Explanatory Memorandum
(Circulated by the Treasurer, the Hon. B.M. Snedden, Q.C., M.P.)Introductory Note
The purpose of this memorandum is to explain the provisions of two income tax Bills.
INCOME TAX BILL 1971
The first Bill - the Income Tax Bill 1971 - will declare the rates of income tax payable by individuals and companies for the current financial year 1971-72. The main features of the Bill involving a change in the practical effect of the law are:-
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- Rates of tax, individuals (clauses 6 to 8). While proposed rates of tax payable by individuals under clauses 6 and 7 for the 1971-72 financial year are to be the same as those that applied for the preceding year the additional tax imposed under clause 8 for the 1971-72 financial year is to be 5 per cent of the income tax otherwise payable. For the 1970-71 financial year, the comparable rate of additional tax was 2 1/2 per cent.
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- Rates of tax, companies (clause 10). The rates of tax payable for the 1971-72 financial year by companies (other than friendly society dispensaries) on the first $10,000 of taxable income of the 1970-71 income year are to be increased by 5 cents in the dollar.
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- Superannuation funds (clause 6(5.)). The rate of tax payable by a trustee of a superannuation fund in respect of the first $10,000 of its 1971-72 investment income where the fund does not invest a sufficient proportion of its assets in public securities is being increased by 5 cents in the dollar.
INCOME TAX ASSESSMENT BILL (NO. 3) 1971
The second Bill - the Income Tax Assessment Bill (No. 3) 1971 - will give effect to proposals announced in the Budget Speech to liberalise personal income tax deductions in connexion with the maintenance and education of students and to authorise a deduction for certain expenditure incurred by taxpayers in adopting children.
Exemptions equivalent to those granted in pursuance of the agreements covering other Australian/United States projects in Australia are to be granted by the Bill in order to give effect to an agreement with the United States in relation to the Joint Defence Space Communications Station at Woomera.
In addition, the Bill will make provision for gifts of $2 and upwards to the Productivity Promotion Council of Australia to be allowable deductions from assessable income and will discontinue the existing provision for gifts to the Australian Productivity Council.
NOTES ON CLAUSES
INCOME TAX BILL 1971
The following notes are restricted to the main provisions of the Bill that differ in practical effect from the legislation that declared the rates of tax for the 1970- 71 financial year.
That legislation comprised two Acts - the Income Tax Act 1970 and the Income Tax (Partnerships and Trusts) Act 1970. The former declared the ordinary rates of income tax while the latter measure imposed the special rates of tax that apply for purposes of legislation enacted in 1964 to counter legal tax avoidance. As a drafting change, the proposed Bill will declare both the ordinary and special rates.
Clause 6: Rates of tax payable by persons other than companies.
Clause 6 of the Income Tax Bill 1971 will declare the rates of tax payable by persons other than companies for the 1971-72 financial year. The rates of tax are set out in the schedules to the Bill, and in the clause itself, and, with one exception, are the same as those declared for 1970- 71.
Sub-clause (5.) will declare the rates of tax payable by a trustee on the investment income of a superannuation fund that does not invest a sufficient proportion of its assets in public securities. In accordance with the Fifth Schedule, the rate on the first $10,000 of the fund's investment income is to be increased from 32 1/2 per cent to 37 1/2 per cent (the rate on the balance remaining at 42 1/2 per cent). The increased rate will apply to investment income of the 1971-72 income year.
Clause 8: Additional tax payable by certain persons other than companies.
Clause 8 will impose additional tax at the rate of 5 per cent of the income tax otherwise payable by individuals and by trustees who are taxed at individual rates of tax. The additional tax will apply where tax is calculated under the averaging provisions applicable to primary producers as well as to tax calculated under the scale applicable to taxpayers generally. It will not be imposed where a reduced amount of tax is payable under the age allowance provisions of clause 9.
Clause 9: Limitation of tax payable by aged persons.
Clause 9 authorises special concessions - usually referred to as the age allowance - for qualified aged persons, that is, residents of Australia who, if men, are 65 years or more or, if women, 60 years or more.
In 1970-71, the age allowance exempted from tax an aged person whose own taxable income did not exceed $1,326. A married aged person contributing to the maintenance of his or her spouse who also met the residential qualification was exempt if the combined taxable income of husband and wife did not exceed $2,314. Special "shading-in" rates applied to taxable income (or combined taxable income) in excess of these exemption levels until the tax at these "shading- in" rates reached the tax payable at ordinary rates on taxable incomes above $2,273 or, in the case of a married aged person, above $4,102.
The exemption levels and "shading-in" rates of the age allowance proposed for 1971-72 are the same as those that applied for 1970- 71. However, because of the proposed increase in the rate of additional tax, which, as indicated in the notes on clause 8 above, does not apply to the tax calculated under the age allowance "shading-in" rates, the tax at the "shading-in" rates will not now reach the tax payable at ordinary rates (including the additional tax) until the taxable income exceeds $2,286 or, in the case of a married aged person, $4,155. Accordingly, it is proposed to raise the upper limits of the "shading-in" ranges of the age allowance to $2,286 and $4,155 respectively. (By clauses 9(2.)(b) and (3.)(b) of the Bill aged taxpayers whose taxable incomes do not exceed these new upper limits will not be called upon to pay further tax, in respect of certain partnership income, under section 94 of the Income Tax Assessment Act.)
Clause 10: Rates of tax payable by a company.
Sub-clause (1.) will declare the rates of tax payable by companies for the 1971-72 financial year (i.e., in respect of income of the 1970-71 income year) to be as set out in the Eighth Schedule. The rates applicable to the first $10,000 of taxable income are being increased by 5 cents in the dollar in all cases, except that income of friendly society dispensaries will continue to be taxed at a uniform rate of 37.5 cents in the dollar. The 50 per cent rate of additional tax on the undistributed amount of profits of a private company is not being changed. (See page 6 for table of proposed new rates of tax for companies.)
Sub-clauses (2.) and (3.) of clause 10 are "shading-in" provisions for non-profit companies that are made necessary because, under clause 5(3.), no tax is payable by a non-profit company whose taxable income does not exceed $416. Sub-clauses (2.) and (3.) will provide for tax at normal rates to be shaded-in over a range of taxable incomes above this level, by limiting the tax payable to a proportion of the excess of taxable income over $416.
For a non-profit company that is not a friendly society dispensary, sub-clause (2.) provides that the tax is to be limited to eleven-twentieths (55 per cent) of the excess of taxable income over $416. This represents an increase of 5 cents in the dollar above the "shading-in" rate of 50 per cent that applied in 1970-71. The upper limit of the "shading-in" range in 1970-71 was $1,664. In consequence of the proposed increase in the normal rate of tax payable by these companies and in the "shading-in" rate, tax at normal rates will now be reached at $1,830 and it is proposed to increase the upper limit of the "shading-in" range to this level.
For a non-profit company that is a friendly society dispensary, sub-clause (3.) provides that where the taxable income of the company does not exceed $1,664 the tax is to be limited to one-half of the excess of taxable income over $416. This "shading-in" rate, and the upper limit of the "shading-in" range, are unchanged from those applying to these companies for the 1970-71 financial year.
Type of Company | Rates of Tax | First $10,000 of Taxable Income | Balance of Taxable Income | % | % | |||
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Private | 37.5 | 42.5 | ||||||
Public - | ||||||||
Co-operative | 42.5 | 47.5 | ||||||
Life Assurance - | ||||||||
Mutual | 37.5 | 42.5 | ||||||
Other Life Assurance - | ||||||||
Resident - | ||||||||
Mutual Income | 37.5 | 42.5 | ||||||
Other Income | 47.5 | 47.5 | ||||||
Non-Resident - | ||||||||
Mutual Income | 37.5 | 42.5 | ||||||
Dividend Income | +42.5 | 47.5 | ||||||
Other Income | 47.5 | 47.5 | ||||||
Non-Profit - | ||||||||
Friendly Society Dispensary | 37.5 | 37.5 | ||||||
Other | 42.5 | 47.5 | ||||||
Other - | ||||||||
Resident | 47.5 | 47.5 | ||||||
Non-Resident - | ||||||||
Dividend Income | 42.5 | 47.5 | ||||||
Other Income | 47.5 | 47.5 | ||||||
+ Maximum income subject to this rate is $10,000 less mutual income. |
INCOME TAX ASSESSMENT BILL (NO. 3) 1971
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.
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.
Clause 2 provides that the Amending Act shall come into operation on the day on which it receives the Royal Assent.
Clause 3: Income of persons connected with certain projects of the United States Government.
Clause 3 proposes amendments to section 23AA of the Principal Act to extend income tax exemptions to persons connected with the Joint Defence Space Communications Station, that correspond with exemptions granted to persons connected with the North West Cape naval communication station, the Sparta project and the Joint Defence Space Research Facility.
The Joint Defence Space Communications Station, which is situated at Woomera, is the subject of an agreement between the Governments of Australia and the United States of America signed on 10 November 1969. The agreement was tabled in the House of Representatives on 25 November 1969.
In broad terms, section 23AA provides that profits and remuneration derived by a contractor, a sub-contractor or an employee of a contractor or sub-contractor from the performance in Australia of a contract with the United States Government in connexion with the establishment, operation or maintenance of an approved project, and by civilian employees of the United States Government who are in Australia solely in connexion with approved projects are, subject to certain conditions being satisfied, deemed to be income of a non-resident from sources outside Australia and thus freed from Australian tax. An important condition of the exemption is that the income, which has its origin in moneys provided by the United States Government, is not exempt from United States tax. In addition, the contractor, sub-contractor or employee must be in Australia, or be carrying on business in Australia, solely for the performance of a contract with the United States Government in connexion with an approved project Australian companies and citizens and persons ordinarily resident in Australia do not qualify for the exemption.
Persons who qualify for the exemptions mentioned are also exempt from Australian tax on ex-Australian income during the period in which they so qualify.
The ex-Australian income of dependants of the classes of persons covered by section 23AA is also exempt under prescribed conditions. This exemption does not apply to any dependant who, before and after becoming a dependant, is ordinarily resident in Australia.
By paragraph (a) of this clause the Joint Defence Space Communications Station will be added to the approved projects to which section 23AA applies. Accordingly, the exemptions outlined above will be available in relation to the Station and Australia will thereby meet the obligations it has accepted in the agreement to provide exemptions from income tax.
Paragraph (b) will insert a definition of the Joint Defence Space Communications Station in sub-section (1.) of section 23AA.
The amendments contained in clause 3 are, by clause 9(1.), deemed to have come into operation as from the commencement of the income year ended 30 June 1970.
Clause 4: Gifts, calls on mining shares, pensions etc.
Section 78(1.)(a) of the Principal Act provides for the allowance of deductions for gifts of $2 and upwards to specified funds, authorities and institutions in Australia and the Territory of Papua and New Guinea.
By clause 4 it is proposed to amend sub-paragraph (xxxv) of section 78(1.)(a) to authorise deductions for gifts to the Productivity Promotion Council of Australia and to discontinue the existing provision for gifts to the Australian Productivity Council. These amendments are being effected by repealing the existing sub-paragraph and inserting a new sub-paragraph in its stead and will apply to assessments based on income of the 1971-72 income year and subsequent years.
Clause 5: Deductions for dependants.
The amendments proposed by this clause will raise from 21 years to 25 years the age at which a student ceases to qualify as a dependant for whom a taxpayer may be allowed a maintenance deduction under section 82B of the Principal Act.
Paragraphs (a) and (b) of clause 5 will effect minor drafting changes which replace references to "student child" by the more appropriate term "student" which will be defined in section 82B(5.).
By paragraph (c) of the clause, a new definition of "student" is to be inserted in sub-section (5.) of section 82B, replacing the present definition of "student child". The term, as used in the section, will mean a person who is not less than 16 years of age but is less than 25 who is receiving full-time education at a school, college or university.
As a result of these amendments a taxpayer who, in a year of income, contributes to the maintenance of a person who is a student as defined, will be entitled to a deduction of $208, subject to certain qualifications contained in sub- sections (3.) and (4.) of section 82B which remain unchanged.
The amendments will apply to assessments based on income of the 1971-72 income year and subsequent years.
The purpose of paragraph (a) of clause 6 is to increase from $300 to $400 the maximum deduction available to a taxpayer under sub-section (4.) of section 82B of the Principal Act in respect of the education expenses of a student who is receiving full-time education at a school, college or university or from a tutor.
Paragraph (b) proposes a complementary amendment to sub-section (5.) of section 82J which applies where two or more persons contribute to the education expenses of one student. In these circumstances, the sum of the deductions allowable overall in relation to the expenses in respect of any one student is also to be increased from $300 to $400.
In line with the amendments proposed in clause 5 of the Bill, paragraph (c) of clause 6 will alter the meaning of "student" as that expression is used in section 82J, so as to raise from 21 to 25 years the age at which a person will cease to be a student for the purpose of the deduction for education expenses authorised by section 82J.
The amendments will apply to assessments based on income of the 1971-72 income year and subsequent years.
Clause 7: Expenses in connexion with adoption of child.
By this clause it is proposed to insert into the Principal Act a new section - section 82JA - which will authorise the allowance of a concessional deduction in respect of certain legal expenses, court costs and fees that are normally incurred by a taxpayer in adopting a child.
Sub-section (1.) of the proposed new section is the operative provision designed to authorise a deduction for eligible expenses that are paid in connexion with the adoption of a child by a taxpayer, or jointly by a taxpayer and his or her spouse. The concession is limited to the adoption of children under the age of 21 years.
Sub-section (2.) of section 82JA will describe the types of expenditure that will be eligible for deduction under the new concession.
"Expenses" are defined as amounts paid for the services of a barrister or solicitor and amounts paid as costs of court proceedings in connexion with the adoption. The definition also extends to fees paid to a private adoption agency or to the Commonwealth, a State or the Administration of a Commonwealth Territory in respect of the adoption of a child. For the purpose of this sub-section, a "private adoption agency" is one that has been approved under a Commonwealth, State or Territory law.
The sub-section expressly excludes from the concession expenses of litigation which might be incurred in obtaining. a Court order dispensing with the consent of any person to an adoption.
The amendment will apply to assessments in respect of the 1971-72 income year and subsequent years.
Clause 8: Amounts paid by trustee after death of a taxpayer.
Section 82K of the Principal Act authorises deductions for medical expenses, funeral expenses and education expenses paid by a trustee as the legal representative of a deceased person who had incurred those expenses at the time of his death and who would have been entitled to deductions if he had paid them during his lifetime.
Under section 82K, an amount as described above is, when paid by the trustee of the deceased person's estate, deductible in the assessment based upon income derived by the deceased during the year in which he died.
By clause 8 it is proposed to extend the operation of section 82K to adoption expenses deductible under the proposed new section 82JA.
The amendment will apply to assessments in respect of the 1971-72 income year and subsequent years.
Clause 9: Application of amendments.
This clause specifies the commencing dates for the application of proposed amendments affecting assessments. These dates have been referred to in the notes on the relevant clauses of the Bill.