I am announcing today amendments to close off a loophole in the dividend imputation provisions relating to life assurance companies in the Income Tax Assessment Act 1936 (the Act). The amendments will prevent life assurance companies inappropriately generating franking credits and also ensure that franking additional tax (FAT) in the dividend imputation provisions applies appropriately to life assurance companies.
Under the current dividend imputation provisions non-mutual life assurance companies receive franking credits and debits on the same basis as other companies with shareholders. However, for franking credits and debits attributable to the statutory funds of a life assurance company the franking credits and debits are reduced by eighty per cent to take into account that there is a limit on the portion of statutory fund income that can be distributed to shareholders because of various prudential requirements.
A scheme exploiting an anomaly in these provisions has recently been exposed. The scheme inappropriately allows one hundred per cent of the franking credits to be generated from the payment of tax attributable to the statutory funds of a life assurance company. Broadly speaking, the scheme relies on a life assurance company deliberately overfranking the payment of dividends and applying the resulting franking deficit tax (FDT) liability to offset its company tax liability.
To ensure that the loophole confers no benefit, the amendments, which take effect from 3.00 pm 4 May 1999 (AEST), will:
- impose an additional amount of tax when a life assurance company applies the payment of FDT to offset any company tax liability that is attributable to its statutory funds;
- calculate the amount of the additional tax payable as eighty per cent of the amount of FDT that has been paid and offset against any company tax liability that is attributable to the statutory funds of the company; and
- ensure that only those franking credits and debits that are directly attributable to the payment or refund of tax or the payment of dividends are considered for the purposes of calculating whether FAT (i.e. penalty tax that applies where companies significantly overfrank the payment of dividends) applies to life assurance companies.
While the Government is aware that these amendments could be overtaken by changes stemming from the recommendations of the Review of Business Taxation (RBT) the Government considers it necessary to close off this loophole immediately.
4 May 1999
CANBERRA
Contact Officers:
Matthew Guy
Assistant Treasurer’s Office
(03) 9650 7274
Haydn Daw (ATO)
Australian Taxation Office
(02) 6271 6413
0416 216 345