House of Representatives

Explanatory Notes

(Circulated by the Treasurer, the Rt. Hon. Sir Arthur Fadden.)

NOTES ON CLAUSES

Clause 1: Short Title and Citation.

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

Clause 2: Commencement.

Section 5(1A.) of the Acts Interpretation Act 1901-1950 provides that every Act shall come into operation on the twenty- eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act.

By this clause, it is proposed that the Income Tax and Social Services Contribution Assessment Act (No. 3) 1956 shall, with the exception of one provision, come into operation on the day on which it receives the Royal Assent.

This action is necessary in order that the Commissioner of Taxation may proceed immediately with the preparation and issue of assessments involving payment of provisional tax and contribution by individuals. At the same time, it will enable the early adjustment of the rates at which tax instalments are to be deducted from the earnings of employees resident in isolated localities. As explained later, those employees, in common with other individuals resident of the localities, will be entitled as from 1st July, 1956, to increased zone allowances.

The excepted provision is paragraph (c) of Clause 13, which inserts a definition of "locality" for the purposes of the special deduction allowed under section 79B of the Principal Act to members of the Defence Force serving at overseas localities. For drafting purposes explained in the note to Clause 13, it is necessary that the definition of "locality" should be deemed to be operative on and from 1st July, 1956.

Clause 3: Parts.

The main purpose of this amendment is to include in section 5 of the Principal Act two new divisions, namely Division 10A - Timber Operations and Division 10B - Industrial Property.

At the same time, section 5, as proposed to be amended, will indicate the sections comprised in each Part and Division of the Principal Act.

Clause 4(a).: Exemption of Income of Hospital and Medical Benefits Organisations.

The new paragraph (eb) proposed to be inserted in section 23 of the Principal Act will exempt from tax the income of medical and hospital benefits organisations. To qualify for the exemption, it is essential that the organization should be registered as such for the purposes of the National Health Act 1953, and that it should not be carried on for the profit or gain of its individual members.

As explained in the notes to sub-clauses (2) and (3) of Clause 4, it is proposed that this exemption and the exemption of income of organisations registered under earlier Commonwealth health legislation shall apply on and from 1st January, 1952.

Clause 4(b) and (c).: Exemption of Grants Made by the United States Educational Foundation in Australia.

Paragraph (b) is a drafting provision.

By paragraph (c) it is proposed to give statutory effect to a provision in an agreement dated 26th November, 1949 between the Government of the United States of America and the Government of Australia - more commonly known as the Fulbright Agreement.

That Agreement established the United States Educational Foundation in Australia, the funds of which are used for the purpose of financing studies, research, instruction and other educational activities of, or for, citizens of the United States of America in Australia and of citizens of Australia overseas. Article 13 of the Agreement provides that the Government of Australia shall exempt from Australian income tax and social services contribution all grants by the Foundation from the funds unless and until the Government of the United States of America fails to grant similar exemptions to grants made by the Australian Government from its funds to recipients in the United States.

Until recent times it was not necessary to provide in the Assessment Act specifically that these grants should be exempt as the grants were made to students receiving full-time education at a school, college or university, and, accordingly, came within the general exemption provided by section 23(z) of the Principal Act. In recent times, however, grants have been made to visiting professors, lecturers and research workers to whom the general exemption under section 23(z) does not apply.

It is proposed, therefore, to implement Article 13 by a specific provision - section 23(za) - of the Principal Act to exempt the grants.

The exemption is declared by clause 23(2) to apply as from 26th November, 1949, the date on which the Agreement was made.

Clause 4(2) and (3).: Exemption of Income of Hospital and Medical Benefits Organisations.

By sub-clause (2) it is proposed to exempt income derived in the period from 1st January, 1952 to 14th April, 1954, by organisations registered under Commonwealth health legislation preceding the National Health Act the relevant Part VI of which came into operation on 14th April, 1954. None of these organisations was registered earlier than 1st January, 1952.

The purpose of sub-clause (3) is to authorise the withdrawal of such assessments as have been made on income derived on and after 1st January, 1952 by these organisations. In the absence of this authorising provision, section 170 of the Principal Act would preclude the withdrawal of the assessments.

Clause 5: Exemption of Pay and Allowances of Members of the Defence Force.

By sub-clause (1) of this Clause, it is proposed to repeal section 23B of the Principal Act, which provides for the exemption of pay and allowances of members of the Defence Force allotted for service in the Korean and Malayan areas. Those areas were prescribed as operational areas by regulation 4AD of the Income Tax and Social Services Contribution Regulations.

By an amendment of regulation 4AD, the exemption in respect of the Korean area was terminated, with effect from 20th April, 1956, on the return of the main body of the Korean Force to Australia.

For practical purposes, therefore, the proposed repeal of section 23B will terminate the exemption of members of the Defence Force allotted for service in the Malayan area, as from the date on which the Bill receives the Royal Assent.

After the repeal of section 23B, it is proposed to declare Malaya as an overseas locality for the purposes of section 79B, with effect from 1st July, 1956. Section 79B provides for a special deduction of Pd120 (proposed by Clause 13 to be increased to Pd180) to members of the Defence Force serving for more than one-half of the year of income at one or more declared localities outside Australia. Where the service is less than one-half of the income year, a proportionate deduction is allowable.

In the year 1956-1957, members of the Forces serving in Malaya will thus be entitled to full exemption up to the date of termination of section 23B and the special deduction of Pd180, or proportionate part thereof. Thereafter, the special annual deduction of Pd180 only will be allowable.

By clause 23(4) of the Bill, the exemption under section 23B of the Principal Act will be continued while personnel who were allotted for duty in Malaya or Korea are undergoing hospital treatment in consequence of illness contracted or injuries sustained whilst so allotted, until discharge from hospital.

Sub-clause (2) of Clause 5 applies to members of the Australian Naval Forces who have served in Malayan waters since 1st July, 1955. When the exemption under section 23B was first provided for service in Malaya, it was not extended to naval personnel, as Australian naval vessels were not at that time operating in Malayan waters. On 1st July, 1955, Australian naval vessels commenced to operate in Malayan waters as part of the Australian Component of the Strategic Reserve in that area and sub-clause (2.) is designed to extend the exemption to such personnel accordingly.

Sub-clause (3) of Clause 5 has been inserted to authorise amendments of assessments of naval personnel to give effect to the exemption proposed by sub-clause (2). In the absence of this authorising provision, section 170 of the Principal Act would preclude amendments of the assessments.

Clause 6: Insurance Recoveries on Losses of Live Stock and Trees.

Section 26B, which is proposed to be amended by this Clause, permits a primary producer who receives insurance moneys in respect of live stock losses through bush fires or other causes to include, if he so desires, one-fifth only of the insurance recovery in the assessable income of the year of receipt and one-fifth in each of the next four succeeding years. Apart from this provision, the whole amount of the insurance recovery would form part of the primary producer's assessable income of the year when the moneys are received.

By Clause 6, it is proposed to extend this optional basis of assessment to insurance recoveries by primary producers in respect of losses by fire of trees. The amendment will have particular significance for taxpayers carrying on a business of afforestation.

The new provision will apply to insurance recoveries received during the current year of income which commenced on 1st July, 1956 and subsequent years of income.

Clause 7: Disposal, Loss or Destruction of Depreciated Property.

Section 59 of the Principal Act, which is proposed to be amended by this clause, provides a system of balancing adjustments where a depreciable asset is disposed of, lost or destroyed. Under section 59(2.), where the consideration receivable exceeds the written-down value of the asset, the excess (to an extent not greater than the depreciation allowed on the asset) is included as a balancing charge in the assessable income of the year in which the disposal, loss or destruction occurs. By this means, the total deductions allowed in respect of the asset over the period of its use are equated to the actual cost of the asset after taking into account any amount received on its disposal, loss or destruction.

In the calculation of a balancing charge, any amount recoverable under a policy of insurance or otherwise on the loss or destruction of an asset is regarded as consideration receivable in respect of that asset. Where, in lieu of a cash payment, the asset is replaced under an insurance policy, the value of such replacement is taken as the consideration receivable in respect of the loss or destruction.

The purpose of the amendments proposed in Clause 7 is to provide an alternative basis of adjustment of the balancing charge in the case of an insurance or other recovery on the loss or destruction of a depreciable asset. The special provisions which are being introduced for this purpose follow the lines of similar provisions which were operative from 1942 until 28th April, 1952, when the 1939-1945 war officially terminated.

The general plan of the proposed provisions is to afford the taxpayer a choice between the inclusion of the balancing charge in his assessable income of the year in which the asset is lost or destroyed, and the deduction of a corresponding amount from the value of the replacement asset or other assets in respect of which he is entitled to depreciation. Where the latter course is chosen, future depreciation allowances on the asset or assets against which the balancing charge is off-set will then be calculated on the reduced value. The practical effect of adjustment on this alternative basis will be to reduce depreciation allowances of future years to an extent equal in total amount to the balancing charge which would otherwise be included in assessable income of one year.

Paragraph (a) of the clause is a drafting amendment to qualify the application of the general provisions where an election is made under the proposed new provisions.

The proposed sub-section (2A.) provides for the exercise of the option by the taxpayer and proceeds to specify the order in which the balancing charge may be deducted from the values of other assets. If the asset is replaced in the same year as the loss occurs, the deduction must be made firstly from the cost of replacement. If replacement cost is less than the balancing charge, or if there is no replacement in that year, the charge or the remainder of the charge, as the case may be, is to be deducted successively from the cost of any other asset acquired during the year and then from the depreciated values of other assets held by the taxpayer at the beginning of the year of income.

The proposed sub-section (2B.) provides that the balancing charge shall not be set off against the cost of an asset unless that asset is, at the end of the income year, used wholly for the purpose of producing assessable income or installed ready for use for that purpose or held in reserve. The sub-section also requires that depreciation shall be allowable on that asset.

The sub-section thus ensures that the exclusion of the balancing charge from assessable income leads to an equivalent reduction in the depreciation allowances.

The effect of sub-section (2C.) is that any excess of the balancing charge over and above the amount deducted from other assets will be included in the assessable income of the taxpayer in accordance with the general provisions of sub-section (2.) of section 59 of the Principal Act.

Sub-section (2D.) will apply where an asset is not replaced in the year of loss or destruction but is replaced within the next two succeeding years. In that event, the balancing charge would be brought into assessable income of the year of loss or destruction unless the taxpayer had required the Commissioner of Taxation to set off that balancing charge against other depreciable assets.

Where the balancing charge has been included in assessable income in these circumstances, the taxpayer may require the Commissioner of Taxation to exclude the balancing charge from assessable income and to reduce the cost of the replacement by a corresponding amount for depreciation purposes.

Authority to amend an assessment to exclude the balancing charge from assessable income is proposed by Clause 21 of the Bill.

The purpose of sub-section (2E.) is to deem the amounts deducted from the value of an asset under the preceding provisions to be depreciation which has been allowed in respect of the asset in calculating its depreciated value for the purposes of future deductions for depreciation and in calculating balancing adjustments on the disposal, loss or destruction of the asset.

The provisions proposed by Clause 7 will commence to apply in assessments based on income of the year 1956-1957.

Clause 8: Definition of Depreciated Value.

By this clause, it is proposed to omit sub-section (3.) from section 62 of the Principal Act. The substance of the sub-section which is being omitted is to be re-enacted by the new sub-section (2E.) of section 59 - Clause 7.

Clause 9: Expenses Relating to Grant of Patents, etc.

By this clause, it is proposed to insert section 68A in the Principal Act to authorise the deduction of expenditure incurred by a taxpayer in obtaining the grant or renewal of a patent, registered design or copyright for use in the production of assessable income. The deduction will be allowable in the year in which the expenditure is incurred and will extend to attorney's fees as well as the statutory registration charges.

The clause is complementary to that part of Clause 20 of the Bill which relates to the deduction of capital expenditure on industrial property in the form of patent rights, registered designs and copyrights.

Section 68A will commence to apply to assessments based on income of the year 1956-1957.

Clause 10: Repeal of Sections 69 and 70.

This clause provides for the repeal of sections 69 and 70 of the Principal Act.

The sections proposed to be repealed relate to the timber industry. In view of the new Division 10A dealing specifically with that industry, the substance of the section will be incorporated (with amendments) in section 124J within that Division - see note on Clause 20.

Clause 11: Gifts.

Section 78(1.)(a) of the Principal Act authorizes the allowance of deductions for gifts of the value of Pd1 and upwards to specified institutions and funds in Australia.

It is proposed by this clause to extend the deduction to gifts to the following:-

The Commonwealth, when made for the purposes of research in the Australian Antarctic Territory.

The Royal Australasian College of Surgeons.

The Royal Australasian College of Physicians.

The Australian Regional Council of the Royal College of Obstetricians and Gynaecologists.

The New South Wales College of Nursing.

The College of Nursing, Australia.

The Council for Christian Education in Schools.

The amendment will apply to gifts made during the income year 1956-1957 and subsequent years.

Clause 12: Deduction for Residents of Isolated Areas.

By this clause it is proposed to amend section 79A of the Principal Act which allows deductions to individuals resident in isolated areas. The deductions are granted as a recognition of the disadvantages to which those persons are subject because of the uncongenial climatic conditions, isolation and high cost of living in the areas concerned, which are defined as Zone A and Zone B, respectively.

At present, residents of Zone A are allowed a special deduction of Pd120, while the deduction allowable to residents of Zone B is Pd20.

Zone A covers, broadly, the section of Australia north of the Tropic of Capricorn, with the exception of the more settled portions of coastal and central Queensland. Islands forming that part of Australia lying adjacent to the Zone, and the external Territories of the Commonwealth, are also included in Zone A.

Zone B embraces, broadly, the remainder of Western Australia excluding the south-west corner, the portion of the Northern Territory south of the Tropic of Capricorn, the northern areas of South Australia, Western and Central Queensland, the north-west of New South Wales and the West Coast of Tasmania.

The effect of paragraph (a) of this clause will be to increase the special deductions from Pd120 to Pd180 in the case of residents of Zone A and, by paragraph (b), from Pd20 to Pd30 in the case of residents of Zone B.

It is also proposed by Clause 22 of the Bill to extend the area of Zone A to include that part of Western Australia north of the 26th parallel of latitude, the whole of the Northern Territory and that part of Western Queensland west of the 141st meridian which is now in Zone B.

The proposed amendments will apply in assessments based on income of the year 1956-1957 and subsequent years.

Clause 13: Deductions for Members of Defence Force Serving Overseas.

By this clause it is proposed to amend section 79B of the Principal Act which allows a deduction of Pd120 to members of the Defence Force who serve for more than one half of the year of income at one or more declared localities outside Australia. Where the period of such service is less than half of the year, a proportionate deduction is allowable.

This allowance is designed to place members of the Defence Force serving in the declared localities on an equal footing for taxation purposes with members serving in the northern areas of Australia who qualify for the deduction of Pd120 allowed to residents of Zone A under section 79A. In consonance with proposed increase in the Zone A allowance to Pd180 - Clause 12 - the amendments of section 79B proposed in paragraphs (a) and (b) of this clause will effect a similar increase in the allowance to members of the Defence Force serving in declared localities outside Australia.

The localities to which the allowance under section 79B is at present declared to apply include Japan, Korea, Morotai, Clarkefield, Nana, British Solomon Islands, Cocos Islands and Hong Kong. Concurrently with the proposed termination of the present exemption of pay and allowances of members of the Defence Force serving in Malaya - Clause 5 - the allowance will be extended to the Malayan area also.

By paragraph (c) it is proposed to insert a definition of "locality" so that Malaya and waters contiguous to the Malayan coast may be declared an overseas locality for the purposes of the special deduction allowed by section 79B. The deduction may thus be extended to seagoing naval personnel as well as to military and air force personnel serving in the Malayan area.

The amendments effected by this clause will commence to apply in assessments based on income of the year 1956-1957.

Clause 14: Losses of Previous Years.

By this clause it is proposed to amend section 80 of the Principal Act which authorises a deduction in respect of losses incurred by a taxpayer in the seven years preceding the year of income. The amount allowable as a deduction is the aggregate of the losses incurred in these years less any part of such losses which has already been deducted from the income of a previous year.

The amount of the loss in any year is the amount by which allowable deductions exceed the assessable income and the net exempt income. Outgoings incurred in producing assessable income may be allowable deductions even although the amounts incurred may not have been actually paid during that year.

It is provided in sub-section (4) of section 80 that a taxpayer who has become bankrupt or has been released from debts by the operation of the Bankruptcy Act shall not be entitled to the deduction of any losses incurred by him prior to bankruptcy or release. Except for this provision, a taxpayer who did not pay his trade debts in full would, in effect, be allowed a deduction for those debts in calculating the losses of previous years.

At present, a taxpayer who voluntarily makes a payment in respect of debts from which he has been released is not allowed any deduction of the amount paid. It is proposed, in the new sub-sections (4A) and (4B) to be inserted by Clause 14, to allow the taxpayer a deduction of any payments to the extent to which the Commissioner of Taxation is satisfied that those payments have been made in respect of a debt that was taken into account in the calculation of a loss incurred prior to bankruptcy or release.

In order that such a taxpayer shall not be placed in a more favourable position than other taxpayers, the following conditions attach to the allowance:-

(i)

that the debt should have been incurred in one of the seven years preceding the year of payment; and

(ii)

that the total deductions under the new sub-section (4A) shall not exceed the total deductions which, but for the prohibition in sub-section (4.), would have been deductible from the taxpayer's assessable income.

The amendments to be effected by Clause 14 will commence to apply in assessments based on income of the year 1956-1957.

Clauses 15 and 16: Life Insurance Premiums etc. Payments to Medical and Hospital Benefits Funds.

Section 82H, proposed to be amended by Clause 15 of the Bill, reads as follows:-

"82H.-(1.) Amounts paid by the taxpayer in the year of income as -

(a)

premiums or sums -

(i)

for insurance on the life of, or against sickness of, or against personal injury or accident to, the taxpayer or his spouse or child; or

(ii)

for a deferred annuity or other like provision for his spouse or child; or

(b)

payments for the personal benefit of the taxpayer or his spouse or child made to -

(i)

a superannuation, sustentation, widows' or orphans' fund;

(ii)

a medical or hospital benefit fund;

(iii)

a fund established by an Act or State Act relating to insurance; or

(iv)

a friendly society,

shall be allowable deductions.

(2.) The deductions allowable to a taxpayer under this section shall not exceed, in the aggregate, Two hundred pounds in respect of any one year of income."

By clause 15 it is proposed -

1.

to remove sub-paragraph (ii) of paragraph (b) from section 82H and to allow those payments as a separate deduction under section 82HA to be enacted by Clause 16 of the Bill;

2.

to increase from Pd200 to Pd300 the maximum aggregate of deductions allowable annually under section 82H after excluding payments to medical and hospital benefit funds.

These amendments will commence to apply in assessments based on income of the year 1956-1957.

Clause 17: Education Expenses.

Section 82J, proposed to be amended by Clause 17 of the Bill, reads as follows:-

"82J.-(1.) Amounts paid by the taxpayer in the year of income in respect of expenses necessarily incurred by him for or in connexion with the full-time education, at a school, college or university or from a tutor, of a person who is less than twenty-one years of age and -

(a)

is a child of the taxpayer; or

(b)

is a person in respect of whom the taxpayer is entitled to a deduction under section eighty-two B of this Act,

shall be allowable deductions.

(2.) The deductions allowable under this section, in respect of any one year of income, in relation to the education of any one person shall not exceed Seventy-five pounds."

By Clause 17 it is proposed to increase from Pd75 to Pd100 the maximum deduction allowable annually under section 82J.

The amendment will commence to apply in assessments based on income of the year 1956-1957.

Clauses 18 and 19: Interpretation: Exemption of Certain Dividends.

The purpose of these two clauses is to remove certain conditions attached to the exemption of dividends paid by private companies out of funds on which undistributed income tax has been paid at shareholders' graduated rates.

Those conditions are -

(a)

that the dividends must be paid wholly and exclusively out of the taxed funds; and

(b)

that the dividends must be paid on shares by reference to which the undistributed income tax was calculated.

Section 103, proposed to be amended by Clause 18, contains a number of definitions governing the interpretation of the provisions of Division 7 of Part III of the Principal Act relating to private companies.

The definition of "special fund dividends" which is being omitted by Clause 18 was enacted in 1952 to facilitate references in the legislation to dividends that are exempt in the hands of shareholders under section 44(2.) or under section 107 of the Principal Act.

The dividends which are exempt under section 44(2.) of the Principal Act are, broadly, those dividends which are paid wholly and exclusively out of -

(a)

exempt income derived by companies, which are bonafide prospectors, from the sale, transfer or assignment of rights to mine for gold or for certain prescribed metals and minerals;

(b)

exempt income derived by companies from mining operations for the purpose of production of the prescribed metals and minerals;

(c)

profits arising from the revaluation by companies of assets not acquired for the purpose of resale at a profit or from the issue of shares at a premium. This exemption is dependent on the dividends being satisfied by the issue of shares of the company declaring the dividend; or

(d)

exempt income derived by companies from gold mining operations in Australia, Papua or New Guinea. This exemption extends to dividends paid by a company out of exempt gold-mining dividends it receives.

The dividends which are exempt under section 107 of the Principal Act are those dividends which are paid before 1st January, 1963, wholly and exclusively out of one or more of the following amounts:

(i)

any amount of income in respect of which a company had incurred a liability to undistributed income tax prior to the inception of the Assessment Act of 1936;

(ii)

an amount of income derived prior to 1st July, 1947 in respect of which a company had incurred a liability to undistributed income tax under the 1936 Assessment Act.

(iii)

the residue of income derived during the year of income which ended on 30th June, 1948 (or later year of income) which was subject to undistributed income tax at the shareholders' graduated rates of tax, after deducting the amount of undistributed income tax charged on that income.

Where a private company pays a dividend wholly and exclusively out of profits of the kind described above and the dividend (which is an exempt dividend) is received by another company, or a partnership or by a trustee holding shares in the private company, the recipient company, partnership or trustee may in turn distribute the dividend as exempt income of its shareholder, or of the partners in the partnership, or the beneficiaries in the trust, as the case may be.

The words before paragraph (c) of section 107(1.) which are being omitted by Clause 19 contain the condition that to qualify for exemption the dividends shall be paid wholly and exclusively out of one or more of the exempt funds.

In the words that are being inserted in section 107(1.) that requirement is not being repeated and provision is being made that a part of a dividend paid out of the taxed funds will be exempt to the extent to which the dividend is so paid.

The new definition of "special fund dividends" proposed by Clause 18 is complementary to the new provisions proposed by paragraph (a) of Clause 19 of the Bill.

The proposal contained in paragraph (b) of Clause 19 to omit sub-section (2.) of section 107 of the Principal Act removes the present requirement for exemption under section 107 that the shares on which the dividend is paid shall be the same shares by reference to which the undistributed income tax was calculated.

These amendments will commence to apply in assessments based on the income of the year 1956-1957.

Clause 20: Introductory Note.

By Clause 20 it is proposed to include in the Principal Act two new divisions, viz. -

Division 10A. - Timber Operations.

Division 10B. - Industrial Property.

Division 10A - Timber Operations.

The main purpose of the new Division 10A will be to allow deductions for the cost of access roads used in the timber industry.

At present, the cost of such roads is deductible to a very limited extent only - that is, where the use of the road or track is of such a temporary character that its cost is properly deductible as an ordinary recurring business expense under section 51 of the Principal Act. The cost of other access roads is not allowable as deductions under the present law as it is expenditure of a capital nature.

The allowance proposed in the new Division takes the form of annual deductions in respect of the capital expenditure over the estimated period during which the road will be used for the purposes of providing access to a stand of timber - section 124F. An estimate may be made each year for the purpose of arriving at the amount of the deduction in that year but, in all cases, a period of twenty-five years will be taken to be the maximum estimated life of the road.

In the event of the sale, destruction or termination of use of the road or any part of the road, balancing adjustments will ensure the allowance to the taxpayer of any unrecouped capital expenditure not previously deducted - section 124G.

The provisions relating to access roads follow, as far as they are adaptable, the present provisions of Division 10 of the Principal Act, which authorises deductions in respect of capital expenditure on the development (including roads) of a mining property.

In addition, it is proposed in section 124J of the new Division to remove certain limitations in the deductions now allowable under sections 69 and 70 of the Principal Act in relation to the felling of timber.

All of the amendments effected by Division 10A will apply in assessments based on income of the year 1956-1957 and subsequent years.

The effect of each of the new sections in Division 10A is explained separately in the following notes.

Section 124E. - Definitions

The purpose of this section is to define the terms "access road" and "timber operations" which are used in Division 10A - see particularly the note on the proposed section 124F.

Section 124F. - Deduction of Expenditure.

Deductions of capital expenditure on access roads will be allowed to persons carrying on timber operations for the purpose of producing assessable income - sub-section (1.).

The term "timber operations" is defined in section 124E as meaning the planting or tending of trees for felling (afforestation), the felling or removal of timber (timber-getting) or the milling or other processing of felled timber.

An "access road" is defined in section 124E as meaning a road constructed primarily and principally for the purpose of providing access to an area so as to enable, in the case of afforestation, the planting or tending of trees in that area, or, in the case of timber-getting, the removal of timber felled in that area.

Expenditure on an access road will include expenditure on works which form integral parts of the road, such as bridges, culverts, drainage, cuttings and embankments.

To obviate double deductions, it is expressly provided in section 124F that expenditure which has been allowed or is allowable as a deduction under any other provision of the Principal Act, or of any previous Act, shall be excluded from the expenditure to which the new allowance applies. Similarly excluded is any expenditure which has been taken into account in ascertaining the amount of an allowable deduction. For example, where a road constitutes a covenanted improvement on leased land, deductions for expenditure on the road would be taken into account in ascertaining the amount of deductions allowable under section 88(2.) of the Principal Act, and would not again be allowable as deductions under section 124F.

The basis of calculating the amount of annual deductions allowable for capital expenditure to which section 124F applies is set out in sub-section (2.)

Briefly, the annual deduction in respect of an access road will be the amount ascertained by dividing the residual capital expenditure (which is later defined) by the number of years remaining in the period during which, it is estimated, the road will be used for the purposes of providing access to the timber area. In practice, this period will coincide generally with the effective life of the timber stand to which the road gives access.

For the purposes of the annual deductions the maximum life of an access road will be regarded as twenty-five years.

The residual capital expenditure, as proposed to be defined in sub-section (3.) of section 124F will be, broadly, the total capital expenditure on the access road, less the amount of that expenditure previously deductible. In effect, the deduction which will be allowed under section 124F from assessable income of the current year and future years will be progressively excluded in ascertaining the residual capital expenditure.

Where a road or part of a road has been disposed of or destroyed, or where its use by the taxpayer for the purposes of providing access to timber has terminated, so much of the expenditure as relates to that property will be excluded in ascertaining the residual capital expenditure - paragraph (b) of sub-section (3.). Where, however, an amount has been excluded under this provision because of the termination of the use of a road and that road again comes into use for the purpose of providing access to timber, the appropriate amount of expenditure (as determined by the Commissioner of Taxation) will be restored to the residual capital expenditure - sub-section (4.).

Deductions under section 124F will commence to be allowed in assessments based on income of the year 1956-1957. The deductions will be allowable both in respect of access roads existing at that date and in respect of roads to be constructed in later years.

In the case of a road in existence at 1st July, 1956, the residual capital expenditure will be deemed to be the amount of expenditure on that road reduced by the sum of the deductions that would have been allowed if section 124F had commenced to apply when that expenditure was first incurred - sub-section (5.)

Section 124G. - Disposal, Destruction or Termination of Use of Property.

In this section it is proposed to provide for balancing adjustments where expenditure has been incurred on an access road and the whole or part of that road is disposed of or destroyed or its use by the taxpayer for the purpose of providing access to timber is otherwise terminated.

Where an amount is received on the disposal of a road is greater than the residual capital expenditure attributable to the road at the time of sale or destruction, the excess will be included in assessable income to the extent that expenditure on the road has been allowed as deductions under section 124F. Similarly, where the taxpayer ceases to use the road for the purpose of providing access to timber, the excess of the value (if any) of the road over the residual capital expenditure will be assessable income to the extent of the deductions allowed.

If, on the other hand, the residual capital expenditure on the road exceeds the amount received on its disposal or the value on termination of use (as the case may be), that excess will be allowed as a deduction - sub-section (3.). This provision will ensure that the taxpayer is allowed, in the aggregate, deductions representing the full amount of the difference between the cost of an access road and any amount received on its disposal or the termination of its use.

Sub-section (4.) is a drafting provision, the purpose of which is to define the consideration receivable in respect of disposal or destruction. It is expressly provided that, in the case of a sale of a leasehold property, any amount which is included in assessable income as a lease premium under Division 4 of Part III. of the Principal Act shall not be included also in assessable income under the proposed section 124G.

Section 124H. - Acquisition of Property.

Where a timber property is purchased, that part of the purchase price which is attributable to an access road will be regarded as capital expenditure on the road for the purposes of allowing deductions under section 124F.

However, there could be circumstances (as, for example, where a property is sold by one company to another company having the same or substantially the same shareholders) in which it would not be appropriate to allow to the purchaser deductions based on an amount in excess of the sum of the deductions which would have been allowed to the vendor and any amount which is included in the vendor's assessable income under the new section 124G. Provision is made in sub-section (1.) of section 124H for the allowance of deductions to the purchaser on this restricted basis where the circumstances warrant.

At the same time, it is recognised that independent parties may enter into a contract for the purchase and sale of a property at a price in excess of its cost to the vendor. Sub-section (2.) provides, in effect, that where the Commissioner is of the opinion that the restriction in sub-section (1.) should not apply, deductions to the purchaser may be granted on the full contract price.

Section 124J. - Timber Felled upon Acquired Land or Under Right

By this section, it is proposed to enlarge the scope of sections 69 and 70 of the Principal Act and to incorporate their provisions in the new Division 10A relating to the timber industry. Correspondingly, provision is made by Clause 9 of this Bill for the repeal of the present sections 69 and 70.

As at present enacted, section 69 authorises the allowance of deductions where a taxpayer has acquired land carrying standing timber for the purpose of felling that timber for sale. The amount of deduction allowable in any year is the proportionate part of the purchase price attributable to the timber felled in the year.

Similarly, section 70 authorises the allowance of deductions where amounts have been paid for the right to fell timber for sale. Here again, the deduction allowable in any year is the proportionate part of the amount paid for the right which is attributable to the timber felled during the year.

The proposed section 124J incorporates the present sections 69 and 70 and enlarges the scope of those provisions in the following respects:-

(a)

Deductions will be allowable irrespective of the original purpose for which the land carrying the standing timber was acquired. Under the present section 69 deductions are restricted to those cases where the property has been acquired for the purpose of felling the timber for sale.

(b)

Deductions will be extended to those cases where the timber is felled for use in manufacturing processes (e.g. saw-milling) for the purpose of producing assessable income. This enlargement will remove the restriction in the present law against the allowance of deductions where a taxpayer acquires timber or the right to fell timber for the purpose of felling for income-producing purposes other than the sale of the timber.

(c)

Deductions for the cost of acquiring timber or the right to fell timber will be extended to those cases where, instead of felling timber himself, the taxpayer grants to another person a right to fell the timber subject to the payment of royalties.

Broadly, the effect of the new section 124J will be to remove anomalies from the operation of the present sections 69 and 70.

Proposed Division 10B - Industrial Property.

The proposed new Division 10B provides for the deduction of expenditure of a capital nature incurred on the development or purchase of a patent, registered design or copyright, or on the purchase of a licence to use a patent, registered design or copyright.

Shortly stated, taxpayers will be entitled to write off such expenditure over the period of the right, commencing with the year of income in which the right is first used for the purpose of producing assessable income.

The proposed provisions will commence to apply in assessments based on income derived during the current income year 1956-1957. In addition to future rights, deductions will be allowable in respect of rights already in use at the commencement of the provisions, based on the written-down value of the right at 1st July, 1956.

New Section 124K. - Definitions.

Sub-section (1.) of section 124K defines the classes of rights in respect of which deductions are allowable. These are patents, registered designs and copyrights, or licences to use such rights, which are registered under, or are governed by, the laws of the Commonwealth relating to patents, designs and copyrights.

To obviate double deductions, it is expressly provided in sub-section (2.) that expenditure which has been allowed or is allowable as a deduction under any other provision of the income tax legislation shall be excluded from the expenditure to which Division 10B applies.

New Section 124L. - Application.

This section defines the classes of persons to whom the Division applies. These are the original inventor of the invention, or author of the work, to which the patent, registered design or copyright relates, or, where the right has been disposed of by the inventor or author, either by sale or otherwise, the person by whom the right has been so acquired.

The effect of sub-section (2.) is to deem a person who has purchased from the original inventor or author the right to apply for a patent of an invention or registration of a design to have purchased the patent or registered design. Upon the grant of the application, the purchaser will then qualify for the deductions under the Division as the purchaser of the patent or registered design. A similar provision is unnecessary in regard to a copyright, as such a right does not require registration to be effective.

New Section 124M. - Annual Deductions.

Section 124M is the operative section under which annual deductions in respect of a right in industrial property will be allowed.

The annual deduction allowable in each year will be calculated by dividing into the residual value of the right at the end of the year the number of years remaining in the effective life of the right calculated from the commencement of the year. In order to avoid the necessity of carrying forward small amounts, provision is made for any amount of Pd50 or less to be written off in the first year, or, if it exceeds Pd50, then at a minimum rate of Pd50 per annum until extinguished - sub-section (2.).

Sub-section (3.) provides that an annual deduction will not be allowable in the year in which the right is disposed of or lapses. In such circumstances, there would be final adjustment in that year under either section 124N or section 124P relating to balancing adjustments on the disposal or lapse of rights.

New Section 124N. - Deductions on the disposal or lapse of a unit of industrial property.

By sub-section (1.) of this section, it is proposed that, on the disposal of a unit of industrial property, the taxpayer shall be entitled to a deduction of the amount by which the residual value of the unit exceeds the consideration receivable on disposal.

On a similar principle, sub-section (2.) will provide for the deduction of the residual value of a unit of industrial property which ceases to exist.

In each instance, the deduction will be allowable from assessable income of the year of disposal or of the year in which the industrial property ceases to exist.

New Section 124P. - Amount to be included in assessable income on disposal of a unit of industrial property.

As a counterpart to the preceding section, by sub-section (1.) of section 124P it is proposed that on the disposal, either wholly or in part, of a unit of industrial property any excess of consideration receivable over the residual value of the unit shall be included in assessable income of the year of disposal but to an extent not greater than that provided by sub-section (3.) explained later. This sub-section will apply where the effective life of the unit has not expired at the time of disposal.

Sub-section (2.) will apply where the effective life of the unit had expired at the time of disposal in which event any consideration receivable will be included in assessable income subject also to the qualification provided by sub-section (3.). In such a case, there would be no residual value to set off against the consideration receivable.

It may here be noted that by section 124U it is proposed that the effective life of a copyright shall, for the purposes of Division 10B, be regarded as being no greater than twenty-five years. If after the expiration of the period of twenty-five years, a copyright were to be sold, there would be no residual value to set off against the sale price.

Sub-section (3.) will provide that the amount to be included in assessable income of the year of disposal, combined with any amounts which may have been included in assessable income of previous years in respect of the unit of property, shall not exceed the deductions previously allowed or allowable in respect of the unit.

New Section 124Q. - Disposal of Part of a Unit of Industrial Property.

This is a drafting provision to ensure the continuance of deductions in respect of the remaining portion of a right where the owner disposes of a part by licence or otherwise.

New Section 124R. - Cost of a Unit of Industrial Property.

Section 124R defines the cost of a unit of industrial property for the purposes of the Division.

In the case of the original inventor or author, the cost is the amount of expenditure of a capital nature which is incurred directly in relation to devising the invention, or producing the work, which is the subject of the right. With regard to an invention, such expenditure would include the cost of materials used in the invention and the preparation and testing of working models. In the case of a work which is the subject of a copyright or registered design the allowable expenditure would include the costs of research and preparation of the relevant manuscript or drawings.

In the case of a transfer of a right without valuable consideration, the person to whom the right is transferred will be deemed to have acquired the right at a cost equal to the residual value of the right in the hands of the previous owner at the time the transfer is made.

Where a right is purchased, the cost is the amount paid for the right. As a safeguard against possible misuse of the provisions, particularly in transactions between related parties, authority is given to the Commissioner to reduce this amount for deduction purposes if he considers that, having regard to the value of the right, the purchase price is excessive - sub-section (2.)

New Section 124S. - Residual Value.

The deductions to be allowed under the Division will be based on the residual, or written-down, value of the right at the end of each year of income. Section 124S defines the basis on which this value is to be calculated.

Generally speaking, the residual value at the end of each income year will be the cost of the right to the owner less the deductions already allowed to him in previous years in respect of the right. Where part of the cost is recovered on the disposal of a part of the right, the residual value will be reduced by the amount so received for the purposes of subsequent deductions. Conversely, the residual value will be increased where additional expenditure is incurred by the owner in relation to the right during the course of its life while he continues to be owner - sub-section (2.).

Sub-section (3.) provides for the residual value of a right which is in use at the commencement of the Division to be taken as the written-down value at that date assuming deductions had been allowed in each previous year from the commencement of its use in the production of assessable income.

New Section 124T. - Consideration Receivable on Disposal.

This section defines the amounts to be taken into account in the adjustment of deductions allowed to the owner where there is a disposal of the whole or part of the right.

In the case of a sale, these amounts are limited to lump sum payments. They do not include payments by way of royalties, as such payments are required to be brought to account as assessable income under other provisions of the Assessment Act.

In the case of a transfer otherwise than by sale, the owner is deemed to have received an amount equal to the residual value of the right at the time of transfer, thus terminating his deductions in respect of the right.

New Section 124U. - Effective Life.

Section 124U defines the period over which deductions in respect of a right are to be allowed.

The period will commence with the year in which the right is first used by the owner for the purpose of producing assessable income. It will end with the year in which the right expires, or, where the right is purchased for a specified term, the year in which that term expires.

Because of the lengthy period for which a copyright may remain in existence, a deemed maximum life of 25 years in the hands of each owner has been adopted for the allowance of deductions in respect of rights of this class. Where, however, the copyright is due to terminate before the end of 25 years, the deduction period will be shortened accordingly.

Sub-section (2.) specifies the periods at the end of which a patent, copyright or registered design will be deemed to terminate for the purposes of the Division. These periods correspond with the normal periods of registration of such rights under the relevant Commonwealth laws.

In certain circumstances, the term of a patent may be extended beyond the normal period of 16 years. Where such an extension is obtained and the patent is subsequently disposed of, sub-section (3.) will have the effect of permitting deductions in the hands of the new owner over the remainder of the extended term.

A copyright in respect of a work of joint authorship extends for a period of 50 years after the death of the author who first dies, or until the death of the second author, whichever is the later. Sub-section (4.) is necessary to enable the period for the allowance of deductions to be determined where the second author survives for more than 50 years after the death of the first author and the copyright is acquired during the extended period. This period will be determined by the Commissioner of Taxation having regard to the life expectancy of the surviving author.

New Section 124V. - Interest by Licence in Patent, etc.

Since the grant of a licence in a patent, copyright or registered design does not involve a transfer of ownership of the right itself, it is necessary in section 124V to deem such transactions to be a disposal of the part of the right represented by the licence, so that the deductions allowed to the person granting the licence may be adjusted in accordance with the consideration receivable by him on the transaction. These provisions are contained in sub-section (1.)

Sub-section (2.) applies where a licence in a patent, copyright or registered design is surrendered to the grantor of the licence.

It is proposed by paragraph (a) not to deem the surrender to be a disposal of the licence for the purposes of the Division, except where the surrender is made in consideration of a lump sum payment. It is necessary that the surrender be treated as a disposal in the latter class of case in order that the sum received may be taken into account in adjusting, under either section 124N or section 124P, the deductions previously allowed to the licensee in respect of the licence. Where no amount is received for the surrender, the licence would be treated as lapsed and the residual value would be deductible in the year of surrender under section 124N. If a surrender in such circumstances were deemed to be a disposal of the licence, paragraph (c) of section 124T would operate to deem a consideration equal to the residual value of the licence to have been receivable in respect of the surrender, thus denying the licensee a balancing allowance.

For similar reasons, it is proposed by paragraph (b) that a licence which is surrendered shall not be treated for deduction purposes as a new unit of industrial property in the hands of the owner to whom it is surrendered. If it were so treated in a case where no amount was paid for the surrender, section 124R(1.)(b) would operate to grant the owner deductions equal to the residual value of the licence in the hands of the licensee at the time the licence is surrendered.

Where an amount is paid by the owner of a unit of industrial property for the surrender of a licence previously granted by him in respect of that unit, sub-section (2.) of section 124S provides for the amount paid for the surrender to be added to the residual value of the original right. By this means, the amount paid for the surrender will be deductible in the hands of the owner over the remaining period of the original right.

The effect of sub-section (3.) will be to deem an extension of the original term of a licence to be the grant of a new licence. The amount paid by the licensee for the extension will thus be deductible under section 124M over the period for which the extension is granted.

New Section 124W. - Disposal of Unit of Industrial Property on Change of Partnership, Etc.

This section relates to transfers of interests in units of industrial property to which the Division applies, particularly where the transfers are associated with the formation, variation or dissolution of a partnership.

Where there is a complete change in ownership or interests in a business - as, for example, where the partnership of A. and B. sells its business to the partnership of C. and D. - a disposal of the assets of the business clearly takes place. If, however, A. had sold his share in the partnership to E., the resultant change of interests in partnership property would not represent a disposal by A. and B. to B. and E.

It is proposed by this section to deem changes in interests in industrial property to be disposals by the persons who owned the property prior to that change to the persons owning the property after the change. The section will apply to any change in interest or ownership, so long as one of the parties who owned the property before the change is one of the persons owning the property after the change. For instance, in the second example cited above the section would operate to deem the partnership interest in a unit of industrial property to be disposed of by A. and B. to B. and E.

This provision is an adaptation of a similar provision - section 59AA - already included in the Principal Act in relation to transfers of interests in assets which are subject to the depreciation allowances.

For the purpose of calculating the balancing adjustments in the assessments of the transferors, the consideration receivable on the transfer of an interest in industrial property in such cases will be deemed to be an amount equal to the value of the interest as specified in the agreement relating to the transfer. Where no such value is specified, or the Commissioner of Taxation is of the opinion that the value specified is excessive, the consideration to be taken into account will be such amount as is determined by the Commissioner.

New Section 124X. - Use of Patent by Commonwealth or State.

Under Commonwealth patent laws the Commonwealth or a State Government requiring the use of a patented invention is empowered to use the invention on payment of compensation to the owner.

The effect of section 124X will be to cause such compensation received by the owner of a patent, where received in a lump sum, to be regarded as a lump sum received for the grant of a licence to use the patent. Thus, if the amount received is less than the residual value of the patent, section 124S(1.) will operate to reduce the residual value by that amount for the purpose of calculating future annual deductions. If, on the other hand, the amount received exceeds the residual value, the excess, to the extent of the deductions previously allowed in respect of the patent, will be included in the assessable income of the owner under section 124P.

It will be noted that section 124X applies only to lump sum payments. A similar provision is unnecessary in regard to payments by way of royalties, as such payments would be assessable income of the recipient under section 26(f) of the Principal Act.

New Section 124W. - Damages for Infringement.

The effect of section 124W will be to regard a lump sum received by the owner of a unit of industrial property in respect of an infringement, or an alleged infringement, of the patent, copyright or registered design as if it were a lump sum received for the grant of a licence to use the right. Amounts so received will thus either be deducted from the residual value of the unit, or included in the assessable income of the owner, as the case may be, in accordance with the principles already outlined in the notes on the previous section.

New Section 124Z. - Benefit from Overseas Rights.

Section 124Z will apply where an invention, work or design which is the subject of a patent, copyright or registered design in Australia is also used in a country outside Australia - for example, where a patented invention is used for the purposes of a business both in Australia and the United Kingdom.

It is proposed by this section that, in such a case, the Commissioner may, having regard to the benefit derived from the use of the right outside Australia, reduce the deductions allowable in respect of the right by such amount as he thinks fit. In other words, the section is designed to exclude from the allowable deductions such part of the cost of the invention, copyright or design which may be said to be attributable to use which is not productive of income subject to Australian tax.

Clause 21: Amendment of Assessments.

Section 170 of the Principal Act, proposed to be amended by this clause, provides authority for and prohibitions against amendment of assessments.

Sub-section (10.) of section 170, so far as relevant, provides that nothing in that section shall prevent the amendment, at any time, of an assessment for the purpose of giving effect to the provisions of sub-section (2C.) of section 59 of the Act.

Sub-section (2C.) is proposed to be repealed and substantially re-enacted by sub-section (2D.) included in Clause 7 of the Bill.

As explained in the note on page 5 to Clause 7, sub-section (2D.) will apply where an asset is not replaced in a year of loss or destruction but is replaced within the next two succeeding years.

Where a balancing charge has been included in assessable income of the year of loss or destruction, the taxpayer may require the Commissioner of Taxation to exclude the balancing charge from assessable income and to reduce the cost of the replacement by a corresponding amount for depreciation purposes.

The substitution of sub-section (2D.) for sub-section (2C.) will provide the necessary authority to exclude the balancing charge from assessable income.

Clause 22: Second Schedule.

The Second Schedule to the Principal Act defines the boundaries of Zones A and B for the purposes of the deductions allowed to residents of isolated areas under section 79A. Paragraph 1 of Part 1. of the schedule defines the limits of Zone A in Australia.

Clause 22 proposes the repeal of paragraph 1 and the insertion of a new paragraph extending the limits of Zone A to include that part of Western Australia north of the 26th Parallel of latitude, the whole of the Northern Territory and that part of Western Queensland west of the 141st meridian which is now in Zone B - see note on Clause 12.

Clause 23: Application of Amendments.

The amendments proposed by the Bill will commence to apply as indicated in this clause. The commencing date for the application of each amendment has been stated in the note to the relevant clause.

Clause 24: Rebate in case of disposal of assets of a business of primary production.

Clause 25: Liability to provisional tax and contribution.

These two clauses, which will not amend the Principal Act, are included in the Bill as drafting provisions consequent upon the proposed Rates Bill which will impose income tax and social services contribution on income derived by individual taxpayers during the current financial year 1956-1957. Upon the passage of the Rates Bill, there will be two Acts imposing tax and contribution for 1956-1957 - viz., the Income Tax and Social Services Contribution (Companies) Act 1956 and the Income Tax and Social Services Contribution (Individuals) Act 1956.

Shortly stated, it is necessary to ensure that the Income Tax and Social Services Contribution (Individuals) Act 1956 shall be regarded as the Act to which references are made in sections 160(3.) and 221YB(3.) of the Principal Act.

Section 160 allows a rebate of tax in certain cases where the whole of the assets of a business of primary production are disposed of for the purpose of putting an end to the business. By sub-section (3.) of that section, the rebate is calculated by reference to the rates of tax declared by the Act imposing tax for the year of tax. Clause 24 of the Bill will make it clear that, so far as the year of tax 1956-1957 is concerned, the relevant Act will be the Income Tax and Social Services Contribution (Individuals) Act 1956.

Section 221YB imposes a liability to provisional tax and contribution on income (other than salary or wages) derived by individual taxpayers. Sub-section (3.) of that section provides, however, that provisional tax and contribution shall not be payable on the income of any year unless the Act declaring the rates of tax and contribution payable for the relevant financial year provides that provisional tax and contribution is payable in accordance with the provisions of the Principal Act. Clause 25 of the Bill will have the effect of identifying, for the financial year 1956-1957, the Income Tax and Social Services Contribution (Individuals) Act 1956 as the Act to which section 221YB(3.) refers.