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Are management fees derived by a registered friendly society which are imposed on funeral or sickness policies issued before 1 January 2003 amounts that are attributable to those policies for the purposes of subparagraph 320-37(1)(d)(iv) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Management fees derived by a registered friendly society and imposed on funeral or sickness policies issued before 1 January 2003 are not amounts that are attributable to those policies for the purposes of subparagraph 320-37(1)(d)(iv) of the ITAA 1997.

The friendly society is registered as a life insurance company under section 21 of the Life Insurance Act 1995 . It issues life policies and undertakes liabilities under life policies. It is a 'friendly society' and a 'life insurance company' as defined in subsection 995(1) of the ITAA 1997. It conducts 'life insurance business' as defined in subsection 995-1 of the ITAA 1997.

The types of life insurance policies issued by the friendly society include funeral policies and sickness policies. The funeral or sickness policies in question were issued before 1 January 2003.

The premiums and the investment income from these policies are included in the relevant benefit funds of the friendly society.

The friendly society charges funeral and sickness policy holders management fees on both the premium income received from these policies, and the income derived from the investment of these premiums.

These management fees are transferred by the friendly society from its Benefit Funds to its Management Fund.

Subparagraph 320-37(1)(d)(iv) of the ITAA 1997 provides that amounts derived on or after 1 January 2003 that are attributable to funeral or sickness policies issued by a friendly society before 1 January 2003 are non-assessable non-exempt income.

Section 15AA of the Acts Interpretation Act 1901 (AIA 1901) states: In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation.

Subsection 15AB(1) of the AIA 1901 states: (1) Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material: (a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or (b) ...

Paragraph 15AB(2)(e) of the AIA 1901 permits the use of the relevant explanatory memorandum in this regard.

In respect of paragraph 320-37(1)(d)(iv) of the ITAA 1997, clause 3.57 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.4) 2003 states: 57. Amounts derived from segregated exempt assets and amounts derived by friendly societies that are attributable to income bonds, funeral policies and certain scholarship plans issued before 1 January 2003 will be treated as non-assessable non-exempt income because those amounts are derived by life insurance companies or friendly societies on behalf of particular groups of policyholders. It would be inequitable to use those amounts to reduce losses that relate to different groups of policyholders or to shareholders .

From this, the purpose of subparagraph 320-37(1)(d)(iv) of the ITAA 1997 is, for present purposes, to treat amounts derived by friendly societies on behalf of particular groups of funeral and sickness policyholders as non-assessable non-exempt income.

Management fees that the friendly society derives from funeral and sickness policies are not attributable to the funeral or sickness policies in that they are not derived on behalf of policyholders as contemplated by the Explanatory Memorandum above. The management fees are only derived by the friendly society itself. Accordingly, they are not non-assessable non-exempt income under subparagraph 320-37(1)(d)(iv) of the ITAA 1997.

Also, paragraph 320-15(1)(k) of the ITAA 1997 states that the assessable income of a life insurance company includes 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 assurance policies.

As the management fees are a relevant fee or charge, funeral or sickness policies are life insurance policies and the friendly society is a life insurance company for the purposes of paragraph 320-15(1)(k) of the ITAA 1997, the conditions for the operation of that paragraph are satisfied. Accordingly, management fees imposed on funeral and sickness policies of a friendly society are fees and charges that are included in its assessable income under paragraph 320-15(1)(k) of the ITAA 1997.

It would be a manifestly absurd interpretation of the law to include management fees as assessable income under paragraph 320-15(1)(k) of the ITAA 1997 and, at the same time, treat the same management fees as non-assessable non-exempt income under subparagraph 320-37(1)(d)(iv). In accordance with section 15AA of the AIA 1901, an interpretation that such management fees fall within subparagraph 320-37(1)(d)(iv) of the ITAA 1997 is not preferred.

Accordingly, the management fees are not non-assessable non- exempt income under subparagraph 320-37(1)(d)(iv) of the ITAA 1997.