House of Representatives

Explanatory Memorandum

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

Notes on Clauses

INCOME TAX BILL 1965.

The main purpose of this Bill is to declare the rates of income tax payable for the current financial year 1965- 66.

A number of factors has necessitated changes in the Bill from provisions that declared the rates of tax for the 1964-65 financial year. The more important of these are the proposed additional levy of 2 1/2 per cent of the tax otherwise payable by individuals, the occurrence of the changeover to decimal currency during the 1965-66 financial year, the proposed change in the name of the levy on incomes, and the necessity to declare special rates of tax payable under provisions introduced into the Assessment Act last year following the Government's consideration of the report of the Commonwealth Committee on Taxation 1959-1961.

The following notes explain only those clauses which propose material changes from the corresponding provisions of the 1964 Act imposing the rates of tax.

Clause 1: Short Title.

This formal clause will, in accordance with the proposal to drop the words "and social services contribution" from the name of the levy, enable the proposed Act to be cited as the Income Tax Act 1965.

Clause 3: Interpretation.

This clause contains definitions of expressions used in the Bill. Material alterations in the clause from last year are noted below.

"private company"

: The definition of private company in the Assessment Act was changed by amendments to that Act last year. The existing definition was repealed and a new one inserted. The new definition in the Assessment Act applies for the first time in assessments of tax on income derived by companies in the 1965-66 income year (i.e., in assessments of tax for the 1966-67 financial year). The repealed definition continues to apply in relation to earlier income years.

The rates of tax to be declared by the Bill are for the 1965-66 financial year and apply to income derived by companies during the 1964-65 income year. The previous definition in the Assessment Act is, therefore, relevant for the purposes of tax on private companies for the 1965-66 financial year.

The definition in the Act proposed by this Bill accordingly provides in paragraph (a) that, in relation to the 1964- 65 income year, a company is a "private company" if it is such a company under the previous definition in the Assessment Act.

Paragraph (b) of the definition gives "private company" a different meaning in relation to a year of income subsequent to the 1964-65 income year. In some cases it may be necessary, before the enactment of the 1966 Act declaring the rates of tax (e.g., where a company is being wound-up), to make an assessment for a year later than the 1964-65 income year. Clause 14(2.) of the Bill provides for such cases. In any such case "private company" will have the meaning it has under the new definition in the Assessment Act.

"superannuation fund"

: In earlier rating Acts, "superannuation fund" has been defined by reference to provisions of the Assessment Act. For drafting reasons associated with amendments in the Assessment Act, this is no longer appropriate. The definition now proposed will not change the effect of the law and "superannuation fund" will, as in the past, mean a provident, benefit, superannuation or retirement fund.

Clause 5: Imposition of Income Tax.

This clause will impose tax for the current financial year at rates declared in the schedules to the Bill. The tax will be imposed as "income tax" instead of as "income tax and social services contribution". The change in name does not effect any change in the nature of the tax.

An important innovation is that the rates of tax are being expressed as a percentage of the taxable income - that is, the income remaining after allowance of all deductions. In previous years rates have been expressed in terms of shillings and pence or pence in the Pd1.

In the 1964 Act declaring the rates of tax it was provided that tax is not imposed upon a taxable income that does not exceed Pd208 derived by a person other than a company, a company in the capacity of a trustee or a non-profit company. The Bill modifies this principle in relation to tax proposed to be imposed in pursuance of certain provisions inserted in the Assessment Act by amendments enacted in 1964.

One modification is expressed by sub-clause (3.) of clause 5. Where a person's taxable income is Pd208 or less, further tax in accordance with section 94 of the Assessment Act may be payable. Section 94 relates to a share of partnership income of which a person does not have, or is deemed not to have, the real and effective control and disposal. Where a person's taxable income is Pd208 or less and consists of, or includes, income to which section 94 applies, he will not be subject to tax (other than further tax) on any of the taxable income. So much of the taxable income as is income to which section 94 applies will be liable to further tax. The rate of further tax under section 94 is determined by the Fourth Schedule and is explained in connection with clause 6.

Sub-clause (4.) makes two further modifications. One of these is that the freedom from tax on a taxable income of Pd208 or less is not to apply in relation to income of a trust estate taxed in accordance with section 99A of the Assessment Act. The rate of tax payable on such income is set out in the Sixth Schedule.

The final modification excludes from the provision relating to taxable incomes of Pd208 or less, a taxable income of a superannuation fund that does not qualify for exemption. The rates of tax applicable to the taxable income of such funds are set out in the Seventh Schedule and are explained in the notes on clause 6.

Clause 6: Rates of Tax Payable by Persons Other Than Companies.

This clause declares the rates of tax payable by persons other than companies for the 1965-66 financial year. The proposed additional levy of 2 1/2 per cent payable by individuals is being imposed by clause 9 of the Bill which is explained later in this memorandum.

As already mentioned, the rates of tax are being expressed as percentages of the taxable income. This will mean that on the advent of decimal currency the percentages expressed will represent a rate of cents per dollar of income.

The rates of tax are set out in the schedules to the Bill. It will be noted that in some of the schedules amounts of income are referred to in terms of the existing currency. Currency legislation will ensure the conversion, at the appropriate time, of these amounts to equivalent amounts in terms of dollars. Under the new system of currency, therefore, the rates expressed will become rates per dollar.

Except where indicated in succeeding notes, the rates of tax declared by clause 6 are the same as those that applied for the 1964-65 financial year.

The general rates of tax payable by individuals are declared by sub-clause (1.) of clause 6 and are set out in the First Schedule to the Bill. The existing general rates of tax were not suitable for exact conversion to decimal currency and have been adjusted slightly for this reason. A table at page 9 provides a comparison with the rates for the 1964-65 financial year. On taxable incomes up to Pd24,000 there are no increases in the amount payable.

Sub-clauses (4.) and (6.) of clause 6 declare the rate of further tax payable, under section 94 of the Assessment Act, by individuals and trustees.

Under sub-section (9.) of section 94 of the Assessment Act, enacted in 1964, a rate of further tax is to be levied on so much of the taxable income of an individual as includes income to which section 94 applies, that is, a share of partnership income over which the person does not have, or is deemed not to have, the real and effective control and disposal. Under sub-sections (11.) and (12.) of the section, a corresponding liability is placed on so much of the taxable income on which a trustee is taxable under section 98 or section 99 of the Assessment Act as includes income to which section 94 applies. Broadly stated, section 98 relates

to income of a trust estate to which a beneficiary under a legal disability is presently entitled, and section 99 applies to income of a trust estate to which no beneficiary is presently entitled.

The rate of further tax under both sub-clause (4.) (individuals) and sub-clause (6.) (trustees) is set out in the Fourth Schedule to the Bill. The broad object of the proposed provisions is to ensure that the overall rate of tax on income to which section 94 applies is 50 per cent (10/- in the Pd), or the taxpayer's personal rate (including the levy of 2 1/2 per cent), whichever is the higher.

To give effect to this it is proposed that "ordinary" rates of tax (including the levy of 2 1/2 per cent) will be imposed on the whole of the taxable income. Where the average rate of "ordinary" tax is less than 50 per cent, a further tax is to be imposed, where necessary, on the income to which section 94 applies at a rate sufficient to bring the aggregate rate of tax on that income up to 50 per cent.

Sub-clause (7.) of clause 6 declares the special rate of tax payable under section 99A of the Assessment Act. This rate is set out in the Sixth Schedule to the Bill.

Section 99A was inserted in the Assessment Act by amending legislation enacted in 1964. Under the section a trustee of a trust estate (other than a deceased estate) is liable to pay tax on income of the trust estate to which no beneficiary is presently entitled. The section applies if the Commissioner of Taxation does not exercise a discretion to tax the income under section 99 of the Assessment Act. Income to be taxed under section 99 is taxed as though it were the income of an individual, i.e., at graduated rates of tax.

The rate of tax proposed for income taxed under section 99A is 50 per cent (10/- in the Pd1).

Sub-clause (8.) declares the rates of tax payable by trustees of superannuation funds. These rates are set out in the Seventh Schedule to the Bill.

As in past years a trustee of a superannuation fund that does not invest an appropriate proportion of its moneys in public securities, that is, that does not comply with what is widely known as the "30/20" rule, is to pay, under section 121D of the Assessment Act, income tax on what is known as "investment income" of the fund. Depending on the circumstances, a fund may be liable to pay tax on all, or some, of its investment income. The rates of tax that applied in the 1964-65 financial year for this purpose are not changed by the Bill, but are being expressed in percentage form.

The Bill does, however, declare for the first time rates of tax payable on income other than "investment income" derived by certain superannuation funds. A liability for tax on this income is created, in differing circumstances, by sections 121CA, 121CB and 121DA of the Assessment Act which were inserted by amending legislation enacted in 1964.

Under section 121CA, tax is to be levied on certain income of a superannuation fund for employees that is derived from a private company and certain transactions not at arm's length and which, by reason of sub-sections (14.) to (16.) of section 23F of the Assessment Act does not qualify for the exemption granted by that section. Section 121CB provides for the imposition of tax on income of a superannuation fund to which section 79 of the Assessment Act applies (i.e., a fund not necessarily for employees which is entitled to the special deduction of 5 per cent of the net cost of its assets).

Section 121DA applies in respect of superannuation funds that do not qualify for any exemption in respect of income, or for the special deduction under section 79 of the Assessment Act.

The rate of tax specified in the Seventh Schedule on taxable incomes of superannuation funds the trustees of which are liable to pay tax under section 121CA, 121CB or 121DA of the Assessment Act is 50 per cent (10/- in the Pd).

Clause 9: Additional Tax Payable by Persons Other Than Companies.

The purpose of this clause is to impose the additional levy of 2 1/2 per cent of tax otherwise payable by individuals and trustees who are taxed at individual rates of tax. The levy is not imposed in relation to further tax payable under section 94 of the Assessment Act, or in relation to income that is taxed in accordance with section 99A of that Act. It is not imposed either in relation to income of a superannuation fund taxed under section 121CA, 121CB, 121D or 121DA of the Assessment Act.

Sub-clause (1.) provides for the additional levy in the case of persons other than aged persons to whom the "age allowance" provisions of clause 8 apply.

A person (other than an aged person in the category mentioned) who is liable to pay tax ascertained by reference to sub-clause (1.), (2.), (3.) or (5.) of clause 6, or to clause 7, is to pay the additional levy. The levy is to be at the rate of 2 1/2 per cent of the tax payable under the provisions referred to, before allowance of any rebate or credit. The provisions referred to are, briefly, as follows :-

sub-clause (1.) of clause 6 : This declares tax payable at the graduated rates set out in the First Schedule in the case of most individual taxpayers.

sub-clause (2.) of clause 6 : This declares the rates of tax payable by primary producers to whom the "averaging provisions" of the Assessment Act apply.

sub-clause (3.) of clause 6 : This declares the rate of tax payable by reference to a notional income determined under section 59AB, 86 or 158D of the Assessment Act.

sub-clause (5.) of clause 6 : This declares the rates of tax payable by a trustee on a taxable income to which section 98 or 99 of the Assessment Act applies. The rates are the rates that would be payable under sub- clauses (1.), (2.) or (3.) if the income were derived by an individual.

clause 7 : This clause operates to limit the amount of tax payable under sub-clauses (1.), (2.), (3.) or (5.) of clause 6 if the taxable income exceeds Pd208 but does not exceed Pd214. A taxable income of Pd208 or less does not attract tax under the provisions mentioned and clause 7 is designed to "shade in" the amount of tax payable where the taxable income exceeds Pd208.

Sub-clause (2.) of clause 9 imposes the 2 1/2 per cent levy in the case of aged persons to whom clause 8 applies.

Clause 8 will operate to place a limit on the total tax payable by persons qualified by age and residence and whose incomes lie within certain specified limits. Except where such a person is liable to pay further tax pursuant to section 94 of the Assessment Act, the levy of 2 1/2 per cent will apply to the amount of tax otherwise payable, whether ascertained by reference to clause 8 or under the Schedules to the Bill. Where, however, the taxable income of the aged person includes income to which section 94 applies, the levy of 2 1/2 per cent will apply to the amount determined under the limiting provisions of clause 8, or to the tax ascertained by reference to sub-clauses (1), (2) or (3) of clause 6 or clause 7, whichever is the less. This will ensure that the 2 1/2 per cent levy is not applied in relation to further tax under section 94 for which an aged person to whom clause 8 applies is liable.

Clause 10: Minimum Tax.

By this clause, which applies to persons other than companies, the minimum tax after deduction of all rebates, is to be five shillings (fifty cents). In other words, if the tax after rebates is less than five shillings, the tax is increased to five shillings. For the 1964-65 financial year the corresponding provision specified a minimum tax of ten shillings. The change to five shillings is appropriate in view of the proposed change to decimal currency during the financial year 1965-66.

Clause 11: Rates of Tax Payable by a Company.

This clause declares the rates of tax payable for the 1965-66 financial year by companies, other than a company in the capacity of trustee. The rates are set out in the Eighth Schedule to the Bill.

The rates of tax proposed are the same as those that applied for the 1964-65 financial year. As in the case of individuals, however, the rates are, in view of the change to decimal currency during the financial year, being expressed as percentages of amounts subject to tax instead of, as in the past, as rates per Pd1. As explained earlier in the notes on clause 6 of the Bill, decimal currency legislation will convert, at the appropriate time, references in the Eighth Schedule to amounts in terms of the existing currency to equivalent amounts in the new currency.

Clause 12: Elimination of Small Amounts.

In the 1964 and previous Acts declaring rates of tax it was provided, in broad terms, that the tax payable by a person, before allowance of any rebate or credit, be taken to the nearest shilling. Pence in excess of six were treated as one shilling and six pence or less were disregarded.

The Bill will continue this position in relation to assessments made before 14th February 1966, the date of changeover to decimal currency. The small amounts will be eliminated in relation to both tax under the general rates (with the addition of the 2 1/2 per cent levy) and further tax payable on income to which section 94 of the Assessment Act applies.

For assessments made after the changeover to decimal currency and on or before 30th June 1966, provision is made by sub-clause (3.) of clause 12 for tax payable under the general rates (plus the 2 1/2 per cent levy) and further tax payable on income to which section 94 of the Assessment Act applies to be taken to the nearest ten cents, i.e., the decimal equivalent of one shilling. In effect, cents in excess of five and below ten will be taken as ten cents, and five cents or less will be disregarded.

In practice, notices of assessment issued in the period 14th February 1966 to 30th June 1966 will show amounts payable in terms of both the existing and the new currency. This procedure will be appropriately authorised, and the provisions of sub-clause (3.) of clause 12 will, in effect, permit the present system of taking tax payable to the nearest shilling to be continued during this period.

For assessments made after 30th June 1966 assessment notices will be expressed in terms of the new currency. The provisions of clause 12 will not apply in relation to such assessments. The amount of tax determined by application of the rates proposed by the Bill will, where necessary, be taken to the next lowest cent. For example, if application of the rates (including the 2 1/2 per cent special levy) to a taxable income results in determination of an amount of 65 dollars and 37.6 cents, the amount payable will generally be $65.37. It is to be noted, however, that as explained at page 87 of this memorandum, it is proposed that, in some cases, the tax to be levied will be one cent less than the tax that would otherwise be payable.

Clause 13: Tax Where Amount to be Collected or Refunded would not exceed Two Shillings.

As in previous years, the Bill by this clause provides that where the difference between the tax instalment deductions made from a person's salary or wages and the tax that would be payable under the preceding provisions of the Bill is not more than two shillings, the amount of tax payable is the amount of the deductions.

In previous years the corresponding provision did not apply where the tax otherwise payable was ten shillings. In line with the reduction in the minimum tax payable - see the notes on clause 10 of the Bill - clause 13 is not to apply where the tax otherwise payable is five shillings.

Clause 15: Provisional Tax.

As part of the change in the name of the tax on incomes, the provisional levy imposed by this clause in respect of income of the 1965-66 income year is imposed as "provisional tax". See also the notes on page 88 of this memorandum concerning section 221YB of the Assessment Act.

INCOME TAX ASSESSMENT BILL 1965

Introductory Note :

This Bill is the second of the measures explained in this memorandum. Its principal features have already been mentioned and the following notes relate to each clause of the Bill.

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.

As already mentioned, the tax on incomes is in future to be known as "income tax" in lieu of "income tax and social services contribution". Consistently with this, the Principal Act will in future be cited as the Income Tax Assessment Act and not as the Income Tax and Social Services Contribution Assessment Act.

Clause 2: Commencement.

Section 5(1A.) of the Acts Interpretation Act 1901-1964 provides that every Act shall come into operation on the twenty-eighth day after the day on which that Act receives the Royal Assent, unless the contrary intention appears in the Act.

By this clause it is proposed that the Amending Act shall come into operation on the day on which it receives the Royal Assent. This provision will enable notices of assessment including provisional tax and notices of assessment for companies to be issued as soon as Assent is given to the Bill.

Clause 3: Synopsis of Act.

Section 5 of the Principal Act lists the Parts and Divisions into which the Principal Act is divided. The purpose of clause 3 is to delete from the list of Parts and Divisions references which, with the change in the name of the levy on incomes, are no longer appropriate.

Clause 4: Definitions.

By clause 4 it is proposed to amend two definitions contained in section 6 of the Principal Act and to insert an additional definition in the section. The amended definitions are consequential upon the change in the name of the levy on incomes from "income tax and social services contribution" to "income tax". The new definition relates to superannuation funds and reproduces a definition that is at present contained in other provisions of the Principal Act.

Notes on the definitions are -

"dividend (withholding) tax":

The present definition of this term is being omitted and a new definition inserted in its place. At present the term is defined to mean "income tax and social services contribution" payable in accordance with a section of the Principal Act - section 128B - which creates a liability for tax on dividends derived by non-residents from companies that are resident in Australia. This meaning of the term is continued by the new definition in relation to dividends that are derived up to the date on which the Amending Act, and thus the proposed new name of the levy under section 128B, comes into operation.

Amendments to section 128B proposed by clause 33 of the Bill will mean that the levy under that section is, in relation to dividends derived from the date on which the Amending Act comes into operation, "income tax". The new definition of "dividend (withholding) tax" accordingly includes "income tax" payable in accordance with section 128B as proposed to be amended.

"income tax" or "tax":

The present definition of this term is being re-stated. At present it is defined to mean "income tax and social services contribution" imposed as such as assessed under the Principal Act. It also means "income tax" imposed as such as assessed under the Principal Act for the financial year 1949-50 and prior years.

The new definition retains these meanings, although expressing them in a different form. The new definition also, however, includes "income tax" imposed as such as assessed under the Principal Act for the financial year 1965-66 and subsequent years. A liability for "income tax" for those years will be created by the new section 17 proposed by clause 6 of the Bill to be inserted in the Principal Act.

"superannuation benefits":

This term is at present defined in sections 23F, 79 and 82AAA of the Principal Act. The transfer of the definition into section 6 of the Principal Act is a drafting measure that will remove the need for its repetition in each of the various provisions in which the term is used.

The term is defined for the purposes of the sections mentioned as meaning individual personal benefits, pensions or retiring allowances. The sections to which the definition is related are concerned with the taxing of income of funds providing such benefits and the allowance of deductions for contributions to such funds.

These amendments will come into force on the day the Bill receives the Royal Assent.

Clause 5: Provisions Relating to the Cessation of Superannuation Benefits.

The new section to be inserted in the Principal Act by this clause has two purposes. One is to state the circumstances in which a person or his dependants is deemed to have ceased to have a right to receive benefits from a superannuation fund. The other is to provide a means of quantifying the benefits the right to receive which has ceased.

The new section proposed to be inserted by the clause - section 6A - will have effect in relation to provisions contained in Subdivision AA - Division 3 - Part III. of the Principal Act, as they are proposed to be amended by this Bill. These provisions require that, in certain circumstances, the deductions available to employers for contributions to a superannuation fund for employees be adjusted in relation to amounts of benefits that are forgone by employees who cease to be members of the fund (see explanations at pages 68 to 80 of this memorandum). The new section will also have effect in relation to sections 23F and 79 as they are proposed to be amended by this Bill (see explanations at pages 22 and 46 of this memorandum). Under these sections, certain courses are to be followed by the trustees of a superannuation fund, in respect of amounts of benefits forgone by members, in order to obtain the exemption of income conferred by section 23F or the special deduction available under section 79, as the case may be.

Sub-section (1.) of the proposed section 6A comprises two paragraphs.

Paragraph (a) in effect provides that a right of a person (or of his dependants) to receive superannuation benefits from a fund shall be deemed to have ceased where the terms and conditions applicable to the fund have operated so that a right (whether contingent or otherwise) to receive payment of any benefits for which provision has been made for him (or his dependants) in the fund ceases to exist. This will usually occur where a person, for one reason or another, ceases to be a member of a fund and the constituent deed of the fund provides that, in this event, the whole or part of the benefits which have, to the time of his ceasing to be a member, been accumulated for him, is to be forgone.

Paragraph (b) provides a basis for quantifying the amount of benefits forgone in the case where a specific part of a superannuation fund has been appropriated for the purpose of making provision for the benefit of a member (or his dependants) whose right to receive benefits has ceased. In broad terms, the amount of benefits forgone is deemed by paragraph (b) to be the amount included in the fund for the purpose of providing superannuation benefits for the person (or his dependants), as reduced by any amount of the benefits which he (or his dependants) actually receives or retains the right to receive.

Sub-section (2.) is designed to quantify the amount of benefits forgone in the case where a specific part of the fund was not appropriated for the purpose of making provision for superannuation benefits for a person (or his dependants) whose right to receive benefits has ceased. This situation may arise where a fund provides superannuation benefits in the form of pensions and in other cases where amounts in the fund are not segregated to satisfy rights of particular members to benefits.

Paragraph (a) of sub-section (2.) authorises the Commissioner of Taxation in such a case to determine an amount as being included in the fund for the purpose of making provision for superannuation benefits for the person (or his dependants) whose right to receive benefits has ceased.

Broadly stated, paragraph (b) provides that the amount determined under paragraph (a) is to be reduced by the amount of benefits actually paid out of the fund to the person or his dependants on cessation of the right.

Paragraph (c) will have effect for the purposes of section 82AAJ, proposed to be inserted in the Principal Act by clause 23 of the Bill (see explanations at page 75 of this memorandum). In broad terms, section 82AAJ will have the effect, where it applies, of reducing the adjustment to be made to deductions for an employer's contributions to a superannuation fund in respect of benefits forgone by members whose rights in the fund have ceased. This reduction may be made where an amount of benefits forgone is applied to provide benefits for other members.

Paragraph (c) will enable the Commissioner to determine, for the purposes of section 82AAJ, the extent to which an amount determined by the application of paragraph (a), as reduced by the application of paragraph (b), is applied for the purpose of making provision for benefits for other members.

The amendment proposed by clause 5 will apply in assessments based on income derived during the 1965-66 income year and subsequent years.

Clause 6: Levy of Income Tax.

This clause proposes the repeal of section 17 of the Principal Act and its replacement by a new section bearing the same number. Section 17 is the charging provision which requires tax to be levied and paid for each financial year upon the taxable income derived during the year of income by any person.

The repeal of the section and the enactment of a new charging section are necessitated by the change in the name of the levy on incomes from "income tax and social services contribution" to "income tax".

The new section 17, which declares that "income tax" is to be levied and paid upon the taxable income derived during the year of income by any person, will apply to assessments for the current financial year 1965-66 and for all subsequent years. This will mean that the first assessments of the levy by the name of "income tax" will be -

(a)

in the case of companies - upon income of the year ended 30th June 1965; and

(b)

in the case of individuals - upon income of the year ending 30th June 1966.

"Income tax and social services contribution" for the financial year 1964-65 and prior years will continue to be levied by the repealed section. Clause 41 of the Bill provides that the repealed section will continue in force for this purpose.

Clause 7: Exemptions.

It is proposed by this clause to amend section 23 of the Principal Act to exempt from income tax the pay and allowances of certain members of the Defence Force.

Paragraph (a) of the clause is a drafting amendment relating to the pay and allowances of members of the Citizen Forces for part-time duty. By an amendment made to the Principal Act in 1964 this income was exempted from income tax for the 1964-65 and subsequent years of income. In order to confine the exemption to pay and allowances for part-time duty, the exempting provision - paragraph (s) of section 23 - excludes from the exemption pay and allowances in respect of "full-time duty". To achieve consistency with the wording adopted in the Acts relating to the Defence Force and with the expression of the amendment proposed by paragraph (b) of this clause, the words "full-time duty" are being replaced by the words "continuous full time service". The practical operation of the law will not be changed by the amendment proposed.

By clause 42 of the Bill, the altered wording of paragraph (s) of section 23 will apply as from the original commencement of the paragraph.

Paragraph (b) of clause 7 inserts in section 23 of the Principal Act a new paragraph - paragraph (sa) - that will provide an exemption for members of the Defence Force Emergency Reserve corresponding to that now enjoyed by members of the Citizen Forces.

The pay and allowances of members of the Emergency Force of each service for part-time duty are to be exempt. The exemption will include pay and allowances for training at an annual camp. Also included within its scope will be the bounty that members of the Emergency Reserve receive on completion of a year's satisfactory service in the Reserve. The exemption proposed will not be available in relation to pay and allowances for full-time duty, i.e., continuous full time service.

In the event of a call out for continuous service of an Emergency Force or a part of that Force, a member who, as the result of the call out, commences to render continuous full time service is entitled to receive a gratuity. This gratuity will also be exempted from tax by the proposed paragraph (sa).

The new paragraph (sa) of section 23 will apply in assessments for the 1965-66 income year and subsequent years.

Clause 8: Exemption of Pay and Allowances of Members of the Defence Force serving in Special Areas

The purpose of this clause is to provide an exemption from income tax in respect of pay and allowances earned by members of the Defence Force while serving in Vietnam and Borneo. For this purpose a new section - section 23AC - is to be inserted in the Principal Act. The exemption proposed will operate from 1st July 1965 and closely corresponds with the exemption that was accorded in respect of operations in Korea and Malaya some years ago.

The proposed legislation specifies when the period of exemption commences and concludes. Broadly stated, it commences when a member leaves Australia for service in the special areas specified for the purposes of the exemption. It ordinarily concludes when he returns to Australia but provision is made for it to continue during any period of hospital treatment for illness contracted or injuries sustained during a member's service in a special area.

More detailed explanations of the new section 23AC are given below.

Sub-section (1.) of the proposed section 23AC is the operative provision. It provides that the pay and allowances earned by a member of the Defence Force, i.e., the Naval Forces, the Military Forces, and the Air Force, during a period of special service are exempt from income tax.

Sub-section (2.) is designed to specify the service of a member of the Defence Force that is to be counted as "special service" for the purposes of section 23AC.

Paragraph (a) of sub-section (2.) refers to a body, contingent or detachment of the Defence Force allotted for duty in a "special area". (Sub-section (4.) of the proposed section 23AC, which is explained below, provides for the prescription, by regulation, of special areas for this purpose.) The special service of a member of a unit allotted for duty in a special area is his service as a member of the unit while it is so allotted.

Paragraph (b) refers to an individual member of the Defence Force who is not a member of a unit to which paragraph (a) refers. The special service of such a person is his service while allotted for duty in a special area.

Neither paragraph (a) nor paragraph (b) of sub-section (2.) extends to service of a member of the Defence Force as or under an attache at an Australian Embassy or Legation. Pay and allowances earned in respect of such service are not to be exempt under the proposed section.

Sub-section (3.) specifies the period during which a member of the Defence Force is to be deemed to be on special service.

Paragraph (a) of sub-section (3.) states when a member's special service commences. Four different sets of circumstances are provided for in the sub-paragraphs of paragraph (a). These are -

sub-paragraph (i) : This sub-paragraph will apply where a member was allotted for duty in a special area on or after 1st July 1965, and was in Australia at the time of his allotment. His special service will commence at the time of his departure from the last port of call (whether seaport or airport) in Australia to take up duty in a special area.

sub-paragraph (ii) : This sub-paragraph will apply where a member was allotted for duty in a special area on or after 1st July 1965, but was not in Australia when so allotted. His special service will commence at the time at which he was allotted for duty in a special area.

sub-paragraph (iii) : This sub- paragraph will apply in relation to a member who was, before 1st July 1965, already allotted for duty in an area that, as from that date, becomes a special area for the purposes of section 23AC, but who had not left Australia by 1st July 1965. In this case the member's period of special service will commence at the time of his departure from the last port of call in Australia for duty in a special area.

sub-paragraph (iv) : This paragraph will apply to a member who, as at the 1st July 1965, was already allotted for duty in the areas of Vietnam and Borneo to be prescribed as special areas, and who was outside Australia at that time. In this case the member's period of special duty will commence on 1st July 1965.

Paragraph (b) sets out the time at which a member's special service is to be deemed to have ended. The paragraph is subject to paragraph (c) which extends the termination date in certain circumstances.

Sub-paragraph (i) of paragraph (b) provides that a member's period of special service ends, if he returns to Australia, at the time at which he arrives at the first port of call in Australia on his return. The period of special service does not, however, end if the member leaves Australia for further duty in a special area within fourteen days after his return here.

Sub-paragraph (ii) provides that where a member is allotted for duty in an area outside Australia that is not a special area, his period of special service ends at the time he arrives in the other area. If, however, he was in the other area when he was allotted for duty in it, his special service ends at the time he was so allotted.

Paragraph (c) is designed to continue the period of a member's special service during periods of hospital treatment on or after 1st July 1965, wherever the treatment is given. A period of hospital treatment qualifies as special service where it is a consequence of illness contracted or injuries sustained during special service, or during a member's service before 1st July 1965 while he was allotted for duty in an area that, as from 1st July 1965, is prescribed as a special area.

Sub-section (4.) provides for the making of regulations declaring areas outside Australia to be special areas for the purposes of section 23AC by reason of a state of disturbance in Borneo or Vietnam (Southern Zone). The sub-section provides that an area may be prescribed as a special area as from a date no earlier than 1st July 1965.

It is proposed to prescribe as special areas for the purposes of section 23AC the areas that are currently specified for the purposes of the Repatriation (Special Overseas Service) Act 1962-1965 in relation to Vietnam and Borneo. It is also proposed that areas specified will be deemed to have become special areas on 1st July 1965.

Sub-section (5.) provides authority for the making of regulations declaring that particular areas that have been declared to be special areas are to cease to be special areas on and after a date specified in the regulations. This will enable exemption to be withdrawn in relation to a particular area if conditions in that area change to such an extent that the exemption is no longer warranted.

Sub-section (6.) authorises the amendment of assessments consequent on the making of regulations under section 23AC. If a member of the Defence Force has been assessed on pay and allowances in respect of service in an area overseas and, on regulations being subsequently made prescribing the area as a special area, the pay and allowances become exempt, sub-section (6.) will allow amendment of the assessment to exclude the income from the member's assessable income. Conversely, amendment of an assessment to include pay and allowances of a member of the Defence Force in his assessable income is authorised by the sub-section where regulations are made declaring that an area has ceased to be a special area.

Sub-section (7.) defines the word "port", where used in the section, to include an airport.

Clause 9: Exemption of Income of Certain Superannuation Funds Established for the Benefit of Employees.

By clause 9 it is proposed to repeal section 23F which was incorporated in the Principal Act last year and to re-enact it with some modifications.

In broad terms, section 23F of the Principal Act applies to provident, benefit, superannuation or retirement funds established by employers to provide individual personal benefits for, or for dependants of, their employees.

A fund which satisfies the tests specified in section 23F, or in respect of which the Commissioner of Taxation has exercised his discretionary powers, qualifies for an exemption from tax on its income if it satisfies the "30/20 rule" concerning the investment of a proportion of its assets in public securities. The exemption does not, however, extend to -

(a)

income from transactions not entered into by the fund on an arm's length basis if the income derived by the fund is greater than the income which could be expected to be derived if the parties had been dealing with each other at arm's length; or

(b)

dividends received from a private company unless the Commissioner exercises a discretionary power not to treat the dividends as assessable income.

The existing provisions of section 23F are being re- enacted in the new section subject to some modifications, of which the principal are as follows -

(a)

directors of companies will be treated as employees and will therefore be eligible for membership of a fund to which section 23F applies; and

(b)

benefits forgone by an employee on ceasing to be a member of a fund may be applied for specified purposes within two months after the end of the year of income in which the employee's right to the benefits has ceased or in accordance with an undertaking approved by the Commissioner of Taxation. Under the existing provisions of section 23F these benefits are required to be applied not later than two months after the end of the year of income unless a further period is approved by the Commissioner.

Some drafting changes are also being made but these will not alter the practical effects of the section.

The new section 23F will apply as from the commencement of the 1965-66 income year. The existing section 23F would also, of course, have commenced to apply for the first time for the 1965-66 income year.

Further explanations of the provisions of the proposed new section 23F are given in the notes that follow. For convenience the explanations given in the Explanatory Memorandum circulated with the Bill that introduced section 23F into the law last year are repeated in respect of those provisions of the present section that are not to be changed. The most significant changes in the provisions of section 23F relate to benefits forgone by employees and are explained in relation to paragraph (f) of sub-section (2.) and sub-sections (7.) to (12.) inclusive of the new section.

Sub-section (1.) of section 23F contains the following definitions of terms designed to facilitate drafting and interpretation.

"employee"

: This is a new definition which is being inserted for the purpose of enabling a director of a company who is not an employee of the company (e.g., a non-executive director) to be treated as an employee. The practical effect of this definition will be to permit section 23F to apply to a fund in which directors of a company, who are not also employees of the company, are members.

"person"

: The definition of this word is not to be changed. The word is defined so as to ensure that the exemption from tax of a superannuation fund receiving contributions for the benefit of employees of a partnership is determined on the same basis as when contributions are received from other taxpayers, e.g., sole traders or companies.

"superannuation fund"

: This definition is also to remain unchanged. Its purpose is to ensure that a reference to a superannuation fund includes a reference to each of the various types of fund from which benefits are paid to persons, usually when their employment ceases. The term includes a provident fund, a benefit fund, a superannuation fund or a retirement fund.

"transaction"

: This term, which is used in sub-section (16.) of section 23F, includes not only one transaction but also a series of transactions. The definition is the same as is included in the existing section 23F.

The definition of "superannuation benefits" is to be omitted from sub-section (1.). As already explained in relation to clause 4(c) of this Bill, it is proposed that this definition be re-enacted in section 6(1.) of the Principal Act.

Sub-section (2.) specifies the tests that are to be satisfied in order that a superannuation fund for the benefit of employees or their dependants may qualify for exemption under section 23F. The discretionary power of the Commissioner of Taxation to disregard a failure by a fund to comply with all of the tests specified if there are special circumstances is retained in sub-section (6.) - see notes on that sub-section. Except as to the test prescribed by paragraph (f), the tests to be satisfied are the same as those provided by the existing section 23F.

Paragraph (a) requires, firstly that, in principle, the fund shall be indefinitely continuing. It also requires that the fund be established and maintained solely for the purposes of providing individual personal benefits, pensions or allowances for employees and their dependants on retirement or death of employees or in other circumstances approved by the Commissioner.

Except for a drafting change, paragraph (a) will re-enact the provisions of the existing paragraph (a) of section 23F. The drafting change is designed to ensure that there exists no doubt that a fund may be established and maintained to provide benefits on retirement of an employee, or for dependants on the death of an employee, or to provide benefits in either or both of these circumstances.

Paragraph (b) states the test that, for a fund to qualify under section 23F for a year of income, an employer of each employee entitled to benefits from the fund (or whose dependants are so entitled) shall contribute to the fund in that year on behalf of each of those employees. This test, as well as other tests, may be read in conjunction with the discretionary power granted to the Commissioner of Taxation under sub-section (6.).

Paragraph (c) sets out the classes of persons from which a fund may accept contributions on behalf of employees and remain eligible for exemption. The persons who may contribute to the fund are -

(i)

the employee;

(ii)

an employer of the employee;

(iii)

a company in which an employer has a controlling interest;

(iv)

if an employer is a company - a person who is associated with the employer.

The circumstances in which a person is associated with an employer are set out in sub-section (3.) which is explained at page 27 of this memorandum.

Paragraph (d) requires that the rights of employees and dependants of employees to receive benefits from the fund be fully secured. By way of example, an employee's right would not be fully secured if, having fulfilled the conditions of the fund, his right could be withdrawn or reduced under a discretionary power granted to the employer, the trustees of the fund or any other person.

Paragraph (e) requires that the right of an employee and his dependants to receive benefits from the fund be defined by the terms and conditions governing the fund. It is also necessary that the employee be notified in writing of his right before or at the time that contributions are first made to the fund on his behalf, or before such later date as the Commissioner of Taxation allows.

Paragraph (f) of section 23F is being modified. The paragraph applies where the rights of employees to receive benefits from a fund cease and specific amounts were appropriated in the fund for the provision of those benefits. The circumstances in which a right to receive benefits is deemed to have ceased are stated in the new section 6A proposed to be inserted in the Principal Act by clause 5 of the Bill (see notes at page 16 of this memorandum).

As paragraph (f) stands at present, it is necessary, if the fund is to meet the requirements of the paragraph, for benefits the right to which has ceased to be applied in the manner prescribed in the paragraph not later than two months after the end of the income year in which the cessation occurred, unless the Commissioner allows further time. As it is proposed to be amended, the paragraph will permit another procedure as an alternative to application within two months of the close of the year of income.

Under this procedure the trustees may apply the relevant amounts in the manner prescribed by the paragraph in accordance with an undertaking given by them to, and approved by, the Commissioner. The basis of the undertaking and the machinery for giving it are set out in new sub-sections - sub-sections 7 to 12 - proposed to be inserted in section 23F. These sub-sections are explained at a later stage of this memorandum.

The purposes for which the relevant amounts may be applied are not to be changed. The amounts may be applied -

(i)

to provide the benefits to which other employees or their dependants are entitled;

(ii)

to provide additional benefits for other employees or their dependants on a basis that, in the opinion of the Commissioner of Taxation, is reasonable; and

(iii)

for other purposes approved by the Commissioner of Taxation.

Paragraph (g) applies where a right of an employee or of his dependants to receive benefits from the fund ceases and specified amounts were not appropriated in the fund for the provision of those benefits. This situation may arise in the case of funds providing benefits in the form of pensions and in other cases where amounts to meet the entitlements of particular employees have not been segregated.

In this class of case, the amounts of benefits to which employees' rights have ceased are not, in the generality of cases, specifically re-applied by the trustees for the benefit of other employees. Those amounts remain in the fund and may be used to provide the benefits to which other employees are entitled from the fund or for the purpose of providing additional benefits for all or some of those employees.

The exemption of income of a fund of this kind will not be affected by paragraph (g) if the Commissioner is satisfied that the basis on which any additional benefits that have been or will be provided for employees is reasonable. The paragraph does not require that benefits to which employees' rights have ceased be applied within a specified time as is required under paragraph (f). Accordingly, it will not be necessary for a trustee of a fund of this kind to lodge an undertaking in respect of the application of those benefits.

The principles upon which paragraph (g) is enacted in the present law are not to be disturbed, but the terminology used in respect of benefits forgone by employees on ceasing to be members of a fund is to be changed.

Paragraph (h) provides the test that excessive benefits for employees are not to be provided by the fund. In determining whether benefits are excessive the Commissioner of Taxation will have regard to the remuneration paid to the employee, the period of his service with his employer and any past, present or future benefits paid, or that may be paid, to the employee or his dependants by another fund. As other circumstances may also call for consideration, the Commissioner is authorised to consider other matters that he considers relevant.

Paragraph (i) limits the exemption provided by section 23F to funds which do not accumulate capital that is substantially in excess of the amount necessary to provide the benefits to which employees and their dependants are entitled. In determining whether the capital is excessive the Commissioner of Taxation will have regard to the contributions that are expected to be made to the fund in succeeding years on behalf of the employees and their dependants who are entitled to benefits. He will also have regard to the income that is expected to be derived by the fund in succeeding years.

Sub-sections (3.) to (6.) inclusive of the proposed section 23F re-enact the provisions of those sub-sections in the existing section 23F.

Sub-sections (3.) and (4.) involve questions of detail that need to be provided for in the legislation in order to facilitate the operation of paragraph (c) of sub- section (2.).

Paragraph (c) of sub-section (2.) specifies the classes of person that may contribute to a fund without that fund losing the exemption otherwise provided by section 23F. The intention is that section 23F should not apply to a fund that receives contributions for the benefit of employees if the contributor is not the employee himself, the employer, or a company in which the employer of the employee has a controlling interest.

The only exception to this principle is the case where the contributor is associated with the employer company. A contributor will be so associated if he has a controlling interest in the employer-company or if both the employer-company and the contributing company are under the control of one person.

A contributor may also be so associated if he is a shareholder, but does not have a controlling interest in, the employer-company, provided that he is not connected with the employee for whom he contributes to the fund. It is not, for example, intended that an exemption should be available to a fund that accepts contributions to provide benefits for the wife of a person who merely holds a small number of shares in a company for which his wife works. If, however, a minority shareholder in the employer-company is not connected with the employee for whom he contributes to a fund, his contribution would not be an obstacle to exemption of income of the fund.

The purpose of sub-sections (3.) and (4.) is to write into the law in some detail the circumstances in which a person may be regarded as being associated with a company that employs the employee for whose benefit the person makes a contribution.

Under paragraph (a) of sub-section (3.) a person who has a controlling interest in the employer-company will be a person associated with the company. For example, a parent company contributing to a fund for the benefit of employees of its subsidiary company will qualify as a person associated with the subsidiary company. Contributions by the parent company will not prejudice the fund's entitlement to exemption under section 23F.

Paragraph (b) is designed to meet the case where a person has a controlling interest in the employer-company and in the contributing company, e.g., two subsidiary companies with a common parent company. In these circumstances, contributions made to a fund by one of the subsidiary companies for the benefit of employees of the other subsidiary will not be an obstacle to exemption of the fund under section 23F.

Paragraph (c) of sub-section (3.) ensures that exemption of a fund is not lost by reason of contributions made by the beneficial owner of shares in an employer-company so long as the contributor is not connected with the employee for whose benefit he makes contributions. The paragraph necessitates a provision stating the circumstances in which a person who contributes to a fund is regarded as being connected with an employee for whose benefit the contribution is made.

The purpose of sub-section (4.) is to set out the circumstances in which a contributor to a fund is regarded as being connected with an employee.

Paragraph (a) of sub-section (4.) provides that a person is connected with an employee if he is a relative of the employee. For income tax purposes a relative includes a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the taxpayer or of his or her spouse. It also includes the spouse of the taxpayer or of any of the other persons mentioned.

In view of paragraph (a) it will not be open to a fund to obtain exemption under section 23F if it accepts a contribution from a person to provide benefits for an employee who is the child, wife or other relative of the contributor, if the contributor holds only a minority of the shares in the employer-company.

Paragraph (b) establishes in relation to a partnership a position corresponding with that explained in relation to paragraphs (a) and (c). A partnership is treated as being connected with a person if any one or more of its partners is so connected.

Paragraph (c) of sub-section (4.) is a technical provision designed to cover cases in which contributions are made to a fund by a private company that is a minority shareholder in the employer-company and there is a relationship between an employee who is to benefit and a director or beneficial shareholder of the private company or an interconnected private company.

A fund that accepts contributions in any of the circumstances covered by paragraph (c) does not qualify for exemption under section 23F unless a controlling interest exists between the private company making the contributions and the employer-company. Comments on the circumstances set out in paragraph (c) can now be given.

By sub-paragraph (i) of paragraph (c), a private company and an employee on whose behalf the company contributes to a fund are connected if the employee or one of his relatives was a director of the company at any time during the income year.

Under sub-paragraph (ii) a private company and an employee are connected if, at any time during the income year, the employee or a relative of the employee owned shares in the company or shares in the company were held indirectly for the employee or one of his relatives. Sub- section (5.), which is explained later, sets out circumstances in which shares are deemed to be held indirectly for an employee or one of his relatives.

Sub-paragraph (iii) applies where, at any time during the income year, an employee for whom a private company contributes to a fund, or a relative, was a director of another private company and, at any time during that year, the latter company owned shares or had indirect interests in the first private company. In these circumstances, the contributing company is connected with the employee.

Under sub-paragraph (iv) of paragraph (c), a private company that makes contributions for the benefit of an employee is connected with the employee if, at any time during the income year, the employee or a relative was a director of, or owned shares in, another private company in which the contributing company, at any time during that year, owned shares or had indirect interests.

An employee is also connected with a private company contributing to a fund for his benefit if at any time during the income year -

(a)

the employee or a relative of the employee beneficially owned shares in, or was a director of, another private company; and

(b)

shares in that other company were beneficially owned by, or were indirectly held for, a person who beneficially owned, or for whom shares were beneficially held, in the private company that makes the contribution.

This provision is the final test in determining whether a contribution to a fund for an employee by a minority shareholder in the employer-company is made on an arm's length basis.

Sub-section (5.) relates to sub-section (4.) and is designed to enable an indirect interest of a person in a private company to be traced through any interposed private companies, trusts or partnerships. For this purpose shares in a private company are deemed to be held indirectly by, or on behalf of, a person if that person would receive a dividend paid by the company in the event of that dividend being distributed successively through any interposed private companies, trusts or partnerships.

Sub-section (6.) grants to the Commissioner of Taxation a discretion which, if exercised, will enable a superannuation fund to obtain an exemption under section 23F even though it has not satisfied all the tests prescribed in sub-section (2.).

The Commissioner may exercise the discretion where the trustee of the fund satisfies him that special circumstances existed in relation to the year of income which make it reasonable for the Commissioner to disregard the failure of the fund to satisfy a particular test or tests. Since the enactment of section 23F last year, the Commissioner has issued a Public Information Bulletin (P.I.B. No. 6) setting out information relating to the exercise of the discretionary power.

If the Commissioner does not exercise the discretion, his decision will, of course, be subject to the usual rights of objection and reference to an independent Taxation Board of Review.

Sub-sections (7.) to (12.), inclusive, are new sub- sections proposed to be inserted in section 23F. They relate to an undertaking given by the trustee of a fund to the Commissioner of Taxation for the purposes of section 23F(2.)(f), the provisions of which are explained at page 25 of this memorandum.

Sub-section (7.) makes provision for the case where a trustee has given an undertaking regarding the application of benefits the right to which has ceased but desires to change the terms of the undertaking because of a change in circumstances occurring after the undertaking was given. The sub-section will permit the trustee to give a fresh undertaking at any time in substitution for an existing undertaking. As in the case of the original undertaking, it is necessary for the fresh undertaking to be approved by the Commissioner of Taxation.

Sub-section (8.) will formally require that an undertaking be in writing and lodged with the Commissioner of Taxation.

The undertaking will need to provide that benefits in respect of which employees' rights have ceased will be applied for the purposes specified in section 23F(2.)(f) within a reasonable time.

Sub-section (9.) provides that an undertaking approved by the Commissioner of Taxation will have effect in relation to a year of income, if it was lodged before or during that year of income or not later than two months after the end of the year. If, for example, an undertaking is lodged by 31st August, 1966, it will be effective for the year of income ending on 30th June, 1966 and subsequent income years. The Commissioner is, however, authorised to approve a further period for the lodgment of the undertaking.

Sub-section (10.) will apply where the trustee of a superannuation fund has given, and the Commissioner of Taxation has approved, an undertaking for the purposes of section 23F(2.)(f), but the undertaking has not been complied with during a year of income. The sub-section will operate subject to sub-sections (11.) and (12.) which are explained later in this memorandum.

Paragraph (a) of sub-section (10.) provides that where the Commissioner is not satisfied that the undertaking has been complied with during a year of income, he is to notify the trustee in writing to that effect.

Paragraph (b) provides that the breach of the undertaking will remove the fund, for the year in which the undertaking is breached, from the scope of the exemption provided by section 23F.

Paragraph (c) provides that the breached undertaking has no effect for any year of income subsequent to the year in which the breach occurred.

Sub-section (11.) authorises the Commissioner to disregard a failure by a trustee to comply with the terms of an undertaking if he is satisfied that the trustee made a genuine attempt to comply and that, in the circumstances, it would be reasonable to disregard the failure. This provision is designed to ensure that the exemption of the income of a fund is not affected by some inadvertent or unavoidable failure of a trustee to apply benefits the rights to which have ceased in accordance with the undertaking given to the Commissioner.

Sub-section (12.) will authorise the Commissioner to approve a fresh undertaking where an earlier undertaking has ceased to operate because of a failure to comply with its terms that the Commissioner has not considered it reasonable to disregard. By virtue of sub-section (9.), the fresh undertaking will, if approved by the Commissioner, have effect in respect of the year of income in which it is lodged and succeeding years of income. It will also, if approved, have effect in respect of a year of income if it is lodged within two months after the end of that year or within such further period as the Commissioner allows.

Sub-sections (13.) to (16.), inclusive, re-enact sub- sections (7.) to (10.), inclusive, of the existing section 23F.

Sub-section (13.) is the operative provision and authorises the exemption of the income of a superannuation fund which satisfies the tests prescribed in sub-section (2.) or in respect of which the Commissioner has exercised his discretion under sub- section (6.). The exemption is, however, subject to the provisions of sub-sections (14.), (15.) and (16.) which are explained below.

Sub-section (14.) provides that the exemption authorised by sub-section (13.) will not apply in relation to dividends paid to a superannuation fund by a private company. The Commissioner is, however, granted a discretion to exempt such dividends if he is of the opinion that it would be reasonable to do so.

In exercising his discretion the Commissioner is directed to have regard to certain matters listed in the sub- section. These matters relate to the paid-up value of shares held by the fund, the cost of the shares, the rate of dividend on the shares and on other shares in the company, the circumstances in which bonus shares have been issued to the fund and other matters that the Commissioner regards as relevant.

Sub-section (15.) is designed as a safeguard to ensure that the provisions of sub-section (14.) are not rendered ineffective by the interposition of trusts or partnerships between a private company paying dividends and a superannuation fund. A fund will, in these circumstances, be deemed to have been paid a dividend by a private company if, in the opinion of the Commissioner of Taxation, income derived by the fund is derived indirectly from such a dividend.

Sub-section (16.) provides that income (other than a dividend paid by a private company) derived by a superannuation fund from a transaction is not exempt under section 23F if the Commissioner of Taxation is satisfied that parties to the transaction were not dealing at arm's length and the income is greater than might have been expected if the parties had dealt at arm's length. As already explained in relation to the definition in sub-section (1.), "transaction" includes a series of transactions.

Clause 10: Certain Items of Assessable Income

By this clause it is proposed to insert a new paragraph - paragraph (ja) - in section 26 of the Principal Act.

Section 26 of the Principal Act specifies certain items of assessable income. The proposed new paragraph is designed to provide specifically that, where a taxpayer receives from the Commonwealth any amount to compensate him for the cost of conversion for use with decimal currency of machines that constitute trading stock of a business carried on by him, the amount of the compensation is included in the taxpayer's assessable income.

The cost of converting such machines for use with decimal currency is an allowable deduction under the general deduction provisions of the Principal Act. The new paragraph will ensure that the deduction for conversion costs related to trading stock of a taxpayer is counter- balanced by the inclusion in assessable income of so much of those costs as is re-imbursed to the taxpayer by the Commonwealth.

Clause 11: Double Wool Clips in 1964-65 Income Year.

The purpose of the new section 26BA proposed to be inserted in the Principal Act by this clause is to provide a measure of relief to woolgrowers whose assessable income of the 1964-65 income year includes the proceeds of sale of two wool clips as a result of an advanced shearing occasioned by the drought that has occurred in certain areas of Australia.

Under the present law, if the assessable income of a woolgrower of a particular income year includes the proceeds of sale of wool shorn at the normal shearing time and drought conditions make it necessary for the woolgrower to shear his sheep in advance of the next normal shearing time, the consequent earlier sale of the wool may result in his assessable income of that year including the proceeds of sale of the second clip. In these circumstances, the assessable income of the one year would include, instead of the proceeds of one clip, the proceeds of two clips. Correspondingly, the expenses of the two shearings may be brought to account in the one income year.

The special provisions proposed in section 26BA will give woolgrowers affected a right of election to overcome this situation. They will be able to elect that the profit on the sale of wool shorn at the advanced shearing, i.e., broadly the proceeds of sale less shearing and selling expenses, is to be excluded from assessable income of the 1964-65 income year. The net profit is then to be taxed as income of the 1965-66 income year.

Sub-section (1.) of the proposed section 26BA formally provides the right of election and states the circumstances in which the right is to be available.

Paragraph (a) of the sub-section confers the right of election where, during the 1964-65 income year, a taxpayer carried on a business of primary production in Australia. If the taxpayer has adopted an accounting period for income tax purposes ending on some day other than the 30th June, the 1964-65 income year of the taxpayer for this purpose will be the accounting period that is in substitution for the year ended 30th June 1965.

Paragraph (b) provides that, subject to other conditions set out in paragraphs (c) and (d), the right of election is to be available if the assessable income of the taxpayer of the 1964-65 income year includes proceeds of the sale of wool referred to in either sub-paragraph (i) or sub-paragraph (ii).

Sub-paragraph (i) refers to the proceeds of wool that was shorn in the 1964-65 income year from sheep forming assets of the taxpayer's business. In effect, the wool referred to in this sub-paragraph is the wool shorn at the normal shearing during the year.

Sub-paragraph (ii) relates to wool that was shorn in the 1963-64 income year from sheep forming assets of the taxpayer's business and was on hand at the beginning of the 1964-65 income year and brought to account at that time for taxation purposes at its cost price.

It is mentioned that if the wool is brought to account at the beginning of the income year 1964-65 at market selling value the whole of the profit on the wool attributable to the 1963-64 income year would be taxed in that year and not in the 1964-65 income year. However, if the wool is brought to account at the beginning of the income year 1964-65 at cost price, and an advanced shearing took place during the year, the effect may be that the proceeds of two clips are assessable income of the year.

Paragraph (c) requires as a condition of the right of election that, by reason of a drought in an area in Australia in which the taxpayer carried on his business, another shearing of sheep additional to the shearing referred to in paragraph (b) has taken place. The other shearing is required to have taken place at a time earlier than the time at which, but for the drought, it would ordinarily have taken place. In other words, paragraph (c) requires an advanced shearing to have taken place by reason of drought.

Paragraph (d) limits the right of election to those cases in which the assessable income of the 1964-65 income year includes proceeds of the sale of wool shorn at the advanced shearing, as well as of a shearing referred to in paragraph (b).

There may be cases in which the drought has required an advanced shearing but in which the wool from the advanced shearing has not been sold at the end of the income year. These cases are not covered by the proposed legislation as it is open to the woolgrower to value the wool that is on hand at the end of the year at cost and thus avoid inflation of his 1964-65 income as a result of the advanced shearing.

Where the tests of sub-section (1.) are satisfied the taxpayer is entitled to elect that succeeding provisions of the new section 26BA will apply in relation to the profit on the sale of wool shorn at the advanced shearing, proceeds of sale of which are included in his 1964-65 assessable income. (The profit on the sale of the wool is to be ascertained in accordance with sub-section (7.)).

Sub-section (2.) will ensure that a right of election will be available to each member of a partnership.

Stated broadly, each partner is assessable on his share of the net income of the partnership. Sub-section (2.) grants each partner a separate right of election in respect of the part of the profit on the sale of the wool shorn at the advanced shearing that is included in his individual interest in the net income of the partnership of the income year 1964-65. One partner may, therefore, make an election under the section even though another partner may prefer to have the profit on the sale of the advanced clip included in his assessable income of the income year 1964-65.

The purpose of sub-section (3.) is to extend to trustees of trust estates and persons presently entitled to the income of trust estates, the same principle as is adopted in sub-section (2.) in relation to partners.

Paragraph (a) will give effect to this principle in relation to so much of the profit on the sale of wool shorn at an advanced shearing as is taxable in the hands of the trustee.

Paragraph (b) establishes a corresponding situation where tax is payable by a beneficiary on income of a trust estate to which he is presently entitled.

Sub-section (4.) is the operative provision. It provides that where an election is made by a taxpayer, the assessable income of the taxpayer of the income year 1964-65 is to be reduced by the profit (or the part of the profit) to which the election relates. It also provides that the assessable income of the taxpayer of the income year 1965-66 is to include the amount to which the election relates.

Paragraph (a) of sub-section (4.) provides that, where an election is made in relation to the whole amount of the profit (e.g. in the case of a sole trader), the assessable income of the taxpayer of the 1964-65 income year is to be reduced by the amount of the profit on the sale of the wool. The paragraph also establishes a corresponding position where an election relates to part of the amount of the profit (e.g., where an election is made by a partner).

Under paragraph (b) the assessable income of the taxpayer of the income year 1965-66 is to include the profit, or the part of the profit, by which the assessable income of the 1964-65 income year has been reduced. The paragraph deems the amount so included to be income derived from primary production. The effect of this is that, irrespective of whether he continues to carry on a business of primary production during the 1965-66 income year, a taxpayer, who in the 1964-65 year is subject to the "averaging provisions" of the Principal Act and makes an election under the section, will continue to have those provisions applied in his assessment for the 1965- 66 year. A primary producer may, however, make an election under section 158A of the Principal Act to withdraw from the averaging system.

Sub-section (5.) applies in the case of a taxpayer who would have been entitled to make an election under section 26BA but who has died before the end of the 1964- 65 income year.

In these circumstances, the sub-section declares that the trustee of the deceased taxpayer's estate may make the election. Where this is done so much of the profit on the sale of wool to which the election relates will be excluded from the 1964-65 assessable income of the deceased taxpayer. The sub-section also provides that, where the trustee makes the election, the relevant amount is to be treated as assessable income of the estate of the deceased taxpayer of the income year 1965-66. The profit is to be treated for assessment purposes as income of the estate to which no beneficiary is presently entitled, and is to be deemed to be income derived by the trustee from carrying on a business of primary production.

Sub-section (6.) provides for the time and manner in which elections are to be made. The sub-section specifies that elections are to be in writing and lodged with the Commissioner of Taxation. The time for lodgment is the later of the 31st December 1965 and the date of lodgment of the 1964-65 return of the taxpayer or of the deceased taxpayer for whom the election is made. The Commissioner is, however, empowered to grant an extension of time for lodgment.

Sub-section (7.) specifies the meaning to be attached to the expression "profit on the sale of wool", that is, the amount that may, on election, be transferred for assessment purposes from the 1964-65 income year to the 1965-66 income year. Broadly stated, the profit is the net proceeds of the wool after deduction of shearing and sale expenses.

The commencement point for the ascertainment of this profit is the proceeds of the sale of wool shorn at the advanced shearing that are included in the assessable income of the taxpayer of the income year 1964-65. From this amount is to be deducted the expenses incurred by the taxpayer in that year which are directly attributable to the shearing and sale of the wool the proceeds of which are included in the 1964-65 assessable income of the taxpayer. If only part of the wool shorn at the advanced shearing is sold in 1964-65 an apportionment of the relevant expenses will be necessary.

Sub-section (8.) will give a power to amend assessments to give effect to elections made under section 26BA. In the absence of this power section 170 of the Principal Act may operate as an impediment to amendment of an assessment where the assessment has been made before lodgment of an election by the taxpayer.

Clause 12: Disposal of Certain Securities.

By this clause it is proposed to amend section 26C of the Principal Act to withdraw the income tax rebate of 2/- in the Pd1 in relation to the amount of earnings on Treasury Notes and associated Inscribed Stock included in taxable income.

Section 26C at present applies to stock and other securities issued by the Commonwealth that do not bear interest as such. The securities to which the section relates are redeemed at an amount above their issue price and are referred to in the section as "prescribed securities" and include Treasury Notes and associated Inscribed Stock. Section 26C includes in the assessable income of a taxpayer who disposes of a prescribed security the excess of the value of the security on the day of disposal over the cost of the security to him. It also applies, where a prescribed security is redeemed, to include in the taxpayer's assessable income the excess of the amount received by him on redemption over the cost to him of the security.

As the law stands at present, an amount that is included in a taxpayer's assessable income under section 26C is, by sub-section (3.) of that section, deemed to be interest of a kind to which section 160AB of the Principal Act applies. An effect of this is that where earnings to which section 26C applies are included in taxable income, a rebate of 2/- in the Pd1 on the amount so included (corresponding with the rebate on interest on Government loans) is available.

By the amendment to section 26C it is proposed to withdraw this rebate from earnings on the disposal or redemption of Treasury Notes and Inscribed Stock issued on the same terms and conditions as Treasury Notes. The rebate will, however, only be withdrawn in relation to such securities that are issued after a date to be fixed by Proclamation.

To give effect to this purpose, it is proposed to repeal sub-section (3.) of section 26C and insert two new sub- sections - sub-sections (3.) and (3A.) - in its stead.

Sub-section (3.) will have the same practical effect, except in relation to Treasury Notes and associated Inscribed Stock, as has the present sub-section (3.) in relation to all prescribed securities.

It provides that an amount that is taxable in accordance with section 26C by reason of the disposal or redemption of a prescribed security is to be deemed to be interest of a kind to which section 160AB applies, if the prescribed security is not a security referred to in the proposed new sub-section (3A.), that is, if it is not a Treasury Note or associated Inscribed Stock.

Sub-section (3A.) relates to securities in the form of Treasury Notes and Inscribed Stock issued on the same terms and conditions as Treasury Notes.

Paragraph (a) provides that if the security was issued on or before a date to be fixed by Proclamation, an amount included in assessable income by reason of section 26C is to be treated as interest of a kind to which section 160AB applies.

Paragraph (b) provides that, if the security is issued after the date fixed by Proclamation, the amount included in assessable income by reason of section 26C is not to be treated as interest of a kind to which section 160AB applies.

Clause 13: Dividends.

Introductory Note :

By this clause it is proposed to amend section 44 of the Principal Act to ensure that a dividend satisfied by the issue of redeemable shares is not exempt from income tax in the hands of shareholders under section 44(2.)(b)(iii). The amendment will extend to shares which are issued as part of an agreement or arrangement which has a purpose of achieving results corresponding to those achieved by the issue of redeemable shares.

Section 44 of the Principal Act sets out the general principles for determining whether or not dividends are to be included in the assessable income of a taxpayer.

Under section 44(2.)(b)(iii) dividends paid wholly and exclusively out of profits arising from the sale or revaluation of assets not acquired for the purpose of resale at a profit, or out of the issue of shares at a premium, are exempt if the dividends are satisfied by the issue of "bonus" shares in the company declaring the dividends. Dividends paid out of such profits and satisfied in cash or property other than shares in the company are not exempt, unless covered by one of the exempting provisions of section 44 other than section 44(2.)(b)(iii).

As the law stands, it is possible to attract the exemption provided by section 44(2.)(b)(iii) by a company going through the formality of issuing bonus shares in order to distribute cash or other property to shareholders. One method is the issue of bonus shares that are redeemable, and are redeemed, thus releasing cash to the shareholders. The return to the shareholders of the nominal value of the shares redeemed does not qualify as a dividend under the income tax law and is exempt from income tax. Another method involves the issue of exempt bonus shares that are intended to be, and are, cancelled shortly afterwards in an approved reduction of capital. The amount of the nominal capital returned in cash is not subject to tax. Variations of these basic methods are practicable.

The amendments proposed are designed to eliminate the weaknesses in section 44(2.)(b)(iii) that permit these practices. The amendments will not affect the present situation applying in relation to the sale of exempt bonus shares by shareholders, or in relation to dividends that are exempt under provisions of section 44 other than sub-section (2.)(b)(iii).

The amendments were foreshadowed in an announcement made on 10th June 1965. In this announcement it was stated that the amendments would apply in relation to dividends declared after 10th June 1965. Clause 42 of the Bill ensures that the amendments will apply in relation to a dividend satisfied by the issue after 10th June 1965 of bonus shares, except where the dividend was declared on or before that date.

More detailed explanations of the proposed provisions are set out below.

Sub-clause (a) of clause 13 makes a drafting amendment to section 44 of the Principal Act that is consequential on the proposed insertion in the Principal Act, by clause 14, of a new section 44A. The new section 44A will exempt certain dividends paid by companies incorporated in the Territory of Papua and New Guinea and the object of sub- clause (a) is to make the general provisions of section 44 subject to the new section.

Sub-clause (b) proposes an amendment of section 44(2.)(b) (iii) of the Principal Act. That section exempts from income tax certain dividends satisfied by the issue of bonus shares. The scope of the exemption has already been mentioned.

The purpose of the amendment proposed by sub-clause (b) is to provide that the exemption for dividends paid out of the capital profits mentioned will only be available if none of the bonus shares issued in satisfaction of the dividend are "redeemable shares" as defined.

Sub-clause (c) will insert two new sub-sections in section 44 of the Principal Act.

The first of these sub-sections, sub-section (2D.), sets out a definition of a "redeemable share" for the purposes of section 44(2.)(b)(iii). The definition is in two parts.

Paragraph (a) of sub-section (2D.) covers the case of a share that is, of its nature, redeemable, e.g., shares of the type the issue of which is authorised by section 61 of the Companies Act. Under the paragraph a share is a redeemable share if it is liable to be redeemed either as a term of its issue or at the option of the company.

Paragraph (b) brings within the scope of the definition shares that are not covered by paragraph (a) but which, by virtue of an agreement or arrangement associated with their issue, are issued with a purpose of enabling the company making the issue to pay cash or distribute other property (other than shares in the company) to shareholders.

The paragraph will apply where an issue of shares is made in pursuance of, or as part of, such an agreement or arrangement. It will not matter whether the agreement or arrangement is made orally or in writing. The time at which the agreement or arrangement is entered into will also be immaterial, i.e., whether it is entered into before or after the enactment of the Amending Act.

The paragraph will apply where the agreement or arrangement has as its purpose, or one of its purposes, the enabling of the company to transfer or apply to, or on behalf of, or at the direction of, the person to whom the shares are issued (or another person) any money or property other than shares in the company. The paragraph will have application if this purpose is served, or to be served, by either the redemption, purchase, cancellation, or a reduction in the paid-up value, of the shares issued or any other shares in the company. It will apply whether or not the exercise of an option by the company or any other person is a necessary part of the agreement or arrangement.

One type of case to which the paragraph is designed to have application may be exemplified. As part of an arrangement, a dividend is declared by a company out of realised capital profits or profits arising from a revaluation of fixed assets. The dividend is satisfied by the issue of bonus shares not in redeemable form at the time of issue. These are exempt from tax under the present law. With the appropriate confirmation, the company then reduces its capital and pays cash to the shareholders in the form of a return of capital, which is also exempt. This avoids the step of issuing redeemable shares but achieves the same result, in that the satisfaction of the dividend by issue of bonus shares is but a step in an arrangement whereby profits of a company are distributed in cash to the shareholders. Variations and refinements of this basic arrangement are, of course, practicable and it is necessary for the definition to be comprehensive to ensure that necessary safeguards are provided against these.

Sub-section (2E.) is the second of the new sub-sections proposed to be inserted in section 44 of the Principal Act. It confers a power to amend assessments and is associated with the proposed amendments relating to redeemable bonus shares.

Sub-section (2E.) will give the Commissioner of Taxation a power to amend an assessment, additional to the powers of amendment contained in other provisions of the Principal Act, for the purpose of treating a bonus share issue as redeemable and thus not entitled to exemption from income tax. The sub-section gives authority to amend an assessment within three years after the date upon which the tax became due and payable under the assessment being amended.

Clause 14: Certain Dividends Paid by Companies Incorporated in the Territory of Papua and New Guinea.

Introductory Note :

By this clause it is proposed to insert a new section - section 44A-in the Principal Act to exempt from Australian income tax certain dividends paid by companies incorporated in the Territory of Papua and New Guinea. The exemption will apply to dividends derived by persons who are residents of Australia and which are paid out of profits that are exempt from Territory tax under the Industrial Development (Incentives to Pioneer Industries) Ordinance 1965 which came into force in the Territory on 1st April 1965.

Under the Industrial Development (Incentives to Pioneer Industries) Ordinance a company is exempt from Territory tax in respect of income derived from carrying on in the Territory an industry which, pursuant to the Ordinance, is declared to be a pioneer industry. The exemption extends to dividends paid out of such income.

Under the present income tax law a resident of Australia (who is not also a resident of the Territory) is subject to Australian tax on dividends paid by Territory companies out of profits from Territory sources, although the dividends may also be subject to tax in the Territory. Double taxation is relieved by a system of credits against Australian tax in respect of the Territory tax. The system is designed to ensure that the combined burden of Australian and Territory tax is no greater than the Australian tax that would have been payable if there were no liability for Territory tax. The effect of the credit provisions is that the Australian revenue suffers a diminution in tax on the dividends to the extent of the Territory tax on them.

If the existing Australian law were not altered the position could arise that dividends paid out of income derived by a company from carrying on a pioneer industry would be subject to Australian tax and, as there would be no Territory tax on the dividends, no credit for Territory tax would be allowable. In these circumstances the tax forgone by the Territory in granting pioneer industry concessions in relation to the dividends would be balanced by the increased Australian tax payable and no overall benefit would flow from the Territory exemption.

The proposed new section 44A is designed to overcome this situation. It will exempt from Australian tax dividends derived by residents of Australia from companies incorporated in the Territory if the dividends are paid out of income that is pioneer industry income for Territory purposes and are exempt from Territory tax. The section contains provisions that will allow an independent determination to be made for Australian tax purposes as to whether a particular industry that is regarded by the Territory authorities as a pioneer industry should be so regarded for the purposes of the Australian exemption.

Further explanations of the provisions of the new section 44A are given below.

Sub-section (1.) will grant the proposed exemption for dividends paid out of pioneer industry income of companies incorporated in the Territory of Papua and New Guinea.

Subject to the other provisions of section 44A, sub- section (1.) provides that the assessable income of a shareholder who is a resident of Australia is not to include dividends paid after 1st April 1965 by a company incorporated in the Territory to the extent that the dividends meet the tests in paragraphs (a) and (b).

Paragraph (a) specifies that the dividends are to be exempt to the extent that they are paid out of income that is pioneer income for the purposes of the relevant Territory legislation, i.e., the Industrial Development (Incentives to Pioneer Industries) Ordinance 1965.

Paragraph (b) provides that the dividends will only be exempt to the extent that they are also exempt from Territory tax by reason of the Territory legislation mentioned.

Sub-section (2.) contains the power under which an industry accepted as a pioneer industry in the Territory may be denied that status for the purpose of the exemption under section 44A.

The sub-section provides for the making of regulations for this purpose. The regulations may provide that section 44A is not to apply in relation to dividends (or parts of dividends) to the extent that they are, or have been, paid out of income derived from engaging in a specified industry in the Territory. If any such regulations are made, the dividends to which they relate will not be exempt from Australian tax by reason of sub- section (1.) of section 44A.

Sub-section (3.) declares that dividends that would otherwise be exempt under section 44A are to cease to be exempt in certain circumstances.

The Territory legislation contains authority for recognition of a company as qualifying under the pioneer industry provisions to be withdrawn by cancellation of the pioneer certificate that was granted under the legislation. It also provides that the Chief Collector of Taxes for the Territory may, within six years after the date of cancellation of a company's pioneer certificate, make an assessment on the dividends of a shareholder in the company in order to give effect to the cancellation.

Sub-section (3.) provides that where dividends, or a part of any dividends, would otherwise be exempt under section 44A, and cease to be exempt from tax in the Territory by reason of the cancellation of a pioneer certificate, the exemption from Australian tax under section 44A is also to be lost.

Sub-section (4.) contains a power to amend assessments to give effect to sub-section (3.). It declares that an amendment to give effect to sub-section (3.) may be made within 6 years of the date upon which the tax became due and payable under the assessment being amended, that is, within broadly the same period as applies under the Territory legislation.

Clause 15: Provisions Relating to Conversion of Plant for use in connection with Decimal Currency.

By this clause it is proposed to insert in the Principal Act a new section - section 62AAA - to provide a uniform basis for dealing with costs incurred by a taxpayer in converting plant for use with decimal currency and with amounts received by the taxpayer from the Commonwealth in relation to machines that require conversion for such use.

In broad terms, it is proposed by the clause that depreciation allowances on such plant will be adjusted in relation to the net cost of conversion (i.e., the actual cost of conversion less any amount received from the Commonwealth).

The broad practical effect of the new section will be that a taxpayer who incurs expenditure on converting plant that is depreciable for income tax purposes will receive deductions for the expenditure by way of increased depreciation allowances in respect of plant. Where amounts are received by a taxpayer from the Commonwealth in respect of plant that requires conversion, depreciation allowances will be adjusted in relation to the amount of the expenditure as reduced by the payments made by the Commonwealth.

Depreciation allowances are available under the depreciation provisions of the Principal Act in relation to plant owned by a taxpayer and used by him in the production of assessable income. The new section will apply in relation to such plant. Special provisions of the Principal Act apply in relation to plant used in the mining industries and measures proposed to be inserted in the Principal Act by clauses 30 and 31 of the Bill relate to plant subject to these special provisions.

Sub-section (1.) of the proposed section 62AAA contains definitions of two terms used in the section. These are -

"compensation payment"

: This term is defined to mean a payment received by a taxpayer in respect of a unit of plant in pursuance of the Decimal Currency Board Act 1963-1965. That Act authorises the Commonwealth to enter into arrangements for the conversion of certain plant for use with decimal currency and to make payments in relation to such plant that requires conversion for this purpose.

"conversion costs"

: This term is defined to mean expenditure incurred by a taxpayer in converting or adapting a unit of plant for use with decimal currency.

Sub-section (2.) is the operative provision of the section.

Paragraph (a) of sub-section (2.) provides that, for the purpose of calculating depreciation allowances in respect of a unit of plant, the depreciated value of the unit is to be increased by any amount expended in converting it for use with decimal currency (that is, by the "conversion costs" as defined in sub-section (1.)). This adjustment to the depreciated value is to be made at the time when the conversion costs are incurred.

Paragraph (b) provides that any amount or amounts of a compensation payment (as defined in sub-section (1.)) are to be applied in reducing the depreciated value of the unit of plant in respect of which the compensation payment is made. This adjustment is to be made to the depreciated value of the unit as at the beginning of the income year immediately following the income year in which the compensation payment is received.

The amount to be applied under paragraph (b) cannot exceed the depreciated value of the unit at the relevant time. Provision is made in later sub-sections for the application of any excess of the compensation payment over the depreciated value.

A practical effect of paragraphs (a) and (b) is that depreciation allowances may be adjusted in relation to conversion costs from the time at which these costs are incurred, but a receipt of compensation payments during a year of income will not affect depreciation allowances until the succeeding year.

Sub-section (3.) is designed to apply only where the compensation payment received by a taxpayer in respect of a unit of plant exceeds the depreciated value of the unit at the relevant time.

In these circumstances, the amount of the excess is to be applied to successively reduce the depreciated values at that time of other units of plant owned by the taxpayer and used by him in producing assessable income. The order in which the excess is to be so applied is set out in paragraphs (a) to (e) and is as follows :-

(a)

any plant acquired by the taxpayer during the income year in which the compensation payment was received to replace the plant in respect of which the payment was made;

(b)

any other plant acquired by the taxpayer during the income year in which the compensation payment was received which is of a kind, or has a use, similar to the unit in respect of which the compensation payment was made;

(c)

any other plant acquired by the taxpayer during the income year in which the compensation payment was received;

(d)

any other plant owned by the taxpayer which is of a kind, or which has a use, similar to the machine in respect of which the payment was made, but which was not acquired during the year of income in which the compensation payment was made;

(e)

any other depreciable plant owned by the taxpayer.

Sub-section (4.) will require that where the whole of a compensation payment received by a taxpayer is not applied to reduce the depreciated value of plant owned by him in accordance with sub-section (3.), the amount that is not so applied is to be included in the assessable income of the taxpayer for the year in which the payment was received.

This sub-section is necessary to cover any case that may occur where a compensation payment exceeds the aggregate depreciated values of all depreciable plant owned by a taxpayer. It is expected that, in practice, the sub- section will have very limited application.

Sub-section (5.) is designed to apply where a compensation payment is received by a taxpayer in respect of a unit of plant which is disposed of, lost or destroyed prior to or during the year of income in which the payment is received.

In these circumstances it will not be practicable for the compensation payment to be applied to reduce the depreciated value of the unit at the beginning of the income year following the year in which the payment is received. It is, therefore, proposed that the payment will be set off against the depreciated values of other plant owned by the taxpayer.

Paragraphs (a) and (b) of sub-section (5.) set out the circumstances in which the section will apply. It will apply where a unit of plant previously owned by a taxpayer is disposed of, lost or destroyed and, in the year in which the disposal, loss or destruction took place or a later year, the taxpayer receives a compensation payment from the Commonwealth in respect of the unit.

Paragraph (c) requires that, in these circumstances, the compensation payment is to be applied to successively reduce the depreciated values of other plant as at the beginning of the income year following the year in which the payment was received. The order of application of the payment is set out in sub-paragraphs (i) to (v) and corresponds with the order set out in paragraphs (a) to (e) of sub-section (3.).

Paragraph (d) of sub-section (5.) will require that, in any case where the whole of the compensation payment cannot be applied to reduce the depreciated values of other plant, the amount which is not so applied is to be included in the assessable income of the taxpayer for the income year in which the payment is received. As already mentioned in relation to sub-section (4.), it is expected that this sub-section will have application only in isolated cases.

Sub-section (6.) will limit the classes of plant in respect of which adjustments to the depreciated value will be authorised by sub-sections (3.) and (5.). The limitation is to plant which meets the requirements of paragraphs (a) and (b) of sub-section (6.).

As explained in relation to sub-section (3.), any excess of a compensation payment over the depreciated value of the unit of plant in respect of which the payment is made is to be applied to reduce the depreciated values of other plant owned by the taxpayer. A similar application is made under sub-section (5.) where payment in respect of a unit is received by a taxpayer after the unit has been disposed of, lost or destroyed.

Paragraph (a) and paragraph (b) of sub-section (6.) provide that no part of a compensation payment is to be applied to reduce the depreciated value of other plant in accordance with sub-sections (3.) or (5.) unless, at the end of the income year in which the payment is received, the plant was used exclusively for the purpose of producing assessable income, or had been installed ready for use for that purpose, and depreciation allowances are available in respect of the plant under the general depreciation provisions of the Principal Act.

Sub-section (7.) has the purpose of deeming an amount deducted from the depreciated value of a unit of plant under preceding provisions (sub-sections (2.), (3.) and (5.)) to be a deduction allowed as depreciation in respect of the unit in calculating its depreciated value for the purposes of future deductions for depreciation and in calculating balancing adjustments on the disposal, loss or destruction of the unit.

The purpose of sub-section (8.) is to make it clear that deductions for costs or converting depreciable plant are not available except by way of increased depreciation allowances.

The sub-section will not affect the allowance or deductions under the general provisions of the Principal Act for the cost of converting machines that are trading stock of the taxpayer. Nor will the sub-section affect the deductions allowable in respect of costs of converting machines the capital expenditure on which is deductible under special provisions relating to plant used in mining operations (see notes on clauses 30 and 31 of the Bill).

The new section 62AAA will come into operation on the day on which the Amending Act receives the Royal Assent. It will apply in relation to the assessment of a taxpayer of a year of income in which he incurs, or has incurred, conversion costs, or receives, or has received, a compensation payment.

Clause 16: Subscriptions to Associations.

This clause proposes an amendment to section 73(2.) of the Principal Act. That section authorises deductions for certain subscriptions, levies and contributions paid to associations.

The amendments proposed relate only to sub-section (2.) of section 73 and do not affect the deductions available under other provisions of that section.

Under sub-section (2.), a deduction may be allowed for subscriptions, levies or contributions paid by a taxpayer to an association that carries out on behalf of its members, activities the cost of which would be deductible by the taxpayer if carried out by him.

If the subscriptions, etc. paid in a year of income do not exceed Pd21, the member is entitled to a deduction for the whole of the amount paid. This position is not being disturbed by the proposed amendment.

If the aggregate of the subscriptions, levies and contributions paid by a member in a year of income exceeds Pd21, the deduction allowable is the greater of Pd21 or an amount determined by a formula expressed in paragraph (b) of the sub-section. In other words, if the formula produces an amount of Pd21, or less, the deduction allowable is Pd21. If it produces an amount greater than Pd21, the amount produced is an allowable deduction. The changes proposed relate to the formula mentioned.

The object of paragraph (b) was to set out a formula that determined a member's entitlement to a deduction by reference to the proportion of the association's expenditure on "deductible" activities to its total expenditure. "Deductible" activities are activities which, if carried out by members, would entitle them to a deduction for the costs incurred in carrying out the activities. The present formula does not, however, achieve the intended result. As a consequence, a deduction is allowable for subscriptions that are used to meet expenditure of a capital nature that would not be allowable if the members, in lieu of the association, incurred it. It is proposed by clause 16 to remedy this position.

For this purpose a new paragraph - paragraph (b) - is being inserted in sub-section (2.) of section 73. It is designed to determine the deduction under the sub-section (for a taxpayer whose aggregate subscriptions in an income year exceed Pd21) by reference to the association's expenditure on "deductible" activities.

The new paragraph (b) is designed to ensure that the deduction is, subject to the lower limit of Pd21 already mentioned, so much of a member's subscriptions, levies and contributions in an income year as have been, or will be, applied by the association in that year or any other year to meet losses or outgoings incurred in carrying out activities the cost of which would be deductible by the member if carried out by him. Any subscriptions, etc. that have been, or will be, applied by the association in meeting losses or outgoings of capital or of a capital nature are to be specifically excluded from deduction, to the extent that they have been, or will be, so applied.

The amendment effected by clause 16 will apply in assessments for the income year 1965-66 and subsequent years.

Clause 17: Five per centum of Cost of Assets of Superannuation Fund Established for Benefit of Employees and Other Persons to be Allowable Deduction.

Introductory Note :

By clause 17 it is proposed to repeal section 79 which was incorporated in the Principal Act last year, and to re-enact it with some modifications.

Section 79 of the Principal Act authorises a special deduction from the income of a superannuation fund which satisfies the tests set out in sub-section (2.) of that section, if the terms and conditions applicable to the fund have been approved by the Commissioner of Taxation. In broad terms, the deduction is equal to 5 per cent of the net cost of assets of the fund as at the end of the year of income.

The deduction is not allowable in relation to assets producing two classes of income derived by a fund to which section 79 applies. Those classes of income are -

(a)

dividends received by a superannuation fund from a private company, unless the Commissioner is of the opinion that it would be reasonable for the deduction to be allowed in relation to the shares on which the dividends are paid; and

(b)

income derived by a superannuation fund from a transaction if the Commissioner is satisfied that the parties to the transaction are not dealing with each other at arm's length and the income derived by the fund is greater than the income which could be expected to be derived if the parties had been dealing with each other at arm's length.

The special deduction cannot be made from those classes of income.

A trustee of a superannuation fund to which section 79 applies will, broadly stated, pay tax at the rate of 10/- in the Pd on the net amount of the two classes of income described above. The same rate of tax will be payable on so much of the balance of the net income of the fund as remains after allowance of the special deduction of 5 per cent of the net cost of assets. The bases for ascertaining those amounts are set out in sections 121BA and 121CB of the Principal Act which are not being amended.

The "30/20 rule" for the investment of assets of superannuation funds applies to funds that are granted exemption from tax. It does not apply to section 79 funds which are entitled only to a special deduction.

The provisions of the existing section 79 are being re- enacted by this Bill subject to some modifications, of which the following are the most important -

(a)

benefits to which a member's right has ceased may be applied for specified purposes before two months after the end of the year of income in which the cessation occurred or, alternatively, in accordance with an undertaking approved by the Commissioner of Taxation. (Under the existing provisions of section 79 these benefits are required to be applied not later than two months after the end of the year unless a further period is approved by the Commissioner);

(b)

unrepaid borrowings of the fund that have been expended in the acquisition of an asset the cost of which is not taken into account in the calculation of the special deduction of 5 per cent of net cost of assets will not be deducted from the cost of assets of the fund for the purposes of that calculation.

Some minor drafting changes are also being made with a view to removing doubts that have been expressed concerning the interpretation of some of the existing provisions. One change of this nature will ensure that the payment by a fund of a pension or annuity to a person may continue after he attains 70 years of age without affecting the fund's entitlement to the special deduction.

The following explanations relate to the various provisions of section 79. For convenience, the explanations contained in the Explanatory Memorandum circulated with the Bill that introduced section 79 into the law last year are repeated in respect of those provisions of the section which remain unchanged in the new section. Notes that are relevant to the provisions giving effect to the more important changes proposed will be found in the explanations relating to paragraph (d) of sub-section (2.), sub-sections (3.) to (9.), inclusive, and sub-sections (15.) to (19.), inclusive, of the new section 79.

The new section will apply in relation to the 1965-66 income year and subsequent years. The section it replaces would, of course, have applied for the first time in relation to the 1965-66 income year.

Sub-section (1.) of section 79 contains definitions of terms which are designed to facilitate drafting and interpretation -

"asset"

: This definition does not differ from the definition contained in the existing section 79. It ensures that life insurance policies are not taken into account in calculating the deduction based on 5 per cent of the cost of net assets of a superannuation fund. The proceeds of such a policy are not, of course, treated as income.

"prescribed asset"

: This is a new definition associated with the calculation of the special deduction related to the net cost of a fund's assets. It means an asset (other than a life insurance policy) owned by a fund at the end of a year of income.

"superannuation fund"

: This definition is not being altered. It ensures that a reference to a superannuation fund includes a reference to a provident, benefit, superannuation or retirement fund. It has the effect, however, of excluding from the scope of section 79 any superannuation funds which qualify for exemption under the provisions of the following sections of the Principal Act -

(a)

section 23(jaa) which exempts the income of a provident, benefit, superannuation or retirement fund established under a law of the Commonwealth, a State or a Territory or established by a local governing body or public authority constituted under such a law;

(b)

section 23(ja) which exempts the income of an approved provident, benefit, superannuation or retirement fund established for the benefit of self-employed persons; and

(c)

section 23F which is explained at pages 22 to 31 of this memorandum.

"the borrowings"

: This is a new definition. The term is used in sub-sections (16.) to (19.) inclusive of section 79 and is defined to mean the sum of any amounts that have been borrowed by a fund and have not been wholly repaid before the end of the year of income.

"the unrepaid borrowings"

: This is also a new definition. For the purposes of sub- sections (16.) to (18.) inclusive it is defined to mean so much of the borrowings of the fund as have not been repaid before the end of the year of income.

A definition of "superannuation benefits" is being omitted from sub-section (1.) of section 79. By clause 4(c) of the Bill the definition is now to be incorporated in section 6(1.) of the Principal Act.

Sub-section (2.) specifies the tests to be satisfied before a superannuation fund may qualify for the special deduction authorised by section 79.

Paragraph (a) provides, in effect, that the provisions of section 79 shall not apply to a fund unless it is an indefinitely continuing fund. A second test is that the fund be established and maintained solely for either or both of the following purposes -

(i)

the provision of individual personal benefits, pensions or allowances for a member in the event of his retirement from a business, trade, profession, vocation, calling, occupation or employment in which he is engaged; and

(ii)

the provision of such benefits for a member's dependants in the event of his death.

The Commissioner has a discretion to approve the payment of benefits, etc. for other purposes, but only if these purposes are incidental and ancillary to the main purposes described.

Except for a minor drafting change the provisions of the existing paragraph (a) are re-enacted in the new paragraph.

Paragraph (b), which is being re-enacted without change, prescribes a test identical with one imposed by section 23F. The test is that the rights of members of the fund and their dependants to receive benefits from the fund be fully secured. As explained in relation to section 23F, this test would not be satisfied if, after fulfilling the conditions of the fund, the benefits to which an employee is entitled could be withheld or reduced at the discretion of the trustee, the employer or some other person.

Paragraph (c), which is also being re-enacted without change, is complementary to paragraph (b). In order to qualify under section 79, it is necessary for the right of each member of the fund to receive benefits from the fund to be defined by the terms and conditions applicable to the fund. In addition, each member must be advised in writing of his right, and of the rights of his dependants, to receive benefits from the fund before or when the first contribution is made to the fund for his benefit and for the benefit of his dependants or before such later date that the Commissioner allows.

Paragraph (d) is being modified. The paragraph applies where a right of a member or his dependants to receive benefits from the fund ceases and specified amounts were appropriated in the fund for the provision of those benefits. The circumstances in which a right to receive benefits is deemed to have ceased are stated in the new section 6A proposed to be inserted in the Principal Act by clause 5 of the Bill (see notes at page 16 of this memorandum).

In its existing form paragraph (d) requires amounts of benefits the right to which have ceased to be applied in the manner prescribed in the paragraph not later than two months after the end of the income year in which the cessation occurred, unless the Commissioner allows further time for their application. As it is proposed to be amended, the paragraph will permit another procedure as an alternative to application of the amounts within two months of the close of the year of income.

Under this procedure the trustee may apply the relevant amounts for the purposes prescribed by the paragraph in accordance with an undertaking given to, and approved by, the Commissioner. The basis of the undertaking and the machinery for giving it are set out in new sub-sections - sub-sections (3.) to (8.) - proposed to be inserted in section 79. They are the same as proposed for this purpose in relation to section 23F (see explanations at pages 30 and 31 of this memorandum).

The bases on which the amounts may be applied are similar to those prescribed in the corresponding provision in section 23F (2.)(f) which is explained at page 25 of this memorandum.

Paragraph (e) applies where a right of a member or of his dependants to receive benefits from the fund ceases and specified amounts have not been appropriated in the fund for the provision of those benefits. This situation may arise in the case of funds providing benefits in the form of pensions and in other cases where amounts to meet the entitlements of the various members have not been segregated.

In this class of case, the amounts of benefits to which members' rights have ceased are not, in the generality of cases, specifically re-applied by the trustees for the benefit of other members. Those amounts remain in the fund and may be used to provide the benefits to which other members are entitled from the fund or for the purpose of providing additional benefits for all or some of those members.

The application of section 79 to the fund will not be affected by paragraph (e) if the Commissioner is satisfied that the basis on which any additional benefits that have been or will be provided for members is reasonable. As the benefits to which members' rights have ceased are not required to be applied within a specified time, it is not necessary for a trustee of a fund of this kind to lodge an undertaking in respect of those benefits.

The principles upon which paragraph (e) is enacted in the present law have not been disturbed but drafting changes have been made in the terminology relating to benefits forgone by a person on ceasing to be a member of a fund.

Paragraph (f) restricts the circumstances in which a fund may allow members to withdraw benefits from the fund and remain eligible for the special deduction.

Sub-paragraph (i) prescribes the first restriction which reflects the nature of the fund, that is, that it is a fund to provide benefits upon retirement. It is accordingly provided that the terms and conditions applicable to the fund are not to permit a member or his dependants to receive any benefits from the fund until the member attains 60 years of age, except in the event of his death, sickness or permanent incapacity for work or such other circumstances approved by the Commissioner of Taxation.

These provisions will now authorise payments to dependants of a member in the circumstances specified to cover those isolated cases where such payments are, during the lifetime of a member, made to dependants of the member, rather than the member himself as a matter of convenience or in special circumstances. The test under the present law permits payment to dependants of a member only in the event of the member's death.

Under sub-paragraph (ii), it will be necessary that the terms and conditions relating to the fund require any pension or annuity to commence to be paid, and any other forms of benefit to be paid, to a member not later than his seventieth birthday.

Sub-paragraph (iii) is complementary to the preceding sub-paragraph and will impose corresponding conditions in relation to the payment to dependants of a member of pensions or annuities and other forms of benefits. Under this provision, however, it will be necessary also that the terms and conditions relating to the fund require such benefits to commence to be paid or to be paid, as the case may be, in the event of the death of the member concerned if the member dies before his seventieth birthday.

The terms and conditions applicable to a fund are to be approved by the Commissioner of Taxation before the fund may qualify for the special deduction under section 79. In approving those terms and conditions, the Commissioner is required by paragraph (g), (h) and (i) to have regard to such matters as the reasonableness of benefits and the amount of the fund, bearing in mind the benefits to be provided, and such other matters as the Commissioner thinks fit to consider. The existing provisions of these paragraphs are, with some minor drafting changes, being re-enacted in the new section.

Sub-sections (3.) to (8.), inclusive, relate to an undertaking by the trustee of a fund to the Commissioner of Taxation for the purposes of section 79(2.)(d), the provisions of which are explained at page 49 of this memorandum. The provisions of these sub-sections correspond with the proposed sub-sections (7.) to (12.) of section 23F which are explained at pages 30 and 31 of this memorandum.

Sub-section (9.) will apply in cases where a reversionary pension or annuity is payable to dependants of a member on his death. Under sub-paragraph (iii) of section 79(2.)(f), such pensions or annuities would be required to be paid not later than the member's seventieth birthday. If the terms and conditions applicable to the fund require the member's pension or annuity to be commenced to be paid before his seventieth birthday and a dependant's pension or annuity to commence to be paid upon the member's death, sub-section (9.) will deem the requirements of sub-paragraph (iii) of section 79(2.)(f) to have been complied with even though the member survives his seventieth birthday and, because of this, the pension or annuity payable to his dependant upon his death does not commence to be paid until after that date.

Sub-sections (10.) to (14.), re-enact, with some minor drafting changes, the provisions of sub-sections (3.) to (7.) of the present section 79.

Sub-section (10.) is the operative provision. It authorises the allowance of a special deduction to a superannuation fund which satisfies the tests specified in sub-section (2.). Subject to the limitation prescribed in section 79C of the Principal Act, the deduction is equal to 5 per cent of the net cost of the assets of the fund as at the end of the year of income.

In determining the cost of the assets on which the deduction is to be calculated, it is necessary to have regard to the provisions of succeeding sub-sections of section 79.

Very broadly, those provisions provide that the cost of assets is not to include the cost of assets producing exempt income or other income that is not taken into account in calculating the net income of the fund. Subject to the provisions of the proposed sub-sections (15.) to (19.), amounts owing on assets and borrowings of the fund not repaid as at the end of the year of income are deducted from the cost of the assets on which the special deduction is calculated. As already mentioned, life insurance policies are excluded from the assets of the fund for that purpose.

Section 79C referred to above provides that the aggregate of the deductions allowable under certain sections of the Principal Act shall not exceed the amount of income that remains after deducting from assessable income all other allowable deductions, except losses of previous years and certain deductions for capital expenditure allowable in relation to prospecting and mining operations. The special deduction of 5 per cent of cost of assets allowed to superannuation funds under section 79 is included in the aggregate of the deductions subject to that limitation.

Sub-section (11.) applies where no part of any income derived in the income year by a fund from an asset is taken into account in calculating the net income of the fund. The net income is calculated in accordance with section 121BA of the Principal Act.

Exempt income derived by a fund is not taken into account in calculating its net income nor are the two classes of income described in the introductory note relating to this clause. Accordingly, where only those classes of income or exempt income have been derived during the income year from an asset owned by the fund as at the end of the year of income, the cost of the asset producing that income is excluded from the cost of the assets on which the special deduction is calculated.

Sub-section (12.) is complementary to sub-section (11.) and applies where only a part of the income derived by a fund from an asset in the income year is taken into account in calculating the net income of the fund.

In those circumstances, if the asset is an asset of the fund as at the end of the income year, only a part of the cost of that asset is included in the cost of the assets on which the special deduction is calculated. The part of the cost of that asset so included is ascertained by the formula -

(Cost of the asset) * ((Part of income from that asset derived in the income year taken into account in calculating the net income of the fund.)/(Total income from that asset derived in the income year.))


Sub-section (13.) applies where -

(a)

no income is derived by the fund in the income year from an asset; and

(b)

during the last preceding income year in which income was derived by the fund from the asset, no part of the income was taken into account in calculating the net income of the fund or would have been so taken into account if the new section 79 had been in force when the income was so derived.

The cost of an asset owned by the fund as at the end of the income year from which such income was derived is excluded from the cost of the assets on which the special deduction is calculated.

Sub-section (14.) is complementary to sub-section (13.) and applies where -

(a)

no income is derived by the fund in the income year from an asset; and

(b)

during the last preceding year of income in which income was derived by the fund from the asset, only a part of the income was taken into account in calculating the net income of the fund or would have been so taken into account if the new section 79 had been in force when the income was so derived.

Only a part of the cost of an asset owned by the fund as at the end of the income year from which such income was so derived is included in the cost of the assets on which the special deduction is calculated. The part of the cost of that asset so included is ascertained by the formula -

(Cost of the asset) * ((Part of income from that asset derived in the preceding income year taken into account in calculating the net income of the fund.)/(Total income from that asset derived in the preceding income year.))


Sub-section (15.) re-enacts, in principle, the existing provisions of paragraph (a) of sub-section (8.) of section 79. In effect, it requires that the cost of an asset be reduced by any unpaid purchase price for the purpose of calculating the special deduction authorised by section 79.

Paragraph (a) of sub-section (15.) will apply where the whole of the cost of an asset of a fund would otherwise be taken into account for the purpose of calculating the special deduction based on 5 per cent of the cost of assets of the fund as at the end of the year of income. In these circumstances, the amount of the purchase price of the asset unpaid at that time will be excluded from the cost of the assets of the fund.

Paragraph (b) will apply where only a part of the cost of an asset is taken into account for the purpose of calculating the special deduction. The amount of the unpaid purchase price of the asset to be excluded from the cost of the assets of the fund will, in these circumstances, be determined in accordance with the formula -

(Unpaid cost of the asset at end of year) * ((Part of cost of the asset included in cost of assets for the purposes of the special deduction.)/(Cost of the asset.))


The assets of a fund will necessarily be reduced when the full cost of the asset is paid and, without the adjustment required by sub-section (15.), a fund could inflate the amount of the special deduction by delaying payment of the amount due in respect of assets acquired until after the end of the income year.

Sub-sections (16.), (17.), (18.) and (19.) relate to the deduction from the cost of the assets of the fund at the end of the year of income of amounts in respect of borrowings of the fund that have not been repaid before the end of that income year. To facilitate repeated reference in the provisions, two terms - "the borrowings" and "the unrepaid borrowings" - are defined in sub- section (1.) of section 79 - see notes on that sub- section already set out.

Sub-section (16.) re-enacts, in principle, the existing provisions of paragraph (b) of sub-section (8.) of section 79. The sub-section will, for the purpose of calculating the special deduction, exclude from the cost of assets of the fund at the end of the income year so much of the borrowings of the fund as has not been repaid before the end of that income year. But for this provision, it would be open to a fund to use borrowed money to purchase assets and so increase unduly the amount of the special deduction.

It is proposed, however, that the cost of assets will not be reduced by the unrepaid borrowings that are attributable to the acquisition of assets of the fund that are not included in the cost of assets taken into account in calculating the special deduction. Effect will be given to this proposal in sub-sections (17.) and (18.) which, broadly speaking, will limit according to circumstances the extent to which the cost of assets of the fund at the end of the income year may be reduced under sub-section (16.) in respect of unrepaid borrowings. In circumstances to which sub-sections (17.) and (18.) apply, the special deduction will be greater than the amount that would be allowable under the existing provisions of section 79.

Sub-section (17.) provides, in effect, that sub-section (16.) will not operate to reduce the cost of assets of the fund by any amount of the unrepaid borrowings where the whole of the unrepaid borrowings relates to assets the cost of which is not included in the cost of assets on which the special deduction is based.

Sub-section (18.) incorporates matters of detail in respect of cases in which unrepaid borrowings of a superannuation fund relate partly to the assets of the fund which are not taken into account for the purposes of the special deduction allowable under section 79. These assets will include assets from which exempt income is earned by the fund and assets from which the two classes of income described in the introductory note to this clause are derived.

As already explained in relation to sub-section (16.), the cost of the assets of a fund as at the end of an income year is to be reduced by the unrepaid borrowings of the fund for the purposes of the special deduction. The cost of the assets is not, however, to be so reduced by the unrepaid borrowings that are attributable to assets held by the fund at the end of the income year which are not taken into account for the purpose of calculating the amount of the special deduction.

Paragraph (a) of sub-section (18.) will operate where all of the borrowings of a fund have been expended in acquiring assets held by the fund at the end of the income year and part of the cost of the assets so acquired is not taken into account for the purpose of calculating the amount of the special deduction.

The paragraph will, in effect, exclude from the amount of the unrepaid borrowings the proportion of those borrowings that relates to assets held by the fund that are not taken into account for the purposes of the special deduction. The amount so excluded from the unrepaid borrowings is to be ascertained by a formula which, in broad terms, is -

(The unrepaid borrowings) * ((The cost of assets acquired with the borrowings not taken into account for the purposes of the special deduction.)/(The total cost of assets acquired with the borrowings.))


Paragraph (b) has application where only a part of the borrowings of a fund has been expended in acquiring assets held by the fund and the whole of the cost of those assets is not taken into account for the purposes of the special deduction.

Here again, the paragraph will exclude from the amount of the unrepaid borrowings that would otherwise reduce the cost of the assets taken into account for the purposes of the special deduction the proportion of those borrowings that relates to assets held by the fund that are not so taken into account. However, in the circumstances which paragraph (b) is designed to meet, it is necessary to apply a different formula to that adopted in paragraph (a) in order to ascertain the appropriate amount to be excluded from the unrepaid borrowings. The formula to be adopted where the circumstances prescribed in paragraph (b) exist is, broadly stated -

(The unrepaid borrowings) * ((The part of the borrowings expended in acquiring assets not taken into account for the purposes of the special deduction.)/(The borrowings of the fund.))


Paragraph (c) is complementary to paragraph (b). It provides, in effect, that the amount ascertained in accordance with paragraph (b) is to be adjusted to meet the situation where a part of the borrowings has been expended in acquiring assets held by the fund and part only of the cost of those assets is not taken into account for the purposes of the special deduction.

In these circumstances, the first step will be to ascertain the amount of the unrepaid borrowings that would be treated as relating to assets that are not taken into account for the purposes of the special deduction if the formula prescribed in paragraph (b) were applied. The formula prescribed in paragraph (c) will then have effect as follows -

(Amount ascertained under paragraph (b)) * ((The part of the cost of assets acquired with the borrowings not taken into account for the purposes of the special deduction.)/ (The total cost of assets acquired with the borrowings.))


Sub-section (19.) is a drafting measure and will provide that, for the purposes of sub-section (18.), the cost of any assets acquired by the expenditure of borrowed money will be the actual cost of the assets whether wholly or partially paid for out of the borrowed money.

Sub-section (20.) re-enacts the provisions of sub-section (9.) of the existing section 79 of the Principal Act. The sub-section is designed as a safeguard where assets are acquired by a fund for a consideration which, in the opinion of the Commissioner of Taxation, is excessive. It also enables a cost to be ascribed to assets acquired by a fund for a consideration not consisting of money. In either event, the amount taken into account as the cost of the asset is the amount that the Commissioner determines as being reasonable in the circumstances.

If this provision is invoked, the trustee is entitled to object against the Commissioner's decision and to have the decision reviewed by a Taxation Board of Review.

Sub-section (21.) re-enacts the provisions of sub-section (10.) of the existing section 79 of the Principal Act. It makes provision for the case where bonus shares are received by a superannuation fund. In these circumstances the cost of the shares is, (for the purposes of calculating the special deduction), deemed to be equal to the amount of the dividend satisfied by the issue of the shares. Except in unusual circumstances, this amount will equal the face value of the shares.

As already noted, the amendments made by this clause will apply in assessments for the 1965-66 income year and subsequent years.

Clause 18: Deductions for Members of Defence Force Serving Overseas.

This clause proposes an amendment of section 79B of the Principal Act consequential on the insertion in the Principal Act, by clause 8 of the Bill, of provisions to exempt the pay and allowances of members of the Defence Force serving in certain areas overseas.

Under section 79B, special deductions are available to members of the Defence Force serving at specified overseas localities. At present, the areas specified for this purpose include the areas that it is proposed to prescribe as special areas for the purposes of the proposed exemption under section 23AC. It is accordingly necessary to ensure that service of a member of the Defence Force at one of these places does not qualify under both provisions.

For this purpose a new sub-section - sub-section (3A.) - is being inserted in section 79B. The sub-section provides that service of a taxpayer that qualifies as special service entitling him to exemption under section 23AC is not to count as service at an overseas locality for the purposes of the deduction under section 79B.

Clauses 19 , 20 and 21 : Losses of Previous Years.

Introductory Note :

It is proposed by clauses 19, 20 and 21 to amend provisions which were incorporated in the Principal Act last year for the purpose of modifying the operation of section 80 of that Act in respect of losses incurred by companies in previous years of income.

Section 80 provides for the deduction in the year of income of losses incurred in any of the seven preceding years which have not already been recouped from assessable income or from exempt income.

Under the provisions of the Principal Act enacted last year, a company is not entitled to a deduction in assessments for the 1965-66 income year and subsequent years for a loss incurred in an earlier year unless the Commissioner of Taxation is satisfied that shares in the company carrying specified rights are beneficially owned throughout the year of income by the same persons who owned, throughout the year in which the loss was incurred, shares carrying rights of the same kind. This principle is also applied to a holding company which, directly or indirectly, controlled the loss company in the year the loss was incurred.

The rights that need to be attached to the relevant shares in a company are -

(a)

a right to exercise not less than 40 per cent of the voting power in the company;

(b)

a right to at least 40 per cent of any dividends paid by the company;

(c)

in the event of the company being wound up - a right to 40 per cent of any distributions of capital; and

(d)

in the event of a reduction in the capital of the company - a right to 40 per cent of any distributions of the capital.

One amendment proposed is the provision of a "continuing business" test as an alternative to the "percentage of shareholding" tests now in the law. This amendment is being effected by the insertion of a new section - section 80E - in the Principal Act. Under the new section, a company will retain its entitlement to deductions for losses of previous years notwithstanding a substantial or total change in the identity of the owners of shares in the company if -

(a)

it carries on during the whole of the year of income the same business as it carried on immediately prior to the change in shareholdings; and

(b)

it does not, in the year of income, derive income from a business or transaction of a kind that it did not carry on or enter into in the course of its business operations before the change in the shareholdings occurred.

It is also proposed to amend the law in relation to cases of infrequent occurrence where, although there is a substantial or total change in the actual shareholdings in a company, there is no significant change in the identity of the persons who held indirect beneficial interests in the company in the year in which a loss was incurred and in the year of income.

To meet this type of situation, the amendments proposed will, in effect, permit an entitlement to a deduction for a prior year loss of a company to be preserved where persons who have direct or indirect beneficial interests in a company throughout the year of income representing, in the aggregate, interests in not less than forty per cent of -

(i)

the voting power in the company;

(ii)

dividends paid by the company; and

(iii)

distributions of capital by the company,

are the same persons who had such direct or indirect interests in the company throughout the year of loss. The proposed amendments are to be made by the repeal of the existing sections 80C and 80D of the Principal Act and insertion of new sections in their place.

Detailed explanations of each of clauses 19, 20 and 21 are set out in following paragraphs. The amendments proposed by each clause will have effect in assessments for the income year 1965-66 and subsequent years.

It is also proposed, by clause 40 of the Bill, to make provision for a transitional situation where companies have adopted a substituted accounting period ending before the 30th June, 1965. That clause is explained at page 88 of this memorandum.

Clause 19: Losses of Previous Years not to be Taken into Account unless there is Substantial Continuity of Beneficial Ownership of Shares in Company.

This clause will effect drafting changes in section 80A of the Principal Act to provide formal authorisation for taking into account other relevant provisions of that Act in the application of the section.

Under sub-section (1.) of section 80A, a company is not entitled to a deduction in a year of income for a prior year loss unless the Commissioner of Taxation is satisfied that shares in the company carrying the specified rights are beneficially owned throughout the year of income by the same persons as owned, throughout the year in which the loss was incurred, shares carrying rights of the same kind.

Sub-section (2.) of section 80A applies where a change in beneficial ownership of shares occurs during the year of income in which a loss is incurred. In these circumstances, and where other conditions are satisfied, the Commissioner is authorised to allow a deduction for the part of the loss that was incurred in the period after the change in the beneficial ownership of the shares took place.

Each of the two sub-sections in section 80A will operate subject to the provisions of section 80B of the Principal Act as proposed to be amended by clause 20 of the Bill and the proposed new sections 80C to 80E to be inserted in that Act by clause 21 of the Bill.

Clause 20: Provisions Relating to Beneficial Ownership of, or Rights Attached to, Shares.

By this clause it is proposed to omit sub-section (5.) of section 80B of the Principal Act and to insert a new sub- section containing provisions which are designed as a safeguard against special arrangements or devices aimed at reducing the effectiveness of the provisions relating to prior year losses of companies.

The provisions of the existing sub-section (5.) of section 80B provide that the Commissioner may treat shares that are subject to an option to acquire the shares as being beneficially owned by a person (other than the owner of the shares in the year in which the loss was incurred) for, or by whom, the option may be exercised.

These provisions are designed to prevent the application of the "percentage of shareholding" tests to a "loss" company being avoided by the granting of options to purchase shares in the company. This device would enable a person who owned shares in the year in which a loss was incurred to retain ownership but grant to the person who is ultimately to become the beneficial owner an option to buy the shares at some later date when the accumulated losses have been allowed as a deduction.

The existing safeguards provided by section 80B(5.) may not be adequate to counter some types of special arrangements, not necessarily involving an option to purchase shares, the purpose of which is to avoid the application of the "percentage of shareholding" tests prescribed in the law. The new sub-section (5.) is designed to remove doubts as to the scope of the safeguards.

In broad terms, the proposed new sub-section (5.) will apply in relation to an arrangement entered into for the purpose (or for purposes that included the purpose) of maintaining an overt position regarding beneficial interests in a "loss" company designed to ensure the deductibility of the loss and also to ensure that the beneficial interests will change after the deduction for the loss has been obtained.

The sub-section will authorise the Commissioner in such a case to treat shares owned by a person in the year of income, who also owned shares throughout the year in which the loss was incurred, as not being owned by that person in the year of income. The following circumstances exemplify one type of case to which the sub-section is designed to apply.

X acquires shares in a "loss" company, Y Ltd., carrying rights to 60% of voting power, dividends and distributions of capital. The balance of the shares continue to be owned by the persons who owned the shares throughout the year in which the loss was incurred.

At the time the agreement covering the acquisition of the shares by X is executed, a separate agreement is entered into between X and the persons owning the balance of the shares in Y Ltd. Under the latter agreement those persons agree that, in the event of Y Ltd. at any time paying a dividend or making a distribution of capital, they will pay X an amount equivalent to the amount of dividends or distributions received by them in respect of those shares.

In this situation, the shares in Y Ltd. which theoretically carry rights to 40 per cent of dividends or distributions of capital are rendered valueless to the owner. However, technically the tests of section 80A of the Principal Act may be met by Y Ltd.

Sub-section (5.) is designed to apply in such a case so that the persons owning the shares that were the subject of the second agreement would be treated as not owning those shares during the year of income. In consequence, the tests of section 80A would not be met by Y Ltd.

As the sub-section is to apply only in relation to arrangements embracing the purpose of avoiding the provisions of the income tax law governing the deduction of company losses, it will not, of course, have application to any dealing in relation to shares which is entirely divorced from such a purpose.

A taxpayer dissatisfied with the Commissioner's decision under the sub-section will have the usual rights of objection and reference to a Taxation Board of Review.

Clause 21:

It is proposed by clause 21 to repeal sections 80C and 80D of the Principal Act and to insert four new sections - sections 80C to 80F - in their stead. The main purposes of these changes are to include in the law an alternative "continuing business" test, and to make provision in relation to certain cases where there is a change in direct beneficial shareholdings sufficient to preclude deduction of a prior year loss, but this change has not occurred in relation to indirect beneficial interests.

Section 80C : Losses of Previous Years of a Subsidiary Not to be Taken into Account unless there is Substantial Continuity of Beneficial Ownership of Shares in Holding Company.

The provisions of the existing section 80C are, in principle, being re-enacted in this section. The section will apply where a "loss" company is, by reason of holdings of its shares, directly or indirectly under the control of another company.

In the absence of section 80C, a loss incurred by a subsidiary company would remain an allowable deduction despite a complete change in the beneficial ownership of the shares in the parent company. Such a change in the shareholdings of the parent company would not vary the beneficial ownership of shares in the subsidiary company. Accordingly, section 80A would not be effective in relation to a loss incurred by the subsidiary company in a previous year.

Sub-section (1.) provides that, for the purposes of section 80C, a "holding company" is a company which had a controlling interest in another company (referred to as "the subsidiary company") at any time during a year in which a loss was incurred by the subsidiary company. For this purpose, the "holding company" is a company which was not, either directly or indirectly, controlled by another company at the time when it held a controlling interest in the subsidiary company.

The section is designed to apply where the holding company directly controls a subsidiary company by ownership of shares in the subsidiary and also where the holding company indirectly controls the subsidiary through its shareholdings in one or more interposed companies. Accordingly, section 80C will apply to the shareholdings of the main parent company notwithstanding the interposition of other holding companies between the subsidiary company and the parent company.

A loss incurred by a subsidiary company will not be deductible in a later year unless the Commissioner is satisfied that -

(a)

the holding company controlled, directly or indirectly, the subsidiary company throughout the year of income; and

(b)

shares in the holding company carrying the specified rights were, throughout the year of income, beneficially owned by persons who beneficially owned shares in that company carrying rights of the same kind throughout the year in which the loss was incurred.

The rights specified in sub-section (1.) of section 80C in relation to the holding company are of the same nature as those already described. Very broadly stated, these are rights to 40 per cent of the voting power in the holding company, and 40 per cent of dividends paid and any distributions of capital by the company.

Section 80C will, however, have effect subject to the provisions of section 80D which are explained later in this memorandum. In some circumstances, the application of section 80C may deny a deduction for a loss incurred by a subsidiary company although the persons who had substantial beneficial interests in the subsidiary throughout the year in which a loss was incurred continue to have those interests throughout the year of income. Where circumstances of this nature occur, it will be open to the company to request that its entitlement to a deduction for a prior year loss be determined by reference to section 80D.

Sub-section (2.) will apply where a change in beneficial ownership of shares to which the section applies occurs during the year in which a loss is incurred.

In these circumstances the Commissioner will be authorised, where other conditions are satisfied, to allow as a deduction in a later year of income a part of the loss incurred in that year. The part which may be allowed is such amount as the Commissioner considers to be the loss incurred after the change in beneficial ownership of the shares.

As in the case of other discretions provided for the Commissioner, a taxpayer affected by the Commissioner's decision will have the usual rights of reference to a Taxation Board of Review which will be entitled to substitute its own opinion for that of the Commissioner.

Sub-section (3.) is a drafting measure and substantially re-enacts sub-section (3.) of the existing section 80C. The sub-section will provide that, in the application of sub-sections (1.) and (2.) of section 80C, the special safeguarding provisions contained in section 80B of the Principal Act relating to the ownership of, and special rights attached to, shares in a company apply in relation to shares in the holding company and shares in companies interposed between the holding company and the "loss" company.

Sub-section (4.) is also a drafting measure which provides that if the provisions of section 80D, now proposed to be inserted in the Principal Act, are applied in determining whether a loss incurred by a subsidiary company is to be taken into account, section 80C is not to apply. An explanation of section 80D follows.

Section 80D : Tracing Beneficial Ownership of Shares Through a Series of Companies for the Purposes of Section 80A.

One purpose of section 80D is to preserve an entitlement to a deduction for a loss incurred in a prior year where, although there is a change in the beneficial ownership of shares in a "loss" company or a holding company otherwise sufficient to preclude the deduction, the persons who had the requisite beneficial interests in the loss company, either directly or indirectly, throughout the year in which the loss was incurred continue to have those interests throughout the year of income.

One example of such a case is where the ownership of shares in a sub-subsidiary company in a group of companies is transferred from one company in the group to another company in the same group. Under the present law a loss incurred by the sub-subsidiary company before the change occurred would not be deductible in a year of income after the change, even though there had been no significant change in the beneficial ownership of shares in the parent company of the group.

Another example is where the ownership of shares in a subsidiary company is transferred from the parent company to persons who had been the shareholders in the parent company. A loss incurred by the subsidiary company in a previous year and before the change in shareholdings occurred would not be deductible under the present law.

In order to make provision for these and other special cases of somewhat infrequent occurrence, section 80D will enable the beneficial interests of a person in the voting power, dividends and capital of a "loss" company to be traced through any companies interposed between the loss company and that person for the purposes of the tests in section 80A, if the "loss" company requests that section 80D be applied.

If, after the beneficial interests are traced, it is found that persons who had the specified beneficial interests in the "loss" company throughout the year of income are the same persons who had such interests throughout the year in which the loss was incurred, neither section 80A nor section 80C will operate to deny a deduction for the loss. In broad terms, the specified interests will be interests equivalent to rights to 40 per cent of the voting power, 40 per cent of dividends paid and 40 per cent of any distributions of capital.

This principle will also be applied where two or more companies had a controlling interest in a "loss" company during the year the loss was incurred but no single company had a controlling interest. In these circumstances section 80C would not apply in respect of the companies concerned and, in the absence of section 80D, the loss would be deductible notwithstanding a complete change in the beneficial ownership of shares in the companies which, directly or indirectly, controlled the "loss" company.

It is proposed that, in cases of this nature, regard shall be had, for the purposes of section 80A, to the persons who, by the application of the tracing procedures provided by section 80D, have beneficial interests in the "loss" company throughout the year in which the loss was incurred and the year of income.

Sub-section (1.) of section 80D provides that the section will apply only in the two sets of circumstances outlined in paragraphs (a) and (b).

Paragraph (a) will enable a "loss" company to request that the section be applied. Such a request is to be furnished at the time when the company lodges its first return of income derived in the year in which the loss is claimed as a deduction. A further period may, however, be allowed by the Commissioner for the lodgment of the request.

Two examples of the type of case where it would be to the advantage of a loss company for the section to be applied have been given in the introductory notes to this section.

Another example is where a company that had a controlling interest in a "loss" company during the year in which a loss was incurred ceased to have that interest either before or during the year of income. By reason of section 80C, the loss would not be deductible even though it were found that the persons who had beneficial interests in not less than 40 per cent of the voting power, dividends and capital of the "loss" company throughout the year in which a loss was incurred, held those interests throughout the year of income. In a case of this nature the company will be able to preserve its entitlement for a deduction of the loss by requesting that section 80D be applied.

If a "loss" company requests that section 80D be applied, the provisions of section 80C will not have effect. The deductibility of the loss will then be determined by reference to the tests of section 80A of the Principal Act.

In applying the tests of section 80A, regard will be had to the beneficial interests held in the "loss" company, whether directly or through one or more interposed companies, by individual shareholders throughout the year the loss was incurred and the year of income. Indirect beneficial interests will be traced to individual shareholders by the application of succeeding provisions of section 80D.

Paragraph (b) provides that the section will apply where, at any time during the year of incurrence of the loss, two or more companies owned shares in the "loss" company or in a company which, directly or indirectly, controlled the "loss" company, but no single company had a controlling interest in the "loss" company. This situation would, for example, occur where two companies each beneficially owned one-half of the shares in the "loss" company carrying one-half of the voting rights.

Where these circumstances exist, neither the provisions of section 80A nor section 80C would be effective in respect of changes in shareholdings of the companies that have the controlling interest. Accordingly, deductions would continue to be available for the losses notwithstanding a complete or major change in the shareholdings of those companies. In order to meet this type of situation it is proposed that the entitlement of the "loss" company to deductions for prior year losses shall be determined by reference to the persons who, directly or indirectly, had beneficial interests in the company throughout the year in which the loss was incurred and the year of income. As in cases where a "loss" company has requested that section 80D be applied this will, in effect, mean that the tests of section 80A will be applied but, in the application of those tests, indirect beneficial interests will be traced to individual shareholders.

Sub-section (2.) provides the means for determining the voting interest a person has in a "loss" company through an interposed company at any time during the year a loss is incurred and at any time during the year of income.

The voting interest of the person is to be ascertained in accordance with the formula -

(Voting interest of the interposed company in the "loss" company.) * ((Voting interest of the person in the interposed company.)/(Total voting interests in the interposed company.))


The voting interest so ascertained will be added to any other voting interest that the person may have in the "loss" company either by virtue of his ownership of shares in that company or through another interposed company. The aggregate voting interest will then, by virtue of sub-section (5.) of the proposed section 80D, be treated as representing the person's voting rights at relevant times for the purposes of section 80A.

Sub-section (3.) is designed to enable the voting interests of a person in a "loss" company to be traced through any number of interposed companies. The principles of sub-section (2.) will be applied successively to each company having a voting interest in the "loss" company until ultimately the indirect voting interests of individuals in the "loss" company are ascertained.

Sub-section (4.) will enable the principles of sub- sections (2.) and (3.) to be applied for the purpose of tracing dividend interests and capital interests of individual shareholders in a "loss" company through any companies interposed between them and the "loss" company. These other interests will be determined on the same basis as voting interests.

Sub-section (5.) will enable the indirect voting interest, dividend interest and capital interest of a person in a "loss" company to be adapted for the purposes of the tests in section 80A of the Principal Act.

As already explained, section 80A provides, broadly, that a loss incurred by a company is not deductible in a later year unless the Commissioner of Taxation is satisfied that shares in the company carrying rights to 40 per cent of the voting power, 40 per cent of dividends paid and 40 per cent of distributions of capital are beneficially owned throughout the year of income by the same persons who owned shares carrying rights of the same kind throughout the loss year.

In the application of section 80D to these tests, regard will be had to the rights in respect of voting power, dividends and distributions of capital represented by a person's voting interest, dividend interest and capital interest in the "loss" company as ascertained under the tracing procedures provided by section 80D.

Paragraph (a) will have the practical effect that where a person has a voting interest (as ascertained in accordance with section 80D) in a loss company at a particular time, he is to be treated for the purposes of section 80A as beneficially owning shares in that company carrying a right to vote at that time.

If, for example, the shares in a "loss" company carried rights to 1000 votes, and X, an individual, is found to have, after the application of sub-sections (2.) and (3.) of section 80D, a 4/10ths voting interest in the company, he is to be treated as beneficially owning shares in the company carrying rights to 400/1000ths or 40 per cent of the voting power in the company. If X held that voting interest and an equivalent dividend interest and capital interest in the company throughout the year in which the loss was incurred and throughout the year of income, the deductibility of the loss would not be affected by changes in the direct shareholdings of the company.

Paragraphs (b) and (c) will apply in relation to a dividend interest and a capital interest upon the same general basis as applies in relation to a voting interest. Broadly stated, a person having such an interest will be treated as beneficially owning shares in the "loss" company carrying rights to dividend and capital distributions to the extent of his dividend interest and capital interest respectively.

Paragraph (d) is designed to apply where two or more persons have joint beneficial interests in shares of a company. Each person will be treated as having a separate voting, dividend or capital interest proportionate to his interest in the shares.

Section 80E : Losses of Previous Years may be taken into Account where Company carries on the Same Business.

This section is designed to provide a "continuing business" test in relation to a "loss" company as an alternative to the "percentage of shareholding" tests prescribed in sections 80A and 80C.

If a company that has incurred a loss in an earlier year satisfies the requirements of section 80E, the entitlement to a deduction for the loss will not be disturbed in consequence of changes in the beneficial ownership of shares in the company.

Sub-section (1.) of section 80E sets out the conditions under which an entitlement to a deduction for a loss incurred in an earlier year by a company will be preserved notwithstanding changes in the shareholdings of the company.

Paragraph (a) of sub-section (1.) is a formal provision. It provides that the section is capable of application, subject to the tests of paragraphs (b), (c) and (d) being met, where the loss would not, but for the section, be deductible because of changes in the beneficial ownership (either direct or indirect) of shares in the company after the loss was incurred.

Paragraph (b) is also formal. It provides that the section is, subject to the other tests being met, applicable if, but for the relevant changes in shareholdings, the loss would be deductible in accordance with section 80 of the Principal Act.

Paragraph (c) states a further requirement, subject to the other tests being met, for the application of the section. This requirement is that the company be carrying on at all times during the year of income in which the loss may be deductible the same business as it carried on immediately before the relevant change in shareholdings took place.

Paragraph (d) states final requirements for application of the section additional to those provided by the preceding paragraphs. One requirement is that the company has not during the year of income derived income from business of a kind that it did not carry on prior to the relevant change in shareholdings. The other is that it has not derived income during that year from a transaction of a kind that it had not entered into in the course of its business operations prior to the change.

Where these conditions are fulfilled, a deduction for the loss of a prior year will, subject to the provisions of sub-section (2.), be available notwithstanding a change in shareholdings that would otherwise preclude the deduction being allowed.

Paragraphs (c) and (d) of sub-section (1.) will not operate to deny a deduction for a prior year loss where a company merely expands the business that it carried on before the change in its shareholdings occurred. The paragraphs are designed to deny such a deduction in such circumstances as where the "loss" company and a company that takes it over enter into transactions which have, as their purpose or effect, the transfer of income from the takeover company (or an associated enterprise) to the "loss" company, e.g., an arrangement under which the takeover company pays a service fee to the "loss" company until the prior year loss has been fully deducted for income tax purposes.

The purpose of sub-section (2.) is to provide a safeguard against special arrangements under which a company that has incurred a loss in a previous year, or anticipates incurring a loss in a particular year, commences to carry on a new business or enters into a new kind of transaction prior to a contemplated change in its shareholdings.

If a purpose of the commencement of the new business, or the entering into the new kind of transaction, is to obtain a deduction under section 80E for a loss of a prior year after a contemplated change in shareholdings, the section will not apply in respect of that loss. In these circumstances the deductibility of the loss will be determined by reference to the "percentage of shareholding" tests of section 80A or 80C.

Section 80F : Amendment of Assessments.

In some cases a company may be allowed a deduction for a loss of an earlier year because relevant particulars relating to changes in shareholdings in a company and the rights attached to shares issued by the company are not made available to the Commissioner of Taxation when an assessment is made.

Section 80F will authorise the Commissioner to amend an assessment in order to give effect to sections 80A and 80C in the light of the special safeguarding provisions of section 80B within six years of tax becoming due and payable under an assessment. This is the period in which assessments generally may be amended where there has not been a full and true disclosure of all of the relevant facts.

Clauses 22 to 26 : Contributions to Superannuation Funds for the Benefit of Employees.

By these clauses it is proposed to amend certain provisions of Subdivision AA - Division 3 - Part III. of the Principal Act which were incorporated in that Act last year.

The provisions of Subdivision AA govern the deductibility of contributions to a superannuation fund for the benefit of employees. Subject to the limitations prescribed in those provisions, deductions are available in respect of contributions to a fund for the benefit of -

(a)

employees engaged in producing assessable income of their employer; and

(b)

employees resident in Australia or the Territory of Papua and New Guinea engaged in the business of their employer.

The contributions are deductible only if the rights of the employees and their dependants to receive the benefits to be provided by the fund are fully secured.

The aggregate of the deductions available in a year of income in respect of contributions on behalf of an employee is limited to the greater of Pd200 or 5 per cent of the employee's remuneration for the year. The Commissioner of Taxation is, however, authorised to allow a larger amount as a deduction where special circumstances exist.

Sections 82AAG to 82AAL in Subdivision AA relate to benefits provided in a fund for employees who forgo rights to receive the benefits on ceasing to be members of the fund - usually on resignation or dismissal from their employment (see notes on clause 5 of the Bill as to the circumstances in which rights to receive benefits are deemed to have ceased).

Broadly stated, the provisions of the existing sections 82AAG to 82AAL provide that deductions for contributions to a fund shall be reduced by -

(a)

the amount of benefits the right to which has ceased that have not been applied to provide benefits for any other employee during the year in which the cessation occurred, or the two months after the end of that year or such further period as the Commissioner of Taxation allows; and

(b)

the amount by which the sum of such benefits that have been applied to provide benefits for another employee, and contributions made for the benefit of that employee, exceed the maximum deduction stipulated in the law in respect of contributions for the benefit of that employee.

To meet special circumstances it is also provided that no reduction in the deductions allowable for contributions is made if benefits the rights to which have ceased are applied for purposes approved by the Commissioner of Taxation.

It is convenient for the purpose of explaining the provisions covered by this clause to refer to benefits the rights to which have ceased as "benefits forgone".

The principles upon which the existing provisions are based are to be retained in new provisions which it is proposed by the Bill to insert in Subdivision AA. Amendments being made are designed to modify the procedures to be followed in relation to benefits forgone with a view to reducing practical difficulties that would otherwise be encountered by employers and trustees of large superannuation funds.

Under the provisions as proposed to be amended, the Commissioner of Taxation will be authorised, upon the request of the trustee of a fund, to approve a scheme for the progressive application of benefits forgone. If an approved scheme is adhered to, adjustments of deductions for contributions made to the fund by the employer will not be necessary.

Where a fund does not operate under an approved scheme, benefits forgone by employees will be dealt with on a basis similar to that now provided in the law. The new provisions are, however, designed to modify the present procedures under which the amount of the adjustment of an employer's deductions for contributions to a fund is determined. More detailed explanations of these provisions follow.

Clause 22: Interpretation.

This clause will effect a drafting amendment to sub- section (1.) of section 82AAA of the Principal Act which contains definitions of terms used in Subdivision AA.

The definition of "superannuation benefits" is to be omitted. As already explained, that definition is being incorporated in section 6(1.) of the Principal Act by clause 4(c) of this Bill - see notes at page 16 of this memorandum.

Clause 23: Application of Benefits the Right to Receive Which Has Ceased.

It is proposed by clause 23 to repeal sections 82AAG to 82AAL, inclusive, of the Principal Act and to insert new sections in their stead. The new sections will apply as from the commencement of the 1965-66 income year, the date from which the sections to be repealed would have applied.

Section 82AAG : Amount of Benefits the Right to Receive Which Has Ceased May be Applied in Accordance with Approved Scheme.

Section 82AAG contains provisions which will enable benefits forgone by employees to be applied in accordance with a scheme approved by the Commissioner of Taxation.

Sub-section (1.) will authorise the Commissioner, at the request of the trustee of a fund, to approve a scheme for the progressive application, within a reasonable period, of benefits forgone by employees. Any restrictions or conditions in respect of the application of the benefits are to be specified in the scheme.

Paragraphs (a), (b) and (c) prescribe the purposes for which the benefits forgone may be applied. Those benefits may be applied to provide the benefits in respect of which other employees or their dependants have fully secured rights, or to provide additional benefits for those employees or their dependants. They may also be applied for other purposes approved by the Commissioner.

Sub-section (2.) formally requires that a request for an approval of a scheme be in writing and signed by, or on behalf of, the trustee of the fund. It is to be lodged with the Commissioner and is to set out the provisions of the scheme in respect of which the trustee seeks approval.

Sub-section (3.) will require the Commissioner to give written notice to the trustee of his decision on any request for approval of a scheme.

Sub-section (4.) will provide the machinery under which a scheme that has been approved by the Commissioner in relation to a fund may be varied to meet changed circumstances of the fund that may make it difficult or impracticable for the trustee to continue to comply with the terms of an existing scheme. The provision will permit the trustee of a fund to request approval of a different scheme in substitution for a scheme that has been approved by the Commissioner.

Sub-section (5.) provides that a scheme approved by the Commissioner will have effect in respect of the year of income in which the request is lodged and subsequent years of income. It will also have effect in respect of a year of income if it is lodged within two months after the end of the year or within such further period as the Commissioner allows.

Sub-section (6.) is a machinery provision which provides that the succeeding provisions of section 82AAG will apply where the rights of employees to receive benefits from a fund cease during an income year in relation to which a scheme has been approved by the Commissioner. These benefits are referred to in succeeding provisions of section 82AAG as "terminated benefits".

Sub-section (7.) formally provides that the provisions of sections 82AAH to 82AAL will not apply if the Commissioner is satisfied that the terminated benefits have been dealt with in accordance with an approved scheme. Those sections, which are explained later in this memorandum, relate to the treatment of benefits in a fund forgone by employees where an approved scheme for the application of the benefits is not in operation.

Sub-section (8.) will have effect where terminated benefits are not applied by a trustee in accordance with a scheme that has been approved by the Commissioner. The sub-section will operate subject to sub-section (10.) which authorises the Commissioner to disregard a failure of a trustee to comply with an approved scheme if he is satisfied that the trustee endeavoured in good faith to comply with it.

Paragraph (a) will require the Commissioner to inform the trustee in writing that he is not satisfied that the scheme has been complied with in relation to the terminated benefits.

Paragraph (b) will ensure that the provisions of sections 82AAH to 82AAL have effect in respect of the terminated benefits that have not been dealt with in accordance with an approved scheme for the income year in which the trustee failed to comply with the scheme.

By paragraph (c) a scheme that has not been complied with in a year of income will cease to have effect for subsequent years of income.

Sub-section (9.) will provide the basis for applying sections 82AAH to 82AAL in relation to terminated benefits that have not been dealt with by a trustee in accordance with a scheme that has been approved by the Commissioner.

As already mentioned, sections 82AAH to 82AAL make provision for reducing deductions available for contributions to a superannuation fund for employees in certain circumstances. The amount by which the deductions may be reduced is "the value of the previous deductions" in relation to contributions to provide the benefits forgone by employees. This term is defined in section 82AAI (see notes on that section). In relation to terminated benefits that have not been dealt with by a trustee in accordance with an approved scheme, "the value of the previous deductions" will be ascertained, for the purposes of sections 82AAH to 82AAL, as provided in paragraphs (a) and (b) of sub-section (9.).

Paragraph (a) provides for the normal type of case where only the taxpayer and the employee have contributed to provide the terminated benefits. The amount of those benefits that have not been applied in accordance with the approved scheme will be "the value of the previous deductions" for the purposes of sections 82AAH to 82AAL.

Paragraph (b) makes provision for other types of cases the circumstances of which may differ widely. In these cases "the value of the previous deductions" will be so much of the terminated benefits that have not been applied in accordance with the scheme as the Commissioner considers to be reasonable in the circumstances.

A taxpayer affected by a decision of the Commissioner under this provision will have the usual rights of objection and reference to a Taxation Board of Review.

Sub-section (10.) will authorise the Commissioner to disregard the failure of a trustee to comply with the terms of a scheme if he is satisfied that the trustee endeavoured in good faith so to comply and that it would be reasonable in the circumstances to disregard the failure. In this event, the scheme will continue to operate notwithstanding the fact that the trustee failed to comply with all of its terms in relation to a year of income.

Sub-section (11.) will permit the approval of a fresh scheme in cases where an earlier approved scheme has ceased to operate because of a failure to comply with its terms and the circumstances are such that the Commissioner has not considered it reasonable to disregard the failure. If approved the fresh scheme will, by virtue of sub-section (5.), have effect in respect of the year of income in which the request for approval was lodged and succeeding years of income. It will also, if approved, have effect in respect of a year of income if the request for approval was lodged within two months after the end of that year or within such further period as the Commissioner allows.

Sub-section (12.) will provide the authority under which a taxpayer's assessment may be amended within a period of six years after the due date for payment if it becomes necessary to adjust any deductions allowed to the taxpayer in respect of contributions to the fund because of a failure to apply benefits forgone in accordance with the provisions of an approved scheme. This is the period in which assessments generally may be amended where there has not been a full and true disclosure of all relevant facts.

Section 82AAH : Total Deductions Allowable to Taxpayer in Respect of all Employees to be Reduced by Value of Previous Deductions Allowed in Respect of Benefits the Right to Receive Which has Ceased.

The provisions of section 82AAH re-enact, in principle, the provisions of the existing section 82AAG of the Principal Act. These provisions will have effect where deductions have been allowed or are allowable to a taxpayer in respect of contributions to a fund for the benefit of an employee and the right of the employee to receive benefits from the fund has ceased.

As explained earlier in this memorandum, section 82AAH and other succeeding provisions will not apply if an approved scheme is in operation for the application of benefits forgone by employees.

Under section 82AAH, a taxpayer's deductions in respect of contributions to a fund in the year in which the right of an employee to receive benefits ceased, or a later year, may be reduced. Expressed in broad terms, the deductions will be reduced by so much of those benefits as is not applied to provide benefits for other employees or for a purpose approved by the Commissioner. If the benefits forgone are applied in a way that results in the total amount set apart in the income year for any employee exceeding the permitted maximum (Pd200 or, if greater, 5 per cent of the employee's remuneration) the amount that would otherwise have been deductible for contributions to the fund will, in effect, be reduced by the excess. The Commissioner is, however, authorised to reduce the deductions otherwise allowable for contributions by an amount that is less than the excess if he is satisfied that special circumstances exist.

Where, for any reason, the deductions for contributions cannot be appropriately reduced in the year in which the right ceased, the reduction will be made in a subsequent income year. If the amount of unapplied benefits by which the deductions are to be reduced exceeds the amount of the contributions that would otherwise be deductible, the excess will be carried forward to a later year. If the taxpayer is not entitled to any deductions for contributions in the year in which the right to benefits ceased, the whole of the unapplied benefits will be carried forward to reduce deductions for contributions made in a later year.

In order to give effect to this principle, section 82AAH provides that the total deductions otherwise allowable for contributions made to a fund in a year of income shall be reduced by so much of "the value of the previous deductions" in respect of all benefits forgone by employees as remains after excluding from that value amounts by which the deductions for contributions have been reduced in earlier income years. These provisions will not, however, apply to benefits to which an employee's right ceased before the commencement of the 1965-66 income year.

The value of the previous deductions is to be ascertained in accordance with the proposed section 82AAI as modified by subsequent provisions. Generally speaking, that value will be part only of the amount ascertained under section 82AAI.

Section 82AAI : Ascertainment of Value of Previous Deductions.

Section 82AAI sets out the method to be adopted in calculating "the value of the previous deductions" in respect of contributions made by a taxpayer to provide the benefits for an employee whose right to receive the benefits has ceased and replaces the existing section 82AAH of the Principal Act. That value, as determined under section 82AAI, will be reduced by the benefits which are applied for the purpose of providing benefits for other employees to the extent prescribed by section 82AAJ and for purposes approved by the Commissioner to the extent prescribed by section 82AAL.

Sub-section (1.) sets out the basis on which "the value of the previous deductions" will generally be calculated.

Paragraph (a) provides that where a person other than the taxpayer and the employee has not made contributions to provide the benefits forgone by the employee, "the value of the previous deductions" is equal to the amount of those benefits.

Paragraph (b) makes provision for the case where the taxpayer and a person or persons other than the taxpayer and the employee have each contributed to only the one fund to provide the benefits forgone by the employee. In these circumstances "the value of the previous deductions" will be an amount calculated in accordance with the formula -

(Benefits forgone by employee) * ((Amount contributed to the fund by the taxpayer to provide the benefits forgone.)/(Sum of amounts contributed to the fund by the taxpayer and persons other than the employee to provide the benefits forgone.))


This formula will enable a basis to be applied in cases falling under paragraph (b) that closely corresponds with the basis applied by paragraph (a).

Paragraph (c) will apply in cases not covered by either paragraph (a) or (b). In such cases, "the value of the previous deductions" will be so much of the amount of the benefits forgone by the employee as the Commissioner considers to be reasonable in the circumstances.

This provision is necessary to enable an appropriate apportionment to be made in special circumstances not covered by the specific provisions of paragraphs (a) and (b). The application of paragraph (c) may, for example, be occasioned by such circumstances, or combinations thereof, as contributions by a number of persons to more than one fund for the benefit of the employee whose right to receive the benefits has ceased or by the cessation of an employee's right to benefits in one fund while retaining his right to receive benefits from another fund. It is impracticable to devise a formula which would be uniformly appropriate in the differing circumstances of all such cases.

A determination made by the Commissioner under this paragraph will be subject to the usual rights of objection and reference to a Taxation Board of Review.

Sub-section (2.) will apply where the taxpayer has not been allowed a deduction in respect of a part of the amounts contributed by him to provide the benefits forgone by an employee. It will enable "the value of the previous deductions" to be appropriately reduced in such cases where the taxpayer furnishes to the Commissioner the necessary information concerning the contributions he has made to provide the benefits and the deductions allowed or allowable in respect of those contributions. It is mentioned that this information will not necessarily be in the Commissioner's possession; taxpayers frequently only inform the Commissioner of contributions that are deductible.

In the circumstances described "the value of the previous deductions" in respect of the benefits forgone by the employee will be calculated in accordance with the following formula -

(Amount determined under section 82AAI(1.)) * ((Deductions allowed or allowable in taxpayer's assessments in respect of contributions to provide benefits forgone by the employee.)/ (Total of taxpayer's contributions to provide the benefits forgone.))


If the deductions allowed or allowable to the taxpayer for contributions on behalf of the employee whose right to benefits has ceased have been reduced in any year by the operation of section 82AAH, the amounts to be taken into account for the purpose of the formula are the amounts of the contributions that would have been deductible if section 82AAH had not been applied. (See notes on section 82AAH).

Section 82AAJ : Value of Previous Deductions to be Reduced Where Amount of Benefits the Right to Receive Which Has Ceased is Applied for Other Employees.

This is a further provision that will apply where an amount is included in a fund to provide benefits forgone by an employee. The section will, to a substantial extent, re-enact the provisions of the existing section 82AAI of the Principal Act.

The first step required by the section is to ascertain whether, within two months after the end of the income year in which the right to receive benefits ceased, or within such further period as the Commissioner may allow, the benefits forgone have been applied for the purpose of providing benefits for an eligible employee.

If such an application has been made, an amount ascertained in accordance with paragraphs (a), (b) or (c) of sub-section (1.) of the section will be excluded from "the value of the previous deductions" in relation to the benefits forgone. This exclusion from "the value of the previous deductions" will, of course, be favourable to the taxpayer because only the reduced value will be offset against the deductions for contributions otherwise allowable to the taxpayer.

Paragraph (a) of sub-section (1.) prescribes the method of ascertaining the amount to be excluded from "the value of the previous deductions" where only the taxpayer and the employee have contributed to provide the benefits forgone by the employee. The amount to be excluded will be the amount of those benefits that has been applied for the benefit of another eligible employee.

Paragraph (b) makes provision for the case where the taxpayer and a person or persons other than the taxpayer and the employee have each contributed to only the one fund to provide the benefits forgone by the employee. In these circumstances the amount to be excluded from "the value of the previous deductions" will be the amount determined in accordance with the formula -

(Amount of benefits forgone applied for the benefit of another employee) * ((Amounts contributed to the fund by the taxpayer to provide the benefits forgone.)/(Sum of amounts contributed to the fund by the taxpayer and persons other than the employee to provide the benefits forgone.))


Paragraph (c) will apply in cases not covered by paragraphs (a) and (b). In such cases, the amount to be excluded will be so much of the benefits forgone by the employee that are applied for the benefit of another employee as the Commissioner considers to be reasonable in the circumstances. This provision is necessary to meet widely differing circumstances that may occur in isolated cases.

The determination to be made by the Commissioner under this paragraph will be subject to the usual rights of objection and reference to a Taxation Board of Review. Similar rights of objection and reference to a Board of Review will apply in relation to determinations to be made by the Commissioner under succeeding provisions of this section.

Sub-section (2.) will place an upper limit on the amount by which "the value of the previous deductions" may be reduced under sub-section (1.).

The statutory maximum deduction permitted in respect of contributions for the benefit of an employee is, in the absence of special circumstances, Pd200 or, if greater, 5 per cent of remuneration. The upper limit mentioned will be the excess of that maximum deduction over the contributions made to the fund by the taxpayer during the income year on behalf of an employee in respect of whom benefits to which the right of an employee has ceased have been applied.

Where, for example, the statutory maximum deduction is Pd200 and the contribution is only Pd150, there remains an amount of Pd50 that could have been deductible if the contribution had been Pd200 or more. In these circumstances, the reduction in "the value of the previous deductions" in relation to the employee would, in accordance with sub-section (2.), be limited to Pd50. The limitation imposed by sub-section (2.) is, however, subject to the provisions of sub-section (4.) of section 82AAI.

Sub-section (3.) will apply where the deduction allowable for contributions on behalf of an employee in respect of whom benefits forgone are applied equals or exceeds the statutory maximum of Pd200 or, if greater, 5 per cent of remuneration. A deduction in excess of the statutory maximum would be allowable where the Commissioner has exercised his discretion under paragraph (b) of section 82AAE of the Principal Act.

In these circumstances, the amount contributed on behalf of that employee would, in no case, be less than the statutory maximum deduction. It is accordingly provided by sub-section (3.) that, in such a case, "the value of the previous deductions" will not be reduced by any part of the benefits forgone applied for the benefit of the employee.

The provisions of this sub-section are, however, subject to the provisions of sub-section (5.) of section 82AAI.

Sub-section (4.) will authorise the Commissioner to reduce "the value of the previous deductions" by an amount that is greater than the amount permitted by sub- section (2.) of section 82AAI (see notes on that sub- section). If the Commissioner is satisfied that special circumstances exist, he may reduce "the value of the previous deductions" by such greater amount as he considers reasonable in the circumstances. The reduction of "the value of the previous deductions" in this manner will, in effect, result in a corresponding increase in the deductions available to the taxpayer for contributions to provide benefits for employees.

Sub-section (5.) is complementary to sub-section (4.). It will also authorise the Commissioner, in special circumstances, to reduce "the value of the previous deductions" by such amount of a benefit forgone that is applied for an employee as he considers reasonable. This discretion of the Commissioner will modify the operation of sub-section (3.) of section 82AAI. That sub-section does not permit "the value of the previous deductions" to be reduced where the deduction allowable for a contribution on behalf of an employee is equal to, or exceeds, the statutory maximum (see notes on sub-section (3.)). The application of sub-section (5.) will result in an increase in the deductions available to the employer in respect of his contributions to provide benefits for employees.

Sub-section (6.) is a machinery provision and will require the Commissioner to exercise his discretion under sub-sections (4.) and (5.) of this section on the same general basis as he adopts in the exercise of his discretion under paragraph (b) of section 82AAE of the Principal Act.

The provisions of section 82AAE(b), which were incorporated in the Principal Act last year, re-enacted provisions that have been in the income tax law for many years. These provisions authorise the Commissioner to allow a deduction in excess of the statutory maximum (of Pd200 or, if greater, 5 per cent of remuneration) if he is satisfied that special circumstances exist.

The practical effect of sub-section (6.) is that, in the exercise of the new discretions under sub-sections (4.) and (5.) of this section, the Commissioner will have regard to principles established over a long period in the exercise of his existing discretionary power relating to deductions for contributions to funds to provide benefits for employees.

Sub-section (7.) will operate only where persons, other than the taxpayer and the other employee for whom benefits forgone are applied, have contributed in the year of income to provide benefits for that employee.

In these circumstances, the provisions of sub-sections (2.), (3.), (4.), (5.) and (6.) will not apply. The value of the previous deductions will be reduced under sub- section (1.) by such amount as the Commissioner considers to be reasonable, having regard to the provisions of section 82AAE (which specifies the maximum annual deduction available to any one or more taxpayers contributing in respect of one employee) and section 82AAF (which contains provisions for the ascertainment of the deductions allowable when two or more taxpayers contribute for the one employee).

Section 82AAK : Special Provisions Where Amount of Benefits the Right to Receive Which has Ceased is Applied for Associated Persons.

This section is designed as a safeguard against the application of excessive amounts of benefits forgone by employees for the purpose of providing additional benefits for an employee with whom the taxpayer contributing to the fund is associated.

The Commissioner of Taxation will be empowered, in these circumstances, to limit the amount by which "the value of the previous deductions" is to be reduced to the amount which, in his opinion, would have been applied for the employee if the employee had not been associated with the taxpayer.

Section 82AAK will extend the existing control of the Commissioner under section 82AAD of the Principal Act over deductions allowable in respect of excessive contributions by a taxpayer for the benefit of an employee with whom he is associated.

The circumstances under which a taxpayer is associated with an employee are specified in section 82AAB of the Principal Act. Broadly stated, a taxpayer is associated with an employee who is a relative of the taxpayer or, if the taxpayer is a private company, with employees who are shareholders or directors of the company or a related company or relatives of such shareholders or directors.

An opinion formed by the Commissioner pursuant to section 82AAK will be subject to the usual rights of objection and reference to a Taxation Board of Review. A Board may, of course, substitute its own opinion for that of the Commissioner.

Section 82AAL : Value of the Previous Deductions to be Reduced Where Benefits to Which Right has Ceased Applied for Other Approved Purposes.

This section will re-enact, in principle, the provisions of the existing section 82AAK of the Principal Act and will operate where an amount included in a fund to provide benefits forgone by an employee is applied, other than for the benefit of another employee, in a manner that has been approved by the Commissioner. For the purposes of this provision, the application of that amount may be made not later than two months after the end of the year in which the right of the employee to receive the benefits ceased or within such further period as the Commissioner allows.

The effect of this section will be to reduce "the value of the previous deductions" calculated in accordance with sections 82AAI, 82AAJ and 82AAK, by an amount ascertained in accordance with paragraph (a), (b) or (c) of section 82AAL. The deductions available to the taxpayer in respect of contributions to provide benefits for employees will, in consequence, be increased by a corresponding amount.

Paragraph (a) prescribes the amount to be excluded from "the value of the previous deductions" where only the taxpayer and the employee have contributed to a fund to provide the benefits to which the employee's right has ceased. The amount to be excluded will be so much of those benefits as has been applied for purposes approved by the Commissioner.

Paragraph (b) will apply where the taxpayer and a person or persons other than the employee have each contributed to only the one fund to provide the benefits forgone by the employee. In these circumstances, the amount to be excluded from "the value of the previous deductions" will be the amount determined in accordance with the formula -

(Amount of benefits forgone applied for approved purposes.) * ((Amounts contributed to the fund by the taxpayer to provide the benefits forgone.)/(Sum of amounts contributed to the fund by the taxpayer and persons other than the employee to provide the benefits forgone.))


Paragraph (c) will apply to cases not covered by paragraphs (a) and (b). In such cases, the amount to be excluded will be so much of the benefits to which the employee's right has ceased that is applied for approved purposes as the Commissioner considers to be reasonable in the circumstances. As in the case of paragraph (c) of section 82AAJ(1.) explained at page 75 of this memorandum, this provision is necessary to meet widely differing circumstances that may occur in isolated cases.

A determination by the Commissioner under this provision will be subject to the usual rights of objection and reference to a Taxation Board of Review.

Clause 24: Ascertainment of Deduction Attributable to Contributions to Fund Where Contributions Made to More Than One Fund.

Clause 24 will effect a drafting amendment to section 82AAN of the Principal Act made necessary by the repeal of the existing section 82AAH and the insertion of section 82AAI in its stead.

Section 82AAN applies in only the relatively few cases in which a taxpayer has contributed to more than one fund on behalf of an employee whose right to receive benefits has ceased. Even in these circumstances the section will have application only where the taxpayer's contributions to provide the benefits forgone have not been wholly allowed as deductions from assessable income and, for the purpose of calculating "the value of the previous deductions", the taxpayer has furnished to the Commissioner relevant information concerning the contributions made to provide the benefits forgone and the deductions allowed or allowable in respect of those contributions. It will not be necessary for section 82AAN to be applied in cases where the amount of the benefits forgone represents "the value of the previous deductions" (see notes on section 82AAI).

The amendment proposed does not affect the practical operation of the section in those few cases to which it will have application.

Clause 25: Special Provisions Relating to Fund Where a Specified Part of the Amount Included in the Fund is Not Appropriated for Each Employee.

It is proposed by this clause that section 82AAO of the Principal Act be repealed.

The purpose of section 82AAO was to provide rules under which the Commissioner of Taxation could, where necessary, determine the amounts that are included in a fund for a particular purpose where specific amounts of the fund have not been appropriated to provide benefits for each employee.

The rules are now to be included in section 6A to be inserted in the Principal Act by clause 5 of this Bill (see notes on that clause).

The provisions of section 82AAO will, accordingly, be rendered redundant and for this reason are being repealed.

Clause 26: Ascertainment of Part of Amount in Fund Applied For Each Employee Where Lump Sum Applied For Two or More Employees.

By this clause it is proposed to effect a drafting amendment in section 82AAP made necessary by the repeal of sections 82AAG to 82AAK of the Principal Act and the insertion of new sections in their stead.

Section 82AAP is designed to facilitate the practical application of the law where a benefit forgone by an employee is applied to provide benefits for two or more employees but the amount so applied in respect of each of those employees is not specified.

It will be necessary for the amount of benefits forgone that is applied for each of those employees to be ascertained for the application of section 82AAJ. For that purpose the Commissioner is authorised to determine the amount of the benefit forgone that is applied for the purpose of providing benefits for the employees concerned.

The amendment will not affect the practical application of the section.

Clause 27: Application of Division.

This is a drafting measure the purpose of which is to remove an ambiguity in section 83AA of the Principal Act. That section is not intended to affect the operation of two other sections of the Principal Act - sections 88A and 88B. The amendment proposed by this clause will make this position clear.

Clause 28: Interpretation.

This clause amends the definition of "special fund dividends" in section 103 of the Principal Act.

That definition serves to describe dividends paid by a private company that are not deductible in calculating the company's liability to tax on undistributed income. The dividends that are at present excluded in this way are dividends that are exempt from tax. The amendment proposed by this clause will have the effect of excluding dividends exempt from tax by reason of the proposed new section 44A (clause 14 of the Bill) in calculating a private company's liability to tax on undistributed income.

Clause 29: Rebates and Provisional Tax.

This clause makes an amendment of section 121DD of the Principal Act that is consequential on the proposed change in the name of the tax on incomes.

Section 121DD provides that the trustee of a superannuation fund is not liable to pay "provisional tax and contribution" in respect of income of the fund. The reference to "provisional tax and contribution" is being replaced by a reference to "provisional tax".

Clause 30: Compensation Payments for Conversion of Property of a Mine Owner for use in connection with the Decimal Currency System.

Introductory Note :

By this clause it is proposed to insert in the Principal Act a new section - section 124AA - relating to plant used in carrying on mining operations for the purpose of producing assessable income and in respect of which the Commonwealth pays compensation to the owner because of the introduction of decimal currency. The new section is complementary to section 62AAA proposed to be inserted in the Principal Act by clause 15 and which has already been explained.

Under Division 10 of the Principal Act, a taxpayer who incurs capital expenditure on necessary plant for the carrying on by him of mining operations on a mining property in Australia or the Territory of Papua and New Guinea for the purpose of producing assessable income may, in lieu of taking depreciation allowances on the cost of the plant, deduct the expenditure -

(a)

over the estimated life of the mine or twenty-five years, whichever is the shorter period;

(b)

in the year of income in which the expenditure is incurred; or

(c)

where assessable income has been appropriated for capital expenditure on necessary plant - in the income year in which the appropriated income was derived.

If depreciation allowances have been claimed on plant in respect of which compensation payments are made by the Commonwealth, the new section 62AAA proposed to be inserted by clause 15 of the Bill will have application. In other cases, section 124AA will apply if compensation payments are received in relation to plant (for example, calculating machines) used in carrying on the mining operations.

Capital expenditure that qualifies for deduction under Division 10 but which has not been allowed as a deduction at the end of a year of income, is "residual capital expenditure" of the mine operator.

Expenditure incurred by a mine operator in converting for use with decimal currency plant necessary in connexion with mining operations may qualify for deduction under Division 10 on whichever of the bases set out above that the mine-operator elects to adopt. To balance this, it is proposed, by the new section 124AA, that the residual capital expenditure of the mine operator at the end of an income year in which a payment is received from the Commonwealth shall be reduced by the amount of that payment. If the payment should exceed the residual capital expenditure, the excess will be included in the assessable income of the mine operator for the year in which the payment is received.

When a mine operator disposes of property in respect of which he has been allowed deductions for capital expenditure under Division 10, or such property is lost or destroyed, appropriate balancing adjustments are made. These adjustments are made by reference to the deductions that have been allowed or are allowable to the mine operator for capital expenditure on the property concerned and the consideration receivable in respect of the disposal, loss or destruction. If the sum of the deductions allowed or allowable and the consideration receivable exceeds the capital expenditure, the excess is included in the assessable income of the mine-operator. If that sum is less than the capital expenditure, the deficiency is allowable as a deduction.

In the calculation of the excess, or the deficiency, as the case may be, regard will be had to the amount of any compensation payment that is applied to reduce the residual capital expenditure of the mine-operator.

Section 124AA will apply in an assessment for any year in which a compensation payment is received by a mine- operator from the Commonwealth.

More detailed explanations of the provisions of the section are contained in the notes that follow.

Sub-section (1.) states the circumstances in which the proposed new section 124AA will apply. Broadly stated, these circumstances are where a mine operator receives a payment from the Commonwealth in respect of plant that requires conversion for use in decimal currency, if capital expenditure on the plant has been or is deductible under Division 10 of the Principal Act. As already mentioned, expenditure incurred on conversion of plant will qualify as capital expenditure for the purposes of deductions allowable under Division 10.

Sub-section (2.) will apply where the amount of the residual capital expenditure of a mine operator at the end of the income year in which a payment is received from the Commonwealth exceeds the amount of the payment. In these circumstances, the residual capital expenditure is to be reduced by the amount of the payment. The practical effect of this adjustment will be to reduce the annual deductions available to the mine operator for residual capital expenditure over the estimated life of the mine or twenty-five years, whichever is the lesser. This reduction will be reflected in the assessment of the year in which the payment is received and the assessments of future years.

Sub-section (3.) will operate where the amount of a payment received by a mine operator in a year of income exceeds the amount of the residual capital expenditure as at the end of the year. This sub-section is technically necessary to cover isolated cases which may occur.

Paragraph (a) provides, in effect, that so much of the payment as is equal to the residual capital expenditure will be applied to reduce the residual capital expenditure to nil.

By paragraph (b), any amount by which the compensation payment exceeds the residual capital expenditure will be included in the assessable income of the mine operator for the year in which the payment is received.

Sub-section (4.) makes provision for those cases where plant in respect of which a mine operator has received a payment from the Commonwealth or, in certain circumstances, other plant or property the residual value of which has been affected by the payment, is disposed of, lost or destroyed.

Section 124 of the Principal Act has effect where property in respect of which capital expenditure has been deductible under Division 10 in assessments of a mine operator is disposed of, lost or destroyed. If the sum of the deductions allowed or allowable and the consideration receivable in consequence of the disposal, loss or destruction exceeds the capital expenditure incurred on the property, the excess is included in the assessable income of the mine operator up to the amount of the deductions allowed or allowable in respect of the capital expenditure on the property. If that sum is less than the capital expenditure, the deficiency is allowable as a deduction.

Where a payment by the Commonwealth has been applied to reduce the residual capital expenditure of a mine operator, it will, for the purposes of determining the balancing adjustments to be made under section 124, be treated as having successively reduced the undeducted capital expenditure on the particular plant and other units of property. In effect, the payment will reduce the residual value of those units of property in respect of which capital expenditure is included in the residual capital expenditure of the mine operator as at the end of the income year in which the payment is received.

The order in which the payment is to be treated as reducing the undeducted capital expenditure of units of property is set out in paragraphs (a) to (d) of sub- section (4.) and is as follows :-

(a)

the expenditure on the unit in respect of which the payment is made unless the unit has been disposed of, lost or destroyed prior to the year of income in which the payment is received;

(b)

the expenditure on a unit acquired during the income year in which the payment is received to replace the unit in respect of which the payment was made;

(c)

the expenditure incurred on other units during the year in which the payment is received;

(d)

the expenditure on other units incurred during a year of income before the year in which the payment is received.

The application of a payment under sub-section (4.) to reduce the capital expenditure on the unit in respect of which the payment is made, or any other unit, will have no practical effect unless the unit is disposed of, lost or destroyed.

At that time, the amount to be included in the assessable income of the mine operator or allowed as a deduction will be determined, for the purposes of section 124 of the Principal Act, by reference to the capital expenditure as reduced by the sub-section. This may increase the amount to be included in the assessable income of the mine operator or, alternatively, reduce the amount that is deductible, consequent upon the disposal, loss or destruction of the property in question.

Sub-section (5.) is a drafting measure and will apply only where, on the disposal, loss or destruction of a unit of plant, an amount is required to be included in the assessable income of a mine operator in pursuance of section 124 of the Principal Act.

As explained in the notes relating to sub-section (4.), where the sum of the deductions allowed or allowable to a mine operator in respect of capital expenditure on a unit of property and the consideration receivable on the disposal, loss or destruction of the unit exceeds the capital expenditure on the unit, the excess is to be included in the assessable income of the mine operator. The amount to be included is, however, limited to the deductions allowed or allowable to the mine operator in respect of the capital expenditure.

For the purpose of this limitation, an amount that is applied in accordance with sub-section (4.) to reduce capital expenditure on a unit of property is to be treated as if it had been allowed or allowable as a deduction to the mine-operator.

Sub-section (6.) contains definitions of two terms that are used in section 124AA.

"compensation payment"

: This term will mean a payment made to a mine operator by the Commonwealth in relation to a unit of property that is required to be converted for use with decimal currency.

"residual capital expenditure"

: This expression, where used in the section, refers to the amount that is the residual capital expenditure of the mine operator for the purposes of section 122 of the Principal Act. In very broad terms, the residual capital expenditure as at the end of a year of income is so much of the capital expenditure incurred by a mine operator either prior to or during that year as remains undeducted at the end of that year. The amount of residual capital expenditure does not include capital expenditure incurred during the year of income which the mine operator has elected to deduct in his assessment of income derived during the year. Nor does it include expenditure that is met out of an appropriation of assessable income that is deducted in the assessment of the preceding year of income.

Clause 31: Unrecouped Capital Expenditure.

By this clause it is proposed to include a new paragraph - paragraph (h) - in section 124DF of the Principal Act.

Section 124DF is part of Division 10AA of Part III. of the Principal Act which deals with deductions for capital expenditure by a taxpayer in prospecting and mining for petroleum in Australia or the Territory of Papua and New Guinea. In broad terms, this expenditure may be carried forward for deductions against assessable income from the sale of petroleum obtained, or its products. The capital expenditure allowable for this purpose is reduced by amounts which, in effect, represent a recoupment of the expenditure to the taxpayer.

Expenditure by a taxpayer on converting plant used in the operations covered by Division 10AA for use with decimal currency will form part of the capital expenditure allowable under the Division. The new paragraph (h) proposed to be inserted in section 124DF will ensure that the allowable capital expenditure is reduced by any payments received by the taxpayer in respect of plant that requires such conversion.

Clause 32: Interest Paid by a Company to a Non-resident.

By this clause it is proposed to effect an amendment to section 125 of the Principal Act as part of the proposal to change the name of the tax on incomes.

Broadly stated, section 125 imposes on a company that pays interest to a non-resident in respect of moneys borrowed and used, or lodged at interest, in Australia a liability to pay tax on that interest. At present the section refers to a liability to pay "income tax and social services contribution". With the proposed change in the name of the tax on incomes, the references are being changed. For the income year 1964-65 and subsequent years the levy in accordance with section 125 is to be known as "income tax".

Clause 33: Liability to Dividend (Withholding) Tax.

This clause will amend section 128B of the Principal Act which establishes a liability for dividend (withholding) tax on dividends derived by non-residents from Australian companies. The amendment makes one of the changes necessary in order to alter the name of the tax on incomes to "income tax".

Sub-section (2.) of section 128B at present creates a liability for "income tax and social services contribution" on dividends to which the section applies. Sub-section (3.) provides that this liability is additional to any other liability the non-resident person might have for "income tax and social services contribution".

This clause will repeal the two sub-sections mentioned and replace them by new sub-sections (2.) and (3.) in which the references to "income tax and social services contribution" have been replaced by references to "income tax". By reason of clause 41(2.) of the Bill, the liability established by the existing provisions for "income tax and social services contribution" will be preserved in relation to dividends derived prior to the date on which the Bill receives the Royal Assent. The new provisions will thus apply in relation to dividends derived by a non-resident on and after that date.

The amendments being made by this clause will necessitate changes in the provisions declaring the rate of dividend (withholding) tax and the Bill for this purpose is explained at page 90 of this memorandum.

Clause 34:

This clause will insert three new sections - section 170A, 170B and 170C - in the Principal Act.

Section 170A : Power to Amend Assessments.

This section is a measure to facilitate drafting. Section 170 of the Principal Act contains the general provisions governing the power of the Commissioner of Taxation to amend assessments. Special provisions regarding amendment of assessments are contained in other provisions of the Principal Act and some are proposed in the present Bill. Where such provisions are inserted it is necessary to provide that they do not limit the general provisions of section 170. To obviate references along these lines in all the sections concerned, the proposed section 170A will contain a general declaration to this effect.

Section 170B : Elimination of Small Amounts in Assessing Taxable Income, etc.

This section is a technical measure associated with changes in the method of declaring rates of tax. These changes, which are reflected in the proposed Act to declare rates of tax for the 1965-66 financial year, have been necessitated by the imminent changeover to decimal currency. In short, the section will ensure that, in relation to taxable amounts in the present currency, tax continues to be levied only in respect of whole pounds and, in relation to taxable amounts in the new currency, will be levied only in relation to whole dollars.

Section 170C : Power of Commissioner to Reduce Amount of Tax Payable.

This new section also arises from the introduction of the decimal currency system.

As mentioned earlier in this memorandum in the explanation of the Income Tax Bill 1965, it is proposed that after 30th June 1966 the amount of tax payable by individuals and trustees for the 1965-66 financial year will not be taken to the nearest ten cents. As a general policy the tax will be calculated in dollars and cents without any "rounding".

It has been the practice for many years to show on the income tax return form for salary and wage earners a table of tax payable for various levels of taxable income. These taxpayers are thus able to calculate from the form the amount of tax payable on the taxable income shown in the return and the amount of any consequent refund of tax instalment deductions. The table serves as a "ready reckoner" of the tax for the year. More comprehensive ready reckoners are also compiled, and used by the public, covering a wider range of taxable incomes.

The advent of decimal currency will require adjustments to the tax tables shown on return forms for salary and wage earners. If the present system were maintained, the coverage of taxable incomes under the new currency would be reduced by approximately one-half. To achieve the maximum coverage a new system has been devised but, when coupled with the rates of tax that are proposed to be declared by the Income Tax Bill 1965, it is impracticable to devise a facile ready-reckoner of tax payable without, in relation to some taxable incomes, reducing the amount of tax payable under a strict application of the law by the amount of one cent.

In order that in these cases the tax on assessment will be the same as that shown in relation to the taxable income on the table on the return form, or in other ready reckoners made available to the public, it is proposed by the new section 170C that the Commissioner be authorised to reduce the tax strictly payable under the law by the amount of one cent. The provision is necessary only in relation to taxpayers who pay tax under the progressive scale, i.e., individuals and trustees.

The new provision will apply in relation to assessments made on or after 1st July 1966, when the use by taxpayers of the return forms incorporating the new tax tables will commence.

Clauses 35 and 36 : Headings.

These clauses make drafting amendments to the Principal Act that are consequential on the change in name of the tax on incomes. Clause 35 will omit the words "and Social Services Contribution" from the heading of the Division relating to tax instalment deductions from salaries and wages. Clause 36 will make a corresponding amendment to the heading of the Division relating to provisional tax.

Clause 37: Interpretation.

This clause amends the definition of "provisional tax" in section 221YA of the Principal Act.

At present, the definition means any amount payable as "provisional tax and contribution" in accordance with Division 3 of Part VI. of the Principal Act. This meaning is continued by the new definition in relation to provisional tax and contribution that is payable for the 1964-65 and prior financial years. The new definition will now include "provisional tax" for the 1965-66 and subsequent financial years payable under the Division. The next clause provides for the payment of that tax.

Clause 38: Liability to Provisional Tax.

This clause will effect, as part of the change in name of the levy on incomes, a change in the name of the provisional levy now known as "provisional tax and contribution". By the clause it is proposed to repeal the existing section 221YB of the Principal Act and replace it with a revised section.

The new section is, with the exceptions that will be mentioned, expressed in the same way as its predecessor. It omits references to "income tax and social services contribution" and "provisional tax and contribution" and replaces them with references to "income tax" and "provisional tax". The new provision declares that "provisional tax" is payable in respect of income of the year of income 1965-66 and all subsequent years of income.

By clause 41(3.) of the Bill, the operation of the existing section 221YB is preserved in relation to provisional tax and contribution for the income year 1964-65 and prior years of income.

Clause 39: References to Social Services Contribution In Certain Notices of Assessment, etc.

This clause is a purely formal measure related to the proposed change in the name of the tax on incomes. In broad terms, it provides for references on notices of assessment to "income tax and social services contribution" or "provisional tax and contribution" to be read, where appropriate, as "income tax" and "provisional tax".

Clause 40: Transitional Provision Relating to Losses Incurred in Previous Years by Certain Companies That Have Adopted Accounting Periods.

This clause is associated with the new provisions of the Principal Act which modify the operation of section 80 of that Act in relation to deductions for prior year losses of companies.

The new provisions apply for the first time in assessments of companies for the income year 1965-66. This means that companies which lodge returns for the orthodox period ending on 30th June could deduct losses, which under the new provisions are not deductible, against income derived up to 30th June 1965. A company that had adopted, in lieu of the period ending on 30th June 1965, a substituted accounting period which ended on a date earlier than 30th June 1965 could, however, deduct the losses only against income derived up to the earlier date. In broad terms, the provisions proposed by this clause will place such companies in much the same position as companies which have not adopted a substituted accounting period.

Sub-clause (1.) of clause 40 contains two definitions for the purposes of the section.

A "company to which this section applies" means a company that has, in accordance with section 18 of the Principal Act, adopted an accounting period in lieu of the income year ended 30th June 1965 and which ends prior to that date. "The transitional period" means the period between the last day of the adopted accounting period and 30th June 1965.

Sub-clause (2.) is the operative provision and will apply where the deduction for a loss incurred by a company during the 1964-65 income year or a previous year would not, in consequence of section 80A or 80C, be deductible and the company has adopted an accounting period ending before 30th June, 1965.

The sub-section will, in effect, preserve to the company its entitlement to a deduction in its assessment for the year of income ending on 30th June 1966 to the extent of the amount of the taxable income derived by the company during the transitional period. For this purpose it will be necessary for the taxable income of the period to be calculated as if the period were a year of income.

Clause 41: Saving.

This clause preserves, to the extent specified, the current operation of three provisions of the Principal Act - sections 17, 128B and 221YB - that are being repealed or amended by this Bill. Explanations of the changes made to these sections, and of the extent of the saving, have been given in the notes on the relevant clauses - clauses 6, 33 and 38.

Clause 42: Application of Amendments.

This clause specifies the commencing date for the application of proposed amendments affecting assessments. These dates have been specified in the notes on the relevant clauses.

INCOME TAX (INTERNATIONAL AGREEMENTS) BILL 1965.

The purpose of this Bill is to make a drafting change in the Income Tax (International Agreements) Act 1953-1964 consequential upon the proposed change in the name of the tax on incomes.

Clause 1: Short Title and Citation.

This clause formally provides for the short title and citation of the Amending Act and the Income Tax (International Agreements) Act 1953-1964 as amended.

Clause 2: Commencement.

By this clause the Amending Act will come into operation on the same date as the main legislation to which it relates, i.e., the Income Tax Assessment Bill 1965 explained earlier in this memorandum.

Clause 3: Definitions.

This clause will amend the definition of "Australian tax" in the Income Tax (International Agreements) Act 1953- 1964. At present, the definition means "income tax and social services contribution". With the proposed imposition of "income tax" it is necessary that the defined expression should include both "income tax" and "income tax and social services contribution". Clause 3 will insert a new definition to this effect.

INCOME TAX (NON-RESIDENT DIVIDENDS) BILL 1965.

This Bill, which relates to dividends derived by non- residents of Australia from Australian companies, is a formal measure consequential on the proposed change in the name of the tax on incomes. It will repeal the existing Act that declares the rate of "income tax and social services contribution" on non-resident dividends and substitute a new Act the provisions of which will declare an equivalent rate of "income tax" on the dividends.

Clause 1: Short Title and Citation.

This clause formally provides for the short title and citation of the new Act. The title excludes any reference to "Social Services Contribution".

Clause 2: Commencement.

By this clause it is proposed that the new Act will come into operation at the same time as the second of the Bills explained in this memorandum. That Bill changes the provisions in the Assessment Act that create a liability for dividend (withholding) tax, and it is necessary that both measures should come into operation at the same time.

Clause 3: Repeal.

This clause will repeal the existing Act that declares the rate of "income tax and social services contribution" on non-resident dividends. The clause provides, however, that notwithstanding the repeal of the present Act, that Act continues to apply in relation to dividend (withholding) tax by the name of income tax and social services contribution payable on dividends derived by non-residents before the new Act comes into operation.

Clause 4: Definition.

This is a drafting measure that defines "the Assessment Act" as the Income Tax Assessment Act 1936-1965.

Clause 5: Incorporation.

This clause will incorporate the Act imposing dividend (withholding) tax with the Assessment Act and will enable both Acts to be read as one.

Clause 6: Imposition of Tax.

This clause formally imposes on non-resident dividends income tax that is payable pursuant to section 128B of the Assessment Act. Clause 33 of the Income Tax Assessment Bill 1965 (see page 85 of this memorandum) will amend section 128B of the Assessment Act to establish a liability for "income tax" instead of "income tax and social services contribution" on dividends to which the section applies. The tax will be imposed as "income tax" on dividends derived after the commencement of the proposed Act.

Clause 7: Rate of Tax.

This clause sets out that the rate of tax to be imposed by the preceding clause will be 30 per cent (6/- in the Pd). This is the rate declared in the Act being repealed.

It is important to observe that, as in the past, the rate of tax is to be modified in certain respects pursuant to double taxation agreements with the United Kingdom, the United States of America, Canada and New Zealand. Each agreement includes provisions relating to the rate of tax payable on dividends paid by Australian companies to residents of the other country.

These provisions are given the force of law by the Income Tax (International Agreements) Act 1953-1964 and the provisions of that Act and of the agreements apply even though this Bill does not make reference to them. By reason of the provisions mentioned a rate of dividend (withholding) tax of 3/- in the Pd will be imposed in precisely the same circumstances as apply under the present law.

Clause 8: Section 221YB of the Assessment Act.

This clause is a technical drafting measure relating to provisional tax.

Under section 221YB of the Assessment Act, provisional tax is not payable unless imposed by the Act declaring rates of tax for the particular financial year. Section 221YB is, of course, intended to refer only to the general rates of tax which the provisional amounts are designed to meet. Clause 8 is accordingly a formal measure to ensure that the Act imposing dividend (withholding) tax is not to be regarded for the purposes of section 221YB as the Act declaring rates of tax for any financial year.

INCOME TAX ASSESSMENT BILL 1965

SCHEDULE OF CLAUSES.