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Australia Proposes Tax Relief Rationalization Of Investment Products

by Mary Swire, Tax-News.com, Hong Kong

16 December 2009


Australia’s Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, has released proposals, for consultation with stakeholders, on product rationalization and consequent tax relief for managed funds and the life insurance industries.

Product rationalization in this area, a press release explained, is a process of converting or consolidating products, such as managed fund or life insurance products, of a similar nature into a single product with equivalent features and benefits. Product rationalization is a complex problem involving a range of issues that need to be addressed, including appropriate measures to address taxation issues.

"The proposed product rationalization mechanism offers a specific solution to the range of issues involved in the process of removing outdated products and transferring investors into newer and better products," Bowen announced. "Importantly a proposed 'no disadvantage' test would ensure investors are not disadvantaged by product rationalization.”

"The proposals paper also outlines proposed tax relief for product rationalization with restrictions to protect the integrity of the proposed tax concession."

To ensure that the taxation relief is only available for genuine legacy products, an important principle in considering such relief would be that it would be limited to circumstances where the legacy product and the replacement product have the same tax characteristics. Thus, broadly, if a legacy product is a life insurance policy, the replacement product would need to be a life insurance policy; and if a legacy product is an interest in a managed investment scheme, the replacement product would need to be an interest in a managed investment scheme.

It is further considered that the taxation issues arising for life insurance products would be, to some extent, different from those affecting rationalizations of managed investment schemes. For example, capital gains tax (CGT) is unlikely to be an issue for a life product rationalization where assets are held and remain in the same life company. In relation to the entity, no taxation issues should arise as there is no disposal of assets – that is, no CGT events should happen.

However, a special tax regime applies to standard life insurance policyholders. They are not assessable on tax on life insurance policy proceeds provided they have held the policy for more than the eligible period (10 years from commencement date for policies issued after December 7, 1983). Therefore, the only issue with these policies is to ensure that product rationalization transfers do not cause the eligible period to restart.

It would seem that a CGT taxing point may only arise if the life company assets are transferred to another life company or custodial arrangement as part of the rationalization. A CGT roll-over may therefore be necessary to facilitate such transfers. On the other hand, in relation to both entities and members, the rationalization of managed investment scheme products may require a CGT roll-over as the transfer of investments may trigger CGT taxing points.

Issues would, in addition, potentially arise for assets held on revenue account (such as traditional securities which are specifically taxed on revenue account). It may therefore be necessary to find some appropriate method of providing relief. For instance, the issue may be able to be handled administratively by characterizing the disposal of assets as part of a rationalization as being a capital transaction (and therefore may be subject to CGT roll-over).

In general, it was said, introducing a product rationalization mechanism would benefit investors by transferring investors into modern products with superior features and would also remove a significant source of risks of error and fraud in the financial system by closing outdated legacy products.

"The proposed solution seeks to strike a balance between protecting the rights and benefits of investors, while offering product providers a practical and flexible process for developing product rationalization mechanisms," Bowen added. "The development of these mechanisms would not only benefit investors but would also remove significant integrity concerns while reducing compliance costs for the Australian financial services sector."

The proposals set out in the paper were developed in consultation with a panel of experts and do not represent government policy at this stage. The paper follows on from an issues paper on product rationalization published in June 2007.

Interested parties are invited to make written submissions by February 26, 2010.


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