House of Representatives

Explanatory Memorandum

(Circulated by the Treasurer, the Rt. Hon. Sir Arthur Fadden.)

Ed. Note

Main Features

INTRODUCTORY NOTE:-

The main features of the Resolution and the Bill are-

Rates of Tax: Individual Taxpayers-

(1)

That the special levy of ten per centum of income tax and social services contribution imposed for the last financial year shall not be reimposed for the current financial year;

(2)

That, subject to the discontinuance of the special levy, the rates applicable for the last financial year 1951-1952 (based on income of the year ended 30th June, 1952) shall continue to apply for the current financial year 1952-1953 (based on income of the year ending 30th June, 1953).

Rates of Tax: Companies-

(3)

That the primary rate to be imposed on taxable incomes derived by both public and private companies during the year ended 30th June, 1952, shall be-

On the first Pd5,000-5s. in the Pd1.

On the balance of taxable income-7s. in the Pd1.

(NOTE.-This represents a reduction, compared with rates applicable for the last financial year, of 2s. in the Pd1 on the first Pd5,000 of taxable incomes derived by public companies);

(4)

That, subject to specified exceptions, the special levy at the rate of 2s. in the Pd1 imposed last financial year shall continue to be imposed on taxable incomes derived by public companies during the year ended 30th June, 1952;

(5)

That the system of advance payments by companies instituted in the last financial year shall be discontinued. Advance payments imposed for the financial year 1951-1952 will be credited in payment of tax to be assessed for the current financial year 1952-1953;

(6)

That the amount of distributable income of the year 1951-1952, in excess of Pd6,000 which a private company may retain free from undistributed income tax shall be increased;

(7)

That the undistributed income tax shall be levied on private companies at the flat rate of 10s. in the Pd1 in lieu of the shareholders' graduated rates;

(8)

That no rebate shall be allowed to shareholders on dividends paid out of income which has borne undistributed income tax at the flat rate of 10s. in the Pd1.

Education Expenses-

(9)

That a concessional deduction shall be allowed for the cost of full-time education of dependent children under 21 years of age, subject to a maximum of Pd50 for each child.

Age Allowance-

(10)

That persons of pensionable age-i.e., men over 65 years, women over 60 years-shall not be required to pay tax on income derived during the current year ending 30th June, 1953, unless the net income, in the case of a single person, exceeds Pd254, or, in the case of a married couple, the aggregate of their net incomes exceeds Pd507. For the last financial year these exemption points were Pd234 and Pd468 respectively.

Leases: Goodwill-

(11)

That consideration paid and received under agreements made after 31st December, 1952, for goodwill associated with businesses on leasehold premises shall be taxable income of the recipient and an allowable deduction to the payer only where the parties so agree and notify the Commissioner of Taxation of their agreement.

Non-Profit Clubs and Organizations-

(12)

That the income of a club established for the promotion of sports in which human beings are the sole participants shall be exempt from tax so long as the club is not carried on 'or the profit of individuals;

(13)

That any other organization not carried on for the profit of individuals shall not be required to pay tax unless its net income exceeds Pd104.

Live Stock-

(14)

That a concessional basis of assessment shall be provided in respect of profits arising from forced sales of live-stock consequent upon loss of pastures or fodder due to the ravages of fire, drought or flood. A primary producer, if he so desires, may include one-fifth of the profit in his return for the year of sale and one-fifth in the return for each of the succeeding four years.

Trading Stock-

(15)

That, where trading stock, including live-stock, is disposed of by way of gift, the donee shall be entitled to the same deduction as a purchaser and the donor shall be taxed in the same manner as a seller of that stock;

(16)

That, where interests in trading stock are transferred-as for example, on the formation, variation or dissolution of a partnership-the parties may, upon unanimous agreement, elect whether tax should be payable on the profit deemed to arise from that transfer or whether the tax liability should be deferred until the trading stock is actually sold.

Northern Territory-

(17)

That primary producers in the Northern Territory shall be allowed to deduct, by way of depreciation over a period of five years, the cost of plant and structural improvements used by them, or, alternatively, in the case of structural improvements, to deduct the whole cost in the year of completion;

(18)

That deductions shall be allowed in respect of live-stock, plant and structural improvements owned by primary producers in the Northern Territory on 1st July, 1952, and in respect of capital expenditure on mining plant and the development of mining properties in the Territory up to that date.

(NOTE.-The exemption previously granted to residents of the Northern Territory in respect of income derived from primary production, mining and fisheries in the Territory expired on 30th June, 1952.)

Pension Funds-

(19)

That the maximum deduction allowable in respect of contributions by employers to employees' pension funds shall be increased from Pd100 to Pd200 for each employee, subject, as at present, to a higher allowance if the Commissioner of Taxation is satisfied that the special circumstances of any case warrant a higher allowance;

(20)

That the income of funds established bona fide for the provision of retirement and other benefits for self-employed persons shall be exempt from tax.

Retiring Allowances-

(21)

That limitations shall be placed on the operation of section 26(d) of the Assessment Act which provides, broadly, that the assessable income of a taxpayer shall include five per centum of a retiring allowance paid in a lump sum.

Notes on Paragraphs/Clauses

INCOME TAX AND SOCIAL SERVICES CONTRIBUTION RESOLUTION 1952.

PARAGRAPH 1.-INTERPRETATION.

Sub-paragraph (1.).

The definitions of "life assurance company", "mutual income" and "mutual life assurance company" are to be read in conjunction with paragraphs 8 and 9 and the Sixth Schedule to the Resolution, which contain provisions relating to the rates to be applied to the taxable incomes of mutual life assurance companies and the mutual incomes of partly mutual life assurance companies.

A mutual life assurance company is a life assurance company, the profits of which are divisible only among its policy holders. In the assessment of a mutual life assurance company, premiums on life assurance policies and expenditure related thereto are excluded. The company, generally speaking, is taxed only in its net income from investments. This income is taxed at the reduced rate set out in paragraph (2.) of the Sixth Schedule to the Resolution.

A partly mutual life assurance company is also exempt from income tax and social services contribution in respect of premiums on life assurance policies. The taxable income of such a company is divided into (a) mutual income and (b) other income. The mutual income represents the same proportion of the taxable income derived by the company from its life assurance business, e.g., investment income, as the profits divided among life assurance policy holders bear to the total life assurance profits divided among shareholders and policy holders.

The definition of "the Assessment Act" is a drafting provision to enable the use of a more convenient and abbreviated reference to the Assessment Act than the long reference set out in the definition.

Sub-paragraph (2.).

This paragraph is a drafting provision designed for application of the rates of income tax and social services contribution proposed in this Resolution to the taxable income as ascertained under the Assessment Act for the relevant income year.

PARAGRAPH 2.-INCORPORATION.

The basis of income tax and social services contribution is that a taxable income is determined in the first instance under the Assessment Act, and in the second instance the rates as declared by the Parliament under the rating measure are applied to the taxable income. For these purposes, both the Assessment Act and the Rating Act are incorporated and read as a single enactment.

PARAGRAPH 3.-IMPOSITION OF INCOME TAX AND SOCIAL SERVICES CONTRIBUTION.

Sub-paragraph (1.).

This sub-paragraph provides for the imposition of income tax and social services contribution for the financial year 1952-53 at the rates declared elsewhere in the Resolution.

In the case of companies, the rates will be applied to taxable incomes derived during the year ended 30th June, 1952.

In the case of individuals, the rates will be applied to taxable incomes derived during the current year ending 30th June, 1953, and also for the purpose of the provisional tax and contribution payable under the pay-as-you-earn system in respect of that year.

Sub-paragraph (2.)

This sub-paragraph declares, in effect, that taxable incomes of Pd104 and less derived by individuals shall not be subject to income tax and social services contribution.

By "taxable income" is meant the amount remaining after deducting from the assessable income all allowable deductions, including concessional deductions.

The effective exemption points for various classes of taxpayers with dependants, having regard to the concessional deductions, are as follows:-

The minimum taxable income of Pd105 applies also where a trustee derives income to which no beneficiary is presently entitled, or in respect of which the beneficiary is under a legal disability. If any such income is less than Pd105, neither the trustee nor a beneficiary is subject to tax on that income.

A company, other than a company in the capacity of a trustee and other than a company as specified in clause (f) of sub-paragraph (2.) of paragraph 9, is liable to tax and contribution on a taxable income of Pd1 and upwards.

The latter class of company includes companies which, by their constitutions, are prohibited from making any distribution of profits to their members. These companies are comprised mainly of clubs, associations, lodges, societies and community hotels. They differ substantially from ordinary companies and, as a general rule, their taxable incomes are of relatively small dimensions.

The proposal to exempt such companies whose taxable income does not exceed Pd104 is a new feature of rates legislation, as previously they were subject to tax and contribution on any taxable income derived. The exemption of these companies has been recommended by the Commonwealth Committee on Taxation, which noted that their taxable income generally consists only of bank interest or small amounts of Commonwealth loan interest received on amounts invested until required to meet expenditure. The receipts of these companies consist mainly of members' subscriptions and other payments by members and, as such, are not liable for income tax.

In sub-paragraph (2.) of paragraph 8 of this Resolution will be found a proposal to limit the amounts of tax on taxable incomes immediately above Pd104 derived by these companies.

PARAGRAPH 4.-RATES OF INCOME TAX AND SOCIAL SERVICES CONTRIBUTION PAYABLE BY PERSONS OTHER THAN COMPANIES.

Sub-paragraph (1.) and First Schedule.

Sub-paragraph (1.), read in conjunction with the First Schedule, declares the basic rates at which tax and contribution are to be imposed on taxable incomes other than the taxable incomes of companies. The rates declared by this Schedule are the same as those imposed for the financial years 1950-1951 and 1951-1952. However, for the financial year 1951-1952, a special levy of 10 per cent. of tax and contribution was imposed. This special levy is not being re-imposed for the financial year 1952-1953.

The rate commences at one penny in the Pd1 on the first Pd100 of taxable income. Income tax and social services contribution is, however, not payable by individuals deriving a taxable income less than Pd105. The declaration of a rate of tax on taxable incomes of Pd1 to Pd104 is made for application in those cases where the taxable income exceeds Pd104, and it will apply also in the case of a primary producer whose taxable income is greater than Pd104 but whose average income is less than Pd105.

The maximum rate declared in the table is 180 pence in the Pd1 on that part of the taxable income which exceeds Pd10,000.

The basic rates of tax and contribution shown in the table are applicable to the total taxable income derived by the taxpayer from (a) personal exertion; (b) property; and (c) both personal exertion and property. Taxable income in excess of Pd100 derived from property is subject, in certain cases, to further tax and contribution as specified in paragraph 5.

It will be observed that the rates of tax and contribution shown in the table apply to specified parts of a taxpayer's total taxable income. For example, all taxpayers other than those whose taxable incomes are less than the minimum taxable amount of Pd105 are required to pay 1d. in the Pd1 on the first Pd100 of their income, i.e., 8s. 4d. In the same way, all persons whose taxable incomes exceed Pd150 pay the 8s. 4d. on the first Pd100 of their incomes and pay 6d. on every Pd1 of income between Pd100 and Pd150, i.e., Pd50 at 6d. = Pd1 5s. Thus on the first Pd150 of their incomes they pay 8s. 4d. plus Pd1 5s.-a total of Pd1 13s. 4d.

This feature of the system allows a table to be prepared showing the amount of tax and contribution payable on each of the incomes at which the various steps commence, e.g. Pd100, Pd150, Pd200, etc., rising to Pd10,000.

The following table sets out in a simplified form the basic rates of tax and contribution:-

A taxpayer whose income coincides with one of the amounts shown in Column 1 can read off from Column 3 of the table the amount of his liability.

If his income lies between any of the amounts shown in Columns 1 and 2 it is only necessary, in order to ascertain the amount payable, to add to the amount shown in Column 3 against the appropriate range of income, an amount calculated by multiplying the excess of his income over the amount shown in Column 1 by the rate of tax and contribution shown in Column 4.

The following is an example of the application of this table to a taxable income of Pd630. The tax and contribution would be calculated as follows:-

Statements are appended to this memorandum comparing the proposed basic tax and contribution with-

(i)

the present basic tax and contribution and special levy; and with

(ii)

the present income tax and national insurance contribution payable in the United Kingdom and the present income tax and social security charge payable in New Zealand.

Sub-paragraph (2.) and Second Schedule.

Sub-paragraph (2.) is operative only in the assessments of those taxpayers who carry on a business of primary production in Australia. For the purposes of these assessments, Division 16 of Part III. of the Assessment Act provides the method by which the average taxable income of the primary producer is to be ascertained. As a general rule, this average taxable income is the average of the taxable income of the year of assessment and the taxable incomes of the preceding four assessment years.

The process of ascertainment of the rate of tax to be applied in the assessment of a primary producer may be illustrated by reference to the four categories into which primary producers fall who derive taxable income.

1. Where both the Taxable Income and the Average Income are less than Pd4,000.

The procedure in this case is, firstly, to calculate the amount of tax and contribution that would be payable on the average taxable income at the rates shown in the First Schedule. The tax so calculated is then divided by the average taxable income to determine the rate. This rate is then applied to the actual taxable income of the assessment year to determine the tax and contribution payable by the primary producer on that taxable income.

Divide Pd4,100 by 5 to obtain an average taxable income of Pd820.

Ascertain the amount payable by applying to a taxable income of Pd820 the rates set forth in the First Schedule as those rates are to be shown on the assessment notices.

Divide Pd94 6s. 8d. by 820 to obtain a rate of 27.6098d. in the Pd1.

The tax and contribution payable on a taxable income of Pd1,500 at 27.6098d. is Pd172 11s. (to nearest shilling).

If the taxpayer were assessed on a taxable income of Pd1,500 without reference to an average income, the tax and contribution would be calculated as follows:-

(2) Where both the Taxable Income and the Average Income Exceed Pd4,000.

Divide Pd25,000 by 5 to obtain an average income of Pd5,000.

The tax and contribution payable on the first Pd4,000 of taxable income at 88.1d. in the Pd1 (i.e., the rate applicable to a taxable income of Pd4,000) is Pd1,468 6s. 8d.

The tax and contribution payable on the balance of taxable income (Pd2,000) is calculated as follows:-

The tax and contribution payable on the total taxable income is the sum of the two amounts so calculated, viz.:-

The amount payable is the same as if the taxpayer were assessed on a taxable income of Pd6,000 without reference to an average income.

(3) Where the Taxable Income Exceeds Pd4,000, and the Average Income does not Exceed Pd4,000.

Divide Pd10,000 by 5 to obtain an average income of Pd2,000.

The amount of tax and contribution payable by applying to a taxable income of Pd2,000 the rates set forth in the First Schedule is Pd468 6s. 8d.

Divide Pd468 6s. 8d. by 2,000 to obtain a rate of 56.2d. in the Pd1.

The tax and contribution payable on the first Pd4,000 of taxable income at 56.2d. in the Pd1 is Pd936 13s.4d.

The tax and contribution payable on the balance of taxable income (Pd1,000) is calculated as follows:-

The tax and contribution payable on the total taxable income is the sum of the two amounts so calculated, viz.:-

If the taxpayer were assessed on a taxable income of Pd5,000 without reference to an average income, the amount of tax and contribution would be obtained directly from the First Schedule and would be Pd2,088 7s. (to the nearest shilling).

(4) Where the Taxable Income is less than Pd4,000, and the Average Income Exceeds Pd4,000.

Divide Pd25,000 by 5 to obtain an average income of Pd5,000.

If the taxpayer were assessed on a taxable income of Pd2,000 without reference to an average income, the amount of tax and contribution would be obtained directly from the First Schedule and would be Pd468 7s. (to the nearest shilling).

By section 158A of the Assessment Act a primary producer is given the right to elect that the averaging system shall not be applied in his assessment. The election once made is irrevocable. In effect the primary producer is given the choice between-

(a)

the application of the averaging system in his assessments; and

(b)

the assessment at the same rate as that to be applied in the assessment of any other individual taxpayer deriving the same amount of taxable income and to which the averaging system does not apply.

Sub-paragraph (3.) and Third Schedule.

Sub-paragraph (3) applies in the assessment of a taxpayer whose assessable income includes any consideration in the nature of a premium for the grant or assignment of a lease. The inclusion of lease premiums in assessable income is based on the principle that the premiums are, in substance, rent received in advance or commuted rent.

Consideration for the sale of goodwill attached to or in connexion with leasehold premises is, under the present law, treated as a lease premium.

Under a proposed amendment in the Assessment Bill, however, consideration so received under a contract made after 31st December, 1952, will be deemed to be a lease premium in those cases only where the parties to the contract so elect. By refraining from making the election the vendor will be relieved of liability to tax on the consideration, and conversely the purchaser will relinquish his right to a deduction in respect of the consideration. This amendment is further explained in clause 17 of the Assessment Bill.

Where a premium (or consideration which is deemed to be a premium) is received in connexion with the grant of a lease for a term of over two years or for the assignment of a lease having an unexpired term of more than two years, the premium represents income that would otherwise have been received in two or more years.

Apart from any special provision, the premium would be taxed at the rate of tax and contribution appropriate to the total taxable income derived by the taxpayer in the year in which the premium is received. This would cause the taxpayer, however, to pay a greater amount of tax and contribution than he would have been required to pay if he received the amount of the lease premium in the form of rent spread over the years of the lease term.

Sub-section (1.) of section 86 of the Assessment Act accordingly provides a special basis for the ascertainment of a rate of tax where a lease premium is included in the assessable income and the term of the lease granted or the unexpired term of the lease assigned is not less than twenty-five months.

The special basis provided by the sub-section is to the effect that the net premium, i.e. the gross premium less expenses, shall be divided by one-half of the number of years of the lease term. The result of this division when added to any other taxable income derived by the taxpayer provides a notional income by reference to which the rate of tax and contribution is determined.

The notional income is ascertained by dividing the net premium of Pd6,000 by 3 = Pd2,000 and adding that result to the other taxable income Pd3,000, providing a notional income of Pd5,000.

Apply to a notional income of Pd5,000 the rates set forth in the First Schedule which will be shown on the assessment notice. Pd5,000-Tax and Contribution-Pd2,088 6s. 8d. Divide Pd2,088 6s. 8d. by 5,000 to obtain a rate of 100.24d. in the Pd1.

If the taxpayer were assessed on a taxable income of Pd9,000 without reference to a notional income, the tax and contribution would be calculated as follows:-

Sub-paragraph (4.) and Fourth Schedule.

Sub-paragraph (4.) prescribes the rate at which income tax and social services contribution shall be payable by a trustee in those cases where a trustee becomes liable to pay tax and contribution under either section 98 or 99 of the Assessment Act.

Ordinarily, a trustee is not assessed and liable to pay tax and contribution as the beneficiaries are required to pay the tax and contribution on their respective shares of the trust income, if they are presently entitled to the income and are not precluded from receiving that income by reason of some legal disability.

Where, however, there is a legal disability preventing a beneficiary from receiving his share of the trust income or where there is trust income to which no beneficiary is presently entitled, the trustee is assessed and liable to pay the tax and contribution. The income is assessed as if it were derived by an individual taxpayer. In these assessments, the rates declared in the First Schedule are applied and, if the income is derived from a business of primary production, the rate appropriate to an average income as prescribed by the Second Schedule is applied. Correspondingly, if the trust income includes a premium for a lease, the provisions of the Third Schedule operate in the assessment of the trustee and the rate of tax and contribution is ascertained by a reference to a notional income.

PARAGRAPH 5.-FURTHER TAX AND CONTRIBUTION ON PROPERTY INCOME.

Sub-paragraph (1.) and Fifth Schedule.

This sub-paragraph imposes the further rates of tax and contribution on taxable incomes derived from property. These rates are identical with those declared for the financial years 1950-51 and 1951-52.

Where the total taxable income exceeds Pd400 and the taxable income from property exceeds Pd100, tax and contribution are imposed under-

sub-paragraph (a) on the total taxable income at the appropriate basic rates specified in the First, Second, Third and Fourth Schedules; and

sub-paragraph (b) on the taxable income from property in the range from Pd100 to Pd10,000 at the further rates specified in the Fifth Schedule.

The principle underlying the rates in the Fifth Schedule is to levy, in accordance with long continued practice, an additional impost on income from property. This impost is additional to the tax and contribution imposed at the basic rates prescribed in the First, Second, Third and Fourth Schedules. These basic rates apply to the total taxable income derived from personal exertion or from property, or from both personal exertion and property.

The further rates of tax and contribution proposed by the Fifth Schedule are designed in the form of stepped rates to conform to the pattern of the basic stepped rates in the First Schedule. The following table sets out in a simplified form the further rates of tax and contribution:-

A further rate of tax and contribution is not being declared on taxable incomes from property of Pd100 or less. If the taxable income is comprised wholly of property income or partly of property income and partly of personal exertion income, neither the basic tax and contribution nor the further tax and contribution will become payable unless the taxable income exceeds Pd104.

Where the basic tax and contribution is payable and the taxable income from property is less than Pd100, no further tax and contribution will be payable on the property income, irrespective of the amount of the total taxable income. This course simplifies the processes of assessment by removing thousands of cases from the field of further tax and contribution. In many of these cases, the relatively small amount of property income is, as a general rule, derived from the investment of savings from earnings.

The further rate of tax and contribution in the range to Pd1,000 is 8d. in the Pd. on the excess of the property income over Pd100. Further tax and contribution will not be payable, however, unless the taxable income from property or from both personal exertion and property exceeds Pd400. Provision to this effect is contained in paragraph 5 of the Resolution.

In the range of property income to Pd1,000, no further tax and contribution is payable on the first Pd100. On the excess of property income over Pd100, further tax and contribution is payable at the rate of 8d. in the Pd1 and on the excess of property income over Pd1,000 the further rate of tax and contribution is 16d. in the Pd1.

Therefore, on a property income of Pd4,000, the further tax and contribution is to be calculated as follows:-

In the range to Pd6,000 the further tax and contribution on Pd4,000 will be Pd230 and the further tax and contribution on the balance of Pd2,000 will be calculated at the rate of 8d. in the Pd1, i.e., Pd66 13s. 4d., making a total liability of Pd296 13s. 4d.

It will be noted that the rate of further tax and contribution on taxable incomes from property in excess of Pd4,000 declines in steps from 16d. to 8d. and to 4d. in the Pd1 until no further tax and contribution is payable on the excess over Pd10,000 of taxable income from property.

The decline in the rate of the further tax and contribution from the point at which the taxable income from property is Pd4,000 is to be considered together with the advance that is made in the basic rates of tax and contribution. The further tax and contribution on property income is blended with the basic rates on the total taxable income in such a manner as to achieve an equitable levy having regard to the amount and nature of the taxable income.

In the field of taxable income from property, there is no further tax and contribution additional to the basic tax at the rate of 15s. in the Pd1, which is payable where the total taxable income exceeds Pd10,000. Above that level, there is a distinct element of property entering into the derivation of incomes from personal exertion, and there is no substantial justification for an added levy on property income as compared with personal exertion income.

Sub-paragraph (2.)

This sub-paragraph places a limitation on the liability to further tax and contribution payable on taxable income from property in the range of total taxable income from Pd401 to Pd1,000.

The purpose of this limitation is to ensure that, in the range of taxable income between Pd401 and Pd1,000, the further tax and contribution shall not exceed an amount calculated at the rate of 12d. in the Pd1 on the excess of the taxable income over Pd400.

The application of the limiting provision is illustrated by the following examples based on incomes derived wholly from property:-

This limiting provision will also have the effect of ensuring a gradual increase in the liability corresponding with the increase in the taxable income.

PARAGRAPH 6.-LIMITATION OF TAX AND CONTRIBUTION PAYABLE BY AGED PERSONS.

The main purpose of this paragraph is to exempt aged taxpayers in the lower income groups from tax and contribution.

The primary qualification for the concession is that the taxpayer shall have attained the following age on or before the last day of the year of income:-

The concession will be allowed to those persons only who have been residents of Australia during the whole of the year of income.

The objective of the proposed paragraph 6 is to confer freedom from tax upon persons of pensionable age whose incomes are below the maximum permissible incomes for the purposes of Commonwealth age pensions. In the current Budget provision has been made for an increase of 7s.6d. per week in age pensions. In consonance with this increase, exemptions are being increased by Pd20 to Pd254 in the case of single persons and by Pd39 to Pd507 in the case of married couples. The proposed age pensions and the maximum permissible incomes announced in the current Budget, are as follows:-

The effect of the concession is that a resident of Australia who has attained the qualifying age will be wholly free from tax and contribution if his or her net income does not exceed Pd254.

The concession is further extended by providing that, where such a person maintains a wife or husband, as the case may be, who also satisfies the conditions of age and residence, no tax and contribution will be payable unless the combined net incomes of husband and wife exceed Pd507. Where, for example, a husband receives income amounting to Pd507, and the wife has no income, the husband's income will be free from tax and contribution. Similarly, where the husband receives Pd350 and the wife receives Pd157, neither will pay tax and contribution.

A taxpayer who is in the specified age group, but whose net income exceeds Pd254 (or, in the case of a married couple, Pd507) by a small margin, will pay less tax and contribution than would otherwise be payable.

In accordance with this provision, the basic tax and contribution payable by a taxpayer whose net income is between Pd254 and Pd272 will not be greater than one-half of the excess of the net income over Pd254. For example, a man aged 67 years in receipt of income amounting to Pd260 will pay no more than Pd3. Apart from the proposed concession, the tax and contribution payable on a taxable income of Pd260 would be Pd8 3s.

Similarly, where the combined net incomes of the taxpayer and his wife are between Pd507 and Pd616, the basic tax and contribution payable by the taxpayer will be limited to one-half of the excess over Pd507. The following examples illustrate the practical application of this paragraph in cases where the combined net incomes of a married couple exceed Pd507:-

In order to conform to the basis of maximum permissible income, it has been necessary to use the expression "net income" in paragraph 6 of this Resolution. In ascertaining the net income of any person for the purposes of this paragraph, his or her gross income (both taxable and exempt) will be taken as a basis. From the gross income there will be deducted all expenses (other than expenses of a capital, private or domestic nature) incurred in deriving that income.

The concessions provided in this paragraph will apply as from 1st July, 1952.

PARAGRAPH 7.-MINIMUM TAX AND CONTRIBUTION.

This paragraph provides, in effect, that if a liability for income tax and social services contribution arises and that liability is calculated at less than 10s., the minimum amount payable, except in the case of a company, shall be 10s. This paragraph repeats a provision that has been included in Rating Resolutions since 1928. It has long been recognised as uneconomical to prepare and issue assessments if the amount payable is less than 10s.

PARAGRAPH 8 AND SIXTH SCHEDULE.-RATES OF INCOME TAX AND SOCIAL SERVICES CONTRIBUTION PAYABLE BY A COMPANY.

This paragraph, read in conjunction with the Sixth Schedule, prescribes the rates at which tax and contribution is to be payable by companies in assessments for the current financial year 1952-1953. These assessments are based on incomes derived by companies during the year ended 30th June, 1952.

For the financial year 1951-52 public companies were liable to pay tax and contribution at the primary rate of 7s. in the Pd1, and private companies at the rates of 5s. in the Pd1 on the first Pd5,000 of taxable income and 7s. in the Pd1 on the balance of taxable income.

The rate of tax applicable to the taxable incomes of mutual life assurance companies and to the mutual income of partly mutual life assurance companies was 6s. in the Pd1. The terms "mutual life assurance company" and "mutual income" are explained in the note on paragraph 1 of this Resolution.

It is proposed that, for the current financial year 1952-53, the primary rates of tax and contribution shall be-

Companies other than Mutual Life Assurance Companies-5s. in the Pd1 on the first Pd5,000 of taxable income; and 7s. in the Pd1 on the balance of taxable income.

Mutual Life Assurance Companies-4s. in the Pd1 on the first Pd5,000 of taxable income; and 6s. in the Pd1 on the balance of taxable income.

Paragraph 3 prescribes the rates of tax and contribution payable by a partly mutual life assurance company. The taxable income of such a company is divided into (a) mutual income and (b) other income. The mutual income derived by such companies is taxed at the rate of 4s. in the Pd1 on the first Pd5,000 of mutual income and 6s. in the Pd1 on the balance of the mutual income. The non-mutual income of such companies is liable to tax and contribution, as to that part which is equal to the amount by which the mutual income is less than Pd5,000, at the rate of 5s. in the Pd1, and the balance at the rate of 7s. in the Pd1.

Paragraph 4 of the Sixth Schedule declares the rate of tax and contribution to be paid by a private company where it has made an insufficient distribution of its taxable income. The rate proposed is 10s. in the Pd1 on the undistributed amount as defined in section 103(1) of the Assessment Act.

At present a private company may retain portion of its distributable income without incurring undistributed income tax on the amount so retained. The amount, called the "retention allowance", ranges from 50 per cent. of the first Pd5,000 of distributable income down to 10 per cent. of the excess of the distributable income over Pd10,000. The balance of distributable income is regarded as a "sufficient distribution". The extent to which the company fails to reach a sufficient distribution by way of dividend payments to its shareholders is known as the "undistributed amount". The company is required to pay the tax and contribution on the undistributed amount which the shareholders would have paid had that amount been distributed as dividends.

Commencing with the income year 1951-52 it is proposed to increase the minimum retention allowance to 25 per cent. Where the present retention allowance exceeds 25 per cent. the greater amount will apply. In the case where a private company chooses to retain profits in excess of the retention allowance undistributed income tax will be payable.

It is proposed that the undistributed income tax shall be levied at a flat rate of 10s. in the Pd1, instead of the shareholders' graduated rates of tax.

Paragraph 5 of the Sixth Schedule declares the rate of tax and contribution to be paid by a company on interest paid or credited by it to a non-resident. The rate specified is 9s. in the Pd1, which is equivalent to the primary tax of 7s. and the special levy of 2s. imposed on public companies under paragraph 9. If the non-resident is a company, the tax and contribution is payable on every Pd1 of such interest. If, however, the non-resident is an individual, the tax and contribution is payable only on so much of the interest as exceeds Pd104. The company paying the tax and contribution is empowered to deduct the relevant amount from the interest otherwise payable to the non-resident and the non-resident is entitled to have the amount paid by the company set off against the total income tax and social services contribution assessed to him.

Sub-paragraph (2.)

The purpose of this paragraph is to ensure a smooth increase in the liability to tax and contribution of companies which, by their constitutions are prohibited from making any distribution of profit to their members. By sub-paragraph (2) of paragraph 3 of this Resolution it is proposed that such companies shall be exempt from tax and contribution provided that their income does not exceed Pd104. Without a limiting provision of the nature proposed by this paragraph companies whose taxable incomes exceeded Pd104 by only a moderate amount would be liable to pay tax and contribution on the 105th pound of income at a rate in excess of 20s. in the Pd1.

PARAGRAPH 9.-ADDITIONAL TAX AND CONTRIBUTION ON CERTAIN COMPANIES.

By this paragraph, it is proposed that a special levy shall be payable by public companies for the current financial year 1952-1953.

The special levy will be at the rate of 2s. in the Pd1 on the taxable incomes derived by public companies during the year ended 30th June, 1952.

By sub-paragraph (2.) it is proposed that the income of certain companies will not be subject to the special levy.

By clause (a), the special levy is not being imposed on the taxable incomes of private companies. These companies are liable to taxation on a special basis and the imposition of the special levy on private companies would therefore be inappropriate.

Clause (b) provides that companies resident outside Australia will be exempt from the special levy of 2s. in the Pd1 in respect of dividends included in the taxable income.

The dividends which it is proposed to exempt are generally paid out of profits subjected to that levy and it would be inappropriate to impose the levy a second time when dividends are paid. Moreover the severity of the total burden of tax on the profits and on the dividends paid out of those profits would be a serious deterrent to the investment of overseas capital by means of subsidiary companies operating in this country.

A corresponding freedom from the special levy in the case of dividends paid to companies resident in Australia is achieved through the allowance of the tax rebate already provided by the Income Tax Law. This proposal will preserve uniformity in this regard as between resident and non-resident companies.

Under clause (c), the special levy at the rate of 2s. in the Pd1 shall not apply to a company in the capacity of a trustee.

Clause (d) provides that the special levy shall not apply to the taxable income of a mutual life assurance company, or to the mutual income of a partly mutual life assurance company. Freedom from the special levy, coupled with the imposition of concessional rates of primary tax (4s. in the Pd1 on the first Pd5,000 and 6s. in the Pd1 on the balance of taxable income) preserves the basis of taxation of such companies which was adopted when Uniform Income Taxation was introduced in 1942. In order that those companies should pay approximately the same amount of income tax as they had previously paid to the Commonwealth and the States, legislation enacted in 1942 provided for a lower rate of primary tax.

Clause (e) exempts co-operative companies from the special levy. Such companies are distinguishable from ordinary public companies, as, in the generality of cases, there are limitations on the number of shares that may be held by any one shareholder, there are restrictions on the transfer of shares, and the shares are not saleable through stock exchanges.

Similarly, clause (f) provides that the special levy shall not apply to companies which, by their constitutions, are prohibited from making any distribution of profits to their members. These companies are comprised mainly of clubs, associations, lodges, societies and community hotels. They differ substantially from ordinary public companies, and, as a general rule, their taxable incomes are of relatively small dimensions.

PARAGRAPH 10.-ELIMINATION OF PENCE.

In the interests of simplification of assessments, it is proposed by this paragraph that pence should be eliminated from the tax and contribution payable.

PARAGRAPH 11.-TAX AND CONTRIBUTION WHERE AMOUNT TO BE COLLECTED OR REFUNDED WOULD NOT EXCEED TWO SHILLINGS.

This paragraph is designed for application in those cases where the value of instalments deducted from earnings closely approximates the amount of income tax and social services contribution payable on those earnings. If the difference between the value of the instalments and the tax and contribution which would be payable is 2s. or less, the taxpayer is not required to pay the additional small amount involved and, alternatively, the Taxation Department is not required to make small refunds.

The paragraph was originally introduced into the law as part of the scheme of applying tax instalment tokens to assessments before issue of the latter to the taxpayer. The scheme was primarily directed towards eliminating unnecessary accounting in the case of employees, and accordingly persons liable to pay provisional tax and contribution in respect of income other than salary or wages were excluded from the operation of the paragraph.

There are cases also where the value of instalments deducted from earnings exceeds the minimum tax and contribution of 10s. imposed by Paragraph 7 of the Resolution. Small refunds of 2s. or less are made in these cases as the withholding of the refund would have the effect of raising the minimum amount of tax and contribution payable.

PARAGRAPH 12.-LEVY OF INCOME TAX AND SOCIAL SERVICES CONTRIBUTION.

Sub-paragraph (1.) of this paragraph declares that income tax and social services contribution imposed in accordance with the above-mentioned provisions shall be levied and paid for the current financial year 1952-1953. Read in conjunction with the preceding provisions of this Resolution-including sub-paragraph (2.) of paragraph 1-the tax and contribution is imposed upon the taxable income derived during the year of income as defined in section 6 of the Assessment Act. In effect, the tax and contribution for the current financial year shall be levied and paid on the taxable income derived-

(a)

by a company during the year ended 30th June, 1952, or the accounting period substituted for that year of income; and

(b)

by individual taxpayers during the current year ending 30th June, 1953, or the substituted accounting period.

Sub-paragraph (2.) provides authority for the application of the above described provisions in assessments for the next financial year 1953-1954 until the commencement of the Act declaring the rates of tax and contribution for that financial year. This authority is involved only in a relatively small number of cases, e.g. where it is necessary to collect income tax and social services contribution from a taxpayer leaving Australia before the rates of tax and contribution for the next financial year are enacted.

PARAGRAPH 13.-PROVISIONAL TAX AND CONTRIBUTION.

This paragraph authorises the imposition of provisional income tax and social services contribution in respect of income of the current income year ending 30th June, 1953.

The payment of provisional tax and contribution is an essential feature of the pay-as-you-earn system of taxation. Amendments to the law made earlier this year have given taxpayers the opportunity to self-assess their own provisional amount. Under this system taxpayers will continue to be charged provisional tax and contribution in respect of the current year's income by the Taxation Department on the basis of the income of the previous year. On receiving his assessment the taxpayer must, if he expects that his current year's income will exceed that of the previous year by more than 20 per cent., calculate the provisional tax payable on his estimated taxable income. It is optional for other taxpayers to self-assess. Any taxpayer who makes his own calculation of provisional tax must then pay that amount in lieu of the provisional tax as notified by the Department.

After the return of income of the year is lodged with the Taxation Department, the correct amount of tax and contribution is assessed and credit is given for the provisional amount paid.

Under section 221YB(3) of the Assessment Act, provisional tax and contribution is not payable unless its imposition is specifically authorized by a provision in the Act imposing the rates of tax and contribution on income of the particular financial year.

The amount of provisional tax and contribution payable in the current financial year and as notified by the Department will be determined on the basis of the taxable income derived during the year ended 30th June, 1952. In order to make due allowance for the removal of the special levy of 10 per cent., the provisional tax and contribution payable in the current financial year will be approximately one-eleventh less than the tax and contribution assessed upon income other than salary and wages of the year ended 30th June, 1952.

Income Tax and Social Services Contribution Assessment Bill (NO. 3) 1952.

CLAUSE 1.-SHORT TITLE AND CITATION.

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

CLAUSE 2.-COMMENCEMENT.

Section 5(1A.) of the Acts Interpretation Act 1901-1948 provides that every Act shall come into operation on the twenty-eighth day after the day on which that Act receives the Royal Assent, unless the contrary intention appears in the Act.

In this clause it is proposed that the Income Tax and Social Services Contribution Assessment Act (No. 3) 1952 shall come into operation on the day on which it receives the Royal Assent. This provision is necessary in order that the Commissioner of Taxation may proceed immediately with the preparation and issue of assessments involving payments of provisional tax and contribution by individuals.

CLAUSE 3.-OFFICERS TO OBSERVE SECRECY.

The purpose of section 16 of the Principal Act is to ensure that officers of the Taxation Department and other officials shall maintain secrecy regarding any information which may be acquired by them, in the course of their official duties, in respect of the affairs of taxpayers.

In order to facilitate the administration of governmental business, however, the section provides that the Commissioner of Taxation may communicate information to specified Commonwealth and State authorities.

The section, as at present enacted, does not authorize the communication of information to the Commissioner for Employees' Compensation who is charged with the administration of the law relating to compensation to employees of the Commonwealth, or dependants of such employees, for injuries suffered in the course of their employment. The office is held ex officio by the Secretary to the Treasury, but provision is made for the delegation of his powers and functions.

The amount of compensation payable varies according to the number of persons dependent upon the incapacitated or deceased employee. In order to determine claims for compensation, therefore, it may be necessary to establish whether certain persons were dependants or not.

Corroborative evidence is often necessary in this connexion, and in the absence of such evidence, the determination of the claim may be delayed. This delay could be obviated, however, if particulars disclosed in income tax returns were made available to the compensation authority.

It is accordingly proposed in this clause to amend section 16 to permit the communication of information by the Commissioner of Taxation to the Commissioner for Employees' Compensation. The amendment will be to the advantage of the incapacitated employee or the dependants of a deceased employee, in that claims may be more expeditiously determined. It will also serve to protect Commonwealth funds against false claims.

Only such information will be communicated as is essential for the proper performance of the official duties of authorities administering Commonwealth employees' compensation. The Commissioner for Employees' Compensation and his delegates and officers to whom confidential information is communicated in accordance with the amended provision will be subject to the same obligations of secrecy as are imposed upon officers of the Taxation Department.

It is proposed also to delete from section 16 a reference to the Commonwealth Prices Commissioner. Consequent upon the repeal of Commonwealth prices legislation, that office has been abolished.

Paragraph (g), which provides for the communication of information to the Commonwealth Prices Commissioner, will accordingly be repealed, and the new provision relating to the Commissioner for Employees' Compensation will become paragraph (g) of section 16(4.) of the Principal Act as amended.

CLAUSE 4.-EXEMPTIONS.

Paragraph (a)-Income of Public and Community Hospitals.

Section 23(e) of the Principal Act exempts from income tax and social services contribution the income of a religious, scientific, charitable or educational institution. Under this provision, the income of a public hospital is exempt as being the income of a charitable institution. Community hospitals, however, although performing a similar service to the public, are not "charitable" in the legal sense of that term and are accordingly outside the scope of the exemption.

In order to correct this anomaly, it is proposed in paragraph (a) of this clause to extend the exemption to the income of hospitals which are carried on by societies or associations otherwise than for the purposes of profit or gain to their individual members.

The societies and associations which conduct these hospitals are usually of a religious or charitable character and the hospitals are essentially public institutions. This is already recognized in section 78(1.)(a)(i) of the Principal Act, which allows a deduction in respect of donations to such hospitals in common with public hospitals.

For convenience of drafting, it is proposed that the exempting provisions relating to hospitals, including public hospitals, should be incorporated in a separate paragraph of section 23-paragraph (ea).

The amendment effected by this paragraph will commence to apply in respect of income derived during the year ended 30th June, 1952.

Paragraph (b)-Income of Sporting Bodies.

The purpose of paragraph (b) of clause 4 is to give effect to a recommendation of the Commonwealth Committee on Taxation that income derived by associations or clubs which are established for the promotion or encouragement of athletic games or sports, and which are not carried on for profit, should be exempt from income tax and social services contribution.

Such bodies are already free from tax and contribution on amounts received from members in the form of subscriptions and other payments, since these amounts do not represent assessable income within the meaning of the Act. This follows from a long accepted principle in taxation law that members of an association or club collectively do not make a profit from transactions amongst themselves.

Amounts received from sources outside its members are, however, assessable income of the association or club. These amounts are derived principally from the general public through the medium of sporting fixtures and social functions. In some cases, relatively small amounts are also received from investments, such as rents and interest.

The proposed exemption will apply to cricket, tennis, football, swimming and similar athletic games and sports, whether of an indoor or outdoor character. It will not apply to horse-racing and other activities in which human beings are not the sole participants.

It might be noted that associations and clubs which are outside the scope of the exemption, and which are not carried on for profit, will not be subjected to tax and contribution unless the net income from sources other than members exceeds Pd104. Provision to this effect is contained in paragraph 3(2.) of the Resolution.

These provisions will apply in respect of income derived during the year ended 30th June, 1952, and subsequent years.

Paragraph (c)-Income of Superannuation Funds.

Section 23(j)(i) of the Principal Act exempts from income tax and social services contribution the income of a provident, benefit or superannuation fund established for the benefit of employees. The purpose of paragraph (c) of clause 4 is to extend the exemption to similar funds established for the benefit of persons other than employees.

The principle of this proposal was recommended by the Commonwealth Committee on Taxation.

As in the case of superannuation funds for employees, the types of funds for self-employed persons which it is intended to exempt are those constituted for the benefit of groups of persons, e.g., members of a profession. Relatively few funds of this nature are at present in existence and there is no clear guide as to the basis on which such funds generally will be conducted. In these circumstances, it is undesirable that the conditions for allowance of the exemption should be laid down in precise terms at this stage, since these may prove unduly restrictive in the light of experience of the funds which may ultimately be involved.

It is accordingly proposed that, for the present, the exemption should be subject to certain broad rules. These will include the requirement that the persons entitled to benefits from the fund (otherwise than as dependants of members) shall be at least twenty in number.

Further, the Commissioner of Taxation will require to be satisfied as to the bona fides of the fund. In this connexion, the Commissioner will have regard to-

(i)

the classes of persons who are eligible for membership;

(ii)

the reasonableness of the benefits provided for;

(iii)

the amount of the fund in relation to those benefits; and

(iv)

such other matters as he thinks fit.

In the course of time, it may be necessary to review the conditions in the light of practical experience.

The amendment effected by this paragraph will commence to apply in respect of the income year ended 30th June, 1952.

Paragraph (d)-Expiry of Northern Territory Exemption.

Paragraph (m) of section 23 of the Principal Act provided an exemption from income tax in respect of certain income derived by residents of the Northern Territory prior to 1st July, 1952. The exemption was restricted to income derived directly and in the first place from primary production, mining or fisheries in the Northern Territory.

As the exemption expired on 30th June, 1952, section 23(m) is now obsolete and, by clause 4(d), the paragraph is being removed from the Principal Act.

As from 30th June, 1952, it is proposed to allow primary producers a concessional rate of depreciation on plant and structural improvements used for agricultural or pastoral pursuits in the Northern Territory. Alternatively, in the case of structural improvements completed after 30th June, 1952, the primary producer will be given the option of deducting the whole cost from the assessable income of the year of completion. Provision is made in clause 10 of this Bill for these concessions, which will apply to both residents and non-residents of the Territory.

Special provision is made also for bringing into account live-stock on hand at the terminal date of the exemption, 30th June, 1952, and for the allowance of depreciation on plant and structural improvements on hand at that date, as well as deductions for capital expenditure incurred up to that date on mining plant and the development of mining properties. These transition provisions are explained in the notes on clauses 22, 23 and 24 of this Bill.

Paragraph (e)-Exemption of Deferred Pay Attributable to War Service.

The amendment proposed in this paragraph is to delete from paragraph (t) of section 23 of the Principal Act references to Regulations which have been repealed.

Section 23(t) provides for the exemption from income tax of so much of an ex-serviceman's deferred pay as is attributable to war service prior to 30th June, 1947.

As a practical test of determining war service, section 23(t) restricts the exemption, in the case of military or air force personnel, to deferred pay attributable to a period in which the pay and allowances earned by the ex-serviceman were paid under the War Financial (Military Forces) Regulations or the Air Force (War Financial) Regulations. In the case of members of the Naval Forces, exemption is conditional upon the Secretary to the Treasury (or his delegate) certifying that the relevant pay and allowances were special war-time pay and allowances.

All deferred pay in respect of the war service of military and air force personnel has now been paid, and the Regulations mentioned in section 23(t) have been repealed.

In the case of naval personnel, however, deferred pay in respect of war service is still payable in some instances. The exemption of deferred pay in those cases will not be affected by the proposed amendment.

CLAUSE 5.-CERTAIN ITEMS OF ASSESSABLE INCOME.

Provision is made in this clause for two drafting amendments of section 26 of the Principal Act. These amendments are consequential upon the proposed insertion of the new section 26c in that Act-see clause 6.

CLAUSE 6.-INSERTION OF NEW SECTIONS 26C AND 26D.

PROPOSED SECTION 26C.-AMOUNTS RECEIVED ON TERMINATION OF, OR RETIREMENT FROM, EMPLOYMENT.

INTRODUCTORY NOTE:-

Since the inception of Commonwealth income tax, the law has provided, broadly speaking, for the taxation in full of any amount received in connexion with continuing employment and for the taxation of five per centum only of any amount received in a lump sum in consequence of retirement from employment.

The concessional basis of assessment in the case of lump sum retiring allowances has in recent years led to serious abuses-firstly, in the payment of excessive retiring allowances, and, secondly, in the payment of amounts which are technically retiring allowances but which, in fact, are related to continuing employment. It is proposed by this clause to adopt, in principle, recommendations of the Commonwealth Committee on Taxation for amendments designed to prevent the avoidance of tax by those practices.

In the Principal Act the provision for the concessional basis of assessment upon five per centum of a retiring allowance paid in a lump sum is paragraph (d) of section 26. That paragraph applies not only to sums received in consequence of retirement from employment but also to allowances, gratuities and compensation received on retirement from any office or on the termination of any office or employment.

It is proposed by clause 5 of this Bill to repeal section 26(d). Clause 6 provides for the replacement of the repealed provisions by a new section-section 26C of the Principal Act.

One proposal in section 26C is that amounts received in consequence of retirement from or termination of an office, as distinct from employment, should not be subject to the concessional basis of assessment, but should be taxed in full like any other amount received in connexion with continuing employment.

The reference to "any office" in the present law was intended to apply to allowances received upon retirement from or termination of a statutory office such as that of a judge or the office of a managing director of a company. Although such offices may not strictly be employment, the allowances in question are comparable with allowances received by an employee on his retirement, and are equally deserving of the concessional basis of taxation.

Recent decisions of Boards of Review, however, have given this provision a wider interpretation than was intended by the legislature.

For example, allowances have been paid to legal and accountancy practitioners who technically retire from an office of, say, secretary to a company but continue in the practice of their professions. In these cases, the so-called retiring allowances are, in substance, the same as fees received from clients. In other cases, amounts have been paid to employees who leave one office but continue in the employment of the same employer in a different capacity. In such cases, the amounts which are now technically retiring allowances are, in fact, remuneration for services rendered in a continuing employment.

To remedy these defects the references to "any office" are omitted from the proposed section 26c. Care has been taken, however, to ensure that the concession will be preserved in the case of allowances received in relation to retirement from those offices which, for all practical purposes, are indistinguishable from ordinary employment.

Another proposal in section 26C is that the concessional basis of assessment which applies to retiring allowances should be limited to amounts which are reasonable, having regard to the length of the recipient's service and the value of his service as measured by his remuneration.

The formula by which this limitation will be effected is explained fully in the notes upon sub-sections (3.) and (4.) of the proposed section 26C. Shortly stated, the concessional basis of assessment of five per centum will be limited to an amount calculated in the proportion of three years' salary for forty years of service, but subject to an overall maximum of Pd10,000. In the interests of simplicity, however, lump sums up to Pd1,000 will be assessed to the extent of five per centum only, i.e. the formula will not be applicable to those retiring allowances.

It would be inappropriate to apply the formula of limitation in the case of amounts received by way of compensation or damages for the termination of employment. Such amounts are in the nature of commuted future remuneration and bear no relationship to the length of the recipient's past service. The concessional basis of assessment upon five per centum of such amounts will accordingly be retained in sub-section (1.) of the proposed section 26C.

The amendments effected by the new section will apply to amounts received after 18th September, 1952.

PROPOSED PROVISIONS.

Sub-section (1.)-Compensation for Termination of Employment.

As explained in the Introductory Note to section 26C, compensation or damages received for the termination of employment will continue to be included in assessable income to the extent of only five per centum. Sub-section (1.) provides for the assessment on this concessional basis.

It is necessary that amounts which purport to be compensation but which are, in fact, retiring allowances should be subject to the limiting formula prescribed in sub-section (3.). The application of sub-section (1.) will be restricted, therefore, to cases where a former employee who has been engaged upon terms entitling him to continuous employment for a period receives compensation or damages in consequence of the termination of the employment before that period expires.

Where such compensation or damages is paid in a lump sum, only five per centum is included in the recipient's assessable income. Where the lump sum is payable by instalments over a period of years, five per centum of the instalments received in each year will be included in the assessable income of that year.

In addition to cases of termination of employment, sub-section (1.) applies to compensation or damages paid for the loss of a statutory office or certain other offices which, for all practical purposes, are indistinguishable from employment. This extension of the strict legal meaning of the term "employment" is explained in the note on sub-section (9.).

Sub-sections (2.), (3.) and (4.)-Lump Sum Retiring Allowances.

These sub-sections of the proposed section 26C provide for a concessional basis of assessment in respect of retiring allowances or gratuities received in a lump sum.

The concessional basis of assessment applies not only to lump sums received in consequence of retirement from employment because of age or infirmity, but also to lump sums received in consequence of the termination of employment-as, for example, by resignation or retrenchment. It is immaterial whether the lump sum is received from the former employer or from a provident fund providing for such benefits upon retirement.

Where the lump sum does not exceed Pd1,000, only five per centum of the amount received is included in the recipient's assessable income. The balance is free from income tax. In these cases, which constitute a large proportion of the cases in which lump sum retiring allowances are received, the present law continues to apply without modification.

Where the lump sum exceeds Pd1,000, the concessional basis of assessment upon five per centum may apply to part only of that sum, the excess being taxed in full. The practical method of determining the amount of which only five per centum is included in assessable income is as follows:-

(a)

Ascertain the taxpayer's remuneration for the last three complete income years.

(b)

Divide that amount by 40.

(c)

Multiply the result by the number of complete years in the period of the taxpayer's employment.

If the amount so ascertained is less than Pd1,000, five per centum of Pd1,000 is assessable and only the excess of the lump sum over Pd1,000 is included in assessable income.

On the other hand, if the amount ascertained in accordance with the formula exceeds Pd10,000, the concessional basis of assessment applies to Pd10,000 only, and the excess of the lump sum over Pd10,000 is included in assessable income.

The application of the formula may be illustrated by the example of an employee who retires on 31st October, 1952, after 30 years' service, and receives Pd7,500 in a lump sum as a retiring allowance. Assuming his salary during the income years 1949-50, 1950-51 and 1951-52 to have been Pd2,000, Pd2,800 and Pd2,400, respectively, the amount subject to assessment to the extent of only five per centum would be calculated as follows:-

Thus, five per centum of Pd5,400 = Pd270 would be taxable in the hands of the retiring employee together with the amount of Pd2,100 by which the lump sum of Pd7,500 exceeds Pd5,400, i.e., the assessable income would be Pd2,370.

The ascertainment of the length of the taxpayer's employment is a question of fact which will be determined on a practical basis. For example, a retiring allowance may relate to service with a business which was originally that of a sole trader but which, during that period, was converted into or acquired by a company. So long as the recipient's service may fairly be recognized as a continuing employment, the service both with the sole trader and with the company will be taken into account for the purposes of applying the formula.

Unlike the present provisions of section 26(d), section 26C will not provide for any concessional basis of assessment in respect of amounts received on the loss of a position held in a continuing employment-that is, where the office is terminated but the employment continues. Similarly, the concession will not apply to amounts received on the termination of an office which is held in the ordinary course of a professional practice-as, for example, an office of company secretary or auditor held by a practising accountant. In these cases the receipts will be taxable in full.

Broadly speaking, the concessional basis of assessment provided in section 26C is restricted to amounts received by former employees. For exceptions to this general rule, however, reference may be made to the explanatory note on sub-section (9.).

Sub-sections (5.), (6.) and (7.)-Retiring Allowances Received in More than One Lump Sum.

Sub-section (5.) extends the concessional basis of assessment to a class of retiring allowances which, under the present law, are taxable in full-viz., retiring allowances of fixed amount which are payable by instalments. Such instalments are not lump sums and under the present law the full amount of each instalment is included in the recipient's assessable income.

On the recommendation of the Commonwealth Committee on Taxation, instalments received within a period of two years from the date of the retirement or termination of employment will be aggregated. The total amount of those instalments will then be treated, for the purposes of the concessional basis of assessment, as a single lump sum received on the date when the first instalment is received. It is proposed, in sub-sections (5.) and (6.), to give effect to this recommendation, and five per centum of that total, or of the part of the total to which the formula in sub-section (4.) applies, will be subject to tax.

Where instalments of a fixed amount of retiring allowance are received after the expiry of the period of two years from the date of retirement, those instalments will continue to be taxable in full under the provisions of section 26(e) of the Principal Act.

It is proposed to make special provision for those cases where a retiring allowance is paid in a succession of lump sums in order to escape the application of the limiting formula in sub-section (4.).

Sub-section (6.) provides that all lump sums relating to retirement from one employment and received within a period of two years from the date of retirement will be aggregated. The total amount so ascertained will be treated in the same manner as the aggregated instalments of a lump sum-that is, it will be taxed to the same extent as if it were a single lump sum received on the date when the first of the lump sums is received. This provision will authorize the aggregation of separate retiring allowances received from the former employer and from a staff provident fund upon retirement.

Because retiring allowances received over a period of two years may be deemed, for the purposes of sub-section (6.), to have been received in the year when the first amount is received, it may be necessary to amend an assessment already issued in respect of income earned by the taxpayer in that earlier year. Generally speaking, an assessment may be amended to increase a taxpayer's liability only where, in making the assessment, there has been a mistake of fact or an error in calculation. This limitation of the power to amend assessments is found in section 170 of the Principal Act.

Sub-section (7.) of the proposed section 26C, however, authorises the amendment of an assessment for the purpose of aggregating retiring allowances paid in a lump sum. The amendment must be made, however, within a period of four years from the date when the tax in the assessment became due and payable.

Sub-section (8.)-Interpretation.

Sub-section (8.) incorporates two minor drafting provisions which are necessary in order to give proper effect to the proposed section 26C.

Paragraph (a) provides that any amount paid or credited by a private company and deemed, for income tax purposes, to be a dividend shall not be treated as a retiring allowance, gratuity, compensation or damages for the purposes of section 26C. Moreover, such a deemed dividend is excluded from the amount of the former employee's remuneration for the purposes of applying the formula in sub-section (4.) of this section.

This paragraph is to be read in conjunction with section 109 of the Principal Act. Under that section, where a private company pays to a shareholder or director a retiring allowance or remuneration which, in the opinion of the Commissioner, exceeds a reasonable amount, that excess is deemed to be a dividend.

Paragraph (b) provides that deferred pay received by members are former members of the Defence Force shall, generally speaking, be treated as a retiring allowance of which five per centum only is taxable. Where, however, the deferred pay relates to war service before 1st July, 1947, it is wholly exempt from income tax, by virtue of section 23(t) of the Principal Act.

Sub-section (8.) does not introduce any new principle into the Principal Act, but merely re-states provisions in the present section 26(d) which is being repealed.

Sub-section (9.)-Meaning of "Employee".

Broadly speaking, the proposed section 26C applies only to amounts received by former employees.

Sub-section (9.), however, extends the application of the section to specified classes of persons retiring from offices or relinquishing services which, for all practical purposes, are indistinguishable from employment. These classes comprise-

(i)

the holders of any judicial or statutory office,

(ii)

clergymen,

(iii)

Ministers of the Crown,

(iv)

Members of Commonwealth or State Parliaments, and

(v)

members of the Defence Force.

A director is not necessarily an employee, and a lump sum received on retirement from a directorship may be taxable in full. Where, however, a person is both a director and an employee of a company-as, for example, a managing director-lump sums received on retirement from that position will be subject to the concessional basis of assessment provided by section 26C.

PROPOSED SECTION 26D.-CONSIDERATION FOR COVENANT IN RESTRAINT OF EMPLOYMENT.

The new section 26D is designed to tax amounts received by a director or other executive in consideration for a covenant to restrict the recipient from engaging in employment or business activities in competition with the payer.

An amount received by an employee in consideration of his undertaking not to engage in certain activities for a specified period after the termination of his employment is not remuneration relating to the employee's services and is not subject to income tax.

The Commonwealth Committee on Taxation has drawn attention to the possibility that payments purporting to be made as consideration for a restrictive covenant may, in fact, be a cloak to cover payments of deferred or future remuneration. On the recommendation of the Committee, it is proposed that these amounts shall be assessable income in full.

The new section will apply to any amount received in connexion with an undertaking whereby the director or employee giving the undertaking restricts his right to engage in other employment or business activities. It is immaterial whether the undertaking is given, or takes effect, during the currency of the employment or before or after that period.

The amendment will apply to amounts received after 18th September, 1952.

CLAUSES 7 AND 8.-TRADING STOCK (INCLUDING LIVE-STOCK.)

INTRODUCTORY NOTE:-

Section 36(1.) of the Principal Act is based on the broad principle that, on a disposal of trading stock (including live-stock), its value shall be taxed in the hands of the person or persons disposing of the stock and, correspondingly, allowed as a deduction to the person or persons acquiring the stock.

Clauses 7 and 8 of this Bill are designed primarily to effect amendments which will remove anomalies that have been found to arise in the operation of section 36(1.), particularly in regard to cases of disposals of trading stock outside the normal course of business. The proposed amendments have been recommended by the Commonwealth Committee on Taxation.

In clause 7 it is proposed to amend section 36(1.) to remove doubts which have arisen whether the present provision applies to disposals of trading stock by way of gift. For example, where a taxpayer has made a gift of trading stock and has been allowed a deduction of the cost of that stock, section 36(1.), as amended, will provide clear authority for bringing the value of the stock into his assessable income.

The principal effect of the proposed amendment of section 36(1.) will be to tax the donor of trading stock in the same manner as if he had sold the stock at its market value, and to allow the donee the same deduction as if he had purchased the stock at that value. This amendment will commence to apply in assessments upon income earned in the current income year 1952-53.

Clause 7 includes also a provision for a concessional basis of assessment in respect of profits arising from forced sales of live-stock consequent upon the loss of pastures or fodder due to the ravages of fire, drought or flood. A primary producer will be able, if he so desires, to include one-fifth of the profit in his return for the year of sale and one-fifth in the return for each of the next succeeding four years.

Clause 8 clarifies the position in regard to partnership transactions involving trading stock.

Considerable doubt has existed for many years on the question whether section 36(1.) applies to the value of trading stock which changes ownership, or the interests in which are transferred, on-

(a)

the formation of a partnership by a sole trader, or by two or more traders joining forces;

(b)

a variation of the members, or in the interests of members, constituting a partnership; or

(c)

the dissolution of a partnership, the partners, or some of them, taking over the trading stock either separately or as a new partnership.

One view, upon which many income tax assessments have been based, was that the transfer of interests in partnership assets, including trading stock, amounted to a constructive disposal of those assets. In accordance with this view, section 36 has been applied to tax partners on the market value of such stock, even though there has not been a realized profit out of which the tax could be paid.

A contrary view is that section 36, as at present enacted, does not apply to the transfer of a fractional interest in trading stock, or to the vesting in another person of an individual share in trading stock, upon the formation, variation or dissolution of a partnership.

In many cases, however, the transfer of a share or interest in trading stock gives rise to a real profit to the transferor who, under the law as now declared, escapes tax on that profit. On the other hand, the transferee is penalized by not being allowed a deduction of the full amount he has paid for the share in the trading stock he has acquired.

The Commonwealth Committee on Taxation has considered such cases, and recommends that the principles underlying section 36 should be extended to any change of ownership or interest in trading stock occurring as the result of the formation, variation or dissolution of a partnership.

The Committee has recognized, however, that such an amendment, if unaccompanied by proper safeguards, might result in the taxation of unrealized profits. For example, if one partner sold his share in a continuing partnership, the proposed amendment would require the transaction to be regarded as a disposal of the whole of the assets by the partnership, as formerly constituted, to the partnership as newly constituted. Moreover, the market value of trading stock included in those assets would be regarded as consideration received for the disposal of the stock. The partners remaining in the business might thus be required to pay tax on a notional profit arising from the disposal of trading stock, before it became a real profit.

As a safeguard in such cases, it is proposed that, where under the amended law a change of interests in trading stock is required to be treated as a disposal of that stock, the parties concerned will be given the right of election (if they unanimously agree) to value the stock as if there had been a continuing business without the formation, variation or dissolution of the partnership.

Most partnerships and individuals carrying on businesses of primary production value live stock on a cost basis. In these cases, the effect of exercising the right of election will be to exclude from the assessable income of the year of transfer any profit, real or notional, arising from the transfer of interests in the trading stock.

To give effect to this proposal, clause 8 provides for the insertion of a new section-section 36A-in the Principal Act. In effect, the parties to a transaction involving a transfer of interests in trading stock will be given a choice, subject to their unanimous agreement, whether tax should be payable on the profit deemed to arise from that transfer, or whether the tax liability should be deferred until the stock is actually sold.

It is proposed that the new section 36A will apply to assessments upon income earned during the income year 1950-51 and all subsequent years. This retrospective application of the amendment will enable partners who have been taxed on profits deemed to have arisen from transfers since 1st July, 1950, to elect, upon unanimous agreement, to have their tax liabilities re-calculated on the basis of a continuing business.

The proposed retrospective amendment of the law, however, will not authorize the application of the new section 36A to increase the liability of a partner, without his consent, by amending an assessment already issued.

CLAUSE 7.-DISPOSAL OF TRADING STOCK.

Paragraph (a)-Trading Stock Disposed of Otherwise than in the Ordinary Course of Business.

Section 36(1.) of the Principal Act, which is proposed to be amended by this paragraph, is based on the broad principle that any profit arising from the disposal of trading stock (including live stock) should be subject to income tax, whether or not the stock is disposed of in the ordinary course of business.

Profits arising from disposals of trading stock in the ordinary course of business are "income" within the generally accepted meaning of that term. Such profits are accordingly subject to income tax quite apart from any such specific provision as section 36(1.).

In the absence of a specific provision, however, it would appear that profits arising from the disposal of trading stock upon the cessation of business would be regarded as capital gains not subject to income tax. As at present enacted, therefore, section 36(1.) is expressed as applying to disposals "whether for the purpose of putting an end to the business or any part thereof or not".

Whilst this wording ensures the effective taxation of profits arising from the disposal of trading stock in clearance sales, the view has recently been expressed that it may be too restrictive in other cases-as, for example, in regard to gifts of trading stock.

In order that section 36(1.) might fulfil its intended purpose of reaching all profits arising from the disposal of trading stock where those profits do not fall within the strict meaning of "income", it is proposed to omit from that provision the reference to "putting an end to the business". In lieu of the words omitted, the amended section 36(1.) will be expressed as applying to all disposals otherwise than in the ordinary course of business. Moreover, it will be explicitly stated that the provision applies to disposals by sale, gift or otherwise.

The practical effect of section 36(1.) is to include in the assessable income of the person disposing of trading stock the market value of the stock on the day of disposal. Conversely, the person acquiring the trading stock is allowed a deduction of that value, as he is deemed to have purchased the stock.

"Trading stock" is defined in section 6 of the Principal Act as including anything produced, manufactured, acquired or purchased for the purposes of manufacture, sale or exchange. Live stock is expressly included in the definition.

In addition to disposals of trading stock, as so defined, section 36(1.) applies to disposals of standing or growing crops, crop-stools, and trees which have been planted and tended for the purpose of sale, where that property forms part of the assets of a business carried on by the person making the disposal. This extension of the general meaning of trading stock is provided in the present section 36(1.) and is to be retained in that provision as amended.

It is further proposed in clause 7 to omit sub-section (2.) from section 36 of the Principal Act. That sub-section provided for a limited continuation of an exemption granted prior to 1936 in respect of profits from the sale of breeding stock disposed of for the purpose of putting an end to a business. The concession was limited in its application to station-bred live stock used for breeding purposes, which were on hand at 1st July, 1935.

As this provision has been inoperative for some years, its deletion from the Principal Act will have no practical effect upon current assessments of primary producers.

The amendments effected by paragraph (a) of clause 7 will apply to assessments upon income earned during the current income year which commenced on 1st July, 1952, and during subsequent years.

Paragraphs (b) and (c)-Profits arising from Forced Sales of Live Stock due to Loss of Pastures or Fodder.

Sub-clause (2.)-Election in Relation to Forced Sales During 1951-52.

The amendment to section 36 of the Principal Act proposed in this paragraph is designed to afford taxation relief to pastoralists who are forced to sell live-stock because of the destruction of pastures or fodder through the ravages of fire, drought or flood.

The effect of such a forced sale is to include in the assessable income of one year profits which, in ordinary circumstances, would have been spread over the assessable income for a number of years. In some instances, so much of the profits is absorbed by taxation that insufficient money is left to finance the re-stocking of the property, when the pastures or fodder is restored.

It is proposed, therefore, to grant pastoralists, in these circumstances, a right of election to have one-fifth only of the profit arising from such forced sales included in the assessable income of the year of sale and one-fifth in the income of each of the next four succeeding years.

Pastoralists seeking to take advantage of this concession will be required to establish that the sale was genuinely occasioned by the loss or destruction of pastures or fodder and that that loss was the result of fire, drought or flood. Further, in order to ensure that the concession will apply only in those cases where the taxpayer intends to use the proceeds of the sale for re-stocking when circumstances permit, it is proposed in sub-section (3B.) that the pastoralist will be required also to demonstrate that a substantial part of those proceeds will be applied to the purchase of live stock in replacement of the stock sold.

Each portion of profit carried forward during the period of four years will be deemed to be income derived from primary production. The effect is that, whether or not the taxpayer continues to carry on a business of primary production during those years, the provisions of the Principal Act for the averaging of incomes of primary production will continue to apply in assessments for those years.

Sub-section (3.) of section 36 already provides for a similar right of election in regard to profits arising from sales of live stock made in consequence of the acquisition or resumption of land by a government under statutory powers.

Section 36, as at present enacted, includes provisions for the making of elections, in special circumstances, by partners, trustees and beneficiaries. These special provisions will apply in the case of forced sales to which the new provisions apply, as well as to sales in consequence of statutory acquisitions or resumptions.

The extension of section 36 proposed by paragraph (b) of clause 7 will apply in assessments based upon income derived during the income year 1951-52 and subsequent years.

The election in respect of the income year 1951-52 may be exercised on or before 31st December, 1952, and in respect of the current and subsequent years on or before the date of lodgment of the return for the year concerned. In special circumstances, the Commissioner of Taxation may extend the time for lodgment of an election.

CLAUSE 8.-DISPOSAL OF TRADING STOCK ON CHANGE OF OWNERSHIP OR INTERESTS.

PROPOSED SECTION 36A.

(NOTE.-The present legislation contains no comparable provisions.)

Sub-section (1.)-Deemed Disposals.

It is proposed by sub-clause (1.) of clause 8 to insert a new section-section 36A-in the Principal Act.

Section 36A is designed to clarify the position in regard to transfers of interests in trading stock, particularly where the transfers are associated with the formation, variation or dissolution of a partnership.

Where there is a complete change of ownership or interests in a business-as, for example, where the partnership of A and B sells its business to the partnership of C and D-a disposal of the assets of the business clearly takes place. In these circumstances, section 36(1.) of the Principal Act operates to include in the assessable income of A and B the market value of trading stock included in the disposal and to allow C and D a deduction of that amount.

If A had sold to E his share in the partnership of A and B, that change of interests would not represent a disposal, within the meaning of section 36(1.), by A and B to B and E.

The purpose of the new section 36A is to give the parties concerned an opportunity of deciding for themselves whether such a change of interests should be treated as a disposal, for the purposes of section 36, or whether, upon their unanimous agreement, the business should be treated as a continuing one.

Under sub-section (1.) of section 36A, changes in interests in trading stock are deemed to be disposals by the persons who owned the stock prior to that change to the persons owning the stock after the change. The sub-section applies to any change in interests or ownership, so long as one of the parties who owned the trading stock before the change was one of the persons owning the stock after the change. For instance, in the second hypothetical example cited above, section 36A would operate to deem the partnership trading stock to be disposed of by A and B to B and E.

Whilst section 36A will apply to any change of interests of this nature, it will have particular application in the case of the formation or dissolution of a partnership-as, for example, where a father takes his son into partnership, or where a partnership is dissolved by one partner buying the shares of retiring partners. It will apply also where there is a variation in the membership of a partnership or in the interests of members.

In the absence of an election by the parties to be treated as a continuing business-see explanatory note on sub-section (2.)-the market value of the trading stock in cases of deemed disposals under section 36A will be included in the assessable income of the person or partnership by whom the disposal is deemed to be made. Conversely, the person or partnership to whom the disposal is deemed to be made is allowed a deduction of that amount.

Like section 36 of the Principal Act, the new section 36A will apply not only to disposals of trading stock, as defined in section 6 of the Principal Act, but also to disposals of standing or growing crops, crop-stools, and trees planted and tended for the purposes of sale.

Sub-section (2.)-Agreement to be Treated as Continuing Business.

In cases where sub-section (1.) deems a change of interests in trading stock to be a disposal within the meaning of section 36 of the Principal Act, sub-section (2.) provides that the parties concerned may, upon unanimous agreement, elect to be treated as though no disposal had taken place.

In the absence of such an election, the effect of sub-section (1.) is to include in the assessable income of the person or partnership by whom the disposal is deemed to be made the market value of the trading stock in question.

Where, however, the parties to the transaction unanimously decide to exercise their right of election under sub-section (2.), the value to be taken into account in respect of the trading stock is not necessarily the market value but the value that would be taken into account, for income tax purposes, in the case of a continuing business.

For instance, in the case of a pastoral business where the former partnership had adopted cost price as the basis of valuing live stock, the consideration received by that partnership for the deemed disposal of live stock is the cost price of that stock. Conversely, the new owners would be deemed to have bought the live stock at that price.

The practical effect of making an election under sub-section (2.), in those circumstances, will be that the tax liability on any profit arising from the disposal of the live stock is deferred until the stock is actually sold.

As an election under sub-section (2.) will virtually transfer the tax liability on a deemed disposal of trading stock from the former owners to the new owners, it is necessary that the application of the provision should be restricted to those cases where all the parties concerned unanimously agree to the transfer of liability.

Where the transfer of interests in live stock takes place between members of a family, it will probably be advantageous, in most instances, for the parties to exercise their right of election, and thus be relieved of a liability to tax on an unrealized profit.

Where the parties are at arms' length, however, it will depend upon the circumstances of the individual case whether or not it is advantageous to exercise the right of election. The essential feature of sub-section (2.) is that the parties have it within their own power, by unanimous agreement, to be relieved of the tax liability on the unrealized profit.

Paragraph (a) of sub-section (2.) restricts the right of election to those cases where, after the transfer of interests, the trading stock forms part of the assets of a business carried on by the new owners. If provision to this effect were not made, the former owners would escape tax on the profits from the transfer and there would be no possibility of tax being levied on an actual sale by the new owners.

It is necessary also to ensure that persons disposing of trading stock may not, by retaining a nominal interest in that stock, avoid being taxed on the market value of the stock in accordance with section 36(1.). It is accordingly proposed by paragraph (b) of sub-section (2.) to restrict the right of election to those cases where the former owners retain, after the transfer, an interest in the stock equal to at least 25 per centum of its value.

Sub-sections (3.) and (4.)-Notices of Agreement.

As sub-section (2.) applies only where the parties to a transfer of interests in trading stock unanimously agree, it is provided, in the proposed sub-section (3.), that notice of that agreement shall be lodged with the Commissioner of Taxation.

No special form of notice is prescribed, but it is required to be in writing and signed by all the persons by whom and to whom the disposal is deemed to be made. The notice may be lodged by any one of those parties, but once it is lodged it is binding upon all the parties.

As the income year, for tax purposes, is generally the period of twelve months ending on 30th June, a notice of agreement in respect of a transfer of interests during that period is required to be made by the following 31st August. This is normally the last day for lodging returns of income earned during the period. In exceptional cases-as, for example, where the taxpayer has adopted an accounting period ending on a date later than 30th June-the Commissioner is empowered to grant further time for lodging the notice.

Sub-section (4.) makes provision for the giving of notice where a transfer of interests occurs in consequence of the death of a member of a partnership. The agreement of the executor or trustee and, in some cases, of the beneficiaries of the estate is required in order to give effective notice under sub-section (3.). The beneficiaries concerned are those (if any) who would be liable to tax on income arising from the business of which the trading stock becomes an asset.

Application of Proposed Section 36A.

Although, by clause 25, it is proposed to give retrospective application to the new section 36A, there will be no authority to apply the section so as to increase the liability to tax in an assessment already issued, except insofar as is necessary to give effect to a notice of agreement signed by the persons concerned.

However, some persons have already been assessed on profits deemed to have arisen from transfers of interests in trading stock since 1st July, 1950. If all the parties to the transfer unanimously agree, they may elect to have their assessments amended on the basis provided in sub-section (2.) of the proposed section 36A. Instead of the former owners being assessed on the market value of the trading stock, and the new owners being allowed a deduction of that amount, the effect of making such an election will be to treat the business as a continuing one.

In regard to transfers of interests which took place during the income years 1950-51 and 1951-52, taxpayers who have been assessed on unrealized profits will have the opportunity, until 31st August, 1953, of securing the unanimous agreement of all the parties concerned to amendments of their assessments and of notifying the Commissioner of that agreement. That date is the normal date for lodgment of returns for the current income year 1952-53.

Where persons who transferred interests in trading stock during 1950-51 or 1951-52 have not yet been assessed, they have a similar right to give notice, up to 31st August, 1953, of the unanimous agreement of the parties to be assessed on the basis of a continuing business.

In exceptional circumstances, the Commissioner is authorized to accept notices after 31st August, 1953.

Sub-clause (3.) of clause 8 authorises the amendment of assessments at any time to give effect to a notice of agreement lodged in accordance with this provision. But for this specific authorisation, section 170 of the Principal Act would preclude the amendment of assessments in this manner.

CLAUSE 9.-DEVOLUTION OF DEATH.

In this clause provision is made for drafting amendments of section 37 of the Principal Act.

Section 37 prescribes the method of ascertaining the value of trading stock, standing or growing crops or crop-stools, where such assets devolve by reason of the death of a taxpayer. The devolution of those assets is a disposal, for the purposes of section 36 of the Principal Act, and the value of the devolved assets is included in the assessable income derived by the deceased up to the date of his death.

Paragraph (a) of clause 9 extends the application of section 37 to trees which have been planted and tended for the purpose of sale. This is in conformity with sections 36 and 36A of the Principal Act.

Paragraph (b) re-expresses part of sub-section (2.) of section 37 to effect minor drafting changes consequent upon the amendment of section 36 and the insertion of the new section 36A.

CLAUSE 10.-SPECIAL DEPRECIATION ALLOWANCE ON PROPERTY USED FOR PRIMARY PRODUCTION IN THE NORTHERN TERRITORY.

INTRODUCTORY NOTE:-

By this clause it is proposed to insert a new section in the Principal Act-section 57AB.

The new section will commence to apply as from 30th June, 1952, the date on which the exemption from tax formerly granted in respect of income derived by residents of the Northern Territory from primary production in the Territory expired.

Shortly stated, primary producers in the Northern Territory will be entitled to write off, as deductions from assessable income over a period of five years, the whole cost of structural improvements effected and plant (except motor cars) installed after 30th June, 1952, and used by them in a business of primary production in the Territory.

This concession is comparable with that granted by section 57AA, which was inserted in the Principal Act last June, to primary producers in other parts of Australia. However, whereas the allowance under section 57AA will expire on 30th June, 1955, the proposed allowance to primary producers in the Northern Territory will be a permanent concession.

In regard to structural improvements completed after 30th June, 1952, primary producers in the Northern Territory may elect, if they so desire, to write off the whole cost as a deduction from assessable income in the year of completion, in lieu of being allowed depreciation over the period of five years.

The provision for writing off depreciation over a period of five years extends to the value of plant (except motor cars) and structural improvements on hand at 30th June, 1952, as well as to units acquired or constructed after that date. The basis of valuing units on hand at 30th June, 1952, which is proposed in clause 23, is explained in the notes on that clause.

PROPOSED SECTION 57AB.

(NOTE.-The present legislation contains no comparable provisions.)

Sub-section (1.).-Property to which Section 57AB will Apply.

Sub-section (1.) provides, as the first condition attached to the allowance of special depreciation to primary producers in the Northern Territory, that the plant in question shall be plant to which section 54 of the Principal Act applies.

Depreciation is allowable only in respect of plant which is owned by the taxpayer and which, during the relevant year, is either-

(a)

used by him for the purpose of producing assessable income, or

(b)

installed ready for use for that purpose and held in reserve.

The definition of "plant" in section 54 includes machinery, implements, utensils and rolling-stock.

It extends also to structural improvements, such as fences and buildings, on land used for the purposes of agricultural or pastoral pursuits. It should be noted that structural improvements used for the domestic or residential purposes of the taxpayer are not subject to the depreciation allowance. Depreciation is allowable, however, in respect of structural improvements providing residential accommodation for employees, tenants or share-farmers engaged in or in connexion with the agricultural or pastoral pursuits.

Section 75 of the Principal Act provides for the allowance of a deduction, in the year of expenditure, in respect of the full cost of certain structural improvements such as dams, tanks, bores or wells used for water conservation, levee banks, and improvements for the prevention of soil erosion. Where such expenditure has been allowed as a deduction under section 75 from the assessable income of a primary producer, the structural improvement on which the expenditure is incurred is excluded from the definition of "plant" in respect of which depreciation is allowable. This is necessary in order to avoid the allowance of a double deduction.

Sub-section (1.) of the proposed section 57AB specifically excludes from the special depreciation allowance motor vehicles designed primarily and principally for the transport of persons. The exclusion will apply to all types of motor cars, station wagons and estate cars. Where, however, such vehicles are used exclusively for income-producing purposes, depreciation at the normal rate (generally 15 per cent. per annum) is allowable.

Such types of motor vehicles as trucks, lorries, utilities and jeeps will be subject to the special allowance if they otherwise satisfy the conditions of section 57AB.

The second condition to the allowance of the special rate of depreciation differs slightly according to whether the item is plant, in the ordinary sense, or structural improvements.

To qualify for the concession, plant other than structural improvements must, during the income year for which the deduction is claimed, be used, or installed ready for use, for the purposes of agricultural or pastoral pursuits in the Northern Territory. In the case of structural improvements, it is essential that, to qualify for the concession, these must be situated on land which, during the relevant year, is used for the purposes of agricultural or pastoral pursuits in the Northern Territory.

The term "agricultural" has a wide meaning. It extends to such branches of primary production as horticulture, viticulture, bee-farming, dairying and poultry-farming.

It is not required that, for the application of section 57AB, the plant, or the land on which the structural improvements are situated, shall be used by the taxpayer himself for the purposes of agricultural or pastoral pursuits. Provided that the plant or improvements are owned by the taxpayer, and that he derives rent, hire or other income therefrom, it is immaterial whether he himself or his tenants or share-farmers use them for agricultural or pastoral pursuits.

Where plant or structural improvements are used partly for income-producing purposes and partly for private purposes, section 61 of the Principal Act authorises the Commissioner of Taxation to allow as a deduction an appropriate part of the full amount of depreciation otherwise allowable in accordance with section 57AB.

Sub-section (2.)-Special Depreciation Allowance.

The general provision in the Principal Act for the allowance of deductions in respect of depreciation is section 54. The amount of deductions allowable under section 54 is normally ascertained in accordance with sections 55, 56 and 57, or, in the case of plant used for agricultural or pastoral pursuits, in accordance with section 57AA.

The effect of sub-section (2.) of the proposed section 57AB is that sections 55, 56, 57 and 57AA will have no application in the case of plant and structural improvements used by primary producers in the Northern Territory. Depreciation allowable under section 54 in respect of units of property to which section 57AB applies will be ascertained solely in accordance with the new section.

The principal variations from the ordinary basis of depreciation are as follows:-

(a)

In lieu of differential rates fixed by reference to the estimated effective life of each class or unit of plant, section 57AB provides for the allowance of depreciation at the flat rate of 20 per cent. per annum.

(b)

In lieu of depreciation calculated on the reducing balance each year, the allowance under section 57AB will be five fixed annual instalments.

(c)

In the case of structural improvements completed after 30th June, 1952, the taxpayer may elect that, in lieu of depreciation on any other basis, the whole cost of the improvements shall be allowed as a deduction in the year of completion.

Sub-section (3.)-Rate of Depreciation.

This sub-section provides for a general rate of 20 per centum as depreciation on plant and structural improvements to which the proposed section 57AB applies.

The first allowance of twenty per centum of the cost of the unit is deductible from the income of the year when the unit is first used for income-producing purposes, or when it is first installed ready for such use. A similar amount is deductible from the income of each of the next four succeeding years, so long as the unit is used during that year for the purposes of agricultural or pastoral pursuits in the Northern Territory.

In clause 23 of this Bill, it is proposed that plant and improvements on hand at 1st July, 1952, shall be deemed to have been first used for income-producing purposes on that date. The effect of that provision is that the depreciated value of such plant and improvements will be deductible over a period of five years in accordance with sub-section (3.) of section 57AB.

Sub-sections (4.), (5.) and (6.)-Election in respect of Structural Improvements completed after 30th June, 1952.

These sub-sections provide that, in regard to structural improvements completed after 30th June, 1952, the primary producer may elect that, instead of being allowed depreciation thereon by way of five equal annual instalments, a deduction of the full cost shall be allowed in the income year when the improvements are completed.

The election is required to be in writing and to be lodged with the Commissioner of Taxation on or before the date of lodgment of the income tax return for the year when the improvements are completed. In special circumstances, however, the Commissioner is authorized to grant an extension of time for the lodgment of the election.

The right of election to deduct the whole cost in one year does not extend to structural improvements completed on or before 30th June, 1952. The value of the improvements at that date is deductible over a period of five years in accordance with sub-section (3.).

Sub-section (7.)-Prevention of Double Deductions.

The purpose of sub-section (7.) is to import into the proposed section 57AB the provisions of section 56(3.) of the Principal Act.

It is provided under section 56(3.) that depreciation in respect of any part of the purchase price of plant or improvements shall not be deducted if a deduction has been allowed under any other provision of the Principal Act.

For example, a deduction is allowed under section 76 of the Principal Act in respect of the full cost of wire and wire netting used by a primary producer in the construction of an animal-proof fence. Apart from section 56(3.), depreciation also would be allowed in respect of that expenditure, as being part of the cost of a structural improvement used for income-producing purposes.

The proposed sub-section (7.) of section 57AB will have the effect of excluding from the cost of plant or improvements, for the purposes of the special depreciation allowable to primary producers in the Northern Territory, any expenditure which is already allowable as a deduction to the primary producer.

CLAUSE 11.-DISPOSAL OF DEPRECIATED PROPERTY ON CHANGE OF OWNERSHIP OR INTEREST.

INTRODUCTORY NOTE:-

In this clause it is proposed to insert a new section (59AA) in the Principal Act, with the object of clarifying taxation liability in regard to transfers of interests in depreciated property. The proposed section will have particular application in regard to section 59 of the Principal Act.

Section 59 applies in all cases where plant or other property in respect of which depreciation has been allowed is disposed of, lost or destroyed.

Where the sale price of the property disposed of is less than the depreciated value of that property for income tax purposes, sub-section (1.) of section 59 applies. That provision ensures that the taxpayer receives the full benefit of any loss incurred on the disposal of depreciable property. To the extent that the diminution in value has not already been allowed in the taxpayer's income tax assessments by way of depreciation, it is allowable as a deduction in the year of sale.

Where the sale price of the property exceeds its depreciated value for income tax purposes, sub-section (2.) of section 59 applies. That excess is included in the taxpayer's assessable income of the year of sale, but only to the extent of the aggregate depreciation allowed as deductions in assessments for years prior to the year of sale. The purpose of this provision, broadly speaking, is to recoup to the revenue the tax lost by the allowance of depreciation deductions which, in the light of the actual sale price of the property, are found to have been in excess of the depreciation which actually has occurred.

The sale price taken into account for the purpose of allowing the deduction or of calculating the amount of assessable income, as the case may be, is the sale price (if any) of the unit of property, as agreed between the parties, less the expenses of that sale. Where the parties have nominated their own sale price, therefore, that amount (less expenses) is binding upon the Commissioner of Taxation.

Where, however, the unit of property is sold with other assets and no separate value is allocated to that unit, the sale price attributable to the unit is determined by the Commissioner.

The application of section 59 to normal sales of plant and other property on which depreciation has been allowed presents no particular difficulty.

Doubts have arisen, however, whether a disposal to which section 59 can apply takes place where interests in plant are transferred on the formation, dissolution or variation of a partnership.

One effect of the non-application of section 59 in these cases would be that an outgoing partner who sells his interest at a price which takes into account depreciable property at a lower value than the depreciated value for income tax purposes would be denied the allowance of his share in the loss on that plant.

The Commonwealth Committee on Taxation has recommended that the application of section 59 be extended so that transfers of interests in depreciable property will be treated as if there had been a disposal of that property. To give effect to this recommendation, it is proposed in the new section 59AA that such transfers should be treated as disposals for the purposes of all the provisions of the Principal Act relating to depreciation.

It is being provided further, however, that where a transfer of interests is so treated, the parties shall be entitled to nominate, in the agreement made by them, the sale price of the property for income tax purposes. The sale price so nominated will be binding on the Commissioner, but, if the parties fail to exercise this right, it will be necessary for the Commissioner to determine the sale price according to the best evidence available. These provisions will be in conformity with the general principles of section 59, as applying to normal sales of plant.

Corresponding to the amendment in regard to transfers of interests in trading stock (clause 8), it is proposed that the amendment effected by clause 11 shall apply to transactions on and after 1st July, 1950.

As, however, the parties to past transactions may not have specified any sale price in the agreement relating to the transfer of the interests in the plant, they will have the opportunity until 31st August, 1953, of nominating the sale price. This right of nomination applies to transactions during the income years 1950-51, 1951-52 and 1952-53.

Whilst the retrospective application of this amendment will enable parties to transfers of interests in plant to adjust, upon unanimous agreement, their taxation liabilities on the most equitable basis, it will not authorize the re-opening, without the taxpayer's consent, of any assessment already made, to give effect to the new provisions.

Proposed New Section 59AA.

(NOTE.-The present legislation contains no comparable provisions.)

The proposed new section 59AA is designed to clarify the position in regard to transfers of interests in plant and other property on which depreciation has been allowed, particularly where the transfers are associated with the formation, variation or dissolution of a partnership.

As explained in the note on clause 8 of this Bill, where there is a complete change of ownership or interests in a business-as, for example, where the partnership of A and B sells its business to the partnership of C and D-a disposal of the assets of the business clearly takes place. If, however, A had sold his share in the partnership to E, the resultant change of interests in partnership plant would not represent a disposal by A and B to B and E.

It is proposed in section 59AA to deem changes in interests in plant to be disposals by the persons who owned the plant prior to that change to the persons owning the plant after the change. The sub-section applies to any change in interests or ownership, so long as one of the parties who owned the plant before the change was one of the persons owning the plant after the change. For instance, in the second example cited above, the new provision would operate to deem the partnership plant to be disposed of by A and B to B and E.

Whilst the proposed amendment will apply to any change of interests of this nature, it will have particular application in the case of the formation or dissolution of a partnership-as, for example, where a father takes his son into partnership, or where a partnership is dissolved by one partner buying the shares of retiring partners. It will apply also where there is a variation in the membership of a partnership or in the interests of members.

The new section further provides that, if any amount is specified by the parties as the value of the plant in an agreement relating to the transfer of interests in that plant, that amount shall be regarded as the consideration for the plant, for the purposes of applying the provisions of the Principal Act relating to depreciation. In effect, therefore, the parties to a transfer of interests in plant will be permitted to nominate, in their written agreement, a disposal value which will be binding on the Commissioner. If no amount is so specified, it is necessary for the Commissioner to determine the amount to be taken into account as consideration receivable for the plant.

Insofar as the transferors are concerned, section 59 of the Principal Act will apply on the footing that the amount specified in the agreement or determined by the Commissioner, as the case may be, is the consideration receivable for the plant.

If that consideration is less than the depreciated value of the plant for income tax purposes, the difference will be allowed as a deduction in the transferors' assessments, under section 59(1). If, however, the consideration exceeds the depreciated value, the excess will be included in the assessable income of the transferors under section 59(2.), but only to the extent of the aggregate depreciation allowed as deductions in their assessments for years prior to the year when the transfer of interests occurs.

On the other hand, the amount which, under the proposed section 59AA, is to be regarded as the consideration receivable by the transferors for the plant, will also be regarded, as a general rule, as the cost of the plant for the purposes of allowing deductions for depreciation in the transferees' assessments.

The application of this general rule may be affected by section 60 of the Principal Act. The effect of that section will be to limit the cost of the plant, for the purpose of allowing depreciation to the transferees, to the sum of the depreciated value in the transferors' assessments and the amount (if any) included in those assessments under section 59(2.).

Application of Proposed Section 59AA.

Sub-clause (2.) modifies the application of the proposed amendments to section 59 of the Principal Act, insofar as those amendments relate to transfers of interests in plant during the income years 1950-51, 1951-52 and 1952-53.

Where the parties to such a transfer have not specified, in the relevant agreement, the value of the plant for the purposes of that agreement, they may elect that a stated amount shall be deemed to be the consideration for the plant.

Sub-clause (3.) provides that an election for this purpose should be notified to the Commissioner of Taxation on or before 31st August, 1953. To be effective, the election is required to be in writing and signed by all the parties to the transfer, but no particular form of election is prescribed. In special circumstances the Commissioner is authorized to accept a notice of election lodged after 31st August, 1953.

Sub-clause (4.) provides that effect shall be given to an election which is duly lodged. Acceptance of the election is conditional, however, upon the Commissioner being satisfied that the amount nominated as consideration receivable for the plant is not inconsistent with the terms of the relevant agreement made by the parties. For example, it would not be open to the parties to nominate Pd5,000 as the consideration for plant if the total value of all assets, including plant, taken into account by the parties for the purpose of the transfer of interests was only Pd4,000.

In the absence of any specific provision, section 170 of the Principal Act would prevent the re-opening of any assessment to give effect to the retrospective amendment of section 59, even if such a re-opening were desired by the taxpayers concerned. Sub-clause (5.) of the proposed clause 11, however, authorises the re-opening of an assessment, at any time, for the purpose of giving effect to a unanimous election made in respect of the income year 1950-51, 1951-52 or 1952-53.

CLAUSES 12 TO 14.-DEDUCTIONS FOR CONTRIBUTIONS TO EMPLOYEES' PROVIDENT FUNDS, RETIRING ALLOWANCES AND PENSIONS.

INTRODUCTORY NOTE:-

Two sections in the Principal Act-sections 66 and 79-provide for the allowance of a deduction in respect of contributions to employees' provident funds. The object of these provisions is to encourage the establishment and maintenance of funds which provide pensions, retiring allowances and other benefits for employees.

The principal difference between sections 66 and 79 is that the former applies only to contributions which the taxpayer is under a legal obligation to pay, and the latter provides for a deduction in respect of voluntary contributions to pension funds. The conditions attaching to the two allowances differ in minor respects.

In their practical application, however, the essential difference is that the deduction under section 66 is deductible, like any other business expense, even if the taxpayer incurs a loss in the year of income, whereas the deduction under section 79 is deductible to the extent only of the taxpayer's net income. This limitation in regard to section 79 is imposed by section 78(3.) and is consistent with the treatment, for the purpose of income tax deductions, of gifts to specified institutions and funds.

The Commonwealth Committee on Taxation has examined sections 66 and 79 and has recommended several amendments with a view to removing anomalies from those provisions.

The most important recommendation is that the maximum deduction allowable under either section in respect of contributions to employees' pension funds shall be increased from Pd100 to Pd200 for each employee. The increased maximum will be subject, as at present, to a higher allowance if the Commissioner of Taxation is satisfied that special circumstances warrant such higher allowance.

In clauses 12 and 14 of this Bill, it is proposed to implement the recommended amendments of sections 66 and 79, respectively.

A further amendment proposed in clause 12 will be based on the view that contributions by a taxpayer to pension funds for the benefit of his own employees, whether paid under legal obligation or not, are legitimate business expenses. In accordance with this view, it is proposed to abandon the present restriction of section 66 to contributions made under legal obligation.

One effect of the proposed amendment is that contributions by a taxpayer to pension funds for the benefit of his own employees will require to be considered under section 66 only. As, under the present law, reference to both sections 66 and 79 is often necessary, the amendment will simplify the relevant legislation and administrative procedure.

Another effect of the proposed amendment is that voluntary contributions, as well as contributions made under a legal obligation, by a taxpayer to pension funds for the benefit of his own employees will be allowable as deductions even if the taxpayer incurs a loss in the relevant income year.

Contributions to funds for the benefit of employees other than the taxpayer's own employees will continue to be considered under section 79. These will be subject to the same limitations as other payments in the nature of gifts.

Another provision in the Principal Act-section 78(1.)(c)-authorises a deduction of amounts paid as retiring allowances or pensions to employees, former employees or their dependants. Minor amendments of section 78(1.)(c) are proposed in clause 13 of this Bill.

The amendments proposed in clauses 12 to 14 will commence to apply in assessments based upon income derived during the current income year 1952-53.

CLAUSE 12.-CONTRIBUTIONS TO FUND FOR BENEFIT OF EMPLOYEES OF THE TAXPAYER.

It is proposed in paragraph (a) of clause 12 to re-express sub-sections (1.) and (2.) of section 66 of the Principal Act.

As explained in the introductory note to clauses 12 to 14, one proposal is that the restriction of section 66(1.) to contributions which the taxpayer is under a legal obligation to pay shall be removed. Section 66(1.), as re-expressed, will apply to all contributions made by a taxpayer to a fund for the purpose of making provision for pensions, retiring allowances and other benefits for his own employees.

The amended sub-section (1.) adds a specific reference to the provision of benefits for the dependants of such employees. This amendment is in conformity with the present provisions of section 79, which allows a deduction in respect of voluntary contributions to provident funds for the benefit of both employees and their dependants.

Sub-section (2.) limits the allowance under section 66 to such part of the taxpayer's contributions as is attributable to the provision of benefits for employees engaged in producing his assessable income, or for dependants of such employees.

Apart from drafting changes, the only other variation in sub-section (2.), as proposed to be re-expressed, is a minor amendment of paragraph (c) of that sub-section. That paragraph was designed to prohibit the deduction of contributions to provident funds by private companies for the provision of benefits to shareholder-employees or shareholder-directors if, in the opinion of the Commissioner, those benefits are provided for the employees or directors as shareholders of the company. The amendment makes it clear that the Commissioner is authorized to disallow either the part or the whole of such a contribution.

By sub-section (3.)(c)(i) of the present section 66, the deduction permitted by the section is limited to Pd100 in respect of each employee or five per centum of the employee's annual remuneration, whichever deduction is the greater. In paragraph (b) of clause 12, it is proposed to increase this general maximum from Pd100 to Pd200.

In special circumstances, however, the Commissioner is authorized, as at present, to exercise a discretion to allow a higher deduction than Pd200 or (if greater) five per centum of the employee's annual remuneration.

Paragraph (c) of clause 12 provides for the repeal of sub-sections (6.), (7.) and (8.) of section 66. All of these provisions are obsolete.

Sub-sections (6.) and (7.) related only to contributions made between 1st July, 1943, and 2nd March, 1944. Sub-section (8.) released a taxpayer from any legal obligation he might be under, on 2nd March, 1944, to make contributions which would not be allowable as deductions under section 66.

Paragraph (d) provides for a drafting amendment of sub-section (10.) consequent upon the repeal of sub-section (6.).

CLAUSE 13.-DEDUCTION FOR RETIRING ALLOWANCES AND PENSIONS.

Section 78(1.)(c) of the Principal Act, which is proposed to be amended by this clause, provides for the allowance of a deduction in respect of amounts paid as retiring allowances or pensions to employees, former employees or their dependants.

This provision is supplementary to section 51(1.) of the Principal Act, under which a deduction is allowed in respect of such payments to the extent that they are necessarily incurred in carrying on a business for the purpose of producing assessable income. Section 78(1.)(c) extends the allowance to voluntary payments if they conform to certain prescribed conditions.

The amendments proposed in clause 13 are based on recommendations of the Commonwealth Committee on Taxation, and are designed to clarify the application of section 78(1.)(c).

One object of the amendments is to remove doubts previously entertained as to whether the allowance under section 78(1.)(c) extended to lump sum gratuities paid to dependants of deceased employees. It will now be clear that a deduction is allowable to the former employer in respect of such payments, even though they are not taxable in the hands of the recipients.

Another amendment suggested by the Committee and incorporated in the re-drafted paragraph removes the limitation of the allowance to amounts paid to residents of Australia. This limitation has operated harshly in some instances-as, for example, where an employee who has spent a substantial period of his service in Australia is, at the time of his retirement, employed in an overseas branch of the employer's business.

As proposed to be amended, section 78(1.)(c) will authorize the allowance of deductions in respect of retiring allowances, etc., to the extent that they are attributable to past services of the employees in any business operations carried on by the employer for the purpose of gaining income which was subject to Australian tax.

The amendments effected by clause 13 will commence to apply in assessments upon income derived during the current income year 1952-53.

CLAUSE 14.-CONTRIBUTIONS TO FUND FOR THE BENEFIT OF EMPLOYEES OF PERSONS OTHER THAN THE TAXPAYER.

As explained in the introductory note on clause 12 to 14, the application of section 79, as proposed to be amended by this clause, will be restricted to contributions to provident funds for the benefit of employees other than employees of the person making the contribution.

Cases in which section 79 will require to be applied are not numerous. However, there are instances from time to time where a shareholder makes a contribution to a pension fund for the benefit of employees of a company from which he receives dividends. Moreover, associated companies sometimes make contributions to funds for employees of other companies in the group. This concession will be preserved in section 79 as amended.

It is necessary to read section 79 in conjunction with section 78(3.) of the Principal Act. The effect of the latter provision is to limit the deduction allowable under section 79 to the amount of net income derived by the taxpayer in the relevant year.

The proposed amendments of section 79 are complementary to those proposed by clause 12 in regard to section 66 of the Principal Act. The explanatory notes accompanying clause 12 accordingly have equal application to the corresponding provisions of section 79.

CLAUSE 15.-CONCESSIONAL DEDUCTION FOR EDUCATION EXPENSES.

Proposed Section 82J.

(NOTE.-The present legislation contains no comparable provisions.)

It is proposed in this clause to add a new section (82J) to that part of the Principal Act which provides for the allowance of concessional deductions.

The new section 82J will authorize the allowance of a deduction for expenditure incurred by a taxpayer in connexion with the full-time education of dependent children under the age of 21 years. The maximum deduction allowable in respect of each child will be Pd50 per annum.

The deduction will be allowable in respect of payments made to the school, college or university at which the child is receiving full-time education. It will extend to payments for tuition, as well as payments for board, text-books, coaching in special subjects, etc., so long as the payments are made direct to the educational institution.

Where the child is receiving full-time education from a tutor or governess, payments to that person will be allowable as deductions, subject to the maximum of Pd50 per annum.

Payments made otherwise than to the educational institution at which the child is receiving full-time education or otherwise than to the person from whom such education is received will not be subject to the proposed allowance. Accordingly, no deduction will be allowable in respect of such expenses as fares to and from school or the cost of school requisites purchased from stationers.

The concession is not restricted to payments made on account of the taxpayer's own children. So long as the child is a dependant in respect of whom the taxpayer is entitled to a dependant's allowance for income tax purposes, and the conditions of the new section 82J are satisfied, a deduction for education expenses incurred on that child's behalf will be allowable.

In conformity with the conditions attaching to concessional allowances generally, it is proposed that, in order to qualify for the new allowance, both the taxpayer and the child receiving full-time education shall be residents of Australia.

The proposed section 82J will apply to education expenses paid on or after 1st July, 1952.

CLAUSES 16 and 17.-LEASES: GOODWILL.

INTRODUCTORY NOTE:-

In clauses 16 and 17 of this Bill it is proposed to give effect to recommendations of the Commonwealth Committee on Taxation for the amendment of Division 4 of Part III. of the Principal Act. That Division contains a number of provisions relating to the taxation of amounts received or paid in connexion with transactions in leases.

One of the principal provisions in Division 4 is to the effect that any premium or consideration in the nature of a premium, received in connexion with the grant, assignment or surrender of a lease, shall be included in the recipient's assessable income. Those amounts are so included because, however described and however paid, they are in effect rent paid in advance or commuted rent.

Conversely, premiums paid in connexion with the grant, assignment or surrender of a lease are allowable as deductions to the payer and these deductions are usually allowed in annual instalments spread over the unexpired period of the lease.

The definition of "premium" includes any amount received for local goodwill if, at the same time, a lease of the business premises is granted, assigned or surrendered. This extension of the strict meaning of "premium" was based on a recommendation of the Royal Commission on Taxation 1932-1934, which stated that, if the goodwill is attached to the premises, then the consideration for it upon a lease is rent and should be taxed as rent.

In order to determine whether any particular amount of consideration for goodwill should be treated as a lease premium, it is necessary, as the law now stands, to ascertain whether the goodwill is attached to land a lease of which is granted, assigned or surrendered.

If the goodwill is found to be so attached, the vendor is taxed upon the amount of the consideration. Correspondingly the purchaser is allowed a deduction of that amount spread over the unexpired term of the lease. If the purchaser re-sells the goodwill before the expiry of the lease, he is permitted to deduct, from the taxable sale price received by him, the balance of purchase price not allowed by way of annual deductions.

In each case of this nature, considerable practical difficulty is experienced in determining whether or not the goodwill is attached to the business premises.

With the object of removing these difficulties, it is proposed that consideration for goodwill in leasehold transactions shall be included in the recipient's assessable income and deductible in the assessment of the payer only where the parties so elect under a binding agreement and notify the Commissioner of Taxation to that effect.

In the absence of such an agreement between the parties, the vendor will not be taxed on the sale price of goodwill and, correspondingly, no deduction will be allowed to the purchaser in respect of the purchase price of the goodwill, either by way of annual deductions or as unrecouped purchase price on a subsequent sale of the goodwill.

The proposed amendment will apply to consideration paid under agreements made after 31st December, 1952. This prospective application of the amendment will afford intending vendors and purchasers an opportunity of familiarising themselves with the new legislation prior to its operation.

With regard to payments for goodwill under agreements made on or before 31st December, 1952, it is proposed that, where such payments were "premiums" under the present law, the payer shall continue to be entitled to the allowance of deductions by annual instalments over the unexpired period of the lease. In the event of the goodwill being sold before the expiry of that period, the payer will be allowed a deduction of the purchase price to the extent that it has not been allowed by way of annual deductions, even although the consideration received by him for the sale of the goodwill may not, under the altered law, be taxable income to him.

Other proposals in the Bill, which are designed to remove anomalies from the present law, may be summarised as follows:-

(a)

That payments made by a lessee to a lessor to secure the cancellation of an onerous lease shall be deductible to the lessee and taxed in the hands of the lessor.

(b)

That, upon the assignment, surrender or cancellation of a lease, the lessee shall be allowed a deduction of any premium which he has paid to acquire the lease and which has not previously been allowed as a deduction.

(c)

That, where an unexpired lease is replaced by a new lease of the premises, the undeducted part of the premium paid to acquire the original lease shall be deductible over the period of the new lease.

The amendments which are necessary to implement these proposals are explained in detail in the notes accompanying each of the following clauses.

CLAUSE 16.-LEASES: INTERPRETATION.

The main proposal in this clause is an amendment of the definition of "premium" in section 83 of the Principal Act, to restrict the application of the lease provision (Division 4), insofar as consideration for goodwill or a licence is concerned, to such considerations as are deemed to be premiums under the proposed new section 83A.

Under the present definition, consideration for goodwill or a licence is treated as a premium, for the purposes of those provisions of the Principal Act which relate to leases, if the goodwill or licence is attached to, or connected with, land a lease of which is granted, assigned or surrendered. The effect of treating the consideration as a premium is, in all cases, to include it in the assessable income of the recipient and, generally speaking, to allow it as deductions, over the unexpired term of the lease, in the assessments of the payer.

Under the new section 83A, which is proposed to be inserted by clause 17 of this Bill, consideration for goodwill or a licence payable under an agreement made after 31st December, 1952, will be treated as a "premium" only if the vendor and purchaser elect that it be so treated.

Two other minor amendments of the definition of "premium" are proposed in clause 16.

Amounts payable in connexion with an assent to the grant or assignment of a lease will be brought within the definition. Under the present law such amounts are included in the recipient's assessable income by virtue of section 84 of the Principal Act. The effect of extending the definition of "premium" to those amounts will be to authorise the allowance of a deduction to the payer.

The reference in the definition to consideration for the surrender of a lease is proposed to be amended. The amendment will make it clear that any such consideration is a "premium", whether it passes from the landlord to the tenant in order to obtain re-possession of an unexpired lease or from the tenant to the landlord for the cancellation of an onerous lease.

Clause 16 provides also for the omission of the definition of "lease", as being no longer necessary for drafting purposes.

Paragraph (c) of this clause provides for a drafting amendment of sub-section (2.) of section 83, consequential upon other amendments of the lease provisions.

Sub-section (2.) is necessary for application in those cases where, in connexion with the grant, assignment or surrender of a lease, there is a sale of other assets-as, for example, trading stock, plant, goodwill or a licence. The effect of the sub-section is that, if no consideration is specifically attributed to the lease by the parties concerned, an allocation may be made by the Commissioner of Taxation. The Commissioner is authorized also to make a similar allocation where an amount specified by the parties as consideration for the lease is not fair and reasonable.

Sub-clause (2.) of clause 16 preserves the present definitions of "premium" and "lease" as applying to consideration payable for goodwill or a licence under agreements made on or before 31st December, 1952.

CLAUSE 17.-REPEAL OF SECTIONS 84 and 85 AND INSERTION OF NEW SECTIONS 83A, 84, 85, AND 85A.

PROPOSED SECTION 83A.-CONSIDERATION FOR GOODWILL OR LICENCE.

(NOTE.-The present legislation contains no comparable provisions.)

It is proposed in clause 17 to insert a new section in the Principal Act-section 83a.

Broadly, the effect of the proposed section is that consideration payable for goodwill or a licence in leasehold transactions will be treated as a "premium" in those cases only where the parties so agree.

Section 83A will apply where an agreement for the grant, assignment or surrender of a lease is made after 31st December, 1952, and where, in that agreement or in a related agreement, goodwill or a licence is agreed to be sold. The agreement for the sale of the goodwill or licence is required to be in writing, and, for the application of section 83A, that agreement should specify the amount of consideration agreed between the parties as the consideration for the goodwill or licence.

In this context, "goodwill or a licence" refers to any goodwill or licence of a business carried on upon the leased land. In the present law, only goodwill which is attached to or connected with the leased land (i.e., what is generally termed "local" goodwill) can be regarded as a premium. Under the proposed amendment, however, consideration for either local or personal goodwill may be treated as a premium, so long as the parties so agree.

Where the parties desire an amount specified in an agreement of sale as consideration for goodwill or a licence to be regarded as a lease premium, it will be necessary, in accordance with sub-section (2.) of the proposed section 83A, to notify the Commissioner of Taxation to that effect.

No particular form of notice is prescribed, but sub-section (3.) requires that it should be in writing and signed by both the parties to the agreement. Either party may lodge the notice, but once it is lodged the notice is binding upon both the vendor and the purchaser.

The notice should be lodged with the Commissioner on or before the 31st August in the financial year next succeeding the financial year in which the sale is made. This is the normal date for lodging returns of income, but, in special circumstances, the Commissioner is authorized to accept notices lodged after that date.

One effect of lodging a notice in accordance with the proposed section 83A will be that the vendor of the goodwill or licence will be assessed on the amount of consideration received by him.

Conversely, the purchaser will be entitled to a deduction, by way of annual instalments over the unexpired term of the lease, of the amount paid by him. If that purchaser re-sells the goodwill or licence prior to the expiry of the lease, he will be entitled to a deduction of the balance of the purchase price which has not been allowed by way of annual deductions.

In the case of a lease of indefinite duration (as, for example, a weekly tenancy) there is no ascertainable unexpired term over which annual instalments of purchase price may be deducted. Under a recent amendment of sections 88, however, a purchaser of goodwill associated with such a lease, who has elected to treat the purchase price as a premium, may further elect to deduct that amount over a period of two years. Alternatively, by refraining from the exercise of this second right of election, he may defer the deduction of the purchase price until he ultimately disposes of the goodwill or licence.

Where the parties to the sale of goodwill or a licence do not notify the Commissioner of their agreement to treat the consideration as a lease premium, the amount is not taxable income of the vendor, but, on the other hand, the purchaser forgoes any deduction in respect of the purchase price, either by way of annual instalments or upon a subsequent re-sale of the goodwill or licence.

PROPOSED SECTION 84.-PREMIUMS INCLUDED IN ASSESSABLE INCOME.

Section 84 of the Principal Act is the provision under which lease premiums received are included in the assessable income of the recipient.

The amendment of section 84 effected by clause 17 is of a drafting nature only. It is consequential upon the inclusion, in the definition of "premium" in section 83(1.), of any amount received for or in connexion with an assent to the grant or assignment of a lease.

PROPOSED SECTION 85.-DEDUCTIONS UPON DISPOSAL OF LEASE, GOODWILL OR LICENCE.

Section 85(1.) of the Principal Act provides for the allowance of deductions from premiums included in a taxpayer's assessable income upon the assignment or surrender of a lease. The deduction allowable is such part of any amount previously paid by the taxpayer to acquire the lease as has not been allowed as a deduction under any other provision of the Principal Act.

For example, if a taxpayer paid, on 1st July, 1948, a premium of Pd5,000 to acquire a lease for a term of five years commencing on that date, he would have been allowed a deduction, under section 88(1.), of Pd1,000 in each of the income years 1948-49, 1949-50 and 1950-51. If he sold the lease on 1st July, 1951, for a consideration of Pd2,500, that amount would be included in his assessable income, by virtue of section 84, as a premium. He would be entitled to a deduction under section 85, however, of Pd2,000, being the balance of purchase price not allowed as annual deductions. The net premium subject to tax in the assessment upon his 1951-52 income would thus be Pd500.

In addition to the allowance of a deduction for the unrecouped purchase price of the lease, section 85(1.) provides for the allowance of a deduction, from a premium received, of amounts expended in making improvements upon the leased land, to the extent that those amounts have not otherwise been allowed by way of deduction.

The deductions under section 85(1.), as at present enacted, are allowable only if the taxpayer receives a premium for the assignment or surrender of the lease. The amount of premium received is immaterial, and the deduction is allowable even if that amount is nominal. On the other hand, if the lease is assigned or surrendered without consideration, the taxpayer is not entitled to any deduction for the unrecouped purchase price or expenditure on improvements.

In the amendment proposed to be effected by clause 17, the restriction of the allowance under section 85 to cases where the taxpayer receives a premium will be removed. Sub-section (1.) of the amended section 85 will permit a deduction of unrecouped expenditure in all cases where the taxpayer assigns or surrenders a lease.

The expenditure in respect of which a deduction will be allowable under sub-section (1.) includes, as at present, any amount paid to acquire the lease or in effecting improvements upon the leased land. In addition, a deduction will be allowable of any amount paid by the lessee to obtain the landlord's assent to the assignment or surrender.

Section 85(1.), as at present enacted, provides also for a deduction where a "premium" received in connexion with the sale of goodwill or a licence is included in the recipient's assessable income. The deduction allowable is so much of the purchase price of the goodwill or licence paid by that taxpayer as has not been allowed by way of annual deductions in his assessments.

Sub-section (2.) of the amended section 85 will preserve the principle of this deduction, but the deduction will not be restricted to those cases where consideration is received by the taxpayer for the sale of the goodwill or licence.

If the taxpayer has paid, to purchase the goodwill or licence of a business carried on upon leasehold premises, any amount which was a "premium" under the relevant law at the time of that purchase, he will be entitled, under sub-section (2.), to a deduction of any unrecouped purchase price when he disposes of the goodwill or licence. This deduction will be allowable irrespective of whether or not the disposal is for valuable consideration.

Where the purchase price of the goodwill or licence was paid under an agreement made after 31st December, 1952, it may be treated as a "premium" only where the parties have so elected under section 83A. Where the purchaser, under an agreement made after 31st December, 1952, is not a party to such an election, he will not be entitled to any deduction under section 85(2.) when the goodwill or licence is subsequently sold.

Sub-section (3.) of the amended section 85 preserves the limitation of deductions allowable under that section to so much of the amounts paid by the taxpayer as have not already been allowed as a deduction in the taxpayer's assessments. The sub-section thus precludes the allowance of double deductions in respect of the same expenditure.

Sub-section (4.)-Deductions Where Taxpayer Succeeds to Lease, Goodwill or Licence on Death of Former Owner.

This sub-section is designed to preserve the principle of sub-section (2.) of the present section 85.

Broadly, the effect of sub-section (4.), read in conjunction with the other provisions of section 85, will be that, where a taxpayer succeeds, upon the death of another person, to a lease or to goodwill or a licence of a business carried on upon leased premises, he will be entitled to the same deductions under that section as would have been allowed to the deceased person.

For example, assume that a taxpayer, prior to his death, had paid Pd5,000 to acquire a lease and had been allowed, up to his death, Pd1,000 by way of annual deductions for that expenditure. If his successor had been allowed further deductions totalling Pd2,500 in respect of the original cost of the lease, the successor would be entitled, upon selling the lease, to a further deduction of Pd1,500 to set off against the sale price.

Sub-sections (5.) and (6.)-Deductions Allowable Against Premiums Received.

For the purpose of determining under section 86 of the Principal Act the rate of tax payable on a taxable income, it is sometimes necessary to ascertain the amount of a net premium included in that taxable income.

"Net premium" is defined in section 83(1.) of the Principal Act as the amount ascertained by deducting from a premium the allowable deductions relating directly thereto.

Sub-section (5.) of section 85, as proposed to be amended, provides that deductions allowable under that section shall be deemed to relate directly to any premium received in connexion with the relevant assignment or surrender (of a lease) or disposal (of goodwill or a licence). Sub-section (5.) is thus a drafting measure designed to facilitate the ascertainment of the amount of a net premium.

Similarly, sub-section (6.) is designed to facilitate the ascertainment of the amounts of net premiums where premiums are received in two or more years in respect of the one assignment, surrender or disposal.

By the definition of "premium", where a consideration to which the definition applies is payable in more than one amount, each such amount is deemed to be a separate premium. The effect of sub-section (6.) is that, where the taxpayer in such a case is entitled to a deduction under section 85, an appropriate proportion of that deduction is allowable against each separate premium. A similar basis of apportionment is provided, for cases of this nature, in sub-section (1.) of the present section 85.

Sub-section (7.)-Deduction Where Unexpired Lease is Replaced by New Lease.

This sub-section is designed to remove a defect from section 85(1.) of the Principal Act, as at present enacted.

By reason of that defect, the holder of an unexpired lease which is replaced by a new lease of the same premises is deprived of deductions of portion of the cost of the old lease.

Section 85(1.) provides for a deduction of the amounts paid for "that lease", not for "a lease of that property". Under the present law, therefore, a deduction is not allowable for the unrecouped expenditure relating to the lease which is replaced by the new lease.

On the recommendation of the Commonwealth Committee on Taxation, it is proposed to remove this defect by sub-section (7.) of the amended section 85.

Sub-section (7.) will provide that, where an unexpired lease is replaced by a new lease, the unrecouped purchase price of the old lease and unrecouped expenditure in effecting improvements on the subject land will be deemed to be a premium paid by the lessee for the new lease. Section 88(1.) of the Principal Act will then authorize the allowance of deductions in respect of the deemed premium, by way of annual instalments over the term of the new lease.

For example, assume that a taxpayer acquires, upon payment of a premium of Pd5,000, a lease, for a term of five years. He would be entitled to annual deductions of Pd1,000 in respect of that payment. If, at the end of third year, the lease is replaced by a new lease for a term of four years running from the date of replacement, the unrecouped part of the amount paid for the former lease (Pd2,000) would be deemed to be a premium paid for the new lease. The effect of the proposed sub-section (7.), read in conjunction with section 88(1.), is to permit the allowance of a deduction of Pd500 in each of the four years comprised in the term of the new lease.

PROPOSED SECTION 85A.-DEDUCTION TO SUB-LESSOR.

The proposed section 85A preserves, with minor drafting amendments, the substance of sub-section (3.) of the present section 85.

Broadly, the purpose of section 85A is to allow, as a deduction from a premium received for the grant of a sub-lease, an appropriate proportion of any amount paid by the grantor of the sub-lease to acquire the head lease.

CLAUSE 18.-DIVISION 7.-PRIVATE COMPANIES.

INTRODUCTORY NOTE:-

By this clause it is proposed to repeal the existing Division 7 and to enact a new Division governing the taxation of the undistributed incomes of private companies.

Private companies are, broadly, those companies which are owned and controlled by, or in the interests of, relatively few individuals.

The plan of private company taxation involves the payment, in the first instance, of tax and contribution, at primary rates, on the taxable incomes derived by private companies.

Shareholders do not pay tax and contribution on income derived by a company until that income is distributed to them as dividends. These dividends are included in the total incomes of the shareholders and taxed at the appropriate rates applicable to individuals.

A private company is required to pay an undistributed income tax if, within six months after the close of the income year, it fails to make a sufficient distribution of its distributable income. In the case of non-resident companies, the period of six months is extended to nine months.

For practical purposes, the distributable income of a private company is the residue of its taxable income after deducting therefrom the tax and contribution payable at the primary rates on that taxable income.

Provision has been made to enable a private company to retain a proportion of its distributable income free from undistributed income tax. The proportion which may be so retained depends on the amount of the distributable income. A sufficient distribution is the distributable income less the proportion which the private company may retain free from undistributed income tax.

The undistributed income tax that a private company is required to pay is the additional tax and contribution that the shareholders would have become liable to pay if a sufficient distribution had, in fact, been made to the shareholders on the last day of the year of income. In other words, the undistributed income tax is calculated at the shareholders' graduated rates.

In the event of a private company distributing dividends wholly and exclusively out of income which has borne undistributed income tax, the shareholders are entitled to rebates of tax on those dividends. The rebates are the amounts by which the shareholders' taxes are increased in consequence of the inclusion of the dividends in assessable income.

The major differences between the existing and the proposed Divisions are-

(1)

that the amounts of distributable income in excess of Pd6,000 which private companies may retain without incurring undistributed income tax are being increased;

(2)

that undistributed income tax is to be levied at a flat rate instead of at shareholders' graduated rates; and

(3)

that no rebate is to be allowed to shareholders on dividends that may be paid out of income which has borne undistributed income tax at the flat rate.

The new Division is also designed to facilitate the assessment and collection of undistributed income tax and to remove complexities that are associated with the present Division.

SECTION 103.-INTERPRETATION.

Sub-section (1.).

Private Company.

This is a drafting provision to facilitate references throughout the Division to a private company which is defined and described in the proposed Section 105 of the Act.

Special Fund Dividends.

This also is a drafting amendment to facilitate references in the legislation to dividends that are exempt in the hands of shareholders under section 44(2.) of the Principal Act or under the proposed section 107. The term "special fund dividends" is used in the definition of the undistributed amount and in several of the proposed sections.

The dividends which are exempt under section 44(2.) of the Principal Act are, broadly, those dividends which are paid wholly and exclusively out of-

(a)

exempt income derived by companies from mining operations for the purpose of production of base metals and rare minerals required for use in, or in connexion with, the war which was formally terminated on 28th April, 1952;

(b)

profits arising from the revaluation by companies of assets not acquired for the purpose of resale at a profit or from the issue of shares at a premium. This exemption is dependent on the dividends being satisfied by the issue of shares of the company declaring the dividend; or

(c)

exempt income derived by companies from gold mining operations in Australia, Papua or New Guinea. This exemption extends to dividends paid by a company out of exempt gold-mining dividends it receives.

The effect of the definition of special fund dividends will be explained in connexion with the provisions in which the definition is used.

The Distributable Income.

In calculating the distributable income of a private company the taxable income is used as a basis and from it are deducted specified taxation liabilities and any ex-Australian business loss (other than a loss of capital) incurred by the company.

Paragraph (a) restates paragraph (a) of the present definition. The paragraph provides for the deduction of primary company tax payable by the company on the taxable income of the relevant year.

Section 221YE(1.)(a) provides, in effect, that the advance payment imposed in the last financial year 1951-52 shall be credited in payment of the income tax payable for the current financial year 1952-53. In calculating the distributable income of the income year 1951-52, a private company will be allowed a deduction of the full amount of primary tax payable on that income for the financial year 1952-53 undiminished by the credit for the advance payment.

Paragraph (b) amalgamates paragraphs (b) and (c) of the present definition and specifies other taxes which are deductible in calculating a private company's distributable income of the income year 1951-52 and subsequent years. These deductions, which are allowable in the year in which the taxes are paid, are as follows:-

(i)

income tax and social services contribution paid in respect of undistributed income of the income years 1935-36 to 1946-47 (both inclusive), i.e., tax paid under Division 7 of the Act in operation for those years;

(ii)

State and Territorial income taxes paid in respect of incomes derived during the income year 1940-41 and prior years;

(iii)

ex-Australian taxes paid on income which is assessable for Commonwealth income tax purposes also.

These deductions are reduced by any refunds of the taxes specified.

The present paragraph (b) provides for the deduction of income tax paid in respect of undistributed income of the income year 1934-35 and prior years. This income tax was assessed under Section 21 and Division 2 of Part III. of the previous Act, i.e., the law in force prior to the enactment of the Income Tax Assessment Act 1936. This provision is obsolete and is not being repeated in the proposed definition.

Paragraph (c) of the proposed definition restates paragraph (d) of the present definition and provides for the deduction of the net loss (other than a loss of a capital nature) incurred by a private company in carrying on its business out of Australia.

The Prescribed Period.

The prescribed period is the period within which dividends paid by a private company are taken to account in determining whether the company has made a sufficient distribution of its income.

Under the present definition separate periods are prescribed in respect of resident companies and non-resident companies. In the case of resident companies the prescribed period extends to the end of the sixth month following the close of a year of income; in the case of a non-resident company the period extends to the end of the ninth month after the close of income. The additional time was first allowed to non-resident private companies during the period of hostilities as delays and losses occurred in the transmission of accounts and reports to their head offices abroad.

It is proposed to extend the prescribed period and to place all private companies on a uniform basis by defining the prescribed period to comprise the two concluding months of the year of income and the first ten months of the succeeding year. In all cases the prescribed period will be a one year period ending ten months after the close of the year of income.

The Reduced Distributable Income.

Under the present definition, the reduced distributable income is the distributable income reduced, in effect, by any dividends which the company may have received from other private companies during the income year.

Under the proposed definition, the reduced distributable income is the distributable income reduced, in effect, by any property income which the private company may have received during the income year.

The property income includes not only dividends received from other private companies but also dividends received from public companies as well as rents from real estate and interest from bonds and mortgages.

For the purposes of the definition, property income means income which, if the company were an individual, would be income derived from property.

The proposed definition is accordingly linked with the definitions in section 6 of the Principal Act of income derived from property and of income derived from personal exertion. In these definitions rent, dividends and interest are specifically excluded from the classification of personal exertion income and correspondingly included in property income unless, in the case of interest, the taxpayer's principal business consists of the lending of money or unless interest is received in respect of a debt due to the taxpayer for goods supplied or services rendered by him in the course of his business.

The effect of the proposed definition of reduced distributable income is that a private company will not be entitled to any retention allowance if its income is derived from investments only. Where a private company derives its income from business as well as from investments, it will not be entitled to a retention allowance on so much of the investment income as is included in the distributable income of the year in which the investment income is derived.

The Retention Allowance.

The definition of the retention allowance is being restated subject only to a revision of the section reference.

The purpose of the definition is to facilitate drafting and it is complementary to section 105B, which provides for the calculation of the retention allowance of a private company.

The Undistributed Amount.

The undistributed amount is the amount on which undistributed income tax is levied.

In calculating the undistributed amount the distributable income, as already defined, is taken as a basis and a deduction is made of the retention allowance under the proposed section 105B.

If the private company, within the prescribed period of twelve months, has distributed the excess of the distributable income over the retention allowance, there is no undistributed amount on which tax under this Division may be levied.

If, on the other hand, the private company has made no distribution within the prescribed period, tax under the Division is payable on the whole of the excess of the distributable income over the retention allowance.

Where a private company has made a distribution of its income during the prescribed period but the distribution is insufficient to absorb the excess of the distributable income over the retention allowance, the dividends distributed are deducted in ascertaining the undistributed amount on which tax under the Division is payable.

Allowance is not made, however, for special fund dividends, as already defined, which may have been distributed by a private company during the prescribed period. These dividends are exempt under either section 44(2.) or the proposed section 107 and accordingly do not form part of the distributable income.

An important difference between the present and the proposed definitions is that under the present definition, dividends are deductible only if they are paid out of the taxable income of the relevant year of income. Under the proposed definition, dividends, except special funds dividends, will be deductible so long as they are paid within the prescribed period. The complications of identifying the taxable income used for the payment of dividends are being removed.

Sub-section (2.).

Sub-section (2.) is being restated, to maintain the present meaning of "nominee" for the purposes of Division 7.

The provision is to be read in conjunction with the proposed section 105, under which companies are classified as private companies. Sub-section (2.) of section 105 provides, in effect, that a person and his nominees shall be deemed to be one person. Sub-section (3.) of section 105 provides that a person and his relatives and his nominees or the nominees of any of his relatives shall be deemed to be one person. The substance of these provisions is to regard a person and his relatives and their nominees as being capable of exercising in unity the voting power in respect of any shares they may hold.

SECTION 104.-ADDITIONAL TAX ON UNDISTRIBUTED AMOUNT.

Sub-section (1.).

Under sub-section (1.), a liability to pay undistributed income tax is imposed on a private company which has not made a sufficient distribution of its income.

A private company is deemed, under section 105A, to have made a sufficient distribution if it has, within the prescribed period, paid in dividends an amount equal to the excess of its distributable income over the retention allowance.

The material differences between the present and the proposed sections are-

(1)

Under the present section 104, the dividends which are taken into the calculation to determine whether or not a company has made a sufficient distribution are those dividends only which are paid out of the income of the relevant year of income. Under the proposed section, all dividends which are assessable income of the shareholders will be taken into the calculation, even although those dividends are paid out of income of years prior to the relevant year of income or out of capital profits.

(2)

Under the present section 104, the undistributed income tax which a private company is liable to pay is the additional amount that would have been payable by the individual shareholders if the undistributed amount had been paid to them as a dividend. This assessment involves calculations at the shareholders' individual graduated rates. Under the proposed section 104, the undistributed income tax will be calculated at a flat rate, which, in respect of the income year 1951-52, is proposed to be 10s. in the Pd1.

Sub-section (2.).

This sub-section restates the substance of present section 109A to provide that the undistributed income tax does not apply to a non-resident private company that does not carry on business in Australia by means either of a principal office or of a branch.

Non-resident private companies of this class have been excluded from the field of undistributed income tax since 1941.

As Australia does not collect income tax on dividends distributed by non-resident companies to non-resident shareholders, the principle underlying the imposition on companies of tax on undistributed income has no application in the case of a non-resident company which does not carry on business in Australia by means either of a principal office or a branch.

It is proposed to continue the application of the Division to non-resident private companies carrying on business in Australia by means either of a principal office or a branch. The affairs of these companies are closely related to Australia and they enjoy protection of their assets in this country. Moreover, competitive anomalies would be created if this class of non-resident private company were exempted from a tax which resident Australian companies are required to pay in the event of an insufficiency of distribution of income.

SECTION 105.-COMPANIES WHICH ARE PRIVATE COMPANIES.

Sub-section (1.).

The proposed section 105 substantially re-enacts the provisions of section 103A of the present Act and defines the companies that are to be classified as private companies for the purposes of Division 7.

Section 103A was enacted in 1951 and commenced to apply to companies as at the end of the income year 1951-52 which, in practically all cases, was 30th June, 1952.

Under paragraph (a) of section 105 (1.), companies the shareholders of which are twenty or less in number are classified as private companies. These companies, to a large extent, represent the incorporation of businesses formerly carried on by sole traders or partnerships. The companies are usually managed and controlled in exactly the same manner and by the same persons as the businesses were managed and controlled prior to incorporation. The business of these companies could still be carried on by partnerships (the partners being identical with the shareholders) as under the laws of the States, incorporation is not obligatory, except in immaterial cases, until the persons seeking to carry on business in common exceed twenty in number.

Under paragraph (b) a company is classified as a private company if more than half the voting power in the company is capable of being exercised by seven or less persons. For the purposes of this paragraph a person and his nominees are deemed to be one person. Provision to this effect is being made in sub-section (2.) of section 105.

Under paragraph (c) a company is classified as a private company, if shares representing more than half of the paid up capital, other than capital represented by shares bearing a fixed rate of dividend only, are held by seven or less persons. In determining the number of persons by whom the shares are held, a person and his nominees are deemed to be one person.

Paragraph (d) is designed for application in those cases where shares of a company are held by nominees and relatives, e.g., family groups. By the application of paragraph (e) of sub-section (2.) of section 103A, in determining the number of persons who are capable of controlling a company, the shares held by a person and the shares held by his nominees and his relatives and their nominees are regarded as being held by one person. If three-quarters of the voting power is capable of being exercised by seven or less persons, the company is classified as a private company.

Under paragraph (e), a company is classified as a private company, if shares representing three-quarters of the paid-up capital are held by seven or less persons. In determining the number of persons by whom the shares are held, a person and his nominees and his relatives and their nominees are regarded as one person. Provision to this effect is contained in sub-section (2.) of section 105.

Under paragraph (f), a company is classified as a private company, if it is capable of being controlled by any means whatever by seven or less persons. This is a general provision for application to those companies which are essentially private companies but which technically may place themselves outside the descriptions contained in the other paragraphs of the proposed definition.

Under sub-section (5.) of section 105, companies are afforded an opportunity of demonstrating that it would be unreasonable to treat them as private companies.

Sub-sections (2.) and (3.).

These sub-sections are complementary to the definition of private company in sub-section (1.).

Sub-section (2.) operates in conjunction with paragraphs (b) and (c) of the definition. In determining whether seven or fewer persons hold more than half of the voting power in a company-paragraph (b) of the definition-or more than half of the paid up capital-paragraph (c)-the shares held by a person and by his nominees are treated as being held by one person.

Sub-section (3.), in a similar manner, operates in conjunction with paragraphs (d) and (e) of the definition. In determining whether seven or fewer persons hold three-quarters or more of either the voting power in a company-paragraph (d)-or the paid up capital-paragraph (e)-the shares held by a person and his nominees and his relatives and the nominees of his relatives are treated as being held by one person.

In the present legislation the provisions of sub-sections (2.) and (3.) of the proposed section 105 are included in paragraphs (d) and (e) of section 103A(2).

Sub-section (4.).

Sub-section (4.) of section 105 includes several provisions by which the terms of sub-section (1.) are interpreted in classifying companies.

Paragraph (a) specifies the conditions under which the company is regarded as one in which the public are substantially interested.

The primary condition under this paragraph is that shares of the company (other than preference shares) shall have been quoted during the relevant income year in the official list of a Stock Exchange.

If the shares are so quoted, the company will not be regarded as a private company unless twenty or less persons are, at the end of the year of income, by means of direct or indirect interest in the shares of the company, capable of exercising, to the extent of at least 75 per centum, the voting power of the company.

Paragraph (b) is also ancillary to the definition of private company and specifies the conditions under which a company qualifies to be regarded as a subsidiary of a public company.

Paragraph (c) is to be read in conjunction with paragraph (a) and the definition of "nominee". The purpose of the paragraph is to trace the beneficial ownership of shares of a private company through other companies, trustees and partnerships, to ascertain the individuals who would be the ultimate recipients of distributions of profits by the private company. In effect, the legal owner of the shares is to be regarded as the "nominee" of any person who would be the ultimate recipient of any part of the distribution, to the extent of that person's beneficial interest in the shares.

Sub-sections (5.) and (6.).

The purpose of sub-sections (5.) and (6.) is to provide a safeguard against the definition in sub-section (1.) resulting in a company being inappropriately classified as a private company.

A company is given the opportunity to state in writing to the Commissioner any special circumstances which should preclude it from being classified as a private company. The circumstances must be in the constitution or control of the company and must exist on the last day of the year of income in respect of which the claim is made.

The decision of the Commissioner on an application under sub-sections (5.) and (6.), if unacceptable to the company, is subject to review by a Taxation Board of Review.

SECTION 105A.-SUFFICIENT DISTRIBUTION.

Section 105A restates the substance of the description of a sufficient distribution, which, in the present Act, is included in section 103B. A sufficient distribution is made if, within the prescribed period in relation to a year of income, a private company distributes dividends equal in amount to the excess of its distributable income over the retention allowance.

Distributable income is defined in section 103 while the retention allowance of a private company will be calculated by reference to a percentage scale included in the proposed section 105B.

Under the present legislation only those dividends which are paid out of the taxable income of a year of income are taken to account in determing whether a company has made a sufficient distribution.

Under the proposed plan of private company taxation, it will not be necessary to determine whether dividends are paid out of taxable income of the relevant income year. All dividends which are assessable income of the shareholders and which are paid during the prescribed period are taken into the calculation in determining whether there has been a sufficient distribution by the company. Accordingly provisions comparable to sub-sections (2.) and (3.) of the present section 103B are not necessary in the amending legislation.

Sub-section (2.) of the proposed section 105A will apply to dividends paid by a private company during the first ten months of the income year 1951-52, i.e., the first year in respect of which the proposed plan of private company taxation will operate.

The substantial effect of the sub-section is to prescribe a period of twenty-two months from 1st July, 1951, to 30th April, 1953, within which dividends paid by a private company will be taken into account in determining whether a sufficient distribution has been made in relation to the income year 1951-52.

Where a company paid interim dividends, for example, late in the year 1951 or in January to April of 1952, those dividends will not have been taken into account as part of the company's distribution of income of the year ended 30th June, 1951. Even if the dividends were paid in the prescribed period for the income year 1950-51 those dividends will not have been paid out of the income of the year of income that ended on 30th June, 1951.

Sub-section (2.) will ensure that all dividends paid by a private company will be taken into account if the dividends are not exempt dividends and if the dividends have not previously been taken into account in determining whether the company has made a sufficient distribution of income of the year 1950-51 or a prior year.

Sub-section (2.) of section 105A will also apply in relation to interim dividends that are paid by a new company during its first year of incorporation.

SECTION 105B.-RETENTION ALLOWANCE.

A private company may retain a proportion of its distributable income without incurring any liability to undistributed income tax in respect of the amount so retained. The amount that can be retained is the retention allowance.

Section 105B provides a percentage scale by reference to which the retention allowance is computed. Different percentage rates are applied to various parts of the reduced distributable income and the sum of the amounts so calculated is the retention allowance. The reduced distributable income is the residue of the distributable income of the company after deducting any income from property.

No retention allowance will apply in respect of income from property. Under the present law, the retention allowance does not apply to dividends received by a company from another private company, but other income from property is subject to the allowance.

The percentage scale in section 105B will continue the present percentage rates of retention in respect of distributable incomes of up to Pd6,000 but will increase the rates on distributable income in excess of that amount. The minimum rate of retention proposed will be 25 per cent. of the excess of distributable income over Pd4,000, which compares with the present minimum retention of 10 per cent. of the excess of distributable income over Pd10,000.

The following table shows a comparison of the retention allowances in respect of various amounts of reduced distributable income under the present law and under the proposed section 105B.

The complex provisions of sub-sections (2.) to (5.) of the present section 103C are not being re-enacted. These provisions were designed to prevent an undue tax advantage being gained by a private company which sub-divided its business amongst a number of companies under similar control or with similar shareholders. Private companies that were under similar control or with similar shareholders were referred to as related companies. The tax advantage to related companies resulted from a number of factors, including that-

(a)

the percentages of retention ranged widely from a maximum of 50 per cent. of the first Pd1,000 of distributable income to a minimum of 10 per cent. of the excess of distributable income over Pd10,000;

(b)

a retention allowance was made in relation to income from property except dividends received from other private companies; and

(c)

the undistributed income tax was calculated at the shareholders' graduated rates of tax.

Under the plan of private company taxation being implemented by these amendments, a wide range of retention allowances will not apply. The maximum percentage will continue to be 50 per cent. of the distributable income up to Pd1,000 but the minimum percentage will be 25 per cent, instead of the present minimum of 10 per cent. The retention allowance will not apply in respect of income from property, and the undistributed income tax will be calculated at the flat rate of 10s. in the Pd1 instead of shareholders' graduated rates.

In the changed circumstances only a negligible saving of undistributed income tax will result from the sub-division amongst several companies of the business of any private company. There is, therefore, no occasion to continue the related company provisions.

SECTION 105C.-ELECTION TO HAVE TAXES PAID DEDUCTED IN ASCERTAINING DISTRIBUTABLE INCOME.

The provisions of the present section 103D are being restated, without alteration, in the proposed section 105C.

In calculating the distributable income of a private company, the taxable income is taken as a base and from it, inter alia, a deduction is made of the primary company tax payable in respect of that taxable income.

Prior to 1941 the deduction allowed was of the primary tax paid during the year of income. This deduction was, invariably, of the tax assessed in respect of the taxable income of a prior year of income and not the primary tax in respect of the taxable income being used in calculating the distributable income.

By legislation introduced in 1941, companies were allowed to elect to deduct the primary tax payable in lieu of the primary tax paid in calculating the distributable income. If a company exercised its right to this election it applied in respect of the year of income for which it was made and applied also to subsequent years of income.

By 1948 the great majority of private companies had made the election referred to, and in that year the law was amended to provide that the deduction from taxable income made in calculating the distributable income should be of the primary tax payable and not, as previously, of the primary tax paid during the relevant year of income.

To meet the position of the minority of companies which had refrained from making the election to deduct primary tax on a tax payable basis, a right of election was provided to enable those companies to continue to deduct the tax paid. New companies were not entitled to make the election.

The conditions attached to the limited right of election provided in the 1948 legislation were that-

(i)

the election was to be made in writing at the time of lodging the return of income to which the election applied;

(ii)

the election applied only to one year of income and had to be renewed from year to year if the company desired to continued the election; and

(iii)

if a company in any year failed to renew its election, it lost the right to make a similar election in relation to any subsequent year of income.

These conditions were designed to bring all private companies on to the basis of deducting the primary tax payable in calculating distributable income but, at the same time, to enable the companies to effect the change in a favourable year when no disadvantage to the companies would result.

At the present time a negligible percentage of companies continue to deduct the primary tax paid. Accordingly the provisions are being re-enacted even although they have very limited application.

SECTION 106.-EXCESS DISTRIBUTIONS.

In the present law, provision is made in section 106 to treat as a dividend paid out of the taxable income of a year of income, the excess, if any, of the distributions made by a private company during the preceding four year period over the aggregate of the smallest amounts that would have been a sufficient distribution in respect of each of those four years.

In effect the excess of distributions over the four year period are offset against any short distribution by the company of its profits of the year of income.

This method of assessment was based upon recommendations made by the Royal Commission on Taxation following upon its review of taxing laws during the years 1932-1934, and has continued in the present Act since its inception in 1936. A similar provision was introduced into the previous Act in 1934. The proposed section 106 will continue to apply in a greatly simplified form, the principle that, before assessing a private company to additional tax in any year based upon its having failed to make a sufficient distribution of income, regard should be had to any excess distributions which the company might have made in prior years.

The proposed section includes a formula for the calculation of an excess distribution, by a private company in any year and also provides the manner in which the excess distribution should be treated so that the company will receive a full benefit from having made the excess distribution.

Section 105A will, in effect, define a sufficient distribution by a company in relation to a year of income. In the note on section 105A it was explained that a company will make a sufficient distribution if, within the prescribed period it distributes dividends (other than special fund dividends) equal in amount to the residue of its distributable income after deducting its retention allowance.

If, in fact, the company distributes dividends that exceed the amount of a sufficient distribution, the amount of the excess will be an excess distribution.

It is proposed that any excess distribution will be deemed to be a dividend paid during the prescribed period for the succeeding year of income. This treatment will ensure that in the succeeding year of income the company receives a benefit in respect of the excess distribution.

If in the succeeding year, apart from the dividend so deemed to have been paid, the company actually pays dividends equal in amount to a sufficient dividend, the deemed dividend will result in an excess distribution being calculated for that succeeding year. This excess will then be treated as a dividend paid during the prescribed period for the next year. In this manner the company will carry forward the benefit of any excess distributions until the benefit is realized by way of offset against any short distribution made by the company in a later year.

Special transition provisions are being enacted in sub-section (3.) to enable a smooth change to the new method of calculating and treating excess distributions.

Under this provision the present section 106 which, as explained, has regard to excess distributions by a company over a four year period will continue in operation until applied to the income of the year ended 30th June, 1951.

If the total of the distributions by a company out of its taxable income of the year of income ended 30th June, 1951, and the four prior years exceeded a sufficient aggregate distribution for those five years, the excess will be deemed to be a dividend paid during the prescribed period for the year ended 30th June, 1952.

Sub-sections (2.) and (3.) of the present section 106 are provisions that are necessary for calculating the excess distributions for the purposes of the Division that is being replaced by these amendments.

Under the present legislation the excess distribution that is carried forward for the purposes of the undistributed income tax is the aggregate excess distribution of a four year period and not the excess distribution in relation to a particular year or years of income.

Sub-section (2.) provides to the effect:-

(a)

that if a company paid undistributed income tax in respect of any of the four years comprising the four year period, the undistributed amounts upon which the undistributed income tax was charged, should be deemed to be dividends paid by the company; and

(b)

that if the company has in fact paid dividends out of income deemed to be a dividend by virtue of paragraph (a), the actual dividend should not also be taken to account.

If both the deemed and the actual dividends were taken to account, the company concerned would, in effect, gain a double concession in respect of a single distribution.

Sub-section (3.) is for application where the period of incorporation of a private company is less than four years prior to the relevant income year. In those cases any excess of the distribution of up to three years preceding the income year, applies by way of off-set to any insufficiency of distribution of the income of the year of income.

Under the proposed amended plan of private company taxation the excess distribution of any year of income will be automatically carried forward as an off-set to any insufficiency of distribution in the next succeeding year of income. Accordingly provisions similar to the provisions of sub-sections (2.) and (3.) of the present section 106 are not necessary in the amending legislation.

SECTION 107.-DIVIDENDS.

Section 107 provides that a person shall be entitled to a rebate where his assessable income includes dividends that are paid by a private company wholly and exclusively out of any amount on which the company has paid undistributed income tax. The rebate is of the amount by which his tax liabilities are increased by reason of those dividends being included in his assessable income. The practical effect of the rebate is that the dividends are free from tax in the hands of the shareholders in the private company.

The funds of profits out of which a private company may pay tax free dividends are-

(i)

any amount of income in respect of which the company has incurred a liability to undistributed income tax under the law prior to the inception of the present Assessment Act in 1936;

(ii)

any amount of income derived prior to 1st July, 1947, in respect of which the company has incurred a liability to undistributed income tax under the present Act; and

(iii)

The residue of any income derived during the year of income which ended on 30th June, 1948 (or later year of income) which was subject to undistributed income tax at the shareholders' graduated rates of tax, after deducting the amount of undistributed income tax charged on that income.

Where a private company pays a dividend wholly and exclusively out of profits of the kind described above, and the dividend (which is a rebateable dividend) is received by another company, or a partnership or by a trustee holding shares in the private company, the recipient company, partnership or trustee may in turn distribute the dividend subject to a rebate allowance to its shareholders, or the partners in the partnership, or the beneficiaries in the trust, as the case may be.

Except in the case of primary producers, the rebate in respect of a tax free dividend is, in practice, allowed in the assessment of the shareholders in the company paying the dividend, by treating the dividend as exempt income.

In the case of tax free dividends paid to a primary producer the dividends are included in the assessable income for purposes of averaging. Although the primary producer receives the full benefit of the rebate in his assessment of the year in which the dividend is received, the dividend may have the effect of increasing his average income (and therefore his rates of tax) in the succeeding four years.

In view of the modification of the averaging system as a result of legislation introduced in 1951, the inclusion of the dividend in the assessable income of primary producers has no real effect in those cases where the taxable income and the average income of the primary producer are both over Pd4,000.

The field in which the inclusion of the dividend in assessable income has any real effect is, therefore, limited to those primary producers whose taxable incomes, or average incomes fall below Pd4,000.

It is proposed that, in conjunction with the plan to impose a flat rate undistributed income tax on private companies and at the same time provide an increased scale of retention allowances, no concession comparable to the tax free rebate, should be allowed to the shareholders in respect of dividends paid out of the balance of an undistributed amount after deducting the flat rate tax payable on that undistributed amount. It is also proposed that concessions in respect of any funds of profits held by a private company upon which, under the present or previous law, undistributed income tax has been incurred at the shareholders' graduated rates of tax should be limited to dividends paid during the next five years.

Because of the very limited number of cases in which the allowance of a rebate has any effect that is different from the effect of treating rebateable dividends as being exempt dividends, it is proposed to substitute exemption under section 107 for the present rebate.

The proposed section 107 will accordingly classify as exempt, dividends which are paid prior to the 1st January, 1958, and would have been rebateable, had the present section 107 continued in operation. The scope of the proposed exemption will be the same as the scope of the present rebate under section 107.

SECTION 107A.-PRIVATE COMPANIES CARRYING ON INSURANCE BUSINESS.

The provisions of the present section 103(3.) are being restated in the proposed section 107A in order to provide an equitable basis for the assessment of undistributed profits tax in the case of a private company carrying on a business of insurance in Australia.

So far as is material, section 148 of the Principal Act provides that, unless an Australian insurance company otherwise elects, premiums paid by the Australian company to non-resident re-insurers shall not be deductible from the income of the company and recoveries from the re-insurer, in respect of losses on the risks re-insured, shall not be assessable income. The practical effect of the provision is that the profit or loss made by the non-resident re-insurer is merged with the income of the company which pays the premiums.

If a profit is derived by the re-insurer, the company carrying on business in Australia bears the tax on that profit. If a loss is incurred, the Australian company obtains a deduction from its own income of the amount of the loss.

Although any profit on the overseas re-insurance business forms part of the taxable income of the Australian insurance company, it is, in fact, not profit derived by, or available for distribution as dividends by, the Australian company.

The general object of the provisions now being restated is to place outside the scope of the tax on the undistributed profits of Australian insurance companies, the profits derived by overseas re-insurance companies from re-insurance business effected with them by the Australian company.

Corresponding to the exclusion of these profits from distributable income, any loss arising from overseas re-insurance business is added to the taxable income of the Australian company in ascertaining its distributable income.

As the Australian company is allowed a deduction of the Australian income tax paid or payable in respect of the full profit arising from the risk insured, the amount of any re-imbursement of that tax by the overseas re-insurer is included in the Australian company's distributable income of the year of re-imbursement.

SECTIONS 108 AND 109.-LOANS TO SHAREHOLDERS AND PAYMENTS TO SHAREHOLDERS AND DIRECTORS.

Subject to drafting amendments, the present sections 108 and 109 are being restated.

These sections apply in cases where profits derived by a private company are made over to shareholders or directors in the guise either of loans or payments ostensibly related to services rendered to the company by the persons concerned. Although disguised, the loans or payments are in substance dividends paid by the company.

The advantages sought to be gained from distributing the profits of a company other than by dividends are that-

(i)

in the case of loans, the shareholders will not be regarded as deriving income by virtue of "borrowing" from the company and will avoid taxation upon the amounts received; and

(ii)

in the case of payments ostensibly related to services rendered to the company by the recipient shareholders or directors, the amounts paid will be deducted as expenses incurred by the company in deriving its assessable income. If the amounts so paid are allowed as deductions, the taxable income of the company will be reduced accordingly and the amount of tax to which the company is liable will be reduced. Additionally it is sought to have the amounts taxed as personal exertion income in the case of the recipients whereas were the profits distributed in the proper form of dividends the amounts received by the shareholders or directors would be taxed as property income in their hands and subject to the higher rates of individual taxation that apply to income on property.

In the case of so-called loans to shareholders, section 108-and in the case of payments to shareholders or directors, section 109-gives to the Commissioner of Taxation the power to determine whether the profits derived by a company are in fact being distributed to its shareholders or directors under these headings.

When the Commissioner determines that an amount of profits of the company is being distributed in the manner indicated, that amount is to be deemed to be a dividend paid by the company within the prescribed period in relation to the year of income. The amount will also be treated as a dividend in the hands of shareholders or directors who are concerned for the purposes of assessing those persons individually to income tax.

SUB-CLAUSE (2.).-SAVING.

In notes on the proposed section 105A it was explained that the substantial effect of sub-section (2.) of that section is to prescribe a period of twenty-two months from the 1st July, 1951, to 30th April, 1953, within which dividends paid by a private company will be taken into account in determining whether a sufficient distribution has been made in relation to the income year 1951-52.

Sub-clause (2.) of clause 18 is a further saving provision, the effect of which is to allow the Commissioner of Taxation a discretion to extend the prescribed period in relation to the year of income ended 30th June, 1952.

The provision is designed particularly to apply to private companies which may have adopted a substituted accounting period for the normal July to June year.

If, for example, a company were to have adopted the year of income that ended on the 31st December, 1951, as the accounting period in lieu of the year of income ended 30th June, 1952, the prescribed period in relation to that substituted year of income would normally expire on the 31st October, 1952, i.e., at the end of the tenth month after the close of the year of income. Such a company will have had a very limited period within which to consider its dividend policy under the amending legislation so as to determine whether it will pay a sufficient amount in dividends to place itself outside the field of the amended private company tax.

Alternatively, a company within the limited period that now remains to the conclusion of the prescribed period as defined in the amending legislation may have difficulty in arranging the finance, or otherwise adjusting its capital requirements, to enable it to make a sufficient distribution in relation to the year of income ended 30th June, 1952, even although it has already determined to pay the dividends necessary to make a sufficient distribution.

To meet cases of the nature described and also to meet unforeseen circumstances which may arise out of the transition from the previous method of private company taxation to the new method, sub-clause (2.) authorises the Commissioner to extend the prescribed period in relation to the year of income ended 30th June, 1952. It is provided that the Commissioner may attach such conditions to the grant of an extension of the prescribed period as he determines are necessary or desirable.

FURTHER PROVISIONS OF THE PRESENT LAW NOT BEING RE-ENACTED.

Section 105.-Interposition of Companies, Trustees and Partnerships.

Section 105 of the present legislation applies where the shareholders of a private company are companies, trustees, or partnerships. In these cases, the undistributed profits tax is assessed on the basis that there would be successive distributions of the private company's income by the interposed companies, trustees and partnerships to the individuals who would ultimately be the recipient of the distribution.

Provisions of this nature are necessary in the present legislation in order to ensure that the undistributed amount of a private company is made fully subject to tax at the individual graduated rates of tax.

In the proposed plan of private company taxation the undistributed profits tax will be charged at a flat rate and provisions comparable to the provisions of the present section 105 are unnecessary.

Section 105A.-Further Additional Tax.

The present section 105A applies where one person, either directly or indirectly, would be entitled to receive the whole or a part of the undistributed amount of each of two or more private companies. In the present sections 104 and 105, the undistributed profits tax payable by each private company is assessed without regard to the undistributed amount of any other private company. Section 105A is designed to secure an aggregation of any persons interested in the undistributed amounts of two or more private companies.

This aggregation is necessary in order that the progressive graduated rate applicable to the total income of the individual may be made fully effective.

Under the proposed amended plan of private company taxation the undistributed income tax is chargeable at a flat rate and a provision comparable to section 105A is accordingly unnecessary.

Section 105B.-Calculation of Tax.

Section 105B is designed to simplify the calculation of the amounts of tax payable by private companies under the present legislation.

The purpose of the section is to avoid some of the complications that, except for the section, would be encountered in assessing undistributed income tax to a private company at a shareholder's individual graduated rates of tax.

In the proposed amended plan of private company taxation, the undistributed income tax is charged at a flat rate and there is no need to retain the provisions of section 105A.

CLAUSE 19.-REBATES-DISPOSAL OF ASSETS OF A PRIMARY PRODUCER.

Section 160 was inserted in the Principal Act last year to provide some relief from the tax payable by primary producers upon income derived from abnormal sales of live stock for the purpose of putting an end to their businesses.

The object of section 160 is to preserve the full benefits of the averaging system insofar as income from abnormal disposal sales of live stock is concerned.

Section 160 provides for the allowance of a rebate of tax where the whole of the assets of a business of primary production are disposed of for the purpose of putting an end to that business, and the assets include live stock which is disposed of at a profit.

As at present enacted, the rebate under section 160 is allowable in those cases only where the whole of the assets of a business of primary production are disposed of during one income year. The rebate is not operative in the case of a primary producer who, through force of circumstances, disposes of part of his assets in one income year and part in another income year.

It is proposed in clause 19 of this Bill to effect a minor drafting amendment of section 160 in order to extend the rebate to these cases.

The effect of the proposed amendment will be to authorize the allowance of the rebate, subject to the other conditions of section 160 being satisfied, so long as the whole of the assets are, in fact, disposed of for the purpose of putting an end to the primary producer's business.

The amendment will apply retrospectively, for the benefit of primary producers, to profits arising from disposals made since 1st July, 1950. The application of the proposed amendment will thus coincide with the application of section 160 as originally enacted.

CLAUSE 20.-ASCERTAINMENT OF AUSTRALIAN TAX ON DIVIDEND.

Clause 20 is a drafting amendment rendered necessary by the amendment proposed in clause 18.

CLAUSE 21.-PROVISIONAL TAX OR ADVANCE PAYMENT TO BE CREDITED AGAINST TAX ASSESSED.

This is a drafting amendment.

By clause 18 of the Bill, section 103D is being re-enacted as section 105C. The section provides that, in certain circumstances, a private company may, in arriving at its distributable income, elect to deduct the primary tax paid during a year of income in lieu of the primary tax payable in respect of the income of that year. Where a company exercises this election a deduction is allowed also of any advance payment made by the company.

During the financial year 1951-52 companies were required to make advance payments. The advance payments were in respect of the tax to be assessed on 1951-52 incomes but were based upon the primary income tax payable on 1950-51 incomes.

A private company which exercised the election under section 103D would be allowed a deduction of the advance payment in calculating the distributable income of the year in which the payment was made.

The purpose of sub-section (2.) of section 221YE is to ensure that there will not be a double deduction of the advance payment, firstly, in the year in which the payment made and, secondly, in the year in which the payment is credited against tax payable on the 1951-52 income.

CLAUSES 22 TO 24.-NORTHERN TERRITORY TRANSITION PROVISIONS.

INTRODUCTORY NOTE:-

The exemption from income tax in respect of income derived by residents of the Northern Territory from primary production, mining or fisheries in the Territory expired on 30th June, 1952.

As income derived by residents of the Northern Territory from the industries mentioned will be taxable as from 1st July, 1952, the transition from exemption to taxability necessitates special legislative provisions. Clauses 22 to 24 are special provisions relating to this transition period.

Clause 22 provides for the basis on which live stock owned by a primary producer in the Northern Territory as at 1st July, 1952, may be brought to account. It is proposed that the primary producer will be given a right to elect whether that live stock should be valued at cost price or at market selling value.

This section of values by the primary producer will generally ensure that the profits represented by enhanced values of live stock on hand at 1st July, 1952, will be preserved free from income tax. As the selected value will be allowed a deduction in the opening stock, little or no taxable profit would result from a subsequent sale of that stock. If, however, the primary producer suffers a loss of live stock which was on hand at 1st July, 1952, he would be allowed a deduction of the full extent of that loss, as no amount in respect of the lost stock would be included as income in the closing values.

The taxpayer is entitled to select cost price as the basis of valuing live stock on hand at 1st July, 1952, if it suits him to do so-as, for example, if the market selling value current at that date was less than the cost price of the stock.

Clause 23 provides a basis for allowing depreciation in respect of plant which was owned by a resident of the Northern Territory at 1st July, 1952, and which was previously used in one or other of the industries the income of which was exempt from tax.

Broadly, depreciation will be allowed on the written-down value of that plant as at 30th June, 1952. Depreciation will thereafter be allowable each year at the appropriate percentage rate.

The provisions of clause 24 will have particular application in the case of primary producers in the Northern Territory. As plant and structural improvements owned by them at 1st July, 1952, will be deemed to have been purchased or completed on that date, the primary producers will be entitled to deduct the written-down value over a period of five years. This concessional basis of depreciation is explained in the note on clause 10.

With regard to mining industries in the Northern Territory, the taxpayers concerned will receive the benefit of similar concessions to those engaged in mining operations elsewhere in Australia. Income from gold-mining, for example, will continue to be exempt from tax, by virtue of section 23(o) of the Principal Act.

Persons engaged in other mining operations in the Territory will be entitled to deduct all capital expenditure incurred after 30th June, 1952, on necessary plant and development of the mining property, as provided in Division 10 of Part III. of the Principal Act.

Special provisions in regard to such capital expenditure incurred up to 30th June, 1952, are made in clause 24 of the Bill. These provisions are explained in the note on that clause.

In addition to the specific provisions of clauses 22 to 24 of this Bill two provisions in the Principal Act may minimise the immediate effects of transition to tax liability of those residents of the Northern Territory whose incomes were formerly free from tax. These provisions are explained in the following paragraphs:-

(a)

The rate of tax payable by an individual primary producer will be ascertained, as a general rule, by reference to the average of the taxable incomes earned by him over a period of five years.

The five years averaging period will apply to 1952-53 incomes even although the income of the first four years of the period was exempt from tax.

By way of illustration, a taxpayer who carried on a business of primary production in the Northern Territory during the years ended 30th June, 1949, to 1953 inclusive, but who had no other source of income in those years, may be assumed to have earned Pd3,000 in each of those years. As his income prior to 1st July, 1952, was exempt from tax, his average taxable income for the purpose of ascertaining the rate of tax on his income of the first taxable year (1952-53) would be as follows:-

		Pd
Year ended 30th June, 1949		Nil
Year ended 30th June, 1950		Nil
Year ended 30th June, 1951		Nil
Year ended 30th June, 1952		Nil
Year ending 30th June, 1953		3,000
	5 )	3,000
Average Taxable Income		600

Tax would be imposed on the taxable income of Pd3,000 at the rate applicable to Pd600.

(b)

From income earned in the first taxable year (1952-53), a primary producer in the Northern Territory will be entitled to deduct, in accordance with sections 77 and 80 of the Principal Act, any losses that may have been incurred in carrying on his business of primary production in the Territory during the years ended 30th June, 1946 to 1952 inclusive. The amount of losses allowable as a deduction will be subject to adjustment on account of any exempt or assessable income derived by him during that period.

CLAUSE 22.-LIVE STOCK.

The principal object of clause 22 is to grant primary producers in the Northern Territory a right to elect, in respect of live stock owned by them at 1st July, 1952, either cost price or market selling value as the deduction allowable for that live stock.

This right of election will apply, in accordance with the proposed sub-clause (1.), only to live stock forming part of the assets of a business the income from which was previously exempt under section 23(m) of the Principal Act-i.e., a business of primary production carried on in the Northern Territory by a resident of the Territory.

Sub-clause (2.) provides for the exercise of the option, and the manner of exercising that option is prescribed in sub-clause (3.). No special form is required, but it is necessary that the option should be exercised by notice in writing to the Commissioner of Taxation.

Generally speaking, the notice will be required to be lodged with the Commissioner on or before the date of lodgment of the return of income earned by the primary producer during the year ending 30th June, 1953. Where special circumstances warrant an extension of time for lodging the notice, the Commissioner is authorized to grant such extension.

The value of the live stock on hand at 1st July, 1952, ascertained by reference either to its cost price or to its market selling value, as elected by the taxpayer, will be allowed as a deduction in the assessment, upon income derived by him during the year ending 30th June, 1953. If the primary producer has not exercised his option, however, sub-clause (4.) provides that the opening stock will be valued at cost price only. This is in conformity with the provisions of section 32 of the Principal Act which applies to cases where elections are not made.

It will be necessary also to determine a basis for valuing the live stock owned by the primary producer at the end of his first taxable year-i.e., at 30th June, 1953. As a general principle, where a primary producer outside the Northern Territory has adopted either cost price or market selling value, that basis of valuing live stock is binding upon him for all time unless, by reason of special circumstances, the Commissioner grants leave for a change of basis-section 33 of the Principal Act.

Sub-clause (5.) provides, however, that, in valuing live stock on hand at 30th June, 1953, a Northern Territory primary producer to whom this clause applies will not be bound to adhere to the basis of election adopted by him in respect of the live stock on hand at 1st July, 1952. If it suits him to do so, he may select a different basis of valuation for the closing stock without seeking the prior approval of the Commissioner.

Where, however, a primary producer adopted market selling value for the live stock on hand at 1st July, 1952, and cost price for the closing stock at 30th June, 1953, sub-clause (6.) provides that the market selling value of the opening stock shall, for the purpose of valuing such of those particular stock as are on hand at 30th June, 1953, be regarded as the cost price.

Sub-clause (7.) makes special provision for primary producers who, with the approval of the Commissioner, adopt accounting periods ending on some date other than 30th June. If, for example, a resident of the Northern Territory balances his accounts on 31st March, the first period of income from primary production on which an assessment will be based will be the period from 1st July, 1952 to 31st March, 1953. For the purposes of valuing live stock, that period will be deemed to be a year of income.

As an aid to drafting, sub-clause (8.) defines "the fist taxable year". This expression is used in other sub-clauses of clause 22.

CLAUSE 23.-DEPRECIATION.

Clause 23 is designed to provide a basis for calculating depreciation on plant which was owned by a resident of the Northern Territory at 1st July, 1952, and which was previously used by him for the purposes of primary production, mining or fisheries in the Territory.

Depreciation on such plant will commence to be allowed as from 1st July, 1952. For the purposes of calculating that depreciation, sub-clause (2.) of this clause provides that the depreciated value of the plant at that date shall be regarded as its cost. The depreciated value of plant is the original cost less depreciation calculated at the appropriate percentage rates per annum on the reducing balance each year from the time of purchase to 30th June, 1952.

Having ascertained the depreciated value as at 30th June, 1952, sub-clause (3.) will enable primary producers in the Northern Territory to claim the special depreciation allowance, under the proposed new section 57AB, in respect of plant and structural improvements on hand at that date. That sub-clause deems such plant to have been first used, and such structural improvements to have been completed, on 1st July, 1952. The effect of this provision is to allow the deemed cost (i.e., the depreciated value at 1st July, 1952) to be deducted by five equal annual instalments from that date.

To the extent that the cost of structural improvements has already been allowed as a deduction from assessable income, however, depreciation will not be allowable under the proposed section 57AB.

For example, where, besides deriving exempt income from primary production, a resident of the Northern Territory derived income from sources subject to tax, the full cost of improvements such as bores, wells and earth tanks constructed between 1st July, 1946, and 30th June, 1952, may have been allowed as a deduction from that assessable income, under section 75 of the Principal Act. In these circumstances, the allowance of a further deduction by way of depreciation on the improvements is precluded by section 54(2.)(b) of the Principal Act.

Where, however, the primary producer derived no income other than exempt income, the cost of such improvements could not have been allowed as a deduction from assessable income. One-fifth of the depreciated value of the improvements as at 1st July, 1952, would accordingly be deductible in the income year 1952-53 and in each of the next four succeeding income years.

With regard to mining plant, residents of the Northern Territory may prefer to claim deductions, in respect of the depreciated value of such plant, under the special mining provisions of the Principal Act. These are explained in the note on clause 24. The ordinary provisions for allowing depreciation by way of deductions over the estimated life of the plant apply to mining plant only where the taxpayer expressly elects that the special mining provisions shall not apply.

CLAUSE 24.-MINING.

The purpose of clause 24 is to permit the allowance of deductions for capital expended by Northern Territory mine owners during the period when profits from mining in that Territory were exempt from tax. Deductions for capital expended since those profits became taxable are already provided for in Division 10 of the Principal Act.

The deductions under the new provision will be allowed if the expenditure was incurred on mine development, plant or housing and welfare. In the case of expenditure on plant, the deductions will be allowed if the plant is used in earning profits now subjected to tax.

Sub-clause (1) sets out that the new provision shall apply where capital was expended before the 1st July, 1952, on necessary plant or development of the mining property. In the case of taxpayers generally, deductions are allowed for capital expenditure incurred on housing and welfare after the 30th June, 1951, and the deductions to be allowed to Northern Territory mining undertakings will be on the same basis.

Sub-clause (2.) is designed to allow deductions based on the amount of expenditure which would have been deductible after the 30th June, 1952, if the mining profits had been taxed before that day.

Expenditure covered by clause 24 will be deductible on the basis provided in section 122 of the Principal Act. That section permits capital expenditure on necessary plant, development of the mining property and housing and welfare to be deducted over the estimated life of the mine.

The expenditure to which clause 24 applies will accordingly be deducted during the period that the mining property continues in production. It is, however, mentioned that to ensure the allowance of deductions within a reasonable period, twenty-five years is accepted as a maximum life of a mine.

Sub-clause (3.) comprises drafting provisions designed to ensure the effectiveness of the clause as a whole.

CLAUSE 25.-APPLICATION OF AMENDMENTS.

The amendments proposed by the Bill will commence to apply as indicated in this clause. The year to which each amendment will commence to apply has been stated in the notes explaining the amendments.