Submission No. 40 Back to full list of submissions
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IFSA Response to ‘A Strong Foundation’

  1. IFSA
  2. The Investment and Financial Services Association was established in January 1998 to represent the interests of the life insurance, superannuation, unit trust and investment management segments of the Australian financial services industry. IFSA has 65 member companies holding more than $420 billion on behalf of about 9 million Australians who have superannuation, life insurance and public offer unit trust assets.

  3. One of IFSA’s goals is to promote stronger national savings. Another is to build an
  4. industry that is robust and efficient that will better serve its consumers. Tax reform is therefore vital to IFSA, its constituents and their customers.

  5. IFSA welcomes the review of business tax arrangements, as it did the Government’s
  6. package of personal and consumption tax initiatives. We support the objective of a stable, simpler and more coherent business tax system. We are pleased that Government intends to consult with industry on the details of these changes. IFSA is committed to working with the Business Tax Review to assist in ensuring that the nation achieves a fairer, simpler, and more efficient business tax system that promotes and works in harmony with key national objectives.


  7. IFSA endorses the approach of the Review has taken in setting national tax objectives of optimising economic growth, ensuring equity and facilitating simplification. However, in relation to these specific objectives we would make the following comments.
  8. Economic growth – role of national savings and international competitiveness
  9. It is unarguable, as the paper states, that the business tax system should not make Australia an unattractive destination for inbound investment, as to a large extent this investment has played an important role in our economic growth. In the words of Fitzgerald in the National Saving document (June 1993) ‘strong economic growth and high levels of saving and investment go hand in hand’.

  10. An equal, if not a more important pre-condition for growth, is a strong local savings and investment market. In terms of government savings, Australia has experienced success in driving down public debt and bringing budgets into balance. However, as confirmed in the 1998 Budget papers, Australia’s household savings stand at an historically low level.
  11. If Australia is unable to improve its household and public savings record there will be two likely outcomes. First, with mounting national debt, international ratings agencies are likely to downgrade the nation’s credit standing, impose interest rate premiums, and this will adversely affect the capacity of the nation to meet its debt obligations. The second concerns the more well known demographic problem that the economy will experience when the proportion of the population aged 65 or more will double during the next 20 – 30 years. Put simply, if the proportion of ‘non-workers’ in the economy increases significantly there needs to be a commensurate strengthening of the capital base to produce the same volume of goods and services.
  12. Capital accumulation of the type required to address this demographic imperative will not take place in the life of a single government. It is important therefore that both the business tax system and the personal tax system have strong and enduring bases that will simultaneously enhance savings, investment and capital accumulation.
  13. Attracting global capital will require Australian companies and other investment vehicles to be competitive not only in their structures, costs, governance, and capacity to generate wealth for their investors but also in the taxation regime which applies. As electronic commerce expands dramatically in the next decade, and global investing becomes as easy as dialing a phone or logging onto a personal computer, even retaining market share of the domestic savings market will become a challenge for local investment vehicles, if the taxation basis is less competitive than elsewhere.
  14. Accordingly, IFSA is concerned that the goal of economic growth should contain explicit statements of both the critical role of domestic savings in generating increased investment as well as the need for international competitiveness in our tax regime. Having such a statement will give both the Review and future governments a reference point from which it can build superior tax policy.
  1. In relation to any specific policy proposal it is of critical importance that a ‘savings impact assessment’ (SIA) be conducted. Achieving simplicity and equity should not take precedence over the national savings component of economic growth objective. The SIA should answer the following questions:
  • Will taxpayers that are affected be better off under the new system, if not why?
  • What will be the impact on national savings?
  • What will be the additional compliance costs at the company level and the Australian Taxation Office, and who will bear any additional compliance costs?
  1. Ensuring equity
  2. IFSA strongly supports the principle of equity that is outlined in the discussion

    paper. As will be stated later in this submission horizontal equity will need to be used as a ruler to determine the ultimate tax regime for personal savings products. The decision (based on the principles of simplification and uniformity) to treat unit trust products as elements of the business tax system will give rise to some unfortunate and unintended equity outcomes.

  3. Simplification
  4. IFSA supports the objective of simplification. Unfortunately, when it comes to national savings, especially long term retirement savings, this important principle has received neither due prominence nor adherence (e.g. the superannuation surcharge). Business taxation also has its share of complex, legalistic and difficult to administer taxation provisions. The 45 day rule on franking credits and the foreign income rules provide recent examples of over-engineered and inefficient tax measures that should be addressed by the Review.

  5. Simplification must, however, be assessed both at the systemic level, as well as at
  6. the individual taxpayer level. What may make a simple system for the tax collector may not always be the simplest system for the taxpayer.

    Policy design principles

  7. Comprehensive income versus direct expenditure approach
  8. IFSA generally supports the approach the Review has taken in establishing a set of principles that should underpin effective policy, legislation and administrative design for the business tax system. Having regard to national savings in the context of business tax reform, it is important to comment on the decision of the Review to adopt the comprehensive income tax (CIT) system as the benchmark to evaluate the tax system. Under this system all income would be taxed as it accrues, whether saved or spent.


  9. IFSA’s position is that the current CIT system taxes saving heavily, and significantly
  10. reduces the incentive to save. The current system doubly taxes savings, once on investment and again as earnings accumulate. This gives rise to large disparities in the effective rates of tax on savings and an inefficient allocation of household savings to some investment areas. In particular, this has resulted in an over-allocation of funds to owner occupied housing. Under the current income tax system a person with a marginal income tax rate of 50 per cent "sees" an investment yielding a return of 10 per cent as if it is yielded only 5 per cent. The community as a whole saves less and fails to grasp fully its economic opportunities.

  11. IFSA believes the Review should canvas the virtues of the alternative to the CIT,
  12. the direct expenditure tax (DET) approach to taxation policy. Under this system gains are not taxed as they accrue, but only after they have accumulated – when they are withdrawn to spend on consumption. They are, however, taxed at the point of consumption in the hands of the individual according to his/her capacity to pay – just as is the case for accruing gains under an income tax. The advent of widespread electronic commerce and the move to ‘cashless’ transactions will allow ‘tracking’ of transactions to make this approach feasible. Support for this approach can be found in the 1993 Fitzgerald report on National Saving that found: "the ideal benchmark for a pro saving tax regime is an expenditure tax…".

  13. Given the nature of the ageing of the population ahead, the direct expenditure tax model with tax paid on withdrawal to spend is a superior approach to retirement incomes policy.
  14. Currently, for example, taxation of superannuation savings (about $3 billion annually) is recorded as increased Budget revenue and as a contribution to national saving by the Budget sector. In fact, Commonwealth taxation of superannuation savings of itself adds nothing to national saving. Rather it involves appropriation of what were already private savings to be expended on public programs (more likely to be of a current rather than a capital nature).
  15. Consistent with the Government’s ‘Charter of Budget Honesty’ the extent to which public saving is really an appropriation of private saving should be fully exposed in the Budget papers. Instead, under the CIT approach the Government releases a Tax Expenditures Statement that quantifies the ‘taxation concessions of various kind’. The TES methodology is to estimate what tax cash flows would have been if funded superannuation had been taxed at the input stage (at relevant marginal rates) and unfunded superannuation taxed at the output stage (at marginal rates).
  16. However, if another benchmark is used it is harder to ascribe the term ‘concessions’ to the taxation of superannuation. Using the DET approach, where tax would only be due when benefits are paid and that taxes on contributions and earnings are inappropriate, gives decidedly different results. Research conducted by Access Economics for IFSA and ASFA using DET as the benchmark found that superannuation had been ‘overtaxed’ and was likely to become even more ‘overtaxed’ when the superannuation surcharge takes full effect.
  1. Furthermore, if an ‘intertemporal’ effect is incorporated an even ‘less concessional outcome’ is the result. In this regard Access Economics took into account the likely ‘down the track’ savings to age pension outlays as a result of increased self provision for retirement that has been induced by the so called tax concessions. According to Access Economics, using the DET approach and taking into account the down the track savings can lead to a conclusion that superannuation is ‘overtaxed’ as follows:
    1. $582 million
    1. $1,426 million
    1. $1,699 million
  1. Equity/neutrality vis a vis CIT
  2. It is argued in the Paper (paras. 6.13 and 6.84) that the principles of horizontal equity and neutrality imply consistent treatment of different entities regardless of their legal form and that taxing trusts as companies is an illustration of this. However, a more critical test for achieving equity/neutrality in respect to entity distributions is to seek alignment with the tax result for an individual investing directly in an income-producing asset, which clearly implies that companies should be taxed as trusts, and not vice versa.

  3. The entity tax proposals contained in the Government’s tax package appear to be
  4. compliance and anti-avoidance focused and therefore do not give sufficient weight to other more desirable (and certainly less distorting) options for achieving equity/neutrality objectives. While taxing companies as trusts may raise difficult issues in respect to the appropriate basis for, inter alia, the taxing of non-residents, such issues clearly also arise in respect to the proposed entity tax approach.

  5. In any event, some compromises with the CIT principle are clearly necessary as
  6. discussed in the Paper, for example, in respect to the taxation of nominal rather than real income. If the Review upholds the entity tax principle IFSA is strongly of the view that the viability of public unit trusts, life companies and other low risk/high compliance cost entities should not be compromised by the new regime. A way needs to be found that will ensure the continuing viability of these widely held savings vehicles. If a way is not found Australia will be out of step with international practice. It is worth noting that at least $5 trillion of the world’s $7 trillion mutual fund assets operate on the "pass through" principle.

  7. IFSA is also concerned with the potential adverse effects of the new regime on
  8. non-resident shareholders (due to an increase in tax on ‘unfranked’ dividends from 15 per cent to 36 per cent for residents of treaty countries). This outcome is at odds with the comments in the Discussion Paper (at 6.77 & 6.78) regarding the need for balanced taxation of international investment. As it would seem difficult for this matter to be appropriately resolved within the Committee’s relatively short reporting time frame, it may be preferable to defer it until later to allow sufficient time for negotiations with Australia’s main treaty partners.

  9. The proposed entity tax approach also appears to be out step with international trends
  10. towards lower corporate tax rates and taxation equivalence in the treatment of debt and equity. While subsequent Committee papers may deal with these issues, we remain to be convinced that they can be appropriately resolved within the entity tax framework.

  11. Review of superannuation and long term savings
  12. IFSA understands that the Review does not have a brief to review superannuation and long term savings policy. IFSA advises that it has written to the Government requesting that it set up an independent review into this key area of national savings. The preceding comments have been made to support the case for alternative benchmarks to evaluate the business tax system.

  13. Real or Nominal Taxation and Comprehensive Income
  14. IFSA strongly supports the view, that only real income should be assessed for income tax. We are disturbed by the suggestion that this principle might be compromised, and that income may not be comprehensively adjusted for inflation, indeed that all indexation might be removed. We believe the inquiry should make every possible effort to support the integrity of taxing only real incomes. Thus, the income definition in point 2 should, in IFSA’s view, be comprehensively adjusted for uniform inflation.

  15. Single Layer of Taxation
  16. We support the view that business income, and hence the income of the ultimate owners of the business, should not bear more than a single layer of Australian taxation. In IFSA’s view there is one aspect of the Tax Reform proposals which falls seriously short of that ideal. It is proposed that for most forms of collective investment for superannuation, tax will be collected via an inefficient and complex ‘round robin’. Unless current proposals are adjusted, eg in the way suggested below by IFSA, tax will be collected initially at a rate of 36 per cent, and then refunded to achieve the ultimate tax rate of 15 per cent. We believe this would clearly violate the principles of once only taxation, of simplicity, of certainty, and of designing tax legislation from the perspective of these that must comply.

  17. Integration of ownership interests
  18. At paragraph 51 the Discussion Paper states that the Review will cover corporate entities, partnerships, trusts, and other collective investment vehicles. The definition of ‘business income taxation’ is seen as being broader than the taxation of the operating income of ‘traditional businesses’ and would encompass individuals investing in shares or earning interest on savings deposits.

  19. IFSA has a fundamental concern with this approach. To include traditional saving products such as bank accounts, cash management trusts and share trusts severely undermines current expectations that individuals have had when they entered these products. Moreover the massive ‘bring forward’ of revenue by taxing these holdings in the entity will grossly detract from forms of national savings. Furthermore, these are not business entities. Rather, they are the products of individuals savings accumulated from post tax income.
  20. Mergers of small and inefficient trusts – Capital Gains Tax Relief

An important issue in capital formation in the managed investment industry is the need to merge small and uneconomic widely-held public offer trusts. This was a finding in the Wallis inquiry into the financial system. The principal impediment to these mergers is the imposition of capital gains tax on these trusts.

  1. Industry and ATO/Treasury interface
  2. IFSA applauds the Review for its creativity and sensitivity in preparing options for improving the government and industry interface when it comes to designing and implementing new tax law for Australian business. As the Review acknowledges there is considerable leeway for change in this area.

  3. IFSA understands that taxation policy and administration is extremely revenue
  4. sensitive and that public knowledge of a proposed change can cause the public revenue severe damage. Notwithstanding this, a way needs to be found to ensure that industry and tax-payer views are taken into account in formulating new policy. IFSA notes that the ATO has a number of consultative groups that serve as ‘lightening rods’ for a better tax system.

  5. Recent moves by the ATO (as flagged in the Corporate Consultative Committee context) to facilitate more meaningful consultation with industry in accordance with the co-design principle seems to be a step in the right direction. However, more precise details of the proposed consultative approach are required before any final assessment could be made.
  1. The formation of the Superannuation Advisory Committee is an excellent example of how enhanced links can be forged between industry and the ATO. It is important that industry consultation of this type be genuine and receive the support of officers in the ATO’s senior ranks. In this regard consideration could be given to including a brief statement on the work of each consultative group in the ATO’s annual report to the Parliament.
  2. IFSA also supports the formation of integrated teams comprising officers from Treasury, ATO and the Office of Parliamentary Counsel. However, these teams will only add value if the ATO and Treasury officials bring to the process the full range of public policy skills that include a keen awareness of the practicalities and market impact of moving down a particular legislative path.
  3. Finally, IFSA supports the concept of an Advisory Board that would give advice to the Treasurer and the Parliament on an ongoing basis on the overall health of the business tax system, including in respect to the nature of consultation with industry on particular policy or administrative measures. The advisory Board should draw on expertise from the broad industry groups and include a representative from the financial services industry.
  4. Specific concerns

  5. IFSA has a number of important points on specific aspects of the proposal, as set out below.
  6. Taxing public managed investment trusts as companies

  7. IFSA believes the proposed measure will:
  • cause permanent savings depletion and significant cash flow disadvantages for retirees and other low or middle income unit holders who earn less than $50,000 by taxing public managed investment trusts ‘up front’ - each year these people would effectively give the Government part of their savings for a period on average between nine to 12 months, and get it back without interest;
  • result in unfair overpayment of tax that will effectively be permanently stripped from the savings of those retirees and others who do not lodge a tax return, because they would not otherwise have to and cannot grapple with the franking credit refund mechanism - we estimate that hundreds of thousands of retirees and other investors will be required to lodge a tax return or suffer this consequence;
  • cause tax distortions which skew the average Australian investor towards direct investment and away from highly productive assets yielding high returns via managed trust investments, such as venture capital enterprises and small and medium size enterprises. Typically low and middle income earners do not have the ability that high income earners have to diversify investments on their own account and will lose the benefit of investment management expertise if they invest directly;
  • introduce potentially substantial tax detriments to all of the almost 3 million people who invest via public managed investment trusts, as compared to both their current tax treatment and the proposed treatment if they invest directly. The detriments arise from aspects of the proposal such as:

- loss of both capital gains tax indexation and averaging for gains earned on disposal of trust assets;

- taxation of distributions which are currently not assessable income (eg. certain property trust income);

- likely double taxation where a trust incurs expenses and invests directly into equities or other trusts, along with loss of use of franking credits in these circumstances;

- likely double taxation on foreign-sourced income;

- loss of ability to offset capital losses they make against gains received by a trust;

  • the enormous expense of administrative system changes needed the accommodate the proposed tax regime.
  • create massive tax distortions between public managed investment trusts and direct investments, to the point where the competitive characteristics of some Australian markets are threatened. For example:

- cash management trusts will face serious decline or demise, giving major banks renewed domination of the transaction account market. Cash management trusts provide a transparent alternative to the bank account, whereby investment in higher yielding interest-bearing securities is pooled, with the returns being passed through to investors in the trust (in contrast to bank rates, which are set by the bank). For many low or middle income Australians it is the only means of attaining an interest in assets such as bank bills. If the proposal to tax cash management accounts but not bank accounts proceeds then, over time, banks could exploit their tax advantage such that their dominance in the market would be reflected in lower bank account returns and higher bank profits;

- the $30 billion listed property trust industry would be placed at risk notwithstanding that it is widely acknowledged as a world leader and provides funding for a city and regional office and infrastructure projects that employ tens of thousands of Australians;

  • jeopardise the international competitiveness of Australia’s $150 billion public managed investment trusts industry. Specifically, it would:

- place Australia out of step with and under threat from comparative international regimes. Indeed, the proposal is out of step with the Government’s recent initiative to favour US fund managers with an exemption under the FIF rules. One of the stated reasons for that move was to expose Australian fund managers to competition from US funds, yet the business tax proposal would place Australian managers at an unfair disadvantage and could greatly undermine the viability of the Australian industry. Retirees would favour U.S. mutual fund products, purchased over the internet and via direct offer by way of telephone and direct mail sales.

- undermine Australia’s opportunity to become a financial hub of the Asia Pacific region. The proposal is likely to decrease the attractiveness of Australian unit trusts to overseas investors, as a result of increased withholding tax rates being increased and offshore income derived by non-residents being subjected to taxation. This is contrary to the Government’s commitment to maintaining both "the attractiveness of Australia as an investment location" and the "internationally competitive taxation treatment of business investments."

Life insurance companies and Pooled superannuation trusts (PSTs)

  1. Pooled Superannuation Trusts (PSTs) are superannuation trusts which comply
  2. with certain conditions set out in the SIS legislation, and into which complying funds place their investments. IFSA data indicates that currently there is approximately $78 billion in these vehicles.

  3. A PST allows small tranches of superannuation moneys to be pooled and thereby driving down brokerage, transaction costs, and funds management charges.
  4. Historically, the taxation of life insurance has differed from that of other financial products reflecting the unique combination of features that it presents, viz:
  • the very long term commitments involved, and the over-arching statutory and regulatory framework, designed to ensure that these commitments will be honoured;
  • the combination of savings and the provision of financial protection to individuals and their dependants in the event of death, disability or retirement;
  • the importance of this form of contractual saving (whether via ordinary or superannuation policies) for the creation of pools of long-term investment capital, particularly for Australian industry;
  • life insurance saving serves to ameliorate social security outlays; and
  • at times, the application of particular government policies (usually expressed in particular taxation treatment) designed to encourage long-term saving and greater self-provision against various risks – both of which reduce burdens on public budgets.
  1. In its 1975 Report, the Asprey Committee articulately expressed the reasons for giving special tax treatment to life insurance, together with superannuation, because:
  2. "…they are, apart from the purchase of a house, the only common forms of contractual long-term savings in Australia and these savings provide a very significant pool of long-term investment capital."

  3. That remains true today, albeit that the balance has shifted significantly towards superannuation, consistent with government policies for superannuation as the preferred vehicle for retirement savings.
  4. The dominance of superannuation is reflected in the business mix of most life companies with superannuation savings now representing around 80 per cent of new business and 65-70 per cent of total in-force business.
  5. Neutral (consistent) taxation treatment of superannuation (whether transacted within a superannuation fund or via a collective investment vehicle such as a life company or PST) has been a long standing feature of Australian taxation policy and legislation. There are specific provisions in the existing income tax law designed to give effect to this principle.
  6. This approach provides superannuation funds (particularly small to medium size funds) and their members with similar advantages to that afforded by public offer unit trusts to individual investors including a greater range of investment opportunities, lower risk through diversification, potential for superior long-term performance and the benefit of full-time specialist investment managers.
  7. Cash-flow Disadvantages

Under the Government’s Tax Reform proposals, superannuation fund investments via life companies or PSTs would be significantly disadvantaged vis-à-vis direct investments by funds.

In particular:

  • funds would be faced with paying tax initially at 36% rather than at their current rate of 15%;
  • tax would be paid, on average, up to 12 months earlier than is presently the case;
  • the foregone earnings on this early tax payment would amount to a direct transfer from investors to the ATO (ie. essentially an interest free loan to Revenue);
  • funds would be able to obtain a credit or refund of the excessive (21 per cent) tax deducted at the life company/PST level but on average there would be a 12 month lag;
  • this lag would occur every year;
  • assets would be liquidated each year to pay the tax owed, then the refunds re-invested – creating unnecessary transaction costs as well as potential market volatility around tax time.
  1. Requirement to Lodge Returns

Rather than simplifying the existing tax return compliance process and reducing the number of taxpayers required to lodge returns, the proposal to extend entity taxation to life company (and PST) superannuation business would have precisely the opposite effect:

  • a large number of funds would be required to lodge income tax returns for the first time simply in order to obtain refunds of overpaid tax;
  • this outcome would be clearly inconsistent with a specific provision (s. 275) of the existing income tax law which provides a facility to enable funds to transfer their contributions tax liability to life companies so that the latter can incorporate payment of the tax via their tax returns and thereby relieve the relevant funds from any obligation to lodge returns;
  • the ATO may need to devote more resources to upgrade its compliance management processes and education programs; and
  • funds which fail, for whatever reason, to lodge an income tax return would suffer a massive tax detriment.
  1. Distortions between competing products
  2. The Government’s primary objective in extending the ‘entity’ tax regime to PST’s and life companies is presumably to ensure consistency of treatment with other companies, both in respect to policyholders and shareholders.


  3. While IFSA does not contest the broad principles underlying the reform proposals for life insurance taxation, particularly in respect to shareholders, a major issue of concern is the prospective inconsistency which would be introduced between the treatment of savings in PST’s and life company funds versus those held directly by superannuation funds.
  4. This inconsistency or non-neutrality arises in part from the proposal to tax PST and life company superannuation business initially at the company or entity rate (currently per cent), but subject to a refund in the following year to bring the rate back to 15 per cent. This process appears to be administratively cumbersome, expensive and inefficient, as well as providing a short-term interest free ‘loan’ to the ATO.
  5. It is not clear why the existing 15 per cent rate for superannuation business cannot be retained as it does not appear to be an integral part of the new ‘entity’ tax regime. While it may reduce the need to apportion expenses between different classes of business taxed at different rates, the costs of achieving this would clearly outweigh the perceived benefits.
  6. In any event, IFSA believes that a much more sensible and practical solution would be to allow the life company to make an initial deduction of the 21 per cent in respect of superannuation fund policyholder income. This would mean that the income tax remitted to the ATO becomes the correct final amount – which is, after all, known with certainty at the outset. It is also noted that unless a more efficient system is agreed, ‘short-circuiting’ the round robin, life insurance superannuation policies may simply cease to exist, as superannuation trustees can migrate entirely to alternatives without the major disincentives currently proposed if they use life funds. This could cause a massive disruption in financial markets as assets would change hands and capital gains taxes and stamp duty charges would be triggered.
  7. Growth Assets

Superannuation funds and related entities (eg. life companies in respect to their superannuation business and PSTs), which invest in growth assets such as shares and real property pay capital gains tax (CGT) on gains from the realisation of those assets. The amount that is subject to CGT is determined after allowing for inflation. This position is based on a specific provision in the income tax law and mirrors that applying to similar investments made directly by individual investors.

  1. Under current arrangements, the benefit of CGT indexation is available to a superannuation fund regardless of whether the fund invests directly or via a life insurance company or PST. A similar position applies in the case of any tax-preferred income derived by a fund such as the tax-deferred component of property trust distributions.

  3. The Government’s deferred company tax (DCT) proposals operate to tax at 36 per cent both the distribution of the indexation component of any capital gains and any tax preferred income by a life company (or PST). IFSA believes that DCT should only be implemented in such a way that it does not wash out the benefits of CGT cost base indexation or any other "concessions" – which, in the main, are designed to limit taxation to economic income rather than capital itself.
  4. In addition, as it is fundamental to our income tax system that capital gains are not taxed until they are realised, the proposal for taxing assignments of bonuses to investment policies each year appears to breach this principle. Accordingly, IFSA suggests that a better alternative is to tax the policyholder (whether an individual or a fund) only when a cash benefit is derived from the policy.
  1. Symmetry of Treatment of Expenses
  2. One effect of the new entity regime applied to life insurance is that all premium loadings, management fees, etc will become explicitly assessable to the life company. The critical issue for the policyholder is that, to avoid double taxation, all amounts paid by the policyholder in respect to the acquisition and servicing of a policy generating assessable income should be deductible, which is not the case at present.

  3. Accordingly, if life company charges/fees are to be included as an explicit item of income in calculating the tax on shareholders, these same fees should be an explicit deduction against income of policy owners to the extent that they represent a cost of earning assessable income.
  4. Transitional Rules

While IFSA welcomes the intention to provide grand-fathering for individual policies written before the proposed new rules commence on 1 July 2000, it is suggested that transition arrangements for life insurers should not be determined until the outcome of the Ralph review is known. This is especially important given the Review’s objective of achieving a reduction in the company tax rate to 30 per cent.

  1. Phase-in

In the light of the estimated increase of around $500 million in the industry’s tax burden (not including the net effect of the indirect tax changes such as the GST and retention of stamp duty on insurance policies), IFSA requests that the increase be phased-in over a period of at least 3 years to ensure an orderly transition process.