House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Rt. Hon. Harold Holt.)

PAY-ROLL TAX ASSESSMENT BILL 1963

GENERAL INTRODUCTION

This Bill has two primary purposes which may be summarised broadly as follows -

(1)

To extend until 30th June 1968 the rebate of pay-roll tax available to an employer whose export sales have increased above the annual average of the export sales made by him during the base period prescribed by the existing law.

(2)

To exclude from the definition of "the gross receipts for the financial year" in section 16A(1.) of the Principal Act certain items which, while they specifically constitute assessable income for income tax purposes, are not trading receipts from carrying on a trade or business in a particular financial year, or are adjustments of expenditure allowed in earlier years as income tax deductions.

The first proposal - to extend the period of operation of the pay-roll tax rebate - is complementary to the proposal contained in the Income Tax and Social Services Contribution Assessment Bill 1963 (see explanation of Clause 6 of that Bill at page 6 of this memorandum) to extend income tax deductions for export market development expenditure for a like period. Under the present law the rebate is available in respect of tax on wages paid or payable up to 30th June 1964. It is proposed that this date be extended to 30th June 1968.

The second proposal - to alter the basis of calculating one of the factors used in determining the amount of a pay-roll tax rebate - is designed to remove the possibility of a rebate available to an employer in relation to increased export sales being diminished by the inclusion in his gross receipts for a financial year of certain specified items that may not be derived as receipts from carrying on his trade or business during that year.

At present the gross receipts taken into account for the purpose of a rebate include, broadly stated, all amounts derived from carrying on a trade or business in Australia during a financial year and which are assessable or exempt income for the purpose of the Income Tax Assessment Act, less certain specified amounts received in relation to exported goods that do not comprise consideration for these goods.

Broadly stated, the rebate under the present law equals -

(Increase in export sales for financial year)/(Gross receipts for financial year (not including income from property)) * (Pay-roll tax for the financial year) * 12.5


It is evident from the formula set out above that the larger the amount of gross receipts taken into account the smaller the rebate available to the employer. Inclusion in the gross receipts of a particular financial year of such amounts as, e.g., an increase in the value of stock inventories during the year, or bad debts of a previous year that have been recovered during the year, as required by the present law, increases the gross receipts and reduces the rebate. Such amounts do not bear any real relation to the taxpayer's trading receipts of that particular year and may, in some cases, have formed part of the gross receipts taken into account in determining a rebate for a previous financial year.

The clauses of the Bill are explained in the following notes.

NOTES ON CLAUSES

Clause 1: Short Title and Citation.

This clause formally provides for the short title and citation of the Amending Act and of the Principal Act.

Clause 2: Commencement.

Section 5(1A.) of the Acts Interpretation Act 1901-1957 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 a contrary intention appears in the Act.

By this clause, it is proposed that the Pay-roll Tax Assessment Act 1963 shall come into operation on the day it receives the Royal Assent. The purpose of this is to ensure that determinations of rebates of tax imposed on wages paid during the current financial year will not be delayed.

Clause 3: Rebate of Tax by Reference to Exports: Interpretation

By this clause it is proposed to amend the present definition of "the gross receipts for the financial year" contained in section 16A(1.) of the Principal Act.

The purpose of the amendment, as explained in the introductory note, is to exclude certain items that are included in the scope of the present definition by reason of being assessable income under provisions of the Income Tax Assessment Act. This has been achieved by omitting the present sub-paragraphs (i) and (ii) of paragraph (a) of the definition, re-inserting these sub-paragraphs as sub-paragraphs (i) and (iv) respectively of the proposed new definition, and inserting two new sub-paragraphs - sub-paragraphs (ii) and (iii).

The proposed exclusions are made by the new sub-paragraphs (ii) and (iii) of paragraph (a) of the amended definition. A brief explanation of each exclusion follows -

Sub-paragraph (ii)

This sub-paragraph is designed to exclude from "the gross receipts for a financial year" certain amounts which constitute assessable income for income tax purposes under paragraph (j) of section 26 of the Income Tax Assessment Act. So far as is relevant, section 26(j) of the Income Tax Assessment Act, broadly stated, requires that any amount received as insurance or indemnity for a loss or outgoing that is an allowable deduction for income tax purposes be included in assessable income.

Any such amount included in assessable income under section 26(j) of the Income Tax Assessment Act merely replaces a business loss or outgoing incurred by a taxpayer. In these circumstances, it does not form part of the trading income derived during the year of receipt of the insurance or indemnity, from carrying on a trade or business in Australia during that year.

Sub-paragraph (iii)

The purpose of this sub-paragraph is to exclude a number of specified items of assessable income for income tax purposes from the definition of "the gross receipts for the financial year". These various items are by nature balancing adjustments rather than receipts derived from carrying on a business.

The first item proposed to be excluded is the amount by which the value of trading stock on hand at the end of a year of income exceeds the value of such stock at the beginning of that year, and which constitutes assessable income for income tax purposes under sub-section (2.) of section 28 of the Income Tax Assessment Act.

It is important to note in this context that an exporter may, in anticipation of export sales or to fill export orders already received, build up stocks during a year of income. Under the present law the increase in the value of stocks forms part of the gross receipts for that financial year for the purposes of determining any claim for rebate of pay-roll tax. When these stocks are disposed of in a succeeding financial year the proceeds of their sale may be included in the employer's gross receipts for that financial year. To this extent, therefore, the effect of the present law is to include the same amounts as gross receipts for different years. The proposed amendment will remedy this situation.

Where the value of stock on hand at the beginning of a year of income exceeds the value at the end of that year an income tax deduction is allowed for the difference. However, no adjustment is made to the "gross receipts for the financial year" in these circumstances. The proposed amendment will place all employers on an equal footing for the purposes of the pay-roll tax rebate as far as trading stock is concerned.

A further item it is proposed to exclude from the definition is any amount included in assessable income for income tax purposes under sub-section (2.) or sub-section (2C) of section 59 of the Income Tax Assessment Act as a recoupment of depreciation allowed on income-producing property when that property is sold or disposed of for a consideration that exceeds its depreciated value.

Also proposed to be excluded from the existing definition are amounts that are assessable income pursuant to sub-section (3.) of section 63 of the Income Tax Assessment Act. Broadly stated, these amounts represent recoveries of debts where the debts have been included in the assessable income of a previous year (or years) of income and have been allowed as an income tax deduction when written off as bad.

The broad effect of sub-section (10.) of section 66 of the Income Tax Assessment Act is to include in assessable income for income tax purposes any receipt that a person receives from a superannuation or pension fund for his employees, contributions to which have been allowed as income tax deductions to him. It is proposed to exclude such receipts from the present definition of gross receipts for the financial year.

It is also proposed to exclude from the definition of the gross receipts for the financial year amounts that constitute assessable income for income tax purposes under sub-section (2.) of section 72 of the Income Tax Assessment Act. This sub-section requires amounts received as refunds of rates or taxes that are allowable deductions for income tax purposes to be brought to account as assessable income in the year in which the refund is received.

Under section 73A of the Income Tax Assessment Act an income tax deduction is available to a taxpayer carrying on business for payments to certain approved scientific research institutes and expenditure of a capital nature on scientific research related to the business carried on by the taxpayer. Where the capital expenditure is on construction or acquisition of a building or on additions or alterations to an existing building for the purposes of using the building for scientific research, a deduction is available for the capital expenditure over a period of three years commencing with the year in which the building, alteration or addition is first used by the taxpayer or on his behalf for scientific research. However, sub-section (4.) of section 73A provides broadly that, if the building is sold or disposed of, any consideration received is to be included in assessable income to the extent that the capital expenditure has been allowed as an income tax deduction. It is proposed that the amount of this balancing adjustment be excluded from the present definition of the gross receipts for the financial year.

Sub-section (9.) of section 79 of the Income Tax Assessment Act makes similar provision to sub-section (10.) of section 66, which has already been discussed, the difference being that section 79 applies to contributions to superannuation funds and the like for another person's employees. Consistently with the proposal regarding section 66(10.) it is proposed to exclude amounts coming under section 79(9.) from the definition of gross receipts.

It is also proposed to exclude from the definition of gross receipts of the financial year amounts that are assessable income by virtue of sub-section (3.) of section 122B, sub-section (2.) of section 124, and sub-section (2.) of section 124D. Each of these sub-sections refers to balancing adjustments included in assessable income in respect of capital expenditure allowed as an income tax deduction under the special provisions of Division 10 of the Income Tax Assessment Act relating to mining.

Section 122B allows an income tax deduction for income appropriated out of the assessable income of an income year to meet capital expenditure to be incurred in the next year of income. Sub-section (3.) of section 122B and sub-section (2.) of section 124D provide, in varying circumstances, for so much of the amount appropriated that is not expended in the next year of income to be included as assessable income for that year. As, for pay-roll tax rebate purposes, the assessable income appropriated may be included in the gross receipts for the financial year in which it was derived, it is not necessary for the unexpended portion to be also included in the gross receipts of the succeeding year.

Broadly stated, sub-section (2.) of section 124 of the Income Tax Assessment Act provides for a balancing adjustment to be included in assessable income on disposal of mining plant or property, in respect of which capital costs have been allowed as income tax deductions in prior years of income. It is proposed to exclude any adjustment under section 124(2.) from gross receipts for the financial year.

Section 124G of the Income Tax Assessment Act applies where income tax deductions in relation to the capital cost of an access road have been allowed under the special provisions of Division 10A of that Act applying to timber operations. Sub-section (2.) of section 124G brings to account as assessable income any amount of the capital expenditure previously allowed that is recouped out of the consideration received when the road is disposed of. It is proposed that a balancing adjustment of this nature be excluded from the definition of gross receipts for the financial year.

Sub-sections (1.) and (2.) of section 124P include in assessable income balancing adjustments on the disposal of items of industrial property (such as patents, designs or copyrights) when capital expenditure on the development or acquisition of the property has been allowed as income tax deductions in earlier years of income. Any adjustment under section 124P is proposed to be excluded from the definition of gross receipts for the financial year.

Clause 4: Rebate of Tax.

Under the present provisions of section 16C(1.) of the Principal Act the system of rebates in respect of increases in export sales applies in relation to tax paid on wages of the financial years 1960-61, 1961-62, 1962-63 and 1963-64. By clause 4 it is proposed to amend that section to extend the operation of the rebate provisions for a further four years, i.e., so that they will apply to tax in respect of wages paid or payable in respect of financial years up to and including the financial year 1967-68.

Clause 5: Application.

By this clause it is proposed that the new definition of "the gross receipts for the financial year" will first apply in relation to the calculation of rebates of tax on wages paid or payable by an employer for the current financial year ending on 30th June 1963.