House of Representatives

Explanatory Memorandum

(Circulated by the Treasurer, the Right Honourable J.B. Chifley)

Ed. Note

NOTES ON CLAUSES

CLAUSE 1.-SHORT TITLE AND CITATION.

CLAUSE 2.-COMMENCEMENT.

Section 5(1A.) of the Acts Interpretation Act 1901-1941 provides that every Act shall come into operation on the twenty-eighth day after the day on which that Act receives the Royal Assent, unless the contrary intention appears in the Act. As the Bill contains a number of provisions which it is considered should come into operation as soon as practicable, it is proposed that the Income Tax Assessment Act 1947, shall come into operation on the day on which it receives the Royal Assent.

Included among the provisions which it is considered should apply as soon as possible are those designed to give legislative approval to the agreement made between the United Kingdom and Australia for the relief of double taxation. Other such provisions are concerned with or related to the collection of tax instalments on the earnings of employees.

Until recently, it was thought that the existing law contained authority for the collection of tax instalments from the earnings of rural workers employed at piece-work rates, e.g., potato diggers, onion pickers, &c. The High Court, however, in the case of Broome v. Chenoweth, recently decided that the law, as presently expressed, contains no such authority.

As it was always intended that the tax instalment provisions should apply in such cases, it is proposed by clause 29 to insert the necessary authorising provisions in the Income Tax Assessment Act. As such provisions will assist both the employees and the Taxation Department, it is considered that they should have application as soon as possible.

CLAUSE 3.-PARTS.

Section 5 of the Principal Act enumerates the Parts and Divisions into which the Act is divided.

The amendment here proposed is a drafting amendment consequent on the insertion in the Principal Act of a new Part which is designed primarily to give the force of law in Australia to the Agreement for the avoidance of double taxation on incomes concluded between the Commonwealth and the United Kingdom Governments.

CLAUSE 4.-INCOME TAX.

The effect of section 17 of the Principal Act is that a taxpayer (other than a company) is not liable to pay income tax (as distinct from social services contribution) unless his income exceeds Pd200.

It is now proposed to raise the taxable minimum in such cases to Pd251, and to apply the new provision in assessments for the financial year beginning 1st July, 1947, and subsequent financial years.

Clause 4 is designed to give effect to this proposal.

In addition to the proposed increase in the amount which may be derived without incurring liability for income tax, additional concessional rebates of tax are proposed for resident taxpayers by clause 24. The effect will be that where income is derived solely from personal exertion, income tax (as distinct from social services contribution) will not be payable unless the income exceeds, in the case of a-

CLAUSE 5.-EXEMPTIONS.

PARAGRAPH (a)-EXEMPTION OF CERTAIN INCOME DERIVED IN THE NORTHERN TERRITORY BY A RESIDENT OF THE TERRITORY.

Under paragraph (m) of section 23 of the Principal Act, an exemption is at present allowed in respect of income derived before the 1st July, 1947, by a resident of the Northern Territory from primary production, mining or fisheries in that Territory.

The exemption was originally enacted in 1923 for a period of five years and has been extended from time to time, the last extension being granted in 1938.

The purpose of the exemption has been to assist in the development of the Northern Territory and to encourage the re-investment of profits in the primary industries of the Territory. It is considered that the taxation relief hitherto granted to residents of the Territory should be continued for the present. Clause 5 of the Bill accordingly proposes that the exemption be extended for a further period of five years, i.e., until 30th June, 1952.

PARAGRAPH (b)-INCOME DERIVED BY BONA FIDE PROSPECTOR FROM THE SALE OF RIGHTS TO MINE FOR CERTAIN METALS OR MINERALS.

Section 23(p) of the Principal Act exempts income derived by a bona fide prospector from the sale, transfer or assignment by him of his rights to mine for gold in a particular area in Australia or the Territory of New Guinea.

It is proposed to enlarge this concession so as to extend the exemption to income derived by a bona fide prospector from the sale of rights to mine for such other metals or minerals as are prescribed by the Income Tax Regulations.

Extension of the concession is recommended by the Mining Industry Advisory Panel and supported by a Special Committee appointed by the Government to examine the Panel's taxation recommendations.

By the enlargement of this concession it is hoped to assist in the discovery and development of mineral ore bodies which will assist in the economic development and expansion of the Commonwealth.

The first proviso to the proposed new section 23(p) is a complementary provision to the new section 123AA which, by clause 20, it is also proposed to insert in the Principal Act.

Section 123AA will allow a deduction, in the year of expenditure, of the cost of prospecting and exploration on mining tenures. The nature of this allowance is more particularly explained in the Note to clause 20.

The view taken is that where a particular amount of income is exempted from income tax, then expenditure incurred in gaining that exempt income should be excluded from the allowable deductions. Applying this principle to the exemption of income derived by a bona fide prospector from the sale of rights to mine, in a particular area, for any metal or mineral to which section 23(p) might apply, it is considered that if expenditure incurred in prospecting or exploration in that area has been allowed or is allowable as a deduction in assessments of the prospector, then the amount of income to be exempted should be reduced by the amount of the deduction so allowed or allowable. Thus, if the rights were sold for Pd1,500, and the prospector had expended Pd1,000 during the year of income on prospecting and exploration in relation to those rights, the amount of income to be exempted under section 23(p) would be Pd500. If the prospecting expenditure had amounted to Pd2,000, no part of the selling price would be exempt. The prospector, however, would obtain a deduction of the full amount of the expenditure, viz. Pd2,000, under section 123AA. The substantial effect of these provisions in such cases will be that any profit on the sale of the mining rights will be exempt but any loss will be deductible. The proposed proviso is accordingly designed to give effect to this intention.

In accordance with the recommendation of the Special Committee, special provision will be made to prevent any unintended avoidance of tax in cases where a relationship exists between prospector and purchaser. In the absence of such a safeguard, it may be possible for taxpayers so to arrange their transactions as to avoid payment of substantial amounts of tax justly payable.

The further proviso to the proposed new paragraph (p) of section 23 therefore provides that the exemption shall not apply where any party to such a contract has power to control, directly or indirectly, the other party's entry into the transaction or the other party's activities in connexion with the mining rights disposed of.

These limiting provisions, however, will not apply in respect of the sale of rights to mine for gold. The reason for this is that income derived from gold mining in Australia is exempt from income tax and consequently the amount paid by a gold mining concern for rights to mine for gold does not, generally, affect the amount of its taxable income.

The proposed definition of "bona fide prospector" is practically the same as that included in the exempting provision which paragraph (b) of clause 5 is intended to replace.

The proposed amendment will apply in respect of income derived during the year ended 30th June, 1947, and subsequent years.

PARAGRAPHS (c) and (d)-INCOME DERIVED BY INTERNATIONAL ORGANIZATIONS AND BY CERTAIN OFFICIALS OF SUCH ORGANIZATIONS.

Clause 5(d) will insert in section 23 of the Principal Act two new paragraphs, viz., paragraphs (x) and (y).

The proposed new paragraph (x) of section 23 will exempt the income of any prescribed organization of which Australia and one or more other countries are members. It is intended, primarily, to exempt any income which might be derived in Australia by the United Nations. It is so designed, however, that it may exempt income derived by any other international organization of which Australia is a member and which is prescribed by the Income Tax Regulations as an organization entitled to the exemption.

The exemption will apply in respect of income derived during the year ended 30th June, 1946, and subsequent years.

The new paragraph (y) of section 23 of the Principal Act will grant exemption in respect of the official salary and emoluments of certain officials of any international organization which is exempted under the proposed new section 23(x).

It might first be mentioned that, broadly stated, a non-resident of Australia is liable to Commonwealth tax on income derived in Australia. A resident of Australia, however, is liable to tax on income derived both in and out of Australia, except income which is derived outside Australia and taxed in the country in which it is so derived.

As regards the remuneration of its officials, the United Nations would desire that Member Governments refrain from imposing income tax thereon.

The view taken by the Commonwealth Government, however, is that Commonwealth tax should be imposed upon the remuneration derived in Australia by those officials who are residents of Australia. Exemption might be granted, however, in respect of the official remuneration of overseas officials who come to Australia.

Justification might also be found for the view that exemption should be granted in respect of the official remuneration derived outside Australia by Australian residents appointed for ex-Australian service by the United Nations.

It is accordingly proposed that section 23(y) shall provide exemption in respect of the official remuneration derived in Australia by any official who is a non-resident of Australia. It will also exempt the official remuneration derived out of Australia by a resident of Australia who is appointed for service with the Organization outside Australia.

The exemption will apply in respect of income so derived during the year ended 30th June, 1946, and subsequent years.

CLAUSE 6.-REPAYMENT OF TAX PAID ABROAD IN RESPECT OF EX-AUSTRALIAN DIVIDENDS.

The primary necessity for this section arises out of the terms of the Agreement for the avoidance of double taxation concluded between the Commonwealth and the United Kingdom Governments.

The clause is designed to ensure that repayments made to a shareholder in a United Kingdom company in respect of United Kingdom income tax which had been deducted from the dividend by the company shall be included in his assessable income. Such repayments are essentially income as they represent, in effect, the payment to the shareholder of a part of his dividend which had been withheld from him by the company. The repayment, however, is in fact a repayment to the shareholder by the United Kingdom Inland Revenue Authorities of a part of the United Kingdom tax paid by the company.

It is well settled that although a United Kingdom company is entitled under the United Kingdom income tax provisions to deduct "the tax appropriate to the dividends" paid by the company, the amounts deducted are not income tax which the shareholders are personally liable to pay under the law of the United Kingdom.

Where a dividend is received by a resident of Australia from a United Kingdom company, and the company has made a deduction at the source in respect of United Kingdom income tax paid by the company on its profits, the Income Tax Assessment Act requires that the net amount actually paid by the company shall be included in the assessable income of the shareholder. Where, therefore, a United Kingdom company declares a gross dividend of, say, Pd10,000, but deducts and retains therefrom, tax at the standard rate, at present 9s. in the Pd, the shareholders would be entitled to receive 11s. only for each Pd1 of the gross dividend, and the liability to Australian tax would be determined by reference to the net amount of the dividend actually received.

For the purposes of calculating the reliefs to which a shareholder is entitled under the United Kingdom law, however, dividends are included in the "total income" of the shareholder and although the shareholder is not personally liable to pay United Kingdom tax (except sur-tax) on the dividends, the extent, (if any), to which he is entitled to reliefs, is calculated by reference to the quantum of his "total income". If the shareholder's rate of tax calculated by reference to his "total income" is less than the rate of tax which the company deducted and retained, the shareholder is entitled to a repayment from the Inland Revenue Authorities and it is the amount of such a repayment that the section requires to be included in the assessable income of the year the repayment is received.

In the generality of cases the repayment will be received in a year subsequent to that in which the net dividend was derived, but it is not proposed that the assessment of the year in which the dividend was derived should be reopened except, as stated later on in the explanation to the proposed new Part IIIB. covering "Relief from Double Taxation", where a taxpayer elects to "gross-up" a dividend. In such a case it is necessary that the repayment be included in the shareholder's assessable income of the year in which the net dividend was paid to him to enable the quantum of the Australian tax attributable to the "grossed-up" dividend to be determined in order that the taxpayer may receive a full credit for the United Kingdom tax payable thereon.

In addition to covering the case where a repayment is received in respect of tax actually deducted from a dividend paid by a United Kingdom company, the section will also cover the case where the company pays a dividend "free of tax" or "partly free of tax" and the shareholder receives a repayment in respect of the tax the company was authorized to deduct.

The section deems any amount received by way of repayment to be a dividend in order that the full property rate of tax may be levied thereon and also that the rebate under section 46 of the Principal Act may be allowed where the recipient is a company.

The section applies generally in cases where the recipient of the dividend was not personally liable for the payment of the tax which was deducted from the dividend. In practice, however, the section will probably apply only in respect of dividends paid by United Kingdom companies.

The new provision will apply in respect of assessments based on income of the year ending 30th June, 1947, and subsequent years.

CLAUSE 7.-DIVIDENDS.

The purpose of this amendment is to ensure that the provisions of section 23(q) shall not affect the operation of section 44(1)(a) of the Principal Act.

Section 23(q), so far as relevant, provides that income derived by a resident of Australia from sources out of Australia shall be exempt from Commonwealth income tax, if that income is not exempt from income tax in the country where it is derived.

Section 44(1)(a) is designed to include in the assessable income of shareholders who are residents of Australia the dividends paid to them by companies out of profits derived by those companies from any source, whether in Australia or elsewhere.

The Income Tax Assessment Acts 1936 contained a provision - Section 44(2)(a) - to the effect that the assessable income of a shareholder should not include dividends received from a company that did not carry on business in, or derive income from sources in, Australia. This exemption continued until 1941 when, by section 7 of Act No.58 of 1941, it was discontinued in respect of dividends which were paid on and after 30th October, 1941.

Since 1941, section 44(1.)(a) has been applied on the basis that its operation was unaffected by section 23(q). Accordingly, dividends received by residents of Australia from ex-Australian companies have been included in assessable income for Commonwealth income tax purposes, irrespective of whether those dividends were subject to or exempt from income tax in the country where they were derived.

This interpretation of section 44 was successfully challenged before the Full High Court in Reid v. The Federal Commissioner of Taxation. By judgment delivered at Melbourne on 20th March, 1947, the Court upheld the taxpayer's claim that section 23(q) applied to exempt from Commonwealth income tax dividends derived by a resident of Australia from sources out of Australia, if those dividends were not exempt from income tax in the country where they were derived.

The defect in the law disclosed by the judgment of the Court will be remedied by the insertion of sub-section (1A.) in section 44.

By clause 38 of the Bill it is provided that the new sub-section (1A.) inserted in section 44 shall apply to all assessments, notices of which have been posted to taxpayers on and after 20th March, 1947, i.e., the date of delivery of judgment of the Court in the case mentioned. The benefit of the judgment will be preserved to the successful appellant and to any other taxpayer who lodges or has lodged a valid objection to any assessment on grounds similar to the grounds taken by the appellant, if the objection is undetermined. The principle of the judgment will also be applied in any undetermined references to the Board of Review and appeals to the Supreme Court of a State or the High Court of Australia.

CLAUSE 8.-CREDIT FOR INCOME TAX PAID ABROAD ON EX-AUSTRALIAN DIVIDENDS.

By clause 8, it is proposed to allow to resident taxpayers who receive a dividend paid by a company resident outside Australia out of its profits derived from sources out of Australia, a credit in respect of income tax imposed on that dividend by a country outside Australia.

The existing section 72A of the Income Tax Assessment Act provides that where the assessable income of a taxpayer includes dividends in respect of which he has paid income tax under the law of any country outside Australia, the amount of the income tax so paid outside Australia shall be allowable as a deduction to the extent that that income tax is attributable to dividends or parts of dividends paid out of profits derived from sources out of Australia.

To the extent that a dividend is paid out of profits derived from sources in Australia, it is considered that Australia, being the country in which the origin of the income is located, has the prior right to tax. No deduction is, therefore, allowed for overseas income tax attributable to dividends or parts of dividends paid out of profits which had their source in Australia. This principle is inherent in the Commonwealth's taxing laws, and it is not intended to depart from it in the proposed section 45.

To the extent that a dividend is paid out of profits derived from sources out of Australia, the existing section 72A provides the Australian resident with a measure of relief from double taxation imposed by the Commonwealth and the country outside Australia. It is considered that adequate relief from double taxation is provided when the relief given reduces the total of the taxes payable to the two countries to an amount not in excess of the higher of the taxes imposed by the two countries. This conception of relief from double taxation is widely accepted in international agreements for the relief of double taxation.

In the case of dividends paid to Australian residents by companies resident outside Australia out of ex-Australian profits, section 72A frequently fails to provide relief which will reduce the total of the taxes on the whole or part of a dividend paid from ex-Australian profits to an amount equal to the higher of the two taxes imposed on that dividend, or part thereof, as the case may be.

By clause 11 it is proposed to repeal section 72A. In lieu of the deduction at present allowed by that section, it is intended by clause 8 to insert a new provision, namely, section 45, by which it is proposed to provide for the allowance of a credit in respect of the overseas tax on the whole or part of a dividend which has been paid by a company resident outside Australia out of ex-Australian profits. The amount of the credit will be restricted to the amount of the Australian tax imposed on that dividend, or part thereof, paid out of ex-Australian profits.

In cases where the Australian tax on the dividend, or the appropriate part thereof, is lower than the overseas tax on that amount of dividend, the credit will equal the Australian tax on that amount of dividend, which will, therefore, bear no Australian tax. No double taxation will exist.

In other cases where the Australian tax on the dividend, or the part thereof paid out of ex-Australian profits, exceeds the overseas tax on that amount of dividend, the credit will equal the amount of the overseas tax on the appropriate amount of dividend. The total of the overseas tax paid on the appropriate amount of dividend and the Australian tax remaining to be paid thereon after the allowance of the credit will, therefore, equal the amount of the Australian tax which would, apart from the allowance of the credit, have been payable in respect of the dividend paid out of ex-Australian profits.

It is intended that the credit should first be allowable in respect of dividends paid to taxpayers during the year of income ending 30th June, 1947.

The following examples, in which rates of tax applicable to income of the year ended 30th June, 1946, are used, show, in various circumstances, a comparison between the tax payable when a deduction for overseas tax is allowed under section 72A and the tax which would be payable if the proposed credit were substituted for the deduction.

EXAMPLE 1.

The taxpayer is a resident (other than a company) whose only income is a dividend of Pd500 paid by a company resident outside Australia out of profits derived from sources out of Australia. The overseas tax on the dividend is, say, 3s. in the Pd, that is, Pd75.

EXAMPLE 2.

The taxpayer is a resident (other than a company) whose only income is a dividend of Pd500 paid by a company resident outside Australia out of profits of which one-half were derived from sources out of Australia. The overseas tax on the dividend is, say, 3s. in the Pd, that is, Pd75.

EXAMPLE 3.

The taxpayer is a resident (other than a company) who derives an income of Pd1,000 from investments in Australia and a dividend of Pd500 paid by a company resident outside Australia out of profits derived from sources out of Australia. The overseas tax on the dividend is, say, 3s. in the Pd, that is, Pd75.

EXAMPLE 4.

The taxpayer is a resident company with a taxable income of Pd10,000 which includes a dividend of Pd500 paid by a company resident outside Australia out of profits derived from sources out of Australia. The overseas tax on the dividend is, say, 3s. in the Pd, that is, Pd75. The resident company pays a dividend of Pd4,000 out of its taxable income within six months of the end of the year of income.

Sub-section (1.) of the proposed section 45 states, in the first place, the conditions under which the section will apply. These are:-

(a)

the taxpayer receiving a dividend must be a resident,

(b)

the dividend must be included in his assessable income,

(c)

the dividend must have been paid by a company resident outside Australia, and

(d)

the taxpayer must have been personally liable in respect of the dividend for income tax paid, either directly or by deduction, to a country outside Australia.

Where these conditions are fulfilled the sub-section provides for the allowance of a credit and prescribes the method by which the amount of the credit shall be ascertained.

In cases where the whole of the dividend has been paid out of profits derived from sources out of Australia the amount of the credit is the smaller of-

(a)

the overseas tax upon the dividend, less any refund or credit thereof, or

(b)

the Australian tax upon the dividend.

Where the dividend is paid only in part out of ex-Australian profits, the credit which would otherwise be allowable is reduced in the same proportion as the dividend is paid out of Australian profits.

For the purpose of determining the amount of the credit it will be necessary to ascertain the amount of Australian tax attributable to the appropriate amount of dividend.

It is also necessary that this should be done for the purposes of the Agreement between Australia and the United Kingdom for the relief of double taxation. By clause 27 it is proposed to include in the Income Tax Assessment Act provisions which will permit effect to be given to that Agreement. Included in these provisions is a proposed section 160K which is intended to direct the method of ascertaining the amount of Australian tax applicable to a dividend. It is intended that the same method of ascertaining the amount of Australian tax applicable to a dividend should be used for the purposes of the proposed section 45.

Explanatory notes relating to the proposed section 160K are included with the notes on clause 27 of this Bill, but it can be mentioned here that all Commonwealth taxes and social services contribution imposed on dividends, and not only income tax, will be taken into account for the purposes of calculating the amount of the credit.

Sub-sections (2.), (3.), (4.) and (5.) of the proposed section 45 are designed to make the amount of any credit a debt due and payable to the taxpayer and also to provide for the application of the credit against taxes or other debts due by the taxpayer to the Crown. Sub-section (5.) is considered necessary in order to ensure that companies liable for undistributed income tax are allowed the proper deduction for taxes in arriving at the amount upon which that tax is imposed.

Similar provisions are considered necessary for the purposes of giving effect to the United Kingdom-Australia Agreement for the relief of double taxation. By clause 27 it is proposed to include these provisions as section 160Q and explanatory notes to clause 27 set out in greater detail the purposes common to the proposed section 160Q and to sub-sections (2.), (3.), (4.) and (5.) of the new section 45 proposed by this clause.

Sub-section (6.) of the proposed section 45 provides that a credit shall not be allowed unless the taxpayer furnishes to the Commissioner all the information necessary for ascertaining the amount of the credit. It is also provided that the credit shall not be allowed unless this information is furnished within three years after the date upon which the Commonwealth income tax imposed on the dividend became due and payable.

The Commonwealth tax will not usually be payable until some months after the year of income in which the dividend is paid. The overseas tax on the dividend will, in most cases, have been paid by means of a tax collected at the source when the dividend is paid. It is accordingly considered that the proposed period of three years will usually provide taxpayers with ample opportunity to furnish the necessary information.

Sub-section (7.) of the proposed section 45 proposes, however, that the Commissioner may extend the period during which the necessary information may be supplied by a further period not in excess of three years. It is intended that the Commissioner should be empowered to grant the extension if it has not been practicable for the taxpayer to supply the information within the period of three years prescribed by the preceding sub-section.

Sub-section (8.) of the proposed section 45 is intended to give to the Commissioner power to recover the amount by which any credit paid to the taxpayer or applied on his behalf is shown to be excessive. A credit could be rendered excessive by reason of a variation in the amount of the tax paid overseas.

Sub-section (9.) of the proposed section 45 is designed to ensure that no taxpayer shall be allowed a credit under section 45 for overseas tax where he is, in respect of the same amount of tax, entitled to a credit by reason of a double taxation agreement which is given the force of law pursuant to the proposed Part IIIB. of the Act.

CLAUSE 9.-DEPRECIATION.

Section 54 of the Principal Act provides for the allowance of depreciation in respect of plant or articles owned by the taxpayer and used by him during the year of income for the purpose of producing assessable income. Sub-section 2(b) of that section provides that the term "plant" shall include fences, dams and other structural improvements on land which is used for the purposes of agricultural or pastoral pursuits. Improvements for domestic or residential purposes are, however, specifically excluded from the depreciation provisions.

Primary producers, generally, have accordingly been allowed depreciation on such improvements as bores, wells, dams &c. It is now proposed by clause 12 of the Bill to expand section 75 of the Income Tax Assessment Act so that the cost of constructing these and similar improvements intended for use in the conservation of water, shall be allowed as a deduction in the year in which the expenditure is incurred. A similar concession will be provided in respect of capital expenditure incurred in combating or preventing soil erosion or in constructing levee banks or similar structures having like uses.

The new provisions will apply in respect of expenditure so incurred during the year ending 30th June, 1947, and subsequent years.

Where a deduction is allowed of the cost of such improvements, depreciation should not, it is considered, also be allowed. Clause 9 accordingly proposes that there shall be excluded from the improvements subject to depreciation deduction, bores, wells, dams and other structural improvements, expenditure on the construction of which will be allowable as a deduction under the proposed new provisions extending the scope of section 75 of the Principal Act.

It may be observed that the taxation benefit will, in future, accrue to the taxpayer who undertakes the construction of these improvements. The exclusion of such improvements from the definition of "plant" will have the effect of placing the improvements outside section 59(2) of the Act. That section provides that where, upon the sale of a unit of property in respect of which depreciation has been allowed, the consideration receivable in respect of the unit exceeds its depreciated value, the excess shall, to the extent of the sum of the amounts of depreciation allowed or allowable in assessments, be included in the assessable income of the vendor.

However, notwithstanding that a deduction has been allowed for the cost of such improvements, the recoupment of such cost upon the sale of the property will not be included in the taxpayer's assessable income. Correspondingly, a person who, after the 30th June, 1946, acquires land with improvements, the cost of which has been allowed as a deduction, under section 75 of the Act, in the assessments of the vendor or any previous holder, will not be entitled to a deduction for depreciation in respect of those improvements.

CLAUSE 10.-CALCULATION OF DEPRECIATION.

The amendment proposed by this clause is complementary to the amendments proposed by clauses 9 and 12. Clause 12 will insert in Section 75 of the Principal Act new provisions allowing special deductions in respect of expenditure incurred in combating or preventing soil erosion, or in constructing bores, wells, dams, levee banks, &c.

Section 56(3.) of the Principal Act at present provides that where a unit of property is bought by the taxpayer, no amount paid by him which has been allowed or is allowable as a deduction for income tax purposes (otherwise than on account of depreciation) shall be deemed to be part of the cost of property for depreciation purposes.

Section 56(3.) thus prevents the allowance of depreciation in respect of that part of the purchase price which has been allowable as a deduction.

Since it is proposed to allow as a deduction, in the year of expenditure, the cost of constructing improvements such as bores, wells, dams, levee banks, &c., it is considered necessary to expand this provision to ensure that a second deduction by way of depreciation may not also be obtained in respect of those improvements.

Sub-section (3.) of Section 56, as re-expressed in clause 10, is designed to achieve this result.

This amendment will apply for purposes of assessments based on the income of the year ending 30th June, 1947, and subsequent years.

CLAUSE 11.-INCOME TAX PAID ABROAD ON EX-AUSTRALIAN DIVIDENDS.

By clause 11 it is proposed to repeal the existing section 72A of the Income Tax Assessment Act. This section at present provides that where the assessable income of a taxpayer includes dividends in respect of which he has paid income tax under the law of any country outside Australia, the amount of the income tax so paid outside Australia shall be allowed as a deduction to the extent that the dividend was paid out of profits derived from sources out of Australia.

Section 72A also provides that any refund of such tax which has been allowed as a deduction shall be included in the assessable income of the taxpayer to whom the deduction was allowed.

By clause 8 it is proposed to allow to resident taxpayers receiving a dividend from a company resident outside Australia a credit in respect of tax paid outside Australia on the part of the dividend paid out of profits derived out of Australia.

From the explanatory notes on clause 8 it will be seen that the present deduction allowed under section 72A does not fully relieve double taxation on dividends received by Australian residents from companies resident outside Australia. It is, however, proposed by that clause that a credit in respect of overseas tax on dividends paid out of ex-Australian profits should be allowed. The proposed credit will provide more adequate relief from double taxation on those dividends than is now provided to taxpayers by reason of the deduction allowed under section 72A.

Since the proposed credit would be allowed in substitution for the existing deduction under section 72A, it is considered necessary to repeal that section in order to avoid the allowance of a double benefit in respect of the same amount of overseas tax.

It can be mentioned that it is intended in clause 38 to provide for the continued operation of section 72A in certain circumstances in order to avoid anomalies which would otherwise arise from the transition from the allowance of a deduction to the allowance of a credit.

CLAUSE 12.-CERTAIN EXPENDITURE ON LAND USED FOR PRIMARY PRODUCTION.

Sections 75 and 76 of the Principal Act contain special provisions permitting primary producers to deduct from their assessable income capital expenditure incurred for such purposes as the eradication of pests, the destruction and removal of timber, scrub or undergrowth indigenous to the land, the preparation of land for agriculture, ploughing and grassing land for grazing purposes, draining swamp lands, &c. The additional cost of making fences rabbit or dog proof is also an allowable deduction.

Since the granting of these concessions, the need to conserve the soil and water supplies has increased. It is therefore proposed to extend the concessions to cover capital expenditure incurred in-

(a)

combating or preventing soil erosion;

(b)

constructing specified improvements intended for use in improving or conserving water supplies; and

(c)

constructing levee banks or similar structures having like uses.

It is intended that the deductions in respect of soil erosion shall cover expenditure incurred in the protection of the banks of waterways, the planting of wind breaks, terracing, the prevention of gullying, &c. It might here be mentioned that the existing provisions of the Principal Act already allow deductions for other classes of expenditure incurred in preventing or combating soil erosion, e.g., expenditure on contour ploughing, rabbit destruction, strip cropping, grassing, &c.

It is not proposed to extend the new concession to expenditure on the erection of fencing, as this is already the subject of a depreciation allowance and, in addition, the cost of making fences rabbit or dog proof is an allowable deduction.

The present law allows depreciation in respect of most of the assets used by primary producers for water conservation. The recoupment of capital cost of these improvements is, however, extended over a somewhat lengthy period. If the full cost of construction of such improvements as dams, earth tanks, underground tanks, and irrigation channels, as well as the cost of sinking bores and wells were allowed as a deduction in the year in which the expenditure is incurred, primary producers would be able to add to their improvements at an earlier date than is, at present, possible.

In view of the need for water conservation in Australia, it is proposed that a deduction of this class of expenditure be permitted in the year in which it is incurred. The adoption of this course would mean that depreciation would not be allowed on the improvements where the cost has been allowed in the year of incurrence.

A further proposal is that the cost of levee banks should be deductible in the year in which the expenditure is incurred. Generally speaking, levee banks are not used for the conservation of water, but, rather, for protecting land from flooding. Their purpose is to increase the area of productive land available for primary industry.

Paragraph (c) of clause 12 will insert in section 75 of the Principal Act a new sub-section (2.) which will apply where the taxpayer is recouped by the Commonwealth, by a State or by some other public authority or person, the cost or part of the cost of the construction of the improvements referred to. In such a case the deduction will not be allowable to the extent to which the taxpayer does not actually bear the expenditure on the improvements. Correspondingly any recoupment will not fall into the assessable income of the taxpayer.

The new provisions will apply in respect of expenditure so incurred during the year ending 30th June, 1947, and subsequent years.

CLAUSE 13.-GIFTS AND CONTRIBUTIONS.

Section 78 of the Principal Act allows as a deduction (inter alia) pensions and retiring allowances paid by the taxpayer to certain of his employees and their dependants. In the case of companies, section 78 also allows a deduction in respect of certain gifts and contributions. Section 79 allows a deduction of voluntary contributions made by the taxpayer to employees' pension or superannuation funds. Section 79A allows a special deduction to taxpayers residing in the remote areas of Australia.

The effect of sub-section (3.) of section 78 is that the aggregate of deductions allowable under sections 78, 79, and 79A shall not exceed the amount of income remaining after deducting from the assessable income all other allowable deductions, except the deduction of losses of previous years.

It is now proposed that, for purposes of the assessment of taxpayers carrying on mining operations in Australia, the amount of any deduction allowable under Division 10 of the Principal Act in respect of capital expenditure on plant or development or expenditure on exploration or prospecting shall not be taken into account before determining the amount (if any) of the deduction allowable under section 78, 79 or 79A of the Principal Act.

The amended provision will apply in respect of assessments based on the income of the year ending 30th June, 1947, and subsequent years.

CLAUSE 14.-DEDUCTION FOR RESIDENTS OF ISOLATED AREAS.

Section 79A of the Principal Act allows special deductions to individuals resident in the remote areas of Australia. This deduction was granted as a recognition of the disadvantages to which these persons are subject because of the uncongenial climatic conditions, isolation and high cost of living in those areas which are referred to as Zone A and Zone B respectively.

At present residents of Zone A are allowed a special deduction of Pd40 while the deduction allowable to residents of Zone B is Pd20.

Zone A roughly comprises the north-western areas and the extreme north-eastern areas of Queensland, the northern part of the Northern Territory and the northern portion of Western Australia. It also includes the Territories of Papua, Norfolk Island and New Guinea.

Zone B broadly embraces north-eastern (but not including the northern extremity), central and south-western Queensland, western New South Wales, the north and west of South Australia, the gold-fields area and the central and southern areas of Western Australia but excluding the south-west corner of that State. It also includes the west coast regions of Tasmania.

The areas included in Zone A are north of the Tropic of Capricorn. It is because the residents of these areas are obliged to endure tropical conditions and also because, in these areas, the disabilities of isolation and higher living costs are, generally speaking, more intensive, that it is considered that the residents of Zone A should receive a higher deduction than the residents of Zone B.

Since the enactment of section 79A it has been ascertained that because of financial and other difficulties and disabilities and particularly because of the scarcity of labour, the granting of some additional concessions to residents of the more remote areas is justifiable.

It is accordingly proposed that the special deduction allowable to residents in Zone A be increased from Pd40 to Pd120. It is not considered, however, that any increase in the deduction allowable to residents of Zone B is warranted.

The increased deduction will apply in assessments based on income derived during the year beginning on the 1st July, 1947.

This concession will be additional to the proposal made by clause 15 to extend the "carry forward" period for losses from four to seven years. This proposal is more particularly explained in the Note to clause 15.

CLAUSE 15.-LOSSES OF PREVIOUS YEARS.

Section 80 of the Principal Act allows a deduction of losses incurred during the four years preceding the year of income. A deduction of this nature has been allowed since 1927.

Until recently, it was considered that the "carry forward" period of four years was generally quite reasonable. It was thought that, in the comparatively few cases where it did prove inadequate, the taxpayers concerned could obtain, under section 265 of the Act, relief from payment of the tax on the ground of serious hardship.

Recent experience of the Taxation Department, however, indicates the need for an extension of the "carry forward" period. For example, it has been found that, because of prolonged drought conditions in some areas, primary producers in those areas have suffered losses for considerably more than four years. In other instances, losses in a very unfavourable season have been so great that they cannot be fully recouped out of the relatively small income of the four succeeding years.

It appears, therefore, that the restriction of the deduction to losses incurred during the four preceding years is adversely affecting the pastoral industry, particularly in northern, north-eastern and north-western areas of Australia. It is also understood that some pastoralists in these areas are finding it impossible to undertake necessary maintenance and improvements to their properties.

There is also evidence that section 265 of the Income Tax Assessment Act which, as already indicated, grants relief from payment of tax where payment would entail serious hardship, does not grant effective relief in all cases where the "carry forward" period of four years proves to be inadequate. An extension of the four-year period is accordingly considered justifiable in the case of the primary producers referred to. It would be impracticable, however, to limit an extension of the concession to particular industries or to residents of particular areas. Such discrimination would inevitably lead to anomalies and would be most difficult of application.

Clause 15 accordingly proposes that a deduction be allowed in respect of losses incurred during the seven years next preceding the year of income.

The amendment will apply for the first time in assessments based on the income of the year ending 30th June, 1947. In those assessments a deduction will be allowed in respect of so much of any losses incurred during the seven preceding years as has not been allowed as a deduction in prior assessments.

Paragraph (b) of clause 15 is a consequential drafting amendment. The proviso to sub-section (2) of section 80 of the Principal Act states that if the Governor-General by proclamation so directs, a "carry forward" period of three years shall be substituted for the "carry forward" period of four years specified in the section. This provision was enacted in 1936. It formed part of the plan for uniformity in the income tax laws of the Commonwealth and the States. The State income tax laws varied considerably. Some allowed a limited deduction for past years' losses, but others provided no such concession. The conclusion was reached by the States, however, that a "carry forward" period of three years might prove adequate. The special provision was accordingly inserted in the Commonwealth Act so that if all the States adopted that period uniformity could be achieved. There has been, however, no such alteration in the "carry forward" period.

The adoption of the proposed "carry forward" period of seven years will accordingly render unnecessary the retention of the existing proviso to section 80(2) of the Act. Clause 15 accordingly proposes that it shall be repealed.

CLAUSE 16.-CERTAIN INCOME TO BE TREATED AS INCOME FROM PERSONAL EXERTION.

The High Court of Australia, in the comparatively recent case of Tindal v. the Commissioner of Taxation (3 A.I.T.R. 299), decided that under the Commonwealth income tax law, the share of the net income of a trust estate on which a beneficiary is assessable should, in all circumstances, be treated as income from property.

Since the inception of Commonwealth income tax, the view has been held that a beneficiary's share of the net income of the trust estate is, in every case, derived from the same source as the income of that estate. This view was founded upon a decision of the Privy Council in the Australian case of Syme v. Commissioner of Taxation ((1914) A.C. 1013).

The effect of this practice is that where a trust estate derived only income from property, each beneficiary's share was assessed at the rate of tax applicable to income from property. Where the trust income consisted solely of income from personal exertion (e.g. the proceeds of a business carried on by the trustees), each beneficiary's share was assessed at the rate applicable to income from personal exertion. Similarly, where the trust income was derived partly from personal exertion and partly from property, and was placed in a mixed fund in which the beneficiaries were entitled to share without regard to the source of the income, the share of each beneficiary was treated as having been derived rateably from the income derived from each source.

In respect of beneficiaries presently entitled to income from a business of primary production carried on by a trustee, the beneficiary is deemed by section 157 of the Act to be a primary producer for purposes of applying the averaging provisions.

The decision of the High Court of Australia in the case of Tindal v. Commissioner of Taxation, has, however, established that the Departmental practice is not in accordance with the law.

It is considered that it would be undesirable to alter the existing practice. Such a departure from long recognised principles might prove inequitable. Moreover, the present practice, which was favourably regarded by the Royal Commission on Taxation 1932-1934, viz. that a beneficiary's share in the net income of a trust estate should be taxed according to its nature in the hands of the trustee, is considered to be reasonable.

The amendment proposed by clause 16 is designed to overcome the effect of the High Court decision and to give legislative expression to a long established practice.

By clause 38, it is proposed that the amendment shall operate on and from 23rd August, 1946, i.e. the date on which the High Court announced its decision in Tindal's case. The combined effect of clauses 16 and 38 will, therefore, be to validate assessments made on and after that date. It is unnecessary to make any special provision regarding assessments made prior to that date. Such prior assessments conform to the Department's interpretation of the income tax law. To amend such assessments would be, therefore, for the purposes of correcting a mistake of law. Section 170 of the Income Tax Assessment Act does not, however, permit the Commissioner to amend assessments in order to correct a mistake of law. Such prior assessments will accordingly remain undisturbed.

CLAUSE 17.-CONCESSIONAL REBATE IN CASE OF TRUST ESTATE.

Under section 160(2.)(g) of the Principal Act a rebate is allowed in respect of gifts made by a taxpayer (other than a company) to public hospitals, public benevolent institutions and certain other classes of organisations. The rebate allowable is calculated by applying to the amount of the gift, the rate of tax applicable to a personal exertion income equal to the taxpayer's total taxable income.

The allowance of this rebate is a recognition of the fact that the financial resources of the taxpayer have been depleted by the making of a gift to a public institution especially deserving of public support.

In view of the fact that the Income Tax law contains special provisions relating to the assessment of the income derived by a trust estate, it was considered necessary to make special provision to cover cases where such gifts are made by the trustee out of trust income.

The provisions relating to the assessment of the income of a trust estate provide that the assessable income of a beneficiary who is not under a legal disability shall include the share of the trust net income to which he is presently entitled. Where a beneficiary is presently entitled to a share of the net income but is under a legal disability, the trustee is liable to be assessed and to pay tax on that share as if it were the income of an individual. The trustee is also assessable on any part of the trust income to which no beneficiary is entitled.

Upon the introduction of Uniform Income Tax in 1942, section 100A was inserted in the Principal Act to ensure that where gifts were made out of the trust income, no person was deprived of any income tax concession to which he should be entitled.

As expressed, section 100A provides that where such a gift is made by the trustee in respect of the trust estate, it shall be deemed to be made proportionately by the trustee and each beneficiary who is liable to be assessed in respect of a share of the net income of the trust estate.

It was intended, however, that this section should apply only in respect of gifts made out of the income of a trust estate.

In the recent case of Commissioner of Taxation v. Elder's Trustee and Executor Co. Ltd. (Trustees of Estate T. E. Barr-Smith deceased) (71 C.L.R. 381) it was decided by the High Court of Australia that the section applies to gifts made by an executor out of corpus in pursuance of the terms of the will. The rebate is allowable notwithstanding that the beneficiary's share of the trust net income is not diminished by any part of the gift and notwithstanding that a deduction in respect of the same gift has been allowed for estate duty purposes.

The effect of the decision of the High Court, therefore, is that in the present state of the law, trustees and beneficiaries will obtain an income tax concession not previously enjoyed by them, and two concessions, one for estate duty and another for income tax, may be allowable in respect of the same gift. The adverse effect upon revenue of such a double allowance might well be considerable.

By clause 17, it is proposed to re-express section 100A, and also to make a corresponding amendment to section 160(2.)(g), so as to avoid these unintended effects and, in particular, to provide that the concessional rebate for income tax purposes will not be allowable in respect of gifts by will. These amendments will not deprive trustees or beneficiaries of any concession which it was previously intended they should enjoy. They will merely confirm the accepted practice in regard to testamentary gifts made out of the corpus of the estate.

It might perhaps be mentioned that where, in accordance with the trust instrument, the trustee pays a share of the net income to a public benevolent or other charitable institution (which institutions are exempt from income tax), neither the trustee nor the institution will be liable to tax in respect of that share. Where a trustee who carries on the business of a testator, makes, in the course of carrying on, and for the purposes of, that business, a subscription to a public benevolent institution, the amount of that subscription will be allowable as a business expense from the trust income.

The existing sections 100A, 160(2.)(h) and 160AA have similar application in respect of rates on non-income producing land and calls to mining companies paid by the trustee of the estate.

The section as re-drafted will ensure that, in the beneficiary's assessment, the rebate for such rates or calls shall be based on an amount not exceeding the amount of such rates or calls charged against the beneficiary's share of corpus or income. Where any such amount is charged against a share of the net income in respect of which the trustee is assessable, a rebate based on the amount so charged will be allowed in the assessment made upon the trustee.

Sub-section (2.) of the proposed new section 100A is a machinery provision designed to ensure that where a beneficiary is deemed to pay the whole or any part of the rates or calls specified in sub-section (1.), the rebate in respect of that whole or part shall not be allowable in any assessment made upon the trustee. An exception is to be made in any case where the beneficiary is under a legal disability and the trustee is liable to be assessed to pay tax in respect of the beneficiary's share of the trust net income. In that case, the rebate will be allowable in the assessment so made upon the trustee.

The amendment will apply in respect of assessments based on income derived during the year ending 30th June, 1947, and subsequent years.

CLAUSE 18.-REVOCABLE TRUSTS AND TRUSTS IN FAVOUR OF UNMARRIED MINORS.

Following upon a recommendation of the Royal Commission on Taxation, 1932-1934, a provision relating to the income of revocable trusts was inserted in the Income Tax Assessment Act. This provision, which is incorporated in the present section 102 of the Income Tax Assessment Act, provides that where a person, who creates a trust in respect of income or income-producing assets, has the power to revoke or alter the trusts so as to acquire a beneficial interest in the income of the trust or the assets producing that income, or any part of that income or those assets, the trustee shall be assessed and liable to pay tax.

The amount of the tax to be paid by the trustee in these circumstances is the additional amount of tax which the person who made the trust would have had to pay had he received, in addition to any other income derived by him, the net income of the trust or the part thereof attributable to the beneficial interest which he had the power to acquire.

It was found that the original section was not fully effective as income tax could still be legally avoided by the creation of trusts for the benefit of unmarried minor children, for whose maintenance the settlor was legally responsible. If, instead of creating such a trust, the settlor had retained the assets and income transferred to the trustee, he would have been assessable on that income, as money expended on the children or accumulated for them would not have been deductible from the income of the settlor.

The section was accordingly extended in 1941 so as to apply to the income of a trust which was payable to or accumulated or applicable for the benefit of any unmarried minor child or children of the settlor.

It has always been the intention that, provided the other conditions imposed by the section were present, the section should have application even though, at the time of the creation of the trust, the assets, the subject of the trust, were not income producing. This view of the section, however, has been successfully challenged before the Taxation Board of Review by a taxpayer who had created a trust in favour of an unmarried minor child. The asset, which was the subject of the trust, was vacant land which, at the date of the creation of the trust, was not income-producing. Shortly after the creation of the trust a block of flats was erected on the land, which thus became income-producing.

The trustees were assessed under section 102 in respect of the income derived, but objection was taken to the assessment on the ground that the trust was not created in respect of income-producing assets. When the matter came before the Board of Review, it was argued in defence of the assessment that the section applied if the trust was created in respect of assets which were income-producing in the year of income to which the assessment related. The Board decided, however, that the words of the section required the assets to be income-producing at the date of the creation of the trust.

The effect of this decision is to render section 102 inapplicable to a trust created in respect of assets which are not actually producing income at the date of creation of the trust. The intended effect of the section may, consequently, be avoided. It is accordingly considered that the section should be amended in order to remove any suggestion that it has application only if the assets, which are the subject of the trust, are income-producing at the time of the creation of the trust.

Paragraph (a) of the clause will effect a partial re-drafting of section 102(1.), so that the application of the section will be possible whether or not the property is producing income when the trust is created.

By paragraph (b) it is proposed to re-state sub-section (2.) of section 102.

This sub-section provides for the method of ascertaining the amount of the tax payable by the trustee, when the section has application. The re-expression of this sub-section is considered necessary for the purpose of clarifying the intention regarding the application of the section in a case where a part only of the income of the trust is payable to or accumulated or applicable for the benefit of any unmarried minor children of the settlor. The existing provision might be open to the interpretation that the whole of the net income of the trust is subject to assessment under section 102, even though some person, other than an unmarried minor child of the settlor, was entitled to a part of the income. It will now be clearly stated that in such a case, the section shall apply, not to the whole of the net income of the trust estate, but only to the extent appropriate in the circumstances.

By paragraph (b) it is also proposed to insert a new sub-section - (2A.) - authorising the continued application of the section in the case where the property which was originally the subject of the trust is converted into other property.

The section will apply in assessments for the financial year 1946-47 and subsequent financial years.

CLAUSE 19.-DEDUCTION OF EXPENDITURE : TAXPAYERS CARRYING ON MINING OPERATIONS IN AUSTRALIA.

By clause 19 it is proposed to give effect to a recommendation made by the Mining Industry Advisory Panel and supported by the Special Committee appointed by the Government to examine the Panel's taxation proposals.

Section 122 of the Income Tax Assessment Act allows a deduction of capital expended on plant and development of the mining property. The amount of the deduction is arrived at by distributing each particular amount of such expenditure proportionately over the estimated life of the mine as at the date of that expenditure. Thus, if Pd10,000 was expended upon a mining property which had an estimated life of ten years at the date of the expenditure, the taxpayer would be entitled to an annual deduction of Pd1,000 for ten years.

It has been represented, however, that the deduction granted by the existing section is sometimes only partially effective. This occurs in years, particularly the early years of the mine, when profits are relatively small and substantially less than the amount of the deduction allowable.

The failure of the section to ensure, in such cases, an effective deduction, from profits, is mitigated, to some extent, by the operation of section 80 of the Principal Act which permits the deduction of losses incurred during the four years next preceding the year of income. The loss incurred in a particular year may therefore be "carried forward" four years. Where, however, losses cannot be recouped within the "carry forward" period, the intention of section 122 to allow a full and effective deduction, from profits, for capital expended on plant and necessary development is not achieved.

The existing provision could be made effective if a deduction were allowed up to the amount of the profits, as otherwise ascertained, for the year of income and the unrecouped expenditure then carried forward and allowed as a deduction from profits derived during the remaining life of the mine.

It is accordingly proposed to re-express section 122 so that if the taxpayer so desires, he may be allowed a deduction up to the amount of the net income (as ascertained before the allowance of the section 122 deduction) derived by him during the year of income and then permitted to carry forward the balance for deduction in future years.

The proposed provision will also permit the life of the mine to be estimated each year. In addition, it will provide that unrecouped expenditure be carried forward and allowed as a deduction over the remaining actual life of the mine.

Sub-section (1.) of the proposed section 122 will prescribe the conditions under which the section will apply and the class of the expenditure covered. In this respect it conforms substantially to the existing section. The section will not apply if the mining operations are not for the purpose of gaining or producing assessable income. The section may have application, however, even though assessable income is not actually derived from the operations during the year of income.

Sub-section (2.) provides, subject to subsequent qualifications intended to ensure the effectiveness of the provision, for the basis of ascertaining the amount of the deduction to be allowed. The deduction for any year will be ascertained by dividing the residual capital expenditure on plant and development by the estimated number of years in the life of the mine. Taxpayers will be entitled to review that estimated life from year to year.

The sub-section is so drafted that the final deduction will be allowable in the year before that in which operations are expected to cease. This will ensure that full recoupment of the expenditure is effected before the final year because, generally speaking, little or no profit is derived from the mine in the final year of its life.

Sub-section (3.) provides that, unless the taxpayer elects to the contrary, the deduction in any year shall not exceed the amount which remains after deducting from the assessable income of that year all allowable deductions, other than the deductions specially provided for in Division 10 of the Act. It might be mentioned that the deductions provided by Division 10 are allowable only to mining businesses.

Sub-section (4.) prescribes the method by which the taxpayer may make an election for purposes of sub-section (2.) of section 122. This election will apply only in respect of the year of income for which it is made.

The election is to be made in writing, signed by or on behalf of the taxpayer, and delivered to the Commissioner on or before the last day for furnishing the return in respect of which it is intended to apply.

Sub-section (5.) defines the term "the residual capital expenditure". This term is defined to include-

(a)

that part of any expenditure incurred before the 1st July, 1946, which would have been allowable as a deduction, in future assessments, under the existing section 122; and

(b)

expenditure which is incurred after the 30th June, 1946, and which comes within the new provisions.

The sum of these two classes of expenditure will be reduced each year by the amount allowed as a deduction under this section and the balance termed "the residual capital expenditure".

The purpose of the definition is to ensure that mining concerns will be eligible to obtain an effective deduction from profits of unrecouped past expenditure as well as all future expenditure.

Sub-section (6.) is a complementary provision to those proposed in clauses 5(b) and 20. Clause 5(b) will exempt income derived by a bona fide prospector from the sale by him of his rights to mine in a particular area for a prescribed metal or mineral.

Clause 20 will authorize the deduction in the year of expenditure of the cost of exploration and prospecting on mining tenures. The deduction will be limited to the amount of mining profits derived by the taxpayer during that year. If the expenditure exceeds the amount of the profits, the excess is to be regarded as expenditure to which section 122 will apply and taken into account in ascertaining the amount of the residual capital expenditure.

As explained in the Note to clause 5(b), it is considered that the amount of income otherwise exempted by section 23(p) should be reduced or off-set by the amount of exploration or prospecting expenditure which was incurred in relation to the particular area and which has been allowed or is allowable as a deduction in the prospector's assessments. Section 23(p) will accordingly provide that where a deduction is allowable under section 123AA, the amount of income otherwise exempt shall be reduced by the amount of that deduction. There may be cases, however, where the whole or part of the exploration and prospecting expenditure has not, in fact, been allowed under section 123AA but, in pursuance of the special provisions of that section, has been included in the amount of residual capital expenditure to which section 122 applies. If the rights to mine in the particular area on which the exploration and prospecting activities were carried on are sold and any part of the profits on sale is otherwise exempted by section 23(p), it is considered reasonable to exclude from the residual capital expenditure that part of exploration or prospecting expenditure which is included therein and which was incurred in connexion with the particular area concerned.

Sub-section (6.) is designed to achieve this effect. It will provide, however, that the amount by which the residual capital expenditure is to be reduced shall not exceed the amount of income exempted by section 23(p).

The new provisions will apply for purposes of assessments based on income derived during the year ending 30th June, 1947, and subsequent years.

CLAUSE 20.-EXPLORATION AND PROSPECTING EXPENDITURE.

It is intended by this clause to give effect to a recommendation of the Mining Industry Advisory Panel that special deductions should be allowed in respect of expenditure on exploration and prospecting. The recommendation is supported by the Special Committee which the Government appointed to consider the taxation aspects of the Panel's recommendations.

If mining in Australia is to expand or even to continue on its present scale, exploration and prospecting will be necessary in order to discover new deposits. Mining concerns, if they desire to continue mining operations, must therefore necessarily engage in exploration and prospecting. Established mining concerns might therefore fairly regard the cost of exploration and prospecting as a normal business expense. Having regard to this factor, and the importance of the mining industry, it is accordingly considered that the Panel's recommendation should be accepted.

Although the larger scale exploration and prospecting may be undertaken by established mining concerns, it is proposed to extend the concession to all persons carrying on exploration or prospecting.

Clause 20 therefore proposes that a new section - section 123AA - be inserted in the Principal Act to permit of the allowance of deductions of the nature indicated.

Sub-section (1.) of the new section will provide the general authority for the deduction for expenditure incurred on exploration or prospecting on any mining tenures. The provision, however, will not apply in respect of expenditure incurred in prospecting for gold as income derived from gold mining is exempt. Expenditure on prospecting for oil is also excluded as this class of expenditure is already the subject of a special concession under section 123A of the Act. The term "exploration or prospecting" is defined in sub-section (4.) of the proposed section.

Sub-section (2.) provides that the amount of the deduction allowable under the section shall not exceed the amount of net income derived by the taxpayer during the year of income from the carrying on of mining operations and from activities directly or indirectly associated with those mining operations.

Sub-section (3.) is a special provision which will apply in cases where the amount of exploration or prospecting expenditure exceeds the amount of the deduction allowable under sub-section (2.).

In cases where the net income is insufficient to permit of a full deduction, the portion of the expenditure not allowed will be carried forward and treated as expenditure to which the new section 122 will apply. This will permit any expenditure not allowed in the year of incurrence, to be deducted over the estimated life of the mine in respect of which the section 122 deduction is allowable. If the taxpayer has not a mining property in respect of which section 122 applies, the excess may be allowed as a deduction from future income. In such cases a deduction will be allowable in the first subsequent year in which he is entitled to a deduction under section 122, in respect of capital expenditure incurred on plant and development of a mining property. The excess will, in effect, be treated as capital expenditure on plant and development of that mining property and will be allowed as a deduction over the life of that mine.

Sub-section (4.) defines the expression "exploration or prospecting" for purposes of section 123AA. That term is defined to mean geological mapping, geophysical surveys, systematic search for mineralised areas and detailed search by drilling or other means for ore deposits within those areas. It will also embrace the search for ore within or in the vicinity of an ore-body by drives, shafts, cross-cuts, winzes, rises and drilling, not being normal development.

The proposed concession will apply in assessments based on income derived during the year ending 30th June, 1947, and subsequent years.

CLAUSE 21.-DEDUCTION OF UNRECOUPED CAPITAL EXPENDITURE ON PROSPECTING OR MINING FOR PETROLEUM.

Section 123A of the Principal Act prescribes the basis for determining the taxable income of a taxpayer carrying on mining operations in Australia or the Territory of New Guinea for the purpose of obtaining petroleum. Briefly, the section provides that the taxpayer shall not be liable to pay tax in respect of income derived from such mining operations until the total amount of the income so derived by him exceeds the total expenditure, including capital expenditure, incurred by him in prospecting or mining for petroleum in Australia or the Territory of New Guinea and acquiring any plant necessary for the treatment of that petroleum.

The section thus constitutes a special code for the purposes of the assessment of the income of such businesses. It has therefore been necessary to include in the section a provision to the effect that the special deductions allowable to mining businesses under section 122 or 123 of the Act shall not be applicable in cases where section 123A applies. Sections 122 and 123 authorize the allowance of deductions, to mining businesses, of capital expenditure incurred on plant and development of the mining property. As section 123A covers the classes of expenditure described in the other two sections mentioned, it was necessary, in order to prevent the allowance of a double deduction, to provide that amounts allowable under section 122 or 123, shall not be allowed to taxpayers who are entitled to deduct the same expenditure under section 123A.

By clause 20 it is proposed to introduce into the Principal Act a new section, viz. section 123AA, authorising the allowance of special deductions in respect of exploration or prospecting expenditure. As expenditure incurred in prospecting for petroleum is already covered by section 123A, it is necessary to provide that a taxpayer who is entitled to deduct the expenditure under section 123A shall not be allowed a deduction under section 123AA in respect of the same amount. Sub-section (3.) of section 123A, as re-expressed, will prevent the allowance of such a double deduction.

The new provision will apply in respect of assessments based on income derived during the year ending 30th June, 1947, and subsequent years.

CLAUSE 22.-REINSURANCE WITH NON-RESIDENTS.

The existing section 148 of the Principal Act provides that the premiums paid to non-resident reinsurers shall not be deductible from the income of the company paying the premiums and that recoveries from the reinsurer in respect of losses on the risks reinsured shall not be assessable income. The practical effect of this provision is that the profit or loss made by the non-resident reinsurer is merged with the income of the company which paid the premiums. If a profit is derived by the reinsurer, the company carrying on business in Australia bears the tax on that profit. If a loss is incurred, that company obtains a deduction from its own income of the amount of the loss.

When the existing provisions were enacted in 1938, a tax of only 1s. in the Pd was imposed on the income of companies. Since then the rate of tax has been increased to 6s. in the Pd and additional taxes in the form of super tax, undistributed income tax, and war-time (company) tax have been imposed on the income of non-private companies.

Owing to the burden of these taxes, certain insurance companies, which are purely Australian companies, suffer a severe disadvantage in the placing of reinsurance overseas. These companies, having their Head Offices in Australia, are in a position to supply full details of the premiums paid to non-resident reinsurers, and, provided that effective provision is made in the law for the insurance company in Australia which effected the reinsurance with the overseas reinsurer to lodge returns on behalf of, and to pay the tax as agent for, the overseas reinsurer in respect of the reinsurance premiums, no good reason exists for continuing to assess any profit derived by the non-resident reinsurer as the income of the Australian company which paid the reinsurance premiums.

In the case of Australian branches of overseas insurance companies, the reinsurance contracts are made by the Head Office and owing to the ramifications of overseas reinsurance business it is sometimes not reasonably practicable in these cases for the Australian branch to lodge returns in respect of the reinsurance premiums paid to the overseas reinsurer by its Head Office overseas.

In order that the Commonwealth may collect its full measure of taxation in respect of reinsurances made overseas, it is necessary to retain the present method of dealing with reinsurance premiums and recoveries. Where, however, an insurance company, whether its Head Office be in Australia or elsewhere, can supply all the information necessary for the making of a separate assessment in respect of the income of the non-resident reinsurers, there is not considered to be any good reason why such income should be merged with the income of the company effecting the reinsurance.

It is accordingly proposed to retain the present method of assessing in respect of profits from reinsurance out of Australia but, as an alternative, to permit insurance companies carrying on business in Australia to deduct reinsurance premiums paid overseas and include any recoveries as assessable income. Any company adopting this course will become liable to furnish returns and pay the tax as agent for the non-resident reinsurers.

The proposed amendment will enable the Australian companies to avoid the disadvantage which they now suffer, but will ensure that the proper amount of tax is paid in respect of these reinsurances, either through the inclusion of the reinsurance profits in the income of the company carrying on business in Australia, or by reason of that company being responsible, as agent, for the payment of the tax assessed in respect of the reinsurance premiums it has paid overseas. This clause is designed to give effect to the intentions expressed above.

Sub-clause (1.) of the proposed clause provides for the continuance of the existing practice. The existing provisions have been re-drafted so that the sub-clause will not be inconsistent with subsequent provisions of the clause and in order to state more precisely than formerly the reinsurance premiums covered.

Sub-clause (2.) provides that a person carrying on the business of insurance in Australia may elect that the existing practice (as provided for in sub-clause (1.)) shall not apply. Whether or not the election is made will depend solely upon the insurance company, but if it makes the election, the company will be responsible for furnishing returns and paying tax as agent for any non-resident reinsurers with whom it has effected reinsurance out of Australia.

The remaining sub-clauses of the clause apply only if the election is made.

Sub-clause (3.) provides that the tax for which the company which made the election shall be liable shall be assessed on 10 per cent. of the gross amounts of premiums it has paid or credited to non-resident reinsurers, and that the tax shall be assessed as if the amount so determined were the income of a non-resident company (not being a private company) not carrying on business in Australia by means either of a principal office or a branch. This will ensure that normal income tax will be payable and that super tax will be payable, as in the case of all non-private companies, where the taxable income is in excess of Pd5,000.

The fixing of 10 per cent. of the gross premiums as the amount to be treated as the taxable income is in conformity with section 143 of the Principal Act. It is considered that, over a period, the result will approximate closely to the true income.

As the proposed provision will relate only to reinsurance effected out of Australia, it is considered reasonable to provide that the income be assessed as the taxable income of a company not carrying on a business through a principal office or branch in Australia. As a result of this provision, undistributed income tax will not be payable. This is in accordance with the existing provisions of the Principal Act in relation to the tax on the undistributed profits of a company. Sections 109A and 160E specifically provide that the provisions relating to the imposition of undistributed profits tax shall not apply to a company which is a non-resident and which does not carry on business in Australia by means either of a principal office or a branch.

Sub-clause (4.) gives to the company which made the election a right to furnish two returns. The purpose of this is to permit the premiums paid to companies and the premiums paid to other non-resident reinsurers (individuals) to be separately assessed.

Sub-clause (5.) provides for the imposition of the tax where a separate return is made in respect of non-resident reinsurers who are not companies. Tax will be imposed upon 10 per cent. of the gross premium paid or credited to such non-resident reinsurers, and the amount of the tax will be the amount which would be payable on a taxable income of that amount by a non-resident private company not carrying on business in Australia by means either of a principal office or branch. The effect of the proposal is that a rate of tax equal to the normal company rate of tax will be imposed in these cases.

In respect of the assessments under the proposed sub-clauses (3.) and (5.), it is not intended to provide for any other amount of taxable income to be substituted for the amount of 10 per cent. of the gross premiums. It is undesirable to provide for any alternative, particularly in view of the inability of most companies to give sufficient information in regard to the actual profit or loss arising from the reinsurances and the delays which would inevitably arise before any assessment could be made.

Sub-clause (6.) provides for the conditions to be imposed in respect of the election provided for in the proposed sub-clause (2.). The election, having once been made, will apply in respect of all subsequent years.

Sub-clause (7.) provides that any assessment made under the proposed provisions shall be separate from any other assessment. This provision is included in order to ensure that effect is given to the intention to calculate the tax payable under this section independently of any tax payable in respect of its own income by the company which made the election.

Sub-clause (8.) provides the basis for allocating the total tax payable under this section to the various non-residents with whom reinsurance has been effected. This provision is necessary in order that the company acting as agent may have a statutory basis upon which it may determine the amount of tax paid on behalf of each non-resident with whom reinsurance has been effected.

Sub-clause (9.) adopts the general provisions of the Act in respect of the liability of agents to pay tax on behalf of their principals. The liability of the agent does not extend beyond the amount which has been due by him to the principal.

The clause will apply in respect of the income of the year ending 30th June, 1947, and subsequent years.

CLAUSE 23.-REBATE IN CASE OF DOUBLE TAXATION.

Section 159 of the Principal Act provides for the allowance of a rebate of tax in certain circumstances where income is taxed by both the Commonwealth and the United Kingdom. Under the existing provision the only Commonwealth taxes taken into account in the calculation of the rebate are taxes imposed by the Income Tax Assessment Act. When the social services contribution was imposed it was not intended that that levy should be excluded in the calculation of the rebate, and it is now proposed by this clause to ensure that, in the calculation of the rebate allowed by section 159, the social services contribution shall be taken into account. The effect will be beneficial to taxpayers.

It is also proposed that this amendment shall have application as from the date of the imposition of social services contribution. Effect will be given to that intention by the proposed clause 38.

It can be mentioned that, with the coming into operation of the Agreement between Australia and the United Kingdom for the relief of double taxation between the two countries, section 159 will cease to apply to income covered by the Agreement. The section will, however, continue to operate for some years in respect to income, already derived, which will not be relieved of double taxation by the coming into force of the Agreement. The necessary provisions limiting the operation of section 159 in respect of income to which the Agreement applies are contained in the proposed clause 27 of this Bill.

CLAUSE 24.-CONCESSIONAL REBATES.

By Clause 24 it is proposed to enlarge the concessional rebates of tax allowable in respect of dependants and medical expenses.

Under the Principal Act, the amount of rebate allowable is arrived at by applying to a prescribed amount, a rate of tax appropriate to a personal exertion income equal to the total taxable income of the taxpayer. It is proposed to expand the existing rebates allowable in respect of dependants by increasing the amounts on which the rebates are based.

It is also proposed to widen the field of concessional rebates to include certain classes of dependants and also a further class of medical expenditure not already provided for in the Principal Act.

Details of the individual amendments proposed to be made in this connexion are set out hereunder.

These amendments will apply in respect of assessments based on the income of the year beginning on the 1st July, 1947, and subsequent years.

CLAUSE 24. - (a) TO (d) - SPOUSE OR FEMALE RELATIVE.

Section 160(2)(a) of the Principal Act allows a rebate of tax in respect of the spouse of the taxpayer. A taxpayer who is a widow or widower is allowed a rebate in respect of a female relative having the care of any of his children under the age of sixteen years. The allowance of the rebate in each instance is conditioned upon the spouse or relative being a resident of Australia and wholly maintained by the taxpayer.

The spouse or relative is deemed to be wholly maintained if the separate net income derived by her during the year of income does not exceed Pd100, and the taxpayer contributes towards her maintenance. If, however, her separate net income exceeds Pd50, but is less than Pd100, a partial rebate on a reducing scale is allowable, the rebatable amount being reduced by Pd2 for every Pd1 by which the net income of the spouse or relative exceeds Pd50. If her separate net income is Pd100 or over, however, no rebate is allowable.

Generally speaking, the amount on which the full rebate is based is Pd100. Where, however the taxpayer's taxable income is between Pd200 and Pd300, the rebatable amount varies between Pd100 and Pd125, according to the amount of the taxable income.

It is proposed by paragraphs (b), (c) and (d) of clause 24 to increase the amount on which the rebate is based to Pd150.

Where the net income of the spouse or relative exceeds Pd50, the amount on which the rebate is based will be reduced by a sum which bears the same proportion to Pd150 as the excess of the net income of the spouse or relative over Pd50 bears to Pd50. Expressed in other words, the prescribed amount on which the full rebate would be based will be reduced by Pd3 for every Pd1 by which the net income of the spouse or relative exceeds Pd50.

If, for example, the taxpayer's taxable income were Pd500, and the separate net income of the spouse were Pd40, the rebate would be based on Pd150. If, however, the separate net income of the spouse were Pd70, the rebatable amount would be Pd90, arrived at as follows:-

As already stated, a taxpayer who is a widow or widower is entitled to a rebate in respect of a female relative having the care of any of his children under the age of sixteen years. However, no provision is made for the allowance of the rebate where the children are his step-children.

To remedy this anomaly, it is proposed to amend the existing provision to enable the rebate to be allowed in the type of case mentioned. This amendment will be effected by paragraph (a) of Clause 24.

CLAUSE 24.-(e)-DAUGHTER-HOUSEKEEPER.

Section 160(2.)(aa) of the Principal Act allows a taxpayer who is a widow or widower a rebate of tax in respect of a daughter who is wholly engaged in keeping house for the taxpayer. The allowance of the rebate is conditioned upon the daughter being wholly maintained by the taxpayer.

The daughter is deemed to be wholly maintained by the taxpayer if her separate net income does not exceed Pd100 and the taxpayer contributes to her maintenance. If the separate net income of the daughter exceeds Pd50, but is less than Pd100, a partial rebate on a reducing scale is allowable, the rebatable amount being reduced by Pd2 for every Pd1 by which the net income of the daughter exceeds Pd50.

As in the case of the spouse or female relative of the taxpayer, it is proposed to increase the amount on which the full rebate is based to Pd150. Similarly, in those cases where the separate net income of the daughter exceeds Pd50, the rebatable amount will be reduced by Pd3 for every Pd1 by which the net income of the daughter exceeds Pd50.

CLAUSE 24.-(f)-Housekeeper.

Section 160(2.)(ab) of the Principal Act allows a taxpayer, who is a widow or widower, a rebate of tax in respect of a person who is wholly engaged in keeping house for him and has the care of any of his children who are under the age of sixteen years.

No provision is made, however, for the allowance of the rebate to a taxpayer who is not a widow or widower. Consequently, the rebate is not allowable, for example, where a husband, who has been deserted by his wife, engages or maintains a housekeeper to care for children under 16 maintained by him.

It is considered that provision should be made for the rebate to be extended to the type of case mentioned and paragraph (f) of clause 24 is designed for this purpose. As in the case of comparable classes of dependants, it is also proposed to increase the amount on which the rebate is based from Pd100 to Pd150.

The proposed extension of the rebate will not apply where the taxpayer is entitled to a rebate for a spouse or daughter-housekeeper. It is proposed also that the rebate will not be allowed where the rebate for spouse is denied to the taxpayer for the reason that his spouse derives a separate net income of Pd100 or more. An exception to this rule is proposed, however, in cases where, because of the existence of special circumstances, the Commissioner of Taxation considers it just to allow the proposed rebate. An example of this excepted class of case would be where a wife who has deserted her husband and children is in employment and in receipt of Pd100 or more.

CLAUSE 24.-(g) to (i)-Children under the Age of Sixteen Years.

Section 160(2.)(b) of the Principal Act allows a rebate of tax in respect of each child under the age of sixteen years who is a resident of Australia and who is wholly maintained by the taxpayer. The amounts upon which the rebate is based are Pd75 in respect of the first such child and Pd30 in respect of each other such child.

It is proposed to increase the rebatable amounts to Pd100 and Pd50, respectively. These increases will be effected by paragraphs (g) and (h) of clause 24.

Under the existing provision, the rebate of tax allowable in respect of the first child is limited to a maximum amount of Pd45, and in respect of each other child to a maximum amount of Pd8. As a means of further extending the concession, it is proposed to increase the maximum amount of the rebate allowable in respect of each child other than the first to Pd15, and paragraph (i) of the clause is designed for this purpose.

CLAUSE 24.-(j)-Invalid Person.

Section 160(2.)(ba) of the Principal Act allows a rebate of tax in respect of an invalid child of the taxpayer of the age of sixteen years or over.

The rebate is allowable only in respect of a child of the taxpayer who is a resident of Australia and is wholly maintained by the taxpayer, or who would be so maintained if an invalid pension under the provisions of the Invalid and Old-age Pensions Act 1908-1942 were not being paid in respect of the child.

Where an invalid pension is not paid in respect of the child, the test of invalidity is the same as that under the Invalid and Old-age Pensions Act, and the allowance of the rebate is dependent upon the production to the Commissioner of Taxation of a certificate of a medical officer of the Commonwealth Department of Health, or of a Commonwealth Medical Referee, that the child is permanently incapacitated for work within the meaning of that Act.

The amount on which the rebate is based is Pd75. In cases where an invalid pension is paid by the Commonwealth, this amount is reduced by the amount of such pension.

Under the existing provision, the rebate is not allowable in respect of a dependent invalid who is a step-child, brother or sister of the taxpayer. It is considered that the concession should be extended to cover these classes of dependants.

Paragraph (j) of clause 24 is accordingly designed to effect this extension. It will also increase the amount on which the rebate is based to Pd100.

CLAUSE 24.-(k) and (l)-Child Between the Ages of Sixteen and Nineteen Years.

Section 160(2.)(bb) of the Principal Act allows a rebate of tax in respect of each child between the ages of sixteen and eighteen years who is wholly maintained by the taxpayer and is receiving full-time education at a school or university.

The amount on which the rebate is based is Pd75. Where, however, assistance in the form of money, accommodation or sustenance is provided by the Commonwealth or a State in connexion with the education of the child, the amount of Pd75 is reduced by the value of such assistance provided during the year of income.

Paragraph (k) of clause 24 is designed to enlarge the concession by extending the maximum age limit to nineteen years.

As in the case of other comparable classes of dependants, it is also proposed to increase the amount on which the rebate is based to Pd100. This increase will be effected by paragraph (l).

CLAUSE 24.-(m)-Parent of the Taxpayer.

Section 160(2.)(c) of the Principal Act provides for a rebate of tax in respect of the mother of the taxpayer. The allowance of the rebate is conditioned upon the mother being a resident of Australia and wholly maintained by the taxpayer.

The amount on which the rebate is based is Pd100, the maximum rebate allowable being Pd45.

Paragraph (m) of clause 24 is designed to extend the scope of the rebate to cover a dependent father.

As in the case of other comparable classes of dependants, it is also proposed to increase the amount on which the rebate is based to Pd150.

CLAUSE 24.-(m)-Special Rebate in Case of Incomes Between Pd250 and Pd350.

Paragraph (m) of clause 24 will also insert in section 160(2.) of the Principal Act a new provision which is designed to provide for the allowance of a special rebate in the case of a taxpayer whose taxable income does not exceed Pd350 and who is entitled to a rebate of tax in respect of a dependant.

The proposed insertion is designed to raise the limits of income which may be derived by persons with dependants before incurring any liability for social services contribution or income tax. The amount will also be included in the rebatable amount used in ascertaining the rate of social services contribution payable by persons with dependants.

If the taxable income does not exceed Pd250 the special rebate will be based on an amount of Pd50. Thereafter, the rebatable amount will diminish by Pd1 for every Pd2 by which the taxable income exceeds Pd250. The rebate will not apply where the taxable income is Pd350 or more.

CLAUSE 24.-(n) and (o)-Medical Expenses.

Section 160(2.)(d) of the Principal Act provides for the allowance of a rebate of tax in respect of various classes of medical expenses incurred by the taxpayer in connexion with any illness of or operation upon himself, his spouse or any of his children under the age of 21 years.

Paragraph (o) of clause 24 is designed to extend the scope of the concession to include expenditure incurred for diathermic treatment, provided such treatment is administered by direction of a legally qualified medical practitioner.

The existing provision in relation to medical, dental and optical expenses fixes the maximum amount on which a rebate may be allowed at Pd50 each for the taxpayer, his spouse and each of his children under the age of 21 years. It is proposed to retain this limit.

CLAUSE 24.-(p)-Gifts.

The amendment proposed in this paragraph is complementary to the proposed amendment of section 100A of the Principal Act contained in clause 17.

Section 160(2.)(g) of the Principal Act allows a rebate of tax in respect of gifts paid to public hospitals, public benevolent institutions and other organisations. It is provided in section 100A that, where such gifts are made by a trustee in respect of a trust estate, the rebate may be allowed to the trustee or the beneficiary who is assessed in respect of the net income of the trust estate. It was intended that these provisions should apply only in respect of gifts made out of the income of the trust estate.

In the recent case of Commissioner of Taxation v. Elder's Trustee and Executor Co. Ltd. (Trustees of Estate T.E. Barr-Smith, Deceased) (3 A.I.T.R. 266), it was decided by the High Court of Australia that the provisions referred to apply to gifts made by an executor out of corpus in pursuance of the terms of the will. At the same time, it is to be noted that a deduction in respect of the same gifts is also allowed for estate duty purposes.

The effect of the decision of the High Court, therefore, is that, in the present state of the law, trustees and beneficiaries will obtain an income tax concession not previously enjoyed by them, and two concessions, one for estate duty and another for income tax, may be allowable in respect of the same gift. The adverse effect upon revenue of such a double allowance might well be considerable.

By clause 17, it is proposed to re-express section 100A, and by paragraph (p) of clause 24 to make a corresponding amendment to section 160(2.)(g), so as to avoid these unintended effects and, in particular, to provide that the concessional rebate for income tax purposes will not be allowable in respect of gifts by will. These amendments will not deprive trustees or beneficiaries of any concession which it was previously intended they should enjoy. They will merely confirm the accepted practice in regard to testamentary gifts made out of the corpus of the estate.

It might perhaps be mentioned that where, in accordance with the trust instrument, the trustee pays a share of the net income to a public benevolent or other charitable institution (which institutions are exempt from income tax) neither the trustee nor the institution will be liable to tax in respect of that share. Where a trustee who carries on the business of the testator, makes, in the course of carrying on, and for the purposes of that business, a subscription to a public benevolent institution, the amount of that subscription will be allowable as a business expense from the trust income.

CLAUSE 25.-REBATE OF TAX IN RESPECT OF CALLS TO COMPANIES.

Section 160AA of the Principal Act provides for the allowance of a rebate in respect of calls paid on shares in a mining company or syndicate carrying on mining operations in Australia for gold, silver, base metals, rare minerals or oil, or in any company carrying on afforestation in Australia as its principal business.

The Mining Industry Advisory Panel has recommended that this provision should be expanded in order to cover calls paid on shares in prospecting companies and syndicates, in addition to the present provision in respect of calls on shares in mining companies and syndicates. The recommendation has the support of a Special Committee appointed by the Government to examine the taxation recommendations of the Panel.

It is considered desirable to encourage the expansion of the mining industry. As prospecting is essential to this expansion, it is accordingly proposed to accept the Panel's recommendation in respect of calls paid on shares in prospecting companies and syndicates.

By the insertion of the references to prospecting, effect will be given to this intention.

This amendment will apply in assessments based on income derived during the year ended 30th June, 1947, and subsequent years.

CLAUSE 26.-APPLICATION OF PART IIIA.

Part IIIA. of the Principal Act provides for the imposition of a further tax on the undistributed income of companies, but section 160E excludes certain companies from the operation of that Part. It is proposed by this clause to re-express section 160E so as to exclude from the operation of Part IIIA. an additional class of company on which it is considered inappropriate to impose further tax.

Section 6 of the Income Tax Assessment Act provides that a company shall include all bodies or associations corporate or unincorporate. Taxes imposed upon companies are, therefore, payable by various bodies such as community hotels, associations, clubs, lodges, societies and other organisations which are not carried on for the profit or gain of their individual members and which, by their constitution or rules, are prohibited from distributing their profits among members.

At present, these bodies are liable for normal tax, super tax and the undistributed income tax imposed on non-private companies. The rate of normal tax is 6s. in the Pd. Super tax at the rate of 1s. in the Pd is imposed upon income in excess of Pd5,000 derived by non-private companies. Undistributed income tax is imposed at the rate of 2s. for each Pd of undistributed income.

The Commonwealth Taxation Board of Review has, in several recent cases, decided that undistributed income tax is chargeable on the undistributed income of community hotels, even though the rules of these hotels prohibit any distribution being made to members. A like position applies in respect of associations (including sporting associations) clubs, lodges and societies.

It is considered inappropriate to impose the undistributed income tax upon community hotels, associations and like bodies which are unable to distribute profits. These bodies differ substantially from ordinary public companies.

The undistributed income tax was intended to apply to the undistributed income of ordinary public companies carrying on business for the profit of their shareholders because, by non-distribution of the profits, the income tax which in the event of distribution of dividends would be payable at the individual property rates of tax is avoided.

Similar factors do not apply in respect of organisations that are not intended for the profit of individual members and which, by their constitution are debarred from making any distribution to members.

Clause 26 will accordingly exempt these classes of organisations from the tax imposed on undistributed profits.

The amendment will first apply for purposes of the ascertainment of the undistributed profits of the year of income ending on the 30th June, 1947.

CLAUSE 27.-RELIEF FROM DOUBLE TAXATION.

PART IIIB.-RELIEF FROM DOUBLE TAXATION.

INTRODUCTORY NOTE:-

Article XV. of the Agreement for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income between the Governments of the Commonwealth of Australia and the United Kingdom provides that the Agreement shall not come into force until it is given the force of law in Australia and the United Kingdom respectively. It is proposed to give the Agreement the force of law in Australia by including a copy thereof as a schedule to the Principal Act. A full explanation of each Article of the Agreement is set out later on in this explanatory memorandum.

In addition to giving the Agreement the force of law by including it as a schedule to the Principal Act it is necessary to implement the Agreement in order that it may be effectively carried out by Australia. Part IIIB. contains the necessary implementing provisions. These provisions generally have been drawn in such a way as to permit their practical application to any future agreements for the avoidance of double taxation which the Commonwealth may enter into with other countries.

An explanation of each of the provisions is set out hereunder.

NEW SECTION 160F.

Sub-section (1.) of the proposed section 160F contains a number of definitions designed to facilitate the drafting and to clarify the intention regarding the new provisions.

The term "agreement" is defined to mean an agreement made between the Government of the Commonwealth and the government of a country outside Australia, and given the force of law by the proposed new Part. Subject to the remarks relating to section 160H, it is proposed that, as respects Australian tax, the Agreement shall be given the force of law by incorporating the Agreement as a schedule to the Principal Act.

The term "Australian tax" is defined to mean income tax and social services contribution. As the term "income tax" is itself defined in section 6 of the Principal Act to mean income tax imposed as such, by any Act as assessed under the Principal Act, the definition of the term "Australian tax" in the new Part operates to include the taxes assessed under the Principal Act, i.e., ordinary income tax, super tax, the additional amount of tax assessed in respect of the undistributed amount of the distributable income of a private company and the further tax imposed on the portion of the taxable income of a company (other than a private company) which has not been distributed as dividends.

The definition of the term "foreign tax" operates to restrict that term to ex-Australian taxes for which credit may be given under an agreement.

Thus, although the Agreement concluded between the Commonwealth and the United Kingdom Governments provides, in Article I., that United Kingdom tax shall include the excess profits tax and national defence contribution, Australia is required to give a credit in respect of United Kingdom tax only against the Australian tax levied on dividends having their source in the United Kingdom. For this purpose, the credit which Australia is required to allow will not include excess profits tax or national defence contribution as those taxes are not payable or deemed to be payable in respect of dividends. Accordingly, the definition operates to exclude excess profits tax and national defence contribution from the provisions of the new Part relating to the allowance of a credit for United Kingdom tax against the Australian tax on dividends.

The sub-section also provides that the Social Services Contribution Assessment Act 1945 shall include that Act as amended. This provision was inserted in order to obviate the necessity for repeated references in the new provisions to cover amendments of the Social Services Contribution Assessment Act.

In drafting the new Part it was considered to be desirable to include therein the aspects relating to social services contribution rather than to adopt the provisions of the new Part in the Social Services Contribution Assessment Act. Thus the new Part will apply to have effect in relation to social services contribution in the same manner as it will apply and have effect in relation to income tax.

Sub-section (2.) is a drafting provision which states that any reference in an agreement to profits of an activity shall, in relation to Australian tax, be read, where the context so permits, as a reference to taxable income derived from that activity.

This provision was found necessary because, under the Principal Act, the Commonwealth levies tax upon "taxable income" and not "profits". Where, therefore, as for example in Article III. in the Agreement, it is provided that Australia may tax the profits of a United Kingdom enterprise attributable to a permanent establishment of that enterprise situated in Australia, the sub-section operates to require that such profits shall be read as taxable income.

NEW SECTION 160G.

Article XIV. of the Agreement provides, so far as Australia is concerned, for the Agreement to commence to operate in respect of assessments for the financial year 1946-47 which, in the case of companies is the income year ended 30th June, 1946, and in the case of individuals the income year ending 30th June, 1947, or the substituted accounting period in both cases. So far as the United Kingdom is concerned the Agreement will commence to operate, in relation to income tax, for the year of assessment beginning on the 6th April, 1946, and, in relation to sur-tax, for the year of assessment beginning on the 6th April, 1945.

The previous arrangement for the relief of double taxation entered into with the United Kingdom in 1921 is embodied in section 159 of the Principal Act, and as application for rebates under that section may be made within six years from the date the tax on the particular assessment was due and payable it is not proposed at present to repeal that section.

However, in order to ensure that taxpayers do not receive the double advantage of the rebate under section 159 in addition to the credit for the Australian tax given by the United Kingdom under the Agreement, it is necessary to provide that section 159 shall not operate in respect of income coming within the ambit of the Agreement.

Accordingly the amendment proposed by sub-section (1.) of the new section 160G provides that section 159 shall not apply in respect of income derived by a company during the year ended 30th June, 1946, and by an individual during the year ended 30th June, 1947, or the substituted accounting period in both cases.

Sub-section (2.) further restricts the operation of section 159, and ensures that no rebate under that section is to be allowed in respect of income derived during any year prior to the years mentioned in the preceding paragraph if a credit for the Australian tax is, under the Agreement, allowed by the United Kingdom in respect of that income.

The necessity for this sub-section arises from the fact that in Australia income is assessed in the year of derivation, but in the United Kingdom certain income is assessed on a remittance basis.

If it were not for sub-section (2.), income assessed in Australia for a financial year prior to the financial year 1946-47, but assessed in the United Kingdom on a remittance basis for a year of assessment to which the Agreement applies, would be the subject of the rebate provided by section 159, as well as the tax credit to be allowed by the United Kingdom under paragraph (1) of Article XII. of the Agreement in respect of the Australian tax.

A further reason for the insertion of this sub-section arises from the fact that trading income derived during a substituted accounting period which ended on any date between the 6th April, 1945, and 5th April, 1946, would normally be accepted by the United Kingdom as in substitution for the United Kingdom income year ended 5th April, 1946, and would form the basis of the United Kingdom assessment for the assessment year beginning on the 6th April, 1946. Thus, if a trader balanced on the 30th June, and his accounting period were accepted in lieu of the United Kingdom income year, the profits of the year ended 30th June, 1945, would form the basis of the United Kingdom assessment for the assessment year beginning on the 6th April, 1946, i.e. the first United Kingdom year to which the Agreement applies. The income of the year ended 30th June, 1945, would, however, also form the basis of the Commonwealth assessment for the financial year 1945-46, and the taxpayer would, in such circumstances, be entitled to a rebate from the Commonwealth, under section 159, as well as a credit from the United Kingdom under paragraph (1) of Article XII. of the Agreement in respect of the Australian tax.

Sub-section (3.) proposes that taxpayers shall not be denied the right to receive a rebate under section 159 in respect of income derived during the years ended 30th June, 1946, and 30th June, 1947 (by a company), and during the year ended 30th June, 1947 (by an individual), if that income is assessed in the United Kingdom for a year of assessment prior to the year of assessment beginning on the 6th April, 1946, i.e. the first United Kingdom year to which the Agreement applies. This provision is necessary to preserve to the taxpayer, in the first year or years of the transition period, his right to a rebate under section 159 in respect of income which may be assessed by the Commonwealth for a financial year to which the Agreement applies in Australia and by the United Kingdom for an assessment year to which the Agreement does not apply in the United Kingdom.

NEW SECTION 160H.

Section 160H provides that so far as the provisions of an agreement relate to Australian tax they shall receive the force of law on the day on which the agreement is given the force of law in the country outside Australia with the government of which the agreement is made or on the day on which the agreement is incorporated as a schedule to the Principal Act, whichever is the later. This ensures that an agreement shall not commence to operate in Australia until it is given the force of law in both countries.

The section is designed also to ensure that any agreement which is given the force of law in Australia shall continue to operate in Australia only for so long as the agreement continues to be effective in the country with which the agreement is concluded. If, therefore, the government of a country outside Australia gave notice of termination of an agreement concluded with Australia, the agreement would, subject to the provisions of the agreement, cease to be effective in both countries simultaneously and it would not be necessary to revoke the agreement by legislative measure.

NEW SECTION 160J.

This section is designed to provide that the provisions of an agreement shall prevail over any provisions of the Principal Act or of the Social Services Contribution Assessment Act (other than the provisions of the proposed new Part IIIB.) which are inconsistent with the agreement.

The necessity for this provision may be illustrated by a comparison of the provisions of the Principal Act and the Agreement with the United Kingdom relating to dividends. Under section 44(1.) of the Principal Act dividends paid to non-resident shareholders are assessable income to the extent to which the dividends are paid out of profits derived from sources in Australia. Under paragraph (2) of Article VI. of the Agreement with the United Kingdom dividends paid by a wholly-owned Australian subsidiary company to a United Kingdom parent company are exempt from Australian tax if the dividends are subject to United Kingdom tax. In other cases dividends paid by Australian companies out of Australian profits to United Kingdom shareholders are subjected to half the Australian tax only. Further comparisons may be drawn in the case of annuities and royalties which under the Agreement with the United Kingdom are assessed only by the country of residence of the recipient of the annuity or royalty. Under the Principal Act annuities and royalties derived from sources in Australia by a non-resident are assessable income.

It is not intended, however, that the provisions of an agreement shall prevail over the provisions of the new Part IIIB. as these latter provisions are designed, inter alia, for the purpose of modifying and interpreting certain provisions of the Agreement with the United Kingdom, e.g., the provisions of paragraph (3) of Article VI. and paragraph (2) of Article XII. which require that the amount of the Australian tax payable in respect of a dividend shall be ascertained subject to such laws as may be enacted in Australia.

NEW SECTION 160K.

The provisions of paragraph (3) of Article VI. of the Agreement concluded between the Commonwealth and United Kingdom Governments operate to reduce by one-half the Australian tax levied on dividends paid to a United Kingdom shareholder if the shareholder is subject to United Kingdom tax in respect thereof and is not engaged in trade or business through a permanent establishment situated in Australia. In addition, paragraph (2) of Article XII. of the Agreement requires that a tax credit in respect of United Kingdom tax is to be allowed against the Australian tax payable in respect of a dividend having its source in the United Kingdom.

It is necessary, therefore, to set out a detailed formula for arriving at the Australian tax payable in respect of a dividend by each of the various classes of taxpayers in order to ensure that Australia will receive the full one-half Australian tax provided for in paragraph (3) of Article VI., and will not be required, under paragraph (2) of Article XII. to allow a greater credit than the Australian tax paid by the taxpayer in respect of the dividend.

Accordingly, the proposed section 160K sets out detailed formula for arriving at the quantum of the Australian tax payable in respect of a dividend. The scheme of the section is firstly to arrive at the gross tax payable in respect of a dividend and then to diminish that gross tax by rebates directly applicable to the dividend and by an appropriate proportion of any rebate which does not relate directly to any particular class of income.

In addition to providing a basis for the ascertainment of the Australian tax in respect of a dividend which is subject to one-half Australian tax under the provisions of paragraph (3) of Article VI., the section will also operate to provide a basis for the calculation of the Australian tax payable in respect of a dividend in cases where a taxpayer elects, in pursuance of paragraph (2) of Article XII., to "gross-up" a dividend received from a United Kingdom company by the addition of the United Kingdom tax appropriate to the dividend. In such a case it is proposed to deem the amount of the United Kingdom tax, which the taxpayer elects to include in his assessable income, to be a dividend and, accordingly, it will be necessary to calculate the amount of the Australian tax assessable thereon in order that the general principle that Australia will not be called upon to allow a greater credit than the lesser amount of the United Kingdom tax payable in respect of the dividend or the amount of the Australian tax assessable thereon, may be adhered to.

Paragraph (a) of sub-section (2.) of the proposed section provides that the gross Australian ordinary income tax referable to a dividend included in the taxable income of a company shall be the amount ascertained by applying the rate of income tax imposed for the year of tax to the amount of the dividend included in the taxable income.

Paragraph (b) of the sub-section provides for the ascertainment of the amount of super tax payable in respect of a dividend where a liability to that tax exists.

The amount of the super tax referable to a dividend will be the amount ascertained by applying the rate of super tax imposed for the year of tax to that part of the dividend as bears to the dividend the same proportion as the portion of the taxable income upon which super tax is payable remaining after deducting therefrom the amount of any Commonwealth Loan interest subject to the 1930-1931 income tax rates and the amount of any dividend subject to the rebate provided by section 107 of the Principal Act as bears to the amount of the total taxable income reduced by the same amounts.

For the purpose of arriving at the amount of super tax referable to a dividend, the paragraph provides for the exclusion of these latter classes of income for the reason that, although section 6 of the Income Tax Act provides that super tax shall be payable upon the taxable income in excess of Pd5,000, section 20 of the Commonwealth Debt Conversion Act 1931, section 52B of the Commonwealth Inscribed Stock Act 1911-1946 and section 107 of the Principal Act operate, in effect, to rebate the amount of super tax levied upon the classes of income covered by those sections.

Paragraph (c) of sub-section (2.) provides, in cases where further tax under Part IIIA. is imposed, for the ascertainment of the amount of further tax referable to a dividend. In arriving at the amount of a dividend included in the portion of the taxable income upon which further tax is imposed, an appropriate proportion of any amounts allowed under the provisions of the Principal Act as a deduction from the taxable income for the purposes of arriving at the portion of the income liable to further tax is taken into account. The further tax referable to the dividend will be calculated by applying the rate of further tax imposed for the year of tax to the amount of the dividend remaining after taking into account an appropriate proportion of such deductions.

Assuming an Australian non-private company derived a taxable income of Pd10,000 made up of the undermentioned classes of income, the amount of the Australian tax referable to a dividend of Pd1,000 received from a United Kingdom company would be calculated as set out hereunder:-

Sub-section (2.) requires that the amount of the Australian tax referable to the dividend of Pd1,000@@ received from a United Kingdom company shall be arrived at as follows:-

NOTES-

(a)

Where it is necessary to ascertain the amount of one-half the Australian tax levied on dividends paid to a United Kingdom shareholder who is subject to United Kingdom tax in respect thereof and is not engaged in trade or business through a permanent establishment situated in Australia, the calculation will be made in accordance with the principles set out above.

(b)

As war-time (company) tax is not payable in respect of dividends the proposed section does not contain any reference to that tax.

Paragraph (d) of sub-section (2.) provides that where additional tax under Division 7 of the Principal Act is payable in respect of the undistributed amount of the distributable income of a private company, the amount of the additional tax attributable to a dividend shall be ascertained by applying the average rate of additional tax to that part of the dividend as remains after deducting the appropriate proportion of the deductions allowed to the company in arriving at the undistributed amount.

The "average rate of additional tax" is defined in sub-section (3.) to mean the rate per Pd1 ascertained by dividing the sum of the amount of the additional income tax and social services contribution assessed in respect of the undistributed amount by so much of the undistributed amount as is effectively taxed. It is necessary to define the "average rate of additional tax" because the additional tax is not levied at a flat rate as is the further tax levied on the undistributed incomes of non-private companies but represents the amount of the additional tax which would have been payable by the shareholders if the company had paid the undistributed amount as a dividend.

In arriving at the part of the undistributed amount which effectively bears additional income tax and social services contribution, the sub-section requires that the undistributed amount shall be reduced by the amount of any dividend or part thereof included therein in respect of which the company is entitled to a rebate under section 107 of the Principal Act or under that section as applied by section 16 of the Social Services Contribution Assessment Act. Such dividends are excluded because a recipient thereof is entitled to a rebate of the amount by which the income tax and social services contribution is increased by the inclusion of the dividends as assessable income and, so far as companies are concerned, the dividends are in effect exempt from tax.

If an Australian private company derived a taxable income of Pd10,000 made up of Pd8,500 trading profit, Pd500 dividend subject to the rebate provided by section 107, and Pd1,000 dividend from a United Kingdom company, the amount of the Australian tax referable to the latter dividend would be Pd89 15s., calculated as set out hereunder:-

Assuming the shares in the company were beneficially owned by a single shareholder who derived a salary of Pd2,000 in addition to the amount of Pd500 deemed to be a dividend under section 109, the Division 7 tax for which the company would be liable in respect of the undistributed amount of the distributable income would be Pd870 4s., arrived at as follows:-

Paragraphs (d), (e) and (f) of sub-section (2.) and sub-section (3.) of the proposed section 160K require that the amount of the Australian tax referable to the dividend of Pd1,000 received from the United Kingdom company shall be arrived at as follows:-

Sub-section (4.) of the proposed section 160K provides in paragraph (a) for the ascertainment of the gross amount of the Australian tax referable to a dividend received by an individual or by a company in the capacity of a trustee. The sub-section provides, in effect, that the amount of the income tax and social services contribution shall be ascertained by applying to the amount of the dividend the rate of tax which would be imposed if the taxpayer's total income (excluding any dividend to which section 107 of the Principal Act relates) were derived wholly from property sources, i.e. from dividends and there were not allowed any rebate or credit under any provision of the Act. Dividends in respect of which a taxpayer is entitled to a rebate under the provisions of section 107 are excluded because such dividends are not effectively taxed in the hands of the recipient taxpayer.

Paragraph (b) of the sub-section provides that the gross amount of the income tax and social services contribution referable to a dividend shall be reduced by an appropriate part of the amount of any rebate which does not relate directly to any particular class of income. The sub-section will operate to ensure that the amount of the Australian tax referable to a dividend will be the "net" tax referable thereto. In applying the provisions of the Agreement for the avoidance of double taxation concluded between the Governments of the Commonwealth and the United Kingdom, the sub-section ensures that Australia will not levy more than one-half Australian tax in respect of certain dividends flowing to United Kingdom residents and will not be called upon to allow a greater credit for the United Kingdom tax than the amount of the Australian tax levied against Australian residents in respect of dividends received from United Kingdom companies.

Assuming a resident of Australia derived an income of Pd2,000 made up of the undermentioned amounts, and he were entitled to a rebate in respect of Pd120 paid on account of life insurance premiums and medical and dental expenses, the Australian income tax and social services contribution referable to a dividend of Pd250 received from a United Kingdom company would be Pd126 6s. (calculated at 1945-1946 rates), arrived at as follows:-

NOTE. - Where it is necessary to ascertain the amount of one-half the Australian income tax and social services contribution levied on a dividend paid to a United Kingdom shareholder who is subject to United Kingdom tax in respect thereof and is not engaged in trade or business through a permanent establishment situated in Australia, the calculation will be made in accordance with the principles set out above.

Paragraph (a) of sub-section (4.) of the proposed section is inserted primarily for the purpose of simplifying the drafting of the provisions relating to the ascertainment of the amount of the Australian tax payable where the dividend in respect of which the Australian tax is required to be calculated is subject to rebate under section 107. The paragraph provides that a dividend in respect of which a rebate is allowable under section 107 of the Principal Act or under that section as applied by section 16 of the Social Services Contribution Assessment Act shall not be regarded as having borne Australian tax.

It may be stated that section 107 of the Principal Act applies to grant a rebate to a recipient of a dividend upon which private company tax has been paid (whether the recipient is a company or an individual) of the amount by which his income tax is increased by the inclusion of the dividend in the assessable income. In effect, a dividend paid out of income which has borne private company tax is exempt from tax in the hands of the shareholder.

Paragraph (b) of the sub-section provides that the amount of the Australian tax payable in respect of a dividend derived by a trustee of a trust estate or by a partner who or which is liable to pay tax assessed under section 102 or 94 of the Principal Act shall be such amount as the Commissioner determines.

Section 102 provides for special taxation in the case of revocable trusts or trusts made for the benefit of unmarried minors and section 94 relates to cases where any partner has not the real and effective control and disposal of his or her share of the net income of the partnership. The sections do not require, however, that the settled income or share of the partnership income should be actually included in the taxable income of the settlor or dominant partner, as the case may be, and accordingly the provisions of the proposed section 160K would not apply as the general scheme of the latter section contemplates that the amount of the Australian tax payable in respect of a dividend shall be ascertained by applying to the amount of the dividend the rate of tax imposed upon the whole (or a portion) of the taxable income.

As sections 102 and 94 of the Principal Act do not have a wide application it is not proposed to insert in the new Part a lengthy and involved provision for the ascertainment of the amount of the Australian tax payable under those sections in respect of a dividend.

NEW SECTION 160L.

Paragraph (2.) of Article XII. of the Agreement concluded between the Commonwealth and United Kingdom Governments provides that a resident of Australia shall be allowed against the Australian tax payable in respect of a dividend a credit of the United Kingdom tax payable thereon only if the recipient of the dividend elects to have the amount of the United Kingdom tax (calculated at the "net United Kingdom rate" where necessary and reduced by the amount of any relief or repayment attributable to the dividends to which the taxpayer is entitled under the law of the United Kingdom included in his assessable income. The provisions of paragraph (2.) of Article XII. operate subject to such provisions as may be enacted in Australia, and the proposed section 160L is designed to allow taxpayers a period of three years within which they may elect to "gross up" dividends by including the United Kingdom tax attributable thereto in their assessable income. Where a taxpayer elects to "gross up" dividends, he will be entitled to receive a credit of the United Kingdom tax attributable to the dividends against the Australian tax payable thereon.

Sub-section (1.) provides that a credit shall not be allowed unless the taxpayer furnishes an election within three years after the date upon which the income tax or social services contribution in respect of the dividend became due and payable and sub-paragraph (a) of the sub-section requires that the election shall be made in writing. It is a further condition precedent to the allowance of a credit that the taxpayer furnishes all the information necessary for the purpose of ascertaining the amount of the credit. The information which a taxpayer electing to "gross up" is required to furnish includes all the information in relation to any amount to which he is entitled in respect of any relief or repayment of ex-Australian tax attributable to the dividend.

Sub-section (2.) provides that where it is not practicable for a taxpayer to furnish the information necessary for the ascertainment of the amount of the credit within three years of the date the income tax or social services contribution in respect of the dividend became due and payable, the Commissioner may extend the time allowed for furnishing the information for such further period, not exceeding three years, as in his opinion is reasonable in the circumstances.

It is to be expected that in the generality of cases taxpayers will be in a position to furnish dividend warrants and the necessary details of repayments received in respect of ex-Australian taxes attributable to dividends within the period of three years specified in sub-section (1.) but in isolated cases where it is not practicable to furnish the information within this period an over-all period, not exceeding six years, is provided for.

Sub-section (3.) provides that where a taxpayer elects to have an amount of ex-Australian tax included in his assessable income, that amount shall be included in his assessable income of the year the dividend was derived by him and shall be deemed to be a dividend.

The sub-section will operate, therefore, to ensure that full property rates of tax are levied on amounts of ex-Australian tax included in the assessable income and will allow the amount of the credit which a taxpayer is entitled to receive in respect of ex-Australian tax to be determined by reference to the lesser of the amount of the ex-Australian tax or the amount of the Australian tax payable on the "grossed up" dividend. In addition, the sub-section will operate to ensure that any amount of ex-Australian tax included in the taxable income of a company shall rank for rebate under the provisions of section 46(1.) of the Principal Act.

Sub-section (4.) is complementary to sub-section (3.) in that where a taxpayer elects to "gross up" a dividend by including in his assessable income the ex-Australian tax attributable thereto it provides that any repayments of ex-Australian tax received in respect of the dividend shall be included in the assessable income of the taxpayer of the year of income in which the dividend was paid to him.

If it were not for this sub-section the repayments would, in terms of the proposed section 26A, be included in the taxpayer's assessable income of the year such repayments were actually received and in these circumstances a full credit in respect of the United Kingdom tax may not be allowed to an Australian taxpayer who elects to "gross up" dividends received from United Kingdom companies. The provision to include the repayments as assessable income of the year the dividend was derived ensures that a taxpayer will receive a full credit, as the amount of the credit to which a taxpayer is entitled will be determined by reference to the lesser of the amount of the ex-Australian tax attributable to the dividend or the amount of the Australian tax payable in respect of the dividend "grossed up" including the repayments.

Where an amount in respect of a repayment attributable to a dividend has been included in the assessable income of the year the repayment was actually received and the taxpayer subsequently elects to "gross up" the dividend the sub-section provides for the exclusion of the repayment from the assessable income of the year such repayment was actually received, and for its inclusion in the assessable income of the year of derivation of the dividend.

Sub-section (5.) provides that the Commissioner may at any time amend an assessment for the purpose of giving effect to the provisions of sub-sections (3.) and (4.) of the section. The sub-section is designed to ensure that section 170 of the Principal Act or that section as applied by the Social Services Contribution Assessment Act shall not prohibit an amendment of an assessment in cases where a taxpayer makes an election to "gross up" a dividend.

The necessity for the sub-section arises from the fact that section 170 places limitations as to time upon the amendment of assessments, and authorizes their amendment only in certain circumstances. In the generality of cases, Australian residents deriving dividends from United Kingdom companies will be assessed on the net amount of such dividends and it is not proposed that section 170 should restrict the amendment of a taxpayer's assessment if he elects to "gross up" dividends and receive a tax credit.

NEW SECTION 160M.

Where a taxpayer elects to "gross up" a dividend declared by a United Kingdom company "free of tax" or "partly free of tax" the dividend actually paid will be "grossed up" to the amount the company would have been required to declare by way of dividend in order to provide a dividend of the amount equal to the amount actually paid to the shareholder if the dividend had not been declared to be "free of tax" or "partly free of tax" and the company had deducted from such dividend the appropriate amount of the United Kingdom tax attributable thereto.

The proposed section 160M provides that, for the purposes of the inclusion of the amount of ex-Australian tax in the shareholder's assessable income and of the ascertainment of the credit in respect of the ex-Australian tax to which the shareholder is entitled, the ex-Australian tax payable in respect of the dividend shall be the amount which would have been deducted in respect of ex-Australian tax if the amount of the dividend paid to the shareholder was the balance of the dividend remaining after the company had made the full deduction of ex-Australian tax which it was authorized to make.

Examples illustrating the method of "grossing up" and calculation of the tax credit in respect of United Kingdom tax to be allowed by Australia against the Australian tax payable on dividends declared "free of tax" or "partly free of tax" are set out later in this memorandum in the explanations to paragraph (2) of Article XII. of the Agreement concluded between the Commonwealth and United Kingdom Governments.

NEW SECTION 160N.

The proposed section 160N provides that the ascertainment of the amount of a credit for ex-Australian tax shall not form part of an assessment.

The section is complementary to the proposed section 160Q and is designed to ensure that where a company elects to deduct "taxes payable" in arriving at the amount of its undistributed income, the amount of the deduction to which the company is entitled for the year of derivation of a "grossed up" dividend shall not be reduced by the amount of the credit for ex-Australian tax referable to the dividend.

NEW SECTION 160P.

The proposed section 160P provides that the amount of a credit for ex-Australian tax payable in respect of a dividend shall not exceed the amount of the Australian tax payable thereon or the amount of the Australian tax payable in respect of the shareholder's income of the year of income, whichever is the less.

The section is designed to ensure that Australia will not be required to give a greater credit for ex-Australian tax than the amount of the Australian tax received in respect of a dividend. The limitation to the Australian tax payable in respect of the shareholder's income of the year of income is designed to cover the case where a shareholder is allowed a rebate under section 127 of the Principal Act, and the amount of that rebate reduces the Australian tax payable for the year of income to an amount which is less than the Australian tax, calculated in accordance with the provisions of the proposed section 160K, payable in respect of the dividend included in the shareholder's income of that year of income.

NEW SECTION 160Q.

Section 160Q makes provision for the application of the credit by the Commissioner towards the liquidation of any tax assessed and owing by the taxpayer or to any tax assessed concurrently with the ascertainment of the credit. To the extent that the credit exceeds the taxpayer's liability, the excess will be refunded.

The Principal Act contains special provisions imposing additional tax on the undistributed incomes of private and non-private companies. In arriving at the distributable income a deduction is allowed from the taxable income of the income tax paid during the year of income or, alternatively, the income tax payable in respect of the income of the year of income.

It is necessary to ensure that the deduction allowed in respect of taxes payable in the year of derivation of a dividend which a company elects to "gross up" is not reduced by an amount allowed as a credit for ex-Australian tax payable in respect of the dividend. It is proposed to limit the amount of the credit to the amount of the Australian tax on the "grossed up" dividend, and in the case of companies the Australian tax which ranks for credit includes the tax levied on the undistributed income. Before the tax payable in respect of the undistributed income may be determined, however, it is necessary to ascertain the amount of the taxes payable.

Accordingly, it is proposed that the deduction in respect of taxes payable in the year of derivation of a dividend which a company elects to "gross up" shall be the taxes payable before the allowance of a credit in respect of ex-Australian tax. The deduction for taxes otherwise allowable in arriving at the undistributed income of the year the credit is applied against a liability of the company, or refunded to the company, will, however, be reduced by the aggregate of the amounts so applied or refunded. Sub-section (4.) of the proposed section makes the necessary provision to this end.

Sub-section (5.) is intended to give to the Commissioner power to recover the amount by which any credit paid to the taxpayer or applied on his behalf is shown to be excessive. A credit might be rendered excessive by reason of a variation in the amount of the tax paid overseas.

NEW SECTION 160R.

The proposed section 160R is designed to prohibit a taxpayer from receiving a double benefit of both a credit and a deduction of ex-Australian tax payable in respect of a dividend.

Where a taxpayer has been allowed a deduction of the ex-Australian tax payable in respect of a dividend and he subsequently elects to "gross up" the dividend and receive a tax credit the section provides for the disallowance of the amount of the deduction previously allowed.

NEW SECTION 160S.

The necessity for the proposed section 160S arises from the fact that under the pay-as-you-earn system the amount of the provisional income tax and social services contribution which a taxpayer is liable to pay in respect of the year ending 30th June, 1947, is determined by reference to the amount of the income tax and social services contribution levied in respect of the year ended 30th June, 1946.

It is proposed that the provisions of the Agreement concluded between the Commonwealth and the United Kingdom Governments shall apply in respect of income derived by individuals during the year ending 30th June, 1947, and it is not desired that United Kingdom residents should be required to pay provisional income tax and contribution for that year in respect of income which the Agreement will operate to exempt. In this connection the Agreement will operate to exempt certain dividends and certain other classes of income, e.g. industrial and literary royalties, and purchased annuities. These latter classes of income will be assessed only by the country in which the taxpayer resides.

Accordingly the section proposes that the Commissioner shall have power to reduce the amount of the provisional income tax and contribution which would be payable for the year ending 30th June, 1947, if it were not for the provisions of the Agreement.

In respect of any other agreement which the Commonwealth may enter into the section would also operate in the commencing year of the agreement.

NEW SECTION 160T.

The necessity for the proposed section 160T arises out of the provisions of paragraphs (2.) and (3.) of Article VI. of the Agreement concluded between the Commonwealth and United Kingdom Governments.

The provisions of paragraph (2.) of Article VI. are designed to place a United Kingdom company which trades in Australia through a wholly-owned subsidiary company in much the same relative position as regards taxation as a United Kingdom company which trades in Australia through the medium of a branch establishment. In order to achieve this objective, the paragraph exempts dividends paid to a United Kingdom parent company by a wholly-owned Australian subsidiary company.

The paragraph requires, inter alia, that the parent company be subject to United Kingdom tax in respect of the dividends and this requirement is met in respect of dividends paid to a parent company by a subsidiary company which is managed and controlled in Australia. The profits of the Australian subsidiary would not, however, be subject to United Kingdom tax.

Where a subsidiary company is incorporated in Australia and managed and controlled in the United Kingdom it will be regarded as a resident in both countries, and the dividends paid by it are not subject to United Kingdom tax in the hands of the parent company because, under the United Kingdom system, the subsidiary company pays United Kingdom tax on its profits and deducts and retains tax from the dividend prior to the payment thereof to the parent company.

A similar position arises in connexion with paragraph (3.) of Article VI. except that cases will occur where a United Kingdom individual recipient of a dividend from a dual resident company is liable to sur-tax.

It is inequitable that the exemption provided by paragraph (2.) and the concession of one-half the Australian tax provided by paragraph (3.) should be denied merely because a subsidiary company happens to be a dual resident. Accordingly section 160T proposes that a United Kingdom resident shall be deemed to be subject to the United Kingdom tax in respect of dividends received from a company which is a dual United Kingdom-Australian resident.

CLAUSE 28.-AMENDMENT OF ASSESSMENTS.

By clause 28 it is proposed to amend section 170 of the Principal Act which sets out the circumstances in which assessments may be amended.

Where a taxpayer has made to the Commissioner a full and true disclosure of all material facts necessary for his assessment, the liability of the taxpayer in respect of an assessment made after that disclosure can, generally speaking, be increased only where the amended assessment is made for the purpose of correcting an error in calculation or a mistake of fact. It is further provided that generally no such amendment shall be made after the expiration of three years from the date upon which the tax became due and payable under the original assessment.

The amendment of an assessment to effect a reduction in the liability of a taxpayer is also generally prohibited, except where the amendment is made to correct an error in calculation or a mistake of fact. Broadly speaking, no such amendment may be made after the expiration of three years from the date upon which the tax became due and payable under the original assessment.

The alteration which it is proposed to make to section 170 will apply only in cases where the taxpayer has been allowed a rebate of tax under section 159 of the Principal Act. This section provides for the allowance of the rebate in certain circumstances where income is taxed by both the Commonwealth and the United Kingdom. In addition, the section permits the rebate to be allowed if application for the rebate, and all information necessary for ascertaining the amount of the rebate, are furnished to the Commissioner within six years after the date upon which the tax, in respect of which the rebate is sought, became due and payable. Rebates are, therefore, allowable under section 159 beyond the period of three years in which assessments are generally open to amendment.

In practice, taxpayers are frequently unable to supply the details necessary for the calculation of the rebate of tax under section 159 until several years after the making of the assessment. The rebates of tax are, therefore, not usually allowed until after the expiration of three years from the date on which the tax became due and payable. In the case of individuals, no difficulties arise from this position. Companies are, however, in a different position.

In the calculation of the amount upon which undistributed profits tax is imposed, a company is allowed a deduction of taxes which were paid by it during the year of income and which were imposed upon income derived by it. These taxes include normal income tax and the tax on undistributed profits. In the case of a public company, they also include super tax and war-time (company) tax. Provision is made, however, for a company to elect to deduct, in lieu of the amounts of normal income tax, super tax and war-time (company) tax paid by it during the year of income, the amounts of those taxes payable in respect of the income derived by it during the year of income. For purposes of war-time (company) tax a company is allowed a deduction of the normal income tax payable by it in respect of the income of the year of income.

In cases where a company does not elect to be allowed a deduction on the basis of the "taxes payable", the deduction allowed for "taxes paid" is reduced by the amount of any refund of tax, including a refund made as a result of the allowance of a rebate. Thus in the year in which the rebate is received, the deduction allowable for "taxes paid" is reduced by the amount of the rebate. No alteration in this position is considered to be necessary.

Where, however, a company has made an election and has been allowed a deduction on the basis of the "taxes payable", and a rebate of tax is subsequently allowed under section 159, the deduction already allowed in the assessments of undistributed profits tax and war-time (company) tax automatically becomes excessive.

If, at the time of the allowance of the rebate under section 159, the undistributed profits tax and war-time (company) tax have been due and payable for a period of less than three years, the assessments of those taxes may be amended to reduce the deduction in respect of "taxes payable". The amounts then allowed are the amounts of tax ultimately payable after the allowance of the rebate. If, however, the period of three years has elapsed, no amendment can be made and the deduction for the "taxes payable" must remain at the excessive amount previously allowed. Thus a company which delays claiming a rebate under section 159 or supplying the information necessary for the calculation of that rebate is placed in a more favourable position than a company which applies for the rebate and submits all necessary information promptly.

In respect of the delay in the allowance of rebates under section 159, it can be mentioned that this usually arises because of the need to obtain extensive information from the United Kingdom. It was considered that some maximum period during which a taxpayer could apply for a rebate and supply information was necessary, and the period of six years was prescribed so that taxpayers would not be deprived of the rebate by reason of their inability to collate the necessary information in a shorter period.

In view of the fact that taxpayers are allowed a period of six years in which to make application for the rebate under section 159, it is considered that the period in which assessments might be amended, for the purpose of adjusting the deduction in respect of "taxes payable", should not be restricted to three years.

It is accordingly proposed by clause 28 that section 170 should be amended for the purpose of extending the time in which such assessments may be amended. The new provision would, however, apply only where a rebate has been allowed under section 159 and the taxpayer (being a company) is entitled to a deduction for "taxes payable" in his assessments for undistributed profits tax and war-time (company) tax.

It is intended that, for the purpose of adjusting the deduction for "taxes payable", war-time (company) tax assessments should be subject to amendment in the same manner as undistributed profits tax assessments. As the relevant provisions of the Income Tax Assessment Act are, in effect, incorporated in the War-time (Company) Tax Assessment Act, the proposed amendment of section 170 will operate to permit of the necessary amendment being made to the war-time (company) tax assessment.

It can be mentioned that, following the amendment of a war-time (company) tax assessment, a company may become entitled to a greater deduction in respect of that tax in his assessment for undistributed profits tax. The proposed amendment to section 170 will permit the allowance of this greater amount.

This clause will operate from the date on which the Bill receives the Royal Assent.

CLAUSE 29.-DEDUCTION BY EMPLOYER FROM SALARIES AND WAGES.

The amendment which is proposed to section 221C of the Principal Act has been made necessary by the judgment recently given in the case of Broome v. Chenoweth, wherein the Full High Court ruled that an employee who picked onions at piece work rates received salary or wages for services which had been rendered, but that the salary or wages had no relation to any period of time.

Section 221C(1A.)(a), as set out in the Bill, seeks to provide that wages earned at piece work rates, which have no relation to any period of time, shall be deemed to relate to the period of time in which the service concerned is performed.

A further amendment is proposed to section 221C to cover the case of a bonus paid to an employee for some service which has no relation to any period of time. An example of such a bonus would be one which is paid to an employee for making a suggestion to improve his employer's business or a payment made to an employee in the form of a part contribution to a Commonwealth Loan. Such a bonus is not paid in respect of any period of time and it is proposed that it should be deemed to be paid in respect of a full year. Paragraph (b) of sub-section (1A.) of section 221C has been inserted in the Bill for this purpose.

This clause will operate from the date on which the Bill receives the Royal Assent.

CLAUSE 30.-APPLICATION OF DEDUCTIONS IN PAYMENT OF TAX.

The proposal to insert a new sub-section (7.) in section 221H of the Principal Act arises from cases in which employers have issued group certificates to employees for amounts in excess of the deductions actually made. Cases have occurred in which employers have advised the Department that group certificates have been issued for excess amounts and have requested the Department to ensure that credit for the excess amount is not given to the employee upon production of the group certificate. The Crown Solicitor has expressed the opinion that the Commissioner is not empowered by the Act to refuse credit to the employee for the full amount stated in the group certificate produced by him. The insertion of the sub-section which is proposed, is designed to correct this position.

CLAUSE 31.-LIABILITY OF EMPLOYER, OTHER THAN GROUP EMPLOYER, IN RESPECT OF DEDUCTIONS.

The Bill proposes to insert a new section 221KF of the Principal Act to enable the Commissioner to sue for and recover deductions which are made by an employer who is not a group employer, if the employer has failed to purchase stamps for those deductions. This new section has been inserted in the Bill following a recent judgment in the Bankruptcy Court on questions stated to the Court by the trustee of an assigned estate. In addition to other questions, the trustee sought a direction as to whether the Commissioner was entitled to lodge a proof of debt for amounts of instalments which had been deducted by the employer prior to the assignment and for which he had failed to purchase stamps. The Court declined to give any ruling on that question as insufficient evidence had been adduced.

It is thought that if section 221KF, as proposed, is inserted in the Principal Act, any doubt will be removed concerning the right of the Commissioner to prove for such instalments. The provisions of the new section proposed will, it is felt, be in keeping with the provisions of section 221KC which relate to amounts payable to the Commissioner by group employers.

PART VIIA.-REGISTRATION OF TAX AGENTS.

INTRODUCTORY NOTE:-

Part VIIA., which provides for the registration of tax agents, was inserted in the Income Tax Assessment Act in 1943 and as from 1st July, 1943, it became an offence for any person not registered or exempted by a Commonwealth Tax Agents' Board to charge a fee for preparing income tax returns or transacting income tax business on behalf of taxpayers.

A Tax Agents' Board has been constituted in each State and each Board consists of three members, one of whom is a leading member of the accountancy profession in the State.

A conference of representatives of each of the six Boards was held recently with the object of reviewing the operation of the registration provisions in the light of the experience gained since 1943, with a view to increasing the effectiveness and facilitating the administration of the provisions. The proposed amendments are designed to implement the recommendations of that conference, and will operate from the date on which the Bill receives the Royal Assent.

CLAUSE 32.-REGISTRATION OF TAX AGENTS.

The purpose of this clause is to empower a Board to refuse registration as a tax agent to a partnership or company if it is not satisfied that the character, integrity and reputation of each of the partners or each of the persons employed by the company in an executive position are such as to justify the registration of the partnership or company as a tax agent.

Section 251J provides that any person or partnership desiring to be registered as a tax agent may make application to a Board for registration. The prescribed lodgment fee is to be forwarded with the application, which, in the case of a partnership or company, must specify a partner or employee respectively as nominee.

If the Board is satisfied that the nominee is a fit and proper person to prepare income tax returns and transact income tax business on behalf of taxpayers, the Board is required to register the partnership or company as a tax agent.

Cases have arisen where a person who has been refused registration has entered into partnership with another person who is then specified as the nominee. As it is the partnership or company which is registered as a tax agent, and not the nominee, it is proper that the Board should have specific authority to refuse registration if the unsuitability of the other partners or the reputation of the company justifies that course.

In considering the suitability of the partners, other than the nominee, or of the persons occupying the executive positions of the company, regard is to be had to their character, integrity and reputation, and not to their qualifications and experience in taxation matters.

The proposed amendment to sub-section (10) of section 251J is complementary to the preceding amendment and is designed to ensure that changes in the executive personnel of a company, which is a registered tax agent, are reported to the Board.

CLAUSE 33.-ANNUAL NOTICE BY TAX AGENTS.

This clause inserts a proposed new section providing that every registered tax agent who desires that his registration shall be continued shall so notify the Board each year.

Under the present provisions, registration continues indefinitely until cancelled by a Board for one of a number of specified reasons such as death, bankruptcy, misconduct, &c. It has been found, in practice, however, that the Boards should be given greater control over registered tax agents. It is therefore considered that a system of annual renewal of registration is vital to the effective operation of the scheme of registration. It is accordingly proposed to insert in Part VIIA. of the Principal Act a new section-section 251JA -to provide for the annual renewal of registration. However, it is not proposed to charge any fee for renewal.

CLAUSE 34.-CANCELLATION OF REGISTRATION OF TAX AGENTS.

Section 251K sets out the grounds on which a Board may cancel the registration of a tax agent.

The amendment proposed by paragraph (a) of clause 34 is complementary to those proposed by clause 32. It is designed to authorize a Board to cancel the registration of a partnership or company if it is satisfied that a newly admitted partner or a person recently employed in an executive capacity by the company is not of good fame, integrity and character.

The proposed additional ground for cancellation of registration to be inserted by paragraph (b) of clause 34 is part of the scheme of annual review of registrations. It is proposed that registration shall be cancelled if the registered tax agent fails to notify his desire to remain registered.

Section 251K provides a right of appeal to a County or District Court, Police or Stipendiary Magistrate, and courts of similar jurisdiction, from a Board's decision to cancel the registration of a tax agent. It also provides that the decision of the prescribed court shall be final and conclusive.

As the question whether the registration of a tax agent should be cancelled is one of fact, it is considered that where the decision of a Board in this regard is over-ridden, especially by a court of relatively minor jurisdiction, a right of appeal should exist.

Accordingly, it is proposed to provide a further right of appeal by either party to the Supreme Court of a State.

CLAUSE 35.-UNREGISTERED TAX AGENTS NOT TO CHARGE FEES.

Section 251L prohibits a tax agent from charging a fee for income tax work unless registered as a tax agent, and prescribes a penalty of not less than Pd2 or more than Pd100. The provision does not, however, specify a time limit within which a prosecution may be launched and, therefore, section 21(1.)(c) of the Crimes Act applies to prevent action being taken against a tax agent who infringes the provision, after the expiration of one year from the time the offence was committed.

It frequently occurs that offences of this nature are not discovered by the Taxation Department until much later and, accordingly, it is proposed to insert a provision extending this time limit to permit legal proceedings being taken at any time within a period of six years from the commission of the offence. The proposed time limit corresponds with that prescribed by other penal provisions of the Act.

CLAUSE 36.-REMOVAL OF BUSINESS TO ANOTHER STATE.

The purpose of this clause is to insert a new section to provide for cases where a tax agent, after being registered by the Board in one State, transfers his business to another State. The proposed section provides, in effect, that the registered agent will come within the jurisdiction of the Board constituted in the State to which he has transferred his business.

CLAUSE 37.-THIRD SCHEDULE.

Clause 37 of the Bill inserts the Agreement between the Commonwealth and United Kingdom Governments for the relief of double taxation and the prevention of fiscal evasion as the Third Schedule to the Principal Act.

The Agreement does not commence to operate until it has received the endorsement of the Commonwealth Parliament and of the House of Commons and the incorporation of the Agreement as the Third Schedule is designed to give it the force of law in Australia.

The provisions of the Agreement and an explanation of each Article are set out hereunder.

AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED KINGDOM AND THE GOVERNMENT OF THE COMMONWEALTH OF AUSTRALIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME.

Signed in London, 29th October, 1946.

INTRODUCTORY NOTE:-

On 29th October, 1946, an Agreement was made between the Government of the United Kingdom and the Government of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. The Agreement is to come into force when the necessary actions have been taken by the Commonwealth Parliament and the House of Commons to give the Agreement the force of law.

The Agreement has been negotiated as it has been recognized for some time, both in the United Kingdom and in Australia, that the weight of taxation on income which is subjected to tax by the two countries has presented a serious obstacle to the investment of United Kingdom capital in Australia and an impediment to the establishment and development of Australian industry.

The Agreement will replace provisions in the taxation laws of the United Kingdom and the Commonwealth which, since 1921, have afforded some measure of relief from double taxation. These provisions have proved to be complicated, cumbersome and productive of long delays before finality is reached in determining the degree of relief to which the taxpayer is entitled.

Double taxation has arisen by the levying of tax, firstly, by the country in which the income has its origin and, secondly, by the other country in which the recipient of the income is resident. The agreement applies to all income which is taxed both by the United Kingdom and by Australia and, broadly, such income may be classified as follows:-

(a)

Income taxed on the "origin" basis- This income will be taxed in priority by the country in which it has its origin, and may also be taxed by the country of which the recipient is a resident. If the country of residence also taxes the income, it will give a credit against its tax of the tax imposed by the country of origin. Where both countries tax the income, the effect of the allowance of the tax credit is that the taxpayer pays an amount of tax equal to the higher of the two taxes.

Australia, however, does not impose tax on income (other than dividends) which has its origin in the United Kingdom if that income is taxed in that country, so there is no double taxation of income (other than dividends) having its origin in the United Kingdom. The United Kingdom, however, taxes income which has its origin in Australia but the allowance of the tax credit for the Australian tax relieves any double taxation on the income.

(b)

Income taxed on the "residence" basis- This income will be assessed only by the country in which the recipient resides. As only one country will tax there will be no double taxation. The classes of income to be assessed on a residence basis include-

(i)

shipping and air transport profits;

(ii)

literary and industrial royalties, other than mining royalties;

(iii)

governmental and private pensions;

(iv)

purchased annuities;

(v)

income from limited types of agencies, i.e., income derived through an agency which is not a "permanent establishment" as defined in Article II. of the Agreement.

Article I.

This Article fixes the scope of the Double Taxation Agreement by relating it to the existing United Kingdom and Australian taxes named in paragraph (1) and provides in paragraph (2) for its extension to any new taxes of a substantially similar character which may be imposed in future by either country or by any territory to which the Agreement is extended under Article XIV.

Article II.

Paragraph (1) of this Article contains a number of definitions designed to facilitate the drafting of the Agreement and to clarify the intention regarding its provisions.

The definition of "Australia" differs from that appearing in the Income Tax Assessment Act. In drafting the Agreement, the territories of Norfolk Island and New Guinea in addition to Papua were included as part of Australia in order to ensure that Australia will not be required to give any tax credit under paragraph (3) of Article XII. in respect of income derived from sources in those territories by a dual resident of Australia and the United Kingdom.

Other defined terms and phrases which may call for special comment are-

"person": The definition includes trustees, partnerships and companies. Paragraph (k) of the Article which provides that words in the singular include the plural and words in the plural include the singular ensures that the definition includes a partnership and two or more trustees and operates for the general interpretation of the Agreement.

"United Kingdom resident" and "Australian resident": The definition requires that reference be made to the United Kingdom law to decide whether an individual or a company is, for the purposes of the Agreement, a "United Kingdom resident" and to the Income Tax Assessment Act to decide whether for this purpose he or it is an "Australian resident".

Taxpayers who are, in fact, residents of both countries are excluded from the terms of the definition. The Agreement, so far as it provides for either country to forego tax on income flowing from its territory to residents of the other country, will not apply to persons who are residents of both countries. In respect of dual residents, however, double taxation will be avoided because the country in which the income has its origin will tax that income while the other country will allow against its tax (if any) imposed on that income a credit of the tax imposed by the country of origin. An exception to this rule would be where a taxpayer with dual residence derived income from a third country which imposed no tax. To meet such a case, the Agreement provides in paragraph (3) of Article XII. that the lower of the taxes of the Commonwealth and the United Kingdom will be apportioned on the basis of each country's tax and a proportionate credit allowed by each country.

"industrial or commercial profits": This definition restricts industrial or commercial profits to what may be called business profits and excludes dividends, interest, rents, royalties, management charges and remuneration for personal services. Those classes of income are excluded because it is not desired that the incidence of taxation in regard thereto in either country should be made dependent upon the same factors as those which apply in respect of trading profits. For example, interest derived from sources in Australia by a United Kingdom taxpayer would be assessed by Australia even though the taxpayer has no permanent establishment in Australia. If the interest were included in "industrial or commercial profits" this tax would not be payable if the taxpayer had no permanent establishment in this country.

In respect of interest, rents and remuneration (other than remuneration covered by Articles VIII., IX. and XI.) the country of origin will in all cases have the prior right to tax. If the country of residence also imposes tax, it will allow a tax credit against its tax in accordance with Article XII. The origin basis of taxation is therefore wholly maintained in respect of these classes of income and in respect of any other class of income not specifically covered by the Agreement.

Dividends and royalties are specifically dealt with in Articles VI. and VII. of the Agreement.

"permanent establishment": The substantive part of this definition is designed to ensure that an enterprise of one of the territories having a fixed place of business in the other territory shall be regarded as having a permanent establishment in that territory.

With regard to agencies, the definition of the term applies to treat an enterprise of one of the territories as not having a permanent establishment in the other territory unless the agent has, and habitually exercises, authority to conclude contracts on behalf of the enterprise otherwise than at prices fixed by the enterprise, or regularly fills orders on its behalf from a stock of goods in the other territory. The question whether the agency fulfills the foregoing conditions is one to be determined according to the particular facts. Stocks do not necessarily have to be under the agent's control and if, for example, a United Kingdom principal holds a stock of goods in a warehouse in Australia from which his agent in Australia fills orders (whether or not such orders have been forwarded by the agent to the principal for acceptance or rejection) the United Kingdom principal will, except where the goods are sold through a bona fide broker or general commission agent as explained hereunder, be regarded as having a permanent establishment in Australia.

Where, however, a United Kingdom principal trades in Australia through an agent and the agent merely takes orders which he forwards to his principal for acceptance or rejection and the principal does not maintain in Australia a stock of goods from which the agent fills the orders, the United Kingdom principal will not be regarded as having a permanent establishment in Australia.

An enterprise of one of the territories which carries on business dealings in the other territory through a bona fide broker or general commission agent receiving the customary rate of commission is not regarded as having a permanent establishment in the other territory, even though the broker or agent may complete the contract and fill the order from stocks of goods which he holds. Thus, an Australian primary producer shipping his products to such a broker or agent in the United Kingdom for sale will not be regarded as having a permanent establishment in the United Kingdom.

Where a bona fide broker or commission agent receives a higher or lower rate of commission than that customary, he will be regarded as a special agent and the substantive part of the definition will apply to determine whether the enterprise for which he is agent is to be regarded as having a permanent establishment in the territory in which the broker or agent operates.

An enterprise of one of the territories which maintains in the other territory an establishment which is purely a "buying house" is not regarded as having a permanent establishment in that other territory. Similarly an enterprise of one of the territories which trades in the other territory only through a subsidiary company is not regarded as having a permanent establishment in that other territory. Thus an Australian business with a purely "buying house" in London would not be regarded as having a permanent establishment in the United Kingdom and a United Kingdom company trading in Australia through the medium of a separate subsidiary company (and not itself trading separately in Australia through a permanent establishment) would not be regarded as having a permanent establishment in Australia.

Paragraph (2) of the Article provides that penalty taxes imposed by the other government are not to be treated as "Australian tax" or "United Kingdom tax" as the case may be. The paragraph is designed to ensure that where tax credits are to be allowed by either country the credit shall not include any penalty taxes, as it is not considered that one country should give a tax credit for penalty taxes imposed in the other country.

Paragraph (3) of the Article provides that any term not otherwise defined in the Agreement shall, unless the context otherwise requires, have the same meaning which it has in the laws of the Contracting Government relating to the taxes which are the subject of the Agreement.

Article III.

This Article provides for the taxation of trading profits (other than profits from certain agencies and from operating ships or aircraft) where an enterprise of one of the territories carries on business through a permanent establishment such as a branch or other fixed place of business situated in the other territory. Thus, a United Kingdom enterprise trading in Australia through a branch or other fixed place of business will be subject to Australian tax on the profits derived in Australia. The United Kingdom will also tax the profits derived by the branch or other fixed place of business in Australia, but is required by paragraph (1) of Article XII. to allow against its tax a credit of the Australian tax on the profits. The incidence of double taxation on the Australian profits is thereby avoided.

Where an Australian enterprise trades in the United Kingdom through a branch or other fixed place of business, the United Kingdom will tax the profits derived in that territory. Australia will exempt those profits because section 23(q) of the Income Tax Assessment Act will continue to operate to exempt from Australian tax any income (other than dividends) derived from sources in the United Kingdom which is not exempt from tax in that country.

Provision is made in paragraph (1) of the Article to ensure that Divisions 14 and 15 of the Income Tax Assessment Act shall continue to apply to businesses coming within the terms of those Divisions. This provision was necessary as United Kingdom film producers, to whom Division 14 applies, and some United Kingdom insurance concerns, to which Division 15 applies, do not carry on business in Australia through a permanent establishment.

The paragraph also preserves the operation of section 17 of the War-time (Company) Tax Assessment Act to enable the Australian profits of a subsidiary of a United Kingdom parent company to be included in the war-time (company) tax assessment of the parent company where an election is made under the section mentioned. As an Australian subsidiary company is not, by virtue of the definition of "permanent establishment", a permanent establishment of the United Kingdom parent company, it is doubtful whether, but for this saving provision, the profits of the Australian subsidiary could be assessed to the United Kingdom parent, if an election were made under section 17 of the War-time (Company) Tax Assessment Act.

The substantive part of paragraph (2) of the Article permits the United Kingdom to impose tax on the part of the profits of an Australian enterprise as is attributable to a permanent establishment of the enterprise situated in the United Kingdom. The proviso to the paragraph preserves to the United Kingdom power to include the profits of an Australian subsidiary with the profits of a United Kingdom parent company in the combined assessment to United Kingdom excess profits tax and national defence contribution.

Paragraph (3) of the Article expresses a principle to be observed in any method followed in dividing the profit of an enterprise between the two territories in which the enterprise and its permanent establishment are situated. The quantum of the profit to be attributed to a permanent establishment is the profit which it might be expected to derive in the territory in which it is situated if it were an independent enterprise engaged in the same or similar activities and its dealings with the enterprise of which it is a permanent establishment were dealings at "arm's length" with that enterprise or an independent enterprise. The principle expressed is that the profit of the permanent establishment is to be ascertained as if the permanent establishment were trading with a stranger and were not controlled by its head office. Thus, in ascertaining the profits of an Australian branch of a United Kingdom concern, the charges to be allowed in respect of goods and services supplied by the head office to the branch will not exceed the price which the branch would be required to pay for those goods and services if it were dealing with a stranger. This principle is already adopted in arriving at the profits of an Australian branch of an overseas concern and will not, in the generality of cases, involve any departure from the basis hitherto adopted in arriving at the profit of an Australian branch or other fixed place of business of a United Kingdom enterprise.

Provision is also made to retain to the Commissioner of Taxation and to the Inland Revenue authorities the power to determine, in accordance with the above-stated principle, the quantum of profit to be attributed to a permanent establishment situated in Australia or the United Kingdom, as the case may be, where the information supplied to the Commissioner or the Inland Revenue authorities is considered to be inadequate or unsatisfactory to enable the profit to be properly determined. So far as Australia is concerned, this provision in the Article will preserve to the Commissioner the powers along the lines of those which he already has in pursuance of section 136 of the Act relating to foreign-controlled businesses.

Paragraph (4) of the Article provides that no profit shall be attributed to a permanent establishment in respect of the mere buying operations of the permanent establishment.

Article IV.

It is provided in the definition of "permanent establishment" in Article II. that, where a company which is a resident of one of the territories has a subsidiary company which is a resident of the other territory or which is engaged in trade or business in that other territory (whether through a permanent establishment or otherwise), the subsidiary company is not to be regarded as a permanent establishment of the parent company.

Article III. deals with the taxation of trading profits derived in one of the territories by a permanent establishment of an enterprise of the other territory and expresses the principle which is to be observed in any method to be followed in dividing the profit of the enterprise between the two territories in which the enterprise and the permanent establishment are situated.

Article IV. deals with inter-connected companies of the two territories and is complementary to Article III. Its purpose is to ensure a fair and reasonable allocation of the profit of the whole organization between the two territories.

Sub-paragraphs (a), (b) and (c) of paragraph (1) set out the conditions precedent to the operation of the Article.

Sub-paragraph (a) is designed to cover the case where a parent company of either the United Kingdom or Australia trades in Australia or the United Kingdom (as the case may be) through a subsidiary company and sub-paragraph (b) is designed to cover the case where the same persons participate directly or indirectly in the management control or capital of the companies established in those countries. It is not necessary, to bring the Article into operation, for the same persons directly or indirectly to wholly manage or control the companies or to wholly own the capital of the companies. It is sufficient if they participate in the management control or capital of the companies. As words in the plural include words in the singular, the sub-paragraph applies if any one person who participates directly or indirectly in the management control or capital of one of the companies participates directly or indirectly in the management control or capital of the other company.

Sub-paragraph (c) combined with the remainder of the paragraph provides for the inclusion in the profits of one of the enterprises profits which would have accrued to that enterprise but which, in consequence of the conditions governing the commercial and financial relations between the two enterprises, have not so accrued. In arriving at the quantum of the profit to be so included the same principles are to be applied in arriving at the true profit of the enterprise as are to be applied under Article III. in ascertaining the quantum of the profits of an enterprise of one of the territories which is to be attributed to its permanent establishment in the other territory. The profit of the enterprise is accordingly to be determined as if it were dealing with a complete stranger and the conditions which governed the commercial and financial relations between the two enterprises did not exist.

Paragraph (2) of the Article provides that the profits included in the profit of an enterprise of one of the territories in pursuance of paragraph (1) are deemed to be derived from sources in that territory and are to be taxed accordingly. This provision is necessary to ensure that if the country of residence of the enterprise also taxes the profit so included, it will give a credit against its tax of the tax paid to the country of origin of the income.

Similar provision is made in paragraph 3 as is made in Article III. to retain to the Commissioner of Taxation and the Inland Revenue Authorities the power to determine in accordance with the principle stated in the second last preceding paragraph the quantum of the profit which might be expected to accrue to an enterprise in Australia or the United Kingdom, as the case may be, where the information supplied to the Commissioner or the Inland Revenue Authorities is considered to be inadequate or unsatisfactory to enable the quantum of such profit to be properly determined. So far as Australia is concerned, this paragraph will preserve to the Commissioner the powers along the lines of section 136 of the Act relating to foreign controlled businesses.

Article V.

This Article provides that profits derived by a resident of one of the territories from operating ships whose port of registry is in that territory or aircraft registered in that territory are to be exempt from tax in the other territory. In the generality of cases, shipping or air transport profits will be assessed by the country in which the enterprise is resident and will be exempt in the other country. Consequently, profits derived by a United Kingdom resident from operating ships or aircraft registered in the United Kingdom will be exempt from Australian tax and subject to United Kingdom tax. Conversely, Australia will tax and the United Kingdom will exempt profits derived by a resident of Australia from operating ships or aircraft registered in Australia.

Profits derived in Australia by a resident of the United Kingdom from operating ships or aircraft registered outside the United Kingdom and shipping or air-transport profits derived in Australia by a United Kingdom resident who is also a resident of Australia will be subject to Australian tax. In such cases, Australia will continue to tax freight and passage moneys under Division 12 of the Income Tax Assessment Act. If the United Kingdom also taxes the ship-owner or charterer or aircraft-owner on such income, it will give a credit in respect of the Australian tax.

Article VI.

This Article is designed to give effect to the Agreement so far as it relates to dividends and to the assessment to Australian private company tax of private companies with United Kingdom shareholders.

When read in conjunction with the defined term "United Kingdom resident" paragraphs (1), (2) and (3) of the Article apply only to exempt dividends or concede half the tax on dividends, as the case may be, to United Kingdom shareholders who are resident in the United Kingdom for the purposes of United Kingdom tax and are not residents of Australia for the purposes of Australian tax. The Article does not apply in the case of a shareholder with dual Australian-United Kingdom residence.

Paragraph (1) of the Article provides that dividends paid to a United Kingdom resident by a company which is a United Kingdom resident shall be exempt from Australian tax. This is a relatively minor concession as, in the generality of cases, Australia does not collect income tax on dividends paid by non-resident companies to non-resident shareholders.

The primary purpose of paragraph (2) is to place subsidiary companies in much the same relative position for taxation purposes as branches. In order to achieve this objective the paragraph provides that, subject to the conditions specified in the paragraph, dividends paid by a wholly-owned Australian subsidiary company to a United Kingdom parent company will be exempt from Australian tax in the hands of the parent company.

For the purposes of the paragraph, a company will, by sub-paragraph (i) of the proviso, be regarded as a wholly-owned subsidiary company if the parent company owns all of the shares in the subsidiary company other than directors' qualifying shares which are not to exceed 5 per centum of the paid-up capital. This provision is necessary to meet the situation where complete ownership is statutorily impossible.

It is a condition precedent to the exemption of the dividends from Australian tax in the hands of the parent company that the parent company be subject to United Kingdom tax in respect thereof. In this regard it is not proposed that dividends of a type which do not attract tax in the United Kingdom, e.g. dividends in the form of bonus shares, should be exempt from tax in both countries.

Sub-paragraph (ii) of the proviso to the paragraph is designed to exclude from the exemption dividends paid by companies which are mainly investment companies. In this regard, one of the main objects of the Agreement is to stimulate investment of United Kingdom capital in trading enterprises in Australia and it is not desired to extend any special encouragement to the investment of United Kingdom capital in property investments in Australia. The purpose of sub-paragraph (ii) accordingly is to preclude exemption of dividends paid by a wholly-owned subsidiary company where the subsidiary company derives its income wholly or mainly from investment sources. Accordingly the exemption does not apply where a dividend is paid by an Australian subsidiary company to a United Kingdom parent company if ordinarily more than one-half of the taxable income of the subsidiary company is derived from interest, dividends and rents other than interest, dividends and rents from any wholly-owned subsidiary company the taxable income of which consists wholly or mainly of industrial or commercial profits.

The purpose of the latter portion of sub-paragraph (ii) is to meet the case where a second subsidiary company which is wholly or mainly a trading company is formed in Australia. In such a case the intervention of the first Australian subsidiary between the second subsidiary and the United Kingdom parent company will not deprive the latter of any exemption which, but for that intervention, would have enured to it.

Paragraph (3) of the Article operates to reduce by one-half the tax levied on dividends paid to a United Kingdom shareholder if the shareholder is subject to United Kingdom tax in respect thereof and is not engaged in trade or business through a permanent establishment situated in Australia.

A United Kingdom shareholder who does not qualify for exemption under either paragraph (1) or (2) of the Article will be subject to half the Australian tax on dividends if the requirements of paragraph (3) are satisfied.

Paragraph (4) is designed to eliminate competitive anomalies by permitting Australia to impose the full private company tax which would have been levied if paragraphs (1), (2) and (3) of the Article had not been included in the Agreement. In calculating the additional tax on the undistributed amount of the distributable income of a private company with United Kingdom shareholders, the concessions granted by the above-mentioned paragraphs will be completely disregarded.

It has not been found necessary to make any special provision to permit Australia to impose the full undistributed profits tax on the undistributed incomes of public companies. The undistributed profits tax levied on public companies is assessed on the undistributed income at a flat rate of tax. This does not involve an ascertainment of the sum of the additional tax which the shareholders would have paid if the undistributed income had been distributed as a dividend as is the case with private companies.

Under the provisions of paragraph (5) Australian residents not engaged in trade or business through a permanent establishment situated in the United Kingdom will be exempt from United Kingdom sur-tax on dividends in respect of which they are subject to Australian tax.

Article VII.

This Article gives effect to the proposal to assess industrial (other than mining) and literary royalties on a residence basis. Such royalties will be taxed only by the country in which the recipient is resident and will be exempt from tax in the country in which the royalty has its origin. In the case of mining royalties the country of origin will tax the royalty and if the country of residence also taxes, it will give a credit in respect of the tax paid to the country of origin.

Film rentals and royalties received by motion picture film producers are excluded from the operation of this Article. The special provisions contained in the Income Tax Assessment Act regarding the assessment of film rentals and royalties received by non-resident film producers in respect of the distribution and exhibition of their films in Australia will accordingly continue to apply. Where the United Kingdom taxes the United Kingdom film producers in respect of such rentals and royalties received from Australia, it will give a tax credit of the Australian tax against its own tax.

Article VIII.

This Article deals with remuneration paid by the Commonwealth and State Governments to employees located in the United Kingdom and with remuneration paid by the United Kingdom Government to its employees located in Australia. The general objective aimed at is that the paying Government alone will tax except where the employee is a permanent resident of the country in which he is employed.

Australia will tax Commonwealth and State Government employees located in the United Kingdom unless the employee is ordinarily resident in the United Kingdom or is not resident in the United Kingdom solely for the purpose of performing his official duties. The United Kingdom on its part will tax the employees of the United Kingdom in Australia except in cases where the employee is a resident of Australia or is not resident in Australia solely for the purpose of performing his official duties.

If an Australian Government employee in the United Kingdom is ordinarily resident in the United Kingdom or is not resident in the United Kingdom solely for the purpose of performing his official duties the United Kingdom will tax the remuneration and Australia will exempt. In the correspondingly reverse position of a United Kingdom Government employee in Australia, the United Kingdom will exempt the remuneration and Australia will tax.

The Article does not apply where the employee's services are rendered in connexion with any trade or business carried on by either the Commonwealth or the United Kingdom Government or by any State Government.

Article IX.

This Article is designed to cover the case of a resident of either territory making short business visits to the other territory.

Remuneration earned by a visiting business man (other than a visiting entertainer) will be exempt from tax in the territory visited, if he remains there for a period or periods not exceeding 183 days during the year of income and if the services he is performing are performed on behalf of a resident of the other territory and the remuneration is subject to tax in that other territory.

The remuneration of a United Kingdom business man, employed by a United Kingdom enterprise and visiting Australia on the business affairs of his employer, will be exempt from Australian tax if the visit does not extend beyond 183 days in the year of income and the remuneration is subject to United Kingdom tax. If the visit extends beyond 183 days in the year of income (and subject to the wider exemption already contained in the Income Tax Assessment Act-see later note) Australia will tax the remuneration earned during the whole period of the visit. If the United Kingdom also taxes the remuneration, it will allow a credit of the Australian tax against the United Kingdom tax. Similarly, the United Kingdom will, subject to corresponding conditions, exempt the remuneration of an Australian business man visiting the United Kingdom. If the visit should extend beyond 183 days in the year of assessment the United Kingdom will tax the remuneration for the full period and Australia will exempt.

The Income Tax Assessment Act already provides for an exemption of the remuneration earned by executive officers of overseas business concerns, consultants, technicians and operatives visiting Australia for a period up to two years. The Article does not detract from this wider exemption and will cover cases of visitors which do not come within the terms of the existing exemption.

The Australian earnings of United Kingdom theatrical and concert artists and other entertainers touring Australia will be subject to Australian tax but if the United Kingdom also taxes the earnings it will be required to give a credit for the Australian tax paid thereon. The United Kingdom earnings of Australian theatrical and concert artists and other entertainers touring the United Kingdom will be subject to United Kingdom tax. The incidence of double taxation will be avoided in such cases as Australia does not impose tax on income (other than dividends) derived by its residents from sources outside Australia where tax is paid on that income in the country in which it is derived.

Article X.

This Article makes provision for the taxation of pensions and purchased annuities. Income of this nature will be taxed by the country in which the pensioner or annuitant resides and will be exempt from tax in the country of origin of the pension or annuity.

The Article does not cover annuities paid under wills and settlements. In these cases, priority of tax will be given to the country of origin of the annuity. If the country of residence of the annuitant also taxes, it will be required to give a credit in respect of the tax paid to the country of origin.

Article XI.

This Article provides that the remuneration received by visiting professors and teachers from one of the territories shall be exempt from taxation in the territory visited during a period of temporary residence not exceeding two years. It is anticipated that a reciprocal exemption from taxation, as provided by the Article, will encourage the interchange of professors and teachers between the United Kingdom and Australia and will lead to consequent cultural advantages to Australia.

Article XII.

Under the Agreement, some classes of income will be assessed only by the country in which the recipient of the income resides. In regard to other classes of income both the country of origin of the income and the country of residence will have the right to tax. Where the country of origin and the country of residence tax the same income, the Agreement provides that relief from double taxation shall be given by the country of residence. This Article provides that the relief shall be given by way of tax credits and states the general principles governing the granting of the credits.

CREDIT TO BE ALLOWED BY THE UNITED KINGDOM TO UNITED KINGDOM RESIDENTS FOR AUSTRALIAN TAX PAID ON INCOME HAVING ITS ORIGIN IN AUSTRALIA WHICH IS ALSO TAXED BY THE UNITED KINGDOM.

Paragraph (1) of the Article provides that, subject to the United Kingdom law relating to the granting of tax credits, the United Kingdom will allow against United Kingdom tax levied on income derived from sources in Australia, a credit in respect of the Australian tax paid directly or by deduction in respect of that income. The United Kingdom law relating to the granting of tax credits is enacted in Sections 51-56 of the United Kingdom Finance (No. 2) Act 1945 and Section 51(4) provides for the Seventh Schedule of that Act to have effect when tax credits are allowed against United Kingdom tax. These provisions of the United Kingdom law apply in respect of credits given to its residents under all double taxation agreements entered into by the United Kingdom.

In the case of income of Australian origin (other than dividends) which is taxed by the United Kingdom, the credit in respect of the Australian tax which the United Kingdom will allow against the United Kingdom tax will include-

(a)

where the income is derived by a company-

(i)

ordinary income tax

(ii)

super tax

(iii)

undistributed profits tax

(iv)

war-time (company) tax

N.B.-(i), (ii) and (iii) will be allowed by the United Kingdom as a credit against United Kingdom income tax; (iv) will be allowed as a credit against United Kingdom excess profits tax and national defence contribution.

(b)

where the income is derived by an individual-

(i)

income tax

(ii)

social services contribution.

These taxes will be allowed by the United Kingdom as a credit against United Kingdom income tax and sur-tax.

Where the income is an ordinary dividend the Australian tax to be allowed as a credit will include, in addition to the tax payable directly by the shareholder on the dividend, the tax (other than war-time (company) tax) payable by the company paying the dividend on the profits distributed. Where the dividend is a preference dividend with a right to a further participation in the profits, the credit will include the tax (other than the war-time (company) tax) payable by the company on the profits attributable to the dividend in excess of the fixed rate. In the case of a preference dividend (other than a participating preference dividend in excess of a fixed rate) the Australian tax payable by the company on the profits distributed will not be taken into account as preference shareholders are not regarded as bearing any part of that tax. War-time (company) tax is excluded from the Australian tax payable on a dividend for which credit is to be allowed by the United Kingdom as war-time (company) tax is a special tax, similar to the United Kingdom excess profits tax, and is not a tax which should be regarded as being borne by the shareholders.

The tax credit to be allowed by the United Kingdom will always be limited to the amount of the United Kingdom tax paid on the income. This principle applies whether the credit to be allowed by the United Kingdom is in respect of dividends or in respect of other income for which priority of tax is given to Australia but which the United Kingdom also taxes.

The unnumbered paragraph following paragraph (1) is complementary to sub-paragraph (a) of the proviso to paragraph (1) of Article III. The purpose of the paragraph is to ensure that the United Kingdom will give a tax credit against its tax in respect of the Australian tax assessed under Divisions 14 and 15 of Part III. of the Income Tax Assessment Act.

The following examples illustrate the method of the calculation of the tax credit in respect of Australian tax to be allowed by the United Kingdom against United Kingdom tax payable on-

(1)

trading profits derived by an Australian branch of a United Kingdom company;

(2)

an ordinary dividend paid by an Australian company to a United Kingdom company;

(3)

an ordinary dividend paid by an Australian company to a United Kingdom individual shareholder.

The calculation of the credit and its allowance to United Kingdom taxpayers is a matter entirely for the United Kingdom Inland Revenue Authorities.

Notes:

(a)

If the company were liable to war-time (company) tax, credit in respect of that tax would be allowed by the United Kingdom against national defence contribution and excess profits tax (if any).

(b)

If the company were a private company, credit in respect of any additional tax assessed under Division 7 of Part III of the Act would, in addition to the ordinary income tax, be allowed by the United Kingdom against United Kingdom income tax as in the case of Part IIIA tax.

Example (2)

Where an ordinary dividend is paid by an Australian company to a United Kingdom company, the Agreement provides that the United Kingdom will allow, up to the level of its own tax on the dividend, a credit of the aggregate of the Australian tax (other than war-time (company) tax) payable on the profits used to pay the dividend and the Australian tax levied directly on the dividend.

Assuming that the dividend of Pd3,000 referred to in Example (1) were paid to a United Kingdom company which is subject to United Kingdom tax in respect thereof and is not engaged in trade or business through a permanent establishment in Australia, the dividend would, in effect, be assessable to Australian tax under paragraph (3) of Article VI in the hands of the United Kingdom company at the rate of 3s. in the Pd1. Subject to section 46(2A.) of the Act, super tax would also be payable if the dividend exceeded Pd5,000. The dividend of Pd3,000 would be "grossed-up" in the United Kingdom to include the tax paid by the Australian company on the profits distributed and subjected to United Kingdom tax in the hands of the recipient company at the rate of 9s. in the Pd1.

Dividend Pd3,000 "grossed-up" by the addition of the tax paid by the company on the profits used to pay the dividend

(Pd3,000)/(1) * (10,000)/(6,750#) = Pd4,444


# Pd10,000 less ordinary and super tax Pd3,250 = Pd6,750.

Notes:

(a)

The amount of Pd4,444 represents the profits required before deduction of ordinary income tax and super tax to pay a dividend of Pd3,000. As only half the profits bore super tax only one-half the dividend would, for this purpose, be regarded as having borne super tax.

	Pd
Ordinary tax on Pd4,444 at 6s, in the Pd1	1,333
Super tax on Pd2,222 at 1s. in the Pd1	111
Total tax on profits of Pd4,444 used to pay the dividend	1,444

(b)

If the dividend were a participating preference dividend of say 10 per cent., representing a fixed rate of 7 per cent. and 3 per cent. further participation in profits, the credit to be allowed by the United Kingdom against the United Kingdom tax payable in respect of the dividend would be ascertained in accordance with the principles set out herein except that in the process of "grossing up" only the tax paid by the company on the profits required to pay a dividend of Pd900

((3)/(10) * Pd3,000)


would be allowed as a credit by the United Kingdom in addition to the Australian tax paid directly on the total dividend of Pd3,000. In this case the tax paid on the profits used to pay the dividend in excess of the fixed rate would be

(3)/(10) * Pd1,444 = Pd433


(c)

If the dividend were paid by the Australian company out of profits which had borne Part IIIA. or Division 7 tax, the dividend would be "grossed-up" by the amount of the Part IIIA. or Division 7 tax, as the case may be, attributable to the profit used in payment of the dividend and the tax credit which the United Kingdom will be required to allow would be increased by a similar amount.

Example (3).

If the dividend of Pd3,000 referred to in Example (2) were paid by an Australian company to a United Kingdom shareholder being an individual who is subject to United Kingdom tax in respect thereof and is not engaged in trade or business through a permanent establishment situated in Australia, the dividend would, under the provisions of paragraph (3) of Article VI, be subject to one-half Australian tax in the hands of the shareholder.

In the new Part IIIB, which is being inserted in the Act to give the Agreement the force of law in Australia, provision is made for the ascertainment of the Australian tax payable by an individual in respect of the dividend, and in cases where paragraph (3) of Article VI applies, the Australian tax payable by the shareholder will be one-half the tax ascertained in accordance with the provision in the new Part.

The United Kingdom would "gross-up" the dividend of Pd3,000 to Pd4,444 as explained in the preceding Example and subject the "grossed-up" dividend to United Kingdom tax.

For purposes of clarity, the exchange difference in Australian and United Kingdom currency is ignored.

CREDIT TO BE ALLOWED BY AUSTRALIA TO AUSTRALIAN RESIDENTS IN RESPECT OF UNITED KINGDOM TAX DEDUCTED FROM DIVIDENDS BY UNITED KINGDOM COMPANIES.

Paragraph (2) of the Article states the general principles governing the granting of relief where income derived from sources in the United Kingdom is subject to tax in the hands of a resident of Australia.

In order to provide this relief the paragraph requires that a tax credit in respect of the United Kingdom tax (reduced by the amount of any relief or repayment to which the taxpayer is entitled under the United Kingdom law) shall be allowed by Australia against any Australian tax payable in respect of the income.

With regard to income (other than dividends) having its origin outside Australia, the policy of the various Commonwealth Governments has been to avoid the incidence of double taxation upon such income derived by residents of Australia. In this connexion Section 23(q) of the Income Tax Assessment Act operates to exempt a resident of Australia from Australian tax on income (other than dividends) having its origin outside Australia, if tax on the income is paid to the country of origin.

However, notwithstanding that the provisions of Section 23(q) of the Act will continue to exempt income (other than dividends) derived by a resident of Australia which has its origin in the United Kingdom and is taxed in that country, paragraph (2) of the Article has been drafted in such a way as to ensure that it will not be necessary to enter into a supplemental agreement with the United Kingdom should Australia wish, at any time in the future, to change its taxing system in regard to income derived by its residents from sources outside Australia. The position is, therefore, that although no Australian tax would be payable in respect of income (other than dividends) which has its origin in the United Kingdom and is subject to tax in that country, the paragraph provides that the United Kingdom tax payable in respect of the income will be allowed as a credit against any Australian tax payable in respect of that income. It will be seen from the foregoing, however, that, under the present system, the Australian tax on the income would be nil and, consequently, Australia would not be required to allow any credit.

So far as dividends are concerned, the Income Tax Assessment Act provides, subject to certain specific exemptions, that the assessable income of a shareholder who is a resident of Australia shall include dividends paid to him by a company out of profits derived by it from any source, whether in Australia or elsewhere.

Where Australia taxes its residents on dividends having their origin in the United Kingdom the Article provides, in accordance with the general principle that each country should bear the cost of protecting its residents from the weight of double taxation, that Australia should allow credit for the United Kingdom tax against the Australian tax on the dividends.

Accordingly, paragraph (2) provides that a tax credit in respect of the United Kingdom tax (reduced by the amount of any relief or repayment to which the taxpayer is entitled under the United Kingdom law) is to be allowed against the Australian tax payable in respect of a dividend having its source in the United Kingdom.

In this latter connexion, a dividend paid by a company resident in the United Kingdom is deemed to be income derived from sources in the United Kingdom. However, the credit is to be allowed only if the recipient of the dividend elects to have the reduced amount of the United Kingdom tax included in his assessable income. This necessitates the introduction into the Australian system of the "grossing up" procedure, i.e., the addition to the dividend of the tax paid on the part of the profits used to pay the dividend. In order to arrive at the amount by which the dividend is to be "grossed up" by the addition of the United Kingdom tax, a shareholder who makes any such election must supply all the necessary details of the United Kingdom taxes and reliefs and repayments to which he is entitled, before any credit may be allowed.

In all cases the tax credits to be allowed by Australia will be limited to the Australian tax on the dividend or the United Kingdom tax, whichever is the lesser. In this regard the paragraph is made subject to such laws as may be enacted in Australia regarding the allowance as a credit against Australian tax of taxes payable in a territory outside Australia. In the new Part IIIB., which is being inserted in the Act to give the Agreement the force of law in Australia, provision is made which will ensure that Australia is not required to give a greater credit than the tax which it receives in respect of the dividend.

For the purposes of "grossing up" and the allowance of the tax credit by Australia, the United Kingdom tax payable in respect of any dividend is not to include United Kingdom excess profits tax or national defence contribution as those taxes are not payable or deemed to be payable in respect of dividends.

The paragraph deems United Kingdom tax payable to include the United Kingdom income tax deductible by the United Kingdom company from the gross dividend but provides that the United Kingdom tax is not to exceed the "net United Kingdom rate" applicable to the dividend in cases where the United Kingdom has allowed, to the company paying the dividend, double taxation relief under an agreement with any country. Section 52 of the United Kingdom Finance (No.2) Act 1945 provides that any relief or repayment to a shareholder in respect of tax deducted from a dividend is to be limited to the "net United Kingdom rate". If the United Kingdom company's income were derived wholly from sources in Australia and Australian tax at the rate of 6s. in the Pd1 were paid on that income, the United Kingdom would tax the company's profits at the standard rate (at present 9s.) and allow a credit, in accordance with paragraph (1) of this Article, for the Australian tax of 6s. leaving the "net United Kingdom rate" of 3s. payable on each Pd1 of the company's profits. Unless the dividend were declared "tax free" the company would deduct 9s. from each Pd1 of the dividend but the "net United Kingdom rate" payable in respect of each Pd1 of the dividend would be 3s. only. For the purposes of "grossing up", the net dividend of 11s. (Pd1 less 9s. United Kingdom tax) would, subject to any reliefs or repayments to which the shareholder may be entitled, be increased by the "net United Kingdom rate" of 3s. = 14s. (if the Australian recipient of the dividend so elected) and a credit of the 3s. in respect of each 14s. contained in each Pd1 of the dividend would then be allowed against the Australian tax payable in respect of each such 14s.

N.B. - In the foregoing explanation super tax and undistributed profits tax have, for purposes of simplicity, been ignored.

The same principle as set out in the preceding paragraph would apply if a resident of Australia received a dividend from a United Kingdom company which derived income from, say, the United States of America, with which country also the United Kingdom has a double taxation agreement. In such a case the United Kingdom would tax the company's profits at 9s. and allow a credit of the United States tax of, say, 8s. payable on the company's profits. Assuming the whole of the profits were earned in the United States, the United Kingdom company would deduct 9s. from each Pd1 of the dividend but the "net United Kingdom rate" would be 1s. Australia would "gross up" the net dividend received by the shareholder from 11s. to 12s., and allow a credit of 1s.

Where a dividend is declared by the United Kingdom company "free of tax" or "partly free of tax", the dividend actually paid will be "grossed up" to the amount the company would have been required to declare by way of dividend in order to provide a dividend of an amount equal to the amount actually paid to the shareholder if the dividend had not been declared to be "free of tax" or "partly free of tax" and the company had deducted from such dividend the appropriate amount of the United Kingdom tax attributable thereto.

The following examples illustrate the method of the calculation of the tax credit in respect of United Kingdom tax to be allowed by Australia against the Australian tax payable on-

(1)

a dividend paid to an Australian shareholder by-

(a)

a United Kingdom company the whole of whose profits are derived from sources in the United Kingdom;

(b)

a United Kingdom company the whole of whose profits are derived from sources in Australia.

(c)

a United Kingdom company one-half of whose profits are derived from sources in the United Kingdom and one-half derived from sources in Australia;

(d)

a United Kingdom company the whole of whose profits are derived from the United States of America;

(2)

a "tax free" dividend paid to an Australian shareholder by a United Kingdom company;

(3)

a "partly tax free" dividend paid to an Australian shareholder by a United Kingdom company.

Example (1)(a)

Where a United Kingdom company derives profits from sources in the United Kingdom, the profits would be subjected to United Kingdom income tax at the standard rate, at present 9s. in the Pd1. Assuming an Australian shareholder in the United Kingdom company were entitled to a Pd400 gross dividend declared out of those profits and the company deducted and retained tax at the standard rate of 9s. = Pd180, the shareholder would receive a net dividend of Pd220 which would be subjected to Australian tax for the year of income in which the dividend was derived. If the shareholder did not derive any other income the Australian tax payable, calculated at 1945-46 rates, would be-

Under paragraph (2) of this Article, however, the shareholder is entitled to elect to have the United Kingdom tax deducted from the dividend (as reduced by the amount of any relief or repayment attributable to the dividend to which he is entitled under the law of the United Kingdom) included in his assessable income and, subject to limitation to the Australian tax on the dividend, to receive a credit equal to the amount so included. If, therefore, the shareholder were entitled to a repayment from the United Kingdom authorities of 4s. in the Pd1 in respect of relief attributable to the dividend viz.,

Pd400 * 4s. = Pd80


he would be entitled to elect to "gross up" the dividend by 5s. for each Pd1 of the gross dividend of Pd400 = Pd100, and receive a credit against the Australian tax levied on the amount so "grossed", of the amount of Pd100 or the Australian tax on the dividend, whichever amount is the lesser. In these circumstances the Australian tax (after allowance of this credit) payable by the shareholder on the "grossed-up" dividend, calculated at 1945-46 rates, would be Pd7 4s., arrived at as follows:-

As stated in the explanation of the proposed new section 26A, in cases where an election to "gross-up" is made, the repayment in respect of relief attributable to the dividend is required to be included in the shareholder's assessable income of the year the dividend is derived.

Example (1)(b).

Where a United Kingdom company derives the whole of its profits from sources in Australia, the company's profits would be subjected to Australian tax. Assuming the Australian tax on the company's profits were 6s. in the Pd1, the United Kingdom would tax the profits at the standard rate, at present 9s. in the Pd1, and allow a credit in accordance with paragraph (1) of this Article for the Australian tax of 6s. leaving a "net United Kingdom rate" of 3s. payable to the United Kingdom authorities on each Pd1 of the company's profits.

If an Australian shareholder in the company were entitled to a gross dividend of Pd1,000 declared out of its profits, he would be entitled in accordance with paragraph (2) of this Article to elect to have the United Kingdom tax (calculated at the "net United Kingdom rate" and reduced by the amount of any relief or repayment attributable to the dividend to which he is entitled under the United Kingdom law) included in his assessable income and, subject to limitation to the Australian tax on the dividend, to receive a credit equal to the amount so included.

If the shareholder were not entitled to a repayment from the United Kingdom authorities in respect of relief attributable to the dividend, he would be entitled to "gross up" the dividend by 3s. for each Pd1 of the gross dividend of Pd1,000 = Pd150 and receive a credit against the Australian tax levied on the amount so "grossed" of the amount of Pd150 or the Australian tax on the dividend, whichever amount is the lesser.

If the shareholder elected to "gross up" the dividend, and did not derive any other income the Australian tax payable calculated at 1945-46 rates would be Pd108 2s., arrived at as follows:-

Example (1)(c).

Where a United Kingdom company derives, say, one-half of its profits from sources in Australia, the profits derived in Australia would be subjected to Australian and United Kingdom tax but the United Kingdom would allow a credit for the Australian tax up to the level of the United Kingdom tax on the profits. If the remaining half of the company's profits were derived from sources in the United Kingdom, these profits would be subjected to United Kingdom tax only.

Assuming the Australian tax on one-half the company's profits were levied at the rate of 6s. in the Pd1, the United Kingdom would charge the profits to tax at the standard rate of 9s. and allow a credit for the Australian tax of 6s., leaving a "net United Kingdom rate" of 3s. payable to the United Kingdom authorities on each Pd1 of the company's profits derived from sources in Australia. The "net United Kingdom rate" payable in respect of profits originating in the United Kingdom would, however, be 9s.

If an Australian shareholder in the company did not derive any other income and he were entitled to a gross dividend of Pd1,000 declared indifferently out of the company's profits and he were not entitled to repayment from the United Kingdom authorities in respect of relief attributable to the dividend, the Australian tax payable in respect of the "grossed-up" dividend calculated at 1945-46 rates would be Pd36 8s., arrived at as follows:-

Example (1)(d).

If the profits of a United Kingdom company were derived wholly from sources in the United States of America, the profits would be subjected to United States tax at, say, 8s. in the Pd1 and to United Kingdom tax at the standard rate of 9s. in the Pd1 but the United Kingdom would allow against the United Kingdom tax on the profits a credit for the United States tax leaving a "net United Kingdom rate" of 1s. payable to the United Kingdom authorities on each Pd1 of the company's profits.

If an Australian shareholder in the company did not derive any other income and he were entitled to a gross dividend of Pd400 declared out of profits originating in the United States and he elected to "gross-up" the dividend, the Australian tax payable in respect of the "grossed-up" dividend calculated at 1945-46 rates would be Pd13, arrived at as follows:-

Example (2).

Where an Australian shareholder in a United Kingdom company receives a dividend "free of tax", he may elect to "gross-up" the dividend to the amount the company would have been required to pay if the dividend had not been declared "free of tax". If, therefore, an Australian shareholder who did not derive any other income received a dividend of, say, Pd220 paid "free of tax" and he were entitled to a repayment from the United Kingdom authorities of 4s. in the Pd1 in respect of reliefs attributable to the gross dividend the company would have been required to pay, if the dividend had not been declared "free of tax", the Australian tax calculated at 1945-46 rates on the "grossed-up" dividend would amount to Pd7 4s., arrived at as follows:-

Example (3).

Where an Australian shareholder in a United Kingdom company receives a dividend paid "partly free of tax", he may elect to "gross-up" the dividend by including in his assessable income, not only the tax actually deducted by the company, but also the further amount which the company was authorized to, but did not, deduct. If the company deducted and retained, say, United Kingdom tax at the rate of 5s. in the Pd1 in lieu of the standard rate of 9s., and the shareholder were entitled to a repayment from the United Kingdom authorities of 4s. in the Pd1 in respect of reliefs attributable to the gross dividend, the Australian tax payable, after taking into account 4s. in respect of the repayment, would be Pd7 4s. (calculated at 1945-46 rates) arrived at as follows:-

For purposes of clarity, the exchange difference in Australian and United Kingdom currency is ignored.

CREDIT TO BE ALLOWED BY AUSTRALIA AND THE UNITED KINGDOM WHERE A DUAL RESIDENT OF THE UNITED KINGDOM AND AUSTRALIA DERIVES INCOME FROM A THIRD COUNTRY AND THE INCOME IS TAXED IN BOTH THE UNITED KINGDOM AND AUSTRALIA.

Paragraph (3) of the Article provides for the allowance of a credit where a dual resident of the United Kingdom and Australia derives income from a third country and the income is taxed in both the United Kingdom and Australia. The paragraph provides that the United Kingdom and Australia should each contribute towards the relief of double taxation. The amount of the relief will be the smaller of the taxes imposed by the United Kingdom and Australia after the allowance of credit (if any) for the taxes of the third country.

In addition to covering the case where income derived from a third country by dual residents is not taxed in the country of origin, the paragraph will cover dividends received from a third country by a dual resident of the United Kingdom and Australia.

The following example illustrates the method of calculating the tax credit under this paragraph in the case of a dual resident of Australia and the United Kingdom deriving income from a third country which is not subject to tax in that country.

Example

If a dual resident of Australia and the United Kingdom derived, say, Pd1,000 income from sources in a third country which did not levy tax on that income and the income were taxed in Australia at the rate of 6s. in the Pd1 and in the United Kingdom at the rate of 9s. in the Pd1, the total amount of relief would equal the amount of the smaller Australian tax.

After the allowance of a credit by each country, the total tax payable on the income of Pd1,000 would be Pd450 and the taxpayer would be in no worse position than he would be if the income were derived from sources in the United Kingdom which in this case imposes the higher tax.

INCOME IN RESPECT OF SERVICES RENDERED TO BE TREATED AS DERIVED IN THE COUNTRY WHERE THE SERVICES ARE PERFORMED.

Paragraph (4) of the Article provides that, for the purposes of the allowance of tax credits, all classes of income in respect of services rendered are to be treated as having been derived from sources in the territory where the services are performed. This paragraph conforms with the Australian conception of the source of income in respect of services rendered. The general principle that the country of origin has the prior right to tax will, subject to Articles VIII, IX and XI, accordingly apply in respect of income of this class.

Article XIII.

This Article provides that information available to the taxation authorities of Australia and the United Kingdom will be exchanged for the purposes of carrying out the provisions of the Agreement and for the prevention of fraud and for the administration of statutory provisions against legal avoidance of tax. No information is to be exchanged which would disclose any trade secret or trade process.

The exchange of information between the taxation authorities of the two countries is essential for the effective carrying out of the Agreement.

Article XIV.

This Article provides that the Agreement may, at the request of either government, be extended to the colonies, overseas territories, protectorates or territories in respect of which the government requesting extension exercises a mandate or trusteeship. The Agreement can be so extended only with the consent of the other government.

Article XV.

This Article provides for the commencement of the Agreement in the United Kingdom and Australia but it will not come into actual operation until such time as it has received the endorsement of the Commonwealth Parliament and the House of Commons.

So far as Australia is concerned, the Agreement will commence to operate in respect of assessments for the financial year 1946-47, which in the case of companies will be the income year ended 30th June, 1946, and in the case of individuals the income year ending 30th June, 1947, or the substituted accounting periods in both cases.

As regards the United Kingdom, the Agreement will commence as regards income tax, for the year of assessment beginning on the 6th April, 1946, as regards excess profits tax and national defence contribution, for the chargeable accounting period beginning on the 1st April, 1946, and as regards sur-tax, for the year of assessment beginning on the 6th April, 1945.

N.B.-United Kingdom excess profits tax has been repealed as from the 31st December, 1946.

Article XVI.

This Article provides for the Agreement to run for a period of 10 years certain and then to continue indefinitely, subject to either Government having the right to give notice of termination.

CLAUSE 38.-APPLICATION OF AMENDMENTS.

The amendments proposed to be made by the Bill will commence to apply as indicated in this clause.