House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Frank Crean, M.P.)

Introductory Note

The purpose of this memorandum is to explain the provisions of three income tax Bills.

Income Tax Assessment Bill (No. 5) 1973

The first Bill - the Income Tax Assessment Bill (No. 5) 1973 - will give effect to proposals announced in the Budget Speech as well as proposals relating to withholding tax on dividends and interest paid to Papua New Guinea residents, the tax status of subsidiary companies, the private company retention allowance, rebates in relation to meat exports, payment of dividends to private companies in foreign tax havens and deduction of tax instalments from workers' compensation payments.

The proposals in the Bill are outlined below.

Profit on sale of property within 1 year of purchase (Clauses 3 and 7)

Casual profits arising from the sale of real or personal property purchased after 21 August 1973 and sold within twelve months of acquisition are to be treated as assessable income. An important exception concerns the sale of a taxpayer's sole or principal residence as a consequence of his changing his place of employment or business. Where disposals of property are made outside the twelve month period the general provisions of the law will apply. Section 6D of the Principal Act is to be terminated. That section provides, broadly, that profits made by a person other than a company on the sale of shares listed on a stock exchange and held for more than eighteen months are not to be taken into account for income tax purposes. It is proposed by the Bill that this provision will not be available for shares acquired after 21 August 1973.

Exemption of income - mining and prospecting (Clauses 4, 6, 27, 28, 29, 30, 32, 38 and 39)

Provisions of the Principal Act under which certain profits earned from mining operations carried on in Australia or Papua New Guinea are exempt from income tax are to be withdrawn. Briefly, the provisions are those authorising the exemption from tax of profits from mining gold or of income derived from the sale, transfer or assignment of rights to mine a particular area for gold or a prescribed metal or mineral and the exemption of one-fifth of the profits earned from mining prescribed metals or minerals.

The exemptions of income derived from gold mining or from mining prescribed metals or minerals will not be available from the commencement of the 1973-74 income year. Income from the sale, transfer or assignment of mining rights that is derived after 21 August 1973 will generally be subject to tax, but special provisions will apply to preserve an entitlement to exemption for such income derived under a contract made on or before that date. Other transitional provisions will permit certain past capital expenditures made by gold mining enterprises on prospecting and mine development, to the extent that they exceed income exempted from tax over a specified period, to be available for deduction against assessable income derived from future mining operations. For the 1973-74 and future income years gold mining activities will otherwise be subject to the same basis of assessment as other mining activities.

Taxation of certain pensions (Clauses 4, 5 and 40)

As part of a package of pension and taxation measures, associated with the phased abolition of the means test for people aged 65 years of age and over, this Bill will withdraw the exemption of pension payments made to persons of age pension age and to wives of such aged persons. Effect has already been given to the pension side of the new arrangements in the relevant pensions legislation. The Income Tax Bill 1973 (the second Bill) will give effect to other parts of the new arrangements by authorising a tax rebate of $156 for aged persons and by discontinuing the age allowance. War pensions will remain exempt as will pensions, other than a wife's pension paid to the wife of a man aged 65 or over, paid to persons below age pension age. Certain elements of otherwise taxable pension payments to aged people, such as amounts representing allowances for the payment of rent or for the support of children, will continue to be exempt.

Trading stock of winemaker (Clause 8)

A special provision which permits manufacturers of wine and brandy to value stock on a concessional basis for income tax purposes is to be repealed. It is proposed that, commencing with the 1973-74 income year, these manufacturers will be required to value stock on one of the three bases available to taxpayers generally, i.e. at cost price, market selling value or replacement price. Special transitional provisions will phase in over a five year period an under-valuation of wine and brandy stock that would have occurred as at the end of the 1973-74 income year if the concessional basis of valuation had been retained.

Dividends (Clauses 9 and 21)

Provisions of section 44 of the Principal Act exempt a number of classes of dividends from income tax in shareholders' hands. It is proposed to discontinue the provisions that exempt dividends paid wholly and exclusively out of exempt profits from gold mining, out of the exempt portion of income from the mining of prescribed metals and minerals or from the exempt income derived by an exploration or prospecting company from the sale of mining rights. It is also proposed to bring to an end the exemption of dividends paid out of profits from sales of locally produced petroleum or products of the petroleum.

With one exception, dividends declared out of any of these sources after 21 August 1973 will be liable to tax. The exception is a dividend declared after 21 August by a public listed company where its payment was, before that date, recommended by the directors.

Withholding tax on dividends and interest paid to residents of Papua New Guinea (Clauses 10, 11, 31, 37, 41 and 42)

The withholding tax on dividends and interest paid to non-residents is not, at present, payable in respect of dividends and interest paid to residents of Papua New Guinea. The dividends and interest are, instead, dealt with by assessment processes. It is proposed by this Bill that, as from the date of introduction of the Bill, dividends and interest paid to residents of Papua New Guinea will be subject to withholding tax. As a consequence Papua New Guinea companies will no longer be entitled to have dividends from Australia freed from Australian tax by the rebate on inter-corporate dividends to which Australian companies are entitled. (Papua New Guinea recently withdrew a corresponding rebate on the introduction there of a dividend withholding tax.)

Special depreciation allowances to primary producers (Clauses 12 and 13)

Provisions for an accelerated income tax rate of depreciation of primary production plant and structural improvements are to be terminated. Expenditure that is incurred after 21 August 1973, other than in pursuance of a contract made on or before that date, will not qualify for the concessions but will be deductible for income tax purposes by way of general depreciation.

Termination of investment allowance (Clauses 14 and 15)

The special income tax deduction known as the investment allowance, which permits a deduction from assessable income of 20 per cent of capital expenditure on specified new plant for use in manufacturing or in primary production, is to be brought to an end.

Expenditure incurred on and after 22 August 1973 will not qualify for the allowance unless it is incurred under a contract entered into before that date and, in the case of manufacturing plant is incurred no later than 30 June 1975.

Rates and taxes (Clause 16)

Commencing with the 1973-74 income year, the deduction in respect of private rates is to be available only for rates paid in respect of a taxpayer's sole or principal residence, the deduction being subject to a limit of $300 in any year. Private rates paid in respect of holiday homes and vacant residential land are no longer to be deductible.

Capital expenditure on land used for primary production (Clauses 17, 18 and 19)

Sections 75 and 76 of the Principal Act which provide immediate deductions for the cost of certain capital expenditure on land used for primary production are to be terminated. Expenditures previously covered by these sections will be deductible either over 10 years or by way of general depreciation where the expenditure is in respect of a depreciable structure. The proposal is to apply to expenditure incurred after 21 August 1973 unless it is incurred in pursuance of a contract entered into on or before that date with suppliers of labour or materials.

Gifts (Clause 20)

Gifts to public war memorial funds established after 21 August 1973 will not be deductible under the gift provisions. Gifts to funds established on or before that date will be deductible only if made before 1 July 1974.

Taxation status of companies (Clause 22)

Under section 103A of the Principal Act, which lays down criteria for determining whether a company is to have public or private status for income tax purposes, a company that would not otherwise qualify as a public company may be treated as such by the exercise of a discretionary power vested in the Commissioner of Taxation. A decision given by the High Court in the case Stocks and Holdings (Constructors) Pty Ltd means this discretionary power can be invoked in only a limited range of circumstances.

An amendment is proposed so that companies which fail in some insignificant way to qualify as public companies under specific tests in section 103A, but which are essentially public in character, can, through the exercise of the discretionary power, be treated as public companies for income tax purposes.

Dividends paid to foreign repository companies (Clause 23)

Provisions in the Income Tax Assessment Bill (No. 4) 1973, which was recently introduced, are designed to prevent avoidance of Australian tax through private companies paying dividends to a private "repository" company owned by Australians but set up in Papua New Guinea. It is proposed by the present Bill to extend these safeguarding provisions to dividends paid by private companies to private "repository" companies set up in any country outside Australia, e.g. in a tax haven.

Retention allowance (Clause 24)

The retention allowance in relation to trading income - which allows companies to retain profits without becoming liable to pay undistributed profits tax - is to be increased to a flat rate of 50 per cent for the 1972-73 and subsequent income years.

Deductions in relation to calculated liabilities (Clause 25)

The special deduction allowable to life assurance companies under section 115 of the Principal Act of, very broadly, 3 per cent of calculated liabilities, is to be reduced to 2 per cent of calculated liabilities.

Reduction in amounts of dividends to be taken into account for purposes of section 46 (Clauses 10 and 26)

The amount of dividends in respect of which a life assurance company is allowed a rebate of tax under section 46 of the Principal Act is to be reduced by an appropriate part of the deductions allowable to the company for expenses of general management and in relation to calculated liabilities.

Rebate for export market development expenditure (Clause 33)

The special income tax rebate allowable in respect of expenditure on the development of export markets will not be available for expenditure made after 10 September 1973 in developing export markets for fresh, chilled or frozen meat unless it is made under a contract entered into on or before that date.

Collection of company tax by instalments (Clause 34)

The tax payable on a company's taxable income for a year of income is ordinarily assessed and payable in the following financial year, the earliest due date normally being 15 February in that financial year. The Commissioner of Taxation is to be authorised to collect an instalment of the tax payable by a company in respect of a year of income ahead of the time that the tax would ordinarily fall due for payment. In the current financial year, the instalment will be payable not earlier than 31 December 1973. The proposal is the first step in a series intended to collect company income tax by four quarterly payments in the financial year following the year in which the income is derived.

Tax instalment deductions (Clause 36)

Income in the form of periodical payments of workers' compensation, sickness pay and accident pay made to an employee in respect of his incapacity for work, are to be subject to tax instalment deductions under the pay-as-you-earn system.

Income Tax Bill 1973

The second Bill - the Income Tax Bill 1973 - will declare the rates of income tax payable by individuals and companies for the current financial year 1973-74. This Bill also provides for instalments of tax to be payable by companies in respect of the 1972-73 and 1973-74 income years in accordance with the provisions of the first Bill.

The main features of this Bill are:

Rates of tax payable by individuals (Clause 6(1))

The rates of tax payable by individuals for the 1973-74 financial year, in respect of income of the 1973-74 income year, are to be the same as those payable for the 1972-73 financial year.

Age relief (Clause 8)

As part of a package of pension and taxation measures the age allowance is not to be continued but a tax rebate will be allowed to residents of Australia who are of age pension age or are women under 60 years of age married to men aged 65 or over. The rebate is to be $156, reducing by 25 cents for each $1 of taxable income above $3,224, reducing to nil at a taxable income of $3,848. Persons who qualify by age and residence for part only of the income year will receive a proportion of the rebate allowable to people who qualify throughout the year.

Rates of tax payable by companies (Clause 9)

The rates of tax payable for the 1972-73 financial year by a private company - 37.5 per cent on the first $10,000 of taxable income and 42.5 per cent on the balance - are to be increased for the 1973-74 financial year (i.e., in respect of income of the 1972-73 income year) to a flat rate of 45 per cent on the whole of the taxable income. The general rate of tax payable by public companies will remain at 47.5 per cent. The rates previously payable in respect of certain categories of public company income - the mutual income of life assurance companies and the dividend income of non-resident companies - will be raised to 47.5 per cent for the 1973-74 financial year. The rates of tax payable by co-operative companies, non-profit companies and friendly society dispensaries will remain unchanged.

Rates of tax payable by superannuation funds (Clause 6(5))

The rate of tax payable in respect of investment income by a superannuation fund that does not invest a sufficient proportion of its assets in public securities is to be increased in line with the increased rate of tax payable by mutual life assurance companies. The rate payable for the 1973-74 financial year, in respect of investment income of the 1973-74 income year, is to be 47.5 per cent.

Collection of company tax by instalments (Clause 12)

A provision of the Bill will formally declare that instalments of company tax, under the proposed quarterly payment scheme, will be payable in respect of company tax on income of the 1972-73 and 1973-74 years of income.

Income Tax (Non-resident Dividends and Interest) Bill 1973

The third Bill - the Income Tax (Non-resident Dividends and Interest) Bill 1973 - amends the Income Tax (Non-resident Dividend and Interest) Act 1967 to declare rates of withholding tax, of 15 per cent and 10 per cent respectively, on dividends and interest paid to residents of Papua New Guinea.

Notes on Clauses

INCOME TAX ASSESSMENT BILL (NO. 5) 1973

The main features of this Bill have been referred to in the introductory pages of this memorandum. The following notes relate to the individual clauses of the Bill.

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 1901-1973 provides that an Act shall come into operation on the twenty-eighth day after the day on which it receives the Royal Assent unless the contrary intention appears in the Act. Several proposals announced in the Budget Speech on 21 August 1973 are to have effect in relation to transactions entered into after that day. It is important also, in regard to provisions in the Bill relating to withholding tax on income paid to non-residents, that the Bill come into effect at the earliest practicable date. Accordingly, it is proposed by clause 2 that the amending Act will come into operation on the day on which it receives Royal Assent.

Clause 3: Transactions involving shares held for eighteen months or more.

In broad terms, section 6D of the Principal Act provides that otherwise taxable profits or deductible losses made by a person (not being a company) on the sale of shares will not be taken into account for income tax purposes if -

(a)

the shares in question were listed on a stock exchange at the time of acquisition, or within 3 months afterwards;

(b)

the person had not acquired the shares as an incident of a business being carried on or had not formally notified the Commissioner of Taxation that they had been acquired for the purpose of profit-making by sale;

(c)

the person had continued to be the owner of the shares for a period of 18 months or more; and

(d)

the shares were acquired by the person on or after 12 April 1972.

The amendment proposed by clause 3 of the Bill limits the application of section 6D to shares acquired before 22 August 1973 and is complementary to the proposed insertion of the new section 26AAA by clause 7 of the Bill, relating to the inclusion in assessable income of profits arising on the sale of property within a year of purchase.

Clause 4: Exemptions.

Sub-clauses (1) and (2) of this clause propose the repeal of paragraphs (k), (kaa), (kab), (ka), (o) and (p) of section 23 of the Principal Act. Paragraphs (k), (kaa), (kab) and (ka) provide for the exemption from tax of certain pensions, allowances, benefits and like payments. Except for pensions that are to become assessable income - broadly, those paid to aged persons - the exemptions at present provided by these paragraphs will be continued by the proposed new section 23AD - see notes on clause 5. The repeal of paragraphs (o) and (p) of section 23 will bring to an end exemptions of mining income that have been available under those provisions.

Paragraph 23(o) authorises an exemption from tax of income derived from the working of a mining property in Australia or Papua New Guinea principally for the purpose of obtaining gold, or gold and copper. Where gold and copper are mined together the exemption applies only where the value of gold produced is not less than 40 per cent of the total output value of the mine, excluding the value of any pyrites derived from the mining operations.

Paragraph 23(p) authorises, subject to certain qualifications, an exemption from tax of income derived by a bona fide prospector from the sale, transfer or assignment of rights to mine in a particular area for gold or any other metal or mineral specified in the Income Tax Regulations in relation to this provision.

The metals and minerals that are specified as metals or minerals in respect of which paragraph 23(p) applies are listed in Regulation 4AA. They are -

Asbestos

Bauxite

Chromite

Emery

Fluorspar

Graphite

Ilmenite

Kyanite

Magnesite

Manganese Oxides

Mica

Monazite

Pyrite

Quartz Crystals (piezo-electric quality)

Radio-active Ores

Rutile

Sillimanite

Vermiculite

Zircon

Ores of

Antimony

Arsenic

Beryllium

Bismuth

Cobalt

Columbium

Copper

Lithium

Mercury

Molybdenum

Nickel

Osmiridium

Platinum

Selenium

Strontium

Tantalum

Tellurium

Tin

Tungsten

Vanadium

By sub-clause (3) the omission from section 23 of paragraphs (k), (kaa), (kab) and (ka) relating to the exemption of pensions, and paragraph (o) relating to income from gold mining, will have effect in respect of assessments based on income derived during the 1973-74 year of income and subsequent years. New pension provisions, operative for the 1973-74 year of income and subsequent years, are being inserted by clause 5.

Under sub-clause (4) the repeal of paragraph (p) of section 23 has effect in relation to income derived after 21 August 1973 from the sale, transfer or assignment of mining rights. However in the case of a sale, transfer or assignment contracted for on or before that day, any income derived under the contract will continue to qualify for exemption under the paragraph.

An explanation of the position in relation to dividends paid from exempt income is given in the notes on clause 9.

Clause 5: Exemption of certain pensions.

Introductory Note

The broad purpose of this clause, which will insert new provisions in the Principal Act, is to set out the circumstances in which pensions paid under social service and repatriation legislation are to be subject to tax or are to be exempt from tax. Clause 4 of the Bill proposes the repeal of existing provisions that confer tax exemption on these pensions.

The new provisions will continue existing exemptions for people other than aged people, while some pensions paid to aged people (e.g. war pensions) will also remain exempt. Very broadly, the pensions that are to become subject to tax (as from the commencement of the 1973-74 income year) are those paid to people of pensionable age (men who are aged 65 or over and women who are aged 60 or over) and to wives (not aged 60 or over) of men of pensionable age.

Put less broadly, the payments, made from 1 July 1973, that are to be taxable (subject to the age rebate) include:

•

pensions and similar benefits paid under the Social Services Act:

-

age or invalid pension including transitional benefit for the aged blind, paid to a person of pensionable age;

-

widow's pension paid to a person of pensionable age;

-

special benefit paid to a person of pensionable age;

-

supporting mother's benefit paid to a person of pensionable age;

-

wife's pension paid to a wife of a person of pensionable age;

•

allowance paid under the Tuberculosis Act to a person of pensionable age;

•

pensions paid under the Repatriation Acts:

-

Service pension, including transitional benefit for the aged blind, paid to a person of pensionable age;

-

wife's pension paid to the wife of a service pensioner where either the wife or service pensioner is of pensionable age;

-

pension paid to a parent of a deceased ex-serviceman as an alternative to an age pension.

The following payments made under these Acts are to continue to be exempt from tax;

•

repatriation war pensions and allowances (including war widows' pensions and domestic allowances);

•

pensions paid to men who have not reached 65 years and women (other than wives of men aged 65 years or over) who have not reached 60 years;

•

additional pension for children, and guardian's or mother's allowance, whether or not the recipient is of pensionable age;

•

supplementary assistance (rent allowance).

Although pensions paid to aged people are to become income subject to tax, a special tax rebate of a basic amount of $156 (to be authorised by clause 8 of the Income Tax Bill 1973) will have the effect of freeing from payment of tax aged people - taxed at ordinary rates of tax - whose taxable income in 1973-74 is $1,921 or less, if they qualify for the rebate for the whole of 1973-74.

More detailed explanations of the rules under which pensions are to be subject to tax, or to be exempt from tax, are provided in the following notes which relate to proposed new section 23AD, to be inserted by clause 5.

Sub-section (1) of section 23AD defines certain terms used in the section:

"Commencing day", in relation to the person concerned, is the day as from which a pension or other benefit is to become assessable income. If a person was of age pension age on 1 July 1973, or was receiving a "wife's pension" on that date, the commencing day for that person will be 1 July 1973. In any other case it will be the date on which the person attains age pension age, or in the case of a woman who is paid a "wife's pension" before she attains that age, the day she commenced to be entitled to a "wife's pension". The proposed definition of "wife's pension" will have the effect that a woman less than 60 years of age will only be taxable on her pension if she is the wife of a man who has attained the age of 65 years.

"Excepted payment" defines, by reference to the terms "excepted pension", "prescribed person" and "commencing day", the payments that are to become assessable income. It also provides for the continued exemption of certain elements of pension payments that could otherwise be assessable. (The term "excepted pension" defines the class of pension payments that are to be assessable.) The otherwise assessable pension payments that are to remain exempt are:-

•

any pension, other than a wife's pension, paid to a woman who has not attained 60 years of age but who is a "prescribed person" by reason that she receives a "wife's pension" - (paragraph (a) of the definition);

•

an instalment of an "excepted pension" that fell due for payment prior to the day on which the person became a "prescribed person" but which was not paid until after that day, e.g. payments of invalid pension to a man aged 65 but which relate to a period when he had not attained the age of 65 (sub-paragraph (b)(iii));

•

the component (if any) of an "excepted pension" which represents the supplementary payment that is paid with certain "excepted pensions" in cases where a person with a small amount of means, or his or her spouse, pays rent, lodging, or board and lodging (sub-paragraph (b)(i));

•

in a case where the person or his or her spouse has the custody, care and control of a child or children or has another person dependent for support, the component of the "excepted pension" paid that the Commissioner determines is attributable to the child or children or other dependant (paragraph (b)(ii)).

Broadly speaking, the part of an assessable pension payment that will continue to be exempt by virtue of paragraph (b)(ii) will be, basically, the amount by which the pension paid to a taxpayer having the custody, care and control of a child or children, or having another person dependent for support, exceeds the pension that would be payable to a person having the same means as assessed but who does not have any children or other persons dependent for support. In certain cases, however, this would not give an appropriate result as between taxpayers supporting children and those without children - for example, in the case of means-test-free pensioners there may be no difference between the amount of pension paid to a person with children and the amount paid to a person without children. In these cases the Commissioner may determine that a greater amount be treated as representing allowance for children, and so exempt. Broadly, the allowance will be treated for tax purposes in these cases as being the amount that it would have been if the pension had been subject to the means test.

Calculation of the allowance for children by the basic method would also give an inappropriate result in the case of the supporting mother's benefit paid under Part IVAAA of the Social Services Act 1947-1973. Benefits, equivalent to a widow's pension, are payable under that Part only where the recipient has the custody, care and control of a child or children, so that under the basic approach, the whole of the benefits would be exempt whereas, in the case of a widow's pension, only the part of the pension attributable to the children would be exempt. In the case of the supporting mother's benefit, therefore, the exempt portion of the benefit would be the amount determined by the Commissioner to have been attributable to the child or children, and not the whole of the benefit.

The usual rights of objection and appeal to independent tribunals will be available in respect of any determination by the Commissioner under these discretionary powers.

"Excepted pension" defines those pensions, allowances and benefits which, where they are paid to a "prescribed person", and subject to the definition of "excepted payment", may be assessable income.

Paragraphs (a), (b), (c) and (d) of the definition identify the statutory provisions authorising the payment of the pensions, allowances or benefits that are to be "excepted pensions". The following list describes these pensions:

Social Services Act 1947-1973 (paragraph (a) of the definition)

•

pensions and allowances in force under the Invalid and Old-age Pensions Act 1908-1946 and the Widows' Pensions Act 1942-1946 and continued in force by the Social Services Act 1947-1973 (paragraphs (c) and (f) of section 4),

•

age and invalid pensions (Part III),

•

widows' pensions (Part IV),

•

supporting mothers' benefits (Part IVAAA),

•

age, invalid or widows' pensions paid to pensioners who have left Australia (Part IVAA),

•

special benefits under the unemployment and sickness benefits provisions of the Act (Part VII),

•

rehabilitation and training allowances (sub-section (1) of section 135D and sub-sections (6) and (7) of section 135T),

•

combined pensions paid to a widow or widower for three months following the death of his or her spouse (section 135U).

Tuberculosis Act 1948 (paragraph (b) of the definition)

•

Tuberculosis allowances under section 9.

Repatriation legislation (paragraphs (c) and (d) of the definition)

•

service pensions,

•

that part of a pension paid to a parent of a deceased ex-serviceman or ex-servicewoman that is alternative to a social services pension.

"Pension pay-day" is defined as a day on which an instalment of the pension concerned is payable.

"Prescribed person" defines the classes of persons to whom payments of an "excepted pension" may, subject to the definition of "excepted payment", be assessable income.

By paragraphs (a) and (b) of the definition, persons of age pension age - 65 years for men and 60 years for women - are prescribed persons. Paragraph (c) provides that a woman in receipt of a "wife's pension", or in respect of whom such a pension is payable (this would include, for example, payment of a pension or part thereof to an institution in respect of the person) is a prescribed person. Because of the way "wife's pension" is defined, this means, in effect, that a woman less than 60 years of age will be a prescribed person only if she is in receipt of a wife's pension as the wife of a man at least 65 years of age.

"Wife's pension" is defined to mean pensions, allowances or benefits paid to wives (including dependent females who, although not married to the man concerned, are treated as wives for the purposes of the legislation under which the pension is paid) of men who have attained the age of 65 years and who are themselves in receipt of (in practice) an "excepted pension" under the relevant legislation. A woman in receipt of a "wife's pension" will be a "prescribed person" even though she may be less than 60 years of age, and as a prescribed person, will be assessed on her wife's pension. However, while she is less than 60 years of age she will not be taxable on any pension other than her wife's pension.

Sub-section (2) of the proposed section 23AD refers to the situation where a woman aged less than 60 years of age is in receipt of a wife's pension as a wife (or dependent female treated as a wife for the purposes of the relevant pension legislation) of a man who has attained the age of 65 years, and that man dies, but the payment of pension continues. Paragraphs (a) and (b) of the sub-section provide that she will be deemed to have ceased to receive a wife's pension immediately before the day on which the man died, if that day was a pension pay day, or, in any other case, immediately before the last pension pay day before he died. In effect, pension paid to her on and after the date of the man's death, if that was a pension pay day, or on and after the last pension pay day before his death in other cases, will not be assessable income while she is less than 60 years of age.

Sub-section (3) will re-enact the exemption from income tax for pension payments that has been conferred in the past by paragraphs (k), (kaa), (kab) and (ka) of section 23 of the Principal Act. However, a payment that is, or is of a similar nature to, an excepted payment (see earlier notes) will not be exempt from tax under the new provision.

Sub-clause (2) of clause 5 provides for the new pension rules contained in section 23AD to apply in assessments based on income derived during the 1973-74 year of income and subsequent years.

Clause 6: Repeal of sections 23A and 23C.

This clause proposes the repeal of sections 23A and 23C of the Principal Act.

Section 23A exempts from tax 20 per cent of the net income derived from mining prescribed metals or minerals in Australia or Papua New Guinea. The prescribed metals and minerals for the purpose of section 23A are specified in Income Tax Regulation 4AA and are listed in the notes relating to clause 4.

Section 23C is to be repealed in consequence of the repeal of the exemption for income from gold mining provided by paragraph (o) of section 23 of the Principal Act (clause 4 of the Bill). Section 23C is supplementary to paragraph (o) of section 23. In broad terms, that paragraph exempts from tax income derived from the working of a mining property principally to obtain gold or gold and copper (refer to the notes relating to clause 4). Section 23C exempts from tax income from sales of newly-mined gold produced in Australia or Papua New Guinea which is purchased from the Reserve Bank by a company approved by the Treasurer for the purposes of section 23C and whose shares are owned by the producers of the gold.

The provisions of section 23C are designed to meet official gold marketing arrangements under which an approved company is authorised to purchase from the Reserve Bank for export or sale to industrial users in Australia, at market prices, the newly-mined gold delivered to the Bank by members of the company. Under sub-section 23C(2), distributions in the form of dividends paid by an approved company out of profits earned from local and export sales of gold are also exempt from tax.

The repeal of sections 23A and 23C effected by clause 6 will apply for the income year 1973-74 and subsequent years.

An explanation is given in the notes on clause 9 of the position regarding dividends paid out of exempt income.

Clause 7: Assessable income from property purchased and sold within 12 months.

Introductory Note

This clause proposes to insert a new section - section 26AAA - in the Principal Act to give effect to one of the proposals for a change in the income tax law announced in the Budget Speech on 21 August 1973.

The proposed new section 26AAA provides for the inclusion in a taxpayer's assessable income of profits arising from the sale within 12 months of purchase of property purchased after 21 August 1973. The proposed new section is intended to supplement, and not replace, existing provisions of the law under which amounts may, in certain circumstances, be included in assessable income or allowed as deductions following the disposal of assets or other property.

The proposed new section will not apply where a taxpayer sells his home as a consequence of changing his place of employment or business. Nor will it have effect where a taxpayer sells property that has devolved upon him under a will or intestacy or that he has acquired as a prize in a lottery or competition. Persons and organisations whose income is exempt from income tax under express provisions of the law will not be affected by the proposed provision.

Section 26AAA

Sub-section (1) of section 26AAA is an interpretive provision designed to facilitate drafting. It explains the meaning of a number of terms used in the section and fixes the time when land is to be taken as having been purchased or sold for the purposes of the section.

Paragraph (a) of sub-section (1) provides that for the purposes of section 26AAA a reference to property or to a particular kind of property includes a reference to an estate or interest in property or in that kind of property. Accordingly, the purchase of an interest in property, followed by the resale of the interest within a year, will be within the scope of the section if the sale is made at a profit.

Paragraphs (b) and (c) are expressed so that expressions used in the section - agreement, option, arrangement, understanding - will be given their natural meaning and will not be read down on grounds of informality or unenforceability.

Paragraphs (d) and (e) of sub-section (1) provide that where the acquisition of shares is by way of a subscription of capital or where a company issues shares to a person as consideration or part consideration for the sale of property to the company, the shares are to be treated as having been purchased by the person to whom they are issued.

Paragraph (f) extends the meaning of the words "purchase" and "sale". It provides that property that is transferred in exchange for other property or by way of a gift, is to be treated as having been sold by the transferor and purchased by the transferee.

By virtue of paragraph (g) the date on which land is, for the purposes of the section, to be taken to be sold or purchased is the date on which the relevant contract for sale or purchase of the land is made.

Sub-section (2) is the operative provision and is to the effect that, where a taxpayer who has purchased property after 21 August 1973 sells the property or an interest in it within twelve months from the date of purchase, profit arising from the sale of the property is to be included in the assessable income of the taxpayer. The sub-section is subject to the other provisions of the section.

Sub-section (3) is designed to meet the case where a sale of property, or of an interest in property, has been made more than a year after the vendor had purchased the property, and the sale is made under an option granted, or an agreement entered into, within the twelve months following the date of purchase. In such a case, the sale is to be treated as having been made within the year following the purchase date. Accordingly, any profit arising would then be included in the taxpayer's assessable income of the relevant year or years of income by virtue of sub-section (2).

Sub-section (4) is also designed to safeguard the intended operation of the new section. It applies where parties to a transaction are not dealing at arm's length and property is transferred as a gift or is sold for less or for more than the amount which, in the opinion of the Commissioner of Taxation, is its true value. The sub-section provides that, for the purposes of the section, the donor or vendor is deemed to have sold the property for a consideration equal to its true value while the donee or purchaser is deemed to have purchased it for consideration equal to that value.

Where, in a case to which sub-section (4) applies, property is sold or transferred within twelve months of purchase the value is by reason of paragraph (c), to be determined as at the date of sale or transfer. Where the sale or transfer takes place outside the twelve months period under an option granted or an agreement entered into during that period the valuation is to be made at the time that the option was granted or the agreement was entered into.

Sub-section (5) excludes from the operation of the proposed new section the sale of certain property by a taxpayer in particular circumstances.

Paragraph (a) applies where the property was included in the assets of a business carried on by the taxpayer if, as a result of the sale, an amount is to be included in the assessable income of the taxpayer under another provision of the Principal Act. An example would be a sale of securities by a taxpayer in the course of carrying on a business of dealing in securities. Such a taxpayer would include the proceeds in his assessable income under the general provisions of the Principal Act, without recourse to the provisions of proposed section 26AAA. Under paragraph (b) the proposed section will not interfere with the operation of section 59 of the Principal Act on a sale of property subject to depreciation under section 54.

Paragraph (c) applies to a sale of property consisting of a dwelling, flat or home unit (or a share in a company that entitles the holder of the share to a right to occupy a flat or home unit) used by the taxpayer as his sole or principal residence. The new section will not apply where the sale of such property takes place as a result of a change in the taxpayer's place of employment or place of business.

Sub-section (6) has effect only where, by reason of a change in his place of employment or business, a taxpayer has sold property of which part only has been used as his sole or principal place of residence, for example, where the property consisted of a block of flats in one of which the taxpayer had been living. The sub-section provides that only so much of the profit as may appropriately relate to the part of the property used by the taxpayer as his sole or principal residence is to be excluded from the operation of the proposed new section.

Sub-section (7) applies where a taxpayer, within twelve months after he had purchased shares in a company, is the recipient of bonus shares issued by the company in satisfaction of a dividend on those shares. In such a case, the sub-section will treat the bonus shares as having been acquired on the same date as the shares in respect of which they were issued and as part of the same transaction by which the original shares were acquired. The effect will be to average the original purchase price over the whole of the shares in calculating the profit on sale of any of the purchased shares or the bonus shares within a year of the original purchase.

Clause 8: Value of trading stock of winemaker.

Under section 31A of the Principal Act, a winemaker is offered a concessional basis on which to bring to account for income tax purposes stocks of wine, brandy or grape spirit on hand at the end of the year of income. Any value may be chosen, provided it is not less than minimum values prescribed by Regulation 4B viz. -

The values selected, together with any relevant amounts paid by way of excise duty, represent the value at which closing stocks are brought to account for income tax purposes. The minimum values were introduced in 1953 and have remained unaltered since that date.

It is proposed by clause 8 to repeal section 31A so that winemakers will in future be required to value their trading stock on one of the three bases available to taxpayers generally, i.e., at the option of the taxpayer, its cost price or market selling value or the price at which it can be replaced. The clause also provides transitional measures to spread the effects of the change in the basis of valuation over a period of five years.

Sub-clause (1) provides for the repeal of section 31A.

Sub-clause (2) is the transitional measure which sets out the adjustments to be made over five years in changing from the concessional basis to the general basis of valuation of trading stock.

The first step is to ascertain the total adjustment to be made over the five year period. This is done by valuing the wine, brandy and grape spirits stocks at the end of the 1973-74 income year on the basis that would have been used but for the repeal of section 31A, and also according to whether the taxpayer chooses to use cost, market or replacement values. The amount by which the value arrived at under section 31A falls short of the value arrived at on the general basis represents the total adjustment to be made to effect the transition.

This total adjustment (referred to in sub-clause (2) as the "excess") is to be brought to account over a period of five years. The stock at the end of the 1973-74 income year, ascertained by reference to the general basis of calculation under section 31, is to be reduced by four-fifths of the adjustment described above (i.e., the "excess"). The resultant figure will be the value of closing stock for the 1973-74 income year and, accordingly, the value of opening stock for the following income year.

In each of the following four years of income the closing stock will be valued in accordance with section 31 as reduced by the relevant fraction of the adjustment to be made. For example, the closing stock of the 1974-75 income year will be valued in accordance with section 31 as reduced by three-fifths of the "excess", or by the value of that stock, whichever is the less.

Sub-clause (3) formally provides that the adjusted value of closing stock ascertained in accordance with sub-clause (2) is to be the figure for opening stock of the following income year. This is in line with section 29 of the Principal Act.

Sub-clause (4) provides a definition of "prescribed trading stock" to facilitate the drafting of the amendments. The term is defined as trading stock owned by the taxpayer to which section 31A of the Principal Act would have applied if that section had not been repealed.

Sub-clause (5) provides that the repeal of section 31A will apply in assessments based on income derived during the 1973-74 year of income and subsequent years.

Clause 9: Dividends.

Section 44 of the Principal Act contains provisions relating to the taxation of dividends. By paragraph (a) of sub-clause (1) it is proposed to omit sub-sections (2), (2A), (2B) and (2C) of section 44 and to substitute a new sub-section (2).

The present paragraphs of sub-section (2) of section 44 specify that the following classes of dividends are exempt from income tax:-

•

Paragraph (a) - dividends paid wholly and exclusively out of net income derived by a company that is tax-free by reason of paragraphs (o) or (p) of section 23 of the Principal Act, or by reason of section 23D of that Act. By "net income" is meant the income that is exempt by reason of those provisions as reduced by expenses applicable to the income.

The operation of paragraphs (o) and (p) of section 23 have been discussed in the notes on clause 4 of the Bill which proposes the repeal of those paragraphs. Briefly, section 23(o) exempts from tax income derived from gold mining in Australia or Papua New Guinea while section 23(p) exempts income derived from the sale or transfer of rights to mine for gold or for prescribed metals or minerals in Australia or Papua New Guinea. Section 23D, operative only as to income derived up to 30 June 1968, exempted income derived from uranium mining and treatment in Australia or Papua New Guinea.

•

Paragraph (b) - dividends paid wholly and exclusively out of income that is exempt by reason of section 23A of the Principal Act. Section 23A, as mentioned in the notes on clause 6 of the Bill which proposes to repeal the section, exempts from tax one-fifth of net income derived from the carrying on, in Australia or Papua New Guinea, of mining operations for prescribed metals or minerals.

•

Paragraph (c) - dividends, paid by a company that is itself a recipient of dividends exempt by reason of paragraph (a) or (b), where they are paid by the company wholly and exclusively out of the net amount of exempt dividends that the company had received.

•

Paragraph (ca) - dividends paid out of profits arising from the sale or re-valuation of assets not acquired for the purpose of resale at a profit, or paid out of premiums associated with certain convertible note issues. This exemption is restricted to dividends satisfied by the issue of shares.

•

Paragraph (d) - dividends up to a certain amount paid wholly and exclusively out of income derived from the sale of petroleum obtained from mining operations in Australia or Papua New Guinea by the company paying the dividends or from the sale of products of that petroleum. Broadly stated, the amount of the dividends that may qualify for exemption is limited to the amount of the deductions allowed under provisions contained in Division 10AA of the Principal Act for capital expenditure incurred by the company paying the dividends in prospecting or mining for petroleum in Australia or Papua New Guinea.

The new section (2) of section 44 will discontinue the mining dividend exemptions but, with one exception, will preserve the exemption provided under the existing paragraph (ca) of the section for distributions out of capital profits. The exception proposed will exclude from the exemption dividends satisfied by profits that are included in the assessable income of a company by reason of the new section 26AAA of the Principal Act proposed to be inserted by clause 7 of the Bill. An explanation of the proposed section 26AAA is contained in the notes on clause 7. Briefly, the section applies (with certain exceptions) to treat as assessable income profit arising from the sale of property where the sale takes place within the period of twelve months from purchase of the property. Section 26AAA is intended to have effect only in relation to sales of property purchased after 21 August 1973.

The proposed repeal of sub-sections (2A), (2B) and (2C) of section 44 is a consequence of the proposed withdrawal of the exemption of mining dividends coming within the classes contained in paragraphs (a), (b) and (c) of section 44(2). The function of the sub-sections (2A) and (2B) has been to enable the exemption of these dividends to be carried through a succession of companies interposed between the operating company and the ultimate shareholders. Sub-section (2C) has applied to reduce the amount that can be paid as exempt dividends out of exempt income from the sale of mining rights in a case where the dividend-paying company has conferred deductions on its shareholders under section 77D or section 77AA in respect of capital spent on the mining area for which the rights were sold.

By sub-clause (1)(b) it is intended to effect a minor drafting amendment to sub-section (2D) of section 44 consequential on the amendments to be effected to sub-section (2) of that section by paragraph (a) of the sub-clause.

Sub-clause (1)(c) is complementary to sub-clause (1)(a). It proposes the omission of sub-sections (3) and (6) of section 44, which are related to the mining exemptions to be discontinued.

The amendments proposed by clause 9 will generally apply in relation to dividends paid on or after 22 August 1973, the day following the Budget announcement that the exemptions were to be withdrawn. However, the amendments will not apply to a dividend paid on or after 22 August 1973 if -

•

the dividend was declared before that date (sub-clause (2)), or

•

in the case of a company whose shares were listed for quotation on a stock exchange, the dividend was paid after that date in accordance with a directors' recommendation made before that date for payment of the dividend (sub-clause (3)).

Clause 10: Rebate on dividends.

This clause will amend section 46 of the Principal Act, under which companies resident in Australia are entitled to a rebate of tax calculated by applying their average rate of tax to dividends included in their taxable income. The amendments to be effected by this clause are related to clauses 26 and 31 of the Bill.

Clause 26 will insert in the Principal Act a new section 116AA, providing for a reduction in the amount of dividends in respect of which a life assurance company will be entitled to a rebate under section 46. Clause 10 will formally provide that section 46 is to have effect subject to section 116AA.

Clause 31 will operate to impose a liability for withholding tax on dividends paid from Australia to residents of Papua New Guinea. At present, a company resident in Papua New Guinea is entitled to the section 46 rebate (being treated by section 7(2) of the Principal Act as a resident of Australia in relation to Australian source dividends), thus freeing from Australian company tax the dividends it receives from Australia.

Under withholding tax principles dividends on which withholding tax is imposed are not included in the recipient's assessable income and, as a result of the application of withholding tax on some dividends going to Papua New Guinea a Papua New Guinea company will not be entitled to a section 46 rebate on such dividends. Withholding tax is not, however, imposed on all dividends - it does not apply to dividends paid by an Australian resident company to a non-resident that has a permanent establishment in Australia. Nor does it apply to dividends paid by a non-resident company out of Australian profits. These dividends will remain subject to tax by assessment and, if the law were not changed, would attract the section 46 rebate in the hands of Papua New Guinea companies. Since other non-resident companies are not in any circumstances entitled to the rebate and, if it were to continue to be allowed to Papua New Guinea companies in any circumstances, residents of Papua New Guinea could make arrangements that would result in avoidance of Australian tax on Australian dividends, it is proposed by clause 10 to withdraw the rebate from such companies.

Sub-clause (1) of clause 10 will amend sub-section (9) of section 46 of the Principal Act to incorporate a reference to new section 116AA, to be introduced into the Principal Act by clause 26 of this Bill. Section 46 will accordingly have effect subject to section 116AA, so that the amount of rebate to which a life assurance company is entitled in respect of dividends included in its assessable income will be reduced in accordance with the provisions of section 116AA.

Sub-clause (2) of clause 10 will insert a new sub-section (10) in section 46, by virtue of which a Papua New Guinea company will no longer be treated as a resident of Australia, for purposes of section 46, in relation to dividends derived from Australia. As a result, Papua New Guinea companies will no longer be entitled to the section 46 rebate. Sub-section (10) will apply in respect of dividends derived by a Papua New Guinea company after the date of introduction of this Bill, that is, the date from which withholding tax will be imposed on dividends paid to residents of Papua New Guinea.

By sub-clause (3), the amendment to sub-section (9) of section 46 to be effected by sub-clause (1) will apply to assessments of life assurance companies in respect of income of the 1973-74 and subsequent income years.

Clause 11: Rebate on dividends paid as part of a dividend stripping operation.

This clause will amend section 46A of the Principal Act, which governs the allowance of a rebate (similar to the rebate provided by section 46) in respect of dividends that arise from a dividend stripping operation. The clause will insert a new sub-section (17) in section 46A - corresponding with, and serving the same purpose in relation to section 46A, as new section 46(10), to be inserted by clause 10(2) of this Bill. (See notes on clause 10.)

Clause 12: Special depreciation allowance to primary producers.

Section 57AA of the Principal Act provides a special accelerated rate of depreciation of 20 per cent a year for primary production plant and structural improvements. Clause 12 proposes the insertion of three new sub-sections - sub-sections (9), (10) and (11) - in section 57AA that will have the effect of limiting the application of the accelerated rate to expenditure incurred on or before 21 August 1973, or incurred after that date under a contract made on or before that date for the supply of materials or labour. Expenditure removed from the scope of section 57AA will become subject to ordinary rates of depreciation as determined under the general depreciation provisions of the law.

Paragraph (a) of the proposed sub-section (9) provides that section 57AA is not to apply in relation to a unit of property the cost of which consists wholly of "excepted expenditure". "Excepted expenditure" is defined by new sub-section (11) to mean expenditure incurred after 21 August 1973 otherwise than under a pre-existing contract.

Paragraph (b) of sub-section (9) provides that section 57AA is not to apply where a change in ownership of a unit of property occurs after 21 August 1973. This means that where a unit changes hands after that date in an ordinary sale transaction or because of the formation or dissolution of a partnership the section 57AA rate of depreciation will not be available after the change.

The proposed new sub-section (10) provides for the case where a part of the cost of a unit of property consists of "excepted expenditure", i.e., expenditure to which section 57AA is not to apply. In these circumstances, so much of the cost of a unit of property as consists of excepted expenditure will not be subject to the special rate of depreciation. Instead it will be subject to the normal depreciation provisions. It will thus be possible, in somewhat unusual cases, for part of the cost of a unit of property to be subject to section 57AA depreciation and another part to depreciation at normal rates. This could happen when some capital expenditure on the unit was incurred before 21 August 1973 and some after that date under a new contract made after that date.

The new sub-section (11) defines "excepted expenditure" as expenditure incurred after 21 August 1973 other than expenditure incurred after that date in pursuance of a contract made on or before that date for the acquisition of goods, or the performance of work for, the taxpayer. To the extent that expenditure falls within this definition it will not be subject to depreciation under section 57AA. Instead, the general rates of depreciation used for income tax purposes will be applied.

Clause 13: Depreciation on property used for primary production in the Northern Territory.

Section 57AB of the Principal Act provides for a special basis of depreciation in respect of certain primary production plant and structural improvements used in the Northern Territory. Broadly, depreciation is allowed under the section at the accelerated rate of 20 per cent of cost a year. A taxpayer may elect to claim an outright deduction for the whole cost of a structural improvement on Northern Territory primary production land as an alternative to accelerated depreciation deductions.

Clause 13 proposes the insertion of three new sub-sections - sub-sections (8), (9) and (10) - in section 57AB to render the section inapplicable as regards expenditure incurred after 21 August 1973. However, expenditure incurred after that date in pursuance of a pre-existing contract for the supply of goods, or the performance of work, for the taxpayer will continue to be subject to section 57AB.

The proposed new sub-sections are in the same terms, and will have the same effect in relation to section 57AB, as the new sub-sections that are proposed by clause 12 to be inserted in section 57AA (see notes on that clause).

Clause 14: Special deduction for investment in manufacturing plant.

By this clause it is proposed to insert two new sub-sections - sub-sections (14) and (15) - in section 62AA of the Principal Act. Section 62AA provides for the deduction of 20 per cent of capital expenditure (including costs of installation) on new plant which is manufacturing plant within the meaning of the section. It is a prerequisite of the allowance that the plant be owned by the manufacturer and used by him in Australia for the production of assessable income or installed ready for use for that purpose.

Sub-section (14) will provide that a deduction under section 62AA will not be allowable in respect of capital expenditure incurred after 21 August 1973 unless the expenditure was incurred under a contract made on or before that date for the acquisition by a taxpayer of new manufacturing plant or for the performance of work in relation to such plant.

Sub-section (15) will provide that a deduction under section 62AA will not in any event be allowable in respect of any expenditure incurred after 30 June 1975. Irrespective of the date on which a contract for the expenditure was entered into, expenditure incurred after 30 June 1975 will be outside the scope of the allowance.

The proposed amendments to section 62AA will not affect entitlements to deductions in respect of any expenditure incurred on or before 21 August 1973. They will not, for example, operate to deny a deduction in respect of expenditure incurred on or before 21 August 1973 in acquiring plant that has not been received by that date if it is plant to which section 62AA applies. Such expenditure will continue to qualify for the allowance at the time the plant is first used or installed ready for use.

Nor will the amendments affect entitlements to a deduction in respect of expenditure incurred between 21 August 1973 and 30 June 1975 in acquiring or installing plant pursuant to a contract for its acquisition or installation entered into on or before 21 August 1973.

The investment allowance deduction is allowable in the year of income in which plant is first used or installed ready for use. Accordingly the amendments will not affect a taxpayer's entitlement to a deduction if, after 30 June 1975, he first uses or installs ready for use plant in respect of which expenditure has been made at any time up to 30 June 1975 in pursuance of a contract entered into on or before 21 August 1973.

Clause 15: Special deduction for investment in plant used in primary production.

By this clause it is proposed to insert a new sub-section - sub-section (10) - in section 62AB of the Principal Act. The new sub-section will apply in relation to primary production plant in the same manner as proposed sub-section (14) of section 62AA is to apply in relation to manufacturing plant (see above). In the absence, however, of a provision comparable with proposed sub-section (15) of section 62AA there will be no time limit within which expenditure under contracts entered into on or before 21 August 1973 must be incurred to remain eligible for the allowance.

Clause 16: Rates and taxes.

Section 72 of the Principal Act provides for a deduction in respect of sums which a taxpayer pays under a personal liability for rates which are annually assessed and for land tax. The deduction is available for rates and land tax paid in respect of both business and private premises and also in respect of vacant land.

Clause 16 proposes an amendment to section 72 affecting the deduction available under the section in respect of private rates and land tax. The amendment provides that the only deduction in respect of private rates and land tax is to be for those paid in respect of a taxpayer's sole or principal residence. Additionally, the deduction is to be limited overall to $300 per annum. Private rates paid in respect of holiday homes or vacant land will no longer be deductible.

Sub-clause (1) of clause 16 proposes the insertion of five new sub-sections - sub-sections (1B), (1C), (1D), (1E) and (1F) - in section 72 of the Principal Act.

Sub-section (1B) provides that a deduction is not allowable under section 72 for rates and land tax paid unless the amount is paid either in respect of income producing land or premises or in respect of a taxpayer's sole or principal residence.

Sub-section (1C) applies where rates are paid in respect of land or premises that are used only partly during the year of income for the purpose of gaining or producing income. In these circumstances, the sub-section provides that so much of the amount paid as in the opinion of the Commissioner is reasonable shall be an allowable deduction.

Sub-section (1D) provides for an annual statutory limit of $300 for rates paid in respect of the taxpayer's sole or principal residence. The limit of $300 applies irrespective of the period that a house or flat has been a taxpayer's sole or principal residence and irrespective of whether the taxpayer occupied more than one dwelling in a year of income as his sole or principal residence. The $300 limit has no application to rates paid in respect of income producing land or premises.

Sub-section (1E) provides for the case where two or more taxpayers pay rates for a house, flat or home unit used concurrently by them during a year of income as their sole or principal residence. In these circumstances the deduction available to each taxpayer is so much of the amounts paid, but not exceeding $300 in the aggregate, as the Commissioner determines. For example, if a husband and wife each paid $250 for annual rates for which each is personally liable, they would each be entitled to claim a deduction of $150.

Sub-section (1F) is a drafting measure which provides that for the purposes of sub-sections (1B) and (1E), rates paid in respect of land on which a dwelling is situated shall be deemed to be paid in respect of the dwelling.

Sub-clause (2) of clause 16 provides that the amendments made to section 72 will apply in assessments based on income derived during the 1973-74 year of income and subsequent years.

Clause 17: Certain expenditure on land used for primary production.

Section 75 of the Principal Act authorises a full deduction in the income year in which expenditure is incurred for certain capital expenditures made by primary producers.

Clause 17 proposes the insertion in section 75 of a new sub-section - sub-section (3). The new sub-section provides that a deduction is not to be available under section 75 for expenditure incurred after 21 August 1973 unless incurred in pursuance of a pre-existing contract made with a supplier of goods or services. As explained in the notes on clause 18, expenditure which no longer falls within section 75 by reason of this amendment will be deductible in the future either by way of ordinary depreciation under the general depreciation provisions of the law or over 10 years in accordance with the proposed new section 75A.

Clause 18: Deduction of certain expenditure on land used for primary production.

This clause proposes the insertion into the Principal Act of a new section - section 75A. The proposed new section is designed to give to primary producers a special deduction, by way of equal annual instalments over 10 years, in respect of certain expenditures of a capital nature that have in the past been deductible under section 75 of the Principal Act, which is being terminated by clause 17. The proposed new section will not apply to expenditures in respect of which deductions are allowable under other provisions of the Principal Act. Specifically, it will not apply to expenditure for which a deduction is allowable by way of depreciation (e.g. in the erection of a hay shed) even though that expenditure may have qualified in the past under section 75 of the Principal Act. Nor will it apply to recurring business expenditures which, not being in the nature of capital outgoings, will continue to qualify under the general deduction provisions of the law for outright deductions against income of the year in which they are incurred.

Sub-section (1) of the proposed new section 75A specifies in paragraphs (a) to (h) the types of expenditures which will be eligible for deduction under the section provided they are incurred by a taxpayer who carries on a business of primary production.

Very broadly, the expenditures are those designed to improve land for use in primary production but which are not made in erecting structures, such as sheds, tanks and stands and other buildings that will be subject to depreciation under the general provisions of the income tax law. Examples of some of the expenditures within the scope of the new section 75A would be initial clearing of land, eradication of weeds on land not formerly used for grazing, the digging of earth tanks, measures to combat soil erosion or flooding and the draining of swamp land. Important exclusions from deductions under the section are the costs of fences and of buildings for on-farm storage of grain, hay or fodder. Although formerly allowable as deductions under section 75, future expenditures on these items will, if not made under contracts entered into before 22 August 1973, be allowable by way of general depreciation deductions spread over the life of the particular structure.

Sub-section (2) provides that the new concession will not apply to expenditure incurred by a taxpayer where a deduction in respect of that expenditure has been allowed, or is allowable under any other provision of the Principal Act. For example, the costs of seasonal ploughing, or of periodical desilting of earth tanks, which are deductible under section 51 of the Principal Act, will not be allowable under paragraphs (e) and (h) of sub-section (1).

Sub-section (2) also provides that the section does not apply to expenditure for which the taxpayer has been, or is entitled to be, recouped from a governmental or other source unless the amount recouped forms part of the taxpayer's assessable income. A similar provision is contained in section 75 of the Principal Act and ensures that the amount deductible is limited to the net costs actually borne by the taxpayer.

Sub-section (3) is the operative provision of the proposed new section. It provides for a deduction of an amount equal to one-tenth of the expenditure in the assessment in respect of the income year in which the expenditure is incurred and in respect of each of the nine succeeding years of income. The deduction is subject to sub-section (4).

Sub-section (4) provides that the deduction otherwise available to a taxpayer under the section is not allowable in respect of any year of income unless, in that year of income, the taxpayer either carries on a business of primary production on the land on which the expenditure was incurred, or derives assessable income from the lease of that land to a person who carries on primary production on that land.

Sub-section (5) provides a special provision to cover the case where a partnership incurs expenditure that qualifies under the new section 75A. In these circumstances, the expenditure is not taken into account in the calculation of the net income of a partnership or a partnership loss, but each partner is deemed to have incurred in his own right so much of the expenditure as is agreed to by the partners. Where the partners have not agreed as to the apportionment of the expenditure between the partners, the expenditure is deemed to have been incurred by each partner in proportion to his individual interest in the net income of the partnership of the year of income in which the relevant expenditure was incurred. Each partner's proportion of the expenditure is deductible in the partner's own assessment subject to the other provisions of section 75A.

Sub-clause (2) of clause 18 provides that the proposed new section 75A will apply in assessments based on income derived during the 1973-74 year of income and subsequent years.

Clause 19: Expenditure on fences.

Section 76 of the Principal Act provides for a full deduction in the year of incurrence for expenditure incurred by a primary producer on the construction or alteration of a fence to prevent the entry of animal pests or to overcome the presence of salt deposits.

Clause 19 proposes the insertion of a new sub-section - sub-section (3) - in section 76 which will have the effect of terminating the operation of the section in respect of expenditure incurred after 21 August 1973 except where that expenditure is incurred in pursuance of a contract made on or before that date for the supply of goods to, or the performance of work for, the taxpayer. In future, expenditure removed from the scope of section 76 will be deductible under the normal depreciation provisions of the Principal Act.

Clause 20: Gifts.

Section 78(1)(a) of the Principal Act lists a number of classes of funds, organisations and institutions, gifts to which are allowable deductions in accordance with the section.

To qualify for deduction under section 78 a gift is required to be of a value of $2 or more and to be in the form of money or of property purchased by the taxpayer within the 12 months preceding the making of the gift.

Clause 20 proposes an amendment to section 78(1)(a) to withdraw the deduction for gifts made to public funds established for providing money for the construction or maintenance of public war memorials, except where the gift is made before 1 July 1974 to a war memorial fund established by 21 August 1973. Paragraph (a) of the clause proposes the omission of the existing sub-paragraph (vii) of section 78(1)(a) and the substitution of a new sub-paragraph (vii). The new sub-paragraph (vii) restricts the deduction to war memorial funds established on or before 21 August 1973. A further restriction on gifts to these funds is imposed by paragraph (d) which provides that a gift to a war memorial fund is not allowable as a deduction under section 78 unless the gift is made before 1 July 1974.

Paragraphs (b) and (c) of clause 20 propose formal amendments to sub-section (5) of section 78 of the Principal Act. Sub-section (5) at present provides for the Prime Minister or his delegate to certify that gifts to prescribed institutions of advanced education are for purposes which relate exclusively to tertiary education.

Paragraphs (b) and (c) propose that the certification should in future be made by the Minister for Education. The amendment will be in accord with established practice as the certification has always been made, under a delegation from the Prime Minister, by the Minister responsible for the administration of the Australian Government's activities in the field of education.

Clause 21: Losses of previous years.

This clause proposes a minor drafting adjustment to sub-section (3A) of section 80 of the Principal Act which relates to the income tax deduction for losses of previous years. The adjustment will delete a reference to paragraph (ca) of the present section 44(2) and is consequential on the amendments in clause 9 of the Bill. The change in sub-section (3A) will not alter the practical effect of the sub-section.

Clause 22: Private companies.

This clause proposes an amendment of section 103A of the Principal Act. The section forms part of Division 7 of Part III of the Act which is largely concerned with the classification of companies for income tax purposes. A company that is classified as a private company is required to distribute a specified part of its after-tax profits or to pay additional tax on undistributed income. Section 103A provides that, for the purposes of Division 7, a company is a private company if it is not a public company and goes on to provide criteria by reference to which it is to be determined whether a company is a public company. A company that would not be classified as a public company by reference to those criteria is nevertheless deemed to be a public company if the Commissioner is of the opinion, having regard to relevant matters, that it would be reasonable for the company to be treated as such. The Commissioner is given this discretionary power by sub-section (5) of section 103A.

In the recent case of Stocks and Holdings (Constructors) Pty Ltd v. Commissioner of Taxation, the High Court ruled, in effect, that sub-section (5) may not be invoked to treat a company as being a public company unless it would thereby be relieved of a liability for additional tax on undistributed income that it would otherwise incur as a private company. If the law in this regard were allowed to stand, there would be lengthy and unacceptable delays in the determination of primary tax liabilities of some companies for the reason that a private company is allowed up to ten months after the end of a year of income to pay sufficient dividends to escape any liability for undistributed income tax and may have this period of time extended in appropriate circumstances.

Moreover, the restriction on the operation of the Commissioner's discretionary power would have other inappropriate effects because the status taken by a company for Division 7 purposes determines the extent of its liabilities under other parts of the income tax law where distinctions are drawn between public and private companies. The status of one company may affect the status, and thus the extent of the taxation liabilities, of others. Where a company that would be a public company on a realistic view failed in some insignificant way to qualify as such under the criteria laid down in section 103A, an inappropriate test of how much it had paid out in dividends would virtually settle the question whether that company, and sometimes its associated companies, would enjoy the advantages, or suffer the disadvantages, of being taxed as a public company.

To avoid these consequences, which could flow from the Court's decision, clause 22 proposes, by sub-clause (1), that a new sub-section (5A) be incorporated in section 103A of the Principal Act and, by sub-clause (2), that the new sub-section is to have effect in relation to the 1972-73 and subsequent income years.

Sub-section (5A) of section 103A will authorise the Commissioner of Taxation, in pursuance of the existing discretionary power in sub-section (5), to form an opinion that it is reasonable to treat a company as a public company for the purposes of sub-section (1) of the section (and thus for the purposes of Division 7 and other parts of the income tax law) notwithstanding that, as a consequence, the company would pay extra income tax and notwithstanding that, if he did not form such an opinion, the company would not be liable to pay undistributed income tax.

The new sub-section, which is designed to restore to sub-section (5) the effect that it was originally intended to have, will require the Commissioner, in forming an opinion whether a company ought to be treated as public, to consider only the characteristics of the company and the relative significance of factors that prevented it from meeting the technical requirements for classification as public.

A determination of status under the amended sub-section (5) will, of course, be subject to the usual rights of objection and reference to independent tribunals.

Clause 23: Prescribed dividends.

It is proposed by Income Tax Assessment Bill (No. 4) 1973 to insert provisions, including a new section 103AA, in Division 7 of Part III of the Principal Act. The new provisions are designed to prevent the avoidance of undistributed income tax on private company profits, without making distributions that would be taxable in shareholders' hands, by paying dividends to "repository" companies in Papua New Guinea. They will have the effect that dividends paid to a Papua New Guinea private company by an Australian private company, or by a non-resident private company out of Australian-source profits, will not be regarded as "distributed profits" for the purposes of determining whether the company paying the dividends is liable to pay tax on undistributed income in accordance with Division 7. The provisions will not apply where, and to the extent that, the Commissioner of Taxation is satisfied, on the basis of a number of specified conditions, that the dividend was not paid for tax avoidance purposes. It is now evident that "repository" companies in other countries, and especially in tax havens, could be used for the purpose of avoiding Australian tax in the same way as companies set up in Papua New Guinea. Clause 23 of this Bill will, therefore, extend the provisions of proposed section 103AA to dividends paid to any non-resident private company.

Paragraph (a) and (b) of clause 23 will extend the operation of sub-sections (1) and (2) of proposed section 103AA to dividends derived, on or after the day following the introduction of this Bill, by all non-resident private companies. Sub-sections (1) and (2) of section 103AA describe the dividends that are "prescribed dividends" for the purposes of the section, and so may not be deductible in calculating liability to undistributed profits tax.

Paragraph (a) will amend sub-section (1) of proposed section 103AA, by which a dividend derived on or after 20 July 1972 by a Papua New Guinea private company from an Australian resident private company will be a prescribed dividend if, and to the extent that, the commissioner considers it does not meet criteria set out in sub-section (4) of that section. The amendment proposed by paragraph (a) of clause 23 will mean that sub-section (1) of section 103AA will apply to dividends paid by an Australian resident private company, after the date of introduction of the Bill, to any non-resident private company (including a Papua New Guinea resident company).

Paragraph (b) of clause 23 will similarly amend sub-section (2) of proposed section 103AA to extend the operation of the sub-section to dividends derived by any non-resident private company. Sub-section (2) as proposed in the Income Tax Assessment Bill (No. 4) 1973 will apply to dividends derived by a Papua New Guinea private company on or after 20 July 1972 where the dividends are paid out of Australian source profits by a private company that is not a resident of Australia.

Paragraph (c) of clause 23 is a drafting amendment consequential upon the proposed introduction by paragraph (d) of a new paragraph - paragraph (da) - into sub-section (4) of proposed section 103AA.

Paragraph (da) will add to the paragraphs of sub-section (4) an additional criterion on the basis of which a part of a prescribed dividend may be regarded as not being a prescribed dividend for the purposes of section 103AA. In broad terms it provides that where the Commissioner is satisfied that any part of a dividend not otherwise excluded from treatment as a prescribed dividend has been or will be applied in payment of tax (incl. foreign tax) payable in respect of the dividend - and so cannot form part of a tax-free accumulation - the part so applied will be excluded from treatment as a prescribed dividend.

Paragraph (e) of clause 23 will add a new sub-section - sub-section (9) - to proposed section 103AA. By this sub-section it is provided that, in relation to paragraph (a) of sub-section (1) and paragraph (a) of sub-section (2) of section 103AA, the expression "resident of Australia" will have the meaning it would have if sub-section (2) of section 7 of the Principal Act had not been enacted. That sub-section deems a resident of Papua New Guinea to be a resident of Australia for the purposes of assessment and payment of income tax on income derived from sources in Australia. It is necessary for the proper functioning of proposed section 103AA that "resident of Australia" have its ordinary meaning, unaffected by section 7(2).

Clause 24: Retention allowance.

By this clause it is proposed to repeal the existing private company retention allowance provisions - section 105B - and replace them with new provisions.

A private company that does not make a sufficient distribution of its distributable income is liable to pay tax at the rate of 50 per cent on the amount of the insufficient distribution. For practical purposes, the distributable income of a private company is the balance of its taxable income after deducting the primary company tax payable. The reduced distributable income is the distributable income less any income from property included in it.

The present retention allowance in respect of income other than property income is made up of -

50 per cent of the first $10,000 of reduced distributable income

45 per cent of the next $10,000 of reduced distributable income

40 per cent of the balance of reduced distributable income

Under the new section 105B to be inserted by sub-clause (1) of clause 24, the graduated rates of retention allowance of reduced distributable income will be replaced by a flat rate of 50 per cent.

There is no retention allowance in respect of dividends from other private companies, but an allowance of 10 per cent is provided for distributable income from other property sources, such as rent, interest and public company dividends. This position is not being changed by the Bill.

By sub-clause (2), the revised retention allowance will apply in determining whether a private company has made a sufficient distribution of its income of the 1972-73 income year and subsequent income years.

Clause 25: Deductions in relation to calculated liabilities.

Introductory Note

Under section 115 of the Principal Act, a life assurance company that maintains the "30/20" ratio of public securities in its life assurance assets is allowed a deduction calculated basically by reference to the following formula -

3% of (value of assets producing assessable income)/(value of total assets) of (calculated liabilities)


The amount of the basic deduction is increased by 1 per cent for each 1 per cent by which the company's holdings of all public securities exceed 30 per cent, and by one-half per cent for each 1 per cent by which the company's holdings of Commonwealth securities exceed 20 per cent. Thus, if the company's holdings of public securities represent 37.5 per cent of its Australian statutory fund assets and its holdings of Commonwealth securities 25 per cent, the basic deduction is increased by 10 per cent (7.5 per cent + one-half of 5 per cent). Instead of a deduction of 3 per cent the company has in the past been entitled to one of 3.3 per cent.

If a company fails to maintain the "30/20" ratio, the basic section 115 deduction is reduced by 1 per cent for each 1 per cent by which the holdings of public securities are less than 30 per cent, and by one-half per cent for each 1 per cent by which the holdings of Commonwealth securities are less than 20 per cent. The deduction cannot, however, be reduced below 75 per cent of the basic 3 per cent deduction. In other words, the section 115 deduction allowable cannot be less than 2.25 per cent of the proportion of calculated liabilities.

By sub-clause (1) of clause 25 it is proposed to reduce the deductions allowable under section 115.

Paragraph (a) of sub-clause (1) substitutes the figure "2" for the figure "3" where it appears in the numerator of formulae contained in section 115(1). This amendment will reduce by one-third the section 115 deduction - whether it is the basic deduction or the basic deduction increased or reduced by reference to the extent to which the holdings of public securities exceed or fall short of what is needed to maintain the "30/20" ratio. Thus a company that under existing law is entitled to a 3 per cent deduction will be entitled to one of 2 per cent and a company that would be entitled to a 3.3 per cent deduction if the law were not changed will be allowed a 2.2 per cent deduction.

Turning to paragraph (b) of sub-clause (1) the formula

(9*a*b)/(400*c)


in section 115(1)(c) ensures that the section 115 deduction cannot, under present law, be less than 2.25 per cent, that is, 75 per cent of the basic deduction of 3 per cent. Since the basic deduction is being reduced to 2 per cent it is necessary to amend this formula so that the minimum deduction is reduced in proportion. Paragraph (b) of sub-clause (1) substitutes the formula

(3*a*b)/(200*c)


which will have the result that the section 115 deduction cannot be reduced below 1.5 per cent, that is, 75 per cent of the proposed basic deduction.

By sub-clause (2) the amendment made by sub-clause (1) is to apply in assessments for the 1973-74 year of income and subsequent years.

Clause 26: Reduction in amounts of dividends to be taken into account for purposes of section 46.

Introductory Note

A resident company is entitled to a rebate of tax on dividends, ascertained by applying its average rate of tax to the part of the dividends included in its taxable income. If the company is a private company, the rebate to which it is entitled in respect of dividends from other private companies included in its taxable income is limited, in effect, to one-half of the normal rebate but the Commissioner is empowered to allow the balance of the normal rebate where he is satisfied that specified tests have been or will be met.

In calculating the part of any dividends included in a company's taxable income for rebate purposes, section 46(7) and section 50 of the Principal Act provide that deductions from income that do not relate directly to dividends must be set off first against other income, and only to the extent of an insufficiency in the other income may they reduce the amount of dividends to be taken into account for rebate purposes. Following interpretations by the Courts some deductions allowed to life assurance companies, including particularly those allowed under sections 113 and 115 of the Principal Act, cannot be set against dividends so as to reduce the amount on which the section 46 rebate is allowable.

A deduction is allowed under section 113 for expenditure incurred in the general management of the business of a life assurance company. However, it is expressly provided that, for the purposes of section 113, such expenditure does not include expenditure exclusively incurred in gaining or producing assessable income or exclusively incurred in gaining or producing income that is not assessable income. That is, expenses of general management comprise expenses incurred partly in earning income that is subject to tax and partly in earning tax-free income. Broadly, the proportion of general management expenditure equal to the proportion that the company's assessable income bears to its total income is allowed as a deduction under section 113.

As mentioned in the notes on clause 25, the basic section 115 deduction is (following the amendments to be made by that clause) to be calculated by reference to the formula -

2% of (value of assets producing assessable income)/(value of total assets) of (calculated liabilities)


That is, the basic deduction is that proportion of 2 per cent of calculated liabilities equal to the proportion that assets producing assessable income bear to total assets.

Dividends technically qualify as assessable income for the purposes of the section 113 deduction, and shares qualify as assets producing assessable income for purposes of the section 115 deduction, even though, by reason of the rebate under section 46, dividends are in effect tax-free.

Broadly, the amendments now proposed are designed to set off a proportion of the deductions under section 113 and 115 against dividends in calculating the amount on which the dividend rebate under section 46 is to be allowed. In the case of the section 113 deduction the amount to be set against dividends will be the amount by which the deduction is increased through treating dividends as assessable income. This is consistent with the basis on which the deductible proportion of expenses of general management is calculated. In the case of the section 115 deduction, the amount to be set off against dividends for dividend rebate purposes will be the amount by which the deduction is increased by the inclusion in the value of assets producing assessable income of the value of shares the dividends on which are assessable income. This is consistent with the basis on which the deductible proportion of 2 per cent of calculated liabilities is calculated.

Clause 26 will insert in the Principal Act a new section, section 116AA, to achieve these purposes.

Paragraph (a) of sub-section (1) of section 116AA states that the amount of deductions to be set against dividends will be applied, in the first place, (in practice, in nearly all cases) only against the amount in respect of which a rebate is to be allowed under sub-section (2) of section 46 of the Principal Act. It also states that the amount of deductions to be so applied shall not exceed the amount rebatable under that sub-section. Sub-section (2) of section 46 provides for the allowance of a rebate to a private company in respect of the sum of one-half of private company dividends, and the full amount of other dividends, included in its taxable income, and the allowance of a rebate to a public company in respect of the full amount of dividends included in its taxable income.

Sub-paragraphs (i), (ii) and (iii) of paragraph (a) set out the manner in which the amounts to be set against dividends are to be ascertained. It will be noted that dividends received from co-operative companies and the value of shares held in those companies are to be excluded from the calculations, since no section 46 rebate is allowable in respect of dividends received from such companies.

Sub-paragraph (i) proposes, in effect, that the amount of dividends in respect of which a rebate will be allowed will be reduced by the same proportion of the section 113 deduction as the amount of assessable dividends bears to total assessable income.

Sub-paragraph (ii) provides that the amount of dividends in respect of which a rebate is to be allowed will also be reduced by a part of the section 115 deduction. The amount of the reduction will be the same proportion of the deduction as the value of shares producing assessable income included in insurance funds bears to the value of assets producing assessable income so included.

Sub-paragraph (iii) will apply where a life assurance company is allowed deductions under both sections 113 and 115. The dividends will, in that case, be reduced by the sum of the amounts ascertained under sub-paragraphs (i) and (ii) of paragraph (a).

Paragraph (b) relates to any life assurance company that is a private company and provides, in effect, that where an amount calculated under sub-paragraphs (i), (ii) and (iii) of paragraph (a) exceeds the amount of dividends in respect of which a rebate is allowable under sub-section (2) of section 46, any amount in respect of which a further rebate is to be allowed under sub-section (3) of that section in respect of dividends from other private companies shall be reduced by the excess amount.

Sub-section (2) of section 116AA states that the amount ascertained under sub-paragraphs (i) or (ii) of paragraph (a) of sub-section (1) shall be reduced by the amounts of the deductions allowed under sections 113 and 115 that have been taken into account for the purposes of section 46A. The latter section governs the allowance of a rebate on dividends paid as part of a dividend stripping operation. Authority is contained in sub-section (9) of section 46A for the deductions under sections 113 and 115 to be taken into account in calculating the amount of rebatable dividends for the purposes of section 46A. Sub-section (2) of section 116AA therefore ensures that these deductions are not taken into account twice for the purposes of ascertaining the amount of rebate, where a company is entitled to rebates under sections 46 and 46A.

Sub-section (3) provides, broadly, that where the operation of the section would otherwise be frustrated by special arrangements made by a life assurance company that resulted in dividends being abnormally low in one year, so that the full amount of the reductions could not be offset in that year, any amount by which the reductions exceed the rebatable amount may be carried forward to a subsequent year of income and applied to reduce the dividends in respect of which a rebate is to be allowed for that year. As usual, a company will have a right of reference to a Taxation Board of Review where the company is dissatisfied with any application by the Commissioner of this sub-section.

Sub-section (4) will ensure that the exclusion of dividends from assessable income, for the purpose of ascertaining the amount of the section 113 deduction to be set off against the amount of dividends rebatable under section 46, will not affect the calculation of the deduction allowable under section 113. For that calculation, assessable dividends will continue to be included in assessable income.

Sub-section (4) also removes any restrictive effect that section 50 of the Principal Act might otherwise have on the operation of section 116AA. Section 50 prescribes the order in which deductions are to be made from various classes of income and has operated to prevent the set-off of part of section 113 and 115 deductions against dividends in determining rebate entitlements.

By sub-clause (2) of clause 26, section 116AA is to apply for the 1973-74 year of income and subsequent years.

Clause 27: Residual capital expenditure.

By this clause it is proposed to amend section 122C of the Principal Act as a consequence of the omission of paragraph (p) of section 23 of that Act as proposed in clause 4. The amendment will delete sub-section (3) of section 122C.

Section 122C provides the basis for determining the amount of "residual capital expenditure" of a taxpayer as at the end of a year of income for the purposes of the special deductions authorised in Division 10 for certain capital expenditures incurred in general mining operations in Australia or Papua New Guinea. The amount so determined is available for deduction over the life of the mine or proposed mine to which the expenditure relates.

Essentially, the "residual capital expenditure" is so much of the allowable capital expenditure incurred up to the end of a year of income as has not been allowed as a deduction in a previous year.

In broad terms, section 122C(3) provides for the exclusion from the residual capital expenditure of a taxpayer of certain undeducted exploration and prospecting expenditures incurred in relation to a particular area by a taxpayer who has derived income - exempt under section 23(p) - from the sale, transfer or assignment of mining rights over the area. With the proposed repeal of section 23(p), the technical provisions of section 122C(3) will no longer generally be required.

As is the case with the repeal of section 23(p) the amendment proposed by this clause will apply in relation to income derived after 21 August 1973 from the sale, transfer or assignment of rights to mine except where the sale, transfer or assignment is pursuant to a contract that was made on or before that date.

Clause 28: Deductions of appropriations.

This clause proposes a consequential amendment to section 122G of the Principal Act by reason of the proposed repeal, by clause 6, of section 23A of that Act.

In broad terms, section 122G permits an election by a taxpayer engaged in prescribed mining operations to have a deduction allowed in respect of an amount of income appropriated for certain classes of allowable capital expenditure which is not expended during the income year in which the appropriation is made.

The deduction is limited to the amount which the Commissioner of Taxation is satisfied will be, or is likely to be, expended by the end of the next income year, and the amount allowed as a deduction is included in the assessable income of that next year where it is offset by a deduction for the expenditure actually incurred.

The amendment proposed will omit sub-section 122G(5) which at present has effect where an election under section 122G is made by a taxpayer who derives income to which section 23A applies. As mentioned in the notes to clause 6, the broad effect of section 23A is to exempt 20 per cent of the net income derived from mining in Australia or Papua New Guinea for prescribed metals or minerals.

With the proposed repeal of section 23A with effect in relation to years of income subsequent to 1972-73, the application of the technical provisions of section 122G(5) cannot arise in relation to assessments of years subsequent to the 1973-74 income year.

A transitional provision is proposed in clause 39 of the Bill to retain the operation of the sub-section in relation to an amount required to be included as assessable income of the 1973-74 income year following a deduction for an appropriated amount allowed in the 1972-73 income year against income that was partially exempt under section 23A.

Clause 29: Exploration and prospecting expenditure.

This clause proposes the repeal of sub-section 122J(5) of the Principal Act in consequence of the repeal of section 23(p) proposed by clause 4.

Section 122J, broadly stated, contains provisions for the deduction of expenditure incurred on exploration or prospecting on a mining tenement in Australia or Papua New Guinea for minerals obtainable by "prescribed mining operations", a term which does not apply in relation to petroleum. The deduction is available only to a taxpayer who is carrying on a mining business and is limited in amount to the net assessable income from that business and from associated activities that remain after taking into account all other allowable deductions relating to the income. Any excess expenditure on exploration or prospecting is carried forward for deduction over the life of the mine and may be carried forward indefinitely until mining operations are commenced.

Section 122J(5) operates in certain circumstances to adjust an amount of excess exploration or prospecting expenditure where income exempt under section 23(p) is derived. As mentioned earlier in this memorandum, section 23(p) exempts income derived from the sale, transfer or assignment of rights to mine in a particular area for a prescribed mineral or metal. The amount of income from the sale of mining rights to an area, otherwise exempt under section 23(p), is subject to reduction by the amount of exploration or prospecting expenditure incurred on the area which has been allowed or is allowable as a deduction under section 122J, or under the related section 122D, as allowable capital expenditure.

In some circumstances, however, the exploration or prospecting expenditure will not have been allowed or be allowable as a deduction under section 122J or section 122D and will not have been included in the residual capital expenditure of the vendor. An example is where the vendor has not been engaged in prescribed mining operations. In such a case, the effect of section 122J(5) is to reduce the amount of expenditure available for future deduction by the vendor by the lesser of the amount of the expenditure or the amount of net exempt income derived from the sale, transfer or assignment.

As section 23(p) is to be repealed the need for sub-section (5) will cease to exist. The amendment effected by clause 29 is to have general effect in relation to income derived after 21 August 1973 from the sale, transfer or assignment of a mining right. However, the amendment is not to apply in relation to income derived after that date where the income arises from a sale etc. contracted for on or before that date.

Clause 30: Deductions where exempt income derived.

This clause is intended to repeal section 122P of the Principal Act consequent on repeal of section 23(o) proposed by clause 4.

Section 122P, which is complementary to the present section 23(o), sets out the deductions allowable against assessable income derived incidentally from the sale of pyrites where that mineral is obtained in the course of mining operations in Australia or Papua New Guinea conducted principally for the purpose of producing gold, or gold and copper.

Very briefly, section 122P deals with capital expenditure incurred in connection with a mining property producing both exempt income (under section 23(o)) from the mining of gold or gold and copper and assessable income from the mining of pyrites. It provides that such expenditure is deductible under Division 10 of the Principal Act only to the extent that is was incurred -

•

in the recovery of pyrites from ore mined on the property;

•

on transport on the mining property of ore mined on that property,

and would not have been incurred if operations to produce assessable income from pyrites had not been carried on.

As the exemption provided in section 23(o) is to be withdrawn it will no longer be necessary to distinguish between capital expenditures incurred on a mining property producing income from both gold and pyrites.

Sub-clause (2) provides that the repeal of section 122P applies to assessments based on income derived during the 1973-74 year of income and subsequent years.

Clause 31: Interpretation.

This clause amends section 128A of the Principal Act in which are defined certain terms used in Division 11A of Part III of the Principal Act. That Division imposes a liability to withholding tax on dividends and interest paid from Australia to non-residents.

The purpose of the amendments is to extend to dividends and interest paid to residents of Papua New Guinea the same system of tax by withholding as applies to dividends and interest paid to residents of other countries.

By paragraph (a) of sub-clause (1) it is proposed to omit the definition of the term "non-resident" in section 128A. At present, the term "non-resident" is defined in the section as not including a resident of a Territory of the Commonwealth, thus operating to exclude from the scope of withholding tax dividends and interest derived from Australian sources by residents of Australia's external Territories, including Papua New Guinea. By the omission of this definition, the expression "non-resident" in the withholding tax provisions of the Act will include residents of Papua New Guinea. It will not include residents of Australia's other external Territories dealt with under amendments proposed by the Income Tax Assessment Bill (No. 4) 1973. Accordingly, residents of Papua New Guinea will become subject to withholding tax on dividends and interest under Division 11A of Part III of the Assessment Act.

By the Income Tax (Non-resident Dividends and Interest) Bill 1973, the rate of tax on their dividends will be 15 per cent, with the rate on interest being fixed at 10 per cent.

Paragraph (b) of sub-clause (1) of clause 31 proposes to insert a new sub-section - sub-section (1A) - in section 128A. This sub-section will operate to avoid any possible conflict between the proposed extension of Division 11A to residents of Papua New Guinea, and sub-section (2) of section 7 of the Principal Act, which deems a resident of Papua New Guinea to be a resident of Australia in relation to his Australian source income. By sub-section (1A), the expression "non-resident" will have, for the purposes of Division 11A, the ordinary meaning it would have if sub-section (2) of section 7 had not been enacted.

Paragraph (c) of sub-clause (1) proposes a drafting change to sub-section (4) of section 128A to ensure that the word "tax" in paragraph (da) of sub-section (4) of proposed section 103AA will include withholding tax as well as tax imposed by normal assessment procedures. Paragraph (da) is to be inserted in sub-section (4) of proposed section 103AA by paragraph (d) of clause 23 of the Bill (see notes on that clause).

Sub-clause (2) of clause 31 will operate to impose withholding tax on dividends and interest paid to residents of Papua New Guinea after the date of introduction of the Bill into the House of Representatives.

Clause 32: Liability to withholding tax.

By clause 32, section 128B of the Principal Act is to be amended in consequence of the amendments proposed in clause 6.

Section 128B sets out the circumstances in which dividends and interest derived by a non-resident on or after 1 January 1968 are liable to withholding tax. Sub-section (3) of section 128B operates to exempt from withholding tax certain classes of dividends and interest that would otherwise be subject to the tax.

The proposed amendment is a drafting measure which will delete a reference to dividends paid out of income that is exempt from income tax under sub-section (2) of section 23C of the Principal Act, i.e., dividends paid wholly and exclusively out of exempt profits arising from the sale of gold produced in Australia or Papua New Guinea.

This amendment is made necessary by the proposed repeal of section 23C and its effect will be to ensure that dividends paid to a non-resident from gold mining profits will be liable to withholding tax.

Sub-clause (2) provides that the amendment to section 128B will apply in relation to dividends paid on or after 22 August 1973 other than dividends declared on or before that date.

Clause 33: Rebate for Export Market development expenditure.

Clause 33 proposes amendments to section 160AC of the Principal Act which provides for a rebate of tax at a rate not exceeding 42 1/2 per cent in respect of certain expenditure designed to develop export markets.

The amendments are designed to exclude from the scope of the rebate expenditure that is incurred after 10 September 1973 in the development of export markets for meat, unless it has been incurred under a contract entered into on or before that date.

Paragraphs (a) and (b) together insert in the definition of "export market development expenditure" in sub-section (1) of section 160AC a new paragraph - paragraph (f) - which specifically excludes the relevant expenditure.

Paragraph (c) inserts in sub-section (1) of section 160AC a definition of meat which will be relevant for the purposes of paragraph (f) to be inserted in the definition of export market development expenditure. "Meat" will mean fresh, chilled or frozen flesh or edible offal of bovine animals, sheep, goats or pigs not being flesh or offal that has been canned, cooked or cured. The term will therefore include fresh, chilled or frozen meat of cattle (including buffaloes), sheep, goats or pigs, whether boneless or not, but will not include cooked or canned meat or, for example, cured meats such as bacon and ham.

Clause 34: Collection by instalments of tax on companies.

Introductory Note

This clause will insert in Part VI of the Principal Act a new division - Division 1A, comprising sections 221AA to 221AJ - which will implement the first stage of a scheme to give effect to the 1973-74 Budget decision to move to a system of quarterly payments of company tax over a period of three years.

This first stage of the scheme is to operate for 1973-74 and provides for the payment by a company of an instalment to be applied against the tax to be assessed on its 1972-73 income. The instalment, which will not be payable before 31 December 1973, will generally be equal to one-quarter of the tax on the company's 1971-72 income. At least 30 days notice will be given before payment is due. The total tax on 1972-73 income less the amount of the instalment will be payable in the usual way not less than 30 days after service of the notice of assessment of tax on the company's income of that year.

Where, before the date of issue of a notice of liability to pay an instalment of tax, a notice of assessment of the tax payable in respect of 1972-73 income has been issued, the instalment will be one-quarter of the amount of that assessment. If, however, a notice of instalment has not been issued more than 30 days before the due date for payment of the assessment, a notice of instalment will not then be issued.

The Commissioner of Taxation will have authority to reduce an amount that would otherwise be payable as an instalment of tax or to forgo an instalment where circumstances warrant. In the exercise of that authority, the Commissioner will refrain from notifying a company of a liability for an instalment of tax where the amount involved would be less than $100. A company will have the right to apply for a variation of the amount of a notified instalment on the basis of its estimate of the income tax that will be payable on its taxable income of the year ended 30 June 1973. If, however, the company's estimate results in a reduction in its instalment, it may incur a liability for additional tax if the tax actually payable for 1972-73 exceeds its estimate.

Notes follow on each of the proposed sections 221AA to 221AJ.

Section 221AA: Interpretation.

Sub-section (1) of the proposed section 221AA provides that the terms "income tax" and "tax", as used in the new Division 1A, do not include income tax that a company is liable to pay in the capacity of a trustee, thus ensuring that income tax payable on trust income will not be within the company tax collection scheme merely because the trustee happens to be a company.

Sub-section (2) provides that the terms "income tax" and "tax", as used in specified sections of the Principal Act, but not in other sections, include instalments of tax payable by companies in accordance with Division 1A. The specified sections are general provisions relating to the collection and recovery of income tax including provisions authorising the Commissioner to sue for recovery, to collect unpaid amounts from agents, to remit additional tax incurred by reason of late payment and to grant extensions of time for payment. The general effect of sub-section (2) is to give these provisions the same force in relation to instalments of tax as they have in relation to income tax itself while preserving, for other purposes of the Principal Act, a distinction between instalments of tax and income tax determined on assessment.

Sub-section (3) is similar to sub-section (2) in its general effects, except that it is concerned, not with the collection and recovery of instalments, but with the collection and recovery of additional tax payable under section 221AG, where a company has obtained a reduction of an instalment on the basis of an estimate of tax which proves to be less than the tax payable on assessment. The provisions of the law governing extensions of time for payment and penalties for late payment - sections 206 and 207 - would not be applicable in relation to additional tax payable in these circumstances and accordingly are not referred to in sub-section (3).

Sub-section (4), by providing that the ascertainment of an amount of notional tax (the base figure from which an instalment is calculated) or the amount of an instalment of tax is not to be deemed to be an assessment, ensures that the rights of objection and appeal against assessments will not extend to liabilities for payment of instalments of tax. An instalment is only an interim payment to be applied against the income tax liability as finally assessed. After a notice of assessment has been served on a company the liability can be challenged by objection and appeal.

Sub-section (5) provides for the amounts payable as instalments of tax to be calculated to the nearest dollar.

Section 221AB: Companies to which Division applies.

This section marks out the area of application of the new Division 1A. A company that has become liable to pay income tax on a taxable income for the year immediately preceding the year of income in respect of which instalments of tax are to be collected will be within the operation of the Division. So too will a company that, perhaps because it was not then carrying on a business, did not have an income tax liability for that preceding year but has become liable to pay income tax on a taxable income for the year of income concerned. In the first stage of the company tax instalment scheme, section 221AB in conjunction with section 221AC(1) makes a company liable to pay an instalment of tax in respect of its 1972-73 taxable income if it is liable to pay income tax on its taxable income of either the 1971-72 or the 1972-73 income year. No liability for an instalment of tax can arise unless a notice of assessment for one of those years has been served on the company.

Section 221AC: Liability to pay instalments of tax.

Sub-section (1) of section 221AC, for the general purpose of securing more expeditious collection of company tax during a year of tax, i.e. the financial year following the year of income in which the income subject to tax was derived, declares that a company to which Division 1A applies is liable to pay an instalment of tax in accordance with the Division. In relation to the year of income ended 30 June 1973 the year of tax is the current financial year ending 30 June 1974.

Sub-section (2) provides that instalments of tax are not payable in respect of the income of any particular year of income unless the Rates Act relevant to that year, or to the immediately preceding year, of income provides that instalments are so payable. Accordingly, the Income Tax Bill 1973, which declares the rates of tax proposed for the current financial year (payable in the case of companies on the income of the 1972-73 income year) formally provides that instalments of tax are payable in respect of income of the 1972-73 and 1973-74 years of income (see notes on clause 12 of the Income Tax Bill 1973).

Section 221AD: Amount of notional tax.

"Notional tax" is a term used to identify the amount by reference to which the amount of an instalment of tax payable by a company is determined.

Sub-section (1) of section 221AD fixes the amount of the notional tax of a company for the relevant year of income as an amount equal to the income tax assessed in respect of the company's taxable income of the next preceding year. This, however, is subject to the provisions of sub-section (2) which applies where there has been a change in company rates and the Income Tax Regulations, in recognition of this change, make provision for a variation in the amount of notional tax of companies.

Irrespective of the amount of notional tax of a company ascertained under sub-sections (1) and (2), when an assessment has been made of the income tax payable by a company on its taxable income for the relevant year, sub-section (3) provides that, from the date of issue of the notice of the assessment, the notional tax of the company for the relevant year will be an amount equal to the income tax payable for that year.

In relation to the year of income ended 30 June 1973, the notional tax of a company will be an amount equal to the income tax payable on its taxable income for the year ended 30 June 1972 until such time as it is issued with a notice of assessment for the year of income ended 30 June 1973. Upon issue of the latter notice, the notional tax of the company will be the income tax payable on its taxable income for the year ended 30 June 1973.

Section 221AE: Amount of instalment of tax.

The amount that a company is to be called upon to pay as an instalment of tax (except in a case where an application for variation of the amount is made by the company in accordance with the provisions of section 221AG) is determined under section 221AE.

Sub-section (1) provides that the amount payable by a company as an instalment of tax in respect of its income of a year of income is to be one-quarter of the amount of the notional tax of the company on the date of issue, in accordance with section 221AF, of a notice specifying the amount payable by the company as an instalment of tax.

In the first year of the company tax collection scheme, it is proposed that notices be issued early in December 1973 to companies liable to pay instalments of tax in respect of 1972-73 incomes. At that time, the notional tax of most of these companies will be the income tax payable on their taxable incomes of the 1971-72 income year and, accordingly, the amount of the instalment under sub-section (1) will be equal to one-quarter of the income tax on 1971-72 income. Some of the companies will, however, have been issued with a notice of assessment for the 1972-73 income year before they are notified in December 1973 of their liability to pay an instalment. In these cases the notional tax at the relevant time will be the income tax payable on the taxable income of the 1972-73 income year and the amount of the instalment under sub-section (1) will be one-quarter of the income tax payable for that year.

Sub-section (2) will authorise the Commissioner of Taxation to determine, having regard to the purpose for which Division 1A is being enacted and to the existence of particular circumstances in relation to a company, that an amount otherwise payable by the company as an instalment of tax should be reduced or that an instalment should not be payable by the company.

During the first stage of the company tax collection scheme the Commissioner does not propose to call upon companies to pay instalments of tax where the amounts payable would be less than $100. There would be other circumstances in which the waiver or reduction of liability to pay an instalment would be warranted. These could include, apart from the circumstances specifically mentioned in sub-section (3), the voluntary prepayment of an amount in excess of the amount that a company would be liable to pay as the instalment of tax, or the cessation of a company's business before the commencement of the year of income in respect of which instalments are being collected.

Sub-section (3) states that the particular circumstances to which regard may be had under sub-section (2) include the operation of specified provisions of the Principal Act relating to credits in respect of ex-Australian tax on ex-Australian income, and the operation of the Income Tax (International Agreements) Act, which gives the force of law to double taxation agreements with other countries and contains measures to facilitate the implementation of those agreements.

Under the authority in sub-section (2), the Commissioner will be able to determine that instalments of tax calculated as a proportion of the income tax assessed to a company should be reduced or waived on account of credits available for application in payment of that income tax under the laws referred to in sub-section (3). He will also be able to make such determinations in recognition of tax exemptions or limitations under provisions of double tax agreements.

Sub-section (4) covers situations where the whole or a part of an instalment of tax remains unpaid on the due date for payment of a company's income tax liability for the year of income to which the instalment relates. It provides that the unpaid amount, to the extent that it may exceed any outstanding income tax liability for the year concerned, ceases to be payable on the date mentioned, but any balance of the unpaid amount continues to be payable. The sub-section thus leaves the way open for recovery of so much of an unpaid amount as may need to be collected for application against an associated income tax liability, while ensuring that no part of an instalment of tax will remain payable indefinitely for no real purpose.

Section 221AF: When instalment of tax payable.

Sub-section (1) of section 221AF requires that a company that is liable to pay an instalment of tax be served with a notice specifying the amount payable and the due date for payment.

Sub-section (2) requires that the due date for payment by a company of an instalment of tax in respect of its income of a year of income is to be at least 30 days after service of the notice and not earlier than 31 December in the year of tax.

It is contemplated that most notices of liabilities to pay instalments in respect of 1972-73 income will be issued in time to require payment to be made early in January 1974.

Section 221AG: Estimated income tax.

This section deals with the rights of companies to have amounts otherwise payable as instalments of tax in respect of the income of a year of income altered on the basis of their estimates of the income tax that will be payable on their taxable incomes of that year.

Sub-section (1) of section 221AG provides that a company that has been served with a notice under section 221AF ("the original notice") may forward to the Commissioner a statement setting out its estimate of the income tax, if any, that will be payable in respect of the taxable income of the year of income to which the instalment of tax relates. The statement is to be furnished on or before the date on which the instalment is due and payable and is to show, in addition to the amount so estimated, the basis on which the estimate has been made and the amount of the "adjusted instalment of tax".

A company's right to make an estimate of the tax on its 1972-73 taxable income will not be affected by the issue of an assessment for that year either before or after the issue of a notice of instalment. It may adopt the assessed tax for the purposes of its estimate or, if it considers that the assessment has been wrongly made, it may select a different figure as its estimate. It would then be for the Commissioner to decide under sub-section (4) of the section whether he should accept the estimate for the purposes of the instalment.

Sub-section (2) provides that, subject to a provision which authorises the Commissioner to disregard a company's estimate, the amount payable as an instalment of tax, in a case where a company has furnished a statement, is an amount equal to the adjusted instalment of tax. Operating in conjunction with section 221AH, sub-section (2) requires the adjusted instalment of tax to be paid by the date shown on the original notice as the due date for payment of the instalment concerned.

Sub-section (3) imposes additional tax where a company has obtained a reduction in an instalment on the basis of an estimate which, having been accepted by the Commissioner under sub-section (4), proves to be less than the income tax that is ultimately payable for the year of income. The additional tax is to be calculated at the rate of 10 per cent per annum from the due date of the instalment to the due date of the assessment on an amount equal to the difference between the adjusted instalment and the lesser of the original instalment and the amount that would have been payable as an instalment if the company had made a correct estimate.

The Commissioner is given authority to remit the whole or a part of any additional tax incurred by a company under sub-section (3) if he considers that there are sufficient reasons for so doing.

Sub-section (4) authorises the Commissioner, if he has reason to believe that the income tax payable by a company will be greater than the estimated amount shown on a statement furnished by the company, to make his own estimate. Where he does so, the amount payable by the company will be either the amount of the instalment as specified in the original notice or one-quarter of the Commissioner's estimate of the tax on the company's 1972-73 income, whichever is the less.

Sub-section (5) makes it clear that estimates by a company or by the Commissioner for the purposes of section 221AG are to be estimates of net amounts remaining to be paid after credits have been set off against a company's income tax liability under provisions of the Income Tax Assessment Act and the Income Tax (International Agreements) Act in respect of ex-Australian tax on ex-Australian income.

Section 221AH: Notice of alteration of amount of instalment.

This section provides for a company to be notified in the event of the amount payable by it as an instalment of tax being altered.

Sub-section (1) of section 221AH deals with situations where, after a company has been served with a notice in accordance with section 221AF specifying an amount payable as an instalment of tax ("the original notice"), the amount payable has been reduced or it has been determined that an instalment is not payable. The sub-section provides for a further notice to be served on the company specifying the reduced amount payable or indicating that an instalment is not payable. It also confirms that the due date for payment of the reduced amount is the date specified in the original notice.

Sub-section (2) deals with situations where a company has made an estimate of the tax that will be payable for the year of income to which an instalment of tax relates but the Commissioner has made his own estimate with the result that the amount payable as an instalment will exceed the adjusted instalment of tax based on the company's estimate. The sub-section requires that the company be served with a further notice specifying the increase in the amount payable and a due date, not less than 14 days after service of the notice, for payment of the extra amount.

Section 221AI: Application of payments of instalments of tax.

This section deals with the application of amounts paid by companies in respect of instalments of tax.

Sub-section (1) relates to cases where the amount of an instalment originally notified to a company has been reduced and the company has paid more than the reduced amount. The sub-section will usually operate to allow an immediate refund to the company of the excess, with the balance of the payment (an amount equal to the reduced instalment) being retained for application in payment of the company's income tax for the year of income to which the instalment relates when that tax subsequently becomes due and payable. If, however, any income tax or withholding tax is outstanding at the time the excess payment is being dealt with, the Commissioner is required to credit the whole or a part of the excess payment against that liability.

Sub-section (2) comes into operation when an assessment has been made of the amount of income tax payable by a company on its taxable income of the year of income to which an instalment relates or when the Commissioner has become satisfied that no income tax will be payable by the company for that year. It applies to what is described as "the residual amount", that is, so much of any amount paid by the company in respect of the instalment as has not been credited or refunded in accordance with sub-section (1).

The Commissioner is required to credit the residual amount, first in payment of any income tax payable by the company on its taxable income of the year of income to which the instalment relates, and then in payment of any other income tax or withholding tax payable by the company. The Commissioner is required to refund to the company so much of the residual amount as has not been so credited.

Section 221AJ: Notice of instalment to be prima facie evidence.

This is an evidentiary provision of a kind usually included in taxation measures. Should it be necessary for the Commissioner to take legal action for the recovery of an instalment of tax, this section will permit a notice served on the company in relation to the instalment, or a certified copy of it, to be produced as prima facie evidence of the company's liability.

Clause 35: Heading.

This clause will change the heading of Division 2 of Part VI of the Principal Act. The change is consequential on the insertion of the new Division 1A - "Collection by Instalments of Tax on Companies" - in Part VI of the Principal Act by clause 34 of the Bill. The existing heading of Division 2 - Collection of Tax by Instalments - which makes provision for the deduction of tax instalment deductions from salaries and wages under the P.A.Y.E. system of taxation is to be changed by clause 35 to "Division 2 - Collection by Instalments of Tax on Persons other than Companies".

Clause 36: Interpretation.

This clause proposes to amend the definition of "salary or wages" contained in section 221A of the Principal Act so that certain payments of workers' compensation, sickness pay and accident pay made to an employee in respect of his total or partial incapacity for work will be subject to tax instalment deductions under Division 2 of Part VI of the Principal Act.

To be subject to tax instalment deductions, payments must be "salary or wages" within the defined meaning in sub-section 221A(1). However, the present definition does not cover payments made by an insurance company to an employed person under a policy of workers' compensation, sickness or accident insurance taken out by that person's employer. These payments constitute assessable income and the effect of the present law is that tax is payable on them in a lump sum rather than under the pay-as-you-earn system applied to similar periodical payments.

Clause 36 will insert in the definition of "salary or wages" a new paragraph (f), to extend the definition to cover compensation payments, sickness pay or accident pay calculated on a weekly or other periodical basis in respect of incapacity for work. The new provision will not extend to require the deduction of tax instalments from amounts paid under policies taken out by a person to insure against the contingency of his own incapacity for work, for example, insurance taken out by a self-employed taxpayer. Nor will tax instalments be required from payments having a non-income character such as a lump sum payment of compensation in respect of an injury involving the loss of a limb.

The amendment is to apply to payments of compensation, sickness pay or accident pay made after the end of the month in which the Bill receives the Royal Assent.

Clause 37: Interpretation.

This clause proposes an amendment of section 221YK of the Principal Act, which includes definitions of terms used in Division 4 of Part VI of that Act relating to the collection of withholding tax. It is necessary to omit definitions which would conflict with the proposal to extend the withholding tax to dividends and interest flowing to residents of Papua New Guinea. Very broadly, Division 4 of Part VI requires a person paying dividends or interest to a non-resident to deduct from the payment, and to remit to the Commissioner, an amount representing withholding tax payable in respect of the payment. As well as applying to direct payments to non-residents, this obligation is imposed upon any person in "Australia" (as specially defined) who receives dividends or interest on behalf of a non-resident.

Paragraph (a) of clause 37 proposes the omission from sub-section (1) of section 221YK of the definitions of the terms "Australia" and "non-resident". The effect of the definitions of these terms is that residents of Papua New Guinea are not "non-residents", so that tax does not have to be withheld from dividends or interest paid to them, while Papua New Guinea is treated as part of Australia, so that a person in Papua New Guinea who receives, e.g. as a nominee, a dividend or interest belonging to a resident of another country has been obliged to deduct Australian withholding tax therefrom.

As a result of paragraph (a), withholding tax will have to be deducted from dividends and interest paid to Papua New Guinea and persons there will no longer be obliged to deduct Australian withholding tax.

Paragraph (b) of clause 37 proposes to insert a new sub-section - sub-section (1A) - into section 221YK. The new sub-section is designed to ensure that section 7(2) of the Principal Act (which for certain purposes treats residents of Papua New Guinea as residents of Australia) will not cut across the intended imposition of withholding tax on dividends and interest paid to residents of Papua New Guinea. This amendment is similar in intention to that proposed by paragraph (b) of clause 31.

The amendments made by this clause, i.e., changes in liability to make withholding tax deductions, will operate from the date of commencement of the Bill, i.e., the date upon which the Bill receives the Royal Assent.

Clause 38: Transitional provisions in relation to gold mining.

Clause 38 proposes special transitional provisions to meet the position of gold mining enterprises which earn assessable income after the end of the 1972-73 year of income. The clause will not amend the Principal Act.

Section 23(o) of the Principal Act, as mentioned earlier in this memorandum, exempts certain income earned from gold mining operations in Australia or Papua New Guinea. The exemption is to be withdrawn by clause 4 of the Bill in relation to income derived after the end of the 1972-73 income year. Accordingly, income earned from such operations after that date will be assessable to gold mining enterprises. However, in the absence of special transitional provisions none of the capital expenditure incurred in carrying on gold mining operations during prior years when the exemption applied would be deductible from assessable income earned in future years.

In broad terms, clause 38 proposes the allowance of deductions against assessable income from mining in future years for expenditure incurred by a gold mining enterprise during the last ten years of the exempt period on exploration or prospecting for gold, capital expenditure on development of the mining property, on mining plant and on housing and welfare to the extent that those expenditures have not been recouped from the net exempt income derived from gold mining operations during the ten year period. The unrecouped expenditure will be deductible - over the life of the relevant mine - from assessable income derived from mining for gold or for other minerals, except petroleum.

Sub-clause (1) specifies the classes of expenditure incurred during the income years 1963-64 to 1972-73 inclusive ("the exempt period") which may qualify for deduction under the special transitional provisions. The provisions do not apply to expenditures which have been allowed or are allowable as deductions to a gold mining enterprise under provisions of the Principal Act.

Paragraph (a) refers to expenditure on exploration or prospecting for gold during the exempt period.

Paragraph (b) refers to certain capital expenditure incurred in connection with gold mining operations during the period from the commencement of the 1963-64 income year to 9 May 1968 - the last day on which the former Division 10 of the Principal Act had effect. This is expenditure incurred on development of the gold mining property, on gold mining plant, and on housing and welfare if the housing and welfare is provided on or adjacent to the mining property.

Paragraph (c) is complementary to paragraph (b). It refers to expenditure, not covered by paragraph (b), incurred during the period from and including 10 May 1968 - the commencing date of operation of the present Division 10 provisions - to the end of the 1972-73 income year, being expenditure that would have qualified as allowable capital expenditure for the purposes of Division 10 if income from gold mining operations had not been exempt from tax during that period.

Sub-clause (2) is the operative provision. The practical effect of the provision is to entitle a gold mining enterprise to deductions for eligible capital expenditure over the life of the mine when it carries on mining operations to earn assessable income during the 1973-74 income year or subsequent years.

For the purposes of the provision, eligible capital expenditure will include so much of the expenditures referred to in paragraphs (a), (b) and (c) of sub-clause (1) as exceeds the net exempt income earned in the exempt period by the taxpayer from gold mining operations and any unrecouped loss from gold in that period that has been allowed as a deduction against assessable income under section 77 of the Principal Act.

Sub-clause (3) defines the two following terms used in sub-clause (2):

"net exempt income from gold" means, broadly, so much of the exempt income earned from gold mining operations during the exempt period as remains after taking into account operating expenses that would have qualified for deduction (otherwise than under the special mining provisions in Division 10) if the income had not been exempt; and

"unrecouped loss from gold" means so much of any loss incurred on gold mining operations during the exempt period as has been allowed as a deduction under section 77, against assessable income derived by the mining enterprise, to the extent that the amount allowed as a deduction had not been recouped as provided for in that section by treating subsequent profits from the business as assessable income.

Sub-clause (4) is a transitional measure which has the purpose of ensuring that, in calculating the net exempt income of a gold mining enterprise earned during the exempt period, the value of concentrates and ore at grass on hand at the end of the exempt period is to be taken into account on one of the bases provided in the trading stock provisions of the law in relation to a business the income from which is assessable. Briefly, the mining enterprise will be able to select values on the basis of the cost of production, the market selling value or the value at which the concentrates and ore at grass can be replaced.

The sub-clause will also ensure that the value of opening stock on hand at the beginning of the 1973-74 income year that is required to be taken into account in determining the assessable income earned from gold mining in that year will be that adopted as the value of the closing stock at the end of the exempt period.

Sub-clause (5) makes provision for the case where property the expenditure on which is deductible under the special transitional provisions is disposed of, lost or destroyed, or ceases to be used in connection with mining operations. For the purpose of any balancing adjustments necessary in respect of such property, the cost of the property will be treated as that part of the capital expenditure on it that is taken into account for deductions by virtue of the special transitional provisions.

Clause 39: Transitional provisions in relation to partial exemption of income from certain mining operations.

This clause will insert a transitional provision of a technical nature in the Bill. The provision is a consequence of the repeal of section 23A (by clause 6), which at present applies to exempt part of the net income derived from mining for prescribed metals or minerals in Australia or Papua New Guinea, and the complementary amendment proposed to section 122G (by clause 28). It has effect in relation to an enterprise mining for prescribed minerals which has elected to claim a deduction in a year of income for amounts appropriated out of income of that year which it intends to expend on allowable capital expenditure in the following year.

The amendment proposed by clause 39 will, in broad terms, ensure that where -

(a)

a deduction for an appropriation of income has been allowed in the 1972-73 income year against income that was partially exempt under section 23A; and

(b)

the amount so deducted is required by the operation of section 122G(4) to be included in assessable income in 1973-74 to offset deductions allowable for the actual expenditure of the appropriated amount,

the whole or an appropriate part of the amount to be so included will continue to be treated as income to which section 23A applies. Without this adjustment, an enterprise which derived assessable income from the sale of a prescribed metal or mineral could effectively be deprived of some of the exemption attributable to income derived in 1972-73, the last year for which the partial exemption will be available.

Clause 40: Calculation of provisional tax in relation to certain aged persons for year of income that commenced on 1 July 1973.

This clause, which will not amend the Principal Act, will vary, in relation to certain aged persons, the operation of section 221YC of the Principal Act which fixes the amount of provisional tax payable by an individual taxpayer in respect of income other than salary or wages. If there is no change in tax rates the provisional tax for a year of income is normally based on the amount of tax assessed for the preceding year of income. Section 221YC of the Principal Act is to this effect. As the tax assessed on 1972-73 income of an aged person may be determined in accordance with the age allowance provisions which operated for that year, but which it is not proposed to re-enact for the 1973-74 financial year, sub-clause (1) of this clause varies the operation of section 221YC, where the taxpayer is an aged person, to the effect that the age allowance is to be disregarded in the calculation of provisional tax for 1973-74.

Sub-clause (2) in effect defines what is meant by the expression "aged person" for the purposes of sub-clause (1). An aged person for these purposes will be a man who was 65 years of age or over or a woman who was 60 years of age or over at 30 June 1973, that is, persons who would have qualified by age for the age allowance for the 1972-73 financial year.

Other factors that will affect the tax payable by aged persons for the 1973-74 financial year but which did not operate for the 1972-73 financial year are the proposed taxation of certain pensions and the proposed rebate of tax for aged persons. It will not be possible by fixed rules to anticipate the effect of these factors when the provisional tax for 1973-74 is being calculated.

Since there will be cases where the tax that will actually be payable for 1973-74 will be greater than the provisional tax payable for that year as a consequence of sub-clause (1), sub-clause (3) makes provision for aged persons who wish to do so to request that a greater amount of provisional tax be substituted for the provisional tax that would otherwise have been calculated. In these cases the provisional tax for 1973-74 will be so much of that greater amount as the Commissioner considers appropriate. This will enable the Commissioner to reduce the amount required by the taxpayer where that amount appears excessive, but it will not enable him to increase the amount requested by the taxpayer. Provision already exists in the law (section 221YDA of the Principal Act) for taxpayers who consider that the provisional tax notified to them for 1973-74 will exceed the tax that will actually be payable by them for that year, for example, because of the rebate of tax for aged persons, to apply for a reduction in the provisional tax payable by them for 1973-74.

Clause 41: Calculation of provisional tax of certain non-residents for year of income commencing on 1 July 1974.

This clause, which will not amend the Principal Act, is a transitional provision, the need for which arises out of the proposal to impose withholding tax on dividends and interest derived from Australia by residents of Papua New Guinea after the date of introduction of this Bill. As a result of this proposal, such dividends and interest derived after that date will, in general, not be subject to tax by assessment.

The purpose of this clause is to provide that, in the calculation of provisional tax based on income derived during the year of income ending 30 June 1974, assessable dividends and interest derived by a resident of Papua New Guinea between 1 July 1973 and the date of introduction of this Bill will be disregarded where the payment would have been subject to withholding tax and so not assessable income if derived after that date.

In effect, a taxpayer, resident in Papua New Guinea, will not be called upon to pay provisional tax for the 1974-75 income year based on any dividends and interest derived from Australia during the 1973-74 income year which, when derived in the 1974-75 income year, will be subject to withholding tax and so not included in assessable income.

Clause 42: Exclusion of income from assessable income not to apply in certain cases.

This clause affects the operation of section 128D of the Principal Act which applies to exclude from a taxpayer's assessable income dividends and interest upon which withholding tax is, or but for specific exemption provisions in the Principal Act would have been, payable. By clause 42, which, like clause 41 does not amend the Principal Act, it is proposed that section 128D will not operate to exclude from assessable income dividends and interest derived from Australia by a resident of Papua New Guinea before the commencement of this Bill, i.e., the date of Royal Assent, unless the Commissioner is satisfied that any withholding tax payable upon that income has been, or will be, paid.

A liability for withholding tax will be imposed on residents of Papua New Guinea in respect of dividends and interest derived by them from the day following the date of introduction of this Bill (see the notes on clause 31 of this Bill). However, the amendment to the withholding tax collection provisions proposed by clause 37 will only be operative from the date of commencement of the Bill (see notes on that clause). Clause 42 is a safeguarding measure which will ensure that in the intervening period between the date of introduction of the Bill (at which time the liability to withholding tax will arise) and the date of commencement (when the amended collection machinery becomes effective) only those dividends and interest derived by a resident of Papua New Guinea on which the Commissioner is satisfied withholding tax has been, or will be, paid will be excluded from assessable income and free from Australian tax calculated under assessment processes.

INCOME TAX BILL 1973

Introductory Note

The following notes are restricted to the main provisions of the Bill that differ in practical effect from the legislation that declared the rates of tax for the 1972-73 financial year.

Clause 6: Rates of tax payable by persons other than companies.

Clause 6 of the Income Tax Bill 1973 will declare the rates of tax payable by persons other than companies for the 1973-74 financial year. The rates of tax are set out in the schedules to the Bill, and in the clause itself, and with one exception are the same as those declared for 1972-73.

Sub-clause (5) together with Schedule 5 declares the rate of tax payable by a trustee on the investment income of a superannuation fund that does not invest a sufficient proportion of its assets in public securities. The rate for the 1973-74 financial year, which, as in previous years, is the same as that payable by mutual life assurance companies is to be 47.5 per cent on the whole of the investment income. For the 1972-73 financial year, the rates were 37.5 per cent on the first $10,000 of investment income and 42.5 per cent on the balance of the investment income. The increased rate will apply to investment income of the 1973-74 income year.

Clause 8: Rebate of tax payable by aged persons and certain pensioners.

By this clause it is proposed that a rebate of tax be allowed for 1973-74 to people of age pension age - 65 years and over for men and 60 years and over for women - who are residents of Australia. The rebate will also be allowed to a woman who has not attained the age of 60 years where she is the wife of a resident of Australia aged 65 years or over or is in receipt of a wife's pension by reason that, as a dependent female, she is treated for the purposes of the legislation under which the pension is paid as the wife of such a person.

These tests of eligibility match tests by which, under new provisions being inserted in the Principal Act by clause 5 of the first Bill, certain pensions are to become assessable income. The rebate is associated with the proposal to make pensions assessable income. It follows on from the former age allowance which, for the 1972-73 financial year, is authorised by section 8 of the Income Tax Act 1972.

The basic rebate is to be $156, reducing by 25 cents for each $1 of taxable income above $3,224. People who meet the tests of eligibility for the rebate for part only of the year will be entitled to a proportionate amount of rebate. A practical effect of the rebate will be to free from tax people who qualify for the rebate for the whole of 1973-74, and whose tax is payable at the general rates set out in Schedule 1, if their taxable income is $1,921 or less. The tax at general rates on a taxable income of $1,921 is $156.13, and when this is reduced by the $156 rebate, the balance of 13* is cancelled by clause 10 of the Bill.

Sub-clause (1) defines certain terms used in the clause.

"Resident of Australia" is defined to include residents of Australia's external Territories. The purpose of this is to ensure that such residents receive the rebate on the same terms and conditions as residents of Australia.

"Taxpayer to whom this section applies", when read in conjunction with the term "wife", defines the people who may be entitled to a rebate. Broadly, they are men aged 65 years or over and women aged 60 years or over who are residents of Australia, and women less than 60 years of age who are residents of Australia and are the wives of men aged 65 years or over who are also residents of Australia. (By reason of the definition of "resident of Australia", residents of Australia's external Territories will be treated as residents of Australia for purposes of the rebate.)

"Wife", as that term is defined, will bring within the scope of the section, and thus the rebate, women under the age of 60 years who are in receipt of a wife's pension by reason that they are dependent females and so treated as wives for the purposes of the legislation under which the pension is paid (see notes on clause 5 of the first Bill).

Sub-clause (2) refers to the case of a woman under 60 years of age who is treated as a taxpayer to whom the section applies only by virtue of the definition of "wife", because she is in receipt of a wife's pension. It will have the effect that she will be entitled to a rebate up to the date of death of the man in relation to whom she is regarded as a dependent. She will, therefore, be entitled to a rebate to the same date as wives under 60 years of age whose eligibility for the rebate does not depend on their being in receipt of a "wife's pension".

Sub-clause (3) specifies the amount of the rebate allowable in the case of a person who qualifies for the rebate for the whole of the income year. If the taxable income of the person does not exceed $3,224 the rebate is to be $156 (paragraph (a)). Where the taxable income of the person exceeds $3,224 the rebate is to be $156 less 25 cents for each $1 by which the person's taxable income is greater than $3,224 (paragraph (b)). The rebate will, therefore, reduce to nil at a taxable income of $3,848.

By section 160AD of the Principal Act (which by clause 4 is to be read as one with the Bill) the rebate allowable under clause 8 is limited to the amount of tax otherwise payable.

Sub-clause (4) provides for a proportionate rebate to be allowed to a person who was a taxpayer to whom the proposed section applied (see notes above) for part only of the year of income. In such cases the rebate allowable in accordance with sub-clause (3) will be apportioned on the basis of the proportion of the income year for which the person qualified for the rebate. If, for example, a man has taxable income in 1973-74 of $3,400, (rebate $112 under clause 3) but is 65 for only half of the year, his rebate will be $56.

Clause 9: Rates of tax payable by a company.

Sub-clause (1) will declare the rates of tax payable by companies for the 1973-74 financial year, in respect of income of the 1972-73 income year, to be as set out in Schedule 6.

The rate of tax payable by private companies is to be increased to a flat 45 per cent of the taxable income, which is in contrast with the position for 1972-73 when there was a lower rate on the first $10,000 of taxable income than on the balance of taxable income. The 50 per cent rate of additional tax on the undistributed amount of profits of a private company is not being changed. By clause 24 of the first Bill the retention allowance in respect of trading income of private companies is being changed from a sliding scale to a flat rate of 50 per cent.

Special rates which applied for 1972-73 to mutual life assurance companies, to the mutual income of other life assurance companies and also to a part of the dividend income of non-resident public companies, are to be discontinued so that all public companies (other than co-operative companies, non-profit companies and friendly society dispensaries) will be taxed on the income derived in the 1972-73 income year (i.e., for the 1973-74 financial year) at a flat rate of 47.5 per cent on the whole of their taxable income. The rates of tax payable for the 1973-74 financial year by co-operative companies, non-profit companies and friendly society dispensaries are to be the same as those that applied for the 1972-73 financial year. The following table sets out the proposed rates of tax payable by companies for the 1973-74 financial year, and compares them with the rates for 1972-73.

•

Maximum income subject to this rate was $10,000 less mutual income.

#

Where the taxable income does not exceed $1.664 a "shading-in" rate of one-half applies to the excess of the taxable income over $416.

xx

Where the taxable income does not exceed $1,830 a "shading-in" rate of eleven-twentieths applies to the excess of the taxable income over $416.

INCOME TAX (NON-RESIDENT DIVIDENDS AND INTEREST) BILL 1973

Introductory Note

The Bill will amend the Income Tax (Non-resident Dividends and Interest) Act 1967 (the Principal Act), principally in consequence of the proposal in clause 31 of the first Bill to extend the withholding tax to dividends and interest paid to residents of Papua New Guinea. The Principal Act declares the rates at which withholding tax is payable on dividends and interest paid to non-residents.

For dividends paid to non-residents, the general rate of withholding tax is 30 per cent but this is reduced to 15 per cent where, in a double taxation agreement, Australia and the other country concerned have agreed to limit their withholding tax rate to that level. Papua New Guinea recently imposed a withholding tax on dividends paid to non-residents (including residents of Australia), at a rate of 15 per cent and it is proposed by this Bill to apply a rate of 15 per cent to dividends paid from Australia to residents of Papua New Guinea. The general rate declared by the Principal Act for interest paid to non-residents - 10 per cent of the amount of the interest - applies to interest paid to residents of all countries. This rate will also apply to interest paid to residents of Papua New Guinea.

Clause 1: Short title and citation.

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

Clause 2: Commencement.

By this clause it is proposed that this Bill shall come into operation on the same day as the day from which the relevant withholding tax provisions in the Income Tax Assessment Bill (No. 5) 1973 will apply. Under that Bill, the existing provisions in the Income Tax Assessment Act that exclude dividends and interest derived by residents of Papua New Guinea from liability to withholding tax and provide for the ascertainment of tax on these amounts under normal assessment procedures are to be replaced by provisions imposing withholding tax on such dividends and interest, and it is necessary that both measures should come into operation at the same time.

Clause 3: Rates of tax.

The clause repeals section 7 of the Principal Act and substitutes a new section 7 in its place. The present section 7 declares a rate of withholding tax of 30 per cent in respect of dividend income and a rate of 10 per cent in respect of interest income to which sub-section (4) of section 128B of the Assessment Act applies. New section 7 will declare 15 per cent as the rate of withholding tax applicable to dividends flowing to residents of Papua New Guinea and 30 per cent as the general rate applicable in other cases.

The proposed rate of withholding tax on interest flowing to Papua New Guinea is 10 per cent of the gross payment. This is the rate currently applicable under section 7 of the Principal Act to interest payable to non-residents. New section 7 provides for this rate to apply in respect of interest payments to all non-residents, including residents of Papua New Guinea.