House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Rt. Hon. Phillip Lynch, M.P.)

Notes on Clauses

INCOME TAX (RATES) AMENDMENT BILL (NO. 2) 1977

This Bill will amend the Income Tax (Rates) Act 1976 (the Rates Act) which declares the rates of tax in respect of income of individuals and trusts and also makes provision for the indexation, by reference to increases in the consumer price index, of the general rates of tax specified in that Act.

The rates of tax applicable for any financial year in accordance with the Income Tax (Rates) Act are imposed for that financial year by an annual Income Tax (Individuals) Act.

Schedules 1 to 4 of the Rates Act specify the rates of tax which, subject to the indexation provisions of the Act, applied for 1976-77 and subsequent financial years.

Under the 1977-78 Budget proposals, the seven step rates scale specified in Schedule 1 of the Rates Act is to be discontinued and replaced, with effect from 1 February 1978, by a three-step structure which will comprise a standard rate of 32 per cent on all taxable income in excess of $3,750 and surcharges of 14 per cent and 28 per cent applying respectively from $16,000 and $32,000.

As explained in the introductory note to this memorandum, significant changes are also being made to the provisions relating to the tax liability of primary producers and trustees.

Clause 1: Short title

This clause provides for the amending Act to be cited as the Income Tax (Rates) Amendment Act (No. 2) 1977 and for the Income Tax (Rates) Act 1976 as previously amended to be referred to in the amending Act as the Principal Act.

Clause 2: Commencement

Sub-section 5(1A) of the Acts Interpretation Act 1901 provides that every Act shall come into operation on the 28th day after the day on which the Act receives Royal Assent, unless the contrary intention appears. By this clause, it is proposed that the amending Act shall come into operation on the day on which it receives the Royal Assent.

Clause 3: Heading

The Rates Act, as amended, is to be divided into five parts. By clause 3 the heading "Part I - Preliminary", which is to cover sections 1 to 4 of the Rates Act, is to be inserted before section 1.

Clause 4: Interpretation

This clause will amend the definition of "tax" in section 3 of the Rates Act. The term now does not include tax payable by a company, a superannuation fund or the with-holding tax payable in pursuance of section 128B on dividends and interest paid to non-residents. By virtue of the proposed amendment the term will not include tax payable, in respect of film and video tape royalties paid abroad, in pursuance of proposed section 136A, which is to be inserted in the Assessment Act by clause 11 of the Income Tax Assessment Amendment Bill (No. 2) 1977.

Clause 5: Heading

This clause will insert before section 5 of the Rates Act, the heading "Part II - Financial year commencing on 1 July 1976". Part II will comprise proposed new section 4A which will be inserted in the Rates Act by clause 6 of the Bill and section 5 of the Rates Act which, together with Schedules 1 to 4 and section 10 declares the rates of tax for 1976-77.

Clause 6: Application of Part II

New section 4A that is being inserted by this clause will provide that the rates declared by Part II (in effect section 5) will apply only for the 1976-77 financial year.

Clause 7: Rates of tax

This clause will make a formal amendment to section 5 of the Rates Act consequential on the division of the Act into Parts.

Clause 8: Rates of tax for 1977-78

This clause will insert in the Rates Act new sections 6A, 6B, 6C, 6D, 6E and 6F which will comprise Parts III and IV of the Rates Act and will in conjunction with Schedules 5 to 12 declare the rates of tax for the 1977-78 financial year and subsequent financial years.

Part III - Financial year commencing on 1 July 1977 - Proposed sections 6A, 6B and 6C

Proposed section 6A formally provides that the rates of tax declared by Part III apply for the 1977-78 financial year.

Proposed section 6B declares the ordinary rates of tax payable by individuals and trustees (but not trustees of superannuation funds) for the 1977-78 financial year. The rates of tax are to be set out in Schedules 5 to 8 which are to be inserted by clause 18 of the Bill. The rates are to apply to resident and non-resident taxpayers.

The general rates of tax, applicable to most individuals, will be those declared by proposed sub-section (1) and set out in Schedule 5. That Schedule specifies the general rates of tax for the 1977-78 financial year and comprises two parts. The rates specified in Part I of Schedule 5 are described as the primary rates of tax and represent 5/12 (41.7 per cent) of the rates that are to apply under the proposed new standard rate system of personal taxation. The rates specified in Part II of Schedule 5 are described as additional rates of tax and represent, broadly, 7/12 (58.3 per cent) of the 1977-78 pre-Budget rates (i.e., the rates specified in Schedule 1 as indexed by 10.9 per cent on 1 July 1977). Those rates have, however, been varied to the extent necessary to absorb the general rebate of $676 (as indexed for 1977-78) and to raise the general tax threshold from the level of $3,154 that would otherwise have applied for 1977-78 to the proposed level of $3,403. The proposed threshold of $3,403 is equal to the present threshold of $3,154 plus 5/12 of the amount by which $3,154 falls short of the level at which the proposed standard rate of 32 per cent is to commence to apply under the new system. The broad effect of Schedule 5 will be to apply current rates until 1 February 1978 when the new standard rate system will effectively commence to operate. The composite rates derived from Schedule 5 will, however, apply to the whole of the 1977-78 income irrespective of when it is derived.

The effective rates of tax under Schedule 5 are as follows-

(a)

1976-77 rates as per Schedule 1 indexed by 10.9%.

(b)

1977-78 pre-Budget rates adjusted to provide for absorption of general concessional rebate of $676 and increase in tax threshold.

(c)

Rate necessary to ensure that increase in tax threshold does not confer benefit on taxpayers with taxable incomes in excess of $3,750.

The tax payable under the above composite rates scale may be calculated from the following table -

Primary producers to whom the averaging provisions of the Assessment Act apply will be liable to tax at the rates declared by proposed sub-section 6B(2) and set out in Schedule 6.

Schedule 6 is in two parts. Part I of Schedule 6 specifies what are described as the "normal" rates of tax payable for 1977-78 by a primary producer, i.e., the rates that are to apply except where the "alternative" rates of tax specified in Part II of the Schedule are to apply. The alternative rates specified in Part II are to apply only in order to ensure that a primary producer is not (as could otherwise happen in isolated circumstances) adversely affected in the assessment of tax for the 1977-78 financial year by reason of the removal of the $16,000 limit on averaging.

The rates of tax payable by a primary producer to whom Part I of Schedule 6 applies are set out in clauses 3, 4 and 5 of the Part.

Clause 3 corresponds broadly with Part I of Schedule 5. It specifies rates equal to five-twelfths of those that are to apply under the standard rate system which effectively comes into operation on 1 February 1978 and reflects both the removal of the $16,000 limit on averaging and the decision to tax a primary producer at ordinary rates if the taxable income is greater than the average income so that it would be to a taxpayer's disadvantage to be taxed by reference to the rate appropriate to his average income. Accordingly, the rate of tax payable under clause 3 is the lesser of the rates ascertained by applying the primary rates specified in Schedule 5 to the average income (paragraph (a)) or the taxable income (paragraph (b)) and by dividing the resultant amount by the average income or the taxable income, as the case requires. Because the rates specified in Schedule 5 are to be applied for the purposes of clause 3, the average rate of tax will reflect the application of the zero rate to the first $3,750 of a primary producer's average income. The rate ascertained under clause 3 is, correspondingly, to apply to the whole of the taxable income.

In the calculation of the average income for the purposes of paragraph (a) the amendment of the Assessment Act being made by clause 12 of the Income Tax Assessment Amendment Bill (No. 2) 1977 is to be regarded as having applied for the 1977-78 financial year. This means that in calculating the average income under the new system for the purposes of paragraph (a), the whole of the taxable income for each year in the averaging period will be taken into account. The amount that may be taken into account in respect of any income year will not, as under the pre-Budget system, be limited to $16,000.

Clauses 4 and 5 of Part I of Schedule 6 correspond broadly with Part II of Schedule 5. They specify rates equal to 7/12 of 1977-78 pre-Budget rates that effectively continue in operation until 1 February 1978. Clause 4 specifies the rate of tax payable on the first $16,000 of a primary producer's taxable income while clause 5 specifies the rate applicable to the part of the taxable income in excess of $16,000. The $16,000 limit thus continues to apply in relation to the tax imposed for 1977-78 by reference to pre-Budget rates.

Under clause 4 the rate of tax on the first $16,000 of taxable income is 58.3% of the average rate of tax ascertained by applying to the average income the 1977-78 pre-Budget rates (which are set out in clause 4) and by dividing the resulting amount by the average income. In this context, the average income is the amount calculated under the present law by limiting to $16,000 the amount that may be included in the average income as the taxable income for any year in the averaging period.

It should be noted that the table in clause 4 is the 1977-78 pre-Budget scale set out in the discussion of Schedule 5 above and is not adjusted for the absorption of the general rebate or the increase in the general tax threshold from $3,154 to $3,403. This is necessary to ensure that the tax payable at the rates specified in clause 4 will be seven-twelfths of the amount that would be payable under the 1977-78 pre-Budget arrangements. Under those arrangements the general rebate was not taken into account in ascertaining the average rate of tax appropriate to a taxpayer's average income but was deducted after the average rate was applied to his taxable income (or to the first $16,000 of a taxable income in excess of $16,000). To ensure that a corresponding result is maintained under clause 4, a rebate of tax is to be allowable in the assessment of a primary producer under clause 6 of the Income Tax (Individuals) Bill 1977 equal to seven-twelfths of the amount by which the tax on the taxable income at 1977-78 pre-Budget rates exceeds the tax on that income at the 1977-78 pre-Budget rates adjusted for the absorption into the rate scale of the general concessional rebate and the increase in the tax threshold. The minimum rebate will be $394.06 or, approximately seven-twelfths of the 1977-78 pre-Budget general rebate of $676.

Under clause 5 of Part I the rate of tax applicable to the part of the taxable income in excess of $16,000 is to be 58.3 per cent of the average rate of tax applicable to that part of the taxable income under the 1977-78 pre-Budget scale. The average rate is ascertained by applying to the whole of the taxable income the 1977-78 pre-Budget rates (which are set out in clause 5) and deducting $5,270.10 (which is equal to the tax on $16,000 at 1977-78 pre-Budget rates) and by then dividing the resultant amount by the part of the taxable income in excess of $16,000.

Part II of Schedule 6 specifies alternative rates that are to apply where the removal of the $16,000 limit on averaging would not be to a primary producer's advantage. This could happen where the taxable income for 1977-78 is less than $16,000 but the taxable income for one or more of the preceding four years was in excess of $16,000.

Alternative rates of tax under Part II are specified in clauses 3,4 and 5 which correspond with clauses 3, 4 and 5 of Part I.

Accordingly, clause 3 of Part II specifies a rate of tax that will be based on the rates applicable under the standard rate system that comes into operation on 1 February 1978. As with clause 3 of Part I, the rate of tax ascertained under paragraph (a) will apply only if it is less than the average rate ascertained under paragraph (b) in relation to the taxable income by applying to the taxable income the primary rates specified in Schedule 5.

For the purposes of the calculation of the rate under paragraph (a), it is necessary to make a calculation of the amount that would be the tax on the taxable income if the averaging limit of $16,000 continued to apply and the primary rates set out in Part I of Schedule 5 were applicable. The amount so ascertained is divided by the total taxable income to arrive at an average rate which will be the rate applied to the taxable income if it is less than the rate ascertained under paragraph (b). It will be noted that there is no reference in sub-paragraph (a) (i) to the rates specified in Schedule 5. Such a reference is not necessary because in that sub-paragraph it is necessary only to refer to the rate of 13.344 per cent (five-twelfths of 32 per cent).

The rates of tax payable in pursuance of clauses 4 and 5 of Part II are the same as those that would apply under clauses 4 and 5 of Part I if that Part were applicable.

Proposed sub-section 6B(3) and Schedule 7 will declare the rates of tax applicable to a taxpayer deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premium) or section 158D (abnormal income of authors and inventors) of the Assessment Act. In effect, the rate of tax payable in these cases will be a rate ascertained by dividing by the notional income an amount equal to the tax on a taxable income equal to the notional income calculated at -

(a)

the primary rate specified in Part I of Schedule 5, i.e., five-twelfths of the rate payable under the standard rate system which is to come into operation on 1 February 1978; and

(b)

seven-twelfths of the 1977-78 pre-Budget rates.

Because the pre-Budget rates do not reflect the absorption of the general rebate into the rate scale or the increase in the general tax threshold, taxpayers liable to pay tax at a rate ascertained by reference to a notional income will be entitled to a rebate under clause 6 of the Income Tax (Individuals) Bill 1977 in the same way as primary producers subject to averaging. (See notes on proposed sub-section 6B(2) and Schedule 6.)

Proposed sub-section 6B(4) and Schedule 8 declare the rates of tax payable by trustees in pursuance of section 98 or 99 of the Assessment Act.

The proposed Schedule 8 will, in clauses 1, 2 and 3, identify 3 different classes of trustees for the purposes of determining the rate of tax for 1977-78.

Clause 1 of Schedule 8 identifies those trustees who are to be taxed at the rates that would be payable under Schedule 5, 6 or 7, i.e., at the same rates as individual taxpayers.

These will be -

(a)

trustees liable to be assessed in pursuance of section 98 unless the trust is an inter vivos trust and the beneficiary presently entitled to the income is under 16 years of age on the last day of the year of income; and

(b)

trustees of deceased estates liable to be assessed under section 99 in respect of income derived in the income year of death of the deceased person or in any one of the following two income years.

Trustees included in (a) above will in effect be taxed for 1977-78 on the same basis as they were under sub-section 5(4) and Schedule 4 of the Rates Act for 1976-77. They will indirectly continue to benefit from the general rebate which has been absorbed into the rates applicable until the standard rate system comes into operation on 1 February 1978 and will thereafter benefit from the zero rate on the first $3,750 of taxable income, average income or notional income, as the case requires.

Trustees included in (b) above were not in 1976-77 entitled to the general rebate but will indirectly become entitled to seven-twelfths of it for 1977-78 by reason of its absorption into the scale that is effectively to apply until the standard rate system comes into operation on 1 February 1978. Thereafter they will have the benefit of the zero rate on the first $3,750 of taxable income, average income or notional income, as the case requires.

Clause 2 of Schedule 8 specifies the rate of tax payable by a trustee of a trust estate in pursuance of section 98 where the trust is an inter vivos trust and the beneficiary is under 16 years of age on the last day of the income year. These trustees will be liable to tax at the rates that would be payable under Schedule 5, 6 or 7, as the case requires, modified to the extent necessary to ensure that they will not, after the standard rate system comes into operation, benefit from the application of the zero rate to the first $3,750 of taxable income, average income or notional income, as the case requires.

Clause 3 will specify the rate of tax payable by a trustee liable to be assessed under section 99 in respect of a trust estate, other than the estate of a deceased person who died less than three years before the end of the year of income. These trustees will be liable to tax at the rates specified in Schedule 5, 6 or 7, as the case requires, modified to the extent necessary to ensure that they do not benefit either from the absorption of the general rebate (to which they were not entitled) into the rates scale applicable until the new standard rate system comes into operation in February 1978, or the benefit under the new system of the zero rate on the first $3,750 of taxable income, average income or notional income, as the case requires.

Proposed sub-section 6B(5) declares the rate of further tax payable for the 1977-78 financial year in pursuance of section 94 of the Assessment Act where there is included in the taxable income any amount of income to which that section applies, i.e., a share of partnership income that is or is deemed to be income over which the person does not have the real and effective control and disposal. The proposed sub-section accords with the provisions of existing sub-section 5(5) of the Rates Act which declares the corresponding rate of further tax for the 1976-77 financial year.

A partner is said to derive "uncontrolled partnership income" if he or she does not have the real and effective control and disposal of the relevant share of the partnership income. A person under the age of 16 at the end of the year of income is deemed not to have the real and effective control and disposal of a share of partnership income except to the extent that the share would constitute reasonable remuneration by way of salary or wages if services rendered by the person to the partnership had been performed by an employee.

As was the case in 1976-77, proposed sub-section 6B(5) imposes further tax on income to which section 94 applies at a rate equal to 50 per cent reduced by the average ordinary rate of tax applicable to the taxpayer's total taxable income. The average ordinary rate of tax is determined for this purpose as being ordinary tax payable divided by the total taxable income. It is expressly provided by the sub-section that the ordinary tax payable is to be the tax before allowance of any rebate or credit to which the taxpayer is entitled.

Proposed sub-section 6B(6) declares the rate of further tax payable for the 1977-78 financial year in pursuance of section 94 of the Assessment Act where the taxpayer is a trustee liable to be assessed and to pay tax under section 98 or section 99 of that Act. Like sub-section 6B(5) this sub-section follows existing sub-section 5(6) of the Rates Act which declares the corresponding rate of further tax for the 1976-77 financial year.

Sub-section 6B(7) declares 54.17 per cent as the rate of tax payable by a trustee liable to tax pursuant to section 99A for the 1977-78 financial year. Apart from the increase in the rate of tax the sub-clause is identical with sub-section 5(7) of the Rates Act which declares the rate payable for the preceding financial year.

The rate of 54.17 reflects, in effect, the application from 1 February 1978 of the 60 per cent maximum rate of personal tax under the new standard rate system. That rate is given a weight of five-twelfths while the existing rate of 50 per cent is given a weight of seven-twelfths.

Proposed section 6C : Limitation of tax payable by trustees

This section is set against the background that a trustee of an inter vivos trust who is assessed under section 98 of the Assessment Act in respect of income to which a beneficiary under the age of 16 years is presently entitled, and most trustees assessable under section 99 in respect of income to which no beneficiary is presently entitled, are not to be entitled to the zero rate on the first slice of trust income.

Section 6C will, for 1977-78, free from tax such a trustee who is liable to be assessed under section 98 or section 99, where the income assessable to the trustee is less than the amounts specified in sub-sections (1) and (3). In short, the section will provide a minimum taxable income rule for these trustees. Proposed sub-sections (2) and (4) will limit the tax payable for 1977-78 where the income assessable to the trustee is marginally greater than the amounts specified in proposed sub-sections (1) and (3).

Sub-section 6C(1) provides, subject to proposed section 7A, that a trustee assessable under section 98 in respect of a share of the net income of an inter vivos trust to which a beneficiary under 16 years of age is presently entitled is not to be liable to tax if the share does not exceed $1,040. Where the beneficiary's share exceeds $1,040 but does not exceed $3,124 the tax is to be limited by the "shading-in" provisions of proposed sub-section (2) to 20 per cent of the amount by which the share exceeds $1,040.

Sub-sections (1) and (2) are to be subject to proposed new section 7A which will make provision for the situation in which a person under 16 years of age is a beneficiary in 2 or more inter vivos trusts. Section 7A is designed to guard against use of multiple trusts for a beneficiary to exploit sub-sections 6C(1) and (2).

Sub-section 6C(3) provides that a trustee assessable under section 99 in respect of the net income of an inter vivos trust or of the estate of a person who died not less than 3 years before the end of the year of income (i.e., a trustee not entitled to the zero rate) is (as was the case for 1976-77) not to be liable to tax if the net income does not exceed $416. Where the net income exceeds $416 but does not exceed $832 the tax is to be limited, by proposed sub-section 6C(4), to 50 per cent of the amount by which the net income exceeds $416.

Part IV : Financial years commencing on or after 1 July 1978 - Proposed sections 6D, 6E and 6F

Proposed section 6D formally provides that the rates of tax declared by Part IV are to apply for the 1978-79 financial year and all subsequent financial years. The rates so declared will, however, be subject to indexation in accordance with section 9 of the Rates Act as proposed to be amended by clause 12 of the Bill.

Proposed section 6E declares the ordinary rates of tax payable by individuals and trustees (other than trustees of superannuation funds) for 1978-79 and subsequent financial years. The rates are set out in Schedules 9 to 12 which are to be inserted by clause 18 of the Bill.

The general rates of tax applicable to most individuals will be those declared by proposed sub-section (1) and set out in Schedule 9. That Schedule specifies the general rates of tax that will, in effect, have come into operation on 1 February 1978, and are, subject to indexation, to apply for 1978-79 and subsequent financial years. The rates specified in Schedule 9 are as follows -

The tax payable at these rates may be calculated from the following table -

A primary producer to whom the averaging provisions of the Assessment Act apply will be liable to tax at the rates declared by proposed sub-section 6E(2) and set out in Schedule 10.

Schedule 10 is, like Schedule 6, which fixes rates of tax for 1977-78, in two Parts.

Part I of Schedule 10 specifies the "normal" rate of tax which, subject to indexation, is to be payable for 1978-79 and subsequent financial years by primary producers to whom the averaging provisions of the Assessment Act apply. The "normal" rate prescribed in Part I will be applicable except where the "alternative" rate specified in Part II is to apply. The alternative rate specified in Part II is to apply in order to ensure that the $16,000 limit on averaging will be retained in the assessment of a primary producer's tax until the application of averaging without limit will be advantageous to him. The alternative rate will not apply after a year in which the removal of the averaging limit has conferred a benefit and will not in any event apply in relation to a year after the 1980-81 financial year.

The normal rate of tax payable by a primary producer under Part I of Schedule 10 is specified in clause 2 of that Part. In accordance with the intention to tax a primary producer at ordinary rates if the taxable income is less than the average income, the rate of tax under clause 2 is the lesser of the rates ascertained by applying the general rates of tax specified in Schedule 9 to the average income (paragraph (a)) or the taxable income (paragraph (b)) and by dividing the resultant amount by the average income or the taxable income, as the case requires. As no rate of tax is applicable under Schedule 9 to the first $3,750 of taxable income, the rate of tax so ascertained will reflect the application of the zero rate to the first $3,750 of the average income or taxable income and the lesser of the rates ascertained under paragraph (a) or (b) will be applied to the whole of the taxable income and not only to the part of the taxable income in excess of $3,750.

The alternative rate payable where Part II applies is specified in clause 3 of Part II. As with clause 2 of Part I the rate of tax ascertained under paragraph (a) of clause 3 will apply only if it is less than the average rate ascertained under paragraph (b) in relation to the taxable income by applying the general rates of tax specified in Schedule 9 to the taxable income.

For the purposes of the calculation of the rate under paragraph (a), it is necessary to make a calculation of the amount that would be the tax on the taxable income if the averaging limit of $16,000 continued to apply. The amount so ascertained is divided by the total taxable income to arrive at an average rate which will be the rate applied to the taxable income if it is less than the rate ascertained under paragraph (b).

Proposed sub-section 6E(3) and Schedule 11 will declare the rates of tax applicable to a taxpayer deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premium) or section 158D (abnormal income of authors and inventors) of the Assessment Act. In these cases the rate of tax payable will be a rate ascertained by dividing by the notional income, an amount equal to the tax payable at the general rates specified in Schedule 9 on a taxable income equal to the notional income.

Proposed sub-section 6E(4) and Schedule 12 will, for 1978-79 and subsequent years, declare the rates of tax payable by trustees in pursuance of section 98 or 99 of the Assessment Act.

Schedule 12 will identify 2 classes of trustees for the purpose of determining the rates of tax that, subject to indexation, are to apply for those years.

Clause 1 of Schedule 12 identifies the trustees who are to be taxed at the rates that would be payable under Schedule 9, 10 or 11 if an individual were liable to be assessed and to pay tax on the income assessable to the trustee. These will be -

(a)

trustees liable to be assessed in pursuance of section 98, unless the trust is an inter vivos trust and the beneficiary presently entitled to income is under 16 years of age at the end of the income year; and

(b)

trustees of deceased estates liable to be assessed under section 99 in respect of income derived in the year of death of the deceased person or in any one of the following two years.

Trustees included in both (a) and (b) above will have the zero rate applied to the first $3,750 of their taxable income, average income or notional income as the case requires.

Clause 2 of Schedule 12 specifies the rate of tax payable by trustees assessable under section 98 or 99, other than those liable to tax at the rate specified in clause 1. These will be -

(a)

trustees assessable under section 98 where the trust is an inter vivos trust and the beneficiary is under 16 years of age at the end of the income year; and

(b)

trustees liable to be assessed under section 99 in respect of income of a trust estate other than the estate of a person who died less than 3 years before the end of the year of income.

These trustees will be liable to tax at the rates specified in Schedule 9, 10 or 11, as the case requires, modified to ensure that they will not benefit from the application of the zero rate to the first $3,750 of taxable income, average income or notional income as the case requires. However, in their case proposed section 6F may provide relief.

Proposed sub-section 6E(5) declares the rate of further tax payable pursuant to section 94 of the Assessment Act for 1978-79 and subsequent financial years where there is included in the taxable income any amount of income to which that section applies, i.e., "uncontrolled partnership income". The proposed sub-section matches proposed sub-section 6B(5) which declares the corresponding rate for 1977-78.

Proposed sub-section 6E(6) declares the rate of further tax payable pursuant to section 94 of the Assessment Act for 1978-79 and subsequent financial years where the taxpayer is a trustee liable to be assessed and to pay tax under section 98 or section 99 of that Act. The proposed sub-section follows proposed sub-section 6B(6) which declares the corresponding rate of further tax for 1977-78.

Proposed sub-section 6E(7) declares the rate of tax payable by a trustee liable to tax pursuant to section 99A for 1978-79 and subsequent financial years. The proposed rate is to be 60 per cent, which is to be the maximum rate of tax payable by individual taxpayers for those years.

Proposed section 6F : Limitation of tax payable by trustees

Proposed section 6F will serve the same purpose in relation to 1978-79 and subsequent financial years as proposed section 6C is to serve in relation to the 1977-78 financial year (see explanation of proposed section 6C). In brief, section 6C will, subject to the safeguarding provisions of proposed section 7A, confer freedom from tax, or a reduction in tax, to those trustees who are not eligible for the zero rate.

Proposed section 6F differs from proposed section 6C only in the shading-in rate that is to apply under sub-section (2). Under sub-section 6F(2), that rate is to be 50 per cent and is to apply where the net income is between $1,040 and $2,888. Under sub-section 6C(2) the shading-in rate is to be 20 per cent and is to apply from $1,040 to $3,124.

The higher shading-in rate of 50 per cent is necessary because of the increase in the tax that would, but for the shading-in provisions, be payable at the tax threshold of $1,041 by trustees specified in sub-section 6F(1). For 1977-78 the tax payable by these trustees (subject to the shading-in rate of 20 per cent), was $138.91 at the tax threshold of $1,041 ($1,041 at 13.344 per cent or five-twelfths of the standard rate of 32 per cent). For 1978-79 and subsequent years the tax on a net income of $1,041 will, subject to the shading-in rate of 50 per cent, be $333.12 ($1,041 at the full standard rate of 32 per cent).

The proposed 50 per cent shading-in rate is the same as that proposed for trustees specified in sub-section 6F(4).

Clause 9: Heading

This clause formally introduces a new heading into the Rates Act, to make the final sections of that Act the subject of a separate Part - Part V.

Clause 10: Operation of sections 6C and 6F

This clause, which will introduce a new section 7A into the Rates Act, qualifies the minimum taxable income and associated "shading-in" provisions that, in pursuance of proposed sections 6C and 6F, are to apply to a trustee assessable under section 98 on the share of the net income of an inter vivos trust to which a beneficiary under 16 years of age is presently entitled. The new section is designed to guard against the use of multiple trusts to exploit sections 6C and 6F.

Section 7A provides, by sub-section (1), that the relevant minimum taxable income provision and its associated shading-in rules are not to have effect where -

(a)

a beneficiary under 16 years of age is presently entitled to income from two or more inter vivos trusts;

(b)

the beneficiary is under 16 years of age at the end of the year of income; and

(c)

the aggregate trust income to which the beneficiary is presently entitled is greater than the $1,040 which is intended to be the maximum amount that may be derived, tax-free, through a trust by a child under 16 years of age.

Sub-section (2), however, specifies that the limitations of sub-section (1) are not to apply in relation to a trust where the Commissioner of Taxation considers, on the basis of guidelines set out in sub-section (3), that it would be unreasonable for sub-section (1) to apply to that trust.

The guidelines set out in sub-section (3) are modelled on provisions contained, for a broadly similar purpose of providing safeguards against resort to multiple trusts, in section 99A of the Assessment Act.

In any case in which the Commissioner did not, on the basis of these guidelines, reach the conclusion under sub-section (2) that it would be unreasonable for sub-section (1) to apply to any particular trust for a child under 16 years of age the trustee would have the usual rights of objection and reference to a Taxation Board of Review. A Board may, of course, substitute its conclusion for that of the Commissioner.

Clause 11: Act to be deemed to be the Act declaring rates of income tax

This is a formal drafting amendment.

Clause 12: Indexation

This clause amends section 9 of the Rates Act which provides for indexation of the general rates scale set out in Schedule 1.

In broad terms, the technical scheme of indexation provided by the Rates Act requires an indexation factor to be ascertained for each income year subsequent to 1976-77, by dividing the sum of the quarterly consumer price index numbers published by the Australian Statistician for the 12 months which ended on 31 March preceding the income year, by the sum of the index numbers for the corresponding period preceding the immediately preceding income year.

Each of the income steps in the schedule of general rates set out in the First Schedule is then increased on the basis of the factor so ascertained or, where a lesser factor is prescribed by a regulation made under sub-section 9(4) of the Rates Act, on the basis of that lesser factor.

In prescribing a lesser factor, regard is to be had to the effects on the factor ascertained directly from the consumer price index movement of changes in indirect taxes and of the currency adjustments and changes in health care arrangements that took place in the December quarter of 1976.

The need for amendment of section 9 arises from the proposed introduction of the new personal tax system with effect from 1 February 1978 and from the decision to vary the extent of indexation to be applied for 1978-79 to the scale introduced as part of that system.

As the rates scale set out in Schedule I is now to apply only for 1976-77 indexation of that scale will no longer have any relevance although the scale set out in Part II of Schedule 5 for notional application for the first seven months of 1977-78 has been derived from the application of an indexation factor to the scale set out in Schedule 1. The ongoing rates are now set out in Schedules 9 to 12 and, subject to indexation, are to apply for 1978-79 and subsequent financial years. It is, therefore, necessary only to index the scales set out in Schedule 9, i.e., the general rates for 1978-79 and subsequent years and the amount of $3,750 twice occurring in Part II of Schedule 10 which is to apply where a primary producer is to continue to be assessed by reference to a $16,000 limit on averaging.

Paragraph (a) of clause 12 will amend the definition of "relevant amount" in sub-section 9(1) which at present means any of the amounts that constitute the income steps in the general scale of rates set out in Schedule 1.

The reference to Schedule 1 will be replaced by a reference to Schedule 9 which will set out the general rates that, subject to indexation, are to apply for 1978-79 and subsequent years and a reference to the amount of $3,750 specified in Part II of Schedule 10. It is necessary to index the last mentioned amount as it will be relevant in the calculation of tax payable by a primary producer who is to continue to be taxed by reference to the $16,000 averaging limit. (See notes on sub-section 6E(2).)

Paragraph (b) amends the definition of "relevant year of income". As amended, "relevant year of income" will mean 1978-79 or a subsequent year of income rather than 1977-78 or a subsequent year of income. The term "relevant year of income" is used in section 9 to refer to a year of income for which rates of tax are to be indexed. As the rates of tax for 1977-78 are now being set out in Schedules 5 to 8 and are not dependent on the indexation of the rates in Schedule 1, it is no longer necessary to include 1977-78 within the meaning of the term "relevant year of income". The first "relevant year of income" will now be 1978-79, i.e., the year for which the standard rates scale that is to operate from 1 February 1978 is to be indexed in accordance with section 9 of the Rates Act and the amendments being effected by this clause.

Paragraph (c) of clause 12 proposes the insertion of 3 new sub-sections - sub-sections 8, 9 and 10 - in section 9 of the Rates Act. These sub-sections will apply only in the determination of the indexation factor for the 1978-79 income year.

Proposed sub-section (8) provides that the factor to be used in indexing the rates of tax under the standard rate system for 1978-79 is to be calculated as follows -

(a)

if a factor has not been prescribed under present sub-section 9(4) or proposed sub-section (10), the factor ascertained under sub-section 9(3) (that is, the factor flowing directly from the relevant movements in the consumer price index) is to be increased by one and divided by two. Thus, if the factor ascertained under sub-section 9(3) is 1.1 the factor for 1978-79 will be

(1.1 + 1)/(2) = 1.05


(paragraph (a));

(b)

if a factor has been prescribed under sub-section 9(4) but not under proposed sub-section (10), the factor prescribed under sub-section 9(4) (that is, a lesser factor than that ascertained under sub-section 9(3) after taking into account the factors of indirect taxes, health care costs and devaluation effects) is to be increased by one and divided by two. Thus, if the factor prescribed under sub-section 9(4) is 1.1 the factor for 1978-79 will be

(1.1 + 1)/(2) = 1.05


. (paragraph (b)); or

(c)

if a factor is prescribed under proposed sub-section 10, that factor will be the factor for 1978-79 (paragraph (c)).

The broad effect of sub-section (8) is that the standard rates scale will be indexed for the 1978-79 income year to the extent of one-half of the adjustment that would otherwise have applied under the existing law. See, however, proposed sub-section (10).

Proposed sub-section (9) is a drafting measure to give effect to the requirement in proposed paragraphs 8(a) and 8(b) that the factor be calculated to 3 decimal places. It provides for the calculation to be made initially to 4 decimal places and, if the figure for the fourth decimal place is greater than 4, the third decimal place is to be increased by one, e.g., if the factor calculated to 4 places is, say, 1.0545 then the factor becomes 1.055.

Proposed sub-section (10) authorises the making of regulations under which the indexation adjustment to the rates scale for 1978-79 may be increased to more than one-half of the ordinary adjustment. It thus constitutes a variation to proposed sub-section (8). It does this by enabling regulations prescribing a factor to be used for the purposes of proposed paragraph (c) of sub-section (8). The factor prescribed under sub-section (10) cannot be less than the factor ascertained under proposed paragraph 8(a) or, if a regulation has been made under sub-section 9(4), the lesser factor ascertained under proposed paragraph 8(b) and cannot be greater than the factor ascertained directly from the consumer price index or, if a lesser factor is prescribed under sub-section 9(4), that lesser factor.

Clause 13: Application

This clause will repeal section 10 of the Rates Act which provides that the rates declared by the Act apply for 1976-77 and all subsequent financial years. Provision is now to be made in section 6D for the ongoing rates set out in Schedules 9 to 12 to apply for 1978-79 and subsequent financial years.

Clauses 14 to 17 : Headings to Schedules 1 to 4

Clauses 14 to 17 insert headings to Schedules 1 to 4 which are now to apply only for the 1976-77 financial year.

Clause 18: Schedules

Clause 18 will insert new Schedules 5 to 12 which specify rates of tax for the purposes of sections 6B (1977-78 financial year) and 6E (1978-79 and subsequent financial years).

INCOME TAX ASSESSMENT AMENDMENT BILL (No.2) 1977

This Bill contains provisions dealing with -

-

film and video tape royalties paid abroad;

-

matters associated with the new system of personal income tax;

-

extension by two years of the 20 per cent phase of the investment allowance;

-

taxation of trusts;

-

use of public bodies to confer public company status on private companies;

-

deductions for capital expenditure on natural gas liquefaction plant;

-

averaging for primary producers;

-

liability of deceased estates to the health insurance levy;

-

provisional tax as it relates to the health insurance levy.

Notes on clauses of the Bill are set out below.

Clause 1: Short title etc

This clause provides formally for the citation of the amending Act.

Clause 2: Commencement

By this clause, the amending Act is to come into operation on the day on which it receives the Royal Assent.

Clause 3: Source of royalty income derived by non-resident

This clause is related to the amendment proposed by clause 11, which will insert in Part III of the Principal Act a new Division - Division 13A - governing the taxation of film and video tape royalties paid overseas.

Against the background that a non-resident is only liable for Australian tax in respect of income having a source in Australia, section 6C of the Principal Act provides statutory rules for determining when royalty payments to non-residents have a source in Australia. This is, broadly, where the royalties are an expense of a business carried on in Australia.

The payments to be subject to the new Division 13A will be restricted to some of the payments to which section 6C applies and clause 3 formally amends sub-section (2) of section 6C to provide that the source rules applicable under that section are to operate for purposes of Division 13A.

Clause 4: Undeducted purchase price of annuities

Under the present law there may be excluded from the amount of a pension that is subject to tax, a portion of the cost of the pension (e.g., the taxpayer's contributions to the superannuation fund paying the pension), known as the undeducted purchase price.

Under previous arrangements only superannuation contributions in excess of the limit for the time being in force (currently $1,200) have formed part of the undeducted purchase price. Due to the changes in the rebate system which are explained in the notes dealing with clause 17, a technical change is proposed by this clause to maintain the previous rule that only the excess over $1,200 of a person's superannuation contributions qualifies as "undeducted purchase price" of the pension concerned.

Clause 5: Deduction in respect of new plant installed on or after 1 January 1976

This clause proposes an amendment to section 82AB of the Principal Act to extend by two years the present termination dates for the 20 per cent phase of the investment allowance.

Section 82AB is the substantive provision that provides for the special deduction, known as the investment allowance, in respect of capital expenditure on the acquisition of certain plant and equipment used wholly in Australia for business purposes.

For eligible plant and equipment that is ordered or leased by 30 June 1978, or which the taxpayer commences to construct by that date, an investment allowance of 40 per cent of the cost is available provided that the plant is brought into use, or is installed ready for use and held in reserve, by 30 June 1979.

Where plant ordered, etc., before 30 June 1978 is first used or installed after 30 June 1979, or where plant is ordered, etc., after 30 June 1978 and no later than 30 June 1983, the investment allowance is available at the rate of 20 per cent of the capital cost of the plant, provided the plant is used, or is installed ready for use and held in reserve, by 30 June 1984.

Paragraph (a) of clause 5 will amend paragraph 82AB(1) (c) of the Principal Act by substituting 1985 for 1983. The effect of this change will be to extend by two years from 30 June 1983 to 30 June 1985 the last day on which plant must be ordered, or construction commenced, for the plant to qualify for the 20 per cent investment allowance.

Paragraph (b) of clause 5 will amend paragraph 82AB(1) (d) by substituting 1986 for 1984. This amendment will extend by two years, to 30 June 1986, the last day by which plant must be used, or installed ready for use and held in reserve, to qualify for the investment allowance.

Clause 6: Certain trust income to be taxed at special rate

By this clause, trusts that are constituted by will as part of tax avoidance arrangements will be made liable to the special rate of tax applicable under section 99A of the Principal Act to trust income to which no beneficiary is presently entitled. This rate is to be 60 per cent as from 1 February when the new system of personal tax, with its maximum rate of 60 per cent, comes into operation.

Trust income to which no beneficiary is presently entitled, broadly, income that is being accumulated in the trust, is subject to tax under section 99A unless the Commissioner of Taxation considers, on the basis of guidelines contained in the section, that it would be unreasonable for the section to apply. In that event, the income is taxed under section 99 at ordinary rates, i.e., under the new system, at the standard rate of 32 per cent plus surcharges (if applicable). If the trust income is $416 or less there is no tax under section 99, in contrast with the position under section 99A where each dollar of income attracts tax.

Under the present law - sub-section (1) of section 99A - deceased estates are excluded from the scope of section 99A and income to which no beneficiary is presently entitled is always assessed under section 99.

This exclusion has been exploited for tax avoidance purposes by some family groups. Through multiple trusts set up by will, each trust having an income of $416 or less, very substantial amounts of income have been made tax-free.

To meet the situation, this clause will repeal the exclusion of deceased estates from the scope of section 99A and income of them to which no beneficiary is presently entitled will be assessed under either section 99 or section 99A, as found appropriate in the circumstances. The change will have effect for the 1977-78 income year and subsequent years.

A trustee of a deceased estate who is assessed under section 99A will of course, like a trustee of a trust set up during the lifetime of the settlor, have the right to have a Taxation Board of Review determine whether the income should, instead, have been taxed under section 99.

Clause 7: Interpretation

This clause is associated with the proposed changes in the basis of taxing film and video tape royalties derived by residents of other countries.

Should it happen that such a taxpayer in receipt of such royalties is a private company deriving other income from Australia, the clause will mean that in calculating whether the company is liable to undistributed profits tax in respect of that other income the tax paid on the royalties is not to be taken into account. This follows the rules now operative in relation to withholding tax - neither the income subject to withholding tax nor the withholding tax itself affect the liability of the private company concerned to the undistributed profits tax in respect of other income.

Clause 8: Private companies

This clause proposes two amendments to section 103A of the Principal Act which is largely concerned with the "public" or "private" status of companies for income tax purposes. These amendments were foreshadowed in an announcement by the Treasurer on 29 June 1977.

A company that is classified as a private company for income tax purposes is, if it does not distribute within a prescribed period of 12 months commencing two months before the end of the relevant income year a specified part of its after-tax profits for that year to shareholders, liable to pay additional tax at a rate of 50 per cent on the shortfall in its distribution for the year. Section 103A declares a company to be a private company if it is not a public company, and provides the criteria for determining whether or not a company is a public company for these purposes.

The basic tests to be applied in order to determine whether a company is a public company in relation to a particular income year are contained in sub-section 103A(2). Under sub-paragraph 103A(2) (d) (iv), a company is a public company if it is one in which either a Government or a public body (of the kind referred to in sub-paragraph 103A(2) (d) (iii)) had a controlling interest on the last day of the income year. This is a public body (other than a company) that is constituted by a law of the Commonwealth or of a State or Territory and established for public purposes, as for example, a public hospital.

Paragraph (a) of sub-clause (1) proposes the first of the amendments to section 103A. This is a formal measure which will ensure that the basic tests in sub-section (2) of that section for determining whether a company is a public company will be subject to the additional qualifications in succeeding provisions of the section, including the additional qualifications to be inserted in section 103A by paragraph (1) (b) of clause 8 to apply in respect of a company seeking public status under sub-paragraph 103A(2) (d) (iv).

Paragraph (b) of clause 8(1) contains the main amendment to section 103A. It will insert two new sub-sections - sub-sections (3A) and (3B) - in section 103A, the effect of which will be to incorporate anti-tax avoidance safeguards in the criteria that a company will have to satisfy if it is to qualify as a public company by reason of being controlled on the last day of its income year by a public body.

These safeguards will qualify the basic condition of sub-paragraph 103A(2) (d) (iv) that an eligible public body have a controlling interest in the company on the last day of the year of income. The thrust of these safeguards will be to ensure that the control held by the public body is effective control and not illusory.

Proposed new sub-section (3A) of section 103A will ensure that, subject to sub-section (3B), a company is not taken to be a public company in relation to a year of income by reason of being controlled by a public body if any of the disqualifying features set out in paragraphs (a) to (f) of sub-section (3A) are present. The effect of the new sub-section (3B) is that paragraphs (a) to (f) will not apply to deny public status to a company if the Commissioner is satisfied that no shares in the company held by the public body were allotted or transferred to it for the purpose of making the company qualify as a public company.

Paragraph (a) of the new sub-section (3A) effectively requires that the exercise by the public body of its controlling interest in the company must not be capable of being prevented by -

(i)

any provisions of the company's Memorandum or Articles of Association as in force on the last day of the year of income; or

(ii)

any arrangements existing on that day affecting the management or conduct of the company including matters relating to the issue and redemption of its shares and the variation of rights attaching to its shares.

Paragraph (a) could apply, for example, where the controlling interest of a public body in a company is achieved through redeemable shares that could be redeemed according to the wishes of private interests in the company in the event of the public body attempting to exercise an effective control over the company's affairs.

Paragraph (b) also supports the broad requirement that the controlling interest of the public body be an effective one by making it necessary that its rights in the company are not to be exercised other than for its own benefit and that the public body's controlling interest is not prejudiced by any failure to exercise those rights.

Paragraph (c) adds the condition that the shares held by the public body in the company were acquired for an adequate commercial consideration, i.e., not by way of gift or for a less than adequate consideration.

Paragraph (d) looks to the existence of any arrangement under which the public body would, after the end of the year of income, divest itself of any of the shares giving it the controlling interest in the company.

Paragraph (e) allows account to be taken of any dividend paid by the company during the year while the public body held its controlling interest and requires that payment of the dividend be compatible with the existence of that interest, i.e., the public body must receive more than one-half of any dividend paid by the company.

Paragraph (f) is the final test and complements paragraph (e). The company will fail to satisfy paragraph (f) if, in the event of no dividend being paid during the income year, the Commissioner is satisfied that the company would have received less than one-half of the dividend if a dividend had been paid during that year.

The new sub-section (3B) of section 103A will enable the Commissioner of Taxation to treat the company as a public company notwithstanding that one or more of the disqualifying features specified in sub-section (3A) may apply. If the Commissioner is satisfied that no shares were allotted or transferred to the public body with the purpose, or under arrangements with the purpose, of enabling the company to be treated as a public company under sub-section 103A(1), the Commissioner will be authorised to accept the company as a public company even though one or more of the disqualifying features specified in sub-section (3A) may apply.

Sub-clauses (2) and (3) of clause 8 provide the basis upon which the amendments made by sub-clause (1) are to apply. Sub-clause (2) provides, generally, that the amendments are to apply in assessments in respect of the 1976-77 income year and subsequent years. Sub-clause (3), however, provides, for companies with substituted accounting periods in respect of the 1976-77 income year that ended before 30 June 1977, that the amendments are to apply in respect of the 1977-78 year of income and subsequent years.

Clause 9: Rebates and provisional tax

As mentioned elsewhere in these notes, trustees assessed under section 99A are to become liable to pay provisional tax and the rate of tax is to be increased from 50 per cent to 60 per cent. There is to be a corresponding increase in the rate of tax on income of superannuation funds assessed under section 121DA and by this clause trustees of these funds will also, for 1978-79 and subsequent years, be liable to pay provisional tax.

Clause 10: Allowable capital expenditure

Division 10AA of the Principal Act authorises the allowance of deductions in respect of eligible capital expenditures incurred by a taxpayer in exploring for petroleum and in carrying on petroleum mining operations in Australia.

Section 124AA of Division 10AA specifies the kinds of capital expenditures that qualify as allowable capital expenditure under the Division. The proposed amendment will extend the scope of the definition of allowable capital expenditure under section 124AA to include expenditure incurred on or after 25 August 1977 on plant for use in the liquefaction of natural gas.

Paragraph (a) of clause 10 will insert a new paragraph - paragraph (aa) - in sub-section 124AA(2) to bring within the range of allowable capital expenditure of a petroleum mining enterprise, capital expenditure incurred on or after 25 August 1977 on plant for use solely in liquefying natural gas obtained from the carrying on by the taxpayer of petroleum mining operations.

By qualifying as allowable capital expenditure, the cost of such plant will be deductible by reference to the life of the petroleum field with which it is associated, subject to a maximum life of five years, on a reducing balance basis. Alternatively, to the extent that the expenditure qualifies as plant, the taxpayer may elect to claim depreciation deductions based on the cost of the plant.

Paragraph (b) of clause 10 will insert a new sub-section - sub-section (3) - in section 124AA to define "natural gas" for purposes of the inclusion in allowable capital expenditure of the cost of a liquefaction plant.

"Natural gas" is defined as a mixture of hydrocarbons that consists principally of methane, or a mixture of hydrocarbons and other gases that consists principally of methane, subject to the mixture being in a gaseous state at a temperature of 15 degrees celsius and a pressure of one atmosphere (that is, at normal atmospheric pressure measured at sea level).

The definition of "natural gas" will be used in determining whether the cost of a liquefaction plant is to be treated as allowable capital expenditure. Essentially, the plant must be for use solely in processing natural gas consisting principally of methane.

Clause 11: Film and video tape royalties derived by non-residents

This clause will change the system of taxing Australian-source motion picture film and video tape royalties derived by non-residents of Australia.

Outgoing film royalties paid through foreign-controlled businesses in Australia are presently taxed under Division 14 of the Principal Act, which in effect deems 10 per cent of gross payments remitted abroad to foreign film makers or distributors to represent profits subject to Australian tax. With a general rate of primary tax payable by companies of 42.5 per cent, this gave an effective rate of tax payable by companies under Division 14 of 4.25 per cent. For other film and video tape royalties the general assessment provisions of the Principal Act have applied, so that, in the case of a company recipient, gross payments less deductible expenses have been taxed at the primary company rate, subject to that tax being limited to 10 per cent of the gross payment where so required by a double taxation agreement.

By the proposed amendment, Division 14 of the Principal Act is to be repealed and a new Division 13A substituted. The new Division will apply in relation to all motion picture film and video tape royalties derived by non-residents on or after 17 August 1977. Division 13A will make a recipient of those royalties liable to tax on the royalties at a rate to be declared by the Parliament. By the Income Tax (Film Royalties) Bill 1977 the rate will be 10 per cent of the gross amount of the royalties. As was the case under Division 14 of the Principal Act, Division 13A is designed to ensure collection of the tax imposed on these royalties, by requiring the payer of the royalties to make suitable arrangements with the Commissioner for payment of the tax payable in respect of the royalties before making a payment to the non-resident recipient.

Sub-clause (1) of clause 11 repeals Division 14 of Part III of the Principal Act and substitutes Division 13A, which contains a new section - section 136A.

Sub-section (1) of section 136A specifies the income to which the section is to apply. This is income derived on or after 17 August 1977 as consideration for the use of or the right to use motion picture films, films or video tapes for use in connection with television, any copyright subsisting in relation to such films, or video tapes, or in any related advertising matter. It must also be income to which section 6C of the Principal Act applies - very broadly, it must be a royalty - and be deemed by that section to have been derived from a source in Australia.

By sub-section (2) of section 136A a person who derives income to which the section applies is to be liable to pay tax on it at the rate declared by the Parliament. The Income Tax (Film Royalties) Bill 1977 will declare this rate, 10 per cent of the gross amount derived by the non-resident concerned.

Sub-section (3) will make it clear that the income tax payable under section 136A is in addition to any other income tax payable under the Principal Act by the recipient of the payments.

Sub-section (4), by providing that income to which the section applies shall not be included in the assessable income of a person, will ensure that the tax imposed by the section will be the final tax payable in respect of the gross amount of the income.

Sub-section (5) makes the payer of the royalties concerned liable, on behalf of the non-resident, to pay the tax imposed by the section; while sub-section (6) requires the payer to make suitable arrangements with the Commissioner for payment of that tax before making a payment to the non-resident recipient of the royalties, or before transferring money out of Australia for the purpose of making such a payment.

Sub-section (7) of section 136A will make a person who contravenes the requirements of sub-section (6) guilty of an offence and liable to a fine of up to the sum of $200 and the amount of income tax payable under the section in respect of the relevant payment.

Sub-clause (2) of clause ll will ensure that Division 14 of the Principal Act continues to have effect in relation to payments to which it applies that were derived before 17 August 1977.

Clauses 12-16: Averaging of income

As outlined in the early part of this Memorandum, significant changes are, with the introduction of the new standard rate system, proposed in the averaging provisions that may apply in the assessment of a primary producer.

The main features of the new averaging arrangements are that

-

in calculating the average rate, the zero rate on the first $3,750 of taxable income will be taken into account;

-

averaging is to apply automatically to all primary producers for 1978-79 and subsequent income years;

-

taxable income will be taxed at average rates when taxable income is higher than average income and at ordinary scale rates when average income is higher than taxable income;

-

the $16,000 income limit for application of averaging is to be abolished; and

-

taxpayers who have previously elected not to have averaging applied are to be entitled to elect to have averaging applied for the 1977-78 financial year.

A number of the proposed changes are to be effected by amendments to be made to the Income Tax (Rates) Act 1976 by the Income Tax (Rates) Amendment Bill (No.2) 1977 and are discussed in the notes on the clauses of that Bill.

Although the averaging provisions will automatically be applied in assessments of primary producers for 1978-79 and subsequent years the rate of tax calculated by reference to the average income is to apply only where the average income is less than the taxable income. Where this is the case the application of the averaging provisions will be beneficial to the taxpayer. As that rate will not be applied where taxable income is less than the average income the application of the averaging provisions will not be capable of operating so that a primary producer pays more tax in any year after 1977-78 than if he had been taxed simply on the basis of his taxable income. Moreover a taxpayer who has not withdrawn from the averaging system may do so for 1977-78 if in that year the averaging provisions applicable under the pre-Budget system for the first part of the year would operate to his detriment. An election to withdraw from averaging for 1977-78 will not be of any effect in subsequent years when averaging will automatically apply if it is beneficial to the taxpayer.

Clause 12: Average income

Clause 12 amends section 149 of the Principal Act which lays down the method of determining the average income used for rating purposes. As that section now stands any amount by which the taxable income of the taxpayer of any one of the average years (ordinarily the year of income in relation to which the average income is to be determined and the four preceding years) exceeds $16,000 is to be disregarded in calculating the average income. The "average income" of a taxpayer ascertained in accordance with section 149 as amended will mean the average of his total taxable incomes of the average years.

Paragraph (a) of sub-clause (1) of clause 12 is a formal drafting amendment to omit a reference in sub-section 149(1) of the Principal Act to sub-section 149(2) which is to be repealed by paragraph (b).

Paragraph (b) of sub-clause (1) of clause 12 omits sub-section 149(2) of the Principal Act under which the amount of taxable income taken into the average income calculation was limited to $16,000.

Sub-clause (2) of clause 12 provides that the amendments made by sub-clause (1) of the clause are to have effect in assessments in respect of income of the 1978-79 and subsequent financial years. This means that for 1978-79 and future years a reference to average income will be taken as a reference to the average of the total taxable incomes of a taxpayer in the averaging period. In certain circumstances specified in the Income Tax (Rates) Act, however, the $16,000 limit on averaging is to be retained and for this purpose average income may for a limited period be calculated as if the amendment of section 149 being effected by clause 12 had not been made.

Clause 13: Permanent reduction of income

Clause 13 amends section 155 of the Principal Act which allows a primary producer to have calculations of his average income started afresh, with high taxable incomes of previous years being dropped out, if he is able to establish that retirement from his occupation or some other event has resulted in his taxable income having been permanently reduced to an amount which is less than two-thirds of his average taxable income.

Sub-clause (1) of clause 13 will amend section 155 by omitting the existing sub-section (2) and substituting a new sub-section which omits a reference to sub-section 149(2) that is to be repealed by clause 12. The effect of the new sub-section 155(2) will be the same as that of the repealed provision and, in applying section 155, average taxable income is to mean, in effect, the amount that would be the average income of the taxpayer in relation to the year concerned if any income received by him in any average year from sources from which he does not usually receive income had not been received.

Sub-clause (2) of clause 13 will apply the amendment made by sub-clause (1) to assessments made in respect of income of 1978-79 and subsequent income years.

Clause 14: Election that Division shall not apply

This clause amends section 158A of the Principal Act under which a taxpayer may elect to withdraw from the averaging system. As mentioned earlier in this memorandum, averaging will be applied automatically in 1978-79 and subsequent years where it will be to the taxpayer's benefit. Consequently there will be no need, after 1977-78 for a right of withdrawal from the averaging system. Amendments made by this clause will therefore remove that redundant right.

Paragraph (a) of clause 14 makes a formal drafting amendment consequential upon the amendment made by paragraph (b) of this clause and by clause 15.

Paragraph (b) of clause 14 adds a new sub-section - sub-section (4) - to section 158A. That sub-section provides in effect that a taxpayer may not elect under section 158A to withdraw from averaging for 1978-79 or a later year and that an election made under the section for 1977-78 or an earlier year is not to have effect for 1978-79 and subsequent years of income.

Clause 15: Election that this Division shall apply

Clause 15 will amend section 158AA of the Principal Act which permitted a taxpayer who had previously withdrawn from the averaging system for 1965-66 or an earlier year a limited right to re-enter the system. Paragraph (a) of clause 15 makes a formal drafting amendment to sub-section 158AA(1) consequential upon the amendment to be made by paragraph (b) of this clause.

Paragraph (b) of clause 15 adds a new sub-section - sub-section (3A) - to section 158AA. New sub-section (3A) will give taxpayers who are at present outside the averaging system an unqualified right of re-entry for the 1977-78 income year. If a person who is at present outside the system does not make such an election, averaging will not apply for any part of the 1977-78 year of income but will, because of the amendments to be made by paragraph (b) of clause 14, apply automatically in 1978-79 and subsequent years of income where it is to the taxpayer's benefit.

Clause 16: Repeals

Clause 16 repeals section 158AB (which because it has prevented certain taxpayers from withdrawing from average will no longer be appropriate) and section 158AC of the Principal Act. The purpose of section 158AC was to ensure that when the averaging limit was raised to $16,000 in 1966 the application of the increased limit did not initially operate to the detriment of a taxpayer to whom averaging applied for 1965-66 and subsequent years. The section could not apply where a tax-payer's taxable income was less than his average income. When that occurs in future a primary producer will be taxed at the rate appropriate to his taxable income, rather than his average income, and section 158AC which now has little if any application would no longer serve any purpose.

Paragraph (a) of clause 16 will repeal sections 158AB and 158AC and paragraph (b) of that clause will provide that the repeal is to have effect in respect of 1978-79 and subsequent years of income.

Clause 17: General concessional rebates

This clause is part of the measures by which, under the new system of personal income tax, the general rebate of $676 is to be replaced by a zero rate of tax on the first $3,750 of taxable income. It reduces from $1,690 to $1,590 the amount of rebatable expenditure that a taxpayer must incur before, effectively, becoming eligible for rebate and correspondingly reduces from 40 per cent to 32 per cent the rate of rebate applicable to expenditure in excess of $1,590.

Section 159N of the Principal Act, which the clause amends, allows taxpayers a rebate of 40 per cent of their rebatable expenditure (superannuation, education expenses, municipal rates, etc.) and if their resulting rebate does not amount to $676 they are allowed an additional rebate to bring the total rebates under the section up to $676. This is, in practical terms, equivalent to allowing a rebate of $676 plus 40 per cent of the excess of the eligible expenditure over $1,690 (40 per cent of $1,690 is $676).

On the replacement of the rebate of $676 by a zero rate on the first $3,750 of taxable income it is necessary not only to withdraw taxpayers' entitlements to a rebate of $676 but also to provide expressly that a rebate based on rebatable expenditure is only to be allowed on the excess of that expenditure over $1,590 (this amount being substituted for 1977-78 for the pre-Budget amount of $1,690).

The clause therefore repeals existing entitlements to rebate under section 159N (both for ordinary situations and the special case of a person in receipt of uncontrolled partnership income) and replaces the repealed provisions by a new sub-section (2) which confers a right to rebate of 32 per cent of the excess of rebatable expenditure over $1,590.

Clause 18: Indexation

This clause follows the absorption of the general rebate of $676 into the personal tax rates scale.

It amends section 159Z of the Principal Act under which various rebates are subject to indexation. One of the rebates that has been subject to indexation has been the general rebate. Indexation that took effect at the commencement of the 1977-78 income year indexed to $676, from $610, the general rebate that had applied for 1976-77.

Withdrawal of the general rebate means that the provision for its indexation can be withdrawn and the amendment to be made by this clause will do this.

Indexation of the general rebate has had the effect of indexing upwards the amount of rebatable expenditure (superannuation contributions, education expenses, municipal rates etc) that a person must incur before becoming eligible to a rebate additional to the amount of the basic general rebate. Pre-Budget, this amount of expenditure had risen to $1,690. The substitute amount of $1,590 that is to be introduced by clause 17 will not be subject to indexation.

Clause 19: Rebate in case of disposal of assets of a business of primary production

This clause will amend section 160 of the Principal Act which allows a special rebate of tax in some of the cases where all the assets of a primary production business are disposed of for the purpose of putting an end to that business, and the assets disposed of include livestock disposed of at a profit.

The rebate under section 160 was, very broadly, designed to have the effect that the application of an income limit on the averaging provisions (currently $16,000) does not preclude the primary producer concerned from enjoying full averaging benefits in relation to such profits.

As there is to be no income limit on averaging for 1978-79 and subsequent years, section 160 will become redundant and is therefore being made inapplicable. For the 1977-78 transition year the rebate under the section will be such amount as the Commissioner considers reasonable in all the circumstances.

Clause 20: Interpretation

The amendment made to section 221YA of the Principal Act by this clause will have the effect that, for the 1978-79 and subsequent years, a trustee assessable under section 99A on trust income (broadly, income to which no beneficiary is presently entitled of a trust set up for tax avoidance purposes) will be liable to pay provisional tax in respect of that income.

Clause 21: Amount of provisional tax

Sub-clause (1) of this clause relates to the inclusion in provisional tax of a component for the health insurance levy and inserts three new sub-sections - sub-sections (1B), (1C) and (1D) - into section 221YC of the Principal Act. That section determines the amount of provisional tax payable on income other than salary and wages. At base, provisional tax for a financial year is calculated on the basis of income of, and circumstances existing in, the previous year.

New sub-section (1B) authorizes the Commissioner to vary the amount to be charged by way of provisional tax in respect of a year of income in any case where he is of the opinion that the health insurance levy payable for that year will be greater or less than that payable for the preceding year. For example, where a person who was liable to pay health insurance levy in respect of 1976-77 income had taken out adequate private hospital and medical insurance before the end of June 1977, the Commissioner will be authorized by sub-section (1B) to refrain from including in the person's provisional tax a component for the levy. Without the amendment the person's provisional tax would include such a component based on the amount of the levy payable for 1976-77.

Proposed sub-section (1C) requires the Commissioner, in applying sub-section (1B), to ignore any variation or proposed variation in the rate at which the levy will be payable in the year of income. Existing sub-section 221YC(2) authorizes the making of a regulation to vary the provisional tax otherwise payable where there is a change in rates of tax including a change in the rate of health insurance levy. It will be noted, however, that the increase from 1.875 per cent to 2.5 per cent in the rate at which levy is to be payable for 1977-78 is to be reflected in provisional tax payable for 1977-78, by virtue of the provisions of clause 23 of this Bill.

New sub-section (1D) ensures that the term "health insurance levy" has the same meaning in new sub-sections (1B) and (1C) as it has in Part VIIB of the Principal Act which imposes the levy.

Sub-clause (2) of clause 21 applies the amendments made by sub-clause (1) in relation to provisional tax in respect of the 1977-78 and subsequent years of income.

Clause 22: Health insurance levy

This clause amends the section of the Principal Act - section 251S of the Principal Act - that specifies the basic conditions under which a taxpayer may be liable for the health insurance levy.

At present, trustees may, in a number of circumstances, be liable to the levy. In particular, a trustee who is to be assessed under section 99 or 99A of the Act in respect of income to which no beneficiary is presently entitled is subject to the levy.

By this clause, a trustee of a deceased estate assessed under section 99 or section 99A will be exempt from the levy for the 1977-78 and subsequent income years.

Clause 23: Provisional tax

This clause, which does not amend the Principal Act, relates to the inclusion of a component for the health insurance levy in provisional tax payable for 1977-78.

Sub-clause (1), in conjunction with sub-clause (3), will increase the provisional tax otherwise payable by a taxpayer by an amount equal to one-third of the health insurance levy payable by the taxpayer for 1976-77 or, if the Commissioner has made a determination under proposed sub-section 221YC (1B) varying the levy component of the provisional tax otherwise payable (see notes on clause 20), by one-third of the amount of the varied component.

The sub-clause is necessary because the levy payable for 1976-77 was 1.875 per cent, or three-quarters of the 1977-78 rate of 2.5 per cent. By increasing by one-third the amount of levy calculated on the basis of the 1976-77 levy that applied for three-quarters of 1976-77, the provisional levy for 1977-78 will be brought up to its 1977-78 "full-year" level.

Sub-clause (2), in conjunction with sub-clause (4), will reduce the amount of provisional tax otherwise payable by a trustee of a deceased estate liable to be assessed under section 99 of the Principal Act by the amount of health insurance levy payable for 1976-77. Under an amendment to section 251S of the Principal Act by clause 22 of the Bill such a trustee is not to be liable to pay the health insurance levy for 1977-78 or any subsequent income year.

INCOME TAX (COMPANIES AND SUPERANNUATION FUNDS) BILL 1977

The main purpose of this Bill is to impose income tax for the 1977-78 financial year, at the rates declared in the Bill, on the 1976-77 incomes of companies and the 1977-78 incomes of superannuation funds.

Other rates of income tax payable for the 1977-78 financial year - by individuals and by trustees generally are to be declared by the Income Tax (Rates) Act 1976, as proposed to be amended by the Income Tax (Rates) Amendment (No.2) Bill 1977, and are to be imposed by the Income Tax (Individuals) Bill 1977.

Apart from some rate changes, the practical effect of the present Bill is the same as the Income Tax (Companies and Superannuation Funds) Act 1976, which declared and imposed the rates of income tax payable by companies and superannuation funds for the 1976-77 financial year.

The rates of income tax declared by this Bill for the 1977-78 financial year are as follows:

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by clause 6, the general rate of tax on taxable income of companies is to be 46 per cent, an increase of 3.5 percentage points over the rate applicable for 1976-77;

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by clause 6, the rate of tax payable by a friendly society dispensary on its taxable income is to be 41 per cent, also an increase of 3.5 percentage points;

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by clause 6, the rate of additional tax payable by a private company on the amount by which dividends paid fall short of a sufficient distribution remains at 50 per cent;

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by clause 7, the rate of tax payable on investment income of a superannuation fund that does not, under the "30/20" rule, invest a sufficient proportion of its assets in public securities is to be 46 per cent, keeping it in line with the rate of tax on taxable income of companies;

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by clause 7, the rate of tax on certain taxable income of superannuation funds to which section 121CA or 121CB of the Assessment Act applies is to remain at 50 per cent;

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by clause 7, the rate of tax on income of trusts qualifying as superannuation funds to which section 121DA of the Assessment Act applies is to be 54.17 per cent instead of the rate of 50 per cent previously applicable.

The latter increase is related to the proposed increase, under the Income Tax (Rates) Amendment Bill (No.2) 1977, in the rate of tax payable under section 99A of the Assessment Act in respect of trust income to which no beneficiary is presently entitled, broadly, income that is being accumulated in the trust.

In the past, the rate of tax applicable under sections 99A and 121DA has been the same rate, 50 per cent. A trust qualifies as a superannuation fund to which section 121DA applies simply if it answers the description of being a "provident, benefit, superannuation or retirement fund". A fund to which section 121DA applies, unlike superannuation funds to which sections 121CA and 121CB apply, does not attract any special taxation treatment and in those circumstances retention of the 50 per cent rate for funds to which section 121DA applies would have left an avenue for avoidance of the increase in the rate of tax payable under section 99A through trusts that would otherwise be taxed under that section being made to qualify as funds to which section 121DA applies.

The rate of 54.17 per cent that is to apply for 1977-78 under sections 99A and 121DA is 58.3 per cent (representing the first seven months of the year) of the previous rate of 50 per cent plus 41.7 per cent (representing the last five months of the year) of the new personal tax system's rate of 60 per cent. By sub-clause (3) of clause 9 the 60 per cent rate is declared for purposes of section 121DA, on an interim basis, for 1978-79.

Clause 11 of the Bill relates to instalments of company tax. The system of collection of company tax by instalments was brought back into operation in 1977-78 by legislation passed earlier this year that required payment of 2 instalments of tax. Clause 11 will authorise the collection of instalments again in the 1978-79 financial year in accordance with relevant provisions of the Assessment Act. Under those provisions, the quarterly payments system will come into full operation in that year, with the first of 3 instalments to be due not earlier than 15 August 1978.

INCOME TAX (INDIVIDUALS) BILL 1977

This Bill will formally impose the tax to apply in respect of income derived by individuals and by trustees during the 1977-78 income year. It is complementary to the Income Tax (Rates) Act 1976 - as amended by the Income Tax (Rates) Amendment Act 1977 and as proposed to be amended by the Income Tax (Rates) Amendment (No.2) Bill 1977 - which declares the rates of tax to apply to such taxpayers. As the Bill is similar to the Income Tax (Individuals) Act 1976, the following notes are confined to those clauses of the Bill which differ in practical effect from the provisions of that Act.

Clause 5: Imposition of income tax

Sub-clauses (1) and (2) have the effect, when read with clause 7, of formally imposing income tax payable by individuals and trustees for the 1977-78 financial year at the rates declared by the Income Tax (Rates) Act 1976 (as amended), while sub-clause (3) excludes from the scope of the Act withholding tax and tax payable on film and video tape royalties paid overseas (under sections 128B and 136A of the Income Tax Assessment Act).

Clause 6: Rebate of tax

Clause 6 is a new provision for which there was no counterpart in the Income Tax (Individuals) Act 1976, and is a measure to deal with the transition, during 1977-78, from the pre-Budget system of personal tax, embodying the general rebate, to the new system that has a zero rate on the first slice of taxable income.

This clause provides a rebate of tax for 1977-78 in those cases where tax is payable at a rate ascertained by reference to an average income (in the case of a primary producer) or a notional income (e.g., in the case of an author or inventor). Amendments to be effected to the Income Tax (Rates) Act 1976 by the Income Tax (Rates) Amendment Bill (No.2) 1977 will, for ease of drafting, require that in calculating the average or notional rate under the rules notionally operative for the first seven months of the year, there is not to be any zero-rating of the first slice of income and that the 1977-78 tax threshold of $3,403 (which is to be distinguished from the pre-Budget tax threshold of $3,154) will not be taken into account. Also, as was the case under pre-Budget arrangements, the general rebate is not to be taken into account in the average and notional rate calculations.

If that were all, the taxpayers concerned would not have the benefit of the general rebate operative for the first seven months of the year, or of the increase in the tax threshold. Accordingly, this clause will allow a special rebate designed so that these taxpayers have these benefits. In short, clause 6 is designed so that in the transition year 1977-78, and for seven months of that year, the general rebate operative under the pre-Budget system will be enjoyed by primary producers and taxpayers taxed under the notional income provisions in the same way as under the pre-Budget system.

The rebate to be allowed by clause 6 will be as follows:-

Provision is made in clause 6 for comparable rebates to be allowed in relevant cases where a trustee is assessed under section 98 of the Income Tax Assessment Act or under section 99 where he is trustee of the estate of a person who died less than 3 years before the end of the year of income.

The rebate provided by this clause is to be capable of producing an excess that, pursuant to section 251U of the Income Tax Assessment Act, may be offset against a taxpayer's liability for health insurance levy. A provision to achieve this result has been included in the Health Insurance Levy Bill 1977.

Clause 7: Levy of tax

This clause operates to levy the tax imposed by clause 5 of the Bill in respect of the 1977-78 financial year and, until the Parliament otherwise provides, for the 1978-79 financial year. This will mean that the "composite" rates set out in the Income Tax (Rates) Act 1976 (as amended) for the 1977-78 financial year are to be levied and payable for that year. The general rates set out in that Act (as amended) for the 1978-79 financial year and subsequent financial years, as automatically indexed according to the provisions of section 9 of that Act (as amended), will apply on an interim basis for the 1978-79 financial year until the Parliament otherwise provides by passing an "imposition" Act for 1978-79.

HEALTH INSURANCE LEVY BILL 1977

This Bill will impose health insurance levy for the 1977-78 financial year at the rate of 2.5 per cent of taxable income, subject to ceilings on the amount of levy payable. To a substantial degree it simply re-enacts provisions included in the Health Insurance Levy Act (No.2) 1976, which imposed the levy for the 1976-77 financial year.

The following notes are therefore confined to the main provisions of the Bill that differ in practical effect from the corresponding provisions of the above Act.

Clause 7: Rate of levy

This clause will fix the rate of health insurance levy for 1977-78 at 2.5 per cent of taxable income for that year. The levy was in operation for only nine months of the preceding year, the rate of 1.875 per cent for 1976-77 being three-quarters of the full year levy rate.

Clause 8: Maximum levy where person included in the same category during the whole year of income.

The purpose of this clause is to set a limit or 'ceiling' on the amount of levy payable by a taxpayer. For the 1977-78 year the 'family' ceiling, for a person with dependants, will be $300 ($225 representing three-quarters of the previous year), and for a person without dependants the ceiling will be $150 ($112.50 for three-quarters of 1976-77).

Clause 12: Small incomes rebate

As in 1976-77, effective exemption is provided from the levy for low income earners. In addition, taxable incomes in a range just above the level at which levy becomes payable, are gradually brought to the full levy of 2.5 per cent of taxable income which, broadly speaking, occurs at the point where income tax commences to be payable.

In 1976-77, these levy reliefs were achieved by deducting excess concessional rebates - e.g., the general rebate and rebates for dependants - from the levy otherwise payable. With the changed system for 1977-78, involving absorption of the general rebate into the income tax rates scale, an altered approach is necessary.

This clause is designed for that purpose and provides a small incomes rebate of levy for 1977-78 equal to 27 per cent of the amount by which taxable income falls short of $3,402, which is the level immediately above which income tax first becomes payable. For example, a person with a taxable income of $3,300 who would, before the application of this rebate, be liable to pay levy of $82.50 (i.e., 2.5 per cent of $3,300), is to be entitled to a rebate of $27.54 (i.e., 27 per cent of $3,402-$3,300), making the net levy payable by him or her $54.96.

The effect of the small incomes rebate is, for 1977-78, to free from levy persons with taxable incomes of $3,113 and less (the comparable 1976-77 figure was $2,605).

Although the general concessional rebate has been replaced by the zero rate system, excess rebates for dependants and other excess concessional rebates which are not fully absorbed in calculating a person's income tax liability, will still be applied to reduce the levy otherwise payable (by virtue of section 251U of the Income Tax Assessment Act). The effect of this for 1977-78 will be that a taxpayer with a wholly dependent spouse will not pay any levy unless his or her taxable income is $4,913 or more ($4,300 in 1976-77).

Sub-clause (1) of clause 12 provides the rebate for persons other than trustees, while sub-clause (2) provides for an equivalent rebate for trustees liable to be assessed and to pay tax under section 98 of the Assessment Act. The measure of rebate is in both cases the same.

Clause 13: Rebates

This clause ensures that the rebate to be allowable under proposed section 6 of the Income Tax (Individuals) Bill 1977 in 1977-78 assessments of taxpayers taxed at a rate ascertained by reference to an average or notional income, will be capable of creating an excess rebate that, under the provisions of section 251U of the Assessment Act, can be applied against a taxpayer's liability to health insurance levy.

As the rebate under proposed section 6 is a 1977-78 transition year allowance matching the former general rebate, clause 13 of this Bill is a transition year application of the principles of section 251U.

Clause 14: Financial years for which levy is payable

By sub-clause (1) the health insurance levy is payable for the 1977-78 financial year upon taxable income of that year.

Sub-clause (2) provides that until the Parliament formally otherwise declares, the levy imposed by the Bill is also to apply for the 1978-79 year. A provision of this kind is needed for cases where it is necessary early in the financial year to make an assessment in respect of income of that year, e.g., where a person is leaving Australia.

Sub-clause (3) provides that in relation to the 1978-79 financial year, the small incomes rebate rate will be 32 per cent rather than the 27 per cent proposed for 1977-78 under clause 12. It also provides that the 32 per cent rebate will be calculated for 1978-79 on the amount by which taxable income falls short of $3,750, or that figure as increased by tax indexation. The point at which levy would first become payable for 1978-79 in the context of an income tax threshold of $3,751 would be $3,479.

INCOME TAX (FILM ROYALTIES) BILL 1977

This Bill imposes and declares the rate of tax payable in respect of film and video tape royalties paid abroad on or after 17 August 1977.

Provisions governing the taxing of such royalties are to be contained in Division 13A of Part III of the Assessment Act, which is being inserted in that Act by clause 11 of the Income Tax Assessment Amendment Bill (No.2) 1977.

The effect of those provisions and this Bill is that such royalty payments will be subject to income tax at the rate of 10 per cent of the gross amount of the royalties.