Explanatory Memorandum
(Circulated by authority of the Treasurer, the Rt. Hon. William McMahon.)Notes on clauses
INCOME TAX ASSESSMENT BILL 1966
This Bill is the third of the measures explained in this memorandum. Its principal features have already been mentioned and the following notes relate to each clause of the Bill.
Clause 1: Short Title and Citation.
This clause formally provides for the short title and citation of the Amending Act and the Principal Act as amended.
Section 5(1A.) of the Acts Interpretation Act 1901-1964 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act.
Sub-clause (1.) of clause 2 proposes that, except for section 17, the Amending Act will come into operation on the day on which it receives the Royal Assent. This provision will enable notices of assessment affected by amendments to the Principal Act to be issued as soon as Assent is given to the Bill.
By sub-clause (2.), section 17 of the Amending Act will come into operation on the day on which the Bankruptcy Act 1966 comes into operation. The date on which the Bankruptcy Act 1966 is to come into operation has yet to be proclaimed - see notes on clause 17 of the Amending Bill later in this memorandum.
Section 5 of the Principal Act lists the Parts and Divisions into which the Act is divided. Clause 3 will effect a drafting amendment to that section by including a reference to three new sections - sections 158AA, 158AB and 158AC - which are to be inserted in Division 16 of the Principal Act by clause 13 - see notes on that clause later in this memorandum.
Clause 4: Double Wool Clips in 1964-65 and 1965-66 Income Years.
The purpose of this clause is to extend to the 1965-66 income year the application of provisions inserted in the Principal Act in 1965 relating to woolgrowers whose assessable income of the 1964-65 income year included the proceeds of sale of two wool clips as a result of an advanced shearing occasioned by drought. These taxpayers could elect that the profit on the sale of wool shorn at the advanced shearing be transferred for assessment from the 1964-65 income year to the 1965-66 income year. A corresponding right of election is now proposed in relation to advanced shearings because of drought in the 1965-66 income year.
In the absence of a provision of this nature if a woolgrower shears at the normal time and then, because of drought, has an advanced shearing, the consequent earlier sale of the second clip may result in his assessable income of the one year including the proceeds of two wool clips. The special provisions now being extended to advanced shearings in the 1965-66 income year enable woolgrowers to overcome this situation.
To give effect to the proposed extension to 1965-66 the provision that applied for the 1964-65 income year - section 26BA of the Principal Act - is being repealed and a new section 26BA is being inserted in its stead. The new section 26BA is applicable to advanced shearings in both years and, with one modification, will operate in exactly the same way as the section it replaces.
This modification relates to woolgrowers who elected to transfer the profit on the sale of wool shorn at an advanced shearing in 1964-65 to 1965-66 and whose assessable income for 1965-66 also includes proceeds of the sale of wool shorn at an advanced shearing carried out in that year in consequence of the drought. In these cases the assessable income for 1965-66 effectively includes proceeds of the sale of two clips and it is proposed that such woolgrowers have a right to transfer the profit from the sale of the 1965-66 advanced clip to 1966-67 for assessment purposes.
Sub-section (1.) of the proposed section 26BA formally states that the section applies to the 1964-65 and 1965-66 years of income. It will, of course, also apply to accounting periods adopted by taxpayers in substitution for the years ending on 30th June 1965 and 1966.
Sub-section (2.) sets out the circumstances in which the right of election under the section is available.
Paragraph (a) enables an election to be made if in the particular income year (either 1964-65 or 1965-66) a taxpayer carried on a business of primary production in Australia.
Paragraph (b) provides that, subject to other conditions set out in paragraphs (c) and (d), the right of election is to be available if the assessable income of the taxpayer for the relevant income year includes proceeds of the sale of wool referred to in either sub-paragraph (i), (ii) or (iii).
Sub-paragraph (i) refers to proceeds of the sale of wool shorn in the particular year from sheep that are assets of the taxpayer's business. In effect, this sub-paragraph refers to wool shorn at the normal shearing.
Sub-paragraph (ii) relates to proceeds of the sale of wool shorn in the income year preceding the particular year from sheep forming assets of the taxpayer's business, which was on hand at the beginning of the particular year and brought to account for income tax purposes at that time at its cost price.
Sub-paragraph (iii) refers to an amount relating to wool shorn at an advanced shearing in 1964-65 that, by reason of an election under section 26BA, is transferred for assessment purposes from the 1964-65 to the 1965-66 income year.
Paragraph (c) requires that, in addition to the shearing referred to in paragraph (b), another shearing of sheep has, because of drought in the area in which the taxpayer carried on business, taken place earlier than the time at which it would ordinarily have occurred.
Paragraph (d) states the fourth test of sub-section (2.). This is that the assessable income of the taxpayer of the particular income year includes proceeds of the sale of wool shorn at the advanced shearing, as well as of a shearing referred to in paragraph (b).
Where the tests of sub-section (2.) are met the succeeding provisions of section 26BA are to have effect.
Sub-section (3.) will give a taxpayer who meets the tests of sub-section (2.) a right to elect that section 26BA will apply in relation to the profit on the sale of wool shorn at the advanced shearing, proceeds of the sale of which are included in his assessable income of the particular year, be it 1964-65 or 1965-66. (Sub-section (9.) specifies what is to be taken as the profit on the sale of the wool.).
Sub-section (4.) will confer a right of election on each member of a partnership where the net income of the partnership includes profit on the sale of wool shorn at an advanced shearing occasioned by drought.
As each partner is assessable on his share of the net income, sub-section (4.) grants each partner a separate right of election in respect of the part of the profit that is included in his individual interest in the partnership net income of the particular income year. One partner may therefore make an election under the section despite the fact that another partner chooses not to do so.
Sub-section (5.) is designed to extend to trustees of trust estates and persons presently entitled to the income of trust estates, the same principle as is adopted in sub-section (4.) in relation to partners.
Paragraph (a) of sub-section (5.) will give effect to this principle in relation to so much of the profit on the sale of wool shorn at an advanced shearing as is taxable in the hands of the trustee.
Paragraph (b) establishes a corresponding situation where tax is payable by a beneficiary on income of a trust estate to which he is presently entitled.
Sub-section (6.) is the operative provision that sets out the consequences of the making of an election under the section.
Under paragraph (a), where an election is made in relation to the whole of the amount of the profit on the sale of wool (e.g., in the case of a sole trader), the assessable income of the taxpayer of the particular year is to be reduced by the amount of the profit. A corresponding position is also established where an election relates only to a part of the profit, such as where an election is made by a partner.
By paragraph (b) the taxpayer's assessable income of the succeeding income year (1965-66 in the case of an election relating to 1964-65 and 1966-67 in the case of an election relating to 1965-66) is to include the profit, or the part of the profit, by which the assessable income of the particular income year has been reduced by reason of paragraph (a). Paragraph (b) also deems the amount carried forward to be income derived from primary production in the later year.
Sub-section (7.) will operate in the case of a taxpayer who would have been entitled to make an election under section 26BA, but who has died before the end of the particular income year.
In such a case the deceased taxpayer's trustee may make the election. If he does, the amount of the profit on the sale of wool to which the election relates is to be excluded from the assessable income of the deceased taxpayer of the particular year. Correspondingly, the relevant amount is to be treated as assessable income of the estate of the deceased taxpayer of the succeeding income year. The profit is to be deemed to be income derived by the trustee from primary production and to be income to which no beneficiary is presently entitled.
Sub-section (8.) provides for the time and manner in which elections are to be made. They are to be in writing and lodged with the Commissioner of Taxation. The primary time for lodgment is 31st December 1965 for 1964-65 elections and 31st December 1966 for 1965-66 elections, or the date of lodgment of the relevant return of income, whichever is the later. The Commissioner may, however, grant an extension of time for lodgment.
Sub-section (9.) specifies the meaning to be attached to the "profit on the sale of wool", i.e., the amount that may, on election, be transferred for assessment purposes from the year in which it arises to the succeeding income year. This profit is broadly the net proceeds of the wool after deduction of shearing and sale expenses.
The commencement point in the ascertainment of this profit is the proceeds of sale of wool shorn at the advanced shearing that are included in the assessable income of the taxpayer of the particular income year. From this amount are to be deducted the expenses incurred by the taxpayer in that year which are directly attributable to the shearing and sale of the wool. If only part of the wool shorn at the advanced shearing is sold in the particular income year an apportionment of the relevant expenses will be necessary.
Sub-section (10.) will give a power to amend assessments to give effect to elections made under section 26BA. In the absence of this power, section 170 of the Principal Act may operate as an impediment to amendment of an assessment where the assessment has been made before lodgment of an election by the taxpayer.
Clause 5: Disposal of Trading Stock.
By this clause it is proposed to amend sub-section (3B.) of section 36 of the Principal Act which specifies the circumstances in which a primary producer who has disposed of live stock in consequence of fire, drought or flood may elect to have the net proceeds of the disposal taxed over a period of five years.
Under the present provisions of sub-section (3B.), the primary producer may make this election if he establishes that the net proceeds on disposal will be used wholly or principally to purchase replacement live stock. The amendment proposed will extend the right of election to cases where the primary producer uses the net proceeds of the disposal wholly or principally to maintain breeding stock for the purpose of replacing the live stock disposed of.
This amendment will apply in relation to assessments for the 1965-66 income year and subsequent years.
This clause makes a drafting amendment to section 54 of the Principal Act.
Section 54 authorises the allowance of deductions for depreciation on plant owned by a taxpayer and used by him for the purpose of producing assessable income or which has been installed ready for use for that purpose and is held in reserve.
Fences, dams and other structural improvements on land which is used for the purposes of agricultural or pastoral pursuits are specifically included in the scope of plant used by a primary producer that is eligible for depreciation allowances. Expenditure on certain types of improvements is, however, deductible in the year in which the expenditure is incurred under section 75 of the Principal Act. The improvements in respect of which expenditure is deductible under section 75 are excluded from the scope of depreciation allowances by virtue of sub-paragraph (ii) of section 54(2.)(b). This ensures that a double deduction is not allowed for the same item of expenditure.
The purpose of clause 6 is to ensure that depreciation allowances are not available in respect of certain fences referred to in clause 7 of the Bill. In broad terms, under that clause, the full cost of certain fences erected to combat soil erosion will be deductible in full in the year of income in which the expenditure is incurred - see notes on clause 7 that follow.
This amendment will apply in assessments for the 1966-67 income year and subsequent years.
Clause 7: Certain Expenditure on Land used for Primary Production.
The primary purpose of this clause is to insert a new paragraph - paragraph (ga) - in sub-section (1.) of section 75 of the Principal Act which will authorise a deduction of the cost of erecting fences to combat soil erosion in specified circumstances.
Section 75 of the Principal Act authorises the allowance of a deduction for certain classes of expenditure incurred by a taxpayer engaged in primary production on land in Australia or the Territory of Papua and New Guinea in the year in which the expenditure is incurred.
The proposed new paragraph to be inserted in section 75 by paragraph (a) of clause 7 provides for a deduction to be allowed for expenditure on the erection of fences on such land to exclude live stock from areas affected by soil erosion. The paragraph requires that the purposes of excluding the live stock from those areas be to prevent or limit any extension or aggravation of the erosion and to assist in the reclamation of the affected areas.
Paragraph (b) of clause 7 effects an amendment to sub-section (2.) of section 75 of the Principal Act consequential upon the introduction of the new paragraph (ga) into sub-section (1.) of that section.
Sub-section (2.) of section 75, broadly stated, limits certain of the deductions available under sub-section (1.) of the section to the actual amount of the taxpayer's expenditure, when part of the total expenditure is met by a Government, Government authority or some person other than the taxpayer.
It is proposed that a similar limitation will apply to the deductions available for the cost of fences erected to combat soil erosion.
The amendment will apply to expenditure incurred on the erection of such fences in the 1966-67 income year and subsequent years.
Clause 8: Gifts, Calls on Mining Shares, Pensions, etc.
Section 78(1.)(a) of the Principal Act authorises the allowance of deductions for gifts of $2 or more to specified funds and institutions in Australia and the Territory of Papua and New Guinea.
By paragraph (a) of this clause it is proposed to amend sub-paragraph (xxvi) of section 78(1.)(a) of the Principal Act to authorise deductions for gifts to the Australian Council of National Trusts. This amendment is being effected by repealing the existing sub-paragraph and inserting a new sub-paragraph in its stead.
Paragraph (b) of clause 8 will insert two new sub-paragraphs - sub-paragraphs (xliii) and (xliv) - in section 78(1.)(a) of the Principal Act.
The new sub-paragraph (xliii) will authorise the allowance of deductions for certain gifts to prescribed institutions of advanced education. It will permit eligible schools, colleges or institutions to be prescribed by regulation. In order to qualify for deduction, it will be necessary for the gifts to be made for purposes of the institution that have been appropriately certified. In broad terms, they are purposes related to tertiary education.
The new sub-paragraph (xliv) will extend the deductions allowable under section 78(1.)(a) to gifts to the Australian Conservation Foundation Incorporated.
Paragraph (c) of clause 8 will insert a new sub-section - sub-section (5.) - in section 78 of the Principal Act. The sub-section will define the purposes referred to in the new paragraph (xliii) and provide a means for their certification.
The amendments proposed by this clause will apply in assessments for the income year 1966-67 and subsequent years.
Clause 9: Losses of Previous Years.
Clause 10: Losses of Previous Years Incurred in Engaging in Primary Production.
Clauses 9 and 10 relate to deductions for losses incurred by a taxpayer prior to the year of income for which tax is being assessed.
Section 80 of the Principal Act provides for the deduction in the year of income of losses incurred in any of the seven preceding years which have not already been recouped from assessable income or from exempt income.
The amendments proposed will remove the seven year limit in respect of losses incurred by a taxpayer in engaging in primary production.
In broad terms, a loss incurred by a taxpayer in carrying on primary production will be deductible in pursuance of a proposed new section - section 80AA. Any other loss will continue to be deductible under section 80 of the Principal Act over the period of seven years following the year in which the loss was incurred.
A taxpayer who is engaged in primary production and who is also engaged in other income earning activities may, from time to time, incur losses in both businesses. In these circumstances, the loss on primary production will, as already explained, be capable of being carried forward for deduction indefinitely but the period available for the other loss will still be seven years. Provision is being made that, in such a case, the loss which is subject to the seven year limitation will be the first to be allowed as a deduction. This is designed to ensure that the taxpayer obtains maximum deductions for losses incurred.
It is proposed to remove the limitation of the period for deductibility of losses in respect of a loss incurred in engaging in primary production during the 1957-58 income year or a later year. The amendment will apply in assessments for the income year 1965-66 and subsequent years.
This will mean that an unrecouped loss incurred in the 1957-58 income year in engaging in primary production will be deductible in the 1965-66 assessment or a later assessment although the loss was incurred outside the seven year period over which the loss may be carried forward under section 80 of the Principal Act. A primary production loss incurred in a year subsequent to the 1957-58 income year will also be deductible over an unlimited period.
In the case where the taxpayer's only business is primary production, the carry forward of the losses on the basis explained would occasion no difficulty. In other cases where losses of a different nature have also been incurred during the period commencing with 1957-58, it is proposed that, for the purposes of assessments for 1965-66 and subsequent years, all losses incurred in the earlier years affected by the amendment are to be taken to have been deductible as if the new provisions had operated during those income years. In broad terms this will ensure that a non-primary production loss in the earlier years will be treated as having been deducted in intervening years ahead of a primary production loss.
Further explanations of the amendments are given in the notes that follow.
Clause 9: Losses of Previous Years.
The purpose of this clause is to make drafting changes in section 80 of the Principal Act that are consequential on the proposed insertion in that Act by clause 10 of three new sections - sections 80AA, 80AB and 80AC - relating to losses incurred in engaging in primary production. As already explained, section 80 now permits losses to be carried forward for deduction over a period of seven years.
Paragraph (a) of clause 9 proposes an amendment to sub-section (1.) of section 80. That sub-section quantifies the amount of a loss deemed to be incurred in an income year. The loss is the excess of allowable deductions, other than concessional deductions and deductions for losses of prior years allowable under section 80 itself, over assessable and exempt income for the year. The amendment is designed to ensure that losses of prior years that arise from engaging in primary production, and which will be allowable deductions pursuant to the proposed section 80AA, are not taken into account as deductions in determining the amount of a loss incurred in any particular income year for the purposes of section 80.
Paragraph (b) proposes to insert in section 80 of the Principal Act a new sub-section - sub-section (2A.) - which will apply where a taxpayer has incurred an overall loss in engaging in primary production and in carrying on other activities. The sub-section limits the loss to which section 80 may apply to so much of the aggregate loss as exceeds the loss from primary production.
A taxpayer may, for example, incur an overall loss of $10,000 in a year of income $8,000 of which is attributable to primary production and $2,000 to another business. The new sub-section (2A.) will have the effect of treating the $2,000 as a loss to be carried forward for a period of seven years in accordance with section 80. The new section 80AA will apply to the $8,000 loss, permitting it to be carried forward indefinitely.
The purpose of paragraph (c) of clause 9 is to state in more appropriate terms a reference to Commonwealth bankruptcy law at present contained in sub-section (4.) of section 80. The amendment will not affect the practical operation of the sub-section which applies where a taxpayer has become a bankrupt or, not having become a bankrupt, has been released from debts by the operation of the bankruptcy law. In these circumstances, a loss incurred by the taxpayer before he became bankrupt or was released from debts is no longer deductible for income tax purposes.
Paragraph (d) is a further drafting measure consequential on the proposed insertion in the Principal Act of the new sections 80AA to 80AC.
It will amend sub-section (4B.) of section 80 of the Principal Act which applies in relation to a taxpayer who has incurred losses prior to his bankruptcy or release from debts and later voluntarily pays debts that have been taken into account in determining the pre-bankruptcy losses. It is to be noted that an outgoing incurred - but not actually paid - may be an allowable deduction for income tax purposes and may thus be taken into account in determining whether a loss has been incurred in a year of income.
As already explained, the effect of sub-section (4.) of section 80, in relation to a taxpayer who has become a bankrupt, or who has been released from any debts by the operation of an Act relating to bankruptcy, is that he is not entitled to a deduction in respect of losses incurred prior to the bankruptcy or release. Sub-section (4.) is, however, modified by sub-section (4A.) of section 80 which authorises a deduction in respect of a voluntary payment by the taxpayer of a debt incurred by him in any of the seven years preceding the year in which the payment is made, if he incurred a loss in the year in which the relevant debt came about. The deduction is, broadly stated, limited to the amount of the debt that was taken into account in ascertaining the amount of the loss of the income year in which the debt was incurred.
A limit on the aggregate deductions that may be allowed under sub-section (4A.) in respect of debts paid by a taxpayer is imposed by sub-section (4B.) in order that such a taxpayer is not placed in a more favourable position than other taxpayers who have not become bankrupt or been released from debts. The deductions allowable in the year of income may not exceed in total the amount of the loss of the year in which the debt was incurred as reduced by the sum of -
- (a)
- deductions allowed under sub-section (4A.) in assessments of previous years in respect of payments of debts incurred during the year of loss;
- (b)
- deductions allowed under section 80 in assessments of previous years in respect of the loss incurred by the taxpayer; and
- (c)
- deductions that would have been applied against net exempt income derived by the taxpayer in any year if he had not become bankrupt or been released from debts.
In future, deductions for losses incurred in engaging in primary production will be allowable under the proposed new section 80AA. Deductions in respect of debts paid by a taxpayer who has become bankrupt or who has been released from debts will, however, by virtue of sub-section (7.) of the proposed section 80AA, continue to be allowed under sub-section (4A.) of section 80 where the debts are paid within the seven year period after they were incurred, even though they were incurred in engaging in primary production - see notes at page 19 of this memorandum.
It is, therefore, necessary for deductions allowed to a taxpayer under the proposed new section 80AA, or that would have been applied in accordance with that section against exempt income if he had not become bankrupt or been released from debts, to be taken into account in determining the limit of the deductions available under section 80 in respect of debts paid by him, to the extent that the debts relate to any of the seven years prior to the year of income.
It is proposed by paragraph (d) of clause 9 to amend sub-section (4B.) of section 80 to achieve this result. For drafting purposes paragraphs (a) to (c) of sub-section (4B.) are being repealed and re-enacted in a form which does not change the practical effect they have at present.
The two new paragraphs - paragraphs (d) and (e) - to be inserted in sub-section (4B.) will ensure that deductions allowed for primary production losses under the proposed section 80AA, or that would have been applied in accordance with that section against exempt income if there had been no bankruptcy or release from debts, are taken into account in determining the limit of the deductions available for debts paid in relation to any of the seven years prior to the year of income in which a loss was incurred.
If debts incurred in engaging in primary production during a year in which a loss was incurred in carrying on that business are paid after the expiration of the period of seven years following the year in which they were incurred, the deductions available in respect of the payments will be determined under the proposed section 80AA. Explanations of the relevant provisions of that section - sub-sections (7.) and (8.) - are at page 19 of this memorandum.
By clause 10 it is proposed to insert in the Principal Act three new sections - sections 80AA to 80AC. These sections relate to deductions allowable in respect of losses incurred by a taxpayer in engaging in primary production.
Section 80AA : Losses of Previous Years Incurred in Engaging in Primary Production.
Section 80AA will authorise the allowance of a deduction in the year of income of a loss incurred by the taxpayer in any of the preceding years which has not been recouped from assessable income or from exempt income. This deduction will be available in respect of a loss incurred in engaging in primary production, i.e., in broad terms, the excess of the allowable deductions incurred in a year of income in carrying on these activities over the assessable income derived in that year.
Sub-section (1.) is a formal provision. It provides that the proposed new section 80AA will apply to a loss incurred by a taxpayer in engaging in primary production in the income year 1957-58 and subsequent years.
Sub-section (2.) sets out the circumstances in which a taxpayer is to be treated as having incurred a loss in an income year in engaging in primary production.
Paragraph (a) will require that the deductions allowable from the assessable income derived by the taxpayer in the year from primary production exceed that assessable income. Concessional deductions and the deductions allowable in respect of prior year losses are excluded from the deductions which are to be taken into account in determining whether a loss has been incurred in carrying on primary production. This accords with the long established principle adopted in section 80 of the Principal Act in determining the amount of loss that may be carried forward for deduction in future years of income under that section.
Paragraph (b) will ensure that a loss may be carried forward for deduction under section 80AA only if the taxpayer has incurred an overall loss in the year in carrying on his income-earning activities. If a taxpayer has incurred a loss in engaging in primary production but has derived net income from other activities which exceeds that loss, he will not have incurred an overall loss during the year. Accordingly, there will be no amount to be carried forward for deduction in subsequent income years under either section 80 of the Principal Act or under section 80AA. The primary production loss will, in effect, be offset against the other net income of the taxpayer in the assessment of his taxable income for the year in which that loss was incurred thus reducing his liability for tax in respect of that year.
Paragraphs (c) and (d) provide, in effect, that where the requirements of paragraphs (a) and (b) are met, the amount of the loss that may be carried forward for deduction under section 80AA will be the lesser of -
- (i)
- the excess of the deductions allowable from assessable income derived from primary production over that income; or
- (ii)
- the amount of the loss that the taxpayer is deemed to have incurred for the purposes of section 80 of the Principal Act.
| Primary Production | Other Business | |||
|---|---|---|---|---|
| Assessable Income | $ 20,000 | $ 10,000 | ||
| Allowable Deductions | $ 24,000 | $ 9,000 | ||
| Loss | $ 4,000 | Net Income | $ 1,000 | |
In this example, the amount of the loss deemed to be incurred by the taxpayer for the purposes of section 80 is $3,000. As this amount is less than the amount of $4,000 incurred in primary production, the amount of $3,000 will be carried forward for deduction under section 80AA in subsequent income years.
| Primary Production | Other Business | |||
|---|---|---|---|---|
| Assessable Income | $ 20,000 | $ 10,000 | ||
| Allowable Deductions | $ 24,000 | $ 12,000 | ||
| Loss | $ 4,000 | Loss | $ 2,000 | |
In this example, the amount of $4,000 loss deemed to be incurred by the taxpayer in primary production is less than the loss of $6,000 deemed to be incurred for the purposes of section 80. Accordingly, the amount of $4,000 will be carried forward for deduction in accordance with section 80AA and the balance of $2,000 will be deductible in accordance with section 80.
Sub-section (3.) states the basis for determining the income tax deductions that are to be taken into account for the purpose of calculating the amount of a loss incurred in engaging in primary production.
By paragraph (a) deductions that relate exclusively to the assessable income derived from primary production will be taken into account for that purpose. These will include all amounts, capital or otherwise, that are allowable deductions under the Principal Act and which relate exclusively to primary production.
Under paragraph (b) other deductions will be taken into account for the purpose of calculating the primary production loss only to the extent to which they relate to assessable income derived from primary production.
Sub-section (4.) is the operative provision of section 80AA. It authorises a deduction of losses incurred by a taxpayer in any of the years prior to the year of income in engaging in primary production to the extent to which the loss has not been recouped from assessable or exempt income. This deduction will be available in assessments for the 1965-66 income year and subsequent years in respect of such a loss incurred by a taxpayer in the 1957-58 income year or a later year.
Paragraph (a) provides that a deduction for undeducted losses of previous years shall be allowed from assessable income if the taxpayer has not derived exempt income during the year of income.
Paragraph (b) makes provision for the case where a taxpayer has derived exempt income during the year of income. In these circumstances, the deduction for the loss is to be allowed successively from the net exempt income and from assessable income.
Paragraph (c) will ensure that where a deduction is allowable under section 80AA for two or more losses, the losses are allowed as deductions in the order in which they were incurred.
Sub-section (5.) defines "net exempt income" as having the same meaning as it has for the purposes of section 80 of the Principal Act.
In the case of a resident of Australia "net exempt income" means, broadly, the part of his net income derived from all sources that is exempt from Australian tax, as reduced by any overseas taxes payable in respect of the income. In the case of a non-resident, the term relates to the net income derived from Australian sources that is exempt from Australian tax.
For the purposes of section 80 of the Principal Act and the proposed new section 80AA, dividends satisfied by the issue of bonus shares that are exempt from tax under section 44(2.)(b)(iii) of the Principal Act are excluded from the exempt income that is to be taken into account. Certain exempt income derived from the sale of petroleum produced in Australia that is excluded from the exempt income to be taken into account for the purposes of section 80 will also be excluded for the purposes of the proposed new section 80AA.
Sub-section (6.) corresponds with the provisions of sub-section (4.) of section 80 of the Principal Act. It provides, in effect, that a taxpayer who has become a bankrupt or, not having become a bankrupt is released from debts by operation of an Act relating to bankruptcy, is not entitled to deductions in respect of losses incurred before the date of bankruptcy or release.
Sub-section (7.) modifies the operation of the provisions of sub-section (6.), and corresponds with sub-section (4A.) of section 80. It applies where a taxpayer who has become bankrupt, or has been released from debts, voluntarily pays an amount in respect of a debt incurred by him during a year not later than eight years before the year of payment of the debt and being a year in which he incurred a loss in engaging in primary production.
If the debt relates to one of the seven years before the year of income the payment will be deductible in accordance with the relevant provisions of section 80. However, if it relates to an earlier year, it will, subject to the limits provided in sub-section (8.), be deductible in accordance with sub-section (7.) of section 80AA, to the extent to which it does not exceed the amount of the debt that was taken into account in ascertaining the amount of the primary production loss of the relevant year.
Sub-section (8.) is a machinery provision broadly corresponding with sub-section (4B.) of section 80, the operation of which has been explained at pages 14 to 16 of this memorandum. Its purpose is to impose a limit on the aggregate of the deductions that may be allowed in accordance with sub-section (7.) in respect of the payment of a debt by a taxpayer who is bankrupt or has been released from debts.
The deductions under sub-section (7.) may not exceed the loss incurred by the taxpayer in engaging in primary production during the year in which the debt was incurred, less the sum of the amounts specified in paragraphs (a), (b), (c) and (d) of sub-section (8.). Very broadly, the amounts specified by those paragraphs represent deductions that have already been allowed to the taxpayer in respect of the loss or payment of the debts, and amounts which would have been applied against exempt income if he had not become bankrupt or been released from debts.
Section 80AB : Order in Which Deductions Allowable in Respect of Losses of Previous Years to be Taken Into Account.
The purpose of this proposed section is to state the order in which deductions are to be allowable for losses where the taxpayer has incurred a loss in engaging in primary production and has also incurred a loss in carrying on other activities. Broadly stated, the section will ensure that the losses which may be carried forward for only seven years are deductible before primary production losses in respect of which no such limitation applies.
Section 80AC : Limitations on Net Exempt Income to be Taken Into Account in Respect of Deductions Under Section 80AA.
Section 80AC is a drafting measure the purpose of which is to prevent a duplication of the amounts of losses applied against exempt income derived by a taxpayer who has incurred a loss in engaging in primary production and a loss in carrying on other activities.
As already explained, both section 80 of the Principal Act and the proposed section 80AA provide that, where a taxpayer derives exempt income during a year of income, a loss incurred in a previous year is to be deducted successively from the net exempt income and the assessable income derived by the taxpayer. Where the taxpayer has voluntarily paid a debt which had been taken into account in determining a loss incurred before his bankruptcy, or release from debts by operation of the Bankruptcy Act, net exempt income derived after the bankruptcy or release may enter into the calculation of the deductions allowable under both of those sections in respect of the payment of the debt.
In the absence of a specific provision to the contrary, the situation might arise where a loss would be applied against the same amount of net exempt income for the purposes of both section 80 of the Principal Act and the proposed section 80AA. The practical effect of this would be to reduce the deductions allowable to the taxpayer from his assessable income in respect of the losses. Similarly, deductions in respect of debts paid after bankruptcy or a release from debts under the Bankruptcy Act would be reduced if the same exempt income were taken into account in the calculation of the deductions allowable under both section 80 and section 80AA.
The proposed section 80AC is designed to avoid this situation by limiting the amount of the net exempt income to be taken into account in calculating deductions allowable under section 80AA.
Sub-section (1.) of the proposed section 80AC will operate where deductions for losses of previous years are allowable against net exempt income under both section 80 of the Principal Act and the new section 80AA.
In these circumstances, only the amount, if any, of the net exempt income remaining after allowing a deduction for a loss under section 80 will be taken into account for the purposes of section 80AA.
Sub-section (2.) adopts a similar principle in respect of isolated cases which may occur where deductions are allowable under both section 80 of the Principal Act and section 80AA in respect of debts paid after bankruptcy or a release from debts. Exempt income will not be taken into account in calculating the deductions allowable under section 80AA in respect of those payments if that income has been taken into account for that purpose in relation to section 80.
Clause 11: Additional Tax on Undistributed Amount.
This clause makes a drafting amendment which does not change the practical effects of the existing law. It is associated with the Income Tax Bill 1966 and, when read with that Bill, its effect is to state that tax is payable on the undistributed income of private companies for the financial year 1966-67 at the rate declared in that Bill.
Clauses 12 and 13 : Averaging of Incomes.
Clauses 12 and 13 relate to the averaging of incomes of primary producers.
In broad terms, the effect of the present law is that the taxable income of a primary producer of a year of income is taxed at the rate applicable to his average income. The maximum span of years for determining the average income is five, inclusive of the year of income being assessed. Where either the taxable income or the average income exceeds $8,000, there are some modifications of the averaging system. Where both taxable income and average income exceed $8,000, the averaging system does not, in practice, apply.
Since 1952 primary producers have had the right to elect to withdraw permanently from the averaging provisions.
In broad terms, it is proposed by clauses 12 and 13 and provisions of the Income Tax Bill 1966 (explained at pages 5 to 6 of this memorandum) to -
- (a)
- raise the income limits up to which the averaging provisions may apply from $8,000 to $16,000; and
- (b)
- authorise re-entry into the averaging system for those primary producers who have elected to withdraw from it in respect of the 1965-66 income year or an earlier year.
Clause 13 proposes special provisions designed to ensure that the raised income limits for averaging purposes proposed to be enacted by the Income Tax Bill 1966 will not operate to the initial disadvantage of a primary producer who has remained in the averaging system. Broadly stated, such a taxpayer will continue to be assessed under the old average limits until the new limits confer an advantage. The new limits will, however, apply in respect of all years after the first year of income in which they confer an advantage.
Subject to the modifications mentioned, the new limits will apply in assessments for the 1966-67 income year and subsequent years.
It is proposed that primary producers who have elected to withdraw from the averaging system in respect of the income year 1965-66 or an earlier year, may elect that the system be again applied. In the normal case of a taxpayer engaged in primary production in the 1966-67 income year and each of the succeeding three income years the right of re-entry may be exercised in respect of any of those years. In the more unusual case of a taxpayer who has previously withdrawn from the averaging system, but is not engaged in primary production in any of the years mentioned, the right of re-entry may be exercised in relation to the first subsequent year in which he is so engaged.
On re-entry into the averaging system, the system will, in the normal case, apply to the primary producer as if he had never withdrawn from it. In other words, the first income year of re-entry, and each subsequent year, will in turn be regarded as the latest year of the average period. In the more unusual case mentioned in the preceding paragraph, the taxpayer will be treated as if he were engaging in primary production for the first time.
Section 158A : Election that this Division Shall Not Apply.
Section 158A of the Principal Act grants to a taxpayer the right to withdraw from the averaging system on lodgment of an election to this effect. Hitherto the election has been irrevocable and its lodgment has excluded the operation of the averaging provisions from assessments in respect of the first year of income specified in the election and all subsequent years.
By clause 12, section 158A will be made subject to two new sections - sections 158AA and 158AB - which clause 13 proposes to insert in the Principal Act. These sections are explained in the notes that follow.
By this clause it is proposed to insert in the Principal Act three new sections - sections 158AA, 158AB and 158AC.
Section 158AA : Election that this Division Shall Apply.
The purpose of this section is to permit a taxpayer who has withdrawn from the averaging system to re-enter in the circumstances set out in the section.
Sub-section (1.) formally provides that the section applies only to a taxpayer who has elected to withdraw from averaging in respect of the 1965-66 income year or an earlier year. Accordingly, a taxpayer who exercises his right to withdraw from the averaging system for the 1966-67 income year or a later year will not be entitled subsequently to request that the averaging provisions again be applied in his assessments.
Sub-section (2.) is the operative provision. It grants to a taxpayer the right to elect that the averaging provisions shall apply in his assessment for the year of income specified in the election and all subsequent years of income.
Sub-section (3.) prescribes the years in respect of which an effective election to re-enter the averaging system may be made.
Paragraph (a) makes provision for the case where a taxpayer who has previously withdrawn from the averaging system is not carrying on primary production during any of the four income years 1966-67 to 1969-70 inclusive. Such a taxpayer will need to lodge an election for the first year after 1969-70 in which he commences to be engaged in primary production if he desires to have the averaging provisions applied in his assessments.
By paragraph (b), other taxpayers engaged in primary production are required to lodge an appropriate election for one of the four income years, 1966-67, 1967-68, 1968-69 or 1969-70, if they desire to re-enter the averaging system.
Sub-section (4.) defines the meaning of a "primary producer" for the purposes of the proposed new section 158AA.
This term is given the same meaning as it has in section 157 of the Principal Act. It means any person who carries on a business of primary production in Australia and extends to cover an Australian resident who, while he is not a resident of the Territory of Papua and New Guinea, carries on a business of primary production in the Territory.
The expression "primary production" is defined in section 6 of the Principal Act. Briefly, this expression includes production resulting directly from the cultivation of land or the maintenance of animals or poultry for the purpose of selling them or their bodily produce. It also covers fishing operations (including oyster farming) and forestry operations conducted for the purposes of a business. The manufacture of dairy produce by a person who produced the raw materials used is also treated as primary production.
Sub-section (5.) is a machinery provision governing the time and manner of lodgment of an election under section 158AA. No special form of election is prescribed. It must, however, be made in writing and lodged with the Commissioner of Taxation not later than the date of lodgment of the return of income of the year in respect of which it is first to apply. The Commissioner is empowered to extend the time for lodgment of an election.
Sub-section (6.) provides that where a taxpayer has made an election under section 158AA in respect of a year of income, the averaging provisions will apply for the purposes of tax upon his taxable income of that year and all subsequent years as though he had not previously withdrawn from the averaging system.
Accordingly, a primary producer who lodges an election specifying the 1966-67 year of income will (subject to the income limits prescribed in the Income Tax Bill) be taxed at average rates of tax in his 1966-67 assessment and assessments for following years.
If the taxpayer has been a primary producer in each of the four years preceding the 1966-67 year of income, the average income of that year will be calculated as the average of his taxable incomes of the years from 1962-63 to 1966-67 inclusive.
As mentioned in the explanation of sub-section (3.) above, a primary producer is given the choice of any of the four income years from 1966-67 to 1969-70 inclusive in which to re-enter the averaging system. This choice will enable primary producers, if they so desire, to defer the making of elections under section 158AA until the lower incomes of the drought years have the greatest effect in calculating the average income.
Section 158AB : No Further Election that this Division Not to Apply.
This section provides, in effect, that an election to re-enter the averaging system is irrevocable. The provisions of the section do not affect the right of a taxpayer who has not previously withdrawn from averaging to elect to withdraw in the future. A taxpayer who makes such an election to withdraw in respect of the 1966-67 income year or a subsequent year will not, however, be entitled to re-enter the averaging system.
Section 158AC : Ascertainment of Average Income in Certain Cases.
The purpose of this section is to ensure that the raising of the income limits up to which the averaging provisions may apply from $8,000 to $16,000 will not initially operate to the disadvantage of a taxpayer who has been continuously subject to those provisions, i.e., one who has never elected to withdraw from their application.
Such a situation would occur where the average income of the taxpayer is higher than his taxable income for a year of income and -
- (a)
- the taxable income is $8,000 or less, but the average income is greater than $8,000; or
- (b)
- the taxable income is more than $8,000 but less than $16,000.
If the situation referred to in (a) existed, the taxpayer would, under the former income limits, pay tax on his taxable income at the rates applicable to $8,000. However, in the absence of section 158AC, the tax payable under the new limits would be determined by reference to an average income in excess of $8,000.
If the situation referred to in (b) existed, the rate of tax under the former income limits would be determined by reference to the actual taxable income. The application of the new limits would, however, require the tax to be calculated at the rate applicable to an average income which is higher than the taxable income, or $16,000, whichever is the lesser.
Broadly stated, section 158AC is designed to limit the tax payable by any taxpayer who has not withdrawn from averaging to the tax he would have paid if the former income limits for the averaging provisions had not been increased. This result will be obtained for each year of income until such time as the new income limits have benefited the taxpayer. A benefit would occur when the average income is less than the taxable income and the former income limits for averaging are exceeded. Once the new limits have operated to a taxpayer's advantage, they will be applied in assessments for all subsequent income years.
The practical application of the section may best be illustrated by a simple example -
- The taxable and average incomes of a taxpayer subject to the averaging provisions are -
Year of Income Taxable Income Average Income $ $ 1966-67 9,000 10,000 1967-68 4,000 7,200 1968-69 15,000 8,600
1966-67
- The rate of tax imposed under the former average income limits would be the rate applicable to a taxable income of $9,000 because both the taxable income and the average income exceed $8,000. By virtue of section 158AC the rate applicable for 1966-67 will remain at the rate applicable to that taxable income notwithstanding the rise in the average income limits. This will ensure that the taxpayer does not pay more tax in consequence of the change in the limits. 1967-68
- The rate of tax imposed under the former average income limits would be the rate applicable to the average income of $7,200. This situation will not be disturbed under the new provisions because the increase in the average income limits does not result in the taxpayer paying more tax than he would have paid if there had been no change in the limits. 1968-69
- The rate of tax imposed on the taxable income of $15,000 will be the rate applicable to the average income of $8,600. Formerly, the taxable income would have been taxed at the rates applicable to $15,000. Having derived a benefit under the increased average income limits, the taxpayer will be assessed in succeeding years in accordance with those limits whether or not they operate to his benefit in a particular year.
Sub-section (1.) of section 158AC sets out the circumstances in which the section will operate in favour of a taxpayer. In brief, the sub-section requires that -
- •
- the taxpayer has been assessable under the averaging provisions for the 1965-66 and each following year of income (paragraph (a));
- •
- his taxable and average incomes of the year concerned are such that, but for the section, he would now be called upon to pay tax at a higher rate than would have applied under the former average income limits (paragraphs (b) and (c));
- •
- he has not already received the benefit of a lower rate of tax under the increased average income limits in an earlier year's assessment (paragraph (d)).
Sub-section (2.) is a drafting provision to define the term "average income of a taxpayer of a year of income" appearing in sub-section (1.). The term will mean, in effect, the average income upon which the rates of tax to be imposed in the taxpayer's assessment would have been determined if section 158AC had not been enacted.
Sub-section (3.) is the operative provision of section 158AC.
It provides that, where the section applies to a taxpayer, his average income shall, for the sole purpose of determining the rate of tax, be taken to be the greater of his taxable income or $8,000.
The practical effect of this provision is that a taxpayer who meets the requirements of sub-section (1.) will be subject to tax at the rates which would have applied in his assessment if the average income limits had been maintained at $8,000.
As already indicated, the provisions of section 158AC will not apply to a taxpayer who has received a benefit from the increased average income limits in the 1966-67 income year or a subsequent year. If a taxpayer who has received such a benefit is adversely affected by the new limits in a subsequent income year he may elect to withdraw from the averaging system provided he has not previously withdrawn and then elected to re-enter.
Clause 14: Rebate in Case of Disposal of Assets of a Business of Primary Production.
This clause proposes two drafting amendments to section 160 of the Principal Act which provides a special rebate of tax for taxpayers who dispose of the whole of the assets of a business of primary production and, in doing so, dispose of live stock at a profit.
The changes proposed are consequential on the proposed expression of the rates of income tax for 1966-67 in the two rating measures and do not affect the practical operation of the section.
Clause 16: Credit in Respect of Tax Paid in the Territory of Papua and New Guinea.
The amendments proposed by these clauses to sections 160AE and 160AF of the Principal Act are of a formal drafting nature associated with the proposal to have two Acts imposing income tax. In these circumstances, the reference to "the" Act imposing income tax in each of those sections is being replaced by a reference to "an" Act imposing income tax. The practical operation of the provisions will not be affected by the amendments.
Clause 17: Payment of Tax to Have Priority in Case of Liquidation.
The purpose of this clause is to abate the existing priority for payment of income tax debts on the bankruptcy of a taxpayer.
Under section 221 of the Principal Act debts for assessed income tax have a high priority for payment in bankruptcies. When the Bankruptcy Act 1966 comes into operation, a more restricted priority will be substituted. The new priority will be provided in section 109 of the Bankruptcy Act 1966. It is, therefore, proposed to repeal provisions of the Principal Act granting priority in bankruptcy cases.
The Bankruptcy Act 1966 is to come into operation on a date yet to be proclaimed. Clause 2 of this Bill ensures that the amendments made by the proposed Clause 17 will operate from the same date.
Sub-clause (1.) is the operative provision.
Paragraph (a) of this sub-clause will omit the provisions of the Principal Act requiring trustees in bankruptcy to pay debts for assessed income tax in priority to other debts of the bankrupt. As mentioned above, a limited priority for these debts will be provided in section 109 of the Bankruptcy Act 1966.
Paragraph (b) of sub-clause (1.) is a drafting amendment, consequential upon the omission made by paragraph (a) of the sub-clause.
Sub-clause (2.) provides that payments made to the Commissioner by a trustee in bankruptcy in accordance with the present priority will not be repayable to the bankrupt's estate after the amendment proposed by sub-clause (1.) comes into operation. The broad effect of the proposed sub-clause is that the existing priority will continue to apply to payments made by the trustee up to the date of commencement of the Bankruptcy Act 1966.
Sub-clause (3.) will, in broad terms, preserve the existing priority for the payment of income tax in respect of a bankruptcy which is partly administered when the Bankruptcy Act 1966 comes into operation and the bankruptcy law requires the trustees to complete the distribution of the bankrupt estate in accordance with the Bankruptcy Act 1924-1965.
Clause 18: Amount of Provisional Tax.
This clause amends section 221YC(2.) of the Principal Act which authorises regulations varying the amount of provisional tax when rates of income tax are changed. The amendment will authorise regulations where some only of the rates are changed, e.g., as outlined in pages 5 to 6 of this memorandum.
Clause 19: Additional Amendments.
Clause 19 formally provides for a number of consequential drafting amendments. These are set out in a Schedule and brief explanations are given later in this memorandum.
Clause 20: Application of Amendments.
This clause specifies the commencing date for the application of proposed amendments affecting assessments. These dates have been referred to in the notes on the relevant clauses.
Clause 21: Transitional Provision in Relation to Losses of Previous Years.
Clause 21 is associated with clause 10 which, as already explained, removes the limit of seven years on the carry-forward period for deduction of a loss incurred in engaging in primary production. Very broadly, its purpose is to provide that in relation to assessments for the income year 1965-66 and subsequent years the amendments being made by the Bill concerning carry-forward of losses are to be deemed, where appropriate, to have been applicable for the purpose of determining the amounts of primary production losses and other losses allowed as deductions in assessments of income years prior to the income year 1965-66.
Sub-clause (1.) of clause 21 states that the provisions of the clause are to apply for the purpose of making an assessment in respect of income derived by a taxpayer during the 1965-66 income year and subsequent years. The provisions will not, therefore, affect an assessment made or to be made in respect of income derived in previous years of income.
Sub-clause (2.) will apply where a taxpayer has incurred a primary production loss during any of the income years 1957-58 to 1963-64 and has been allowed deductions for the loss under section 80 of the Principal Act.
Deductions for such losses will be allowable under the proposed section 80AA for the 1965-66 income year and subsequent years to the extent to which they have not been recouped from exempt or assessable income of earlier years.
In those cases where a taxpayer has in earlier years incurred a primary production loss and a loss in carrying on other activities, the losses may have been deducted under section 80 in the assessments of income of the earlier years in a different order from which they would have been deducted if section 80AA had been in operation during those years.
Broadly stated, the purpose of the provisions of clause 21 is, as far as practicable, to place a taxpayer in these circumstances in the same position as he would have been in if section 80AA had been operative during the years in question. If a primary production loss has been allowed as a deduction in an income year prior to 1965-66 and, if the new provisions had then applied, another loss would have been deducted from the income of the year concerned in lieu of the primary production loss, the other loss will be treated as having been allowed as a deduction in that year. This procedure will preserve to the taxpayer an entitlement to a deduction of the primary production loss without limitation as to the period over which the loss may be carried forward.
The provisions of clause 21 will not, however, operate to entitle a taxpayer to any greater deductions for losses in assessments of the earlier years than the deductions which he has actually been allowed in those years.
Sub-clause (3.) is a drafting provision.
By paragraph (a) a reference in clause 21 to a deduction that has been, or would have been, allowed is to be read as a deduction that is, or would have been, allowable to the taxpayer. There may, for example, be cases where a particular loss is allowable to a taxpayer in an income year before 1965-66 but has not been allowed because an assessment has not been made in respect of that year. Paragraph (a) will ensure that the transitional provisions apply in such a case and others involving broadly corresponding circumstances.
Paragraph (b) provides that a reference in clause 21 to a deduction is also to be read as a reference to a deduction from net exempt income. As already explained, a loss is deductible under both section 80 of the Principal Act and under the proposed new section 80AA successively from net exempt income and from assessable income derived by a taxpayer.
The practical effect of paragraph (b) of sub-clause (3.) is that, in having regard to the deductions for primary production losses allowed in assessments for the 1964-65 and earlier income years, the losses deducted from net exempt income will also be taken into account in determining the amounts of such losses which are to be treated as unrecouped for the purposes of the proposed new section 80AA.
Schedule of Additional Amendments.
A number of the amendments to the Principal Act consequential upon the proposed removal of the limitation on the period over which deductions may be allowable against income in respect of losses incurred in engaging in primary production are of a relatively minor nature. These are being made in the Schedule to the Bill. This is authorised by clause 19 of the Bill. The nature of the amendments and the sections amended are as follows :
Section 51AC : Export Market Development Allowance.
In broad terms, section 51AC of the Principal Act authorises allowance of a special deduction in respect of certain classes of expenditure incurred primarily and principally in promoting the export of goods and services from Australia.
The special allowance takes the form of a further deduction equal to the amount of the export market development expenditure incurred. Provision is, however, made for limitation of the further deduction to an amount that does not result in a tax saving in excess of four-fifths of the amount incurred on export market development.
This limitation on the amount of the special deduction continues to have effect where a loss is incurred in the year of expenditure and the outgoings subject to the special deduction are carried forward as part of a loss for deduction from income of a subsequent year in accordance with section 80 of the Principal Act.
The amendment proposed by the Schedule is designed to ensure that the limitation referred to continues to have effect in respect of the special deduction available to a taxpayer for export market development expenditure that is taken into account in calculating a loss incurred in engaging in primary production.
Section 79C : Limitation on Certain Deductions.
Section 79C of the Principal Act provides that certain allowable deductions are not to be taken into account for the purpose of determining whether a loss has been incurred in a year of income which may be carried forward for deduction against income of subsequent years in accordance with section 80 of the Principal Act.
The amendment to section 79C proposed by the Schedule ensures that these deductions will also be excluded from the calculation of a primary production loss in accordance with the proposed new section 80AA.
Section 80A, 80B, 80C, 80D, and 80E : Losses of Previous Years Incurred by a Company.
Sections 80A, 80B, 80C, 80D and 80E of the Principal Act modify the operation of section 80 of that Act in respect of the deductions allowable for a loss incurred by a company in a previous income year.
Very broadly, a company is not entitled to a deduction in its assessments for a loss incurred in an earlier year if -
- (a)
- there has been a greater than 60 per cent change in the shareholdings of the company; and
- (b)
- the company does not carry on only the same business as it carried on before the change in shareholdings took place.
Under the present law, these provisions apply to losses incurred by all companies and the amendments proposed in the Schedule will preserve this position in relation to companies that incur losses from carrying on primary production.
Section 90 : Partnerships - Definitions.
Section 90 of the Principal Act contains definitions of "net income" and "partnership loss" which are designed to facilitate the interpretation of sections 91 to 94 inclusive. The latter provisions set out the means of ascertaining the individual interests of partners in the net income derived by a partnership or in a partnership loss incurred in the year of income.
Broadly, the two definitions in section 90 provide that the net income derived by a partnership or a loss incurred by a partnership is to be calculated as if the partnership were a taxpayer. The individual interests of partners in the resultant "net income" or "partnership loss" are then carried into their respective assessments. Deductions are allowable in the individual partners' assessments in respect of any losses, or shares of losses, incurred by them. Concessional deductions are also allowable in the individual assessments. For these reasons the definitions exclude both the concessional deductions and deductions in respect of losses of previous years from the calculation of the net income or loss of the partnership.
The amendments proposed by the Schedule are of a drafting nature and will not disturb the present position. Losses of previous years incurred in engaging in primary production and losses incurred in carrying on other activities will continue to be excluded from the calculation of the "net income" of a partnership and of a "partnership loss".
Section 95 : Net Income of Trust Estates.
Section 95 of the Principal Act sets out the basis for calculating the net income of a trust estate. Broadly stated, the net income is calculated by deducting from the total assessable income derived by the trust estate all allowable deductions other than concessional deductions. Except as to certain losses which have to be met out of corpus, the allowable deductions include losses incurred by the trust estate in previous years, i.e., deductions allowable under section 80 of the Principal Act and the proposed new section 80AA of that Act.
The amendment proposed in the Schedule is of a drafting nature only and will not affect the principles applied in determining the net income of a trust estate.
Section 124DF : Unrecouped Capital Expenditure.
Section 124DF of the Principal Act provides the basis for calculating the "unrecouped capital expenditure" of a taxpayer. In broad terms, the "unrecouped capital expenditure" as at the end of a year of income represents the maximum amount of the deduction allowable for capital expenditure incurred by the taxpayer in prospecting or mining for petroleum in Australia or the Territory of Papua and New Guinea. This deduction is allowable from assessable income derived from the sale of the petroleum.
Very broadly, the unrecouped capital expenditure is the amount of allowable capital expenditure incurred by the taxpayer remaining after deducting certain amounts specified in paragraphs (a) to (h) of section 124DF.
Paragraph (b) of the section requires, in effect, that net exempt income from petroleum be deducted from the allowable capital expenditure in calculating the unrecouped capital expenditure. However, sub-paragraph (i) and (ii) operate to ensure that net exempt income from petroleum that has been applied to reduce a loss allowable as a deduction under section 80 of the Principal Act will not be deducted from the allowable capital expenditure for that purpose.
The effect of the amendments to those two sub-paragraphs proposed in the Schedule will be to make a corresponding exclusion of net exempt income from petroleum that has been applied to reduce a primary production loss allowable as a deduction under the proposed new section 80AA.
ESTATE DUTY ASSESSMENT BILL 1966
The purpose of this Bill is to authorise exemption from estate duty of property passing to the National Trusts of Queensland, Western Australia and Tasmania, and to the Australian Council of National Trusts.
The Estate Duty Assessment Act 1914-1965 already provides for the exemption from duty of property passing to the National Trusts of New South Wales, Victoria and South Australia.
Notes on the clauses of the Bill are as follows -
Clause 1: Short Title and Citation.
This clause formally provides for the short title and citation of the Amending Act and the Principal Act as amended.
Section 5(1A.) of the Acts Interpretation Act 1901-1964 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act.
By this clause it is proposed that the Amending Act will come into operation on the day on which it receives the Royal Assent. The amendment proposed by the Bill will have effect in relation to the estates of persons dying on or after that date.
This clause proposes the amendment of section 8 of the Principal Act. That section provides, in sub-section (5.)(b), that estate duty is not payable on property devised or bequeathed to specified institutions in Australia. The provision also frees from estate duty, gifts inter vivos made to those institutions within three years before the death of the donor.
The amendment proposed by clause 3 will extend the exemption to bequests or gifts to the National Trusts of Queensland, Western Australia and Tasmania, and the Australian Council of National Trusts.
Clause 4: Application of Amendments.
By this clause it is proposed that the amendments to be made by the Bill will apply in relation to the estates of persons dying on or after the date of commencement of the Amending Act.
PAY-ROLL TAX ASSESSMENT BILL 1966
This is the fifth measure explained in this memorandum. Its two features have been mentioned earlier in the memorandum and the following notes relate to each clause of the Bill.
Clause 1: Short Title and Citation.
This clause formally provides for the short title and citation of the Amending Act and the Principal Act as amended.
Section 5(1A.) of the Acts Interpretation Act 1901-1964 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act.
Under sub-clause (1.) of clause 2 the provisions of the Amending Act, other than clause 3, are to come into operation on the date of Royal Assent to the Amending Act.
Sub-clause (2.) provides that clause 3 of the Amending Act shall be deemed to have come into operation on 1st September, 1966. The effect of this will be that the exemption from pay-roll tax being granted to certain schools will apply to salaries and wages paid on or after that date.
This clause proposes the insertion of a new paragraph - paragraph (bb) - in section 15 of the Principal Act designed to exempt from pay-roll tax the salaries and wages paid by certain privately-run schools.
At present there is no specific exemption in the law in relation to schools. An exemption is provided for salaries and wages paid by religious institutions. Certain schools established and conducted under the auspices of a church are entitled to this exemption. The exemption now proposed will not impair the exemption now enjoyed by these schools.
Under the proposed paragraph (bb) an exemption from pay-roll tax is to be available for schools and colleges that provide education at or below, but not above, the secondary level of education. Technical schools and colleges are not to be entitled to the exemption.
For the exemption to apply, it is necessary that the school or college be carried on by a body corporate, society or association otherwise than for the profit or gain of the individual members of the organisation. In other words the exemption is for what may broadly be described as non-profit schools. Schools or colleges carried on by or on behalf of a State will not fall within paragraph (bb).
As already noted, the proposed exemption will apply to wages paid on or after 1st September, 1966.
This clause proposes amendments to the provisions that determine the pay-roll tax rebate entitlements of employers whose export sales have increased above the annual average of the export sales made by them during a base period. The amendment will have the effect of increasing the rebate available to certain employers who pay excise duty and sales tax in respect of goods sold by them.
The rebate in relation to increased exports is determined by a formula which, broadly stated, is as follows -
((Increase in export sales for financial year.)/("Gross receipts" for financial year.)) * (Pay-roll tax for the financial year.) * (12 + ((1)/(2)))
It will be seen that the larger the amount of "gross receipts" for the financial year, the smaller is the amount of rebate that may be allowed and the amendments proposed will reduce the amount of "gross receipts" in particular circumstances.
At present the gross receipts taken into account for the purpose of a rebate include, broadly stated, amounts derived from carrying on a trade or business in Australia and which are assessable or exempt income for the purpose of the Income Tax Assessment Act. Certain specified amounts, such as some items of assessable income that do not bear any real relation to an employer's trading receipts and certain amounts received in relation to exported goods, are excluded from gross receipts.
Where an employer pays excise duty or sales tax to the Commonwealth in respect of particular goods and those goods are later sold by him, the price for which the goods are sold will, of course, include an element that constitutes a recovery of the duty or tax paid in respect of the goods.
Broadly stated, the proposed amendment will exclude from gross receipts such recoveries of excise duty and sales tax. A corresponding exclusion will apply in respect of diesel fuel tax and the honey levy.
Paragraph (a) of clause 4 inserts in sub-section (1.) of section 16A of the Principal Act a definition of "prescribed levy". This term defines the levies, recoveries of which are to be excluded from gross receipts. These levies are diesel fuel tax, excise duty, honey levy and sales tax.
Paragraph (b) of clause 4 is a drafting amendment to paragraph (a) of the definition of "the gross receipts for the financial year" contained in section 16A. It is consequential on the proposed insertion of a new sub-paragraph in paragraph (a) of that definition.
Paragraph (c) of clause 4 inserts a new sub-paragraph - sub-paragraph (v) - in paragraph (a) of the definition of "the gross receipts for the financial year". The sub-paragraph will exclude from gross receipts recoveries of prescribed levies paid by an employer.
The new sub-paragraph operates to exclude from gross receipts of an employer a portion of the consideration receivable by the employer in respect of the sale of goods that is assessable or exempt income of the employer for the particular financial year. This portion is the amount that represents a "prescribed levy" (see notes above) paid by the employer to the Commonwealth in respect of the goods, i.e., the amount of the recovery of such a levy that would otherwise be included in gross receipts.
A corresponding exclusion will apply in relation to consideration receivable in respect of the leasing of goods; in practice this will apply only in relation to sales tax imposed in respect of the leasing of goods.
An exceptional case may occur in which a prescribed levy is paid in respect of goods that the employer is entitled to treat as qualifying exports for rebate purposes, i.e., where he is the "producer for export" of the goods. The recovery of the prescribed levy will not be excluded from gross receipts in such a case for the reason that it would, in those circumstances, not only be included in the denominator of the rebate formula but in the numerator as well.
Clause 5: Application of Amendments.
By this clause the amendments relating to recoveries of prescribed levies made by clause 4 will apply for the purpose of rebate calculations for the current financial year 1966-67 and subsequent financial years.
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