Download Transactions of The Institute of Actuaries of Australia – 1995 PDF

TitleTransactions of The Institute of Actuaries of Australia – 1995
File Size19.1 MB
Total Pages704
Document Text Contents
Page 1


A.C.N. 000 423 656



Volume II

Page 352



(dJ That is to say, the taxable value of the additional benefits received by
the policyholders in the year in respect of capital gains made by the life
office is equal to26

w pxtfM

(eJ Then the tax the life office has to incur on behalf of policyholders as their
proxy, in respect of activities over a year, on the Neutral Tax Basis can
be said to be

liJ tpxpxtfM. ................................................................ Formula 10

(f) The correct corporate tax that life offices should pay on the Neutral Tax
Basis is then

(iJ tcx(l-p)xfRCG+{MJXVa-Moxvax(l +i))J. ................ Formula 11


The following allowances have to be made to the formulae developed above to
fully reflect the principles in section 3 (page 1086):

(aJ Neither one of Formula 10 or Formula 11 for the Neutral Tax Basis
allows for the inflation offset for capital gains. They therefore assume
that realised and unrealised capital gains are to be taxed as income,
both on account of the corporate portion of the tax and on account of the
tax incurred by the life office on behalf of policyholders as their prox/7 .
In that sense, they could be said to over-state the correct capital gains
tax that should be paid on the Neutral Tax Basis, if the view is taken that
neither the life office nor the policyholder is an active trader in invest-

(bJ The formulae on the Neutral Tax Basis for the tax incurred by the life
office on behalf of policyholders as their proxy (Formula 6 on page 1109
and Formula 10 on page 1114) allow fully for all deductible expenses, as
they are paid29 . If capital gains were to be regarded as entitled to the
capital gains inflation offset, then it can be argued that the deductibility
of the expenses incurred by the policyholder in acquiring the investment
(as opposed to the expenses incurred in maintaining the investment)
should be deferred until the gains are realised. This leads to an argu-

26 One can come straight to this conclusion from the general reasoning that the policyholder's taxable
income on account of capital gains should be the pre-tax benefit accruing from the policyholder's share
of capital gains. that is to say px&\4, but the more roundabout way is used above to illustrate the link
between how benefits accrue in practice to policies and the taxable income generated thereby.

Albeit, for the corporate component, deferred until realised according to Formula 11 (page 1114 ).
28 Although for the purpose of this paper the impact on the corporate component is disregarded. See the
footnote to paragraph 7.2.10(c) (page 1120).
29 The "expense deduction" on the policyholders' portion lies in "P".

Page 353



ment that the acquisition expenses loaded into the premiums30 should
be deferred until the gains are realised.

(c) Formula 10 has the effect of taxing unrealised gains passed on to poli-
cies when the value of the policies are increased thereby, and of thus
taxing the gains on life policies earlier than on equivalent alternative di-
rect investments. In this sense, Formula 10 can be said to over-state the
correct capital gains tax that should be paid on the Neutral Tax Basis.

(d) With respect to the tax incurred by the life office on behalf of policyhold-
ers as their proxy, the effect of paragraphs 7.2.5(a) and 7.2.5(c) could
very easily exceed the effect of paragraph 7.2.5(b), if the incidence of
taxable income brought out by Formula 6 (page 11 09) and Formula 10
(page 1114) for the Neutral Tax Basis is compared with the incidence of
taxable income if the policyholder were to make a typical direct invest-
ment. An adjustment therefore has to be made to the total of the
amounts generated by Formula 6 and Formula 10. Thus, the total of the
amounts generated by Formula 6 and Formula 10 are called amounts
generated by the "Unadjusted Neutral Tax Basis". After the adjustments
explained below, the results are referred to as the "Adjusted Neutral Tax

(e) As mentioned in paragraph 7.2.5(b) above, in Formula 6 (page 1109) the
value of "P" includes the full premium as a tax deduction, including any
fee included in the premium to cover acquisition expenses. This means
that there are the following differences between the tax that the life office
pays on behalf of the policyholder (as would be the case in Formula 6),
and the tax that the policyholder would pay had he/she made a similar
investment in a non-life insurance investment asset:

r•J In Formula 6, an acquisition cost built into the premium is effec-
tively immediately offset against gains in the year in which it is in-
curred by virtue of the fact that it is included in the premium.

(ii! In a non-life insurance asset, any acquisition costs are only al-
lowable as a tax relief when the asset is realised.

(f) The combined effect of the

r•! "over-taxation" caused by Formula 10 (page 1114) in taxing un-
realised gains before they are "realised", and of the

r•'! "under-taxation" of Formula 6 (page 11 09) in effectively allowing
acquisition costs as a full deduction as they are incurred,

As opposed to the renewal expenses loaded into the premiums.

Page 703




(iii) Outline the tax treatment to a Fund of surplus repatriated to a
sponsoring employer. If the employer suggested delaying the
repatriation until September 1995 what impact does this have on the
tax treatment of a repatriation of surplus?

(1 mark)

(iv) Outline the procedure required under legislation concerning the
repatriation of surplus to a sponsoring employer. You should assume
that the Plan will not be wound up.

(6 marks)

The Trustee has agreed to repatriate some surplus to the employer on the
basis that some of the surplus will be used to meet benefit improvements for
the members of the Plan.

(v) You have been asked as the actuary to the Plan to provide a report
concerning the repatriation of surplus. Briefly cover the information
that should be contained in your report.

(15 marks)


State Anti-Discrimination legislation covering a superannuation plan client of
yours has been amended to include age based discrimination, both direct and
indirect. Direct age discrimination is where someone is treated unfairly or
unequally simply because they are a particular age or they fit into, or don't
fit into, a particular age group.

The Trust Deed and Rules of your client contains the following two clauses

"members may contribute a percentage of Salary equal to 0%, 1 o/o,
2%, 3%, 4%, 5%, 6% or 7% provided that a maximum of 5% applies
while the Member is aged less than 45"; and

"Accrued Benefit Multiple"

means the sum of:

(a) the total of the product of:

{i) the period of Membership during which a Member contributed (or is
deemed to have contributed) at the Contribution Rates shown in the
table below; and

Page 704




(ii) the Benefit Rate corresponding to that period of Membership shown in
the table below:-

Contribution Rate Benefit
(%of Salary) Rate

Nil 2%
I 51/3o/o
2 8


3 12%
4 151/3%
5 18


6 22%
7 251/3%

Member's benefits are determined by multiplying their Accrued Benefit
Multiple and their Final Average Salary.

The Fund Secretary has received legal advice that this approach is not
allowable in view of anti-discrimination legislation and has asked for your
advice regarding changes to the rules including cost implications. Draft your
response setting out

(i) Why the approach is discriminatory
(ii) some possible solutions
(iii) your recommended solution, and
(iv) the next steps for the solution to be implemented.

(20 marks)

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