Part 3‑10—Financial transactions
Division 240—Arrangements treated as a sale and loan
Table of Subdivisions
Guide to Division 240
240‑A Application and scope of Division
240‑B The notional sale and notional loan
240‑C Amounts to be included in notional seller’s assessable income
240‑D Deductions allowable to notional buyer
240‑E Notional interest and arrangement payments
240‑F The end of the arrangement
240‑G Adjustments if total amount assessed to notional seller differs from amount of finance charge
240‑H Application of Division 16E to certain arrangements
240‑I Provisions applying to hire purchase agreements
240‑1 What this Division is about
For income tax purposes, some arrangements (such as hire purchase agreements) are recharacterised as a sale of property, combined with a loan, by the notional seller to the notional buyer, to finance the purchase price.
240‑3 How the recharacterisation affects the notional seller
Effect of notional sale
(1) The consideration for the notional sale is either the price stated as the cost or value of the property or its arm’s length value. If the notional seller is disposing of the property as trading stock, the normal consequences of disposing of trading stock follow. In particular, the notional seller will be assessed on the sale price.
(2) Where the property is not trading stock the notional seller’s assessable income will include any profit made by the notional seller on the notional sale or on the sale of the property after a notional re‑acquisition.
Effect of notional loan
(3) The notional seller’s assessable income will include notional interest over the period of the loan.
Other effects
(4) These effects displace the income tax consequences that would otherwise arise from the arrangement. For example, the actual payments to the notional seller are not included in its assessable income. Also, the notional seller loses the right to deduct amounts under Division 40 (about capital allowances).
240‑7 How the recharacterisation affects the notional buyer
Effect of notional purchase
(1) The cost of the acquisition is either the price stated as the cost or value of the property or its arm’s length value. If the notional buyer is acquiring the property as trading stock, the normal consequences of acquiring trading stock follow. In particular, the notional buyer can usually deduct the purchase price.
(2) If the property is not trading stock, the notional buyer may be able to deduct amounts for the expenditure under Division 40 (about capital allowances).
Effect of notional loan
(3) The notional buyer may be able to deduct notional interest payments over the period of the loan.
Other effects
(4) These effects displace the income tax consequences that would otherwise arise from the arrangement. For example, the notional buyer cannot deduct the actual payments to the notional seller.
Subdivision 240‑A—Application and scope of Division
Table of sections
Operative provisions
240‑10 Application of this Division
240‑15 Scope of Division
240‑10 Application of this Division
An *arrangement is treated as a notional sale and *notional loan if:
(a) the arrangement is listed in the table below; and
(b) the arrangement relates to the kind of property listed in the table; and
(c) any conditions listed in the table are satisfied.
Special provisions that apply to particular arrangements are also listed in the table.
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This Division applies to: |
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*Arrangements of this kind: |
That relate to this kind of property: |
If these conditions are satisfied: |
Special provisions: |
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1 |
*Hire purchase agreement |
Any goods |
None |
See Subdivision 240‑I |
This Division has effect for the purposes of this Act and for the purposes of the Income Tax Assessment Act 1936 other than:
(a) Parts 3‑1 and 3‑3 of this Act (capital gains tax); and
(b) Division 11A of Part III of the Income Tax Assessment Act 1936 (certain payments to non‑residents etc.).
Subdivision 240‑B—The notional sale and notional loan
Table of sections
Operative provisions
240‑17 Who is the notional seller and the notional buyer?
240‑20 Notional sale of property by notional seller and notional acquisition of property by notional buyer
240‑25 Notional loan by notional seller to notional buyer
240‑17 Who is the notional seller and the notional buyer?
(1) An entity is the notional seller if it is a party to the *arrangement and:
(a) actually owns the property; or
(b) is the owner of the property because of a previous operation of this Division.
(2) An entity is the notional buyer if it is a party to the *arrangement and, under the arrangement, has the *right to use the property.
Example: If the arrangement is a hire purchase agreement, the finance provider will be the notional seller and the hirer will be the notional buyer.
(1) The *notional seller is taken to have disposed of the property by way of sale to the *notional buyer, and the notional buyer is taken to have acquired it, at the start of the *arrangement.
(2) The *notional buyer is taken to own the property until:
(a) the *arrangement ends; or
(b) the notional buyer becomes the *notional seller under a later *arrangement to which this Division applies.
240‑25 Notional loan by notional seller to notional buyer
(1) On entering into the *arrangement, the *notional seller is taken to have made a loan (the notional loan) to the *notional buyer.
(2) The notional loan is for a period:
(a) starting at the start of the *arrangement; and
(b) ending on the day on which the arrangement is to cease to have effect or, if the arrangement is of indefinite duration, on the day on which it would be reasonable to conclude, having regard to the terms and conditions of the arrangement, that the arrangement will cease to have effect.
(3) The notional loan is of an amount (the notional loan principal) equal to the consideration for the sale of the property less any amount paid, or credited by the *notional seller as having been paid, by the *notional buyer to the notional seller, at or before the start of the *arrangement, for the cost of the property.
Note: Section 240‑80 affects the amount of the notional loan principal where the arrangement is an extension or renewal of another arrangement.
(4) The notional loan is subject to payment of a charge (the finance charge).
(5) The consideration for the sale of the property by the *notional seller, and the cost of the acquisition of the property by the *notional buyer, are each taken to have been:
(a) if an amount is stated to be the cost or value of the property for the purposes of the *arrangement and the notional seller and the notional buyer were dealing with each other at *arm’s length in connection with the arrangement—the amount so stated; or
(b) otherwise—the amount that could reasonably have been expected to have been paid by the notional buyer for the purchase of the property if:
(i) the notional seller had actually sold the property to the notional buyer at the start of the arrangement; and
(ii) the notional seller and the notional buyer were dealing with each other at arm’s length in connection with the sale.
(6) The *notional loan principal is taken to be repaid, and the *finance charge is taken to be paid, by the making of the payments under the *arrangement.
Subdivision 240‑C—Amounts to be included in notional seller’s assessable income
240‑30 What this Subdivision is about
This Subdivision provides for the inclusion in the notional seller’s assessable income of:
(a) amounts (notional interest) on account of the finance charge for the notional loan that the notional seller is taken to have made to the notional buyer; and
(b) any profit made by the notional seller:
(i) on the notional sale of the property to the notional buyer; or
(ii) on a sale of the property after any notional re‑acquisition of the property by the notional seller.
Table of sections
Operative provisions
240‑35 Amounts to be included in notional seller’s assessable income
240‑40 Arrangement payments not to be included in notional seller’s assessable income
240‑35 Amounts to be included in notional seller’s assessable income
Notional interest
(1) The *notional seller’s assessable income of an income year includes the *notional interest for *arrangement payment periods, and parts of arrangement payment periods, in the income year.
Profit on notional sale
(2) If the property is not *trading stock of the *notional seller and the consideration for the notional sale of the property exceeds the cost of the acquisition of the property by the notional seller, the excess is included in the notional seller’s assessable income of the income year of the notional sale.
Profit on actual sale after notional re‑acquisition
(3) If:
(a) the *notional seller is taken under this Division to have re‑acquired the property from the *notional buyer; and
(b) the notional seller afterwards sells the property; and
(c) the consideration for the sale exceeds the cost of the re‑acquisition;
the excess is included in the notional seller’s assessable income of the income year in which the sale occurred.
240‑40 Arrangement payments not to be included in notional seller’s assessable income
(1) The *arrangement payments that the *notional seller receives, or is entitled to receive, under the *arrangement:
(a) are not to be included in the *notional seller’s assessable income of any income year; but
(b) are not taken to be *exempt income of the notional seller.
(2) However, those *arrangement payments are taken into account in calculating *notional interest that is included in the *notional seller’s assessable income under section 240‑35.
(3) A loss or outgoing incurred by the *notional seller in deriving any such *arrangement payments is not taken to be a loss or outgoing incurred by the notional seller in relation to gaining or producing *exempt income.
Subdivision 240‑D—Deductions allowable to notional buyer
240‑45 What this Subdivision is about
This Subdivision provides that the notional buyer may, in certain circumstances, be entitled to deductions for the notional interest for the notional loan that the notional seller is taken to have made to the notional buyer.
Table of sections
Operative provisions
240‑50 Extent to which deductions are allowable to notional buyer
240‑55 Arrangement payments not to be allowable deductions
240‑50 Extent to which deductions are allowable to notional buyer
(1) The *notional buyer is only entitled to deduct *notional interest for an income year to the extent that the notional buyer would, apart from this Division, have been entitled to deduct *arrangement payments for that income year if no part of those payments were capital in nature.
(2) The *notional buyer is entitled to deduct *notional interest for *arrangement payment periods, and parts of arrangement payment periods, in the income year.
240‑55 Arrangement payments not to be allowable deductions
The *notional buyer is not entitled to deduct *arrangement payments that the *notional buyer makes under the *arrangement, but those payments are taken into account in calculating *notional interest that may be deducted under section 240‑50.
Subdivision 240‑E—Notional interest and arrangement payments
Table of sections
Operative provisions
240‑60 Notional interest
240‑65 Arrangement payments
240‑70 Arrangement payment periods
(1) The *notional interest for an *arrangement payment period is worked out as follows:
Calculating *notional interest
Step 1. Add the *notional interest from previous *arrangement payment periods to the *notional loan principal.
Step 2. Subtract any *arrangement payments that have already been made or that are due but that have not been made. The result is the outstanding notional loan principal as at the start of the *arrangement payment period.
Step 3. Work out the implicit interest rate. It is the rate of compound interest for the *arrangement payment period at which the *notional loan principal equals the sum of:
(a) the present value of the *arrangement payments payable by the *notional buyer under the *arrangement; and
(b) the present value of any *termination amounts.
Step 4. Multiply the outstanding *notional loan principal by the implicit interest rate. The result is the notional interest for the *arrangement payment period.
(2) If only part of an *arrangement payment period occurs during an income year, the *notional interest for that part of the arrangement payment period is so much of the notional interest for that arrangement payment period as may appropriately be related to that income year in accordance with generally accepted accounting principles.
(3) In calculating the implicit interest rate, if any of the relevant amounts are not known at the start of the *arrangement, a reasonable estimate of the amount is to be made and is to be used for the purposes of calculating the implicit interest rate for each income year of the *notional seller.
(4) If a reasonable estimate cannot be made at that time, an estimate of the amount is to be made at the end of each income year of the *notional seller for the purposes of calculating the implicit interest rate for each income year of the notional seller.
An arrangement payment is an amount that the *notional buyer is required to pay under the *arrangement but does not include:
(a) an amount in the nature of a penalty payable for failure to make a payment on time; or
(b) a *termination amount.
240‑70 Arrangement payment periods
(1) An *arrangement payment period is a period for which a payment under the *arrangement is allocated or expressed to be payable.
(2) However, if a period exceeds 6 months, the period is not an *arrangement payment period but each of the following parts of the period is a separate arrangement payment period:
(a) the part of the period beginning at the start of that period and ending 6 months later;
(b) each part of the period:
(i) beginning immediately after a part of the period that is an arrangement payment period under paragraph (a) or under a previous application of this paragraph; and
(ii) ending 6 months after the start of that later part or at the end of the period, whichever first occurs.
Subdivision 240‑F—The end of the arrangement
Table of sections
Operative provisions
240‑75 When is the end of the arrangement?
240‑78 Termination amounts
240‑80 What happens if the arrangement is extended or renewed
240‑85 What happens if an amount is paid by or on behalf of the notional buyer to acquire the property
240‑90 What happens if the notional buyer ceases to have the right to use the property
240‑75 When is the end of the arrangement?
(1) If the *arrangement is stated to cease to have effect at a particular time, it is taken for the purposes of this Division to end (even if it is extended or renewed) at the earlier of:
(a) that time; or
(b) the time at which the arrangement ceases to have effect (whether because the arrangement is terminated or for any other reason).
Note: Section 240‑80 deals with extensions and renewals.
(2) An *arrangement is taken to have ended if it is extended or renewed.
(3) If the *arrangement is of indefinite duration, it ends at the time at which the arrangement ceases to have effect even if the *arrangement is renewed.
Note: Section 240‑80 deals with extensions and renewals.
(4) An *arrangement is taken to have ended if it is reasonable to conclude, having regard to the terms and conditions of the *arrangement, that the arrangement has ceased to have effect.
(5) An *arrangement is also taken to have ended if the property has been lost or destroyed.
A termination amount is an amount payable because an *arrangement ends and includes:
(a) if, at the end of the arrangement, the *notional buyer acquires the property from the *notional seller—an amount payable to the notional seller for the acquisition; or
(b) if, at the end of the arrangement, the property is lost or destroyed—any amounts paid to the notional seller (whether by the notional buyer or another entity) as a result of the loss or destruction of the property; or
(c) otherwise—the value of the property at the end of the arrangement.
240‑80 What happens if the arrangement is extended or renewed
(1) This section sets out what happens if, after the end of the *arrangement, the *notional buyer and *notional seller extend or renew the *arrangement.
(2) This Division applies as if the original *arrangement has ended and the extended arrangement or renewed arrangement is a separate arrangement (the new arrangement).
(3) There is not, however, taken to be any disposal or acquisition as a result of the original arrangement ending or of the new arrangement starting and the *notional buyer does not cease to own the property.
(4) Also, the *notional loan principal for the new loan is:
(a) if the *arrangement as extended or renewed states an amount as the cost or value of the property for the purposes of the extension or renewal and the *notional seller and the *notional buyer were dealing with each other at *arm’s length in connection with the extension or renewal—the amount so stated; or
(b) otherwise—the amount that could reasonably have been expected to have been paid by the notional buyer for the purchase of the property if:
(i) the notional seller had actually sold the property to the notional buyer when the arrangement was extended or renewed; and
(ii) the notional seller and notional buyer were dealing with each other at arm’s length in connection with the sale.
(5) Subdivision 240‑G applies to the *notional loan for the original arrangement. For that purpose, the *notional loan principal for the new arrangement is taken to be a *termination amount paid to the *notional seller under the original arrangement.
If, at or after the end of the *arrangement, an amount is paid to the *notional seller by, or on behalf of, the *notional buyer to acquire the property, the following provisions have effect:
(a) the amount paid is not included in the notional seller’s assessable income;
(b) the notional buyer cannot deduct the payment;
(c) the notional buyer is taken to continue to own the property;
(d) the transfer to the notional buyer of legal title to the property is not taken to be a disposal of the property by the notional seller.
240‑90 What happens if the notional buyer ceases to have the right to use the property
(1) This section applies if, at the end of the *arrangement:
(a) the arrangement is not extended or renewed in the way mentioned in subsection 240‑80(1); and
(b) no amount is paid to the *notional seller by, or on behalf of, the *notional buyer to acquire the property; and
(c) the property is not lost or destroyed.
(2) The property is taken to have been disposed of by the *notional buyer by way of sale back to the *notional seller, and to have been acquired by the *notional seller, at the end of the *arrangement.
(3) The consideration for the sale of the property by the *notional buyer, and the cost of the acquisition of the property by the *notional seller, are each taken to be equal to the *market value of the property at the end of the *arrangement.
(4) Subsection (5) applies where the property is a *car and if it:
(a) had been bought from the *notional seller, when this Division first applied to an *arrangement in respect of the car, by the *notional buyer for a price equal to the *notional loan principal; and
(b) had been first used by the notional buyer for any purpose in the *financial year in which that time occurred;
the cost of the car, for the purpose of working out its decline in value for that person under Division 40, would have been limited by section 40‑230.
240‑100 What this Subdivision is about
This Subdivision provides for adjustments if the sum of the amounts included in the notional seller’s assessable income are greater or less than the finance charge, worked out at the end of the arrangement, for the notional loan.
Table of sections
Operative provisions
240‑105 Adjustments for notional seller
240‑110 Adjustments for notional buyer
240‑105 Adjustments for notional seller
(1) This section applies at the end of the *arrangement.
(2) If the sum of:
(a) all amounts (other than *termination amounts) that were paid or payable to the *notional seller under the *arrangement; and
(b) any termination amounts paid or payable to the notional seller;
exceeds the amount worked out using the formula in subsection (4), the excess is included in the notional seller’s assessable income of the income year in which the arrangement ends.
Note: Subsection 240‑80(5) provides that the amount of a notional loan that is taken to be made by an extended or renewed arrangement is a termination amount paid under the previous arrangement.
(3) If the amount worked out using the formula in subsection (4) exceeds:
(a) all amounts (other than *termination amounts) that were paid or payable to the *notional seller under the *arrangement; and
(b) any termination amounts paid or payable to the notional seller;
the notional seller is entitled to deduct the excess in the income year in which the arrangement ends.
Note: Subsection 240‑80(5) provides that the amount of a notional loan that is taken to be made by an extended or renewed arrangement is a termination amount paid under the previous arrangement.
(4) The formula for the purposes of subsections (2) and (3) is:
where:
assessed notional interest means the *notional interest that has been or is to be included in the *notional seller’s assessable income of any income year.
240‑110 Adjustments for notional buyer
(1) If:
(a) an amount is included in the *notional seller’s assessable income of an income year under subsection 240‑105(2); or
(b) an amount would have been so included if the notional seller had been subject to tax on assessable income;
the *notional buyer is entitled to deduct a corresponding amount in the notional buyer’s income year.
(2) If:
(a) the *notional seller is entitled to deduct an amount for an income year under subsection 240‑105(3); or
(b) the notional seller would have been so entitled if the *notional seller had been subject to tax on assessable income;
a corresponding amount is included in the notional buyer’s assessable income for the notional buyer’s income year.
(3) The *notional buyer is entitled to a deduction, and is required to include an amount in his or her assessable income only to the extent (if any) that the notional buyer would, apart from this Division, have been entitled to deduct *arrangement payments if no part of those payments were capital in nature.
Subdivision H—Application of Division 16E to certain arrangements
240‑112 Division 16E applies to certain arrangements
(1) Division 16E of Part III of the Income Tax Assessment Act 1936 applies in relation to an arrangement (the assignment arrangement) between the notional seller and another person (the holder) to transfer the right to payments (the Division 240 payments) under an arrangement that is treated as a sale and loan by this Division (the sale and loan arrangement).
(2) In applying Division 16E, the following assumptions are to be made:
(a) the assignment arrangement is the qualifying security;
(b) the notional seller is the issuer;
(c) the qualifying security is issued when the assignment arrangement is entered into;
(d) the issue price is consideration provided to the notional seller under the assignment arrangement;
(e) the Division 240 payments are payments made by the notional seller under the assignment arrangement;
(f) no part of the payments represent periodic interest.
(3) This Subdivision does not apply if the assignment arrangement gives rise to a termination of the sale and loan arrangement for the purposes of this Division.
(4) To avoid doubt, Division 6A of Part III of the Income Tax Assessment Act 1936 does not apply to an assignment arrangement to which this Subdivision applies.
Subdivision 240‑I—Provisions applying to hire purchase agreements
Table of sections
Operative provisions
240‑115 Another person, or no person taken to own property in certain cases
240‑115 Another person, or no person taken to own property in certain cases
(1) This section sets out special modifications of the effect of this Division that apply in relation to a *hire purchase agreement unless:
(a) the notional buyer would have been the owner or the *quasi‑owner of the property if the *arrangement had been a sale of the property; and
(b) it is reasonably likely that the right, obligation or contingent obligation to acquire the property will be exercised by, or in respect of, the notional buyer.
Note: An example of a contingent obligation is a put option.
(2) The modifications also apply if the *notional buyer:
(a) disposes of his or her interest in the property; or
(b) enters into a lease covered by Division 42A of Schedule 2E to the Income Tax Assessment Act 1936 under which he or she leases the property to another person.
Modifications
(3) For the purpose of the *capital allowance provisions, if, apart from the operation of this Division, an entity other than the *notional seller would own the property that is the subject of an agreement covered by this section, that entity is taken to be the owner of the property.
(4) For the purpose of the *capital allowance provisions, if, apart from the operation of this Division, the *notional seller would own the property that is the subject of an agreement covered by this section, no entity is taken to be the owner of the property.
Division 243—Limited recourse debt
Table of Subdivisions
Guide to Division 243
243‑A Circumstances in which Division operates
243‑B Working out the excessive deductions
243‑C Amounts included in assessable income and deductions
243‑D Special provisions
243‑10 What this Division is about
This Division tells you when you must include an additional amount in your assessable income at the termination of a limited recourse debt arrangement. It also tells you what the additional amount is.
Basically, the Division applies where the capital allowance deductions that have been obtained for expenditure that is funded by the debt and the deductions are excessive having regard to the amount of the debt that was repaid.
The reason for the adjustment is to ensure that, where you have not been fully at risk in relation to an amount of expenditure, you do not get a net deduction if you fail to pay that amount.
Subdivision 243‑A—Circumstances in which Division operates
Table of sections
Operative provisions
243‑15 When does this Division apply?
243‑20 What is limited recourse debt?
243‑25 When is a debt arrangement terminated?
243‑30 What is the financed property and the debt property?
243‑15 When does this Division apply?
(1) This Division applies if:
(a) *limited recourse debt has been used to wholly or partly finance or refinance expenditure; and
(b) at the time that the debt *arrangement is terminated, the debt has not been paid in full by the debtor; and
(c) the debtor can deduct an amount as a *capital allowance for the income year in which the termination occurs, or has deducted or can deduct an amount for an earlier income year, in respect of the expenditure or the *financed property.
Note: This Division does not apply to certain limited recourse debts that are used to refinance limited recourse debt to which this Division has applied (see subsection 243‑50(4)).
(2) However, unless the net *capital allowance deductions have been excessive having regard to the amount of the debt that remains unpaid (see section 243‑35), no amount is included in the debtor’s assessable income under this Division although future deductions may be reduced.
(3) In working out if the debt has been paid in full, and in working out the unpaid amount of the debt, the following amounts are to be treated as if they were not payments in respect of the debt:
(a) any reduction in the debt as a result of the *financed property being surrendered or returned to the creditor at the termination of the debt;
(b) any payment to reduce the debt that is funded directly or indirectly by *non‑arm’s length limited recourse debt or by proceeds from the disposal of the debtor’s interest in the financed property.
However, any amounts accrued that are interest, *notional interest or in the nature of interest are taken not to be unpaid.
(4) In working out if the debt has been paid in full, and in working out the unpaid amount of the debt, payments are to be attributed first to the payment of any accrued amounts that are interest, *notional interest or in the nature of interest.
(5) A *notional loan is taken to be debt that has been used to wholly or partly finance or refinance expenditure.
Note: Notional loans arise under Division 240.
243‑20 What is limited recourse debt?
(1) A limited recourse debt is an obligation imposed by law on an entity (the debtor) to pay an amount to another entity (the creditor) where the rights of the creditor as against the debtor in the event of default in payment of the debt or of interest are limited wholly or predominantly to any or all of the following:
(a) rights (including the right to money payable) in relation to any or all of the following:
(i) the *debt property or the use of the debt property;
(ii) goods produced, supplied, carried, transmitted or delivered, or services provided, by means of the debt property;
(iii) the loss or disposal of the whole or a part of the debt property or of the debtor’s interest in the debt property;
(b) rights in respect of a mortgage or other security over the debt property or other property;
(c) rights that arise out of any *arrangement relating to the financial obligations of an end‑user of the *financed property towards the debtor, and are financial obligations in relation to the financed property.
(2) An obligation imposed by law on an entity (the debtor) to pay an amount to another entity (the creditor) is also a limited recourse debt if it is reasonable to conclude that the rights of the creditor as against the debtor in the event of default in payment of the debt or of interest are capable of being limited in the way mentioned in subsection (1). In reaching this conclusion, have regard to:
(a) the assets of the debtor (other than assets that are indemnities or guarantees provided in relation to the debt);
(b) any *arrangement to which the debtor is a party;
(c) whether all of the assets of the debtor would be available for the purpose of the discharge of the debt (other than assets that are security for other debts of the debtor or any other entity);
(d) whether the debtor and creditor are dealing at *arm’s length in relation to the debt.
(3) An obligation imposed by law on an entity (the debtor) to pay an amount to another entity (the creditor) is also a limited recourse debt if there is no *debt property and it is reasonable to conclude that the rights of the creditor as against the debtor in the event of default in payment of the debt or of interest are capable of being limited. In reaching this conclusion, have regard to:
(a) the assets of the debtor (other than assets that are indemnities or guarantees provided in relation to the debt);
(b) any *arrangement to which the debtor is a party;
(c) whether all of the assets of the debtor would be available for the purpose of the discharge of the debt (other than assets that are security for other debts of the debtor or any other entity);
(d) whether the debtor and creditor are dealing at *arm’s length in relation to the debt.
(4) A *notional loan under a *hire purchase agreement is also a limited recourse debt.
Note: Notional loans arise under Division 240.
(5) However, an obligation that is covered by subsection (1) is not a limited recourse debt if the creditor’s recourse is not in practice limited due to the creditor’s rights in respect of a mortgage or other security over property of the debtor (other than the financed property) the value of which exceeds, or is likely to exceed, the amount of the debt.
(6) Also, an obligation that is covered by subsection (1), (2) or (3) is not a limited recourse debt if, having regard to all relevant circumstances, it would be unreasonable for the obligation to be treated as limited recourse debt.
(7) A *limited recourse debt is a non‑arm’s length limited recourse debt if the debtor and creditor do not deal with each other at arm’s length in relation to the debt.
243‑25 When is a debt arrangement terminated?
(1) A debt arrangement is taken to have terminated if:
(a) it is actually terminated; or
(b) the debtor’s obligation to repay the debt is waived, novated or otherwise varied so as to reduce, transfer or extinguish the debt; or
(c) an agreement is entered into to waive, novate or otherwise vary the debtor’s obligation to repay the debt so as to reduce, transfer or extinguish the debt; or
(d) the creditor ceases to have an entitlement to recover the debt from the debtor (other than as a result of an arm’s length assignment of some or all of the creditor’s rights under the debt arrangement); or
(e) the debtor ceases to be the owner or the *quasi‑owner of some or all of the *debt property because that property is surrendered to the creditor because of the debtor’s failure to pay the whole or a part of the debt; or
(f) the debtor ceases to be the owner of a beneficial interest in some or all of the debt property because the interest is surrendered to the creditor because of the debtor’s failure to pay the whole or a part of the debt; or
(g) the debt becomes a bad debt.
(2) However, a debt arrangement that is a *notional loan is not taken to have terminated merely because it has been renewed or extended.
Note: Notional loans arise under Division 240. Under that Division, they are taken to have ended if they are renewed or extended.
(3) Where a debt is terminated under paragraph (1)(b) or (c) as a result of the debt being reduced, the remaining debt is taken to be a new debt to which section 243‑15 applies.
243‑30 What is the financed property and the debt property?
(1) Property is the financed property if the expenditure referred to in paragraph 243‑15(1)(a) is on the property, is on the acquisition of the property, results in the creation of the property or is otherwise connected with the property.
(2) If the debt agreement is a *notional loan, the property that is the subject of the agreement is the financed property.
Note: Notional loans arise under Division 240.
(3) Property is the debt property if:
(a) it is the *financed property; or
(b) the property is provided as security for the debt.
Subdivision 243‑B—Working out the excessive deductions
Table of sections
Operative provisions
243‑35 Working out the excessive deductions
243‑35 Working out the excessive deductions
(1) The *capital allowance deductions have been excessive having regard to the amount of the debt that remains unpaid if the amount worked out under subsection (2) exceeds the amount worked out under subsection (4).
(2) This is how to work out the total net *capital allowance deductions:
Working out the total net capital allowance deductions
Step 1. Add up all of the debtor’s *capital allowance deductions in respect of the expenditure or the *financed property (including deductions because of balancing adjustments) for the income year in which the termination occurs or an earlier income year.
Step 2. Deduct from that any amount that is included in the assessable income of the debtor of any income year by virtue of a provision of this Act (other than this Division) as a result of the disposal of the *financed property the effect of which is to reverse a deduction covered by Step 1.
Step 3. Deduct from the result an amount equal to the sum of any amounts included in the entity’s assessable income as a result of an earlier application of this Division to the debt.
Step 4. Add to the result an amount equal to the sum of any deductions to which the entity is entitled under section 243‑45 (repayments of the original debt after termination) or 243‑50 (repayments of the replacement debt) because of payments in respect of the debt.
(3) The reference in step 2 of the method statement in subsection (2) to an amount that is included in the assessable income of a taxpayer as a result of the disposal of the *financed property includes a reference to an amount that is included under section 26AG of the Income Tax Assessment Act 1936 as a result of the disposal of the financed property.
Note: Division 20 deals with amounts included to reverse the effect of past deductions.
(4) This is how to work out the total net capital allowance deductions that would otherwise be allowable taking into account the amount of the debt that is unpaid:
Working out the total net capital allowance deductions that would otherwise be allowable
Work out the amount that would be worked out under subsection (2) if the deductions and the amounts included in assessable income had been calculated using the following assumptions:
(1) The original expenditure in respect of which deductions were calculated was reduced by the amount of the debt that was unpaid by the debtor when the debt was terminated. (In calculating the amount unpaid the following are to be disregarded:
(a) any reduction in the amount as a result of the *financed property being surrendered or returned to the creditor at the termination of the debt;
(b) any reduction in the amount to the extent that it is funded directly or indirectly by *non‑arm’s length limited recourse debt or by the consideration for the disposal of the debtor’s interest in the financed property.)
(2) Deductions for income years after the income year in which the termination occurred were also taken into account.
(3) The original expenditure in respect of which deductions were calculated was increased by any amount that is paid by the debtor as consideration for another person assuming a liability under the debt. (This assumption does not apply to the extent that the consideration is funded directly or indirectly by *non‑arm’s length limited recourse debt or by the consideration for the disposal of the debtor’s interest in the *financed property.)
(4) Step 2 were omitted from subsection (2).
Subdivision 243‑C—Amounts included in assessable income and deductions
Table of sections
Operative provisions
243‑40 Amount included in debtor’s assessable income
243‑45 Deduction for later payments in respect of debt
243‑50 Deduction for payments for replacement debt
243‑55 Effect of Division on later capital allowance deductions
243‑57 Effect of Division on later capital allowance balancing adjustments
243‑58 Adjustment where debt only partially used for expenditure
243‑40 Amount included in debtor’s assessable income
The debtor’s assessable income for the income year in which the termination occurs is to include the excess referred to in subsection 243‑35(1).
Note: Section 243‑60 applies in relation to certain partnership debts.
243‑45 Deduction for later payments in respect of debt
(1) This section applies if:
(a) an amount was included in the debtor’s assessable income under section 243‑40 or a deduction was reduced under section 243‑55; and
(b) the debtor makes a payment to the creditor, after the termination of the debt arrangement, in respect of the debt (other than an amount to the extent to which it is a payment of interest, of *notional interest or in the nature of interest).
(2) This is how to work out the amount of the deduction:
Working out the amount of the deduction
Step 1. Work out the amount that would be worked out under subsection 243‑35(2) if the debt were terminated immediately before the payment.
Step 2. Work out the amount that would have been worked out under subsection 243‑35(4) at that time if the payment had been taken into account.
Step 3. The amount of the deduction is the amount (if any) by which the amount worked out under Step 2 exceeds the amount worked out under Step 1.
(3) The amount can be deducted for the income year in which the payment is made.
Limit on deductions
(4) The total amounts deducted under this section in respect of a debt, and under section 243‑50 in respect of a replacement debt, cannot exceed the sum of:
(a) any amounts included in the debtor’s assessable income under this Division in respect of the original debt; and
(b) any amount by which deductions in respect of the original debt were reduced under section 243‑55.
243‑50 Deduction for payments for replacement debt
Payments where debt refinanced
(1) This section applies if:
(a) an amount was included in the debtor’s assessable income under section 243‑40 or a deduction was reduced under section 243‑55; and
(b) an amount funded by a *non‑arm’s length limited recourse debt (the replacement debt) was disregarded in calculations under subsection 243‑35(4); and
(c) the debtor makes a payment, after the termination of the original debt arrangement, in respect of the replacement debt (other than to the extent to which it is a payment of interest, of *notional interest or in the nature of interest).
(2) This is how to work out the amount of the deduction:
Working out the amount of the deduction
Step 1. Work out the amount that would be worked out under subsection 243‑35(2) if the replacement debt were terminated immediately before the payment.
Step 2. Work out the amount that would have been worked out under subsection 243‑35(4) at that time if the payment had been made in respect of the original debt and it had been taken into account.
Step 3. The amount of the deduction is the amount (if any) by which the amount worked out under Step 2 exceeds the amount worked out under Step 1.
(3) The amount can be deducted for the income year in which the payment is made.
Division not to apply to termination of replacement debt
(4) This Division does not apply to termination of the replacement debt referred to in paragraph (1)(b).
Limit on deductions
(5) The total amounts deducted under section 243‑45 in respect of the original debt, or under this section in respect of the replacement debt, cannot exceed the sum of:
(a) any amounts included in the debtor’s assessable income under this Division in respect of the original debt; and
(b) any amount by which deductions in respect of the original debt were reduced under section 243‑55.
243‑55 Effect of Division on later capital allowance deductions
(1) This section applies where this Division (other than section 243‑65) has applied in relation to a debt and the debtor is entitled to a *capital allowance deduction in respect of the expenditure or the *financed property in relation to a time or period after the termination of the debt.
(2) The *capital allowance deduction is reduced if the amount that would have been worked out under subsection 243‑35(2) would have exceeded the amount worked out under subsection 243‑35(4) if the following assumptions were applied in both subsections:
Assumptions to be applied
(1) That the debt was terminated at the time, or at the end of the period, referred to in subsection (1) of this section.
(2) That the amount unpaid at the time, or at the end of the period, is reduced by any amounts paid under a replacement debt.
(3) The debtor’s *capital allowance deductions in respect of the expenditure or the *financed property were increased by the amount of the capital allowance deduction referred to in subsection (1) of this section.
(3) The deduction is to be reduced by the amount of the excess.
243‑57 Effect of Division on later capital allowance balancing adjustments
(1) This section applies where this Division (other than section 243‑65) has applied in relation to a debt and an amount is later included in the assessable income of an entity by virtue of a provision of this Act (other than this Division) as a result of the disposal of the *financed property the effect of which is to reverse a deduction covered by Step 1 in subsection 243‑35(2).
(2) Any amount that would be included in the debtor’s assessable income is reduced if the amount that would have been worked out under subsection 243‑35(4) would have exceeded the amount worked out under subsection 243‑35(2) if the following assumptions were applied in both subsections:
Assumptions to be applied
(1) That the debt was terminated at the time of the disposal of the *financed property, referred to in subsection (1) of this section.
(2) The amount in Step 2 in subsection 243‑35(2) were increased by the amount that would otherwise be included in the debtor’s assessable income.
(3) The amount worked out under subsection 243‑35(4) were reduced by any amount by which:
(a) the amount arising as a result of the disposal that is taken into account for the purposes of the provision mentioned in subsection (1);
exceeds:
(b) the unpaid amount of the debt immediately before the time of the disposal of the *financed property, referred to in subsection (1).
(3) The amount is to be reduced by the amount of the excess.
243‑58 Adjustment where debt only partially used for expenditure
If the debt is only partially used to finance the expenditure, or the property, in respect of which the *capital allowance deductions referred to in Step 1 in subsection 243‑35(2) are allowed, the amount of any deduction, any reduction in a deduction or any amount included in assessable income is to be so much as is reasonable taking into account the proportion of the debt that is used for that purpose.
Subdivision 243‑D—Special provisions
Table of sections
Operative provisions
243‑60 Application of Division to partnerships
243‑65 Application where partner reduces liability
243‑70 Application of Division to companies ceasing to be 100% subsidiary
243‑75 Application of Division where debt forgiveness rules also apply
243‑60 Application of Division to partnerships
This Division applies to a partnership in respect of the partnership’s debts and in respect of debts of a partner, and references to a debtor include a reference to a partnership.
243‑65 Application where partner reduces liability
(1) This section applies to a debt in relation to a partner in a partnership if:
(a) in connection with an *arrangement, the partner’s liability to pay the debt is reduced or eliminated and the partner’s interest in the partnership ceases or is varied or transferred; and
(b) an excess would have been worked out under subsection 243‑35(1) if, at the time when the debt is reduced or eliminated, the debt had been terminated and remained unpaid and this section had not applied.
(2) If this section applies to a debt in relation to a partner in a partnership, an amount is to be included in his or her assessable income.
(3) This is how to work out the amount to be included:
Working out the amount included
Step 1. Work out which income years the partner was a member of the partnership and the partnership was entitled to a *capital allowance deduction in respect of the expenditure or the *financed property (including deductions because of balancing adjustments).
Step 2. For each of those income years, work out the proportion of net income of the partnership or the partnership loss (as the case requires) that was included in the assessable income of the partner or which the partner could deduct.
Step 3. For each of those income years, multiply the *capital allowance deductions in respect of the expenditure or the *financed property (including deductions because of balancing adjustments) of the partnership by the corresponding proportion worked out under Step 2. Sum all of the amounts.
Step 4. Divide the sum by the total of the *capital allowance deductions in respect of the expenditure or the *financed property (including deductions because of balancing adjustments) of the partnership for all of those income years.
Step 5. Work out the amount that would have been included in the partnership’s assessable income under section 243‑40 if the debt had been terminated and remained unpaid and this section had not applied.
Step 6. Multiply the amount worked out in Step 5 by the factor worked out in Step 4. The result is the amount to be included in the partner’s assessable income.
243‑70 Application of Division to companies ceasing to be 100% subsidiary
(1) This section applies to a company if:
(a) the company ceases to be a *100% subsidiary in relation to at least one other company; and
(b) at that time, the company is the debtor for a *limited recourse debt that has not been paid in full by the company; and
(c) the creditor’s rights under the debt are transferred or assigned to another entity.
(2) If this section applies, this Division applies as if the debt were terminated, and refinanced with *non‑arm’s length limited recourse debt, at the time the company ceased to be a *100% subsidiary of that other company.
243‑75 Application of Division where debt forgiveness rules also apply
(1) This section is to remove doubt about how this Division and Schedule 2C to the Income Tax Assessment Act 1936 apply where both apply to the same debt.
(2) Where both apply:
(a) this Division is to be applied first and is to be applied disregarding any operation of that Schedule; and
(b) any amounts included in assessable income under this Division are taken into account under paragraph 245‑85(1)(a) of that Schedule.
Division 320—Life insurance companies
Table of Subdivisions
Guide to Division 320
320‑A Preliminary
320‑B What is included in a life insurance company’s assessable income
320‑C Deductions and capital losses
320‑D Income tax, taxable income and tax loss of life insurance companies
320‑F Virtual PST
320‑H Segregation of assets to discharge exempt life insurance policy liabilities
320‑I Transfers of business
320‑1 What this Division is about
This Division provides for the taxation of life insurance companies in a broadly comparable way to other entities that derive similar kinds of income.
Because of the nature of the business of life insurance companies, the Division contains special rules for working out their taxable income.
Those rules:
• include certain amounts in assessable income;
• identify certain amounts of exempt income and non‑assessable non‑exempt income;
• identify specific deductions.
Life insurance companies can have one or both of these taxable incomes for any income year for the purposes of working out their income tax for that year:
• a taxable income of the complying superannuation class, which consists of taxable income that relates to complying superannuation business and is taxed at the rate of tax that applies to complying superannuation funds;
• a taxable income of the ordinary class, which consists of taxable income that relates to other businesses and is taxed at the corporate tax rate.
Life insurance companies can also have tax losses that correspond to those 2 classes. The Division provides that tax losses of a particular class can be deducted only from incomes in respect of that class.
The Division ensures that the income tax worked out on the basis of these taxable incomes and tax losses is a single amount of income tax on one taxable income.
The Division also contains rules for segregating the assets of life insurance companies into:
• assets that relate to complying superannuation business;
• assets that relate to immediate annuity and other exempt business.
(1) The object of this Division is to provide for the taxation of *life insurance companies in a broadly comparable way to other entities that *derive similar kinds of income.
(2) To achieve this object, the Division:
(a) identifies certain amounts that are included in the assessable income, or are *exempt income or *non‑assessable non‑exempt income, of a *life insurance company; and
(b) identifies certain amounts that a life insurance company can deduct; and
(c) enables a life insurance company to have taxable incomes and *tax losses of the following classes for the purposes of working out its income tax for an income year:
(i) the *complying superannuation class;
(ii) the *ordinary class; and
(d) contains other provisions necessary to enable the income tax on the taxable income of a life insurance company to be worked out.
Note: Section 320‑5 of the Income Tax (Transitional Provisions) Act 1997 provides that the tax consequences of certain transfers of assets of a life insurance company that is a friendly society to a complying superannuation fund are to be disregarded.
Subdivision 320‑B—What is included in a life insurance company’s assessable income
320‑10 What this Subdivision is about
This Subdivision provides for certain amounts to be included in a life insurance company’s assessable income and for certain other amounts to be exempt income or non‑assessable non‑exempt income.
Table of sections
Operative provisions
320‑15 Assessable income—various amounts
320‑30 Assessable income—special provision for certain income years
320‑35 Exempt income
320‑37 Non‑assessable non‑exempt income
320‑45 Tax treatment of gains or losses from CGT events in relation to virtual PST assets
320‑15 Assessable income—various amounts
(1) A *life insurance company’s assessable income includes:
(a) the total amount of the *life insurance premiums paid to the company in the income year; and
(b) amounts received or recovered under *contracts of reinsurance (except amounts that relate to a risk, or part of a risk, in relation to which subsection 148(1) of the Income Tax Assessment Act 1936 applies) to the extent to which they relate to the *risk components of claims paid under *life insurance policies; and
(c) any amount received or recovered that is a refund, or in the nature of a refund, of the life insurance premium paid under a contract of reinsurance (except any amount that relates to a risk, or part of a risk, in relation to which subsection 148(1) of the Income Tax Assessment Act 1936 applies); and
(ca) any reinsurance commission received or recovered by the company in respect of a contract of reinsurance (except any commission that relates to a risk, or part of a risk, in relation to which subsection 148(1) of the Income Tax Assessment Act 1936 applies); and
(d) any amount received under a profit‑sharing arrangement contained in, or entered into in relation to, a contract of reinsurance; and
(da) the *transfer values of assets transferred by the company from a *virtual PST under subsection 320‑180(1) or 320‑195(3); and
(db) the transfer values of assets transferred by the company to a virtual PST under subsection 320‑180(3) or 320‑185(1); and
(e) if an asset (other than money) is transferred from or to a virtual PST under subsection 320‑180(1) or (3), to a virtual PST under section 320‑185 or from a virtual PST under subsection 320‑195(2) or (3)—the amount (if any) that is included in the company’s assessable income of the income year in which the asset was transferred because of section 320‑200; and
(f) the transfer values of assets transferred by the company from the company’s *segregated exempt assets under subsection 320‑235(1) or 320‑250(2); and
(g) if an asset (other than money) is transferred to the company’s segregated exempt assets under subsection 320‑235(3) or section 320‑240—the amount (if any) that is included in the company’s assessable income because of section 320‑255; and
(h) subject to subsection (2), if the *value, at the end of the income year, of the company’s liabilities under the *net risk components of life insurance policies is less than the value, at the end of the previous income year, of those liabilities—an amount equal to the difference; and
Note: Where the value at the end of the income year exceeds the value at the end of the previous income year, the excess can be deducted: see section 320‑85.
(i) amounts included in the company’s assessable income under section 275 of the Income Tax Assessment Act 1936; and
(j) *specified roll‑over amounts paid to the company; and
(ja) amounts imposed by the company in respect of risk riders for *ordinary investment policies in an income year in which the company did not receive any life insurance premiums for those policies; and
(k) fees and charges (not otherwise included in, or taken into account in working out, the company’s assessable income) imposed by the company in respect of life insurance policies; and
(l) if the company is an *RSA provider—*taxable contributions made to *RSAs provided by the company.
(2) Paragraph (1)(h) does not cover any liabilities under:
(a) a *life insurance policy that provides for *participating benefits or *discretionary benefits; or
(b) an *exempt life insurance policy; or
(c) a *funeral policy.
320‑30 Assessable income—special provision for certain income years
(1) This section applies to a *life insurance company for each of the following income years (each a relevant income year):
(a) the income year in which 1 July 2000 occurs;
(b) the 4 following income years.
Note: The effect of this section is modified when the life insurance business of a life insurance company is transferred to another life insurance company: see section 320‑340.
(2) If:
(a) the *value of the company’s liabilities at the end of 30 June 2000 under its *continuous disability policies (being the value used by the company for the purposes of its return of income);
exceeds
(b) the value of the company’s liabilities at the end of 30 June 2000 under the *net risk components of its continuous disability policies as calculated under subsection 320‑85(4);
the company’s assessable income for each relevant income year includes an amount equal to one‑fifth of the excess.
(3) However, if a *life insurance company ceases in a relevant income year to carry on *life insurance business or to have any liabilities under the *net risk components of *continuous disability policies, subsection (2) does not apply for that income year or any future income years but the company’s assessable income for that income year includes so much of the excess referred to in subsection (2) as has not been included in the company’s assessable income for any previous relevant income years.
These amounts *derived by a *life insurance company are exempt from income tax:
(a) amounts of *ordinary income and *statutory income accrued before 1 July 1988 that were derived from assets that have become *virtual PST assets;
(b) if the company is an *RSA provider—any amounts that are disregarded because of paragraph 320‑137(3)(d) or (e) in working out the company’s taxable income of the *complying superannuation class.
320‑37 Non‑assessable non‑exempt income
(1) These amounts *derived by a *life insurance company are not assessable income and are not *exempt income:
(a) amounts of ordinary income and statutory income derived from *segregated exempt assets, being income that relates to the period during which the assets were segregated exempt assets;
(b) amounts of ordinary income and statutory income derived from the *disposal of units in a *pooled superannuation trust;
(c) if an *Australian/overseas fund or an *overseas fund established by the company derived foreign establishment amounts—the foreign resident proportion of the foreign establishment amounts;
(d) if the company is a *friendly society:
(i) amounts derived before 1 July 2001 that are exempt from income tax under section 50‑1; and
(ii) amounts derived on or after 1 July 2001 but before 1 January 2003, that are attributable to *income bonds, *funeral policies or *sickness policies; and
(iii) amounts derived on or after 1 July 2001 but before 1 January 2003, that are attributable to *scholarship plans and would have been exempt from income tax under section 50‑1 if they had been received before 1 July 2001; and
(iv) amounts derived on or after 1 January 2003 that are attributable to income bonds, funeral policies or *sickness policies, that were issued before 1 January 2003; and
(v) amounts derived on or after 1 January 2003 that are attributable to scholarship plans issued before 1 January 2003 and that would have been exempt from income tax if they had been received before 1 July 2001.
Note: The effect of this section is modified when the life insurance business of a life insurance company is transferred to another life insurance company: see section 320‑325.
(1A) For the purposes of paragraph (1)(c), foreign establishment amounts for the *life insurance company means the total amount of assessable income that was *derived in the income year:
(a) in the course of the carrying on by the company of a business in a foreign country at or through a *permanent establishment of the company in that country; and
(b) from sources in that or any other foreign country; and
(c) from assets that:
(i) are attributable to the permanent establishment; and
(ii) are held to meet the liabilities under the *life insurance policies issued by the company at or through the permanent establishment.
(2) For the purposes of paragraph (1)(c), the foreign resident proportion of the *foreign establishment amounts is the amount worked out using the formula:
where:
all foreign establishment policy liabilities means the average value for the income year (as calculated by an *actuary) of the policy liabilities (as defined in the *Valuation Standard) for all *life insurance policies that:
(a) were included in the class of *life insurance business to which the company’s *Australian/overseas fund or *overseas fund relates; and
(b) were issued by the company at or through the *permanent establishment to which the foreign establishment amounts relate.
foreign resident foreign establishment policy liabilities means the average value for the income year (as calculated by an *actuary) of the policy liabilities (as defined in the *Valuation Standard) for all *life insurance policies that:
(a) are *foreign resident life insurance policies; and
(b) were issued by the company at or through the *permanent establishment to which the foreign establishment amounts relate.
320‑45 Tax treatment of gains or losses from CGT events in relation to virtual PST assets
If a *CGT event happens in respect of a *CGT asset that is a *virtual PST asset of a *life insurance company, Division 10 of Part IX of the Income Tax Assessment Act 1936 applies for the purpose of working out the amount of any *capital gain or *capital loss that arises from the event.
Subdivision 320‑C—Deductions and capital losses
320‑50 What this Subdivision is about
This Subdivision specifies particular deductions that are available to a life insurance company, specifies particular amounts that a life insurance company cannot deduct and contains provisions relating to a life insurance company’s capital losses.
Table of sections
Operative provisions
320‑55 Deduction for life insurance premiums where liabilities under life insurance policies are to be discharged from virtual PST assets
320‑60 Deduction for life insurance premiums where liabilities under life insurance policies are to be discharged from segregated exempt assets
320‑65 Deduction for life insurance premiums in respect of life insurance policies that provide for participating or discretionary benefits
320‑70 No deduction for life insurance premiums in respect of certain life insurance policies payable only on death or disability
320‑75 Deduction for ordinary investment policies
320‑80 Deduction for certain claims paid under life insurance policies
320‑85 Deduction for increase in value of liabilities under net risk components of life insurance policies
320‑87 Deduction for assets transferred from or to virtual PST
320‑100 Deduction for life insurance premiums paid under certain contracts of reinsurance
320‑105 Deduction for assets transferred to segregated exempt assets
320‑110 Deduction for interest credited to income bonds
320‑111 Deduction for funeral policy payout
320‑112 Deduction for scholarship plan payout
320‑115 No deduction for amounts credited to RSAs
320‑120 Capital losses from assets other than virtual PST assets or segregated exempt assets
320‑125 Capital losses from virtual PST assets
(1) This section applies to a *life insurance company in respect of *life insurance policies where the company’s liabilities under the policies are to be discharged out of *virtual PST assets.
(2) The company can deduct:
(a) the amounts of the *life insurance premiums received in respect of the policies that are transferred to its *virtual PST assets in the income year;
less:
(b) so much of those amounts as relate to the company’s liability to pay amounts on the death or disability of a person.
(3) For the purposes of subsection (2) only, the amount of a *life insurance premium that relates to the company’s liability to pay amounts on the death or disability of a person is:
(a) if the policy provides for *participating benefits or *discretionary benefits—nil; or
(b) if paragraph (a) does not apply and the policy states that the whole or a specified part of the premium is payable in respect of such a liability—the whole or that part of the premium, as appropriate; or
(c) if neither paragraph (a) nor (b) applies:
(i) if the policy is an *endowment policy—10% of the premium; or
(ii) if the policy is a *whole of life policy—30% of the premium; or
(iii) otherwise—so much of the premium as an *actuary determines to be attributable to such a liability.
A *life insurance company can deduct the amounts of *life insurance premiums transferred in the income year to its *segregated exempt assets under subsection 320‑240(3).
A *life insurance company can deduct the amounts of *net premiums received in respect of *life insurance policies (other than *virtual PST life insurance policies or *exempt life insurance policies) that provide for *participating benefits or *discretionary benefits.
(1) A *life insurance company cannot deduct any part of the amounts of *life insurance premiums received in respect of *life insurance policies under which amounts are to be paid only on the death or disability of a person.
(2) This section does not apply to:
(a) *life insurance policies that provide for *participating benefits or *discretionary benefits; or
(b) funeral policies.
320‑75 Deduction for ordinary investment policies
(1) This section applies to a *life insurance company in respect of *ordinary investment policies issued by the company.
(2) The company can deduct, in respect of *life insurance premiums received in the income year for those policies:
(a) the sum of the *net premiums;
less:
(b) so much of the net premiums as an *actuary determines to be attributable to fees and charges charged in that income year.
(3) In making a determination under subsection (2), an *actuary is to have regard to:
(a) the changes over the income year in the sum of the *net current termination values of the policies; and
(b) the movements in those values during the income year.
(4) In addition, if an *actuary determines that:
(a) there has been a reduction in the income year (the current year) of exit fees that were imposed in respect of those policies in a previous income year; and
(b) the reduction (or a part of it) has not been taken into account in a determination under subsection (2) for the current year;
the company can deduct so much of that reduction as has not been so taken into account.
320‑80 Deduction for certain claims paid under life insurance policies
(1) A *life insurance company can deduct the amounts paid in respect of the *risk components of claims paid under *life insurance policies during the income year.
(2) The risk component of a claim paid under a *life insurance policy is:
(a) if:
(i) the policy does not provide for *participating benefits or *discretionary benefits; and
(ii) the policy is neither an *exempt life insurance policy nor a *funeral policy; and
(iii) an amount is payable under the policy only on the death or disability of the insured person;
the amount paid under the policy as a result of the occurrence of that event; or
(b) if the policy provides for participating benefits or discretionary benefits or is an exempt life insurance policy or a funeral policy—nil; or
(c) otherwise—the amount paid under the policy as a result of the death or disability of the insured person less the *current termination value of the policy (calculated by an *actuary) immediately before the death, or the occurrence of the disability, of the person.
(3) Except as provided by subsection (1), a *life insurance company cannot deduct amounts paid in respect of claims under *life insurance policies.
(1) A *life insurance company can deduct the amount (if any) by which the *value, at the end of the income year, of its liabilities under the *net risk components of *life insurance policies exceeds the value, at the end of the previous income year, of those liabilities.
Note 1: Where the value at the end of the income year is less than the value at the end of the previous income year, the difference is included in assessable income: see paragraph 320‑15(h).
Note 2: Section 320‑85 of the Income Tax (Transitional Provisions) Act 1997 makes special provision in respect of the calculation of the value of a life insurance company’s liabilities under the net risk components of life insurance policies at the end of the income year immediately preceding the income year in which 1 July 2000 occurs.
(2) Subsection (1) does not cover any liabilities under:
(a) a *life insurance policy that provides for *participating benefits or *discretionary benefits; or
(b) an *exempt life insurance policy; or
(c) a *funeral policy.
(3) If a *life insurance policy is a *disability policy (other than a *continuous disability policy), the value at a particular time of the liabilities of the *life insurance company under the *net risk component of the policy is the *current termination value of the component at that time (calculated by an *actuary).
(4) In the case of *life insurance policies other than policies to which subsection (3) applies, the value at a particular time of the liabilities of the *life insurance company under the *net risk components of the policies is the amount calculated by an *actuary to be:
(a) the sum of the policy liabilities (as defined in the *Valuation Standard) in respect of the net risk components of the policies at that time;
less
(b) the sum of any cumulative losses (as defined in the Valuation Standard) for the net risk components of the policies at that time.
320‑87 Deduction for assets transferred from or to virtual PST
(1) A *life insurance company can deduct the *transfer values of assets that are transferred by the company in the income year from a *virtual PST under subsection 320‑180(1) or 320‑195(3).
(2) A *life insurance company can deduct the *transfer values of assets that are transferred by the company in the income year to a *virtual PST under subsection 320‑180(3) or 320‑185(1).
(3) If an asset (other than money) is transferred by a *life insurance company:
(a) from a *virtual PST under subsection 320‑180(1) or 320‑195(2) or (3); or
(b) to a virtual PST under subsection 320‑180(3) or section 320‑185;
the company can deduct the amount (if any) that it can deduct because of section 320‑200.
320‑100 Deduction for life insurance premiums paid under certain contracts of reinsurance
A *life insurance company can deduct amounts that:
(a) were paid by the company in the income year as *life insurance premiums under *contracts of reinsurance; and
(b) do not relate to a risk, or part of a risk, in relation to which subsection 148(1) of the Income Tax Assessment Act 1936 applies.
320‑105 Deduction for assets transferred to segregated exempt assets
(1) A *life insurance company can deduct the *transfer values of assets transferred in the income year to the company’s *segregated exempt assets under subsection 320‑235(3) or 320‑240(1).
(2) If an asset (other than money) is transferred to a *life insurance company’s *segregated exempt assets under subsection 320‑235(3) or section 320‑240, the company can deduct the amount (if any) that it can deduct because of section 320‑255.
320‑110 Deduction for interest credited to income bonds
(1) A *life insurance company that is a *friendly society can deduct interest credited in the income year to the holders of *income bonds issued after 31 December 2002 where the interest accrued on or after 1 January 2003.
(2) This section has effect despite subsection 320‑80(3).
320‑111 Deduction for funeral policy payout
(1) A *life insurance company that is a *friendly society can deduct the amount of a benefit provided in the income year by the company under a *funeral policy issued after 31 December 2002, reduced by so much of the sum of the amounts deducted or deductible by the company under section 320‑75 for any income year as is reasonably related to the benefit.
(2) This section has effect despite subsection 320‑80(3).
320‑112 Deduction for scholarship plan payout
(1) A *life insurance company that is a *friendly society can deduct the amount of a benefit it provides in the income year and on or after 1 January 2003:
(a) under a *scholarship plan covered by subsection (2) or (3); and
(b) to, or on behalf of, a person nominated in the plan as a beneficiary whose education is to be helped by the benefit;
reduced by so much of the sum of the amounts deducted or deductible by the company under section 320‑75 for any income year as is reasonably related to the benefit.
(2) This subsection covers a *scholarship plan issued by the *life insurance company after 31 December 2002.
(3) This subsection covers a *scholarship plan if:
(a) the plan was issued by the *life insurance company before 1 January 2003; and
(b) no amount received by the company on or after 1 January 2003 and attributable to the plan is *non‑assessable non‑exempt income of the company under paragraph 320‑37(1)(d).
(4) This section has effect despite subsection 320‑80(3).
320‑115 No deduction for amounts credited to RSAs
A *life insurance company that is an *RSA provider cannot deduct amounts credited to *RSAs.
320‑120 Capital losses from assets other than virtual PST assets or segregated exempt assets
(1) This section applies to assets (ordinary assets) of a *life insurance company other than:
(a) *virtual PST assets; or
(b) *segregated exempt assets.
(2) In working out a *life insurance company’s *net capital gain or *net capital loss for the income year, *capital losses from ordinary assets can be used only to reduce *capital gains from ordinary assets.
(3) If some or all of a *capital loss from an ordinary asset cannot be applied in an income year, the unapplied amount can be applied in the next income year in which the company’s *capital gains from ordinary assets exceed the company’s capital losses (if any) from ordinary assets.
(4) If the company has 2 or more unapplied *net capital losses from ordinary assets, the company must apply them in the order in which they were made.
Note: This section affects the amount of assessable income that is to be taken into account in working out a taxable income or tax loss of the ordinary class: see sections 320‑139 and 320‑143.
320‑125 Capital losses from virtual PST assets
(1) In working out a *life insurance company’s *net capital gain or *net capital loss for the income year, *capital losses from *virtual PST assets can be used only to reduce *capital gains from virtual PST assets.
(2) If some or all of a *capital loss from a *virtual PST asset cannot be applied in an income year, the unapplied amount can be applied in the next income year in which the company’s *capital gains from *virtual PST assets exceed the company’s capital losses (if any) from virtual PST assets.
(3) If the company has 2 or more unapplied *net capital losses from *virtual PST assets, the company must apply them in the order in which they were made.
Note: This section affects the amount of assessable income that is to be taken into account in working out a taxable income or tax loss of the complying superannuation class: see sections 320‑137 and 320‑141.
Subdivision 320‑D—Income tax, taxable income and tax loss of life insurance companies
320‑130 What this Subdivision is about
This Subdivision explains how a life insurance company’s income tax is worked out.
For that purpose, this Subdivision enables a life insurance company to have taxable incomes and tax losses of the following classes:
• the complying superannuation class;
• the ordinary class.
320‑131 Overview of Subdivision
Working out the income tax
(1) In any income year, a life insurance company can have:
(a) a taxable income of the complying superannuation class and/or a taxable income of the ordinary class; or
(b) a tax loss of the complying superannuation class and/or a tax loss of the ordinary class; or
(c) a taxable income of one class and a tax loss of the other class.
Note: The taxable incomes mentioned in paragraph (a) are taxed at different rates: see section 23A of the Income Tax Rates Act 1986.
(2) Taxable incomes and tax losses of both classes are taken into account in working out the amount of income tax that the company has to pay for the income year (see section 320‑134). That amount is then taken to be the income tax on the company’s taxable income for that income year.
Working out taxable income and tax loss of each class
(3) In general, the rules in this Act about working out a company’s taxable income or tax loss, or deducting a company’s tax loss, apply to a life insurance company in relation to:
(a) working out a taxable income or tax loss of a particular class; or
(b) deducting a tax loss of a particular class.
(4) However, that general rule is subject to the following:
(a) sections 320‑137 to 320‑143, which allocate amounts of incomes and deductions for the purposes of working out a taxable income or tax loss of a particular class;
(b) subsections 320‑141(2) and 320‑143(2), which provide that tax losses of a particular class can be deducted only from incomes in respect of that class;
(c) section 320‑149, which sets out the provisions in this Act that have effect only in relation to a taxable income or tax loss of the ordinary class.
Table of sections
General rules
320‑133 Object of Subdivision
320‑134 Income tax of a life insurance company
320‑135 Taxable income and tax loss of each of the 2 classes
Taxable income and tax loss of life insurance companies
320‑137 Taxable income—complying superannuation class
320‑139 Taxable income—ordinary class
320‑141 Tax loss—complying superannuation class
320‑143 Tax loss—ordinary class
320‑149 Provisions that apply only in relation to the ordinary class
(1) The object of this Subdivision is to ensure that:
(a) for the purposes of working out the amount of a *life insurance company’s income tax for an income year:
(i) the company’s taxable income or *tax loss of one *class is worked out separately from its taxable income or tax loss of the other class; and
(ii) the company’s tax losses of a particular class can be deducted only from its incomes in respect of that class; and
(b) for the purposes of this Act, that amount of income tax is treated as the company’s income tax on its taxable income for that income year.
(2) In subsection (1), a class means the *complying superannuation class or the *ordinary class.
320‑134 Income tax of a life insurance company
Working out the income tax
(1) Work out a *life insurance company’s income tax for an income year under section 4‑10 as follows:
(a) apply steps 1 and 2 of the method statement in subsection 4‑10(3) to work out separately the amount that would be the company’s basic income tax liability for its taxable income of each *class for that year;
(b) treat the sum of these amounts as the company’s basic income tax liability for that year and apply step 4 of the method statement to subtract its *tax offsets from that sum.
(2) For the purposes of this Act:
(a) the income tax worked out in accordance with subsection (1) is taken to be the company’s income tax on its taxable income for the income year; and
(b) except as provided by subsection (1) of this section and sections 320‑135 to 320‑149, the company’s taxable income for that year is taken to be equal to the sum of the company’s taxable incomes of the 2 *classes for that year.
Note: This means that there is only one assessment in respect of the company’s taxable income for the income year and that the income tax constitutes only one debt to the Commonwealth.
Working out the income tax on certain assumptions
(3) Subsection (1) also has effect in relation to working out an amount that would be the company’s income tax if certain assumptions were made. It has that effect in the same way as it has effect in relation to working out the company’s income tax under section 4‑10 (except in regard to those assumptions).
Note: This means, for example, subsection (1) also has effect in relation to working out the amount of a life insurance company’s income tax on the basis of the tax offset priority rules in Division 63.
320‑135 Taxable income and tax loss of each of the 2 classes
(1) Subject to the other provisions in this Subdivision:
(a) this Act has effect for a *life insurance company in relation to working out a taxable income of a particular *class in the same way as it has effect in relation to working out a taxable income of any other company; and
(b) this Act has effect for a life insurance company in relation to working out or deducting a *tax loss of a particular class in the same way as it has effect in relation to working out or deducting a tax loss of any other company.
(2) Sections 320‑137 to 320‑143 have effect in addition to other provisions in this Act that relate to working out a taxable income or *tax loss, or deducting a tax loss (as appropriate).
(3) Nothing in this Subdivision prevents a *life insurance company from:
(a) having taxable incomes, or *tax losses, of both *classes for the same income year; or
(b) having a taxable income of one class and a tax loss of the other class for the same income year.
Note: In certain circumstances, a life insurance company can have a taxable income and a tax loss of the same class in an income year (see Subdivision 165‑B as it has effect under this Subdivision).
Taxable income and tax loss of life insurance companies
320‑137 Taxable income—complying superannuation class
(1) A *life insurance company’s taxable income of the complying superannuation class is a taxable income worked out under this Act on the basis of only:
(a) assessable income of the company that is covered by subsection (2); and
(b) deductions of the company that are covered by subsection (4); and
(c) *tax losses of the company that are of the *complying superannuation class.
Note: For the usual way of working out a taxable income: see subsection 4‑15(1). For other ways of working out a taxable income: see subsection 4‑15(2).
Relevant assessable income
(2) This subsection covers the following assessable income of a *life insurance company:
(a) assessable income *derived by the company from the investment of its *virtual PST assets in relation to the period during which those assets were virtual PST assets;
(b) so much of the amount that is included in the company’s assessable income because of paragraph 320‑15(1)(a) as is equal to the total *transfer value of assets transferred in the income year by the company to a *virtual PST under subsection 320‑185(3);
(c) if an asset (other than money) is transferred by the company from a virtual PST under subsection 320‑180(1) or 320‑195(2) or (3)—amounts that are included in the company’s assessable income because of section 320‑200;
(d) amounts that are included in the company’s assessable income because of paragraph 320‑15(1)(db), (i) or (j);
(e) amounts that are included in the company’s assessable income under subsection 115‑280(4);
(f) subject to subsection (3), so much of the company’s assessable income for the income year as is:
(i) the total amount credited during that year to the *RSAs provided by the company; less
(ii) the total amount debited during that year from the RSAs.
Amounts disregarded for RSAs
(3) In working out the amount mentioned in paragraph (2)(f), disregard the following amounts:
(a) contributions credited to the *RSAs that are not *taxable contributions;
(b) amounts debited from the RSAs that are benefits paid to, or in respect of, the holders of the RSAs;
(c) income tax debited from the RSAs;
(d) if an *annuity was paid from an RSA in respect of the whole of the income year, or the whole of the part of the income year in which the RSA existed, the total amount credited to the RSA during the income year;
(e) if an annuity was paid from an RSA in respect of a part, but not the whole, of the portion of the income year in which the RSA existed, so much of the total amount credited to the RSA during the income year as is equal to the amount worked out using the following formula:
Relevant deductions
(4) This subsection covers the following deductions of a *life insurance company:
(a) amounts that the company can deduct under section 320‑55;
(b) amounts that the company can deduct (other than any *tax losses) in respect of the investment of the company’s *virtual PST assets in relation to the period during which those assets were virtual PST assets;
(c) amounts that the company can deduct under section 320‑87 because of subsection (1) or paragraph (3)(a) of that section;
(d) amounts that the company can deduct under subsection 115‑280(1);
(e) so much of the amounts that the company can deduct under subsection 115‑215(6) as are attributable to *capital gains that:
(i) the company is taken to have under subsection 115‑215(3); and
(ii) are in respect of the investment of the company’s virtual PST assets; and
(iii) are in relation to the period during which those assets were virtual PST assets.
320‑139 Taxable income—ordinary class
A *life insurance company’s taxable income of the ordinary class is a taxable income worked out under this Act on the basis of only:
(a) assessable income of the company that is not covered by subsection 320‑137(2); and
(b) amounts (other than *tax losses) that the company can deduct and are not covered by subsection 320‑137(4); and
(c) tax losses of the company that are of the *ordinary class.
Note: For the usual way of working out a taxable income: see subsection 4‑15(1). For other ways of working out a taxable income: see subsection 4‑15(2).
320‑141 Tax loss—complying superannuation class
Working out a tax loss of the complying superannuation class
(1) A *life insurance company’s *tax loss of the complying superannuation class is a tax loss worked out under this Act on the basis of only:
(a) assessable income of the company that is covered by subsection 320‑137(2); and
(b) deductions of the company that are covered by subsection 320‑137(4); and
(c) *net exempt income of the company that is attributable to *exempt income *derived:
(i) from the company’s *virtual PST assets; and
(ii) in relation to the period during which those assets were virtual PST assets.
Note: For the usual way of working out a tax loss: see section 36‑10. For other ways of working out a tax loss: see section 36‑25.
Deducting a tax loss of the complying superannuation class
(2) A *life insurance company’s *tax loss of the complying superannuation class can be deducted under this Act only from:
(a) *net exempt income of the company that is attributable to *exempt income *derived:
(i) from the company’s *virtual PST assets; and
(ii) in relation to the period during which those assets were virtual PST assets; and
(b) assessable income of the company that is covered by subsection 320‑137(2), reduced by deductions of the company that are covered by subsection 320‑137(4).
Note: For the usual way of deducting a tax loss: see section 36‑17. For other ways of deducting a tax loss: see section 36‑25.
320‑143 Tax loss—ordinary class
Working out a tax loss of the ordinary class
(1) A *life insurance company’s *tax loss of the ordinary class is a tax loss worked out under this Act on the basis of only:
(a) assessable income of the company that is not covered by subsection 320‑137(2); and
(b) amounts (other than tax losses) that the company can deduct and are not covered by subsection 320‑137(4); and
(c) *net exempt income of the company that is not attributable to *exempt income *derived:
(i) from the company’s *virtual PST assets; and
(ii) in relation to the period during which those assets were virtual PST assets.
Note: For the usual way of working out a tax loss: see section 36‑10. For other ways of working out a tax loss: see section 36‑25.
Deducting a tax loss of the ordinary class
(2) A *life insurance company’s *tax loss of the ordinary class can be deducted under this Act only from:
(a) *net exempt income of the company that is not attributable to *exempt income *derived:
(i) from the company’s *virtual PST assets; and
(ii) in relation to the period during which those assets were virtual PST assets; and
(b) assessable income of the company that is not covered by subsection 320‑137(2), reduced by amounts (other than tax losses) that the company can deduct and are not covered by subsection 320‑137(4).
Note: For the usual way of deducting a tax loss: see section 36‑17. For other ways of deducting a tax loss: see section 36‑25.
320‑149 Provisions that apply only in relation to the ordinary class
(1) The provisions covered by subsection (2):
(a) have effect as provided by section 320‑135 in relation to a *life insurance company’s taxable income, or *tax loss, of the *ordinary class; but
(b) have no effect in relation to the company’s taxable income, or tax loss, of the *complying superannuation class.
(2) This subsection covers these provisions:
(a) section 36‑55;
(b) Division 165 (except Subdivision 165‑CD).
Example 1: A life insurance company that has an amount of excess franking offsets will need to recalculate its tax loss of the ordinary class under section 36‑55. But its tax loss of the complying superannuation class is unaffected by that section.
Example 2: A life insurance company that fails to meet the relevant tests of Division 165 will need to recalculate the ordinary class of its taxable income and tax loss under Subdivision 165‑B. But the complying superannuation class of its taxable income and tax loss are unaffected by that Subdivision.
320‑165 What this Subdivision is about
This Subdivision explains how a life insurance company can segregate assets (to be known as a virtual PST) to be used for the sole purpose of discharging its complying superannuation liabilities.
Table of sections
Operative provisions
320‑170 Establishment of virtual PST
320‑175 Valuations of virtual PST assets and virtual PST liabilities for each valuation time
320‑180 Consequences of a valuation under section 320‑175
320‑185 Transfer of assets to virtual PST otherwise than as a result of a valuation under section 320‑175
320‑190 Virtual PST liabilities
320‑195 Transfer of assets and payment of amounts from a virtual PST otherwise than as a result of a valuation under section 320‑175
320‑200 Consequences of transfer of assets to or from virtual PST
320‑170 Establishment of virtual PST
(1) A *life insurance company may, on or after 1 July 2000, segregate in accordance with subsections (2) and (3) any of its assets for the sole purpose of discharging its *virtual PST liabilities out of those assets.
Note: Section 320‑170 of the Income Tax (Transitional Provisions) Act 1997 provides that a life insurance company may transfer a part of an asset to a virtual PST before 1 October 2000.
(1A) Except as provided by section 320‑170 of the Income Tax (Transitional Provisions) Act 1997, an asset is taken not to be included in the *virtual PST assets unless the whole of the asset is included among those assets.
(2) The assets segregated must, at the time of the segregation, be a representative sample of all the company’s assets that support its *virtual PST liabilities immediately before the segregation.
(3) The assets segregated must have, as at the time of the segregation, a total *transfer value that does not exceed the sum of:
(a) the company’s *virtual PST liabilities as at that time; and
(b) any reasonable provision made by the company at that time in its accounts for liability for income tax in respect of the assets segregated.
(4) A *life insurance company that segregates assets as mentioned in subsections (1) to (3) at a time after 1 July 2000 but before 1 October 2000 is taken to have segregated those assets in accordance with those subsections on 1 July 2000.
(5) If a segregation of assets is made in accordance with the above subsections, the company must use the segregated assets, and any other assets afterwards included among the segregated assets, only for the purpose of discharging its *virtual PST liabilities.
(6) The assets from time to time segregated are together to be known as a virtual pooled superannuation trust or a virtual PST and each asset from time to time included among the segregated assets is to be known as a virtual PST asset.
(7) In this Subdivision:
(a) a reference to the transfer of an asset to, or from, the *virtual PST:
(i) is a reference to the inclusion of the asset among the segregated assets, or the exclusion of an asset from the segregated assets, as the case may be; and
(ii) includes a reference to the transfer of money to, or from, the virtual PST, as the case may be; and
(b) if an asset transferred to or from the virtual PST is money, a reference to the *transfer value of the asset transferred is a reference to the amount of the money.
320‑175 Valuations of virtual PST assets and virtual PST liabilities for each valuation time
(1) A *life insurance company that has established a *virtual PST must cause the following amounts to be calculated within the period of 60 days starting immediately after each *valuation time:
(a) the total *transfer value of the company’s *virtual PST assets as at the valuation time;
(b) the company’s *virtual PST liabilities as at the valuation time.
(2) These are the valuation times:
(a) the end of the income year in which the *virtual PST was established;
(b) the end of each later income year.
Note 1: The time when a life insurance company joins or leaves a consolidated group is also a valuation time: see sections 713‑525 and 713‑585.
Note 2: A life insurance company that fails to comply with this section is liable to an administrative penalty: see section 288‑70 in Schedule 1 to the Taxation Administration Act 1953.
320‑180 Consequences of a valuation under section 320‑175
Transfer from the virtual PST
(1) If the total *transfer value of the company’s *virtual PST assets as at a *valuation time exceeds the sum of:
(a) the company’s *virtual PST liabilities as at that time; and
(b) any reasonable provision made by the company at that time in its accounts for liability for income tax in respect of those assets;
the company must transfer, from the *virtual PST, assets of any kind having a total transfer value equal to the excess.
(2) A transfer under subsection (1) must be made within the period of 30 days starting immediately after:
(a) the day on which the total *transfer value and the *virtual PST liabilities (as at the *valuation time) were calculated; or
(b) if those amounts were calculated on different days—the later of those days.
The transfer, once made, is taken to have been made at the valuation time (whether or not the transfer is made within those 30 days).
Note: A life insurance company that fails to comply with subsections (1) and (2) is liable to an administrative penalty: see section 288‑70 in Schedule 1 to the Taxation Administration Act 1953.
Transfer to the virtual PST
(3) If the total *transfer value of the company’s *virtual PST assets as at a *valuation time is less than the sum of:
(a) the company’s *virtual PST liabilities as at that time; and
(b) any reasonable provision made by the company at that time in its accounts for liability for income tax in respect of those assets;
the company can transfer, to the *virtual PST, assets of any kind having a total transfer value not exceeding the difference.
(4) A transfer under subsection (3) is taken to have been made at the *valuation time if it is made within the period of 30 days starting immediately after:
(a) the day on which the total *transfer value and the *virtual PST liabilities (as at the valuation time) were calculated; or
(b) if those amounts were calculated on different days—the later of those days.
(1) If a *life insurance company determines, at a time other than a *valuation time, that the total *transfer value of the company’s *virtual PST assets as at that time is less than the sum of:
(a) the company’s *virtual PST liabilities as at that time; and
(b) any reasonable provision made by the company at that time in its accounts for liability for income tax in respect of those assets;
the company can transfer, to the *virtual PST, assets of any kind having a total transfer value not exceeding the difference.
(2) A *life insurance company can at any time transfer an asset of any kind to a *virtual PST in exchange for an amount of money equal to the *transfer value of the asset at the time of the transfer.
(3) A *life insurance company can transfer to a *virtual PST in an income year assets of any kind having a total *transfer value not exceeding the total amount of the *life insurance premiums paid to the company in that income year for the purchase of *virtual PST life insurance policies.
(4) Except as provided by this section and subsection 320‑180(3), a *life insurance company cannot transfer an asset to a *virtual PST.
320‑190 Virtual PST liabilities
(1) The amount of the *virtual PST liabilities of a *life insurance company is to be worked out in accordance with subsection (2) in respect only of *life insurance policies issued by the company:
(a) that are *virtual PST life insurance policies; and
(b) the liabilities under which are to be discharged out of the company’s *virtual PST assets.
(2) The amount of the virtual PST liabilities of a *life insurance company at a particular time is the sum of the following amounts at that time, as calculated by an *actuary:
(a) for policies providing for *participating benefits or *discretionary benefits:
(i) the values of supporting assets, as defined in the *Valuation Standard; and
(ii) the *policy owners’ retained profits;
(b) for other policies—the *current termination values.
(1) If:
(a) a *life insurance policy issued by a *life insurance company becomes an *exempt life insurance policy; and
(b) immediately before the policy became an exempt life insurance policy, the policy was a policy referred to in subsection 320‑190(1);
the company can transfer from a *virtual PST, to its *segregated exempt assets, assets of any kind whose total *transfer value does not exceed the company’s liabilities in respect of the policy.
(2) A *life insurance company can at any time transfer an asset from a *virtual PST in exchange for an amount of money equal to the *transfer value of the asset at the time of the transfer.
(3) If a *life insurance company:
(a) imposes any fees or charges in respect of *virtual PST assets; or
(b) imposes any fees or charges in respect of *virtual PST life insurance policies other than policies:
(i) that provide death or disability benefits, within the meaning of Part IX of the Income Tax Assessment Act 1936, that are *participating benefits; and
(ii) the liabilities under which are to be discharged out of the company’s *virtual PST; or
(c) determines, at a time other than a *valuation time, that the total *transfer value of the company’s virtual PST assets as at that time exceeds the sum of:
(i) the company’s *virtual PST liabilities at that time; and
(ii) any reasonable provision made by the company at that time in its accounts for liability for income tax in respect of those assets;
the company must, when the fees or charges are imposed or the excess is determined, as the case may be, transfer, from the *virtual PST, assets having a total transfer value equal to the fees, charges or excess, as the case may be.
(4) If:
(a) any liabilities arise for the discharge of which a *life insurance company’s *virtual PST is established; or
(b) any expenses are incurred by a life insurance company directly in respect of *virtual PST assets in relation to a period during which the assets are virtual PST assets; or
(c) any liabilities to pay *PAYG instalments, or income tax, that are attributable to the company’s *virtual PST assets;
the life insurance company must pay, from the virtual PST, any amounts required to discharge the liabilities, or amounts equal to the expenses (as appropriate).
320‑200 Consequences of transfer of assets to or from virtual PST
(1) This section applies if:
(a) an asset (other than money) is transferred from a *virtual PST under subsection 320‑180(1) or 320‑195(2) or (3); or
(b) an asset (other than money) is transferred to a virtual PST under subsection 320‑180(3) or section 320‑185.
(2) In determining:
(a) for the purposes of this Act (other than Parts 3‑1 and 3‑3) whether an amount is included in, or can be deducted from, the assessable income of a *life insurance company in respect of the transfer of the asset; or
(b) for the purposes of Parts 3‑1 and 3‑3:
(i) whether the company made a *capital gain in respect of the transfer of the asset; or
(ii) whether the company made a *capital loss in respect of the transfer of the asset;
the company is taken:
(c) to have sold, immediately before the transfer, the asset transferred for a consideration equal to its *market value; and
(d) to have purchased the asset again at the time of the transfer for a consideration equal to its market value.
(2A) Without limiting subsection (2), where the asset transferred is a *depreciating asset, Division 40 has effect for the company as if:
(a) in relation to the sale of the asset that is taken to have occurred under paragraph (2)(c):
(i) the sale were a *balancing adjustment event; and
(ii) the *termination value of the asset for that event were equal to the consideration for the sale under that paragraph; and
(iii) the company had stopped *holding the asset at the time of the sale; and
(b) in relation to the purchase of the asset that is taken to have occurred under paragraph (2)(d):
(i) the company had only begun to hold the asset after the purchase; and
(ii) the first element of the asset’s *cost were equal to the consideration for the purchase under that paragraph; and
(iii) the company had acquired the asset from an *associate of the company.
Note: This means that, amongst other things, as a result of the transfer:
· the asset’s cost for the purposes of working out a deduction under Division 40 is reset; and
· the company’s assessable income might be adjusted under section 40‑285.
(3) If, apart from this subsection and section 320‑55, a *life insurance company could deduct an amount or make a *capital loss as a result of a transfer of an asset to or from its *virtual PST, the deduction or capital loss is disregarded until:
(a) the asset ceases to exist; or
(b) the asset, or a greater than 50% interest in it, is *acquired by an entity other than an entity that is an *associate of the company immediately after the transfer.
(4) Subsection (3) does not apply in relation to an amount that the company can deduct under a provision in Division 40.
Subdivision 320‑H—Segregation of assets to discharge exempt life insurance policy liabilities
320‑220 What this Subdivision is about
This Subdivision explains how a life insurance company can segregate assets to be used for the sole purpose of discharging its liabilities under life insurance policies where the income derived by the company from those policies is exempt from income tax.
Table of sections
Operative provisions
320‑225 Segregation of assets for purpose of discharging exempt life insurance policy liabilities
320‑230 Valuations of segregated exempt assets and exempt life insurance policy liabilities for each valuation time
320‑235 Consequences of a valuation under section 320‑230
320‑240 Transfer of assets to segregated exempt assets otherwise than as a result of a valuation under section 320‑230
320‑245 Exempt life insurance policy liabilities
320‑246 Exempt life insurance policy
320‑247 Policy split into an exempt life insurance policy and another life insurance policy
320‑250 Transfer of assets and payment of amounts from segregated exempt assets otherwise than as a result of a valuation under section 320‑230
320‑255 Consequences of transfer of assets to or from segregated exempt assets
320‑225 Segregation of assets for purpose of discharging exempt life insurance policy liabilities
(1) A *life insurance company may, on or after 1 July 2000, segregate in accordance with subsections (2) and (3) any of its assets for the sole purpose of discharging its *exempt life insurance policy liabilities out of those assets.
Note: Section 320‑225 of the Income Tax (Transitional Provisions) Act 1997 provides that a life insurance company may transfer a part of an asset to its segregated exempt assets before 1 October 2000.
(1A) Except as provided by section 320‑225 of the Income Tax (Transitional Provisions) Act 1997, an asset is taken not to be included in the segregated assets under this Subdivision unless the whole of the asset is included among the segregated assets.
(2) The assets segregated must, at the time of the segregation, be a representative sample of all the company’s assets that support its *exempt life insurance policy liabilities immediately before the segregation.
(3) The assets segregated must have, as at the time of the segregation, a total *transfer value that does not exceed the amount of the company’s *exempt life insurance policy liabilities as at that time.
(4) A *life insurance company that segregates assets as mentioned in subsections (1) to (3) at a time after 1 July 2000 but before 1 October 2000 is taken to have segregated those assets in accordance with those subsections on 1 July 2000.
(5) If a segregation of assets is made in accordance with the above subsections, the company must use the *segregated exempt assets, and any other assets afterwards included among the segregated assets, only for the purpose of discharging its *exempt life insurance policy liabilities.
(6) In this Subdivision:
(a) a reference to the transfer of an asset to, or from, a *life insurance company’s *segregated exempt assets:
(i) is a reference to the inclusion of an asset among the segregated exempt assets, or the exclusion of an asset from the segregated exempt assets, as the case may be; and
(ii) includes a reference to the transfer of money to, or from, those assets, as the case may be; and
(b) if an asset transferred to or from those assets is money, a reference to the *transfer value of the asset transferred is a reference to the amount of the money.
(1) A *life insurance company that has segregated any of its assets in accordance with section 320‑225 must cause the following amounts to be calculated within the period of 60 days starting immediately after each *valuation time:
(a) the total *transfer value of the company’s *segregated exempt assets as at the valuation time;
(b) the amount of the company’s *exempt life insurance policy liabilities as at the valuation time.
(2) These are the valuation times:
(a) the end of the income year in which the segregation occurred;
(b) the end of each later income year.
Note 1: The time when a life insurance company joins or leaves a consolidated group is also a valuation time: see sections 713‑525 and 713‑585.
Note 2: A life insurance company that fails to comply with this section is liable to an administrative penalty: see section 288‑70 in Schedule 1 to the Taxation Administration Act 1953.
320‑235 Consequences of a valuation under section 320‑230
Transfer from the segregated exempt assets
(1) If:
(a) the total *transfer value of the company’s *segregated exempt assets as at a *valuation time;
exceeds
(b) the amount of the company’s *exempt life insurance policy liabilities as at that time;
the company must transfer, from the segregated exempt assets, assets of any kind having a total transfer value equal to the excess.
(2) A transfer under subsection (1) must be made within the period of 30 days starting immediately after:
(a) the day on which the total *transfer value and the *exempt life insurance policy liabilities (as at the *valuation time) were calculated; or
(b) if those amounts were calculated on different days—the later of those days.
The transfer, once made, is taken to have been made at the valuation time (whether or not the transfer is made within those 30 days).
Note: A life insurance company that fails to comply with subsections (1) and (2) is liable to an administrative penalty: see section 288‑70 in Schedule 1 to the Taxation Administration Act 1953.
Transfer to the segregated exempt assets
(3) If:
(a) the total *transfer value of the company’s *segregated exempt assets as at a *valuation time;
is less than
(b) the amount of the company’s *exempt life insurance policy liabilities as at that time;
the company can transfer, to the segregated exempt assets, assets of any kind having a total transfer value not exceeding the difference.
(4) A transfer under subsection (3) is taken to have been made at the *valuation time if it is made within the period of 30 days starting immediately after:
(a) the day on which the total *transfer value and the *exempt life insurance policy liabilities (as at the valuation time) were calculated; or
(b) if those amounts were calculated on different days—the later of those days.
(1) If a *life insurance company determines, at a time other than a *valuation time, that:
(a) the total *transfer value of the company’s *segregated exempt assets as at that time;
is less than
(b) the company’s *exempt life insurance policy liabilities as at that time;
the company can transfer, to the segregated exempt assets, assets of any kind having a total transfer value not exceeding the difference.
(2) A *life insurance company can at any time transfer an asset of any kind to its *segregated exempt assets in exchange for an amount of money equal to the *transfer value of the asset at the time of the transfer.
(3) A *life insurance company can transfer, to its *segregated exempt assets in an income year, assets of any kind having a total *transfer value not exceeding the total amount of the *life insurance premiums paid to the company in that income year for the purchase of *exempt life insurance policies.
(4) Except as provided by this section and subsections 320‑195(1) and 320‑235(3), a *life insurance company cannot transfer an asset to its *segregated exempt assets.
320‑245 Exempt life insurance policy liabilities
(1) The amount of the *exempt life insurance policy liabilities of a *life insurance company is to be worked out in accordance with subsection (2) in respect only of *life insurance policies issued by the company:
(a) that are *exempt life insurance policies; and
(b) the liabilities under which are to be discharged out of the company’s *segregated exempt assets.
(2) The amount of the exempt life insurance policy liabilities of a *life insurance company at a particular time is the sum of the following amounts at that time, as calculated by an *actuary:
(a) for policies providing for allocated benefits (other than *participating benefits or *discretionary benefits)—the *current termination values;
(b) for policies providing for participating benefits or discretionary benefits:
(i) the values of supporting assets, as defined in the *Valuation Standard; and
(ii) the *policy owner’s retained profits;
(c) for other policies—the policy liabilities, as defined in the Valuation Standard.
(3) An *exempt life insurance policy provides for allocated benefits if:
(a) the policy:
(i) is held by the trustee of a *complying superannuation fund; and
(iii) provides for an *allocated pension; or
(b) the policy:
(i) is held by a *life insurance company other than the life insurance company that issued the policy; and
(ii) is a *segregated exempt asset of the life insurance company that issued the policy; and
(iii) provides for an allocated pension; or
(c) the policy provides for an *allocated annuity.
320‑246 Exempt life insurance policy
(1) An exempt life insurance policy is a *life insurance policy (other than an *RSA):
(a) that is held by the trustee of a *complying superannuation fund and provides solely for the discharge of the current pension liabilities (within the meaning of Part IX of the Income Tax Assessment Act 1936) of the fund; or
(b) that is held by the trustee of a *pooled superannuation trust, where:
(i) the policy provides solely for the discharge of the current pension liabilities (within the meaning of Part IX of the Income Tax Assessment Act 1936) of complying superannuation funds; and
(ii) the funds are unit holders of the trust; or
(c) that is held by another *life insurance company and is a *segregated exempt asset of that other company; or
(d) that is held by the trustee of a *constitutionally protected fund; or
(e) that provides for an *immediate annuity that:
(i) was purchased on or before 9 December 1987 and was not purchased wholly or partly with a rolled‑over amount; or
(ii) satisfies the conditions in subsections (3), (4) and (5) and was purchased on or before 9 December 1987 wholly or partly with a rolled‑over amount; or
(iii) satisfies the conditions in subsections (3), (4) and (5) and was purchased after 9 December 1987; or
(f) that provides for either or both of the following:
(i) a *personal injury annuity, payments of which are exempt from income tax under Division 54;
(ii) a *personal injury lump sum, payment of which is exempt from income tax under Division 54.
Note: A part of a life insurance policy may be taken to be an exempt life insurance policy under section 320‑247.
(2) In subsection (1), a rolled‑over amount has the same meaning as it has under section 27A of the Income Tax Assessment Act 1936.
(3) An *immediate annuity satisfies the conditions in this subsection if it is payable until the later of:
(a) the death of a person (or the death of the last to die of 2 or more persons); or
(b) the end of a fixed term.
(4) An *immediate annuity satisfies the conditions in this subsection if the contract under which it is payable does not permit:
(a) the total amount payable for its commutation to exceed its reduced purchase price (within the meaning of section 27A of the Income Tax Assessment Act 1936); and
(b) any payment of its residual capital value (within the meaning of that section) to exceed its purchase price (within the meaning of that section).
(5) An *immediate annuity satisfies the conditions in this subsection if there is no unreasonable deferral of the payments of the annuity, having regard to:
(a) to the extent to which the payments depend on the returns of the investment of the assets of the *life insurance company paying the annuity—when the payments are made and when those returns are *derived; and
(b) to the extent to which the payments do not depend on those returns—the relative sizes of the payments from year to year; and
(c) any other relevant factors.
320‑247 Policy split into an exempt life insurance policy and another life insurance policy
When is a part of a policy taken to be an exempt life insurance policy?
(1) A part of a *life insurance policy (the original policy) is taken to be an *exempt life insurance policy for the purposes of this Act if:
(a) the part provides solely for the discharge of the current pension liabilities (within the meaning of Part IX of the Income Tax Assessment Act 1936) of a *complying superannuation fund; and
(b) the trustee of the fund holds the original policy.
(2) A part of a *life insurance policy (the original policy) is taken to be an *exempt life insurance policy for the purposes of this Act if:
(a) the part provides solely for the discharge of liabilities that are attributable to the current pension liabilities (within the meaning of Part IX of the Income Tax Assessment Act 1936) of *complying superannuation funds; and
(b) the trustee of a *pooled superannuation trust holds the original policy; and
(c) the funds are unit holders of the trust.
What happens to the rest of the policy?
(3) If a part of a policy (the original policy) is taken to be an *exempt life insurance policy under subsection (1) or (2), the rest of the original policy is taken to be another *life insurance policy for the purposes of this Act.
(1) A *life insurance company can at any time transfer an asset from its*segregated exempt assets in exchange for an amount of money equal to the *transfer value of the asset at the time of the transfer.
(2) If a *life insurance company:
(a) imposes any fees or charges in respect of *segregated exempt assets; or
(b) imposes any fees or charges in respect of *exempt life insurance policies where the liabilities under the policies are to be discharged out of the company’s segregated exempt assets; or
(c) determines, at a time other than a *valuation time, that the total *transfer value of the company’s segregated exempt assets as at that time exceeds the amount of the company’s *exempt life insurance policy liabilities as at that time;
the company must, when the fees or charges are imposed or the excess is determined, as the case may be, transfer from the segregated exempt assets, assets having a total transfer value equal to the fees, charges or excess, as the case may be.
(3) If:
(a) any liabilities arise for the discharge of which a *life insurance company has *segregated exempt assets; or
(b) any expenses are incurred by a life insurance company directly in respect of segregated exempt assets in relation to a period during which the assets are segregated exempt assets;
the life insurance company must pay from the segregated exempt assets any amounts required to discharge the liabilities or amounts equal to the expenses, as the case may be.
320‑255 Consequences of transfer of assets to or from segregated exempt assets
(1) This section applies if:
(a) an asset (other than money) is transferred from the company’s *segregated exempt assets under subsection 320‑235(1) or 320‑250(1) or (2); or
(b) an asset (other than money) is transferred to the company’s *segregated exempt assets under subsection 320‑235(3) or section 320‑240.
(2) In determining:
(a) for the purposes of this Act (other than Division 40 and Parts 3‑1 and 3‑3) whether an amount is included in, or can be deducted from, the assessable income of a *life insurance company in respect of the transfer of the asset; or
(b) for the purposes of Parts 3‑1 and 3‑3:
(i) whether the company made a *capital gain in respect of the transfer; or
(ii) whether the company made a *capital loss in respect of the transfer;
the company is taken:
(c) to have sold, immediately before the transfer, the asset transferred for a consideration equal to its *market value; and
(d) to have purchased the asset again at the time of the transfer for a consideration equal to its market value.
(3) If, apart from this subsection, section 320‑60 and subsection 320‑105(1), a *life insurance company could deduct an amount or apply a *capital loss as a result of the transfer of an asset to its *segregated exempt assets, the deduction or capital loss is disregarded until:
(a) the asset ceases to exist; or
(b) the asset, or a greater than 50% interest in it, is *acquired by an entity other than an entity that is an *associate of the company, immediately after the acquisition.
(3A) Subsection (3) does not apply in relation to an amount that the company can deduct under a provision in Division 40.
(4) A *life insurance company cannot deduct an amount or apply a *capital loss as a result of the transfer of an asset from its *segregated exempt assets.
(6) If a *depreciating asset is transferred to the *segregated exempt assets of a *life insurance company, then, in determining for the purposes of Division 40 whether an amount is included in, or can be deducted from, the company’s assessable income as a result of the transfer, the company is taken:
(a) to have, at the time immediately before the transfer, sold the asset for a consideration equal to its *market value at that time; and
(b) to have, at the time of the transfer, purchased the asset again for a consideration equal to its market value at that time.
(7) If a *depreciating asset that has been included in the *segregated exempt assets of a *life insurance company since the asset was acquired by the company or the initial segregation of those assets took place is transferred from those assets, then the company must assume for the purposes of Division 40 that:
(a) if the asset’s *market value at the time of the transfer is greater than its *adjustable value at that time, the company:
(i) had, at the time immediately before the transfer, sold the asset for a consideration equal to its adjustable value at that time; and
(ii) had, at the time of the transfer, purchased the asset again for a consideration equal to its adjustable value at that time; or
(b) if the asset’s market value at the time of the transfer is equal to or less than its adjustable value at that time, the company:
(i) had, at the time immediately before the transfer, sold the asset for a consideration equal to its market value at that time; and
(ii) had, at the time of the transfer, purchased the asset again for a consideration equal to its market value at that time.
(8) If a *depreciating asset that was previously transferred to the *segregated exempt assets of a *life insurance company is transferred from those assets, then, the company must assume, for the purposes of Division 40 that:
(a) if the asset’s *market value at the time of its transfer from those assets is greater than its market value at the time when it was transferred to those assets, the company:
(i) had, at the time immediately before the transfer from those assets, sold the asset for a consideration equal to its market value at the time when it was transferred to those assets; and
(ii) had, at the time of the transfer from those assets, purchased the asset again for a consideration equal to its market value at the time when it was transferred to those assets; or
(b) if the asset’s market value at the time of its transfer from those assets is equal to or less than its market value at the time when it was transferred to those assets, the company:
(i) had, at the time immediately before the transfer from those assets, sold the asset for a consideration equal to its market value at that time; and
(ii) had, at the time of the transfer from those assets, purchased the asset again for a consideration equal to its market value at that time.
(9) Division 40 has effect in relation to an asset covered by subsection (6), (7) or (8) as if:
(a) in relation to the sale of the asset that is taken to have occurred under that subsection:
(i) the sale were a *balancing adjustment event; and
(ii) the *termination value of the asset for that event were equal to the consideration for the sale under that subsection; and
(iii) the company had stopped *holding the asset at the time of the sale; and
(b) in relation to the purchase of the asset that is taken to have occurred under that subsection:
(i) the company had only begun to hold the asset after the purchase; and
(ii) the first element of the asset’s *cost were equal to the consideration for the purchase under that subsection; and
(iii) the company had acquired the asset from an *associate of the company.
Note: This means that, amongst other things, as a result of the transfer:
· the asset’s cost for the purposes of working out a deduction under Division 40 is reset; and
· the company’s assessable income might be adjusted under section 40‑285 if the transfer is a transfer to the company’s segregated exempt assets.
Subdivision 320‑I—Transfers of business
320‑300 What this Subdivision is about
This Subdivision contains special rules that apply when all or part of the life insurance business of a life insurance company is transferred to another life insurance company under the Life Insurance Act 1995 or the Financial Sector (Transfers of Business) Act 1999.
Table of sections
Operative provisions
320‑305 When this Subdivision applies
320‑310 Special deductions and amounts of assessable income
320‑315 Virtual PST and segregated exempt assets
320‑320 Certain amounts treated as life insurance premiums
320‑325 Friendly societies
320‑330 Immediate annuities
320‑335 Parts of assets treated as separate assets
320‑340 Continuous disability policies
320‑345 Exemption of management fees
320‑305 When this Subdivision applies
The rules in this Subdivision have effect if all or part of the *life insurance business of a *life insurance company (the originating company) is transferred to another life insurance company (the recipient company):
(a) in accordance with a scheme confirmed by the Federal Court of Australia under Part 9 of the Life Insurance Act 1995; or
(b) under the Financial Sector (Transfers of Business) Act 1999.
320‑310 Special deductions and amounts of assessable income
Deduction for originating company
(1) If the originating company pays an amount to the recipient company in respect of liabilities under the *net risk components of *life insurance policies transferred to the recipient company, the originating company can deduct that amount for the income year in which the transfer took place.
Amount included in originating company’s assessable income
(2) If the originating company receives an amount from the recipient company in respect of liabilities under the *net risk components of *life insurance policies transferred to the recipient company, that amount is included in the assessable income of the originating company for the income year in which the transfer took place.
Deduction for recipient company
(3) If the recipient company pays an amount to the originating company in respect of liabilities under the *net risk components of *life insurance policies transferred to the recipient company, the recipient company can deduct that amount for the income year in which the transfer took place.
320‑315 Virtual PST and segregated exempt assets
(1) Assets that were *virtual PST assets of the originating company just before the transfer took place and that are transferred to the recipient company become virtual PST assets of the recipient company.
(2) Assets that were *segregated exempt assets of the originating company just before the transfer took place and that are transferred to the recipient company become segregated exempt assets of the recipient company.
320‑320 Certain amounts treated as life insurance premiums
(1) This Division applies to the recipient company as if the amount or value of any consideration received by the recipient company in respect of liabilities under *life insurance policies transferred to the company were *life insurance premiums paid to the company at the time the transfer took place.
(2) However, subsection (1) does not apply to consideration:
(a) that relates to liabilities that, just before the transfer took place, were discharged out of the originating company’s *virtual PST assets or *segregated exempt assets; or
(b) that relates to the part of a *life insurance policy that has been reinsured under a *contract of reinsurance (except consideration that relates to a risk, or part of a risk, in relation to which subsection 148(1) of the Income Tax Assessment Act 1936 applies).
(1) This section has effect if the originating company and the recipient company were *friendly societies just before the transfer took place.
(2) For the purposes of paragraph 320‑37(1)(d), an *income bond, *funeral policy, *sickness policy or *scholarship plan issued by the recipient company in substitution for an income bond, funeral policy, sickness policy or scholarship plan (the original policy) transferred from the originating company is taken to have been issued at the time the original policy was issued if the terms of the substituted policy are not materially different from those of the original policy.
For the purposes of section 320‑246, a *life insurance policy that provides for an *immediate annuity issued by the recipient company in substitution for a policy (also the original policy) transferred from the originating company is taken to have been issued at the time the original policy was issued if the terms of the substituted policy are not materially different from those of the original policy.
320‑335 Parts of assets treated as separate assets
If:
(a) an asset is transferred to the recipient company from the originating company; and
(b) parts of that asset were, under section 320‑170 or 320‑225 of the Income Tax (Transitional Provisions) Act 1997, treated as separate assets of the originating company just before the transfer took place;
those parts of that asset are also treated as separate assets of the recipient company.
320‑340 Continuous disability policies
(1) This section has effect if:
(a) the originating company and the recipient company were members of the same *wholly‑owned group just before the transfer took place; and
(b) all of the liabilities under the *continuous disability policies of the originating company are transferred to the recipient company; and
(c) the transfer took place before the income year in which 1 July 2005 occurs; and
(d) an amount (the section 320‑30 amount) would have been included in the assessable income of the originating company under section 320‑30 for the income year in which the transfer took place if the transfer had not taken place.
(2) Section 320‑30 does not apply to the originating company for the income year in which the transfer took place or a later income year.
(3) The amount worked out using this formula is included in the assessable income of the originating company for the income year in which the transfer took place:
where:
continuous disability policy days means the number of days during the income year in which the transfer took place that the originating company held *continuous disability policies.
(4) The section 320‑30 amount, reduced by the amount included in the assessable income of the originating company under subsection (3), is included in the assessable income of the recipient company for the income year in which the transfer took place.
(5) For each income year after the year in which the transfer took place and that is a relevant income year for the purposes of section 320‑30, the recipient company’s assessable income includes the amount that would have been included in the originating company’s assessable income under that section for that year if the transfer had not taken place.
320‑345 Exemption of management fees
(1) This section has effect if:
(a) the originating company and the recipient company were members of the same *wholly‑owned group just before the transfer took place; and
(b) a *life insurance policy (also the original policy):
(i) is constituted by a contract made with the originating company before 1 July 2000; and
(ii) is transferred to the recipient company before 1 July 2005.
(2) For the purposes of section 320‑40, a *life insurance policy issued by the recipient company in substitution for the original policy is taken to have been constituted by a contract made with the recipient company before 1 July 2000 if the terms of the substituted policy are not materially different from those of the original policy.
(3) Subsection 320‑40(4) applies to so much of the sum of the amounts applicable in respect of the substituted policy under subsections 320‑40(5), (6) and (7) as does not exceed any fees or charges made by the recipient company that the originating company would have been entitled to make under the terms of the original policy as applying just before 1 July 2000.
Division 322—HIH rescue package
322‑1 What this Division is about
This Division sets out special measures to assist in the rescue package provided in response to the collapse of the HIH group.
Table of sections
Operative provisions
322‑5 Rescue payments treated as insurance payments by HIH
322‑10 HIH Trust exempt from tax
322‑15 Certain capital gains and capital losses disregarded
322‑5 Rescue payments treated as insurance payments by HIH
(1) This Act applies to you as if a payment you receive from the Commonwealth, the *HIH Trust or a prescribed entity for assignment of your rights under or in relation to a *general insurance policy you held with an *HIH company:
(a) had been made by the HIH company; and
(b) had been made under the terms and conditions of the general insurance policy you held with the HIH company.
(2) The HIH Trust is the HIH Claims Support Trust (established on 6 July 2001).
(3) An HIH company is:
(a) CIC Insurance Limited; or
(b) FAI General Insurance Company Limited; or
(c) FAI Reinsurances Pty Limited; or
(d) FAI Traders Insurance Company Pty Limited; or
(e) HIH Casualty and General Insurance Limited; or
(f) HIH Underwriting and Insurance (Australia) Pty Limited; or
(g) World Marine and General Insurances Pty Limited; or
(h) another related company specified in writing by the Commissioner.
322‑10 HIH Trust exempt from tax
The total *ordinary income and *statutory income of:
(a) the HIH Trust; and
(b) an entity prescribed for the purposes of this Division;
is exempt from income tax.
322‑15 Certain capital gains and capital losses disregarded
A *capital gain or *capital loss you make because you assign a right under or in relation to a *general insurance policy you held with an *HIH company to the Commonwealth, the trustee of the *HIH Trust or a prescribed entity is disregarded.
Part 3‑45—Rules for particular industries and occupations
Table of Subdivisions
328‑A Guide to Division 328
328‑B Objects of this Division
328‑D Capital allowances for STS taxpayers
328‑E Trading stock for STS taxpayers
328‑F Entities eligible to be STS taxpayers
328‑G Entering and leaving the STS
Subdivision 328‑A—Guide to Division 328
Table of sections
328‑5 What this Division is about
328‑5 What this Division is about
This Division gives you a choice to change the way the income tax law applies to you in these ways if you are carrying on a business with a small turnover, and you pass certain other criteria:
• you only account for annual changes in trading stock value that are more than $5,000; and
• you put your depreciating assets into either a long life pool or a general pool and treat each pool as a single asset.
In usual circumstances, these changes will simplify the working out of your taxable income, and so reduce your compliance costs.
Note: If you choose to become an STS taxpayer, you may be entitled to the 25% entrepreneurs’ tax offset: see Subdivision 61‑J.
Subdivision 328‑B—Objects of this Division
328‑50 Objects of this Division
(1) The main object of this Division is to offer eligible small businesses the choice of a new platform to deal with their tax. The platform is designed to benefit those businesses in one or more of these ways:
• reducing their tax;
• providing simpler rules for determining their income and deductions;
• providing simpler capital allowances and trading stock requirements;
• reducing their compliance costs.
(2) This Division also provides rules that are intended to prevent other businesses from taking advantage of those benefits.
Subdivision 328‑D—Capital allowances for STS taxpayers
328‑170 What this Subdivision is about
STS taxpayers deduct amounts for most of their depreciating assets on a diminishing value basis using a pool that is treated as a single depreciating asset.
Broadly, a pool is made up of the costs of the depreciating assets that are allocated to it or, in some cases, a proportion of those costs.
The pool rate is 30% for most depreciating assets, and 5% for depreciating assets that have an effective life of 25 years or more.
There is an immediate deduction for low‑cost assets.
This Subdivision sets out how to calculate the pool deductions, and also sets out the consequences of:
(a) disposal of depreciating assets; and
(b) ceasing to be an STS taxpayer; and
(c) changing the business use of depreciating assets.
Table of sections
Operative provisions
328‑175 Calculations for depreciating assets
328‑180 Low cost assets
328‑185 Pooling
328‑190 Calculation
328‑195 Opening pool balance
328‑200 Closing pool balance
328‑205 Estimate of taxable use
328‑210 Low pool value
328‑215 Disposal etc. of depreciating assets
328‑220 What happens when you stop being an STS taxpayer
328‑225 Change in business use
328‑230 Estimate where deduction denied
328‑235 Interaction with Divisions 85 and 86
328‑243 Roll‑over relief
328‑245 Consequences of roll‑over
328‑247 Pool deductions
328‑250 Deductions for assets first used in BAE year
328‑253 Deductions for cost addition amounts
328‑255 Closing pool balance etc. below zero
328‑257 Taxable use
328‑175 Calculations for depreciating assets
(1) You calculate your deductions and some amounts of assessable income under this Subdivision instead of under Division 40 for an income year for a *depreciating asset that you *hold if:
(a) you are an *STS taxpayer for the income year; and
(b) you started to use the asset, or have it *installed ready for use, for a *taxable purpose during or before that income year.
Note: You continue to use this Subdivision for your STS pools after you leave the STS: see section 328‑220.
Exception: assets to which Division 40 does not apply
(2) This Subdivision does not apply to a *depreciating asset to which Division 40 does not apply because of section 40‑45.
Exception: primary production
(3) If you are an *STS taxpayer for the income year, for each *depreciating asset you use to carry on a *primary production business and for which you could deduct amounts under Subdivision 40‑F (about primary production depreciating assets) or Subdivision 40‑G (about capital expenditure of primary producers and other landholders) apart from subsection (1), you can choose:
(a) to deduct amounts for it under Subdivision 40‑F or 40‑G; or
(b) to calculate your deductions for it under this Subdivision.
Note: A choice made by a transferor under this subsection for an asset applies also to the transferee if roll‑over relief under subsection 40‑340(3) is chosen: see section 328‑245.
(4) You must make that choice for each *depreciating asset of that kind for the later of:
(a) the first income year for which you are, or last became, an *STS taxpayer; or
(b) the income year in which you started to use the asset, or have it *installed ready for use, for a *taxable purpose.
Once you have made the choice for an asset, you cannot change it.
Exception: horticultural plants
(5) You cannot deduct amounts for *horticultural plants (including grapevines) under this Subdivision.
Exception: asset let on depreciating asset lease
(6) You cannot deduct amounts for a *depreciating asset under this Subdivision if the asset is being or might reasonably be expected to be let predominantly on a *depreciating asset lease.
Exception: assets in a low‑value or software development pool
(7) You cannot deduct amounts for a *depreciating asset under this Subdivision if:
(a) the asset was allocated to your low‑value pool under Subdivision 40‑E, or to your pool under the former Subdivision 42‑L, before you became an *STS taxpayer; or
(b) the asset is *in‑house software and expenditure on the asset is allocated to a software development pool under that Subdivision.
Note: You will have to continue deducting amounts for these assets under Division 40.
(8) A *depreciating asset referred to in subsection (7) is not allocated to a pool under this Subdivision and does not qualify for a deduction under section 328‑180.
Exception: assets previously deductible under research and development provisions
(9) You cannot deduct amounts for a *depreciating asset for any period under this Subdivision if you can deduct an amount for the asset under section 73BA of the Income Tax Assessment Act 1936 (or could so deduct an amount if you had not chosen a tax offset under section 73I of that Act) for the same or an earlier period.
(1) You deduct the *taxable purpose proportion of the *adjustable value of a *depreciating asset for the income year in which you start to use the asset, or have it *installed ready for use, for a *taxable purpose if:
(a) you were an *STS taxpayer for that year and the year in which you started to *hold it; and
(b) the asset is a *low‑cost asset.
(2) You can also deduct for an income year for which you are an *STS taxpayer the *taxable purpose proportion of an amount included in the second element of the *cost of a *low‑cost asset for which you have deducted an amount under subsection (1) if:
(a) the amount so included is less than $1,000; and
(b) you started to use the asset, or have it *installed ready for use, for a *taxable purpose during an earlier income year.
(3) A *low‑cost asset for which you have deducted an amount under this section is allocated to your *general STS pool if:
(a) an amount of $1,000 or more is included in the second element of the asset’s *cost; or
(b) any amount is included in the second element of the asset’s cost and you have deducted or can deduct an amount under subsection (2) for an amount previously included in the second element of the asset’s cost.
(4) This Division applies to the asset as if its *adjustable value were the amount included in the second element of its *cost as mentioned in subsection (3).
(5) Subsection (3) applies even if the amount is included in the second element of the asset’s *cost when you are not an *STS taxpayer.
(1) As an *STS taxpayer, you deduct amounts for your *depreciating assets (except *low‑cost assets for which you have deducted or can deduct an amount under section 328‑180) through a pool, which allows you to deduct amounts for them as if they were a single asset, thereby simplifying your calculations. You use one rate for the pool.
(2) There are 2 kinds of pools:
(a) a general STS pool to which *depreciating assets having *effective lives of less than 25 years are allocated; and
(b) a long life STS pool to which depreciating assets having effective lives of 25 years or more are allocated.
Allocating assets to a pool
(3) A *depreciating asset:
(a) that you *hold just before, and at the start of, the first income year for which you are, or last became, an *STS taxpayer; and
(b) for which you calculate your deductions under this Subdivision instead of under Division 40; and
(c) that has not previously been allocated to your *general STS pool or *long life STS pool; and
(d) that you have started to use, or have *installed ready for use, for a *taxable purpose;
is automatically allocated to your general STS pool or long life STS pool according to its *effective life.
(4) A *depreciating asset that you start to use, or have *installed ready for use, for a *taxable purpose during an income year while you are an *STS taxpayer is allocated to the appropriate pool at the end of that year.
Note: The allocation happens even if you no longer hold the asset at the end of that income year.
Exception for long life assets
(5) You can choose not to have a *depreciating asset allocated to a *long life STS pool to which it would otherwise have been allocated if you started to use it, or have it *installed ready for use, for a *taxable purpose before 1 July 2001.
Note: If you make this choice, you would continue to deduct amounts for the asset under Division 40.
(6) You must make that choice for the first income year for which you are an *STS taxpayer. Once you have made the choice for an asset, you cannot change it.
No re‑allocation
(7) Once a *depreciating asset is allocated to your *general STS pool or *long life STS pool, it is not re‑allocated, even if you stop being an *STS taxpayer and again become one.
Note: You continue to use this Subdivision for your STS pools after you leave the STS: see section 328‑220.
Example: Greg chooses to leave the STS for the 2002‑03 income year. At that time, his long life STS pool contains one depreciating asset that has an effective life of 28 years.
When Greg chooses to re‑enter the STS for the 2008‑09 income year, he still holds that asset. The asset has remained in the pool since Greg left the STS and is not re‑allocated when he re‑enters, even though its remaining effective life is now 22 years.
(1) You calculate your deduction for each pool for an income year using this formula:
where:
pool rate is:
(a) 30% for a *general STS pool; or
(b) 5% for a *long life STS pool.
Note: You use section 328‑210 instead if the pool has a low pool value.
(2) Your deduction for each *depreciating asset that you start to use, or have *installed ready for use, for a *taxable purpose during an income year while you are an *STS taxpayer is:
(a) 15% of the *taxable purpose proportion of its *adjustable value if its *effective life is less than 25 years; or
(b) 2.5% of the taxable purpose proportion of its adjustable value if its effective life is 25 years or more.
(3) You can also deduct for an income year for which you are an *STS taxpayer the amount worked out under subsection (4) for an amount (the cost addition amount) included in the second element of the *cost of a *depreciating asset for that year if you started to use the asset, or have it *installed ready for use, for a *taxable purpose during an earlier income year.
Note: The second element of cost is worked out under section 40‑190.
(4) The amount you can deduct is:
(a) 15% of the *taxable purpose proportion of the cost addition amount if the asset’s *effective life is less than 25 years; or
(b) 2.5% of the taxable purpose proportion of the cost addition amount if the asset’s effective life is 25 years or more.
Note: The amounts that a transferor and transferee can deduct under this section are modified if roll‑over relief under subsection 40‑340(3) is chosen: see section 328‑247.
(1) For the first income year for which you are an *STS taxpayer, the opening pool balance of a pool is the sum of the *taxable purpose proportions of the *adjustable values of *depreciating assets allocated to the pool under subsection 328‑185(3).
(2) For a later income year, the opening pool balance of a pool is that pool’s *closing pool balance for the previous income year, reduced or increased by any adjustment required under section 328‑225 (about change in the business use of an asset).
Note: You continue to deduct amounts using your STS pools after you leave the STS: see section 328‑220.
(3) However, if you stop being an *STS taxpayer and again become one for an income year, the opening pool balance of a pool includes the sum of the *taxable purpose proportions of the *adjustable values of *depreciating assets allocated to the pool under subsection 328‑185(3) for that year.
You work out the closing pool balance of a pool for an income year in this way:
Method statement
Step 1. Add to the *opening pool balance of the pool for the income year:
(a) the sum of the *taxable purpose proportions of the *adjustable values of *depreciating assets you started to use, or have *installed ready for use, for a *taxable purpose during the income year and that are allocated to that pool; and
(b) the taxable purpose proportion of any cost addition amounts (see subsection 328‑190(3)) for the income year for assets allocated to the pool.
Step 2. Subtract from the step 1 amount:
(a) the *taxable purpose proportions of the *termination values of *depreciating assets allocated to the pool and for which a *balancing adjustment event occurred during the income year; and
(b) your deduction under subsection 328‑190(1) for the pool for the income year; and
(c) your deductions under subsection 328‑190(2) for *depreciating assets you started to use, or have *installed ready for use, for a *taxable purpose during the income year and that are allocated to that pool; and
(d) your deductions under subsection 328‑190(3) for the income year for cost addition amounts for assets allocated to the pool.
Step 3. The result is the closing pool balance of the pool for the income year.
Note: A transferor does not subtract anything for certain balancing adjustment events under paragraph (a) of step 2 if roll‑over relief under subsection 40‑340(3) is chosen: see section 328‑245.
328‑205 Estimate of taxable use
(1) You must, for the first income year for which you are, or last became, an *STS taxpayer, make a reasonable estimate for that year of the proportion you will use, or have *installed ready for use, each *depreciating asset that you *held just before, and at the start of, that year for a *taxable purpose if:
(a) the asset has not previously been allocated to your *general STS pool or *long life STS pool; and
(b) you have started to use it, or have it installed ready for use, for a taxable purpose; and
(c) you calculate your deductions for it under this Subdivision.
Note 1: That proportion will be 100% for an asset that you expect to use, or have installed ready for use, solely for a taxable purpose.
Note 2: Your estimate will be zero for an income year if another provision of this Act denies a deduction for that year: see section 328‑230.
Note 3: This subsection does not apply to a transferee for certain assets if roll‑over relief under subsection 40‑340(3) is chosen: see section 328‑257.
(2) You must also make this estimate for each *depreciating asset that you *hold and start to use, or have *installed ready for use, for a *taxable purpose while you are an *STS taxpayer. You must make the estimate for the income year in which you start to use it, or have it installed ready for use, for such a purpose.
(3) The taxable purpose proportion of a *depreciating asset’s *adjustable value, or of an amount included in the second element of its *cost, is that part of that amount that represents:
(a) the proportion you estimated under subsection (1) or (2); or
(b) if you have had to make an adjustment under section 328‑225 for the asset—the proportion most recently applicable to the asset under that section.
Note: An amount included in the second element of the cost of a depreciating asset is referred to in this Division as a cost addition amount: see subsection 328‑190(3).
(4) The taxable purpose proportion of a *depreciating asset’s *termination value is that part of that amount that represents:
(a) if you have not had to make an adjustment under section 328‑225 for the asset—the proportion you estimated under subsection (1) or (2); or
(b) if you have had to make at least one such adjustment and the asset is allocated to a *general STS pool—the average of:
(i) the proportion you estimated under subsection (1) or (2); and
(ii) the proportion applicable to the asset for each of the 3 income years you *held the asset after the one in which the asset was allocated to the pool; or
(c) if you have had to make at least one such adjustment and the asset is allocated to a long life STS pool—the average of:
(i) the proportion you estimated under subsection (1) or (2); and
(ii) the proportion applicable to the asset for each of the 20 income years you *held the asset after the one in which the asset was allocated to the pool.
Example: When Bria’s van was allocated to her general STS pool for the 2001‑02 income year, she estimated that it would be used 50% for deliveries in her florist business. Due to increasing deliveries, Bria estimates the van’s business use to be 70% for the 2002‑03 year, and 90% for the 2003‑04 year. She makes an adjustment under section 328‑225 for both those years.
Bria sells the van for $3,000 at the start of the 2005‑06 income year. She must now average the business use estimates for the van for the year it was allocated to the pool and the next 3 years to work out the taxable purpose proportion of its termination value. The average is worked out as follows:
· 50% (original estimate); plus
· 70% (2002‑03 estimate); plus
· 90% (2003‑04 estimate); plus
· 90% (no change on previous year);
The taxable purpose proportion of the van’s termination value is, therefore:
(1) Your deduction for a *general STS pool or *long life STS pool for an income year is the amount worked out under subsection (2) (instead of an amount calculated under section 328‑190) if that amount is less than $1,000 but more than zero.
Note: See section 328‑215 for the result when the amount is less than zero.
(2) The amount is the sum of:
(a) the pool’s *opening pool balance for the income year; and
(b) the *taxable purpose proportion of the *adjustable value of each *depreciating asset you started to use, or have *installed ready for use, for a *taxable purpose during the income year and that is allocated to that pool; and
(c) the taxable purpose proportion of any cost addition amounts (see subsection 328‑190(3)) for the income year for assets allocated to the pool;
less the sum of the taxable purpose proportion of the *termination values of depreciating assets allocated to that pool and for which a *balancing adjustment event occurred during the income year.
(3) In that case, the *closing pool balance of the pool for that income year then becomes zero.
Example: Amanda’s Graphics, an STS taxpayer, has an opening pool balance of $1,200 for its general STS pool for the 2004‑05 income year.
During that year, Amanda acquired a new computer for $2,000. The taxable purpose proportion of its adjustable value is:
Amanda also sold her business car for $1,900 during that year. The car was used 100% in the business.
To work out whether she can deduct an amount under this section, Amanda uses this calculation:
Because the result is less than $1,000, Amanda can deduct the $900 for the income year. The pool’s closing balance for the year is zero.
328‑215 Disposal etc. of depreciating assets
(1) This section sets out adjustments you may have to make if a *balancing adjustment event occurs for a *depreciating asset for which you calculate your deductions under this Subdivision.
(2) If the asset is allocated to a pool and:
(a) the *closing pool balance of the pool for the income year in which the event occurred is less than zero; or
(b) the amount worked out under subsection 328‑210(2) for that income year is less than zero;
the amount by which that balance or amount is less than zero is included in your assessable income for that year.
(3) In that case, the *closing pool balance of the pool for that income year then becomes zero.
(4) If the asset was one for which you deducted an amount under section 328‑180 (about low‑cost assets), you include the *taxable purpose proportion of the asset’s *termination value in your assessable income.
328‑220 What happens when you stop being an STS taxpayer
(1) If you stop being an *STS taxpayer for an income year, this Subdivision continues to apply to your *general STS pool and *long life STS pool for that year and later years.
(2) However, *depreciating assets you started to use, or have *installed ready for use, for a *taxable purpose while you are not an *STS taxpayer cannot be allocated to a pool under this Subdivision until you again become an STS taxpayer.
(3) This section applies to a transferee referred to in subsection 328‑243(1) who is not an *STS taxpayer for the income year in which the relevant *balancing adjustment events occurred as if the transferee had been an STS taxpayer and stopped being one for that year. This rule applies even if roll‑over relief is not chosen.
328‑225 Change in business use
(1) You must, for each income year (the present year) after the year in which a *depreciating asset is allocated to a pool, make a reasonable estimate of the proportion you use the asset, or have it *installed ready for use, for a *taxable purpose in that year.
Note: This section is modified in its application to a transferee for certain assets if roll‑over relief under subsection 40‑340(3) is chosen: see section 328‑257.
(1A) You must make an adjustment for the present year if your estimate for that year under subsection (1) is different by more than 10 percentage points from:
(a) your original estimate (see section 328‑205); or
(b) if you have made an adjustment under this section—the most recent estimate you made under subsection (1) that resulted in an adjustment under this section.
(2) The adjustment is made to the *opening pool balance of the *general STS pool or *long life STS pool to which the asset was allocated, and it must be made before you calculate your deduction under this Subdivision for the present year.
Note: The opening pool balance will be reduced if the adjustment worked out under subsection (3) is a negative amount. It will be increased if the adjustment is positive.
(3) The adjustment is:
where:
asset value is:
(a) for a *depreciating asset you started to use, or have *installed ready for use, for a *taxable purpose while you were an *STS taxpayer—the asset’s *adjustable value at that time; or
(b) for an asset you started to use, or have installed ready for use, for a taxable purpose while you were not an STS taxpayer—its adjustable value at the start of the income year for which it was allocated to a *general STS pool or a *long‑life STS pool;
increased by any amounts included in the second element of the asset’s *cost from the time mentioned in paragraph (a) or (b) until the beginning of the income year for which you are making the adjustment.
last estimate is:
(a) your original estimate of the proportion you use, or have *installed ready for use, a *depreciating asset for a *taxable purpose (see section 328‑205); or
(b) if you have made an adjustment under this section—the latest estimate taken into account under this section.
present year estimate is your reasonable estimate of the proportion you use the asset, or have it *installed ready for use, for a *taxable purpose during the present year.
reduction factor is the number worked out under subsection (4).
(4) The reduction factor in the formula in subsection (3) is:
(a) for a *depreciating asset you started to use, or have *installed ready for use, for a *taxable purpose while you were an *STS taxpayer:
(b) for an asset you started to use, or have *installed ready for use, for a taxable purpose while you were not an STS taxpayer:
where:
n is the number of income years (counting part of an income year as a whole year) before the present year for which you have deducted or can deduct an amount for the *depreciating asset under this Subdivision.
rate is the rate applicable to the pool to which the asset is allocated.
Note: The reduction factor for a depreciating asset in your general STS pool which you started to use, or have installed ready for use, for a taxable purpose while you were not an STS taxpayer is:
· 0.7 for the income year after it is allocated to the pool; and
· 0.49 for the income year after that; and
· 0.343 for the income year after that.
The reduction factor for a depreciating asset in your general STS pool which you started to use, or have installed ready for use, for a taxable purpose while you were an STS taxpayer is:
· 0.85 for the income year after it is allocated to the pool; and
· 0.595 for the income year after that; and
· 0.417 for the income year after that.
Exceptions
(5) However:
(a) you do not need to make an estimate or an adjustment under this section for a *depreciating asset for an income year that is at least:
(i) for an asset allocated to a *general STS pool—3 income years after the income year in which it was allocated; or
(ii) for an asset allocated to a *long life STS pool—20 income years after the income year in which it was allocated; and
(b) you cannot make an adjustment for a depreciating asset if your reasonable estimate of the proportion you use a depreciating asset, or have it *installed ready for use, for a *taxable purpose changes in a later income year by the 10 percentage points mentioned in subsection (1) or less.
328‑230 Estimate where deduction denied
This Subdivision applies to you as if you had estimated that you will not use, or have *installed ready for use, a *depreciating asset at all for a *taxable purpose during an income year if a provision of this Act outside this Division denies a deduction for the asset for that year.
328‑235 Interaction with Divisions 85 and 86
(1) Despite sections 85‑10 and 86‑60, as an *STS taxpayer you can deduct amounts for *depreciating assets under this Subdivision.
(2) However, you cannot deduct an amount for a *car under this Subdivision if, had you not chosen to be an *STS taxpayer, sections 86‑60 and 86‑70 would have prevented you deducting an amount for it.
(1) Roll‑over relief can be chosen under subsection 40‑340(3) if:
(a) *balancing adjustment events occur for *depreciating assets on a day (the BAE day) because of subsection 40‑295(2); and
(b) deductions for the assets are calculated under this Subdivision; and
(c) the entity or entities that had an interest in the assets just before the balancing adjustment events occurred (the transferor) and the entity or entities that have an interest in the assets just after the events occurred (the transferee) jointly choose the roll‑over relief; and
(d) the condition in subsection (2) is met.
(2) All of the *depreciating assets that, just before the *balancing adjustment events occurred, were:
(a) *held by the transferor; and
(b) allocated to the transferor’s *general STS pool or *long life STS pool;
must be held by the transferee just after those events occurred.
328‑245 Consequences of roll‑over
(1) The transferor does not subtract anything for the *balancing adjustment events under:
(a) paragraph (a) of step 2 in the method statement in section 328‑200; or
(b) subsection 328‑210(2).
(2) Subsection 328‑215(4) does not apply to the *balancing adjustment events for the transferor.
(3) A choice made by the transferor for a *depreciating asset under subsection 328‑175(3) (about primary production assets) applies to the transferee as if it had been made by the transferee.
(4) Sections 328‑247 to 328‑257 have effect.
(1) The amount that can be deducted for the transferor’s *general STS pool and *long life STS pool for the income year (the BAE year) in which the *balancing adjustment events occurred under subsection 328‑190(1) or section 328‑210 for the BAE year is split equally between:
(a) the transferor and the transferee; or
(b) if there are 2 or more occurrences of balancing adjustment events for relevant entities for the BAE year and a roll‑over is chosen for each occurrence—the entities concerned.
Example: John and Dave operate a dry cleaning business in partnership (the transferor). The transferor is an STS taxpayer. On the 90th day of an income year, Jonathan joins the partnership. The new partnership (the transferee) becomes an STS taxpayer for the income year. Had there been no partnership change, a deduction of $6,600 would have been available for the transferor’s general STS pool. The transferor and transferee jointly choose the roll‑over.
The deduction available to the transferor and the transferee for the pool under subsection 328‑190(1) is $3,300 each.
(2) The transferor cannot deduct any amount for the transferor’s *general STS pool or *long life STS pool for an income year after the BAE year.
328‑250 Deductions for assets first used in BAE year
(1) This section applies in working out the amount that the transferor or transferee can deduct for the BAE year under subsection 328‑180(1) (low‑cost assets) or subsection 328‑190(2) (assets that will be pooled) for a *depreciating asset that the transferor or transferee started to use, or have *installed ready for use, for a *taxable purpose during the BAE year.
Asset first used by transferor
(2) If the asset was first used or *installed ready for use by the transferor, the amount that can be deducted under subsection 328‑180(1) or subsection 328‑190(2) for the asset for the BAE year is split equally between:
(a) the transferor and the transferee; or
(b) if there are 2 or more occurrences of *balancing adjustment events for relevant entities for the BAE year and a roll‑over is chosen for each occurrence—the entities concerned.
Asset first used by transferee
(3) If the asset was first used or *installed ready for use by the transferee:
(a) the transferor cannot deduct anything for the asset for the BAE year; and
(b) the amount that can be deducted under subsection 328‑180(1) or 328‑190(2) for the asset for the BAE year is:
(i) deductible by the transferee; or
(ii) if there are 2 or more occurrences of *balancing adjustment events for relevant entities for the BAE year and a roll‑over is chosen for each occurrence—split equally between the entities concerned (except ones that did not use the asset or have it installed ready for use).
Example: To continue the example from section 328‑247, the transferee buys a low‑cost asset on the 150th day of the BAE year for $800.
On the 250th day of the year, Evan joins the transferee partnership. The new transferee partnership becomes an STS taxpayer for the BAE year, and a further roll‑over is chosen.
The original transferor cannot deduct anything for the asset. The original transferee (now a transferor) and the new transferee can deduct $400 each.
Special rule for low‑cost assets
(4) Subsection (5) applies if:
(a) the transferor started to use, or have *installed ready for use, a *low‑cost asset during the BAE year; and
(b) a *balancing adjustment event occurs for that asset before the BAE day.
(5) The transferee cannot deduct anything for the asset for the BAE year, and subsection 328‑215(4) does not apply to the transferee in relation to the asset.
328‑253 Deductions for cost addition amounts
(1) This section applies in working out the amount that the transferor or transferee can deduct for the BAE year under subsection 328‑180(2) or 328‑190(3) for expenditure incurred by the transferor or transferee during the BAE year that is included in the second element of the *cost of a depreciating asset.
Expenditure incurred by transferor
(2) If the expenditure was incurred by the transferor, the amount that can be deducted under subsection 328‑180(2) or 328‑190(3) for the BAE year is split equally between:
(a) the transferor and the transferee; or
(b) if there are 2 or more occurrences of *balancing adjustment events for relevant entities for the BAE year and a roll‑over is chosen for each occurrence—the entities concerned.
Expenditure incurred by transferee
(3) If the expenditure was incurred by the transferee:
(a) the transferor cannot deduct anything for the expenditure for the BAE year; and
(b) the amount that can be deducted under subsection 328‑180(2) or 328‑190(3) for the expenditure for the BAE year is:
(i) deductible by the transferee; or
(ii) if there are 2 or more occurrences of *balancing adjustment events for relevant entities for the BAE year and a roll‑over is chosen for each occurrence—split equally between the entities concerned.
Special rule for expenditure on low‑cost assets
(4) Subsection (5) applies if:
(a) the transferor incurred the expenditure in relation to a *low‑cost asset; and
(b) a *balancing adjustment event occurs for that asset before the BAE day.
(5) The transferee cannot deduct anything for the expenditure for the BAE year, and subsection 328‑215(4) does not apply to the transferee in relation to the asset.
328‑255 Closing pool balance etc. below zero
(1) This section applies if:
(a) the *closing pool balance of the transferor’s *general STS pool or *long life STS pool for the BAE year is less than zero; or
(b) the amount worked out under subsection 328‑210(2) for that pool for the BAE year is less than zero;
because a *balancing adjustment event occurred for an asset allocated to that pool during that year.
(2) The amount included in assessable income under subsection 328‑215(2) is split equally between:
(a) the transferor and transferee; or
(b) if there are 2 or more occurrences of *balancing adjustment events for relevant entities for the BAE year and a roll‑over is chosen for each occurrence—the entities concerned.
(1) This section applies to *depreciating assets (the previously held assets) that were *held by the transferor just before the *balancing adjustment events occurred.
(2) Subsection 328‑205(1) (about estimates of taxable use) does not apply to previously held assets in the hands of the transferee for the BAE year. Instead, the transferee uses for the BAE year:
(a) the estimate made by the transferor under that subsection for the asset; or
(b) if the transferor had made one or more estimates for the asset under subsection 328‑225(1) that resulted in an adjustment under section 328‑225 (about change in business use)—that estimate or the most recent of those estimates.
(3) Section 328‑225 applies to the transferee for each previously held asset for income years after the BAE year as if:
(a) the transferee had *held the asset during the period that the transferor held it; and
(b) estimates applicable to the transferor for the asset under that section were also applicable to the transferee.
Subdivision 328‑E—Trading stock for STS taxpayers
328‑280 What this Subdivision is about
STS taxpayers do not need to account for their trading stock in some circumstances. This Subdivision modifies the rules in Division 70 about trading stock for STS taxpayers.
Table of sections
Operative provisions
328‑285 Trading stock for STS taxpayers
328‑290 Adjustments in certain cases
328‑295 Value of trading stock on hand
328‑285 Trading stock for STS taxpayers
(1) You do not have to account for changes in the *value of your *trading stock for an income year if:
(a) you are an *STS taxpayer for that year; and
(b) the difference between the value of all your trading stock on hand at the start of that year and the value you reasonably estimate of all your trading stock on hand at the end of that year is not more than $5,000.
Note 1: As a result, sections 70‑35 and 70‑45 (about comparing the value of each item of trading stock on hand at the start and end of an income year) will not apply to you for the income year.
Note 2: When making a reasonable estimate of the value of trading stock on hand:
· special valuation rules may be used, for example, obsolete stock, natural increase of livestock, horse breeding stock; and
· the estimated value disregards an amount equal to the amount of input tax credits (if any) to which you would be entitled for an item if the acquisition of the item had been solely for a creditable purpose: see subsection 70‑45(1A).
Exception: choice to account for trading stock
(2) However, you can choose to account for changes in the *value of your *trading stock for an income year.
Note: If you make this choice, you will have to do a stocktake and account for the change in the value of all your trading stock: see Subdivision 70‑C.
328‑290 Adjustments in certain cases
If you are an *STS taxpayer for an income year and you account for changes in the *value of your *trading stock for the income year, you must:
(a) value each item of your trading stock on hand at the end of the income year in accordance with section 70‑45; and
(b) take into account the *value of all your *trading stock, in accordance with section 70‑35, in working out your assessable income and deductions.
Note 1: You account for changes in the value of your trading stock for the income year if:
· you choose to do so; or
· the estimated difference between the value of your trading stock at the start and at the end of that year is more than $5,000.
Note 2: Section 70‑35 includes in assessable income any excess of the value of trading stock at the end of the income year over the value at the start of the income year, and allows a deduction for any excess of the value at the start of the income year over the value at the end of the income year.
328‑295 Value of trading stock on hand
(1) If you are an *STS taxpayer for an income year, the *value of all your *trading stock on hand at the start of the income year is:
(a) the same amount as was taken into account under this Act at the end of the previous income year; or
(b) zero if no item of trading stock was taken into account under this Act at the end of the previous income year.
Note: The amount taken into account at the end of the previous income year is worked out under either section 70‑45 or subsection (2) of this section.
(2) If subsection 328‑285(1) applies to you for an income year and you have not made a choice under subsection 328‑285(2) for that year, this Act applies to you as if the *value of all your *trading stock on hand at the end of the year were equal to the value of all your trading stock on hand at the start of the year.
Note: If subsection 328‑285(1) does not apply, the value of trading stock on hand at the end of the year is worked out using section 70‑45.
Example: Angela operates a riding school, and also sells riding gear. She is an STS taxpayer.
At the start of the 2003‑04 income year, the opening value of Angela’s trading stock is $30,000. Using her reliable inventory system, she estimates the closing value to be $34,000.
The closing value for the 2003‑04 income year, and the opening value for the 2004‑05 income year, will be $30,000.
Subdivision 328‑F—Entities eligible to be STS taxpayers
328‑360 What this Subdivision is about
This Subdivision explains that you can choose to be an STS taxpayer only if you are carrying on a business. In addition, you (and others who can be expected to act in concert with you in your business) together must have:
• an average annual business turnover of less than $1m; and
• depreciating assets with an end of year value below $3m.
You normally work out your average turnover using any 3 of the last 4 years, but there are special rules for some other cases.
Table of sections
Operative provisions
328‑365 Eligibility to be an STS taxpayer
328‑370 Meaning of STS average turnover
328‑375 Meaning of STS group turnover
328‑380 Grouped entities
328‑365 Eligibility to be an STS taxpayer
(1) You are eligible to be an *STS taxpayer for an income year if:
(a) you carry on a *business in that year; and
(b) your *STS average turnover for that year is less than $1,000,000 (ignoring any *input tax credits to which you are entitled and *decreasing adjustments that you have); and
(c) the sum of the *adjustable values of the *depreciating assets (for which an amount can be deducted under Division 40, or under this Division apart from this paragraph) that you, and entities (the grouped entities) whose value of business supplies is grouped with yours in accordance with section 328‑380, *held at the end of that year is less than $3,000,000.
Note 1: If you are eligible to be an STS taxpayer, you can choose to become one: see section 328‑435.
Note 2: If you choose to become an STS taxpayer, you may be entitled to the 25% entrepreneurs’ tax offset: see Subdivision 61‑J.
(2) You use the *closing pool balance of your, or your grouped entities, *general STS pool, *long l