Commonwealth of Australia Explanatory Memoranda

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TAXATION LAWS AMENDMENT BILL (NO. 6) 2002

2002

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

HOUSE OF REPRESENTATIVES

TAXATION LAWS AMENDMENT BILL (No. 6) 2002

SUPPLEMENTARY EXPLANATORY MEMORANDUM

(Amendments to be moved on behalf of the Government)

(Circulated by authority of the
Treasurer, the Hon Peter Costello, MP)

Table of contents

Glossary

The following abbreviations and acronyms are used throughout this supplementary explanatory memorandum.

General outline and financial impact

Interest Withholding Tax

The amendments to Schedule 1 to Taxation Laws Amendment Bill (No. 6) 2002 will extend the IWT exemption for interest paid on nostro accounts held by ADIs to financial institutions which are not ADIs but conduct banking business with the public.

Date of effect: The amendments will apply to interest paid on nostro accounts on or after 29 August 2001.

Proposal announced: The proposal was announced by the former Assistant Treasurer and the former Minister for Financial Services and Regulation in Press Release No. 42 on 29 August 2001.

Financial impact: The proposed amendments will have no impact on the forward estimates.

Compliance cost impact: The amendments will reduce and eliminate compliance costs

Goods and services tax

Government amendments to the Taxation Laws Amendment Bill (No. 6) 2002 adds Schedule 4 to this bill. Schedule 4 amends the GST Transition Act, so that an entity is not entitled to claim an input tax credit for the acquisition of CTP insurance where the acquisition relates to a period of insurance that commences before 1 July 2003. That is, input tax credits will be denied because of the commencement date of the CTP insurance rather than payment date for the acquisition of the CTP insurance.

Date of effect: The amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting on, or after, 1 July 2000.

Proposal announced: Not previously announced.

Financial impact: $5 million in the first year after the transition period ends.

Compliance cost impact: Reduction in compliance costs for providers of CTP insurance.

Chapter 1
Interest withholding tax

Outline of chapter

1.1 The amendments extend the IWT exemption for interest paid on nostro accounts held by ADIs to financial institutions which are not ADIs but conduct banking business with the public.

Explanation of amendments

1.2 Schedule 1 to the bill proposes to amend the Income Tax Assessment Act 1936 to exempt interest paid on nostro accounts held by ADIs from IWT. The bill defines an ADI as a body corporate that is an authorised deposit-taking institution for the purposes of the Banking Act 1959. These entities include Australian banks and foreign bank branches.

1.3 Following the introduction of the bill into the Parliament, representations have been received from industry to extend the exemption to financial institutions which are not ADIs but which conduct banking business with the public, such as merchant banks.

1.4 In order to extend the exemption from IWT to interest paid on nostro accounts held by these types of financial institutions, the definition of the term ‘nostro account’ contained in item 3 of schedule 1 to the bill will be amended. Presently a nostro account is defined to mean an account that an ADI holds with a foreign bank and maintains for the sole purpose of settling international transactions. The definition will be extended to include accounts of this type that are maintained by non-ADI financial institutions. [Schedule 1, item 3, definition of ‘nostro account’ in subsection 128A(1)]

1.5 A ‘non-ADI financial institution’ is defined to mean a corporation that:

• is a registered entity within the meaning of the Financial Sector (Collection of Data) Act 2001; and

• is included in Category D (Money Market Corporation) in a list kept under section 11 of that Act; and

• carries on a general business of providing finance (within the meaning of that Act) on a commercial basis.

This definition limits the exemption to merchant banks and like financial institutions that carry on the business of providing finance on a commercial basis, predominantly to unrelated parties.

[Schedule 1, item 2A, definition of ‘non-ADI financial institution’ in subsection 128A(1)]

1.6 The amendment will ensure greater consistency with the press release jointly issued by the former Minister for Financial Services and former Assistant Treasurer on 29 August 2001 which stated that the exemption from IWT on interest payable on nostro accounts would apply to financial institutions.

Chapter 2
Goods and services tax

Outline of chapter

2.1 This bill amends the GST Transition Act so that an entity is entitled to claim an input tax credit for the acquisition of CTP insurance, where the acquisition relates to a period of insurance that commences on or after 1 July 2003. That is, input tax credits will be claimable based on the commencement date of the CTP insurance rather than the payment date for the acquisition of the CTP insurance.

Context of amendments

2.2 Each State and Territory has a CTP motor accident injury insurance scheme (CTP insurance scheme) that operates with motor vehicle registration processes.

2.3 Under the GST, the supply of general insurance, including CTP insurance, is generally a taxable supply. Where the insurance is acquired for a creditable purpose, a business that is registered for GST would normally be entitled to claim an input tax credit. Insurers are entitled to claim a decreasing adjustment for payments or supplies made in settlement of claims, but only to the extent that an insured entity is not entitled to claim an input tax credit for the acquisition of the CTP insurance.

2.4 When the GST was introduced, CTP insurers were granted a special three year transitional measure, effective until 30 June 2003, to give them time to adapt their systems to comply with the GST. Section 23 of the GST Transition Act removes an entity’s entitlement to claim an input tax credit for the acquisition of CTP insurance where payment for the insurance is made before 1 July 2003. Accordingly, for CTP policies paid for before 1 July 2003, a registered insured entity is not entitled to input tax credits and CTP insurers are entitled to full decreasing adjustments when they make payments or supplies in settlement of all claims.

2.5 From 1 July 2003, with the ending of the transitional measure for CTP insurers, input tax credits will be available to registered businesses in relation to CTP insurance premiums acquired. Under the current wording of section 23 of the GST Transition Act, a registered insured entity will only be allowed to claim input tax credits on CTP insurance policies paid on or after 1 July 2003. However, this will result in a number of unintended consequences:

• Entities that make payment before 1 July 2003, for the acquisition of CTP insurance commencing on or after that date, will be denied input tax credits. (Policyholders will sometimes pay early as they often receive renewal notices six weeks prior to the policy expiry date.)

• In some circumstances, entities acquiring CTP insurance commencing before 1 July 2003 may have an incentive to delay payment for the insurance until after that date, in order to claim an input tax credit on the acquisition.

• Suppliers of CTP insurance would incur additional compliance costs in being required to identify and track within their systems these particular policies of insurance.

2.6 Amendments to section 23 of the GST Transition Act are required so that input tax credit entitlements are based on the commencement date of the policy (rather than the date of premium payment). This will avoid the issues described above. Further, CTP insurers support these amendments because it will be administratively easier for them to determine a policy’s commencement date than to determine the premium payment date. In addition, the amendments will maintain the end of the transitional period at 30 June 2003.

Summary of new law

2.7 Section 23 of the GST Transition Act will be amended to allow input tax credits on the acquisition of CTP insurance only where the insurance commences on or after 1 July 2003, regardless of when payment is made.

Comparison of key features of new law and current law

Detailed explanation of new law

2.8 Paragraphs 23(1)(a) and 23(1)(b) of the GST Transition Act are amended to ensure that an entity is not entitled to claim an input tax credit for a creditable acquisition of CTP insurance, where the insurance commences before 1 July 2003 [Amendment 2, Schedule 4, items 1 and 2]. As a result, a registered supplier of CTP insurance will be entitled to claim a full decreasing adjustment (under section 78-10 of the GST Act) in relation to any settlement for CTP insurance that commenced before 1 July 2003.

2.9 New subsection 23(1AA) ensures that it does not matter when the entity makes payment to acquire the CTP insurance. For example, an entity that delays payment of premium for CTP insurance until 2 July 2003 for insurance that commenced on 29 June 2003, will not be entitled to claim an input tax credit on the acquisition. [Amendment 2, Schedule 4, item 3]

2.10 The amendments to section 23 also ensure that no matter when payment is made, a registered entity will be entitled to claim an input tax credit for the creditable acquisition of CTP insurance that commences on or after 1 July 2003. For example, an entity will be entitled to claim an input tax credit for the creditable acquisition of CTP insurance where it pays the insurance premium on 15 June 2003, for insurance commencing on 5 July 2003.

Application and transitional provisions

2.11 The amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting, or that started, on or after 1 July 2000. The application date ensures that section 23 applies to CTP insurance that is, or has been, acquired since 1 July 2000. [Amendment 2, Schedule 4, item 4]

Index

Schedule 1: Interest Withholding Tax

Schedule 4: Goods and services tax

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