House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Rt. Hon. Harold Holt.)

Notes on Clauses

Income Tax and Social Services Contribution Assessment Bill 1960.

By this Bill, it is proposed to amend the Income Tax and Social Services Contribution Assessment Act 1936-1959 (in these notes referred to as the Principal Act).

Clause 1: Short Title and Citation.

This clause formally provides for the short title and citation of the Amending Act and the Principal Act as amended.

Clause 2: Secrecy Provisions

The purpose of this clause is to amend section 16 of the Principal Act to authorise the Commissioner to disclose information concerning a taxpayer to the Commonwealth Scholarships Board.

Section 16 of the Principal Act is designed to ensure that officers of the Taxation Department maintain secrecy regarding any information disclosed or obtained under the Income Tax laws. An officer who obtains such information in the course of his employment is, in general, prohibited from disclosing that information except in the performance of his duty.

In order to facilitate the administration of governmental business, however, the section expressly authorises the Commissioner (or a Second Commissioner or Deputy Commissioner) to disclose information to specified authorities charged with the administration of Commonwealth pensions and social services benefits etc. Persons to whom the information is communicated in this way are subject to the same rights and obligations with regard to secrecy as are officers of the Taxation Department.

Section 16 has, for many years, authorised the disclosure of information to the Universities Commission for the purpose of the administration of any law of the Commonwealth relating to financial assistance to students. Under the Education Act 1959, the Commonwealth Scholarships Board is now responsible for the administration of that law as regards assistance to students. It is accordingly proposed to replace the reference to the Universities Commission in section 16 by a similar reference to the Commonwealth Scholarships Board.

The information communicated by the Commissioner of Taxation will, of course, be limited to such particulars as are essential for the proper administration of the functions vested in the Commonwealth Scholarships Board.

The amendment proposed by this clause will be effective from the date on which the Bill becomes law.

Clauses 3 and 4: Concessional Deductions

The purposes of these clauses are -

(i)

to ensure that residents of the Territory of Papua will retain their present entitlement to concessional deductions when (as a result of an amendment proposed in the Schedule to the Bill) Papua ceases to be treated as part of Australia for the purposes of the Principal Act; and

(ii)

to extend to residents of the Territories of New Guinea, Norfolk Island, Cocos (Keeling) Islands and Christmas Island and to residents of the Island of Nauru the same rights to concessional deductions as are at present allowed to residents of Papua.

The provisions of the Principal Act relating to concessional deductions are contained in Sub-division B of Division 3 of Part III. One of the conditions for the allowance of deductions for the maintenance and medical expenses on account of dependants is that both the taxpayer claiming the deductions and the dependants should be residents of Australia.

Under section 7 of the Principal Act, taxpayers who reside in the external territories of the Commonwealth or the Island of Nauru and derive Australian income are deemed to be residents of Australia for assessment and payment of Australian tax. However, this provision does not extend to dependants of those taxpayers.

The result is that a taxpayer resident in a Territory other than Papua may be allowed concessional deductions on account of his dependants if they are living in Australia or in Papua (which the present law treats as part of Australia) but not if they reside with him in his own Territory. On the other hand, a taxpayer residing with his dependants in the Territory of Papua has the same entitlement to concessional deductions as a resident of mainland Australia.

The amendment proposed by clause 3 is designed to remove this discrimination, and ensure maintenance of the present position as regards Papua, by treating all persons who reside in the Australian external territories or the Island of Nauru as residents for the purpose of the concessional deductions.

The effect of the amendment will be that a resident of any of the areas mentioned who derives income from Australian sources will be eligible for the same dependants allowances as a resident of mainland Australia.

A complementary amendment, proposed by clause 4, will extend on similar lines the concessional deduction for a housekeeper under section 82D of the Principal Act.

Under the present law, it is a condition for the allowance of the deduction that the housekeeper should be wholly engaged in keeping house for the taxpayer in Australia or Papua. The effect of the amendment proposed by clause 4 will be to authorise the housekeeper allowance, in appropriate circumstances, even though the housekeeper may be keeping house for the taxpayer in one of the other external territories of the Commonwealth or in the Island of Nauru.

Clause 5: Capital Expenditure on Prospecting or Mining for Petroleum.

By this clause, it is proposed to make drafting adjustments in section 123A of the Principal Act, in order to remove certain doubts as to the effect of the section.

Section 123A authorises allowances for capital expenditure incurred in mining or prospecting for petroleum in Australia or the Territory of Papua and New Guinea or in plant necessary for the treatment of that petroleum. On the discovery of oil in commercial quantities, the capital expenditure will be set off against income derived from the sale of that petroleum except where a company has elected to forgo the allowance. In that event, shareholders resident in Australia are entitled to deduct from their incomes the capital contributed by them to meet the company's expenditure. Profits from the petroleum are free of tax until the capital expenditure has been recouped out of the sale price of the petroleum or shareholders have been entitled to allowances for the capital subscribed to meet that expenditure.

When section 123A was first enacted in 1939, it provided, broadly speaking, that the amount available for deduction under the section in any given year of income would be the capital expenditure incurred prior to or during that year in mining or prospecting for petroleum in Australia or Papua-New Guinea, reduced by the net income derived from the sale of that petroleum.

The section was amended in 1940 to remove a technical blemish but, in the process, a further drafting defect occurred. In defining the amount available for deduction under section 123A, i.e. the "unrecouped capital expenditure", it was found necessary to insert definitions of "net assessable income" and "net exempt income" to describe the classes of income that should be treated as recoupments of the capital expenditure on mining or prospecting. These definitions were worded in such a way as to be open to the interpretation that any income from the sale of petroleum would serve to reduce the deductions allowable under section 123A, even if the taxpayer had bought the petroleum from another producer, or mined it overseas in the course of operations having no connection with his Australian business.

It would not be appropriate to reduce the allowances for capital expenditure associated with mining and prospecting in Australia or Papua-New Guinea by exempt income having no relationship to that expenditure.

Clause 5 is designed to deal with this situation by amending the definitions of "net assessable income" and "net exempt income", to ensure that income from the sale of petroleum will not serve to reduce the deductions allowable to a taxpayer under section 123A unless the petroleum has been obtained as a result of mining operations carried on by the taxpayer in Australia or the Territory of Papua and New Guinea.

The proposed amendment will be applicable to assessments in respect of the 1959-1960 income year and subsequent years, but it will clarify the operation of the section in relation to all petroleum sales, whether made before or after its commencement.

Clause 6: Relief from Double Taxation

By clause 6, it is proposed to insert two new Divisions in the Principal Act.

Division 18 will make provision for the granting of a credit against the Australian tax liability where an Australian resident is subject to both Australian and Territory tax on income from sources in the Territory of Papua and New Guinea.

Division 19 will insert in the Principal Act a number of general machinery provisions dealing with the administration of double tax relief and the granting of credits. Provisions of this nature are at present included in the Income Tax (International Agreements) Act, which gives effect to the double tax agreements with the United Kingdom, the U.S.A. and Canada. However, with the inclusion of Division 18 in the Principal Act, it is considered more appropriate that the machinery provisions should also be transferred to the Principal Act.

Division 19 will govern the allowance of credits under the various international agreements as well as credits under Division 18. The corresponding provisions in the Income Tax (International Agreements) Act will become redundant and their repeal is proposed by the Income Tax (International Agreements) Bill considered later in this memorandum.

Division 18.

Division 18 is designed to ensure that (so far as can be achieved by adjustment of Australian tax liability) the combined burden of Australian and Territory tax will be no greater than the Australian tax that would have been payable if there were no liability for Territory tax.

This result will be brought about by allowing against the Australian tax a credit to relieve the double taxation.

Division 18 consists of three sections (section 160AE, 160AF and 160AG). The operative provision is section 160AF which authorizes the allowance of credits and lays down a formula to be used in ascertaining the part of the Australian tax payable by a taxpayer that is to be attributed to the Territory income. Section 160AE defines and clarifies various terms and concepts used in section 160AF, while section 160AG will place an upper limit on the amount of credit allowable under Division 18 in respect of tax paid on a dividend, in cases where a credit is also allowable under an international agreement, or under section 45 of the Principal Act.

Section 160AE.

Sub-section (1.) of the proposed section 160AE contains a number of definitions designed to facilitate drafting and to clarify the meaning of the new Division.

"Apportionable deductions" are defined as meaning deductions made under section 77A (capital subscriptions for oil exploration purposes), section 78(1.)(a) (gifts to prescribed organisations), section 78(1.)(b) (calls paid to mining and afforestation companies), section 79A (zone allowances), section 79B (allowances for members of Defence Force on overseas service) or concessional deductions. Deductions for rates or land tax under section 72 are also regarded as apportionable deductions if they do not relate to property producing assessable income.

The concept of "apportionable deductions" is used in Division 18 to describe a number of deductions of a concessional or semi-concessional nature which are not, strictly speaking, directly related to income producing activities. In calculating the part of the Australian taxes that may appropriately be related to Territory income, it is necessary to set off, against the gross income from Territory sources, the expenses relating to that income. "Apportionable deductions", however, represent a class of deductions that relate generally to the whole of the taxpayer's income but cannot be said to relate directly either to Territory income or non- Territory income. Accordingly, these expenses are (in effect) apportioned pro rata between the two classes of income in calculating the net income attributable to the Territory.

"Company" is defined so as to exclude a company in the capacity of a trustee. Income derived by a company in its capacity as a trustee is taxed on a basis that differs from the taxation of the company's own income. The definition is a drafting expedient that will enable a credit in respect of a company's own income to be ascertained without regard to any Territory tax that may have been paid on trust income.

"Private Company" is defined as having the same meaning as in Division 7 of the Principal Act (i.e., the Division which imposes undistributed profits tax on private companies).

"The adjusted net Territory income" is a concept used in ascertaining the amount of Australian tax that relates to income from Territory sources. It means "the net Territory income" of the taxpayer (also a defined term), reduced by an appropriate part of the taxpayer's "apportionable deductions". The result obtained is adopted as the amount of Territorial income subject to Australian tax.

The effect of the definition will be to allocate the apportionable deductions rateably over all the classes of net income that enter into the determination of the taxable income.

"The average rate of Australian tax" means an amount per Pd1 ascertained by calculating the income tax that would be payable by the taxpayer if he were not entitled to any rebate (other than the special 5% rebate currently allowed to all individual taxpayers) and dividing the amount so obtained by the number of whole pounds in his taxable income.

"The net Territory income" means the part of a taxpayer's assessable income that is derived from sources in the Territory, reduced by -

(a)

the allowable deductions that relate exclusively to Territory income; and

(b)

so much of any other allowable deductions as, in the opinion of the Commissioner, may appropriately be related to Territory income.

Any taxpayer who is dissatisfied with the apportionment of expenses made by the Commissioner would, of course, have the usual rights of objection and reference to a Board of Review. For this purpose, the Board would have power to substitute its own opinion for that of the Commissioner.

The figure ascertained by means of the definition of "the net Territory income" is not a final determination of the taxable income attributable to Territory sources because "apportionable deductions" are not taken into account. This further stage in the process of estimating the taxable income attributable to the Territory sources is carried out by means of the definition of "the adjusted net Territory income", which has already been discussed.

"The Territory" is defined as meaning the Territory of Papua and New Guinea.

"The Territory undistributed amount" is calculated, in the case of a private company, by taking the company's adjusted net Territory income (as defined) and calculating an amount which bears to it the same proportion as the company's undistributed amount bears to its taxable income. In effect, the deductions allowed for the purposes of undistributed profits tax will be allocated for the purposes of undistributed profits tax will be allocated rateably against the various classes of net income making up the taxable income.

"The undistributed amount" is declared to be the amount that is the undistributed amount of the company under Division 7 of the Principal Act.

Sub-section (2.) of section 160AE is designed to attribute a source, for the purpose of calculating credits under Division 18, to amounts that are included in the taxpayer's assessable income under sections 26B or 36 of the Principal Act.

Shortly stated, section 26B (as proposed to be amended by the Schedule) will enable a taxpayer engaged in primary production in Australia or the Territory to include in his current assessment only one-fifth of certain insurance recoveries received on account of the loss of livestock or trees, and to bring amounts representing the remaining four-fifths to account by equal instalments over the succeeding four years. To protect the revenue, the Commissioner is empowered to treat the whole of the untaxed amounts as income of the current year in cases where the taxpayer dies, becomes bankrupt, is about to leave Australia etc.

Section 36 makes a similar provision in relation to abnormal profits from forced sales of livestock.

Sub-section (2.) of section 160AE provides, in effect that where income is withheld from assessments pursuant to sections 26B or 36, the amounts included in the ensuing years shall be deemed, for the purposes of Division 18, to be income derived from the same sources as the insurance recoveries or abnormal income to which the amounts relate. In other words, if a taxpayer elects to withhold abnormal income from his assessments and that abnormal income has a Territory source, the amounts brought to account in succeeding years will also be deemed to be Territory income. If, on the other hand, the abnormal income was from an Australian business, the amounts brought to account in succeeding years would be regarded as having an Australian source.

Sub-section (3.) of section 160AE provides that, for the purposes of Division 18, dividends shall be deemed to be derived from sources in the Territory to the extent that they are paid out of profits derived from sources in the Territory.

Under both the Australian and the Territory taxing systems, tax on dividends received by non-residents is imposed by reference to the source of the profits out of which the dividends are paid. Section 44(1.) of the Australian law requires a resident taxpayer to include in his assessable income dividends derived out of profits from any source; a non-resident is taxed on dividends only to the extent to which they are paid out of profits derived by the company from sources in Australia. There is a comparable provision in the Territory Ordinance.

The provision will enable a credit to be allowed for Territory tax paid on dividends distributed out of Territory profits even though the company paying the dividends is an Australian resident and the shares are on an Australian share register.

Section 160AF

This section authorises the granting of credits in respect of Territory tax and, by means of the terms defined in section 160AE, lays down the procedure for ascertaining the amount of the credit that is to be allowed.

Sub-section (1.) entitles Australian residents to a credit against their Australian tax for Territory tax paid on income having a source in the Territory which enters into the ascertainment of the Australian tax.

The amount of the credit is the lesser of -

(i)

the Territory tax that the taxpayer was personally liable to pay, less any refund or credit of that tax, and

(ii)

the Australian tax payable in respect of the Territory income.

The credit does not, however, extend to provisional tax, for which a credit is allowable against Territory tax on income of the succeeding year or to additional tax in the nature of a penalty, for example, additional tax payable in consequence of an understatement of income in a return.

Sub-section (2.) lays down the method of ascertaining the Australian tax (other than undistributed profits tax) payable on the Territory income. It is to be calculated by applying "the average rate of Australian tax" to "the adjusted net Territory income" and deducting therefrom any rebates relating exclusively to Territory income to which the taxpayer is entitled, other than the 5% reduction in tax currently allowable to individual taxpayers and rebates allowable on dividends under section 46.

The 5% rebate granted to individuals is not deducted because it will already have been taken into account in the calculation of "the average rate of Australian tax".

Section 46 of the Principal Act has the effect of freeing from tax any dividends received by a resident company. The dividends are included in the company's assessable income, but the amount of tax attributable to the dividends is allowed as a rebate under section 46.

For the purpose of ascertaining the Australian tax attributable to Territory income, Division 18 of the Principal Act achieves a comparable result by eliminating both the dividends and the rebates that free them from tax.

Sub-section (3.) provides, in effect, that where a company has included dividends from Territory sources in its assessable income, these dividends and the deductions relating thereto are to be eliminated in calculating the adjusted net Territory income. The purpose of this sub-section is to simplify the operation of the credit provisions. Dividends received by a company are, in effect, tax free, and an equitable result is achieved by eliminating dividends from Territory sources in calculating the Australian tax payable in respect of Territory income.

Sub-section (4.) deals with the case of a private company that is liable for undistributed profits tax. The Australian tax on the Territory income is deemed to be the amount ascertained under sub-section (2.) plus an additional amount representing the proportion of undistributed profits tax that is attributable to income from Territory sources. The amount of undistributed profits tax to be taken into account in this way is ascertained by applying to the Territory undistributed amount of the company, the rate of undistributed profits tax payable by private companies.

Sub-section (5.) is designed to make appropriate provision for the special cases where tax is payable under section 94 or section 102 of the Principal Act in respect of Territory income. These sections are designed to avoid loss of revenue through the setting up of family partnerships and family trusts. In certain circumstances a higher rate of tax is payable by the partnership or the trustee, as the case may be. Where an assessment is made under one or other of these sections, the Commissioner of Taxation is empowered to determine the part of the Australian tax that is reasonably attributable to the income derived from sources in the Territory, and this amount forms the basis for the credit to be allowed.

Section 160AG.

This section is designed to place an appropriate limitation on the amount of the credit that may be allowed under Division 18 if tax is payable on a dividend both in the Territory and in an overseas country. This situation could arise, for example, if an Australian taxpayer received from a United Kingdom company a dividend paid out of profits derived from sources in the Territory.

One of the principles underlying the various provisions which relieve double taxation is that the credits allowable shall not exceed the Australian tax on the overseas income. In order to maintain this principle, sub-section (1.) of section 160AG will make provision to ensure that, where a credit in respect of tax paid on a dividend is allowable under the Income Tax (International Agreements) Act or under section 45 of the Principal Act, the amount of any credit that may be allowed under Division 18 on account of tax paid on the same dividend shall not be greater than the amount by which the Australian tax on the dividend exceeds the credit allowable in respect of overseas tax.

In applying sub-section (1.), it may be necessary to ascertain the proportion of a credit allowable under Division 18 that relates to tax paid on a particular dividend. It would not be practicable to lay down a rigid basis for making this calculation because the situations that might arise are extremely varied. Sub-section (2.) of section 160AG will therefore empower the Commissioner to determine the amount of credit which is attributable to the dividend in the light of all the circumstances of the case.

Any taxpayer who is dissatisfied with the Commissioner's determination will have the usual rights of objection and reference to a Board of Review.

Division 19

Division 19 will contain a number of machinery provisions governing the procedure for determination of credits by the Commissioner, the rights of objection and appeal against determinations and the Commissioner's power to apply credits in settlement of outstanding tax. It will also include a provision designed to ensure that the total amount of the credits allowable under the various provisions of the law dealing with relief of double taxation will not exceed the total amount of Australian tax payable in respect of the year of income.

The provisions of Division 19 are similar to provisions that were inserted in the Principal Act in 1947, when effect was given to the agreement between Australia and the United Kingdom for the relief of double taxation. In 1953, these sections were removed from the Principal Act and re-enacted in a modified form as part of the Income Tax (International Agreements) Act.

With the introduction, in Division 18, of a system of credits in respect of Territory tax, machinery provisions relating to the allowance of credits will again be required in the Principal Act. In order to avoid duplication of such provisions in the Principal Act and in the Income Tax (International Agreements) Act, it has been thought desirable to repeal the machinery provisions contained in sections 7 to 11, 14 and 15 of the Income Tax (International Agreements) Act and to enact Division 19 as a general provision governing the granting of credits under both Acts.

As the sections of the proposed Division 19 are largely a re-enactment of the sections that are to be repealed in the Income Tax (International Agreements) Act, the new Division will not be explained in detail except to the extent that new matter has been introduced in consequence of the introduction of Division 18.

Section 160AH of Division 19 contains three definitions designed to facilitate the drafting of the division;

"Australian tax" means income tax (i.e. the Income Tax and Social Services Contribution as assessed under the Principal Act or its predecessors).

"Credit", for the purposes of Division 19, means a credit that is allowable under Division 18 or under the Income Tax (International Agreements) Act.

"Non-Australian tax" includes foreign tax to which the Income Tax (International Agreements) Act applies, and Territory tax.

Section 160AI requires the Commissioner to determine whether a credit claimed by a taxpayer is allowable and, if so, the amount of the credit. He is required to advise the taxpayer accordingly. The determination of a credit does not form part of an assessment but the Commissioner's notification may be included either in a notice of assessment or a separate written advice.

Section 160AJ is an evidentiary provision designed to facilitate proceedings before courts and Boards of Review. It provides that production of a notice of a determination, or a certified copy of a notice, shall be conclusive evidence of the making of the determination and, except in proceedings on appeal against the determination, that the determination is correct.

Section 160AK lays down the conditions under which a determination may be amended.

Where a person who has been allowed a credit has made a full disclosure of all the relevant facts, the credit is not to be subsequently reduced except to correct an error in calculation or a mistake of fact, or in consequence of adjustment of Australian or non-Australian tax. On the other hand, the Commissioner is not, in general, empowered to increase the amount allowed as a credit except to correct an error in calculation or a mistake of fact, or in consequence of a tax adjustment. An amendment may be made at any time, however, if it is necessary to give effect to a decision on an objection, review or appeal.

Subject to these limitations, the Commissioner may amend a determination at any time.

Section 160AL deals with reviews and appeals and, in effect, extends to persons claiming credits the same rights of objection or appeal against determinations as are given to taxpayers dissatisfied with their assessments.

Section 160AM provides that a credit shall not be allowed unless the person claiming the credit has furnished all necessary information regarding the credit within three years of the Australian tax becoming due and payable. In special circumstances, the Commissioner is empowered to extend this period for a further three years.

Section 160AN deals with the application of credits. A credit, when determined, is a debt due and payable by the Commissioner on behalf of the Commonwealth. The credit may be applied in payment of any outstanding tax liabilities of the person claiming the credit, who will then be deemed to have paid the amount in question at the time the credit is applied. Credits received by a private company will be included in its "distributable income" (on which liability for undistributed profits tax is based).

Section 160AO is designed to ensure that the total amount of the credits that Australia allows to relieve double taxation will not exceed the Australian tax payable by the taxpayer.

As has already been mentioned, section 45 of the Principal Act provides for the granting of credits for overseas tax which is paid on dividends and which is not the subject of an international agreement for the relief of double taxation. Division 18, of course, will relieve double taxation of Territory income, while the Income Tax (International Agreements) Act will continue to govern the allowance of credits under the terms of an agreement.

Section 160AO provides that the total of the credits allowable under these three credit provisions shall not exceed the amount of Australian tax payable by the taxpayer in respect of his taxable income of the year of income.

Under the present law, section 14 of the Income Tax (International Agreements) Act imposes a similar limitation on the total amount of credits that may be allowed under that Act and under section 45 of the Principal Act. This provision in section 14 will now be repealed.

Clause 7: Additional Amendments.

A number of the amendments proposed in consequence of the introduction of Territory tax are of a relatively simple nature and, for convenience of drafting, these amendments have been set out in a Schedule which appears at the end of the Bill.

Clause 7 formally provides that the Principal Act is amended as set out in the Schedule.

Clause 8: Application of Amendments.

Clause 8 will govern the commencing dates of the proposed amendments.

Sub-section (1.) provides that, insofar as amendments affect assessments, they will apply to assessments in respect of the 1959-1960 income year and all subsequent years. Their commencement will thus coincide with the introduction of income tax in the Territory of Papua and New Guinea.

Sub-section (2.) deals with the commencement of Division 19. The new machinery provisions relating to the allowance of credits under Division 18 and under the international agreements for the relief of double taxation will apply to credits of tax paid in respect of income of the 1959-1960 income year and all subsequent years. Although the comparable provisions of the Income Tax (International Agreements) Act are to be repealed, they will continue to have effect in relation to credits of tax paid in respect of income derived prior to the 1959-1960 income year.

Amendments not expressly dealt with in clause 8 will be governed by section 5(1A.) of the Acts Interpretation Act, which provides that every Act shall come into operation on the twenty-eighth day after it receives the Royal Assent, unless the contrary intention appears in the Act.

The Schedule of Additional Amendments.

A number of the amendments to the law proposed in consequence of the introduction of Territory tax are set out in a Schedule to the Bill. It is provided in clause 7 of the Bill that the Principal Act is amended as set out in the Schedule.

The nature of these amendments and the sections affected are as follows:

Section 5: Synopsis of Act

Section 5 of the Principal Act lists the parts and divisions of the Act. The amendment proposed in the Schedule is designed to insert in the list the two new divisions that it is proposed, by clause 6 of the Bill, to include in the Principal Act.

Section 6: Definitions

Section 6 of the Principal Act contains a number of definitions for the more convenient interpretation of the Act.

It is proposed to amend section 6 to repeal the definition of "Australia" and to include new definitions that will facilitate reference to the Territory of Papua and New Guinea and to Territory tax.

The present law provides that, unless the contrary intention appears, "Australia" includes the Territory of Papua. The reasons underlying the proposed repeal of this definition have already been discussed in the general introduction. With the imposition of a separate Territory income tax, it is no longer considered appropriate that Papua should be treated as part of Australia for Australian income tax purposes. It is proposed, however, that other sections of the Principal Act shall be amended so that allowances which have previously been available in relation to Papua because that Territory has been treated as part of Australia will continue, and be extended to the whole of the Territory of Papua and New Guinea.

With the repeal of the definition of "Australia", the Acts Interpretation Act will govern the meaning to be attributed to the term "Australia" in the Principal Act. Henceforth the word will include the whole of the Commonwealth, but not Australia's external territories.

It is also proposed to include in section 6 a new definition of "the Income Tax Ordinances of the Territory of Papua and New Guinea". This expression will include the Income Tax Ordinance 1959, or that Ordinance as amended from time to time, and any Ordinance declaring the rates of income tax imposed by the Territory. Use of this defined term will avoid the need for the more complete citation in various provisions designed to relieve double taxation as between Australia and the Territory.

For similar reasons, it is proposed to insert in section 6 a new sub-section (sub-section (3.)) declaring that the Territory of Papua and the Territory of New Guinea are together referred to in the Principal Act as the Territory of Papua and New Guinea.

Section 7: Taxpayers Resident in Territories

A drafting amendment is proposed in section 7(1.) which extends the operation of the Principal Act to the Australian external territories, but exempts from Australian tax the income derived from sources in those territories by a resident of a territory.

In order that a consistent terminology may be used throughout the Act, references to the Territory of Papua and the Territory of New Guinea in section 7(1.) are being replaced by a reference to the Territory of Papua and New Guinea.

The proposed change will not alter the effect of the section in any way.

Section 16: Secrecy Provisions

Section 16 of the Principal Act, which is designed to ensure that secrecy will be maintained with regard to information obtained under the provisions of the income tax laws, has already been explained in the note to clause 2 of the Bill.

It is proposed, by the Schedule, to amend section 16 to empower the Commissioner to disclose information concerning a taxpayer's affairs to the Chief Collector of Taxes for the Territory of Papua and New Guinea. Section 16 already authorizes the Commissioner to furnish information to various State taxing authorities.

A comparable provision has been enacted as part of the Income Tax Ordinance of the Territory, enabling the Chief Collector to communicate information to the Commissioner.

The information to be disclosed to the Chief Collector will, of course, be limited to what is necessary to enable him to carry out his official functions.

Section 23(c)(vi): Visiting Industrial Experts

Section 23(c)(vi) provides for exemption of income derived by a person visiting Australia if, in the opinion of the Treasurer, his visit and occupation are primarily and principally directed to assisting the Commonwealth or a State Government in the settlement or development of Australia (including Papua).

The section is to be amended so that the exemption will be allowable if, in the Treasurer's opinion, the visit will assist the Government in the settlement or development of Australia or the Territory of Papua and New Guinea.

Section 23(h): Societies promoting the development of Australian resources

Section 23(h) grants exemption to the income of a non-profit society or association established to promote the development of aviation or the agricultural, pastoral, horticultural, viticultural, manufacturing or industrial resources of Australia (including Papua).

It is proposed to amend the section so that such organisations will qualify for exemption from tax if they have been set up to promote the development of the resources of Australia or the Territory of Papua and New Guinea.

Section 23(n): Income derived from Pacific Islands

Section 23(n) exempts the income of a resident of a British territory or island in the Pacific Ocean, other than New Zealand, from the sale in Australia of produce of that Territory or Island. Under the present law, this section applies to exempt income derived from the sale of produce in Papua as well as in Australia, because Papua is regarded as part of Australia for income tax purposes.

As Australian tax will not in the future be levied on income derived from sources in Papua by non-residents of Australia, the specific exemption granted by section 23(n), so far as it relates to Papua, will be of little practical significance. However, the section could be of some assistance to a taxpayer who is, concurrently, both a resident of Australia and a resident of a Pacific territory. Under the system now proposed such a person will still be liable for Australian tax on any income he derives from Papua.

In order to maintain the existing exemption from Australian tax available to such persons, and to eliminate discriminations against residents of the Territory of New Guinea, it is proposed, by this amendment, to provide that section 23(n) will apply where the sale of produce is made either in Australia or in the Territory of Papua and New Guinea.

Section 23(o): Gold mining income

This is an amendment of a drafting nature made necessary by the proposed repeal of the definition of "Australia" as including the Territory of Papua. Under the present law, section 23(o) provides for an exemption of certain income derived from the working of a gold mining property in Australia or in the Territory of New Guinea. It is proposed to substitute for the words "in Australia or in the Territory of New Guinea" the words "in Australia or in the Territory of Papua and New Guinea". The meaning of the section will, however, remain unchanged.

Section 23(p): Income of a bona fide prospector

This is another drafting amendment. Section 23(p) exempts income derived by a bona fide prospector from the sale, transfer or assignment of his rights to mine for gold or specified metals and minerals in a particular area in Australia or in the Territory of New Guinea. It is proposed that the section should, in future, refer to a particular area in Australia or in the Territory of Papua and New Guinea but, here again, the effect of the section will be unaltered.

Section 23(q): Exemption of overseas income

Section 23(q) provides, broadly speaking, that where a resident derives income from sources out of Australia and the income is not exempt from tax from the country of origin, or is subject to a royalty or export duty there, there is no liability for Australian tax.

This is a general provision designed to avoid double taxation of such income. As has already been explained in the notes dealing with the proposed new Division 18 of the Principal Act, it is proposed to set up a system of credits to relieve double taxation in respect of income from sources in the Territory of Papua and New Guinea.

The exemption provided by section 23(q) would not, therefore, be appropriate in relation to Territory income and it is accordingly proposed to provide that section 23(q) will not apply where income is derived from sources in the Territory of Papua and New Guinea.

Section 23A

The purpose of this amendment is to retain, for persons carrying on mining operations in Papua, the partial exemption under section 23A of profits from the production of prescribed metals or minerals, and to extend that exemption to persons carrying on similar operations in the Territory of New Guinea.

At present section 23A requires that the mining operations should be carried on in Australia (which, by definition, includes Papua). It is proposed, by this amendment, that the section shall apply where the mining operations are conducted either in Australia or the Territory of Papua and New Guinea.

Section 23C: Exemptions of income from sale of gold

Section 23C provides exemption of income derived by a company from the sale of gold produced in Australia or in the Territory of New Guinea, provided that all the shareholders are engaged in mining operations and certain other conditions are satisfied.

It is proposed to replace the reference to the Territory of New Guinea by a reference to the Territory of Papua and New Guinea. This is a drafting amendment consequent on the repeal of the existing definition of "Australia" as including Papua. It will not alter the meaning of the section.

Section 23D: Income from mining and treating uranium

Section 23D at present exempts income derived by a resident of Australia (including Papua) from working a mining property in Australia or in the Territory of New Guinea for the purpose of obtaining uranium bearing ore or the treatment of the ore obtained for the purpose of recovering uranium concentrates.

The first amendment to section 23D proposed by the Schedule will extend the exemption to a resident of the Territory of New Guinea and will thus remove an existing discrimination as between the two parts of the Territory.

By a second amendment, references to the Territory of New Guinea in sub-paragraphs (i) and (ii) of sub-section (1.)(a) will be replaced by references to the Territory of Papua and New Guinea. These are drafting amendments consequent on the repeal of the existing definition of "Australia", and will not affect the operation of the section.

Section 26B: Insurance Recoveries

This amendment will extend, to taxpayers engaged in primary production in the Territory of New Guinea, the right to invoke section 26B.

Section 26B is designed to relieve the tax disadvantages that might be suffered where a taxpayer carrying on primary production receives abnormal income in the form of an insurance recovery on account of the loss of livestock or trees.

If the taxpayer were required to bring the whole of the abnormal income to account in one year, he might suffer serious disadvantages under a system of progressive taxation. The taxpayer is therefore permitted, at his option, to bring this income to account by instalments over a period of five years.

Under the present law, section 26B applies only to taxpayers engaged in primary production in Australia (which, by definition, at present includes the Territory of Papua). The proposed amendment will extend the operation of the section and make it available to taxpayers engaged in primary production in the Territory of Papua and New Guinea.

Section 36: Disposal of Trading Stock

It is also proposed to extend to primary producers in the Territory of New Guinea the right to invoke section 36(3.) of the Principal Act.

Section 36 is designed to ensure that the value of trading stock (including livestock) is appropriately brought to account for income tax purposes where a taxpayer disposes of his stock otherwise than in the ordinary course of carrying on his business. Generally speaking, the value of the stock must be brought to account as income and the person acquiring the stock is deemed to have purchased it at a price equal to that value.

An exception is made in the case of a taxpayer carrying on primary production who is forced to sell his livestock because of compulsory acquisition of his land, fire, drought or flood, etc. Section 36(3.) enables him, at his option, to bring the profit on the forced sale to account, for income tax purposes, by instalments over a period of five years.

At present, the provision is available only to a taxpayer who is carrying on primary production in Australia (which, by definition, includes Papua). The amendment proposed in the schedule will re-enact section 36(3.) of the Principal Act in a form that will allow a person carrying on primary production in the Territory of Papua and New Guinea who is subject to Australian tax on that income (for example an Australian resident with a farming property in New Guinea) to take advantage of the provision if, for one of the specified reasons, he is forced to sell his livestock.

Section 44: Dividends

The amendments proposed in section 44 are of a drafting nature and will not alter the meaning of the section.

Sub-sections (2.), (3.) and (4.) make provision for the exemption from tax, in the hands of shareholders, of dividends paid by a company out of mining income which was exempt from tax when received by the company. The three sub-sections contain several references to "Australia and the Territory of New Guinea" and this expression (through the operation of the extended definition of "Australia" in section 6 of the Principal Act) includes the Territory of Papua. It is proposed to replace the references to the Territory of New Guinea by references to the Territory of Papua and New Guinea, so that the sub-sections will remain unchanged in their effect when the extended definition of "Australia" in section 6 is omitted.

Section 45: Credit in respect of Tax Paid Abroad on Dividends

In certain circumstances, section 45 of the Principal Act grants relief against double taxation of dividends received from overseas countries. The purpose of the present amendment is to ensure that section 45 will not apply to tax paid in the Territory of Papua and New Guinea on dividends received by Australian residents. Relief against double taxation as between Australia and the Territory is to be provided by the new Division 18 which clause 6 proposes to insert in the Principal Act.

Under the present law, sub-section (9.) of section 45 provides that the section shall not apply in relation to any amount of foreign tax for which the taxpayer is already entitled to a credit under the Income Tax (International Agreements) Act. It is proposed to repeal this sub-section and replace it by a new sub-section (9.) which repeats the reference to credits under the Income Tax (International Agreements) Act, and provides further that section 45 does not apply to an amount of tax paid under the Income Tax Ordinances of the Territory of Papua and New Guinea.

Section 72: Rates and Taxes

Section 72 of the Principal Act provides for the allowance of deductions for amounts paid by the taxpayer, in Australia, as rates or land tax.

Under the present law "Australia" is defined to include the Territory of Papua and, with the repeal of this definition, it is proposed to enact that section 72 shall apply in respect of amounts paid in Australia or the Territory of Papua and New Guinea. This will maintain the present position in relation to amounts paid in Papua and eliminate discriminations by extending the provision to amounts paid in the Territory of New Guinea.

Section 73A: Expenditure on Scientific Research

The purpose of this amendment is to retain, for taxpayers carrying on business in Papua, their present entitlement to deductions under section 73A of the Principal Act for certain expenditure on scientific research, and to make these deductions available, on a similar basis, to taxpayers carrying on business anywhere in the Territory of Papua and New Guinea.

Section 73A authorises the allowance of a deduction where a person carrying on a business for the purpose of producing assessable income incurs certain classes of expenditure on scientific research, either directly or by making payments to an approved research institution.

The full amount of the expenditure may be an allowable deduction where the expenditure is incurred in Australia (which, by definition, includes Papua). Where, however, the expenditure is incurred outside Australia and the business to which it relates is carried on partly in and partly out of Australia, the deduction to be allowed is only such part of the total expenditure as the Commissioner considers reasonable in the circumstances.

With the repeal (as proposed by the Schedule) of the definition of "Australia" in section 6 of the Principal Act, it is proposed to insert in section 73A itself a definition of "Australia" as including the Territory of Papua and New Guinea. This will ensure that, in relation to section 73A, the position of persons carrying on business in Papua will not be disturbed. At the same time, entitlement to corresponding allowances will be authorised for persons carrying on business in the Territory of New Guinea.

Section 75: Expenditure on Land Used for Primary Production

This amendment is designed to remove discrimination between the Territory of Papua and the Territory of New Guinea in the operation of section 75 of the Principal Act, under which taxpayers engaged in primary production are allowed deductions on account of certain classes of capital expenditure incurred in improving their land. The section covers expenditure on pest eradication, drainage, erosion control, pasture improvement etc.

If the land is in Australia (including Papua), the deductions are allowable irrespective of whether the land is used to produce assessable income. If the land is in the Territory of New Guinea, however, the deduction is not allowed unless the land is used by the taxpayer for the purpose of gaining or producing assessable income.

With the introduction of Territory tax, it is no longer considered appropriate that the Australian law should make this distinction between the two parts of the Territory of Papua and New Guinea. It is accordingly proposed to remove from section 75 the special qualification imposed in relation to the Territory of New Guinea. Expenditure to which section 75 relates will then be an allowable deduction if the land on which it is incurred is situated either in Australia or in the Territory of Papua and New Guinea.

Section 77: Losses incurred in gaining exempt income

This amendment will extend the operation of section 77 of the Principal Act to taxpayers carrying on exempt businesses in the Territory of New Guinea.

Section 77 provides a deduction to a taxpayer in respect of any loss incurred in carrying on, in Australia, a business the income from which (if any) would have been exempt from tax. If the business subsequently becomes profitable, the profits are treated as assessable income until any losses allowed as deductions during the previous three years have been recouped.

Under the present law, "Australia" includes Papua but not the Territory of New Guinea. It is proposed to provide, in section 77, that a loss incurred in carrying on an exempt business in Australia or the Territory of Papua and New Guinea shall be an allowable deduction against the taxpayer's assessable income.

Section 77A: Moneys paid on shares for the purpose of petroleum exploration

Two minor amendments to section 77A of the Principal Act are proposed. One is a drafting adjustment. The other will remove a possible source of discrimination against companies resident in the Territory of New Guinea.

Section 77A enables shareholders in an oil exploration company to deduct the full amount of capital subscribed for purposes of oil search if the company using the capital declares that the moneys have been, or will be, expended in mining or prospecting for petroleum. Where these deductions are allowed the amount of the deductions potentially available to the company under section 123A (deductions that would be allowed in the event of oil being discovered) will be reduced to a corresponding extent.

In sub-section (1.) of section 77A there are a number of definitions for the more convenient interpretation of the section and, in particular, "Australia" is defined as including the Territory of Papua and the Territory of New Guinea. The first amendment to section 77A proposed by the Schedule deletes that form of reference to the two Territories and declares instead that "Australia" includes "the Territory of Papua and New Guinea". This is a drafting amendment which makes use of the standard terminology for which provision will be made in section 6 of the Principal Act.

The second amendment to section 77A is to insert a definition of "resident". For the purposes of that section, "resident" will include a person residing in the Territory of Papua and New Guinea as well as a resident of Australia.

The deductions under section 77A are only allowable to taxpayers who are residents. However, this requirement does not prevent shareholders who are residents of the Territory of Papua and New Guinea from obtaining the deductions - by the operation of section 7 of the Principal Act they are treated as residents for the purpose of assessing their liability to Australian tax.

There is, however, one situation in which residence in the Territory of New Guinea can affect the deductions allowable under section 77A. This occurs where capital is contributed to companies that do not directly engage in oil search, but use their capital to invest in other companies which carry on the active operations. Under section 77A(6.), shareholders in an interposed company of this nature may be allowed deductions for their capital contributions if certain conditions are satisfied - one of the requirements is that the interposed company should be a resident.

The inclusion of the definition of "resident" in section 77A(1.) will give to that section the same operation in relation to companies resident in the Territory of New Guinea as it now has in relation to companies resident in Australia or Papua.

Section 78: Gifts, calls on mining shares etc.

This amendment will make drafting adjustments to section 78 and remove discrimination against the Territory of New Guinea in section 78(1.)(b).

Section 78(1.)(a) of the Principal Act lists a number of organisations, gifts to which are allowable deductions if the organisations are situated in Australia. Section 78(1.)(b) provides for the allowance of a deduction equal to one-third of the amount of calls paid by a taxpayer on shares in a company principally engaged in mining or prospecting for oil, or certain metals or in afforestation in Australia.

Both of these provisions at present extend to Papua, because "Australia" is defined (in section 6) as including Papua. For the purposes of section 78(1.)(a), "Australia" also includes the Territory of New Guinea, a special definition to that effect having been included in section 78(2.). As a result, the deductions on account of gifts are allowable whether or not the organisations to which the gifts are made are situated in Australia or the Territory of Papua and New Guinea. On the other hand, the deduction for one- third of calls is allowed only in relation to companies operating in Australia or Papua.

It is proposed to remove this discrimination by altering section 78(2.) to provide that "Australia" includes the Territory of Papua and New Guinea, for purposes of section 78(1.)(b) as well as for purposes of section 78(1.)(a).

This adjustment will not affect the deductions that are at present allowable for gifts under section 78(1.)(a). It will, however, extend to shareholders in New Guinea companies deductions under section 78(1.)(b) which the present law grants only to companies operating in Australia or Papua.

Section 79: Contributions to fund for benefit of employees of persons other than taxpayer

Section 79 of the Principal Act provides that, where a taxpayer makes contributions to a fund for the purpose of providing benefits, pensions or retirement allowances for the employees of a person other than himself, or for the dependants of those employees, those payments will, subject to certain conditions being satisfied, be allowable deductions. The section applies in relation to employees who are residents of Australia and, under the present law, Australia includes Papua, but not the Territory of New Guinea.

It is proposed to bring employees resident in the Territory of New Guinea within the ambit of section 79. This result will be achieved by adding to section 79 a new sub-section (sub- section 11), which will define "residents", for the purposes of section 79, as including residents of the Territory of Papua and New Guinea.

In consequence of this change, a minor drafting amendment is also proposed in sub-section (2.)(b) of section 79. This sub- section gives practical effect to the principle that section 79 applies only in relation to contributions on account of employees who are residents; it requires the Commissioner to determine the amount applicable to employees who are "non-residents" and to make an appropriate reduction in the amount allowable as a deduction.

To avoid the need for a definition of "non-residents", this term will be replaced by the words "not residents". Payments will then be allowable as deductions insofar as they relate to employees who are residents of Australia or the Territory of Papua and New Guinea or to the dependants of those employees.

Section 79B: Deductions for members of the Defence Force serving overseas

A drafting alteration is proposed in section 79B of the Principal Act which provides an allowance for members of the Defence Force serving overseas, comparable to the Zone Allowances which section 79A grants to taxpayers living in isolated areas. The Treasurer is authorised to declare the localities to which the section applies and section 79B(5.) requires these areas to be situated outside "Australia and the Territory of New Guinea".

In consequence of the proposed repeal of the definition of "Australia" in section 6, it is proposed to replace these words by a reference to "Australia and the Territory of Papua and New Guinea". This will not alter the meaning of the section.

Section 80: Losses of prior years

An amendment of a drafting nature is proposed in section 80 of the Principal Act, which makes provision for losses incurred in the preceding seven years to be deducted from a taxpayer's assessable income. The amount of the loss that may be carried forward in this way is the amount by which the allowable deductions for the year of the loss exceed the sum of -

(a)

the assessable income of that year; and

(b)

the net exempt income of that year.

The term "net exempt income" is defined in section 80(3.). In the case of a resident (which, for the purpose of assessing tax on Australian income, includes a resident of the Territory of Papua and New Guinea) "net exempt income" broadly means that part of his net income that is exempt from Australian tax, less any taxes payable in respect of that income in a country outside Australia. In calculating this figure, it is appropriate for income tax paid in the Territory of Papua and New Guinea to be deducted in arriving at the net exempt income. It is not clear, however, that the Territory may properly be regarded as "a country outside Australia". To clarify the position, it is proposed to enact that taxes paid under the Income Tax Ordinances of the Territory of Papua and New Guinea are to be deducted in calculating the amount of the net exempt income of a resident of Australia.

Section 88B: Mining Leases

A minor drafting amendment is proposed in section 88B.

Division 4 of the Principal Act contains a number of provisions dealing with the taxing of lease premiums and the adjustments to be made in the assessments of the lessor and lessee when improvements are effected on leasehold land. The effect of section 88B is that, unless the parties elect to the contrary, the provisions of Division 4 do not apply to leases for mining purposes of land in "Australia or the Territory of New Guinea".

Under the present law, mining leases of land in Papua are within the ambit of section 88B because "Australia" is defined, in section 6 of the Principal Act, as including the Territory of Papua. With the proposed repeal of the definition of "Australia", it will be necessary to include an express reference to Papua in section 88B if the section is to retain its present effect.

It is accordingly proposed to replace the reference to the Territory of New Guinea by a reference to the Territory of Papua and New Guinea.

Section 103: Private Companies

The purpose of the proposed amendment to section 103 of the Principal Act is to ensure that taxes paid in the Territory of Papua and New Guinea will be taken into account in calculating the distributable income of a private company.

A private company incurs liability for undistributed profits tax if the dividends it pays during the prescribed period are less than a specified proportion of its distributable income. The distributable income (in effect, the amount that the company has available for distribution to its shareholders out of the year's profits) is defined in section 103. Broadly speaking, it is the amount remaining after deducting from the company's taxable income -

(a)

the Australian taxes payable in respect of that income;

(b)

any taxes paid in a country other than Australia in respect of the company's income; and

(c)

any net loss incurred in carrying on business outside Australia.

It is considered appropriate that Territory taxes should be deducted in calculating the distributable income and the proposed amendment will expressly provide for this to be done.

Sections 122, 122B and 123AA: Mining

Amendments of a drafting nature are proposed in each of these sections but the sections will remain unchanged in their effect.

Section 122 allows deductions on account of certain classes of capital expenditure where a taxpayer is engaged in mining operations in Australia or the Territory of New Guinea. Where income has been appropriated for such capital expenditure, a deduction may, in certain circumstances, be allowed under section 122B, notwithstanding that the actual expenditure is not to be incurred until the following income year. Section 123AA provides for deductions on account of exploration or prospecting expenditure incurred in Australia or the Territory of New Guinea.

In each of these sections, there is a reference to Australia (including Papua) and the Territory of New Guinea. In order to ensure that the present operation of the mining provisions is not disturbed, it is proposed to replace the references to the Territory of New Guinea in sections 122, 122B and 123AA by references to the Territory of Papua and New Guinea.

Section 123A: Expenditure on Mining or Prospecting for Petroleum

An amendment to section 123A, which allows deductions for capital expenditure incurred in mining or prospecting for petroleum, is proposed in clause 5 of the Bill, and the operation of the section has already been explained in the note to that clause.

Three further drafting amendments to section 123A are proposed in the Schedule.

Two of these amendments will replace references to "Australia or the Territory of New Guinea" by references to "Australia or the Territory of Papua and New Guinea". These changes are consequential on the proposed repeal of the definition of "Australia" in section 6 and will not alter the effect of section 123A.

The other proposed amendment also relates to the definition of "unrecouped capital expenditure" in sub-section (1.). The amount determined in accordance with this definition is the amount that is available to the taxpayer for deduction under section 123A.

Since the enactment of section 77A of the Principal Act in 1958, the deductions allowable to an oil exploration company are reduced by the amount of deductions under section 77A allowed to shareholders who have contributed the capital used for oil exploration. Paragraphs (c) and (d) of the definition of "unrecouped capital expenditure" make provision for this.

In particular, paragraph (d) of the definition has the effect, where the taxpayer is a company, of excluding from the amount available for deduction under section 123A any moneys expended by the taxpayer in mining or prospecting for petroleum in Australia or necessary treatment plant, being moneys that have been specified in declarations under section 77A(6.) of the Principal Act. This reduction is made because the company, by lodging the declaration under section 77A, has brought about the allowance of deductions to its shareholders, and one of the conditions for the allowance of those deductions is that the company's entitlement to deductions under section 123A should be correspondingly reduced.

Under the present law, the reference to "Australia" in paragraph (d) includes the Territory of Papua, but not the Territory of New Guinea. As Australia will not in future include either Papua or the Territory of New Guinea, it is proposed to amend paragraph (d) of the definition of unrecouped capital expenditure so that it will relate expressly to moneys expended on oil search activities in Australia or the Territory of Papua and New Guinea. This amendment will retain the present position as regards moneys expended in the Territory of Papua, and place companies operating in the Territory of New Guinea on the same basis as companies operating in Papua or in mainland Australia.

The amendment will thus give to section 123A uniform operation throughout the Territory of Papua and New Guinea on the same basis as the section applies in Australia.

Section 124A: Acquisition of Mining Property

A drafting amendment is also proposed in section 124A of the Principal Act. This section is complementary to the mining provisions that have already been mentioned (sections 122, 122B and 123AA). It places limits on the deduction that may be allowed where a taxpayer purchases a property that has already been used for mining operations in Australia or the Territory of New Guinea, and is designed to prevent excessive deductions being obtained as a result of sales between parties who are not at arm's length (e.g. between companies with the same shareholders).

In consequence of the proposed repeal of the definition of "Australia" in section 6 of the Principal Act, the reference to the "Territory of New Guinea" is to be changed to "Territory of Papua and New Guinea". The meaning of the section will, however, remain unaltered.

Section 125: Interest Paid to Non-Residents

Section 125 requires a company that pays interest to a non-resident in respect of certain borrowed moneys to pay tax at a flat rate on that interest. The rate at present is 7/6 in the Pd and the company is authorised to deduct this tax from the amount remitted to the non-resident.

The proposed amendment is designed to ensure that this section does not apply where interest is paid to residents of the Territory of Papua and New Guinea, who will include interest from Australian sources in their returns in the normal way.

Section 128A and 221YL: Dividend (Withholding) Tax

In the last sittings of Parliament, a system of withholding tax was introduced, under which Australian companies will be required as from 1st July, 1960 to make deductions from dividends paid to non-residents. Amendments to sections 128A and 221YL of the Principal Act are proposed in order to ensure that tax will not be deducted from dividends paid to residents of the Territory of Papua and New Guinea, and it will be convenient to describe these amendments jointly.

Features of the dividend withholding tax include -

(a)

the levying of a flat rate of tax on dividends paid by Australian companies to shareholders not resident in this country; and

(b)

the deduction from dividends of the tax payable, so enabling the tax to be collected almost concurrently with the payment of the dividends.

The amendment of section 128A will ensure that dividend withholding tax is not imposed on dividends paid by Australian companies to shareholders who are residents of the Territory of Papua and New Guinea. This will be done by adding in section 128A a provision to the effect that the term "non-resident", when used in the provisions imposing that tax, does not include a resident of the Territory of Papua and New Guinea. For convenience of drafting the whole of sub-section (1.) of section 128A is to be repealed and re-enacted with the reference to non-residents added.

The other amendment mentioned is in section 221YL(1.), which requires Australian companies to make deductions at a prescribed rate from dividends paid to a shareholder whose address on the share register is outside Australia or who has authorised the payment of the dividend at a place outside Australia. Sub- section (2.) imposes a corresponding obligation on any person in Australia who receives a dividend on behalf of a non-resident. If withholding tax has not already been deducted, the intermediary is required to make the deduction and remit the money to the Commissioner.

It is proposed to effect the amendment of this section by repealing the present sub-section (5.) of section 221YL, which at present consists of a definition of the term "money". A new sub-section (5.) to be inserted will repeat the definition of "money" and also provide definitions of "Australia" and "non- resident".

For the purposes of section 221YL, "Australia" will include the Territory of Papua and New Guinea and it will be unnecessary for companies to deduct withholding tax because dividends are paid in the Territory or to shareholders having an address in the Territory.

The definition of "non-resident" has a corresponding purpose. It will ensure that residents of the Territory are not, for the purposes of the withholding tax deductions, regarded as non-residents of Australia. Deductions will not, therefore, need to be made from dividends received by a person in Australia on behalf of a resident of the Territory. On the other hand, deductions will be necessary where a person in Australia or the Territory receives a dividend to which another person not resident in Australia or the Territory is entitled.

Section 142: Income of Non-Resident Insurer

The purpose of the proposed amendment to section 142 is to relieve non-resident insurers from liability to Australian tax in respect of certain classes of premiums that will in future be subject to the income tax imposed by the Territory of Papua and New Guinea.

The income tax laws contain special provisions designed to tax ex-Australian underwriters in respect of Australian business undertaken by them in competition with companies established in Australia. These provisions are in Division 15 of the Principal Act (sections 141 - 148).

Broadly speaking, the scheme of Division 15 is that premiums received by a non-resident insurer are subject to Australian tax (irrespective of where the contract is executed) if either -

(a)

the insured property is in Australia or the event insured against can only happen there; or

(b)

the insured person is an Australian resident, and the insurance was entered into through the instrumentality of an agent or representative in Australia of the overseas insurer.

The Income Tax Ordinance of the Territory of Papua and New Guinea imposes corresponding tests for determining the liability of overseas insurers to Territory tax (the references to Australia being replaced, of course, by references to the Territory).

As the law now stands, the areas in which tax is imposed by the Australian and Territory systems overlap.

In the first place, Papua is part of Australia for income tax purposes, as well as being part of the Territory of Papua and New Guinea, but the proposed amendment to section 6 of the Principal Act, which will repeal the extended definition of "Australia", will rectify the position in this regard.

However, the proposed amendment to section 6 will not avoid a second form of double taxation where an insurer is subject to Australian tax because a contract falls within one of the tests outlined above and is also subject to Territory tax because the same contract satisfies the alternative test in the Territory Ordinance. For example, an Australian resident may arrange, through the Australian representative of an overseas underwriter, for the insurance of property situate in the Territory. The insurer will be subjected to Australian tax because the contract was effected through an agent in Australia and to Territory tax because the insured property is in the Territory. In addition, he may be liable to tax in his own country.

The present amendment is designed to relieve double taxation in this type of situation.

Premiums will continue to attract Australian tax if the insured property is in Australia or the insured event is one that can only happen in Australia. However, the alternative basis of liability will be modified. If the property is situate in Papua-New Guinea, or the insured event can only happen there, Australian tax will not in future be imposed merely because an Australian agent or representative arranged the contract.

This amendment is based on the proposition that, as the latter type of contract relates to the Territory business of the overseas insurer, Australia should withdraw from this field of taxation now that tax is imposed by the Territory.

Section 157: Averaging Provisions

The purpose of this amendment is to remove discrimination between the Territory of Papua and the Territory of New Guinea in the operation of the averaging provisions in Division 16 of the Principal Act (which enable a primary producer to have his tax rates ascertained by reference to his average income over a period, normally five years).

Section 157 restricts the operation of the averaging provisions to taxpayers who carry on in Australia a business of primary production.

Under the present law, a resident of Papua who is subject to Australian tax is entitled to have the averaging provisions applied, unless he has elected to the contrary. The provisions do not extend, however, to a person who is carrying on primary production in the Territory of New Guinea.

In order to remove this discrimination, it is proposed to insert in section 157(2.) additional words which will extend the averaging provisions to any person carrying on primary production in the Territory of Papua and New Guinea if that person is a resident of Australia and not a resident of the Territory of Papua and New Guinea. It is not necessary to extend the averaging provisions for persons who are residents of the Territory of Papua and New Guinea, or who are not residents of Australia, because they will not be subject to Australian tax on any income derived from primary production in the Territory.

Section 221YDC: Reduction of Provisional Tax

The purpose of this amendment is to enable an appropriate reduction to be made in the provisional tax payable by a taxpayer who is likely to be granted a credit in respect of Territory tax.

Section 221YDC, which is complementary to the various provisions designed to relieve double taxation, provides that where a person is likely to be granted a credit under section 45 of the Principal Act or under the provisions of the Income Tax (International Agreements) Act, the Commissioner may reduce the provisional tax by such amount as he thinks reasonable in the circumstances.

In consequence of the proposed enactment of a new Division 18 in the Principal Act to provide relief against double taxation in respect of income from the Territory of Papua and New Guinea, it is proposed, by the present amendment, to empower the Commissioner to reduce provisional tax, where appropriate, on account of anticipated credits under Division 18.

Section 221YL: Deductions from dividends

Proposed amendments of section 221YL have already been considered in conjunction with amendments to the related section 128A.

Section 251B: Registration of Tax Agents

Sections 251A to 251Q of the Principal Act deal with the registration of tax agents. In particular, provision is made for a Tax Agents' Board to control tax agents in each State and, for convenience of administration, section 251B declares that the Territory of Papua shall be deemed to be part of the State of Queensland for these purposes.

In accordance with the policy of eliminating from the Australian law differential treatment as between the Territory of Papua and the Territory of New Guinea, it is proposed that the reference to the Territory of Papua in section 251B shall be replaced by a reference to the Territory of Papua and New Guinea.

The practical consequence in this amendment is that persons in the Territory of New Guinea who propose to charge fees for the preparation of Australian income tax returns will be directed to seek registration with the Tax Agents' Board that has been set up in the State of Queensland. The amendment will not impose any additional burdens on such persons, however. The existing law already requires them to register as tax agents if they propose to charge fees for the preparation of returns.

INCOME TAX AND SOCIAL SERVICES CONTRIBUTION BILL 1960.

By this Bill, it is proposed to effect a minor amendment to the Income Tax and Social Services Contribution Acts 1959, which is the statute imposing tax on income of the 1959-1960 year.

Section 7 of this Act authorises an age allowance in specified circumstances and the proposed amendment will remove a possible source of discrimination between aged persons living in the Territory of Papua and aged persons resident in the Territory of New Guinea.

The allowance is available to persons who have been residents of Australia throughout the year of income and who, at the end of the income year, have attained the age of 65 in the case of men or 60 years in the case of women. At present the allowance confers freedom from tax on net incomes not exceeding Pd429. In the case of married couples, combined net incomes of up to Pd858 are exempt from tax if both husband and wife satisfy the tests mentioned and one of them contributes to the maintenance of the other. In addition to these exemptions, tax is payable at a reduced rate where the income of an aged person does not exceed Pd485 (or in the case of a married couple, where the combined income does not exceed Pd1181).

Under the present law, the age allowance is available to residents of the Territory of Papua, because Papua is treated as part of Australia for income tax purposes.

The position of residents of the Territory of New Guinea is slightly different. Where a taxpayer residing in the Territory of New Guinea derives Australian income, he may claim the age allowance because (through the operation of section 7 of the Assessment Act) he is deemed to be a resident of Australia for the purposes of assessment and payment of Australian tax. However, section 7 does not declare that a taxpayer's spouse shall also be deemed to be a resident. Hence, a married taxpayer resident in the Territory of New Guinea could not obtain the allowance available to married couples unless his wife were living in Australia or Papua.

The Bill proposes to remove this anomaly by adding at the end of section 7 a new sub-section providing that the term "resident of Australia" in section 7 includes a resident of the Territory of Papua and New Guinea.

This amendment will ensure that taxpayers resident anywhere in the Territory of Papua and New Guinea will have the same entitlement to age allowance as residents of mainland Australia.

INCOME TAX (INTERNATIONAL AGREEMENTS) BILL 1960.

The amendments proposed in this Bill are consequential on the proposed changes in the Income Tax and Social Services Contribution Assessment Act.

The Income Tax (International Agreements) Act 1953-1959 contains the general machinery provisions governing the allowance of credits to relieve double taxation, under the terms of the agreements between Australia and the United Kingdom, the United States of America and Canada. For drafting reasons that have already been mentioned in the notes on the Income Tax and Social Services Contribution Assessment Bill, it is proposed to remove the machinery provisions from the Income Tax (International Agreements) Act, and insert a new set of machinery provisions in the Assessment Act, which will then govern the allowance of credits both in respect of Papua-New Guinea tax and in respect of tax that is the subject of an international agreement.

Clause 1: Short Title and Citation.

This clause formally provides for the short title and citation of the Bill, and of the Income Tax (International Agreements) Act as amended.

Clause 2: Repeal of sections 7-11.

Clause 2 provides for the repeal of sections 7 to 11 of the Income Tax (International Agreements) Act. These sections, together with section 15 (which is proposed to be repealed by clause 3) at present govern the procedure for determination of claims by the Commissioner, the taxpayer's rights of objection and appeal against determinations, the Commissioner's power to apply credits in payment of outstanding tax etc. These sections will be redundant when the proposed Division 19 of the Assessment Act (which has already been explained in this memorandum) becomes law.

Clause 3: Repeal of sections 14 and 15 and Limitation of Credit.

Clause 3 provides for the repeal of sections 14 and 15 of the Income Tax (International Agreements) Act and the insertion of a new section 14.

Under the present law, section 14 serves two purposes. Firstly, it provides that the credits allowable under international agreements shall not exceed either the Australian tax on the income to which the credits relate, or the total Australian tax payable in respect of the year of income. Secondly, section 14 places similar limits on the combined amount that may be allowed where credits are allowable both under an international agreement and under section 45 of the Assessment Act.

The proposed new section 14 will retain only the first of these functions and will provide simply that credits allowable under the provisions of an agreement shall not exceed the amount of Australian tax on the income to which they relate. The second function - that of limiting the total amount that may be allowed as credits when two or more credit provisions are involved - will now be performed by section 160AO, the effect of which has already been mentioned in the notes on the Assessment Bill.

Clause 4: Ascertainment of Australian Tax on Dividend.

Clause 4 proposes a minor drafting improvement in section 16. This section lays down a formula for ascertaining the amount of Australian tax that is attributable to a dividend. In its present form, the section is expressed to apply where, for the purposes of the application of an agreement, it is necessary to ascertain the Australian tax. It is proposed to insert additional words indicating that the section also applies where, for any other purpose of the Act, it is necessary to ascertain the Australian tax on a dividend. This will ensure that the provisions of section 16 may be used where it is necessary to ascertain the Australian tax for the purposes of section 14 (the operation of which has already been explained).

Clause 5: Application of Amendments

Clause 5 will govern the commencement of the amendments. It provides that the amendments do not apply to credits for tax paid on income derived before the commencement of the 1959- 1960 income year. This will ensure that the repeal of the provisions relating to credits will be co-ordinated with the commencement of the proposed new Division 19 in the Assessment Act.