House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

Introductory Note

The purpose of this memorandum is to explain the provisions of the Income Tax Assessment Amendment Bill 1978 which is a Bill to amend the Income Tax Assessment Act in a number of important respects.

The main features of the Bill are -

Bonus shares. (Clauses 3 and 5)

The law is to be amended to overcome the decision of the High Court in Curran's case by providing that tax-free bonus shares allotted after 16 August 1977 (date of 1977-78 Budget Speech) shall be treated as having no independent cost to the taxpayer. The amended law will mean that for the purposes of the trading stock provisions, and in calculating any taxable profit or deductible loss on the sale of shares, the cost of the original shares in relation to which the bonus issue was made is to be spread over those original shares and the bonus shares.

Exploitation of gift provisions. (Clause 12)

The gift deduction provisions are to be strengthened against tax avoidance arrangements. Very broadly, the deduction will no longer be available in respect of gifts made after the specified date (date of introduction) where the gift is made under arrangements whereby its value to the relevant fund, authority or institution will be less than the value of the property at the time the gift is made, the donor or an associate obtains some benefit or advantage in connexion with the gift or the donee fund, authority or institution undertakes to acquire property from the donor or an associate of the donor.

Share trading losses. (Clauses 6 and 9)

The amendments, which are to be effective from the specified date, will complement last year's anti-avoidance measures against schemes which used elections under section 36A of the Principal Act to create artificial share trading losses. By clause 6, certain trading stock (shares, debentures and other choses in action) are to be treated as having been bought and sold at a commercially realistic value having regard to any collateral arrangements or understandings that have the effect that the true value of the stock is significantly less than its ostensible market value. If schemes of the kind that have been encountered were to he implemented in future the commercial profit would thus be taxed, instead of (as is claimed) a manufactured tax loss being deductible.

A variation of this type of scheme seeks to rely upon the manufacture of artificial share trading losses by using the general deduction provisions of the income tax law or the provisions governing losses incurred on property acquired for profit-making. By clause 9 the amounts deductible under those provisions in respect of the cost of shares, etc., will be limited to levels that are commercially realistic in the light of such collateral arrangements as may effectively compensate for the loss suffered on sale of the shares.

Rebate on dividends received as part of dividend stripping operation (Clauses 7 and 8)

Existing provisions of the Principal Act which limit the amount of rebate available on inter-company dividends that are received in the course of a dividend stripping operation are being clarified by clause 7. The amendment will ensure that, in the application of that limitation, there will, in special situations, be offset against the inter-company dividends otherwise subject to rebate, not only the relatively negligible cost of the shares on which the stripping dividend is directly paid, but also the cost to that same shareholder of other shares (including rights or options to acquire shares) in the company that were acquired to initiate that dividend stripping operation.

Clause 8, which is to be effective from the specified date, will counter yet another kind of dividend rebate avoidance scheme under which shares in a company are purchased for dividend stripping purposes, the stripping dividend is paid to another company on special class shares but the cost of the shares purchased from the first company (and the resultant tax loss) is borne by a company or other entity associated with the stripping company. An inter-company dividend rebate is not in future to be available to the stripping company in respect of such dividends.

Sufficient distribution (Clause 13)

A private company that does not make a sufficient distribution of its income to its shareholders is liable to pay a 50 per cent undistributed income tax on the shortfall in its dividend payments. With effect from the date specified, companies will not be able to satisfy this "sufficient distribution" requirement by employing methods which, in broad substance, have the effect that a dividend is not distributed. A dividend will not be credited towards the making of a sufficient distribution if it is paid under an arrangement whereby a compensating benefit approximating the amount of the dividend is to be paid.

Exploitation of primary producer averaging provisions (Clause 17)

The benefit of the averaging provisions applicable to primary producers will be prevented from flowing to persons who are not primary producers but who, under tax avoidance arrangements, become entitled to a minimal share in income derived by a trust from a primary production business. For the future, a beneficiary in a primary production trust will be able to rely on his or her interest in such a trust to qualify for averaging if his or her share of the trust income in the income year is at least $1,040 or the Commissioner of Taxation is satisfied that the interest was not acquired primarily to gain the benefit of averaging. The amended provisions will apply for the 1977-78 and subsequent income years but for a person who became an income beneficiary in such a trust on or before the specified date they will first apply for the 1978-79 income year.

Expenditure pursuant to franchise (Clause 10)

Deductions are not to be available under section 62A of the Principal Act for capital expenditure incurred under the terms of certain franchises granted by the Commonwealth, a State or a public authority, in respect of expenditure incurred under franchises granted after the specified date.

Shareholder rebates for capital subscriptions to petroleum mining companies (Clauses 14 to 16, 20 and 24)

A new income tax concession is being introduced to encourage exploration for and development of off-shore petroleum fields. The concession will be available in respect of moneys subscribed after 24 August 1977 as paid-up capital to companies holding valid licences or permits under the Petroleum (Submerged Lands) Act, or registered interests in licences or permits under that Act. Those companies will be able to lodge declarations with the Commissioner of Taxation forgoing the right to deductions to which they would become entitled under Division 10AA of the Principal Act for eligible outgoings, i.e., capital expenditure incurred after 24 August 1977 on off-shore exploration for petroleum or on the development of off-shore petroleum fields.

By lodging a declaration, a company will be able to confer an income tax rebate on both corporate and non-corporate shareholders in respect of their share capital subscribed that is spent on eligible outgoings. The tax rebate will be allowable in the subscriber's income tax assessment for the year of income in which the moneys are subscribed and will be an amount of 30 cents for each dollar subscribed.

The concession will be available where moneys are subscribed directly to a petroleum exploration or mining company or to a company interposed between the shareholder and the operating company provided there is an appropriate connection between the interposed company and the operating company.

Liberalization of gift provisions (Clause 11)

Under section 78 of the Principal Act, gifts of the value of $2 or more to the funds, authorities or institutions referred to therein are allowable deductions from the assessable income of the donor. Deductions in respect of gifts of property other than money have been available only in respect of property that was purchased by the donor within the preceding twelve months and the amount deductible is limited to the lesser of the value of the property at the time the gift was made and the amount paid by the donor for the property.

It is proposed that the funds specified in section 78 as eligible recipients of tax deductible gifts be extended to include The Australiana Fund, The National Trust of Australia (Northern Territory) and The National Trust of Australia (A.C.T.).

In addition, gifts to collections maintained by The Australiana Fund or by a public library, museum or art gallery will qualify for deduction irrespective of when or how the property was acquired by the donor, where the gift is made in the period 1 January 1978 to 31 December 1980. The amount of the deduction will generally be equal to the value of the property at the time the gift was made, as evidenced by valuations obtained from approved valuers, but may be appropriately reduced where the donee fund, authority or institution does not receive immediate and unfettered control, custody or title to the gifted property.

Isolated children (Clause 19)

Benefits paid under the scheme of assistance with the education of isolated children are not to be treated as separate net income of a dependant. As a consequence, payment of these benefits will not result in a reduction in zone or certain other rebates allowable to parents of the children.

Taxation of allowances paid under the Former Regular Servicemen's Vocational Training Scheme (Clauses 4 and 22)

Allowances paid under the Former Regular Servicemen's Vocational Training Scheme are expressly being made subject to tax.

Averaging (Clause 18)

A technical amendment of the averaging provisions for primary producers is proposed to ensure that all taxpayers who had previously elected to withdraw from the averaging system will be able to re-enter the system for the 1977-78 income year.

Notes on each clause of the Bill are set out on the following pages.

Notes on Clauses

Clause 1: Short title, etc.

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 the Amending Act shall come into operation on the day on which it receives the Royal Assent.

Clause 3: Cost of shares issued in satisfaction of dividend

Introductory note

This clause, which concerns the calculation of profits and losses on the sale of bonus shares, proposes the insertion of a new section - section 6BA - into the Principal Act to counter the effect of the decision of the High Court in the case of Curran v F.C. of T., so that the income tax law can operate in the way that it had been applied for many years prior to the Curran decision.

Prior to the Court decision, bonus shares had generally been treated for income tax purposes as not having an independent cost in circumstances where it was necessary to calculate any taxable profit or deductible loss on their sale. For this purpose, the cost of the original shares in respect of which the bonus issue was made had been spread over the total number of the original shares and the bonus shares.

In the particular case a taxpayer, as a share trader, purchased 200 shares in a company for $186,046 and the company then issued to him a non-taxable bonus issue, out of capital reserves, of 191,000 fully paid $1 shares. The total shareholding of 191,200 shares was sold for $188,829 - a profit of $2,783 on the total cash outlay. However, in the view that the 191,200 shares had cost $377,046 (the initial outlay of $186,046 for the 200 original shares plus the paid up nominal value ($191,000) of the 191,000 bonus shares) the Court held, by majority, that the vendor was entitled to deduct an income tax loss of $188,217.

If in a situation of this kind the company involved did not capitalize reserves by the issue of tax-free bonus shares, the purchase and sale would result in a taxable profit of $2,783. The amendment proposed by clause 3 is directed to obtaining this result in cases where the bonus shares are allotted after 16 August 1977.

The amendment will mean, broadly, that in calculating the taxable profit or deductible loss on disposal of any original shares or associated bonus shares that do not constitute trading stock of the vendor (e.g., where section 26(a) or section 52 of the Principal Act applies), and the bonus shares are issued as fully-paid, the cost of the original shares will be treated as the full cost of the original shares and the bonus shares together. The cost of each of those original shares and associated bonus shares will be ascertained by spreading that full cost of original shares over the original and associated bonus shares.

Where capital is actually subscribed by the shareholder in respect of the bonus shares (e.g., where they are allotted as only partly paid-up by the dividend declared on the original shares) the cost of each bonus share will be represented by its appropriate part of the total cost of the original shares plus any amount actually paid by the shareholder in respect of the bonus shares (e.g., on allotment, by way of a premium or for a call).

Where any of the original shares or associated bonus shares are held as trading stock of the taxpayer, and the taxpayer exercises an option under section 31 to adopt cost price as the end of year value of those shares, the "cost" value to be taken into account will ordinarily be the average cost of the original shares plus, in respect of the bonus shares, the amount, if any, actually paid by the shareholder to the company in respect of those bonus shares.

Similarly, the deduction allowable for a bonus share brought in as trading stock will be limited to any amount actually paid or payable by the shareholder under the terms of issue of the bonus shares. It will not include any part of the cost of the relevant original shares or of the dividend in satisfaction of which the bonus issue was made.

It is proposed that the new section 6BA apply for all purposes of the Principal Act other than section 26AAC and section 79. In broad terms, section 26AAC brings to account as assessable income the amount by which the value, at the time of the acquisition, of shares acquired under a scheme for the acquisition of shares by employees, exceeds the consideration actually paid by the employee for those shares. Sub-section 79(23) provides that, in calculating the special "5 per cent of cost of net assets" deduction that is available for a superannuation fund to which section 79 applies, the cost of bonus shares included in the fund's assets shall be deemed to be the amount of the dividend satisfied by the issue of those bonus shares. It is not proposed that the new section 6BA will disturb the position that obtains under section 26AAC and section 79(23) in relation to bonus issues of shares.

Section 6BA is to apply where bonus shares are allotted after the date specified in the Bill, i.e., 16 August 1977.

The following notes explain the proposed section 6BA in more precise terms.

Sub-section (1) of the new section 6BA sets out the basic conditions under which the section is to apply. These are that a dividend be payable to a taxpayer on "original" shares in a company and that the amount of the dividend be satisfied in whole or in part by an issue of "bonus shares" to the taxpayer. The dividend to which the section applies can include a tax-free amount that is not a dividend for income tax purposes, because of being declared out of funds in a share premium account.

Where these criteria are satisfied, the special provisions in section 6BA relating to bonus shares are to apply, other than for the purposes of section 26AAC and sub-section 79(23).

Sub-sections (2) and (3) are the operative provisions of section 6BA. However, each are to apply subject to sub-section (4), the effect of which is that sub-sections (2) and (3) will not apply if the dividend that is satisfied by the bonus issue of shares effectively bears income tax.

Sub-section (2) will provide the basic concept for the calculations to be made under section 6BA in relation to the "cost" of original shares and their associated bonus shares, i.e., that the amount of dividend that is satisfied by the bonus issue is not to be treated as being in any way a cost of acquiring the bonus shares.

Sub-section (3) contains the basis for applying an appropriate value to the original or bonus shares, first, where any of those shares form part of the taxpayer's end of year trading stock, and the taxpayer elects under section 31 to adopt an end of year "cost" basis of valuation in respect of all or any of those shares, and, second, in determining the taxable profit or deductible loss (e.g., under sections 26(a), 26AAA or 52) arising from the disposal of original or bonus shares not held as trading stock.

In either case, amounts paid or payable by the taxpayer in respect of the original shares, including their purchase price or any application, allotment or call moneys paid or payable by the taxpayer on the shares, are to be taken to be paid or payable in respect of the total number of original and bonus shares in such proportions as the Commissioner of Taxation considers appropriate. There are, of course, varying practical situations in which the relevant costs will need to be apportioned.

The effect of sub-section (4) will be that section 6BA will not apply in respect of any original or associated bonus shares in somewhat special circumstances where the dividend that is satisfied by the issue of the bonus shares is effectively subject to income tax.

The usual form of bonus share in Australia is one that is paid-up out of capital profits and which, by section 44(2) of the Principal Act, does not result in the shareholder being taxed on the dividend used to pay up the bonus share. If a company does issue a bonus share out of profits other than capital profits, there is, by reason of section 46 of the Act, effectively no tax on the underlying dividend where the shareholder concerned is a resident company.

Accordingly, the earlier provisions of proposed section 6BA are to apply generally in relation to all bonus shares, but sub-section (4) will vary this in defined situations where the shareholder concerned is effectively taxed in respect of the receipt of a bonus share, e.g., should a case arise where an individual is issued with a bonus share paid-up out of trading profits.

In such a case, the amount of the dividend that is effectively taxable would be treated as consideration paid for the bonus shares in calculating any taxable profit or deductible loss on a disposal of any of the original shares or associated bonus shares, when bringing the bonus shares to account as purchases or in the application of a section 31 election to adopt cost as an end-of-year value for any such original or bonus shares that are trading stock of the tax-payer.

Paragraph (a) of sub-section (4) will remove from the operation of section 6BA, so much of a dividend satisfied by an issue of bonus shares that is to be included in the assessable income of any taxpayer who is not a resident company or a trustee. Paragraph (a) is to apply where, either directly, or indirectly by distribution through any interposed partnership or trust, a natural person or a non-resident company, neither being a trustee, is taxed on the dividend.

Paragraph (b) of sub-section (4) is to apply in relation to the trustee of a trust estate to remove from the operation of section 6BA, so much of a dividend that is satisfied by an issue of bonus shares as is to be included in the net income of the trust estate on which the trustee is liable for income tax.

Under sub-clause (2) of clause 3, the new section 6BA is to apply in any case where bonus shares are allotted after the specified date, i.e., 16 August 1977, being the date of the 1977-78 Budget Speech. In that Speech, the Government indicated that legislation would be brought forward to combat tax avoidance practices.

Clause 4: Exemptions.

Paragraph (z) of section 23 of the Principal Act provides an exemption from tax for certain educational allowances paid to students receiving full-time education at a school, college or university.

Sub-clause 4(1) proposes the repeal of the existing paragraph (z) and the insertion in the Principal Act of a new paragraph (z). The new paragraph specifically excludes from the scope of the exemption, any allowances received under the Former Regular Servicemen's Vocational Training Scheme. This will ensure that allowances paid under the scheme are subject to tax. The amendment will not in any way disturb the exemptions applicable under the paragraph to other payments.

By sub-clause 4(2) the amendment will have effect in respect of amounts paid under the vocational training scheme in the 1977-78 income year and subsequent income years. The scheme commenced on 1 February 1978.

Clause 5: Assessable income from property purchased and sold within 12 months.

This clause proposes two drafting changes to sub-section 26AAA(7) of the Principal Act. Sub-section (7) applies to bonus shares that are issued by a company in satisfaction of a dividend payable on other (original) shares in the company and the amendment is related to the new provisions of section 6BA proposed by clause 3.

So far as it relates to shares, section 26AAA taxes any profit on a disposal of shares that occurs within 12 months of the date of their acquisition. This 12 months' period is established by sub-section 26AAA(7) for bonus shares by deeming them to have been purchased when the relevant associated original shares were acquired.

A dividend for section 26AAA(7) purposes includes a dividend debited against a share premium account. There are, however, some amounts paid out of share premium accounts that are not "dividends" within the particular definition of that term in section 6 of the Principal Act.

To ensure that sub-section 26AAA(7) applies to all amounts out of share premium account that are satisfied by an issue of bonus shares, paragraph (a) of sub-clause 5(1) will remove from paragraph (b) of sub-section 26AAA(7) the reference to a "dividend" and substitute a reference to an "amount" that is debited against an amount standing to the credit of a share premium account.

In order that no separate cost (other than part of the cost of the relevant original shares) is attributed to bonus shares, sub-section 26AAA(7) as presently in force deems the bonus shares to have been purchased as part of the transaction by which the relevant original shares were purchased. However, this effect will flow from the proposed section 6BA that is being inserted in the Principal Act by clause 3 of the Bill and paragraph (b) of sub-clause 5(1) will remove this duplication.

Sub-clause 5(2) provides for the amendments proposed by clause 5 to apply in relation to bonus shares allotted after the date specified in the Bill, i.e., 16 August 1977, being the same date as applies in respect of the proposed clause 3 amendment.

Clause 6: Disposal of trading stock.

This clause will amend section 36 of the Principal Act, with the object of countering schemes of tax avoidance under which taxpayers aim to secure deductions for losses on the disposal of shares and other securities.

Section 36 provides that, where trading stock forming the whole or a part of the assets of a business is disposed of by a taxpayer other than in the ordinary course of carrying on the business, the value of the trading stock is to be included in his assessable income. In these circumstances, the value to be brought to account as assessable income of the former owner or owners is ascertained in accordance with sub-section 36(8), that is, the market value at that time. The trading stock is also taken to have been acquired at that value by the new owners. In addition, where a taxpayer transfers to a partnership in which the taxpayer is a partner any property that constituted trading stock of the taxpayer, sub-section 36A(1) operates with sub-section 36(8) to treat the transfer as having taken place at the market value of the stock at the time, unless the sub-sequent provisions of section 36A are brought into application.

Section 36A of the Income Tax Assessment Act 1936 was amended last year to counter misuse of that provision by the "manufacture" of artificial tax losses through share trading schemes utilising the election available under sub-section 36A(2). This enabled trading stock to be treated as having been transferred at cost price rather than at market value.

Substitute schemes for manufacturing artificial tax losses from trading in shares, without the need to rely on the election used under the former schemes, have since been put into effect.

Under the recent arrangements, a share trading company (A) acquires at a cost of, say, $950,000, all the issued shares in another company (B) with accumulated profits of, say, $1,000,000 (represented by cash). Purchasing company A then enters into a share trading partnership with 19 high income earners seeking to minimise their tax. By agreement between the partners, purchasing company A contributes the shares in company B to the capital of the partnership at an agreed value of $25,000 as between the partners.

As pre-arranged, company B then creates and issues for $100 to purchasing company A 100 special class shares of $1 each on which it pays to company A a dividend of $950,000. Company A seeks to receive a rebate of tax on the inter-company dividend it receives, with the object of effectively freeing itself from income tax on that dividend. The payment of the dividend reduces the value of the original shares owned by the partnership in company B to an approximate value of $50,000. The partnership then disposes of these shares, in the ordinary course of its share trading business, for $30,000.

While the partnership has made a commercial profit of $5,000 (i.e., $30,000 less the cost price of $25,000) the promoters of the scheme and taxpayers who have entered into it contend that the existing income tax law deems the shares to have been acquired by the partnership for taxation purposes at a market value of $1,000,000. The resultant tax "loss" of $970,000 (i.e., $1,000,000 less the sale price of $30,000) is divided amongst the partners and claimed as a deduction against other income derived by them.

Broadly, the amendments proposed by clause 6 are designed to prevent misuse of the provisions of section 36 by arrangements of this kind.

Clause 6 will insert in section 36 two new sub-sections - sub-sections (9) and (10) - which will enable the Commissioner of Taxation to treat trading stock consisting of shares, debentures and other choses in action as having been disposed of by the vendor and acquired by the purchaser at a value that is ascertained on a commercially realistic basis having regard to any collateral arrangements or understandings designed to ensure that in circumstances of the kind outlined the true value of such trading stock is significantly less than its ostensible market value.

The proposed sub-section (9) of section 36 will provide that, notwithstanding sub-section 36(8), the value of any prescribed property for the purposes of that section, shall, if the Commissioner so determines, be such value as the Commissioner, on the basis of stated guidelines, considers reasonable. The term "prescribed property" is defined in new sub-section (10) to mean, broadly, any shares in or debentures of a company or any other chose in action. The sub-section is to apply to prescribed property disposed of by a taxpayer (in the above example - the share trading company) after the date specified in the Bill.

In forming an opinion as to the reasonable value of the prescribed property, the Commissioner will be required by sub-section (9) to have regard to the matters contained in paragraphs (a) to (f) inclusive of that sub-section.

Paragraph (a) will require the Commissioner to have regard to the cost to the taxpayer of the property. In the example given earlier, the Commissioner would be required to have regard to the cost of the shares ($950,000) notwithstanding that the shares were transferred by the taxpayer at the reduced value of only $25,000.

Paragraph (b) will require the Commissioner to have regard to any amount specified in any agreement entered into in connexion with the disposal of the property, whether specified as the value of the property or as the consideration received or receivable in respect of its disposal. In the case described above this would be the agreed transfer value of $25,000.

Paragraph (c) will require the Commissioner to have regard to any agreement or arrangement (whether or not legally enforceable and whether or not intended to be so enforceable), entered into, or any understanding reached, before the property was disposed of, as a result of which there has been, or could reasonably be expected to be, a substantial reduction in the value of the property after the disposal takes place. The Commissioner will, under this paragraph, be required to have regard to the pre-arranged plan to pay the stripping dividend.

Paragraph (d) will require the Commissioner to have regard to any transaction, operation, undertaking, scheme or arrangement involving the disposal of the property by the tax-payer or the acquisition of the property by the new owners where that transaction, etc., was entered into or carried out for a purpose of securing for any person a reduction in that person's liability to income tax in respect of a year of income. Referring again to the example given, the Commissioner will be required to have regard to the reduction in income tax by each of the partners sought to be brought about by the payment of the stripping dividend and the sale of the shares at a claimed loss of $970,000.

Paragraph (e) will require the Commissioner to have regard to any transaction, operation, undertaking, scheme or arrangement involving the disposal of the property by the taxpayer or the acquisition of the property by the new owners where the Commissioner is satisfied that the transaction, etc., was by way of dividend stripping or was similar to a trans-action, etc., by way of dividend stripping. Schemes of the kind against which the new provision is directed are commonly associated with dividend stripping arrangements.

Paragraph (f) will require the Commissioner to have regard to any other relevant matters.

Sub-section (10) will define the term "prescribed property" in sub-section (9) to mean a share or stock in the capital of a company, a debenture, note or other security issued in respect of a loan to the company or any other chose in action. This application of the new provisions matches the scope of the provision enacted in 1977 to counter schemes under sub-section 36A(2), referred to above.

Clause 7: Rebate on dividends paid as part of dividend stripping operation.

This clause will amend section 46A of the Principal Act to make clear the intended scope of the section.

Section 46A limits the otherwise allowable rebate on inter-company dividends where the dividends arise from the carrying out of an operation that the Commissioner is satisfied was by way of dividend stripping. Broadly, the rebate under section 46A is limited to so much of the dividend as exceeds the expenditure on the shares giving rise to the dividend.

Paragraph (a) of sub-clause (1) will make an amendment to paragraph 46A(3)(c) complementary to the proposed new sub-section (12B). This will ensure that the expanded reference to "shares" in the proposed sub-section (12B) will not affect the existing operation of that paragraph.

Paragraph (b) will insert a new sub-section (12A) in section 46A. Under sub-section 46A(10), the amount of otherwise rebatable dividend which is paid as part of a dividend stripping operation is reduced by any deduction attributable to those dividends. This ensures that a double benefit (i.e., a full rebate on dividends and a deduction for the loss on the sale of the stripped shares) is not received by dividend strippers. There could be an argument, however, under arrangements of the kind described in the notes relating to clause 6, that unintended benefits under section 46A might be secured by offsetting against the rebatable dividend received by company A ($950,000) only the actual cost of the special class of shares (i.e., $100) issued to company A by company B (the company with accumulated profits) and on which the dividend is paid. For section 46A to achieve its intended effect it is necessary to be able to set off against the rebatable dividend received by company A ($950,000) the total cost of all shares held by company A in company B. Broadly, the amendment proposed by clause 7 is designed to clarify the existing provisions and ensure that unintended benefits are not available.

Sub-section (12A) of section 46A will make it clear that the Commissioner may, for the purposes of sub-section (10), be satisfied that it is reasonable to offset against a dividend paid to a shareholder as part of a dividend stripping operation any deductions allowed or allowable to that shareholder, not-withstanding that those deductions might relate to the acquisition of shares in the company other than the actual shares in respect of which the dividend was paid.

Sub-section (12B), also to be introduced by clause 7, will extend the meaning of a "share" in section 46A to include property consisting of an interest in a share and a right or option (including a contingent right or option) to acquire a share or an interest in a share. This will ensure that a dividend stripping operation which relies on the diminution in value of such property will be covered by section 46A as it will also be covered by the new section 46B.

These amendments will be effective from the date specified in sub-clause (2).

Sub-clause (3) of clause 7 will specify for the purposes of sub-clause (2) when a dividend is to be taken to have been declared in certain cases where a declaration is not in fact made.

Paragraph (a) of sub-clause (3) will provide, in the case where the Principal Act deems an amount paid or credited (e.g., under sections 108 or 109) or deems assets distributed (e.g., a liquidator's distribution under section 47) to be a dividend paid by a company, that the dividend is to be taken to have been declared at the time when the amount was in fact paid or credited, or the assets were in fact distributed, as the case may be.

Paragraph (b) will provide, in the case where, by virtue of a provision in the constituent document of a company, a dividend may become payable without any declaration being made by the company, that any such dividend that has become payable is to be taken to have been declared at the time when it became payable.

Clause 8: Rebate not allowable in certain circumstances

Introductory note

This clause is a measure against tax avoidance.

A resident company is, under section 46 of the Principal Act, entitled to a rebate of tax on dividends ascertained by applying its average rate of tax to the part of the dividends included in its taxable income. The ordinary effect of the provision is to effectively free the dividends from tax. Where the payment of a dividend, however, is made in the course of an operation that the Commissioner is satisfied was by way of dividend stripping, section 46A, in lieu of section 46, governs the determination of the rebate on such a dividend. Section 46A follows the same general lines as section 46 but contains some variations specifically directed against dividend stripping arrangements.

In its most straightforward form, a dividend stripping operation involves the purchase by a share trading company of shares in another company which has accumulated profits, typically represented by assets such as cash in the bank. A payment of a dividend is then made to the share trading company which, in effect, wholly or substantially recoups its outlay on the purchase of the shares. The shares purchased are then resold for a reduced price or are retained at a reduced value, for income tax purposes. Either way, the share trading company has a tax deductible loss represented by the difference between the purchase price and the resale price or reduced value. The effect of section 46A is to allow a rebate only to the extent of the net dividends received by the share trading company after taking into account deductions relating to the purchase of the shares acquired for dividend stripping purposes.

Tax planners have devised ways and means of side-stepping the provisions of section 46A by payment of the dividend in the course of the dividend stripping operation, not directly to the share trading company in respect of the shares acquired by it, but to an associate or several associates of that company on a special class of share issued at a nominal consideration for the purpose of enabling the payment of that dividend. In some cases, dividends are paid progressively to one or more associated companies, while the original shares are progressively transferred by and to other companies, trusts or partnerships. By side-stepping the provisions of section 46A, the rebate on dividends falls to be determined under the pro-visions of section 46. As a result, while the dividends are effectively freed from tax, the cost of acquiring the shares at their pre-dividend inflated value is able to be utilised as part of other tax avoidance arrangements or offset against other income which thereby escapes full tax.

Broadly, the amendment proposed by clause 8 is designed to withdraw the unintended benefits that can be obtained from the rebate on inter-company dividends by means of these arrangements.

Clause 8 will insert in the Principal Act a new section, section 46B, which will apply to dividend stripping arrangements not covered by section 46A. This provision will ensure that no rebate under section 46 or section 46A will be allowed to a company where a dividend is paid as part of a dividend stripping operation, or as part of any similar operation, in the circumstances explained above where the company in receipt of the dividend is a company associated with the share trader.

Sub-section (1) of section 46B spells out, in paragraphs (a) to (d), the conditions and circumstances under which the section will operate. Where the arrangement entered into by a company comes within those conditions or circumstances, any rebate that would otherwise be allowable to the company which received the dividend arising from the dividend stripping or similar arrangement will not be allowable.

Paragraph (a) of sub-section (1) will identify the payment of a dividend in respect of which the section may operate. It will also apply, in conjunction with sub-sections (7) and (8), to confine the operation of the section to a dividend paid after the date prescribed in the Bill, other than a dividend declared on or before that day.

Paragraph (b) of sub-section (1) will require that, before the dividend was paid, another person acquired shares in the company to be stripped or acquired shares in a company related to that company. (Sub-section (2) explains what is a related company.)

These shares are referred to in the new section as "associated shares". By sub-section (3) the meaning of the term "shares" is expanded to include an interest in shares or a right or option to acquire shares or an interest in shares.

Paragraph (c) of sub-section (1) will require that the associated shares be acquired as trading stock or in such circum-stances that any profit that would arise on their disposal would, in whole or in part, be included in the assessable income of the person engaging in the dividend stripping operation or any loss that would arise on their disposal would, in whole or in part, be allowable as a deduction to that company.

Paragraph (d) of sub-section (1) will provide that the Commissioner must be satisfied on two matters. First, that the payment of the dividend and the acquisition of the associated shares by the person engaging in the dividend stripping operation arose out of or were made in the course of a transaction, operation, undertaking, scheme or arrangement and, second, that the transaction, operation, undertaking, scheme or arrangement was by way of dividend stripping or was similar to a transaction, operation, undertaking, scheme or arrangement by way of dividend stripping.

Sub-section (2) will explain the meaning of the expression "related to the relevant company" as that expression is used in paragraph (b) of sub-section (1). A company is to be taken as being related to another company (i.e., the company which is to be dividend stripped) if a reduction in the value of shares in the latter company could reasonably be expected to result in a reduction in the value of shares in the first-mentioned company.

Sub-section (3) is a drafting measure which will extend the meaning of a "share", to include an interest in a share and a right or option (including a contingent right or option) to acquire a share or an interest in a share.

Sub-section (4) will provide that, in the case of an acquisition by a person of shares in pursuance of an agreement to acquire those shares, that the person is to be taken to have acquired the shares at the time when the agreement was entered into. This is necessary because paragraph (b) of sub-section (1) applies to associated shares acquired before the payment of the stripping dividend. It will ensure that a person who agreed to acquire those shares, but arranged for the dividend to be paid before the actual acquisition occurred, will not escape the operation of the proposed section 46B.

Sub-sections (5) and (6) will extend the reference in sub-section (4) to an "agreement" to include arrangements or understandings and to cover agreements that are not legally enforceable. Comparable provisions appear in existing tax avoidance legislation.

Sub-sections (7) and (8) concern the date of operation of the section. As noted above, paragraph (a) of sub-section (1) will apply the section to dividends paid after the prescribed date, and sub-section (7) will further ensure that the section will not apply to a dividend declared on or before that day.

Sub-section (8) will, like sub-clause 7(3), specify for this purpose the time when a dividend is to be taken to have been declared in certain cases where a dividend becomes payable without in fact having been declared. Paragraph (a) will provide, in the case where the Principal Act deems an amount paid or credited (e.g., under section 108) or deems assets distributed to be a dividend paid by a company (e.g., section 47), that the dividend is to be taken to have been declared at the time when the amount was in fact paid or credited, or the assets were in fact distributed, as the case may be. Paragraph (b) will provide - in the case where, by virtue of a provision in the constituent document of a company, a dividend may become payable without any declaration being made by the company - that any such dividend that has become payable is to be taken to have been declared at the time when it became payable.

Sub-section (9) concerns the power of the Commissioner to amend assessments for certain purposes associated with the operation of the section.

Paragraph (a) will authorise an amendment of an assessment within three years after the date on which the tax became due and payable under the assessment to disallow a rebate that has been allowed if it is later found that the rebate should not have been allowed in the assessment concerned.

Paragraph (b) will authorise an amendment of an assessment at any time to disallow a rebate where, by virtue of sub-section (4), an acquisition of shares by a person is deemed to have taken place before the end of the year of income to which the assessment relates.

Clause 9: Certain expenditure disregarded in ascertaining taxable income

Introductory Note

The new section 52A proposed by this clause is an anti-avoidance provision to deal with situations of the same general kind as those to which the amendments proposed by clause 6 are directed.

Section 51 of the Principal Act provides in general terms for the deduction of expenditure incurred in gaining assessable income, or in the course of carrying on a business for the purpose of earning assessable income. Where trading stock is acquired by a taxpayer, the cost of that stock is normally expenditure deductible under section 51.

Section 52, which is complementary to section 26(a), allows as a deduction any loss incurred on the sale of property or from the carrying on or carrying out of any undertaking or scheme, the profit from which (if one had been made) would have been included in a taxpayer's assessable income under section 26(a).

Complex tax avoidance schemes which seek to rely on the deductibility of expenditure to acquire trading stock or on the deductibility of a loss incurred as part of a profit-making undertaking or scheme have been devised. The schemes, in essentials, are similar to that described earlier in relation to clause 6.

Under one variant of the scheme, a partnership of high income earners is formed, ostensibly to trade in shares. As a result of many complex inter-company loan arrangements and transactions which the partnership and other persons enter into, the partnership is supplied with sufficient funds to purchase all the shares in certain private companies for the purpose of dividend stripping.

There are several ways that the partnership can be provided with funds. The original source of the funds is typically a short-term loan from a financial institution and the moneys thus made available are, in further transactions, provided to the partnership. One way is by use of a "collapsible" loan - that is a loan which is repayable on demand if demanded by a specified or ascertainable date, but if repayment is not demanded by that date it becomes repayable at a time well into the future, e.g., 80 years. In practical terms, the loan is never to be repaid. Another method is to arrange for moneys out of the original loan funds to be subscribed to a company controlled by the partnership, in the form of a share premium. These funds are then on-lent to the partnership. Should the loan ever be called up, and the partnership repay the amount of the loan, the partners may liquidate the company and thereby retrieve the funds.

After acquisition of the shares by the partnership in the course of its trading operations, at a value which represents the accumulated profits to be dividend stripped, the companies issue a special class of share to another company the equity in which is owned by promoters of the scheme. The companies then pay a large dividend in respect of those shares, effectively stripping them of their accumulated profits and substantially reducing the value of the shares. The amounts paid as dividends are absorbed as part of the complex loan arrangements in repayment of the original loan to acquire the shares. The partnership then sells its shares in the companies at their substantially reduced value, making (so it is claimed) a large tax loss deductible against other income derived by the partners. The partners are not effectively out of funds to the extent of the loss because of the arrangements, outlined earlier, whereby they have been provided with money to implement the scheme.

The flow of dividends and loan arrangements are such that while there may be a liability for payment of undistributed income tax by a company involved in the scheme there will be no funds or recourse to funds available to meet any assessment of undistributed income tax which might be issued by the Commissioner.

Clause 9 will insert a new section, section 52A, into the Principal Act to counter arrangements of this kind. These provisions will complement the amendments to be effected by clause 6 of this Bill. In both instances, the amendments will apply to transfers of property being shares, stocks and other securities, and both will provide for the deduction otherwise allowable in respect of such property to be, in effect, reduced to a commercially realistic level.

Although section 52A refers in specific terms to a taxpayer, section 52A will, by reason of section 90 of the Principal Act, apply where it is a partnership that purchases the prescribed property.

Sub-section (1) of section 52A will provide that if the Commissioner considers, on the basis of stated guidelines, that it would be unreasonable for a deduction to be allowed under sub-section (1) of section 51 for the whole of any loss or outgoing incurred by a taxpayer in the purchase or acquisition of "prescribed property" as trading stock of the taxpayer, the loss or outgoing is to be allowable as a deduction only to the extent that the Commissioner considers it reasonable in the circumstances that a deduction should be allowed. The term "prescribed property" is to be defined in sub-section (4) to mean, broadly, shares, debentures or any other securities.

Sub-section (1) is to apply to a purchase or acquisition of prescribed property after the date specified in the Bill. The Commissioner's opinion as to the extent to which it is reasonable that a deduction should be allowed is to be formed having regard to the matters mentioned in sub-section (3) of the section and, like other powers contained in the Principal Act or proposed by the Bill, will be subject to review by an independent Taxation Board of Review.

Sub-section (2) will apply in similar fashion in the case where expenditure that is incurred in the purchase or acquisition of prescribed property as part of a profit-making undertaking or scheme, would, but for the sub-section, be taken into account for the purpose of ascertaining whether any profit arose, or any loss was incurred, from the carrying on or carrying out of the undertaking or scheme and for the purpose of ascertaining the amount of any such profit or loss. Sub-section (2) will, in these circumstances, allow the Commissioner to take the expenditure into account only to the extent that he considers it reasonable in the circumstances that the expenditure should be taken into account for those purposes. As with sub-section (1), the sub-section will apply to expenditure incurred after the prescribed date in the acquisition of prescribed property. Again, the Commissioner's opinion as to the extent to which it is reasonable that the expenditure should be taken into account is to be formed having regard to the matters specified in sub-section (3).

Sub-section (3) will prescribe the matters that the Commissioner must have regard to in forming an opinion for the purposes of sub-section (1) or (2) as to the extent to which it is reasonable that a deduction should be allowed to a taxpayer for expenditure incurred in the purchase or acquisition of prescribed property, or that expenditure should be taken into account for the purposes of determining any profit or loss from the profit-making undertaking or scheme, as the case may be.

Paragraphs (a) and (b) will require the Commissioner to have regard to the circumstances in which, and the persons from whom, the taxpayer obtained moneys that were expended by him, or in the opinion of the Commissioner enabled the taxpayer to expend moneys in purchasing or acquiring prescribed property. If the taxpayer borrowed from another person moneys to be so used, the Commissioner is required to have regard to the circum-stances in which, and the terms and conditions on which the taxpayer borrowed those moneys and whether, in the Commissioner's opinion, the taxpayer and the lender dealt with each other at arm's length.

Paragraph (c) will require the Commissioner to have regard to any agreement or arrangement entered into (whether or not legally enforceable and whether or not intended to be so enforceable) or understanding reached as a result of which there has been, or could reasonably be expected to be, a substantial reduction in the value of the prescribed property after it was purchased or acquired.

Paragraph (d) will require that the Commissioner have regard to any transaction, operation, undertaking, scheme or arrangement involving the purchase or acquisition of prescribed property where that transaction, etc., was entered into or carried out for a purpose of securing for any person a reduction in that person's liability to income tax in respect of a year of income.

Paragraph (e) will require the Commissioner to have regard to any transaction, operation, undertaking, scheme or arrangement involving the purchase or acquisition of prescribed property by the taxpayer where the Commissioner is satisfied that the transaction, etc., was by way of dividend stripping or was similar to a transaction, etc., by way of dividend stripping.

Paragraph (f) will require the Commissioner to have regard to the fact that the purchase or acquisition of prescribed property by the taxpayer arose out of, or was made in the course of a transaction, operation, undertaking, scheme or arrangement where, under that transaction, etc., money was to be paid or other property was to be transferred or made available by a person other than the taxpayer to the taxpayer or to any person or persons other than the taxpayer. This guideline will not apply unless the money or the value of the other property was to be not less than, or not substantially less than, the amount expended by the taxpayer in the purchase or acquisition of the property.

Paragraph (g) will enable the Commissioner to have regard to any other relevant matters.

Sub-section (4) defines the term "prescribed property" to mean a share or stock in the capital of a company, a debenture, note or other security issued in respect of a loan to the company or any other chose in action. The definition is the same as that proposed (by clause 6) in new sub-section (10) of section 36. It too applies to the same property to which the related provisions of sub-section 36A(5) apply.

By sub-section (5) of section 52A, a person who is issued or allotted prescribed property by a company will be taken, for the purposes of the section, to have acquired the prescribed property.

Sub-section (6) is a drafting measure which will extend the reference in sub-section (3) to terms and conditions to include implied terms and conditions and also terms and conditions that are not enforceable by legal proceedings regardless of whether they were intended to be so enforceable.

Sub-section (7) is designed to ensure that the cost or cost price of prescribed property, for the purposes of the application of Subdivision B of Division 2 of Part III (i.e., the provisions dealing with trading stock), is to be taken to be an amount equal to the amount of the reduced deduction which, by virtue of sub-section (1), is allowable to the taxpayer for expenditure incurred by him in the purchase or acquisition of prescribed property.

Clause 10: Expenditure pursuant to franchise.

Clause 10 provides for the termination of section 62A of the Principal Act.

Section 62A authorises deductions, over the life of a revenue-earning franchise granted by a government or public authority, for capital expenditure incurred by the owner of the franchise.

As, in general terms, a freehold owner or lessee is not entitled to deductions in respect of the capital cost of income producing assets other than plant, the section could be used to confer an entitlement to deductions that would not be available if the expenditure was incurred by a freehold owner or by a lessee.

Clause 10 will terminate the operation of the section so that deductions under the section will be available only in respect of franchises granted on or before the date specified.

Clause 11: Gifts, calls on afforestation shares, pensions, etc.

Introductory note

Under section 78 of the Principal Act, gifts of the value of $2 or more of money or of property other than money purchased within the preceding 12 months are deductible when made to a fund, authority or institution listed in paragraph 78(1)(a). The amount of the deduction available in respect of gifts of property other than money is limited by sub-section (2) to the lesser of the value of the property at the time when the gift was made or the amount paid by the donor for the property.

Clause 11 proposes amendments to section 78 to authorise deductions for gifts to The Australiana Fund and to National Trust bodies in the A.C.T. and the Northern Territory. Clause 11 also proposes the liberalisation of the conditions for the deductibility of gifts of certain property to the Australiana Fund or to a public library, public museum or public art gallery.

Gifts made on or after 1 January 1978 and on or before 31 December 1980 to the Australiana Fund or a public library, museum or art gallery of property, other than money or an interest in land or buildings, that is to form part of a collection maintained or being established by the Fund or institution, will qualify for deduction irrespective of how or when the property was acquired by the donor.

During this period, the deduction will generally be based on the value of the property at the time when the gift was made. Determination of that value is to be based on the average of two or more valuations obtained from approved valuers.

Provision is made, however, for the deduction to be based on the cost of acquiring or producing the property in circumstances where, if the property had been sold rather than being gifted, any profits or proceeds arising from the sale would have been assessable to the donor and where the value of that property is not so assessable to the donor as a consequence of the gift being made.

Specific provision is being made for the allowance of a proportionate deduction for gifts that qualify under the liberalised provisions in circumstances where the property is owned and gifted by more than one person and for a reduction of the amount otherwise deductible in circumstances such as where the donor continues to derive a benefit from the gifted property by reason that he retains some control over the custody and use of the property.

Explanations of the individual provisions of the clause follow.

Paragraph (a) of sub-clause (1) of clause 11 proposes an amendment to sub-paragraph 78(1)(a)(xxvi) of the Principal Act which authorises deductions for gifts to certain National Trust bodies. The amendment will authorise deductions for gifts to the National Trust of Australia (A.C.T.) which, until 20 December 1976, was a branch of the N.S.W. National Trust which is already included in sub-paragraph (xxvi). The amendment will also give effect to the change of name on 16 November 1976 of the Northern Territory National Trust (under which that body is included in sub-paragraph (xxvi)) to the National Trust of Australia (Northern Territory). Sub-clause 11(2) provides for these amendments to apply to gifts that are made to those bodies on or after 20 December 1976 and 16 November 1976 respectively.

Paragraph (b) of sub-clause (1) proposes the insertion of a new sub-paragraph - sub-paragraph (xlvi) - in paragraph (a) of sub-section 78(1), to authorise deductions for gifts to The Australiana Fund. The effect of the amendment will be that gifts to the Australiana Fund of money and of property other than money to which proposed new paragraph (aa) of sub-section 78(1) does not apply will qualify for deduction in accordance with the present basic provisions of section 78.

Paragraph (c) of sub-clause (1) proposes the insertion of a new paragraph - paragraph (aa) - in sub-section 78(1) to authorise deductions on the new liberalised basis for certain gifts to the Australiana Fund, a public library, public museum or public art gallery in Australia or an institution in Australia consisting of a public library, public museum and a public art gallery or any two of them.

To qualify for deduction under paragraph (aa) the gift must be of property that is given to and accepted by The Australiana Fund, or the authority or institution concerned, for inclusion in a collection maintained or being established by that Fund, authority or institution. Testamentary gifts and gifts of money, or of an estate or interest in land or in a building or a part of a building are specifically excluded from the operation of paragraph (aa). Property previously forming part of a building, as for example a stained glass window retrieved from a now demolished building, will, however, be eligible for deduction.

Paragraph (d) of sub-clause 11(1) proposes to insert in section 78, a new sub-section - sub-section (1A) - to ensure that where a deduction is allowable on the new basis under the new paragraph (aa) of sub-section 78(1) in respect of a particular gift, a deduction is not also allowable under the present provisions of section 78. This amendment will enable a person who chooses to claim a deduction under the present provisions of the law in respect of a gift that would otherwise qualify for deduction on the proposed new basis to do so by not supplying valuation certificates in respect of the gifted property. As explained in the notes on proposed sub-section (6B), one condition for a deduction being allowable under the proposed new provisions is that the donor must supply at least two valuations by approved valuers in respect of the gifted property.

Paragraph (e) of sub-clause (1) proposes an amendment to sub-section 78(2) of the Principal Act which provides that the value of a gift of property other than money shall be the lesser of the value of the gift at the time the gift is made or the amount paid by the donor for the property. The amendment proposed by paragraph (e) will ensure that that basis of valuation applies only in respect of gifts deductible under paragraph (a) of sub-section 78(1) and, accordingly, will not apply in respect of gifts that qualify under the proposed paragraph (aa).

Paragraph (f) of sub-clause (1) proposes the insertion of new sub-sections - sub-sections (6A) to (6H) - in section 78 of the Principal Act that are associated with the proposed insertion of paragraph (aa) by sub-clause (1)(c).

Sub-section (6A) of section 78 provides that, to qualify for deduction under paragraph (aa) of sub-section 78(1), the gift must be made on or after 1 January 1978 and on or before 31 December 1980.

Sub-section (6B) will require that, for a deduction to be allowable under proposed paragraph (aa) of sub-section 78(1), the donor must furnish two or more valuations of the gifted property with his or her return of income for the year of income in which the gift was made, or by such later date as the Commissioner of Taxation allows.

The valuations are to be in writing and are to state the value that, in the opinion of the person making the valuation, was the value of the property at the time the gift was made or, providing the valuation was made within 30 days before or after the making of the gift (or such longer period as the Commissioner allows) the value of the property at the time the valuation was made.

The person giving the valuation is required to be a valuer who is an approved valuer for the purpose of valuing gifts of the class of property in which the gifted property is included. Sub-section (6D) identifies persons who are approved valuers for this purpose.

Sub-section (6C) of section 78 will ensure that it is not necessary for the donor to furnish the valuations required by sub-section (6B) in circumstances where the value of the gift is to be determined by the application of paragraph (b) of sub-section (6E).

As explained in the notes on sub-section (6E), the value of a gift for the purposes of paragraph (aa) of sub-section 78(1) is to be the value of the property at the time the gift is made, determined generally by reference to the average of the valuations furnished in accordance with sub-section (6B). However, in certain circumstances, paragraph (b) of sub-section (6E) provides that the value of the gift for the purposes of paragraph (aa) of section 78(1) shall be equal to the cost of acquiring or creating the gifted property. In these circum-stances, valuation certificates are not required to be furnished in accordance with sub-section (6B).

Sub-section (6D) of section 78 will identify the persons who are to be approved valuers for the purposes of sub-section (6B). The donor of a gift is to be required to furnish valuations in respect of the gifted property from valuers who are approved at the time the valuation is made for the purposes of valuing property of the class in which the gifted property is included. Sub-section (6D) provides that an approved valuer at a particular point in time in relation to a particular class of property is a valuer whose name is included at that time in a register of approved valuers maintained by the Department of Home Affairs for the purposes of sub-section (6D) as a valuer approved for the purpose of valuing property of that class.

Sub-section (6E) provides the basis of valuation for determining the amount deductible in the case of gifts of property to which paragraph (aa) of sub-section 78(1) applies. The value ascertained under sub-section (6E) may be reduced in accordance with sub-section (6F).

Paragraph (a) of sub-section (6E) contains the general basis of valuation that is to apply otherwise than in a case to which paragraph (b) applies. Under paragraph (a), the basis of valuation is to be that of the value of the property at the time when the gift is made.

This value is, at base, to be evidenced by the average of the valuations from approved valuers furnished by the donor in accordance with sub-section (6B). However, the amount deductible may be less than this average where the Commissioner of Taxation is of the opinion that the average amount does not fairly represent the value of the property at the time. Where the Commissioner is of that opinion, the value of the property for the purposes of paragraph (aa) of sub-section (1) is to be the amount that in the opinion of the Commissioner was the value of the property at the time when the gift was made.

Paragraph (b) of sub-section (6E) specifies an alternative basis of valuation (and, hence, the amount deductible) in circumstances where firstly, if the property had been sold by the donor rather than being gifted, any profits or proceeds arising from the sale would, otherwise than by reason of section 26AAA (property disposed of within 12 months of acquisition), have been included in the assessable income of the donor and secondly, an amount is not so included in the assessable income of the donor as a consequence of the gift being made.

Where a person donates an item from his trading stock, the gift would come within the first part of the paragraph (b) test, i.e., the proceeds from the sale of the property would have been included in the assessable income of the donor if it were sold rather than gifted. However, if the disposal by gift was not in the ordinary course of carrying on the donor's business, sub-section 36(1) of the Principal Act would include the value of the gifted item in the donor's assessable income. Thus, although coming within the first part of the paragraph (b) test, the gift would not come within the second part of that test and the paragraph (b) cost basis of valuation would not apply. In these circumstances the value of such a gift for deduction under paragraph 78(1)(aa) would be determined under the rules provided in paragraph (a) of sub-section (6E).

Where, however, there is a gift of trading stock that, if sold, would be included in the assessable income of the donor and section 36(1) does not operate to include the value of the gifted item in the donor's assessable income because it is a gift made in the ordinary course of the business concerned it will be a gift that falls within the circumstances specified in paragraph (b). Similarly, a gift of property that is not trading stock but the profit on which would (otherwise than by operation of section 26AAA) be included in the donor's assessable income if sold, e.g., property originally acquired for the purposes of resale at a profit or as part of a profit-making undertaking or scheme, would also fall within the circum-stances specified in paragraph (b).

Where paragraph (b) applies, the value of the gift for the purposes of paragraph (aa) of sub-section (1) is to be an amount equal to the amount paid for the property by the donor, or, where the property is created or produced by the donor, an amount equal to so much of the cost of creating or producing that property as would have been allowed as a deduction to the donor under the Principal Act had the property been sold by the donor. Where a deduction would also be available under any other provision of the Principal Act (i.e., apart from section 78) section 82, of course, prevents a double deduction being allowed in respect of the same costs.

Sub-section (6F) may operate to reduce the amount of a deduction that would otherwise be available in respect of a gift of property that qualifies for deduction under the proposed paragraph (aa).

This reduction is to be made where the effect of the terms and conditions under which the gift is made, or the Commissioner is satisfied that the effect of any agreement, arrangement or understanding entered into in association with the making of the gift, is such that, broadly, the Fund, authority or institution does not obtain immediate custody and control or full rights to custody and control of, and full legal title to, the gifted property.

In determining the amount of the allowable deduction where these conditions apply, the Commissioner is, having regard to them, to reduce the amount of the deduction otherwise available for the value of the gift by such amount as he considers to be appropriate. The purpose of the reduction would be to arrive at the reduced value of the gift to the recipient. The amount of the reduced deduction allowable in such circumstances is broadly the amount that would be allowed in similar circumstances under the gift provisions of the present law.

Sub-section (6F), in conjunction with the new sub-section 78A(5) that is being inserted in the Principal Act by clause 12, will ensure that, notwithstanding the new section 78A, the whole of the deduction is not to be disallowed but a reduced basis of deduction will be available for gifts of the kind to which sub-section (6F) applies.

Sub-section (6G) is a drafting measure designed to ensure that a reference in the gift provisions to an agreement will be read as a reference to any form of agreement, arrangement or understanding.

Sub-section (6H) ensures that a deduction is available under paragraph (aa) of section 78(1) in circumstances where property, that if owned and gifted by one person would have qualified for deduction under that paragraph, is gifted by two or more persons who own the property jointly. The amount of the deduction to be available to each such person is to be calculated having regard to the deduction that would be available to that person if he had owned and gifted the property himself and is to be equal to so much of that amount as the Commissioner of Taxation considers appropriate having regard to that person's interest in the gifted property.

Sub-clause (2) of clause 11 proposes that the amendments apply to gifts to The National Trust of Australia (Northern Territory) and the National Trust of Australia (A.C.T.) that are made on or after 16 November 1976 and 20 December 1976 respectively.

Sub-clause (3) of clause 11 will ensure that nothing in section 170 of the Principal Act which governs the powers of the Commissioner of Taxation to amend income tax assessments shall prevent the deduction of gifts made to The National Trust of Australia (Northern Territory) or the National Trust of Australia (A.C.T.) on or after 16 November 1976 and 20 December 1976 respectively. This amendment will give the Commissioner power to amend any assessments that may have been raised, to allow deductions for gifts made to these bodies prior to the Bill receiving Royal Assent.

Clause 12: Certain gifts not to be allowable deductions

Introductory note

As explained in the notes on clause 11, section 78 of the Principal Act authorises deductions for gifts to the funds, authorities and institutions referred to therein. The amendments proposed by clause 12 will insert a new section - section 78A - in the Principal Act to strengthen the conditions under which deductions are available under paragraph (a) and new paragraph (aa) of sub-section 78(1) and to render ineffective schemes developed to exploit the availability of deductions under that section.

One such scheme involves an arrangement whereby an intending donor borrows $8,500 from a finance company to enable him to make a gift of $10,000. The donor provides the balance of $1,500 from his own resources or from other sources. The value of the note ($8,500) given by the borrower to the finance company is, by reason of its terms and conditions, reduced to a nominal sum ($20) if the borrower makes a gift to a named charity. On receipt of the gift, the charity pays a procuration fee of $9,880 for the benefit of the finance company. On payment of the gift of $10,000, the donor or a relative or other associate may acquire the right to purchase, for the nominal sum of $20 mentioned, the finance company's rights under the note.

The effects of the arrangement are that the value of the gift of $10,000 received by the charity is reduced to $120 after payment of the procuration fee and the donor, for an outlay of $1,520, claims an income tax gift deduction of $10,000.

Another group of schemes operates to reduce the benefit of a gift (of property other than money) to a charitable institution by subsequently reducing the value of the property comprising the gift. There may be various techniques for doing this. Under one scheme unsecured notes evidencing money owed by a company are purchased by persons provided with funds through a series of loan transactions. The notes provide commercially realistic rates of interest and repayment periods while the holder of the notes is a shareholder of the company. The donor, a shareholder in the company, donates the notes to a body referred to in the gift provisions which has been issued with a redeemable preference share in the company. The object is that once the income tax gift deduction has been allowed to the donor for the face value of the notes, the share will be redeemed and, under the terms of the note, the interest rate is reduced to a minimal sum, e.g., one-twentieth of one per cent per annum, and the date for repayment of principal is extended almost indefinitely. Because of these changed terms, the donor is then able to repurchase the note from the body for a nominal sum. That purchase price represents the benefit that the body, in the ultimate, receives as a consequence of the gift.

Under another group of schemes which have similar consequences for the donee body and the donor, cash is donated to the institution on condition that it be used to purchase property which is in turn lent to the donor or an associate of the donor. Alternatively, the donor makes a gift of property on condition that he retains the use and enjoyment of that property for a nominated period.

The broad effect of the amendments proposed by clause 12 will be that a deduction will no longer be available under paragraph (a) or the proposed paragraph (aa) of sub-section 78(1) in respect of gifts made after the date specified in the Bill where, by reason of the making of the gift or under any scheme or agreement associated with the gift -

(a)

the amount or value of the benefit derived by the fund, authority or institution as a consequence of the gift is, or may reasonably be expected to be, less than the amount or value of the property comprising the gift at the time the gift was made;

(b)

the donor or an associate obtains, or may reasonably be expected to obtain, any benefit, advantage, right or privilege other than the benefit of a tax saving; or

(c)

the fund, authority or institution is to acquire property from the donor or an associate.

Notes on the individual provisions of proposed section 78A follow.

Sub-section (1) of section 78A defines terms used in the section -

"agreement" is defined as including any agreement, arrangement or understanding whether that agreement, arrangement or understanding is formal or informal, express or implied and whether or not enforceable by legal proceedings, irrespective of whether it was intended to be so enforceable.

"associate" is defined in relation to a donor as including -

•

a relative (section 6 of the Principal Act) of the donor

•

a partner of the donor

•

a spouse of a partner of the donor

•

a trustee of a trust estate where the donor or a person who is, by reason of this definition, an associate of the donor, benefits or is capable of benefiting under the trust either directly or through any interposed companies, partnerships or trusts

•

a company that is effectively controlled (either in their own right or collectively) by the donor or by persons who are, by reason of this definition, associates of the donor and including any companies that are controlled by that company

and, in addition, where the donor is a company -

•

a person who, either by himself or together with persons who are, in the terms of this definition, associates of that person, is able effectively to control the donor company, and

•

persons who are, in the terms of this definition, associates of a person who effectively controls the donor company.

Sub-section (2) of section 78A is the operative provision that sets out, in paragraphs (a) to (d), the circum-stances in which a deduction will not be available under paragraphs (a) or (aa) of section 78(1) for gifts made after the specified date.

Under paragraph (a) of sub-section (2), a gift is not to be an allowable deduction where the amount or value of the benefit derived by the fund, authority or institution as a consequence of the gift is less than the amount or value of the gift at the time when it was made, and this happens by reason of any act, transaction or circumstance that has occurred as part of, in connexion with, or as a result of the making or receipt of the gift or of any agreement or scheme entered into in association with the making or receipt of the gift.

Paragraph (a) will also operate to preclude a deduction for a gift where there is a prospective reduction in the value of the gift, by reason of any such act, agreement, etc., that will occur or that may reasonably be expected to occur.

Paragraph (a) would operate to deny a deduction for the gift in the circumstances of schemes explained in the introductory note to this clause. However, as explained in the notes on sub-section (4), paragraph (a) will not operate to deny a deduction in circumstances where the reduction in the amount or value of the benefit derived by the institution as a consequence of the gift is caused only by reason of reasonable expenses having been incurred in obtaining or soliciting the gift.

Paragraph (b) of sub-section (2) is a safeguarding provision designed to ensure that the provisions of paragraph (a) will not be avoided. Without paragraph (b) this could happen through the use of affiliated bodies under arrangements whereby one body receives the gift and another body incurs the liability, obligation, detriment or disadvantage that, under paragraph (a), would result in the amount or value of the benefit derived as a consequence of the gift being less than the amount or value of the property comprising the gift at the time the gift was made.

Paragraph (b) thus provides that a deduction is not to be available in respect of a gift where, by reason of any act, transaction or circumstance, of a kind referred to in paragraph (a), any fund, authority or institution other than a fund, authority or institution to which the gift is made,

•

makes or becomes liable to make a payment to any person;

•

transfers or becomes liable to transfer any property to any person; or

•

incurs or becomes liable to incur any other detriment, disadvantage, liability or obligation.

Consistent with paragraph (a), the operation of paragraph (b) also extends to any liability or transfer or any other detriment, disadvantage, liability or obligation that, having regard to the scheme or agreement associated with the gift, may reasonably be expected to arise.

By paragraph (c) of sub-section (2), a deduction for a gift is to be denied if the donor or an associate of the donor has obtained, will obtain or may reasonably be expected to obtain any benefit, advantage, right or privilege by reason of any act, transaction or circumstance that occurs as part of, in connexion with or as a result of the making or receipt of the gift or as a result of any scheme or agreement associated with the gift. Paragraph (c) will not, however, operate to deny a deduction by reason only that the donor would be entitled to the benefit of an income tax deduction in respect of the gift.

Paragraph (d) of sub-section (2) relates to arrangements that have been developed to obtain a deduction for what is, effectively, a gift of property that would not otherwise qualify for deduction. Under these arrangements, a gift of cash is made to a fund, authority or institution on the basis that the money be used to acquire property from the donor or an associate of the donor.

Under the amendments proposed by paragraph (d), gifts made under an arrangement after the specified date whereby the donee is to acquire other property from the donor or an associate of the donor will not qualify for deduction. Paragraph (d) will apply whether the arrangements are such that the other property is acquired by the fund, authority or institution to which the gift is made or by another fund, authority or institution.

Sub-section (3) will strengthen the operation of paragraph (c) of sub-section (2). Sub-section (3) deems paragraph (c) of sub-section (2) to apply to a gift where the terms and conditions attaching to the gift result in the fund, authority or institution not receiving immediate custody and control of the property, not having the unconditional right to retain custody and control of the property in perpetuity (to the exclusion of the donor or an associate of the donor) or not obtaining immediate and full title to the property. The effect will be that a deduction will not be allowable for the gift.

Sub-section (3) thus ensures that paragraph (2)(c) will operate to deny a deduction in circumstances where the terms and conditions under which the gift is made are such that the donor retains the right of use of the gifted property for himself or an associate.

Sub-section (4) of section 78A will ensure that paragraph (a) of sub-section (2) will not operate to deny a deduction for a gift by reason only that the fund, authority or institution incurs, or is expected to incur, expenses for the purpose of obtaining or soliciting the gift in circumstances where those expenses are, in the opinion of the Commissioner of Taxation, reasonable in relation to the value of the gift.

Sub-section (5) of section 78A will ensure that where sub-section 78(6F) applies to allow a reduced deduction under section 78(1)(aa) in respect of the gift, section 78A will not operate to deny a deduction in respect of the gift.

Clause 13: Sufficient distribution

Introductory note

This clause is designed to counter schemes of tax avoidance whereby a dividend that a private company pays to free itself from undistributed income tax is effectively reimbursed to the company.

Section 105A of the Principal Act provides that a private company will be deemed to have made a sufficient distribution in relation to a year of income if it has, within a prescribed period of twelve months ending ten months after the end of that income year, paid in dividends at least the amount by which the distributable income of the year (broadly, its after-tax income) exceeds the proportion of its income specified as the retention allowance under section 105B of the Principal Act (60 per cent in the case of trading income; 10 per cent in the case of property income other than private company dividends and nil in the case of private company dividends). A private company which fails to make a sufficient distribution is liable to additional tax on the undistributed amount at the rate of 50 per cent.

Sub-sections (3) and (4) of section 105A of the Principal Act were inserted into that section in 1972 to safe-guard against a device by which a private company could technically satisfy the requirement to make a sufficient distribution of its profits. This was done by the issue of special class shares in the company at a premium to a public company in pursuance of an arrangement under which the amount of the premium was to be paid over by the public company in exchange for roughly equivalent amounts of dividends to be declared and paid to it by the private company.

The public company would receive the dividends effectively tax-free because of the rebate of tax on inter-company dividends. The private company, while paying a dividend which would be taken into account in determining whether it had made a sufficient distribution of its profits for undistributed income tax purposes, would be effectively reimbursed for the payment of the dividend by the share premium it received.

While sub-sections (3) and (4) of section 105A of the Principal Act have proved to be an effective safeguard against arrangements of this particular kind, other kinds of arrangements have been devised to enable a private company similarly to technically satisfy the requirement to make a sufficient distribution of its profits.

One technique, which has been upheld by a Taxation Board of Review, involved the issue by a private company of special class preference shares in the company for an amount slightly less than the sum it was required to distribute as a sufficient distribution of its profits. A once-and-for-all dividend necessary to satisfy the sufficient distribution requirements of the law was then paid. The preference shares carried rights which entitled the holders to the once-and-for-all dividend but, upon payment of that dividend, the preference shares virtually ceased to carry any voting rights, dividend rights or capital distribution rights.

In schemes of this kind, it is common that after payment of the dividend, the preference shares are sold by their original holder at a nominal price and the original holder thereby incurs a loss on resale roughly equivalent to the amount of the dividend. The loss on resale of the shares is claimed as a deduction by the original holder thereby effectively freeing the dividend from tax.

Similar, but rather more complicated, arrangements have been used in other cases in which convertible notes have been issued - but the result sought is the same; effectively, the private company makes no distribution of its profits and, apart from a fee it usually pays to the promoter and the other participants in the arrangements, the company retains its profits intact.

Under the convertible note technique the company issues to the promoter of the scheme as trustee of a family trust a redeemable convertible note (with a face value of $10) at a premium of, say, $250,000 and simultaneously allots to the promoter, again as trustee, a redeemable preference share with a par value of $2 carrying very limited rights, except the right to a once-and-for-all dividend of $255,000. Usually on the same day, the company declares and pays the dividend of $255,000 and the scheme promoter as trustee disposes of the convertible note and the preference share at their par values to himself in his personal capacity and the company then redeems the note and the preference share.

The result of this complex series of transactions is that the company makes a sufficient distribution of $255,000; the scheme promoter receives a fee of some $5,000, ostensibly for acting as trustee, and the dividend is effectively received in a tax-free form by reason of the off-setting of the loss on sale of the preference share, the convertible note and the trustee's fee.

Yet again, the dividend that is declared may be used to pay up shares that are issued to the shareholder in whose favour the dividends are declared, but the shares that are issued are more or less worthless.

In situations where the person to whom the dividend is declared is not able to offset that dividend for taxation purposes by the loss on disposal of the shares concerned, the dividend may have been payable to an institution whose income is exempt from tax.

Sub-clause 13(1) will omit sub-sections (3) and (4) of section 105A of the Principal Act and substitute sub-sections (3) to (4E) inclusive. The new sub-sections will operate not only against arrangements of the kind formerly covered by the existing sub-sections (3) and (4), but also against the more recent kinds of arrangements entered into to circumvent existing anti-avoidance measures and sufficient distribution requirements of the law.

Sub-section (3) of section 105A will operate to ensure that a dividend is not taken into account in determining whether a private company is to be deemed to have made a sufficient distribution if the dividend is paid in pursuance of an agreement under which a benefit is to be provided to the company and the Commissioner is satisfied that the value of the benefit was to be not less than, or not substantially less than, the amount of the dividend. The sub-section will also provide for the situation where the benefit is to be provided to another person or persons or to the company and another person or other persons. This will ensure that the provisions will not be capable of being avoided by the simple expedient of arranging for the benefit to flow to other persons (e.g., to an associate or to a trust for the benefit of persons associated with the shareholders in the company paying the dividend).

Sub-section (4) of section 105A is a drafting measure that will extend the references in paragraph (a), (b) or (c) of sub-section (3) to a person and to a company to include a person or a company, as the case may be, in the capacity of a trustee.

Sub-section (4A) will, in relation to a person, mean that an agreement is to be viewed for the purposes of sub-section (3) as an agreement under which a benefit is to be provided to the person only if it is one under which money is to be paid to, property transferred to or services provided for, the person for less than full consideration. Sub-section (4A) is to be read with sub-sections (4B) and (4C).

Sub-section (4B) will ensure that certain agreements whereby loans or other debts cease for all practical purposes to be repayable, or shares, debentures, or other property worth less than their ostensible value are to be issued or transferred, are deemed to be agreements under which a payment of money is to be made to the borrower, debtor or company, as the case may be. Sub-section (4A) will then operate to treat the transaction as the provision of a benefit for the purposes of sub-section (3), the value of which is to be ascertained under sub-section (4D).

Paragraph (a) of sub-section (4B) will describe the essential features of a type of loan known in tax avoidance jargon as a "collapsible loan". Briefly, a collapsible loan is one which, according to its terms, is repayable on demand provided repayment is demanded by a specified or ascertainable date, but if not so demanded becomes repayable at a time far into the future, e.g., 80 years. In practical terms, the loan is usually never to be repaid.

Paragraph (b) will deal with the case where a debt is released or abandoned or where an agreement is made not to demand payment of the debt when it falls due.

Paragraph (c) will deal with the case where a dividend is credited to a person by a company and the payment of that dividend is in whole or in part to be satisfied by the issue to the person of any shares in, or debentures of, the company or by the transfer to the person of any property.

Sub-section (4C) will enable an agreement under which money is to be paid, or property is to be transferred, in exchange for the issue or transfer of shares in a company, or of debentures of a company to be taken, in the application of section 105A, to have been made for no consideration. One result which follows will be that the agreement for the payment of money or transfer of property in these circumstances will constitute an agreement under which a benefit is to be provided. A further result will be that in determining the value of a benefit in accordance with paragraph (a) of sub-section (4D), the value of the consideration given for that payment of money or transfer of property will be treated as nil.

Sub-section (4D) will provide that the reference in sub-section (3) to "the value of a benefit" is to be read as a reference, in the case of a payment of money or a transfer of property, to the amount by which, in the opinion of the Commissioner, the amount of money paid, or the value of the property transferred, exceeds the value of any consideration given for that payment or for that transfer, as the case may be. Similarly, in the case of the provision of services, the reference in sub-section (3) to "the value of a benefit" will be read as a reference to the amount by which, in the opinion of the Commissioner, the value of the services provided exceeds the value of any consideration given for the provision of those services.

Sub-section (4E) is a drafting measure intended to remove any doubt that the term "property" in the preceding provisions will include a chose in action and any estate, interest, right or power, whether at law or in equity, in or over property.

Sub-clause 13(2) provides for the amendments to be made by sub-clause 13(1) to apply in relation to dividends paid after the specified date, other than dividends declared on or before that date.

Sub-clause 13(3) supplements the application date specified in sub-clause (2) by providing for a declaration date in those circumstances where a dividend is not in fact declared.

Paragraph (a) of sub-clause (3) will provide, in the case where the Principal Act deems an amount paid or credited (e.g., under sections 108 or 109) or deems assets distributed (e.g., under section 47) to be a dividend paid by a company, that the dividend is to be taken to have been declared at the time when the amount was in fact paid or credited, or the assets were in fact distributed, as the case may be.

Paragraph (b) will provide, in the case where, by virtue of a provision in the constituent document of a company, a dividend may become payable without any declaration being made by the company, that any such dividend that has become payable is to be taken to have been declared at the time when it became payable.

Clause 14: Purchase of prospecting or mining rights or information

This clause proposes an amendment to section 124AB of the Principal Act consequential upon amendments proposed to be made to section 124AR and the proposed insertion of a new section - section 160ACA - relating to the allowance of rebates for capital subscriptions to petroleum mining companies.

Section 124AB relates to the acquisition of a petroleum prospecting or mining right or petroleum prospecting or mining information. Capital expenditure incurred by a tax-payer 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) imposes limits on the amounts that may be transferred in this way. It provides for the aggregation of the amount of undeducted allowable capital expenditure and exploration expenditure (other than on plant) of the vendor as at the end of the year of income, incurred on the area that is the subject of the right or to which the information relates. This provides a limit on the amount that may be transferred to the purchaser.

Sub-section 124AB(6) presently provides for reduction of the aggregate amount referred to in sub-section (3) where the vendor of the right or information has an amount of net declared capital for the purposes of section 124AR of Division 10AA. The sub-section is, by clause 14, to be amended to provide for a similar adjustment where the vendor has an amount of net eligible declared capital for the purposes of section 124AR.

The term 'net declared capital' is to be redefined in the amendments proposed to be made to section 124AR by clause 16 of the Bill. It will be, broadly, so much of the sum of the amounts received by a company as moneys paid on shares and specified in declarations made by the company in pursuance of section 77D of the Principal Act or section 77A (repealed in 1969) as has not been applied to reduce the deductions allowable to the company for capital expenditure. A result of making those declarations is that a company elects to forgo deductions otherwise available to it under Division 10AA to the extent of the amount declared, so that deductions will be available for that amount to the shareholders of the company.

'Net eligible declared capital' is a term that is to be defined in section 124AR by the amendments proposed by clause 16 of the Bill. Shortly stated, it will mean so much of the sum of the amounts received by a company as moneys paid on shares and specified in declarations made by the company in pursuance of the proposed new section 160ACA (that is to be inserted in the Principal Act by clause 20 of the Bill) as has not been applied to reduce the deductions allowable to the company for certain capital expenditure incurred after 24 August 1977. The making of a declaration under the proposed section 160ACA has the effect of the declarant company forgoing deductions otherwise available to it under Division 10AA to the extent of the amount specified in the declaration, so that rebates will be available for 30 per cent of that amount to the shareholders of the company.

The purpose of proposed new sub-section (6) is to follow existing principle by restricting the deductions available to a purchaser of a petroleum mining or prospecting right or information to so much of the amounts referred to in sub-section (3) as exceeds the net declared capital and the net eligible declared capital of the vendor. This will ensure that the purchaser is not entitled to greater deductions in relation to expenditure incurred in acquiring the right or information than the vendor would have been entitled to if the right or information had not been sold.

Where the net declared capital and the net eligible declared capital relates to expenditure on more than one area, the Commissioner is authorised to determine the proportion of the total net declared capital and net eligible declared capital as may reasonably be attributable to the area that is the subject of the right or information disposed of. In such a case, only that proportion is to be taken into account for the purposes of the sub-section.

Clause 15: Unapplied moneys paid on shares specified in certain declarations

This clause proposes a technical amendment to Division 10AA of the Principal Act by inserting a new section - section 124AEA - to ensure that the correct amount of net declared capital is brought to account in section 124AR as a result of declarations lodged under sections 77A and 77D.

Section 124AE brings to account allowable capital expenditure that comprised unrecouped capital expenditure under the provisions of section 124DF (replaced by section 124AE in 1974), being expenditure incurred on or before 30 June 1973. It also applies to allowable capital expenditure incurred after 30 June 1973 and on or before 17 September 1974, or after that date and before 1 July 1976 in pursuance of a contract entered into before 17 September 1974. The total of these amounts is referred to as unrecouped previous capital expenditure which is deductible immediately against assessable income from petroleum.

In certain circumstances, for example, where moneys declared under section 77A or 77D have not been spent within the relevant period or where other set-offs such as petroleum search subsidies were received, the amount of declared moneys could exceed a company's unrecouped capital expenditure or unrecouped previous capital expenditure, as the case may be. The policy of the legislation, recognised in declarations by companies in favour of shareholders, is that unapplied declared moneys be applied in reduction of the company's deduction entitlements for capital expenditure incurred in subsequent years. Proposed new section 124AEA will provide clear authority to treat those unapplied declared moneys as net declared capital for the purposes of section 124AR, and thus as moneys to be applied, in keeping with companies' declarations, as an offset against otherwise deductible expenditure.

Sub-section (1) of proposed section 124AEA will apply where the amounts to be offset against unrecouped capital expenditure of a company under section 124DF (repealed in 1973) exceed the amount of the unrecouped capital expenditure at the end of the year of income next preceding the year of income in which 17 September 1974 occurred. In that event, so much of the excess as comprises moneys paid on shares that were specified by the company in a declaration lodged under section 77A or under section 77D will be deemed to be net declared capital for the purposes of section 124AR in relation to the company's year of income in which 17 September 1974 occurred and all subsequent years.

Sub-section (2) will operate in a similar manner in relation to unrecouped previous capital expenditure that is defined by paragraph (b) of section 124AE of the Principal Act. It will have effect where, at the end of the year of income of a company in which 30 June 1976 occurs, the amounts to be offset against the unrecouped previous capital expenditure of the company, that are specified in paragraphs (c) to (g) of that section, exceed the amount of the unrecouped previous capital expenditure and any amount of unrecouped capital expenditure brought forward under paragraph (a) of that section. So much of the excess as comprises moneys paid on shares that were specified by the company in a declaration lodged in pursuance of section 77D will be deemed to be net declared capital for the purposes of section 124AR in relation to the company's year of income in which 30 June 1976 occurs and all subsequent years.

Clause 16: Reduction of allowable deductions where certain declarations lodged

As explained in the later notes on clause 20 of the Bill, a company engaged in mining or prospecting for petroleum (including natural gas) in areas on the continental shelf of Australia will be able, by lodging a declaration under the proposed new section 160ACA of the Principal Act, to confer an entitlement on its shareholders for a rebate in respect of moneys subscribed after 24 August 1977 as paid-up capital on shares in the company.

Where a company elects to make a declaration under the new section 160ACA, the special deductions under Division 10AA to which it would otherwise be entitled for capital expenditure on off-shore petroleum operations, are, to the extent that the capital subscriptions received were specified in the declaration, to be correspondingly reduced.

Section 124AR presently authorises reductions of this kind in relation to declarations made under section 77D of the Principal Act.

The main purpose of the amendments proposed to be made to section 124AR is to incorporate in that section a basis for the calculation of the reductions to be made in a company's entitlement to deductions under Division 10AA in relation to capital expenditure incurred after 24 August 1977, where the company has made a declaration pursuant to section 160ACA. In addition, technical amendments are proposed consequential upon the introduction of proposed section 124AEA, referred to in the notes on clause 15 of the Bill.

Paragraph (a) of clause 16 will omit sub-section (1) of section 124AR and insert a new sub-section (1) in its stead. The sub-section contains definitions of several terms used in the section -

'mining company': This term is not being changed and retains the same meaning as in section 77D. It means, broadly, a company that carries on, or that proposes to carry on, as its principal business, exploration, prospecting or mining in Australia for petroleum or other minerals, except gold.

'mining or prospecting outgoings' will have the same meaning as that term is to have in the proposed new section 160ACA. Shortly stated, it means expenditure of a petroleum mining company (as defined) incurred in carrying on exploration, prospecting or mining operations for petroleum in off-shore areas on the continental shelf of Australia, that is allowable capital expenditure under the provisions of Division 10AA.

'net declared capital': This is the amount which, from time to time, remains to be applied in reduction of the deductions of a mining company that has lodged a declaration under section 77D, insofar as it applies in relation to petroleum exploration or mining. It also includes unapplied declared moneys specified in declarations under section 77A and 77D that are deemed to be net declared capital by virtue of the new section 124AEA.

From the total of these amounts is deducted the sum of any amounts by which the company's deductions have been reduced in a previous income year by the application of this section. The net result so obtained will be the net declared capital as at the end of the year of income.

'net eligible declared capital': This term, in relation to a petroleum mining company, will mean the sum of any amounts specified in declarations lodged by the company in pursuance of new section 160ACA that have not been expended in making payments to other petroleum mining companies (referred to as prescribed payments) and which remain to be applied in reduction of deductions allowable for mining or prospecting outgoings incurred after 24 August 1977.

In ascertaining the amount of net eligible declared capital it will first be necessary to determine the amounts that have been specified in declarations under section 160ACA and to exclude any amounts that have been expended in making capital subscriptions to other petroleum mining companies. The second step requires the amount so ascertained to be diminished by the sum of any amounts by which the company's deductions for capital expenditure incurred after 24 August 1977 (referred to as prescribed petroleum deductions) have been reduced in a previous income year by the application of this section. The figure produced from this calculation will be the net eligible declared capital as at the end of the year of income.

'petroleum exploration company': This term has been inserted because of the inter-relationship between section 77A and section 124AR arising from the changes to be made to the definition of net declared capital and associated provisions. It means, broadly, a company that has received moneys paid on shares which were specified in an appropriate declaration lodged by the company under section 77A.

'petroleum mining company' is a term used in common with section 160ACA because of the relationship between the two sections. Shortly stated, it means a company that holds valid licences or permits under the Petroleum (Submerged Lands) Act or registered interests therein which enable it to engage in exploration or development operations for petroleum on the continental shelf of Australia.

'prescribed deduction' is a modified form of the term now used in section 124AR. The definition specifies the type of deduction that may be reduced consequent on a declaration made by a mining company under section 77D or, as a result of the revised definition, by a petroleum exploration company under section 77A. The deductions specified are, broadly -

•

deductions available under sections 124AD, 124ADB, 124AH or 124AM for allowable capital expenditure in carrying on prescribed petroleum operations or exploration or prospecting for petroleum; and

•

depreciation allowances on plant in respect of which the company has elected to be allowed deductions for depreciation, in lieu of deductions available under Division 10AA of the Principal Act, for the cost of the plant.

The revised definition will not, however, apply to deductions for capital expenditure incurred in off-shore areas after 24 August 1977 that are to be reduced by amounts specified in declarations lodged under section 160ACA. Those deductions, referred to as prescribed petroleum deductions, are to be treated separately and reduced under proposed new sub-section (2A) of section 124AR.

'prescribed payments' is to have the same meaning as it will have in section 160ACA. It means, broadly, payments by a company to a petroleum mining company that will be applied as paid-up capital in the petroleum mining company and expended on mining or prospecting outgoings by the petroleum mining company.

'prescribed petroleum deduction': This term specifies the kinds of deductions for mining or prospecting outgoings that, in relation to a petroleum mining company, may be reduced by the amount of net eligible declared capital arising from declarations lodged under section 160ACA by the company. The deductions specified comprise, broadly -

•

deductions available under sections 124ADB, 124AH or 124AM for allowable capital expenditures that constitute mining or prospecting outgoings (as defined) incurred after 24 August 1977, i.e., exploration, prospecting or mining operations for petroleum on the continental shelf of Australia; and

•

depreciation allowances on plant for use in off-shore petroleum operations the expenditure on which is incurred after 24 August 1977 and in respect of which the company has elected for depreciation, in lieu of deductions available under Division 10AA of the Principal Act, for the cost of the plant.

Excluded from the meaning of this definition are deductions for capital expenditure that has been, or is deemed to be, incurred by the provisions of proposed sub-section (4) of section 124AR out of unexpended moneys paid on shares that were specified in declarations lodged under section 77A or section 77D. This expenditure will form part of the amount that constitutes prescribed deductions (a defined term already described in the notes on this sub-section).

Paragraphs (b) and (c) of clause 16 propose two amendments to sub-section (2) of section 124AR -

•

to insert a reference to a petroleum exploration company, being a company that has received moneys paid on shares which it specified in a declaration lodged under section 77A; and

•

to replace paragraph (a) of sub-section (2) with a new paragraph (a) to refer to a company that has at any time lodged a declaration or declarations under sections 77A or 77D.

Sub-section (2) of section 124AR of the Principal Act is the section which enables prescribed deductions to be reduced by the amount of net declared capital. The amendments to it are consequential upon the proposed insertion of section 124AEA that brings to account unapplied moneys paid on shares that were specified under sections 77A and 77D.

Paragraph (d) of clause 16 proposes the omission of sub-section (3) of section 124AR of the Principal Act and the insertion of three new sub-sections - sub-section (2A), (3) and (4) - in that section.

Sub-section (2A) will perform the same function in relation to prescribed petroleum deductions and net eligible declared capital as sub-section (2) of section 124AR now does in respect of prescribed deductions and net declared capital. It will state the circumstances in which the prescribed petroleum deductions are to be reduced and will quantify the amount of the reductions. The sub-section will apply only where the three tests set out in paragraphs (a), (b) and (c) of the sub-section are satisfied. These tests are -

(a)

that the petroleum mining company concerned shall have lodged a declaration or declarations under section 160ACA;

(b)

that, in relation to the company, there is at the end of the year of income an amount of net eligible declared capital; and

(c)

that the company is (or would be but for section 124AR) entitled for the income year to prescribed petroleum deductions.

If all of these tests are satisfied, the Commissioner is required to apply the whole, or a part, of the net eligible declared capital in reduction of the prescribed petroleum deductions in the following manner -

•

where the total prescribed petroleum deductions exceeds the net eligible declared capital, paragraph (d) of sub-section (2A) requires that the whole of the net eligible declared capital is to be applied in reduction of the prescribed petroleum deductions;

•

where the total of the prescribed petroleum deductions does not exceed the net eligible declared capital, paragraph (e) of sub-section (2A) requires the application of so much of the net eligible declared capital as will reduce the prescribed petroleum deductions to nil.

In a case where paragraph (d) has applied there will be a full recoupment against the company's deductions of the capital subscriptions of shareholders allowed by way of rebates. Where paragraph (e) has applied, the balance, if any, of the net eligible declared capital not applied in reduction of prescribed petroleum deductions for the relevant income year will remain available for set-off against prescribed petroleum deductions of subsequent years.

The proposed new sub-section (3) of section 124AR is substantially a replica of the existing sub-section (3), modified to include a reference to a petroleum exploration company and a petroleum mining company in addition to a mining company, that is, a company that has lodged declarations under any of sections 77A, 77D or 160ACA. It also includes a reference to new sub-section (2A).

Sub-section (3) is a provision that ensures that deductions available to those companies for their allowable capital expenditure, exploration or prospecting expenditure, or for depreciation allowances, are not disturbed beyond the extent necessary to give effect to section 124AR.

This result is achieved by deeming those deductions to have been allowed in full even though they have been reduced by the operation of sub-section (2) or (2A).

Sub-section (4) is a provision designed to regulate the order in which unexpended moneys paid on shares that have been specified in declarations lodged under sections 77A, 77D and 160ACA are to be treated as having been outlaid on mining or prospecting outgoings. The effect of the provision will be that unexpended moneys specified in declarations under sections 77A and 77D will be deemed to be expended first on mining or prospecting outgoings and the deduction entitlements arising therefrom will be treated as prescribed deductions that are to be reduced under sub-section (2) by the amount of net declared capital.

Where the mining or prospecting outgoings exceed any amount of unexpended section 77A and 77D moneys the balance of those outgoings, to the extent of any unexpended section 160ACA moneys, will be treated as having been expended on mining or prospecting outgoings. Mining or prospecting outgoings financed in this way or out of other funds will constitute prescribed petroleum deductions that are to be reduced under sub-section (2A) by the amount of net eligible declared capital.

Sub-section (4) will apply where the tests set out in paragraphs (a) and (b) of the sub-section are met, that is, where -

(a)

a company incurs expenditure on mining or prospecting outgoings; and

(b)

immediately before that expenditure was incurred the company held unexpended moneys paid on shares being moneys that were specified in a declaration or declarations lodged by the company in pursuance of section 160ACA and either or both of sections 77A and 77D.

In these circumstances the sub-section provides that the expenditure on mining or prospecting outgoings mentioned in paragraph (a) (referred to as the relevant expenditure) shall be deemed, for the purposes of section 124AR, sub-section 77D(20) and section 160ACA to have been expended by the company out of those unexpended moneys in the manner prescribed in paragraphs (c) to (f).

Paragraph (c) provides that where the unexpended moneys included section 77A moneys - the relevant expenditure shall, to the extent of those section 77A moneys, be deemed to have been expended out of those moneys.

Paragraph (d) provides that where the unexpended moneys included section 77D moneys but not section 77A moneys - the relevant expenditure shall, to the extent of those section 77D moneys, be deemed to have been expended out of those moneys.

Paragraph (e) stipulates that where the unexpended moneys include both section 77A and section 77D moneys and the relevant expenditure exceeded the amount of section 77A moneys, the excess is deemed to have been spent out of section 77D moneys.

Where the relevant expenditure exceeds the sum of any section 77A and 77D moneys, paragraph (f) provides that so much of the excess as does not exceed the amount of the section 160ACA moneys shall be deemed to have been expended by the company out of the section 160ACA moneys.

Clause 17: Application of Division to primary producers.

This clause is designed to counter schemes of tax avoidance under which taxpayers become entitled to the benefits of the averaging provisions through having a minimal interest in income from a trust that carries on a business of primary production.

Under Division 16 of Part III of the Principal Act, a person is eligible, where this is of benefit to him, to have the rate of tax applicable to his taxable income determined by reference to averaging provisions, if he is a primary producer. The application of averaging is, by section 157, confined to persons carrying on a business of primary production.

Sub-section 157(3), however, extends the ambit of the Division beyond people who themselves carry on a business of primary production by providing, in effect, that where the trustee of a trust estate is carrying on a business of primary production a beneficiary who is presently entitled to share in the income derived by the trust is to be treated, for purposes of the averaging provisions, as if he were carrying on the business carried on by the trustee.

As sub-section (3) stands, a person is eligible to have the whole of his taxable income subject to averaging if he is an income beneficiary in such a trust, even if his interest in the trust is minimal.

The amendments proposed by this clause will vary the operation of sub-section 157(3) in the light of a recent Court decision. That decision concerned a case where the taxpayer, as one of a number of taxpayers, had an entitlement to $1 of income from a trust the trustee of which carried on a business of primary production. The transactions leading to the tax-payer's receipt of this income were found to be explicable only by reference to a desire to attract the averaging provisions of the statute and the taxation advantage which they conferred. Nevertheless, the taxpayer having met the specific tests of sub-section 157(3), the Court held that section 260 of the Principal Act had no application.

Sub-clause (1) of clause 17 proposes two amendments to section 157, designed to overcome schemes of this kind. The first of these, contained in paragraph (1)(a) of the sub-clause, will make it clear that the application of sub-section 157(3) is to be subject to the provisions of proposed new sub-section 157(3A) to be introduced by the second of the amendments contained in paragraph (1)(b).

New sub-section (3A) will, as a screening mechanism, limit the application of sub-section (3) in the first instance to those beneficiaries of a primary production trust estate who have a present entitlement to a share of the trust's income in the income year of $1,040 or more. However, a beneficiary whose entitlement to share in the trust income is less than $1,040, will also qualify for the application of sub-section (3) if the Commissioner of Taxation is satisfied that the person's interest as beneficiary in a trust estate was not acquired primarily for the purpose of having the benefit of the averaging provisions applied in relation to his income. This will mean that the beneficiary will be deemed to be carrying on a business of primary production in the year, and averaging will be applicable. A beneficiary whose income interest is less than $1,040, and who did acquire his interest as a beneficiary primarily to obtain averaging benefits will, however, by reason of sub-section (3A) not enjoy them.

Sub-clause (2) of clause 17 governs the application of the amendment proposed by sub-clause (1). The amendments are to apply for the purpose of determining whether a beneficiary in a trust estate is to be deemed to be carrying on a business of primary production at any time after the date specified in the Bill.

This will ensure that the amendments apply generally in respect of income of the 1977-78 and subsequent income years, other than in relation to a taxpayer who became a beneficiary in a relevant trust estate on or before the specified date. For such a person, the amendments will first apply in respect of income of the 1978-79 income year.

Clause 18: Election that this Division shall apply.

The purpose of this clause is to give full technical effect to the intended policy that primary producers who have been outside the averaging system will have an unqualified right of re-entry for the 1977-78 income year.

When, in association with the introduction of the new standard rate system of personal income tax, amendments were made last year to the averaging provisions, it was explained in the explanatory memorandum dealing with the relevant clause - clause 15 of the Income Tax Assessment Amendment Bill (No. 2) 1977 - that there would be this right of re-entry. However, the strict technical effect of that clause was that a right of re-entry for 1977-78 was given only to primary producers who had withdrawn for 1965-66 or an earlier year.

By sub-section (1A), to be inserted in section 158AA of the Principal Act, a right of re-entry for 1977-78 is given to primary producers who have withdrawn from averaging for 1966-67 or a subsequent year. Averaging will, of course, apply automatically in 1978-79 and later years, where this is to the taxpayer's benefit.

Clause 19: Rebates for dependants.

The purpose of this clause is to ensure that the receipt of benefits paid by the Commonwealth under its scheme for assistance with the education of isolated children will not adversely affect taxpayers' entitlements to zone and other rebates. Under existing law this can happen because the benefits constitute separate net income of a dependant under section 159J of the Principal Act.

Although child and student rebates have been replaced by family allowances, these rebates have been 'notionally' retained in section 159J, because if the tests of dependency are met, eligibility for rebates under other sections may be established or affected. One of those tests is the amount of the dependant's separate net income. If the separate net income of a dependant exceeds $189 in 1977-78, the relevant notional rebate is reduced by $1 for every $4 over $189. Under section 79A, a resident of a prescribed isolated area who has dependent children is entitled to a zone rebate of a proportion of the notional rebate for the child.

As a consequence of the amendment, payment of the isolated children's benefit will not adversely affect the entitlement of a taxpayer to the zone rebate or other rebates. Other rebates that may be affected favourably by the amendment are those for a sole parent or a housekeeper, and the rebate of 32 per centum on certain concessional expenses in excess of $1,590. The particular expenses within the group of items comprising the latter rebate are medical, funeral and education expenses.

Sub-clause (1) of clause 19 amends the definition of "separate net income" in sub-section 159J(6) of the Principal Act, to ensure that benefits paid under the scheme are excluded from separate net income.

Sub-clause (2) of clause 19 applies the amendments made by sub-clause (1) to assessments in respect of the 1977-78 and subsequent years of income.

Clause 20: Rebate for moneys paid on shares for the purposes of off-shore petroleum exploration, prospecting or mining

Introductory Note

The principal purpose of this clause is to insert a section - section 160ACA - in the Principal Act that will introduce an income tax concession in the form of a rebate to shareholders in respect of capital subscriptions to certain petroleum exploration and mining companies. It will also insert an additional section - section 160ACB - in the Principal Act that is designed to operate as a safeguard against abuse of the concession. A further section - section 160ACC - is concerned with the inter-relationship of the new provisions with aspects of the investment allowance.

Subject to a number of important qualifications, the new scheme will incorporate many of the features of section 77D of the Principal Act. That section permitted companies engaged in exploration and mining activities in Australia to forgo their deduction entitlement under Division 10 or Division 10AA in favour of their resident shareholders, where the companies specified the capital subscriptions received in declarations lodged with the Commissioner of Taxation.

Under the new scheme, only companies holding valid licences or permits under the Petroleum (Submerged Lands) Act, or registered interests in licences or permits under that Act, will be permitted to lodge declarations. These declarations will be limited to capital subscriptions received after 24 August 1977 and may include subscriptions made by both resident and non-resident shareholders.

Where companies elect to lodge declarations under the scheme they will need to declare that the share moneys will be spent, or have been spent, on outgoings deductible under Division 10AA of the Principal Act for capital expenditure incurred after 24 August 1977 in respect of off-shore exploration for petroleum and the development of off-shore petroleum fields. Eligible capital expenditures also include expenditures on facilities located on-shore that are directly related to the off-shore petroleum operations, to the extent that they qualify as allowable capital expenditure under Division 10AA. However, the cost of acquiring petroleum mining or exploration rights or petroleum prospecting or mining information will not qualify under the scheme.

The effect of the declarations will be to withdraw deductions otherwise available to the companies under Division 10AA and confer income tax rebates on subscribers of capital at a rate of 30 cents for each dollar of paid-up capital subscribed. The rebates to shareholders are not to give rise to a refund of tax or to a carry-forward credit.

As with section 77D, the scheme is to apply where moneys are subscribed through a company interposed between the shareholders and a company engaged in eligible petroleum exploration or mining operations. A pre-requisite, however, will be, broadly, that the interposed company be a public listed company, or a subsidiary thereof, and that the operating company be wholly owned by the interposed company or by that company and one or more other companies all of which are companies whose shares are listed on a stock exchange.

The scheme will incorporate safeguarding provisions contained in section 77D and its associated section 77E of the Principal Act. It will also contain the following additional safeguards -

(a)

declared moneys must be spent on eligible outgoings in the income year of receipt or within the two income years following the income year in which the moneys are subscribed;

(b)

an interposed company that receives moneys for transmission to an operating petroleum mining company must pass those moneys on within 2 months of receipt;

(c)

declarations will only be permitted in respect of all, or a specified proportion of the capital subscriptions received in a year of income, expressed as a percentage of the total capital subscriptions received;

(d)

capital subscriptions not immediately spent on eligible outgoings must be held in readily realisable deposits with a bank, in the short term money market or in Commonwealth securities;

(e)

where declared moneys are not expended in accordance with the declaration and within the prescribed period, the tax rebate to the subscriber is to be withdrawn but no reinstatement of the deduction entitlements of the company will be made; and

(f)

a taxpayer entitled to a rebate in respect of share capital subscriptions specified in a declaration is not to have the moneys so specified taken into account in calculating any profit or loss on sale of the shares.

A more detailed explanation of the provisions of section 160ACA and the associated provisions is contained in the notes that follow.

Proposed section 160ACA

Sub-section (1) of section 160ACA defines certain expressions used in the section -

'adjacent area' is a term used to refer to the off-shore areas of Australia where eligible (petroleum) operations will be carried on. It means an area specified in Schedule 2 to the Petroleum (Submerged Lands) Act 1967 as being adjacent to a State or Territory of Australia.

The areas to be treated as adjacent areas are the same as the areas covered by section 6AA of the Principal Act, which is the general provision under which the income tax law applies to continental shelf mining and associated activities.

The adjacent areas comprise the areas of Australia's territorial sea and the continental shelf beyond. The term "continental shelf" is used in these notes as a convenient description of the whole of the adjacent areas.

'authorized dealer in the short-term money market': This phrase has been defined to facilitate a reference to such dealers for the purposes of the definition of 'short-term investments' explained later in the notes on sub-section (1). It is to mean a person who deals in securities issued by the Commonwealth, who for that purpose borrows money for short periods, and who has been declared by the Reserve Bank of Australia to be an authorised dealer in the short-term money market.

'eligible operations' have been defined to facilitate drafting and means exploration, prospecting and mining for petroleum in an adjacent area (as defined).

'mining or prospecting outgoings': This expression is designed to specify in relation to a petroleum mining company (as defined), the manner in which moneys paid on shares specified in declarations lodged by it under section 160ACA may be expended. It means expenditure that is -

•

incurred in carrying on eligible operations (as defined) or incurred wholly and exclusively, and directly, in connexion with eligible operations; and

•

is allowable capital expenditure within the meaning of section 124AA or is exploration expenditure referred to in section 124AH.

It does not include expenditure on the acquisition of a petroleum prospecting or mining right or petroleum prospecting or mining information.

The phrase 'wholly and exclusively, and directly, in connexion with eligible operations' is intended to extend mining and prospecting out-goings to expenditure on plant and facilities located on-shore which qualify as allowable capital expenditure under section 124AA of the Principal Act, but only where that plant or those facilities are acquired or constructed wholly and exclusively, for use directly in connexion with the off-shore eligible operations (that is, exploration, prospecting or mining for petroleum on the continental shelf of Australia).

'moneys paid on shares': This definition specifies the classes of share capital which may qualify for rebate under section 160ACA. These comprise amounts paid on shares after 24 August 1977 by way of application and allotment moneys and calls which are applied by a company towards the paid-up value of its shares (see also sub-section (2)). It will not include -

(a)

moneys paid on redeemable shares; or

(b)

moneys lent to a company that are subsequently treated as payment in respect of shares issued by the company or calls made by the company on its shares.

'petroleum mining company' is defined as meaning a company -

(a)

that is the holder of a current production licence or a current exploration permit, for petroleum, issued under Part III of the Petroleum (Submerged Lands) Act 1967 or a holder of any registered interest in such a licence or permit; and

(b)

that carries on, or that the Commissioner is satisfied proposes to carry on, eligible operations (as defined).

'prescribed payments' has been defined to facilitate drafting. It means payments to petroleum mining companies by a company interposed between its shareholders and the petroleum mining company in respect of shares in those companies, being payments made for the purpose of enabling the moneys to be expended by those petroleum mining companies on mining or prospecting outgoings (as defined). The petroleum mining companies referred to are those which conform with the preceding definition and which, at the time the capital is contributed, are, broadly, wholly owned by the inter-posed company or by that company and other companies all of which, including the interposed company, are listed companies or subsidiaries thereof.

'short-term investments': This term has been defined to facilitate the drafting of sub-section (24) of section 160ACA that requires unexpended moneys paid on shares specified in declarations under section 160ACA and not immediately required for expenditure on mining or prospecting outgoings to be held in short-term investments. It means investments -

(a)

by way of deposit with a bank, being a trading bank as defined by sub-section 5(1) of the Banking Act 1959, or with another bank approved by the Commissioner of Taxation;

(b)

by way of loan to, or deposit with, an authorised dealer in the short-term money market (as defined in this sub-section);

(c)

in securities of the Commonwealth; or

(d)

in any other manner approved by the Commissioner of Taxation,

being investments, the terms of which require the moneys invested to be repaid on demand or on the giving of a period of notice not exceeding 3 months.

The authority to be conferred on the Commissioner under paragraph (d) is designed to enable him to approve other forms of investment that are fully secured and similar in nature to those included in the definition.

Sub-section (2) of section 160ACA has the purpose of ensuring that the section operates only in relation to amounts that are applied by a company towards the paid-up value of shares issued by it. The money paid may be applied as application moneys, allotment moneys, calls or as other payments made to the company as part of the paid-up capital on the shares. Moneys not applied towards the paid-up value of shares, e.g., application moneys that are refunded or premiums on shares, will not be covered by section 160ACA.

Sub-section (3) will allow a petroleum mining company (as defined) that has received moneys paid on shares (as defined) to lodge with the Commissioner of Taxation a written declaration that the company has spent, or proposes to spend those moneys in the year of income in which those moneys were received or before the expiration of two years of income of the company next succeeding that year of income, on mining or prospecting outgoings (as defined).

The lodgment of such a declaration will be a pre-requisite to the allowance of rebates to shareholders who have paid the moneys concerned. (The rebate will be authorised by sub-section (5) of this section.) A complementary provision in section 124AR of the Principal Act, already described in these notes, will result in a corresponding reduction in the allowances for capital expenditure to which the company would otherwise be entitled under Division 10AA.

A declaration, signed by the public officer of the company, may be lodged before the expiration of one month after the end of the income year of the company in which the capital subscriptions were received. The Commissioner is to be empowered to extend the time for lodgment.

Sub-section (4) is a safeguarding measure which provides that where a company specifies in a declaration lodged under section 160ACA (that is, under sub-sections (3), (7) or (13)(a)) part only of the moneys paid on shares in the year of income, the amount so specified is to be expressed as a percentage of the total of all moneys paid on shares received in the year. Where a declaration excludes moneys paid on particular shares or a particular class of shares or moneys paid by particular persons, the declaration will be invalid.

Sub-section (5) is the operative provision under which a shareholder will be entitled to a rebate of tax of 30 cents for each dollar subscribed as moneys paid on shares to a petroleum mining company that has made a declaration under sub-section (3). The rebate will be allowed in the shareholder's assessment in respect of the year of income in which the share capital subscription was made.

In the generality of cases the rebate is likely to be 30 per cent of the amount paid to the company on shares and specified in the declaration by the company. The operation of sub-section (5) will, however, be subject to the other provisions of section 160ACA and to new section 160ACB. As explained later in these notes, section 160ACB deals with a possible misuse of the provisions of section 160ACA that involves schemes for the sale of shares in petroleum mining companies after the shares are 'stripped' of their tax benefits.

The total amount of any rebates allowable to a tax-payer in an assessment for a year of income will, by virtue of section 160AD of the present law, be limited to the amount of tax that would otherwise be payable by the taxpayer on that assessment, and no amount of rebate will be carried forward into assessments of succeeding years or give rise to a refund of tax.

Sub-section (6) of section 160ACA will apply where a declaration has been made under sub-section (3) but the Commissioner is not satisfied that any of the moneys specified in the declaration have been, or will be, spent by the company on mining or prospecting outgoings within the prescribed period.

Where a declaration under sub-section (3) relates, wholly or partly, to moneys which the Commissioner is not satisfied have been or will be, used for mining or prospecting outgoings within the required period, sub-section (6) will require that an appropriate reduction be made in the rebate allowable to each of the shareholders who have contributed those moneys.

As explained in the introductory notes on section 160ACA, where rebates are reduced in this way, the companies will, nevertheless, continue to forgo their deduction entitlements under Division 10AA to the extent of the moneys specified in the declaration that relate to those rebates. This effect results from the absence of a provision to restore the deductions in the circumstances to which sub-section (6) applies.

The Commissioner is, by proposed sub-section (6), required to inform the company if he is not satisfied that the moneys specified in a declaration, have been or will be used on mining or prospecting outgoings within the prescribed period. Should a taxpayer be dissatisfied with the Commissioner's resulting determination of the amount of the rebate allowable, he will have the usual right of objection. On reference to a Taxation Board of Review, it will be open to the Board to substitute its determination for that of the Commissioner.

Sub-sections (7) to (15) are designed to allow rebates, in certain circumstances, for capital subscribed to companies whose activities, in the year of income in which the capital was subscribed, have been restricted to exploration, prospecting or mining in Australia for petroleum or other minerals (excluding gold), or, where there is an appropriate relationship, to the provision of capital to petroleum mining companies. Some of these companies might not be carrying on eligible operations themselves and therefore may be unable to qualify as petroleum mining companies for the purposes of sub-sections (3), (5) and (6). Companies of this kind are placed between the original subscriber of capital and the company actually engaged in prospecting or mining operations for petroleum, and for convenience, they will be referred to as interposed companies.

The plan of sub-sections (7) to (15) is to provide for the making of declarations by interposed companies. Sub-section (7) permits an interposed company to lodge a declaration, sub-sections (8) to (11) specify the status required of an interposed company, while sub-sections (12) to (15) set conditions on the allowance of rebates in accordance with such declarations.

An important pre-requisite to the eligibility of an interposed company to lodge a declaration (sub-section (8)) is, broadly, that the company must be a listed company as defined in sub-section (9) at the time it subscribes capital to a petroleum mining company. That is, its shares must be listed for quotation on a stock exchange in Australia or elsewhere. Alternatively, it may be eligible where all of the interposed company's shares are, in the ultimate, beneficially owned by no more than two companies each of which is a listed company at the relevant time.

Sub-section (12) contains provisions applying where a declaration is made by an interposed company in relation to moneys it has already expended when it makes the declaration. Sub-sections (13) and (14) govern the position where the declaration of an interposed company relates to moneys it has received and is still holding when it lodges the declaration.

Capital contributions to interposed companies will not be rebatable if the provisions of those sub-sections are not satisfied. Correspondingly, where a declaration is not validly lodged by the interposed company at the outset, there will be no adjustment to the deductions allowable to the petroleum mining company. Where declarations are duly lodged by both the interposed company and the petroleum mining company, however, and rebates are not allowed for reasons prescribed in other provisions of section 160ACA or in section 160ACB, the petroleum mining company will continue to forgo the deductions to which it would otherwise be entitled under Division 10AA.

Sub-section (15) provides for the allowance of rebates for moneys specified in a declaration by an interposed company, but, under later provisions, an adjustment of the rebate will be made where the Commissioner is not satisfied that the moneys have been, or will be expended on eligible operations within the prescribed period, or if undertakings given by a company are not fulfilled.

The various sub-sections are examined in more detail in the following notes.

Sub-section (7) relates to a company, required by sub-section (8) to be a listed company (as defined by sub-section (9)), that has not, during a year of income in which the company has received moneys paid on shares, carried on any business apart from -

•

exploration, prospecting and mining operations for the purpose of gaining or producing assessable income, as described in paragraph (a); or

•

providing capital to petroleum mining companies that are, at the time, appropriately related to the first-mentioned company (referred to as an interposed company). An appropriate relation-ship is one where the whole of the share capital in the petroleum mining companies -

(i)

is beneficially owned by the interposed company, which must be a listed company as defined in sub-section (9); or

(ii)

is beneficially owned by that interposed company and one or more other companies all of which must be listed companies or companies wholly owned by listed companies.

If a company in this category has received "moneys paid on shares" it may lodge with the Commissioner of Taxation a declaration that it has expended, or proposes to expend, the whole or a specified part of those moneys in the manner and within the period prescribed in paragraphs (c), (d) and (e) of the sub-section.

As previously explained, where a company specifies part only of the moneys paid on shares it receives, sub-section (4) requires that the part of the moneys so specified be expressed as a percentage of the total of all of the moneys paid on shares received in the year of income. This requirement applies also to declarations under sub-section (7).

By paragraph (c) of sub-section (7), the declaration must state that the company has expended or proposes to expend the moneys specified -

•

if the company is itself a petroleum mining company - on mining or prospecting outgoings or on the making of prescribed payments or both;

•

where the company is not a petroleum mining company - on the making of prescribed payments.

As already mentioned, 'prescribed payments' are defined in sub-section (1) and means the provision of share capital to petroleum mining companies of the kind referred to in paragraph (b) of sub-section (7) for the purpose of enabling the moneys paid to be expended by those petroleum mining companies on mining or prospecting outgoings.

Paragraph (d) requires that where any of the moneys specified in the declaration have already been expended on the making of capital subscriptions to petroleum mining companies, the moneys were so expended within 2 months of the date on which the company received the moneys.

Paragraph (e) of sub-section (7) deals with the situation where all or a part of the moneys specified in the declaration have not been expended at the time the declaration is lodged. In these circumstances the declaration must stipulate that the company proposes to expend the moneys -

(i)

in the case of moneys to be expended on mining or prospecting outgoings - before the expiration of the second year of income of the company next following the year of income in which the company received the moneys; or

(ii)

in the case of moneys to be expended on the making of prescribed payments (i.e., capital subscriptions to petroleum mining companies) - within 2 months of the date on which the company received the moneys.

The lodgment of a declaration under this sub-section is a pre-requisite to the allowance, under sub-section (15), of rebates to shareholders for capital subscribed by them to an interposed company of the kind described.

As already mentioned, a complementary reduction is to be effected (by the proposed amendments to section 124AR of the Principal Act) in the deductions to which the company using the money on mining or prospecting outgoings may otherwise be entitled in relation to its capital expenditure.

Sub-section (8) imposes a further qualification on the eligibility of an interposed company to lodge a declaration under sub-section (7) in respect of prescribed payments.

It provides that where a company has lodged a declaration under sub-section (7) and has expended moneys specified in the declaration on prescribed payments, the declaration shall, to the extent of the moneys so expended, be deemed not to have been duly lodged unless the interposed company was a listed company at the time the prescribed payments were made.

Sub-section (9) defines the circumstances in which a company shall be taken to be a listed company, for the purposes of sub-sections (7) and (8) of section 160ACA and for the purposes of sub-section (7) of section 160ACB. These circum-stances are where, at a particular time -

(a)

shares in the company (other than preference shares) are listed for quotation on the official list of a stock exchange in Australia or in another country; or

(b)

all the shares in the company are beneficially owned at that time by no more than two companies each of which is a listed company, as defined in paragraph (a), and the company satisfies the Commissioner that it is reasonable in the circumstances to treat the company as a listed company.

For the purpose of tracing the beneficial ownership of shares in a company special tracing provisions are contained in sub-section (11).

Sub-section (10) empowers the Commissioner to treat a company as a listed company notwithstanding the temporary removal of its shares from the official list of a stock exchange.

It provides that where shares in a company that were listed for quotation on the official list of a stock exchange cease to be listed and are later restored to the list the Commissioner may -

•

having regard to the reason why the shares ceased to be listed; and

•

the period during which they ceased to be listed,

treat the shares, for the purposes of section 160ACA and section 160ACB, as not having ceased to be listed during that period.

Sub-section (11) is designed, for the purposes of sub-section (9), to enable the beneficial ownership of the shares in an interposed company to be traced through any number of companies in a group of companies to the ultimate parent company or companies.

Paragraph (a) of sub-section (11) specifies that if, at any time, a company (i.e., a parent company) is the beneficial owner of shares in a second company and, at the same time, the second company beneficially owns shares in a third company then the first (or parent) company shall be deemed to be, at that time, broadly, the beneficial owner of the shares in the third company in the same proportions as its ownership of shares in the second company bears to the total number of shares in that company. Thus if the first (parent) company owns all of the shares in the second company it will be treated as owning all of the shares held by the second company in the third company.

Paragraph (b) of sub-section (11) extends the application of paragraph (a) to any number of subsidiary companies in a group of companies the beneficial ownership of which may be traced to the ultimate parent company.

Sub-section (12) of proposed section 160ACA prescribes the circumstances in which an effective declaration may be made by an interposed company in respect of capital contributed on its shares and already invested in a petroleum mining company at the time the declaration is made. A declaration made by an interposed company in relation to such capital is to be effective only if -

•

the petroleum mining company has itself made a declaration for the purposes of sub-section (3) that it has expended, or proposes to expend, the moneys on mining or prospecting outgoings within the prescribed period;

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the Commissioner has, in writing, informed the interposed company that he is satisfied that the money will be so used; and

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the interposed company seeking rebates for its shareholders has not itself been allowed a rebate in respect of those moneys.

These tests accord with the principle of allowing rebates only if the capital subscribed is used for mining or prospecting outgoings. They are also required to enable the appropriate adjustments to be made in the deductions for capital expenditure to which a company may otherwise be entitled under the proposed amendments to section 124AR of the Principal Act.

Sub-section (13) will apply where an interposed company has received moneys paid on shares that it has not expended at the time it makes a declaration under sub-section (7). As already mentioned, where an interposed company proposes to expend the moneys specified in such a declaration on capital subscriptions to petroleum mining companies for use on mining or prospecting outgoings (i.e., prescribed payments) it is required to pass over the moneys within two months of the date the moneys were received.

Sub-section (13) governs the circumstances in which a declaration in respect of unexpended moneys paid on shares will be effective. It requires that the declaration be accompanied by an undertaking by the interposed company that it will not, without the approval of the Commissioner, subscribe the moneys specified in the declaration to a petroleum mining company unless the petroleum mining company makes the appropriate declaration required by paragraph (a) and that the Commissioner be satisfied that the moneys will be used for mining or prospecting outgoings. In conformity with the general plan of section 160ACA the petroleum mining company will declare its intention to expend the moneys concerned on mining or prospecting outgoings in the year of income in which it receives the moneys or before the expiration of the succeeding two years of income.

The Commissioner, on being satisfied that the money will be so used, will advise the interposed company accordingly. Shareholders in that company will then be entitled to rebates for the capital subscribed by them that has been specified in the declarations.

In some circumstances, it may not be convenient for a petroleum mining company to lodge a declaration for each amount of capital subscribed by an interposed company. To meet this situation, it is provided that the undertaking will leave the interposed company free to pay the capital to a petroleum mining company without the appropriate declarations of that company being first obtained, if the Commissioner approves the payment. Approval of the Commissioner will, in effect, operate as an extension of the time in which declarations may be lodged by the petroleum mining company.

Sub-section (14) permits the Commissioner, for the purposes of sub-section (13), to approve the payment of moneys to a petroleum mining company (i.e., prescribed payments) in circumstances where he has not required a declaration to be lodged under paragraph (a) of sub-section (13), if he is satisfied that the petroleum mining company -

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will expend the moneys on mining or prospecting outgoings in the year of income in which it receives the moneys or before the expiration of the succeeding two years of income; and

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will lodge the appropriate declaration for the purposes of sub-section (3) before the expiration of one month after the close of the year of income in which it receives the money.

Should there be a case in which a mining company fails to make the declaration for the purposes of sub-section (3), the Commissioner may advise the interposed company of the failure and the shareholders in the interposed company will cease to be entitled to rebates for capital specified in the relevant declaration.

Sub-section (15) of section 160ACA will allow rebates for capital contributed directly by shareholders to interposed companies. The amount of the rebate will generally be 30 cents for each dollar paid on the shares in the interposed company and specified in the declaration made by that company under sub-section (7). The operation of sub-section (15) will, however, be subject to other provisions of section 160ACA and the provisions of the proposed new section 160ACB that is explained later in these notes.

Sub-section (16) is complementary to sub-section (15). Its effect is to prevent a rebate under sub-section (5) being allowed, to an interposed company that has made a declaration under sub-section (7), in respect of any moneys specified in that declaration. An entitlement to a rebate will be conferred on that company's shareholders under sub-section (15).

Paragraph (b) of sub-section (16) also operates to deny a deduction to an interposed company in respect of expenditure incurred by it in making payments on shares to petroleum mining companies (i.e., as 'prescribed payments') out of moneys specified in declarations made by it under sub-section (7). Such a deduction would duplicate the rebate allowed to the company's shareholders.

Sub-section (17) will operate where an interposed company has made a declaration relating to capital received but not expended before the declaration is made. If the appropriate undertaking and declaration have been given under paragraph (a) of sub-section (13) and other steps have been completed to entitle shareholders in that company to rebates in respect of those moneys, then a petroleum mining company to which those moneys are subsequently subscribed will not be entitled to lodge a declaration under sub-section (3) or sub-section (7) relating to those moneys. The declaration made by a petroleum mining company under sub-section (13) operates in the same way as a declaration made under sub-section (3) or (7) of section 160ACA for the purposes of that section and for the purpose of reducing the company's entitlements to deductions for capital expenditure under Division 10AA of the Principal Act.

Sub-section (18) of section 160ACA will apply where the Commissioner is not satisfied that moneys specified in a declaration duly lodged under sub-section (7) have been or will be expended in accordance with the declaration, or where he is of the opinion that an interposed company has failed to comply with an undertaking given by it under sub-section (13). It also will apply where an interposed company has used the moneys specified in such a declaration to subscribe for shares in a petroleum mining company and the latter company fails to expend the moneys in accordance with its declaration.

If the Commissioner gives the interposed company and, where appropriate, the petroleum mining company, appropriate written advice of his views, paragraph (a) of the sub-section will reduce the rebates allowable to the shareholders in the interposed company so as to bring them into line with the amount as to which the requirements of section 160ACA have, in the Commissioner's view, been satisfied. Sub-section (18) thus will apply to interposed companies in the same way as sub-section (6) is to apply to petroleum mining companies.

Notwithstanding the reduction under sub-section (18) in the rebates allowable to its shareholders, where an inter-posed company has expressed its intention to expend a part of the moneys paid on shares specified in a declaration under sub-section (7) on mining or prospecting outgoings, the interposed company will, to the extent of the moneys so appropriated, continue to forgo deductions to which it might otherwise be entitled under Division 10AA for capital expenditure on eligible operations in the same way as will petroleum mining companies in similar circumstances.

Where an interposed company has given an undertaking for the purposes of sub-section (13) in respect of money to which sub-section (18) applies, paragraph (e) of sub-section (18) will release the company from its undertaking in relation to that money.

Sub-section (19) will apply where a company has, perhaps inadvertently, lodged a declaration under either of the sub-sections (3) or (7) and wishes to lodge a declaration under the other sub-section. The sub-section enables the company to lodge a further declaration under the other sub-section in respect of the same moneys with the approval of the Commissioner. It is also provided that the first declaration shall be deemed not to have been duly lodged where a second declaration under a different sub-section is approved.

Sub-sections (20) to (24) will apply to both petroleum mining companies and interposed companies.

Sub-section (20) is a provision that will have application only where it is necessary to trace moneys specified in a declaration and the manner in which the moneys have been dealt with cannot be readily ascertained from the records of the company that made the declaration. In these circumstances, the manner in which the money has been dealt with may be determined by the Commissioner.

A taxpayer whose assessment is affected by the Commissioner's determination will have the usual rights of objection and appeal. In the event of a reference to a Taxation Board of Review, the Board would have power to substitute its own opinion for that of the Commissioner.

Sub-section (21) will ensure that a declaration made by a company will not be rendered invalid for the reason only that it specifies moneys in excess of those that actually qualify for rebate under section 160ACA. For example, the company may have erroneously included in its declaration moneys paid on redeemable shares. The sub-section provides that, in such a case, the declaration will remain valid as to the moneys which do, in fact, fall within the section.

Sub-section (22) is directed at special classes of arrangements an objective of which may be to exploit the rebates available under section 160ACA.

The sub-section is to have effect where the Commissioner is satisfied that any moneys specified in a declaration lodged by a company under section 160ACA were paid by a person in pursuance of an agreement or an arrangement made in connexion with the purchase by the company of a mining or prospecting right or mining or prospecting information or shares in a company owning such a right or information. If the Commissioner is so satisfied he may inform the company lodging the declaration to that effect.

In this event, the sub-section provides that a rebate will not be allowable under section 160ACA in respect of the amount of moneys paid in pursuance of the agreement or arrangement.

Sub-section (23) is designed as a safeguard against avoidance of the application of sub-section (22) in respect of the purchase of shares in a company that holds rights or information. In its absence, the provisions of sub-section (22) could be avoided if a person selling shares arranged for one or more companies to be interposed between the company which holds the rights or information and the company in which the shares are sold. Where these circumstances exist, the company in which shares are sold will be deemed, for the purposes of sub-section (22), to hold the right or possess the information.

Sub-section (24) applies to moneys specified in a declaration under sub-sections (3), (7), or (13(a)) by a company, which have not been expended but which the company has stated it proposes to expend in the future in accordance with its declaration. In the interim, the sub-section in effect will require those unexpended moneys to be held by the company in short term investments if shareholders' entitlement to rebates is to be preserved. The term "short term investments" is defined in sub-section (1).

To meet this objective the Commissioner may, where he is satisfied that the unexpended moneys are not held in short term investments, inform the company by notice in writing to this effect, and, in that event, paragraph (d) will operate to reduce the amount of any rebate allowable to the company's shareholders that relates to the moneys not so invested. Where a company has given an undertaking for the purposes of sub-section (13) in respect of moneys to which sub-section (24) applies, paragraph (e) will release the company from its under-taking in relation to that money.

Sub-section (25) is a safeguarding provision designed to prevent a taxpayer from gaining a double benefit in respect of moneys paid on shares to a company that lodges a declaration under section 160ACA. The sub-section provides that where a person has been allowed or is entitled to a rebate under section 160ACA in respect of the moneys paid on shares, he shall not also be entitled to a deduction from his assessable income for the amount of those moneys nor shall the moneys be taken into account in ascertaining any profit or loss on the sale of shares in respect of which the moneys were paid.

The principle incorporated in this sub-section accords with that specified in section 82 of the Principal Act, which prohibits double deductions.

Sub-section (26) will entitle partners in a partnership, which has subscribed capital to a company that has made a declaration under section 160ACA specifying the moneys paid on shares by the partnership, to a rebate for their respective shares of the moneys paid.

A partnership is not subject to tax on its income. Each partner is, however, taxed on his share of the net income of the partnership and is allowed a deduction for his proportion of any loss incurred by the partnership.

The sub-section will, therefore, authorise the apportionment of the rebate allowable between the partners in the same proportions as they share the net income and any losses of the partnership. Each partner's share of that rebate will then be treated in the same way, for the purposes of the allowance of the rebate against his tax, as if he had expended his share of the moneys paid on shares.

Sub-section (27) will apply in cases where the trustee of a trust estate subscribes capital to a company that specifies the moneys paid on shares in a declaration lodged under section 160ACA. Its purpose is similar to that of sub-section (26) in relation to partners in a partnership, and will enable the persons assessed on the net income of a trust estate to qualify for a rebate in respect of an appropriate share of the moneys paid on shares by the trustee.

Section 160ACB: Sale of shares in petroleum mining companies.

The proposed new section 160ACB will have the effect of withdrawing rebates otherwise allowable to a person under the proposed section 160ACA for capital subscribed directly or indirectly to a petroleum mining company, should the shares concerned be sold or otherwise disposed of to a petroleum mining company or to a petroleum mining investment company (a 'prescribed company') before the moneys subscribed have been expended on mining or prospecting outgoings.

The provisions generally follow those already incorporated in section 77E of the Principal Act which similarly applied to deductions otherwise allowable under section 77D. Section 77E was designed to limit shareholders to deductions related to the excess of the amount of money subscribed by them for mining or prospecting over the amount recouped by them on the sale of the shares.

The proposed safeguarding provisions of section 160ACB will apply in the same manner to limit rebates to share-holders by reference to the net amount of money supplied by them for use on mining or prospecting outgoings. For the purposes of Division 10AA of the Principal Act, however, the companies will be treated as having specified the amount of declared moneys subscribed by shareholders, before offset by the amount received by shareholders on the sale of their shares, and will forgo relevant deductions under Division 10AA to that extent.

Section 160ACB will not apply to the sale of shares in a 'listed' company as defined in sub-section (9) of section 160ACA (that is, a company whose shares are listed on the official list of a stock exchange in Australia or elsewhere or a wholly owned subsidiary of such a company), except in certain specified circumstances. These circumstances include cases where contracts, arrangements or understandings are entered into by a person to sell or dispose of the shares to a prescribed company at the time moneys are paid on the shares by that person.

Sub-section (1) of proposed section 160ACB defines certain expressions used in the section -

'eligible operations' is defined to have the same meaning as in section 160ACA, where it will mean exploration, prospecting or mining for petroleum in an adjacent off-shore area of Australia.

'mining or prospecting outgoings': This term is also given the same meaning as it will have in section 160ACA. It is designed to stipulate, in relation to a petroleum mining company, the manner in which the company may expend moneys paid to it on shares that are specified in declarations lodged under section 160ACA.

'prescribed company': This definition is designed to facilitate references for the purposes of the new section 160ACB to a company that acquires shares in another company that has lodged a declaration under section 160ACA. It means a company that carries on a business of exploring or mining for petroleum in the off-shore areas on the continental shelf of Australia (i.e., eligible operations) or that the Commissioner of Taxation is satisfied intends to carry on such activities.

The term extends to a company engaging in a business of investing in shares in a company that carries on, or the Commissioner is satisfied intends to carry on, eligible operations. It also applies to a company carrying on both of these activities. Paragraph (b) will therefore encompass a company that may be eligible to lodge declarations under sub-section 160ACA(7).

Sub-section (2) is a drafting measure. Paragraph (a) is designed to identify a year of income to which a declaration under section 160ACA relates. Paragraph (b) provides that a reference to a sale or other disposal of a share includes the sale or other disposal of a beneficial interest in a share.

Sub-section (3) is the principal operative provision under which entitlement to rebates under section 160ACA may not be allowable to a shareholder who sells shares under circumstances falling within the scope of section 160ACB.

Where rebates under section 160ACA are otherwise allowable to a person for moneys paid on shares in a petroleum mining company or an interposed company, paragraph (d) of sub-section (3) will require whole or partial disallowance of the rebates if, in a year of income, the person sells those shares to a prescribed company and the Commissioner is not satisfied that, before the shares were sold, the petroleum mining company or interposed company had fully expended on mining or prospecting outgoings all declared moneys received on shares. (For this purpose, an interposed company will be treated, by virtue of sub-section (6) of section 160ACB, as itself having expended on mining or prospecting outgoings, moneys it has passed on to an associated petroleum mining company in accordance with the provisions of section 160ACA, if its associated company has expended on such outgoings the moneys passed on.)

Where the sub-section applies and a rebate is allowable, to the person under section 160ACA in respect of moneys paid on shares that are later sold, the amount of the rebate will, in the generality of cases, be reduced by 30 per cent of the proceeds of the sale of the shares to the prescribed company. The reduction will not, however, exceed 30 per cent of the amount actually paid on the shares sold.

Sub-section (4) is directed at special classes of arrangements which might otherwise be availed of to circumvent the provisions of section 160ACB by an indirect acquisition of shares by a prescribed company.

The sub-section will have effect where a person sells or otherwise disposes of (e.g., by gift) shares in a petroleum mining company or an interposed company to another person under a scheme to which a prescribed company is a party and which concerns the management or control of the petroleum mining or interposed company or the use of moneys belonging to that company or which otherwise contains provisions that would enable the prescribed company to acquire the shares subject to the scheme.

Where there is such a scheme concerned with a sale of shares, sub-section (4) provides for the prescribed company to be treated as having been the buyer of the shares. The effect of this is to bring sub-section (3) into operation.

Sub-section (5) is another safeguarding provision designed to overcome arrangements under which shares in a petroleum mining or interposed company may be sold or otherwise disposed of for a consideration that does not fairly reflect the real value of the shares. Because the sale price of shares is the yardstick by which sub-section (3) determines the amount of rebates that are not to be allowed where that sub-section applies, it is necessary that the sale price should be a fair reflection of the value of the shares.

Where the Commissioner of Taxation is satisfied that the parties to a sale of shares were not dealing with each other at arm's length and that, as a consequence, the consideration given for the shares was less than their value at the relevant time, sub-section (5) will have the effect of substituting the valuation of the Commissioner as the measure of the consideration to be taken into account in the application of sub-section (3).

In forming his opinion on these matters the Commissioner may have regard to any connection that exists between the parties and to any other relevant circumstances.

Sub-section (6) is a machinery provision that enables certain amounts expended on mining or prospecting outgoings by a petroleum mining company to be regarded as having been expended by an associated interposed company in determining whether, for the purposes of sub-section (3), all moneys included in declarations lodged under section 160ACA by the interposed company for years of income up to and including the year of sale had been expended on eligible outgoings before a person had sold shares in that interposed company.

The sub-section will apply where moneys paid on shares by a person are specified in a declaration under sub-section (7) of section 160ACA by an interposed company and those moneys are passed on as moneys paid on shares to a petroleum mining company. If the Commissioner of Taxation is satisfied that an amount of the moneys so passed on has been expended by the petroleum mining company on mining or prospecting outgoings, that amount will be treated, for the purposes of sub-section (3), as having been expended on those outgoings by the interposed company.

Sub-section (7) provides protection, in the generality of cases, from the operation of section 160ACB for moneys paid on shares by a person who has sold those shares to a prescribed company where the Commissioner is satisfied that the shares were shares in a company that was, at the time the payment was made, a 'listed company' or the company became a 'listed company' within 3 months after that time.

As previously explained, sub-section (9) of section 160ACA defines a listed company, for the purposes of section 160ACA and sub-section (7) of section 160ACB, as being a company the shares in which (other than preference shares) are listed on the official list of a stock exchange in Australia or else-where. Alternatively a company may be treated as a listed company where all of its shares are beneficially owned by no more than two parent companies each of which is a listed company and where there is an appropriate connection between the first-mentioned company and the petroleum mining company to which it subscribed capital.

However, the sub-section does not afford protection in cases where, broadly stated, arrangements had been made between the vendor of the shares and a prescribed company that in any way affected or depended upon the right of the vendor to sell or otherwise dispose of his beneficial interest in those shares - for example, where shares in a listed company were sold to a prescribed company under an agreement made with the vendor before the shares were allotted to him. Nor does the sub-section provide protection in the case of the sale of shares in a petroleum mining company which is not a listed company. An interposed company will be, of course, by reason of the requirements of sub-section (8) of section 160ACA, in every case a listed company.

Matters which, under the proposed section 160ACB, are to be determined by the formation of an opinion by the Commissioner will be subject to the usual rights of objection and reference to a Board of Review.

Section 160ACC: Company not entitled to investment allowance in certain circumstances

The third new section - section 160ACC - proposed for insertion in the Principal Act by clause 20 of the Bill, will preclude a deduction for the investment allowance in respect of any expenditure on plant for use in exploring for petroleum in off-shore areas of Australia in circumstances where a company has duly lodged a declaration under section 160ACA and also makes an election under section 124AG to claim depreciation on the cost of the plant.

Where the cost of plant of this kind is deductible under the relevant part of the petroleum mining provisions of the Principal Act (i.e., section 124AH) the entire cost is deductible in the one year and a deduction for the investment allowance is, by reason of section 82AM of the Act, not available. It is only where a company elects under section 124AG to take deductions over a number of years by way of depreciation that a company may be allowed the investment allowance in respect of the plant. As the rebate for share-holders is a means of giving an immediate benefit to share-holders that takes the place of a company's right to deductions under the petroleum mining provisions, it is proposed that a company may not both enable its shareholders to have the rebate and claim the investment allowance in respect of exploration plant financed out of shareholders' subscriptions.

Section 160ACC will thus, in effect, apply the principle of section 82AM in the context of the rebate scheme. By it, the investment allowance will not be available for exploration plant in respect of which a company elects to claim depreciation instead of immediate deductibility under section 124AH where, in addition, the company lodges a declaration under section 160ACA for the benefit of shareholders. To avoid the necessity of tracing share capital subscribed through to its use in the acquisition of such plant this rule will apply in respect of exploration plant acquired in the year of income in which declared moneys are received or in the two succeeding income years. The period of two years matches the two year period proposed in section 160ACA for the expenditure on mining or prospecting outgoings of capital subscribed by share-holders.

Clause 21: 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.

Clause 21 will insert in sub-section 170(10) a reference to the proposed new sections 78A, 160ACA, 160ACB and 160ACC. As amended, sub-section 170(10) will enable the Commissioner to give effect to the nominated provisions by amending the assessments of taxpayers at any time, i.e., to disallow deductions for gifts made as part of tax avoidance schemes, or to reduce rebates allowed or withdraw deduction entitlements, as made necessary by the failure of companies to comply with the terms of their declarations.

Clause 22: Interpretation.

This clause is related to the amendment to section 23(z) of the Principal Act (by proposed clause 4 of the Bill) to provide for allowances paid under the Former Regular Servicemen's Vocational Training Scheme to be subject to tax.

Clause 22 proposes the insertion in the definition of 'salary or wages' contained in section 221A of the Principal Act of a new paragraph - paragraph (j) - to ensure that allowances paid under the scheme fall within the definition and will thus be subject to PAYE tax instalment deductions under Division 2 of Part VI of the Principal Act. The change in definition has effect for the 1977-78 and subsequent years of income.

Clause 23: Release of taxpayers in cases of hardship

Section 265 of the Principal Act authorises a nominated Board to release a person from liability to pay income tax in whole or in part where the Board is satisfied that the exaction of the tax payable will entail serious hardship.

The Board consists of the Commissioner of Taxation, the Secretary to the Department of the Treasury and the Comptroller-General of Customs, or such substitutes for all or any of them as the Treasurer appoints.

By clause 23 it is proposed, following changes in administrative functions, to change the nominated membership of the Board so that the Secretary to the Department of the Treasury is replaced by the Secretary to the Department of Finance.

Sub-clause (2) will ensure that a Board constituted under the existing terms of section 265 will continue to have jurisdiction in respect of hardship applications still under consideration when the amendment to change the membership, as proposed by sub-clause (1), takes effect.

Clause 24: Effect of sub-section 124AB(6) of the Principal Act

Clause 24 is a drafting amendment that will ensure that the present reference to a mining or prospecting right or mining or prospecting information in sub-section 124AB(6) will be interpreted as if it had always been a reference to a petroleum mining or prospecting right or a petroleum mining or prospecting information.

The amendment proposed by clause 24 of the Bill to sub-section 124AB(6) will repair a deficiency in the language of the existing provisions. Section 124AB falls within the Division of the Principal Act dealing with mining operations for petroleum but, by inadvertence, the sub-section used words more appropriate to the separate Division dealing with mining operations for minerals other than petroleum.