House of Representatives

Explanatory Memorandum

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

Notes on Clauses

INCOME TAX ASSESSMENT BILL (NO. 2) 1969

Introductory Note

The principal features of this Bill have already been mentioned in this memorandum and the following notes relate to each clause of the Bill.

Clause 1: Short title and citation.

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

Clause 2: Commencement.

Section 5(1A.) of the Acts Interpretation Act 1901-1966 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.

By this clause it is proposed to amend section 6 of the Principal Act which contains definitions of words and phrases used in that Act.

Sub-clause (1.) proposes an amendment to the definition of 'apportionable deductions' which is consequential upon the proposed insertion in the Principal Act of a new section - section 77D - by clause 9 of the Bill, relating to deductions for share capital subscribed by Australian residents to prospecting or mining companies. The reference to section 77D is inserted in lieu of the present references to sections 77A and 77AA of the Principal Act which are to be repealed by clause 7.

The term 'apportionable deductions ' means, broadly, deductions of a concessional nature, including deductions for moneys paid on shares to certain exploration and mining companies, which do not directly relate to the production of income. These deductions are, for certain purposes of the Principal Act, apportioned on a pro-rata basis against various classes of income. In the future, moneys paid on shares in certain exploration or mining companies may be deductible under the proposed new section 77D. The amendment proposed in the definition of apportionable deductions will enable deductions allowed for moneys paid on shares under section 77D to be apportioned on the same basis as were deductions under sections 77A and 77AA where such an apportionment is required under the relevant provisions of the Principal Act.

Sub-clause (2.) is a transitional provision designed to preserve the existing definition of 'apportionable deductions' as it applies to deductions under sections 77A and 77AA for moneys paid on shares. It is proposed that the new section - section 77D - will apply to moneys paid on shares after 30 June 1969. Moneys paid on shares on or before that date will, subject to the necessary declarations by the companies concerned, qualify for deduction under the existing provisions. It is therefore necessary to provide for the continued apportionment of those deductions where such an apportionment is required.

Clause 4: Dividends.

This clause proposes an amendment of paragraphs (a) and (b) of sub-section (2C.) of section 44 of the Principal Act, which relates to dividends, as a consequence of the proposed repeal of section 77AA and the insertion of the new section - section 77D.

Section 44(2C.) modifies, in specified circumstances, the exemption from tax on certain dividends provided by section 44(2.)(a) of the Principal Act. The broad effect of section 44(2.)(a) is to exempt from tax in a shareholder's hands dividends paid wholly and exclusively out of income derived by a company that is exempt, in the company's hands, under section 23(p) of the Principal Act. Broadly stated, under the latter section income derived by a prospecting company from the sale of rights to mine gold and prescribed metals or minerals is exempt from tax.

For the modification to apply under the present law it is necessary, in the first place, for a company that derives income exempt under section 23(p) to have lodged with the Commissioner of Taxation a declaration under section 77AA of the Principal Act specifying amounts of share capital received by it from shareholders. It is also necessary for shareholders to have become entitled by virtue of the declaration to income tax deductions for the share capital specified. When both of these events have occurred the modification applies only where some or all of the share capital has been expended by the company on prospecting or other activities on the mining rights in relation to the sale of which it derived income exempt from tax under section 23(p).

In very broad terms, where sub-section (2C.) of section 44 applies, the exempt income available for distribution as dividends by a company is reduced by so much of the share capital subscribed, and allowed to the shareholders, as has been expended by the company on prospecting or mining on the rights that produced the exempt income. The provision does not affect, in any way, the amount of income exempt in the company's hands.

The amendments proposed to paragraphs (a) and (b) of sub-section (2C.) will not alter the practical effect of the operation of the sub-section. As already mentioned, it is proposed to repeal section 77AA and substitute section 77D which will, in all respects relevant to this proposed amendment, operate in the same manner as did section 77AA.

Clause 5: Depreciation.

This clause will amend section 54 of the Principal Act.

Under section 54 a deduction is allowable for depreciation of plant owned by a taxpayer that either is used by him in the production of assessable income or has been installed ready for use for that purpose and is held in reserve.

The term "plant" is defined in the section and includes fences, dams and other structural improvements on land which is used for agricultural or pastoral pursuits. However, section 75 of the Principal Act also authorises a deduction for expenditure on certain types of improvements in the year in which it is incurred. Where expenditure on improvements is deductible under section 75 it is excluded from the scope of the depreciation allowances by sub- paragraph (ii) of section 54(2.)(b). This ensures that where the cost of improvements is allowable under section 75 as a deduction in the year it is incurred, that cost will not also be deductible by way of depreciation allowances.

The purpose of clause 5 is to ensure that deductions for depreciation are not allowable in respect of the improvements for the purposes of conserving water or storing fodder which are referred to in clause 6 of the Bill. Broadly stated, that clause will amend section 75 of the Principal Act to provide an outright deduction for the cost of construction of those improvements in the year the expenditure is incurred - see notes on clause 6.

This amendment will apply in assessments for the 1969-70 income year and subsequent years.

Clause 6: Certain expenditure on land used for primary production.

By paragraph (a) of this clause a new paragraph (h) is to be substituted for the existing paragraph (h) of sub-section (1.) of section 75 of the Principal Act, and a new paragraph - paragraph (l) - is to be added to that sub-section. In broad terms, the purpose of these amendments is to authorise a deduction - in the year in which the expenditure is incurred - for the cost of certain improvements made by a primary producer for the purpose of conserving water or fodder. The cost of the improvements concerned is, under the present law, subject to depreciation allowances spread over five income years (section 57AA of the Principal Act).

As observed in the note on clause 5, section 75 of the Principal Act authorises a full deduction, in the income year in which the expenditure is incurred, for certain capital expenditure made by primary producers. In its present form it extends to the cost of structural improvements for water conservation purposes, such as dams, earth tanks, underground tanks, bores and wells. The proposed new paragraph (h) of sub- section (1.) of section 75 will, by sub-paragraph (i), extend the scope of the structural improvements covered by the section to all improvements for conserving water, including, e.g., concrete tanks and stands for tanks.

Sub-paragraph (ii) of the new section (h) will, in effect, re- enact an existing provision providing a deduction for the cost of irrigation channels and similar improvements for conveying water.

Paragraph (b) of clause 6 is merely a drafting measure but, by paragraph (c), it is proposed to add an additional paragraph - paragraph (l) - to section 75, the effect of which will be to extend the deductions available under the section to the cost of construction by a primary producer on his primary production land of buildings or other structural improvements for the purpose of storing fodder for use in feeding animals in the course of carrying on his business of primary production. The paragraph will cover improvements for use in storing fodder that has been purchased or produced by the primary producer.

Paragraph (d) of clause 6 will amend sub-section (2.) of section 75, which ensures that expenditure deductible under sub-section (1.) of the section is limited to the taxpayer's actual costs, i.e., his costs after deducting any amount recouped by him from a governmental or other source. Paragraph (d) proposes that this limitation will also apply in respect of the additional types of improvement now to be covered by section 75.

The amendments proposed by clause 6 will apply in respect of expenditure incurred in the 1969-70 income year and subsequent years.

Clause 7: Repeal of sections 77A and 77AA.

Sub-clause (1.) of clause 7 proposes the repeal of sections 77A and 77AA of the Principal Act which permit deductions for share capital subscribed by Australian residents to petroleum exploration companies and to other companies whose principal business is prospecting or mining for minerals other than gold or petroleum. As already mentioned, a proposed new section - section 77D - is to be inserted in their stead. Section 77D will incorporate the principles of sections 77A and 77AA - see notes on clause 9.

Sub-clause (2.) is a transitional provision designed to continue the application of sections 77A and 77AA in respect of moneys paid on shares before 1 July 1969 and to ensure that these sections will not apply in respect of moneys paid on shares on or after that date. Moneys paid on shares on or after that date will fall within the scope of the proposed section 77D.

Clause 8: Calls paid on shares for purposes of exploration or prospecting for minerals or of afforestation.

This clause proposes a drafting amendment to section 77C of the Principal Act which is consequential upon the proposed insertion in that Act of a new section - section 77D.

Section 77C authorises deductions for one-third of the amount of calls paid on shares to a company carrying on as its principal business mining or searching for minerals obtainable by mining where the company lodges with the Commissioner of Taxation a declaration that the call moneys have been or will be expended on exploration or prospecting for minerals. The allowance of a deduction under this section is also subject, inter alia, to the provisions of sub-section (11.) of section 77A of the Principal Act. Broadly stated, that sub-section precludes a company that is interposed between investors contributing share capital for petroleum exploration and the company undertaking the exploration work from obtaining a deduction under section 77C or 77A where the interposed company has lodged a declaration which entitles the investors to deductions for their capital contributions.

The provisions of sub-section (11.) of section 77A will, in effect, be re-enacted in sub-section (11.) of the proposed new section 77D. Sub-clause (1.) therefore proposes to substitute the words 'sub-section (11.) of section 77D' for the words 'sub- section (11.) of section 77A' in section 77C of the Principal Act so that the section will continue to operate on the same practical basis as it has in the past. Sub-clause (2.) is a transitional provision which will continue the application of section 77A(11.) in relation to calls paid on shares before 1 July 1969 but will discontinue the application of that section in respect of calls paid on shares on or after that date when section 77D will apply.

Clause 9: Moneys paid on shares for the purposes of certain exploration, prospecting or mining.

Introductory Note.

The principal purpose of this clause is to insert a new section - section 77D - in the Principal Act in substitution for the existing provisions of sections 77A and 77AA which it is proposed to repeal by clause 7.

Sections 77A and 77AA are both concerned with the allowance of deductions to shareholders who are residents of Australia or the Territory of Papua and New Guinea in respect of contributions of share capital to companies whose principal business is mining or prospecting. Section 77A is concerned with moneys paid by resident shareholders to companies whose principal business is mining or prospecting for petroleum in Australia or the Territory of Papua and New Guinea. Section 77AA is concerned with moneys paid by resident shareholders to companies whose principal business is mining or prospecting in Australia or the Territory of Papua and New Guinea for minerals (other than petroleum or gold) obtainable by mining.

In respect of both sections, the deductions only become available to the shareholders if the company declares to the Commissioner of Taxation that all or part of the share capital received from resident shareholders during the income year concerned has been or will be expended in prospecting or mining for the appropriate minerals and the Commissioner is satisfied that the moneys have been or will be expended in accordance with the declaration.

Where a company lodges a declaration under section 77A or 77AA, the declaration has the effect of reducing the deductions otherwise available to the company for capital expenditure on prospecting or mining. These deductions are available under Division 10AA for petroleum mining companies and Division 10 for companies mining other minerals.

Under section 77A deductions are available, in certain circumstances, for moneys paid on shares in a company which is not itself engaged in petroleum exploration but which is interposed between the investor and the company carrying on the prospecting operations. Similar deductions are not authorised by section 77AA.

It is proposed to incorporate in the new section 77D the principles of sections 77A and 77AA of the Principal Act so that, broadly, share capital subscribed to companies exploring for both petroleum and other minerals may be declared and expended on the same basis as capital subscribed to companies searching for one or the other. Subject to the following main changes, section 77D will operate with the same practical effects as the existing provisions of sections 77A and 77AA for companies and shareholders -

(i)

In similar circumstances to those now applying in section 77A, moneys paid as share capital to a company which is not itself engaged in mining or prospecting but which is interposed between the investor and a company carrying on these activities may be allowed as deductions under the proposed new provision. As already mentioned, deductions are at present allowable only for such moneys paid to companies interposed between investors and petroleum exploration companies.

(ii)

The basis upon which the deductions available to a company for allowable capital expenditure are to be reduced when the company makes a declaration specifying moneys subscribed by its shareholders will be changed. Under the present law, the relevant deductions are reduced by the amount specified in a declaration where the Commissioner is satisfied that the moneys have been or will be spent in accordance with the declaration. In future, it is proposed to effect this reduction only when the moneys specified in a declaration have been expended on exploration or mining operations. Provision will be made for the expenditure to be appropriately applied to petroleum mining operations and to mining for other minerals for the purposes of these adjustments where a company is engaged in both of these activities.

(iii)

In line with amendments made last year to the provisions governing deductions for calls paid on mining shares, it is proposed that moneys paid on redeemable shares shall not qualify for deduction under section 77D.

The proposed section 77D will apply to moneys paid on shares on or after 1 July 1969. No limit is proposed on the period for which section 77D is to operate.

Notes on each of the sub-sections of the proposed section 77D follow.

Sub-section (1.) defines certain expressions used in the section.

'Australia' will include the Territory of Papua and New Guinea. The practical effect of the definition is that mining and prospecting operations in the Territory for all minerals obtainable by mining (except gold) will rank as operations conducted in Australia.

'eligible operations' is a term used to facilitate drafting and means operations of any one or more of the kinds specified namely exploration, prospecting and mining for minerals (as defined).

'minerals' is defined as meaning all minerals obtainable by prescribed mining operations, and petroleum. The term 'prescribed mining operations' is to be defined in section 77D as having the same meaning as it has in section 122(1.) of Division 10 in the Principal Act. Broadly, it means mining operations carried on in Australia in extracting minerals, other than petroleum, for the purpose of earning assessable income. As the income from gold is exempt, this mineral is excluded under the proposed definition. Similarly, any mineral which is not obtained by mining operations is also excluded. The term petroleum is defined in sub-section (1.) of section 6 of the Principal Act and means, broadly, any naturally occurring hydrocarbon or mixture of hydrocarbons whether in a gaseous, liquid or solid state and includes a mixture which contains hydrogen sulphide, nitrogen, helium and carbon dioxide. For all practical purposes, the new definition of minerals will have the same effect as the definitions of 'petroleum' and 'prescribed minerals' have under the existing provisions of sections 77A and 77AA.

'mining company': This definition is designed to facilitate references to companies that are entitled to make a declaration for the purposes of the new section 77D. It means a company that carries on as its principal business mining, prospecting or exploring in Australia for minerals. The term also includes a company that the Commissioner of Taxation is satisfied will carry on such activities as its principal business thus enabling the provisions of section 77D to apply where, for example, a newly incorporated company raises capital before it has actually commenced prospecting or mining operations.

'mining or prospecting information' is defined as meaning geological, geophysical or technical information, relating to the presence, absence or extent of mineral deposits in a particular area that has been obtained from exploration, prospecting or mining for minerals.

'mining or prospecting outgoings': This expression, which is used in the existing provisions of section 77AA of the Principal Act, has been adapted to incorporate outgoings by a company which will qualify under the provisions of the proposed section 77D in respect of both petroleum and other mineral exploration and mining. It means outgoings of a company in carrying on mining, prospecting or exploring in Australia for minerals and includes all expenditure of the company that is -

•

allowable capital expenditure incurred in mining for minerals other than gold or petroleum and the costs of searching for such minerals - sections 122A and 122J of the Principal Act; or

•

allowable capital expenditure incurred in prospecting and mining for petroleum - section 124DD of the Principal Act.

It does not include any other expenditure of a capital nature, or expenditure in the acquisition of a mining or prospecting right or mining or prospecting information.

'mining or prospecting right' is a term used to describe an authority, licence, permit or right to mine for minerals in a particular area in Australia. It also includes a lease of land which entitles the lessee to mine or prospect on the land. An interest in such an authority, Iicence, permit, right or lease is also within the scope of the definition.

'moneys paid on shares': This definition specifies the classes of share capital subscribed which may qualify for deduction under section 77D. These comprise amounts paid on shares by way of application and allotment moneys and calls which are applied by the company towards the paid-up value of the shares. Moneys paid on redeemable shares after the date of introduction of this Bill are to be excluded from qualifying for deduction under this section.

Moneys paid on shares not beneficially owned by persons resident in Australia at the time of the payment are outside the scope of the new provision. This exclusion applies if more than one person beneficially owns the shares and any one of the beneficial owners is a non-resident at the time of the payment. Also excluded from the scope of section 77D are application moneys paid in relation to shares which, upon allotment, are beneficially owned either wholly or in part by a person not then a resident of Australia. In this context 'resident of Australia' has the meaning as defined in section 6(1.) of the Principal Act but is extended by the definition of 'resident' contained in sub-section (1.) of section 77D to include residents of the Territory of Papua and New Guinea.

Moneys paid on shares to a company before 1 July 1969 will not qualify for a deduction under section 77D and will continue to be subject to the provisions of section 77A or 77AA.

'prescribed mining operations' is defined as having the same meaning as the term used in Division 10 of Part III of the Principal Act, i.e., the definition contained in section 122(1.) of that Act. Accordingly, the expression means mining operations on a mining property in Australia or the Territory of Papua and New Guinea for the extraction of minerals, other than petrol eum, from their natural site. The operations must be carried on for the purpose of gaining or producing assessable income. Although petroleum is the only mineral specifically excluded, the fact that the operations must be carried on for the purpose of gaining assessable income means that any mineral, the income from which is wholly exempt (e.g. gold), is also excluded. Moreover,as the minerals concerned must be obtained by actual extractive mining operations, minerals obtained by quarrying or other means which do not constitute mining will similarly be excluded. This definition is in line with the definition which presently exists under section 77AA of the Principal Act.

'resident' is defined to include a resident of the Territory of Papua and New Guinea. As mentioned previously, this extends the meaning of the term 'resident' as defined in section 6(1.) of the Principal Act.

Sub-section (2.) is a drafting measure which ensures that the section operates only in relation to amounts that are applied by a company towards the paid-up value of shares issued by it. The money paid may be applied as application money, allotment moneys, calls or as other payments made to the company as part of the paid-up capital on the shares. Moneys not applied towards the paid-up value of shares, e.g. application money that is refunded, premiums on shares etc., will not be covered by section 77D.

Sub-sections (3.), (4.) and (5.) correspond to the existing sub- section (3.), (4.) and (5.) of sections 77A and 77AA of the Principal Act and cover cases where capital is contributed directly to a company whose principal business is the carrying on of exploration, prospecting or mining for minerals.

Sub-section (3.) will allow a mining company (as defined) that has received moneys paid on shares to lodge with the Commissioner a written declaration that the company has spent, or proposes to spend, those moneys on mining or prospecting outgoings in Australia.

The lodgment of such a declaration will be a prerequisite to the allowance of deductions to resident shareholders who have paid the moneys in question. A complementary provision in sub-section (20.) of this section, and in sections 122Q and 124DF of the Principal Act, will result in a corresponding reduction in the allowances for capital expenditure incurred to which the company would otherwise be entitled under Division 10 or Division 10AA.

A declaration, signed by the public officer of the company, may be lodged within one month after the close of the income year of the company in which the capital was received. The Commissioner is empowered to extend the time for lodgment.

Sub-section (4.) is the operative provision under which deductions will be allowed to resident shareholders of a company that has made a declaration under sub-section (3.).

In the generality of cases, the deduction is likely to be the amount paid to the company on shares and specified in the declaration by the company. The operation of sub-section (4.) will, however, be subject to the other provisions of section 77D.

Sub-section (5.) will apply where a declaration has been made under sub-section (3.) but the Commissioner is not satisfied that the money specified in the declaration has been, or will be, spent by the company on mining or prospecting outgoings.

If no safeguards were provided, it would be open to a company to obtain for its shareholders deductions in respect of amounts not expended, and not likely to be expended, in accordance with its declaration.

Where a declaration under sub-section (3.) relates, wholly or partly, to moneys which the Commissioner is not satisfied will be used for mining or prospecting outgoings, sub-section (5.) will require a proportionate reduction to be made in the deduction allowable to each of the shareholders who has contributed those moneys. Where deductions are reduced in this way no adjustment will be made in respect of the deductions to which the company may be entitled for allowable capital expenditure under Division 10 or 10AA.

The Commissioner is required to inform the company if he is not satisfied that the moneys specified in a declaration Bill be used on mining or prospecting outgoings. Should a taxpayer be dissatisfied with the Commissioner's determination of the amount of the deduction allowable, he will have the usual right of objection. On reference to a Taxation Board of Review, it will be open to the Board to substitute its determination for that of the Commissioner.

Sub-sections (6.) to (13.) are designed to allow deductions, in certain circumstances, for capital subscribed to companies whose activities, in the year of income in which the capital was subscribed, have been restricted to exploration, prospecting or mining for minerals, the treatment of minerals mined by the company in Australia, or the provision of capital to mining companies. Some of these companies may not qualify as mining companies for the purposes of sub-sections (3.) to 15.). Companies of this kind are placed between the original subscriber of capital and the company actually engaged in prospecting or mining operations and, for convenience, they will be referred to as interposed companies.

The plan of sub-sections (6.) to (13.) is to provide for the making of declarations by interposed companies. Sub-section (6.) permits an interposed company to lodge a declaration while sub- sections (7.) to (13.) ensure the allowance of deductions in accordance with such a declaration only in appropriate circumstances.

Sub-section (7.) contains provisions applying where a declaration is made by an interposed company in relation to moneys it has already expended when it makes the declaration. Sub-sections (8.) and (9.) govern the position where the declaration of an interposed company relates to moneys it has received and is still holding when it lodges the declaration.

Capital contributions to interposed companies will not be deductible if the provisions of those sub-sections are not satisfied. Correspondingly there will then be no adjustment of the deductions allowable to the mining company.

Sub-section (10.) provides for the allowance of deductions for moneys specified in a declaration by an interposed company, but an adjustment of the amount deductible will be made where the Commissioner is not satisfied that the moneys will be expended on eligible operations in Australia or if undertakings given by a company are not fulfilled.

The sub-sections are examined in more detail in the following notes.

Sub-section (6.) relates to a company that has not, during a year of income in which the company has received moneys paid on shares, carried on any business apart from -

•

eligible operations - i.e. exploration, prospecting or mining for minerals (as defined);

•

treatment in Australia of minerals mined by it in Australia; or

•

providing capital to mining companies.

If a company in this category has received 'moneys paid on shares' it may lodge with the Commissioner of Taxation a declaration that it has expended, or proposes to expend, the whole or a specified part of those moneys -

•

on 'mining or prospecting outgoings'; or

•

in subscribing capital to a mining company for the purpose of enabling the moneys to be used for 'mining or prospecting outgoings'.

The lodging of this declaration is a pre-requisite to the allowance under sub-section (10.) of deductions to resident shareholders for capital subscribed by them to such an interposed company.

As already mentioned, a complementary reduction is effected by sub-section (20.) of this section, in conjunction with the amendments proposed to be made to sections 122Q and 124DF of the Principal Act, in the allowances to which the company using the money on mining or prospecting outgoings may otherwise be entitled in relation to its capital expenditure.

The procedures for lodging a declaration are similar to those explained in the notes on sub-section (3.).

Sub-section (7.) prescribes the circumstances in which an effective declaration may be made by an interposed company in respect of capital contributed on its shares and already invested in a mining company at the time the declaration is made. A declaration made by an interposed company in relation to money that it has expended by way of capital contributions to a mining company is effective only if -

•

the mining company has itself made a declaration for the purposes of sub-section (3.) that it has expended, or proposes to expend, the moneys on mining or prospecting outgoings;

•

the Commissioner has, in writing, informed the interposed company that he is satisfied that the money will be so used; and

•

the interposed company seeking deductions for its shareholders has not already been allowed a deduction for the moneys.

These tests accord with the principle of allowing deductions only if the capital subscribed is used for mining or prospecting outgoings. They are also required to enable the appropriate adjustments to be made in the deductions for capital expenditure to which a company may otherwise be entitled under Division 10 or Division 10AA.

Sub-section (8.) applies where an interposed company has received moneys that it has not expended at the time it makes a declaration under sub-section (6.).

Sub-section (8.) governs the circumstances in which a declaration in respect of unexpended moneys will be effective. The plan of the sub-section is that the declaration be accompanied by an undertaking by the interposed company that it will not, without the approval of the Commissioner, subscribe the money declared to a mining company unless that company has also made the appropriate declaration and the Commissioner is satisfied that the moneys will be used for 'mining or prospecting outgoings'. In conformity with the general plan of section 77D, the mining company will declare its intention to use the money concerned on mining or prospecting outgoings. The Commissioner, on being satisfied that the money will be so used, will advise the interposed company accordingly. Shareholders in that company will then be entitled to deductions for the capital subscribed by them and which has been specified in the declarations.

In some circumstances, it may not be convenient for a mining company to lodge a declaration for each amount of capital subscribed by an interposed company. To meet this situation, it is provided that the undertaking will leave the interposed company free to pay the capital to a mining company without the appropriate declarations of that company being first obtained, if the Commissioner approves the payment. Approval of the Commissioner will, in effect, operate as an extension of the time in which declarations may be lodged by the mining company. An arrangement of this nature is at present provided for in section 77A of the Principal Act and has proved more convenient to the companies concerned than a rigid provision necessitating lodgment of declarations by the mining company before any payment is made to it.

Sub-section (9.) permits the Commissioner, for the purposes of sub-section (8.), to approve the payment of moneys to a mining company if he is satisfied that that company -

•

will expend the moneys on mining or prospecting outgoings; and

•

will lodge the appropriate declaration for the purposes of sub- section (3.) within one month after the close of the year of income in which it receives the money.

Should there be a case in which a mining company fails to make the declaration for the purposes of sub-section (3.), the Commissioner may advise the interposed company of the failure and the resident shareholders in the interposed company will cease to be en-titled to deductions for capital specified in the relevant declaration.

Sub-section (10.) provides for the allowance of deductions for capital contributed by residents of Australia directly to interposed companies.

The amount of the deduction will generally be the amount paid on the shares in the interposed company and specified in the declaration made by that company. The operation of sub-section (10.) will, however, be subject to the other provisions of section 77D.

Sub-section (11.) is complementary to sub-section (10.). Its effect is that moneys deductible by shareholders under sub- section (10.) are not also deductible under section 77C, section 77D or section 78(1.)(b) from the income of the interposed company.

Sub-section (12.) operates where an interposed company has made a declaration relating to capital received but not expended before the declaration is made. If the appropriate undertaking and declaration have been given under sub-section (8.) and other steps have been completed to entitle resident shareholders in that company to deductions in respect of those moneys, then a mining company to which those moneys are subsequently subscribed will not be entitled to lodge a declaration under sub-section (3.) or sub-section (6.) relating to those moneys. The declaration made by a mining company under sub-section (8.) operates in the same way as a declaration made under sub-section (3.) or (6.) of section 77D for the purposes of that section and of reductions in the company's entitlements to deductions for capital expenditure under Division 10 or 10AA of the Principal Act.

Sub-section (13.) applies where the Commissioner is not satisfied that moneys specified in a declaration duly lodged under sub-section (6.) will be expended in accordance with the declaration, or where he is of the opinion that a company has failed to comply with an undertaking given by it under sub- section (8.). If the Commissioner gives the company written advice to that effect, paragraph (c) of the sub-section reduces the deductions allowable to resident shareholders so as to bring them into line with the amount as to which the requirements of section 77D have been satisfied. Sub-section (13.) applies to interposed companies in the same way as sub-section (5.) applies to mining companies.

Where an interposed company has given an undertaking for the purposes of sub-section (8.) in respect of money to which sub- section (13.) applies, paragraph (d) releases the company from its undertaking in relation to that money.

Paragraph (e) provides that sub-section (11.), which has already been explained, shall not operate in relation to an amount to which sub-section (13.) applies.

A taxpayer whose assessment is affected by the operation of sub- section (13.) will have the usual rights of objection and appeal.

Sub-section (14.) applies where a company has, perhaps inadvertently, lodged a declaration under either of the sub- sections (3.) or (6.) and wishes to lodge a declaration under the other sub-section. The sub-section provides that a company is not entitled to lodge a further declaration under the other sub- section in respect of the same moneys without the approval of the Commissioner. It is also provided that the first declaration shall be deemed not to have been duly lodged where a second declaration under a different sub-section is approved.

Sub-sections (15.) to (20.) will apply to both mining companies and interposed companies.

Sub-section (15.) is a machinery provision that will have application only where it is necessary to trace moneys specified in a declaration and the manner in which the moneys have been dealt with cannot be readily ascertained from the records of the company that made the declaration. In these circumstances, the manner in which the money has been dealt with may be determined by the Commissioner.

Without a provision of this nature it may, in some circumstances, be impracticable for the Commissioner to determine the use to which moneys specified in declarations have been put and the application of section 77D would then be impeded. Sub-section (15.) is designed to provide a means of overcoming this difficulty.

A taxpayer whose assessment is affected by the Commissioner's determination will have the usual rights of objection and appeal. In the event of a reference to a Taxation Board of Review, the Board would have power to substitute its own opinion for that of the Commissioner.

Sub-section (16.) provides that where a deduction is allowable under section 77C or section 78(1.)(b) of the Principal Act for one-third of the calls paid to a mining company, a corresponding reduction is to be made in allowances under the new section 77D.

Section 77C and section 78(1.)(b) allow a deduction equal to one- third of the calls paid to certain companies, including a company whose principal business is mining or prospecting for minerals. The whole of such calls may, however, qualify for deduction under the new section 77D if the company concerned makes the appropriate declaration.

Where an amount paid on shares satisfies the tests of both section 77D and section 77C or section 78(1.)(b), sub-section (16.) of the new section 77D will ensure that the amount otherwise deductible under that section will be reduced by one- third, that is, by the amount that is already deductible under section 77C or section 78(1.)(b).

It will be observed that the existing deduction under section 77C or section 78(1.)(b) is not to be disturbed. If a company does not make a declaration under section 77D its shareholders may nevertheless qualify for the deduction of one-third of calls under either section 77C or section 78(1.)(b).

Sub-section (17.) is a machinery provision to ensure that a declaration made by a company will not be rendered invalid for the reason only that it specifies moneys in excess of those that actually qualify for deduction under section 77D. For example, the company may have erroneously included in its declaration moneys paid by a non-resident. The sub-section provides that, in such a case, the declaration will remain valid as to the moneys which do, in fact, fall within the section.

Sub-section (18.) is directed at special classes of arrangements an objective of which may be to exploit the deductions available under section 77D. Similar provisions are contained in sections 77A and 77AA of the Principal Act.

The sub-section has effect where the Commissioner is satisfied that any moneys specified in a declaration lodged by a company under section 77D were paid by a person in pursuance of an agreement or an arrangement made in connection with the purchase by the company of a mining or prospecting right or mining or prospecting information or shares in a company owning such a right or information.

If the Commissioner is so satisfied he may inform the company lodging the declaration to that effect.

In this event, paragraph (a) provides that a deduction will not be allowable under section 77D in respect of the amount of moneys paid in pursuance of the agreement or arrangement.

Paragraph (b) provides that, in these circumstances, the declaration shall, for the purposes of the proposed sub-section (20.), sub-section (2C.) of section 44 of the Principal Act as amended by this Act (see notes on clause 4), and Divisions 10 and 10AA, be deemed not to have specified the moneys paid in pursuance of the agreement or arrangement. This ensures that the deductions available to the company under Division 10 or 10AA for allowable capital expenditure incurred in searching and mining for minerals are not reduced by the amount that has been specified in the declaration and not allowed as a deduction to the person paying it.

Sub-section (19.) is designed as a safeguard against avoidance of the application of sub-section (18.) in respect of the purchase of shares in a company that holds rights or information. In its absence, the provisions of sub-section (18.) could be avoided if a person selling shares arranged for one or more companies to be interposed between the company which holds the rights or information and the company in which the shares are sold. Where these circumstances exist the company in which shares are sold will be deemed, for the purposes of sub-section (18.), to hold the right or possess the information.

Sub-section (20.) has effect for the purposes of the adjustments to be made in the deductions to which a company should otherwise be entitled for capital expenditure under Division 10 or Division 10AA. As already explained, by lodging a declaration under section 77D, a company elects to forgo its own deductions for capital expenditures on prospecting and mining in favour of its shareholders.

Section 122Q of the Principal Act relates to companies mining minerals other than petroleum. The section establishes, in effect, an amount of net declared capital which is applied to reduce the deductions available to the company under Division 10 for allowable capital expenditure it has incurred in carrying on its prospecting or mining operations. Paragraph (a) of sub- section (20.) will enable so much of the moneys paid on shares and specified by a company in a declaration under section 77D as have been expended on exploration, prospecting or mining for minerals other than petroleum or gold to form part of that net declared capital.

Section 124DF of the Principal Act establishes the amount of the unrecouped capital expenditure of petroleum exploration companies. The unrecouped capital expenditure is, broadly, the total amount of capital expenditure allowable under Division 10AA reduced by a variety of items, such as subsidies, etc. Deductions of unrecouped capital expenditure are only allowable when the company concerned commences to derive income from petroleum mined by it in Australia. Paragraph (b) of sub-section (20.) will enable so much of the moneys paid on shares specified in a declaration lodged by a company under section 77D as have been expended on exploration, prospecting or mining for petroleum to be applied to reduce the amount of the unrecouped capital expenditure of the company.

As already mentioned in these notes, the provisions of section 77D will apply to moneys paid on shares after 30 June 1969.

Clause 10: Gifts, calls on mining shares, pensions etc.

The amendment to be effected by this clause is a drafting amendment consequential upon the proposed insertion in the Principal Act of a new section - section 77D.

Insofar as it is relevant to these proposed amendments, section 78(1.)(b) of the Principal Act provides that a deduction shall be allowed for one-third of calls paid on shares issued on or before 9 May 1968 to companies whose principal business is mining or prospecting for gold, silver, base metals, rare minerals or oil or in a company whose principal business is afforestation. Sub- section (1.) of section 78 presently provides that the deductions allowable under that section shall be subject to the provisions of sub-section (11.) of section 77A of the Principal Act. That latter section is to be repealed and replaced with section 77D.

As already mentioned in the notes on clause 9, sub-section (11.) of section 77D provides that a deduction shall not be allowed to a company under section 78(1.)(b) where that company has lodged a declaration under sub-section (6.) of section 77D. Accordingly sub-clause (1.) provides that the words 'sub-section (11.) of section seventy-seven D' be substituted for 'sub-section (11.) of section seventy-seven A'.

Sub-clause (2.) is a transitional provision which provides that this proposed amendment shall be deemed to have applied in relation to calls paid on or after 1 July 1969 but not to apply to calls paid before 1 July 1969 as section 77A will continue to apply up to that date.

Clause 11: Limitation of certain deductions.

This clause proposes a drafting amendment to section 79C of the Principal Act which is consequential upon the proposed repeal of sections 77A and 77AA and the insertion in that Act of a new section - section 77D.

Section 79C provides that the aggregate of the deductions allowable under certain sections of the Principal Act, referred to at present as 'the last six preceding sections', shall not exceed the amount of income that remains after deducting from assessable income all other allowable deduction, except losses of previous years and certain deductions for capital expenditure allowable in relation to prospecting and mining operations. The amendment proposed by this clause will specify in section 79C the relevant sections of the Principal Act but will not affect the practical operation of section 79C in relation to those sections.

Clause 12: Double deductions.

By this clause it is proposed to amend section 82 of the Principal Act so that it prohibits deductions for the cost of oil and other mining shares, or of afforestation shares, being allowed under more than one section of the Principal Act; in short, to ensure that only one deduction is allowed for the cost of such shares.

The basic purpose of section 82 is, in broad terms, to lay down a general rule that, where deductions for the one amount of expenditure are allowable, for example, under both general and special provisions of the Principal Act, only one deduction is granted the taxpayer. In its present form the section excepts from this general rule the special deductions provided for share subscriptions to companies engaged in oil exploration or mining and in respect of calls on shares in mining companies generally or in afforestation companies. Subject to transitional provisions, which are explained later, these exceptions from the operation of section 82 are to be removed.

Sub-clause (1.) of clause 12 has the effect (by paragraph (d) of the sub-clause) of removing from section 82 the exceptions now provided for deductions allowable under the special provisions of sections 77A (share subscriptions to oil exploration and oil mining companies), 77C and 78(1.)(b) (both of which apply in respect of calls paid on shares in mining or afforestation companies). The sub-clause also makes some drafting amendments consequential upon this.

An effect of this amendment will be that, where persons are taxable on profits from transactions in Mining shares, or are entitled to deductions for losses on such transactions, the deductions allowable under the special provisions mentioned (or under the new section 77D proposed by clause 9 of the Bill) will not be disregarded in determining the taxable profit or deductible loss on a transaction. In other words, two deductions will not be allowed in respect of the one amount of expenditure.

Sub-clause (2.) provides that the amendments made to section 82 by sub-clause (1.) shall apply only in respect of relevant expenditure incurred after 12 August 1969, i.e., the date of the Budget Speech in which the proposed amendments were announced. However, by succeeding provisions of the sub-clause explained in ensuing paragraphs of these notes, the amendments will not have effect, in specified circumstances, as regards some expenditures incurred after 12 August 1969.

Sub-clauses (3.) and (4.) are transitional provisions designed to ensure that the removal of the "double deduction" does not apply, in specified circumstances, in respect of some expenditures incurred after 12 August 1969. The proposed amendments to remove the "double deduction" will not apply in respect of expenditure on shares (deductible under section 77A, 77C or 78(1.)(b) of the Principal Act or, in relation to shares in oil exploration or oil mining companies, under the proposed new section 77D) where, in broad terms, the taxpayer incurs the expenditure in respect of shares he owned on or before 12 August 1969, or which came into his ownership after that date, either by virtue of an application lodged or an agreement made on or before that date, or pursuant to his exercise of an option to acquire the shares that was held by him on that date.

Sub-clause(5.) provides that, where expenditures after 12 August 1969 remain unaffected by the amendments to remove the "double deduction", the benefits to be obtained from the two deductions are subject to the same limitation as applies under section 82(4.) of the Principal Act in respect of expenditures made on or before 12 August 1969. In brief, the sub-clause provides that the total tax saving from taking the deductions into account for the purpose of determining a taxable profit or a deductible loss may not exceed the amount of the expenditure subject of the deductions.

Clause 13: Allowable capital expenditure.

This clause proposes an amendment to sub-section (1.) of section 122A of Division 10 of the Principal Act. Division 10 authorises deductions for capital expenditure incurred by enterprises mining for minerals other than petroleum. Section 122A specifies the categories of capital expenditure that may qualify for deduction under Division 10 and also those which do not so qualify.

By clause 13 it is proposed to add a new paragraph (e) to sub- section (1.) of section 122A. The effect of this paragraph will be to include in allowable capital expenditure of a mining company certain formation expenses and share issue expenses.

The allowable capital expenditure of a company which is carrying on, or which proposes to carry on, as its sole or principal business prescribed mining operations or the provision of capital (whether by capital subscription or otherwise) to such a company, shall include -

(i)

expenditure in respect of the formation and incorporation of the company; and

(ii)

so much of the expenditure incurred by the company in issuing, or making calls on, shares as the Commissioner considers reasonable having regard to the amount of the moneys paid on those shares that are expended on mining or prospecting outgoings.

Under the present law, this class of expenditure qualifies for deduction if incurred by a petroleum mining company. The amendment will, therefore, place companies mining for minerals other than petroleum in the same position as petroleum mining companies insofar as formation expenses and the costs of raising share capital are concerned.

Clause 14: Purchase of mining or prospecting right or information.

This clause proposes a drafting amendment to section 122B of the Principal Act which relates to the acquisition of a 'mining or prospecting right' or 'mining or prospecting information'. The amendment is consequential upon the insertion in that Act of a new section - section 77D - and will not disturb the basis on which section 122B now operates.

Broadly stated, section 122B provides that capital expenditure incurred by a taxpayer in acquiring a mining right or mining information from another person may, within certain limits, be included in the allowable capital expenditure of the purchaser for the purposes of Division 10.

Sub-section (6.) of section 122B provides for the reduction of the amount of capital expenditure which may be transferred by the vendor to the purchaser under section 122B where the vendor has an amount of net declared capital in relation to the right or information being transferred.

The term 'net declared capital' is defined in section 122Q of the Principal Act. It means, broadly, so much of the sum of the amounts received by a company as moneys paid on shares and specified in declarations made by the company in pursuance of section 77AA of the Principal Act as has not been applied to reduce the deductions allowable to the company for capital expenditure. A company which lodges a declaration under section 77AA forgoes deductions otherwise available to it under Division 10 to the extent of the amount declared so that deductions are available for that amount to the shareholders of the company.

The drafting amendment proposed in relation to sub-section (6.) will include in that provision a reference to declarations made under the new section - section 77D - which as already explained will operate in place of, and in much the same manner as, section 77AA that is to be repealed.

Clause 15: Reductions of allowable deductions where declaration lodged under section 77D.

This clause proposes certain drafting amendments to section 122Q of the Principal Act which are consequential upon the insertion in that Act of the new section - section 77D and the proposed repeal of section 77AA.

As already explained, a mining or prospecting company may, by lodging an appropriate declaration under section 77AA of the Principal Act, entitle its resident shareholders to deductions for moneys subscribed as paid-up capital on shares in the company. Where a company elects to make such a declaration, the deductions to which it would otherwise be entitled for capital expenditure under the special mining provisions are correspondingly reduced. Section 122Q authorises these reductions and provides a basis on which to calculate them.

Sub-section (1.) of section 122Q contains definitions of several terms used in the section. Two of these definitions are to be amended by paragraph (a) of clause 13 in consequence of the proposed insertion in the Principal Act of section 77D.

'mining company': Because of the relationship between the two sections, this term is given the same meaning as in the new section 77D. It means, broadly, a company that carries on, or that proposes to carry on, as its principal business exploration, prospecting or mining in Australia for petroleum or other minerals, except gold.

'net declared capital': This is the amount which, from time to time, remains to be applied in reduction of the deductions of a company that has lodged a declaration under section 77AA, or in future, under section 77D.

The first step in calculating the net declared capital is to ascertain the net declared capital as at the end of the year of income that ended on 30 June 1967. To this amount is added all amounts specified by a company in declarations made under section 77AA in years of income subsequent to that year of income together with amounts required to be included in the net declared capital by the operation of sub-section (6.) of section 122Q. The amendment proposed in the definition shall also include amounts specified in declarations made under the new section 77D to the extent that those moneys have been expended in prospecting or mining for minerals other than petroleum.

The amendments proposed by paragraphs (b), (c) and (d) of clause 15 are technical drafting amendments only which are consequential upon the proposed repeal of section 77AA of the Principal Act. They do not disturb the basis on which section 122Q operates under the present law.

Clause 16: Allowable capital expenditure.

By this clause it is proposed to effect a technical amendment to section 124DD of the Principal Act. That section specifies the classes of capital expenditure incurred by a petroleum mining company which may qualify as allowable capital expenditure that is eligible for deductions authorised under Division 10AA of that Act.

Paragraph (a) of section 124DD provides that expenditure incurred by a company, which is formed solely or principally for the purpose of carrying on petroleum prospecting or mining operations or providing capital to petroleum exploration companies, on the formation and incorporation of the company may qualify as allowable capital expenditure. The cost of share issues or the making of calls on shares in the company may also qualify as allowable capital expenditure to the extent that the moneys paid on shares are used on petroleum prospecting or mining operations or on plant necessary for those operations.

The amendment proposed will remove the formal requirement of the existing provision that a company be 'formed solely or principally' for the purposes of petroleum exploration or mining or of providing capital to petroleum exploration companies. In future, it will be sufficient if the company's sole or principal business is the carrying on of those activities even though the company may be authorised to carry on other activities by its constituent documents, e.g., its Memorandum of Association.

Clause 17: Unrecouped capital expenditure.

This clause proposes a drafting amendment to section 124DF of the Principal Act which is consequential upon the proposed insertion in that Act of a new section - section 77D.

Section 124DF relates to the unrecouped capital expenditure of a company which is allowable as a deduction to the company under section 124DG of the Principal Act against income from the sale of petroleum mined by it. Unrecouped capital expenditure consists of allowable capital expenditure as defined by section 124DD of the Principal Act and is reduced by, among other things, moneys paid on shares specified in a declaration under section 77A of that Act.

As already explained, section 77A is to be repealed and replaced by section 77D. The amendment proposed to paragraph (c) of section 124DF preserves the existing principle in relation to moneys paid on shares and specified in a declaration lodged under section 77A which is to be repealed. In addition, the amendment will ensure that the unrecouped capital expenditure is reduced by amounts specified in a declaration under section 77D to the extent that those moneys are expended in prospecting or mining for petroleum.

Clause 18: Amendment of assessments.

By sub-clause (1.) of clause 18 it is proposed to delete the reference in sub-section (10.) of section 170 of the Principal Act to sections 77A and 77AA which are to be repealed, and to insert in their stead a reference to the proposed new section - section 77D.

Section 170 governs the power of the Commissioner of Taxation to amend income tax assessments. Sub-section (10.) of section 170 provides that nothing in that section shall prevent the amendment of an assessment at any time for the purpose of giving effect to specified provisions of the Principal Act.

As explained in the notes on clause 9 of the Bill, section 77D is to be inserted in the Principal Act to provide a deduction in respect of moneys paid on shares in companies whose sole or principal business is exploration, prospecting or mining in Australia for minerals. The deduction is dependent upon the company that receives the moneys declaring that it has expended, or will expend, those moneys on mining or prospecting outgoings. If, after deductions have been allowed to the shareholders in consequence of such a declaration, it is found that the moneys have not been spent in accordance with that declaration, the deductions available to the shareholders are reduced.

The inclusion of the reference to section 77D in section 170 will provide the necessary authority for the Commissioner to amend the assessments of the shareholders in those circumstances.

Sub-clause (2.) of clause 18 is a transitional provision designed to ensure the continued application of the existing provisions of section 170(10.) as they apply to sections 77A and 77AA in relation to moneys paid on shares before 1 July 1969.

Clause 19: Application of amendments.

This clause specifies the commencing date for the amendments to sections 54 and 75 proposed by clauses 5 and 6. These amendments will apply in assessments for the 1969/70 and subsequent income years. The commencing dates of the other amendments proposed by the Bill are contained in the relevant amending provisions.