House of Representatives

Explanatory Memorandum

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

Notes on Clauses

INCOME TAX AND SOCIAL SERVICES CONTRIBUTION BILL 1963.

Introductory Note:

The main purpose of this Bill is to declare the rates of tax payable for the current financial year 1963-64.

The rates proposed are the same as applied for the 1962-63 financial year and it is also proposed to continue the rebate of 5% of the tax payable by individuals.

The major part of the Bill is similar to provisions adopted by the Parliament for 1962-63 and the following notes explain only those clauses which propose a material change from the corresponding provisions of the 1962 Act imposing the rates of tax.

Clause 5: Imposition of Income Tax and Social Services Contribution.

This clause will impose income tax for the current financial year at rates declared elsewhere in the Bill.

Sub-clause (3.), however, provides that no tax is to be payable where the taxable income derived by an individual, a person in the capacity of a trustee of an estate or a non-profit company does not exceed Pd208. Under the corresponding provision in the 1962 Act no tax is payable by these persons on a taxable income of Pd104 or less.

The term "non-profit company" used in the legislation means, broadly, a friendly society dispensary or a company which is not carried on for the profit or gain of its members and which is prohibited from making any distribution to them.

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

Sub-clause (6.), which is consequential on the proposal to increase the minimum taxable income subject to tax, proposes a limit on the tax payable by an individual or a person in the capacity of a trustee where the taxable income exceeds Pd208 but does not exceed Pd214. In these cases the tax is not to exceed one-half of the excess of the taxable income over Pd208. The tax so ascertained will be reduced by any rebate or credit to which the taxpayer is entitled, e.g., the rebate of 2/- in the Pd in respect of Commonwealth loan interest included in taxable income.

The sub-clause is a limiting provision only and where the tax which would otherwise be payable is less than the amount determined under sub-clause (6.) the lesser amount will be the amount of tax payable.

Clause 7: Limitation of Tax Payable by Aged Persons.

This clause proposes two changes in the law governing the age allowance.

The allowance is available to persons who have been residents of Australia throughout the year of income and who, at the end of that year have attained, if men, the age of 65 years or, if women, the age of 60 years.

The age allowance exempts from tax persons who meet the age and residential qualifications and whose net income does not exceed the sum of the full age pension and the maximum amount of other permissible income for age pension purposes. For the 1962-63 income year, the age allowance freed from tax a person whose net income did not exceed Pd455. A married taxpayer who contributed to the maintenance of his or her spouse was, if both husband and wife met the age and residential qualifications, exempt from tax if the combined net income of the couple did not exceed Pd910.

The first of the changes proposed is that following on the increase of 10/- a week in the pension payable to single pensioners, the exemption limit of Pd455 will be increased to Pd481 (sub-clause (2.) of clause 7). The exemption limit of Pd910 for a married couple will not be disturbed.

A measure of relief is also provided by the age allowance where the net income is somewhat in excess of the exemption levels already mentioned. This relief may, under the 1962 Act, be effective where the taxpayer's own net income is between Pd455 and Pd520 or the combined net income of an aged married couple is between Pd910 and Pd1,293. These limits will not be altered for the purposes of the married couple provisions but the former range of Pd455 - Pd520 in the case of other aged persons will be adjusted to Pd481 - Pd556.

The relief in these marginal cases takes the form of a restriction of the amount of tax payable to nine-twentieths of the excess of the net income over the exemption point. For example, under the proposed law the tax payable by an aged person with a net income of Pd501 will be limited to nine-twentieths of the excess of Pd501 over Pd481, that is, to Pd9 from which will be deducted the 5% rebate, leaving an amount of Pd8.11.0. The limiting provisions establish a maximum amount of tax only and if the application of normal assessment processes would result in a smaller amount of tax being payable, then only the smaller amount is payable.

The opportunity has been taken to draft the provisions so as to ensure that any amount of tax determined under the age provisions will be reduced by any rebate or credit to which a taxpayer is entitled. This action confirms the correctness of a procedure in relation to which some doubts had arisen.

The second change to be effected relates to the application of the age allowance to married persons. Under sub-clause (3.) it will no longer be a pre-condition for the application of the married couple provisions that both husband and wife be qualified by age. For 1963-64, a taxpayer who satisfies the general tests of the age allowance will be entitled to have the married couple provisions applied even though his or her spouse does not meet the age qualification.

Clause 10: Rates of Tax Payable by a Company.

A provision included in previous income tax rating Acts limited the amount of tax payable by a non-profit company whose taxable income was in the range Pd105 to Pd260 to one-half of the excess of the taxable income over Pd104.

Consequent on the proposal to increase from Pd105 to Pd209 the minimum taxable income on which tax is payable by a non-profit company, sub-clause (2.) of clause 10 will apply a corresponding limitation where the taxable income of a non-profit company is between Pd208 and Pd520. In such a case, the tax payable by the company will not exceed one-half of the excess of the taxable income over Pd208. The amount of tax so calculated will, as in previous years, be reduced by any rebate or credit to which the company is entitled.

INCOME TAX AND SOCIAL SERVICES CONTRIBUTION ASSESSMENT BILL (NO. 2) 1963.

Introductory Note:

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

Clause 1: Short Title and Citation.

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

Clause 2: Commencement.

Section 5(1A.) of the Acts Interpretation Act 1901-1963 provides that every Act shall come into operation on the twenty-eighth day after the day on which that Act receives the Royal Assent, unless the contrary intention appears in the Act.

By sub-clause (1.) of this clause, it is proposed that the Amending Act shall, with two exceptions, come into operation on the day on which it receives the Royal Assent. This provision will enable notices of assessments including provisional tax to be issued as soon as Assent is given to the Bill.

The exceptions referred to are in respect of the amendments to the Principal Act proposed by clauses 5 and 6(a) which are at pages 13 and 20 of this memorandum.

Clause 3: Synopsis of Act.

Section 5 of the Principal Act lists the Parts and Divisions into which the Principal Act is divided. Clause 3 is a drafting amendment to bring the list of Parts and Divisions into line with other amendments explained later in this memorandum.

Clause 4: Definitions.

By clause 4, it is proposed to insert a number of definitions in section 6 of the Principal Act. Most of the new definitions are of terms used in proposed provisions relating to prospecting or mining for petroleum - see clauses 8, 25 and 46. In addition, there are provisions that will enable certain forestry operations to be treated as primary production.

Notes on the new definitions are -

"assessable income from petroleum": This term will mean income not exempt from tax and which is derived by a taxpayer from the sale of petroleum he has obtained from mining operations carried on in Australia or the Territory of Papua and New Guinea or from the sale of the products of that petroleum.

"exempt income from petroleum": This term will include income which is exempt from tax and which has been derived from sources out of Australia by a taxpayer from the sale of petroleum obtained by him from mining in Australia or the Territory of Papua and New Guinea or from the sale of the products of that petroleum.

Income from mining for petroleum will be exempt -

(a)

in the case of a resident of Australia, if it is derived from sources outside Australia and the Territory of Papua and New Guinea and is taxed in the country of its source;

(b)

in the case of a non-resident of Australia, if it is derived from sources outside Australia.

"forest operations": This term will mean the planting or tending in a plantation or forest of trees for felling and also the felling of trees in a plantation or forest. In addition, transportation of the felled timber from the forest or plantation to a saw mill or place where it is first processed, or to some intermediate point such as a railway siding will qualify as forest operations if the transportation is carried out by the person who felled the trees. Transportation by the feller of the timber from the place of felling to a place where it is prepared as posts, poles, railway sleepers etc. will also fall within the scope of the definition. In order to qualify under the definition, the operations will need to be carried on in the course, or for the purposes, of a business

"income from petroleum": This term, which is inserted as a drafting expedient, will mean "assessable income from petroleum" or "exempt income from petroleum". The meaning of those two terms has been explained.

"petroleum": This word will mean solid, liquid or gaseous hydrocarbons that occur naturally in a free state. It will not, however, include products obtained from coal, shale or other rock by the application of heat or by a chemical process.

The definition of "petroleum" now proposed will have the same practical effect as the existing definition although the terminology has been varied to some extent in order to achieve consistency with the definition in the Petroleum Search Subsidy Act 1959.

"petroleum exploration company": Section 77A of the Principal Act defines this term for the purposes of that section only. As the term is now to be used in various provisions, the definition is being included in section 6 so ensuring that the defined meaning will apply in all provisions in which the term is used. Stated briefly, a petroleum exploration company is a company whose principal business is prospecting or mining for petroleum in Australia or the Territory of Papua and New Guinea.

"petroleum prospecting or mining information": The definition provides that this term shall mean geological, geophysical or technical information related to the presence, absence or extent of petroleum deposits in a particular area and obtained from prospecting or mining operations.

"petroleum prospecting or mining right": This term will mean an authority, licence, permit or right granted under the law of a State or a Territory of the Commonwealth to prospect or mine for petroleum. It will also include a lease granted under such a law and entitling the lessee to prospect or mine for petroleum on the leased land. An interest in such an authority, licence, permit, right or lease will also be within the scope of the definition.

"primary production": The existing definition is being amended to include forest operations. The meaning of that term has already been explained.

Forest operations will accordingly qualify for the 1963-64 and subsequent income years as primary production. In consequence, provisions of the Principal Act relating to the averaging of incomes to arrive at the rate of tax payable, and to the allowance of deductions for expenditure on the clearing, preparing etc. of rural land for primary production will apply to a person who conducts a business of forest operations. Clauses 10 and 12 extend to persons engaged in forest operations the special depreciation allowances available to primary producers, while clause 24 will authorise deductions for the cost of fencing to keep animal pests off the land.

Clause 5: Income of Persons Connected with Certain Projects of United States Government.

Introductory Note:

Clause 5 is designed to give the force of law to those provisions of the following agreements with the Government of the United States that relate to income tax -

(1)

an agreement relating to the establishment of a Naval Communication Station at North West Cape, Western Australia (referred to in this memorandum as the Cape agreement); and

(2)

an agreement concerning the Status of United States Armed Forces in Australia (referred to in this memorandum as the Forces agreement).

These agreements were tabled in Parliament on 9th May 1963. The Cape agreement is printed as the schedule to the United States Naval Communication Station Agreement Act 1963.

Clause 5 will insert a new section - section 23AA - in the Principal Act to give effect to the relevant Articles of the two agreements. The immediately relevant Articles are Article 9 of the Cape agreement and Articles 1, 6 and 7 of the Forces agreement. It is provided by the Cape agreement that the two agreements are to be read together.

In broad terms, under the Cape agreement Australia has agreed, where certain conditions that will be explained in later paragraphs of this memorandum are fulfilled, to exempt from Australian income tax profits and remuneration derived by a contractor, a sub-contractor, or an employee of a contractor or sub-contractor, from the performance in Australia of a contract with the United States Government in connection with the establishment, operation or maintenance of the Naval Communication Station at North West Cape. An important condition of the exemption is that the income, which will have its origin in moneys provided by the United States Government, is not exempt from United States income tax.

The exemption is to apply if the contractor, sub-contractor or employee is in Australia, or is carrying on business in Australia, solely for the performance of a contract with the United States Government of the type referred to in the preceding paragraph. A person is to be considered as being in, or carrying on business in, Australia solely for this purpose where that person is also engaged in connection with another project in Australia agreed upon between the Governments of Australia and the United States.

The exemption will not be available to Australian companies, citizens or residents.

Foreign contractors, sub-contractors and employees are also to be exempt from Australian income tax on income derived from sources outside Australia. (Ex-Australian income, other than dividends, that is taxed in the country of its source is exempt from Australian income tax under the present law.)

Under the Forces agreement Australia has agreed to exempt the pay of members of the Armed Forces of the United States. The pay and allowances of members of the Armed Forces of any foreign Government who are serving in Australia is already exempt from Australian income tax under section 23(u) of the Principal Act, except where paid by the Commonwealth Government. Accordingly, it has not been necessary to provide an exemption of such income in the new section 23AA but, as agreed in the Forces agreement, it is proposed that ex-Australian income of members of the United States Armed Forces shall be exempt from Australian income tax.

Also under the Forces Agreement Australia has, broadly stated, agreed to exempt from Australian income tax remuneration for services rendered in Australia by civilians employed by the United States Forces or by United States organisations which, with the approval of the Australian Government, accompany the United States Forces in Australia. The proposed exemption is conditional upon the remuneration not being exempt from the income tax of the United States Government. Ex-Australian income of these civilians will also be exempt from Australian income tax.

Civilians who are citizens of Australia or ordinarily resident here will not qualify for the exemptions.

As required by the terms of the two agreements it is also proposed to exempt, under prescribed conditions, the ex-Australian income of dependants of the classes of persons covered by the agreements. This exemption will not apply to any dependant who, before and after becoming a dependant, is ordinarily resident in Australia.

The Forces agreement applies to persons engaged on agreed space vehicle or defence research projects in Australia as well as to persons engaged on the North West Cape project.

Further explanations of the provisions of the proposed new section are given below.

Sub-section (1.) of the proposed section 23AA comprises definitions of several expressions used in the section. These definitions are explained hereunder.

"Australia": For the purposes of the new section 23AA Australia is defined as including the Territories of the Commonwealth. As explained in the introductory note above, a contractor who is carrying on business in Australia solely for the purposes of the performance of a United States Government contract for the establishment of the Naval Communication Station at North West Cape, and of a similar contract related to another agreed project in Australia, may qualify for exemption of the profits derived from the North West Cape contract.

A primary purpose of the definition is to ensure that such a contractor will not be deprived of an exemption otherwise available where, for example, the additional contract, while being managed from a base in Australia, involves the performance of some work in one of Australia's territories.

"Civilian accompanying the United States Forces": This definition states the category of persons who, while not being members of the United States Armed Forces, may qualify for exemption if employed in Australia by any of those forces or by certain bodies associated with any of those forces.

The term does not include persons who are Australian citizens or who are ordinarily resident in Australia. Other persons may be within the scope of the definition if they are employees of a branch of the United States Armed Forces, or of a body that conducts a club or similar facility for the benefit of members of those forces or of persons accompanying them. It is required, however, that the club or facility be officially recognised by the Government of the United States as a non-appropriated fund activity. Broadly stated, a non-appropriated fund activity is one which is not directly financed by the United States Government. Examples include clubs for officers or other ranks, canteens and recreational centres.

Civilian persons, other than Australian citizens or residents, serving with an organization that accompanies the United States Armed Forces in Australia, with the approval of both the Australian and the United States Governments, are also within the scope of the definition.

"Dependant": It has already been explained that a dependant of one of the categories of persons to which the new section is to apply is to be exempt from Australian income tax on ex-Australian income provided certain prescribed tests are fulfilled. The purpose of this definition is to state the conditions under which a person will be considered to be a dependant of such a person.

The term includes the spouse of a person to whom the new section applies. It also includes any other relative who is dependant upon such a person for support. It does not include a spouse or other relative who, before such relationship came into existence, was ordinarily resident in Australia.

A woman ordinarily resident in Australia who marries, for example, a United States soldier serving in Australia will not fall within the definition so long as she remains ordinarily resident here after her marriage. However, a child born to the wife of a United States soldier in Australia will not be excluded from the scope of the definition by the fact of having been born here.

"Foreign contractor": As explained in the introductory note, income derived by a contractor from the performance in Australia of a contract with the United States Government for the establishment etc. of the North West Cape Naval Communication Station is to be exempt in prescribed circumstances. A contract of this type is defined by a later definition as a "prescribed contract".

The primary purpose of the definition of "foreign contractor" is to limit the proposed exemption to persons (including companies and members of partnerships) who are parties to a prescribed contract as defined. The term "foreign contractor" does not include a company incorporated in Australia or any individual who is an Australian citizen or ordinarily resident in this country.

"Foreign employee": This definition is designed to fix the scope of employees of foreign contractors who may, under the Cape agreement, qualify for exemption from Australian income tax if the prescribed conditions are fulfilled. A foreign employee is defined as a person who is an employee of a foreign contractor, or is a director of a company that is such a contractor. The expression does not include Australian citizens or other persons ordinarily resident in Australia.

"Prescribed contract": This definition is associated with the definitions of "foreign contractor" and "foreign employee". Its purpose is to describe the types of contract upon the performance in Australia of which the proposed exemptions applicable to foreign contractors and employees will basically depend.

Paragraph (a) of the definition c overs contracts to which the Government of the United States is a party and which have been entered into for the establishment, maintenance or operation of the North West Cape Naval Communication Station. Except to the extent provided by paragraph (b) of the definition, which refers to sub-contracts entered into for purposes related to the performance of a contract with the United States Government, contracts to which the United States Government is not a party do not come within the ambit of the definition.

As already stated, paragraph (b) brings within the scope of the definition of "prescribed contract" sub-contracts entered into in order that a contract of the kind covered by paragraph (a) may be performed.

"Prescribed purposes": This definition is a drafting measure providing a comprehensive description of the purposes for which a foreign contractor, a foreign employee, a civilian accompanying the United States Forces or a member of the United States Forces is required to be in Australia to qualify for the exemptions respectively proposed under the new section 23AA.

Paragraph (a) of the definition applies to a foreign contractor or employee. Prescribed purposes in relation to these two classes of persons are purposes relating to the performance in Australia of a "prescribed contract" as defined in the new section.

Paragraph (b) applies to a member of the Armed Forces of the United States Government in Australia and to a civilian accompanying the United States Forces in Australia. In relation to these two classes of person, prescribed purposes are purposes relating to the carrying on of activities in Australia that have been agreed upon by the Governments of Australia and the United States.

"The North West Cape Naval Communication Station": This definition is a drafting measure designed to facilitate reference throughout the new section to the North West Cape project. The term is defined to mean the Naval Communication Station at North West Cape the establishment of which is provided for by the agreement approved by the United States Naval Communication Station Agreement Act 1963.

"United States Forces": This definition is a further drafting measure to provide facile reference in the new section to the Armed Forces of the Government of the United States.

Sub-section (2.) of the new section 23AA is designed to ensure that a foreign contractor or foreign employee is not deprived of any exemption otherwise available under the new section by reason of the fact that he is engaged in Australia in connection with another project agreed between the Australian and United States Governments in addition to the North West Cape project. The sub-section will not, however, affect any liability to Australian income tax arising out of activities related to the other project.

This provision is necessary because, by sub-section (5.) of the new section 23AA (explained at a later stage of this memorandum), the proposed exemptions are to be dependent upon a contractor or employee being in Australia, or carrying on business here, solely for the purposes of a contract or sub-contract connected with the North West Cape project.

In circumstances where the contractor or employee is in Australia, or is carrying on business here, in relation to the North West Cape project and another agreed project, it is provided by sub-section (2.) that the connection with the second contract will not preclude the contractor or employee being deemed to be in Australia solely for the purposes of the North West Cape project.

Sub-section (3.), which is subject to sub-section (4.), provides, as required by the terms of the two agreements, that persons to which the new section 23AA applies are not to be taken to be residents of Australia for income tax purposes for any period during which the sub-section has application to them.

Broadly stated, individuals who actually reside in Australia, or are present in Australia for more than one-half of a year of income, may qualify as residents of Australia for income tax purposes under the definition of "resident" contained in section 6(1.) of the Principal Act. A company not incorporated in Australia but controlled (in the management sense or by shareholders resident here) and carrying on business here also qualifies as a resident for Australian income tax purposes. The principal effect of a person's being a resident of Australia, as defined, is that Australian income tax may be imposed in relation to income derived by him from all sources within and outside Australia.

Sub-section (3.) has the effect of treating a person (including a company not incorporated in Australia) as a non-resident for the duration of a period in which the person is a foreign contractor, foreign employee, member of the United States Forces or a civilian accompanying the United States Forces or a dependant of one of those persons. In these circumstances, income derived from sources outside Australia by these persons during such a period will, subject to the provisions of sub-section (4.), be exempt from Australian income tax under section 23(r) of the Principal Act. That section exempts from Australian income tax the income derived by a non-resident from sources outside Australia.

The sub-section does not deem the persons mentioned to be non-residents for the purposes of the concessional deductions available to, or in respect of, residents and their dependants under Sub-division B of Division 3 of Part III of the Principal Act. In consequence, these deductions may be available in respect of a person of any of the classes mentioned who becomes subject to Australian income tax during a period in which he qualifies as a person of that class. For these deductions to be available, however, it will be necessary for a person to be a resident of Australia as defined in section 6(1.) of the Principal Act.

The sub-section also provides, subject to sub-section (4.), (which is explained in immediately ensuing paragraphs of this memorandum) that a period during which a person falls within the classes referred to will not be taken into account in determining whether that person is a resident of Australia. This will apply where such a person remains in Australia after that period ends.

The purpose of sub-section (4.) is to ensure that the proposed exemptions from Australian income tax will not have a wider range than required by the agreements.

The sub-section will apply in relation to persons (including companies) of a third country who may fall within the definitions of foreign contractor, foreign employee or civilian accompanying the United States Forces but who are not subject to the income tax laws of the Government of the United States of America. By reason of sub-section (4.), such persons will not be deemed by sub-section (3.) to be non-residents of Australia. Their liability to Australian income tax on income derived from sources outside Australia will, therefore, continue to be determined according to the general principles of Australian income tax law. (Income derived by such persons from sources within Australia, e.g., from a North West Cape contract, will not be exempt under the new section 23AA because the income tax law of the United States will not apply in relation to the income.)

Sub-section (5.) of the proposed section 23AA is designed to authorise exemption from Australian income tax for foreign contractors and foreign employees of income derived from, or from employment in connection with, the performance of a prescribed contract in Australia. The exemptions are dependent upon three conditions being fulfilled.

Paragraph (a) of sub-section (5.) limits the exemption to income derived wholly and exclusively from the contract or employment.

Paragraph (b) makes the exemption dependent upon the income not being exempt from the income tax of the Government of the United States.

Paragraph (c) requires that the recipient of the income be in Australia, or be carrying on business in Australia, solely for prescribed purposes as defined (i.e., briefly stated, for the performance in Australia of a prescribed contract).

Where all these conditions are met the income, which on general principles may ordinarily have a source in Australia, is deemed by sub-section (5.) to have a source outside Australia. As already explained, sub-section (3.) will, except in the cases covered by sub-section (4.), deem foreign contractors and employees to be non-residents of Australia while they meet the various tests provided by sub-section (3.) The combined consequences of that sub-section and sub-section (5.) are that the income will be exempt from Australian income tax, under section 23(r) of the Principal Act, as income derived by a non-resident of Australia from sources outside Australia.

In a case where one of the conditions is not met, for example, where the income from the contract or employment in Australia is exempt from the income tax of the Government of the United States, the question of liability to Australian income tax will continue to be determined according to the general principles of Australian law governing the source of income.

Sub-section (6.) will apply similar provisions to a civilian accompanying the United States Forces as are applied by sub-section (5.) to foreign contractors and employees.

Paragraph (a) of sub-section (6.) states the income which may be exempt under the sub-section. This is income derived by a civilian accompanying the United States Forces in respect of his service as such during a period in which he is in Australia solely for prescribed purposes (i.e. for purposes relating to activities agreed upon by the Governments of Australia and the United States).

Paragraph (b) makes the exemption conditional upon the income not being exempt from the income tax of the Government of the United States.

Where these tests are met it is proposed that the income will, subject to the provisions of sub-sections (3.) and (4.), be deemed to have been derived from sources outside Australia by a non-resident of Australia and thus exempt from Australian income tax under section 23(r) of the Principal Act.

It is provided by sub-clause (2.) of clause 2 of the Bill that the amendments made by this clause are to be deemed to have come into operation on the day on which the two agreements were tabled in Parliament - 9th May 1963. Pursuant to section 3(2.) of the Acts Interpretation Act 1901-1963 the amendments will therefore apply to income derived on or after that date.

Clause 6: Certain Items of Assessable Income.

By this clause it is proposed to amend section 26 of the Principal Act which provides that the assessable income of a taxpayer shall include various amounts of specified characters.

Paragraph (a) of clause 6 will amend paragraph (g) of section 26 under which any bounty or subsidy that the taxpayer receives in relation to the carrying on of his business is regarded as assessable income. Subsidies paid by the Commonwealth under legislation relating to petroleum exploration are designed to assist enterprises engaged in the search for oil. The amended provision will ensure that these enterprises may receive the subsidies without liability for tax at the time of receipt. A complementary provision will, however, provide for a decrease to be made in the deductions for capital expenditure to which the recipients of the subsidies would otherwise be entitled if they produce petroleum on a commercial basis - see section 124DF(d) which it is proposed to insert by clause 46.

The proposed exemption will, by clause 2(3.) of the Bill, be deemed to have come into operation on 12th December, 1957 which is the date on which the Petroleum Search Subsidy Act 1957 became operative.

Paragraph (b) is a drafting measure necessitated by the inclusion of two new paragraphs - paragraphs (k) and (l) - in the existing section.

Paragraph (c) is designed to give effect to two recommendations of the Commonwealth Committee on Taxation 1959-1961. For this purpose two new paragraphs - paragraphs (k) and (l) - are being inserted in section 26 of the Principal Act.

The new paragraph (k) will make specific provision for the inclusion in assessable income of recoveries made by a taxpayer in respect of a loss suffered by him through embezzlement, larceny and other forms of misappropriation, where the loss is an allowable deduction (under section 71 of the Principal Act) to the taxpayer in the year of income in which it is ascertained.

Section 71 of the Principal Act has, for many years, authorised a deduction for a loss, of money included in the assessable income of a taxpayer, through embezzlement or larceny by a person employed in the taxpayer's business. The loss is allowable in the year of income in which it is ascertained.

The Commonwealth Committee on Taxation recommended that section 71 be amended to authorise a deduction in similar circumstances for a loss suffered through an agent of the taxpayer. It also recommended that losses suffered through other forms of defalcation and misappropriation be brought within the scope of the deduction. It further recommended that specific provision be made to include recoveries of such losses in the assessable income of a taxpayer who is granted a deduction for them.

The proposed amendment to broaden the scope of section 71 of the Principal Act is explained in reference to clause 22 of the Bill.

It is proposed by the new paragraph (k) of section 26 that where a loss deductible under section 71 is subsequently made good to the taxpayer, in whole or in part, by way of insurance, indemnity, recoupment, recovery or reimbursement, the amount so received shall be assessable income of the taxpayer of the year of income in which it is received. The effect of the provision will be to restore to the taxpayer's assessable income that amount of the loss which is not effectively suffered by him.

The amendment proposed to be made by the insertion of the new paragraph (l) of section 26 is designed to give effect to an omnibus recommendation of the Commonwealth Committee regarding amounts paid by a lessee to a lessor in respect of the lessee's failure to carry out repairs required under a covenant of the lease of land held by him for the purpose of producing assessable income.

The Commonwealth Committee recommended that a payment of this kind (which has been held by independent tribunals not to be an allowable deduction under the present law) be allowed as a deduction to the lessee and, where such a deduction is allowable, be included in the assessable income of the lessor who receives the payment. Provision to authorise the deduction to the lessee is being made by clause 9 of the Bill.

Broadly stated, paragraph (l) will apply to an amount that is (under the new section 53AA to be inserted by clause 9 of the Bill) an allowable deduction to a lessee as a payment to his lessor by way of indemnity, compensation or damages for failure to carry out repairs to improvements on land subject of the lease. The amount will be an allowable deduction to the lessee, and thus assessable income of the lessor, if the land is held by the lessee for the purpose of producing assessable income and he is obliged by the terms of the lease to make the repairs.

It is proposed that the amount will constitute assessable income of the lessor of the year of income in which it is received by him. Should the lessor carry out the repairs himself any deduction authorised for the cost of repairs by section 53 of the Principal Act will be available to him.

The amendments effected by paragraph (c) of clause 6 of the Bill will apply in assessments for the current income year - 1963-64 - and subsequent years.

Clause 7: Value at the end of Year of Trading Stock.

Introductory Note:

The purpose of this clause is to amend section 31 of the Principal Act to give effect to a recommendation of the Commonwealth Committee on Taxation. The Committee recommended that taxpayers should be permitted to adopt an additional basis of valuing trading stock on hand at the end of a year of income where the Commissioner is satisfied that, in relation to particular trading stock, there are special circumstances which justify the adoption of a basis other than one of those provided by the present provisions of section 31.

Section 31 of the Principal Act states the bases on which trading stock (other than live stock) on hand at the end of the year of income is to be taken into account for income tax purposes. At the option of the taxpayer, each article of trading stock may be valued at either cost price, market selling value or the price at which it can be replaced. Under section 28 of the Principal Act the excess of the value of trading stock at the end of a year of income over the value at the beginning of the year constitutes assessable income. In the converse case the excess is an allowable deduction. Trading stock, so far as is relevant, includes anything produced, manufactured, acquired or purchased for the purpose of manufacture, sale or exchange.

The report of the Commonwealth Committee indicated that it considered a different basis of valuation may sometimes be more appropriate in relation to such articles of trading stock as discontinued lines, obsolete items and spare parts for which there may only be a sporadic market. In such cases a taxpayer may, under the present law, elect to bring the stock to account at the lowest of the three values authorised. In some cases, however, none of these values may be appropriate when regard is had to the future prospects of marketing the stock or using it in manufacture.

Sub-section (1.) of the new section 31 re-enacts the provisions of the existing section, subject to new provisions to be inserted by sub-sections (2.) and (3.). The three bases of valuation of trading stock referred to in the introductory note above will, at the taxpayer's option, continue to apply in respect of all articles of trading stock, unless circumstances exist which render sub-section (2.) applicable.

Sub-section (2.) provides for a different basis of valuation to be substituted where the Commissioner is satisfied that, by reason of obsolescence or other special circumstances relating to particular trading stock, the value to be taken into account should be less than the lowest value at which the stock may be taken into account under sub-section (1.).

Where the Commissioner is so satisfied, it is proposed by the new sub-section (2.) of section 31 that the value to be taken into account will be the fair and reasonable value determined by the Commissioner, having regard to:-

(a)

the quantity of the trading stock on hand at the end of the relevant year;

(b)

the quantity of the trading stock that the taxpayer has sold or used in manufacture since the end of the relevant year;

(c)

the prospects of future sales or use of the stock in manufacture by the taxpayer; and

(d)

the quantity of the same kind of stock sold or used in manufacture by the taxpayer during the relevant year of income and earlier years.

The Commissioner may also have regard to any other matters he considers relevant.

A determination by the Commissioner under sub-section (2.) will be subject to the usual rights of objection and reference to a Board of Review for review. A Board may, of course, substitute its own determination for that of the Commissioner.

The proposed sub-section (3.) of section 31 provides that the new basis of valuation may be available where the taxpayer gives the Commissioner written notice that he desires a determination in accordance with sub-section (2.) to be made. The notice is to be lodged with the Commissioner on or before the last day for furnishing the return of income of the taxpayer of the relevant year. The Commissioner will, however, be authorised to allow further time for lodgment.

The amendment made by clause 7 will apply to assessments for the current income year - 1963-64 - and subsequent years.

Clause 8: Dividends.

Clause 8 will amend the provisions of section 44 of the Principal Act which relates to dividends.

Paragraph (a) is a drafting amendment made necessary by the new sub-sections (5.) and (6.) it is proposed to add to section 44. It will ensure that the existing section 44(2.) operates subject to the new sub-sections.

Paragraph (b) will implement a recommendation of the Commonwealth Committee on Taxation that dividends paid by a company out of capital profits and satisfied by the issue of bonus shares be exempt from income tax.

Section 44(2.)(b)(iii) of the Principal Act at present exempts from income tax dividends paid wholly and exclusively out of profits arising from a revaluation of assets not acquired for the purpose of resale at a profit or the issue of shares at a premium if the dividends are satisfied by the issue of bonus shares. The operation of that provision will be extended to dividends paid out of profits arising from the sale of assets not acquired for resale at a profit.

The exemption will apply in assessments for the 1963-64 income year and subsequent years.

Paragraph (c) of clause 8 will repeal the existing section 44(2.)(d) and will insert in its place a new paragraph (d) designed to avoid a technical defect in the existing law.

Broadly stated, the present sub-paragraph (i) of paragraph (d) exempts dividends paid wholly and exclusively out of net income derived by a company from petroleum mining operations carried on in Australia or the Territory of Papua and New Guinea and which is free of tax by reason of deductions available for capital expenditure on prospecting or mining for petroleum. A company may, however, undertake treatment of petroleum it has mined and, although the resulting profits are free of tax by reason of the deductions available, the exemption of dividends may, under the present law, be lost if any part of them is distributed out of profits arising from the treatment.

The new sub-paragraph (i) will overcome this technical defect by ensuring that the exemption extends to dividends paid wholly and exclusively out of tax-free income derived from the sale of petroleum produced by a company in Australia or the Territory of Papua and New Guinea or from the sale of the products of that petroleum.

Stated broadly, the amount of dividends that may qualify for the exemption will be limited to the amount of the deductions allowed for capital expenditure incurred in prospecting or mining for petroleum in Australia or the Territory of Papua and New Guinea. Explanations of the provisions under which those deductions will be allowed may be found at page 66 of this memorandum.

The new sub-paragraph (ii) of section 44(2.)(d) re-expresses the present provision which exempts dividends paid wholly and exclusively out of the net amount of dividends received by a company that have been exempted under sub-paragraph (i). The new provision enables the exempt nature of dividends to be retained when they are passed through a company interposed between a petroleum mining company and individual investors. The practical effect of the present law will not be disturbed.

Paragraph (d) of clause 8 will insert two new sub-sections - sub-sections (5.) and (6.) - in section 44.

Sub-section (5.) is a drafting measure, the effect of which is to ensure that the exemption of dividends paid by a petroleum producing company is determined under the new provisions of section 44(2.)(d) explained in preceding paragraphs. In the absence of the proposed sub-section (5.), it may be necessary to apply section 44(2.)(c) which is designed for application to dividends paid by mining companies generally and would be inappropriate in relation to dividends paid from the proceeds of petroleum and its products.

The proposed sub-section (6.) of section 44 of the Principal Act relates to the amount of the fund available to a company for the payment of dividends exempt under section 44(2.)(d)(i) where -

(a)

the company earns exempt income from petroleum; or

(b)

an amount has been, or is to be included in the assessable income of the company under section 124DK or 124DL. (Explanations of those provisions may be found at pages 68 to 69 of this memorandum.

As previously explained, the amount of the fund from which exempt dividends may be paid by a petroleum producing company will, broadly stated, be limited to the amount of the deductions allowed or allowable for capital expenditure incurred in prospecting or mining for petroleum. It is, however, necessary to consider the position where a company derives exempt income from petroleum. In these cases the deductions for capital expenditure are reduced by the amount of that exempt income. There would, but for the proposed sub-section (6.)(a), be a corresponding reduction in the amount of the fund from which tax-free dividends could be paid and shareholders in a company would be prejudiced if the company derived exempt income as a result of the export of its petroleum.

Paragraph (a) of sub-section (6.) is accordingly designed to place the shareholders of a company earning exempt income from petroleum, so far as is practicable, in the same position as if the company had earned only assessable income from petroleum. This result will be achieved by including in the fund available for payment of exempt dividends the amount that would have been the total deductions for capital expenditure on prospecting or mining for petroleum if the exempt income from petroleum derived by the company had been assessable income. In consequence, shareholders will not be placed at a disadvantage because a company contributes to Australian exports by the sale overseas of petroleum it has mined in Australia or the Territory of Papua and New Guinea.

Paragraph (b) of sub-section (6.) proposes a further adjustment to the amount of the fund from which a company may pay exempt dividends.

In some cases an appropriate adjustment of the capital expenditure on prospecting or mining may not be practicable where assets are sold by a petroleum exploration or mining company, e.g., where the proceeds of the sale exceed amounts available for deduction. When the company derives income from the sale of petroleum it has mined in Australia or the Territory of Papua and New Guinea the adjustment in these circumstances will be made by including the amount of that excess in the assessable income of the company. It will also be equitable to reduce the fund available for payment of exempt dividends by a like amount in order to ensure that exempt dividends do not exceed the amount of capital expenditure on prospecting and mining less amounts recovered on the sale of assets.

Paragraph (b) of sub-section (6.) that it is proposed to add to section 44 will enable this course to be followed. It will also enable similar action to be taken in respect of property the use of which in petroleum prospecting or mining operations has been terminated, otherwise than by sale, loss or destruction, after the company commences to earn income from the sale of Australian or Territory petroleum it has produced. In these circumstances the excess of the value of the assets when they cease to be so used over the amounts of capital expenditure available for deduction is to be included in the company's assessable income and a corresponding reduction will be made in the fund from which exempt dividends may be paid.

The amendments proposed by paragraphs (c) and (d) of clause 8 will have application in assessments made after the day on which the amending Act receives the Royal Assent.

Clause 9: Payment for Non-Compliance with Covenant to Repair.

By this clause it is proposed to give effect to a recommendation of the Commonwealth Committee on Taxation that a deduction be authorised for an amount that is paid by a lessee to a lessor as indemnity, compensation or damages for failure to effect repairs required to be made under the terms of a lease. As already explained in relation to clause 6, the amendment proposed by this clause is complementary to the new section 26(l) to be inserted in the Principal Act.

To give effect to the Committee's recommendation a new section - section 53AA - is being inserted in the Principal Act by clause 9. The proposed section comprises four paragraphs which state the circumstances in which the deduction will be authorised.

Paragraph (a) requires that the lease be held by the lessee for the purpose of producing assessable income.

Paragraph (b) requires that the lease impose an obligation on the lessee to make repairs to improvements on the leased land.

Paragraph (c) is designed to bring the section into operation where the circumstances referred to in paragraphs (a) and (b) apply. Under paragraph (c) the section may operate to authorise a deduction if the lessee fails to fulfil his obligation to effect the repairs and, in consequence, becomes liable to pay to the lessor an amount by way of damages, indemnity or compensation for his breach.

By paragraph (d) it is provided that the section will apply where a payment referred to in paragraph (c) is made by the lessee.

The deduction authorised by the new section 53AA will be available to the lessee in the year of income in which he makes the payment.

The amendment made by this clause will apply in assessments for the 1963-64 income year and subsequent years.

Clause 10: Depreciation.

The purpose of paragraph (a) of this clause is to authorise depreciation allowances on structural improvements (other than access roads) completed during the 1963-64 income year or a subsequent year on land used in forest operations.

In order to achieve this result, the definition of "plant" in section 54(2.) of the Principal Act will be amended by clause 10 so that plant subject to the depreciation provisions will include those structural improvements.

Depreciation deductions on access roads to a forest area are not to be allowed because the cost of the roads is already deductible under section 124F of the Principal Act.

The meaning of "forest operations" has been explained in the notes on clause 4 of the Bill.

Paragraph (b) will also amend the definition of "plant".

For the purposes of the depreciation allowances, "plant" does not include structural improvements the cost of which has been wholly deductible in the year in which it was incurred, e.g., expenditure on improvements for water conservation, levee banks and the prevention of soil erosion for which section 75 of the Principal Act authorises a deduction.

It is proposed by clause 24 (which is explained at page 43 of this memorandum) to extend the deductions at present allowable under section 76 of the Principal Act for expenditure on the purchase of wire and wire netting and in placing it on a fence to keep animal pests off land used for agricultural or pastoral pursuits. The deductions will in future be available for the whole of the cost of such fences.

Deductions will also be authorised if the land is used for forest operations and for the cost of fences erected on land used in a business of primary production if it is adversely affected by naturally occurring deposits of salt.

The amendment to be effected by paragraph (b) will prohibit the allowance of depreciation deductions on fences the cost of which is deductible under section 76 of the Principal Act.

Clause 11: Calculation of Depreciation.

By this clause it is proposed to effect amendments to sub-section (3.) of section 56 of the Principal Act that are consequential upon the proposed insertion of two new sections - section 62AB (investment allowance for new plant for use in primary production) and section 70 ( deduction for cost of extending telephone lines to land used in primary production) - in the Principal Act.

The purpose of the clause is to ensure that the depreciation allowances available in relation to assets for use in a business of primary production will not be affected by the introduction of the two new sections referred to in the preceding paragraph.

Broadly stated, sub-section (3.) of section 56 of the Principal Act provides that, for the purposes of depreciation allowances, the cost of plant is not to include any amount that has been allowed as an income tax deduction, except by way of depreciation. As at present enacted, that provision would result in the cost on which depreciation allowances are based being reduced by the proposed special deduction of 20% of the cost of new plant for use in a business of primary production.

One effect of clause 11 will be to prevent a reduction being made for income tax purposes in the cost of plant in relation to which the special 20% deduction is allowable. Existing depreciation allowances will not, therefore, be disturbed in consequence of the special deduction.

The other effect of clause 11 will be that the operation of the depreciation provisions of the Principal Act in relation to a telephone line owned by a primary producer will not be affected by the introduction of the new section 70 into the Principal Act.

In broad terms, it is proposed that where any part of the cost of a telephone line qualifies for depreciation allowances under the existing law those allowances will continue to apply. Correspondingly, the proposed deductions under section 70 are not to apply in relation to any part of the cost of a telephone line on which depreciation allowances are available. The inclusion of the reference to section 70 in sub-section (3.) of section 56 is a drafting measure to enable this result to be achieved.

Clause 12: Special Depreciation Allowance to Primary Producers.

By this clause it is proposed to extend the special 20% depreciation allowances provided for primary producers by section 57AA of the Principal Act to plant used in forest operations and to structural improvements which will in future qualify for depreciation deductions by reason of the amendment proposed by clause 10.

Paragraph (a) of clause 12 will amend sub-section (2.)(a) of section 57AA so as to bring within the scope of the section units of property used wholly and exclusively for the purposes of forest operations.

Paragraph (b) will effect a corresponding amendment in sub-section (2.)(b) of section 57AA and, in consequence, that section will apply to structural improvements situated on land used for forest operations and which qualify for depreciation allowances under section 54 of the Principal Act. The application of section 54 to those improvements has been explained in relation to clause 10.

The purpose of paragraph (c) is to provide that the special 20% depreciation allowances will be available in relation to plant, other than structural improvements, used wholly and exclusively in forest operations only if it is first used or installed ready for use in forest operations after 30th June, 1963 and before 1st July, 1967. The terminating date of 1st July, 1967 is the same as applies in respect of corresponding plant used in agricultural or pastoral pursuits or fishing operations.

The drafting procedure adopted in paragraph (c) is to repeal sub-section (3.)(b) of section 57AA which places a limit upon the period for which the special 20% depreciation may apply to plant, other than structural improvements. A new sub-section (3.)(b) is then inserted but it will not vary the practical effect of the existing provisions relating to units of property used in agricultural or pastoral pursuits or in fishing operations.

Clause 13: Depreciation of Pipe Lines for Transporting Petroleum.

Introductory Note:

This clause will introduce into the Principal Act a new section - section 58 - relating to depreciation allowances in respect of pipe lines used wholly and exclusively in transporting petroleum from a well in Australia or the Territory of Papua and New Guinea to a refinery or a terminal. The new provisions will also apply to ancillary plant used primarily, principally and directly in the operation of the pipe line.

Depreciation allowances on pipe lines and ancillary plant are permitted by existing provisions of the law but are available only over a period that may greatly exceed the life of the oil field from which the pipe line operates. Under the provisions now proposed pipe line owners will be entitled to write off the whole cost of such pipe lines and ancillary plant as deductions from assessable income over a period of five years, that is, at a rate of 20% of the cost. A pipe line owner will, however, have the right to elect that the cost be allowed as deductions over a longer period.

For the purpose of the proposed depreciation allowance, the cost of the pipe line will include capital expenditure incurred by the pipe line owner in obtaining rights or options to construct the pipe line over other persons' property. It will also include compensation payments of a capital nature to those persons in respect of any damage or loss attributable to the construction of the pipe line.

The special depreciation allowances in respect of a pipe line will be available if construction of the pipe line is commenced before 1st July, 1968 and completed before 1st January, 1970. If a pipe line satisfies this test, plant ancillary to it may qualify if installed before 1st January, 1970.

Unless a taxpayer elects otherwise, the depreciation allowances will commence in the year in which the pipe line and ancillary plant is first used for income producing purposes or is installed ready for such use and in each of the four succeeding years. If the owner of the pipe line so elects, he will be entitled to have his expenditure deducted over a longer period nominated by him.

Further explanations of the provisions of the proposed new section 58 are given below.

Sub-section (1.) of the proposed section 58 specifies the units of property to which the special provisions will apply.

The first test is that the pipe line and ancillary plant qualify for depreciation allowances under section 54 of the Principal Act. That section authorises deductions for depreciation of plant owned by the taxpayer and which, during the relevant year, is either -

(a)

used by him for the purpose of producing assessable income; or

(b)

installed ready for use for that purpose and held in reserve.

For this purpose, "plant" includes machinery, implements, utensils and rolling stock.

A second test in relation to a pipe line is that it be constructed and used wholly and exclusively for the purpose of transporting petroleum from the place in Australia or the Territory of Papua and New Guinea where it is mined to a refinery or to a terminal. A terminal need not be on the mining property and will include storage facilities in which the crude petroleum transported through the pipe line is held prior to refining or shipment.

In the case of ancillary plant, a second test will be that it is used primarily and principally, and directly, in connection with the operation of the pipe line. Ancillary plant will include plant used in pumping the petroleum through the pipe line, storage tanks, wharves and other terminal facilities.

Ships, railway rolling stock or road vehicles of a kind ordinarily used for the transport of persons or goods (including vehicles designed or adapted for the transport of petroleum) will not qualify for the special allowances authorised by the new section 58. Depreciation at the normal rates, based on the estimated effective life of such plant, will however, continue to be available to the extent that the plant is used in gaining assessable income.

Sub-section (2.) will limit the special rate of depreciation to pipe lines constructed and ancillary plant installed during a specified period.

In the case of a pipe line, the special rate of depreciation will apply if the construction of the line is commenced before 1st July, 1968 and completed before 1st January, 1970.

In the case of ancillary plant used in connection with the operation of the pipe line the special rate of depreciation will be available if -

(a)

the construction of the pipe line is commenced before 1st July, 1968; and

(b)

the construction of the pipe line and the installation of the ancillary plant is completed before 1st January, 1970.

Sub-section (3.) is a drafting measure and is designed to meet the case where the installation of a pipe line and ancillary plant is completed during a year of income but the pipe line and ancillary plant are not used during that year for any purpose.

In those circumstances, paragraphs (a) and (b) of sub-section (3.) will deem the pipe line and the ancillary plant to be used during the year in which the installation was completed for the purpose of transporting petroleum. The allowance of the special rate of depreciation will not, therefore, be prejudiced because the pipe line and plant have not been in actual use.

Sub-section (4.) is the operative provision of the proposed new section 58 and will authorise the allowance of deductions of depreciation at the rate of 20% of the cost of an eligible pipe line and ancillary plant or, if the pipe line owner so elects, at a lesser rate specified in the election.

The special rate of depreciation will not be allowable in respect of a pipe line that is, during the year of income, used for purposes other than the transport of Australian or Territory petroleum or ancillary plant that is not, during the year, used primarily, principally and directly in connection with the operation of such a pipe line. Depreciation will, however, be available under the general provisions of the Principal Act if the pipe line or plant is used for other purposes to produce assessable income provided, of course, that the cost has not previously been fully deducted under section 58.

The sub-section will ensure that the provisions of the proposed new section 58 apply in relation to eligible pipe lines and ancillary plant in place of the general depreciation provisions included in sections 55, 56 and 57 of the Principal Act.

Sub-section (5.) provides for an election referred to in sub-section (4.) to be made in writing signed by or on behalf of the taxpayer and lodged with the Commissioner of Taxation on or before the due date for furnishing the return of income for the year in which the pipe line and ancillary plant is first used to produce assessable income or is installed ready for such use. The Commissioner may, however, extend the date for lodgment of the election.

Sub-section (6.) is designed to authorise some classes of capital expenditure that might not otherwise qualify as part of the cost of construction or installation to be included in the cost of a pipe line and ancillary plant for the purposes of the special depreciation allowances.

Expenditure to be included in that cost includes capital expenditure incurred in relation to the obtaining of a licence, permit or right to construct the pipe line or install the plant on land owned or leased by another person. It will also include capital expenditure incurred in paying compensation to a property owner or lessee in respect of any damage or loss caused by the construction of the pipe line or the installation of the plant on such land.

Premiums paid for a lease of land for purposes of constructing the pipe line or installing the plant will, however, be excluded from the capital expenditure which may be included in the cost of the pipe line or the plant. Deductions in respect of premiums paid for a lease of land used in the production of assessable income are authorised by provisions in Division 4 of the Principal Act.

The special depreciation allowances proposed by the new section will have application in assessments made after the date on which the amending Act receives the Royal Assent.

Clause 14: Special Deduction for Investment in Manufacturing Plant.

This clause is a drafting measure. Its purpose is to exclude from the operation of section 62AA of the Principal Act expenditure on new plant in relation to which a special investment allowance is to be provided by section 62AB proposed to be inserted in the Principal Act by clause 15 of the Bill.

Broadly stated, section 62AA authorises a special deduction of 20% of the cost of new manufacturing plant. By clause 15 it is proposed that the new section 62AB will authorise a similar deduction for plant used wholly and exclusively in a business of primary production. The amendment effected by clause 14 ensures that deductions will not be available in relation to the same plant under both section 62AA and the new section 62AB.

Clause 15: Special Deduction for Investment in Plant used in Primary Production.

Introductory Note:

By this clause it is proposed to insert in the Principal Act a new section - section 62AB - authorising the allowance of a deduction of 20% of capital expenditure (including installation costs) incurred by a taxpayer on new plant and equipment for use wholly and exclusively in carrying on a business of primary production. It is a prerequisite of the allowance that the plant be owned by the primary producer and used by him in Australia in the production of assessable income or installed ready for use for that purpose.

Broadly stated, the deduction is to be available in respect of new (as distinct from secondhand or used) plant, and will be based on expenditure incurred on or after the 14th August, 1963 under a contract entered into on or after that date. The deduction will be allowable in the assessment of the year of income in which the plant is first used, or installed ready for use, in the production of assessable income.

For the purposes of the new section 62AB primary production includes agricultural or pastoral pursuits and fishing or pearling operations. It also includes the planting or tending of trees for felling and the felling of trees in a plantation or forest or certain transportation of the felled timber. Plant for use wholly and exclusively in businesses of these kinds may therefore qualify for the deduction. However, certain types of plant, such as road vehicles, are excluded from the deduction.

Sub-section (1.) of the proposed section 62AB comprises definitions of two expressions used in the section. These definitions are explained hereunder.

"Goods": The word "goods" is defined to include live stock. The purpose of this definition is to make it clear that where the term is used in the new section, e.g., in relation to the transport of goods, it includes live stock as well as goods in the commonly understood sense.

"New": As mentioned in the introductory note, the special deduction is to apply to new plant and equipment. The purpose of the definition of the word "new" is to exclude from the scope of the allowance plant that is secondhand or has been used. The restriction of the allowance to new plant will ensure that the deduction is available only once in relation to any one item of plant no matter how frequently that plant changes hands.

Sub-section (2.) designates the general class of plant in respect of which the deduction is to be available. Stated in broad terms, sub-section (2.) will enable the special 20% deduction to be available in relation to plant owned by the taxpayer and for use by him wholly and exclusively for the purpose of carrying on in Australia a business of primary production. The provisions of sub-section (2.) are, however, subject to certain exclusions specified in sub-section (3.).

Under section 6 of the Principal Act primary production, broadly stated, means -

(i)

the cultivation of land;

(ii)

the maintenance of animals or poultry for the purpose of selling their bodily produce, including natural increase; and

(iii)

fishing or pearling operations and oyster farming.

By an amendment to section 6 proposed in clause 4 of this Bill, primary production for income tax purposes will be extended to include "forest operations". The scope of that expression is explained in the notes on clause 4 of the Bill (see page 12 of this memorandum).

Only plant that is for use "wholly and exclusively" for the purpose of carrying on a business of primary production is to qualify for the special deduction. Expenditure on plant that is for use partly for private purposes, or partly in a business other than primary production, is not subject to the special deduction.

Sub-section (3.) specifies items of property to which the deduction will not apply, whether or not for use wholly and exclusively in carrying on a business of primary production.

Paragraph (a) excludes from the scope of the new provisions all buildings and other structural improvements.

Paragraph (b) has the purpose of excluding all conventional road vehicles irrespective of the use to which they are put. It also excludes road vehicles designed or adapted for the delivery of particular kinds of goods, e.g., milk or live stock. Caravans are also excluded by this paragraph.

Paragraph (c) excludes office machines and equipment, whether or not for use wholly and exclusively in a business of primary production.

Paragraph (d) applies to exclude household furniture, furnishings and appliances from the scope of the allowance, while paragraph (e) excludes wireless receivers and transmitters together with television sets and antennae.

The purpose of paragraph (f) is to exclude from the deduction containers in which goods are delivered by the taxpayer, but which remain his property and are returned to him, e.g., milk cans.

Paragraph (g) applies to exclude plant used in the preparation of food or drink.

Paragraph (h) is designed to eliminate from the scope of the special allowance a variety of items which do not constitute major items of plant and expenditure on which, in the generality of cases, is a frequently recurring outgoing in a business of primary production.

Paragraph (i) serves a similar purpose to paragraph (h) in that it excludes from the scope of the section hand implements, hand tools and loose tools. All items of this description are excluded by paragraph (i), including those named in paragraph (i) of sub-section (3.) of section 62AA of the Principal Act. The list contained in that section (which authorises the 20% investment allowance for the cost of new manufacturing plant) indicates the general nature of the items to which the new section 62AB will not apply.

Sub-section (4.) is the operative provision which authorises the allowance of the special deduction. Subject to all the other provisions of the section, sub-section (4.) provides that a primary producer incurring expenditure of a capital nature on new plant for use wholly and exclusively in a business of primary production is entitled to a deduction of one-fifth (20%) of the expenditure in the first year of income that the plant is either used for producing assessable income or is installed ready for use and held in reserve.

To qualify for the special deduction expenditure is required, by sub-section (4.), to be incurred on or after 14th August 1963. However, expenditure incurred on or after that date under a contract entered into before that date will not qualify.

The year of income in which the expenditure is incurred will not necessarily coincide with the year in which the special deduction is allowable. This is so because the allowance of the special deduction is dependent on the use of the plant, or its installation ready for use, in producing assessable income.

The expenditure in relation to which the special 20% deduction is to be available will generally correspond with the cost of the plant for the purposes of depreciation allowances. It will, for example, include installation costs. The special deduction will also normally be available in the first income year that a depreciation allowance is available in relation to the relevant unit of plant.

Sub-section (5.) is designed to provide a safeguard against re-arrangement of contracts to make it appear that expenditure on plant is incurred under a contract entered into on or after 14th August 1963 whereas a contract to acquire the plant or substantially similar plant had been concluded prior to that date.

Stated broadly, the operation of the sub-section is to be dependent upon the Commissioner of Taxation being satisfied that -

(a)

the taxpayer has, before 14th August 1963, entered into a contract for the acquisition of plant,

(b)

on or after that date, the taxpayer has caused a different contract to be substituted for the original contract, providing for the acquisition of the same or similar plant, and

(c)

the later contract was made for the purpose of obtaining a deduction under the new section, or a greater deduction under that section than the taxpayer would otherwise have been entitled to.

The sub-section gives the Commissioner a discretion, in any case where he is satisfied that the circumstances are as described, to disallow any part of the special deduction or allow such part of that deduction as he considers fitting in the particular circumstances.

The exercise of the Commissioner's discretion will be subject to the usual rights of objection and reference to a Board of Review. A Board of Review may, of course, substitute its own opinion for that of the Commissioner.

Sub-section (6.) will operate where the Commissioner is satisfied that a person who has disposed of plant to which the section applies acquired the plant merely for the purpose of obtaining the special deduction and then disposing of the plant. This provision is necessary to guard against arrangements whereby a primary producer would purchase plant with a view to disposing of it to a person who is not entitled to the special deduction or to whom the deduction would provide a smaller tax saving.

Where the sub-section is applicable, the Commissioner is authorised to include an amount, not in excess of the special deduction allowed in relation to the cost of the plant, in the assessable income of the primary producer of the year of income in which the plant is disposed of by him.

In any case where the Commissioner exercises his discretion under this sub-section the matter will be open to the usual rights of objection and reference to a Board of Review.

Sub-section (7.) is designed to exclude from the allowance plant the full cost of which is an allowable deduction in the year of expenditure.

Section 75 authorises a deduction in full, in the year of income in which the expenditure is incurred, in respect of certain expenditure on land used for primary production. Where capital expenditure on new plant, e.g., on underground pipes, is allowable in full in the year of incurrence under section 75 the new section 62AB will not apply.

Sub-section (8.) is designed to ensure that the special deduction to be allowed under the new section 62AB will be additional to the ordinary allowances for depreciation on plant used in a business of primary production. The provision is required because, in its absence, section 82 of the Principal Act may operate to prohibit the allowance of both the special 20% deduction and depreciation allowances.

Sub-section (9.) will apply where a taxpayer has been recouped or is to be recouped by a Government, authority or person for the whole or a part of his expenditure on new plant for use in a business of primary production. In that case, the taxpayer will not be entitled to a deduction under the new section 62AB in respect of that part of the cost of the plant which is, by reason of the recoupment, not actually borne by him. Any recoupment included in the taxpayer's assessable income, will not, however, operate to diminish the proposed special deduction.

Clause 16: Bad Debts.

By this clause it is proposed to amend sub-section (1.) of section 63 of the Principal Act to implement a recommendation of the Commonwealth Committee on Taxation.

In broad terms, sub-section (1.) of section 63 authorises a deduction for bad debts that have been included in a taxpayer's assessable income or are in respect of loans made by a money lender in the ordinary course of his business. The sub-section specifically states, however, that these "and no other bad debts" shall be an allowable deduction.

The view has been expressed by a Taxation Board of Review that the words "and no other bad debts" preclude the deduction of bad debts, not specifically referred to in sub-section (1.) of section 63, which might otherwise be deductible, under the general provisions of section 51 of the Principal Act, as losses incurred in producing assessable income or in carrying on a business for the purpose of producing assessable income.

The Commonwealth Committee recommended that the words "and no other bad debts" be deleted from sub-section (1.) of section 63. It is proposed by this clause to delete these words and so ensure that any bad debt not within the scope of section 63 may be considered under the general deduction provisions of the Principal Act.

The amendment will not affect the operation of sub-section (3.) of section 63. That sub-section requires a bad debt for which a taxpayer has received a deduction to be included in his assessable income if it is subsequently paid.

The amendment made by this clause will apply in assessments of the current income year - 1963-64 - and subsequent years.

Clause 17: Legal Expenses.

By this clause it is proposed to give effect to a recommendation of the Commonwealth Committee on Taxation that legal expenses, not of a private or domestic nature and not exceeding in the aggregate Pd25 in a year of income, be an allowable deduction to a taxpayer carrying on a business.

To implement the Committee's recommendation it is proposed to insert a new section - section 64A - in the Principal Act.

Sub-section (1.) defines the legal expenses to which the new section 64A will, subject to other provisions of the section, apply.

Paragraph (a) of sub-section (1.) makes the section applicable to expenditure incurred by the taxpayer for the services of a barrister or solicitor.

Paragraph (b) brings within the scope of the section expenditure incurred by the taxpayer for the registration or deposit of a document in a public register. It also makes the section applicable to the cost of stamping a document.

By paragraph (c) the section will apply to expenditure incurred by the taxpayer in connection with proceedings before a court, board, commission or similar tribunal. The paragraph will cover proceedings on behalf of the taxpayer or against him.

Certain legal expenses deductible under specified sections of the Principal Act are excluded from the operation of the new section by sub-section (1.). These are amounts within the scope of section 67 (expenses of borrowing money used for the purpose of producing assessable income); section 67A (expenses of discharging a mortgage related to the production of assessable income); section 68 (preparation registration and stamping of lease documents related to production of assessable income); section 68A (expenses relating to patents, designs and copyrights used in production of assessable income); or section 69 (expenses of preparation of a taxpayer's income tax return).

Amounts allowable under the sections mentioned will not be taken into account in determining the deduction authorised by the new section 64A. A deduction under that section will, therefore, be additional to any deductions allowable under those other sections. The new section will not affect the availability of deductions for legal expenses under the general deduction provisions of the law. The general provision normally applicable is section 51(1.) of the Principal Act.

Sub-section (2.) is the operative provision and it provides that, subject to all the other provisions of the section, legal expenses (as defined) that are necessarily incurred in the year of income in carrying on a business for the purpose of producing assessable income will, except to the extent to which they are expenses of a private or domestic nature, be allowable deductions in the year of income in which they are incurred.

Sub-section (3.) limits the amount of the deduction to be available under the new section to Pd25 in the aggregate.

The deduction is restricted by sub-section (3.) to the amount by which Pd25 exceeds legal expenses allowable under section 51(1.) of the Principal Act. Broadly stated, section 51(1.) authorises deductions for outgoings incurred for the purpose of producing assessable income, or in carrying on a business for that purpose, except to the extent that they are outgoings of a private or capital nature.

Private legal expenses will, by reason of sub-section (2.) of the new section 64A, continue to be wholly non-deductible. However, a deduction for legal expenses of a capital nature will, within the limits prescribed by sub-section (3.), be authorised by the new provision.

The amendment made by this clause will apply in assessments of the current income year - 1963-64 - and subsequent years.

Clause 18: Expenses of borrowing (section 67). Expenses of Discharge of Mortgage (section 67A).

This clause proposes to repeal section 67 of the Principal Act and to insert in its stead two new sections - a re-drafted section 67 and section 67A.

Section 67: Expenses of borrowing

The proposed section 67 will incorporate the present provisions of the law relating to the deduction of expenses of borrowing and, in addition, authorise the deduction of small amounts of borrowing expenses (not exceeding Pd50) in the year of expenditure.

Sub-section (1.) and sub-section (2.) of the proposed section 67 re-enact existing provisions of the law which authorise a deduction for the expenses of borrowing money used for the purpose of producing assessable income. The deduction, as at present, is to be spread over the term of the loan, or if the term is not fixed or exceeds five years, over a period of five years from the date on which the money is borrowed.

Sub-section (3.) of section 67 provides that, where the aggregate expenses incurred in an income year in securing the loan of moneys used in the production of assessable income do not exceed Pd50, the full amount of the expenses is to be an allowable deduction in the year of incurrence.

Section 67A: Expenses of discharge of mortgage

By the new section 67A it is proposed to authorise a deduction for expenses incurred in discharging a mortgage related to the production of assessable income. The section will apply to expenses incurred by a taxpayer in a year of income in discharging a mortgage given by him as security for the repayment of moneys borrowed by him, or for the payment, in whole or in part, of the purchase price of a property bought by him. The deduction will be available in respect of so much of the expenses as is attributable to the use of the moneys or the property in producing assessable income.

The section does not apply to payments of principal or interest. Interest payments on money used to produce assessable income are, of course, allowable under the general deduction provisions of the Principal Act.

Paragraph (a) of the new section provides that, where the moneys secured by the mortgage are used solely for producing assessable income, the expenses of discharging the mortgage are to be allowable in full. The paragraph makes similar provision in relation to a mortgage given for the payment of the purchase price (or part of the price) of a property used solely for the production of assessable income.

Paragraph (b) will apply to the case where the moneys secured by a mortgage, or the property in relation to the purchase of which the mortgage is given, are used only partly for the purpose of producing assessable income. In such a case the deduction to be authorised is so much of the expenses as the Commissioner of Taxation considers proper.

A determination of the Commissioner under paragraph (b) will be subject to the usual rights of objection and reference to a Board of Review.

The amendments made by clause 18 will apply to assessments for the 1963-64 and subsequent income years.

Clause 19: Expenses Relating to Lease Documents.

This clause proposes to amend section 68 of the Principal Act to extend the existing deduction for the cost of preparation, registration and stamping of a lease of property used in the production of assessable income to expenses of that kind incurred in relation to assignments and surrenders of such leases. This amendment follows a recommendation of the Commonwealth Committee on Taxation. It will apply in assessments for the income year 1963-64 and subsequent years.

Clause 20: Expenses of Preparing Income Tax Returns.

It is proposed by this clause to insert a new section - section 69 - in the Principal Act to specifically authorise a deduction in respect of expenditure incurred by a taxpayer for the preparation of an income tax return required to be furnished by him under the Principal Act. It will be required that the expenditure be incurred for preparation of the return by a registered tax agent or other authorised person (see explanation of sub-section (3.) below for the meaning of "registered tax agent" etc.).

Sub-section (1.) is designed to apply to the usual case where a taxpayer incurs expenditure by way of a fee for the preparation of any return of income required to be furnished by him under the Principal Act (including a statement for the purpose of the dividend (withholding) tax).

The deduction is to be available in the year of income in which the expenditure is incurred. A trustee who derives trust income is a taxpayer for the purposes of the new section. The deduction will also be authorised for expenditure incurred by a partnership for preparation of a partnership return.

Sub-section (2.) makes special provision for the case of a taxpayer who dies. Broadly stated, it provides that expenditure incurred by the trustee of such a taxpayer for the preparation of a return required to be furnished in respect of income derived during the deceased's lifetime is to be deemed to have been incurred by the taxpayer during the year of income in which he died. The provision is designed to ensure that a deduction under the section will not be denied in the case where, for example, no income is derived by a deceased person's estate after his death.

Sub-section (3.) provides that, for the purposes of the section, "registered tax agent" means an agent as defined in section 251A of the Principal Act or a person exempted from registration by section 251L of that Act.

A registered tax agent for the purposes of section 251A is one registered by a Tax Agents' Board duly constituted under the Principal Act. A Tax Agents' Board may, under section 251L of the Principal Act, at its discretion exempt certain persons from registration as tax agents.

The deductions proposed by the new section 69 will be available for the current income year 1963-64 and subsequent years.

Clause 21: Cost of Extending Telephone Lines.

Section 70, which it is proposed to insert in the Principal Act by clause 21, will authorise the allowance of a deduction in respect of capital expenditure incurred by a taxpayer after the end of the 1962-63 income year in having a telephone line extended to, or on, land on which a business of primary production is being carried on.

Sub-section (1.) of the proposed new section defines two expressions used in the section.

"Telephone line": The purpose of this definition is to designate the lines or parts of lines expenditure on which may qualify for deduction under the proposed new section 70. In brief, the new section will apply in relation to a line or part of a line the cost of which does not qualify for deduction, by way of depreciation allowances or otherwise, under any other provision of the Principal Act.

"The cost of a telephone line": This definition is designed to fix the scope of expenditure on telephone lines for which deductions will be authorised by the new section. Provided the expenditure does not qualify for deduction under another section of the Principal Act, the new section 70 will apply to capital expenditure on a line, or part of a line, extending to the boundary of, or on to, land being used at the time that the expenditure is incurred for carrying on a business of primary production. Included within the scope of the definition is such capital expenditure incurred by -

(a)

the owner of the land;

(b)

a lessee, tenant or other person having an interest in the land; or

(c)

a share-farmer carrying on a business of primary production on the land.

Sub-section (2.) is the operative provision authorising deductions for capital expenditure on a telephone line as that term is defined. The deduction to be allowed from the assessable income of a taxpayer of the year of income in which capital expenditure on a telephone line is incurred by him is to be an amount equal to one-tenth of that expenditure. A deduction of an equal amount is to be allowed in each of the nine succeeding years of income.

Sub-section (3.) deals with the case where the cost of a telephone line is incurred by a partnership. In that event, the cost of the line will not be taken into account in the ascertainment of the net income of the partnership, or the partnership loss, under section 90 of the Principal Act. For the purposes of sub-section (2.) of the new section 70, each partner in the partnership will be treated as if he had incurred a part of the cost of the telephone line, and he will be entitled to a deduction under that sub-section based on that part of the cost.

Where capital expenditure on a telephone line is borne by a partnership the part of the expenditure proposed to be attributed to a partner is -

(a)

that amount which, by agreement between the partners, he is required to bear as his share of the cost of the telephone line incurred by the partnership; or

(b)

if there is no agreement between the partners, the part of the cost proportionate to the extent of his individual interest in the net income of the partnership, or in the partnership loss, as the case may be, as calculated in accordance with section ninety of the Principal Act, of the year of income in which the expenditure on the telephone line is incurred.

Sub-section (4.) is designed to prevent the allowance of a deduction, under any other provision of the Principal Act, in respect of a telephone line, where any part of the cost of that telephone line has been allowed or is allowable as a deduction under this section in an assessment in respect of any taxpayer. The restriction imposed by this sub-section extends not only to the taxpayer who incurred the cost of a telephone line, but also to any other taxpayer into whose ownership the telephone line may subsequently come.

A taxpayer may incur expenditure in extending a telephone line over land which he does not own, and thereby become entitled to a deduction in respect of the cost of the telephone line under sub-section (2.). Where he subsequently becomes the owner of that land, the effect of sub-section (4.) is that neither he nor any transferee from him of that land will be entitled to depreciation in respect of the telephone line.

The deductions authorised by the new section 70 will be available in relation to capital expenditure on telephone lines incurred in the current income year - 1963-64 - and subsequent years.

Clause 22: Losses by Embezzlement, etc.

By this clause it is proposed to broaden the scope of the deduction available under section 71 of the Principal Act for losses of assessable income sustained by a taxpayer through the dishonesty of an employee or agent of the taxpayer. The proposed amendment adopts a recommendation of the Commonwealth Committee on Taxation.

As at present enacted section 71 of the Principal Act authorises a deduction for a loss, of money included in the assessable income of a taxpayer, through embezzlement or larceny by a person employed in the taxpayer's business. The loss is allowable in the year of income in which it is ascertained.

It is proposed that the existing section be repealed and a new section 71 be inserted in its place. The new section will preserve the deductions at present available and authorise deductions for ascertained losses not at present covered. Within the scope of the new section will be an ascertained loss, of money included in assessable income, that is sustained by a taxpayer through embezzlement, larceny, defalcation or misappropriation by a person, including an agent, employed by the taxpayer. It will no longer be necessary for the person through whom the loss is suffered to be employed in the taxpayer's business. However, losses through a person employed solely for private or domestic purposes will not qualify for deduction under the new section 71.

The new section 71 will first apply in respect of losses ascertained during the income year 1963-64.

As explained in relation to clause 6 of the Bill, an associated provision - the proposed new section 26(k) - will restore to the assessable income of a taxpayer any recoveries made by him of losses deductible under section 71.

Clause 23: Rates and Taxes.

Introductory Note:

The purpose of this clause is to provide a deduction for land tax and annually assessed rates in relation to owners of private home units (or "own-your-own flats") in cases where such a deduction is not at present authorised because the unit owner is not personally liable for payment of those dues.

Section 72 of the Principal Act, which it is proposed by this clause to amend, authorises a deduction for rates that are annually assessed and which are paid in the year of income by a person who is personally liable to make the payments. The section also authorises a deduction for land tax in similar circumstances. But for section 72, rates and land taxes on private property would be non-deductible private expenses for income tax purposes.

Some home unit blocks are subject to a strata title system. Where this is the case the owner of a private unit is usually personally liable for payment of the rates and taxes on the unit and thus entitled to a deduction for these levies under the present law.

In other cases the legal personal liability for payment of rates or taxes falls on a company, of which the unit owners are shareholders. The company undertakes the management and maintenance of the block and is financed for the purpose of meeting expenditure, including rates and taxes, by contributions made on a proportionate basis by the unit owners. A unit owner is not, in these circumstances, at present entitled to a deduction for the proportionate part of the rates and taxes borne by him.

Broadly stated, it is proposed by clause 23 that a deduction be authorised for the proportionate share of rates and taxes on a home unit block that is paid by the owner of a unit in the block.

Three new sub-sections are to be inserted in section 72 of the Principal Act - sub-section (1A.), sub-section (3.) and sub-section (4.).

The effect of sub-section (1A.) will be to authorise a deduction for rates and taxes indirectly borne by the owner of a home unit. The existing sub-sections (1.) and (2.) are not to be altered.

In order to explain the provisions of sub-section (1A.) it is necessary to refer to certain definitions contained in the new sub-section (4.) proposed to be inserted in section 72. These definitions are as follows:

"Proprietary right": The deduction proposed to be available under the new provisions is basically dependent upon a person having a proprietary right in a home unit or flat. Under this definition a person whose rights of occupancy of a flat or home unit arise from any form of co-ownership with other occupants will have a proprietary right in the flat or unit for the purposes of the new provisions.

Also brought within the scope of the definition is the common situation where a taxpayer has rights of occupancy of a flat or home unit that arise through his ownership of (or his contract to buy) shares in the company that owns the block of flats or home units. The rights may be set out in the Articles of Association of the company or in a separate agreement (sometimes described as a lease) between the company and the taxpayer. The essential requirement of the definition is that the holding of shares in the company directly or indirectly entitles the shareholder to a flat or home unit in a block the legal title to which is vested in the company.

"Sub-divided residence": This expression means, in effect, a building which is divided into home units or "own-your-own flats".

"Sub-divided residence scheme": Broadly stated, this term means any scheme or arrangement devised to enable different persons to hold proprietary rights in flats or home units contained in the one building.

Sub-section (1A.) will apply to a taxpayer who has proprietary rights under a sub-divided residence scheme. It will apply where such a taxpayer makes a payment in accordance with the scheme which is wholly or partly for rates or land tax paid, or to be paid, by some other person (e.g., the proprietor company) in respect of the sub-divided residence.

The effect of paragraph (a) of the proposed sub-section (1A.) is that the deduction available under the sub-section will be so much of the payment made by the taxpayer as the Commissioner of Taxation is satisfied represents rates or land tax paid, or to be paid, by the other person in respect of the sub-divided residence.

Paragraph (b) of the proposed sub-section (1A.) is designed to prevent a deduction under section 72 being allowed to more than one person in respect of payment of the same amount of rates.

This provision is necessary because, for example, a company owning a block of home units is entitled to a deduction under that section for rates and land tax actually paid by it on the block, if it is personally liable for payment of those dues. As already explained, it is proposed by paragraph (a) of sub-section (1A.) to transfer this entitlement to the unit holders, where the money out of which the company pays the rates and land taxes is contributed by them. As a corollary, it is proposed by paragraph (b) that, where this occurs, any deduction otherwise allowable under section 72 to the actual payer of the rates and land tax is to be reduced by the amount of the deduction transferred to the unit owners.

Any deduction available to a home unit or "own-your-own flat" company for rates and taxes under the general deduction provisions of the Principal Act will not be affected by the new provisions of section 72.

The new sub-section (3.) proposed to be inserted in section 72 will apply where a refund of rates or land tax paid in respect of a block of own-your-own flats or home units is made by a government or authority.

The existing sub-section (2.) of section 72 - which it is not proposed to amend - operates to include in the assessable income of a taxpayer any amount received by him as a refund of rates or taxes for which a deduction is allowable to him for income tax purposes.

The proposed sub-section (3.) will apply the principle expressed in sub-section (2.) to cases in which a deduction is allowable under the new sub-section (1A.) to a flat or home unit owner for a contribution towards rates or land tax payable by some other person in circumstances where a refund of those rates or land tax is made. In such a case there will be included in the assessable income of the flat or home unit owner so much of the refund as the Commissioner considers reasonable. Correspondingly, any amount to be included under sub-section (2.) in the assessable income of the person receiving the refund will be reduced by the amount included in the assessable income of the flat or home unit owner.

Sub-section (4.) comprises definitions of terms used in the new provision. Explanations of these definitions have already been given.

Clause 24: Expenditure on Fences.

By this clause it is proposed to amend section 76 of the Principal Act so that -

(i)

taxpayers who carry on forest operations (which term is being defined by clause 4) will be entitled, along with taxpayers who carry on agricultural and pastoral pursuits in districts which are subject to animal pests, to deductions for expenditure incurred in a year of income on fencing to keep animal pests from entering the land where those operations are carried on;

(ii)

the deduction allowable where the section applies will be the whole cost of the fencing in lieu of the present allowance for expenditure on the purchase of wire or wire netting and on placing it in position as part of the fence; and

(iii)

expenditure on fences on land used in a business of primary production and adversely affected by natural deposits of mineral salts will be deductible by primary producers in the year of incurrence of the expenditure.

Paragraph (a) of the clause will extend the application of section 76 to taxpayers who carry on forest operations.

Paragraph (b) is a drafting measure correcting a drafting deficiency in paragraph (b) of the existing section 76. The amendment proposed by this paragraph does not alter the operation of the section.

Paragraph (c) and paragraph (d) will enable deductions to be allowed for the whole of the cost of eligible fencing. At present expenditure is deductible under section 76 only if it is incurred on acquiring wire or wire netting and placing it in position on a fence.

Paragraph (e) will add a further provision to section 76 designed to authorise deductions in respect of expenditure on fencing on salt affected land used in a business of primary production.

The amendments effected by clause 24 will apply in assessments for the income year 1963-64 and subsequent years.

Clause 25: Moneys Paid on Shares for the Purposes of Petroleum Exploration.

Introductory Note:

This clause proposes several amendments in section 77A of the Principal Act. That section authorises the allowance to residents of Australia or the Territory of Papua and New Guinea of deductions for moneys paid to a petroleum exploration company as share capital on shares issued by the company. The moneys may be paid as application money for the shares, as allotment money or as calls on shares issued.

Section 77A applies where a petroleum exploration company, that has received moneys paid on shares, furnishes to the Commissioner a declaration that so much of those moneys as are specified in the declaration have been, or will be, expended in prospecting or mining for petroleum in Australia or the Territory of Papua and New Guinea or in plant necessary for the treatment of that petroleum.

In some cases a company that has received moneys paid on shares does not itself expend the moneys in prospecting or mining for petroleum but contributes share capital in a company that undertakes to spend the money for that purpose. If the appropriate declarations and undertakings are furnished, section 77A may entitle resident shareholders in the first company to a deduction for the moneys paid to the company on the shares issued by it.

If the Commissioner is satisfied that the moneys specified have been, or will be, expended in accordance with the declarations and undertakings furnished to him, the declarations have two effects. These are -

(a)

amounts paid to the company by resident shareholders as share capital on shares issued by the company are deductible to the extent that they are specified in the appropriate declarations;

(b)

the deductions for capital expenditure on mining and prospecting for petroleum and treatment plant to which the company would otherwise be entitled when it produces oil in commercial quantities are reduced by the amounts specified in the declarations.

The deductions for capital expenditure on prospecting and mining for petroleum are at present authorised by section 123A of the Principal Act. It is, however, proposed to repeal that provision and, by clause 46, to insert new provisions providing for deductions for the capital costs of prospecting and mining for petroleum.

By paragraph (a) it is proposed to omit from section 77A definitions of "petroleum" and "petroleum exploration company". As previously explained in relation to clause 4, it is proposed to insert definitions of those terms in section 6 of the Principal Act so that they will apply wherever those terms are used in the Principal Act. Retention of the definitions in section 77A is accordingly unnecessary.

Paragraph (b) will insert a new provision - sub-section (1A.) - in section 77A relating to the expenditure that may be incurred by a petroleum exploration company for the purposes of the section.

The new sub-section provides that, with one exception, references in section 77A to expenditure or proposed expenditure on prospecting or mining for petroleum or on necessary plant include amounts that may qualify under a proposed new section 124DD for deduction as capital expenditure on prospecting or mining for petroleum. The intention is to correlate, as far as is appropriate, the expenditure that may be deductible under the new provisions to be inserted by clause 46 with the expenditure or proposed expenditure that may be met out of moneys specified in declarations under section 77A.

The exception mentioned is expenditure or proposed expenditure in acquiring a petroleum prospecting or mining right or petroleum prospecting or mining information. Expenditure on the purchase of rights or information already existing is not expenditure incurred in carrying out the actual operations of new prospecting or mining.

Paragraph (c) will omit the words "in mining or prospecting for petroleum in Australia or in plant necessary for the treatment of that petroleum" wherever occurring in section 77A and include the words "in carrying on prospecting or mining operations in Australia for the purpose of discovering or obtaining petroleum or on plant necessary for the carrying on of such operations". This change is designed to ensure consistency between the terms used in section 77A and those in the proposed new provisions allowing deductions for capital expenditure on prospecting or mining for petroleum (see clause 46).

Paragraph (d) will omit from section 77A references to section 123A and insert references to Division 10AA. This amendment arises from the proposed repeal of section 123A and the enactment of substantially similar provisions in Division 10AA.

The amendments to section 77A will apply in respect of moneys paid on shares after the 12th June, 1963 which is the date on which the decision of the Government to introduce those amendments was announced.

Clause 26: Gifts.

Introductory Note:

Section 78(1.)(a) of the Principal Act authorises deductions for gifts of Pd1 and upwards made to funds, authorities and institutions listed in that provision. Clause 26 will amend that list by adding -

the Australian Institute of International Affairs;

the Australian National Travel Association; and

the National Safety Council of Australia.

Clause 26 also relates to public funds established and maintained for the purpose of providing money or other benefits to funds, authorities and institutions specified in section 78(1.)(a). Deductions will be allowed where the fund is established by will or by instrument of trust which will, of course, determine the use to which the moneys of the fund may be put. A second test will apply only if the trustee of the fund is empowered to invest gifts pending distribution for the purposes of the fund. In these circumstances, a deduction will be permitted if the Commissioner is satisfied that the gift, and the assets it represents, together with income therefrom, may not be invested other than in trustee securities.

Deductions for gifts (whenever made) to existing funds providing moneys for public and non-profit hospitals and public benevolent institutions or for their establishment will not be disturbed. Deductions will be available under the new provisions for gifts made after the beginning of the 1963-64 income year.

Paragraph (a) of clause 26 will amend sub-paragraph (iii) of section 78(1.)(a) which authorises deductions for gifts to a public fund providing money to, or for the establishment of, a public or non-profit hospital or a public benevolent institution. The sub-paragraph, as amended, will continue to authorise deductions to such a fund established before the 23rd October, 1963. Gifts to funds established subsequently will be considered under the proposed new provision.

Paragraph (b) is a drafting amendment ensuring that there is no disturbance of the deductions presently allowed for gifts to a public fund for the relief of necessitous persons in Australia.

Paragraph (c) will specify the three additional bodies already mentioned and will authorise, on conditions that have been explained, deductions for gifts to a public fund established and maintained exclusively to provide money and benefits for any of the funds, authorities and institutions specified in section 78(1.)(a).

Clause 27: Deduction for Residents of Isolated Areas.

Clause 27 effects drafting adjustments to section 79A of the Principal Act which refers to section 82C of the Principal Act.

As this clause will repeal section 82C it is necessary to omit references to that section from section 79A. This result will be achieved by clause 27. There will, however, be no change in the practical effect of section 79A which authorises a special deduction for residents of prescribed zones in the remoter parts of Australia.

The amendments will apply in assessments for 1963-64 and subsequent income years.

Clause 28: Deductions for Members of Defence Force Serving Overseas.

Clause 28 effects in section 79B of the Principal Act drafting amendments consequent on the repeal of section 82C of the Principal Act. Section 79B authorises a special deduction for Defence personnel serving in prescribed areas where conditions are unfavourable.

The amendments, which correspond with those proposed by clause 27, will not result in any change in the practical effect of the law.

The amendments will apply in assessments for 1963-64 and subsequent income years.

Clause 29: Limitation on Certain Deductions.

This clause will effect in section 79C of the Principal Act a drafting amendment consequential on the repeal of the existing provisions in Division 10 of the Act relating to capital expenditure on prospecting and mining for petroleum and insertion (by clause 46) of a new Division 10AA allowing deductions for such expenditure.

Section 79C limits certain deductions for gifts, calls, pensions and zone allowances to the net income remaining after allowance of all deductions other than deductions for previous year losses and deductions authorised for the mining industry by Division 10 of the Principal Act. As provisions corresponding with some previously included in Division 10 are now to be inserted in Division 10AA, it has been necessary to include in section 79C a reference to Division 10AA so as to ensure that operation of the section is not disturbed.

Clause 30: Losses of Previous Years.

Clause 30 will insert in section 80 of the Principal Act two new provisions - sub-sections (3A.) and (3B.) - designed to modify the meaning that "net exempt income" has in that section.

Section 80 authorises deduction from assessable income of a loss incurred by a taxpayer during any of the seven preceding years.

The amount of a loss that may be carried forward for deduction under section 80 is the amount by which the allowable deductions for an income year exceed the sum of -

(a)

the net assessable income of that year; and

(b)

the net exempt income of that year.

The amount deductible is also reduced by the net exempt income derived in a year subsequent to the income year when the loss was incurred.

For that purpose, the term "net exempt income" is defined in sub-section (3.) of section 80. In the case of a resident of Australia, "net exempt income" means, broadly, that part of his net income derived from all sources that is exempt from Australian tax less any overseas taxes payable in respect of that income. In the case of a non-resident the term relates to the net income derived from Australian sources that is exempt from Australian tax.

The proposed sub-section (3A.) will exclude from exempt income, for the purposes of section 80, dividends that are exempt under section 44(2.)(b)(iii) of the Principal Act.

Section 44(2.)(b)(iii) (as amended by clause 8) exempts dividends paid wholly and exclusively out of profits arising from the sale or revaluation of assets not acquired for resale at a profit or from the issue of shares at a premium if the dividends are satisfied by the issue of bonus shares.

This amendment, which will give effect to a recommendation by the Commonwealth Committee on Taxation, will apply in assessments based on income derived during the 1963-64 income year and subsequent years.

Sub-section (3B.) applies in relation to net exempt income from petroleum derived by a taxpayer who is a resident of Australia and who has incurred a loss that is deductible under section 80.

If a taxpayer derives net exempt income from petroleum, that income generally has the effect of reducing the unrecouped capital expenditure which is allowable as a deduction to the taxpayer under Division 10AA. (This aspect of Division 10AA is explained at page 65 of this memorandum in relation to section 124DF(b).) Where net income from petroleum has the effect of reducing the deductions under Division 10AA for expenditure on prospecting or mining for petroleum, it would be inequitable if the same net income also had the effect of reducing deductions under section 80.

In order to prevent such a result, the amount of net exempt income from petroleum derived by a resident taxpayer during an income year will be included in "net exempt income" for the purposes of section 80 only to the extent of any excess of the net exempt income from petroleum over the amount that would have been deductible under Division 10AA if that net exempt income had not been derived. A corresponding provision is unnecessary in relation to non-residents since net exempt income from petroleum would have a source outside Australia and is not taken into account in ascertaining the deduction allowable under section 80.

The proposed new sub-section (3B.) will apply in any assessment made after the amending Act receives the Royal Assent.

Clause 31: Deductions for Dependants.

Paragraph (a) of clause 31 proposes an amendment of section 82B of the Principal Act which authorises deductions for dependants, other than parents or parents-in-law. Deductions for dependent parents and parents-in-law are now authorised by section 82C.

Paragraph (a) will specify in the classes of dependants enumerated in section 82B(2.) parents and parents-in-law and that provision will re-enact the existing maximum deduction of Pd143 in relation to the maintenance of those dependent parents and parents-in-law. It is proposed by clause 32 to repeal the present section 82C now that deductions for parents and parents-in-law will be authorised by section 82B.

The amendments mentioned will give effect to a recommendation of the Commonwealth Committee on Taxation. When making this recommendation the Committee pointed out that the maximum deductions in relation to the maintenance of dependants may be subject to reduction where the dependants derived income. The reductions differ according to the category of dependants and, in some circumstances, according to the amount and class of income derived. The Committee recommended that a uniform basis for reducing the deductions by reason of the income of dependants be adopted. This proposal is being implemented (see notes on paragraph (b) of clause 31) and the change will be facilitated by the transfer of the deductions for parents and parents-in-law from section 82C to section 82B.

By paragraph (b) of clause 31 it is proposed to repeal sub-section (3.) of section 82B of the Principal Act and, in its place, insert a new sub-section (3.). The present sub-section (3.) prescribes the basis upon which the maximum deductions for various categories of dependants are to be reduced by reason of the separate net income derived by the dependants.

The reductions at present made in the amount of the maximum deductions are -

(a)

in the case of a spouse or daughter-housekeeper - the maximum deduction of Pd143 is reduced by Pd2 for every Pd1 by which the separate net income of the dependant exceeds Pd65;

(b)

in the case of a child less than sixteen years of age - the maximum deductions of Pd91 for one child and Pd65 for each other child are reduced by Pd2 for every Pd1 by which the separate net income of the dependent child exceeds Pd52;

(c)

in the case of a student child or invalid relative - the maximum deduction of Pd91 is reduced by Pd2 for every Pd1 by which the separate net income of the dependant exceeds Pd52, and, further -

(i)

by the value of governmental education assistance provided for a student child; and

(ii)

by any amount of invalid pension paid to an invalid relative.

In place of these differing adjustments, it is proposed by the new sub-section (3.) that the maximum deduction in respect of any dependant shall be reduced by Pd1 for every Pd1 by which the dependant's separate net income exceeds Pd65. The new sub-section will also apply in relation to deductions for parents and parents-in-law who derive separate net income. The maximum amount of these deductions will be reduced by Pd1 for each Pd1 by which the dependant's separate net income exceeds Pd65, in lieu of the existing reductions by Pd1 for each Pd1 of separate net income.

This provision, which was recommended by the Commonwealth Committee on Taxation, will establish a uniform basis which will not in any circumstances be less favourable to a taxpayer than the existing provisions.

Paragraph (c) of clause 31 is a drafting amendment to insert in section 82B of the Principal Act the current citation of the Social Services Act 1947-1963 in place of an outdated citation. The amendment will not alter the effect of the law.

Paragraph (d) of clause 31 omits from section 82B the present definition of "separate net income" and inserts in its place a definition that accords with a recommendation of the Commonwealth Committee on Taxation.

The existing definition provides that "separate net income" shall not include child endowment, certain invalid pensions or scholarships, bursaries etc. provided for student children not less than 16 and under 21 years of age. The amounts of invalid pensions received by invalid relatives and the value of scholarships provided by the Commonwealth or a State for the student children are, however, subtracted from the amount otherwise allowable as a deduction.

The new definition, like the provision it replaces, excludes child endowment from the separate net income of dependants.

A further feature of the new definition is that the "separate net income" of a dependent student will in future include government assistance only if it is provided by way of maintenance or accommodation in connection with the education of a child under sixteen years of age or a student child under twenty-one years of age.

In the past all government assistance has been taken into account in ascertaining the amount of the deduction available for such a child. Apart from assistance for maintenance or accommodation that practice will be terminated by the amendments now proposed. Stated broadly, the deduction for maintenance of a child will not in future be reduced by the value of scholarships, bursaries etc. to provide tuition, text books, equipment etc.

The existing procedure of reducing deductions for invalid relatives by the amount of an invalid pension will be discontinued. While the pensions will qualify as separate net income, only the excess of the separate net income over Pd65 will be taken into account in determining the amount to be allowed as a deduction.

The proposed change in the definition of separate net income will not in any circumstances be prejudicial to taxpayers but, in appropriate cases, increased deductions will be available.

The amendments effected by clause 31 will apply in assessments for the current income year 1963-64 and for subsequent years.

Clause 32: Parents of Taxpayer and his Spouse.

Clause 32 proposes the repeal of section 82C of the Principal Act.

That section at present authorises a deduction of up to Pd143 for the maintenance of a parent or parent-in-law but, as already explained in relation to clause 31, the deduction will in future be authorised by section 82B. The amount of the maximum deduction of Pd143 will not be disturbed but in some cases in which the present deduction is less than Pd143, the amount of the deduction to be available in the future may be increased because of the uniform test to be applied by section 82B in relation to the separate net income of dependants. This test has been explained in the notes on clause 31.

The repeal of section 82C will apply for the 1963-64 income year and subsequent years.

Clause 33: Housekeeper.

Clause 33 is designed to give effect to a recommendation of the Commonwealth Committee on Taxation to the effect that the deduction of up to Pd143 available in certain circumstances for a housekeeper should be extended to a taxpayer whose spouse is in receipt of an invalid pension and who employs a housekeeper engaged wholly in keeping house for the taxpayer and in caring for the invalid spouse.

Paragraph (a) of clause 33 restates the existing circumstances in which deductions for a housekeeper may be allowed and inserts for the first time a provision that will authorise a deduction where the spouse is in receipt of an invalid pension under the Social Services Act 1947-1963.

Paragraphs (b), (c) and (d) are drafting amendments that are necessary to ensure that the amendment proposed by paragraph (a) will be effective.

The amendments will apply for the 1963-64 income year and subsequent years.

Clause 34: Double Concessional Deductions.

Clause 34 is a drafting amendment to section 82E of the Principal Act which at present includes a reference to section 82C. As section 82C is to be repealed by clause 32, the reference will be inappropriate and clause 34 will result in its omission.

The repeal will apply from the commencement of the 1963-64 income year.

Clause 35: Medical Expenses.

Clause 35 proposes the repeal of section 82F of the Principal Act which authorises the allowance of a concessional deduction for medical expenses incurred by a taxpayer and the enactment of a new section. The new section 82F will authorise deductions for medical expenses paid by a taxpayer in relation to himself, his spouse, each of his children under 21 years and other persons for whom he is entitled to claim a dependant's allowance.

In the generality of cases the deduction at present allowable in any year in relation to any one person is limited to a maximum amount of Pd150.

This limitation is not being re-enacted and, in consequence, sub-sections (2.) and (2A.) of the present section 82F, will have no counterpart in the new section 82F allowing deductions for medical expenses.

Sub-section (1.) of the new section 82F is designed to allow a deduction for medical expenses paid by a taxpayer in a year of income to the extent to which neither he nor any other person has been, or is entitled to be, paid an amount in respect of those medical expenses by a government, public authority, society, association or fund (whether incorporated or not).

If an amount qualifying as a medical expense is recouped by, say, a government or a fund, the net amount of that expense after allowing for the recoupment will be deductible. In the past, this offset of the recoupment has been avoided by a small percentage of taxpayers who have paid medical expenses but have arranged for their wives to join a medical or hospital benefits fund and so become entitled to the recoupment. The Commonwealth Committee on Taxation recommended that offset of a recoupment should be made irrespective of the person to whom the recoupment was made. The new sub-section (1.) will give effect to this recommendation.

Sub-section (2.) proposes the allowance of deductions for medical expenses paid by a trustee from the income of a trust estate on behalf of resident beneficiaries.

This provision, which has no counterpart in the present law, was recommended by the Commonwealth Committee on Taxation.

In order that the Committee's recommendation may be effective it has been necessary to recognise that income applied to meet the medical expenses of a beneficiary is, in some circumstances (e.g., in the case of a minor), taxable in the hands of the trustee under section 98 of the Principal Act. In some cases, the beneficiary is required to pay tax on the amount of income so applied.

Where section 98 requires the trustee to pay tax on the income concerned, the deduction for the medical expenses will be allowed to the trustee. In cases in which the beneficiary is taxed, the deduction will be allowed to the beneficiary.

Sub-section (3.) defines the terms "dependant" and "medical expenses", which are used in section 82F.

"Dependant" will mean the spouse or minor child of the taxpayer or a dependant in respect of whose maintenance the taxpayer is entitled to a deduction. The effect of the law will not be changed.

All expenses which have hitherto qualified as "medical expenses" will be encompassed by the new definition and it is proposed to add two further categories of expense, as recommended by the Commonwealth Committee on Taxation.

The additional classes of expenditure are -

(a)

payments made to a registered dental mechanic for the supply, alteration or repair of artificial teeth, if the payment is permitted by the law - that is, if the dental mechanic is legally entitled to deal with the public and accept payment; and

(b)

the cost of maintaining a guide dog used by a blind person and which the Commissioner is satisfied has been properly trained by a public institution in the guidance of the blind.

The amendments to be effected by clause 35 will apply in assessments for the 1963-64 and subsequent years of income.

Clause 36: Funeral Expenses.

By clause 36 it is proposed to increase from Pd30 to Pd50 the maximum deduction available for funeral, burial or cremation expenses paid in respect of a deceased spouse, a child of the taxpayer under 21 years of age or other dependant in respect of whom the taxpayer was entitled to claim a dependant's allowance.

The existing deduction is authorised by section 82G of the Principal Act and the increase in the permissible deduction will be achieved by repealing the present sub-section (2.) of section 82G and inserting in its place a new sub-section (2.) that provides for the increase to Pd50 of the maximum deduction.

Clause 36 will also insert in section 82G a new provision - sub-section (2A.). This new sub-section will apply where two or more persons contribute in an income year to the funeral expenses of one deceased person. The aggregate of the deductions available to the persons who contributed will be limited to Pd50 and the Commissioner will be authorised to allocate that amount between the contributors on a basis that he considers reasonable in the circumstances of each case.

The increased deduction will be available in assessments for the income year 1963-64 and subsequent years.

Clause 37: Education Expenses.

The purpose of paragraph (a) of clause 37 is to increase from Pd100 to Pd150 the maximum deduction available to a taxpayer in respect of the education of a dependant under 21 years of age who is receiving full-time education at a school, college or university or from a tutor.

Paragraph (b) proposes to insert in section 82J of the Principal Act a new provision - sub-section (3.) - which will apply where two or more persons contribute to the education expenses of one student.

Where only one person pays education expenses in respect of a student, the maximum deduction allowable in relation to the student has in recent years been Pd100, even though the expenses paid were, say, Pd200. If, however, both parents derived income and each paid Pd100 to meet the expenses, each parent has been entitled to a deduction of Pd100. The Commonwealth Committee on Taxation (1959-1961) regarded this position as anomalous and recommended that the total deductions allowable for the education expenses of one student be limited to the prescribed maximum - formerly Pd100, now to be increased to Pd150.

The new sub-section (3.) to be inserted in section 82J of the Principal Act will, in the circumstances described, limit the sum of the deductions in relation to one student to Pd150 and authorise the Commissioner to allocate that amount between the persons entitled to a deduction on a basis that, in his opinion, is reasonable in the circumstances.

The amendments proposed by clause 37 will apply for the 1963- 64 and subsequent years of income.

Clause 38: Amounts paid by Trustee after Death of a Taxpayer.

Clause 38 is designed to authorise deductions for medical expenses, funeral expenses and education expenses paid by a trustee as the legal representative of a deceased person who had incurred those expenses at the time of his death and who would have been entitled to deductions if he had paid them during his lifetime.

Under the present law there is no entitlement to a deduction for these amounts from either the income derived by the deceased person or from the income of his estate. The Commonwealth Committee recommended that a deduction be authorised.

In order to give effect to this recommendation, clause 38 proposes to insert in the Principal Act a new provision - section 82K.

Under this new section an amount described above will, when paid by the trustee of the deceased person's estate, be deductible from the income derived by the deceased during the income year in which he died. A provision stating the circumstances in which an assessment may be amended in order to allow the deduction is explained at page 75 of this memorandum in the notes relating to clause 53.

The deductions proposed will be permitted in assessments on income derived in the 1963-64 income year and subsequent years.

Clause 39: Additional Period for Making Sufficient Distribution.

By clause 39 it is proposed to insert in the Principal Act a new section - section 105AA - which is designed to give effect to a recommendation by the Commonwealth Committee on Taxation that the Principal Act be amended to permit, in certain circumstances and subject to the control of the Commissioner of Taxation, an extension of the prescribed period in which private companies may distribute dividends that are deductible for the purposes of the undistributed income tax payable by private companies.

The prescribed period in relation to an income year of a private company is the period of twelve months commencing two months before the end of the income year. For example, the prescribed period in relation to the income year ended on 30th June, 1963 is the period from 1st May, 1963 to 30th April, 1964.

Dividends paid by a private company during the prescribed period qualify for deduction in ascertaining the company's liability for undistributed income tax. If a private company does not pay sufficient dividends during the prescribed period it is liable for undistributed income tax at the rate of 10/- in the Pd on the undistributed amount. Very broadly stated, the undistributed amount is the amount remaining after deducting from the taxable income for an income year the sum of the primary tax payable in respect of that income, the retention allowance and dividends paid during the prescribed period.

Under sub-section (1.) of the new section 105AA a private company may, in writing signed by its public officer, request the Commissioner to determine a further period in relation to a year of income during which it may pay dividends to be taken into account for the purposes of the undistributed income tax of that year.

Such a request may be made where a notice of assessment for an income year has not been served on the company before "the prescribed time" as defined in sub-section (6.). A request may also be made where a notice of amended assessment which either results in the company having a distributable income or in the distributable income being increased is served after "the prescribed time".

For an income year prior to the 1962-63 income year the prescribed time will, in accordance with sub-section (6.), be the end of the year of income that ended on 30th June, 1963. If, therefore, a notice of assessment or a notice of amended assessment for the 1961-62 income year or a previous year is served on a company on or after 1st July, 1963, the company will be eligible to request, in relation to the year concerned, a further period in which it may pay dividends deductible in arriving at the amount (if any) upon which undistributed income tax is payable.

For the 1962-63 income year and any subsequent year, the prescribed time is the close of the 15th day before the end of the prescribed period in relation to the income year concerned. In the case of a company whose income year ended on 30th June, 1963, the prescribed period would end on 30th April, 1964 and the prescribed time would be the close of 16th April, 1964. The company would be entitled to request a further period if a notice of assessment for the 1962-63 income year is not served before 17th April, 1964 or if a notice of amended assessment for that year is served on or after 17th April, 1964.

Sub-section (2.) provides that the Commissioner, on receiving a request for a further period, may determine a further period or may refuse the request.

Sub-section (3.) requires the Commissioner to serve, by post, to a company that has requested the determination of a further period a notice of his decision on the request. If the request is granted, the notice must be served by the Commissioner before the commencement of the further period that he determines.

Sub-section (4.) directs the Commissioner, when considering a request for a further period related to an income year to have regard to the date on which the company lodged its relevant return of income.

If the company did not make a full and true disclosure in its relevant return of all material facts necessary for the making of an assessment, the Commissioner is to take into account in his considerations the date when a full and true disclosure of those facts was made. The Commissioner is also to have regard to all other matters that he considers relevant to the request.

Sub-section (5.) applies where the Commissioner of Taxation has determined a further period in relation to an income year of a private company and the company pays dividends (other than certain exempt dividends known as special fund dividends) during that period.

In these circumstances the company will be entitled, in a written notice given not later than 30 days after the end of the further period, to specify the whole or a part of the dividends paid. The dividends so specified will, subject to two limitations, be treated as dividends paid within the prescribed period for the income year concerned and will be deductible in ascertaining the undistributed amount of the company for that year. The two limitations mentioned are, broadly, the amount of dividends that is sufficient for the company to avoid a liability for undistributed income tax or an increase in a previous liability consequent upon the amendment of the assessment on which that liability was based.

Sub-section (6.) defines, for the purposes of the section, "the prescribed time". The meaning of this term has been explained in the notes relating to sub-section (1.).

Clause 40: Retention Allowance.

By clause 40, it is proposed to increase the retention allowance that may be deducted from trading income in arriving at the undistributed income tax payable by private companies.

A private company pays, in the first instance, tax at primary rates on the taxable income derived. In addition, a private company is required to pay undistributed income tax at the rate of 10/- in the Pd for an income year if, during the prescribed period, it does not make a sufficient distribution. The meaning of prescribed period has been explained in relation to clause 39.

Provision is made for a private company to retain a proportion of its distributable income without incurring a liability to undistributed income tax in respect of the amount so retained. The amount that may be so retained is the retention allowance.

For practical purposes, the distributable income of a private company is the residue of the taxable income after deducting therefrom the tax payable at primary rates on the taxable income. The reduced distributable income, for the purposes of the retention allowance, is the distributable income less any income from property included in the distributable income.

The present retention allowance in respect of income other than property income is -

The effect of the proposed amendment will be to increase the retention allowance as follows -

There is no retention allowance in respect of dividends from other private companies, but a retention allowance of 10 per cent is provided in respect of distributable income from other property sources, such as rents, interest and dividends from public companies. This allowance will not be affected by the proposed amendment.

The increased retention allowance will apply in assessments based on income of the 1962-63 year and subsequent years.

Clause 41: Application of Division.

Clause 41 is a drafting measure which will insert in Division 10 of the Principal Act a new section - section 122AA.

The purpose of the new section is to ensure that the provisions of Division 10, which authorise deductions for certain classes of capital expenditure incurred in prospecting or mining operations, do not apply to expenditure incurred in prospecting or mining for petroleum. This provision is necessary because deductions for the latter class of expenditure will be allowable under the proposed new Division 10AA to be inserted in the Principal Act by clause 46.

Clause 42: Exploration and Prospecting Expenditure.

This clause will effect a drafting amendment to section 123AA in Division 10 of the Principal Act. That section authorises a deduction for exploration and prospecting expenditure, but it does not apply to expenditure on exploring or prospecting for gold (income from which is exempt from tax) or petroleum (as defined in section 123A of the Principal Act).

With the enactment of section 122AA, which is explained in the notes on clause 41, it will be provided that no part of Division 10 (which includes section 123AA) shall apply to expenditure on prospecting for petroleum. In these circumstances the reference in section 123AA will be redundant and clause 42 proposes its omission.

Clause 43: Deduction of Unrecouped Capital Expenditure on Prospecting or Mining for Petroleum.

Clause 43 proposes the repeal of the provisions of section 123A of the Principal Act which authorises deductions for capital expenditure incurred in prospecting or mining for petroleum in Australia or the Territory of Papua and New Guinea and in plant necessary for the treatment of that petroleum.

Clause 46 proposes new provisions authorising deductions for capital expenditure on prospecting or mining operations in Australia or the Territory of Papua and New Guinea to discover or obtain petroleum and on plant necessary for carrying on those operations.

Clause 44: Deductions not Allowable under other Provisions.

Clause 44 proposes to insert a new provision in section 124C which is in Division 10 of the Principal Act.

Division 10 authorises deductions for capital expenditure incurred by a mining enterprise on exploration and prospecting, mine development, necessary plant or housing and welfare for employees and their dependants.

Section 124C provides that capital expenditure deductible, wholly or in part, under Division 10 is not to be allowed as a deduction under any other provision, and shall not be taken into account in ascertaining the amount of an allowable deduction, other than under the provisions of that Division. If any deduction has been allowed under Division 10 for capital expenditure on a unit of plant, it follows that no deductions for depreciation of that plant may be allowed.

In the generality of cases this is appropriate. However, in isolated cases, an enterprise may terminate the use of plant in mining operations so that the plant may be used in other operations. In these circumstances deductions under Division 10 cease in relation to that plant and, if the value of the plant at the relevant time is greater than the unrecouped capital expenditure on the plant, some part of the deductions allowed under that Division may be written back as assessable income.

The proposed sub-section (2.) of section 124C is designed to remove the existing prohibition against depreciation allowances in respect of the plant if it is used in other operations producing assessable income. The sub-section will enable depreciation allowances to be based on the amount that is, in the opinion of the Commissioner of Taxation, the value of the plant at the time that it commences to be used in the production of assessable income, other than by mining operations. A taxpayer will have the usual rights of objection and appeal against any valuation adopted by the Commissioner.

Clause 45: Reduction of Certain Allowable Deductions.

This clause is a drafting provision that will omit from section 124DA of the Principal Act a reference to section 123A. As explained in the notes on clause 43, section 123A is to be repealed and the reference to it in section 124DA will accordingly be redundant.

The reference to section 123A occurs in the definition of "prescribed deductions" in section 124DA(1.). The practical effect of the definition will not be varied by the proposed deletion of the reference.

Clause 46: Prospecting and Mining for Petroleum.

By clause 46 it is proposed to insert a new Division - Division 10AA - in the Principal Act in relation to the taxation of enterprises prospecting or mining for petroleum in Australia or the Territory of Papua and New Guinea.

The provisions of section 123A in the Principal Act, which are to be repealed, will, in substance, be re-enacted in the provisions of this Division. The general principle of that section is that special deductions are to be available for capital expenditure incurred in prospecting or mining for petroleum in Australia or the Territory of Papua and New Guinea and in plant necessary to treat that petroleum.

Deductions under section 123A are allowable from income derived by a taxpayer from the sale of petroleum produced by the taxpayer in Australia or the Territory and products of that petroleum.

In other words, deductions become available only when petroleum is produced in commercial quantities. (Broadly stated, capital expenditure qualifying under the section, but which is still to be deducted, is known as unrecouped capital expenditure, a term which is explained in more detail at pages 64 to 66 of this memorandum.)

The general effect of the deductions authorised by section 123A is to free the proceeds from the sale of Australian and Territory petroleum and its products from Australian tax until the allowable capital expenditure has been fully recouped. That principle will not be disturbed by the provisions being inserted in the new Division 10AA.

Stated broadly, the principal features of Division 10AA are:

1.

Capital expenditure qualifying for the special deductions will be expenditure incurred in carrying on petroleum prospecting or mining operations in Australia or the Territory of Papua and New Guinea and on plant necessary for carrying on such operations. The following classes of capital expenditure also qualify -

(a)

expenses incurred in incorporating a company for petroleum exploration purposes and expenses incurred by such a company in raising capital if the Commissioner is satisfied that the capital has been, or will be, expended in petroleum prospecting or mining operations;

(b)

amounts incurred in acquiring a petroleum prospecting or mining right or petroleum prospecting or mining information up to an amount specified in a notice given to the Commissioner by the parties to the transaction, but not exceeding the amount that would, but for the relevant transaction, have been the unrecouped capital expenditure of the vendor;

(c)

the cost of providing housing and amenities for mine employees and their dependants on or adjacent to the mining site.

The special deductions under Division 10AA will not be available in respect of expenditure on pipe lines and ancillary plant, railway rolling stock, road vehicles or ships used to transport petroleum from the mining site or a terminal. Deductions will not be available for the cost of refineries.

2.

The capital expenditure that may be allowed as deductions will, as under the present law, be reduced by the net exempt income (if any) derived from the sale of Australian or Territory petroleum and amounts declared by a company for the purpose of enabling its resident shareholders to obtain deductions for moneys paid on shares under section 77A. (The principal features of section 77A have been set out in the notes on clause 25.) It is proposed that the expenditure available for deduction shall also be reduced by the following receipts which, in effect, result in a recoupment of the capital expenditure incurred in the prospecting and mining activities -

(a)

petroleum search subsidies received from the Commonwealth;

(b)

so much of an amount receivable for the sale of a petroleum prospecting or mining right or petroleum prospecting or mining information as has been specified in a notice given to the Commissioner of Taxation by the purchaser and the vendor of the right or information;

(c)

consideration receivable for the sale, loss or destruction of property in respect of which allowable capital expenditure has been incurred;

The capital expenditure that may be allowed as a deduction will also be reduced by the value of property the use of which in petroleum prospecting and mining activities is terminated. If the property is used in other activities producing assessable income, deductions will, in appropriate circumstances, be authorised under other provisions.

3.

If the consideration receivable in respect of the sale, loss or destruction of property exceeds the unrecouped capital expenditure at the end of the year of income and the taxpayer has derived income from petroleum mining operations in Australia or the Territory, the excess will be included in the assessable income subject to an appropriate adjustment if exempt income has been derived from the sale of Australian or Territory petroleum. In the case of a taxpayer who has not derived income from petroleum mining operations the excess is to be carried forward and applied to reduce the unrecouped capital expenditure of succeeding years up to and including the year when such income is derived. Any amount of the excess then remaining will be included in the assessable income of the taxpayer.

4.

Where the use of property in petroleum prospecting or mining activities is terminated in an income year and the value of the property at the date of termination of use exceeds the unrecouped capital expenditure at the end of that year, the excess will be included in the assessable income of the taxpayer, subject to an appropriate adjustment if exempt income has been derived from the sale of Australian or Territory petroleum.

5.

A share of income derived from the sale of petroleum produced in Australia or the Territory of Papua and New Guinea received by a taxpayer under a joint venture or farm out type of arrangement will be treated as if it were income derived from the sale of petroleum produced by the recipient. The recipient will thus be entitled to the special deductions from that income in respect of capital expenditure incurred by him which qualifies as expenditure deductible under the provisions of Division 10AA.

6.

If petroleum produced by a taxpayer in Australia or the Territory of Papua and New Guinea or a product of that petroleum is used by that taxpayer in the manufacture of other goods, it is proposed that the petroleum or the product so used shall be treated for the purposes of Division 10AA as if it had been sold. This procedure will facilitate the allowance of deductions for the unrecouped capital expenditure incurred by that taxpayer.

Explanations of each of the sections in the proposed new Division 10AA follow.

Section 124DB: Interpretation.

Sub-section (1.) of this section contains definitions of terms used in the Division to facilitate drafting and interpretation.

"Net exempt income from petroleum": This term will mean the amount remaining after deducting from the exempt income from petroleum derived by a taxpayer during a year of income all expenses (other than expenses of a capital nature) incurred in gaining or producing that income. Any taxes paid during an income year in respect of exempt income from petroleum derived during that year or a preceding income year is deductible in ascertaining the amount of the net exempt income from petroleum. The meaning of the term "exempt income from petroleum" has been explained in relation to clause 4.

"Prescribed petroleum operations": The operations falling within this term will be prospecting or mining operations carried on in Australia or in the Territory of Papua and New Guinea for the purpose of discovering or obtaining petroleum.

Sub-section (2.) sets out the meaning to be given to the words "an amount receivable by a taxpayer as consideration in respect of the disposal, loss or destruction of property". If the property is lost or destroyed, the amount receivable as consideration will be the amount of insurance recoverable. Where property is sold, the amount receivable as consideration will, in the generality of cases, be the sale price less the expenses of sale. The definition is, however, subject to the provisions of a proposed section 124DC which may apply where the parties to the transaction are not at arm's length (see notes on that section hereunder.)

Sub-section (3.) relates to cases in which non-capital expenses incurred during an income year in earning exempt income from petroleum and overseas taxes paid in respect of that income during the year exceed the amount of the exempt income earned during that year. In these circumstances the excess is deemed to be a loss incurred in relation to exempt income from petroleum. The significance of this provision emerges in the explanation of the proposed section 124DF(b) given at page 65 of this memorandum.

Section 124DC: Transactions between persons not at arm's length.

This section is designed as a safeguard in relation to sales of property where the Commissioner is satisfied that the purchaser and the vendor of property were not dealing with each other at arm's length, e.g., where property is sold by a parent company to a subsidiary or an associated company.

In these circumstances, the Commissioner will be authorised to adopt the amount that, in his opinion, is the value of the property at the date of the transaction if that value is greater or less than the purchase price. The value so adopted will have effect in the assessments of both the vendor and the purchaser.

The provision will apply to the purchase of property only where the cost of the property qualified as allowable capital expenditure for the purposes of Division 10AA in the hands of the vendor or qualifies as such expenditure in the hands of the purchaser.

A taxpayer who is dissatisfied with a decision of the Commissioner under the section will have the usual rights of objection and reference to a Taxation Board of Review.

Section 124DD: Allowable capital expenditure.

Section 124DD sets out categories of capital expenditure that may qualify for deduction under Division 10AA when petroleum is produced commercially in Australia or the Territory of Papua and New Guinea.

The section is, in effect, a definition of "allowable capital expenditure". As those words imply, only expenditure of a capital nature will qualify. A further general test is that the expenditure be incurred on "prescribed petroleum operations" or plant necessary for carrying on those operations. "Prescribed petroleum operations" are defined in the proposed new section 124DB, and mean prospecting or mining operations in Australia or the Territory of Papua and New Guinea for the purpose of discovering petroleum.

Section 124DD is not exhaustive of all outgoings that may qualify as allowable capital expenditure. In addition to the kinds of expenditure mentioned in the section, expenditure may be within the scope of the section if it is incurred in petroleum prospecting or mining operations, e.g., expenditure incurred in -

exploratory surveys of an are;

drilling plant and costs of drilling;

pumping plant and plant at the well head used to remove gas, water or other impurities from the petroleum; and

storage tanks at the well-head.

Paragraph (a) includes within the scope of allowable capital expenditure the costs of formation and incorporation of a company solely or principally for petroleum exploration or mining purposes or for the purpose of providing capital to petroleum exploration companies. Expenditure incurred by such a company in issuing or making calls on shares is also included to the extent to which the Commissioner thinks reasonable having regard to the manner in which the moneys so received by the company have been or are to be expended. If part only of the moneys are expended in carrying on prescribed petroleum operations or on plant necessary for carrying on such operations, the Commissioner may be of the opinion that only a proportion of the expenditure should be regarded as allowable capital expenditure. The usual rights of objection and reference to a Taxation Board of Review would, of course, be available to the taxpayer.

Paragraph (b) provides for the inclusion in allowable capital expenditure of the cost of acquiring a petroleum prospecting or mining right or petroleum prospecting or mining information. The amount to be included is so much of the cost as is specified in a notice under section 124DE that has been given to the Commissioner by the purchaser and the vendor of the right or information. An explanation of section 124DE is given at pages 63-4 of this memorandum but it is important to note at this stage that the amount that may qualify as allowable capital expenditure in the hands of the purchaser is limited to the amount that would, but for the sale of the right or information, have been the unrecouped capital expenditure of the vendor at the end of the year in which the transaction took place.

Paragraph (c) brings within the scope of Division 10AA capital expenditure incurred by a taxpayer in providing residential accommodation for mine employees and their dependants on or adjacent to the mining site and paragraph (d) includes expenditure on health, educational, recreational or other similar facilities provided principally for the welfare of those employees and dependants. Expenditure on facilities that are conducted for the purpose of profit-making by the taxpayer or any other person, e.g., cinemas, hotels, shops etc. will not, however, qualify for deduction. Expenditure within the scope of paragraphs (c) and (d) corresponds with housing and welfare expenditure for which deductions are allowable under the provisions applying to mining generally.

Some categories of capital expenditure are specifically excluded from allowable capital expenditure by paragraphs (e), (f) and (g).

Paragraph (e) excludes expenditure on pipe lines constructed to transport petroleum from the mining site to a refinery or a wharf or other terminal and ancillary plant used primarily, principally, and directly, in connection with the operation of the pipe line. As previously explained at pages 28 to 31 of this memorandum, it is proposed that a new section 58 will authorise a special rate of depreciation for pipe lines used wholly and exclusively for the transport of petroleum from the mining site and ancillary plant used in operating such a pipe line.

Paragraph (f) excludes capital expenditure on ships, railway rolling stock and road vehicles for use in transporting petroleum from the mining site or from a wharf or other terminal. Normal depreciation allowances will, however, continue to be available in respect of such plant under the general depreciation provisions of the Principal Act.

Paragraph (g) excludes expenditure on plant for use in refining petroleum or products of petroleum. Depreciation allowances will continue to be available, however, and new refinery plant is included in plant that may qualify for the 20% investment allowance enacted in 1962.

Section 124DE: Purchase of prospecting or mining rights or information.

This section relates to the acquisition of a petroleum prospecting or mining right or petroleum prospecting or mining information. The meanings of those terms have been explained in the notes on clause 4.

As previously explained in relation to section 124DD(b), capital expenditure incurred by a taxpayer in acquiring such a right or information from another person may, within certain limits, be included in the allowable capital expenditure of the purchaser for the purposes of Division 10AA. This course is followed only where an appropriate notice is given to the Commissioner by the vendor and purchaser.

Sub-section (1.) permits a purchaser and a vendor of a petroleum prospecting or mining right or petroleum prospecting or mining information to give notice to the Commissioner that they have agreed that so much of the cost as is specified in the notice is to be included in the allowable capital expenditure of the purchaser.

Stated broadly, the effect of such a notice will be to entitle the purchaser, when he produces petroleum, to deductions under Division 10AA for the amount specified in the notice, while a corresponding reduction will be made in the amount of unrecouped capital expenditure of the vendor that would otherwise be so deductible.

Sub-section (2.) states circumstances in which the amount included in the allowable capital expenditure of the purchaser and the amount excluded from the unrecouped capital expenditure of the vendor may be less than the amount specified in the notice. This occurs where unrecouped capital expenditure of the vendor at the end of the income year if the notice (or a notice in relation to a subsequent sale of a right or information during that year) had not been given to the Commissioner.

For example, a taxpayer who purchases a petroleum prospecting right for Pd3,000 during a year of income and the vendor specify an amount of Pd2,500 in a notice given to the Commissioner. If that notice had not been given the unrecouped capital expenditure of the vendor at the end of that year would have been Pd2,000. Sub-section (2.) will limit the amount that may be included in the allowable capital expenditure of the purchaser for the purposes of Division 10AA to Pd2,000. Similarly, the amount by which the unrecouped capital expenditure of the vendor is to be reduced in consequence of the notice being given will be limited to Pd2,000.

Sub-section (3.) of the proposed section 124DE will operate to nullify a notice given under that section in respect of a transaction involving the grant, assignment or surrender of a lease in respect of which the parties have made an election under section 88B(5.) of the Principal Act.

Section 88B(5.) is included in Division 4 of the Principal Act. The Division provides for the taxing of premiums received in connection with the grant, assignment or surrender of a lease. A lessee is entitled to deductions for a premium paid for the grant, assignment or surrender of a lease of a property producing assessable income.

The provisions of Division 4 do not, however, apply to mining leases unless the parties to the transaction elect otherwise. Such an election may be made under section 88B(5.).

If an election is made under that section the expenditure to which the proposed section 124DE will apply will be deductible under Division 4. The provisions of sub-section (3.) of the new section 124DE will ensure that the premium does not also qualify as expenditure that is eligible for the deductions authorised under Division 10AA, in addition to the deductions allowable under Division 4.

Sub-section (4.) provides for a notice under section 124DE to be in writing signed by or on behalf of the persons giving the notice. Notice may be lodged with the Commissioner of Taxation not later than two months after the end of the income year of the purchaser of the right or information in which the transaction occurred. The Commissioner is, however, authorised to extend the time for lodgment of a notice.

Section 124DF: Unrecouped capital expenditure.

This section provides the basis for calculating the unrecouped capital expenditure of a taxpayer. The unrecouped capital expenditure, as at the end of a year of income, represents the maximum amount of the deduction allowable for capital expenditure from assessable income derived in that income year from the sale by the taxpayer of Australian or Territory petroleum obtained from mining operations carried on by him or products of that petroleum.

In calculating the unrecouped capital expenditure it is necessary firstly, to ascertain the total amount of allowable capital expenditure incurred by the taxpayer prior to and during the year of income. Allowable capital expenditure represents expenditure which qualifies for the purposes of section 124DD, the provisions of which have already been explained. From the allowable capital expenditure there are deducted amounts which represent, in effect, a recoupment of the capital expenditure. Also to be deducted are amounts which have been included in declarations made by the taxpayer for the purposes of section 77A of the Principal Act, the broad purpose of which has been explained at pages 44 to 45 of this memorandum.

The amounts to be deducted from the allowable capital expenditure in order to ascertain the unrecouped capital expenditure are prescribed in the paragraphs of section 124DF.

Under paragraph (a) the sum of the deductions already allowed or allowable in previous years under the special provisions is to be deducted from the allowable capital expenditure. Those deductions represent the allowable capital expenditure that has already been recouped for income tax purposes.

Paragraph (b) requires, broadly, the total amounts of net exempt income from petroleum derived by the taxpayer during the year of income and previous years to be deducted from the allowable capital expenditure.

Net exempt income from petroleum that has been applied to reduce a loss allowable as a deduction under section 80 of the Principal Act is not, however, to be deducted from the allowable capital expenditure when ascertaining the unrecouped capital expenditure. This aspect has been explained in relation to clause 30.

Also excluded from the net exempt income from petroleum is the amount of any loss incurred during the year of income or in any preceding year in relation to exempt income from petroleum. As explained in relation to section 124DB(3.), a loss is deemed to be incurred where the non-capital expenses incurred in earning the exempt income and overseas taxes paid in respect of the exempt income exceed that exempt income.

Paragraph (c) requires the allowable capital expenditure of a company to be reduced by the sum of moneys received by it as share capital before or during the year of income and specified in declarations lodged under section 77A(3.) or section 77A(6.) of the Principal Act. As explained previously, one result of these declarations is to entitle shareholders who paid the moneys declared to deductions therefor. However, a company that has made a declaration under section 77A(6.) may expend some or all of the moneys declared in making payments to petroleum exploration companies for shares in those companies. In these circumstances, the amounts so expended will not be deducted from the allowable capital expenditure of the company that made the declaration. They will, however, be deducted from the allowable capital expenditure of the company to which the moneys were paid.

Paragraph (d) will require amounts of petroleum search subsidies paid by the Commonwealth under legislation relating to the search for petroleum in Australia or the Territory of Papua and New Guinea to be deducted from the allowable capital expenditure. This provision will have effect in respect of both past and future subsidies paid by the Commonwealth in relation to petroleum exploration and the Commonwealth and in the event of such a repayment being made by a taxpayer, the unrecouped capital expenditure will, in effect, be increased by the amount of the repayment.

Paragraph (e) provides for the deduction from the allowable capital expenditure of the sum of amounts specified in notices given to the Commissioner under section 124DE in relation to sales of petroleum prospecting or mining rights or petroleum prospecting or mining information by the taxpayer. The provisions of section 124DE have been explained at pages 63 to 64 of this memorandum.

Paragraph (f) requires the allowable capital expenditure to be reduced by the sum of the values of property the use of which in carrying on petroleum prospecting or mining operations has been terminated. The provision applies only to property in respect of which expenditure has been included in the allowable capital expenditure of the taxpayer for the purposes of Division 10AA. Any amounts that have been, or are to be, included in the assessable income of the taxpayer for the income year and previous years in consequence of the use of property in petroleum prospecting or mining operations being terminated will not be deducted from the allowable capital expenditure in ascertaining the unrecouped capital expenditure. The circumstances under which a liability for tax may arise in respect of property ceasing to be used in those operations are explained in relation to section 124DK at pages 68 to 69 of this memorandum.

Paragraph (g) provides for allowable capital expenditure to be reduced by the sum of considerations receivable in respect of the disposal, loss or destruction of property in respect of which expenditure has been included in the allowable capital expenditure of the taxpayer for the purposes of Division 10AA. Any amounts which have been, or are to be, included in the assessable income of the taxpayer for the income year and previous years in consequence of the disposal, loss or destruction will not be deducted from the allowable capital expenditure in ascertaining the unrecouped capital expenditure. The circumstances under which amounts may be included in assessable income in respect of the disposal, loss or destruction of property are explained in relation to section 124DL at page 69 of this memorandum.

Section 124DG: Deductions of unrecouped capital expenditure.

Section 124DG is the operative provision which authorises a deduction for unrecouped capital expenditure.

Sub-section (1.) provides that a deduction for the unrecouped capital expenditure of a taxpayer as at the end of a year of income shall be allowable from the assessable income from petroleum of the taxpayer. As explained previously, assessable income from petroleum means assessable income derived by the taxpayer from the sale of petroleum he has obtained from mining operations carried on by him in Australia or in the Territory of Papua and New Guinea or of the products of petroleum so obtained. Accordingly, no deductions will be allowable to a taxpayer under this section until he produces petroleum in commercial quantities in Australia or the Territory.

The deduction is limited to the net amount of assessable income from petroleum remaining after deducting from that income all deductions allowable otherwise than under section 124DG in respect of that assessable income. If the unrecouped capital expenditure exceeds that net amount, the excess remains available for deduction in a subsequent year when further assessable income from petroleum is derived.

Sub-section (2.) states the basis for determining the income tax deductions allowable, otherwise than under section 124DG, in calculating the net amount of assessable income from petroleum.

Deductions related exclusively to assessable income from petroleum are to be deducted from that income, together with so much of any other deduction allowable for the year of income as, in the opinion of the Commissioner, may appropriately be related to the assessable income from petroleum.

A taxpayer dissatisfied with the Commissioner's basis of apportioning indirect deductions, will have the usual rights of objection and reference to a Taxation Board of Review.

Section 124DH: Prospecting or mining by contractors and profit sharing arrangements.

Sub-section (1.) of this section will apply where a holder of a petroleum prospecting or mining right pays another person, e.g., a contractor, to undertake work that would qualify as prospecting or mining operations if he had undertaken that work himself. The prospecting or mining operations will, in those circumstances, be regarded as having been carried on by the holder of the right and the payment will be treated as expenditure incurred by the holder in carrying out those operations.

The provision will not, however, apply where a person carries out prospecting or mining operations on a right held by another person in return for a share of income derived by the holder of the right from sales of petroleum or its products. Nor will it affect the position of a person who carries out those operations in consideration for an interest in a right attaching to land on which the operations are undertaken or some other right. In the circumstances mentioned in this paragraph the cost of the prospecting or mining operations will qualify as allowable capital expenditure of the taxpayer who incurred them.

Sub-section (2.) relates to profit-sharing joint ventures and farm-out arrangements. Under these classes of arrangements a taxpayer may carry out petroleum prospecting or mining operations on a right held by another taxpayer on the basis that he will be entitled to a share of the income derived if petroleum is produced commercially in consequence of those operations. Alternatively, a taxpayer may acquire a petroleum prospecting or mining right by undertaking exploration and prospecting operations on the land concerned and agreeing to pay to the previous holder of the right a specific share of the income that may in the future be derived from the sale of petroleum produced from the land to which the right relates.

The effect of sub-section (2.) is that a share of income received in such circumstances will be regarded as income derived from the sale by the recipient of petroleum (or its products) produced by him in Australia or the Territory of Papua and New Guinea. In consequence, the recipient will be entitled to deduct from the share of income he receives under such an arrangement unrecouped capital expenditure that he has incurred. If the recipient is a company, it will be able to distribute exempt dividends to its shareholders on the same basis as if it had produced and sold the petroleum in question.

The sub-section will also ensure that the payments of a share of income in these circumstances do not qualify as allowable capital expenditure in the hands of the taxpayer producing and selling the petroleum.

Sub-section (3.) will apply where a petroleum prospecting or mining right or an interest in such a right is assigned or sub-let by a taxpayer as consideration for prospecting or mining operations carried out on that or some other right by another person.

In these circumstances the capital expenditure incurred by the person carrying out the operations will qualify as allowable capital expenditure of that person. Sub-section (3.) ensures that section 21 of the Principal Act will not operate so as to entitle the person assigning or sub-letting the right (or an interest in the right) to have the value of it included in his allowable capital expenditure. Section 21 provides that where, upon any transaction, consideration is paid or given otherwise than in cash, the money value of that consideration shall be deemed to have been paid or given.

Section 124DJ: Petroleum or petroleum products used in manufacturing other goods.

Section 124DJ applies where a taxpayer uses Australian or Territory petroleum he has obtained from mining operations (or products of that petroleum) in the manufacture of other goods.

As already explained in relation to section 124DG(1.), the deduction for unrecouped capital expenditure is allowable only from assessable income derived from the sale of Australian or Territory petroleum by the taxpayer who obtained that petroleum from mining operations. Moreover, the deduction for unrecouped capital expenditure in relation to an income year is limited to the net amount of such income derived during that year as remains after deducting all other relevant allowable deductions.

Accordingly, if a taxpayer uses his petroleum in the manufacture of other goods during an income year, his assessable income from petroleum against which a deduction for unrecouped capital expenditure may be allowed would be less than if he had sold the petroleum. This could have the effect of reducing the deduction which would otherwise be allowable under section 124DG(1.) for that year.

To remedy that situation, the market value of the petroleum or a petroleum product used in manufacture will be deemed by section 124DJ to be assessable income derived from the sale of the petroleum or its products during the income year that it is used in manufacture. The effect of this will be to place the taxpayer, as near as practicable, in the same position for purposes of the allowance of deductions of unrecouped capital expenditure as if he had sold the petroleum or petroleum product instead of using it in manufacture.

Section 124DK: Assessable income to include excess values of property the use for which in prescribed petroleum operations has been terminated.

Section 124DK relates to cases in which allowable capital expenditure has been incurred by a taxpayer on property that he has ceased to use in prospecting or mining for petroleum.

As explained in relation to section 124DE, the value of such property is deducted from the allowable capital expenditure in the process of ascertaining the unrecouped capital expenditure for which deductions may be allowed. However, in isolated cases, there may be insufficient expenditure to enable a complete set-off to be made of the value of property which ceases to be used in petroleum operations.

In these circumstances the amount that it is not practicable to set-off will be treated as assessable income. If, however, the taxpayer has derived exempt income from petroleum, the Commissioner will, in effect, be entitled to make some set-off against that income and to include in assessable income only a part of the amount not set against unrecouped capital expenditure. The usual rights of objection and reference to a Taxation Board of Review will be available to a taxpayer who is dissatisfied with the Commissioner's decision.

The section will apply to the excess of the value of the property that, during an income year, has ceased to be used in petroleum operations over the amount which would be ascertained at the end of that year as the unrecouped capital expenditure if the use of the property in petroleum operations had not been terminated and no adjustment had been necessary by reason of any consideration receivable in respect of property sold, lost or destroyed in that year.

If property that has ceased to be used in petroleum operations is used in other operations designed to produce assessable income, depreciation allowances on the usual basis will be available.

Section 124DL: Assessable income to include excess consideration on disposal, loss or destruction of property.

It has been explained in relation to section 124DF that the sale price or insurance recoveries resulting from the disposal, loss or destruction of property will be set against the taxpayer's allowable capital expenditure in order to ascertain the unrecouped capital expenditure. In some cases, the sale price or insurance recovery may be sufficient to render a complete set-off impracticable and another basis of adjustment is proposed by the new section 124DL.

Sub-section (1.) will apply only in the first year in which the taxpayer derives income from petroleum. If the sum of the sale prices and insurance recoveries in respect of property sold, lost or destroyed in that year and previous years exceeds the amount that would be the unrecouped capital expenditure if there had been no sales, losses or destruction of property, the excess is to be included in the assessable income of the taxpayer. No amount will, however, be included as assessable income under this section until the taxpayer derives income from the sale of Australian or Territory petroleum he has mined.

If the taxpayer has derived exempt income from petroleum the Commissioner may include in assessable income only so much of the excess as he considers reasonable in the circumstances.

Sub-section (2.) will come into operation only if, in an income year prior to the sale, loss or destruction, the taxpayer has derived income from the sale of Australian or Territory petroleum mined by him.

If, in these circumstances, the sale prices or insurance recoveries in respect of the sale, loss or destruction of property during an income year exceed the amount that would have been the unrecouped capital expenditure at the end of the year if no sale, loss or destruction of property had occurred, the excess is to be regarded as assessable income. Should the taxpayer have derived exempt income from petroleum, only so much of the excess as the Commissioner considers reasonable in the circumstances will be included in assessable income.

Any opinion formed by the Commissioner under either sub-section will be subject to the usual rights of objection and reference to a Taxation Board of Review.

Section 124DM: Property recommenced to be used in prospecting or mining for petroleum.

This section is, broadly stated, designed to apply in two classes of cases, viz. -

(a)

where property that has been used for purposes other than petroleum prospecting or mining operations commences to be used in petroleum prospecting or mining operations; and

(b)

where property that has ceased to be used in petroleum prospecting or mining operations is again used for those purposes.

In each class of case the property may have been used in the production of assessable income and deductions previously allowed under provisions of the Principal Act not related to petroleum operations. In some cases the property may have been used for private purposes or in the production of exempt income and in neither event would deductions have been allowed.

The Commissioner will be permitted in cases of this nature to determine an amount which will, for the purposes of Division 10AA, be deemed to be allowable capital expenditure incurred in respect of the property in the year it commences or recommences to be used in petroleum prospecting or mining operations. That amount will be so much as the Commissioner considers reasonable having regard to all the circumstances.

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

The proposed new section 124DM is expressed to operate notwithstanding section 124C of the Principal Act, the provisions of which have been explained in relation to clause 44. Deductions under Division 10AA will, therefore, be available in respect of property previously used in general mining operations that is transferred for use in petroleum prospecting or mining operations.

Section 124DN: Double deductions.

Sub-section (1.) of the proposed section 124DN provides that an amount of capital expenditure that qualifies as allowable capital expenditure for the purposes of Division 10AA shall not be deductible, or be taken into account in ascertaining the amount of an allowable deduction, under any other provision of the Principal Act. This will ensure that deductions are not available under more than one provision of that Act in respect of capital expenditure to which Division 10AA relates.

Sub-section (2.) modifies the effect of sub-section (1.) in the case of property that is used for other purposes in producing assessable income after its use in petroleum prospecting or mining operations has been terminated.

The net deductions available under Division 10AA in respect of the property will not include the value of the property at the time it ceases to be used in petroleum prospecting or mining operations. In these circumstances it is not proposed to prohibit, in respect of plant used in the production of assessable income, deductions under the depreciation or general mining provisions where this would be appropriate.

The provisions of Division 10AA will have application in any assessments made after the day on which the amending Act receives the Royal Assent.

Clause 47: Headings.

This clause effects a change in the heading "Division 10A - Timber Operations" consequent on the decision to allow deductions in respect of the cost of certain timber mill buildings and houses for employees (see clause 51). The Division will be divided into two parts. The Division heading, which will appear after new section 124DN of the Principal Act, will read "Division 10A - Timber Operations and Timber Mill Buildings". Sub-division headings will be inserted.

Clause 48: Definitions.

Clause 49: Deduction of Expenditure.

Clause 50: Acquisition of Property.

A very minor amendment will be made by these three clauses in sections 124E, 124F and 124H of the Principal Act. In each case the word "Division" will be omitted and "Sub-division" inserted. The amendments are consequential on the severance of Division 10A into two sub-divisions and will not disturb the effect of the existing law.

Clause 51: Timber Operations and Timber Mill Buildings.

Introductory Note.

The purpose of this clause is to insert in the Principal Act a new sub-division comprising three sections - sections 124JA to 124JC. These provisions are designed to authorise deductions for capital expenditure incurred after the beginning of the 1963-64 income year on certain buildings for use primarily and principally in a business of timber milling. Where the appropriate tests are satisfied the buildings concerned will include residential accommodation for employees in the business.

Stated broadly, buildings will qualify if they are situated in a forest and are in the area where timber being milled by the taxpayer was felled, or adjacent to that area.

The deductions will be allowable over the period in which the buildings are used for the purpose for which they were primarily and principally constructed or purchased. If the period is expected to exceed 25 years, the deduction will be ascertained by dividing the eligible expenditure by 25.

The three sections proposed will comprise sub-division B of Division 10A and a heading to that sub-division is being inserted.

The three sections are explained in the following notes.

Section 124JA: Deduction of expenditure.

Sub-section (1.) of this section will authorise deductions for expenditure which satisfies tests set out in the sub-section.

The first test is that expenditure of a capital nature shall have been incurred in the current income year 1963-64 or in a subsequent year. It is, however, provided that the expenditure shall qualify only if it has not been deductible, and has not been taken into account in ascertaining the amount of a deduction, other than under the proposed new sub-division.

A second test is that the capital expenditure shall have been incurred on the construction or purchase of a building primarily and principally for use in a timber milling business for gaining or producing assessable income. A building used primarily and principally to house employees in the business, or their dependants, may qualify.

A further test is that, in order to qualify, a building shall be located in a forest and either in, or adjacent to, the area where the timber being milled is felled. The question whether a building is situated in a forest or is in, or adjacent to, the area where the timber is felled will need to be determined in the light of the facts of each case. Any decision by the Commissioner on these matters will be subject to the usual rights of objection and appeal.

Sub-section (2.) prescribes the method to be adopted in ascertaining the amount of the deduction.

For this purpose it will be necessary at the end of each income year to make an estimate of the period for which the building will be used for the purposes for which it was primarily and principally constructed or purchased. In the generality of cases, the deduction for any income year will be ascertained by dividing the residual capital expenditure (which is explained in relation to sub-section (3.)) on the building by the number of whole years in the estimated period.

In some cases, the estimated period at the close of an income year may exceed 25 years, and in this eventuality the deduction for that year will be one twenty-fifth of the residual capital expenditure.

Sub-section (3.) states the meaning to be given to the term "residual capital expenditure". It will mean the capital expenditure on an eligible building and to which sub-section (1.) refers, less any deductions allowed or allowable under the section for a previous income year.

The purpose of sub-section (4.) is to ensure that deductions will not be allowed in relation to a building that has been disposed of or destroyed. The proposed section 124JB will, however, provide for an appropriate adjustment to be made at the time of the disposal or destruction.

Sub-section (5.), which is complementary to sub-section (4.), will apply where the use of a building for the purposes of a timber milling business is terminated other than by reason of sale or destruction.

The sub-section will ensure that deductions will be discontinued in these circumstances. An appropriate adjustment will then be made under the proposed section 124JB.

Section 124JB: Disposal, destruction or termination of use of building.

Sub-section (1.) provides that the section shall apply where capital expenditure on a building has qualified for deduction under the new provisions and the building is either disposed of or destroyed or its use primarily and principally in the timber milling business of the taxpayer has been terminated.

Sub-section (2.) specifies the adjustment to be made where the consideration receivable in relation to such a building that has been disposed of or destroyed exceeds the residual capital expenditure in respect of that building immediately before the disposal or destruction took place. It also provides for the making of an adjustment if the value of a building at the time it ceases to be used in the timber milling business exceeds its residual capital expenditure immediately before that use terminates.

In either event the excess over the residual capital expenditure is to be included in the taxpayer's assessable income. There is, however, a modification that limits the amount to be treated as assessable income to the sum of the deductions allowed or allowable under the new provisions in relation to the building.

The practical effect of the provision is that any excess of deductions allowed over the difference between the cost of the building and the proceeds or value at the time of disposal, destruction or termination of appropriate use is restored to the assessable income.

Sub-section (3.) is the converse of sub-section (2.). If the consideration receivable on disposal or destruction, or the value when appropriate use terminates, is less than the residual capital expenditure, the difference is an allowable deduction.

Sub-section (4.) defines "the consideration receivable in respect of the disposal or destruction".

Where a building is sold, the consideration receivable is the sale price less the expenses of the sale.

In the case of a building that has been destroyed, the consideration is the amount receivable, whether under an insurance policy or otherwise.

If a building is sold together with other assets and no separate value is allocated to the building, the consideration is an amount determined by the Commissioner, but any determination by the Commissioner will be subject to the usual rights of objection and reference to a Taxation Board of Review.

Should a building be disposed of other than by sale, the consideration receivable will be the value, if any, of the building at the date of disposal.

There is an over-riding provision which excludes from consideration receivable any amount that has been, or will be, included in assessable income under the lease provisions (Division 4) of the Principal Act. Apart from this provision there would be a double adjustment if an amount were both treated as assessable income and taken to account under section 124JB.

Section 124JC: Acquisition of building.

Sub-section (1.) relates to a building purchased after the end of the 1962-63 income year by a taxpayer carrying on a timber milling business. If the purchase is made from another person carrying on such a business, this sub-section may limit the amount of the expenditure on which the purchaser is entitled to deductions under the new provision.

Subject to sub-section (3.) of the section, deductions will be ascertained by reference to no more than the sum of -

(a)

the amount that, if the sale had not taken place, would have been the residual capital expenditure on the building as at the end of the income year in which the sale took place; and

(b)

any part of the sale price which has been restored to the assessable income of the vendor under section 124JB(2.). That provision has already been explained.

Briefly stated, the sub-section will restrict the amount upon which the purchaser is entitled to base deductions to the original cost to the vendor of the building less the net deductions allowed under the new provisions in respect of the building.

Sub-section (2.) is complementary to sub-section (1.) and applies where the vendor has not used the building concerned in a business of timber milling.

The vendor may, however, have used the building in other income-producing activities and have been allowed deductions for depreciation, for example, if the building had been used in agricultural or pastoral pursuits.

In these circumstances, deductions available to the purchaser will be based upon the depreciated value of the property at the time of the transaction, together with any amount included in the vendor's assessable income by way of adjustment at the time of the sale.

Sub-section (3.) recognises that there may be circumstances in which the limitations placed upon deductions by this section would not be appropriate. For example, the vendor and the purchaser may be dealing at arm's length and it may be reasonable to allow the purchaser deductions by reference to the full amount paid by him.

In order to meet such cases, sub-section (3.) of section 124JC provides that the section is not to apply if the Commissioner is of the opinion that the circumstances warrant its non-application.

The three sections inserted by clause 51 will apply in assessments on incomes of the 1963-64 and subsequent years of income.

Clause 52: Interest Paid by a Company to a Non-Resident.

By this clause it is proposed to effect an amendment to section 125 of the Principal Act that is consequential upon the proposal to increase the minimum amount of taxable income on which tax is payable from Pd105 to Pd209.

Broadly stated, section 125 imposes upon a company that pays interest to a non-resident in respect of moneys borrowed and used, or lodged at interest in Australia to pay tax on that interest. Where the non-resident person is a company, tax is levied on the interest-paying company on whatever amount of interest is paid. On the other hand, where the non-resident is not a company tax is at present levied under section 125 only on the amount by which the interest paid during the year of income exceeds Pd104. Consequential upon the proposal to increase the minimum taxable income to Pd209 it is proposed that tax will be payable under section 125 on interest paid by a company to a non-resident, other than a company, only on the amount by which the interest exceeds Pd208.

Clause 53: Amendment of Assessments.

This clause will amend section 170 of the Principal Act, which governs the powers of the Commissioner of Taxation to amend income tax assessments.

Paragraph (a) of clause 53 inserts in section 170 of the Principal Act a new sub-section (9A.) which is complementary to section 82K.

As explained in relation to clause 38, the new section 82K is designed to authorise deductions for certain medical, funeral and education expenses paid by a trustee of the estate of a deceased person who incurred the expenses during his lifetime. The deductions are to be allowed against the income derived by the deceased during the income year in which he died.

In some cases the assessment of the taxable income for that year will be made before the expenses are paid by the trustee and the present provisions of section 170 would prohibit the making of an amended assessment to allow the deductions proposed by section 82K.

The provision to be inserted by paragraph (a) of clause 53 will authorise the making of an amended assessment in the circumstances described if the trustee, within three years of the date of death of the deceased person, applies in writing to the Commissioner for an amended assessment and supplies all the relevant information needed by the Commissioner.

Paragraph (b) will include in sub-section (10.) of section 170 references to sections 105AA and 124DE(2.)

Sub-section (10.) of section 170 provides that nothing in the section shall prevent the amendment of an assessment at any time for the purpose of giving effect to specified sections of the Principal Act.

By clause 39, it is proposed to insert in the Principal Act a new section 105AA authorising the Commissioner to grant a further period, beyond that already allowed, for the payment of dividends subject to deduction for the purposes of the undistributed income tax payable by private companies. The inclusion of a reference to section 105AA in section 170(10.) is designed to ensure that the Commissioner shall have the necessary authority to amend an assessment for undistributed income tax in order to allow deductions for dividends paid in the further period.

Section 124DE(2.) is, broadly stated, designed to limit the deduction available under Division 10AA in respect of expenditure incurred in acquiring a petroleum prospecting or mining right or petroleum prospecting or mining information to the unrecouped capital expenditure of the vendor of the right or information as at the end of the income year in which the transaction took place - see pages 63 to 64 of this memorandum.

The amendment to sub-section (10.) to include a reference to section 124DE(2.) will enable an assessment of the purchaser or the vendor of the right or information to be amended in a later year to give effect to that section if it is subsequently ascertained that the unrecouped capital expenditure of the vendor as originally calculated does not accord with the facts as ultimately established.

Clause 54: Deductions by Employer from Salary or Wages.

Amendments proposed by this clause relate to the liability of an employer to make tax instalment deductions from the salaries or wages paid to his employees.

Sub-section (1.) of section 221C of the Principal Act, as at present enacted, requires an employer to make instalment deductions, at rates specified in Regulations made under the Principal Act, where the salary or wage of an employee for a week or part of a week exceeds Pd2. As a consequence of the proposed increase in the minimum amount of taxable income subject to tax from Pd105 to Pd209, instalment deductions will not be required where the weekly salary or wage is Pd4 or less. The amendments are designed to give legislative sanction to regulations prescribing amounts to be deducted from any salary or wages. In view of the proposed increase to Pd209 in the minimum amount of taxable income subject to tax, current regulations prescribe deductions from salary or wages only if they exceed Pd4 a week.

Paragraph (a) of clause 54 proposes the repeal of the existing sub-section (1.) of section 221C and the inclusion in its place of two new provisions - sub-sections (1.) and (1A.).

The new sub-section (1.) of section 221C provides authority for regulations prescribing the rates at which deductions are to be made by an employer from salary or wages paid by him. It has been found unnecessary in the sub-section to make reference to any particular rate of salary or wages.

Sub-section (1A.) requires an employer to make deductions at the rates, if any, prescribed by regulations made under sub-section (1.). The maximum penalty for failure to make the deductions is, as under the present law, Pd20.

Paragraph (b) is a minor drafting amendment which allows the present section 221C(2.) to apply for the purposes of the regulations as well as the Principal Act.

Clause 55: Amount of Provisional Tax.

The amendment proposed by this clause is consequential upon the proposed increase in minimum taxable income from Pd105 to Pd209. It is designed to ensure that provisional tax payable in accordance with section 221YC is brought into line with the new minimum amount of taxable income upon which tax is payable.

Sub-section (1.) will amend sub-section (4.) of section 221YC of the Principal Act. As that sub-section now stands, a taxpayer who up to 31st March in a year of income has derived assessable income (other than salary or wages) in excess of Pd104 is obliged to lodge with the Commissioner of Taxation an estimate of his assessable income for the whole year if he did not derive assessable income (other than salary or wages) in excess of Pd104 in the preceding income year. The estimate enables the Commissioner to calculate the provisional tax payable by the taxpayer for the later year.

In accordance with the proposed increase to Pd209 in the minimum amount of taxable income on which tax is payable, the existing references in sub-section (4.) of section 221YC to Pd104 are being replaced by references to Pd208.

Sub-section (2.) and sub-section (3.) affect the operation of sub-section (1.) of section 221YC of the Principal Act in certain cases but will not amend that sub-section.

Paragraph (a) of sub-section (1.) of section 221YC applies where the taxpayer derived a full year's income from business or property sources in the year preceding that for which the provisional tax is payable. In such cases, the provisional tax payable for the current year is an amount equal to the tax payable for the preceding year.

Paragraph (b) of the same sub-section applies where the income of the preceding year was not a full year's income. In these cases, the provisional tax payable for the current year is an amount equal to the tax for the preceding year adjusted to a full year basis.

As regards incomes of the current year 1963-64 which will be affected by the provisions relating to the proposed new minimum taxable income, ascertainment of provisional tax on the basis set out in section 221YC(1.) would not be appropriate. Sub-sections (2.) and (3.) will enable calculations of any provisional tax for the current year in these cases to be made having regard to the raising of the minimum taxable income on which income tax is payable.

Clause 56: Application of Amendments.

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

INCOME TAX (INTERNATIONAL AGREEMENTS) BILL 1963.

This is the third of the measures explained in this memorandum.

The amendment proposed in this Bill is consequential on the proposal to amend the Income Tax and Social Services Contribution Assessment Act to give effect to the agreement with the United States Government for the establishment of a naval communication station at North West Cape, so far as that agreement relates to income tax matters.

Clause 1: Short Title and Citation.

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

Clause 2: Commencement.

By reason of section 5(1A.) of the Acts Interpretation Act 1901-1963, every Act, unless the contrary intention appears, is deemed to come into operation on the 28th day after it has received the Royal Assent.

Clause 2 of the amending Act provides that that Act shall come into operation on 9th May, 1963, the day the agreement for the establishment of the naval communication station was tabled in Parliament.

Clause 3: Certain Foreign Contractors Deemed not to be Trading Through Permanent Establishments in Australia.

By clause 3 it is proposed to insert a new provision - section 19A - in the Income Tax (International Agreements) Act 1953- 1960.

The purpose of the new section is to ensure that a foreign contractor (as defined in sub-section (1.) of the proposed new section 23AA of the Income Tax and Social Services Contribution Assessment Act), who is a resident of the United States, will not, by reason of his activities as a foreign contractor in Australia, be subject to a higher rate of Australian income tax on any dividends received from an Australia resident company than would have been the case if he had not undertaken those activities.

Article VII(1.) of the double tax convention between Australia and the United States provides that, subject to specified conditions, Australian tax on dividends paid by a company resident in Australia to a United States resident shall not exceed 15% of the dividends. The rate limitation does not apply if the United States resident is engaged in business in Australia through a permanent establishment. The carrying out of a contract for the establishment etc. of the North West Cape project may involve the setting up of a permanent establishment in this country. Where this occurs a United States resident contractor would not, in the absence of the amendment proposed by this clause, be entitled to the reduced rate on dividends from Australian sources.

Sub-section (1.) of new section 19A will enable a foreign contractor who is a United States resident and carrying on business in Australia solely for prescribed purposes to continue to qualify for the rate limitation on dividends. This is achieved by deeming the foreign contractor not to be engaged in trade or business in Australia through a permanent establishment in Australia for the purposes of Article VII of the Australia-United States convention.

Sub-section (2.) is designed to ensure that a foreign contractor will not be deprived of the reduced rate on dividends by virtue of his engagement in another project in Australia (or a Territory) agreed upon between the Governments of Australia and the United States in addition to the North West Cape project.

Sub-section (3.) of section 19A defines several expressions used in sub-section (1.).

Paragraph (a) of sub-section (3.) provides that the terms "foreign contractor", "prescribed purposes" and "the North West Cape Naval Communication Station" are to have the same meanings as in the new section 23AA to be inserted in the Income Tax and Social Services Contribution Assessment Act by clause 5 of the Bill amending that Act. That Bill is the second of the measures explained in this memorandum.

Paragraph (b) of sub-section (3.) provides that the terms "Australia" and "United States resident" are to have the same meaning as in the convention with the United States of America. The reference to "Australia" is a drafting measure designed to facilitate the proposed continuation of the rate limitation on dividends.

Under the convention the term "United States resident" means an individual who is resident in the United States for the purposes of the United States income tax law and is not a resident of Australia for the purposes of the Australian income tax law. It also means any company or partnership created or organized under the laws of the United States, if the company or partnership is not a resident of Australia for purposes of the Australian income tax law. (Foreign contractors to whom the new section 19A will apply are, under sub-section (3.) of the proposed section 23AA of the Income Tax and Social Services Contribution Assessment Act, deemed not to be residents of Australia.)

ESTATE DUTY ASSESSMENT BILL 1963.

Introductory Note:

This is the fourth taxation Bill referred to in the introductory part of this memorandum. Its general purposes have already been explained at pages 6 to 7 of this memorandum and the following notes deal with individual clauses of the Bill.

Clause 1: Short Title and Citation.

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

Clause 2: Commencement.

Section 5(1A.) of the Acts Interpretation Act 1901-1963 provides that every Act shall come into operation on the 28th day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act.

The amendments proposed to be made by this Bill relate to two matters. The first of these concerns a proposal to increase the level of the statutory exemptions from Commonwealth estate duty. The other concerns certain exemptions to be granted in pursuance of agreements between the Governments of Australia and the United States of America regarding the establishment of a United States Naval Communication Station in Australia and the status of United States Forces in Australia (hereinafter referred to as "the Cape Agreement" and "the Forces Agreement", respectively).

By sub-clause (1.) of clause 2 it is proposed that the provisions relating to the two agreements will be deemed to have come into operation on the day on which the agreements were tabled in Parliament - 9th May 1963. By sub-clause (2.) it is proposed that the other amendment will come into operation on the day that the Act receives the Royal Assent.

Clause 3: Estates of Certain Persons who were in Australia for Purposes Connected with Projects of the United States Government.

By this clause, it is proposed that there be inserted in the Principal Act a new section - section 8AA - which is designed to give effect to articles of the Cape Agreement and the Forces Agreement that relate to estate duty.

Stated broadly, under those agreements Australia has agreed to exempt from Commonwealth estate duty certain personal property that is in Australia solely by reason of the presence of designated persons in Australia for the purpose of performing contracts or carrying out duties described by the agreements. An important condition of the proposed exemption is that the personal property be not exempt from the estate tax of the Government of the United States. The proposed exemption from Commonwealth estate duty does not apply to real property situated in Australia.

Sub-section (1.) of the new section 8AA is designed to facilitate drafting of the proposed new section, and consists of a number of definitions of words and expressions used throughout the new provision.

With one exception - an additional definition not relevant to the associated income tax measures already explained - the definitions in this sub-section and those contained in sub-section (1.) of the proposed section 23AA to be inserted in the Income Tax and Social Services Contribution Assessment Act 1936-1963 are expressed in identical terms. (See pages 14 to 17 of this memorandum for explanations of these definitions.)

The additional definition relates to "personal property" that it is proposed will, in accordance with the two agreements, be exempt from Commonwealth estate duty where prescribed conditions are fulfilled.

"Personal property": The effect of this definition is that personal property situated in Australia, other than property of the kinds specifically referred to in the definition, may qualify for the exemption provided by the new section 8AA. The classes of personal property specifically excluded from the proposed exemption are:-

(a)

property which is held as an investment or for the purposes of an investment;

(b)

copyright;

(c)

intangible property in the form of property arising out of letters patent for an invention, or a registered trade mark or industrial design; and

(d)

property held in connection with the carrying on of a business other than a business carried on for a purpose covered by the Cape Agreement.

Sub-section (2.) of section 8AA is designed to ensure that the estate of a deceased foreign contractor or foreign employee may be exempt in respect of personal property (other than property specifically excluded from exemption) notwithstanding that the contractor or employee was engaged in connection with another project in Australia agreed upon between the Governments of Australia and the United States in addition to the North West Cape project.

The sub-section does not affect any liability for Commonwealth estate duty on personal property held in Australia by a contractor or employee in connection with his engagement on the other project.

Broadly stated, sub-section (3.) of section 8AA is designed to give effect to agreements concluded under the Cape Agreement and the Forces Agreement by which a foreign contractor, a foreign employee, a member of the United States Forces, or a civilian accompanying the United States Forces, and a dependant of any of these classes of person, is not to be regarded as having become domiciled in Australia by reason of any period during which he qualifies as one of those classes of person.

This sub-section provides that a person of one of the specified classes (or a dependant of such a person) shall not be taken to have become domiciled in Australia at the commencement of, or during any period, in which he was in Australia solely for purposes prescribed by one or other of the agreements.

One exception to the application of this section is proposed. This is the case of a woman who, though otherwise a person of one of the designated classes, marries a man domiciled in Australia. Under the law of domicile applicable in Australia such a person acquires the domicile of her husband on marriage. In a case of this kind the woman's Australian domicile would result from her marriage and not from her presence in Australia for purposes covered by either of the agreements.

In consequence of the proposed restriction on the acquisition of Australian domicile, the estate of a person to whom this provision applies will not, subject to the proposed sub-section (4.) explained in immediately succeeding paragraphs, include any personal property situated outside Australia. In the absence of the proposed provision the estate of such a person who acquired an Australian domicile would include his personal property situated outside Australia, by reason of sub-section (3.) of section 8 of the Principal Act.

Sub-section (4.) ensures that the last preceding sub-section does not apply in relation to a foreign contractor, a foreign employee, a civilian accompanying the United States Forces, or a dependant of one of those persons, for any period when the person concerned was not a citizen of, or domiciled in the United States of America. Such a person would not be subject to the estate tax law of the United States Government.

The effect of sub-section (4.) is that, for the purposes of Commonwealth estate duty, the liability of a person to whom sub-section (3.) might otherwise apply, but who is not a citizen of, or domiciled in, the United States, will continue to be determined according to the general law of domicile. Liability to Commonwealth estate duty will not, in these circumstances, be affected by the agreements or by the present Bill.

Sub-section (5.) is the operative provision which excludes personal property from the dutiable value of the estate of a person of the classes specified in sub-section (1.) of the new section 8AA.

The sub-section will apply in relation to the estate of a deceased foreign contractor, foreign employee, member of the United States Forces, or civilian accompanying the United States Forces, who was, at the time of his death, in Australia solely for purposes prescribed by either of the agreements. It will apply also to the estate of a deceased dependant of one of those persons.

Property to be excluded from an estate by this sub-section is personal property that, at the time of death, was held by the deceased in Australia solely by reason of his having been, at that time, a foreign contractor, etc., who was in Australia for prescribed purposes, or a dependant of such a person, other than personal property specifically precluded from exemption (see explanation of definition of "personal property" at page 81 of this memorandum).

It is a condition of the exemption that the property be subject to estate tax as part of the deceased person's taxable estate under the law of the United States of America.

Clause 4: Quick Succession Rebates.

By this clause, an amendment of section 8A of the Principal Act is proposed. The amendment is consequential on the proposed insertion of the new section 8AA after section 8. Since section 8A will no longer be immediately preceded by section 8, the reference in paragraphs (a) and (b) of sub-section (4.) and paragraphs (c) and (d) of sub-section (5.) of section 8A to "the last preceding section" are to be omitted and replaced by a reference to "section eight of this Act".

Clause 5: Deductions from Gross Value of Estate.

By this clause, it is proposed that a new sub-section - sub-section (1A.) - be inserted in section 17 of the Principal Act.

Sub-section (1.) of section 17 provides that for the purpose of assessing the value for duty of the estate of a deceased person, there shall be deducted from the gross value of the assessable estate certain debts owing and taxes outstanding. In the case of a deceased person who was not domiciled in Australia at the time of his death, the debts deductible are those due and owing by him at the time of his death to persons resident in Australia, or contracted to be paid in Australia, or charged on dutiable property situated in Australia.

The proposed sub-section (1A.) is designed to ensure that debts in respect of property exempted from duty by sub-section (5.) of the new section 8AA shall not be allowed as a deduction against dutiable property.

The new sub-section will achieve this result by providing that a reference in sub-section (1.) to a debt due and owing will not include a reference to such a debt that was incurred by a deceased person in respect of property upon which, by virtue of sub-section (5.) of the proposed section 8AA, duty is not to be assessed or payable.

Clause 6: Statutory Exemption.

By this clause it is proposed to amend section 18A of the Principal Act so as to double the maximum amounts of the statutory exemption allowable in the assessment of duty payable on an estate, and to shade them out more slowly than under the present law.

At present, section 18A provides that in cases where the whole of the estate passes to the widow, widower, children or grandchildren of the deceased, no duty is payable where the value of the estate does not exceed the statutory exemption of Pd5,000. Where the value of the estate exceeds Pd5,000, the exemption remains as a deduction which diminishes at the rate of Pd1 for every Pd3 of the excess, and thus vanishes when the value of the estate reaches Pd20,000.

If the estate passes to other classes of persons, the corresponding exemption at present allowable is Pd2,500, diminishing at the rate of Pd1 for every Pd3 of the excess of Pd2,500, and thus vanishing at a value of Pd10,000.

A proportionate allowance is made where the estate passes partly to the widow, widower, children or grandchildren, and partly to other persons.

Sub-clause (1.) of clause 6 proposes to omit paragraphs (a) and (b) of sub-section (1.) of section 18A, and to insert in their stead new paragraphs (a) and (b).

The new paragraph (a) provides that no duty will be payable as regards estates passing to the widow, widower, children or grandchildren if the value of the estate does not exceed Pd10,000. The increased statutory exemption will shade out at the rate of Pd1 for every Pd4 by which the value of the estate exceeds Pd10,000, and will, therefore, not be exhausted until the value of the estate reaches Pd50,000.

The new paragraph (b) provides that where no part of the estate passes to the widow, etc., no duty will be payable if the value of the estate does not exceed Pd5,000. As with estates passing to the widow, etc., the new statutory exemption will diminish by Pd1 for every Pd4 in excess of Pd5,000 and ultimately vanish when the value of the estate reaches Pd25,000.

A proportionate allowance related to the new exemption level will be available where the estate passes partly to the widow, etc.

Sub-clause (2.) of clause 6 provides that the amendment increasing the statutory exemption will apply to the estates of persons dying after the commencement of the proposed section. As stated in the notes to clause 2 of this Bill, the proposed section 6 will come into operation on the day on which the Act receives the Royal Assent.

Clause 7: Apportionment of Duty Among Beneficiaries.

This clause is a drafting measure consequential upon the proposal to exempt certain property from duty under the new section 8AA. It will amend section 35 of the Principal Act, which provides for the apportionment of duty payable by an estate among the persons beneficially entitled to the estate.

The present section excludes from the apportionment calculations so much of the estate as is exempt from estate duty by sub-section (5.) of section 8 of the Principal Act.

Clause 7 will have the effect of excluding from the apportionment calculations any part of the estate which is exempt by any provision of the Principal Act, including the proposed section 8AA.

Clause 8: Application of Certain Amendments.

This clause specifies the commencing date for the application of the amendments proposed in clauses 3, 4, 5 and 7 of this Bill in relation to the Cape Agreement and the Forces Agreement. The amendments proposed therein will apply to the estates of persons dying on or after 9th May 1963.

GIFT DUTY ASSESSMENT BILL 1963.

This Bill is the fifth of the taxation measures referred to in the general introduction to this memorandum. As stated previously, its purpose is to effect amendments to the Gift Duty law to provide exemptions from gift duty to which Australia agreed under the Cape Agreement and the Forces Agreement. Explanatory notes on the individual clauses of the Bill are set out hereunder.

Clause 1: Short Title and Citation.

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

Clause 2: Commencement.

Section 5(1A.) of the Acts Interpretation Act 1901-1963 provides that every Act shall come into operation on the 28th day after the day on which that Act receives the Royal Assent, unless the contrary intention appears in the Act.

Clause 2 provides that the Amending Act shall be deemed to have come into operation on the same day as the income tax and estate duty amendments relating to the two agreements - 9th May 1963.

Clause 3: Gifts.

By this clause it is proposed to insert two sections - sections 15 and 16 - in the Principal Act.

Section 15: Gifts made by certain persons in Australia for purposes connected with projects of the United States Government.

The proposed new section 15 is designed to give effect to articles of the Cape Agreement and the Forces Agreement that relate to gift duty.

In broad terms, under the two agreements Australia has agreed to exempt from Commonwealth gift duty certain personal property that is in Australia solely by reason of the presence of specified persons here for the purpose of performing contracts or carrying out duties described by one or other of the agreements. It is a prerequisite of the proposed exemption that the property be not exempt from the gift tax of the Government of the United States. No exemption is to be granted in relation to real property situated in Australia.

Sub-section (1.) of the proposed section 15 contains definitions of expressions used throughout the new section. The terms defined, and the definitions, are the same as in the Estate Duty Bill (see page 81 of this memorandum). As also proposed in relation to estate duty, no exemption is to be provided in relation to the following classes of personal property situated in Australia -

(a)

property which is held as an investment or for the purposes of an investment;

(b)

copyright;

(c)

intangible property in the form of property arising out of letters patent for an invention, or a registered trade mark or design; or

(d)

property held in connection with the carrying on of a business other than a business carried on for a purpose covered by the Cape Agreement.

Sub-section (2.) of section 15 is designed to ensure that a foreign contractor or employee is not deprived of an exemption from gift duty otherwise available by virtue of his engagement in connection with another project in Australia agreed upon by the Governments of Australia and the United States in addition to the North West Cape project.

The sub-section will not affect any liability for Commonwealth duty on gifts of personal property held in Australia by a contractor or employee in connection with his engagement on the other project.

Broadly stated, sub-section (3.) provides that a foreign contractor, a foreign employee, a member of the United States Forces, a civilian accompanying the United States Forces, or a dependant of any of those persons, shall not be taken to have become domiciled in Australia by reason of any period during which he qualifies as one of those classes of persons.

This sub-section does not apply to a woman who marries a man domiciled in Australia. She will, under the general law applicable in Australia, acquire the domicile of her husband.

In consequence of the proposed restriction on the acquisition of Australian domicile, a foreign contractor or foreign employee etc. who makes a gift of property situated outside Australia during a period when he was in Australia solely for prescribed purposes will not be liable to duty in respect of that gift. The fact that he does not acquire an Australian domicile removes him from the scope of section 11(a) of the Principal Act, which imposes duty on gifts of property, wherever situated, that are made by a person domiciled in Australia.

Sub-section (4.) restricts the application of the last preceding sub-section to a person who, during any period when he was a foreign contractor, a foreign employee, a civilian accompanying the United States Forces, or a dependant of one of those persons, was a citizen of, or domiciled in the United States of America.

The effect of sub-section (4.) is that, for the purposes of Commonwealth gift duty, the liability of a person to whom sub-section (3.) might otherwise apply, but who is not a citizen of, or domiciled in, the United States, will continue to be determined according to the general law of domicile. In these cases, liability for Commonwealth gift duty will not be affected by the agreements or by this Bill.

Sub-section (5.) is the operative provision. It exempts from gift duty a gift made by a person of personal property that, at the time the gift was made, was held by him in Australia solely by reason of his having been, at that time, a person within the categories mentioned.

The persons who may make a gift which will be exempt from duty under this section are a foreign contractor, a foreign employee, a member of the United States Forces or a civilian accompanying the United States Forces who was in Australia solely for prescribed purposes, or a dependant of one of those persons.

The exemption provided by this sub-section will be available only if the gift is, or has been, subject to gift duty under the law of the United States.

Section 16: Exempt gifts not to be taken into account in ascertaining duty on other gifts.

Section 16 is a drafting measure. It ensures that the value of an exempt gift will not be added to the value of any other gift made by the same donor in ascertaining whether duty is payable in respect of the other gift or in ascertaining the amount of duty on the other gift.

Clause 4: Returns by Donor.

This clause proposes an amendment to section 19 of the Principal Act that is consequential upon the proposed introduction of the new section 15.

Section 19 requires a return to be furnished to the Commissioner of Taxation by any person who makes, and any person who receives, a gift, or gifts made during a period of 18 months, of a total value in excess of Pd1,500.

Sub-section (4.) of section 19 provides that a return need not be made in respect of, or include, any gift exempt from duty under the existing section 14 of the Principal Act.

It is proposed to insert in sub-section (4.) a reference also to the new section 15, so that a return need not be furnished in respect of, or include, any gift exempt from duty under the new section.

Clause 5: Application of Amendments.

This clause provides that the amendments proposed in this Bill will apply only in respect of gifts made after the commencement of the Amending Act. As stated above, the Amending Act is, by clause 2, to be deemed to have come into operation on 9th May 1963.