House of Representatives

Explanatory Memorandum

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

Notes on Clauses

LOAN (DROUGHT BONDS) BILL 1969

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

PART I - Preliminary

Clause 1: Short title and citation

This clause provides the short title of the Act.

Although the Act will be cited as the Loan (Drought Bonds) Act 1969, the securities issued under the Act will be available only in the form of inscribed stock. The securities have been referred to widely as "Drought Bonds" and it appears desirable to preserve this name.

Clause 2: Commencement

Section 5(1A.) of the Acts Interpretation Act 1901-1966 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act. By this clause, it is proposed that the Act shall come into operation on the day it receives the Royal Assent.

Clause 3: Parts

Clause 4: Interpretation

Sub-clause (1.) provides the definitions of the principal terms employed in the Bill. Many of the definitions in this sub-clause are the same as those to be used in the Income Tax Assessment Bill (No. 3) 1969. This is because the two pieces of legislation are complementary.

Sub-clause (2.) is a drafting measure.

Sub-clause (3.) provides that stock which has become redeemable will be regarded as stock which has been redeemed.

Part III of the Bill provides that, in certain circumstances, the Commissioner of Taxation may declare that drought bonds have become redeemable and for the bondholder to be advised accordingly. Clause 28 provides that the bonds will then be redeemed. In the interval between the bonds becoming redeemable (by declaration) and actual redemption (by repayment of the moneys borrowed on the bonds), the bonds will be regarded for various purposes of the Bill as having been redeemed.

PART II - Creation and Issue of Drought Bonds

Clause 5: Power to create Drought Bonds

By paragraph (a) of this clause the Governor-General may, by Order-in-Council, create stock called "Drought Bonds" for the purpose of raising money by way of loan, and may determine the amount of the stock so created.

By paragraph (b) the Governor-General may authorise the Treasurer, by Order-in- Council, to issue the drought bonds.

Clause 6: Borrowings on Security of Drought Bonds

Sub-Clause (1.) of this clause authorises the Treasurer to borrow moneys on the security of drought bonds.

Sub-clause (2.) authorises the Treasurer to determine the price, terms and conditions (including interest), amounts and manner in which drought bonds will be issued and sold, subject to any special provisions of the Act.

Part III of the Act provides the terms and conditions relating to redemption.

All terms and conditions, which will still require the approval of the Australian Loan Council, will be set out fully in the prospectuses which will accompany each issue. This is in keeping with normal loan raising procedures.

Sub-clause (3.) restricts the issue of stock to amounts of $100 and multiples of $100.

Clause 7: Expenses and interest to be paid out of Consolidated Revenue Fund

This clause appropriates the Consolidated Revenue Fund to the extent necessary to meet the expenses of flotation and management and interest payments due on drought bonds.

Clause 8: Establishment of Drought Bonds Trust Account

Sub-clause (1.) establishes the Drought Bonds Trust Account.

Sub-clause (2.) provides that it is a Trust Account for the purposes of section 62A of the Audit Act 1901-1969. This will permit the investment of funds standing to the credit of the Trust Account in Commonwealth securities. Interest earned by these investments will be paid to the Consolidated Revenue Fund.

Clause 9: Loan Moneys to be paid into trust Account

Proceeds from the sale of drought bonds will, in accordance with the Audit Act, be paid to the Loan Fund.

Sub-clause (1.) of clause 9 appropriates the Loan Fund to the extent necessary to transfer these proceeds to the Drought Bonds Trust Account.

Sub-clause (2.) provides that drought bonds will be redeemed from the Trust Account.

Clause 10: National Debt Sinking Fund Act not to apply

This clause dispenses with the requirement in the National Debt Sinking Fund Act that the Commonwealth pay amounts into the Sinking Fund in respect of drought bonds on issue.

Since repayment of the bonds is to be made from the Trust Account established by clause 8, there is no need for the Sinking Fund to be used for repayment of drought bonds.

Clause 11: Borrowing to be subject to the Financial Agreement

All commonwealth borrowings, except those for defence and temporary purposes, are subject to clause 6 of the Financial Agreement, that is, they are subject to the approval of the Australian Loan Council. The terms and conditions of the issue and sale of drought bonds must therefore by approved by the Loan Council.

Clause 12: Drought Bonds may held by one person only

Since subscriptions to drought bonds may entitle the holder to income tax deductions it is necessary that there should be a single identifiable holder, who may be an individual, a member of a partnership, or a company.

Where drought bonds are transmitted to an executor or trustee, as a result of death or bankruptcy, there could be more than one person involved, and consequently this type of case is exempted from the provision for a single holder. Under clause 22(1.), drought bonds will be declared redeemable when the purchaser of the bonds dies or becomes bankrupt, and this will result in the payment of the proceeds of the redemption to the estate subject to any taxation consequences that arise from the redemption.

Clause 13: Drought Bonds not transferable

This clause prevents a stockholder from selling his drought bonds. However, there is provision in clause 20 for redemption of bonds by the vendor and re-issue of those bonds to the purchaser on disposal of a grazing business, but this, technically, is not a "transfer".

In broad terms, the income tax treatment is in two parts - an income tax deduction may be allowed in respect of the cost of bonds and upon the bonds becoming redeemable either an equivalent amount is to be included in the bond-holder's assessable income (drought, fire or flood cases) or tax equal to the tax saved on account of the deduction for the cost of the bonds becomes payable (other cases). It follows that the same person, the taxable entity, must hold the bonds on purchase and on redemption, and it is for this reason that transfer of the bonds is precluded.

Clause 14: Application of Commonwealth Inscribed Stock Act to Drought Bonds

The issue of Commonwealth securities and their inscription and redemption involve a good many procedures, mainly of an administrative nature, which are governed by the provisions of the Inscribed Stock Act 1911-1966. In order to avoid the repetition of these provisions in this Bill, clause 14 provides for their application to drought bonds.

The provisions concerned, with a brief indication of their nature, are:

The sections of the Inscribed Stock Act excluded by sub-clause (1.) are those which are not suitable for application to drought bonds - e.g. relating to transfer of stock, etc.

Sub-clause (2.) provides that certain parts and sections of the Inscribed Stock Act which would be inappropriate in the case of drought bonds are not to apply to drought bonds.

Sub-clause (3.) provides for the application of certain other sections of the Inscribed Stock Act not covered in sub-clause (1.).

PART III - Redemption of Drought Bonds

Clause 15: When Drought Bonds redeemable

Sub-clause (1.) provides that drought bonds will be redeemable on maturity (which will be the date set out in the prospectus) and, in certain circumstances, before maturity.

By sub-clause (2.), once drought bonds are redeemed they are not to be re-issued except when a declaration is made under clause 20 (i.e., when a grazing business is disposed of).

Clause 16: Interpretation

The purpose of clause 16, in conjunction with sub-sections (3.) and (4.) of the proposed section 159 of the Income Tax Assessment Bill (No. 3) 1969, is to identify bonds for which an income tax deduction has been allowed and to quantify the amount of an unrecouped income tax deduction existing in respect of all or part of a parcel of bonds that is being redeemed.

The bonds will be issued only in the form of inscribed stock. Since this means that no bearer securities will be issued (inscribed stock being merely an entry in a stock ledger recording the subscription), and since taxation deductions must be identified with some subscriptions or part thereof, the problem arises of identifying the amount of a particular purchase of bonds that has been deductible for income tax purposes.

For this reason, the Bill refers to "parcels of stock" and a parcel is defined, in clause 4(1.) as the whole of the stock issued to a stockholder at one time or, if part of the stock issued to him at one time has been redeemed, the remainder of that stock. Such an amount of stock would be recorded, at the Inscribed Stock Registry, by date of purchase, amount and Series, and the name of the purchaser. It can therefore be identified. This clause, together with certain provisions in the Income Tax Assessment Bill (No. 3) 1969, will permit the taxation deduction allowed in respect of a parcel of bonds to be similarly indentified in relation to each parcel.

Sub-clause (1.) defines, for the purposes of this part, the meanings of certain expressions to be adopted in relation to parcels of bonds. These expressions are:

"An unrecouped income tax deduction"

shall be deemed to exist in the same circumstances as in the proposed Division 16B of Part III of the Income Tax Assessment Bill (No. 3) 1969. It shall exist where the purchase of the parcel has resulted in an amount being included in an income tax deduction, and (i) no part of the parcel has been redeemed, or (ii) where part has been redeemed.

"The amount of the unrecouped income tax deduction"

in respect of a parcel will mean, where no bonds included in the parcel have been redeemed, the amount in respect of the parcel included in a deduction or deductions or, where part of the parcel has been redeemed, the excess of the income tax deduction allowed in respect of that parcel over the part of the parcel that has been subject to tax because of a prior redemption.

"A reduced income tax deduction"

in respect of a parcel shall be deemed to have been allowed where the amount of the unrecouped income tax deduction ascertained in accordance with preceding sub-paragraph (b) is less than the amount of stock included in the parcel.

Sub-clause (2.) and sub-clause (3.) bring into this Bill the criteria for eligibility for income tax deductions in respect of the cost of drought bonds, namely, in the relevant year of income the grazier's receipts from sheep and beef cattle were not less than 90 per cent of his gross farm receipts.

Sub-clause (4.) recognises that graziers may not be able to assess their eligibility for an income tax deduction for subscriptions to drought bonds, or the extent of that deduction, until their accounts for income tax purposes have been made up for the year. Accordingly, bonds issued during the twelve month period ending two months after the close of the year of income will be available for deduction in that year.

Furthermore, under the Income Tax Assessment Bill (No. 3) 1969, purchases of drought bonds during November and December 1969, may, at the option of the bondholder, for purposes of income tax deductions, be deemed to have been issued during the year ended 30 June 1969.

Clause 17: Delegation by authorised person

The responsibility for declaring that drought bonds have become redeemable rests with the "authorised person", who is defined in clause 4(1.) as the Commissioner of Taxation.

Sub-clauses (1.), (2.) and (3.) of clause 17 permit the Commissioner to delegate his powers or functions, except the power of delegation, and provided the normal rules concerning the delegation of statutory powers.

Clause 18: Declaration of drought areas

One of the main purposes of the Drought Bond scheme is to encourage the grazier to make financial provision which can be called upon in time of drought.

It is necessary to have some means by which the "authorised person" will know with certainty that a holder of bonds is in a situation of drought, and should therefore be able to exchange his bonds for money. The best means of achieving this appear to be to have defined areas declared as "drought areas" for definite periods of time. Clause 18 provides the machinery by which this may be done.

Sub-clause (1.) authorises the Minister for Primary Industry to declare, by notice in the Gazette, that an area in Australia, which in his opinion is experiencing drought, is a drought area.

By sub-clause (2.), when the Minister is satisfied that the drought is over he may, by notice in the Gazette, revoke the declaration in respect of the whole area or part of it.

Clause 19: Redemption in case of drought, fire, flood or financial hardship.

Clause 19 describes the conditions under which a bond holder may seek to have his drought bonds redeemed in the circumstances in which the scheme is designed to apply, namely, drought, fire or flood. This clause also permits redemption on the grounds of serious financial hardship.

Sub-clause (1.) allows a bondholder to request the Commissioner of Taxation, on the grounds referred to in sub-clause (2.), to declare an amount of his drought bonds to be redeemable. The bondholder may specify the amount he wishes to have redeemed.

By sub-clause (2.) the bondholder may make his request on one of the following grounds -

(a)

that he has, alone or with other persons, carried on a grazing business in an area at a time it was a declared drought area (see clause 18);

(b)

that a grazing business carried on by him, alone or with other persons, has suffered substantial damage to or substantial loss of pastures or livestock because of fire or flood; or

(c)

that he is, for any reason, suffering serious financial hardship.

(When the redemption is allowed because of drought, fire or flood the amount of the income tax deduction previously allowed in respect of the bonds being redeemed is included in the assessable income of the year in which the bonds became redeemable. When the redemption is for any other reason, including financial hardship, an income tax, equal to the tax originally saved by virtue of the deduction of the cost of the bonds from assessable income, is imposed).

Sub-clause (3.) allows a period of 12 months after the declaration of the drought area has ceased to be in force, or 12 months after the occurrence of the fire or flood, in which requests may be made to have the bonds declared redeemable.

Sub-clause (4.) establishes the principle of "first-in first-out" in respect of parcels of bonds where the bondholder requests that part only of his holding of drought bonds be declared redeemable.

Sub-clause (5.) provides that where the Commissioner of Taxation is satisfied that the ground on which the request was made has been established, he will declare that the bonds have become redeemable.

Clause 20: Redemption and re-issue of Drought Bonds on disposal of grazing business

A bondholder who disposes of his grazing business, or part of it, may request the redemption of his drought bonds, or part of them, and their re-issue to the purchaser.

The vendor will pay income tax equal to the tax originally saved through the income tax deduction for the redeemed bonds. The purchaser, who is required to pay the purchase price of the bonds to the Registrar of Inscribed Stock, will be allowed an income tax deduction for the full amount of the re-issued bonds in the income year of acquisition irrespective of whether he satisfies the eligibility tests in that year but subject to the deduction not giving rise to a loss for taxation purposes in that year. The purchaser is, however, required to become eligible for an income tax deduction within four years (including the year of acquisition) otherwise the bonds will become redeemable.

Sub-clause (1.) will provide for a joint request by the vendor and purchaser of the grazing business that specified bonds held by the vendor be redeemed and be re-issued to the purchaser of the grazing business.

Sub-clause (2.) will require the bonds to be redeemed in the order in which they were issued to the vendor. This will facilitate the identification of bonds and taxation deductions applicable to those bonds when part only of the vendor's holding is to be redeemed.

Sub-clause (3.) will prevent bonds in respect of which an amount has not been included in an income tax deduction or deductions from being included in a request for the purposes of this clause. This may apply to either the whole or part of a parcel. For example if the cost of a parcel is $10,000 in respect to which $8,000 had been included in an income tax deduction, the request could relate only to bonds costing $8,000.

Sub-clause (4.) provides that where the Commissioner of Taxation is satisfied that (i) the ground on which the request for redemption and re-issue has been established and (ii) the Registrar has received the purchase price of the bonds, the bonds will become redeemable and, after redemption, will be re-issued to the purchaser.

Sub-clause (5.) provides that where a request for redemption and re-issue is made in respect of part of a parcel of bonds, but another part of that parcel has not been the subject of an income tax deduction, the latter part will be redeemed (but not re-issued to the purchaser). This provision ensures that the correct tax saving will be calculated in respect of that parcel.

Clause 21: Redemption where stockholder has ceased to carry on grazing business

Sub-clause (1.) provides that where a person holds a parcel of drought bonds for which an income tax deduction has been allowed, and he has ceased to be eligible for income tax deductions for drought bonds, having permanently ceased to carry on a grazing business, he may ask to have his bonds redeemed. Alternatively, the Commissioner of Taxation may, of his own initiative, declare that the bonds have become redeemable.

Sub-clause (2.) provides that sub-clause (1.) does not apply in respect of bonds acquired as the result of the purchase of a grazing business unless the holder of the bonds has in the year of acquisition of these bonds or a later year met the ninety per centum test contained in clause 16(2.).

Sub-clause (3.) also refers to the purchaser of a grazing business (clause 20) and authorises the Commissioner of Taxation to declare bonds re-issued to the purchaser in accordance with clause 20 to become redeemable if the purchaser does not satisfy the ninety per centum test in a year of income not later than four successive income years including the year in which he acquired the bonds.

Clause 22: Redemption in case of death, bankruptcy or winding-up

Sub-clause (1.) provides that where the Commissioner of Taxation is satisfied that a bondholder has died, become bankrupt or, if a company, is being wound-up, he will declare any bonds held by such a person to have become redeemable.

Sub-clause (2.) provides that the Commissioner will not make a declaration because of death, bankruptcy or winding-up, while any application for redemption because of drought, fire, flood, financial hardship, or disposal of a grazing business, is pending.

This provides for an order in which causes of redemption are to be dealt with where two occasions of redemption occur in the one year and no declaration has been made for either cause. In the case of disposal of a grazing business (clause 20), redemption on the basis of death, etc., could disadvantage the purchaser who had applied for re- issue of the bonds to him.

Clause 23: Redemption of Drought Bonds in respect of which income tax deductions not allowed

Sub-clause (1.) allows a person who holds a parcel of drought bonds for which no income tax deduction has been allowed to request, after his income tax assessment for the relevant year has been issued to him, that the bonds be declared redeemable.

Sub-clause (2.) allows a person who holds a parcel of bonds to request redemption for that portion of the parcel which has not been the subject of an income tax deduction.

By sub-clause (3.) the Commissioner of Taxation will declare the bonds covered by the requests in sub-clauses (1.) and (2.) to have become redeemable.

Clause 24: Redemption of amounts of stock in excess of $50,000

There is a limit on the total amount of drought bonds one person may hold. This limit, which is accompanied by a corresponding limit on the total amount of tax deductions allowable in respect of any one holding of bonds, is thought to provide for a sufficient reserve for most graziers to meet future droughts.

The limit of $50,000 may be compared with a limit of $30,000 placed on holdings of Special Bonds - all series.

Sub-clause (1.) authorises the Commissioner of Taxation, either at the request of the bondholder or otherwise, to declare any excess of bonds over $50,000 (held by one person) to have become redeemable.

Sub-clause (2.) restricts the operation of sub-clause (1.) to the redemption of bonds for which there has been no income tax deduction allowed.

Sub-clause (3.) ensures that where part only of a parcel of bonds has been subject to an income tax deduction, only that part for which no deduction has been allowed will be redeemed under sub-clause (1.).

A holder will not be able to obtain tax deductions in respect of a holding of bonds of a value exceeding $50,000.

Referring to sub-clauses (2.) and (3.) above, the responsibility of ensuring that the tax deduction is limited to $50,000 rests with the Commissioner of Taxation in his administration of the Income Tax Assessment Act. The operation of the Income Tax Assessment Act and the Loan (Drought Bonds) Act 1969 combined will serve to keep both the total income tax deduction and the total holding of one person to the limit of $50,000 at any one time.

Clause 25: Stock to be redeemed in multiples of $100

Clause 8 provides that drought bonds will be issued in multiples of $100 while clause 25, as a complementary measure, provides that the bonds will be redeemed in multiples of $100. The income tax law will provide that deductions in respect of drought bonds will be allowed in multiples of $100.

Clause 26: Reference to Board of Review

Sub-clause (1.) provides that, where a bondholder makes a request to have his bonds redeemed for any of the following reasons -

•

drought, fire, flood or financial hardship (clause 19)

•

disposal of his grazing business or part thereof (clause 20)

•

permanently ceased to carry on a grazing business (clause 21)

•

income tax deductions have not been allowed (clause 23)

•

bonds held in excess of $50,000 (clause 24)

and the Commissioner of Taxation does not meet the request within one month, the Commissioner will notify the bondholder of his reasons for not declaring the bonds to be redeemable.

Sub-clause (2.) provides for a modification of sub-clause (1.) where the Commissioner is required to obtain additional information in connection with the request. In this type of case, the Commissioner is given an extended time in which to notify the bondholder of his reasons for not declaring the bonds to be redeemable. This will be one month after the information is furnished or two months after the original request was made whichever period expires first.

Sub-clause (3.) allows the bondholder, within one month of receiving the notice from the Commissioner, to have his request referred (through the Commissioner) to a Board of Review. Clause 4(1.) defines a Board of Review as one which is constituted under the Income Tax Assessment Act.

Sub-clause (4.) directs the Commissioner, upon receipt of a fee which will be prescribed by regulation (a similar fee provided by the income tax law is $2), to refer the request to a Board of Review.

Sub-clause (5.) vests in the Board of Review the powers and functions of the Commissioner of Taxation (i.e. the authorised person) in relation to the request. In effect, the Board of Review takes the place of the Commissioner.

Sub-clause (6.) provides for the case where a Board of Review refuses to make a declaration in accordance with the taxpayer's request. A Board of Review, in such a case, is obliged to give its decision and reasons for that decision in writing.

Sub-clause (7.) will give a taxpayer a right to appeal to the High Court from an adverse decision by a Board of Review, where the decision involves a question of law. A similar right of appeal exists in the Income Tax Assessment Act in relation to income tax assessments.

Sub-clause (8.) provides that where a taxpayer appeals to the High Court, the Court, in determining the appeal, may make whatever order on the appeal that it thinks fit, including an order directing the Board of Review to make a declaration as requested by the taxpayer.

Sub-clause (9.) extends the application of section 194 of the Income Tax Assessment Act, which sets out the rules applying to sittings of a Board of Review, to this Bill.

Sub-clause (10.) allows regulations made under this Bill to make provisions for the giving of notices and directions concerning a reference to a Board of Review, proceedings before a Board of Review and the refund, in certain circumstances, of the prescribed fee (sub-clause (3)).

Clause 27: Notices of declarations by authorised person

The Commissioner of Taxation will give notice of any declaration that drought bonds have become redeemable, to the following -

•

the Registrar of Inscribed Stock,

•

the bondholder, and

•

where stock has been redeemed, and re-issued on the disposal of a grazing business, to the purchaser of the grazing business.

Where a Board of Review is directed by the High Court under clause 26 to make a declaration, the Board is required by clause 27 to give notice of that declaration to these same persons.

Clause 28: Effect of Drought Bonds having become redeemable

Clause 28 provides that when drought bonds become redeemable -

(a)

interest on the bonds ceases; and

(b)

the bonds are to be redeemed, subject to the income tax requirement (section 159D of the Income Tax Assessment Act) that the income tax on the proceeds of redemption of bonds (which are redeemed for reasons other than drought, fire or flood) be paid by the Registrar to the Commissioner of Taxation from those proceeds; any bonds which are redeemed following a request by the vendor of a grazing business, in terms of clause 20 of this Bill, will be re-issued to the purchaser of the grazing property.

Clause 29: Only one request in respect of the same stock to be pending

A bondholder may, at any one time, request a redemption of drought bonds for only one of the following reasons -

•

drought, fire, flood or financial hardship (clause 19)

•

disposal of grazing business (clause 20)

•

permanently ceasing to carry on a grazing business (clause 21).

Clause 30: Requests, etc. to be in writing

All requests, declarations, notices and directions concerning the redemption of drought bonds must be in writing.

PART IV - Miscellaneous

Clause 31: Regulations

By sub-clause (1.) the Governor-General may make regulations not inconsistent with the Bill. In particular, the regulations -

(a)

may require a bondholder, the personal representative of a deceased bondholder, the trustee in bankruptcy of a bondholder, or the liquidator of a company which is a bondholder to furnish information to the Commissioner of Taxation; and

(b)

may prescribe penalties, not exceeding $200, for offences against the regulations.

By sub-clause (2.) the regulations made under this Bill may provide that any of the regulations (or forms prescribed by the regulations ) made under the Commonwealth Inscribed Stock Act will apply with modifications, if necessary, to drought bonds.

INCOME TAX (DROUGHT BONDS) BILL 1969

The purpose of this Bill is to impose a special income tax in relation to certain redemptions of drought bonds. The tax, which is to be calculated according to the income tax saved by the bondholder by the allowance of income tax deductions for the purchase of the bonds, will be payable where drought bonds are redeemed:

-

on maturity;

-

in cases of serious financial hardship;

-

on death, bankruptcy or winding-up of the bondholder;

-

on the bondholder permanently ceasing to carry on an eligible grazing business;

-

in special circumstances relating to the sale of a grazing business.

The tax will not be payable in respect of bonds redeemed on account of drought or of substantial loss of pastures or livestock by reason of fire or flood. As explained later in the notes on the Income Tax Assessment ??bill (No. 3) 1969, in these circumstances the amount of the bonds redeemed will be included in the taxpayer's assessable income of the year of redemption.

The tax imposed by this Bill will not be payable in respect of bonds for which no income tax deduction has been allowed prior to redemption.

Clause 1: Short Title and Citation

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

Clause 2: Commencement

It is proposed that the Act shall come into operation on the day on which it receives the Royal Assent.

Clause 3: Imposition of Tax

This clause provides for the imposition of income tax payable in accordance with the new section 159C of the Income Tax Assessment Act proposed to be inserted in that Act by the Income Tax Assessment Bill (No. 3) 1969. Tax will be payable in accordance with the new section 159C when drought bonds become redeemable for reasons other than drought, fire or flood.

An explanation of the provisions of the proposed section 159C is given in the notes on the Income Tax assessment Bill (No. 3) 1969. Briefly, the income tax payable in the circumstances to which the section relates will restore to revenue the tax saved by a bondholder by reason of the income tax deductions formerly allowed him for the cost of bonds.

The income tax imposed by this Bill will be payable by the holder of the bonds, and in practice, will be deducted by the Registrar of Inscribed Stock from the total amount of the bonds being redeemed.

INCOME TAX ASSESSMENT BILL (NO. 3) 1969

Introductory Note

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

Clause 1: Short title and citation

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

Clause 2: Commencement

Section 5(1A.) of the Acts Interpretation Act 1901-1966 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act. By this clause, it is proposed that the amending Act shall come into operation on the day it receives the Royal Assent.

Clause 3: Parts

Section 5 of the Principal Act lists the Parts and Divisions into which the Principal Act is divided. The purpose of clause 3 is to include in the list a reference to the new Division of Part III of the Act relating to drought bonds which will be inserted into the Principal Act by clause 5 of the Bill.

Clause 4: Limitation on Certain Deductions

This clause proposes a drafting amendment to section 79C of the Principal Act which is consequential upon the proposed insertion in that Act of the new Division relating to drought bonds.

Section 79C provides that the aggregate of special deductions allowable under certain sections of the Principal Act (such as gifts and zone allowances) shall not exceed the amount of income that remains after deducting from assessable income all other allowable deductions, except losses of previous years and certain deductions for capital expenditure allowable under Divisions 10 and 10AA of the Principal Act, in relation to prospecting and mining operations. The amendment proposed by this clause will exclude from "all other allowable deductions" deductions allowable for subscriptions to drought bonds. This amendment, together with the proposed section 159A(10), will ensure that the deduction for drought bonds will be allowed only after section 79C has been applied. This will assist in identifying the tax saving in relation to a deduction for drought bonds and will also ensure that the amounts otherwise allowable to a taxpayer under the sections of the Principal Act specified in section 79C will not be diminished as a consequence of a purchase of drought bonds.

Clause 5: Drought Bonds

By this clause it is proposed to insert a new Division - Division 16B - in the Principal Act which will provide for the taxation aspects of the drought bonds scheme.

Section 159 : Interpretation

This section is a drafting provision which defines the meanings to be given to certain words and phrases used in the Division.

Sub-section (1.) contains a number of definitions.

"beef cattle"

does not, for the purposes of the new Division 16B, include dairy cattle. To qualify for drought bond deductions, a person must derive not less than ninety per cent of gross farm receipts from maintaining sheep or beef cattle; income from maintaining dairy cattle is not to be regarded for this purpose as income from beef cattle.

"current parcel of stock"

is defined as meaning so much of an original parcel or, if some of it has become redeemable, the balance not redeemed. The definition is designed to ensure in conjunction with other measures, that on redemption of a parcel or part of it, the appropriate amount is included in assessable income or restored to revenue as tax payable in accordance with the new section 159C.

"gross farms receipts"

this definition states the receipts ninety per cent of which, in a year of income, must be receipts from sheep and beef cattle for a person to qualify for drought bond deductions. The definition is subject to some modifications contained in sub-section (2) of the proposed section 159 (see explanation of that sub-section). Subject to these modifications, gross farm receipts will, in the case of a sole trader (either an individual or a company) include so much of his assessable income of a year of income as is derived by him from carrying on a business of primary production in Australia, i.e., from a business of cultivating land or maintaining animals or poultry to sell them or their bodily produce (including natural increase). The value of trading stock on hand will not be taken into the calculation of gross farm receipts. For a member of a partnership, in addition to any separate gross farm receipts of his own, his individual interest in the gross farm receipts of the partnership will be taken into account. Gross farm receipts derived as a trustee of a trust estate are excluded from the scope of the definition.

"original parcel of stock"

is a term used to facilitate drafting a nd means the total investment in drought bonds made by a taxpayer at the one time.

"receipts from sheep and beef cattle"

for a person to qualify for drought bond deductions, ninety per cent of "gross farm receipts" (a term already explained) must, in a relevant year of income, be derived by way of "receipts from sheep and beef cattle". Such receipts are defined as receipts attributable to maintaining sheep or beef cattle (not including dairy cattle).

"stock"

is defined as stock issued under the name of drought bonds in pursuance of the Loan (Drought Bonds) Act 1969. Although the securities to be issued for the purposes of the drought bonds scheme have become known as "drought bonds" and will be called drought bonds in these notes, there will be no issue of separately identifiable bonds; the securities will be in the form of inscribed stock.

"the Registrar"

means the Registrar of stock at which the stock is inscribed under the Commonwealth Inscribed Stock Act 1911-1966 and includes a person temporarily performing the functions of the Registrar.

Sub-section (2.) of the proposed section 159 modifies the definition of gross farm receipts contained in sub-section (1.). One effect of sub-section (2.) is that sections of the Principal Act which result in certain types of income being spread over a number of years for income tax purposes will not have effect in the calculation of gross farm receipts. This will permit the upper limit of the drought bond deduction to be determined by reference to the assessable income actually derived by a taxpayer in a particular year. Another effect will be to ensure that the maximum deduction allowable will not be calculated by reference to amounts that are deemed to be assessable income where a taxpayer has disposed of livestock by way of gift, or in the course of putting an end to a grazing business.

Sub-sections (3.) and (4.) have been inserted to facilitate drafting of the provisions relating to the redemption of bonds and the taxation implications of such redemptions. The sub-sections will provide for the identification of drought bond deductions with each purchase of bonds and will also provide for the determination of the amount of the income tax deductions that have been allowed in respect of any bonds being redeemed. This is necessary in order to calculate the amount to be included in assessable income where bonds are redeemed by reason of drought, fire or flood, or to calculate the amount of the tax payable in other cases of redemption. A person may, in such circumstances, redeem the whole of a parcel of bonds at the one time, or he may redeem, part of it. The cost of the whole parcel may have been allowed as a tax deduction or only part of the cost may have been so allowed. He may have already redeemed part of a parcel and had tax adjustments made in respect of the earlier partial redemption while further adjustments are necessary in relation to the later redemption. All these, and other such contingencies must be provided for and it is the purpose of sub-sections (3) and (4) to make such provision.

Sub-section (3.) provides that, for the purposes of sub-section (4.) a deduction is deemed to have been allowed in relation to a "current parcel of stock" (i.e., an original parcel purchased less any prior redemptions) if any deductions have been allowed or are allowable for the cost of bonds included in the original parcel. The amount of the deduction is, for the purposes of sub-section (4.), deemed to be the deduction actually so allowed or allowable or, if more than one deduction is involved, the sum of the deductions.

Sub-section (4.) provides for the calculation of the "unrecouped deduction" in respect of an amount of bonds held by a taxpayer at any time. An "unrecouped deduction" is, in broad terms, the amount of a deduction allowed in respect of bonds in a particular parcel as reduced by any tax adjustments previously made because of earlier redemptions of bonds included in the parcel.

Paragraph (a) of sub-section (4.) deems an unrecouped deduction to exist where deductions have been allowed for the cost of stock included in a current parcel which, because there have been no prior redemptions, is indentical with the original parcel. It also deems an unrecouped deduction to exist where deductions have been allowed in respect of a current parcel, when part of the original parcel has been already redeemed. In such a case, an unrecouped deduction will be deemed to exist if the amount of the deduction allowed or allowable exceeds the sum of any amount which, because of prior redemptions, has been included in the taxpayer's assessable income or has been subjected to tax in accordance with the proposed new section 159C.

Once it is determined, according to sub-sections (3.) and (4.) that there is deemed to be an unrecouped deduction, paragraph (b) of sub-section (4.) becomes operable for the purposes of ascertaining the amount of the unrecouped deduction.

Sub-paragraph (i) of paragraph (b) refers to the case where the stock being redeemed is the whole of an original parcel purchased by the taxpayer. In this case the amount of the unrecouped deduction equals the amount of the deduction allowed in respect of the parcel.

Sub-paragraph (ii) refers to the case where the stock being redeemed is the whole of a particular parcel held by a taxpayer, but is less than the amount of the original purchase of that parcel because of a prior redemption. In this case, the amount of the unrecouped deduction is the amount of the excess calculated in accordance with paragraph (a) of the sub-section.

Sub-paragraph (iii) refers to the case where the stock being redeemed is part only of a taxpayer's holding of a particular parcel and the amount of the total current holding of that parcel is equal to the amount of the unrecouped deduction that exists in respect of that total current holding (i.e. where a full deduction has been allowed in respect of the bonds held). In this case the amount of the unrecouped deduction is equal to the amount of the bonds being redeemed.

Sub-paragraph (iv) refers to the case where the stock being redeemed is part only of the current holding of a particular parcel and the amount of the stock in the current holding of that parcel is greater than the unrecouped deduction in respect of that current holding. In other words the sub-paragraph applies in the case where deductions have not been allowed for the full amount of the bonds included in the current holding. In this case, the unrecouped deduction is the amount, if any, that remains after deducting from the amount of the stock being redeemed the amount by which the amount of the current holding of that particular parcel exceeds the amount of the unrecouped deduction that exists in respect of that parcel.

In effect, this calculation provides that, on the redemption of part of a current parcel of bonds in a case where the whole of the current parcel has only been partly deductible for income tax purposes, the amount of the bonds in the parcel for which an income tax deduction has not been allowed is deemed to be redeemed first. There are no taxation consequences on the redemption of bonds for which no deduction has been allowed.

Section 159A : Deductions in respect of drought bonds.

Section 159A will provide for the allowance of income tax deductions in respect of purchases of drought bonds and will specify the conditions under which deductions are allowable and the limits on the amount of the deduction that may be allowed in a particular year of income.

Stated briefly, deductions will be allowable in accordance with the section to a taxpayer (other than a trustee) for the cost of drought bonds purchased by him up to two months after the end of the year of income, provided that, in relation to the year of income, at least ninety per cent of the taxpayer's gross farm receipts are from the grazing of sheep and beef cattle. The section provides that the amount of the deduction is to be not greater then twenty per cent of the taxpayer's income from grazing sheep and beef cattle in that year and that his maximum holding of bonds on which deductions have been allowed is not to exceed $50,000 at any one time. The section also authorises the allowance of deductions to a purchaser of a grazing business where both the vendor and the purchaser have agreed that certain bonds originally purchased by the vendor should be redeemed and re-issued to the purchaser of the business.

Sub-section (1.) of the proposed section 159A provides that deductions are allowable in relation to the purchase of drought bonds in accordance with the provisions of the section.

Subject to the various tests, a deduction under this section will be available to individuals and to companies that are carrying on a grazing business. A deduction will not be available to a partnership, but the individual partners may claim deductions in respect of bonds purchased in their own names, having regard to their proportionate share of the gross farm receipts and the gross receipts from grazing sheep and cattle of the partnership. A person in the capacity of a trustee will not be able to claim deductions.

For a beneficiary in a trust estate that carries on a grazing business, the interest in the trust estate will be ignored both for the purposes of determining his gross farm receipts and the proportion of these derived from sheep or beef cattle.

Sub-section (2.) establishes, subject to the succeeding provisions of the section, the amount of a deduction allowable to a taxpayer in respect of a year of income. The deduction allowable is an amount equal to the sum of -

(a)

the cost of drought bonds purchased by the taxpayer (otherwise than as a trustee) in the period of twelve months ending two months after the end of the year of income; and

(b)

so much of the cost of drought bonds purchased by the taxpayer before the commencement of that period that has not been included in a deduction in respect of an earlier year of income.

By paragraph (a) of sub-section (2.) a taxpayer is given two months beyond the end of a year of income in which to purchase bonds that may be deductible in that year of income. The extra two months is provided to enable the taxpayer to estimate with some accuracy his gross farm receipts and gross receipts from sheep and beef cattle for that year of income. He will then be able to estimate the deduction to which he is entitled for drought bonds and hence to make a judgment as to how much to invest in bonds at that time.

By paragraph (b) of the sub-section, provision is made for a deduction to be allowable in respect of bonds purchased in an earlier year of income to the extent to which a deduction has not been allowed in respect of those bonds in an earlier year of income. The deduction is only available in the subsequent year of income if the taxpayer has retained the bonds which were not deductible in the earlier income year and the other provisions of the section are satisfied.

Sub-section (3.) modifies the provisions of sub-section (2.). It provides that the bonds the cost of which may be allowable as a deduction under sub-section (2.) do not include bonds -

(a)

that became redeemable not later than the day next following the end of the period referred to in that sub-section;

(b)

that became redeemable after that date as a result of a request for redemption made by the taxpayer not later than the end of that period; or

(c)

that became redeemable in consequence of the holder of the bonds having died, become bankrupt or, being a company, commencing to be wound-up, not later than the end of that period.

The effect of this sub-section will be that, in determining the deduction to be allowed for drought bonds in respect of a year of income, no account will be taken of bonds which have become redeemable during the specified period under consideration, or of bonds which will become redeemable after that period as the result of a request for redemption made during the relevant period. Also excluded will be bonds which will be redeemable after that period because of the happening during the period of one of the causes of redemption, e.g., death of the bond holder.

Sub-section (4.) provides the basic eligibility test for an income tax deduction in respect of the purchase of drought bonds. The deduction in relation to a year of income is allowable only where the taxpayer has "receipts from sheep and beef cattle" (as defined) that amount to not less than ninety per centum of his "gross farm receipts" (as defined) for that year. Explanations of these defined terms have been given in the notes on sub-section (1.) of the proposed section 159.

The eligibility test will apply separately to each year of income so that it would be possible for a particular taxpayer to be entitled to a deduction in an assessment for one income year but not another.

The sub-section does not apply in respect of bonds issued to a taxpayer as the result of a declaration under section 20 of the Loan (Drought Bonds) Act 1969. This is the case where, on the sale of a grazing business, the parties to the sale agree that the vendor shall redeem bonds and the purchaser of the business will purchase bonds of an equivalent amount. In these circumstances, the purchaser is, by section 21 of the Loan (Drought Bonds) Act 1969, to be given four income years, including the year of purchase, to satisfy the ninety per centum test. If he does not satisfy this test in any year of this period, section 21 of the Loan (Drought Bonds) Act 1969 will provide for the bonds to become redeemable. On such a redemption income tax will become payable in accordance with the proposed section 159C.

Sub-section (5.) provides that the deduction allowable to a taxpayer for drought bonds in relation to a year of income shall not exceed twenty per centum of his "receipts from sheep and beef cattle" in respect of that year. This provision is subject to the other provisions of the section with the result that sub-section (5.) would not permit the allowance of a deduction if the taxpayer, for example, failed to meet the ninety per centum test contained in sub-section (4.) in respect of the relevant year of income.

Sub-section (6.) provides a further limitation to the deduction allowable under the proposed section 159A in respect of a year of income. The sub-section provides an upper limit of $50,000 in respect of the deduction for drought bonds. (It is to be noted that, by clause 24 of the Loan (Drought Bonds) Bill 1969 it is proposed that the maximum permissible holding of drought bonds by a person at any time will be $50,000.)

If a taxpayer has a holding of drought bonds amounting to $40,000 for which income tax deductions have been allowed, and a subsequent deduction calculated in accordance with the other provisions of the proposed section 159A amount to $20,000, the deduction allowable will be limited to $10,000 by the operation of sub- section (6.). On the other hand, a taxpayer may have received, over past years, deductions totalling $50,000 but had redeemed portion of that holding amounting to, say, $10,000. In such a case, he will be entitled to a deduction for a further $10,000, subject to the other provisions of the section being satisfied.

Sub-section (7.) is a provision which will have limited effect as it will apply only in cases where there has been the sale of a grazing business and an agreement between the vendor and purchaser of that business for certain bonds to be redeemed by the vendor and re-issued to the purchaser. Where bonds are acquired by the purchaser of a grazing business in this way, the sub-section provides that, in respect of these bonds, the twenty per centum limitation contained in sub-section (5.) of this section shall not apply.

Sub-sections (8.) and (9.) will have the effect of rounding-off a deduction for drought bonds to the nearest one hundred dollars. Thus, where a deduction calculated in accordance with the other provisions of the section amounts to less than fifty dollars, no deduction is to be allowable. Where a deduction so calculated is not less than fifty dollars, the deduction allowable is to be taken to the nearest one hundred dollars. For example, if the application of sub-section (5.) of this section results in an amount of $1,540, the deduction would be rounded-off under sub-section (9.) to $1,500; if the application of sub-section (5.) resulted in an amount of $1,560, the deduction would be rounded-off to $1,600, provided that the cost of bonds for the purposes of sub-section (2.) is at least $1,600.

The purpose of rounding-off the deduction is tied in with the fact that bonds will be issued and redeemed only in amounts of one hundred dollars or multiples of one hundred dollars and with the fact that a taxpayer is to be permitted to redeem bonds for which an income tax deduction is not allowed.

Sub-section (10.) provides that the deduction allowable under the section shall not exceed an amount equal to the number of complete hundreds of dollars in the amount remaining after deducting from the assessable income all other allowable deductions.

The purpose of this sub-section is to ensure that the deduction for drought bonds will not give rise to a loss for income tax purposes in respect of a year of income. Any bonds that are not allowed as a deduction in the year of purchase will be available for deduction in a subsequent year of income under sub-section (2.)(b) of the proposed section 159A.

Sub-section (11.) prescribes the order in which parcels of drought bonds are to rank for deduction in certain circumstances. Where, in a particular year of income, two or more parcels of drought bonds may be available for deduction but the maximum deduction allowable under the proposed section 159A is less than the total amount of those parcels, the parcels are deductible in the order in which they were purchased. This provision is necessary in order to determine the tax saving as a result of the deduction allowed for each separate parcel of bonds.

Sub-section (12.) modifies the operation of sub-section (11.) in cases where a deduction in respect of a year of income for two or more parcels of bonds includes a deduction in respect of bonds issued in accordance with section 20 of the Loan (Drought Bonds) Act 1969 - i.e. bonds originally purchased by the vendor of a grazing property and re-issued to the purchaser of the property - and sub-section (5.) of this section operates to reduce the total deductions allowable. In this comparatively rare type of case, the bonds acquired under section 20 of the Loan (Drought Bonds) Act 1969 will qualify for deduction before any other bonds are available for deduction in that year.

Section 159B : Where stock redeemed in consequence of drought, fire or flood.

This section provides the taxation consequences of a redemption of bonds on account of drought, fire or flood. In broad terms, on a redemption for any of these reasons, there is to be included in assessable income of the year in which the bonds become redeemable an amount equal to any deduction allowed to the taxpayer for the cost of the bonds being redeemed. If there have been prior redemptions out of a parcel of bonds, and these have resulted in earlier tax adjustments, the amount to be included in assessable income on the redemption of the balance of the parcel will, in broad terms, be so much of the deduction allowed as was not dealt with at the time of the earlier redemption. The amount to be included in assessable income is the amount of the "unrecouped deduction" relating to the bonds being redeemed. The meaning of "unrecouped deduction" and the method by which it is calculated in differing circumstances have been explained in the notes on sub-sections (3.) and (4.) of new section 159 proposed to be inserted in the Principal act by clause 5 of the Bill. Of course, if a taxpayer redeems a parcel of bonds in respect of which no deduction has been allowed, section 159B will not operate to include an amount in assessable income in respect of the redemption.

The new section 159B is complementary to section 19 of the Loan (Drought Bonds) Act 1969 insofar as that section sets out the conditions on which bonds may be redeemed on account of drought, fire or flood. These conditions are explained in the notes on clause 19 of the Loan (Drought Bonds) Bill 1969 and are set out in the notes in ensuing paragraphs on sub-section (1.) of the proposed section 159B.

Sub-section (1.) of proposed section 159B provides that the section applies to drought bonds that become redeemable in consequence of a request under section 19 of the Loan (Drought Bonds) Act 1969 on a ground specified in paragraph (a) or (b) of sub- section (2.) of that section. It also provides that section 159B only applies to drought bonds that amount to all or part of a parcel of bonds in respect of which an unrecouped income tax deduction is, under section 16 of the Loan (Drought Bonds) Act 1969, deemed to exist.

Paragraphs (a) and (b) of section 19(2.) of the Loan (Drought Bonds) Act 1969 provide that a taxpayer may request the redemption of bonds where -

(a)

he has carried on a grazing business in an area at a time when that area was declared by the Minister for Primary Industry to be subject to a drought; or

(b)

a grazing business carried on by him has suffered substantial loss of pastures or livestock by reason of fire or flood.

The sub-section only applies to bonds that form the whole or part of a parcel of bonds in respect of which an income tax deduction has been allowed. Bonds for which no income tax deduction has been allowed may be redeemed but, in respect of those bonds, no taxation consequences flow from the redemption.

Sub-section (2.) provides for the inclusion in the assessable income of the person redeeming the bonds in the year of income in which the bonds become redeemable on account of drought, fire or flood, an amount equal to the unrecouped deduction in relation to the bonds being redeemed. The unrecouped deduction has already been explained in these notes and, broadly, means the amount of income tax deduction allowed in respect of the bonds being redeemed. For example, where all or part of a parcel of bonds which has been fully deductible is redeemed, the amount to be included in assessable income will equal the amount of the bonds being redeemed.

In the case where the bonds being redeemed constitute all of a parcel of bonds the cost of which has only been partly deductible for income tax purposes, the amount to be included in assessable income will be an amount equal to the amount of the income tax deduction that has been allowed.

Sub-section (3.) refers to the case where a taxpayer dies before the bonds to which proposed section 159B applies become redeemable. In this situation, the proposed section 22 (2.) of the Loan (Drought Bonds) Act 1969 provides that a declaration authorising redemption by reason of death of the bond holder cannot be made while a request for redemption on account of drought is pending. Therefore, where section 159B applies in this type of case, the bonds being redeemed are, to the extent to which income tax deductions have been allowed, to be included in assessable income.

The sub-section provides that, in this type of case, section 101A of the Principal Act applies in respect of the amount to be included in assessable income. This will mean that the amount will form part of the income of the trust estate of the year in which the bonds become redeemable and will be deemed to be income to which no beneficiary is presently entitled. Accordingly, the trustee will be assessed and will be liable to pay tax on that income.

Section 159C : Other redemptions - liability of holder to pay income tax equal to tax saved.

Under this section a special income tax will become payable by a taxpayer in respect of bonds for which income tax deductions have been allowed, where the bonds become redeemable for a reason other than drought, fire or flood. Thus, the section will apply where the bonds become redeemable on account of -

•

maturity of the bonds;

•

serious financial hardship;

•

permanent cessation of an eligible grazing business;

•

sale of a grazing business where the vendor and purchaser agree that the vendor's bonds shall be redeemed and re-issued to the purchaser;

•

death, bankruptcy, or in the case of a company, on commencement of winding-up proceedings.

In the event of bonds becoming redeemable for any one of these reasons, the special income tax will become payable in respect of each parcel or part of a parcel of bonds being redeemed. The tax will be payable on an amount equal to the unrecouped deduction existing in respect of the bonds being redeemed. The meaning of unrecouped deduction has already been explained in the notes on sub-section (4.) of the proposed new section 159.

Where the bonds being redeemed represent the whole of a parcel of bonds for which income tax deductions have been fully allowed, the unrecouped deduction is an amount equal to the amount of bonds in the parcel and, in this case, the amount of tax payable on redemption will equal the amount of tax saved as a result of the deductions allowed for the bonds in the parcel.

Sub-section (1.) is a drafting provision which provides that the section will be operative so long as the Income Tax (Drought Bonds) Act 1969 is in force. That Act will impose the special income tax which is payable in accordance with the provisions of this section.

Sub-section (2.) provides that where bonds in respect of which an unrecouped deduction exists become redeemable for a reason other than drought, fire, or flood, income tax becomes payable by the person who purchased the bonds. Where the person who purchased the bonds has died or is an undischarged bankrupt, the tax is payable by the trustee of his estate. In either case, the tax is payable in respect of the amount that was the unrecouped deduction in relation to the bonds being redeemed immediately before they became redeemable.

Sub-section (3.) provides for the calculation of the amount of income tax payable in respect of the bonds being redeemed. Broadly, this is the proportion of the total tax saving made by the allowance of deductions for the whole of the bonds in that parcel that is attributable to the bonds in that parcel that are being redeemed. This calculation may be demonstrated by the following example -

Sub-section (4.) sets out the way in which the tax saved in respect of a purchase of an original parcel of bonds is to be ascertained.

Paragraph (a) provides for the calculation of the tax saved in respect of each year of income in which an income tax deduction has been allowed in respect of the parcel. The amount of tax saved will be the amount by which the tax otherwise payable by that person for that year was reduced by reason of the drought bond deduction in that year. In other words, it will be the difference between the tax actually payable for the year and the tax that would have been payable if the bond deduction had not been allowed in the assessment for that year.

Paragraph (b) provides for the case where a deduction for bonds in respect of a year of income relates to more than one parcel of bonds. In this case, the tax saved, as calculated in accordance with paragraph (a), is apportioned between the parcels included in the deduction in proportion to the amounts of the separate parcels. Where the deduction allowed in respect of a year of income related to one parcel of bonds, paragraph (b) will not vary the amount of the tax saved as calculated under paragraph (a) of the sub-section.

Under paragraph (c), which is the final step in the calculation of the tax saved in respect of an original parcel of bonds, the tax saved is fixed as the amount, or the sum of the amounts (where more than one income year is involved) ascertained under paragraph (b).

The following example illustrates the calculation of the tax saving in accordance with these paragraphs -

Sub-section (5.) will apply where an assessment for ordinary income tax purposes is amended and bonds for which a deduction was allowed in the original assessment for that year have become redeemable prior to the amendment of assessment, in circumstances in which tax is payable under section 159C in respect of redemption. In this situation, any amendment of the ordinary income tax assessment which increases or decreases the taxable income for that year would, because of the incremental rates of tax, vary the tax saved in respect of the bond deduction for that year.

To meet the case where all or part of the bonds in such a parcel have been redeemed before the amendment of the ordinary assessment, sub-section (5.) will apply so that the amount of the tax saving effected in the original assessment will not be changed in the amended assessment. This will be achieved by adjusting the ordinary income tax payable under the amended assessment. This adjustment may be by way of either an increase or decrease in the tax payable on the amendment, depending on whether the rate of tax has been increased or reduced.

Sub-section (6.) will ensure that, with some specified exceptions, the references to "income tax" or "tax" in other parts of the Assessment Act do not include a reference to the special income tax payable in accordance with this section. The exceptions specified are the references to "income tax" or "tax" in the following sections of the Principal Act -

Section 159D : Determination and Collection of Tax in respect of Tax Saving.

The proposed section 159D provides that an amount of income tax payable in accordance with section 159C will become due for payment when, under the provisions of section 159D, the Commissioner determines the amount. The Commissioner is required to serve notice containing particulars of the determination to the Registrar of Stock and to the person liable to pay the tax, i.e., the person whose bonds have become redeemable.

The Registrar may not redeem bonds for any reason other than in consequence of drought, fire or flood until he has received a notice of determination of the tax, if any, payable in respect of those bonds. Upon receipt of such a notice, the Registrar will be required, on the authority of the Treasurer, to deduct the amount of tax payable from the amount of the bonds being redeemed and to forward the amount deducted to the Commissioner, the net proceeds of the bonds being sent to the subscriber.

Where bonds in respect of which no amount has been allowed as a income tax deduction under Division 16B become redeemable, a notice of determination showing that no tax is payable will be issued to the Registrar.

Sub-section (1.) will provide that an amount of income tax payable in accordance with the last preceding section will not become due for payment until the Commissioner has determined the amount due for payment in accordance with section 159D.

Sub-section (2.) will apply where bonds are to be redeemed for a reason other than drought, fire or flood. In these circumstances, the Registrar will require an authorisation in the form of a notice of determination in respect of the bonds as provided in the proposed sub-section (3.) of section 159D. The purpose of this is to ensure that, where an amount of income tax is payable in respect of the redemption, the Registrar will be advised of the amount of tax to be deducted from the proceeds on redemption and paid to the Commissioner.

Under sub-section (3.) the Commissioner of Taxation is required, as soon as practicable after any bonds become redeemable other than because of drought, fire or flood, to determine the amount of tax, if any, that will be payable on redemption of those bonds. Having made the determination, the Commissioner is then obliged to serve notice of the amount of tax payable, on both the bondholder and the Registrar of Stock. Where no tax is payable, notice to this effect will only be served on the Registrar.

Sub-section (4.) provides that upon the Registrar receiving a notice of determination showing that an amount of income tax is payable on redemption, the Treasurer will cause to be paid to the Commissioner out of the Drought Bonds Trust Account the amount of tax shown as payable. Where an amount is so paid to the Commissioner, the amount will be deemed to have been paid by the person liable to pay the tax (i.e., the bond holder) and the Commonwealth will, to the extent of the payment, be discharged from its liability in respect of the bonds to the person entitled to receive the proceeds of redemption of the bonds.

Sub-section (5.) will authorise the deduction of the income tax payable from the amount of bonds being redeemed and the remittance of that amount to the Commissioner, notwithstanding any law of the Commonwealth or of a State or Territory of the Commonwealth (including a law relating to bankruptcy or the winding- up of companies) or any legal or equitable right or interest in or in relation to drought bonds that have been acquired by a person.

The special priority given to the Commissioner by this sub-section for payment of this special tax, as compared with priority for other taxes, is explained by the fact that this special tax is not more than the repayment of tax deferred from earlier years. It is inherent in the scheme that, from the time a deduction is allowed for bonds, any tax saved as a result of that deduction is to be repaid out of the proceeds on a redemption for a reason other than drought, fire or flood.

Sub-section (6.) is a formal provision which states that the production of a notice of determination or of a document certified by the Commissioner, a Second Commissioner or a Deputy Commissioner to be a copy of such a notice, is to be conclusive evidence of the due making of the determination and (except in proceedings on appeal against the determination) that all particulars of the determination are correct.

This sub-section is similar in effect to section 177 of the Principal Act, which applies generally to simplify administrative procedures relating to the production of notices of assessment and similar documents.

Section 159E : Amendment of Determinations

This section will permit the Commissioner, in certain specified circumstances, to amend a determination of the amount of tax payable on redemption of bonds, made in accordance with the preceding section. Under the drought bond scheme, it should seldom be necessary to amend a determination.

Sub-section (1.) formally provides that, subject to the section, the Commissioner may at any time amend a determination in such manner as he thinks necessary.

Sub-section (2.) requires, and provides authority for, the Commissioner to amend a determination of the amount of tax payable on redemption where this is necessary to give effect to a decision on an objection, appeal or review. As is explained in the notes on the proposed section 159F, a taxpayer will have the opportunity of testing a determination of the Commissioner before a Board of Review or a Court if he is dissatisfied with the determination.

Sub-section (3.) provides that, except in the case of an amendment arising out of a reference to a Board of Review or to a Court, an amendment of a determination increasing the amount of tax payable shall not be made except to correct an error in calculation or a mistake of fact. Moreover, such an amendment is not to be made more than three years after the making of the original determination. No time limit is placed on the amendment of a determination in order to reduce the amount of tax payable on redemption.

Sub-section (4.) provides that, for the purposes of the Division, an amended determination is to be deemed to be a determination. As a result, any reference in the Division to a determination will include a reference to an amended determination except where specific provision is made to the contrary (as in section 159D(4.) relating to the deduction of tax from the proceeds of redemption). This will mean, for example, that an amended determination may be further amended and will also mean that an amended determination may be referred to a Board of Review or form the subject for appeal to a Court under section 159F, subject to the requirements of Division 2 of Part V of the Principal Act being complied with.

Section 159F : Reviews and appeals.

The purpose of this section is to ensure that the objections, reviews and appeals provisions of the Principal Act will be available to a taxpayer in respect of determinations of tax payable under the new Division 16B in the same way as they are available generally in respect of assessments of income tax.

The section provides that references to Division 2 of Part V of the Principal Act to assessments and to taxpayers are to be read as references to determinations and to persons liable to pay the special income tax referred to in determinations. The effect of this provision is that a taxpayer may, in writing, object to a determination of tax payable under proposed section 159D. The objection should be lodged within sixty days after service of the notice of the determination. The Commissioner will then be required to consider the objection and, if appropriate, to amend the determination.

If the taxpayer is dissatisfied with the decision of the Commissioner on the objection he may request the Commissioner either to refer the decision to a board of Review or to treat the objection as an appeal and forward it to the High Court or the Supreme Court of a State. As mentioned earlier, the Commissioner will be required by proposed section 159E to amend a determination where necessary to give effect to a decision on an objection, review or appeal.

In addition to his rights of objection, etcetera, described above, a purchaser of drought bonds is also to be entitled to have referred to a Board of Review, a refusal of the Commissioner to approve a redemption of bonds when requested to do so by the bondholder (see notes on clause 26 of the Loan (Drought bonds) Bill 1969).

Section 159G : Special provisions relating to private companies.

The purpose of this section is to provide for a special adjustment in the case of certain taxpayers that are private companies in the year or years of income in which a deduction is allowed in respect of the purchase of drought bonds. The adjustment will only apply in the year of redemption of bonds and then only where the bonds are redeemed for reasons other than drought, fire or flood.

The necessity for this adjustment arises from the fact that a deduction in respect of drought bonds in the case of a private company not only produces a saving of primary income tax (as with other taxpayers) but, in addition, results in a reduction in the amount which a private company must declare as dividends in order to avoid tax on its undistributed income under Division 7 of the Principal Act.

Where a private company redeems its holding of bonds for which income tax deductions have been allowed for reasons of drought, fire or flood, the amount of the bonds being redeemed will be included in assessable income. In these cases, any reduction in the distributable income for Division 7 purposes that resulted from the allowance of deductions for the bonds, will be offset by a broadly corresponding increase in distributable income when the proceeds of the bonds are included in the assessable income of the company upon redemption. However, this automatic adjustment to the distributable income in the year bonds become redeemable will not occur where bonds are redeemed in circumstances where, instead of an unrecouped deduction being included in assessable income, tax is payable in respect of the redemption in accordance with the proposed section 159C.

To meet these latter cases, it is proposed that the amount that a company must pay as dividends to avoid tax on its undistributed income (i.e., the "sufficient distribution") should be increased in the year the bonds become redeemable by the same amount as the sufficient distribution had been reduced in an earlier year or years as a result of the allowance of deductions for the purchase of those bonds.

Sub-section (1.) will provide for the amount that would be a sufficient distribution, but for the application of this section, to be increased by the amount by which the sufficient distribution was reduced in a prior year of income as a result of the purchase of the bonds which have become redeemable. The adjustment will be made in the year of income in which the bonds become redeemable, but only when proposed section 159C applies to the redemption, i.e., when the redemption is for a reason other than drought, fire or flood and no part of the proceeds of the bonds are included as assessable income of the private company. The amount by which the sufficient distribution is to be increased will be calculated in accordance with sub-section (2.).

Sub-section (2.) prescribes the method by which the amount of the adjustment to be made under the section is to be ascertained.

Paragraph (a) will provide for the ascertainment of the amount of the reduction in the sufficient distribution of the company in each year of income by the allowance of deductions for purchases of drought bonds. Where deductions had been allowed for one original parcel of bonds only the amount ascertained will be the amount by which the sufficient distribution had been reduced as a result of that deduction (sub- paragraph(i)).

Where, in respect of a year of income, the deduction allowed for drought bonds related to more than one parcel of bonds, the amount by which the sufficient distribution was reduced as a result of the deduction is apportioned between the parcels in the same proportion as the amounts in respect of each parcel are included in the deduction (sub- paragraph (ii)).

Paragraph (b) provides for ascertaining the amount of the reduction in the sufficient distribution in respect of the original parcel of which the bonds being redeemed form a part. This is to be done by taking such part of the amount ascertained under paragraph (a) as is the same proportion as the deductions allowed in respect of the bonds being redeemed bears to the total of the deductions allowed in respect of the original parcel. Where the whole of an original parcel of stock has been allowed as an income tax deduction, and the whole of the parcel is being redeemed, the calculation under paragraph (b) of the sub-section will not vary the amount obtained under paragraph (a).

Sub-section (3.) is a drafting measure to give the term "sufficient distribution" the same meaning as it has for the purposes of Division 7 of the Principal Act.

Clause 6: Transitional Provisions

The purpose of this clause (which will not amend the Principal Act) is to permit a deduction for the cost of drought bonds to be allowed in an assessment in respect of the year of income ended on 30 June 1969, if the taxpayer so elects.

As already explained in the notes on proposed section 159A, the deduction for drought bonds relates to the cost of bonds purchased in a period of twelve months ending two months after the end of the relevant year of income. For taxpayers whose year of income ended on 30 June 1969, the period for the purchase of bonds to be deductible in an assessment in respect of that year of income expired on 31 August 1969. As the first issue of bonds will not be made until November 1969, it would not be possible for these taxpayers to meet the requirements of the normal provisions and so obtain a deduction for the 1968/1969 income year.

To meet this situation the transitional provision will have the effect of extending the period in which bonds may be purchased for the purpose of obtaining a deduction in respect of the 1968/1969 income year. Thus, bonds purchased by a taxpayer on or before 31 December 1969 may, if the taxpayer so elects, be treated as having been purchased in the period of twelve months ending two months after the end of the 1968/1969 income year. If a taxpayer purchases bonds during the period from 3 November 1969 to 31 December 1969 and does not elect that the purchase be treated as being available for deduction in the assessment of the 1968/1969 income year, the purchase will qualify for deduction in his assessment for the 1969/1970 income year under the provisions of section 159A.

An election for the purposes of this clause is to be lodged with the Commissioner not later than 31 January 1970, or within such further time as the Commissioner allows.

The clause also authorises the Commissioner to amend an assessment to give effect to the transitional provision. This would apply where an assessment in respect of the income year 1968/1969 has been made prior to a taxpayer electing to claim deduction in that assessment for the drought bonds purchased between 3 November 1969 and 31 December 1969.

Sub-clause (1.) provides that, if a taxpayer so elects, drought bonds purchased on or before 31 December 1969 will be treated as having been purchased within the period of two months after the end of his 1968/1969 income year, for the purposes of the deduction provisions of proposed section 159A.

By sub-clause (2.), the election is required to be made in writing and lodged with the Commissioner by 31 January 1970. The Commissioner is, as is usual, authorised to extend the time for lodgment of the election.

Sub-clause (3.), will ensure that the Commissioner may amend an assessment for the 1968/1969 income year to allow a deduction for drought bonds purchased on or before 31 December 1969 where a valid election has been made under this clause.

Clause 7: Application of Amendments

This clause provides that the amendments made by this Bill apply to assessments for the 1968/1969 and subsequent income years. As explained in the notes on clause 6 of this Bill, where a taxpayer has made the necessary election, a deduction may be available in an assessment for the 1968/1969 income year in respect of drought bonds purchased on or before 31 December 1969.