House of Representatives

Explanatory Memorandum

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

Introductory Note

Explanations are given in this memorandum of the provisions of the abovementioned Bill which proposes a number of amendments to the Income Tax Assessment Act 1936-1972 (the "Principal Act"). Briefly stated the proposals contained in the amending Bill are -

Company Losses (Clauses 8 to 13)

Under the Principal Act, a company's entitlement to a deduction for a loss incurred in an earlier year is subject to the condition that shares carrying at least 40 per cent of the voting rights and rights to dividend and capital distributions are beneficially owned by the same persons in the year of income and the year in which the loss was incurred. This condition is referred to in this memorandum as the "continuing ownership test". A company which, because of changes in ownership of more than 60 per cent of its shares, fails to satisfy the "continuing ownership test" may still claim the deduction for loss of an earlier year if it carries on in the year of income the same business as it carried on before the change in its shareholdings occurred. This is referred to as the "same business test".

It is proposed to strengthen the "continuing ownership test" and to enact safeguarding provisions against devices designed to avoid the operation of the test. The proposed amendments will -

(a)

require a continuing ownership of shares carrying more than one-half (in lieu of the present 40 per cent) of the voting, dividend and capital rights;

(b)

extend the area of application of provisions under which the ownership of direct and indirect interests in a "loss" company can be traced through interposed companies, trusts and partnerships to individual persons; and

(c)

enable regard to be had to the subordination of the rights, powers and interests of continuing shareholders in a "loss" company to those of other persons who had little or no beneficial interest in the company in the year in which the loss was incurred.

The operation of the "same business test" will not be affected by these proposals.

Bad Debts (Clause 6)

The amendments proposed by this clause are designed to remove opportunities companies now have to obtain tax advantages through buying up the shells of other companies to which substantial amounts are owed by way of debts which are bad but have not been written off as such. It is proposed that deductions otherwise allowable to a company for debts owed to it and written off as bad are not to be available unless the company satisfies tests substantially the same as those governing the allowance of deductions for company losses - i.e., the "continuing ownership test" or the "same business test".

Very broadly, a company will be entitled to a deduction for a bad debt only if it satisfies the "continuing ownership test", having regard to the year in which the debt came into existence and the year in which it is written off as bad, and provided that persons other than the continuing shareholders will not obtain the real benefits of the deduction for the debts, A company unable to meet the "continuing ownership test" may be allowed a deduction for its bad debts if it satisfies the alternative "same business test".

Private Companies (Clauses 15 to 19)

Clauses 18 and 19 are designed to eliminate the tax benefits now being obtained by private companies through buying up the shells of other private companies which have paid dividends in excess of the amount required to avoid the imposition of additional tax on undistributed income. The tests proposed for this purpose follow the general lines of the provisions that are to govern the allowance of deductions for company losses and bad debts.

Broadly speaking, a private company will be required to satisfy the "continuing ownership test" or, alternatively, the "same business test", as a condition of its being able to take into account for the purposes of tax on undistributed income any amount which may have been paid in excess of a sufficient distribution of its income of a previous year. In applying the "continuing ownership test", regard will be had to the persons who were the beneficial owners of shares in the company in the respective "prescribed periods". A "prescribed period" is the period of twelve months that commences two months before the end of a year of income and is the period during which a company may make a sufficient distribution for tax purposes of its income of the year. As with deductions for bad debts and losses of earlier years, an excess distribution will not be taken into account if persons other than the continuing shareholders are the real beneficiaries of its deduction in determining the company's liability to tax on undistributed income.

The new tests could be circumvented to some extent if income were channelled into a private company in the last two months of an income year and matched against dividends that had been paid earlier in those two months. Clauses 15 to 17, which include tests corresponding with those that are to apply in relation to excess distributions, will have application in determining whether such dividends are to be taken into account for the purposes of tax on undistributed income.

Life Insurance Premiums, Superannuation Contributions (Clause 14)

It is proposed that the concessional deduction of up to $1,200 for life insurance premiums and payments to superannuation funds be made subject to certain conditions. For premiums paid on a life insurance policy taken out on or after 1 January 1973, it is proposed that the premiums be deductible only if benefits, other than death benefits, are not payable under the policy within a period of 10 years after its commencement. Where a policy taken out since that date is forfeited or surrendered before it has been in force for 10 years, provisions are proposed under which some or all of the deductions allowed may be withdrawn.

For contributions to a superannuation fund on or after 1 January 1973, it is proposed that the allowance of deductions be conditional upon the fund itself being eligible for tax exemption or other concessional tax treatment.

Rebate for Export Market Development Expenditure (Clause 20)

It is proposed by this clause to extend to 30 June 1974 the operation of the provisions under which a rebate of tax is allowable in respect of certain expenditure to promote exports.

Dividends (Clause 4)

It is proposed to clarify the scope and operation of provisions of the Principal Act designed to exempt from income tax dividends paid out of profits from gold mining carried on in Australia or Papua New Guinea.

Conversion of Plant for use under the Metric System (Clause 5)

It is proposed that expenditure on converting plant for use under the metric system of measurement be allowable as an outright deduction for income tax purposes in the year in which it is incurred.

Secrecy (Clause 3)

The secrecy provisions of the Principal Act are to be amended to bring a citation of an Act up to date and to authorize the Commissioner to communicate information to the Secretary to the Department of Education in connection with the provision by the Commonwealth of financial assistance to students.

Capital Expenditure on Mining (Clause 25)

It is proposed to amend transitional provisions of the Income Tax Assessment Act (No. 2) 1968 so that they also apply in respect of an agreement entered into between a mining company and a government where the agreement has been assigned with the consent of the government.

Formal Amendments (Clause 22 and Schedule 1)

A number of drafting amendments are proposed to be made to provisions of the Principal Act, in line with drafting practices that are now being followed. The operation of the provisions that are to be amended will not be affected.

The various proposals contained in the Bill are explained in the notes that follow relating to each of the clauses of the Bill.

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 as amended.

Clause 2: Commencement.

Section 5(1A) of the Acts Interpretation Act 1901-1966 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 this clause it is proposed that, subject to sub-clause (2) of clause 25 of the Bill, the amending Act shall come into operation on the day it receives the Royal Assent. As explained in the notes on clause 25, it is proposed to amend the Income Tax Assessment Act (No. 2) 1968 - in terms of sub-clause (2) of that clause - with effect from 25 June 1968

Clause 3: Officers to observe secrecy.

By section 16 of the Principal Act, officials are, except in particular circumstances in which the communication of information is authorised by the section, required to maintain secrecy as to information about the affairs of taxpayers that comes to their knowledge in the performance of their official duties.

Sub-section (4)(g) of section 16 authorises the Commissioner of Taxation to communicate information from income tax records to the Commissioner for Employees' Compensation for the purpose of administering laws relating to compensation for Commonwealth employees. By paragraph (a) of this clause a technical amendment is proposed whereby a now outdated reference to the Commonwealth Employees' Compensation Act 1930-1951 is to be replaced by a reference to the Compensation (Commonwealth Employees) Act 1971-1973, the statute under which the Commissioner for Employees' Compensation holds office.

Paragraph (b) of clause 3 will amend sub-section (4)(i) of section 16 to authorise the Commissioner of Taxation to communicate information to the Secretary to the Department of Education for the purpose of administering Commonwealth laws relating to financial assistance to students.

The present law permits the communication of information to the Commonwealth Scholarships Board in relation to tertiary scholarships administered by the Board, particularly regarding applicants for means-tested maintenance allowances. It is proposed that similar information be made available to the Secretary to the Department of Education who is responsible for administering the new senior secondary scholarship scheme under which provision is made for the payment, on a means-tested basis, of maintenance allowances to students.

Clause 4: Dividends.

Section 44 of the Principal Act, which relates to the taxation of dividends, contains provisions intended to provide an exemption from tax only for dividends having their origin in profits derived from gold mining operations - or, up to 30 June 1968, from uranium mining operations - carried on by companies in Australia or Papua New Guinea.

A possible construction of these provisions is, however, that they exempt from tax in the hands of Australian recipients dividends paid out of any mining profits derived in Papua New Guinea by companies that are resident there or elsewhere outside Australia. The basic purpose of clause 4 is to clarify the intended scope and operation of the relevant provisions.

Paragraph (a) of clause 4 will redraft provisions now contained in paragraphs (a), (b) and (c) of sub-section (2) of section 44. The amendments proposed by the other paragraphs of clause 4 are consequential upon the redrafting of sub-section (2) of section 44 and, together with paragraph (a), are directed to removing the uncertainty referred to in the preceding paragraph of these notes.

Paragraph (a) of clause 4 will delete the first three paragraphs of sub-section (2) of section 44 and replace them with four new paragraphs - (a), (b), (c) and (ca).

The new paragraph (a) of sub-section (2) of section 44 will specify as eligible for exemption dividends that are paid wholly and exclusively out of "net" income derived by a company that is tax-free by reason of paragraph (o) or paragraph (p) of section 23 of the Principal Act, or by reason of section 23D of that Act. By "net" income is meant the income that is exempt by reason of those provisions as reduced by expenses applicable to the income.

Broadly stated, paragraph (o) of section 23 exempts from Australian tax income derived from gold-mining in Australia or Papua New Guinea and paragraph (p) exempts income derived by a prospector from the sale or transfer of his rights to mine for gold or for certain other metals or minerals in Australia or Papua New Guinea. Section 23D, operative only as to income derived up to 30 June 1968, exempted income derived from uranium mining and treatment in Australia or Papua New Guinea.

The new paragraph (b) corresponds with the existing paragraph (b)(i) of section 44(2) and provides for an income tax exemption for dividends paid wholly and exclusively out of income that is exempt by reason of section 23A of the Principal Act. That section exempts from tax one-fifth of net income derived from the carrying on, in Australia or Papua New Guinea, of mining operations for prescribed metals or minerals.

The paragraph does not alter the operation of the law as it now applies in relation to dividends of the kind specified in the paragraph.

The new paragraph (c) is designed to ensure that, where a company is the recipient of a dividend that is exempt from tax by reason of new paragraphs (a) or (b), its shareholders will be exempt from tax on dividends paid to them by the company wholly and exclusively out of the net amount of the exempt dividend received by the company.

The new paragraph (c) is to take the place of, and will have the same effect as, paragraphs (a)(ii) and (c)(ii) of the present section 44(2).

The new paragraph (ca) corresponds with the existing paragraph (b)(iii) of section 44(2) which provides an exemption for dividends paid out of profits arising from the sale or re-valuation of assets not acquired for the purpose of re-sale at a profit, or paid out of premiums associated with certain convertible note issues. This exemption is restricted to dividends satisfied by the issue of shares.

The new paragraph (ca) does not change the law as it now applies to dividends of this kind.

By paragraphs (b) and (c) of clause 4, it is proposed to effect drafting amendments to sub-section (2A) of section 44. These adjustments are of a minor nature and are consequential on the amendments to be effected to subsection (2) of that section by paragraph (a) of clause 4.

Paragraph (d) of clause 4 proposes a minor drafting adjustment to sub-section (2D) of section 44. This adjustment is also consequential on the amendments proposed by paragraph (a).

Paragraph (e) of clause 4 proposes to omit subsections (3), (4) and (5) from section 44 and to substitute a new provision - sub-section (3).

The provisions to be deleted by paragraph (e) are drafting measures that owe their existence in the present law to paragraph (c) of section 44(2). As that paragraph is to be deleted by paragraph (a) of clause 4, sub-sections (3), (4) and (5) are no longer required.

The new sub-section (3) will ensure that dividends paid by companies resident in Papua New Guinea or elsewhere outside of Australia, out of profits of gold-mining operations conducted in Papua New Guinea will continue to be treated as exempt from Australian tax in the hands of Australian shareholders. As previously explained, such dividends are intended to be covered by the exemption provided in the existing law for gold-mining dividends.

The amendments proposed by this clause will apply in assessments for the income year ending 30 June 1973 and subsequent years.

Clause 5: Cost of converting plant for use in connection with metric system of measurement to be allowable deduction.

This clause proposes the introduction into the Principal Act of a new section - section 53G - which will authorise a deduction of the costs incurred by a taxpayer in converting plant for use under the metric system of measurement. As in the case of expenditure for the conversion of plant for use with decimal currency, the deduction will be allowed in the year in which the costs are incurred.

Sub-section (1) of the proposed new section defines two terms used in the section -

"conversion costs" is defined to mean expenditure incurred in relation to a unit of property in converting or adapting it for use under the metric system of measurement; and

"unit of property" by definition excludes property which is held by a taxpayer as trading stock. Taxpayers who incur expenditure in converting machines or other items which form part of their trading stock will obtain deductions for that expenditure under the general provisions of the Principal Act. The broad effect of this definition is to confine the operation of the section to conversion costs incurred in relation to units of property used as plant for the purpose of producing assessable income.

Sub-section (2) is the operative provision of the proposed section. It provides for a deduction of the full amount of the conversion costs where the unit of property converted is used for the purpose of producing assessable income. The deduction is to be allowed in the year of income in which the conversion costs are incurred.

Sub-section (3) is designed to ensure that a taxpayer does not become entitled to more than one deduction in respect of conversion costs incurred in respect of his business plant.

Paragraph (a) formally provides that no part of any conversion costs that are deductible under the proposed new section may be allowable as a deduction under any other provision of the Principal Act. The paragraph also provides that no part of those costs may be taken into account in ascertaining the amount of an allowable deduction, e.g., by way of depreciation allowances or deductions for capital expenditure incurred by taxpayers engaged in mining operations.

Paragraph (b) states that conversion costs are not to be treated as capital expenditure or expenditure of a capital nature for the purposes of the Principal Act. The principal effect of this provision will be in respect of plant converted that is used in mining operations. When plant so used is disposed of, lost or destroyed, balancing adjustments are made in accordance with section 122K of the Principal Act by reference to the capital expenditure incurred on the plant. Paragraph (b) will exclude conversion costs allowable as a deduction under the proposed new section from the capital expenditure on the plant that is to be taken into account for the purpose of the balancing adjustments.

Sub-section (4) of the proposed section is designed to permit the amendment of any assessments for the year of income which commenced on 1 July 1971 (the first year of income to which the proposed new section will apply) if those assessments have been made on the basis that conversion costs are not allowable deductions. It is unlikely that many such assessments will have been made but the sub-section will authorise the necessary amendment in any such cases that occur. The usual powers of the Commissioner to amend assessments in relation to the present income year and future years will not be affected by this provision.

As mentioned above, the proposed new section will apply to assessments in respect of the year of income which commenced on 1 July 1971 and subsequent years of income.

Clause 6: Bad Debts of a company.

Introductory Note

Section 63 of the Principal Act authorises a deduction for debts owed to a taxpayer that are written off as bad in the year of income if the debts have been included in assessable income of the taxpayer or are in respect of loans made by the taxpayer as a money lender in the ordinary course of his business.

Section 51 of the Principal Act authorises deductions for losses and outgoings incurred in deriving assessable income or in carrying on business for the purpose of deriving such income. Debts owed to a taxpayer which become bad during a year of income and which do not qualify for deduction under section 63, may be deductible under section 51.

The amendments proposed by this clause are directed against a practice under which shares in a company which has substantial bad debts, and is usually insolvent, are acquired by another company for the purpose of reducing tax. It is arranged for profitable business to be put through the company acquired for its potential bad debt deductions. The bad debts thus become deductions against the income from the business diverted to the purchased company.

By clause 6 it is proposed to insert three new sections in the Principal Act to deal with this situation. These will require a "continuing ownership test" or, alternatively, a "same business test" to be met as a condition for deductibility of bad debts by companies. In short, the allowance of deductions for bad debts will depend upon the meeting of tests corresponding with those required to be met for the deduction by companies of losses of earlier years.

The amendments proposed by this clause will apply for the current income year (1972-73) and subsequent income years. For 1972-73, however, the "continuing ownership test" will be based on a 40 per cent continuity of shareholders' rights. For 1973-74 and subsequent income years, more than 50 per cent continuity of shareholders' rights will be required.

Section 63A: Bad debts of company not allowable deductions unless there is substantial continuity of beneficial ownership of shares in company.

By virtue of sub-section (1), neither section 51 nor section 63 will operate to allow to a company a deduction for a bad debt where the company fails to satisfy the tests proposed in section 63A. This section is, however, itself subject to the provisions of proposed new sections 63B and 63C, which are explained later in these notes.

Sub-section (2) applies to the deduction of a company's bad debts a requirement of continued ownership of shares in the company of the kind applied in the provisions relating to deductions for losses incurred by companies in past years. Sub-section (2) provides that a company is not entitled to a deduction in a year of income for bad debts incurred in an earlier year, unless the debts are written off as bad in the year of income and the Commissioner of Taxation is satisfied that shares carrying between them rights to more than one-half of the voting power, dividends and capital distributions of the company were beneficially owned by the same persons at all times during the year in which the debt came into existence and the year of income for which the deduction is claimed.

These tests will be satisfied by a public company if the Commissioner considers it reasonable to assume that the same persons beneficially owned shares carrying the specified rights throughout the two relevant years. This relieving provision recognises that numerous sales of shares in large public companies could make it impracticable to determine with any accuracy whether shares carrying the specified rights were beneficially owned throughout the two relevant years by the same persons. Difficulties could also occur for the company concerned in identifying the beneficial owners of shares registered in the names of nominees or other trustees. The Commissioner will, of course, have authority to seek and obtain such information as may be available to assist him in reaching a decision on the matter.

Sub-section (3) sets out circumstances in which the "tracing" provisions contained in sub-section (4) may be applied, in lieu of sub-section (2), to determine whether the "continuing ownership test" has been satisfied. Under sub-section (2) this test is applied by reference only to the beneficial owners (companies or natural persons) of shares in the company. In some situations, however, the test would be more appropriately applied by having regard to the direct shareholdings of natural persons in the bad debt company and also by a tracing through any company, trustee or partnership shareholders to the natural persons who have the ultimate indirect beneficial interests in the company.

Sub-section (3) provides for the application of sub-section (4) where the company requests the Commissioner of Taxation, when lodging its return for the year of income or within such further time as the Commissioner allows, that the sub-section be applied. This could be of advantage to a company where, for example, its direct corporate shareholders have changed but, by the application of the tracing process provided by sub-section (4), the required continuing ownership of shareholders' rights is found in the indirect beneficial interests of natural persons.

Sub-section (4) may also be applied in lieu of sub-section (2) if the Commissioner considers it reasonable to do so. The Commissioner may invoke sub-section (4) where, for example, there have been substantial changes in the shareholders of a company itself holding a majority of the shares in the company with the bad debts. In such a case, sub-section (3) will enable sub-section (4) to be applied to determine whether, having regard to the individuals with direct and indirect interests in the "bad debt" company, the "continuing ownership test" has been met.

Under sub-section (4), a debt will not be an allowable deduction for a year of income unless it is written off as bad in that year and the Commissioner is satisfied, or he considers it reasonable to assume, that the same natural persons, at all times during the year in which the debt came into existence and the year for which the deduction is claimed, either indirectly, or directly and indirectly, between them, controlled or were capable of controlling the voting power in the company and had rights to receive more than one half of any dividends or capital distributions of the company.

Sub-section (5) will apply where the debt being considered came into existence in a year of income after a change had occurred in that year in the beneficial ownership of shares in the company or in another relevant company and, by reason of that change, the continuing ownership requirements of either sub-section (2) or (4) are not met. In these circumstances, the Commissioner is empowered to apply the ownership tests of sub-sections (2) and (4) without regard to the shareholding before the debt came into existence. He will, therefore, in these circumstances look to the shareholding position in the year of incurrence of the debt as it existed from the date on which the debt is incurred.

Sub-sections (2), (3) and (4) apply tests for the deduction of a debt that came into existence in a year before the year in which it is written off as bad and claimed as a deduction. Identical tests are repeated in sub-sections (6), (7) and (8) respectively to govern the deduction of a debt owed to a company that is incurred and written off as bad in the same year of income and so potentially a deduction available in that year.

Continuing ownership is required under sub-sections (2) and (4) as between the year in which the debt came into existence and the year in which the deduction for the bad debt is claimed. Under sub-sections (6) and (8), however, continuing ownership is required as between the part of the year that ended on the day on which the debt came into existence and the later part of that year, i.e., the part that followed the day on which the debt came into existence.

Sub-section (9) is a drafting measure for the purposes of sub-sections (4) and (8). It operates for the purposes of the tracing process provided in those sub-sections to treat a natural person who beneficially owns shares in a company interposed between him and the "bad debt" company as having a right to receive some part of any dividend or capital distribution of the "bad debt" company. The tracing process may proceed on this basis through any number of interposed companies. The sub-section operates similarly for holdings through trusts and partnerships.

The purpose of sub-section (10) is to apply the principles of section 80B (other than sub-sections (2) and (4) which are being repealed) of the Principal Act as proposed to be amended in determining the beneficial ownership of shares in a "bad debt" company and in any relevant interposed companies for the purposes of applying the "continuing ownership test".

Section 80B of the Principal Act incorporates safeguarding measures to strengthen the "continuing ownership test" as it applies to the deduction of past year company losses. Notes relating to the operation of the section, and to the operation of the company loss provisions appear later in this memorandum.

Sub-section (11) is a safeguard against circumstances which, although likely to occur infrequently in normal situations, could be open to manipulation in inter-company transactions.

The "continuing ownership test" proposed in section 63A would be ineffective where a debt is incurred and becomes bad on the last day of an income year. The taxpayer concerned has a choice as to when a debt is to be written off as bad and to remove any scope for manipulating these circumstances to circumvent other proposed provisions, it is proposed, by sub-section (11) that no debt that is both incurred and written off as bad on the last day of the income year will be an allowable deduction.

Sub-section (12) is a relieving provision under which the continuing ownership tests in section 63A will not apply in any case where, having regard to the shareholders of the company at the time when the debt became bad, the Commissioner considers it unreasonable that the deduction should not be allowed. Without this discretion a deduction could not be allowed, for example, in a case in which debts owed to a company have become bad after a disqualifying change in shareholdings occurred.

Insofar as matters to be determined under proposed section 63A rest upon the opinion of the Commissioner of Taxation, his opinion will be subject to the usual rights of objection and reference to an independent Board of Review. A Board of Review may, of course, substitute its own opinion for the Commissioner's.

The proposed section 63A will apply in assessments based on income of the year ending 30 June 1973 and subsequent years. However, for the year ending 30 June 1973 the "continuing ownership test" will be satisfied by a 40 per cent or more continuity of rights, whereas for subsequent years the continuity is required to be more than 50 per cent.

Section 63B: Bad debts of company not allowable deductions in certain circumstances.

Section 63B contains provisions which will apply so as to prevent deductions being allowed to a company for bad debts where, despite technical compliance with the "continuing ownership test" under proposed section 63A, the factual situation is that the benefits from the allowance of the deduction would accrue, to a disproportionate extent, to persons other than the continuing shareholders. The section will have no application where the "same business test" provided in proposed new section 63C is met.

Under paragraph (a) of sub-section (1) of section 63B, a deduction will not be allowable for a bad debt in any case where a company derives income in the relevant income year that it would not have derived if the bad debt had not been available to be written off for deduction in that income year. The operation of this provision, which is directed against cases where income is channelled into a company to offset available bad debt deductions, is qualified by sub-section (2) of the section.

Sub-section (2) ensures that, while paragraph (a) of sub-section (1) may apply even though the receipt of income by the "loss" company occurred in the course of ordinary family or commercial dealing, it will not operate to disallow the deduction if the Commissioner considers that the continuing shareholders will benefit from the receipt of the income by the company to an extent appropriate to their rights and interests in the company. The opinion of the Commissioner will be subject to review in the usual way.

Under paragraph (b) of sub-section (1), a deduction will not be allowable for a bad debt where a person other than the company to which it is owed receives a taxation benefit or advantage from any dealings that would not have been undertaken if the bad debt had not been available for deduction.

In relation to paragraph (b), sub-section (3) specifies that, without limiting its scope, a person is to be treated as having received or obtained a taxation benefit or advantage if he pays no tax, or pays less tax, because he has derived less income than he would have derived if the dealings specified had not been undertaken.

Sub-section (4) also governs the operation of paragraph (b) of sub-section (1). It makes it clear that the paragraph may apply even though the dealings giving rise to the taxation advantage were undertaken in the course of ordinary family or commercial dealing, but excludes its application in respect of any such advantage accruing to a shareholder if the Commissioner considers the advantage to be fair and reasonable having regard to the shareholder's interest in the company. The usual review procedures will be applicable in respect of this discretionary power.

Paragraph (c) of sub-section (1) of the proposed section 63B will apply in the factual situation where a "bad debt" company's day-to-day business operations are managed and conducted in a manner inconsistent with the rights, powers and interests of the shareholders who represent continuing interest in the company required under proposed section 63A. Where these circumstances exist, a deduction for a company's bad debts will not be allowable, despite its compliance with the "continuing ownership test". Matters that would be examined in deciding whether a company is being managed with due regard to the rights of continuing shareholders would include -

•

the degree of participation by the continuing shareholders in the affairs of the company;

•

the way in which directors have been appointed or removed;

•

the relationship between directors of the company and persons associated with its sources of income;

•

the circumstances under which income is derived by the company;

•

the circumstances under which persons who are creditors of the company acquired those claims.

Paragraph (d) of sub-section (1) is a further safeguarding provision which can have application in cases where sub-sections (2), (4) and (5) of section 63A apply - that is, where the bad debt was incurred in a year before the year of income. This provision will ensure that, even where there has been a continuing ownership under the direct ownership tests in sub-section (2), under the tracing procedures of sub-section (4), or under the part year provision of sub-section (5), the deduction will not be allowable where a person who controls, or is capable of controlling, the voting power of the company during the whole or part of the year of income, did not have similar powers of control at all times during the year in which the debt came into existence, if his control in the year of income was acquired for the purpose of receiving or obtaining a taxation benefit or advantage.

Paragraph (e) of sub-section (1) will apply in the same way as paragraph (d) in cases under sub-sections (6) and (8) of section 63A where the bad debt is incurred and written off in the same year of income.

Sub-sections (2), (3) and (4) are drafting measures which apply for the purposes of sub-section (1). They are explained in the notes relating to the operation of sub-section (1).

Sub-section (5) is a drafting measure which - for the purposes of sub-section (4) - defines a shareholding interest as the direct or indirect beneficial interest of a person in a company.

Sub-section (6) identifies the persons referred to in sub-section (2) as continuing shareholders in the company. These are the persons who beneficially own shares in a bad debt company, or in an interposed company, at the relevant times for the purpose of satisfying the "continuing ownership test" under sub-sections (2), (4), (5), (6) and (8) of section 63A.

Sub-section (7) applies in relation to paragraph (c) of sub-section (1). It provides that the matters to be taken into consideration under that provision, in determining whether a company is conducted without proper regard to the rights of continuing shareholders, will include transactions and happenings that are associated with ordinary family or commercial dealing.

Sub-sections (8) and (9) apply in relation to sub-sections (1)(a) and (1)(b) and for the purposes of sub-section (3) as it applies to sub-section (1)(b).

The provisions will permit sub-section (1)(a) to operate where several factors, including the availability of a bad debt deduction, entered into the arrangements which resulted in income being derived by the "bad debt" company. In the same way, sub-section (1)(b) will be able to apply where the agreement, scheme, arrangement, etc. referred to in the provision had been entered into for more than one purpose. The provisions will also enable sub-section (3) to operate in relation to paragraph (1)(b) where the availability of a tax benefit was but one of several matters which led to income being diverted to a "bad debt" company.

It is proposed that the new section 63B apply in assessments based on income of the year ending 30 June 1973 and subsequent years.

Section 63C: Bad debts of company may be allowable deductions where company carries on same business.

The purpose of section 63C is to provide a "same business test" as an alternative qualification for deduction of a company's bad debts in cases where entitlement to a deduction would otherwise be lost because of a change in shareholders' rights in the company.

This provision applies the same principle to the deduction of a company's bad debts as was enacted in section 80E of the Principal Act for the purpose of the deduction of past year losses of companies.

Very briefly, sub-section (1) of section 63C provides that neither section 63A nor section 63B will prevent a bad debt being taken into account if the bad debt company carries on at all times during the income year the same business as it carried on immediately before a disqualifying change in the beneficial ownership of shares in the company or of any relevant interposed company, and the company did not derive income during the income year from a business of a kind it did not carry on before the change in shareholdings or from a transaction of a kind that it had not entered into prior to the change.

Sub-section (2) is a safeguard against special arrangements under which a company begins to carry on a new kind of business or engages in a new kind of transaction in anticipation of a disqualifying change in shareholdings. In these circumstances, section 63C will not apply in relation to a bad debt and the company's entitlement for a deduction in respect of the debt will be determined by reference to the "continuing ownership test" in section 63A and the special safeguarding provisions in section 63B.

This section will apply in assessments for the year of income ending 30 June 1973 and subsequent years.

Clause 7: Losses of previous years.

This clause proposes a minor drafting adjustment to sub-section (3A) of section 80 which relates to the income tax deduction for losses of previous years. The adjustment follows from clause 4 which proposes to replace paragraph (b)(iii) of the present section 44(2) with a new paragraph - paragraph (ca).

Clauses 8 to 13: Company losses of previous years.

Introductory Note

Section 80 of the Principal Act provides for the deduction in a year of income of losses incurred in any of the seven preceding years that have not already been recovered out of assessable or exempt income. Section 80AA makes similar provision for the deduction of primary production losses without limiting the period within which the losses may be recouped. In the case of a company, the deductions available under these provisions are conditional upon the company satisfying a "continuing ownership test" or alternatively, a "same business test". The provisions of sections 80A to 80D of the Principal Act prescribe the "continuing ownership test". The conditions to be satisfied in relation to the "same business test" are laid down in section 80E.

The amendments proposed by clauses 8 to 13 have as a main purpose the strengthening of the "continuing ownership test" and are designed to ensure that the test operates in the way intended when it was introduced into the law. They will also repeal provisions relating to newly incorporated companies which are, in general, catered for by the alternative "same business test".

The effects of the amendments proposed in clauses 8 to 13 will be -

(a)

to strengthen the "continuing ownership test" by -

(i)

requiring that there be continuing ownership under section 80A of shares representing a majority interest, in lieu of the present 40 per cent interest, in the "loss" company, having regard to the voting rights and rights to dividends and distributions of capital carried by the shares. In effect the test will call for shares carrying more than one-half of the voting, dividend and capital rights in the company to be owned by the same persons at all times during the year of loss and during the year of income for which the deduction is claimed;

(ii)

by requiring as an additional safeguard that the loss deduction will not be allowable where the benefit of the deduction will flow, to a disproportionate extent, to persons who were not beneficial owners, directly or indirectly, of an interest in the company in the year in which the loss was incurred. This safeguard is contained in the provisions of a new section - section 80DA - which is proposed by clause 11.

(b)

to repeal special provisions relating to newly incorporated loss companies;

(c)

to strengthen some aspects of existing safeguards against arrangements affecting direct and indirect beneficial interests in a loss company; and

(d)

to withdraw provisions relating to companies with controlling interests in "loss" companies and replace them with more direct provisions to allow beneficial interests in a loss company to be traced through any interposed companies, trusts or partnerships, either at the loss company's request or on the initiative of the Commissioner.

Detailed explanations of each of clauses 8 to 13 are set out in succeeding paragraphs. Some of the amendments have effect in assessments for the income year 1972-73 and subsequent years, others for the income year 1973-74 and subsequent years while some are affected by transitional provisions. Relevant explanations in this connection are incorporated in the notes to each clause.

Clause 8: Losses of previous years not be taken into account unless there is substantial continuity of beneficial ownership of shares in company.

This clause repeals section 80A of the Principal Act and inserts a new section 80A in its stead.

Sub-section (1) of section 80A re-enacts the "continuing ownership test" for company losses in relation to voting, dividend and capital distribution rights carried by shares beneficially owned in the "loss" company itself. (Sub-section (3) may apply in certain cases where one or more companies beneficially own shares in the "loss" company.)

A change proposed by sub-section (1) is to increase from the present 40 per cent to more than one-half the proportion of rights required to be carried by shares owned by the same persons in the year the loss was incurred and the year of income.

Under sub-section (1), a company will not be entitled to a deduction in a year of income for a loss incurred in an earlier year unless the Commissioner of Taxation is satisfied that shares carrying between them rights to more than one-half of the voting power, dividends and capital distributions of the "loss" company were beneficially owned by the same persons at all times during the year in which the loss was incurred and the year of income for which the deduction is claimed.

These tests will be satisfied by a public company if the Commissioner considers it reasonable to assume that the same persons beneficially owned shares carrying the specified rights throughout the two relevant years. This relieving discretion recognises that numerous sales of shares in large public companies could make it impracticable to determine with complete accuracy whether shares carrying the specified rights were beneficially owned throughout those two years by the same persons. Difficulties could also occur in identifying the beneficial owners of shares registered in the names of nominees or other trustees. The Commissioner will, of course, have authority to seek and obtain such information as may be available to assist him in reaching a decision on the matter.

Sub-section (2) sets out criteria under which subsection (3) may be applied in lieu of sub-section (1) to determine whether the "continuing ownership test" has been satisfied. Under sub-section (1) this test is determined by reference only to the beneficial owners (companies or natural persons) of shares in the "loss" company. Sub-section (3) takes into account for the purposes of the test the direct shareholdings of natural persons in the "loss" company and also authorises a tracing through any companies, trustees or partnerships to the natural persons who have the ultimate indirect beneficial interest in the "loss" company.

Sub-section (2) provides that sub-section (3) is to apply instead of sub-section (1) where a "loss" company requests the Commissioner, when lodging its return for the year of income or within such further time as the Commissioner allows, that the sub-section be applied. This could be of advantage to a "loss" company where, for example, corporate shareholders in the company have changed but, through the tracing processes of sub-section (3) the required continuing ownership of shareholders' rights is found in the indirect beneficial interests of natural persons.

Sub-section (3) may also be applied in lieu of sub-section (1) if the Commissioner considers it reasonable to do so. The Commissioner may invoke sub-section (3) where, for example, there has been no disqualifying change in the beneficial ownership of a company or companies of shares in a "loss" company but there is such a change among the natural persons beneficially owning shares in the corporate shareholders to the extent that the required continuing ownership of shareholders, rights cannot be found by reference to those natural persons. In such a case, sub-section (2) will enable sub-section (3) to be applied to deny a deduction for the past year losses.

Where sub-section (3) applies, a company will not be entitled to a deduction in a year of income for a loss incurred in an earlier year unless the Commissioner is satisfied, or he considers it reasonable to assume, that the same natural person or persons, at all times during both relevant years either indirectly, or directly and indirectly, controlled or were capable of controlling the voting power in the "loss" company and had rights to receive more than one half of any dividends or capital distributions of the company.

The provisions of sub-section (3) will provide authority to trace beneficial interests in shares in a "loss" company through interposed companies and trustees, in place of the tracing procedures at present provided by section 80D of the Principal Act. That section is to be repealed.

Sub-section (4) is a drafting measure relating to the provisions of sub-section (3). It applies in carrying out the tracing process provided for in that sub-section so as to treat a natural person who beneficially owns shares in a company interposed between him and the "loss" company as having a right to receive some part of any dividend or capital distribution of that company. The tracing process may proceed on this basis through any number of interposed companies and operates similarly for holdings through trusts and partnerships.

Sub-section (5) re-enacts section 80A(2) of the Principal Act and has application in cases where persons (the "continuing shareholders") who beneficially own shares carrying the specified rights throughout the year of income had acquired those shares during the earlier year in which the loss was incurred. In this situation, sub-section (1) or sub-section (3), as the case may be, will operate to disallow a deduction for the loss.

However, sub-section (5) authorises the Commissioner, where other conditions are satisfied, to allow as a deduction a part of the loss incurred. The part which may be so allowed is the amount the Commissioner considers to be the loss incurred in the part of the year of loss occurring after the shares were acquired by the continuing shareholders.

The new section 80A will have effect in assessments for the income year 1973-74 and subsequent years. Section 80A of the Principal Act, which is based on a 40 per cent continuity of shareholders' rights, will continue to apply for the income year 1972-73 and earlier years.

Companies which need to re-organise their shareholdings to meet the increase in the "continuing ownership test" from "not less than 40 per cent" to "more than 50 per cent" have until the commencement of their 1973-74 income year to do so. A special transitional provision (clause 24(2)) will enable a company commencing its 1973-74 income year before 1 July 1973 to be treated, where appropriate, as having complied with the increased test from the commencement of that year.

Insofar as the amended section 80A depends for its application upon an opinion to be formed by the Commissioner the usual rights of review of the Commissioner's opinion by an independent Taxation Board of Review will be available.

Clause 9: Special provisions relating to beneficial ownership of, or rights attached to, shares.

This clause proposes that section 80B of the Principal Act be amended in several respects, the main aims of the amendments being to clarify and strengthen the provisions of the section and to clear the way for its application to be tested before a court in any taxation appeal in which the beneficial ownership of shares in a "loss" company is one of the questions in issue.

Sub-section (1) of section 80B is a drafting provision which formally applies the section for the purposes of the "continuing ownership test" in section 80A.

Paragraph (a) of clause 9 will amend sub-section (1) of section 80B of the Principal Act by inserting in that section a reference to a part of a loss. This will remove any doubt as to the operation of section 80B in a case involving the allowance, by virtue of proposed new section 80A(5), of a deduction for a loss incurred during part only of a year following a change in shareholdings in that year. The amendment applies to the income year 1972-73 and subsequent years.

Sub-section (2) of section 80B of the Principal Act can have effect where shares are allotted by a "loss" company within its first three income years. The provision was designed to meet the case where a company incurs a loss during a period of early establishment at a time when the promoters of the company were the only shareholders. Under the sub-section, shares that are allotted within the first three income years of a company's existence are treated as having been allotted at the commencement of the year in which the loss was incurred. The provision has been used to reduce the tax of profitable companies and it is proposed, by paragraph (b) of clause 9, that it be repealed. The "same business test" is adequate to cater for the kind of situation to which the provision being repealed is directed.

Sub-section (2) of section 80B will not apply for the income year 1973-74 or any subsequent year. It is proposed also (clause 24(3)) that the sub-section will not apply for the income year 1972-73 in relation to shares that are allotted after the date on which the amending Bill is introduced into the Parliament.

By paragraph (b) of clause 9 it is proposed that sub-section (4) of section 80B of the Principal Act also be repealed. Under the sub-section a change of ownership of shares is deemed not to have taken place where shares are transferred to a company in which shares carrying between them more than 50 per cent of the rights to voting power, dividends and distributions of capital are beneficially owned by the transferor or, if he is deceased, his heirs.

With the repeal of sub-section (4) of section 80B of the Principal Act, the indirect interests of the transferor concerned will be able to be ascertained more precisely through the tracing process of proposed sub-section (4) of section 80A assisted, in a case where the transferor has died, by sub-section (3) of section 80B which enables a change in ownership of shares occurring on the death of the beneficial owner to be disregarded.

The repeal of sub-section (4) of section 80B of the Principal Act will apply for the income year 1973-74 and subsequent years.

Sub-section (5) of section 80B of the Principal Act is a safeguard against special arrangements or devices aimed at reducing the effectiveness of the "continuing ownership test" for the deduction of prior year losses of companies. Paragraph (c) of clause 9 proposes an amendment to the provision, so that it can be invoked, if appropriate, in a case where a company claims that a particular person is the beneficial owner of shares in the company. The purpose of this amendment is to avoid a situation where, in a taxation appeal a court's settlement of a question of beneficial ownership of shares in a company may result in a second and separate appeal relating to the application of sub-section (5) of section 80B to the company.

Paragraph (d) of clause 9 proposes a further amendment to sub-section (5) of section 80B to ensure that the provision may apply where there is an agreement or arrangement which affects the beneficial interests in shares of a continuing shareholder in a company, whether or not it is established that that shareholder is a party to the agreement or arrangement.

Paragraph (e) of clause 9 makes a drafting change in the terms of paragraph (c) of sub-section (5) of section 80B. This is consequential upon the inclusion of new sub-section (11) as proposed by paragraph (h) of clause 9.

Paragraph (f) of clause 9 also amends paragraph (c) of sub-section (5) of section 80B of the Principal Act to make it clear that, while sub-section (5) of section 80B applies in relation to the purpose of a person who is "granted" a right, power or option, it will apply also in relation to the purpose of a person who "acquires" a right, power or option.

Paragraph (g) of clause 9 effects drafting amendments to sub-sections (6) and (7) of section 80B of the Principal Act which are consequential upon the addition of a new sub-section (11) by paragraph (h) of clause 9.

Paragraph (h) of clause 9 inserts sub-sections (9), (10) and (11) in section 80B of the Principal Act.

Sub-section (9) is a drafting measure which will operate for the purposes of the application of sub-sections (5), (6), (7) and (8) of section 80B to the case of any company that is dealt with in sub-section (5) of section 80A, i.e., a case in which the "continuing ownership test" may be applied for part only of the year of loss, following a shareholding change in that year.

Sub-section (9) will provide that the references in sub-sections (5), (6), (7) and (8) of section 80B to "the year in which the loss was incurred" can be read, in the application of those provisions to a case coming under sub-section (5) of section 80A, to the part of that year that is referred to in that sub-section.

Sub-sections (10) and (11) of section 80B are drafting measures which extend reference in section 80B to an agreement, right, power or option to include arrangements or understandings and to cover agreements, etc., that are not legally enforceable.

The amendments to section 80B of the Principal Act effected by paragraphs (c) to (h) of clause 9 will apply for the income year 1972-73 and subsequent years. It has already been noted that the repeal - by paragraph (b) of clause 9 - of sub-sections (2) and (4) of section 80B will first apply for the income year 1973-74.

Clause 10: Repeal of sections 80C and 80D.

This clause repeals sections 80C and 80D of the Principal Act.

Section 80C is a safeguard against certain deficiencies in the "continuing ownership test" prescribed in the present terms of section 80A of the Principal Act. Section 80C applies where a "loss" company is, directly or indirectly, under the control of another company. Without the section, a loss incurred by a subsidiary company could remain an allowable deduction despite a complete change in the beneficial ownership of shares in the parent company. In these circumstances, existing section 80A would be ineffective.

Section 80D applies in limited circumstances to enable tracing procedures to be followed through companies, trusts and partnerships interposed between a "loss" company and the individuals who are the ultimate owners of indirect beneficial interests in the company.

The tracing process in the proposed sub-section (4) of section 80A will perform more satisfactorily the safeguarding and tracing functions for which sections 80C and 80D were originally designed and render the retention of those sections unnecessary.

The repeal of sections 80C and 80D will have effect as from the income year 1973-74, coinciding with the commencement of operation of the new section 80A.

Clause 11: Losses of previous years not to be taken into account in certain circumstances.

The provisions of section 80DA are designed to ensure that deductions for previous years, losses are not allowed to a company in circumstances where, although the "continuing ownership test" has been technically satisfied, the benefits from the allowance of the deductions would, in fact, flow wholly or mainly to persons who were not shareholders in the company during the years in which the losses were incurred. The section is mainly intended to ensure the effectiveness of the "continuing ownership test" and will not apply to a company which meets the requirements of the " same business test" under section 80E.

Under paragraph (a) of sub-section (1) of section 80DA, a deduction will not be allowable in a year of income for a loss previously incurred by a company where the "loss" company derived income during that year that it would not have derived if that loss had not been available for deduction.

This provision is intended to apply to cases in which income is in some way channelled into a "loss" company to obtain the benefit of a taxation deduction for its losses. Its operation is affected by the proposed sub-section (2).

The proposed sub-section (2) of section 80DA will operate so as to enable paragraph (a) of sub-section (1) to apply in a case in which the income had been derived in the course of ordinary family or commercial dealing. The sub-section also provides, however, that paragraph (a) will not apply to disallow a loss deduction in a case in which the Commissioner considers that the continuing shareholders in the company will receive a benefit from the company's derivation of the income that is appropriate to their continuing beneficial interest in the company. This discretionary power of the Commissioner will be subject to the usual review procedures.

Paragraph (b) of sub-section (1) provides that a deduction will not be allowable in a year of income for a loss incurred in an earlier year where a person other than the "loss" company will receive a taxation benefit or advantage from any dealings that would not have been undertaken if the loss had not been available for deduction.

Sub-section (3) specifies that, without limiting the scope of paragraph (b) of sub-section (1), a person shall be treated as having received or obtained a taxation benefit or advantage if he pays no tax, or pays less tax, because he has derived less income than would have been derived if dealings of the kind covered by paragraph (b) of sub-section (1) had not been undertaken.

Sub-section (4) also governs the operation of paragraph (b) of sub-section (1). It provides that the paragraph can apply even though the dealings giving rise to the taxation advantage were undertaken in the course of ordinary family or commercial dealing but excludes its application in respect of any such advantage received by any shareholder that the Commissioner considers to be reasonable having regard to the shareholder's interest in the company. Again, an opinion formed by the Commissioner will be subject to the usual rights of objection and reference to an independent Taxation Board of Review.

Paragraph (c) of proposed sub-section (1) of section 80DA will apply in a factual situation where a "loss" company's day-to-day business affairs are managed and conducted in a year of income in a way that is inconsistent with the rights, powers and interests of the shareholders who represent the continuing interest in the company required by section 80A. Under these conditions, deductions for a company's previous years' losses will not be allowable, despite compliance with the "continuing ownership test". The matters that would be examined in deciding whether or not a company has been managed with due regard to the rights of continuing shareholders would include -

•

the degree of participation by the continuing shareholders in the affairs of the company;

•

the way in which directors have been appointed or removed;

•

the relationship between directors of the company and persons associated with its sources income;

•

the circumstances under which income is derived by the company;

•

the circumstances under which persons who are creditors of the company acquired those claims.

Paragraph (d) of sub-section (1) is designed to ensure that, despite there being sufficient continuing ownership in a company to satisfy the requirements of section 80A, the deduction for the company's losses will not be allowable where a person who controls, or is capable of controlling, the "loss" company during the year of income did not have similar powers of control at all times during the year in which the loss was incurred, if his control of the voting power was acquired for the purposes of receiving or obtaining a taxation benefit or advantage.

Sub-sections (2), (3) and (4) are drafting measures which apply for the purposes of sub-section (1). They are explained in the notes relating to the operation of sub-section (1).

Sub-section (5) is a drafting measure which defines a shareholding interest, for the purposes of sub-section (4), as the direct or indirect beneficial interest of a person in a company.

Sub-section (6) identifies the persons referred to in sub-section (2) as continuing shareholders in a "loss" company. These are the persons who beneficially own shares in the company, or in an interposed company, at the relevant times for the purpose of satisfying the "continuing ownership test" under section 80A.

Sub-section (7) applies in relation to paragraph (c) of sub-section (1) and provides that the matters to be taken into consideration under that provision, in determining whether a company is conducted without proper regard to the interests of continuing shareholders, will include transactions and happenings associated with ordinary family or commercial dealings.

Sub-sections (8) and (9) apply in relation to paragraphs (a) and (b) of sub-section (1) and for the purposes of sub-section (3) as it applies to paragraph (b) of sub-section (1).

The provisions will permit paragraph (a) of sub-section (1) to operate where several factors, including the availability of a loss deduction, entered into the arrangement which resulted in income being derived by a "loss" company. In the same way, paragraph (b) of sub-section (1) will be able to apply where the agreement, scheme, arrangement, etc. referred to in the provision had been entered into for more than one purpose. The provisions will also enable sub-section (3) to operate in relation to paragraph (b) of sub-section (1) where the availability of a tax benefit was but one of several matters which led to income being diverted to a "loss" company.

The amendments made by clause 11 will apply for the income year 1972-73 and subsequent years.

Clause 12: Losses of previous years may be taken into account where company carries on same business.

Paragraph (a) of clause 12 re-enacts the provisions of the "same business test" in sub-section (1) of section 80E of the Principal Act with minor drafting changes that are consequential upon the proposed introduction of section 80DA by clause 11. A "loss" company which satisfies the "same business test" will not be prevented by sections 80A or 80DA from deducting its past year losses.

Paragraphs (b) and (c) of clause 12 effect drafting changes to sub-section (2) of section 80E of the Principal Act. The change effected by paragraph (b) is merely formal. The amendment made by paragraph (c) will clarify the scope of operation of paragraph (b) of sub-section (2) by providing that the purpose referred to in sub-section (2) is a purpose of obtaining a deduction for a loss by reason of complying with the continuing business requirements of section 80E(1).

These amendments apply for the income year 1972-73 and subsequent years.

Clause 13: Loss resulting from bad debt not to be taken into account in certain circumstances.

Clause 13 will repeal section 80F of the Principal Act and substitute a new section 80F in its stead.

The repealed section 80F relates to amendment of assessments and is to be re-enacted by incorporation in the new sub-section (13) proposed to be inserted in section 170 of the Principal Act by clause 21(b).

The new section 80F is a safeguarding measure against the manipulation of the "continuing ownership" and "same business" tests in relation to a company's bad debts. But for this section, an insolvent company with substantial outstanding bad debts which had undergone a disqualifying change of shareholders could write off the debts before changing its business thereby giving rise to a loss capable of being carried forward for deduction in later years. If profitable business were diverted to the company in subsequent years, deductions for the loss could be available under the "continuing ownership test" despite the changes that had taken place in both shareholdings and business.

To safeguard against this, section 80F is designed to ensure that, where a deduction for a bad debt is not disqualified in a year of income under the "same business test" and results in a loss to be carried forward, that loss may qualify for deduction only if, in the income year in which the loss is otherwise deductible, the company is carrying on the same business as it did before the change in its shareholdings.

The amendments made by clause 13 will apply for the income year 1972-73 and subsequent years.

Clause 14: Life insurance premiums etc.

Section 82H of the Principal Act provides for the allowance of a concessional deduction for premiums paid by a taxpayer for insurance on his own life or on the life of his wife or child and for sickness, personal injury and accident insurance cover for himself, his wife or child. Personal contributions to a superannuation fund or to a sustentation, widows' or orphans' fund for the benefit of himself or his family are also deductible under this provision. The deductions allowable to a taxpayer under the concession are limited to a maximum amount of $1,200 a year.

Clause 14 proposes to insert further provisions - sub-sections (1A) to (1H) - in section 82H, the effect of which will be that the allowance of the deduction will be made subject to certain conditions being satisfied. Essentially, the purpose of the conditions is to ensure that the concessional deduction is not available for payments made for life insurance benefits realisable in the short term or to a superannuation fund which does not comply with requirements of provisions of the Principal Act which confer special tax privileges in relation to the income of the fund.

In explaining the proposed provisions it will be necessary to refer to the following terms that are defined in proposed new sub-section (1H) -

"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 proposed sub-sections (1A) and (1D) 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 will not, by virtue of the definition, be regarded as benefits and thus will not bring into operation the provisions of sub-sections (1A) and (1D).

"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 proposed new sub-sections (1A), (1C), (1D) and (1E). 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 will 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 82H i.e. for insurance on the life of the taxpayer or his 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 proposed new sub-sections (1A) to (1F) and determines the classes of policy to which the new provisions may apply. By virtue of an exclusion provided under paragraph (a) of the definition, the new provisions will 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. Deductions for premiums paid under these policies, sometimes referred to as "term" policies, will continue to be governed by the present law irrespective of the period of cover or date of commencement of risk.

Paragraph (b) of the definition will have the effect of excluding from the scope of the new provisions premiums paid on a policy that is assigned to or issued to a person by virtue of his 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 deductibility of premiums paid on the policy will continue to be governed by the existing law. The exclusion of premiums on these policies from the scope of the new provisions 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 the Principal Act -

section 23(jaa) - which exempts from tax the income of a provident, benefit, superannuation or retirement fund set up under a Commonwealth 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 for deduction under section 82H.

"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 new provisions. The term is relevant for the purposes of new sub-sections (1A), (1B), (1C) and (1F). For the purpose of sub-section (1B), however, which will limit the deduction allowable 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 (1A) will provide 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 concessional deduction. The premiums affected by the new 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 (1A) will not affect the deductibility of premiums paid on policies under which a premium had been paid before 1 January 1973. These premiums will continue to be considered for deduction under the existing provisions of section 82H, whether or not benefits are payable within 10 years of commencement of risk.

Sub-section (1B) will limit the amount of premiums paid in respect of a policy that may be considered for deduction under sub-section (1) of section 82H where increasing premiums are payable over the life of a policy. The limitation will apply 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 to be disregarded for the purposes of sub-section (1) of section 82H.

The purpose of sub-section (1B) is to ensure that the intention of the new provisions 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 (1H) a "premium" will not for the purposes of sub-section (1B) 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 will be 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 (1B).

Sub-section (1C) will provide authority to withdraw some or all of the deductions 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 (1A) and (1B) this provision can apply only where the policy is one under which the first premium was paid on or after 1 January 1973. Sub-section (1C) will not, however, apply in circumstances specified in sub-section (1F), which is explained later in these notes.

In cases where the provisions of sub-section (1C) apply, the Commissioner of Taxation will be authorised by provisions proposed to be inserted in section 170 of the Principal Act by clause 21 of the Bill to amend assessments to disallow deductions which have been allowed.

Where a policy has been forfeited or surrendered within 5 years of commencement of risk paragraph (a) of sub-section (1C) applies to disentitle the taxpayer to any deductions allowed or otherwise allowable in respect of premiums paid on the policy, subject only to the application of sub-section (1F).

Paragraphs (b) and (c) of sub-section (1C) specify what deductions 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) will withdraw deductions 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)) will also authorise disallowance of deductions for premiums paid that fell due for payment in those 5 years.

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

Sub-section (1C) is to apply irrespective of any change in ownership during the life of a policy. Accordingly deductions for premiums paid before the assignment of a policy may be withdrawn by the operation of sub-section (1C) if the assigned policy is surrendered before the expiration of 10 years from the commencement of risk under the policy.

Sub-section (1D) provides for the withdrawal of deductions in the manner specified in sub-section (1C) 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 will apply 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 for deduction under sub-section (1) of section 82H and been allowed subject to the limit of $1,200 under sub-section (2). The payment of benefits on maturity within 10 years will bring sub-section (1C) into operation as if, instead of maturing, the policy had been forfeited or surrendered and deductions previously allowed will be withdrawn in accordance with the provisions of that sub-section.

Because of the definition of "benefits" sub-section (1D) will not operate to withdraw deductions where, for example, sickness or accident benefits have been paid under a policy before it is 10 years old. Neither will 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 (1E) will ensure that sub-section (1C) will not operate to withdraw any of the deductions allowed 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 deductions allowed for the premiums paid on either policy may be withdrawn.

Sub-section (1F) is a relieving provision to ensure that deductions 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 will not, however, be available if a person has taken out a policy, not for the purpose of providing security for himself or his dependants by way of life insurance cover, but rather to obtain the benefit of tax deductions 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 (1G) will place a condition on the deductibility under section 82H of personal contributions to a superannuation, sustentation, widows' or orphans' fund. Under the existing provisions of the law personal contributions to any fund meeting the general description of any of these classes of funds are deductible within the overall limit of $1,200 per annum imposed by sub-section (2) of section 82H. Sub-section (1G) provides that contributions made to any of the specified funds on or after 1 January 1973 will be ineligible for deduction under section 82H 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 a concessional basis of assessment under paragraphs (jaa) or (ja) of section 23, or section 23F or section 79 or is a sustentation fund the income of which is exempt from tax under paragraph (e) of section 23.

Sub-section (1H) defines a number of terms for the purposes of section 82H. These have been explained in the foreword to the notes on clause 14.

Clauses 15 to 19: Private companies.

Introductory Note

Distinctions are drawn by the income tax law between public companies - essentially those in which there is a substantial public interest - and private companies.

A company that is a public company for income tax purposes is taxed on its income at a higher rate than a private company but there is no additional tax liability for a public company in relation to its undistributed profits. A private company on the other hand, while paying primary tax on its income at lower rates than a public company, is also liable for additional tax at the rate of 50 per cent if it does not distribute an appropriate proportion of its after-tax profits within a prescribed period.

The minimum amount that a private company is required to distribute as dividends to its shareholders, to avoid a liability for additional tax on undistributed income, is referred to in the law as a "sufficient distribution". The prescribed period in relation to a year of income in which a sufficient distribution of the income of that year is required to be made is the 12 months period commencing 2 months before the end of the income year. That is, a company whose 1972-73 income year will end on 30 June 1973 is required to make a sufficient distribution of its 1972-73 income during the 12 months period from 1 May 1973 to 30 April 1974.

Any amount by which dividends paid in a prescribed period fall short of a sufficient distribution is the company's "undistributed amount" on which the additional tax is payable. However, the payment of dividends in a prescribed period in excess of a sufficient distribution will give rise to an "excess distribution" that is carried forward, without limitation as to amount or time, as a dividend deemed to be paid in the prescribed period relating to the next year of income and, in turn, to any number of successive prescribed periods.

Once a private company that is no longer in receipt of income has been stripped of its assets, it becomes a mere shell which may, by the operation of the provisions described briefly above, be regarded as having continued to pay a dividend in each succeeding prescribed period equal to the amount of any unused excess distribution. Because of this, the shell may be acquired by persons who were not shareholders when the excess distribution was made and used as a repository for income that would bear tax at progressive personal rates if distributed to individuals.

The amendments proposed by clauses 15 to 19 will introduce a "continuing ownership test", with an alternative "same business test" as conditions for private companies being able to take into account -

(a)

any dividends paid during the first 2 months of a prescribed period (that is, the last 2 months of the related income year); and

(b)

any excess distribution of an earlier period,

in determining whether a sufficient distribution of income has been made.

Under the proposed amendments, an excess distribution will not be taken into account in determining whether a private company is liable for undistributed income tax unless the company satisfies a "continuing ownership test" (as between the prescribed period during which the dividend giving rise to the excess distribution was paid and the later prescribed period during which the excess distribution is to be deemed to have been paid as a dividend) or an alternative "same business test".

Similar restrictions are to apply to dividends paid by a private company during the last 2 months of an income year. Where, during the period of 2 months, the shareholdings change beyond the extent permissible under the "continuing ownership test", and there is also a change in the company's business, dividends paid to the former shareholders will be disregarded in determining whether the company has made a sufficient distribution for undistributed income tax purposes.

Clause 15: Interpretation.

This clause will amend the definition of "the undistributed amount" in section 103(1) of the Principal Act. It will exclude from the calculation of a private company's undistributed amount those dividends that are paid within the first 2 months of a prescribed period and which fail to meet the proposed new tests for taking those dividends into account for undistributed income tax purposes.

The amendment will apply in relation to undistributed income tax assessments raised for the income year 1972-73 and for subsequent years.

Clause 16: Sufficient distribution.

Paragraph (a) of clause 16 proposes to amend section 105A(2) of the Principal Act.

As mentioned above, the prescribed period of 12 months, in relation to a year of income, within which a private company may pay a sufficient amount in dividends to avoid a liability for tax on undistributed income of that year commences 2 months before the end of the income year. In the case of a newly-incorporated private company, dividends paid during the first 10 months of the income year in which it was incorporated would not, ordinarily, be capable of falling within a prescribed period relating to a year of income of the company. Sub-section (2) of section 105A is a special provision which deems dividends paid by a private company during this 10 months period to be paid in the prescribed period relating to the first income year, thereby ensuring that the company receives full credit for its dividends in determining whether it has made a sufficient distribution of its income for that year.

However, where a company formerly classified as a public company for income tax purposes becomes a private company for those purposes the dividends it pays during the first 10 months of the first year in which it is a private company technically count as dividends paid out of the profits of that year by virtue of sub-section (2) of section 105A.

The amendment proposed to the provision will make it clear that it applies only to dividends paid during the first 10 months of the income year in which a private company is incorporated.

This amendment will apply in relation to undistributed income tax assessments raised for the 1972-73 income year and for subsequent years.

Paragraph (b) of clause 16 proposes to amend section 105A of the Principal Act by inserting new sub-sections (5) to (12). These provisions will introduce a "continuing ownership test" to be applied in determining whether dividends paid by a private company in the last 2 months of an income year are to be taken into account in ascertaining whether the company has made a sufficient distribution for undistributed income tax purposes of income it derived during that year of income. Additional provisions affecting this question, including the introduction of a "same business test", are proposed by clause 17.

Proposed sub-section (5) of section 105A applies a test of continuing ownership of shareholders' rights on the basis of shares that are beneficially owned in the private company. (Proposed sub-section (9) may apply in lieu of sub-section (5) in certain cases where one or more companies beneficially own shares in the private company.)

Under sub-section (5), a dividend paid by the private company in the first 2 months of a prescribed period is not to be taken into account for undistributed income tax purposes unless the Commissioner of Taxation is satisfied that shares carrying between them rights to more than one-half of the voting power, dividends and capital distributions of the company were beneficially owned by the same persons throughout the period of 2 months. An opinion of the Commissioner formed for the purposes of this sub-section will be subject to the usual rights of objection and reference to an independent Board of Review.

The "continuing ownership test" in sub-section (5) would be ineffective where a change of shareholdings occurred on the first or last day of the 2 months period. Accordingly, dividends paid on that first or last day are excluded from the operation of sub-section (5) and are dealt with in sub-section (7).

Sub-section (6) is a safeguarding measure to ensure that the "continuing ownership test" in sub-sections (5) and (9) are not avoided by the device of declaring a dividend to a group of shareholders that is payable to those persons at a future time when the shareholdings will have changed. Sub-section (6) will render such an arrangement ineffective as regards the ownership tests in respect of the dividend by deeming the original shareholders to have continued to be the beneficial owners of the shares until such time as the dividend is paid.

Sub-section (7) specifies circumstances in which a dividend paid on the first or last day of the period of 2 months will not be taken into account for undistributed income tax purposes. These are circumstances to which the continuity of ownership criteria could not be effectively applied. Such a dividend would, of course, qualify to be taken into account if the company satisfies the "same business test" in proposed section 105AAB.

Under paragraph (a) of sub-section (7), a dividend paid on the first or last day of the 2 months period will not be taken into account if a change occurs in the beneficial ownership of shares in the company on either of those days.

Paragraph (b) applies where a dividend is paid on the first or last day of the 2 months period and between declaration and payment of the dividend a change occurred in the beneficial ownership of shares in the company.

The "continuing ownership test" would be ineffective in these circumstances. Where the dividend is paid on the first day to the old shareholders, the new shareholders would have to be treated as satisfying the requirements of sub-section (5). Where the dividend is paid on the last day to the old shareholders, sub-section (6) would treat them, for the purposes of sub-section (5), as beneficially owning the shares until that last day. Again sub-section (5) would be taken as satisfied. It is proposed therefore that the dividend not be taken into account in these circumstances.

Paragraph (c) will apply to exclude the dividend from being taken into account where there was in existence before the end of the 2 months period an agreement, right, power or option affecting shareholders' rights that had a purpose of ensuring that a dividend paid during the period of 2 months would be taken into account.

It is not expected that arrangements of the kind dealt with in sub-section (7) would be encountered in an ordinary commercial situation but, in any event, it could be expected that any genuine case would be able to satisfy the "same business test" under proposed section 105AAB.

Sub-section (8) sets out the criteria under which sub-section (9) may be applied in lieu of sub-section (5) to determine whether the "continuing ownership test" has been satisfied. Sub-section (5) determines this by reference only to the beneficial owners (companies or natural persons) of shares in the private company. In some situations, however, the test would be more appropriately applied by having regard to the direct shareholdings of natural persons in the private company and also by tracing through any companies, trustees or partnerships to the natural persons who have the ultimate indirect beneficial interests through those companies, trustees or partnerships in the private company.

Sub-section (8) provides for sub-section (9) to apply where the private company requests the Commissioner of Taxation, when lodging its return for the year of income or within such further time as the Commissioner allows, that the sub-section be applied. This could be of advantage to a private company where, for example, direct corporate shareholders in the company have changed but, by applying the sub-section (9) tracing process, the required continuing ownership of shareholders' rights is found in the indirect beneficial interest of natural persons in the private company.

Sub-section (9) may also be applied in lieu of sub-section (5) if the Commissioner considers it reasonable to do so. The Commissioner may invoke sub-section (9) where, for example, there have been substantial changes in the shareholders of a company which itself holds a majority of the shares in a private company. In such a case, sub-section (8) will enable sub-section (9) to be applied to determine whether, having regard to the individuals with direct and indirect interests in the private company the "continuing ownership test" has been met.

Under sub-section (9) a dividend will not be taken into account unless the Commissioner is satisfied, or he considers it reasonable to assume, that the same natural persons, throughout the two months period, either indirectly, or directly and indirectly, between them, controlled or were capable of controlling the voting power in the private company and had rights to receive more than one-half of any dividends or capital distributions of the private company. The Commissioner's opinion will be subject to the usual review procedures.

Sub-section (10) is a drafting measure for the purpose of sub-section (9). It operates in the tracing process under sub-section (9) to treat any natural person who beneficially owns shares in a company interposed between that natural person and the private company as having a right to receive some part of any dividend or capital distribution of the private company. The tracing process may proceed on this basis through any number of interposed companies and operates similarly for holdings through trusts and partnerships.

The purpose of sub-section (11) is to apply the principles of section 80B (other than sub-sections (2) and (4) which are being repealed) of the Principal Act as amended by the amending Act, to the beneficial ownership of shares in the private company and in any relevant interposed company in applying the continuing ownership tests in sub-sections (5) and (9) of section 105A.

Section 80B incorporates certain safeguarding measures relating to the "continuing ownership test" which applies for purposes of the deduction of past year company losses. Notes concerning the operation of section 80B, and to the operation of the company loss provisions appear earlier in this memorandum.

Sub-section (12) is a relieving provision under which requirements of sub-sections (5) to (11) will not apply to any dividend in a case where the Commissioner, having regard to the beneficial owners of shares in the private company at the time the dividend was paid, considers that the dividend should be taken into account for undistributed income tax purposes. This discretion could be applied, for example, where there has been a change in the beneficial ownership of shares during the 2 months period so that the continuing ownership tests are not satisfied. If, however, the dividend in question was paid to the new shareholders after the change in shareholdings occurred, it would be unreasonable for the dividend not to be taken into account.

A private company which meets the "continuing ownership test" in section 105A may, nevertheless, fail to have the dividend taken into account if section 105AAA (as proposed by clause 17) applies in respect of the private company. On the other hand, a dividend which fails to be taken into account because of section 105A or section 105AAA may be taken into account if the company satisfied the "same business test" in proposed section 105AAB.

The amendments proposed by paragraph (b) of clause 16 will also apply in relation to undistributed income tax assessments for the income year 1972-73 and subsequent years.

Clause 17: Dividends paid in first 2 months of prescribed period not to be taken into account in certain circumstances.

By this clause it is proposed to insert three new sections - sections 105AAA, 105AAB and 105AAC - in the Principal Act.

The proposed section 105AAA specifies certain circumstances in which a dividend paid by a private company during the first 2 months of the prescribed period in relation to a year of income is not to be taken into account in ascertaining whether the company has made a sufficient distribution in relation to that year of income. The provision will apply where, despite technical compliance with the "continuing ownership test", the factual situation is that by taking the dividend into account for undistributed income tax purposes, benefits would accrue, to a disproportionate extent, to persons other than the continuing shareholders. The provision will not, however, apply where the "same business test" under proposed section 105AAB has been satisfied.

Under paragraph (a) of sub-section (1) of section 105AAA, a dividend will not be taken into account in any case in which a private company derives income during the 2 months period, and after the dividend was paid, that would not have been derived if the dividend had not been paid.

The provision, the operation of which is qualified by the proposed sub-section (2) of the section, is directed against cases in which income is channelled into a company so that dividends paid by the company during the 2 months period can be counted in calculating whether a sufficient distribution of that income has been made.

Sub-section (2) of section 105AAA ensures that, while paragraph (a) of sub-section (1) applies even though the income may be derived in the course of ordinary family or commercial dealing, it will not operate so that a dividend is not taken into account if the Commissioner considers that the continuing shareholders in the company will receive a benefit from the company deriving the income that is appropriate to their continuing beneficial interest in the private company. The Commissioner's opinion will be subject to the usual review procedures.

Under paragraph (b) of sub-section (1), a dividend will not be taken into account where a person other than the private company receives a taxation benefit or advantage from any dealings that would not have been undertaken if the dividend had not been paid. In relation to this paragraph, sub-section (3) specifies that, without limiting its scope, a person is to be treated as having received or obtained a taxation benefit or advantage if he pays no tax, or pays less tax, because he has derived less income than he would have derived if the dealings mentioned had not been undertaken.

Sub-section (4) also governs the operation of paragraph (b) of sub-section (1). It makes it clear that the paragraph may apply even though the dealings giving rise to the taxation advantage were undertaken in the course of ordinary family or commercial dealing, but excludes its application in respect of any such advantage received by a shareholder which the Commissioner considers to be fair and reasonable having regard to the shareholders' interest in the private company. The usual review procedures will be applicable in respect of this discretion.

Paragraph (c) of proposed sub-section (1) of section 105AAA will apply as regards a dividend paid before the last day of the 2 months period, in a factual situation where the management and conduct of the company's affairs or business operations during the period of that 2 months that followed payment of the dividend are inconsistent with the rights, powers and interests of the shareholders who represent the continuing interest in the private company required under the proposed amendments to section 105A.

Considerations similar to those outlined earlier in relation to the similar test proposed by paragraph (c) of sub-section (1) of section 80DA, relating to deductions for company losses (see pages 26-27 of this memorandum) would be taken into account for the purpose of this paragraph.

Paragraph (d) of sub-section (1) is designed to ensure that, notwithstanding compliance with the "continuing ownership test" in section 105A, a dividend will not be taken into account where a person who controlled, or was capable of controlling, the voting power in the private company during the part of the period of the 2 months that followed payment of the dividend did not have similar powers of control before the dividend was paid if this control in the later part of the period was acquired for the purpose of receiving or obtaining a taxation benefit or advantage.

The operation of sub-sections (2), (3) and (4) of proposed section 105AAA have been explained in the notes relating to sub-section (1).

Sub-section (5) is a drafting measure which defines a shareholding interest - the direct or indirect beneficial interest of a person in the private company paying the dividend - for the purposes of sub-section (4).

Sub-section (6) identifies the persons referred to as continuing shareholders in the private company. These are the persons who beneficially own shares in the private company, or in an interposed company, at the relevant times for purposes of the continuing ownership tests in sub-sections (5) and (9) of section 105A.

Sub-section (7) applies in relation to paragraph (c) of sub-section (1). It provides that the matter to be taken into consideration under that provision, concerning the management and conduct of the company's affairs, will include transactions and happenings associated with ordinary family or commercial dealing.

Sub-sections (8) and (9) are drafting provisions which apply in relation to sub-section (1) and for purposes of sub-section (3). The provisions will permit paragraph (a) of sub-section (1) to apply where several factors influenced the arrangements which led to income being derived by the private company or where the arrangements had been entered into for more than one purpose. Sub-section (3) will also be capable of operating in relation to paragraph (b) of sub-section (1) where several matters, including the availability of a tax benefit, had led to the dealings to which the paragraph refers.

Section 105AAB: Dividend may be taken into account where company carries on same business.

Section 105AAB provides a "same business test" as an alternative qualification for the taking into account of a dividend paid by a private company during the first 2 months of a prescribed period in a case where the dividend would not otherwise be taken into account because of a disqualifying change in shareholders' rights in the company.

This provision applies in relation to the treatment of a dividend the principles of the "same business test" enacted in section 80E of the Principal Act for the purpose of the deduction of past year company losses.

Very briefly, sub-section (1) of section 105AAB provides that neither section 105A nor section 105AAA will prevent a dividend being taken into account if, at all times during the part of the period of 2 months that followed payment of the dividend, the company carried on the same business as it carried on immediately before a disqualifying change in the beneficial ownership of shares in the private company or in any relevant interposed company, and the company did not derive income during the part of the period of 2 months that followed payment of the dividend from a business of a kind that it did not carry on before the change in shareholdings or from a transaction of a kind that it had not entered into prior to the change.

Sub-section (2) is a safeguard against special arrangements under which a company commences to carry on a new business or engage in a new kind of transaction in anticipation of a disqualifying change in shareholdings. In these circumstances sub-section (1) of section 105AAB will not apply in relation to the dividend and the company's entitlement to take the dividend into account will fall to be determined by reference to the "continuing ownership test" in section 105A and the special safeguarding provisions in section 105AAA.

Section 105AAC: Special provisions relating to year of incorporation or winding up of a company.

Section 105AAC is a drafting measure relating to the period that is the first 2 months of a prescribed period for the purposes of applying the "continuing ownership test" and the "same business test" to dividends paid during that 2 months period.

Paragraph (a) of section 105AAC extends that period of 2 months, where it is the last 2 months of the income year in which the company was incorporated, to include any earlier period of that income year. Dividends paid in the first 10 months of a private company's year of incorporation, to which sub-section (2) of section 105A of the Principal Act applies, will thus be subjected to the "continuing ownership" and "same business" tests in sections 105A, 105AAA and 105AAB.

Paragraph (b) appropriately shortens a period of 2 months for the purposes of sections 105A, 105AAA and 105AAB where the company was incorporated during the relevant period while paragraph (c) performs a similar function where the company is wound up during that period.

The amendments proposed to clause 17 will apply to undistributed income tax assessments for the income year 1972-73 and subsequent years.

Clause 18: Excess distributions carried forward.

Paragraph (a) of clause 18 proposes to amend sub-section (1) of section 106 of the Principal Act to exclude from the calculation of a private company's excess distribution dividends paid within the first 2 months of a prescribed period that fail to meet the proposed new tests for taking those dividends into account for undistributed income tax purposes.

The amendment made by paragraph (a) of clause 18 applies in relation to undistributed income tax assessments raised for the income year 1972-73 and subsequent years.

Paragraph (b) of clause 18 proposes to insert a new sub-section (5) in section 106 of the Principal Act. Sub-section (5) formally gives effect to the calculation of an excess distribution under section 106, subject to the operation of the "continuing ownership test" and the alternative "same business test" under the proposed sections 106A, 106B, 106C and 106D.

The amendment made by paragraph (b) applies in relation to undistributed income tax assessments raised for the income year 1971-72 and subsequent years.

Clause 19: Notional dividends.

This clause proposes to insert four new sections - sections 106A, 106B, 106C and 106D - in the Principal Act.

Section 106A

Section 106A contains a number of drafting provisions the purpose of which is to identify particular dividends, or parts of dividends, that are included in the excess distribution (notional dividends) of private companies for undistributed income tax purposes. These are the dividends to which the "continuing ownership test" and the alternative "same business test" under proposed sections 106B, 106C and 106D are to apply.

The identifying provisions are necessary to enable the dividends in question to be taken into account for undistributed income tax purposes on a first-paid, first-applied basis, except that a dividend actually paid in a prescribed period is to be taken into account before earlier dividends which make up an excess distribution brought forward from the preceding prescribed period. Clause 24(5) of the Bill will apply to treat the identifying process as having always been in operation for undistributed income tax purposes.

The broad effect of sub-sections (1), (2) and (3) of the proposed section 106A is that -

(a)

references throughout sections 106A, 106B, 106C and 106D to a "notional dividend" are to be treated as references to the excess distribution for an income year that, in accordance with sub-section (2) of section 106 of the Principal Act, is to be treated as a dividend paid during the prescribed period for the next income year;

(b)

references in those sections to a dividend paid during a prescribed period are references to dividends actually paid in that period and do not include deemed dividends, i.e., a notional dividend (excess distribution);

(c)

a notional dividend is to be treated as consisting of the separate dividends, or parts of dividends, of which it is comprised; and

(d)

in ascertaining which of the dividends paid by a private company from time to time are to be treated as included in a notional dividend -

(i)

dividends actually paid during a prescribed period are to be treated as having been taken into account for undistributed income tax purposes in the order in which they were paid; and

(ii)

a notional dividend which is taken into account for undistributed income tax purposes is to be treated as having been so taken into account by successively applying the dividends, or the parts of the dividends, of which it is comprised, in the order in which those dividends were paid.

Sub-section (4) of section 106A is a drafting measure under which any part of a prescribed period that occurs after a company has been wound up is to be ignored in applying the "continuing ownership test" or "same business test" to any dividend to be included in an excess distribution.

Section 106B: Dividends not to be taken into account unless there is substantial continuity of beneficial ownership of shares in company.

Sub-section (1) of section 106B applies a "continuing ownership test" in determining whether a dividend paid by a private company during the prescribed period for an income year is to be included in a notional dividend (excess distribution) that is deemed to have been paid during the prescribed period of a later income year. The sub-section applies these tests by having regard to the beneficial ownership of shares in the private company. (Sub-section (3) may apply in lieu of sub-section (1) in certain cases where one or more companies beneficially own shares in the private company.)

Sub-section (1) excludes any dividend from a notional dividend deemed to have been paid in a prescribed period for the later income year unless the Commissioner of Taxation is satisfied that shares carrying between them rights to more than one-half of voting power, dividends and capital distributions of the company were beneficially owned by the same persons at all times during the prescribed period in which the dividend was paid and the prescribed period for the later income year during which the notional dividend is deemed to have been paid. The Commissioner's opinion formed for the purpose of this provision will be subject to the usual review procedures.

Sub-section (2) sets out criteria under which the tracing provisions of sub-section (3) may be applied in lieu of sub-section (1) to determine whether the "continuing ownership test" has been satisfied. Sub-section (3) takes into account for the purpose of the test the direct shareholdings of natural persons in the private company and also authorises a tracing through any companies, trustees or partnerships to the natural persons who have the ultimate indirect beneficial interests through those companies, trustees or partnerships in the private company.

Sub-section (2) provides for sub-section (3) to apply where the private company requests the Commissioner of Taxation, within one month after the end of the prescribed period for the later year of income or within such further time as the Commissioner allows, that the sub-section be applied. This could be of advantage to a private company where, for example, direct corporate shareholders in the company have changed but, by applying the tracing process under sub-section (3), the required continuing ownership of shareholders' rights is found in the direct and indirect beneficial interests of natural persons in the company.

Sub-section (3) may also be applied in lieu of sub-section (1) if the Commissioner considers it reasonable to do so. The Commissioner may invoke sub-section (3) where, for example, there has been no disqualifying change in the beneficial ownership by a company of shares in the private company but there is such a change among the natural persons beneficially owning shares in those corporate shareholders in the private company, to the extent that the required continuity of ownership in the private company cannot be found by reference to those natural person. In such a case, sub-section (2) will enable sub-section (3) to be applied so as not to include the dividend in the notional dividend.

Where sub-section (3) applies, a dividend will not be included in a notional dividend unless the Commissioner is satisfied, or considers it reasonable to assume, that the same natural person or persons throughout the two prescribed periods either indirectly, or directly and indirectly, controlled or were capable of controlling the voting power in the private company and had rights to receive more than one-half of any dividends or capital distributions of the private company.

Sub-section (4) is a drafting measure relating to the provisions of sub-section (3). It applies in carrying out the tracing process under that sub-section so as to treat any natural person who beneficially owns shares in a company interposed between him and the private company to have a right to receive some part of any dividend or capital distribution of the private company. The tracing process may proceed on this basis through any number of interposed companies and operates similarly for holdings through trusts and partnerships.

Sub-section (5) will apply where a dividend is paid by a private company in a prescribed period for a year of income after a shareholding change that occurred during that prescribed period and, by reason of that change, the "continuing ownership test" cannot be met. In these circumstances, the Commissioner is empowered to apply the ownership tests of sub-section (1) or (3) by reference to the shareholders' rights during the prescribed period for the later year of income and during the part of the earlier prescribed period that commenced on the day when the dividend was paid. The effect of sub-section (5) is that, in appropriate cases, any disqualifying changes in shareholders' rights that occurred before the dividend was paid can be disregarded.

The purpose of sub-section (6) is to apply the principles of section 80B (other than sub-sections (2) and (4) which are being repealed) of the Principal Act to the beneficial ownership of shares in the private company and in any relevant interposed company in applying the continuing ownership tests in sub-sections (1), (3) and (5) of section 106B.

Section 80B incorporates certain safeguarding measures relating to the "continuing ownership test" which applies for purposes of the deduction of past year company losses. Brief notes concerning the operation of section 80B are at pages 22 to 24.

Section 106C: Dividends included in excess distributions not to be taken into account in certain circumstances.

The provisions of proposed section 106C are designed to ensure that dividends are not included in a notional dividend (excess distribution) for undistributed income tax purposes in circumstances where, despite technical compliance with the "continuing ownership test", the benefits resulting from the inclusion of the dividends would flow wholly or mainly to persons other than the continuing shareholders. The section is intended mainly as a safeguard to ensure the effectiveness of the "continuing ownership test" and will not apply to a private company which satisfies the "same business test" under proposed section 106D.

Under paragraph (a) of sub-section (1) of section 106C, a dividend paid in a prescribed period by a private company will not be included in a notional dividend deemed to be paid in a later prescribed period where the company derived income that it would not have derived if that dividend had not been available to be included in the notional dividend.

This provision is intended to apply to cases where income is channelled into a private company which has earlier paid dividends that have given rise to an excess distribution for undistributed income tax purposes. Sub-sections (8) and (9) provide that paragraph (a) applies even though there may also have been another purpose in channelling the income into the company.

Sub-section (2) of section 106C operates to enable paragraph (a) to apply even though the income may be derived in the course of ordinary family or commercial dealing. However, it also provides that the paragraph will not apply to prevent the dividend being included in a notional dividend in any case where the Commissioner considers that the continuing shareholders in the company will receive a benefit from the company's derivation of the income that is appropriate to their continuing beneficial interest in the private company. This administrative discretion will be subject to the normal review procedures.

Under paragraph (b) of sub-section (1), a dividend will not be included in a notional dividend where a person other than the private company concerned receives a taxation benefit or advantage from any dealings that would not have been undertaken if the dividend had not been available to be included in the notional dividend.

Sub-section (3) specifies, without limiting the scope of sub-section (1)(b), that a person shall be treated as having received or obtained a taxation benefit or advantage if he pays no tax, or pays less tax, because he has derived less income than he could have derived if the dealings mentioned above had not been undertaken. Sub-sections (8) and (9) ensure that sub-section (3) may apply where the availability of a tax benefit because of an existing excess distribution was one of several factors which resulted in income being diverted to the private company.

Sub-section (4) also governs the operation of paragraph (b) of sub-section (1). It provides that the paragraph may apply even though the dealings giving rise to the taxation advantage were undertaken in the course of ordinary family or commercial dealing, but excludes its application in respect of any such advantage received by a shareholder in the company that the Commissioner considers to be reasonable having regard to the shareholder's interest in the company. An opinion formed by the Commissioner will be subject to the usual rights of objection and reference to an independent Taxation Board of Review.

Sub-sections (8) and (9) will permit the operation of sub-section (1)(b) even though an agreement, scheme, arrangement, etc. may have been entered into for more than one purpose.

Paragraph (c) of sub-section (1) will apply in a factual situation where a private company's business affairs are managed and conducted inconsistently with the rights, powers and interests of continuing shareholders. The provision is similar in terms and effect to proposed sub-section (1) of section 80DA which has effect in relation to deductions for company losses. The matters to be taken into consideration in determining whether it should apply will include matters of the kind instanced at pages 26-27 of this memorandum, in relation to provisions governing the deduction of past year losses of companies.

Paragraph (d) of sub-section (1) is designed to ensure that, despite there being sufficient continuing ownership in a company to satisfy the requirements of proposed section 106B a dividend will not be included in a notional dividend in a case where a person who controls, or is capable of controlling, the company during the later prescribed period did not have similar powers of control throughout the earlier period in which the dividend was paid, if his control of the voting power in the later period was acquired for the purpose of receiving or obtaining a taxation benefit or advantage.

Sub-sections (2), (3) and (4) are drafting measures which apply for the purposes of sub-section (1). They have been explained in the notes relating to the operation of sub-section (1).

Sub-section (5) is a drafting measure which defines a shareholding interest, i.e., the direct or indirect beneficial interest of a person in the private company, for the purposes of sub-section (4).

Sub-section (6) identifies the persons referred to as continuing shareholders in the private company. These are the persons who beneficially own shares in the company, or in an interposed company, at the relevant times for the purpose of satisfying the "continuing ownership test" under proposed section 106B.

Sub-section (7) applies in relation to paragraph (c) of sub-section (1) and provides that the matters to be taken into consideration under that provision, in determining whether a company is managed without proper regard to the interests of continuing shareholders, will include transactions associated with ordinary family or commercial dealings.

Sub-sections (8) and (9) are drafting provisions which have been explained in the notes relating to sub-section (1).

Section 106D: Dividend may be taken into account where company carries on same business.

Proposed section 106D provides a "same business test" as an alternative qualification for including a dividend in a notional dividend.

In broad terms, sub-section (1) provides that sections 106B and 106C will not prevent a dividend being included in a notional dividend if, at all times during the later prescribed period, the company carried on the same business as it carried on immediately before a disqualifying change of shareholdings in the private company, or in any relevant interposed company, and the company did not derive income during that prescribed period from a business of a kind that it did not carry on before the change in shareholdings or from a transaction of a kind that it had not entered into prior to the change.

Sub-section (2) is a safeguard against special arrangements under which the company begins to carry on a new business or engage in a new kind of transaction in anticipation of a disqualifying change in shareholdings. In these circumstances section 106C will not apply in relation to the dividend and the company's entitlement to include the dividend in the notional dividend will be determined by reference to the "continuing ownership test" in section 106B and the special safeguarding provision in section 106C.

The amendments made by clause 19 apply in relation to undistributed income tax assessments of private companies raised for the income year 1971-72 and subsequent years. For 1971-72 assessments, a 40 per cent continuing ownership of shareholders' rights will be required (see clause 24(6)). For assessments for 1972-73 and subsequent years, it will be necessary for shares carrying more than one-half of the voting, dividend and capital rights to be owned by the continuing shareholders.

Clause 20: Rebate for export market development expenditure.

The provisions of section 160AC of the Principal Act provide for the allowance to a taxpayer of a rebate of 42 1/2 per cent of certain expenditure designed to develop export markets. These provisions are at present expressed to apply to expenditure incurred before 1 July 1973.

By clause 20 it is proposed to amend sub-section (3) of section 160AC so as to extend by one year (to 30 June 1974) the period within which expenditure incurred on export promotion may qualify for the rebate.

Clause 21: Amendment of assessments.

Paragraph (a) of clause 21 proposes to amend section 170 of the Principal Act which governs the power of the Commissioner of Taxation to amend income tax assessments. Sub-section (10) of section 170 provides that nothing in that section shall prevent the amendment of an assessment at any time for the purpose of giving effect to specified provisions of the Principal Act.

As explained in the notes on clause 14 of the Bill, sub-section (1C) which is proposed to be inserted in section 82H of the Principal Act will in certain circumstances withdraw deductions previously allowed where life insurance policies are forfeited or surrendered before the expiration of 10 years from the date of commencement of risk. The inclusion in sub-section (10) of section 170 of a reference to sub-section (1C) of section 82H will provide the necessary authority for the Commissioner to amend assessments where sub-section (1C) has application.

Paragraph (b) of clause 21 will insert a new sub-section - sub-section (13) - in section 170. One effect of sub-section (13) will be to continue the authority to amend an assessment within 6 years after the date upon which tax became due and payable under the assessment that is at present provided in existing section 80F of the Principal Act in relation to past year company losses. The existing section 80F is being repealed by clause 13 as a drafting measure.

Sub-section (13) of section 170 will also extend the Commissioner's authority to amend assessments so that full effect can be given, within the specified period of 6 years, to the provisions proposed to be inserted in the Principal Act to reinforce the "continuing ownership test" in the provisions relating to past year company losses, bad debts owed to companies and certain dividends and excess distributions of private companies.

Clause 22: Formal amendments.

The Schedule to the Bill contains provisions for a number of amendments to be made to the Principal Act as a consequence of the adoption of new drafting practices. The amendments are purely formal in nature and will not affect the operation of the provisions to be amended.

Clause 22 proposes that the Principal Act be amended as set out in the Schedule.

Clause 23: Application of amendments.

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

Clause 24: Transitional provisions.

By sub-clause (1) of clause 24 the "continuing ownership test", that is to apply under proposed section 63A to the deduction of a company's bad debts, will be satisfied for the income year 1972-73 if there is continuity of ownership of shares carrying not less than 40 per cent of the relevant rights. For 1973-74 and subsequent income years, section 63A will require continuity of ownership of shares carrying more than 50 per cent of the voting, dividend and capital rights.

The "continuing ownership test" will also apply on this basis to the deduction for past year company losses under section 80A. A specific transitional provision is not needed for this purpose.

Sub-clause (2) will ensure that all companies have at least until 30 June 1973 to satisfy the "continuing ownership test" (having regard to the persons owning shares carrying more than 50 per cent of the relevant rights) in relation to the 1973-74 income year, for the purpose of the deductions for bad debts and losses of previous years. Where a company has been permitted to adopt a substituted accounting period so that its 1973-74 income year has commenced before 1 July 1973, sub-clause (2) will authorise the Commissioner to treat shares beneficially owned by the same persons throughout the part of the company's 1973-74 income year commencing 1 July 1973 as having been owned by those persons since the beginning of that income year.

Sub-clause (3) applies to the operation of section 80B(2) of the Principal Act (relating to losses incurred by newly-incorporated companies), which is to be repealed by clause 9(b) in relation to the income year 1973-74 and subsequent years. Sub-clause (3) of clause 24 will ensure that section 80B(2) will not authorise the allowance of a deduction of a past year loss in a company's assessment for the 1972-73 income year if an allotment of shares made after 11 April 1973 results in the "continuing ownership test" not being met.

Sub-clause (4) is a transitional provision which will apply to any past year company loss which had its origin in the deduction, for a year before the 1972-73 income year, of a bad debt owed to the company. If the debt had been written off before that year, after what would be in relation to the 1972-73 income year a disqualifying change of shareholdings, the "continuing ownership test" that is to govern the deduction of past year company losses for the 1972-73 and later income years may be inapplicable.

Sub-clause (4) proposes accordingly that, if the debt giving rise to the past year loss would not be an allowable deduction for the company's 1972-73 income year if it had been written off as bad in that year, so much of the past year loss attributable to the bad debt as has not already been deducted will not be an allowable deduction in assessments for the company's 1972-73 income year and later years.

Sub-clause (5) is a drafting provision which will facilitate the identifying of particular dividends included in the excess distributions of private companies for purposes of the amendments made by clause 19.

Sub-clause (6) will apply the "continuing ownership test" in respect of excess distributions of private companies in undistributed income tax assessments for the 1971-72 income year, i.e., in relation to the prescribed period 1 May 1972 to 30 April 1973, on the basis that it will be satisfied where there is continuing ownership up to that period of shares carrying not less than 40 per cent of the relevant rights. In assessments for 1972-73 and subsequent income years, the test will require that there be continuing ownership of shares carrying more than 50 per cent of the voting, dividend and capital rights.

Sub-clause (7) will ensure that all private companies have at least until 30 June 1973 to satisfy the "continuing ownership test" (having regard to the persons owning shares carrying more than 50 per cent of the relevant rights throughout their 1972-73 prescribed period - generally the 12 months period commencing 1 May 1973) for the purpose of taking their 1971-72 excess distributions into account in determining any liability for undistributed income tax. Where a company has commenced its 1972-73 prescribed period before 1 July 1973 (this will generally be the case) sub-clause (7) will authorise the Commissioner to treat shares beneficially owned by the same persons throughout the part of the 1972-73 prescribed period that falls after 30 June 1973 as having been owned by those persons since the beginning of that prescribed period.

Sub-clauses (8), (9), (10) and (11) are relieving provisions that may apply in circumstances relating to the deduction of company bad debts and past year company losses in respect of the 1972-73 income year and the taking into account of the excess distributions of private companies in undistributed income tax assessments for the 1971-72 income year.

The provisions of the amending Bill referred to in sub-clauses (8), (9), (10) and (11) prevent a bad debt or past year loss being deducted by a company, or an excess distribution being taken into account, if a person who did not control the voting power in the company concerned in the relevant earlier year or prescribed period controlled, or was capable of controlling, that voting power in the later income year or prescribed period.

These paragraphs operate in the context of a "continuing ownership test" that requires continuity of the ownership of shares carrying more than 50 per cent of the voting, dividend and capital rights.

For the 1972-73 and 1971-72 income years referred to, continuing ownership of not less than 40 per cent of the relevant rights will be sufficient to satisfy the test. Sub-clauses (8), (9), (10) and (11) propose, accordingly that the specified provisions of the amending Bill will not prevent a bad debt or past year company loss being deducted in respect of the 1972-73 income year, or an excess distribution being taken into account in relation to the 1971-72 income year, if the person with control of the voting power in the 1972-73 income year, or the prescribed period relating to the 1971-72 income year, as the case may be, did not during that income year, or that prescribed period, have rights to receive more than 60 per cent of the relevant company's dividends or distributions of capital.

Sub-clause (12) is a drafting provision for the purposes of sub-clauses (8), (9), (10) and (11). It treats a person as having a right to receive dividends or capital distributions of a company if he has an indirect beneficial interest in the company through any companies or trust interposed between him and that company

Clause 25: Transitional provisions in relation to capital expenditure on mining.

This clause, which will not amend the Principal Act, proposes an amendment to special transitional provisions contained in the Income Tax Assessment Act (No. 2) 1968 - Act No. 60 of 1968. These transitional provisions relate to substantial changes made in 1968 to certain provisions of the income tax law affecting mining companies.

Sub-clause (1) of clause 25 proposes an amendment of section 21 of the Income Tax Assessment Act (No. 2) 1968 to insert an additional sub-section - sub-section (9) - which will extend the application of existing sub-section (8) to assignees of a taxpayer referred to in that sub-section.

Sub-section (8) of section 21 of the Income Tax Assessment Act (No. 2) 1968 is a special transitional provision which does not have wide application. It applies only where the following conditions are met -

(a)

the taxpayer has agreed, on or before 9 May 1968, with the Commonwealth or a State to construct a plant to process minerals he has mined;

(b)

under the agreement the taxpayer is required (unless specific approval is given to the contrary) to construct the plant at or in the vicinity of the mine site;

(c)

the plant is constructed or installed at or in the vicinity of the mine site; and

(d)

the taxpayer incurs capital expenditure on the construction of the plant and associated improvements within the period specified in the agreement.

If all these conditions are satisfied, the expenditure incurred by the taxpayer after 9 May 1968 will be treated, for the purposes of the transitional provisions, as if the taxpayer had entered into a contract to incur the expenditure on or before that date. The essential effect of sub-section (8) is to preserve to a taxpayer any rights to deductions for the cost of the plant which may, in the circumstances described, have been available under the provisions of pre-1968 Division 10 if it had continued in operation, and are not available under the provisions of new Division 10 as enacted by the Income Tax Assessment Act (No. 2) 1968.

Proposed sub-section (9) provides that where a taxpayer, who was a party to an agreement with the Commonwealth or a State of the kind referred to in existing sub-section (8), assigns his rights under that agreement to one or more taxpayers then that sub-section will apply to capital expenditure incurred by the assignee or assignees in the same way as if the assignor had incurred that expenditure.

Sub-clause (2) of clause 25 deems the proposed amendment to section 21 of the Income Tax Assessment Act (No. 2) 1968 to have effect from 25 June 1968. This was the date of assent of the 1968 amending Act.

Sub-clause (3) amends the citation of the Income Tax Assessment Act (No. 2) 1968 as amended by this clause to the Income Tax Assessment Act 1968-1973.