House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Rt. Hon. Harold Holt.)

Income Tax and Social Services Contribution Assessment Bill 1963

Introductory Note

The principal purposes of the Bill are -

1.

To extend the special income tax deduction for expenditure on the development of export markets to expenses incurred up to 30th June, 1968 (Clause 6);

2.

To empower a Court to allow time for the payment of a fine imposed by it for an offence under the income tax law (Clause 10);

3.

To exempt from tax educational allowances paid by the Commonwealth to students or trainees temporarily in Australia to pursue a course of study or training (Clause 3);

4.

To establish a basis of taxing income derived from non-interest-bearing securities issued by the Commonwealth (Clause 4);

5.

To extend through successive companies the exemption of dividends originating from exempt mining income (Clause 5);

6.

To prescribe time limits for the allowance of deductions for gifts to the Australian National Committee for World Refugee Year and the Australian National Committee for the Freedom from Hunger Campaign (Clause 7);

7.

To extend for a period of two years from 31st December 1962, the exemption of dividends paid by companies out of certain profits which have borne undistributed income tax payable by private companies (Clause 8);

The clauses of the Bill are explained in the following notes.

NOTES ON CLAUSES

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 1901-1957 provides that every Act shall come into operation on the twenty-eighth day after the day on which that Act receives the Royal Assent, unless the contrary intention appears in the Act.

By this clause it is proposed that the Amending Act shall, with exceptions explained later in this memorandum, come into operation on the day on which it receives the Royal Assent. This provision will expedite the granting to courts of the power to allow time for the payment of fines and will also facilitate settlement of the taxation affairs of visiting students and trainees in receipt of educational allowances from the Commonwealth.

The exceptions mentioned in the preceding paragraph of this memorandum relate to clauses 4, 5 and 8 and explanations are given in the comments on those clauses.

Clause 3: Exemptions.

By paragraph (a) of clause 3, it is proposed to specify the Secretary to the Department of Trade, or a person authorized by him, as the certifying authority for the purposes of section 23(c)(vii) of the Principal Act.

Section 23(c)(vii) states the conditions upon which exemption from tax is authorized in respect of remuneration derived by a visitor to Australia who is employed as a director, manager or administrative officer, consultant, technician or operative in a manufacturing, mercantile or mining business, or a business of primary production.

If the remuneration is taxed in the country where the visitor to Australia ordinarily resides, exemption from Australian income tax is available in respect of remuneration derived during -

(a)

the first year of the visit; or

(b)

the second year of the visit if the authority specified in section 23(c)(vii) certifies, and the Treasurer is satisfied, that the retention of the visitor's services in Australia beyond the first year will assist or has assisted in the development of Australian industry.

Under the existing law, the authority specified is the Director of the Division of Industrial Development of the Department of National Development, or a person authorized by him in writing to give certificates. The functions of the Division of Industrial Development have, however, been transferred to the Department of Trade and it is proposed by clause 3(a) to delete the reference to the Director of that Division, or person authorized by him, and to specify the Secretary to the Department of Trade or a person authorized by him.

Paragraph (b) of clause 3 proposes the insertion in section 23 of the Principal Act of a new paragraph - paragraph (ya) - which is designed to exempt from tax certain allowances paid by the Commonwealth to students or trainees in Australia for the purpose of pursuing a course of study or training under the Colombo Plan or a Commonwealth aid programme.

The existing law already exempts certain scholarships, bursaries and educational allowances, but this exemption is conditional upon the student receiving full-time education at a school, college or university. Allowances paid by the Commonwealth to part-time students and trainees visiting Australia under the Colombo Plan or a Commonwealth aid programme do not qualify for exemption from tax. This situation arises, for example, where the visiting student or trainee is in part-time employment in which he gains experience supplementing his study. Remuneration paid for those services will continue to be assessable income but it is proposed to exempt the amounts provided by the Commonwealth as a scholarship, bursary or other educational allowance for a student or trainee who comes to Australia solely for the purposes of the course he is undertaking.

The proposed exemption will apply in assessments for the income year that commenced on 1st July, 1962, and for all subsequent years.

Clause 4: Disposal of Certain Securities.

This clause will amend section 26C of the Principal Act relating to the short-term seasonal securities formerly issued by the Commonwealth. These securities did not bear interest but were redeemed at an amount above their issue price. Accretions that took place in the value of these securities are deemed by section 26C to be assessable income.

In 1962, the seasonal securities were replaced by Treasury Notes. It is also proposed that non-interest-bearing securities in the form of Inscribed Stock be issued pursuant to amendments currently proposed to the Commonwealth Inscribed Stock Act 1911-1946. In each case the new securities will be redeemed at a price above their issue price and neither will bear interest.

The broad purpose of clause 4 is to ensure that section 26C will apply to the new securities in the same way as it applied to seasonal securities.

Paragraph (a) of clause 4 will amend section 26C by omitting references to "seasonal securities" and by inserting references to "prescribed securities".

Paragraph (b) provides for the repeal of the present definition of "seasonal securities" and, in its place, defines "prescribed securities". This term will include seasonal securities and any non-interest-bearing stock or other security (including Treasury Notes) issued by the Commonwealth.

It will also include an interest in any such security or stock. The word "stock" will mean Commonwealth Government Inscribed Stock or Australian Consolidated Inscribed Stock.

These amendments to section 26C will ensure that the assessable income of a person who disposes of a "prescribed security" includes any excess of the value of the security on the day of the disposal over the cost of the security to that person. Correspondingly, where the amount received by a person upon redemption of a "prescribed security" exceeds the cost to him of the security, that excess is included in his assessable income.

Amounts included in the assessable income of a person by reason of section 26C may at present qualify for a rebate of 2/-in the Pd on the same basis as interest on government and certain semi-government securities. This position is not being disturbed.

The amendments proposed by clause 4 are deemed, by clause 2(2.), to have come into operation on 13th July, 1962, which is the day on which the issue of Treasury Notes was authorized.

Clause 5: Dividends.

Clause 5 proposes to amend the provisions of section 44 of the Principal Act which relates to dividends.

Paragraph (a) of clause 5 will insert two new sub-sections - sub-sections (2A.) and (2B.) - in section 44.

Stated broadly, the purpose of the new sub-sections is to enable the exempt nature of certain mining profits to be retained when successive companies pay dividends which originate wholly and exclusively from those exempt profits.

Sub-section (2.) of section 44 at present exempts dividends paid wholly and exclusively out of exempt income derived by mining companies. Very briefly stated, the exempt income is derived from gold-mining, the mining and treatment of uranium by a resident of Australia and the sale, transfer or assignment by a bona fide prospector of rights to mine for prescribed metals and minerals. Exemption is also available for one-fifth of the net income derived from mining for prescribed metals and minerals. (Thirty-nine metals and minerals are prescribed and include asbestos, copper, tin, bauxite, rutile and pyrite.)

If the recipient of such an exempt dividend is a company, its shareholders are entitled to exemption of dividends distributed to them wholly and exclusively out of the net amount of exempt dividend received by the company. If, however, the dividends pass through the hands of more than one company exemption is not available to shareholders of subsequent companies.

The exemptions of dividends that have passed through one company are authorized by paragraph (a)(ii), (c)(ii) and (d)(ii) of the present section 44(2.).

Where a dividend exempt under any of those paragraphs is paid after the commencement of the new provisions, the proposed sub-section (2A.) will enable the exempt nature of the dividends referred to in those paragraphs to be carried a step further than is authorized at present. If a company receives a dividend that is exempt under any one of those paragraphs and it, in turn, distributes wholly and exclusively therefrom a further dividend, that latter dividend is deemed to be of a kind referred to in one of those paragraphs and consequently exempt thereunder. Stated briefly, where exempt mining profits are distributed as a dividend the exempt nature of the income may be retained when it subsequently passes through the hands of two further companies.

The proposed sub-section (2B.) will apply if the dividends pass through the hands of more than two companies before being received by an individual shareholder. In these circumstances, sub-section (2B.) will, in effect, deem a dividend paid out of the kind of dividend referred to in paragraph (a) of sub-section (2A.) to be itself a dividend of that kind. That dividend will, in consequence, be deemed to be a dividend of a kind that is exempt under paragraph (a)(ii), (c)(ii), or (d)(ii) of the existing section 44(2.).

It is a condition of the proposed law that each successive dividend be paid wholly and exclusively out of the net amount of an exempt dividend, that is, out of the amount of an exempt dividend less expenses attributable thereto.

Paragraph (b) of clause 5 is consequential on the enactment of the new sub-sections (2A.) and (2B.). A reference in section 44(3.) of the Principal Act to "the last preceding sub-section" (which is at present sub-section (2.)) is to be omitted and will be replaced by a reference to "sub-section (2.) of this section". The amendment will not disturb the existing effect of the law.

Clause 5 is deemed by clause 2(3.) to have come into operation on 1st July, 1962. The new provisions to be inserted will accordingly apply where dividends exempt under paragraph (a)(ii), (c)(ii) or (d)(ii) are paid on or after that date.

Clause 6: Export Market Development Allowance.

By clause 6 it is proposed to amend section 51AC of the Principal Act by extending the period in which the special allowance for export market development expenditure is available.

Section 51AC states the circumstances in which a special allowance, in addition to the deduction authorized under the general provisions of the law, may be allowed for expenditure on promoting the sale overseas of goods and services provided from Australia.

The special allowance is at present authorized in respect of the appropriate classes of expenses incurred up to 30th June, 1964. The amendment proposed will ensure that section 51AC applies to expenditure incurred on or before 30th June, 1968.

Clause 7: Gifts, Calls on Mining Shares, Pensions, etc.

By this clause, it is proposed to amend section 78 of the Principal Act, by omitting sub-section (3.) and inserting two new sub-sections, sub-sections (3.) and (4.).

The existing sub-section (3.) of section 78 provides that gifts made to the United Nations Appeal for Children or the Australian National Committee for the Freedom from Hunger Campaign will be allowable deductions only if made before 1st July, 1963.

The new sub-section (3.) provides that gifts to the United Nations Appeal for Children and also to the Australian National Committee for World Refugee Year will be allowable deductions only if made before 1st July, 1963.

The proposed sub-section (4.) provides that gifts to the Australian National Committee for the Freedom from Hunger Campaign will be allowable deductions if made before 1st July, 1964. In consequence, the period in which gifts, subject to deduction, may be made for the benefit of the Freedom from Hunger Campaign will be extended for one year until 30th June, 1964.

Clause 8: Exemption of Certain Dividends.

The purpose of this clause is to extend for a period of two years from 31st December, 1962, the operation of the provisions of section 107 of the Principal Act. That section exempts dividends paid before 1st January, 1963 out of income derived prior to the 1951-52 income year and upon which undistributed income tax has been paid under provisions relating to private companies.

By omitting from section 107 the reference to 1st January, 1963, and inserting a reference to 1st January, 1965, clause 7 will extend for two years the period in which the dividends may be paid free of tax.

Clause 2(4.) of the Bill deems clause 8 to have come into operation on 1st January, 1963. This action ensures that, where the tests of section 107 are satisfied, the exemption will be available in relation to dividends paid between 31st December, 1962 and the coming into effect of the amendment proposed.

Clause 9: Rebate of Tax Payable by Visiting Industrial Experts.

This clause effects an amendment to section 160ABA of the Principal Act, which provides for the allowance of a rebate from the tax otherwise payable by visitors referred to in section 23(c)(vii) of the Principal Act, but whose remuneration does not qualify for exemption under that provision. (Section 23(c)(vii) is referred to previously in these notes in connection with clause 3 of the Bill.) In respect of the second, third and fourth years of a visit, allowance of the rebate is conditional upon the giving of a certificate by a person specified in the section.

The amendment to be made in section 160ABA by clause 9 corresponds with the amendment to section 23(c)(vii) proposed in clause 3. The reference to the Director of the Division of Industrial Development of the Department of National Development is to be replaced by a reference to the Secretary to the Department of Trade.

Clause 10: Treatment of Convicted Offenders.

The purpose of this clause is to permit courts to allow time for the payment of fines imposed for income tax offences or to authorize the payment of such fines by instalments.

Section 247 of the Principal Act sets out the action that may be taken when a court has imposed a pecuniary penalty for an offence under the income tax law and the penalty is not paid. One course open to the court is the imprisonment of the person concerned and the court is not authorized to allow time for payment of the fine or to permit payment by instalments. In consequence, a person who does not pay a fine forthwith may be liable to immediate imprisonment.

Clause 10 inserts in section 247 an additional provision - sub-section (2.) - under which a court will be entitled, at any time before a person is imprisoned, to allow a specified time for payment of a fine or permit a fine to be paid by instalments. A person who makes payment in accordance with the order of the court will not be imprisoned. If, before he is imprisoned, part payment of the fine is made, the term of imprisonment is to be only the period appropriate to the unpaid portion of the fine.

The new sub-section will apply as from the date the Bill receives Royal Assent.

Clause 11: Application of Amendments.

This clause specifies the commencing date for the application of the amendment proposed in clause 3(b) of the Bill. As explained in the notes on that provision, the exemption proposed will apply to assessments on income of the income year that commenced on 1st July, 1962 and all subsequent years.

PAY-ROLL TAX ASSESSMENT BILL 1963

GENERAL INTRODUCTION

This Bill has two primary purposes which may be summarised broadly as follows -

(1)

To extend until 30th June 1968 the rebate of pay-roll tax available to an employer whose export sales have increased above the annual average of the export sales made by him during the base period prescribed by the existing law.

(2)

To exclude from the definition of "the gross receipts for the financial year" in section 16A(1.) of the Principal Act certain items which, while they specifically constitute assessable income for income tax purposes, are not trading receipts from carrying on a trade or business in a particular financial year, or are adjustments of expenditure allowed in earlier years as income tax deductions.

The first proposal - to extend the period of operation of the pay-roll tax rebate - is complementary to the proposal contained in the Income Tax and Social Services Contribution Assessment Bill 1963 (see explanation of Clause 6 of that Bill at page 6 of this memorandum) to extend income tax deductions for export market development expenditure for a like period. Under the present law the rebate is available in respect of tax on wages paid or payable up to 30th June 1964. It is proposed that this date be extended to 30th June 1968.

The second proposal - to alter the basis of calculating one of the factors used in determining the amount of a pay-roll tax rebate - is designed to remove the possibility of a rebate available to an employer in relation to increased export sales being diminished by the inclusion in his gross receipts for a financial year of certain specified items that may not be derived as receipts from carrying on his trade or business during that year.

At present the gross receipts taken into account for the purpose of a rebate include, broadly stated, all amounts derived from carrying on a trade or business in Australia during a financial year and which are assessable or exempt income for the purpose of the Income Tax Assessment Act, less certain specified amounts received in relation to exported goods that do not comprise consideration for these goods.

Broadly stated, the rebate under the present law equals -

(Increase in export sales for financial year)/(Gross receipts for financial year (not including income from property)) * (Pay-roll tax for the financial year) * 12.5


It is evident from the formula set out above that the larger the amount of gross receipts taken into account the smaller the rebate available to the employer. Inclusion in the gross receipts of a particular financial year of such amounts as, e.g., an increase in the value of stock inventories during the year, or bad debts of a previous year that have been recovered during the year, as required by the present law, increases the gross receipts and reduces the rebate. Such amounts do not bear any real relation to the taxpayer's trading receipts of that particular year and may, in some cases, have formed part of the gross receipts taken into account in determining a rebate for a previous financial year.

The clauses of the Bill are explained in the following notes.

NOTES ON CLAUSES

Clause 1: Short Title and Citation.

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

Clause 2: Commencement.

Section 5(1A.) of the Acts Interpretation Act 1901-1957 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless a contrary intention appears in the Act.

By this clause, it is proposed that the Pay-roll Tax Assessment Act 1963 shall come into operation on the day it receives the Royal Assent. The purpose of this is to ensure that determinations of rebates of tax imposed on wages paid during the current financial year will not be delayed.

Clause 3: Rebate of Tax by Reference to Exports: Interpretation

By this clause it is proposed to amend the present definition of "the gross receipts for the financial year" contained in section 16A(1.) of the Principal Act.

The purpose of the amendment, as explained in the introductory note, is to exclude certain items that are included in the scope of the present definition by reason of being assessable income under provisions of the Income Tax Assessment Act. This has been achieved by omitting the present sub-paragraphs (i) and (ii) of paragraph (a) of the definition, re-inserting these sub-paragraphs as sub-paragraphs (i) and (iv) respectively of the proposed new definition, and inserting two new sub-paragraphs - sub-paragraphs (ii) and (iii).

The proposed exclusions are made by the new sub-paragraphs (ii) and (iii) of paragraph (a) of the amended definition. A brief explanation of each exclusion follows -

Sub-paragraph (ii)

This sub-paragraph is designed to exclude from "the gross receipts for a financial year" certain amounts which constitute assessable income for income tax purposes under paragraph (j) of section 26 of the Income Tax Assessment Act. So far as is relevant, section 26(j) of the Income Tax Assessment Act, broadly stated, requires that any amount received as insurance or indemnity for a loss or outgoing that is an allowable deduction for income tax purposes be included in assessable income.

Any such amount included in assessable income under section 26(j) of the Income Tax Assessment Act merely replaces a business loss or outgoing incurred by a taxpayer. In these circumstances, it does not form part of the trading income derived during the year of receipt of the insurance or indemnity, from carrying on a trade or business in Australia during that year.

Sub-paragraph (iii)

The purpose of this sub-paragraph is to exclude a number of specified items of assessable income for income tax purposes from the definition of "the gross receipts for the financial year". These various items are by nature balancing adjustments rather than receipts derived from carrying on a business.

The first item proposed to be excluded is the amount by which the value of trading stock on hand at the end of a year of income exceeds the value of such stock at the beginning of that year, and which constitutes assessable income for income tax purposes under sub-section (2.) of section 28 of the Income Tax Assessment Act.

It is important to note in this context that an exporter may, in anticipation of export sales or to fill export orders already received, build up stocks during a year of income. Under the present law the increase in the value of stocks forms part of the gross receipts for that financial year for the purposes of determining any claim for rebate of pay-roll tax. When these stocks are disposed of in a succeeding financial year the proceeds of their sale may be included in the employer's gross receipts for that financial year. To this extent, therefore, the effect of the present law is to include the same amounts as gross receipts for different years. The proposed amendment will remedy this situation.

Where the value of stock on hand at the beginning of a year of income exceeds the value at the end of that year an income tax deduction is allowed for the difference. However, no adjustment is made to the "gross receipts for the financial year" in these circumstances. The proposed amendment will place all employers on an equal footing for the purposes of the pay-roll tax rebate as far as trading stock is concerned.

A further item it is proposed to exclude from the definition is any amount included in assessable income for income tax purposes under sub-section (2.) or sub-section (2C) of section 59 of the Income Tax Assessment Act as a recoupment of depreciation allowed on income-producing property when that property is sold or disposed of for a consideration that exceeds its depreciated value.

Also proposed to be excluded from the existing definition are amounts that are assessable income pursuant to sub-section (3.) of section 63 of the Income Tax Assessment Act. Broadly stated, these amounts represent recoveries of debts where the debts have been included in the assessable income of a previous year (or years) of income and have been allowed as an income tax deduction when written off as bad.

The broad effect of sub-section (10.) of section 66 of the Income Tax Assessment Act is to include in assessable income for income tax purposes any receipt that a person receives from a superannuation or pension fund for his employees, contributions to which have been allowed as income tax deductions to him. It is proposed to exclude such receipts from the present definition of gross receipts for the financial year.

It is also proposed to exclude from the definition of the gross receipts for the financial year amounts that constitute assessable income for income tax purposes under sub-section (2.) of section 72 of the Income Tax Assessment Act. This sub-section requires amounts received as refunds of rates or taxes that are allowable deductions for income tax purposes to be brought to account as assessable income in the year in which the refund is received.

Under section 73A of the Income Tax Assessment Act an income tax deduction is available to a taxpayer carrying on business for payments to certain approved scientific research institutes and expenditure of a capital nature on scientific research related to the business carried on by the taxpayer. Where the capital expenditure is on construction or acquisition of a building or on additions or alterations to an existing building for the purposes of using the building for scientific research, a deduction is available for the capital expenditure over a period of three years commencing with the year in which the building, alteration or addition is first used by the taxpayer or on his behalf for scientific research. However, sub-section (4.) of section 73A provides broadly that, if the building is sold or disposed of, any consideration received is to be included in assessable income to the extent that the capital expenditure has been allowed as an income tax deduction. It is proposed that the amount of this balancing adjustment be excluded from the present definition of the gross receipts for the financial year.

Sub-section (9.) of section 79 of the Income Tax Assessment Act makes similar provision to sub-section (10.) of section 66, which has already been discussed, the difference being that section 79 applies to contributions to superannuation funds and the like for another person's employees. Consistently with the proposal regarding section 66(10.) it is proposed to exclude amounts coming under section 79(9.) from the definition of gross receipts.

It is also proposed to exclude from the definition of gross receipts of the financial year amounts that are assessable income by virtue of sub-section (3.) of section 122B, sub-section (2.) of section 124, and sub-section (2.) of section 124D. Each of these sub-sections refers to balancing adjustments included in assessable income in respect of capital expenditure allowed as an income tax deduction under the special provisions of Division 10 of the Income Tax Assessment Act relating to mining.

Section 122B allows an income tax deduction for income appropriated out of the assessable income of an income year to meet capital expenditure to be incurred in the next year of income. Sub-section (3.) of section 122B and sub-section (2.) of section 124D provide, in varying circumstances, for so much of the amount appropriated that is not expended in the next year of income to be included as assessable income for that year. As, for pay-roll tax rebate purposes, the assessable income appropriated may be included in the gross receipts for the financial year in which it was derived, it is not necessary for the unexpended portion to be also included in the gross receipts of the succeeding year.

Broadly stated, sub-section (2.) of section 124 of the Income Tax Assessment Act provides for a balancing adjustment to be included in assessable income on disposal of mining plant or property, in respect of which capital costs have been allowed as income tax deductions in prior years of income. It is proposed to exclude any adjustment under section 124(2.) from gross receipts for the financial year.

Section 124G of the Income Tax Assessment Act applies where income tax deductions in relation to the capital cost of an access road have been allowed under the special provisions of Division 10A of that Act applying to timber operations. Sub-section (2.) of section 124G brings to account as assessable income any amount of the capital expenditure previously allowed that is recouped out of the consideration received when the road is disposed of. It is proposed that a balancing adjustment of this nature be excluded from the definition of gross receipts for the financial year.

Sub-sections (1.) and (2.) of section 124P include in assessable income balancing adjustments on the disposal of items of industrial property (such as patents, designs or copyrights) when capital expenditure on the development or acquisition of the property has been allowed as income tax deductions in earlier years of income. Any adjustment under section 124P is proposed to be excluded from the definition of gross receipts for the financial year.

Clause 4: Rebate of Tax.

Under the present provisions of section 16C(1.) of the Principal Act the system of rebates in respect of increases in export sales applies in relation to tax paid on wages of the financial years 1960-61, 1961-62, 1962-63 and 1963-64. By clause 4 it is proposed to amend that section to extend the operation of the rebate provisions for a further four years, i.e., so that they will apply to tax in respect of wages paid or payable in respect of financial years up to and including the financial year 1967-68.

Clause 5: Application.

By this clause it is proposed that the new definition of "the gross receipts for the financial year" will first apply in relation to the calculation of rebates of tax on wages paid or payable by an employer for the current financial year ending on 30th June 1963.