House of Representatives

Second Reading Speech

Mr. Fadden (Darling Downs-Treasurer) (4.5).-by leave-I move-

That the bill be now read a second time.

The principal amendments to be effected to the Income Tax Assessment Act by the passage of this bill may be divided into two sections, the first relating to amendments implementing the Government's proposals for additional revenue from individuals and companies, as outlined in my budget speech, and the second relating to the new methods to be employed in collecting the income tax payable by salary and wage earners, by deduction from their salaries or wages.

The most important of the amendments relating to the increased liabilities to be imposed on the taxpaying community is the reduction of the statutory exemption from Pd250 to Pd150. A statutory exemption is designed to afford freedom from income tax to those members of the community whose incomes are not sufficiently large to warrant their being called upon to make a contribution to revenue by direct taxation. The ideal of preceding governments has been to maintain the statutory exemption at as high a level as is possible, having regard to the needs of revenue.

The statutory exemption of Pd250, which has applied for many years, has had the effect, in conjunction with the liberal concessional deductions allowed, of keeping a very considerable section of the income-earning people of Australia outside the field of Commonwealth direct taxation. The allowance of a statutory exemption of Pd250 was part of a plan of preceding governments to place the burden of taxation upon the shoulders of those best able to bear it. As a consequence of this and other concessional allowances, approximately 70 per cent. of the total personal incomes, and over 80 per cent. of the families of Australia, have, for many years, been practically freed of the obligation to make any contribution to Commonwealth revenue in the form of income tax. This was a splendid ideal in normal times, and it was only after very long and serious consideration of the subject that the Government reluctantly found itself compelled to modify the concession.

In reaching its decision, the Government has sought to avoid, as far as possible, any serious encroachment upon living standards, particularly in respect of the family unit. Even though it is proposed that the statutory exemption shall be reduced from Pd250 to Pd150, a married man with two dependent children will not be called upon to pay Commonwealth income tax, unless his net income exceeds Pd300-approximately Pd6 a week-which is far in excess of the basic wage standard.

The means of financing the tremendous obligations which the war has imposed on the people of Australia have been explored in my budget speech, and, as honorable members understand, the Government proposes that Pd33,000,000 for a full year shall be raised by means of income tax from individuals.

In determining the incidence of this increased taxation, the Government naturally looked to the higher incomes, that is, to incomes over Pd1,000. It found that the full amount of additional revenue to be raised could not be obtained from those incomes. At this stage, the Government is satisfied that the higher ranges of income cannot contribute more than an additional Pd10,000,000, making a total contribution to revenue of Pd20,000,000 by taxpayers in this group. Similarly, in the range of middle incomes between Pd400 and Pd1,000, the additional Pd6,000,000 which the taxpayers of this class are being called upon to contribute will bring the taxation of middle incomes practically to its maximum, that is, a total income tax contribution of Pd8,000,000.

The Government was accordingly forced to seek a contribution to its revenue from incomes in the lower ranges, which, as I have mentioned previously, represent approximately 70 per cent. of the total personal incomes.

In order to get the share of additional revenue required from incomes of the lower group, it has proved to be necessary to extend the field of the tax by lowering the statutory exemption. This the Government has done, but I assure honorable members that only in the face of stern necessity has this course been taken, a course which the Government considers to be inescapable. This matter is quite outside party political considerations; it raises no question of thrusting unfairly a burden of tax upon any section of the community, or of discriminating against one section in favour of another. If revenue is to be obtained in amounts essential for the successful prosecution of the war, it is plainly unavoidable that some greater measure of tax shall be borne by taxpayers in the lower income group.

To facilitate the collection of the tax from salary and wage-earners and, at the same time, to ease the burden of meeting the payment of the tax in a lump sum, the Government proposes to introduce a scheme for the deduction of the tax from salaries and wages, and earnings of that character, by instalements spread throughout the year. I shall explain the operation of this scheme in a few moments.

Another important amendment is the withdrawal of the tax rebate hitherto allowed to individual shareholders in respect of dividends distributed to them by companies. Briefly stated, the rebate of tax which the law at present allows to shareholders is made at the shareholders' rate of tax on property income, or at the company rate, whichever is the less. The allowance of a tax rebate is based on the conception that the assessment of the profits of a company, and the assessment of a shareholder on dividends paid out of those taxed profits, involve double taxation; in other words, the company is merely the machine by which the shareholders combine to earn profits, and the assessment of the profits of a company is really the assessment of the income of the shareholders. Whatever merit be attached to the principle of the allowance of a tax rebate on dividends, the Government considers that the concession which might be granted in normal times should be withdrawn as part of a plan to provide the funds so necessary for war purposes.

It is appropriate to mention that the allowance of the rebate has operated in such a way as to confer unequal advantages upon shareholders in companies generally. Thus, whilst a company's profits have been taxed at a flat rate of 2s. in Pd1, a shareholder whose rate of tax was 2s. or more in Pd1 has received the full benefit in rebate of the tax paid by the company. But a shareholder receiving the same amount of dividend whose rate was less than 2s. did not enjoy the full benefit of the tax paid by the company but only a rebate based on his lower rate of tax. The discrimination as between shareholders is more clearly revealed when one considers that one class of shareholder received a rebate of 2s. in the Pd1, whilst a shareholder whose income fell below the statutory exemption received no rebate at all. The Government has given earnest consideration to views expressed in support of the retention of the rebate as well as to those advanced for its abolition, and has decided that the revenue demands of the moment justify a discontinuance of the concession. The gain in revenue which will be derived from the abolition of the rebate in the case of individuals is estimated at Pd1,700,000 for this financial year.

The allowance of the rebate is being retained in the case of dividends received by resident companies from other companies in which they hold shares, as it is considered that the holding company is merely the channel through which profits eventually flow to the individual shareholders. To levy a tax upon the dividends received by the holding company without a corresponding rebate would have the effect of throwing an inequitable burden upon investors in companies.

General consideration of the question of the allowance of the tax rebate has attracted attention to the anomalous situation that has arisen in regard to dividends paid out of Commonwealth loan interest. The effect of section 45 of the Income Tax Assessment Act is that the part of a dividend paid out of Commonwealth loan interest carries a rate of tax of 16d. in the Pd1 as compared with the rate of 2s. in the Pd1 on the balance of the taxable income of a company. Previously the tax rebate has been allowed to companies at the rate of 2s. in the Pd1 on the whole of the dividend received by the company, resulting in a loss to revenue of 8d. in the Pd1 on the part of the dividend paid out of Commonwealth loan interest. Now that section 46 of the act is to be amended the opportunity is being taken to correct this anomaly by limiting the rate of rebate in the part of the dividend paid out of Commonwealth loan interest to 1s. 4d.

The amending bill also provides for an alteration of the basis on which the further tax on the undistributed profits of public companies is to be levied. When this further tax was imposed in May last, provision was made for a deduction of an amount equal to 25 per cent. of the company's profit after certain deductions had been made therefrom. This allowance was granted because the reservation of profits was considered necessary to meet expansion and contingencies and to cover expenditure not deductible for taxation purposes. In its search for additional sources of revenue the Government has given further consideration to the question of this allowance and has decided that it should be withdrawn. The view taken is that the allowance of 25 per cent. of adjusted profits is more than adequate for the purpose for which it was designed and the withdrawal of the deduction still leaves a substantial pool of reserved profits after payment of the undistributed profits tax at the comparatively low rate of 2s. in the Pd1. The undistributed profits tax is levied after the allowance of a deduction for dividends paid within six months after the close of the year of income.

The Government has reconsidered the position of non-resident companies, particularly those in the United Kingdom which, owing to the present disturbed conditions, find themselves unable within the statutory period of six months to comply with the formalities necessary to the distribution of company profits. The Government has, accordingly, decided to extend the period to nine months in the case of non-resident companies.

A further proposed amendment relates to the special deduction provided by section 122 of the act for capital expended by mining companies in plant and development of the mining property. The object of that provision is to permit of the recoupment of capital expenditure out of profits during the estimated life of the mine. The practical application of the provision, however, has disclosed that it is defective in that a full recoupment is not provided for in the section. The amendment is being proposed to cure the defect.

The act is also being amended to place a time limitation upon the operation of section 159 and the corresponding sections of the law which provide for the allowance of a rebate in the case of income doubly or trebly taxed in the United Kingdom, the Commonwealth and the States. Those provisions apply to assessments back to the financial year 1921-22 and, at the present time, an application for a rebate may extend retrospectively for nearly 20 years. It is proposed that an application for a rebate in respect of any assessment must be made within six years from the date when the tax on that assessment became due and payable. The period of six years is considered to give a reasonable opportunity for the lodgment of the application and the submission of the particulars required for the calculation of the rebate. It is most unreasonable that the Taxation Department should be required to attempt to calculate rebates after the expiration of more than six years from the time the assessments were made. In reaching this decision the Government has been influenced by provisions in the law of the United Kingdom which places a similar limit on application for relief granted in that country in respect of dominion income taxes.

I shall now proceed to explain the scheme which the Government proposes to introduce for the collection of tax payable on salaries and wages and earnings of that character. The comprehensive legislative machinery necessary to give effect to the scheme will be found in clause 13 of the bill which consists of 23 proposed new sections. With the lowering of the statutory exemption a considerable number of taxpayers from the salary and wage-earning class will be brought into the taxable field; and to ease the burden which would be imposed on them if they were obliged to meet the payment of their assessments in a lump sum, the Government has decided to introduce a scheme whereby the tax will be paid by instalments throughout the greater part of the year.

The scheme has already been adopted for State taxation purposes in Victoria, South Australia, Western Australia and Tasmania. Stated generally, the scheme for which the bill makes provision is an arrangement whereby the payment of income tax is effected by instalment deductions from the salary or wages of the employee, either by the purchase of tax-instalment stamps by the employer, or by means of cash-instalment deductions made under approved group schemes.

The deductions to be made will commence on the 1st January, 1941, and will be on account of tax payable in respect of assessments for the current financial year based on income derived during the year ended the 30th June, 1940. The deductions will be fixed amounts of instalments based upon salary or wages being received at the time the instalments are deducted. The basic deduction which it is intended shall apply is that relating to a person without dependants, and in the case of a married man with a dependent wife and children this basic rate is reduced by 4s. a week in respect of each dependant. As the deductions are being made as from the 1st January next, it is necessary that the weekly instalment be based on an amount that will secure the payment of the tax in full before the 30th June next. Thus the deductions for this year will be spread over a period of only 25 weeks. For subsequent years it is proposed that the deductions commence on the 1st August and continue over a period of 40 weeks. The statement "A" which has been circulated for the information of honorable members shows the weekly deductions which will be made on varying incomes ranging from Pd4 a week to Pd19 a week in the case of a taxpayer without dependants and taxpayers with one, two, three and four dependants.

It will be seen in the case of a single man earning Pd6 a week that the weekly deduction is 12s. and in the case of a married man with a wife and one child 4s. A single man earning Pd10 a week will have 30s. a week deducted, whilst the married man with dependent wife and child earning the same salary or wages will have 22s. a week deducted from his salary or wages, and so on. The maximum rate of deduction which is to be applied is 5s. in the pound a week.

To authorize the employer to make weekly deductions lower than the basic rate prescribed in the case of a person without dependants, the employee will be required to furnish a declaration in duplicate to his employer setting out therein particulars regarding his dependants. On the information shown in this declaration the employer will reduce the basic deduction by 4s. a week for each dependant. The employer will retain one copy of the declaration and forward the duplicate to the Taxation Department.

Tax instalment stamps will be made available for sale at all post offices and other approved places as may be found necessary. Employers will be required to make the prescribed deductions from each payment of wages, and to hand to the employee concerned a tax-instalment stamp or stamps equal in denomination to the deductions made. The employee will be required to affix the stamp to a page in his stamp book and to cancel it by writing thereon his name or initials and the date. Approved stamp books published by a number of printing firms will be on sale at stationers' shops and other distributing points at a nominal charge. Books for instalment stamps cost 1 1/2d. or 2d. each and last for at least a year. The employee will be responsible for the safe custody of his stamps until such time as he presents them at the Taxation Office in payment of his tax.

When the taxpayer receives his notice of assessment he will forward the book of stamps and the notice of assessment to the Taxation Department where the face value of the stamps will be applied in payment of his tax. If the value of the stamps is insufficient to pay the whole of the tax, any balance must be paid by the employee in cash, and where the value of the stamps exceeds the amount of the tax payable the excess will be refunded in cash immediately to the employee.

Employers of large numbers of employees who do not desire to use tax-instalment stamps may, with the concurrence of their employees, obtain the Commissioner's approval for the formation of a group. Under this arrangement, the employer will make prescribed deductions on pay days and will pay the aggregate amounts deducted to the Taxation Department at pre-arranged times. When the employee receives his notice of assessment he may either hand it to his employer who will vary the amount of the deduction to meet the tax by the due date, or the employee desirous of maintaining the confidential character of his notice of assessment may obtain from the employer a certificate of the deductions made. The certificate will then be presented by the employee to the Taxation Department and the necessary credit will be given to him for the amount of the deduction paid through the group. Adjustments for under-payments and over-payments will be made as in the case where tax-instalment stamps are used.

Provision has also been made for the Commissioner to require employers to make deductions under group schemes in lieu of delivering tax instalment stamps to employees if, owing to special circumstances connected with the character of their employment, such an arrangement is considered to be desirable.

The Government considers that the benefits of the scheme should be afforded to taxpayers other than employees, and the bill contains a provision enabling such persons, if they so desire, to purchase tax instalment stamps from the authorized source. As regards these persons, however, the purchase of the stamps will not be compulsory, but the provision is made to assist those taxpayers who desire to set aside a certain amount of tax, from time to time, in anticipation of the receipt of a notice of assessment.

Taxpayers may at any time make application to the Taxation Department for a certificate exempting them from suffering further instalment deductions from their wages. These certificates will be issued in those cases where-

(a)

the assessed tax has been fully paid;

(b)

where the taxpayers' annual return shows that the income received for the year is less than the minimum amount taxable.

As soon as possible after the lodgment of annual returns, those of the employee class will be examined by the Taxation Department, and in the non-taxable cases, certificates of exemption will be issued to the individuals concerned, informing them they have no tax to pay and authorizing their employers to refrain from making the prescribed deductions. This certificate will also entitle the taxpayers to a cash refund from the department of the face value of any stamps he may have in his possession.

The advantages of the scheme are summarized as follows:-

(a)

The deduction of instalments in a financial year will normally commence on the 1st August and continue for a period of 40 weeks or such shorter time until the taxpayer has accumulated sufficient credit to meet his tax liability. The load of taxation is, therefore, spread over the maximum period of time. For the current year, however, deductions will commence on the 1st January and continue for a period of 25 weeks.

(b)

There will be an earlier and regular flow of revenue from income tax instead of the receipt of large payments towards the end of the financial year.

(c)

It is expected it will lead to the discovery of a certain number of defaulters. Some persons liable to lodge annual returns fail to do so, but under the proposed scheme the employers of these persons will be required to make the prescribed deductions and issue tax instalment stamps. Consequently the income tax revenue will receive amounts to which it is entitled whether the taxpayer makes his returns or fails to do so.

The system of payment of tax by tax instalment stamps and group schemes, which has been in operation for State taxation purposes in South Australia and Victoria for several years, has been a marked success. After investigation of the results achieved in those States, Western Australia and Tasmania introduced similar schemes as from the 1st July, 1940. The fact that the scheme is already in operation in four States will enable the Commonwealth to super-impose the scheme for federal purposes with a minimum of inconvenience to employers, employees and the department concerned. In New South Wales and Queensland the federal provisions will operate independently of the State systems although administered by the one amalgamated Taxation Department.

To facilitate the operation of the scheme, it is proposed to amend section 204 of the act to provide that income tax shall be due and payable on a date not less than 30 days after the service of the notice of assessment in lieu of the specific period of 60 days at present allowed.

The operation of the scheme in those States where a similar scheme is already functioning for State purposes makes it very desirable that the Commonwealth and State tax should be made due and payable on the same day. The proposed amendment will enable this course to be followed.

I wish, however, to make it clear that taxpayers outside these particular States as well as all taxpayers who do not come within the provisions of the scheme will, as heretofore, continue to be allowed 60 days for payment of their assessments. The additional tax payable by private companies and the further tax on the undistributed income of public companies will, however, be payable 30 days after the receipt of the assessment.

There will be no disturbance of the existing methods of administration by the adoption of the proposed scheme. It will be necessary, however, to provide for the Governor-General in Council to arrange with the Governors in Council of the States for agreements to be entered into for the carrying out of the necessary functions arising from the new provisions. The preparation of these agreements will follow the passing of the necessary legislation.

At present in the States of Victoria, South Australia, Western Australia and Tasmania, State tax instalment stamps are in use. The agreements with those States will provide for the withdrawal of the State stamps on the 31st December, 1940, and commencing on the 1st January, 1941, the new stamp will come into circulation and will be used as a joint stamp for Commonwealth and State purposes. The stamp will be accepted by the Commonwealth and State Governments in the four States mentioned as payment, in due proportions, of the tax assessed for Commonwealth and State purposes respectively. In the States of New South Wales and Queensland, the stamp will be used for Commonwealth purposes only during the period in which those two State Governments retain their existing systems of State taxation.

The principle followed in these two States is that of tax assessment and tax collection at the source in respect of the current year's income. The tax on income from employment is levied on weekly earnings and irregular wage-earners pay tax at the same rate as those in regular employment. Tax contributions are, therefore, not equal. There is no complete recognition of the varying domestic responsibilities of the taxpayers; and the differentiation is made in the case of taxpayers in receipt of business or property income where the assessment is based upon the income of the immediately preceding financial year.

For the reasons mentioned, the Government has decided to adopt the scheme in operation in the four States other than New South Wales and Queensland. The scheme adopted also has the recommendation of the conference of expert taxation officers, held in Sydney in January this year.

Both the 1921 and the 1934 Royal Commissions on Taxation supported the principle that in any system of payment of income tax by instalments collected at the source, an adjustment of over and under payments in relation to the total income of the year should be made.

The comment of the 1921 Royal Commission on Taxation reads as follows:- e

We have no hesitation in saying that the proposal to tax wages at the source cannot fairly be considered except in conjunction with the system of adjustments which will have the effect of finally imposing tax only to the extent justified by the total taxable income for the year.

The remarks of the 1934 Royal Commission on Taxation are-

Simplicity is not the only consideration and we are not prepared to recommend any method of collecting tax on wages at the source that does not provide for any eventual adjustment of over or under payments.

Trafficking in tax instalment stamps is prohibited and is made an offence under the act and heavy penalties are provided in cases where a person is proved guilty of forging or uttering counterfeit stamps.

I commend the bill to honorable members.

Debate (on motion by Mr. Scullin) adjourned.