House of Representatives

Explanatory Memorandum PART B

(Circulated by authority of the Treasurer, the Hon P.J. Keating, M.P.)

Notes on Clauses

TAXATION LAWS AMENDMENT BILL (NO. 3) 1985

PART I - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act (No. 3) 1985.

Clause 2: Commencement

Under sub-clause 2(1), the amending Act, except as provided in sub-clauses 2(2) and 2(3), is to come into operation on the day on which it receives the Royal Assent.

By sub-clause 2(2), Part II of the amending Act, which will amend the Australian Capital Territory Taxation (Administration) Act 1969 to complement amendments of the Australian Capital Territory Stamp Duty Act 1969 proposed by the accompanying Australian Capital Territory Stamp Duty Amendment Bill 1985, will come into operation on the first day of the month following that in which the amending Act receives the Royal Assent.

Sub-clause 2(3) will deem Parts IV, V and VI of the amending Act to have come into operation on 1 July 1969. Those Parts will amend the Australian Capital Territory Tax (Insurance Business) Act 1969, the Australian Capital Territory Tax (Purchases of Marketable Securities) Act 1969 and the Australian Capital Territory Tax (Sales of Marketable Securities) Act 1969, respectively, to empower the Governor-General to make regulations under those Acts. This power was previously thought to have been provided by section 99 of the Australian Capital Territory Taxation (Administration) Act 1969 (see the notes on clause 11). This deemed commencement date will ensure that regulations under those Acts that have already been made are valid.

The amending Act would, but for clause 2, come into operation on the twenty-eighth day after Royal Assent, by virtue of sub-section 5(1A) of the Acts Interpretation Act 1901.

PART II - AMENDMENTS OF THE AUSTRALIAN CAPITAL TERRITORY TAXATION (ADMINISTRATION) ACT 1969

Clause 3: Principal Act

This clause facilitates references to the Australian Capital Territory Taxation (Administration) Act 1969 which, in Part II, is referred to as "the Principal Act".

Clause 4: Interpretation

Section 4 of the Principal Act contains definitions of terms used in that Act and other interpretative provisions. Paragraphs (a) to (c) inclusive of clause 4 propose the insertion in sub-section (1) of the following definitions:

"borrower" means, in relation to a loan security or in relation to an instrument of the kind referred to in new sub-section 58M(1) of the Principal Act (to be inserted by clause 8), the borrower or the person who is bound under the security or instrument - e.g., a guarantor, (paragraph (a) of the definition). Where an instrument is lodged by a body corporate under new sub-section 58R(2) of the Principal Act (to be inserted by clause 8), that body corporate is the borrower (paragraph (b)). In relation to an instrument of trust that is a mortgage by virtue of paragraph (g) of the definition of "mortgage" in new section 58H of the Principal Act (also to be inserted by clause 8), the borrower is the person who issued the corporate debentures to which the trust instrument relates (paragraph (c)).

"corporate debenture" is defined to mean a debenture issued by a body corporate, and to include debenture stock, a bond, a note and any other security of a body corporate, regardless of whether or not it constitutes a charge on the body corporate's assets.

"loan security" means a mortgage within the meaning of Division 12 of Part III of the Principal Act (paragraph (a) of the definition), a corporate debenture, as defined (paragraph (b)) or a bond or a covenant for securing a loan made or to be made (paragraph c)). A mortgage within the meaning of Division 12 is defined in new section 58H of the Principal Act (to be inserted by clause 8), while new sub-section 4(10) (to be inserted by paragraph (g) of this clause) amplifies the meaning of the word "loan" (see later notes). The exclusion from the definition of "loan security" of an instrument included in a prescribed class of instruments will enable regulations to be made should the need arise for certain instruments to be not treated as loan securities.

By paragraph (d) of clause 4, the existing definition of "marketable security" in sub-section 4(1) of the Principal Act is in effect to be expanded to take in a unit in a unit trust scheme, including a right of a person to have such a unit issued. The terms "unit" and "unit trust scheme" are defined by the amendments proposed by paragraph (f) of clause 4.

This expansion of the meaning of "marketable security" will mean that purchases, sales and transfers of units in unit trusts will be subject to ACT tax and stamp duty on the same basis as purchases, sales and transfers of shares and debentures of companies are presently subject to tax and duty. In terms of sub-clause 2(2) and clause 9 of the Bill, the paragraph (d) and (f) amendments are to apply to transactions on or after the first day of the month following that in which the Bill receives the Royal Assent (see notes on clause 9).

Paragraphs (e) and (f) will insert in sub-section 4(1) the following definitions-

"Real Property Ordinance" is a drafting device and will mean the Real Property Ordinance 1925 of the Australian Capital Territory.

"unit", in relation to a "unit trust scheme" (as defined), means a right or interest of a beneficiary under the scheme, irrespective of the description of that right or interest.

"unit trust" is defined to mean a trust to which a "unit trust scheme" (see next definition) relates.

"unit trust scheme" is any arrangement that is made for the purpose, or has the effect, of providing facilities for a person with funds available for investment to participate, as a beneficiary under a trust, in any profits or income arising from the acquisition, holding, management or disposal of property pursuant to the trust.

Paragraph (g) of clause 4 will add 5 new sub-sections to section 4 of the Principal Act. New sub-section 4(9) replaces sub-section 6(10) of the Australian Capital Territory Stamp Duty Act 1969, which sub-section is being omitted by clause 4 of the accompanying Australian Capital Territory Stamp Duty Amendment Bill 1985. Paragraph (a) of new sub-section (9) will provide that a bill of exchange or promissory note that is dated is deemed to have been drawn or made on that date, unless the contrary is shown. Under paragraph (b), an instrument is to be taken to have been executed on the date on which the last party to the instrument appears to have executed it.

Proposed new sub-section 4(10) stipulates that the reference to a loan in paragraph (c) of the definition of "loan security" (being inserted in sub-section 4(1) by paragraph (c) of clause 4) includes a reference to an advance of money, and to money paid for a person, on account of a person, on behalf of a person or at the request of a person, as well as to a forbearance to require the payment of money owing and to any other transaction that in substance effects a loan of money.

New sub-section (11) sets out the circumstances in which, for the purposes of the Principal Act, a loan security is to be taken to be connected with the ACT. That will be so where the loan security is executed in the ACT (paragraph (b)) or, if the loan security subjects property to a security, where part or all of that property is situated in the ACT (paragraph (a)).

By new sub-section 4(12) a loan security that is not executed is deemed to be executed at the time and place of its issue.

Proposed sub-section 4(13) provides that, in relation to an instrument of trust protecting the interests of corporate debenture holders (as mentioned in paragraph (g) of the definition of "mortgage" in new section 58H to be inserted by clause 8), a reference in the Principal Act to the amount secured by a loan security is a reference to the amount repayable in respect of the corporate debebtures to which the instrument of trust relates. This will enable the ready calculation of the amount of stamp duty payable on such an instrument.

Clause 5: Refund of duty where land transferred by way of mortgage is re-transferred

Clause 5 proposes the insertion of new section 50B in the Principal Act. Its insertion is consequent on the proposed removal of the stamp duty exemption - under Item 12 of Schedule 2 to the Australian Capital Territory Stamp Duty Act 1969 - of a conveyance, under the Real Property Ordinance 1925 of the ACT, of an interest in land by way of mortgage (see the notes on clause 7 of the accompanying Australian Capital Territory Stamp Duty Amendment Bill 1985). The new section will ensure that the net amount of stamp duty on a bona fide transfer of a legal interest under the Real Property Ordinance by way of mortgage is the amount of duty appropriate to a conventional mortgage.

Sub-section 50B(1) will apply only where the conditions set out in paragraphs (a) to (d) are satisfied; namely, where -

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stamp duty has been paid on a transfer of, or an agreement to transfer, an interest in land which is, or will be, transmitted under the Real Property Ordinance by way of mortgage, i.e., where the legal interest in land is transferred as security for a loan etc., and it is intended that re-transfer will occur on repayment of the loan (paragraph (a));

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if the instrument on which the duty was paid is an agreement to transfer, the interest has been transferred pursuant to the agreement (paragraph (b));

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the interest has been either re-transferred to the mortgagor or transferred to a person (called to mortgagor's successor) to whom the equity of redemption (i.e., the right to have the legal interest re-transferred) has been transmitted as a result of the mortgagor's death, bankruptcy or insolvency (paragraph (c)); and

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the mortgagor or the mortgagor's successor, as appropriate, becomes the registered owner of that interest (paragraph (d)).

Where all of those conditions are satisfied, the person who paid the stamp duty will be entitled to a refund equal to the amount of duty paid less the amount of duty payable had the transfer, or the agreement to transfer, been security for a loan instead of a conveyance of a legal interest.

By sub-section 50B(2), the entitlement to a refund under sub-secton (1) will not arise unless, within 12 months after paragraph (1)(d) (see preceding notes) is satisfied, the person otherwise entitled to the refund applies to the Commissioner of Taxation on an approved form and provides any information required by the Commissioner to determine the amount of the refund.

New sub-section 50B(3) will make it clear that section 50B is not to be construed as overriding sub-section 51(1) of the Real Property Ordinance, which prohibits the Registrar of Titles from registering an instrument except as provided by the Ordinance and unless the instrument is in accordance with the Ordinance.

Clause 6: Heading to Division 11 of Part III

Clause 6 proposes to amend the heading to Division 11 of Part III of the Principal Act, which at present reads "Registration of Transfers of Marketable Securities by Companies", to add the words "and Unit Trusts". The amendment is consequent on the amendment of section 58G of the Principal Act proposed by clause 7 (see the following notes).

Clause 7: Transfer of marketable securities not to be registered unless duly stamped

Section 58G of the Principal Act, in Division 11 of Part III of the Act, prohibits a company from registering or recording in its books a transfer of a share in the capital of the company or of a debenture of the company except, broadly, where an appropriate amount of stamp duty or similar tax has been or will be paid. Consequent on the extension of the definition of "marketable security" in section 4 (proposed by paragraph (d) of clause 4, to include units in unit trusts-see the notes on that clause), clause 7 will amend section 58G to prohibit the registration or recording of a transfer of a marketable security, as now defined, in the books of either a company or a unit trust.

Clause 8: Division 12 - Loan Securities

By this clause, it is proposed to insert in Part III of the Principal Act a new Division - Division 12. The new Division will set out the rules governing the liability for stamp duty on loan security instruments that is to be imposed by the amendments of section 4 of the Australian Capital Territory Stamp Duty Act 1969, proposed by clause 3 of the accompanying Australian Capital Territory Stamp Duty Amendment Bill 1985.

A detailed explanation of each provision in new Division 12 follows.

Section 58H : Interpretation

Section 58H defines the following terms used in new Division 12-

"duly stamped" is defined to mean duly stamped in connection with stamp duty that is payable by virtue of Division 12. Existing sub-section 4(3) of the Principal Act describes what is meant by duly stamping for the general purposes of the Act.

"duty" is stamp duty imposed by the Australian Capital Territory Stamp Duty Act 1969 and payable by virtue of Division 12.

"mortgage" is defined to mean a security, by way of mortgage or charge, in respect of the payment of a specific sum of money that was advanced or lent, or was previously due or owing, or in respect of such a sum of money payment of which was forborne (paragraph (a)). It also means security of that kind for the repayment of money to be later lent, advanced or paid, or which may become due on a current account either with or without a sum that has already been advanced or due (paragraph (b)). The term "mortgage" also specifically includes -

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a security by way of mortgage or charge in consideration for the transfer of an interest in either real or personal property (paragraph (c));

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a transfer of an interest in real or personal property in trust to be sold or to be otherwise converted into money, where the transfer is intended only as a security and is redeemable before the disposal of the interest, either expressly or otherwise. However, it does not include a transfer that is made for the benefit of creditors who accept the payment provided for in full satisfaction of their debts (paragraph (d));

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any instrument for defeating, making redeemable, explaining or qualifying a transfer, assignment or disposition of any interest in real or personal property that appears absolute but is intended only as a security (paragraph (e));

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an agreement, contract or covenant relating to documents of title, or accompanied with the deposit of any such documents or of instruments creating a charge on property where that agreement, etc. is either for making a mortgage, or other security or transfer of an interest in the relevant property, or for the pledging or charging of that property as a security (paragraph (f)); and

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any instrument of mortgage (including one referred to in paragraph (c), (d), (e) or (f) of the definition) for the purpose of securing repayment of corporate debentures, or an instrument of trust protecting the interests of corporate debenture holders (paragraph (g)).

The term does not, however, include a conveyance by which an interest in land is transferred under the Real Property Ordinance by way of mortgage. This is consistent with the exclusion of such conveyances from the class of instruments exempt from stamp duty by virtue of new Item 12 of Schedule 2 to the Australian Capital Territory Stamp Duty Act - proposed to be inserted by clause 7 of the accompanying Australian Capital Territory Stamp Duty Amendment Bill 1985.

Section 58J : Persons liable to pay duty

By new section 58J, the borrower is liable to pay the duty imposed on a loan security or on an instrument of the kind referred to in proposed new sub-section 58M(1) or 58R(2) (see later notes). As explained earlier in the notes on clause 4 the term "borrower" is being defined by sub-section 4(1) of the Principal Act.

Section 58K : When loan securities are to be duly stamped

Section 58K specifies the time within which a borrower must generally lodge a loan security with the Commissioner of Taxation for assessment, or arrange for it to be duly stamped. Where the amount payable or repayable (if a fixed amount) under, or secured by, a loan security exceeds $15,000, or (if not a fixed amount) the maximum that may become payable or repayable exceeds $15,000, the loan security is to be lodged for assessment within 30 days after execution (paragraph (a)). Other loan securities must be duly stamped immediately on execution (paragraph (b)), as is the case with other dutiable instruments that are not required to be lodged for assessment.

Section 58L : How duty denoted

This section specifies the method of denoting that duty has been paid on a loan security or other instrument liable to duty by virtue of Division 12. Sub-section 58L(1) requires the payment of duty imposed on an instrument that must be lodged with the Commissioner of Taxation to be denoted by impressed stamp. In the case of a loan security that need not be so lodged, the payment of duty is to be denoted by adhesive duty stamps (sub-section 58L(2)).

Section 58M : Duty where amount secured is increased, is not a definite sum, & c.;

Under section 58M, rules are laid down for calculating liability to duty on loan securities and certain other instruments under which, broadly, the amount secured is increased or is not a precise sum.

Sub-section 58M(1) deals with a loan security connected with the ACT, under which the total amount secured or ultimately recoverable is expressed in the loan security to be limited to a definite and certain sum of money (paragraph (a)). If that total amount is increased pursuant to an instrument, whether that instrument is the loan security or some other instrument (paragraph (b)), then that instrument is liable to the difference between duty payable on an instrument for the increased amount and that paid on the original instrument for the original amount (paragraph (d)). Where the original amount is increased pursuant to an instrument other than the loan security in question, sub-section 58M(1) does not, in terms of paragraph (c), apply unless the loan security was executed on or after the date of commencement of section 58M - that is, the first day of the month following that in which this Bill receives the Royal Assent. Paragraph (e) requires the borrower to lodge the instrument with the Commissioner of Taxation for assessment within 30 days after the increase occurs.

The effect of sub-section 58M(1) is to ensure that the amount of duty ultimately payable on such a loan security is the amount of duty that would have been payable had the total amount ultimately secured by, or recoverable under, the loan security been expressed as the definite sum to which the loan security was limited.

Sub-section 58M(2) applies to a loan security that -

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is for the payment or repayment of money which is yet to be lent, advanced or paid or which may become due on a current account with or without money already due (paragraph (a)); and

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expressly limits the total amount secured or ultimately recoverable to a precise sum of money (paragraph (b)).

Such a loan security is deemed, for the purposes of the Principal Act, to be for the payment or repayment of the amount so expressed.

Sub-section 58M(3) is concerned with a loan security connected with the ACT, where the total amount secured or ultimately recoverable is not expressed to be limited to a precise amount of money. Paragraph (a) provides that the loan security is liable to duty as though it were for the payment or repayment of $15,000. By paragraph (b), the loan security is to be lodged for assessment within 30 days after it is executed.

Sub-section 58M(4) applies to a similar kind of loan security as that mentioned in sub-section 58M(3) but where it is enforced in relation to an amount greater than $15,000 (paragraphs (a) and (b)). In that event, the loan security is liable to duty equal to the difference between the duty that would be payable were the loan security for the payment or repayment of the amount for which it was enforced and the duty already paid (paragraph (c)). The loan security must, within 30 days after it is enforced, be lodged for assessment (paragraph (d)).

Sub-section 58M(5) also applies to a loan security that does not expressly limit to a definite sum the total amount secured or ultimately recoverable (paragraph (a)). If an advance is made which, together with any previous advances, exceeds the amount in respect of which duty has been paid (paragraph (b)), the loan security is again liable to duty. The amount of the duty is the duty that would be payable if the loan security was for an amount on which duty has already been paid plus the advance, less the duty already paid (paragraph (c)). Within 30 days after the advance is made, the loan security is to be lodged for assessment by the borrower (paragraph (d)).

Section 58N : Loan securities for repayment by periodical payments, & c.;

This section deals with a loan security for the payment of a rent charge, an annuity or periodical payments to repay, to satisfy or to discharge a loan, advance or payment that is intended to be so repaid, satisfied or discharged. Such a loan security is to be taken, for the purposes of the Principal Act, to be for the payment of the amount of money lent, advanced or paid.

Section 58P : Collateral securities

Section 58P prescribes the rules for liability to duty of a collateral loan security, i.e., a loan security that is auxiliary to a primary loan security.

The general rule is set out in sub-section 58P(1) - that is, a collateral loan security for the same money secured by a primary loan security is exempt from duty. However, by virtue of sub-section (2), such a collateral loan security will, if connected with the ACT, be liable to duty if the primary loan security is also connected with the ACT and the primary loan security (or any another collateral security for the same money secured by the primary loan security) has not been duly stamped. The duty to which it is liable is the duty that would be payable if the collateral security were instead the primary loan security and if the primary loan security had been executed at the time the collateral security was executed (paragraph (a)). A collateral security liable to duty under the sub-section is to be lodged for assessment within 30 days after execution (paragraph (b)).

Sub-section 58P(3) defines the term "collateral security", to include an additional or substituted security. It also includes a legal mortgage that is executed pursuant to an agreement, contract or covenant referred to in paragraph (f) of the definition of "mortgage" in section 58H (see earlier notes).

Section 58Q : Subsequent mortgages

Section 58Q applies to a mortgage that is subsequent to a prior mortgage.

By sub-section (1), where the subsequent mortgage includes a covenant that allows the mortgagee to pay the amount owing under a prior mortgage to the prior mortgagee (paragraph (a)) and provides that any such payment will be directly secured by the subsequent mortgage (paragraph (b)), the provisions of the covenant are to be ignored in determining the amount of duty payable on the subsequent mortgage.

However, once a payment is made under the covenant, the subsequent mortgage becomes liable to additional duty by virtue of sub-section 58Q(2). The amount of the additional duty is the duty that would be payable if the subsequent mortgage were for the repayment of the amount of the payment (paragraph (a)). The borrower in this instance is required to lodge the subsequent mortgage with the Commissioner of Taxation for assessment within 30 days after the payment is made (paragraph (b)).

Section 58R : Duty on subscriptions under instruments which secure debentures

By section 58R, a body corporate may elect to have its liability for duty on its corporate debentures determined in accordance with the section.

Where a body corporate is, or will be, under a liability to repay money received in respect of its corporate debentures (paragraph 58R(1)(a)) and the body corporate is a party to an instrument of trust relating to the debentures (paragraph 58R(1)(b)), sub-section 58R(1) enables the body corporate to make an election that section 58R apply to those debentures by giving notice to the Commissioner of Taxation in accordance with an approved form. The consequence of making such an election is that the trust instrument, any mortgage executed by the body corporate that protects the interests of the debenture-holders, and the debentures, are not liable to duty. Duty is instead payable on an instrument to be lodged in accordance with sub-section (2).

By sub-section 58R(2), a body corporate that has made an election under sub-section (1) is required to lodge with the Commissioner of Taxation for assessment, within 21 days after the end of each month, an instrument in accordance with an approved form. The instrument is to set out the following information in respect of amounts subscribed in respect of such of the corporate debentures issued during the month as are connected with the ACT-

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5% of the total of amounts so subscribed that are repayable at or after the expriation of not less than 30 days and not more than 3 months (paragraph (a));

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50% of the total of the amounts that are repayable at or after the expriation of more than 3 months but not more than 6 months (paragraph (b)); and

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the total of all other so subscribed amounts, excluding amounts either repayable at call or in less than 30 days (paragraph (c)).

Sub-section (3) specifies the amount of duty to which the instrument lodged under sub-section (2) is liable; namely, the amount that would be payable if the instrument were a loan security for the repayment of the total of the amounts specified in the instrument.

For the purpose of lodging instruments in accordance with sub-section (2), amounts repayable at call after a specified period are, by sub-section (4), to be treated as though they are repayable at the expiration of the specified period.

Sub-section 58R(5) makes it clear that a reference in section 58R to an amount subscribed in respect of corporate debentures includes a reference to an amount represented by corporate debentures that are issued when an existing holding of corporate debentures or other marketable securities is converted or renewed.

Section 58S : Debentures not liable to duty if mortgage duly stamped

This section, like section 58P, reflects the underlying principle that duty is not to be imposed twice, where there are two loan securities in respect of the same obligation.

The section provides that where -

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the repayment of corporate debentures is secured on a mortgage - being a mortgage, but not a trust instrument, within the scope of paragraph (g) of the definition of "mortgage" in section 58H, (i.e., a mortgage to secure repayment of corporate debentures) - and the amount secured is at least equal to the amount repayble in respect of those debentures (paragraph (a)); or

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the interests of the holders of corporate debentures to which a mortgage - being a mortgage that is a trust instrument and is within the scope of paragraph (g) of the definition - relates are protected by the mortgage at least to the extent of the amount repayable in respect of the debentures (paragraph (b)),

and the mortgage is duly stamped, the debentures are not liable to duty.

Section 58T : Credits in respect of non-Territory stamp duty paid on loan securities

In recognition of the fact that a loan security subject to ACT stamp duty may also be liable to stamp duty in another jurisdiction, section 58T provides for credits of duty to be given, where that is necessary to avoid an unjustifiable imposition of double duty.

By sub-section 58T(1), an entitlement to a credit of duty in respect of ACT stamp duty payable on a loan security arises if -

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the loan security is secured on property (paragraph (a));

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some or all of that property is situated in a State, the Northern Territory or an external Territory of Australia (paragraph (b)); and

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duty is payable or, but for the sub-section, would be payable on the loan security (paragraph (c)).

The amount of the credit is the amount of stamp duty paid or payable on the loan security under a law of the State, the Northern Territory or the external Territory.

Sub-section 58T(2) provides that the maximum credit allowable is the amount of the ACT stamp duty that would otherwise be payable on the loan security.

For a credit to be allowable, sub-section (3) requires the person liable to pay the ACT duty to give to the Commissioner of Taxation, within 12 months after the time when the duty became due and payble, an application in accordance with an approved form, as well as any information the Commissioner requires to enable the amount of the credit to be determined.

Once a credit is allowable under the section, sub-section 58T(4) requires the credit to be first applied against the duty payable on the loan security, if it has not been paid (paragraph (a)). Next, any remaining credit is to be applied against any other liability, of the person entitled to the credit, to the Commonwealth under a taxation law administered by the Commissioner of Taxation (paragraph (b)). Any remaining credit is then to be refunded (paragraph (c)).

Sub-section 58T(5) applies to an instrument which increases the amount secured or recoverable under a loan security on property but which is not itself a loan security. It operates to ensure that a credit will be available in respect of duty imposed on such an instrument by sub-section 58M(1).

Section 58U : Stamping and lodgment of duplicate instruments, & c.;

This section provides for the stamping and lodgment of duplicate instruments, where the original instrument is, or is to be treated as, unavailable.

By sub-section 58U(1), if a duplicate or copy of an original instrument on which duty is payable by virtue of Division 12 is duly stamped or lodged with the Commissioner of Taxation for assessment instead of the original instrument - which instrument is lodged with a public office at which registration is effected - that original instrument will be treated as having been duly stamped or lodged.

Sub-section 58U(2) applies where a requirement arises under the Division for an instrument to be lodged for assessment within a specified period, but the instrument is, pursuant to section 67 of the Principal Act, held by the Commissioner (e.g., for non-payment of duty) or by a court (paragraph (a)), or the instrument is the subject of a previous lodgment requirement (paragraph (b)). In those circumstances, the first-mentioned requirement to lodge will only be satisfied if a duplicate or copy is lodged with the Commissioner within the specified period.

Sub-section 58U(3) operates to ensure that lodgement requirements will not be satisfied in respect of an instrument that is to be lodged for assessment, unless it is accompanied by any information the Commissioner requires to make the assessment.

Clause 9: Application

Paragraphs (d) and (f) of clause 4 of the Bill will amend section 4 of the Principal Act to include a "unit" in a "unit trust scheme" (both newly defined terms), within the existing definition of "marketable security". Purchases and sales of such units will, therefore, be subject to tax on the same basis as purchases and sales of marketable securities are subject to tax under the Australian Capital Territory Tax (Purchases of Marketable Securities) Act 1969 and the Australian Capital Territory Tax (Sales of Marketable Securities) Act 1969. Similarly, transfers of such units will be subject to stamp duty imposed by the Australian Capital Territory Stamp Duty Act 1969.

By clause 9, the amendments being made by paragraphs (d) and (f) of clause 4 are to apply to purchases and sales (paragraph (a)) and transfers (paragraphs (b)) of those units that are made on or after the date of commencement of clause 9. That date, by virtue of sub-clause 2(2), will be the first day of the month following that in which the Bill receives the Royal Assent.

PART III - AMENDMENT OF THE AUSTRALIAN CAPITAL TERRITORY TAX (HIRE-PURCHASE BUSINESS) ACT 1969

Clause 10: Principal Act

This clause facilitates references to the Australian Capital Territory Tax (Hire-Purchase Business) Act 1969, which, in Part III of the Bill, is referred to as "the Principal Act".

Clause 11: Regulations

Clause 11 proposes the insertion of a regulation making power in the Principal Act. It had been considered that the power to make regulations under the Principal Act was contained in section 99 of the Australian Capital Territory Taxation (Administration) Act 1969 with which the Principal Act is incorporated; both Acts being read as one Act. However, the Federal Court's reasoning in Amalgamated Television Services Pty Ltd v Australian Broadcasting Tribunal (1984) 54 ALR 57 makes it clear that such an incorporation provision does not have the effect of granting the power to make regulations under the Principal Act. To overcome the effect of this decision a regulation-making power is required for each Act.

Under new section 7, being inserted by clause 11, regulations will be able to be made for the purposes of paragraph 6(b) of the Principal Act, so as to exempt from the tax on hire-purchase agreements an agreement entered into by a prescribed Commonwealth or Territory Authority. The amendment will, by virtue of sub-clause 2(1) of the Bill, come into operation on the date of Royal Assent. No regulations have to date been made for the purpose of paragraph 6(b).

PART IV - AMENDMENT OF THE AUSTRALIAN CAPITAL TERRITORY TAX (INSURANCE BUSINESS) ACT 1969

Clause 12: Principal Act

By this clause, the Australian Capital Territory Tax (Insurance Business) Act 1969 is, in Part IV of the Bill, referred to as "the Principal Act".

Clause 13: Regulations

Clause 13 will amend the Principal Act to add a new section 7 to authorise the making of regulations for the purposes of paragraph 6(g) of the Principal Act. By that paragraph, insurance by, or insurance on property of, a prescribed Commonwealth or Territory authority is exempt from the ACT tax imposed on insurance premiums.

This amendment is necessary as a consequence of the Federal Court decision in Amalgamated Television Services Pty Ltd v. Australian Broadcasting Tribunal (see notes on clause 11). By virtue of sub-clause 2(3) of the Bill, section 7 will be deemed to have come into operation on 1 July 1969, thereby validating regulations that have already been made.

PART V - AMENDMENT OF THE AUSTRALIAN CAPITAL TERRITORY TAX (PURCHASES OF MARKETABLE SECURITIES) ACT 1969

Clause 14: Principal Act

By this clause, the Australian Capital Territory Tax (Purchases of Marketable Securities) Act 1969 is referred to as "the Principal Act" in Part V of the Bill.

Clause 15: Regulations

The amendment being made by this clause, also to insert a regulation-making power in the Principal Act, follows from the Federal Court's reasoning on Amalgamated Television Services Pty Ltd v Australian Broadcasting Tribunal (see notes on clause 11). The regulation-making power will be contained in new section 7, which will allow regulations to be made for the purposes of section 4 and paragraph 6(c) of the Principal Act to prescribe stock exchanges in respect of which the ACT tax on marketable security purchases applies, and to prescribe Commonwealth and Territory authorities that are exempt from the tax in relation to such purchases.

To validate existing regulations, sub-clause 2(3) of the Bill provides for section 7 to be deemed to have come into operation on 1 July 1969.

PART VI - AMENDMENT OF THE AUSTRALIAN CAPITAL TERRITORY TAX (SALES OF MARKETABLE SECURITIES) ACT 1969

Clause 16: Principal Act

This clause facilitates references in Part VI of the Bill to the Australian Capital Territory Tax (Sales of Marketable Securities) Act 1969, which is referred to as "the Principal Act".

Clause 17: Regulations

By clause 17, a new section 7 is to be added to the Principal Act to empower the Governor-General to make regulations for the purposes of section 4 and paragraph 6(c) of that Act. Those provisions provide for the prescribing of stock exchanges in respect of which the ACT tax on sales of marketable securities applies, and of Commonwealth and Territory authorities whose sales are exempt from the tax.

This new regulation-making power is necessary as a result of the Federal Court's decision in Amalgamated Television Services Pty Ltd v Australian Broadcasting Tribunal (see notes on clause 11). New section 7 is, by virtue of sub-clause 2(3) of the Bill, to be deemed to have come into operation on 1 July 1969, so as to validate existing regulations.

PART VII - AMENDMENTS OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 18: Principal Act

This clause facilitates references to the Income Tax Assessment Act 1936 which, in Part VII of the Bill, is referred to as "the Principal Act".

Clause 19: Interpretation

This clause proposes an amendment of a technical nature to sub-section 6(1) of the Principal Act, which contains definitions of various terms used in that Act. The amendment will delete from the definition of "apportionable deductions" in sub-section 6(1) the reference to paragraph 78(1)(b) - consequential upon the proposed omission of that paragraph by clause 28 of the Bill (see notes on that clause).

Clause 20: Officers to observe secrecy

Existing sub-section 16(1) of the Principal Act sets out definitions of terms used in section 16, which contains the secrecy provisions applicable to the income tax law. Paragraphs (a) and (b) of clause 20 will insert definitions of three new terms relevant to the operation of the secrecy provisions as proposed to be amended by other paragraphs of this clause -

"Director of Public Prosecutions" means a person appointed, under the Director of Public Prosecutions Act 1983, to hold or act in the position of the Director of Public Prosecutions.

"Special Prosecutor" is defined to mean a person appointed as a Special Prosecutor, or acting as a Special Prosecutor, under the Special Prosecutors Act 1982.

"tax-related offence" is defined for the purposes of section 16 to mean:

•

an offence against an Act of which the Commissioner of Taxation has the general administration, or against a regulation made under such an Act;

•

an offence against the Crimes (Taxation Offences) Act 1980; or

•

an offence against the Crimes Act 1914, where it relates to an Act administered by the Commissioner of Taxation, to a regulation made under such an Act or to the Crimes (Taxation Offences) Act 1980.

The formal amendment proposed by paragraph (c) of clause 20 - to paragraph 4(hb) of section 16 of the Principal Act - will give effect to the change in name of the Department of Education (formerly Education and Youth Affairs), as set out in the Administrative Arrangements Order of 13 December 1984.

The amendment to be made by paragraph (d) of clause 20 is designed to facilitate the modification (see following notes) of the prohibition imposed by sub-paragraph 16(4A)(a)(ii) of the Principal Act on the disclosure of taxation-sourced information during the course of a proceeding by a Royal Commission. Under existing sub-paragraph 16(4A)(a)(ii), taxation-sourced information that does not identify the person to whom it relates may be disclosed during the course of public or private proceedings conducted by a Royal Commission. By the proposed amendment, this restriction on disclosure is to be limited to proceedings conducted in public by a Royal Commission.

Under the present law, sub-section 16(4A) sets out the circumstances in which a Royal Commission may divulge taxation information supplied to it and specifies the obligations imposed on the Royal Commission and its staff for the purpose of protecting the confidentiality of that information. As indicated in the previous paragraph, a Royal Commission is prohibited by sub-paragraph 16(4A)(a)(ii) from divulging, during a private or public session, taxation-sourced information that either identifies, or is reasonably capable of being used to identify, the person to whom the information relates. However, by virtue of new paragraph 16(4A)(aa), to be inserted in the Principal Act by paragraph (e) of clause 20, this secrecy requirement is to be modified. A Royal Commission will be permitted, during the course of a private session, to disclose taxation-sourced information.

New paragraph 16(4A)(ba), to be inserted by paragraph (f) of clause 20, will enable a Royal Commission to supply the "Director of Public Prosecutions" and/or a "Special Prosecutor" with taxation-sourced information where the Royal Commission is of the view that the information is, or may be, relevant to an investigation of a "tax-related offence", as defined for the purposes of section 16. See notes on paragraphs (a) and (b) for an explanation of the terms "Director of Public Prosecutions", "Special Prosecutor" and "tax-related offence".

Existing paragraph 16(4A)(c) prohibits any disclosure of taxation-sourced information by a Royal Commission, other than a disclosure permitted by paragraphs 16(4A)(a) and (b) or, where it is relevant to the conduct of an enquiry by the Royal Commission, a disclosure to its employees or other persons who are under the control of the Royal Commission. Paragraph (g) of clause 20 will amend paragraph 16(4A)(c) to provide for a disclosure made in accordance with new paragraphs 16(4A)(aa) and (ba) (see notes above).

The effect of the present sub-section 16(4B) is to make it clear that sub-section 16(4A) does not prevent a Royal Commission from communicating taxation-sourced information to a person specified in paragraphs 16(4B)(a),(b) or (c). Paragraph (a) of sub-section 16(4B) permits the communication of taxation-sourced information to an individual in respect of whose affairs the information relates, while paragraph (c) permits the information to be communicated to the person who furnished the information to the Commissioner of Taxation. Paragraph (b) of sub-section 16(4B) is concerned with the communication of taxation-sourced information that relates to the affairs of a company. Existing paragraph 16(4B)(b) restricts the communication of information relating to the affairs of a company to any person who is, or has been, directly involved in, or responsible for, the preparation of information furnished to Commissioner on behalf of the company. By virtue of the amendment to be made by paragraph (h) of clause 20, existing paragraph 16(4B)(b) is to be widened to also include any person who is, or was, a director or officer of a company in respect of which taxation-sourced information has been communicated to a Royal Commission.

Paragraph (j) of clause 20 proposes an amendment of existing sub-section 16(4D) to ensure that, where information has been communicated to a person during the course of a proceeding conducted in private by a Royal Commissioner, and that information was not originally provided to the Commissioner of Taxation by the person to whom it has now been communicated or the information does not relate to the affairs of that person, he or she will be prohibited from making a record of the information or divulging or communicating that information in any circumstances.

Paragraph (k) of clause 20 proposes to insert two new sub-sections - 16(4FA) and 16(4FB) - in the Principal Act. These new sub-sections deal with the on-communication, by either the Director of Public Prosecutions or a Special Prosecutor, of information initially obtained by a Royal Commission under paragraph 16(4)(k) of the Principal Act and subsequently disclosed by a Royal Commission under proposed paragraph 16(4A)(ba) to the Director of Public Prosecutions or the Special Prosecutor.

By new paragraph 16(4FA)(a), the Director of Public Prosecutions is prohibited from on-communicating taxation-sourced information, except where that communication is to a person or employee under the control of the Director of Public Prosecutions and then only where it is for purposes of, or in connection with, the performance by that person or employee of his or her official duties.

Proposed paragraph 16(4FA)(b) is a safeguarding provision designed to prohibit the recording or disclosure of taxation-sourced information by a person who is no longer the Director of Public Prosecutions.

Sub-paragraph 16(4FA)(c)(i) is also a safeguarding provision which ensures that a person to whom the Director of Public Prosecutions has communicated information under new paragraph 16(4FA)(a) is prohibited from recording or disclosing the communicated information to any person other than the Director of Public Prosecutions or another person or employee under the control of the Director of Public Prosecutions. Such a disclosure is only permitted where it is for the purposes of enabling the Director of Public Prosecutions, or persons or employees under his or her control, to perform their respective official duties.

Sub-paragraph 16(4FA)(c)(ii) is a further safeguarding provision which is designed to ensure that, where a person to whom the Director of Public Prosecutions has communicated information under new paragraph 16(4FA)(a) ceases to be a person or employee under the control of the Director of Public Prosecutions, that person is prohibited from recording or disclosing the relevant information.

Proposed sub-section 16(4FB) has substantially the same purpose and effect as new sub-section 16(4FA) except that it relates to the disclosure or communication by a Special Prosecutor and/or a person or employee under his or her control of information initially provided by the Commissioner of Taxation to a Royal Commission and subsequently on-communicated by that Royal Commission to the Special Prosecutor - see notes above on new sub-section 16(4FA).

Paragraph (m) of clause 20 is a formal drafting measure to facilitate the insertion, by paragraph (n), of new paragraph 16(4G)(c).

The insertion of new paragraph 16(4G)(c) by paragraph (n) of clause 20 is designed to make it clear that a reference, in sub-section 16(4A), to a person under the control of a Royal Commission includes a member of either the Australian Federal Police or a police force of a State or Territory or a Special Member of the Australian Federal Police who has been assigned to the Royal Commission to carry out an investigation on behalf of, or under the control of, the Royal Commission.

The amendment to be made by paragraph (o) of clause 20 to existing sub-section 16(4J), which prohibits the disclosure of certain taxation-scoured information to a court, is designed to make it clear that a person who, in consequence of the disclosure of confidential taxation information to a Royal Commission, has received such information cannot be compelled to disclose that information in any court.

Paragraph (p) of clause 20 will insert two new sub-sections - (4JA) and (4JB) - in section 16 of the Principal Act. The effect of these new sub-sections is to permit the use of taxation-sourced information in connection with, and in the course of, a prosecution for a tax-related offence.

Where taxation-sourced information has been communicated to the Director of Public Prosecutions or a Special Prosecutor, or a staff member of either, new paragraph 16(4JA)(a) will permit the further disclosure of that information to another person for the purpose of, or in connection with, the prosecution of a person for a tax-related offence as defined for the purposes of section 16.

By virtue of proposed paragraph 16(4JA)(b), where information is admissible as evidence in the prosecution of a person in respect of an offence as mentioned in paragraph 16(4JA)(a), that information may be further communicated to a court in the course of the relevant prosecution proceedings before that court.

New paragraph 16(4JB) provides that, where information has been communicated to a person in connection with a prosecution of another person for a tax-related offence, the person to whom the information has been communicated shall not make a record of, or divulge or communicate, the information otherwise than for the purpose of, or in connection with, the prosecution of the relevant person for the tax-related offence.

Clause 21: Exemptions

This clause will amend section 23 of the Principal Act which specifies a range of circumstances in which income is exempt from income tax.

Subject to certain exceptions, paragraph 23(z) of the Principal Act exempts from tax income derived by way of scholarships, bursaries or educational allowances by students receiving full-time education at a school, college or university. Payments to students by the Commonwealth as a grant of Tertiary Education Assistance under the Student Assistance Act 1973 (TEAS) and payments under a scheme known as the Adult Secondary Education Assistance Scheme (ASEAS) are exempt from tax under this paragraph, but by amendments proposed by this clause are now to be made subject to tax.

Paragraph 23(zaa) of the Principal Act currently exempts from tax income derived by way of payments made to or in respect of students under Commonwealth secondary or technical scholarships and payments made by way of Commonwealth assistance in connection with the education of isolated children. Clause 21 proposes to omit the existing paragraph 23(zaa) and to insert a new paragraph 23(zaa) to take account of the fact that the Commonwealth no longer provides secondary or technical scholarships, but pays allowances in the form of secondary assistance.

The amendments proposed by clause 21 will result in allowances paid under TEAS and ASEAS in respect of a period commencing on or after 1 January 1986, other than a payment made in respect of a child or children wholly or substantially dependent on the recipient, to be dealt with under the general assessment provisions of the income tax law. Amounts paid under the schemes that are of an income nature are a living allowance, including any component in the allowance paid to a student who is independent or is living away from home or who has a dependent spouse and children, and an incidentals allowance. The effect of the amendments will be to include both allowances in the assessable income of a student, except to the extent of any component paid to the student in respect of a dependent child or children. A fares allowance paid under the schemes is not considered to be of an income nature.

Paragraph 23(z) does not operate to exempt Commonwealth educational assistance exempted by paragraph 23(zaa). Paragraph (a) of clause 21 is a drafting measure and will amend paragraph 23(z) to maintain its existing operation by excluding from its scope Commonwealth assistance for secondary education and assistance in connection with the education of isolated children. Such assistance will continue to be exempt from income tax under paragraph 23(zaa) as proposed to be amended by paragraph (d) of clause 21. A consequence of the amendments proposed by paragraphs (a) and (d) of clause 21 is that ASEAS payments will in future fall for consideration under new paragraph 23(zaa), rather than paragraph 23(z).

Paragraph (b) of clause 21 is a drafting measure necessary as a consequence of the proposed insertion, by paragraph (c), of new sub-paragraphs (v) and (vi) in paragraph 23(z).

New sub-paragraph 23(z)(v) will remove the exemption in respect of a TEAS payment received by a student that does not include a component paid in respect of a child or children dependent on the student. Where payment to a student includes such a component, new sub-paragraph 23(z)(vi) will operate so that only the amount paid under TEAS that is in excess of the component received in respect of the dependent child or children will be removed from the exemption.

Paragraph (d) of clause 21 will omit existing paragraph 23(zaa) and insert a new paragraph 23(zaa). The new paragraph extends an income tax exemption for payments of Commonwealth secondary education assistance made to or in respect of a student. This change takes account of the present schemes of secondary educational assistance provided by the Commonwealth. The exemption of payments of assistance in connection with the education of isolated children is retained.

In its amended form paragraph 23(zaa) would, but for new sub-paragraphs 23(zaa)(i) and (ii), exempt from tax ASEAS payments. Sub-paragraph 23(zaa)(i) proposes to remove the exemption in respect of any ASEAS payment received by a student that does not include an additional component paid in respect of a dependent child or children, while sub-paragraph 23(zaa)(ii) proposes to remove the exemption, where a payment includes such a child component, only in respect of the excess of the payment over that component.

The amendments will apply, by the operation of sub-clause 42(2), to payments of TEAS and ASEAS made in respect of a period commencing on or after 1 January 1986. Thus, any payment received on or after that date as arrears of TEAS or ASEAS allowances in respect of a period before that date will remain exempt from tax.

By an amendment proposed by clause 39 of this Bill, the living allowance, to the extent it is to be included in a students' assessable income (but not the incidentals allowance), will be subject to pay-as-you-earn tax instalment deductions.

Clause 22: Exemption of certain film income

Clause 22 proposes amendments of section 23H of the Principal Act to generally reduce the level of the income tax exemption available to an investor in respect of his or her net earnings from a qualifying Australian film.

Under the existing law, those net earnings are exempt from tax up to a maximum of 33% or 50% of the investor's eligible capital expenditure on the film, depending on whether the expenditure attracts an income tax deduction of 133% or 150%, respectively, of that expenditure. The reduction in the exemption level to 20% of eligible expenditure is associated with the proposed general reduction in the deduction level - to 120% - where the expenditure is incurred under a contract entered into after 19 September 1985 (see notes on clauses 36 and 37).

The broad effect of section 23H as proposed to be amended will be that, where eligible expenditure on a film attracts a deduction of 150%, the corresponding exemption in respect of the investor's net earnings from the film will be up to 50% of the expenditure, where the deduction level is 133%, the maximum exemption level will be 33% and, where the deduction level is 120%, the maximum exemption level will be 20%.

Paragraph (a) of clause 22 corrects a drafting oversight by removing a reference to the "relevant year of income" which was inadvertently retained when sub-section 23H(4) was amended in 1984.

The amendments proposed by paragraph (b) will amend sub-sections 23H(4) to redefine the meaning of "unrecouped capital expenditure", which is used to delimit a taxpayer's remaining exemption entitlement after taking into account any exemption conferred in a preceding year of income in relation to income derived from a particular film. The term is used in sub-sections 23H(1) and (2), which operate to confer the exemption in respect of the taxpayer's net earnings from the film and to ensure that it does not exceed the amount of the unrecouped capital expenditure.

In terms of new paragraph 23H(4)(a), a taxpayer's unrecouped capital expenditure at the end of a year of income is to be the amount by which net film earnings previously exempted from tax under section 23H are exceeded by the sum of -

•

50% of expenditure in respect of which a deduction at the rate of 150% has been allowed (sub-paragraph (i));

•

33% of expenditure in respect of which a 133% deduction has been allowed (sub-paragraph (ii)); and

•

20% of expenditure in respect of which a 120% deduction has been allowed (sub-paragraph (iii)).

Where there is no such excess, the unrecouped capital expenditure is to be nil (new paragraph 23H(4)(b)).

Sub-section 23H(4A) defines terms used in sub-section (4) to describe film expenditure in respect of which a deduction has been allowed ("deductible moneys") and such expenditure that was deductible at the rate of 133% ("deductible 133% moneys") or 150% ("deductible 150% moneys"). This sub-section is to be amended by paragraph (c) of clause 22 to include a further definition of "deductible 120% moneys" to describe film expenditure in respect of which a deduction has been allowed at the rate of 120%.

Sub-clause 42(3) of the Bill specifies the year of income in which the amendments proposed by clause 22 will first apply. Generally, they will first apply in the year of income in which 19 September 1985 occurred - the effective date of reduction in the film exemption and deduction levels. The amendments may, however, apply in the preceding year where sub-section 23H(5) operates to bring to account for exemption purposes in that preceding year later expenditure that has been allowed as a deduction at the rate of 120%. Sub-section 23H(5) ensures that, should a taxpayer outlay expenditure in the production of a film in an income year later than that in which income is first derived from the film, the expenditure is capable of being taken into account in determining any exemption entitlement in respect of that income. This situation could arise where income is derived under a pre-sale agreement entered into prior to the taxpayer's total investment in the film being made.

Clause 23: Value of live stock at end of year of income

Introductory note

This clause will repeal existing section 32 of the Principal Act and substitute a new section 32 that contains a new option for valuing at the end of a year of income certain horses. That option will be in addition to the options for valuing live stock on hand at the end of a year of income that are presently available under section 32.

Existing section 32 stipulates that the value of live stock to be taken into account at the end of the year of income in ascertaining taxable income shall be its cost price or, at the taxpayer's option, its market selling value. A proviso to the section permits the adoption of a value other than cost or market selling value for the whole or part of the live stock, if the taxpayer satisfies the Commissioner of Taxation that there are circumstances which justify another value.

Circumstances in which the initial high value of specific items of breeding stock diminishes significantly over a small number of years is accepted by the Commissioner as constituting circumstances to which the proviso to section 32 refers. On that basis, it is administrative practice to allow named and identified stud stock of any species in the above circumstances to be brought to account at market selling value even if other stock owned by the taxpayer is valued at cost. For the purposes of valuing that stud stock, the administrative practice extends to enabling the taxpayer to value an animal at its estimated market selling value, being its cost price reduced annually by 20% of the cost price. It is open to the taxpayer to establish that the actual diminution in the market selling value during a year of income was greater than 20% of cost. On the other hand, if during a year of income the taxpayer were to receive a firm offer to buy the animal, or obtain a professional valuation, or there was some other evidence that the animal had maintained or increased its value from the previous year, the 20% reduction would not be available.

The new section 32 will not disturb these existing methods of valuing live stock. It will, however, provide a further option for valuing "eligible horses" - a term that is defined in proposed new sub-section 32(1) to mean horses that are capable of use for breeding purposes and that are acquired under contracts entered into after 20 August 1985. The new option will enable a taxpayer to write down the value of an eligible horse regardless of whether the horse maintains or increases the value at which it was first brought to account by the taxpayer. The proposed new option compares with the write-down arrangements that are currently available, as an administrative practice, under the income tax law of New Zealand.

The proposed additional methods of valuing eligible horses will be based on a horse's "opening value" less a reduction amount. The reduction amount may be either a "general reduction amount" (a percentage of the horse's written-down value) or, in the case of a mare, a "special reduction amount" (generally a fixed annual amount to be applied over a minimum of 3 years). The terms "opening value", "general reduction amount" and "special reduction amount" are defined in proposed sub-section 32(1) and are explained in the detailed notes on that sub-section.

Each of the proposed new methods of valuing eligible horses will be treated as a basis of valuation for the purposes of section 33 of the Principal Act. Under that section, a taxpayer may not vary the basis of valuation of live stock from one income year to the next without the agreement of the Commissioner. In the case of a male eligible horse, this means that a taxpayer who elects to value that horse by writing down its cost at, say, 40% per annum may not, without the Commissioner's agreement, change the percentage write down rate to a greater or lesser rate. In the case of a female eligible horse, it means that a taxpayer who elects to value the horse by writing down its cost on a straight line basis over, say, 6 years may not, without the Commissioner's agreement, subsequently change the basis of valuation to one that would write down the value of the horse at 33 1/3% per annum on a diminishing value basis. The new methods of valuation are explained in detail in the notes on the definitions of "general reduction amount" and "special reduction amount" within new sub-section 32(1).

Proposed section 32 incorporates safeguarding provisions that will preclude a horse from being written down under the new valuation option in circumstances where the horse was owned, or was being acquired, by the taxpayer on or before 20 August 1985 and subsequently the taxpayer entered into a scheme for the purpose of enabling the horse to be treated as an "eligible horse" of the taxpayer or, in a case where the taxpayer retains the effective use of the horse, of some other person.

Sub-section (1) of new section 32 contains the following definitions of terms used in the section -

"birth date" is a term used and expanded upon in sub-section (2) to provide the basis for determining the age of a horse for the purposes of the calculation of a "special reduction amount". The term is defined so that, regardless of the actual date on which a horse is foaled, or in which geographical location a horse is foaled, a horse will be regarded as having its birth date on -

•

in the case of a horse foaled on or after 1 August in a calendar year - 1 August in that year (paragraph (a)); and

•

in the case of a horse foaled before 1 August in a calendar year - 1 August in the preceding year (paragraph (b)).

"eligible horse" refers to a horse that is eligible to be valued under the new write-down option. Under the definition, a horse is an "eligible horse" if it was acquired by the taxpayer under a contract entered into after 20 August 1985 and was not, at the time the contract was entered into -

•

a gelding (paragraph (a)); or

•

a female horse that had been spayed (paragraph (b)).

In other words, the horse must be capable of being part of breeding stock of the taxpayer.

"general closing value" is an expression used in sub-section (5) to describe the value of a horse at the end of a year of income under one of the new methods of valuing breeding horses. The expression is defined to mean the "opening value" of an eligible horse (paragraph (a)) less the "general reduction amount" in relation to that horse in the year of income (paragraph (b)).

"general reduction amount" is one of two terms (see definition of "special reduction amount") used to describe the reduction in value of eligible horses during a year of income and is defined for the purposes of determining an eligible horse's "general closing value". In the case of a male eligible horse, the general reduction amount is an amount not exceeding 50% of the horse's opening value (paragraph (a)). This means that a taxpayer may write down a male horse at any percentage rate up to and including 50% per annum. In the case of a female eligible horse, the "general reduction amount" is 33 1/3% of the horse's opening value (paragraph (b)). Unlike the percentage rate for a male eligible horse - where the taxpayer may select any percentage rate that does not exceed 50% - the diminishing value write-down rate for a female eligible horse is fixed at 33 1/3% per annum. In addition to this fixed percentage rate on the diminishing value basis, a female eligible horse may, alternatively, be written down using a straight line method (see notes on the definition of the terms "special closing value" and "special reduction amount").

"opening value" is a term used for the purposes of calculating an eligible horse's "general closing value" or "special closing value" and is defined to mean -

•

where the horse was live stock of the taxpayer during the whole of a year of income (called the current year of income) and it was the taxpayer's live stock at the end of the preceding year of income, its value taken into account at the end of that preceding year (paragraph (a)); or

•

where the horse became live stock of the taxpayer during the current year of income, the lesser of the horse's cost price or its depreciated value within the meaning of section 62 of the Principal Act at that time (paragraph (b)). This will mean that, where immediately before the horse became trading stock of the taxpayer it was not used by the taxpayer for the purpose of producing assessable income, its "depreciated value" will be a notional depreciated value calculated as if the horse were wholly used for the purpose of producing assessable income and without the accelerated depreciation provisions of section 57AG having been applied. On the other hand, if at all times while the taxpayer was the owner of the horse before the time when the horse became trading stock of the taxpayer, the horse had been used by the taxpayer for the purpose of producing assessable income, its "depreciated value" will be its actual depreciated value.

"person" is defined to include a partnership and a person in the capacity of a trustee of a trust estate. The term is used in the safeguarding provisions of sub-sections 32(8) and (9).

"scheme" is given an extended meaning common to other safeguarding provisions of the Principal Act, to include any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not legally enforceable or intended to be so enforceable (paragraph (a)), as well as any scheme, plan, proposal, action, course of action or course of conduct, unilateral or otherwise (paragraph (b)).

"special closing value" is an expression used in sub-section (5) to describe the value of a female eligible horse at the end of a year of income under one of the new methods of valuing breeding horses. The expression is defined to mean the "opening value" of the horse less the "special reduction amount" in relation to that horse in the year of income (paragraph (a)), or $1 where the special reduction amount equals or exceeds the opening value (paragraph (b)). It is because the expression applies to a straight line method of writing down the value of a horse that the definition provides that the "special closing value" can never be less than $1.

"special reduction amount" is the second of the two terms used to describe the reduction in value of eligible horses during a year of income - the first being the "general reduction amount". The term applies in relation to female eligible horses for the purposes of determining a horse's "special closing value" and will enable the value of such a horse to be written down to $1 over a minimum period of 3 years by the time the horse reaches 12 years of age or more. Specifically, the term means -

•

in the case of a horse aged less than 10 years when it became live stock of the taxpayer, an amount calculated using the formula

(A)/(12-B)


, where -

A

is the cost price of the horse; and

B

is the age of the horse, as a whole number (having regard to the definition of "birth date" and sub-section 32(2)), at the time when the horse is taken into account as live stock of the taxpayer; and

•

in the case of a horse aged 10 years or more when it became live stock of the taxpayer, an amount calculated using the formula

(A)/(B)


, where -

A

is the cost price of the horse; and

B

is a whole number, not less than 3, that the taxpayer selects and notifies to the Commissioner at the same time and in the same manner as in selecting the option to value the horse at its special closing value.

Sub-section 32(2) specifies, for the purposes of proposed section 32, the time at which a horse attains a particular age, expressed in whole years. That age is attained upon the commencement of the relevant anniversary of the horse's "birth date", as defined. For example, a horse foaled on 1 September 1985 will be taken to have attained the age of 1 year on 1 August 1986, 2 years on 1 August 1987, etc.

This provision, together with the definition of the term "birth date" in sub-section 32(1), will mean that, for the purposes of determining the "special reduction amount" in a case where, for example, a horse foaled on 1 September 1985 is first taken into account by a taxpayer on 1 July 1989, the age of the horse (component B in the formula

(A)/(12-B)


- see notes above) will be 3.

Sub-section 32(3) provides that, in circumstances where a horse may have become live stock of the taxpayer on more than one occasion, the time at which the horse shall be taken to have become the taxpayer's live stock is the last occasion on which it became such live stock. For example, in a case where a horse that was live stock of the taxpayer was sold but subsequently was re-purchased by the taxpayer and taken into account again as live stock, the horse shall, for the purposes of section 32, be taken to have become live stock on that later occasion on which it became the taxpayer's live stock.

Sub-section 32(4) provides for the pro-rating of a "general reduction amount" or "special reduction amount", as the case may be, in the first year of income in which an eligible horse is taken into account as live stock of a taxpayer.

By paragraph 32(4)(a), the relevant percentage for the purpose of calculating the "general reduction amount" in relation to the first year of income in which an eligible horse is taken into account as live stock of the taxpayer is to be calculated using the formula

((AB)/(C))


.

The formula pro-rates the relevant percentage according to the part of the income year that the eligible horse was live stock of the taxpayer as a fraction of the whole year of income. For example, if a stallion were taken into account on 1 January of an income year ending on 30 June and the taxpayer elected to write down the value of the horse at the rate of 50% per annum, the amount of the "general reduction amount" in that first year of income would be one-half of 50% of the stallion's "opening value".

Paragraph 32(4)(b) operates in a similar manner for the purpose of calculating the "special reduction amount" as paragraph (a) operates for the calculation of "general reduction amount", except that it is the special reduction amount itself that is pro-rated according to the part of an income year that a female eligible horse was live stock of the taxpayer.

Sub-sections 32(5), (6) and (7) are the operative provisions of section 32. Sub-sections (5) and (6) provide the various options for valuing live stock, including the additional option for valuing horses that are eligible horses, while sub-section (7) specifies that, if the taxpayer does not exercise the option for another value, live stock is to be valued at cost price.

Subject to sub-sections (6) and (7), sub-section 32(5) provides a taxpayer with the option of valuing live stock as follows -

•

where the live stock is an eligible horse (male or female) - at the horse's "general closing value" (paragraph (a));

•

where the live stock is a female eligible horse - at the horse's "special closing value" (paragraph (b)); or

•

regardless of the type of live stock - at cost price (paragraph (c)) or market selling value (paragraph (d)).

The proviso to existing section 32 is effectively re-stated in new sub-section 32(6). Sub-section (6) will operate in an identical manner to the existing proviso and may provide a method (e.g. estimated market selling value) of valuing live stock additional to those available under sub-section 32(5). For discussion on the administrative application of the existing proviso, see earlier notes on clause 23 of the Bill under the heading "Introductory note".

New sub-section 32(7) maintains another feature of existing section 32. By sub-section (7), where a taxpayer does not exercise one of the options available under new sub-section (5) within the time and in the manner prescribed, the value of live stock to be taken into account at the end of the year of income is to be the cost price of the live stock. Regulation 5 of the Income Tax Regulations will continue to prescribe the time and manner in which an option under section 32 may be exercised. By sub-clause 42(5), regulations made for the purposes of existing section 32 are to continue in force as if they were made for the purposes of new sub-section 32(7).

Sub-sections 32(8) and (9) are safeguarding provisions that will counter the substitution of arrangements entered into on or after 21 August 1985 for arrangements already in place before that date in an attempt to gain eligibility for the new write-down options for horses. In addition, the provisions will apply to "end-user" arrangements, under which a horse is sold by a taxpayer to another person, subject to a scheme whereby the taxpayer retains effective control over the use of the horse in the taxpayer's activities.

The basic safeguarding rules are contained in proposed sub-section 32(8). That sub-section applies where a taxpayer who before 21 August 1985 was the owner of a horse or before that date entered into a contract or arrangement for the acquisition of a horse, enters into a scheme in pursuance of which the taxpayer becomes the owner of that horse in circumstances that would otherwise qualify the horse as an eligible horse (e.g., by substituting for the pre-21 August 1985 contract new post-20 August 1985 contractual arrangements for the acquisition of the horse). Where the Commissioner is satisfied that the scheme was entered into by the taxpayer with a purpose of enabling the horse to be treated as an eligible horse, the Commissioner may, for the purposes of ascertaining the value of the horse to be taken into account at the end of the year of income, treat the horse as if it had been acquired in pursuance of a contract entered into before 21 August 1985. As a consequence, the option to value the horse at either the "general closing value" or "special closing value" would not be available.

Alternatively, where the scheme is such that the taxpayer becomes the "end-user" of the horse (see notes on new sub-section 32(9)), the Commissioner may, for the purpose of determining the method by which the horse may be valued in the hands of the new owner, regard the horse as if the new owner had acquired the horse in pursuance of a contract entered into before 21 August 1985.

Sub-section 32(9) specifies, for the purposes of the operation of sub-section 32(8), circumstances in which a taxpayer will be taken to be the end-user of a horse. These are where, as part of a scheme to which the taxpayer is a party, there exists a combination of two factors. The first of these is that the horse is owned by a person other than the taxpayer and used wholly or principally in connection with the taxpayer's activities (paragraph (a)). The second is that the taxpayer is able to control directly or indirectly the use of the horse in connection with those activities (paragraph (b)).

By sub-clause 42(4) of the Bill, the amendments being made by clause 23 to insert new section 32 in the Principal Act are to apply in assessments in respect of the 1985-86 year of income and all subsequent years of income.

Clause 24: Full-year deductions and partnership deductions

Clause 24 will amend section 50F of the Principal Act, consequential upon the amendments proposed by clauses 31 to 35 to enable general and petroleum mining companies to make an annual election to have certain undeducted development and exploration expenditure treated as a carry-forward loss.

Section 50F is part of the current year loss provisions which are designed to prevent profits derived by a company in one part of a year of income under the ownership of one group of shareholders from being offset by losses incurred by the company during another part of the year of income when the company is owned by another group of shareholders. For the purposes of these current year loss provisions, section 50F identifies the deductions that are to be treated as full-year deductions of a company or, as the case requires, full-year partnership deductions where a company is a partner in a partnership. Full-year deductions and full-year partnership deductions are those deductions that are taken into account in calculating the company's actual taxable income for the whole of a year of income rather than its notional taxable income for part only of the year.

The amendments proposed by clause 24 will have effect in respect of deductions for expenditure to which Divisions 10 (expenditure on general mining) and 10AA (expenditure on petroleum mining) apply and in respect of which an election is made that the deduction is not limited to the amount of remaining assessable income of the year of income. Consistent with the present position under section 50F where an election is made in relation to certain general mining expenditure and reflecting the amendments being made by clauses 31 to 35 to provide further elections, deductions of that kind will be deemed not to be full-year deductions. They will instead be divisible deductions (see notes on clause 25).

Paragraphs (a) and (b) of clause 24 are drafting measures relevant to the insertion, by paragraph (c), of a new sub-section 50F(2). Paragraph (a) will remove from paragraph 50F(1)(c) of the Principal Act the existing reference to relevant petroleum mining deductions, while paragraph (b) will insert that same reference in paragraph 50F(1)(d). The effect is that those deductions are full-year deductions of a company only where new sub-section 50F(2) does not apply.

New sub-section 50F(2), being inserted by paragraph (c) of clause 24, provides that, where a company makes an election for a year of income under section 122D, 122DB, 122DD or 122DF (paragraph (a)) or under section 122DG, 122J, 124ADH or 124AH in relation to particular expenditure (paragraph (b)), the deduction for expenditure dealt with in any one of those sections (paragraphs (c) and (d)) is deemed not to be a full-year deduction of the company in that year of income. The sections referred to in sub-section 50F(2) relate to deductions for certain expenditure incurred at particular times by general or petroleum mining companies. The new sub-section reflects the fact that such a company will, by the amendments proposed by clauses 31 to 35 of the Bill, be able to elect that undeducted expenditure of this kind incurred in the 1985-86 and subsequent income years forms part of the company's carry-forward losses (see notes on clauses 31 to 35).

The amendments of sub-sections 50F(4) and (5) proposed by paragraphs (d) and (e) of clause 24, also consequential upon amendments proposed by clauses 31 to 35, are to the same effect in relation to full-year partnership deductions as the amendments proposed by paragraphs (a), (b) and (c) in relation to full-year deductions.

Clause 25: Divisible deductions

This clause will amend section 50G of the Principal Act, which identifies certain deductions that are to be treated as divisible deductions for the purposes of the current year loss provisions. Divisible deductions (as distinct from full-year deductions - see notes on clause 24) are the deductions that, under those provisions, are allowed in calculating notional incomes or losses in the relevant parts of a company's year of income. Section 50G specifies the manner in which those divisible deductions are to be taken into account under those provisions.

The amendments proposed are consequential upon those being made by clauses 31 to 35 inclusive, which will enable petroleum and general mining companies to elect to have undeducted development and exploration expenditure incurred in the 1985-86 and subsequent income years treated as carry-forward losses.

Paragraph (a) will extend the list of divisible deductions in sub-section 50G(1) by the inclusion of new paragraph 50G(1)(ba). The new paragraph will include as divisible deductions those deductions allowable to a general mining or petroleum mining company in a year of income under section 122DG, 122J or 124AH or Division 10AA of the Principal Act, where the company has made an election, in relation to expenditure dealt with in those provisions, that the deductions not be limited to the assessable income of the year that remains after allowing all other deductions. The effect of the election is that undeducted relevant expenditure will form part of the company's carry-forward losses (see notes on clauses 31 to 35).

Paragraph 50G(2)(q) of the Principal Act specifies the manner in which divisible deductions allowable under Division 10 (expenditure on general mining) are to be taken into account for the purposes of the current year loss provisions of the Principal Act. The deductions are those which, if undeducted in a particular year because there is insufficient income to absorb them, a company may elect to treat as part of its carry-forward loss. Paragraph (b) of clause 25 will insert references in paragraph 50G(2)(q) to section 122DG, 122J, 124AH and Division 10AA consequential upon amendments proposed by clauses 31 to 35 to enable similar elections to be made in respect of those sections and that Division.

Clause 26: Calls paid by certain holding companies

This clause proposes amendments of a technical nature to section 77B of the Principal Act consequential upon the proposed omission of paragraph 78(1)(b) of the Act by clause 28 (see notes on that clause). The purpose of section 77B is, inter alia, to enable a company that is entitled to a deduction under paragraph 78(1)(b), in respect of one-third of calls paid to an afforestation company in which it beneficially owns all the paid-up capital, to pass back its entitlement to the deduction to a resident company that has provided, as share capital, the money out of which the calls were paid.

Reflecting the omission of paragraph 78(1)(b) from the Principal Act, clause 26 will omit sub-section 77B(3), which specifies the circumstances in which a paragraph 78(1)(b) deduction may be passed back (paragraph (a)), and delete the reference to paragraph 78(1)(b) in sub-section 77B(6) (paragraph (b)).

Clause 27: Moneys paid on shares for the purposes of certain exploration, prospecting or mining

The amendments of section 77D of the Principal Act proposed by this clause are also of a technical nature consequential upon the proposed omission of paragraph 78(1)(b) by clause 28 (see notes on that clause).

Section 77D authorises deductions for certain moneys paid on shares in a company carrying on either or both petroleum and general mining activities. The amendments proposed by clause 27 will omit the references to paragraph 78(1)(b) in paragraph 77D(11)(a) and in sub-section 77D(16).

Clause 28: Gifts, pensions, & c.;

Paragraph 78(1)(b) of the Principal Act provides a deduction of one-third of the amount of calls paid on non-redeemable shares in a company carrying on as its principal business afforestation in Australia, where the call moneys are for use by the company in that business. Under sub-section 78(7) the availability of the deduction is restricted to companies, non-residents and certain trustees.

Clause 28 will omit paragraph 78(1)(b) and sub-section 78(7) from the Principal Act, thereby withdrawing the deduction available in respect of calls on afforestation shares. In terms of sub-clause 42(6), the withdrawal will apply to calls paid after 19 September 1985. However, under sub-clause 42(7), calls paid after that date by a person who owned or beneficially owned the shares on or before that date in respect of calls made on or before that date may, subject to sub-section 78(7), continue to qualify for deduction under the former paragraph 78(1)(b).

Clause 29: Transfer of loss within company group

Clause 29 proposes amendments of section 80G of the Principal Act, which allows entitlement to a deduction for a loss incurred by a resident company to be transferred to another resident company where there is 100 per cent common ownership between the companies. The amendments are complementary to those proposed by clauses 31 to 35, which will enable general and petroleum mining companies to elect to have undeducted exploration and development expenditure incurred in the 1985-86 and subsequent income years treated as carry-forward losses. By the amendments proposed by this clause, such losses will be able to be transferred for deduction by another company in the same group as the company that incurred the allowable expenditure.

Sub-section 80G(10) operates so that a loss company may not transfer prior year losses that could be absorbed by the sum of its assessable income and any net exempt income of the current income year less allowable deductions other than certain deductions under Division 10 (general mining), Division 10AA (petroleum mining) and Division 16C (Income Equalization Deposits), which deductions cannot create or increase a loss.

The effect of the amendments proposed is to omit from paragraph (a) of sub-section 80G(10) references to certain Division 10 and Division 10AA deductions - those available under section 122DG, 122J, 124ADG and 124AH - to reflect the fact that, by amendments proposed by clauses 31 to 35 of the Bill, companies will be able to elect to treat as carry-forward losses unabsorbed expenditure that would be deductible under those sections. Substituted references to deductions under those sections where an election is not made by the company concerned are being inserted in new paragraph 80G(10)(c), the result being that the deductions will only be taken into account for the purposes of the sub-section 80G(10) calculation where they do not form part of losses - that is, where no election is made.

Clause 30: Interpretation

This clause will correct a drafting error in technical amendments of section 82KH of the Principal Act that were included in the Taxation Laws Amendment Bill (No. 2) 1985. Those amendments were consequential on measures contained in that Bill to repeal the concessional expenditure rebate provisions of the Principal Act.

Clause 31: Deduction of allowable (post 19 July 1982) capital expenditure

This clause will amend section 122DG of the Principal Act to enable a general mining company to elect to have undeducted exploration and development expenditure incurred in the 1985-86 and subsequent income years treated as a carry-forward loss under section 80 of the Principal Act, in order that the excess deduction may be transferred to another company via the group loss transfer provisions (see notes on clause 29).

Under section 122DG, "allowable capital expenditure" (described in sub-section 122A(1) of the Principal Act) incurred under a contract entered into after 19 July 1982 on prescribed mining operations is deductible on a straight-line basis over the lesser of 10 years or the life of the mine. Under sub-section 122DG(6), where in a year of income the net income of the taxpayer from mining and other activities (prior to deductions being made under section 122J for exploration and prospecting expenditure) is insufficient to absorb the deduction otherwise allowable under section 122DG, the deduction is limited to the amount of the net income. By deeming any excess deduction to be allowable in the next succeeding year of income, sub-section 122DG(7) ensures that the sub-section 122DG(6) limitation does not deny the taxpayer deductions for the allowable capital expenditure.

The amendments proposed by clause 31 will provide for a taxpayer to elect that sub-section 122DG(6) does not apply. Paragraph (a) of the clause will amend the sub-section to make its application subject to the provisions of new sub-section (6B) which, together with new sub-sections (6A) and (6C), is to be inserted by paragraph (b).

New sub-section (6A) provides that a taxpayer may elect, in a particular income year, that sub-section (6B) is to apply to all allowable (post 19 July 1982) capital expenditure incurred by the taxpayer in the 1985-86 or a subsequent income year. Where such an election is made (paragraph (6B)(a)) and sub-section (6) would otherwise apply to limit or reduce the deduction allowable in respect of that expenditure (paragraph (6B)(b)), new sub-section (6B) will operate so that sub-section (6) does not so apply. The combined effect of these provisions will ensure that, in relation to the particular income year, any excess allowable (post 19 July 1982) capital expenditure incurred in, or after, the 1985-86 income year may e used to create or increase a carry-forward loss.

New sub-section 122DG(6C) provides that, if sub-section 122DG(6) would, apart from sub-section (6B), apply to limit or reduce the amount of a deduction otherwise allowable for capital expenditure in respect of which no election has been made, the application of sub-section (6) is not affected by sub-section (6B). Sub-section (6C) thus ensures that an election made in relation to the allowable capital expenditure of one year cannot be taken to affect the deductibility under section 122DG of expenditure of an earlier year that has not been deducted and in respect of which no election was made.

Clause 32: Exploration and prospecting expenditure

Section 122J of the Principal Act, under which expenditure on exploration or prospecting in Australia for minerals obtainable by prescribed mining operations is generally deductible in the year in which it is incurred, is being amended by clause 32 for the same reason as section 122DG is being amended by clause 31 (see notes on that clause).

Sub-section 122J(4B) presently operates to limit the amount of the deduction for exploration and prospecting expenditure incurred after 21 August 1984 to the amount of the taxpayer's assessable income remaining after deducting all other allowable deductions. Any excess expenditure is able to be carried forward indefinitely to be deducted against the assessable income of subsequent years.

Paragraph (a) of clause 32 will amend sub-section 122J(4B) consequential upon the amendments proposed by paragraph (b) so that its application will be subject to proposed new sub-section (4BB).

Paragraph (b) proposes the insertion of new sub-sections (4BA), (4BB) and (4BC). Sub-section (4BA) will enable a taxpayer to make an election in relation to the 1985-86 year of income or a subsequent year of income that sub-section (4B) is not to apply to "actual expenditure" (see notes on new sub-section (4BC)) incurred by the taxpayer in that year of income. Where such an election is made (paragraph (4BB)(a)) and sub-section (4B) would otherwise apply to limit the deduction allowable in respect of that expenditure (paragraph (4BB)(b)), new sub-section (4BB) will operate to ensure that sub-section (4B) does not so apply (paragraph (4BB(c)).

In those circumstances paragraph (4BB)(d) will operate to determine the amount of the deduction allowable in respect of any exploration and prospecting expenditure of a previous year that has not been absorbed by that year's assessable income and that has been carried forward for deduction against income of the current year. By the operation of sub-section (4C), any such excess expenditure is deemed to have been incurred by the taxpayer during the first subsequent year of income in which the taxpayer derives assessable income. Where the subsequent year's income is insufficient to absorb both that "deemed expenditure" (see notes on new sub-section (4BC)) carried forward and any actual exploration and prospecting expenditure of that subsequent year, paragraph (d) will apply so that each is deducted proportionally. The proportion of deemed expenditure to be deducted is ascertained in accordance with the formula (specified in paragraph (4BB)(d))

(AC)/(A+B)


, where -

A

is the whole dollar amount of the deemed expenditure;

B

is the whole dollar amount of the actual expenditure; and

C

is the taxpayer's assessable income less all allowable deductions, other than deductions allowable under section 122J for post-12 August 1984 expenditure - that is, expenditure the subject of the sub-section 122J(4BA) election.

The undeducted balance of any deemed expenditure will be carried forward to subsequent years.

New sub-section (4BC) specifies what is meant by the references in sub-sections (4BA) and (4BB) to "actual expenditure" (paragraph (4BC)(a)) and "deemed expenditure" (paragraph (4BC)(b)). Actual expenditure of a year of income is exploration and prospecting expenditure incurred in that year, not being deemed expenditure. Deemed expenditure of a year of income is undeducted exploration and prospecting expenditure incurred in a previous year that is deemed by sub-section (4C) to have been incurred by the taxpayer during the year of income.

Clause 33: Elections

Clause 33 will amend section 122M (which appears in Division 10 of the Principal Act) to reflect the amendments being made by clauses 31 and 32.

Section 122M stipulates the manner in which certain elections under Division 10 are to be made and clause 33 will extend its scope to include the elections that are being made available under sections 122DG and 122J by clauses 31 and 32. The inclusion in sub-paragraph 122M(b)(iii) of references to those sections will require the elections to be made in writing, signed by or on behalf of the taxpayer, and delivered to the Commissioner on or before the last day for the furnishing of the return of income of the income year specified in the election, or within such further time as the Commissioner allows.

Clause 34: Election in relation to limit on certain deductions

This clause proposes the insertion of new section 124ADH in Division 10AA (expenditure on petroleum mining) of the Principal Act to allow a taxpayer to elect that the existing limitations on the deduction of allowable capital expenditure under the Division (whereby the deduction is limited to assessable income less other allowable deductions, and so cannot increase or create a loss) are not to apply. The amendment will enable petroleum mining companies to elect to have undeducted relevant expenditure incurred in the 1985-86 and subsequent income years treated as a carry-forward loss, so that entitlement to the deduction might be transferred to another company in the same company group.

The provisions of Division 10AA operate, broadly, to authorise deductions in respect of certain capital expenditure incurred in connection with prescribed petroleum operations. Expenditure that qualifies as "allowable capital expenditure" is described in section 124AA, but a different basis of deduction is allowable in respect of the capital expenditure, depending on when it was incurred or contracted for. For this purpose, sections 124ADA, 124ADC, 124ADE and 124ADG, respectively, determine the amounts of "residual capital expenditure", "residual (1 May 1981 to 18 August 1981) capital expenditure", "residual (19 August 1981 to 19 July 1982) capital expenditure" and "allowable (post 19 July 1982) capital expenditure". Expenditure that is "allowable (post 19 July 1982) capital expenditure", for example, is deductible on a straight line basis over the lesser of 10 years or the life of the petroleum field.

New sub-section 124ADH(1) will permit a taxpayer to elect, for a year of income specified in the election, that new sub-section 124ADH(3) apply in relation to all allowable capital expenditure incurred by the taxpayer in the 1985-86 and subsequent years of income.

New sub-section 124ADH(2) specifies that a sub-section (1) election is to be made in writing, signed by or on behalf of the taxpayer, and delivered to the Commissioner (unless a further period is granted) on or before the last day for furnishing the return of income of the year specified in the election.

Sub-section (3) is the operative provision of new section 124ADH. It will apply where a sub-section (1) election has been made (paragraph (3)(a)), and operate so that the provisions of Division 10AA (i.e., those specified in paragraph 124ADH(3)(b)) that would otherwise apply to limit or reduce the deduction allowable under section 124ADA, 124ADC, 124ADE or 124ADG in respect of expenditure incurred in 1985-86 and subsequent income years do not apply in that way. The effect will be that undeducted expenditure may be carried forward as, or as part of, a loss deductible against income of future years.

New sub-section 124ADH(4) provides that, if a provision specified in sub-section (3) would, but for section 124ADH, apply to limit or reduce the amount of a deduction otherwise allowable for capital expenditure in respect of which no election has been made, section 124ADH does not prevent such an application. Sub-section (4) thus ensures that an election made in relation to expenditure of one year cannot be taken to affect the deductibility under Division 10AA of expenditure of an earlier year that has not been deducted and in respect of which no election has been made.

Clause 35: Exploration and prospecting expenditure

The amendments proposed by clause 35 will allow a taxpayer to elect, in relation to a year of income, to have undeducted petroleum mining exploration and prospecting expenditure incurred in the 1985-86 and subsequent years of income treated as a carry-forward loss.

The clause will amend section 124AH of the Principal Act, which authorises deductions in respect of petroleum exploration or prospecting expenditure against income from any source, to qualify the application of sub-section 124AH(4A). That sub-section operates to limit the amount of the deduction for such expenditure incurred after 17 August 1976 to so much of the assessable income of the year of income remaining after deducting all other allowable deductions. By sub-section (4B), any undeducted excess is deemed to be incurred in the next subsequent year in which the taxpayer derives assessable income.

Paragraph (a) of clause 35 will amend sub-section 124AH (4A) so that its application is subject to proposed new sub-section (4AC), while paragraph (b) will insert that new sub-section as well as new sub-sections (4AA), (4AB) and (4AD).

Sub-section 124AH(4AA) will enable a taxpayer to make an election, in relation to the year of income that commenced on 1 July 1985 or a subsequent income year, that sub-section (4A) is not to apply to limit the deduction allowable under section 124AH in relation to "actual expenditure" (see notes on new sub-section (4AD)) incurred in that year of income. New sub-section (4AB) specifies that the election is to be in writing, signed by or on behalf of the taxpayer and lodged with the Commissioner of Taxation on or before the last day for furnishing the taxpayer's return of income for the year specified in the election or within such further period as the Commissioner allows.

Where such an election is made (paragraph (4AC)(a)) and sub-section (4A) would otherwise apply to limit the deduction allowable for expenditure incurred in the year of income (paragraph (4AC)(b)), new sub-section (4AC) will operate to ensure that sub-section (4A) does not so apply (paragraph (4AC)(c). In those circumstances, paragraph (4AC)(d) will also have effect. It will operate to determine the amount of the deduction allowable in respect of any exploration and prospecting expenditure of a previous year that has not been absorbed by that year's assessable income and that has been carried forward for deduction against income of the current year. As mentioned above, any such excess expenditure is deemed, by existing sub-section 124AH(4B), to have been incurred by the taxpayer during the first subsequent year of income in which the taxpayer derives assessable income. Where the subsequent year's income is insufficient to absorb both that "deemed expenditure" (see notes on sub-section (4AD)) carried forward and any actual exploration and prospecting expenditure of that subsequent year, paragraph (d) will apply so that a proportionate part of each is deducted. The proportion of deemed expenditure to be deducted is ascertained in accordance with the formula (specified in paragraph (4AC)(d))

(AC)/(A+B)


, where -

A

is the whole dollar amount of the deemed expenditure;

B

is the whole dollar amount of the actual expenditure; and

C

is the taxpayer's assessable income less all allowable deductions, other than deductions allowable under section 124AH for post-17 August 1976 expenditure - that is, expenditure the subject of the sub-section 124AH(4AA) election.

The undeducted balance of any deemed expenditure will be carried forward to subsequent years.

Sub-section (4AD) specifies what is meant by the references in sub-sections (4AA) and (4AC) to "actual expenditure" (paragraph (4AD)(a)) and "deemed expenditure" (paragraph (4AD)(b)). Actual expenditure of a year of income is exploration and prospecting expenditure incurred in that year, not being deemed expenditure. Deemed expenditure of a year of income is undeducted exploration and prospecting expenditure incurred in a previous year that is deemed by sub-section (4B) to have been incurred by the taxpayer during the year of income.

Clauses 36 and 37 : Deductions for capital investment in qualifying Australian films

Introductory note

Clauses 36 and 37 will effect a reduction in the deduction available in respect of capital moneys expended in, or as a contribution to, the production of qualifying Australian films.

When introduced in 1981, Division 10BA of the Principal Act authorised a deduction equal to 150% of capital expenditure in the production of a qualifying Australian film, where that expenditure resulted in the acquisition by the investor of an interest in the initial copyright in the film. At that time, section 23H of the Principal Act applied to exempt from tax an investor's net earnings from the film of an amount up to 50% of the eligible investment. These rates of deduction and exemption were reduced in 1984, in respect of investments under contracts entered into after 23 August 1983, to 133% and 33% respectively.

The operative provisions of the present law are section 124ZAF of the Principal Act relating to capital expenditure under pre-13 January 1983 contracts and certain other contracts, and section 124ZAFA of the Principal Act relating to capital expenditure incurred under post-12 January 1983 contracts. Broadly, where the expenditure is made under a contract entered into on or before 23 August 1983, a deduction of 150% of the expenditure is allowable, but where it is made under a contract entered into after that date the deduction is at the rate of 133%.

Under amendments proposed by clauses 36 and 37, the rate of deduction is, except in the case to be mentioned shortly, to be reduced to 120% where the expenditure is made under a contract entered into after 19 September 1985. By the amendments proposed by clause 22 to section 23H of the Principal Act, the associated exemption from tax of an investor's net earnings from a film is to be reduced to a maximum of 20% of the eligible investment.

The reduction in the rate of deduction, and accordingly the reduction in the rate of exemption, is to be modified in the case where investors contribute to the cost of producing a film in place of an underwriter who would have been entitled to the higher rates of deduction and exemption. Those deduction and exemption rates will continue to apply to an investor who makes a contribution under a contract entered into after 19 September 1985 to the extent that this relieves the obligations of an underwriter who had agreed to underwrite the production cost of the film under a contract entered into on or before that date.

Clause 36: Deductions for capital expenditure under pre 13 January 1983 contracts and certain other contracts

Clause 36 will amend sub-section 124ZAF(2A) of the Principal Act. Section 124ZAF authorises the allowance of deductions for capital expenditure by a taxpayer in, or as a contribution towards, the production of a qualifying film. Deductions are allowable in the income year in which the taxpayer was the first owner of the copyright in the film and first used it for the purpose of producing assessable income from the exhibition of the film. Alternatively, in a case where pre-sale arrangements had been entered into prior to the copyright coming into existence, the deduction is available in the income year in which the copyright is first owned by the taxpayer (i.e., when the film has been completed).

Where capital moneys were first invested in the production of a film prior to the 1982-83 financial year, sub-section 124ZAF(2A) authorises a deduction where the taxpayer's capital expenditure is made under a contract entered into on or after 13 January 1983, provided that the film's production had begun before that date and was ongoing at that date. The deduction is conditional on the taxpayer not being entitled to a deduction under section 124ZAFA in respect of his or her investment in the film.

Sub-section 124ZAF(2A) is to be amended by clause 36 so that the deduction allowable will be an amount equal to 150% of capital moneys expended under a contract entered into on or before 23 August 1983 (existing paragraph (f) of the sub-section), 133% of such moneys expended under a contract entered into after that date, but on or before 19 September 1985 (new paragraph (g) of sub-section 124ZAF(2A) - being inserted by paragraph (b) of clause 36), and 120% of such moneys expended under a contract entered into after 19 September 1985 (new paragraph (h) - also being inserted by paragraph (b) of this clause). The amendment being made by paragraph (a) of the clause is a drafting measure to provide for the amendment being made by paragraph (b).

Clause 37: Deductions for capital expenditure under post 12 January 1983 contracts

This clause will amend section 124ZAFA of the Principal Act in two respects. It will first give effect to the reduction to 120% in the rate of deduction in respect of capital moneys expended in or as a contribution towards the production of a qualifying film. Secondly, it will enable a taxpayer who invests in the production of a film after 19 September 1985 to obtain a deduction at a higher rate if his or her investment is in lieu of that which an underwriter would otherwise have had to make pursuant ot an underwriting contract entered into on or before 19 September 1985.

Paragraph (a) of clause 37 is a drafting measure to provide for the insertion, by paragraph (b), of new paragraph 124ZAFA(1)(g). Paragraph (b) will also substitute a new paragraph 124ZAF(1)(f). The two new paragraphs will operate to reduce the rate of deduction available under sub-section 124ZAFA(1) to 120% in respect of capital moneys expended under a contract entered into after 19 September 1985, while maintaining the rate of 133% in respect of moneys expended under a contract entered into after 23 August 1983 and on or before 19 September 1985.

Sub-section 124ZAFA(1A) of the Principal Act relates to expenditure of capital moneys under post-23 August 1983 contracts where that expenditure is in substitution for an amount committed under an underwriting contract entered into on or before that date. In those circumstances, it effectively preserves, in respect of that expenditure, the 150% deduction that would have been allowable to the underwriter if the underwriter had expended the moneys under the pre-24 August 1983 underwriting contract. Paragraph 124ZAFA(1A)(b) contains one of the conditions for the application of sub-section (1A) and provides that the expenditure must, except for the sub-section, qualify for deduction at the rate of 133%. The amendment proposed by paragraph (c) of clause 37 will include in paragraph 124ZAFA(1A)(b) a reference to the proposed reduced rate of 120%. Together with the amendment to the sub-section proposed by paragraph (e) of the clause (see below), this will enable expenditure incurred after 19 September 1985 in substitution for an amount committed under an underwriting contract entered into on or before that date to attract the rate of deduction available at the time the underwriting contract was entered into.

Paragraph (d) of clause 37 is a drafting measure to provide for the insertion, by paragraph (e), of new paragraph 124ZAFA(1A)(h). Paragraph (e) of the clause will amend sub-section 124ZAFA(1A) of the Principal Act to substitute new paragraph 124ZAFA(1A)(g) and to insert a new paragraph 124ZAFA(1A)(h). Existing paragraph (g) of sub-section 124ZAFA(1A) effectively provides that the 150% rate of deduction applies to so much of a film investment made under a post-23 August 1983 contract that is in lieu of contributions underwritten on or before 23 August 1983, with the 133% rate of deduction applying to any excess of the investment over those underwritten contributions. New paragraph (g) of the sub-section will maintain that position, but only in respect of film investments made under contracts entered into after 23 August 1983 and before 20 September 1985. For an investment made under a post-19 September 1985 contract, new paragraph (h) of sub-section 124ZAFA(1A) will effectively provide that the 150% rate of deduction applies to so much of that investment that is in lieu of contributions underwritten on or before 23 August 1983, with the 120% rate of deduction applying to any excess of the investment over those underwritten contributions.

Paragraph (f) of clause 37 will insert a new sub-section (1AA) in section 124ZAFA of the Principal Act. This sub-section is similar to sub-section (1A) and will enable a taxpayer who has invested in a film under a post-19 September 1985 contract to obtain a deduction at a rate of 133% where an underwriting agreement was entered into after 23 August 1983 but before 20 September 1985. In these cases, the taxpayer will be entitled to a deduction at the higher rate of 133% of eligible expenditure to the extent that the investment is in lieu of contributions that the underwriter would otherwise have had to make pursuant to the underwriting agreement. Any excess of the investment over those underwritten contributions will be deductible at the rate of 120%.

The conditions for the application of new sub-section 124ZAFA(1AA) are -

•

the taxpayer's investment by way of contribution to the cost of producing a film must be made under a contract entered into after 19 September 1985 (paragraph (a));

•

the investment must be one that, but for sub-section (1AA), would qualify for deduction at the rate of 120% (paragraph (b));

•

the film production contract or underwriting agreement was (or agreements were) entered into on or before 19 September 1985 (paragraph (c));

•

if there was no separate underwriting agreement, a party to the production contract was an underwriter who agreed to underwrite some or all of the cost of production (paragraph (d)); and

•

the estimated cost of production exceeded the committed capital (i.e. the non-underwritten capital - see following notes) when the taxpayer contracted to invest in the film (paragraph (e)).

Sub-section 124ZAFA(1B) of the Principal Act presently defines the term "committed capital" in relation to a film for the purposes of sub-section (1A). The term means the amount that persons have expended or agreed to expend in, or as a contribution towards, the production of the film, other than underwritten amounts. The term is also used in new sub-section (1AA), being inserted by paragraph (f) of clause 37. Accordingly, sub-section (1B) is being amended by paragraph (g) of the clause to insert a reference to new sub-section (1AA).

Clause 38: Rebate for moneys paid on shares for the purposes of petroleum exploration, prospecting or mining

The amendments proposed by clause 38 will withdraw the rebate of tax available under section 160ACA of the Principal Act in respect of share capital subscribed to petroleum exploration, prospecting and mining companies. That withdrawal is to generally apply to capital subscribed after 19 September 1985.

Section 160ACA presently authorises a rebate of 27 cents for each dollar of share capital subscribed to a company exploring, prospecting or mining for petroleum in Australia (including off-shore areas), where the company has declared that those capital subscriptions will be spent on eligible petroleum operations. A rebate of 27 cents for each dollar subscribed is also available in respect of capital subscribed to an interposed mining investment company, where the company has declared that those capital subscriptions will in turn be paid to an operating petroleum exploration, prospecting or mining company for the purpose of enabling that company to expend the moneys on eligible petroleum operations.

By paragraph (a) of clause 38, paragraph 160ACA(5A)(b) will be replaced by a new paragraph. To give effect to the general withdrawal of the rebate in respect of moneys paid after 19 September 1985, but not where such moneys are paid on certain calls made on or before that date, new paragraph (5A)(b) stipulates that the 27% rebate in respect of moneys paid on shares to a company that has, in accordance with sub-section 160ACA(3A), declared that the moneys will be spent on eligible petroleum operations, will only be available where -

•

the moneys are paid after 30 April 1981 and on or before 19 September 1985 (sub-paragraph (i)); or

•

the moneys are paid after 19 September 1985 in respect of calls made on or before that date on shares owned or beneficially owned by the taxpayer on or before 19 September 1985 (sub-paragraph (ii)).

Paragraph (b) of clause 38 will substitute a new paragraph 160ACA(15A)(b) to govern the rebate available to shareholders of an interposed mining investment company in respect of moneys paid on shares in the interposed company and in respect of which the company has made the appropriate declaration under sub-section 160ACA(7A). The new paragraph will operate in the same manner as described in the notes on paragraph (a) of clause 38 to generally withdraw the rebate in respect of moneys paid after 19 September 1985.

Clause 39: Interpretation

As part of the pay-as-you-earn system, section 221C of the Principal Act requires an employer to deduct tax instalments from payments of "salary or wages", a term given an extended meaning by the definition contained in section 221A. Clause 39 will amend the definition of "salary or wages" to effectively bring within the scope of the tax instalment deduction system the living allowances, other than any component in respect of a dependent child or children, paid under the Tertiary Education Assistance Scheme (TEAS) and the Adult Secondary Education Assistance Scheme (ASEAS). The amendments are consequential on the proposal, to be given effect by clause 21 of the Bill, to remove from the exemption provided by paragraphs 23(z) and 23(zaa) of the Principal Act, certain income derived under TEAS and ASEAS.

Paragraph (a) of clause 39 is a drafting measure consequential upon the amendment proposed to be effected by paragraph (b). Paragraph (b) will insert two new paragraphs - paragraphs (m) and (n) - in the definition of "salary or wages" in sub-section 221A(1) of the Principal Act so that, like salary and wages and other periodical receipts of an income nature, living allowances, other than any component in respect of a dependent child or children, paid to recipients of TEAS or ASEAS will be subject to pay-as-you-earn tax instalment deductions.

By sub-clause 42 (8) tax instalment deductions will apply in respect of payments of living allowances made in respect of a period commencing on or after 1 January 1986.

Clause 40: Interpretation

This clause will amend section 22IYHA of the Principal Act which ascribes particular meanings to various words and expressions in Division 3A of Part VI of that Act for the purposes of the prescribed payments system (PPS) and its associated reporting arrangements.

Sub-section 221YHA(3) sets out the circumstances in which a natural person will be treated as a 'householder' under the PPS. As a householder, a person is not required to deduct tax from, but must report, prescribed payments he or she makes under all contracts connected with larger private construction projects, i.e., those costing more than $10,000.

It has been argued that paragraph 221YHA(3)(a) may, on a literal reading of its present terms, limit the scope of the definition of a householder to a natural person who contracts with one person only in relation to a larger private or domestic construction project. In other words, the argument is that the present provision may not apply to a situation where, in relation to a particular project, the householder contracts with a range of contractors or sub-contractors.

That argument is not accepted but, to put the matter beyond doubt, sub-clause 40(1) will amend paragraph 221YHA(3)(a) to ensure that a natural person will continue to be treated as a householder irrespective of the number of persons with whom he or she contracts in relation to a construction project or a part thereof.

This amendment will, by sub-clause 42(9) of the Bill, apply to the prescribed payments made under contracts entered into on and after the date of Royal Assent to the Bill.

The remaining provisions of this clause will give effect to the tax reform proposal that householders who undertake larger domestic construction projects by arrangements - commonly called "owner builder" arrangements - under which they effectively assume the role of the builder, are to be liable to made deductions from prescribed payments, rather than to merely report such payments to the Taxation Office.

In broad terms, the amendments proposed by sub-clause 40(2) will -

•

insert a statutory definition of an "owner-builder" in section 221YHA;

•

ensure that an owner-builder is no longer treated as a householder for the purpose of the PPS; and

•

include an owner-builder within the meaning of the term "eligible paying authority" under the PPS.

Taken together, the practical effect of these changes will be to impose on owner-builders, who would ordinarily have been treated as householders, a liability to make deductions of tax from prescribed payments made in connection with private or domestic construction projects, the cost of which exceeds $10,000. The changes will apply in relation to prescribed payments made in connection with construction projects that commence on or after 1 July 1986 - see notes on sub-clauses 42(10), (11) and (12).

Paragraph (a) of sub-clause 40(2) is a drafting measure that will ensure that the definition of a householder in sub-section 221YHA(3) of the Principal Act is read subject to the operation of proposed new sub-section 221YHA(3A) explained below.

Paragraph 40(2)(b) will insert two new sub-sections - sub-sections (3A) and (3B) - in section 221YHA of the Principal Act.

Proposed sub-section 221YHA(3A) will ensure that a person who is defined as an owner-builder is not to be taken to be a householder for the purposes of the PPS. Accordingly, such persons will, by the operation of existing paragraph 221YHD(1)(a) and the definition of eligible paying authority in sub-section 221YHA(4) - as proposed to be amended by paragraph (c) of this sub-clause - be required to make deductions of tax from prescribed payments they make or are liable to make.

New sub-section 221YHA(3B) defines an "owner-builder". Before a natural person will be taken to be an owner-builder under this sub-section, it is necessary that the person would, but for the operation of sub-section 221YHA(3A), have been a householder - paragraph 221YHA(3B)(a). In other words, the natural person will have to have entered into or undertaken contracts in relation to a private or domestic contruction project, the cost of which exceeds $10,000. Where this condition is met, sub-section 221YHA(3B) describes two situations in relation to which the natural person will be treated as an owner-builder.

First, a natural person will be an owner-builder if the construction permit, building permit or other authorisation issued, for example, by a local council, in connection with the relevant project, is issued in the name of the natural person - sub-paragraph 221YHA(3B)(b)(i). These building permits are often referred to as "owner-builder permits".

The second situation will arise where the building permit or other authorisation is issued in the name of a person (referred to as the "authorised person") other than the natural person - sub-paragraph 221YHA(3B)(b)(ii) - if the further tests contained in paragraph 221YHA(3B)(c) are met.

Briefly stated, a natural person will be an owner-builder in this second situation where the work carried out in relation to the construction project by the authorised person, or under contracts entered into by the authorised person, represents only a minor part of the total constructing projects. In other words, if it is in fact the natural person who actually arranges for the whole or the greater part of the work to be undertaken in relation to the construction project, that person will be treated as an owner-builder.

On the other hand, where the building permit is issued in the name of a licensed builder who actually carries out, or contracts with others to carry out, the whole or the greater part of the work associated with the construction project, the natural person will not be treated as an owner-builder but will continue to be a householder for the purposes of the PPS.

Paragraph 40(2)(c) will effect a technical amendment to the definition of an "eligible paying authority" that is consequential upon the exclusion of owner-builders from the category of natural persons known as householders. This paragraph will ensure that natural persons who are treated as "owner-builders" will be eligible paying authorities, and liable to made deductions of tax from prescribed payments in the same way as others who are not householders in relation to such payments.

Clause 41: Deductions from certain withdrawals from film accounts

The amendments of section 221ZN of the Principal Act being proposed by this clause are consequential upon the reduction from 133% to 120% in the rate of deduction for investments in qualifying Australian films that is being effected by clauses 36 and 37.

Section 221ZN is part of a system of withholding tax relating to the arrangements that govern deductions for investments in Australian films made under contracts entered into after 12 January 1983. It imposes on a person who withdraws an amount from an account opened in relation to a film with the Australian Film Industry Trust Fund a requirement to make a deduction from that amount if it is not, upon withdrawal, dealt with in the prescribed manner. Generally, an amount will be taken as being dealt with in the prescribed manner if it is expended directly in producing the film.

Paragraphs 221ZN(1)(a) and (b) specify the rate at which such deductions are to be made. Under sub-paragraph (a)(i), the rate of deduction in respect of a withdrawal from a film account that is to be paid to a company, otherwise than in the capacity as a trustee, is set at 61% of the amount of the withdrawal. The rate of deduction for any other withdrawals that are not to be dealt with in the prescribed manner (i.e., withdrawals expended otherwise than in producing the film or as refunds to individual investors) is set by sub-paragraph (a)(ii) or paragraph (b) at 80% of the amount of the withdrawal. The amendments of paragraphs 221ZN(1)(a) and (b) by clause 41 will reduce the rates of deduction from 61% to 55%, and from 80% to 72%.

By sub-clause 42(13) of the Bill, those reduced rates will apply to amounts withdrawn from a film account more than 28 days after these amendments come into operation.

Clause 42: Application of amendments

This clause, which will not amend the Principal Act, will specify the years of income in which, or the dates from which, various amendments proposed in Part VII of the Bill will first apply. The clause also contains transitional and interpretative provisions relating to certain amendments.

In terms of sub-clause 42(1), the term "amended Act" means the Principal Act (that is, the Income Tax Assessment Act 1936), as that Act is being amended by this Bill.

By sub-clause 42(2) the amendments proposed by clause 21 of the Bill will apply to payments made in respect of a period commencing on or after 1 January 1986. Clause 21 proposes to amend paragraphs 23(z) and 23(zaa) of the Principal Act to remove the exemption from income tax available for payments by the Commonwealth of Tertiary Education Assistance (TEAS) and under the Adult Secondary Education Assistance Scheme (ASEAS) and to take account of the fact that the Commonwealth no longer provides secondary or technical scholarships, but pays allowances in the form of secondary assistance.

As a consequence of the operation of sub-clause 42(2), any payment on or after 1 January 1986 as arrears of TEAS or ASEAS allowances in respect of a period before that date will remain exempt from tax.

As explained in the notes on clause 22, sub-clause 42(3) provides that the amendments being made by clause 22 - to reduce the extent to which certain film income is exempt from tax - is to apply generally to income tax assessments for the year of income in which 19 September 1985 occurred or subsequent income years, but may in some circumstances first apply in the year of income preceding that in which 19 September 1985 occurred.

Sub-clauses 42(4) and (5) relate to the amendment being made by clause 23 to introduce a new live stock valuation option for certain horses. By sub-clause (4), that amendment is to apply in income tax assessments for the 1985-86 and subsequent years, while sub-clause (5) will ensure that regulations made before the amending Act receives the Royal Assent, for the purpose of the live stock valuation provisions of the Principal Act, continue in force for the purposes of those provisions as amended by clause 23 (see the notes on that clause).

By sub-clauses 42(6) and (7), the amendments proposed by clauses 19, 26, 27 and 28 of this Bill in relation to the withdrawal of the deduction for one-third of calls paid on afforestation shares will apply to calls paid after 19 September 1985, other than calls paid after that date in respect of calls made on or before 19 September 1985 where the payments are made by a person who owned or beneficially owned the shares on or before that date.

Sub-clause 42(8) proposes that the deduction of pay-as-you-earn tax instalments, authorised by clause 39 of the Bill to be made from the living allowance (but not any component for a dependent child or children) paid under the Tertiary Education Assistance Scheme or the Adult Secondary Education Assistance Scheme, is to be made from payments made in respect of a period commencing on or after 1 January 1986.

By sub-clause 42(9), the amendment to be made by sub-clause 40(1) - to address a perceived technical deficiency in the present definition of a "householder" for purposes of the prescribed payments system (PPS) - will apply to a prescribed payment made on or after the date of the Royal Assent to the Bill under contracts entered into on or after that date.

As indicated in the earlier notes on sub-clause 40(2), it is proposed by that sub-clause to amend the PPS provisions to impose on persons who are "owner-builders" a liability to make deductions of tax from prescribed payments. By sub-clause 42(10) those amendments are to apply in relation to any prescribed payment made on or after 1 July 1986 under a contract or contracts in connection with a construction project that commenced on or after that date.

Sub-clause 42(11) is to the effect that, for purposes of determining when a construction project commences under sub-clause 42(10), the undertaking or carrying out of surveying, design or other preliminary activities are to be disregarded. In other words, the commencement date of a construction project will be taken to be the date on which actual site work begins.

Sub-clause 42(12) is a drafting measure that complements sub-clauses (9), (10) and (11) and ensures that those sub-clauses apply for the purposes of the application of section 221YHA of Division 3A of Part VI of the Principal Act, as if those provisions were also part of that Division.

As explained in the notes on clause 41, the amendments being made by that clause - to reduce, as a consequence of the reduction by clauses 36 and 37 in the deduction available in respect of investments in Australian films, the amount required to be withheld from Australian Film Industry Trust Fund account withdrawals - are, by sub-clause 42(13), to apply to withdrawals made more than 28 days after the Bill receives the Royal Assent.

Clause 43: Amendment of assessments

Clause 43, which will not amend the Principal Act, is a standard measure that will ensure that the Commissioner of Taxation has authority to re-open an income tax assessment made before the Bill becomes law, should that be necessary in order to give effect to the various amendments it contains.

PART VIII - AMENDMENTS OF THE INCOME TAX (INTERNATIONAL AGREEMENTS) ACT 1953

Clause 44: Principal Act

Clause 44 formally provides that references to the "Principal Act" in Part VIII of the Bill relate to the Income Tax (International Agreements) Act 1953.

Clause 45: Interpretation

Clause 45 will insert in sub-section 3(1) of the Principal Act a definition of the term "the Finnish agreement". That term is defined to mean the comprehensive taxation agreement with Finland and the protocol to that agreement, both of which are, by clauses 46 and 48 of the Bill respectively, to be given the force of law in Australia and incorporated as Schedule 25 to the Principal Act.

Clause 46: Agreement with Finland

Clause 46 proposes the insertion in the Principal Act of a new section - section 11P - which will give the force of law in Australia to the comprehensive taxation agreement and protocol with Finland with effect from the dates set out in Article 27 of the Finnish Agreement - see later notes on that Article.

By sub-section (1) of proposed section 11P, the Finnish agreement and protocol will, when they enter into force, have effect as regards Australian tax -

(a)

in respect of dividends or interest subject to withholding tax that are derived on or after 1 January in the calendar year next following that in which the agreement enters into force; and

(b)

in respect of other income, for any year of income beginning on or after 1 July in the calendar year next following that in which the agreement enters into force.

Sub-section (2) provides for the date on which the agreement and protocol enter into force to be notified in the Gazette as soon as practicable thereafter. This will provide a readily available and authoritative source from which persons may ascertain the fact and date of entry into force of the agreement and protocol. Because, under the terms of the agreement, it will not enter into force until after a future exchange of notes, it is not possible to indicate in this Bill the date of entry into force.

Clause 47: Provisions relating to certain income derived from sources in certain countries

The primary purpose of this clause is to apply the credit method of relief of double taxation to interest and royalties that are derived by residents of Australia from Finland and in respect of which, under the agreement, the source country's rate of tax is limited. Section 12 of the Principal Act, which is to be amended by this clause, already achieves a corresponding result for interest and royalties derived by residents of Australia from other countries with which Australia has concluded comprehensive taxation agreements and in which the rate of foreign tax on such income is limited.

Section 23(q) of the Income Tax Assessment Act 1936 (the "Assessment Act") confers relief from double taxation in the form of an exemption from Australian tax in respect of foreign source income (other than dividends) of Australian residents that is not exempt from income tax in the country where it is derived. Section 12 of the Principal Act gives effect to a policy that this exemption method of relief is not to apply to interest or royalties derived, either directly or as a beneficiary in a trust estate, from another country where the comprehensive taxation agreement with that country limits the tax it may charge. Once the exempting provision is, by section 12, made inapplicable, interest and royalties that are taxed in the country of source become assessable income for the general purposes of the Assessment Act, but in each case the agreement requires Australia to credit against its tax the limited tax of the other country. Sections 14 and 15 of the Principal Act govern the allowance of the credit.

By clause 47, this policy will apply, as was indicated when signature of the agreement was announced, to interest and royalties derived by Australian residents from Finland on and after the date of effect specified in Article 27 of the agreement - see later notes on that Article and identified in the provisions being inserted by the clause.

Paragraph (a) of clause 47 will effect a formal drafting amendment consequent upon the addition to section 12(1) of the Principal Act of new paragraph (au).

Paragraph (b) will insert the new paragraph in section 12(1) of the Principal Act. This section formally sets out classes of income to which the exemption under section 23(q) of the Assessment Act is not to apply.

The new paragraph (au) will ensure that interest and royalties derived by a resident of Australia from Finland, the Finnish tax on which is expressly limited to 10 per cent of the gross amount of the interest and royalties, will not be exempt from Australian tax. Paragraph (au) will apply to such income derived in income years which commence on 1 July in the calendar year next following that in which the agreement enters into force.

Clause 48: Schedule

This clause will add the agreement and protocol with Finland as Schedule 25 to the Principal Act.

AGREEMENT WITH FINLAND

This agreement accords in substantial practical effect with other comprehensive taxation agreements to which Australia is a party. Like them, the agreement allocates the right to tax some income to the country of source, sometimes at limited rates, while the country of residence is given the sole right to tax other types of income. It contains provisions to the effect that where income may be taxed in both countries, the country of residence, if it taxes, is to allow a credit against its own tax for the tax imposed by the country of source.

Article 1 - Personal Scope

The agreement will apply to persons (which term includes companies) who are residents of either Australia or Finland.

The situation of persons who are dual residents (i.e. residents of both countries) is dealt with in Article 4.

Article 2 - Taxes Covered

This article specifies the existing taxes to which the convention applies. These are the Australian income tax and the Finnish state income tax, communal tax, church tax, sailors' tax and the withholding tax on non-residents income. The article will automatically extend the application of the agreement to any identical or substantially similar taxes which may subsequently be imposed by either country in addition to, or in place of, the existing taxes.

Article 3 - General Definitions

This article provides definitions for a number of the terms used in the agreement. Some other terms are defined in the articles to which they relate and terms not defined in the agreement are to have the meaning which they have under the taxation law of the country applying the agreement.

As with Australia's other modern double taxation agreements, "Australia" is defined as including external territories and areas of the continental shelf. By reason of this definition, Australia retains taxing rights in relation to mineral exploration and mining activities on its continental shelf. The definition is also relevant to the taxation by Australia of shipping and airline profits in accordance with Article 8 of the agreement.

Article 4 - Residence

This article sets out the basis on which the residential status of a person is to be determined for the purposes of the agreement. Residential status is one of the criteria for determining each country's taxing rights and is a necessary condition for the provision of relief under the agreement. Residence according to each country's taxation law provides the basic test. The article also includes rules for determining how residency is to be allocated to one or other of the countries for the purposes of the agreement where a taxpayer - whether an individual, a company or other entity - is regarded as a resident under the domestic laws of both countries.

Article 5 - Permanent Establishment

Application of various provisions of the agreement (principally Article 7) is dependent upon whether a person resident of one country has a "permanent establishment" in the other, and if so, whether income derived by the person in the other country is effectively connected with that "permanent establishment". The definition of the term "permanent establishment" which this article embodies corresponds closely with definitions of the term in Australia's other double taxation agreements.

The primary meaning of the defined term is expressed in paragraph (1) as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. Other paragraphs of the article are concerned with elaborating on the meaning of the term by giving examples of what may constitute a "permanent establishment" - such as an office, a mine or an agricultural property - and by specifying the circumstances in which a resident of one country shall, or shall not, be deemed to have a "permanent establishment" in the other country.

Article 6 - Income from Real Property

By this article, income from real property, including income from the direct use, letting or use in any other form of land or interest therein, and royalties and other payments in respect of the working of or the right to work mines, oil or gas wells, quarries or other places of extraction or exploitation of natural resources, may be taxed in the country in which the land, mine, quarry or natural resource is situated.

Income to which this article applies is specifically excluded from the scope of Article 7 (by paragraph (8) of that article) and is therefore taxable in the country of source regardless of whether or not the recipient has a "permanent establishment" in that country.

Article 7 - Business Profits

This article is concerned with the taxation of business profits derived by a resident of one country from sources in the other country.

The taxing of these profits depends on whether they are attributable to a "permanent establishment" of the taxpayer in that other country. If they are not, the profits will be taxed only in the country of residence of the taxpayer. If, however, a resident of one country carries on business through a "permanent establishment" (as defined in Article 5) in the other country, the country in which the "permanent establishment" is situated may tax profits attributable to the establishment.

The article provides for profits of the "permanent establishment" to be determined on the basis of arm's length dealing. These provisions correspond in their practical effect with comparable provisions in Australia's other double taxation agreements, and with Division 13 of the Income Tax Assessment Act.

Paragraph (7) of the article allows the application of provisions of the source country's domestic law (e.g. the Australian Division 13) where the correct amount of profits attributable to a "permanent establishment" is incapable of determination or the ascertainment thereof presents exceptional difficulties, for example, where there is insufficient information available to determine the profits of the "permanent establishment" on the basis of arm's length dealing.

Article 8 - Shipping and Air Transport

Under this article the right to tax profits from the operation of ships or aircraft in international traffic, including profits derived from participation in a pool service, a joint transport operating organisation or an international operating agency, is reserved to the country of residence of the operator.

Any profits derived by a resident of one country from internal traffic in the other country may be taxed in that other country. In such cases, the tax in respect of carriage in internal operations is ordinarily not to exceed 5 per cent of the net amount paid or payable for the carriage. By reason of the definition of the term "Australia" contained in Article 3 and the terms of paragraph (4) of Article 8, any shipments by air or sea from a place in Australia to another place in Australia, its continental shelf or external territories are treated as forming part of internal traffic.

Article 9 - Associated Enterprises

This article authorises the re-allocation of profits between related enterprises in Australia and Finland on an arm's length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between independent enterprises dealing at arm's length with one another.

By virtue of paragraph (2) of the article, each country retains the right to apply its domestic law (e.g. the Australian Division 13) to its own enterprises, provided that such provisions are applied, so far as it is practicable to do so, in accordance with the principles of this article.

Where a re-allocation of profits is effected under this article or, by virtue of paragraph (2), under domestic law, so that the profits of an enterprise of one country are adjusted upwards, a form of double taxation would arise if the profits so re-allocated continued to be subject to tax in the hands of an associated enterprise in the other country. Paragraph (3) requires the other country concerned to make an appropriate adjustment to the amount of tax charged on the profits involved with a view to relieving any such double taxation.

Article 10 - Dividends

This article in general limits the tax that the country of source may impose on dividends payable to beneficial owners resident in the other country to 15 per cent of the gross amount of dividends. Under this article, Australia will reduce its rate of withholding tax on dividends paid to residents of Finland from 30 per cent to 15 per cent, while Finland will reduce its withholding tax on dividends paid to Australian residents from 25 per cent to 15 per cent.

Paragraph (4) provides that the 15 per cent limitation on the source country's tax will not apply to dividends derived by a resident of the other country who has a "permanent establishment" or "fixed base" in the country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that "permanent establishment" or "fixed base". In those cases the dividends will be taxed at normal rates in accordance with the provisions of Article 7 or Article 14, as the case may be.

The purpose of paragraph (5) of this article is to ensure, broadly, that one country will not tax dividends paid by a company resident solely in the other country unless the person deriving the dividend is a resident of the first country or the holding giving rise to the dividends is effectively connected with a "permanent establishment" or "fixed base" in that country.

Paragraph (6) preserves the right of Australia to impose the "branch profits" tax provided for in its domestic law. It also provides that, for the purpose of calculating undistributed profits tax, the branch profits tax will not be taken into account, but the company will be deemed to have paid dividends of such amount that tax equal to the amount of the branch profits tax would have been payable under the article.

Article 11 - Interest

This article requires the country of source generally to limit its tax on interest derived by residents of the other country to 10 per cent of the gross amount of the interest. This limitation will not affect the rate of Australian withholding tax on interest derived by Finnish residents which will continue to be imposed at the rate of 10 per cent under Australia's domestic law.

Interest derived by a resident of one country which is effectively connected with a "permanent establishment" or "fixed base" of that person in the other country will form part of the business profits of that establishment or "fixed base" and be subject to the provisions of Article 7 or Article 14. Accordingly, paragraph (4) of Article 11 requires that the 10 per cent limitation is not to apply to such interest.

The article also contains a general safeguard (paragraph (6)) against payments of excessive interest - in cases where there is a special relationship between the persons associated with a loan transaction - by restricting the 10 per cent limitation in such cases to an amount of interest which might be expected to have been agreed upon by persons dealing at arm's lenght.

Article 12 - Royalties

This article in general limits to 10 per cent of the gross amount of the royalties the tax that the country of source may impose on royalties paid to beneficial owners resident in the other country.

The 10 per cent limitation is not to apply to natural resource royalties, which, in accordance with Article 6, are to remain taxable in the country of source without limitation of the tax that may be imposed.

In the absence of a double taxation agreement, Australia generally taxes royalties paid to non-residents (other than film and video tape royalties which are taxed at the rate of 10 per cent of the gross royalties), as reduced by allowable expenses, at ordinary rates of tax.

As in the case of the dividends and interest, it is specified in paragraph (4) that the 10 per cent limitation of tax in the country of origin is not to apply to royalties effectively connected with a "permanent establishment" or "fixed base" in that country.

By paragraph (6), if royalties flow between related persons, the 10 per cent limitation will apply only to the extent that the royalties are not excessive.

Article 13 - Income From Alienation of Property

Under this article, income from the alienation of real property may be taxed in the country in which that property is situated.

Real property is defined for the purposes of the article, in the case of Australia, as including a lease of land or other direct interest in or over land and rights to exploit, or to explore for, natural resources. Shares or comparable interests in a company the assets of which consist wholly or principally of direct interests in or over land in one of the countries, or of rights to exploit or explore for natural resources in one of the countries, are also for these purposes deemed to be real property.

Article 14 - Independent Personal Services

The purpose of this article is to ensure that income derived by an individual resident in Australia or Finland from the performance of professional services or similar independent activities in the other country (which may now be taxed in the country in which the services or activities are performed), will continue to be taxed in the country in which the services are performed if the recipient has a "fixed base" regularly available in that country for the purpose of performing his or her activities, and the income is attributable to activities exercised from that base. If these tests are not met, the income will be taxed only in the country of residence.

Remuneration derived as an employee and income derived by public entertainers are the subject of other articles of the agreement and are not covered by this article.

Article 15 - Dependent Personal Services

Article 15 provides the basis upon which the remuneration of visiting employees is to be taxed. Generally, salaries, wages, etc. derived by a resident of one country from an employment exercised in the other country will be taxed in that other country. However, subject to specified conditions, there is a conventional provision for exemption from tax in the country being visited where only visits of a short-term nature are involved. The conditions for exemption are that the visit or visits not exceed, in the aggregate, 183 days in the year of income of the country visited, that the remuneration is paid by, or on behalf of, an employer who is not a resident of the country being visited, that the remuneration is not deductible in determining taxable profits of a "permanent establishment" or a "fixed base" which the employer has in the country being visited, and that the remuneration will be taxed in the country of residence.

By paragraph (3) of the article, income from an employment exercised aboard a ship or aircraft operated in international traffic is to be taxed in the country of residence of the operator.

Article 16 - Directors' Fees

Under this article, remuneration derived by a resident of one country in the capacity of a director of a company which is a resident of the other country is to be taxed in the country where the company is resident.

Article 17 - Entertainers

By this article, income derived by visiting entertainers (including athletes) from their personal activities as such will continue to be taxed in the country in which the activities are exercised, irrespective of the duration of the visit.

Paragraph (2) of this article is a safeguarding provision designed to ensure that income in respect of personal activities exercised by an entertainer, whether received by the entertainer or by another person, e.g., a separate enterprise which formally provides the entertainer's services, is taxed in the country in which the entertainer performs, whether or not that other person has a "permanent establishment" or "fixed base" in that country.

Article 18 - Pensions and Annuities

Under this article pensions and annuities are, with one exception, to be taxed only by the country of residence of the recipient.

Paragraph (3) provides that any pension paid by the government (including State and local government) of one country in respect of services rendered to that government, or pensions paid or other payments made under the social security system of that country, may be taxed in that country. However, this provision is only to apply if the recipient of the pension or payment is a citizen or national of that country.

In order to avoid a form of double taxation which could occur from the different bases of taxing alimony and maintenance payments in the two countries, paragraph (4) of the article provides that such payments arising in one country and paid to a resident of the other shall be taxed only in the country in which they arise.

Article 19 - Government Service

Paragraph (1) of this article provides that remuneration in respect of services rendered to a government (including a State or local government) of one of the countries will be taxed only in that country. However, such remuneration is to be taxable only in the other country if the services are rendered in that country and the recipient is a resident of that country who is a citizen or national of it or is a resident of that country who did not acquire that status solely to perform the services.

Paragraph (2) provides, in effect, that paragraph (1) does not apply where the services are rendered in connection with a trade or business carried on by a government. In such a case, the provisions of Articles 15 or 16 apply, as the case may be.

Article 20 - Students

This article applies to students temporarily present in a country solely for the purpose of their education who are, or immediately before the visit were, resident in the other country. In these circumstances, the students will be exempt from tax in the country visited in respect of payments received from abroad for the purposes of their maintenance or education.

Article 21 - Income Not Expressly Mentioned

This article provides rules for the allocation between the two countries of taxing rights in relation to items of income not expressly mentioned in the preceding articles of the agreement.

Broadly, such income derived by a resident of one country is to be taxed only in his or her country of residence unless it is derived from sources in the other country, in which case the income may also be taxed in the country of source.

However, the first-mentioned exclusive taxing right of the country of residence does not apply where the income is effectively connected with a "permanent establishment" or "fixed base" which a resident of one country has in the other. In such cases, the provisions of Article 7 or Article 14, as the case may be, will apply.

Article 22 - Source of Income

Article 22 specifies the source of various classes of income, for the purposes of ensuring that each country is empowered to exercise the taxing rights allocated to it by the agreement over residents of the other country and that, as intended by the agreement, double taxation relief will be given by the country of residence in respect of tax levied by the country of source in accordance with the taxing rights allocated to it under the agreement. The provision obviates any question of income not having, by domestic law rules, a source in the country that is, by the agreement, entitled to tax that income in the hands of a resident of the other country.

Article 23 - Methods of Elimination of Double Taxation

Double taxation does not arise in respect of income flowing between the two countries where the terms of the agreement provide for the income to be taxed only in one country or the other, or where the domestic taxation law of one of the countries frees the income from its tax. It is necessary, however, to prescribe a method for relieving double taxation in respect of other classes of income which are subject to tax in both countries. Australia's other double taxation agreements provide for a credit basis for the relief of double taxation to be applied by Australia and, usually, the other country. In these cases, the country of residence is required to give credit against its tax for the tax of the country of source. This approach has generally been adopted in this agreement.

By paragraph (1) of the article, Australia is obliged to relieve double taxation by allowing a credit against its own tax for Finnish tax (other than certain, Finnish tax which may be paid in accordance with sub-paragraph 2(c) of the article by a national of Finland who is a resident of Australia for the purposes of the agreement but is regarded as a resident of Finland under Finland's income tax law) on income derived by a resident of Australia from sources in Finland. Credit will be allowed by Australia for the Finnish tax on dividends derived from Finland by individuals and on interest and royalties derived from Finland by individuals and companies in respect of which the tax of that country is limited by the agreement to 10 per cent. Under the present Australian law, dividends derived from Finland by Australian resident companies will remain effectively free from tax under the provisions of section 46 of the Income Tax Assessment Act.

The present Australian income tax law would operate to exempt from Australian tax other income of Australian residents that is taxed in Finland. In these cases, since there will be no Australian tax payable, there is no call for allowance of credits.

For its part Finland will include in assessable income of its residents that income which, in accordance with the provisions of the agreement, may be taxed in Australia, and allow a deduction from its tax on that income for the Australian tax paid up to but not exceeding the Finnish tax on the income. Income derived by a Finnish resident from Australia, which under the agreement is to be taxed only in Australia, will be exempt from Finnish tax but may be taken into account in determining the amount of tax on the remaining income of the Finnish resident. This is commonly known as the "exemption with progression" method of relief. Dividends paid by an Australian resident company to a company which is a resident of Finland will be treated in the same way as inter-company dividend payments between Finnish resident companies, i.e. currently as tax-exempt in Finland.

Article 24 - Mutual Agreement Procedure

One of the purposes of this article is to provide for consultation between the taxation authorities of the two countries with a view to reaching a satisfactory solution where a taxpayer is able to demonstrate actual or potential subjection to taxation contrary to the provisions of the agreement. A taxpayer wishing to use this procedure must present a case within three years of the first notification of the action giving rise to the taxation not in accordance with the agreement and if, on consideration, a solution is reached, it may be implemented irrespective of any time limits imposed by domestic tax laws of the relevant country.

The article also authorises consultation between the taxation authorities of the two countries for the purpose of resolving any difficulties regarding the interpretation or application of the agreement and to give effect to it.

Article 25 - Exchange of Information

This article authorises the two taxation authorities to exchange information necessary for the carrying out of the agreement or of domestic laws concerning the taxes to which the agreement applies. The purposes for which this information may be used and the persons to whom it may be disclosed are restricted along the lines of Australia's other double taxation agreements.

The exchange of information that would disclose any trade, business, industrial or professional secret or trade process or which would be contrary to public policy is not permitted by the article.

Article 26 - Diplomatic and Consular Officials

The purpose of this article is to ensure that the provisions of the agreement do not result in members of diplomatic and consular posts receiving less favourable treatment than that to which they are entitled in accordance with international laws. In Australia, such persons are entitled to fiscal privileges under the Diplomatic (Privileges and Immunities) Act and the Consular (Privileges and Immunities) Act.

Article 27 - Entry into Force

This article provides for the entry into force of the agreement. This will be on the thirty-first day after the date on which notes are exchanged through the diplomatic channel notifying that the last of such things has been done in Australia and Finland as is necessary to give the agreement the force of law in both countries.

Once it enters into force, the agreement will have effect in Australia, for purposes of withholding tax, in respect of income derived on or after 1 January in the calendar year next following that in which the agreement enters into force and, in respect of tax other than withholding tax, in relation to income of any income year beginning on or after 1 July in the calendar year next following that in which the agreement enters into force. Where a taxpayer has adopted an accounting period ending on a date other than 30 June, the beginning of the accounting period that has been substituted for the year beginning on 1 July in the year in which the agreement first has effect will be the date from which the agreement will take effect in respect of tax other than withholding tax. In Finland, the agreement will have effect, for purposes of withholding tax, in respect of income derived on or after 1 January in the calendar year next following the year in which the agreement enters into force, and, in respect of tax other than withholding tax, in relation to taxes chargeable for any taxable year beginning on or after 1 January in the calendar year next following the year in which the agreement enters into force.

Article 28 - Termination

By this article the agreement is to continue in effect indefinitely. However, either country may give written notice of termination on or before 30 June in any calendar year beginning after the expiration of five years from the date of its entry into force. In that event, the agreement would cease to be effective in Australia, for withholding tax purposes, in respect of income derived on or after 1 January in the calendar year next following that in which the notice of termination is given and, for tax other than withholding tax, in relation to income of any year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given. It would cease to be effective in Finland for withholding tax purposes in respect of income derived on or after 1 January in the calendar year next following the year in which the notice of termination is given, and, for tax other than withholding tax, in relation to taxes chargeable for any taxable year beginning on or after 1 January in the calendar year next following the year in which the notice of termination is given.

Protocol to the Agreement with Finland

The protocol contains provisions varying or extending parts of the main body of the agreement. The protocol itself provides that its provisions are to form an integral part of the agreement.

The provisions of the protocol require that if, after 12 September 1984 (the date of signature of the agreement and protocol), Australia enters into an agreement with a country which is a member of the O.E.C.D., whereby Australia agrees to limit its tax on dividends, interest or royalties to rates less than those prescribed in the Finnish agreement, or there is included in the agreement with the other country a non-discrimination article, Australia is to enter into negotiations with Finland for the purposes of reviewing those rates in the Finnish agreement and, in relation to the inclusion of a non-discrimination article, of providing the same treatment for Finland as that provided for the other country.

PART IX - AMENDMENT OF THE TAXATION ADMINISTRATION ACT 1953

Clause 49: Principal Act

By this clause, the Taxation Administration Act 1953 is, in Part IX of the Bill, referred to as "the Principal Act".

Clause 50 : Provision of taxation information to National Crime Authority

By this clause, paragraph 3D(12)(b) of the Principal Act is to be widened to include within the category of specified persons to whom the National Crime Authority may, during a private hearing, divulge or communicate taxation-sourced information a person who is, or was, a director or officer of a company in respect of which taxation-sourced information has been communicated to the National Crime Authority under section 3D of the Principal Act. This amendment brings the use that, during a private hearing, the National Crime Authority may make of taxation sourced-information relating to the affairs of a company into line with the use that is proposed for a Royal Commission in possession of similar information - see notes on paragraph (h) of clause 20.

AUSTRALIAN CAPITAL TERRITORY STAMP DUTY AMENDMENT BILL 1985

Clause 1: Short title, & c.;

By sub-section (1) of this clause, the amending Act is to be cited as the Australian Capital Territory Stamp Duty Amendment Act 1985.

Sub-clause (2) facilitates references to the Australian Capital Territory Stamp Duty Act 1969 which, in the Bill, is referred to as "the Principal Act".

Clause 2: Commencement

But for this clause, the amending Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after it receives the Royal Assent. Under sub-clause 2(1), the provisions of the amending Act (other than section 5 - see notes on sub-clause 2(2)) will come into operation on the first day of the month following that in which the Act receives the Royal Assent.

By sub-clause 2(2), section 5 of the amending Act will be deemed to have come into operation on 1 July 1969. The effect will be to validate regulations that have been made under the Principal Act in reliance on a regulation-making power that, prior to the Federal Court's decision in Amalgamated Television Services Pty Ltd v. Australian Broadcasting Tribunal (1984) 54 ALR 57, was thought to have been provided by section 99 of the Australian Capital Territory Taxation (Administration) Act 1969 - see notes on clause 5.

Clause 3: Imposition of stamp duty

Section 4 of the Principal Act imposes stamp duty on instruments included in the classes of instruments specified in Schedule 1 to the Principal Act. Paragraph (a) of clause 3 is a technical amendment related to the amendment proposed by paragraph (b), under which stamp duty on certain other instruments will be imposed. The amendment by paragraph (a) will make it clear that rules to be inserted in the Australian Capital Territory Taxation (Administration) Act 1969 relating to the imposition of duty on those instruments are to be taken into account in determining the amount of stamp duty imposed under the Principal Act.

New sub-section 4(2), to be inserted in the Principal Act by paragraph (b) of clause 3, will impose stamp duty on instruments liable to an amount of duty under new sub-section 58M(1), (3), (4) or (5) or new section 58P, 58Q or 58R of the Australian Capital Territory Taxation (Administration) Act 1969 (see the notes on clause 8 of the accompanying Taxation Laws Amendment Bill (No.3) 1985). The amount of stamp duty to be imposed is the amount of duty to which the particular instrument is liable under those provisions.

Clause 4: Exemptions from stamp duty

Section 6 of the Principal Act specifies instruments that are exempt from stamp duty. Clause 4 proposes the omission of sub-section 6(10), which sets out the rules for determining when a bill of exchange or promissory note has been drawn or made and when an instrument has been executed. New sub-section 4(9) of the Australian Capital Territory Taxation (Administration) Act 1969, as proposed to be inserted by paragraph (g) of clause 4 of the accompanying Taxation Laws Amendment Bill (No.3) 1985, will in effect replace sub-section 6(10) and apply in a similar way to the sub-section for the purposes of both that Act and the Principal Act.

Clause 5: Regulations

Sub-section 6(3) of the Principal Act exempts from stamp duty an instrument included in a prescribed class of instruments executed by a prescribed Commonwealth or Territory authority. When that sub-section was enacted, it was considered that the power to make the necessary regulations in relation to that exemption was contained in section 99 of the Australian Capital Territory Taxation (Administration) Act 1969. However, the reasons of the Federal Court in Amalgamated Television Services Pty Ltd v. Australian Broadcasting Tribunal (1984) 54 ALR 57 make it clear that a regulation-making power provided in one Act (as is contained in the Australian Capital Territory Taxation (Administration) Act) for the purposes of that Act does not extend to the making of regulations under another Act (in this case, the Principal Act) with which it is incorporated and with which it is required to be read as one. Clause 5 therefore proposes the insertion of new section 8 in the Principal Act to authorise the Governor-General to make regulations for the purposes of sub-section 6(3). As mentioned in the notes on sub-clause 2(2), new section 8 is to be deemed to have commenced on 1 July 1969 in order to validate existing regulations.

Clause 6: Amendments of Schedule 1

This clause proposes a number of amendments of Schedule 1 to the Principal Act, which specifies classes of instruments on which stamp duty is imposed and the amount of duty payable on such instruments.

By paragraph (a), Items 4 and 5 of Schedule 1 are to be replaced so as to specify the increased rates of stamp duty payable on transfers of, or agreements to transfer, freehold interests in land situated in the ACT and transfers of, or agreements to transfer, Crown leases granted for more than 5 years. The new rates are set out in the earlier part of this memorandum that explains the main features of the Bill.

Paragraph (b) of clause 6 proposes the replacement of Item 7 of Schedule 1 to set the increased rates of duty payable on transfers or assignments of, or agreements to transfer or assign, leases of land situated in the ACT other than a Crown lease for more than a 5-year term. The new rates are the same as those that will apply to instruments specified in Items 4 and 5 of Schedule 1.

Under Item 8 of Schedule 1, an instrument of transfer of a marketable security that is registered in a register kept by a company in the ACT is subject to stamp duty. Paragraph (c) will amend that Item to include transfers registered in a register kept by a unit trust, consequent upon the proposed amendment of the definition of "marketable security" in the Australian Capital Territory Taxation (Administration) Act 1969 to include units in unit trusts. That amendment is proposed by paragraph (d) of clause 4 of the accompanying Taxation Laws Amendment Bill (No.3) 1985 (see notes on that clause).

By paragraph (d) of clause 6, new Item 9 is to be added to Schedule 1 to include in the classes of dutiable instruments loan securities that are connected with the ACT. Various terms and expressions used in the Item are defined by amendments of section 4 of the Australian Capital Territory Taxation (Administration) Act 1969 proposed by clause 4 of the Taxation Laws Amendment Bill (No.3) 1985. By virtue of new Item 9, the stamp duty payable on such loan securities will be $5 where the amount payable or repayable under the loan security, or the amount secured by the loan security, does not exceed $15,000. If that amount is not fixed, $5 duty will be payable if the maximum amount payable or repayable under or secured by the loan security does not exceed $15,000. Where, however, that amount or maximum amount exceeds $15,000, the stamp duty payable will be $5 for the first $15,000 and, in addition, 40 cents for each $100, and any fractional part of $100, that exceeds the first $15,000.

Clause 7: Amendments of Schedule 2

Schedule 2 to the Principal Act specifies classes of instruments which, by virtue of sub-section 6(1) of the Principal Act, are exempt from stamp duty.

Paragraph (a) of clause 7 will omit Item 12 of Schedule 2, which includes in the classes of exempt instruments a conveyance that transfers an interest in land by way of mortgage or consequent on the death, bankruptcy or insolvency of the holder of the interest, and insert a new Item 12. New item 12 will limit the exemption for a conveyance by way of mortgage to one where the legal interest is not transferred under the Real Property Ordinance 1925 of the ACT and where an instrument that constitutes or evidences the mortgage either has been duly stamped or is not liable to duty. A further change to be made to Item 12, consistent with the policy that a legal interest in land transferred in good faith by way of mortgage ought not attract the stamp duty applicable to conveyances, is to include as exempt instruments conveyances transferring a legal interest in land by way of discharge of mortgage.

Paragraph (b) of clause 7 will add new Items 32, 33, 34 and 35 to Schedule 2 to include certain loan securities among the classes of exempt instruments. Item 32 will, in effect, exempt from stamp duty a loan security where the amount or maximum amount payable or repayable under or secured by the instrument does not exceed $500. Consistent with classes of instruments currently exempted, Items 33 to 35 will exempt loan securities under which the borrower is the Commonwealth, a public hospital, a public educational institution, a public benevolent institution, a religious institution or a member of a foreign diplomatic mission.

Clause 8: Application

Clause 8 specifies that the amendments proposed by clauses 3, 6 and 7 will apply to instruments executed on or after the date on which the clause comes into operation - i.e., by sub-clause 2(1), the first day of the month after that in which the amending Act receives the Royal Assent.

BANK ACCOUNT DEBITS TAX AMENDMENT BILL 1985

Clause 1: Short title, & c.;

Sub-clause (1) of this clause provides for the amending Act to be cited as the Bank Account Debits Tax Amendment Act 1985.

Sub-clause (2) facilitates references to the Bank Account Debits Tax Act 1982 which, in the Bill, is referred to as "the Principal Act".

Clause 2: Repeal and substitution of sections 4 and 5 and insertion of section 6

This clause proposes the repeal of existing sections 4 and 5 of the Principal Act and their replacement with new sections 4 and 5. The clause will also insert a new section 6 in the Principal Act.

Broadly, existing section 4 imposes bank account debits tax in three specified circumstances; namely, where -

•

a taxable debit of $1 or more is made to a taxable account (i.e., a debit is made to a cheque account in Australia for which a certificate of exemption is not in force);

•

an eligible debit of $1 or more is made to an exempt account (i.e., a debit is made to an account for which a certificate of exemption is in force, but the debit is not of a kind covered by the certificate of exemption); or

•

an eligible debit of $1 or more is made to an account kept outside Australia by a resident of Australia for the purpose of avoiding the tax for which the account holder would otherwise be liable.

Tax imposed in respect of an eligible debit in these circumstances is payable by the account holder, while that imposed in respect of a taxable debit is payable by the bank but is recoverable from the account holder. Existing section 5 provides that the amount of tax to be imposed in terms of section 4 is the amount specified in the Schedule to the Act.

New sections 4 and 5, in conjunction with the proposed new Schedule, will double in the rates of tax imposed on debits made to accounts kept in the Australian Capital Territory (or, in certain circumstances, outside the ACT), while maintaining the existing rates of tax on all other bank account debits.

Section 4 : Imposition of tax

Paragraph (a) of new sub-section 4(1) essentially restates existing paragraph 4(a) and will impose tax on every taxable debit of $1 or more made to a taxable cheque account. Tax imposed by this paragraph will continue to be payable on a monthly basis by the bank with which the account is kept and be recoverable from the account holder.

Proposed new paragraph 4(1)(b) also restates the substance of the existing provisions and will impose tax on eligible debits of $1 or more made to exempt accounts. Tax imposed in these circumstances will continue to be payable by the account holder.

Paragraph 4(1)(c) is a new provision designed to counter arrangements that may be entered into by residents (as defined by new sub-section 4(4)) of the Territory (that is, the Australian Capital Territory and the Jervis Bay Territory - see new sub-section 4(3)) to avoid the increased rates of tax applicable in the Territory. The paragraph will impose tax on each eligible debit of $1 or more made to a cheque account kept by a Territory resident with a bank outside the Territory or outside Australia, where the objective conclusion is that the debit was made to that account for a purpose of avoiding tax that would have been payable if the debit had been made to a cheque account kept in the Territory. Tax imposed in these cases will also be payable by the account holder.

Paragraph (d) of new sub-section 4(1) essentially restates existing paragraph 4(c) and complements new paragraph 4(1)(c). It will impose tax on each eligible debit of $1 or more made to an account kept by a resident of Australia with a bank outside Australia for the purpose, or purposes that include the purpose, of avoiding bank account debits tax that would be payable if the debit were made to a cheque account kept in Australia but outside the Territory. The tax imposed in these cases will also be payable by the account holder.

Consistent with the position under the present law, banks will not be called upon to monitor and identify eligible debits to which paragraphs 4(1)(b), (c) and (d) apply - administrative responsibility lies with the Commissioner of Taxation who will recover the appropriate tax direct from an account holder. Banks will, however, continue to be liable, jointly and severally with account holders, for the tax payable on taxable debits to which paragraph 4(1)(a) applies. Banks are authorised under the law to recover from an account holder the tax paid in respect of taxable debits made to the cheque account of the account holder.

In accordance with this legislative scheme, proposed new sub-section 4(2) specifically provides that a debit to which paragraph 4(1)(c) applies is deemed to be a debit made to an account other than a taxable account. This will ensure that the account holder, and not the bank, is liable, under sub-sections 8(1) and (2) of the Principal Act, to pay the amount of tax that is sought to be avoided under arrangements covered by paragraph 1(c) - namely, where a resident of the Territory keeps an account outside the Territory for the purpose of avoiding Territory rates of tax. An account kept in Australia, but outside the Territory could, if it were not for new sub-section 4(2), be a taxable account - that term being defined in sub-section 3(1) of the Principal Act as an account (other than an exempt account) kept in Australia.

Sub-section 4(3) provides that the term "Territory", as used in new section 4, means the Australian Capital Territory as well as the Jervis Bay Territory.

Proposed new sub-section 4(4) describes those persons who are to be taken to be residents of the Territory for the purposes of new section 4. In terms of paragraph (4)(a), a person other than a company will be treated as a resident of the Territory if the person -

•

was ordinarily resident in the Territory;

•

carried on business in the Territory; or

•

carried on any other activity in the Territory.

Under paragraph (4)(b), a company will be treated as a resident of the Territory if the company carries on a business or any other activity in the Territory.

Section 5 : Amount of tax

New section 5 specifies the amount of bank account debits tax imposed in respect of debits made to cheque accounts.

Paragraph 5(1)(a) identifies the rates of tax that are to be levied on taxable and eligible debits, where new paragraph 5(1)(b) (i.e., ACT accounts) does not apply. Those rates of tax are the rates that apply under the existing law. The non-ACT rates are set out in column 2 of the new Schedule being inserted by clause 3, opposite the reference in column 1 of that Schedule to the range of amounts within which the amount of the debit is included (see notes on clause 3).

Paragraph 5(1)(b) identifies the rates of tax that are to be levied on taxable and eligible debits made to -

•

an account kept in the Territory (sub-paragraph (i)); or

•

an account kept by a Territory resident outside the Territory or outside Australia for the purpose of avoiding Territory rates of tax (sub-paragraph (ii)).

The rates of tax applicable to these debits are those set out in column 3 of the new Schedule being inserted by clause 3, opposite the reference in column 1 of that Schedule to the range of amounts within which the amount of the debit is included. The rates are twice the rates identified in paragraph 5(1)(a) (see notes on clause 3).

Sub-section 5(2) defines the term "Territory", as used in new section 5, to mean the Australian Capital Territory and includes the Jervis Bay Territory.

Section 6 : Accounts linked to building societies and credit unions registered in the Australian Capital Territory

Proposed new section 6 deems certain bank accounts kept in Australia, but outside the Australian Capital Territory (including Jervis Bay) that are opened on behalf of depositors with an ACT building society or credit union, to be accounts kept in the ACT and subject to ACT rates of tax. The circumstances in which section 6 applies are set out in paragraphs (a) and (b) of sub-section (1).

In terms of paragraph (1)(a), the bank account (in sub-section 6(1) called a cheque account) must be one that is an account kept in Australia, but outside the Territory. Under paragraph (1)(b), the cheque account must be in the name of a current or prospective account holder with a Territory building society or Territory credit union (these terms are defined by sub-section 6(3)) and be an account that was opened in accordance with arrangements between the bank and the building society or credit union for providing cheque accounts for the building society's or credit union's account holders under either of the conditions set out in the sub-paragraphs of paragraph (b).

Sub-paragraphs (b)(i) and (b)(ii) outlines the bases on which funds in a person's building society or credit union account might be applied to meet cheques drawn on the cheque account. There may be a standing authorisation by the account holder for the building society or credit union to debit his or her account as necessary in respect of payments made to the bank to honour cheques (sub-paragraph (b)(i)) or it may be that the building society or credit union will, on request by the account holder, transfer amounts from his or her account to the cheque account with the bank (sub-paragraph (b)(ii)).

Where the cheque account is one to which paragraphs (a) and (b) apply and either of the fund transfer arrangements specified in sub-paragraphs (b)(i) and (ii) exists, the cheque account is deemed to be an account held in the Territory for bank account debits tax purposes.

Sub-section 6(2) makes it clear that a reference in new section 6 to an account held with a Territory building society or Territory credit union includes a reference to an account that is held by way of share capital in the building society or credit union that can be withdrawn, or by way of money on deposit with the building society or credit union.

Sub-section 6(3) defines the following terms used in new section 6 -

"Co-operative Societies Ordinance" (a term used in the definitions of "Territory building society" and "Territory credit union") is defined to mean the Co-operative Societies Ordinance 1939 of the Australian Capital Territory.

"Territory" means the Australian Capital Territory and includes the Jervis Bay Territory.

"Territory building society" is a building society registered under the "Co-operative Societies Ordinance".

"Territory credit union" means a credit society registered under the "Co-operative Societies Ordinance".

Clause 3: Schedule

This clause proposes the repeal of the existing Schedule to the Principal Act - which sets out the rates account of bank account debits tax - and the substitution of a new Schedule. The new Schedule restates the existing Schedule, with the addition of a new column - column 3 - that sets out the increased rates of tax that, in terms of paragraph (b) of new sub-section 5(1), are to apply to debits made to cheque accounts kept in the ACT and to accounts kept outside the ACT for the purpose of avoiding the higher rate of tax. The existing rates of tax - applicable to all other debits - are shown in column 2 of the Schedule. The rates of tax specified are -

Clause 4: Application of amendments

By this clause, the amendments being made by the Bill are to apply to debits made on or after the first day of the second month following that in which the Bill receives the Royal Assent. This will enable banks and other organisations affected by the increase in rates to make the necessary administrative and procedural changes.