Explanatory Memorandum
(Circulated by authority of the Treasurer, the Rt. Hon. William McMahon.)Notes on Clauses
INCOME TAX ASSESSMENT BILL (NO. 2) 1967.
This Bill is the first 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 of the Principal Act as amended.
Section 5(1A.) of the Acts Interpretation Act 1901-1966 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act. By clause 2 it is proposed that the Amending Act shall come into operation on the day on which it receives the Royal Assent.
Section 5 of the Principal Act lists the Parts and Divisions into which the Principal Act is divided. Clause 3 will effect a drafting amendment to the list which is consequential on the amendment proposed by clause 9 explained later in this memorandum.
Clause 4: Income of Certain Persons Connected with Undertakings of the United States Government.
Introductory Note.
Clause 4 proposes amendments to section 23AA of the Principal Act to extend to persons who are connected with two projects in Australia - the Joint Defence Space Research Facility and the undertaking known as the Sparta project - exemptions similar to those which already apply to persons connected with the North West Cape naval communication station.
The Joint Defence Space Research Facility, which is situated in the vicinity of Alice Springs, is the subject of an agreement between the Australian and United States Governments signed on 9th December, 1966. The Sparta project, which is a project for the firing of certain re-entry vehicles at Woomera, is the subject of an agreement signed on 30th March, 1966 between Australia, the United Kingdom and the United States.
In broad terms, 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 either of the two projects mentioned will, subject to certain conditions being satisfied, be freed from Australian tax. An important condition of the exemption is that the income, which has its origin in moneys provided by the United States Government, is not exempt from United States tax. In addition the contractor, sub-contractor or employee must be in Australia, or be carrying on business in Australia, solely for the performance of a contract with the United States Government in connection with the Joint Defence Space Research Facility or the Sparta project. Australian companies, citizens or residents will not qualify for the exemption.
The proposed amendments to section 23AA will also authorise an exemption for earnings of civilian employees of the United States Government in respect of activities in connection with the Joint Defence Space Research Facility or the Sparta project if the employees are in Australia solely for the purpose of carrying on those activities. This exemption is also conditional upon the earnings not being exempt from the income tax of the United States Government. It will not apply to employees who are citizens of Australia or ordinarily resident here.
Persons who qualify for the exemptions mentioned will be free from Australian tax on income derived from sources outside Australia during the period in which they do so qualify.
It is also proposed to exempt, under prescribed conditions, the ex-Australian income of dependants of the classes of persons to be covered by the amendments of section 23AA. This exemption will not apply to any dependant who, before and after becoming a dependant, is ordinarily resident in Australia.
Further explanations of the proposed amendments to section 23AA of the Principal Act are given below.
Paragraph (a) of clause 4 will insert in sub-section (1.) of section 23AA a new definition - of the term "approved project" - which will mean the establishment, maintenance or operation of any of three projects in Australia, viz :-
- the North West Cape naval communication station;
- the Joint Defence Space Research Facility; and
- the Sparta project.
The new definition is designed to facilitate reference throughout section 23AA to these projects.
By paragraph (b) of clause 4 it is proposed to amend the definition of "prescribed contract" which identifies the types of contract upon the performance of which the exemption applicable under section 23AA to foreign contractors and employees basically depends.
At present, paragraph (a) of the definition of "prescribed contract" covers contracts, to which the Government of the United States of America is a party, which have been entered into for the establishment, maintenance or operation of the North West Cape naval communication station. The amendment will omit the reference to the North West Cape naval communication station and insert, in lieu, a reference to an approved project.
This amendment will not disturb the application of section 23AA to income arising out of United States Government contracts in respect of the project at North West Cape which is - as has been explained in the note on paragraph (a) of clause 4 - within the definition of an "approved project". The purpose of the change effected by the amendment is to extend the scope of section 23AA so that it applies, also, to income arising out of like contracts in respect of the establishment, maintenance or operation of the Joint Defence Space Research Facility or the Sparta project.
Sub-contracts entered into in order that a contract of the kind mentioned above may be performed are, by paragraph (b) of the definition, brought within the scope of a "prescribed contract". Except to this extent, contracts to which the United States Government is not a party do not come within the ambit of the definition.
Paragraphs (c) and (d) of clause 4 will effect amendments to the definition of "prescribed purposes" in sub-section (1.) of section 23AA. The term will be extended to apply to certain activities of a United States employee. A definition of "United States employee" is being inserted in the section by paragraph (g) of this clause.
The definition of "prescribed purposes" provides 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 provided under section 23AA.
Paragraph (a) of the definition of "prescribed purposes" applies to a foreign contractor or employee. Prescribed purposes in relation to these two classes of person are purposes relating to the performance in Australia of a "prescribed contract" - see notes on paragraph (b) of clause 4.
Paragraph (b) of the definition 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 amendment proposed will insert in the definition a new paragraph - paragraph (aa) - which applies to a United States employee. In relation to this class of employee, prescribed purposes will be purposes relating to the carrying on of activities in Australia in connection with the projects within the ambit of the definition of "approved project", viz., the North West Cape naval communication station, the Joint Defence Space Research Facility and the Sparta project.
Paragraphs (e) and (f) of clause 4 will insert two new definitions in sub-section (1.) of section 23AA - definitions of "the Joint Defence Space Research Facility" and of "the Sparta project".
"The Joint Defence Space Research Facility" is defined to mean the undertaking the establishment of which is provided for by an agreement between the Australian Government and the Government of the United States of America dated 9th December, 1966. The place for the establishment of this project is in the vicinity of Alice Springs.
"The Sparta project" is defined to mean the undertaking the establishment of which is provided for by a Memorandum of Arrangement dated 30th March, 1966, between the Australian Government and the Governments of the United States of America and of Great Britain and Northern Ireland. The place for the establishment of this project is Woomera.
Paragraph (g) of clause 4 will insert a definition of United States employee in sub-section (1.) of section 23AA. This definition is designed to identify the classes of civilian employees of the United States Government who may qualify for exemption from Australian tax if the prescribed conditions are met.
The term will mean an employee of the United States Government other than a member of the United States Forces or a civilian accompanying the United States Forces. The latter two classes of person are already covered by section 23AA.
A person who is an Australian citizen or ordinarily resident in Australia is specifically excluded from the scope of the definition.
Paragraph (h) of clause 4 will omit sub-section (2.) of section 23AA and insert a new sub-section in its stead.
The present sub-section ensures that a foreign contractor or foreign employee is not deprived of any exemption otherwise available under section 23AA 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 does not affect any liability for tax arising out of activities related to the other project.
This provision is necessary because, by sub-section (5.) of section 23AA, the exemptions provided are 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 project will not preclude the contractor or employee being regarded as being in Australia solely for the purposes of the North West Cape project.
The proposed new sub-section will extend this principle to the Joint Defence Space Research Facility and the Sparta project. It will also extend the principle to a United States employee engaged on either of these projects. A connection with another agreed project outside the scope of section 23AA will not preclude the foreign contractor, foreign employee or United States employee concerned being regarded as being in Australia solely for the purposes of the North West Cape project, the Joint Defence Space Research Facility or the Sparta project.
Paragraph (i) of clause 4 will amend sub-sections (3.) and (4.) of section 23AA to include in those provisions a reference to a United States employee, i.e., an employee of the United States Government who is not a member of the United States Forces, a civilian accompanying those Forces, an Australian citizen or ordinarily resident in Australia.
At present, 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 is, subject to sub-section (4.), exempt from Australian income tax.
The practical effect of the amendment proposed to sub-section (3.) will be to extend this exemption to ex-Australian income derived by United States employees who are engaged in Australia on activities connected with the Joint Defence Space Research Facility and the Sparta project during the period in which they are so engaged.
Sub-section (4.) of section 23AA ensures that the exemptions authorised by the section do not have a wider range than is required by the relevant agreements.
The sub-section applies in relation to persons (including companies) or a third country who may fall within the definitions of a foreign contractor, foreign employee or civilian accompanying the United States Forces, or a dependant of any such person, 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 are not 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 in Australia, e.g., from a contract relating to any one of the projects falling within the definition of an approved project, is not exempt under section 23AA because the income tax law of the United States will not apply in relation to the income).
The amendment proposed by paragraph (i) of clause 4 will ensure that sub-section (4.) has the same effect in relation to a United States employee as it has in relation to the other classes of persons now referred to in the sub-section.
By paragraph (j) of clause 4 it is proposed to amend sub-section (6.) of section 23AA to provide an exemption for a United States employee.
Paragraph (a) of the sub-section now specifies the income which may qualify for exemption. 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 purposes relating to activities agreed upon by the Governments of Australia and the United States.
By virtue of the amendment proposed, an exemption will also be provided for income derived by a United States employee in respect of his service as such during a period in which he is in Australia solely for purposes relating to activities connected with the Joint Defence Space Research Facility or the Sparta project.
The exemption is conditional upon the income not being exempt from the income tax of the Government of the United States.
By clause 16 of the Bill, the amendments made by clause 4 will apply in assessments for the 1965/66 income year and subsequent years.
Clause 5: Moneys Paid on Shares for the Purposes of Petroleum Exploration.
This clause proposes an amendment to section 77A of the Principal Act to extend the operation of the section for a further period of three years from 1st July, 1967.
Section 77A 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 section applies where a petroleum exploration company furnishes to the Commissioner of Taxation a declaration that moneys received by it as share capital and specified in the declaration have been, or will be, expended in carrying on prospecting or mining operations for the purpose of discovering or obtaining petroleum in Australia or the Territory of Papua and New Guinea or on plant necessary for carrying on these operations.
Provision is also made to meet certain cases where a company that has received share capital does not itself expend the moneys in petroleum exploration or mining operations but contributes it as share capital to a company that does expend the moneys for that purpose. If the appropriate declarations are furnished section 77A may also, in these circumstances, entitle resident shareholders in the first company to a deduction for the moneys paid to it as share capital.
Where the Commissioner is satisfied that the moneys specified in a declaration under section 77A have been, or will be, expended in accordance with a declaration furnished to him, the declaration has 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; and
- (b)
- the deductions for capital expenditure on petroleum prospecting or mining operations and plant necessary for those operations to which the company would otherwise be entitled when it produces petroleum in commercial quantities, are reduced by the amounts specified in the declarations.
Sub-section (18.) of section 77A places a time limit on the operation of the section. The amendment will extend the operation of the section beyond the present expiration date - 30th June, 1967 - to 30th June, 1970.
Clause 6: Moneys Paid on Shares for the Purposes of Certain Mining or Prospecting
This clause will extend the operation of section 77AA for a period of three years from 1st July, 1967.
Under section 77AA residents of Australia or the Territory of Papua and New Guinea are, in certain circumstances, entitled to deductions for moneys subscribed as paid-up capital on shares in companies whose principal business is prospecting or mining in Australia or the Territory for minerals other than gold, uranium and oil.
Entitlement to these deductions is conditional upon the company to which the capital is subscribed declaring that the money has been, or will be, used in prospecting or mining for minerals other than gold, uranium and oil. Where a company duly makes such a declaration, the deductions to which it would otherwise be entitled for capital expenditure in respect of its mining operations are correspondingly reduced.
Sub-section (9.) of section 77AA places a time limit on the operation of the section. The amendment proposed in this provision will extend the operation of the section beyond the present expiration date - 30th June, 1967 - to 30th June, 1970.
Clauses 7 to 14 : Dividend Withholding Tax.
Clauses 7 to 14 propose amendments to provisions of the Principal Act relating to the dividend withholding tax on dividends paid by Australian resident companies to non-resident shareholders. The amendments will withdraw the option that a non-resident shareholder now has to elect to have dividends included in his assessable income and taxed on an ordinary assessment basis. In addition, residents of Australian external territories will be excluded from liability for the withholding tax on dividends. The amendments will apply in relation to dividends derived on or after 1st July, 1967.
A non-resident shareholder, other than a shareholder resident in the Territory of Papua and New Guinea, is liable for dividend withholding tax on dividends he receives from Australian companies. In general, dividend withholding tax is deducted by the company paying the dividend and remitted to the Commissioner of Taxation.
The general rate of dividend withholding tax is 30 per cent of the dividend. A rate of 15 per cent is, however, applied to dividends paid to residents of the United Kingdom, the United States of America, Canada and New Zealand where this is appropriate in accordance with agreements concluded by Australia with those countries for the relief of double taxation.
Under the present law a non-resident shareholder may elect to pay tax on his Australian dividends under the general assessment provisions of the Principal Act, rather than accept the withholding tax as the final tax on the dividends. Where a dividend is included in assessable income as a result of a shareholder exercising this right of election, the rate of tax payable in respect of the dividend is, broadly, the lesser of the general rate payable on an ordinary assessment basis and the rate of the dividend withholding tax paid on the dividend. Any excess of the withholding tax over the tax payable on the dividends under an assessment basis is repaid to the shareholder.
The proposal to withdraw the option of a non-resident shareholder to elect to have dividends included in assessable income will mean that the dividend withholding tax will be a final tax on dividends paid to non-residents.
Under the present law, shareholders resident in Norfolk Island, Cocos (Keeling) Islands, Christmas Island, and Nauru are treated as non-residents of Australia for the purposes of dividend withholding tax.
Dividends derived by residents of these territories from Australian companies are, therefore, generally subject to withholding tax at the rate of 30 per cent. As with other non-residents, they may elect to have the dividends taxed on an ordinary assessment basis. In the event of such an election being made, they are eligible for the same concessional deductions and pay the same rates of tax as Australian residents.
The proposal to exclude residents of the territories from liability for withholding tax on dividends derived from Australian companies will mean that these taxpayers are taxed on their income from Australia, including dividends, on the same basis as now applies to taxpayers who are resident in Australia or in the Territory of Papua and New Guinea. More detailed explanations of each of the clauses 7 to 14 of the Bill follow.
This clause proposes amendments to section 128A of the Principal Act which contains provisions relevant to the interpretation of the Division of that Act which imposes liability for dividend withholding tax - Division 11A.
By paragraph (a) of clause 7, it is proposed to replace the present definition of the term "non-resident" in sub-section (1.) of section 128A of the Principal Act with a new definition of that term.
The existing definition does not include a resident of the Territory of Papua and New Guinea. In consequence, residents of that Territory are not liable for dividend withholding tax, but are subject to tax by assessment in the ordinary way.
Under the new definition a resident of Norfolk Island, Cocos (Keeling) Islands, Christmas Island and Nauru will not be treated as a non-resident for the purposes of the withholding tax. The practical effect of the amendment will be to exclude dividends paid to residents of these territories from the scope of that tax. The present position in relation to the residents of the Territory of Papua and New Guinea will not be disturbed.
Paragraph (b) of clause 7 proposes to omit from sub-section (3.) of section 128A a reference to section 226 of the Principal Act. Sub-section (3.) of section 128A is a drafting measure relating to the expressions "income tax" and "tax". It enumerates the provisions of the Principal Act in which those words are to be taken to include dividend withholding tax. Stated briefly, the expressions "income tax" and "tax" include dividend withholding tax in sections which are concerned with the collection of tax, the omission of income from returns or statements, arrangements to avoid tax and the granting of relief from payment of tax in cases of serious hardship.
On withdrawal of the option of non-residents to elect to be assessable on dividends derived from Australian companies, it will no longer be appropriate for the reference to "tax" in the provisions of section 226 - which imposes tax additional to tax assessable in certain cases such as where there is a failure to duly furnish correct returns or information - to include dividend withholding tax. This is because the tax on dividends derived by non-residents on or after 1st July, 1967 will not be subject to tax by assessment in any circumstances. Accordingly, the reference to this section in sub-section (3.) of section 128A is being removed in relation to dividends derived on or after 1st July, 1967.
Clause 8: Non-resident Dividend Income Not Included in Assessable Income
Clause 8 proposes the repeal of section 128D of the Principal Act and the insertion of a new section in its place, the effect of which will be to make the dividend withholding tax the final tax on dividends derived by non-residents.
The present section 128D states, in effect, that dividends subject to withholding tax are not also subject to tax by assessment unless the taxpayer has so elected, in which case the dividend withholding tax is - under section 128E - allowed as a credit against the tax assessed.
With the withdrawal of the option of non-residents to elect to be assessed on dividends the new section 128D will simply state that dividends subject to withholding tax are not subject to tax by assessment.
The new section 128D will apply in relation to dividends derived by non-residents on or after 1st July, 1967. The old section will remain in operation as to dividends derived before that date.
Clause 9: Credits and Rebates Where Election Made.
Clause 9 proposes the repeal of section 128E of the Principal Act, which has already been referred to in these notes. As indicated earlier, section 128E applies where a non-resident shareholder who has derived a dividend subject to withholding tax has elected to have the dividend treated as assessable income.
In these circumstances, section 128E authorises the allowance of a credit for withholding tax deducted from the dividend against the tax assessed. It also provides for the allowance of a rebate, where necessary, to ensure that the ultimate liability of the shareholder for Australian tax does not exceed the amount that would have been payable if no election had been made.
The removal of the option for non-residents to be assessed on dividends derived on or after 1st July, 1967, renders the provisions of section 128E unnecessary in relation to such dividends and it is accordingly being repealed. It will, of course, remain in operation in relation to dividends derived before 1st July, 1967.
Clause 10: Amendment of Assessments.
This clause proposes an amendment to sub-section (10.) of section 170 of the Principal Act. That section, which sets out circumstances in which an assessment may be amended, provides, inter alia, that an amendment to an assessment may be made at any time to give effect to an election made under section 128D of the Principal Act to have non-resident dividend income included in assessable income.
This provision will be redundant in relation to dividends derived by a non-resident on or after 1st July, 1967 in consequence of the withdrawal of the option of a non-resident shareholder to make such an election. Clause 10 therefore proposes the omission of the present reference to sub-section (4.) of section 128D in sub-section (10.) of section 170 of the Principal Act.
The amendment will not disturb the rights of shareholders who derived dividend income before 1st July, 1967 to have assessments amended in order to give effect to an election to have such dividends included in assessable income for the year of income ended 30th June, 1967 or an earlier year.
Clause 11: Provisional Tax Not Payable in Respect of Non-Resident Dividend Income.
Clause 11 proposes the repeal of section 221YAB of the Principal Act which authorises the exclusion of non-resident dividend income from the calculations necessary to ascertain the amount of provisional tax (if any) payable by a non-resident in receipt of dividends from Australian companies.
By virtue of the amendments proposed by clause 8, a non-resident shareholder will not be entitled to elect to have dividends derived on or after 1st July, 1967 included in his assessable income. These dividends will not, therefore, be taken into account in any assessment of other income derived from Australian sources by such a taxpayer. In these circumstances the dividends will not affect any calculation of provisional tax payable in respect of that other income.
Accordingly, the present provisions of section 221YAB are no longer necessary and are being repealed.
Clause 12: Amount of Provisional Tax.
This clause proposes a minor drafting amendment to section 221YC(5.) of the Principal Act and is complementary to clause 11.
The amendment is consequential upon the proposed withdrawal of the option of a non-resident shareholder to elect to have non-resident dividend income derived on or after 1st July, 1967 included in assessable income. Such dividends will not be taken into account in calculating the provisional tax payable by a non-resident and it will not, therefore, be necessary for the present reference to non-resident dividend income in section 221YC(5.) to be retained.
Clause 13 proposes to amend section 221YK of the Principal Act by inserting definitions of the words "Australia" and "non-resident" in sub-section (1.) of the section.
These definitions will have effect for the purposes of Division 4 of Part VI. of the Principal Act which provides machinery for the collection of dividend withholding tax. The tax is, in general, collected by means of deductions made by Australian companies from dividends at the time they are paid to non-residents. The amounts deducted are then remitted to the Commissioner of Taxation in payment of the dividend withholding tax due on the dividends.
For the purpose of the collection of dividend withholding tax "Australia" will include Papua and New Guinea, Norfolk Island, Cocos (Keeling) Islands, Christmas Island and Nauru. The new definition of "non-resident" is a complementary amendment in that this term will not include a resident of any of those territories.
The insertion of the two definitions will mean that a company paying dividends on or after 1st July, 1967 to a shareholder whose address is shown in the share register as being in one of the territories will not be required to make a deduction of withholding tax from the dividends. This is consistent with the amendment proposed by clause 7 to section 128A(1.) of the Principal Act the effect of which is to free residents of the territories from a liability for withholding tax on dividends derived on or after 1st July, 1967 and to render all such dividends subject to tax on the ordinary assessment basis.
Clause 14: Deductions from Dividends.
This clause proposes some drafting amendments to section 221YL of the Principal Act. One of the amendments is a consequence of the enactment of the Post & Telegraph Act 1966. That Act repealed provisions relating to postal notes and provided for the issue of postal orders. The clause will omit a reference in section 221YL to "postal notes" and substitute for it a reference to "postal orders".
Clause 14 will also omit the definitions of "Australia" and "non-resident" at present appearing in sub-section (5.) of section 221YL. It is proposed by clause 13 of the Bill that these definitions be inserted in sub-section (1.) of section 221YK of the Principal Act.
Clause 15: Calculation of Provisional Tax Payable in Respect of Year of Income Commencing on 1st July, 1967.
This clause, which will not amend the Principal Act, is a transitional provision related to the calculation of provisional tax payable by a non-resident in respect of the year of income ending 30th June, 1968. Its purpose is to authorise the ascertainment of the provisional tax for that year without regard to dividends paid by Australian companies to the non-resident during the year of income ending on 30th June, 1967 where he has elected to have those dividends included in his assessable income for that year of income.
Clause 16: Application of Amendments.
Amendments proposed by this Bill will commence to apply as enacted by Clause 16. The year to which each amendment will first apply, or the date on which an amendment will commence to apply, has been stated in the notes explaining the relevant clauses of the Bill.
INCOME TAX (INTERNATIONAL AGREEMENTS) BILL 1967.
This is the second of the measures explained in this memorandum.
The amendments proposed in the Bill are consequential on the proposal to amend the Income Tax Assessment Act to give effect to agreements with the United States Government relating to the Joint Defence Space Research Facility and the Sparta project as far as those agreements relate to income tax matters.
Clause 1: Short Title and Citation.
This clause formally provides for a short title and citation of the Amending Act and the Income Tax (International Agreements) Act as amended.
This clause provides that the Amending Act shall have effect as from 30th March, 1966, the day on which the agreement relating to the Sparta project was signed. In the absence of this clause the Amending Act would, by reason of section 5(1A.) of the Acts Interpretation Act 1901-1966, come into operation on the twenty-eighth day after it has received the Royal Assent.
Clause 3: Certain Foreign Contractors Deemed Not to be Trading Through Permanent Establishments in Australia.
By clause 3 it is proposed to amend section 19A of the Income Tax (International Agreements) Act 1953-1966.
The purpose of section 19A is to ensure that a foreign contractor (as defined in sub-section (1.) of section 23AA of the Income Tax 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 Australian 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 per cent 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, the Joint Defence Space Research Facility or the Sparta 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 provisions of section 19A of the Income Tax (International Agreements) Act, be entitled to the reduced rate on dividends from Australian sources.
By section 19A, a foreign contractor who is a United States resident and carrying on business in Australia solely for prescribed purposes continues 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.
Paragraph (a) of clause 3 will effect an amendment to sub-section (2.) of section 19A.
That sub-section is designed to ensure that a foreign contractor will not be deprived of the reduced rate on dividends by virtue of his engagement on any 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.
The North West Cape project will now be included b definition in the term "approved project" in sub-section (1.) of section 23AA of the Income Tax Assessment Act along with the Joint Defence Space Research Facility and the Sparta project. The reference to the North West Cape project is, therefore, being deleted from sub-section (2.) and replaced by the defined term.
The practical effect of the amendment is that a foreign contractor engaged on the North West Cape project, the Joint Defence Space Research Facility or the Sparta project will not be deprived of the reduced rate on dividends by virtue of his engagement on another agreed project.
Paragraph (b) of clause 3 will effect a drafting amendment in sub-section (3.) of section 19A which defines several expressions used in sub-section (1.).
Paragraph (a) of sub-section (3.) of section 19A provides that certain terms, including "the North West Cape naval communication station" used in the section have the same meanings as in section 23AA of the Income Tax Assessment Act. The amendment proposed will omit the reference to the North West Cape project and insert the term "approved project" in its stead. As already mentioned, this term embraces the North West Cape project, the Joint Defence Space Research Facility and the Sparta project.
ESTATE DUTY ASSESSMENT BILL 1967.
This is the third taxation Bill referred to in the introductory part of this memorandum. Its general purpose has already been explained at page 2 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.
Section 5(1A.) of the Acts Interpretation Act 1901-1966 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act.
The purpose of this Bill is to give effect to an exemption to be granted in pursuance of an agreement between the Governments of Australia and the United States of America relating to the establishment in Australia of the Joint Defence Space Research Facility. Sub-clause (2.) of Clause 2 proposes, therefore, that the exemption will be deemed to have come into operation on the day on which that agreement was signed - 9th December, 1966.
Clause 3: Estates of Certain Persons Connected With Projects of the United States Government.
By this clause it is proposed to effect certain amendments to section 8AA of the Principal Act.
Stated broadly, section 8AA as it now stands exempts 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 in the agreements referred to in the section. These are agreements between the Governments of Australia and the United States of America concerning the establishment of a United States naval communication station at North West Cape and the status of United States Forces in Australia.
An important condition of the exemption is that it does not apply unless the personal property is within the scope of the estate tax of the United States Government. The practical effect of this is that the Australian exemption applies only as regards the estates of persons who were citizens of, or ordinarily resident in, the United States of America. The exemption from Commonwealth estate duty does not apply to real property situated in Australia nor to personal property here in the nature of an investment.
The designated persons now referred to in section 8AA comprise members of the United States Forces, civilians accompanying those Forces, certain foreign contractors, foreign employees of those contractors, and dependants of any of those classes of persons. The foreign contractors and foreign employees are those who are in Australia in connection with the establishment, operation or maintenance of the North West Cape naval communication station. Australian citizens and persons ordinarily resident in this country are specifically excluded from the scope of the exemption.
In accordance with the agreement of 9th December, 1966 between Australia and the United States, it is proposed to extend the provisions of section 8AA of the Principal Act to certain personal property that is in Australia solely by reason of the presence in this country of designated persons and their dependants for the purpose of performing contracts or carrying out duties in connection with the establishment, operation or maintenance of the Joint Defence Space Research Facility. Those persons are civilian employees of the United States Government, foreign contractors and foreign employees of those contractors.
Paragraphs (a), (b), (c), (d), (e) and (f) of clause 3 will effect amendments to definitions in sub-section (1.) of section 8AA that, with one exception, are identical with the amendments proposed to sub-section (1.) of section 23AA of the Income Tax Assessment Act by the associated income tax measure - see pages 4 to 6 of this memorandum. The exception is the definition of "approved project" to be inserted by paragraph (a). For estate duty purposes this definition will refer to the North West Cape naval communication station and the Joint Defence Research Facility but not to the Sparta project.
The explanations given in respect of the income tax amendments have equal application to the amendments proposed to corresponding provisions in section 8AA subject to the difference in the definition of "approved project" mentioned above.
Paragraph (g) will omit sub-section (2.) of section 8AA of the Principal Act and insert a new sub-section in its stead.
The present sub-section ensures that the estate of a deceased foreign contractor or foreign employee does not lose exemption in respect of certain personal property merely because 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 practical effect of the amendments proposed in the sub-section will be to extend this principle to a foreign contractor, a foreign employee or a United States employee engaged in connection with agreed projects in addition to the Joint Defence Space Research Facility.
It should be noted that sub-section (2.) has no effect on liability to Commonwealth estate duty as regards personal property which was held in Australia by a contractor or employee in connection with his engagement on an agreed project other than the North West Cape project and the Joint Defence Space Research Facility.
Paragraph (h) of clause 3 will amend sub-sections (3.), (4.) and (5.) of section 8AA to extend the operation of these sections to a United States employee, i.e., an employee of the United States Government who is not a member of the United States Forces, a civilian accompanying those Forces, an Australian citizen or ordinarily resident in Australia.
Broadly stated, sub-section (3.) of section 8AA provides that 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 persons, 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 more of the relevant agreements. Consequently the estate of such a person does not, subject to sub-section (4.) explained in succeeding paragraphs, include any personal property situated outside Australia. Such property is liable to duty only if included in the estate of a person who was domiciled in Australia.
Sub-section (4.) of section 8AA of the Principal Act restricts the application of sub-section (3.) 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. A person not meeting this test 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 is not, in these circumstances, affected by the relevant agreements or by section 8AA.
Sub-section (5.) of section 8AA of the Principal Act is the operative provision which excludes certain personal property from the dutiable value of the estate of a person of the classes specified in sub-section (1.) of the section.
The sub-section applies 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 in the relevant agreements. It also applies to the estate of a deceased dependant of one of those persons.
Property excluded from an estate by sub-section (5.) 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.
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.
The amendments proposed by paragraph (h) will bring a United States employee engaged in Australia on activities connected with the Joint Defence Space Research Facility (and his dependants) within the classes of persons covered by subsections (3.), (4.) and (5.).
GIFT DUTY ASSESSMENT BILL 1967
This is the fourth taxation Bill referred to in the general introduction to this memorandum. Its general purpose has already been explained at page 2 of this memorandum and explanatory notes dealing with 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.
Section 5(1A.) of the Acts Interpretation Act 1901-1966 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act.
Clause 2 provides that the Amending Act shall be deemed to have come into operation on the same day as the related estate duty amendments - 9th December, 1966.
Clause 3: Gifts Made by Certain Persons Connected With Projects of the United States Government.
By this clause it is proposed to amend section 15 of the Principal Act to give effect, insofar as gift duty is concerned, to terms of the agreement with the United States Government relating to the establishment of the Joint Defence Space Research Facility in Australia.
In broad terms, section 15 at present exempts from Commonwealth gift duty gifts of certain personal property that is in Australia solely by reason of the presence of designated persons in this country for the purpose of performing contracts or carrying out duties described in the agreements referred to in the section. These are agreements between the Governments of Australia and the United States of America concerning the establishment of a United States naval communication station in Australia and the status of United States Forces in Australia.
An important condition of the exemption is that it does not apply unless the personal property is within the scope of the gift tax of the United States Government. The practical effect of this is that the Australian exemption applies only as regards gifts made by persons who are citizens of, or ordinarily resident in, the United States of America. The exemption from Commonwealth gift duty does not apply to real property situated in Australia nor to personal property here in the nature of an investment.
The designated persons now referred to in section 15 of the Principal Act comprise members of the United States Forces, civilians accompanying those Forces, certain foreign contractors, foreign employees of those contractors, and dependants of any of those classes of persons. The foreign contractors and foreign employees are those who are in Australia in connection with the establishment, operation or maintenance of the North West Cape naval communication station. Australian citizens and persons ordinarily resident in this country are specifically excluded from the scope of the exemption provided by section 15.
In accordance with the agreement of 9th December, 1966 between Australia and the United States, it is proposed to extend the provisions of section 15 to certain personal property that is in Australia solely by reason of the presence in this country of designated persons and their dependants for the purpose of performing contracts or carrying out duties in connection with the establishment, operation or maintenance of the Joint Defence Space Research Facility. Those persons are civilian employees of the United States Government, foreign contractors and foreign employees of those contractors.
Paragraphs (a), (b), (c), (d), (e) and (f) of clause 3 propose amendments to sub-section (1.) of section 15 that, with one exception, are identical with amendments proposed to sub-section (1.) of section 23AA of the Income Tax Assessment Act and which are explained at pages 4 to 6 of this memorandum. The exception is the definition of an "approved project" which, for gift duty purposes, refers to the North West Cape naval communication station and the Joint Defence Space Research Facility but not to the Sparta project.
Subject to this difference in the definition of "approved project", the explanations given on the income tax amendments have equal application to the amendments proposed in sub-section (1.) of section 15 of the Principal Act.
Paragraph (g) of clause 3 will omit sub-section (2.) of section 15 of the Principal Act and insert a new sub-section in its stead.
The present sub-section ensures that a foreign contractor or employee is not deprived of an exemption from gift duty otherwise available, merely because 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 amendments proposed in the sub-section will extend this principle to a foreign contractor, a foreign employee or a United States employee who is engaged on an agreed project in addition to the Joint Defence Space Research Facility.
The sub-section does 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 an agreed project other than the North West Cape project and the Joint Defence Space Research Facility.
Paragraph (h) of clause 3 will amend sub-sections (3.), (4.) and (5.) of section 15 of the Principal Act to include in those provisions a reference to a United States employee, i.e., an employee of the United States Government who is not a member of the United States Forces, a civilian accompanying those Forces, an Australian citizen or ordinarily resident in Australia.
Sub-section (3.) provides, broadly, 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. The effect is that such a person could not be liable to Commonwealth gift duty in respect of a gift of ex-Australian property. Such gifts are dutiable only if made by persons domiciled in this country.
Sub-section (4.) of section 15 restricts the application of sub-section (3.) 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. A person not meeting this test would not be subject to the gift tax law of the United States Government.
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, continues to be determined according to the general law of domicile. In these cases, liability for Commonwealth gift duty is not affected by the relevant agreements or by section 15.
Sub-section (5.) of section 15 exempts from gift duty a gift made by a person of certain personal property that, at the time the gift was made, was held in Australia solely by reason of his having been, at that time, a person within the categories mentioned.
At present the exemption under section 15 of the Principal Act from gift duty is restricted to foreign contractors, foreign employees, members of the United States Forces and civilians accompanying the United States Forces who are in Australia solely for prescribed purposes, and dependants of those persons.
The amendments proposed by paragraph (h) will mean that sub-sections (3.), (4.) and (5.) of section 15 of the Principal Act will also apply to a United States employee who is in Australia solely for purposes connected with the Joint Defence Space Research Facility, and dependants of such an employee.