House of Representatives

Explanatory Memorandum

(Circulated by the Treasurer, the Rt. Hon. William McMahon)

Notes on Clauses

Clause 1: Short Title and Citation.

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

Clause 2: Commencement.

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 this clause it is proposed that the Amending Act shall come into operation on the day it receives the Royal Assent.

Clause 3: Interpretation.

This clause proposes an amendment of section 6 of the Principal Act which contains definitions of words and phrases used in that Act.

Paragraph (a) proposes a drafting amendment to the definition of "petroleum". The new definition conforms with the definition used in the Petroleum (Submerged Lands) Act 1967-1968 and will cover not only naturally occurring hydrocarbons but also a mixture of hydrocarbons and other substances that are sometimes encountered in the course of petroleum mining operations.

Paragraph (b) proposes a drafting amendment to the definition of "petroleum prospecting or mining right" which is consequential upon the enactment of the Petroleum (Submerged Lands) Act 1967-1968.

Prior to the enactment of the Commonwealth off-shore legislation in 1967, rights to prospect or mine for any minerals were granted under State or Territory laws and the existing definition of "petroleum prospecting or mining right" refers only to rights granted under such laws. With the enactment of the Petroleum (Submerged Lands) Act 1967-1968, this situation has changed. Rights to prospect or mine for petroleum in Australian off-shore areas are now conferred under the relevant State or Territory law and under the Commonwealth law. The amended definition reflects this position.

Clause 4: Continental Shelf to be Treated as Part of Australia for Certain Purposes.

Introductory Note

This clause proposes the insertion in the Principal Act of a new section - section 6AA - relating to the exploration for, and the exploitation of, petroleum resources on the continental shelf of Australia, and associated activities.

Under the present income tax law, it is a general rule that residents of Australia are subject to Australian tax on income from all sources, both inside and outside Australia. On the other hand, non-residents are subject to Australian tax only on income that has a source in Australia.

The provisions of the new section 6AA are designed to make it clear -

(a)

that Australia has the right to tax income derived from, or in connection with, petroleum exploration or mining activities on the continental shelf when the income is derived by a person who is not a resident of Australia for income tax purposes; and

(b)

that taxpayers, both resident and non-resident, are entitled to the same income tax deductions, including the special deductions available for capital expenditure incurred in petroleum exploration and mining, as they would be if their operations were carried out on the Australian mainland.

For this purpose the off-shore "adjacent areas" as specified in the Petroleum (Submerged Lands) Act 1967-1968, other than areas adjacent to the Territory of Papua and New Guinea, will be treated as a part of Australia. The amendment proposed will not affect the taxing rights of the Territory of Papua and New Guinea as to its continental shelf.

The expanded definition of Australia will have effect in respect of petroleum exploration or mining operations on the continental shelf and also activities associated directly or indirectly with those operations. Thus, the income from a petroleum drilling contract, or the remuneration of a non-resident employee working on an off-shore rig, will, to the extent that it has a source on the continental shelf, be treated as having a source in Australia.

The new provision will apply to income derived from petroleum mining and associated activities on the continental shelf as from the date of introduction of the Bill into Parliament. It will also apply to past and future expenditures incurred in petroleum exploration or mining on the continental shelf; for the 1968-69 income year and subsequent years enterprises producing petroleum from the shelf will be eligible for the special deductions provided in relation to such expenditure on the same basis as if the expenditure had been incurred on mainland operations.

Notes on each of the sub-sections of the proposed new section 6AA follow.

Section 6AA

Sub-section (1.) provides that, for all purposes of the income tax law related directly or indirectly to the exploration for, and the exploitation of, petroleum, or associated activities, the adjacent areas, other than the areas adjacent to the Territory of Papua and New Guinea, are to be treated as if they are, and always have been, a part of Australia.

The term, "adjacent area", is defined in sub-section (4.) of the section. Broadly, it is a delineated area of territorial and continental shelf waters specified in the Second Schedule to the Petroleum (Submerged Lands) Act 1967-1968 as being adjacent to a particular State or Territory.

Income derived from petroleum mining in an adjacent area of Australia will, therefore, be taxed on the same basis as if it were derived from operations carried out on the mainland. Income earned from any activities associated with petroleum exploration or mining in an adjacent area of Australia will also be taxed on that basis. This would include, for example, income earned under a contract to drill for petroleum in an adjacent area, shipping freights for the carriage of oil from a well in an adjacent area, insurance premiums paid in respect of property located on a petroleum establishment in an adjacent area, etc. Dividends paid out of profits earned from petroleum mining in an adjacent area, or from activities associated with petroleum exploration or mining in an adjacent area, will also be subjected to Australian tax on the same basis as dividends paid out of profits earned from mainland operations.

Areas adjacent to the Territory of Papua and New Guinea will not be treated as part of Australia. Accordingly, the taxing rights of the Territory in respect of income earned from activities associated with petroleum exploration or mining on its continental shelf will not be disturbed by the amendments proposed.

Although it is provided in sub-section (1.) that an adjacent area is to be treated as if it has always been part of Australia, this is modified by sub-section (3.) in relation to income earned before the introduction of the Bill into Parliament - see notes on sub-section (3.). The retrospective operation of the provision will, therefore, have a practical effect only in respect of expenditures.

Special deductions are authorised by the income tax law for capital expenditure incurred in exploring for, or mining, petroleum in Australia or the Territory of Papua and New Guinea. The deductions are allowable to an enterprise producing petroleum in Australia or the Territory from income it derives from the sale of that petroleum. It is proposed that these deductions will be available from petroleum income earned in the 1968-69 income year and subsequent years for both past and future expenditures incurred in exploring for, and mining, petroleum in the adjacent areas of Australia or the Territory of Papua and New Guinea.

Sub-section (2.) is designed to meet a particular type of situation involving the determination of the residence of a company for Australian income tax purposes.

Broadly, a company is a resident of Australia for income tax purposes if it is incorporated in Australia, or if, not being incorporated in Australia, the company carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

Cases could occur where a company that has not been incorporated in Australia, but whose voting power is controlled by Australian shareholders, is engaged in operations on the continental shelf but does not carry on business on the mainland. The purpose of sub-section (2.) is to ensure that such a company is treated as a resident of Australia in the same way as any other similar company which is carrying on a mainland business.

Sub-section (3.) modifies the operation of sub-section (1.) in relation to income derived from activities associated with petroleum exploration or mining operations on the continental shelf before the introduction of the Bill into Parliament.

As already explained, sub-section (1.) will require that, for income tax purposes generally, adjacent areas of Australia are to be treated as if they had at all times been part of this country. Sub-section (3.) specifically provides, however, that the section is not to operate so as to include in the assessable income of a person any income derived before the Bill was introduced into Parliament that would not otherwise have been included. To date, there has been no commercial production of petroleum on the continental shelf.

Sub-section (4.) contains definitions relevant to the interpretation of the term "adjacent area" for the purposes of section 6AA.

Basically, an adjacent area is an area specified in the Second Schedule to the Petroleum (Submerged Lands) Act 1967-1968 as being adjacent to a State or Territory of the Commonwealth. These areas are illustrated in maps attached to the agreement between the Commonwealth and State Governments in relation to exploration for, and exploitation of, petroleum on Australia's continental shelf.

In relation to the Territory of Ashmore and Cartier Islands, the adjacent area is deemed to include both the land and the surrounding territorial waters. These islands are, by virtue of the Ashmore and Cartier Islands Acceptance Act, part of the Northern Territory. However, under the legislation relating to exploration for, and exploitation of, petroleum on the continental shelf, the adjacent area belonging to the Territory of Ashmore and Cartier Islands is separate from the Northern Territory adjacent area. The proposed income tax provisions are consistent with that legislation.

It is also specifically provided that an adjacent area is to be construed as including the land below the waters of such an area and the air space above those waters. The term thus includes the sea-bed and sub-soil in which drilling may be done and from which petroleum may be recovered and the air apace above in which aeromagnetic surveys may be carried out by enterprises searching for petroleum.

Clause 5: Taxpayer Resident in Territories.

By this clause it is proposed to repeal special provisions of the Principal Act governing the taxation of residents of Nauru which were enacted when that country was a territory of the Commonwealth.

Under the present law -

(a)

a person working in Nauru who remains a resident of Australia for income tax purposes is exempt from Australian tax on his Nauruan earnings; and

(b)

a person living in Nauru is taxed on Australian income (other than dividends or interest on which he pays withholding tax) as if he were a resident of Australia; this entitles him to concessional deductions for the maintenance of dependants, for medical expenses, etc.

An effect of these provisions is that Australian residents to whom the tax exemption applies are not entitled to maternity allowances or child endowment under the Social Services Act. The persons mainly affected by the exemption are Commonwealth public servants and others recruited in Australia to serve the Nauruan Administration or the British Phosphate Commission.

The Nauru Independence Act 1967 provided that, as from Nauru Independence Day (31 January 1968), all legislation that extended to Nauru as a territory of the Commonwealth ceased to so extend. However, for technical reasons, the Independence Act did not end the operation of the special provisions of the income tax law relating to Nauru.

It is now proposed to withdraw those special provisions, with effect from 1 July 1968, so that Nauru is placed in the same position, for Australian income tax purposes, as any other country. A resident of Australia working in Nauru will, in consequence, be subject to Australian tax on his Nauruan earnings. On the other hand, he will be eligible for social services benefits that he does not now receive. A resident of Nauru who derives income from sources in Australia will not be entitled to concessional deductions for dependants, etc. unless he is also an Australian resident for income tax purposes.

The amendments proposed by clause 5 will apply in respect of the income of the income year 1968-69 and subsequent years.

Clause 6: Officers to Observe Secrecy.

Clause 6 proposes an amendment of the secrecy provisions of the Principal Act to require the Commissioner of Taxation, at the request of the Treasurer, to provide a Minister of the Crown with information on matters that the Treasurer is satisfied is necessary for an effective review of the operation of the export market development allowance scheme by the Government. The Commissioner will also be required, at the request of the Treasurer, to provide such information to the Secretary of the Department of the Treasury and the Secretary of the Department of Trade and Industry. Officers of these Departments will be placed under the same obligation to maintain secrecy in relation to any information furnished to them by the Commissioner as is now imposed on taxation officers.

Clauses 7 and 8: Concessional Deductions.

The amendments proposed by these clauses are consequential upon the amendments explained in connection with clause 5 of the Bill. These clauses will remove references to Nauru from sections 82AA and 82D of the concessional deduction provisions of the Principal Act. As explained in the notes on clause 5, the amendments proposed in relation to Nauru follow Nauru's independence and are designed to place residents of that country in the same position, for Australian income tax purposes, as residents of any other country.

Clause 9: Rebate for Export Market Development Expenditure.

Introductory Note

By clause 9, it is proposed to insert in the Principal Act a new section - section 160AC - which will continue the operation of the export market development allowance - with certain modifications - for a further period of five years from 1 July 1968.

Present Law

Section 51AC of the Principal Act provides for the allowance of a special deduction for specified classes of expenditure incurred before 1 July 1968 primarily and principally in the promotion of exports of Australian goods and services. The special deduction is also available if the expenditure was incurred to promote the grant or assignment of rights existing outside Australia in patents, trademarks, designs or copyright.

This deduction is additional to the deductions available for the expenditure under the general provisions of the Principal Act. The overall effect is that for each one dollar of eligible expenditure, the taxpayer is entitled to a total deduction from assessable income of two dollars. Allowance in full of the special deduction is subject, however, to the proviso that the total saving in tax resulting from the double deduction does not in any case exceed eighty cents for each dollar of eligible expenditure.

Shortly stated, the classes of expenditure to which the special deduction applies are the cost of -

Carrying out market research or obtaining market information;

Advertising, securing publicity or soliciting business;

Supplying free samples or technical information to persons overseas;

Preparation and submission of tenders.

The special deduction is available only in relation to expenditure qualifying for deduction under -

Section 51 of the Principal Act as an expense incurred for the purpose of gaining the taxpayer's assessable income; or

Section 73(2.) of the Principal Act as a subscription, levy or contribution to an association for activities carried out on the taxpayer's behalf.

It does not extend to expenditure incurred for the purpose of gaining exempt income, expenditure of a capital nature or payments by way of commission on the sale of goods or the supply of services.

Where a taxpayer or his employees travel outside Australia for the purpose of promoting exports, the special deduction applies only to fares and not to outgoings on accommodation and entertainment. This limitation does not apply in relation to employees who are permanently stationed overseas. There is also a limitation on the special deduction in certain circumstances where fares are incurred in connection with two or more relatives travelling overseas at the same time.

Proposed New Law

Section 160AC will re-enact, in substance, the provisions of section 51AC. Broadly stated, the new features that will be introduced by section 160AC into the previous allowance for export market development expenditure are -

(a)

the special deduction for such expenditure will be replaced by a rebate of 42.5 cents for each dollar expended;

(b)

the rebate will be available for expenditure incurred during the five year period commencing 1 July 1968;

(c)

the total tax saving limitation will be increased from 80 cents for each dollar of expenditure to 87.5 cents;

(d)

any rebate entitlement for an income year that exceeds the tax payable by the taxpayer may be carried forward for seven years - in the same way as a loss can be carried forward under section 80 of the Principal Act - for allowance against the tax payable in a subsequent income year;

(e)

the classes of expenditure that may qualify for rebate will include export market development expenditure -

(i)

that would be deductible under section 51 or section 73(2.) of the Principal Act but for being incurred in the production of exempt income;

(ii)

that is of a capital or revenue nature and is incurred:

-

in promoting the disposal outside Australia of rights in relation to inventions, works, designs or other things, and certain classes of know-how, that have been developed to a substantial extent from research or other work carried out in Australia or for trademarks that were first used commercially in Australia;

-

in securing protection outside Australia for rights in relation to inventions, works, designs or other things that have been developed to a substantial extent from research or other work carried out in Australia or for trademarks that were first used commercially in Australia;

-

in the selection or designing of special labels and packaging for use exclusively in connection with the export of goods from Australia;

(f)

the new scheme will include additional safeguards designed to prevent unintended benefits being obtained from the export market development allowance.

Detailed explanations of the provisions of the proposed new section 160AC are given below.

Sub-section (1.) of the proposed section 160AC comprises definitions of several expressions used in the section. The sub-section re-enacts many of the definitions in section 51AC of the Principal Act for the purpose of the new export market development allowance scheme.

"Associated company"

This expression is used in the definition of "prescribed outgoings" to exclude from the expenditure eligible for rebate certain payments involving taxpayers not at arm's length, usually inter-related companies.

In consequence of this definition, any two companies will be regarded as associated companies if either controls, or is able to control, by direct or indirect means, the operations of the other.

There are also instances in which a parent company controls a number of subsidiary companies. Each subsidiary may be legally independent of every other subsidiary but the operations of the various subsidiaries may, nevertheless, be co-ordinated by reason of the control exercised by the parent company. The definition is accordingly designed to ensure that companies will be regarded as associated companies if their operations are controlled, or are able to be controlled, whether directly or indirectly, by the same person or persons.

"Container system unit"

This term is defined to mean containers, and ancillary fittings and equipment, which are designed for repeated use in the transport of goods by specially designed ships or aircraft without unloading or repacking. Generally, this special type of container would not be regarded, for export market development allowance purposes, as exported from Australia. It is proposed, however, that eligible expenditure to promote sales of this special type of container to overseas buyers, for use in ships or aircraft operating beyond Australia, will qualify for the allowance even though the containers may be returned to Australia from time to time.

"Disposal" is defined as a drafting measure to facilitate reference in the section to a sale, grant, assignment or supply of goods, industrial property rights, know-how or services.

"Export" is defined to ensure that, for the purposes of the rebate, exports do not include goods sent out of Australia by way of gift or, container system units excepted, with the intention that they will subsequently be returned to Australia.

"Export market development expenditure"

The proposed rebate is to be allowed in respect of expenditure satisfying the tests of this definition.

The first test is that the expenditure comprise "prescribed outgoings" which is a defined term explained later in these notes. It is also necessary that the expenditure be incurred primarily and principally in creating or seeking opportunities for the export of Australian goods, services, industrial property rights or know-how from Australia or in creating or increasing the demand outside Australia for Australian goods, services, industrial property rights or know-how.

For this purpose, paragraph (a) of the definition specifies goods that have been manufactured, produced, assembled, processed or packed, or graded and sorted in Australia. Expenditure promoting the export of goods which have undergone this kind of treatment in Australia may qualify under the definition, notwithstanding that the goods consist wholly or partly of imported materials or components. Expenditure relating to goods which are imported and subsequently re-exported in the same form as they entered Australia will not, however, come within the definition.

Paragraph (b) relates to expenditure to promote the supply of services outside Australia and includes the provision of technical advice such as may be provided under service agreements, educational and technical training or the provision of assistance in relation to construction projects, etc. The paragraph does not relate to disposals of know-how or the supply of services related to know-how or industrial property rights.

Under paragraph (c), the definition will include expenditure relating to the disposal (i.e., any sale, grant, assignment or supply) of industrial property rights or know-how for use outside Australia and the supply of services to facilitate the use of the rights or know-how. The disposal must be made in the course of carrying on business in Australia to persons resident outside Australia. It is also necessary for the industrial property rights and know-how to have resulted to a substantial extent from research or other work performed in Australia. "Industrial property rights" and "know-how" are defined terms which are explained later in these notes.

Paragraphs (d) and (e) contain specific exclusions from the definition of "export market development expenditure".

Paragraph (d) excludes from that definition expenditure incurred in promoting the sale of goods (other than goods specified in paragraph (a) of the definition) that are manufactured or produced outside Australia and which contain only a small proportion of Australian parts or materials. On the other hand, goods so manufactured or produced may come within the definition if the final product is comprised substantially of Australian components.

Paragraph (e) will ensure that the rebate is not available in respect of export market development expenditure incurred by a taxpayer where the taxpayer is paid or reimbursed for incurring the expenditure, for example, a market consultant who is paid a fee by a manufacturer to obtain market information. In such a case, the rebate would be allowable to the manufacturer in respect of the fee paid to the consultant but not to the consultant for the expenditure incurred by him in obtaining the information.

"Industrial property rights"

This term is used in the definitions of "export market development expenditure" and "prescribed outgoings". It means rights in relation to inventions, or copyright in relation to works, designs or other things, where the inventions, works, designs or things have been substantially developed by research or other work carried out in Australia. The term also extends to trademarks that have been used commercially in Australia if they have not, before that use, been used commercially in any other country. Expenditure incurred in obtaining protection overseas for industrial property rights (as defined) may qualify for the export market development allowance. The cost of promoting the disposal of these rights to persons outside Australia may also qualify for the allowance.

"Know-how"

The term "know-how", which is used in the definition of "export market development expenditure", is defined to mean scientific or technological knowledge or information relating to industrial operations. It includes drawings, models or other material things, or services, which are supplied to facilitate the use of industrial property rights or know-how. As already explained, expenses in promoting sales or the supply of know-how overseas will qualify as export market development expenditure only where the know-how has a substantial Australian origin, i.e., where it has, to a substantial extent, resulted from research or other work performed in Australia.

"Permanent employee"

This definition has relation to sub-sections (7.) and (12.) where two or more relatives travel overseas at the same time. In these circumstances, it is proposed that, as under the previous scheme, the export market development allowance will generally be available only in relation to fares in respect of the taxpayer and permanent employees or the taxpayer. Where fares are expended by a partnership, and partners who are relatives travel overseas at the same time, the fares in respect of only one partner and permanent employees of the partnership will, in the generality of cases, qualify for the allowance. For this purpose, "permanent employee" is defined to mean a person who has been a full-time employee of the taxpayer or the partnership for a continuous period of not less than five years immediately preceding the visit overseas.

"Prescribed agent"

This expression is used in paragraph (f) of the definition of "prescribed outgoings" and in sub-sections (7.) and (12.) in relation to expenditure incurred on overseas travel.

For the purposes of those provisions, "prescribed agent" will include the taxpayer himself, employees of the taxpayer and directors where the taxpayer is a company. Where the expenditure is incurred by a partnership, the term will include the partners and employees of the partnership and, if a company is a partner, directors of the company. Since an association may undertake overseas travel for export promotion on behalf of taxpayers, the definition extends also to members of the governing body and employees of the association.

"Prescribed outgoings"

This definition specifies the classes of expenditure in respect of which the export market development allowance will be available. In each instance, eligibility for the allowance in respect of such expenditure is subject to the basic test provided in the earlier definition of "export market development expenditure" that the expenditure represents outgoings incurred primarily and principally for the purpose of promoting exports.

The general plan of the definition is to list the broad categories of expenditure coming within the scope of "prescribed outgoings", followed by a number of specific exclusions.

In addition to the cost of promotional activities carried out by the taxpayer himself, "prescribed outgoings" will include payments made by the taxpayer to an association, agent or other person for the carrying out of activities on his behalf. If a payment is made by a taxpayer for more than one purpose, it will qualify as a prescribed outgoing to the extent to which it is made in relation to expenditure covered by the definition.

Sub-paragraph (i) of paragraph (a) of the definition refers to the carrying out of market research or the obtaining of market information and will embrace such activities as, for example, research into the location, extent and characteristics of overseas markets. However, the definition will not extend to costs of laboratory research on products designed for export.

Eligible outgoings covered by sub-paragraph (ii) will include the cost of advertisements in newspapers and magazines circulating overseas, as well as in trade journals and other publications designed primarily for the export trade. The sub-paragraph will also extend to costs of participating in overseas exhibitions, trade missions and similar activities for the purpose of promoting Australian exports. Costs of soliciting business will include expenditure on negotiating with representatives of overseas enterprises or in maintaining permanent sales representatives overseas.

Sub-paragraphs (iii) to (vi) will have the effect of excluding certain types of payments from the classes of expenditure specified in sub-paragraphs (i) and (ii) of paragraph (a).

Sub-paragraph (iii) will exclude payments, whether as salary, fees or otherwise, made to a person ordinarily employed in Australia by the taxpayer in respect of services performed by that person in Australia or during the course of a visit overseas. A similar exclusion will apply to payments made to a person ordinarily employed in Australia by an associated company or by an association acting on behalf of the taxpayer. However, the sub-paragraph will not exclude payments, including remuneration and travel expenses, made to employees stationed overseas.

Sub-paragraphs (iv), (v) and (vi) will exclude, in all cases, payments made to a director where the taxpayer is a company, to a director of an associated company or to an associated company which carries on business in Australia.

Paragraph (b) brings within the definition of "prescribed outgoings" the costs of providing free samples and free technical data to potential overseas buyers. Eligible expenditure under this heading will include direct costs of producing the samples or data, including factory wages and transportation charges from Australia.

Paragraph (c) will include in the definition direct cost incurred in the preparation and submission of tenders or quotations for the supply of goods outside Australia where those goods are not of a kind or specification being regularly produced or supplied by the person submitting the tender or quotation. The definition will also extend to tenders and quotations for the supply of services outside Australia, for example, the supervision of construction projects. The types of expenditure which may qualify under this paragraph will include costs of preparing plans and specifications, fares incurred on overseas travel and similar items.

Under paragraph (d), "prescribed outgoings" will include expenditure incurred in selecting or designing special export labels and packaging to be used exclusively in the export of goods from Australia. The relevant expenditure will include only the costs that are directly attributable to the selection or design of materials for, or the form of, such labels and packaging and will not include any other production costs.

Paragraph (e) will include in the definition expenditure incurred in obtaining, or seeking to obtain, the grant of a patent for an invention or the registration of a trademark or copyright under the law of a country outside Australia. Expenses incurred in obtaining an extension of the period or term of an existing grant or registration are also included.

The paragraph applies only to inventions, works, designs or other things that have, to a substantial extent, resulted from research or work carried out in Australia. It is necessary for trademarks to have been used commercially in Australia before being so used in any other country.

Paragraphs (f) to (l) specify particular types of expenditure which will be excluded from the definition of "prescribed outgoings".

Paragraph (f) will exclude the costs of accommodation, sustenance or entertainment incurred in relation to a visit outside Australia by the taxpayer or by a prescribed agent, as defined, who is ordinarily employed or carrying out duties in Australia. This limitation will not, however, apply to employees not ordinarily employed in Australia, for example, a sales representative stationed overseas.

Paragraph (g) is complementary to paragraph (c) - explained above - and will operate to exclude from the definition expenses related to the preparation and submission of tenders or quotations for goods which are of the same kind or specification as goods that are being regularly produced or supplied by the person making the tender or quotation. The cost of day to day quotations on stock lines, for example, will thus not be eligible for the export market development allowance.

The effect of paragraph (h) will be to place outside the definition of "prescribed outgoings" expenses of advertising in Australia in relation to the supply of services outside Australia, for example, advertising in local newspapers by transport companies in respect of travel services from Australia.

Paragraph (i) will exclude from the definition payments by way of commission on the sale of goods, supply of services or know-how or the grant or assignment of industrial property rights where that commission is paid otherwise than by way of salary, retainer or fee.

Paragraph (j) is complementary to paragraph (i). It will exclude any remuneration paid by way of salary, retainer or fee to the extent to which the payment is in the nature of a commission. The paragraph will, therefore, have application where the amount of remuneration is determined by reference to sales made or business obtained by the person to whom the remuneration is paid.

Paragraph (k) will ensure that any discount or credit allowed or paid in relation to any sale or other disposal does not qualify as "prescribed outgoings" and paragraph (l) will exclude from the definition such compulsory levies as wool tax and the canning-fruit charge as well as amounts paid to Commonwealth and State Marketing Authorities.

"Tax payable" or "Tax"

These terms are defined as a drafting measure. The rebate available for export market development expenditure is to be applied in reducing the amount of the tax liability of a taxpayer that is ascertained after all other rebates allowable under the Principal Act have been taken into account. On the other hand, the rebate is not to be applied to reduce any liability for additional tax payable by a private company on its undistributed income. References to "tax payable" or "tax" in the provisions of section 160AC will, therefore, mean the tax payable by a taxpayer, other than any tax on undistributed income, less any rebates to which the taxpayer is entitled in his assessment, other than the rebate available for export market development expenditure.

Sub-section (2.) is designed to bring within the compass of the export market development allowance, amounts paid by a taxpayer to an association which are applied by the association for the purposes of export promotion.

Broadly stated, section 73(2.) of the Principal Act authorises the deduction of subscriptions, levies or contributions paid by a taxpayer to an association which conducts activities on behalf of its members the cost of which would be deductible by the members in their income tax assessments if they carried out those activities themselves.

For the purposes of the rebate under the proposed section 160AC, subscriptions, etc. paid to an association and deductible under section 73(2.) will, to the extent that the Commissioner is satisfied that the payments have been, or will be, used by the association as export market development expenditure, be treated as expenditure of that description incurred by the taxpayer making the payments.

Where an association incurs expenditure associated with the production of exempt income or that is of a capital nature, subscriptions, etc. applied by the association to meet such expenditure are not deductible by the members in their income tax assessments. However, as explained in the notes on the next sub-section - sub-section (3.) - it is proposed that expenditure of a taxpayer in promoting exports the income from which is exempt from Australian tax will be eligible for the export market development allowance. It is also proposed that certain capital expenditures shall qualify for the allowance. These are capital expenditures incurred in connection with -

(i)

the selection or design of special export labels and packaging (paragraph (d) of the definition of "prescribed outgoings");

(ii)

the seeking of protection overseas for patents, copyright and trademarks (paragraph (e) of the definition of "prescribed outgoings"); or

(iii)

the promotion of the disposal of industrial property rights or know-how for use outside Australia (paragraph (c) of the definition of "export market development expenditure").

Accordingly, sub-section (2.) provides, in effect, that subscriptions, etc. paid by a taxpayer to an association and applied by it to meet these classes of expenditure on behalf of its members are also to be treated as export market development expenditure incurred by the members, notwithstanding that they are not deductible to those members under section 73(2.) of the Principal Act.

Sub-section (3.) is the operative provision which will authorise the allowance of the rebate in respect of export market development expenditure incurred during the five year period from 1 July 1968 to 30 June 1973.

The rebate will be available to a taxpayer for subscriptions, levies or contributions paid to an association which are, by virtue of sub-section (2.) explained above, to be treated as export market development expenditure of the taxpayer. It will also be available for export market development expenditure incurred by a taxpayer if the expenditure meets the requirements of paragraphs (a) to (d) of sub-section (3.).

Under paragraph (a), the rebate will be available for export market development expenditure that is allowable as a deduction under section 51 of the Principal Act. Section 51 provides for a deduction of expenditure, not being of a capital, private or domestic nature, to the extent that it is incurred by a taxpayer for the purpose of gaining or producing assessable income or is necessarily incurred in carrying on a business for that purpose.

Paragraph (b) relates to expenditure incurred in promoting the sale of goods and the supply of services overseas the income from which is exempt from Australian tax under section 23(q) of the Principal Act. Broadly, section 23(q) exempts from Australian tax income earned in another country by a resident of Australia if the income is taxed by that other country.

Revenue expenses incurred for the purpose of earning exempt income are not deductible under section 51 of the Principal Act. Accordingly, export market development expenditure relating to the production of exempt income would not qualify for the rebate in the terms of paragraph (a) of sub-section (3.).

The effect of paragraph (b) will be to extend the rebate to export market development expenditure of a non-capital nature incurred in promoting exports the income from which is exempt under section 23(q).

Paragraphs (c) and (d) will have the effect of extending the rebate to certain classes of export market development expenditure not deductible under section 51 because the expenditure is of a capital nature.

Paragraph (c) relates to export market development expenditure incurred:

-

in selecting or designing special labels and packaging to be used exclusively in the export of goods from Australia (paragraph (d) of the definition of "prescribed outgoings"); or

-

in seeking protection overseas for industrial property rights, i.e., inventions, works, designs or other things that have, to a substantial extent, resulted from research or other work performed in Australia and trademarks that have been used commercially in Australia before being used commercially in another country (paragraph (e) of the definition of "prescribed outgoings").

Paragraph (d) relates to export market development expenditure incurred to promote disposals overseas of:

-

industrial property rights of the kind described above in the notes on the preceding paragraph of sub-section (3.); and

-

know-how (as defined) that has, to a substantial extent, resulted from research or other work performed in Australia.

The rebate will, however, only be available in respect of such expenditure if the industrial property right or the know-how is disposed of in the course of carrying on business in Australia to persons resident outside Australia for use overseas.

Expenditure which meets the requirements of sub-section (3.) will be subject to a rebate of tax of 42.5 cents for each dollar of such expenditure incurred in the year of income. This rebate is deducted from the amount of tax payable on the taxable income for that year after all other rebates allowable under provisions of the Principal Act have been taken into account. It is not, however, deductible from any tax on undistributed income that may be payable by a private company. A limitation on the amount of the rebate that may be allowed is imposed by sub-section (9.) to ensure that the maximum tax saving arising from the normal deduction for expenditure and the rebate does not exceed 87.5 cents for each dollar expended on export promotion.

Sub-sections (4.), (5.) and (6.) make provision for the carry-forward of a rebate credit, i.e., the amount by which the rebate allowable for a year exceeds the tax payable on the taxable income of that year. It is proposed to permit a rebate credit to be carried forward for allowance against the tax payable on income of any of the seven succeeding years of income in the same way as a loss may be carried forward for deduction in a subsequent year of income.

Sub-section (4.) will set out the conditions under which a taxpayer has a rebate credit and will quantify the amount of the credit. In broad terms, a taxpayer will have a rebate credit when his rebate entitlement in respect of export market development expenditure incurred in a year exceeds the tax payable on his taxable income for that year. A rebate credit will not arise in any year in which the rebate entitlement has been reduced to ensure that the total tax saving in respect of the expenditure incurred does not exceed 87.5 cents for each dollar expended.

Sub-section (5.) authorises the application of any rebate credit determined under sub-section (4.) to reduce the tax payable for any of the next seven income years. A rebate credit will be applied against the tax payable in respect of any year after deduction from that tax of the rebate entitlement for export market development expenditure incurred in that year.

Sub-section (6.) will provide that, where a taxpayer has unapplied rebate credits carried forward from more than one previous year, the credits are to be applied in the order in which they became available.

Sub-section (7.) will place a limitation on entitlement to the export market development allowance in respect of fares incurred in connection with two or more relatives travelling overseas at the same time. This limitation will apply in relation to both the taxpayer and his employees (including directors of a company)and members of the governing body and employees of an association acting on the taxpayer's behalf.

A relative is defined in section 6 of the Principal Act as meaning, in relation to any person, any of the following -

(1)

the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of that person or of his or her spouse; and

(2)

the spouse of that person or of any other person specified in (1) above.

Broadly, fares covered by sub-section (7.) will not be eligible for the export market development allowance. Sub-section (12.) will impose similar limitations in relation to fares incurred by a partnership.

Paragraph (a) of sub-section (7.) will apply when the travel is undertaken by the taxpayer himself and any relatives are absent from Australia (either accompanying him or otherwise) during the same period. In these circumstances, the export market development allowance will not be available in respect of fares paid for any such relative unless he or she was, during that period, a permanent employee as defined, that is, a full-time employee of the taxpayer for a continuous period of at least five years immediately prior to departure from Australia.

Paragraph (b) will apply where the travel is undertaken by a permanent employee and any relatives, who are not also permanent employees, are absent from Australia during the same period. In this case, the allowance will not be available in respect of fares paid for the relatives.

Paragraph (c) will apply where the travel is undertaken by two or more relatives, none of whom is the taxpayer or a permanent employee of the taxpayer. Since fares for one such person, if travelling overseas alone, may qualify for the allowance, provision is made, in these circumstances, for the taxpayer to nominate the person in respect of whom the fares paid will be eligible for the allowance. The nomination is to be by notice in writing to the Commissioner of Taxation.

Sub-section (8.) will re-enact a provision that is designed as a safeguard, particularly in relation to transactions between taxpayers whose dealings are not at arm's length.

If the Commissioner is of the opinion that, having regard to charges that might reasonably be expected to be payable in the ordinary course of business, the amount claimed to be export market development expenditure is excessive, he may limit the amount of the expenditure that will be eligible for rebate to such amount as he considers appropriate.

The usual rights of objection and reference to a Taxation Board of Review will be available in these cases to a taxpayer who is dissatisfied with the amount of the expenditure determined by the Commissioner to be excessive.

Sub-section (9.) will place a limit on the total tax saving that may be obtained in a year of income by virtue of the export market development allowance. It is proposed that the total tax saving, ascertained in accordance with sub-section (10.), shall not exceed 87.5 cents for each dollar of export market development expenditure incurred by a taxpayer.

Most expenditure eligible for the export market development allowance will be deductible from assessable income under the general deduction provisions of the Principal Act. This deduction results in a tax saving to the taxpayer. In addition, the taxpayer will be entitled to a rebate of tax of 42.5 cents for each dollar of export market development expenditure he has incurred in the year of income.

Broadly, if a taxpayer's rate of tax is 50 cents in the dollar, his tax saving in respect of a deduction for expenditure is 50 cents for each dollar expended. Allowance of a rebate of tax of 42.5 cents for each dollar of the expenditure would result in a total tax saving, by virtue of the deduction and the rebate, of 92.5 cents for each dollar expended.

In these circumstances, sub-section (9.) will operate to reduce the rebate to the extent necessary to ensure that the total tax saving from the deduction and the rebate does not exceed 87.5 cents for each dollar of expenditure. On the basis of the example given above, the rebate would be reduced to 37.5 cents so that the total saving from the rebate (37.5 cents) and the deduction (50 cents) is limited to 87.5 cents for each dollar of expenditure that qualifies for the rebate.

Sub-section (10.) defines, for the purposes of sub-section (9.), the total tax saving in respect of any export market development expenditure incurred in a year of income that is eligible for rebate. The total tax saving in relation to that expenditure is the aggregate of the amounts calculated in accordance with paragraphs (a), (b) and (c) of the sub-section.

Paragraph (a) of sub-section (10.) provides the basis for calculating the tax saving achieved in the year in which export market development expenditure is incurred.

Sub-paragraph (i) of paragraph (a) will apply where a deduction is not allowable for a prior year loss in the year in which the taxpayer has incurred export market development expenditure. In these circumstances, the tax saving will represent the difference between:

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the tax that would have been payable if no deduction had been allowed for the export market development expenditure; and

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the tax payable after the allowance of a deduction for that expenditure.

Sub-paragraph (ii) of paragraph (a) makes provision for the calculation of the tax saving where a prior year loss is deductible in the year in which the taxpayer has incurred export market development expenditure. In such a case, the tax saving is calculated on the basis of the tax that would have been payable by the taxpayer if a deduction had not been allowed for the loss. The tax saving will then represent the difference between:

-

the tax that would have been payable if no deductions had been allowed for the export market development expenditure or the prior year loss; and

-

the tax that would have been payable after the allowance of a deduction for the export market development expenditure but before the deduction of the loss.

Paragraph (b) will apply in only isolated cases where a taxpayer has a loss in the year in which he has incurred export market development expenditure and the whole or some of that expenditure is included in the loss carried forward for deduction from the assessable income of a subsequent year. These provisions are necessary because, where such circumstances occur, a tax saving arises in the year in which the loss is allowed as a deduction instead of the year in which the amounts were expended on export promotion.

Sub-paragraph (i) of paragraph (b) will provide the basis for calculating the tax saving in respect of so much of the export market development expenditure as is included in a loss deducted in a subsequent year or years. The calculation is made on the same general basis as that explained in relation to paragraph (a)(i) of this sub-section. In broad terms, the tax saving will represent the amount by which the tax payable has been reduced in consequence of the allowance of a deduction for export market development expenditure included in the prior year loss.

Sub-paragraph (ii) of paragraph (b) is not expected to apply frequently. Application of this provision will be limited to cases where:

-

a deduction is allowable in the year of income for a prior year loss which includes export market development expenditure incurred in the year of the loss; and

-

a deduction is also allowable in that year of income for a loss of a year later than the year in which the export market development expenditure was incurred.

In this type of case, the calculation of the tax saving will be made on the same general basis as that explained in relation to paragraph (a)(ii) of this sub-section. Broadly, the tax saving will represent the amount of the reduction in the tax payable after taking the export market development expenditure included in the prior year loss into account but before deduction of the loss of the later year.

By paragraph (c) the tax saving in respect of any export market development expenditure will include the amount by which the tax otherwise payable by a taxpayer has been reduced in consequence of rebates allowed under sub-sections (3.) and (5.) of section 160AC.

Under sub-section (3.), the rebate is allowable against the tax payable for the year in which the export market development expenditure is incurred. Sub-section (5.) provides for the allowance of a rebate for an amount of rebate credit that has been carried forward to be applied against the tax of an income year after the year of the expenditure.

As explained in the notes on sub-section (9.), the total tax saving in respect of any export market development expenditure is limited to 87.5 cents for each dollar expended.

Sub-section (11.) will entitle the partners in a partnership which has incurred export market development expenditure to a rebate for their respective shares of that expenditure.

A partnership is not subject to tax on its income. Each partner is, however, taxed on his share of the net income of the partnership and is allowed a deduction for his proportion of any loss incurred by the partnership.

The sub-section will, therefore, authorise the apportionment of export market development expenditure of a partnership between the partners in the same proportions as they share the net income and any losses of the partnership. Each partner's share of that expenditure will then be treated in the same way, for the purposes of the allowance of the rebate against his tax, as if he had incurred the expenditure himself.

Sub-section (12.) is complementary to the provisions of sub-section (7.). It will apply where the export market development expenditure of a partnership includes fares in respect of overseas travel and will place a limitation on entitlement to the export market development allowance in respect of fares incurred in connection with two or more relatives travelling overseas at the same time. This limitation will have effect in relation to all partners and employees of the partnership and, if a company is a partner, directors of the company. The meaning of a "relative" has been given in the notes on sub-section (7.).

Paragraph (a) of sub-section (12.) will apply where the travel overseas is undertaken by one partner in a partnership and any relatives are absent from Australia (either accompanying him or otherwise) during the same period. In these circumstances, the export market development allowance will not be available in respect of fares paid for any relative unless he or she was, during that period, a permanent employee of the partnership, i.e., a full-time employee of the partnership for a continuous period of at least five years immediately prior to departure from Australia.

Paragraph (b) will apply where the travel is undertaken during the same period by two or more partners and any relatives are absent from Australia during that period. If the partners are relatives of each other, the allowance will be available only in respect of the partner nominated by the partnership by notice in writing to the Commissioner of Taxation signed by each partner. Where any employees of the partnership who are relatives of each other, or of a partner travelling abroad, are travelling overseas at the same time, the allowance is limited to the fares paid for any employee who was, during that period, a permanent employee of the partnership.

Paragraph (c) will apply where the travel is undertaken by permanent employees of the partnership and any relatives who are not permanent employees of the partnership are also absent from Australia during the same period. The allowance will not be available in respect of fares paid for the relatives.

Paragraph (d) will apply where the travel is undertaken by two or more relatives, none of whom is a partner or a permanent employee. In these circumstances, the allowance will be available in respect of the fares of the employee nominated by the partnership, by notice in writing to the Commissioner signed by each partner.

Sub-section (13) will grant the Commissioner a discretion not to apply the provisions of sub-sections (7.) and (12.). The Commissioner may allow the rebate in respect of export market development expenditure on overseas fares of a person whose fares are excluded under sub-section (7.) or (12.) if he is satisfied that special circumstances exist which justify allowance of the rebate. The purpose of the discretionary power is to avoid anomalies in special circumstances. For example, where a taxpayer has been engaged in business for less than five years and consequently has no permanent employee as defined, the Commissioner will be authorised to consider all the facts and to determine whether the circumstances warrant the allowance of the rebate in respect of fares that would otherwise be excluded by sub-section (7.) or (12.).

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

Sub-section (14.) will apply in only isolated cases where the trustee of a trust estate incurs export market development expenditure. Its purpose is similar to that of sub-section (11.) in relation to partners in a partnership and will enable the persons assessed on a share of the net income of a trust estate to qualify for a rebate in respect of an appropriate share of export market development expenditure incurred by the trustee.

The overall entitlement to rebate will be 42.5 cents for each dollar of such expenditure. However, a wide variety of circumstances may affect the apportionment of trust estate income and losses to the trustee and beneficiaries for the purposes of assessment. For this reason, sub-section (14.) provides for the respective entitlements of the trustee and beneficiaries to a rebate in respect of export market development expenditure incurred by a trustee to be determined by the Commissioner on a basis that he considers reasonable. In making the determination, the Commissioner will be required to take into consideration the operation of the export market development allowance provisions in relation to other persons, for example, the operation of sub-section (11.) in relation to partners in a partnership, and to have regard also to the respective interests of the beneficiaries in the trust estate.

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

Sub-section (15.) is designed as a safeguard against certain kinds of agreements or arrangements under which some taxpayers have, in the past, exploited the export market development allowance.

This provision will enable export market development expenditure to be appropriately reduced where a taxpayer has entered into an agreement or arrangement under which he makes payments in the form of export market development expenditure and receives, in return, increased prices for his exports. The reduction to be made in the expenditure will be determined by the Commissioner on the basis of the increase in prices that can be attributed to such payments made by the exporter.

The safeguard will operate in relation to such agreements or arrangements that may be entered into in the future. It will also prevent any undue entitlements to rebate from being obtained under agreements or arrangements that were entered into in the past with a view to exploiting the export market development allowance.

A taxpayer who is dissatisfied with a decision made by the Commissioner under sub-section (15.) will have the usual rights of objection and reference to a Taxation Board of Review.

Clause 10: 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.

As explained previously, it is proposed that the total tax saving in consequence of deductions and rebates allowed for export market development expenditure falling within the scope of section 160AC shall not, in any case, exceed 87.5 per cent of that expenditure (section 160AC(9.)). It is also proposed that payments made in accordance with certain agreements or arrangements will not be included in export market development expenditure that is eligible for rebate (section 160AC(15.)).

The amendment proposed by this clause to sub-section (10.) of section 170 will authorise the Commissioner to amend an assessment at any time to ensure that these results are achieved.

Clause 11: Application of Amendments.

The amendments proposed by the Bill will commence to apply as enacted by this clause. The commencement dates have been referred to in the notes on the relevant clauses of the Bill.