EXPLANATORY STATEMENT
STATUTORY RULES 1989 NO. 135
Issued by the Authority of the Minister for Primary Industries and Energy
LOAN (INCOME EQUALIZATION DEPOSITS) ACT 1976
LOAN (INCOME EQUALIZATION DEPOSITS)
ACT 1976 REGULATIONS (AMENDMENT)
Under the new income equalization deposits (IED) scheme, as provided by the recently amended Loan Income Equalization Deposits Act 1976 (the Act) interest is paid only on the “investment component” of deposits.
Section 3 of the Act defines the “investment component” of a deposit as that percentage of the deposit as is prescribed in regulations at that time.
The adjustment rate to calculate the investment component will be determined having regard to a tax rate which will reflect the typical marginal tax rate of depositors. This is because it is not appropriate to pay interest on that part of a deposit which would otherwise have been paid in tax; this part of the deposit represents deferred tax payable when the deposit is later withdrawn.
The investment component, X, of a deposit can be calculated according to the following formula;
where: X = Y (I - Z)
• X represents the investment component
• Y represents the deposit, and
• Z represents the tax adjustment rate.
The adjustment rate to calculate the investment component will be 39 per cent from 1 July 1989. Consequently the rate prescribed in Regulations which will be applied to deposits to determine the investment component will be 61 per cent.
The 39 per cent adjustment rate is based on the tax rate applied to the life insurance business of life offices and represents the assumed tax rate of policy holders. It is expected that depositors in IEDs would have a similar income profile. Indeed, analysis of tax-related IEDs before 1983 indicates that the bulk of deposits were made by depositors in the second highest tax bracket.
The Act also established that a deduction of tax be applied by the administering authority (the Department of Primary Industries and Energy) when a deposit is withdrawn.
Paragraph 20B(1)(c) of the Act requires that the authorised person deduct from the deposit the percentage which is prescribed in the regulations for the purposes of this paragraph. This will ensure that there is no undue deferral of tax in the year of withdrawal. The rate of deduction of tax to apply from 1 July 1989 will be 29 per cent, which represents the expected typical marginal tax rate of withdrawees in this year.
Consequently, where the depositor notifies the Department of the amount of a withdrawal that is assessable (that is, is liable for income tax) 29 per cent shall be deducted from the assessable amount. Alternatively, if the Department is not advised of the assessable amount 29 per cent shall be deducted from the amount withdrawn.
Withdrawees will be able to seek to have the rate of tax to be withheld reduced if they expect their marginal tax rate, based on their total estimated taxable income for the year of withdrawal, to be below the standard rate of tax as set by the Regulation.
The amended IED legislation also provides that a fee may be required to be paid to the Department, as administrator of the scheme (refer to section 10(b)), and that any fee be prescribed by regulations.
Charging a fee for using the scheme is consistent with covering costs of providing Government services, where appropriate. The fee will cover the costs of handling deposits and withdrawals, assuming the same level of transactions as the pre - 1983 scheme and amortising the cost of establishing a new computer system for the Scheme.
It is proposed that a fee of $20 apply from 1 July 1989 to cover administration costs.