House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. W.G. Hayden, M.P.)

Main Features

The purpose of this memorandum is to provide explanations of the provisions of three income tax measures.

Income Tax Bill 1975

The first Bill - the Income Tax Bill 1975 - will declare the rates of income tax payable by individuals and companies for the current financial year, 1975-76. The main features of the Bill are:

General rates of tax payable by individuals (Clause 6(1))

The general rates of tax payable by individuals for the 1975-76 financial year, in respect of income of the 1975-76 income year, are, as a consequence of a new rates schedule, to be varied from those applicable for the 1974-75 financial year.

Rates of tax payable by companies (Clause 8)

The rate at which company tax is generally payable for the 1975-76 financial year (on taxable income of 1974-75) is to be reduced from 45 per cent to 42 1/2 per cent. The new rate of 42 1/2 per cent will apply to the taxable incomes of all companies with the exception of friendly society dispensaries in respect of which the rate will continue to be 37 1/2 per cent. The rate of additional tax payable on undistributed profits of a private company is to remain at 50 per cent.

Surcharge of tax on property income

The surcharge of tax in respect of income from property, which was imposed for the 1974-75 financial year by section 8 of the Income Tax Act 1974, is not being imposed for the 1975-76 financial year.

Age rebate

The rebate of tax allowed to aged persons (i.e. men aged 65 or more and women aged 60 or more) and the wives of aged persons pursuant to section 7 of the Income Tax Act 1974, is not being continued for the 1975-76 financial year.

Income Tax Assessment Bill (No. 2) 1975

The second Bill - the Income Tax Assessment Bill (No. 2) 1975 - is designed principally to give effect to the new system of rebates of tax announced in the Budget Speech. The main features of this Bill are :

Concessional rebates (for dependants) (Clause 17)

Rebates for dependants : The following direct rebates of tax are to replace the existing income tax allowances provided by way of concessional deductions in respect of the maintenance of dependants :-

	Maximum Rebate
Spouse, daughter-housekeeper, parent or parent-in-law, housekeeper	$400
Student	$200
Child under 16, not being a student	$200 (in respect of 1 such child)
	$150 (in respectof each other such child)
Invalid relative	$200

Except for the category "student", each class of dependant will remain defined as under the existing law. The student rebate will, however, be available in respect of any dependant under the age of 25 receiving full-time education at a school, college or university (under the present law, a concessional deduction for a student is limited to students aged 16 to 25 years).

Sole parent rebate : This is a new allowance. It will provide a rebate, up to a maximum of $200, to a person who is a parent without a partner and is maintaining dependants who qualify for rebate purposes as children under 16 or as students.

General concessional rebate (Clause 17)

With two exceptions to be mentioned, all expenses at present allowable as concessional deductions, including private rates and land taxes, medical expenses, life insurance premiums and superannuation payments, contributions to medical and hospital benefit funds, education expenses, etc., are to be allowed by way of a rebate of tax. The rebate allowable for these expenses will be calculated at 40 cents in the dollar of the amount qualifying for rebate or $540, whichever is the greater. At least, the minimum rebate of $540 will accordingly be allowable in the assessment of each resident individual taxpayer, except in unusual circumstances where further tax is payable in pursuance of section 94 of the Principal Act (see proposed section 159N). It will be allowable in addition to any dependant, sole parent or housekeeper rebate to which the taxpayer may be entitled.

Generally, the present statutory limit on expenditure subject to concessional deduction will apply in determining the amount subject to rebate. However, the existing limit of $150 per student that applies in respect of education expenses and self-education expenses is to be raised to $250. The scope of the concession for expenses of self-education is to be broadened to include all expenses necessarily incurred in connexion with a prescribed course of education, thus removing the present restriction to expenditure on fees, books and equipment. Amounts allowable by way of this rebate will not be deductible under any other provision of the law. As a result, claims for outright deductions for self-education expenses will be confined to amounts in excess of $250 per taxpayer incurred in any year commencing with the 1975-76 income year.

The two deductions of a concessional nature that are to continue to be allowable by way of deductions are-

•

housing loan interest payments.

•

gifts to charities, school building funds, etc.

Zone Allowances (Clauses 5, 10 and 11)

Zone allowances are to become separate rebates of tax, additional to any rebates for dependants or in respect of expenditure subject to rebate.

Accelerated depreciation allowances (Clause 7)

A new provision is to be inserted in the Income Tax Assessment Act 1936-1975 to double the effective rates at which depreciation is allowable on most new plant and equipment - not including certain motor vehicles - where the depreciable property is first used or installed ready for use on or after 1 July 1975. The accelerated rates will continue to apply to eligible plant throughout the period it is used by the taxpayer in the production of assessable income, or until the cost of the plant has been fully written off for income tax purposes. A taxpayer has the right to elect to forgo double depreciation.

Income Tax (International Agreements) Bill 1975

The third Bill - the Income Tax (International Agreements) Bill 1975 - will amend the Income Tax (International Agreements) Act 1953-1974 mainly to effect certain amendments consequential on proposals contained in the first and second Bills.

Notes on Clauses

INCOME TAX BILL 1975

Introductory Note.

As this Bill, to a substantial degree, re-enacts provisions included each year in the legislation declaring the rates of income tax for the financial year, the following notes are confined to the main provisions of the Bill that differ in practical effect from the provisions of the Income Tax Act 1974 which declared the rates of tax for the 1974-75 financial year.

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

This clause declares the ordinary rates of tax payable by persons other than companies, i.e., by individuals and by trustees, for the 1975-76 financial year. The rates of tax are set out in the schedules to the Bill.

The general rates of tax, applicable to most individuals, are declared by sub-clause (1) and are set out in Schedule 1 to the Bill. The new Schedule 1 contains a completely restructured progressive rates scale of seven steps, as compared with 14 steps in the scale it replaces. By comparison with the rates that applied for 1974-75, the new rates will be higher on so much of taxable income as is no greater than $6,000 and, in general, lower for the excess of taxable income over $6,000. On so much of taxable income as falls between $15,000 and $16,000 the rate will remain at 55 per cent while, for a taxable income exceeding $25,000, the excess over $25,000 up to $40,000 will bear tax at a rate of 65 per cent compared with 64 per cent under the 1974-75 scale. The 65 per cent rate is, however, the maximum marginal rate. A maximum rate of 67 per cent applied in 1974-75 to the part of taxable income in excess of $40,000.

Sub-clauses (2), (3) and (4) and the associated Schedules 2, 3 and 4 to the Bill enact the new rates of tax in the cases to which each Schedule applies.

Primary producers to whom the averaging provisions of the Assessment Act apply are liable for tax at the rates declared by sub-clause (2), as set out in Schedule 2. The effect of Schedule (2) is to tax the first $16,000 of taxable income at the lower of the average rate based on the general rates applicable to the person's average income and the average of the general rates applicable to a taxable income of $16,000. In consequence of the proposed changes in the general rates of tax, Schedule 2 differs from its 1974-75 counterpart in two respects. The average rate of tax applicable to an income of $16,000 has been reduced from its 1974-75 level of 37.625 cents in the dollar to 36 cents in the dollar and the tax at general rates on a taxable income of $16,000 has been reduced from its 1974-75 level of $6,036.70 to the lower level of $5,760.

Sub-clause (3) declares the rate of tax applicable to a taxpayer deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premium) or section 158D (abnormal income of authors and inventors) of the Assessment Act. This is set out in Schedule 3 to the Bill. As Schedule 3 applies by reference to the rates in Schedule 1, the changes in the general rates will apply automatically in these cases.

Sub-clause (4) declares that the rate of tax payable by a trustee in pursuance of section 98 (broadly, income to which a minor beneficiary is presently entitled) or section 99 (income to which no beneficiary is presently entitled) of the Assessment Act is to be determined by Schedule 4. Although this Schedule has not been varied from its 1974-75 counterpart, the proposed alterations to the general rates of tax will flow through to these cases, since Schedule 4 specifies that the rates of tax fixed by Schedules 1, 2 and 3 are applicable in assessments under section 98 and section 99. It will be seen from the notes on the Income Tax Assessment Bill that rebates of tax under the new Subdivision A of Division 17 of Part III of the Assessment Act, including the general rebate of $540, are not to be allowable in an assessment under section 99.

Sub-clause (5) declares the rate of tax to be payable by a trustee on the investment income of the 1975-76 income year of a superannuation fund that does not invest a sufficient proportion of its assets in public securities. The rate is to be 42 1/2 per cent instead of 45 per cent as for the 1974-75 income year.

Sub-clause (6) declares the rate of further tax payable pursuant to Section 94 of the Assessment Act where there is included in the taxable income any amount of income to which that section applies, i.e., "uncontrolled partnership income" less the deductions specified in sub-section (10) of section 94.

A person is said to derive uncontrolled partnership income if, being a partner in a partnership, he or she does not have the real and effective control of the relevant share of the partnership income. A person under the age of 16 at the end of the year of income of a partnership is deemed not to have the real and effective control of a share of partnership income except to the extent that, in the opinion of the Commissioner, the share would constitute reasonable remuneration by way of salary or wages if services rendered by the person to the partnership had been performed by an employee.

The effect of sub-section 6(6) of the 1974 Act was to impose further tax on income to which section 94 applies at a rate equal to 50 per cent reduced by the average ordinary rate of tax applicable to the taxpayer's total taxable income. The ordinary rate of tax was ascertained by the formula : tax payable before the allowance of any rebates or credits divided by taxable income.

Hitherto, the deductions made from uncontrolled partnership income in ascertaining the amount of the taxable income subject to further tax have included a proportion of any concessional deductions.

Under amendments proposed to the Assessment Act, concessional deductions, other than those for housing loan interest, are now to be replaced by concessional rebates of tax. While the rebates for dependants will replace deductions formerly made from assessable income, the minimum general rebate of $540 is to be allowed irrespective of the level of eligible expenditure to which it relates. Where the actual expenditure is less than $1,350 there will, in effect, be a part of the general rebate of $540 that is not matched by any amount that would have been apportionable against uncontrolled partnership income if the concessional deductions system had continued unchanged.

As explained in the notes on the new section 159N of the Assessment Act, the amount of the general rebate is to be reduced for section 94 purposes where the actual expenditure is less than $1,350 and the sum of the dependant, sole parent and housekeeper rebates and a full general rebate of $540 exceeds the ordinary tax payable before allowing any other rebates or any credits to which a taxpayer is entitled. The reduction in the general rebate pursuant to sub-section 159N(4) or 159N(5) will be an amount equal to the amount of such excess.

The effect of this is that any part of the general rebate of tax not matched by actual expenditure will be allowable only in reduction of the ordinary tax payable. As a corollary, any part of the general rebate not matched by actual expenditure, whether or not limited by sub-section 159N(4) or 159N(5), should be deducted from the ordinary tax (before the allowance of any other rebate or credit) in arriving at the average rate of ordinary tax and the further rate of tax which will be the amount by which that ordinary rate falls short of 50 per cent. Accordingly, sub-clause (6) makes provision for any rebate allowable under sub-section 159N(2) or paragraph 159N(3)(b), i.e. any part of the general rebate not matched by actual expenditure, to be deducted in the process of determining the rate of further tax payable by a person in pursuance of section 94.

Sub-clause (7) declares the rate of further tax payable pursuant to section 94 of the Assessment Act where the taxpayer is a trustee liable to be assessed and to pay tax under section 98 or section 99 of that Act. Where any rebate is allowed under sub-section 159N(2) or paragraph 159N(3)(b) in the assessment of a trustee liable to tax under section 98 (broadly, income to which a minor beneficiary is entitled), that rebate will be taken into account in the process of determining the further rate of tax payable by the trustee in the manner described above in a case to which sub-clause (6) applies. A trustee liable to tax under section 99 of the Assessment Act (income to which no beneficiary is presently entitled) will not be entitled to the proposed general rebate of tax. Accordingly the further rate of tax payable in an assessment under that section will be calculated under sub-clause (7) in the same way as it was under sub-section 6(7) of the Income Tax Act 1974.

Sub-clause (8) retains at 50% the rate of tax payable by a trustee liable to tax pursuant to section 99A of the Assessment Act.

Sub-clause (9) retains at 50 per cent the rate of tax payable by a trustee of a superannuation fund liable to tax pursuant to section 121CA, 121CB or 121DA of the Assessment Act.

Clause 7: Limitation of tax payable on certain incomes

Clause 7 imposes a limit on the amount of tax payable by persons, other than companies, on incomes marginally above the amounts specified in paragraphs (a) and (b) of sub-clause 5(3) as the amounts of income up to which no tax will be payable. The purpose of this clause is to cushion the movement from complete exemption into tax at ordinary rates. In 1974-75, tax at ordinary rates was limited in the case of individuals, and of trustees liable to tax under section 98 of the Assessment Act, to 66 per cent of the amount by which the income exceeded $1,040, tax at general rates being reached at an income above $1,061. The tax at ordinary rates payable by a trustee under section 99 was for 1973-74 limited to 45 per cent of the amount by which the income exceeded $416, with tax at general rates being reached at an income above $425. In line with the changes in general rates of tax, the "shading-in" arrangements for 1975-76 are being varied.

Sub-clause (1) relates to assessments of individual taxpayers and provides that, where the taxable income does not exceed $1,492 (the new upper limit of the "shading-in" range), the tax payable under Schedules 1, 2 and 3 to the Bill is limited to 66 per cent of the amount by which the taxable income exceeds $1,040. Because resident taxpayers will be entitled to the general rebate of $540 under section 159N of the Assessment Act, they would not generally be subject to tax on a taxable income of $2,518 or less. Accordingly, sub-clause (1) will be capable of application only in the case of an assessment of a non-resident taxpayer who, not being entitled to the general rebate under section 159N, will generally be subject to tax on a taxable income of $1,041 or more.

Sub-clause (2) relates to assessments of trustees liable to be assessed in respect of the net income of a trust estate under section 98 of the Assessment Act, i.e., where the beneficiary presently entitled to the income is under a legal disability. Where the net income does not exceed $1,492 the tax payable by reference to Schedule 4 to the Bill will be limited to 66 per cent of the net income in excess of $1040. This sub-clause will be capable of application only where the beneficiary is a non-resident (cf. explanation of sub-clause (1) above).

Sub-clause (3) relates to assessments of trustees liable to be assessed under section 99 of the Assessment Act in respect of the net income of a trust estate to which no beneficiary is presently entitled. If the net income does not exceed $748 the tax payable will be limited to 45 per cent of the excess of that income over $416.

Clause 8: Rates of tax payable by companies

Sub-clause (1) will declare the rates of tax payable by companies for the 1975-76 financial year, in respect of income of the 1974-75 income year, to be as set out in Schedule 5.

The general rate of company tax for the 1974-75 financial year was 45 per cent and is to be reduced to 42 1/2 per cent for the 1975-76 financial year. The 1974-75 general rate of 45 per cent applied to all taxable income of companies except for -

(a)

the first $10,000 of income of a co-operative company or a non-profit company (other than a friendly society dispensary), which was taxed at 42 1/2 per cent; and

(b)

the whole of the taxable income of a non-profit company, being a friendly society dispensary, which was taxed at 37 1/2 per cent.

As these rates are not being varied, the new general rate of 42 1/2 per cent for the 1975-76 financial year will apply to all company taxable income except that derived by a non-profit company that is a friendly society dispensary. This will continue to be taxed at the rate of 37 1/2 per cent.

The rate of tax applicable to the undistributed income of a private company remains at 50 per cent.

Sub-clauses (2) and (3) place a limit on the amount of tax that may be payable by friendly society dispensaries and other non-profit companies which, pursuant to sub-paragraph 5(3)(b)(i), are not liable to tax on a taxable income of $416 or less. The purpose of the limitation is to cushion the movement from complete exemption into tax at ordinary rates. Sub-clauses (2) and (3) re-enact the provisions of sub-sections 8(2) and 8(3) of the Income Tax Act 1974.

Clause 9: Adjustment where amount to be paid by, or refunded to, taxpayer would not exceed 49 cents

Clause 9 is a provision relating to small balances - whether owing to or by the taxpayer - that remain after all other adjustments have been made. It applies to companies as well as other persons.

The clause authorises an adjustment to reduce any balance of 49 cents or less to nil, so avoiding the necessity to collect or refund amounts of this order. Except for increasing from 20 cents to 49 cents the amount of any balance that may be dealt with under the provision, this clause re-enacts the provisions of section 11 of the Income Tax Act 1974.

INCOME TAX ASSESSMENT BILL (NO.2) 1975

The main features of this Bill have been outlined 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 the Principal Act, as amended.

Clause 2: Commencement.

Section 5(1A) of the Acts Interpretation Act 1901-1973 provides that, unless the contrary intention appears, every Act shall come into operation on the day on which it receives the Royal Assent.

Sub-clause (1) of clause (2) proposes that, subject to sub-clause (2), the amending Act will come into operation on the day on which it receives the Royal Assent. This will enable the early making of new Regulations under the Act as amended to provide that the collection of income tax instalments from salary and wages, under the P.A.Y.E. arrangements, are based on the new income tax rate scale and rebate system.

Sub-clause (2) proposes that the amendment made by paragraph 11(1)(c) - see notes on that paragraph later in this memorandum - are to have effect from the date, yet to be proclaimed, on which section 7 of the Defence Force Re-organization Act 1975 comes into operation.

By sub-clause (3), the amendment made by clause 30 will take effect on the date fixed by Proclamation under sub-section 2(2) of the Australia Police Act - see notes on clause 30 in this memorandum.

Clause 3: Interpretation.

This clause proposes to effect three amendments to sub-section 6(1) of the Principal Act which contains definitions of words and phrases used in that Act. The amendments are of a technical nature and are related to the amendments proposed in this Bill that are designed to replace certain of the existing concessional deductions with rebates of tax as part of the proposed new personal income tax scheme announced in the 1975-76 Budget Speech.

Paragraph (a) of clause 3 proposes an amendment to the definition of "apportionable deductions" in sub-section 6(1). Stated broadly, the term "apportionable deductions" means deductions of a concessional nature which do not directly relate to the production of assessable income. The definition enables deductions of this kind to be apportioned on a pro-rata basis against various classes of income where it is appropriate to do so for purposes of provisions of the Principal Act.

The amendment proposed by paragraph (a) will have the effect of deleting from the definition of "apportionable deductions" the existing references to deductions allowable under the provisions of sub-section 23AB(7), section 79A, section 79B and Subdivision B of Division 3 of Part III. Commencing with assessments in respect of income of the 1975-76 income year, these deductions are to be available only by way of rebates of tax and, accordingly, the references being deleted from the definition of "apportionable deductions" are no longer required.

Paragraph (b) of clause 3 proposes to re-define the term "concessional deductions" in sub-section 6(1) of the Principal Act. The term is relevant, e.g., to section 95 which excludes "concessional deductions" from the ascertainment of the net income of a trust estate. At present the definition encompasses all the concessional deductions provided by Subdivision B of Division 3 of Part III, which, on the change to concessional rebates, is being repealed. The effect of the amendment is that only deductions for housing loan interest - under Subdivision C of Division 3 of Part III - will fall within the term "concessional deductions".

Paragraph (c) of clause 3 proposes to amend the definition of "foreign superannuation fund" in sub-section 6(1) of the Principal Act. The definition describes the classes of funds which, in relation to dividends and interest derived from Australia, are excluded from the scope of certain provisions of the Principal Act applying to the taxation of superannuation funds.

Under the present definition, a foreign superannuation fund is a provident, benefit, superannuation or retirement fund which has no connexion with Australia other than its investment here. The definition does not include a fund for which an amount has been set aside, or to which an amount has been paid, by a taxpayer, in respect of which a deduction has been allowed or is allowable under any provision of the Principal Act.

By paragraph (c) of clause 3, the definition of "foreign superannuation fund" is to be amended to ensure that a fund is also unable to qualify as a foreign superannuation fund for Australian income tax purposes where, on the substitution of rebates for deductions, a rebate of tax is allowed or allowable to a taxpayer - in respect of an amount set aside for, or paid to, the fund.

By sub-clause 34(1) of the Bill, the amendments to be effected by clause 3 will apply in relation to assessments in respect of the 1975-76 income year and subsequent years.

Clause 4: Income of certain persons connected with undertakings of the United States Government.

Clause 4 proposes a drafting amendment to sub-section 23AA(3) of the Principal Act that is consequential on the proposed repeal of Subdivision B of Division 3 of Part III (i.e. the concessional deduction provisions of the income tax law) by clause 15 of the Bill and the introduction of new Subdivision A of Division 17 of Part III authorising the rebates of tax that are to take the place of existing concessional deductions (see notes on clause 17).

Sub-section 23AA(3) provides, as required by certain agreements between the Australian and United States Governments, that a person to whom the section applies is not to be taken to be a resident of Australia for the purposes of the provisions of the Principal Act, other than the provisions of Subdivision B of Division 3 of Part III, for any period during which the person is covered by the section. In these circumstances, income derived by such a person from sources outside Australia during a qualifying period will, where certain conditions are fulfilled, be exempt from Australian income tax under section 23(r) of the Principal Act. (That section exempts from Australian income tax income derived by a non-resident from sources outside Australia). In terms of sub-section 23AA(3), the person is not, however, to be regarded automatically as a non-resident for the purpose of applying the concessional deduction provisions contained in Subdivision B of Division 3 of Part III of the Principal Act. This means that a person who is covered by the provisions of section 23AA (being a person who is a resident of Australia as defined in section 6(1) of the Principal Act) may at present qualify for the allowance of concessional deductions under Subdivision B of Division 3 of Part III in his assessment in respect of Australian income that is liable to tax.

The amendment proposed by clause 4, in conjunction with sub-clause 34(1), will ensure that persons covered by sub-section 23AA(3) are placed in a corresponding position as regards the availability of rebates of tax under new Subdivision A of Division 17 of Part III, in assessments in respect of the 1975-76 and subsequent income years, as they now are for purposes of the concessional deductions provided under Subdivision B of Division 3 of Part III.

Clause 5: Income of certain persons serving with an armed force under the control of the United Nations.

Clause 5 proposes amendments to sub-sections (7) and (9) of section 23AB of the Principal Act. The amendments are designed to convert from deduction to rebate the special allowances available under the section to civilian personnel serving with an armed force of the United Nations overseas. Corresponding amendments are proposed to sections 79A and 79B which authorise somewhat similar special deductions for certain other classes of taxpayers (see notes on clauses 10 and 11).

Paragraph (a) of clause 5 proposes to amend sub-section (7) of 23AB. At present sub-section (7) authorises a special taxation deduction for civilian personnel contributed by Australia to an armed force of the United Nations overseas, in circumstances where the salaries, wages and allowances of the personnel are paid by Australia, or by the United Nations as agent for Australia. Members of the Australian Police Unit serving with the United Nations force in Cyprus are at present the only personnel covered by section 23AB.

In broad terms, a person whose United Nations service extends over more than half the year of income is at present entitled to a special additional deduction of $540 plus one-half of concessional deductions allowable in respect of dependants. It is proposed that such a person will, on the change from deductions to rebates, be entitled to a special additional rebate of $216 plus 25 per cent of dependants rebates and, if it applies, the sole parent rebate.

Where the period of United Nations service during the year is less than one-half of the year of income, the rebate allowable to the taxpayer is to be such amount as, in the opinion of the Commissioner of Taxation, is reasonable in the circumstances of the particular case, but is not to exceed the amount of the rebate that would have been allowable if the service during the year was six months or longer. A similar procedure now applies in these cases for purposes of the additional deduction.

Paragraph (b) of clause 5 proposes to effect minor drafting amendments to sub-section 23AB(9) that are consequential on the amendment proposed by paragraph (a) and the amendment to section 79A proposed by clause 10.

In terms of sub-clause 34(1), the amendments to be made to section 23AB by clause 5 will apply in relation to assessments in respect of income of the 1975-76 and subsequent years of income.

Clause 6: Export market development expenditure.

This clause proposes an amendment to section 51AC of the Principal Act that is consequential upon the proposed repeal of the tax surcharge on property income. (Notes on that proposal are provided in the memorandum dealing with the Income Tax Bill 1975).

Section 51AC of the Principal Act authorises the allowance of a special deduction, in addition to any other deduction that may be available under the Principal Act, for specified classes of business expenditures ("export market development expenditures") that are incurred after 30 June 1961 and before 1 July 1968 primarily and principally in the promotion of exports of Australian goods and services. The total "tax saving" in respect of any export market development expenditure that may arise as a result of the allowance of deductions under section 51AC and any other section of the Act may not exceed 80 cents for each dollar of expenditure. The term "the tax saving" is defined in a way that ensures that the property income surcharge that applied for the 1974-75 income year is not taken into account in the calculation of "the tax saving".

Eligible expenditure incurred on or after 1 July 1968 and before 1 July 1974 is the subject of a rebate of tax under section 160AC of the Principal Act. In practice, this means that the section 51AC deduction (and consequently the definition of "the tax saving") can now apply only in a case where export market development expenditure incurred before 1 July 1968 is an element of a loss that, under the relevant loss provisions of the income tax law, may be carried forward for deduction against income of the 1975-76 or subsequent income year.

As the property income surcharge is to be terminated, the present reference to that tax in the definition of "tax saving" in sub-section 51AC(1) will not be required in relation to assessments for 1975-76 and subsequent income years. Sub-clause 34(1) provides for the definition of "the tax saving", as amended by clause 6, to apply in relation to those assessments.

Clause 7: Special depreciation on new plant first used or installed on or after 1 July 1975.

Introductory Note

This clause will insert in the Principal Act a new provision, section 57AD, that will authorise higher depreciation allowances in respect of certain plant or articles that are used by taxpayers in the production of assessable income. In effect, the new section will enable taxpayers to claim deductions for depreciation on eligible plant at twice the rates of depreciation normally provided under the depreciation provisions of the income tax law for plant of the relevant class.

New section 57AD is along lines similar to section 57AC of the Principal Act which authorises the allowance of doubled rates of depreciation for manufacturing or primary production plant that was first used or installed ready for use in the one year period from 1 July 1974 to 30 June 1975. However, as will be indicated in the notes that follow, the scope of plant eligible for depreciation in terms of section 57AD is to be considerably wider than under section 57AC. In particular, the new allowance will not be limited to plant used in manufacturing and primary production industries.

Sub-section (1) of section 57AD contains a definition of "plant" for the purposes of the section. "Plant" is given the meaning that it has in section 54 of the Principal Act, with the exception that, in section 57AD, certain classes of motor vehicles are to be expressly excluded from the operation of the section by virtue of paragraphs (a) to (c) of sub-section (1).

As defined in section 54, "plant" has a wide meaning which embraces classes of property that might not otherwise be regarded as plant. In addition to property normally encompassed by the term, it includes, within limits, fences, dams and other structural improvements where used for agricultural or pastoral pursuits or for the purposes of forestry or pearling operations. Certain plumbing fixtures and fittings, including tiling, also fall within the definition of "plant".

The specified classes of motor vehicles (including four wheel drive vehicles falling within those classes) that are to be ineligible for double depreciation allowances by virtue of the definition of "plant" in section 57AD(1) are as follows -

•

paragraph (a) - motor cars, station wagons, panel vans, utility trucks and similar vehicles (which, for example, would include land rovers jeeps and estate cars).

•

paragraph (b) - motor cycles and similar vehicles e.g. motor scooters, and

•

paragraph (c) - any other road vehicles designed to carry a load of less than 1 tonne or less than 9 passengers. This paragraph will exclude from the scope of the section a category of vehicles broadly similar to those falling within paragraph (a) and which include for example, passenger vehicles known as microbuses, campervans etc.

Larger vehicles such as trucks, vans, lorries etc. that are designed to carry loads of 1 tonne or more and buses, tourist coaches and the like designed to carry at least 9 passengers are not excluded by sub-section (1) and will therefore be eligible for double rates of depreciation provided other requirements of the section are satisfied.

Other classes of motor vehicles which either could not be regarded as road vehicles or are not designed to carry loads or passengers (e.g., tractors, fork-lift trucks, tow trucks, road-making plant) do not fall for exclusion under paragraph (c) and may also qualify for double depreciation allowances.

Sub-section (2) of section 57AD prescribes the conditions under which plant may be eligible for depreciation at the higher rates under the section. The special depreciation is to be available in respect of plant owned by the taxpayer and which is otherwise eligible for normal depreciation under the income tax law.

Paragraph (a) of sub-section (2) lays down the further requirement that the plant or articles be first used by the taxpayer for the purpose of producing assessable income, or be first installed ready for such use, on or after 1 July 1975. This provision will double the depreciation rates applicable to new plant first used or brought into use on or after that date. Plant that the taxpayer had installed or used prior to 1 July 1975 will not attract the accelerated rate under this section although it may, of course, be subject to doubled rates already, by virtue of section 57AC.

To satisfy the requirements of the section, plant must be used by the taxpayer concerned for the purpose of producing assessable income. However, this does not mean that it has to be physically operated in the taxpayer's own business. Thus, a taxpayer who as lessor derives assessable income in rentals and charges from hiring out or leasing plant for use by lessees of the plant may qualify for accelerated deprecation in the same way as an owner who actually operates plant.

Once eligibility for double depreciation is established, eligible plant will remain subject to the higher depreciation allowance in respect of its use in the production of the taxpayer's assessable income in income years subsequent to that in which the plant is first so used or installed ready for use until the cost of the plant has been fully written off for income tax purposes. (See notes below relating to proposed sub-section 57AD(3)).

Paragraph (b) of sub-section (2) requires that, in order to be eligible for the accelerated allowances, plant meeting the requirements of paragraph (a) must not have previously been used or held for use by the taxpayer for a purpose not associated with the gaining of assessable income or been used for any purpose by any other person. The effect of this provision is to ensure that the allowance only applies to new plant. It will not apply to purchases of second-hand plant or to plant previously used by the taxpayer for private purposes.

Paragraph (c) excludes from the new provision special categories of plant for which statutory rates of depreciation are provided in the income tax law under sections 55(2), 57AA, 57AB and 73A of the Principal Act. Sections 55(2) and 73A, respectively, prescribe depreciation rates of 33 1/3 per cent in relation to certain facilities and amenities provided by employers for employees and children of employees and for certain plant used for scientific research purposes. Annual rates of 20 per cent are set by sections 57AA and 57AB in relation to plant used for primary production where the plant was acquired under contracts made on or before 21 August 1973.

Depreciation allowances in relation to plant subject to statutory rates of depreciation under sections 55(2), 57AA, 57AB and 73A will not be disturbed.

Sub-section (3) of section 57AD is the operative provision for the purpose of the new and more broadly-based accelerated depreciation allowances. In broad terms, it provides that eligible plant is to be subject to depreciation for income tax purposes at double the rates that would otherwise be ascertained as applying to the plant by reference to its estimated effective life.

Section 54 of the Principal Act authorises deductions for depreciation of plant or articles owned by a taxpayer and used during the year of income for the purpose of producing assessable income or installed ready for use for that purpose and held in reserve. To fix the basic rate of depreciation of a unit of plant the Commissioner of Taxation is required by section 55(1) to estimate the effective life of the unit concerned. (In practice, standard rates of depreciation for most recognised items of plant have been fixed by the Commissioner and are published in Income Tax Order No. 1217).

As previously mentioned, statutory rates of depreciation are provided in the income tax law for some special classes of plant. Except where statutory rates have effect, a taxpayer is given an option under section 56(1) of the Principal Act to have deductions for depreciation determined under the prime cost method or by reference to the depreciated value of the plant. In the latter instance the rate allowed is one and one-half times the basic rate determined under section 55(1).

An option to adopt the prime cost method of depreciation, once made, will generally apply in assessments for all subsequent years unless the method of calculating the depreciation allowances is changed with the leave of the Commissioner given under section 57 of the Principal Act. A limited exception to this general rule is contained in section 56A of the Principal Act which permits a further option to adopt the diminishing value method for certain taxpayers who had opted for the prime cost basis up to the 1956-57 income year.

Sub-section (3) of proposed section 57AD provides that, notwithstanding anything contained in sections 55(1), 56(1), 56A or 57, the rates of depreciation that would otherwise apply by reference to the estimated effective life of the plant are to be doubled in relation to plant meeting the tests for eligibility under sub-sections (1) and (2). Both the prime cost and diminishing value rates will be doubled. The broad effect of sub-section (3) is to halve the effective life estimated for the purpose of fixing the depreciation rates for eligible plant.

Sub-section (4) of section 57AD confers on taxpayers an option to forgo the double depreciation rates authorised by sub-section (3) and, instead, to be allowed deductions for depreciation on eligible plant at ordinary rates determined without reference to the new section.

An election to adopt ordinary depreciation rates instead of double rates may be made in respect of all plant that would otherwise be eligible for depreciation under section 57AD and which was first used or installed ready for use in the year of income specified in the election. A taxpayer is not permitted to elect in relation to some only of plant that was first used or installed in that year.

As already stated, plant eligible for accelerated depreciation is limited to plant that is first used or installed ready for use on or after 1 July 1975 - so that the 1975-76 income year will be the first year in respect of which such an election will be possible.

Sub-section (5) prescribes the procedure to be adopted with regard to the exercise of an option conferred by sub-section (4). The notice of election is required to be in writing and must be lodged with the Commissioner of Taxation not later than the date of lodgment of the return to which the election relates or within such further time as the Commissioner allows.

Sub-clause (2) of clause 6 will provide authority for the Commissioner to amend assessments to allow claims for depreciation at accelerated rates on eligible plant where assessments have been issued allowing depreciation at ordinary rates prior to the coming into force of the proposed section 57AD. This authority is necessary in relation to certain taxpayers who adopt substituted accounting periods for income tax purposes.

Clause 8: Rates and taxes

Section 72 of the Principal Act authorises deductions for sums paid by a taxpayer in the year of income under a personal liability for rates which are annually assessed, or for land tax. In relation to private rates and land tax, this deduction is restricted to those paid by the taxpayer in respect of his sole or principal residence. The deduction available in these circumstances is limited to $300 in any income year.

The amendments proposed to be made to section 72 by clause 8 of the Bill are related to the proposal to substitute a rebate of tax for the deductions presently available under the section in respect of private rates and land tax. This rebate is to be authorised by a new provision section 159V. As explained in the relevant notes dealing with clause 17, the effect of this new provision, in relation to a payment of private rates or land tax, will be to treat as a rebatable amount an amount equal to the amount that would now be deductible under section 72 in respect of the payment of private rates or land tax.

The proposed amendments to section 72 will, generally speaking, apply to private rates and land tax paid by resident taxpayers. The basis on which deductions are at present available under section 72 for rates and land tax in respect of business premises will not be affected by the amendments.

Paragraph (a) of clause 8 formally provides that the provisions of paragraph (b) of sub-section (IB) of section 72 of the Principal Act are subject to the provisions of new sub-section (IG).

Paragraph (b) of clause 8 proposes the insertion of two new provisions - sub-sections (IG) and (IH) - in section 72 of the Principal Act.

New sub-section (IG) of section 72 ensures that a deduction is not allowable under section 72 in respect of an amount paid by a resident taxpayer in the year of income that commenced on 1 July 1975, or in a subsequent year of income, in respect of private rates or land tax levied on a dwelling, flat or home unit used by the taxpayer during the relevant year of income as his sole or principal residence. Such amounts are now to be allowable by way of rebates of tax.

However, provision is made that where a private house, flat or home unit is let for a period of the year the present situation will not be disturbed. That part of the rates and land tax that is applicable to the period of letting will continue to be an allowable deduction against the rent.

New sub-section (IH) is related to sections 7 and 30 of the Income Tax Assessment Act 1975 - Act No. 80 of 1975 - assented to on 20 June 1975. An effect of those sections was to discontinue, in relation to assessments in respect of years of income subsequent to the year in which Papua New Guinea attained independence, the allowance of deductions to taxpayers resident in Papua New Guinea (not being residents of Australia for Australian tax purposes).

As Papua New Guinea attained independence on 16 September 1975, the amendments contained in the Income Tax Assessment Act 1975 will commence to apply to assessments in respect of the 1976-77 income year.

Sub-section (IH) is designed to ensure that a taxpayer resident in Papua New Guinea will continue, for the income year 1975-76, to be entitled to a rebate in respect of rates and land taxes - on the same terms as a deduction would have been available for rates and land taxes but for the change in the system.

Paragraph (c) of clause 8 proposes an amendment to sub-section 72(3) of the Principal Act.

Sub-section 72(3) applies to cases in which a deduction is allowable under sub-section (1A) to a flat or home unit owner for a contribution towards the rates or land tax payable by some other person in circumstances where a refund of those rates or land tax is made. In such a case, an appropriate part of the refund is included in the assessable income of the flat or home unit owner. Correspondingly, any amount that is to be included (under sub-section (2)) in the assessable income of the person receiving the refund is reduced by the amount included in the assessable income of the flat or home unit owner.

The amendment proposed to be made to sub-section (3) by paragraph (c) of clause 8 will extend the principle expressed in the existing sub-section (3) to cases where a rebate of tax is allowed under new section 159V to a flat or home unit owner for a contribution towards rates or land tax and a refund of those rates or land tax is subsequently made.

Clause 9: Gifts, calls on afforestation shares, pensions etc.

This clause proposes to effect two amendments to paragraph (1)(b) of section 78 of the Principal Act which authorises a deduction for one-third of the amount of calls paid on shares (other than redeemable shares) in afforestation companies, where the call moneys are for use by the company in its afforestation business. The effect of the proposed amendments is to terminate the availability of deductions under paragraph 78(1)(b) to taxpayers and trustees who are to be within the scope of the corresponding rebate for calls paid on shares in afforestation companies under new section 159W (that section is explained in the notes dealing with clause 17). The amendments will not disturb the allowance of the special deduction under paragraph 78(1)(b) in the assessment of taxpayers (chiefly companies, non-residents, and trustees liable to tax under section 99 or 99A) to whom the new section 159W is not to apply.

Paragraph (a) of clause 9 is a formal amendment to make the operation of paragraph 78(1)(b) subject to a new provision - sub-section 78(7).

Paragraph (b) will add at the end of section 78 a new provision - sub-section (7) - which will have the effect of withdrawing, in relation to the assessments of taxpayers and trustees to whom new Subdivision A of Division 17 of Part III is to apply, the special deduction authorised by paragraph 78(1)(b). Such taxpayers are to be entitled to rebates of tax in respect of their eligible calls under new section 159W instead of deductions as now authorised by paragraph 78(1)(b).

By clause 34, the amendments proposed by clause 9 will have effect in relation to assessments for the 1975-76 income year and subsequent years.

Clause 10: Rebates for residents of isolated areas.

Section 79A of the Principal Act provides for special deductions for the residents of certain isolated areas subject to uncongenial climatic conditions and in which the cost of living is high. For the purposes of the section the areas, the residents of which are entitled to the special deductions, are divided into two zones, Zone A and Zone B. (The zone areas, as described in detail in Part 1 and 11 of Schedule 2 of the Principal Act, are not changed by this Bill.)

By clause 10, it is proposed to convert the special deductions now available to eligible taxpayers under section 79A of the Principal Act to rebates of tax. Broadly, the effect of this change will be as follows :

(a)

in the case of a resident of Zone A - the rebate of tax allowable will be the sum of $216 and an amount equal to 25 per cent of the sum of the rebates (if any) to which the taxpayer is entitled in respect of the year of income under new sections 159J, 159K and 159L (in respect of a spouse or daughter-housekeeper, children under 16, student children, invalid relatives, parents, parents-in-law or a housekeeper, or by way of a sole parent rebate);

(b)

in the case of a resident of Zone B - the rebate of tax allowable will be the sum of $36 and an amount equal to 4 per cent of the sum of the dependant, housekeeper or sole parent rebates to which the taxpayer is entitled in respect of the year of income under the sections mentioned.

Where a taxpayer has resided in areas included in the prescribed zones for more than half of the year of income but not for a full six months in either zone, sub-section 79A(2) empowers the Commissioner to determine the amount of the deduction which is reasonable, not being an amount greater than the full deduction allowable to residents of Zone A, nor less than the full deduction allowable to residents of Zone B. This principle is retained, and will apply in relation to the allowance of rebates of tax under section 79A as amended by this Bill.

Paragraph (a) of clause 10 effects a drafting amendment to sub-section 79A(1) that is consequential on the proposal to change the special deduction to a rebate of tax.

Paragraph (b) of clause 10 proposes to substitute a new sub-section (2) for the existing sub-section. The new sub-section comprises three paragraphs - paragraphs (a), (b) and (c).

The first of these new paragraphs - paragraph (a) prescribes the rebate of tax allowable in the case of a resident of Zone A, namely $216 plus 25 per cent of any rebates to which the taxpayer is entitled in respect of the year of income under new section 159J (for spouse, daughter-housekeeper, children under 16, student children, invalid relatives, parents and parents-in-law), under new section 159K (by way of the sole parent rebate) and under new section 159L (for housekeeper).

The second - paragraph (b) - prescribes the rebates allowable in the case of a resident of Zone B who has not resided or actually been in Zone A during any part of the year of income, namely $36 plus 4 per cent of any rebates to which the taxpayer is entitled in respect of the year of income under sections 159J, 159K or 159L.

Paragraph (c) - the third paragraph of new sub-section 79A(2), applies in cases not covered by preceding paragraphs (a) and (b). It authorises the Commissioner to allow a rebate to a taxpayer who has resided in the area comprising the zones for more than half of the year of income but not for a full six months in either zone. The rebate is not to exceed the full rebate allowable to residents of Zone A, nor to be less than the full rebate allowable to residents of Zone B.

By sub-clause (1) of clause 34 of the Bill, the amendments to section 79A of the Principal Act are to apply to assessments in respect of income of the 1975-76 income year and subsequent years.

Clause 11: Rebates for members of Defence Force serving overseas.

This clause proposes a number of amendments to section 79B of the Principal Act which provides a special deduction - comparable to the concession available to residents of Zone A and Zone B under section 79A (see notes on clause 10) - to members of the Defence Force serving in certain overseas localities, in recognition of the uncongenial nature of service in, and the isolation of, the particular locality.

The amendments, explained separately in the notes that follow, are chiefly related to the proposal to change the present concession from a deduction basis to a rebate of tax basis.

Paragraph (a) of sub-clause (1) of clause 11 effects the formal amendment to sub-section 79B(1) that is necessary because of the proposal to change the special deduction under section 79B to a rebate of tax.

Paragraph (b) of sub-clause (1) of clause 11 effects a drafting amendment to sub-section (1A) that is consequential on the change of the special deduction to a rebate of tax.

Paragraph (c) of sub-clause (1) of clause 11 omits from sub-section (1B) the reference to "the Naval Board, the Military Board or the Air Board or a person authorised by one of those Boards" and substitutes, in its stead, a reference to "a chief of staff or a person authorised by a chief of staff".

This is a drafting change consequential on amendments made to the Defence Act 1903-1973 by section 7 of the Defence Force Re-organisation Act 1975 that are to come into operation on a date to be proclaimed. By sub-clause (2) of clause 2 of this Bill, the consequential drafting changes to sub-section (1B) of section 79B of the Principal Act will have effect on and from the date fixed by proclamation on which the relevant amendments to the Defence legislation become operative.

Paragraph (d) of sub-clause (1) effects a drafting change to sub-section (1B) of section 79B consequential on the change of the special deduction to a rebate of tax.

Paragraph (e) of sub-clause (1) omits sub-section (2) of section 79B and substitutes a new sub-section to provide the rebate of tax that is to take the place of the existing deduction. The rebate to be allowable under amended section 79B is comparable to the existing deduction, and will be available on substantially the same conditions as now apply under the section.

Paragraph (a) of new sub-section (2) of section 79B applies where the total period of service of the member of the Defence Force in a prescribed overseas locality during the year of income is more than one-half of the year of income, or where the taxpayer dies at a prescribed overseas locality during the year of income. In these cases, the rebate allowable is the sum of $216 and an amount equal to 25 per cent of any rebates to which the taxpayer is entitled in respect of the year of income under new section 159J (for spouse, daughter-housekeeper, children under 16, student children, invalid relatives, parents and parents-in-law), under new section 159K (by way of the sole parent rebate) and under new section 159L (for a housekeeper).

Paragraph (b) of new sub-section (2) provides for a case where the overseas service of the taxpayer during the year of income does not exceed six months. In these circumstances, the Commissioner is empowered to allow a rebate of such amount as is reasonable, but the amount is not to exceed the amount of the rebate the taxpayer would have been entitled to if paragraph (a) of sub-section (2) had applied in respect of the year of income.

Paragraph (f) of sub-clause (1) of clause 11 replaces sub-section (4) with a comparable provision which limits the aggregate of the rebates allowable to a taxpayer in respect of a year of income under sections 79A and 79B to $216 plus 25 per cent of the sum of any rebates allowable to the taxpayer under new sections 159J, 159K and 159L. In terms of existing sub-section (4) of section 79B, the allowance of deductions under sections 79A and 79B is subject to the same sort of limitation.

Paragraph (g) of sub-clause (1) of clause 11 effects a drafting change to sub-section (5B) of section 79B that is consequential on the proposal to change the concession from a deduction to a rebate.

Sub-clause (2) of clause 11 ensures that the proposed amendments to section 79B that are, by reason of sub-clause 34(1) of this Bill, to first apply in assessments in respect of the 1975-76 income year do not affect the allowance of deductions, under existing section 79B, in assessments in respect of the 1974-75 and preceding income years.

Sub-clause (3) of clause 11 is a technical measure to ensure that certificates issued, for the purposes of existing sub-section 79B(1B), by the Naval Board, the Military Board or the Air Board, or a person authorised by one of those Boards, will remain valid, notwithstanding the amendment proposed by paragraph (c) of sub-clause (1) of clause 11 (see notes on that paragraph).

Clause 12: Limitation on certain deductions.

This clause proposes to amend section 79C of the Principal Act.

Section 79C provides that the aggregate of the deductions allowable under sub-section 23AB(7), sections 79A and 79B, and certain other specified provisions of the Principal Act shall not exceed the amount of income that remains after deducting from assessable income all other allowable deductions, except losses of previous years and certain deductions for capital expenditures incurred in prospecting and mining operations and by way of Drought Bonds subscriptions.

The effect of the amendment proposed by clause 12 is to exclude from section 79C the existing references to sub-section 23AB(7), section 79A and section 79B. As explained in the notes on clauses 4, 10 and 11, the respective deductions allowable under those provisions are to be discontinued and replaced by rebates of tax.

By clause 34 of the Bill, the amendment made by clause 11 will apply in assessments for the 1975-76 income year and subsequent years.

Clause 13: Deductions for expenses of self-education.

This clause proposes to insert a new provision - section 82A - in the Principal Act. The section relates to other proposals being implemented by the Bill, namely, the allowance of a rebate of tax in respect of expenses of self-education as part of the new general concessional rebate provided, under section 159N, in lieu of the concessional deduction under existing section 82JAA, and the proposed restatement of the definition of expenses of self-education (present section 82JAA(5)).

The new provision will make clear that entitlement to an allowance for income tax purposes in respect of expenditure incurred by a taxpayer on a course of self-education will, as to expenditure up to $250 in a year, be determined by reference to the rebate provisions of section 159N, leaving the general deduction provisions of section 51 of the Principal Act to be considered only in respect of any balance of the expenditure. For the purposes of the rebate, self-education expenses will accordingly include all expenditure including fares and accommodation as well as fees, books and equipment, necessarily incurred in pursuing an approved course of self-education for career or employment purposes.

Sub-section (1) of new section 82A applies where a deduction would, but for the section, be allowable to the taxpayer under the general deduction provisions of section 51 in respect of "expenses of self-education" (as defined - see notes on proposed sub-section (2) below). In these cases, the sub-section provides to the effect that only so much of the net amount of those expenses as exceeds the amount of $250 is to be eligible for deduction under section 51. The "net amount of expenses of self-education" is defined in sub-section (2) as, in broad terms, the amount of self-education expenses incurred by the taxpayer in the year of income less non-taxable scholarship benefits or reimbursements relating to that expenditure.

Sub-section (2) of new section 82A defines the technical terms that are used in the section.

"Expenses of self-education"

is defined to mean expenses necessarily incurred by the taxpayer for or in connexion with a prescribed course of education.

"Net amount of expenses of self-education"

means, broadly, the total amount of expenses of self-education (as defined) incurred by the taxpayer in the year of income as reduced by the sum of the payments of scholarship benefits (as defined) and payments in the nature of reimbursements of self-education expenses, received by the taxpayer during the year of income.

In the case of scholarship benefits, paragraph (a) of the definition provides that so much of any such benefits as has been taken into account in calculating the amount that is to be rebatable under section 159T (the provision relating to the rebate for education expenses allowable to the parent of a student under 25 years), is not to be brought into account also in calculating, for the purposes of section 82A, the net amount of expenses of self-education. The definition also excludes from that calculation scholarship benefits applicable to an earlier year of income.

Paragraph (b) of the definition of the "net amount of expenses of self-education" refers to payments (other than payments that have been, or will be, included as assessable income of the taxpayer) received by the taxpayer, or that the taxpayer was entitled to receive, in the year of income, from his employer or from any other person in respect of expenses of self-education (being a payment relating to self-education expenses incurred in the year of income, or in respect of which a deduction or rebate has been allowed or is allowable in an assessment of the taxpayer for a preceding year of income). In terms of the definition, such payments are to be offset against the taxpayer's total amount of expenses of self-education for the year in calculating the net amount of those expenses for purposes of section 82A.

"Prescribed course of education"

is to have the same meaning as in new section 159U (notes on this definition are included in the notes dealing with clause 17).

"Scholarship benefits"

has the same meaning as in new section 159T (notes on the definition are included in the notes dealing with clause 17).

In terms of sub-clause 34(1) of the Bill, the new section 82A is to apply in relation to assessments in respect of the 1975-76 income year and subsequent years.

Clause 14: Deductions for contributions to funds for employees not allowable under any other provision of the Act.

This clause proposes an amendment to section 82AAR of the Principal Act that is consequential on the proposed repeal of section 82H as a result of the proposed repeal of Subdivision B of Division 3 of Part III of the Principal Act.

Section 82AAR provides that, except as provided under section 82H, a deduction is not allowable in respect of an amount set apart or paid to a superannuation fund for employees or their dependants under any provisions of the Act other than Subdivision AA of Division 3, which governs the deductibility of such payments. Under section 82H, a concessional deduction is provided for contributions to superannuation funds paid by a taxpayer for his or her own benefit or for the benefit of his or her spouse or child.

By virtue of new section 159R (see notes on that section in the segment of this memorandum dealing with clause 17), the present deduction under section 82H is to be replaced by a rebate of tax. In these circumstances, the reference to section 82H in section 82AAR is no longer necessary.

By sub-clause 34(1) of the Bill, the amendment of section 82AAR is to apply to assessments for the 1975-76 income year and subsequent years.

Clause 15: Concessional deductions.

Sub-clause (1) of clause 15 proposes the repeal of Subdivision B of Division 3 of Part III of the Principal Act. The concessional deductions available under the Subdivision are to be convreted into rebates of tax as part of the new personal income tax scheme to apply to the 1975-76 income year. The repeal of Subdivision B of Division 3 of Part III by clause 15 is complementary to the proposed introduction into Division 17 of Part III of the Principal Act, of a new Subdivision - "Subdivision A - Concessional Rebates" - containing the provisions relating to the rebates that are to replace the deductions now allowable under Subdivision B.

Sub-clause (2) of clause 15 is a technical measure which provides in effect for the provisions of section 82H(IC) of the Principal Act to continue to apply, notwithstanding their repeal as part of Subdivision B of Division 3 of Part III, in relation to amounts paid by a taxpayer in a year of income prior to the 1975-76 income year.

Sub-section (IC) of section 82H authorises the withdrawal of some or all of the deductions allowed or allowable in respect of premiums paid under a policy (being a policy in respect of which the first premium was paid on or after 1 January 1973) which is forfeited or surrendered within 10 years of commencement of risk. Sub-clause (2) of clause 15 ensures that deductions in respect of premiums paid prior to 1 July 1975 under a policy that is caught by section 82H(IC), by virtue of being forfeited or surrendered on or after that date but within 10 years of commencement of risk, will be able to be withdrawn in accordance with the principles laid down in the existing section 82H.

The re-opening of assessments to withdraw deductions previously allowed in respect of policies coming within the scope of section 82H(IC) is now authorised by sub-section (10) of section 170 of the Principal Act and is to be preserved - by sub-clause (3) of clause 24 - notwithstanding the amendment to be made to sub-section 170(10) by sub-clause (1)(b) of clause 24.

Sub-clause (3) of clause 15 is another technical provision. It continues the application of the provisions of section 82K of the Principal Act in relation to an amount paid by the trustee of a deceased estate in respect of a liability incurred by the deceased person in a year of income prior to the 1975-76 income year, notwithstanding the repeal of that section as part of Subdivision B of Division 3 of Part III.

Sub-clause (3) will ensure that a trustee of a deceased estate will not be deprived of a deduction (being a deduction that would have been allowable to him, but for the repeal of section 82K, in an assessment in respect of income derived by the deceased taxpayer prior to the 1975-76 income year) as a result of the repeal of Subdivision B of Division 3 of Part III and the insertion into the income tax law of its rebate counterpart - Subdivision A of Division 17 of Part III.

Clause 16: Certain income to be treated as income from personal exertion.

Clause 16 proposes to repeal section 95A of the Principal Act.

Section 95A provides that, where the assessable income of a person includes a share of the net income of a trust estate, that share is deemed to be income from personal exertion to the extent to which it consists of a share of that part of the net income of the trust estate that is derived from personal exertion (e.g., profits derived from a business carried on by the trustee). The purpose of the section is to ensure that, in these cases, the relevant share of the net income of the trust estate is not subject to the property income surcharge in the hands of the beneficiary.

As already indicated, the property surcharge is not to be re-applied for the 1975-76 income year and it is therefore proposed to repeal section 95A.

By sub-clause 34(1) of the Bill, the repeal of section 95A is to have effect in relation to assessments for the 1975-76 income year and subsequent years.

Clause 17: Subdivision A - Concessional rebates.

The main purpose of this clause is to insert in Division 17 of Part III of the Principal Act a new Subdivision - Subdivision A - containing the substantive provisions to introduce the rebates of tax that are to replace existing concessional deductions and certain other deductions of a concessional nature. The clause is complementary to clause 15 which proposes the repeal of Subdivision B of Division 3 of Part III of the Principal Act which covers most of the deductions that are to be replaced with rebates of tax.

Broadly, deductions that are to be replaced by rebates of tax under new Subdivision A are:-

•

the concessional deductions for the maintenance of dependants and all of the other deductions (e.g., for medical expenses, life insurance, superannuation, education expenses, etc.) allowable under existing Subdivision B of Division 3 of Part III of the Principal Act;

•

deductions for private rates and land taxes paid by a resident taxpayer in respect of his sole or principal place of residence; and

•

deductions to a resident taxpayer for calls paid on afforestation shares.

In addition, it is proposed to introduce a rebate - the sole parent rebate - for which there is no corresponding concessional deduction under the present law. This special rebate ($200 maximum) is to be available to a person (male or female) who is a parent without a partner and is maintaining dependants who qualify as children under 16 or students.

By clause 34(1), the new rebate provisions contained in Subdivision A of Division 17 of Part III are to apply in relation to assessments in respect of the 1975-76 income year and subsequent years. Consistently with the general principles expressed in section 160AD of the Principal Act, the sum of all rebates is not to exceed the tax payable in respect of a year.

Further details of the new concessional rebates are given in the notes below dealing with the individual sections that are comprised in new Subdivision A.

Section 159H : Application.

This section provides for the new rebates that are to replace the existing concessional deductions to be available in relation to income tax assessments only if the taxpayer is a taxpayer of a class specified in paragraph (a) or (b) of sub-section (1).

Sub-section (1) of section 159H contains two paragraphs - paragraphs (a) and (b) - which restrict the allowance of rebates of tax under Subdivision A of Division 17 of Part III to the income tax assessments of -

(a)

individual taxpayers who are residents of Australia. (A resident of Papua New Guinea may qualify for the new rebates of tax in an assessment for the 1975-76 income year but not subsequent assessments - see notes below on sub-section (2) of section 159H. Subject to parabraph (b) below, the rebates are not available in the assessments of companies or trustees); and

(b)

trustees, where an assessment is made under section 98 in respect of a share of the net income of a trust estate, the beneficiary presently entitled to that share being a resident and subject to a legal disability.

Sub-section (2) of section 159H is related to sections 7 and 30 of the Income Tax Assessment Act 1975 - Act No. 80 of 1975, assented to on 20 June 1975-and has a similar purpose to new sub-section (1H) that is to be inserted in section 72 of the Principal Act by clause 8 of this Bill. The effect of new sub-section 159H(2) is to ensure that a person who is a resident of Papua New Guinea, but who is now treated as a resident of Australia for purposes of the existing concessional deductions, will be so treated for the purposes of the allowance of the proposed concessional rebates of tax in an Australian income tax assessment for the 1975-76 (but no other) income year. After the 1975-76 income year, persons to whom sub-section 159H(2) refers will not be treated as residents of Australia for Australian income tax purposes. This accords with the principles underlying the amendments to the income tax law effected by the Income Tax Assessment Act 1975 to apply upon Papua New Guinea's becoming an independent country.

Section 159J : Rebates for dependants

This section corresponds with existing section 82B of the Principal Act, and re-enacts many of the provisions of that section which is, of course, being repealed by Clause 15 of the Bill. The concessional deductions previously authorised by section 82B in respect of the maintenance of dependants are to be converted to rebates of tax, entitlements to which will be governed by conditions essentially the same as those now governing the corresponding concessional deductions.

As already indicated, the new rebates for dependants, as with the other new concessional rebates, will first apply in assessments of eligible resident taxpayers for the 1975-76 income year.

Sub-section (1) of section 159J formally provides that a taxpayer who, during the year of income, contributes to the maintenance of a person (referred to as a "dependant") specified as a dependant under sub-section (2) is entitled, in his assessment for that income year, to a rebate of tax ascertained in accordance with the section.

Sub-section (2) of section 159J sets out the rebates of tax that are to be allowable, subject to the other provisions of the section, in respect of the maintenance by a taxpayer of various classes of dependants. The proposed maximum rebates are summarised below:-

Sub-section (3) of section 159J empowers the Commissioner to allow a partial rebate in certain specified circumstances. Subject to sub-sections (4) and (5), sub-section (3) provides, in effect, for a proportion of the relevant maximum rebate to be allowed in any of the following circumstances:-

(a)

Where the taxpayer contributes to the maintenance of a dependant during part only of the year of income;

(b)

where, during the whole or part of the year of income, 2 or more persons contribute to the maintenance of a person who is a dependant in relation to 1 or more of the persons so contributing;

(c)

where a dependant, being the spouse of the taxpayer, is married to the taxpayer during part only of the year of income;

(d)

where a dependant, being a daughter-housekeeper, is wholly engaged in keeping house for the taxpayer during part only of the year of income; or

(e)

where a dependant, being a student, a child under 16 who is not a student, or an invalid relative, is such a dependant during part only of the year of income.

Sub-section (4) of section 159J provides for the amount of the rebate otherwise allowable under the section in respect of a dependant to be reduced by $1 for every $4 by which the separate net income exceeds $150. The term "separate net income" is dealt with in the notes below on sub-section (6). For the purposes of the separate net income test, any income derived by the dependant outside the period in which the test for dependancy is satisfied (or a period that is, by sub-section (5), deemed to be a period during which the taxpayer is to be taken to have contributed to the dependant's maintenance) is disregarded. Therefore, income derived by the spouse of the taxpayer before marriage or after dissolution of marriage, income derived by a student after turning 25 in a year of income or after ceasing to be a student at any time during a year, or income derived after turning 16 by a child who is not a student will not be treated as separate net income.

Sub-section (5) provides, in effect, that unless it is established that the facts are to the contrary, a taxpayer shall be taken to have contributed to the maintenance of a dependant for so much of the year of income as the dependant resides with the taxpayer and meets the relevant dependancy test (e.g., of age in respect of a child under 16, etc.). The provision makes it clear that the separate net income of the dependant is in these circumstances to be taken into account as provided by sub-section (4), in calculating the amount of the rebate allowable to the taxpayer under the section in respect of the dependant.

Sub-section (6) of section 159J defines the following terms for purposes of the section:-

"daughter-housekeeper":

This term is defined to mean the daughter of a taxpayer who is a widow or widower, being a daughter who is wholly engaged in keeping house for the taxpayer;

"invalid relative":

This term means a person, not less than 16 years, who is a child, brother or sister of the taxpayer and in respect of whom an invalid pension is being paid, or who is certified by an approved medical practitioner or medical officer as permanently incapacitated for work. In this context, "child" includes an adopted child, a step-child or an ex-nuptial child;

"separate net income":

This expression ensures that the payment by way of child endowment, a handicapped child's allowance or domiciliary nursing care benefit is excluded from the separate income of dependants for concessional rebate purposes. (The exclusion of a handicapped child's allowance from separate net income is a new feature).

As with the existing definition (section 82B(5)), the separate net income of a dependant will include government assistance only if it is provided by way of maintenance or accommodation relating to the education of the dependant. The definition also ensures that the rebate for maintenance of a dependant will not be reduced as the result of assistance provided in respect of the education of the dependant by way of scholarships, bursaries, etc., to provide tuition, text books, equipment, etc.

"student":

This term means a person who is less than 25 years of age and is receiving full-time education at a school, college or university. (The definition of "student" in existing section 82B(5) restricts the corresponding concessional deduction to students aged between 16 and 25 years.)

Section 159K : Sole parent rebate.

Under this section a rebate of $200 is to be allowable in the assessment of a taxpayer who is entitled to a rebate in respect of a child under 16 years of age or a student (up to 25 years of age) and has the sole care of that child or student. The rebate will be primarily for the benefit of single, widowed or divorced parents caring for a child without the aid of a daughter-housekeeper or housekeeper. The rebate has no counterpart in the existing concessional deduction system. The maximum rebate that may be allowed under the section is $200 irrespective of the number of persons in the care of the taxpayer.

Sub-section (1) of section 159K provides, subject to sub-section (3) (see below), that, where a taxpayer has the sole care of a child under 16 or a student during the whole of the year of income and is entitled to a rebate for the maintenance of that child or student, a rebate of $200 is to be allowed provided that the taxpayer is not entitled to a rebate in respect of a spouse or daughter-housekeeper or a housekeeper. If the taxpayer is entitled to a rebate for a daughter-housekeeper or housekeeper in respect of a part of the year of income, or contributed to the maintenance of his spouse during a part of the year of income, a proportionate part of the basic $200 rebate is allowable.

Sub-section (2) deals with the situation where the taxpayer has the sole care of a child under 16 or a student during part only of the year of income. In this case a rebate may be allowed of such an amount, not exceeding $200, as the Commissioner considers reasonable in the circumstances. (The Commissioner's determination will be open to the usual rights of objection and reference to an independent Taxation Board of Review.)

Sub-section (3) provides that where a taxpayer is married during the whole or part of the year of income, the rebate is not to be available unless the Commissioner is of the opinion that, because of special circumstances, it would be just to allow a rebate. An example of special circumstances for the purposes of sub-section (3) would be where a parent deserted by the other partner to a marriage is left caring for a dependent child or student. Again the Commissioner's determination, if adverse, will be referable to an independent tribunal for reconsideration.

Sub-section (4) provides that a man and woman living together as husband and wife on a bona fide domestic basis, though not legally married, are to be treated for the purposes of the section as if they are legally married.

Section 159L : Housekeeper.

Under this section, a rebate of $400 is to be allowable to a taxpayer in respect of a housekeeper under the same conditions as the existing concessional deduction is allowable under section 82D of the Principal Act. As with the section 82D concessional deduction, the amount of the proposed rebate in respect of a housekeeper is not diminished by the separate net income of the housekeeper.

Sub-section (1) of section 159L provides that a taxpayer is entitled to a rebate of tax ascertained in accordance with the section where, during a year of income, a housekeeper is wholly engaged in keeping house for the taxpayer and in caring for -

(a)

a child of the taxpayer less than 16 years of age (whether or not the taxpayer is entitled to a rebate for that child);

(b)

any other child under 16 years of age for whom the taxpayer is entitled to a rebate under section 159J;

(c)

an invalid relative for whom the taxpayer is entitled to a rebate under section 159J; or

(d)

a spouse in receipt of an invalid pension under the Social Services Act 1947-75.

Sub-section (2) of section 159L formally provides that, subject to the section, the rebate allowable in the assessment of a taxpayer in respect of a housekeeper shall be $400.

Sub-section (3) of section 159L provides to the effect that a rebate is not allowable in respect of a housekeeper where the taxpayer is entitled to a rebate in respect of a spouse (other than a spouse in receipt of an invalid pension) or a daughter-housekeeper.

Sub-section (4) of section 159L authorises the Commissioner, where the taxpayer is married and his or her spouse is not in receipt of an invalid pension, to allow a rebate to the taxpayer in respect of a housekeeper if, because of special circumstances, it is just to do so. The rebate to be allowed under sub-section (4) is the amount, not exceeding $400, that, in the opinion of the Commissioner, is reasonable in the circumstances. An example of special circumstances for purposes of sub-section (4) would be where one partner to a marriage is deserted by the other and is obliged to engage a housekeeper to care for children under 16 years of age.

Sub-section (5) of section 159L provides for an appropriate part of the maximum rebate of $400 to be allowable to a taxpayer where the housekeeper is wholly engaged in keeping house for the taxpayer and in caring for the child, dependant or spouse during part only of the year of income.

Section 159M : Double concessional rebates.

This section corresponds with the present section 82E of the Principal Act. The section is designed to cover cases where a taxpayer would otherwise be eligible, under sections 159J and 159L, to more than one rebate of tax in respect of the same person. By section 159M, the Commissioner is empowered to grant such rebate or rebates as he considers reasonable in these circumstances.

Section 159N : General concessional rebates.

Reference has already been made in this memorandum to the substitution of tax rebates for a range of deductions formerly made from assessable income. This section provides for a tax rebate equal to 40 per cent of the sum of the amounts that will qualify as rebatable amounts under sections 159P to 159X.

Those sections will provide for the following classes of expenditure to qualify as rebatable amounts -

The broad plan of section 159N is to provide for a rebate of tax of an amount equal to the greater of $540 or 40 per cent of the sum of the amounts that qualify as rebatable amounts under the abovementioned sections. As will be explained in connexion with sub-sections (4) and (5), however, a rebate of an amount less than $540 may be allowed in some cases where a taxpayer is liable to pay further tax in pursuance of section 94 of the Principal Act in respect of "uncontrolled partnership income".

Sub-section (1) defines "rebatable amount" as an amount that under the abovementioned sections is to be treated as a rebatable amount for the purposes of section 159N.

Sub-section (2) makes provision for a rebate of $540 where there is no rebatable amount under sections 159P to 159X.

Sub-section (3) provides for the ascertainment of the amount of rebate allowable where there is any rebatable amount under those sections.

Under paragraph (a) a taxpayer is entitled to a rebate of 40 per cent of any amounts that are to be treated as rebatable amounts under sections 159P to 159X. The rebate under this paragraph will, of course, exceed the minimum rebate of $540 if the total of the rebatable amounts exceeds $1,350. When the sum of the rebatable amounts is less than $1,350, and the rebate under paragraph (a) is less than $540 paragraph (b) provides for an additional rebate equal to the amount by which the rebate under paragraph (a) falls short of $540.

It should be noted that the rebate allowable under paragraph (b) is additional to any rebate allowed under paragraph (a) and that rebates will be regarded as having been allowed in respect of any rebatable amount even though the aggregate rebate does not exceed the minimum of $540. This will have significance, in particular, in relation to any amounts contributed to a superannuation fund, and treated as rebatable under section 159R. These amounts will not be capable of being treated as part of the undeducted purchase price of an annuity (section 26AA) whether or not the rebate under section 159N is greater than the minimum amount of $540 as a result of the allowance of a rebatable amount under section 159R in respect of contributions to a superannuation fund, etc.

Sub-sections (4) and (5) place a limit on the amount that may be allowed as a rebate in pursuance of sub-section (2) or paragraph (3)(b) where an amount of further tax is payable in pursuance of sub-section (9) or (11) of section 94 and the allowance in full of the amount ascertained in accordance with sub-section (2) or paragraph (3)(b) would reduce the further tax otherwise payable.

A rebate allowable under sub-section (2) or paragraph 3(b), not being related to any actual outgoings, has no counterpart in the deductions that, in the absence of the change to the concessional rebate system, could have been offset against uncontrolled partnership income in arriving at the amount subject to further tax in pursuance of sub-section (9) or (11) of section 94. Accordingly a rebate allowable under sub-section (2) or paragraph 3(b) is to be limited to the amount of ordinary tax payable (before any rebate or credit) less any dependant rebates (section 159J), sole parent rebate (section 159K), housekeeper rebate (section 159L) or rebate in respect of a rebatable amount under paragraph 159N(3)(a). To the extent that a rebate is allowable under sub-section (2) or paragraph (3)(b) it will, as explained in the notes on sub-clause 6(6) of the Income Tax Bill, be deducted from the ordinary tax in the process of arriving at the further rate of tax payable on income to which section 94 applies.

Sub-section (4) deals with the situation in which further tax is payable in pursuance of sub-section (9) or (11) of section 94 of the Principal Act and a rebate is allowable under sub-section (2) i.e. there is no rebatable amount. If the taxpayer is not entitled to any rebate under section 159J, 159K or 159L, the rebate under sub-section (2) is limited to an amount equal to the "gross" amount of ordinary tax i.e., to the ordinary tax that would be payable on the total taxable income before the allowance of any rebate or credit to which he may be entitled. In any other case, i.e. if a rebate is allowable under section 159J, 159K or 159L,the rebate under sub-section (2) is limited to the amount by which the "gross" ordinary tax exceeds the rebate or rebates allowable under those sections.

Sub-section (5) deals with the situation in which further tax is payable in pursuance of sub-sections (9) or (11) of section 94 of the Principal Act and a rebate is allowable under paragraph 3(b) i.e., there is a rebatable amount but it is less than $1,350. In this situation the rebate under paragraph 3(b) is limited to an amount equal to the "gross" ordinary tax, less the sum of the rebates allowable under sections 159J, 159K and 159L and paragraph 159N(3)(a). A rebate must of course be allowable under paragraph (3)(a) in any case in which a rebate is allowable under paragraph 3(b).

Section 159P : Medical expenses.

Section 159P provides that there is to be treated as a rebatable amount for the purposes of proposed section 159N the amount of a taxpayer's own medical expenses, and of those of his or her spouse, children under 21, or other dependants in respect of which a rebate is allowable under the proposed section 159J. The section is comparable to the existing section 82F and apart from the minor drafting changes that are necessary, mainly to effect the change-over to the rebate basis, is to be enacted in substantially the same form as section 82F.

Sub-section (1) of the new section 159P is designed to allow a rebate for midical expenses paid by a taxpayer in a year of income to the extent to which neither the taxpayer nor any other person has been, or is entitled to be, paid an amount in respect of those medical expenses by a government, public authority, society, association or fund (whether incorporated or not).

If an amount qualifying as a medical expense is recouped by, say, a government or a fund, the net amount of that expense after allowing for the recoupment will be treated as the rebatable amount for the purposes of section 159N.

Sub-section (2) deems domiciliary nursing care benefits that are paid, or to which there is an entitlement to be paid, not to be in respect of medical expenses. As is the case under the present concessional deduction provisions, an entitlement to receive such benefits does not affect the amount to be treated as a rebatable amount in respect of medical expenses.

Under sub-section (3), medical expenses paid by a trustee from the income of a trust estate on behalf of resident beneficiaries may qualify, for the purposes of section 159N, as a rebatable amount to the extent that the expenses are not recouped to the trustee or any other person.

Where the trustee is liable to be assessed under section 98 in respect of income of the year of income to which the beneficiary is presently entitled, the amount available to be treated as a rebatable amount in respect of the medical expenses will be taken into account in the trustee's assessment in respect of that income. In cases in which the beneficiary is liable to be assessed, the amount available to be treated as a rebatable amount will be reflected in the beneficiary's assessment.

Sub-section (4) defines the terms "dependant" and "medical expenses" for the purposes of section 159P.

"Dependant"

means a spouse or a child (under 21 years of age) of the taxpayer or a dependant in respect of whose maintenance the taxpayer is entitled to a deduction. The effect of the law in this regard will not be changed. Similarly, all expenses which have hitherto qualified as "medical expenses" will be encompassed by the new definition including, in addition to payments made for medical, surgical, dental, optical or prescribed therapeutic treatment, amounts paid in respect of an artificial limb, etc., a medical or surgical appliance, for the remuneration of a person attendant upon a person who is blind or permanently confined to bed, or for the maintenance of a blind person's guide dog.

Section 159Q : Funeral expenses.

This section provides for amounts paid by a taxpayer for funeral, burial or cremation expenses arising from the death of a dependant, to the extent that the expenses are not recouped by a government, public authority, society or association, to be treated as rebatable amounts for the purposes of section 159N. The section re-enacts the same qualifying conditions as apply to the existing concessional deduction under section 82G.

Sub-section (1) of section 159Q provides that the amount paid by the taxpayer in the year of income for funeral, burial or cremation expenses arising from the death of a dependant, less any amount which has been or will be recouped by the taxpayer from a government, public authority, society or association shall be treated as a rebatable amount for the purposes of section 159N. The dependant must have been a resident at the time of death.

Sub-section (2) provides that the maximum amount to be treated as a rebatable amount in respect of any one deceased person shall not exceed $100.

Sub-section (3) covers the case where 2 or more taxpayers have paid amounts to which this section refers in respect of a person who, at the time of death, was a dependant of each of those taxpayers and the total of the amounts paid exceeds $100. In these circumstances, sub-section (3) provides that the amounts to be treated as rebatable amounts in respect of each taxpayer shall be determined by the Commissioner and shall not, in the aggregate, exceed $100.

Sub-section (4) provides that, for the purposes of the section, "dependant" has the same meaning as in section 159P. This means that a dependant includes the spouse of the taxpayer, a child of the taxpayer less than 21 years or a person in respect of whom the taxpayer is entitled to a dependant rebate.

Section 159R : Life insurance premiums etc.

Section 159R provides for a rebatable amount in respect of amounts paid by a taxpayer as premiums for insurance on the taxpayer's own life or on the life of the wife or child of the taxpayer and for sickness, personal injury and accident insurance cover for the taxpayer or wife or child of the taxpayer. Personal contributions to a superannuation fund or to a sustentation, widows' or orphans' fund for the benefit of the taxpayer or the taxpayer's family are also taken into account under this provision.

Apart from recognising the change from deductions to rebates the section re-enacts the provisions of section 82H of the present law.

Sub-section (1) of section 159R provides that an amount equal to the total of amounts paid as described above, but specifically excluding amounts paid to medical and hospital benefits funds (which are rebatable under proposed section 159S), shall be treated as a rebatable amount for the purposes of section 159N in respect of the year of income in which the amounts are paid.

Sub-section (2) provides that premiums paid on certain "policies of life insurance" for terms of less than 10 years are not to be taken into account for the purposes of the rebatable amount. The premiums affected by the sub-section are those payable on life insurance policies under which the first premium was paid on or after 1 January 1973 and which provide for the payment of benefits, other than death benefits, before the expiration of 10 years from the date of commencement of risk.

Sub-section (2) does not affect the allowance as rebates of premiums paid on policies under which a premium had been paid before 1 January 1973. These premiums will continue to be taken into account under the section, whether or not benefits are payable within 10 years of commencement of risk.

Sub-section (3) limits the amount of premiums paid in respect of a policy that may be considered under sub-section (1) where increasing premiums are payable over the life of a policy. The limitation applies only where the first premium paid under a policy was paid on or after 1 January 1973. Where the premiums payable under a policy in any year of income are more than one and one-quarter times the premiums payable in the next preceding year of income, and the policy was in force for the whole of that preceding year, the excess is disregarded for the purpose of sub-section (1).

Sub-section (3) ensures that the intention of the section is not defeated by arrangements for substantial increases in premiums - to secure short term benefits - over the last year or years of the life of a policy.

By virtue of the definition in sub-section (9), a "premium" does not for the purposes of sub-section (3) include so much of a premium as is charged by reason of exceptional risk of death. For this reason any loading for exceptional risk of death either in the year of income or the preceding year is disregarded for the purpose of ascertaining whether premiums increase by more than one-quarter in any year of income for the purposes of sub-section (3).

Sub-section (4) provides authority to withdraw some or all of the rebates allowed or allowable in respect of premiums paid under a policy that is forfeited or surrendered within 10 years of commencement of risk. Like sub-sections (2) and (3) this provision applies only where the policy is one under which the first premium was paid on or after 1 January 1973. Sub-section (4) does not, however, apply in circumstances specified in sub-section (7), which is explained later in these notes.

In cases where the provisions of sub-section (4) apply, the Commissioner of Taxation is authorised by provisions in section 170 of the Principal Act to amend assessments to disallow rebates which have been allowed (see notes on clause 24 in this memorandum). It achieves this result by treating all, or the more recent premiums, as not having been paid for the purposes of sub-section 159R(1). Whether or not this will result in the amendment of assessments to recover tax saved by the allowance of a rebate will, of course, depend on whether, in the year concerned, the total expenditure (including life insurance premiums) subject to rebate was greater than $1,350.

Where a policy has been forfeited or surrendered within 5 years of commencement of risk paragraph (a) of sub-section (4) applies to disentitle the taxpayer to any rebates allowed or otherwise allowable in respect of premiums paid on the policy, subject only to the application of sub-section (7).

Paragraphs (b) and (c) of sub-section (4) specify what rebates are to be withdrawn where forfeiture or surrender takes place more than 5 years (but less than 10 years) after commencement of risk. Where premiums are payable by way of equal annual or other periodical amounts paragraph (b) withdraws rebates for any amounts paid in respect of premiums that fell due for payment in the 5 years prior to surrender or forfeiture. Where premiums are not payable by regular annual or other periodical amounts, paragraph (b) (sub-paragraph (ii)) also authorises disallowance of any rebates for premiums paid that fell due for payment in those 5 years.

Paragraph (c) applies in cases such as where a single premium policy has been forfeited after it has been in force for 5 years and authorises the withdrawal of a proportion of any rebate allowed in respect of that premium calculated by reference to the period for which the policy was in force.

Sub-section (4) applies irrespective of any change in ownership during the life of a policy. Accordingly, rebates allowed for premiums paid for the assignment of a policy may be withdrawn by the operation of sub-section (4) if the assigned policy is surrendered before the expiration of 10 years from the commencement of risk under the policy.

Sub-section (5) provides for the withdrawal of rebate entitlements in the manner specified in sub-section (4) when, otherwise than in accordance with the original terms of a policy, benefits other than death benefits have been paid before the policy is 10 years old. The sub-section applies where, for example, the terms of either a whole of life policy or an endowment policy for a term of 10 years or more are changed so that the policy matures in less than 10 years from the date of commencement of risk. In such a case, premiums paid before the change in terms may have qualified under sub-section (1) and been taken into account subject to the limit of $1,200 under sub-section (10). The payment of benefits on maturity within 10 years will bring sub-section (4) into operation as if, instead of maturing, the policy had been forfeited or surrendered and amounts previously taken into account will be withdrawn in accordance with the provisions of that sub-section.

Because of the definition of "benefits", sub-section (5) does not operate to withdraw rebates allowed where, for example, sickness or accident benefits have been paid under a policy before it is 10 years old. Neither does it operate to withdraw deductions where the first premium paid under a policy was paid before 1 January 1973.

In certain situations a new policy may be issued to a person in substitution for another policy owned by him. If, in such a case, an exchange policy matures or is forfeited or surrendered before it is 10 years old but more than 10 years after commencement of risk under the original policy, sub-section (6) ensures that sub-section (4) does not operate to withdraw any of the amounts taken into account for premiums paid under either policy. Where, however, the exchange policy is terminated (on maturity, forfeiture or surrender) within 10 years of the date of commencement of risk under the original policy, some or all of the amounts taken into account for the premiums paid on either policy may be withdrawn.

Sub-section (7) is a relieving provision to ensure that amounts treated as rebatable amounts for premiums paid under a life insurance policy are not withdrawn in a case where the policy is forfeited or surrendered in circumstances arising out of serious financial difficulties. The relief is not, however, available if a person has taken out a policy, not for the purpose of providing personal security or security for dependants by way of life insurance cover, but rather to obtain the benefit of tax deductions or rebates for premiums paid and an early return of premiums either by surrendering the policy or borrowing on it and allowing it to be forfeited.

Sub-section (8) places a condition on the amount to be taken into account under section 159R of personal contributions to a superannuation, sustentation, widows' or orphans' fund. Sub-section (8) provides that contributions made to any of the specified funds on or after 1 January 1973 are ineligible for rebate under section 159R unless the fund is a provident, benefit, superannuation or retirement fund that, in respect of the year of income in which the contribution is received, satisfies the requirements for exemption, or for a concessional basis of assessment, under paragraphs (jaa) or (ja) of section 23, or under section 23F or 79, or is a sustentation fund the income of which is exempt from tax under paragraph (e) of section 23.

Sub-section (9) defines a number of terms for the purposes of section 159R.

"Benefits":

This term refers to benefits payable under a "policy of life insurance" (also a defined term which is explained later in these notes) and is defined as not including sickness or accident benefits or bonuses. The definition is relevant for the purposes of sub-sections (2) and (5) which have application where benefits (other than death benefits) may become payable or have been paid within 10 years of the date of commencement of risk under a policy. Rights to sickness or accident benefits under a combined life and sickness or accident policy or to bonuses attaching to a policy are not, by virtue of the definition, regarded as benefits and thus do not bring into operation the provisions of sub-sections (2) and (5).

"Date of commencement of risk":

This term is defined as the date of the commencement of the period in respect of which the first or, in the case of a single premium policy the only, premium under a policy is paid. If the first or only premium is not related to a specific period, the date of commencement of risk will be taken as the date of the payment of that premium.

This definition is relevant mainly for the purposes of sub-sections (2), (4), (5) and (6). The period from the date of commencement of risk to the date on which benefits other than death benefits may be paid, or have been paid, or on which a policy is forfeited or surrendered determine whether these sub-sections may apply.

"Policy of life insurance":

This term is defined to include, with certain specific exceptions referred to in paragraphs (a) and (b) of the definition, a policy or contract for insurance of the classes referred to in sub-section (1) of section 159R, i.e. for insurance on the life of the taxpayer or the taxpayer's spouse or child or for a deferred annuity or other like provision for the spouse or child of the taxpayer. The definition is relevant for the purposes of sub-sections (2) to (7) and determines the classes of policy to which those provisions may apply. By virtue of an exclusion provided under paragraph (a) of the definition, sub-sections (2) to (7) do not apply to premiums paid under a policy which provides for the payment of benefits only on death within a certain time but for no benefits on forfeiture or surrender.

Paragraph (b) of the definition has the effect of excluding from the scope of sub-sections (2) to (7) premiums paid on a policy that is assigned to or issued to a person by virtue of the person's rights as a member of a superannuation fund e.g., where a policy for a term of less than 10 years taken out by a trustee to provide benefits for a member at age 65 is assigned to the member on premature retirement, the eligibility of premiums paid on the policy will not be affected by sub-sections (2) to (7). The exclusion of premiums on these policies from the scope of sub-sections (2) to (7) is, however, conditional on the fund having met, in the year of income in which the assignment or issue takes place, certain requirements for exemption of its income or for a concessional basis of assessment under one of the following provisions of t he Principal Act -

section 23(jaa) - which exempts from tax the income of a provident, benefit, superannuation or retirement fund set up under an Australian or State Act or Territory Ordinance or by a corporation, local governing body or public authority constituted under such an Act or Ordinance;

section 23(ja) - which exempts the income of a provident, benefit, superannuation or retirement fund established for the benefit of not less than 20 self-employed persons, the terms and conditions applicable to which have been approved by the Commissioner of Taxation;

section 23F - which exempts the income of a provident, benefit, superannuation or retirement fund established by an employer for the benefit of his employees, i.e., an employees' fund of the traditional kind which satisfies certain tests specified in the provision; or

section 79 - which frees from tax by way of a statutory deduction, income representing up to 5 per cent of the cost of the net assets of a provident, benefit, superannuation or retirement fund that is established for the benefit of a person or persons engaged in gainful occupation and meets certain tests specified in the provision.

Failure on the part of a fund to invest in public securities the proportion of its assets prescribed in section 121C of the Principal Act as a condition of exemption under section 23(ja) or 23F of that Act will be disregarded for the purpose of determining whether premiums paid by a contributor on a policy assigned or issued to him are to be eligible under section 159R.

"Premium":

This term is defined to ensure that a part of a premium (as where a premium is paid by instalments) is itself regarded as a premium for the purposes of the provisions. The term is relevant for the purposes of sub-sections (2), (3), (4) and (7). For the purposes of sub-section (3), however, which limits the amount to be treated as a rebatable amount where the premiums payable under a policy in any year exceed by more than one-quarter those payable in the previous year, "premium" does not include a loading charged by reason of an exceptional risk of death.

Sub-section (10) provides that the amount, or the total of the amounts, that may be treated as a rebatable amount for the purposes of section 159N shall not exceed $1,200 in respect of any one year of income.

Section 159S : Payments to medical and hospital benefits funds.

Under this section the total of the amounts paid by a taxpayer in the year of income to a medical or hospital benefits fund may qualify, for purposes of section 159N, as a rebatable amount in respect of that year of income. As in section 82HA of the present law that is to be replaced by this section, the amounts paid must be for the personal benefit of the taxpayer or the spouse or child of the taxpayer.

Section 159T : Education expenses.

Section 159T provides for the treatment of education expenses as a rebatable amount for the purposes of section 159N to the extent that they are paid by a taxpayer in respect of the full-time education of a dependant under the age of 25 years. Apart from recognising the change from deductions to rebates, the proposed section 159T is a re-enactment of section 82J of the present law.

Sub-section (1) is the first of three sub-sections authorising the treatment of education expenses as rebatable amounts. Sub-section (1) applies where the taxpayer has paid education expenses in respect of a student and no scholarship benefits may be claimed in the year of income by any person in respect of that student. Scholarship benefits that were capable of being claimed in an earlier year of income are not taken into account.

In these circumstances, but subject to the limit of $250 in sub-section (4), the total expenses paid by the taxpayer are treated as a rebatable amount for the purposes of section 159N in respect of the year of income.

Sub-section (2) operates where only one taxpayer pays education expenses for a particular student and scholarship benefits are payable to any person in relation to the student. As in sub-section (1), scholarship benefits that were capable of being claimed in an earlier year of income are not taken into account.

The sub-section provides that the amount by which the total education expenses paid exceeds the scholarship benefits paid or payable shall, for the purposes of section 159N, be treated as a rebatable amount in respect of that year of income.

Sub-section (3) relates to cases where two or more taxpayers each pay education expenses for a particular student in relation to whom scholarship benefits are payable. The sub-section provides that, in these circumstances, the amount to be treated as a rebatable amount in respect of each taxpayer is the amount of education expenses paid by the taxpayer less so much of the total scholarship benefits as is reasonably related to those expenses.

As in sub-sections (1) and (2), scholarship benefits that were capable of being claimed in an earlier year of income are not taken into account.

Sub-section (4) provides that the amount that may be treated as a rebatable amount under sub-sections (1) to (3) in relation to any one student shall not exceed $250 in respect of any one year of income.

Sub-section (5) provides for the dissection of the maximum amount of $250 in respect of a student in cases where two or more taxpayers have paid education expenses of the student that total more than $250. In these circumstances, the sub-section provides that the amounts to be treated as rebatable amounts for each taxpayer shall be such respective proportions of $250 as the Commissioner considers reasonable.

Sub-section (6) defines three terms for the purposes of the section -

"education expenses"

means expenses necessarily incurred by a taxpayer for or in connextion with full-time education at a school, college or university or from a tutor.

"scholarship benefits"

means amounts payable under a scheme for the provision by Australia of secondary scholarships or technical scholarships or of assistance in connexion with the education of isolated children. Amounts payable for maintenance or accommodation are specifically excluded from the definition.

"student"

means a person less than 25 years of age who -

(a)

is a child of the taxpayer; or

(b)

is a person in respect of whose maintenance the taxpayer is entitled to a rebate under section 159J (as a dependant) in respect of the year of income.

Section 159U : Expenses of self-education.

Section 159U provides for the treatment of expenses of self-education as a rebatable amount for the purposes of section 159N. Apart from recognising the change from deductions to rebates and widening the scope of the definition of expenses of self-education, the proposed section 159U is a re-enactment of section 82JAA of the present law. However, reference should also be made to the notes on clause 13 of the Bill relating to the proposed new section 82A. As explained in those notes, the new section 82A in broad terms provides that expenses of self-education can fall for consideration under section 51(1) of the Principal Act only to the extent of the amount by which they exceed $250.

Sub-section (1) applies where the taxpayer has paid expenses of self-education and he has not received, and was not entitled to receive, in the year of income any payment from his employer or from any other person in respect of those expenses, and neither the taxpayer nor any other person was capable of claiming any scholarship benefits.

Scholarship benefits that were capable of being claimed in an earlier year of income or that have been, or are to be, taken into account for the purposes of section 159T, are not taken into account for the purposes of sub-section (1) of section 159U. Reimbursements of self-education expenses by an employer or any other person that fall to be treated as assessable income of the taxpayer are also disregarded for the purposes of sub-section (1).

Where the tests of sub-section (1) are met, the total amount of self-education expenses (subject to the limit of $250 set in sub-section (3)) shall be treated, for the purposes of section 159N, as a rebatable amount in respect of that year of income.

Sub-section (2) applies in situations where a taxpayer has paid expenses of self-education and is the holder of an Australian secondary or technical scholarship which gives the taxpayer or some other person an entitlement to claim scholarship benefits in the year of income.

The sub-section also applies where a taxpayer has received, or is entitled to receive, a reimbursement of expenses of self-education from an employer or some other person and the reimbursement does not form part of the taxpayer's assessable income.

As in sub-section (1), scholarship benefits that were claimable in an earlier year of income or that are taken into account for the purposes of section 159T in calculating the rebatable amount for any person under that section, are disregarded for the purposes of sub-section (2).

Where a case falls under sub-section (2), the amount to be treated as a rebatable amount for the purposes of section 159N, is, subject to the overall limit of $250, the total expenses paid as reduced by any scholarship benefits and reimbursements.

Sub-section (3) places a limit on the amount that may be treated as a rebatable amount for the purposes of section 159N in respect of self-education expenses. It provides that the amount shall not be greater than -

•

where no amount is to be treated as a rebatable amount under section 159T in respect of the year of income in relation to the education of the taxpayer - the amount of $250.

•

where an amount is to be treated as a rebatable amount under section 159T in respect of the year of income in relation to the education of the taxpayer - the amount of $250 as reduced by the rebatable amount under section 159T.

Sub-section (4) relates to an unusual situation where a parent or other person would have been entitled to a rebatable amount under section 159T but for the fact that scholarship benefits claimable exceeded the education expenses paid in respect of the taxpayer. In this situation, the excess scholarship benefits are deemed by sub-section (4) not to have been taken into account in calculating the rebatable amount under section 159T.

The effect of this provision is that the expenses of self-education paid by the taxpayer will be reduced by the excess scholarship benefits in determining the amount to be treated as a rebatable amount in respect of the taxpayer under section 159U.

Sub-section (5) defines three terms used in section 159U. The terms are -

"expenses of self-education":

This means expenses necessarily incurred by the taxpayer for, or in connexion with, a prescribed course of education (also defined) but not including expenses allowable to the taxpayer under any other provision of the Principal Act. (This definition is wider in scope than the definition of self-education expenses contained in section 82JAA of the present law, under which eligible expenses are confined to those incurred in respect of fees, books and equipment.)

"prescribed course of education":

This means a course of education provided by a school, college, university or other place of education undertaken by the taxpayer for the purpose of gaining qualifications for use in carrying on a profession, business or trade or in the course of any employment. It is immaterial whether the course is attended on a full-time or part-time basis or is carried on by correspondence. A course of training for the purpose of developing a hobby or for recreation will not satisfy the definition.

"scholarship benefits":

This has the same meaning as in section 159T and reference may be made to the notes on that section.

Section 159V : Rates and land tax in respect of sole or principal residence of taxpayer.

The rebate provided by this section (in conjunction with section 159N) is to replace, in the case of a taxpayer who is a resident, the deduction now authorised by section 72 of the Principal Act in respect of private rates or land tax paid by the taxpayer in respect of a dwelling, flat or home unit used during the year of income as the taxpayer's sole or principal residence.

The amount that is, under section 159V, to be treated as a rebatable amount in respect of private rates or land tax paid in the year of income is to be equal to the amount that would have been deductible under section 72. It follows that the maximum amount to be treated, under section 159V, as a rebatable amount in respect of private rates or land tax will be $300 in respect of any income year.

An effect of section 159V is that only payments of private rates or land tax payments of the kind now eligible for deduction under section 72 will qualify for the new rebate. Private rates in respect of vacant land or holiday flats and cottages not used to produce income will continue to be ineligible for a tax concession.

Rates and land tax paid in respect of land or premises used in the production of income will not be affected by this Bill and will continue to be allowable as deductions against rent or other income.

As indicated in the notes on clause 8, in relation to new sub-section (IH) of section 72, a person who is a resident of Papua New Guinea will, in certain circumstances, be regarded as a resident of Australia in relation to the 1975-76 income year for purposes of section 72. In this event such a person is entitled to have any eligible payments of private rates or land tax treated as rebatable amounts in his Australian income tax assessment in respect of the 1975-76 income year.

Section 159W : Calls on afforestation shares.

This section, in conjunction with section 159N, provides a rebate to replace, in the case of resident individual taxpayers, the deduction now available under paragraph (b) of sub-section 78(1). As with that provision, the rebate concession is to apply only to one-third of the amount of calls paid by the taxpayer in the year of income on shares (other than redeemable shares) owned by the taxpayer concerned in a company carrying on as its principal business afforestation in Australia. Also, the calls must, if they are to be treated as rebatable, be for use by the company in its afforestation business in Australia.

Section 159X : Expenses in connexion with adoption of child.

Under this section expenses paid by a taxpayer in a year of income in connexion with the adoption by the taxpayer, or by the taxpayer and his or her spouse, of a child under the age of 21 years may qualify for the purposes of section 159N as a rebatable amount in respect of that year of income. Apart from recognising the change from deductions to rebates, the section re-enacts the provisions of section 82JA of the present law.

Sub-section (1) provides that expenses paid in connexion with an adoption, less any amount repaid to the taxpayer in the year of income, shall be treated as a rebatable amount for the purposes of section 159N.

Sub-section (2) describes the expenses that qualify for the purposes of the section. They include -

(a)

expenses for the services of a barrister or solicitor;

(b)

expenses of proceedings before a Court; or

(c)

fees payable to Australia, a State, the administration of a Territory or an Organisation approved as a private adoption agency under a law of Australia or of a State or Territory.

Expenses in connexion with the obtaining of a Court order dispensing with the consent of a person to the adoption are expressly excluded from the concession.

Section 159Y : Amounts paid by trustee after death of a taxpayer.

This section corresponds with existing section 82K. It provides that where medical expenses, funeral expenses, education expenses, self-education expenses or adoption expenses are paid by a trustee as the legal representative of a deceased person who had incurred those expenses at the time of his or her death, and who would have been entitled to rebates of tax in respect of such expenses if they had been paid during lifetime, such expenses when paid by the trustee will be treated as rebatable amounts in the assessment of the trustee upon assessable income derived by the deceased person during the year of income in which death occurred. Amendments are being effected to section 170 by clause 24 to ensure that that section does not preclude the issuing of an amended assessment to the trustee giving effect to this principle. Special provision has also been made, by sub-clause 15(3), for a case where a trustee pays, on or after the date that this Bill comes into operation, an amount in respect of a liability (being an amount for which a deduction is allowable to the trustee under the present law) incurred by the deceased in a year of income prior to the 1975-76 income year. In these circumstances, the trustee will continue to be eligible for the deduction conferred by existing section 82K.

Clause 18: Subdivision heading

This is purely a drafting measure associated with the insertion, by clause 17, of a new Subdivision - "Subdivision A - Concessional Rebates" into Division 17 of Part III of the Principal Act. It groups as a separate Subdivision the rebate sections 160 to 160AD inclusive that presently make up Division 17.

Clause 19: Rebate in case of disposal of assets

This clause proposes to delete from the definition of "tax", in sub-section (5) of section 160, the reference to the surcharge of tax that applied in respect of 1974-75 property income. The amendment is consequential on the discontinuance of the surcharge as from the 1975-76 income year. Under sub-clause 34(1), the amended definition of "tax" will apply for purposes of section 160 in relation to assessments in respect of the 1975-76 income year and subsequent years.

Clause 20: Rebate in respect of deductions for dependants.

This clause proposes the repeal of section 160AA of the Principal Act. Stated broadly, the section authorised a rebate of tax (generally known as the low income family rebate) to ensure that a taxpayer was entitled to a tax saving of at least 40 per cent of the amount of any concessional deductions available for maintenance of dependants or for a housekeeper.

With the proposed replacement of the existing concessional deductions in respect of dependants and a housekeeper with direct rebates of tax that will provide the same level of tax savings at all relevant income levels, section 160AA will no longer be necessary.

By sub-clause 34(1), the proposed repeal of section 160AA will apply in relation to assessments in respect of the 1975-76 income year and subsequent years.

Clause 21: Rebate for export market development expenditure.

This clause will amend the definition of "'tax payable' or 'tax'" in sub-section 160AC(1) of the Principal Act to remove the reference to the property income surcharge. The amendment is consequential upon the discontinuance of the surcharge on property income and, accordingly, is to apply in relation to assessments in respect of the 1975-76 income year and subsequent years.

Clause 22: Interpretation

This clause proposes amendments to paragraphs (a) and (b) of the definition of "average rate of Australian tax" in section 160AE of the Principal Act. The definition operates for the purposes of Division 18 of Part III which provides for the allowance of a credit, against the Australian tax payable by a resident of Australia on income derived from sources in Papua New Guinea, in respect of the Papua New Guinea tax on the income.

Paragraph (a) of clause 22 will effect amendments to the definition of "average rate of Australian tax" in sub-section (1) of section 160AE that are consequential on the substitution of rebates of tax for the deductions presently available under sub-section 23AB(7), sections 79A and 79B (i.e., the zone and locality allowances), and Subdivision B of Division 3 of Part III of the Principal Act, and to repeal the rebate of tax presently available under section 160AA of that Act (i.e., the rebate in respect of deductions for dependants).

Very broadly, the amount of Australian tax on particular income, for the purposes of Division 18, is ascertained by applying the average rate of Australian tax to the amount of that income included in the taxable income. In calculating the average rate of tax, rebates of tax allowable under the Act declaring the rates of tax and the rebate of tax allowable under section 160AA, but no other rebates, are taken into account (paragraph (a) of the definition). An effect of the revised paragraph (a) of the definition of "average rate of Australian tax" being inserted by paragraph (a) of this clause will be that the new rebates of tax to be allowed under sub-section 23AB(7), sections 79A and 79B, and under Subdivision A of Division 17 of Part III are to be taken into account as factors that reduce the overall amount of tax. (These rebates are explained, respectively, in the notes dealing with clauses 5, 10, 11 and 17). The revised paragraph (a) of the definition has omitted the reference to section 160AA as that section is being repealed by clause 20 of this Bill.

Paragraph (b) of clause 22 will revise paragraph (b) of the definition of "average rate of Australian tax" in sub-section (1) of section 160AE to delete from the definition the reference to the surcharge of tax on property income. The reference is no longer necessary as the surcharge is not being re-enacted for the 1975-76 income year.

By sub-clause 34(2), the revised definition of "average rate of Australian tax" will apply in relation to the determination of credits in respect of income of the 1975-76 income year and subsequent years.

Clause 23: Credits in respect of tax paid in Papua New Guinea

This clause omits sub-sections (3) and (4) from section 160AF of the Principal Act. This amendment also arises from the proposal not to re-enact the surcharge of tax that applied to 1974-75 property income.

By sub-clause 34(2), this amendment will apply in relation to the determination of credits in respect of income of the 1975-76 income year and all subsequent years.

Clause 24: Amendment of assessments

By sub-clause 1 of this clause it is proposed to make two amendments to section 170 of the Principal Act which governs the power of the Commissioner to amend income tax assessments. Both of the proposed amendments are consequential on the substitution of concessional rebates for concessional deductions.

Paragraph (a) proposes that a reference in sub-section (9A) of section 170 to the repealed section 82K be replaced by a reference to the new section 159Y. As explained in the notes on section 159Y, certain amounts paid by a trustee after the date of death of a deceased person are to be regarded as rebatable amounts for the purposes of the assessment of the deceased person's income up to the date of death. The repealed section 82K provided for deductions to be allowed in the assessment for the period up to the date of death in similar circumstances.

By sub-section 9A of section 170 it is provided that nothing in section 170 prevents the amendment of an assessment to the date of death of a deceased person to give effect to section 82K, if within 3 years of the date of death the trustee applies in writing and provides all information necessary for the Commissioner to decide the application.

Sub-section 9A as amended will, therefore, enable an assessment to the date of death of a deceased person to be amended if, after the assessment has been made, the trustee pays any of the amounts specified in section 159Y and makes application for an amended assessment within the prescribed time.

The combined effect of paragraphs (b) and (c) will be to replace the reference, in sub-section (10) of section 170, to sub-section (IC) of the repealed section 82H by a reference to sub-section (4) of the new section 159R.

Sub-section (10) of section 170 provides that nothing in the section prevents the amendment of an assessment at any time for the purposes of giving effect to certain provisions specified in the section. One of these is sub-section (IC) of the repeal section 82H under which deductions previously allowed in respect of premiums paid on a life insurance policy may in certain circumstances be disallowed if subsequently the policy is forfeited or surrendered before it has been in force for 10 years. A corresponding provision is contained in sub-section (4) of the new section 159R.

Sub-section (10) of section 170 as amended will, therefore, enable an assessment to be amended to disallow or reduce a rebate where appropriate in respect of premiums paid if, subsequent to the making of the assessment, the policy on which premiums were paid is forfeited or surrendered within the 10 year period.

Sub-clause 2 will not amend section 170 but will preserve the power to amend an assessment to give effect to the repealed section 82K, notwithstanding the substitution of the reference to section 159Y for the reference to section 82K in sub-section 9A of section 170 (see notes on paragraph 1(a) above).

Sub-clause 2 will have effect only in relation to assessments for the 1974-75 income year or an earlier year of income as, by virtue of clause 34, section 82K will not apply in relation to 1975-76 or a subsequent year of income.

Sub-clause 3 will preserve the right to amend assessments to give effect to sub-section (IC) of the repealed section 82H of the Principal Act, notwithstanding the substitution of the reference to sub-section (4) of section 159R for the reference to sub-section (IC) of section 82H in sub-section (10) of section 170 (see notes on paragraphs 1(b) and (c) above). The right provided by clause 2 will be exercised in any case in which a premium paid prior to 1 July 1975 ceases to be deductible because the policy on which it was paid is forfeited or surrendered before it has been in force for 10 years.

Clause 25: Powers of Board.

The amendment proposed to be made by this clause to section 193 of the Principal Act is complementary to the proposed amendment to section 226 (see notes on clause 29) and is similarly consequential upon the proposed rebates of tax that, under this Bill, are to be substituted for corresponding concessional deductions available under the existing law.

Sub-section 193(2) governs the powers of the Taxation Boards of Review to review decisions of the Commissioner in relation to the remission of additional tax in certain circumstances. One such circumstance covered in the sub-section is where the taxpayer is liable to additional tax as a result of claiming in his return a deduction for expenditure in excess of the expenditure actually incurred. The amendment proposed by clause 25 will extend sub-section 193(2)(b) to cover a case where the additional tax is imposed under section 226 as a result of the taxpayer making a claim in his return for an excessive rebate of tax.

The amendment is to apply in relation to assessments in respect of the 1975-76 income year and subsequent years (sub-clause 34(1)).

Clause 26: Amount of provisional tax.

By this clause, it is proposed to amend paragraph 221YC(1)(b) of the Principal Act, which, in conjunction with section 221YA, ensures that, where a taxpayer commences to derive income during a year of income, the amount of provisional tax payable in respect of the following year is to be calculated by reference to the income of the year of income adjusted to the full-year equivalent.

The amendment to paragraph 221YC(1)(b) is consequential on the termination of the property income surcharge as a result of which it will no longer be necessary for the Commissioner to exercise the authority contained in that paragraph to determine the extent, if any, to which the income that is to be subject to provisional tax is income from property.

The amendment made by clause 26 applies in relation to provisional tax in respect of the 1975-76 income year and subsequent years (sub-clause 34(3)).

Clause 27: Provisional tax on estimated income.

This clause proposes the amendment of section 221YDA of the Principal Act concerning the provisional tax payable in cases where the taxpayer applies to have provisional tax for a year of income varied. In such cases, the taxpayer is required by sub-section (1) of that section to submit to the Commissioner of Taxation an estimate of the amount of taxable income for the year of income, the respective amounts of salary or wages and other income from property included in the estimated taxable income, the amount of tax instalments that are estimated will be made from earnings in the year and an estimate of the amount of dependants deductions to be claimed by the taxpayer in respect of which a special rebate of tax may have been allowable. Except where the Commissioner has reason to believe that the estimated amounts are too low, the amount of tax calculated on the basis of these estimates is substituted for the provisional tax originally notified as payable by the taxpayer for that year.

It is proposed by paragraph (a) of this clause to omit existing paragraphs (d) and (da) of sub-section 221YDA(1) of the Principal Act and insert two new paragraphs in their place.

New paragraph (d) of sub-section 221YDA(1) is largely a restatement of existing paragraph (d) except that a taxpayer seeking a variation of provisional tax will no longer be required to provide the Commissioner with an estimate, as a component of estimated taxable income, of income from property. This amendment is consequential upon the proposal to terminate the surcharge of tax on property income for the 1975-76 income year.

New paragraph (da) of sub-section 221YDA(1) relates to the proposed rebates of tax that are to be substituted for the deductions presently available under sub-section 23AB(7), sections 79A and 79B and Subdivision A of Division 17 of Part III, of the Principal Act. Paragraph (da) will enable these new rebates to be taken into account in recalculating provisional tax. An application for a variation of provisional tax will, by virtue of new paragraph (da), require an estimate to be made of the rebates to which the taxpayer will be entitled in respect of the relevant year of income, so that they may be taken into account as factors that reduce the overall liability to tax.

Paragraph (b) of clause 27 omits sub-paragraphs (i) and (ii) of sub-section 221YDA(2)(a) of the Principal Act and inserts two new sub-paragraphs in their place. Sub-section 221YDA(2)(a) applies, in relation to the calculation of provisional tax, in cases where the taxpayer has provided an estimate of taxable income in accordance with the preceding provision - sub-section 221YDA(1).

The amendments proposed to be made to sub-section 221YDA(2) by paragraph (b) of clause 27 are complementary to the amendment proposed to be made to sub-section 221YDA(1) by paragraph (a).

Paragraph (c) of clause 27 omits sub-section (5) of section 221YDA and inserts a new sub-section in its stead. Broadly, where there is reason to believe that the taxpayer's taxable income will be greater than the amount estimated as his taxable income, sub-section 221YDA(4) authorises the Commissioner to estimate the taxpayer's taxable income to recalculate the provisional tax to be paid. In terms of sub-section 221YDA(5), the amount so estimated by the Commissioner is not to exceed the amount of the salary or wages, or income from property, derived by the taxpayer in the preceding year of income.

In the revised sub-section (5) to be inserted for the existing sub-section (5), the reference to income from property (which is no longer necessary) has been deleted. The new sub-section is substantially the same as the corresponding sub-section that applied prior to the enactment of the 1974-75 property income surcharge.

The amendment to section 221YDA made by clause 27 applies in relation to provisional tax in respect of the 1975-76 income year and subsequent years (sub-clause 34(3)).

Clause 28: Penalty where income understated.

This clause will amend section 221YDB of the Principal Act which provides for the imposition of a penalty where, at the taxpayer's request, provisional tax has been varied (see notes to preceding clause 27) and the taxpayer's estimate of taxable income for that purpose falls short of four-fifths of both the current year's taxable income as subsequently assessed and the previous year's taxable income. The amount of the penalty prescribed is 10 per cent of the difference between the provisional tax payable on the estimated taxable income and the income tax that would be payable on the lesser of a taxable income equal to four-fifths of the taxpayer's current year taxable income and a taxable income equal to four-fifths of taxable income of the previous year.

As the surcharge of tax on property income is not to be re-enacted for the 1975-76 income year, it will no longer be necessary for it to be taken into account in calculating any penalty under this section. Accordingly, the references in existing paragraphs (a) and (b) of sub-section 221YDB(1) to the surcharge are redundant. The drafting changes necessary are to be effected by omitting the existing paragraphs and substituting new paragraphs (a) and (b) in their stead.

The proposed amendment of section 221YDB will apply in relation to provisional tax in respect of the 1975-76 income year and subsequent years (sub-clause 34(3)).

Clause 29: Additional tax in certain cases.

This clause proposes an amendment to sub-section (2) of section 226 that is consequential on the substitution of a number of concessional deductions with direct rebates of tax as explained earlier in this memorandum.

Sub-section (2) of section 226 provides for the imposition of additional tax as a penalty where, inter alia, the taxpayer includes in his return a claim for a deduction in respect of expenditure in excess of the expenditure actually incurred by him. The amendment proposed by clause 29 is designed to extend this principle to cases where the taxpayer claims a rebate of tax, under section 159N and associated provisions, in respect of expenditure in excess of the expenditure actually incurred by him.

This amendment applies in relation to assessments in respect of the 1975-76 income year and subsequent years (sub-clause 34(1)).

Clause 30: Release of taxpayers in cases of hardship.

This clause proposes a formal amendment to section 265 of the Principal Act arising from provisions contained in the Australia Police Act under which the functions of the Comptroller-General of Customs will be assumed by the Secretary to the Department of Police and Customs.

Under section 265 one of the members of the Board constituted in that section to deal with applications for relief from payment of income tax is the Comptroller-General of Customs. It is proposed by clause 30 to delete the reference in section 265 to the Comptroller-General of Customs and to substitute a reference to the Secretary to the Department of Police and Customs.

Clause 31: Calculation of provisional tax for year of income that commenced on 1 July 1975.

This clause, which will not amend the Principal Act, will vary the operation of section 221YC of that Act which fixes the amount of provisional tax payable by an individual taxpayer in receipt of income other than salary or wages. In accordance with sub-section 221YC(1) the provisional tax payable in respect of the income of a year of income is in general an amount equal to the tax assessed in respect of the taxable income of the next preceding year of income. Where the taxable income of that preceding year of income includes income from salary or wages, the Commissioner is authorised by sub-section 221YC(1A) to make an appropriate adjustment to the provisional tax otherwise payable. The provisional tax otherwise payable may also be increased or decreased by regulation where any of the rates of tax declared for a financial year are higher or lower than the corresponding rates for the preceding financial year.

It would not be practicable to make provision for all of the proposed changes in the income tax law to be reflected with any precision in the calculation of provisional tax payable in respect of 1975-76 income. To do this would require a virtual re-assessment of each return of income disclosing income other than salary or wages.

It is proposed however, by sub-clause (1) of clause 31, to exclude from the provisional tax that would otherwise be payable in respect of 1975-76 income any amount payable in respect of 1974-75 income by way of the surcharge of tax on property income which is not being re-imposed for 1975-76.

Paragraph (a) of sub-clause (1) deals with the normal situation where paragraph 221YC(1)(a) applies and the provisional tax is based on the taxable income of the preceding year. In this situation the provisional tax for 1975-76 is to be an amount equal to the tax that would have been payable if section 8 of the Income Tax Act 1974 which imposed the property tax surcharge, had not been enacted.

Paragraph (b) of sub-clause (1) deals with unusual cases covered by paragraph 221YC(1)(b) where the taxpayer concerned had commenced to derive income after the commencement of the preceding year so that the income for the year did not cover a full year. In these cases the provisional tax payable for the current year is based on the income of the preceding year, adjusted to a full year basis so that, for 1975-76, the provisional tax would be an amount equal to the tax that would have been payable on a full year's income at 1974-75 rates, again on the basis that the provision imposing the surcharge of tax on property income had not been enacted.

Sub-clause (2) of clause 31 will authorise the Commissioner to determine that no provisional tax is payable for 1975-76 where he is of the opinion that no income tax would have been payable by the taxpayer in respect of his 1974-75 income if the proposed new personal income tax system had applied for that year.

Clause 32: Saving of certain Income Tax Regulations.

It was announced in the Treasurer's Budget Speech that the proposed changes in the personal income tax system would not be in operation for PAYE purposes until 1 January 1976.

As it is proposed that the amendments to be made by this Bill should, in general, come into operation on the date on which the amending Act receives the Royal Assent, the existing Regulations dealing with collection of tax under the P.A.Y.E. system will cease to be consistent with the Principal Act as amended. In particular references to "deduction values" of dependants claimed for the purpose of obtaining reduced rates of instalment deductions will be inconsistent with the rebates of tax that are to be allowed in respect of dependants under the new section 159J.

It is proposed by clause 32 to provide that the existing P.A.Y.E. regulations will continue in force until 31 December 1975 (or such earlier date as is prescribed by regulation) as if the amendments of the Principal Act, to be made by the amending Act, had not been made. This will enable new P.A.Y.E. regulations, made after Royal Assent has been given to the amending Act, to come into operation not later than 1 January 1976 or such earlier date as is fixed by regulation. Clause 32 also provides that, for a period of one month after the date on which the existing P.A.Y.E. regulations cease to have effect, an employer may, in such circumstances as the Commissioner determines, continue to make deductions from salaries or wages in accordance with those regulations.

The purpose of this provision is to enable the existing prescribed rates of deduction to be applied beyond the general commencement date of any new P.A.Y.E. regulations to allow employees further time to make declarations affecting the allowance for tax instalment purposes of the general rebate and the rebates in respect of dependants. Some employees have, in the past, chosen not to lodge declarations in respect of dependants with their employers so as to ensure that the tax instalments deducted from salary will produce a refund of tax on assessment or cover the tax payable on assessment where income is derived from sources other than employment. The provision will enable a further period of one month to be provided for employees in this situation to review their decision concerning the declarations. During the period of grace, the instalments may continue to be deducted at their current levels.

Clause 33: Transitional provision in relation to calculation of deductions for dependants for year of income that commenced 1 July 1974.

This clause will not amend the Principal Act but will modify the operation of sub-section (5) of the repealed section 82B of the Principal Act in relation to the income year 1974-75.

Under sub-section (3) of section 82B of the Principal Act the amount of a deduction otherwise allowable in respect of a dependant is reduced by the amount by which the separate net income of the dependant exceeds $130. By virtue of sub-section (5) of the section separate net income does not include child endowment paid under the Social Services Act or domiciliary nursing care benefit paid under the National Health Act. Under the new section 159J which makes provision for rebates of tax in respect of dependants the rebate otherwise allowable in respect of a dependant is reduced by $1 for every $4 by which the separate net income of the dependant exceeds $150. By virtue of sub-section (6) of that section separate net income is to exclude, in addition to child endowment and domiciliary nursing care benefit, a handicapped child's allowance paid under the Social Services Act. Handicapped children's allowances first became payable in 1974-75.

By sub-clause (1) of clause 33 section 82B of the Principal Act is to have effect in relation to the 1974-75 income year as if, from 1 July 1974, sub-section (5) had been amended to exclude from separate net income a handicapped child's allowance paid under the Social Services Act, thus ensuring that the receipt of an allowance at any time after the benefit first commenced to be paid will not extinguish or affect the concessional deduction allowable under section 82B to a parent or other person maintaining a child for whom a handicapped child's allowance is paid.

Sub-clause 2 provides that the Commissioner may amend an assessment at any time to give effect to this measure. The right conferred by sub-clause 2 will, of course, relate only to assessments in respect of the 1974-75 income year.

Clause 34: Application of amendments.

The amendments proposed by this Bill will, in relation to assessments, the determination of credits, or the ascertainment of provisional tax, as the case may be, commence to apply as enacted by clause 34. The year to which each amendment will first apply, or the date on which an amendment will commence to apply, has been stated in the notes explaining the relevant clauses of the Bill.

INCOME TAX (INTERNATIONAL AGREEMENTS) BILL 1975

Introductory Note

This Bill proposes to effect technical amendments to the Income Tax (International Agreements) Act 1953-1974 (referred to as the "Principal Act") that are consequential on certain amendments proposed in relation to the Income Tax Assessment Act 1936-1975 (referred to as the "Assessment Act"). The Bill also proposes an amendment to the Principal Act that follows from the proposal not to re-enact the surcharge of tax that applied in respect of property income of the 1974-75 income year.

Further details of the proposed amendments are provided in the notes on the individual clauses of the Bill given below.

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, unless the contrary intention appears, every Act shall come into operation on the twenty-eighth day after the day on which it receives Royal Assent. By this clause, the amending Act will come into operation on the day on which it receives Royal Assent.

Clause 3: Ascertainment of Australian tax.

The amendments proposed by this clause relate to section 15 of the Principal Act which contains provisions for determining, for purposes of certain provisions of the Principal Act, the amount of Australian tax payable on particular income.

Paragraph (a) of clause 3 will effect amendments to the definition of "the average rate of Australian tax" in sub-section 15(1) that are consequential on proposals, in the Income Tax Assessment Bill (No. 2) 1975, to substitute rebates of tax for the deductions presently available under sub-section 23AB(7), under section 79A and section 79B (i.e., for the zone and locality allowances), and under Subdivision B of Division 3 of Part III (i.e., for the concessional deductions) of the Assessment Act.

Very broadly, the amount of Australian tax on particular income, for the purposes of the Principal Act, is ascertained by applying "the average rate of Australian tax" to the amount of that income included in the taxable income. In calculating the average rate of tax, rebates of tax allowable under the Act declaring the rates of tax and the "low income family" rebate of tax allowable under section 160AA of the Assessment Act, but no other rebates, are taken into account (paragraph (a) of the definition). An effect of the revised paragraph (a) of the definition of "the average rate of Australian tax" being inserted by paragraph (a) of clause 3 of the Bill will be that the new rebates of tax to be allowed under sub-section 23AB(7), section 79A and 79B, and under Subdivision A of Division 17 of Part III (i.e., under the provisions converting the existing concessional deductions to rebates of tax), of the Assessment Act, are to be taken into account as factors that reduce the overall amount of tax. These new rebates are explained, respectively, in the notes dealing with clauses 5, 10, 11 and 17 of the Income Tax Assessment Bill (No.2) 1975. The reference in the existing definition of "the average rate of Australian tax" to section 160AA of the Assessment Act has been deleted as that section is not being re-enacted for the 1975-76 income year.

The revised paragraph (b) of the definition of "the average rate of Australian tax", also to be inserted by paragraph (a) of clause 3 of the Bill, will delete from the definition the reference to the surcharge of tax on property income. The reference is no longer necessary as the surcharge is not being imposed for the 1975-76 income year.

Paragraph (b) of clause 3 omits sub-sections (3A) and (3B) from section 15 of the Principal Act. This amendment also arises from the proposal not to re-enact the surcharge of tax that applied to 1974-75 property income.

Paragraph (c) of clause 3 effects a drafting amendment to sub-section 15(4) that is consequential upon the omitting of sub-sections 15(3A) and 15(3B) by preceding paragraph 3(b) of this Bill.

Clause 4: Application

By this clause, the proposed amendments to section 15 of the Principal Act will apply to assessments, and in relation to the determination of credits, in respect of income of the 1975-76 and subsequent income years.