House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Phillip Lynch, M.P.)

Introductory Note

The purpose of this memorandum is to explain the provisions of four Bills.

The first Bill - the Income Tax Assessment Amendment Bill (No. 3) 1976 - will amend the Income Tax Assessment Act 1936 (the Principal Act), mainly to give effect to proposals made as part of the 1976-77 Budget.

The second Bill - the Loan (Income Equalization Deposits) Bill 1976 - contains provisions governing the making and repayment of income equalization deposits.

The third Bill - the Loan (Drought Bonds) Amendment Bill 1976 - will amend the Loan (Drought Bonds) Act 1969 to provide that, for drought bonds converted into income equalization deposits, interest is to be payable until the end of the month in which the application for conversion is made.

The fourth Bill - the Income Tax (Companies and Superannuation Funds) Bill 1976 - will declare the rates of tax payable by companies and superannuation funds for the 1976-77 financial year.

The main features of the Bills are:-

Income Tax Assessment Amendment Bill (No. 3) 1976

Definition of resident (Clause 3)

The provision treating as Australian residents contributors to the Commonwealth superannuation fund is being amended to reflect the fact that Commonwealth officers now contribute to a differently-constituted fund.

Exemption of income of Thalidomide Foundation (Clause 4)

Income of the Thalidomide Foundation, to which children who have been afflicted by the drug, thalidomide, are beneficially entitled, is to be exempt from income tax and is to retain its exempt character when received by the children.

Visiting industrial experts (Clause 5)

Transitional provisions under which special taxation concessions for visiting industrial experts were being phased out over a period ending on 30 June 1978 are now to be terminated as from 1 July 1976.

Income equalization deposits (Clauses 6-8, 31-36)

Deposits lodged by primary producers with the Commissioner of Taxation under the income equalization scheme are to be allowable as tax deductions, while withdrawals of deposits for which deductions have been allowed will be included as assessable income for income tax purposes.

Private companies (Clauses 9, 10 and 35)

The retention allowance in respect of trading or business income, available to private companies for undistributed income tax purposes, is to be increased from 50 to 60 per cent, the increase first applying in respect of the 1975-76 year of income.

Provisions under which a private company may treat as a dividend for an income year the amount by which its dividend distributions in relation to a previous income year exceeded the minimum distribution necessary to avoid imposition of undistributed income tax are to be terminated. The termination will first have effect in determining the level of a private company's sufficient distribution out of income of the 1976-77 year.

Capital expenditure on prospecting and mining for minerals other than petroleum (Clauses 11 to 16)

Deductions under Division 10 of the Principal Act, for allowable capital expenditure incurred after 17 August 1976 that is allowable over the estimated life of the mine, will be subject to a maximum life of mine of 5 years instead of the present 25 years. Thus, the rate of deduction will be increased from 4 per cent per annum to 20 per cent per annum on a reducing balance basis.

Capital expenditure on facilities for the transport of certain minerals (Clauses 17 to 21)

Deductions under Division 10AAA of the Principal Act for capital expenditure incurred after 17 August 1976 on eligible transport facilities is to be deductible over either 10 years or 20 years at the option of the taxpayer.

The classes of capital expenditure for the purposes of Division 10AAA are to be widened to include certain capital expenditures on port facilities related to the transport of minerals.

Capital expenditure on prospecting and mining for petroleum(Clauses 22 to 30)

Deductions under Division 10AA of the Principal Act for petroleum exploration expenditure and for allowable capital expenditure incurred on developing a petroleum field are, in respect of expenditure incurred after 17 August 1976, to be allowable against income derived from any source.

Deductions for allowable capital expenditure incurred in carrying on petroleum mining operations that are currently allowable over the estimated life of the field subject to a maximum life of 25 years on a reducing balance basis are, in respect of expenditure incurred after 17 August 1976, to be deductible by reference to a maximum life of field of 5 years on a reducing balance basis.

Mineral exploration in Papua New Guinea (Clauses 2 and 37)

Transitional provisions enacted in 1975 to allow deductions for mineral exploration expenditure in Papua New Guinea by Australian companies after Papua New Guinea became independent on 16 September 1975 but before 1 July 1976 are to be extended, broadly, to such expenditure incurred before 1 July 1978 by companies which, at 16 September 1975, held prospecting authorities or other rights for exploration in Papua New Guinea.

Loan (Income Equalization Deposits) Bill 1976

Deposits (Clauses 4, 11)

Amounts lodged on deposit by or on behalf of individual persons or companies with the Commissioner of Taxation are to bear interest, initially at the rate of 5 per cent per annum.

Drought bonds (Clause 12)

Drought bonds for which tax deductions have been allowed may be converted to income equalization deposits.

Trust Account (Clauses 7, 8)

Moneys deposited are to be credited to the Income Equalization Deposits Trust Account and withdrawals of deposits are to be repaid out of moneys in that Account.

Withdrawals (Clauses 16, 20)

Deposits may not be withdrawn within 12 months of lodgment except on grounds of serious financial difficulty. On death or bankruptcy, deposits will be immediately repayable.

Loan (Drought Bonds) Amendment Bill 1976

Conversion to income equalization deposits

Drought bonds that are converted into income equalization deposits will be deemed to have been redeemed on the date of application for conversion. Interest will, however, be payable on the drought bonds until the end of the month in which the application for conversion is made.

Income Tax (Companies and Superannuation Funds) Bill 1976

Rates of tax

Income tax is imposed for the 1976-77 financial year, at the rates declared in the Bill, on the incomes of companies and superannuation funds. (The rates of income tax payable by individuals and trustees for the 1976-77 financial year were declared earlier this year.)

The rates of tax declared by the Bill are the same as those declared for the 1975-76 financial year, the general rate of company tax being 42.5 per cent of taxable income.

INCOME TAX ASSESSMENT AMENDMENT BILL (NO. 3) 1976

The main features of this Bill have been referred to in the introductory pages of this memorandum. The following notes relate to the individual clauses of the Bill.

Clause 1: Short title and citation

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

Clause 2: Commencement

Section 5(1A) of the Acts Interpretation Act 1901 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-section (2), the Amending Act shall come into operation on the day on which it receives the Royal Assent.

By sub-clause (2),clause 37 of the Bill, which amends the Income Tax Assessment Act 1975, will come into operation on the day that that Act came into operation.

Clause 3: Interpretation

Paragraph (a) of clause 3 of the Bill will amend the definition of "income from personal exertion" in sub-section 6(1) of the Principal Act.

As amended, the term, for the general purposes of the Act, will include any amount that is included in the assessable income of a taxpayer by reason of proposed section 159GD, i.e. any amount included in assessable income when deposits made under the proposed income equalization deposits scheme become repayable.

The amendment will make it clear that amounts withdrawn by a private company under the scheme will, if assessable, be treated as income other than income from property in determining what amount will require to be paid as dividends by the company to avoid a liability for undistributed income tax.

Paragraph (b) of clause 3 will effect a technical amendment of the definition of "resident" or "resident of Australia" contained in section 6 of the Principal Act. The amendment f lows from the new superannuation scheme for Commonwealth officers.

The definition of "resident" is basic to the operation of the income tax law. A person who is a resident is, subject to measures for the relief of double taxation, liable to tax on income from sources throughout the world (a non-resident is taxable only on Australian source income) and residents (but not non-residents ) are entitled to the general rebate and other concessional rebates.

The tests of when an individual is an Australian resident are set out in the definition in section 6. The basic test is that a person is a "resident" if he or she resides here and this is supplemented by other rules, one of which treats a person as a resident if the person has an Australian domicile and the conclusion is not reached that the person' s permanent place of abode is outside Australia.

Since 1939 a further supplementary rule has specifically treated a person as a resident of Australia for income tax purposes if the person is, or is the spouse or a child under 16 years of age of, a contributor to the superannuation fund for Commonwealth officers. By reason of the Superannuation Act 1976 a new superannuation scheme for Commonwealth officers has come into operation with effect from 1 July 1976 and this clause maintains the previous rule in relation to people who are "eligible employees" (contributors under the new scheme ).

Sub-clause (1) replaces the reference in the definition of "resident" to previous superannuation arrangements by a reference to the new arrangements. By sub-clause (2) the definition, in its present form, continues to apply in determining residency questions arising prior to 1 July 1976.

Clause 4: Exemption

This clause proposes, by sub-clause (1), to insert a new paragraph - paragraph (ec) - in section 23 of the Principal Act which will exempt the income derived for the benefit of thalidomide-afflicted children by The Thalidomide Foundation Ltd in its capacity as trustee of the trust known as The Thalidomide Foundation.

The exemption will apply in relation to income derived for the benefit of each of the children until on a particular beneficiary's attaining the age of 25 years, he or she becomes entitled to receive a share of the capital of the trust.

In addition to exempting the income of the trust in the hands of the trustee, the provision will effectively exempt each of the beneficiaries from tax on his or her share in the income of the trust.

By sub-clause (2), the exemption will apply to income derived during the year ended 30 June 1975 - the year in which the trust was established - and to the income of subsequent years of income.

Sub-clause (3) of Clause 4 will ensure that there is no barrier to the amendment of any assessment to give effect to the exemption provided by the proposed new paragraph. This will protect the position of any beneficiary who has included income from the Foundation in an income tax return and has been assessed thereon.

Clause 5: Income of visiting experts

This clause will compress the phasing-out period for the withdrawal, by section 24AA, of certain income tax concessions for visiting experts from overseas.

Very briefly, the allowances being phased-out are:

•

the exemption, under section 23(c)(vi), of income derived by a visiting expert from an occupation carried on in Australia mainly directed to assisting the Commonwealth or a State government in the settlement or development of Australia.

•

the exemption for up to two years, under section 23(c)(vii), of directors fees, salary or wages derived by a visiting industrial expert, subject to the income being taxed in the visitor's home country and, in the case of the second year of the visit, to certification that the visitor's services assist in the development of Australian industry.

•

the rebate for up to four years, under section 160ABA, allowed to a visiting industrial expert, subject, in respect of the second, third and fourth years of the visit, to certification that the visitor's services assist in the development of Australian industry.

Under the existing phasing-out arrangements, the relevant allowance may be available up to the end of the income year 1977-78, provided that the visit commenced on or before 30 June 1973, or after that date pursuant to a contract entered into on or before 14 May 1973.

Clause 5 will repeal existing section 24AA of the Principal Act and substitute a new section 24AA to the effect that, subject to new transitional arrangements, the relevant allowances will not be available after the income year 1975-76. Under the transitional arrangements the allowances will continue to be available in respect of the first year of a visit that commenced before 10 June 1976, that being the date on which it was announced that the existing phasing-out provisions were to be amended. The allowances will also be available in respect of a second, third or fourth year of a visit where a certificate, as required by the relevant sections, was given for the year concerned before 10 June 1976, or on or after that date pursuant to an application for such a certificate lodged on or before that date.

Clause 6: Limitation on certain deductions

This clause proposes an amendment to section 79C of the Principal Act consequential upon the proposed insertion in the Act of the new division relating to income equalization deposits.

Section 79C provides that the aggregate of special deductions allowable under sections 77B, 77C, 78 and 79 of the Principal Act (which include deductions for calls on certain shares, and gifts) is not to exceed the amount of income that remains after deducting from assessable income all other allowable deductions except losses of previous years and certain deductions for capital expenditure allowable under Divisions 10 and 10AA of the Principal Act in relation to mining and prospecting operations or for purchases of drought bonds under Division 16B. The amendment proposed by this clause will exclude from "all other allowable deductions" the deductions allowable for income equalization deposits. This will ensure that the amounts otherwise allowable to a taxpayer under the sections in the Principal Act specified in section 79C will not be diminished as a consequence of the making of an income equalization deposit.

Clause 7: Net income of trust estate

Clause 7 of the Bill will amend section 95 of the Principal Act which provides, broadly, that, in calculating the net income of a trust estate, the assessable income of the estate, calculated as if it were a taxpayer, is reduced by all allowable deductions except concessional deductions.

By this clause it will be made clear that the deductions allowable in calculating the net income of a trust estate will not include any amount in respect of a deposit made under the proposed income equalization deposits scheme. A deduction may, however, be allowed in certain circumstances in the assessment of a beneficiary in respect of a deposit made by the trustee of a deceased estate on behalf of the beneficiary. (See notes on clause 34.)

Clause 8: Certain beneficiaries deemed not to be under legal disability

Under section 98 of the Principal Act, the trustee of a trust estate is liable to pay tax in respect of the share of the net income of the trust estate to which a beneficiary who is under a legal disability, e.g. because of infancy, has a presently existing entitlement.

Provision is to be made in the Loan (Income Equalization Deposits) Bill to enable the trustee of a deceased estate to make deposits on behalf of a beneficiary who, although presently entitled to income of the estate, is under a legal disability. Under proposed section 159GB, which is being inserted in the Principal Act by clause 34 of this Bill, a deposit made on behalf of such a beneficiary is to be deemed to have been made by the beneficiary, if the estate carries on a business of primary production and the beneficiary shares in the income of that business.

Sub-section (1) of proposed section 97A, which is being inserted in the Principal Act by clause 8, will provide that where a beneficiary who is under a legal disability is presently entitled to a share in the income of an "eligible trust estate" - a deceased estate - and is deemed by proposed sub-section 159GB(2) to have made an income equalization deposit in the relevant period in relation to the year of income (ordinarily the 12 months period ending 2 months after the end of the year of income) the beneficiary will be assessed as if no disability existed. In these circumstances, the trustee will not be assessed and liable to pay tax in pursuance of section 98 of the Principal Act in respect of the beneficiary's share in the trust income. Instead, the beneficiary will be assessed in respect of his share under the provisions of section 97 of the Principal Act, with the deduction in respect of the deposit being allowed in the assessment. Enactment of section 97A will facilitate the application of the provisions of the proposed new Division 16C, particularly in relation to the application of limits on the deductions allowable in respect of deposits and in determining the amount to be included in assessable income when a deposit becomes repayable.

Sub-section (2) of proposed section 97A defines for the purposes of the section three terms used in sub-section (1) - "deposit", "eligible trust estate" and "relevant period". "Deposit" and "relevant period" are given the same meanings as in the proposed new Division 16C being inserted by clause 34. Thus "deposit" means an income equalization deposit made in pursuance of the Loan (Income Equalization Deposits) Act 1976 and "relevant period", in relation to a year of income, means the 12 months period ending 2 months after the end of the year of income or, in relation to the 1975-76 and 1976-77 income years, the periods specified in the definition in proposed sub-section 159GA(1), (see notes on that sub-section). "Eligible trust estate" is given the same meaning as in proposed section 159GB and therefore means, broadly, a deceased estate.

Clauses 9 and 10: Private companies

Introductory Note

A company that is classified as a private company for income tax purposes has a period of 12 months commencing 2 months before the end of the income year (the "prescribed period" in relation to that income year) within which to make a prescribed level of distribution to its shareholders (a "sufficient distribution") in respect of its taxable income of that year.

A private company's taxable income less company tax is its "distributable income". The balance of distributable income after deducting the "retention allowance" (the amount of distributable income that a private company may retain free of undistributed income tax) is its "sufficient distribution" for the relevant income year.

It is relevant to note that distributable income less any income from property is the private company's "reduced distributable income" and that:-

(a)

the present rate of retention allowance for income other than property income is 50 per cent of the reduced distributable income;

(b)

there is no retention allowance available for distributable income that is property income consisting of private company dividends; and

(c)

there is a 10 per cent retention allowance for other distributable income from property such as rent, interest and public company dividends.

The amount by which dividends paid in the prescribed period fall short of a sufficient distribution is the company's "undistributed amount" for the relevant income year. A private company pays undistributed income tax at the rate of 50 per cent of its undistributed amount.

Conversely, any amount of dividends paid in excess of a sufficient distribution in the prescribed period for an income year may be carried forward from year to year without limit as to time to be credited as a dividend deemed to have been paid in the prescribed period of the succeeding income year if the company satisfies in relation to that excess distribution a so-called "continuing ownership" test or an alternative "same business" test.

The amendments made by clauses 9, 10 and 35 will increase the amount of the retention allowance and terminate the excess distribution provisions.

Clause 9: Retention allowance

It is proposed by sub-clause (1) of clause 9 to amend section 105B(a) of the Principal Act to increase the present rate of retention allowance for trading or business income, that is, income other than income from property, from 50 to 60 per cent of the private company's reduced distributable income. There is to be no change in the rate of retention allowance presently available for property income.

Under sub-clause (2), the increased retention allowance for trading or business income will apply in determining whether a private company has made a sufficient distribution in respect of income of the 1975-76 income year and subsequent income years.

Clause 10: Repeal of sections 106, 106A, 106B, 106C and 106D

Sub-clause (1) of clause 10 repeals sections 106, 106A, 106B, 106C and 106D of the Principal Act. These are provisions that provide for the creation by a private company of an excess distribution and the treatment of the excess as a dividend deemed to have been paid in the prescribed period of the succeeding income year. The provisions also lay down the" continuing ownership test" and the alternative "same business" test which specify the conditions under which an excess distribution may be so carried forward.

By virtue of the provisions, a private company that has made more than the required minimum distribution in respect of its after-tax taxable income for an income year, and which satisfies the " continuing ownership test or alternative "same business test, is enabled to pay something less in dividends than the prescribed minimum for a later year without incurring a liability for undistributed income tax.

Under sub-clause (2) the termination of the excess distribution provisions will apply so that excess distributions will not be taken into account in the undistributed income tax calculations in relation to income of the 1976-77 income year and the subsequent income years.

The effect of this on a private company, whose financial year ends on 30 June for taxation purposes, will be that an excess distribution in existence at 30 April 1976 will be available, subject to existing rules, in ascertaining whether a sufficient distribution in relation to 1975-76 income has been made by the company by 30 April 1977. For 1976-77, however, only dividends that are actually paid during the 1976-77 prescribed period of 12 months ending 30 April 1978 will count towards the sufficient distribution required to be made in relation to 1976-77 income.

Thus, if a private company had, at 30 April 1976, an excess distribution that is at least equal to the amount of a sufficient distribution of its 1975-76 income, and the excess is one that otherwise satisfies the existing requirements of the income tax law, the company will not be required by the distribution provisions of the law to make any further dividend payment until 30 April 1978.

Clauses 11 to 16: Capital expenditure on prospecting and mining for minerals other than petroleum

Introductory Note

Division 10 of the Principal Act authorises special deductions in relation to eligible capital expenditures incurred by a mining enterprise in connection with the development of a mining property in Australia and the conduct of mining operations on the mining property. The Division also provides for the allowance of deductions for expenditures on mineral prospecting and exploration.

The amendments proposed to be made to Division 10 will not disturb the classes of capital expenditure which may qualify for deduction. Their main purpose is generally to allow for a more rapid rate of deduction in respect of eligible expenditures that are incurred after 17 August 1976 and which are currently deductible by reference to the life of the mine to which they relate. The maximum life of a mine for this purpose is to be reduced from 25 to 5 years with deductions continuing to be calculated on the reducing balance of undeducted amounts.

Exploration and prospecting expenditure of general mining enterprises will continue to be allowable as outright deductions up to the level of the net income derived from a mining business.

Clause 11: Purchase of mining or prospecting right or information

This clause proposes an amendment to section 122B of the Principal Act.

Section 122B provides, within certain limits, for the inclusion in the allowable capital expenditure of a purchaser of a mining or prospecting right or mining or prospecting information expenditure incurred in acquiring that right or information. Broadly stated, the section is designed to transfer to the purchaser a vendor's entitlement to deductions for certain capital expenditure. The amount of the deductions that may be transferred is limited to the amount of the consideration given by the purchaser for the mining or prospecting right or information.

Sub-section (1) permits a purchaser and a vendor of a mining or prospecting right or mining or prospecting information to give notice to the Commissioner of Taxation that they have agreed that so much of the amount paid for the right or information as is specified in the notice is to be included in the allowable capital expenditure of the purchaser. The practical effect of the notice is, in very broad terms, to transfer to the purchaser the entitlement of the vendor to have the relevant expenditure deducted over the life of the mine.

Sub-section (2) specifies circumstances in which the amount to be included in the allowable capital expenditure of the purchaser of the right or information may be less than the amount specified in a notice given in accordance with sub-section (1). In effect, the purchaser's entitlement is limited to the sum of the amounts referred to in paragraphs (a) to (d) of sub-section (2).

The proposed amendment will include in paragraph (a) of sub-section 122B(2) a reference to "residual previous capital expenditure" - an expression defined by section 122C of the Principal Act as amended by clause 12 of the Bill and explained in the notes that follow relating to that clause.

At present paragraph (a) refers to the amount of the capital expenditure (other than on plant or on exploration or prospecting) incurred by the vendor in relation to the area which is subject to the right or to which the information relates. The amount brought into the calculation of the purchaser's entitlement is the amount of the vendor's relevant expenditure that would have been included in the vendor's residual capital expenditure as at the end of the year of income in which the transaction occurred, had the section 122B notice not been given to the Commissioner.

By the proposed amendment, the amount to be brought into the calculation of the purchaser's entitlement will include capital expenditure of the vendor that would have been included in either the "residual capital expenditure" or the "residual previous capital expenditure" of the vendor as at the end of the relevant income year.

Clause 12: Residual previous capital expenditure

Section 122C of the Principal Act provides the basis for determining the amount of the residual capital expenditure of a taxpayer at the end of a year of income. The amount so determined as at the end of any income year is available for deduction by reference to the life of the mine or proposed mine to which it relates. In broad terms, the residual capital expenditure is so much of the allowable capital expenditure incurred by the taxpayer up to the end of the year of income as has not been allowed and is not allowable as a deduction in respect of a previous year of income.

Because there are in future to be two distinct bases for calculating deductions for allowable capital expenditure - according to whether the expenditure was incurred on or before 17 August 1976 or after that date - it is necessary to provide for separate pools for the carryforward of undeducted capital expenditures.

To this end, section 122C will be recast so as to apply only to capital expenditure incurred on or before 17 August 1976 and will become the basis for determining the "residual previous capital expenditure" of a taxpayer. The amount of residual previous capital expenditure as at the end of any income year will give rise to deductions in terms of section 122D of the Principal Act.

Paragraph (a) of clause 12 proposes a formal change to sub-section (1) so that the amount calculated by reference to section 122C will be referred to as "residual previous capital expenditure" (instead of "residual capital expenditure" as at present).

Paragraph (b) of the clause provides a merely formal drafting amendment to omit the conjunction "and" at the end of sub-section 122C(1) consequent on the proposed addition of an additional paragraph to the sub-section.

Paragraph (c) will omit the present paragraph (b) of section 122C(1) and substitute new paragraphs (b) and (ba) as components to be brought into account in the calculation of residual previous capital expenditure.

Paragraph 122C(1)(b) will provide for the inclusion in residual previous capital expenditure of the amount of allowable capital expenditure that is incurred by a taxpayer after the year of income that ended on 30 June 1967 and before the end of the year of income where the expenditure is also incurred on or before 17 August 1976.

New paragraph 122C(1)(ba) will provide for the inclusion also in the residual previous capital expenditure of any amount of allowable capital expenditure that is deemed by sub-section 122C(2) to have been incurred by the taxpayer in the year of income or in an earlier year. Broadly, that sub-section applies where property on which capital expenditure has been incurred has ceased to be used for mining purposes.

In the event of such property commencing to be used again for purposes for which allowable capital expenditure may be incurred, sub-section 122C(2) provides that an amount determined by the Commissioner of Taxation shall be deemed to have been incurred by the taxpayer in the year of income in which the property again commences to be used for mining purposes. By new paragraph (ba) of sub-section 122C(1) any amount so deemed to have been incurred will be brought into account in the calculation of residual previous capital expenditure provided that the initial expenditure on the property before it ceased to be used for mining purposes was incurred on or before 17 August 1976. (A complementary amendment to sub-section 122C(2) is proposed by paragraph (e) of this clause.)

Paragraph (d) of clause 12 will substitute a new paragraph for the present paragraph 122C(1)(d) which specifically excludes from the residual capital expenditure of a taxpayer amounts that have been specified in notices by him under section 122B as the vendor of a mining right or of mining or prospecting information. The revised paragraph will provide for the exclusion from the residual previous capital expenditure of amounts specified under section 122B notices that are attributable to expenditure on the subject area. The amendment to be made by this paragraph is a technical one which complements the main purpose of the amendments to section 122C i.e. to confine the application of the section as amended to expenditure incurred on or before 17 August 1976.

Paragraph (e) proposes to amend sub-section 122C(2) to also confine the application of that sub-section to allowable capital expenditure incurred on or before 17 August 1976. The operation of sub-section 122C(2) has already been discussed in the explanatory notes above on the amendments proposed by paragraph (c) of this clause.

Clause 13: Deduction of residual previous capital expenditure

Section 122D of the Principal Act authorises the allowance of deductions for eligible capital expenditures (other than exploration expenditure) on a life of mine basis.

Clause 13 proposes two amendments that will leave the operation of section 122D undisturbed other than to effectively restrict its application to allowable capital expenditure that is incurred on or before 17 August 1976.

The first amendment will replace several references in the section to "residual capital expenditure" by references to "residual previous capital expenditure" consistent with the changes to section 122C proposed by clause 12.

The second amendment will insert in sub-section 122D(3) a reference to the proposed new section 122DB that is to be inserted into the Principal Act by clause 14. Sub-section 122D(3) provides that, unless the taxpayer elects otherwise, a deduction under section 122D is limited to the amount of assessable income remaining after taking into account all other deductions except the deductions under section 122J in respect of prospecting or exploration expenditure and those under section 122D.

The amendment will ensure that deductions under new section 122DB are also excluded, with the deductions under section 122D and 122J, from the calculation of the amount available for deduction in the absence of a contrary election by the taxpayer.

The purpose of sub-section 122D(3) is to ensure that a taxpayer is not deprived of an effective deduction for allowable capital expenditure by reason of section 80 of the Principal Act which limits the carry-forward of losses to 7 years. In the absence of the sub-section this could happen if the taxpayer did not derive sufficient income within the next 7 years after incurring the expenditure to absorb the full amount of the expenditure.

An amount excluded from the deduction allowable for a particular year of income by virtue of sub-section 122D(3) remains as residual previous capital expenditure to be deducted in future years. However, a taxpayer may elect in terms of sub-section 122D(4) in relation to any particular year for sub-section 122D(3) not to apply. In that event, the excess of deductions over assessable income is carried forward for deductions under the general loss provisions in accordance with section 80.

As amended by the clause, sub-section 122D(1) will provide that where a taxpayer has an amount of residual previous capital expenditure as at the end of a year of income a deduction is allowable in accordance with the section.

Sub-section (2) provides that the deduction for any year is ascertained by dividing the amount of the residual previous capital expenditure as at the end of the year by the lesser of the number of years in the estimated life of the mine as at the end of the year of income and 25.

Where a taxpayer has more than one mine on a mining property, the sub-section provides that the calculation of the deduction allowable for the residual previous capital expenditure is to be made on the basis of the estimated life of the mine with the longer or longest estimated life, as the case may be.

Provision is also made to meet the situation where a taxpayer has undertaken preparatory work such as clearing the mine site and installing light and power but has not commenced the actual extractive mining operations. In such a case, the deduction is determined by relating the expenditure to the estimated life of the proposed mine.

Where a taxpayer carries on prescribed mining operations on two or more mining properties a separate amount of residual previous capital expenditure is ascertained for each property. The deductions allowable under section 122D are then determined for each property on the basis of the estimated life of the mine on that property.

Clause 14: Residual capital expenditure

By this clause two new sections - sections 122DA and 122DB - are to be inserted into the Principal Act. The new sections will complement existing sections 122C and 122D respectively and will have application in respect of allowable capital expenditure that is incurred after 17 August 1976.

New section 122DA will provide the basis for determining the amount of "residual capital expenditure" of a taxpayer as at the end of a year of income. The amount so determined as at the end of any income year will be deductible on the basis to be provided by proposed section 122DB.

In broad terms, the residual capital expenditure is so much of the allowable capital expenditure incurred by a taxpayer after 17 August 1976 and before the end of the year of income as has not been allowed as a deduction in a previous year of income.

Sub-section (1) of section 122DA prescribes the amounts to be taken into account in ascertaining the residual capital expenditure as at the end of a year of income.

The scheme of the sub-section is to deduct from the amount of allowable capital expenditure, incurred after 17 August 1976 and before the end of the year of income, certain amounts referred to in paragraphs (a) and (b) of the sub-section that are specifically excluded from the residual capital expenditure. These amounts are any part of the allowable capital expenditure that -

(a)

(i)

has been allowed or is allowable as a deduction in a prior year of income under proposed section 122DB i.e. as an annual deduction in respect of residual capital expenditure;

(ii)

was incurred on property (not being property in respect of which a notice under section 122B has been given) which has been disposed of, lost or destroyed, or the use of which for prescribed purposes has been terminated and has not been allowed, and is not allowable, as a deduction for a year of income prior to that in which the disposal etc. takes place; and

(b)

represents so much of any amounts specified in notices given under section 122B, in respect of which the entitlement to deductions has been transferred to the purchaser of a mining or prospecting right or information, which would otherwise be included in the residual capital expenditure of the taxpayer vendor as at the end of the year of income.

Sub-section (2) of section 122DA will provide for a situation where expenditure on property has been excluded from residual capital expenditure, because the property has ceased to be used by the taxpayer for prescribed purposes, and the property commences to be used again for the purposes for which allowable capital expenditure may be incurred.

In these circumstances, so much of the expenditure incurred after 17 August 1976 and before the termination of use as the Commissioner of Taxation determines is to be deemed, for the purposes of section 122DA, to have been incurred by the taxpayer for the relevant purposes in the year in which its use for those purposes recommenced.

New section 122DB is the operative provision establishing the basis for allowing annual deductions in respect of the residual capital expenditure.

Sub-section (1) provides that where a taxpayer has an amount of residual capital expenditure as at the end of a year of income, a deduction is allowable in accordance with the section.

Under sub-section (2), the deduction allowable for a year is to be found by dividing the amount of the residual capital expenditure as at the end of the year by the lesser of 5 and the number of years in the estimated life of the mine as at the end of the year of income.

The sub-section thus places a statutory upper limit of 5 years on the estimated life of a mine, as at the end of the year, for the purpose of calculating the annual deduction.

This means that where the estimated life of the mine at the end of a year is 5 years or more the allowable deduction will be equal to one-fifth of the residual capital expenditure as at the end of the year in question. Where the number of whole years in the estimated life of the mine is between 1 and 4 years, however, the allowable deduction is to be found by dividing the residual capital expenditure by that number.

Sub-sections (3), (4) and (5) of proposed section 122DB follow the principles of their counterparts in section 122D in all material respects.

Sub-section 122DB(3), like sub-section 122D(3) which has been described in detail in the earlier notes on clause 13 of the Bill, is designed to ensure that mining enterprises are not denied effective deductions for allowable capital expenditure through the operation of the loss provisions of section 80 of the Principal Act.

The sub-section provides that where the net income of the enterprise from mining and other activities (before the deduction of exploration and prospecting expenditure under section 122J) is insufficient to absorb the amount to be deducted under the section, the deduction is limited to the amount of the net income. The excess amount is then to be retained in the residual capital expenditure for deduction in subsequent years.

Sub-section (4) is complementary to sub-section (3) and provides that, if an enterprise does not wish the deduction to be limited to the net income of a particular year, it may elect that the limitation shall not apply. In that event, any loss arising from the deduction in respect of residual capital expenditure will be carried forward under the general loss provisions of section 80 for up to 7 years and allowed as a deduction as income becomes available.

Sub-section (5) continues the procedure adopted in section 122D(5) which permits the Commissioner of Taxation to substitute his own estimate of the life of a mine or proposed mine if he is not satisfied that the estimate made by the taxpayer is realistic and soundly based.

In any exercise of this power the Commissioner would be required to have regard to any relevant information in his possession and would be expected to be guided by expert technical advice in forming his estimate which would, of course, be open to review in the usual way by a Board of Review.

Clause 15: Elections

This clause proposes a formal drafting change to section 122M of the Principal Act to insert in that section a reference to proposed new section 122DB.

Section 122M sets out the times within which the elections which a taxpayer is entitled to make under various provisions of Division 10 must be lodged with the Commissioner of Taxation. All notices of election must be in writing and signed by or on behalf of the taxpayer. The Commissioner is, however, authorized to extend further time for lodgment.

Clause 16: Deductions not allowable under other provisions

Section 122N of the Principal Act prevents the allowance of more than one deduction in respect of capital expenditure which has been or may become deductible under Division 10. The section provides, in broad terms, that such expenditure is not to be deductible or to be taken into account in determining a deduction under any other provisions of the Principal Act.

Sub-section 122N(3) is a drafting measure which ensures that amounts which, by virtue of the operation of the limits placed on deductions by section 122D(3) and 122J(2), are not allowable in the year of income (i.e. because the taxpayer derived insufficient income to absorb the deductions in full), but are carried forward for deduction under Division 10 in subsequent years, are not to be deductible under any other provisions of the income tax law.

Clause 16 proposes a formal drafting change to sub-section 122N(3) to make clear that the same principle is to be applied to excess amounts carried forward as residual capital expenditure by the application of the limitation imposed by the new sub-section 122DB(3).

Clauses 17 to 21: Capital expenditure on facilities for the transport of certain minerals

Introductory Note

Division 10AAA of the Principal Act, expressed very broadly, authorises the allowance of special deductions in respect of capital expenditure incurred on a railway, road, pipeline or other facility for transporting minerals (including oil and natural gas) mined in Australia for the purpose of producing assessable income. For eligible expenditure incurred after 17 September 1974, the deductions are allowable in equal instalments over 20 years. Subject to transitional provisions, a 10 year write off period is available for expenditure incurred on or before that date.

It is proposed to give to enterprises that incur capital expenditure on eligible transport facilities after 17 August 1976 the right to take deductions for that expenditure over either 10 years or 20 years according to their choice.

In addition, the classes of eligible expenditure for the purposes of Division 10AAA are to be widened to include certain capital expenditures incurred by a taxpayer in relation to the provision of port facilities in Australia for the sea transport of minerals or petroleum.

Clause 17: Interpretation

Section 123 of the Principal Act is an interpretation provision that defines a number of expressions used in Division 10AAA and also contains certain rules of construction relating to the meaning to be given to references in the Division to "capital expenditure on a railway, road, pipeline or other facility". Clause 17 proposes three amendments to section 123.

The first of the proposed amendments will insert in sub-section (1) a definition of "housing and welfare facilities", an expression used in sub-section (2) in relation to certain types of expenditure that are specifically excluded from the scope of the Division.

It should be noted, however, that separate provisions in Divisions 10 and 10AA of the Principal Act, which authorise deductions for allowable capital expenditure on general mining and petroleum mining operations, provide for deductions to be allowable under those Divisions for expenditure on certain housing and welfare facilities situated at or adjacent to the mine site or site of petroleum mining operations.

The definition being inserted to exclude expenditure on housing and welfare facilities from the scope of Division 10AAA will extend to the costs of health, education, recreational or similar facilities such as hospitals, medical and dental clinics, child welfare centres, libraries, technical colleges, schools, sports arenas, swimming pools and children's play centres. It will also extend to expenditure on buildings such as shops, theatres, hotels, etc. and on canteens, restaurants and other facilities for the provision of meals.

Also within the definition is expenditure on works carried out directly in connexion with accommodation or facilities such as the provision of water, light or power services, access roads or communications.

The amendment proposed by paragraph (b) of this clause will insert a new sub-section (1A) into section 123 to declare that, for the purposes of the Division, references to a "railway, road, pipeline or other facility" are to be taken as including a reference to a port facility or other facility for ships. These references appear in sections 123(2) and 123A.

The amendment is a drafting device, designed to facilitate the extension of the scope of the Division to certain capital expenditures incurred in constructing a port or other shipping facilities for the transport of eligible minerals.

Paragraph (c) of the clause proposes an amendment to sub-section 123(2). That sub-section is principally designed to bring within the scope of the deductions allowed under Division 10AAA certain classes of expenditure which might not otherwise qualify as part of the cost of a transport facility.

To this end, a reference in the Division to capital expenditure on a railway, road, pipeline or other facility (which, by virtue of new sub-section 123(1A), includes port facilities or other facilities for ships) is to be read as including capital expenditure incurred by a person -

(a)

in obtaining a right to construct or install such a facility, or part of it, on land owned or leased by another person, whether by means of a licence, permit or otherwise;

(b)

in paying compensation in respect of damage or loss caused by the construction or installation; or

(c)

on earthworks, bridges, tunnels and cuttings necessary for the facility.

As well as extending the scope of the Division in this way, sub-section (2) at present expressly excludes expenditure in respect of railway rolling stock, road vehicles and ships and also port facilities and other facilities for ships.

Consistent with the amendment proposed by paragraph (b) of clause 17, the exclusion of expenditure on port facilities and other facilities for ships is to be deleted. This will be replaced by an express exclusion of expenditure incurred, in connexion with provision of port facilities, on housing and welfare (as defined) or works for the provision of water, light or power.

This will ensure that capital expenditure on the development of a port and associated facilities will become eligible for deduction under the Division provided tests of eligibility imposed by other provisions of the Division are satisfied.

The categories of port development expenditure that fall within the widened scope of the Division are discussed in the notes on clause 18 of the Bill that follow.

Clause 18: Application of Division

Section 123A of the Principal Act specifies the circumstances in which capital expenditure may qualify for the special deductions authorised by Division 10AAA and quantifies that expenditure for the purposes of the deductions.

Sub-section 123A(1) states that capital expenditure on transport facilities is, subject to certain exclusions provided for in the sub-section, eligible for the deductions where the following conditions are met:-

•

the expenditure has been incurred on or after 1 July 1961;

•

the expenditure has been incurred on, or by way of contribution to expenditure by another person on, a railway, road, pipeline or other transport facility (now to include a port facility or other facility for ships);

•

the facility has been constructed or acquired for use primarily and principally for the transport -

(a)

of minerals obtained from the carrying on by any person of prescribed mining operations; or

(b)

of processed materials produced from such minerals,

other than transport wholly within the site of prescribed mining operations; and

•

the facility is to be used in carrying on a business for the purpose of gaining assessable income.

It is not necessary that the expenditure on a transport facility be incurred by the mine owner who is producing the minerals or mineral products to be transported.

Sub-section 123A(1A) extends the application of the Division to similar facilities for use in the transport of petroleum. The deductions are available where the transport facility is used for transporting petroleum (i.e. crude oil and natural gas) between the oil or gas field and a refinery or other terminal. Deductions are not available in respect of capital expenditure on facilities used to transport petroleum products or to reticulate gas to consumers.

The amendments proposed by paragraphs (a) and (b) of this clause are drafting measures intended to ensure that deductions under the Division continue to be restricted to mineral or petroleum transport facilities that are constructed or installed in Australia. Thus, if a taxpayer were to contribute to the cost of the construction of port facilities in an overseas country, the cost would not qualify for deduction, notwithstanding that the facilities may be built to handle Australian minerals or mineral products, exported to that country.

Paragraph (c) of the clause proposes to insert into section 123A two new sub-sections (1C) and (1D).

Sub-section (1C) qualifies the extension of the Division to expenditure on port facilities and other facilities for ships by providing that capital expenditure on, or by way of contribution to expenditure of another person on, such facilities is only to be eligible if the expenditure:

•

was incurred after 17 August 1976; and

•

is neither allowable as a deduction nor to be taken into account in determining the amount of allowable deduction from the assessable income of the taxpayer under any other provision of the income tax law.

Capital expenditure on plant that qualifies for deduction by way of depreciation allowances under section 54 of the Principal Act will accordingly be excluded from the eligible Division 10AAA expenditure, e.g. expenditure on wharf handling equipment and the cost of constructing wharves and jetties (which are within the extended meaning of "plant" in section 54).

As mentioned in the notes on clause 17, section 123(2) as amended by this Bill will also specifically exclude expenditure in respect of housing and welfare and on works for the provision at a port of water, light or power.

Classes of port development expenditure not excluded by these qualifications and which will attract the special deductions include the cost of harbour surveys, initial dredging of a harbour or channel, non-plant expenditure on navigational aids and the construction of breakwaters. Also included will be the cost of site works, land reclamation and similar works and the provision at or to the port of access roads and communications. Structural improvements at a port to provide storage facilities for minerals or mineral products awaiting shipment (e.g. concrete storage pads) would also attract deductions.

Sub-section (1D) is a technical measure that provides that section 123E(1) of the Principal Act is to be disregarded in determining the eligibility of capital expenditure in terms of section 123A(1C). In broad terms, section 123E(1) provides that an amount of expenditure on transport facilities which is eligible for deduction under Division 10AAA is not to be deductible or taken into account in ascertaining deductions under any provision of the Principal Act other than Division 10AAA.

Clause 19: Deduction of expenditure

Section 123B is the operative provision of Division 10AAA. It lays down the periods over which deductions are to be allowable in respect of the capital expenditure encompassed by section 123A. The deductions are, of course, dependent upon the particular transport facility being used for a purpose referred to in section 123A.

Under paragraph (a) of sub-section 123B(1) a deduction of one-tenth of the capital expenditure to which that paragraph applies is allowable in the first year of income in which the facility is so used and in each of the next succeeding 9 years. This paragraph applies in relation to capital expenditure incurred on or before 17 September 1974 or incurred between 17 September 1974 and 30 June 1976 under a contract made on or before 17 September 1974.

Under paragraph (b) of the sub-section a deduction of one-twentieth of capital expenditure incurred after 17 September 1974 (other than expenditure incurred between 17 September 1974 and 30 June 1976 which satisfies the above requirements for the application of paragraph (a)) is allowable as a deduction in the first income year in which the transport facility comes into use for eligible purposes and a further one-twentieth is allowable as a deduction in each of the following 19 years.

The amendment proposed to section 123B(1) by clause 19(a) will introduce the qualification that the sub-section is to be read subject to the provisions of section 123BA and the proposed new section 123BB of the Principal Act.

Section 123BA permits a taxpayer who has incurred eligible expenditure that is deductible over 10 years - i.e. expenditure incurred on or before 17 September 1974 or incurred after that date and before 1 July 1976 pursuant to a contract made on or before 17 September 1974 - to make an election in respect of so much of the expenditure as has not been allowed and is not allowable for years of income preceding the 1974-75 income year. If the taxpayer so elects, deductions for the balance of the expenditure are spread over a period equal to 20 years as reduced by the number of earlier years in which deductions have been allowed or are allowable.

Proposed section 123BB, which is explained in the notes on clause 21 of the Bill, will apply in relation to expenditure incurred after 17 August 1976. Broadly stated, the section will permit a taxpayer to elect to spread deductions for eligible expenditure over either 10 or 20 years.

Paragraph (b) of clause 19 is a formal measure that will delete the conjunction "or" at the end of sub-paragraph 123B(1)(a)(i) consequent on the proposed addition of a new sub-paragraph (a)(iii).

Paragraph (c) of the clause inserts the new sub-paragraph (a)(iii) which will render paragraph 123B(1)(a) applicable also to eligible expenditure that is incurred after 17 August 1976. This will mean that expenditure incurred after that date will be allowable as deductions over the 10 year period provided for by paragraph 123B(1)(a) unless the taxpayer makes an election, in terms of proposed section 123BB, to take deductions on the basis provided under paragraph 123B(1)(b) i.e. in equal instalments over 20 years.

Paragraph (d) of clause 19 proposes a complementary amendment to paragraph 123B(1)(b) to ensure that the 20 year basis of deduction therein provided is limited to eligible expenditure incurred after 17 September 1974 and on or before 17 August 1976 (unless the taxpayer elects in terms of proposed section 123BB to claim deductions over 20 years in relation to expenditure incurred after 17 August 1976).

Clause 20: Election in relation to certain expenditure

This clause proposes a technical amendment to section 123BA of the Principal Act which will not disturb the operation of that section.

As previously stated, section 123BA allows a taxpayer to elect -in respect of so much of eligible expenditure incurred on or before 17 September 1974, or incurred after that date and before 1 July 1976 under a pre 18 September 1974 contract, as has not been allowed and is not allowable as a deduction in assessments for years of income prior to the 1974-75 income year - to spread deductions for the balance of the expenditure by reference, broadly stated, to a period of 20 years.

The section is a transitional measure that was introduced into Division 10AAA in 1974 when the basic period over which eligible expenditure may be deducted under the Division was increased from 10 to 20 years.

The amendment proposed by clause 20 is consequent on the amendment to paragraph 123B(1)(a) to be made by clause 19 and will ensure that a reference to that paragraph in sub-section 123BA(1), which identifies the capital expenditure which may be the subject of an election under section 123BA, does not include expenditure incurred after 17 August 1976 that is referred to in new sub-paragraph 123B(1)(a)(iii).

Clause 21: Election in relation to expenditure incurred after 17 August 1976

This clause will introduce into the Principal Act a new section - section 123BB - which, broadly stated, will enable a taxpayer who has incurred eligible expenditure after 17 August 1976, and which would otherwise be deductible in equal instalments over 10 years in terms of section 123B(1)(a) as amended by this Bill, to elect to have deductions for the expenditure spread over 20 years.

Sub-section (1) of the new section identifies the capital expenditure in respect of which an election under the section may be made, i.e. expenditure within the scope of Division 10AAA that is incurred after 17 August 1976.

Sub-section (2) is a machinery provision that specifies how and when an election under section 123BB may be made. It provides that an election is to be made in writing and signed by or on behalf of the taxpayer. The election is required to be delivered to the Commissioner of Taxation on or before the last day for the submission of the taxpayer's income tax return for the year in which the relevant transport facility is first used primarily and principally for a purpose specified in the Division. The Commissioner may, however, extend additional time for lodgment of an election.

Sub-section 123BB(3) is the operative provision and provides that expenditure in relation to which an election is made is to be treated as expenditure to which paragraph (b) of sub-section 123B(1) applies and not, as would otherwise be the case, expenditure to which paragraph (a) of that sub-section applies.

As already observed, one-twentieth of capital expenditure to which paragraph (b) of sub-section 123B(1) applies is allowable as a deduction in the first year of income in which the facility concerned is used primarily and principally for a purpose referred to in section 123A and in each of the next 19 succeeding years.

Clauses 22 to 30: Capital expenditure on prospecting and mining for petroleum

Introductory Note

Exploration expenditure incurred by a taxpayer in searching for oil or natural gas in Australia that is currently allowable as outright deductions against net assessable income from petroleum is, if incurred after 17 August 1976, to be deductible from income derived from any source, provided the Commissioner of Taxation is satisfied that a genuine business activity in exploration is being carried on.

Deductions under Division 10AA of the Principal Act for allowable capital expenditure incurred in developing an oil or natural gas field that are presently allowable only against net assessable income from petroleum are, in respect of expenditure incurred after 17 August 1976, to be allowable against income derived from any source.

Deductions under Division 10AA for allowable capital expenditure incurred in carrying on petroleum mining operations that are currently allowable over the estimated life of the field subject to a maximum life of 25 years on a reducing balance basis are, in respect of expenditures incurred after 17 August 1976, to be deductible by reference to a maximum life of field of 5 years on a reducing balance basis.

Clause 22: Purchase of prospecting or mining rights or information

This clause proposes an amendment to section 124AB of the Principal Act, consequential upon a proposed amendment to section 124AC and the proposed insertion of a new section - section 124ADA - relating to the allowance of deductions for allowable capital expenditure on a life of field basis.

Section 124AB relates to the acquisition of a petroleum prospecting or mining right or petroleum prospecting or mining information. Capital expenditure incurred by a taxpayer in acquiring such a right or information from another person may, within certain limits, be included in the allowable capital expenditure of the purchaser for purposes of Division 10AA.

This course is followed where a notice under section 124AB is given to the Commissioner by the vendor and purchaser. Broadly stated, the effect of such a notice is to transfer from the vendor to the purchaser the right to deductions for capital expenditure for which deductions have not been allowed to the vendor.

Sub-section 124AB(3) provides for limits on the amounts that may be transferred in this way. Paragraph (a) of the sub-section limits the amount to be taken into account to expenditure (other than on plant) incurred by the vendor in relation to the area which is the subject of the right or to which the information relates as would have been included in the residual capital expenditure of the vendor as at the end of the relevant year of income if the notice (or any later notice) had not been given.

The amendment to paragraph (a) of sub-section 124AB(3) proposed by clause 22 will ensure that the deductions available for transfer under the section will take into account amounts included in the residual previous capital expenditure of the vendor. As explained in the notes on clause 23, these will be amounts of allowable capital expenditure incurred on or before 17 August 1976 that are deductible on a life of field basis.

Clause 23: Residual previous capital expenditure

Section 124AC of the Principal Act provides the basis for determining the amount of the residual capital expenditure of a taxpayer as at the end of a year of income. Broadly, this is so much of the allowable capital expenditure incurred by a taxpayer up to the end of a year of income as has not been allowed as a deduction in a previous year of income. Residual capital expenditure is deductible over the estimated life of the oil or gas field to which it relates.

Clause 23 proposes an amendment to section 124AC to insert a cut-off date for allowable capital expenditure that will continue to be deductible from net assessable income from petroleum on a life of field basis, subject to a minimum deduction of 4 per cent per annum on a reducing balance basis. The termination date is to be 17 August 1976 and allowable capital expenditure incurred on or before that date will become part of "residual previous capital expenditure".

As explained in the notes on clause 25, it is proposed that allowable capital expenditure incurred after that date will be deductible from income from any source on a life of field basis, subject to a minimum deduction of 20 per cent per annum on a reducing balance basis.

The proposed amendment will replace the present sub-sections (1) and (2) of section 124AC with two new sub-sections. The new sub-sections will, in effect, provide for an expanded definition of residual previous capital expenditure".

Sub-section (1) of section 124AC prescribes the amounts to be taken into account in order to ascertain the residual previous capital expenditure as at the end of a year of income.

The first part of the calculation is to add together the amounts prescribed in paragraphs (a) and (b) of sub-section (1).

Paragraph (a) refers to allowable capital expenditure incurred on or before 17 August 1976 and before the end of the relevant year of income.

Paragraph (b) refers to any amount of allowable capital expenditure that is deemed by sub-section (2) to have been incurred in the relevant year of income or a preceding year of income.

From the sum of these two amounts is deducted the sum of the amounts specified in paragraphs (c), (d) and (e).

Sub-paragraph (i) of paragraph (c) provides for the reduction of the sum of the amounts in paragraph (a) and (b) by deductions allowed or allowable under section 124AD in respect of expenditure included in that sum in relation to a preceding year of income.

Sub-paragraph (ii) of paragraph (c) provides for the sum of paragraphs (a) and (b) to be reduced by the undeducted amount of expenditure included in that sum that is in respect of property that has been disposed of, lost or destroyed or the use of which for carrying on prescribed petroleum operations has been otherwise terminated. Property subject to a notice under section 124AB is not covered by this sub-paragraph but by paragraph (d).

Paragraph (d) provides for the sum of paragraphs (a) and (b) to be reduced by so much of amounts specified in notices under section 124AB as would, but for this paragraph, be included in the residual previous capital expenditure of the vendor of a petroleum prospecting or mining right.

Paragraph (e) requires amounts of petroleum search subsidies paid by the Australian Government in respect of expenditure incurred, broadly, after 17 September 1974 to be deducted from the sum of paragraphs (a) and (b). Where any subsidies are repayable to the Australian Government by a taxpayer, the paragraph provides, in effect, for the residual previous capital expenditure to be increased by the amount of the repayment.

Sub-section (2) applies where a taxpayer brings into use for petroleum mining operations after 17 September 1974 property that had previously been used for such operations but had ceased to be so used or property that had previously been used for non-petroleum mining operations. In these cases, provided the taxpayer incurred the expenditure on or before 17 August 1976, the sub-section provides that so much of the expenditure as the Commissioner determines shall 40.

be deemed to be incurred by the taxpayer during the year of income in which the property comes into use. This will have the effect of increasing the residual previous capital expenditure by the relevant amount.

Clause 24: Deduction of residual previous capital expenditure

This clause proposes several amendments to section 124AD of the Principal Act which are consequential on the amendments to section 124AC, by clause 23 and the proposed insertion of new section 124ADB by clause 25.

Section 124AD provides the basis of deductions for residual capital expenditure over the life of the petroleum field. The deduction for any year is ascertained by dividing the amount of the residual capital expenditure as at the end of the year of income by the lesser of the number of years in the estimated life of the field or twenty-five.

As explained in the notes on clause 23, this basis is to be retained for allowable capital expenditure incurred on or before 17 August 1976 and the expenditure to remain subject to this basis of deduction is to be rename residual previous capital expenditure". Allowable capital expenditure incurred after 17 August 1976 will become residual capital expenditure under section 124ADA to be inserted in the Principal Act by clause 25.

Paragraph (a) of clause 24 provides for the insertion in section 124AD of the word "previous" after the word "residual" wherever occurring. This will provide the distinction between the two types of residual expenditure that are to be deductible on different bases depending on the date the expenditure is incurred.

Paragraph (b) of clause 24 provides for a drafting amendment to cater for the case where allowable capital expenditure is incurred before there is an established petroleum field. In such a case, the deduction to be allowable will have regard to the estimated life of the proposed petroleum field. This amendment will bring this section into line with a similar provision in Division 10 which deals with general mining.

Paragraph (c) of clause 24 provides for an amendment consequential upon the proposed insertion of section 124ADB into the Principal Act by clause 25.

Sub-section 124AD(3) limits the deduction allowable under the section in a year of income to the amount of assessable income from petroleum that remains after allowing all other deductions other than deductions under section 124AD or 124AH in respect of exploration expenditure.

The amendment proposed by paragraph (c) will have the effect of excluding the deduction allowable under the new section 124ADB, in calculating the deduction to be allowable under section 124AD in respect of residual previous capital expenditure. The result will be that the deduction under section 124AD will be allowable before any deduction allowable under section 124ADB in respect of residual capital expenditure.

Paragraph (d) also provides for a consequential amendment as a result of the proposed insertion of section 124ADB by clause 25. It proposes the insertion in sub-section 124AD(4) of a reference to the new section 124ADB.

Clause 25: Residual capital expenditure

Clause 25 proposes the insertion of two new sections in Division 10AA of the Principal Act. These sections provide the basis for determining the amount of the residual capital expenditure of a taxpayer and the provision of deductions in respect of that expenditure.

The provision of these two sections arises from the changes announced in the 1976-77 Budget as to the basis of deductions of allowable capital expenditure incurred after 17 August 1976. As previously mentioned, this expenditure is to be deductible against income from any source with a minimum deduction of 20 per cent per annum on a reducing balance basis.

Section 124ADA: Residual capital expenditure

In broad terms, the proposed new section 124ADA provides that the residual capital expenditure will be so much of the allowable capital expenditure incurred after 17 August 1976 and up to the end of a year of income as has not been allowed as a deduction in a previous year of income. Exploration expenditure will not be included in residual capital expenditure.

Sub-section (1) of section 124ADA prescribes the amounts to be taken into account in order to ascertain the residual capital expenditure as at the end of a year of income. From the amount of allowable capital expenditure incurred after 17 August 1976 and before the end of the relevant year of income is to be deducted the sum of the amounts specified in paragraphs (c) and (d).

The opening sum of allowable capital expenditure comprises the sum of the amounts specified in paragraphs (a) and (b) of sub-section (1).

Paragraph (a) provides for the inclusion in residual capital expenditure of allowable capital expenditure incurred by a taxpayer after 17 August 1976 and before the end of the relevant year of income.

Paragraph (b) provides for the inclusion in residual capital expenditure of amounts of allowable capital expenditure incurred after 17 August 1976 deemed by sub-section 124ADA(2) to have been incurred in the relevant year of income or a preceding year of income. These will be amounts in respect of property that is brought into use for petroleum mining operations where such use had previously been terminated or where property had previously been used for non-petroleum mining operations.

Sub-paragraph (i) of paragraph (c) provides for the deduction from the sum of paragraphs (a) and (b) of any part of the expenditure included in that sum that has been allowed or is allowable as a deduction under section 124ADB from the assessable income of a preceding year of income.

Sub-paragraph (ii) of paragraph (c) provides for the deduction from the sum of paragraphs (a) and (b) of any part of the expenditure included in that sum that represents the undeducted amount of expenditure on property that has been disposed of, lost or destroyed or the use of which for carrying on prescribed petroleum operations has been terminated.

Paragraph (d) provides for the deduction from the sum of paragraphs (a) and (b) of amounts specified in notices under section 124AB that would, but for this paragraph, be included in the residual capital expenditure as at the end of the year of income.

Sub-section (2) of the new section 124ADA applies where a taxpayer brings into use for petroleum mining operations property, on which the taxpayer had incurred capital expenditure after 17 August 1976, which had previously ceased to be used for such operations or which had previously been used for non-petroleum mining operations.

In these cases, the sub-section provides that so much of the expenditure as the Commissioner of Taxation determines shall be treated as allowable capital expenditure incurred in the year of income in which the property commences or recommences to be used for petroleum mining operations. This will mean an increase in the amount of the residual capital expenditure by the amount so determined.

Sub-section (3) provides that sub-section (2) is to operate notwithstanding section 122N which is contained in Division 10 of the Principal Act.

Section 122N has the purpose of preventing double deductions in respect of an amount of capital expenditure that qualifies for deduction under the general mining provisions of Division 10. It provides that expenditure that is deductible under Division 10 is not to be deductible under any other provision of the Principal Act.

In most cases this safeguard is necessary. However, there may be cases where expenditure on an item of plant that qualifies under Division 10 ceases to be used for general mining and commences to be used for petroleum mining. Sub-section (3) will permit deductions to be allowed under Division 10AA in such a case.

Section 124ADB: Deduction of residual capital expenditure

The proposed new section 124ADB is the operative section that authorises deductions for residual capital expenditure over the life of the petroleum field.

Sub-section (1) provides that where a taxpayer has an amount of residual capital expenditure as at the end of a year of income, a deduction is allowable in accordance with section 124ADB.

Sub-section (2) provides that the deduction for any year is ascertained by dividing the amount of the residual capital expenditure as at the end of the year by the lesser of the number of years in the estimated life of the petroleum field as at the end of the year of income or five. Where a taxpayer has more than one petroleum field, a separate deduction will be calculated for each field.

The deduction (or deductions) allowable under sub-section (2) is subject to sub-section (3).

Sub-section (3) provides that the deduction allowable under section 124ADB in respect of a year of income is limited to the amount of assessable income that remains after allowing all other deductions other than a deduction under section 124ADB or under section 124AH in respect of exploration expenditure. This provision follows a similar provision in the present law and is directed to ensuring that a taxpayer will not be deprived of an effective deduction for allowable capital expenditure through the operation of section 80 of the Principal Act. This could occur where a taxpayer has insufficient income in the seven years subsequent to the year in which the deduction is allowable to recoup the full amount of that deduction.

Provision is also made for the case where a taxpayer is carrying on mining operations on more than one petroleum field. In such a case, the total deductions on all fields is limited to the net income after allowance of other deductions excluding deductions under this section and under section 124AH. Where appropriate there is to be a proportionate reduction of the deductions allowable.

An amount excluded from the deduction allowable for a particular income year under this sub-section remains in residual capital expenditure to be deducted in future years.

Sub-section (4) provides for the case where the Commissioner is not satisfied that a taxpayer's estimate of the life of a petroleum field is reasonable. In these circumstances, the sub-section gives the Commissioner power to substitute an estimated life that he considers reasonable. An opinion formed by the Commissioner pursuant to this provision will be subject to review under the general objection and appeals provisions. As mentioned in relation to general mining, the Commissioner would form his opinion on the basis of relevant information available to him which would, in appropriate cases, include expert technical advice.

Clause 26: Deductions of unrecouped previous capital expenditure

This clause proposes an amendment to section 124AF that is consequential on the proposed insertion of the new section 124ADB relating to deductions for residual capital expenditure.

Section 124AF authorises deductions in respect of unrecouped previous capital expenditure which, broadly speaking, is capital expenditure on petroleum mining operations incurred on or before 17 September 1974.

The deduction under section 124AF is limited to the net amount of assessable income from petroleum remaining after deducting from that income all deductions allowable otherwise than under sections 124AF, 124AD and 124AH. Clause 26 proposes that the deductions to be available under section 124ADB are also to be excluded in calculating the net assessable income from petroleum under this section. This will have the effect of allowing deductions under section 124AF ahead of these other three deductions where the taxpayer is in receipt of assessable income from petroleum.

Clause 27: Exploration and prospecting expenditure

Clause 27 proposes several amendments to section 124AH of the Principal Act to provide that petroleum exploration expenditure incurred after 17 August 1976 is immediately deductible from income derived from any source provided the Commissioner is satisfied that a genuine business activity in exploration is being carried on.

Petroleum exploration expenditure incurred on or before 17 August. 1976 that is at present deductible under section 124AH only against income derived from the sale of petroleum and its products will remain deductible on that basis.

Paragraph (a) of clause 27 proposes the omission of the present sub-section 124AH(2) and the substitution of a new sub-section (2).

The present sub-section (2) limits the deduction under the section to a taxpayer that derives assessable income from petroleum. It also limits the deduction allowable to so much of the assessable income from petroleum as remains after deducting all other allowable deductions relating to that income including deductions allowable under other sections of Division 10AA.

The proposed new sub-section (2) will contain these same limitations but only in respect of petroleum exploration expenditure incurred on or before 17 August 1976. Petroleum exploration expenditure incurred after that date will be deductible under the proposed new sub-section 124AH(4A).

Paragraph (b) provides for an amendment to sub-section 124AH(3) that is consequential on the proposed insertion of the new section 124ADB, relating to the deduction for residual capital expenditure.

Sub-section 124AH(3) specifies the allowable deductions to be taken into account in arriving at the net assessable income from petroleum for the purpose of calculating the deduction allowable under sub-section 124AH(2). Specifically included are deductions allowable under sections 124AD, 124AF and 124AM. This amendment will also include deductions allowable under section 124ADB in respect of residual capital expenditure. In this way, the entitlement to immediate deductions for petroleum exploration expenditure will arise after the deductions allowable under the specified provisions.

Paragraph (c) of clause 27 provides for the omission of the present sub-section 124AH(4) and the substitution of four new sub-sections - sub-sections (4), (4A), (4B) and (4C).

These amendments arise from the proposed change in the basis of deduction of petroleum exploration expenditure, viz. expenditure incurred after 17 August 1976 to be deductible against income from any source.

The present sub-section 124AH(4) applies where the exploration expenditure incurred by a taxpayer in an income year exceeds the deduction allowable in respect of that year. This may occur because the taxpayer is not in receipt of assessable income from petroleum in that year or because the amount of that income is insufficient to fully recoup that expenditure. Sub-section 124AH(4) deems this excess to be incurred in the next subsequent year in which the taxpayer derives assessable income from petroleum. This process is repeated as long as the expenditure is not fully recouped.

The proposed new sub-section (4) will be along very similar lines to the present sub-section (4) except for providing that the sub-section shall now apply only in respect of petroleum exploration expenditure incurred on or before 17 August 1976. Petroleum exploration expenditure incurred after that date is deductible in accordance with the proposed new sub-sections (4A), (4B) and (4C).

The proposed new sub-section (4A) provides for the limit on the deduction for petroleum exploration expenditure incurred after 17 August 1976. As with the present and proposed sub-section (2) of section 124AH, the purpose of the limit is to prevent a loss arising that could fail to be deductible because of insufficiency of income in the succeeding seven years.

The deduction under the new sub-section (4A) is limited to so much of the assessable income of the year of income as remains after deducting all allowable deductions other than deductions allowable in respect of exploration expenditure incurred after 17 August 1976. This will mean that all other allowable deductions, including deductions allowable for petroleum exploration expenditure incurred on or before 17 August 1976, will be deductible before the deduction available under sub-section (4A).

The proposed new sub-section (4B) applies where the exploration expenditure incurred after 17 August 1976 exceeds the deduction available in respect of the relevant year. In such a case, sub-section (4B) deems the excess to be incurred in the next subsequent income year in which the taxpayer derives assessable income.

If there is a further excess in that subsequent year, the process is repeated again in each following year until the taxpayer has received deductions for the full amount of the expenditure.

The proposed sub-section (4C) provides that a deduction is not allowable for petroleum exploration expenditure incurred after 17 August 1976 unless the Commissioner is satisfied that during the year of income -

(a)

the taxpayer carried on or proposed to carry on prescribed petroleum operations; or

(b)

the taxpayer carried on a business of petroleum exploration in Australia and the expenditure was necessarily incurred in carrying on that business.

Paragraphs (d) and (e) of clause 27 propose two amendments to sub-section 124AH(5) that are consequential on the proposed insertion of sub-section 124AH(4B).

Sub-section 124AH(5) covers the case where the whole or part of an excess amount of petroleum exploration expenditure is to be taken into account for the purpose of transferring the right to deductions for unrecouped expenditure from the vendor to the purchaser of a petroleum mining or prospecting right or information. Where such an amount is taken into account in determining the deductions available to a purchaser, sub-section (5) ensures that the same amount does not remain deductible to the vendor or become deductible to a subsequent purchaser.

At present sub-section (5) refers only to excess amounts arising under sub-section (4) which as amended by this clause relates to exploration expenditure incurred on or before 17 August 1976. The additional reference to sub- section (4B) proposed by these paragraphs will ensure that sub-section (5) also applies to excess amounts relating to exploration expenditure incurred after 17 August 1976.

Clause 28: Disposal, loss, destruction or termination of use of property

Section 124AM of the Principal Act provides for balancing charges to be made when property in respect of which expenditure has been or is deductible under Division 10AA is disposed of, lost, or destroyed, or its use for petroleum mining or petroleum exploration has been terminated.

Sub-section 124AM(4) presently limits the amount that may be allowed as a deduction on disposal, etc. of property to the net amount of assessable income from petroleum derived in the year of disposal.

Clause 28 proposes the omission of the present sub-section (4) and the substitution of a new sub-section (4). The new sub-section will provide that the limitation of the deduction to net assessable income from petroleum applies only in respect of disposals etc., on or before 17 August 1976. Where disposals etc. of property after that date give rise to a deduction that deduction will be allowable against assessable income from any source.

Clause 29: Double deductions

Clause 29 provides for two amendments of section 124AN that are consequential on the proposed insertion of new sections 122DA and 124ADB and new sub-section 124AH(4A).

Section 124AN is a general safeguarding provision the purpose of which is to prevent more than one deduction being allowed for the one amount of expenditure. It provides that where expenditure is deductible under the special petroleum mining provisions of Division 10AA, it is not to be deductible under any other provision of the income tax law.

Sub-section 124AN(2) modifies the general prohibition against deductions under more than one provision in the case of property that is used for other purposes in producing assessable income after its use in petroleum exploration or mining operations has been terminated.

The sub-section already refers to sub-section 122C(2) and it is proposed by paragraph (a) of clause 29 to include a reference to sub-section 122DA(2). As explained in the notes relating to these two sub-sections, the present deduction for residual capital expenditure of a general mining enterprise is to be split into two deductions depending on whether the expenditure was incurred on or before 17 August 1976 or after that date.

Paragraph (b) of clause 29 proposes an amendment of sub-section 124AN(3) to include references to sub-sections 124ADB(3) and 124AH(4A). As with the amendment proposed by paragraph (a) these amendments follow from the split of residual capital expenditure and exploration expenditure deductions depending on whether the expenditure was incurred on or before 17 August 1976 or after that date.

Clause 30: Reduction of allowable deductions

Clause 30 proposes an amendment to section 124AR of the Principal Act that is consequential on the insertion of the new section 124ADB relating to the deduction for residual capital expenditure.

Section 124AR authorises reductions in deductions otherwise available under Division 10AA to a company that has declared, under the now repealed section 77D, to forgo those deductions in favour of its resident shareholders.

The deductions that may be reduced consequent on such a declaration are to include deductions under section 124ADB relating to expenditure incurred after 17 August 1976. The amendment recognises the proposed split of residual previous capital expenditure and residual capital expenditure as explained in the notes on sections 124AD and 124ADB.

Clause 31: Interpretation

Clause 31 will amend section 159 of the Principal Act which defines a number of terms used in the division of that Act dealing with drought bonds - Division 16B of Part III.

A new sub-section - sub-section (5) - to be inserted in section 159 will provide for the situation in which drought bonds are converted into income equalization deposits in accordance with proposed clause 12 of the Loan (Income Equalization Deposits) Bill and deemed, by proposed new section 27A (which is to be included in the Loan (Drought Bonds) Act 1969 by clause 3 of the Loan (Drought Bonds) Amendment Bill 1976), to have been redeemed.

The proposed new sub-section (5) of section 159 will affect the operation of sub-section 159(4) in quantifying the unrecouped deduction in relation to a parcel of stock (drought bonds) at any time. This is the amount which may be subjected to tax following redemption of the parcel and is, broadly, the amount by which deductions that have been allowed in respect of the original parcel in which the stock was included exceed the amount, if any, that has been subjected to tax following redemption of any of the stock included in the original parcel.

Paragraph (a) of proposed new sub-section (5) will provide that a reference in sub-section (4) to stock that has been redeemed is to include a reference to stock that has been converted into an income equalization deposit.

Paragraph (b) provides that the amount of any stock converted into an income equalization deposit will be deemed to have been included in assessable income and will therefore reduce the amount of the unrecouped deductions in respect of the original parcel of stock. It should be noted that a parcel of stock (drought bonds) may be converted into an income equalization deposit only to the extent of the unrecouped deduction in respect of the parcel - hence the unrecouped deduction is reduced by the full amount of the conversion. There is deemed under proposed section 159GA(4) to be an unrecouped deduction of a like amount in respect of the conversion deposit.

Clause 32: Deductions in respect of drought bonds

Under section 159A of the Principal Act a deduction may be allowed in respect of the purchase of drought bonds issued in pursuance of the Loan (Drought Bonds) Act 1969. One of the limits on the amount deductible in respect of drought bonds is imposed by sub-section 159A(10) under which the deduction is not to exceed the amount of the assessable income less all other deductions. Deductions may be allowed in respect of drought bonds issued to a taxpayer in the 12 months period ending 2 months after the end of a year of income or in respect of drought bonds issued to him in an earlier period if a deduction has not previously been allowed.

As drought bonds were on issue until 31 August 1976 there may be cases in which a taxpayer will be eligible for deductions for both drought bonds and income equalization deposits in his assessment for the 1975-76 income year. Also by reason of the re-issue of bonds to the purchaser of a grazing business and the right to deductions for drought bonds not allowable in earlier years it is possible that a taxpayer will be entitled to claim deductions for both drought bonds and income equalization deposits in a year later than 1975-76.

To resolve a situation in which a taxpayer's assessable income and other allowable deductions may be such that both claims could not be allowed without creating a loss, priority is to be given to the deduction in respect of drought bonds. This will be achieved by the amendment of sub-section 159A(10) proposed by clause 32 of the Bill. As amended, sub-section 159A(10) will provide that the limit on deductions for drought bonds will be ascertained by deducting from the assessable income all of the allowable deductions other than those allowable under Division 16C in respect of income equalization deposits. The deductions for income equalization deposits will, by proposed section 159GC, be limited to the amount that would be the taxable income after deducting all allowable deductions including those in respect of drought bonds but before deducting those in respect of income equalization deposits.

Clause 33: Other redemptions - Liability of holder to pay income tax equal to tax saved

Where drought bonds are redeemed other than in consequence of drought, fire or flood, section 159C of the Principal Act provides for the imposition of tax on the proceeds of redemption equal to the tax saved as a result of any deductions allowed in respect of the bonds.

Under the provisions of the Loan (Income Equalization Deposits) Bill 1976, a holder of drought bonds is to be given the right to convert his holding, up to the amount of any unrecouped deductions, into an income equalization deposit and, by an amendment proposed by the Loan (Drought Bonds) Amendment Bill 1976, bonds so converted are to be deemed to have been redeemed.

Clause 33 of the Bill will amend section 159C of the Principal Act, which provides for the recapture of tax previously saved as a result of a deduction for drought bonds when bonds are redeemed other than in consequence of drought, fire or flood. A new sub-section - sub-section (3A) - is to be inserted in section 159C which will exclude from the scope of the section, drought bonds that are deemed to have been redeemed on conversion to income equalization deposits. Accordingly, a conversion of drought bonds into an income equalization deposit will not have any immediate income tax consequences. Any subsequent withdrawal of the whole or part of the income equalization deposit will, under provisions to be inserted in the Principal Act by clause 34, result in the inclusion in assessable income of an amount equal to the amount of the withdrawal.

Clause 34: Income equalization deposits

Introductory Note

A new Division - Division 16C - to be inserted by clause 34 in Part III of the Principal Act will, in conjunction with the Loan (Income Equalization Deposits) Bill 1976, introduce the scheme for income equalization deposits for primary producers that was foreshadowed in the Budget Speech.

The scheme will provide for the allowance of deductions for moneys deposited with the Commissioner of Taxation in accordance with the provisions of the Loan (Income Equalization Deposits) Bill and for the inclusion in assessable income of proceeds received on withdrawal of deposits.

More important features of the income equalization deposits scheme are summarised below.

•

In general, amounts placed on deposit with the Commissioner of Taxation by primary producers, during the 12 months period ending 2 months after the end of the income year, will be allowable as income tax deductions in respect of that year, i.e. a primary producer whose tax year ends on 30 June will have until 31 August each year to ascertain his income for the year, and to decide what deposit, if any, it is desirable to lodge.

•

Deposits will bear interest, initially at 5 per cent per annum, on the full amount placed on deposit.

•

Deductions under the scheme are to be limited to taxable income other than income from property and, in any event, are not to exceed 40 per cent of gross primary production income for the particular year of income. The total deductions allowed in respect of deposits and drought bonds are not to exceed $100,000 at any one time.

•

Deductions will not be allowable for deposits made and withdrawn within a 12 months period ending 2 months after the close of the year of income - i.e. a deposit lodged on 31 July 1977, in respect of the income year ended 30 June 1977, and withdrawn on 30 August 1977 will not be allowable as a tax deduction.

•

Deposits may be withdrawn upon application made at any time by the depositor if an income tax deduction is not allowable, e.g., because the depositor is not a primary producer, or because he currently has over $100,000 on deposit.

•

Generally, however, income equalization deposits for which deductions are allowable may not be withdrawn within 12 months after lodgment, except on grounds of serious financial difficulties due to circumstances not in existence at the time of deposit.

•

In relation to the 1975-76 year of income (the first year of the scheme), special provisions will permit deposits made by 31 January 1977 to be withdrawn on hardship grounds at any time, although the hardship was due to conditions (e.g., drought) that had occurred before the deposit was made.

•

Withdrawal of deposits outside the 12 months period will be authorised by the Commissioner at the request of the depositor.

•

The proceeds of withdrawals of deposits are to be assessable to the extent of deductions allowed, and are to be included as assessable income of the year of income in which the application to withdraw a deposit is made.

•

Deposits will become redeemable immediately on the death or bankruptcy of a taxpayer or, in the case of a company, on the commencement of winding up proceedings.

•

Drought bonds will be convertible into income equalization deposits at the request of the holder.

•

Provisional tax in respect of a year of income following a year in which income equalization deposits are lodged or withdrawn will be notified as if there had been no deposit or withdrawal.

The new Division 16C will comprise sections 159GA to 159GD. Explanations of the provisions of the proposed sections are given in the following notes.

Section 159GA: Interpretation

Section 159GA explains the meanings given to certain words and phrases used in the Division. Sub-section (1) of the section contains a number of definitions.

"conversion deposit" is a term used to refer to a deposit that results from a conversion of drought bonds. Clause 12 of the Loan (Income Equalization Deposits) Bill will enable a holder of drought bonds to convert the holding, to the extent of any deductions previously allowed, into an income equalization deposit. The resultant deposit is referred to in the new Division 16C as a conversion deposit to distinguish it from a deposit made in cash.

"deposit" is defined as a deposit made in pursuance of the Loan (Income Equalization Deposits) Act 1976. The term also includes a conversion deposit.

"depositor" is defined in relation to a deposit as the person who made, or is deemed by proposed section 159GB to have made, the deposit. Under section 159GB, a beneficiary in a deceased estate may, in certain specified circumstances, be deemed to have made a deposit that has been lodged by the trustee of the estate on the beneficiary's behalf.

"drought bonds" means stock issued as drought bonds in pursuance of the Loan (Drought Bonds) Act 1969.

"gross receipts from primary production" is a compendious term which, by paragraph (a) of the definition, means so much of a taxpayer's assessable income of a year of income as is derived from carrying on in Australia a business of primary production. It will not, however, reflect amounts included in assessable income in relation to the value of trading stock on hand at the beginning and end of a year of income.

Under paragraph (b) of the definition "gross receipts from primary production" also includes, where a taxpayer is a member of a partnership, the individual interest of the partner in the gross primary production receipts of the partnership.

Where a partnership derives the whole of its income from a business of primary production, a partner's share in the partnership's gross receipts from primary production, calculated as if it were a taxpayer, will, under sub-paragraph (i), be a proportionate part of those receipts calculated by reference to the partner's share of the net income of the partnership. Where the partnership does not derive the whole of its income from a business of primary production the partner's share in the firm's gross receipts from primary production will, by sub-paragraph (ii), be so much of those receipts as the Commissioner considers reasonable. Where, for example, a partnership derives income from primary production and from some other source, and the partners do not share income from both sources in the same proportions, the Commissioner will be able to take this into account in ascertaining the individual partner's share in the partnership's gross receipts from primary production.

Where a taxpayer is a beneficiary presently entitled to a share in the net income derived by a trust estate from a business of primary production, the gross receipts from primary production will, by paragraph (c) of the definition, also include so much of the amount that would be the gross receipts from primary production of the trust estate, if the trust estate were a taxpayer, as the Commissioner considers reasonable.

The definition of "gross receipts from primary production", which is governed also by sub-section 159GA(2), is central to the income equalization deposits scheme. This is because one of the limits placed on the amounts allowable as a deduction in respect of a deposit made in relation to a year of income is related to the amount of the taxpayer's gross receipts from primary production for the year of income. Under proposed sub-section 159GC(4) the deduction is not to exceed 40 per cent of those gross receipts. No amount would be allowable as a deduction in respect of income equalization deposits made in relation to a year of income in which the taxpayer did not derive assessable income from carrying on primary production.

In the context of the new scheme, primary production carries the same meaning a-, for income tax purposes generally, i.e. production resulting directly from the cultivation of land, the maintenance of animals or poultry for the purpose of selling them or their bodily produce (including natural increase), fishing operations or forest operations.

"relevant period" is given different connotations in relation to the income years 1975-76, 1976-77 and all income years subsequent to 1976-77. Under proposed section 159GC, deductions may be allowed in an assessment in respect of a year of income for deposits made during the relevant period in relation to the year of income. In terms of paragraph (c) of the definition this will be, for 1977-78 and later years, the period of 12 months ending two months after the end of the year of income. For the 1975-76 income year, however, the relevant period will, under paragraph (a) of the definition, commence when the Loan (Income Equalization Deposits) Act 1976 comes into force and end on 31 January 1977. Under paragraph (b) the relevant period for the 1976-77 income year will commence on 1 February 1977 and end two months after the end of the year of income, i.e. it will end on 31 August 1977 for a taxpayer with a regular accounting period ending 30 June 1977.

Sub-section (2) of proposed section 159GA provides that, for the purposes of the definition in sub-section (1) of "gross receipts from primary production", the assessable income is to be calculated as if sections of the Principal Act, which result in certain types of income being spread over a number of years for income tax purposes or for the inclusion in assessable income of amounts deemed to be assessable income, were not applicable. This will permit the amount of gross receipts from primary production and the upper limit for deposits to be determined by reference to the assessable income actually derived by a taxpayer in a particular year.

Sub-section (3) states when an unrecouped deduction is to be deemed to exist in relation to an income equalization deposit and quantifies the amount of the unrecouped deduction. The unrecouped deduction in respect of a deposit is the amount that may be included in the assessable income of a depositor when a deposit becomes repayable.

By paragraph (a) of sub-section (3) of section 159GA an unrecouped deduction is to be deemed to exist when the amount of a deduction allowable in pursuance of Division 16C in respect of a deposit exceeds the amount, if any, that has been included in assessable income by reason of any part of the deposit having become repayable. The amount of the unrecouped deduction is, by paragraph (b), the amount of the excess.

Sub-section (4) provides that, for the purposes of sub-section (3), a deduction equal to the amount of any conversion deposit shall be deemed to have been allowed under Division 16C in respect of the deposit. As explained in relation to the definition of "conversion deposit" in sub-section (1), the holder of a parcel of drought bonds will be permitted to convert the parcel into an income equalization deposit to the extent of the unrecouped deductions in respect of those drought bonds under Division 16B. The amount deemed to be allowed under Division 16C in respect of a conversion deposit will, therefore, match the unrecouped deductions under Division 16B in respect of the parcel prior to the conversion.

Section 159GB: Beneficiary of trust estate

By sub-section (1) of proposed section 159GB, a beneficiary in a trust estate is deemed to have carried on in Australia a business of primary production in a year of income if presently entitled to a share of income from such a business that was carried on in Australia by the trustee during the year. As a result, a beneficiary entitled to a share of the income of a primary production business carried on by the trustee of any trust estate, may be entitled to deductions under the income equalization deposits scheme for deposits made by the beneficiary on his own account or deemed to have been made by him under sub-section 159GB(2).

By sub-section (2) of proposed section 159GB, a beneficiary will be deemed in certain circumstances to have made a deposit under the income equalization deposits scheme when a deposit has been made on his behalf by a trustee of a trust estate.

Under clause 11 of the Loan (Income Equalization Deposits) Bill 1976 the trustee of a deceased estate will be permitted to make an income equalization deposit on behalf of a beneficiary only where the beneficiary concerned has a presently existing entitlement to a share of the income of the estate but is under a legal disability. Where a deposit has been so made, the beneficiary will be deemed to have made the deposit on the day on which it was made if, by reason of being a beneficiary in the estate, sub-section (1) of section 159GB applies to treat the beneficiary as having carried on a business of primary production in Australia in the year of income.

Sub-section (3) of proposed section 159GB provides that, for the purposes of the section, an eligible trust estate is one that resulted from a will or an intestacy or an order from the Court varying or modifying a will or the provisions of the law relating to intestacy, i.e. a deceased estate.

Section 159GC: Deductions in respect of income equalization deposits

Section 159GC will provide for the allowance of deductions in respect of income equalization deposits. The section will specify the conditions under which the deductions are allowable and the limits to apply to the amounts allowable as deductions.

Stated broadly, deductions will be allowable in accordance with the section to a taxpayer for the amount of deposits made by the taxpayer during the "relevant period" in relation to a year of income. By virtue of the definition in proposed sub-section 159GA(1), the "relevant period" in relation to a year of income is, subject to the phasing-in arrangements for 1975-76 and 1976-77, the 12 months period ending two months after the end of the year of income. The deduction allowable under the section in respect of any year of income, together with any deductions for drought bonds under Division 16B, is not to exceed 40 per cent of a taxpayer's gross receipts from primary production during that year. Further the deduction is not to exceed the amount that would, apart from the deduction, be a taxpayer's taxable income from sources other than property. Finally the unrecouped deductions in respect of both drought bonds (Division 16B) and income equalization deposits (Division 16C) are not, at any time, to exceed $100,000.

Sub-section (1) of proposed section 159GC provides that deductions in respect of income equalization deposits are allowable in accordance with the provisions of the section.

Sub-section (2) provides that, subject to the succeeding provisions of the section, deductions are allowable to a taxpayer, in relation to a year of income, equal to the amount of a deposit made by the taxpayer during the relevant period in relation to the year of income if, during any part of the year of income, the taxpayer carried on in Australia a business of primary production.

The sub-section does not specifically exclude any particular class of taxpayer. However, because a provision of the Loan (Income Equalization Deposits) Bill will prevent an income equalization deposit being made by 2 or more persons jointly, no question will arise of any deduction for an income equalization deposit in ascertaining the net income of a partnership. An individual partner in a primary production partnership will, however, be entitled to claim a deduction in respect of deposits made on that partner's own account subject, of course, to the limits imposed by other provisions of the section.

Moreover, the amendment of section 95 proposed by clause 7 of the Bill, ensures that deductions under Division 16C, for income equalization deposits, are not to be taken into account in ascertaining the net income of a trust estate. Accordingly, no deduction can be allowable under section 159GC, even if a deposit should be made by a trustee in circumstances in which it is not deemed to have been made by a beneficiary, e.g. where a deposit is made on behalf of a beneficiary in a deceased estate who does not share in the income of a primary production business carried on by the trustee.

Sub-section (3) modifies the operation of sub-section (2). It provides that a deposit in respect of which a deduction may be allowed under sub-section (2) does not include -

(a)

a conversion deposit, i.e. a deposit that resulted from the conversion of drought bonds; or

(b)

a deposit that becomes repayable as a result of -

(i)

a declaration under clause 16 of the Loan (Income Equalization Deposits) Bill 1976 in pursuance of a request made before the end of the relevant period in which it was made; or

(ii)

a declaration under clause 20 of that Bill in consequence of the taxpayer having died or become bankrupt or, being a company, commencing to be wound-up before the end of that period.

Because of the exclusion of a conversion deposit by paragraph (a), a deduction will not be allowed twice for the purchase of a holding of drought bonds that is later converted to an income equalization deposit. By virtue of clause 12 of the Loan (Income Equalization Deposits) Bill, a holding of drought bonds may be converted into an income equalization deposit only to the extent of the unrecouped deductions in respect of the drought bonds at the time of conversion.

Paragraph (b) will ensure that, where a deposit becomes repayable as a result of action taken by the depositor before the end of the relevant period in which it is made or in consequence of the death etc., of the depositor before the end of that period, a deduction is not to be allowable in respect of the deposit. This paragraph will be relevant if, for example, a deposit were to be made by a person in the relevant period in relation to the 1976-77 income year, say in July 1977, and the deposit were to become repayable as a result of a request made on or before 31 August 1977. In such a situation, no deduction would be allowable in respect of the deposit. Similarly, no amount would then, by virtue of proposed section 159GD, be included in assessable income in respect of its withdrawal.

Sub-sections (4) to (9) impose a number of restrictions on the amount that would otherwise be allowable as a deduction for a year of income in pursuance of sub-section (2) as affected by sub-section (3).

Sub-section (4) imposes a limit in relation to the amount of the "gross receipts from primary-production" for a year of income as defined in sub-section (1) of proposed section 159GA. Where a depositor is not entitled to a deduction under section 159A in respect of the purchase of drought bonds the limit is, by paragraph (b) of sub-section (4), an amount equal to 40 per cent of those gross receipts. Where there is an entitlement under section 159A the limit is by paragraph (a) reduced by the amount of that entitlement.

Sub-section (5) will limit the deductions otherwise allowable in respect of a year of income to an amount necessary to keep the amount of the unrecouped deductions at any time in respect of a taxpayer's total holdings of drought bonds and any equalization deposits below a ceiling of $100,000.

Paragraph (a) of sub-section (5) applies where, at the end of the relevant period, there is no unrecouped deduction in respect of -

(i)

a conversion deposit made at any time or any other income equalization deposit made before the commencement of the relevant period in relation to the year of income; or

(ii)

drought bonds issued to the taxpayer before or during the relevant period in relation to the year of income.

In this situation the deduction for the year of income is not to exceed $100,000. Where there are, at the end of the relevant period in relation to the year of income, any unrecouped deductions in respect of drought bonds or income equalization deposits referred to in (i) or (ii) above, the deduction otherwise allowable for the year of income is not to exceed the amount by which $100,000 exceeds the sum of those unrecouped deductions.

By sub-section (6), the deduction under the Division to which a taxpayer may be entitled in relation to a particular income year is limited to the amount of the taxable income other than income from property for that year. In this context taxable income is by sub-section (7) to be read as a reference to the amount that would be the taxable income but for a deduction in respect of income equalization deposits. The effect of sub-sections (6) and (7) taken together is that deductions for income equalization deposits will not be allowable against property income and will not be capable of creating or increasing, a loss for income tax purposes for a year of income.

Sub-sections (8) and (9) together deal with the situation where the amount otherwise allowable as a deduction exceeds the taxable income and the taxable income is not an exact multiple of $100.

Under sub-section (8) no deduction is allowable if the taxable income, in the sense in which the term is used in sub-sections (6) and (7), is less than $100. Under sub-section (9) the deduction otherwise allowable is reduced by the amount by which the taxable income exceeds an exact multiple of $100. A deduction for an income equalization deposit cannot therefore be anything other than an exact multiple of $100. As deposits may be made only in multiples of $100, a rounding problem does not arise where the deduction otherwise allowable exceeds the taxable income in the sense the term is used in sub-sections (6) and (7).

Sub-section (10) applies where amounts otherwise deductible in respect of 2 or more deposits cannot be allowed in full because of the limits imposed by sub-sections (4), (5), (6) and (9). It provides in effect that deposits will be regarded as having been deducted, up to the amount of the relevant limit, in the order in which they were made. This provision has relevance for the purpose of ascertaining the unrecouped deduction in respect of a deposit at any time, in particular when a deposit or part of it becomes repayable.

Section 159GD: Unrecouped deduction included in assessable income on becoming repayable

This section deals with the income tax consequences of a deposit, in respect of which there is an unrecouped deduction, becoming repayable. Briefly, the section provides that, when a deposit becomes repayable in a year of income, the assessable income of the taxpayer concerned is to include an amount equal to the unrecouped deductions in respect of the deposit. When part only of a deposit becomes repayable, and the amount of the deposit is greater than the amount of the unrecouped deduction in respect of the deposit, the excess will be regarded as being the first to become repayable. The amount to be included in assessable income in this situation will, accordingly, be reduced to take into account the part of the deposit for which no deduction had been allowed.

The conditions under which deposits may become repayable are specified in clauses 16-20 of the Loan (Income Equalization Deposits) Bill 1976.

Clause 16 will provide for redemption within 12 months of the date of a deposit at the request of a depositor who is experiencing serious financial difficulties. Clause 17 will provide for redemption at the request of the depositor at any time after the expiration of 12 months from the date a deposit is made. Clauses 18 and 19 will provide for redemptions of deposits or parts of deposits in respect of which an income tax deduction is not allowable. Clause 20 will provide for redemption on the death or bankruptcy of a depositor or, if the depositor is a company, on commencing to be wound up.

Redemption in pursuance of clauses 18 and 19 will have no consequence for income tax purposes. Therefore section 159GD makes provision only for redemption in pursuance of clauses 16, 17 and 20 of the Loan (Income Equalization Deposits) Bill.

Sub-section (1) of proposed section 159GD applies where -

(a)

a deposit becomes repayable following a request under clause 16 or 17 of the Loan (Income Equalization Deposits) Bill 1976; and

(b)

immediately before the making of the request there was an unrecouped deduction in respect of the deposit.

The sub-section will, however, have no application in relation to a deposit becoming repayable in consequence of a request made before the end of the relevant period in which it is made, since no deduction will be allowable under section 159GC in respect of such a deposit.

The amount to be included in the assessable income where a deposit to which sub-section (1) applies becomes repayable is governed by paragraphs (c) and (d) of the sub-section. Paragraph (c) provides that, where the whole of a deposit becomes repayable, the assessable income of the year of income in which the request was made is to include an amount equal to the unrecouped deductions immediately before the request was made. Where part only of a deposit becomes repayable, the amount to be included in the assessable income is the amount of the unrecouped deduction immediately before the request was made less any balance remaining on deposit after the amount specified in the request has become repayable. This, of course, has the effect of treating the undeducted portion of a deposit as being the first to become repayable. There would be no amount to be included in assessable income if the amount becoming repayable did not exceed the undeducted portion of the deposit.

Sub-section (2) applies where a deposit, in respect of which an unrecouped deduction exists, becomes repayable in consequence of clause 20 of the Loan (Income Equalization Deposits) Bill 1976, by reason of the death or bankruptcy of the depositor (or winding up of a company) after the end of the relevant period in which the deposit was made. In this situation, where the whole of the deposit becomes repayable, it follows that the whole of the unrecouped deduction is to be included in the assessable income of the year in which the death, etc., of the depositor occurs.

It will be noted that sub-section (2) refers only to deposits that become repayable by reason of the death, etc., of a depositor after the end of the relevant period in which a deposit was made. Where the death, etc., occurs before the end of the relevant period in which a deposit is made, there will, by virtue of section 159GC(3), be no deduction allowable in respect of the deposit and no amount would then be included in assessable income.

By sub-section (3) of proposed section 159GD, section 101A of the Principal Act is not to apply to any amount received by the trustee of the estate of a deceased depositor as the result of the whole or part of a deposit made by the deceased person becoming repayable. Section 101A provides that, where, in a year of income, the trustee of the estate of a deceased person receives any amount that would have been assessable income of the deceased person if received during his lifetime, the amount is assessable income of that year of the trust estate and is deemed to be income to which no beneficiary is presently entitled.

Where an amount becomes repayable in respect of a deposit made by any person, any income tax consequences of the deposit becoming repayable are to be reflected in assessments of the depositor. Under section 159GD the amount to be included in assessable income when a deposit becomes repayable will be brought to account, either in the assessment for the year in which a request is made, or in the assessment for the period up to the date of death of the depositor.

Clause 35: Amendment of assessments

This clause will 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 the section is to prevent the amendment of an assessment at any time for the purpose of giving effect to specified provisions of the Principal Act.

By paragraph (a) of sub-clause (1) it is proposed to insert in sub-section 170(10) a reference to proposed new Division 16C which will provide for the allowance of deductions in respect of moneys deposited under the income equalization deposits scheme and for the inclusion of an amount in assessable income when a deposit becomes repayable.

As amended, sub-section 170(10) will provide the necessary authority for the Commissioner to amend an assessment in respect of a year of income where, for example, after the assessment has been made a deposit becomes repayable as a result of a declaration in pursuance of a request made before the end of the year of income under clause 16 of the Loan (Income Equalization Deposits) Bill 1976 i.e. a request on the grounds of serious financial difficulties being experienced by the person in respect of whom the deposit was made.

The provision will have particular significance however for the 1975-76 income year in respect of which deposits may be made at any time up to 31 January 1977. If a deposit is made on or before that date and a notice of assessment in respect of 1975-76 income issues without the allowance of a deduction to which the taxpayer is entitled, an amendment will be permitted without limit as to time. This will be the case whether the assessment has been made before 31 January 1977 or is made after that date.

Paragraph (b) of sub-clause (1) removes the reference to section 106C from section 170(13) of the Principal Act. This amendment is consequential upon the repeal of section 106C of the Principal Act by clause 6(1) of the Amending Act.

Under sub-clause (2) of clause 35, the amendment of section 170(13) by paragraph (b) of sub-clause (1) will apply to the undistributed income tax assessments of private companies in relation to income of the 1976-77 income year and subsequent income years.

Clause 36: Interpretation

By clause 36 of the Bill, it is proposed to insert in section 221YA of the Principal Act a new sub-section -sub-section (5) - which will affect the definition of "provisional income" in sub-section (1) of that section where, in accordance with the proposed Division 16C of Part III, a deduction is allowed for an income equalization deposit or an amount is included in assessable income in respect of the redemption of an income equalization deposit.

In broad terms, provisional tax payable in respect of a year of income is calculated by reference to the provisional income in respect of that year. In the normal case this is an amount equal to the taxable income of a taxpayer for the next preceding year of income. The effect of the proposed sub-section 221YA(5) will be to substitute for the taxable income of the preceding year, the amount that would have been the taxable income for that year but for the application of the provisions of the proposed new Division 16C, i.e. but for the allowance of a deduction under proposed section 159GC or the inclusion in assessable income of an amount under section 159GD.

Clause 37: Amendments of Income Tax Assessment Act 1975

This clause will amend transitional provisions included in sections 34 and 36 of the Income Tax Assessment Act 1975, subject to which the allowance of deductions to Australian resident taxpayers for capital expenditure incurred from the time of Papua New Guinea's independence (16 September 1975) in relation to general mining activities and petroleum activities in Papua New Guinea was discontinued. These transitional provisions preserved entitlements to deductions for eligible capital expenditure incurred up to 30 June 1976 in pursuance of a contract made before the date of introduction of the amending Bill (22 May 1975). A limited extension for expenditure up to 30 June 1978 is now proposed.

Briefly, clause 37 will extend the transitional provisions so that deductions will be available for certain capital expenditure incurred before 1 July 1978 by Australian residents in exploration or prospecting for minerals or petroleum in Papua New Guinea.

Sub-clause (1) of clause 37 will amend section 34 of the Income Tax Assessment Act 1975 (that deals with general mining) by omitting sub-section (2) - the transitional provision - and substituting a new sub-section.

Paragraph (a) of new sub-section 34(2) in effect re-enacts the provisions of the present sub-section 34(2). Under it, a deduction is available for capital expenditure incurred by a taxpayer on mining operations in Papua New Guinea if incurred before 1 July 1976 in pursuance of a contract made before 22 May 1975, being a contract under which property was to be acquired by, or work was to be performed for, the taxpayer.

Paragraph (b) is a new provision, the effect of which will be that eligible capital expenditure incurred by an Australian resident taxpayer on exploration or prospecting for minerals in Papua New Guinea will also be allowable if incurred before 1 July 1978 in pursuance of an authority, licence, permit or right to explore or prospect for minerals granted to the taxpayer by the Papua New Guinea Government prior to Papua New Guinea independence day.

Paragraph (c) will extend transitional benefits, corresponding with those proposed by paragraph (b), to capital expenditure incurred before 1 July 1978 by an Australian resident taxpayer on exploration or prospecting for minerals in Papua New Guinea pursuant to an authority, licence, permit or right granted to another person by the Papua New Guinea government before Papua New Guinea independence day where:

•

the exploration or prospecting is carried out in pursuance of "farm-in" arrangements between the taxpayer and that other person entered into before Papua New Guinea independence day (sub-paragraph (i)); or

•

the exploration or prospecting is carried out in pursuance of an agreement between the taxpayer and the Papua New Guinea government entered into on or after Papua New Guinea independence day and before 1 July 1976 in pursuance of written arrangements with the Papua New Guinea government made before Papua New Guinea independence day (sub-paragraph (ii))

Sub-clause (2) of clause 37 will similarly amend the transitional provisions relating to petroleum activities included in section 36 of the Income Tax Assessment Act 1975. The new transitional provisions to be inserted by this sub-clause will have equivalent effects, in respect of petroleum exploration and prospecting activities in Papua New Guinea, to those described in the notes on sub-clause (1) in relation to other mineral exploration and prospecting activities in Papua New Guinea.

LOAN (INCOME EQUALIZATION DEPOSITS) BILL 1976

The purpose of this Bill is to prescribe the terms and conditions under which deposits may be made and redeemed under the income equalization deposits scheme, the main features of which have been summarised in an introductory note to clause 34 of the Income Tax Assessment Amendment Act (No. 3) 1976 elsewhere in this memorandum.

In the notes that follow each clause of the Bill is explained in detail.

Clause 1: Short title

This clause provides the short title of the Act.

The Act will authorise the borrowing of moneys by the accepting of deposits which will be known as "Income Equalization Deposits".

Clause 2: Commencement

The Act is to come into operation when it receives the Royal Assent. Deposits under the scheme will be accepted once the Act is passed into law.

Clause 3: Interpretation

Sub-clause (1) defines the principal terms employed in the Bill.

"authorised person" means the Commissioner of Taxation. Under the Bill deposits are to be made with the Commissioner and applications for repayment of deposits are to be made to the Commissioner.

"Board of Review" means a Board of Review constituted under the Income Tax Assessment Act 1936.

"deposit" means an income equalization deposit made in pursuance of the Bill.

"request" means a request under section 16, 17, 18 or 19, i.e. a request for repayment of a deposit under section 17, 18 or 19 or a request under section 16 for a declaration by the Commissioner that a deposit is repayable on the grounds that the person in respect of whom the deposit was made is experiencing serious financial difficulties.

"stock" means drought bonds issued under the Loan (Drought Bonds) Act 1969. Provision is being made for conversion of drought bonds into income equalization deposits in certain circumstances.

"year of income" is given the same meaning as in the Income Tax Assessment Act 1936.

Sub-clause (2) defines the term "depositor" as it is used in the Bill.

Where a deposit has been made by a person on his own behalf, a reference in the Bill to the depositor in relation to that deposit is a reference to that person. Where, however, a deposit has been made by the trustee of a trust estate on behalf of a beneficiary under a legal disability, a reference to a depositor in relation to the deposit is a reference to the trustee, until the disability ceases, and thereafter a reference to the beneficiary.

Clause 4: Borrowings by accepting deposits

Sub-clause (1) will authorise the Treasurer to borrow moneys by accepting deposits.

Sub-clause (2) describes deposits accepted under authority of the Act as "Income Equalization Deposits".

Sub-clause (3) provides that a deposit may not be made by or on behalf of two or more persons jointly. This means, for example, that partnerships, as such, will not be permitted to make deposits. However, the individual partners in a partnership will be able to make deposits on their own account for which they may be eligible for income tax deductions in accordance with the provisions of the income tax law. It will be noted also that, by clause 11 of the Bill, a trustee of a trust estate may make a deposit only in the circumstances specified in the clause and only on behalf of a named beneficiary. However, a beneficiary in any trust estate will be permitted to make deposits on his own account. For practical purposes, therefore, deposits may be made by any individual (including a partner in a partnership or a beneficiary in a trust estate), a company, or a trustee of a trust estate on behalf of a beneficiary in the circumstances specified in clause 11.

Sub-clause (4) provides that the rate of interest payable in respect of deposits will be 5 per cent per annum, but will be variable by Regulation.

Sub-clause (5) restricts the lodgment of deposits to amounts of $100 or multiples of $100. Similarly, under clause 21, deposits can only be withdrawn in amounts of $100 or multiples of $100.

Sub-clause (6) authorises the Treasurer to determine terms and conditions on which the deposits will be accepted. The Treasurer's determination would relate to matters not provided by the Act. In particular, the Treasurer's determination would be subject to sub-clauses (3), (4) and (5) of this clause and to Part III of the Act which lays down the terms and conditions relating to redemption.

In accordance with normal loan raising procedures, approval for the terms and conditions has been sought and obtained from the Australian Loan Council. All terms and conditions as specified in the Act and Regulations and as determined by the Treasurer under this clause will be set out fully in a statement which will be available to the public.

Clause 5: Records relating to deposits

Sub-clause (1) obliges the Treasurer to cause records to be kept in relation to the making or repayment of deposits.

Sub-clause (2) provides that the Commissioner of Taxation may certify matters relating to the making or redemption of a deposit. Sub-clause (3) provides that a document purporting to be a certificate under sub-clause (2) shall, unless the contrary is established, be deemed to be a certificate duly made.

Clause 6: Expenses and interest to be paid out of Consolidated Revenue Fund

This clause appropriates the Consolidated Revenue Fund to the extent necessary to meet the expenses of flotation and management and interest payments due on income equalization deposits.

Clause 7: Establishment of Income Equalization Deposits Trust Account

Sub-clause (1) establishes the Income Equalization Deposits Trust Account.

Sub-clause (2) provides that it is a Trust Account for the purposes of section 62A of the Audit Act 1901. This will permit the investment of funds standing to the credit of the Trust Account in Commonwealth securities. Interest earned by these investments will be paid to the Consolidated Revenue Fund.

Clause 8: Loan moneys to be paid into Trust Account

Proceeds received by acceptance of income equalization deposits will, in accordance with the Audit Act, be paid to the Loan Fund.

Sub-clause (1) appropriates the Loan Fund to the extent necessary to transfer these proceeds to the Income Equalization Deposits Trust Account.

Sub-clause (2) provides that income equalization deposits will be repayable from the Trust Account.

This procedure was also adopted in respect of the drought bonds scheme, which will be replaced and extended by the income equalization deposits scheme.

Clause 9: National debt sinking fund not to apply

Since repayment of the deposits is to be made from the Trust Account established by clause 8, there is no need for the Commonwealth to make sinking fund contributions in respect of income equalization deposits accepted. The Bill accordingly provides that the National Debt Sinking Fund Act shall not apply to amounts deposited.

This procedure was also adopted in respect of the drought bonds scheme, which will be replaced and extended by the income equalization deposits scheme.

Clause 10: Manner of making deposits

Clause 10 of the Bill provides that a deposit is to be accompanied by an application on a form made available by the authorised person, i.e. the Commissioner of Taxation and is to contain such information as is required by the form.

Clause 11: Deposits on behalf of beneficiaries of certain trust estates

Clause 11 specifies the circumstances in which a deposit may be made by the trustee of a trust estate on behalf of a beneficiary.

Sub-clause (1) of clause 11 provides that a deposit may be made by the trustee of an "eligible trust estate" on behalf of a beneficiary who is presently entitled to a share of the trust income but is under a legal disability.

For the purposes of the Income Tax Assessment Act, a deposit so made will be deemed, by proposed section 159GB of that Act, to have been made by the beneficiary if the trust estate carries on a business of primary production and, by virtue of his interest in the income of the estate, the beneficiary is deemed by that section to be a primary producer.

Sub-clause (2) of clause 11 provides that a trustee of a trust estate is not otherwise entitled to make a deposit in his capacity as trustee.

Under sub-clause (3) "eligible trust estate" means, broadly, one that resulted from a will or intestacy, i.e. a deceased estate.

Clause 12: Conversion of drought bonds

Sub-clause (1) provides that the holder of a parcel of drought bonds may apply to convert his holding into an income equalization deposit to the extent of any unrecouped income tax deduction in respect of the parcel. There is no provision for the conversion of drought bonds in respect of which there is no unrecouped deduction. These would be redeemable at the request of the depositor who could, if he so desired, request the Commissioner of Taxation to declare the bonds to have become redeemable and invest the proceeds of redemption in income equalization deposits.

Sub-clause (2) provides that an application for conversion of drought bonds is to be made on a form supplied by the authorised person, i.e. the Commissioner of Taxation, and to contain such information as is required by the form.

Sub-clause (3) provides that the conversion, which is achieved under the Loan (Drought Bonds) Act and this Act by the Bonds being deemed to have been redeemed and the deposit to have been made, shall be taken to have occurred on the date on which the application is made. This will have significance for the calculation of interest both in respect of the drought bonds and the conversion deposit and for the purposes of the provisions relating to repayment of income equalization deposits - in particular in accordance with clauses 16 and 17 of this Bill.

Appropriate amendments to the Loan (Drought Bonds) Act being submitted together with this Bill complete the legislative requirements for conversions.

Sub-clause (4) provides that interest on "conversion deposits" does not commence until the first day of the month following the date on which conversion application is made. A complementary amendment to the Loan (Drought Bonds) Act will ensure that interest on Drought Bonds converted will continue to the end of the month in which conversion application is made.

These provisions will ensure continuity of interest (under Drought Bonds prospectuses accrued interest is paid on a completed month basis) and will avoid any conflict with existing procedures for the payment of interest.

Clause 13: Deposits not transferable

This clause prevents a depositor from negotiating his rights in respect of a deposit. The income tax law provides the conditions for the allowance of a deduction in respect of a deposit in the assessments of a depositor and for an amount to be included in assessable income of the depositor when a deposit becomes repayable. It follows that it would not be appropriate for rights in respect of a deposit to be transferable from the depositor to any other person.

Clause 14: Stamp duty not payable in respect of deposits

This provision is in accordance with existing practice that the Commonwealth exempts its borrowing instruments from stamp duty and also the instruments made to effect deposits, withdrawals or interest payments.

Clause 15: Interpretation

The purpose of this clause is to adapt, for the purposes of the provisions of the Bill relating to the repayment of deposits, the definition of unrecouped deductions in proposed section 159GA of the Income Tax Assessment Act.

Paragraph (a) states that for the purposes of Part III of the Bill an unrecouped income tax deduction shall be deemed to exist in respect of a deposit if an unrecouped deduction is deemed to exist under proposed Division 16C of the Income Tax Assessment Act. Broadly, this is the case where the deduction allowable in respect of a deposit exceeds any amount included in assessable income as a result of any part of a deposit having become repayable.

Paragraph (b) provides in effect that the amount of the unrecouped income tax deduction in respect of a deposit shall be deemed to be the amount of that excess.

Clause 16: Repayment within 12 months on grounds of financial difficulties

Broadly this clause will provide for the making of a request to the Commissioner of Taxation, within 12 months of lodging a deposit, for a declaration that the deposit is repayable on the grounds that the depositor is experiencing serious financial difficulties. Where a deposit has been made by the trustee of a trust estate on behalf of a beneficiary, a reference to the depositor in this context is a reference to the beneficiary.

Sub-clause (1) of clause 16 provides that a person who, in accordance with sub-clause 3(2) of the Bill, is the depositor in relation to a deposit may, within 12 months after the date on which the deposit was made, and on the grounds set out in sub-clause (2), request the authorised person, i.e. the Commissioner of Taxation to declare all or part of the deposit to be repayable.

Sub-clause (2) of clause 16 specifies that the grounds on which a request under sub-clause (1) may be made -

(a)

where the deposit was made by a trustee on behalf of a beneficiary - that the beneficiary is experiencing serious financial difficulties; or

(b)

in any other case, i.e. in any case in which the deposit was made by a person on his own behalf -that the person who made the deposit is experiencing serious financial difficulties.

In the case of a deposit made after 31 January 1977 (i.e. in respect of 1976-77 and later years of income), the difficulties are required to have resulted from circumstances not in existence at the time the deposit was made.

Sub-clause (3) provides that where, in relation to a person, there are two or more deposits in respect of which an unrecouped income tax deduction exists a request may not be made under clause 16 (in respect of a deposit of less than one year's standing) unless, at the same time, any earlier deposit is the subject also of a request under clause 16 or, in the case of a deposit of more than one year's standing, under clause 17.

Sub-clause (4) of clause 16 provides that, where the Commissioner of Taxation is satisfied as to the grounds of a request under clause 16, he shall declare that the deposit or the part of a deposit to which the request relates is repayable. Upon the making of a declaration the deposit or part thereof is deemed to have become repayable. Provision is made in clause 22 for the situation in which the Commissioner does not meet a clause 16 request.

Clause 17: Repayment of deposits after the expiration of 12 months

Clause 17 provides that, at the expiration of 12 months from the date on which a deposit is made, the deposit is to be repayable on request made by the depositor to the Commissioner of Taxation. Where, in relation to a person, there are two or more deposits in respect of which there is an unrecouped income tax deduction, requests for repayment under clause 17 are to be made on a first-in first-out basis.

Sub-clause (1) of clause 17 provides that a person who is the depositor in relation to a particular deposit may, at any time after the expiration of 12 months from the date on which the deposit was made, make a request to the authorised person, i.e. the Commissioner of Taxation, for repayment of all or part of the deposit.

Sub-clause (2) provides that where, in relation to a person, there are two or more deposits in respect of each of which there is an unrecouped income tax deduction, a request may not be made under clause 17 for the repayment of one of those deposits made on any particular date unless, at the same time, a request is made for repayment of any of those deposits made at an earlier date.

Sub-clause (3) of clause 17 provides that where a request is made in accordance with clause 17 the deposit or part thereof, as the case may be, automatically becomes repayable on the date on which the request is made. A declaration by the Commissioner to this effect is not necessary.

Clause 18: Repayment of deposits in respect of which no income tax deduction has been allowed

This clause provides for the repayment of a deposit which, in whole or in part, is not deductible for income tax purposes, e.g. because the person in respect of whom the deposit is made is not a primary producer or because he has insufficient gross receipts from primary production or taxable income to permit the allowance of a deduction for the full amount of the deposit. The 12 months restriction period applicable to requests under clause 17 does not apply to a request under clause 18. A request under clause 18 may, however, be made only after an assessment of the year of income to which the deposit relates has been made or the taxpayer has been notified by the Commissioner of Taxation that no tax is payable by him in respect of that year of income.

Sub-clause (1) of clause 18 sets out the circumstances in which a request under clause 18 may be made. These are that a deposit has been made in the relevant period in relation to a year of income either by a person on his own behalf or by a trustee on behalf of that person and -

(a)

an income tax assessment in respect of the year of income of the person has been made; or

(b)

the Commissioner of Taxation has notified him that no income tax is payable.

Sub-clause (2) provides, in effect, that a request may not be made under sub-clause (1) in respect of so much, if any, of a deposit as has been allowed as a deduction for income tax purposes. Thus a request may not be made in relation to the whole of a deposit if there is any unrecouped income tax deduction in respect of the deposit (paragraph (a) of sub-clause (2)). Also, under paragraph (b) of sub-clause (2), a request is not to be made in relation to any greater amount than the excess of the amount of a deposit over the unrecouped deduction in relation to the deposit (i.e. the undeducted portion of the deposit). If a part of a deposit has previously become repayable, a request may not be made in relation to an amount greater than the excess of the amount remaining on deposit over the amount of the unrecouped income tax deduction.

Sub-clause (3) provides that where a request is duly made under clause 18 to the Commissioner, in respect of all or part of a deposit, the deposit becomes repayable on the date on which the request is made. A declaration by the Commissioner to this effect is not necessary.

Sub-clause (4) provides that, for the purposes of clause 18, the term "relevant period" has the same meaning as in Division 16C of Part III of the Income Tax Assessment Act (see notes on proposed section 159GA - clause 34 of the Income Tax Assessment Amendment Bill(No. 3)1976).

Clause 19: Repayment of excess deposits

Where at any time a person's holdings of drought bonds together with moneys on deposit under the income equalization deposits scheme exceed $100,000, income equalization deposits equal to the amount of the excess are by clause 19 to become repayable on request to the authorised person, i.e. the Commissioner of Taxation.

Sub-clause (1) of clause 19 sets out the circumstances in which a request under clause 19 may be made. These are that the sum of -

(a)

income equalization deposits made by a person on his own behalf less any amounts that have become redeemable;

(b)

income equalization deposits made by a trustee of a trust estate on behalf of the person less any amounts that have become redeemable; and

(c)

any drought bonds held by the person

exceeds $100,000.

In this situation the person who, in relation to any of the deposits referred to in (a) or (b) above, is the depositor as defined in sub-clause 3(2) may, subject to other provisions of clause 19, request repayment of any of those deposits.

Sub-clause (2) provides, in effect, that a request may not be made under sub-clause (1) in respect of so much, if any, of a deposit as has been allowed as a deduction for income tax purposes. Thus a request may not be made in relation to the whole of a deposit if there is any unrecouped income tax deduction in respect of the deposit (paragraph (a) of sub-clause (2)). Also under paragraph (b) of sub-clause (2) a request is not to be made in relation to any greater amount than the excess of the amount of a deposit over the unrecouped income tax deduction in relation to the deposit (i.e. the undeducted portion of the deposit). If a part of a deposit has previously become repayable a request may not be made in relation to an amount greater than the excess of the amount remaining on deposit over the amount of the unrecouped income tax deduction.

By sub-clause (3), a request for repayment of an amount greater than the excess referred to in sub-clause (1) is of no effect. Where two or more requests are made under clause 19 on the same day none of those requests will be of any effect if the sum of the amounts specified in the requests is greater than that excess.

Sub-clause (4) fixes the date a request is made for repayment of a deposit under clause 19 as the date on which the deposit becomes repayable.

Clause 20: Repayment in case of death, bankruptcy or winding up

Under this clause a deposit made on behalf of any person is to be declared to be repayable by the authorised person, i.e. the Commissioner of Taxation, on the death or bankruptcy of the person or, in the case of a company, on commencing to be wound up. A declaration may not however be made under clause 20 while a request under clause 16 is pending or if a request has been duly made under section 17, 18 or 19.

Sub-clause (1) provides that, on becoming satisfied that -

(a)

a person who has made a deposit on his own behalf; or

(b)

a beneficiary on whose behalf a deposit has been made by the trustee of a trust estate

has died or become bankrupt, the Commissioner of Taxation shall, subject to the restriction mentioned in sub-clause (3), declare that the deposit is repayable.

Sub-clause (2) provides that on becoming satisfied that a company that has made a deposit has been, or is being, wound up the Commissioner shall subject to sub-clause (3) declare that the deposit has become repayable.

Sub-clause (3) provides that a declaration in respect of a deposit may not be made under sub-clause (1) or (2) while a request under section 16 in respect of the deposit is pending or if a valid request has been made under section 17, 18 or 19. This will ensure that a request for repayment under any of those sections will be dealt with notwithstanding the death etc. of the person in respect of whom the deposit was made. In particular this will mean that, where a request is made under section 16 on the grounds of serious financial difficulties and a declaration is made in pursuance of the request, any amount to be included in assessable income as a result of the deposit becoming repayable will be included in the assessable income of the year in which the request was made. In some circumstances this may be a year other than the year in which the death etc. of the person occurred. Where a deposit is declared to be repayable under clause 20, any amount to be included in assessable income is, by proposed section 159GD of the Income Tax Assessment Act, to be included in the assessable income of the year of death etc. of the person in respect of whom the deposit was made.

Clause 21: Deposits to be redeemed

This clause restricts withdrawals to amounts of $100 or multiples of $100, in order to be consistent with clause 4(4) which places a similar restriction on lodgment of deposits.

Clause 22: Reference to Board of Review

Clause 22 provides a depositor with a right to have a request under clause 16 considered by a Board of Review if the authorised person i.e. the Commissioner of Taxation does not, in pursuance of the request, declare the deposit specified in the request to have become repayable.

Sub-clause (1) provides that, where a depositor makes a request to have a deposit declared to be repayable on the grounds that he is experiencing serious financial difficulties and the Commissioner of Taxation has not met the request within one month, the Commissioner shall notify the depositor of his reasons for not declaring the deposit to be repayable.

Sub-clause (2) provides for a modification of sub-clause (1) where the Commissioner is required to obtain additional information in connexion with a request. In this type of case the Commissioner is not required to notify the depositor of his reasons for not declaring the deposit to be redeemable earlier than one month after the information is furnished or two months after the original request was made, whichever period expires first.

Sub-clause (3) allows the depositor, within one month of receiving the notice from the Commissioner, to have his request referred (through the Commissioner) to a Board of Review (clause 3 of the Bill defines a Board of Review as one that is constituted under the Income Tax Assessment Act).

Sub-clause (4) directs the Commissioner, upon payment of the prescribed fee (if any), to refer the request to a Board of Review.

Sub-clause (5) vests in the Board of Review the powers and functions of the authorised person i.e. the Commissioner of Taxation in relation to the request. In effect the Board of Review takes the place of the Commissioner.

Sub-clause (6) provides for the case where a Board of Review refuses to make a declaration in accordance with the taxpayer's request. A Board of Review in such a case is obliged to give its decision in writing and, if so requested by the Commissioner or the person who made the request, to state its reasons for the decision.

Sub-clause (7) provides that, for the purposes of clause 22, a Board of Review shall be constituted by the Chairman of the Board or another member authorised in writing by the Chairman.

Sub-clause (8) authorises the making of regulations under this Bill, concerning the giving of notices and directions relating to a reference to a Board of Review, proceedings before a Board of Review, and the refund, in certain circumstances, of the prescribed fee, if any, (sub-clause (4)).

Clause 23: Requests under section 16 to lapse in certain circumstances

Clause 23 provides that a request under clause 16 in relation to a deposit or part of a deposit is to lapse if, while the request is pending, a request in relation to a deposit is duly made under clause 18 or 19.

A request may be made under clause 18 only if, on the making of an assessment in respect of the year of income in relation to which a deposit is made, there is no unrecouped deduction in respect of the deposit, or an unrecouped deduction that is less than the amount of the deposit, i.e. if no deduction has been allowed, or a deduction has not been allowed for the full amount of the deposit in the relevant assessment. This could occur because of insufficiency of taxable income or gross receipts from primary production, or because the depositor concerned was not a primary producer.

Similarly a request under section 19 may be made only where a deduction in respect of a deposit or a part of a deposit has been disallowed by reason of the limit of $100,000 on deductions for income equalization deposits and drought bonds held by a taxpayer.

As there is no income tax consequence of a deposit that may be the subject of a request under clause 18 or 19 becoming repayable, it follows that there would be no consequence of such a deposit becoming repayable as a result of a declaration under clause 16. No purpose would therefore be served in determining a clause 16 request, once the conditions for the making of a request under clause 18 or 19 have been satisfied and a request under one of those clauses has been duly made. Moreover, once a request is duly made under clause 18 or 19, the amount specified in the request automatically becomes repayable. Accordingly the interests of the depositor are best served by providing for a clause 16 request to lapse if he makes a valid request under either clause 18 or 19.

Clause 24: Provision applicable where request under section 16 pending 12 months after making of deposit

Clause 24 deals with the case where a request under clause 16 in relation to a deposit or part of a deposit is pending at the expiration of a period of 12 months from the date on which a deposit is made. In those circumstances clause 24 provides that, except where the person in respect of whom the deposit was made has died, become bankrupt or, being a company, commenced to be wound up, the clause 16 request is to lapse and the amount specified in the request is to become repayable at the expiration of that 12 months period. However, the depositor will have a right to apply to the Commissioner of Taxation for a declaration that the ground on which the request was made was established. Where this right is not exercised the deposit will be deemed to have become repayable in pursuance of a request under section 17 and an amount equal to the unrecouped deductions, if any, in respect of the deposit will be included in the assessable income of the depositor of the year of income in which the 12 months period expired. Where, however, the depositor applies for a declaration in pursuance of his request, and the request is met, the relevant amount will be included in the assessable income of the year in which the request was made. It is expected that a depositor would apply for a declaration only if the request was made in a year of income different from that in which the 12 months period expires. Otherwise the obtaining of a declaration would not have any consequence for income tax purposes other than that which flows from the deposit being deemed to have become repayable in pursuance of a clause 17 request.

By sub-clause (1), clause 24 is to apply in relation to any clause 16 request that is pending at the expiration of a period of 12 months from the date on which the deposit was made unless, before the expiration of that period, the person in respect of whom the deposit was made has died, become bankrupt or, being a company, commenced to be wound up. In such a case the clause 16 request will have to be determined, notwithstanding the death etc., of the person or the expiration of the 12 months period. If the request is met, the assessable income of the year in which the request was made will include any amount that is to be brought to account as assessable income as a result of the deposit becoming repayable. This could be a year earlier than that in which a person died etc. or in which the 12 months period expired. If the request is not met, any assessable amount will be included in the income of the period to the date of death etc. and not, as in a case to which clause 24 applies, the year in which the 12 months period expires.

Sub-clause (2) of clause 24 provides that, if a clause 16 request to which clause 24 applies is pending at the expiration of 12 months after the date on which a deposit is made, it is to lapse and, except as otherwise provided by the clause, is to be deemed to have become repayable in pursuance of a clause 17 request. The consequences of this have been mentioned above.

Sub-clause (3) provides a period of one month after the date on which a deposit becomes repayable under sub-clause (2) for the person who made the request to apply to the Commissioner for a declaration that the ground on which the request was made was established.

Sub-clause (4) provides that, where the Commissioner makes a declaration in accordance with the application, the deposit shall be deemed to have become repayable under clause 16 rather than clause 17. Accordingly the amount, if any, to be included in the assessable income in pursuance of the deposit having become repayable will be included in the assessable income of the year in which the request was made rather than the year in which the period of 12 months from the date of the deposit expired.

Sub-clause (5) requires the Commissioner, if he has not made a declaration within one month of the making of the application, to give notice to the person who made the clause 16 request of his reasons for not making the declaration sought.

Sub-clause (6) provides a period of one month from the date on which notice is given under sub-clause (S) in which the person who made the application may direct the Commissioner to refer his application to a Board of Review.

Sub-clause (7) provides that the Commissioner shall, upon receipt of a direction under sub-clause (6) and upon payment of the prescribed fee, if any, refer the application to a Board of Review.

Sub-clause (8) confers on the Board of Review the same powers and functions in relation to the application as the Commissioner and a declaration by the Board in pursuance of the application is to be deemed to have been made by the Commissioner.

Sub-clause (9) provides that, where the Board decides not to make a declaration in accordance with the application, it shall give its decision in writing and, if so requested by the Commissioner or the applicant, state its reasons for the decision.

Sub-clause (10) provides that, for the purposes of clause 24, the Board of Review shall be constituted by the Chairman of the Board or another member authorised by him in writing.

Sub-clause (11) allows regulations to be made under this Bill to make provision for the giving of notices and directions concerning a reference to a Board of Review under this clause, proceedings before a Board under the clause and the refund in certain circumstances of the prescribed fee (sub-clause (7)).

Clause 25: Form of requests

Sub-clause (1) of clause 25 provides that any request or application under Part III of the Bill is to be in writing in accordance with a form approved by the Commissioner of Taxation and signed by the person making the request or application. The clause will apply to any request for repayment of a deposit under clause 17, 18 or 19 and to any request under clause 16 for a declaration that a deposit is repayable on the grounds that a person in respect of whom the deposit was made is experiencing serious financial difficulties. The clause will also apply to an application for a clause 16 request to be referred to a Board of Review in circumstances in which clause 24 of the Bill applies.

Sub-clauses (2) and (3) provide for the case in which a request is made (under clauses 16 to 19) in relation to a deposit that has been made by the trustee of a trust estate on behalf of a beneficiary who at the time the deposit was made was under a legal disability. Where the request is made by the trustee it is to be accompanied by evidence to show that the beneficiary is still under a legal disability (sub-clause (2)). Where the request is made by the beneficiary, it is to be accompanied by evidence to show that the beneficiary is no longer under a legal disability (sub-clause (3)).

Clause 26: Lodging of deposits, requests, directions and applications

Clause 26 requires that any deposit, request or application under the Bill be lodged with the authorised person, i.e. the Commissioner of Taxation, or any person to whom the Commissioner has delegated any of his powers under the Bill in pursuance of clause 27. The deposit, etc. is to be deemed to have been made at the time when it is so lodged.

Clause 27: Delegation by authorised person

Sub-clause (1) of clause 27 will enable the Commissioner of Taxation to delegate to a Second Commissioner of Taxation, or to an officer, all or any of his powers under the Bill (other than the power of delegation). Under sub-clause (2) powers exercised by a delegate are for the purposes of the Bill to be deemed to have been exercised by the Commissioner.

Sub-clause (3) provides that a delegation under clause 27 does not prevent the exercise of a power by the Commissioner.

Clause 28: Regulations

Sub-clause (1) provides that the Governor-General may make regulations not inconsistent with the Bill. In particular, the regulations -

(a)

may require a depositor, the personal representative of a depositor, the trustee in bankruptcy of a depositor or the liquidator of a company that is a depositor to furnish information to the Commissioner of Taxation; and

(b)

may prescribe penalties, not exceeding $200, for offences against the regulations.

Sub-clause (2) defines "depositor" for the purposes of sub-clause (1) to be the beneficiary where the deposit is made on his behalf by a trustee.

LOAN (DROUGHT BONDS) AMENDMENT BILL 1976

The purpose of this Bill has been referred to in the introductory pages of this memorandum.

Clause 1: Short title

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

Clause 2: Commencement

The Act is to come into operation on the day on which it receives the Royal Assent.

Clause 3: Conversion of stock

Clause 3 provides for an additional section -section 27A - to be inserted in the Loan (Drought Bonds) Act 1969 which, together with clause 12 of the Loan (Income Equalization Deposits) Bill, will provide for the conversion of drought bonds into income equalization deposits.

Sub-clause (1) of the proposed section 27A provides that a parcel of drought bonds shall be deemed to have been redeemed on the date on which application is made for conversion of the parcel into an income equalization deposit. In terms of legislation implementing the scheme, the "conversion" will be achieved by bonds being deemed to have been redeemed and an income equalization deposit being deemed to have been made. The second part of this procedure, the deeming of deposits being made, is encompassed in sub-clause 12(3) of the Loan (Income Equalization Deposits) Bill. Under sub-clause 12(1) of that Bill, a parcel of drought bonds may be converted into an income equalization deposit only to the extent of any unrecouped income tax deductions in respect of the parcel.

Paragraph (a) of sub-clause (1) provides that interest on bonds converted will continue to the end of the month in which the conversion application is made. A complementary clause, 12(4), of the Loan (Income Equalization Deposits) Bill, provides that interest on "conversion deposits" does not commence until the first day of the month following the date on which conversion application is made.

In conjunction, the abovementioned provisions ensure that there is continuity of interest. All series of drought bonds were issued on terms and conditions which included a term that accrued interest on redemption would be paid up to the end of the last completed month. In the absence of these provisions a bondholder could ensure continuity of interest only by applying for conversion on the first day of a month.

In addition, these provisions conform with existing procedures for payment of interest on drought bonds.

Paragraph (b) provides for the "conversion redemption" to be effected without any liability to make any payment in respect of the deemed redemption of bonds other than the payment of accrued interest. In the absence of such a provision, redemption could only be effected by repayment of principal. This clause is necessary because the procedures for conversion under the Loan (Drought Bonds) Act involve the deeming of parcels of bonds to be redeemed.

Sub-clause (2) specifies the accounting arrangements which will apply where drought bonds are converted into income equalization deposits pursuant to an application by the stockholder.

INCOME TAX (COMPANIES AND SUPERANNUATION FUNDS) BILL 1976

The purpose of this Bill is to impose income tax for the 1976-77 financial year, at the rates declared in the Bill, on the 1975-76 incomes of companies and the 1976-77 incomes of superannuation funds.

Other rates of income tax payable for the 1976-77 financial year - by individuals and trustees - were declared and imposed earlier this year, on the introduction of indexation of personal income tax, by the Income Tax (Rates) Act 1976 and the Income Tax (Individuals) Act 1976.

While some drafting changes have been necessary in consequence of the departure from the previous practice of declaring all rates of income tax for a financial year in the one measure, the practical effect of this Bill is the same as that of the corresponding provisions of the Income Tax Act 1975 which declared and imposed the rates of income tax payable by companies and superannuation funds for the 1975-76 financial year.

The rates of income tax declared by this Bill are the same as those declared for the 1975-76 financial year. These are:

-

general company tax rate: 42 1/2 per cent

-

rate of tax payable by a friendly society dispensary: 37 1/2 per cent

-

rate of additional tax payable by a private company on amount by which dividends paid fall short of a sufficient distribution: 50 per cent

-

rate of tax payable on investment income of a superannuation fund that does not invest a sufficient proportion of its assets in public securities: 42 1/2 per cent

-

special "anti-avoidance" rate of tax on certain income of superannuation funds to which section 121CA, 121CB, or 121DA of the Assessment Act applies: 50 per cent