House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Rt Hon Phillip Lynch, M.P.)

General Outline

The purpose of this memorandum is to explain the main features of the enabling Commonwealth legislation that will permit the Commonwealth, where any State so wishes, to collect for the State an income tax levied by the State on its residents or to allow, at the cost of the State, a rebate of the Commonwealth income tax levied on residents of the State.

The proposed legislation will fulfil, on the Commonwealth's part, "stage 2" of the tax sharing arrangements between the Commonwealth and the States. Under stage 1 of those arrangements the States are, under the States (Personal Income Tax Sharing) Act 1976, to be paid 33.6 per cent of the amount collected as personal income tax levied by the Commonwealth.

Legislation, under "stage 2", to impose a State income tax or for a State to allow a tax rebate, will of course need to be passed by the Parliament of each State that wishes either to impose a tax or to allow a rebate. This Bill therefore does not introduce either State taxes or rebates. All that it does is to enable the Commissioner of Taxation to administer, on behalf of a State (and in conjunction with his administration of Commonwealth income tax laws) a tax or rebate law of that State if that law meets certain criteria set out in the Bill. These have been designed to maintain the essential uniformity of the Australian personal tax system and to enable Commonwealth and State laws to be applied with as much simplicity, and as little cost, as is practicable.

The Bill is in four main parts - Parts II, III, IV and V - Part I being devoted to definitional and other formal provisions. In brief, Part II sets out the criteria that State tax and rebate laws must meet if they are to be administered by the Commissioner of Taxation, Parts III and IV contain technical and machinery amendments to the Income Tax Assessment Act and other Commonwealth Acts, while Part V authorises the Commissioner of Taxation to exercise powers conferred on him by State tax and rebate laws and provides for payment to the States of amounts collected by the Commonwealth on their behalf. It also provides for equalisation assistance to be paid to the less populous States and deals with a range of other miscellaneous matters.

The main features of Part II are as follows:

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The Treasurer is empowered to declare a State to be a "participating State" for a year of income if it has tax or rebate laws that meet stated criteria and the State, as a "supporting State", legislates to enable the PAYE requirements of other States to operate in "border" situations (clause 4(1)).

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The Treasurer may revoke such a declaration where the State law ceases to meet those criteria (clause 4(2)).

(Declaration of a State as a "participating State" is a necessary condition for the Commissioner to administer the State's tax and rebate laws and for Taxation Boards of Review to exercise functions under those laws (clause 73).)

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State tax and rebate laws applicable for a financial year must be in force within a time scale that does not impair the orderly collection of income tax (clause 4(4)).

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Other criteria to which State tax and rebate laws must adhere for a particular financial year if the State is to be classed as a "participating State" for that year are:

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The Commissioner of Taxation and his officers are to be given like powers for the administration of State tax and rebate laws as are conferred by Commonwealth income tax law (clause 6).

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The State is to limit the application of its tax and rebate laws to -

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individuals "resident" in the State - the basic test being that if a person has his or her sole or principal place of residence on 30 June in the State, the person will be taken to be a resident of that State for the year; and

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certain trustees (clause 7).

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The State tax or rebate applicable to each resident of the State is to be expressed as a single flat percentage of the ordinary Commonwealth income tax payable by the person for that year (clause 7(1) (a), (e) and (j)).

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However, State tax will not be payable on interest from Commonwealth loans where the relevant prospectus has specified that the interest is not to be subject to State tax (clause 7(1)(e)).

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The State legislation is to be in such a form that the Commissioner of Taxation will be able to carry out, with sufficient uniformity, the administration of Commonwealth and State laws (clauses 8 and 9).

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The State will, so far as its jurisdiction permits, require that appropriate PAYE deductions reflecting its tax be made from the pay of employees resident in the State (clause 10).

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The State will allow its residents a credit against their State tax for so much of any foreign tax paid by those residents as has not been allowed as a credit against Commonwealth tax (clause 11).

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The State will legislate to achieve the result that any appeal against an assessment to State tax or determination of entitlement to State rebate will be heard by the same tribunal that considers an appeal against the matching Commonwealth assessment (clause 12).

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To facilitate the combined collection of Commonwealth and State tax, the State will assign to the Commonwealth for collection purposes the liability of employers and taxpayers to make payments of State tax (clauses 10(5), 13 and 15(2)). (By clause 76 the Commonwealth will pay to the State the amount collected by the Commonwealth on the State's behalf pursuant to such assignment.)

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Each State that imposes a tax or allows a rebate is, in "support" of other States, to require employers in border areas in the State to make PAYE deductions applicable under the law of another State in which the employee concerned is resident (clauses 15 and 10(2)).

As mentioned earlier, Part III of the Bill makes a number of technical and machinery amendments to the Income Tax Assessment Act. They are designed mainly to enable the Commissioner of Taxation to carry out the administration of State tax and rebate laws alongside his basic function of administration of the Income Tax Assessment Act. The more important of the amendments to the Assessment Act are as follows:-

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Where a participating State legislates to grant a rebate to its residents and provides the Commonwealth with funds necessary for that purpose the Commissioner of Taxation is to apply the rebate in reduction of the Commonwealth tax liability of the people concerned (clause 31).

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Correspondingly, the Commonwealth PAYE deductions and provisional tax liability of the State residents concerned are to be reduced to reflect their State rebate entitlement (clauses 39 and 57).

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A pre-uniform tax provision under which arrangements could be made for the Commonwealth to administer State income tax laws is being repealed (clause 18).

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Returns of income required for purposes of Commonwealth income tax may include questions relevant in determining liability to State tax and eligibility for State rebates (clause 25).

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Particulars of an assessment to State tax may be included on a Commonwealth assessment notice (clause 28).

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Notification of liability to State provisional tax may also be included on an assessment notice which includes a notification of liability to Commonwealth provisional tax (clause 53(b)).

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Commonwealth schedules of PAYE deductions from salaries and wages may include PAYE deductions necessary to meet State tax liability (clause 40).

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The Relief Board that may grant relief from payment of Commonwealth tax in cases of hardship is empowered also to give relief from payment of State tax (clause 66).

Part IV of the Bill amends or repeals various Acts other than the Income Tax Assessment Act. The more important of these amendments are:

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The Commonwealth Inscribed Stock Act 1911 is to be amended to place it beyound legal doubt that where the prospectus for a Commonwealth loan has provided that the interest on the loan is not subject to State income tax, the interest will be exempt from State income tax (clause 69).

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The Commonwealth Salaries Act 1907, which provides a basis for State taxation of Commonwealth public servants and Members of Parliament inconsistent in some respects with that proposed in the "stage 2" arrangements is to be repealed (clause 70).

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In calculating the amount of Commonwealth income tax in which the States are to share under "stage 1", pursuant to the States (Personal Income Tax Sharing) Act 1976, the amount of tax collected by the Commissioner of Taxation on behalf of the States under "stage 2" is to be disregarded (clause 71).

Part V of the Bill deals with a number of miscellaneous matters. The more important of these are:-

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The Commissioner of Taxation is to be formally empowered to administer the tax and rebate laws of participating States, and Boards of Review empowered to determine objections arising under such laws (clause 73).

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Arrangements are to be made for the Commissioner to supply to a State reports on the working of the State's tax and rebate laws (clause 74).

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Commonwealth authorities and employers in Commonwealth territories are to make PAYE deductions on account of State tax liability of employees resident in a State (clause 75).

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Amounts collected by the Commissioner of Taxation in respect of taxpayers' liabilities to State tax are to be paid periodically to each State, the Consolidated Revenue Fund being appropriated accordingly (clause 76).

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The Grants Commission may assess the "equalization" amount that should be paid to any of the less populous States that imposes a State tax, to make up for its lower taxing capacity (clause 76(5)).

Notes on each clause of the Bill are set out below:-