House of Representatives.

Explanatory Memorandum.

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

INCOME TAX AND SOCIAL SERVICES CONTRIBUTION ASSESSMENT BILL 1965.

Introductory Note.

This Bill relates primarily to income tax aspects of the Government's scheme for the provision of secondary and technical scholarships.

One purpose of the Bill is to exempt from income tax payments made under the scheme. Another purpose is to make it clear that a taxpayer is not entitled to a concessional deduction for education expenses of a child that are, by payments made under the scheme, borne by the Commonwealth.

A further object of the Bill is to authorise deductions for income tax purposes of gifts of Pd1 and upwards to -

The Winston Churchill Memorial Trust;

The National Trust of Queensland.

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 as amended.

Clause 2: Commencement.

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 clause 2, it is proposed that the Amending Act will come into operation on the day on which it receives the Royal Assent. This provision will facilitate the preparation of returns and assessments of taxpayers affected by the amendments for the income year ending 30th June 1965.

Clause 3: Exemptions.

The purpose of this clause is to exempt from income tax payments made under the Commonwealth's scheme for the provision of secondary and technical scholarships.

Paragraph (a) is a drafting measure the purpose of which is to ensure that the exemption of payments under the Commonwealth's scheme is centralised in one provision - the new paragraph (zaa) of section 23 of the Principal Act proposed to be inserted by paragraph (c) of clause 3.

Paragraph (z) of section 23, which it is proposed to amend by paragraph (a) of clause 3, could in isolated circumstances operate to exempt from tax payments under the secondary and technical scholarships scheme. As a comprehensive exemption of these payments is to be made by the new paragraph (zaa), it is proposed to amend paragraph (z) so that it applies only in relation to scholarships other than those provided under the secondary and technical scholarships scheme.

Paragraph (b) of clause 3 is also a drafting measure. It makes an amendment to paragraph (z) of section 23 that is consequential upon the insertion of a new paragraph in that section.

Paragraph (c) proposes the insertion of a new paragraph - paragraph (zaa) - in section 23 of the Principal Act.

The new paragraph will have the effect of exempting from tax all payments by the Commonwealth under the secondary and technical scholarships scheme whether made to the student to whom the scholarship is awarded or to the parent or guardian of such a student.

The exemption will apply to living (i.e., maintenance and accommodation) allowances paid under the scheme. It will also apply to payments made in relation to expenditure on school fees, books, compulsory items, etc.

While a living allowance paid under the scheme will not constitute assessable income of the recipient, it will, under sub-section (5.) of section 82B of the Principal Act, qualify as "separate net income" of a student in respect of whom it is paid for the purpose of determining the amount of any concessional deduction available to a taxpayer under that section in relation to the maintenance of the student. In this respect, it will be treated in the same way as other living allowances provided by a Government in connexion with the education of a child.

The amendments made by clause 3 will apply in assessments in respect of the 1964-65 income year and subsequent years.

Clause 4: Gifts, calls on mining shares, pensions, etc.

Section 78(1.)(a) of the Principal Act authorises the allowance of deductions for gifts of Pd1 and upwards to specified funds, authorities and institutions in Australia.

It is proposed by this clause to extend the deduction to gifts to the following -

The National Trust of Queensland;

The Winston Churchill Memorial Trust.

The amendments will apply to gifts made during the income year 1964-65 and subsequent years.

Clause 5: Education expenses.

Introductory Note.

By this clause it is proposed to amend section 82J of the Principal Act in relation to certain payments made under the secondary and technical scholarships scheme. The payments concerned are those made in respect of expenditure on school fees and books, etc. for a student holding a scholarship provided under the scheme. They will not always be received during the same year of income as that in which the education expenses to which they relate are paid. They will, however, generally be claimable in that year.

Section 82J of the Principal Act authorises a deduction for education expenses necessarily incurred by a taxpayer for, or in connexion with, the full-time education of a dependant of the taxpayer who is under the age of 21 years and which are paid by the taxpayer during the year of income. The maximum deduction for a year of income in respect of each such dependant is Pd150.

The purpose of the proposed amendment to section 82J is to provide in express terms that, in determining the deduction available under the section, the gross amount of education expenses paid in respect of a dependant is to be reduced by the amount of the Commonwealth's contribution under the secondary and technical scholarships scheme towards the education expenses of the dependant. An allowance paid under the scheme for maintenance or accommodation is not to be taken into account for this purpose.

To give effect to the purpose of the amendments, it is proposed by clause 5 to repeal section 82J of the Principal Act and to replace it with amended provisions. Each of the first three sub-sections in the amended section sets out a taxpayer's entitlement to a deduction for education expenses in differing sets of circumstances. In broad terms, these circumstances are where the student does not hold a Commonwealth secondary or technical scholarship (sub-section (1.)), where the student holds such a scholarship and only one taxpayer pays education expenses for him (sub-section (2.)), and where the student holds such a scholarship and two or more taxpayers pay education expenses for him (sub- section (3.)). Sub-sections (4.) and (5.) are a re- enactment of sub-sections (2.) and (3.) of the existing section 82J, while sub-section (6.) contains definitions used in the revised section.

In cases where no scholarship benefits are payable the amendments do not change the principles on which the existing provisions of the law are based.

In order to explain the provisions of the new sub- sections (1.), (2.) and (3.) it is necessary to refer to definitions contained in the new sub-section (6.) proposed to be inserted in section 82J. These definitions are as follows -

"education expenses"

: This definition is based on provisions of the existing section 82J. The term is defined to mean expenses necessarily incurred by the taxpayer for or in connexion with full-time education at a school, college or university or from a tutor. It applies only in relation to expenses in respect of a student who is a dependant of the taxpayer. The meaning of "student" is set out below.

"scholarship benefits"

: This term describes the benefits under the Commonwealth scholarship scheme that are to be taken into account in determining the deduction allowable for education expenses. The term is defined to mean amounts payable under a scheme for the provision by the Commonwealth of secondary scholarships or technical scholarships. Amounts payable for maintenance or accommodation are not within the scope of the definition.

"student"

: This definition is also based on provisions of the existing section 82J. Its object is to state the classes of dependants of a taxpayer in relation to which a deduction for education expenses is available. The word is defined to mean a person who is less than 21 years of age and is a child of the taxpayer. Also included within its scope is a person under that age who is a dependant of the taxpayer in respect of whose maintenance the taxpayer is entitled to a concessional deduction under section 82B of the Principal Act. The definition does not reduce or expand the classes of dependants to which the existing section 82J applies.

Sub-section (1.), as already stated, is the first of three sub-sections authorising deductions for the education expenses of a student. In short, sub-section (1.) will apply where no scholarship benefits may be claimed in respect of a student, i.e., where the student does not hold a Commonwealth secondary or technical scholarship. In the cases to which it applies the sub- section will have the same effect as the existing law.

The sub-section provides that a taxpayer is entitled to a deduction for education expenses if the tests in paragraphs (a) and (b) of the sub-section are satisfied.

Paragraph (a) states a primary requirement. This is that education expenses be paid by the taxpayer in respect of a student in the year of income.

Paragraph (b) states a further requirement for the operation of the sub-section. This is that, in the year of income, no scholarship benefits may be claimed by any person in respect of the student. If, in the year of income, scholarship benefits may be claimed which could also have been claimed in an earlier income year, they are to be disregarded in applying paragraph (b). In such cases, of course, the scholarship benefits will be taken into account for the income year in which they were first claimable.

Where the tests in paragraphs (a) and (b) are met the taxpayer is entitled to a deduction of the amount of education expenses paid by him in the year of income for the student.

Sub-section (1.) is, of course, to be read subject to sub-sections (4.) and (5.) of the revised section 82J. These sub-sections place a limit of Pd150 on the amount deductible, in a year of income, for education expenses of a student.

Sub-section (2.) operates where only one taxpayer pays education expenses for a particular student and scholarship benefits are payable in relation to the student. The sub-section provides that the net amount of the expenses, after deduction of the scholarship benefits, is to be an allowable deduction (subject to the maximum deduction of Pd150).

Paragraph (a) of sub-section (2.) states the primary requirement for the section to be applicable. As with sub-section (1.) already discussed, this requirement is that education expenses in respect of a student be paid by the taxpayer in the year of income. It may be noted at this point that, by virtue of provisions contained in sub-section (3.) that are explained at a later stage of this memorandum, sub-section (2.) applies only in the case where, in the year of income, no other taxpayer pays education expenses in respect of the student.

Paragraph (b) sets out the circumstances in which scholarship benefits are to be taken into account for the purposes of the sub-section.

The scholarship benefits that may be taken into account for these purposes are generally those that, in the year of income, may be claimed by any person in respect of the student. If, however, the scholarship benefits were claimable in an earlier income year they will be taken into account in relation to that year and the effect of paragraph (b) is that they may not also be taken into account in relation to a later year.

Where paragraphs (a) and (b) apply in relation to a student, the taxpayer is to be entitled to a deduction for education expenses of the amount by which the amount of education expenses paid by him during the year exceeds the amount of scholarship benefits referred to in paragraph (b). The maximum deduction allowable in respect of the student is, by virtue of sub-section (4.) of section 82J, Pd150.

It is to be noted that under the sub-section scholarship benefits are not necessarily to be taken into account in the year of income in which they are paid. Where an amount of scholarship benefits is, or may be, claimed in one income year but not paid until the next, it is to be taken into account in determining the deduction available for the education expenses of the earlier year. This ensures that the benefits are specifically related to the education expenses in respect of which they are paid.

Scholarship benefits will, in the large majority of cases, be payable to the taxpayer who pays the education expenses of a student and is entitled to an income tax deduction for those expenses. However, this may not always be the case. The sub-section accordingly provides that benefits payable to a person other than the taxpayer who pays the education expenses are to be taken into account in determining the deduction available to that taxpayer.

The operation of sub-section (2.) may be illustrated by the following examples in which three taxpayers, "A", "B" and "C" pay education expenses for students "X", "Y" and "Z" respectively.

Sub-section (3.) relates to cases in which two or more taxpayers each pay education expenses for a particular student in relation to whom scholarship benefits are payable. Each taxpayer is to be entitled, subject to the maximum deduction of Pd150 in respect of the student, to deduct the net amount of the education expenses borne by him.

As under sub-sections (1.) and (2.) there are two tests to be satisfied. The tests in sub-section (3.) correspond with those in sub-section (2.) discussed above.

Paragraph (a) of sub-section (3.) varies from paragraph (a) of sub-section (2.) only in that it applies where education expenses in respect of the one student are paid in the year of income by more than one taxpayer.

Paragraph (b) requires that scholarship benefits (other than benefits claimable in an earlier year) be claimable in the year.

In these circumstances each of the taxpayers concerned is, subject to the overall limit of Pd150, to be entitled to a deduction of the amount by which the education expenses paid by him in the income year exceed so much of the scholarship benefits as is reasonably related to the education expenses paid by him.

The following examples illustrate the application of sub- section (3.). In each case two taxpayers each pay education expenses for the one student.

Sub-section (4.) re-enacts sub-section (2.) of the present section 82J with two formal drafting changes. The operation of the sub-section is not altered. As previously, it provides that the maximum deduction allowable to a taxpayer for the education expenses of any one student for any one income year is Pd150.

Sub-section (5.) corresponds with sub-section (3.) of the existing section 82J. Apart from the re-numbering, the only change made is to substitute the word "student" for the word "person". This change is consequential upon the definition of "student" to be inserted in sub-section (6.). As previously, sub-section (5.) limits to Pd150 the aggregate deductions allowable in a year of income to two or more taxpayers for the education expenses of the one student.

Sub-section (6.) comprises definitions of three terms used in the revised section 82J. Explanations of those terms have been given above.

The amendments to section 82J made by clause 5 will apply in assessments for the 1964-65 income year and subsequent years.

Clause 6: Constitution of Boards.

This clause proposes a formal amendment to section 251D of the Principal Act. That section sets out the membership of the Boards charged with functions relating to the registration of tax agents.

Paragraph (a) of sub-section (1.) of the section specifies that the person acting as "Accountant" at the Commonwealth Sub-Treasury in the particular State is to be the Chairman of the Board in that State. Because of changes in the designations of the positions concerned it is proposed by this clause to replace the word "Accountant" by the words "officer in charge".

Clause 7: Application of amendments.

This clause specifies the commencing date for the application of the proposed amendments affecting assessments. Those dates have been stated in the notes on the relevant clauses.