Income Tax Assessment Act 1997

Chapter 3—Specialist liability rules

Part 3‑32—Co‑operatives and m utual entities

Division 315—Demutualisation of private health insurers

Table of Subdivisions

Guide to Division 315

315‑A Capital gains and losses connected with a demutualisation of a private health insurer to be disregarded

315‑B Cost base of certain shares and rights in private health insurers

315‑C Lost policy holders trust

315‑D Special cost base rules for certain shares and rights in holding companies

315‑E Special CGT rule for legal personal representatives and beneficiaries

315‑F Non‑CGT consequences of demutualisation

Guide to Division 315

315‑1 What this Division is about

This Division sets out the taxation consequences of the demutualisation of private health insurers.

Policy holders, demutualising health insurers and certain other entities can disregard capital gains and losses arising under a demutualisation (see Subdivision 315‑A).

Shares and rights issued under the demutualisation are given a cost base based on the market value of the demutualising health insurer at the time of issue (see Subdivisions 315‑B and 315‑D).

Assets held by a lost policy holders trust are given roll‑over relief if transferred to the lost policy holder, or if the lost policy holder becomes absolutely entitled to them. Otherwise the trustee of the lost policy holders trust is taxed on any capital gains (see Subdivision 315‑C).

A legal personal representative can disregard capital gains and losses made when passing an asset to a beneficiary of a policy holder’s estate (see Subdivision 315‑E).

Shares, rights or cash received under a demutualisation are not assessable income and not exempt income (see Subdivision 315‑F).

Subdivision 315‑A—Capital gains and losses connected with a demutualisation of a private health insurer to be disregarded

Table of sections

Rules for policy holders

315‑5 Policy holders to disregard capital gains and losses related to demutualisation of private health insurer

315‑10 Effect on the legal personal representative or beneficiary

315‑15 Demutualisations to which this Division applies

315‑20 What assets are covered

Rules for demutualising health insurer

315‑25 Demutualising health insurers to disregard capital gains and losses related to demutualisation

Rules for other entities

315‑30 Other entities to disregard capital gains and losses related to demutualisation

Rules for policy holders

315‑5 Policy holders to disregard capital gains and losses related to demutualisation of private health insurer

Disregard a *capital gain or *capital loss of an individual from a *CGT event that happens in relation to a *CGT asset if:

(a) the CGT event happens under a demutualisation to which this Division applies; and

(b) the individual is, or has been, a policy holder (within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015) of, or another person insured through, the demutualising entity (the demutualising health insurer); and

315‑10 Effect on the legal personal representative or beneficiary

Disregard a *capital gain or *capital loss of an entity from a *CGT event that happens in relation to a *CGT asset if:

(a) the CGT asset forms part of the estate of a deceased individual who is mentioned in paragraph 315‑5(b); and

(b) the entity is the deceased individual’s *legal personal representative or a beneficiary in the deceased individual’s estate; and

(d) the CGT event happens under a demutualisation to which this Division applies; and

(e) the CGT asset is covered by section 315‑20.

315‑15 Demutualisations to which this Division applies

This Division applies to a demutualisation of an entity if:

(a) the entity:

(i) is an entity to which item 6.3 of the table in section 50‑30 applies; and

(ii) is not registered under Part 3 of the Life Insurance Act 1995; and

(iia) is not an entity to whose demutualisation Division 316 applies; and

(iii) does not have capital divided into shares; and

Note: Item 6.3 of the table in section 50‑30 applies to a private health insurer within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015 that is not carried on for the profit or gain of its individual members.

(b) an application by the entity to convert to being registered as a for profit insurer (within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015) is approved under subsection 20(5) of that Act; and

(c) consistently with the conversion scheme mentioned in paragraph 20(2)(a) of that Act, the entity becomes registered as a for profit insurer (within the meaning of that Act).

315‑20 What assets are covered

These *CGT assets are covered:

(a) an interest in the demutualising health insurer as a policy holder;

(b) a membership interest in the demutualising health insurer;

(d) a right or interest of another kind that arises under the demutualisation.

Rules for demutualising health insurer

315‑25 Demutualising health insurers to disregard capital gains and losses related to demutualisation

Disregard a *capital gain or *capital loss of an entity from a *CGT event if:

(a) the CGT event happened under a demutualisation to which this Division applies; and

(b) the entity is the demutualising health insurer.

Rules for other entities

315‑30 Other entities to disregard capital gains and losses related to demutualisation

Disregard a *capital gain or *capital loss of an entity from a *CGT event if:

(a) the entity is established solely for the purpose of participating in a demutualisation to which this Division applies; and

(b) the entity is not a trust covered by Subdivision 315‑C (about lost policy holders); and

(i) happened under a demutualisation to which this Division applies; and

(ii) happened before or at the same time as the allocation or distribution (in the form of shares or cash) of the accumulated surplus of the demutualising health insurer; and

(iii) was connected to that allocation or distribution.

Note: The allocation or distribution of the accumulated surplus could happen through an arrangement involving more than one transaction.

Subdivision 315‑B—Cost base of certain shares and rights in private health insurers

Table of sections

315‑80 Cost base and acquisition time of demutualisation assets

315‑85 Demutualisation asset

315‑90 Participating policy holders

315‑80 Cost base and acquisition time of demutualisation assets

Cost base adjustment

(1) The first element of the *cost base and *reduced cost base of a *CGT asset is its *market value on the day it is issued if:

(a) the asset is covered by section 315‑85 (a demutualisation asset); and

(b) the asset is issued to an entity (a participating policy holder) covered by section 315‑90.

Note: There is an exception to this rule in Subdivision 315‑D where the asset is a share or right in a holding company with other assets.

Acquisition rule

(2) The participating policy holder is taken to have *acquired the demutualisation asset at the time it is issued.

315‑85 Demutualisation asset

(1) This section covers an asset if:

(a) the asset is:

(i) a share in the demutualising health insurer; or

(ii) a right to *acquire a share in the demutualising health insurer; or

(iii) a share in an entity that owns all of the shares in the demutualising health insurer; or

(iv) a right to acquire a share in an entity mentioned in subparagraph (iii); and

(b) the share or right is issued under a demutualisation to which this Division applies; and

(i) the variation or abrogation of rights attaching to or consisting of a *CGT asset covered by section 315‑20; or

(ii) the conversion, cancellation, extinguishment or redemption of such a CGT asset.

Exclusion for rights with an exercise price

(2) Despite subsection (1), this section does not cover a right to *acquire a share in an entity if the holder of the right must pay an amount to exercise the right.

Exclusion where assets not issued simultaneously

(3) Despite subsection (1), an asset is not covered by this section unless all of the assets covered by subsection (1) for the demutualisation in question are issued:

(a) at the same time; and

(b) to an entity that is either:

(i) a participating policy holder (see section 315‑90); or

(ii) the trustee of a trust covered by Subdivision 315‑C (about the lost policy holders trust).

315‑90 Participating policy holders

(1) This section covers an individual who:

(a) is, or has been, a policy holder (within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015) of, or another person insured through, the demutualising health insurer; and

(b) is entitled, under the demutualisation, to an allocation of demutualisation assets.

(2) This section also covers an entity who became entitled to an allocation of demutualisation assets because of the death of an individual mentioned in subsection (1).

Subdivision 315‑C—Lost policy holders trust

Table of sections

315‑140 Lost policy holders trust

315‑145 CGT treatment of demutualisation assets in lost policy holders trust

315‑150 Roll‑over where assets transferred to lost policy holder

315‑155 Trustee assessed if assets dealt with not for benefit of lost policy holder

315‑160 Subdivision 126‑E does not apply to lost policy holders trust

315‑140 Lost policy holders trust

This Subdivision covers a trust (a lost policy holders trust) in relation to a demutualisation to which this Division applies if:

(a) the conversion scheme mentioned in paragraph 20(2)(a) of the Private Health Insurance (Prudential Supervision) Act 2015 for the demutualisation provides for the trust; and

(b) under the demutualisation, demutualisation assets (see section 315‑85) are issued to the trustee of the trust; and

(i) individuals (lost policy holders) who are, or have been, policy holders (within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015) of, or other persons insured through, the demutualising health insurer; or

(ii) if the lost policy holder has died—the *legal personal representative of the lost policy holder or a beneficiary in the estate of the lost policy holder.

Example: An example of an individual on whose behalf the trust might hold assets would be an individual who has not completed a formal step required for them to be issued with demutualisation assets directly. Another example might be an individual living overseas.

315‑145 CGT treatment of demutualisation assets in lost policy holders trust

Cost base adjustment

(1) The first element of the *cost base and *reduced cost base of a demutualisation asset issued to the trustee of a lost policy holders trust is its *market value on the day it is issued.

Note: There is an exception to this rule in Subdivision 315‑D where the asset is a share or right in a holding company with other assets.

Acquisition rule

(2) The trustee is taken to have *acquired the demutualisation asset at the time it is issued.

315‑150 Roll‑over where assets transferred to lost policy holder

(1) This section applies in relation to a *CGT event if:

(a) the CGT event happens in relation to an asset held by the trustee of a lost policy holders trust on behalf of a lost policy holder; and

(b) the CGT event happens because the lost policy holder (or, if the lost policy holder has died, the *legal personal representative of the lost policy holder or a beneficiary in the estate of the lost policy holder) either:

(i) is transferred the asset by the trustee; or

(ii) becomes absolutely entitled to the asset.

Note: The asset may be a demutualisation asset, or some other asset.

Consequence for trustee

(2) Disregard a *capital gain or *capital loss the trustee makes from the *CGT event.

Consequence for lost policy holder

(3) The *cost base of the asset in the hands of the trustee of the lost policy holders trust just before the *CGT event becomes the first element of the cost base and *reduced cost base of the asset in the hands of the lost policy holder, *legal personal representative or beneficiary.

(4) The lost policy holder, *legal personal representative or beneficiary is taken to have *acquired the asset when the trustee of the lost policy holders trust acquired it.

315‑155 Trustee assessed if assets dealt with not for benefit of lost policy holder

(1) This section applies in relation to a *capital gain from a *CGT event if:

(a) the CGT event happens in relation to an asset held by the trustee of a lost policy holders trust; and

(b) section 315‑150 does not apply to the CGT event.

(2) If this section applies:

(a) sections 115‑215 and 115‑220 do not apply in relation to the *capital gain; and

(b) for the purposes of this Act, the trustee is taken to be *specifically entitled to all of the capital gain.

315‑160 Subdivision 126‑E does not apply to lost policy holders trust

Subdivision 126‑E does not apply in relation to a demutualisation to which this Division applies.

Subdivision 315‑D—Special cost base rules for certain shares and rights in holding companies

Table of sections

315‑210 Cost base for shares and rights in certain holding companies

(1) This section applies in relation to a *CGT asset that is a demutualisation asset if:

(a) the demutualisation asset is:

(i) a share in an entity mentioned in subparagraph 315‑85(1)(a)(iii); or

(ii) a right to *acquire a share in an entity mentioned in that subparagraph; and

(b) the entity owns other assets in addition to the shares in the demutualising health insurer; and

This section applies despite sections 315‑80 and 315‑145.

Cost base adjustment

(2) The first element of the *cost base and *reduced cost base of the *CGT asset is worked out under the method statement.

Method statement

Step 1. Start with the *market value of the demutualising health insurer on the day the asset is issued.

Step 2. Divide the result of step 1 by the sum of:

(a) the number of shares in the entity that are issued under the demutualisation; and

(b) the number of shares in the entity that can be *acquired under rights that are demutualisation assets issued under the demutualisation.

Step 3. The result of step 2 is the first element of the *cost base and *reduced cost base of the asset, unless the asset is a right.

Step 4. If the asset is a right, multiply the result of step 2 by the number of shares that can be *acquired under the right. The result is the first element of the *cost base and *reduced cost base of the asset.

Example: Wellbeing Health demutualises on 1 April 2008 and has a market value of $400 million on that day. It distributes its accumulated mutual surplus in the form of rights to acquire shares in its holding company Healthiness Insurance Ltd (Healthiness). The rights do not have an exercise price.

A total of 800 million shares can be acquired in Healthiness under rights issued under the demutualisation. Each right allows the holder to acquire 50 shares. No shares in Healthiness are issued.

Under the method statement, the first element of the cost base and reduced cost base of each right is worked out by dividing the market value of Wellbeing Health (step 1) by the number of shares in Healthiness that can be acquired under the demutualisation (step 2) and multiplying the result by the number of shares that can be acquired under the right (step 4):

$Start formula start fraction $400 million over 800 million end fraction times 50 equals $25 end formula$

Acquisition rule

(3) The participating policy holder or trustee is taken to have *acquired the *CGT asset at the time it is issued.

Subdivision 315‑E—Special CGT rule for legal personal representatives and beneficiaries

Table of sections

315‑260 Special CGT rule for legal personal representatives and beneficiaries

(1) This section sets out what happens if a *CGT asset:

(a) is a demutualisation asset; and

(b) forms part of the estate of a participating policy holder mentioned in subsection 315‑90(1) who has died, but was not owned by the policy holder just before dying; and

(c) *passes to a beneficiary in the policy holder’s estate because the asset is transferred to the beneficiary by the policy holder’s *legal personal representative.

Note: Division 128 deals with the effect of death in relation to CGT assets a person owns just before dying.

(2) Disregard a *capital gain or *capital loss the *legal personal representative makes if the asset *passes to a beneficiary in the policy holder’s estate.

Consequence for beneficiary

(3) The *cost base and *reduced cost base of the asset in the hands of the *legal personal representative just before the asset *passes to the beneficiary becomes the first element of the cost base and reduced cost base of the asset in the hands of the beneficiary.

(4) The beneficiary is taken to have *acquired the asset when the *legal personal representative acquired it.

Subdivision 315‑F—Non‑CGT consequences of demutualisation

Table of sections

315‑310 General taxation consequences of issue of demutualisation assets etc.

(1) An amount of *ordinary income or *statutory income of an entity to which subsection (2) applies is not assessable and not *exempt income if:

(a) the amount would otherwise be included in the ordinary income or statutory income of the entity only because a demutualisation asset was issued to the entity; or

(b) the amount is a payment made to the entity, under a demutualisation to which this Division applies, in connection with:

(i) the variation or abrogation of rights attaching to or consisting of a *CGT asset covered by section 315‑20; or

(ii) the conversion, cancellation, extinguishment or redemption of such a CGT asset.

(2) This subsection applies to an entity that:

(a) is, or has been, a policy holder (within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015) of, or another person insured through, the demutualising health insurer; or

(b) is issued with the demutualisation asset, or receives the payment, because of the death of a policy holder mentioned in paragraph (a).

Division 316—Demutualisation of friendly society health or life insurers

Table of Subdivisions

Guide to Division 316

316‑A Application

316‑B Capital gains and losses connected with the demutualisation

316‑C Cost base of shares and rights issued under the demutualisation

316‑D Lost policy holders trust

316‑E Special CGT rules for legal personal representatives and beneficiaries

316‑F Non‑CGT consequences of the demutualisation

Guide to Division 316

316‑1 What this Division is about

Special tax consequences follow the demutualisation of a friendly society that provides health insurance or life insurance, or has a wholly‑owned subsidiary that does.

Subdivision 316‑A—Application

Table of sections

316‑5 Application of this Division

This Division applies in relation to a demutualisation of a *friendly society if:

(a) the society is, or has a *wholly‑owned subsidiary (a health/life insurance subsidiary) that is:

(i) a private health insurer as defined in the Private Health Insurance (Prudential Supervision) Act 2015; or

(ii) a company registered under section 21 of the Life Insurance Act 1995; and

(b) the society does not have capital divided into *shares held by its *members; and

(c) after the demutualisation the society is to be carried on for the object of securing a profit or pecuniary gain for its *members.

Subdivision 316‑B—Capital gains and losses connected with the demutualisation

Guide to Subdivision 316‑B

316‑50 What this Subdivision is about

Disregard capital gains and losses made by any entity from a CGT event happening under the demutualisation, unless the entity:

(a) is or has been a member of the friendly society or insured through the society or any of its wholly‑owned subsidiaries; and

(b) receives money for the event.

Table of sections

Gains and losses of members, insured entities and successors

316‑55 Disregarding capital gains and losses, except some involving receipt of money

316‑60 Taking account of some capital gains and losses involving receipt of money

316‑65 Valuation factor for sections 316‑60, 316‑105 and 316‑165

316‑70 Value of the friendly society

Friendly society’s gains and losses

316‑75 Disregarding friendly society’s capital gains and losses

Other entities’ gains and losses

316‑80 Disregarding other entities’ capital gains and losses

Gains and losses of members, insured entities and successors

316‑55 Disregarding capital gains and losses, except some involving receipt of money

(1) Disregard an entity’s *capital gain or *capital loss from a *CGT event that happens under the demutualisation to a *CGT asset if:

(a) the entity:

(i) is or has been a *member of the *friendly society; or

(ii) is or has been insured through the friendly society or a health/life insurance subsidiary of the friendly society; and

(b) the CGT asset is one of these (an interest affected by demutualisation):

(i) an interest in the friendly society as the owner or holder of a policy of insurance with the friendly society or health/life insurance subsidiary;

(ii) a *membership interest in the friendly society;

(iii) a right or interest of another kind in the friendly society;

(iv) a right or interest of another kind that arises under the demutualisation, except an interest in a lost policy holders trust (see section 316‑155).

Note: Subdivision 316‑D deals with the effects of CGT events happening to interests in lost policy holders trusts.

(2) Disregard a *capital gain or *capital loss of an entity (the successor) from a *CGT event that happens under the demutualisation to a *CGT asset if:

(a) the successor is the *legal personal representative, or beneficiary in the estate, of a deceased individual who was:

(i) a *member of the *friendly society; or

(ii) insured through the friendly society or a health/life insurance subsidiary of the friendly society; and

(b) the CGT asset:

(i) forms part of the deceased individual’s estate; and

(ii) devolves or *passes to the successor; and

(iii) is an interest affected by demutualisation (see paragraph (1)(b)).

316‑60 Taking account of some capital gains and losses involving receipt of money

(1) This section applies if:

(a) a *CGT event happens under the demutualisation to an entity’s interest affected by demutualisation (see section 316‑55); and

(b) the event involves:

(i) the variation or abrogation of rights attaching to or consisting of the interest; or

(ii) the conversion, cancellation, extinguishment or redemption of the interest; and

(i) the entity is one described in paragraph 316‑55(1)(a); or

(ii) the entity is one described in paragraph 316‑55(2)(a) and the interest is a *CGT asset described in paragraph 316‑55(2)(b); and

(d) the *capital proceeds from the event include or consist of money received by the entity.

(2) Work out whether the entity makes a *capital gain or *capital loss from the *CGT event, and the amount of the gain or loss, assuming that:

(a) the *capital proceeds from the CGT event were the amount they would be if they did not include any *market value of property other than money; and

(b) the *cost base and *reduced cost base for the interest were the amount worked out using the formula:

Example: Assume the entity receives $50 in money and 10 shares with a market value of $4 each in respect of CGT event C2 happening, and that the valuation factor worked out under section 316‑65 is 0.9. The entity makes a capital gain from the event of $5, worked out as follows:

This ignores the market value of the shares because they are property other than money.

Note: Division 114 (Indexation of cost base) is not relevant, because this section provides exhaustively for working out the amount of the cost base.

(3) The *capital gain or *capital loss is not to be disregarded, despite:

(a) section 316‑55; and

(b) any provision of this Act for disregarding the *capital gain or *capital loss because the interest affected by demutualisation was *acquired before 20 September 1985.

Note: The capital gain is not a discount capital gain: see section 115‑55.

316‑65 Valuation factor for sections 316‑60, 316‑105 and 316‑165

(1) For the purposes of sections 316‑60, 316‑105 and 316‑165, the valuation factor is the amount worked out using the formula:

$Start formula start fraction Market value of the friendly society's health insurance business (if any) plus Embedded value of the friendly society's other business (if any) over Total *capital proceeds for all entities from *CGT events happening under the demutualisation to interests affected by demutualisation (except those described in subparagraph 316-55(1)(b)(iv)) end fraction end formula$

where:

embedded value of the friendly society’s other business (if any) means the amount that would be the value of the *friendly society worked out under section 316‑70 assuming that neither the friendly society, nor any health/life insurance subsidiary of it, carried on any health insurance business within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015.

market value of the friendly society’s health insurance business (if any) means the total *market value of every health insurance business, within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015, carried on by either or both of the *friendly society and its health/life insurance subsidiaries (if any), taking account of any consideration paid to the society or subsidiary for disposal or control of that business.

(2) Disregard paragraph 316‑60(2)(a) for the purposes of the formula in subsection (1) of this section.

316‑70 Value of the friendly society

(1) The value of the *friendly society is the sum, worked out in accordance with this section, of the friendly society’s existing business value and its adjusted net worth on the day (the applicable accounting day) identified under subsection (3).

Eligible actuary and Australian actuarial practice

(2) The sum is to be worked out, according to Australian actuarial practice, by an *actuary who is not an employee of:

(a) the *friendly society; or

(b) a health/life insurance subsidiary of the friendly society; or

Applicable accounting day

(3) The applicable accounting day is:

(a) if an accounting period of the *friendly society ends on the day (the demutualisation resolution day) identified under subsection (4)—that day; or

(b) in any other case—the last day of the most recent accounting period of the friendly society ending before the demutualisation resolution day.

Demutualisation resolution day

(4) The demutualisation resolution day is:

(a) the day on which the resolution to proceed with the demutualisation is passed; or

(b) if, under the demutualisation, the whole of the *life insurance business of the *friendly society or of a health/life insurance subsidiary of the friendly society is transferred to another company under a scheme confirmed by the Federal Court of Australia—the day (or the last day) on which the transfer takes place.

Adjustment for changes after applicable accounting day

(5) In a case covered by paragraph (3)(b), if any significant change in the amount of the existing business value or adjusted net worth occurs between the applicable accounting day and the demutualisation resolution day, the amount is to be adjusted to take account of the change.

Continued business assumption

(6) In working out the existing business value or the adjusted net worth, assume:

(a) that after the applicable accounting day the *friendly society, and any health/life insurance subsidiary of the friendly society, will continue to conduct *business and any other activity in the same way as before that day, and will not conduct any different business or other activity; and

(b) that the demutualisation will not occur; and

(c) that any health/life insurance subsidiary of the friendly society will continue to be a *wholly‑owned subsidiary of the friendly society.

Expenditure assumption

(7) In working out the existing business value, assume that expenditure that the *friendly society and any of its health/life insurance subsidiaries will incur, in conducting *business, on recurring items after the demutualisation resolution day will be of the same kinds and amounts (increased to take account of any inflation) as it incurred in the accounting period, or part of an accounting period, ending on the demutualisation resolution day.

Friendly society’s gains and losses

316‑75 Disregarding friendly society’s capital gains and losses

Disregard the *friendly society’s *capital gain or *capital loss from a *CGT event that happens under the demutualisation.

Other entities’ gains and losses

316‑80 Disregarding other entities’ capital gains and losses

Disregard an entity’s *capital gain or *capital loss from a *CGT event that happens under the demutualisation if:

(a) the entity is established solely for the purpose of participating in the demutualisation and is not a lost policy holders trust (see section 316‑155); and

(b) the CGT event:

(i) happens before or at the same time as the allocation or distribution of the accumulated surplus of the *friendly society; and

(ii) is connected to that allocation or distribution.

Note: The allocation or distribution of the accumulated surplus could happen through an arrangement involving more than one transaction.

Subdivision 316‑C—Cost base of shares and rights issued under the demutualisation

Guide to Subdivision 316‑C

316‑100 What this Subdivision is about

The value of the friendly society and its business affects cost bases of shares and certain rights issued under the demutualisation to:

(a) entities that are or were members of the friendly society; or

(b) entities insured through the society or its subsidiaries; or

(d) the trustee of the lost policy holders trust.

Table of sections

316‑105 Cost base and time of acquisition of shares and certain rights issued under demutualisation

316‑110 Demutualisation assets

316‑115 Entities to which section 316‑105 applies

316‑105 Cost base and time of acquisition of shares and certain rights issued under demutualisation

First element of cost base

(1) The first element of the *cost base and *reduced cost base of a *CGT asset is the amount worked out using the formula in subsection (2) if:

(a) the asset is a CGT asset (a demutualisation asset) covered by section 316‑110; and

(b) the asset is issued to an entity covered by section 316‑115.

(2) The formula is:

Time of acquisition

(3) The entity is taken to have *acquired the *CGT asset at the time it is issued.

316‑110 Demutualisation assets

(1) This section covers a *CGT asset that:

(a) is:

(i) a *share in the *friendly society; or

(ii) a right to *acquire a share in the friendly society; or

(iii) a share in an entity that owns all of the shares in the friendly society; or

(iv) a right to acquire a share in an entity mentioned in subparagraph (iii); and

(b) is issued under the demutualisation; and

(i) the variation or abrogation of rights attaching to or consisting of an interest affected by demutualisation (see paragraph 316‑55(1)(b)); or

(ii) the conversion, cancellation, extinguishment or redemption of an interest affected by demutualisation.

Exclusion for rights with an exercise price

(2) Despite subsection (1), this section does not cover a right to *acquire a *share in an entity if the holder of the right must pay an amount to exercise the right.

Exclusion where assets not issued simultaneously

(3) Despite subsection (1), a *CGT asset is not covered by this section unless all of the CGT assets covered by subsection (1) for the demutualisation are issued:

(a) at the same time; and

(b) to entities that are covered by section 316‑115.

316‑115 Entities to which section 316‑105 applies

(1) This section covers an entity that:

(a) either:

(i) is or has been a *member of the *friendly society; or

(ii) is or has been insured through the friendly society or a health/life insurance subsidiary of the friendly society; and

(b) is entitled under the demutualisation to an allocation of demutualisation assets.

(2) This section also covers an entity that has become entitled to an allocation of demutualisation assets because of the death of an individual who was an entity described in subsection (1).

(3) This section also covers the trustee of a lost policy holders trust (see section 316‑155).

Subdivision 316‑D—Lost policy holders trust

Guide to Subdivision 316‑D

316‑150 What this Subdivision is about

If the demutualisation creates a trust just to hold shares, rights to acquire shares or money for entities that were members of the friendly society or insured through the society or its subsidiary, or are successors of such entities, then:

(a) capital gains or losses from CGT events happening to beneficiaries’ interests in the trust are disregarded, except where the capital proceeds include money; and

(b) when a CGT event happens involving the transfer of the shares or rights to a beneficiary, or a beneficiary’s absolute entitlement to them, the trustee’s capital gain or loss is disregarded and the beneficiary has the same cost base and time of acquisition as the trustee; and

Table of sections

Application

316‑155 Lost policy holders trust

Effects of CGT events happening to interests and assets in trust

316‑160 Disregarding beneficiaries’ capital gains and losses, except some involving receipt of money

316‑165 Taking account of some capital gains and losses involving receipt of money by beneficiaries

316‑170 Roll‑over where shares or rights to acquire shares transferred to beneficiary of lost policy holders trust

316‑175 Trustee assessed if shares or rights dealt with not for benefit of beneficiary of lost policy holders trust

316‑180 Subdivision 126‑E does not apply

Application

316‑155 Lost policy holders trust

(1) This Subdivision applies if the conditions in subsections (2) and (5) are met.

First condition

(2) The first condition is that, under the demutualisation, a trust (the lost policy holders trust) exists solely for one or both of the purposes that are described in subsection (3) in relation to persons (beneficiaries of the lost policy holders trust) covered by subsection (4).

(3) The purposes are as follows:

(a) holding demutualisation assets (see section 316‑110) that are *shares or rights to *acquire shares, or proceeds from disposal of those assets, on behalf of one or more beneficiaries of the lost policy holders trust and transferring those assets or proceeds to those beneficiaries;

(b) holding on behalf of one or more beneficiaries of the lost policy holders trust, and paying to them, money payable to them for:

(i) the variation or abrogation of rights attaching to or consisting of the beneficiaries’ interests affected by demutualisation (see paragraph 316‑55(1)(b)); or

(ii) the conversion, cancellation, extinguishment or redemption of those interests.

(4) This subsection covers:

(a) a person who is or has been a *member of the friendly society or is or has been insured through the *friendly society or a health/life insurance subsidiary of the friendly society; and

(b) a *legal personal representative, or beneficiary in the estate, of such a person who has died.

Second condition

(5) The second condition is that, under the demutualisation, the trustee of the lost policy holders trust is:

(a) issued with demutualisation assets that are *shares, or rights to *acquire shares; or

(b) paid money described in paragraph (3)(b) to hold and pay to beneficiaries of the lost policy holders trust.

Effects of CGT events happening to interests and assets in trust

316‑160 Disregarding beneficiaries’ capital gains and losses, except some involving receipt of money

Disregard a *capital gain or *capital loss of a beneficiary of the lost policy holders trust from a *CGT event that happens to the beneficiary’s interest in the trust.

316‑165 Taking account of some capital gains and losses involving receipt of money by beneficiaries

(1) This section applies if:

(a) a *CGT event happens to an interest of a beneficiary of the lost policy holders trust in that trust; and

(b) the *capital proceeds from the event include or consist of money received by the beneficiary.

(2) Work out whether the beneficiary makes a *capital gain or *capital loss from the *CGT event, and the amount of the gain or loss, assuming that:

(a) the *capital proceeds from the CGT event were the amount they would be if they did not include any *market value of property other than money; and

(b) the *cost base and *reduced cost base for the interest were the amount worked out using the formula:

Example: Assume that the beneficiary of the lost policy holders trust is paid $50 in money by the trustee to satisfy the beneficiary’s interest in the trust so that a CGT event happens, and that the valuation factor worked out under section 316‑65 is 0.9. The beneficiary makes a capital gain from the event of $5, worked out as follows:

Note: Division 114 (Indexation of cost base) is not relevant, because this section provides exhaustively for working out the amount of the cost base.

(3) The *capital gain or *capital loss is not to be disregarded, despite sections 316‑55 and 316‑160.

Note: The capital gain is not a discount capital gain: see section 115‑55.

316‑170 Roll‑over where shares or rights to acquire shares transferred to beneficiary of lost policy holders trust

(1) This section applies in relation to a *CGT event if:

(a) the CGT event happens in relation to an asset that:

(i) is a *share or a right to *acquire one or more shares; and

(ii) is held by the trustee of the lost policy holders trust on behalf of a beneficiary of the lost policy holders trust; and

(b) the CGT event happens because the beneficiary of the lost policy holders trust either:

(i) is transferred the asset by the trustee; or

(ii) becomes absolutely entitled to the asset.

Consequence for trustee

(2) Disregard a *capital gain or *capital loss the trustee makes from the *CGT event.

Consequences for beneficiary

(3) The *cost base and *reduced cost base of the asset in the hands of the trustee of the lost policy holders trust just before the *CGT event becomes the first element of the cost base and reduced cost base of the asset in the hands of the beneficiary of the lost policy holders trust.

Note: Section 316‑105 affects the cost base of the asset in the hands of the trustee of the lost policy holders trust if the asset is covered by section 316‑110.

(4) The beneficiary of the lost policy holders trust is taken to have *acquired the asset when the trustee acquired it.

316‑175 Trustee assessed if shares or rights dealt with not for benefit of beneficiary of lost policy holders trust

(1) This section applies in relation to a *capital gain from a *CGT event if:

(a) the CGT event happens in relation to a demutualisation asset that:

(i) is a *share or a right to *acquire a share; and

(ii) is held by the trustee of a lost policy holders trust; and

(b) section 316‑170 does not apply to the CGT event.

(2) If this section applies:

(a) sections 115‑215 and 115‑220 do not apply in relation to the *capital gain; and

(b) for the purposes of this Act, the trustee is taken to be *specifically entitled to all of the capital gain.

316‑180 Subdivision 126‑E does not apply

Subdivision 126‑E does not apply in relation to the demutualisation.

Note: Subdivision 126‑E is about an entitlement to shares after demutualisation and scrip for scrip roll‑over.

Subdivision 316‑E—Special CGT rules for legal personal representatives and beneficiaries

Table of sections

316‑200 Demutualisation assets not owned by deceased but passing to beneficiary in deceased estate

316‑205 Interest in lost policy holders trust not owned by deceased but passing to beneficiary in deceased estate

316‑200 Demutualisation assets not owned by deceased but passing to beneficiary in deceased estate

(1) This section sets out what happens if a *CGT asset:

(a) is a demutualisation asset (see section 316‑110); and

(b) forms part of the estate of an individual who is an entity described in subsection 316‑115(1) and has died; and

(d) *passes to a beneficiary in the individual’s estate because the asset is transferred to the beneficiary by the individual’s *legal personal representative.

Note: Division 128 deals with the effect of death in relation to CGT assets a person owns just before dying.

Consequence for legal personal representative

(2) Disregard a *capital gain or *capital loss the *legal personal representative makes because the asset *passes to the beneficiary.

Consequence for beneficiary

(4) The beneficiary is taken to have *acquired the asset when the *legal personal representative acquired it.

316‑205 Interest in lost policy holders trust not owned by deceased but passing to beneficiary in deceased estate

(1) This section sets out what happens if a *CGT asset:

(a) is an interest in a lost policy holders trust (see section 316‑155); and

(b) forms part of the estate of an individual who is an entity described in subsection 316‑115(1) and has died; and

(d) *passes to a beneficiary in the individual’s estate because the asset is transferred to the beneficiary by the individual’s *legal personal representative.

Note: Division 128 deals with the effect of death in relation to CGT assets a person owns just before dying.

Consequence for legal personal representative

(2) Disregard a *capital gain or *capital loss the *legal personal representative makes because the asset *passes to the beneficiary.

Subdivision 316‑F—Non‑CGT consequences of the demutualisation

Guide to Subdivision 316‑F

316‑250 What this Subdivision is about

In many cases, income from demutualisation is assessed through the CGT provisions rather than as ordinary income or other statutory income.

Franking debits arise for the friendly society and its subsidiaries to ensure they do not enjoy a franking surplus. Franking debits and credits arise to negate credits and debits from things attributable to the time before demutualisation.

Table of sections

316‑255 General taxation consequences of issue of demutualisation assets etc.

316‑260 Franking debits to stop the friendly society and its subsidiaries having franking surpluses

316‑265 Franking debits to negate franking credits from some distributions to friendly society and subsidiaries

316‑270 Franking debits to negate franking credits from post‑demutualisation payments of pre‑demutualisation tax

316‑275 Franking credits to negate franking debits from refunds of tax paid before demutualisation

316‑255 General taxation consequences of issue of demutualisation assets etc.

(1) An amount of *ordinary income or *statutory income (other than a *net capital gain) of an entity covered by subsection (2) is not assessable income and is not *exempt income if:

(a) the amount would otherwise be included in the ordinary income or statutory income of the entity only because a demutualisation asset (see section 316‑110) was issued to the entity; or

(b) the amount is a payment made to the entity, under the demutualisation, in connection with:

(i) the variation or abrogation of rights attaching to or consisting of an interest affected by demutualisation (see paragraph 316‑55(1)(b)); or

(ii) the conversion, cancellation, extinguishment or redemption of an interest affected by demutualisation; or

(c) the amount would otherwise be included in the ordinary income or statutory income of the entity only because a *share or a right to *acquire one or more shares was transferred to the entity by the trustee of a lost policy holders trust (see section 316‑155); or

(d) the amount is a payment made to the entity from a lost policy holders trust in connection with:

(i) the variation or abrogation of rights attaching to or consisting of an interest affected by demutualisation; or

(ii) the conversion, cancellation, extinguishment or redemption of an interest affected by demutualisation.

(2) This subsection covers an entity that:

(a) is or has been a *member of the *friendly society; or

(b) is or has been insured through the friendly society or a health/life insurance subsidiary of the friendly society; or

(c) is issued with the demutualisation asset, or receives the payment, because of the death of a person covered by paragraph (a) or (b); or

(d) is a beneficiary of a lost policy holders trust (see section 316‑155).

316‑260 Franking debits to stop the friendly society and its subsidiaries having franking surpluses

(1) A *franking debit arises in the *franking account of the *friendly society or a *wholly‑owned subsidiary of the society if the account is in *surplus immediately before the demutualisation resolution day identified under subsection 316‑70(4).

(2) The amount of the *franking debit equals the *surplus.

(3) The *franking debit arises at the start of that day.

316‑265 Franking debits to negate franking credits from some distributions to friendly society and subsidiaries

(1) This section applies if a *franking credit arises in the *franking account of the *friendly society or a *wholly‑owned subsidiary of the society because a *distribution declared before the demutualisation resolution day identified under subsection 316‑70(4) is made to the society or subsidiary on or after that day.

(2) A *franking debit arises in that account.

(3) The amount of the *franking debit equals the amount of the *franking credit.

(4) The *franking debit arises at the same time as the *franking credit arises.

316‑270 Franking debits to negate franking credits from post‑demutualisation payments of pre‑demutualisation tax

(1) This section applies if a *franking credit arises in the *franking account of the *friendly society or a *wholly‑owned subsidiary of the society because, on or after the demutualisation resolution day identified under subsection 316‑70(4), the society or subsidiary *pays a PAYG instalment, or *pays income tax, that is wholly or partly attributable to a period before that day.

(2) A *franking debit arises in that account.

(3) The amount of the *franking debit is so much of the *franking credit as is attributable to the period before that day.

(4) The *franking debit arises at the same time as the *franking credit arises.

316‑275 Franking credits to negate franking debits from refunds of tax paid before demutualisation

(1) This section applies if a *franking debit arises in the *franking account of the *friendly society or a *wholly‑owned subsidiary of the society because, on or after the demutualisation resolution day identified under subsection 316‑70(4), the society or subsidiary *receives a refund of income tax that is wholly or partly attributable to a period before that day.

(2) A *franking credit arises in that account.

(3) The amount of the *franking credit is so much of the *franking debit as is attributable to the period before that day.

(4) The *franking credit arises at the same time as the *franking debit arises.

Part 3‑35—Insurance business

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‑E No‑TFN contributions of life insurance companies that are RSA providers

320‑F Complying superannuation asset pool

320‑H Segregation of assets to discharge exempt life insurance policy liabilities

320‑I Transfers of business

Guide to Division 320

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.

This Division also ensures that life insurance companies that are RSA providers are liable to pay tax on no‑TFN contributions income.

Operative provisions

Subdivision 320‑A—Preliminary

320‑5 Object of Division

(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

Guide to Subdivision 320‑B

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 complying superannuation assets

Operative provisions

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 *complying superannuation asset pool under subsection 320‑180(1) or 320‑195(3); and

(db) the transfer values of assets transferred by the company to a complying superannuation asset pool under subsection 320‑180(3) or 320‑185(1); and

(e) if an asset (other than money) is transferred from or to a complying superannuation asset pool under subsection 320‑180(1) or (3), to a complying superannuation asset pool under section 320‑185 or from a complying superannuation asset pool 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 specified in agreements under section 295‑260; 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—contributions made to *RSAs provided by the company that would be included in the company’s assessable income under Subdivision 295‑C if that Subdivision applied to 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

(3) An amount included in assessable income under paragraph (1)(i) is included for the income year of the *life insurance company that includes the last day of the transferor’s income year to which the agreement referred to in section 295‑260 relates.

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 *income tax return);

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.

320‑35 Exempt income

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 *complying superannuation 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

(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:

$Start formula Foreign establishment amounts times start fraction Foreign resident foreign establishment policy liabilities over All foreign establishment policy liabilities end fraction end formula$

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 complying superannuation assets

(1) If a *CGT event happens in respect of a *CGT asset that is a *complying superannuation asset of a *life insurance company, section 295‑85 and 295‑90 applies for the purpose of working out the amount of any *capital gain or *capital loss that arises from the event.

Note: See Subdivision 295‑B of the Income Tax (Transitional Provisions) Act 1997 for rules about cost base for assets owned by superannuation entities at the end of 30 June 1988.

(2) Subsection (1) has effect despite anything in Division 230.

Subdivision 320‑C—Deductions and capital losses

Guide to Subdivision 320‑C

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 complying superannuation 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 complying superannuation asset pool

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 complying superannuation assets or segregated exempt assets

320‑125 Capital losses from complying superannuation assets

Operative provisions

320‑55 Deduction for life insurance premiums where liabilities under life insurance policies are to be discharged from complying superannuation 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 *complying superannuation 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 *complying superannuation 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

(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.

320‑60 Deduction for life insurance premiums where liabilities under life insurance policies are to be discharged from segregated exempt assets

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).

320‑65 Deduction for life insurance premiums in respect of life insurance policies that provide for participating or discretionary benefits

A *life insurance company can deduct the amounts of *net premiums received in respect of *life insurance policies (other than *complying superannuation life insurance policies or *exempt life insurance policies) that provide for *participating benefits or *discretionary benefits.

320‑70 No deduction for life insurance premiums in respect of certain life insurance policies payable only on death or disability

(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.

320‑85 Deduction for increase in value of liabilities under net risk components of 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(1)(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

(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 complying superannuation asset pool

(1) A *life insurance company can deduct the *transfer values of assets that are transferred by the company in the income year from a *complying superannuation asset pool 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 *complying superannuation asset pool 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 *complying superannuation asset pool under subsection 320‑180(1) or 320‑195(2) or (3); or

(b) to a complying superannuation asset pool 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 complying superannuation assets or segregated exempt assets

(1) This section applies to assets (ordinary assets) of a *life insurance company other than:

(a) *complying superannuation 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 complying superannuation assets

(1) In working out a *life insurance company’s *net capital gain or *net capital loss for the income year, *capital losses from *complying superannuation assets can be used only to reduce *capital gains from complying superannuation assets.

(2) If some or all of a *capital loss from a *complying superannuation 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 *complying superannuation assets exceed the company’s capital losses (if any) from complying superannuation assets.

(3) If the company has 2 or more unapplied *net capital losses from *complying superannuation 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

Guide to Subdivision 320‑D

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

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

General rules

320‑133 Object of Subdivision

(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

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 *complying superannuation assets in relation to the period during which those assets were complying superannuation 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 *complying superannuation asset pool under subsection 320‑185(3);

(c) if an asset (other than money) is transferred by the company from a complying superannuation asset pool 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 would not be included in the company’s assessable income under Subdivision 295‑C if that Subdivision applied to the company;

(b) amounts debited from the RSAs that are benefits paid to, or in respect of, the holders of the RSAs;

(d) if an *annuity covered by subsection (3A) 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 covered by subsection (3A) 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:

$Start formula Total amount credited to the *RSA during the income year times start fraction Number of days in the part of the income year in which the *annuity covered by subsection (3A) was paid over Number of days in the income year in which the RSA existed end fraction end formula$

(3A) An *annuity is covered by this subsection if it is a *superannuation income stream that is in the *retirement phase.

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 *complying superannuation assets in relation to the period during which those assets were complying superannuation 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).

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

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

(i) from the company’s *complying superannuation assets; and

(ii) in relation to the period during which those assets were complying superannuation 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 *complying superannuation assets; and

(ii) in relation to the period during which those assets were complying superannuation 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

(i) from the company’s *complying superannuation assets; and

(ii) in relation to the period during which those assets were complying superannuation 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 *complying superannuation assets; and

(ii) in relation to the period during which those assets were complying superannuation 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;

(aa) Division 160 (Corporate loss carry back tax offset for 2020‑21, 2021‑22 or 2022‑23 for businesses with turnover under $5 billion);

(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.

Subdivision 320‑E—No‑TFN contributions of life insurance companies that are RSA providers

Guide to Subdivision 320‑E

320‑150 What this Subdivision is about

This Subdivision makes Subdivisions 295‑I and 295‑J apply to life insurance companies that are RSA providers.

The consequence is that those life insurance companies are liable to pay tax on no‑TFN contributions income under Subdivision 295‑I. They may also be entitled to a tax offset under Subdivision 295‑J.

Table of sections

Operative provisions

320‑155 Subdivisions 295‑I and 295‑J apply to companies that are RSA providers

Operative provisions

320‑155 Subdivisions 295‑I and 295‑J apply to companies that are RSA providers

(1) Despite subsection 295‑5(4), Subdivisions 295‑I and 295‑J apply to a *life insurance company that is an *RSA provider.

(2) For the purposes of the application of those Subdivisions to a *life insurance company, a contribution included in the assessable income of the company under paragraph 320‑15(1)(l) is taken to have been included under Subdivision 295‑C.

Subdivision 320‑F—Complying superannuation asset pool

Guide to Subdivision 320‑F

320‑165 What this Subdivision is about

This Subdivision explains how a life insurance company can segregate assets (to be known as a complying superannuation asset pool) to be used for the sole purpose of discharging its complying superannuation liabilities.

Table of sections

Operative provisions

320‑170 Establishment of complying superannuation asset pool

320‑175 Valuations of complying superannuation assets and complying superannuation liabilities for each valuation time

320‑180 Consequences of a valuation under section 320‑175

320‑185 Transfer of assets to complying superannuation asset pool otherwise than as a result of a valuation under section 320‑175

320‑190 Complying superannuation liabilities

320‑195 Transfer of assets and payment of amounts from a complying superannuation asset pool otherwise than as a result of a valuation under section 320‑175

320‑200 Consequences of transfer of assets to or from complying superannuation asset pool

Operative provisions

320‑170 Establishment of complying superannuation asset pool

(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 *complying superannuation liabilities out of those assets.

(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 *complying superannuation 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 *complying superannuation 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 *complying superannuation 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 *complying superannuation liabilities.

(6) The assets from time to time segregated are together to be known as the complying superannuation asset pool and each asset from time to time included among those assets is to be known as a complying superannuation asset.

(7) In this Subdivision:

(a) a reference to the transfer of an asset to, or from, the *complying superannuation asset pool:

(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 complying superannuation asset pool, as the case may be; and

(b) if an asset transferred to or from the complying superannuation asset pool 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 complying superannuation assets and complying superannuation liabilities for each valuation time

(1) A *life insurance company that has established a *complying superannuation asset pool 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 *complying superannuation assets as at the valuation time;

(b) the company’s *complying superannuation liabilities as at the valuation time.

Note: The time when a life insurance company joins or leaves a consolidated group is also a valuation time: see section 713‑525.

(2) These are the valuation times:

(a) the end of the income year in which the *complying superannuation asset pool 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 complying superannuation asset pool

(1) If the total *transfer value of the company’s *complying superannuation assets as at a *valuation time exceeds the sum of:

(a) the company’s *complying superannuation 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 *complying superannuation asset pool, 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 *complying superannuation 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 complying superannuation asset pool

(3) If the total *transfer value of the company’s *complying superannuation assets as at a *valuation time is less than the sum of:

(a) the company’s *complying superannuation 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 *complying superannuation asset pool, 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 *complying superannuation liabilities (as at the valuation time) were calculated; or

(b) if those amounts were calculated on different days—the later of those days.

320‑185 Transfer of assets to complying superannuation asset pool otherwise than as a result of a valuation under section 320‑175

(1) If a *life insurance company determines, at a time other than a *valuation time, that the total *transfer value of the company’s *complying superannuation assets as at that time is less than the sum of:

(a) the company’s *complying superannuation 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 *complying superannuation asset pool, 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 *complying superannuation asset pool 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 *complying superannuation asset pool 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 *complying superannuation life insurance policies.

(4) Except as provided by this section and subsections 320‑180(3) and 320‑250(1A), a *life insurance company cannot transfer an asset to a *complying superannuation asset pool.

320‑190 Complying superannuation liabilities

(1) The amount of the *complying superannuation 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 *complying superannuation life insurance policies; and

(b) the liabilities under which are to be discharged out of the company’s *complying superannuation assets.

(2) The amount of the complying superannuation 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.

320‑195 Transfer of assets and payment of amounts from a complying superannuation asset pool otherwise than as a result of a valuation under section 320‑175

(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 *complying superannuation asset pool, 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 *complying superannuation asset pool 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 *complying superannuation assets; or

(b) imposes any fees or charges in respect of *complying superannuation life insurance policies other than policies:

(i) that provide *superannuation death benefits, *disability superannuation benefits or temporary disability benefits of a kind referred to in paragraph 295‑460(c), that are *participating benefits; and

(ii) the liabilities under which are to be discharged out of the company’s *complying superannuation asset pool; or

(c) determines, at a time other than a *valuation time, that the total *transfer value of the company’s complying superannuation assets as at that time exceeds the sum of:

(i) the company’s *complying superannuation 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 *complying superannuation asset pool, 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 *complying superannuation asset pool is established; or

(b) any expenses are incurred by a life insurance company directly in respect of *complying superannuation assets in relation to a period during which the assets are complying superannuation assets; or

(c) any liabilities to pay *PAYG instalments, or income tax, that are attributable to the company’s *complying superannuation assets;

the life insurance company must pay, from the complying superannuation asset pool, 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 complying superannuation asset pool

(1) This section applies if:

(a) an asset (other than money) is transferred from a *complying superannuation asset pool under subsection 320‑180(1) or 320‑195(2) or (3); or

(b) an asset (other than money) is transferred to a complying superannuation asset pool 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 *complying superannuation asset pool, 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

Guide to Subdivision 320‑H

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

Operative provisions

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.

(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.

320‑230 Valuations of segregated exempt assets and exempt life insurance policy liabilities for each valuation time

(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.

Note: The time when a life insurance company joins or leaves a consolidated group is also a valuation time: see section 713‑525.

(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.

320‑240 Transfer of assets to segregated exempt assets otherwise than as a result of a valuation under section 320‑230

(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;

(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

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 fund’s liabilities (contingent or not) in respect of *superannuation income stream benefits that are currently *RP superannuation income stream benefits 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 liabilities (contingent or not) in respect of *superannuation income stream benefits that are currently *RP superannuation income stream benefits of complying superannuation funds; and

(ii) the funds are unit holders of the trust; 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; or

(ii) is a *superannuation income stream that is in the *retirement phase; or

(iii) satisfies whichever of the conditions in subsection (3) are applicable; or

(ea) that provides for an *annuity that:

(i) is not an *immediate annuity; and

(ii) is a superannuation income stream that is in the retirement phase; 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.

(3) The following table sets out the conditions mentioned in subparagraph (1)(e)(iii):

Annuity conditions
Item	Column 1 The condition in column 2 applies in the following circumstances ...	Column 2 The condition is that ...
1	there is a residual capital value (within the meaning of section 27H of the Income Tax Assessment Act 1936) in relation to the *immediate annuity.	the contract under which the annuity is payable does not permit the residual capital value to exceed the annuity’s purchase price (within the meaning of that section).
2	the contract under which the *immediate annuity is payable provides that the annuity is payable until the end of a term of years certain.	the contract does not permit the total of the amounts paid for the annuity’s commutation (whether in whole or in part) to exceed the annuity’s purchase price (within the meaning of that section), reduced by the sum of the deductible amounts excluded from assessable income under that section.
3	the contract under which the *immediate annuity is payable: (a) provides that the annuity is payable until the later of: (i) the death of a person (or the death of the last of 2 or more persons to die); or (ii) the end of a term of years certain; and (b) permits one or more amounts (commutation payments) to become payable before the end of the term of years certain for the annuity’s commutation (whether in whole or in part).	the contract does not permit the total of the commutation payments that may become payable before the end of the term of years certain to exceed the annuity’s purchase price (within the meaning of that section), reduced by the sum of the deductible amounts excluded from assessable income under that section.
4	all circumstances.	there is no unreasonable deferral of the payments of the immediate 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 annual totals 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 liabilities (contingent or not) in respect of *superannuation income stream benefits that are currently *RP superannuation income stream benefits 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 liabilities (contingent or not) in respect of *superannuation income stream benefits that are currently *RP superannuation income stream benefits of *complying superannuation funds; and

(b) the trustee of a *pooled superannuation trust holds the original policy; and

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.

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

(1A) If:

(a) a *life insurance policy issued by a *life insurance company becomes a policy referred to in subsection 320‑190(1); and

(b) immediately before the policy became a policy referred to in subsection 320‑190(1), the policy was an *exempt life insurance policy;

the company can transfer from its *segregated exempt assets, to a *complying superannuation asset pool, assets of any kind whose total *transfer value does not exceed the company’s liabilities in respect of the policy.

(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(1A), (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

Guide to Subdivision 320‑I

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 (Transfer and Restructure) Act 1999.

Table of sections

Operative provisions

320‑305 When this Subdivision applies

320‑310 Special deductions and amounts of assessable income

320‑315 Complying superannuation asset pool 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

Operative provisions

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 (Transfer and Restructure) 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 Complying superannuation asset pool and segregated exempt assets

(1) Assets that were *complying superannuation assets of the originating company just before the transfer took place and that are transferred to the recipient company become complying superannuation 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 *complying superannuation 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).

320‑325 Friendly societies

(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.

320‑330 Immediate annuities

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

(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:

$Start formula Section 320-30 amount times start fraction Continuous disability policy days over 365 end fraction end formula$

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 321—General insurance companies and companies that self‑insure in respect of workers’ compensation liabilities

Table of Subdivisions

321‑A Provision for, and payment of, claims by general insurance companies

321‑B Premium income of general insurance companies

321‑C Companies that self‑insure in respect of workers’ compensation liabilities

Subdivision 321‑A—Provision for, and payment of, claims by general insurance companies

Table of sections

321‑10 Assessable income to include amount for reduction in outstanding claims liability

321‑15 Deduction for increase in outstanding claims liability

321‑20 How value of outstanding claims liability is worked out

321‑25 Deduction for claims paid during current year

321‑10 Assessable income to include amount for reduction in outstanding claims liability

A *general insurance company’s assessable income for the *current year includes an amount equal to the amount (if any) by which:

(a) the value, at the end of the previous income year, of the company’s liability for *outstanding claims under *general insurance policies; exceeds

(b) the value, at the end of the current year, of that liability.

Note: Those values are worked out under section 321‑20.

321‑15 Deduction for increase in outstanding claims liability

A *general insurance company can deduct for the *current year an amount equal to the amount (if any) by which:

(a) the value, at the end of the current year, of the company’s liability for *outstanding claims under *general insurance policies; exceeds

(b) the value, at the end of the previous income year, of that liability.

Note: Those values are worked out under section 321‑20.

321‑20 How value of outstanding claims liability is worked out

Work out the value, at the end of an income year, of a *general insurance company’s liability for *outstanding claims under *general insurance policies in this way:

Method statement

Step 1. Add up the amounts that, at the end of the income year, the company determines, based on proper and reasonable estimates, to be appropriate to set aside and invest in order to meet:

(a) liabilities for outstanding claims under those policies; and

(b) direct settlement costs associated with those outstanding claims.

Step 2. Reduce the step 1 amount by so much of it as the company expects at the end of the income year to recover:

(a) under a contract of reinsurance; or

(b) in any other way;

other than under a contract of reinsurance to which subsection 148(1) of the Income Tax Assessment Act 1936 (about reinsurance with non‑residents) applies.

321‑25 Deduction for claims paid during current year

A *general insurance company can deduct for the *current year amounts paid during that year in respect of claims under *general insurance policies.

Subdivision 321‑B—Premium income of general insurance companies

Table of sections

321‑45 Assessable income to include gross premiums

321‑50 Assessable income to include amount for reduction in value of unearned premium reserve

321‑55 Deduction for increase in value of unearned premium reserve

321‑60 How value of unearned premium reserve is worked out

321‑45 Assessable income to include gross premiums

A *general insurance company’s assessable income for the *current year includes the gross premiums received or receivable by the company during the current year in respect of *general insurance policies.

321‑50 Assessable income to include amount for reduction in value of unearned premium reserve

A *general insurance company’s assessable income for the *current year includes an amount equal to the amount (if any) by which:

(a) the value, at the end of the previous income year, of the company’s unearned premium reserve; exceeds

(b) the value, at the end of the current year, of that reserve.

Note: Those values are worked out under section 321‑60.

321‑55 Deduction for increase in value of unearned premium reserve

A *general insurance company can deduct for the *current year an amount equal to the amount (if any) by which:

(a) the value, at the end of the current year, of the company’s unearned premium reserve; exceeds

(b) the value, at the end of the previous income year, of that reserve.

Note: Those values are worked out under section 321‑60.

321‑60 How value of unearned premium reserve is worked out

Work out the value, at the end of an income year, of a *general insurance company’s unearned premium reserve in this way:

Method statement

Step 1. Add up the gross premiums received or receivable by the company, in relation to *general insurance policies issued in the course of carrying on *insurance business, in that or an earlier income year.

Step 2. Reduce the step 1 amount by so much of the costs incurred by the company in connection with the issue of those policies as relate to the gross premiums, including, for example, costs such as:

(a) commission and brokerage fees; and

(b) administration costs of processing insurance proposals and renewals; and

(d) selling and underwriting costs; and

(e) fire brigade charges; and

(f) stamp duty; and

(g) other charges, levies and contributions imposed by governments or governmental authorities that directly relate to general insurance policies.

Step 3. Reduce the step 2 amount by any premiums (the relevant reinsurance premiums) paid or payable by the company, in that or an earlier income year, for the reinsurance of risks covered by those policies, except:

(a) reinsurance premiums that the company cannot deduct because of subsection 148(1) of the Income Tax Assessment Act 1936 (about reinsurance with non‑residents); and

(b) reinsurance premiums that were paid or payable in respect of a particular class of *insurance business where, under the contract of reinsurance, the reinsurer agreed to pay, in respect of a loss incurred by the company that is covered by the relevant policy, some or all of the excess over an agreed amount.

Step 4. Add to the step 3 amount any reinsurance commissions received or receivable by the company that relate to the relevant reinsurance premiums.

Step 5. The value, at the end of an income year, of the unearned premium reserve is so much of the step 4 amount as the company determines, based on proper and reasonable estimates, to relate to risks covered by the policies in respect of later income years.

Subdivision 321‑C—Companies that self‑insure in respect of workers’ compensation liabilities

Table of sections

321‑80 Assessable income to include amount for reduction in outstanding claims liability

321‑85 Deduction for outstanding claims liability

321‑90 How value of outstanding claims liability is worked out

321‑95 Deductions for claims paid during current year

321‑80 Assessable income to include amount for reduction in outstanding claims liability

The assessable income for the *current year of a company that is not required by law to insure, and does not insure, against liability for workers’ compensation claims includes an amount equal to the amount (if any) by which:

(a) the value, at the end of the previous income year, of the company’s liability for such claims that:

(i) arose from events that occurred in that or an earlier income year; and

(ii) were not paid in full before the end of the previous income year; exceeds

(b) the value, at the end of the current year, of that liability.

Note: Those values are worked out under section 321‑90.

321‑85 Deduction for outstanding claims liability

A company that is not required by law to insure, and does not insure, against liability for workers’ compensation claims can deduct for the *current year an amount equal to the amount (if any) by which:

(a) the value, at the end of the current year, of the company’s liability for such claims that:

(i) arose from events that occurred in the current or an earlier income year; and

(ii) were not paid in full before the end of the current year; exceeds

(b) the value, at the end of the previous income year, of that liability.

Note: Those values are worked out under section 321‑90.

321‑90 How value of outstanding claims liability is worked out

Work out the value, at the end of an income year, of a company’s liability for claims covered by section 321‑80 or 321‑85 by adding up the amounts that, at the end of that income year, the company determines, based on proper and reasonable estimates, to be appropriate to set aside and invest in order to meet:

(a) liabilities for those claims; and

(b) direct settlement costs associated with those claims.

321‑95 Deductions for claims paid during current year

A company that is not required by law to insure, and does not insure, against liability for workers’ compensation claims can deduct for the *current year amounts paid during that year in respect of such claims.

Division 322—Assistance for policyholders with insolvent general insurers

Guide to Division 322

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 and deals with the tax treatment of entitlements under Part VC (Financial claims scheme for policyholders with insolvent general insurers) of the Insurance Act 1973.

Table of sections

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

Subdivision 322‑A—HIH rescue package

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

(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.

Subdivision 322‑B—Tax treatment of entitlements under financial claims scheme

Guide to Subdivision 322‑B

322‑20 What this Subdivision is about

This Act applies to a payment of an entitlement under Part VC (Financial claims scheme for policyholders with insolvent general insurers) of the Insurance Act 1973 as if the payment were made by the insurer under the insurance policy concerned.

Disregard a capital gain or loss from:

(a) the disposal to APRA under that Part of rights against the insurer under an insurance policy; or

(b) the payment of an entitlement under that Part.

Table of sections

Operative provisions

322‑25 Payment of entitlement under financial claims scheme treated as payment from insurer

322‑30 Disposal of rights against insurer to APRA and meeting of financial claims scheme entitlement have no CGT effects

Operative provisions

322‑25 Payment of entitlement under financial claims scheme treated as payment from insurer

(1) This Act applies to you as if an amount paid to you, or applied for your benefit, to meet your entitlement under Part VC (Financial claims scheme for policyholders with insolvent general insurers) of the Insurance Act 1973 relating to a *general insurance policy issued by a *general insurance company had been paid to you by the company under the terms and conditions of the policy.

(2) To avoid doubt, subsection (1) does not affect the operation of Part 2‑5 in Schedule 1 to the Taxation Administration Act 1953.

Note: Division 21 in Schedule 1 to the Taxation Administration Act 1953 contains special provisions about how Part 2‑5 in that Schedule operates in relation to the meeting of entitlements under Part VC of the Insurance Act 1973.

322‑30 Disposal of rights against insurer to APRA and meeting of financial claims scheme entitlement have no CGT effects

Disregard a *capital gain or *capital loss you make because:

(a) under section 62ZZL of the Insurance Act 1973, you *dispose of a *CGT asset consisting of your rights against a *general insurance company to *APRA; or

(b) your entitlement under section 62ZZF, 62ZZFA, 62ZZG or 62ZZGA of that Act is met.

Note 1: Section 62ZZL of the Insurance Act 1973 causes you to cease to be the owner, and APRA to become the owner, of rights against a general insurance company relating to a general insurance policy when your entitlement arises under Part VC of that Act in relation to the policy.

Note 2: Sections 62ZZF, 62ZZFA, 62ZZG and 62ZZGA of the Insurance Act 1973 entitle persons with valid claims based on general insurance policies issued by certain general insurance companies that have since become insolvent to be paid the amount of those claims by APRA.

Part 3‑45—Rules for particular industries and occupations

Division 328—Small business entities

Table of Subdivisions

328‑B Objects of this Division

328‑C What is a small business entity

328‑D Capital allowances for small business entities

328‑E Trading stock for small and medium business entities

328‑F Small business income tax offset

328‑G Restructures of small businesses

Guide to Division 328

328‑5 What this Division is about

This Division explains the meaning of the terms small business entity, annual turnover, aggregated turnover and related concepts (Subdivision 328‑C).

If you are a small business entity, this Division allows you to change the way the income tax law applies to you in these ways:

(a) you can choose to put your depreciating assets into a general pool and treat the pool as a single asset (Subdivision 328‑D);

(b) you can choose not to account for annual changes in trading stock value that are not more than $5,000 (Subdivision 328‑E).

In usual circumstances, these changes will simplify the working out of your taxable income, and so reduce your compliance costs.

You may be entitled to a tax offset for any small business income included in your assessable income, if you are an individual (Subdivision 328‑F).

Table of sections

328‑10 Concessions available to small business entities

(1) If you are a small business entity for an income year, you can choose to take advantage of the concessions set out in the following table. Some of the concessions have additional, specific conditions that must also be satisfied.

Item	Concession	Provision
1A	Immediate deductibility for small business start‑up expenses	Subsection 40‑880(2A) of this Act
1	CGT 15‑year asset exemption	Subdivision 152‑B of this Act
2	CGT 50% active asset reduction	Subdivision 152‑C of this Act
3	CGT retirement exemption	Subdivision 152‑D of this Act
4	CGT roll‑over	Subdivision 152‑E of this Act
5	Simpler depreciation rules	Subdivision 328‑D of this Act
6	Simplified trading stock rules	Subdivision 328‑E of this Act
6A	Small business income tax offset	Subdivision 328‑F of this Act
6B	Restructures of small businesses	Subdivision 328‑G of this Act
7	Deducting certain prepaid business expenses immediately	Sections 82KZM and 82KZMD of the Income Tax Assessment Act 1936
8	Accounting for GST on a cash basis	Section 29‑40 of the GST Act
9	Annual apportionment of input tax credits for acquisitions and importations that are partly creditable	Section 131‑5 of the GST Act
10	Paying GST by quarterly instalments	Section 162‑5 of the GST Act
11	FBT car parking exemption	Section 58GA of the Fringe Benefits Tax Assessment Act 1986
12	PAYG instalments based on GDP‑adjusted notional tax	Section 45‑130 in Schedule 1 to the Taxation Administration Act 1953

Note 1: The CGT concessions mentioned in items 1, 2, 3 and 4 of the table apply only if you are a CGT small business entity (see section 152‑10).

Note 2: The small business income tax offset mentioned in item 6A of the table applies only if you are a small business entity as defined for the purposes of Subdivision 328‑F (see section 328‑357).

Note 3: Some of these concessions are also available to medium businesses (for example, see subsection 328‑285(2)).

(2) Also, if you are a small business entity for an income year, the standard 2‑year period for amending your assessment applies to you (section 170 of the Income Tax Assessment Act 1936).

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‑C—What is a small business entity

Guide to Subdivision 328‑C

328‑105 What this Subdivision is about

This Subdivision explains the meaning of the terms small business entity, annual turnover, aggregated turnover and related concepts.

Table of sections

Operative provisions

328‑110 Meaning of small business entity

328‑115 Meaning of aggregated turnover

328‑120 Meaning of annual turnover

328‑125 Meaning of connected with an entity

328‑130 Meaning of affiliate

Operative provisions

328‑110 Meaning of small business entity

General rule: based on aggregated turnover worked out as at the beginning of the current income year

(1) You are a small business entity for an income year (the current year) if:

(a) you carry on a *business in the current year; and

(b) one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your *aggregated turnover for the previous year was less than $10 million;

(ii) your aggregated turnover for the current year is likely to be less than $10 million.

Note 1: If you are a small business entity for an income year, you may apply to the Commissioner under section 61C of the Excise Act 1901 for permission to deliver goods for home consumption (without entering them for that purpose) in respect of a calendar month.

Note 2: If you are a small business entity for an income year, you may apply under section 69 of the Customs Act 1901 for permission to deliver like customable goods or excise‑equivalent goods into home consumption (without entering them for that purpose) in respect of a calendar month.

Note 3: The $10 million thresholds in this subsection and in subsections (3) and (4) have been increased to $50 million for certain concessions (for example, see subsection 328‑285(2)).

(2) You work out your *aggregated turnover for the current year for the purposes of subparagraph (1)(b)(ii):

(a) as at the first day of the current year; or

(b) if you start to carry on a *business during the current year—as at the day you start to carry on the business.

Note: Subsection 328‑120(5) provides for how to work out your annual turnover (which is relevant to working out your aggregated turnover) if you do not carry on a business for the whole of an income year.

Exception: aggregated turnover for 2 previous income years was $10 million or more

(3) However, you are not a small business entity for an income year (the current year) because of subparagraph (1)(b)(ii) if:

(a) you carried on a *business in each of the 2 income years before the current year; and

(b) your *aggregated turnover for each of those income years was $10 million or more.

Note: Section 328‑110 of the Income Tax (Transitional Provisions) Act 1997 affects the operation of this subsection in relation to the 2007‑08 and 2008‑09 income years.

Additional rule: based on aggregated turnover worked out as at the end of the current income year

(4) You are also a small business entity for an income year (the current year) if:

(a) you carry on a *business in the current year; and

(b) your *aggregated turnover for the current year, worked out as at the end of that year, is less than $10 million.

Note: If you are a small business entity only because of subsection (4), you cannot choose any of the following concessions:

(a) paying PAYG instalments based on GDP‑adjusted notional tax: see section 45‑130 in Schedule 1 to the Taxation Administration Act 1953;

(b) accounting for GST on a cash basis: see section 29‑40 of the GST Act;

(c) making an annual apportionment of input tax credits for acquisitions and importations that are partly creditable: see section 131‑5 of the GST Act;

(d) paying GST by quarterly instalments: see section 162‑5 of the GST Act;

(e) applying for permission under the Excise Act 1901 to deliver goods for home consumption (without entering them for that purpose) in respect of a calendar month: see section 61C of that Act;

(f) applying for permission under the Customs Act 1901 to deliver like customable goods or excise‑equivalent goods for home consumption (without entering them for that purpose) in respect of a calendar month: see section 69 of that Act.

Winding up a business previously carried on

(5) This Subdivision applies to you as if you carried on a *business in an income year if:

(a) in that year you were winding up a business you previously carried on; and

(b) you were a *small business entity for the income year in which you stopped carrying on that business.

Note 1: Subsection 328‑120(5) provides for how to work out your annual turnover (which is relevant to working out your aggregated turnover) if you do not carry on a business for the whole of an income year.

Note 2: A special rule applies if you were an STS taxpayer under this Division (as in force immediately before the commencement of this section) in the income year in which you stopped carrying on the business: see section 328‑111 of the Income Tax (Transitional Provisions) Act 1997.

Partners in a partnership

(6) A person who is a partner in a partnership in an income year is not, in his or her capacity as a partner, a small business entity for the income year.

328‑115 Meaning of aggregated turnover

(1) Your aggregated turnover for an income year is the sum of the relevant annual turnovers (see subsection (2)) excluding any amounts covered by subsection (3).

Note: For small business CGT relief purposes, additional entities may be treated as being connected with you or your affiliate under sections 152‑48 and 152‑78.

(2) The relevant annual turnovers are:

(a) your *annual turnover for the income year; and

(b) the annual turnover for the income year of any entity (a relevant entity) that is *connected with you at any time during the income year; and

(c) the annual turnover for the income year of any entity (a relevant entity) that is an *affiliate of yours at any time during the income year.

(3) Your aggregated turnover for an income year does not include the following amounts:

(a) amounts *derived in the income year by you or a relevant entity from dealings between you and the relevant entity while the relevant entity is *connected with you or is your *affiliate;

(b) amounts derived in the income year by a relevant entity from dealings between the relevant entity and another relevant entity while each relevant entity is connected with you or is your affiliate;

(c) amounts derived in the income year by a relevant entity while the relevant entity is not connected with you and is not your affiliate.

328‑120 Meaning of annual turnover

General rule

(1) An entity’s annual turnover for an income year is the total *ordinary income that the entity *derives in the income year in the ordinary course of carrying on a *business.

Exclusion of amounts relating to GST

(2) In working out an entity’s *annual turnover for an income year, do not include any amount that is *non‑assessable non‑exempt income under section 17‑5 (which is about GST).

Exclusion of amounts derived from sales of retail fuel

(3) In working out an entity’s *annual turnover for an income year, do not include any amounts of *ordinary income the entity *derives from sales of *retail fuel.

Amounts derived from dealings with associates

(4) In working out an entity’s *annual turnover for an income year, the amount of *ordinary income the entity *derives from any dealing with an *associate of the entity is the amount of ordinary income the entity would derive from the dealing if it were at *arm’s length.

Note: Amounts derived in an income year from any dealings between an entity and an associate that is a relevant entity within the meaning of section 328‑115 are not included in the entity’s aggregated turnover for that year: see subsection 328‑115(3).

Business carried on for part of income year only

(5) If an entity does not carry on a *business for the whole of an income year, the entity’s *annual turnover for the income year must be worked out using a reasonable estimate of what the entity’s annual turnover for the income year would be if the entity carried on a business for the whole of the income year.

Regulations may provide for different calculation of annual turnover

(6) The regulations may provide that an entity’s *annual turnover for an income year is to be calculated in a different way, but only so that it would be less than the amount worked out under this section.

328‑125 Meaning of connected with an entity

(1) An entity is connected with another entity if:

(a) either entity controls the other entity in a way described in this section; or

(b) both entities are controlled in a way described in this section by the same third entity.

Note 1: See Subdivision 106‑B if a CGT asset of yours is vested in a trustee in bankruptcy or a liquidator.

Note 2: See Subdivision 106‑C if you are absolutely entitled to a CGT asset as against the trustee of a trust.

Note 3: See Subdivision 106‑D if you provided security over an asset to another entity.

Direct control of an entity other than a discretionary trust

(2) An entity (the first entity) controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates:

(a) except if the other entity is a discretionary trust—own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

(i) any distribution of income by the other entity; or

(ii) if the other entity is a partnership—the net income of the partnership; or

(iii) any distribution of capital by the other entity; or

(b) if the other entity is a company—own, or have the right to acquire the ownership of, *equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company.

Direct control of a discretionary trust

(3) An entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its *affiliates, or the first entity together with its affiliates.

(4) An entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year:

(a) the trustee of the trust paid to, or applied for the benefit of:

(i) the first entity; or

(ii) any of the first entity’s *affiliates; or

(iii) the first entity and any of its affiliates;

any of the income or capital of the trust; and

(b) the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year.

Note: Section 328‑112 of the Income Tax (Transitional Provisions) Act 1997 affects the operation of this subsection in relation to the 2007‑08, 2008‑09, 2009‑10 and 2010‑11 income years.

(5) An entity does not control a discretionary trust because of subsection (4) if the entity is:

(a) an *exempt entity; or

(b) a *deductible gift recipient.

Commissioner may determine that an entity does not control another entity

(6) If the control percentage referred to in subsection (2) or (4) is at least 40%, but less than 50%, the Commissioner may determine that the first entity does not control the other entity if the Commissioner thinks that the other entity is controlled by an entity other than, or by entities that do not include, the first entity or any of its *affiliates.

Indirect control of an entity

(7) This section applies to an entity (the first entity) that directly controls another entity (the second entity) as if the first entity also controlled any other entity that is directly, or indirectly by any other application or applications of this section, controlled by the second entity.

(8) However, subsection (7) does not apply if the second entity is an entity of any of the following kinds:

(a) a company *shares in which (except shares that carry the right to a fixed rate of *dividend) are listed for quotation in the official list of an *approved stock exchange;

(b) a *publicly traded unit trust;

(d) a *mutual affiliate company;

(e) a company (other than one covered by paragraph (a)) all the shares in which are owned by one or more of the following:

(i) a company covered by paragraph (a);

(ii) a publicly traded unit trust;

(iii) a mutual insurance company;

(iv) a mutual affiliate company.

328‑130 Meaning of affiliate

(1) An individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the *business of the individual or company.

(2) However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.

Note: For small business relief purposes, a spouse or a child under 18 years may also be an affiliate under section 152‑47.

Example: A partner in a partnership would not be an affiliate of another partner merely because the first partner acts, or could reasonably be expected to act, in accordance with the directions or wishes of the second partner, or in concert with the second partner, in relation to the affairs of the partnership.

Directors of the same company, or the company and a director of that company, would be in a similar position.

Subdivision 328‑D—Capital allowances for small business entities

Guide to Subdivision 328‑D

328‑170 What this Subdivision is about

If you are a small business entity, you can choose to deduct amounts for most of your depreciating assets on a diminishing value basis using a pool that is treated as a single depreciating asset.

Broadly, the 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%.

There is a deduction for assets whose cost is less than $1,000 in the income year in which you start to use the asset or have it installed ready for use.

This Subdivision sets out how to calculate the pool deductions, and also sets out the consequences of:

(a) disposal of depreciating assets; and

(b) not choosing to use this Subdivision for an income year after having chosen to do so for an earlier income year; and

Table of sections

Operative provisions

328‑175 Calculations for depreciating assets

328‑180 Assets costing less than $1,000

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 if you are not a small business entity or do not choose to use this Subdivision for an income year

328‑225 Change in business use

328‑230 Estimate where deduction denied

328‑235 Interaction with Divisions 85 and 86

Special rules about roll‑overs

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

Operative provisions

328‑175 Calculations for depreciating assets

(1) You can choose to calculate your deductions and some amounts of assessable income under this Subdivision instead of under Division 40 for an income year for all the *depreciating assets that you *hold if:

(a) you are a *small business entity for the income year; and

(b) you started to use the assets or have them *installed ready for use, for a *taxable purpose during or before that income year.

This subsection has effect subject to subsections (2) to (10).

Note: If you choose to use this Subdivision for an income year, you continue to use this Subdivision for your general small business pool for a later income year even if you are not a small business entity, or do not choose to use this Subdivision, for the later year: 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 a *small business entity 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(1) or (3) is chosen: see section 328‑245.

(4) You must make the choice under subsection (3) for each *depreciating asset of the kind referred to in that subsection for the later of:

(a) the first income year for which you are, or last were, a *small business entity; 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, during an income year for which you were not a *small business entity or had not chosen to use this Subdivision; 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 your *general small business pool under this Subdivision and does not qualify for a deduction under section 328‑180.

Exception: assets for which previously entitled to a tax offset under the R&D provisions

(9) You cannot deduct amounts for a *depreciating asset for any period under this Subdivision if you are entitled under section 355‑100 to a *tax offset for a deduction under section 355‑305 for the asset for the same or an earlier period.

Exception: second‑hand assets used in residential property

(9A) You cannot deduct amounts for a *depreciating asset under this Subdivision to the extent that section 40‑27 prevents you from deducting amounts under subsection 40‑25(1) for the asset.

Exception: restriction on choosing to use this Subdivision

(10) If:

(a) you choose to use this Subdivision to deduct amounts for your *depreciating assets for an income year; and

(b) you do not choose to use this Subdivision for a later income year for which you satisfy the conditions to make this choice (see subsection (1));

you cannot choose to use this Subdivision until at least 5 years after the first later income year for which you satisfied the conditions to make this choice but did not do so.

Note 1: Your ability to choose to use this Subdivision may also be restricted by section 328‑440 of the Income Tax (Transitional Provisions) Act 1997.

Note 2: If you choose to use this Subdivision for an income year, you continue to use it for assets that have been allocated to your general small business pool for a later income year even if you are not a small business entity, or do not choose to use this Subdivision, for the later year: see section 328‑220.

Note 3: Subsections 328‑180(2) and (3) of the Income Tax (Transitional Provisions) Act 1997 affect the operation of this subsection in relation to income years ending on or after 12 May 2015.

328‑180 Assets costing less than $1,000

(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 a *small business entity for that year and the year in which you started to *hold it; and

(ab) you chose to use this Subdivision for each of those years; and

(b) the asset is a depreciating asset whose *cost as at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose is less than $1,000.

Note: This threshold may be affected by section 328‑180 (about temporary increased access to accelerated depreciation) or 328‑181 (about temporary full expensing) of the Income Tax (Transitional Provisions) Act 1997.

(2) You can also deduct, for an income year for which you are a *small business entity and you choose to use this Subdivision, the *taxable purpose proportion of an amount included in the second element of the *cost of an 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.

Note: Paragraph (b) may not apply for costs included after 31 December 2020 for assets you first acquire between 12 May 2015 and 31 December 2020: see subsection 328‑180(5A) of the Income Tax (Transitional Provisions) Act 1997.

(3) An asset for which you have deducted an amount under this section is allocated to your *general small business 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 during an income year for which you are not a *small business entity or do not choose to use this Subdivision.

328‑185 Pooling

(1) If you are a *small business entity for an income year and you have chosen to use this Subdivision for that year, you deduct amounts for your *depreciating assets (except 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 is a general small business pool to which *depreciating assets 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 were, a *small business entity; and

(b) for which you calculate your deductions under this Subdivision instead of under Division 40; and

(d) that you have started to use, or have *installed ready for use, for a *taxable purpose;

is automatically allocated to your general small business pool.

(4) A *depreciating asset that you start to use, or have *installed ready for use, for a *taxable purpose during an income year for which you are a *small business entity and you choose to use this Subdivision is allocated to the *general small business 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 assets used or installed before 1 July 2001

(5) You can choose not to have a *depreciating asset allocated to the *general small business pool 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 a *small business entity and you choose to use this Subdivision. 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 small business pool, it is not re‑allocated, even if you are not a *small business entity for a later income year or you do not choose to use this Subdivision for that later year.

Note: If you chose to use this Subdivision for an income year, you continue to use it for your general small business pool for a later income year even if you are not a small business entity, or do not choose to use this Subdivision, for the later year: see section 328‑220.

328‑190 Calculation

(1) You calculate your deduction for your *general small business pool for an income year using this formula:

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 for which you are a *small business entity and choose to use this Subdivision is 15% of the *taxable purpose proportion of its *adjustable value.

(3) You can also deduct for an income year for which you are a *small business entity and choose to use this Subdivision 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 15% of the *taxable purpose proportion of the cost addition amount.

Note: The amounts that a transferor and transferee can deduct under this section are modified if roll‑over relief under section 40‑340 is chosen: see sections 328‑243 and 328‑247.

328‑195 Opening pool balance

(1) For the first income year for which you are a *small business entity and choose to use this Subdivision, the opening pool balance of your *general small business 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 your *general small business 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 general small business pool even if you are not a small business entity, or do not choose to use this Subdivision, for a later income year: see section 328‑220.

(3) However, if:

(a) you are not a *small business entity for an income year or you do not choose to use this Subdivision for that year; but

(b) you are a small business entity for a later income year and you choose to use this Subdivision for the later year;

the opening pool balance of your *general small business 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.

328‑200 Closing pool balance

You work out the closing pool balance of your *general small business 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 the 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 the 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 section 40‑340 is chosen: see sections 328‑243 and 328‑245.

328‑205 Estimate of taxable use

(1) You must, for the first income year for which you are, or last were, a *small business entity, 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 small business pool; and

(b) you have started to use it, or have it installed ready for use, for a taxable purpose; and

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 section 40‑340 is chosen: see sections 328‑243 and 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 during an income year for which you are a *small business entity and you choose to use this Subdivision. 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—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.

Example: When Bria’s computer was allocated to her general small business pool for the 2012‑13 income year, she estimated that it would be used 50% for her florist business. Due to increasing business, Bria estimates the computer’s use to be 70% for the 2013‑14 year, and 90% for the 2014‑15 year. She makes an adjustment under section 328‑225 for both those years.

Bria sells the computer for $1,000 at the start of the 2016‑17 income year. She must now average the business use estimates for the computer 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% (2013‑14 estimate); plus
90% (2014‑15 estimate); plus
90% (no change on previous year);

=300% ÷ 4 = 75%

The taxable purpose proportion of the computer’s termination value is, therefore:

75% of $1,000 = $750

328‑210 Low pool value

(1) Your deduction for a *general small business 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 1: See section 328‑215 for the result when the amount is less than zero.

Note 2: This threshold may be affected by section 328‑180 (about temporary increased access to accelerated depreciation) or 328‑181 (about temporary full expensing) of the Income Tax (Transitional Provisions) Act 1997.

(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 the 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 the 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 is a small business entity for the 2014‑15 income year and chooses to use this Subdivision for that year. The business has an opening pool balance of $8,500 for its general small business pool for that year.

During that year, Amanda acquired a new computer for $2,000. The taxable purpose proportion of its adjustable value is:

$2,000 x 80% business use estimate = $1,600

Amanda also sold her business car for $9,600 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:

$8,500 + $1,600 ‑ $9,600 = $500

Because the result is less than $1,000, Amanda can deduct the $500 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 your *general small business 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 assets costing less than $1,000), you include the *taxable purpose proportion of the asset’s *termination value in your assessable income.

328‑220 What happens if you are not a small business entity or do not choose to use this Subdivision for an income year

(1) If you are not a *small business entity for an income year or you do not choose to use this Subdivision for that year, this Subdivision continues to apply to your *general small business pool for that year and later income years.

(2) However, *depreciating assets you started to use, or have *installed ready for use, for a *taxable purpose during an income year for which you are not a *small business entity or do not choose to use this Subdivision cannot be allocated to your *general small business pool under this Subdivision until an income year for which you are a small business entity and you choose to use this Subdivision.

(3) This section applies to a transferee referred to in subsection 328‑243(1) or (1A) who:

(a) was not a *small business entity for the income year in which the relevant *balancing adjustment events occurred; or

(b) did not choose to use this Subdivision for that year;

as if the transferee had been a small business entity for an earlier income year and had chosen to use this Subdivision for the earlier 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 section 40‑340 is chosen: see sections 328‑243 and 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 small business 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:

Start formula Reduction factor times Asset value times open bracket Present year estimate minus Last estimate close bracket end formula

where:

asset value is:

(a) for a *depreciating asset you started to use, or have *installed ready for use, for a *taxable purpose during an income year for which you were a *small business entity and chose to use this Subdivision—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 during an income year for which you were not a *small business entity or did not choose to use this Subdivision—its adjustable value at the start of the income year for which it was allocated to a *general small business 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:

$Start formula open square bracket 1 minus open round bracket start fraction rate over 2 end fraction close round bracket close square bracket times open square bracket 1 minus rate close square bracket start superscript n minus 1 end superscript end formula$

(b) for an asset you started to use, or have *installed ready for use, for a taxable purpose during an income year for which you were not a *small business entity or did not choose to use this Subdivision:

Start formula open bracket 1 minus rate close bracket start superscript n end superscript end formula

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 small business pool which you started to use, or have installed ready for use, for a taxable purpose during an income year for which you were not a small business entity or did not choose to use this Subdivision 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 small business pool which you started to use, or have installed ready for use, for a taxable purpose during an income year for which you were a small business entity and chose to use this Subdivision 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 3 income years after the income year in which the asset 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, if you are a *small business entity for an income year 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 been a *small business entity and chosen to use this Subdivision, sections 86‑60 and 86‑70 would have prevented you deducting an amount for it.

Special rules about roll‑overs

328‑243 Roll‑over relief

(1A) There is roll‑over relief under subsection 40‑340(1) (as affected by subsection 40‑340(2)) if:

(a) *balancing adjustment events occur for *depreciating assets on a day (the BAE day) because an entity (the transferor) disposes of the assets in an income year to another entity (the transferee); and

(b) the disposal involves a *CGT event; and

(d) deductions for the assets are calculated under this Subdivision; and

(e) the transferor and the transferee jointly choose the roll‑over relief; and

(f) the condition in subsection (2) is met.

(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 small business 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.

328‑247 Pool deductions

(1) The amount that can be deducted for the transferor’s *general small business 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 a small business entity for the relevant income year and has chosen to use this Subdivision for that year. On the 90th day of an income year, Jonathan joins the partnership. The new partnership (the transferee) is a small business entity for the income year and chooses to use this Subdivision for that year. Had there been no partnership change, a deduction of $6,600 would have been available for the transferor’s general small business pool. The transferor and transferee jointly choose the roll‑over.

The deduction available to the transferor and the transferee for the pool under section 328‑210 is $3,300 each.

(2) The transferor cannot deduct any amount for the transferor’s *general small business 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) (assets costing less than $1,000) 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 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 an 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 is a small business entity for the BAE year, and chooses to use this Subdivision for that 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 assets costing less than $1,000

(4) Subsection (5) applies if:

(a) the transferor started to use, or have *installed ready for use, an asset of a kind mentioned in paragraph 328‑180(1)(b) 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

Special rule for expenditure on assets costing less than $1,000

(4) Subsection (5) applies if:

(a) the transferor incurred the expenditure in relation to an asset of a kind mentioned in paragraph 328‑180(1)(b); 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 small business pool for the BAE year is less than zero; or

(b) the amount worked out under subsection 328‑210(2) for the 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.

328‑257 Taxable use

(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 small and medium business entities

Guide to Subdivision 328‑E

328‑280 What this Subdivision is about

Small and medium business entities can choose not to account for their trading stock in some circumstances. This Subdivision modifies the rules in Division 70 about trading stock for those entities.

Table of sections

Operative provisions

328‑285 Trading stock for small and medium business entities

328‑295 Value of trading stock on hand

Operative provisions

328‑285 Trading stock for small and medium business entities

(1) You can choose not to account for changes in the *value of your *trading stock for an income year if:

(a) you are a *small business entity, or an entity covered by subsection (2), 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:

(a) special valuation rules may be used, for example, obsolete stock, natural increase of live stock, horse breeding stock; and

(b) 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).

Note 3: If you choose to account for changes in the value of your trading stock for an income year, you will have to do a stocktake and account for the change in the value of all your trading stock: see Subdivision 70‑C.

(2) An entity is covered by this subsection for an income year if:

(a) the entity is not a *small business entity for the income year; and

(b) the entity would be a small business entity for the income year if:

(i) each reference in Subdivision 328‑C (about what is a small business entity) to $10 million were instead a reference to $50 million; and

(ii) the reference in paragraph 328‑110(5)(b) to a small business entity were instead a reference to an entity covered by this subsection.

328‑295 Value of trading stock on hand

(1) If you make a choice under section 328‑285 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 you make a choice under section 328‑285 for an income 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 you do not make a choice under section 328‑285, 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. Her business is a small business entity for the 2008‑09 income year and makes a choice under section 328‑285 for that year.

At the start of the 2008‑09 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 2008‑09 income year, and the opening value for the 2009‑10 income year, will be $30,000.

Subdivision 328‑F—Small business income tax offset

Guide to Subdivision 328‑F

328‑350 What this Subdivision is about

You may be entitled to a tax offset if you are an individual:

(a) who is a small business entity; or

(b) whose assessable income includes a share of the net small business income of an unincorporated small business entity; or

(c) whose assessable income includes an amount because you are a partner in a partnership, or a beneficiary in a trust, that is a small business entity.

In working out whether you are or another entity is a small business entity, a special $5 million turnover threshold applies (see section 328‑357).

Table of sections

Operative provisions

328‑355 Entitlement to the small business income tax offset

328‑357 Special meaning of small business entity for the purposes of this Subdivision—$5 million turnover threshold

328‑360 Amount of your tax offset

328‑365 Net small business income

328‑370 Relevant attributable deductions

328‑375 Modification if you are under 18 years old

Operative provisions

328‑355 Entitlement to the small business income tax offset

You are entitled to a *tax offset for an income year if you are an individual:

(a) who is a *small business entity for the income year; or

(b) whose assessable income for the income year includes an amount that is a share of the *net small business income, for the income year, of a small business entity that is not a *corporate tax entity; or

(i) would not have been so included if you had not been a partner in a partnership, or a beneficiary in a trust, that is a small business entity for the income year; and

(ii) is not included in the partnership’s or trust’s assessable income for an income year; and

(iii) would have formed part of the partnership’s or trust’s net small business income for an income year if the amount were included in the partnership’s or trust’s assessable income for an income year.

Note: This section does not apply to an individual in his or her capacity as the trustee of a trust (see subsection 960‑100(4)).

328‑357 Special meaning of small business entity for the purposes of this Subdivision—$5 million turnover threshold

For the purposes of this Subdivision, in working out whether you are a *small business entity for an income year, assume that each reference in section 328‑110 to $10 million were a reference to $5 million.

328‑360 Amount of your tax offset

(1) The amount of your *tax offset is equal to 16% of the following:

$Start formula start fraction Your total net small business income for the income year over Your taxable income for the income year end fraction times Your basic income tax liability for the income year end formula$

where:

your total net small business income for the income year means so much of the sum of the following as does not exceed your taxable income for the income year:

(a) your *net small business income for the income year, if you are a *small business entity for the income year;

(b) an amount referred to in paragraph 328‑355(b) or (c) that is included in your assessable income for the income year, reduced (but not below zero) by your deductions to the extent that they are attributable to that amount and covered by section 328‑370.

Note: If you are under 18 years old, your total net small business income will probably be worked out under section 328‑375.

(2) However, the amount of your *tax offset is $1,000 if the amount worked out under subsection (1) exceeds $1,000.

Note: Your tax offset is capped at $1,000 regardless of the number of small business entities that cause you to be entitled to the tax offset for the income year.

328‑365 Net small business income

(1) A *small business entity’s net small business income for an income year is the result of:

(a) working out the entity’s assessable income for the income year to the extent that it relates to the entity carrying on a *business, but disregarding:

(i) any *net capital gain; and

(ii) any *personal services income not produced from conducting a *personal services business; and

(b) subtracting the entity’s deductions to the extent that they are attributable to that assessable income and covered by section 328‑370.

(2) However, the entity’s net small business income for the income year is zero if that result is less than zero.

328‑370 Relevant attributable deductions

For the purposes of this Subdivision, this section covers all attributable deductions other than any under:

(a) section 25‑5 (about tax‑related expenses); or

(b) Division 30 (about gifts or contributions); or

328‑375 Modification if you are under 18 years old

(1) Despite subsection 328‑360(1), your total net small business income for the income year is worked out under this section if you are a prescribed person (within the meaning of section 102AC of the Income Tax Assessment Act 1936) for the income year.

(2) Your total net small business income for the income year is the result of:

(a) working out your business income (within the meaning of subsection 102AE(5) of that Act) for the income year to the extent that it relates to you carrying on:

(i) a *business as a *small business entity for the income year; or

(ii) a business as a partner in a partnership, if the partnership is a small business entity for the income year; and

(b) subtracting your deductions, and each partnership’s deductions, to the extent that they are attributable to that business income and covered by section 328‑370.

(3) However, your total net small business income for the income year is:

(a) zero if that result is less than zero; or

(b) equal to your taxable income for the income year if that result exceeds that taxable income.

Subdivision 328‑G—Restructures of small businesses

Guide to Subdivision 328‑G

328‑420 What this Subdivision is about

There are tax‑neutral consequences for a small business entity that restructures the ownership of the assets of the business, without changing the ultimate economic ownership of the assets.

Table of sections

Object of this Subdivision

328‑425 Object of this Subdivision

Requirements for a roll‑over under this Subdivision

328‑430 When a roll‑over is available

328‑435 Genuine restructures—safe harbour rule

328‑440 Ultimate economic ownership—discretionary trusts

328‑445 Residency requirement

Consequences of a roll‑over under this Subdivision

328‑450 Small business transfers not to affect income tax positions

328‑455 Effect of small business restructures on transferred cost of assets

328‑460 Effect of small business restructures on acquisition times of pre‑CGT assets

328‑465 New membership interests as consideration for transfer of assets

328‑470 Membership interests affected by transfers of assets

328‑475 Small business restructures involving assets already subject to small business roll‑over

Object of this Subdivision

328‑425 Object of this Subdivision

The object of this Subdivision is to facilitate flexibility for owners of small business entities to restructure their businesses, and the way their business assets are held, while disregarding tax gains and losses that would otherwise arise.

Requirements for a roll‑over under this Subdivision

328‑430 When a roll‑over is available

(1) A roll‑over under this Subdivision is available in relation to an asset that, under a transaction, an entity (the transferor) transfers to one or more other entities (transferees) if:

(a) the transaction is, or is a part of, a genuine restructure of an ongoing *business; and

(b) each party to the transfer is an entity to which any one or more of the following applies:

(i) it is a *small business entity for the income year during which the transfer occurred;

(ii) it has an *affiliate that is a small business entity for that income year;

(iii) it is *connected with an entity that is a small business entity for that income year;

(iv) it is a partner in a partnership that is a small business entity for that income year; and

(i) which individual has, or which individuals have, the ultimate economic ownership of the asset; and

(ii) if there is more than one such individual—each such individual’s share of that ultimate economic ownership; and

(d) the asset is a *CGT asset (other than a *depreciating asset) that is, at the time the transfer takes effect:

(i) if subparagraph (b)(i) applies—an *active asset; or

(ii) if subparagraph (b)(ii) or (iii) applies—an active asset in relation to which subsection 152‑10(1A) is satisfied in that income year, or would be satisfied in that income year if paragraph 152‑10(1AA)(b) were disregarded; or

(iii) if subparagraph (b)(iv) applies—an active asset and an interest in an asset of the partnership referred to in that subparagraph; and

(e) the transferor and each transferee meet the residency requirement in section 328‑445 for an entity; and

(f) the transferor and each transferee choose to apply a roll‑over under this Subdivision in relation to the assets transferred under the transaction.

Note: The roll‑over of a depreciating asset transferred in the restructuring of a small business is addressed in item 8 of the table in subsection 40‑340(1).

(2) However, a roll‑over under this Subdivision is not available if the transferor, or any transferee, is either an *exempt entity or a *complying superannuation entity.

328‑435 Genuine restructures—safe harbour rule

For the purposes of paragraph 328‑430(1)(a) (but without limiting that paragraph), a transaction is, or is a part of, a genuine restructure of an ongoing *business if, in the 3 year period after the transaction takes effect:

(a) there is no change in ultimate economic ownership of any of the significant assets of the business (other than *trading stock) that were transferred under the transaction; and

(b) those significant assets continue to be *active assets; and

328‑440 Ultimate economic ownership—discretionary trusts

For the purposes of paragraph 328‑430(1)(c), a transaction does not have the effect of changing the ultimate economic ownership of an asset, or any individual’s share of that ultimate economic ownership, if:

(a) either or both of the following applies:

(i) just before the transaction took effect, the asset was included in the property of a *non‑fixed trust that was a *family trust;

(ii) just after the transaction takes effect, the asset is included in the property of a non‑fixed trust that is a family trust; and

(b) every individual who, just before the transfer took effect, had the ultimate economic ownership of the asset was a member of the family group (within the meaning of Schedule 2F to the Income Tax Assessment Act 1936) relating to the trust or trusts referred to in paragraph (a); and

(c) every individual who, just after the transfer takes effect, has the ultimate economic ownership of the asset is a member of that family group.

328‑445 Residency requirement

For the purposes of paragraph 328‑430(1)(e), the residency requirement for an entity is that:

(a) if the entity is an individual or a company—the entity is an Australian resident; or

(b) if the entity is a trust—it is a *resident trust for CGT purposes; or

(c) if the entity is a partnership (other than a *corporate limited partnership)—at least one of the partners is an Australian resident; or

(d) if the entity is a corporate limited partnership—it is, under section 94T of the Income Tax Assessment Act 1936, a resident for the purposes of the *income tax law.

Consequences of a roll‑over under this Subdivision

328‑450 Small business transfers not to affect income tax positions

(1) Except as provided by this Subdivision, a transfer of an asset has no direct consequences under the *income tax law if:

(a) the transfer occurs under a transaction in relation to which section 328‑430 applies; and

(b) a roll‑over under this Subdivision is available under that section in relation to the asset.

Example: If the transfer were a transfer of the asset from a company to a shareholder, it would not be treated as a payment of a dividend under Division 7A of Part III of the Income Tax Assessment Act 1936.

(2) To avoid doubt, this section does not affect the application of the *income tax law in relation to:

(a) anything that happens in relation to the asset that does not directly relate to the transfer; or

(b) the ownership of the asset at any time.

328‑455 Effect of small business restructures on transferred cost of assets

(1) The *income tax law applies to an entity in relation to the transfer of an asset by the entity, or to the entity, as if the transfer takes place for the asset’s *roll‑over cost if:

(a) the transfer occurs under a transaction in relation to which section 328‑430 applies; and

(b) a roll‑over under this Subdivision is available under that section in relation to the asset.

(2) The asset’s roll‑over cost is whichever of the following amounts is applicable in relation to the transfer:

(a) in relation to the application of subsection (1) to the asset as a *CGT asset (other than *trading stock, a *revenue asset or a *depreciating asset)—the transferor’s *cost base for the asset just before the transfer takes effect;

(b) in relation to the application of subsection (1) to the asset as trading stock—the amount equal to:

(i) the *cost of the item for the transferor; or

(ii) if the transferor held the item as trading stock at the start of the income year—the *value of the item for the transferor then;

(c) in relation to the application of subsection (1) to the asset as a revenue asset—the amount that would give rise to the transferor not making a profit or a loss on the transfer.

328‑460 Effect of small business restructures on acquisition times of pre‑CGT assets

For the purposes of applying subsection 328‑455(1) to the asset as a *CGT asset (other than a *revenue asset) that is a *pre‑CGT asset, a transferee is taken to have *acquired the asset before 20 September 1985.

328‑465 New membership interests as consideration for transfer of assets

(1) If:

(a) section 328‑455 applies in relation to the transfer of an asset under a transaction; and

(b) the transaction provides for *membership interests to be issued; and

(c) the membership interests constitute all or part of the consideration provided for the transfer of assets (transferred assets) under the transaction;

then:

(d) the first element of the membership interests’ *cost base is the sum of:

(i) the *roll‑over costs of the transferred assets that are neither *depreciating assets nor *pre‑CGT assets; and

(ii) the *adjustable values of the transferred assets that are depreciating assets;

(less any liabilities that a transferee of any of the transferred assets undertakes to discharge in respect of the transferred assets) divided by the number of membership interests; and

(e) the first element of the membership interests’ *reduced cost base is worked out similarly.

(2) However, if the *membership interests constituted only a part of the total consideration provided for the transfer of the transferred assets, reduce accordingly the amounts worked out under paragraphs (1)(d) and (e).

328‑470 Membership interests affected by transfers of assets

If:

(a) section 328‑455 applies in relation to the transfer of an asset under a transaction; and

(b) an entity holds, either directly or indirectly:

(i) a *membership interest in the transferor or a transferee; or

(ii) a membership interest that was issued as provided for by the transaction;

disregard a *capital loss from a *CGT event that arises in relation to the membership interest after the transaction takes effect, except to the extent that the entity can demonstrate that the loss is attributable to a matter other than the transaction.

328‑475 Small business restructures involving assets already subject to small business roll‑over

If:

(a) section 328‑455 applies in relation to the transfer of an asset (the transferred asset) of the transferor’s business to one or more transferees; and

(b) the transferor has previously chosen a small business roll‑over under Subdivision 152‑E for a *CGT event that happened in relation to a *CGT asset for which the transferred asset is a replacement asset (within the meaning of sections 104‑185, 104‑190, 104‑197 and 104‑198);

sections 104‑185, 104‑190, 104‑197 and 104‑198 apply to each transferee (to the extent of the transferee’s interest in the asset) as if the transferee, and not the transferor, made that choice.

Note: Sections 104‑185, 104‑190, 104‑197 and 104‑198 provide for capital gains to arise under CGT events J2, J5 and J6, after the choice of a small business roll‑over under Subdivision 152‑E has deferred the making of a capital gain.

Division 355—Research and Development

Table of Subdivisions

Guide to Division 355

355‑A Object

355‑B Meaning of R&D activities and other terms

355‑C Entitlement to tax offset

355‑D Notional deductions for R&D expenditure

355‑E Notional deductions etc. for decline in value of depreciating assets used for R&D activities

355‑F Integrity Rules

355‑G Clawback of R&D recoupments, feedstock adjustments and balancing adjustments

355‑H Catch up deductions for balancing adjustment events for assets used for R&D activities

355‑I Application to earlier income year R&D expenditure incurred to associates

355‑J Application to R&D partnerships

355‑K Application to Cooperative Research Centres

355‑W Other matters

Guide to Division 355

355‑1 What this Division is about

An R&D entity may be entitled to a tax offset for R&D activities. The tax offset may be a refundable tax offset if the R&D entity’s aggregated turnover is less than $20 million.

To be entitled to the tax offset, the R&D entity needs one or more notional deductions under this Division.

There are 2 main kinds of notional deductions. One is for expenditure on R&D activities. The other is for the decline in value of tangible depreciating assets used for R&D activities.

Note: All of these notional deductions require the R&D entity to be registered for the R&D activities under Part III of the Industry Research and Development Act 1986.

Subdivision 355‑A—Object

Table of sections

355‑5 Object

(1) The object of this Division is to encourage industry to conduct research and development activities that might otherwise not be conducted because of an uncertain return from the activities, in cases where the knowledge gained is likely to benefit the wider Australian economy.

(2) This object is to be achieved by providing a tax incentive for industry to conduct, in a scientific way, experimental activities for the purpose of generating new knowledge or information in either a general or applied form (including new knowledge in the form of new or improved materials, products, devices, processes or services).

Subdivision 355‑B—Meaning of R&D activities and other terms

Table of sections

355‑20 R&D activities

355‑25 Core R&D activities

355‑30 Supporting R&D activities

355‑35 R&D entities

355‑20 R&D activities

R&D activities are *core R&D activities or *supporting R&D activities.

355‑25 Core R&D activities

(1) Core R&D activities are experimental activities:

(a) whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:

(i) is based on principles of established science; and

(ii) proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and

(b) that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).

(2) However, none of the following activities are core R&D activities:

(a) market research, market testing or market development, or sales promotion (including consumer surveys);

(b) prospecting, exploring or drilling for minerals or *petroleum for the purposes of one or more of the following:

(i) discovering deposits;

(ii) determining more precisely the location of deposits;

(iii) determining the size or quality of deposits;

(d) research in social sciences, arts or humanities;

(e) commercial, legal and administrative aspects of patenting, licensing or other activities;

(f) activities associated with complying with statutory requirements or standards, including one or more of the following:

(i) maintaining national standards;

(ii) calibrating secondary standards;

(iii) routine testing and analysis of materials, components, products, processes, soils, atmospheres and other things;

(g) any activity related to the reproduction of a commercial product or process:

(i) by a physical examination of an existing system; or

(ii) from plans, blueprints, detailed specifications or publically available information;

(h) developing, modifying or customising computer software for the dominant purpose of use by any of the following entities for their internal administration (including the internal administration of their business functions):

(i) the entity (the developer) for which the software is developed, modified or customised;

(ii) an entity *connected with the developer;

(iii) an *affiliate of the developer, or an entity of which the developer is an affiliate.

355‑30 Supporting R&D activities

(1) Supporting R&D activities are activities directly related to *core R&D activities.

(2) However, if an activity:

(a) is an activity referred to in subsection 355‑25(2); or

(b) produces goods or services; or

the activity is a supporting R&D activity only if it is undertaken for the dominant purpose of supporting *core R&D activities.

355‑35 R&D entities

(1) Each of the following is an R&D entity:

(a) a body corporate incorporated under an *Australian law;

(b) a body corporate incorporated under a *foreign law that is an Australian resident.

Note: Each of the above paragraphs extends to a body corporate acting in its capacity as trustee of a public trading trust (see subsection 102T(9) of the Income Tax Assessment Act 1936).

(2) A body corporate incorporated under a *foreign law that:

(a) is a resident of a foreign country for the purposes of an agreement in force between that country and Australia that:

(i) is a double tax agreement (as defined in Part X of the Income Tax Assessment Act 1936); and

(ii) includes a definition of permanent establishment; and

(b) carries on business in Australia through a permanent establishment (within the meaning of that definition) of the body corporate in Australia;

is an R&D entity to the extent that it carries on business through that permanent establishment.

(3) However, an *exempt entity cannot be an R&D entity.

Subdivision 355‑C—Entitlement to tax offset

Table of sections

355‑100 Entitlement to tax offset

355‑105 Deductions under this Division are notional only

355‑110 Notional deductions include prepaid expenditure

355‑115 Working out an R&D entity’s total expenses

355‑100 Entitlement to tax offset

If notional deductions are between $20,000 and $150 million

(1) An *R&D entity is entitled to a *tax offset for an income year equal to the percentage, set out in the table, of the total of the amounts (if any) that the entity can deduct for the income year under any or all of the following provisions:

(a) section 355‑205 (R&D expenditure);

(b) section 355‑305 (decline in value of R&D assets);

(d) section 355‑480 (earlier year associate R&D expenditure);

(e) section 355‑520 (decline in value of R&D partnership assets);

(g) section 355‑580 (CRC contributions).

Rate of R&D tax offset
Item	In this case:	The percentage is:
1	the R&D entity’s aggregated turnover for the income year is less than $20 million (and item 2 of this table does not apply)	the R&D entity’s *corporate tax rate for the income year, plus 18.5 percentage points
2	at any time during the income year an exempt entity, or combination of exempt entities, would control the R&D entity in a way described in section 328‑125 (connected entities) if: (a) references in section 328‑125 to 40% were references to 50%; and (b) subsection 328‑125(6) were ignored	the R&D entity’s *corporate tax rate for the income year
3	any other case	the R&D entity’s *corporate tax rate for the income year

Note 1: The tax offset will be a refundable tax offset if item 1 of the table applies (see section 67‑30).

Note 2: The tax offset is increased under subsection (1A) of this section if item 2 or 3 of the table applies.

R&D premium

(1A) If item 2 or 3 of the table in subsection (1) applies to the *R&D entity, the amount of the *tax offset for the income year is increased by the sum of the amounts (if any) worked out for each item of the following table for that entity:

Tiered offset rates
Item	Work out the part of the total amount mentioned in subsection 355‑100(1) that:	Multiply that part by this percentage:
1	exceeds nil but does not exceed 2% of the *R&D entity’s total expenses for the income year worked out under section 355‑115	8.5%
2	exceeds 2% of the *R&D entity’s total expenses for the income year worked out under section 355‑115	16.5%

If notional deductions are less than $20,000

(2) However, if the total amount mentioned in subsection (1) is less than $20,000, the *R&D entity is instead entitled to a *tax offset for the income year, worked out in accordance with subsections (1) and (1A), as if that amount were instead the total of the following kinds of expenditure (if any):

Expenditure not subject to $20,000 threshold
Item	Kind of expenditure
1	Expenditure: (a) that the R&D entity can deduct under section 355‑205 (R&D expenditure) for the income year; and (b) that was incurred to a research service provider (within the meaning of the Industry Research and Development Act 1986) that is not an associate of the R&D entity or of the relevant R&D partnership (as appropriate); and (c) that was for the provider to provide services, within a research field for which the provider is registered under Division 4 of Part III of that Act, applicable to one or more of the R&D activities to which the deduction relates
2	Expenditure that the *R&D entity can deduct under section 355‑580 (CRC contributions) for the income year

If notional deductions exceed $150 million

(3) Despite subsections (1) and (1A), if the total amount mentioned in subsection (1) exceeds $150 million, the *R&D entity is instead entitled to a *tax offset for the income year equal to the sum of:

(a) the amount worked out in accordance with those subsections as if that amount were $150 million; and

(b) the product of the excess and the R&D entity’s *corporate tax rate for the income year.

355‑105 Deductions under this Division are notional only

(1) An amount (the notional amount) that an *R&D entity can deduct under this Division is disregarded except for the purposes of:

(a) working out whether the R&D entity is entitled under section 355‑100 to a *tax offset; and

(b) a provision (of this Act or any other Act) that refers to an entitlement of the R&D entity under section 355‑100 to a tax offset; and

(i) prevents some or all of the notional amount from being deducted; or

(ii) changes the income year for which some or all of the notional amount can be deducted; and

Note: Examples are Divisions 26 and 27 of this Act, Subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936 and Part IVA of that Act.

(d) a provision (of this Act or any other Act) that includes an amount in assessable income wholly or partly because of the notional amount; and

Note: An example is Subdivision 20‑A, which may include in assessable income a recoupment of a loss or outgoing if the entity can deduct an amount for the loss or outgoing.

(e) a provision (of this Act or any other Act) that excludes expenditure from:

(i) the *cost base or *reduced cost base of a *CGT asset; or

(ii) an element of that cost base or reduced cost base.

Note: An example is section 110‑45, which may exclude deductible expenditure from elements of the cost base of an asset.

(2) Subsection (1) does not apply to amounts that the *R&D entity can deduct under the following:

(a) subsection 355‑315(2);

(b) subsection 355‑475(1);

355‑110 Notional deductions include prepaid expenditure

For the purposes of this Division, if:

(a) apart from Subdivision H (prepaid expenditure) of Division 3 of Part III of the Income Tax Assessment Act 1936, an *R&D entity can deduct an amount under section 355‑205 or 355‑480 for an income year (the present year) or an earlier income year; and

(b) that Subdivision applies to the calculation of that amount; and

the entity is taken to be able to deduct under section 355‑205 or 355‑480 (as appropriate) the amount referred to in paragraph (c) for the present year.

Note: Section 355‑205 is about deductions for R&D expenditure. Section 355‑480 is about deductions for earlier year associate R&D expenditure.

355‑115 Working out an R&D entity’s total expenses

(1) For the purposes of subsection 355‑100(1A), an *R&D entity’s total expenses for an income year is the sum of the amounts covered by subsection (2).

(2) The following amounts are covered by this subsection:

(a) the *R&D entity’s total expenses for the income year worked out in accordance with:

(i) the *accounting principles; or

(ii) if accounting principles do not apply in relation to the R&D entity—commercially accepted principles relating to accounting;

(b) any amount the R&D entity can deduct for the income year as mentioned in subsection 355‑100(1), to the extent the amount is not covered by paragraph (a) for the income year.

Amounts counted once only

(3) For the purposes of subsection (2):

(a) disregard an amount to which paragraph (2)(a) otherwise applies if paragraph (2)(b) has previously applied in relation to the amount; and

(b) disregard an amount to which paragraph (2)(b) otherwise applies if paragraph (2)(a) has previously applied in relation to the amount.

Subdivision 355‑D—Notional deductions for R&D expenditure

Table of sections

355‑200 What this Subdivision is about

355‑205 When notional deductions for R&D expenditure arise

355‑210 Conditions for R&D activities

355‑215 R&D activities conducted by a permanent establishment for other parts of the body corporate

355‑220 R&D activities conducted for a foreign entity

355‑225 Expenditure that cannot be notionally deducted

355‑200 What this Subdivision is about

An R&D entity can notionally deduct its expenditure on registered R&D activities for which certain conditions are met.

There are special conditions for R&D activities conducted for foreign residents.

355‑205 When notional deductions for R&D expenditure arise

(1) An *R&D entity can deduct for an income year (the present year) expenditure it incurs during that year to the extent that the expenditure:

(a) is incurred on one or more *R&D activities:

(i) for which the R&D entity is registered under section 27A of the Industry Research and Development Act 1986 for an income year; and

(ii) that are activities to which section 355‑210 (conditions for R&D activities) applies; and

(b) if the expenditure is incurred to the R&D entity’s *associate—is paid to that associate during the present year.

Note 1: If the matters in subparagraphs (a)(i) and (ii) are not satisfied until a later income year, the R&D entity will need to wait until then before it can deduct the expenditure for the present year.

Note 2: The R&D activities will need to be conducted during the income year the R&D entity is registered for those activities (see sections 27A and 27J of the Industry Research and Development Act 1986).

Note 3: The entity may also be able to deduct expenditure incurred to an associate in an earlier income year (see section 355‑480).

Note 4: Expenditure incurred in income years starting on or after 1 July 2011 may be deductible for activities registered for income years starting before 1 July 2011 (see section 355‑200 of the Income Tax (Transitional Provisions) Act 1997).

(2) This section has effect subject to section 355‑225 (excluded expenditure), Subdivision 355‑F (integrity rules) and subsection 355‑580(3) (CRC contributions).

355‑210 Conditions for R&D activities

(1) An *R&D activity covered by one or more of the following paragraphs is an activity to which this section applies:

(a) the R&D activity is conducted for the *R&D entity solely within Australia;

(b) if the R&D entity is a body corporate carrying on business through a permanent establishment (as described in subsection 355‑35(2))—the R&D activity is conducted:

(i) for the body corporate; but

(ii) not for the purposes of that permanent establishment;

and the conditions in section 355‑215 (activities conducted for a body corporate by its permanent establishment) are met for the R&D activity;

(i) incorporated under a *foreign law; and

(ii) a resident of a foreign country for the purposes of an agreement of a kind described in subsection 355‑35(2);

and the conditions in section 355‑220 (activities conducted for a foreign entity) are met for the R&D activity;

(d) the R&D activity is:

(i) conducted for the R&D entity solely outside Australia; and

(ii) covered by a finding in force under paragraph 28C(1)(a) of the Industry Research and Development Act 1986;

(e) the R&D activity consists of several parts, with:

(i) some parts being conducted for the R&D entity solely within Australia; and

(ii) the other parts being conducted for the R&D entity outside Australia while covered by a finding in force under paragraph 28C(1)(a) of the Industry Research and Development Act 1986.

Note: An activity can be covered by a finding under paragraph 28C(1)(a) of the Industry Research and Development Act 1986 if the activity cannot be conducted in Australia.

(2) However, an *R&D activity is not an activity to which this section applies if the activity is conducted, to a significant extent, for one or more other entities not covered by any paragraph of subsection (1).

Note: An entity would not be covered by, for example, paragraph (1)(c) if the conditions in section 355‑220 were not met for the R&D activity in relation to that entity.

355‑215 R&D activities conducted by a permanent establishment for other parts of the body corporate

For the purposes of paragraph 355‑210(1)(b), the conditions for an *R&D activity are as follows:

(a) the R&D activity is conducted solely within Australia;

(b) if the R&D activity is a *supporting R&D activity, each corresponding *core R&D activity must be:

(i) an activity conducted, or to be conducted, solely within Australia; and

(ii) an activity for which the *R&D entity is or has been registered under section 27A of the Industry Research and Development Act 1986, or could be registered for an income year if that core R&D activity were conducted during the income year;

(c) there is written evidence that the R&D activity is conducted for the body corporate but not for the purposes of that permanent establishment.

Note: The body corporate is the R&D entity to the extent that it carries on business through that permanent establishment (see subsection 355‑35(2)).

355‑220 R&D activities conducted for a foreign entity

(1) For the purposes of paragraph 355‑210(1)(c), the conditions for an *R&D activity conducted for one or more foreign residents are as follows:

(a) the R&D activity is conducted solely within Australia;

(b) if the R&D activity is a *supporting R&D activity, each corresponding *core R&D activity must be:

(i) an activity conducted, or to be conducted, solely within Australia; and

(i) each foreign resident is *connected with the R&D entity; or

(ii) for each foreign resident—either the foreign resident is an *affiliate of the R&D entity or the R&D entity is an affiliate of the foreign resident;

(d) the R&D activity is conducted:

(i) in accordance with a written agreement binding on only the R&D entity and each foreign resident; and

(ii) either directly by the R&D entity, or indirectly by another entity under an agreement binding on the R&D entity;

(e) the R&D activity is not conducted in connection with an agreement covered by subsection (2).

Note: An example of conducting an R&D activity indirectly under a contract is conducting the R&D activity under a subcontract, or one of a chain of subcontracts, under the contract.

(2) An agreement is covered by this subsection if:

(a) the agreement is binding on the R&D entity (the first entity) and an R&D entity that:

(i) is *connected with the first entity; or

(ii) has the first entity as an *affiliate, or is an affiliate of the first entity;

while the *R&D activity is conducted; and

(b) the R&D activity is to be conducted under the agreement by the first entity or by an entity:

(i) who is not bound by the agreement; and

(ii) who is to conduct the R&D activity directly or indirectly under another agreement to which the first entity is, or will become, bound.

Note: One effect of this subsection is that, even if the R&D entity has an agreement with the foreign resident for conducting the R&D activity, the R&D entity cannot deduct expenditure incurred:

(a) for conducting the R&D activity as a subcontractor under a subcontract with an affiliated R&D entity; or

(b) if the R&D entity is a subcontractor to an affiliated R&D entity—for further subcontracting the conducting of the R&D activity.

355‑225 Expenditure that cannot be notionally deducted

Expenditure on buildings, certain assets and interest

(1) Sections 355‑205 (deductions for R&D expenditure) and 355‑480 (deductions for earlier year associate R&D expenditure) do not apply to the following expenditure:

(a) expenditure incurred to acquire or construct:

(i) a building or a part of a building; or

(ii) an extension, alteration or improvement to a building;

(b) expenditure included in the *cost of a tangible *depreciating asset for the purposes of Division 40 (as that Division applies as described in section 355‑310 or otherwise);

(c) expenditure incurred for interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936) payable to an entity.

Note 1: Expenditure covered by paragraph (a) may be deductible under Division 43 (capital works).

Note 2: The decline in value of an asset covered by paragraph (b) may be notionally deductible under section 355‑305.

Note 3: Expenditure covered by paragraph (c) may be deductible under section 8‑1.

Expenditure on core technology

(2) Sections 355‑205 (deductions for R&D expenditure) and 355‑480 (deductions for earlier year associate R&D expenditure) do not apply to expenditure incurred in acquiring, or in acquiring the right to use, technology wholly or partly for the purposes of one or more *R&D activities if:

(a) a purpose of the R&D activities was or is:

(i) to obtain new knowledge based on that technology; or

(ii) to create new or improved materials, products, devices, processes, techniques or services to be based on that technology; or

(b) the R&D activities were or are an extension, continuation, development or completion of the activities that produced that technology.

Subdivision 355‑E—Notional deductions etc. for decline in value of depreciating assets used for R&D activities

Table of sections

355‑300 What this Subdivision is about

355‑305 When notional deductions for decline in value arise

355‑310 Notional application of Division 40

355‑315 Balancing adjustments—assets only used for R&D activities

355‑300 What this Subdivision is about

An R&D entity can notionally deduct the decline in value of a tangible depreciating asset used for R&D activities.

If a balancing adjustment event later happens for the asset, the R&D entity may be able to actually deduct a further amount. Alternatively, an amount may be included in the R&D entity’s assessable income.

355‑305 When notional deductions for decline in value arise

(1) If:

(a) an *R&D entity is registered under section 27A of the Industry Research and Development Act 1986 for an income year (the present year) for one or more *R&D activities that are activities to which section 355‑210 (conditions for R&D activities) applies; and

(b) while a tangible *depreciating asset is *held by the R&D entity during the present year, the asset is used for the purpose of conducting one or more of those R&D activities; and

(c) the R&D entity could deduct an amount under section 40‑25 for the asset for the present year if Division 40 applied with the changes described in section 355‑310; and

(d) the R&D entity cannot deduct an amount for the asset for:

(i) an earlier income year under Subdivision 328‑D (capital allowances for small business entities); or

(ii) an earlier income year under Division 40 (as that Division applies apart from this Division), in a case where section 40‑440 (low‑value pools) applied;

the R&D entity can deduct the amount referred to in paragraph (c) for the present year.

(2) This section has effect subject to subsection 355‑580(4) (CRC contributions).

355‑310 Notional application of Division 40

(1) In addition to its application apart from this section, Division 40 also applies with the changes set out in this section for the purposes of:

(a) paragraph 355‑225(1)(b) (excluded expenditure); and

(b) paragraph 355‑305(1)(c); and

(2) Firstly, substitute the following for references to a *taxable purpose in Subdivisions 40‑A to 40‑D (other than for the purposes of sections 40‑100, 40‑105 and 40‑110):

Replacing references to a taxable purpose
Item	If this application of Division 40 is for the purposes of:	Substitute a reference to:
1	paragraph 355‑225(1)(b) or 355‑305(1)(c)	the purpose of conducting one or more of the *R&D activities covered by paragraph 355‑305(1)(b)
2	section 355‑315	the purpose of conducting one or more of the *R&D activities to which the R&D deductions (within the meaning of that section) relate

Note: Sections 40‑100, 40‑105 and 40‑110 are about working out an asset’s effective life. Those sections already refer to the use of the asset for R&D activities.

(3) Secondly, assume that Division 40 does not apply to a building, nor to an extension, alteration or improvement to a building, (the building works) for which the *R&D entity:

(a) can deduct amounts under Division 43 (capital works); or

(b) could deduct amounts under Division 43:

(i) apart from expenditure being incurred, or the building works being started, before a particular day; or

(ii) had the R&D entity used the building works for a purpose relevant to those building works under section 43‑140 (using an area in a deductible way).

(4) Finally, assume that the following provisions had not been enacted:

(a) subsection 40‑25(7) (meaning of taxable purpose);

(b) subsection 40‑45(2) (assets to which Division 40 does not apply);

(d) Subdivision 328‑D (capital allowances for small business entities).

Note: Subsection (3) and paragraph (4)(b) mean that deductions under section 355‑305 may be available for capital works other than building works.

355‑315 Balancing adjustments—assets only used for R&D activities

(1) This section applies to an *R&D entity if:

(a) a *balancing adjustment event happens in an income year (the event year) for an asset *held by the R&D entity; and

(b) the R&D entity cannot deduct an amount under section 40‑25, as that section applies apart from:

(i) this Division; and

(ii) former section 73BC of the Income Tax Assessment Act 1936;

for the asset for an income year; and

(c) the R&D entity is entitled under section 355‑100 to *tax offsets for one or more income years for deductions (the R&D deductions) under section 355‑305 for the asset; and

(d) the entity is registered under section 27A of the Industry Research and Development Act 1986 for one or more *R&D activities for the event year; and

(e) if Division 40 applied with the changes described in section 355‑310:

(i) the entity could deduct for the event year an amount under subsection 40‑285(2) for the asset and the balancing adjustment event; or

(ii) an amount would be included in the entity’s assessable income for the event year under subsection 40‑285(1) for the asset and the balancing adjustment event.

Note 1: This section applies in a modified way if the entity also has deductions for the asset under former section 73BA or 73BH of the Income Tax Assessment Act 1936 (see section 355‑320 of the Income Tax (Transitional Provisions) Act 1997).

Note 2: Section 40‑292 applies if the entity can deduct an amount under section 40‑25, as that section applies apart from this Division and former section 73BC of the Income Tax Assessment Act 1936.

(2) If the *R&D entity could deduct for the event year an amount under subsection 40‑285(2) for the asset and the event if Division 40 applied as described in paragraph (1)(e), the R&D entity can deduct that amount for the event year.

Note 1: A deduction under this subsection is not a notional deduction (see subsection 355‑105(2)).

Note 2: A deduction under this subsection results in a catch up amount for the R&D entity (see section 355‑465).

(3) If an amount would be included in the *R&D entity’s assessable income for the event year under subsection 40‑285(1) for the asset and the event if Division 40 applied as described in paragraph (1)(e), that amount is included in the R&D entity’s assessable income for the event year.

Note: Some or all of the amount included in the R&D entity’s assessable income may result in a clawback amount for the R&D entity (see section 355‑446).

Subdivision 355‑F—Integrity Rules

Table of sections

355‑400 Expenditure incurred while not at arm’s length

355‑405 Expenditure not at risk

355‑410 Disposal of R&D results

355‑415 Reducing deductions to reflect mark‑ups within groups

355‑400 Expenditure incurred while not at arm’s length

If:

(a) an *R&D entity incurs expenditure to another entity on all or part of an *R&D activity; and

(b) either:

(i) when the R&D entity incurs the expenditure, the R&D entity and the other entity do not deal with each other at *arm’s length; or

(ii) the other entity is the R&D entity’s *associate; and

for the purposes of this Division, the R&D entity is treated as if the amount of expenditure it incurred on the relevant R&D activity or part (as appropriate) were equal to that market value.

Note: For the purposes of a deduction under section 355‑305 or 355‑520 for an asset’s decline in value, the arm’s length rules in Division 40 apply as part of the notional application of that Division under that section.

355‑405 Expenditure not at risk

(1) An *R&D entity cannot deduct expenditure under section 355‑205 or 355‑480 if:

(a) when it incurs the expenditure, the R&D entity or its *associate had received, or could reasonably be expected to receive, consideration:

(i) as a direct or indirect result of the expenditure being incurred; and

(ii) regardless of the results of the activities on which the expenditure is incurred; and

(b) that consideration is equal to or greater than the expenditure.

Note: Section 355‑205 is about deductions for R&D expenditure. Section 355‑480 is about deductions for earlier year associate R&D expenditure.

(2) If:

(a) when an *R&D entity incurs expenditure, the R&D entity or its *associate had received, or could reasonably be expected to receive, consideration:

(i) as a direct or indirect result of the expenditure being incurred; and

(ii) regardless of the results of the activities on which the expenditure is incurred; and

(b) that consideration is less than the expenditure;

the R&D entity cannot deduct under section 355‑205 or 355‑480 so much of the expenditure as is equal to the consideration.

(3) For the purposes of paragraphs (1)(a) and (2)(a), have regard to:

(a) anything that happened or existed before or at the time the expenditure is incurred; and

(b) anything that is likely to happen or exist after that time.

(4) This section does not apply to expenditure incurred on *R&D activities covered by paragraph 355‑210(1)(b) or (c).

Note: Those paragraphs cover R&D activities conducted for foreign residents.

355‑410 Disposal of R&D results

(1) This section applies to an *R&D entity if:

(a) the R&D entity is entitled under section 355‑100 to a *tax offset because it can:

(i) deduct under section 355‑205 or 355‑480 expenditure incurred on *R&D activities; or

(ii) deduct under section 355‑305 or 355‑520 an amount for an asset (the R&D asset) used for the purpose of conducting one or more R&D activities; and

(b) the R&D entity receives or becomes entitled to receive one or more of the following amounts (the results amounts) in an income year (the results year):

(i) an amount for the results of any of the R&D activities;

(ii) an amount from granting access to, or the right to use, any of those results;

(iii) an amount attributable to the R&D entity having incurred the expenditure, including an amount it is entitled to receive regardless of the results of the R&D activities;

(iv) an amount attributable to the R&D asset being used for the purpose mentioned in subparagraph (a)(ii), including an amount the R&D entity is entitled to receive regardless of the results of the R&D activities;

(v) an amount from *disposing of a *CGT asset, or from granting a right to occupy or use a CGT asset, where the disposal or grant resulted in another person acquiring a right to access or use any of those results.

Note: This section also applies with changes to the partners of an R&D partnership (see section 355‑535).

(2) For each results amount, the following amount is included in the *R&D entity’s assessable income for the results year:

(a) if the results amount is only a results amount because of subparagraph (1)(b)(v), and the asset referred to in that subparagraph is a *depreciating asset—an amount equal to the extent (if any) that the results amount exceeds the asset’s *cost just before the disposal or grant;

(b) if the results amount is only a results amount because of subparagraph (1)(b)(v), and the asset referred to in that subparagraph is not a depreciating asset—an amount equal to the extent (if any) that the results amount exceeds the asset’s *cost base just before the disposal or grant;

(3) For the purposes of paragraph (2)(a), assume that subsection 40‑45(2) did not, except in the case of buildings and extensions, alterations and improvements to buildings, prevent Division 40 from applying to certain capital works.

355‑415 Reducing deductions to reflect mark‑ups within groups

(1) This section applies to an *R&D entity if:

(a) the R&D entity can deduct an amount under section 355‑205 or 355‑480 for an income year for one or more *R&D activities; and

(b) one or more other entities (the grouped entities) incurred expenditure during the income year, or an earlier income year, on one or more of those *R&D activities; and

(i) the grouped entity was *connected with the R&D entity; or

(ii) the grouped entity was an