House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

Notes on Clauses

Income Tax Assessment Amendment Bill (No. 5) 1983

Clause 1: Short title, etc

By sub-clause (1) of this clause the amending Act is to be cited as the Income Tax Assessment Amendment Act (No.5) 1983.

Sub-clause (2) facilitates references to the Income Tax Assessment Act 1936 which, in the Bill, is referred to as the "Principal Act".

Clause 2: Commencement

By this clause the amending Act is to come into operation on the day on which it receives the Royal Assent. But for this clause the amending Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Exemption of certain pensions

This clause proposes an amendment to section 23AD of the Principal Act which sets out the circumstances in which pensions, benefits and allowances paid under social security and repatriation legislation are subject to, or exempt from, tax. The broad scheme of section 23AD is that sub-section (3) exempts from tax all pensions, allowances or benefits paid under the relevant legislation other than those included within the term "excepted payment", which is defined in sub-section (1).

Clause 3 will amend the definition of "excepted payment" to exempt from tax the first 2 weeks' payments of special benefit under Part VII of the Social Security Act to victims of certain major disasters. Under the present definition of "excepted payment" a payment of a benefit or allowance under Part VII of the Social Security Act is, by paragraph (c) of the definition, taxable unless it is the subject of the exemptions in paragraphs (d) and (f) for additional benefits for children and supplementary allowances to assist with rent. Special benefit, which is paid under Division 6 of Part VII of that Act, is taxable.

By sub-clause (1), it is proposed to omit paragraph (c) of the definition and substitute a new paragraph (c) which will exclude from its scope payments of special benefit that satisfy the tests set down in proposed new sub-paragraphs (c)(i) and (ii). The tests for exclusion from assessability are that the payments must be made -

(i)

in relation to an occurrence that the Director-General of Social Security considers to be a major disaster that has directly affected a substantial number of people, and

(ii)

in respect of the first 2 weeks of eligibility of the person for payment of that benefit.

Sub-clause (2) applies so that the amendments made by sub-clause (1) will operate in relation to payments of special benefit made on or after 17 February 1983.

Clause 4: Exemption of certain film income

Clause 4 proposes amendments to section 23H of the Principal Act to generally reduce the level of the income tax exemption available to an investor in respect of his or her net earnings from a qualifying Australian film. At present, those net earnings are exempt from tax up to a maximum of 50% of the investor's eligible capital expenditure on the film, which expenditure currently attracts an income tax deduction of 150% of that expenditure.

The reduction in the exemption level to 33% of eligible expenditure is associated with the proposed general reduction in the deduction level - from 150% to 133% - where the expenditure is incurred under a contract entered into after 23 August 1983 (see notes on clause 23).

The broad effect of section 23H as proposed to be amended will be that, where eligible expenditure on a film attracts a deduction of 150%, the corresponding exemption in respect of the investor's net earnings from the film will be up to 50% of the expenditure and, where the deduction level is 133%, the maximum exemption level will be 33%.

Paragraph (a) of sub-clause 4(1) will omit the existing sub-section 23H(4) and substitute new sub-sections 23H(4) and (4A).

New sub-section (4) will redefine the term "unrecouped capital expenditure", which is used to delimit a taxpayer's remaining exemption entitlement after taking into account any exemption conferred in a preceding year of income in relation to income derived from a particular film. The term is used in sub-sections 23H(1) and (2), which operate to confer the income tax exemption in respect of the taxpayer's net earnings from the film and to ensure that the exemption does not exceed unrecouped capital expenditure.

In terms of new sub-section 23H(4), a taxpayer's unrecouped capital expenditure at the end of a year of income would be the amount left after deducting any previously recouped expenditure from 50% of expenditure in respect of which a deduction at the rate of 150% has been allowed, or from 33% of expenditure in respect of which a 133% deduction has been allowed. In a case where a taxpayer is entitled to deductions at each rate in respect of different amounts invested in the same film, the unrecouped capital expenditure at the end of a year of income would be the sum of each of those calculations.

New sub-section 23H(4A) inserted by paragraph (a) of clause 4 defines terms used in new sub-section (4) to describe film expenditure in respect of which a deduction has been allowed ("deductible moneys") and such expenditure which was deductible at the rate of 133% ("deductible 133% moneys") or 150% ("deductible 150% moneys"). It also defines "previously recouped amount", used in sub-section (4), to mean total net earnings from a film that have been exempted in previous years.

Paragraph (b) of sub-clause 4(1) is a drafting measure that will insert in existing sub-section 23H(5) of the Principal Act appropriate references to new sub-sections (4) and (4A), while paragraph (c) will amend sub-section 23H(5) to make it clear that amounts of capital expenditure deemed by that sub-section to have been expended in an earlier year of income may be either deductible 133% moneys or deductible 150% moneys.

Sub-clause (2), which will not amend the Principal Act, specifies the year of income in which the amendments proposed by sub-clause (1) will first apply. Generally, they will first apply in the year of income in which 24 August 1983 occurred - the effective date of reduction in the film exemption and deduction levels. The amendments may, however, apply in the preceding year where sub-section 23H(5), as proposed to be amended, operates to bring to account for exemption purposes in that preceding year later expenditure that has been allowed as a deduction at the rate of 133%. Sub-section 23H(5) as it now stands will operate in the preceding year in respect of expenditure that has been allowed as a deduction at the 150% rate.

Clause 5: Assessable income to include value of certain benefits received from or in connection with section 23F superannuation funds

Introductory note

This clause amends the Principal Act to insert a new section - section 26AFA - which will include in the assessable income of a taxpayer the value of certain benefits received or obtained from a superannuation fund, the income of which has at any time been exempt from income tax under section 23F of the Principal Act. The new section operates where benefits were received or obtained in circumstances where the taxpayer had no right under the fund rules to receive the benefits or where the benefits paid were excessive for the purposes of paragraph 23F (2)(h).

By way of background, section 23F of the Principal Act provides for exemption from tax of the income derived by the trustee of a superannuation fund established for the benefit of employees and which meets the requirements of that section. A concomitant of a fund meeting the requirements of that section is that a taxpayer's own contributions to the fund are eligible for rebate for the purposes of the general concessional rebate provisions of the law. Moreover, superannuation contributions made to such funds by employers - it is a requirement of section 23F that an employer of each employee/member must contribute to the fund during each year of income - are allowable deductions for income tax purposes to those employers.

Practices have developed where some employers, often small business enterprises operated by means of a private company, establish superannuation funds which outwardly conform to the requirements of section 23F. Maximum contributions are made by the employer ostensibly to provide superannuation benefits for all employees, including proprietor-directors, but collateral arrangements are made to ensure that the arm's length employees do not receive any of those benefits. This is achieved by terminating the services of such employees before any entitlement to benefits under the rules of the fund arises. These "forfeited benefits" then accumulate for the benefit of the remaining members of the fund.

After taking advantage of the taxation concessions for contributions and the tax-free treatment for investment income of the fund, the proprietors of the business terminate the services of the other members of the fund and wind-up the fund, generally with themselves as the sole remaining recipients of the assets of the fund. At that time, because of the accumulation of forfeited benefits, it is usually the case that the benefits received by the proprietors are in excess of those permitted, under the guidelines issued by the Commissioner of Taxation, as reasonable benefits by reference to the criteria specified in sub-section 23F(2) of the Principal Act.

Proposed section 26AFA follows broadly the lines of existing section 26AF of the Principal Act which applies to payments made after 19 August 1980 out of superannuation funds established in accordance with paragraph 23(ja) or section 79 of the Principal Act (basically non-employee funds) and made otherwise than in accordance with the terms and conditions approved by the Commissioner of Taxation for the operation of those funds.

The purpose of this proposed new section is to include in full in the assessable income of a taxpayer, instead of at 5%, an amount, or the value of a benefit, received or obtained from a section 23F fund (as defined) in circumstances where the benefit is excessive or is a benefit which the taxpayer has no right under fund rules to receive. The section will act to counter practices described above which abuse the exemption provided by section 23F for the income of the fund and the provisions of the income tax law which allow deductions to employers for their contributions to superannuation funds.

Proposed section 26AFA is to have retrospective effect in relation to benefits received in the abovementioned circumstances on or after 1 July 1977.

Detailed notes on section 26AFA follow.

Sub-section (1) sets out the conditions for the application of the proposed new section. Paragraph (a) provides for the situation where a benefit is, or has been, received or obtained on or after 1 July 1977 directly from a section 23F fund and also where a benefit is received or obtained which is attributable to assets of a section 23F fund, for example, where those assets have earlier been transferred to another fund.

Paragraph (b) contains the second requirement for the application of the new section, namely that the benefit is either one that the taxpayer has no right to receive under fund rules or is excessive. The first mentioned circumstance can occur where there is close identity or association between the trustee of the fund and the remaining "proprietor" members.

The second circumstance in which the proposed section is to operate requires that the benefit received is excessive having regard to criteria set out in paragraph 23F(2)(h) of the Principal Act. Those criteria take into account the level of the employee's remuneration, the period of service with the employer, the benefits received or receivable under all section 23F funds and other matters considered relevant by the Commissioner.

The third requirement of sub-section (1) is contained in paragraph (c), namely that the Commissioner must be satisfied that there is a causal connection between the benefit received or obtained and either membership of the fund or association with the employer who had made tax deductible contributions. It will be a sufficient connection if the payment or benefit was received or obtained because the taxpayer was a member of the fund (sub-paragraph (c) (i)), because the taxpayer was a dependant (a defined expression) of a member of the fund (sub-paragraph (c)(ii)), because the taxpayer was associated with a member of the fund (sub-paragraph (c)(iii)), e.g., a related company or trust, or because the taxpayer was associated with an employer who had made deductible contributions to the fund (sub-paragraph (c)(iv)).

If all the conditions specified in paragraphs (a), (b) and (c) are satisfied, then, subject to sub-section (2), the taxpayer's assessable income of the year of income will include the amount or value of the benefit received or obtained.

Sub-section (2) is an ameliorating provision which provides for the situation where, although the conditions of paragraphs (a), (b) and (c) in sub-section (1) are satisfied and the case is one where the benefit is excessive (paragraph (a)), the Commissioner is satisfied that it would be unreasonable for the whole or part of the amount of the benefit to be included in full in assessable income. Paragraph (b) requires the Commissioner, in deciding whether or not to apply the ameliorating power, to have regard to the nature of the fund (sub-paragraph (i)), the circumstances by reason of which the benefit is excessive (sub-paragraph (ii)) and such other matters relating to the receiving or obtaining of the benefit as the Commissioner considers relevant (sub-paragraph (iii)).

An example of the operation of sub-section (2) would be where, because of the extended meaning of "section 23F fund" (refer to notes on sub-section (4)), a fund once exempt from tax under section 23F is assessable on all of its income under section 121DA of the Principal Act (at a penalty rate of tax, presently 60%). Such funds are commonly used in bona fide situations where the superannuation benefits provided for employees are excessive according to the guidelines issued by the Commissioner and the trustees of the fund decide to no longer seek the exemption afforded by section 23F. In such cases, where there are no tax avoidance connotations and where there has been no interference with the rights to benefits receivable by arm's length employees, it would generally be unreasonable to add an additional penalty to the rate of tax already charged on the fund's income. The Commissioner is given the opportunity under sub-section (2) not to apply proposed section 26AFA to the whole or, if more appropriate, a part of the benefit received.

Sub-section (3) contains a further safeguard against the abuse of section 23F funds and meets the situation where a taxpayer might seek to avoid the operation of sub-section (1) by assigning (or otherwise disposing of) for value his or her right to receive a benefit from a section 23F fund, thus gaining an effective benefit, not direct from the superannuation fund but from transferring rights to a person who pays for that transfer. To deal with this situation, sub-section (3) proposes the inclusion in a taxpayer's assessable income of the amount or value of any consideration received after 1 July 1977 in respect of the transfer of such entitlements, whether or not the rights transferred are vested or contingent on a subsequent event (such as the transferor attaining a specified age).

Sub-section (4) contains definitions of some of the terms used in proposed section 26AFA -

"dependant" specifically includes the spouse and any child of a taxpayer;

"excessive benefit" is to mean a benefit of any kind that is excessive having regard to the criteria contained in paragraph 23F(2)(h), as mentioned in the notes on sub-section (2); and

"section 23F fund" means a fund to which that section of the Principal Act has applied in relation to any year of income. Because proposed sub-section (1) also refers to benefits attributable to assets of a section 23F fund, and the definition of section 23F fund includes a fund which may no longer be exempt from tax under that section, it will not be possible to avoid the impact of proposed section 26AFA by diverting assets to another fund or by converting a fund into one which by design does not comply with section 23F during the year of income in which the benefit is received or obtained.

Sub-clause (2) of the Bill provides that the amendment which includes proposed section 26AFA in the Principal Act will have retrospective application in relation to assessments of all years of income from and including the year of income in which 1 July 1977 occurs. This would normally be the 1977-78 year of income but may be an earlier year of income if a substituted accounting period applies.

Clause 6: Bonuses and other amounts received in respect of certain short-term life assurance policies

By this clause a new section - section 26AH - will be inserted into the Principal Act to provide that, subject to specified exemptions, bonuses and certain other amounts in the nature of bonuses received in respect of policies of life assurance will be assessable income of the recipient in the income year in which they are received.

New section 26AH will operate in respect of policies of life insurance issued after 27 August 1982 and, depending upon the date of commencement of the policy, will apply to amounts received under the policy during either the first 4 years of the policy or the first 10 years of the policy.

In respect of policies issued after the date of introduction of the Bill a 10 year taxing period will apply, on the basis that amounts that are received in the first 8 years of the policy will be fully assessable while amounts received in the ninth and tenth year of the policy will be assessable as to two-thirds and one-third respectively. In respect of policies issued after 27 August 1982 and on or before the date of introduction, a 4 year period will apply on the basis that amounts received in the first 2 years of the policy will be fully assessable while amounts received in the third and fourth years will be assessable as to two-thirds and one-third respectively.

The new section provides a number of exclusions from its operation. Amounts received because of death, accident, illness or disability, in connection with superannuation policies or in circumstances arising out of serious financial difficulties will not be subject to the new measures.

A range of anti-avoidance measures is also a feature of new section 26AH. These measures are designed to ensure that the new taxing provision operates as is intended and cannot be circumvented by devices such as low or no interest loans, assignment of the policy, etc.

A more detailed explanation of the provisions contained in new section 26AH follows.

Sub-section (1) of new section 26AH contains definitions of a number of terms used in the proposed section -

"agreement" is defined in a now common form to mean any agreement, arrangement or understanding whether formal or informal, whether express or implied and whether or not enforceable by legal proceedings, irrespective of whether it is intended to be so enforceable;

"assurance year" is defined in relation to an eligible policy (a term later explained) to mean a 12 month period commencing on the date of commencement of risk of the policy (a term also later explained) and each subsequent period of 12 months commencing on the anniversary of that date;

"date of commencement of risk" will mean the date of the commencement of the period in respect of which the first or, in the case of a single premium policy, the only premium under a policy is paid or, if the first or only premium is not related to a particular period, the date of the payment of that premium;

"eligible period" means the 10 year period commencing on the date of commencement of risk of a policy. By reason of proposed sub-section (12), where a policy commenced after 27 August 1982 and on or before the date of introduction, the eligible period is instead to be a 4 year period;

"eligible policy" is defined to mean a policy of life assurance that has a date of commencement of risk after 27 August 1982, that date being the date when the new measures were first foreshadowed; and

"eligible reckoning date" is defined for the purposes of sub-section (11) to mean the date of commencement of an assurance year in which a greater than 25% premium increase has taken place.

Sub-section (2) applies the new measures to amounts received after 27 August 1982 under a life assurance policy with a date of commencement of risk after that date.

Sub-sections (3) and (4) together operate to ensure that, except where a bonus or similar amount is applied to increase the value of a life assurance policy, e.g., where a bonus is credited to the policy or is applied against arrears of premiums, any application or re-investment of a bonus, etc., to the benefit of a taxpayer will be taken to be a receipt by the taxpayer of the bonus. Thus, it will not be possible to circumvent the new measures by having a bonus paid to, or invested with, a third person.

Sub-section (5) is the operative provision of the proposed section. Under it the extent to which bonuses, or other amounts which for the purposes of the section are to be treated as bonuses, are to be included in the assessable income of a taxpayer will be ascertained.

Where a taxpayer receives an amount (referred to as the "relevant amount" for the purposes of the sub-section) as or by way of a bonus, or an amount deemed to be a bonus by sub-section (7), on a policy of life assurance the date of commencement of risk of which is after 27 August 1982, that amount is received during the first 10 years of the policy and is an amount not otherwise subject to tax, the bonus or the deemed bonus will be included in the taxpayer's assessable income in the year the amount is received. The operation of sub-section (5) is, however, qualified by sub-section (12) in relation to an eligible policy date of commencement of risk of which is on or before the date of introduction of the Bill. As explained later, eligible policies issued after 27 August 1982 and on or before the date of introduction will be subject to a taxable period of 4 years instead of 10 years.

In respect of policies issued after the date of introduction, if the relevant amount is received during the first 8 years of the policy the whole of that amount is to be included in the assessable income of the taxpayer (paragraph (a)). If the relevant amount is received in the ninth year, paragraph (b) includes an amount equal to two-thirds of the relevant amount in assessable income and by paragraph (c) an amount equal to one-third of the relevant amount is to be included in assessable income if that amount is received in the tenth year after the commencement of the policy.

Sub-section (6), which qualifies sub-section (5) specifies a number of circumstances where amounts received by a taxpayer under an eligible policy are not to be included in assessable income. Sub-paragraph (a)(i) excludes from the ambit of sub-section (5) amounts received on the death of an insured person, while sub-paragraph (a)(ii) excludes amounts received as a result of an accident, illness or other disability suffered by the person insured.

Paragraph (b) of sub-section (6) excludes life assurance policies issued for superannuation purposes from the operation of sub-section (5).

Paragraph (c) of sub-section (6) is to the effect that, where an amount is received under an eligible policy by a taxpayer due to the forfeiture, surrender or other termination of the policy in circumstances where the taxpayer is in serious financial difficulties, that amount will not be included as assessable income. However, as an anti-tax avoidance measure, sub-section (5) will continue to apply in these circumstances if the policy was effected with a view to it being forfeited, surrendered or otherwise terminated, or maturing within 10 years from the date of commencement.

Sub-section (7) is a further anti-tax avoidance provision which will authorise the Commissioner of Taxation to treat certain amounts not strictly bonuses received by the taxpayer under an eligible policy as amounts to which sub-section (5) applies. Paragraph (a) applies where a taxpayer receives an amount (the "relevant amount") in a form other than that traditionally recognised as being a bonus under a life assurance policy. By paragraph (b) the Commissioner has a power to treat the relevant amount as a bonus where he is of the opinion that the amount represents the whole or part of a bonus that has accrued or been declared on the policy (sub-paragraph (i)), or a bonus that can reasonably be expected to accrue in respect of the policy (sub-paragraph (ii)).

Where the Commissioner forms the requisite opinion - an opinion which is open to review by an independent Taxation Board of Review - the amount received or the part of the amount received is deemed to have been received by the taxpayer under the policy as or by way of a bonus. Sub-section (5) therefore applies to include the amount in assessable income, other conditions in that sub-section being met.

Sub-section (8) is designed to ensure that where an amount that has been treated as a bonus under sub-section (7) is subsequently received by the taxpayer as an actual bonus it is not to be again included in the assessable income of the taxpayer. The sub-section therefore ensures that there will be no double taxing of amounts received by a taxpayer. Under sub-section (8), sub-section (7) continues to operate in respect of the amount that was deemed to be a bonus, while the actual bonus is not subject to tax.

Sub-section (9) deals with amounts received by a taxpayer as an interest-free, or low interest, loan in connection with the policy either from the assurer or from a third party associated with the assurer. Such low or no interest loans are to be treated as amounts received by way of bonus under an eligible policy for the purposes of sub-section (7) and thus assessable under sub-section (5). The distinguishing feature of amounts to which sub-section (9) applies is that the terms under which they are received must be at no interest or at a rate of interest lower than that which could be expected where the parties are dealing at arm's length. As explained in the notes on sub-section (7), if the Commissioner forms an opinion under paragraph (7)(b) that amounts of the kind covered by sub-section (9) represent the whole or part of a bonus, that amount will be deemed to have been received by the taxpayer as a bonus on the policy and, in accordance with sub-section (5), be included in a taxpayer's assessable income.

Sub-section (10) covers the situation where an eligible policy or rights under it are sold or assigned during the eligible period of the policy, i.e., during the first 10 years or 4 years depending on the commencement date of the policy. Where a policy is sold or assigned during this period the amount of the consideration received by the taxpayer is deemed by paragraph (a) to be an amount to which paragraph (7)(a) applies and the Commissioner may treat the consideration or part of the consideration received as a bonus. Paragraph (b) of sub-section (10) alters the operation of paragraphs (7)(b) and (8)(a) for this purpose only so that "represents" is replaced in those paragraphs by "is attributable to". As a result of this modified operation of those paragraphs, only that amount of consideration received which is attributable to a bonus on sale or assignment of a policy in respect of the policy is to be capable of inclusion in the assessable income of the vendor or assignor of the policy.

Sub-section (11) is a safeguarding provision against the possibility that the period for which an eligible policy is to be held, in order that bonuses will be tax-free, might be satisfied by the payment of nominal premiums in the earlier years, followed by substantially larger premiums in later years. The broad effect of sub-section (11) is to deem the eligible period in respect of a policy of life assurance to recommence at the start of any assurance year in which premiums increase by more than 25% over premiums of the immediately preceding assurance year.

Where such an increase of more than 25% occurs, the date of the commencement of the year in which premiums so increase is the date (the "eligible reckoning date" - see notes on sub-section (1)) from which the taxable period for the policy is to be re-calculated. The sub-section is designed to cover the situation where there may be 2 or more increases in premiums by more than 25%. Thus, it will be possible for there to be more than one eligible reckoning date in respect of one policy. The taxable period for a policy in effect re-commences on each eligible reckoning date.

Sub-section (12), which has been referred to earlier in these notes, is a transitional provision that applies a different taxable period to policies taken out after 27 August 1982 and on or before the date of introduction of the Bill. Policies taken out during this period will carry a period of 4 years during which bonuses and like amounts will be subject to proposed section 26AH.

Adjustments to the operation of section 26AH to give effect to this arrangement are made by sub-section (12). Paragraph (a) alters the reference to "10 years" in the definition of "eligible period" in sub-section (1) to " 4 years". Paragraph (b) alters the references to "8 years", "ninth year" and "tenth year" in sub-section (5) to "2 years", "third year" and "fourth year" respectively, while paragraph (c) substitutes for "10 years" in paragraph (6)(c) "4 years". Each of those provisions then operates as explained in these notes on the basis of the substituted references.

This means that a taxpayer who receives an amount as or by way of a bonus or an amount deemed to be a bonus in respect of an eligible policy whose date of commencement of risk is after 27 August 1982 and on or before the date of introduction will have the whole of the amount included in assessable income if it is received within 2 years of commencement of the policy or, if the amount is received in the third or fourth year, two-thirds or one-third respectively of the amount will be included in assessable income.

Clause 7: Divisible deductions

This clause proposes technical amendments to section 50G, one of the "current year loss" provisions of Subdivision B of Division 2A of Part III of the Principal Act. The amendments are consequential upon the new section 57AM proposed by clause 10 to authorise depreciation, in equal instalments over 5 years, in respect of the cost of an eligible Australian trading ship.

In broad terms, the current year loss provisions divide an income year into "relevant periods" that are separated by a "disqualifying event", e.g., on the occurrence of a 50% or greater change in shareholders' dividend, capital or voting rights. A net loss incurred in one relevant period is not to be offset against net income derived during another relevant period of the same year unless the company satisfies a "continuing ownership" test or the alternative "same business" test.

For the purposes of these provisions, section 50G describes a category of deductions as "divisible deductions" and directs how such deductions are to be taken into account under the provisions. Very broadly, divisible deductions are those allowable deductions of a year of income which are apportioned or spread in an appropriate manner over the relevant periods of the company in relation to the year of income for the purpose of determining the notional taxable income or notional loss of the company in relation to each of its relevant periods.

The amendments proposed by clause 7 will ensure that, where necessary, a depreciation deduction authorised by new section 57AM in respect of an eligible ship will be treated as a divisible deduction and apportioned between relevant periods on a pro-rata basis in a year of income in which the ship is used or installed ready for use and held in reserve.

Clause 8: Deductions not allowable in respect of property used under certain leveraged arrangements

This clause will insert a new section, section 51AD, into the Principal Act to ensure that taxation deductions attributable to the ownership of property will not be allowable where the purchase or construction of the property has been predominantly financed by a non-recourse debt, i.e., under a leveraged leasing or similar arrangement, and the property is used overseas by non-residents or in tax-exempt activities, or where the lessee or real end-user of the property previously owned it.

In that context, a non-recourse debt is one in respect of which, broadly, the creditor's rights as against the taxpayer in the event of default would be effectively limited to the property itself or to income or goods or services generated by the property. A debt is also to be treated as non-recourse if the creditor would not have the usual rights of access to the general assets of the taxpayer in an action for recovery of the debt.

Under section 51AD, deductions are to be denied to the owner of property on the basis that it is either leased to another person, or another person has effective control of the end use of the property, and either -

•

the lessee or end-user is a non-resident and the property is used wholly or principally outside Australia;

•

the lessee or end-user uses the property otherwise than solely for the purpose of producing assessable income; or

•

the lessee or end-user was the owner of the property before it was acquired by the taxpayer under a sale and lease-back arrangement.

Deductions will also be denied where one or more of the lessees of property is a body whose income is exempt from tax and which has effective control of the use of the property in conducting its exempt business operations or transactions.

To give effect to these intentions, property to which section 51AD applies for any period will, during that period, be treated as property that the owner has not used or held for use for the purpose of producing assessable income.

That general rule will be modified for any period during which a lessee or end-user of the property uses it partly for the purpose of producing assessable income. In such a case, the taxpayer will not lose the whole entitlement to deductions, but will be entitled to proportionate deductions determined by reference to the extent to which the plant is used by the lessee or end-user to derive assessable income.

Another important modification, in recognition of common practice in commercial leasing arrangements, is that the general rule will not apply to deny deductions in relation to property that has been the subject of a sale and lease-back arrangement if the property had been first put into use by the lessee within 6 months preceding its acquisition by the taxpayer and, at that time, there was an arrangement that it would be sold and leased back.

Broadly related amendments to the investment allowance provisions of the Principal Act are proposed by clause 17 of the Bill.

Against that background, detailed notes on the operation of proposed new section 51AD follow.

Sub-section 51AD(1) defines certain terms used throughout the section -

"arrangement" is given an extended meaning, common to other provisions of the Principal Act, so as to include any agreement, arrangement, understanding, promise or undertaking, or any scheme, plan, proposal, action, course of action or course of conduct;

"associate", in relation to a person, is defined to have the same meaning as that term has by reason of the definition contained in sub-section 26AAB(14) of the Principal Act. That definition specifies who is an associate in relation to a natural person, a company, a trustee of a trust estate or a partnership and, in broad terms, refers to those persons who by reason of family or business connections might appropriately be regarded as being associated with a particular person;

"construction" is defined to include manufacture;

"control", wherever that expression is used in new section 51AD, means to effectively control, i.e., to control in a practical sense whether or not, in a more formal sense, there would be control;

"goods" is defined to include anything capable of being owned or used;

"hire-purchase agreement" has the same meaning as it has in Subdivision B of the Principal Act (the investment allowance provisions) but an agreement will not be treated as a hire-purchase agreement if, in the particular circumstances, the Commissioner of Taxation is of the opinion that such rights as the hire-purchaser has under the agreement to purchase the property could not be expected to be exercised;

"lease" is defined in relation to property to include any arrangement (other than a hire-purchase agreement as defined) under which a right to use the property is granted by the owner to another person, or by that other person to someone else;

"owner", in relation to property, is to include a person who is the hire-purchaser of the property;

"person" is defined to include a person in the capacity of a trustee; and

"prescribed time" means 1 pm by standard time in the Australian Capital Territory on 24 June 1982 (the time at which the proposed amendments were foreshadowed).

Sub-section 51AD(2) makes it clear that a reference to the acquisition of property by a person is a reference to the person becoming the owner of the property, or to the construction of the property for that person by another person on the first person's premises.

By sub-section 51AD(3), references in section 51AD to property being held for use are to be taken as also meaning installed ready for use and held in reserve.

Sub-section 51AD(4) lays down the conditions relating to the ownership and use of property that will cause section 51AD to apply to the property. The first is that the property was acquired by the taxpayer under a contract entered into after 1 pm on 24 June 1982 or, where constructed by the taxpayer, that construction commenced after that time.

If such property is leased by the taxpayer, the section will, in terms of paragraph 51AD(4)(a), apply where -

•

the lessee or sub-lessee is a non-resident and the property is used wholly or principally outside Australia;

•

the property is used by the lessee or sub-lessee otherwise than solely for the purpose of producing assessable income; or

•

the property was owned and used, or held for use, by the lessee or sub-lessee prior to the taxpayer's acquisition of it.

If the property is not leased, the section will, by paragraph 51AD(4)(b), apply if the property is used in the production or supply of goods or services, another person has the effective control of the use of the property, and that other person -

•

is a non-resident and the property is used wholly or principally outside Australia;

•

uses the goods or services provided by means of the property for tax-exempt purposes;

•

does not derive assessable income in providing those goods or services; or

•

owned and used the property, or held it for use, prior to the taxpayer's acquisition of it.

Sub-section 51AD(5) will ensure that the denial of deductions intended in relation to property that is the subject of a sale and lease-back or similar arrangement cannot be avoided by, for example, effecting an interim change in the legal ownership of the property just prior to its acquisition by the taxpayer. Hence, a reference to a lessee or end-user in sub-paragraph (4)(a)(iii) and sub-sub-paragraph (4)(b)(ii)(D) also includes a reference to any associate of that person.

It is not intended, however, that the sale and lease-back of property should disentitle its new owner from deductions if the property was first used by the lessee or an associate within 6 months before the taxpayer became the owner and, at the time of that first use, there was an arrangement that the property would be sold to another person and leased by that person to the lessee or associate. Sub-section 51AD(6) will ensure that the taxpayer remains entitled to deductions in those circumstances.

Sub-section 51AD(7) is a drafting measure that makes it clear that the use of property by any of the partners in a partnership is to be taken as use of the property by all of the partners.

Sub-section 51AD(8) will have the effect of excluding from the operation of the section property the whole or the predominant cost of which has not been financed by a non-recourse debt. For that purpose, a non-recourse debt will be one incurred under arrangements that limit or are intended to limit the rights of the creditor, if the taxpayer defaults, to rights against the property itself, rights in mortgages or other securities over the property, or rights in relation to income or goods generated by the property. A debt will also be a non-recourse debt if the creditor would not have access to all of the unsecured assets of the taxpayer in an action by him for recovery of the debt.

However, to provide for circumstances where the acquisition or construction of property has been financed under arrangements which might technically be non-recourse within these rules but where it is clear that there is no real intention to restrict the lender's rights as against the taxpayer, the Commissioner of Taxation will be authorised to not treat the particular debt as a non-recourse debt if he considers that would be reasonable having regard to relevant circumstances. That authorisation is contained in new sub-section 51AD(9).

Sub-section 51AD(10) will operate to disallow deductions attributable to the ownership of property to which section 51AD applies. It will do this by stipulating that such property is to be taken as not being used or held for use by the taxpayer for the purpose of producing assessable income or in carrying on a business for that purpose.

The general application of sub-section 51AD(10), however, will be modified by the operation of proposed new sub-sections 51AD(11), (12) and (13) in cases where the property is used by a lessee or end-user partly for the purpose of producing assessable income and partly for other purposes.

Sub-section (11) will apply where, although property is not used by a lessee or end-user exclusively for assessable income producing purposes, it is nevertheless used to some extent in that way. In those circumstances the Commissioner of Taxation will be authorised, having regard to the amount of taxable end use and the period during which that occurred, to determine the extent to which the taxpayer should be deemed to have used the property for the the purpose of producing assessable income. The taxpayer will then be entitled to deductions on a proportionate basis that reflects the extent of that deemed taxable use.

Sub-section (12) will have a similar application to sub-section (11) in a case where, in providing goods or services by use of the property, the end-user derives some assessable income.

Sub-section (13) will also apply to allow proportionate deductions in a similar way in cases where the lessee or end-user of property to which section 51AD applies is a partnership, and some but not all of the partners are tax-exempt organisations or the partners are not deriving wholly assessable income from the partnership's use of the property.

In deciding, for the purposes of sub-section (13), the extent to which a taxpayer is to be taken as using the property in taxable pursuits, the Commissioner of Taxation is by sub-section 51AD(14) required to have regard to the respective interests of the "taxable" partners in the net partnership income or loss and the extent to which, if at all, any of the other partners have used the property in deriving assessable income.

Sub-section 51AD(15) will apply, notwithstanding sub-sections (10), (11) and (13), in a case where new sub-paragraph 51AD(4)(a)(ii) applies - i.e., where property to which section 51AD applies is leased and a lessee or sub-lessee does not use the property solely for the purpose of producing assessable income. If, in such a case, there are 2 or more lessees and one is a tax-exempt organisation that has effective control of the use of the property in the conduct of its ordinary business activities, the property is to be treated as not being used by the owner for the purpose of producing assessable income. Consequently, that taxpayer will not be entitled to deductions that the taxpayer would otherwise be entitled to as the owner of the property.

Sub-sections 51AD(16), (17) and (18) are special provisions that will apply to authorise the Commissioner of Taxation, in certain circumstances, to reduce deductions that would otherwise be allowable to the owner of property under section 53, 67 or 68 of the Principal Act. Those sections authorise deductions respectively for the cost of repairs, expenses of borrowing and expenses relating to the preparation of lease documents.

In the case of repairs, those made necessary by the use of the property during a period when section 51AD applied to it will not be allowable, except to the extent that the taxpayer is deemed to have used the property partly for producing assessable income during that period.

Similarly, borrowing expenses normally written off over the period of the loan, or over the statutory maximum period of 5 years if the loan period is more than 5 years, will not be deductible where section 51AD applies to the property during the write-off period except to the extent that the taxpayer may be deemed to have used the property partly in deriving assessable income.

If section 51AD applies to property that is the subject of a lease, the cost of the preparation, registration and stamping of the lease, etc., will also only be deductible to the extent that, during the part of the lease period when section 51AD applies, the taxpayer is deemed by sub-section (11), (12) or (13) to have used the property for the purpose of producing assessable income.

Sub-section 51AD(19) will apply in a case where property has been acquired or constructed by a partnership and, but for the fact that it was so acquired under a contract entered into on or before 1 pm on 24 June 1982 or that construction commenced on or before that time, section 51AD would apply to deny deductions attributable to the ownership of the property. In such a case, any partner who became a partner in the partnership under a contract entered into after that time will have included as assessable income his or her proportionate share of any deduction that would have been denied the partnership if the contract under which the partnership acquired the property had been entered into, or the construction of the partnership property had commenced, after 1 pm on 24 June 1982.

Sub-section 51AD(20) will apply in circumstances similar to those described in relation to sub-section (19) and will operate where a taxpayer became a partner in the partnership under a contract entered into on or before 1 pm on 24 June 1982 but made additional capital contributions to the partnership, so increasing the partner's interest in the partnership, after that time. The effect of the sub-section will be that the partner's share of deductions attributable to the partnership property will be limited to what would have been that share if no additional capital contributions had been made after that time.

Sub-clause (2) of clause 8, which will not amend the Principal Act, proposes that section 51AD as inserted by sub-clause (1) apply to income tax assessments for the income year in which 24 June 1982 occurred and of all subsequent years of income.

Clause 9: Special depreciation on plant

This clause proposes an amendment to section 57AG of the Principal Act that is consequent upon the new section 57AM proposed by clause 10 to authorise depreciation, in equal instalments over 5 years, in respect of the cost of an eligible Australian trading ship.

Clause 9 will amend section 57AG of the Principal Act so that ships that qualify for the new depreciation rate authorised by section 57AM will not also be eligible under section 57AG for the 18% loading applicable to general depreciation rates.

Clause 10: Special depreciation on trading ships

This clause proposes to amend the Principal Act to insert new section 57AM to authorise special depreciation allowances for income tax purposes for eligible Australian trading ships.

A ship eligible under the new provisions will qualify for depreciation on a prime cost basis at a rate of 20% (excluding the special 18% depreciation loading) where the ship is constructed or acquired new by the owner and first commissioned on or after 29 July 1977.

In broad terms, a ship will be an eligible trading ship for the purposes of the new rules where it is -

•

engaged exclusively in the coastal and/or overseas carriage of cargo or passengers;

•

wholly owned and used by residents of Australia;

•

used wholly and exclusively to produce assessable income;

•

registered under the Shipping Registration Act 1981;

•

manned by persons who are either residents of Australia or non-residents whose engagement for a specified period is authorised by the Secretary to the Department of Transport; and

•

manned at a level that does not exceed the manning level determined for that ship by the Secretary to the Department of Transport.

The new measure will apply only where the owner, and any lessee, of the ship elect that all income derived from the use of the ship will be subject to Australian income tax. This will ensure that income derived from sources outside Australia, which might otherwise not be taxed in Australia, is so taxed. In the event that the taxpayer is personally liable for tax on the income under the law of another country, the taxpayer will be allowed a credit, against the Australian tax, of the lesser of an amount equal to the overseas tax paid or the Australian tax payable.

The new depreciation rate will generally be first available in the year of income in which the ship qualifies as an eligible Australian ship and will be calculated on the depreciated value of the ship at the commencement of that year. However, where a ship qualifies as an eligible Australian ship within a period of 90 days after the date on which the amending Act comes into operation (in the case of a ship commissioned before that date), or after the commissioning date of the ship (in any other case), the new rate will be available from the year of income in which the ship is commissioned, except where the commissioning year was earlier than the 1982-83 income year, in which case the new rate will apply from the beginning of the 1982-83 year.

Where a ship is commissioned after 30 June 1983, new section 57AM will authorise a depreciation allowance in the year of income preceding the year in which the ship is commissioned. The amount of the deduction will be the lesser of 20% of the cost of the ship or the amount expended by the taxpayer in the pre-commissioning year towards the cost of acquiring or constructing the ship. This deduction may be allowed before the ship is actually commissioned, in which case it will, initially, be based on the taxpayer's estimate of the cost of the ship. A deduction will not be available unless the Commissioner is satisfied that the ship will qualify as an eligible Australian ship within 90 days after commissioning.

It is also proposed that eligible Australian ships, even though used outside Australia, may qualify for the investment allowance (see notes on clause 11). Proposed new sub-section 57AM(1) contains a number of definitions of terms used in the new section -

"commission" is defined to mean putting a ship into service or holding the ship in reserve for that purpose;

"commissioning date" is defined to mean the date on which a trading ship is first commissioned;

"eligible date" is the term used to describe the date from which the proposed new rate of depreciation is to be first available in respect of an eligible Australian trading ship. Entitlement to the concessions available under section 57AM will vary according to the date on which the ship is commissioned and the date on which it becomes an "eligible Australian ship" (i.e., the date on which it satisfies all of the criteria described in proposed new sub-section 57AM(4) for qualification as such a ship). Generally, the eligible date for a trading ship will be the date on which the ship becomes an "eligible Australian ship". However, the eligible date for a trading ship will be advanced -

•

where a ship is commissioned after new section 57AM comes into operation and the ship becomes an eligible Australian ship within 90 days after the commissioning date of the ship - to the commissioning date;

•

where a ship is commissioned on or after 29 July 1982 and before the date on which section 57AM comes into operation, and the ship becomes an eligible Australian ship within 90 days after that later date - to the date on which the ship was commissioned; and

•

where a ship was commissioned on or after 29 July 1977 and before 29 July 1982, and the ship becomes an eligible Australian ship within 90 days after section 57AM comes into operation - to 29 July 1982;

"Government ship" is defined as a ship owned by the Commonwealth or a State or Territory. Ships owned by the Australian Shipping Commission (i.e., ships of the Australian National Line) are not, however, included in the definition. A Government ship as defined is a class of ship which is to be excluded from the definition of 'trading ship' and, therefore, will not be eligible for the new rate of depreciation;

"harbour" will have the same meaning as in the Navigation Act 1912. In that Act, "harbour" is defined to mean a harbour within its normal meaning, whether natural or artificial, and includes an estuary, navigable river, creek, channel, haven, roadstead, dock, pier, jetty or other place at which ships can obtain shelter or ship and unship goods or passengers;

"lease" is defined, in relation to a trading ship, to include any scheme (other than a hire-purchase agreement) under which a right to use the ship is granted by the owner to another person, or by that other person to someone else;

"manning notice" is the term used to describe a notice of a determination made by the Secretary to the Department of Transport (or other relevant department) under proposed sub-section 57AM(22), in relation to a ship, of the number of officers and crew of specified designations required to man the ship in a safe and efficient manner when it is engaged in operations of a particular kind;

"new" is defined to exclude from the scope of the deductions available under new section 57AM second-hand trading ships, including trading ships previously acquired, or held, by a person for use by that person. The definition will also ensure that the special depreciation concessions will not apply to a trading ship that has been reconditioned or rebuilt;

"new ship" is defined as a trading ship which is first commissioned after section 57AM comes into operation. The purpose of this definition, and of the definitions of "pre-July 1982 ship" and "post-July 1982 ship", is to define the three kinds of ship which may qualify as eligible Australian ships under proposed sub-section 57AM(4);

"passenger" will have the same meaning as in the Navigation Act 1912. In that Act, "passenger" is defined essentially to exclude persons employed on the ship, children under the age of 1 year and certain other persons on board the ship to assist shipwrecked or distressed persons;

"person" is defined to include a partnership and a person in the capacity of a trustee of a trust estate;

"post-July 1982 ship" is defined as a trading ship which was commissioned on or after 29 July 1982 and before the date on which proposed section 57AM comes into operation. Under section 57AM, ships commissioned on or after 29 July 1982 may qualify for the full benefit of the concessions available, whereas ships commissioned before that date, but on or after 29 July 1977 (i.e., a "pre-July 1982 ship"), may qualify only on a limited basis;

"pre-July 1982 ship" means a trading ship commissioned on or after 29 July 1977 and before 29 July 1982;

"Secretary" is defined as the Secretary to the Department administered by the Minister for the time being administering the Navigation Act 1912 (currently, this is the Secretary to the Department of Transport);

"ship" will have the same meaning as in the Navigation Act 1912. In that Act, "ship" is defined to mean any kind of vessel used in navigation by water, however propelled or moved, and includes -

(a)

a barge, lighter or other floating vessel; and

(b)

an air-cushion vehicle, or other similar craft, used wholly or primarily in navigation by water;

"trading ship" is the term used to describe the various kinds of ships which may qualify, under proposed sub-section 57AM(4), as eligible Australian ships. Such a ship is one that is used, or held in reserve for use, directly or indirectly, in any business or commercial activity and includes a ship for use wholly or principally in the carriage of passengers or cargo for hire or reward. The definition will exclude the following classes of ships -

•

ships for use wholly or principally for the provision of services to ships or shipping, e.g., tugboats and lighters (paragraph (a));

•

Government ships, as defined in this sub-section (paragraph (b));

•

fishing vessels, ships for use wholly for recreational or sporting activities (whether let for hire or reward or otherwise) and ships for use wholly in waters other than waters of the sea (paragraph (c));

•

an "off-shore industry mobile unit" as defined in the Navigation Act 1912, i.e., any ship or mobile structure that is for use wholly or primarily in the exploration or exploitation of the non-living resources of -

-

the Continental Shelf of Australia;

-

the seabed of the Australian coastal sea; or

-

the subsoil of that seabed,

by drilling with equipment forming part of that ship or structure;

•

an "off-shore industry vessel" as defined in the Navigation Act 1912, i.e., a ship which is not an off-shore industry mobile unit that is for use wholly or primarily for the exploration or exploitation of non-living resources of the same areas specified in the immediately preceding notes on the meaning of "off-shore industry mobile unit";

•

small craft within the meaning of the Shipping Registration Act 1981, that is ships which are less than 12 metres in length; or

•

ships that are for use wholly or principally within a harbour.

Proposed sub-section 57AM(2) will reinforce the general restriction of the section to eligible Australian ships used wholly and exclusively in the production of assessable income (see notes on proposed paragraph 57AM(4)(b)). Sub-section 57AM(2) may apply to a private company otherwise entitled to claim depreciation under this section in respect of an eligible Australian ship used wholly or partly for private or domestic purposes by directors, shareholders or employees of the private company, or relatives of such persons.

A ship held by a private company that is used for private or domestic purposes by directors, etc., is deemed, for the purposes of proposed section 57AM, to be used by the company otherwise than for the purpose of producing assessable income. The ship will, in these circumstances, cease to be an eligible Australian ship and will therefore, by virtue of proposed sub-section 57AM(8), cease to attract a deduction under section 57AM.

Proposed sub-section 57AM(3) contains two further interpretative provisions to apply for the purposes of the section. Paragraph (a) will ensure that a reference in section 57AM to the acquisition of a ship by a person is taken to include a reference to the construction of the ship for that person by someone else.

Paragraph (b) will provide that, where the depreciated value of a ship at the beginning of a year of income cannot be ascertained, a reference in section 57AM to the "depreciated value" of a ship at the beginning of a year of income will be read as a reference to the depreciated value of the ship at the first time during that year of income at which the depreciated value can be ascertained. Generally, this provision will be applicable in cases where a ship is still under construction at the beginning of the year of income or was commissioned during the year.

Proposed sub-section 57AM(4) will set out the eligibility criteria that must be satisfied before a trading ship can qualify as an eligible Australian ship and attract a deduction under section 57AM. Only ships commissioned on or after 29 July 1977, and owned by the person seeking the deduction, may in any event qualify.

Paragraph 57AM(4)(a) will require that the owner of a ship be a resident of Australia (as that term is generally defined for the purposes of the Principal Act in section 6).

Paragraph 57AM(4)(b) will impose two separate requirements. First, a ship must either have been constructed by its owner or have been new when acquired by the owner. Secondly, a ship must be for use by its owner wholly and exclusively for the purpose of producing income which is assessable for income tax purposes in Australia. Since it is common for an Australian ship engaged in overseas trade to derive some income which is exempt from tax in Australia - in which case section 57AM would not apply to that ship - this Bill also proposes amendments to the Principal Act to enable the owner, and any person who uses the ship, to elect that all income derived from the use of the ship will be assessable in Australia. Where an election is made, the person will be allowed a credit, against the Australian tax, of an amount equal to the overseas tax paid or the Australian tax payable, whichever is the lesser (this matter is dealt with in more detail in the notes on sub-sections 57AM(6), (29) to (32) and clause 26).

Paragraph 57AM(4)(c) will require that the owner of the ship be entitled to a deduction for depreciation under section 54 of the Principal Act. Essentially, this means that, during the relevant income year, the ship is either used by the owner for the purpose of producing assessable income or is installed ready for use for that purpose and is held in reserve. Generally, once a ship is commissioned it will satisfy this requirement.

Paragraph (d) will require that each officer and member of the crew of a ship must be either -

•

a resident of Australia; or

•

a non-resident in respect of whom the Secretary to the Department of Transport has issued a certificate under sub-section 57AM(26) authorising, for a particular period, the non-resident's employment or engagement on the ship in the absence of a suitably qualified Australian resident.

Paragraphs (e) and (f) will impose two related requirements. First, a ship must have been owned, at all times since it was first commissioned, by the person claiming a deduction under section 57AM (sub-paragraphs (e)(iii) and (f)(iii). Secondly, the ship must have been registered under the Shipping Registration Act 1981, and not under the law of any other country, at all times since -

(a)

in the case of a pre-July 1982 ship - 29 July 1982 (sub-paragraphs (e)(i) and (ii)); and

(b)

in any other case - the date on which the ship was commissioned (sub-paragraphs (f)(i) and (ii)).

Paragraph (g) will set out additional requirements which are to be satisfied by the lessee of a ship. As with the ship's owner, a lessee must also be a resident of Australia and must use the ship wholly and exclusively for the purpose of producing assessable income.

Paragraph (h) will require that the Secretary must have issued a manning notice under proposed sub-section 57AM(22) in respect of the ship, setting out the maximum number of officers and crew required to man the ship in operations of a particular kind specified in that notice. The ship must not, at any time, be manned at a level in excess of the level specified in the notice for that kind of operations.

Proposed sub-section 57AM(5) will establish that the new basis of depreciation for ships is to apply in lieu of the normal depreciation rules.

Sub-section 57AM(5) will thus ensure that depreciation allowable in respect of an eligible Australian ship will be available, in the year in which the eligible date in relation to the ship occurs and each subsequent year, on the basis of the special rate proposed by sub-section 57AM(7).

Proposed sub-section 57AM(6) provides that no deduction is allowable in respect of an eligible Australian ship under section 57AM unless both the taxpayer and any lessee of the ship elect that all income which they derive from the use of the ship will be assessable in Australia.

An election for this purpose under proposed sub-section 57AM(29) must, by virtue of sub-section (6), be lodged by the taxpayer by the date of lodgment of the return of income for the year in which the ship satisfies the eligibility criteria in sub-section 57AM(4) and becomes an eligible Australian ship. For a lessee, the election must be made in that year or, if the lease is entered into in a later year, in that later year.

Proposed sub-section 57AM(7) will authorise the new rate of depreciation that is to apply to an eligible Australian ship in the year in which the eligible date in relation to the ship occurs and in any subsequent year of income in which the ship continues to be an eligible Australian ship.

In the case of an eligible Australian ship commissioned on or after 29 July 1982, where the eligible date of the ship is its commissioning date (i.e., the ship became an eligible Australian ship within a period of 90 days after the ship was commissioned or after new section 57AM came into operation, whichever occurred later), the rate of depreciation allowable under section 57AM will be 20% of the cost of the ship.

The rate of depreciation allowable under section 57AM to any other eligible Australian ship will be 20% of the depreciated value of the ship at the beginning of the year of income in which the eligible date in relation to the ship occurs. For some ships, the eligible date will occur in the same year as the ship is commissioned, but the ship may not be commissioned at the beginning of the year. In these cases, the depreciation allowance will, by virtue of proposed paragraph 57AM(3)(b), be based on the cost of the ship.

Proposed sub-section 57AM(8) will ensure that, if at any time a ship ceases to be an eligible Australian ship by reason that one of the eligibility criteria in sub-section 57AM(4) is no longer satisfied, the ship will not qualify for a deduction under section 57AM in that year or any subsequent year.

Proposed sub-sections 57AM(9), (10) and (11) may, in certain conditions, authorise a deduction under section 57AM to be first allowable in respect of a ship in the year of income preceding the year in which the ship is commissioned. A deduction under section 57AM will not be available for a ship commissioned before 29 July 1982 or for a ship commissioned after that date which has an eligible date that is not the commissioning date of the ship (i.e., a deduction will not be available if the ship becomes an eligible Australian ship more than 90 days after the ship is commissioned, or the amending Act comes into operation, whichever is the later date).

Sub-section 57AM(9) authorises a deduction under section 57AM to be allowable before a ship is actually commissioned. Sub-section (9) will apply only to ships which have not been commissioned before the amending Act comes into operation. The deduction may be allowed to a person who is, or is to be, the owner of a ship which is either constructed, but not commissioned, or still in the course of construction.

There are a number of requirements to be satisfied before a deduction will be allowable under sub-section (9). Broadly, these are -

•

the taxpayer claiming the deduction must be a resident of Australia;

•

the taxpayer must lodge a declaration with the Commissioner of Taxation specifying the estimated cost of the ship and the year in which the taxpayer predicts the ship will be commissioned. Additionally, the taxpayer must undertake to ensure that the ship will qualify as an eligible Australian ship within 90 days after the ship is commissioned and to ensure that the ship will be depreciable under section 57AM over the first 4 years that it is used;

•

the Commissioner must be satisfied as to all the matters set out in the taxpayer's declaration, including that the taxpayer's estimate of the cost of the ship does not exceed the amount that in the Commissioner's opinion will be the cost of the ship; and

•

the taxpayer must have expended moneys in the pre-commissioning year on the acquisition or construction of the ship.

If all these requirements are satisfied a deduction will be allowable in the year before the year in which the taxpayer predicts that the ship will be commissioned. The amount of that deduction will be 20% of the taxpayer's estimate of the cost of the ship, unless the taxpayer has not expended an equivalent amount on the acquisition or construction of the ship in the pre-commissioning year. In those cases, the amount of the deduction will be limited to the amount of the moneys expended by the taxpayer in that year. As explained in the notes on sub-section 57AM(14), an adjustment may be made to the amount of the deduction allowed in the pre-commissioning year once the actual cost of the ship is known.

Proposed sub-sections 57AM(10) and (11) together authorise a deduction under section 57AM in the pre-commissioning year of income for a ship commissioned on or after 29 July 1982 but that deduction is not to be claimed by the taxpayer until after the ship becomes an eligible Australian ship.

Sub-section (10) will apply to a ship commissioned after the amending Act comes into operation which becomes an eligible Australian ship within 90 days after the commissioning date.

Proposed sub-section (11) will apply to a ship commissioned on or after 29 July 1982 and before the amending Act comes into operation which becomes an eligible Australian ship within 90 days after the amending Act comes into operation.

For ships to which sub-sections (10) and (11) apply, a deduction will be allowable under section 57AM in the pre-commissioning year of income, provided that -

•

a deduction is not allowable. or has not already been allowed, under sub-section 57AM(9); and

•

the taxpayer has expended moneys in the pre-commissioning year on the construction or acquisition of the ship.

Where the amount of the expenditure by the taxpayer in the pre-commissioning year is less than 20% of the cost of the ship, the amount of the deduction under sub-sections (10) and (11) will be limited to the amount of that expenditure.

An amendment to section 170 of the Principal Act proposed by clause 28 will permit assessments to be re-opened to allow deductions to give effect to sub-section (10).

Proposed sub-section 57AM(12) will ensure that a deduction allowed under sub-sections 57AM(9), (10) or (11) in the year before an eligible Australian ship is commissioned will be taken to be an amount of depreciation for the purposes of the Income Tax Assessment Act. In the absence of this sub-section, a deduction under sub-sections (9), (10) or (11) would be taken to be in addition to any deduction allowable under proposed sub-section 57AM(7).

Under sub-section 57AM(13), a deduction already allowed under sub-section 57AM(9) will be withdrawn if the ship in respect of which the deduction is allowed does not satisfy, within 90 days after its commissioning date, the eligibility criteria set out in sub-section 57AM(4) for the ship to qualify as an eligible Australian ship.

The amendment to section 170 of the Principal Act proposed by clause 28 will permit assessments to be re-opened for this purpose.

Sub-section 57AM(14) may apply where a deduction has been allowed pursuant to sub-section (9) in respect of a ship before it is commissioned based on the taxpayer's estimate of the ultimate cost of the ship. Where the actual cost of the ship proves to be greater or less than that estimated a new deduction will be substituted under sub-section (14), being the lesser of 20% of the actual cost of the ship or the amount of the moneys expended by the taxpayer in the pre-commissioning year towards the cost of acquiring or constructing the ship.

Proposed sub-section 57AM(15) will result in the withdrawal of any deduction that has been allowed under section 57AM in respect of a ship if, within a period of 12 months after the ship became an eligible Australian ship, any one or more of the eligibility criteria set out in sub-section 57AM(4) is no longer satisfied.

Proposed sub-section 57AM(16) is complementary to sub-section (15) and will authorise the withdrawal of a deduction allowed under section 57AM where, in certain circumstances, a ship ceases to be an eligible Australian ship after the expiration of 12 months. The deduction will be withdrawn in terms of sub-section (16) if the Commissioner of Taxation is satisfied that, at the time a ship satisfied the eligibility criteria set out in sub-section 57AM(4) for qualifying as an eligible Australian ship, the taxpayer intended that the ship would cease to satisfy one or more of those eligibility criteria.

The amendment to section 170 of the Principal Act proposed by clause 28 will permit assessments to be re-opened to disallow deductions pursuant to sub-sections (15) and (16).

Proposed sub-section 57AM(17), in conjunction with sub-sections (18) and (19), will override sub-section (15) where a ship ceases to be an eligible Australian ship by reason only that it is disposed of between companies within a wholly-owned listed public company group and there is, throughout the 12 months' period, no change in the underlying ownership of the ship by the same listed public company or companies. Deductions will not be withdrawn in such a case.

Sub-sections (17) and (18) will apply in two company group situations. The first group is one that comprises one listed public company parent and wholly-owned subsidiary companies. In this kind of group, transfers of property are to be permitted between the holding company and its subsidiaries and between the subsidiaries.

The second group is one that comprises two or more listed public companies and wholly-owned subsidiary companies that are wholly-owned, either directly or indirectly, by the listed public companies. Transfers of property within this group will be permitted where they are made between the wholly-owned subsidiaries.

Sub-sections (17) and (18) will not apply to leased ships or to private company groups and are based on section 82AJA of the Principal Act. Sub-section (19) will apply the interpretative provisions of section 82AJA for the purposes of these sub-sections.

Proposed sub-sections 57AM(20) to (25) are consequential upon the requirement, in paragraph 57AM(4)(h), that in order to qualify as an eligible Australian ship a ship must not be manned at a level that exceeds the appropriate manning level determined for that ship.

Sub-section 57AM(20) will authorise a person who is, or is to be, the owner of a ship, or an authorised person, to request the Secretary to make a manning determination and issue a manning notice in relation to that ship.

Proposed sub-section 57AM(21) will specify the information that must be included in a request under sub-section (20).

After receiving a request under sub-section (20) for a manning notice, the Secretary is authorised, by proposed sub-section 57AM(22), to issue to the person who made that request a manning notice setting out the manning level which, in the opinion of the Secretary, will enable the ship to be operated in a safe and efficient manner. In forming an opinion as to that level, the Secretary is to have regard to any relevant industrial relations considerations.

By proposed sub-section 57AM(23) the Secretary is authorised, in certain circumstances, to vary a manning notice issued under sub-section (22).

A manning notice may be varied where written request is made to the Secretary and the Secretary is satisfied that the original manning level determined is no longer appropriate because of -

•

a proposed change in the kind of operations in which the ship is, or is to be, engaged; or

•

a proposed modification of the ship.

Proposed sub-section (24) will require the Secretary, once he has received a written request for the issue of a manning notice or a variation of a manning notice, to issue that notice or variation within a period of 70 days after the commissioning date of the ship or the date of the request, as appropriate.

By sub-section 57AM(25), a manning notice or variation will apply from the day on which it is issued.

Proposed sub-sections 57AM(26), (27) and (28) will empower the Secretary to authorise the temporary employment of a non-resident on an eligible Australian ship. Those sub-sections will complement proposed paragraph 57AM(4)(d) which requires that an eligible Australian ship must be manned at all times either by a resident of Australia or a non-resident temporarily authorised by the Secretary under sub-section (26).

The Secretary will be empowered to authorise the temporary employment of a non-resident on a ship only if he is satisfied that a person possessing particular skills is required on the ship at a particular time and that there is no Australian resident possessing those skills available.

Proposed sub-sections 57AM(29) to (32) will complement the requirements of paragraph 57AM(4)(b) (under which a ship must be used wholly and exclusively for the purpose of producing income assessable in Australia in order to qualify as an eligible Australian ship) and of sub-section (6) (which will deny a deduction to any ship under section 57AM unless both the owner of the ship and any lessee have made an election under proposed sub-section 57AM(29)).

Sub-section (29) is complementary to paragraph 57AM(4)(b) and enables a taxpayer who owns or leases a ship to make an election that all the income which that taxpayer derives from the use of the ship will be assessable for income tax purposes in Australia.

Sub-section 57AM(30) will give effect to an election under sub-section 57AM(29). Once an election is made, a taxpayer will become liable to tax in Australia on all the foreign source income derived from the ship in a year of income in which a deduction under section 57AM is allowable.

Sub-section 57AM(31) is an interpretative provision which will ensure that an election made by the owner of a ship under sub-section (29) will apply to any foreign source income which is derived as payments made under a lease of that ship.

Sub-section(32) will require an election under sub-section (29) to be in the form of a notice in writing to the Commissioner of Taxation signed by, or on behalf of, the taxpayer.

Sub-section 57AM(33) will ensure that the eligibility criteria for a ship to become an eligible Australian ship do not preclude a deduction being available under section 57AM in respect of a ship that is leased to a lessee under certain initial "lease-back" arrangements.

Broadly, this is to cater for common practices where the person who is to lease the ship from the lessor first acquires it and uses it for a relatively short "shaking-down" period before selling it to the lessor. The ship is then leased back to the lessee under a standard lease.

In the absence of sub-section 57AM(33) the eligibility criteria set out in sub-section 57AM(4) (e.g., that the ship must have been acquired new by its owner) would result in neither of the parties to the lease-back arrangement being entitled to a deduction in respect of the leased ship.

Sub-section (33) will, in effect, remove these obstacles and leave the way open for the ship to qualify as an eligible Australian ship where the other eligibility requirements set out in sub-section 57AM(4) are satisfied and -

•

the taxpayer (the "lessor") leases to another person (the "lessee") a ship that was acquired from that other person;

•

the ship was commissioned by the lessee on or after 29 July 1977;

•

the ship was constructed or acquired new by the lessee and was owned by the lessee at all times since its commissioning date and prior to acquisition by the lessor;

•

the period between the commissioning date of the ship and the date on which it was acquired by the lessor did not exceed 6 months;

•

the Commissioner is satisfied that the various transactions in respect of the ship occurred in pursuance of a contract or arrangement that the lessor and the lessee entered into at arm's length;

•

if the ship was commissioned by the lessee before 29 July 1982, it has been registered continuously since that date and has been owned by the lessor at all times since the lessor acquired the ship; and

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if the ship was commissioned after 29 July 1982 it has been registered continuously since the commissioning date and has been owned by the lessor at all times since the lessor acquired the ship.

If these conditions are met, the ship will be deemed to have been acquired new by the lessor and the commissioning date of the ship will be taken to be the day on which the lessor acquired the ship from the lessee.

A lessor who becomes entitled to a deduction under section 57AM by virtue of the operation of sub-section (33) will not be entitled to a deduction under sub-section 57AM (9), (10) or (11) in the year before the year in which sub-section (33) deems the ship to be commissioned. In these circumstances, no deduction is to be allowed in that pre-commissioning year.

Proposed sub-section 57AM(34) is a safeguarding measure which will apply in cases where transactions associated with the acquisition of a ship by a taxpayer involve parties who are not dealing with each other at arm's length and the actual cost is greater than the amount that would have been the cost if they had been dealing with each other at arm's length.

Where the Commissioner of Taxation is satisfied that these circumstances exist, sub-section (34) will deem the arm's length value of the ship at the time of acquisition to be the cost for the purposes of calculating the deduction allowable under section 57AM.

Clause 11: Property to which Subdivision applies

This clause and clauses 12 to 16 and 18 to 21 will extend the investment allowance provisions of the Principal Act to eligible Australian ships commissioned on or after 29 July 1977 and which are for use, or have been used, outside Australia. An eligible Australian ship is to be defined in new sub-section 57AM(4), as is proposed to be inserted in the Principal Act by clause 10, and the term will have the same meaning for investment allowance purposes.

As it now stands, section 82AA of the Principal Act provides for the investment allowance to be available only in respect of eligible property which is for use wholly in Australia. Plant that is used partly outside Australia does not qualify for the allowance. Clause 11 proposes to amend section 82AA by inserting three new sub-sections - sub-sections 82AA (2), (3) and (4) - which will apply in relation to an eligible Australian ship for use outside Australia. (It may be noted here that ships used only in coastal trade attract the allowance).

Proposed sub-section 82AA(2) governs the extension of the investment allowance in relation to an eligible Australian ship that is for use, or has been used, outside Australia. Paragraph 2(a) will cover in the case of a ship which has, before it became an eligible Australian ship (as defined), failed to qualify for the investment allowance, at least one of the reasons for the ship originally failing to qualify for the investment allowance being that it was for use outside Australia. The paragraph will only be applicable if, on the day on which the ship first satisfies the criteria set out in sub-section 57AM(4) as an eligible Australian ship the only reason for the investment allowance not being available at that time under sub-section 82AA(1) (other than that the taxpayer did not acquire the ship new on that day) is that it is to be used outside Australia.

Paragraph (b) of sub-section 82AA(2) will apply to an eligible Australian ship that is commissioned after the amending Act comes into operation and which qualifies as an eligible Australian ship within 90 days after commissioning. For such a ship the investment allowance will be available if the only reason for it not being eligible under the existing rules of sub-section 82AA(1), is also that it is for use outside Australia.

Paragraphs (c) and (d) of sub-section 82AA(2) will impose essentially the same eligibility criteria on eligible Australian ships as apply for ordinary investment allowance property by virtue of existing paragraphs 82AA(a) and (b).

Proposed sub-section 82AA(3) will make availability of the investment allowance in respect of an eligible Australian ship which qualifies for the allowance under proposed sub-section 82AA(2) conditional on the owner of the ship, and any lessee, making an election under proposed sub-section 57AM(29) that all income derived from their use of the ship will be taxable in Australia (see notes on clause 10).

Proposed sub-section 82AA(4) is a drafting measure which will make it clear that, for the purposes of the investment allowance provisions (other than sections 82AB and 82AD - see notes on clauses 12 and 13 ) a ship that is first used, or installed ready for use, before the eligible date in relation to the ship will be taken to have been first used, or installed ready for use, on the eligible date in relation to the ship. The "eligible date" in relation to an eligible Australian ship for this purpose is as defined in new sub-section 57AM(1) and already explained in the notes on clause 10.

Clause 12: Deduction in respect of plant installed on or after 1 January 1976

Clause 12 will amend section 82AB of the Principal Act as part of the proposed extension of the investment allowance to eligible Australian ships used outside Australia.

Section 82AB authorises an investment allowance deduction for eligible capital expenditure incurred by a taxpayer in acquiring or constructing a unit of eligible property. The section also specifies the rates at which the allowance is to be calculated.

Paragraph (a) of clause 12 proposes the amendment of sub-section 82AB(1) to restrict application of that sub-section to property which is already eligible for the investment allowance by virtue of sub-section 82AA(1). Paragraph (b) of the clause will insert new sub-section 82AB(1A) which will authorise a deduction in respect of a ship that qualifies for investment allowance purposes - provided that it satisfies essentially the same eligibility criteria as presently apply in sub-section 82AB(1) to plant generally.

The deduction will be allowed against the assessable income of the taxpayer for the year of income in which the eligible date in relation to the ship occurs or, if the ship has not been used or installed ready for use by the eligible date, in the year of income in which the ship is first used or installed ready for use.

Paragraphs (c) and (d) of clause 12 are drafting measures to restrict application of sub-sections 82AB(2) and (4), respectively, to "sub-section 82AA(1) property". Sub-section 82AB(2) fixes the closing date for the 40% phase of the allowance while sub-section 82AB(4) specifies the period during which the 18% (previously 20%) phase of the allowance applies.

Paragraph (e) of clause 12 will insert two new sub-sections - sub-sections (5A) and (5B) - in section 82AB of the Principal Act. The purpose of the sub-sections is to specify the amount of investment allowance that is to be available in respect of a "sub-section 82AA(2) ship".

By sub-section 82AB(5A) the amount of investment allowance allowable in respect of a "sub-section 82AA(2) ship" will be 18% of the depreciated value of the ship calculated on the eligible date in relation to the ship or, if the ship has not been used or installed ready for use by that day, on the first day on which it is first used or installed ready for use.

For the purposes of sub-section 82AB(5A), the depreciated value will be determined according to the criteria to be specified in proposed sub-section 82AB(5B). Essentially, the criteria will establish a notional value calculated on a non-concessional diminishing value basis.

Paragraph (f) of clause 12 will amend existing sub-section 82AB(6) by extending it to a sub-section 82AA(2) ship. Sub-section 82AB(6) is a drafting measure relating to the preceding sub-sections of section 82AB which are expressed to apply on the basis of when the property is first used or installed ready for use. Sub-section (6) makes it clear that in respect of leased plant, the references in those sub-sections to use or installation are to the use or installation by the lessee.

Paragraphs (g), (h) and (j) of clause 12 will restrict the application of sub-sections 82AB(6A), (7) and (9) respectively, of the Principal Act to "sub-section 82AA(1) property". Sub-section 82AB(6A) sets out the conditions under which the transition from the 40% to the 20% phase of the investment allowance applies, while sub-section 82AB(7) ensures that section 82AB does not preclude the allowance of a deduction in respect of eligible property leased by a leasing company for a period of not less than 4 years to a lessee under certain "lease-back" arrangements. Sub-section 82AB(9) defines the category of eligible expenditure that qualifies for the 18% phase of the allowance.

Paragraph (k) of clause 12 will insert new sub-section 82AB(10) into the Principal Act. Sub-section (10) is a drafting provision relating to those provisions of section 82AB which are expressed to apply on the basis of when property is first used or installed ready for use. The sub-section will make it clear that, in the case of a "sub-section 82AA(2) ship" which is used before the eligible date in relation to the ship, the ship is to be taken to have been first used, or installed ready for use, on the eligible date.

Clause 13: Lessor may transfer benefit of deduction to lessee

Clause 13 will amend section 82AD of the Principal Act whereby a bank or other approved finance company that is a "leasing company" (as defined in section 82AQ ) is able to forgo, in favour of the lessee-user of a unit of eligible property, its right to all or part of an investment allowance deduction.

Paragraph (a) of clause 13 will amend sub-section 82AD(1), which requires the leasing company to lodge with the Commissioner a declaration that the leasing company transfers the whole or a part of its deduction to the lessee as well as additional information described in paragraph 82AD(1)(b). The amendment proposed by paragraph (a) will require further information to be provided where the property to which the deduction relates is a "sub-section 82AA(2) ship". That further information is -

•

the commissioning date and the eligible date of the ship (as defined in new sub-section 57AM(1)); and

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the depreciated value of the ship on the day when it becomes entitled to attract a deduction under new section 82AB.

Paragraph (b) of clause 13 will replace existing sub-section 82AD(2) with new sub-sections 82AD(1A) and (2).

Proposed sub-section 82AD(1A) is a drafting provision relating to sub-section (1), which is expressed to apply on the basis of when the property is first used or installed ready for use. Sub-section (1A) will make it clear that, in the case of a "sub-section 82AA(2) ship" which is used before the eligible date in relation to the ship, the ship shall be taken to have been first used, or installed ready for first use, on the eligible date.

New sub-section 82AD(2) extends to a "sub-section 82AA(2) ship" existing sub-section 82AD(2), which prescribes the date by which a declaration made by a leasing company under sub-section 82AD(1) is required to be lodged with the Commissioner of Taxation.

In the case of a lease of a ship where the lease is entered into before the date on which the ship becomes an eligible Australian ship, the prescribed date for section 82AD declarations is the eighth day after that date. In the case of any other ship, the prescribed date is the eighth day after the end of the month in which the lease agreement is entered into.

The prescribed date for sub-section 82AA(1) property will remain unchanged, as will the Commissioner's power to grant a leasing company an extension of the prescribed date.

Clause 14: Subdivision not to apply to certain other property

Clause 14 proposes amendments to section 82AF of the Principal Act which lists categories of property that will not qualify for the investment allowance.

Paragraphs (a) and (b) of clause 14 will amend sub-section 82AF(3), which prevents an investment allowance being allowed in respect of second-hand plant leased to another person by a leasing company, so as to restrict it to "sub-section 82AA(1) property".

Paragraph 14(c) will insert new sub-section 82AB(3A) into the Principal Act to complement sub-section 82AB(3). It will make it clear that an investment allowance is not allowable in respect of a "sub-section 82AA(2) ship" leased to another person by a leasing company, if the ship became a second-hand ship after the day on which it became an eligible Australian ship and before the lease was entered into.

Clause 15: Disposal etc., of property within 12 months after installation, etc.

Clause 15 proposes amendments to section 82AG, the general safeguarding measure which causes the investment allowance to be withdrawn if one of the disqualifying events specified in the section occurs within 12 months of the property being first used or installed ready for use. The amendments proposed by this clause will extend to sub-section 82AA(2) ships, the same kind of sanctions against early disposal, etc., of a ship that apply under section 82AG for all other eligible plant.

Paragraphs 15(a) and (b) will amend existing sub-sections 82AG(1) and (2) respectively to restrict their application to sub-section 82AA(1) property.

Paragraph (c) will insert two new sub-sections - sub-sections (2A) and (2B) - into section 82AG.

Sub-section 82AG(2A) will govern situations where a taxpayer has become entitled to an investment allowance deduction in respect of a sub-section 82AA(2) ship (other than a leased ship), and within 12 months of the ship becoming an eligible Australian ship -

•

it is used by another person as the result of a lease or other right granted by the taxpayer (paragraph (a)) or;

•

the ship ceases to be an eligible Australian ship by reason that it no longer satisfies one of the criteria specified in proposed sub-section 57AM(4) (paragraph (b)).

Sub-section 82AG(2B) will have effect in a situation where a taxpayer, having become entitled to an investment allowance deduction in respect of a sub-section 82AA(2) ship (not being a ship leased by a leasing company to another person), disposes of part of his interest in the property within 12 months of it becoming an eligible Australian ship.

Sub-section (2B) will cause the withdrawal of so much of the investment allowance entitlement of the taxpayer in respect of the ship as the Commissioner considers appropriate. Generally, the amount to be disallowed would be the appropriate proportion of the deduction based on the disposed of part-interest.

Paragraph (d) of clause 15 will restrict the scope of sub-section 82AG(3) to restrict sub-section (3) to sub-section 82AA(1) property. Sub-section 82AG(3) extends the sanctions imposed by section 82AG to leased plant. New sub-section 82AG(3A) to be inserted by paragraph (e) of clause 15 will have that effect in relation to a sub-section 82AA(2) ship that is on lease.

Paragraph (f) of clause 15 will amend sub-section 82AG(4) to restrict the application of that sub-section also to sub-section 82AA(1) property. Sub-section 82AG(4) withdraws an investment allowance deduction in respect of leased property where, before the commencement of the lease, the lessee contracted or arranged for the use of the property by another person. New sub-section 82AG(3A) will operate for that purpose in respect of a sub-section 82AA(2) ship.

Clause 16: Disposal, etc., of property after 12 months after installation, etc.

This clause proposes the amendment of section 82AH of the Principal Act, which is complementary to section 82AG and provides for the withdrawal of the whole or a part of the investment allowance where any of the specified events occurs in respect of eligible property after the expiration of 12 months from the time the property is first used or installed ready for use, and the occurrence of the specified event was in the taxpayer's contemplation at the time the entitlement to the investment allowance arose.

The amendments proposed by this clause are generally to provide, for sub-section 82AA (2) ships, the same kind of sanctions as presently apply under section 82AH for all eligible plant.

Paragraph 16(a) will amend sub-sections 82AH (1) and (2) to restrict their application to sub-section 82AA(1) property. Sub-sections 82AH (1) and (2) apply to withdraw some or all of the investment allowance previously allowable in respect of plant, except leased plant, where one of the disqualifying events specified in those sub-sections occurs.

Paragraph (b) will insert two new sub-sections - sub-sections (2A) and (2B) - into section 82AH.

Before any deduction may be withdrawn in these circumstances, the Commissioner must first be satisfied that, at the time when the ship became an eligible Australian ship, the taxpayer intended to dispose of the ship or part of his interest in the ship after qualifying for the investment allowance deduction.

Sub-section 82AH(2A) will authorise the Commissioner, if he so determines, to withdraw the investment allowance previously allowed to a taxpayer in respect of a sub-section 82AA(2) ship (not being a ship the subject of a lease) if, after the expiration of 12 months after the ship became an eligible Australian ship -

•

the taxpayer granted a lease or right to use the ship or let the ship on hire under a hire-purchase agreement (sub-paragraph (b)(i)); or

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the ship ceased to be an eligible Australian ship by reason that it no longer satisfies one of the criteria specified in proposed sub-section 57AM(4) (sub-paragraph (b)(ii)).

New sub-section 82AH(2B) will similarly authorise the withdrawal of a deduction where, after the 12 months period, the taxpayer disposed of a part of his interest in the ship.

Paragraph 16(c) will amend sub-section 82AH(3) to restrict it to sub-section 82AA(1) property. Sub-section 82AH(3) extends the sanctions imposed by section 82AH to leased plant. New sub-section 82AH(3A) to be inserted by paragraph (d) of this clause will have that effect in relation to a sub-section 82AA(2) ship that is on lease.

Paragraph 16(e) will amend sub-section 82AH(4) so as to restrict it to sub-section 82AA(1) property. Sub-section 82AH(4) authorises the Commissioner to withdraw the investment allowance allowed to a lessee of property.

Paragraph 16(f) will insert new sub-section (5) into section 82AH. Sub-section 82AH(5) will authorise the Commissioner to withdraw the investment allowance allowed to a lessee of an eligible Australian ship. The circumstances in which sub-section (5) will operate and the matters on which the Commissioner must be satisfied before invoking the provision to withdraw the deduction correspond to those explained in the notes on preceding new sub-section 82AH(3A).

Clause 17: Goods or services used to produce exempt income

This clause, which should be read in conjunction with clause 8, proposes the insertion of a new section, section 82AHA, in Subdivision B of Division 3 of Part III of the Principal Act which will have the effect of extending the application of existing safeguards that deny investment allowance deductions in certain cases where an owner or lessee of otherwise eligible plant grants rights to other persons to use it. Safeguards are contained in sections 82AG, 82AH and 82AJ and these operate in supplementation of a basic principle of the investment allowance that the end use of the plant must be wholly and exclusively in the production of assessable income - see section 82AA.

Section 82AG applies to withdraw an investment allowance deduction where, within 12 months of eligible new plant being first used, or installed ready for use, the taxpayer grants to another person a right to use it. It applies similarly to leased plant if, within that time, the lessee enters into a contract or arrangement with another person for the use of the property by that other person.

Section 82AH is complementary to section 82AG and carries the same sanction of disallowance of the investment allowance where one of the events specified in the previous paragraph occurs in respect of eligible plant after the expiration of 12 months from the time the plant is first used or installed ready for use. Before any deduction may be withdrawn under section 82AH, the Commissioner of Taxation must be satisfied that the taxpayer-owner or the lessee-user, as the case may be, intended to grant others rights to use it at the time it was first acquired or constructed or taken on lease.

Section 82AJ provides safeguards against the granting of rights to others to use eligible plant in cases where an investment allowance deduction has been allowed to a partnership. These safeguards apply in similar circumstances to, and have broadly the same effect as, those contained in sections 82AG and 82AH in relation to plant owned by taxpayers in their own right. Where the section 82AJ safeguards apply, their general effect is that an appropriate share of the relevant investment allowance deduction is added to the assessable income of each partner.

New section 82AHA will operate where a person other than the owner or lessee effectively controls the use of otherwise eligible plant in providing goods or services, and the income of that controlling end-user is exempt or partially exempt from income tax. In those circumstances, the owner of the plant will be deemed to have granted a right to another person to use it or, if the plant is leased, the lessee will be deemed to have entered into a contract or arrangement with another person for the use of the plant by that other person. The effect will be that section 82AG, 82AH or 82AJ, whichever is appropriate, will apply to make investment allowance deductions unavailable in respect of that particular plant.

New sub-section 82AHA(1) defines a number of terms to be used in the section and which correspond with terms contained in proposed new section 51AD (see notes on clause 8)-

"control", wherever that expression is used in section 82AHA, means to effectively control;

"goods" is defined to include anything capable of being owned or used; and

"person" is defined to include a person in the capacity of a trustee.

Sub-section 82AHA(2) makes it clear that a reference in the section to property being owned by a person is to be taken as including a reference to property taken and held by the person on hire under a hire-purchase agreement.

Sub-section 82AHA(3) sets out the circumstances in which a taxpayer who owns plant (not being leased plant) that would otherwise be eligible for investment allowance purposes will be taken to have granted a right to another person to use that plant. Those circumstances are-

•

the plant was acquired by the taxpayer under a contract entered into after 18 December 1981 or was constructed by the taxpayer, construction having commenced after that date;

•

while the taxpayer owns the plant, it is, or is to be, used in the production, supply, carriage, transmission or delivery of goods or the provision of services;

•

a person other than the taxpayer is able to effectively control that use of the plant; and

•

that other person (the "end-user") either does not use the goods or services exclusively for the purpose of producing assessable income or does not derive wholly assessable income in providing those goods or services to others.

Sub-section 82AHA(4) is complementary to sub-section 82AHA(3) and specifies the circumstances in which a lessee of otherwise eligible plant will be taken to have entered into a contract or an arrangement with another person for the use of the plant by that other person. These circumstances are similar to those contained in sub-section (3) except that the controlling end-user will be a person other than the lessee and the relevant use of the plant in providing the goods or services will be its use while the lease is in force.

Sub-section 82AHA(5) will apply in a case where plant has been acquired or constructed by a partnership and, but for the fact that it was so acquired under a contract entered into on or before 18 December 1981, or that construction commenced on or before that date, section 82AHA would apply to deny investment allowance deductions in respect of that plant. In such a case, any partner who became a partner in the partnership under a contract entered into after that date will have added to assessable income the partner's proportionate share of any deduction that would have been denied the partnership if the plant acquisition contract had been entered into, or the construction of the plant had commenced, after 18 December 1981.

Sub-section 82AHA(6) will apply in circumstances similar to those relevant to sub-section (5), except that it will operate where a partner who became a partner in the partnership under a contract entered into on or before 18 December 1981 made, or agreed to make, additional capital contributions to the partnership after that date. The effect of the sub-section will be that a partner's share of partnership deductions in respect of relevant plant will be limited to what would have been that share if the additional capital contributions had not been made.

Sub-section 82AHA(7) makes it clear that, for the general purposes of the Subdivision, sub-sections 82AHA(3) and (4) are not to limit the circumstances in which a person will be regarded as having granted a right to another person to use property or as having entered into a contract or arrangement with another person for the use of property by that other person.

By sub-clause (2) of clause 17, which will not amend the Principal Act, the amendment made by sub-clause (1) in inserting new section 82AHA into the Principal Act is to apply to assessments in respect of income of the year of income in which 18 December 1981 occurred and of all subsequent years of income.

Clause 18: Notional disposal of property under hire-purchase

Clause 18 will amend section 82AI of the Principal Act which for the purposes of sub-sections 82AG(1) and 82AH(1), deems a taxpayer who acquired property under a hire-purchase agreement to have disposed of the property if any act or omission of the taxpayer results in the property being repossessed by the owner. For the purpose of determining whether the hire-purchase property has been so disposed of by such a taxpayer before or after the expiration of the 12 month period specified in those sub-sections, section 82AI deems the disposal to have been made by the hire-purchaser when the possession of the property reverts to the owner.

By this clause, section 82AI will apply to a sub-section 82AA(2) ship which is repossessed by its owner and will deem that ship to have ceased to be an eligible Australian ship at the time it was repossessed.

Clause 19: Special provisions relating to partnerships

This clause proposes an amendment to section 82AJ of the Principal Act, which applies in cases where an investment allowance deduction has been allowed to a partnership in respect of eligible property acquired or constructed by the partnership and a partner subsequently disposes of the whole or part of his interest in the eligible property.

The safeguards imposed by section 82AJ apply in similar circumstances, and have broadly the same practical effect, in relation to a taxpayer who owns property jointly, as corresponding safeguards imposed by sections 82AG and 82AH have in relation to taxpayers owning property in their own right. The amendments proposed by this clause are similar to the amendments proposed by clauses 15 and 16 to sections 82AG and 82AH and will ensure that the section 82AJ safeguards apply equally to eligible Australian ships.

Clause 20: Disposals within company group

Clause 20 proposes the amendment of section 82AJA of the Principal Act which overrides section 82AG by permitting the transfer of property within 12 months of first use of that property without loss of the investment allowance, where the transfer is between companies within a wholly-owned listed public company group and there is, throughout the 12 months period, no change in the underlying ownership of the property by the companies.

Clause 20 will extend section 82AJA to permit the transfer of a sub-section 82AA(2) ship in the same circumstances without loss of the investment allowance.

Clause 21: Interpretation

Clause 21 will amend section 82AQ, which defines a number of terms and ascribes particular meanings to certain expressions that are used in Subdivision B of Division 3 of Part III. The clause will insert in section 82AQ a number of additional definitions required to give effect to the extension of the investment allowance to an eligible Australian ship used outside Australia as proposed by clauses 11 to 16 and 18 to 20.

Four of the definitions proposed to be included in section 82AQ - "commissioning date", "eligible Australian ship", "eligible date" and "new ship" - are defined to have the same meaning as in proposed new sub-section 57AM(1), and these definitions have been explained in the notes on clause 10. The remaining new terms that are defined in section 82AQ are -

"sub-section 82AA(1) property" which means any eligible property which would presently qualify for the investment allowance under section 82AA; and

"sub-section 82AA(2) ship" which is an eligible Australian ship which qualifies for the investment allowance by virtue of new sub-section 82AA(2) proposed to be inserted into the Principal Act by clause 11.

Clauses 22 and 23 : Deductions for capital investment in qualifying Australian films

Introductory note

These clauses will effect a general reduction in the deduction available in respect of capital moneys expended in, or as a contribution to, the production of qualifying Australian films, enable qualifying film investments to be made under certain underwriting arrangements and open the way for investors in some ongoing film productions to obtain deductions in respect of their investments on a basis that was available before 13 January 1983.

Existing provisions of Division 10BA of the Principal Act authorise a deduction equal to 150% of capital expenditure in the production of a qualifying Australian film where that expenditure results in the acquisition by the investor of an interest in the initial copyright in the film. Existing section 23H of the Principal Act applies to exempt from tax an investor's net earnings from the film of an amount up to 50% of the qualifying investment.

Where an investment is made under a contract entered into before 13 January 1983, the 150% deduction is allowable in the income year in which the investor becomes the first owner of an interest in the copyright in the completed film and uses it for income producing purposes. Where the investment is made under a contract entered into on or after 13 January 1983, the 150% deduction is generally available in the year in which the eligible expenditure is made.

Under amendments proposed by these clauses, the 150% rate of deduction is to be generally reduced to 133% where the expenditure is made under a contract entered into after 23 August 1983. As explained earlier in these notes, by the amendments proposed by clause 4, the associated exemption from tax under section 23H of an investor's net earnings from a film is being reduced from a maximum of 50% of the qualifying investment to a maximum of 33%.

One of the conditions for deductions in respect of post-12 January 1983 film investments is that, by the close of the financial year in which moneys are first invested in the production of a film, there must have been entered into a production agreement that secures all the funds necessary for the production of the film. That broad condition is to remain, but it will no longer be a necessary condition of deduction for the particular investor to have been a party to that agreement by the end of that year.

The reduction in the rate of deduction, as in the associated rate of exemption, is to be modified in cases where investors contribute to the cost of producing a film in place of an underwriter who would have been entitled to a deduction at the rate of 150% and exemption of up to 50% of the eligible investment. Those deduction and exemption rates will continue to apply to an investor who makes a contribution under a contract entered into after 23 August 1983 to the extent that this relieves the obligations of an underwriter who had agreed to underwrite the production cost of the film under a contract entered into by the underwriter on or before that date.

Because of the requirement for deduction of post-12 January 1983 investments that the particular film's budget be secured by the end of the first financial year in which there was investment in the film, ongoing film productions that were first invested in prior to 1982-83 are unable to attract new investors who can qualify for the concessions under those rules. Furthermore, because deduction under the earlier rules is limited to investments made under contracts entered into before 13 January 1983, nor can potential investors in such films qualify for deduction and exemption under those earlier rules. Amendments proposed will close this gap so as to enable taxpayers who invest in such films under contracts entered into after 12 January 1983 to qualify for deduction on the general basis that had previously applied i.e., on the basis of the deduction becoming available in the year when the investor becomes the first owner of an interest in the copyright in the completed film and uses it for income producing purposes.

Clause 22: Deductions for capital expenditure under pre-13 January 1983 contracts and certain other contracts

This clause will amend section 124ZAF of the Principal Act by inserting a new sub-section 124ZAF(2A). Section 124ZAF authorises the allowance of deductions for capital expenditure by a taxpayer in, or as a contribution towards, the production of a qualifying film. Deductions are allowable in the income year in which the taxpayer was the first owner of the copyright in the film and first used it for the purpose of producing assessable income from the exhibition of the film. Alternatively, in a case where pre-sale arrangements had been entered into prior to the copyright coming into existence, the deduction is available in the income year in which the copyright is first owned by the taxpayer (i.e., when the film has been completed).

Where capital moneys were first invested in the production of a film prior to the 1982-83 financial year, new sub-section 124ZAF(2A) will authorise a deduction on that basis where the taxpayer's capital expenditure is made under a contract entered into on or after 13 January 1983 provided that the film's production had begun before that date, and was ongoing at that date. The deduction will be conditional on the taxpayer not being entitled to a deduction under section 124ZAFA in respect of his or her investment in the film, and on the general exclusion of pre-13 January 1983 investments being the only bar to deduction under section 124ZAF.

The deduction allowable under sub-section 124ZAF(2A) will be an amount equal to 150% of capital moneys expended under a contract entered into on or before 23 August 1983 and 133% of such moneys expended under a contract entered into after that date.

Clause 23: Deductions for capital expenditure under post-12 January 1983 contracts

Sub-clause 23(1) will amend section 124ZAFA of the Principal Act in several respects. It will first give effect to a general reduction from 150% to 133% in the rate of deduction in respect of capital moneys expended in or as a contribution towards the production of a qualifying film. To facilitate the use of certain underwriting arrangements, the sub-clause will also remove the present requirement for deduction that the taxpayer has, before the end of the financial year in which capital moneys were first invested in the production of a film, entered into a contract under which the taxpayer has (or the taxpayer and other persons have) agreed to expend the amount specified in the contract as the estimated cost of that production. Finally, it will enable a taxpayer who invests in the production of a film after 23 August 1983 to obtain a deduction at the higher rate of 150% if his or her investment is in lieu of that which an underwriter would otherwise have had to make pursuant to an underwriting contract entered into on or before 23 August 1983.

Paragraph (a) of sub-clause 23(1) proposes to replace existing sub-paragraph 124ZAFA(1)(d)(iv). This change will make it possible for the estimated cost of producing the film to be secured in one of two ways by the end of the financial year in which capital moneys were first invested in the production. The first is by means of a production contract under which the estimated cost is to be expended. The second is by means of a production contract and one or more underwriting contracts under which the estimated cost as specified in the production contract is to be expended.

Paragraph (b) of sub-clause 23(1) will authorise the reduction in the rate of deduction available under section 124ZAFA from 150% to 133% of capital moneys expended in or contributed towards the production of a qualifying Australian film. The former rate will continue to apply to moneys expended under contracts entered into on or before 23 August 1983 and the latter will apply to moneys expended under contracts entered into after that date.

Paragraph (c) of sub-clause 23(1) will insert new sub-sections 124ZAFA(1A) and (1B) into the Principal Act. Sub-section (1A) will enable a taxpayer who has invested in a film under a post-23 August 1983 contract to obtain a deduction equal to 150% of his or her eligible investment instead of 133% if the following conditions apply -

•

the production agreement or underwriting agreement was (or agreements were) entered into before 23 August 1983;

•

if there was no separate underwriting agreement, a party to the production agreement was an underwriter who agreed to underwrite some or all of the cost of production; and

•

the estimated cost of production exceeded the committed capital - i.e., non-underwritten capital (see notes on new sub-section (1B)) - when the taxpayer contracted to invest in the film.

New sub-section 124ZAFA (1B) defines the term "committed capital" in relation to a film. It is the amount that persons have expended or agreed to expend in or as a contribution towards the production of the film, other than amounts that persons have agreed conditionally to expend - underwritten amounts - (see notes on new sub-sections (5) and (6)).

Paragraph (d) of sub-clause 23(1) will insert two new sub-sections in section 124ZAFA, sub-sections (5) and (6). Sub-section (5) defines a production contract in relation to a film as one under which persons have agreed to expend capital moneys in or as a contribution towards the production of the film, but excluding an underwriting contract. An underwriting contract is defined as one under which a person has conditionally agreed to contribute to the cost of producing a film and under which no person has agreed to contribute other than conditionally.

New sub-section (6) makes it clear that to conditionally agree to contribute to the cost of producing a film is to agree to do so only if the total of other moneys invested, or agreed to be invested, in the production is less than a sum specified in the contract under which the conditional agreement is made.

Sub-clause (2) of clause 23, which will not amend the Principal Act, proposes that new sub-paragraph 124ZAFA(1)(d)(iv) is to apply to assessments of income of the income year in which 13 January 1983 occurred, and of all subsequent years of income - 13 January 1983 being the effective date of first application of section 124ZAFA.

Clause 24: Division not to apply to interest on certain debentures

Under section 128F of the Principal Act, interest paid on bearer debentures is exempt from the 10% withholding tax on interest paid to non-residents where the debentures are issued publicly or are otherwise widely distributed among investors overseas by a company that is a resident of Australia, or by a non-resident subsidiary of an Australian resident company if the sole business of the subsidiary is to borrow money for the parent at no profit to the subsidiary. The exemption is available to both Australian and foreign owned companies, but the money must be used by a resident of Australia in a business in Australia, or, if used outside Australia, for purposes connected with an Australian business.

Sub-clause (1) of this clause will amend section 128F to remove the present limitation of the exemption to debentures that are in bearer form so that it applies to all public or widely-spread debenture issues, whether in bearer or registered form.

Paragraphs (a) and (b) of sub-clause (1) respectively propose the omission of existing paragraph 128F(1)(c), and the word "bearer" in sub-section 128F(3), which presently limit the exemption to bearer debentures.

By sub-clause (2) of this clause, the amendments proposed by sub-clause (1) will apply, and will be deemed to have applied, in relation to interest paid on debentures issued after 23 November 1983. The deeming provision will make it clear that, in any case where an interest payment on a post 23 November issue of registered securities is made before the amending Act receives Royal Assent, and in respect of which withholding tax would be payable in accordance with the existing law, the amount of the tax so paid may subsequently be refunded.

Clause 25: Rebate in respect of amounts assessable under section 26AH

By this clause a new section - section 160AAB - will be inserted into the Principal Act. The new section will provide for a rebate of tax at the standard rate in respect of certain bonuses received in respect of short-term life assurance policies included as assessable income under proposed section 26AH. The rebate of tax will apply where the policy is one issued by a life assurance company the investment income of which is subject to income tax payable in accordance with the Principal Act.

Sub-section (1) of new section 160AAB defines "taxable life assurance company" to mean a life assurance company to which the special assessment provisions of Division 8 of Part III of the Principal Act apply but which is not exempt from income tax on the whole of its income.

Sub-section (2) formally authorises the rebate of tax. The sub-section specifies the rebate as an amount equal to 30% of the amount that has been included as assessable income under section 26AH. Sub-section (3) increases for the 1982/83 year of income the 30% rebate of tax specified in sub-section (2) to 30.67% (the standard rate of tax for that year of income).

Clause 26: Credits in respect of overseas tax paid on certain shipping income

This clause will insert new Division 18B in Part III of the Principal Act to provide for a credit to be allowed against Australian income tax for overseas tax paid on certain income derived from the overseas use of Australian ships.

As the law now stands, the income in question would be exempt from Australian tax - either because it is foreign source income of an Australian resident that is taxed in the country of source (paragraph 23(q) of the Principal Act) or because it is foreign source income of a non-resident (paragraph 23(r) of the Principal Act). However, it is a requirement for entitlement to the proposed new concessions for Australian ships trading overseas that the taxpayers concerned elect that all income derived from the use of the ships be assessable for income tax purposes in Australia (see earlier notes on proposed new sub-sections 57AM(6), (29) and (30) and new sub-section 82AA(3)).

Proposed new sub-section 160AGB(1) will confer entitlement to the tax credit in these circumstances. The sub-section will apply only where the taxpayer derives income from the use of a "trading ship", which income would, but for the taxpayer's election and sub-section 57AM(30), be exempt from Australian tax in terms of paragraph 23(q) or 23(r). The new sub-section also requires that the overseas tax on the income be tax for which the taxpayer was personally liable and that the tax has been paid under the income tax laws of the source country.

By new sub-section (2), the credit is only available where no other provision of the Principal Act allows credit for the overseas tax.

Under sub-section (3), the credit allowable is to be the lesser of the foreign tax borne by the taxpayer or the amount of Australian tax payable on the relevant foreign source income.

For the purposes of calculating the Australian tax payable on the income, sub-section (4) adopts the rules applied under section 15 of the Income Tax (International Agreements) Act 1953. Very broadly, the tax would be calculated by applying to the relevant foreign source income, net of relevant deductions, the average rate of Australian tax on the taxpayer's taxable income.

By sub-section (5), the term "trading ship" is to have the meaning it has in new section 57AM (see notes on clause 10).

By virtue of sub-section (6) the reference in new paragraph 160AGB(1)(a) to an amount of income derived by a taxpayer from the use of a trading ship is to be taken to include a reference to income derived by the taxpayer from -

(a)

the granting of a lease of the trading ship;

(b)

the letting of the trading ship on hire, otherwise than under a hire-purchase agreement; or

(c)

the granting of rights to use the trading ship.

Clause 27: Definitions

The amendment being made by this clause will ensure that the machinery provisions of Division 19 of Part III of the Principal Act which govern the allowance of credits for tax of other countries are applicable in relation to the credit provisions being introduced by clause 26.

Clause 28: Amendment of assessments

The general rules governing the amendment of income tax assessments are laid down in section 170 of the Principal Act, which contains certain limitations on the power of the Commissioner to amend assessments. Sub-section (10) of the section authorises the re-opening of assessments at any time, without the limitations usually applying to the making of amended assessments and either to increase or reduce liability, where this is necessary to give effect to specified provisions of the Principal Act.

Clause 28 of the Bill will insert in sub-section 170(10) references to new provisions that are to be included in the Principal Act by the Bill. These are new section 51AD, that is being inserted by clause 8, and sub-sections 57AM (10), (13), (14), (15) and (16) that are contained in clause 10.

Section 51AD may be applied to deny certain deductions attributable to the ownership of property on the basis that the property is to be used in a particular way, or in circumstances that require the Commissioner of Taxation to determine in advance the extent to which the property will be used for income producing purposes. If, in the light of the actual use of the property, it transpires that deductions of a greater or lesser amount ought to have been allowed the reference to section 51AD that is to be inserted in sub-section 170(10) by clause 28 will enable assessments to be appropriately amended.

The references to sub-sections 57AM(10), (13), (14), (15) and (16) being inserted in sub-section 170(10) will similarly authorise the amendment of assessments to give effect to those provisions. The circumstances in which such amendments may be necessary are explained earlier in these notes in relation to the operation of clause 10.

Clause 29: Deductions from certain withdrawals from film accounts

The amendments to section 221ZN of the Principal Act being proposed by this clause are consequential upon the general reduction from 150% to 133% in the rate of deductions for investment in qualifying Australian films that is being effected by clause 23.

Section 221ZN is part of a system of withholding tax that applies in relation to the arrangements that govern deductions for investments in Australian films made under contracts entered into after 12 January 1983. It imposes on a person who withdraws an amount from an account opened in relation to a film in the Australian Film Industry Trust Fund a requirement to make a deduction from that amount if it is not, upon withdrawal, dealt with in the prescribed manner. By and large, an amount will be taken as being dealt with in the prescribed manner if it is expended directly in producing the film.

Paragraphs 221ZN (1)(a) and (b) specify the rate at which such deductions are to be made. Under paragraph (a), the rate of deduction in respect of a withdrawal from a film account that is to be paid as a refund of contributions is set at 69% of the amount of the withdrawal in the case of a corporate investor, and 90% in all other cases. The rate of deduction for any other withdrawals that are not to be dealt with in the prescribed manner (i.e., withdrawals expended otherwise than in producing the film or as refunds to investors) is set by paragraph (b) at 90% of the amount of the withdrawal.

By the amendments to paragraphs 221ZN(1)(a) and (b) that are being proposed by sub-clause 29(1) the rates of deduction will be reduced from 69% to 61%, and from 90% to 80% respectively.

By sub-clause 29(2), which will not amend the Principal Act, those reduced rates will apply to amounts withdrawn from a film account more than 28 days after these amendments come into operation.

Clause 30: Transitional provisions relating to section 57AM and Subdivision B of Division 3 of Part III of the Income Tax Assessment Act 1936

Clause 30 of the Bill will not amend the Principal Act. It contains transitional provisions which are consequential upon the proposed allowance of special depreciation concessions for eligible Australian trading ships as well as the extension of the investment allowance in respect of such ships which are used outside Australia.

Sub-clause 30(1) will provide for the new concessions to apply, in certain circumstances, in respect of otherwise non-qualifying leased ships that are commissioned before the amending Act comes into operation.

Where the concessions would not otherwise apply because the lessor of a ship is a non-resident, the parties involved will have 6 months after the Act comes into operation, or such further time as the Commissioner of Taxation allows, to enter into an agreement under which the lessee acquires the ship. Similarly, where the investment allowance would not otherwise be available because the lessor is not a leasing company, the lessee may acquire the ship within the time allowed.

Where this action is taken and all the relevant conditions of sub-clause 30(1) are satisfied, the ship is, for the purposes of the special depreciation concessions provided by proposed new section 57AM (see notes on clause 10), to be taken to have been acquired new by the lessee and the commissioning date of the ship taken to be the date on which the lessee acquires the ship. No pre-commissioning deduction will, however, be allowed under sub-section 57AM(11). For investment allowance purposes, the ship will be taken to have been acquired new by the lessee under the acquisition agreement.

It will also be open to the parties involved to take action, again within a 6 months period, to extend the term of a lease so that it becomes a long-term lease (that is, a lease for 4 or more years) as required for investment allowance purposes. Where all the conditions of sub-clause 30(1) are satisfied, the lessee will then be taken, for investment allowance purposes, to have agreed to lease the ship under the original agreement for not less than 4 years.

Sub-clause (1) will only apply to new ships that were commissioned on or after 29 July 1977 which have been owned, and registered under the Shipping Registration Act 1981, continuously since 29 July 1977 or, if later, the commissioning date of the ship, and which have been leased since that date only to the lessee. The ship must also have commenced to be constructed, or to have been contracted for, by the lessor on or after 1 January 1976.

Sub-clause (2) will apply, for the purposes of sub-clause (1), so that references in that latter sub-clause to the lessor acquiring a ship new will be read to include a lessor who has acquired the ship from the lessee under a sale and lease-back transaction concluded within 6 months after the construction or acquisition of the ship.

Sub-clause (3) defines a number of terms used in clause 30("commissioning date", "lease", "post-July 1982 ship", "pre-July 1982 ship" and "trading ship") to have the same meaning as in proposed new section 57AM. The term "leasing company" is to have the same meaning as it does in the investment allowance provisions of the Principal Act.

Clause 31: Amendment of assessments

Clause 31, which will not amend the Principal Act, will ensure that the Commissioner of Taxation has authority to re-open an income tax assessment made before this Bill becomes law if that should be necessary in order to give effect to the amendments contained in clause 3 (special benefits paid to victims of major disasters), clause 5 (employee superannuation funds), clause 6 (short-term life assurance), clauses 7, 9, 10, 11 and 12 (Australian trading ships), and clause 25 (rebate in respect of short-term life assurance). The power of amendment authorised by clause 31 is necessary because the range of measures proposed by those clauses are to have effect from various dates prior to the Bill becoming law.