The Government has decided not to proceed with the recommendations made by the Review of Business Taxation regarding the taxation of ordinary life insurance investment policies because of concerns with compliance costs.
The RBT's recommendations affecting special investment products offered by friendly societies will be implemented, with some modification. From 1 January 2003, friendly societies will include investment income relating to income bonds, funeral policies and scholarship plans taken out after 30 November 1999 in their assessable income and be entitled to a deduction for amounts paid to policyholders. More details of the taxation treatment of these products are outlined in the Attachment.
Legislation to introduce these reforms will be developed in consultation with industry reinforcing the Government's commitment to allow greater industry involvement in the legislative design process.
Treasury contact:
Mike Buckley (02) 6263 4413
ATO contact: Tony Regan (02) 6216 1005
Attachment
Income bonds
Friendly societies will include investment income attributable to income bonds taken after 30 November 1999 in assessable income with effect from 1 January 2003 and be entitled to a deduction for amounts credited to policyholders.
Policyholders will continue to include these amounts in assessable income.
Scholarship plans
Friendly societies will include investment income attributable to scholarship plans taken after 30 November 1999 in assessable income with effect from 1 January 2003 and will be entitled to a deduction for the investment income component of benefits paid to the nominated student or back to the investor.
Capital and investment income in relation to scholarship plans can be divisible - that is, the capital may be able to be returned to the investor and investment income paid to the nominated student.
The whole amount of the investment income will be included in the recipient's assessable income. However, Division 6AA will continue to apply to investment income paid from scholarship plans to nominated students under 18 years of age.
Funeral policies
Friendly societies will include investment income attributable to funeral policies taken after 30 November 1999 in assessable income with effect from 1 January 2003 and will be entitled to a deduction for the investment income component of benefits paid to the trustee of the estate or the funeral director.
If the recipient of the proceeds of the policy is the trustee of the policyholder's estate, the trustee will be assessable on the investment return at the time of receipt.
If the recipient of the proceeds of the policy is a funeral director, the funeral director will be assessable on the whole of the proceeds of the policy (that is, the capital and the investment return) at the time of receipt.