Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. Phillip Lynch, M.P.)NOTES ON CLAUSES
Notes on each clause of the Bill are set out below.
Clause 1: Short title.
This clause formally provides for the citation of the amending Act.
Clause 2: Commencement.
Section 5(1A) of the Acts Interpretation Act 1901 provides that, unless the contrary intention appears, every Act shall come into operation on the twenty-eighth day after the day on which it receives the Royal Assent. By this clause the amending Act will come into operation on the day on which it receives the Royal Assent.
Clause 3: References to Income Tax Assessment Act.
This clause provides, in effect, that in Part II of the Bill, the provisions of which will amend the Income Tax Assessment Act, the expression "the Principal Act" means the Income Tax Assessment Act 1936.
Clause 4: Interpretation.
By this clause it is proposed to re-define the expression "royalty" in section 6 of the Principal Act.
As mentioned earlier in these notes, the expression "royalty" is at present defined in the Principal Act by reference to the definition of "royalties" contained in the double taxation agreement with the United Kingdom. It is proposed to omit this definition by reference and substitute one which expressly states the scope that the term is intended to have. The re-expressed provision will not change the meaning of the term in practice, but will remove doubts as to whether it applies to amounts falling within its scope paid to residents of all countries.
Clause 5: Source of royalty income derived by a non-resident.
Section 6C of the Principal Act ascribes an Australian source to royalties for the purposes of the income tax law. The section provides, in effect, that royalty income which is an expense of an Australian business shall, for the purposes of section 25 of the Principal Act, be deemed to have been derived from a source in Australia. Section 25 makes a non-resident subject to tax on income from a source in Australia. While section 6C as at present drafted thus applies for purposes of the provision creating a liability to Australian tax, it does not expressly contain a reference to section 23(r) of the Principal Act which provides that income derived by a non-resident from sources wholly out of Australia is to be exempt from Australian tax.
The amendment to section 6C proposed by clause 5 is designed to make it abundantly clear that income to which an Australian source is ascribed by section 6C is not to be viewed as having a source outside Australia for the purposes of section 23(r).
Clause 6: Certain items of assessable income.
This clause proposes a drafting amendment of sub-section 26(f) of the Principal Act. That sub-section provides that the assessable income of a taxpayer shall include any amount received as or by way of royalty, other than an amount that, but for the definition of "royalty" in sub-section (1) of section 6, would not be such an amount. The practical effect of this is that any amount received as a royalty in the strict sense of that word falls to be included in assessable income under section 26(f), while any amount of income that is not a royalty within the technical meaning of the word, but falls within the wider definition of royalty in section 6, is included in assessable income under the general provisions of section 25.
The technical amendment to section 26(f) will not affect the amounts of royalties to be included in assessable income. In the case of a non-resident, of course, the amounts will be so included only where they have a source in Australia.
Clause 7: Interpretation.
The main purpose of this clause is to amend the Income Tax (International Agreements) Act so as to eliminate any doubt that the royalty definition has effect for the purposes of provisions of Australia's double taxation agreements, currently those with the United States of America and Canada, in which the term "royalties", being undefined, has the meaning which it has for Australian income tax purposes. As indicated earlier, a recent court decision suggests that the definition of "royalty" inserted in the Income Tax Assessment Act in 1968 may not be applicable for these purposes.
All of Australia's double taxation agreements entered into since 1967 include definitions of the term "royalties" along the lines of the definition inserted in the Assessment Act in 1968. The agreements with the United States of America and Canada, which were negotiated before that time, do not include such a definition. Those agreements do, however, provide that undefined terms - "royalties" being one such term - are to have the meanings they have in the laws of the country applying the agreement.
Paragraph (a) of clause 7 proposes a drafting amendment to the definition of "the Assessment Act" in section 3 of the Income Tax (International Agreements) Act. Paragraph (b) of clause 7 will insert two new sub-sections (sub-sections (8) and (9)) in section 3 of the Income Tax (International Agreements) Act.
Sub-section (8) provides that where the expression "royalties" is not defined in a double taxation agreement, the expression shall have the meaning it has by virtue of the definition of "royalties" proposed to be inserted in section 6 of the Principal Act by clause 4 of this Bill. The new sub-section, which will, in effect, duplicate the existing double taxation agreement provisions relating to undefined terms, is being inserted for the avoidance of doubt specifically in relation to the term "royalties".
The new sub-section (9) is being inserted to make it clear that the operation of double taxation agreement provisions relating to undefined terms (other than the term "royalties") is not to be affected by implications that might be drawn from the insertion, in sub-section (8), of provisions to the same effect dealing only with royalties.
Clause 8: Application of amendments.
The Treasurer announced on 4 July 1976 that the present amendments would apply to all assessments made after that day. This clause accordingly proposes that the present amendments shall have effect in relation to income derived on or after 1 July 1968, that is, the date from which the 1968 amendments had effect, other than income in respect of which an assessment was made before 5 July 1976. The amendments will not affect the determination of valid objections lodged against assessments made before that day.
Clause 9: Amendments not to affect interpretation of previous law.
As noted in the explanations of other clauses of this Bill, the amendments to be effected by the Bill are not intended to alter in any practical way the intended operation of the provisions of the existing law that are being amended, but are to remove doubts as to their operation. This clause specifically declares that the proposed amendments are for the avoidance of doubt and, in particular, are not to be taken as implying that the definition of "royalty" inserted in the Assessment Act in 1968 did not apply in relation to payments made to residents of countries other than the United Kingdom, or for the purpose of double taxation agreements in which the term "royalties" is not defined.