House of Representatives

Explanatory Memorandum

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

Introductory Note

This Bill relates solely to the taxation of the incomes of certain prospecting and mining companies and of shareholders in those companies. The main purposes of the Bill are -

1.

To extend for a further three years from 1st July 1964 the deductions authorised for share capital subscribed to -

(a)

petroleum exploration companies (Clause 4(b)); and

(b)

other companies, the principal business of which is mining or prospecting for minerals other than gold, uranium or oil (Clause 5(e));

2.

To provide that, in specified circumstances, a deduction is not authorised for share capital subscribed to a company as part of an arrangement with a person from whom the company has purchased a prospecting or mining right or technical information relating to such a right, or shares in a company holding such a right or possessing such information. This will apply in relation to both petroleum exploration companies and other mining or prospecting companies (Clauses 4(a) and 5(d));

3.

To express with greater precision the scope of expenditure in relation to which deductions are authorised for share capital subscribed to companies mining or prospecting for minerals other than gold, uranium or oil (Clause 5(b));

4.

To modify, in specified circumstances, the exemption provided for dividends paid out of exempt income derived by a company from the sale of mining rights, when shareholders in the company paying the dividends have been granted deductions for share capital subscribed to the company (Clause 3).

More detailed explanations are set out hereunder.

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 1901-1963 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 clause 2, it is proposed that the amending Act shall come into operation on the day on which it receives the Royal Assent. This provision will enable amended provisions relating to deductions for share capital subscribed to petroleum exploration and other mining companies to be applied in respect of capital subscribed to such companies after that date.

Clause 3: Dividends

This clause proposes to insert a new sub-section - sub- section (2C.) - in section 44 of the Principal Act, which relates to dividends.

The new sub-section will, in circumstances that are specified, modify the exemption from tax on certain dividends now provided by section 44(2.)(a) of the Principal Act. The modification will apply only where a deduction has previously been allowed for capital originally subscribed for the shares on which the dividends are paid.

The broad effect of section 44(2.)(a) of the Principal Act is to exempt from tax in a shareholder's hands dividends paid wholly and exclusively out of income derived by a company that is exempt, in the company's hands, under section 23(p) of the Principal Act. Broadly stated, under the latter section income derived by a prospecting company from the sale of rights to mine for gold and prescribed metals or minerals is exempt from tax.

For the proposed modification to apply it will be necessary, in the first place, for a company that derives income exempt under section 23(p) to have lodged with the Commissioner of Taxation a declaration under section 77AA of the Principal Act specifying amounts of share capital received by it from shareholders. It will also be necessary for shareholders to have become entitled by virtue of the declaration to income tax deductions for the share capital specified. When both of these events have occurred, the modification will apply only where some or all of the share capital has been expended by the company on prospecting or other activities on the mining rights in relation to the sale of which it derived the income exempt from tax under section 23(p).

The proposed sub-section (2C.) comprises four paragraphs which state the circumstances in which the exemption may be modified. It also sets out the basis of the modification. In very broad terms, it is proposed that where the sub-section applies, the exempt income available for distribution as dividends by a company will be reduced by so much of share capital subscribed, and allowed as deductions to shareholders, as has been expended by the company on prospecting or mining on the rights that produced the exempt income. The proposed provision will not affect, in any way, the amount of income exempt in the company's hands.

Paragraph (a) of sub-section (2C.) states the first prerequisite for application of the sub-section. In effect, this is that a company has lodged a declaration under section 77AA(3.) of the Principal Act entitling its shareholders to a deduction for share capital subscribed to it.

Paragraph (b) states a further prerequisite for application of the sub-section. It requires that the Commissioner be satisfied that expenditure by the company out of the declared moneys has been incurred in relation to a particular area in Australia or the Territory of Papua and New Guinea.

Paragraph (c) is designed to bring the sub-section into operation when the circumstances referred to in paragraphs (a) and (b) apply. Under paragraph (c), the sub-section may operate if the company has sold, transferred or assigned the rights to mine in the area on which it has incurred expenditure out of the declared moneys.

Paragraph (d) states the final prerequisite for application of the sub-section - that the income derived by the company from the sale, transfer or assignment of the rights is exempt from tax in the company's hands under section 23(p) of the Principal Act.

When all the circumstances described in paragraphs (a) to (d) apply, it is provided by the sub-section that the amount of income that may be distributed by the company as exempt dividends to shareholders is to be reduced by an amount equal to so much of the moneys declared by the company as have been expended by it on prospecting or mining the area from the sale of the rights in which it has derived exempt income.

The provisions of sub-section (2C.) apply in assessments for the income year 1964-65 and subsequent years.

Clause 4: Moneys paid on shares for the purposes of petroleum exploration

Introductory Note

This clause proposes two amendments to section 77A of the Principal Act. One of these will extend the operation of that section for a further three years from 1st July 1964.

The broad purpose of the other proposed amendment is to ensure that a deduction under section 77A will not be authorised for share capital subscribed by a person who has sold mining rights or information to a company when the money paid for the rights or information has, in effect, been returned to the company as the share capital.

In the circumstances described above the payment to the company does not represent a real monetary contribution to the share capital of the company and the effect of the transaction is, in substance, no different from the issue to the vendor of paid-up shares. A deduction is not available under section 77A when the vendor accepts paid- up shares in return for the transfer of rights or information.

Section 77A of the Principal Act authorises the allowance to residents of Australia or the Territory of Papua and New Guinea of deductions for moneys paid to a petroleum exploration company as share capital on shares issued by the company.

The section applies where a petroleum exploration company furnishes to the Commissioner a declaration that moneys received by it as share capital and specified in the declaration have been, or will be, expended in carrying on prospecting or mining operations for the purpose of discovering or obtaining petroleum in Australia or the Territory of Papua and New Guinea or on plant necessary for carrying on these operations. Expenditure, or proposed expenditure, in acquiring a petroleum prospecting or mining right or petroleum prospecting or mining information is specifically placed outside the classes of expenditure that may qualify for the purposes of section 77A.

In some cases a company that has received share capital does not itself expend the moneys in petroleum prospecting or mining operations, but in turn contributes it as share capital to a company that undertakes to spend the moneys for that purpose. If the appropriate declarations are furnished, section 77A may, in these circumstances, entitle resident shareholders in the first company to a deduction for the moneys paid to it as share capital.

Where the Commissioner is satisfied that the moneys specified in a declaration under section 77A have been, or will be, expended in accordance with a declaration furnished to him, the declaration has two effects. These are:-

(a)

amounts paid to the company by resident shareholders as share capital on shares issued by the company are deductible to the extent that they are specified in the appropriate declarations;

(b)

the deductions for capital expenditure on petroleum prospecting or mining operations and plant necessary for those operations, to which the company would otherwise be entitled when it produces petroleum in commercial quantities, are reduced by the amounts specified in the declarations.

By paragraph (a) of Clause 4 it is proposed to insert two new sub-sections - sub-sections (17A.) and (17B.) - in section 77A.

The proposed sub-section (17A.) will apply only in the circumstances specified in the sub-section. These circumstances are where the Commissioner is satisfied that a person has paid money specified in a declaration lodged by a company under section 77A in pursuance of an arrangement or agreement connected with the purchase by the company, or another company, of a petroleum prospecting or mining right, petroleum prospecting or mining information, or shares in a company that holds such a right or possesses such information.

If the Commissioner is so satisfied he may inform the company in writing to that effect. In that event, paragraph (a) of the proposed sub-section 17A will ensure that a deduction is not authorised under the section in the circumstances described in the preceding paragraph of this memorandum. Paragraph (b) of the sub-section will, in turn, ensure that the deductions available to the company under Division 10AA of the Principal Act (in the event of its producing petroleum commercially) for capital expenditure incurred in petroleum prospecting or mining operations, and necessary plant, are not reduced by the amount that has been specified in the declaration and not allowed as a deduction to the person paying it.

An opinion formed by the Commissioner pursuant to sub- section (17A.) will be subject to the usual rights of objection and reference to a Board of Review. A Board may, of course, substitute its own opinion for that of the Commissioner.

Sub-section (17B.) is designed as a safeguard against avoidance of the application of sub-section (17A.) in respect of the purchase of shares in a company that holds rights or information. In its absence, the provisions of sub-section (17A.) could be avoided if a person selling shares arranged for one or more companies to be interposed between the company which holds the rights or information and the company in which shares are sold. Where these circumstances exist the company in which shares are sold will be deemed, for the purposes of sub- section (17A.), to hold the right or possess the information.

The provisions of the proposed new sub-sections (17A.) and (17B.) will apply in respect of any moneys paid on shares after the day on which the amending Act receives the Royal Assent.

Paragraph (b) proposes the amendment of sub-section (18.) of section 77A. That sub-section places a time limit on the operation of section 77A. The amendment will extend the operation of the section beyond the present expiration date - 30th June 1964 - to 30th June 1967.

Clause 5: Moneys paid on shares for the purposes of certain mining or prospecting

This clause proposes several amendments to the scope of section 77AA of the Principal Act. It will also extend the operation of that section for a further three years from 1st July 1964.

Under section 77AA, residents of Australia or the Territory of Papua and New Guinea are, in certain circumstances, entitled to deductions for moneys subscribed as paid-up capital on shares in companies whose principal business is prospecting or mining in Australia or the Territory for minerals other than gold, uranium and oil.

Entitlement to those deductions is conditional upon the company to which the capital is subscribed declaring that the money has been, or will be, used in prospecting or mining for a mineral other than gold, uranium or oil. Where a company duly makes such a declaration, the deductions to which it would otherwise be entitled for capital expenditure or depreciation in respect of its mining operations are correspondingly reduced.

The purpose of paragraphs (a), (b) and (c) of this Clause is to effect amendments to sub-section (1.) of section 77AA, which will make it clear that deductions are not authorised by the section in respect of moneys which a company disburses in acquiring mining rights or information.

For this purpose, it is proposed by paragraph (a) to insert in sub-section (1.) of section 77AA a definition of "mining or prospecting information". This term is proposed to be defined as meaning geological, geophysical or technical information, related to the presence, absence or extent of mineral deposits in a particular area, that has been obtained from prospecting or mining operations.

Paragraph (b) will amend the definition of "mining or prospecting outgoings" contained in sub-section (1.) of section 77AA. Broadly stated, this term is defined as meaning expenditure by a company for the purposes of engaging in mining or prospecting in Australia or the Territory of Papua and New Guinea for minerals other than gold, uranium and oil. The term also includes within its scope capital expenditure on exploration and prospecting, development of the mining property, and necessary plant and housing and welfare provided in the vicinity of the mine for the benefit of employees and their dependants.

The amendment proposed by paragraph (b) will make it clear that the scope of the definition does not extend to expenditure by a company in acquiring "mining or prospecting information" (see explanation of paragraph (a) above) of a "mining or prospecting right" (see explanation of paragraph (c) hereunder).

Paragraph (c) will insert in sub-section (1.) of section 77AA a definition of "mining or prospecting right". It is proposed that this term be defined as meaning an authority, licence, permit or right to mine for minerals other than gold, uranium or oil in a particular area in Australia or the Territory of Papua and New Guinea. The term will also include a lease of land which entitles the lessee to mine or prospect on the land. An interest in such an authority, licence, permit, right or lease will also be within the scope of the definition.

Paragraph (d) will insert two new sub-sections - sub- sections (8A.) and (8B.) - in section 77AA.

The practical effect of sub-sections (8A.) and (8B.) in relation to section 77AA will correspond with that of sub-sections (17A.) and (17B.) of section 77A proposed in relation to the latter section. The provisions of sub- sections (17A.) and (17B.) proposed to be inserted in section 77A by clause 4 of the Bill have been explained at pages 4 and 5 of this memorandum.

Broadly stated, sub-section (8A.) will provide that a deduction under section 77AA is not authorised for moneys paid on shares and specified in a declaration lodged by a company, if the Commissioner informs the company in writing that he is satisfied that the moneys have been paid in accordance with an agreement or arrangement relating to the purchase by the company or another company of a mining or prospecting right, mining or prospecting information, or shares in a company holding such a right or possessing such information. An amendment in section 124DA proposed by clause 6 of the Bill will ensure that an appropriate increase is then made in the deductions to which the company is entitled in respect of capital expenditure it has incurred in mining or prospecting operations.

Sub-section (8B.) will operate in the same manner as sub- section (17B.) of section 77A (see page 5 of this memorandum).

Paragraph (e) of Clause 5 proposes an amendment of sub- section (9.) of section 77AA which places a time limit on the operation of the section. The amendment will extend the operation of the section beyond the present expiration date - 30th June 1964 - to 30th June 1967.

The amendments proposed by paragraphs (a) to (d) of this clause will apply in respect of moneys paid on shares after the day on which the amending Act receives the Royal Assent.

Clause 6: Reduction of certain allowable deductions

This clause will effect an amendment to sub-section (3.) of section 124DA of the Principal Act that is consequential upon the amendment to section 77AA proposed by paragraph (d) of clause 5.

Sub-section (3.) of section 124DA applies only in isolated cases in which the Commissioner (under sub- section (5.) of section 77AA) notifies a company that he is not satisfied that amounts specified in a declaration lodged by it have been, or will be, expended on prospecting or mining in accordance with the declaration. In that event, the deductions to which shareholders would otherwise be entitled for amounts specified in the declaration are reduced. There is then an appropriate increase in the deductions for capital expenditure available to the company. Sub-section (3.) prescribes the basis for determining the amount of that increase.

As already explained in relation to paragraph (d) of clause 5, deductions under section 77AA will not in future be available, in certain circumstances, to a person who has sold rights or information to a mining or prospecting company. The proposed amendment to sub- section (3.) of section 124DA is designed to ensure that, where this occurs, an appropriate increase will be made in the deductions to which the company is entitled for capital expenditure incurred by it in carrying on mining or prospecting operations.

This amendment to section 124DA will apply in respect of moneys paid on shares after the day on which the amending Act receives the Royal Assent.

Clause 7: Amendment of Assessments

It is proposed by this clause to amend sub-section (10.) of section 170 of the Principal Act. Section 170 governs the powers of the Commissioner to amend income tax assessments.

Sub-section (10.) of section 170 at present authorises the Commissioner to amend assessments where a declaration made by a company under section 77AA in relation to its expenditure of share capital in prospecting or mining is not fulfilled. The effect of the proposed amendment to the sub-section will be to enable the Commissioner also to amend an assessment where a deduction under section 77AA is allowed for moneys paid on shares by a taxpayer and it is subsequently ascertained that, by virtue of the new sub-section (8A.) and (8B.) proposed to be inserted in section 77AA, the taxpayer was not eligible for the deduction (see notes on clause 5 at page 5 of this memorandum).

Clause 8: Application of Amendments

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