the following reasons:

  • We are being asked to design new products in response to the proposed reforms. This requires new administration systems and training of employees and distributors;
  • Year 2000 issues are imposing enormous stresses upon businesses. Our Year 2000 work requires a necessary freeze on systems work in the run-up to 1 January, 2000. Resources to modify systems for the impact of ‘tax reform’ will be very difficult (if not impossible) to find until April 2000. This gives us insufficient time to design and implement the necessary changes to systems by 1 July 2000;
  • We are already heavily committed to modifying our business systems in response to the proposed GST. The GST has a start date of 1 July 2000. To apply the same start date to the commencement of the tax reform measures is imposing an unrealistic burden upon all businesses, but in particular life insurers due to the structural changes to our products that will be required.

A start date of 1 July, 2001 would still be a challenging target for us, however we support the broader reform agenda and would therefore support that commencement date.

In addition to a deferred start date, we believe there needs to be significant quarantining of existing business from the application of the reform proposals.

We acknowledge the new tax base of life insurers is appropriate in the longer term, however, applying the reform proposals to existing business is inequitable on the following grounds:

  • Many of our risk and savings products have long term commitments embedded in them in terms of sum insured, investment returns and guaranteed level premiums. In many instances we do not have the opportunity to alter the ‘price’ to our policyholders. Immediate annuities are a classic example of this (but by no means the only example);
  • We have invested large sums of money in procuring our in-force business. The costs of procurement have largely been expended and ‘deducted’ under the current tax regime. In the case of ordinary life insurance, superannuation and annuity business we received very little or nothing in the form of a tax deduction for those costs. Certainly nothing like a deduction at the full corporate rate. Under the new tax regime fee income and underwriting profits will become assessable at the full corporate rate; however this income is largely a recovery of costs already expended. This would be tantamount to retrospective taxation.
  • Previous changes to the tax regime have allowed for transitional relief. In particular, we note that any changes to accelerated depreciation will only apply to new equipment. In a similar vein, we believe the changes to the taxation of life office profits should only apply to new business.

We therefore strongly believe that substantial transitional relief for life insurers is required on equitable grounds. We believe the relief should extend to all existing business in respect of :

  • Life underwriting profits; and
  • Fee income embedded in premiums.

We acknowledge that the new regime should apply from the commencement date in respect of:

  • Investment earnings on shareholder reserves to the extent that those reserves exceed capital adequacy requirements;
  • That the general corporate tax rate should apply to non-superannuation investment earnings and accident & disability profits from the commencement date.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: Can a deduction be claimed for fees paid to a life insurer?

Chapter Reference: 35

Preferred Option: Fees and expenses should be deductible under the general deduction provisions of the Act. An efficient way of delivering deductibility for management fees charged on policies would be to allow a deduction within the life office such that assessable bonuses/credits to policyholders would be net of policy fees.

Discussion:

Under a new regime where bonuses in respect of policies are assessable to the policyholder, it is appropriate that fees and expenses incurred in respect of deriving that income should be deductible.

The deductibility of fees and expenses needs to put on a similar footing to that applying to a unit trust investment.

This would require the repeal of section 67AAA of the Act.

In terms of any borrowing costs that may be incurred by the policyholder in acquiring an investment policy, any interest deductions would be claimed by the policyholder directly as part of the individual’s income tax return.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: When should new (non-superannuation) life insurance policies be taxed in the hands of the policyholder?

Chapter Reference: 35

Preferred Option: Option 3 – tax payable when bonuses are finally distributed to the policyholder and therefore ‘assigned’ for tax purposes.

Discussion:

We note and support the recommendation that the current tax treatment for taxing risk benefits received by policyholders remains unchanged.

Life insurance investment is a form of long term collective investment. We therefore agree that the taxation of bonuses at the marginal rate of the investor is appropriate and that any excess imputation credits should be refundable to the policyholder.

In terms of when such bonuses should be assessable in the hands of the policyholder we are of the view that only upon distribution should the bonus be assessable. Taxation of bonuses prior to distribution means that unrealised gains embedded in bonuses would be subject to tax. This is unfair when compared to the situation applying to unit trust investments. Option 3 offers flexibility in the timing of assessment and ensures that only realised gains be subject to tax.

We agree with the Review that under option 3, life insurers could offer two types of policies:

  • Policies where bonuses are assigned annually. These would be attractive to low marginal rate taxpayers; and
  • Policies where bonuses are assigned upon surrender or maturity. Such policies would be attractive to high marginal rate taxpayers.

This flexibility may encourage investors to take a long-term view in their savings decisions - a good thing from a national perspective.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: In respect of new (non-superannuation) life insurance policies, what amount should be assessable in the hands of the policyholder?

Chapter Reference: 35

Discussion:

Our submissions in respect of chapter 35 only refer to the non-superannuation investment business of life insurers as we believe that the superannuation business of life insurers should remain a tax paid product. Our reasons for this view are discussed in our submissions relating to chapter 34 of the paper.

We are in broad agreement with the Review’s proposals in respect of the amounts that should be included in policyholder assessable income. We are concerned with the likelihood that unrealised gains will form part of assessable bonuses for non investment-linked business, but cannot see any administratively simple solution to this problem. Some redesign of our products will therefore be necessary and we therefore express concern about the need for a delay in the implementation of the new regime in order to provide us with sufficient time to establish new systems and train our distribution force.

A July 1, 2001 start date is considered to be a minimum requirement. We refer to our general submission on transitional matters in this regard.

It should be noted that for investment account policies, there can be a clawback of previously credited bonuses in the event of significant falls in underlying values of assets backing the policy liability. In these instances, only the capital guaranteed portion of the bonus should be assessable. There would ultimately be a final taxable amount upon redemption of the policy.

It is important that life company investment policies be treated in a similar way to CIVs. That is, there is a flow through of ‘CGT’ status to the policyholder so that the policyholder can take advantage of any lower individual CGT rates that may arise from the business tax reforms; and also to provide the opportunity for offsets of gains against capital losses that the policyholder may have available. Unless this flow through is available, life company investment products will be at a competitive disadvantage to CIV products and direct investment.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: How should existing policies be taxed?

 

Chapter Reference: 35

Preferred Option: Option 1 - continue to apply the current taxation treatment to bonuses paid on existing life insurance investment policies.

Discussion:

Option 1would overcome the need to create franking credits on existing bonuses and also avoid any issues as to whether franking credits need to be created on undistributed policyholder reserves at the date of change in tax regimes.

Our preferred start date for the new regime is 1July, 2001. (See our submission on transitional issues).

We therefore believe that, providing risk commences prior to 1 July 2001 the existing tax basis should apply.

In instances where premiums payable in a particular year on existing policies exceed the premiums payable in the immediately preceding year by more than 25%, the policy should retain the existing status but trigger a recommencement of the 10 year requirement for full tax exemption.

This ensures no disruption to the existing investment arrangements of policyholders. The administrative complexity for life insurers in having to keep records of ‘new’ and ‘old’ policies is unfortunate, however the interests of existing policyholders need to be protected.

National Mutual Holdings Ltd.
447 Collins Street Melbourne, 3000

Contact Details:
Mr. Lewis Culliver,
Phone – (03) 9618 5303
Fax (03) 9618 5275
Email lculliver@nm.com

Submission to the Review of Business Taxation

"A Platform for Consultation"

Key Policy Issue: Who should be able to invest in PSTs and what rate of tax should apply?

Chapter Reference: 36

Preferred Option: We do not support any change to the current basis of taxing PSTs. Eligible investors in PSTs should continue to be restricted to complying superannuation funds.

Discussion:

The reform proposal to apply the redesigned imputation system to PSTs would be unnecessarily disruptive to the superannuation industry.

The issues are very similar to those discussed in our submissions on chapter 34 relating to the superannuation business of life insurers. Our view is that PSTs will cease to be a viable investment option for superannuation funds.

Our understanding is that an objective of the imputation system is to ensure that distributions of income are taxed at the marginal tax rates of the recipients of that income. Different individuals have different tax rates applying to them based on the level of their income. The imputation system ensures that the appropriate tax rate is paid. In the case of PSTs however, the tax rates of investors are known to be 15% - the superannuation fund rate. A system of imputation is therefore unnecessary where membership of the fund is restricted to complying superannuation funds.