House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. J.W. Howard, M.P.)

Notes on Clauses

INCOME TAX (RATES) AMENDMENT BILL 1978

This Bill will amend the Income Tax (Rates) Act 1976, (in this section of these notes referred to as "the Principal Act") which declares the rates of tax in respect of the income of individuals and trusts and includes provision for the indexation of the rates of tax by reference to increases in the consumer price index.

The rates of tax applicable for any financial year in accordance with the Income Tax (Rates) Act are imposed for that financial year by an annual Income Tax (Individuals) Act.

In the absence of the changes to the income tax law that this Bill proposes, the rates of tax declared by Part IV of the Principal Act - that is, those set out in Schedules 9 to 12 of that Act as affected by the indexation provision of that Act - would apply for 1978-79 and subsequent years.

Under the 1978-79 Budget proposals the standard rate of income tax for 1978-79 is to be increased from 32% to 33 1/2% and the income tax averaging provisions for primary producers are to be modified. This Bill proposes necessary changes to the Principal Act to give effect to those proposals.

Notes on the clauses of the Bill are set out below.

Clause 1: Short title etc.

This clause provides for the amending Act to be cited as the Income Tax (Rates) Amendment Act 1978 and for the Income Tax (Rates) Act 1976 as previously amended to be referred to in the amending Act as the Principal Act.

Clause 2: Commencement

Sub-section 5(1A) of the Acts Interpretation Act 1901 provides that every Act shall come into operation on the 28th day after the day on which the Act receives the Royal Assent, unless the contrary intention appears. By this clause, it is proposed that the amending Act shall come into operation on the day on which it receives the Royal Assent.

Clause 3: Heading to Part IV

Clause 4: Application of Part IV

Clause 3 will amend the heading to Part IV of the Principal Act as a consequence of the amendment proposed by clause 4 of the Bill. Clause 4 proposes that section 6D of the Principal Act, which provides that the rates of tax declared by Part IV of that Act apply for the 1978-79 financial year, and all subsequent financial years, be amended so that the rates declared by that Part will apply for the 1978-79 financial year only. The rates of tax declared by Part IV are being amended by other clauses to incorporate the increase in the standard rate of tax which is to apply for 1978-79 only.

Section 6D, as amended, will also provide that the notional rates of tax declared by Part IV of the Principal Act for the purposes of section 156 of the Assessment Act are to apply for the financial year 1978-79 only. Notional rates are a part of the new averaging arrangements. They are, in effect, the same as the present average rates and are to be used to determine the tax that would have been payable by a person who had derived primary production income in the year if no change had been made to the averaging system for primary producers. This calculation is necessary for purposes of determining the averaging benefit in respect of which a rebate of tax is to be allowable under amended section 156 of the Assessment Act. The full amount of the benefit will be allowed if all of the taxpayer's income is taken to be derived from primary production and a proportion of the benefit will be available where a part only of the taxpayer's income is taken to be from primary production.

Clause 5: Rates of tax and notional rates

This clause proposes the amendment of section 6E of the Principal Act as a consequence of the change that is being made to the income tax averaging system for primary producers and to the standard rate of tax for 1978-79. Section 6E sets out the rates of tax payable by taxpayers, according to the category into which they fall, for the 1978-79 financial year.

The general rates of tax, applicable to most individuals, for 1978-79 will be those declared by existing sub-section 6E(1) of the Principal Act and set out in new Schedule 9 which, by clause 10, is to be substituted for the existing Schedule 9.

The rates specified in new Schedule 9 are as follows:

The tax payable at the rates shown in new Schedule 9 may be calculated from the following table:

Under the proposed new averaging provisions of the Assessment Act the averaging benefit is to be made available to a primary producer not by applying special rates of tax to the primary producer's income but by means of a rebate of tax which is to be determined having regard to the notional rates declared for the purposes of those provisions. Accordingly paragraph (a) proposes the omission from the Principal Act of sub-section 6E(2) which, in conjunction with existing Schedule 10, declares the special rates of tax that are no longer to apply for purposes of the averaging provisions. Paragraph (a) also proposes that a new sub-section 6E(2) declaring - in conjunction with new Schedule 10 - the notional rates of tax for 1978-79 be inserted in the Principal Act.

New Schedule 10 which is being inserted in the Principal Act by clause 10 is divided into three parts. Parts I and II of the new Schedule are basically the same as Parts I and II of the existing Schedule. However, the new Schedule makes it clear that the rates shown in the Schedule are notional rates. Paragraph 2(b) of Part I and paragraph 3(b) of Part II of the existing Schedule have not been included in the proposed Schedule. These paragraphs were needed in the existing Schedule to avoid a taxpayer being required to pay more tax under the averaging provisions than that which would have been payable on his or her taxable income at the general rates of tax. Under the modified averaging provisions of the Assessment Act the tax payable is first determined having regard to the general rates of tax and this is reduced by a rebate equal to the averaging benefit that is allowable. Accordingly the averaging provisions can only operate to reduce this amount and the paragraphs being omitted are no longer necessary.

Part III of new Schedule 10 which sets out the notional rates of tax for certain trust income is a new Part. It broadly corresponds to the provisions of existing Schedule 12 as those provisions would have applied in circumstances where the trustee was entitled to have the trust's tax determined under the averaging provisions. Schedule 12 as amended will declare the ordinary rates of tax payable by a trustee who is liable to be assessed under section 98 or 99 of the Assessment Act.

Paragraph (b) of clause 5 will substitute new sub-sections (5) and (6) in section 6E in lieu of existing sub-sections (5) and (6). Existing sub-sections (5) and (6) declare the rate of further tax payable on income to which section 94 applies. Under section 94 of the Assessment Act further tax is payable by a person whose income includes any amount of "uncontrolled partnership income".

A partner is said to derive "uncontrolled partnership income" if he or she does not have the real and effective control and disposal of the relevant share of the partnership income. A person under the age of 16 at the end of the year of income is deemed not to have the real and effective control and disposal of a share of the income of a partnership, other than certain kinds of partnerships deriving property income only, except to the extent that the share would constitute reasonable remuneration by way of salary or wages if services rendered by the person to the partnership had been performed by an employee.

As is the case under the existing provisions, proposed new sub-section 6E(5) imposes further tax for the 1978-79 financial year on income to which section 94 applies at a rate of 50% reduced by the average ordinary rate of tax applicable to the taxpayer's total income. The average ordinary rate of tax is to be determined for this purpose in a different manner depending on whether the income to which the further tax is to apply is "primary production" income (this income is referred to as the "prescribed part" of the taxable income) or is not "primary production" income (that is, the "relevant part" of the taxable income). The average ordinary rate applicable to the relevant part of the taxable income is to be taken as being ordinary tax payable divided by the total taxable income. In the case of the prescribed part of the taxable income average ordinary rate of tax is to be determined by dividing the tax that would have been payable if the notional rates of tax had applied to taxable income, by the total taxable income.

Proposed new sub-section 6E(6) declares the rate of further tax payable for the 1978-79 financial year in pursuance of section 94 of the Assessment Act where a trustee is liable to be assessed and to pay tax under section 98 or section 99 of that Act. The rates of further tax payable under this sub-section are to be determined in a corresponding manner to that in which they are to be determined under new sub-section (5).

Paragraph (c) of clause 3 will amend sub-section 6E(7) which declares the rate of tax payable for the 1978-79 financial year by a trustee liable to tax pursuant to section 99A of the Assessment Act. At present, the rate of tax payable on such income is equal to the maximum rate of tax payable by an individual, standard rate and surcharge combined, that is, 60%. The increase in the standard rate of tax for 1978-79 will increase the maximum rate of tax payable by an individual, standard rate and surcharge combined, to 61.5%. Accordingly, paragraph (c) proposes that the rate payable by trustees liable to be assessed under section 99A be also increased to 61.5% for 1978-79.

Clause 6: Limitation on tax payable by certain trustees

Clause 6 will amend section 6F of the Principal Act. Section 6F applies to a trustee of a trust estate who is liable to be assessed and to pay tax under section 98 or 99 of the Assessment Act where the trustee is not entitled to the zero rate of tax on the first slice of trust income. In those circumstances, section 6F operates to free the trustee from tax if the net income on which the trustee is liable to pay tax is less than $1,041 (section 98 cases) or $417 (section 99 cases). Above the tax-free point tax is limited to 50% of the excess of the net income over $1,040 or $416, respectively. Under the existing rates of tax the "shading-in" rate of 50% over $1,040 or $416 applies in the range of income $1,041 to $2,888 (section 98 cases) and $417 to $1,155 (section 99 cases). Consequent on the increase in the standard rate of tax it is necessary, and clause 6 so proposes, that the shading-in ranges be extended from $2,888 to $3,151 (section 98 cases) and from $1,155 to $1,260 (section 99 cases). These are the new income levels above which tax at the shading-in rate of 50% would exceed tax at the rates declared by sub-section 6E(4) of the Principal Act.

Clause 7: Rates of tax for 1979-80 and subsequent financial years

This clause will insert a new Part, Part IVA, in the Principal Act, comprising new sections 6G, 6H and 6J which, in conjunction with Schedules 13 to 16, will declare the rates of tax, and the notional rates for the purposes of the primary producer averaging provisions of the Assessment Act, for the 1979-80 financial year and subsequent financial years.

Proposed section 6G formally provides that the rates of tax and the notional rates declared by Part IVA are to apply for the 1979-80 financial year and all subsequent financial years.

Proposed section 6H declares the rates of tax payable by individuals and trustees (but not trustees of superannuation funds), and the notional rates for purposes of the primary producer averaging provisions, for the 1979-80 financial year and all subsequent financial years. The rates are set out in Schedules 13 to 16 which are to be inserted in the Principal Act by clause 13 of the Bill. The rates are to apply to resident and non-resident taxpayers.

The general rates of tax applicable to most individuals for 1979-80 and subsequent years will be those declared by proposed sub-section 6H(1) and set out in Schedule 13. These are the same as the rates of tax that would have applied for 1978-79 but for the increase in the standard rate proposed by this Bill. The effective rates specified in Schedule 13 are as follows -

These income ranges are subject to indexation in accordance with the provisions of section 9 of the Principal Act, as proposed to be amended by this Bill.

Sub-section 6H(2) declares for 1979-80 and subsequent financial years the notional rates for purposes of the primary producer averaging provisions of the Assessment Act. These rates are set out in Schedule 14 which corresponds with new Schedule 10 which sets out 1978-79 notional rates, except that the reduction in the standard rate from 33 1/2% to 32% for 1979-80 and subsequent years will be reflected in the operation of Schedule 14. This is to be achieved by referring in Schedule 14 to the rates in accordance with Schedule 13, as set out above.

Proposed sub-section 6H(3) and Schedule 15 will declare the rates of tax applicable for the 1979-80 and subsequent financial years to a taxpayer deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premium) or section 158D (abnormal income of authors or inventors) of the Assessment Act. In these cases the rate of tax payable will be ascertained by dividing by the notional income, an amount equal to the tax that would be payable at the general rates specified in Schedule 13 on a taxable income equal to the notional income. Accordingly, return to the standard rate of 32% provided for in Schedule 13 will be reflected in the tax payable in accordance with Schedule 15.

Proposed sub-section 6H(4) and Schedule 16, like the corresponding 1978-79 Schedule 12, will declare, for 1979-80 and subsequent years, the rates of tax payable by trustees in pursuance of sections 98 and 99 of the Assessment Act. The restoration of a standard rate for these years of 32% will be reflected in the tax payable by these trustees through the reference in Schedule 16 to the rates of tax payable under Schedules 13 or 15.

Proposed sub-section 6H(5) declares the rate of further tax payable pursuant to section 94 of the Assessment Act for 1979-80 and subsequent financial years where there is included in the taxable income any amount of income to which that section applies, i.e., "uncontrolled partnership income". The proposed sub-section matches proposed sub-section 6E(5) which declares the corresponding rate for 1978-79.

Proposed sub-section 6H(6) declares the rate of further tax payable pursuant to section 94 of the Assessment Act for 1979-80 and subsequent financial years where the tax-payer is a trustee liable to be assessed and to pay tax under section 98 or section 99 of that Act. The proposed sub-section follows proposed sub-section 6E(6) which declares the corresponding rate of further tax for 1978-79.

Proposed sub-section 6H(7) declares the rate of tax payable by a trustee liable to tax pursuant to section 99A for 1979-80 and subsequent financial years. The proposed rate is to be 60%, which is to be the maximum rate of tax payable by individual taxpayers for those years.

Proposed section 6J will limit the tax payable for 1979-80 and subsequent years by trustees of trust estates liable to be assessed and to pay tax under sections 98 or 99 of the Assessment Act who are not entitled to the zero rate of tax on the first slice of trust income. Apart from changes to the upper limits of the "shading-in" ranges consequent upon the restoration of the standard rate of tax for 1979-80 and subsequent years to 32%, the new section is the same, in effect, as section 6F which is being amended by clause 6 of this Bill - see the notes on that clause.

Clause 8: Operation of sections 6C, 6F and 6J

This clause effects a formal drafting amendment of section 7A of the Principal Act consequential on the insertion of new section 6J into the Act.

Clause 9: Indexation

This clause amends section 9 of the Principal Act which provides for indexation of the general rates scale set out in Schedule 9 and certain amounts set out in Schedule 10.

Paragraph (a) of clause 9 will amend the definition of "relevant amount" in sub-section 9(1) of the Principal Act. This definition, at present, means any of the amounts that constitute the income steps in the general scale of rates set out in Schedule 9, and the amount of $3,750 specified in sub-paragraph 3(a)(i) and in sub-paragraph 3(a)(ii) of Part II of Schedule 10. Schedules 9 and 10 are being amended by this Bill to apply for the financial year 1978-79 only, and accordingly, it will be necessary for future indexation adjustments to apply to the rates, excluding the 1978-79 increase in the standard rate, declared for 1979-80 and subsequent years.

In the amended definition of "relevant amount", the reference to Schedule 9 will be replaced by a reference to Schedule 13 which sets out the general rates that, subject to indexation, are to apply for 1979-80 and all subsequent years and the reference to the amount of $3,750 specified in the relevant sub-paragraphs in Part II of Schedule 10 will be replaced by a reference to the amount of $3,893 specified in paragraphs 3(a) and 3(b) of Part II of Schedule 14, i.e., the schedule for 1979-80 and subsequent years corresponding to 1978-79 Schedule 10.

Paragraph (b) will amend the definition of "relevant year of income". Consistent with the amendments proposed by paragraph (a) above, "relevant year of income" will mean the 1979-80 year of income or a subsequent year of income, rather than 1978-79 or a subsequent year of income. The use of income ranges indexed to 1978-79 in the restatement of the rates of tax in new Schedule 13 is in line with this approach.

Paragraph (c) will repeal sub-sections (8), (9) and (10) of section 9 of the Principal Act. These sub-sections had special application for 1978-79 only and, with the changes being made by paragraphs (a) and (b), will have no further relevance. They are accordingly being repealed.

Clause 10: Repeal of Schedules 9 and 10

This clause omits existing Schedules 9 and 10 and substitutes new Schedules 9 and 10. The effect of the new Schedules has been explained earlier in the notes on clause 5.

Clause 11: Heading to Schedule 11

This clause amends the heading to Schedule 11 by omitting from that heading the words "AND SUBSEQUENT FINANCIAL YEARS". Amendments explained earlier will have the effect that Schedule 11 will now apply for the 1978-79 financial year only, and not also for years subsequent to that financial year as is presently provided.

Clause 12: Schedule 12

This clause amends Schedule 12 to the Principal Act in several respects. As in the case of Schedule 11, amendments explained earlier will have the effect that Schedule 12 will apply only for the 1978-79 financial year. Accordingly, paragraph (a) of clause 12 proposes the omission from the heading to that Schedule of the reference to subsequent financial years.

Paragraph (b) of clause 12 proposes to delete the reference in Schedule 12 to Schedule 10. This amendment is consequential upon the proposed change to the averaging provisions for primary producers. New Schedule 10 will declare the notional rates for 1978-79, not the rates of tax payable for that year. Accordingly, the reference to that Schedule in Schedule 12 is now not appropriate and it is being omitted. Part III of new Schedule 10 sets out the notional rates of tax for the trustees concerned.

Paragraph (c) of clause 12 will delete paragraphs 2(b), (c) and (d) of Schedule 12 and insert a new paragraph (b). New paragraph (b) of Schedule 12 is simply a restatement of existing paragraph (b) of that Schedule, adjusted for changes resulting from indexation. Paragraphs (c) and (d) relate to Schedule 10 which as explained in the notes on paragraph (b) of this clause will not have effect in determining the rates of tax payable by trustees, and these paragraphs are no longer necessary.

Clause 13: Schedules 13, 14, 15 and 16

This clause will insert new Schedules 13 to 16 in the Principal Act. These Schedules specify the rates of tax for the purposes of section 6G for the 1979-80 financial year and all subsequent financial years. The effect of these Schedules has been explained earlier in the notes on clause 7.

INCOME TAX ASSESSMENT AMENDMENT BILL (NO. 2) 1978

Clause 1: Short title, etc.

This clause formally provides for the short title and citation of the Amending Act, and the Income Tax Assessment Act 1936 (in this section of these notes referred to as the Principal Act).

Clause 2: Commencement

By section 5(1A) of the Acts Interpretation Act 1901 every Act is to 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, a number of the provisions of which are to be effective from 1 November 1978, will come into operation on the day on which it receives the Royal Assent.

Clause 3: Exemptions

This clause will amend section 23 of the Principal Act which states a variety of circumstances in which income is exempt from income tax.

Sub-paragraph (t)(ii) of section 23 exempts from income tax deferred pay, including interest thereon, paid to a member of the Defence Force before 1 July 1947 or paid subsequently for service during any period before 1 July 1947.

As the last payment for deferred pay was made some years ago, it is proposed by paragraph (a) of sub-clause (1) to omit the now redundant sub-paragraph (t)(ii). The amendment is expressed formally to apply to assessments in respect of income of 1978-79 and all subsequent years of income.

Paragraph (z) of section 23 of the Principal Act exempts from income tax certain educational allowances received by students receiving full-time education at a school, college or university. Allowances paid under the Commonwealth Post-graduate Awards Scheme provided for in the Student Assistance Act 1973 are exempted from tax by paragraph (z), but are now to be made subject to tax.

By paragraphs (b) and (c) of sub-clause (1), it is proposed to insert a new sub-paragraph - sub-paragraph (iv) - in section 23(z) of the Principal Act to remove income derived under the Commonwealth Post-graduate Awards Scheme from the exemption provided by that section. The amendment will require allowances paid under the scheme on or after 1 November 1978 to be dealt with under the general assessment provisions of the income tax law. Amounts paid under the scheme are living allowances in respect of the award holder and any dependent spouse and children, travelling allowances, establishment allowances, incidentals (union dues etc.) allowances and thesis allowances.

The effect of the amendment will be to include in the assessable income of the award holder, the living allowances and the incidentals and thesis allowances. By the amendment proposed in clause 14(1)(c) of the Bill, the living allowances will be subject to pay-as-you-earn tax instalment deductions. Expenses of self-education, including amounts expended for the purposes for which the incidentals and thesis allowances are granted, will qualify as to the first $250 as rebatable expenditure under section 159U of the Principal Act and the balance will be deductible under the general deduction provisions of the law. The travelling allowance and the establishment allowance are paid in respect of the award holder's costs in taking up the award. They will not constitute income of the award holder and, correspondingly, the expenditure in respect of which these allowances are paid will not be an allowable income tax deduction.

Clause 4: Certain items of assessable income

The amendments being made by this clause mainly concern the proposed change in the basis of taxing lump sum amounts for unused annual leave and long service leave.

Paragraph (d) of section 26 of the Principal Act includes in the assessable income of a taxpayer 5% of the capital amount of any allowance, gratuity or compensation paid in a lump sum in consequence of retirement from, or the termination of, any office or employment, and whether so paid voluntarily, by agreement or by compulsion of law. Paragraph (e) of section 26 includes in assessable income the value to a taxpayer of benefits received in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by the taxpayer.

Each paragraph contains a proviso which excludes certain amounts from its operation.

Sub-clause (a) of clause 4 will omit the existing paragraph 26(d) of the Principal Act and insert a new paragraph (d). The substituted paragraph (d) will not apply to any payments falling within the scope of the proposed new sections 26AC and 26AD. Those two sections (to be inserted by clause 5) propose to include in the assessable income of a taxpayer, in whole or in part, any lump sums paid after 15 August 1978 to a taxpayer in consequence of the retirement from, or the termination of, the employment of the taxpayer in respect of unused annual leave or long service leave. The substituted paragraph will otherwise continue to operate in the same manner as previously, except that the reference in the proviso to the existing paragraph, which excluded from the operation of the paragraph payments of deferred pay for Defence Force service prior to 1 July 1947, will be omitted. The last payment for deferred pay was made some years ago. See also clause 3.

Sub-clause (b) of clause 4 will amend paragraph (e) of section 26 so that the paragraph will not apply to any payments falling within the scope of the proposed new sections 26AC and 26AD.

Clause 5: Amounts received on retirement or termination of employment in lieu of annual leave and long service leave

It is proposed by this clause to include two new sections, sections 26AC and 26AD, in the Principal Act. Section 26AC will cause an amount paid after 15 August 1978 to a taxpayer in a lump sum in respect of unused annual leave in consequence of retirement from, or the termination of, an office or employment after that date to be included in full in the taxpayer's assessable income. Section 26AD will mean that an amount paid after 15 August 1978 to a taxpayer in a lump sum in respect of unused long service leave (including an amount in the nature of long service leave) in consequence of retirement from, or the termination of, an office or employment after that date is to be included in the taxpayer's assessable income to the full extent to which it is a payment for leave related to service after that date. However, an amount so included under section 26AD is not to attract tax at any more than the standard rate of tax. A payment in respect of long service leave relating to service up to 15 August 1978 is to be included in the assessable income to the extent of 5% of the amount.

Annual leave

The new section 26AC is to apply, as proposed by sub-section (1), to an amount paid after 15 August 1978 to a taxpayer in a lump sum if it is paid -

(a)

in consequence of retirement after 15 August 1978 from, or the termination after that date of, any office or employment, and whether so paid voluntarily, by agreement or by compulsion of law; and

(b)

in respect of unused annual leave or in respect of unused annual leave and a bonus or additional payment relating to that leave.

Sub-section (2) proposes that any amount to which the section applies because of the operation of sub-section (1) shall be included in assessable income of the taxpayer of the year of income in which the amount is paid to the taxpayer. A rebate of tax, designed to limit the tax on the amount to the standard rate of tax may be allowed under proposed section 160AA (clause 13).

Sub-section (3) will make it clear that section 26AC applies to pro-rata payments tied to annual leave entitlements received by taxpayers who retire or have their employment terminated before becoming entitled to annual leave as such. For instance, a taxpayer who retires after completing 8 of the 12 months service that would have given him an entitlement to 3 weeks annual leave (worth $450) might be treated under a law or award governing annual leave entitlements of people in his employment category as being entitled to a payment of $300.

Under the terms of sub-section (3), the character of an amount paid in respect of unused annual leave would be attributed to the $300 whether the description of the taxpayer's entitlement under the relevant law or award happened to be 2 weeks leave, a payment equal to two-thirds of the pay rate for a full leave period, a payment equal to one twenty-sixth of the pay rate for a year or something else which recognised that the qualifying period for 3 weeks annual leave had been partially served by the taxpayer at the retirement date.

Sub-section (4) defines for the purposes of the section the meaning of the term "annual leave".

Paragraph (a) of the definition provides that the term means annual leave, recreation leave or annual holidays to which the taxpayer has an entitlement by virtue of a law of the Commonwealth, a State or Territory, an award, determination or an industrial agreement in force under any such law, a contract of employment or the terms of an appointment to an office.

Paragraph (b) is designed to ensure that leave to which a taxpayer has an entitlement under a law, award, etc. and which is of the same nature as leave bearing any of the descriptions referred to in paragraph (a) is not left outside the defined meaning of "annual leave" merely because the leave happens to be described in a less-than-usual way. Paragraph (b) would not bring a payment in lieu of accumulated sick leave within the ambit of the definition.

Paragraph (c) of the definition includes within the meaning of the term "annual leave", leave made available to a taxpayer as a privilege, rather than as an entitlement, where the availability of the leave is determined by reference to matters similar to matters by reference to which entitlements to leave referred to in paragraphs (a) and (b) are ordinarily determined. The paragraph is designed to cover cases of office holders who may have no actual entitlement to take annual leave but are allowed the privilege of doing so, and of employees who are allowed by their employers to take leave additional to their actual annual leave entitlements.

Long service leave

The new section 26AD is to apply, as proposed by sub-section (1), to the amount paid after 15 August 1978 to a taxpayer in a lump sum if it is paid -

(a)

in consequence of retirement after 15 August 1978 from, or the termination after that date of, any office or employment, and whether so paid voluntarily, by agreement or by compulsion of law; and

(b)

in respect of unused long service leave.

The whole of an amount to which the section applies may thus be fully assessable (subject to proposed section 160AA), the whole of the amount may be assessable to the extent of 5% only, or part of the amount may be fully assessable and part of the amount assessable to the extent of 5% only.

The basis of assessment to be applied will be dependent mainly on whether the period of eligible service of the taxpayer -

•

was commenced after 15 August 1978, in which event the whole amount will be fully assessable (sub-section (2));

•

was commenced before and ended on or before 15 August 1978, in which event the whole amount will be assessable to the extent of 5% only (sub-section (5)); or

•

was commenced on or before 15 August 1978 and ended after that date, in which event the part of the amount attributable to the period up to that date will be assessable to the extent of 5% only and the part of the amount attributable to the period after that date will be fully assessable (sub-sections (3), (4) and (5)).

A case within the last of those categories could, in effect, be taken into the second last category, if the taxpayer concerned used more leave after 15 August 1978 than the leave treated as having accrued after that date.

The term "eligible service period" is defined in sub-section (7) as meaning -

(a)

where the taxpayer had not, before the date of his retirement from, or the termination of, his office or employment used any long service leave - the period by reference to which the lump sum payment was determined; or

(b)

where the taxpayer had, before the date of his retirement from, or the termination of, his office or employment used any of his long service leave entitlement - the period by reference to which the long service leave used by the taxpayer and the lump sum payment he received was determined (in effect, the total leave credited to him up to the retirement date).

Sub-section (2) of section 26AD relates to any case where the eligible service period of the taxpayer, in respect of which the lump sum payment for unused long service leave was received, commenced after 15 August 1978. In such a case, the whole of the payment received by the taxpayer in respect of the unused long service leave is to be included in assessable income. A rebate of tax, designed to limit the tax on the payment to the standard rate of tax, may be allowed under proposed section 160AA (clause 13).

Sub-section (3) relates to any case where the eligible service period of the taxpayer, in respect of which the payment for unused long service leave was received, commenced on or before 15 August 1978 and ended after that date and where the employment or service was performed by the taxpayer on a full time basis throughout the eligible service period or was performed on a part time basis throughout that period.

The sub-section lays down a formula to be used in ascertaining the part of the amount received in respect of unused long service leave which, being attributable to the period of eligible service after 15 August 1978, is to be included in full in the taxpayer's assessable income. The balance of the amount received will, by the operation of sub-section (5), be assessable to the extent of 5% only.

Basically, the amount attributable to the period after 15 August 1978, and thus fully assessable under sub-section (3), is the amount that bears to the lump sum payment received in respect of the unused long service leave the same ratio as the number of long service leave days deemed to have accrued and to remain unused in respect of the eligible service period after 15 August 1978 bears to the number of unused long service leave days in respect of which the lump sum amount is paid.

In making the calculation it is necessary to ascertain the number of whole days in the eligible service period and the number of such days which accrued after 15 August 1978.

The meaning of the term "eligible service period", as defined in sub-section (7), has been explained in the notes on sub-section (1). Subject to a refinement applicable in particular cases as explained in the notes on sub-section (11), sub-section (7) provides the basis for ascertaining the number of days in that period.

The formula set out in sub-section (3) provides for the number of days of long service leave which accrued in respect of the eligible service period after 15 August 1978 to be calculated by apportioning the total number of days of long service leave accrued in respect of the total eligible service period (

B + D


) according to the ratio that the number of days in the eligible service period after 15 August 1978 (C) bears to the total number of days in the eligible service period (E).

The number of days so calculated as having been accrued after 15 August 1978 is then to be reduced by the number of long service leave days used by the taxpayer after that date. If the number of days accrued exceeds the number of days used, the difference - representing the number of unused leave days attributable to the period after 15 August 1978 - is then to be multiplied by the daily rate (

(A)/(B)


) of the amount paid to the taxpayer in respect of long service leave unused at retirement or termination of employment.

The amount resulting from this calculation is the amount to be included in the taxpayer's assessable income under sub-section (3) of section 26AD, that is, the part of the total amount received in respect of long service leave that is attributable to the period after 15 August 1978.

If the number of days of long service leave which are deemed to have accrued after 15 August 1978 is less than the number of such days used after that date, then no part of the amount paid to the taxpayer in respect of unused long service leave is to be included in the assessable income under sub-section (3). In these circumstances, sub-section (5) will operate to include 5% of the total amount in the assessable income.

In a case where a taxpayer had not used any long service leave at all before his retirement, the amount to be included in his assessable income under sub-section (3) may be calculated by a "short-cut" method.

All that would be required is an apportionment of the amount paid to the taxpayer in respect of unused long service leave in the same ratio as the number of days in the eligible service period occurring after 15 August 1978 bears to the total number of days in the eligible service period. This short-cut method of calculation will probably be capable of use in most cases where taxpayers have not become entitled at the time of retirement or termination of employment to long service leave as such but are entitled to pro-rata payments.

Sub-section (4) relates to any cases where the eligible service period of the taxpayer, in respect of which the payment for unused long service leave was received, commenced on or before 15 August 1978 and ended after that date and where, unlike the cases to which sub-section (3) relates, the employment or service was performed by the taxpayer partly on a full-time basis and partly on a part-time basis.

In a case to which sub-section (4) relates, calculations need to be made in accordance with the formula set out in sub-section (3) separately in relation to the amount received on retirement or termination of employment in respect of unused leave attributable to service on a full-time basis and the amount received in relation to unused leave attributable to employment on a part-time basis.

For the purposes of these separate calculations, sub-section (4) provides for certain references under sub-section (3) to be read as if they relate to the full-time employment on the one hand and the part-time employment on the other. The sum of the amounts determined under each of the separate calculations as being attributable to the period after 15 August 1978 is to be fully assessable under sub-section (4).

Sub-section (5) identifies the part of the amount paid to a taxpayer after 15 August 1978 on retirement or termination of an office or employment after that date in respect of unused long service leave which, being related to a period of eligible service up to that date, is to be assessable to the extent of 5% only. This is the amount, if any, ascertained by deducting from the total amount paid to the tax-payer in respect of unused long service leave any amounts included in the assessable income by the application of sub-sections (3) and (4).

Sub-section (6) will make it clear that section 26AD applies to pro-rata payments tied to long service leave entitlements received by taxpayers who retire or have their employment terminated before becoming entitled to long service leave as such. For instance, a taxpayer who retires after completing 10 of the 15 years service that would have given him an entitlement to 3 months long service leave (worth $1,800) might be treated under a law or award governing long service leave entitlements to people in his employment category as being entitled to a payment of $1,200.

Under the terms of sub-section (6) the character of an amount paid in respect of unused long service leave would be attributed to the $1,200 whether the description of the tax-payer's entitlement under the relevant law or award happened to be 2 months leave, a payment equal to two-thirds of the pay rate for a full leave period, a payment equal to one-sixtieth of the pay rate for the period of his eligible service or some-thing else which recognised that the qualifying period for 3 months annual leave had been partially served by the taxpayer at retirement date.

The sub-section makes it clear that the days of "relevant long service leave" in respect of which the pro-rata payment was made are, for the purposes of section 26AD calculations, to be counted in the number of whole days of long service leave that accrued in respect of the eligible service period.

Sub-section (7) contains definitions of two expressions used in section 26AD.

The defined meaning of one of them, "eligible service period", has already been explained in the notes on sub-section (1). This expression is relevant for the purposes of the calculations to be made in sub-sections (2) to (5) in ascertaining the amounts to be included in assessable income under section 26AD. The length of the "eligible service period" of a taxpayer will not necessarily equal the length of time that the taxpayer was employed.

In some cases certain absences from employment, although they do not affect the continuity of the employment in determining the eligibility for long service leave, are not taken into account in determining the length of the long service leave entitlement. Also, where a taxpayer accrues his entitlement to long service leave otherwise than on a daily basis, the "eligible service period" will not necessarily end on the date of retirement from, or the termination of his, employment but will cease on the date on which the taxpayer last became entitled to an accrual of long service leave. Where the leave accrues in respect of a continuous year of employment the "eligible service period" may end up to one year before the actual date of termination of the employment.

The term "retirement date" is defined as meaning the date on which the taxpayer retired from the office or employment or on which that office or employment was terminated.

Sub-section (8) defines the meaning of the term "long service leave" for the purposes of section 26AD.

Under paragraph (a), "long service leave" is to mean long service leave, long leave, furlough, extended leave, or leave of a similar kind (however described) to which a person has an entitlement by virtue of a law of the Commonwealth or of a State or Territory, an award, determination or industrial agreement in force under any such law, a contract of employment or the terms of appointment to an office.

Paragraph (b) of the definition includes within the meaning of "long service leave" any leave (other than leave which is annual leave for the purposes of section 26AC) to which a person has an entitlement by virtue of a scheme or arrangement by reason of the existence and nature of which the employer of the person has secured exemption from obligations to comply with a law of the Commonwealth or of a State or Territory relating to long service leave, long leave, furlough, extended leave or leave of a similar kind.

Some State Acts provide that an employer may be granted exemption from the terms of any law relating to the provision of long service leave benefits for his employees if he operates a scheme which provides certain other benefits. Where such an exemption is granted to an employer, any leave benefits provided to an employee by that alternative scheme will come within the meaning of "long service leave" except to the extent that the leave is annual leave as defined for the purposes of section 26AC.

Paragraph (c) includes within the meaning of the term "long service leave", leave made available as a privilege, rather than as an entitlement, where the availability of the leave is determined by reference to matters similar to matters by reference to which entitlements to leave referred to in paragraphs (a) and (b) are ordinarily determined. The paragraph is designed to cover cases of office holders who may have no actual entitlement to take long service leave but are allowed the privilege of doing so, and of employees who are allowed by their employers to take leave additional to their actual long service leave entitlements.

Sub-section (9) of section 26AD states that any reference in sub-section (3) to a number of whole days of long service leave is to be read as a reference to the number of such days for which the taxpayer has been paid or is entitled to be paid the full or ordinary rate of pay in respect of those days.

The purpose of this sub-section is to avoid any distortion of the calculations to be made under sub-section (3) in cases where, for instance, the conditions of a taxpayer's entitlements to long service leave provide for him to have twice the ordinary leave entitlements at one-half of the ordinary rate of pay.

Sub-section (10) is complementary to sub-section (9). Where a taxpayer has used a number of days of long service leave and was paid or was entitled to be paid in respect of that long service leave at a rate of pay that was less than the rate of full or ordinary pay, the taxpayer will be deemed, for the purposes of the sub-section (3) calculations, to have used such number of whole days of long service leave as bears to the number of days of long service leave used the same proportion as the rate of pay received bears to the full or ordinary rate of pay.

Accordingly, if a taxpayer uses a number of days leave for which he receives a rate of pay equal to one-half of the full or ordinary rate of pay in respect of the leave, the number of whole days of long service leave deemed to have been used for the purposes of sub-section (3) will be one-half the number of days of leave used by the taxpayer.

Sub-section (11) of section 26AD relates to situations whereby as part of a change of conditions which alter an employee's entitlements to long service leave (e.g., a reduction of qualifying service for 3 months leave from 20 years to 15), the change-over arrangements associated with the alteration require the employee's entitlements under the new conditions to be determined by reference to a reduced period of qualifying service (e.g., only three-quarters of the service that would have counted under the former conditions).

In such circumstances the full period of service that would have counted under the former conditions is to be treated as the period of eligible service for the purposes of section 26AD.

Clause 6: Gifts, calls on afforestation shares, pensions, etc.

The purpose of this clause is to provide an income tax deduction for gifts made to the recently incorporated World Wildlife Fund Australia.

Section 78 of the Principal Act authorises an income tax deduction for gifts of the value of $2 and upwards of money, or of property other than money that was purchased by the tax-payer within the twelve months preceding the making of the gift, to a fund, authority or institution specified in paragraph (a) of sub-section 78(1). The deduction in respect of gifts of property other than money is limited to the lesser of the value of the property at the time the gift was made or the amount paid by the donor for the property.

By sub-clause (1), a new sub-paragraph - sub-paragraph (xlvii) - is to be inserted in paragraph (a) of sub-section 78(1) to specify the World Wildlife Fund Australia as a fund to which the income tax deduction provided by sub-section 78(1)(a) applies.

Sub-clause (2) proposes that the gift deduction will be available for any gifts made to the Fund, including those made before the legislation authorising the deduction becomes law.

The intention that gifts to the World Wildlife Fund Australia be made tax deductible was announced earlier this year in advance of the formal incorporation of the Fund. Sub-clause (3) will authorise the Commissioner of Taxation to re-open an income tax assessment made before the enabling legislation becomes law where this is necessary to allow a deduction for a gift made to the fund before that time.

Clause 7: Interest accruing after 31 October 1978 not deductible

The purpose of this clause is to terminate with effect from 1 November 1978, the income tax deduction that is available under Subdivision C of Division 3 of Part III of the Principal Act - sections 82KA to 82KG inclusive - for interest paid on home loans.

The deduction is available under the present law, subject to a net income test, for interest paid on a housing loan connected with a dwelling used during the whole or part of a year as the taxpayer's sole or principal residence. The deduction is restricted to interest paid on a loan connected with the first home owned by the taxpayer or his or her spouse that is used as the taxpayer's sole or principal residence and is available only for interest paid during the first five years of use of that first home.

Under the net income test, a deduction of the whole of the interest paid during the income year is allowable where the combined net income of the taxpayer and spouse is $4,099 or less. No deduction is available where the combined net income is $14,000 or more. Where the combined net income is between $4,099 and $14,000, the interest paid that is allowable as a deduction reduces by 1% for each $100 by which the combined net income exceeds $4,000.

Clause 7 will insert a new section - section 82KBB - in the Principal Act to terminate the deduction for housing loan interest. Under this provision, the deduction will be available (subject to the existing net income, first home, first five years of use tests) for interest paid by 30 June 1979 to the extent that the payment is for interest that has accrued in respect of a period up to and including 31 October 1978.

Paragraph (a) of the proposed section 82KBB will mean that a deduction is not available for any payment made in respect of interest that accrues in respect of any period after 31 October 1978. By paragraph (b) no deduction will be available for any housing loan interest paid after 30 June 1979, irrespective of the period in relation to which that interest accrued.

Clause 8: Partner not having control and disposal of share in partnership income

The amendments to section 94 of the Principal Act proposed by this clause are consequential upon the proposed variation of the system of averaging for primary producers and do not affect the substance of the existing provisions. The changes are designed to identify separately, uncontrolled partnership income that receives averaging benefit, and such income that does not qualify for averaging benefit.

Under section 94 of the Principal Act, further tax is payable on income over which a partner in a partnership does not have, or is deemed not to have, real and effective control and disposal. Further tax is imposed on such income at a rate that is sufficient to bring the tax otherwise payable on the income, up to 50% of that income.

Under the proposed variation of the averaging system for primary producers, cases will occur where section 94 applies and only part of the primary producer's income qualifies for averaging benefits. As two different rates of tax will in effect be levied in such cases, one on income subject to averaging and another on the remaining income, it is necessary to identify separately, uncontrolled partnership income that receives the averaging rebate (see notes on clause 11) and uncontrolled partnership income that is subject to ordinary tax.

The rate of further tax on uncontrolled partnership income that attracts the averaging rebate, will be, in effect, the difference between 50% and the notional average rate of tax payable on a taxable income equal to the taxpayer's average income. (See notes on clause 5 of the Income Tax (Rates) Amendment Bill 1978).

The rate of further tax on the part of uncontrolled partnership income that does not attract any averaging benefit, will be the difference between 50% and the average rate of tax payable on the total taxable income before any rebate or credit.

Paragraph (a) of sub-clause (1) of clause 8 replaces the main operative sub-section of existing section 94. It refers to taxpayers other than trustees, and is to the effect that further tax is to be payable on uncontrolled partnership income to which section 94 applies - referred to as the "eligible portion" of the taxable income - in accordance with new sub-section (10A) or (10B). There is no change to the earlier sub-sections which specify the circumstances in which income is subject to the further tax.

Paragraph (b) of sub-clause (1) will omit existing sub-sections (11) and (12) of section 94 and substitute eight new sub-sections.

New sub-section (10A) refers to taxpayers with no averaging benefits on any part of their taxable income. There will be no change in substance in the calculation of further tax in these cases to arrive at an effective rate of 50%. The eligible portion of the taxable income - that is, the part of the taxable income that is uncontrolled partnership income to which section 94 applies - will be liable to further tax at the rate specified in respect of non-primary production income, referred to as the relevant part, in sub-section 6E(5)(a) of Part IV of the Income Tax (Rates) Act 1976, as proposed to be amended by clauses 4 and 5 of the Income Tax (Rates) Amendment Bill 1978 for the income year 1978-79, and sub-section 6H(5)(a) of Part IVA of the Income Tax (Rates) Act 1976 as proposed to be inserted by the Income Tax (Rates) Amendment Bill 1978 for 1979-80 and subsequent financial years.

In brief, the rate of further tax will be the difference between 50% and the average rate of tax payable on the total taxable income before rebates or credits.

New sub-section (10B) refers to taxpayers to whom averaging applies. The sub-section distinguishes between two amounts which may be subject to the further tax, so that appropriate (and different) rates of further tax can be applied separately to each amount to ensure that it effectively bears 50%.

One part is so much of the uncontrolled partnership income as does not qualify for the average rebate - this is referred to as the relevant part of the eligible portion of the taxable income. This part is calculated as a residual figure - the uncontrolled partnership income less any part of it that does qualify for the average rebate (see paragraph (b) of proposed new sub-section (10C). The further tax rate on this part is calculated on the same basis as that just described for sub-section (10A).

The second part is so much of the uncontrolled partnership income in respect of which an averaging rebate is allowable - this is referred to as the prescribed part of the eligible portion of the taxable income. Paragraph (a) of proposed new sub-section (10C) sets out two methods for calculating the prescribed part, sub-paragraph (i) dealing with the case where a taxpayer derives taxable primary production income and sub-paragraph (ii) dealing with the case where the taxpayer incurs a loss from primary production. Under sub-paragraph (i), the prescribed part is, broadly, the sum of so much of the net income from primary production as is included in uncontrolled partnership income - see clause(A) - and so much of the amount of non-primary production income qualifying for the averaging benefit as is included in the uncontrolled partnership income - see clause (B). The latter is calculated as a proportion of the non-primary production income in respect of which the averaging benefit is allowable equal to the proportion which the non-primary production income included in uncontrolled partnership income bears to total non-primary production income.

Where a taxpayer incurs a loss from primary production, the averaging rebate will be allowed in respect of the amount of non-primary production income that would have qualified for the rebate if there had not been a loss from primary production, reduced by the amount of the loss from primary production. Sub-paragraph (ii) specifies the formula to be used in ascertaining the prescribed part in these cases. In effect, the prescribed part will be that proportion of the non-primary production income that qualifies for the averaging rebate equal to the proportion that the uncontrolled partnership income of the taxpayer bears to the sum of the taxpayer's taxable income and the primary production loss.

Trustees assessed under section 98 or section 99 of the Principal Act may also become liable for the further tax on uncontrolled partnership income. Paragraph (b) of sub-clause (1) of clause 8 proposes to omit existing sub-sections 94(11) and (12) relating to trustees, and to substitute new sub-sections (11), (12), (12A), (12B) and (12C).

The effect of these proposed sub-sections in relation to trustees is the same as that already outlined in relation to individuals. That is, they specify how uncontrolled partnership income is to be separated into the part that receives no benefit from averaging, and the part (if any) that does receive such a benefit. This allows the appropriate further rate of tax to be calculated in respect of each part in accordance with sub-section 6E(6) of the Income Tax (Rates) Act 1976 as proposed to be amended by the Income Tax (Rates) Amendment Bill 1978 for 1978-79, and sub-section 6H(6) for 1979-80 and later years. One rate is declared for the "relevant part" of the net income of a trust estate which does not receive averaging benefits. Another rate is declared for the "prescribed part" which does receive averaging benefits. The end result is to impose an effective 50% rate on both parts included in uncontrolled partnership income.

Paragraph (c) of sub-clause (1) of clause 8 is a drafting measure by which certain terms used in the proposed amendments to section 94 are to have the same meaning as in the definitions appearing in proposed section 156 (clause 11).

Under sub-clause (2) of clause 8, the proposed amendments of section 94 will apply to assessments in respect of the 1978-79 and later income years.

Clause 9: Income of deceased received after death

Section 101A includes in the assessable income of the trust estate of a deceased person any amount received by the trustee during the year of income which would have been assessable income in the hands of the deceased person if it had been received by him during his lifetime.

Clause 9 proposes to insert a new provision, sub-section (2), in section 101A which will ensure that the section does not operate to include in the assessable income of a trust estate any lump sum payment in respect of annual leave or long service leave received by the trustee of the estate of a deceased person which would have been included in the assessable income of that person, if it had been received during lifetime, because of the operation of the proposed new sections 26AC and 26AD (clause 5).

Clause 10: First application of Division in relation to a taxpayer

Clause 10 proposes amendments to section 151 of the Principal Act consequential upon the proposed changes to the averaging provisions. At present, the tax in averaging cases is based on an average rate of tax and existing section 151 refers to the calculation of this rate of tax. These references would not be appropriate in relation to the proposed new averaging system (under which averaging benefits are to be by way of rebates) and accordingly, paragraphs (a), (b) and (c) of sub-clause (1) replace these references with references to the application of the averaging Division - Division 16.

By sub-clause (2) the amendments to section 151 will apply in respect of the 1978-79 and later income years.

Clause 11: Rebate of tax for certain primary producers

By this clause, the income tax averaging provisions for primary producers are to be modified to confine the benefit of averaging more closely to income from primary production. Under the existing averaging system, a taxpayer who qualifies as a primary producer is entitled to averaging benefits in respect of the whole of his or her taxable income.

For 1978-79 and subsequent income years average income will be calculated as under the present law on the basis of the entire taxable income of the relevant years, i.e., average income will not be calculated only on the basis of primary production income. Under the new arrangements, averaging benefits will be confined to:

•

that part of taxable income that is derived from a business of primary production; plus

•

where taxable income from non-farm (i.e., non-primary production) sources is $5,000 or less, the amount of that income; or

•

where the taxable income from non-farm sources is greater than $5,000, the amount (if any) that remains after deducting from $5,000 the excess of that income over $5,000 - the allowance for non-farm income will thus shade out completely when the non-farm income reaches $10,000.

The averaging rebate will only apply in situations where the taxpayer's average income - broadly, of the year and the preceding four years - is less than the taxable income of the year of income, i.e., where the averaging provisions will provide a benefit. If the only income is from primary production, or (as outlined above) other income is of a limited amount, the full amount of taxable income will attract the averaging benefit.

The amount of the proposed averaging rebate is basically to be calculated as in the following example. It is assumed that for 1978-79 a primary producer has a taxable income of $18,000, an average income of $14,000, and net non-farm income of $9,500, the rest of his taxable income, namely $8,500, being from primary production:

Clause 11 proposes the repeal of existing section 156, which provides for the tax payable by a person to whom the averaging provisions apply to be calculated at the rate of tax applicable to average income and the insertion of a new section providing for an averaging rebate in its place.

In essence, the section will do two things. It will set out the definitions and rules which establish the amount of income that is to qualify for the averaging rebate, and it will indicate how the rebate is to be calculated (the ordinary tax rates and the notional tax rates also needed to calculate the rebate, are contained in the Income Tax (Rates) Act 1976 as proposed to be amended by the Income Tax (Rates) Amendment Bill 1978).

Sub-section (1) of new section 156 contains definitions of a number of terms used in the section.

The definitions of "actual taxable income from primary production", "assessable primary production income" and "relevant primary production deductions" are self-explanatory, merely establishing that, as in the case of income generally, taxable income from primary production is equal to assessable income from primary production (including income included in assessable income of the current year in consequence of the carrying on of a business of primary production, such as an amount included in assessable income under sub-section 36(3A) of the Principal Act where a taxpayer has elected to defer four-fifths of the profit from a forced sale of livestock in an earlier year), reduced by allowable deductions that relate exclusively to or may appropriately be related to primary production income and a proportion of the apportionable deductions to which the taxpayer is entitled.

The method of calculating the amount of any non-primary production income which will be eligible for the averaging rebate (i.e., the non-farm income allowance of up to $5,000) is set out in the definition of "notional taxable income from primary production".

The definition is split into two parts - one to cover a situation where there is a loss on primary production, and the other where there is no such loss.

Paragraph (a) of the definition covers the latter situation. Under sub-paragraph (i), where the non-primary production income does not exceed $5,000, the amount is the taxable income less so much of the taxable income as is from primary production. Under sub-paragraph (ii), which applies where the amount of non-primary production income exceeds $5,000, the amount becomes $5,000 less $1 for every $1 by which non-primary production income exceeds $5,000.

Primary production loss situations are covered by paragraph (b) of the definition of "notional taxable income from primary production". Under sub-paragraph (i), the amount of such income is equal to the taxable income, where the sum of the taxable income and the amount of the primary production loss (in effect, the non-farm income before deduction of the primary production loss) is $5,000 or less.

Under sub-paragraph (ii), where the amount of non-farm income as described above exceeds $5,000, the amount is $5,000 less $1 for every $1 of the non-farm income in excess of $5,000, less the amount of the primary production loss (the latter being defined in proposed sub-section 156(3)).

For example, assume a primary producer has non-farm income of $8,000 and a loss from primary production of $1,000, giving a taxable income of $7,000. His "notional taxable income from primary production" will be calculated as follows:

The term "deemed taxable income from primary production" is defined in effect as the actual taxable income from primary production plus the notional taxable income from primary production, if any. This is the amount on which the averaging rebate is to be based.

Sub-sections 156(2) and (3) specify respectively when a taxpayer has a non-primary production profit, and a primary production loss and are largely self-explanatory. The excess of non-farm income over non-farm deductions represents a non-primary production profit, and the excess of farm deductions over farm income represents a primary production loss.

Sub-section (4) provides that where the tax that would be payable at ordinary rates of tax by a taxpayer who is a primary producer, other than a taxpayer in the capacity of a trustee, exceeds the tax that would be payable if the notional rates of tax (the average rate of tax on a taxable income equal to the taxpayer's average income) were applied to the tax-payer's taxable income, the taxpayer is entitled to an averaging rebate. As explained earlier, the rebate will be equal to that proportion of the excess which the deemed taxable income from primary production bears to total taxable income.

Sub-sections 156(5) to (8) will fix the averaging rebate allowable to certain trustees liable to be assessed under section 98 (where a beneficiary is presently entitled to income but is under a legal disability) or section 99 (where the trust income is being accumulated). The effect of these provisions is similar to that already described in relation to individuals.

Sub-section (5) sets out the formula for calculating the averaging rebate in cases where the average provisions apply to the net income of a trust estate and a trustee is liable to be assessed under section 98 or 99 on all or part of that net income.

Sub-section (6) contains definitions of terms used in these provisions relating to the averaging rebate allowable to trusts. These definitions are equivalent, in relation to the net income of trust estates, to the definitions in sub-section (1) relating to the taxable income of individuals - see the notes on that sub-section.

Sub-section (7) specifies when a trust estate is to be taken to have incurred a primary production loss and establishes the amount of that loss while sub-section (8) specifies when a trust estate is to be taken to have a non-primary production profit. These are the same, in effect, as sub-sections (2) and (3) relating to individuals - see the notes on those sub-sections.

By sub-clause (2) of clause 11 the averaging rebate and associated provisions in section 156 are to apply for the 1978-79 and subsequent income years.

Clause 12: Rebates for dependants

This clause will amend section 159J of the Principal Act to limit the allowance of concessional tax rebates in respect of the maintenance of dependants to those dependants who are residents of Australia for income tax purposes. The definition of "resident" in section 6 of the Principal Act sets out the circumstances in which people are residents of Australia for tax purposes.

Existing provisions of the Principal Act authorise concessional rebates in respect of specified categories of dependants, irrespective of the residential status of the dependants. Until 1974-75, concessional allowances in respect of the maintenance of dependants, which were then in the form of deductions from income, were allowable only where the dependants were residents of Australia for income tax purposes.

The practical effect of the amendment proposed will be to restore the pre 1974-75 situation, and to withdraw the allowance of a rebate in respect of a dependent spouse, parent, parent-in-law or invalid relative living outside Australia except where the dependant qualifies as a resident of Australia who is residing temporarily overseas. In this category are, for example, dependants who have left Australia for a relatively short period but who, while away, retain their tax status as residents of Australia. As another illustration, where a husband migrates to Australia from another country, but his wife and children do not accompany him to Australia initially, the wife and children are regarded as residents of Australia provided arrangements have been made for them to follow the migrant as soon as circumstances permit. This recognition ceases if the family has not arrived in Australia within five years.

Other concessional allowances may depend upon whether dependants, including children or students, are residents of Australia for income tax purposes. A consequence of the proposed amendment will be to withdraw those allowances so far as they relate to a dependant who is not a resident. An example is the income tax zone rebate.

As the proposed amendment is to commence to have effect from 1 November 1978, concessional tax rebates will continue to be allowable in 1978-79, on a part-year basis for the period 1 July 1978 to 31 October 1978, in respect of the maintenance of a dependant who is a non-resident.

The amendment to sub-section (1) of section 159J proposed by paragraph (a) of sub-clause (1) of clause 12 will re-introduce the condition that concessional rebates in respect of dependants are to be allowed only where the dependants are residents of Australia for the purposes of the Principal Act. The amendment to sub-section (3) of section 159J proposed by paragraph (b) of sub-clause (1) will deal with situations where a dependant is a resident of Australia for part only of a year of income. It will enable the matching proportionate part of the full-year rebate to be allowed.

By sub-clause (2), the amendments made by sub-clause (1) are to apply to assessments in respect of income of the 1978-79 income year and subsequent years of income. Sub-clause (2) is subject, however, to sub-clause (3), which will operate to deem a person in respect of whom a taxpayer is otherwise entitled to a concessional rebate, to be a resident during the period 1 July 1978 to 31 October 1978. This will permit the allowance of a partial rebate in 1978-79 in respect of dependants who were non-residents during that period.

Clause 13: Rebate in respect of payments received in lieu of annual or long service leave

Sub-clause (1) of clause 13 proposes to include in the Principal Act a new section, section 160AA, which will provide for a rebate of tax so that the maximum rate of tax payable on the amount of any payment after 15 August 1978 included in the assessable income of a taxpayer because of the operation of section 26AC (i.e., a payment in respect of unused annual leave) or because of the operation of sub-section (2), (3) or (4) of section 26AD (i.e., a payment in respect of unused long service leave attributable to eligible service after 15 August 1978) will be the standard rate of tax which, for the year ending 30 June 1979, is to be 33 1/2%.

When general rates of tax apply, a rebate will be allowable whenever the taxable income includes an amount paid after 15 August 1978 in respect of unused long service leave which accrued after that date or in respect of unused annual leave and that taxable income exceeds the amount of taxable income above which a surcharge applies - $16,608 for the 1978-79 year of income. In other cases in which the taxable income exceeds (in 1978-79) $16,608 (e.g., where the tax payable on the taxable income is calculated by reference to an average rate of tax applicable to a lesser taxable income) the inclusion of the annual leave or the long service leave lump sum in assessable income may not cause it to attract tax at more than the standard rate and in those circumstances the rebate will not be allowable.

Sub-section (1) of the proposed section 160AA sets out the conditions for a rebate entitlement. A rebate will be allowable where -

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an amount is included in the assessable income of the taxpayer under section 26AC or sub-section (2), (3) or (4) of section 26AD;

•

the taxable income exceeds $16,608 (the amount will be subject to indexation for years of income subsequent to 1978-79);

•

the relevant tax amount exceeds the notional tax amount; and

•

the additional tax amount, which is the excess of the relevant tax amount over the notional tax amount, exceeds 32% (33 1/2% for 1978-79 only by virtue of sub-clause (2) of clause 13) of the relevant income amount.

The amount of the rebate is the excess just mentioned. The underlined terms are defined in sub-section (2).

Sub-section (2) defines various terms used in sub-section (1) -

"additional tax amount" is defined as the amount remaining after deducting from the relevant tax amount the notional tax amount.

"notional tax amount" is defined as the amount of tax that would be payable by the taxpayer in respect of income of the year of income, apart from any rebates or credits other than the proposed new primary production rebate (section 156 - clause 11 of this Bill) to which the taxpayer is entitled, if no amount had been included in the assessable income of the taxpayer under section 26AC or sub-section (2), (3) or (4) of section 26AD (clause 5).

"relevant income amount" is defined as one of two amounts. Where the taxable income of the taxpayer of the year of income exceeds the sum of -

(i)

$3,893 (the amount of taxable income above which tax is payable); and

(ii)

the amount included in the assessable income of a year of income under section 26AC or sub-section (2), (3) or (4) of section 26AD, or if two or more such amounts are included, the sum of those amounts,

then the "relevant income amount" will be the amount or the sum of the amounts included in the assessable income as set out in paragraph (ii). Where the taxable income exceeds $3,893 but does not exceed the sum of that amount and the amounts referred to in paragraph (ii) above, then the "relevant income amount" will be the amount by which the taxable income exceeds $3,893.

"relevant tax amount" is defined as the amount of tax that would be payable by the taxpayer in respect of income of the year of income before the allowance of any rebate or credit other than the proposed new primary production rebate (section 156 - clause 11).

Sub-section (3) proposes that certain "relevant amounts" as specified in sub-section (5) - the amounts of $16,608 and $3,893 used in sub-sections (1) and (2) - are to be indexed for 1979-80 and subsequent income years so that the amounts used for the purposes of section 160AA will each year correspond with the amounts that, as a consequence of indexation for rating purposes, will replace the amounts of $3,893 and $16,608 specified in Schedule 13 of the Rates Act.

Sub-section (4) provides for the rounding to the nearest whole dollar where an amount determined by application of the indexation factor contains a fraction of a dollar.

Sub-section (5) details the relevant amounts to be subject to indexation and the years of income to which the indexation factor is to be applied.

Sub-clause (2) of clause 13 proposes that, for the year of income ending 30 June 1979, the percentage figure of 32 in sub-section (1) of section 160AA will be 33 1/2. This percentage figure represents the standard rate of tax for the year of income ending 30 June 1979.

Clause 14: Interpretation

As part of the PAYE system, section 221C of the Principal Act requires an employer to deduct tax instalments from payments of "salary or wages", a term given an extended meaning by the definition contained in section 221A. This clause proposes amendments to section 221A which, by way of changes to the definition and otherwise, will bring within the scope of the tax instalment deductions system additional kinds of payments that would not, or might not, be properly classifiable as "salary or wages" under the existing terms of the definition. The amendments are to be effected by sub-clause (1) of clause 14, and relate to lump sums for unused annual leave or long service leave and living allowances paid under the Commonwealth Post-graduate Award Scheme.

Paragraph (a) of sub-clause (1) proposes an amendment of the definition of "salary or wages" in section 221A of the Principal Act to bring within the meaning of the term -

•

any payments of amounts to which the proposed new section 26AC applies (amounts in respect of annual leave that are to be included in the recipient's assessable income); and

•

any payments of amounts to which the proposed new section 26AD applies (long service leave) but only to the extent that such an amount is to be included in the recipient's assessable income.

By virtue of sub-clause 14(2), the amendment is to apply in relation to payments made on or after 1 November 1978.

For drafting convenience, the expression "assessable retirement amount" has been used for the purposes of this amendment, and associated amendments of section 221C proposed by clause 15, to describe what might be called the assessable content of an amount to which section 26AD applies. A new sub-section (2), which will give the expression that general meaning, is to be included in section 221A by paragraph (d) of sub-clause 14(1).

Sections 26AC and 26AD are the provisions proposed to be incorporated into the Principal Act by clause 5 to lay down new bases of assessment for certain retirement and employment-termination payments in respect of unused leave. The amendment of the definition of "salary or wages" in section 221A proposed by paragraph (a) of sub-clause 14(1) is designed, in conjunction with amendments of section 221C proposed by clause 15, to bring such payments within the tax instalment deduction system to the extent to which they are to constitute assessable income of the recipient under the new bases of assessment.

The overall effect of those amendments, with the support of relevant regulations, will be to require tax instalment deductions to be made on and after 1 November 1978 at a rate equivalent to the standard rate of tax (33 1/2% for 1978-79) from -

•

the amount paid in respect of unused annual leave;

•

the amount of any pro-rata annual leave payment;

•

so much of any amount paid in respect of long service leave, or as a pro-rata long service leave payment, as is attributable to eligible service after 15 August 1978;

•

5% of so much of any amount paid in respect of long service leave, or as a pro-rata long service leave payment, as is attributable to eligible service up to 15 August 1978,

where, in each instance, the payment is made in consequence of the recipient having retired after 15 August from an office or employment or in consequence of the office or employment of the recipient having been terminated after that date.

Reflecting the fact that tax instalment deductions made from periodical salary and wages include a "loading" to cover leave bonuses, a bonus or similar additional payment relating to the annual leave referred to above will be subject to tax instalment deductions at the standard tax rate to the extent to which it exceeds, for 1978-79, $240. The method of determining how much of a long service leave payment is attributable to eligible service after 15 August 1978, and how much is attributable to eligible service up to that date, is explained in the notes on clause 5 that relate to the new section 26AD.

Paragraphs (b) and (c) of sub-clause (1)are related to the amendment proposed by clause 3 of the Bill to remove from the exemption provided by section 23(z) of the Principal Act, with effect from 1 November 1978, income derived by award holders under the Commonwealth Post-graduate Award Scheme.

Paragraph (b) is a drafting amendment which is consequential upon the amendment to be effected by paragraph (c) of sub-clause (1). Paragraph (c) will insert a new paragraph - paragraph (k) - in the definition of "salary or wages" in section 221A of the Principal Act so that, like salary and wages and other periodical receipts of an income nature, living allowances, including dependent spouse and child allowances, that are paid to the holder of a Commonwealth Post-graduate Award under the Student Assistance Act 1973 will be subject to pay-as-you-earn tax instalment deductions.

By sub-clause (2), tax instalment deductions to be made under the authority of the amendments made by paragraphs (b) and (c) of sub-clause (1) will apply in respect of living allowances paid on or after 1 November 1978.

By paragraph (d) of sub-clause (1) it is proposed to insert a new sub-section - sub-section (2) - in section 221A.

The new sub-section (2) relates to an expression "assessable retirement amounts" to be included in the definition of "salary or wages" in sub-section (1). It declares what the expression means for the purposes of that definition. The meaning has been explained in general terms in the notes on amendments to be effected by paragraph (a) of sub-clause (1).

Clause 15: Deductions by employer from salary or wages

This clause proposes the insertion of new provisions, sub-sections (1AB) and (2A), in section 221C of the Principal Act. These amendments will open the way for payments of amounts that are to be brought within the meaning of "salary or wages" by paragraph (a) of sub-clause 14(1) - broadly, amounts to which the new section 26AC (annual leave lump sums) is to apply and the assessable content of amounts to which the new section 26AD (long service leave lump sums) is to apply - to be subjected to tax instalment deductions on the basis outlined in the notes on that paragraph.

By providing that the Regulations may prescribe rates of deductions in respect of the payments different from rates of deductions that are prescribed in respect of other salary or wages, and deeming the recipients to have received the payments as salary or wages in respect of a week, the proposed new sub-sections will allow a rate of deductions from those payments equal to the standard rate of tax (33 1/2% for 1978-79) to be prescribed.

Clause 16: Provisional tax on estimated income

The amendments of section 221YDA of the Principal Act proposed by this clause relate, in part, to the changes in the system of averaging applicable to primary producers and are partly of a technical kind.

Under section 221YDA a taxpayer may arrange to have varied the amount of provisional tax notified - normally on a notice of assessment - and for this purpose the taxpayer is to provide the Commissioner of Taxation with an estimate of his or her taxable income for the year for which the provisional tax has been notified. The taxpayer's "self-assessment" estimate is to include the amounts of the estimated taxable income that are represented by salary or wages, Government loan interest and other income, an estimate of certain rebates to which the taxpayer will be entitled in his or her assessment and an estimate of the total amount of PAYE deductions that will be made from his or her salary or wages. Where the taxpayer furnishes the required estimates, the Commissioner, unless he has reason to believe the estimate of taxable income is too low, is required to recalculate the provisional tax on the basis of those estimated amounts.

Paragraph (a) of sub-clause (1) of clause 16 concerns the time within which applications to self-assess provisional tax must be lodged. The present law, in sub-section 221YDA(1) requires that an application be lodged no later than the later of 31 March in the financial year concerned and the due date for payment of tax as notified to the taxpayer. The amendment will sanction the granting by the Commissioner of Taxation of additional time for lodgment of an application.

New sub-paragraphs (ii) and (iii), which are proposed to be inserted in section 221YDA(1)(d) by paragraph (b) of the sub-clause, will require a taxpayer who seeks to "self-assess" provisional tax to furnish the Commissioner of Taxation with an estimate of income that provides a split-up between income from the carrying on of a business of primary production and other income. The estimation of the amount of primary production income will be required by the Commissioner to enable him to calculate the benefits to which the taxpayer may be entitled under the new averaging provisions (see clause 11).

Paragraph (c) of the sub-clause proposes an amendment to section 221YDA(1)(e) to reflect the fact that the amount estimated by the taxpayer as PAYE deductions will include not only tax instalment deductions at prescribed rates made under section 221C but also deductions at rates varied from prescribed rates under section 221D.

The amendment to section 221YDA(2)(a)(i) proposed by paragraph (d) of the sub-clause is consequential upon the amendment proposed by paragraph (b) above, which will require the taxpayer to submit an estimate of his primary production income. It will formally require the Commissioner to calculate the averaging benefit to which the taxpayer is entitled in his or her recalculated provisional tax, on the basis of the estimate submitted by the taxpayer.

Paragraph (e) of the sub-clause proposes an amendment to section 221YDA(2)(b) consequential upon the amendment proposed by paragraph (c) above, and will formally require the Commissioner to deduct the taxpayer's estimated PAYE deductions under both sections 221C and 221D in recalculating the provisional tax payable by the taxpayer.

Paragraph (f) of sub-clause 16(1) will insert a new sub-section, sub-section (2A), in section 221YDA. The new provision is related to sub-section 221YDA(3), under which provisional tax based on a taxpayer's "self-assessment" estimate is due and payable on the date on which the provisional tax originally notified is due and payable. The proposed sub-section (2A) will retain this due date for payment of provisional tax, calculated on the basis of estimated income, where the Commissioner allows an extension of time to lodge the estimate (see paragraph (a) of sub-clause 16(1)).

Paragraph (g) of sub-clause (1) will amend sub-section 221YDA(5) which is to the effect that where the Commissioner substitutes his own estimate of taxable income for that submitted by the taxpayer for the purpose of having his or her provisional tax varied, the Commissioner's estimate of the taxable income and components of taxable income are not to exceed the actual taxable income and components of taxable income derived by the taxpayer in the preceding year of income. The proposed amendment is consequential upon the amendment proposed by paragraph (b) above and will mean that the Commissioner's estimate of the taxpayer's primary production income for the year is not to exceed the taxpayer's actual primary production income of the preceding year.

By sub-clause (2) of clause 16, the amendments proposed by sub-clause (1) will apply in the ascertainment of provisional tax in respect of the 1978-79 and subsequent years of income.

Clause 17: Additional tax where income under-estimated

This clause will amend section 221YDB of the Principal Act under which additional tax may be imposed on a taxpayer who substantially under-estimates his or her taxable income for the purpose of reducing the amount of "self-assessed" provisional tax. The amendments will more readily expose taxpayers to additional tax, thus strengthening section 221YDB as a measure against deliberate under-estimation of taxable income.

At present, additional tax is payable where the estimated taxable income for a year is found to be more than 20% below the taxpayer's taxable income both of the preceding year and of the current year. The additional tax is, broadly, 10% of the amount by which the provisional tax on the estimated income falls short of the tax that would be payable on a taxable income equal to 80% of the taxpayer's taxable income of the current year or of the preceding year, whichever is the less. However, the Commissioner of Taxation has power to remit the additional tax, in whole or in part, where the under-estimate giving rise to the additional tax arose from circumstances of which the taxpayer was not aware at the time.

Paragraph (a) of sub-clause (1) will omit existing sub-sections (1), (1A) and (1B) of section 221YDB and insert revised sub-sections (1) and (1A) in their place.

Sub-section (1) contains the basic rule for imposition of additional tax as outlined above. The revision of it will have the effect that additional tax will be payable where the amount of the taxpayer's estimated taxable income, other than the part of it that represents salary or wages, proves to be more than 10% less than the amount remaining after deducting from the amount of the actual taxable income, the amount derived by the taxpayer as salary or wages.

The additional tax will (subject to the rules in sub-section (1A) for a taxpayer who has income from salary or wages) be equal to 10% of the lesser of the amount by which the provisional tax on the estimated taxable income falls short of the tax on the taxable income and the amount by which the provisional tax on the estimated taxable income is less than the provisional tax originally notified. However, sub-section (4) will continue to give the Commissioner authority to remit the additional tax that became payable by reason of circumstances of which the taxpayer was not aware when making the estimate.

Paragraph (a) of the new sub-section (1A) is a re-expression of provisions of the existing sub-section (1A). It relates to legislation for "stage 2" of tax sharing arrangements with the States and will apply where the Commissioner of Taxation is required under section 203 of the Principal Act to apply a State rebate in partial discharge of a taxpayer's Commonwealth income tax liability. In that situation, the reference to tax payable in respect of the taxable income in proposed section 221YDB(1)(a) will be taken to mean tax payable as reduced by the amount of the State rebate.

Paragraph (b) of revised sub-section (1A) repeats, in effect, the provisions of existing paragraph (b), varied in consequence of the changes proposed to sub-section (1). It will have the effect that a reference to provisional tax payable in respect of the estimated taxable income in proposed section 221YDB(1)(a) will, where the taxpayer is in receipt of salary or wage income, be taken to mean the sum of that provisional tax and the total amount of PAYE tax instalment deductions made from that salary or wage.

The existing sub-section (1B) which is being repealed will be made redundant by the varied earlier provisions of section 221YDB outlined above.

The amendments proposed by paragraphs (b) and (c) of sub-clause (1) are drafting measures consequential upon the substitution in the revised sub-section (1) of the term "additional tax" for references to "penalty" in existing sub-section (1).

Under sub-clause (2) of clause 17 the amendments proposed by sub-clause (1) are to apply in relation to the ascertainment of provisional tax for the 1978-79 and subsequent years of income.

Clause 18: Interpretation

This clause will effect technical amendments to the health insurance levy provisions of the Principal Act consequential upon changes to the health care financing arrangements to apply as from 1 November 1978. At present, a person is exempt from the levy, in broad terms, while he or she is a prescribed person - that is, covered as a "privately insured person" by private health insurance or covered by other arrangements. Under the new health care arrangements a person will not need for levy purposes to be covered by private health insurance or other arrangements as from 1 November 1978.

By paragraph (a) of clause 18 "privately insured person" is to have the meaning that it has under the health care financing arrangements operative up to 31 October 1978.

Paragraph (b) of clause 18 will insert a new sub-section, sub-section (8), in section 251R, which will ensure that a person who is a prescribed person during the period 1 July 1978 to 31 October 1978 will be exempt from the levy for the whole of the 1978-79 income year and a person who is a prescribed person for a part of the period from 1 July to 31 October will be entitled to exemption from a corresponding part of the levy otherwise payable for 1978-79.

Clause 19: Health insurance levy

Section 251S of the Principal Act is the basic section providing for the payment of health insurance levy. The effect of clause 19 will be that the levy will last be levied and payable for the 1978-79 year of income.

Clause 20: Excess rebates to be allowed against levy

This clause concerns the section of the Principal Act - section 251U - under which excess concessional rebates, i.e., concessional rebates that are in excess of the amount of income tax payable, are available to reduce the amount of health insurance levy otherwise payable by the taxpayer. The effect of the clause will be that the averaging rebate allowable to primary producers (section 156) and the rebate that effectively limits to the standard rate of tax the tax payable on certain long service and annual leave payments (section 160AA) will be taken into account in determining the amount of income tax payable and, hence, in arriving at the amount of excess concessional rebates that may be applied in reduction of health insurance levy.

Clause 21: General concessional rebates for financial year 1978-79

A rebate is allowed against income tax otherwise payable for specified expenditures (on medical and education expenses, life assurance premiums, superannuation contributions, municipal rates, etc.) to the extent to which they exceed $1,590 at a rate equal to the standard rate of tax. This clause will have the result that for 1978-79 the rebate will be calculated at a rate of 33.5% rather than 32%.

Clause 22: Provisional tax for financial year 1978-79

The purpose of this clause is to reflect the proposed 1.5% increase in the standard rate in the calculation of provisional tax for 1978-79 and to make allowance for the cessation of health insurance levy from 1 November 1978 in the calculation of the health insurance levy component of provisional tax payable by a taxpayer in respect of the 1978-79 year.

Sub-clause (1) is set against the background that under existing law the provisional tax for 1978-79 for a taxpayer who had no salary or wage income in 1977-78 would ordinarily be an amount equal to tax payable for 1977-78, at the "composite" rates applicable for that year. Tax at those rates was payable on the part of taxable income in excess of $3,402. For a taxpayer liable to pay health insurance levy in 1977-78, there would similarly be an addition to 1978-79 provisional tax of a component for the health insurance levy, equal in amount to the levy for 1977-78.

Sub-clause (1) will have two effects. One will be to increase, by 1.5% of the amount by which taxable income or provisional income exceeds $3,402, the amount of provisional tax otherwise payable; the other, to reduce the provisional tax otherwise payable by an amount equal to two-thirds of the amount that otherwise would have been included on account of health insurance levy.

In cases where the Commissioner of Taxation determines, in accordance with sub-section 221YC(1B) of the Principal Act, that the levy component to be included in provisional tax for 1978-79 should be greater or less than the levy payable for 1977-78, sub-clauses (2) and (3) provide for the reduction of the amount of the varied component by two-thirds.

INCOME TAX (INDIVIDUALS) BILL 1978

This Bill will formally impose the tax payable in respect of income derived by individuals, and by trustees generally, during the 1978-79 income year. It is complementary to the Income Tax (Rates) Act 1976 - as proposed to be amended by the Income Tax (Rates) Amendment Bill 1978 - which declares the rates of tax to apply to such taxpayers. As the Bill is similar to the Income Tax (Individuals) Act 1977, the following notes are confined to those clauses of the Bill which differ in practical effect from the provisions of that Act.

Clause 5: Imposition of income tax

Sub-clauses (1) and (2) have the effect, when read with clause 7, of formally imposing income tax payable by individuals and trustees for the 1978-79 financial year at the rates declared by the Income Tax (Rates) Act 1976 (as amended), while sub-clause (3) excludes from the scope of the Act withholding tax, and tax payable on film and video tape royalties paid overseas (under sections 128B and 136A of the Income Tax Assessment Act). The latter two taxes are imposed by the Income Tax (Dividends and Interest Withholding Tax) Act 1974 and the Income Tax (Film Royalties) Act 1977, respectively.

Clause 6: Rebates of tax

Clause 6 is a new provision and is a measure to ensure that no individual taxpayer will pay more tax in 1978-79 as a consequence of the substitution of the standard rate system that has applied from 1 February 1978, with half indexation for 1978-79, for the previous personal income tax system, fully indexed.

The clause provides for a rebate of tax for 1978-79 in the case of the limited number of taxpayers - those whose 1978-79 taxable incomes fall in the range $6,601 to $6,978 inclusive - who would, if nothing were done to prevent it, be slightly worse off, by amounts ranging up to $7.06, as a result of the substitution. The maximum detriment thus arising would be suffered by a person with a taxable income of $6,742.

Provision is also made for comparable rebates to be allowed in relevant cases where a trustee is assessed on net income of a trust estate under section 98 of the Income Tax Assessment Act, or under section 99 where he is trustee of the estate of a person who died less than 3 years before the end of the year of income.

The rebate to be allowed by clause 6 will be as follows:-

Clause 7: Levy of tax

This clause operates to formally levy the tax imposed by clause 5 of the Bill in respect of the 1978-79 financial year and, until the Parliament otherwise provides, for the 1979-80 financial year.

INCOME TAX (COMPANIES AND SUPERANNUATION FUNDS) BILL 1978

The main purpose of this Bill is to impose income tax for the 1978-79 financial year, at the rates declared in the Bill, on the 1977-78 incomes of companies and the 1978-79 incomes of superannuation funds.

Other rates of income tax payable for the 1978-79 financial year - by individuals and by trustees generally - are to be declared by the Income Tax (Rates) Act 1976, as proposed to be amended by the Income Tax (Rates) Amendment Bill 1978, and are to be imposed by the Income Tax (Individuals) Bill 1978. The "branch profits" tax on non-resident companies will be imposed by the Income Tax (Non-Resident Companies) Bill 1978.

Apart from one rate change for superannuation funds to which section 121DA of the Assessment Act applies - referred to below - the practical effect of the present Bill will be the same as the Income Tax (Companies and Superannuation Funds) Act 1977, which declared and imposed the rates of income tax payable by companies and superannuation funds for the 1977-78 financial year.

The rates of income tax declared by this Bill for the 1978-79 financial year are as follows:

-

by clause 6, the general rate of tax on taxable income of companies is to remain at 46%;

-

by clause 6, the rate of tax payable by a friendly society dispensary on its taxable income is to remain at 41%;

-

by clause 6, the rate of additional tax payable by a private company on the amount by which dividends paid fall short of a sufficient distribution remains at 50%;

-

by clause 7, the rate of tax payable on investment income of a superannuation fund that does not, under the "30/20" rule, invest a sufficient proportion of its assets in public securities remains at 46%;

-

by clause 7, the rate of tax on Certain taxable income of superannuation funds to which section 121CA or 121CB of the Assessment Act applies is to remain at 50%;

-

by clause 7, the rate of tax on income of trusts qualifying as superannuation funds to which section 121DA of the Assessment Act applies is to be 61.5% instead of the rate of 54.17% applicable to 1977-78 income.

The latter increase is related to the proposed increase to 61.5%, under the Income Tax (Rates) Amendment Bill 1978, in the rate of tax payable under section 99A of the Assessment Act in respect of trust income to which no beneficiary is presently entitled, broadly, income that is being accumulated in the trust.

In the past, the rate of tax applicable under sections 99A and 121DA has been the same. A trust qualifies as a superannuation fund to which section 121DA applies simply if it answers the description of being a "provident, benefit, superannuation or retirement fund". A fund to which section 121DA applies, unlike a superannuation fund to which section 121CA or section 121CB applies, does not attract any special taxation treatment.

By sub-clause (3) of clause 9, the rate of tax applicable under section 121DA for the 1979-80 financial year is to be 60%. This reflects the position that, with the termination of the 1.5% temporary increase in the standard rate of personal income tax as from 1 July 1979, the rate of tax applicable under section 99A will revert to 60% for 1979-80.

Clause 11 of the Bill relates to instalments of company tax. Clause 11 will authorise the collection of instalments in the 1979-80 financial year in accordance with relevant provisions of the Assessment Act. The first of 3 instalments is to be due not earlier than 15 August 1979.

HEALTH INSURANCE LEVY BILL 1978

This Bill will impose the health insurance levy for the 1978-79 financial year. Reflecting the fact that new health care financing arrangements, not including the health insurance levy, are to apply as from 1 November 1978, the rate of levy, to apply to taxable income for the whole year, is to be 0.833% i.e., one-third of the 2.5% rate which applied in 1977-78. Similarly, the levy ceilings are to be one-third of the ceilings which applied in 1977-78. Apart from amendments necessary to give effect to these new arrangements and minor changes to the levy rebate provisions, the Bill simply re-enacts provisions included in the Health Insurance Levy Act 1977 which imposed the levy for the 1977-78 financial year.

The following notes are therefore confined to the main provisions of the Bill that differ in practical effect from the corresponding provisions of the above Act, and to one new provision (sub-clause (3) of clause 3).

Clause 3: Interpretation

Sub-clauses (1), (2), (4) and (5) simply re-enact corresponding provisions in the Health Insurance Levy Act 1977. Sub-clause (3), a new provision, specifies that in applying the various provisions of the Bill, the four months period that commenced on 1 July 1978 and ends on 31 October 1978 is to be taken as a year of income. Thus, for example, if a couple were married for one-third of the period 1 July 1978 to 31 October 1978 the husband would, for the purposes of clause 5, be treated as being in the third category, in accordance with sub-clause 5(3), for two-thirds of the year and in the first (or second) category (depending on the circumstances), in accordance with sub-clause 5(2), for one-third of the year.

Clause 7: Rate of levy

This clause fixes the rate of health insurance levy payable for 1978-79 by individuals and trustees and sets limits on the amount payable by trustees in specified circumstances. The rate of levy payable by individuals is to be 0.833% of taxable income of the year (sub-clause (1)). Sub-clauses (2) and (3) apply the same rate of levy in the case of trustees liable to be assessed under sections 98, 99 or 99A. Sub-clause (4) provides for the amount of levy to be shaded in where the income assessable under section 99 is marginally in excess of $416 (i.e., the minimum leviable amount applicable in such cases), and sets, for assessments under both sections 99 and 99A, a ceiling of $100 on the amount of levy payable. The rates of levy, shading-in rate and the levy ceilings are all one-third of the full year amounts that applied for the 1977-78 financial year, reflecting the changed arrangements to apply as from 1 November 1978.

Clause 8: Maximum levy where person included in same category during whole of year of income

The purpose of this clause is to set a limit or "ceiling" on the amount of levy payable by a taxpayer for the 1978-79 year. For a person included in the same category for the whole of the period 1 July 1978 to 31 October 1978 (treated as constituting the 1978-79 income year in accordance with sub-clause 3(3)), the "family" ceiling, for a person with dependants, will be $100 (representing one-third of the $300 ceiling applying for the 1977-78 year) and for a person without dependants the ceiling will be $50 (one-third of the $150 ceiling applying in 1977-78).

A husband and wife are to share in the one "family" ceiling of $100, i.e., the combined levy liability of the couple for 1978-79 is not to exceed $100 ($300 in 1977-78), while reduced ceilings (one-third of those that applied in 1977-78) are provided for service personnel and eligible repatriation beneficiaries and their spouses.

Clause 12: Small incomes rebate

This clause provides levy relief, in the form of a rebate, for taxpayers whose taxable incomes do not reach the income tax threshold - $3,894 for 1978-79. The rebate is at the rate of 33.5 per cent, equal to the standard rate of income tax that applies to taxable incomes above $3,893, based on the amount by which taxable income falls short of $3,893. For example, a person with a taxable income of $3,850 who would, before the application of the rebate, be liable to pay levy of $32.07 (i.e., 0.833 per cent of $3,850) will be entitled to a rebate of $14.40 (i.e., 33.5 per cent of $3,893-3,850) making the net levy payable by that person $17.67.

The effect of the small incomes rebate, for 1978-79, will be to free from levy a person without dependants with taxable income of $3,798, or less (the comparable 1977-78 figure was $3,113).

Rebates for dependants and other concessional rebates, to the extent to which they exceed the amount of income tax otherwise payable, will be applied to reduce the levy otherwise payable (by virtue of section 251U of the Income Tax Assessment Act). The effect of this for 1978-79 will be that a taxpayer with a wholly dependent spouse will not pay levy unless the taxpayer's taxable income is $5,538 or more ($4,913 in 1977-78). For a person entitled to the full sole parent rebate, levy will not be payable unless taxable income is $5,014 or more ($4,385 in 1977-78).

Clause 13: Rebates

By this clause the principle of section 251U of the Income Tax Assessment Act, that excess concessional rebates are to be allowed against the health insurance levy, is to be applied to the "no-detriment" rebate for which provision is being made by clause 6 of the Income Tax (Individuals) Bill 1978.

Clause 14: Financial year for which levy is payable

The health insurance levy is payable for the 1978-79 financial year upon taxable income of that year.