House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Finance, the Hon J.S. Dawkins, MP)

General Outline

The Income Tax Assessment Amendment Bill 1983 will amend the income tax law:

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to introduce from 1 September 1983 a system of tax deductions at source and of information reporting in respect of certain payments for contract work, and to make associated changes in PAYE tax deduction rules;

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to introduce, with effect from 20 July 1982, a new system of depreciation allowances under which plant is generally to be depreciable on a prime cost basis over either 5 years or 3 years, including a write-off over 3 years of certain plant and structures used in primary production;

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to introduce, with effect from 20 July 1982, a new basis of deduction for capital expenditure incurred in developing a mining property or oil field, under which deductions will generally be available on a straight line basis over ten years;

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to modify, with effect from 13 January 1983, the operation of the special income tax concessions for investment in the production of Australian films so that the special 150 per cent deduction may be taken in the year the qualifying investment is made, subject to the film being completed and the copyright interest being used for income producing purposes within 2 years after the end of the financial year in which investments in the film were first made;

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to introduce a scheme of depreciation allowances in respect of the construction cost of non-residential income-producing buildings, the construction of which commenced on or after 20 July 1982;

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to facilitate the collection of tax payable by non-resident beneficiaries of trust estates;

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to specifically provide in the law that interest paid by the Commissioner of Taxation under the proposed Taxation (Interest on Overpayments) Act 1983 will be assessable income of the recipient in the income year in which it is paid;

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to correct a technical deficiency in the motor vehicle cost price depreciation limit consequential on a change made in the basis of calculation of the motor vehicle purchase sub-group of the Consumer Price Index, on which annual changes in the limit are based.

The Income Tax (Payments for Work) (Consequential Amendments) Bill 1983 will make amendments to the Bankruptcy Act 1966 and the Crown Debts (Priority) Act 1981 to provide the Commissioner of Taxation the same priority in relation to the recovery of tax under the new source deduction system as he has in respect of outstanding PAYE instalments.

The remaining Bills will amend the income tax rates Acts to provide for the declaration and imposition of tax payable by a trustee of a trust estate who is in future to be taxed on behalf of a non-resident beneficiary.

Main features

Income Tax Assessment Amendment Bill 1983

Collection of tax at source from certain payments for work or services and associated amendments (Clauses 56-65)

The Bill provides for the introduction, with effect from 1 September 1983, of a new collection system involving the deduction of tax at source in respect of certain payments for work or services, that are not subject to the existing PAYE system. Initially, the system will apply in respect of certain payments that are to be prescribed in the regulations, in the building and construction, architectural, consultant engineering, surveying and other technical building services, joinery and cabinet making, road transport, motor vehicle repair and cleaning industries. The payments to be prescribed from 1 September 1983 will, with two exceptions, be confined to those made and received by persons and firms operating within these industries. The exceptions to this intra-industry basis will be in relation to limited categories of payments from sources outside the building and construction and road transport industries.

Associated with these measures will be requirements on householders to report payments made in connection with larger private building projects and consequential amendments in relation to the existing PAYE system.

The new system for deduction of tax at source will comprise a new Division - Division 3A - in Part VI of the Principal Act which, while not unlike the PAYE provisions in broad concept, imposes substantially different obligations on those who are subject to it.

Under the system, a person entitled to receive prescribed payments - a payee - will be required to complete, on a monthly basis, a deduction form setting out his name, address and taxation file number.

A person who makes prescribed payments - an eligible paying authority - will generally be required to deduct tax from those payments, complete the relevant details on the deduction forms, forward that tax and a copy of the completed deduction forms to the Taxation Office and issue a further copy of the forms to the payees concerned, also on a monthly basis. Householders will not be required to make deductions under the system, but will be required to report to the Taxation Office, on a monthly basis, all prescribed payments made in connection with any building project the cost of which exceeds $10,000.

Where deduction of tax is required the rate of tax - which will also be prescribed by regulation - will generally be 10 per cent. If, however, a payee fails to complete a deduction form, the rate of tax to be deducted is to be increased, by 15 percentage points, to 25 per cent of the gross payment.

The new measures provide that the Commissioner may issue a deduction exemption certificate on a application by a taxpayer who has carried on business from established premises for the immediately preceding 3 years and can demonstrate that he has, in all respects, maintained a satisfactory record of compliance with the tax laws during that period. Although prescribed payments made to the holder of a deduction exemption certificate will not be subject to deductions, the payer will still generally be required to report those payments to the Tax Office.

Provision has also been made for a payer and a payee who holds a deduction exemption certificate to apply, in a limited number of cases where special circumstances exist, for dispensation from the reporting requirement, e.g. where they enter into a long term contract under which clearly determinable prescribed payments will be made. In these limited cases, the Commissioner could exempt the payer and payee from the systems reporting requirements, if satisfied that both payer and payee will account for the payments in their returns.

In other cases where a payee can establish that, because of special circumstances it would not be appropriate to deduct tax at the 10 per cent basic rate, the Commissioner may issue to the payee a certificate varying the rate of deduction that will be required to be made in relation to prescribed payments received by the payee.

The Commissioner will be empowered to revoke any of the above mentioned certificates. All decisions by the Commissioner relating to the issue of certificates and their revocation will be subject to objection and review by an independant Taxation Board of Review.

Credit for tax deducted will be allowed in respect of deduction forms lodged with a taxpayer's annual income tax return and special provisions will apply to allocate credits to partners and trust estate beneficiaries where deduction forms are lodged with the returns of partnerships and trust estates.

Consequential amendments are to be made to the PAYE provisions to clarify their scope and to ensure that there is no overlap between those provisions and the new system for deduction of tax at source. The Bill also provides for amendments to correct technical deficiencies in the PAYE provisions revealed in 2 court decisions decided adversely to the Commissioner of Taxation.

Accelerated depreciation allowances (Clauses 9, 12, 14 and 15)

A new system of depreciation allowances will authorise a 20 per cent prime cost rate of depreciation for eligible new and second-hand plant where, under existing law, such plant would attract a prime cost rate of 20 per cent or less (after taking into account the special 18 per cent depreciation loading) or a 33 1/3 per cent prime cost rate for eligible plant where, under existing law, such plant would attract a prime cost rate of more than 20 per cent.

The accelerated rates will be available for eligible plant that is acquired under a contract entered into by the taxpayer after 19 July 1982. Eligible plant constructed by the taxpayer will qualify on the same basis where construction commenced after that date.

The accelerated rates will not apply to motor vehicles of a kind presently excluded from the 18 per cent loading (principally cars and station wagons), works of art, structural improvements, or plant of a kind presently qualifying for depreciation at a rate equal to or in excess of 33 1/3 per cent.

Normal safeguards will apply against substitution of contracts entered into before 20 July 1982 (and equivalent arrangements) in an attempt to gain eligibility for the accelerated rates. In addition, plant that is the subject of a sale and leaseback or similar arrangement will be excluded from eligibility where the lessee/real end-user would have otherwise been depreciating the plant under the existing depreciation arrangements.

Taxpayers will be able to elect to have normal rates of depreciation apply to individual plant items instead of the special 20 per cent or 33 1/3 per cent rate if they so wish. Such an election ordinarily will need to be made at the time of lodgment of the income tax return in which depreciation is first claimed for the plant or machinery. Once made, an election would be irrevocable.

Depreciation of certain primary production plant and structural improvements (Clauses 10 and 13)

The Bill will authorise an increase in the 20 per cent rate of depreciation presently allowable for new plant used wholly and exclusively for the purposes of agricultural or pastoral pursuits, forest operations or fishing operations; and for structural improvements used for the purpose of the storage of grain, hay or fodder in the course of carrying on a business of primary production.

The present 20 per cent prime cost rate available to eligible plant and structural improvements will be increased to 33 1/3 per cent. The increased rate will be available for eligible property that is acquired under a contract entered into after 19 July 1982. Eligible property constructed by the taxpayer will also qualify where construction commenced after that date.

Safeguards consistent with those proposed in relation to the introduction of the general accelerated depreciation arrangements will apply.

Deductions for capital expenditure incurred in the development of a mine or oil field (Clauses 7 and 20 to 40)

The Bill will amend the deduction arrangements for eligible capital expenditures incurred in developing a mining property or oil field. At present, deductions are available on a diminishing value basis calculated by reference to the lesser of 10 years or the estimated life of the mine or field.

For allowable capital expenditure incurred after 19 July 1982 (unless incurred under a contract entered into on or before that date or, in respect of property constructed by the taxpayer, where construction commenced on or before that date) the deductions will be allowable by reference to the same maximum statutory life of 10 years, but calculated instead on a straight line basis. Under these arrangements one-tenth of the eligible development expenditure incurred in a year of income will be deductible in that year and in each of the nine succeeding years of income. If the mine has a shorter life, the period of deduction will be based on that shorter life. Development expenditures which cannot be written-off on this basis because of an insufficiency of income will, consistent with the existing deduction arrangements, be carried forward indefinitely for write-off against income of future years.

Deductions for capital investment in qualifying Australian films (Clauses 3, 5, 9, 16, 41 to 53, 60 and 66)

Existing income tax concessions for investment in Australian films authorise the deduction of 150 per cent of capital expenditure in the production of a qualifying film where that expenditure results in the acquisition of the initial copyright, and the exemption from tax of an investor's net earnings from the film of up to 50 per cent of his or her qualifying investment. The 150 per cent deduction presently becomes available after the investor becomes the owner of an interest in the initial copyright and uses that interest for income producing purposes.

Under amendments proposed by the Bill, the 150 per cent deduction is to be available in the income year in which the eligible expenditure is made.

The deduction will be conditional on the investor becoming the first owner of an interest in the copyright in the completed film and using that interest for income producing purposes within two years from the close of the financial year in which moneys are first expended in, or contributed towards, the production of the film.

The availability of deductions in the year of expenditure for investors who expend capital moneys by way of contribution towards the production of the film will be subject to the additional requirements that -

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a production agreement securing all funds necessary for the production of the film is entered into by the close of the financial year in which moneys are first expended in, or contributed towards, the production of the film;

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moneys contributed towards the production are held in a non-interest bearing account opened in relation to the film in the Australian Film Industry Trust Fund that is to be administered by the Department of Home Affairs and Environment; and

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a declaration - designed broadly to evidence compliance with the eligibility requirements - in relation to the film is lodged by an appropriate person (generally the producer) within 1 month after the end of the financial year in which capital moneys are first expended by way of contribution to the cost of producing the film.

Arrangements for the establishment of the Australian Film Industry Trust Fund are currently being made and the requirement that contributions be deposited in an account in the Fund opened in relation to the film will apply in relation to all contributions made on or after 1 July 1983. In addition, the unexpended portion of contributions qualifying for the extended completion and use time limit that are made before that date will be required to be transferred to that account by 1 July 1983.

Payments out of an account opened in the Trust Fund are to be made only for the purposes of expenditure in the production of the film to which the account relates or by way of refund to contributors. In the event of a refund being made, special withholding tax arrangements will apply. Under these, an amount equal to 90 per cent (69 per cent in the case of a corporate investor) of the amount of the refund is to be deducted upon withdrawal from the account and remitted to the Commissioner of Taxation with appropriate notification. Amounts withheld under these arrangements will be applied against tax due on the amended assessment withdrawing the 150 per cent deduction previously claimed in respect of the excess contribution. Special withholding tax arrangements will also apply in the event that amounts are expended from the film account for ineligible purposes. Procedural and penalty provisions will apply for the purposes of the operation of the withholding tax arrangements, consistent with existing withholding provisions of the income tax law.

The revised basis of deduction will apply with respect to eligible expenditure incurred by an investor under a contract entered into on or after 13 January 1983. Subject to the change in timing of deductions, the general eligibility requirements embodied in the present law will continue to apply.

Deductions for capital expenditure on certain income producing buildings (Clauses 9 and 54)

It is proposed to introduce a system of income tax deductions for capital expenditure on the construction of new non-residential buildings used for the purpose of producing assessable income, where construction of the building commenced after 19 July 1982. Capital expenditure on building extensions or alterations will qualify on a similar basis.

Buildings used for the provision of residential accommodation, including hotels, motels, guest houses and apartment buildings, etc., used for the provision of traveller accommodation will not be eligible under the new scheme. Traveller accommodation buildings may, however, qualify for deduction under the existing traveller accommodation depreciation arrangements where the general eligibility requirements of that scheme, including the requirement that at least ten guest rooms are provided, are met.

The deductions will be available on the same general basis as that presently applying for eligible traveller accommodation buildings. Fixed annual deductions of 2 1/2 per cent of the construction cost (i.e., amortized over 40 years) will be allowed to the extent to which the qualifying building, extension or alteration is used for eligible income producing purposes during that period.

The construction cost of a building, extension or alteration for the purposes of the scheme would include such preliminary expenses as architects fees and engineering fees and the cost of foundation excavation. (Costs of demolishing a building in order to build an eligible building on the site will not qualify.)

Buildings which, when constructed, qualify for deduction under existing provisions of the law (e.g., buildings that qualify as allowable capital expenditure under the special provisions applicable to mining infrastructure and scientific research buildings) will continue to qualify under the existing deduction arrangements. Similarly, the cost of plant contained in a building (e.g., lifts and air-conditioning plant) that is depreciable under the general depreciation provisions of the income tax law will continue to attract deductions under those provisions. Once a building qualifies for deduction under the new scheme it will continue to be depreciable on that basis for so long as it is used for eligible income-producing purposes.

The statutory 2 1/2 per cent deduction will generally be allowable in the first instance to the person who first owns the building, incurs the construction costs and uses the building for income-producing purposes. However, a lessee will be entitled to deductions where he or she incurs eligible construction costs. Where the ownership of, or a lease over, a building changes hands, entitlement to deductions will generally pass to the new owner from the person previously entitled to them. Deductions will also be allowable where parts of a building are owned or leased by different persons.

Where an eligible building is demolished or destroyed within the statutory 40 year period, a balancing deduction will be allowed in appropriate circumstances where the written down value (residual value) of the building exceeds any insurance or salvage recoveries.

Tax liability of the trustee of a trust estate with non-resident beneficiaries (Clauses 17, 18, 19 and 67)

The Bill will give effect to a proposal to facilitate the collection of tax payable by non-residents. The proposed amendments will operate so that, broadly, the trustee of a trust estate will be primarily responsible for payment of tax on trust income to which a non-resident beneficiary is presently entitled.

Under the existing law, the share of trust income to which a beneficiary who is not under a legal disability (e.g. infancy) is presently entitled is included in that beneficiary's assessable income and tax is assessed to and payable by the beneficiary. Where the beneficiary is under a legal disability, the trustee is assessed on the beneficiary's behalf.

With a view to overcoming problems that exist with the collection of tax payable by a beneficiary who does not reside in Australia, the amendments proposed will, where the beneficiary is a non-resident at the end of the year of income, transfer primary liability for payment of the tax to the trustee, acting on behalf of the beneficiary. However, the non-resident beneficiary may also be assessed in respect of the trust income, with a credit being allowed, against the tax payable by the beneficiary, for the tax paid by the trustee. If the tax paid by the trustee exceeds that payable by the beneficiary, the excess will be refunded.

The proposed amendments are only to apply to trust distributions that are made on or after 18 May 1983, the date of introduction of the Bill.

Interest on overpaid amounts of taxation (Clause 4)

An amendment to section 26 of the Principal Act is proposed to provide that interest paid by the Commissioner of Taxation in respect of certain refunds of tax made as a result of a successful objection or appeal by a taxpayer against an assessment or other decision of the Commissioner will be subject to income tax. Under the proposed Taxation (Interest on Overpayments) Act 1983 the Commissioner, as from 14 February 1983, will be authorised to pay interest on overpaid amounts of tax that are refunded to, or applied against any other tax liability of, a taxpayer in circumstances where the overpayment results from an objection or appeal decided in favour of a taxpayer. Interest received or applied in these circumstances will be subject to income tax in the year of income it is received or applied.

Income Tax (Rates) Amendment Bill 1983

The Income Tax (Rates) Act 1982, which is to be amended by this Bill, declares the rates of tax for individuals and trustees (who generally pay tax at individual rates) for the 1982-83 and subsequent financial years. The rate of tax payable by a trustee taxed on behalf of a non-resident company beneficiary under proposed amendments to the Income Tax Assessment Act 1936 is to be the general company rate of 46 per cent and is to be declared and imposed by the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1982, as proposed to be amended by the accompanying Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1983.

This Bill will therefore provide that the Income Tax (Rates) Act 1982 is not to apply where a trustee is taxed on behalf of a non-resident company beneficiary.

Income Tax (Individuals) Amendment Bill 1983

The amendment to the Income Tax (Individuals) Act 1982 proposed by this Bill is similar in effect to the amendment to the Income Tax (Rates) Act 1982 proposed by the accompanying Income Tax (Rates) Amendment Bill 1983.

The Income (Individuals) Act 1982 formally imposes tax payable for the 1982-83 financial year and, until the Parliament otherwise provides, for the next succeeding financial year by individuals, and trustees generally, at the rates declared by the Income Tax (Rates) Act 1982. The latter Act is to be amended to exclude from its scope a trustee taxed on behalf of a non-resident company and it is proposed that the Income Tax (Individuals) Act 1982 be similarly amended. The amendment proposed by this Bill will achieve that result.

Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1983

The Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1982 declares and imposes the rates of tax payable for the 1982-83 financial year and, until the Parliament otherwise provides, for the 1983-84 financial year by companies, trustees of corporate unit trusts and trustees of superannuation funds. The amendment proposed by this Bill will extend the operation of the Act so that it also declares and imposes the rate of tax payable by a trustee of a trust estate who is taxed on behalf of a non-resident company beneficiary under proposed amendments to the Income Tax Assessment Act 1936. That rate will be 46 per cent, the rate applicable to companies generally.

Income Tax (Payments for Work) (Consequential Amendments) Bill 1983

This Bill will amend the Bankruptcy Act 1966 and the Crown Debts (Priority) Act 1981 to provide that a debt payable to the Commissioner under proposed Division 3A of Part VI of the Income Tax Assessment Act 1936 (clause 65 of Income Tax Assessment Amendment Bill 1983) will have the same priority as tax instalment deductions under the PAYE provisions of the income tax law over other debts payable by a trustee of a bankrupt estate or the liquidator of a company.

More detailed explanations of each of the provisions of the Bills are contained in the notes that follow.

Notes on Clauses

INCOME TAX ASSESSMENT AMENDMENT BILL 1983

Clause 1: Short title, etc.

By sub-clause (1) of this clause the amending Act is to be cited as the Income Tax Assessment Act 1983.

Sub-clause (2) facilitates references to the Income Tax Assessment Amendment Act 1936 which, in the Bill, is referred to as "the Principal Act".

Clause 2: Commencement

But for this clause, the amending Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent. Subject to the operation of sub-clause (2), the amending Act is, by virtue of sub-clause (1), to come into operation on the twenty-eighth day after the date of Assent. Sub-clause (2) will ensure that the amendment proposed by clause 4, which is consequential on the operation of the Taxation (Interest on Overpayments) Act 1983, will come into operation on the date of commencement of that Act.

Clause 3: Exemption of certain film income

Clause 3 proposes an amendment to section 23H of the Principal Act that is consequential on the introduction by proposed new section 124ZAFA (clause 48) of the new basis of deduction for qualifying film investments in lieu of the existing basis of deduction under section 124ZAFA of the Principal Act.

Broadly, section 23H operates to entitle a taxpayer who incurs eligible expenditure in the production of a qualifying Australian film to an exemption of net receipts from the film of up to an amount equal to 50 per cent of his or her deductible capital expenditure on the film. The amendment proposed by clause 3 will ensure that the exemption conferred by section 23H relates similarly to film investments qualifying for deduction under new section 124ZAFA.

Clause 4: Certain items of assessable income

By this clause, section 26 of the Principal Act will be amended to insert a new paragraph - paragraph (jb). Section 26 specifically brings various receipts within the concept of assessable income.

The proposed Taxation (Interest on Overpayments) Act 1983 will authorise the Commissioner of Taxation to pay interest on certain refunds of overpaid tax made as a result of a successful objection or appeal by a taxpayer against an assessment or other decision of the Commissioner. That Act will apply to refunds of income tax (including provisional tax), recoupment tax and bank account debits tax. Interest will also be payable where an amount of tax is, instead of being refunded to a taxpayer, applied by the Commissioner against any other tax liability of the taxpayer.

New paragraph 23(jb) will make it clear that interest payable by the Commissioner under the proposed Taxation (Interest on Overpayments) Act 1983 is to be included in a recipient taxpayer's assessable income in the year of income in which the interest is paid or otherwise applied in meeting a tax liability of the person.

Clause 5: Certain film proceeds included in assessable income

The amendment to section 26AG of the Principal Act proposed by clause 5 is a further amendment consequential on the introduction of the revised basis of deduction for eligible film investments under proposed new section 124AFA (clause 48).

Section 26AG incorporates a code for the assessment of receipts from the use or disposal of a film copyright by a taxpayer whose capital expenditure on the film has qualified for the film investment concessions. The section also applies to identify income of the taxpayer which is to be subject to the exemption of income provided by section 23H of the Principal Act. The amendment proposed by clause 5 will ensure that amount deductible under proposed new section 124ZAFA are taken into account as a qualifying investment for the purposes of the operation of section 26AG.

Clauses 6, 7, 8 and 9 : Current year loss provisions

These clauses propose amendments to the "current year loss" provisions of Subdivision B of Division 2A of Part III of the Principal Act that are consequential on amendments proposed by the Bill.

In broad terms, the current year loss provisions divide an income year int o"relevant periods" that are separated by a "disqualifying event", e.g., on the occurrence of a 50 per cent or greater change in shareholders' dividend, capital or voting rights. A net loss incurred in one relevant period is not to be offset against net income derived during another relevant period of the same year unless the company satisfies a "continuing ownership" test, or the alternative "same business" test.

Clauses 6 and 8 propose amendments that are consequential upon the new section 98A proposed by clause 19. As explained in the notes on that clause, certain non-resident beneficiaries of trust estates who are now assessed in accordance with section 97, are to be assessed by virtue of section 98A.

Clause 6 will amend sub-section 50B(1) of the Principal Act so that the definition of "full-year amount" includes a reference to section 98A as well as the existing reference to section 97. The effect of the amendment is to ensure that the definition of full-year amount will retain its former scope, following the changes proposed to section 97 by which certain income included in the assessable income of non-resident beneficiaries under section 97 will in future be included in their income under section 98A.

Clause 8 will effect a similar consequential amendment to paragraph 50E(1) (j) of the Principal Act, to add a reference to section 98A so that the calculation of divisible amounts will continue to take into account amounts included in assessable income under section 98A that would previously have been included under section 97.

Clauses 7 and 9 will ensure that deductions becoming available under the revised bases proposed for plant expenditures (new section 57AL - clause 15), mine or oil field development expenditures (new sub-sections 122DG and 124ADG - clauses 27 and 36) and eligible film investment (new section 124ZAFA - clause 48) are treated, for the purposes of the operation of the current year loss provisions, consistently with the treatment of deductions presently available for those expenditures. Similarly, clause 9 will also ensure that deductions in respect of the construction cost of new non-residential income-producing buildings (new Division 10D - clause 54) are treated consistently with deductions presently available under Division 10C of the Principal Act in respect of the construction cost of eligible traveller accommodation buildings.

Clause 10: Special depreciation on property used for storage of grain, hay or fodder

This clause proposes amendments to section 57AE of the Principal Act to increase from 20 per cent to 33 1/3 per cent the special accelerated rate of depreciation allowable under that section for a structural improvement used, or installed ready for use, for the purpose of storage of grain, hay or fodder in the course of carrying on a business of primary production on land on which the improvement is situated.

Paragraph (a) of clause 10 proposes the omission of paragraph 57AE(2) (a) of the Principal Act and the substitution of a new paragraph 57AE(2) (a), which will increase the rate of depreciation applicable under section 57AE to 33 1/3 per cent with effect for an eligible structural improvement acquired by a taxpayer under a contract entered into after 19 July 1982, The 33 1/3 per cent rate will similarly apply to eligible structural improvements constructed by the taxpayer where construction commenced after 19 July 1982.

Paragraph (b) of clause 10 will omit existing paragraph 57AE(2) (c) of the Principal Act and substitute a new paragraph 57AE(2) (c), consequential on the increase in the applicable rate of depreciation proposed by new paragraph 57AE(2) (a). New paragraph (2)(c) will apply, in conjunction with existing paragraph (2)(b), to ensure that structural improvements depreciable under the new accelerated basis will qualify for deductions equal to 33 1/3 per cent of the cost of the eligible improvement in three annual instalments, commencing with the year of income in which the improvement is first used for the purpose of producing assessable income or is first installed ready for use for that purpose.

Paragraph (c) of clause 10 proposes the insertion of new sub-sections 57AE (4), (5), (6), (7), (8) and (9) in the Principal Act. These sub-sections will insert in section 57AE safeguarding provisions against arrangements involving the substitution of contracts entered into before 20 July 1982 (and equivalent arrangements) in an attempt to gain eligibility for the new 33 1/3 per cent rate. In addition, they will operate to exclude from eligibility for the new rate, an eligible structural improvement that is the subject of a sale and leaseback or similar arrangement in circumstances where the lessee/end-user would have otherwise been depreciating the improvement under previously (lower) applicable rates.

The provisions to be inserted by paragraph (c) apply similarly in relation to the proposed increase in the rate of depreciation applying to certain new primary production plant (clause 13) and plant generally (clause 15) and are explained in more detail in the notes on clause 15.

Clause 11: Limit on cost price for depreciation of motor vehicles

Clause 11 will amend section 57AF of the Principal Act which limits the cost for income tax depreciation purposes of certain motor vehicles. The amendment is consequential on a change made in the basis of calculation of the motor vehicle purchase sub-group of the Consumer Price Index, on which annual changes in the limit are based.

The motor vehicle depreciation limit for 1982-83 income year is $21,547 and, in the terms of section 57AF, the 1983-84 depreciation limit is to be determined by indexing the 1982-83 limit for appropriate price movements. The indexation factor for this purpose is to be ascertained by dividing the sum of the appropriate index numbers in respect of the June 1982 to March 1983 quarters by the sum of the index numbers in respect of the four preceding quarters. The appropriate index number in relation to a quarter is defined in sub-section 57AF(15) of the Principal Act to be the index number for the motor vehicle purchase sub-group of the Consumer Price Index, being the weighted average of the 6 State capital cities, published by the Australian Statistician in respect of that quarter.

With effect form the June 1982 quarter the Statistician has calculated and published the quarterly index numbers as the weighted average of the 8 capital cities, i.e., the 6 State capital cities plus Darwin and Canberra. ACcordingly, sub-clause 11(1) proposes to substitute a reference to "8 capital cities" for a reference to "6 State capital cities" in sub-section 57AF(15). By sub-clause 11(2) the newly based index numbers will be used for the purpose of determining the depreciation limit to apply for the 1983-84 income year, which is required to be published in the Commonwealth Gazette by the Minister for Finance before the commencement of the 1983-84 income year.

Clause 12: Special depreciation on plant

This clause proposes an amendment to section 57AG of the Principal Act that is consequential upon the new section 57A6 proposed by clause 15 to authorise accelerate rates of depreciation for plant generally.

Clause 12 will amend section 57AG of the Principal Act so that plant that qualifies for either of the new accelerated rates authorised by section 57A6 will not also be eligible under section 57AG for the 18 per cent loading applicable to existing general depreciation rates.

Clause 13: Special depreciation on property used for primary production

This clause proposes amendments to section 57AH of the Principal Act to increase from 20 per cent to 33 1/3 per cent the special accelerated rate of depreciation allowable under that section for new plant used, or installed ready for use, wholly and exclusively for the purpose of agricultural or pastoral pursuits, forest operations or fishing operations.

Paragraph (a) of clause 13 proposes the omission of paragraph 57AH(3)(a) of the Principal Act and the substitution of a new paragraph 57AH(3)(a), which will increase the rate of depreciation applicable under section 57AH to 33 1/3 per cent with effect for eligible plant acquired by a taxpayer under a contract entered into after 19 July 1982. The 33 1/3 per cent rate will similarly apply to eligible plant constructed by the taxpayer where construction commenced after that date.

Paragraph (b) of clause 13 will omit existing paragraph 57AH(3)(c) of the Principal Act and substitute a new paragraph 57AH(3)(c), consequential on the increase in the applicable rate of depreciation proposed by new paragraph 57AH(3)(a). New paragraph (3)(c) will apply, in conjunction with existing paragraph 57AH(3)(b), to ensure that plant depreciable under the newly accelerated basis will qualify for deductions equal to 33 1/3 per cent of the cost of the eligible plant three annual instalments, commencing with the year of income in which the plant is first used for the purpose of producing assessable income or is first installed ready for use for that purpose.

Paragraph (c) of clause 13 proposes the insertion of new sub-sections 57AH (8A), (8B), (8C) and D) in the Principal Act which will apply safeguarding arrangements on an equivalent basis to those to apply in relation to the proposed increase in the rate of depreciation applying to structural improvement for the storage of grain, hay or fodder (clause 10) and plant generally (clause 15).

Broadly, the safeguards will apply in relation to arrangements involving the substitution of contracts entered into before 20 July 1982 in an attempt to gain eligibility for the 33 1/3 per cent rate and in relation to arrangements involving the sale and leaseback of plant (and equivalent arrangements) in circumstances where the lessee/end-user would have otherwise been depreciating the plant under previously applicable (lower) rates. The operation of these safeguarding provisions is explained in more detail in the notes on clause 15.

Paragraph (d) of clause 13 proposes amendments to sub-section 57AH(9) of the Principal Act that are consequential on the introduction of the new safeguarding arrangements. The amendments will ensure that a reference to a unit of property in new sub-sections 57AH (8A) to (8D) is to be taken to include a reference to a portion of a unit of property.

Clause 14: Special depreciation on property used for basic iron or steel production

Clause 14 proposes to terminate the operation of section 57AK of the Principal Act consequential on the introduction of a new accelerated basis of depreciation for plant generally under proposed new section 57AL (clause 15).

Section 57AK presently authorises, for certain plant used in the production of basic iron or steel products, accelerated depreciation rates identical to those now proposed to apply under section 57AL for plant generally. The amendment proposed by clause 14 will limit the operation of section 57AK to plant acquired by a taxpayer under a contract entered into before 20 July 1982 and, in the case of plant constructed by the taxpayer, to plant the construction of which commenced before that date. Basic iron or steel production plant acquired under a contract entered into on or after 20 July 1982 or commenced to be constructed by the taxpayer on or after that date will qualify for equivalent accelerated rates under proposed new section 57AL.

Clause 15: Special depreciation on property acquired or constructed after 19 July 1982

This clause proposes to amend the Principal Act to insert new section 57AL to authorise the new general scheme of accelerated depreciation allowances for income tax purposes for new and second-hand plant acquired for use for the purpose of producing assessable income.

Plant eligible under the new provisions will qualify for depreciation on a prime cost basis at a rate of 20 per cent or, where the plant is of a kind that presently qualifies for depreciation at a prime cost rate in excess of 20 per cent (including the special 18 per cent depreciation loading), at a rate of 33 1/3 per cent.

The accelerated rates will be available in respect of eligible plant that is acquired under a contract entered into after 19 July 1982. Eligible plant constructed by the taxpayer will qualify on the same basis where construction commenced after that date.

The new accelerated rates will not apply to motor vehicles of a kind that do not presently qualify under section 57AG of the Principal Act for the 18 per cent depreciation loading (principally cars and station wagons), works of art, structural improvements and plant of a kind presently qualifying for depreciation at a prime cost rate equal to or in excess of 33 1/3 per cent. In addition, taxpayers will be entitled to elect to have normal rates of depreciation, including the 18 per cent loading, apply to individual plant items in lieu of the proposed accelerated rates.

The ordinary income tax rules that apply to general depreciation allowances will remain applicable to eligible plant. Depreciation allowances at accelerated rates will thus become available in the year in which the plant is first used, or installed ready for use and held in reserve. Proportionate allowances will apply where these requirements are not satisfied until part way through the relevant year.

Sub-clause 15(1) will insert in the Principal Act new section 57AL to give effect to the proposed new accelerated rates of depreciation.

Sub-section (1) of section 57AL sets out the general conditions under which the special accelerated rates will apply to a unit of property. Paragraph (a) of that sub-section requires that the relevant plant be a unit of property in respect of which the taxpayer is entitled in the year of income to a depreciation allowance under section 54 in respect of plant which is owned by the taxpayer and which, during the relevant income year, is either used by the taxpayer for the purpose of producing assessable income or is installed ready for use for that purpose and held in reserve.

Paragraph (b) of proposed sub-section 57AL(1) specifies that the special accelerated rates are to apply to a unit of property that is acquired by a taxpayer under a contract entered into after 19 July 1982 or, if the unit was constructed by the taxpayer, where the construction of the unit commenced after 19 July 1982.

Sub-section 57AL(2) specifies certain categories of property that will not qualify for the special accelerated rates under the section. These are -

•

paragraph (a) - motor vehicles (including four wheel drive vehicles) that are:

(i)

motor cars, station wagons, panel vans, utility trucks or similar vehicles;

(ii)

motor cycles and similar vehicles; and

(iii)

any other road vehicle designed to carry a load of less than 1 tonne or fewer than 9 passengers;

•

paragraph (b) - paintings, sculptures, drawings, engravings, or photographs, and articles having a similar use (including reproductions);

•

paragraph (c) - structural improvements;

•

paragraph (d) - primary production plant that qualifies for depreciation under section 57AH of the Principal Act at the increased prime cost rate of 33 1/3 per cent (clause 13) and certain storage facilities for petroleum fuel which are depreciable under section 57AJ of the Principal Act at a prime cost rate of 100 per cent; and

•

paragraph (e) - property of a kind that would otherwise qualify for depreciation at a prime cost rate equal to or in excess of 33 1/3 per cent (after taking into account the special 18 per cent loading).

Sub-section 57AL(3) establishes that the new accelerated basis of depreciation applies (under section 54) in lieu of the basis applicable in accordance with sections 55, 56, 56A and 57 of the Principal Act.

Broadly, the depreciation deductions that are allowable in accordance with those sections are based on rates of depreciation fixed having regard to the estimated effective life of the plant. These rates are then generally increased by 18 per cent by the operation of section 57AG of the Principal Act.

Sub-section 57AL(3) will ensure that depreciation allowable in respect of qualifying plant will be available on the basis of the special accelerated rates proposed by sub-section (4).

Sub-section 57AL(4) authorises the accelerated basis of depreciation that is to apply to qualifying plant.

Eligible plant of a kind that would otherwise qualify for depreciation at a prime cost rate of 20 per cent or less (after taking into account the special 18 per cent loading) will be depreciable at a 20 per cent prime cost rate. Plant in the category that would otherwise be depreciable at a prime cost rate, inclusive of the loading, in excess of 20 per cent will qualify for a 33 1/3 per cent rate of depreciation.

The accelerated rates will apply on a prime cost basis only and, as explained in the notes on clause 12, will not be subject to further increase by the 18 per cent loading applicable to general depreciation rates under section 57AG.

Sub-section 57AL(5) will ensure that, as with general depreciation allowances, depreciation deductions are allowable under new section 57AL on a pro-rata basis in circumstances where the relevant plant is owned and used for the purpose of producing assessable income, or is owned and installed ready for use for that purpose, during a part only of the year of income.

A further effect of sub-section (5) will be to ensure that existing anti-avoidance provisions of sub-section 56(4) of the Principal Act apply similarly to depreciation deductions allowable under new section 57AL. Broadly those provisions operate to counter attempts to inflate the cost of depreciable property and, thus, of depreciation allowances.

Sub-section 57AL(6) is a drafting measure that will ensure that existing provisions of the law relating to the treatment of plant withdrawn from use in mining activities and used instead in other forms of income-producing activities will apply equally with respect to depreciation deductions authorised under section 57AL.

Broadly, sub-sections 122N(2), 123E(2) and 124AN(2) apply where plant that has been subject to deduction under the special deduction provisions of the Principal Act relating to allowable capital expenditure on general mining, transport of minerals and petroleum mining respectively is withdrawn for use in non-mining activities. Where such plant is subsequently used in circumstances that would entitle its owner to ordinary depreciation allowances, those sections ensure that depreciation is calculated by reference to the value of the plant at the time it is withdrawn from mining activities, rather than to its historic cost.

Sub-section 57AL(6) will ensure that the accelerated basis of depreciation authorised by section 57AL will be similarly applied to the value of any plant that is withdrawn from mining activities and comes into use in connection with general income producing activities.

By proposed sub-section 57AL(7) a taxpayer is to be entitled to elect not to have the accelerated rate of depreciation otherwise available under section 57AL apply to particular items of plant. Where such an election is made, the plant will be depreciable at ordinary rates of depreciation (including the 18 per cent loading). Once an election is made a taxpayer will be precluded from subsequently seeking to depreciate the plant at the accelerated rates proposed by the section.

Proposed sub-section 57AL(8) sets out the conditions under which an election authorised by sub-section (7) is to be made. Paragraph (a) requires an election to be made in writing to the Commissioner of Taxation. Such notice must, by virtue of paragraph (b) be lodged with the Commissioner by the date of lodgment of the taxpayer's return of income for the first year in which the accelerated rate would be allowable in respect of the relevant unit. The Commissioner is, however, empowered to extend the time for lodgment of an election.

Proposed new sub-sections 57AL(9) to (14) will insert in section 57AL safeguarding provisions against the substitution of contracts entered into before 20 July 1982 (and equivalent arrangements) in an attempt to gain eligibility for the new 20/33 1/3 per cent rates. In addition, they will operate to exclude from eligibility for the new rates, plant that is made the subject of a sale and leaseback arrangement in circumstances where the lessee would otherwise have been depreciating the plant at existing (lower) rates. This latter exclusion will apply also to "end-user" arrangements, under which plant is sold by a taxpayer to another person subject to a scheme whereby the taxpayer has effective control over the use of the plant in the provision of goods or services to the taxpayer. The safeguards also extend to arrangements involving the use of "substituted plant" in an attempt to circumvent the basic rules.

The basic exclusion rules are contained in proposed new sub-section 57AL(9). That sub-section applies where a taxpayer who before 20 July 1982 was the owner of a unit of property, or had commenced construction of, or entered into a contract or arrangement for the acquisition of, a unit of property enters into a scheme in pursuance of which he or she becomes the owner of the original unit of property in circumstances that would otherwise qualify the taxpayer for the benefit of the new accelerated rates (e.g., by the substitution of new contractual arrangements for the acquisition of the property for the pre-20 July 1982 contract). Where the Commissioner is satisfied that the scheme was entered into with a purpose of obtaining the benefit of the accelerated rates of depreciation, he is empowered to treat the plant, for the purposes of ascertaining any depreciation allowances allowable to the taxpayer, as if it had been acquired in pursuance of a contract entered into at the time when the relevant pre-20 July 1982 acquisition or construction arrangements were entered into. As a consequence, the depreciation rate applicable to plant acquired under a contract entered into at that time would apply in relation to the plant.

Alternatively, where the scheme is such that the taxpayer becomes the lessee or "end-user" of the original property (see notes on new sub-sections (11) and (12)), the Commissioner is empowered to determine the amount of any depreciation allowable to the owner as if that person had acquired the plant in pursuance of a contract entered into at the time when the relevant pre-20 July 1982 acquisition or construction arrangements were entered into by the taxpayer.

Sub-section 57AL(10) will apply to prevent the basic exclusions contained in sub-section 9 being circumvented by the use of "substituted plant".

Thus, in circumstances where the scheme is such that the taxpayer becomes the owner of a unit of property intended by the taxpayer to be in lieu of the unit that was the subject of the pre-20 July 1982 arrangements, sub-section (10) empowers the Commissioner to determine any depreciation allowances allowable to the taxpayer as if the substituted unit had been acquired in pursuance of a contract entered into at the time when the pre-20 July 1982 acquisition or construction arrangements were entered into. Similarly, where the scheme is such that the taxpayer becomes the lessee or end-user of a substituted unit, the Commissioner is empowered to determine the amount of any depreciation allowable to the owner as if that person had acquired the plant in pursuance of a contract entered into at the time when the pre-20 July 1982 acquisition or construction arrangements were entered into by the taxpayer.

Before taking that action, the Commissioner is required to be satisfied, in a case where the scheme was entered into at a time when the taxpayer had yet to become the owner of the original unit, that the taxpayer had entered into the scheme with a purpose of benefiting directly or indirectly (e.g., through lowered lease charges) from the application of the accelerated rates of depreciation to the property. Alternatively, where the scheme was entered into after the time when the taxpayer became the owner of the original unit, the Commissioner is required to be satisfied, in effect, that the scheme was entered into to circumvent the basic exclusion enforced by sub-section (9) (e.g., that the taxpayer entered into an arrangement for the lease of the substituted unit in lieu of the original unit because of the depreciation rate limit on the leaseback of the original unit imposed by sub-section (9)).

Sub-section 57AL(11) specifies for the purposes of the operation of the exclusions embodies in sub-sections (9) and (10), circumstances in which a taxpayer will be taken to be the end-user of a unit of property. These are where, as part of a scheme to which the taxpayer is a party, there exists a combination of two factors. The first of these is that the unit of property is owned by a person other than the taxpayer and used wholly or principally in connection with the production or supply of goods to the taxpayer or the provision of services to the taxpayer (paragraph (11)(a)). The second is that the taxpayer is able to control directly or indirectly the use of the property in the production or supply of those goods or the provision of those services (paragraph (11)(b)).

Sub-section 57AL(12) defines terms used for the purposes of the safeguarding provisions:

"goods"

is defined to include anything capable of being owned or used;

"lease"

is defined in relation to a unit of property to include any scheme (other than a hire-purchase agreement) under which a right to use the property is granted by the owner to another person or by a person to whom such rights are granted, to another person;

"person"

is defined to include a partnership and a person in the capacity of a trustee of a trust estate; and

"scheme"

is given an extended meaning common to other safeguarding provisions so as to include any agreement, arrangement, understanding, promise or undertaking, or any scheme, plan, proposal, action, course of action or course of conduct.

Sub-section 57AL(13) is a drafting measure under which, in applying sub-sections (9), (10), (11) or (12), a reference to a unit of property is to be taken to include a reference to a portion of a unit of property.

Sub-section 57AL(14) is a further drafting measure to ensure that a reference in section 57AL to the acquisition of property by a taxpayer is to be taken to include a reference to the construction of the property for the taxpayer by someone else.

Clause 16: Film Losses

Clause 16 proposes an amendment to section 80AAA of the Principal Act that is consequential on the introduction by proposed new section 124ZAFA (clause 48) of the new basis of deduction for qualifying film investments, in lieu of the existing basis of deduction under section 124ZAF of the Principal Act.

Section 80AAA contains a code for the deduction of film losses of a previous year. The broad effect of section 80AAA is that a film loss is available for deduction in any of the next succeeding 7 income years, but only against film income, i.e., income to which section 26AG of the Principal Act applies (see notes on clause 4). The amendment proposed by clause 16 will ensure that, in calculating the amount of any film loss, deductions available under the new section 124ZAFA are taken into account in the same way as film deductions presently available under section 124ZAF of the Principal Act.

Clause 17: Beneficiary not under any legal disability

This clause proposes the amendment of section 97 of the Principal Act to, in broad terms, exclude from assessment in the hands of a beneficiary under that section, certain trust income to which non-resident beneficiaries are, or are deemed to be, presently entitled. The income so excluded will instead first be taxed in the hands of the trustee of the trust estate, and then, in accordance with proposed section 98A (clause 19), be taxed to the beneficiary subject to adjustment for the tax paid by the trustee.

Broadly, sub-section 97(1) requires that, where a beneficiary who is not under a legal disability is presently entitled to a share of trust income, the beneficiary is to be directly liable for tax in respect of that share of the trust's net income. However, by virtue of sub-section 97(2), a beneficiary is not taxed directly under sub-section 97(1) on trust income in which a beneficiary who is a natural person (other than a beneficiary in the capacity of trustee of another trust estate or a beneficiary who has made, or is deemed to have made, an income equalisation deposit) has a vested and indefeasible interest and in respect of which the beneficiary is deemed, by sub-section 95A(2), to be presently entitled. The income so excluded from the application of sub-section 97(1) is instead taxed in the hands of the trustee under sub-section 98(2) of the Principal Act.

Although sub-section 97(1), where it applies, imposes a liability for tax on a non-resident beneficiary, difficulties can be encountered in collecting the tax involved. The need to overcome these difficulties became more important following the withdrawal, last year, from non-residents generally of the benefit of the zero rate step in the income tax rate scale, at which time a strengthening of collection arrangements was foreshadowed. The amendments proposed by clauses 17-19 are intended to achieve that result by imposing tax on the trustee first and the beneficiary second, with a credit and/or refund being available to the beneficiary in respect of tax paid by the trustee.

Clause 17 will substitute a new sub-section 97(2) in the Principal Act and add a further sub-section, sub-section 97(3). Proposed new sub-section 97(2) will have a two-fold effect. By paragraph (a) it will exclude from the operation of sub-section 97(1) trust income excluded by virtue of the omitted sub-section 97(2), where the beneficiary in question is a resident at the end of the year of income.

Proposed new sub-section 97(2) will also exclude from the operation of sub-section 97(1) trust income to which a beneficiary described in paragraph (b) of the new sub-section is presently entitled. Such a beneficiary is one who is a non-resident at the end of the year of income, other than -

•

a beneficiary to whom new sub-section 97(3) applies - that is, a tax-exempt beneficiary (see the following notes);

•

a beneficiary to whom sub-section 97A(1) or (1A) applies - that is, one who has made, or is deemed to have made, an income equalisation deposit; or

•

a beneficiary who is, in respect of the particular income, a beneficiary in the capacity of trustee of another trust estate.

Where all of the conditions set out in paragraph (a) of new sub-section 97(2) apply, the trust income in question will continue to be taxed to the trustee under existing sub-section 98(2). Where all of the paragraph (b) conditions are met, the relevant trust income will be taxed to the trustee under existing sub-section 98(2) or under new sub-section 98(3) or (4) (see notes on clause 18).

Proposed new sub-section 97(3) will have application for the purpose only of paragraph (b) of new sub-section 97(2). Where a beneficiary is a beneficiary to whom sub-section 97(3) applies, the trust income of that beneficiary will not be affected by the proposal to tax the trust income of a non-resident beneficiary in the hands of the trustee.

This new sub-section will apply only where the beneficiary presently entitled to the trust income is a non-resident body, association, fund or organization to which the exemption provisions of section 23 of the Principal Act apply or is an international organization the income of which is exempt from income tax by virtue of a regulation in force under the International Organizations (Privileges and Immunities) Act 1963.

Trust income to which such non-resident beneficiaries are presently entitled will continue to be exempt from tax.

Clause 18: Liability of Trustee

This clause proposes the amendment of section 98 of the Principal Act to include two new sub-sections. The amendment complements the amendment proposed by clause 17 - that is, to exclude from the operation of sub-section 97(1) of the Principal Act the trust income of certain non-resident beneficiaries. The new sub-sections of section 98 will provide, broadly, that the trustee of a trust estate is to be assessed and liable to pay tax in respect of the relevant share of the trust income to which a beneficiary who is a non-resident at the end of the year of income is presently entitled.

Proposed new sub-section 98(3) will apply where the beneficiary is a company and is also a beneficiary as described in paragraph (b) of proposed new sub-section 97(2) (see clause 17) - that is, where the beneficiary is a company and -

•

is not, in respect of the particular income, a beneficiary in the capacity of trustee of another trust estate (paragraph (a) of proposed new sub-section 98(3));

•

is a non-resident at the end of the year of income (paragraph (b)); and

•

is not -

•

a beneficiary to whom sub-section 97(1A) of the Principal Act applies, that is, one who has made an income equalisation deposit (sub-paragraph (c)(i)); or

•

a body, association, fund or organization referred to in proposed new sub-paragraph 97(3)(c) (i) or (ii), that is, one that is exempt from tax under section 23 of the Principal Act or by virtue of a regulation in force under the International Organizations (Privileges and Immunities) Act 1963 (sub-paragraph (c)(ii)).

If any of the above tests are not satisfied, the relevant trust income will continue to be taxed to the company beneficiary under section 97 of the Principal Act. Where all the tests are satisfied, the trustee will be assessed and liable to pay tax, under new sub-section 98(3), on behalf of the company beneficiary at the rate declared by the Parliament - proposed to be the current company tax rate of 46 per cent (see notes on the accompanying Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1983).

In keeping with the general principle that a resident is subject to Australian tax on income from all sources, while a non-resident is so subject only on Australian source income, the trustee will be taxed under new sub-section 98(3) in respect of the trust income from any source that is attributable to a period when the company beneficiary was a resident (paragraph (d)), as well as the trust income from Australian sources that is attributable to a period when the company beneficiary was a non-resident (paragraph (e)).

Subject to the tests provided, proposed new sub-section 98(4) will apply where the beneficiary is an individual. It is the counterpart of new sub-section 98(3), which will apply where the beneficiary is a company, and the tests provided are similar to those contained in that sub-section. There is, however, an additional test in new sub-section 98(4) to the effect that the sub-section will not apply where existing sub-section 98(1) or (2) applies in respect of any part of the particular share of trust income. That is, where a trustee is taxed under sub-section 98(1) (on behalf of a non-resident beneficiary under a legal disability such as infancy), or under sub-section 98(2) (on behalf of a non-resident beneficiary not under a legal disability, who is a natural person and who is deemed to be presently entitled under sub-section 95A(2) to a share of trust income), the trustee will not also be taxed in respect of the same income under new sub-section 98(4).

The proposed new sub-section will thus apply where the beneficiary presently entitled (or deemed to be presently entitled under sub-section 95A(2)) to the trust income is not a company and -

•

is not, in respect of the income, a beneficiary in the capacity of trustee of another trust estate (sub-paragraph (a)(i));

•

is a non-resident at the end of the year of income (sub-paragraph (a)(ii); and

•

is not a beneficiary to whom sub-section 97A(1) or (1A) applies, that is, one who has made, or is deemed to have made, an income equalisation deposit (sub-paragraph (a)(iii), and

where the trustee is not taxed on any part of the particular share of trust income under sub-section 98(1) or (2) of the Principal Act (paragraph (b)).

If any of the above noted tests in proposed new paragraph 98(4)(a) are not satisfied, the relevant trust income will continue to be taxed to the beneficiary under section 97 of the Principal Act and, if the test in new paragraph 98(4)(b) is not satisfied, existing sub-section 98(1) or (2) only will apply in respect of the relevant trust income.

If all of the above tests are satisfied, the trustee will be taxed on behalf of the beneficiary in respect of the trust income from any source that is attributable to a period when the beneficiary was a resident (paragraph 98(4)(c)) and in respect of the trust income from Australian sources that is attributable to a period when the beneficiary was a non-resident (paragraph 98(4)(d)). The trustee will be so taxed at the rates of tax applicable to individuals, so that if the beneficiary were a resident at any time during the relevant year of income the trustee would, in accordance with the Income Tax (Rates) Act 1982, be taxed at the rates applicable to residents (see the notes on the accompanying Income Tax (Rates) Amendment Bill 1983).

Clause 19: Non-resident beneficiaries assessable in respect of certain income

By this clause, it is proposed to insert a new section 98A in the Principal Act to provide for a non-resident beneficiary, on whose behalf a trustee has been taxed under new sub-section 98(3) or (4), to be also taxed on the particular trust income - with an appropriate credit being allowed for the tax paid by the trustee. The proposed new section will also provide for a refund of any excess of the tax paid by the trustee over that assessed to the beneficiary.

Proposed new sub-section 98A(1) will apply where the trustee is taxed under new sub-section 98(3) on behalf of a company beneficiary. Apart from providing the means by which recourse could be had to the beneficiary if the tax could not be collected from the trustee, this will ensure that those existing provisions of the income tax law that have particular application to companies are not affected by the proposed changes.

The new sub-section will also apply where the trustee is taxed under new sub-section 98(4) on behalf of an individual beneficiary. Apart from providing a means of second recourse in respect of the tax involved, this will ensure, on one hand, that an individual beneficiary's total income is brought to account and the tax calculated accordingly and, on the other hand, that the beneficiary is not disadvantaged in relation to any deduction and/or rebate from which he or she would have benefited if he or she continued to be taxed directly under section 97, and which will not be allowable in the assessment on the trustee under sub-section 98(4).

An example of the application of new sub-section 98A(1) in the latter regard would be where a beneficiary has a carried forward loss from a previous year to be allowed as a deduction against the trust income. Another example would be where the trust income in question is from primary production activities. In such a case, any averaging rebate of tax in respect of the primary production income will not be allowed to the trustee but will, by the operation of sub-section 98A(1), be allowed to the beneficiary.

Where the proposed new sub-section applies, the beneficiary will be taxed on the trust income from any source that is attributable to any period when the beneficiary was a resident (paragraph (a)) and on that income from Australian sources that is attributable to a period when he or she was a non-resident (paragraph (b)).

Proposed new sub-section 98A(2) will provide that where sub-section 98A(1) applies - that is, where a trustee is taxed under sub-section 98(3) or (4) and the beneficiary also is taxed under sub-section 98A(1) - the tax paid by the trustee is to be offset against that assessed to the beneficiary.

By paragraph (a) of the new sub-section, the tax paid by the trustee (in terms of new sub-section 98(3) or (4)) on behalf of the beneficiary will be deducted from the tax assessed to the beneficiary in respect of his total income. Paragraph (b) provides that, where the tax so paid by the trustee exceeds that so assessed to the beneficiary, the excess will be refunded to the beneficiary.

Clauses 20 to 40 : Deductions in respect of capital expenditure incurred in the development of a mining property or oil field

Introductory note

Deductions in relation to eligible capital expenditure incurred in connection with the development of a mining property or an oil or natural gas field and in carrying on general mining or petroleum mining operations in Australia are available under Divisions 10 and 10AA of the Principal Act.

The amendments to be made to Divisions 10 and 10AA by these clauses will not disturb the classes of capital expenditure which may qualify for deduction. Their purpose is to change the method of calculating the deduction for eligible expenditure that is incurred after 19 July 1982 (otherwise than under a contract entered into on or before that date or in respect of property that the taxpayer commenced to construct on or before that date).

Deductions in respect of allowable capital expenditure are at present available on a diminishing balance basis calculated by dividing the undeducted balance of the allowable capital expenditure (the residual capital expenditure) as at the end of the year of income by the lesser of 10 years (in respect of expenditure incurred after 18 August 1981) or the estimated remaining life of the mine or oil field.

Under the new basis of deduction that is to be given effect by the amendments proposed by these clauses, allowable capital expenditure is to continue to be deductible by reference to the lesser of 10 years or the life of the mine or field, but on a "straight line" basis.

The general effect of the new arrangements will be that allowable capital expenditure incurred in a year of income will be deductible in 10 equal instalments in succeeding years of income, commencing with the year of income in which the expenditure was incurred. Where the estimated number of years of life of the mine or field at the end of the year of income in which the expenditure was incurred is less than 10 years, deductions will be available in equal instalments determined by reference to that lesser number of years. Deduction entitlements arising under these arrangements which cannot be written-off in any year of income because of an insufficiency of assessable income are to be carried-forward for deduction in future years without being subject to the general 7 year limit on carry-forward losses.

Amendments proposed by these clauses will also correct certain technical deficiencies that have occurred as a consequence of amendments to give effect to previous changes in the basis of deduction for allowable capital expenditures.

The amendments proposed by clauses 20 to 28 relate to Division 10, which is concerned with mining operations other than for petroleum, and the amendments proposed by clauses 30 to 40 relate to Division 10AA, which is concerned with petroleum (oil and gas) mining operations. Clause 29 will correct a minor drafting error in section 123BB in Division 10AAA, which authorises deductions relating to the cost of capital expenditure on certain mineral transport facilities.

Clause 20: Purchase of mining or prospecting right or information

The amendments proposed by clause 20 are consequential in part upon the proposed introduction of the new basis of deduction under new section 122DG (clause 27) and in part upon amendments made in 1981 that increased the statutory maximum life of a mine from 5 to 6 years for post 30 April 1981 capital expenditure and then from 6 to 10 years for post 18 August 1981 capital expenditure.

Section 122B of the Principal Act enables the purchaser of a mining or prospecting right or mining or prospecting information to include expenditure incurred in acquiring that right or information in the purchaser's allowable capital expenditure. Sub-section 122B(2) limits the maximum deduction entitlement that may be transferred to the purchaser to the undeducted balance of the vendor's expenditure in relation to the mining or prospecting area.

When the law was amended to increase the maximum life of mine from 5 to 6 years (by the Income Tax (Assessment and Rates) Amendment Act 1981) and from 6 to 10 years (by the Income Tax Laws Amendment Act (No.3) 1981), certain consequential amendments to sub-section 122B(2) - to permit the transfer from vendor to purchaser of any undeducted balance in the two new pools of residual capital expenditure created by those amendments - that would have maintained existing policy were not made.

That omission is being remedied by the insertion by sub-clause 20(1) of proposed new paragraph 122B(2)(a). Paragraph 122B(2)(a) will authorise the purchaser of a mining or prospecting right or information to include in his allowable capital expenditure the amount that would have been included in the vendor's residual (1 May 1981 to 18 August 1981) capital expenditure or the vendor's residual (19 August 1981 to 19 July 1982) capital expenditure at the end of the year of income during which the transaction occurred (sub-paragraph 122B(2)(a)(i).

Consequent upon the introduction of the further revised basis of deduction by new section 122DG, sub-paragraph 122B(2)(a)(ii) will likewise authorise the transfer to a purchaser of the undeducted balance of a vendor's entitlement ot deductions under section 122DG in respect of allowable (post 19 July 1982) capital expenditure that relates to a mining or prospecting right or information.

To ensure that the remedial aspects of sub-clause 20(1) apply from the time when the 1981 amendments first came into force, sub-clause 20(2) proposes that the amendments made by sub-clause (1) apply to assessments in relation to the year of income that commenced on 1 July 1980 and all subsequent years of income.

Clause 21: Deduction of residual previous capital expenditure

This clause will amend sub-section 122D(3) of the Principal Act in consequence of the insertion of new section 122DG by clause 27.

Under sub-section 122D(3), unless the taxpayer elects otherwise, a deduction under section 122D is limited to the amount of assessable income remaining after taking into account all other deductions except the deductions under sections 122DB, 122DD, 122DF and 122J and those under section 122D. Briefly, section 122D provides the basis for deductions in respect of eligible capital expenditure incurred after 17 August 1976; section 122DB provides for deductions in respect of eligible capital expenditure incurred after 17 August 1976 and on or before 30 April 1981; section 122DD provides for deductions in respect of eligible capital expenditure incurred after 30 April 1981 and on or before 18 August 1981; section 122DF provides for deductions in respect of eligible capital expenditure incurred after 18 August 1981 and section 122J provides for deductions in respect of prospecting and exploration expenditure.

The purpose of sub-section 122D(3) is to ensure that a taxpayer is not deprived of an effective deduction for allowable capital expenditure by reason of section 80 of the Principal Act, which limits the carry-forward of losses to a period of 7 years. In the absence of the sub-section this could happen if the taxpayer did not derive income, within the next 7 years after incurring the expenditure, sufficient to absorb the full amount of the expenditure. Accordingly, any amounts prevented from being deducted by the rule embodied in sub-section 122D(3) are retained in the pool of residual previous capital expenditure for deduction in subsequent years of income.

By clause 21 deductions under new section 122DG will be grouped with the deductions under sections 122D, 122DB, 122DD, 122DF and 122J that are in the absence of a contrary election by the taxpayer excluded from the calculation of the amount available for deduction. Another effect of the clause is to establish an order of deduction (essentially first-in-first-out) in respect of the various pools of expenditure. These arrangements will ensure that deductions attributable to the various pools are applied seriatim in determining the extent to which there is assessable income available in a year of income to absorb the particular deduction entitlements.

Clause 22: Deduction of residual capital expenditure

The amendment proposed by clause 22 - to insert a reference to new section 122DG in sub-section 122DB(3) - has a purpose similar to the amendment proposed by clause 21.

Sub-section 122DB(3) is designed to ensure that mining enterprises are not deprived of effective deductions for allowable capital expenditure through the operation of the loss provisions of section 80 of the Principal Act. This is achieved, unless the taxpayer elects otherwise, by limiting the amount of the deduction allowable under section 122DB to the amount of assessable income remaining after taking into account all deductions except those under sections 122DB, 122DD, 122DF and 122J.

As amended, sub-section (3) will require that deductions allowable under new section 122DG also be excluded in calculating the amount of assessable income available to absorb deductions under section 122DB.

Clause 23: Residual (1 May 1981 to 18 August 1981) capital expenditure

This clause corrects a drafting error which occurred when section 122DC was amended by the Income Tax Laws Amendment Act (No. 3) 1981 to increase the maximum statutory life of a mine from 6 to 10 years.

The amendment replaced former paragraphs (a) to (d) of sub-section 122DC(1) by new paragraphs (a) to (f), of which new paragraph (e) re-enacted former paragraph (c). At that time, a consequential amendment to sub-section 122DC(2) - which continues to refer to sub-sub paragraph (ii)(B) of the former paragraph (c) -was not effected. Sub-clause 23(1) proposes to remedy that omission.

The amendment being made by sub-clause 23(1) will, by virtue of sub-clause 23(2), apply from the time the 1981 amendment to section 122DC first came into force, i.e., in relation to assessments for the year of income that commenced on 1 July 1980 and of all subsequent years of income.

Clause 24: Deduction of residual (1 May 1981 to 18 August 1981) capital expenditure

The amendment proposed by this clause, which will insert a reference to new section 122DG in sub-section 122DD(3), has a similar object to the amendments proposed by clauses 21 and 22.

The purpose of sub-section 122DD(3) is to ensure that mining enterprises are not, through the operation of the loss provisions of section 80 of the Principal Act, denied effective deductions for allowable capital expenditure. To this end, the sub-section provides that, unless the taxpayer elects otherwise, the amount of the deduction allowable under section 122DD is limited to the amount of assessable income remaining after taking into account all deductions except the deductions under sections 122DD, 122DF and 122J.

By clause 24 deductions allowable under new section 122DG will also be excluded from the calculation of the amount of assessable income available for deduction under section 122DD.

Clause 25: Residual (19 August 1981 to 19 July 1982) capital expenditure

This clause will amend section 122DE by inserting a new sub-section (1) and making a consequential amendment to sub-section (2).

Existing section 122DE provides the basis for determining the amount of residual (post 18 August 1981) capital expenditure of a taxpayer as at the end of a year of income. In broad terms, the residual (post 18 August 1981) capital expenditure is so much of the allowable capital expenditure incurred by a taxpayer after 18 August 1981 (not being expenditure that was incurred under a contract entered into on or before that date, or in relation to the construction of property by the taxpayer where the construction was commenced on or before that date) and before the end of the year of income as has not been allowed as a deduction in a previous year of income. The amount so determined is deductible on the basis provided in section 122DF.

New sub-section 122DE(1) is substantially a restatement of the existing sub-section except that expenditure incurred after 19 July 1982 is to be excluded from the scope of the relevant expenditure pool unless the expenditure was incurred under a contract entered into on or before that date or, in relation to the construction of property by the taxpayer, the construction was commenced on or before that date. ACcordingly, the relevant expenditure pool now referred to as "residual (post 18 August 1981) capital expenditure" is to be restyled "residual (19 August 1981 to 19 July 1982) capital expenditure". In all other respects the calculation of residual (19 August 1981 to 19 July 1982) capital expenditure under sub-section 122DE(1) equates with that of the existing sub-section (1).

Existing sub-section 122DE(2) applies in relation to expenditure on property which has been excluded from allowable capital expenditure (because the property has ceased to be used by the taxpayer for prescribed purposes) but commences to be used again after 18 August 1981 for purposes for which allowable capital expenditure may be incurred. In these circumstances, so much of the expenditure incurred after 17 August 1976 and before the termination of use as the Commissioner of Taxation determines is to be deemed, for the purposes of section 122De, to have been incurred by the taxpayer for relevant purposes on the day on which its use for those purposes recommenced.

Sub-section (2) as amended will operate in a similar fashion to the existing sub-section in relation to expenditure incurred after 17 August 1976 on property, the use of which by the taxpayer for prescribed purposes has ceased, but will be confined to cases where the recommencement of use for eligible purposes occurred after 18 August 1981 and on or before 19 July 1982.

Clause 26: Deduction of residual (19 August 1981 to 19 July 1982) capital expenditure

Clause 26 proposes two amendments to section 122DF that will leave the operation of the section undisturbed other than to effectively restrict its application to allowable capital expenditure incurred after 18 August 1981 and on or before 19 July 1982.

Consequent upon the insertion of new section 122DG by clause 27, the title of the capital expenditure pool to which section 122DF relates will, by paragraph (a) of clause 26, change from "residual (post 18 August 1981) capital expenditure" to "residual (19 August 1981 to 19 July 1982) capital expenditure" to reflect the new qualifying expenditure termination date.

Paragraph (b) of clause 26 will amend sub-section 122DF(3) which, like its counterparts sub-sections 122D(3), 122DB(3), and 122DD(3), is to operate so that a taxpayer does not lose a deduction allowable under section 124ADF by reason of the limit of 7 years, under section 80, on the carry-forward of losses. By paragraph (b), a deduction allowable under the new section 122DG, together with deductions allowable under sections 122DF and 122DJ, will be excluded in calculating the amount available for deduction under section 122DF, in the absence of a contrary election by a taxpayer.

Clause 27: Deduction of allowable (post 19 July 1982) capital expenditure

By this clause new section 122DG is to be inserted into the Principal Act to introduce the new "straight line" basis of deduction for allowable capital expenditure incurred after 19 July 1982 (otherwise than under a contract entered into on or before that date or in respect of property which the taxpayer commenced to construct on or after that date).

The broad operation of new section 122DG may be illustrated in a case where the amount of allowable (post 19 July 1982) capital expenditure incurred by a taxpayer in a year of income is $1000. In this case a deduction equal to one-tenth of that amount (i.e., $100) would be an allowable deduction in the year of expenditure. In the subsequent year, the deduction is to be calculated by dividing the "unrecouped" amount of that expenditure (i.e., the original $1000 less the $100 deduction allowed in the preceding year) by the number of years remaining for deduction, i.e., nine. Thus, the deduction allowable in year two is similarly $100. This process continues until, after ten years, the original amount has been fully written-off in equal instalments.

In a case where the remaining life of the mine as at the end of a year of income is less than the dividing factor determined under the above rule, deductions are to be determined by reference to the life of the mine. If, in the above basic example, it were estimated that the remaining life of the mine at the end of the year of income immediately succeeding the year of expenditure was only two years, the unrecouped expenditure of $900 would be allowable in two equal instalments of $450 in each of the year succeeding the year of expenditure and the subsequent income year.

In the event that there is insufficient assessable income (after taking into account deductions available in respect of previous pools of allowable capital expenditure) the undeducted entitlement is carried forward to the next succeeding income year as an amount deductible under section 122DG, subject again to there being sufficient income to absorb the deduction. Thus, if in the above basic example, there was only $50 of remaining assessable income in the year of expenditure, $50 of the $100 deduction entitlement would be written-off against the remaining income and the $50 undeducted would be carried forward as a separate deduction available under section 122DG. In this case the "unrecouped" amount of the original expenditure would be determined as if the full $100 deduction had been allowed and future deduction entitlements in respect of the original expenditure would be determined on the basis outlined in the example.

If property in respect of which an amount of allowable (post 19 July 1982) capital expenditure was incurred is disposed of lost or destroyed or its use is otherwise terminated the amount of the expenditure attributable to the property that has not been deducted in a year prior to the year of disposal, etc., is deducted from the amount of the unrecouped expenditure. For this purpose it is assumed that deductions have been allowed in full in preceding years, i.e., that there has been sufficient income to absorb the deductions. In the event that amounts have not, in fact, been deducted because of insufficiency of income, any deduction entitlements for those amounts that would otherwise have been carried forward for deduction in the year of disposal, etc., or a future year of income under the rule outlined in the preceding paragraph will be withdrawn. The broad effect of the arrangement is, consistent with those applying under the existing deduction arrangements, to prevent any undeducted amounts of allowable (post 19 July 1982) capital expenditure that is attributable to property that is disposed of, etc., being available for deduction in the year of disposal (or in a subsequent year as necessary).

Similar adjustments will apply in relation to undeducted amounts of allowable (post 19 July 1982) capital expenditure that is the subject of a notice lodged under section 122B (see notes on clause 20).

Against that background, notes on the individual provisions of new sub-section 122DG follow.

Section 122DG : Deduction of allowable (post 19 July 1982) capital expenditure

Sub-section 122DG(1) defines "allowable (post 19 July 1982) capital expenditure" to mean, in relation to a taxpayer, allowable capital expenditure incurred after 19 July 1982, other than expenditure incurred under a contract entered into on or before that date or incurred in respect of the construction of property by the taxpayer where the construction commenced on or before that date. In the latter cases, the provisions of section 122DE will continue to apply (see clause 25).

Sub-section 122DG(2) formally authorises the allowance of deductions for the allowable (post 19 July 1982) capital expenditure incurred by a taxpayer in a year of income in respect of that year and in respect of subsequent years of income.

By sub-section 122DG(3), the deduction allowable in respect of a year of income is to be determined by dividing the amount of the allowable (post 19 July 1982) capital expenditure of a year of income that is unrecouped as at the end of that year by the lesser of -

(a)

the difference between 10 and the number of preceding years of income in respect of which a deduction has been allowed or is allowable in respect of that expenditure, or would be allowable but for the limitations on deduction imposed by sub-section 122DG(6) by reason of an insufficiency of income to absorb the deduction; and

(b)

the number of whole years in the estimated life of mine or proposed mine on the mining property as at the end of the year of income.

Sub-section 122DG(4) prescribes the amounts to be taken into account in ascertaining the amount of the allowable (post 19 July 1982) capital expenditure that is unrecouped as at the end of a year of income.

This is determined by deducting from the amount of allowable (post 19 July 1982) capital expenditure incurred in a year of income certain amounts that are defined in paragraphs (a) and (b) of the sub-section. Those amounts are any part of that allowable (post 19 July 1982) capital expenditure that -

•

has been allowed or is allowable as a deduction in a preceding year of income under sub-section (2), or that would have been so allowable but for the limitation on a deduction imposed by sub-section (6) due to an insufficiency of income to absorb the deduction;

•

was incurred on property which has been disposed of, lost or destroyed, or the use of which for prescribed purposes has been terminated, and has not been allowed and is not allowable as a deduction in a preceding year of income; and

•

represents so much of any amounts specified in notices given under section 122B, in respect of which the entitlement to deductions has been transferred to the purchaser of a mining or prospecting right or information, and has not been allowed, and is not allowable, as a deduction in a preceding year of income.

Sub-section 122DG(5) ensures that - for purposes of determining under sub-section 122DG(4) the amount to be excluded from the unrecouped amount of an amount of allowable (post 19 July 1982) capital expenditure in circumstances where property is disposed of, etc., - deductions arising in a year of income preceding the year of disposal are taken to have been allowed in full. Sub-section (5) applies similarly for the purpose of determining the amount of unrecouped expenditure that is attributable to an amount specified in a notice lodged under section 122B.

Sub-section 122DG(6), which needs to be read in conjunction with sub-section (7), is, like sub-sections 122D(3), 122DB(3), 122DD(3) and 122DF(3) discussed earlier in connection with clauses 21, 22, 24 and 26, designed to ensure that mining enterprises are not denied effective deductions for allowable capital expenditure through the operation of the loss provisions of section 80.

The sub-section provides that where the net income of the taxpayer from mining and other activities (before the deduction of exploration and prospecting expenditure under section 122J) is insufficient to absorb the amount to be deducted under the section, the deduction is limited to the amount of the net income. Where the total of 2 or more deductions exceeds the remaining amount of net income, each deduction is to be reduced proportionately so that together they equal that remaining amount.

Under sub-section 122DG(7) the whole or a part of a deduction which is disallowed under sub-section (6) is to be an allowable deduction under sub-section (2) in respect of the next succeeding year of income, subject again to the limit imposed by sub-section (6) in the succeeding year.

Sub-section 122DG(8) will apply to ensure that undeducted allowable (post 19 July 1982) capital expenditure incurred in relation to property cannot be carried forward for deduction by virtue of the operation of sub-section (7) where that property is disposed of, lost or destroyed, or the use of the property for prescribed purposes has been otherwise terminated. In a case where part of the allowable (post 19 July 1982) capital expenditure incurred by the taxpayer in respect of such property has not been deducted because of the application of sub-section (6) and would therefore be deductible in a future year under sub-section (2) by reason of the operation of sub-section (7), sub-section (8) applies to withdraw any deduction entitlement otherwise arising in relation to the year of disposal, etc, or any subsequent year.

Sub-section 122DG(9) will apply in a similar manner to sub-section (8) to ensure that allowable (post 19 July 1982) capital expenditure incurred by a taxpayer in relation to an area that is subject of a notice lodged under section 122B that remains undeducted as at the end of the year of income prior to the year in which the transaction to which the notice relates occurred, cannot be carried forward for deduction in the year of the transaction or any subsequent year. As explained in the notes on clause 20, the effect of the section 122B notice is to transfer any undeducted deduction entitlement to the purchaser of the mining or prospecting right or information.

Sub-section 122DG(10) will apply in a situation where property that has ceased to be used by the taxpayer for prescribed purposes is, after 19 July 1982, brought back into use for purposes for which allowable capital expenditure may be incurred.

In these circumstances, so much of the expenditure incurred after 17 August 1976 and before the termination of use as the Commissioner of Taxation determines is to be deemed, for the purposes of deduction under section 122DG, to have been incurred by the taxpayer for the relevant purposes on the day on which its use for those purposes recommenced.

Sub-section 122DG(11) restates the rule in sub-sections 122D(5), 122DB(5), 122DD(5) and 122DF(5) which permits the Commissioner of Taxation to substitute his own estimate of the life of a mine or proposed mine if he is not satisfied that the estimate made by the taxpayer is realistic and soundly based.

Clause 28: Deduction not allowable under other provisions

Section 122N of the Principal Act prevents the allowance of more than one deduction in respect of capital expenditure which has been or may become deductible under Division 10. The section stipulates that such expenditure is not to be deductible or to be taken into account in determining a deduction under any other provision of the Principal Act.

Sub-section 122N(3) ensures that amounts which, by virtue of the operation of the limits placed on deductions by sub-sections 122D(3), 122DB(3), 122DD(3), 122DF(3) and 122J(2), are not allowable in the year of income (i.e., because a taxpayer derived insufficient income to absorb the deductions in full), but are carried forward for deduction under Division 10 in subsequent years, are not to be deductible under any other provisions of the income tax law.

Clause 28 will amend sub-section 122N(3) to make it clear that the same principle is to be applied to amounts of allowable (post 19 July 1982) capital expenditure carried forward by the application of the corresponding limitation imposed by new sub-section 122DG(6).

Clause 29: Election in relation to expenditure incurred after 17 August 1976

This clause will, by sub-clause (1), correct a drafting error that is contained in sub-section 123 BB(3) by replacing the reference in that sub-section to paragraph 123B(2)(b) with a reference to paragraph 123B(1)(b).

The error occurred when section 123BB was first inserted in the Principal Act by the Income Tax Assessment Amendment Act (No.3) 1976 and, as the section applies in relation to capital expenditure incurred after 17 August 1976, sub-clause (2) proposes that the amendment made by sub-clause (1) will apply to assessments in respect of income of the year of income in which 17 August 1976 occurred and of all subsequent years of income.

Clause 30: Purchase of prospecting or mining rights or information

Clauses 30 to 40 propose amendments to Division 10AA relating to deductions for eligible capital expenditure incurred by a taxpayer in the development and operation of an oil or natural gas field. The amendments broadly correspond with those being made by clauses 20 to 29 in relation to Division 10.

The amendments proposed by clause 30 are consequential in part upon the proposed introduction of the new basis of deduction for allowable capital expenditure under new section 124ADG (clause 36) and in part upon amendments made in 1981 that increased the statutory maximum life of an oil or natural gas field from 5 to 6 years (for residual (1 May 1981 to 18 August 1981) capital expenditure) and from 6 to 10 years (for residual (19 August 1981 to 19 July 1982) capital expenditure).

Section 124AB of the Principal Act enables the purchaser of a petroleum prospecting or mining right or petroleum prospecting or mining information to include expenditure incurred in acquiring that right or information in the purchaser's allowable capital expenditure. Sub-section 124AB(3) limits the maximum deduction entitlement that may be transferred to the purchaser to the undeducted balance of the vendor's expenditure in relation to the area. The broad effect is to transfer to the purchaser the vendor's remaining entitlement to deductions in respect of expenditure on the area to which the right or information relates.

When the law was amended to increase the maximum life of an oil or natural gas field from 5 to 6 years (by the Income Tax (Assessment and Rates) Amendment Act 1981) and from 6 to 10 years (by the Income Tax Laws Amendment Act (No.3) 1981), the need for consequential amendments to sub-section 124AB(3) - to permit any undeducted balance in the two new pools of residual capital expenditure that were created by those amendments to be transferred from a vendor to a purchaser - was overlooked.

That defect is being remedied by the insertion by sub-clause 30(1) of proposed new paragraph 124AB(3)(a). Paragraph 124AB(3)(a) will authorise the purchaser of a petroleum prospecting right or information to include in his allowable capital expenditure the amount that would have been included in the vendor's residual (1 May 1981 to 18 August 1981) capital expenditure or the vendor's residual (19 August 1981 to 19 July 1982) capital expenditure at the end of the year of income during which the transaction occurred (sub-paragraph 124AB(3)(a)(i).

Consequent upon the insertion of proposed new section 124ADG, sub-paragraph 124AB(3)(a)(ii) will likewise authorise the transfer to a purchaser of the balance of a vendor's entitlement to deductions under section 124ADG in respect of allowable (post 19 July 1982) capital expenditure that relates to a petroleum prospecting or mining right or petroleum prospecting or mining information.

To ensure that the remedial aspects of sub-clause 30(1) apply from the time when the 1981 amendments first came into force, sub-clause 30(2) proposes that the amendments apply to assessments in respect of the year of income that commenced on 1 July 1980 and all subsequent years of income.

Clause 31: Deduction of residual previous capital expenditure

Clause 31 will amend section 124AD of the Principal Act in consequence of the insertion of new section 124ADG by clause 36.

Sub-section 124AD(3) limits the deduction allowable under the section in a year of income to the amount of assessable income from petroleum that remains after allowing all other deductions other than deductions under sections 124AD, 124ADB, 124ADD, 124ADF or under section 124AH in respect of petroleum exploration expenditure. This provision is directed at ensuring that a taxpayer will not be deprived of an effective deduction for allowable capital expenditure through the operation of section 80 of the Principal Act, which limits the carry-forward of losses to 7 years. Accordingly, any amount prevented from being deducted by the rule embodied in sub-section 124AD(3) is retained in the residual previous capital expenditure pool for deduction in subsequent years.

Paragraph (a) of clause 31 will have the effect of excluding the deduction under new section 124ADG in calculating the deduction allowable under section 124AD in respect of residual previous capital expenditure. The result will be that the deduction allowable under section 124AD will be allowable before any deduction allowable under section 124ADB in respect of residual capital expenditure, under section 124ADD in respect of residual (1 May 1981 to 18 August 1981) capital expenditure, under section 124ADF in respect of residual (19 August 1981 to 19 July 1982) capital expenditure, under section 124ADG in respect of allowable (post 19 July 1982) capital expenditure or under section 124AH in respect of exploration expenditure.

Paragraph (b) effects another consequential amendment as a result of the proposed insertion of section 124ADG by clause 36. It will insert in sub-section 124AD(4) appropriate references to the new section 124ADG.

Clause 32: Deduction of residual capital expenditure

By this clause, sub-section 124ADB(3) will be amended to insert a reference to new section 124ADG.

Sub-section 124ADB(3), like its counterpart sub-section 124AD(3), the operation of which has been explained in the notes on clause 31, is designed to ensure that a deduction allowable under section 124ADB is not lost to a taxpayer by reason of the 7 year limit on the carry-forward of losses under section 80.

The amendment will have the effect of excluding a deduction allowable under the new section 124ADG in calculating the deduction to be allowed under section 124ADB in respect of residual capital expenditure. The result will be that the deduction under section 124ADB will be set off against the available assessable income of an income year before determining any deduction under section 124ADD in respect of residual (1 May 1981 to 18 August 1981) capital expenditure, under section 124ADF in respect of residual (19 August 1981 to 19 July 1982) capital expenditure, under section 124ADG in respect of allowable (post 19 July 1982) capital expenditure or under section 124AH in respect of exploration expenditure.

Clause 33: Deduction of residual (1 May 1981 to 18 August 1981) capital expenditure

Clause 33, which has a similar purpose to the amendments proposed by clauses 31 and 32 will amend sub-section 124ADD(3) by inserting a reference to new section 124ADG.

By clause 33 a deduction allowable under the new section 124ADG will be excluded from the calculation of the deduction to be allowed under section 124ADD in respect of residual (1 May 1981 to 18 August 1981) capital expenditure. The result will be that amounts deductible under section 124ADD will be deducted from the available assessable income of an income year before amounts deductible under section 124ADF in respect of residual (19 August 1981 to 19 July 1982) capital expenditure, under section 124ADG in respect of allowable (post 19 July 1982) capital expenditure or under section 124AH in respect of exploration expenditure.

Clause 34: Residual (19 August 1981 to 19 July 1982 capital expenditure

This clause proposes amendments to section 124ADE which provides the basis for determining the amount of residual (post 18 August 1981) capital expenditure of a taxpayer as at the end of a year of income. Broadly, this is so much of the allowable capital expenditure incurred by a taxpayer after 18 August 1981 (not being expenditure that was incurred under a contract entered into on or before that date or, in relation to the construction of property by the taxpayer, where the construction was commenced on or before that date) and before the end of the year of income, as has not been allowed as a deduction in a previous year of income. The deduction available for residual (post 18 August 1981) capital expenditure is calculated in accordance with section 124ADF by reference to the lesser of the estimated life of the field or 10 years.

Paragraph (a) of clause 34 will amend section 124ADE by inserting a new sub-section (1), and paragraph (b) will make a consequential amendment to sub-section (2). The effect of the amendment proposed by paragraph (a) will be that the residual (post 18 August 1981) capital expenditure of a taxpayer will not include allowable capital expenditure incurred after 19 July 1982 unless it was incurred under a contract entered into on or before that date or was incurred in respect of the construction of property by the taxpayer where the construction commenced on or before that date. The capital expenditure pool created by section 124ADE will in future be referred to as "residual (19 August 1981 to 19 July 1982) capital expenditure" to reflect the termination date for the particular qualifying capital expenditure.

Paragraph (b) will effect an amendment to sub-section 124ADE(2) consequent on the amendment proposed by paragraph (a). Existing sub-section (2) applies where, after 18 August 1981, a taxpayer has brought into use for petroleum mining operations property on which the taxpayer had incurred capital expenditure after 17 August 1976 but which had ceased to be used for such operations or which had been used for non-petroleum mining operations. The amendment will confine the application of the sub-section to property which is so brought into use after 18 August 1981 and on or before 19 July 1982.

Clause 35: Deduction of residual (19 August to 19 July 1982) capital expenditure

By this clause, two amendments to section 124 ADF are to be made consequent upon the insertion by clause 36 of new section 124ADG.

The amendment proposed by paragraph (a) of clause 35 will change the name of the capital expenditure pool to which section 124ADF relates from "residual (post 18 August 1981) capital expenditure" to "residual (19 August 1981 to 19 July 1982) capital expenditure" to reflect the new qualifying expenditure termination date.

Paragraph (b) of clause 35 will amend sub-section 124ADF(3) which like its counterparts sub-sections 124AD(3), 124ADB(3) and 124ADD(3), is designed to ensure that a taxpayer does not lose a deduction allowable under section 124ADF by reason of the limit of 7 years, under section 80, on the carry-forward of losses.

The amendment proposed by paragraph (b) will have the effect of excluding a deduction allowable under the new section 124ADG, together with deductions allowable under sections 124ADF and 124AH, in calculating the amount available for deduction under section 124ADF in respect of residual (19 August 1981 to 19 July 1982) capital expenditure.

Clause 36: Deduction of allowable (post 19 July 1982) capital expenditure

This clause will insert a new section - section 124ADG - in Division 10AA of the Principal Act to introduce the new "straight line" basis of deduction for allowable capital expenditure incurred after 19 July 1982 (otherwise than under a contract entered into on or before that date or in respect of property which the taxpayer commenced to construct on or after that date).

The operation of new section 124ADG is in relation to petroleum mining activities, consistent with that of new section 122DG (concerned with general mining activities) in relation to the deduction of allowable capital expenditure incurred after 19 July 1982 in respect of a mining property. An understanding of the operation of new section 124ADG can be obtained by referring to the general notes on the operation of new section 122DG that are contained in the notes on clause 27. That understanding provides a necessary background for the following comments on the individual provisions of new section 124ADG.

Sub-section 124ADG(1) defines "allowable (post 19 July 1982) capital expenditure" to mean, in relation to a taxpayer, allowable capital expenditure incurred after 19 July 1982, other than allowable capital expenditure incurred under a contract entered into on or before 19 July 1982 or incurred in respect of the construction of property by the taxpayer where the construction commenced on or before that date.

Sub-section 124ADG(2) formally authorises the allowance of deductions for allowable (post 19 July 1982) capital expenditure incurred by a taxpayer in a year of income in respect of that year and in respect of subsequent years of income.

By sub-section 124ADG(3), the deduction allowable in respect of a year of income is to be determined by dividing the amount of the allowable (post 19 July 1982) capital expenditure of a year of income that is unrecouped as at the end of that year by the lesser of -

(a)

the difference between 10 and the number of preceding years of income in respect of which a deduction has been allowed or is allowable in respect of that expenditure, or would be allowable but for the limitations on deduction imposed by sub-section 122ADG(6) by reason of an insufficiency of income to absorb the deduction; and

(b)

the number of whole years in the estimated life of the petroleum field or proposed petroleum field as at the year of income.

Sub-section 124ADG(4) prescribes the amounts to be taken into account in ascertaining the amount of the allowable (post 19 July 1982) capital expenditure that is unrecouped as at the end of a year of income. Under the sub-section, unrecouped expenditure is to be found by deducting from the amount of the allowable (post 19 July 1982) capital expenditure incurred in a year of income certain amounts that are defined in paragraphs (a) and (b). Those amounts are any part of that allowable (post 19 July 1982) capital expenditure that -

•

has been allowed or is allowable as a deduction in a preceding year under sub-section (2), or that would have been so allowable but for the limitations on deduction imposed by sub-section (6) due to an insufficiency of income;

•

was incurred on property which has been disposed of, lost or destroyed, or the use of which for prescribed purposes has been terminated, and has not been allowed and is not allowable as a deduction in a preceding year of income; and

•

represents so much of any amounts specified in notices given under section 124AB, in respect of which the entitlement to deductions has been transferred to the purchaser of a petroleum prospecting or mining right or information, and has not been allowed, and is not allowable, as a deduction in a preceding year of income.

Sub-section 124ADG(5) ensures that in determining for the purposes of section 124ADG(4) the amount to be excluded from the unrecouped amount of an amount of allowable (post 19 July 1982) capital expenditure in circumstances where property is disposed of, etc., deductions arising in a year of income preceding the year of disposal are taken to have been allowed in full. Sub-section (5) applies similarly for purposes of determining the amount of unrecouped expenditure that is attributable to an amount specified in a notice lodged under section 124AB.

Sub-section 124ADG(6) which needs to be read in conjunction with sub-section (7), limits the deduction allowable under section 124ADG in respect of a year of income to the amount of assessable income that remains after allowing all other deductions other than a deduction under section 124ADG or section 124AH in respect of exploration expenditure. Where the total of two or more deductions exceeds the remaining amount of net income each deduction is to be reduced proportionately so that together they equal the remaining amount.

Under sub-section 124ADG(7), the whole or a part of a deduction not allowed by reason of sub-section (6) is to be deemed to be a deduction allowable under sub-section (2) in respect of the next succeeding year of income, subject again to the limit imposed by sub-section (6) in the succeeding year.

Sub-section 124ADG(8) will apply to ensure that undeducted allowable (post 19 July 1982) capital expenditure incurred in relation to property cannot be carried forward for deduction by virtue of the operation of sub-section (7) where that property is disposed of, lost or destroyed, or the use of the property for prescribed purposes has been otherwise terminated. In a case where part of the allowable (post 19 July 1982) capital expenditure incurred by the taxpayer in respect of such property has not been able to be deducted because of the application of sub-section (6) and would therefore be deductible in a future year under sub-section (2) by reason of the operation of sub-section (7), sub-section (8) applies to withdraw any deduction entitlement otherwise arising in relation to the year of disposal or any subsequent year.

Sub-section 124ADG(9) will apply in a similar manner to sub-section (8) to ensure that allowable (post 19 July 1982) capital expenditure incurred by a taxpayer in relation to an area that is the subject of a notice lodged under section 124AB that remains undeducted as at the end of the year of income preceding the year in which the transaction to which the notice relates occurred, cannot be carried forward for deduction in the year of the transaction or any subsequent year. As explained in the notes on clause 30, the effect of the section 124AB notice is to transfer any undeducted deduction entitlement to the purchaser of the mining or prospecting right or information.

Sub-section 124ADG(10) will apply where, after 19 July 1982, a taxpayer brings into use in petroleum mining operations property that has previously ceased to be used for such purposes or which was used for other purposes.

In these circumstances, so much of the capital expenditure incurred by the taxpayer on that property after 17 August 1976 as the Commissioner of Taxation determines is to be deemed, for the purpose of deduction under section 124ADG, to have been incurred on the day on which he property is brought into use for petroleum mining operations.

Sub-section 124ADG(11) is in conformity with sub-section 124ADF(4) and the other similar provisions which apply in a case where the Commissioner is not satisfied that a taxpayer's estimate of the life of a petroleum field is reasonable. In such circumstances, sub-section (11) will give the Commissioner power to substitute a revised figure.

Clause 37: Deduction of unrecouped previous capital expenditure

This clause proposes an amendment to section 124AF that is consequential upon the insertion by clause 36 of new section 124ADG relating to deductions for allowable (post 19 July 1982) capital expenditure.

Section 124AF authorises deductions in respect of unrecouped previous capital expenditure which, broadly speaking, is capital expenditure on petroleum mining operations incurred on or before 17 September 1974.

The deduction under section 124AF is limited to the net amount of assessable income from petroleum remaining after deducting from that income all deductions allowable otherwise than under sections 124AD, 124ADB, 124ADD, 124ADF, 124AF and 124AH. Clause 37, by inserting references to new section 124ADG in sub-sections 124AF(1) and (2), proposes that the deductions to be available under section 124ADG also be excluded in calculating the net assessable income from petroleum under this section. This will have the effect of allowing deductions under section 124AF ahead of those other 6 deductions where the taxpayer is in receipt of assessable income from petroleum.

Clause 38: Exploration and prospecting expenditure

This clause proposes an amendment to sub-section 124AH(3) to insert a reference to new section 124ADG.

Sub-section 124AH(3) specifies the allowable deductions to be taken into account in arriving at the net assessable income from petroleum for the purpose of calculating the deduction allowable under sub-section 124AH(2). Specifically included are deductions allowable under sections 124AD, 124ADB, 124ADD, 124ADF, 124AF and 124AM. This amendment will also include deductions allowable under section 124ADG in respect of allowable (post 19 July 1982) capital expenditure. In this way, the entitlement to immediate deductions for petroleum exploration expenditure will arise after the deductions allowable under the provisions specified.

Clause 39: Double deductions

This clause proposes an amendment to sub-section 124AN(3) consequential upon the insertion of new section 124ADG by clause 36.

Section 124AN is a general safeguarding provision, the purpose of which is to prevent more than one deduction being allowed for the one amount of expenditure. It provides that where expenditure is deductible under the special petroleum mining provisions of Division 10AA, it is not to be deductible under any other provision of the income tax law.

Sub-section 124AN(3) has the effect of deeming amounts that would have been allowable as deductions, but for the limitations imposed on deductions by sub-sections 124AD(3), 124ADB(3), 124ADD(3), 124ADF(3), 124AF(1), 124AH(2) or (4A) or 124AM(4), to have been allowed as deductions and therefore not deductible under other provisions of the income tax law.

By clause 39 a reference to new sub-section 124ADG(6) will be included in sub-section 124AN(3) to apply the same principle to excess amounts of allowable (post 19 July 1982) capital expenditure to be carried forward for deduction in a future year by reason of the limitation imposed by new sub-section 124ADG(6).

Clause 40: Reduction of allowable deductions where certain declarations lodged

Clause 40 proposes amendments to section 124AR of the Principal Act that are consequential upon the insertion of new section 124ADG relating to deductions for allowable (post 19 July 1982) capital expenditure.

Section 124AR authorises reductions in deductions otherwise allowable under Division 10AA where a company has made appropriate declarations to forgo those deductions under the various shareholder rebate or deduction schemes that are or have been in force at particular times.

The deductions that may be reduced consequent upon a declaration made under the petroleum shareholder rebate scheme of section 160ACA of the Principal Act are, by the amendments proposed, to also include deductions under new section 124ADG relating to allowable (post 19 July 1982) capital expenditure.

Clauses 41, 42 and 43 : Consequential amendments to Division 10B of the Principal Act

These clauses propose amendments to the provisions of Division 10B of Part III of the Principal Act consequential on the introduction of the new basis of deduction under proposed new section 124ZAFA (clause 48) for qualifying film investment in lieu of the existing basis of deduction under section 124ZAF of the Principal Act.

Division 10B applies to allow a deduction for certain capital expenditure incurred by a taxpayer, either as an owner or a licensee, in acquiring rights in respect of a patent granted in Australia, a design registered in Australia or a copyright subsisting in Australia. The broad operation of the Division is to allow the owner or licensee of rights in respect of an Australian patent, design or copyright to deduct the cost of the unit over the period during which the owner or licensee may exercise rights in respect of the unit. However, for a film classified as an "Australian film" for purposes of that Division, Division 10B attributes to the unit of property that relates to the copyright in the film an effective life of two years, with the result that one-half of the cost to a taxpayer of acquiring an interest in the copyright is deductible in the year of income during which the unit is first used for the purposes of producing assessable income and the remaining half is deductible in the following year of income.

The amendments proposed by clauses 41, 42 and 43 will, consistent with the present arrangements for the exclusion of expenditure deductible under section 124ZAF, ensure that capital expenditure that falls for deduction under the new section 124ZAFA will be excluded from the operation of Division 10B.

Clauses 44 to 53 : Deductions for capital investment in qualifying Australian films

Introductory Note

These clauses will, together with associated withholding tax measures proposed by clause 66 and certain consequential amendments proposed by clauses 3, 5, 9, 16, and 41 to 43, give effect to the proposed new basis of deduction for qualifying investment in the production of an eligible Australian film.

Existing income tax concessions contained in Division 10BA of the Principal Act - to which the amendments proposed by these clauses relate - authorise a deduction equal to 150 per cent of capital expenditure in the production of a qualifying Australian film where that expenditure results in the acquisition by the investor of an interest in the initial copyright in the film. Associated arrangements authorised by section 23H of the Principal Act apply to exempt from tax an investor's net earnings from the film of an amount up to 50 per cent of his or her qualifying investment.

Under the existing concessions the special 150 per cent deduction becomes available after the investor becomes the first owner of an interest in the copyright in the completed film and uses it for income producing purposes.

Under the amendments proposed by these clauses, the 150 per cent deduction is to be available in the year in which the eligible expenditure is made.

The deduction will be conditional on the investor becoming the first owner of an interest in the copyright in the completed film and using that interest for income producing purposes within two years from the close of the financial year in which moneys are first expended in, or contributed towards, the production of the film. In the event that those conditions are not satisfied previously allowed deductions will be withdrawn.

The availability of deductions in the year of expenditure for investors who expend capital moneys by way of contribution towards the production of the film will be subject to the additional requirements that -

•

a production agreement securing all funds necessary for the production of the film is entered into by the close of the financial year in which moneys are first expended in, or contributed towards, the production of the film;

•

moneys contributed towards the production are held in a non-interest bearing account opened in relation to the film in the Australian Film Industry Trust Fund;

•

a declaration - designed broadly to evidence compliance with the eligibility requirements (see notes on proposed new section 124ZADA) - in relation to the film is lodged by an appropriate person (generally the producer) within 1 month after the end of the financial year in which capital moneys are first expended by way of contribution to the cost of producing the film.

The Australian Film Industry Trust Fund is to be administered by the Department of Home Affairs and Environment and arrangements for its establishment and operation are currently being made. Against that background the requirement that contributions be deposited in an account opened in relation to the film will apply with effect from 1 July 1983. Under that requirement, eligible contributions made on or after that date are to be deposited, upon contribution, in the appropriate account. In addition the unexpended portion of eligible contributions made before that date is to be transferred to the account by 1 July 1983.

Payments out of an account opened in relation to a film are, broadly, to be made only for the purposes of expenditure in the production of the film or by way of refund of contributions to investors. Special withholding tax arrangements, which are explained in the notes on clause 66, apply in relation to amounts withdrawn from an account otherwise than for expenditure in the production of the film.

In addition, any deductions previously granted in respect of contributions withdrawn from an account and not expended directly in the production of the film will be subject to disallowance. As explained in the notes on clause 66, amounts withheld from such withdrawals under the withholding tax arrangements will be credited against the tax arising under the amended assessment disallowing the relevant deduction.

Existing certification arrangements for the identification of a qualifying Australian film remain unaltered. In addition, subject to the modifications outlined, existing deduction requirements (e.g., that the investor be "at risk" in relation to his investment) remain relevant.

The revised basis of deduction will apply with respect to eligible expenditure incurred by an investor under a contract entered into on or after 13 January 1983.

Clause 44: Interpretation

Paragraphs (a) and (b) of clause 44 will amend section 124ZAA of the Principal Act which defines certain terms used in Division 10BA. Paragraphs (a) and (b) will insert in that section definitions of further terms used in new provisions proposed to be inserted in Division 10BA to give effect to the new basis of deduction. For this purpose:

"film account"

in relation to a film is defined to mean an account opened in relation to the film in the Film Trust Fund;

"Film Trust Fund"

is defined to mean the Australian Film Industry Trust Fund referred to in section 60 of the Audit Act - under which the Trust Fund, to be administered by the Department of Home Affairs and Environment, is to be established;

"relevant 24 month period"

in relation to a film is defined to mean the period of 24 months after the end of the financial year in which capital moneys were first expended in producing, or by way of contribution to the cost of producing, the film.

Paragraph (c) of clause (44) will insert new sub-sections 124ZAA(7), (8), (9) and (10) in the Principal Act. New sub-section 124ZAA(7) defines for the purposes of Division 10BA the circumstances in which moneys from a film account opened in the Trust Fund in relation to a film will be taken to be dealt with in the "prescribed manner". These are -

•

where the moneys are expended in producing the film - which by virtue of the operation of existing sub-section 124ZAA(6) is a reference to amounts to the extent to which they are expended directly in producing the film;

•

in payment to the Commissioner of Taxation of amounts deducted under the withholding tax arrangements (see notes on clause 66) from amounts withdrawn from the film account otherwise than for expenditure in producing the film that, under those arrangements, have been re-deposited in the film account pending remittance to the Commissioner (new paragraph 221ZZN(1)(e); and

•

in payment to an investor of amounts deducted under the withholding tax arrangements from amounts withdrawn from a film account as a refund of contributions to an investor where, under those arrangements, the amount has been re-deposited in the film account and the Commissioner has issued a certificate advising that the amount need not be remitted to the Commissioner (i.e., because a deduction had not been allowed in respect of the original contribution) (new sub-section 221ZN(4)).

The principal purpose of defining how amounts withdrawn from a film account may be dealt with in the prescribed manner is to identify amounts that are, upon withdrawal, expended in producing the film. This is relevant to the declaration provision (new section 124ZAD) and for the purpose of withdrawing previously allowed deductions for contributions that are not, in fact, expended in producing the film.

The treatment of the other two kinds of payments as being payments in the prescribed manner is designed to prevent those amounts being counted twice as not having been dealt with in the prescribed manner. That would otherwise occur because, before being deducted and re-deposited, they were part of the gross amount originally withdrawn from the film account for non-production purposes, i.e., not originally dealt with in the prescribed manner.

Existing safeguards relating to non-arm's length transactions (section 124ZAJ) and to amounts expended in acquiring assets that are subsequently disposed of (section 124ZAK) continue to apply for the purpose of determining whether contributions are expended in producing the film and, as such, whether withdrawals are dealt with in the prescribed manner. This will ensure that appropriate reductions of previously allowed deductions are made under new sub-section 124ZAG(2) in cases where these safeguards operate.

However, to the extent that the term is relevant to the declaration required under new section 124ZAD that moneys contributed and paid into a film account will be dealt with in the prescribed manner (i.e., expended in producing the film), proposed new sub-section 124ZAA(8) will ensure that the operation of those reduction provisions is disregarded.

New sub-section 124ZAA(9) will ensure that, in determining - for the purpose of the requirements relating to the time by which a declaration in respect of a film is to be lodged (new section 124ZADA) and the time by which a production agreement in respect of the film is to have been entered into (new sub-paragraph 124ZAFA(1)(d)(iv)) - when moneys are first expended in or as a contribution to the cost of producing a film, the effect of existing safeguarding provisions that apply to deem moneys not to have been expended is disregarded.

As mentioned in the introductory notes, the Australian Film Industry Trust Fund is to be administered by the Department of Home Affairs and Environment. Officers of that Department will be formally responsible for depositing amounts received from a film producer and withdrawing amounts on a request by the producer. In the absence of new sub-section 124ZAA(10), requirements under the new deduction arrangements relating to the withholding tax arrangements (Division 6 of Part VI of the Principal Act - clause 66) and the manner of expenditure of moneys out of a film account would be imposed on officers of that Department. Sub-section 124ZAA(10) avoids this result by ensuring that the person (e.g., the producer) on whose behalf officers of that Department operate the account is taken to be the person who is depositing and withdrawing moneys from the account.

Clause 45: Declarations and notification arrangements

Clause 45 will insert new sections 124ZADA and 124ZADB in the Principal Act to give effect to certain declaration and notification requirements of the new film investment deduction arrangements.

Section 124ZADA : Declarations

By new sub-section 124ZADA(1) an appropriate person (see notes on sub-section (2)) associated with a film is required to lodge before the expiration of 1 month after the close of the financial year in which moneys are first contributed by investors under a contract entered into on or after 13 January 1983 (the date of effect of the new deduction arrangements) a declaration -

•

that a contract for the production of the film has been entered into under which persons have agreed to expend the estimated cost of producing the film - by proposed new section 124ZAFA it will be necessary that the contract be entered into before the close of the financial year (paragraph (c));

•

specifying the items of expenditure that comprise the estimated cost of production of the film (paragraph (d));

•

that a film account has been opened in relation to the film in the Australian Film Industry Trust Fund (paragraph (e));

•

that all moneys expended by persons by way of contribution to the cost of producing the film - other than exempt moneys (see notes on sub-sections (6) and (7)) - that are received after the time when the declaration is made will, upon receipt, be paid into the film account (paragraph (g)); and

•

that all moneys withdrawn from the film account will, upon withdrawal, be dealt with in the prescribed manner - broadly, in producing the film or in remitting amounts withheld under the withholding tax arrangements (see notes on new sub-sections 124ZAA(7) and (8)) - or paid to persons as refunds of their capital contributions (paragraph (h)).

As outlined in the introductory note, the requirement that contributions be deposited in a film account in the Trust Fund is to apply with effect from 1 July 1983, so that contributions made after that date are required to be deposited, upon receipt, in the account and, correspondingly, the unexpended portion of previously contributed amounts is to be transferred to the account by that date. While declarations as to the depositing and withdrawal of amounts from a film account are to apply prospectively from the date of the declaration, satisfaction of the preceding requirements in relation to the period prior to the declaration is to be evidenced from the following details that are required to be lodged with the declaration. These are specified in paragraph 124ZADA(1)(f) and are -

•

the total amount of contributions received prior to the date of the declaration;

•

the total amount of those moneys that were received prior to 1 July 1983;

•

the total amount of contributions received prior to 1 July 1983 that were, before 1 July 1983, paid into the film account;

•

the total amount of contributions received prior to 1 July 1983 that were expended directly in producing the film;

•

the total amount of contributions received after 30 June 1983 and before the date of the declaration, that were, on receipt, paid into the film account;

•

the total amount withdrawn from the film account prior to the declaration being made; and

•

the total amount of those moneys that were, upon withdrawal, expended in producing the film.

Associated with the introduction of the new film account arrangements with effect from 1 July 1983, a declaration will not be capable of being lodged prior to that date.

New sub-section 124ZADA(2) empowers the Commissioner of Taxation to determine whether a person who lodges a declaration in accordance with sub-section (1) is an appropriate person to make that declaration. In determining that, the Commissioner is to have regard to the role of the person in the production of the film. As explained in the notes on new section 124ZAFA, it is a requirement for eligibility for deduction under the new basis that a declaration by a person considered by the Commissioner to be an appropriate person to make that declaration be in force (see also notes on new sub-sections (8) and (9)).

Sub-section (2) also applies to empower the Commissioner to determine, in circumstances where a change occurs in the roles of persons in the production and it becomes necessary to obtain a declaration from another person, that the new declaration is lodged by an appropriate person (see notes on sub-sections (4) and (5)).

As explained in the notes on sub-sections (10) and (11), a decision of the Commissioner under this section may be subject to review.

Under new sub-section 124ZADA(3) a person from whom a declaration is current is required to notify the Commissioner of any change that occurs in his or her role in the production of the film. That information is relevant to the Commissioner's determination of whether the person continues to be an appropriate person in relation to the declaration as it relates to the operation of the film account.

A person failing to comply with this requirement may be found guilty of an offence punishable by a fine of up to $200.

Sub-section 124ZADA(4) empowers the Commissioner to determine that a person from whom a declaration is in force is, having regard to his current role in a film, no longer an appropriate person to make a declaration as to the operation of the film account. The Commissioner is required to notify a person in writing of his decision.

In circumstances where a person from whom a declaration is in force dies, or where the Commissioner has notified a person under sub-section 124ZADA(4) that he no longer considers that person to be an appropriate person to make the declaration, sub-section 124ZADA(5) permits another appropriate person to lodge a declaration within 1 month of the death or notification. That declaration is to be to the effect that -

•

all contributions other than exempt contributions (see notes on sub-sections (6) and (7)) received after the date of the declaration will, upon receipt, be paid into the film account; and

•

all moneys withdrawn from the film account after the date of the declaration will, upon withdrawal, be dealt with in the prescribed manner (see notes on new sub-sections 124ZAA (7) and (8)) or be paid as refunds of contributions.

As explained in the notes on sub-sections (8) and (9) it is necessary that a declaration be in force in relation to the film if deductions are to be available to investors.

New sub-section 124ZADA(2) applies for the purposes of enabling the Commissioner to determine whether the new person is an appropriate person to make the declaration.

Sub-sections 124ZADA(6) and (7) apply to exempt from the requirement that contributions be deposited in a film account opened in relation to a film, contributions by a person who is not entitled to deductions under Division 10BA in respect of contributions towards the production of the film.

New sub-section 124ZADA(6) defines "exempt moneys" for the purposes of declarations lodged under sub-sections (1) and (5) relating to the depositing of contributions in a film account. The effect of sub-section (6) is that where the Commissioner issues a certificate under sub-section (7) to a person in respect of his or her contributions, contributions made after the certificate is issued are not required to be paid into the film account.

Sub-section 124ZADA(7) empowers the Commissioner to issue a certificate exempting a person's future contributions from the requirement that they be lodged in the film account where that person has lodged an election under section 124ZAE of the Principal Act that Division 10BA is not to apply in relation to his or her contributions. It would be open for a non-resident or exempt body - who would not in any event be entitled to deductions - to lodge an election under that section and obtain exemption from the requirement that contributions be deposited in the film account.

New sub-sections 124ZADA(8) and (9) apply for the purpose of determining whether a declaration is to be taken to be in force in relation to a film and, thus, whether deductions are to be available under the new arrangements.

Sub-section 124ZADA(8) ensures that, subject to the operation of new sub-section (9), an original declaration lodged under sub-section (1) in relation to a film by a person considered by the Commissioner to be an appropriate person to lodge the declaration, is taken to be in force at all times after it is lodged.

By sub-section 124ZADA(9) a declaration lodged under sub-section (1) will be taken to be no longer in force - with the result that deductions will not be available for contributions to the film - in circumstances where a person from whom a declaration is current dies or is notified by the Commissioner under sub-section (4) that he is no longer considered an appropriate person to lodge the declaration and where a valid declaration has not been substituted by another person under sub-section (5).

New sub-sections 124ZADA(10) and (11) ensure that decisions of the Commissioner under sub-sections (2) or (4) as to whether a person is an appropriate person to lodge a declaration in relation to a film are subject to review.

Under sub-section (10), a person notified by the Commissioner of a decision under sub-section (2) or (4) is empowered to lodge a formal objection with the Commissioner. Any such objection is to be in writing and posted to or lodged with the Commissioner within 60 days after being notified of the Commissioner's decision. As with all objections the grounds of objection are to be stated fully and in detail. Sub-section (11) ensures that the general objection and appeal provisions of the Principal Act apply in relation to such an objection.

Section 124ZADB : Notification regarding non completion of film

New section 124ZADB requires a person from whom a declaration in relation to a film under sub-section 124ZADA(1) or (5) is current to notify the Commissioner within 14 days of his or her becoming satisfied that a film is unlikely to be completed within the required period of 2 years from the close of the financial year in which moneys were first expended in or as a contribution to the cost of producing the film. The requirement applies similarly to a person who has lodged a declaration under sub-section 124ZADA(1) or (5) and who has yet to be notified of a decision by the Commissioner as to whether he or she is an appropriate person to lodge the declaration.

Notification under this section will not, of itself, result in previously allowed deductions being withdrawn. The notification will, however, be relevant to the operation of new section 124ZAGA under which deductions are to be withdrawn where the Commissioner becomes satisfied that the film will not be completed within the required two year period.

A person failing to comply with the requirements of new section 124ZADB may be found guilty of an offence carrying up to $200 penalty.

Clause 46: Election that Division not apply

Clause 46 will amend section 124ZAE of the Principal Act that allows an investor to elect that the provisions of Division 10BA not apply in relation to expenditure incurred by the person. The amendment is consequential on the operation of new sub-sections 124ZADA(6) and (7) - relating to exemption from the requirement that contributions be deposited in a film account in the Trust Fund - and will ensure that an election can be lodged in anticipation of contributions being made to the production of a film.

Clause 47: Deductions for capital expenditure under pre 13 January 1983 contracts

Clause 47 will amend section 124ZAF of the Principal Act - which applies to grant deductions for eligible expenditure after the taxpayer becomes the first owner of an interest in the copyright in the film and uses it for income producing purposes - to limit its operation to capital moneys expended in or as a contribution to the cost of producing a qualifying film under a contract entered into before 13 January 1983.

Clause 48: Deductions for capital expenditure under post 12 January 1983 contracts

Clause 48 will insert new section 124ZAFA in the Principal Act to give effect to the proposed new basis of deductions for eligible expenditures under contracts entered into on or after 13 January 1983.

Paragraphs 124ZAFA(1)(a) to (d) specify the conditions that are required to be satisfied by a taxpayer to become entitled to the new deduction in respect of his or her expenditure on the film. The first three of these (paragraphs (a) to (c)) are, apart from the requirement that the expenditure be under a contract entered into on or after 13 January 1983, a restatement of deduction requirements incorporated in section 124ZAF. These are that at the time of the expenditure:

•

the taxpayer was a resident.

•

there was a provisional certificate or a final certificate in force in relation to the film when the amount was expended (see existing sections 124ZAB and 124ZAC); and

•

the Commissioner of Taxation is satisfied that the taxpayer expected to become the first owner, or one of the first owners, of the copyright in the film and intended to use that copyright or his or her interest in it for the purpose of producing assessable income from the exhibition of the film to the public in cinemas or by way of television broadcasting.

Paragraph 124ZAFA(1)(d) imposes new requirements in relation to eligible expenditure that is made by way of contribution to the cost of producing the relevant film. These are that -

•

moneys contributed after 30 June 1983 were, upon contribution, deposited in a film account opened in the Australian Film Industry Trust Fund in relation to the film;

•

moneys contributed before 1 July 1983 were, before that date, either expended in producing the film or paid into a film account opened in relation to the film;

•

there is in force a declaration lodged in respect of the film by a person who has been notified by the Commissioner that he or she is an appropriate person to lodge a declaration in respect of the film (see notes on new sub-section 124ZADA(8) and (9)); and

•

the taxpayer entered into a contract before the end of the financial year in which capital moneys were first expended in or as a contribution to the cost of producing the film under which the taxpayer (and other persons) agreed to expend on the film the amount specified in the contract as the estimated cost of production.

Where the conditions outlined in paragraphs (1)(a) to (d) are satisfied an amount equal to 150 per cent of the expenditure by the taxpayer in or as a contribution the production of the film is to be allowable as a deduction in the income year in which the moneys were expended.

New sub-section 124ZAFA(2) will ensure that deductions previously allowed under sub-section (1) will be subsequently withdrawn if, before the expiration of 2 years after the end of the financial year in which moneys were first expended in or as a contribution to the production of a film, the taxpayer does not become the first owner of an interest in the copyright of the completed film (paragraph (2)(b)) or does not use the copyright for the purpose of producing assessable income from the exhibition of the film (sub-paragraph (2)(a)(1)). Sub-section (2) would not apply to disallow a deduction notwithstanding that the taxpayer had failed to use the copyright for the purpose of producing assessable income from the exhibition of the film if, prior to the expiration of the 2 year period and before the copyright came into existence, the taxpayer had derived income from pre-sale arrangements relating to the exhibition of the film on its completion (sub-paragraph (2)(a)(ii)).

Sub-section 124ZAFA(3) will apply, consistently with existing sub-section 124ZAF(2), to a taxpayer who dies after having been allowed a deduction in respect of eligible expenditure, but prior to satisfying the conditions outlined in sub-section (2) necessary for continued eligibility for deductions. Sub-section (3) will apply in these circumstances to authorize the Commissioner to disregard the operation of sub-section (2) where he is satisfied that the conditions relating to ownership of copyright and use for income producing purposes would have been satisfied if the taxpayer had not died.

Sub-section 124ZAFA(4) will operate in a case where sub-section (3) has been applied, to authorize the Commissioner to subsequently disallow deductions under sub-section (2) where he later becomes satisfied that the conditions relating to ownership of copyright and use for income producing purposes would not, in fact, have been satisfied.

Clause 49: Expenditure of contributions

Clause 49 will amend section 124ZAG of the Principal Act by adding new sub-section 124ZAG(2).

Existing section 124ZAG applies in circumstances where a taxpayer's qualifying expenditure is by way of contribution to the cost of producing a film, to limit the deduction under the concession to so much of the amount contributed as is actually spent on the film. For this purpose sub-section 124ZAH(1) and sections 124ZAJ (relating to arm's length transactions) and 124ZAK (relating to the acquisition of assets that are subsequently disposed of) apply to determine the extent to which a taxpayer's contributions have been expended in the production of the film.

Capital expenditure which satisfies this test is, subject to the taxpayer satisfying the general "at-risk" test (existing section 124ZAM) and not assigning an interest in the future copyright (existing section 124ZAL), eligible for deduction under section 124ZAF.

New sub-section (2) will perform an equivalent function in relation to amounts contributed under the new arrangements. Under sub-section (2) the amount of any deduction allowed to a taxpayer in respect of contributions to the production of a film is to be reduced to the extent to which the contributions are, upon withdrawal from the relevant film account, not dealt with in the prescribed manner (see notes on new sub-sections 124ZAA(7) and (8)). The practical effect of this is that deductions will be denied for the amount of any contributions not expended directly in the production of the film, as under the existing deduction arrangements.

Clause 50: Satisfaction of the Commissioner as to the future application of certain provisions

Clause 50 will insert new section 124ZAGA in the Principal Act to enable the Commissioner of Taxation to anticipate the application of the disallowance provisions contained in sub-section 124ZAFA(2) (relating to ownership of copyright and use for income producing purposes within the relevant two year period) and section 124ZAG (relating to expenditure of contributions otherwise than in the production of the film).

Under paragraphs 124ZAGA(1)(a) and (c) the Commissioner of Taxation is authorised to withdraw deductions for contributions where he is satisfied that the conditions necessary for the application of sub-section 124ZAFA(2) or section 124ZAG will apply at a future date.

Paragraphs 124ZAGA(1)(b) and (d) apply to authorise the Commissioner to reinstate a taxpayer's deduction entitlement where he later becomes satisfied that conditions necessary for the application of sub-section 124ZAFA(2) or section 124ZAG, which he had anticipated in withdrawing the deduction, will not, in fact, arise.

Sub-section 124ZAGA(2) enables a taxpayer who considers that the Commissioner should apply paragraphs 124ZAGA(1)(b) and (d) to reinstate deductions previously withdrawn, to ask the Commissioner for an amended assessment. Any such request is to be in writing and is to be posted to, or lodged with, the Commissioner. By virtue of sub-section 124ZAGA(3) the Commissioner is to consider any such request and is required to give the taxpayer written notice of his decision on that request.

Under sub-section 124ZAGA(4) a taxpayer dissatisfied with the Commissioner's decision under sub-section (3) may lodge a formal objection with the Commissioner. Any such objection is to be in writing and posted to or lodged with the Commissioner within 60 days after the service on the taxpayer of the notice of the decision of the Commissioner. As with all objections, the grounds of objection are to be stated fully and in detail.

Sub-section 124ZAGA(5) ensures that the general objection and appeal provisions of the Income Tax Assessment Act are to apply in relation to such an objection.

Clause 51: Allocation of contributions expended

Clause 51 will amend section 124ZAH of the Principal Act. Section 124ZAH presently applies for the purpose of section 124ZAG to authorise the Commissioner of Taxation, in circumstances where taxpayers have contributed towards the production of the film, to attribute actual expenditure on the production of the film to the contribution of a particular taxpayer.

New sub-section 124ZAH(1A) will perform, for the purposes of the operation of new sub-section 124ZAG(2), an equivalent function in relation to amounts contributed under the new deduction arrangements. By virtue of new sub-section (1A), the Commissioner of Taxation will be authorised to attribute amounts that, upon withdrawal from the film account, are not dealt with in the prescribed manner (broadly, expended in producing the film - see notes on new sub-sections 124ZAA(7) and (8)) to the contributions of particular taxpayers.

Paragraph (b) of clause 51 will make it clear that in determining whether amounts withdrawn from the film account are dealt with in the prescribed manner (expended in the production of the film) existing safeguards under section 124ZAJ (relating to arm's length transactions) and 124ZAK (relating to the acquisition of assets subsequently disposed of) apply.

Clause 52: Variation of Contracts

Clause 52 will amend section 124ZAN of the Principal Act to provide a safeguard against the re-arrangement of contracts that are designed to avoid the restriction on eligibility for the new basis of deduction to expenditure made under a contract entered into on or after 13 January 1983.

The new safeguard is modelled on existing section 124ZAN which applied on the introduction of Division 10BA. By paragraph (a) of clause 52 the operation of the existing safeguard is to be restricted to expenditure under a contract entered into before 13 January 1983.

Paragraph (b) of clause 52 will insert new sub-section 124ZAN(2) that will operate where the Commissioner is satisfied that a taxpayer entered into a contract before 13 January 1983 under which capital was to be expended on the production of the film and, on or after that date, in an attempt to qualify for the new deduction arrangements, the taxpayer entered into another contract under which capital was to be expended, in lieu of the original expenditure, on the production of a film. In these circumstances the Commissioner is to be empowered to treat that expenditure as if it were incurred under a contract entered into at the time the original contract was entered into. Any deduction entitlement would thereby be determined by reference to that date.

Clause 53: Limitation of deductibility of revenue expenses

Clause 53 will amend section 124ZAO of the Principal Act consequential on the introduction of the new basis of deduction for eligible film expenses under proposed section 124ZAFA.

The broad effect of section 124ZAO is that revenue expenses associated with an eligible film that are incurred in an income year are deductible only to the extent of the amount of the proceeds derived from the film in that year. This restriction is relevant to the exemption under section 23H of the Principal Act of the net proceeds from a qualifying film investment. Expenses subject to limitation under section 124ZAO are defined by that section to be exclusive of deductions available under section 124ZAF of the Principal Act. The amendment proposed by clause 53 will apply similarly to exclude from the operation of section 124ZAO expenditure deductible under new section 124ZAFA.

Clause 54: Deductions for Capital Expenditure on certain Income-Producing Buildings

Introductory note

Clause 54 will insert new Division 10D in Part III of the Principal Act to introduce a system of income tax deductions for capital expenditure on the construction of new non-residential buildings used for the purpose of producing assessable income. Capital expenditure on building extensions, alterations or improvements will qualify on a similar basis.

Buildings or parts of buildings used wholly or principally for the provision of residential accommodation, including hotels, motels, guest houses and apartment buildings, etc., used for the provision of traveller accommodation, will not be eligible under the new scheme. Nor will a part of a building that is part of a person's home. Traveller accommodation buildings may, however, qualify for deduction under the existing traveller accommodation depreciation arrangements where the general eligibility requirements of that scheme, including, broadly, the requirement that at least ten guest rooms are provided, are met.

Capital expenditure that qualifies for deduction under the new scheme will be written-off over a 40 year period at the rate of 2 1/2 per cent per annum on the same general basis as that already applying in respect of buildings used to provide short-term accommodation for travellers.

Qualifying for deduction under the scheme will be the cost of construction of non-residential buildings constructed in Australia after 19 July 1982 to the extent that they are for use for the purpose of producing assessable income. Capital expenditure on extensions or alterations to existing buildings will, subject to the same general eligibility requirement qualify to be written off as deductions at the annual rate of 2 1/2 per cent where construction of the extension or alteration commenced after 19 July 1982.

Deductions will commence to be available on the date, after completion of construction, on which the building or extension is first used or maintained ready for use for eligible income-producing purposes. Subject to a proportionate part-year deduction being allowed in the income year in which the building or extension first becomes eligible, the new allowance will be available by way of fixed annual deductions of 2 1/2 per cent of the construction cost.

The cost of constructing an eligible building or eligible extensions or alterations, will be taken to include such preliminary expenses as architects fees, engineering fees and the cost of foundation excavations. Capital expenditure on land (on which an eligible building is to be constructed), including clearing and demolition costs, will not qualify for deduction purposes.

Buildings which, when constructed, qualify for deduction under existing provisions of the law (e.g., buildings that qualify as allowable capital expenditure under the special provisions applicable to mining infrastructure (Division 10, 10AAA and 10AA of the Principal Act), scientific research buildings (section 73A) and buildings used in timber milling operations (section 124JA)) will continue to qualify under the existing deduction arrangements. Similarly, the cost of plant contained in a building (e.g., lifts and air-conditioning plant) that is depreciable under the general depreciation provisions of the income tax law will continue to attract deductions under those provisions. Once a building qualifies for deduction under the new scheme it will continue to be depreciable on that basis for so long as it is used for eligible (non-residential) income-producing purposes.

Entitlement to the statutory allowance will generally vest in the owner of the eligible building who uses it for the purpose of producing assessable income. However, where a lessee incurs the qualifying expenditure or obtains the lease by assignment from a lessee who incurred the expenditure, the lessee will be entitled to the allowance in respect of so much of the building as he continues to lease, whether under the original or a renewed lease. On final surrender or termination of a lease any entitlement of the lessee to deductions will revert to the owner.

Where parts of an eligible building are owned (or leased) by different persons the allowance in respect of any qualifying capital expenditure will correspondingly vest in the owner (or lessee) of each part.

Entitlement to the allowance will be dependent on the building continuing to be used, or maintained ready for use, for eligible purposes and reduced deductions will be available should part only of the building be used for eligible purposes.

Where an eligible building is demolished or destroyed within the statutory 40 year period, a balancing deduction will be allowed to the extent that the remaining entitlement to deductions exceeds any insurance or salvage recoveries. Partial demolition or destruction will attract corresponding adjustments.

A fuller explanation of the operation of the scheme is contained in the following outline of the operation of proposed new Division 10D.

General plan of amendments

The amendments proposed to give effect to this scheme are contained in proposed sections 124ZF to 124ZK of proposed new Division 10D.

The first step in determining whether a deduction is allowable under the scheme is to identify that there is an amount of qualifying capital expenditure. This is identified under section 124ZG as so much of any expenditure of a capital nature incurred by the owner or lessee in constructing, extending or altering a building after 19 July 1982 as is attributable to that part of the building, extension or alteration as -

•

is used, or maintained ready for use (sub-section 124ZF(7)), for the purpose of producing assessable income, and

•

is not for use wholly or principally for, or in association with, residential accommodation (including short-term traveller accommodation - sub-section 124ZF(1)) or for exhibition or display in connection with the sale of the whole or part of any building or the lease of the whole or part of any residential accommodation (section 124ZG(2)).

The residential use exclusion extends, by virtue of sub-section 124ZF(6), to any part of a building that is part of a person's home or is used for the purpose of operating a hotel, motel or guest house - other than in the provision of a facility of a kind not commonly provided in a hotel, motel or guest house in Australia and that is excluded from eligibility under the short-term traveller accommodation scheme by virtue of the operation of sub-section 124ZA(10) or (11) (sub-section 124ZF(5)). In addition, the cost of constructing a building or plant that would otherwise qualify for deduction under existing provisions of the income tax law is excluded from being treated as qualifying capital expenditure for the purposes of the new scheme (sub-section 124ZG(3)). Such expenditure will continue to be deductible under the existing law.

In determining a person's entitlement to a deduction, that part of an eligible building to which an amount of qualifying expenditure is attributable is identified as the "prescribed part" (sub-section 124ZF(2)).

It is important to note that this expression will be used extensively in the explanations of new Division 10D that follow. Towards a more ready comprehension of these subsequent explanations it may be of assistance to keep in mind that a particular building may, at any time, contain several "prescribed parts" as defined. This is because the term "prescribed part" may relate to amounts of qualifying capital expenditure incurred at different times or by more than one person, e.g., an original eligible building may constitute one "prescribed part", and a later extension of the building may constitute another.

Entitlement to deductions under the scheme in respect of an amount of qualifying capital expenditure is conferred on the owner (or owners), or an eligible lessee, of the prescribed part by section 124ZH, in respect of the period that he or she uses that part in the prescribed manner.

The owner (or eligible lessee) of the whole or part of a prescribed part will be taken to have used the part in the prescribed manner at any time when he or she used that part for the purpose of producing assessable income (sub-section 124ZF(3)).

For this purpose, any part of a building that is used or available for use wholly or principally for the provision of residential (including short-term) accommodation or for exhibition or display in connection with the sale of the whole or any part of that building or any other building or the lease of any residential accommodation, will be taken not to be used for eligible income-producing purposes (section 124ZF(4)). As outlined above, this exclusion specifically extends to the use of any part of a building that is part of a person's home or to any part of a building that is for use for the purpose of operating a hotel, motel or guest house (sub-sections 124ZF(5) and (6)).

By sub-section 124ZF(7), a part of an eligible building will not be taken not to have been used for prescribed purposes by reason only of a temporary cessation of use that is consequential on the construction of an extension, alteration or improvement to a building or the making of repairs, or where part of an eligible building is not used but is maintained ready for use for the purpose of producing assessable income.

In a case where a taxpayer owns the whole prescribed part and uses it in the prescribed manner, during the whole of the year of income, the owner (or lessee) will be entitled to a deduction equal to 2 1/2 per cent of the amount of the qualifying expenditure (paragraph 124ZH(1)(c)). A taxpayer who owns part only of a prescribed part, and uses that part in the prescribed manner during the whole of a year of income, will be entitled to a proportion of the full 2 1/2 per cent allowance determined by reference to the extent to which the qualifying capital expenditure is attributable to the part owned by the taxpayer (paragraph 124ZH(1)(d)).

Where a taxpayer owns a prescribed part, and uses it for purposes of producing assessable income during part only of a year of income the 2 1/2 per cent deduction entitlement will be reduced proportionately by reference to the number of days in the relevant part of the year of income (paragraph 124ZH(2)(c). A taxpayer, who owns and uses in the prescribed manner a part only of the prescribed part during portion only of a year of income, will be entitled to a pro-rata deduction determined by reference to the number of days in that portion of the year of income and the extent to which the qualifying capital expenditure is attributable to the part owned by the taxpayer (paragraph 124ZH(2)(d)).

Sub-sections 124ZF(8), 124ZF(12) and 124ZF(13) will confer entitlement to deductions on a lessee who incurs qualifying capital expenditure (or on an assignee of a lease from a lessee who so incurred the expenditure) by treating the lessee as the owner of so much of the prescribed part as he or she continues to lease.

A taxpayer's entitlement to a deduction in respect of an amount of qualifying expenditure is to be subject to reduction if, while the whole or part of the prescribed part is owned by the taxpayer, it is used only partly for the purpose of producing assessable income (sub-section 124ZJ(1)).

Entitlement to a deduction in respect of the total or partial destruction of an eligible building is established under section 124ZK. By virtue of sub-section 124ZK(1), where a prescribed part is destroyed an owner will be entitled to a deduction. This deduction will be equal to the amount by which the amount of the residual capital expenditure (i.e., the remaining entitlement to deductions in respect of the qualifying capital expenditure - sub-section 124ZF(11)) - attributable to that part of the prescribed part owned by the taxpayer - exceeds the amount received in respect of the destruction (including salvage recoveries net of demolition costs - sub-section 124ZK(3)), that is attributable to that part (sub-section 124ZK(4)).

A taxpayer's entitlement to a deduction in respect of the destruction of a prescribed part is limited to cases where, either immediately before the destruction the part owned by the taxpayer was being used by the taxpayer for prescribed purposes or where the last use of that part by the taxpayer was for prescribed purposes (paragraphs 124ZK(1)(d) and (e)). Correspondingly pro rata balancing deductions will be available where there is a partial destruction of a prescribed part owned by a taxpayer (sub-section 124ZK(2)).

A taxpayer's entitlement to a deduction in respect of the destruction of an eligible building owned by him will be subject to reduction having regard to any previous ineligible use of the building (sub-section 124ZJ(2)).

A fuller explanation of the operation of the scheme is contained in the following detailed notes on the individual provisions of proposed new Division 10D.

Section 124ZF : Interpretation

Section 124ZF contains a number of definitions and interpretational provisions necessary for the operation of proposed new Division 10D.

Sub-section (1) of section 124ZF defines certain terms used in the Division -

"construct"

is defined as including make, e.g., references to the construction of an alteration or improvement will be taken to include the making of an alteration or improvement;

"eligible building"

is defined to mean a building in respect of which qualifying expenditure has been incurred;

"residential accommodation"

is defined to include short-term traveller accommodation and other short-term residential accommodation.

As explained in the general notes on the operation of Division 10D, entitlement to deductions in respect of an amount of qualifying expenditure is determined by reference to a person's ownership and use of that part of the building to which the qualifying expenditure is attributable. For this purpose sub-section 124ZF(2) describes that part of the building in respect of which an amount of qualifying expenditure, as described in section 124ZG, is attributable as the "prescribed part". Thus, where the amount of qualifying expenditure is the cost of construction of a building used solely for eligible (non-residential) income-producing purposes, that building will be taken to be the prescribed part in relation to that expenditure. Where the amount of qualifying expenditure is the cost of construction of an extension or alteration that is used for eligible purposes, that extension or alteration will constitute the prescribed part in relation to that expenditure.

A person will be entitled to a deduction under this Division in respect of any part of a year of income in which that person owns the whole or a part of a prescribed part (as defined in sub-section 124ZF(2)) and deals during that period with the prescribed part in the prescribed manner. By the operation of sub-section 124ZF(3) the owner will be taken to have dealt with the prescribed part in the prescribed manner at a particular time if, at that time, he or she used it for the purpose of producing assessable income.

Sub-sections (4) to (7) lay down rules for the purpose of determining whether a building or a particular part of a building is to be taken to be used of the purpose of producing assessable income for the purposes of the new scheme.

By sub-section (4) any part of a building that was used or available for use by any person wholly or principally for residential accommodation or for use in connection with facilities that are used wholly or principally in association with residential accommodation are to be taken not to be used for income-producing purposes (paragraph 124ZF(4)(a)). The effect of this is to exclude from eligibility under the new scheme that part of any building that is for use for, or in association with, residential accommodation. As noted in the notes on new sub-section 124ZF(1), residential accommodation includes traveller and other short-term accommodation.

Similarly, by paragraph 124ZF(4)(b), any part of a building that is for use wholly or principally for exhibition or display in connection with the sale of the whole or any part of a building or in connection with the lease of the whole or any part of a building for residential purposes, is taken not to be used for eligible income-producing purposes. The effect of paragraph (b) would be to exclude, for example, an exhibition home.

Sub-section 124ZF(5) will ensure that any part of a building that is excluded from eligibility under the traveller accommodation depreciation scheme (Division 10C of the Principal Act) by sub-section 124ZA(10) or (11) by reason of being for use for the provision of a facility of a kind not commonly provided in a hotel, motel or guest house in Australia will qualify for deduction under the new scheme. Sub-section (5) would, for example, bring within the scope of the new scheme that part of a hotel that was used as a casino or convention centre that had been excluded from eligibility under the traveller accommodation scheme.

Sub-section 124ZF(6) will make it clear that no part of a building that forms part of a person's home or that is for use wholly or principally for the purpose of operating a hotel, motel, or guest house will qualify under the new scheme. The former test will ensure that "home offices" are excluded from eligibility. The latter test is subject to the operation of sub-section (5).

Sub-section 124ZF(7) will ensure that any part of a building that is not used, but that is maintained ready for use for eligible income-producing purposes will qualify the owner for deductions under the scheme. Eligibility is subject to the use of the particular part of a building for eligible income-producing purposes not having been abandoned (paragraph 124ZF(7)(b)). Sub-section (7) will ensure, for example, that deductions are available in respect of commercial premises that are available for tenancy or in respect of a factory whose use for eligible income-producing purposes has temporarily ceased because of a lack of demand for particular products. Sub-section (7) will also ensure that deductions continue to be available in respect of any part of a building that has temporarily ceased to be used for eligible income-producing purposes by reason only of the making of repairs or the construction of an extension to the building (paragraph 124ZF(7)(a)).

Sub-section 124ZF(8) operates in conjunction with proposed sub-sections 124ZF(12) and 124ZF(13) to confer eligibility for deductions on lessees who incur qualifying expenditure or who obtain their lease on assignment from an eligible lessee. The availability of deductions will, of course, be subject to the lessee dealing with the relevant premises in the prescribed manner.

The effect of these sub-sections will be to confer entitlement to annual deductions on a lessee who incurs qualifying expenditure for so long as he or she continues to lease the building or the part of the building to which the expenditure is attributable. Should this eligible lessee assign the lease, the right to deductions will pass to the assignee, who will become an eligible lessee.

Where a lessee who is entitled to deductions surrenders the lease or the lease is terminated, and the lessee does not immediately secure another lease, the entitlement to deductions will pass to the owner of the building. The right to deductions will then remain with the owner of the building notwithstanding any subsequent lease arrangements. Should an eligible lessee surrender part only of the lease, he or she will remain entitled to deductions but only with respect to that part of the building that he or she continues to lease.

For these purposes, sub-section (8) defines an "eligible lessee" in relation to an amount of qualifying expenditure. Thus, a lessee who has incurred an amount of qualifying expenditure will be taken to be an eligible lessee in relation to that expenditure for as long as he or she continues to lease the whole or any part of the building to which the expenditure is attributable. Alternatively, a lessee will be taken to be an eligible lessee in relation to an amount of qualifying expenditure incurred by a previous eligible lessee if he or she is assigned the lease in respect of the whole or part of the building to which qualifying expenditure incurred by the previous eligible lessee is attributable.

Sub-section (12) effectively confers entitlement to deductions on an eligible lessee in respect of an amount of qualifying expenditure by deeming an eligible lessee to be the owner of that part of the building to which the expenditure is attributable, and which is leased by the eligible lessee at a particular time, so long as, at all times since the relevant construction was completed, the eligible lessee or a previous eligible lessee had a lease over that part of the building. Sub-section (13) is a complementary provision that ensures that where an eligible lessee is taken to be the owner of part of a building, no other person can be taken to be the owner of that part for the purposes of determining any entitlement to deductions in respect of the particular amount of qualifying capital expenditure.

Sub-section (9) is a drafting measure by which a reference in the Division to a person is to be taken to include a reference to a partnership or a person in the capacity of a trustee. Thus, for example, a reference to capital expenditure incurred by a person on the construction of a building includes a reference to the cost of construction of a building by a partnership or trustee.

As mentioned in the introductory note, deductions in respect of an amount of qualifying expenditure are to be available commencing from the date, after completion of the relevant construction (i.e., after completion of construction of the building or the extension, alteration or improvement), on which the building or extension, etc., is first used or maintained ready for use for eligible income-producing purposes. To this end, sub-section (10) ensures that the owner of the whole or a part of the prescribed part in relation to an amount of qualifying expenditure will not be taken to have dealt with that part in the prescribed manner at any time prior to the completion of the relevant construction.

Sub-section (11) defines the term "residual capital expenditure" in relation to an amount of qualifying capital expenditure. Determination of this amount at a particular time will be necessary in ascertaining the amount of any deduction allowable to a taxpayer under proposed section 124ZK in respect of the destruction of the whole or any part of a prescribed part owned by the taxpayer. As explained in the note on that section, a deduction is to be available to the owner (or eligible lessee) of a prescribed part that is destroyed if the residual capital expenditure in relation to the prescribed part exceeds any insurance or salvage recoveries received in respect of that destruction.

In essence, the residual capital expenditure in relation to an amount of qualifying expenditure at a particular time is the amount prospectively remaining as eligible to be written-off as deductions in respect of that expenditure. Thus, sub-section (11) identifies the amount of residual capital expenditure at a particular time as the amount by which the amount of the expenditure exceeds the sum of the deductions that would have been available to a taxpayer had he or she been fully entitled to deductions up to that time, i.e., as if the person had owned and used the relevant premises in the prescribed manner throughout and deductions allowable had not been subject to any reduction under section 124ZJ.

As explained more fully in the notes on sub-section 8, sub-section (12) operates to confer entitlement to deductions on eligible lessees in respect of amounts of qualifying expenditure that they or preceding lessees have incurred, by deeming the lessee to be the owner of that part of the building to which the expenditure is attributable if, at all times since completion of the construction to which the expenditure relates, the relevant part of the building has been leased by an eligible lessee.

Sub-section (13) complements the operation of sub-section (12) by ensuring that where an eligible lessee is taken to be the owner of any part of an eligible building, no other person is taken to be the owner of that part for the purposes of determining any entitlement to deductions in respect of the particular amount of qualifying expenditure.

Sub-section (14) is a drafting measure by which a reference in relation to an amount of qualifying expenditure, to "the relevant construction" is used as a short-hand reference to the construction of a building or the extension, alteration or improvement to which the expenditure is attributable.

Sub-section (15) operates to prevent the overlapping of deduction entitlements by defining the prescribed part owned by a taxpayer in circumstances where the extent of a taxpayer's ownership of a particular prescribed part in relation to an eligible building varies during the year of income. This would occur, for example, where a taxpayer who owns several floors in an eligible building acquires a further floor that is contained in the relevant prescribed part of the building, or disposes of a floor, during the course of the year.

By virtue of the proposed sub-section (15), where a taxpayer's ownership changes in this way, the part owned by the taxpayer prior to the variation is treated as separate from the part owned after the variation. Thus, for example, where a taxpayer owns one-half of a prescribed part (part A) throughout the year of income and acquires ownership of the remaining half (part B) for the last six months of the year of income, proposed sub-section (15) means that the taxpayer will be treated as owning one part (A) for the first six months and another part (constituted by A and B) for the second six months.

In the absence of sub-section (15), a taxpayer in the example outlined might technically be in the position of satisfying the requirements for deductions both in respect of part A for 12 months and for part A again within the extended part constituted by parts A and B for six months.

Section 124ZG : Qualifying expenditure

Section 124ZG identifies when an amount of expenditure is an amount of qualifying expenditure for the purposes of the Division.

By virtue of sub-section (1) an amount of capital expenditure incurred by a person on the construction of a building in Australia or on an extension, alteration or improvement to a building in Australia will be taken to be an amount of qualifying expenditure if, on completion of the construction, the building or the extension, alteration or improvement, is to be used for the purpose of producing income.

Where the building, or the extension, alteration or improvement, is not solely for use in producing income so much only of the expenditure as is attributable to the income-producing part of the building or extension will be taken to be qualifying expenditure. In addition, only expenditure incurred by a person who, when the expenditure was incurred, was to be the owner or lessee of the relevant premises will be taken into account in determining the amount of qualifying expenditure.

A building constructed by a tax exempt organisation for use for eligible income-producing purposes will give rise to an amount of qualifying expenditure for the purposes of the scheme. If the building is subsequently acquired by a person who uses the building or part of the building for the purpose of producing assessable income, deductions would become available to that person.

Similarly, a building constructed "on spec" will be capable of giving rise to qualifying expenditure. In these circumstances deductions would become available to the person who acquires the building from the builder and uses if for eligible income-producing purposes.

Consistent with the operation of sub-section 124ZF(4), sub-section 124ZG(2) operates to exclude from qualifying expenditure, capital expenditure on the construction of any part of a building that is for use wholly or principally for the provision of residential (including short-term) accommodation or for exhibition or display in connection with the sale of the whole or any part of the building or the lease of any residential accommodation. As outlined in the notes on sub-sections 124ZF(4), (5) and (6), this exclusion extends to the use of any part of a building that is part of a person's home and to any part of a building that is for use for the purpose of operating a hotel, motel or guest house. The effect of sub-section 124ZG(2) is to exclude buildings constructed for these purposes from qualifying for deduction under the new scheme.

A building constructed for the provision of residential accommodation, to the extent that it is used to provide short-term accommodation for travellers, may be eligible for depreciation under Division 10C of the Principal Act where the eligibility requirements of that Division, including the minimum 10 guest room requirement embodied in sub-sections 124ZA(4) and (5), are satisfied. Other buildings used for residential accommodation are excluded from the scope of both Division 10C and the new Division 10D.

By virtue of sub-section 124ZG(3), in determining the amount of any qualifying expenditure, expenditure incurred on plant or articles, such as lifts and air-conditioning plant that presently qualify as depreciable property is to be disregarded. Such property will continue to be depreciable under the general depreciation provisions of section 54 of the Principal Act. Similarly, expenditure incurred on property that is eligible for deduction under section 73A (scientific research), section 75B (conserving or conveying water), section 124JA (timber milling), Division 10 (general mining), Division 10AAA (transport of certain minerals) or Division 10AA (prospecting and mining for petroleum) will continue to be deductible under the relevant provision of the Principal Act.

Sub-section (4) ensures that once a building qualifies for deduction under new Division 10D, deductions in respect of eligible (non-residential) income-producing use will continue to be allowable under that Division to the exclusion of any deduction entitlements attributable to the qualifying expenditure that might otherwise arise in respect of the future use of the building.

Section 124ZH : Deductions in respect of qualifying expenditure

A primary entitlement to deductions is established under section 124ZH for the owner (or eligible lessee) of the whole or a part of a prescribed part in respect of the period that he or she deals with that part in the prescribed manner (as explained in the notes on sub-sections 124ZF(3) to (7)).

Sub-section (1) ensures that a taxpayer who, during the whole of a year of income, is the owner of a prescribed part of a building and deals with that part in the prescribed manner will be entitled, by virtue of paragraph (c), to a deduction of an amount equal to 2 1/2 per cent of the amount of qualifying expenditure related to the prescribed part.

A person who is the owner of a part of a prescribed part during the whole of the year of income and deals with that part throughout the year of income in the prescribed manner will be entitled, under paragraph (d), to a proportion of the full 2 1/2 per cent deduction determined by reference to the extent to which the qualifying expenditure is attributable to the part that he or she owns. For example, the owner of a part of the prescribed part to which fifty per cent of the expenditure relates would be entitled to a deduction equal to one-half of the full 2 1/2 per cent deduction.

Sub-section (2) will apply where, during part only of a year of income, a taxpayer owns the whole or part of a prescribed part and deals with it in the prescribed manner. Sub-section (2) could apply, for example, where a taxpayer is the owner of a prescribed part during the whole of the year of income but uses it, or maintains it ready for use, for eligible income-producing purposes for 4 months only. Sub-section (2) could also apply where a taxpayer was the owner of a prescribed part for a period of 4 months and dealt with it in the prescribed manner for all of that period.

By paragraph (c) a taxpayer who, during a part only of a year of income, was the owner of an entire prescribed part and dealt with it in the prescribed manner is to be entitled to a proportion of the full annual deduction of 2 1/2 per cent of the qualifying expenditure, the proportion to be determined by reference to the number of days in that part of the year of income. Thus, a person who owns and uses a prescribed part in the prescribed manner for a period of six months would be entitled to one-half of the full 2 1/2 per cent deduction.

Again, a taxpayer who, for part of a year of income, is the owner of a part of a prescribed part of an eligible building and deals with it in the prescribed manner is, by virtue of paragraph (d), to be entitled to a pro-rata deduction determined by reference to the number of days in that period and also to the extent to which the qualifying expenditure is attributable to the part owned by the taxpayer. For example, where one-half of an amount of qualifying expenditure of $200,000 is attributable to that part of the prescribed part owned by a taxpayer who deals with the part in the prescribed manner for 6 months, the taxpayer would be entitled to a deduction for that year of one-half of 2 1/2 per cent of $100,000, i.e., $1,250.

Sub-section 124ZH(3) operates to ensure that deductions cease to be available in respect of an amount of qualifying expenditure after the expiration of a 40 year period. Under sub-section (3), the particular prescribed part to which the qualifying expenditure relates is not to be taken to have been dealt with in the prescribed manner at any time after the expiration of the 40 year period commencing on the day on which that part was first used (or maintained ready for use) after completion of the relevant construction.

Section 124ZJ : Reduction of deductions

As explained in the notes on section 124ZH, a primary entitlement to deductions in respect of an amount of qualifying expenditure is conferred on the owner (owners) of the relevant prescribed part in respect of the period that he or she uses that part in the prescribed manner. That primary entitlement to deductions is made subject to reduction, in defined circumstances, by the operation of section 124ZJ.

Sub-section 124ZJ(1) will operate where a prescribed part is not used during any period solely for eligible income-producing purposes. (The meaning of use for the purpose of producing assessable income is governed by the exclusion of residential accommodation, etc., contained in sub-sections 124ZF(4) to (7)). As explained in the notes on sub-section 124ZF(3), the owner of the whole or part of a prescribed part will be taken to have dealt with that part in the prescribed manner during any period when he or she uses any part of that part for eligible income-producing purposes.

On that basis a taxpayer may be taken to have dealt with a prescribed part in the prescribed manner, and therefore be entitled to a deduction under section 124ZH, in relation to a period when the prescribed part was used by the taxpayer only partly for the purpose of producing assessable income.

This could occur, for example, where a section of the prescribed part owned by the taxpayer was not used for eligible income-producing purposes during that period (sub-paragraph 124ZJ(1)(b)(i)). Alternatively, the prescribed part may be owned and used by a person whose income is partly exempt from income tax (sub-paragraph 124ZJ(1)(b)(ii)).

Sub-section 124ZJ(1) applies in these circumstances to authorise a reduction in the deduction otherwise available to an owner.

Sub-section 124ZJ(2) operates, in certain circumstances, to reduce a taxpayer's entitlement to a deduction as established under section 124ZK when there occurs during a year of income a total or partial destruction of an eligible building. As will be explained more fully in the notes on that section, a balancing deduction is to be available to the owner (or eligible lessee) of a prescribed part that is destroyed, if the residual capital expenditure in relation to that part exceeds any insurance or salvage recoveries received in respect of that destruction.

By sub-section (2), the deduction otherwise available in respect of the destruction of a prescribed part is to be reduced appropriately where, at any time prior to the destruction, that part was being used in circumstances that either precluded the allowance of a deduction in respect of the relevant amount of qualifying expenditure or resulted in a reduced deduction being available.

Section 124ZK : Deduction in respect of destruction of building

Section 124ZK, the last of the new sections to be inserted by clause 54, will authorise deductions in respect of the total destruction of a prescribed part (sub-section (1)) and in respect of the partial destruction of a prescribed part (sub-section (2)). The section will apply both to voluntary destruction (demolition) and involuntary destruction (e.g., loss by fire) of the premises concerned.

Sub-section 124ZK(1) operates so that the owner of a prescribed part that is destroyed is to be entitled to a deduction of the amount by which the residual capital expenditure (as defined in sub-section 124ZF(11)) at the time of destruction exceeds the amount, if any, received or receivable by the taxpayer (under a policy of insurance or otherwise) in respect of the destruction.

As explained in the notes on sub-section 124ZF(11) the residual capital expenditure at a particular time is, broadly, the amount of the qualifying expenditure remaining to be written off at that time. By virtue of sub-section 124ZK(3), the amount received or receivable in respect of the destruction of a prescribed part will include the amount of any salvage recoveries (net of demolition costs).

A deduction is to be available in respect of the destruction of a prescribed part only where the prescribed part was, immediately before the destruction, being used by its owner in the prescribed manner or, where it was not being so used, where the last use of the prescribed part by the owner was in the prescribed manner. In the latter case, where, at the time when the prescribed part was last used in the prescribed manner, some of the prescribed part was also being used for purposes other than in producing assessable income (within the meaning of that term as governed by sub-sections 124ZF(4) to (7)) and continued to be used for those other purposes, that fact will not preclude the owner from being entitled to a balancing deduction in respect of the destruction of the prescribed part.

Where parts of a prescribed part that is destroyed were owned by different taxpayers, each taxpayer will, subject to the general tests of deductibility, be entitled to a deduction of the amount by which the residual capital expenditure attributable to his or her part exceeds any amounts received or receivable in respect of the destruction of that part.

Sub-section 124ZK(2) will authorise deductions in respect of the destruction of a part of the prescribed part, referred to in the sub-section as the "destroyed part".

Subject to satisfying requirements equivalent to those outlined in sub-section (1), i.e., broadly, that the last use of the destroyed part was for prescribed purposes, the owner of the destroyed part is to be entitled to a deduction of the amount by which the residual capital expenditure attributable to the destroyed part exceeds the amount received or receivable by the owner in respect of the destruction.

The owner of a part of the destroyed part will be similarly entitled to a deduction of the amount by which the residual capital expenditure attributable to his or her share of the destroyed part exceeds any amount received or receivable in respect of its destruction.

As explained in the notes on sub-section (1), the amount received or receivable in respect of the destruction of the whole or part of a building is to include any amounts received or receivable in respect of the disposal of any property salvaged from the destruction. For this purpose, sub-section 124ZK(3) deems any amount received by a person on the disposal of property that formed part of a building that, prior to destruction, was owned by the person to be an amount received or receivable in respect of the destruction. Where demolition costs are incurred, the amount received will be taken to be the amount net of those costs.

Where a whole or a part of an eligible building is destroyed, separate deductions in respect of that destruction are to be calculated under section 124ZK in relation to each of the prescribed parts within the building or, where different parts of a prescribed part are owned by different people, in relation to each of those parts of a prescribed part. For these purposes, sub-section 124ZK(4) empowers the Commissioner of Taxation to allocate an amount received or receivable in respect of the destruction between parts of the destroyed building.

Clause 55: Rebate of tax for certain primary producers

This clause proposes amendments to section 156, one of the "primary producer averaging" provisions of Division 16 of Part III of the Principal Act. The amendments are consequential upon new sub-sections 98(3) and (4) proposed to be inserted by clause 18, which provide for the trustee of a trust estate to be assessed in respect of a share of income of the trust estate to which a beneficiary who is a non-resident at the end of the year of income is presently entitled and in respect of which the beneficiary would, but for that amendment, have been assessed directly under section 97.

As mentioned in the notes on clause 19, it is intended that any averaging rebate of tax in respect of the primary production income of a non-resident beneficiary of a trust estate will not be allowed to the trustee but will, by the operation of new sub-section 98A(1), be allowed to the beneficiary. Clause 55 will amend paragraph 156(5)(a) and sub-section 156(6) by omitting the references to section 98, in both cases, and replacing these with references to the sub-sections 98(1) and (2), which cover the income previously covered by section 98.

Clauses 56-65: Collection of tax at source from certain payments for work or services and associated amendments

Introductory Note

The Bill will give effect to the proposal, announced in the 1982-83 Budget speech, to introduce a new collection system involving deduction of tax at source from payments for work or services that are not presently subject to deductions under the PAYE provisions. Initially, the system is to operate in a limited number of industries but is capable of extension to other industries. Associated with these measures are requirements for householders to report in respect of payments made in connection with larger private building projects, and consequential amendments in relation to the existing PAYE provisions.

The new measures are to have effect from 1 September 1983 in relation to payments that are to be prescribed in the regulations. The regulations are also to provide for the rates of deductions that are generally to apply to those prescribed payments - initially, a single rate of 10% of the gross payment received is planned to apply.

It is intended that, from 1 September 1983, the measures will generally apply to payments in the building and construction, architectural, consultant engineering, surveying and other technical building services, joinery and cabinet making, road transport, motor vehicle repair and cleaning industries. With two exceptions in respect of limited categories of payments the system will only apply to intra-industry payments, that is to payments between persons each of whom is engaged in the particular industry.

The two exceptions to this intra-industry basis are in relation to the building and construction and the road transport industries. So far as the building and construction industry is concerned, payments in relation to building or construction projects made by persons other than householders from outside the industry will be subject to deductions of tax at source where the value of the project exceeds $10,000. This requirement corresponds to the obligation to be imposed on householders to report similar payments. As to the road transport industry, the system will also apply to payments received from outside the industry for the transport of goods by road where the payment relates to the exclusive use of a vehicle for the person making the payment who regularly engages the recipient for that purpose. Certain firms, such as breweries, petroleum distributors, brick and pre-mix concrete manufacturers and newspaper publishers are known to employ such arrangements. Payments that a business house makes for the casual delivery of goods, including deliveries to its retail customers, would not be subject to deductions of tax at source.

Clause 65 of the Bill will insert a new Division 3A in Part VI of the Principal Act to provide for the collection of tax deductions at source and reporting in cases of payments for labour and services that are not subject to PAYE deductions. Although the new Division is broadly modelled, in a number of its basic features, on the PAYE provisions - Division 2 of Part VI of the Principal Act - which provide for the collection by instalments of tax in respect of salary and wages income, the obligations imposed on persons making and receiving payments to which the new Division is to apply are, in many respects, significantly different from those under the PAYE provisions.

So that there is no overlap between the application of the new Division and the PAYE provisions, certain amendments (in clauses 58 and 65) ensure that the PAYE provisions will not apply to a payment that is wholly or principally for the labour of a person, who is not an employee as such, where the payment is prescribed for purposes of the source deduction system.

The major concepts of the proposed new Division which are central to its operation are as follows -

Deduction form:

The deduction form is to be the focal point of proposed Division 3A. It will provide the Commissioner with a complete and accurate record of payments to which the Division applies and will be readily available from post offices and taxation offices. It will have to be completed in part by each of the payer and the payee in respect of all prescribed payments made in relation to a calendar month. The form will record certain details relating to the payer and payee, the amount of the prescribed payments and deductions (if any) made therefrom. The payer will be called on to forward to the Australian Taxation Office on a monthly basis a copy of all completed deduction forms for the month, together with a remittance for any deduction made from the payments covered by those forms.

When the deduction forms arrive in the Taxation Office, details will be extracted and entered in taxpayers' computer records to enable verification and reconciliation with amounts shown in income tax returns lodged by the payers and payees.

While the income derived by a payee from prescribed payments will continue to attract provisional tax, the amount of deductions made from such payments will be applied to reduce the amount of provisional tax that otherwise would be payable.

Payees:

The proposed Division imposes certain liabilities and obligations on both eligible paying authorities (referred to in these notes as payers) and payees.

In the case of a payee, these liabilities and obligations arise primarily in respect of the completion of a deduction form (see earlier notes) at a time before the payee receives a payment to which the new Division applies, that is, a prescribed payment. The particulars required will be in the form of a declaration specifying the full name, address and taxation file number of the payee. In the case of payments to partnerships, trusts and companies, the details entered on the form by the payee will be those of the entity entitled to receive the payment. Where the payee receives more than one prescribed payment from a particular payer during a month, the one deduction form will cover all payments made to the payee by that payer during the month.

The payee will be required to give the completed deduction form to the payer before the payee receives the prescribed payment. Where a payee fails to furnish a deduction form to a payer, or does not fully complete the deduction form, the amount of tax to be deducted from the payment by the payer will be increased by 15 per cent of the amount of the gross payment, that is, the basic rate of deduction will be increased from 10 per cent to 25 per cent of the gross payment.

Each payee will be required to submit with his or her annual return of income deduction forms relating to the particular year. As was explained earlier in the notes on the deduction form, credit will be allowed to the payee in his or her assessment for the source deductions made, and will be taken into account in the calculation of provisional tax.

Payers:

A payer who, on or after 1 September 1983, makes, or is liable to make, a prescribed payment will be required to register with the Australian Taxation Office. Payers will generally be persons involved in businesses in which it is customary to make prescribed payments and will include the Commonwealth, the States, the Northern Territory and their respective authorities. Payers will also include, to the extent they make prescribed payments, a person acting in the capacity of trustee of a trust estate or as a member of a religious, charitable, social or recreational, cultural, educational or other organisation or body. (Another category of payers is that of householders whose obligations under these measures are dealt with separately hereunder).

The relevant provisions of the Bill ensure that persons who expect to be payers on or after 1 September 1983 may register with the Taxation Office prior to that time.

At the time a payer makes a prescribed payment to any payee, the payer will be obliged to deduct the appropriate amount of tax, and within 14 days after the end of each calendar month, in which payments were made -

•

pay to the Commissioner the amount of tax deducted from those payments;

•

complete the deduction forms received from the payees in relation to those payments;

•

issue to each payee a copy of his or her deduction form;

•

prepare a statement reconciling the total of the amounts of payments and deductions (if any) made with the amounts recorded on the deduction forms; and

•

forward that reconciliation together with a copy of all relevant deduction forms to the Commissioner with the above remittance.

Householders:

A householder's obligations under the proposed Division are limited to a requirement to register with the Taxation Office where a building or construction project the cost of which will exceed $10,000 is commenced, and to report prescribed payments in respect of that project. There are no circumstances in which a householder will in that capacity be required to make deductions from prescribed payments.

While not liable to make deductions, a householder who is subject to the new Division will generally be required to satisfy the other obligations placed on persons making prescribed payments under the system.

Prescribed certificates:

There are three certificates available under the new Division, each of which in varying degree affects the obligations of payers and payees.

The deduction exemption certificate may be made available to a payee on application to the Commissioner, if the Commissioner is satisfied that, basically, the payee is and has been, for a period of 3 years prior to the application, carrying on a business in Australia and has, in all respects, complied with his obligations under all taxation laws during that period. Prescribed payments that, by reason of the payee having an exemption certificate, will not be subject to tax deductions, will be reported by the payer to the Taxation Office. The holding of an exemption certificate will not, however, absolve its holder from making deductions from payments he or she makes to others.

Where it can be established that, because of special circumstances, the basic deduction rate of 10% will not be appropriate, a payee may apply to the Commissioner for the issue of a deduction variation certificate.

Where a payer makes a prescribed payment to a payee who is the holder of a deduction variation certificate, the deduction will be made at the lower rate indicated on the certificate.

The last of the certificates available under new Division 3A - a reporting exemption certificate - will only be issued in limited circumstances. A payer and a payee (being a payee who is the holder of a deduction exemption certificate) will be able to apply jointly to the Commissioner to be exempted from obligations under the new Division in respect of prescribed payments to be made by the payer to the payee under a specifically identified contract. It is expected that this certificate will only be issued where the Commissioner is satisfied that all the details of payments that are to be made in respect of a particular contract of long duration will be declared in the payer's and payee's annual income tax returns.

Each of the certificates described above will be valid for a period specified on the certificates. The Commissioner will have the power to revoke a prescribed certificate at any time by service of notice in writing on the payee or payer as the case requires.

The Commissioner is required to give notice in writing of his decision in relation to an application for a prescribed certificate or to revoke a certificate. A person who is dissatisfied with the Commissioner's decision in this regard will be accorded rights of objection against that decision and review by an independent Taxation Board of Review.

General:

The new Division will provide special penalties to be statutorily imposed where a payer has failed to make a deduction from a prescribed payment, has failed to remit a deduction made from a prescribed payment, or, in certain circumstances has failed to forward a deduction form in respect of a prescribed payment.

Such penalties will be subject to a power of remission by the Commissioner and, except for the late payment element they contain, will also be subject to objection by the taxpayer and review by an independent Taxation Board of Review.

The Bill also provides for significant court imposed penalties in appropriate cases.

As mentioned above, credit for tax deducted at source will be allowed in the assessment of the payee. Where tax has been deducted from payments made to a partnership, the amount of the credit on a certificate will be apportioned between the partners in the partnership by reference to each partner's share of the prescribed payments that are included in the net income of the partnership. Similar rules are to apply in relation to distributions of prescribed payment income to the beneficiaries of trust estates.

Although provisional tax is payable on income subject to source deductions, the deductions of the preceding year will be taken into account in determining the provisional tax payable that is determined at the time the assessment for the preceding year is made. A provisional taxpayer will, under self assessment provisions, also have available the opportunity to have such basic provisional tax re-calculated having regard to relevant income and deductions at source made, or estimated to be made, during the then current income year.

Where tax has been deducted from a payment to a company, credit will be allowed in the assessment of that company for the year of income to which the payment relates. The amount of company tax instalments calculated on the basis of that assessment will accordingly reflect the amount of credit allowed. Companies will also be able to seek a variation of instalments in respect of a particular year of income to take account of the source deductions made, or estimated to be made, from payments received or to be received during that year of income.

Associated PAYE amendments. The Bill also provides (in clause 58) for amendments to overcome technical deficiencies in the PAYE provisions (governing tax instalment deductions from salaries and wages) which were exposed in the Atlas and Bolwell cases and, as noted earlier, to ensure that there is no overlap between the proposed new Division 3A and the PAYE provisions.

The existing PAYE provisions of the income tax law require that tax instalment deductions be made from salaries and wages paid to employees, and for this purpose salaries and wages include payments that are made under a contract that is wholly or substantially for the labour of the person to whom the payments are made.

Put broadly, the amendments proposed by this clause will amend the existing PAYE provisions:

(a)

so that they apply only to payments wholly or principally for the payee's labour;

(b)

to restrict a householder's liability to make PAYE deductions to payments made to a person who is an employee in the ordinary sense of that word; and

(c)

to make it clear that payments wholly or principally for the labour of the payee fall within the PAYE system -

(i)

where the payee performs or is to perform the labour even thought he or she has the right under contract to engage other persons to do it; and

(ii)

where the payee is an individual who renders services, or performs, as a musician, entertainer or other person of creative talent.

Notes on the provisions of each clause follows.

Clause 56: Amount of instalment of tax

Section 221AE provides for determination of the amount of each of the 3 interim tax instalments payable by a company in a year of income. Generally, the amount of the instalment payable by a company is one quarter of the company's notional tax, that is, an amount equal to the income tax assessed in respect of the company's taxable income of the year next preceding the year of income. Under sub-section 221AE(2), the Commissioner is empowered to determine, having regard for the purpose of the Division and to particular circumstances, that the company's tax instalments should be reduced.

Clause 57: Estimated income tax

Under section 221AG, a company may request the Commissioner to alter the amount of its company tax instalment on the basis of the company's estimate of the amount of tax that will be payable in respect of its taxable income of the year of income to which the instalment relates. Where the company has made such an application and there is an underestimation of the amount of tax payable, sub-section 221AG(6) provides for a penalty by way of additional tax equal to 20 per cent per annum of, broadly, the amount by which the instalment originally notified exceeds the reduced instalment based on the company's estimate of the tax payable on its taxable income.

Sub-section 221AG(8) provides that a reference in the section to the amount of tax that is or will be payable by the company is to be read as a reference to the amount remaining after specified credits have been taken into account. The credits specified are those under section 45, Division 18 of Part III of the Income Tax (International Agreements) Act 1953. Clause 57 will amend sub-section 221AG(8) along the same lines as the amendment to section 221AE effected by clause 56, to take into account credits to which a company may be entitled under proposed new sub-section 98A(2) in respect of any tax that is paid or payable on the company's behalf by a trustee under new sub-section 98(3), or under proposed new Division 3A in respect of any deductions of tax at source under that Division.

Sub-section (3), as proposed to be amended by clause 56, will, in effect, provide that the credit to which a non-resident company is to be entitled under proposed new sub-section 98A(2) in respect of tax paid by the trustee of a trust estate in accordance with proposed new sub-section 98(3) in respect of a share of the income of the trust estate to which the company is presently entitled and the credit to which a company is to be entitled in respect of source deductions of tax under the new Division 3A, are particular circumstances to which the Commissioner may have regard to reduce the company's instalments.

Clause 58: Interpretation

This clause will, broadly, amend the definition of "salary or wages" in section 221A(1), and affect, in various respects, Division 2 of Part VI of the Principal Act which deals with the collection of tax by instalments in respect of payments of salary or wages to employees. The definition of "salary or wages" in sub-section 221A(1) sets out the categories of payments in respect of which deductions are required to be made under the Division.

Paragraph (a) of sub-clause (1) will omit the existing paragraph (a) of the definition of "salary or wages", which includes within that term payments made under a contract which is wholly or substantially for the labour of the person to whom the payments are made, and substitute a revised paragraph (a) which differs from the existing paragraph in two respects. Firstly, the revised paragraph will make it clear that it is only payments which are wholly or principally for a person's labour (and not the existing wider phrase wholly or substantially) that are included in "salary or wages" for purposes of the Division.

Secondly, the combined effect of sub-paragraphs (i) and (ii) of revised paragraph (a) will be to exclude from the term "salary or wages" (and so relieve householders from the obligation to make PAYE deductions), payments made to persons who are not employees as such, where the payments are wholly or principally of a private or domestic nature.

Paragraph (b) of sub-clause (1) proposes a further amendment to the "salary or wages" definition in sub-section 221A(1) in order to clarify the boundary between payments that are subject to PAYE deductions and those that are to be subject to deductions under proposed new Division 3A. This amendment will provide for the exclusion of "prescribed payments" within the meaning of proposed new Division 3A (see notes on clause 65) from the scope of the "salary or wages" definition. When read with the definitions of "prescribed payment" and "payment" in the proposed new Division 3A, the effect of this amendment is that, to the extent that a payment is prescribed for purposes of the new Division and is not a payment of salary or wages to an employee as such, the provisions of the new Division 3A will apply rather than the PAYE provisions.

Paragraph (c) of this clause will omit existing sub-section 221A(2) and substitute a new sub-section with a view to correcting technical deficiencies in paragraph (a) of the "salary or wages" definition that were exposed by two court decisions in Neale v Atlas Products (Vic) Pty Ltd (1955)
10 ATD 460 and Deputy Commissioner of Taxation (Com) v Bolwell (1967) ATR 862.

Paragraph (a) of new sub-section 221A(2) is a restatement of the existing sub-section 221A(2) under which lump sum payments for unused long service leave, to the extent that they are assessable under section 26AD, are included in "salary or wages" for the purposes of the Division.

Paragraph (b) of the revised sub-section 221A(2) is designed to correct the technical deficiency identified in the Atlas Products case where it was decided that, for a payment to fall within paragraph (a) of the "salary or wages" definition, it was necessary that the contract require the person to whom the payment was made to personally perform the work and that if the contract left it open for the person to engage someone else to perform it, it was not a payment to which paragraph (a) of the "salary or wages" definition applied. Under paragraph (b) of this revised sub-section, a payment is on the terms set out in the paragraph to be regarded as having been made under a contract that is wholly or principally for the labour of the person to whom the payment is made, and so included in the "salary or wages" definition, unless it is made by a householder for private or domestic purposes. The terms of the paragraph mean that a payment will be classed as "salary or wages" for this purpose if the person actually performs the whole or a principal part of the labour before the payment is made (sub-paragraph (i)) or, in a case where the payment is made before the labour is performed, if the person making the payment can reasonably be expected to believe that the person who receives the payment will perform the whole or a principal part of the labour (sub-paragraph (ii)).

The insertion of proposed paragraph (c) is intended to overcome the decision in the Bolwell case where it was held that paragraph (a) of the definition of "salary or wages" did not apply to payments made to musicians, who were not employees as such, because the payments were not for labour, but for the exercise of creative talent to produce an artistic work. Paragraph (c) specifies, in effect, that, for purposes of paragraph (a) of the definition of "salary or wages", payments to an individual for the performance or presentation by the person of, or participation in any music, play, dance, entertainment, address, sport, display promotional activity, exhibition, or any similar activity involving the exercise by the person of intellectual, artistic, musical, physical or other personal skills or performance of services connected therewith are to be within the scope of that paragraph (sub-paragraph (i)). Also included are payments for the performance of services in connection with the making of any film, tape or disc or of a television or radio broadcast (sub-paragraph (ii)).

Paragraph (d) of the revised sub-section is also relevant to paragraph (a) of the "salary or wages" definition, as amended by paragraph (a) of sub-clause (1). This paragraph, together with new sub paragraph (a)(ii) makes it clear that, it is only private or domestic payments by householders to which paragraph (a) of the definition refers, that are not included within the term "salary or wages" and so not subject to PAYE deductions. By this paragraph, payments made by a natural person that might fall within the private or domestic category if made on his or her own account will not be taken to be of a private or domestic nature if made in his or her capacity of trustee of a trust estate or as a member of a religious, charitable, social, cultural, recreational or other organisation or body.

Clause 59: Employer not accounting for deductions

This clause proposes a technical amendment to sub-section 221P(2) of the Principal Act under which, in cases of bankruptcy or liquidation, unremitted tax instalment deductions from salaries and wages are to have priority over all other debts of the person.

Deductions of tax under the proposed new Division 3A, in respect of prescribed payments for work and services are of a similar character to PAYE deductions and, as they also are available as a credit against tax assessed to the payee, it is proposed that they be accorded a priority over a taxpayer's other debts, similar to that which applies under existing sub-section 221P(2).

Proposed revised sub-section 221P(2) and the corresponding section in new Division 3A (proposed sub-section 221YHJ(4)) will resolve the technical question of priority of debts as between amounts payable under those two sections by providing that debts in respect of deductions made under Division 2 and debts in respect of deductions made under new Division 3A rank equally with each other.

Clause 60 to 64 : Amendments relating to provisional tax

Clauses 60 to 64 will effect a number of amendments to Division 3 of Part VI of the Principal Act - Provisional Tax - consequential upon a number of amendments to other provisions of the Principal Act to be effected by other clauses of the Bill.

Sub-section 221YA(1) of the Principal Act defines certain terms used in Division 3 in relation to provisional tax. It is proposed that the provisional tax payable by a person whose income includes prescribed payments from which tax has been deducted at source under new Division 3A will be reduced in consequence of the tax so deducted (see notes on clauses 61 and 62). For convenience of drafting and interpretation of the relevant provisions, paragraph (a) of clause 60 will define "prescribed payment", in sub-section 221YA(1), as a prescribed payment as defined in section 221YHA (see notes in clause 65).

Paragraphs (b), (c) and (d) are concerned with the proposed changed rules governing deduction for investments in Australian films (clauses 41 to 53). At present, section 221YA operates so that in calculating the amount of provisional tax for a year based on the preceding year's taxable income, any deduction allowable in that year under section 124ZAF is added back. That is, the special deduction allowable in one year does not reduce the provisional tax for the next year.

Deduction entitlements in respect of Australian films are now to arise under section 124ZAFA, and a corresponding provisional tax rule will by these paragraphs be adopted.

Clause 61: Amount of provisional tax

Sub-section 221YC(1A) of the Principal Act authorises the Commissioner, where a taxpayer's assessable income includes salary and wages, to reduce the amount of provisional tax that might otherwise be payable by the taxpayer in relation to a year of income to take into account the fact that PAYE instalment deductions will be made in relation to that salary or wages income.

Paragraph (a) of clause 61 will amend sub-section 221YC(1A) to insert a reference to prescribed payments so that the provisional tax payable by a person whose income includes prescribed payments subject to tax deductions in accordance with new Division 3A may similarly be reduced to take those deductions into account.

Under sub-section 221YC(4) of the Principal Act, a taxpayer who, in broad terms, was not liable, on the basis of his income of the preceding year of income, to pay provisional tax in respect of a year of income is, in certain circumstances, required to furnish to the Commissioner by 15 April in the year of income a return setting out assessable income derived up to 31 March in that year, and an estimate of assessable income that will be derived during the remainder of that year. Under sub-section 221YC(5), the amount of provisional tax payable by a person who provides an estimate of income pursuant to the preceding sub-section is the estimated income tax payable in respect of that income, other than the salary and wages component of that income.

So that the provisional tax payable in these circumstances will similarly take into account source deductions from prescribed payments, paragraph (b) of clause 61 will amend sub-section 221YC(5) to the effect that the provisional tax otherwise payable in accordance with that sub-section, will be reduced by the amount of any deductions of tax that have been, or will be made in respect of prescribed payment income of the taxpayer during that year of income.

Clause 62: Provisional tax on estimated income

Under section 221YDA of the Principal Act, a taxpayer may furnish an estimate of his or her taxable income for the current year of income in order to have provisional tax liability re-calculated on the basis of that estimate. Under sub-section 221YDA(1), a taxpayer seeking a variation of provisional tax must, within certain time limits, furnish to the Commissioner a statement setting out his or her estimate of certain amounts as required by the sub-section that are needed for the purposes of the provisional tax re-calculation. These include the taxpayer's estimate of taxable income, and of certain components thereof, in particular salary and wages and primary production income, as well as of certain rebates and of the tax deductions to be made in respect of salary or wages income.

Paragraph (a) of this clause will insert a new sub-paragraph 221YDA(1)(d)(ia) under which a person seeking a provisional tax variation will be required to give an estimate of "prescribed payments" included in the estimate of taxable income.

Reflecting the fact that tax deductions will not be made from all prescribed payments (see notes on clause 65). Paragraph (b) proposes to insert a new paragraph - paragraph (daa) - in sub-section 221YDA(1) which will require a taxpayer to also provide an estimate of taxable income from prescribed payments from which deductions under proposed new Division 3A have been or will be made and, under new paragraph (f) of the sub-section, to be inserted by paragraph (c) of this clause, the taxpayer will be required to provide an estimate of the amount of deductions that have been or will be made from prescribed payments under new Division 3A during the income year.

Sub-section 221YDA(2) provides for the calculation by the Commissioner of a taxpayer's provisional tax liability on the basis of the information the taxpayer has provided under the previous sub-section. Sub-clause (d) will insert in sub-paragraph (a)(i) of this sub-section a reference to "prescribed payments" to allow the Commissioner to take account of the prescribed payment component (if any) of estimated taxable income that the taxpayer may have furnished in his or her application for a provisional tax variation. Sub-clause (e) of this clause will omit existing paragraph 221YDA(2)(b) which provides for the deduction from the amount of tax calculated on the basis of the estimated taxable income, the estimated amount of tax instalments in respect of salary or wages included in the estimated taxable income, and substitute a new paragraph under which the estimated tax deducted at source from prescribed payments, as well as the estimated tax instalment deductions from salary or wages, will be deducted in recalculating provisional tax.

Clause 63: Additional tax where income underestimated

This clause proposes amendments to section 221YDB of the Principal Act which provides for penalty by way of additional tax to be imposed in certain circumstances where there is a significant difference between a taxpayer's estimated taxable income of an income year for purposes of section 221YDA and the taxpayer's taxable income as determined for that year. For purposes of calculating the amount of any additional tax under sub-section 221YDB(1), the existing sub-section 221YDB(1A) ascribes particular meanings to the terms "tax payable", and "provisional tax payable" in respect of estimated taxable income. So far as the latter concept is concerned, the existing paragraph 221YDB(1A)(b) provides that provisional tax payable is to include the amount of any tax instalment deductions made in respect of salary or wages income under section 221C or 221D. Clause 63 will omit existing paragraph 221YDB(1A)(b) and substitute a new paragraph to take account of proposed new Division 3A to the effect that provisional tax payable on estimated taxable income is to include the amount of deductions made under Division 3A in respect of prescribed payments, as well as PAYE deductions from salary or wages income.

Clause 64: Reduction of provisional tax

This clause proposes a further amendment that is consequential upon the new sub-section 98A(2) proposed by clause 19, which provides for a credit to be allowed in the assessment of the beneficiary for tax paid by the trustee under the revised arrangements for collection of tax from non-resident beneficiaries.

Clause 64 will amend sub-section 221YDC(1) which provides for the amount of provisional tax otherwise payable in respect of a year of income to be reduced by the amount of credits likely to be allowed in the taxpayer's income tax assessment for that year. It is proposed to include a reference to new sub-section 98A(2). This will allow the Commissioner to reduce the provisional tax otherwise payable by a non-resident where the new sub-section 98A(2) operates to take into account the credit that will be allowable under that section in the assessment of that non-resident.

Clause 65: Collection of tax in respect of certain payments for work

Clause 65 proposes the insertion of a new Division - Division 3A - in Part VI of the Principal Act the basic purpose of which is to provide for the collection of tax at source by deduction from certain payments for work or services.

The new measures and their main features are described earlier in this memorandum and a detailed explanation of each proposed section follows.

Section 221YHA : Interpretation

This section contains a number of definitions and other interpretive provisions. Each term defined in these meaning, unless the contrary intention appears.

Under sub-section (1) the term "construction permit" is defined to mean a permit or other approval issued by an appropriate government body in connection with the undertaking or carrying out of a construction project. The term is used in relation to a proposed requirement on bodies which issue such permits to supply certain information regarding those permits to the Commissioner of Taxation.

"Construction project" is defined in the sub-section to mean any work or similar activity usually associated with the building, construction, modification, demolition of any structure, and to include other specified activities which are peripheral to the building or construction of a structure e.g., painting, decorating, heating, insulation, lighting, etc. By paragraph (g) of the definition, other activities may also be prescribed in the future in relation to a structure. In this Division, the term is used in relation to a requirement that householders report to the Commissioner payments made in respect of certain construction projects.

The definition of "contract" is drafted in a way that covers the various forms a contract might take i.e., contracts which are express or implied, whether or not in writing and whether or not enforceable, or intended to be enforceable, by legal proceedings.

'Deduction exemption certificate' means a certificate issued by the Commissioner under section 221YHQ, the holder of which will be entitled to receive prescribed payments without deduction of tax.

'Deduction form', in relation to a prescribed payment, refers to a document, which will be central to the operation of the new Division. It will be used to record details of prescribed payments, and of the persons making and receiving those payments, and will also provide the basis for determining the availability of credit, in respect of deductions made from prescribed payments, in the assessment of the person receiving the payments.

'Deduction variation certificate' means a certificate issued by the Commissioner under section 221YHP the holder of which will be entitled to receive prescribed payments subject to deduction at the rate notified on the certificate in lieu of the rate that is to be prescribed by regulation.

The term 'government body' means the Commonwealth, a State or the Northern Territory, and includes an authority of the Commonwealth, of a State or of the Northern Territory. This definition is only relevant to penalty provisions of the Division which, with certain limited exceptions, provide that a government body is not liable to any penalty under the Division.

A 'householder notification form' means a document which will be required to be completed and forwarded to the Commissioner by householders who are about to undertake or carry out major construction projects.

An 'issuing authority' is defined as a person or body that issues construction permits. Generally this would be a local authority, municipal council or like body.

'Month' means any of the twelve calendar months of the year.

'Payee' refers to a person who receives, or is entitled to receive, a prescribed payment under a contract.

'Paying authority' is the term used to describe a person who makes, or is liable to make, a prescribed payment. When read in conjunction with the definition of "person", a paying authority will include a company, a householder and a government body.

'Paying authority notification form' refers to a document which will be completed by persons other than householders who make, or are liable to make, prescribed payments on or after 1 September 1983.

'Payment' is defined to mean a payment that is made or is liable to be made under a contract which, in whole or in part, involves the performance of work and, for the purposes of the definition, it is unnecessary that work be performed by the person to whom the payment is made or is liable to be made. The definition excludes -

(a)

a payment of salary and wages within the meaning of section 221A other than salary and wages to which paragraph 221A(1)(a) applies; and

(b)

a payment of exempt income.

One effect of this definition, when read together with the amendment explained in the notes on clause 58, is to ensure that there is no overlap between Division 3A and the PAYE provisions in the case of a payment to a person who is not an employee as such to which this Division applies and which would otherwise fall within the definition of salary and wages.

A 'person' includes a company and a government body. The Division will also, by virtue of section 221YHZ apply in certain respects as if a partnership were a person (see notes on section 221YHZ).

'Prescribed certificate' means a deduction exemption certificate, a reporting exemption certificate or a deduction variation certificate.

A 'prescribed payment' will be, in effect, any payment of a kind declared by the regulations to be a prescribed payment for the purposes of this Division.

'Reconciliation form' means a document in a form approved by the Commissioner of Taxation for the purpose of reconciling details of presented payments, and deductions of tax made and remitted to the Taxation Office in a calendar month.

A 'reporting exemption certificate' means a certificate issued by the Commissioner under section 221YHR which will in special but limited circumstances, exempt the payer and an exempt payee from reporting obligations under the Division.

'Structure' includes a part of a structure. Examples of a structure include residential accommodation and business premises and premises used in connection with a business.

'Work' is defined so as to include services and work of a professional, technical, skilled or artistic kind. The definition is extended further to include activities of a kind described in proposed sub-paragraphs 221A(2)(c)(i) and (ii) of the Principal Act as proposed to be amended by this Bill and as explained in the notes on clause 58.

Sub-section (2) of section 221YHA is, in effect, an anti-avoidance provision to guard against splitting a project to bring each part below the $10,000 householder reporting threshold (see notes on paragraph (3) below). It will ensure that where each of 2 or more activities would, but for this sub-section separately constitute a construction project, yet those activities are so related that, when taken together, they are reasonably capable of being regarded as a single activity, the activities shall be regarded as a single construction project.

Sub-section (3) sets out the circumstances under which a natural person who makes a prescribed payment will be a "householder" and thereby required to meet certain obligations under the Division. A person will be a householder if -

(a)

he or she is a natural person who enters into a contract or contracts for the undertaking or carrying out of a construction project by another person;

(b)

the payments to be made under the contract are wholly or principally of a private or domestic nature; and

(c)

the cost of the construction project (including goods, materials and preliminary expenditures) may reasonably be expected to exceed $10,000.

On these tests, a person who contracted for a $20,000 extension on his private residence, or on a holiday home which he perhaps rented for a nominal period, say 2 or 3 weeks a year, would be a householder. The reference to natural person will mean that a company can never be a "householder".

Sub-section (4) contains the tests to be satisfied if a paying authority is to be an "eligible paying authority". Under the Division, an eligible paying authority (other than a householder) is required to make deductions from prescribed payments. Briefly, an eligible paying authority is any paying authority other than a natural person in relation to payments of a private or domestic nature made in connection with building projects the cost of which is less than $10,000.

Sub-section (5) is an interpretative aid to clarify what is meant by payments of a private or domestic nature in the preceding sub-section. It provides in effect that it is only when a natural person makes a prescribed payment on his own behalf, and not in his capacity as a trustee of a trust estate or as a member of an organisation or body, that the payment may be treated as of a private or domestic nature. (See also the notes earlier in this memorandum on a broadly equivalent amendment to Division 2 of Part VI of the Principal Act - clause 58).

Sub-section (6) sets out the circumstances, which are relevant to the operation of proposed section 221YHC, by which a payee shall be taken to have properly furnished a deduction form to an eligible paying authority in relation to a precribed payment made in a month.

By paragraph (a) a payee shall be deemed to have properly furnished a deduction form in respect of a second or subsequent prescribed payment made to the payee by the eligible paying authority in a month, where the payee has previously completed the applicable part of a deduction form and delivered that form to the eligible paying authority, no earlier than 7 days before the commencement of the month but before the making of the first prescribed payment.

In a case where the prescribed payment is the first payment by an eligible paying authority to the payee in a month, paragraph (b) provides that the payee shall be deemed to have properly furnished a deduction form to the eligible paying authority where the deduction form is completed and furnished to the payer before the prescribed payment is made to the payee, and no earlier than 7 days before the commencement of the month in which the prescribed payment is made.

Section 221YHB : Provision of information to Commissioner

Proposed section 221YHB sets out the requirements for an eligible paying authority to notify the Commissioner, generally on a "once only" basis for payers who are not householders, if the payer makes or is liable to make prescribed payments or enters into a contract under which such payments are to be made.

A person who is an eligible paying authority, other than a householder, is required, under sub-section (1) to furnish a paying authority notification form to the Commissioner of Taxation before 15 September 1983 where, on 1 September 1983, he or she is liable to make a prescribed payment under a contract, or within 14 days of entering into a contract after 1 September 1983 which will involve the payment of a prescribed payment.

Sub-section (2) will permit a person who expects to be required to furnish a paying authority notification form on 1 September 1983 to lodge that form with the Commissioner of Taxation before 1 September 1983.

Sub section (3) relieves a person of any obligation to furnish a paying authority notification form under sub-section (1) where the person has already furnished a form under sub-section (1) or (2). The effect of this provision is that the information to be furnished is required once only.

Sub-section (4) is to similar effect to sub-section (1), in relation to a person who is on 1 September 1983, a householder in relation to prescribed payments. By the sub-section such a householder will be required, by 15 September 1983, to furnish to the Commissioner a householder notification form in respect of those payments.

Sub-sections (5) and (6) are intended to have a similar effect in relation to householders to that described in the notes on sub-sections (2) and (3) above in respect of other eligible paying authorities. By sub-section (5) a person who expects to be a householder on 1 September 1983 may lodge a householder notification form with the Commissioner of Taxation before 1 September 1983. Sub-section (6) will ensure that a householder who furnishes a notification form in relation to a particular construction project before 1 September 1983 under sub-section (5) will not be required to furnish another notification in relation to that project under sub-section (4).

Similarly, householders are required, under sub-section (7), to furnish a householder notification form to the Commissioner within 14 days of entering into a contract involving prescribed payments in connection with a construction project the cost of which exceeds $10,000, where that contract is entered into after 1 September 1983.

The effect of sub-section (8) is to ensure that, for the purposes of sub-section (7), a householder notification form is only required once in relation to each project. Thus, if a householder has previously given notice to the Commissioner in relation to prescribed payments under contracts in relation to the project, pursuant to sub-section (4), (5) or (7), no further notification is required.

Where a householder has furnished a householder notification form to the Commissioner in respect of a construction project, the householder is required, by sub-section (9), within 14 days of the completion of the project, to advise the Commissioner to that effect.

Sub-section (10) requires an issuing authority (i.e. local councils and other authorities which issue construction permits) to furnish to the Commissioner of Taxation, within 14 days of the end of each month or such extended period as the Commissioner allows, certain information (as notified in the Gazette) about construction permits that it has issued in that month. It is envisaged that the information required would be the address of the premises concerned, the names and addresses of the owner and of the holder of the building permit and an estimate of the cost of the project.

Sub-section (11) proposes the creation of offences for failure by a person, other than a Government body, to comply with the requirements of this section (other than requirements placed on issuing authorities under sub-section (10)) within the specified time periods.

By paragraph (a) the maximum fine on conviction by a court is to be $50 in respect of each offence.

Paragraph (b) is a technical provision which ensures that an obligation on a person to comply, within a specified period, with any requirement of this section continues to apply, notwithstanding that the specified period has expired.

Where the failure by a person to comply with a requirement of this section continues, paragraph (c) provides that the person is guilty of a separate and further offence in respect of each day after the expiration of the period for compliance on which he or she failed to comply with that requirement.

By paragraph (d) the maximum penalty in respect of each separate and further offence that arises under paragraph (c) above is a fine not exceeding $50.

Section 221YHC : Duties of payees

Section 221YHC sets out the general duties of a payee who becomes entitled to receive a prescribed payment from an eligible paying authority.

Sub-section (1) requires a payee, other than a payee who holds a deduction exemption certificate and to whom, jointly with an eligible paying authority, a reporting exemption certificate has been issued under section 221YHR, to complete the applicable part of a deduction form and deliver the form to the eligible paying authority before receiving the prescribed payment, but no earlier than 7 days before the commencement of the month in which the payment is made.

A payee who becomes entitled to receive more than one prescribed payment in a month from the same payer, is, by virtue of sub-section (2), not required to complete any further deduction forms in relation to the second or subsequent payments in that month.

A maximum fine of $50 is provided by sub-section (3) for any person, other than a government body, convicted of an offence under sub-section (1). And, as provided in proposed paragraph 221YHD(5)(b), where a payee fails to properly furnish a deduction form in relation to a prescribed payment, the amount of tax to be deducted from the payment will be increased by 15 per cent of the amount of the gross payment.

Sub-section (4) makes it clear that a payee has no obligations in relation to prescribed payments made before 1 September 1983.

Section 221YHD : Duties of eligible paying authorities

Section 221YHD is an important provision which imposes obligations and duties on eligible paying authorities (including householders). While there is to be no requirement for an eligible paying authority, being a householder, to deduct tax, a householder is to be called on to report to the Commissioner of Taxation prescribed payments made in connection with a construction project, the cost of which is in excess of $10,000.

Sub-section (1) sets out the duties of an eligible paying authority in relation to a prescribed payment or payments made during a month. By paragraph (a), an eligible paying authority, not being a householder, is required to deduct the "relevant amount" of tax from each prescribed payment made to a payee in a month, except where the payee is the holder of a deduction exemption certificate which is in force. (The term "relevant amount" is a drafting aid which is explained later in these notes on sub-section (5) of this section).

Paragraph (b), which is subject to sub-sections (2) and (3) and section 221YHR, allows an eligible paying authority up to 14 days after the end of a month in which prescribed payments have been made by him to comply with the obligations contained in sub-paragraphs (b)(i) to (vi).

Sub-paragraph (b) (i) refers to the case where a payee has properly furnished a deduction form to the eligible paying authority, and requires the eligible paying authority to complete the part of a deduction form applicable to him.

Sub-paragraph (b)(ii) deals with the situation where a payee fails to properly furnish a deduction form to the payer. This sub-paragraph requires the eligible paying authority to complete that part of the deduction form applicable to the paying authority and also to complete so much of the part of the form that relates to the payee as he or she is able to complete.

Under sub-paragraph (b)(iii), the eligible paying authority is required to complete a reconciliation form in relation to all prescribed payments made during that month.

As was explained in the notes on paragraph (a), an eligible paying authority, being a householder, is not required to deduct tax in respect of prescribed payments made during a month, nor is an eligible paying authority, not being a householder, required to deduct tax in respect of payments made to a payee who is the holder of an exemption certificate issued by the Commissioner under section 221YHQ. However, except in cases where a reporting exemption certificate has been issued under section 221YHR, these payees are required to properly furnish deduction forms to the payer, and sub-paragraph (b)(iv) provides that the payer is required to forward the deduction forms to the Commissioner, together with the reconciliation form required by sub-paragraph (iii).

Sub-paragraph (b)(v) applies in those circumstances where tax has been deducted from prescribed payments. By sub-sub-paragraph (A), an eligible paying authority is required to pay to the Commissioner all amounts deducted by him during the month and, at the same time, under sub-sub-paragraph (B), forward to the Commissioner the deduction forms and reconciliation form completed in respect of the relevant month.

Finally, sub-paragraph (b)(vi) requires the eligible paying authority to deliver to the payee a copy of the deduction form completed in accordance with sub-paragraph (i) or (ii) in relation to the payee.

The Commissioner may, under paragraph (a) of sub-section (2), by notice in writing served on an eligible paying authority, extend the period of 14 days within which the eligible paying authority is required to comply with sub-paragraphs (1)(b)(i) to (vi).

By paragraph (b) of sub-section (2) the Commissioner may, also by notice in writing served on an eligible paying authority, vary to a limited extent the requirements placed on the eligible paying authority under paragraph (1)(b). However, those requirements may only be varied in their application in relation to prescribed payments made by the eligible paying authority to the holder of a deduction exemption certificate. In practice, this will mean that only the requirements of sub-paragraphs (1)(b)(i), (ii), (iv) and (vi) may be varied.

Paragraphs(a) to (c) of sub-section (3) provide various fines and penalties in relation to an eligible paying authority, other than a government body, convicted by a court of an offence of contravening or failing to comply with a requirement of sub-section (1) (including the requirements of that sub-section as varied under sub-section (2)).

Where an eligible paying authority fails to deduct the relevant amounts of tax from a prescribed payment the eligible paying authority is liable, under paragraph (a), to a maximum fine of $1000.

By sub-paragraph (i) of paragraph (b) an eligible paying authority who is an individual who fails to pay to the Commissioner any tax deducted from a prescribed payment, will be liable to a maximum fine of $5000, or gaol for a period up to 12 months, or both. If the eligible paying authority is not an individual, sub-paragraph (ii) provides a fine not exceeding $25000 for such a failure.

Paragraph (c) provides for a fine not exceeding $2000 in any other case, for example, failure to complete the applicable part of the deduction form, failure to complete a reconciliation form, failure to deliver a copy of a deduction form to a payee etc.

Where a person is convicted of an offence under paragraph (3)(a) (failure to deduct), sub-section (4) provides that the court may order that person to pay to the Commissioner an amount not exceeding the amount that the person failed to deduct. Any amount so ordered by the Court to be paid by a person under this sub-section is in addition to any penalty imposed in respect of that offence.

Sub-section (5) defines the term 'relevant amount', as mentioned above in the notes on paragraph (1)(a) of this section, as, basically, the amount of tax required to be deducted by an eligible paying authority at the time of making a prescribed payment in the circumstances described in the paragraphs of that sub-section.

Paragraph (a) specifies the amount to be deducted from a prescribed payment made by an eligible paying authority to a payee, where the payee has properly furnished a deduction form to the eligible paying authority in relation to that payment.

Sub-paragraph (i) provides that, where neither sub-paragraph (ii) nor (iii) applies, the amount of tax to be deducted is the amount determined in accordance with regulations made for the purposes of the sub-paragraph.

Sub-paragraphs (ii) and (iii) specify the amount to be deducted where the payee is the holder of a deduction variation certificate. Sub-paragraph (ii) covers the situation where a payment is made to a payee in person, while sub-paragraph (iii) provides for a payment to a payee otherwise than in person, for example, through the post or to a third party.

The practical difference between sub-paragraphs (ii) and (iii) is that where a payment is made to a payee in person, the payee will be required to complete a declaration in a deduction form that a varied rate applies and produce his deduction variation certificate to the payer before the payment is made. In any other case, the payee will only be required to declare on the deduction form that he is the holder of a current deduction variation certificate. Where the payee produces his deduction variation certificate in person, a deduction is to be made in accordance with the certificate. Where the payment is not made to the payee in person, the deduction is to be made at the rate specified in the declaration.

Paragraph (b) of sub-section (5) deals with the situation of a payee who fails to properly furnish a deduction form in relation to a prescribed payment. By virtue of this paragraph, the eligible paying authority will be required to deduct an amount of tax equal to the amount that would have been applicable under sub-paragraph (a)(i) if the payee had properly furnished a deduction form to him, increased by an amount equal to 15 per cent of the gross prescribed payment. In other words, if the rate applicable under sub-paragraph (a)(i) were 10 per cent, the eligible paying authority would, in these circumstances, be required to deduct 25 per cent of the gross prescribed payment.

Sub-section (6) makes it clear that an eligible paying authority will not be required to make deductions in respect of prescribed payments made before 1 September 1983.

Section 221YHE : Deduction forms to be forwarded to Commissioner

Sub-section 221YHE(1) requires a payee to forward with his annual income tax return all deduction forms that relate to prescribed payments made to the payee in respect of the year of income to which the return relates.

Under sub-section (2) a person, other than a government body, who fails to comply with sub-section (1) will be guilty of an offence. A person convicted of such an offence will be liable to a maximum fine of $1000.

Section 221YHF : Credits in respect of deductions from prescribed payments

As was explained in the introductory notes, the deduction form provides the basis upon which credit for tax deductions from prescribed payments will be available to a person in his income tax assessment. Section 221YHF establishes the circumstances under which a person will be entitled to credit in respect of deductions made from prescribed payments received by him.

Sub-sections (1), (2) & (3) respectively set out the entitlement of an individual or a company, a partner in a partnership and a trustee or a beneficiary of a trust estate, as the case may be, to a credit under this section. Each of the sub-sections is subject to the provisions of sub-sections (4) and (5) - see notes on those sub-sections.

A person, being an individual or a company, is entitled under sub-section (1) to a credit of an amount equal to the amount of deductions made in a year of income, recorded in the deduction forms forwarded to the Commissioner, at the time when an assessment has been made by the Commissioner or when the Commissioner is satisfied that no tax is payable by the person in relation to the year of income.

Where deduction forms are forwarded with the annual income tax return of a partnership, sub-section (2) operates to apportion the credit available in respect of those deduction forms as between each partner, at the time when an assessment has been made by the Commissioner of the tax payable by the partner, or the Commissioner is satisfied that no tax is payable by the partner in respect of the year of income. Each partner will be entitled to a credit for a proportion of the tax deducted from prescribed payments received by the partnership, determined in the same proportion as that which the person's share of the net income or loss from the partnership as is attributable to the prescribed payments bears to the net income or loss of the partnership attributable to prescribed payments.

Sub-section (3) operates, in much the same way as sub-section (2), to determine the amount of credit, which is to be available to the trustee or to a beneficiary in a trust estate, as the case requires, in respect of deduction forms forwarded to the Commissioner in relation to deductions made in a year of income from prescribed payments made to the trustee of a trust estate.

Paragraphs (a), (b) and (c) of sub-section (3), provide for the distribution of credit as between trustees and beneficiaries of a trust estate in accordance with the operation of sections 97, 98, and 99 or 99A, of the Principal Act respectively. In essence, these paragraphs provide that where an assessment has been made on the beneficiary or trustee as the case requires, or the Commissioner is satisfied that no tax will be payable by the beneficiary or trustee, credit is to be allowed to the beneficiary or trustee for a proportion of the tax deducted from prescribed payments made to the trustee of the trust estate equal to that which the share of the income of the trust estate attributable to prescribed payments taxed to the beneficiary or trustee bears to the net income of the trust estate attributable to prescribed payments.

By sub-section (4), the Commissioner, where he is satisfied that an amount recorded on a deduction form received by him was not in fact deducted from a prescribed payment, is not to allow credit under sub-sections (1) (2) or (3) in respect of the amount recorded on that deduction form.

Sub-section (5) authorises the Commissioner, upon satisfying himself as to the correct amount of deduction made from a prescribed payment, to allow credit for that amount in accordance with sub-sections (1) (2) and (3) in two situations. The first is in cases where a completed deduction form has not been forwarded to the Commissioner, for example where it has been lost or stolen - paragraph (a). The second is in cases where the Commissioner is satisfied that a deduction form does not accurately record the amount of a deduction actually made - paragraph (b).

Sub-section (6) will ensure that, in a case where a deduction form has not been received by the Commissioner in respect of a deduction made from a prescribed payment and credit has been allowed to a person in accordance with paragraph (a) of sub-section (5) in respect of that deduction, that person will not be entitled to any further credit upon the production of the deduction form.

Section 221YHG : Application of credits

Section 221YHG sets out the rules for the application, by the Commissioner, of the credit to which a person is entitled under section 221YHF.

Under sub-section (1), an amount of credit to which a person is entitled under section 221YHF is, subject to the operation of this section, a debt due and payable to that person by the Commissioner.

Sub-section (2) applies where neither sub-section (3) nor (4) applies, that is, other than cases where a trustee of a trust estate is entitled to a credit.

Paragraph (a) of sub-section (2) authorises the Commissioner to apply the whole or part of a credit referred to in sub-section (1) that is available to a person, including a person who as a beneficiary in a trust estate is taxed on a share of the net income of the trust estate, being an individual, a partner in a partnership or a company, in total or partial discharge of that person's liability under an assessment in relation to the year of income in which the deductions to which the credit relates were made.

Paragraph (b), applies where the amount of credit exceeds the tax payable under paragraph (a). In such cases the Commissioner is, by virtue of sub-paragraph (i), to first apply the credit against the tax payable under paragraph (a) and, by virtue of sub-paragraph (ii), to next apply so much of the excess as does not exceed any other tax liability of the person to the Commissioner in payment or part payment of that tax. Any excess that remains would then be available for refund to the taxpayer.

Sub-section (3) and (4) are, in relation to a trustee of a trust estate, similar in effect to sub-section (2). They authorise the Commissioner to apply the credit to which the trustee of a trust estate is entitled against the tax liability of that trustee in respect of the share or part of trust income assessed to the trustee in respect of a year of income under section 98, or sections 99 or 99A of the Principal Act, respectively and to apply any excess in full or part payment of any other tax payable by the trustee in respect of any other year of income. Any excess then remaining would be available for refund to the trustee.

Sub-section (5) establishes the time of payment of a liability under the income tax law where the Commissioner has applied an amount of a credit in discharge of the liability in accordance with sub-section (2). The person will be deemed to have paid the amount so applied in payment of that liability at the time it was applied, or at such earlier time as the Commissioner determines.

Sub-section (6) ensures that, if circumstances arose where the Commissioner had paid or applied an amount in excess of the credit to which a person was entitled under this Division, the Commissioner may recover the excess as if it were income tax due and payable by that person. Accordingly, recovery will be able to be obtained by the usual avenues available to the Commissioner under Division 1 of Part VI of the Principal Act.

Sub-section (7) is a technical measure to make it clear that references in sub-sections (2), (3) and (4) to tax payable are references to amounts payable to the Commonwealth under the Principal Act. In practice the credit will initially be applied against the tax liability of the person under an assessment raised by the Commissioner in respect of income of a year of income.

Section 221YHH : Failure to make deductions from prescribed payments

This is the first of three sections which contain statutorily imposed penalties on a person who fails to meet his or her obligations under the new Division. Section 221YHH applies where a person fails to make the appropriate deduction of tax in respect of a prescribed payment.

By sub-section (1), where an eligible paying authority, other than a government body, makes a prescribed payment without first making a deduction that is required to be made from the payment in accordance with section 221YHD, the eligible paying authority is liable to pay to the Commissioner, by way of penalty -

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an amount equal to the amount which the eligible paying authority failed to deduct from that prescribed payment; (the "undeducted amount") - paragraph (a); and

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an amount equal to 20 per cent per annum of so much of the undeducted amount as remains unpaid, calculated from the date when the deduction, if made, should have been paid to the Commissioner. By virtue of section 221YHD this date will, in practice, be the fifteenth day after the end of the month in which the prescribed payment was made - paragraph (b).

Where a person, being a government body other than the Commonwealth, makes a payment without first making a deduction, that person is liable to pay to the Commissioner by way of penalty under sub-section (2), an amount equal to 20 per cent per annum of the undeducted amount in respect of the prescribed payment, also calculated, as in paragraph (1)(b), from the fifteenth day after the end of the month in which the prescribed payment was made and ending on the day on which the whole of the amount payable in accordance with this sub-section is paid.

Sub-section (3) provides that where, a prosecution for an offence against the new Division is instituted in a case where a person would be liable to pay a penalty under sub-section (1), the amount payable under sub-section (1) will not be payable unless and until the prosecution is withdrawn. If the prosecution proceeds, no amount will be payable under this section.

Section 221YHJ : Failure to pay amounts deducted to Commissioner

Section 221YHJ contains the second statutorily imposed penalty in Division 3A and relates to cases where an eligible paying authority other than the Commonwealth, deducts tax from a prescribed payment but fails to remit that tax to the Commissioner of Taxation as required, and within the time specified, by section 221YHD.

Sub-section (1) provides that where there is a failure to pay to the Commissioner tax deducted from a prescribed payment, an eligible paying authority (not being the Commonwealth) will continue to be liable to pay the amount of the tax to the Commissioner - paragraph (a). In addition, the eligible paying authority will also be liable to pay to the Commissioner, by way of penalty -

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where the paying authority is a government body, a late payment penalty of an amount equal to 20 per cent per annum calculated in respect of the unpaid amount from the expiration of the period within which the payment should have been remitted to the Commissioner, namely, from the fifteenth day of the month after the month in which the deduction of tax was made, until the amount is paid - sub-paragraph (b)(i); and

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where the paying authority is not a government body, a flat penalty equal to 20 per cent of the unpaid amount - sub-sub-paragraph (b)(ii)(A) - and a late payment penalty of an amount equal to 20 per cent per annum of the amount remaining unpaid in respect of both the unpaid amount and the 20 per cent flat penalty, also calculated from the expiration of the period within which the unpaid amount should have been remitted to the Commissioner of Taxation - sub-sub-paragraph (b)(ii)(B).

Under sub-section (2) a person, (not being a government body) is not liable to pay to the Commissioner the amount equal to the 20 per cent flat penalty under sub-sub-paragraph (1)(b)(ii)(A) where there has been a failure to remit deductions, if a prosecution has been commenced against the person in respect of that matter, unless and until the prosecution is withdrawn. If the prosecution action proceeds, the person remains liable to the late payment penalty calculated in accordance with sub-sub-paragraph (1)(b)(ii)(B).

Sub-section (3) is a technical measure designed to ensure that where an amount deducted from a prescribed payment is payable to the Commissioner by a person whose property subsequently vests in a trustee (e.g. in the case of a deceased estate or a bankruptcy) the trustee is liable to pay the amount to the Commissioner.

Sub-sections (4) and (5) are complementary provisions to sub-section (3). Sub-section (4) provides that an amount payable to the Commissioner by a trustee under sub-section (3) has priority over all other debts, except a debt payable by a trustee to the Commissioner under section 221P with which it will rank equally. In the event that the property held by the trustee is insufficient to extinguish any amounts payable under this section and under section 221P, the effect of sub-section (4) is to ensure that the property will be apportioned in the proportions that amounts payable under each of those sections bear to the total debt under both sections. As indicated in the notes on clause 59, a corresponding amendment is proposed to section 221P of the Principal Act to mirror the above position in the PAYE area.

The priority accorded the Commissioner by sub-section (4) is limited in certain instances where the property vests in a trustee of an estate of a bankrupt or a liquidator of a company. Sub-section (5) ensures that a trustee or liquidator is entitled to recoup any costs, charges or expenses of the administration of the trust estate or the winding up of the company, as the case requires, before any amount payable under this section. This provision corresponds, in effect, with sub-section 221P(3) which similarly limits the Commissioner's priority in respect of unremitted PAYE deductions.

Section 221YHK : Failure to furnish deduction form, etc.

As was explained earlier in these notes, there are two circumstances in which an eligible paying authority is not required to make a deduction of tax in relation to a prescribed payment. They are where the eligible paying authority -

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is a householder; or

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is not a householder, but the payee is the holder of a deduction exemption certificate.

While not being required to deduct tax at source from prescribed payments in these circumstances, the eligible paying authority must report these payments to the Commissioner on a monthly basis unless some other period is approved under sub-section 221YHD(2).

Section 221YHK contains the third of the administratively imposed penalties and will apply where an eligible paying authority fails to report prescribed payments in the circumstances outlined. These penalties do not, however, apply where the paying authority is a government body.

Paragraph (a) and (b) specify the circumstances in which, and the persons to whom, the section is to apply. These are as described above.

In the case of a householder, the penalty to be applied for a failure to report prescribed payments is provided in paragraphs (c) and (d) of sub-section 221YHK(1).

Under paragraph (c) (which applies where paragraph (d) does not apply), a householder is liable to pay to the Commissioner a penalty equal to the amount that would have been payable to the Commissioner if the householder had been an eligible paying authority who was required to make a deduction and had failed to do so. The penalty in this case is to be the same as that which is to be imposed on an eligible paying authority under sub-section 221YHH(1) in respect of a failure to deduct where the payee had completed a deduction form, that is, an amount equal to the tax that a paying authority liable to deduct tax would have had to deduct from the prescribed payment plus a 20 per cent late payment component.

Paragraph (d) provides for the situation where a householder has failed to report a prescribed payment made to a payee who was, at that time, the holder of a current deduction exemption certificate. In this case, the householder is liable to pay the Commissioner a penalty of $50 in respect of each such failure.

Paragraph (e) provides a similar penalty - $50 per failure - that is to apply where an eligible paying authority other than a householder fails to report a prescribed payment made to the holder of a deduction exemption certificate.

Where a prosecution is commenced by the Commissioner in respect of a matter which gave rise to a penalty under sub-section (1), sub-section (2) provides that the penalty is not payable unless and until the prosecution is withdrawn. If the prosecution action proceeds, no penalty is payable under this section.

Section 221YHL : Remission of certain amounts

Section 221YHL gives the Commissioner powers of remission in relation to the statutory penalties payable by a person under sections 221YHH, 221YHJ and 221YHK. In this section, a distinction is made between penalties by way of the imposition of additional tax of 20 per cent per annum of an amount (referred to as late payment penalty) under sections 221YHH and 221YHJ and other elements of the penalties provided in sections 221YHH, 221YHJ and 221YHK and in respect of which a person may be able by virtue of section 221YHT, to seek independent review.

Under sub-section (1), the authority of the Commissioner to remit late payment penalty payable by a person under paragraph 221YHH(1)(b), sub-paragraph 221YHJ(1)(b)(i) or sub-sub-paragraph 221YHJ(1)(b)(ii)(B), is restricted to certain circumstances that parallel those specified in sub-section 207(1A) of the Principal Act which provides for remission of additional tax imposed under that section on unpaid tax.

By paragraph (a) of sub-section (1) the Commissioner may remit the late payment penalty if he is satisfied that the circumstances that led to the delay in payment of the principal amount was not caused by an act or omission of the taxpayer. The power to remit the penalty will, however, only be available if the taxpayer has taken any action reasonably available to mitigate the effects of the adverse factors.

Paragraph (b) of sub-section (1) will authorise the Commissioner of Taxation to remit the late payment penalty in appropriate cases, notwithstanding that the circumstances which led to the delay in payment of a principal amount were caused by the taxpayer.

Remission of the late payment penalty will be possible if the Commissioner is satisfied that the taxpayer has taken reasonable action to mitigate the effects of those circumstances and that it is fair and reasonable to remit the late payment penalty in view of the nature of those circumstances.

By paragraph (c) of sub-section (1) the Commissioner of Taxation will be able to remit late payment penalty imposed for late payment of a principal amount where he considers that there are other special circumstances to justify that course.

While sub-section (1) gives the Commissioner restricted authority to remit late payment penalty, sub-section (2) will permit the Commissioner, for such reasons he thinks sufficient, to remit the whole or part of the fixed element of the penalties payable in accordance with sections 221YHH and 221YHJ, and the penalties payable by a person, including a householder, under section 221YHK.

By sub-section (3), the Commissioner is required to give notice in writing to a person where he decides, under sub-section (2), not to remit any part of the fixed elements of the section 221YHH and 221YHJ penalties and any penalty under section 221YHK. This notice will provide the person affected with the means to consider the possibility of seeking further review in accordance with section 221YHT - see notes on that section.

Section 221YHM : Persons discharged from liability in respect of deductions

Section 221YHM is a measure to afford protection to a person who has made a deduction from a prescribed payment for or purporting to be for, the purposes of section 221YHD. Such a person is, by this section, discharged from any liability to pay or account for the deduction to any person other than the Commissioner.

Section 221YHN : Recovery of amounts by Commissioner

Section 221YHN contains machinery provisions to enable collection of amounts payable to the Commissioner under this Division.

Under sub-section (1) an amount payable to the Commissioner under this Division other than by the Commonwealth is to be a debt due to the Commonwealth and payable to the Commissioner and may be sued for and recovered in a Court of competent jurisdiction by the Commissioner or a Deputy Commissioner - paragraph (a). Alternatively, a court before which proceedings are taken against a person for an offence against a provision of this Division may order the person to pay that amount to the Commissioner - paragraph (b).

Sub-section (2) enables the averment provisions of section 243 of the Principal Act to apply to proceedings for recovery of amounts payable under this Division.

Sub-section (3) permits an order under paragraph (b) of sub-section (1) or under sub-section 221YHD(4) to be registered in any court having jurisdiction to entertain civil proceedings. For this purpose the sub-section specifies that the provisions of section 249 of the Principal Act which relate to enforcement of orders for payment are to apply to proceedings under this paragraph.

Sub-section (4) deals with to the situation where a person owes two or more separate amounts to the Commissioner and pays an amount in part or full payment of one or more of the debts due, but not sufficient to discharge the total of amounts payable. Notwithstanding any direction given by the person making the payment or by whom the amounts are payable as to how the amount should be applied against the amounts payable, sub-section (4) allows the Commissioner to apply payments against the undissected total amount owing, and to sue for the undissected balance of the amounts payable.

Section 221YHO : Payments into and out of consolidated revenue fund

Section 221YHO directs that monies received by the Commissioner under the Division are to be paid into the Consolidated Revenue Fund, and authorises the necessary appropriation in respect of any amounts that the Commissioner becomes liable to pay in pursuance of the Division.

Section 221YHP : Deduction variation certificates

This section allows the Commissioner to issue one of the prescribed certificates which will be available to persons under Division 3A - a deduction variation certificate.

The purpose of a deduction variation certificate is to allow a person for whom the prescribed rate is too high, to have that rate reduced to take account of special circumstances that exist in his or her case.

Where a person considers that the prescribed rate will be too high in his or her particular circumstances, sub- section (1) allows the person to apply in writing to the Commissioner for the issue of a deduction variation certificate.

Sub-section (2) provides that the Commissioner shall not issue a deduction variation certificate unless he is satisfied that, because of the special circumstances of the applicant, the prescribed rate of tax to be deducted from the prescribed payments received by the applicant should be reduced. The deduction variation certificate issued by the Commissioner in accordance with this section will relate only to a year or a part of a year of income. In practice therefore, a taxpayer who sought to continue to have a rate lower than the prescribed rate apply to payments made to him would need to re-apply for a deduction variation certificate each year.

Where the Commissioner issues a deduction variation certificate to a person in relation to a year of income, or a part of a year, sub-section (3) provides that the certificate shall remain in force in relation to that year or part of a year, unless revoked by the Commissioner (see notes on section 221YHS).

Section 221YHQ : Deduction exemption certificates

Section 221YHQ relates to the second of the prescribed certificates under the new Division - the deduction exemption certificate. It sets out the conditions that are to be satisfied by a person for the issue of such a certificate. Under the Division, the holder of a deduction exemption certificate will be entitled to receive prescribed payments without deduction of any tax.

As the new measures are essentially ones for the collection of tax by deduction at source, the issue of exemption certificates is to be confined to those persons who have been in business for a significant period and are able to demonstrate that, during that time, a satisfactory taxation record has, in all respects, clearly been maintained. In these circumstances, section 221YHQ specifies that deduction exemption certificates will only be available to people who are able to demonstrate, to the satisfaction of the Commissioner, that they meet these fundamental tests. However, the Commissioner will also be able to issue a deduction exemption certificate where he is satisfied that, in relation to a particular year of income, the person concerned will have no tax liability. In the notes which follow, a person, seeking a deduction exemption certificate is described as the 'applicant'.

Sub-section (1) is a formal measure which, subject to the section, authorises the Commissioner to issue a certificate to a person who has in a form approved by the Commissioner for purposes of the section, applied for issue of a deduction exemption certificate.

Under sub-section (2), the Commissioner is not authorised to issue a deduction exemption certificate unless he is satisfied that the applicant meets the relevant tests contained in this sub-section. As mentioned above, however, the Commissioner may issue a certificate in accordance with sub-section (2) where he is satisfied that there is no reasonable likelihood that tax will be payable by the applicant in relation to the year of income to which the certificate, if issued, will relate. An example of the kind of situation envisaged would be where the applicant has significant carry-forward losses from previous years which, when set off against projected income of the year, would result in the applicant having no tax to pay for that year.

In any other case where a person seeks a deduction exemption certificate it will be necessary for the applicant to satisfy the basic requirements which are contained in paragraph (a) of the sub-section, as well as one or more of the other requirements of the sub-section which are discussed later. However, as also discussed later in these notes - see sub-sections (4) and (5) - where the applicant fails to meet one or more of the tests specified in paragraph (a) in minor respects, the Commissioner may still issue a deduction exemption certificate if he concludes that, having regard to any special circumstances that existed, it would be unreasonable not to do so.

Under paragraph (a), the applicant must satisfy the Commissioner that he complies with the following conditions -

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that he or she has for 3 years preceding the application (the relevant period) been regularly engaged in carrying on business in Australia (sub-paragraph (i)). It will not be necessary for the applicant to have carried on the same business, or indeed any one business during the relevant period to meet this requirement. This test is, however, in relation to the trustee of a trust estate, subject to the operation of sub-section (7) of this section - see later notes;

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that, during the relevant period, the applicant has maintained accounting and taxation records that correctly record and explain the transactions and the financial position of the business (sub-paragraph (ii)(A)). It will not be necessary that the applicant maintains records in a particular form, for example, a system of double entry accounts, provided the records which are kept satisfy this requirement;

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that, during the relevant period, the business has been conducted from established premises that were advertised to the public as such (sub-sub-paragraph (ii)(B)). An applicant could meet the established premises requirement in respect of a business conducted from his or her private residence so long as the public could ascertain, for example, from the 'yellow pages' of the telephone directory, the letterhead on the applicant's business correspondence, newspaper advertisements, etc., that the business of the applicant was conducted from those premises;

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that, during the relevant period, all financial transactions of the business were conducted through a bank account or accounts separate from the applicant's private or domestic accounts. An applicant who has dealt with any business receipts otherwise than by depositing them to his or her business bank account would not meet this test. However, where the applicant was able to clearly demonstrate that such receipts were properly accounted for in his or her income tax return, the Commissioner could have regard to that fact for the purposes of determining, in accordance with sub-section (4) which is discussed later, whether, despite the failure of the applicant to meet this test, it would be unreasonable for the Commissioner not to issue a deduction exemption certificate (sub-sub-paragraph (ii)(c));

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that, during the relevant period, the taxpayer has satisfactorily complied with his obligations under Acts administered by the Commissioner (sub-paragraph (iii)). A principal consideration here would be that the applicant has lodged income tax returns that accurately report his or her taxable income. The tests set out in paragraphs (d) to (e) of this sub-section are directed to enabling the Commissioner to satisfy himself in this regard;

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that, during the currency of the certificate, if issued, the applicant will be regularly engaged in carrying on business in Australia, that the foregoing conditions in sub-paragraph (ii) will be satisfied in relation to any business carried on by the applicant during that future period and that the applicant will continue to comply with his obligations under Acts administered by the Commissioner (sub-paragraph (iv)).

Given the extent of non-reporting of income of the kinds to be subject to tax deductions under the new system, the Commissioner could not be satisfied that no income has been omitted from a person's income tax returns, simply on the basis that tax returns have been lodged and have not been the subject of more than routine scrutiny. To enable an expeditious processing of applications for exemption certificates, paragraphs (b), (c), (d) and (e) of sub-section (2), with one exception, require the applicant to provide the Commissioner, but only in relation to the most recent year of income for which a return has been furnished, the information which the Commissioner would gather if he himself were to conduct the kind of examination that would show whether returns had properly disclosed the person's assessable income and allowable deductions.

Briefly, the information required in paragraphs (b) to (e) is -

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where the applicant has kept full records, including a balance sheet, that are audited by a competent person, - a declaration by a "prescribed person" - defined in sub-section (3) - as to the accuracy of the return (paragraph (b));

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where the applicant is a company, partnership or trustee of a trust estate to whom paragraph (b) does not apply - a statement of the applicant's sources and applications of funds, reconciled with the relevant return and a declaration by a "prescribed person" as to the accuracy of the return (paragraph (c));

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where the applicant is an individual to whom paragraph (b) does not apply - the same information reconciliation and declaration as are required for companies etc, to which paragraph (c) applies, but also including details of sources and applications of funds that are of a private or domestic nature (paragraph (d)); and

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where the applicant is a person to whom paragraph (c) or (d) applies - such statements or declarations of the kind referred to in those paragraphs as may be required by the Commissioner in relation to any person who is an associate of the applicant, that is, the partners in a partnership, the directors and shareholders of a private company and, in the case of an applicant who is an individual, the members of his family - see notes on sub-section (3) - (paragraph (e)).

Sub-section (3) is an interpretative provision which sets out for purposes of sub-section (2) the meanings of the references to "prescribed person" and "associate of a person" in that sub-section. Under paragraph (a), a prescribed person is, in effect, defined as a registered tax agent within the meaning of Part VIAI of the Principal Act or any other person who, in the opinion of the Commissioner, is competent and qualified to furnish declarations required under sub-section (2).

Paragraph (b) provides that an associate of a person (referred to as a "relevant person") is -

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where the relevant person is a company (including a trustee company) - any person who is a director of, or shareholder in, the company;

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where the relevant person is a partnership - any of the partners in the partnership; and

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in any other case (that is, where the relevant person is an individual), any relative of the relevant person.

As mentioned earlier, sub-section (4) is designed to allow the Commissioner to issue a deduction exemption certificate in cases where he is satisfied that the applicant has, other than in minor respects, met the requirements specified in sub-section (2) for the issue of a deduction exemption certificate. For example, an applicant who meets all of the other tests specified in sub-section (2) may be unable to meet the requirement of having carried on business in Australia for a period of three years prior to the date of application only because the applicant migrated to Australia 33 months prior to that date. Where, in such circumstances, the Commissioner, having regard to the purposes of the Division, the special circumstances relating to a particular applicant or such other matters as he thinks fit, is satisfied that it would be unreasonable not to issue a certificate, he is authorised by this sub-section to do so.

Among the special circumstances to which the Commissioner may have regard for purposes of considering an applicant's position under sub-section (4), are those which are set out in detail in sub-section (5). Under paragraph (a), where the applicant is a private company in the year of income preceding that to which the exemption certificate would relate, the Commissioner may have regard to the extent to which the individual directors and shareholders have complied with the requirements of sub-paragraphs (2)(a)(i), (ii) and (iii) in relation to any business carried on by them. Paragraph (b) allows the Commissioner, in respect of a public company, to look to the compliance with these requirements in relation to any business carried on by the company's directors. Paragraph (c) permits the Commissioner to have regard to compliance with these requirements in relation to any business carried on by partners in the case of a partnership applying for a certificate and, under paragraph (d), where the trustee of a trust estate has applied for a certificate, the Commissioner may have regard to the trustee's compliance with the requirements of the section in respect of any business carried on by the trustee in his own right.

Although these circumstances are relevant in relation to any case considered by the Commissioner under sub-section (4), a main area of application will be in relation to newly established businesses, including reconstituted partnerships, for example where a person who has carried on business as a sole trader forms a company or partnership to carry on the business and cases where there have been changes in the ownership or structure of private companies. In such cases, the Commissioner will be able to issue deduction exemption certificates where, in effect, he is satisfied that that course is warranted having regard to the business and tax compliance position of the persons who stand behind the entities concerned.

Sub-section (6), provides that a person shall, for purposes of the previous sub-section, be deemed to have complied with the relevant requirements of sub-section (2) of this section, if, on the date of the application for a certificate, the person was the holder of a current deduction exemption certificate.

As mentioned above in relation to sub-paragraph (2)(a)(i), sub-section (7) is an interpretative provision which clarifies that, in a case where a trustee of a trust estate applies for the issue of a deduction exemption certificate under sub-section (2), the trustee must, for purposes of that sub-section, establish in relation to his conduct of the business of the trust estate, that he has satisfied all of the requirements of the section. It would not therefore be sufficient for purposes of that sub-section for a trustee to establish that, in his own personal capacity, in relation to his own business, he met conditions set out in the sub-section, although, in accordance with sub-section (5), that would be taken into consideration for purposes of sub-section (4).

Sub-section (8) provides that a deduction exemption certificate shall, subject to the Commissioner's power of revocation in section 221YHS, remain in force for the period that is specified in the certificate. As indicated in the earlier notes on this section, a deduction exemption certificate that is issued on the basis that the applicant will have no tax liability in relation to a particular year of income will be issued only for the duration of that year or for a part of that year. In all other cases a deduction exemption certificate will be issued for such period as the Commissioner determines in each particular case.

Sub-section (9) sets out the circumstances in which an eligible paying authority may make a prescribed payment to the holder of a deduction exemption certificate without the deduction of tax that would otherwise be required under the Division. A necessary condition for the certificate holder to receive a prescribed payment without deduction is that the certificate holder has properly furnished a deduction form in respect of the payment and also completed a declaration to the effect that he is the holder of a current exemption certificate (paragraph (a) and (b)). Under paragraph (a), where the payment is made to the payee in person, as an additional requirement, the deduction exemption certificate must be produced to the eligible paying authority who must have no reasonable grounds for believing that that certificate has been revoked. These provisions mirror those in sub-section 221YHD(5) in their application to holders of deduction variation certificates.

Section 221YHR : Reporting exemption certificates

Section 221YHR deals with the last of the Division's formal certificates - the reporting exemption certificate - which, as explained earlier, would be issued only in a limited number of cases where special circumstances apply and the payee is the holder of a deduction exemption certificate.

Under sub-section (1) the Commissioner may issue this certificate where conditions set out in paragraphs (a), (b) and (c) are satisfied.

Paragraph (a) of sub-section (1) requires an eligible paying authority (payer) and a payee who have entered into a contract under which the payer is liable to make prescribed payments to the payee to apply, jointly, in writing, to the Commissioner in an approved form.

The payee referred to in paragraph (a) above is, by virtue of paragraph (b), required to be the holder of a deduction exemption certificate which, at the time of application, is in force.

Finally, paragraph (c) requires the Commissioner to be satisfied that special circumstances exist in relation to both the eligible paying authority and the payee.

As noted above, it is envisaged that the Commissioner would only issue these certificates in limited circumstances, and then only where it was clear that both the eligible paying authority and the payee would properly account for prescribed payments, that are the subject of the exemption certificate, in their annual income tax returns.

Sub-section (2) provides that a reporting exemption certificate will, subject to the Commissioner's power to revoke the certificate, remain in force while the payee's deduction exemption certificate remains in force.

By sub-section (3), the eligible paying authority and the payee to whom a reporting exemption certificate has been issued, and is in force, are exempted from their respective duties under sections 221YHC and 221YHD that is, the payee and the eligible paying authority are not required to complete their respective parts of the deduction forms that would, but for this certificate, otherwise be required to be furnished in respect of the prescribed payments covered by the certificate.

Section 221YHS : Revocation of certificates

By sub-section (1) of section 221YHS, the Commissioner may revoke a prescribed certificate at any time and where he does so he must notify the person or persons to whom the certificate was issued that it is no longer in force.

The sub-section could be applied where a person to whom a certificate has been issued fails to comply with the income tax law during the period the certificate is in force, or is found subsequently to have made a false declaration or statement in order to obtain the certificate. It could also have application where the method of conducting a person's business alters, for example, a partner leaves a partnership thereby bringing that particular partnership to an end, or a material change occurs in the ownership or structure of a private company.

Where a person is notified of the revocation of a certificate by the Commissioner, that person is required under sub-section (2) to return the certificate to the Commissioner within 14 days of receipt of such notification. The sub-section provides for a penalty of $500 if the person fails to do so.

Sub-section (3) establishes a further offence in a case where a payee has furnished to an eligible paying authority a deduction form including a declaration in relation to a deduction exemption certificate or a deduction variation certificate and, after furnishing the deduction form but before a prescribed payment is made the certificate is revoked by the Commissioner. If the payee does not notify the payer of the revocation before the prescribed payment is made, the payee is guilty of an offence punishable on conviction by a maximum fine of $2000.

Section 221YHT : Notification and review of decisions

Section 221YHT contains machinery provisions concerning the review of decisions of the Commissioner in relation to prescribed certificates and statutorily imposed penalties.

By sub-section (1) of section 221YHT the Commissioner is required to notify the applicant for a prescribed certificate of his decision in writing in relation to that application.

A person who is dissatisfied with the Commissioner's decision on an appreciation for a prescribed certificate, as notified under sub-section (1), in relation to remission of penalties, as notified under sub-section 221YHL (3) or to revoke a prescribed certificate as notified under sub-section 221YHS(1), may, under sub-section (2), lodge with the Commissioner an objection within 60 days of the Commissioner's notification of his decision, explaining in full the grounds upon which the person relies.

By sub-section (3) the review and appeal provisions relating to decisions under the Principal Act are extended to objections made under sub-section (2). The effect of this is that a person, who complies with the requirements of Division 2 of Part V, may have the Commissioner's decision in relation to the objection lodged under sub-section (2) reviewed by an independent Taxation Board of Review or appeal to a Court.

Section 221YHU : Offences

This section specifies a number of offences relating to attempts to unlawfully circumvent the operation of the provisions of Division 3A, or to fraudulently obtain a credit in respect of deductions of tax under this Division.

Paragraph (a) of section 221YHU will make it an offence for a person to attempt to have applied for his own advantage or benefit, credit in respect to, or payment of, an amount deducted from a prescribed payment that has been made to another person.

It will be an offence, under paragraph (b), for a person to present to the Commissioner, for the purpose of obtaining credit or other benefit, a deduction form or document purporting to be such a form, other than a deduction form duly delivered to the person.

Under paragraph (c) a person will commit an offence where he or she alters a prescribed certificate, or presents a deduction exemption certificate or deduction variation certificate to an eligible paying authority that has been altered without the authority of the Commissioner.

Under paragraph (d) it will be an offence for a person, without lawful excuse, to be in possession of a forgery or colourable imitation of a prescribed certificate.

It will be an offence under paragraph (e) to falsely pretend to be a person named in a deduction exemption certificate or a deduction variation certificate.

Finally, an offence arises under paragraph (f), where a person, by presenting a document other than a prescribed certificate issued to him that is currently in force, causes an eligible paying authority not to make the appropriate amount of deduction from a prescribed payment.

The penalty prescribed for any one of the above offences is a fine of $5,000 or imprisonment for 12 months, or both.

Section 221YHV : Time for prosecutions

The penalties prescribed for offences against proposed Division 3A of Part V1 of the Principal Act are of a pecuniary nature and, in some instances, also provide for the imposition of a term of imprisonment not exceeding 12 months. Accordingly, in the absence of a specific enactment to the contrary, the Crimes Act would require a prosecution for an offence against the Division to be commenced within one year of the offence having been committed.

In relation to comparable offences, the Principal Act already enables prosecutions to be commenced at any time, e.g., offences in relation to PAYE instalment deductions from salary or wages. As a breach of the provisions concerning the collection of deductions from prescribed payments may not in some cases be detected within one year after its commission, the institution of prosecutions for such offences is, by this section, to be permitted without a time limitation.

Section 221YHW : Joinder of charges under this Division

This section is designed to expedite prosecution proceedings where a person commits a number of similar offences against the provisions covering the collection of deductions of tax at source from prescribed payments. In its terms it is identical with provisions already contained in the Principal Act in relation to the collection of PAYE instalment deductions made from wages and salaries, collection of withholding tax on dividends and interest paid to non-residents, and the collection of mining withholding tax.

More than one charge may be included in the same complaint if the charges are founded on the same facts or form, or are part of a series of similar offences, and charges so joined shall be tried together unless the Court orders that any charge shall be tried separately (sub-sections (1), (2) and (3)).

The Court may impose a single penalty in respect of all charges joined in the one complaint, subject to the proviso that the penalty shall not be greater than the sum of the maximum penalties that could be imposed if each charge was tried separately (sub-section (4)).

Section 221YHX : Power of Commissioner to obtain information

Section 221YHX is designed to ensure that the general power of the Commissioner to require a person to attend and give evidence before him or any officer authorised by him will apply in respect of any matter relevant to the administration or operation of this Division.

Section 221YHY : Declarations

This section makes it clear that forms used for any of the purposes of Division 3A may be required to include a declaration in respect of the subject matter to which the form relates. By this means, a person making a false declaration in respect of information required under this Division may be liable to prosecution under section 229 of the Principal Act.

Section 221YHZ : Special provisions relating to partnerships

As a partnership is not a separate legal entity, special provisions are necessary to ensure that the rights and obligations of a partnership under Division 3A may be exercised or discharged, as the case requires, by one or more of the partners.

By sub-section (1) of section 221YHZ, Division 3A applies in relation to the making and receipt of prescribed payments by a partnership as if the partnership were a person.

By virtue of sub-section (2), any one or more of the partners of a partnership may discharge any obligation imposed on the partnership.

Every partner is generally liable for the debts of the partnership. Sub-section (3) ensures that such liability, in relation to a debt arising under Division 3A, is a joint and several one for each of the partners. In other words, the Commissioner may sue one or more of the partners severally, or all the partners jointly in respect of the recovery of any outstanding debt of the partnership under the Division.

In relation to an offence against Division 3A which has been deemed to have been committed by a partnership, sub-section (4) deems that offence to have been committed by each partner.

Clause 66: Film withholding tax arrangements

Clause 66 will insert new Division 6 in Part VI of the Principal Act to give effect to the system of withholding tax that is to apply in relation to the new arrangements governing deductions for investments in Australian films.

As explained in the introductory notes to clauses 44 to 53, amounts contributed towards the production of a film are, as part of the new arrangements, to be held in a film account opened in relation to the film in the Australian Film Industry Trust Fund. Those arrangements are to have effect from 1 July 1983.

Under declarations to be lodged in relation to a film, payments out of a film account opened in the Trust Fund are to be made, broadly, only for the purposes of expenditure in the production of the film or by way of refund to contributors.

In the event of a refund being made, amendments proposed by this clause will operate so that an amount equal to 90 per cent (69 per cent in the case of a refund to a corporate investor) of the amount of the intended refund is to be deducted and remitted, within 21 days, to the Commissioner of Taxation with appropriate notification. Where the amount is not remitted immediately to the Commissioner, the amount is required to be held in the film account pending remittance.

Amounts withheld under these arrangements will be credited against tax due on the amended assessment withdrawing the 150 per cent deduction previously allowed under new section 124ZAFA in respect of the excess contributions. Any excess credit will be applied against the amount of any other taxes due to the Commissioner, with any remaining excess being refunded to the investor. An investor who receives a refund of contributions in respect of which deductions had not previously been allowed under section 124ZAFA, will be able to apply to the Commissioner to exempt the refund from the withholding tax.

Special withholding tax arrangements - designed broadly to achieve an equivalent result to that applying in relation to refunds - will apply in the event that amounts are otherwise withdrawn from the film account for ineligible purposes.

Procedural and penalty arrangements will apply for the purposes of the withholding tax arrangements, consistent with existing withholding tax provisions of the income tax law.

Section 221ZM : Interpretation

New section 221ZM is a drafting measure that ensures that expressions given a particular meaning for the purposes of the operation of Division 10BA of the Principal Act are ascribed the same meaning for the purposes of the operation of the withholding tax arrangements.

Section 221ZN : Deductions from certain withdrawals from film accounts

Section 221ZN imposes on a person (see notes on new sub-section 124ZAA(10)) who withdraws an amount from an account opened in relation to a film in the Australian Film Industry Trust Fund a requirement to make a deduction from that amount if it is not, upon withdrawal, to be dealt with in the prescribed manner.

As explained in the notes on new sub-sections 124ZAA(7) and (8), an amount withdrawn from a film account will be taken to be dealt with in the prescribed manner if it is -

•

expended in producing the film;

•

paid to the Commissioner in respect of an amount deducted from a previous withdrawal from the film account that had been re-deposited in the account under paragraph 221ZN(1)(e) pending remittance; or

•

refunded to an investor out of a deduction re-deposited in the film account under paragraph 221ZN(1)(e) where the investor has been issued by the Commissioner with a certificate under sub-section 221ZN(4) exempting the refund from withholding tax.

In determining for these purposes the amount that is expended in producing the film no regard is to be had to provisions of Division 10BA that otherwise apply to notionally reduce the amount that is taken, for the purpose of the special 150 per cent deduction entitlement, to have been expended in producing the film.

Paragraphs 221ZN(1)(a) to (e) specify the rate at which deductions are to be made and the manner in which they are to be remitted to the Commissioner.

Under paragraph (a), the rate of deduction in respect of a withdrawal from the film account that is to be paid as a refund of contributions is set at 69 per cent of the amount of the withdrawal in the case of a corporate investor and 90 per cent in all other cases. The 90 per cent rate also applies to corporate investors acting in their capacity as the trustee of a trust estate.

The rate of deductions for any other withdrawals that are not to be dealt with in the prescribed manner (i.e., for withdrawals expended otherwise than in producing the film or as refunds to investors) is set by paragraph (b) at 90 per cent of the amount of the withdrawal.

By paragraph (c) a person making a deduction in accordance with paragraph (a) or (b) is required to pay the amount deducted to the Commissioner within 21 days of the relevant withdrawal having been made. Paragraph (d) requires that a payment made in accordance with paragraph (c) be accompanied by a statement with respect to the deduction, signed by the person who made the deduction. The amount of a deduction made in accordance with paragraph (a) or (b) that is not paid to the Commissioner at the time the deduction is made is, by virtue of paragraph (e), to be re-deposited in the film account pending remittance to the Commissioner.

Sub-sections 221ZN(2) to (4) operate to enable an investor who has had an amount deducted in accordance with paragraph 221ZN(1)(a) from a refund of contributions to apply to the Commissioner for a certificate exempting the person who made the deduction from the requirement to remit the amount of the deduction to the Commissioner. These sub-sections will be appropriate where, under paragraph 221ZN(1)(e), the amount of the deduction has been re-deposited in the film account pending payment to the Commissioner and where the investor has not, in fact, been allowed a deduction in respect of the original contribution at the time the refund is made.

Sub-section (2) applies, in a case where an amount has been deducted from a refund, to confer on the investor a right to apply in writing to the Commissioner, within seven days of the amount of the refund being withdrawn from a film account, for a certificate exempting the person who made the deduction from the requirement to pay the amount of the deduction to the Commissioner.

Where the Commissioner is satisfied that a deduction has not been allowed to the investor in respect of the contribution to which the refund relates, sub-section (3) authorises the Commissioner to issue a certificate in relation to the amount deducted.

Where a certificate issued under sub-section (3) is presented to the person who made the deduction, that person is, by virtue of sub-section (4), released from the requirement to pay the deduction to the Commissioner. Correspondingly, the investor is not entitled to a credit under section 221ZS in respect of the original deduction.

Sub-section (5) prescribes penalties for failure to comply with the provisions of sub-section 221ZN(1). Under paragraph (a), a person who fails to pay to the Commissioner in accordance with paragraph (1)(c) the amount of a deduction made under paragraph (1)(a) or (b) is guilty of an offence punishable on conviction by a fine not exceeding $1000 or imprisonment for a period not exceeding 6 months. A person failing to comply with any of the other requirements of sub-section (1) is guilty of an offence punishable upon conviction by a fine not exceeding $200.

Sub-section (6) ensures that safeguarding provisions that otherwise apply for the purposes of Division 10BA to notionally reduce the amount that is taken to be expended by a taxpayer as a contribution towards the cost of producing a film do not apply for the purposes of the withholding tax provisions.

Section 221ZO : Liability of person who fails to make deduction

Section 221ZO imposes certain liabilities upon a person who fails to make the appropriate deduction in respect of amounts withdrawn from a film account.

By sub-section (1) where a person withdraws an amount from a film account and deals with that amount otherwise than in the prescribed manner without making a deduction in accordance with sub-section 221ZN(1) that person is to pay to the Commissioner -

(a)

an amount equal to the amount that the person failed to deduct; and

(b)

an amount equal to 10 per cent per annum of so much of the deduction that remains unpaid, calculated from the date on which the amount was payable, i.e., twenty one days after the original amount was withdrawn.

Where the Commissioner becomes aware that a person has failed to make a deduction required to be made under sub-section 221ZN(1) from a withdrawal from a film account the Commissioner is, by virtue of sub-section (2), to notify the person in writing of the amount that he was required to deduct.

By virtue of sub-section (3), where a person receives a notice from the Commissioner under sub-section (2) in relation to an amount that the person has failed to deduct from a withdrawal from a film account, the amount of that deduction ceases to be payable under paragraph 221ZO(1)(a) on the expiration of a period of sixty days from the date of receipt of that notice. The period by reference to which an additional amount would be payable under paragraph 221ZO(1)(b) in relation to the deduction would, accordingly, be determined by reference to that date.

In circumstances where an amount withdrawn from a film account is expended for ineligible purposes the Commissioner is empowered by new sub-section 124ZAH(1A) (clause 51) to attribute that amount to the contributions of particular investors. The background to this is that, where a person who has made a withdrawal from a film account for ineligible use without making the appropriate deduction in accordance with paragraph 221ZN(1)(b) subsequently makes a payment in accordance with this section, that person will not normally be in a position to determine which of the film's investors have received a credit (under new section 221ZN) in respect of the payment.

To enable a person in this situation to take action to recover the amount of the payment from those investors who have benefited, paragraph (a) of sub-section (4) authorises the Commissioner, on application by a relevant person, to notify that person of the identity of the investors who have become entitled to a credit in respect of a payment made by the person under this section. By paragraph (b) of sub-section 4 a person is authorised to recover from an investor an amount equal to the amount of any credit received by the investor from the payment.

Section 221ZP : Liability of person who fails to remit deduction

Section 221ZP will apply in circumstances where an amount payable to the Commissioner under paragraph 221ZN(1)(c) in respect of an amount deducted from a film withdrawal remains unpaid after the specified 21 day period for payment.

Paragraph 221ZP(a) ensures that the amount deducted remains payable to the Commissioner even though the period for payment of the amount has elapsed. Paragraph (b) imposes liability for an additional amount calculated at the rate of 20 per cent per annum on a person who fails to pay an amount deducted to the Commissioner by the specified time.

Section 221ZQ : Remission of certain amounts

Section 221ZQ gives the Commissioner authority to remit, as appropriate, any additional amount payable under paragraphs 221ZO(1)(b) or 221ZP(b). The power of remission is similar to those contained in other parts of the Principal Act and, consistent with those, will operate to permit the Commissioner to remit any additional tax payable under those paragraphs only in restricted circumstances.

Section 221ZR : Recovery of amounts by Commissioner

Proposed section 221ZR contains machinery provisions to enable collection of amounts payable under this Division.

Under sub-section (1) an amount payable under this Division is to be a debt due to the Queen on behalf of the Commonwealth and payable to the Commissioner and may be sued for and recovered in a Court of competent jurisdiction by the Commissioner or a Deputy Commissioner. Alternatively, a Court before which proceedings are taken against a person for an offence against a provision of the new Division 6 may order the person to pay that amount to the Commissioner.

Sub-section (2) enables the averment provisions of section 243 of the Principal Act to apply to proceedings for recovery of amounts payable under this Division.

Sub-section (3) allows for an order under paragraph (b) of sub-section (1) made in a Court of summary jurisdiction to be registered in any Court having jurisdiction to entertain civil proceedings. For this purpose the sub-section specifies that the provisions of section 249 of the Principal Act are to apply to such an order.

Section 221ZS : Entitlement to a credit in respect of deductions

Section 221ZS applies to entitle a person to a credit in respect of deductions, made in accordance with this Division from withdrawals from the film account out of amounts contributed by the person.

Sub-section (1) applies in relation to amounts deducted under sub-section 221ZN(1) from a refund made to an investor and to an amount paid to the Commissioner under paragraph 221ZO(1)(a) in relation to an amount that was required to be deducted from a refund to an investor. By virtue of sub-section (1), the person to whom the refund was made is entitled to a credit of an amount equal to the deduction or the amount paid under paragraph 221ZO(1)(a) in relation to the deduction.

Sub-section 221ZS(2) applies similarly to confer an entitlement to a credit in respect of an amount withdrawn from a film account and expended for ineligible purposes. Sub-section 124ZAH (clause 51) applies to authorise the Commissioner to attribute the amount withdrawn to the contributions of particular investors and sub-section 221ZS(2) applies similarly to apportion the amount of the credit in a manner consistent with the determination made under section 124ZAH.

Section 221ZT : Application of credits

Section 221ZT will provide the machinery for allowing the credit to which an investor is entitled under section 221ZS.

Under sub-section (1) an amount of credit to which a person is entitled by virtue of section 221ZS is a debt due and payable to the person by the Commissioner.

Sub-section (2) applies in circumstances where a person is entitled to a credit in respect of an amount withdrawn from a film account where no deduction has been allowed in respect of the contribution to which the withdrawal relates. In these circumstances the amount of the credit is to be applied firstly in discharge of any liability of a person to the Commonwealth which arises under any Act of which the Commissioner has general administration.

Sub-section (3) applies where a deduction has been allowed in respect of the contribution to which the withdrawal relates. In these circumstances the Commissioner is not required to apply the credit until the assessment in which the deduction was allowed is amended to disallow the deduction. On that occurring, the credit is to be applied successively in payment of any tax payable under the amended assessment and, to the extent of any remaining credit, in total or partial discharge of any liability of the person to the Commonwealth which arises under any Act of which the Commissioner has the general administration.

Sub-section (4) means that should the Commissioner pay or apply an amount in excess of the credit to which a person is entitled, the Commissioner may recover the excess as if it were income tax due and payable by that person.

Section 221ZU : Persons discharged from liability in respect of deductions from refunds

Sub-section (1) of section 221ZU is a measure to afford protection to a person, who has made a deduction under this Division, against legal action by another person for payment to the other person of the amount of the deduction.

Sub-section (2) ensures that a person who has made a deduction under this Division remains liable to legal action for recovery by an investor where, prior to the amount being remitted to the Commissioner, the person is presented with a certificate under sub-section 221ZN(3) exempting the person from paying the amount to the Commissioner.

Section 221ZV : Payments into and out of Consolidated Revenue Fund

Section 221ZV directs that moneys received by the Commissioner under the Division be paid into the Consolidated Revenue Fund and authorises the necessary appropriation in respect of any amounts that the Commissioner becomes liable to pay in pursuance of the Division.

Section 221ZW : Time for prosecutions

The penalties prescribed for offences against proposed Division 6 of Part VI of the Principal Act are of a pecuniary nature or impose a term of imprisonment not exceeding 6 months. Accordingly, in the absence of a specific enactment to the contrary, the Crimes Act would require a prosecution for an offence against the Division to be commenced within one year after the offence had been committed.

In relation to certain other offences, the Principal Act already enables prosecutions to be commenced at any time, e.g., offences in relation to tax instalments from salary or wages. As a breach of the provisions concerning deductions from withdrawals from Australian Film Industry Trust Fund accounts may not be detected within one year of its commission, it is proposed that the institution of prosecutions for such offences be also permitted without a time limitation.

Section 221ZX : Joinder of charges under Division 6

This section is designed to expedite prosecution proceedings where a person commits a number of similar offences against the requirements of this Division. In its terms it is identical with provisions already contained in the Principal Act in relation to the collection of tax instalment deductions made from wages and salaries and the collection of withholding tax on mining payments.

More than one charge may be included in the same complaint and charges so joined shall be tried together unless the Court orders that any charge shall be tried separately.

The Court may impose a single penalty in respect of all charges joined in the one complaint, subject to the proviso that the penalty shall not be greater than the sum of the maximum penalties that could be imposed if each charge was tried separately.

Clause 67: Application of trust amendments

This clause, which will not amend the Principal Act, will specify the year of income in which the amendments proposed by clauses 17, 18 and 19 will first apply and will, where necessary, modify the operation of those amendments in that year by means of transitional provisions. Broadly, the amendments proposed by those clauses deal with the imposition on the trustee of a trust estate of the primary liability for tax on trust income to which a non-resident beneficiary is presently entitled.

By sub-clause (1) of clause 67, the amendments proposed by clauses 17, 18 and 19 will apply in assessments for the year of income in which 18 May 1983 occurred and all subsequent years of income.

Sub-clause (2) proposes that where trust income - in respect of which the trustee would, but for the sub-clause, be taxed under proposed new sub-section 98(3) or (4) (see notes on clause 18) - has been paid to or applied for the benefit of a beneficiary during the income year in which 18 May 1983 occurred but before that date, the trustee is not taxed on that income under the proposed new sub-section. The trustee is so taxed only on such income as is paid or applied on or after that date.

Sub-clause (3) complements sub-clause (2) and proposes that in a case to which sub-clause (2) applies, the beneficiary is to be taxed on all relevant trust income paid or applied during the income year in which 18 May 1983 occurred, whether it is paid or applied before or after that date. Proposed sub-clause (4) provides that where a beneficiary is taxed in terms of sub-clause (3), a credit is allowed against the beneficiary's tax for the tax paid by the trustee in respect of the particular trust income in the transitional year.

Clause 68: Amendment of assessments

Clause 68, which will not amend the Principal Act, will ensure that the Commissioner of Taxation has authority to re-open an income tax assessment made before this Bill becomes law if that should be necessary in order to give effect to the amendments that it contains. The power of amendment authorised by clause 68 is necessary because a range of concessions proposed by the Bill are to have effect from 20 July 1982 or, in the case of the new film industry concessions, from 13 January 1983.

INCOME TAX (RATES) AMENDMENT BILL 1983

This Bill will amend the Income tax (Rates) Act 1982 - the Principal Act - which declares the rates of tax payable for the 1982-83 and subsequent financial years by individuals and trustees generally. The effect of the amendment will be to exclude from the scope of the Act a trustee taxed under proposed new sub-section 98(3) of the Income Tax Assessment Act 1936 in respect of a non-resident company.

This will be achieved by clause 3 which proposes the amendment of the definition of "tax" in sub-section 3(1) of the Principal Act by the inclusion of a new paragraph (aa). "Tax" is defined as income taxes other than those the rates of which are not declared by the Principal Act and the new paragraph will exclude from the definition the income tax payable by a trustee of a trust estate taxed under the proposed sub-section 98(3) of the Assessment Act - that is, a trustee who is taxed on a share of trust income to which a beneficiary that is a company and is a non-resident at the end of the year of income is presently entitled (see the notes on clause 18 of the accompanying Income Tax Assessment Amendment Bill 1983).

The rate of tax payable by a trustee in these circumstances will be declared and imposed by the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1982, as proposed to be amended by the accompanying Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1983.

However, the provisions of the Principal Act which declare the rates of tax payable by trustees generally will operate to declare the rate of tax payable by a trustee who is taxed, under new sub-section 98(4) of the Assessment Act, on behalf of an individual who is a non-resident at the end of the year of income. The trustee is to be so taxed on the relevant trust income as if it were the income of an individual and the Principal Act will operate so that the trustee pays tax at the rates that would have applied to the beneficiary - for example, if the beneficiary were a resident at any time during the year of income, the trustee will be taxed at the rates applicable to residents.

INCOME TAX (INDIVIDUALS) AMENDMENT BILL 1983

This Bill proposes the amendment of the Income Tax (Individuals) Act 1982 - the Principal Act - which imposes the tax payable for the 1982-83 financial year by individuals and trustees generally, at the rates declared by the Income Tax (Rates) Act 1982. The amendment proposed will have the effect that the Act does not impose tax payable by a trustee, under new sub-section 98(3) of the Income Tax Assessment Act 1936, on behalf of a non-resident company beneficiary.

Existing sub-section 5(2) of the Principal Act states that income taxes payable by certain entities are not imposed by the Act. These entities are described in paragraphs of the sub-section. Clause 3 of this Bill will amend that sub-section to include an additional paragraph - paragraph (d), to the effect that the Principal Act does not impose tax payable by a trustee of a trust estate who is taxed under new sub-section 98(3) of the Assessment Act (see the notes on clause 18 of the accompanying Income Tax Assessment Amendment Bill 1983).

The income tax payable by a trustee taxed under new sub-section 98(3) of the Assessment Act will be declared and imposed by the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1982 (see the notes on the accompanying Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1983).

The Principal Act will, however, impose the tax payable by a trustee who is taxed, under new sub-section 98(4) of the Assessment Act, on behalf of a beneficiary who is an individual and is a non-resident at the end of the year of income (see notes on the accompanying Income Tax (Rates) Amendment Bill 1983).

INCOME TAX (COMPANIES, CORPORATE UNIT TRUSTS AND SUPERANNUATION FUNDS) AMENDMENT BILL 1983

This Bill will amend the Principal Act - the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1982 - to extend its operation. The Principal Act declares and imposes the rates of tax payable by companies, by trustees of corporate unit trusts and by trustees of superannuation funds. It is proposed that it also declare and impose the rate of tax payable by a trustee taxed under new sub-section 98(3) of the Income Tax Assessment Act 1936 on behalf of a non-resident beneficiary that is a company (see the notes on clause 18 of the accompanying Income Tax Assessment Amendment Bill 1983).

Clause 3 of the Bill will amend sub-section 5(3) of the Principal Act to provide for the imposition on a trustee, whether a natural person or a company, of the tax payable by the trustee under new sub-section 98(3) of the Assessment Act. Clause 4 will insert a new section in the Principal Act - section 8A - which will declare the rate of tax payable by such a trustee to be 46 per cent - the general rate of tax applicable to companies.

The proposed amendments will not affect the operation of the Income Tax (Non-Resident Companies) Act 1978, which imposes (at the rate of 5 per cent) the "branch profits tax" payable by a non-resident company in accordance with section 128T of the Assessment Act. Where appropriate, that tax will continue to be payable by the non-resident company itself and will not be imposed on the trustee in respect of the company's share of trust income. In terms of new sub-section 98A of the Assessment Act (see the notes on clause 19 of the Income Tax Assessment Amendment Bill 1983), the company's assessable income will include the trust income taxed to the trustee under sub-section 98(3), with a credit being allowed to the company for the tax paid by the trustee.

INCOME TAX (PAYMENTS FOR WORK) (CONSEQUENTIAL AMENDMENTS) BILL 1983

This Bill amends section 109 of the Bankruptcy Act 1966 and section 4 of the Crown Debts (Priority) Act 1981 by inserting a reference to section 221YHJ of Division 3A of Part VI (which relates to deduction of tax at source in relation to prescribed payments for work) as proposed to be inserted in the Income Tax Assessment Act 1936 by clause 65 of the Income Tax Assessment Amendment Bill 1983.

Briefly stated, section 109 of the Bankruptcy Act 1966 provides, subject to that Act and to sections 221P and 221YU of the Income Tax Assessment Act 1936 (which respectively relate to PAYE instalment deductions and to withholding tax on dividends and interest paid to non-residents), a specific order of priority for the making of payments from the proceeds of the property of the bankrupt. Section 4 of the Crown Debts (Priority) Act 1981 ensures that nothing in that Act relating to the priority of Crown debts affects the operation of section 221P or 221YU of the Income Tax Assessment Act 1936.

The effect of the amendments contained in Part II and Part III of this Bill, when read in conjunction with proposed section 221YHJ, is to ensure that any claim by the Commissioner on the trustee of a trust estate or the liquidator of a company, in respect of outstanding deductions of tax at source from prescribed payments, will have the same priority as that currently applying to PAYE instalment deductions under section 221P of the Income Tax Assessment Act.