House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Phillip Lynch, M.P.)

Introductory Note

The purpose of this memorandum is to explain the provisions of the Income Tax Assessment Amendment Bill 1976 which is a Bill to amend the Income Tax Assessment Act in a number of important respects.

The main features of the Bill are:-

Eligibility of securities for "30/20" status (Clause 3)

Securities issued after 12 April 1976 by banks constituted under Commonwealth, State or Territory legislation are to be excluded from the classes of securities that may be taken into account as Commonwealth securities or public securities in ascertaining whether a superannuation fund or a life assurance company has maintained the "30/20" ratio of public securities in the investment of its assets.

Trading stock of winemakers (Clauses 5 and 20)

Commencing with the 1973-74 income year, manufacturers of wine and brandy have been required to bring into account for income tax purposes the closing values of trading stock determined according to one of the 3 bases available to taxpayers generally. This followed the withdrawal of the former concessional basis of valuation available for this industry under section 31A of the Principal Act. Special transitional provisions were enacted in 1973 to bring into assessable income over a five year period the accumulated amounts of income that had not been taken into account in winemakers' income tax assessments because of the artificially low values of wine and brandy stocks reported under the concessional basis of valuation. The Bill now proposes to extend to a minimum of eight years after the 1973-74 income year, the transitional period over which tax will be payable on the accumulated amounts of income. It is also proposed to ensure that no winemaker that is a private company will be called on to pay any greater amount of additional tax on undistributed profits than would have been the case had its taxable income in any of the remaining transitional years not been increased by the operation of the new transitional arrangements.

Special depreciation on new plant (Clause 8)

The Bill proposes to bring to an end the scheme of doubled depreciation for new plant that was introduced for 1974-75 and extended last year. Plant or equipment first used or installed ready for use before 1 July 1976 will not be affected by termination of the scheme, and, if otherwise eligible, will continue to be depreciable at double the rates that normally apply until its cost is fully written-off for income tax purposes. Ordinary rates of depreciation will apply in respect of plant and equipment that is first used, or installed ready for use after 30 June 1976.

Investment Allowance (Clause 10)

It is proposed to enact a new Subdivision to provide for the new investment allowance that is to be available in respect of the capital cost of acquiring or constructing new plant and equipment for use wholly and exclusively in Australia for the production of assessable income. The allowance will be available in respect of most new plant that is ordered on or after 1 January 1976. The deduction will be available in the year of income in which the plant is first used or installed ready for use and will be available in addition to any depreciation allowances.

The new Subdivision provides for a 40 per cent allowance in respect of plant that is ordered on or after 1 January 1976 and before 1 July 1978 and is first used or installed ready for use by 30 June 1979. Provision is also made for a 20 per cent allowance in respect of plant that is ordered on or after 1 July 1978 and before 1 July 1983 and is first used or installed ready for use by 30 June 1984. If plant is ordered on or after 1 January 1976 and before 1 July 1978 but is not used or installed ready for use by 30 June 1979, the 20 per cent allowance will be available if it is first used or installed ready for use by 30 June 1984.

Special provisions are to apply in respect of new plant that is acquired under long term leasing arrangements so that the benefits of the new investment allowance can be available to the same extent as if the plant were purchased outright.

Interest in respect of housing loans (Clause 11)

The existing provisions of the income tax law, under which income tax deductions are allowable, with certain qualifications, for interest paid by an individual taxpayer on a housing loan used to acquire or extend his or her principal residence, are to be amended to restrict the application of the deduction to interest paid during the first five years of occupation of the first residence owned by a taxpayer or his or her spouse. The amendment is to apply in respect of interest on a housing loan that becomes payable on or after 1 July 1976.

Interest on convertible notes (Clauses 12, 13, 14, 15 and 16)

It is proposed to relax some of the tests that have to be satisfied for a company to get a tax deduction for interest paid on borrowed money convertible into share capital.

Following amendments made in 1960 to deal with then prevailing tax avoidance practices, deductions for interest on convertible notes were withdrawn in all cases. In 1970 this rule was relaxed to allow deductibility where specified tests were met. It is now proposed to effect a further relaxation by omitting some of the 1970 tests. For convertible notes issued in respect of loans raised on or after 1 January 1976 the Bill will -

(a)

abolish the requirement that the loan be for at least 7 years;

(b)

withdraw the requirement that the option to convert a debt into shares must remain open to the noteholder at at least 12 monthly intervals throughout a stated period from the date when it is first exercisable;

(c)

allow companies to offer conversion terms designed to induce noteholders to convert earlier rather than later; and

(d)

allow interest rates on convertible note loans raised in Australia to vary in line with prevailing Commonwealth loan interest rates.

Instalments of company tax (Clause 18)

The liability of a company to pay the third instalment of income tax during the current financial year in respect of 1974-75 income, and the three instalments that would otherwise be payable during the 1976-77 financial year in respect of 1975-76 income, is to be removed. In each case the amount of tax not collected by instalments is to be payable as part of the final assessment for the relevant year of income.

Notes on each clause of the Bill are set out on following pages.

Notes on Clauses

Clause 1: Short title and citation

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

In accord with current practice, a Bill with the major purpose of amending another statute will generally be recognised as an amending Bill in its short title. For this reason, this Bill is to be cited as the Income Tax Assessment Amendment Bill 1976.

Clause 2: Commencement

Section 5(1A.) of the Acts Interpretation Act 1901-1973 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, provisions of which have effect from 1 January 1976, shall come into operation on the day on which it receives the Royal Assent.

Clause 3: Interpretation

By this clause it is proposed to omit from section 6 of the Principal Act the definitions of "Commonwealth securities" and "public securities" and to redefine those terms in a way which will exclude from their scope securities issued by government-owned banks. The definitions have particular significance for superannuation funds and life assurance companies.

Under section 121C of the Principal Act a superannuation fund that would otherwise be exempt from tax by virtue of paragraph (ja) of section 23 or section 23F is liable to tax on its investment income unless the Commissioner is satisfied that, at all times during the year of income, the fund maintained a "30/20" ratio of public securities in the investment of the assets of the fund. That ratio is maintained when -

(a)

the assets of the fund include public securities the cost of which is not less than 30 per cent of the cost of all the assets of the fund; and

(b)

the assets of the fund consisting of public securities include Commonwealth securities the cost of which is not less than 20 per cent of the cost of all the assets of the fund.

A fund that came into existence on or before 1 March 1961 may, by maintaining its holdings of public securities and Commonwealth securities at the 1 March 1961 level, retain exemption up to the level of its 1960-61 investment income. It may also retain exemption of any increase in its investment income above the 1960-61 level by maintaining the "30/20" ratio of public securities in relation to the increase in its assets since 1 March 1961.

Where a life assurance company maintains the "30/20" ratio in relation to the assets of each of its Australian statutory funds it is entitled to exemption from tax in respect of that part of its investment income that is referable to policies issued for the purposes of superannuation funds that meet the requirements for exemption under paragraph (jaa) or (ja) of section 23 or section 23F or for a concessional basis of assessment under section 79. The proportion of a life assurance company's total assets invested in Commonwealth securities and other public securities also affects the amount of the deduction allowable to the company under section 115 in relation to its calculated liabilities.

Broadly, section 115 provides for a deduction from the assessable income of a life assurance company of an amount calculated by reference to the following formula -

1% of ((value of assets producing assessable income)/(value of total assets)) * calculated liabilities


The amount of the basic deduction so calculated is increased by 1 per cent for each 1 per cent by which the company's holdings of all public securities exceed 30 per cent and by one-half per cent for each 1 per cent by which the company's holdings of Commonwealth securities exceed 20 per cent. Thus, if the company's holdings of public securities represent 37.5 per cent of its Australian statutory fund assets and its holdings of Commonwealth securities 25 per cent, the basic deduction is increased by 10 per cent (7.5 per cent plus one-half of 5 per cent). Instead of a deduction of 1 per cent the company would be entitled to one of 1.1 per cent.

If a company fails to maintain the "30/20" ratio the basic section 115 deduction is reduced by 1 per cent for each 1 per cent by which the holdings of public securities are less than 30 per cent and by one-half per cent for each 1 per cent by which the holdings of Commonwealth securities are less than 20 per cent. The deduction cannot, however, be reduced below 75 per cent of the basic 1 per cent deduction. In other words the section 115 deduction allowable cannot be less than .75 per cent of the proportion of calculated liabilities.

As at present defined both "Commonwealth securities" and "public securities" effectively include securities issued by Government-owned banks.

The new definitions proposed to be substituted by clause 3 will have the effect of excluding from the scope of both definitions securities issued after 12 April 1976 by a bank that is constituted by or under a law of the Commonwealth, a State or a Territory, i.e., a Government-owned bank.

This exclusion will mean that, where a superannuation fund or a life assurance company invests in securities issued after that date by the Reserve Bank or any of the banks constituted under the Commonwealth Banks Act, it will not be entitled to have them taken into account in determining its ratio of investment in Commonwealth securities or public securities at any relevant time. The status of any securities issued by those banks on or before that date will, however, be unaffected by the change in definition.

The amendment will also mean that where a superannuation fund or a life assurance company invests in securities issued after 12 April 1976 by a bank that has been constituted under the law of a State or Territory it will not be entitled to have those securities taken into account as public securities in determining its ratio of investment in public securities at any relevant time. Securities issued by such a bank on or before 12 April 1976 will continue to qualify as public securities for the purposes of the investment ratio.

As a consequence of the change in the definition of "public securities" in the Income Tax Assessment Act the meaning of that expression will be changed also in provisions of the Life Insurance Act which are complementary to those of the income tax law relating to life assurance companies. An amendment of the Life Insurance Act will not be necessary to achieve this result.

Clause 4: Officers to observe secrecy

Paragraph (h) of section 16(4) permits the disclosure of information by the Commissioner of Taxation, a Second Commissioner, a Deputy Commissioner and other duly authorized tax officers to the Secretaries of the Departments of Defence, Army, Navy and Air. This disclosure is authorised only for the purpose of the administration of any law of the Commonwealth relating to payments in respect of dependants of members of the Defence Force.

Clause 4 proposes to amend paragraph (h) by deleting the references therein to the Secretaries of the Departments of Army, Navy and Air that have been absorbed into the Department of Defence. The reference in paragraph (h) to the Secretary, Department of Defence, remains and will thus continue to authorise the disclosure of information, for the purpose stated above, to the Secretary to that Department.

Clause 5: Transitional provision relating to trading stock of winemakers

Introduction

This clause proposes the insertion of a new section - section 31B - into the Principal Act so as to substitute new transitional arrangements in place of those made by section 7 of the Income Tax Assessment Act (No. 5) 1973 in association with the repeal of the former section 31A of the Principal Act. Clause 20 of the Bill proposes a complementary amendment to omit sub-sections 7(2), (3) and (4) of the Income Tax Assessment Act (No. 5) 1973.

The former section 31A provided wine and brandy producers with a concessional basis of valuing for income tax purposes stocks of wine, brandy or grape spirits on hand at the end of a year of income. The section permitted producers to value their stocks at or above the following minimum values prescribed by Regulation 4B:

The values selected, together with any amount paid on the stock as excise duty, were the values at which closing stocks were brought to account for income tax purposes.

The effect of sub-section 7(1) of the Income Tax Assessment Act (No. 5) 1973, which repealed section 31A with effect in relation to assessments based on income derived during the 1973-74 and subsequent income years, was to require winemakers as from the 1973-74 income year to value their trading stock on hand at end of year on one of the 3 bases available to taxpayers generally, i.e., at the option of the taxpayer, at cost price, at market selling value or at the price for which it could be replaced.

Sub-section 7(2) of the 1973 amending Act required transitional adjustments to be made over a 5 year period arising from the change from the special basis to the general bases of trading stock valuation. Section 31A had allowed winemakers, in effect, to defer the payment of tax on some current income to later years. To put it broadly, the 1973 transitional arrangements required the amount of this deferred income - measured by the amount by which wine stocks at the end of the 1973-74 income year valued under the general stock valuation provisions exceeded the value of those stocks calculated by reference to section 31A - to be brought into account as assessable income in 5 instalments spread over the income years 1973-74 to 1977-78 inclusive.

To ascertain the total adjustment for deferred income to be made over this period, wine, brandy and grape spirit stocks at the end of the 1973-74 income year were required to be valued on the basis that would have been used but for the repeal of section 31A as well as at the general value (cost, market or replacement value) selected by the taxpayer. The amount by which the value arrived at on the section 31A basis fell short of the value under the selected general basis represented the total adjustment (referred to as "the excess") to be made to effect the transition.

Sub-section 7(2) required one-fifth of the excess to be brought into account in assessments of winemakers for the 1973-74 income year and of each of the succeeding 4 income years. This was to be achieved by reducing the value of stock on hand at the end of the 1973-74 income year (as ascertained under the basis chosen in accordance with section 31 of the Principal Act) by four-fifths of the excess. The reduced amount was the value of closing stock for the 1973-74 income year and of opening stock for the 1974-75 income year. In the same way, closing stock for 1974-75 valued under section 31 was to be reduced by three-fifths of the excess to arrive at the appropriate value; the section 31 closing stock value for 1975-76 was to be reduced by two-fifths of the excess, and so on.

Sub-section 7(3) of the Income Tax Assessment Act (No.5) 1973 was designed to ensure that the adjusted value of closing stock ascertained as above was to be the value for opening stock of the following income year. This is consistent with the general principle of stock valuation contained in section 29 of the Principal Act.

The transitional arrangements of sub-sections 7(2) and (3) of the 1973 amending Act are now to be replaced by the modified arrangements to be inserted in the Principal Act in proposed section 31B and, accordingly, clause 20 proposes the withdrawal of sub-sections 7(2) and (3) and the associated sub-section (4) which defined the term "prescribed trading stock" used in that section.

Detailed explanations of the provisions to be substituted in new section 31B follow. Stated very broadly, the new arrangements will have the following effects -

•

The period over which the income adjustments will be made will be extended by four years, with one-tenth of the deferred income being included in each of the income years 1974-75 to 1981-82 inclusive.

•

Where the inclusion of the fraction of the deferred income in any year results in a tax increase of more than 10 per cent of the taxable income before that inclusion, the excess over 10 per cent is to be held over for payment in a later assessment, and the effect of this is that, if it is necessary, a further period beyond the 1981-82 year will be allowed for payment of the tax on the deferred income.

•

Private company winemakers will not have to pay additional dividends because a part of the deferred income is included in an assessment for a year. However, in calculating the distributable income of the company (for purposes of ascertaining whether any tax on undistributed profits is payable) all tax payable on a primary tax assessment for a year, including that payable under the assessment on the part of deferred income included for the year, will be taken into account.

The first 3 proposed sub-sections of section 31B are drafting measures to explain the meaning of terms used in the substantive provisions of the section.

Proposed sub-section (1) of section 31B defines an expression used in the section:

"prescribed trading stock", in relation to a taxpayer, is trading stock owned at the end of the year of income concerned which would have been eligible for the concessional basis of valuation formerly available under section 31A but for the repeal of that section. The expression thus refers to stocks of wine, brandy or grape spirit held by a wine or brandy producer at the end of the year of income.

Sub-section (2) explains 3 other expressions used in the section.

Paragraph (a) of the sub-section makes it clear that a reference in the section to a taxpayer having a taxable income in respect of an income year is to be taken as meaning a taxable income in respect of which tax is payable. This ensures that such a reference does not include a taxable income on which no tax is payable due to the allowance of an income tax rebate in the assessment of the taxpayer. The need for this distinction arises from the fact that the application of later sub-sections depends on whether or not the taxpayer has a taxable income in respect of which tax is payable.

Paragraph (b) explains references in proposed sub-sections (5), (6), (7) and (8) of new section 31B to whether a taxpayer has a "notional taxable income" in respect of an income year. The paragraph contemplates a taxpayer who has a taxable income in respect of the year of income concerned after the application of section 31B in relation to the values of opening and closing prescribed trading stocks for that year, and who would have had a taxable income (albeit of a lesser amount) in respect of that income year also requiring payment of tax had the adjustments required under the section not been made. In such circumstances the taxpayer is said to have a notional taxable income and the paragraph provides that the amount of that notional taxable income is the amount that would have been his taxable income if section 31B had not been enacted.

Where, but for the trading stock value adjustments required by section 31B, a taxpayer would not have had a taxable income (as defined by paragraph (a)) in relation to an income year, paragraph (b) permits reference to such a person as one who does not have a notional taxable income in respect of the year of income concerned.

Paragraph (c) explains the meaning to be given to a descriptive phrase used throughout the section - "a taxpayer to whom sub-section (4) applies". Such a taxpayer is a person or company who is a winemaker and who, at the end of the 1973-74 income year, owned wine or brandy stocks to which former section 31A would have applied but for the repeal of that section by the 1973 amending Act - in essence, a taxpayer who had (or who could have) derived a benefit under the former section.

Sub-section (3) adds a qualification to the basis of determining whether a resident company has a notional taxable income in the terms of sub-section (2)(b) in relation to any year of income within the last 8 years of the transitional period i.e., in respect of the 1974-75 to 1981-82 income years.

The sub-section, in effect, prescribes that any dividends derived by the company in the income year concerned in respect of which the company is entitled to a rebate of tax under section 46 of the Principal Act are not to be taken into account either in determining whether the company has a notional taxable income in respect of that income year or in determining the amount of the notional taxable income.

As will appear from following notes, sub-sections (5) to (8) inclusive will broadly place a ceiling, equal to 10 per cent of a taxpayer's notional taxable income, on the maximum additional amount of tax attributable to the transitional adjustments required by section 31B over the 1974-75 to 1981-82 income years that a taxpayer may be called upon to pay as part of the tax due and payable under the income tax assessment for the relevant year. Where this ceiling would otherwise be exceeded, sub-sections (5) to (8) will allow payment of the excess amount of tax to be deferred to a later year.

The purpose of sub-section (3) is to ensure that the calculation of this ceiling in relation to a resident company is made after the notional exclusion from taxable income of dividends rebatable in terms of section 46 that, as a broad proposition, would not have attracted tax in the hands of the company. The effect of sub-section (3) is to exclude all dividends from the income calculation, irrespective of whether the dividends attract a full or part rebate under section 46 of the Principal Act.

Sub-section (4) of new section 31B substantially re-enacts transitional provisions along the lines of those contained in sub-section 7(2) of the Income Tax Assessment Act (No. 5) 1973 (that are to be repealed by clause 20) while providing also for the 5 year transitional period under sub-section 7(2) to be extended by a further 4 years.

Like sub-section 7(2) of the 1973 amending Act, proposed sub-section 31B(4) requires a calculation of the amount (referred to as "the excess") by which wine and brandy stocks on hand at the end of the 1973-74 income year of a producer valued in accordance with repealed section 31A fell short of the value of those stocks when valued and brought to account under whichever of the general bases of stock valuation provided for by section 31 of the Principal Act was selected by the taxpayer. The excess so found represents the total adjustment to be made over the extended transitional period.

Paragraph (a) of sub-section (4) provides for one-fifth of the total adjustment to be made in the assessments of winemakers for the 1973-74 income year - with the exception of some taxpayers who traded at a loss in 1973-74, and possibly a few other taxpayers to whom unusual circumstances may apply, the assessments based on 1973-74 incomes of taxpayers affected by the repeal of section 31A have been issued and finalised. The adjustment provided in respect of that income year is the same as the adjustment required to be made under the 1973 transitional provisions and will not make it necessary to re-cast any 1973-74 assessments.

The 1973-74 adjustment is to be effected by ascertaining the aggregate value of stock on hand at the end of that income year on the basis of its selected cost, market or replacement value under section 31 and deducting from that total value four-fifths of the excess referred to above. The closing value of trading stock for the 1973-74 income year is deemed to be the amount arrived at by this calculation.

Paragraphs (b) to (h) of sub-section (4) set out the basis on which the remaining four-fifths of the total adjustment (or excess) is to be brought to account over the transitional period. Under sub-section 7(2) of the 1973 amending Act one-fifth of the excess would have been brought to account in each of the 4 income years 1974-75 to 1977-78 inclusive. Paragraphs (b) to (h) will extend this 4 year period so that one-tenth of the excess will now be brought into account in each of the 8 income years 1974-75 to 1981-82 inclusive.

Thus paragraph (b) provides that the closing value of any prescribed trading stock on hand at the end of the 1974-75 income year as valued in accordance with the general provisions of section 31 is to be deemed to have been reduced by so much of that value as does not exceed seven-tenths of the excess. The resultant figure is the amount to be taken into account as the value of closing stock for the 1974-75 income year and, by virtue of proposed sub-section (14), that value also becomes the value of opening stock for the 1975-76 income year.

It should be noted that the opening value of trading stock for the 1974-75 income year will have been reduced by four-fifths of the excess as a corollary of the adjustment to the 1973-74 closing stock value effected by paragraph (a). By reducing the closing stock for the 1974-75 income year by seven-tenths of the excess, the desired net adjustment equal to one-tenth of the excess is brought to account as assessable income of the 1974-75 income year.

Paragraphs (c) to (h) correspondingly provide that in each of the next 6 income years the closing stock valued in accordance with section 31 is to be reduced by the relevant fraction of the adjustment to be made. For example, the closing stock of the 1975-76 income year (which becomes the opening stock for 1976-77) is to be reduced by six-tenths of the excess, or by the value of that stock, whichever is the less. For 1976-77 closing stock the reduction is five-tenths; for 1977-78, four-tenths; and so on.

The final one-tenth instalment to complete the transition is to be effected in the 1981-82 income year through the lowered opening stock value for that year as a consequence of the closing stock adjustment for the 1980-81 income year required by paragraph (h).

Sub-sections (5) to (9) of section 31B contain provisions designed to limit the additional amount of tax assessed that a taxpayer may be required to pay in any income year consequent on increases in assessable income that occur as a result of adjustments required by sub-sections (4) or (14). Very broadly, sub-sections (5) to (9) will ensure that the adjustments do not call on a taxpayer to pay immediately an amount of tax in relation to any year of income that is more than 10 per cent above the amount of tax that would have been payable by him had no adjustments been required to values of stock on hand determined under section 31, i.e., if section 31B were not enacted. Those sub-sections will allow any amount of tax in excess of this limit to be postponed for payment to a later year without attracting any penalty.

Each of those 5 proposed sub-sections is expressed to apply notwithstanding section 204 of the Principal Act which, in broad terms, provides that income tax assessed becomes due and payable on the date specified in the notice of assessment, being not less than 30 days after the date of service of the assessment notice. The Commissioner of Taxation may, however, specify a due date for payment that is more than 30 days after the date of service.

Sub-section (5) may apply, subject to sub-sections (7) and (9), in relation to any of the 8 income years 1974-75 to 1981-82 inclusive if a taxpayer has both a taxable income and a notional taxable income in respect of the relevant income year.

As previously explained, the notional taxable income is the amount - disregarding rebateable dividends - that would have been the taxable income of the taxpayer but for the adjustments required to be made in accordance with sub-sections (4) and (14), being a taxable income in respect of which tax would have been payable. As the net effect of the adjustments made under sub-sections (4) and (14) is to bring into account as income over the transitional period the "excess" previously described, the notional taxable income will generally be less than and, in any event, cannot exceed the taxable income for the relevant year.

Sub-section (5) requires calculations to be made of both the tax payable in respect of the taxable income of the relevant income year and the tax that would have been payable on the notional taxable income. Where the sum of the amount of tax that would have been payable on the notional taxable income plus an amount equal to 10 per cent of that notional taxable income does not exceed the tax payable on the taxable income the taxpayer's assessment for the relevant year will become due and payable in accordance with section 204.

However, where the sum of those two amounts is greater than the tax payable on the taxable income, the sub-section operates to postpone payment of an amount of tax equal to the difference until the due date for payment of the assessment for the next later year of income in which the taxpayer has a taxable income. Further postponement of some or all of the amount of tax deferred by sub-section (5) may be authorised under sub-sections (7) or (9) where the 10 per cent ceiling would otherwise also be exceeded in relation to that later year of income.

Sub-section (6) may apply where, in relation to any income year within the 8 transitional years 1974-75 to 1981-82 inclusive, the adjustments to trading stock values made in accordance with sub-sections (4) and (14) have resulted in a taxpayer having a taxable income on which tax is payable where, but for those adjustments, no tax would have been payable by the taxpayer in respect of that income year, i.e., where the taxpayer does not have a notional taxable income.

In these circumstances, sub-section (6) may operate to postpone payment of all of the tax payable in respect of the taxable income of the income year concerned. The tax so postponed will then become due for payment on the same day as tax becomes due and payable by the taxpayer in respect of the next income year for which a taxable income is derived on which tax is payable.

However, sub-section (6) is to be applied subject to the operation of sub-sections (8) and (9) which, in the circumstances envisaged by those sub-sections explained below, may permit the further postponement of the time for payment of some or all of the carried-forward tax that would otherwise fall due for payment with tax payable in respect of a subsequent income year.

Sub-section (7) supplements sub-section (5). It also applies where a taxpayer has both a taxable income and a notional taxable income in respect of any of the 7 income years 1975-76 to 1981-82 inclusive and where, in addition, one or more amounts of tax payable in respect of previous income years has been postponed for payment by virtue of the ceiling imposed under sub-sections (5), (6), (7) and (8) and would be due and payable at the same time as the tax payable in respect of the taxable income of the income year concerned.

In these circumstances, sub-section (5) does not apply but sub-section (7) applies and requires comparison of the following two sums -

(i)

the amount of tax payable in respect of the taxable income of the relevant income year plus the amount or amounts of postponed tax falling due for payment at the same time as the tax payable on the taxable income due to the operation of sub-sections (5), (6), (7) or (8) in an earlier year; and

(ii)

the amount of tax that would have been payable on the notional taxable income of the relevant income year plus an amount equal to 10 per cent of the notional taxable income.

Where the sum of the amounts in (i) exceeds the sum of the amounts in (ii), payment of an amount of tax equal to the difference is postponed to the due date for payment of tax payable in respect of the next income year in which the taxpayer has a taxable income.

Again, further postponement of some or all of the excess amount of tax may be authorised in relation to the assessment of income for that later year of income if the operation of sub-section (7) or sub-section (9) is attracted in respect of that later year.

Sub-section (8), like sub-section (6), applies in circumstances where the net effect of trading stock valuation adjustments under sub-sections (4) and (14) of section 31B in relation to an income year has been to give rise to a taxable income on which tax is payable by the taxpayer although no tax would have been payable in respect of that income year had the adjustments made under the section not been required.

In addition, before sub-section (8) may apply, it is necessary that under the tax postponement rules in sub-sections (5), (6) or (7), or in sub-section (8) itself, the due date for payment of an amount of tax payable in respect of one or more previous income years would, but for sub-section (8), coincide with the due date for payment of the tax payable on the assessable income of the income year concerned. For this reason, sub-section (8) may apply only in respect of the years of income 1975-76 to 1981-82 inclusive.

Where the circumstances envisaged by sub-section (8) are satisfied, sub-section (6) does not apply. Instead sub-section (8) operates to postpone payment of both the tax payable in respect of the taxable income of the income year concerned and so much of the tax payable in respect of the taxable income of earlier years as had been postponed for payment by the application of sub-section (5), (6), (7) or (8) in relation to those earlier income years and had not been paid.

Consistent with sub-sections (5), (6) and (7), the sum of the amounts of tax the payment of which is postponed by the application of sub-section (8) in relation to the income year concerned is stipulated to fall due for payment at the same time as tax falls due for payment in respect of the next income year in which a taxable income is derived.

Sub-section (9) complements sub-sections (5) to (8) and will have operation in respect of the 1982-83 income year (the first year after the end of the transitional period) and later income years in circumstances where sub-sections (5) to (8) have applied in relation to the 1981-82 income year or any earlier year and, as a result of that application, one or more amounts of tax payable in respect of those earlier years has been postponed for payment until the due date for payment of tax payable in respect of the income year concerned.

In such a case, sub-section (9) will permit a further postponement (again to the next income year in which the taxpayer derives a taxable income) of an amount of tax equal to so much of the postponed tax of previous years as exceeds 10 per cent of the taxable income of the income year concerned. The 10 per cent test will apply again in relation to the next taxable income year so as to further extend time for payment, if necessary, of some of the postponed tax carried forward to that year, and so on.

Sub-section (10) has an effect complementary to that of sub-section (3) and ensures that, in relation to a taxpayer that is a resident company, the calculation of the 10 per cent of taxable income required to be made under sub-section (9) in respect of the 1982-83 income year or a later year is made after treating the taxable income as not including any dividends derived by the company during the relevant income year in respect of which the company is entitled to a rebate under section 46 of the Principal Act in its assessment for that year.

Sub-section (11) will apply in relation to a winemaker that is a private company and, in broad terms, is intended to ensure that the company will have no greater liability to pay additional tax on undistributed profits under the provisions of Division 7 of the Principal Act than would have been the case were section 31B not enacted.

Under Division 7, a private company is required to pay additional tax at the rate of 50 per cent on its undistributed profits unless it has paid, or has been deemed to have paid, dividends at least equal to the amount of a "sufficient distribution". To ascertain whether a company has made a sufficient distribution, it is necessary to have regard to section 103(1) of the Principal Act which provides a definition of "the distributable income" in relation to a private company. Broadly, the expression means the taxable income of the company as reduced by the amount of tax (other than additional tax on undistributed profits) payable by the company in respect of the taxable income.

Sub-section (11) will, in effect, provide a substituted definition of "the distributable income" in section 103(1) for application to a private company in respect of the 1974-75 or a later income year which will have two effects -

(i)

it will ensure that the taxable income for the purposes of Division 7 is taken as being the amount that would have been the taxable income of the company in respect of the year concerned but for the adjustments to opening and closing values of prescribed trading stock made under sub-sections (4) or (14) of section 31B, i.e., the distributable income will be calculated by reference to the taxpayer's notional taxable income; and

(ii)

full credit will be given to the company for tax payable in respect of its actual taxable income for the income year concerned and for so much of any deferred tax in respect of an earlier year that falls due for payment at the same time as the tax payable on the taxable income in terms of sub-sections (5) to (9) and which has not been further postponed for payment to a later year.

Sub-sections (12) and (13) are designed to ensure that sub-sections (5) to (9) do not create situations in which payment of the tax can be deferred for an indefinite period.

Under sub-section (12) the Commissioner of Taxation may require the payment of tax that has been postponed if he becomes satisfied that the taxpayer concerned has purposely changed the nature or conduct of his business, or commenced to engage in a course of business conduct or in business transactions different to those previously engaged in, so as to take undue advantage of the postponement provisions of sub-sections (5) to (9). In the case of an associated group of companies, for example, internal marketing arrangements could be changed to lower indefinitely the profits of a company subject to adjustments under section 31B so as to avoid or put off the payment of tax arising from the adjustments while not disturbing overall group profits.

In such circumstances, the Commissioner may notify the company concerned in writing and the effect of the notice will be to make any unpaid amount of tax postponed in terms of section 31B fall due for payment on the date specified in the notice, being a date at least 30 days after the day on which the notice is served. A further effect of such a notice being issued will be to prevent a liability to tax that may arise in respect of subsequent years being further postponed under the section.

Sub-section (13) similarly authorises the Commissioner to issue a notice to a taxpayer requiring the payment of postponed tax if he becomes satisfied that there is a reasonable probability that the taxpayer will not have a taxable income in respect of any future year. This could occur, for example, if a company owing tax postponed under section 31B were to be placed in liquidation or if it became known that an individual taxpayer owing such an amount intended to leave Australia permanently.

Again, the effect of such a notice will be to make the postponed tax due and payable on a specified date, being not less than 30 days after service of the notice.

Sub-section (14) formally provides that the adjusted value of closing stock ascertained in accordance with proposed sub-section (4) is to be the figure for opening stock of the following income year to be taken into account under section 29 of the Principal Act. This is in line with the general rule of stock valuation embraced in section 29 that the closing value of an item of stock as at the end of one income year is always the opening value for the subsequent income year.

Clause 6: Dividends

This clause proposes an amendment to section 44(2) of the Principal Act which is consequential on the proposed insertion in the Principal Act of provisions - section 82SA - regarding the allowance of deductions for interest in respect of convertible note issues made on or after 1 January 1976.

So far as is relevant, section 44(2) exempts from tax dividends satisfied by the issue of bonus shares and paid out of profits from the issue, at a premium, of convertible notes in respect of which the interest payments do not qualify for deduction under section 82S of the Principal Act. Such convertible notes are treated, in effect, as being equivalent to shares, and bonus shares issued out of profits from their issue at a premium are accorded treatment equivalent, in effect, to that accorded bonus shares issued out of share premium reserves. The effect of the amendment proposed by this clause will be that premiums on the issue of convertible notes made on or after 1 January 1976, interest on which does not qualify for deduction under proposed new section 82SA, which is to replace section 82S, will likewise be available for tax-free distribution to shareholders as bonus shares.

Clause 7: Calculation of depreciation

This clause will make an amendment to sub-section 56(3) of the Principal Act that is consequential upon clause 10 of this Bill which enacts provisions governing the proposed investment allowance for eligible plant and equipment.

Broadly stated, sub-section 56(3) of the Principal Act provides that, for the purpose of calculating depreciation allowances, the cost of plant is not to include any part of the cost for which income tax deductions (other than the depreciation allowances) are allowed or allowable. As at present enacted, sub-section 56(3) would result in the cost of plant qualifying for the proposed investment allowance to be reduced, for the purpose of calculating depreciation allowances, by the amount of the investment allowance provided in respect of the plant.

The amendment to sub-section 56(3) proposed by clause 7 will ensure that the calculation of depreciation allowances in respect of plant will not be affected by any deduction allowable in respect of eligible plant by way of the proposed investment allowance. The amendment ensures that the new investment allowance will be available in respect of eligible plant in addition to the allowable deductions under the depreciation provisions.

Clause 8: Special depreciation on new plant first used or installed on or after 1 July 1975 and before 1 July 1976

This clause proposes to terminate, as from 1 July 1976, the operation of section 57AD of the Principal Act which at present authorises doubled rates of depreciation for eligible plant, provided the plant is first used by the taxpayer for the purpose of producing assessable income, or is first installed ready for that use, on or after 1 July 1975. The termination of the doubled depreciation scheme is consequential on the introduction, by clause 10 of this Bill, of the proposed investment allowance scheme.

The amendment made to section 57AD by the clause will have the effect of restricting the doubled depreciation scheme to eligible plant first used, or installed ready for use, by the taxpayer on or after 1 July 1975 and before 1 July 1976. Such plant will continue to be depreciable at doubled rates until its cost is fully written off for income tax purposes. (An example showing the operation of the double depreciation allowances and the proposed investment allowance where plant is eligible for both is provided in the notes on clause 10.)

As a result of the proposed termination of section 57AD of the Principal Act, plant that is first used, or installed ready for use, on or after 1 July 1976 will be depreciable at ordinary rates under the general depreciation provisions.

Clause 9: Expenditure on scientific research

Section 73A of the Principal Act provides for the deduction of specified expenditure on scientific research including certain payments made to an approved research institute.

By sub-clause (1) of clause 10 it is proposed to alter the definition of "an approved research institute" in sub-section (6) of section 73A by changing the present reference to the Secretary to the Department of Labour to a reference to the Secretary, Department of Employment and Industrial Relations. The new reference follows the Administrative Arrangements Order of 22 December 1975. By sub-clause (2) the amendment is deemed to have had effect on and from that date.

Clause 10: Investment Allowance

The purpose of this clause is to insert in Part III of the Principal Act a new Subdivision - Subdivision B of Division 3 - containing the code that is to provide an investment allowance through the income tax system for capital expenditure made by a taxpayer on the acquisition, on or after 1 January 1976, of eligible property consisting of new depreciable plant or articles.

Main features of investment allowance

The investment allowance is to be a special income tax deduction, representing the prescribed percentage of capital expenditure, including installation expenses, of acquiring or constructing eligible property. Generally speaking, the investment allowance will apply only to new property that is depreciable for income tax purposes. The allowance will be deductible in addition to the deductions that, under the depreciation provisions, are allowable for the full cost of the property. The allowance will be available only for capital expenditure - the cost of repairing plant and other expenditures of a revenue nature will not attract it.

Initially, a rate of 40 per cent will apply in calculating the special deduction. In the second phase of the scheme, the deduction will be based on a 20 per cent rate.

The special deduction will be allowable in calculating the assessable income of the taxpayer for the year of income in which the eligible property is first used, or installed ready for use. It is a condition of the deduction that the property be used solely in Australia and only for the production of assessable income by the taxpayer concerned.

Individual items of property costing $500 or less will not qualify for the allowance. A full investment allowance will, however, be available for an item of eligible plant costing $976 or more. For an item of eligible plant costing between $500 and $976, the allowance will, in its first (40 per cent) phase, be shaded-in at the rate of 2 per cent of the cost price for each $25 or part thereof of the excess of cost over $500. During the second (20 per cent) phase the corresponding shading-in rate will be 1 per cent of the cost price for each $25 or part thereof by which the cost exceeds $500.

An item of plant costing $680 that is purchased and brought into use during the first (40 per cent) phase of the scheme will, accordingly, attract an investment allowance of $109 (i.e., 16 per cent of $680). If purchased and brought into use during the second (20 per cent) phase of the scheme, the same item would attract a deduction of $55 (i.e., 8 per cent of $680).

The level of the deductions that will be available over the shading-in range, that is, for individual items of eligible property costing between $500 and $976, are set out at the end of the explanatory notes on this clause.

A basic requirement for the special deduction is that the eligible property be acquired under a contract made by the taxpayer concerned with the person supplying the property, that is entered into on or after 1 January 1976 and on or before 30 June 1983. For eligible property constructed on the taxpayer's premises, the corresponding requirement is -

•

if the eligible property is constructed by the taxpayer - where construction commenced on or after 1 January 1976;

•

if the eligible property is constructed by an independent contractor - where the contract for the construction was entered into on or after 1 January 1976.

To qualify for the investment allowance, the eligible property will also need to be first used, or installed ready for use, by 30 June 1983. However, for property that has been ordered by that date a further year's grace, until 30 June 1984, will be allowed for it to be brought into use or installed ready for use, and so qualify under the scheme.

Unit of property

The allowance is to be based on the capital expenditure incurred by the taxpayer in the acquisition or construction of each unit of new plant or equipment that qualifies for the concession.

What constitutes a 'unit of property' will, in many instances, be self-evident. To be a unit (i.e., an individual item), of plant, the property must be functionally complete. The practical procedures adopted for purposes of the depreciation provisions and earlier investment allowances (which are also based on "a unit of property") will generally be followed in applying the new investment allowance.

Plant under hire purchase

As is the case for depreciation purposes, a taxpayer who acquires eligible property under a hire-purchase agreement will be regarded as having acquired title to the property and, accordingly, may qualify for the investment allowance at the time that the plant is first used or installed ready for use. Stamp duty and charges for the preparation of documents will be regarded as capital expenditure for this purpose but not the insurance or interest components of the hiring charges.

Leased plant

Eligible property acquired by a bank or approved finance company (referred to in these notes as a "leasing company") for leasing to a taxpayer for use solely in Australia and wholly and exclusively for the purpose of producing assessable income will attract the investment allowance, provided the lease is for 4 years or longer. The primary entitlement to the allowance will be with the leasing company as the owner and lessor of the property. The law will, however, enable leasing companies to forgo, by way of a declaration, the right to all, or part, of the investment allowance in favour of the lessee-user of the relevant property.

Under the declaration system proposed for enabling leasing companies to confer the benefit of the allowance on the lessees of eligible property, a leasing company will furnish to the Taxation Office on a monthly basis a statement setting out details of lease transactions involving eligible property in respect of which all or part of the investment allowance is to be forgone in favour of the relevant lessees. A declaration by the leasing company, forming part of this statement, or accompanying it, will operate as a formal transfer of all or the specified part of the relevant allowance from the lessor to the lessee in accordance with the arrangements made between the parties themselves.

Consistently with the treatment proposed for plant acquired by purchase or hire-purchase, the investment allowance for leased plant will be available when the plant is first used or installed ready for use by the lessee. In a "lease-back" arrangement the plant will be deemed to be first used or installed at the time that the lease is entered into.

Ineligible plant

The investment allowance scheme will apply to a comprehensive range of plant and equipment. However, as with the earlier investment allowances for manufacturing and primary production plant, certain specified categories of property are to be ineligible for the concession. These are detailed in the following notes dealing with the individual provisions of the new investment allowance legislation.

Rate of deduction

For eligible property ordered during the first phase of the scheme - that is, on or after 1 January 1976 and before 1 July 1978 - the general rate for purposes of calculating the investment allowance is to be 40 per cent provided the property is used, or installed ready for use, not later than 30 June 1979.

For eligible property ordered during the second phase of the scheme - that is, on or after 1 July 1978 and before 1 July 1983 - the general rate for purposes of calculating the investment allowance is to be 20 per cent provided the property is used or installed ready for use by 30 June 1984. Eligible property ordered during the first phase of the scheme but installed after 30 June 1979 and during the second phase will also qualify for the 20 per cent rate.

In the case of eligible property leased by a leasing company to a lessee-user, it has been explained above that the full amount of the investment allowance may be passed on to the lessee under a declaration lodged with the Taxation Office by the leasing company. If the leasing company arranges to retain for itself the amount of the allowance (or part of it), the deduction to the company will be limited to what would be the company's taxable income in the absence of the investment allowance deduction and any amount available for deduction in respect of a previous year's loss. In other words, the leasing company will not be able to carry forward through the loss provisions of the income tax law, for deduction against future income, the amount of an investment allowance that cannot effectively be allowed as a deduction against income of the year in which the property is first used or installed.

This restriction will apply only where the allowance in respect of property leased to another taxpayer is claimed by the leasing company. In other cases, i.e., where the claimant is a lessee-user, a purchaser or a hire-purchaser, any tax loss resulting from the investment allowance will be available to be carried forward against future assessable income of the taxpayer, subject to the statutory requirements that govern the deduction for income tax purposes of previous years' losses.

Plant eligible for investment allowance and doubled depreciation

The following example shows the operation of the investment allowance scheme and the doubled depreciation scheme (see notes on clause 8) where property is eligible for both concessions. It is assumed that a new item of eligible property is purchased for $10,000 on 1 March 1976 and immediately put into use in the production of assessable income. Also, that the normal depreciation rate for the particular property is 10 per cent prime cost, and that the taxpayer claims depreciation at doubled rates on the prime cost basis.

A detailed explanation of the new investment allowance scheme is provided in the following notes dealing individually with the various sections that are to make up new Subdivision B of Division 3 of Part III of the Principal Act.

For the purposes of new Subdivision B, an interpretation section - section 82AQ - ascribes particular meanings to a number of terms and expressions that have been used in drafting the Subdivision. The defined terms, where used in the following notes on separate sections of Subdivision B, have the defined meanings given by section 82AQ. They are as follows -

"construction" : The meaning of the word "construction" is extended to include "manufacture". The term is used in this wider sense in provisions contained in the Subdivision that are to apply to new plant whether purchased by the taxpayer, or manufactured or constructed by or for the taxpayer.

"eligible property" : For purposes of the investment allowance provisions, the term encompasses property being plant or articles within the meaning of section 54 of the Principal Act and also includes earth tanks excavated for the purpose of conserving water for use in carrying on a business of primary production. Sub-section 54(2) of the Act operates for purposes of the general depreciation provisions and gives an expanded meaning to the word "plant" by providing for the term to include, inter alia, certain specified types of structural improvements.

The term "eligible property" is, of course, a drafting term used in the provisions contained in the new Subdivision. Its use in this way does not have the effect of extending the proposed investment allowance to every item of property for which depreciation allowances are available. The investment allowance will not, for example, be available in respect of a building or other structure unless it is a "primary production" structure of a kind that is specified in paragraph (b) of proposed section 82AE (see notes on that section). As explained in the notes dealing with sub-sections 82AF(1) and 82AF(2) of the Subdivision, the investment allowance will also not apply to the range of depreciable property specified in those sub-sections. Nor will second-hand plant or plant that costs less than $500 be eligible.

"hire-purchase agreement" : The need to use and define this term arises because of the proposal that the investment allowance be available in respect of eligible property acquired by the taxpayer-user under a hire-purchase agreement. As is the case for depreciation purposes, a taxpayer who acquires a unit of eligible property under a hire-purchase agreement will be treated as the owner and, accordingly, may qualify for the investment allowance in respect of the property. Consistent with the approach adopted for depreciation purposes, the other party to the hire-purchase agreement (i.e., the person agreeing to sell the unit on hire-purchase terms) will not be entitled to the investment allowance.

"lease" : This term means grant a lease of property or let property on hire otherwise than under a hire-purchase agreement. Cognate expressions (e.g., "leasing") have corresponding meanings. The new Subdivision contains provisions designed to extend the availability of the proposed investment allowance to new eligible property that is leased by a "leasing company" (see notes below) to a lessee-user for not less than 4 years.

"leasing company" : This term means a company carrying on in Australia as its sole or principal business -

•

banking; or

•

the borrowing of money and "providing finance" (The term "providing finance" is explained in the notes dealing with proposed sub-section 82AQ(2)).

A bank or finance company (for example, a government-owned bank) which is exempt from Australian tax will not be regarded as a leasing company. For leased plant, the investment allowance will be available only where the lease is given by a leasing company as defined.

A declaration procedure is being provided to enable leasing companies to transfer the benefit of the new investment allowance in respect of eligible property to the lessee-user of the property. The procedure is explained in the notes relating to proposed sub-section 82AD(1).

"long-term lease agreement" : This term relates to the proposal that the investment allowance be available in respect of leased plant where the eligible property is leased by a leasing company to the lessee-user for not less than 4 years - i.e., under a "long-term lease agreement". Plant leased for a period shorter than 4 years will not normally attract the new investment allowance. Eligible property leased for less than 4 years prior to the date of assent to this Bill (which is to be the formal commencement date of the investment allowance provisions) may, however, attract the special deduction if the period of the initial lease is extended by the parties to not less than 4 years (see notes on section 82AP).

"new" : As was the case with the earlier investment allowances for the manufacturing and primary production industry, the new investment allowance is only to apply to "new" plant and equipment. The word "new" is accordingly defined to exclude from the scope of the allowance second-hand plant, including plant previously acquired, or held, by any person for use by that person. The definition also ensures that plant will not attract an investment allowance if it has been reconditioned or rebuilt.

"providing finance" : A reference to a leasing company "providing finance" is a reference to the company -

(a)

lending money, with or without security;

(b)

letting property on hire under a hire-purchase agreement; or

(c)

leasing property.

"acquisition of property" : Property is regarded as being acquired by a taxpayer if it is purchased or constructed (on the taxpayer's premises) by the taxpayer or is taken under a hire-purchase agreement. The term also includes the acquisition of property by the taxpayer as a result of an independent contractor constructing the property on the taxpayer's premises.

"installed ready for use" : The term is used in relation to property to connote that the property is installed ready for use and held in reserve.

"taking property on lease" : This expression covers the taking of property on lease or hire, other than under a hire-purchase agreement.

Section 82AA : Property to which Subdivision applies

Section 82AA provides for the investment allowance to be available in relation to a unit of eligible property that is for use solely in Australia and solely for the purpose of producing assessable income. Thus plant that is used partly outside Australia or partly for private or exempt purposes will not qualify for the allowance. The section makes it clear that, in referring to use of the property, the provision has regard to the use of the property for the purpose for which it has been designed. It does not include "use" by a person who merely leases the property to another person.

Paragraph (a) of section 82AA provides for the general case of a taxpayer acquiring, having constructed or constructing a unit of eligible property for use by the taxpayer for the purpose for which the plant was designed. In such a case the property must be for use wholly and exclusively in Australia and solely for the purpose of producing assessable income. Excluded from the scope of the paragraph is eligible property that is for use in producing assessable income in the form of rental income by leasing or hiring out the property, by letting it on hire under a hire purchase agreement or by granting another person a right to use the property.

The owner of property held by a hirer-user under a hire-purchase agreement is not, by virtue of the paragraph, entitled to an investment allowance deduction in respect of the property. Any such deduction will be available to the hirer-user.

Paragraph (b) of section 82AA brings within the scope of the allowance, eligible property that is leased by a leasing company to a person for use by that person (i.e. the lessee) wholly and exclusively in Australia and solely for the purpose of producing assessable income. The paragraph provides for leased plant to qualify for the allowance only where the lease is a long term lease entered into on or after 1 January 1976 by a leasing company in the course of carrying on business in Australia and is entered into by the leasing company and the lessee at arm's length.

As already noted, a long term lease is defined in section 82AQ as a lease for a minimum period of 4 years while a leasing company is defined in that section as a company that has as its sole or principal business in Australia the business of banking or the business of borrowing money and providing finance.

Section 82AP provides special transitional arrangements in respect of plant that is leased on or after 1 January 1976 by a non-leasing company (as defined) and in respect of lease agreements that are for a period of less than 4 years. These arrangements are explained in the notes on that section.

Section 82AB : Deduction in respect of new plant installed on or after 1 January 1976

Section 82AB is the substantive provision of the new Subdivision. It authorises the allowance of the proposed investment allowance deduction for eligible capital expenditure incurred by a taxpayer in acquiring or constructing a unit of eligible property. The section also specifies the rate at which the allowance is to be calculated during the first and second phases of the scheme's operation.

Sub-section (1) of section 82AB formally authorises the allowance of the special deduction in respect of a new unit of eligible property where the sub-section applies, and subject to the other provisions of the proposed new Subdivision. The deduction is to be allowed against the assessable income of the taxpayer for the year of income during which the eligible property is first used for the purpose of producing assessable income, or installed ready for use for that purpose.

Paragraph (a) of sub-section (1) of section 82AB provides for the deduction to be allowed where, on or after 1 January 1976, a taxpayer has incurred expenditure of a capital nature in respect of the acquisition or construction of a new unit of eligible property in relation to which Subdivision B applies.

A new unit of property that is constructed for the taxpayer on his premises, together with property acquired on hire purchase terms, will be covered by the special deduction in the same way as property acquired by outright purchase, or that is constructed or manufactured by the taxpayer.

Eligible expenditure for the purpose of calculating the investment allowance will include capital expenditure relating to the delivery and installation of the property and thus will generally correspond with the cost of the property for the purposes of depreciation allowances.

Paragraph (b) of sub-section (1) provides for the allowance of the special deduction where the eligible expenditure to acquire or construct the property exceeds $500. A unit of property that costs $500 or less will not attract the deduction.

Paragraph (c) of sub-section (1) in effect restricts the allowance to a unit of eligible property acquired, or the construction of which commenced, within a certain specified period. To qualify for the concession, the eligible expenditure must relate to a unit of property that was either -

•

acquired by the taxpayer under a contract entered into on or after 1 January 1976 and before 1 July 1983 (sub-paragraph (c)(i)); or

•

constructed by the taxpayer and the construction of which commenced on or after 1 January 1976 and before 1 July 1983 (sub-paragraph (c)(ii)).

Paragraph (d) of sub-section (1) ensures that only eligible property first used or installed ready for use before 1 July 1984 will attract the investment allowance.

Sub-section (2) of section 82AB fixes the closing date of the 40 per cent phase of the allowance. By virtue of sub-section (2), the cost of an eligible unit of plant will qualify for deduction in the 40 per cent phase if the plant was acquired under a contract entered into before 1 July 1978 or, in the case of the construction of plant by the taxpayer, the construction commenced before 1 July 1978. In the case of both acquisition and construction, the 40 per cent phase of the allowance will apply only if the eligible plant is first used or installed before 1 July 1979.

Where these conditions as to time of first use or installation are met, the sub-section provides for the amount of the investment allowance to be such percentage of the eligible expenditure as is prescribed by sub-section (3).

Sub-section (3) of section 82AB prescribes the investment allowance levels that will apply during the 40 per cent phase of the allowance.

Paragraph (a) of sub-section (3) provides that where the eligible expenditure is less than $526 the rate of the allowance is 2 per cent. This paragraph is to be read in conjunction with paragraph (b) of sub-section (1) of section 82AB that provides that an investment allowance is available only if the eligible expenditure exceeds $500. This means that the rate of 2 per cent will apply to eligible expenditure of $501 to $525 inclusive.

Paragraph (b) of sub-section (3) provides that where the eligible expenditure is between $526 and $975 inclusive, the rate of the allowance will be 2 per cent plus 2 per cent for each whole $25 by which the eligible expenditure exceeds $501. A table provided at the end of the notes on this clause sets out the rates of the allowance for items costing from $501 to $975. In each case, the relevant percentage applies to the full amount of the eligible expenditure.

Paragraph (c) of sub-section (3) provides for the full 40 per cent rate of allowance where the eligible expenditure is $976 or more.

Sub-section (4) of section 82AB specifies the periods during which eligible expenditure will qualify for the 20 per cent phase of the allowance. As with the 40 per cent phase, eligible expenditure must be incurred under contracts entered into, or construction must be commenced within a certain period and the plant must be first used or installed by a certain date for the allowance to be available.

Paragraph (a) of sub-section (4) refers to eligible expenditure that meets the contract or construction dates for the first phase of the allowance but fails to meet the final test of being first used or installed ready for use by 30 June 1979. This expenditure will qualify for the 20 per cent phase of the allowance provided the relevant unit of plant is first used or installed by 30 June 1984 as specified in paragraph (d) of sub-section 82AB(1).

Paragraph (b) of sub-section (4) provides for the second category of eligible expenditure that will qualify for the 20 per cent phase of the allowance. This will be -

•

eligible expenditure incurred in respect of a unit of property acquired under a contract entered into on or after 1 July 1978; or

•

eligible expenditure incurred in respect of a unit of property that the taxpayer commenced to construct on or after 1 July 1978.

The paragraph only provides the opening dates for contracts or commencement of construction because the closing date of 30 June 1983 is specified in paragraph (c) of sub-section 82AB(1). Paragraph (d) of sub-section 82AB(1) also provides the closing date of 30 June 1984 for the first use or installation of plant if it is to qualify for the 20 per cent phase of the allowance.

Where eligible expenditure meets the timing requirements for the 20 per cent phase of the allowance, the sub-section provides for the investment allowance to be such percentage of the eligible expenditure as is prescribed by sub-section (5).

Sub-section (5) of section 82AB prescribes the investment allowance percentages to apply during the 20 per cent phase of the allowance.

Paragraph (a) of sub-section (5) provides that where the eligible expenditure is less than $526 the rate of the allowance is 1 per cent. This paragraph is to be read in conjunction with paragraph (b) of sub-section 82AB(1) that provides that an investment allowance is available only if the eligible expenditure exceeds $500. This means that the rate of 1 per cent will apply to eligible expenditure of $501 to $525 inclusive.

Paragraph (b) of sub-section (5) provides that where the eligible expenditure is between $526 and $975 inclusive, the rate of the allowance will be 1 per cent plus 1 per cent for each whole $25 by which the eligible expenditure exceeds $501. The table provided at the end of the notes on this clause sets out the rates of the allowance for eligible expenditure of from $501 to $975. In each case the relevant percentage applies to the full amount of the eligible expenditure.

Paragraph (c) of sub-section (5) prescribes the full 20 per cent rate of allowance where the eligible expenditure is $976 or more.

Sub-section (6) of section 82AB is a drafting measure related to preceding sub-sections (1), (2) and (4) which are expressed to apply on the basis of when the property is first used or installed ready for use by the taxpayer.

Sub-section (6) makes it clear that in respect of leased plant, the references in those sub-sections are to use or installation by the lessee.

Sub-section (7) of section 82AB is intended to ensure that the provisions contained in the section do not preclude the allowance of the special deduction in respect of eligible property that is leased by a leasing company for a period of not less than 4 years to a lessee under certain "lease-back" arrangements.

Briefly, these arrangements provide for the person who is to lease the property from the leasing company to, firstly, construct or acquire the property, and then to sell it to the leasing company. The property is then leased back to the person (the lessee) under a standard lease granted by the leasing company.

In certain circumstances, the formal transfer or sale of the property to the leasing company is deferred until the plant has been completed and operated by the lessee for a relatively short shaking-down period.

In the absence of proposed sub-section 82AB(7), technical provisions contained elsewhere in the Subdivision (e.g. the provisions which have the effect of restricting the scheme to "new" units of property) could result in neither of the parties to the lease-back arrangements being entitled to a deduction under the scheme in respect of the leased property.

Sub-section (7) in effect removes these technical obstacles and leaves the way open for the special deduction to be allowed in lease-back cases where the basic requirements for the allowance are satisfied. The special provisions of sub-section (7) will enable a leasing company to attract the allowance in respect of eligible property that is the subject of a lease-back arrangement where the following conditions, set out in paragraphs (a) to (d) inclusive of sub-section 82AB(7), are satisfied -

(a)

a leasing company leases to another person plant that was acquired from that other person;

(b)

the only disqualification to a deduction to the lessor in respect of that plant is that it was used, or held for use, by the lessee;

(c)

the period during which the plant was used, or held for use, by the lessee before acquisition by the leasing company did not exceed 6 months; and

(d)

the Commissioner of Taxation is satisfied that the various transactions in respect of the plant occurred in pursuance of a contract or arrangement entered into on or after 1 January 1976 and that the lessor and the lessee entered into the contract or arrangement at arm's length.

If these conditions are met, the expenditure incurred in acquiring the plant by the leasing company is deemed to have been incurred in respect of a new unit of property. The sub-section also provides that for the purpose of determining the income year in which the deduction is allowable, the plant is deemed to have been first used or installed on the date that the lease agreement is entered into.

As a result of sub-section (7), a leasing company will be able, under the proposed declaration system, to pass all or part of the special deduction in respect of property that is the subject of a lease-back arrangement on to the lessee-user of the relevant property.

Sub-section (8) of section 82AB provides that an investment allowance deduction is not to be available in respect of plant acquired on or after 1 January 1976 by a leasing company if, before that date, the leasing company had entered into a contract or arrangement to lease the plant either to the person to whom the plant is leased or to another person.

The purpose of this sub-section is to place leasing companies and purchasers of plant for their own use on the same footing. In both cases, plant acquired in pursuance of contracts made before 1 January 1976 is to be excluded from the allowance.

Section 82AC : Limitation of deduction in case of leased property

Section 82AC is designed to restrict the amount of the deduction, or the aggregate of the deductions allowable under Subdivision B in respect of a year of income, to a leasing company in respect of eligible property that the company has leased out during the year of income. Section 82AC does not affect the amount of the deduction allowable to the company in respect of eligible property that it acquires and retains for a qualifying use in the conduct of its business. Nor does the section affect the amount of the deduction that may be allowable to the lessee-user of property leased from a leasing company.

In terms of this section, a leasing company will not be entitled, in respect of a year of income, to a deduction in respect of eligible property that it leases to another person in excess of the amount (if any) that remains after deducting from its assessable income of the year of income all allowable deductions other than -

(a)

the investment allowances available to the company in respect of property leased to other persons (paragraph (a)); or

(b)

deductions allowable by way of tax-deductible business losses under section 80 or 80AA of the Principal Act (paragraph (b)).

The operation of the restriction proposed by section 82AC is illustrated below -

EXAMPLE

Assume the following particulars apply to a leasing company in respect of the year of income ending 30 June 1976:

Application of section 82AC

The special deduction in respect of the leased property - item (c)(i) - is to be limited to $150,000 (i.e.

$1,000,000 - (800,000 + 50,000)


).

Notes:

(1)

The special deduction ($150,000) under Subdivision B would have the effect of making the leasing company non-taxable for the 1975-76 income year;

(2)

The previous year loss ($300,000) would not be affected and would be available for deduction against future income, subject, of course, to the requirements of section 80 and other relevant provisions;

(3)

It would be open to the leasing company to pass all (i.e. $400,000), or simply the unused portion ($250,000), of the allowance on to the respective lessees of the property by declarations made for that purpose (see notes below on section 82AD).

Section 82AD : Lessor may transfer benefit of deduction to lessee

Sub-section (1) of section 82AD is designed to provide a declaration system whereby a bank or other approved finance company that is a "leasing company" (as defined in section 82AQ) will be able to forgo, in favour of the lessee-user of a unit of eligible property, its right to all or part of the investment allowance in respect of the capital expenditure incurred by the leasing company in acquiring or constructing the property.

The declaration system is, in terms of paragraph (a) of sub-section (1), based on the leasing company lodging with the Commissioner a declaration, signed by its public officer, to the effect that the company transfers to the relevant lessee either -

•

the benefit of the full deduction;

•

the benefit of a specified fraction of the deduction; or

•

the benefit of so much of the deduction as does not exceed an amount specified in the declaration.

The declaration is to be lodged with the Commissioner before the "prescribed date" (see notes on sub-section (2)).

Paragraph (b) of sub-section (1) sets out the necessary details that are to be furnished for the purposes of a declaration lodged by a leasing company under section 82AD. The information may form part of the declaration itself, or, if the company prefers, be contained in a separate statement, also to be signed by the public officer of the leasing company, and attached to the declaration. The relevant information required by paragraph (b) is as follows:

•

a description of the eligible property leased by the leasing company (sub-paragraph (i));

•

the date on which the property was acquired by the company, or the construction of the property was commenced (sub-paragraph (ii));

•

the amount of the expenditure incurred by the company in the acquisition or construction of the property (sub-paragraph (iii));

•

the date of the lease agreement (sub-paragraph (iv));

•

the name and address of the lessee (sub-paragraph (v)); and

•

the period for which the property is leased to the lessee (sub-paragraph (vi)).

Where a declaration and supporting details have been lodged by a leasing company for the purpose of transferring a deduction to a lessee, the sub-section provides for a deduction to be allowable to the lessee of an amount equal to the amount transferred.

Paragraphs (c), (d) and (e) of sub-section (1) provide for the amounts that are to be allowable deductions to the lessee depending on whether the leasing company has transferred the whole of the relevant deduction (paragraph (c)), a specified fraction of that deduction (paragraph (d)) or a particular amount (paragraph (e)).

The deduction to the lessee will be allowable from assessable income of the year of income in which the eligible property is first used, or installed ready for use by the lessee.

Sub-section (2) of section 82AD sets out the prescribed date before which a declaration made by a leasing company under section 82AD is required to be lodged with the Taxation Office.

In the case of a lease agreement entered into by 1 July 1976, the prescribed date for section 82AD declarations is 8 July 1976 (paragraph (a)). In the case of lease agreements made on or after 1 July 1976, the prescribed date is the eighth day after the end of the month in which the lease agreement is entered into (paragraph (b)).

Sub-section (2) also empowers the Commissioner to grant a leasing company an extension of the prescribed date for the purpose of lodging a declaration.

Sub-section (3) of section 82AD operates to ensure that where a leasing company makes a declaration under sub-section (1), transferring to a lessee all or part of the investment allowance to which it would otherwise be entitled in respect of the relevant leased property, the amount forgone will not also be an allowable deduction in the assessment of the leasing company.

Sub-section (4) of section 82AD provides that in looking to the amount of a deduction available to a leasing company for transfer to a lessee, the restriction on a leasing company's deduction through the operation of section 82AC is to be disregarded. This will make it clear that the full benefit of an investment allowance deduction can be conferred on a lessee-user of plant, even though the lessor could not, by virtue of the limits under section 82AC, have availed itself of the full allowance.

Section 82AE : Subdivision not to apply to certain structural improvements

Section 82AE provides that, with the exception of certain structures specified in the section, the investment allowance will not be generally available in respect of structural improvements including buildings integral with plant.

Paragraph (a) of section 82AE ensures that new plumbing fixtures and fittings associated with new employees' wash-rooms, rest rooms etc. will qualify for the investment allowance. Fixtures and fittings associated with facilities provided for employees to engage in entertainment, amusement, or gambling or cultural, sporting or recreational pursuits are expressly excluded from paragraph (a) and will be ineligible for the investment allowance.

Paragraph (b) of section 82AE consists of a series of provisions - sub-paragraphs (i) to (vi) inclusive - which specify the types of structural improvements that are to qualify for the investment allowance.

Sub-paragraph (i) of paragraph (b) extends the investment allowance to fences constructed on primary production land, as a reclamation measure, to exclude livestock from areas affected by soil erosion. Capital expenditure incurred in the construction of such fences will therefore attract the allowance where the other conditions for the concession are satisfied.

Sub-paragraph (ii) provides, in effect, that fences constructed on primary production land to fence off a part of the land that is adversely affected by naturally occurring deposits of mineral salt are within the scope of the proposed allowance.

Sub-paragraph (iii) brings within the scope of the allowance fences constructed to subdivide land for the purpose of carrying on primary production on the land. Boundary fences, fences enclosing yards, and fences along public roads, public stock routes or other public rights of way are expressly excluded from sub-paragraph (iii) and accordingly will be ineligible for the allowance.

Sub-paragraph (iv) of paragraph (b) specifies that the following categories of structural improvements, where constructed on land for use in carrying on primary production, are to be eligible for the investment allowance -

•

improvements for the purpose of conserving water such as dams, earth tanks, underground tanks, concrete tanks and tank stands;

•

irrigation channels or similar improvements for the purpose of conveying water for use in carrying on primary production, and bores and wells for water for such use.

Sub-paragraph (v) has the effect of extending the investment allowance to capital expenditure on new underground pipes laid for the purpose of conveying water for use in carrying on primary production, e.g. pipes carrying water for irrigation purposes or for watering stock.

Sub-paragraph (vi) extends the allowance to capital expenditure on buildings or other structural improvements used by a primary producer for the purpose of storing grain, hay or fodder where those improvements are erected on the land used in carrying on primary production.

Section 82AF : Subdivision not to apply to certain other property

This section contains a list of categories of property that will not qualify for the investment allowance.

Sub-section (1) of section 82AF has the effect of excluding household appliances other than appliances of that type that are for use in the tourist accommodation industry.

Paragraph (a) of sub-section (1) excludes household appliances, such as radios and television sets, except where the appliances are for use in a business that is substantially engaged in the tourist accommodation industry (e.g., in a motel or guest house) or for use in premises held or used principally by the taxpayer for the purpose of providing accommodation for tourists and travellers (e.g., in rent-producing holiday flats or cottages).

Paragraph (b) provides for the general exclusion of furniture and furnishings, floor coverings, light fittings, partitions, fitting rooms, signs, shelving, cupboards, counters, display models, display cases and display stands, and similar items.

However, sub-paragraphs (i), (ii) and (iii) provide for exceptions to this general exclusion where these items are for use in a business that is substantially engaged in the provision of tourist accommodation or for use in premises used principally for the accommodation of tourists or travellers. Similarly, items of the kind referred in paragraph (b) may attract the allowance where they are for use for the purpose of providing amenities for employees, such as first-aid or restroom facilities, or meals or facilities for meals, or for the care of employees' children.

Sub-section (2) of section 82AF consists of a series of provisions - paragraphs (a) to (j) inclusive - that have the effect of making a number of specific exclusions from the scope of the investment allowance.

In terms of paragraph (a) of sub-section (2), the following classes of motor vehicles (including four wheel drive vehicles falling within those classes) are to be ineligible -

•

motor cars, station wagons, panel vans, utility trucks and similar vehicles, e.g., land rovers, jeeps and estate cars (sub-paragraph (i));

•

motor cycles and similar vehicles, e.g., motor scooters (sub-paragraph (ii)); and

•

other road vehicles (e.g., microbuses, campervans, etc.) designed to carry a load of less than 1 tonne or less than 9 passengers (sub-paragraph (iii)).

Trucks, vans, lorries, etc., that are designed to carry loads of 1 tonne or more, and buses, tourist coaches and similar vehicles that are designed to carry at least 9 passengers, are not affected by paragraph (a) and may therefore be eligible for the allowance if other requirements of the section are satisfied.

Paragraph (b) has the effect of excluding from the concession works of art such as paintings, sculptures, drawings, engravings, or photographs, and articles having a similar use.

Paragraph (c) expressly excludes books from the allowance. Technical and trade books, as well as libraries, will accordingly be outside the scope of Subdivision B.

Paragraph (d) makes it clear that films, records, tapes, etc., including items of computer software (e.g., tapes, disc packs and cartridges) are not to qualify for the investment allowance. Paragraph (d) does not apply to computer hardware which is a category of eligible property covered by the allowance.

Paragraph (e) refers to musical instruments and equipment for use in conjunction with musical instruments. Property of this kind is ineligible for the investment allowance by virtue of the paragraph.

Paragraph (f) will exclude from the scope of the investment allowance plant and equipment for use in, or primarily and principally in connexion with, the following leisure pursuits -

•

amusement or recreation (sub-paragraph (i));

•

sport (including the racing of animals or vehicles), or physical exercise or in any similar activities (sub-paragraph (ii));

•

gaming or gambling (sub-paragraph (iii)); and

•

public entertainment, such as circus performances, music, plays, dancing or exhibition of films in cinemas (sub-paragraphs (iv) and (v)).

In addition to plant or articles for use directly in amusement, sport, gambling or entertainment, etc., the allowance is not to be available for plant for use primarily and principally in connexion with such activities. A stand-by generator in a cinema, plant to heat a swimming pool and a freezing plant for use in connexion with an ice skating rink, are examples of equipment that will, in terms of paragraph (f), be ineligible for the investment allowance.

Paragraph (f) will not operate to exclude from the allowance television receivers and other appliances, or furniture and furnishings etc., that, in terms of sub-section (1) of section 82AF, are to qualify where for use in the tourist accommodation industry. The paragraph will also not affect the granting of the allowance for plant and equipment used in the manufacture or production of sporting goods, poker machines, indoor bowling equipment, gymnasium equipment, and so on that is used in or in connexion with sport, amusement, gambling, etc. Film production and T.V. studio equipment are also not excluded by paragraph (f) and may thus be eligible for the allowance where the basic requirements are satisfied.

Paragraph (g) excludes from the proposed investment allowance plant or articles referred to in paragraph (h) or (i) of sub-section (3) of section 62AA, or in paragraph (h) of sub-section (3) of section 62AB of the Principal Act. The lists contained in those existing provisions cover a range of tools and tooling that were ineligible for the investment allowances that formerly applied in respect of manufacturing and primary production plant. By new paragraph (2)(g) of section 82AF, any tools or tooling of a type that were ineligible for the earlier investment allowances, will similarly be excluded from the new allowance.

Paragraph (h) of sub-section (2) makes it clear that wharves and jetties will not attract the investment allowance. The eligibility of plant (e.g., cranes and other lifting or loading devices) installed or used on wharves would not be affected by sub-paragraph (h).

By paragraph (j) of sub-section (2) items of personal clothing and accessories will not qualify for the allowance whether or not the cost of these items is deductible as a business expense for income tax purposes.

Sub-section (3) of section 82AF is a drafting safeguard related to the basic limitation of the investment allowance to new eligible property. The sub-section makes it clear that paragraph (b) of section 82AA could not be construed as permitting an investment allowance in respect of second-hand plant leased to another taxpayer by a leasing company. However, the sub-section expressly does not apply in a case to which sub-section 82AB(7) applies, i.e., in a case involving certain lease-back arrangements in which it is appropriate, for the purposes of the allowance, to disregard the fact that the property may previously have been used by another taxpayer (i.e., the lessee). This will ensure that a unit of eligible property that is the subject of approved lease-back arrangements (see notes on sub-section 82AB(7)) may attract the allowance in the same way as new property.

Sub-section (4) of section 82AF is a further necessary safeguard to ensure that the special deduction is not available under the proposed scheme in respect of property acquired, or the construction of which was commenced, before 1 January 1976.

The provision makes it clear that property that was held by a taxpayer, or was in the course of being constructed for or by a taxpayer, prior to 1 January 1976 is outside the scope of the scheme. Such property will not attract the allowance if transferred to another taxpayer on or after 1 January 1976. However, where a person holds property for sale, i.e., as trading stock, before 1 January 1976, this will not be an obstacle in the path of a purchaser who acquires the property on or after 1 January 1976, for use for a qualifying purpose.

Section 82AG : Disposal, etc., of property within 12 months after installation

This section is designed to provide a general safeguard against misuse of the investment allowance deduction in respect of eligible property acquired or constructed by a taxpayer (sub-sections (1) and (2)) or by a leasing company and leased by the company to another person (sub-section (3)).

Section 82AG will cause the allowance in respect of such property to be withdrawn if one of the events specified in the relevant sub-sections occurs within 12 months of the property being first used, or installed ready for use.

The Commissioner is to be authorised to amend an assessment to withdraw a deduction in a case where section 82AG applies under an appropriate amendment to section 170 of the Principal Act (see notes on clause 17).

Sub-section (1) of section 82AG governs situations where, after a taxpayer has become entitled to an investment allowance deduction in respect of eligible property (not being property leased by a leasing company to another person), any of the following events occurs within 12 months of the property being first used or installed ready for use -

•

it is disposed of, lost or destroyed (paragraph (a));

•

it is used by another person as the result of a lease or other right granted by the taxpayer, or sold under a hire-purchase agreement, (paragraph (b));

•

it is used by the taxpayer outside Australia, or for a purpose other than the purpose of producing assessable income (paragraph (c)).

In the case of property disposed of, lost or destroyed within the 12 months period, it would usually be the case that an investment allowance would be available in respect of new property acquired by the taxpayer as a replacement item.

Sub-section (2) has affect in a situation where a taxpayer, having become entitled to an investment allowance deduction in respect of eligible property (again, not being property leased by a leasing company to another person), disposes of part of an interest in the property within 12 months of its being first used or installed ready for use.

The sub-section will cause the withdrawal of so much of the investment allowance allowed to the taxpayer in respect of the property as the Commissioner considers appropriate. Generally, the amount to be disallowed would be the appropriate proportion of the deduction based on the part-interest disposed of - the basis on which a discretion was exercised would be subject to review in the usual way under the general objections and appeals provisions of the income tax law.

Sub-section (3) extends the sanctions proposed by section 82AG to leased plant. In relation to eligible property leased by a leasing company to another person (i.e., the lessee), any investment allowance entitlement will be withdrawn if one of the following events occur within 12 months of the property being first used, or installed ready for use by the lessee -

•

the property was disposed of by the leasing company or was lost or destroyed (sub-paragraph (a));

•

the lessee used the property outside Australia or for a purpose other than for producing assessable income (sub-paragraph (b));

•

the lease was terminated otherwise than by the acquisition of the property by the lessee;

•

the lessee entered into a contract or arrangement with another person for the use of the property by that other person; or

•

the lessee acquired the property and disposed of it.

Section 82AH : Disposal, etc., of property after 12 months after installation

This section is complementary to section 82AG and provides the same kind of sanction against misuse of the investment allowance deduction where any of specified events occurs in respect of eligible property after the expiration of 12 months from the time the property is first used or installed ready for use, and the happening of the event was in the taxpayer's contemplation at the time the entitlement to the investment allowance arose.

The sanction under section 82AH, which is the withdrawal of all or part of an investment allowance in respect of property acquired or constructed by the taxpayer (sub-sections (1) and (2)) and property leased by a leasing company to another person (sub-sections (3) and (4)) may be invoked only if the Commissioner is satisfied as to certain matters specified in the relevant provisions.

In any case where the Commissioner invokes section 82AH to withdraw an investment allowance (or part of it), the taxpayer will have the usual rights to have the matter taken before a Taxation Board of Review.

In terms of sub-section (1) of section 82AH, the Commissioner, if he so determines, may withdraw the investment allowance previously allowed to a taxpayer in respect of eligible property (not being property leased by a leasing company to another person) if, after the expiration of 12 months after the property was first used or installed ready for use -

•

the taxpayer disposed of the property (paragraph (b)(i));

•

the property was used by another person as the result of a lease or right granted by the taxpayer, or was let on hire by the taxpayer under a hire-purchase agreement (paragraph (b)(ii)); or

•

the taxpayer used the property outside Australia, or otherwise than for purposes of producing assessable income (paragraph (b)(iii)).

Before applying the sub-section to withdraw the deduction allowed to the taxpayer in respect of the property, the Commissioner must be satisfied that, at the time the property was acquired or constructed, the taxpayer intended to dispose of it, or to use it in one of the ways specified above, after becoming entitled to the investment allowance.

Sub-section (2) provides a corresponding safeguard where the taxpayer disposes of part of his interest in eligible property (not being property leased by a leasing company to another person) after the expiration of 12 months of the property being first used or installed.

Before any deduction may be withdrawn in these circumstances, the Commissioner must first be satisfied that at the time of acquiring or constructing the property, the taxpayer intended to dispose of the property or part of his interest in the property after qualifying for the investment allowance deduction.

Sub-sections (3) and (4) of section 82AH operate in the same way in relation to property leased by a leasing company to another person (i.e., the lessee).

Sub-section (3) authorises the Commissioner to withdraw an investment allowance deduction allowed to a leasing company (that is, to the lessor) in respect of property leased to another person where one of the following circumstances occurs later than 12 months after the property was first used, or installed ready for use, by the lessee and before the expiration of the lease -

•

the leasing company disposed of the property to a person other than the lessee (paragraph (b)(i));

•

the property was used by the lessee outside Australia, or for a purpose other than the purpose of producing assessable income (paragraph (b)(ii));

•

the lease was terminated otherwise than by the acquisition of the property by the lessee (paragraph (b)(iii));

•

another person became the user of the property under an agreement with the lessee (paragraph (b)(iv)); or

•

the lessee acquired the property and disposed of it.

To invoke the safeguard, the Commissioner must be satisfied that, at the time the lessee took the property on lease, it was the leasing company's intention to dispose of the property before the expiration of the lease or, as the case requires, it was the lessee's intention to cause the lease to be terminated, or to use it in one of the ways mentioned in paragraphs (b)(ii) or (iv).

Sub-section (4) authorises the Commissioner to withdraw the investment allowance allowed to a person (i.e., the lessee) in respect of property taken on lease from a leasing company.

The circumstances in which the sub-section will operate, and the matters on which the Commissioner must be satisfied before invoking the provision to withdraw the lessee's deduction, correspond to those explained in the notes on preceding sub-section (3), paragraphs (b)(i), (b)(ii) and (b)(iii).

An amendment to section 170 of the Principal Act proposed by clause 17 will permit assessments to be re-opened to disallow deductions pursuant to section 82AH.

Section 82AI : Notional disposal of property under hire-purchase

Section 82AI is a technical measure that provides that, for the purposes of sub-sections 82AG(1) and 82AH(1), a taxpayer who acquired property under a hire-purchase agreement shall be deemed to have disposed of the property if any act or omission of the taxpayer results in the property being repossessed by the owner. For the purpose of determining whether the hire-purchase property has been so disposed of by such a taxpayer before or after the expiration of the 12 month period specified in those sub-sections, section 82AI deems the disposal to have been made by the hire-purchaser at the time the possession of the property reverts to the owner.

Section 82AJ : Special provisions relating to partnerships

This section is to provide safeguards against unintended arrangements in cases where a deduction has been allowed under Subdivision B to a partnership in respect of eligible property acquired or constructed by the partnership and a partner subsequently disposes of the whole or part of his interest in the eligible property. The safeguards proposed by section 82AJ are to apply in similar circumstances, and to have broadly the same practical effect, in relation to a taxpayer who owns property jointly, as corresponding safeguards, proposed by section 82AG (Disposal of property within 12 months of installation) and section 82AH (Disposal of property after 12 months of installation), are to have in relation to taxpayers owning property in their own right.

Sub-section (1) applies where a partnership has qualified for an investment allowance deduction in the calculation of its net income (or a partnership loss) in respect of eligible property. If, within 12 months of such property being first used or installed ready for use by the partnership, a partner in the partnership disposes of the whole or part of an interest in the property, section 82AJ provides for an adjustment (based on the "prescribed amount" - see notes below on sub-section (3)) to be made to the partner's assessable income of the year in which the benefit of the deduction was received.

Where the partner has disposed of the whole of an interest in the property, sub-section (1) provides for the whole of the "prescribed amount" to be included in the assessable income of the relevant year. If only a part interest in the property has been disposed of, the amount to be included as assessable income is so much of the "prescribed amount" as the Commissioner considers appropriate (this would generally be a proportionate figure based on the extent to which the partner has disposed of an interest in the partnership property).

The safeguard proposed by sub-section (2) is similar to the sub-section (1) safeguard but will apply where the partner disposes of the whole or a part interest in partnership property that has attracted the investment allowance after the expiration of 12 months from the time the property was first used or installed ready for use by the partnership. Sub-section (2) is, however, to be invoked by the Commissioner only where he is satisfied that, at the time the property was acquired or constructed by the partnership, the individual partner intended to dispose of an interest, or a part of an interest, in the property after the partnership became entitled to the investment allowance.

As with the other corresponding safeguards, the Commissioner's decision to apply sub-section 82AJ(2) will, of course, be open to the usual rights of objection and reference to a Taxation Board of Review.

Sub-section (3) of section 82AJ is a technical provision related to adjustments that may be made in relation to partnership transactions under sub-sections (1) and (2). Where either of those provisions applies, the amount to be included in the relevant partner's assessable income to effect the withdrawal of the tax benefit under the scheme will be the whole or part of the "prescribed amount" calculated in accordance with sub-section (3).

In terms of sub-section (3), the prescribed amount for purposes of an adjustment under sub-section (1) or (2) of section 82AJ will be the amount that bears to the investment allowance granted to the partnership in respect of the property the same proportion as so much of the cost of the property as the partners have agreed is to be borne by the relevant partner.

Where the partners have not agreed as to the amount of the eligible expenditure to be borne between them, the prescribed amount for inclusion in the relevant partner's assessable income will be the equivalent of the partner's share of the investment allowance granted to the partnership, based on the proportion that the individual interest of the partner in the net income of the partnership (or in the partnership loss) bears to the net income of the partnership (or partnership loss) for the relevant income year.

Sub-section (4) of section 82AJ provides a special provision to cover the case where a partnership, one or more of the partners of which is a leasing company, incurs capital expenditure in respect of property that is eligible for the investment allowance and that is leased to another person. In these circumstances, the allowance is not to be allowable to the partnership in the calculation of the partnership's net income (or the partnership loss), but each partner is deemed to have incurred so much of the eligible expenditure incurred by the partnership as is agreed between the partners. Where the partners have not agreed as to the apportionment of the expenditure between the partners, the eligible expenditure is to be deemed to have been incurred by each partner in proportion to the individual interest of each in the net income (or loss) of the partnership of the year of income in which the relevant expenditure was incurred. A partner, not being a leasing company, will not, of course, be entitled to a special deduction in respect of property leased by the partnership.

By virtue of sub-section (4), the appropriate proportion of an investment allowance in respect of eligible expenditure may be allowed as a deduction in the assessments of each individual partner that is a leasing company where property is leased by the partnership for a period of not less than 4 years and other conditions governing the granting of the investment allowance are satisfied.

A leasing company that is a member of a partnership and entitled to an investment allowance deduction measured by reference to proposed sub-section (4) will be able to forgo, through the declaration system to be provided by sub-section 82AD(1), all or part of that deduction in favour of the relevant lessee. The amount of a deduction claimable by the leasing company itself in the relevant year of income would, of course, be subject to the limitation imposed by section 82AC.

Sub-sections (5) and (6) provide safeguarding provisions that are to apply in the case of leased property owned by a partnership of which one or more partners is a leasing company. These provisions are along the lines of those provided elsewhere in the Subdivision but are designed to fit in with the special treatment of the investment allowance deduction where at least one of the partners of a partnership is a leasing company.

Sub-section (5) relates to the case where such a partnership leases eligible property to another person and before the expiration of 12 months after the property was first used or installed ready for use by the lessee, a partner that is a leasing company disposes (otherwise than to the lessee) of the whole or a part of its interest in the eligible property.

The sub-section provides that where the whole of the interest is disposed of, the investment allowance otherwise available to the leasing company partner is deemed not to be allowable. Where only a part interest in the leased property is disposed of, so much of the investment allowance otherwise allowable to the leasing company as the Commissioner considers appropriate shall be deemed not to be allowable. The Commissioner's determination will, of course, be subject to review in the usual way.

Sub-section (6) authorises the Commissioner to withdraw the investment allowance otherwise available to a leasing company that is a partner in a partnership where, after the expiration of 12 months after the property was first used or installed ready for use by the lessee, the leasing company disposed of the whole or part of its interest in the leased property.

Before this provision may be invoked, the Commissioner must be satisfied that, at the time the property was leased, the leasing company intended to dispose of the whole or part of its interest in the property after becoming entitled to an investment allowance in respect of the property. Again, an exercise of the Commissioner's discretionary power may be subjected to review through the usual channels.

As with sub-section (5) the disposal of the whole of an interest will mean the withdrawal of all the investment allowance otherwise allowable and a disposal of a part interest will result in the withdrawal of so much of the allowance as the Commissioner considers appropriate.

Sub-section (7) may have application where, within a 12 months period from the time leased property is first used or installed ready for use, the property is transferred by the leasing company to the lessee who, in turn, arranges to sell (or grants rights to use) the property to another person. Where arrangements of this kind are carried through during the 12 months period mentioned above, any investment allowance entitlements in respect of the property will be withdrawn.

Section 82AK : Private use of property by employees, etc., of private company

Section 82AK is designed to reinforce the general restriction of the investment allowance to eligible property used wholly and exclusively in the production of assessable income (see notes on section 82AA).

The section may apply to a private company otherwise entitled to claim the investment allowance in respect of eligible property used wholly or partly for the private or domestic purposes of directors, shareholders or employees of the private company, or relatives of such persons.

Property held by a private company that is used for private or domestic purposes by directors, etc., is deemed, in terms of section 82AK, to be use of the property by the company otherwise than for the purpose of producing assessable income. The company may, in these circumstances, cease to be entitled to an investment allowance deduction in respect of the property.

Section 82AL : Property acquired, etc., in substitution for other property

This section is designed, broadly, as a check on a re-arrangement of contracts to make it appear that property has been acquired or taken on lease by a taxpayer under a legal obligation entered into on or after 1 January 1976, in circumstances where a contract for the acquisition or leasing of the property or substantially similar property (in these notes referred to as the "substituted unit"), had, in fact, been entered into by the taxpayer before 1 January 1976. The section is also expressed to apply in a case where the taxpayer commenced the construction of a "substituted unit" on or after 1 January 1976.

Broadly stated, the operation of sub-section (1) of the section will require that the Commissioner be satisfied that -

•

the taxpayer entered into a pre-1 January 1976 contract to acquire or take on lease a unit of property (paragraph (a));

•

on or after that date, the taxpayer had substituted a different contract for the acquisition or taking on lease by the taxpayer, or commenced the construction, of an identical or substantially similar item with the intention that the substituted unit should be acquired, taken on lease, or constructed, as the case may be, in lieu of the unit provided for by the pre-1 January 1976 contract (paragraph (b)); and

•

a post-1 January 1976 contract was made for the purpose of obtaining the investment allowance that would not otherwise have been available (paragraph (c)).

The sub-section empowers the Commissioner, in any case where he is satisfied that the circumstances are as specified, to refuse to allow the investment allowance in respect of the relevant property.

The exercise by the Commissioner of this power will be subject to the usual rights of objection and reference to a Board of Review.

Sub-section (2) of section 82AL provides a safeguard, similar to that proposed by sub-section (1), that is designed to apply where a taxpayer, having commenced the construction of a unit of property before 1 January 1976 (being property for which the investment allowance is not to be available) seeks to re-negotiate or rearrange matters so that the 1 January 1976 commencing date will not preclude a deduction for the investment allowance.

Broadly, the operation of sub-section (2) will depend upon the Commissioner being satisfied that -

•

the taxpayer commenced the construction of a unit of property before 1 January 1976 (paragraph (a));

•

on or after 1 January 1976 the taxpayer commenced the construction of an identical unit of property or a substantially similar unit (in these notes referred to as the "substituted unit") intended to be used by the taxpayer in lieu of the original unit (paragraph (b)(i)); or

•

on or after 1 January 1976 the taxpayer entered into a legal obligation for the acquisition or taking on lease of the original unit, or of another substantially similar unit (also referred to here as the "substituted unit") intended to be used by the taxpayer in lieu of the original unit (paragraph (b)(ii)); and

•

the taxpayer commenced the construction of the substituted unit or entered into the post 1 January 1976 arrangement for the acquisition or leasing of the original or substituted unit, as the case may be, for the purpose of obtaining the investment allowance under this Subdivision (paragraph (c)).

The sub-section empowers the Commissioner, in any case where he is satisfied that the circumstances are as specified, not to allow the investment allowance in respect of the relevant unit. The taxpayer will have the same rights of objection, etc., in relation to the refusal of the Commissioner to allow the deduction as where the preceding sub-section is applied.

Sub-section (3) of section 82AL is a drafting measure related to the operation of the preceding sub-sections (1) and (2). Sub-section (3) provides that, in applying those sub-sections a reference to a unit of property is to be taken to include a reference to a portion of a unit of property.

Section 82AM : Deduction under Subdivision to be in addition to other deductions

Sub-section (1) of section 82AM makes it clear that, subject to the exceptions explained in the notes below dealing with sub-section (2) of the section, the investment allowance under Subdivision B is to be available in addition to any other deduction allowable (e.g., depreciation allowances) in respect of the relevant property under other provisions of the Principal Act.

Sub-section (2) of section 82AM specifies certain exceptions to the operation of sub-section (1). It has the effect of denying the investment allowance in respect of property that qualifies for any of the special deductions authorised by sections 122J, 123B and 124AH of the Principal Act.

Under the provisions of section 122J of the Principal Act, the capital cost of certain plant used by a taxpayer in the exploration or prospecting for minerals (other than petroleum) may be claimed as an outright deduction against mining income in the year in which the expenditure is incurred. Such plant is not to be eligible for the investment allowance as well. (Under section 122H of the Principal Act, the taxpayer may, as an alternative to the special outright deduction, elect to have the cost of the exploration plant deducted for tax purposes by way of depreciation allowances under the general depreciation provisions. A taxpayer who chooses this method for deducting the cost of the exploration plant will be able to qualify for the investment allowance in respect of the plant where the conditions contained in Subdivision B are satisfied.)

Broadly stated, section 123B of the Principal Act provides a special deduction which enables a taxpayer who has incurred certain capital expenditure on a railway, road, pipeline or other transport facility (which could include expenditure in relation to property for which the investment allowance might, but for proposed sub-section (2), be available) to deduct the total amount of the capital expenditure over a period of 20 years. In terms of sub-section (2), the investment allowance will not be available in respect of capital expenditure that attracts the section 123B concession.

Section 124AH of the Principal Act operates in respect of capital expenditure on plant used in the exploration for petroleum in a similar way to section 122J in relation to plant used in the exploration for minerals other than petroleum (see notes above). It is proposed that capital expenditure that qualifies for an outright deduction under section 124AH will similarly be ineligible for the investment allowance. However, if the taxpayer chooses to deduct the expenditure under the general depreciation provisions, the investment allowance will be available provided the basic conditions for the allowance are satisfied.

Section 82AN : Ascertainment of amount of eligible expenditure

This section contains measures to enable the appropriate investment allowance to be ascertained and allowed as a deduction where, under a contract for the acquisition or construction of property that includes a unit of eligible property, no separate amount is allocated as the cost of the unit of eligible property.

In these circumstances, sub-section (1) empowers the Commissioner, for the purpose of applying the investment allowance provisions, to determine how much of the total expenditure involved in the contract is properly attributable to the acquisition or construction of the unit of eligible property.

Sub-section (2) of section 82AN applies where the Commissioner is satisfied that an amount expressed to be payable under a contract for the construction or acquisition of property exceeds -

•

in the case of a contract for the construction of property for the taxpayer by another person on premises of the taxpayer - the market value of the property at the time of completion of the construction (paragraph (a)); or

•

in any other case - the market value of the property at the date of the contract (paragraph (b)).

Where the Commissioner is satisfied as to the matter specified in sub-section (2), the amount payable in respect of the construction or acquisition of the property shall, if the Commissioner so determines, be taken to be the market value at the time of the construction or at the date of the contract, as the case may be.

Sub-section (2) will thus be available as a counter to arrangements that might otherwise result in excessive allowances being available to a taxpayer where an inflated figure is attributed to the expenditure on property for the purpose of securing a greater investment allowance than the property would otherwise have attracted.

In any case where the Commissioner makes a determination as empowered under section 82AN, the matter will be able to be contested by the taxpayer through the usual rights of objection and reference to a Taxation Board of Review.

Section 82AO : Recoupment of expenditure

Sub-section (1) of section 82AO ensures that capital expenditure for which the taxpayer has been recouped, or is entitled to be recouped, will not qualify as capital expenditure eligible for the investment allowance.

Where, for example, the investment allowance is allowed to a taxpayer in respect of eligible expenditure to acquire a unit of property, and the taxpayer is subsequently reimbursed for some of that expenditure, sub-section (1) will have the effect of withdrawing so much of the special deduction as is attributable to the amount of the reimbursement.

Where the reimbursement is received in a year of income subsequent to that in which the special deduction is allowed, the Commissioner is to be authorised to effect the amendment of the taxpayer's earlier assessment (see notes dealing with clause 17).

Sub-section (2) of section 82AO is necessary to ensure that the preceding provision may operate in a case where a taxpayer is reimbursed an amount in respect of expenditure on property that qualifies for the investment allowance and property that does not qualify and the amount in respect of the eligible property is not specified.

In these circumstances, the Commissioner is to be empowered, by sub-section (2), to determine the extent to which the total amount constitutes a reimbursement of capital expenditure otherwise eligible for the investment allowance and which is to be withdrawn by the operation of sub-section (1) in conjunction with section 170 of the Principal Act, as amended by clause 17 of this Bill.

A determination made by the Commissioner under sub-section (2) will be subject to the usual rights of objection by the taxpayer, and reference to a Taxation Board of Review.

Section 82AP : Transitional

This section modifies the operation of the investment allowance scheme as set out in the preceding sections in relation to certain leasing arrangements made on or after 1 January 1976 and before the commencement of the new Subdivision B - i.e. before the date of Royal Assent to the amending Bill. (In the notes that follow this period is referred to as the transitional period.)

Sub-section (1) refers to a case where a leasing company has, under a lease agreement entered into during the transitional period, leased eligible property to another person for a period of less than 4 years. Under the preceding sections, this property would not qualify for the investment allowance because of the requirement in the case of leased plant that the lease be for a minimum period of 4 years (section 82AA(b)).

In these circumstances, sub-section (1) of section 82AP will permit the lessor and the lessee to extend the term of the lease in order to comply with the 4 years minimum requirement and so bring the relevant plant within the scope of the investment allowance. The sub-section requires the extension of the original lease to be agreed to by 30 June 1976 or by such later date as the Commissioner determines.

Sub-section (2) will operate as a further transitional measure where on or after 1 January 1976 and before the commencement of Subdivision B -

•

a taxpayer entered into an agreement to take property on lease from another person, not being a leasing company; or

•

a taxpayer entered into an agreement with a leasing company to take property on lease for a period of less than 4 years.

In these circumstances, sub-section (2) will enable the preceding sections of this Subdivision to apply to that property as if it were new property where the lessee purchases the property from the lessor (either by outright purchase or under hire purchase) by 30 June 1976 or by such later date as the Commissioner determines.

Section 82AQ : Interpretation

To facilitate drafting of new Subdivision B, section 82AQ defines a number of terms and ascribes particular meanings to certain expressions that are used in the Subdivision. The terms and expressions, and the meanings to be given to them in the context of Subdivision B, have been referred to in the notes provided at the beginning of the notes on clause 10.

Clause 11: Interest deductible only if paid during first 5 years of loan connected with first residence owned by taxpayer or his spouse

This clause proposes the insertion of a new section - section 82KBA - in Subdivision C of Division 3 of Part III of the Principal Act to provide two restrictions on the deductibility of interest paid on home loans.

Under the present law, income tax deductions are available, subject to a net income test, in respect of interest on a housing loan connected with a dwelling used during the whole or part of a year of income as the taxpayer's sole or principal residence. Under the net income test, a full deduction of such interest is allowable if the combined net income of taxpayer and spouse is $4,099 or less while no deduction is allowable where the combined net income level is $14,000 or more. Where the combined net income is between $4,099 and $14,000, the deductible proportion reduces by one per cent for each $100 by which the combined net income exceeds $4,000.

Under the new section 82KBA the deduction will be 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. Moreover, the deduction will be allowable only in respect of interest paid during the first 5 years of use of that first home. The new section will apply in respect of interest paid on or after 1 July 1976.

Sub-section (1) of section 82KBA restricts the housing loan interest deduction to interest paid in respect of the first home owned by the taxpayer or his or her spouse and used as the taxpayer's sole or principal residence. Interest paid by a taxpayer on or after 1 July 1976 in respect of a loan connected with the taxpayer's sole or principal residence will not qualify for deduction if, at an earlier time, the taxpayer or his or her spouse owned another dwelling that was used as the taxpayer's sole or principal residence.

Paragraph (a) of sub-section (1) of section 82KBA provides the first part of the test which operates to restrict the deduction for interest paid on a housing loan to a loan in respect of a taxpayer's first home. The first part of the test is that, before the occupation of the present home as a sole or principal residence, the taxpayer had not used another dwelling in Australia as a sole or principal residence. A taxpayer who had earlier owned a house but had not used it as a sole or principal residence will not fail this part of the test. Nor will a taxpayer whose earlier home was outside Australia.

Paragraph (b) of sub-section (1) provides the second part of the test. This is that the taxpayer or his or her spouse held a relevant interest in the earlier dwelling at the time it was the taxpayer's principal residence. The holding or acquisition of a relevant interest is defined in sub-section (4) and means, in essence, that the taxpayer or the spouse had owned or acquired an interest in the land on which the dwelling was built, an interest in a stratum unit in relation to that dwelling, or proprietary rights in respect of that dwelling where the dwelling is a flat or home unit.

Sub-section (1), of course, will not apply to deny interest deductions where the earlier residence was not owned by the taxpayer or his or her spouse. It will therefore not apply where the earlier residence was rented accommodation.

By virtue of a definition in sub-section (4), a "spouse" for the purposes of paragraph (b) means a person who was married to the taxpayer or living with the taxpayer as wife or husband on a bona fide domestic basis at the relevant time. This means that, in referring to an earlier home that was owned by the taxpayer's spouse, paragraph (b) may refer to a person who was the taxpayer's spouse at that earlier time. The limits imposed by sub-section (1) do not extend to a situation where a house had been owned by the taxpayer's spouse at a time before that relationship was established.

Sub-section (2) of section 82KBA will operate to restrict the housing loan interest deduction to interest on a loan in connection with a dwelling that becomes payable during the first 5 years that the dwelling is used by the taxpayer as sole or principal residence. By virtue of sub-section (1), this will be the first dwelling used as the taxpayer's sole or principal residence and owned by the taxpayer or his or her spouse.

The sub-section states that a housing loan interest deduction is not allowable in respect of interest paid on or after 1 July 1976 on a loan connected with a dwelling where the liability for the payment arose after the expiration of a period of 5 years from the date on which the taxpayer or his or her spouse first acquired the dwelling, or from the first day of the income year in which the taxpayer first used the dwelling as a sole or principal residence, whichever date is the later.

Paragraph (a) of sub-section (2) provides that the 5 year period for deduction will commence to run from the time that the taxpayer or spouse acquired the dwelling used as sole or principal residence where the taxpayer so uses it in the year of income in which the dwelling was first acquired. Accordingly, where a taxpayer or his or her spouse purchase a dwelling that had been used by the taxpayer as a residence before buying it, the 5 year period starts to run from date of purchase of the dwelling.

The reference to a spouse of the taxpayer includes, for the purposes of the paragraph, a reference to a person who is or has been the spouse of the taxpayer at the time the interest in the dwelling was acquired or held.

Paragraph (b) of sub-section (2) will apply instead of paragraph (a), where a taxpayer first uses a dwelling as a sole or principal residence in a year of income after the year of income in which the taxpayer or his or her spouse acquired ownership of the dwelling. In these circumstances, the 5 year period will commence on the first day of the year of income of the taxpayer in which the dwelling is first used by the taxpayer as a sole or principal residence.

Thus, if a taxpayer purchased a dwelling on 1 March 1974 and first occupied it as a sole or principal residence on 1 March 1975, the 5 year period will commence on 1 July 1974, assuming the taxpayer's year of income for income tax purposes commences on that date. The need to start the 5 year period from the first day of the year of income in which the taxpayer first occupies the dwelling, rather than the date of occupation, arises from the operation of section 82KB of the Principal Act. That section provides for a deduction for interest paid in respect of a dwelling used for the whole or part of a year of income as the taxpayer's sole or principal residence. Thus, in the above example, although the taxpayer did not occupy the dwelling until 1 March 1975, there would, subject to other requirements being met, be an entitlement to a deduction in the 1974/75 income year for interest paid at any time in that income year.

Sub-section (3) of section 82KBA provides that deductions will not be allowable under the Subdivision, in respect of interest paid by a taxpayer, if the taxpayer's spouse would not have been entitled to a deduction in respect of that payment through the operation of sub-sections (1) or (2) of section 82KBA.

The effect of this sub-section will be that the first home-first 5 years' restriction will apply in the same way to both husband and wife in respect of a particular dwelling. It will mean that if sub-section (1) operates to deny a deduction to a person because the interest is paid in respect of that person's second residence, a deduction is also to be denied to that person's spouse in respect of that residence even if it is the first residence which the spouse has acquired. Similarly, if sub-section (2) operates to deny a deduction to a person because of the expiration of the 5 year period, a deduction is also to be denied to that person's spouse in respect of that dwelling. In the absence of these provisions, deductions could be obtained in respect of successive residences by, for example, acquiring first in the name of one partner and then in the name of the other.

Sub-section (4) is a drafting measure that defines a relevant interest in a dwelling and the meaning of spouse for the purposes of the section. In both cases, the terms are given meanings similar to those used for the general purposes of the Subdivision.

Paragraph (a) of sub-section (4) provides that, for the purposes of the section, a person is deemed to have a relevant interest in a dwelling if, whether alone or with others, that person has a prescribed interest in the land on which the dwelling is situated, a prescribed interest in a stratum unit in relation to the dwelling or, in the case of a flat or home unit, a proprietary right in respect of the dwelling.

This measure is designed to ensure that in applying the first home or first 5 years test, regard is had only to a dwelling of which the taxpayer or his or her spouse is an owner (or part-owner) or long-term lessee or licensee.

Paragraph (b) of sub-section (4) provides that a reference in the section to a spouse of the taxpayer is a reference to a person who is legally married to the taxpayer other than such a person who is living separately and apart from the taxpayer. It also extends to a person living with the taxpayer as husband or wife of the taxpayer on a bona fide domestic basis although not legally married to the taxpayer.

Paragraph (c) of sub-section (4) caters for the situation where a taxpayer pays interest in advance of when it is actually due for payment. The paragraph provides that interest paid before 1 July 1976 on account of interest due for payment on or after that date shall be taken to be paid at the time it falls due and not when it is actually paid.

The paragraph complements sub-section (5) of section 82KB of the Principal Act and, like that sub-section, is designed to ensure the equitable operation of the Subdivision. For example, it will make it clear that payments of interest falling due on or after 1 July 1976 but paid in advance before that date will be subject to the new tests in determining their deductibility.

As mentioned above, the first home-first 5 years' test imposed by the new section will apply in relation to interest paid on or after 1 July 1976.

Clause 12: Bonus share allotments

The amendments to section 82P of the Principal Act proposed by sub-clauses (a) and (b) of this clause are drafting measures associated with proposed section 82SA. Sub-paragraph (d)(ii) of sub-section 82SA(1) - like sub-paragraph (d)(ii) of sub-section 82S(1), which it replaces - allows a company, without forfeiting the deduction for interest, to provide in the terms of a convertible note issue for the noteholder to have the right - as set out in section 82P - to participate in new share issues that might be made during the currency of the notes. The amendment to section 82P formally identifies the provision in section 82SA that section 82P serves.

Clause 13: Interest on certain convertible notes not to be an allowable deduction

By this clause section 82R of the Principal Act will be expressed to operate subject to both the present section 82S and the proposed section 82SA.

Section 82R provides that interest, or a payment in the nature of interest, on a convertible note issued after 15 November 1960 is not an allowable deduction from assessable income. Section 82S, however, specifies that section 82R does not apply in relation to those convertible notes connected with loans made after 27 October 1970 that meet the tests set out in section 82S. The proposed section 82SA will do the same in respect of loans that are made on or after 1 January 1976 and which meet the somewhat less restrictive tests of the new provision. Clause 13 accordingly formally makes section 82R subject to new section 82SA.

Clause 14: Interest on certain convertible notes to be an allowable deduction - where loan made before 1 January 1976

Sub-clause (a) of clause 14 has the effect of confining the application of section 82S (which sets out tests for deductibility of convertible note interest) to convertible notes that relate to loans made before 1 January 1976, i.e., before the operative date for loans to which the proposed replacement section 82SA is to apply.

Sub-clause (b) of clause 14 is a consequential drafting amendment caused by the insertion in the Principal Act of the proposed section 82SA between the current sections 82S and 82T.

Clause 15: Interest on certain convertible notes to be an allowable deduction - where loan made on or after 1 January 1976

The general principle of the income tax law (as expressed in section 51 of the Principal Act) is that interest on borrowed money that is incurred by a company in producing its assessable income, or is necessarily incurred by a company in carrying on business for the purpose of producing such income, is an allowable deduction in arriving at the company's taxable income on which its tax is based.

By contrast, dividends paid by a company on its share capital are not an allowable deduction in calculating taxable income.

The effect of these basic rules is that profits of a company that are used to pay dividends effectively bear tax in its hands; if used to pay interest they do not.

On the view that interest paid on convertible notes - on the terms on which the notes were then being issued - had generally more in common with non-deductible dividends on deferred shares than deductible interest on borrowed money, the Principal Act was amended in 1960 to provide that interest incurred by a company on convertible notes was not to be deductible from the assessable income of the company where the notes were issued after 15 November 1960.

By amendments effected in 1970, deductibility of interest on convertible notes was restored for notes issued after 27 October 1970 where the issue was made on terms specified in the law. It is now proposed that, without significantly impairing those terms insofar as they operate as a measure against a return to pre-1960 practices, to provide a relaxation of the tests for deductibility. The relaxation is to apply to notes issued in respect of loans raised on or after 1 January 1976.

Interest payments will continue to be non-deductible for income tax purposes where incurred in respect of convertible note issues occurring between 15 November 1960 and 27 October 1970; where incurred in respect of convertible notes raised after 27 October 1970 and before 1 January 1976 which do not satisfy the existing tests for deductibility (largely set out in section 82S of the Principal Act); and where incurred in respect of loans raised by convertible notes on or after 1 January 1976 which fail to meet the proposed, somewhat relaxed, conditions for deductibility.

The conditions set out in section 82S of the Principal Act will continue to govern the allowance of deductions for interest paid on convertible note loans raised after 27 October 1970 and before 1 January 1976.

The Bill proposes that the relaxed tests for deductibility of interest paid on convertible notes issued in respect of loans made on or after 1 January 1976 be contained in a new section - section 82SA - which, except for changes to give effect to the relaxation's referred to earlier, repeats the tests contained in section 82S.

The tests applicable under present law in respect of convertible note issues (pursuant to section 82S) which are not to apply in respect of issues relating to loans made on or after 1 January 1976 are those which -

(a)

require that the loan to which the notes apply be for a minimum period of seven years (section 82S(1)(b)(ii) and (d)(vii) and (2));

(b)

require that after a maximum "no-option" period of up to two years (this test to be retained) the option to convert must remain open for exercise by the noteholder, at least at yearly intervals, throughout a subsequent period (section 82S(1)(d) (v)(B) and (vi));

(c)

do not permit, in relation to domestic loans, terms which offer the noteholder an inducement to advance the exercise of his option to convert (section 82S(1)(d)(ix)(A) (in part)); and

(d)

do not permit, in relation to domestic loans, any variation in the rate of interest payable throughout the period of the borrowing (see section 82S(1)(d) (viii) and (6)).

The principal tests of proposed new section 82SA which will apply in respect of convertible note issues relating to loans made on or after 1 January 1976 are summarised below.

In brief, interest paid on convertible notes will be eligible for deduction where -

•

the notes are convertible into share capital only at the option of the noteholder;

•

the noteholder's option is first exercisable no later than 24 months after the notes are offered for subscription and is not exercisable after the earlier of the maturity date of the loan and the date occurring 10 years after the notes are offered for subscription;

•

the price to be paid for each share allotted or transferred in pursuance of the noteholder's exercise of his option to convert is not less than the greater of -

•.

the par value of the share; or

•.

90 per cent of the value of an equivalent share in the capital of the company when the notes are offered for subscription; and

•

except for changes in interest rates in line with movements in interest rates generally, the interest rate is not variable, and other terms of the loan do not become more favourable the longer the notes are held and not converted.

Other provisions supplement these briefly stated tests and are designed against circumvention of them. A more detailed explanation of the revised provisions follows.

Clause 15 will insert new section 82SA in the Principal Act. The new section is the provision by which effect will be given to the proposed relaxation of the tests which a convertible note must in future satisfy to attract deductibility of interest. It provides that section 82R, which generally denies deductibility of interest on convertible notes is not to apply to convertible notes that meet the tests specified in section 82SA.

In addition to setting out the basic conditions which establish a right to deductions for interest on convertible notes to which the section applies, the proposed section 82SA contains provisions necessary to ensure that these conditions effectively have their intended operation.

Sub-section (1.) of section 82SA comprises a series of paragraphs setting out conditions to be complied with if interest paid under a convertible note issue is to be an allowable deduction from assessable income. In each case, the paragraphs have their parallel in the existing section, section 82S.

Paragraph (a) of sub-section (1.) provides that the loan to the company to which the note relates is to be a new loan or an approved replacement loan as specified in section 82M of the Principal Act.

Broadly, section 82M provides that a new loan is a loan made wholly by the payment of money to the company at the time that the loan is made, while an approved replacement loan is a loan into which an earlier fixed-term, fixed-interest loan is converted.

Paragraph (b) of sub-section 82SA(1.) has the effect of restricting deductions under this section to interest on loans made to the company on or after 1 January 1976.

Paragraph (c) of sub-section 82SA(1.) provides that the convertible note must be issued by the company within two months after the relevant loan was made to the company. Some of the tests for deductibility of interest under convertible notes relate to the terms applicable to the notes, which may possibly not be ascertainable until the notes are actually issued. By requiring that the convertible notes be issued within two months after the loan was made, paragraph (c) ensures that the information necessary to determine the eligibility of the notes will be available. In addition, paragraph (c) - when read in conjunction with paragraph (d) of sub-section (1.) - will operate to ensure that interest deductions are only allowed in relation to a loan that is raised on terms that satisfy the proposed tests for deductibility.

Paragraph (d) contains a series of tests relating to the terms applicable to convertible notes, which must be met at the time the note is issued and at all subsequent times, if the interest under the notes is to be deductible. A reference to a term or terms applicable to a convertible note is (by reason of sub-section (5) of section 82L of the Principal Act) to be read as including a reference to terms that apply in pursuance of or by virtue of a trust deed or otherwise.

Sub-paragraph (i) of paragraph (d) provides that the terms applicable to the note must give the noteholder an option to have shares in the capital of the company issuing the note or in the capital of another company allotted to him, or transferred to him by a person who already holds them. It also specifies that the expression "the option to convert" used elsewhere in Division 3A of the Principal Act means an option given to the noteholder.

Sub-paragraph (ii) of paragraph (d) has three main purposes. The first is to give effect to the intention that the conversion of a loan into share capital by the allotment or transfer of shares is to take place only at the option of the noteholder. The second is to ensure that the "conversion price" test (see the notes below relating to sub-paragraph (xi)) operates in the intended way and is not circumvented by, e.g., a provision in the terms of the issue conferring on the noteholder rights to an issue of additional shares on the exercise of the option to convert, thus effectively reducing the conversion price. Thirdly, the sub-paragraph will allow noteholders to participate, equally with existing shareholders, in "bonus" issues and other issues of shares made to the shareholders during the currency of the notes.

For these purposes, the sub-paragraph makes it a condition for deductibility of interest that the terms applicable to the convertible note do not make provision for the allotting or transferring of shares to the noteholder except in two cases. One of these exceptions is, of course, allotment or transfer in pursuance of the noteholder's option to convert.

The other exception may occur where the convertible note provides for the case where the company, during the currency of the borrowing, makes a "bonus" issue of shares to shareholders or makes some other issue of shares to them, e.g., a cash issue at par (section 82P of the Principal Act). Broadly, this exception will ensure that the company may, without losing its entitlement to interest deductions, give to noteholders who have an option to take up shares of the same kind as those held by the shareholders a right to participate with the shareholders in the "bonus" or other issue. It will not be obligatory for the company to give noteholders such rights but, if it does, the rights must correspond with, or be no more favourable to the noteholders than, the rights which the shareholders have.

If, however, a noteholder who exercised his option to convert were to have a right to further shares that the relevant shareholders did not have, or a right to such shares on more favourable terms than the shareholders, interest paid under the convertible note would not qualify for deduction. Sub-paragraph (viii) contains a safeguarding provision that has a comparable purpose, i.e., to safeguard the "conversion price" test.

Sub-paragraph (iii) of paragraph (d) is designed to reinforce the first of the three main purposes of sub-paragraph (ii). It will operate where a loan may, otherwise than by the allotment or transfer of fully-paid shares, be converted into share capital - e.g., where the loan moneys are to be applied in paying up the amount unpaid on shares that have been issued. If the terms of a relevant convertible note issue provide for any such conversion, interest paid under the note will not be an allowable deduction.

In other words, sub-paragraphs (ii) and (iii) in combination ensure that interest paid under a convertible note to which the section applies will be eligible for deductibility of interest if the conversion of the loan into share capital can only take place as a consequence of the exercise by the noteholder of an option to have shares allotted or transferred.

Sub-paragraph (iv) of paragraph (d) specifies that it is to be open to the noteholder to first exercise the option to convert not later than two years after the date on which the notes are offered for subscription, i.e., there may be a maximum "no-option" period of 2 years. The sub-paragraph does not, of course, make it obligatory for it to be provided that the noteholder must exercise the option at that time.

Sub-paragraph (v) of paragraph (d) requires that the last date for exercise of the option must not be later than the maturity date of the loan, or ten years after the date of offer, if that is earlier. For example, if the convertible notes are offered for subscription in a prospectus dated 1 January 1977 and the borrowing to which a convertible note relates is to mature on (say) 1 January 1984, the final date on which the option may be exercised may be the maturity date of the loan (1 January 1984). If, in the above example, the maturity date of the loan had been 1 January 1991, the option must be exercisable no later than 1 January 1987, that is, 10 years after the date of offer.

By sub-paragraph (vi) of paragraph (d) it is required that, subject to sub-section (5), the terms applicable to the note must provide for a constant rate of interest to be payable in respect of the convertible loan throughout the period of the borrowing. Thus, for example, a company could not influence a noteholder to defer conversion by increasing interest rates the longer the notes are held. However, as explained later in the notes on sub-section (5) of section 82SA, a provision that the rate of interest on a loan is to be varied in accordance with prevailing interest rates is not to be regarded as a breach of this test.

Sub-paragraph (vii) of paragraph (d) is associated with the preceding sub-paragraph - sub-paragraph (vi). It will exclude from deduction interest on a convertible note issued on terms which offer the noteholder an inducement to postpone the exercise of his option to convert.

This test is a relaxation of the comparable provision in existing section 82S (section 82S(1)(d)(ix)), in that the terms applicable to a convertible note to which new section 82SA applies may, if the company so wishes, offer an inducement to advance the exercise of the noteholders' option to convert without disqualifying the relevant interest from being deductible. Section 82S only allows this for foreign loans. It is important to note that this relaxation relates to the timing of the option's exercise and not to inducements as to whether the option will be exercised or not. The next sub-paragraph deals with that matter.

Sub-paragraph (viii) is complementary to the other basic tests and requires that the amount which the noteholder is entitled to receive with respect to the repayment, redemption or satisfaction of the loan is not, under the terms applicable to the note, to vary according to whether or not he exercises the option to convert. For example, the terms of an issue of convertible notes may not, if interest on the notes is to be deductible, be such as would be effective to give the noteholder an additional cash benefit on the termination of the loan only if he exercises the option to convert. (Sub-paragraph (ii), in part, deals with the provision of additional benefits to the noteholder in the form of rights to further shares.)

Sub-paragraph (ix) of paragraph (d) is related to and reinforces other tests. The sub-paragraph requires that the shares which, under the terms of the issue, are to be allotted or transferred upon the exercise of the option to convert are to be so allotted or transferred within two months after the exercise of the option and are also to be fully-paid shares of the same class as shares that, no later than six weeks before the offer of the notes for subscription, had been both allotted and fully paid-up.

The requirement that shares be allotted or transferred within two months of the exercise of the option to convert means that once a noteholder has exercised the conversion option (sub-paragraph (v) has provisions about the timing of this) there can, having regard also to sub-paragraph (ix), be no lengthy period before the amount invested is converted from an interest-bearing loan to a dividend-bearing share.

As the "conversion price" is to be related to the value of shares in a company that have been allotted and fully-paid at the time of an offer of notes, the provisions of sub-paragraph (ix) also necessarily provide that the option to convert relate only to fully-paid shares of the same class as fully-paid shares that have been allotted.

The reference to 6 weeks in sub-paragraph (ix)(c) ties in with the definition in section 82L of "the valuation date", i.e., the date 6 weeks before the offer of the notes.

Sub-paragraph (x) of paragraph (d) is a measure designed to ensure that the "conversion price" test has its intended practical operation. The sub-paragraph provides that the terms of issue are not to include any provision for shares allotted or transferred, in consequence of an exercise of the option to convert, to be changed or converted, after allotment or transfer, into shares of a different class. It further provides that the terms of issue are not to provide for the allotment or transfer of shares which, under the company's memorandum and articles, may be changed or converted into shares of another class.

In the absence of such a provision, the value of shares at the valuation date could be determined on the basis of the rights, etc., attached to them at that time although after allotment or transfer and change into a different class, they would have entirely different characteristics which, if they had existed at the valuation date, would have affected the value then.

It is to be noted, however, that deductibility of interest will not be affected by appropriate provision against the event that shares which are the subject of the option to convert are, during the currency of the loan, changed or converted into shares of a different class merely as the result of a consolidation or sub-division of the share capital of the company.

Sub-paragraph (xi) of paragraph (d) contains the "minimum conversion price" test to which reference has already been made in these notes. Sub-paragraph (ix) and sections 82Q and 82T of the Principal Act are also relevant. (Section 82Q, in effect, defines the term "class of share" for the purposes of Division 3A, while section 82T provides the basis on which the value of a share is to be determined for the purposes of section 82SA).

To satisfy sub-paragraph (xi) the amount payable by a noteholder on his exercise of the option to convert must, under the terms applicable to the issue, be no less than the minimum amount specified in the sub-paragraph. In effect, this amount is the greater of -

(a)

the par value of a fully-paid share of the class of shares in which the share to be allotted or transferred on conversion is or will be included; and

(b)

90 per cent of the amount which, for the purposes of the section, is the market value (as determined under section 82T) at the "valuation date" of a fully-paid share of that class.

The valuation date is defined in sub-section 82L(1) of the Principal Act as the date which occurs six weeks before the date on which the notes are offered for subscription. It has also been explained - in relation to sub-paragraph (ix) - that the option to convert is required to be related to a class of shares allotted and fully-paid up at least six weeks before the date of offer of the notes. What constitutes a "class of shares" for the purposes of Division 3A is, as mentioned above, defined by section 82Q of the Principal Act.

Sub-paragraph (xi) also requires that, under the terms of issue, the amount payable by a noteholder in respect of the allotment or transfer of a share on the exercise of his option is to be paid no later than one month after the allotment or transfer.

Sub-section (2.) of section 82SA is taken from the existing law and reinforces the basic tests for deductibility of interest set out in sub-section (1.) of the section. The provision concerns cases where the terms of a convertible note issue initially satisfy the requirements of the section but, through a subsequent departure from those terms, the requirements are no longer met. If the change in terms occurs otherwise than by reason of a compromise or arrangement approved by a court, sub-section (1.) of the section is to be deemed never to have had effect in relation to the note.

One consequence of section 82SA ceasing to have effect, and being deemed never to have had effect, in relation to a convertible note is that section 82R of the Principal Act will be treated as having always applied, with the result that all interest incurred under the convertible note will be disqualified from deduction.

By clause 17 of the Bill, it is proposed to amend section 170 of the Principal Act to authorise the re-opening of assessments for the purpose of giving effect to the provisions of sub-section (2.) of section 82SA - just as assessments may be re-opened to give effect to the corresponding provision in section 82S.

As already indicated, sub-section (2.) will not operate to withdraw a deduction for interest that has previously been paid in cases where a change in the terms of a convertible note issue occurs by reason of a compromise or arrangement approved by a court. In these cases interest that is incurred after the change will not be an allowable deduction from income if the effect of the court's order is that the various tests of section 82SA are no longer satisfied.

Sub-section (3.) of section 82SA relates to a situation where the holder of a convertible note is able, whilst still retaining an interest in the indebtedness to which the note relates, to sell or otherwise dispose of the option to take up shares. The sub-section deals with cases in which the noteholder makes such a disposal so that, by reason of assignment of the option to convert, the option becomes exercisable by a person other than the holder or owner of the note.

In these circumstances sub-section (3.), in effect, deems the holder or owner to have retained the option to convert and thus ensures that income tax deductions for interest under the note will not be lost because, technically, the holder or owner of the note no longer has an option to take up shares in the company.

Sub-section (4.) of section 82SA is directed at special arrangements made by a company or its directors to depress, for purposes of a convertible note issue, the "conversion price" to be paid by a noteholder on the exercise of his option to convert.

It has the effect that deductions for interest paid under a convertible note are not to be allowable where the company issuing the note, or a director of it, adopts, in connection with the note issue, a course of action that has the effect of reducing below what it otherwise would have been the minimum conversion price required by sub-paragraph (xi) of paragraph (d) of section 82SA(1).

Sub-section (5.) of section 82SA modifies the test specified in sub-paragraph (vi) of paragraph (d) of sub-section (1.) of the section. Sub-paragraph (vi) provides that, subject to this sub-section, the terms applicable to a convertible note must not provide for the rate of interest to vary during the period of the loan.

This sub-section means that the inclusion of an appropriate term in a convertible note to the effect that the rate of interest is to be varied from time to time in line with changes in prevailing interest rates, will not result in the failure of the convertible note to satisfy the basic test that the rate of interest may not vary. The terms of a convertible note will not be regarded as failing to satisfy this basic test if they provide that the interest rate is to be varied in accordance with changes in the rate of interest applicable to a specified class of Commonwealth securities (domestic loans) or in respect of a specified overseas market (foreign loans). Under existing law, interest rates on foreign loans, but not domestic loans, may be so varied.

Sub-section (6.) of section 82SA deals with a similar situation to that dealt with by sub-section (2.) of section 82Q of the Principal Act, which defines the term "class of shares" for the purposes of Division 3A. It modifies the operation of sub-paragraph (vii) of paragraph (d) of sub-section (1.) of the section by providing that an otherwise eligible convertible note will not be outside the scope of the new provisions merely because any dividend entitlement of the holder of a share issued in pursuance of the exercise of an option to convert will, or may, during the first twelve months after allotment vary because the allotment occurs at a time in a year that makes it appropriate to pay less than a full year's dividend on the share.

Clause 16: Value of shares

This clause proposes to amend section 82T of the Principal Act so that the rules that it contains for the valuation of shares will apply for purposes of the new section 82SA, as it applies for purposes of the existing section, section 82S.

Clause 17: Amendment of assessments

The general rules governing the amendment of income tax assessments are laid down in section 170 of the Principal Act. The section provides that an assessment made after the taxpayer has disclosed all material facts may be amended so as to increase the liability under the assessment only to correct an error in calculation or a mistake of fact. It provides also that, in these circumstances, the assessment may not be amended more than 3 years after the date the tax imposed in the assessment became due and payable.

The section authorises the amendment of assessments outside the 3 year period, so as to increase liability, where the taxpayer has not made the required full and true disclosure of material facts. It also permits an assessment to be reduced on amendment, generally within the 3 year period running from the date tax first became due and payable.

Sub-section (10) of section 170 authorises the re-opening of assessments at any time, either to increase or reduce liability, where this is necessary to give effect to specified provisions of the Principal Act. Clause 17 of the Bill proposes to insert references to new provisions that are to be inserted in the Principal Act by the Bill relating to section 31B (winemakers' trading stocks), the new Subdivision governing the investment allowance, and sub-section 82SA(2) concerning deduction of interest paid on certain convertible notes.

The new transitional arrangements relating to the valuation of trading stocks in assessments of winemakers have effect as from the 1974-75 year of income. As some assessments to which the new arrangements will apply have already been made, authority is needed to re-open them to give effect to section 31B and sub-section 170(10) is being amended to this end.

An investment allowance deduction allowable under new Subdivision B of Division 3, Part III may cease to be allowable to a taxpayer in certain circumstances, as where the subject property is disposed of prematurely or where, under a lease-back arrangement, an entitlement to all or part of the deduction is to be left with the lessor following the agreement of the parties to the lease.

Circumstances in which amendments to assessments may be necessary to give effect to the provisions governing the investment allowance are described in the explanatory notes relating to the new Subdivision. The reference to the Sub-division that is now to be inserted in section 170 will enable the assessments to be amended in such circumstances.

Another effect of clause 17 is that sub-section (2) of section 82SA will be included in the provisions to which sub-section (10) of section 170 applies. As explained in the notes on proposed section 82SA, sub-section (2) of that section provides that where, in certain circumstances, a convertible note issue ceases to satisfy the tests on which the deduction for interest depends, the interest shall be deemed never to have been deductible. To give effect to this provision in cases where assessments have already been made allowing a deduction for interest paid before the note issue ceased to satisfy the relevant tests, it will be necessary to amend the earlier assessments to disallow the deductions previously allowed. The insertion of the reference to sub-section (2) of section 82SA in section 170 will provide the necessary authority for the Commissioner to do this.

Clause 18: Liability to pay instalments of tax

This clause will implement the decision not to proceed with the collection of the third instalment of company tax in respect of 1974-75 income that would otherwise have been due for payment in February 1976 or the collection of the 3 instalments of company tax that would otherwise have been payable in respect of 1975-76 income during the 1976-77 financial year.

Under Division 1A of Part VI of the Principal Act, comprising sections 221AA to 221AJ, a company is required to pay part of the tax on its income for 1974-75 and each subsequent year of income by 3 instalments payable not earlier than 15 August, 15 November and 15 February in the financial year following the year of income. The balance of the tax in respect of the income of any year of income is payable by the due date shown in the company's notice of assessment which in the case of a company that is called upon to pay instalments is generally not earlier than 30 April following the close of the year of income.

Sub-clause (1) of clause 18 proposes the substitution of 2 new paragraphs in place of the existing paragraph 221AC(1)(b) of the Principal Act. The new paragraph (b) will provide that only 2 instalments of tax are payable in respect of income of the year of income that commenced on 1 July 1974. By virtue of paragraph 221AF(2)(b) of the Principal Act these will be the instalments due for payment not earlier than 15 August and 15 November last. The new paragraph (c) will provide for 3 instalments of tax to be paid in respect of income of the year of income that commences on 1 July 1976 and each subsequent year of income.

The omission from section 221AC of any reference to the year of income that commenced on 1 July 1975 in conjunction with the provisions of sub-clause (2) will mean that instalments of company tax in respect of 1975-76 income will not be payable in 1976-77.

Sub-clause (2) provides that the Income Tax Act 1975 (i.e. the Rates Act) is to have effect as if section 11 of that Act, which provided authority for the collection of instalments in respect of 1975-76 income, had not been enacted.

Sub-section 221AC(2) of the Principal Act provides that instalments of tax are not payable in respect of the income of any particular year of income unless the Rates Act relevant to that year or to the immediately preceding year of income provides that instalments are so payable. The authority provided by section 11 of the 1975 Rates Act for the collection of instalments in respect of 1975-76 income is to be removed by sub-clause (2) consistently with the amendment to make sub-section 221AC(1) of the Principal Act inapplicable to that year of income.

Clause 19: Release of taxpayers from liability in cases of hardship

Under section 265 of the Principal Act the Comptroller-General of Customs is one of three members of a Board constituted under the section to deal with applications for relief from payment of income tax. It is proposed by clause 19 to delete the reference in section 265 to the Comptroller-General of Customs and to substitute a reference to the Permanent Head of the Department now dealing with matters arising under the Customs Act 1901-1975.

Clause 20: Amendment of section 7 of Income Tax Assessment Act (No. 5) of 1973

As mentioned in explanation of clause 5 of the Bill, this clause proposes an amendment to the Income Tax Assessment Act (No. 5) 1973 to omit sub-sections 7(2), (3) and (4) of that Act and to deem those sub-sections never to have had effect. The clause will not amend the Principal Act.

The amendment proposed by clause 20 is consequential on the insertion into the Principal Act of new section 31B which contains revised transitional measures relating to the trading stock of winemakers. The provisions in section 31B are to be substituted for the transitional arrangements provided in sub-sections 7(2), (3) and (4) of the 1973 amending Act and which were introduced with the repeal by sub-section 7(1) of that Act of section 31A of the Principal Act, the former concessional basis for valuing winemakers' stocks.

Clause 21: Release of taxpayers in cases of hardship

By section 30 of the Income Tax Assessment Act (No. 2) 1975 it was proposed to amend section 265 of the Principal Act to substitute a reference to the Secretary to the Department of Police and Customs for the reference to the Comptroller-General of Customs. The amendment was to have effect "on and from the date fixed by Proclamation under sub-section 2(2) of the Australia Police Act 1975." As the Australia Police Bill 1975 lapsed when the Parliament was dissolved in November 1975 it is proposed by clause 21 to repeal section 30 of the Income Tax Assessment Act (No. 2) 1975.

It will be noted from the explanation of clause 19 that the reference to the Comptroller-General of Customs is now to be replaced by a reference to the Permanent Head of the Department dealing with matters arising under the Customs Act 1901-1975.

Clause 22: Additional amendments

Clause 22 proposes that the Principal Act be amended as set out in the Schedule.

The amendments proposed in the Schedule are purely formal in nature and will not affect the operation of the provisions to be amended.