House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Rt. Hon. William McMahon.)

INTRODUCTORY NOTE

The purpose of this memorandum is to explain the provisions of three income tax Bills.

Income Tax Bill 1967

The first Bill - the Income Tax Bill 1967 - will declare the ordinary rates of income tax payable by individuals and companies for the current financial year 1967-68. Features of the Bill are :

Rates of Tax (Clauses 6 and 9)

The rates of tax applicable for the 1967-68 financial year (including the 2 1/2 per cent special levy payable by individuals) are to be the same as those that applied for the preceding year 1966-67.

Age Allowance (Clause 8)

The exemption level for persons qualified by age - 65 years for men and 60 years for women - will be increased from $1,980 to $2,106 for taxpayers assessed under the married couple provisions and from $1,070 to $1,196 for other aged taxpayers; also, the allowance will be based on the taxable income of an aged person instead of net income as in previous years.

More detailed explanations will be found at pages 4 and 5 of this memorandum.

Income Tax (Partnerships and Trusts) Bill 1967

The second Bill - the Income Tax (Partnerships and Trusts) Bill 1967 - will declare the special rates of tax payable by certain trustees, superannuation funds and partners for the 1967-68 financial year. These rates are unchanged from those that applied for the 1966-67 financial year.

Income Tax Assessment Bill (No. 3) 1967

The third Bill - the Income Tax Assessment Bill (No. 3) 1967 - is designed to give effect to proposals amending the basis upon which tax is assessed. Broadly stated, the main proposals covered by this Bill are :

Double Wool Clips (Clause 3)

A woolgrower whose assessable income of an income year includes the proceeds of two wool clips may, where the inclusion of the proceeds of the additional clip was due to an advanced shearing by reason of fire, drought or flood, elect to transfer the proceeds of the additional clip, less shearing and other direct expenses, to the assessable income of the next succeeding income year.

Disposal of Live Stock (Clause 5)

A primary producer who is forced to sell live stock in consequence of fire, drought or flood may elect that the profit be excluded from his assessable income of the year of sale and be applied in reducing the cost, for income tax purposes, of live stock acquired as replacements.

Special Depreciation Allowance to Primary Producers (Clause 7)

The special 20 per cent depreciation allowances on plant and structural improvements used for primary production purposes are to be continued without a time limit as to their operation.

Erection of Subdivisional Fencing (Clause 8)

The cost of erecting subdivisional fencing on land used for primary production is to be deductible in the year in which the expenditure is incurred.

Concessional Allowances (Clauses 9, 10 and 11)

The concessional deduction allowable for each dependant and for a housekeeper is to be increased by $26. The deduction for payments by a taxpayer to obtain life insurance and superannuation cover for himself and his family is to be increased by $400.

More detailed explanations will be found at pages 6 to 25 of this memorandum.

NOTES ON CLAUSES

INCOME TAX BILL 1967

INCOME TAX (PARTNERSHIPS AND TRUSTS) BILL 1967

The purpose of these two Bills is to declare the rates of income tax payable for the current financial year 1967-68.

The Income Tax Bill 1967 declares the rates of tax payable by companies and the ordinary rates of tax payable by other taxpayers. It also continues for the 1967-68 financial year the additional levy of 2 1/2 per cent of the tax otherwise payable by individuals.

The Income Tax (Partnerships and Trusts) Bill 1967 declares the special rates of tax payable in respect of certain partnership, trust and superannuation fund income.

Except for the changes proposed in the age allowance, the Bills have the same practical effects as the measures declaring the rates of tax for the 1966-67 financial year. The following notes are, therefore, restricted to the provisions of the Income Tax Bill 1967 relating to the age allowance.

Clause 8 of the Income Tax Bill 1967 will increase the income exemption levels for application of the age allowance and modify the basis on which the allowance is applied.

This allowance is available to persons who have been residents of Australia throughout the year of income and who at the end of the year have, if men, attained the age of 65 years or, if women, the age of 60 years.

The age allowance has, in the past, exempted from tax aged persons meeting the residential qualifications and whose net income did not exceed the sum of the full age pension and the maximum amount of other permissible income for age pension purposes. In 1966-67 this allowance exempted from tax a person whose net income did not exceed $1,070. A married taxpayer contributing to the maintenance of his or her spouse who met the residential qualifications was exempt if the combined net income of the couple did not exceed $1,980.

In line with the liberalisation of the means test in April of this year the exemption limits are to be raised by $126. In addition, the allowance is to be based on the taxable income of an aged person instead of his net income.

The change to a taxable income basis will mean that income which is not taxable, such as repatriation and social services pensions, will not, in future, be taken into account in calculating the age allowance. Moreover, concessional allowances for medical expenses, rates on the taxpayer's residence, maintenance of dependants, etc. will be deductible from the taxpayer's income for the purposes of the calculation.

By virtue of these changes, an aged person will be exempt from tax if his taxable income for 1967-68 does not exceed $1,196. A married taxpayer contributing to the maintenance of his or her spouse will be exempt if the combined taxable income of the couple does not exceed $2,106.

A measure of tax relief is also provided by the age allowance where the taxable income is somewhat in excess of the exemption levels that have been mentioned. For 1967-68, this relief will apply to a taxpayer whose own taxable income is between $1,196 and $1,451 or, where the taxpayer is assessed under the married couple provisions, if the combined taxable income of the couple is between $2,106 and $3,287. (By clause 7 of the Income Tax (Partnerships and Trusts) Bill 1967 aged taxpayers within these increased limits will not be called upon to pay further tax under section 94 of the Income Tax Assessment Act).

The form of relief in the marginal cases mentioned is that tax (other than the 2 1/2 per cent additional levy) is limited to nine-twentieths of the excess of the taxable income over the exemption point. These provisions are designed to cushion the transition from complete exemption to full taxability and, for this purpose, prescribe the maximum amount of tax that may be payable by a taxpayer whose income falls within the marginal area. In some cases normal assessment processes may result in a smaller amount of tax being imposed and, in that event, only the smaller amount is payable.

INCOME TAX ASSESSMENT BILL (NO. 3.) 1967.

Introductory Note.

The principal features of this Bill have already been mentioned in this memorandum and the following notes relate to each clause of the Bill.

Clause 1: Short Title and Citation.

This clause formally provides for the short title and citation of the Amending Act and of the Principal Act as amended.

Clause 2: Commencement.

Section 5(1A.) of the Acts Interpretation Act 1901-1966 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act. By this clause it is proposed that the Amending Act will come into operation on the day on which it receives the Royal Assent.

Clause 3: Double Wool Clips.

This clause will extend - without limit as to time - the operation of section 26BA of the Principal Act which, for the income years 1964-65 and 1965-66, applied to woolgrowers whose assessable income included the proceeds of more than one wool clip in circumstances where drought had necessitated a shearing to be undertaken in advance of the usual time. The section permitted a woolgrower in this position to elect, in respect of 1964-65 or 1965-66, that the profit arising from the advanced shearing be excluded from the assessable income of the year of receipt and included instead in the assessable income of the ensuing year in which it normally would have been received.

It is proposed by clause 3 to remove from section 26BA the present limitation to the income years 1964-65 and 1965-66. The section will thus apply for 1966-67 and subsequent income years. The clause also extends the operation of the section - for 1966-67 and subsequent years - to cases where the advanced shearing is caused by fire or flood. This is the only substantial change in the section which will otherwise apply for 1966-67 and future years on the same basis as it applied for 1965-66.

Sub-clause (1.) of clause 3 proposes to amend section 26BA of the Principal Act to extend its application as outlined above.

Paragraph (a) of sub-clause (1.) will omit sub-section (1.) of section 26BA. This sub-section limits the application of the section to the income years 1964-65 and 1965-66. Its omission will enable the provisions of the section to apply to advanced shearings in 1966-67 and future income years.

Paragraph (b) effects a consequential drafting amendment to sub-section (2.)(a) of section 26BA. It omits words that were appropriate only while the operation of the section was restricted to particular income years.

By paragraph (c) the word "drought" appearing twice in sub-section (2.)(c) will be replaced by the words "fire, drought or flood". This amendment will permit the application of the provisions of section 26BA where the advanced shearing is occasioned by any of these natural disasters occurring in an area in Australia in which a taxpayer is carrying on wool growing activities.

Paragraph (d) will omit the existing sub-section (8.) of section 26BA and replace it with a new sub-section consistent with the proposed removal of the limitation of the section to two particular income years.

Sub-section (8.) provides for the time and manner in which elections under the section are to be made. As now expressed, it applies only in relation to elections for the income years 1964-65 and 1965-66. As proposed to be re-expressed, the sub-section will be applicable in respect of any relevant income year. In broad terms, it will require, as the present sub-section does, that an election under the section be made on or before the date of lodgment of the return of income for the relevant year unless the Commissioner exercises a power to grant further time.

Sub-clause (2)., which will not amend the Principal Act, provides that the extended application of section 26BA to cover advanced shearings occasioned by fire or flood will first apply in respect of the profit on the sale of wool that would otherwise fall for assessment in the 1966-67 income year.

Sub-clause (3.) relates only to elections under the section in respect of the 1966-67 income, and will not amend the Principal Act. It provides that, notwithstanding the period of time prescribed in sub-section (8.) of section 26BA, an election relating to 1966-67 may be lodged at any time up to and including 31st December, 1967.

Clause 4: Disposal of Trading Stock.

Clause 4 will effect a drafting amendment in sub-section (8.) of section 36 of the Principal Act that is consequential upon the introduction into that Act of a new section - section 36AAA - proposed by clause 5 of the Bill (see notes on that clause).

Section 36 of the Principal Act relates to disposals of trading stock, including live stock, otherwise than in the ordinary course of carrying on a business. Provision is made in the section to enable a primary producer who is forced to sell live stock in consequence of fire, drought or flood (and certain other circumstances) to elect that the profit on the forced sale be taxed over a period of five years instead of in the income year in which the sale took place.

Sub-section (8.) sets out the basis on which a profit on a sale of live stock is to be determined for the purposes of such an election. The amendment proposed by clause 4 to the sub-section will enable that basis to be applied in arriving at the profit on a forced sale for the purposes of the new section 36AAA proposed to be introduced by clause 5. This new section will provide an alternative method of bringing the profit on a forced sale of live stock in consequence of fire, drought or flood to account for income tax purposes.

Clause 5: Alternative Election in Respect of Income Resulting From Forced Disposal of Live Stock.

This clause proposes the introduction into the Principal Act of a new section - section 36AAA - which will provide an alternative basis on which a primary producer may account, for income tax purposes, for the profit on a forced sale of live stock due to fire, drought or flood.

At present section 36 of the Principal Act permits a primary producer to elect that the profit on a forced sale in these circumstances be taxed in equal instalments over a period of five years instead of wholly in the year in which the profit is realised. A primary producer may take advantage of this right of election only if he establishes that the proceeds of the forced sale will be used to replace the stock subject of the sale, either by purchase of, or breeding up, new stock.

This right will not be altered by the introduction of the new section proposed by clause 5. The new section will, however, confer an alternative right of a different nature. Subject to the same basic conditions as apply in relation to the existing right, it is, in broad terms, proposed by clause 5 that a primary producer may elect to have the profit on a forced sale excluded from his assessable income of the year in which it accrues and applied to reduce the cost for income tax purposes of stock acquired, during that year or any of the five succeeding years, to replace the stock disposed of.

In some cases it may occur that replacement stock is bred by the producer instead of being purchased. Where this is the case, the producer will be able to elect to exclude the profit from the year of sale and to bring it to account in appropriate instalments, over the period already mentioned, as the replacement stock is bred up.

If, at the end of the fifth year after the year in which the forced sale occurred, any balance of the profit on the disposal has not been applied to reduce the cost of new stock purchased, or has not otherwise been included in assessable income, it is proposed that the amount will be included in the assessable income of the producer of that year.

The proposed alternative basis is designed to have the broad effect of deferring payment of tax on the profit of a forced sale until stock acquired in replacement of the stock sold is itself disposed of in the normal course of business. This new concept has required measures ancillary to its basic purposes to preserve equity amongst taxpayers, safeguard the revenue and to take account of events which, in practice, may occur over the period of years in which the taxation consequences of an election operate, e.g., where a producer who had made an election as a sole trader enters into a partnership, or where the interests in a partnership which has made an election are varied.

More detailed explanations of the amendments proposed by the clause are set out in ensuing paragraphs. The amendments will apply in relation to disposals of live stock in the 1967-68 and subsequent income years.

Sub-clause (1.) of clause 5 will introduce into the Principal Act the proposed section 36AAA.

Sub-section (1.) of the proposed new section formally provides the right of the alternative election and states the circumstances in which that right is available.

Paragraph (a) of the sub-section will be satisfied where live stock included in the assets of a business of primary production carried on in Australia or the Territory of Papua and New Guinea are disposed of in consequence of fire, drought or flood.

Paragraph (b) provides that the right of election shall be available if the proceeds of the sale of the live stock would, apart from the new provisions, be included in the primary producer's assessable income of the income year in which the forced sale took place.

Paragraph (c) requires the Commissioner of Taxation to be satisfied that the proceeds of the forced sale will be used by the elector wholly or principally for the purposes of re-stocking.

Paragraph (d) will limit the right to make the alternative election to be provided under section 36AAA to cases where an election has not been made under section 36 of the Principal Act to have the profit on the forced sale taxed over a period of five years.

Where the requisite conditions are met an election may be made under sub-section (1.) that the assessable income of the year in which the disposal occurs be reduced by the profit on the disposal. The profit will then be dealt with in accordance with the provisions of sub-section (2.) and other sub-sections of 36AAA explained later in this memorandum.

If the live stock disposed of are assets of a sole trader, the election is to be made by the individual or company as the case may be.

Where it is a partnership that disposes of the live stock, the election is to be made by the partnership as a whole. Members of a partnership will not be able to make individual elections. The reason for this is that it would not be generally practicable for the consequences of an election to operate in relation to one partner and not the others. A partnership will be debarred from making an election under sub-section (1.) if any member of it has made the alternative election under section 36 of the Principal Act to have his share of the profit on the forced sale taxed over a period of five years.

If the live stock are disposed of by a trustee of a trust estate, the trustee, and each beneficiary who is presently entitled to a share of the net income of the trust estate and who is not under a legal disability, may make an election under sub-section (1.) provided that neither the trustee, nor any such beneficiary, has made the alternative election under section 36 of the Principal Act to have a part of the profit taxed over five years.

Sub-section (2.) will provide the basis upon which an election under sub-section (1.) has effect.

Paragraph (a) will reduce the assessable income of the elector for the year in which the forced sale occurred by the amount of the profit on the disposal of the live stock.

Under paragraph (b) that profit will be applied to reduce, for income tax purposes, the cost of live stock purchased by the elector during the year of income in which the disposal occurred, and any of the five succeeding income years, to replace the stock sold. The amount by which the cost of any replacement animal is reduced will be an amount ascertained in accordance with sub-paragraph (i) unless sub-paragraph (ii) applies.

Before explaining the terms of sub-paragraphs (i) and (ii), it is mentioned that the general aim of the proposed provisions is to reduce the cost for taxation purposes of replacement animals, so that the taxable profit realised on sale of these animals in the normal course is increased by an amount equivalent to the amount of profit on the forced sale on which the person who has made an election has not been taxed. This means, in effect, that the profit on the forced sale is replaced for taxation purposes by a notionally increased profit on the sale of the replacement animals, so that payment of tax on what is really the profit on the forced sale may be deferred from the time at which the producer requires financial resources to build up replacements.

To this end, the reduction in the cost of replacement animals is related to the amount of profit from the forced sale. Sub-paragraphs (i) and (ii) of paragraph (b), together with sub-section (3.), set out the way in which this relationship is to be achieved.

Sub-paragraph (i) of paragraph (b) requires the cost of each animal purchased as a replacement to be reduced by an amount determined on the basis prescribed in sub-section (3.) of section 36AAA - see notes on that sub-section later in this memorandum. In broad terms, the cost of each replacement animal will generally be reduced by the average profit on each animal disposed of or by the actual cost price of the replacement animal, whichever is the less. By average profit is meant the profit on the forced sale divided by the number of animals involved in the sale.

Sub-paragraph (ii) of paragraph (b) will limit the amount by which the cost of replacement animals may be reduced. The cost cannot be reduced by any amount in excess of the profit derived from the forced sale.

Under sub-paragraph (ii), this question will need to be considered in each of the years in which consequences of the election operate. The amount of profit available to reduce the cost price of replacement animals will also need to be determined in relation to that year. The latter amount is referred to as the reduced profit on the disposal and is to be calculated in the manner prescribed in sub-section (16.), which is explained later in this memorandum. In broad terms, the reduced profit at any time is the profit on the forced sale less the sum of any amounts of this profit previously applied, in consequence of the election, against the cost of replacement animals purchased and any amount of the profit that has been included in the assessable income of the primary producer.

In some circumstances, the amount of the profit on the forced sale to be taken into account in reducing the cost of replacement stock purchased could exceed the amount of the reduced profit remaining at the time of the purchase. Where this occurs, sub-paragraph (ii) requires that the amount by which the cost price of each animal purchased is to be reduced shall be calculated on the basis of the formula -

A * (reduced profit on date of purchase of replacement animals)/(A * number of replacement animals purchased.)


A = the lesser of -

the average profit on disposal of the livestock replaced; and

the cost price of the livestock purchased as replacements.

The purchase price of $30 per head will be reduced in accordance with sub-paragraph (ii) by $5 - the total amount by which the cost of the stock purchased is reduced is, therefore, limited to the reduced profit at the time of the purchase, viz., $1,500.

Paragraph (c) of sub-section (2.) will include in the assessable income of the elector any amount that is specified in an election made under sub-section (4.). Such an election may be made where live stock subject of a forced sale is replaced by natural increase. Sub-section (4.) is explained at a later stage in this memorandum.

Paragraph (d) will provide for any reduced profit on the forced sale remaining at the end of the last of the five years succeeding the year of disposal to be included in the assessable income of that last year.

Sub-section (3.) of section 36AAA will provide the basis for determining appropriate amount applicable to a replacement animal for the purpose of reducing the cost of the animal in accordance with paragraph (b) of sub-section (2.).

Under paragraph (a) of sub-section (3.), if the replacement animal is of the same species as the live stock disposed of, e.g., where sheep are replaced with sheep, the amount applicable to that animal will be the lesser of the average profit per head of the live stock disposed of and the actual cost of the replacement animal.

Paragraph (b) will apply where the live stock disposed of (say, sheep) are replaced by live stock of a different species (say, cattle). In these circumstances, if paragraph (c) does not apply, the amount applicable to the replacement animal will also be the lesser of the average profit per head of the live stock disposed of and the actual cost of the replacement animal.

Paragraph (c) will apply in lieu of paragraph (b) where the live stock disposed of are replaced with live stock of a different species, and the purchase price of the latter substantially exceeds the cost at which the stock disposed of could be replaced with stock of the same species.

The amount applicable to the replacement animal in these circumstances will be such amount as the Commissioner considers reasonable. However, the amount determined by the Commissioner in this respect is not to exceed the cost of the replacement animal and cannot be less than the average profit per head of the live stock disposed of.

Sub-section (4.) will apply where live stock disposed of have been replaced by natural increase and an election has been made under sub-section (1.) for the profit on the disposal to be applied in the reduction of the cost of replacement live stock. In these circumstances there may be specified in a separate election made under sub-section (4.) an amount of the profit on the disposal that is to be included in the assessable income of the year in which the replacement by natural increase occurs.

Sub-section (5.) of section 36AAA contains provisions that are necessary to safeguard the revenue in certain circumstances. They will be applicable where a taxpayer carrying on business as a sole trader in the ordinary way has elected under sub-section (1.) to have the profit on a disposal of live stock applied to reduce the cost of stock purchased as replacements. Sub-sections (6.) and (9.) will apply in a like manner in respect of partnerships and trust estates.

The sub-section provides that, if the taxpayer leaves or is about to leave Australia, or dies, or ceases to carry on the business of primary production, or becomes bankrupt or (being a company) commences to be wound up, the part of the profit on disposal not applied at the end of the income year in which the event occurs may be included in the assessable income of the taxpayer for that year. That reduced profit may also be included in the taxpayer's assessable income if a partnership in which he is a partner takes over his business of primary production.

The sub-section will permit the profit to continue to be applied in accordance with the taxpayer's election over the remainder of the period covered by the election if the Commissioner considers the circumstances appropriate to permit such a continuance. In addition, sub-section (12.) will, subject to some conditions, permit a partnership of which the taxpayer is a member, and which has taken over the business he conducted at the time of his election, to elect that the taxpayer's original election under sub-section (1.) continue to operate in relation to the partnership.

Sub-sections (6.) (7.) and (8.) of section 36AAA will apply in relation to a partnership that has elected under sub-section (1.) to have the profit on the disposal of live stock applied to reduce the purchase price of replacement stock.

Sub-section (6.) is complementary to sub-section (5 ) and will apply on a similar basis where a partner leaves or is about to leave Australia, or becomes bankrupt or (being a company) commences to be wound up.

This sub-section also applies where any part of the profit on a disposal of live stock is unapplied at the end of an income year in which the partnership ceases to carry on the business of primary production or in which there is a variation in the constitution of the partnership.

If any of the circumstances specified occur in an income year the Commissioner may include the amount of the reduced profit at the end of the year in the assessable income of the partnership for that year. As in sub-section (5.), the profit may, however, continue to be applied in accordance with the election by the partnership over the remainder of the period covered by the election if the Commissioner considers the circumstances appropriate to permit the continuance.

Sub-section (7.) has effect where a partnership which has made an election under sub-section (1.) is dissolved in a relevant year of income. If any part of the profit on disposal of live stock has not, at the date of dissolution of the partnership, been applied to reduce the cost of stock purchased as replacements or included in the assessable income of the partnership in a previous income year, that part of the profit unapplied will be included in the assessable income of the partnership for the year in which it is dissolved. This provision is, however, subject to sub-section (8.) which is explained below.

Sub-section (8.) will, in certain circumstances, permit an election under sub-section (1.) by a partnership that is dissolved to be continued in respect of a partnership that has acquired the business of the dissolved partnership.

Paragraph (a) requires that the partnership acquiring the primary production business of the dissolved partnership commence to carry on that business immediately after the dissolution.

By paragraph (b) some or all of the partners in the dissolved partnership must be partners in the partnership which has acquired the primary production business of the dissolved partnership.

Paragraph (c) requires that the aggregate of the interests of partners of the dissolved partnership in the income of the partnership which acquired the primary production business of that dissolved partnership be not less than one-quarter of that income.

If all of these conditions are met, the partnership acquiring the business of the dissolved partnership may elect that the election under sub-section (1.) by the former partnership shall continue to have effect. This will mean that the amount of the profit on disposal not applied when the former partnership is dissolved will not be included in the assessable income of that partnership for the year in which the dissolution took place. It will also mean that the profit continues to be applied to reduce the cost of replacement stock purchased by the partnership which acquired the business. The partnership acquiring the business will, therefore, be treated on the same basis as the dissolved partnership insofar as the application of the profit on disposal of the live stock by the former partnership is concerned.

Sub-section (9.) is complementary to sub-sections (5.) and (6.) and applies on a similar basis where an election under sub-section (1.) has been made in relation to the disposal of live stock of a trust estate.

If the trustee or a beneficiary leaves or is about to leave Australia, or a beneficiary dies, or the trust estate becomes bankrupt or (if a beneficiary is a company) the company commences to be wound up, any part of the profit on disposal not applied at the end of the year in which the event occurs may be included in the assessable income of the trust estate for that year. That reduced profit may also be included in the assessable income of the trust estate if the trustee ceases to carry on the primary production business or a partnership in which the trustee is a partner takes over that business.

As with sub-sections (5.) and (6.), the election under sub-section (1.) may continue to be effective in relation to the trust estate if the Commissioner considers the circumstances appropriate to permit the continuance. In addition, a partnership in which the trustee is a member,and which has taken over the business which he conducted at the time of his election, may make an election under sub-section (12.), the practical effect of which is to continue, in relation to the partnership, the operation of the election made under sub-section (1.) in respect of the disposal of the live stock by the trustee.

Sub-section (10.) has effect where an election under sub-section (1.) has been made in respect of the disposal of live stock of a trust estate and the trust estate ceases to exist in a year of income. In these circumstances the part of the profit on disposal not applied to reduce the cost of replacement stock purchased or previously included in the income of the trust estate is to be included in its assessable income for that year. This provision is necessary because there would not, in a case where a trust estate comes to an end in a year of income, be any means of securing payment of tax on the amount of the profit on disposal not applied when the trust ceases to exist.

Sub-section (11.) is a drafting measure. Its purpose is to ensure that an amount in excess of the reduced profit on a disposal of live stock at the end of an income year is not included in the assessable income of the elector of that year.

Sub-sections (12.) and (13.) are designed to meet the situation where an election has been made by a sole trader or in respect of a trust estate and the business carried on at the time the election was made is later taken over by a partnership in which the elector becomes a member. Where certain conditions are met, the partnership may elect that the consequences of the original election carry over into the partnership.

Sub-section (12.) sets out the conditions to be met before the partnership may make an election under the sub-section.

Paragraph (a) states that an election under sub-section (1.) must have been made by the sole trader or by the trustee and the beneficiaries of the trust estate, as the case may be.

Paragraph (b) requires that a partnership in which the sole trader or the trustee of the trust estate becomes a partner commence, not later than five years after the end of the year in which the live stock were disposed of, to carry on the primary production business previously carried on by the sole trader or the trust estate.

By paragraph (c) the sole trader or the trust estate that previously carried on the business is required to be entitled to at least one-quarter of the income of the partnership.

If the tests prescribed in sub-section (12.) are met the partnership may elect that sub-section (13.) shall apply as from the date the partnership commenced to carry on the business.

The effects of an election under sub-section (12.) are set out in paragraphs (a) to (f) inclusive of sub-section (13.).

Paragraph (a) of sub-section (13.) will, in its practical effect, continue the operation of the election previously made in respect of the live stock disposed of by the sole trader or the trust estate. Because the profit on the disposal will already have been excluded from the assessable income of the sole trader or the trust estate, it will not again be excluded from the income of the partnership.

Paragraph (b) will ensure that, other than for the purposes of ascertaining the reduced profit at any time in accordance with sub-section (16.), the profit on disposal in relation to the sole trader or the trust estate is also the profit on disposal to be taken into account in relation to the partnership. The practical effect of this provision is that the reduction of the cost of live stock purchased by the partnership will be determined on the same basis as would have applied if the sole trader or the trustee had continued to carry on the business.

Paragraph (c) will apply for the purpose of calculating, under sub-section (16.), the reduced profit of the partnership at any time in respect of the disposal. It provides that the amount of the reduced profit of the sole trader or the trust estate on the day preceding that on which the partnership commenced to carry on the business of the sole trader or the trust estate will be the profit on the disposal in relation to the partnership. This amount is to be applied by the partnership in reducing the cost of replacement stock purchased or by inclusion in the assessable income of the partnership where the replacement stock are bred by it. Any part of the amount not so applied as at the end of the fifth year after the year in which the live stock were disposed of will be included in the assessable income of the partnership for that year.

The effect of paragraph (d) will be to limit the operation of the election by the partnership to the same period as that to which the election by the sole trader or the trust estate would have applied if the business had not been taken over by the partnership.

Paragraph (e) will ensure that the election by the sole trader or the trust estate under sub-section (1.) remains effective for the period it covered before the partnership commenced to carry on the business of the sole trader or the trust estate.

As a corollary to paragraph (d), paragraph (f), will provide that, on the day on which the partnership commenced to carry on the business, the reduced profit in relation to the sole trader or the trust estate shall be nil.

Sub-section (14.) specifies the periods in which elections are to be made for the purposes of section 36AAA. Elections are to be in writing and, where made by a partnership, are to be signed by or on behalf of each of the partners.

Paragraph (a) states that an election under sub-section (1.) to apply the profit on a forced sale of live stock in reducing the cost of replacement stock purchased is to be made on or before the date of lodgment of the return of income of the income year in which the live stock are disposed of.

By paragraph (b), an election under sub-section (4.) for part of the disposal profit to be included in assessable income where live stock disposed of are replaced by natural increase is to be made on or before the date of lodgment of the return of income of the income year in which the natural increase are bred.

Paragraph (c) will require an election under sub-section (8.) by a partnership that takes over the business of a dissolved partnership to be made on or before the date of lodgment of the return of the continuing partnership of the year of income in which it commenced to carry on that business.

Under paragraph (d) an election under sub-section (12.) by a partnership that takes over the business of a sole trader or a trust estate is to be made by the partnership on or before the date of lodgment of the return of the partnership of the year of income in which it commenced to carry on that business.

An extended time for lodgment of any of the elections covered by the sub-section may be granted by the Commissioner of Taxation.

By sub-section (15.) any amount of reduced profit on disposal of live stock included in the assessable income of an elector will be treated as income derived from the carrying on of a business of primary production in Australia.

The effect of this provision is that, irrespective of whether he is carrying on a business of primary production during the income year in which that amount is included in his assessable income, an elector who has not permanently withdrawn from the averaging system may be entitled to have the averaging provisions applied in his assessment for that year.

Sub-section (16.) states the basis for calculating at any time the reduced profit in respect of a forced sale of live stock. This term, which is used in provisions relating to an election under sub-section (1.), means broadly so much of the profit on the disposal as has not, on any particular day, been applied to reduce the cost of live stock purchased as replacements and has not been included in the assessable income of a previous income year.

To ascertain the reduced profit on any day the sum of the amounts specified in paragraphs (a) and (b) is to be deducted from the profit on the disposal of the live stock.

The amount specified in paragraph (a) is the total cost of replacement stock purchased less the total of the amounts that are deemed to be the cost price after setting off against the total cost the appropriate amount of the profit on the disposal. In effect, therefore, the amount specified in this paragraph is so much of the profit on disposal of live stock as has been applied to reduce the cost of stock purchased as replacements.

The amount specified in paragraph (b) is the sum of any amounts of the profit on disposal that have been included in the assessable income for income years prior to the year in relation to which the reduced profit is being calculated. In the generality of cases, these amounts would be included in the assessable income because of an election made under sub-section (4.) where live stock have been replaced by natural increase.

Sub-section (17.) is a drafting measure and will enable the profit on a disposal of a particular species of live stock to be determined in accordance with the principles laid down in sub-section (8.)(b) of section 36 of the Principal Act for the calculation of the profit on the disposal of live stock generally.

In broad terms, the profit on a disposal of live stock is, under sub-section (8.)(b) of section 36 of the Principal Act, ascertained by deducting from the proceeds of the disposal the following amounts -

(a)

in relation to the stock that were on hand at the beginning of the year in which the disposal occurred - the value at which the stock were then brought to account for income tax purposes;

(b)

in relation to the stock that were purchased in the year in which the disposal occurred - the cost of the stock; and

(c)

in relation to the other stock, not being natural increase - the value of the stock at the time it was acquired by the primary producer.

These principles will be applied in calculating the profit on a forced sale of a particular species of live stock.

Sub-section (18.) has effect where an election has been made under sub-section (1.) and stock of a different species from those disposed of in the forced sale are acquired. In these circumstances, the new stock is to be treated, for the purposes of the section, as replacing the stock disposed of only if the Commissioner is satisfied that this is the case.

Sub-section (19.) is also a drafting measure. Its purpose is to enable the reduced profit to be ascertained before the end of an income year if it is necessary for the Commissioner to make an assessment for a period which ends before the last day of the year of income, e.g., if a company which has made an election under sub-section (1.) proposes to go into liquidation before the end of the year and a part of the profit on disposal remains unapplied.

Sub-clause (2.) of clause 5 provides, in effect, that an election under sub-section (1.) of the proposed new section 36AAA can be made in respect of a forced sale of live stock during the 1967-68 income year or any subsequent income year.

Clause 6: Depreciation.

This clause will amend section 54 of the Principal Act.

Under section 54, a deduction is allowable for depreciation of plant owned by a taxpayer that either is used by him in the production of assessable income or has been installed ready for use for that purpose and is held in reserve.

The expression "plant" is defined in the section and includes fences, dams and other structural improvements on land which is used for agricultural or pastoral pursuits. However, section 75 of the Principal Act also authorises a deduction for expenditure on certain types of improvements in the year in which it is incurred. Where expenditure on improvements is deductible under section 75, it is excluded from the scope of the depreciation allowances by sub-paragraph (ii) of section 54(2.)(b). This ensures that where the cost of improvements is allowable under section 75 as a deduction in the year it was incurred, that cost will not also be deductible by way of depreciation allowances.

The purpose of clause 6 is to ensure that deductions for depreciation are not allowable in respect of sub-divisional fences referred to in clause 8 of the Bill. Broadly stated, that clause will amend section 75 of the Principal Act to provide an outright deduction of the cost of these fences in the year the expenditure is incurred - see notes on clause 8.

This amendment will apply in assessments for the 1967-68 income year and subsequent years.

Clause 7: Special Depreciation Allowance to Primary Producers.

By this clause it is proposed to extend without time limit the special 20 per cent depreciation allowances available to primary producers under section 57AA of the Principal Act. The allowances are available in relation to -

(a)

plant used solely for the purpose of agricultural or pastoral pursuits, forest or fishing (including pearling) operations;

(b)

structural improvements which are situated on land used for agricultural or pastoral pursuits or forest operations, or which are used for pearling operations.

In the case of structural improvements, section 57AA of the Principal Act at present authorises the 20 per cent depreciation allowances where the improvements are completed before 1st July, 1967, or are commenced at that date and completed before 1st July, 1968. In relation to other depreciable assets that are covered by the section, the 20 per cent rate applies if the asset is first used by the taxpayer or is installed ready for use before 1st July, 1967.

Paragraph (a) of clause 7 will amend section 57AA by omitting paragraph (a) of sub-section (3.) and by re-enacting that paragraph in a form which does not specify a termination date for the application of special 20 per cent depreciation allowances to structural improvements.

Paragraph (b) of clause 7 effects a drafting amendment to sub-section (3.) which is consequential upon the form of the amendments proposed to the sub-section.

Paragraph (c) of clause 7 will amend paragraph (b) of sub-section (3.) by omitting the termination date for the application of the special 20 per cent depreciation allowances to plant other than structural improvements.

Clause 8: Certain Expenditure on Land Used For Primary Production.

The primary purpose of this clause is to insert a new paragraph - paragraph (gb) - in sub-section (1.) of section 75 of the Principal Act. The paragraph will authorise a deduction to primary producers of the cost of erecting internal sub-divisional fencing.

Under section 75 a deduction is allowable for certain classes of expenditure incurred by a taxpayer engaged in primary production on land in Australia or the Territory of Papua and New Guinea. The deduction is allowable in the income year in which the expenditure is incurred.

The new paragraph to be inserted by paragraph (a) of the clause provides for a deduction to be allowed for expenditure on the erection of fences to sub-divide the land for the purposes of carrying on primary production on the land. Expenditure on boundary fences, fences enclosing yards or fences along public roads, stock routes and rights of way is not deductible under this provision but will remain subject to depreciation allowances.

Paragraph (b) of the clause amends sub-section (2.) of section 75 of the Principal Act as a consequence of the insertion of new paragraph (gb) in sub-section (1.).

In broad terms sub-section (2.) of section 75 limits certain of the deductions allowable under sub-section (1.) of the section to the amount actually expended by the taxpayer when part of the total expenditure is met by a Government, Government authority or some other person. A similar limitation is to be applied to the deduction allowable for the cost of internal sub-divisional fencing.

The amendment will apply to expenditure incurred on the erection of this type of fencing in the 1967-68 income year and subsequent years.

Clauses 9 and 10 : Deduction For Dependants.

The amendments proposed by these clauses are designed to -

(a)

increase by $26 the maximum deduction specified in sub-section (2.) of section 82B of the Principal Act for maintenance of each class of dependant; and

(b)

increase by $26 the maximum deduction specified in section 82D of the Principal Act in respect of a housekeeper.

The amendments will apply in assessments based upon income of the 1967-68 and subsequent years.

Increase in Deductions.

The following is a comparison of the present and proposed maximum deductions for each class of dependant and a housekeeper :-

Clause 11: Life Insurance Premiums, etc.

Section 82H of the Principal Act authorises the allowance of a concessional deduction in respect of life insurance premiums, superannuation contributions and like payments made by a taxpayer for the benefit of himself or members of his family.

By this clause, it is proposed to increase the maximum deduction allowable in respect of such payments for any one year from $800 to $1,200.

The amendment will commence to apply in assessments based on income for the current year 1967-68.

Clause 12: Rebate in Case of Disposal of Assets in a Business of Primary Production.

This clause will effect a drafting amendment to section 160 of the Principal Act which provides a special rebate of tax for taxpayers who dispose of the whole of the assets of a business of primary production and, in doing so, dispose of live stock at a profit. The amendment is consequential upon the amendments proposed by clause 5.

Section 160 applies subject to an election not having been made under the existing provisions of section 36 of the Principal Act. Clause 12 will make the application of section 160 subject to an election not having been made under section 36AAA to be inserted in the Principal Act by clause 5. The amendment, which will apply for the 1967-68 income year and subsequent years, will not disturb the basis on which section 160 now operates where an election is made under section 36 of the Principal Act in respect of a forced sale of live stock.

Clause 13: Credits in Respect of Tax Paid Under the Income Tax Ordinances of the Territory of Papua and New Guinea.

The clause will effect a drafting amendment to paragraph (b) of sub-section (2.) of section 160AE of the Principal Act which is also consequential upon the insertion of the new section 36AAA in the Principal Act as proposed by clause 5.

Sub-section (2.) of section 160AE of the Principal Act provides, in effect, that where income is withheld from the assessment of a year of income under a section which permits the spread of abnormal receipts of a business of primary production over a period of years, the amounts included in the assessments of the subsequent years shall be deemed, for the purposes of Division 18 of the Principal Act, to be derived from the same source as the abnormal receipts. Division 18 of the Principal Act contains provisions relating to the assessments of taxpayers who derive income from both Australia and the Territory of Papua and New Guinea.

The effect of the amendment is that, if a sole trader, partnership or a trustee of, and beneficiaries in, a trust estate make an election under the proposed section 36AAA in respect of a forced sale of live stock and the stock are assets of a business of primary production carried on in the Territory of Papua and New Guinea, any amounts included in the assessable income of the elector in pursuance of that section shall be deemed, for the purposes of Division 18 of the Principal Act, to be income derived from a source in the Territory.

The amendment made by this clause will, like section 36AAA, apply for the 1967-68 income year and subsequent years.

Clause 14: Application of Amendments.

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