House of Representatives

Explanatory Memorandum

(Circulated by authority of the Acting Treasurer, the Rt. Hon. R. G. Menzies.)

General Outline

In this memorandum explanations are given in relation to the provisions of the two Bills relating to income tax.

Income Tax and Social Services Contribution Bill 1964

The first Bill (the Income Tax and Social Services Contribution Bill 1964) declares the rates of income tax and social services contribution payable by individuals and companies for the current financial year 1964-65. It also prescribes the circumstances in which an age allowance is available to residents of Australia who, in the case of men, have attained the age of 65 years and, in the case of women, are not under 60 years of age.

Income Tax and Social Services Contribution Assessment Bill (No. 2) 1964

The second Bill (the Income Tax and Social Services Contribution Assessment Bill (No. 2) 1964) has the following purposes:-

Pay and allowances of Citizen Forces (Clause 4)

Pay and allowances received for part time service in the Citizen Forces are to be exempt from tax.

Persons serving with the armed forces of United Nations (Clauses 5 to 8)

Civilian persons who serve overseas with the armed forces of the United Nations may be accorded special income tax treatment corresponding to that accorded to members of the Defence Force serving at certain overseas localities.

Secrecy provisions (Clause 3)

The Commissioner will be authorised to advise the Commonwealth Statistician of the names, addresses and industries of persons who are employers for the purpose of the income tax law. The information is to be used by the Statistician in collecting employment statistics.

Provisional Tax (Clause 10)

Provisional tax in respect of the income of the 1964-65 income year is to be an amount which would have been payable if the rebate of 5 per cent of tax payable by individuals had not applied in respect of the 1963-64 income year.

The provisions of the two Bills are explained in succeeding paragraphs of this memorandum.

Main Features

INCOME TAX AND SOCIAL SERVICES CONTRIBUTION BILL 1964.

The main purpose of this Bill is to declare the rates of income tax and social services contribution payable for the financial year 1964-65. As in previous years, the Bill also authorises the granting of an age allowance.

The explanations that follow relate principally to those aspects of the income tax rates that differ from the provisions of the rating Act of 1963.

Discontinuance of 5% Rebate to Individuals.

The rates of income tax declared in the first four schedules to the Bill apply to the taxable incomes of individuals for the current year 1964-65. The rates are the same as those levied for the preceding year 1963-64.

For the 1963-64 year, however, the law authorised a rebate equal to 5% of the tax otherwise payable. The present Bill does not include a corresponding provision.

Superannuation Funds.

A superannuation fund is required to pay income tax if it does not invest an appropriate proportion of its moneys in public securities, that is, if it does not comply with what is widely known as the "30/20" rule.

The rates of tax payable on investment income of such funds have been the same as those payable in recent years on the mutual income of life assurance companies, namely, 5/- in the Pd on the first Pd5,000 of taxable income and 7/- in the Pd on the balance of the taxable income. In consonance with the proposed increase of 6d. in the Pd in the rates of tax payable by companies, the Fifth Schedule to the Bill declares the rates of tax payable on the taxable portion of the investment income of superannuation funds not complying with the "30/20" rule to be 5/6 in the Pd on the first Pd5,000 of that income and 7/6 in the Pd on the balance.

Age Allowance.

By clause 7 of the Bill the level of incomes up to which the age allowance may apply will be increased.

The age allowance is available to an individual who, throughout the income year, has been a resident of Australia and who, at the end of that year, has attained the age of 65 years in the case of a man or 60 years in the case of a woman.

The purpose of the allowance is to exempt from tax a person who satisfies those tests and whose income does not exceed the sum of the age pension and the maximum permissible income for age pension purposes. At present, the allowance confers freedom from tax if the net income of the person does not exceed Pd481. In the case of a married taxpayer qualified by age and residence and who contributes to the maintenance of the spouse, exemption is at present authorised if the combined net incomes of husband and wife do not exceed Pd910 and the spouse is a resident of Australia throughout the year of income.

Consistent with the proposed increase of 5/- a week in the age pension, clause 7 of the Bill proposes that the existing exemption limits of Pd481 and Pd910 be increased to Pd494 and Pd936 respectively.

A measure of relief is also provided for a person who satisfies the age and residence tests but whose net income is somewhat in excess of the limits mentioned. For the 1963-64 income year, this relief was authorised if the net income was between Pd481 and Pd556 or, in the case of a married person, if the combined net incomes of the husband and wife was between Pd910 and Pd1,293. By clause 7 of the Bill, the upper limits at which the allowance may operate will be increased from Pd556 to Pd574 and, in relation to the combined net incomes of married couples, from Pd1,293 to Pd1,350.

Where the net income of an aged person exceeds the exemption limit, but is within the upper limits mentioned, the amount of tax payable will not exceed nine-twentieths of the excess of the net income over the exemption limit. For example, if the combined net incomes of a married couple total Pd1,000, the excess over the exemption limit of Pd936 is Pd64. The tax payable by the aged person will not exceed nine-twentieths of Pd64, that is, Pd28.16.0. Should the normal assessment processes result in a smaller amount of tax being payable, then only the smaller amount is charged.

The revised age allowance provisions will apply for the current income year 1964-65.

Rates of Tax Payable by Companies.

The Sixth Schedule to the Bill declares the rates of income tax payable by companies for the 1964-65 financial year, that is, in respect of incomes for the income year 1963-64. A limitation applying in relation to non-profit companies is explained later in this memorandum.

The rates of tax payable on the taxable incomes of companies will be six pence in the Pd above those applied for the preceding income year 1962-63. The proposed rates are -

Limitation of Tax Payable by Non-Profit Companies.

For the 1962-63 income year, tax was payable by a non- profit company only if the taxable income derived exceeded Pd208. Clause 5 of the present Bill proposes a similar provision for the 1963-64 year.

By sub-clause (2.) of clause 9 it is provided that the tax payable by a non-profit company deriving a taxable income for the 1963-64 income year not in excess of Pd594 shall not be greater than one-half of the excess of the taxable income over Pd208. For the 1962-63 income year, this basis of arriving at the amount of tax payable applied to taxable incomes not exceeding Pd520. The increase from Pd520 to Pd594 results from the proposed increase by 6d. in the Pd in the rates of tax payable by companies.

Without a limiting provision of this nature, a non- profit company whose taxable income exceeded Pd208 by only a moderate amount would be liable to pay tax on the 209th pound of taxable income at a rate in excess of 20s. in the Pd. A comparable position would occur over the whole range of taxable income between Pd209 and Pd594. The sub-clause will ensure a smooth rate of increase in the tax liability of non-profit companies.

Elimination of Pence.

Clause 10 proposes the continuance of a provision by which pence are eliminated from the amount of tax calculated at the rates declared in relation to the incomes of individuals.

The clause does not depart from the practice of earlier years but a provision of the 1963 Act relating to the 5% rebate has been omitted consequent on the discontinuance of that rebate.

NOTES ON CLAUSES

INCOME TAX AND SOCIAL SERVICES CONTRIBUTION ASSESSMENT BILL (NO. 2) 1964

This Bill is the second measure referred to previously in this memorandum. The principal features have been listed and the following notes relate to each clause 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 1901-1964 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 the contrary intention appears in the Act.

By sub-clause (1.) of this clause, it is proposed that the Amending Act shall, with the exceptions stated in sub-clause (2.), come into operation on the day on which it receives the Royal Assent. This provision will enable notices of assessments including provisional tax to be issued as soon as Assent is given to the Bill.

The exceptions referred to are in respect of the amendments to the Principal Act proposed by clauses 5 to 8. These amendments are to be deemed to have come into operation on 14th May, 1964. This will enable special taxation treatment to be accorded members of the Australian Police Unit in Cyprus as from the date on which members first took up duty there.

Clause 3: Officers to observe secrecy.

By this clause it is proposed to amend section 16 of the Principal Act to authorise the Commissioner to divulge certain specified information to the Commonwealth Statistician for the purpose of the collection of statistics on employment.

The purpose of section 16 of the Principal Act is to ensure that officials shall maintain secrecy in respect of any information about the affairs of taxpayers that is acquired by them in the course of their official duties.

The proposed amendment will enable the Commissioner to give to the Commonwealth Statistician lists showing the names, addresses and industries of employers who are group employers for income tax purposes or who make tax instalment deductions from employee's wages in accordance with the tax stamp system. The amendment will not give the Statistician access to information from the returns of income or assessments of taxpayers, and he and his officers will be subject to the same obligations of secrecy, in respect of information conveyed to them, as are taxation officials.

Clause 4: Exemptions.

By this clause it is proposed to insert a new paragraph - paragraph (s) - in section 23 of the Principal Act.

The proposed paragraph is designed to authorise an exemption from tax in respect of the pay and allowances of a member of the Citizen Forces for part-time service. The exemption will apply in respect of all part-time training, including, for example, training at an annual training camp. It will apply in respect of all sectors of the Citizen Forces - Navy, Army and Air Force. The exemption will not be available in respect of pay and allowances for full time duty, e.g., where a member of the Citizen Forces has volunteered or been called up for such duty.

The amendment made by this clause will apply in assessments for the 1964-65 income year and subsequent years.

Clause 5: Taxation of certain persons serving with an Armed Force under the control of the United Nations.

The purpose of this clause is to provide a means whereby special taxation treatment may, as the occasion arises, be accorded to civilian personnel contributed by Australia to an armed force of the United Nations overseas, in circumstances where the salaries and allowances of personnel are paid by Australia, or by the United Nations as agent for Australia.

It is proposed that the special treatment be accorded by regulation under new provisions to be inserted in the Principal Act. In broad terms, the amendment will authorise the same income tax treatment to be accorded Australian civilians serving overseas with a United Nations force as applies in respect of members of the Defence Force serving in certain overseas localities.

For the purposes mentioned above, it is proposed by this clause to insert a new section - section 23AB - in the Principal Act.

Sub-section (1.) of the proposed section 23AB contains definitions of several expressions used in the section.

Notes on the definitions are:-

"prescribed taxpayer"

: This defintion is a drafting measure. Its purpose is to provide a means of reference elsewhere in the section to a person who is, or is included in a class of persons that is, prescribed in the regulations for the purposes of the section.

"tax deductions unapplied"

: One of the provisions which it is proposed may apply in relation to taxpayers prescribed for the purposes of the section is that on the death of such a taxpayer his trustee will, in specified circumstances, be released from outstanding tax on salary and allowances derived by the taxpayer in respect of service overseas with a force of the United Nations. Broadly stated, the release will operate to the extent that the tax is not covered by tax instalment deductions made from the income. This definition is for the purposes of the provision mentioned. The definition encompasses tax instalment deductions made from salary, wages or allowances derived by a deceased person in respect of United Nations service, which have not been applied in payment of tax or refunded by the Commissioner.

"the prescribed area"

: This definition is a drafting measure and is explained in relation to sub-section (8.) of the proposed new section 23AB (see page 9 of this memorandum)

"United Nations service"

: The purpose of this definition is to state the scope of service with an armed force of the United Nations which is necessary for a prescribed taxpayer to render in order to have the provisions of the section applied. For service to fall within the ambit of the definition it is necessary for it to be performed at the direction, or with the approval, of the Commonwealth. Further requisites are that the service be performed otherwise than as a member of the Defence Force, and during a period in which the person performing it is prescribed in the regulations for the purposes of the section.

Sub-section (2.) authorises the making of regulations in accordance with the section for the purpose of prescribing persons or classes of persons to whom provisions of the section will apply. An example of a class of person to which the section may, by regulation, be made applicable is the Australian Police Unit at present serving with the United Nations force in Cyprus.

The sub-section will restrict the application of the proposed section to persons whose salaries and allowances for United Nations service are paid by Australia or by the United Nations as agent for Australia.

It will also permit regulations to be made so as to apply the section (or as explained later, certain provisions of the section) in relation to some members of a particular class of persons to the exclusion of others in the same class, e.g., where the conditions of service of different members vary considerably.

The purpose of sub-section (3.) is to authorise the making of regulations that apply any or all of the provisions of sub-sections (5.), (6.), (7.) and (10.) of the proposed section 23AB to persons or classes of persons. The provisions of these sub-sections are explained in succeeding paragraphs.

Sub-section (3.) is, to an extent, complementary to sub- section (2.). It is envisaged that some persons may serve with a United Nations force in circumstances in which it would not be appropriate for them to be treated for taxation purposes wholly as if they were members of the Defence Force serving overseas but it would, nevertheless, be appropriate to apply certain of the special provisions to them. Sub-section (3.) will enable this to be done should such cases occur.

Sub-section (4.) is designed to authorise the making of regulations that are effective as from the same date as the new section. This provision is necessary for the purpose of regulations in respect of the Australian Police Unit in Cyprus, members of which first commenced duty on 14th May, 1964.

Sub-section (5.) provides that payments by the Commonwealth of compensation in respect of a taxpayer to whom the sub-section applies shall, in certain specified circumstances, be exempt from income tax. The exemption will extend to payments of this kind made to such a taxpayer or to other persons in the event of the taxpayer's death. It will also permit compensation payments to be exempt, in the circumstances specified, when the payments are made, or commence to be made, after a taxpayer has ceased to be a person performing United Nations service, e.g., where the Commonwealth's liability for such payments is not determined until after that time.

Paragraph (a) of the sub-section makes the provision applicable in relation to payments of compensation under the Commonwealth Employees' Compensation Act 1930-1962 in respect of the incapacity or death of a taxpayer to whom the sub-section applies.

Paragraph (b) ensures that the exemption will be available only if the payments are made in respect of an incapacity or death that resulted from an event that happened while the taxpayer was performing United Nations service.

Paragraph (c) operates to exempt from tax the compensation payments to which paragraphs (a) and (b) refer in a case where, had the taxpayer, at the time that the incapacity or death occurred, been a member of the Defence Force, the Commonwealth would be liable to pay a pension under the Repatriation (Special Overseas Service) Act 1962 in respect of the incapacity or death. Pensions payable under that Act in respect of members of the Defence Force are exempt from income tax under section 23(k) of the Principal Act.

Sub-section (6.) relates to the value of meals, sustenance and quarters received by a person during a period for which he is a prescribed taxpayer.

Where the sub-section can be applied under regulations that may be made, it ensures that the value to be included in the assessable income of such a taxpayer in respect of meals, sustenance and quarters received in relation to United Nations service is to be calculated at the rate of Pd1 per week. This value will apply whether the taxpayer received such allowances in money or by way of free meals etc. The same value is applied to allowances by way of meals etc., received by members of the Defence Force (see sections 26(e) and 26(ea) of the Principal Act).

Sub-section (7.) of the proposed section 23AB authorises a special deduction from the assessable income of a prescribed taxpayer to whom the sub-section applies in accordance with the regulations.

The deduction is to be available in the assessment of any year of income in which such a taxpayer has performed United Nations service and derived income by way of salary, wages or other allowances in respect of that service.

The special deduction authorised by this provision corresponds with the deduction authorised by section 79B of the Principal Act in relation to members of the Defence Force serving at certain overseas localities.

Paragraph (a) of sub-section (7.) applies where the total period of United Nations service during the year of income is more than one-half of that year. In such a case the deduction to be available is the amount of Pd270 plus one-half of the amount of the concessional deductions, if any, to which the taxpayer is entitled for maintenance of dependants.

Paragraph (b) will apply where the period of United Nations service is less than one-half of the year of income. It will authorise the Commissioner of Taxation to allow a deduction that is reasonable in the circumstances of the particular case, e.g., a deduction that is proportionate with the period of United Nations service during the income year.

Sub-section (8.) is designed to ensure that, where sub- section (7.) applies in relation to a taxpayer, the period of United Nations service shall be deemed to include a period during the year of income spent in a locality in Australia in consequence of which a special tax deduction is available.

Sub-section (9.) is a drafting measure complementary with sub-section (8.). It is designed to ensure that when a deduction is allowable under the new section 23AB, a deduction is not also allowable under another provision of the Principal Act in respect of a period spent in a particular locality.

Sub-section (10.) provides, in specified circumstances, for the release of a trustee from unpaid tax on income of a taxpayer who is deceased.

Broadly stated, the income in respect of tax on which the release may be granted is salary, wages or allowances related to the United Nations service of the deceased taxpayer. The amount of the release is, in broad terms, the amount of outstanding tax on such income that is not covered by tax instalment deductions made from the income and which are available for crediting against the tax. A similar release may be granted in respect of tax owing in respect of a deceased member of the Defence Force under section 265A of the Principal Act.

Paragraph (a) of the sub-section makes the section applicable when the trustee of the estate of a deceased person is liable to pay tax for any year of income in respect of income of the kind referred to above.

Under paragraph (b) the section may be applied if the death of the person resulted from some event that occurred during the performance of United Nations service by him.

Paragraph (c) states another condition which must be met for the sub-section to be applicable. This condition is that, if the deceased person had, at the time the event occurred which caused his death, been a member of the Defence Force, the Commonwealth would be liable to pay a pension under the Repatriation (Special Overseas Service) Act 1962 in respect of his death.

Where these three conditions are fulfilled in relation to a deceased person to whom the sub-section applies, his trustee shall, subject to the provisions of paragraphs (d) and (e) explained hereunder, be released from the payment of so much of the tax as remains unpaid after deducting any "tax deductions unapplied". The expression "tax deductions unapplied" has been explained in relation to sub-section (1.) of the proposed section 23AB (see pages 6 and 7 of this memorandum)

Paragraph (d) applies where the deceased person's income consists solely of income derived from United Nations service. Where the sub-section applies to such a case the amount from which the trustee is released is the amount of tax outstanding less any tax instalment deductions which have been made from the income and have not been credited in payment of tax assessed.

Paragraph (e) applies to a case where the assessable income of the deceased person includes other income besides income derived from United Nations service. Where the sub-section applies to such a case the trustee shall be released from the amount remaining after deducting from the lesser of the following amounts, the amount of tax instalment deductions made from the income derived from United Nations service, which have not been credited in payment of tax assessed -

(a)

the amount of the tax outstanding; or

(b)

the amount by which the tax payable has been increased by the inclusion of the income from United Nations service in the assessable income of the deceased.

Sub-section (11.) corresponds with sub-section (2.) of section 265A of the Principal Act. That section, as already explained, makes provision for a release from payment of tax by a trustee of the estate of a deceased member of the Defence Force that corresponds with the release proposed to be authorised by section 23AB in respect of a person who dies as a result of an event that occurred during his United Nations service.

The effect of sub-section (11.) is that the Commissioner is not authorised or required to refund any tax that has been paid by the deceased person or his trustee. As is the case also with section 265A, the release under the proposed section 23AB may apply only in respect of unpaid tax.

It is provided by sub-clause (2.) of clause 2 of the Bill that the amendments made by this clause are to be deemed to have come into operation on 14th May, 1964. Pursuant to section 3(2.) of the Acts Interpretation Act 1901-1964 the amendments will therefore apply to income derived on or after that date.

Clause 6: Deductions for residents of isolated areas.

This clause is a drafting measure which effects an amendment to section 79A of the Principal Act that is consequential upon the proposed insertion of the new section 23AB in the Act.

Its purpose is to ensure that deductions are not allowable both under section 79A and the new section in relation to a period of United Nations service.

The amendment made by this clause is to be deemed to have come into operation on 14th May, 1964.

Clause 7: Limitation on certain deductions.

The purpose of this clause is to amend section 79C of the Principal Act to make it applicable in relation to deductions authorised by the new section 23AB proposed to be inserted in the Principal Act.

Section 79C provides that deductions allowable under certain sections of the Principal Act, e.g., section 79B which authorises a special deduction for members of the Defence Force serving in certain overseas localities, 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 allowable in relation to prospecting and mining for petroleum. By this clause, the deduction authorised by sub-section (7.) of section 23AB will also be made subject to this limitation.

The amendment made by this clause is to be deemed to have come into operation on 14th May, 1964.

Clause 8: Amendment of Assessments.

This clause will amend section 170 of the Principal Act, which governs the powers of the Commissioner of Taxation to amend income tax assessments. It is proposed to include in sub-section (10.) of that section a reference to the new section 23AB.

Sub-section (10.) of section 170 provides that nothing in the section shall prevent the amendment of an assessment at any time for the purpose of giving effect to specified sections of the Principal Act.

The amendment to sub-section (10.) to include a reference to section 23AB will enable an assessment in respect of a person who has performed United Nations service to be amended at any time to apply a provision of that section which applies in consequence of that service.

The amendment made by this clause is to be deemed to have come into operation on 14th May, 1964.

Clause 9: Application of Amendments.

This clause specifies the commencing date for the application of proposed amendments affecting assessments. These dates have been stated in the notes on the relevant clauses.

Clause 10: Provisional tax for year of income that commenced 1st July, 1964.

Clause 10 is a drafting amendment relating to provisional tax and is consequential upon the discontinuance of the 5 per cent rebate allowed to individuals for the 1963-64 income year.

Section 221YC of the Principal Act provides the basis of calculation of the amount of provisional tax payable by an individual taxpayer in respect of income other than salary or wages.

Paragraph (a) of sub-section (1.) of that section applies where the taxpayer derived a full year's income from professional, business or property sources in the year preceding that for which the provisional tax is payable. In such cases, the provisional tax payable for the current year is an amount equal to the tax assessed for the preceding year.

Paragraph (b) applies where the income of the preceding year was not a full year's income. In these cases, the provisional tax payable for the current year is an amount equal to the tax for the preceding year adjusted to a full year basis.

Unless it is provided otherwise, the provisional tax for the 1964-65 income year will be calculated as though the rebate of 5 per cent of the tax payable by individuals for the 1963-64 income year applied also for 1964-65. As the rebate will not be available for the later year, it has been necessary to include clause 10 which will ensure that the provisional tax for 1964-65 is ascertained without taking into account the 5 per cent rebate that applied for the preceding year.