House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Frank Crean, M.P.)

NOTES ON CLAUSES

Clause 1: Short title and citation.

This clause provides for the short title and citation of the amending Act and of the Principal Act as amended.

Clause 2: Commencement.

Section 5(1A) of the Acts Interpretation Act 1901-1973 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act. As several clauses of the Bill are expressed to take effect on and from 20 July 1972, the day after the date on which the particular proposals were publicly announced, it is proposed by this clause that the amending Act shall come into operation on the day on which it receives the Royal Assent.

Clause 3: Parts.

Section 5 of the Principal Act contains a list of the Parts and Divisions of that Act. Clause 3 proposes that, as part of the process of simplifying drafting, the section be repealed.

Clause 4: Interpretation.

Paragraph (a) of this clause proposes a change in the definition of "friendly society" in section 6(1) of the Principal Act, so that the term will include a friendly society registered under any law in force in any of the three external Territories, Norfolk, Cocos and Christmas Islands. The income of any such society may, as is the case for other Australian societies, thus be exempt under section 23(g)(i) of the Principal Act and payments to it for the personal benefit of a taxpayer or his spouse or child deductible under section 82H(1)(b) of that Act.

Paragraph (b) of clause 4 will effect two unrelated amendments. The first is a purely technical change in consequence of the change in name of the Territory of Papua and New Guinea by the Papua New Guinea Act 1971 (Act No. 123 of 1971).

The second aspect of clause 4(b) is the insertion, as a drafting measure, of a new section 6(3) in the Principal Act. The new section will make it clear that specific references in the proposed new provisions to "companies" do not imply that, where references are made to "persons", the latter term does not include companies. "Person" is at present defined in section 6(1) to include a company.

Clause 5: Extension of Act to Papua New Guinea. Application of Act in relation to certain other Territories.

This clause is a basic part of the proposed amendments. In effect, it omits references to Norfolk, Cocos and Christmas Islands from existing section 7 of the Principal Act, so that that section will in future apply only to Papua New Guinea. Its application in respect of Papua New Guinea is not being changed.

The basic change made by clause 5 is the insertion of a new section 7A, which provides that the Principal Act is to apply as if the three Territories of Norfolk, Cocos and Christmas Islands were part of Australia. Section 7A will accordingly have the primary effect of treating residents of those Territories as if they were residents of Australia subject to tax on the same basis as other Australian residents. Another primary effect is that Territory source income will be treated as if it had a source in Australia. These changes are designed to remove the tax haven status of the Territories. Important qualifications of the primary effects of section 7A are, however, proposed. These are in the form of specific exemptions proposed by clause 7 of the Bill.

Among the consequences of making the Principal Act apply as if the three Territories were part of Australia is that dividend and interest withholding tax will apply to payments from the Territories in the same way as to payments from Australia. In addition, sections 129 and 142 of the Principal Act will apply to shipping freights and insurance contracts, respectively, as they apply to Australia.

Clause 6: Exemptions.

Paragraph (a) of clause 6 will amend paragraphs (d) and (f) of section 23 of the Principal Act, as a consequence of the proposed insertion of new section 7A treating the three Territories as if they were part of Australia. The amendment to section 23(d) will extend the exemption provided by that section to the revenue of a municipal corporation or other local governing body or of a public authority to such bodies constituted under a law in force in any of the three Territories. The change to paragraph (f) of section 23 will extend the existing exemption for the income of a trade union or association of employers or employees to such bodies registered under a law in force in any of the three Territories relating to the settlement of industrial disputes.

Paragraph (b) of clause 6 will have the effect of removing the general exemption from tax provided by paragraph (n) of section 23 for income derived by a Norfolk Island resident from the sale by him in Australia or Papua New Guinea of produce of Norfolk Island. Clause 7 will, however, provide for exemption in respect of such sales of produce by residents of Norfolk Island who are entitled to the exemptions provided by the new sections 24F and 24G proposed to be inserted by that clause.

Clause 7: Division 1A - Provisions relating to certain External Territories.

Introductory Note

This clause proposes that a new Division be inserted in the Principal Act, comprising sections 24B to 24N. The main purposes of the new sections are to define which people and companies resident in the Territories are to be exempt from tax, and in what circumstances. The scheme of the new provisions has been outlined in pages 2 to 4 above.

Notes on each of the proposed sections 24B to 24N follow.

Section 24B: Interpretation.

Sub-section (1) of proposed section 24B is a drafting measure which defines two terms used in the Division -

"Prescribed person" covers a "Territory resident", a "Territory company" and a "Territory trust", all of which are defined terms explained else where in these notes. It is a collective term for the class of persons who may derive exempt income under other provisions of the Bill and is used in proposed new sections 24J and 24L, which relate to the source of dividends, interest and royalties.

"Prescribed Territory" covers the three Territories of Norfolk, Cocos and Christmas Islands, and occurs throughout the Bill.

Sub-section (2) of section 24B contains drafting measures associated with parts of the new provisions that are directed against tax avoidance. It provides that references to a right, power, option or agreement extend to cover rights, etc. that are not legally enforceable. It also extends the meaning of "agreement" to embrace informal arrangements and understandings.

Sub-section (3) is also a drafting measure which specifies the time for determination of whether an individual is a "Territory resident". This is to be the date of derivation of income or the application of income for the benefit of a person. An effect is that an individual is exempt on Territory source income if he qualifies as a "Territory resident" at the time the income is derived.

Section 24C: Territory resident.

An individual who resides, and has his ordinary place of residence, in a prescribed Territory, is by this section to be treated as a Territory resident. The significance of this is that an individual must qualify as a Territory resident to be exempt from tax on certain income under proposed sections 24F and 24G. If, however, the person is a resident of Australia under the ordinary rules in section 6, of the Principal Act, he cannot qualify as a Territory resident (paragraph (b) of proposed section 24C). Temporary absence from a prescribed Territory of a person who is a Territory resident will not impair that status.

Section 24D: Territory company.

The proposed section 24D defines what is meant by a "Territory company". Its purpose is to establish which companies incorporated in a prescribed Territory are to be exempt from tax on income from sources outside Australia or in a prescribed Territory (under proposed sections 24F(1) and 24G(1)(b)).

In broad terms, a company will qualify as a Territory company if it is incorporated in a prescribed Territory and is wholly managed and controlled in a real sense by Territory residents as defined (proposed section 24D(1)(a) and (b)). Further, it is necessary that a person who is not a Territory resident does not have any shareholding interest in the company, or be in a position to affect the share ownership rights of the Territory resident owners of the company (proposed section 24D(1)(c), (d) and (e)).

Sub-section (2) of the proposed section 24D sets out that a "shareholding interest" means a beneficial interest in a company and sub-section (3) provides for shareholding interests of a person to be traced through a series of companies. If an individual has a shareholding interest in a company which in turn has a shareholding interest in another company the individual is to be regarded as having a share- holding interest in the other company, and so on if there are further companies in a chain of shareholdings. Sub-sections (4) and (5) spell out - for the purposes of sub-sections (1)(d) and (e) - the circumstances in which a person is to be taken as being in a position to affect the rights of Territory resident shareholders.

A further safeguard against exploitation of the exemptions for a Territory company is that the affairs and business operations of the company must not in practice be conducted to any extent in the interests of persons other than the Territory resident shareholders (proposed section 24D(6) and (7)).

To meet situations such as those where a shareholder in a Territory company temporarily retains his share in a Territory company on ceasing to be a Territory resident, the Commissioner of Taxation is empowered by sub-section (8) of section 24D to disregard a temporary failure to meet the test that only Territory residents, and no other persons, may have a shareholding interest in a Territory company, if it is to be entitled to tax exemption.

The Commissioner is also to be empowered by sub-section (9) to treat a company as a Territory company in appropriate circumstances, notwithstanding that the conditions of paragraph (d) or (e) of sub-section (1), or of sub-section (6), are not met, This means that status as a Territory company would not necessarily be lost because, for example, an option to acquire shares in the company was held beneficially by a Territory resident who did not own shares in the company.

An implication of the proposals is that exemption of income will not be available where Islanders and non-Islanders join in ownership of an Island company to conduct a business. However, common ownership of an Island business could be effected by a partnership between a Territory company and, say, an Australian-owned company. In that event the Territory-owned company, but not the Australian-owned company, would be entitled to tax exemption on income of the Island business.

Section 24E: Territory trusts.

Broadly speaking, section 24E establishes that a trust of one of two types may qualify as a "Territory trust". Income derived by a trustee of a Territory trust from sources in a prescribed Territory may be exempt under proposed section 24G(1)(c).

Under sub-section (1) of section 24E a trust resulting from the death of a person who was a Territory resident immediately before his death will qualify as a Territory trust if either the administration of the estate has not progressed to the stage where any beneficiary is presently entitled to the year's income or, that stage of administration having been passed, there is no person presently entitled to the income and the only possible beneficiaries are Territory residents.

Sub-section (2) defines a second type of trust as a Territory trust if the trust instrument is executed in a prescribed Territory by a Territory resident, no person is presently entitled to the year's income, and the only possible beneficiaries are Territory residents.

Sub-section (3) limits the meaning of "Territory trust" to the trusts just described.

Drafting measures are contained in sub-section (4) to facilitate the practical application of the section. Essentially, paragraphs (a) and (b) deem separate trusts to exist, for purposes of applying the new provisions, where two or more beneficiaries are presently entitled to income, or there is income to which no beneficiary is presently entitled. Paragraph (c) ensures that references to a trustee are references to such a person only in a trustee capacity.

Section 24F: Exemption from tax of certain income derived from sources outside Australia.

Sub-section (1) of proposed section 24F is a provision which will exempt from tax income derived by a Territory resident or a Territory company from sources outside "Australia" which, by reason of new section 7A, must be read as including the prescribed Territories. There is no need to make similar provision for Territory trusts because the High Court has held that the assessable income of a trust can include only income with a source in Australia.

Sub-section (2) makes a specific exclusion from the exemption, of dividends paid to a Territory resident or a Territory company by a company that is a resident of Australia under the normal rules of section 6 of the Principal Act. The purpose is to ensure that Territory residents are assessable on dividends paid to them by an Australian resident company regardless of the territorial source of the profits used to service the dividends.

Sub-section (3) is designed as an anti-avoidance measure to overcome possible arrangements by which exempt income - ostensibly that of a Territory resident or a Territory company - is in reality applied, or may be applied, so as to benefit a non-Islander, e.g., by way of a long-term interest free loan arrangement or by payment of a capital sum. It should be read together with proposed section 24H, which sets out in some detail circumstances in which income may be taken to be applied for the benefit of some other person (not necessarily an Australian resident).

Sub-section (4) is a relieving provision which modifies sub-section (3) of section 24F so as to retain exemption of income, even where it is applied for the benefit of some non-Island person, if the Commissioner is satisfied that it involves a genuine business or family dealing and is not part of a tax avoidance arrangement.

Sub-section (5) formally provides the exemption for the income to which the section applies.

Section 24G: Exemption from tax of certain income derived from sources in a prescribed Territory.

This proposed section will, through sub-sections (1) and (4), exempt from tax income derived from sources in a prescribed Territory by a Territory resident (paragraph (a) of sub-section (1)), a Territory company (paragraph (b) of sub-section (1)), or a Territory trust (paragraph (c) of sub-section (1)).

The exemption will apply to Territory source trust income to which a Territory resident is presently entitled and in respect of which the trustee of the trust is the taxpayer (under section 98) because the beneficiary is under a legal disability (paragraph (d) of sub-section (1)).

The section will also exempt earnings from a prescribed Territory of a person who at the time he started working in the Territory intended to remain there for more than 6 months (paragraph (e) of sub-section (1)). For the exemption to apply it is necessary that the duties of the office or employment be wholly or mainly performed in a prescribed Territory.

Sub-sections (2) and (3) have similar objectives to sub-sections (3) and (4) of section 24F (explained above). In combination they will have the effect that Territory-source income is not to be exempt from tax under section 24G if the income is, except in conditions unassociated with tax avoidance, to be enjoyed by a person not qualified for exemption under the section.

Sub-section (4) formally provides the exemption for the income to which the section applies.

Section 24H: When income to be taken to be applied for benefit of a person.

The proposed section 24H is designed as part of measures to counter avoidance of tax that might otherwise occur by persons attempting to exploit the exemption proposed to be granted to certain income derived by Territory residents, companies and trusts. It complements proposed sections 24F(3) and 24G(2), by describing circumstances to be taken into account in determining whether income has been, or may be, applied for the benefit of a person.

In broad terms, the section is intended to apply to all situations in which income that would otherwise be exempt is able to be enjoyed by a person not eligible for tax exemption, whether in the form of income or capital.

As mentioned earlier, sections 23F(4) and 24G(3) will operate to prevent income losing its exempt classification if the application of income for the benefit of some other person is a genuine commercial or family dealing and is not part of a tax avoidance arrangement.

Section 24J: Source of dividends.

The proposed section 24J contains rules to determine when two classes of dividends have a source in a prescribed Territory. Once dividends have such a source, they will be exempt (under section 24G) when derived by a prescribed person (i.e., a Territory resident, company or trust (section 24B(1)).

The first class of dividends consists of those paid by a Territory company out of income that is exempt from tax under the proposed new sections 24G or 24F, i.e., out of profits from a source in a prescribed Territory or in a foreign country. The second class comprises dividends paid out of profits derived before 20 July 1972 from sources outside Australia proper. The latter profits are defined as "residual income" in section 24J(1).

Sub-section (1) defines three terms -

"Prescribed income". This term covers both income derived by a Territory company (see section 24D) that is exempt under the new provisions ("Territory income"), and "residual income". It also covers each type of income separately. Its effect, when read with section 24J(2)(a), is that dividends paid by a Territory company wholly and exclusively out of "prescribed income" is deemed to have a source in a prescribed Territory.

"Residual income" represents the pool of profits derived before 20 July 1972 which, under the law then in force, were from sources outside Australia proper. When read with other substantive provisions, the effect will be to preserve exemption for prescribed persons in relation to dividends paid out of residual income. The dividend need not be paid by a Territory company as now defined. It could be paid by a company incorporated in a prescribed Territory.

"Territory income". The term is a description of the fund of exempt income derived by a Territory company from sources in a prescribed Territory, or in another country, covered by proposed sections 24G and 24F.

Sub-section (2) is the operative provision which deems dividends to be derived from a source in a prescribed Territory if, and only if, the tests in paragraphs (a) or (b) of the sub-section are met. Under paragraph (a) it is necessary that the dividend be paid by a "'Territory company" wholly and exclusively out of net prescribed income (i.e., out of "residual income", or "Territory income" (or both) as reduced by expenses that relate to that income). Under paragraph (b), the dividend must be paid by a company incorporated in a prescribed Territory wholly and exclusively out of "residual income" (as reduced by related expenses), or out of profits constituted by dividends paid out of such income.

Sub-sections (3) to (7) all relate to residual income.

Sub-section (3) is a provision which is designed to forestall possible avoidance by Territory-incorporated, but Australian-owned, companies which have "residual income" funds. Under other provisions in the Bill, dividends paid out of "residual income" to prescribed persons are to be exempt. In the absence of sub-section (3) it would be possible for the Australian owners to sell their shares to Territory residents for a price approximating the accumulated reserves, and so obtain a tax-free capital gain in respect of income which is exempt in the hands of the Territory residents, but which would have been assessable in the hands of the former Australian owners.

Sub-section (3) is designed to have the effect that dividends paid out of "residual income" to a prescribed person who obtained the beneficial ownership of relevant shares after 19 July 1972 from a person who would not be entitled to exemption on the dividends, or, broadly speaking, who derived the dividend as a result of some arrangement made after that date with such a person, will be deemed not to be derived from a source in a prescribed Territory. Consequently, they will not qualify for exemption under section 24G.

Sub-section (4) modifies the operation of the previous sub-section by excluding a change in beneficial ownership resulting from the death of any person.

Sub-sections (5), (6) and (7) are measures which are designed to facilitate the application of sub-section (3) and to guard against arrangements designed to escape the limitations of that sub-section. Their effect is that if a dividend is to any extent paid out of "residual income", and whether it passes through one or more other companies (sub sections (6) and (7)), it is to be treated as a dividend attributable to "residual income". If it is to be so treated, sub-section (3) may operate to treat it as not having a Territory source.

Section 24K: Source of income from employment.

A rule specifying when income from employment has a source in a prescribed Territory is contained in the proposed section 24K. For the income to have a Territory source under section 24K the duties must be wholly or mainly performed in a prescribed Territory. The amount of income that is to be regarded as having a Territory source is to be limited to the amount the Commissioner considers reasonable remuneration for the duties concerned.

Section 24L: Source of interest or royalty.

The purpose of the proposed section 24L is to prescribe a rule for determining when interest or royalties derived by a prescribed person do not have a source in a prescribed Territory, or otherwise outside Australia, and consequently when such income does not qualify for exemption under the proposed section 24G or section 24F. The proposals are modelled on the existing provisions of the Principal Act contained in Division 11A relating to interest withholding tax and in section 6C relating to royalties.

Under sub-section (1), interest or a royalty will fall within the section if, in broad terms, the moneys on which interest is paid, or the property giving rise to the royalty, is used in Australia, so that the outgoing is an expense of an Australian business. By reason of sub-section (5) of section 24L the reference to "Australia" does not extend the scope of the section to an expense of a business carried on in a prescribed Territory. (But see section 24M.)

Sub-section (2) provides that interest or a royalty to which section 24L applies does not have a source in a prescribed Territory or otherwise outside Australia.

Sub-sections (3) and (4) apply, in the same way as corresponding sub-sections of the provisions on which section 24L is modelled, to cases where interest or a royalty is, in part only, an expense of a business carried on in Australia proper. By sub-sections (3) and (4), section 24L will apply only to that part.

Sub-section (5) restricts the meaning of the terms "Australia", "resident" and "non-resident" (for the purposes of sub-sections (1), (3) and (4) only) to what might be described as their normal meaning, that is, to the meaning they would have if the income tax law were not made to apply as if the three Territories were part of Australia. The effect is that, for the purposes of the proposed section 24L the three Territories are excluded from the meaning of "Australia", when it is used in a geographical sense, and persons who would not be treated as "resident" or "non-resident" apart from proposed new section 7A are excluded from the scope of these terms.

Sub-section (6) provides, in effect, that for purposes of section 24L interest or a royalty shall be deemed to have been paid by a person to another if it has been dealt with on the latter's behalf, or at his direction.

Section 24M: Certain income deemed not to be derived from sources in a prescribed Territory or outside Australia.

This section is a provision to combat tax avoidance arrangements that may be designed, for the purposes of the new provisions, to give a source in a prescribed Territory or outside Australia to income that would otherwise have had a source in Australia. Sub-section (1) applies to income that technically, and but for the proposed section 24M, would have a source in a prescribed Territory, while sub-section (2) relates to income that, apart from section 24M, technically would have a source in another country. Both sub-sections cover the same classes of income, except that, because the proposed section 24J comprehensively determines when dividends have a Territory-source, sub-section (1) of section 24M does not apply to dividends.

The section provides that income that has a technical source in a prescribed Territory or outside Australia is to be deprived of that source to the extent that it is received, or accrues, directly or indirectly, in pursuance of some artificial arrangement or of an arrangement entered into for tax-avoidance purposes.

Section 24N: Transitional.

The proposed section 24N is a transitional measure to meet the situation of a company that will not qualify as a Territory company throughout the period since 20 July 1972 under the legislation that is proposed, but that takes the necessary steps to so qualify throughout the last 6 months of the 1973-74 income year.

The section will empower the Commissioner to treat as exempt so much of the Territory-source and foreign-source income derived by the company between 20 July 1972 and the end of the year ending on 30 June 1974 as he considers reasonable, having regard to the extent to which Territory residents beneficially owned shares during that time. Reference (in sub-section (1)) to the two years preceding the 1973-74 year is necessary to meet the case of any company that has adopted a substituted accounting period ending on a date other than 30 June.

Clause 8: Rates and taxes.

Clause 8 is another clause consequential on the proposal to make the income tax law apply as if the prescribed Territories were part of Australia. It will permit the deduction under section 72 of the Principal Act for municipal rates and land taxes to apply in respect of the three Territories in the same way as it applies in respect of Australia proper.

Clause 9: Definition.

This clause relates to concessional deductions provisions of the Principal Act. Those provisions stipulate that deductions are available only in relation to a dependant who is a resident of Australia. Section 82AA provides that a resident of Norfolk, Cocos or Christmas Islands, or of Papua New Guinea, is to be treated as a resident of Australia for this purpose. As new section 7A, which will make the Principal Act apply as if the first three Territories were part of Australia, will achieve this result in relation to residents of those Territories, it is proposed by clause 9 to confine the application of section 82AA to Papua New Guinea.

Clause 10: Housekeeper.

Clause 10, by which it is proposed to amend section 82D of the Principal Act, has much the same technical background as clause 9. The deduction under section 82D for a housekeeper keeping house for the taxpayer in Norfolk, Cocos or Christmas Islands will in future be authorised by the combined effect of section 7A and section 82D.

Clause 11: Interpretation.

This clause amends definitions contained in section 103 of the Principal Act, which are used in determining whether a private company is liable to pay undistributed profits tax under provisions contained in Division 7 of Part III of the Act. The amendments relate partly to the amendments already explained above in relation to Norfolk, Cocos and Christmas Islands and partly to amendments concerning Papua New Guinea that are explained in the notes below on clause 12.

A private company may be liable to pay undistributed profits tax if, after its taxable income has been reduced by the amount of tax on its income, by a "retention allowance" and by dividends paid, there is left an amount of undistributed profits ("the undistributed amount"). Some dividends are, however, not deductible in determining the undistributed amount. Included in these are "special fund dividends" which, in broad terms, are dividends paid out of income that is exempt from tax. Also included are certain other dividends which, in broad terms, are paid under an arrangement for a buyer of shares to pay a premium which is to be re-imbursed by a dividend, i.e., under a tax avoidance arrangement.

Paragraph (a) of clause 11 amends the definition of "special fund dividends" so that dividends paid by a company in Norfolk, Cocos or Christmas Islands out of income that is exempt from tax (and hence not included in taxable income) by proposed sections 24F and 24G will not be deductible in calculating whether the company is liable to undistributed profits tax. It could have a liability to the tax in respect of any income it may derive from within Australia proper.

Paragraph (b) of clause 11 formally amends the definition of "undistributed amount" in section 103 of the Principal Act so as to preclude dividends that are "prescribed dividends" under the amendments proposed to be effected by clause 12 from being deducted in determining the amount upon which a company is liable to tax on undistributed income.

Clause 12: Prescribed dividends.

Introductory Note

This clause contains the core of proposed provisions designed to preclude the tax-free accumulation of dividends by Australian private company groups through setting up so-called "repository" companies in Papua New Guinea. Under existing law a private company in Australia might avoid payment of undistributed profits tax by paying dividends to a private company in Papua New Guinea, and arrangements might be made that would have the result that, even though the individuals in Australia who own the companies concerned do not immediately receive, and hence are not taxed on, distributions out of those dividends, the group concerned escapes tax that would have had to be paid if the dividends had not been paid outside Australia.

The proposed measures - which have been framed against the background of section 7 of the Principal Act - provide that an Australian private company cannot take into account a dividend paid to a Papua New Guinea company in determining whether it has a liability to tax on undistributed income, except to the extent that the Commissioner is satisfied that one of a number of specified conditions is met. The specified conditions are designed to establish that the dividend is paid for other than tax avoidance purposes.

The proposed new section 103AA, to be inserted by clause 12, sets out what is meant by the term "prescribed dividend". Amendments to the Principal Act being made by clauses 11, 13 and 14 will mean that a "prescribed dividend" is not deductible in calculating liability to undistributed profits tax.

Sub-section (1) of the proposed section 103AA relates to a dividend derived on or after 20 July 1972 by a Papua New Guinea resident private company from an Australian resident private company. (20 July 1972 is the day after the day on which the announcement foreshadowing the introduction of this legislation was made.) A dividend to which sub-section (1) applies will be a prescribed dividend if, and to the extent that, it does not fall within the categories set out, for purposes of sub-section (3), in sub-section (4). Sub-section (6) also qualifies the operation of sub-section (1).

Sub-section (2), which is also subject to sub-sections (3), (4) and (6), applies to dividends derived by a Papua New Guinea private company where the dividends are paid out of Australian-source profits by a private company that is not a resident of Australia, e.g., by a foreign-resident company that carries on business in Australia through a branch. Such a company may be liable to undistributed profits tax in respect of income from its Australian business, and dividends paid out of the income from such a business (but not income constituted by dividends to which sub-section (1) applies) are to be within the purview of sub-section (2).

Sub-sections (3) and (4) of section 103AA will operate to preclude certain dividends that would otherwise be prescribed dividends, pursuant to sub-sections (1) or (2), from being treated as prescribed dividends for the purposes of Division 7.

Sub-section (3) specifies that so much of a dividend as would otherwise be a prescribed dividend - the whole of the dividend, covered by sub-section (1), or the part of a dividend that is paid out of Australian profits, covered by sub-section (2), (which is described as the "relevant dividend") - is not to be treated as a prescribed dividend to the extent that it satisfies conditions set out in sub-section (4).

Paragraph (a) of sub section (4) relates to, and excludes from treatment as a prescribed dividend, so much of the relevant dividend as the Commissioner is satisfied will flow, whether directly or through interposed companies, trusts, etc. to individuals who are not residents of Australia or to public companies. This exclusion is explained by the fact that section 103AA is directed against use of a Papua New Guinea repository company by Australian resident individuals. For paragraph (a) to be applied it will be necessary for the Commissioner to be satisfied that the dividend derived by the non-resident individual, or by a public company, will not be applied (except in circumstances unassociated with tax avoidance) for the benefit of an individual who is a resident of Australia or for the benefit of a private company.

Paragraph (b) of sub-section (4) will exclude from treatment as a prescribed dividend so much of a relevant dividend as the Commissioner is satisfied will flow to an individual resident in Australia, before the expiration of ten months after the end of the year of income of the Papua New Guinea private company in which it derived the dividend.

Paragraph (c) of sub-section (4) will exclude from treatment as a prescribed dividend so much of a relevant dividend as the Commissioner is satisfied will be subject to undistributed profits tax levied on the company that receives the relevant dividend.

Paragraph (d) of sub-section (4) will have a corresponding effect in relation to so much of the relevant dividend as the Commissioner is satisfied will, by a distribution or distributions made within ten months of the end of the year of income in which the company that derived the relevant dividend, be subject to undistributed profits tax levied on any other private company.

Paragraph (e) of sub-section (4) will authorise the Commissioner to exclude so much of a relevant dividend as should be excluded because of the presence in the particular ease of special circumstances.

In any case where undistributed profits tax is payable, and the Commissioner has not applied sub-section (3) in the way in which the company considers it ought to have been applied, the company may, of course, take the usual steps to have the matter considered by a Taxation Board of Review, which can substitute its view for that of the Commissioner.

Sub-section (5) of section 103AA specifies that the tests in proposed section 24H (see page 10 of these notes) for determining whether income has been, or may be, applied for the benefit of a person for purposes of the Norfolk Island amendments, also have effect for the purposes of sub-section (4)(a) of section 103AA.

By reason of sub-section (6) no part of a relevant dividend is to be taken to be a prescribed dividend if more than ninety per cent of the relevant dividend is excluded from treatment as a prescribed dividend by the tests in sub-section (4).

Sub-section (7) is designed to apply where, in accordance with sub-section (4), a part of a dividend has been disregarded in ascertaining the extent to which the dividend was a prescribed dividend, but it becomes clear that, on facts that are subsequently established, the part ought not to have been disregarded. If the Commissioner considers that, having regard to all the relevant circumstances, that part of the dividend should not have been so disregarded, sub-section (4) will have effect as if it had not been so disregarded.

The purpose of sub-section (8) of section 103AA is to ensure that the Commissioner has the necessary authority to amend an assessment for the purpose of giving effect to sub-section (7).

Clause 13: Sufficient distribution.

This amendment is another part of proposed amendments relating to repository companies in Papua New Guinea, with which clauses 11(b), 12 and 14 also deal, It involves an amendment to section 105A of the Principal Act, which specifies when a private company is to be taken to have made a "sufficient distribution", i.e., a distribution of dividends sufficient to free it from payment of tax on undistributed income.

The effect of clause 13 will be that so much of a dividend as is a prescribed dividend by reason of clause 12 will not be taken into account in determining whether a company has made a sufficient distribution.

Clause 14: Excess distributions carried forward.

Under section 106 of the Principal Act a private company that pays dividends in excess of those needed to avoid becoming liable to pay tax on undistributed income may carry the excess forward to a later year of income, when it will be taken into account as though it were a dividend in ascertaining whether there is a liability to pay the tax for the later year.

The amendment to section 106 proposed by this clause will mean that an amount of prescribed dividends, as determined under the proposed new section 103AA (Clause 12 of the Bill), will not be eligible for inclusion in an excess distribution to be carried forward.

Clause 15: Informal arrangements.

Clause 15 proposes a technical amendment to section 128R of the Principal Act which will clarify the intention that the section should operate only for the purpose of the Division (Division 11A) in which it appears.

Clause 16: Territories.

The re-enactment of section 251B of the Principal Act to be effected by this clause will mean that for the purpose of registration of tax agents, Norfolk Island will be treated as part of New South Wales, and Cocos and Christmas Islands as part of Western Australia.

Clause 17: Cancellation of registration of tax agents.

The amendment to section 251K(5) proposed by this clause will mean that should the registration of a tax agent in Norfolk, Cocos or Christmas Islands be cancelled the appeal against cancellation that is provided for in section 251K may be made to a Court in the relevant Territory.

Clause 18: Additional amendments.

This clause proposes that various sections mentioned in the schedule to the Bill be amended to substitute the words "Papua New Guinea" for the words "the Territory of Papua and New Guinea". The change is a formal one flowing from the description now applied to Papua New Guinea.

Clause 19: Territory transitional provisions - trading stock.

The purpose of this clause - which will not amend the Principal Act - is to provide options as to valuation of trading stock included in the assets of a business carried on in a prescribed Territory (Norfolk, Cocos or Christmas Islands) on 20 July 1972 (paragraph (1)). The clause will have practical effect in relation to a taxpayer whose Territory income becomes subject to tax as a consequence of the Bill, e.g., a company that is owned by residents of Australia proper.

Under paragraph (2) of clause 19, stock on hand at 20 July 1972 may be valued at cost price or market selling value in the case of live stock and other stock, with a further alternative, namely, replacement price, in the case of trading stock other than live stock.

Paragraph (3) requires that an option relating to the value of stock be lodged in writing within sixty days of the date of Assent to the Bill, or within such further time as the Commissioner determines.

Paragraph (4) will have the effect that, if no election is made, the opening stock will be valued at cost price.

Paragraph (5) allows a taxpayer who has exercised his option under paragraph (2) to exercise a further option to value stock on hand at the end of the first taxable year at any of the normal bases set out in section 32 of the Principal Act in the case of live stock, and in section 31 for other trading stock.

Paragraph (6) provides that where a taxpayer elects to value trading stock on hand at the end of the year at cost price, the cost of stock on hand at 20 July 1972 shall be deemed to be the value at which the stock was taken into account under paragraph (2).

Paragraph (7) deems the period from 20 July 1972 to the end of the first taxable year of income to be a year for the purposes of the trading stock provisions.

Paragraph (8) is a drafting measure which defines three of the terms used throughout clause 19.

Clause 20: Territory transitional provisions - depreciation.

Clause 20 contains transitional provisions covering depreciable property in a prescribed Territory on 20 July 1972. Like clause 19 it will apply in practice only to a taxpayer whose Territory income becomes taxable as a result of the Bill.

Its effect, in broad terms, is to deem the cost of the relevant plant to be original cost less depreciation that would have been allowed under the diminishing value method if the plant had been used to produce assessable income from the date of acquisition.

Clause 21: Amendment of assessments.

The purpose of this clause is to authorise the making of amendments to any assessments that may already have been made, in order to give effect to the legislation proposed in this Bill.

Clause 22: Application of amendments.

This clause, in paragraph (1), specifies 20 July 1972 as the commencing date for the application of amendments proposed by clause 5 (which treats the prescribed Territories of Norfolk, Cocos and Christmas Islands as if they were part of Australia), clause 6 (which extends two exemption provisions to the prescribed Territories), clause 7 (which inserts new Division 1A relating to the prescribed Territories), clause 9 (which is a technical amendment to section 82AA), and clause 10 (which is a technical amendment to section 82D).

Paragraph (2) provides that the export market development rebate under section 160AC of the Principal Act will not be affected by the provisions of this Bill, that is, the rebate will not be affected by the proposal to make the income tax law apply as if Norfolk, Cocos and Christmas Islands were part of Australia.