Explanatory Memorandum
(Circulated by authority of the Treasurer, the Rt. Hon. Harold Holt.)INCOME TAX AND SOCIAL SERVICES CONTRIBUTION ASSESSMENT BILL (NO. 3) 1961.
NOTES ON CLAUSES
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 1901-1957 provides that every Act shall come into operation on the twenty-eighth day after the day on which that Act receives Royal Assent, unless the contrary intention appears in the Act.
By this clause, it is proposed that the Income Tax and Social Services Contribution Assessment Act (No. 3) 1961 shall come into operation on the day on which it receives the Royal Assent.
This provision will enable the issue of assessments involving the payment of provisional tax to be expedited.
Clause 3: Compensation for Death or Compulsory Destruction of Live Stock.
Sub-clause (1.) of this clause inserts in the Principal Act a new section - section 36AA - relating to compensation received by primary producers for the compulsory destruction of live stock.
Section 36AA - Introductory Note.
The proposed section 36AA will introduce into the income tax law special provisions which, at the option of the taxpayer, will apply where a primary producer receives compensation in consequence of the compulsory destruction of his live stock for the purpose of controlling or eradicating stock diseases. The new provisions will also be available where an animal dies by reason of a disease prescribed by a law that authorises the compulsory destruction of stock to control or eradicate disease.
Under the present law the compensation and any proceeds from the sale of hides or other part of the carcases of the animals qualifies as assessable income. Any excess of those moneys over the cost of the animals or their taxation value at the beginning of the income year in which death occurs is subject to tax in that year. This excess is referred to in the legislation as the profit arising in respect of the death of the live stock and is explained in more detail in relation to sub-section (8.) of the new section.
The special provisions proposed by section 36AA will entitle the primary producer to elect that only one-fifth of the profit be taxed in the year in which the live stock is destroyed or dies of disease. The balance of the profit is then to be taxed in equal instalments over the four succeeding years.
The new provisions will apply in relation to the income year ended 30th June, 1961 and subsequent years.
Sub-section (1.) of the proposed section 36AA formally provides the right of election and states the circumstances in which that right is to be available.
Sub-paragraph (i) of paragraph (a) of the sub-section will be satisfied where live stock included in the assets of a business of primary production carried on in Australia or the Territory of Papua and New Guinea has died by reason of a disease prescribed under a law of the Commonwealth, a State or a Territory that authorises the compulsory destruction of live stock for the purpose of controlling or eradicating disease. Sub-paragraph (ii) of paragraph (a) will be satisfied where the live stock is destroyed in accordance with any of these laws.
Paragraph (b) provides that the right of election shall be available if the proceeds of the death of the live stock would, apart from the new provisions, be included in the primary producer's assessable income of any year of income. (The expression "proceeds of the death of the live stock" is determined by sub-section (7.) which is explained at page 8 of these notes.)
By paragraph (c) the right of election is limited to those cases where a profit arises from the death of the live stock. Where no profit arises, no advantage could accrue from the exercise of a right of election. ("Profit arising in respect of the death of any live stock" is ascertained under sub-section (8.) - see page 8 of these notes.)
Where the tests of the sub-section are satisfied, the primary producer is entitled to elect that the succeeding provisions of the new section 36AA apply in relation to the profit arising on the death of the live stock.
Sub-section (2.) is the operative provision and provides that, where a primary producer exercises his right of election, the profit arising on the death of the live stock shall be taxed in equal annual instalments over a period of five years commencing with the year in which the death of the live stock takes place.
As already mentioned, the whole of the profit would, but for an election made under the new section, be reflected in the primary producer's income for the year in which it was derived.
Paragraph (a) of sub-section (2.) will allow the proceeds of the death or destruction of the live stock to be included in the primary producer's assessable income for the year in which that stock died or was compulsorily destroyed. It will also ensure that those proceeds are not taken into account in any other year. The paragraph will have practical application only in isolated cases in which the proceeds are not derived in the year of the death or destruction of the live stock and will ensure consistency in the application of the new provisions.
Under paragraph (b) the assessable income for the year in which the death or destruction occurs will be reduced by an amount equal to four-fifths of the profit arising on the death of the live stock. The net result is that one-fifth of that profit is taxed in the year in which the live stock is destroyed or dies of disease.
Paragraph (c) provides that one-fifth of the profit shall be included in the assessable income of the primary producer in each of the four succeeding years.
Paragraph (c) also deems each portion of the profit included in a taxpayer's income of the four years succeeding the year of the death of the live stock to be income derived from primary production. The effect is that, irrespective of whether he continues to carry on a business of primary production during those years, a taxpayer who, in the year of the death of the live stock, was subject to the provisions of the Principal Act for the averaging of incomes, will continue to have those provisions applied in his assessments for the four succeeding years. A primary producer is entitled, however, under section 158A of the Principal Act to make an irrevocable election to withdraw from the averaging system.
Sub-section (3.) will ensure that a right of election is available to each member of a partnership whose live stock is compulsorily destroyed or dies by reason of a disease prescribed by the relevant laws authorising compulsory destruction.
As a general rule, a partnership is not liable to pay income tax, but each partner is assessable on his share of the net income of the partnership. The sub-section will enable one partner to have his share of the profit arising on the death of the live stock taxed over the five year period although another partner may prefer to have the whole of his share assessed in the one year.
Paragraph (a) grants a separate right of election to each partner in respect of the share of the profit included in his individual interest in the net income of the partnership.
Paragraph (b) is complementary to paragraph (a) of sub-section (2.) - see page 6 of these notes. Where a partner makes an election, the paragraph will allow the proceeds of the death of the live stock to be taken into account in arriving at the partner's share of the net income of the partnership for the year in which the stock died or was compulsorily destroyed. It will also ensure that the proceeds are not so taken into account in any other year. The position of any partner not making an election will not be disturbed.
The purpose of sub-section (4.) is 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 (3.) in relation to partners.
Paragraph (a) will give effect to this principle in relation to so much of the proceeds of the death of the live stock as are 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 (5.) may apply where a taxpayer who has made an election is about to leave Australia, or dies, or becomes bankrupt, or (in the case of a company) commences to be wound up.
If one of these events occurred before the end of the five year period, it might not be possible, in the absence of a special provision, to ensure that the five instalments of the taxable amount are brought to account in a taxpayer's assessments. Sub-section (5.) accordingly provides that where any of these events occurs during a year of income, the Commissioner of Taxation may include the total of any untaxed instalments in the taxpayer's assessment of that year.
The sub-section will, however, permit the Commissioner, in any case in which he considers the circumstances warrant it, to allow the untaxed instalments to be brought to account as contemplated when the right of election was exercised.
Sub-section (6.) provides for the time and manner in which elections are to be made. The sub-section provides for elections to be in writing and lodged with the Commissioner of Taxation.
Paragraph (a) of sub-section (6.) will apply where the loss of the live stock and the payment of the compensation both take place within the one year. In these cases, the election is to be lodged with the Commissioner of Taxation on or before the date of lodgment of the return of that year.
Paragraph (b) applies to the case where payment of compensation is not completed until a year subsequent to the year of death of the live stock. In these cases, the election is to be lodged with the Commissioner on or before the date of lodgment of the return of the year of income during which the last of the proceeds of the death of the live stock is derived.
The Commissioner of Taxation is empowered by sub-section (6.) to extend the time for making an election in any case where he considers that the circumstances warrant that course.
Sub-section (7.) sets out that the "proceeds of the death of any live stock" shall include compensation received from the Commonwealth or a State Government, the Administration of a Territory of the Commonwealth or an authority constituted under the law of one of these, if the compensation is paid for the death or destruction of the live stock. Any proceeds received as payment for the hide or other part of a carcase of the live stock also qualifies as proceeds of the death of that live stock.
Insurance recoveries on stock that has died or been destroyed are not included in these receipts. Section 26B of the Principal Act makes separate provision for these recoveries to be spread over the assessments of five years, if a taxpayer so elects in accordance with that section.
Sub-section (8.) specifies the meaning of the expression "profit arising in respect of the death of any live stock", that is, the amount which, if the right of election is exercised, is to be taxed over a period of five years.
The commencement point for the ascertainment of this profit is the "proceeds of the death of the live stock" as determined under sub-section (7.) explained above. Where any of the relevant live stock was on hand at the beginning of the income year in which the death or destruction occurred, the value for taxation purposes of the live stock as at that date is deducted from the proceeds of the death in order to arrive at the profit on the death of the live stock.
In the case of live stock not on hand at the beginning of that year and not bred by the taxpayer in that year, the profit is ascertained by deducting from the proceeds of the death of that live stock the purchase price of the stock or the amount deemed by the Principal Act to be the purchase price.
If the live stock dying or destroyed in an income year is natural increase bred by the taxpayer in that year, the profit arising on its death equals the proceeds of its death as determined under sub-section (7.).
The proposed new section 36AA will apply in relation to live stock dying or destroyed during the 1960-61 income year or subsequently.
Sub-clause (2.) of clause 3 makes special provision for taxpayers whose stock died or was destroyed during the 1960-61 income year. Notwithstanding that some of these taxpayers may have lodged their returns of income for that year and included therein the proceeds of the death of that stock, a right of election is, by virtue of sub-clause (2.), to be automatically available to them until 31st December, 1961.
The sub-clause also empowers the Commissioner of Taxation to extend the time for lodging elections in these cases beyond 31st December, 1961 in appropriate circumstances.
Clause 4: Disposal on Change of Ownership or Interests.
This clause is a drafting measure consequential upon the insertion of the new section 36AA between sections 36 and 36A of the Principal Act.
Section 36A of the Principal Act contains references to "the last preceding section" which, up to the present, has been section 36. Clause 4 omits the words "the last preceding section" and, in their place, includes specific references to section 36.
The amendment, which will apply for the 1960-61 income year and subsequent years, will not alter the practical effect of the existing law.
Clause 5: Deduction in Respect of Living-Away-From-Home Allowances.
This clause is also a drafting measure designed to exclude from section 51A of the Principal Act a reference to "the last preceding section" and include in its place a specific reference to section 51. The amendment is necessary because sections have now been interposed between section 51 and section 51A.
The amendment is to apply for the 1960-61 income year and subsequent years, and does not alter the practical effect of the existing law.
This clause is consequential upon the amendment proposed by clause 7 of the Bill. Its purpose is to provide that a deduction for depreciation is not to be available for underground pipes when the purchase price of the pipes is allowable as an outright deduction to a primary producer who incurred the expenditure. It is proposed by clause 7 that the cost of certain underground pipes will be allowed as a deduction under section 75 of the Principal Act in assessments for the income year 1961-62 and subsequent years.
Section 54 of the Principal Act, which it is proposed by this clause to amend, provides for the allowance of a deduction for depreciation on plant and certain structural improvements owned by a taxpayer and used by him during the year of income for the purpose of producing assessable income.
In the case of a primary producer there is excluded from the operation of section 54 plant or structural improvements the full cost of which is an allowable deduction under paragraph (g); (h) or (i) of section 75 of the Principal Act. Excluded in this way are improvements constructed to combat or prevent soil erosion; water improvements such as dams, earth or underground tanks, irrigation channels, bores or wells, and levee banks, if the full cost of the improvements is deductible in accordance with the paragraphs mentioned.
It is proposed by clause 7 of the Bill, explained hereunder, to expand section 75 of the Principal Act so that the purchase price of water pipes, and the cost of placing them underground for a specified purpose, will be an allowable deduction in the year in which the expenditure is incurred by a primary producer. As a corollary, it is proposed to amend section 54 to exclude these pipes from the definition of plant for which a deduction for depreciation is available under that section.
The amendment to section 54 will not affect the allowance of depreciation on pipes placed underground by a taxpayer when the purchase price is not an allowable deduction to him, or to some other taxpayer, under the expanded section 75. Thus it will not affect the allowance of depreciation on pipes initially acquired by any taxpayer prior to the commencement of the 1961-62 income year, the first year for which a deduction is to be available under section 75. Neither will it affect the allowance of depreciation on the cost price of pipes in those cases where only the cost of placing the pipes underground is an allowable deduction under section 75.
Although a deduction is allowed for the purchase price of pipes placed underground, no recoupment of the cost of the pipes will, if they are subsequently sold by the taxpayer, be included in his assessable income. The taxpayer who incurs the expenditure, therefore, obtains the full taxation relief arising from the deduction. Correspondingly when a person acquires underground pipes with land, and the purchase price of the pipes has been allowed as a deduction, under section 75, in the assessments of the vendor or any previous holder, a deduction for depreciation will not be available to the purchaser.
The amendment will apply in assessments for the 1961-62 income year and subsequent years.
Clause 7: Certain Expenditure on Land Used for Primary Production.
The primary purpose of this clause is to insert in sub-section (1.) of section 75 of the Principal Act two new paragraphs - paragraphs (j) and (k) - providing for the allowance of a deduction for expenditure on underground water pipes used in carrying on primary production.
The deductions for expenditure on underground pipes will be subject to two primary tests; firstly, that the expenditure is incurred by a taxpayer engaged in primary production on land in Australia or the Territory of Papua and New Guinea and, secondly, that it is incurred in relation to the land on which the taxpayer is so engaged.
The deduction will be available for expenditure incurred upon underground pipes laid for the purpose of conveying water for use in carrying on primary production. This will include, for example, pipes carrying water for irrigation purposes, or for consumption by stock or employees.
To qualify for the deduction it will be necessary for pipes to be effectively laid underground. Provided pipes are so laid, the depth to which they are laid will not be relevant. For instance, expenditure on pipes laid permanently underground at a depth sufficient to avoid damage by ploughing may fall within the scope of the deduction.
Where expenditure on pipes or associated equipment does not qualify for deduction under the new provisions depreciation allowances will continue to be available.
The proposed paragraph (j) relates to the purchase price of pipes to be placed underground, while the proposed paragraph (k) provides the deduction for the cost of placing pipes underground.
The plan of paragraph (j), in conjunction with paragraph (k), is that expenditure on the purchase and installation of underground pipes is to be allowed as it is incurred. If the purchase of pipes is made in one year of income and the installation takes place in another, the actual expenditure of each year is to be the deduction for that year.
It is also the plan of paragraph (j) that the taxpayer who initially purchases the pipes will obtain the deduction for the purchase price. A deduction for the purchase price of pipes is not, therefore, to be available to a taxpayer if a deduction has been allowed under paragraph (j) in the assessments of another taxpayer for the purchase price of the same pipes. For example, if a taxpayer who has obtained a deduction for the price of pipes under paragraph (j) sells his property, including the pipes, to another taxpayer, the purchasing taxpayer will not be entitled to a further deduction for the price of the pipes.
Sub-paragraph (i) of paragraph (j) will apply where the purchase of pipes by the taxpayer and their installation underground by him, or on his behalf, take place in the same year of income. Subject to the qualifications outlined above, the purchase price of the pipes is to be an allowable deduction in that year, provided that the pipes are placed underground for the purpose of conveying water for use in carrying on primary production.
Sub-paragraph (ii) is designed to provide a deduction for the purchase price of pipes in the case where the purchase of the pipes and their installation underground do not occur in the same income year. Subject to the qualifications already outlined, a deduction for the purchase price is to be available in the year in which the expenditure is incurred, provided that the taxpayer who purchases the pipes has the intention of placing them underground for the purpose referred to in sub-paragraph (i). A deduction will not, however, be available in a case where pipes are purchased and sold, without being placed underground, in the same year of income.
Paragraph (k) provides for a deduction to be allowed for the cost of placing pipes underground. A condition attaching specifically to this deduction is that the pipes are placed underground for the purpose of conveying water for use in carrying on primary production.
The deduction under paragraph (k) is to be available whether or not a deduction is also available to the taxpayer under paragraph (j). For example, a taxpayer who purchased pipes prior to the commencement of the 1961-62 income year, or acquires pipes from a person who has already been allowed a deduction under paragraph (j) for the initial purchase price, will be entitled to a deduction for the cost of placing the pipes underground for the prescribed purpose.
Clause 7 also effects an amendment to sub-section (2.) of section 75 of the Principal Act consequential upon the introduction of the new paragraphs (j) and (k) 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 that 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. This limitation applies to the deduction available under sub-section (1.) of section 75 for the cost of water conservation improvements.
It is proposed that a similar limitation will apply to the deductions available for the cost of underground water pipes.
The amendment will apply to expenditure incurred on underground pipes during the current 1961-62 income year and succeeding years.
Clause 8: Moneys Paid on Shares for the Purposes of Petroleum Exploration.
This clause effects in section 77A of the Principal Act drafting amendments consequential on the inclusion of a new provision, section 77B.
Section 77A includes references to "the next succeeding section" which, up to the present, has been section 78. As a new section is to be interposed between section 77A and section 78, it is necessary to delete from the former section the words "the next succeeding section" (wherever occurring) and to insert specific references to section 78.
Clause 9: Calls Paid by Certain Holding Companies.
By this clause, it is proposed to insert in the Principal Act a new provision - section 77B - relating to calls paid by certain holding companies.
A deduction in relation to calls paid to certain companies is permitted by the present law. Section 78(1.)(b) of the Principal Act authorises allowances for one-third of calls paid to a company carrying on in Australia or the Territory of Papua and New Guinea as its principal business mining or prospecting for gold, silver, base metals, rare minerals or oil. An allowance is also available for one-third of calls paid to a company whose principal business is afforestation in Australia or the Territory of Papua and New Guinea.
Stated broadly, the purpose of the new provisions is to permit a company that has paid calls to a prospecting, mining or afforestation company in which it beneficially owns all the paid-up capital to pass back its entitlement to a deduction for one-third of those calls to a company that has provided, as share capital, the moneys out of which the calls have been paid.
It is a condition for the passing back of the deduction that not less than one-half of the paid-up capital in the company that pays the calls to the prospecting, mining or afforestation company be held by the company that provided moneys to meet the calls. It is a further condition that the company liable for the calls pay those calls in the same income year as that in which it received the moneys used to meet the calls.
A company that elects to transfer its entitlement to a deduction automatically forgoes the deduction for one-third of the calls to which it would otherwise have been entitled.
It will be convenient in these notes to refer to the company through which the moneys pass as the "interposed company".
The right to pass back the deductions will be available in relation to moneys paid on shares in an interposed company on or after 1st July, 1961.
Sub-section (1.) comprises several definitions that are designed to facilitate the drafting and operation of the new section.
- "Beneficial shareholder": This term will mean a shareholder who is the beneficial owner of shares in a company as distinct from a shareholder who holds shares on behalf of another person.
- "Moneys paid on shares": This definition specifies certain moneys contributed as share capital of a company.
- An interposed company that has paid calls to a mining, prospecting or afforestation company may transfer its entitlement to a deduction for one-third of those calls only if it has paid the calls out of moneys falling within the definition.
- The moneys falling within the compass of the definition are amounts paid by owners of shares in the company and applied by it towards the paid-up value of the shares. Moneys paid by a beneficial owner of shares may satisfy the tests of the definition even though the shares are registered in the name of another person.
- The amounts paid may include application and allotment moneys for shares to be allotted as well as calls on shares already issued.
- Amounts paid to a company before the 1st July, 1961 will not, however, qualify, for the purposes of the new provisions, as moneys paid on shares.
- "Prescribed beneficial shareholder": This term will mean a shareholder having the beneficial ownership of shares representing not less than one-half the paid-up capital of a company. A deduction under the new provisions will be available only in the case of a prescribed beneficial shareholder who satisfies tests mentioned in sub-section (5.), which is explained on page 15 of these notes.
Sub-section (2.) is a drafting provision that will apply where moneys have been paid on shares registered in the name of a person who is not the beneficial owner of those shares.
The sub-section provides that, in these circumstances, moneys paid on shares are to be regarded as moneys paid by the beneficial owner. The provision will ensure that a company is not deprived of a deduction under the new provisions merely because moneys due on shares are paid by its nominee or other person in whose name the shares are registered.
Sub-section (3.) specifies the categories of interposed companies entitled to pass back deductions for calls paid and also states the procedure by which those companies may invoke the new provisions.
The sub-section may apply where an interposed company has paid calls to another company whose principal business is mining or prospecting for gold, silver, base metals or rare minerals in Australia or the Territory of Papua and New Guinea. It may also apply where calls have been paid to a company carrying on, as its principal business, afforestation in Australia or that Territory.
An interposed company entitled to pass back deductions for calls paid by it may invoke the provisions of the new section 77B by lodging with the Commissioner of Taxation a written notice in which it elects that the new section shall apply in relation to calls specified in the notice.
The sub-section specifically provides that a notice may be lodged by a company only if it is the beneficial owner of all the shares in the mining, prospecting or afforestation company at the time that the calls were paid.
Although the existing deduction for one-third of calls extends to calls that are paid to a company whose principal business is mining or prospecting for oil, the new provisions will not apply in relation to calls paid to such a company. However, section 77A of the Principal Act already contains provisions under which a company mining or prospecting for oil may pass back deductions to investors who have contributed to it capital to be used in the search for oil.
Sub-section (4.) provides that an interposed company may specify in a notice lodged under sub-section (3.) only calls that have been paid by it out of amounts received as moneys paid on its shares. A further test is that the calls be paid by the company in the year in which it received those moneys.
Sub-section (5.) serves two purposes. Firstly, it prescribes tests to be satisfied before a company becomes entitled to a deduction. Secondly, it sets out the basis upon which the amount of the deduction is to be determined.
The deduction is available only to a beneficial shareholder in an interposed company that has lodged a notice of election under sub-section (3.). A further test is that the beneficial shareholder be a company that is a resident of Australia.
A deduction is also conditional upon not less than 50% of the paid-up capital of the interposed company being beneficially owned, at the time the interposed company received the moneys used to pay the calls specified in the notice, by the company to which it is proposed to pass deductions.
The commencing point for ascertaining the amount of the deduction is the amount of calls specified in the notice of election lodged by the interposed company. Where the foregoing tests are satisfied, the amount of the deduction is determined by the following formula -
(Calls specified in notice.) * (Moneys paid on shares in the interposed company by the company to which a deduction is to be passed back.)/(All moneys paid on shares in the interposed company.)
Sub-section (6.) is complementary to sub-section (5.) and provides for a reduction in the allowance available under the present law to an interposed company that lodges a notice of election under sub-section (3.).
The deduction to which the interposed company would have been entitled if it had not chosen to lodge a notice of election is diminished by the amount of the deduction passed back to the company that provided the moneys used to meet calls paid to a mining, prospecting or afforestation company.
Sub-section (7.) is a machinery provision that will have application only where it is necessary to trace moneys specified in a notice lodged under sub-section (3.). It will apply only where the sources from which an interposed company obtained the moneys used to pay calls cannot readily be ascertained from the records of that company. In such an event, the Commissioner may, after considering all the circumstances, determine the source of moneys used in the payment of calls.
Without a provision of this nature the application of the section may, in some circumstances, be impracticable. The clause is designed to provide a means of avoiding such a situation.
A taxpayer whose assessment is affected by the Commissioner's determination will have the usual rights of objection and appeal. In the event of a reference to a Taxation Board of Review, the Board would have power to substitute its own opinion as to the source of the moneys.
Sub-section (8.) is designed to ensure that a notice lodged by a company will not be rendered invalid for the reason only that it specifies calls additional to those which the company is entitled to specify. For example, a company may have erroneously included in its notice of election calls paid to a company that is not a mining, prospecting or afforestation company. In such a case, the notice will be effective in relation to so much of the calls as the company has validly specified in the notice.
Sub-section (9.) states the conditions to be satisfied in relation to a notice of election, given under sub-section (3.), in respect of any calls.
Under paragraph (a) a notice, signed by the public officer of a company wishing to pass its entitlement to a deduction in relation to calls, may be given in any form authorised by the Commissioner.
Paragraph (b) provides for the inclusion in such a notice of information that, by reason of the notice, is relevant to the application of the new provisions.
Paragraph (c) will allow the lodging of a notice under sub-section (3.) up to the end of one month after the end of the income year in which the calls specified in the notice were paid. The Commissioner may, however, extend the time for lodging a notice.
Clause 10: Gifts, Calls on Mining Shares, etc.
This clause proposes three amendments to section 78 of the Principal Act.
Paragraph (a) effects two drafting amendments in sub-section (1.) of section 78 of the Principal Act.
A reference to "this section" has become redundant and is being omitted. The second amendment is consequential on other amendments explained in these notes and inserts specific references to two new sections - sections 77B and 79C - now being inserted in the Principal Act. A reference to section 77A(11.) of the Principal Act is also inserted in order to avoid a possible conflict that might otherwise exist between that provision and section 78.
The amendments do not vary the substance of the present law.
Paragraph (b) will amend section 78(1.)(a) of the Principal Act to authorise the allowance of deductions for gifts of Pd1 and upwards made to the Ian Clunies Ross Memorial Foundation.
This amendment will commence to apply for the 1961-62 income year.
Paragraph (c) repeals sub-section (3.) of section 78 of the Principal Act. That provision is explained in connection with clause 14 by which it is proposed to insert a new section - section 79C - re-enacting, with an addition, the present section 78(3.).
These clauses effect drafting amendments in sections 79, 79A and 79B of the Principal Act. The application of each of those provisions is subject to the operation of the present section 78(3.) which, as already explained, is being repealed by clause 10, but, in substance, is to be re-enacted as section 79C of the Principal Act.
The amendments to sections 79, 79A and 79B will delete from those provisions references to section 78(3.) and insert references to the proposed section 79C. These amendments will ensure that the deductions authorised by sections 79, 79A and 79B are not disturbed. The operation of those sections is outlined in the explanation of clause 14.
Clause 14: Limitation on Certain Deductions.
By this clause, it is proposed to insert a new provision - section 79C - in the Principal Act. The new section will re-enact the substance of the present section 78(3.) of the Principal Act, which it is proposed by clause 10 to omit. It will also operate in relation to the new section 77B that it is proposed by clause 9 to include in the Principal Act.
Section 78(3.) of the Principal Act limits the aggregate of the deductions authorised by sections 78, 79, 79A and 79B of that Act. The total of the amounts that may be allowed under those sections in any year may not exceed the amount remaining after there has been deducted from the assessable income of the year all other allowable deductions except deductions for losses incurred in previous years, and deductions for capital expenditure allowable to persons carrying on mining operations.
The deductions allowable under the sections mentioned are -
- section 78 - gifts, one-third of calls in mining, prospecting and afforestation companies and certain pensions etc. paid to former employees and their dependants.
- section 79 - certain contributions to superannuation and other funds for the benefit of employees, other than employees of the person who made the contribution.
- section 79A - zone allowances for residents of isolated areas.
- section 79B - special allowances, corresponding to zone allowances, for members of the Defence Forces serving in prescribed areas overseas.
The new section 79C is designed to ensure that the present effect of section 78(3.) is maintained. It will also provide that the limitation prescribed by that section extends to deductions for one-third of calls passed back under the proposed section 77B from an interposed company to another company that has provided the money used to pay the calls.
As deductions under section 77B are in substitution for deductions under section 78(1.)(b), the new section 79C will maintain a principle that has hitherto applied in relation to the deductions for calls.
By this clause, it is proposed to amend section 82F of the Principal Act so as to remove the existing limitation of Pd30 on the deductions authorised for dental expenses.
Section 82F provides for the allowance of a deduction for medical (including dental) expenses paid by a taxpayer in relation to himself, his spouse, any of his children under 21 years of age or any other dependant in relation to whose maintenance he is entitled to a deduction. The deduction is, except in the case of certain persons who have attained the age of 65 years, limited to Pd150 for each person and it is also provided that deductions for dental expenses of each person be limited to Pd30.
The limitation of deductions for dental expenses to Pd30 will be excluded from the law but other provisions relating to medical expenses will not be disturbed.
The amendment will apply for the 1961-62 income year and subsequent years.
By clause 16, it is proposed to effect three amendments in section 160AE of the Principal Act.
Paragraph (a) will amend sub-section (1.) of that section which includes a definition of "apportionable deductions". That term, by the definition, includes the deduction allowable under section 78(1.)(b) of the Principal Act for one-third of calls paid to certain mining, prospecting and afforestation companies.
The new section 77B proposed by clause 9 to be inserted in the Principal Act will enable certain companies having an entitlement under section 78(1.)(b) to a deduction for calls to pass that deduction back to another company. As the present deduction for calls qualifies as an apportionable deduction the existing effect of the definition of "apportionable deductions" can be maintained by including in the definition a reference to the new section. Paragraph (a) is designed to achieve this result.
Paragraph (b) is a minor drafting amendment that omits the word "or" from paragraph (b) of sub-section (2.) of section 160AE. The word will become redundant following the amendment proposed in paragraph (c) of this clause.
Paragraph (c) proposes to insert in sub-section (2.) of section 160AE an additional paragraph that is consequential upon the proposal contained in clause 3 to introduce the new section 36AA into the Principal Act.
Sub-section (2.) of section 160AE of the Principal Act, provides, in effect, that where income is withheld from the assessment of a year of income under a section which permits the spread of abnormal receipts of a business of primary production over a period of years, the amounts included in the assessments of the subsequent years shall be deemed, for the purposes of Division 18 of the Principal Act, to be derived from the same source as the abnormal receipts. Division 18 of the Principal Act contains provisions relating to the assessments of taxpayers who derive income from both Australia and the Territory of Papua and New Guinea.
The effect of the amendment is that, if a taxpayer makes an election under the proposed section 36AA in respect of compensation received for a compulsory destruction of live stock, and the stock are assets of a business of primary production carried on in the Territory of Papua and New Guinea, the amounts deferred for assessment in consequence of the election will be deemed, for the purposes of Division 18 of the Principal Act, to be income derived from a source in the Territory.
The amendments made by this clause, so far as they are consequential upon the introduction of the new section 36AA, will, like that section, apply for the 1960-61 income year and subsequent years. The remainder will apply for the 1961-62 income year and subsequent years.
Clauses 17-21: Relief of Double Taxation.
These clauses will amend the provisions of Divisions 18 and 19 of Part III. of the Principal Act, which govern the relief of double taxation as between Australia and the Territory of Papua and New Guinea.
Under the present law, Australian residents who derive income from sources in the Territory of Papua and New Guinea may need to lodge income tax returns both in Australia and the Territory and to make separate payments of tax under each system. Double taxation is relieved, however, by allowing, against the Australian tax liability, a credit equal to the lesser of -
- (a)
- the Territory tax paid;
- (b)
- the Australian tax payable on the income from Territory sources.
The present system envisages that a taxpayer will claim a credit in reduction of the Australian tax liability only after paying his Territory tax.
The amendments are designed to introduce an alternative procedure, under which the Commissioner of Taxation will collect the gross amount of Australian tax, then calculate the appropriate credit and apply the amount of the credit by making a payment to the Chief Collector of Taxes in the Territory in settlement of the taxpayer's Territory liability.
The new procedure will not alter the taxpayer's combined liability for Australian and Territory tax. The change will, however, facilitate the adoption of administrative arrangements under which certain classes of Australian taxpayers deriving income from Territory sources will be freed from the obligation to lodge Territory income tax returns, and will be able to make a single payment to the Commissioner of Taxation which will be used to satisfy both the Australian and the Territory tax liabilities.
The amendments will enable the alternative basis of allowing credits to be applied after the Bill comes into operation.
Clause 17: Credit in Respect of Territory Tax.
Clause 17 proposes to insert, in section 160AF of the Principal Act, a new sub-section (sub-section (1A.)), which will empower the Commissioner to determine that the new procedures shall apply in cases where an Australian resident has derived income from Territory sources and income tax (other than provisional tax or penalty tax) is payable in respect of that income under the Income Tax Ordinances of the Territory.
In any case where the Commissioner determines that the sub-section shall apply, the taxpayer is deemed, for the purposes of the Principal Act to have paid the Territory income tax. The taxpayer will then be entitled to a credit under the existing provisions of the law on the same basis as if he had actually paid the tax.
In consequence of the insertion of a new sub-section (1A.), a minor drafting change is proposed in sub-section (2.) of section 160AF but the meaning of that provision will remain unchanged.
Clause 18: Determination of Claims for Credit.
Clause 18 will effect drafting changes in section 160AI of the Principal Act which are needed in consequence of the introduction of a new method of allowing credits.
In its present form, sub-section (1.) of section 160AI provides that, where a person makes a claim for a credit, the Commissioner is to determine whether a credit is allowable, and if so, the amount of the credit. Sub-section (3.) provides that as soon as conveniently may be after determination is made, the Commissioner of Taxation shall serve notice of the determination on the person claiming the credit.
The present wording of these two sub-sections would not be appropriate to deal with the case where a credit is allowed under the proposed provisions without any formal application for credit being made by the taxpayer. Accordingly, sub-section (1.) is to be amended so as to provide that the Commissioner shall make a determination either -
- (a)
- where a person makes a claim for a credit; or
- (b)
- where a person is deemed to have paid Territory tax under the new sub-section (1A.) of section 160AF, which it is proposed, by clause 17, to insert in the Principal Act.
A comparable amendment is proposed in sub-section (3.) where a reference to the person "claiming the credit" will be replaced by a reference to the person "to whom the determination relates".
Clause 19: Amendment of Determinations.
By this clause, it is proposed to make drafting adjustments to sub-sections (2.) and (4.) of section 160AK of the Principal Act.
In its present form, sub-section (2.) provides that where a person claiming a credit has made to the Commissioner of Taxation a full and true disclosure of all the material facts necessary for the making of the determination, any credit determined after that disclosure is made shall not be amended so as to reduce the amount of the credit allowable except where the amendment is made to correct an error in calculation or a mistake of fact, or in consequence of a variation in Australian or non-Australian tax. In its amended form, the operation of the sub-section will no longer be restricted to the case where a person has claimed a credit, but will apply wherever a credit is allowed and the person to whom the determination relates has made a full and true disclosure.
For similar reasons, a reference in sub-section (4.) to the person "claiming the credit" has been replaced by a reference to the person "to whom the determination relates". Sub-section (4.) authorizes the amendment of a determination where this is necessary to give effect to a decision on an objection, review or appeal against the determination.
Clause 20: Period for Furnishing Information.
This clause proposes a drafting change in section 160AM, which provides that a credit shall not be allowed unless all the information necessary for the determination of the credit is furnished to the Commissioner of Taxation within specified periods. In its present form, this section would have the effect of prohibiting the allowance of a credit where a taxpayer has not made a formal claim for a credit and, in consequence, the new procedures would be inoperative. To avoid this situation, section 160AM is being amended to ensure that it requires information to be furnished prior to the allowance of a credit only in those cases where a credit is to be determined in consequence of a claim made by a taxpayer.
Clause 21: Application of Credits.
Clause 21 will insert, in section 160AN of the Principal Act, a new sub-section (1A.) providing that any credit that is allowed in consequence of the adoption of the new procedures is to be used to discharge the taxpayer's Territory income tax liability. Minor drafting amendments will also be made in sub-sections (2.) and (4.) of section 160AN.
In its present form, section 160AN contains the machinery provisions by which the taxpayer is given the benefit of any credits to which he is entitled. The amount of a credit is declared to be a debt due and payable to the person entitled to it, and the Commissioner is authorised to pay the credit out of the Consolidated Revenue Fund. As an alternative to paying the credit directly to the taxpayer, the Commissioner may apply the whole or a part of the credit in total or partial discharge of any tax liability of the person claiming the credit.
The new sub-section (1A.) will provide that, where a person is entitled to a credit by reason of his being deemed, under section 160AF(1A.), to have paid Territory income tax (i.e., where the Commissioner has invoked the new credit procedures to be enacted by clause 17), the credit allowable will be paid by the Commissioner of Taxation to the Chief Collector of Taxes for the Territory of Papua and New Guinea in total or partial discharge of the Territory tax to which the credit relates.
Sub-section (2.) of section 160AN is being amended to provide that its operation is subject to sub-section (1A.). This is designed to place beyond doubt that, in any case where the new credit procedures are applied, the amount of the credit is to be used to pay the Territory tax and not to be applied in discharge of the taxpayer's other liabilities under the Australian law.
Sub-section (4.) provides for the case where a private company is entitled to a credit and ensures that an adjustment, consequent on the allowance of a credit, is made in calculating the company's distributable income.
In its present form, the section ensures that an adjustment is made where a credit is applied by the Commissioner or paid to the company. To meet the new case where the amount available as a credit is paid to the Chief Collector in the Territory, the provision is being re-expressed so as to be applicable in all cases where a credit is applied or paid by the Commissioner.
Clause 22: Amendment of Assessments.
Section 170 of the Principal Act, which it is proposed by this clause to amend, imposes limits on the time and the circumstances in which an assessment may be amended.
The purpose of the amendment is to ensure that section 170 will not present any impediment to the amendment of an assessment to give effect to an election made under section 36AA by a primary producer in relation to compensation etc. for the death or destruction of live stock. In the absence of clause 22, it may be impracticable to amend assessments to implement an election, particularly where compensation in relation to the destruction of live stock in one income year is not derived by the primary producer until a succeeding year.
Clause 23: Application of Amendments.
This clause specifies the commencing date for the application of the proposed amendments affecting assessments. These dates have been stated in the notes on the relevant clauses.
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