House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

INCOME TAX ASSESSMENT AMENDMENT BILL (No. 2) 1978

The main features of the Assessment Bill are -

Main Features

Current year losses (Clauses 3, 4, 5(1)(b), 7 to 11, and 29)

Existing provisions of the Income Tax Assessment Act (the "Principal Act") prevent deduction in a year of income of a loss incurred by a company in a previous income year unless the loss company satisfies a "continuing ownership" test or alternative "same business" test.

As a further step in countering tax avoidance, a net loss incurred by a company during a part of an income year under the proprietorship of one set of shareholders is not to be offset against the net income derived during another period of the same income year under the proprietorship of a different set of shareholders, unless the company satisfies a "continuing ownership" test or alternative "same business" test corresponding with those applicable in relation to the deduction of losses incurred by companies in previous years.

In broad terms, the income year is to be divided into "relevant periods" separated by a disqualifying event, i.e., the occurrence of a 50 per cent or greater change in share-holdings or of one of a number of circumstances that invoke anti-avoidance safeguards against mere technical compliance with the continuing ownership test. A net loss incurred in one such relevant period is not to be offset against a net income derived during another relevant period of the same year unless the company satisfies the "continuing ownership" test or alternatively the "same business" test.

Losses not allowed as deductions in the assessment for the particular income year under these new provisions will, nevertheless, be able to qualify for deduction in a later year, as a prior year loss, if the company satisfies the continuing ownership test or the alternative same business test that applies under the Principal Act to prior year company losses.

The amendments are to apply for the 1977-78 income year, and for subsequent years in relation to disqualifying events that occur after 7 April 1978.

Rebates on dividends received as part of dividend stripping operations (Clauses 5 and 6)

Sections 46A and 46B of the Principal Act operate to prevent a double benefit in the form of a full rebate of tax on dividends received in the course of a dividend stripping operation and a deduction for the "loss" on the sale of the shares after their value has been reduced by payment of the dividend. Section 46A operates in the case where the one company receives the stripped dividend and incurs the loss on the sale of the shares. Section 46B operates where a company receives the stripping dividend and an associated entity incurs the loss on the sale of other shares in the company.

Clause 5 will amend section 46A to counter a further kind of tax avoidance that relies on the interposition of an investment company or trust between the company to be stripped and the corporate stripper. The amendment will ensure that any expenditure incurred by the stripping company in acquiring shares in the interposed companies or interests in the inter-posed trusts may, in addition to any other expenditure that is already capable of being offset against the dividend received by the company, be offset in a similar fashion.

Clause 6 will amend section 46B to provide a counter to the same general kind of avoidance where a trust is inter-posed between the stripping company and the company to be stripped. Section 46B already contains a counter to the use of interposed companies in a dividend stripping operation of the particular kind to which that section applies.

These amendments are to be effective from 7 May 1978.

Branch profits tax (Clause 28)

By this clause, and by the Income Tax (Non-resident Companies) Bill 1978, it is proposed to charge an additional tax of 5 per cent on income derived by non-resident companies from Australian sources. The tax will be payable on income of the 1977-78 and subsequent income years. For the 1977-78 income year the tax will only apply to a proportionate part of the year's income, reflecting the part of the year that commenced on 4 November 1977.

The base for the tax of 5 per cent will be, broadly, the taxable income of non-resident companies, as reduced by the exclusion of certain income included in that taxable income. One exclusion will be of dividends received by a branch of a non-resident company, and others will be for income taxed under special provisions, namely, film royalties (Division 14 of Part III of the Principal Act), shipping profits (Division 12), and certain insurance and re-insurance premiums (sections 143 and 148). In the case of non-resident life assurance companies, the tax base for the branch profits tax will be calculated by excluding from taxable income the proportion of that income that is allocated to policy holders.

Capital investment in Australian film rights (Clauses 13 to 27 and 31)

By these clauses it is proposed to amend the "industrial property" provisions of Division 10B of Part III of the Principal Act to permit capital expenditure incurred to acquire rights in or under copyrights relating to "Australian films" - which is presently deductible for income tax purposes over periods ranging up to 25 years - to be deducted over 2 income years. (Where a taxpayer holds rights under a copyright in an Australian film for less than one income year, the cost will be deductible, as at present, in the one year.) For these purposes, a film is to be treated as an "Australian film" if so certified by the Minister for Home Affairs, on the basis of matters set out in the Bill.

The 2 year write-off concession is to be available for the capital costs of Australian film rights in cases where the rights or the films to which they relate are first used for the purpose of producing income after 21 November 1977. However, an owner of film rights may elect that the quick write-off concession will not apply, in which case the write-off period will be as fixed by the present law.

Also included in the amendments proposed by these clauses are safeguarding provisions designed as a counter against certain tax avoidance arrangements that could be entered into between parties not at arm's length for the purpose of securing excessive benefits under Division 10B. These safeguards are to apply to arrangements entered into after 27 April 1978, the date on which these safeguarding measures were foreshadowed.

Additional period for distribution by liquidator (Clauses 12 and 29)

These amendments are designed to achieve the result that the undistributed profits tax provisions of the income tax law do not, in the last year of income of a private company that is being liquidated, operate to delay the final winding up of the company.

At present, a liquidator of a private company that has derived a taxable income in the early part of an income year, and who wishes as early as practicable thereafter to make a final distribution to shareholders out of that income, must wait until the last 2 months of the year before doing so. This is because a distribution is only effective to free the company from the tax on undistributed income of a year of income if it is made in the period of 12 months commencing 2 months before the end of that income year.

The amendments will enable a liquidator in such a case to be granted approval to make a qualifying distribution, in relation to an income year, during the first 10 months of that year.

Cancellation of registration of tax agents (Clause 30)

Section 251K of the Principal Act provides that a tax agent whose registration has been cancelled by a Tax Agents' Board may have the Board's decision reviewed by the Administrative Appeals Tribunal, as constituted by a presidential member of the Tribunal. Section 251K is being amended to enable the review to be undertaken by a senior non-presidential member of the Tribunal.

Notes on each clause of the Bill are set out on the following pages.

Notes on Clauses

Clause 1: Short title, etc.

This clause formally provides for the short title and citation of the Amending Act and the Income Tax Assessment Act 1936 (the "Principal Act").

Clause 2: Commencement

Section 5(1A) of the Acts Interpretation Act 1901 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act. By this clause, it is proposed that the Amending Act shall come into operation on the day on which it receives the Royal Assent.

Clause 3: Interpretation

This clause proposes an amendment to sub-section 6(1) of the Principal Act to substitute a revised definition of the term "taxable income". The amendment is a consequence of the proposed insertion, by clause 9 of the Bill, of the new Subdivision B of Division 2A of Part III.

This new subdivision relates to "current year losses" and provides for the taxable income of a company to be calculated in accordance with special rules contained in the subdivision where a disqualifying change in company ownership occurs during a year of income.

The new definition of taxable income proposed by clause 3 will have the same meaning as under the existing law in any case where the proposed subdivision does not apply. Where the new subdivision does apply, taxable income will mean the amount calculated under the proposed new section 50C.

Clause 4: Rebate on dividends

Clause 4 proposes an amendment to section 46 of the Principal Act to insert a new sub-section - sub-section (6A) - related to amendments concerning "current year losses" of companies. This sub-section is expressed, in a case where the new Subdivision B of Division 2A of Part III applies in the calculation of a company's taxable income, to establish the method of ascertaining for the purposes of applying section 46 the amount of any private company dividends and other dividends included in the taxable income of the company.

Very broadly, section 46 grants a rebate of tax on dividends which a resident company receives from another company, thereby effectively freeing those dividends from tax. Where a company which is a private company for income tax purposes receives dividends from another private company, the rebate on inter-company dividends is limited to 50 per cent of the tax payable on the dividends unless the Commissioner, on the basis of specified guidelines, considers the full rebate should be allowed.

The determination of the amount of private company dividend income and other dividend income included in the taxable income of a company is necessary in order to calculate the amount of the inter-company dividend rebate allowable to a company under section 46 and this function is at present performed by the existing sub-section 46(7).

Where the proposed new Subdivision B of Division 2A applies in the determination of a company's taxable income, the proposed sub-section (6A) provides the amount of private company dividend income and other dividend income included in the taxable income of the company to be ascertained in accordance with the proposed section 50N - see notes on section 50N.

Clauses 5 and 6: Measures relating to dividend stripping

Introductory note

These clauses are measures against tax avoidance.

Under section 46 of the Principal Act, a resident company is entitled to a rebate of tax on dividends, ascertained by applying its average rate of tax to the part of the dividends included in its taxable income. The ordinary effect of the section is to effectively free the dividends from tax. Where the payment of a dividend, however, is made in the course of an operation that the Commissioner of Taxation is satisfied was by way of dividend stripping, section 46A (in lieu of section 46), governs the determination of the rebate on such a dividend. Section 46A follows the same general lines as section 46 but contains some variations directed against dividend stripping arrangements.

In its most straightforward form, a dividend stripping operation involves the purchase by a share trading company of shares in another company which has accumulated profits, typically represented by assets such as cash in the bank. A payment of a dividend is then made to the share trading company which, in effect, wholly or substantially recoups its outlay on the purchase of the shares. The shares purchased are then resold for a reduced price or are retained at a reduced value, for income tax purposes. Either way, the share trading company would, in the absence of any measures to the contrary, receive a double benefit. First it would have a tax deductible loss represented by the difference between the purchase price and the resale price or reduced value and, second, the dividend received to recoup its outlay would be tax free. To obviate this double benefit, section 46A allows a rebate only to the extent of the net dividends received by the share trading company after taking into account deductions relating to the purchase of the shares acquired for dividend stripping purposes.

Section 46B was inserted into the Principal Act by the Income Tax Assessment Amendment Act 1978 to prevent dividend stripping arrangements being carried out by the use of associates of the dividend stripping company. Prior to the enactment of that section, section 46A could be circumvented by arrangements involving associated companies or trusts. Section 46B provides that where a dividend stripping operation is carried out by payment of the dividend, not directly to the share trader in respect of the shares acquired by it, but to an associate or associates of the trader then, notwithstanding section 46 or 46A, no inter-company rebate on the dividend is allowable.

Notwithstanding the provisions of sections 46A and 46B, tax planners have still been able to effectively obtain the double benefit on a dividend stripping operation against which those sections are directed. This can be achieved in the case of section 46A by interposing between the share trading company and the company being dividend stripped another company or a trust (invariably a unit trust). In the case of section 46B, which already provides for the interposition of companies, that provision can be circumvented by interposing a trust between the company being stripped and the share trader who acquired the original shares. As a result of interposing a company or a trust in the manner described, the company receiving the dividend does not incur a loss on the sale of shares in the stripped company, but incurs the loss on the sale of shares in the interposed company or on the sale of the beneficial interest in the interposed trust. Accordingly, the existing section 46A does not apply and the full inter-company rebate is available under section 46. In the case of section 46B, no provision is made for the interposition of a trust, and accordingly that section does not presently apply to an arrangement involving interposed trusts.

Clause 5 will amend the provisions of section 46A to provide for the case where a company or trust is interposed between the company being dividend stripped and the share trading company. Where arrangements of this nature are entered into, the amendments will enable the Commissioner to offset against the dividend received by the share trading company the losses and outgoings incurred in the acquisition of any property which has a specified connection with the dividend stripping operation. Effectively, the company receiving the dividend will be entitled to an inter-company dividend rebate only on the net dividend after offsetting those losses or outgoings.

Clause 6 will amend section 46B of the Principal Act to provide for the case where a trust is interposed in a manner similar to that already provided for in relation to the interposition of companies.

Amendments to both sections will apply in relation to dividends declared after 7 May 1978, being the date on which the Government's intention to introduce the present legislation was announced.

Clause 5: Rebate on dividends paid as part of dividend stripping operation

Clause 5 proposes a number of amendments to section 46A of the Principal Act.

Paragraph (a) of sub-clause (1) will omit the existing sub-sections (2) and (3) of section 46A and re-enact those sub-sections with some variations designed principally to detail all the various arrangements by which dividend stripping operations can be carried into effect.

The proposed new sub-section (2) replaces the existing sub-section (2) which specifies the conditions under which section 46A operates. The proposed sub-section will also perform this function. Paragraphs (a) and (b) re-enact provisions of the existing sub-section (2). Paragraphs (c) and (d) will provide for the cases, not covered by the existing sub-section, in which a company is interposed between the company being dividend stripped and the stripping company and, similarly, for the case where a trust is interposed. As with the existing sub-section (2), a condition precedent to the operation of the section will be that the shares or the beneficial interest in the trust estate should be acquired as trading stock, or in such circumstances that any profit or loss that would arise from a disposal of the property would in whole or in part constitute assessable income or be an allowable deduction to the shareholder.

New sub-section (3) substantially re-enacts with some minor drafting changes the existing sub-section (3), which states the matters which the Commissioner is required to consider when forming his opinion as to whether a dividend arises out of an operation that constitutes a dividend stripping operation, but the new sub-section also reflects changes necessary as a result of the extension of sub-section (2).

In broad terms, the matters which the Commissioner is required to consider when forming his opinion are -

(a)

whether the receipt of the dividend in respect of the shares amounts to a recoupment of the price paid for relevant property ("relevant property" is defined for the purposes of the section by sub-section (13D).);

(b)

whether the value of any relevant property is substantially reduced after acquisition by the dividend stripper and, if so, whether the reduction is wholly or mainly attributable to the payment of the dividend by the company being stripped;

(c)

whether there are any special conditions incorporated in the constituent document of the company, or imposed by any agreement, limiting the dividend stripper to a fixed or ascertainable dividend in respect of shares in the company being dividend stripped; and

(d)

any other relevant matters.

The sub-section thus requires the Commissioner to consider those features which are common to most dividend stripping operations.

Paragraph (b) of sub-clause (1) proposes the insertion of a new sub-section (8A) in section 46A, arising from the amendments being made in relation to "current year losses" - new Subdivision B of Division 2A of Part III (see notes on proposed section 50N).

Paragraph (c) of sub-clause (1) omits sub-sections (11), (12), (12A) and (12B) of section 46A from the Principal Act and substitutes three sub-sections which substantially re-enact the provisions of sub-sections (12A), (11) and (12) respectively. The revised sub-sections reflect the changes made necessary as a result of the amendments to sub-section (2). Sub-section (12B) is re-enacted, with necessary changes, as sub-section (13B) by paragraph (d) of sub-clause (1).

Sub-section (10A), which replaces, in substantially the same form, sub-section (12A), is designed to make it clear that the Commissioner may, for the purposes of sub-section (10), be satisfied that it is reasonable to offset against a dividend paid to a shareholder as part of a dividend stripping operation any deductions allowed or allowable to that shareholder, notwithstanding that those deductions might relate to the acquisition of relevant property other than the actual shares in respect of which the dividend was paid.

Sub-sections (11) and (12) which replace the existing sub-sections (11) and (12) - again substantially in the same form - are designed to bring within the operation of section 46A a dividend received by a company from a dividend stripping operation where the relevant property acquired by the dividend stripper is not acquired as trading stock, but nevertheless is acquired as part of a profit-making scheme. In these circumstances, if the acquisition of the relevant property were associated with the dividend stripping, the Commissioner would be entitled, in applying sub-sections (10) and (10A), to take into consideration the expenditure incurred on that relevant property.

Paragraph (d) of sub-clause (1) proposes the insertion into section 46A of the Principal Act of six new sub-sections which explain and expand upon the meaning of various expressions used in the section.

Proposed sub-section (13A) will explain the meaning of the expression "related to the relevant company" as that expression is used in sub-section (2) and sub-section (13D). Under paragraph (a) a company is to be taken as being related to another company (i.e., the company which is being dividend stripped) if a reduction in the value of shares in the latter company could reasonably be expected to result in a reduction in the value of shares in the first-mentioned company. Under paragraph (b) a trust estate is to be taken as being related to the company which is being dividend stripped if a reduction in the value of shares in that company could reasonably be expected to result in a reduction in the value of any property of the trust estate.

Proposed sub-section (13B) substantially re-enacts the existing sub-section (12B) in an expanded form to cater for the references in the section to an interest in a trust estate. The sub-section will extend the meaning of "share" to include an interest in a share and a right or option (including a contingent right or option) to acquire a share or an interest in a share and likewise will extend the meaning of "a beneficial interest in a trust estate" to include a right or option (including a contingent right or option) to acquire a beneficial interest in a trust estate.

Sub-section (13C) will provide that, where a person acquires shares or a beneficial interest in a trust estate in pursuance of an agreement to acquire that property, the person is to be taken to have acquired the property concerned at the time when the agreement was entered into. This will ensure that a person who agrees to acquire property, but arranges for the stripping dividend to be paid before the formal acquisition has occurred, will not escape the operation of section 46A.

Sub-section (13D) is a drafting measure which explains the meaning of the expression "relevant property" as that expression is used throughout the amended section. The particular meaning of "relevant property" will vary depending on the nature of the arrangements which are entered into by the dividend stripper. The term encompasses the shares in respect of which the stripping dividend was paid; other shares in the company being dividend stripped that were acquired by the dividend stripper at any time before the payment of the dividend; shares in another company acquired at any time before the payment of the dividend where that other company is related to the company being dividend stripped; and a beneficial interest in a trust estate acquired at any time before the payment of the dividend where that trust estate is related to the company being dividend stripped. Whether a company or a trust estate is related to the company being dividend stripped is to be ascertained in accordance with the rules specified in sub-section (13A).

Sub-sections (13E) and (13F) will extend the references in paragraph (3)(c) of section 46A and in sub-section (13C) to an "agreement" to include arrangements or understandings and to cover agreements that are not legally enforceable. Provisions comparable to these proposed sub-sections already appear in existing anti-avoidance legislation.

Paragraphs (e) and (f) of sub-clause (1) will insert in existing sub-section 46A(14) a power to amend assessments where a person acquires shares or a beneficial interest in a trust estate in pursuance of an agreement to do so, but that acquisition occurs after the end of the year of income in which the dividend stripping operation is carried out. The proposed paragraph (c) of sub-section (14) will authorise an amendment of an assessment at any time where, by virtue of sub-section (13C), an acquisition of shares or a beneficial interest in a trust estate by a person is deemed to have taken place before the end of the year of income to which the assessment relates.

The amendments proposed to be made by clause 5, other than the amendment relating to current year losses, will, by virtue of sub-clause (2) of clause 5, apply in relation to dividends paid after 7 May 1978 other than dividends declared on or before that date.

Sub-clause (3) will specify for the purposes of sub-clause (2) when a dividend is to be taken to have been declared in certain cases where a declaration is not in fact made.

Paragraph (a) of sub-clause (3) will provide, in the case where the Principal Act deems an amount paid or credited (e.g., under sections 108 or 109) or deems assets distributed (e.g., a liquidator's distribution under section 47) to be a dividend paid by a company, that the dividend is to be taken to have been declared at the time when the amount was in fact paid or credited, or the assets were in fact distributed, as the case may be.

paragraph (b) will provide, in the case where, by virtue of a provision in the constituent document of a company, a dividend may become payable without any declaration being made by the company, that any such dividend that has become payable is to be taken to have been declared at the time when it became payable.

Clause 6: Rebate not allowable in certain circumstances

Clause 6 proposes amendments to section 46B of the Principal Act to enable that section to apply where a trust estate is interposed between a dividend stripping company and the company to be stripped. Section 46B already caters for the situation where a company is interposed between the dividend stripper and the company to be stripped.

Paragraph (a) of sub-clause (1) will omit paragraphs (1)(b) and (c) of section 46B and substantially re-enact those paragraphs, with necessary variations, to insert the references to interposed trust estates.

Proposed new paragraph (b) of sub-section 46B(1) will mean that where, before the stripping dividend was paid, a person (other than the company in receipt of the stripping dividend) acquired shares in the company to be stripped, acquired shares in another company that was related to the company being stripped or acquired a beneficial interest in a trust estate which was related to the company being stripped, section 46B will (subject to the person meeting the remaining conditions precedent of the sub-section) be applicable. (Sub-section (2) explains when a company or a trust estate is to be taken as being related to the company being stripped.)

Paragraph (c) of sub-section 46B(1) re-enacts in substantially the same form the existing paragraph (1)(c) of section 46B, which at present requires that the shares associated with the dividend stripping operation be acquired as trading stock or in such circumstances that any profit or loss that would arise from a disposal of the property would in whole or in part constitute assessable income or be an allowable deduction to the shareholder. The new paragraph reflects the changes which are necessary as a result of the amendments being made to paragraph (b) and refers to "associated property" in lieu of "associated shares". The term "associated property" encompasses interests in a trust estate as well as shares in a company which is related to the company being dividend stripped.

Paragraph (b) of sub-clause (1) will make changes to the existing paragraph (1)(d) of section 46B which are consequential upon the amendments proposed to be made to paragraph (c).

Paragraph (c) of sub-clause (1) will omit sub-sections (2), (3) and (4) of section 46B of the Principal Act and substitute sub-sections which, again, substantially re-enact the provisions of the existing sub-sections but, again, with variations appropriate to the introduction of the concept of the interposed trust estate.

Proposed sub-section (2) will explain the meaning of the expression "related to the relevant company" as that expression is used in paragraph (1)(b). Under paragraph (a) a company is to be taken as being related to another company (i.e., the company which is being dividend stripped) if a reduction in the value of shares in the latter company could reasonably be expected to result in a reduction in the value of shares in the first-mentioned company. Under paragraph (b) a trust estate is to be taken as being related to the company which is being dividend stripped if a reduction in the value of shares in that company could reasonably be expected to result in a reduction in the value of any property of the trust estate.

Proposed sub-section (3) of section 46B substantially re-enacts the existing sub-section (3), but in an expanded form to cater for the newly introduced references in the section to a trust estate. The sub-section will extend the meaning of "share" to include an interest in a share and a right or option (including a contingent right or option) to acquire a share or an interest in a share and, likewise, will extend the meaning of "a beneficial interest in a trust estate" to include a right or option (including a contingent right or option) to acquire a beneficial interest in a trust estate.

Sub-section (4) replaces in substantially the same form the existing sub-section (4), but includes references to a beneficial interest in a trust estate which are necessary as a result of the amendments to paragraph (1)(b). Sub-section (4) will provide that, where a person acquires shares or a beneficial interest in a trust estate in pursuance of an agreement to acquire that property, the person is to be taken to have acquired the property concerned at the time when the agreement was entered into. This will ensure that a person who agrees to acquire property, but arranges for the stripping dividend to be paid before the formal acquisition has occurred, will not be able to escape the operation of section 46B.

Paragraph (d) of sub-clause (1) will insert into paragraph (9)(b) of section 46B, which deals with the power of the Commissioner to amend assessments for certain purposes associated with the operation of the section, a reference to a beneficial interest in a trust estate. Paragraph (9)(b) will thus authorise an amendment of an assessment at any time to disallow a rebate where, by virtue of sub-section (4), an acquisition of shares or a beneficial interest in a trust estate by a person is deemed to have taken place before the end of the year of income to which the assessment relates.

The amendments proposed by clause 6 will, by virtue of sub-clause (2), apply in relation to dividends paid after 7 May 1978, other than dividends declared on or before that date.

Sub-clause (3) will specify for the purposes of sub-clause (2) when a dividend is to be taken to have been declared in certain cases where a declaration is not in fact made.

Paragraph (a) of sub-clause (3) will mean, in the case where the Principal Act deems an amount paid or credited (e.g., under sections 108 or 109) or deems assets distributed (e.g., a liquidator's distribution under section 47) to be a dividend paid by a company, that the dividend is to be taken to have been declared at the time when the amount was in fact paid or credited, or the assets were in fact distributed, as the case may be.

Paragraph (b) will provide, in the case where, by virtue of a provision in the constituent document of a company, a dividend may become payable without any declaration being made by the company, that any such dividend that has become payable is to be taken to have been declared at the time when it became payable.

Clause 7: Heading

Clause 8: Heading to Division 3 of Part III

These clauses, which are consequential on the amendments relating to "current year losses", will vary the headings to certain provisions of the Principal Act.

By clause 7, a new heading is proposed to be inserted in the Principal Act after section 47. The heading will be -

"Division 2A - Calculation of Taxable Income".

Subdivision A of Division 2A will encompass the existing provisions of sections 48, 49 and 50 of the Principal Act which govern the calculation of taxable incomes for the general body of taxpayers. Subdivision B, to be inserted by clause 9, will provide special rules for the calculation of taxable incomes of companies where disqualifying events occur.

The heading 'Division 3 of Part III' is proposed to be omitted by clause 8 and is to be reinserted by clause 9 at the end of Subdivision B of Division 2A, so that it will cover sections, other than sections 48, 49 and 50, that now make up the Division.

Clause 9: Current year losses

Introductory note

As explained earlier in these notes, clause 7 proposes that a new Division be inserted in the Principal Act - "Division 2A - Calculation of Taxable Income". Subdivision A of the new Division is to comprise existing sections 48, 49 and 50 of the Principal Act. Clause 9 proposes the insertion of Subdivision B in the new Division and will comprise those new provisions - proposed sections 50A to 50N inclusive - containing the "current year losses" provisions.

The amendments to be effected by clause 9 are designed to prevent profits derived by a company in one part of a year of income under the proprietorship of one set 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 a different set of shareholders. Under proposed Subdivision B, the allowance of a deduction for current year losses is to be subject to the company satisfying a "continuing ownership test" or an alternative "same business test" along the lines of those in the Principal Act that apply to the deduction of prior year company losses.

Under the present law, a company may not deduct against income of a year of income a business loss incurred in a prior year unless, throughout both years, the same parties beneficially owned more than 50 per cent of shareholders' voting, dividend and capital rights or, alternatively, the company carried on throughout the whole of the later year of income, the same business as it carried on immediately before a disqualifying change in its share holdings. The proposed new provisions will apply these principles to the deduction in the assessment of income of a year of income of losses or outgoings incurred in that same year of income.

In broad terms, the proposed new Subdivision B of Division 2A is designed to divide the income year into "relevant periods", the dividing line between each such period being the time of occurrence of a disqualifying event which may be a 50 per cent or greater change in the beneficial ownership of shareholders' voting, dividend or capital rights or the setting up of a situation under which, although there is technical compliance with the continuing ownership test, persons who were not shareholders, or who were not substantial shareholders, when the losses were incurred will benefit from the company's operations at the expense of shareholders who were. Section 50H specifies the nature of the events that are to be treated as disqualifying events for purposes of the new Subdivision B.

Where such a disqualifying event or events occur to divide the income year into two or more "relevant periods" the taxable income or loss of the company for that year is to be determined in accordance with Subdivision B, as set out below.

The first step will be to calculate a notional taxable income or notional loss in respect of each such relevant period as if it were itself a year of income. This calculation takes into account amounts of income and deductions of the company that are attributable to the respective relevant periods, either specifically or by apportionment over the year of income. The amounts of certain kinds of income and deductions that cannot be so allocated to particular relevant periods or reasonably apportioned over all or some part of the income year are to be taken into account, after the calculation described in the first, second and third steps herein, for the purpose of making the final calculation of the company's taxable income for the year.

The second step is to apply the continuing ownership test or alternative same business test to the notional loss of a relevant period in relation to the notional taxable income of another relevant period to determine whether, by the company complying with either of those tests, the notional loss, or part of it, up to the amount of that notional taxable income, may be deducted in the company's assessment for the income year. A notional loss that so qualifies for deduction becomes an eligible notional loss. Where, in the same income year there is more than one relevant period for which there is a notional loss, the sum of each amount of notional loss that qualifies to be so deducted makes up the company's eligible notional loss for the income year.

The third step is to deduct from the sum of the notional taxable incomes of relevant periods in the income year -

(a)

the amount of the company's eligible notional loss for that year; and

(b)

allowable deductions for bad debts written-off and trading stock valuation adjustments. (There are special rules in the Principal Act governing deductibility of these items where a change has occurred in the company's shareholders or business.).

Subject to other special adjustments mentioned below, the remainder amount from the above calculation would represent the company's taxable income of the income year. Where that calculation results in an excess of deductions over the sum of notional taxable incomes, that excess and any notional losses that do not qualify as eligible notional losses for deduction under that calculation will be carried forward for deduction as a prior year loss in a subsequent income year, subject of course to the company satisfying the continuing ownership test or alternative same business test that applies to the deduction of prior year losses.

Special provisions are included in the new Subdivision B to take account of income that cannot by its nature be treated as income that is specifically related to a relevant period or periods or that cannot be apportioned over the income year, e.g., certain income from a trust estate.

Similarly, special provision has been made to ensure that certain kinds of deductions such as gifts, prior year losses or special deductions for capital expenditure on mining operations, etc. are taken into account in making the final calculation of a company's taxable income. This special treatment outside the calculation of a notional taxable income or notional loss for a relevant period is necessary because of limitations in the Principal Act which do not permit deductions of this kind to give rise to a carry-forward loss.

The amendments being made by clause 9 are to apply to the 1977-78 income year and subsequent years in relation to disqualifying events that occur after 7 April 1978.

The following table lists the sections that comprise the new Subdivision B of Division 2A. A more detailed explanation of these provisions is given in the notes that follow.

Section 50A: Application of Subdivision

The first of the sections in Subdivision B - section 50A - specifies the circumstances in which the Sub-division will apply and the date from which it will operate.

By reason of sub-section (1), Subdivision B will apply only where the taxpayer is a company and a disqualifying event, the nature of which is specified in proposed section 50H, is deemed to have occurred during the year of income.

Under sub-section (2), Subdivision B will apply only by reason of a disqualifying event that occurs after 7 April 1978.

The sub-section also means that a disqualifying event will be treated as not having occurred in relation to a company that is not a private company for income tax purposes in relation to the year of income where the Commissioner of Taxation considers that it would be unreasonable to treat a disqualifying event as having occurred. This rule matches the rule contained in paragraph (a) of sub-section 80A(1) in relation to prior year losses. It recognises that it would be impracticable to determine with complete accuracy whether a disqualifying event has occurred in relation to each sale of shares in a large public company. Difficulties could also occur in identifying the beneficial owners of shares registered in the names of nominees or other trustees. The Commissioner will, of course, have authority to seek and obtain such information as may be available to assist him in reaching a decision on the matter.

Section 50B: Interpretation

Proposed section 50B is an interpretation provision that ascribes particular meanings to a number of terms and expressions that are used in the new Subdivision B. It also specifies the manner in which notional taxable incomes and notional losses are to be calculated, the treatment to be accorded to a company's interest in a partnership net income or partnership loss and provides technical definitions in relation to a number of other matters.

Sub-section (1) definitions are as follows -

`excepted amount' will mean an amount (of assessable income) that is a full-year amount (as defined in this sub-section) or a divisible amount (as defined by section 50E);

`excepted deduction' describes an allowable deduction that is a full-year deduction (as defined by section 50F) or a divisible deduction (as defined by section 50G);

`full-year amount' will mean so much of any amount that is included in the assessable income of the company of the year of income under section 97 (i.e., the company's share in the net income of a trust estate as a presently entitled beneficiary) as is not a divisible amount (see notes on paragraph 50E(1)(j) in relation to such a company;

`income period' will mean a part of the income year that is a 'relevant period' in respect of which the company is deemed to have a notional taxable income (see notes on sub-section (2) of this section);

`loss period' will mean a part of the income year that is a relevant period in respect of which the company is deemed to have a notional loss (see notes on sub-section (3) of this section);

`natural person' is defined as meaning a person other than a company;

`relevant period' is the term used to describe any of the following periods -

(a)

where only one disqualifying event, (e.g., a 50 per cent or greater change in company ownership) is deemed to have occurred in relation to a company during the year of income -

(i)

the period commencing at the commencement of the year of income and ending immediately before the time when the disqualifying event occurred; and

(ii)

the period commencing at the time when the disqualifying event occurred and ending at the end of the year of income;

(b)

where 2 or more disqualifying events are deemed to have occurred in relation to a company during the year of income -

(i)

the period commencing at the commencement of the year of income and ending immediately before the first of those disqualifying events is deemed to have occurred;

(ii)

the period commencing at the time when the last of those disqualifying events is deemed to have occurred and ending at the end of the year of income; and

(iii)

each intervening period commencing at the time when one of those disqualifying events is deemed to have occurred and ending immediately before the time when the next of those disqualifying events is deemed to have occurred;

`whole day' will mean a period of 24 hours.

Sub-section (2) matches the ordinary meaning of "taxable income" specified in section 48 of the Principal Act - assessable income less allowable deductions. Where the assessable income of a company in a relevant period exceeds the allowable deductions of the company in that relevant period, the excess will be the notional taxable income of the company for that period.

Similarly, sub-section (3) adopts the basic approach of section 80 of the Principal Act. By it, a company will have a notional loss in respect of a relevant period to the extent that the allowable deductions of the company for the period exceed the assessable income derived by the company in that period.

For the purposes of sub-sections (2) and (3) of section 50B, sub-section (4) will identify the amounts of assessable income and the allowable deductions that are to be taken into account in relation to a relevant period in calculating the notional taxable income or the notional loss for that period.

Under paragraph (a) of sub-section (4) the assessable income of a company in respect of a relevant period will include the sum of -

(i)

any amounts (other than "excepted amounts") that would be included in the assessable income of the company of the year of income if the year of income were constituted by that relevant period; and

(ii)

any amounts that are deemed to be included by section 50E (i.e., divisible amounts) in the assessable income of the company of that relevant period.

The assessable income of a company for a relevant period will include the increase in value of trading stock on hand as at the end of that relevant period as compared with the value at the beginning of that period. This will follow from treating a relevant period as if it constituted a year of income. Trading stock that is brought to account in this way will, of course, also constitute the opening stock of the immediately following relevant period.

Paragraph (b) identifies the following amounts as allowable deductions of a company in respect of a relevant period -

(i)

deductions (other than "excepted deductions") that would be allowable to the company under the Principal Act in relation to the year of income if the year of income were constituted by that relevant period; and

(ii)

any amount that is deemed by section 50G (i.e., a divisible deduction) to be an allowable deduction in respect of the relevant period.

Allowable deductions of a relevant period will include the excess of the value of trading stock on hand at the beginning of that period over the value at the end of that period and any trading stock purchased in that relevant period.

Sub-section (5) is a drafting measure to the effect that any amount that would be included in assessable income or allowed as a deduction in calculating the company's taxable income for a year of income under section 48 of the Principal Act is an amount that is to be included in the company's assessable income or allowed as a deduction where Subdivision B applies in relation to the company for that year of income.

Sub-sections (6) to (9) of section 50B will cover the situation where a company to which Subdivision B applies is a member of a partnership from which it derives a share of the net income of the partnership or is entitled to a deduction for its share of the partnership loss. The broad aim of sub-sections (6) to (9) is to calculate, in relation to a period in the income year of a partnership that is the same period as a relevant period of a company that is a partner in the partnership, the notional net income of the partnership or the notional partnership loss on the same basis as if that partnership were a company for which a notional taxable income or notional loss were being ascertained in relation to that relevant period.

Sub-section (6), as affected by sub-sections (8) and (9), will apply for this purpose where the period that constitutes the year of income of the company is the same period as the period that constitutes the same year of income of the partnership. In the notes that follow on sub-sections (6) to (9), references to a "partnership relevant period" are to be read as a reference to a period of the partnership's year of income that is the same period as the relevant period of the company that is a partner in the partnership. Sub-section (7) will apply where the partnership and the company have different accounting periods in relation to the same income year.

Sub-section (6) will provide the general basis upon which a partnership is to be deemed to have a notional net income or a notional partnership loss, as the case may be, in respect of a partnership relevant period. Sub-section (8) identifies the amounts of assessable income and allowable deductions to be taken into account for this purpose.

Sub-section (7) will apply where the period that constitutes the partnership's income year is not the same period as the period that constitutes the member company's year of income. In these circumstances the partnership will not have a notional net income or a notional partnership loss in respect of a partnership relevant period.

However, where sub-section (7) applies, paragraph (2)(k) of section 50E and paragraph (2)(o) of section 50G will authorise the Commissioner to take into account in respect of a relevant period of the company, such amounts of the member company's share of the net income of the partnership or of the partnership loss as he considers reasonable in the circumstances. This broad approach is necessary to deal with the complexities that can arise from the corporate partner and its partnership having adopted different accounting periods for taxation purposes in respect of the same financial year.

Sub-section (8) will identify for the purposes of sub-section (6), the amounts of assessable income and allowable deductions that are to be taken into account in ascertaining the partnership's notional net income or notional partnership loss in respect of a partnership relevant period.

Paragraph (a) of sub-section (8) will include in the assessable income of the partnership relevant period -

(i)

amounts of income (other than "excepted amounts") that would be included in the partnership's assessable income of the year of income if that year of income were to be constituted by that relevant period; and

(ii)

amounts that are "divisible amounts" (section 50E) and are deemed by the operation of sub-section (9) in relation to that section for purposes of sub-section (8) to be included in the assessable income of that relevant period.

Paragraph (b) will authorise as deductions allowable in respect of the partnership relevant period -

(i)

deductions (other than "divisible deductions" and full year partnership deductions (section 50F)) that would be allowable to the partnership under the Principal Act in relation to a year of income if that year were constituted by that relevant period; and

(ii)

amounts that are "divisible deductions" (section 50G) that are deemed by the operation of sub-section (9) in relation to that section for the purposes of sub-section (8) to be allowable partnership deductions in respect of that relevant period.

Sub-section (9) is, for the purposes of sub-section (8), designed to apply the provisions of section 50B, section 50E and section 50G to a partnership as if that partnership were a company, in determining, in respect of a partnership relevant period -

(a)

whether, in relation to the partnership, an amount is an 'excepted amount' or a deduction is a 'divisible deduction'; and

(b)

whether an amount is deemed to be included in the assessable income of the partnership or whether an amount is deemed to be an allowable deduction of a partnership.

Sub-section (10) is designed to cover situations where a disqualifying event has occurred in relation to a company at a particular time during a day or where one or more disqualifying events have occurred within the space of one day and it is necessary to determine for the purposes of Subdivision B how many whole days there are in a relevant period. For example, the apportionment of certain deductions is to be made by reference to the number of whole days in a relevant period, expressed as a proportion of the number of days in the year of income.

Paragraph (a) provides that where a "nominated period" (see below) consists of more than 12 hours and less than 24 hours that period will be deemed to be one whole day.

Under paragraph (b), where a nominated period consists of one or more days and more than 12 hours of another day, the number of whole days in the nominated period will be deemed to consist of the number of whole days it contains plus one.

Sub-section (11) defines a nominated period for the purposes of sub-section (10). Paragraphs (a) and (d) refer to periods that are relevant periods. Paragraphs (b) and (c) refer to periods that are mentioned in relation to divisible amounts (section 50E) or divisible deductions (section 50G) where those amounts, or those deductions are to be pro-rated over a period that runs from the time that the income was derived or the expenditure was incurred to the end of a relevant period or the end of the year of income. For example, borrowing expenses are to be apportioned rateably over the period for which moneys have been borrowed. Where the period of the loan extends over more than one relevant period and the loan was obtained in the middle of a relevant period, the deduction allowable in the first relevant period would be calculated on a time basis over the balance of that relevant period.

Sub-section (12) will apply where the year of income of a company is not constituted by 365 days. This could happen in a 'leap' year or where a company is dissolved or incorporated during the year of income. In that situation, a reference in the Subdivision to 365 is to be read as a reference to the number of days in that year of income.

Section 50C: Calculation of taxable income

Sub-section (1) of section 50C is the operative provision which will provide for the taxable income of an income year of a company to which Subdivision B applies to be calculated under section 50C rather than under the provisions of section 48 of the Principal Act.

Sub-sections (2) and (3) set out the basis for ascertaining the company's taxable income for such an income year. The formula has been divided into two parts to enable either a carry-forward loss to be determined under the sub-section (2) calculation or, where the income exceeds the amount of that class of deductions taken into account in the sub-section (2) calculation, to permit other classes of full-year deductions to be applied in accordance with sub-section (3) up to the amount of that excess. An example of the operation of these two sub-sections follows the notes on this section.

By sub-section (2), the taxable income of the company will, subject to sub-section (3), be the amount (if any) remaining after deducting from the sum (the 'income amount') of -

(a)

the sum of any notional taxable incomes in respect of relevant periods of the company; and

(b)

any "full-year amounts" that are to be included in the assessable income of the company (e.g., income from a trust estate in certain circumstances);

the sum (the "deductible amount") of -

(c)

the amount of any eligible notional loss of the company (section 50D);

(d)

any full-year deductions that are allowable to the company in respect of bad debts under section 51 or section 63 of the Principal Act or trading stock valuation adjustments under Subdivision BA of Division 3 of that Act; and

(e)

any "partnership deductions" (section 50F) that, by the operation of sub-sections 50F(3), and (4), are allowable in relation to the company in relation to the year of income. ('Partnership deductions' is a term that is used by sub-section 50F(3) to describe certain full-year deductions specified in section 50F, including trading stock valuation adjustments and full-year deductions of the kind listed in sub-section (3) of section 50C that are allowable to partnerships).

As explained later in these notes in relation to the amendment proposed to be made by clause 10 to section 80 of the Principal Act, the amount by which the "deductible amount" exceeds the "income amount" will form part of any carry-forward loss for the year of income.

Sub-section (3) will apply only where -

(a)

the income amount exceeds the deductible amount ascertained under sub-section (2); and

(b)

full-year deductions as specified in sub-section 50F(1) (other than deductions allowable for bad debts or trading stock valuation adjustments) are allowable to the company for the year of income.

In these circumstances the taxable income of the company of the year of income will be the amount that remains after deducting successively from the excess of the income amount referred to in paragraph (a), to the extent of that excess, the following classes of full-year deductions -

(i)

deductions allowable under section 77B or 78 for calls on shares, gifts, pensions, etc;

(ii)

investment allowance deductions to leasing companies under Subdivision B of Division 3;

(iii)

deductions allowable under section 80 or 80AA for losses of previous years;

(iv)

deductions allowable under Division 10 or Division 10AA for allowable capital expenditure incurred by general mining and petroleum mining companies;

(v)

deductions allowable under section 122J or 124AH for expenditure incurred on exploration and prospecting for minerals including petroleum; and

(vi)

deductions allowable under Division 16C for income equalisation deposits.

Each of the provisions governing deductions that are specified as full-year deductions (other than those relating to bad debts and trading stock valuation adjustments) contain in-built limitations that prevent the allowable deduction exceeding the amount of income remaining after allowing certain other allowable deductions. These deductions are listed above in their paragraph 50C(3)(d) order which is the order in which they are deductible under the Principal Act. Where any one of those deductions exhausts the amount of the excess of the income amount, no lower class of deduction is allowable. Moreover none of the sub-section (3) classes of deductions may give rise to a carry-forward loss.

Sub-section (4) specifies the order in which the full-year deductions referred to in sub-section (3) may be applied successively against any excess amount of income arising from the application of sub-section (2) to the point where all of those deductions or the excess amount is exhausted.

Example

Assume that three disqualifying events have occurred in relation to a company in a year of income in which notional taxable incomes of $10,000 and $20,000 and notional losses of $5,000 and $10,000 have been ascertained in respect of the four relevant periods. Because of the nature of one of the disqualifying events, the $5,000 notional loss does not qualify as an eligible notional loss.

The notional loss of $5,000 that is excluded from the above calculation because it does not qualify as an eligible notional loss may be available for carry forward under section 80 if it meets the requirements of the prior year loss provisions.

Section 50D: Eligible notional loss

Proposed new section 50D is designed to apply the "continuing ownership test" or the alternative "same business test" to determine whether a notional loss incurred in a relevant period by a company is to qualify for inclusion in the company's eligible notional loss for the income year that is to be taken into account in calculating under section 50C the company's taxable income for that year. Essentially, the tests employ the established rules that apply to govern the allowance of prior year company losses, with necessary adaptations to deal with the "reverse" situation where an income period of a year of income precedes a loss period of the same year. An "income period" is a relevant period of an income year in respect of which the company is deemed to have a notional taxable income. A "loss period" is a relevant period of the income year in respect of which the company is deemed to have had a notional loss.

Sub-section (2) will apply the continuing ownership test, while sub-sections (4) and (6) will apply the "same business" test to determine whether a notional loss will qualify for inclusion in the company's eligible notional loss for the income year. Under sub-section (13), the Commissioner is required to apply these tests in an order that will be to the company's best advantage, i.e., to enable the maximum possible amount of notional losses to qualify for inclusion in the company's eligible notional loss (see example at end of notes on this section).

Safeguards are included in proposed sections 50H and 50K along the lines of safeguards in sections 80DA and 80B of the Principal Act that apply for purposes of the deduction allowable for prior year company losses. In very broad terms, the effect of these safeguards is that, notwithstanding that there may have been a technical compliance by the company with the continuing ownership test in accordance with the requirements of section 50D, the notional loss will not be taken into account as an eligible notional loss or as part of the eligible notional loss where there are arrangements in existence under which persons who were not shareholders in the company, or persons who were not substantial shareholders in the company, during the loss period, will benefit from activities in relation to the company's affairs at the expense of persons who are shareholders.

Sub-section (1) of section 50D will, for the purposes of Subdivision B, have the effect that the eligible notional loss of a company for a year of income is the sum of the amounts of notional losses of loss periods in the year that, by reason of sub-sections (2), (4) and (6), are to be taken into account in ascertaining the eligible notional loss of the company for that year.

Sub-section (2) will apply where a company satisfies the Commissioner that, at all times during a loss period, shares in the company carrying between them -

(a)

the right to exercise more than one-half of the voting power in the company;

(b)

the right to receive more than one-half of any dividends that might be paid by the company; and

(c)

the right to receive more than one-half of any distribution of capital of the company,

were beneficially owned by natural persons who beneficially owned shares in the company carrying between them rights of those kinds -

(d)

at all times during an income period; or

(e)

at all times during two or more income periods.

In that case, so much of the notional loss from a loss period as has not already been taken into account by the previous application of sub-sections (4) and (6) will be taken into account in determining the eligible notional loss of the company.

The amount of the notional loss that is to qualify as part of the eligible notional loss of a company is, however, by virtue of paragraphs (f) and (g) of sub-section (2), not to exceed the amounts of the notional taxable incomes derived in the income periods referred to in paragraphs (d) and (e) and that remain unappropriated by any previous application of sub-section (2) or of sub-sections (4) and (6).

Section 50J, as affected by section 50K, will enable the tracing at any time, for the purposes of sub-section (2), of the ownership of shares in a company through interposed companies to the natural persons who are the ultimate beneficial owners of those shares.

Sub-section (3) will preclude a notional loss of a loss period or a notional taxable income of an income period from being taken into account in ascertaining the amount of the eligible notional loss by a company that satisfies the continuing ownership test under sub-section (2) where there occurred at the commencement of that loss period and that income period any one of the kinds of disqualifying events specified in paragraphs (d) to (h) of sub-section 50H(1). These are disqualifying events which, while they bear no relationship to whether the continuity of shareholders' rights in the company has been disturbed, are events with a tax avoidance connotation. It can be expected that where a loss period or an income period has been created by the occurrence of such a disqualifying event, it will have been done in this way to ensure that, notwithstanding the tax avoidance potential of that disqualifying event, the requirements of the continuing ownership test will, nevertheless, be satisfied. If a notional loss fails to so qualify by reason of paragraph (1)(d) of section 50H, it may nevertheless qualify as part of the eligible notional loss if the company satisfies the same business test.

Sub-sections (4) and (6), in conjunction with sub-section (8), will apply a "same business test" to determine whether a notional loss of a loss period should become part of the company's eligible notional loss for the income year. This test follows the principles that apply under section 80E of the Principal Act to determine eligibility for deduction of prior year losses of companies.

Sub-section (4) will apply the same business test to a loss period that precedes a "subsequent continuous business period" which is defined in sub-section (8) as a period commencing at the end of the loss period and ending at the end of an income period, during the whole of which the company carried on the same business as it carried on at the end of the loss period. Under this definition, the subsequent continuous business period could consist of a number of contiguous relevant periods comprising, for example, a loss period, an income period, a loss period and ending with an income period.

The same business test requirement of sub-section (4) is that the company carried on during the whole of that subsequent continuous business period the same business as it carried on at the end of the loss period and did not, at any time during that subsequent continuous business period -

(a)

derive income from a business of a kind that it did not carry on, or from a transaction of a kind that it had not entered into in the course of its business operations, before the end of the loss period; or

(b)

incur expenditure in carrying on business of a kind that it did not carry on, or as a result of a transaction of a kind that it had not entered into in the course of its business operations, before the end of the loss period.

Where these tests and the further safeguard in sub-section (5) are satisfied, so much of the notional loss of the loss period as has not already been taken into account by previous applications of sub-sections (2) and (6) will be included in the company's eligible notional loss for the year. However, the loss to be included will, again, be limited by paragraphs (4)(c) and (4)(d), to so much of the notional taxable incomes derived in the subsequent continuous business period as has not been already taken into account by a previous application of sub-section (4) or of sub-sections (2) and (6) in ascertaining the amount of the company's eligible notional loss for the income year.

Sub-section (5) will impose a further safeguard in the application of the same business test under sub-section (4). This also follows principles that apply under the prior year company loss provisions of the Principal Act. Its purpose is to counter special arrangements under which a company that has incurred a loss in a loss period or anticipates incurring a loss in that period, commences to carry on a new business or enters into a new kind of transaction prior to a contemplated change in its share holdings.

If the purpose of the commencement of the new business, or the entering into the new kind of transaction, is to enable the notional loss incurred in the loss period to qualify as an eligible notional loss under sub-section (4) or for the purpose of enabling a notional taxable income to be taken into account in relation to that loss period, sub-section (4) will not apply in respect of that loss period. Under circumstances of this kind, sub-section (5) will not permit the notional loss of the loss period to qualify for inclusion in the company's eligible notional loss for the income year by applying the same business test under sub-section (4).

Sub-section (6) will apply the same business test to a loss period that is included in, and occurs at the end of, a "prior continuous business period" where the prior continuous business period is preceded by an income period. As defined in sub-section (8), a prior continuous business period is a period, commencing at the end of an income period and ending at the end of the loss period, during the whole of which the company carried on the same business as it carried on at the end of the income period. A prior continuous business period may consist of a number of contiguous relevant periods comprising, for example, a loss period, an income period and ending with a loss period.

The same business test requirement of sub-section (6) is that the company carried on during the whole of that prior continuous business period the same business as it carried on at the end of the income period and did not, at any time during that prior continuous business period -

(a)

derive income from a business of a kind that it did not carry on, or from a transaction of a kind that it had not entered into in the course of its business operations, before the commencement of that prior continuous business period; or

(b)

incur expenditure in carrying on a business of a kind that it did not carry on, or as a result of a transaction of a kind that it had not entered into in the course of its business operations, before the commencement of that prior continuous business period.

Where these tests and the further safeguards in sub-section (7) are satisfied, so much of the notional loss of the loss period as has not already been taken into account by previous applications of sub-sections (2) and (4) will be included in the company's eligible notional loss for the year but again limited, by paragraphs (6)(c), (6)(d) and (6)(e) to so much of the notional taxable incomes derived in the prior continuous business period and the income period that precedes it as has not been taken into account by a previous application of sub-section (6) or of sub-sections (2) and (4) in ascertaining the amount of the company's eligible notional loss for the income year.

Sub-section (7) will apply a further safeguard in the application of the same business test under sub-section (6) along identical lines to the additional safeguard provided by sub-section (5) in relation to the sub-section (4) same business test. Similarly, sub-section (7) will not permit the notional loss of the loss period to qualify for inclusion in the company's eligible notional loss for the income year by applying the same business test under sub-section (6) where the company commenced to carry on a new business or entered into a new kind of transaction prior to a contemplated change in shareholders for the purpose, in broad terms, of ensuring a deduction for losses incurred or anticipated in a loss period.

Sub-section (8) defines the terms "prior continuous business period" and "subsequent continuous business period" which have been explained in the notes on sub-sections (6) and (4) respectively.

Sub-section (9) will qualify the operation of sub-sections (4) and (6) by precluding the application of the same business test in relation to any loss period or income period that has been created by the occurrence of a disqualifying event of the kind specified in paragraphs (e) to (h) of sub-section 50H(1). This is consistent with the prior year company loss provisions of the Principal Act under which the same business test cannot apply to authorise a deduction for a prior year company loss that has been disallowed because of the occurrence of a disqualifying event of that kind.

Sub-sections (10), (11) and (12) will authorise the Commissioner of Taxation to determine the order in which sub-sections (2), (4) and (6) may be applied to loss periods for the purpose of ascertaining the amount of the eligible notional loss of a company for the year of income and sub-section (13) will require the Commissioner to make that determination in a manner that will be the most beneficial to the company in relation to the year of income.

For example, if a company had five relevant periods in a year of income as the result of four disqualifying events and the trading results of those relevant periods were -

and the sub-section (2) "continuing ownership" test is satisfied between periods 1 and 4, the sub-section (4) "same business" test is satisfied between periods 1 and 2 and the sub-section (6) "same business" test is satisfied between periods 4 and 5, the order in which those sub-sections are applied can materially affect the quantum of the eligible notional loss. If the period 1 loss is deducted from the period 4 income and the period 5 loss is deducted from the period 4 income, the maximum eligible notional loss would be $15,000.

In these circumstances, however, sub-section (13) would require the Commissioner to apply the period 1 loss against period 2 income, the balance of the period 1 loss ($5,000) against period 4 income and the period 5 loss against the balance of the period 4 income ($10,000). The eligible notional loss under this order of application is $18,000.

Section 50E: Divisible amounts of assessable income

The new section 50E will specify what are divisible amounts of assessable income for the purposes of Subdivision B. These represent classes of income which are for purposes of the current year losses provisions to be spread by section 50E over the relevant periods that comprise a year of income of a company. By the definition in sub-section 50B(1), "excepted amount" includes a divisible amount.

As explained earlier in these notes, sub-section 50B(9) applies the provisions of section 50E to determine whether an amount of assessable income of a partnership is an excepted amount in respect of a period that is a relevant period of a company which is a partner in that partnership, as if the reference to the partnership were a reference to the company. For this purpose, the kinds of amounts that are described in section 50E as divisible amounts of a company are, as appropriate, also to be treated as divisible amounts of a partnership.

Sub-section (1) identifies, in terms of the relevant sections of the Principal Act, those classes of income included in the assessable income of a company that are to be treated as divisible amounts of assessable income for the purposes of Subdivision B -

Where the Commissioner of Taxation considers that the whole or a part of income derived by the company as a share of the net income of a trust estate was derived during a period that is a relevant period in relation to the company, that share, or a part of that share, as the case may be, of that net income is to be treated as a divisible amount. Any amount not so included is to be treated as a "full-year amount" in accordance with the definition of that term in sub-section 50B(1). This approach to the treatment of trust income has been dictated by the varied circumstances under which income from a trust estate may be derived and by the extreme difficulties associated with any attempt to formulate detailed rules that would be appropriate to all of those circumstances.

Sub-section (2) will call for the divisible amounts of assessable income to be apportioned, for the purposes of sub-paragraph (a)(ii) of sub-section 50B(4), in a manner appropriate in the light of the normal operation of the particular provisions.

The following table shows the manner in which each class of divisible amount is to be apportioned in relation to a year of income in which a disqualifying event occurs -

Paragraphs (j) and (k) will authorise apportionment of the share of net income of a partnership that is derived by a partner that is a company - and that is a divisible amount - where there has occurred a disqualifying event in relation to the company, and the income years of the partnership and the company correspond. In these circumstances sub-section 50B(6) will require, for the purpose of ascertaining the notional taxable income of the company for a relevant period in that income year, that the partnership be deemed to have relevant periods that correspond with the company's relevant periods and that for those relevant periods the partnership have notional taxable incomes or notional partnership losses for purposes of applying Subdivision B in the company's assessment for the income year.

Sub-paragraph (j)(i) applies where the partnership has a net income for the year as a whole and treats the amount of the company's share of notional net income of the partnership for the relevant period as being the divisible amount to be included in the assessable income of the company of that period. Sub-paragraph (ii) quantifies the company's share of notional net income of the partnership for the relevant period where the partnership has sustained a partnership loss for the income year as a whole. Sub-paragraph (iii) will apply where the partnership did not derive a net income or sustain a partnership loss for the income year and will authorise the Commissioner of Taxation to include in a relevant period of the company so much of the notional net income of the partnership of that period as he considers fair and reasonable.

Paragraph (k) will apply where the income years of the partnership and company do not coincide because they have adopted different accounting periods for income tax purposes. In these circumstances, the Commissioner of Taxation is to be empowered to include in the assessable income of the company of a relevant period, so much of the divisible amount (i.e., the share of the net income of the partnership) as he considers fair and reasonable having regard to all the relevant circumstances. This broad authority is necessary to meet the varied circumstances that may arise from the company and the partnership having different accounting periods. The exercise by the Commissioner of this power will be subject to the usual rights of objection and reference to a Taxation Board of Review.

Section 50F: Full year deductions and partnership deductions

The proposed new section 50F describes those allowable deductions of a company that are to be excluded from the calculation of the notional taxable income of a relevant period because it is more appropriate for them to be brought to account in the final calculation of the company's taxable income for the year rather than be dissected between relevant periods. It also specifies in respect of a company in relation to which a disqualifying event has occurred in the income year and which is a member of a partnership, those allowable deductions of the partnership that are to be treated, to the extent of the company's interest in the partnership, as full-year deductions in the company's assessment for the income year. These are the deductions that, by virtue of sub-section 50F(3), are referred to in Subdivision B as "partnership deductions".

Sub-section (1) identifies, on the basis of provisions of the Principal Act, the allowable deductions of a company that are to be classed as full-year deductions. These are -

(a)

deductions for bad debts allowable under section 51;

(b)

investment allowance deductions allowable to a leasing company, to the extent permitted by section 82AC;

(c)

any deduction allowable under -

section 63 -	for bad debts;
section 77B -	for calls on shares paid by a holding company;
Section 78 -	for gifts, calls on shares or for pensions, gratuities or retiring allowances for the company's employees or dependants;
sections 80 and 80AA -	for prior year losses;
Subdivision BA of Division 3 -	for trading stock valuation adjustments;
Division 10AA (other than section 124AM) -	for expenditure on exploration for and development of petroleum fields;
Division 16C -	for income equalisation deposits; and

(d)

subject to sub-section (2), deductions allowable under Division 10 (other than section 122K) - for expenditure on exploration and mining for minerals other than petroleum.

Deductions allowable under sections 124AM and 122K occur in relation to the disposal, loss or destruction, etc. of property in respect of which a balance of the cost has still to be written-off under Division 10AA or Division 10. These deductions are to be allowed in the relevant period of the company in which the disposal, loss or destruction occurs.

Sub-section (2) will apply where a deduction under sections 122D or 122DB of Division 10 of the Principal Act for residual capital expenditure is allowable and the company has made an election under those sections. In that case the deduction is not to be a full-year deduction. In these circumstances, proposed section 50G will deem the deduction to be a divisible deduction that is to be spread over the year of income. This is because, by reason of the election, the deduction will not be limited to the net income of the year of income by the provisions of sub-section 122D(3) or 122DB(3) of the Principal Act.

Sub-section (3) is designed, for the purposes of Subdivision B, to take account of the full-year deductions of a partnership - of which the company concerned is a member - in calculating the taxable income of the company.

Paragraph (a) of the sub-section will apply where at any time during the year the company was a member of a partnership, a full-year deduction is allowed or allowable to the partnership, the year of income of the company and the partnership correspond, and the partnership had a net income for that year. In this situation, so much of the full-year deduction as is proportionate to the company's individual interest in the net income will be a 'partnership deduction' in relation to the company. The effect of this is to include that partnership deduction in the "deductible amount" that is taken into account for purposes of sub-section 50C(2) in calculating the taxable income of the company for the year of income.

Paragraph (b) makes a similar provision where the partnership concerned suffers a partnership loss. It deems a proportionate part of any full-year deduction of the partnership to be a 'partnership deduction' in relation to the company for the year of income.

Paragraph (c) will apply in the same manner where the partnership does not derive a net income and does not sustain a partnership loss in a year of income that corresponds with the year of income of the company. In these circumstances, the Commissioner of Taxation is to be authorised to allow to the company, as a 'partnership deduction', a proportionate part of the full-year partnership deduction to the extent that he considers it fair and reasonable to do so having regard to the company's individual interest in the partnership.

Where a partnership's year of income and the year of income of a company that is a member of that partnership do not coincide, it is intended that the company be allowed a partnership deduction of so much of the full-year partnership deduction as is fair and reasonable having regard to all the relevant circumstances.

For purposes of calculating a company's 'partnership deduction' in accordance with sub-section (3) sub-section (4) specifies the allowable deductions of a partnership in relation to a year of income that are to be classified as full-year partnership deductions. These are -

(a)

any deduction allowable to the partnership under the following provisions of the Principal Act -

section 78 -	for gifts, calls on shares, pensions, gratuities or retiring allowances for employees or dependants;
Subdivision BA of Division 3 -	for trading stock valuation adjustments;
Division 10AA (other than section 124AM) -	for expenditure on exploration for, or development of, petroleum fields; and

(b)

subject to sub-section (5), any deduction allowable to the partnership under Division 10 (other than section 122K) for expenditure on exploration or mining for minerals other than petroleum.

Notes relating to sections 124M and 122K appear at the end of the notes on sub-section (1).

Sub-section (5) will, where a partnership has made an election under section 122D or 122DB of Division 10 of the Principal Act, have the effect that a deduction under that section is not to be a full-year partnership deduction. In these circumstances, paragraph (1)(b) of section 50G treats that deduction as a divisible deduction of the company to the extent of the company's interest in the partnership.

Section 50G: Divisible deductions

This section will specify, for purposes of Sub-division B, the allowable deductions of a company in relation to a year of income that are to be treated as divisible deductions and the manner in which those divisible deductions are to be taken into account. These are deductions that may be taken into account in a particular relevant period or pro-rated over a number of relevant periods.

Divisible deductions are "excepted deductions" as defined in sub-section 50B(1). As explained in the notes on that section, an effect of sub-section 50B(9) is to apply section 50G to determine whether an allowable deduction of a partnership is to be treated as an excepted deduction in relation to the partnership in respect of a period that is a relevant period of a company as if the reference to a partnership were a reference to the company. As a consequence, deductions of the kind specified in section 50G as divisible deductions of a company in respect of a relevant period are also to be regarded as divisible deductions of a partnership for a relevant period to determine the notional net income or notional partnership loss of the partnership for that relevant period.

Sub-section (1) of section 50G identifies, in relation to provisions of the Principal Act, deductions that are to be treated as divisible deductions for purposes of Subdivision B. These are as follows -

(a)

any deduction allowable to the company in relation to the year of income under -

section 54 -	depreciation on plant etc;
section 57AA -	special depreciation allowance to primary producers;
section 57AB -	depreciation on property used for primary production in the Northern Territory;
section 62A -	expenditure pursuant to a franchise;
section 67 -	expenses of borrowing;
section 70 -	cost of extending telephone lines;
sub-section 73A(2) -	capital expenditure on a building for scientific research;
section 75A -	capital expenditure on land used for primary production;
section 88 -	certain leasehold expenditure;
section 92 -	notional partnership loss (see further explanation dealing with paragraphs (o) and (p) of sub-section 50G(2));
Division 10AAA (other than section 123C) -	capital expenditure on certain mineral transport facilities;
Division 10A (other than section 124G or 124JB) -	capital expenditure on access roads for timber operations or on timber mill buildings; or
Division 10B (other than section 124N) -	capital expenditure on a unit of industrial property; and

(b)

any deduction allowable under section 122D or 122DB for capital expenditure on mining operations where an election has been made by the company under that section.

The exceptions mentioned in relation to Divisions 10AAA, 10A and 10B are of provisions that permit the balance of expenditure not previously written off to be deducted when property is disposed of, lost or destroyed, etc. It is intended that deductions allowable in these circumstances will be deductible in the relevant period during which the disposal, loss or destruction, etc. occurs.

Sub-section (2) describes the manner in which the divisible deductions of a company are to be allowed in relation to a relevant period of a year of income for the purposes of sub-paragraph (b)(ii) of sub-section 50B(4). In some cases the divisible deductions are to be pro-rated over the balance of a year of income in which the relevant section first applies (referred to in these notes as a "first year allowance"). In other cases, the divisible deduction is to be allowed in the calculations for a particular relevant period where the nature of the deduction requires this to be done.

The following table sets out the bases on which the divisible deductions are to be allowed in accordance with sub-section (2) in calculating the notional taxable income or the notional loss of a company for a relevant period.

Paragraph (2)(o) of section 50G will apply where, during the whole or a part of the relevant period, a company was a partner in a partnership that had a notional partnership loss in respect of the relevant period. Under sub-paragraph (i), if the partnership had a net income for the year of income, a deduction is to be allowed to the company in the relevant period of so much of the notional partnership loss as is proportionate to the individual interest of the company in the net income of the partnership. Where the partnership incurred a partnership loss in the year of income, sub-paragraph (ii) authorises a deduction in the relevant period of so much of the notional partnership loss as is proportionate to the individual interest of the company in the partnership loss. In any other case, that is, where the partnership trading result is "all-square", sub-paragraph (iii) allows a deduction in the relevant period of so much of the notional partnership loss of the relevant period as the Commissioner of Taxation considers fair and reasonable having regard to the extent of the interest of the company in the partnership.

Paragraph (2)(p) of section 50G will operate where a divisible deduction is allowable to a company under section 92 in respect of its individual interest in a partnership loss incurred by a partnership in a year of income and the period that constitutes the year of income of the partnership is not the same period as the period that constitutes the year of income of the company. In this case the amount of the divisible deduction allowable is to be so much of the partnership loss as the Commissioner of Taxation considers fair and reasonable having regard to all the relevant circumstances. The exercise by the Commissioner of this power will be subject to the usual rights of objection and reference to a Taxation Board of Review.

Section 50H: Occurrence of disqualifying event

This section will specify which events are to be classed as disqualifying events occurring during a year of income. The occurrence of a disqualifying event will have the effect of causing the year of income to be divided into 2 or more relevant periods, as provided for by sub-section 50B(1). The notional taxable income or notional loss of each relevant period thus created will then be calculated in accordance with the provisions of section 50B. The proposed section 50H, as affected by sections 50J and 50K, adopts the principles of the prior year loss provisions of the Principal Act (sections 80A, 80B and 80DA) in fixing a time (referred to in the sub-section as the "relevant time") during the year of income at which the disqualifying event will be deemed to have occurred. The tests to enable the time of occurrence of a disqualifying event to be ascertained are enumerated in sub-section (1).

Paragraphs (a) to (c) adapt the beneficial ownership tests contained in sub-section 80A(1) of the Principal Act. Under these tests, a disqualifying event will be deemed to have occurred where the Commissioner is satisfied that immediately after a time during the year of income (i.e., the relevant time), there were no natural persons beneficially owning shares carrying more than 50 per cent of certain rights who, before that time, beneficially owned shares carrying more than 50 per cent of those rights. Where a company is the beneficial owner of shares in the company being considered the provisions of section 50J will require a tracing through that company and any other interposed companies to the natural persons who have the ultimate indirect beneficial ownership of shares in the company.

The rights which are referred to in paragraphs (a) to (c) are -

(a)

a right to exercise more than 50 per cent of the voting power in the company;

(b)

a right to receive more than 50 per cent of any dividends paid by the company;

(c)

in the event of the company being wound up - a right to receive more than 50 per cent of any distributions of capital of the company; and

(d)

in the event of a reduction in the capital of the company - a right to receive more than 50 per cent of any distributions of capital made by the company.

Paragraph (d) of sub-section (1) is designed to ensure that, despite there being a sufficient beneficial ownership of shares in a company at any particular time during the year to satisfy the requirements of paragraphs (a), (b) and (c), nevertheless a disqualifying event will be deemed to have occurred where a natural person or persons control, or are capable of controlling, the company immediately after the relevant time and did not have similar powers of control immediately prior to the relevant time. The paragraph will apply where the control of the voting power was acquired for the purpose of receiving or obtaining a taxation benefit or advantage either for those persons or for others. Paragraph (d) will therefore mean that persons who acquire "creeping" control of a company will not thereby be able to avoid the occurrence of a disqualifying event. Such an event will be deemed to have occurred once a point in time is reached when more than 50 per cent of the voting power in the company falls under the control of persons who did not control such voting power at any prior time during the year of income.

Paragraph (e) of sub-section (1) will mean that, where there is a point in time during the year of income at which a company has an "available loss" (defined in sub-section (2)) and at that time income is derived by the company that it would not have derived if it had not had that loss available to be offset against that income, then a disqualifying event will be deemed to have occurred at the time when the company derived the income. This provision is based on and adapts the existing paragraph (1)(a) of section 80DA. It will apply to cases in which income is in some way channelled into a company to obtain the benefit of a taxation deduction for losses which have been incurred in the earlier part of that same income year. The operation of the paragraph is subject to a relieving provision provided by sub-section (3).

A similar test to paragraph (e) is to be applied by paragraph (f) which will deal with the reverse of the circumstances dealt with by paragraph (e). That is, where a company has an "available profit" (defined in sub-section (2)) at a time during the year of income and at that time it incurs a loss or outgoing that would not have been incurred if there had not been that available profit, a disqualifying event will be deemed to have occurred at the time at which the company incurs that loss or outgoing. Like paragraph (e), this provision is based on the existing paragraph (1)(a) of section 80DA. It will apply to cases in which a loss (often an artificially created tax loss) is channelled into a company in order for that loss to be offset against income derived by the company in the earlier part of the same year of income. The operation of paragraph (f) is subject to a relieving provision contained in the proposed sub-section (4).

Paragraph (g) of sub-section (1) is designed to operate where a person other than the company will receive a taxation benefit or advantage either directly or indirectly as a result of the operation of any agreement, scheme, arrangement, understanding, transaction, course of conduct or course of business that the company entered into, where that agreement, etc., would not have been entered into if the company had not had an available profit or an available loss at the time it entered into that agreement, etc. Where such a circumstance occurs, a disqualifying event will be deemed to have occurred at the time the company entered into or commenced to carry out that agreement, etc. Paragraph (g) is based on the existing paragraph (1)(b) of section 80DA of the Principal Act and is, broadly, intended to deal with the same circumstances contemplated by that paragraph. Paragraph (g) is to be read subject to sub-section (5) which defines a benefit or advantage in relation to the application of the Assessment Act and to a relieving provision provided by sub-section (6).

Paragraph (h) will apply to deem a disqualifying event to have occurred if the company's day-to-day business affairs are managed or conducted in a manner inconsistent with the rights, powers and interests of the ultimate beneficial owners of shares who were capable of controlling the voting power in the company at the particular time being considered for the application of the paragraph. The matters that would be relevant to examine in deciding whether or not the affairs of a company have been managed or conducted with due regard to the rights of the persons having a beneficial shareholding interest in the company would include -

•

the degree of participation by those persons in the affairs of the company;

•

the way in which the directors of the company have been appointed or removed from office;

•

the relationship between the directors of the company and the persons associated with its sources of income;

•

the circumstances under which and the sources from which the income is derived by the company;

•

the circumstances under which a loss or outgoing is incurred by the company and the person or persons in relation to whom such a loss or outgoing is incurred;

•

the circumstances under which persons who are creditors of the company acquired their claims.

Proposed sub-section (2) is a drafting measure which will explain the meaning of the terms "available loss" and "available profit" as used in sub-section (1). Paragraph (a) will provide that a company shall be taken to have an available loss at a particular time if the assessable income of the company to that point of time is less than the allowable deductions of the company to that time. Paragraph (b) will have the effect that a company will be taken to have an available profit at a particular time during a year of income if the assessable income of the company to that point of time exceeds the allowable deductions of the company to that time. The sub-section is thus designed to enable a calculation to be made of the results of the company's business operations up to a point of time during the year of income in order to ascertain, for the purposes of paragraphs (e), (f) and (g) of sub-section (1), whether it would be advantageous for income to be channelled into the company or for the company to incur an artificially created tax loss in order to neutralise any income tax which might otherwise be payable on the income channelled into the company or on the income derived by the company in the earlier part of the income year.

The proposed sub-section (3) will operate so as to enable paragraph (e) of sub-section (1) to apply to a case in which the income channelled into the company has been derived in the course of what might otherwise be classed as ordinary family or commercial dealing. The sub-section will also provide relief from the application of paragraph (e) by deeming a disqualifying event not to have occurred where the natural person or persons who had shareholding interests in the company both immediately before and immediately after the time when the income was derived will benefit from the derivation of that income to an extent that the Commissioner considers is appropriate, having regard to their continuing beneficial interests in the company.

Proposed sub-section (4) will operate so as to enable paragraph (f) to apply in a case in which the loss or outgoing referred to in that paragraph was incurred in the course of what might otherwise be classed as ordinary family or commercial dealing. The sub-section will also provide relief from the application of paragraph (f) by deeming a disqualifying event not to have occurred where the natural person or persons who had shareholding interests in the company both immediately before and immediately after the time when the loss or outgoing was incurred will benefit from the loss or outgoing being incurred by the company to an extent that the Commissioner considers is appropriate having regard to their continuing beneficial interests in the company.

Sub-section (5) will specify that, without limiting the scope of paragraph (g) of sub-section (1), a person shall be treated as having received or obtained a taxation benefit or advantage if he is not liable to pay tax, or is liable to pay less tax, because he has derived less income than he would have derived if an agreement, etc. of the kind covered by paragraph (g) had not been entered into or undertaken. This could occur where the income which would otherwise have been derived by a person associated with the company in one way or another is diverted into the company to be offset against an available loss.

Sub-section (6) will also govern the operation of paragraph (g) of sub-section (1). By it, the paragraph will apply even though the agreement, etc. giving rise to the taxation benefit or advantage was, formally, undertaken in the course of ordinary family or commercial dealing. However, the sub-section will also provide relief from the application of paragraph (1)(g) if the person who received or obtained the benefit or advantage had a shareholding interest in the company and the Commissioner considers that the benefit or advantage is appropriate having regard to that person's shareholding interest in the company.

Sub-section (7) is a drafting measure which provides for the purposes of section 50H that "shareholding interest" will mean the direct or indirect beneficial interest of a person in a company. This requires a tracing of shareholding interests to discover the ultimate beneficial ownership of shares in the company by natural persons.

Sub-section (8) will apply in determining for the purposes of paragraph (h) of sub-section (1) of section 50H whether the business affairs of a company are managed or conducted without proper regard to the interests of the beneficial owners of the shares in the company. It will require that regard be had to any act or thing done in this connection notwithstanding that it was done in the course of what might otherwise be classed as ordinary family or commercial dealing and irrespective of its formal purpose.

Sub-sections (9) and (10) will apply for the purposes of paragraphs (e) and (f) of sub-section (1) and for the purposes of sub-section (5) in its application to paragraph (g) of sub-section (1).

These proposed sub-sections will enable paragraphs (e) and (f) to operate where several factors, including the existence of either an available loss or an available profit could be said to have motivated the arrangements under which income was channelled into the company or an artificial loss or outgoing was incurred by the company. In the same way, paragraph (g) will be capable of applying where the agreement, scheme, arrangement etc. referred to in that paragraph was entered into for more than one purpose. The proposed sub-sections will also enable sub-section (5) to operate in relation to paragraph (g) of sub-section (1) where the availability of a tax benefit or advantage was only one of several matters which led to income being channelled into the company.

Section 50J: Tracing of beneficial ownership of shares

For the purposes of the tests contained in sections 50D and 50H, the proposed section 50J will enable the beneficial interests of natural persons in the voting, dividend and capital rights of a company to be traced through any companies interposed between that company and those natural persons.

As explained earlier in the notes on sections 50D and 50H, those sections make it a test that shares in the company carrying rights to more than 50 per cent of the voting power, dividends and distributions of capital be beneficially owned at particular times during the year of income by natural persons. The sections look to the ultimate beneficial ownership of shares by natural persons and this will be ascertained under the tracing procedures provided in section 50J. This section, which is based on former section 80D, will apply automatically in all circumstances where natural persons do not beneficially own all the shares in the company to which Subdivision B of Division 2A is being applied.

Where section 50J applies in association with section 50H in the determination of whether a disqualifying event has occurred in relation to a company by reason of a change that has occurred in the ownership of shares in that company, section 50J applies to enable the ultimate beneficial ownership of those shares to be traced for the purpose of that determination through interposed companies to natural persons.

Section 50J, in conjunction with section 50D, will operate, depending on the circumstances, to either preserve an entitlement to a deduction for a loss incurred in a relevant period or to deny such an entitlement.

A deduction for a loss incurred by a company in a relevant period would be preserved where, although there was a change in the beneficial ownership of shares in the company or in another company otherwise sufficient to preclude the deduction of that loss, natural persons had the requisite beneficial interests in the company either directly, or indirectly as established through the operation of section 50J, or a combination of such direct and indirect interests.

An example of such a case would be where the ownership of shares in a sub-subsidiary company in a group of companies is transferred from one company in the group to another company in the same group, although the ultimate beneficial ownership of shares in the parent company of the group remains unchanged. Another example would be where the ownership of shares in a subsidiary company was transferred from the parent company to the natural persons who, at all appropriate times, were shareholders in the parent company.

Although no change occurs in the direct beneficial ownership of shares in the company, the application of section 50J might disclose that substantial changes have occurred in the beneficial ownership of shares in interposed companies including the ultimate holding company. In these circumstances, after the beneficial interests are traced through to the natural persons who ultimately are deemed to have beneficial interests in the company, the tests provided for in sections 50D and 50H may not be met.

Sub-section (1) of section 50J is introductory and provides that the section will apply for the purposes of section 50D and section 50H in determining whether a natural person was at any time the beneficial owner of shares in a company.

Sub-section (2) contains the means for ascertaining the voting interest that a person has in a company through one interposed company or, through the application of sub-section (3), through 2 or more interposed companies. The voting interest of a person is to be ascertained as follows -

(Voting interest of the interposed company in the relevant company) * ((Voting interest of the person in the interposed company)/(Total voting interests in the interposed company))


The voting interest so ascertained will be added to any other voting interest that the person may have in the relevant company either by virtue of his direct ownership of shares in that company or by virtue of an ownership which is deemed to exist by reason of sub-section (5). The aggregate voting interest will then, by virtue of sub-section (6) of the proposed section 50J, be treated as representing that person's voting rights at any appropriate time for the purposes of section 50D or 50H.

Sub-section (3) is designed to enable the voting interests of a person in a company to be traced through any number of interposed companies. The principles of sub-section (2) are to be applied successively to each company having a voting interest in any other company until the ultimate voting interests in the past

mentioned company of natural persons who are shareholders in all the companies in the chain are ascertained.

Sub-section (4) will enable the principles of sub-sections (2) and (3) to be applied for the purpose of tracing dividend interests and capital interests held by natural persons in a company through any companies interposed between them and that company. These other interests are to be ascertained in the same manner as voting interests.

Sub-section (5) will enable the indirect voting interests, dividend interests and capital interests of a person in a company to be treated for the purposes of the section as voting, dividend or capital interests attaching to the beneficial ownership of shares in that company, and will facilitate the tracing through interposed companies and the aggregation of the various voting, dividend and capital interests. Paragraphs (a), (b) and (c) apply respectively to voting, dividend and capital interests and deem a person having such an interest to be the beneficial owner of shares in the company and the extent of the voting, dividend or capital interest, as the case may be, to be the fraction of the total interest in the company the right to which is carried by those shares.

Paragraph (d) will apply where two or more persons have joint beneficial interests in shares in a company. Each person will be treated as having a separate voting, dividend or capital interest, proportionate to his interest in the shares.

Sub-section (6) is designed to ensure, for the purposes of section 50J, and also for the purposes of sections 50D and 50H, that a person who is deemed by section 50J to have a voting, dividend or capital interest in a company shall be also deemed to be the beneficial owner of shares carrying a voting, dividend or capital right, as the case may be. The extent of that right is to be deemed to be the same as the extent of the voting, dividend or capital interest, as the case requires.

The operation of sub-sections (5) and (6) may be illustrated by a case in which the beneficial ownership of all of the shares in company A which were beneficially owned by natural person ABC was acquired during the year of income by company B from ABC. (Were it not for the tracing provisions of section 50J, this change in share holdings would constitute a disqualifying event in relation to company A for that year of income.) Company C beneficially owns shares carrying 80 per cent of the voting rights in company B and natural person ABC beneficially owns shares carrying 75 per cent of the voting rights in company C.

After the application of sub-sections (2) and (3), ABC is found to have a 60 per cent voting interest in company A (

(75 per cent) * (80 per cent) = (60 per cent)


) and, by reason of sub-sections (5) and (6), would be treated as beneficially owning shares in company A (after the change in share holdings) carrying rights to exercise 60 per cent of the voting rights in that company.

If ABC also held equivalent dividend and capital interests in company A, no disqualifying event for the purposes of section 50H would be deemed to have occurred in relation to company A by reason of the change in its share holdings during the year of income. In the circumstances described, ABC will actually beneficially own shares carrying all of the voting, dividend and capital rights in company A before the change in share holdings and be deemed by the operation of section 50J to beneficially own shares in company A after the change carrying 60 per cent of the voting, dividend and capital rights in the company.

Section 50K: Special provisions relating to beneficial ownership of, or rights attached to shares

This section will reinforce the provisions of sections 50D, 50H and 50J when determining the beneficial ownership of shares or establishing the voting, dividend and capital rights attached to shares. Those sections are to apply in determining whether a notional loss is to qualify as an eligible notional loss under the continuing ownership test, in establishing whether a disqualifying event has occurred and in tracing the beneficial ownership of shares to natural persons where the shares are owned by a company.

Under tax avoidance schemes at which this amendment is directed, it would, but for the special safeguarding provisions proposed by this section, be possible for a person who beneficially owned shares during one part of the year of income in question to retain that ownership but to enter into various kinds of agreements or arrangements such as the issue of redeemable preference shares, the granting of an option to purchase shares or the entering into of arrangements which affect the rights carried by shares, and yet still technically comply with the continuing ownership test. In reality, the original shareholders would take no part in the company's business affairs after entering into such arrangements and the intended shareholders could use the company structure to minimise their tax liabilities.

To counter arrangements of these kinds, proposed section 50K will incorporate the safeguards contained in the existing section 80B of the Principal Act that apply for similar purposes to the tests for deduction of prior year losses.

Sub-section (1) of proposed section 50K formally provides that the section is to have effect where -

(a)

it is necessary to determine under sub-section 50D(2) in applying the continuing ownership test as between relevant periods of the income year whether at any time a person beneficially owned shares in a company or whether certain rights attached to shares in a company;

(b)

the beneficial ownership test is being applied to determine under section 50H whether a disqualifying event is deemed to have occurred in relation to a company during a year of income and it is necessary for that purpose to determine, in relation to arrangements, etc. of the kind specified in section 50K, whether a person is to be treated as beneficially owning shares in the company or in any other company, or whether certain rights are to be treated as attaching to shares in any company during that year of income; or

(c)

it is necessary to determine under the tracing provisions of section 50J whether a person at any time beneficially owned shares in a company, or whether certain rights were attached to shares in any company, otherwise than by the operation of that section.

Sub-section (2) will apply where a natural person beneficially owned shares at the time of his death and the ownership of the shares is transferred to the trustee of his estate in his capacity as trustee or to a person as a beneficiary in that estate. In these circumstances, a change of beneficial ownership will not be treated as having occurred by reason of the death of that person. The section will thus preserve an entitlement to a current year loss which might otherwise be lost as a result of events quite beyond the control of the company or its shareholders. The section is comparable to the existing sub-section 80B(3) of the prior year company losses provisions.

Sub-section (3) is designed to ensure that the effectiveness of the provisions of Subdivision B is not impaired by the existence of shares that are capable of being redeemed. The sub-section is to the effect that redeemable shares beneficially owned by a person at any time shall be treated as not having been owned by the person at that time. Nevertheless, those redeemable shares will be taken into account for the purpose of determining the total issued share capital of a company.

Sub-section (4) defines the nature of redeemable shares for the purpose of sub-section (3). The definition accords with the provisions of sub-section 44(2D) of the Principal Act and is in two parts.

Paragraph (a) covers the case of a share that is, of its nature, redeemable, e.g., shares of the type the issue of which is authorised by section 61 of the various Companies Acts. Under this paragraph, a share is a redeemable share if it is liable to be redeemed either as a term of its issue or at the option of the company.

Paragraph (b) brings within the scope of the definition shares that are not covered by paragraph (a) but which, by virtue of an agreement (as expanded by sub-sections (8) and (9)) associated with their issue, are issued in pursuance of an agreement (whether made before or after the commencement of the sub-section) with a purpose of enabling the company making the issue to pay cash or distribute other property (other than shares in the company) to shareholders.

This paragraph will also apply where a purpose or one of the purposes of the agreement is to enable the company to transfer or apply to or on behalf of the person to whom the shares are issued (or another person) or to transfer or apply at the direction of that person, any money or property other than shares in the company. The paragraph will have application if this purpose is to be achieved, by either the redemption, purchase, cancellation, or a reduction in paid-up value, of the shares issued or any other shares in the company, and it will apply whether or not the exercise of an option by the company or any other person is a necessary part of the agreement.

The provisions of sub-section (5) are designed to prevent the "continuing ownership" tests in sub-section 50D(2) and section 50H being avoided, by a technical compliance with those tests, where options to purchase have been granted by the beneficial owners of shares in a company to other persons or where other agreements or understandings exist which affect the rights of the beneficial owners of shares.

In broad terms, the sub-section will apply where a company claims that a person beneficially owned shares in a company, or where it is otherwise necessary to determine whether a person beneficially owns shares in a company, at a time (referred to as the "relevant time") and there has been an agreement (in the expanded sense of sub-sections (8) and (9)) entered into for the purpose (or for purposes that include the purpose) of maintaining an overt position regarding the beneficial interests in a company to overcome the "continuing ownership" tests used in sections 50D and 50H.

The sub-section will authorise the Commissioner in such a case to treat shares beneficially owned by a person at the relevant time and affected by such an agreement as not being beneficially owned by that person at that time. As a consequence, the beneficial ownership tests of section 50D or section 50H may not be met.

As the sub-section is to apply only in relation to agreements embracing a purpose of tax avoidance, it will not, of course, have application to any dealing in relation to shares which is entirely divorced from such a purpose.

Sub-section (6) will apply where the Commissioner is satisfied that, by reason of a provision in the memorandum and articles of association of a company (the "constituent document") as in force at any time during the year of income or, under an agreement entered into before the end of the year of income, shares in the company have commenced, or will, or may commence, to carry certain rights. In these circumstances, the shares will be deemed to have carried those rights at all times during the year of income when the provision in the constituent document was in force or after the time when the agreement was entered into.

Sub-section (7) will apply to the converse situation where the Commissioner is satisfied that by reason of a provision in the constituent document of a company, or an agreement entered into before the end of the year of income, shares in the company have ceased, or will, or may at any time cease, to carry rights that those shares carried at any time during the year of income. In these circumstances, the shares will be deemed not to have carried those rights at any time when the provision of the constituent document was in force, or at any time after the time the agreement was entered into.

The provisions of sub-sections (6) and (7) which follow the safeguards contained in sub-sections 80B(6) and (7) of the Principal Act are necessary to ensure that the new provisions cannot be avoided by actions which affect rights attaching to shares.

Sub-sections (8) and (9) will extend the meaning of the reference to an agreement, right, power or option in section 50K to include arrangements or understandings whether in writing or otherwise and to cover agreements etc. that are not legally enforceable.

Section 50L: Deemed dividends

Proposed section 50L will operate for the purposes of the new Subdivision in relation to payments or amounts which are affected by sections 65, 108 and 109 of the Principal Act. The division of the year of income into relevant periods of less than 12 months necessitates a modification of the effect of the provisions of these sections for the purposes of the new Subdivision in relation to cases where a company is the recipient of an amount deemed by any of those sections to be a dividend paid.

Section 65 of the Principal Act has the effect that, where a payment is made, or a liability is incurred, to an associated person the Commissioner may reduce the deduction otherwise allowable for the payment or the liability. The payment or liability is, in such circumstances, deductible only to the extent that the Commissioner considers it to be reasonable. Where section 65 is applied to reduce a deduction allowable to a partnership in which a company is a partner, the company's share of the disallowed amount is deemed to be a dividend paid by the company at the end of the year of income of the company making the payment to the person to whom the payment is made or the liability is incurred.

Section 108 of the Principal Act has a similar operation in relation to amounts that are paid or assets that are distributed by a private company to any of its shareholders by way of advances or loans, or payments made by the company on behalf of or for the benefit of any of its shareholders. Where the Commissioner is of the opinion that such a payment or loan is in reality a distribution of income of the company to the shareholder, the amount of that payment or loan is deemed to be a dividend paid by the company to the shareholder on the last day of the year of income of the company which made the payment or distribution.

Section 109 of the Principal Act deals with sums paid or credited by a private company to a shareholder or director of the company, or a relative of a shareholder or director, which purport to be remuneration for services rendered by that person. To the extent to which that sum exceeds the amount which the Commissioner considers is reasonable, the payment or credit is deemed to be a dividend paid by the company to that person on the last day of the year of income of the company which paid or credited the sum.

Sub-section (1) of section 50L will apply in a case where a company to which the new Subdivision applies (in the sub-section referred to as "the relevant company") is in receipt of a payment from, or has had a liability incurred to it by, a partnership in which another company is a partner. Where section 65 applies to deem that other company to have paid a dividend to the relevant company, sub-section (1) will mean that, for the purposes of the new Subdivision, the deemed dividend is to be taken to have been received by the relevant company at the time when the payment was in fact made or the liability was in fact incurred, rather than on the last day of the year of income.

Proposed sub-section (2) will deal in a similar manner with payments made or assets distributed to the relevant company which are deemed by section 108 to be dividends paid to the company on the last day of the year of income. Under sub-section (2) those dividends will be deemed to have been received by the relevant company at the time when the payment or distribution was in fact made.

Sub-section (3) will have a like operation in relation to sums paid or credited to the relevant company which are deemed to be dividends by section 109. The sub-section will deem these sums to have been received when they were in fact paid or credited to the relevant company rather than at the end of the year of income.

Section 50M: Trading stock of wine makers

Proposed new section 50M will apply where a company to which the new Subdivision applies carries on business as a wine maker or distiller of spirits.

Under the former section 31A, which was repealed in 1973, a taxpayer who carried on a business of winemaking or of distilling spirits was entitled to elect to value prescribed trading stock (i.e., trading stock consisting of wine, brandy or grape spirit) on a special basis, being a value not less than a minimum value prescribed in relation to the trading stock of the class being valued. In effect, a taxpayer to which the section applied was able to value prescribed trading stock at a substantially lower value than would have otherwise been the case under section 31 of the Principal Act (i.e., the provision which permits a taxpayer to value articles of trading stock at one or other of cost, market selling value or replacement value). The repeal in 1973 of section 31A meant that a taxpayer who had formerly valued trading stock under section 31A would, but for the introduction of transitional provisions (section 31B), have been required to bring to account as assessable income in the first year of income after the repeal of section 31A the full difference between the valuations ascertained under section 31A and section 31.

Under section 31B of the Principal Act which, as explained above, was introduced as a transitional measure to cover the change to the general basis of valuation of trading stock, special rules are applied in respect of prescribed trading stock to enable a company to spread the increase in value of trading stock over a period of 8 years.

Should it happen that a taxpayer to which section 31B applies is a company to which the new Subdivision also applies in relation to a year of income, the division of the year of income into 2 or more relevant periods will require a valuation to be made of trading stock on hand at the end of each relevant period and at the end of the year of income in accordance with the provisions of section 31. The purpose of the new section 50M is to apply the same principles as contained in section 31B to the taxpayer's trading stock at the end of each such relevant period.

Because a relevant period consists of a period of less than 12 months, the "adjustment" which is effected by section 31B is to be pro-rated over the whole of the year of income. This is to be achieved by providing that the trading stock on hand at the end of each relevant period during the year of income (other than the relevant period which ends at the end of the year of income) is to be adjusted by deducting from the value of trading stock ascertained under section 31 of the Principal Act a proportionate part of the adjustment which is to be made under section 31B. The application of the formula contained in proposed sub-section (2) is intended to have the result that an appropriate part of the annual adjustment will be included in the calculation of the notional taxable income or the notional loss, as the case may be, of each relevant period within the year of income.

The new sub-section (3), which compares with sub-section 31B(14) of the Principal Act, formally provides that the adjusted value of closing stock at the end of each relevant period, ascertained in accordance with the formula under sub-section (2), is to be the figure for the opening value of trading stock on hand at the commencement of the immediately succeeding relevant period. This is in line with the general rule of trading stock valuation, contained in section 29 of the Principal Act, that the closing value of trading stock as at the end of one income year is to be the opening value of that trading stock for the subsequent income year.

Sub-section (4) explains the meaning of terms used in the substantive provisions of the section. "Prescribed trading stock" is defined as having the same meaning as that term has for the purposes of section 31B, and is the trading stock of the taxpayer which would have been eligible for the concessional basis of valuation available under the former section 31A. The expression thus refers to stocks of wine, brandy or grape spirit held as trading stock by a wine or brandy producer. "Excess amount" is defined to mean the excess referred to in sub-section 31B(4), i.e., the difference between the trading stock of the taxpayer as valued at the end of the 1973-74 year of income under section 31 and as valued under the rules contained in the former section 31A, where the section 31A value was less than the section 31 value. In effect, this is the amount which the taxpayer is entitled under section 31B to spread over the 8 years of income following the 1973-74 year.

Section 50N: Composition of taxable income

Special note

The broad purpose of this section is to set out the basis on which deductions are to be set against dividend and other income in cases where there has been a "disqualifying event" in the year, e.g., a significant change in ownership of the company, and the taxable income of the company is to be calculated under the "current year loss" provisions.

The intention is that deductions should, in this particular context, be set against dividend and other income of each relevant period on the same basis as they would be set for purposes of relevant provisions of the Principal Act, if there had been no disqualifying event and the taxable income had been calculated on the ordinary basis.

Proposed section 50N (and the consequential amendments to sections 46 and 46A) as contained in the Bill, do not achieve this intention. In particular, the Bill does not adequately reflect the basis set out in section 46 of the Principal Act for offsetting of deductions against private company dividends from overseas. Nor does it carry into the current year loss provisions, in a case where the "dividend stripping" provisions of section 46A apply, the rules contained in that section for applying deductions against dividends subject to rebate. These deficiencies will be corrected by appropriate alterations to provisions of the Bill.

Section 50N and the following notes on the detailed provisions of the section should therefore be read in the light of the foregoing.

Section 50N is expressed to provide the method of calculating the amount of each of 4 classes of income included in the taxable income of a company which is assessed under the new Subdivision. The 4 classes of income are: private company dividends, dividends other than private company dividends, property income other than dividends and income from personal exertion.

Under various provisions of the Principal Act, for example, in the calculation of the retention allowance of a private company for the purposes of undistributed income tax, and in determining the rebate on inter-company dividends under sections 46 and 46A, it is necessary to ascertain to what extent the taxable income is composed of one or other of these classes of income. Where the taxable income is calculated in the ordinary way under Subdivision A of Division 2A (i.e., in the usual case where no disqualifying event is deemed to have occurred during the year of income) the general function of determining the composition of the taxable income is performed by sections 49 and 50 of the Principal Act, but sections 46 and 46A contain additional rules for the purposes of those sections.

An amendment associated with the new section 50N is proposed by paragraph (b) of sub-clause (5)(1) to insert into section 46A of the Principal Act a new sub-section - sub-section (8A). In a case where the new Subdivision B applies in the calculation of a company's taxable income, the new sub-section (8A) provides that for the purposes of applying section 46A, the amount of any private company dividends and other dividends included in the taxable income of the company shall be ascertained under the proposed section 50N.

Sub-section (1) of proposed section 50N is introductory and, as expressed, provides that, notwithstanding any other provision of the Principal Act, the new section will apply for the purpose of determining the extent to which the taxable income of a company to which the Subdivision applies consists of income from private company dividends, income from dividends other than private company dividends, income from property or income from personal exertion.

As expressed, sub-section (2) provides that where, in respect of a relevant period, a company derives income from more than one of the 4 classes of income referred to earlier, the allowable deductions of the company in respect of that relevant period are to be deducted from that income in the order provided in sub-sections (3), (4), (5) and (6).

Sub-sections (3), (4), (5) and (6) deal with the order in which allowable deductions or parts of allowable deductions are to be deducted from the various classes of income described above. This calculation is to be made in respect of each relevant period which occurs during the year of income and, in effect, apply the principles contained in section 50 of the Principal Act to the assessable income and allowable deductions which are taken into account in each relevant period. One effect of making a separate calculation in respect of each relevant period is that the inter-company dividend rebate allowable to a company under section 46 or 46A of the Principal Act is to be determined on the net dividend income received in each particular relevant period. A notional loss incurred in respect of a relevant period will not be taken into account in determining the amount of net dividend income of a year unless that loss is to be taken into account in calculating the taxable income of the company of the year of income. Another effect of making a separate calculation of the composition of the notional taxable income of each relevant period is that the retention allowance for the purposes of undistributed income tax on private companies which are assessed under the Sub-division will be determined on the basis of the net income of each class of income derived in each relevant period and there will not be taken into account any income or deductions which occur in a loss period unless that loss forms part of the eligible notional loss of the company to be taken into account in calculating the taxable income.

Sub-section (3) sets out an order in which allowable deductions or parts of allowable deductions which relate directly to private company dividends are to be deducted. Under the sub-section, such allowable deductions are firstly to be deducted from income from private company dividends and thence successively from income from dividends other than private company dividends, from income from property other than dividends and from income from personal exertion.

Sub-section (4) relates to income from dividends other than private company dividends. Allowable deductions or parts of allowable deductions which relate directly to income from that source are to be deducted successively from income from dividends other than private company dividends, from income from private company dividends, from income from property other than dividends and from income from personal exertion.

Sub-sections (5) and (6) follow the same general pattern as sub-sections (3) and (4) by dealing respectively with allowable deductions or parts of allowable deductions which relate directly to income from property other than dividends and to those which do not directly relate to income from property. The order prescribed in sub-section (5) is for the deductions to be made successively from income from property other than dividends, from income from private company dividends, from income from dividends other than private company dividends and from income from personal exertion. Sub-section (6) provides that the order of deduction shall be from income from personal exertion, from income from property other than dividends, from income from private company dividends and from income from dividends other than private company dividends.

New sub-section (7) prescribes the order in which deductions are to be made where more than one of sub-sections (3), (4), (5) and (6) apply in respect of a particular relevant period. By this sub-section, any allowable deductions or parts of allowable deductions are firstly deductible from income of the class to which that deduction directly relates and then against the next class of income specified by the sub-section dealing with allowable deductions from income from that class until either the allowable deductions are exhausted or the income is exhausted.

Sub-section (8), as expressed, provides the next step in the calculation. Broadly, the sub-section provides that, having deducted the allowable deductions or parts of allowable deductions in accordance with sub-sections (3), (4), (5) and (6), the notional taxable income in respect of each income period shall be deemed to be constituted by the amount or amounts of income in each class of income remaining after deducting all the allowable deductions or parts of allowable deductions from that particular class of income. Paragraphs (a), (b), (c) and (d) deal respectively with income from private company dividends, income from dividends other than private company dividends, income from property other than dividends and income from personal exertion.

Proposed sub-section (9) is designed to perform a similar function to sub-section (8) in relation to any relevant period in which the company derives a notional loss. The notional loss of a company in respect of such a relevant period is to be so much of the allowable deductions or parts of allowable deductions which relate directly to one of the 4 classes of income previously referred to, as remains after all income of the company from which allowable deductions of that particular class are to be deducted as provided for in sub-section (7) is exhausted.

Sub-sections (10) and (11) specify a basis for ascertaining the composition of any eligible notional loss of the company. Under the new section 50D, a notional loss incurred by a company in respect of a relevant period may or may not fall to be taken into account in ascertaining the amount of the eligible notional loss of the company. By virtue of sub-section 50N(9), the component parts of the notional loss are to be ascertained and, where that notional loss is in whole or in part to be taken into account under section 50D in determining the eligible notional loss of the company, it becomes necessary to determine what proportion of those component parts of the notional loss is to be transferred to the eligible notional loss.

Sub-section (10) will supply that answer in the most straightforward situation. Where the whole of the notional loss of a relevant period is to be taken into account in determining the eligible notional loss of the company, the components which constitute the notional loss shall also constitute that part of the eligible notional loss which is constituted by that notional loss. Paragraphs (a), (b), (c) and (d) deal respectively with the private company dividend, the dividend other than private company dividend, the property and the personal exertion components of the eligible notional loss.

Sub-section (11) deals with the more complex situation where only part of the notional loss in respect of a relevant period is to be taken into account in determining the amount of the eligible notional loss of the year of income. The sub-section provides that, in this circumstance, the component parts of the eligible notional loss will reflect proportionately the component parts of the notional loss.

Proposed sub-sections (12), (13), (14), (15), (16), (17), (18) and (19) set out the final step in the calculation of the composition of the taxable income of the company that is provided by section 50N.

Having ascertained the component parts of the notional taxable incomes of relevant periods during the year of income under sub-section (8) and the component parts of the eligible notional loss under sub-sections (10) and (11), proposed sub-sections (12) and (13) bring together, in respect of private company dividends, those component parts. The calculation performed by sub-section (12) aggregates the amount of income from private company dividends included in the notional taxable income of each relevant period and the amount of any income from private company dividends included in any full year amounts of income (i.e., income derived as a beneficiary in a trust estate) and from this figure there are to be deducted the allowable deductions or the parts of the allowable deductions that relate directly to income from private company dividends (whether of the year of income or of a previous year of income) included in the eligible notional loss of the company by reason of sub-sections (10) and (11) and the amount of any allowable deductions which are full-year deductions which relate directly to income from private company dividends.

Sub-section (13) continues this calculation where allowable deductions which relate directly to income from other sources exceed the income from those other sources and then fall to be deducted successively from private company dividends. Paragraph (a) provides that any allowable deductions that relate directly to income from dividends other than private company dividends which exceed the income from that source will next be deducted from any income from private company dividends which remains after having deducted allowable deductions which relate directly to income from that source. Paragraph (b) performs a similar function in relation to allowable deductions that relate directly to income from property other than dividends and which exceed that income, while paragraph (c) does likewise in relation to allowable deductions that relate directly to income from personal exertion which exceed income from that source.

Sub-sections (14) and (15) provide for a similar calculation to be made in relation to income and allowable deductions from dividends other than private company dividends. However, the order of deductions is varied so that allowable deductions that relate directly to income from dividends other than private company dividends will be deducted in the first instance, while allowable deductions that relate directly to income from private company dividends, to income from property other than dividends and to income from personal exertion will be deducted successively where those allowable deductions exceed the income derived from those sources.

Proposed new sub-sections (16) and (17) contain rules for a similar calculation in relation to income and allowable deductions from property other than dividends, the order in which allowable deductions are to be deducted being from income from property other than dividends, from income from private company dividends, from income from dividends other than private company dividends and from income from personal exertion.

Sub-sections (18) and (19) will deal with allowable deductions included in the eligible notional loss or in any full year deductions that relate directly to income from personal exertion. The calculation which is prescribed by those sub-sections again follows the pattern described above. Sub- sections (13), (15), (17) and (19) also apply in like manner in the application of allowable deductions against particular income in calculating a company's share of the net income of a partnership or of a partnership loss.

Sub-section (20) sets out the order in which allow-able deductions are to be set off against income of particular classes where sub-sections (13), (15), (17) or (19) apply. The sub-section provides that any allowable deductions or parts of allowable deductions which are required to be set off under those sub-sections will firstly be deducted from income of the class first referred to in the sub-section and then against the next class of income specified by the sub-section until either the allowable deductions are exhausted or the income from that class is exhausted.

Sub-section (21) authorises the Commissioner, where allowable deductions or parts of allowable deductions relate directly to income from dividends but do not relate specifically to either private company dividends or other dividends, to apportion those deductions between private company dividends and other dividends. Having made this apportionment, paragraph (a) provides that so much of the deductions as the Commissioner considers may be appropriately related to income from private company dividends shall, for the purposes of section 50N, be deemed to relate directly to income from that source and, under paragraph (b), the balance of the allowable deductions relating to dividends will be treated as relating directly to income from dividends other than private company dividends.

Sub-section (22) defines, for the purposes of the section, the expression "private company dividends". It is intended that a dividend will be deemed to be a private company dividend for the purposes of section 50N if it is a private company dividend for dividend rebate purposes.

Clause 9 also re-inserts in the Principal Act after section 50N the heading to Division 3 of the Principal Act which is proposed to be omitted by clause 8. The heading "Division 3 - Deductions" "Subdivision A - General" will, therefore, now appear immediately before section 51 of the Principal Act.

Clause 10: Losses of previous years

Clause 11: Losses of previous years incurred in engaging in primary production

Introductory note

Clauses 10 and 11 relate to losses incurred by a company in a year of income to which the new ("current year losses") Subdivision B of Division 2A applies, that are to be carried forward in accordance with section 80 or 80AA of the Principal Act for deduction in a subsequent year of income.

Section 80 of the Principal Act provides for the deduction in a year of income of losses (other than primary production losses) incurred in any of the seven preceding years of income that have not already been recouped from assessable income. A loss incurred by a taxpayer in carrying on primary production is deductible in accordance with section 80AA of the Principal Act without limitation as to the time. For a taxpayer engaged in primary production and other activities, a section 80 loss is deductible before a section 80AA loss.

In the case of a company, the deductions available under sections 80 and 80AA are subject to the company satisfying a continuing ownership test or an alternative same business test.

Clause 10 proposes that a new sub-section - sub-section (1A) - be inserted in section 80 of the Principal Act to identify for carry-forward purposes, in a case where Subdivision B of Division 2A applies to a company in respect of a year of income, the amount that is to be deemed to be the company's loss for that year. Sub-section (1) of section 80 of the Principal Act will continue to apply to companies for income years in respect of which Subdivision B does not apply.

Under sub-section (1A) of section 80, the loss incurred by a company in a year to which Subdivision B applies is deemed to be the amount by which its "loss amount" exceeds its net exempt income for that year. The company's loss amount for an income year is to be the sum of -

(a)

the amount by which the total of its notional losses of relevant periods in the income year exceeds its "eligible notional loss" for that year (see notes on clause 9 concerning section 50D); and

(b)

the amount by which its "deductible amount" exceeds its "income amount" for an income year (see notes on clause 9 concerning sub-section 50C(2)).

Clause 11 proposes that three new sub-sections - sub-sections (3A), (3B) and (3C) be inserted in section 80AA of the Principal Act to identify, for carry-forward loss purposes in a case where Subdivision B of Division 2A applies to a company in respect of an income year, the loss deemed to have been incurred by the company from carrying on primary production in that year. Sub-section (2) of section 80AA of the Principal Act will continue to apply to primary production losses for income years in respect of which Subdivision B does not apply.

In a case to which Subdivision B of Division 2A applies, the primary production loss of a company for the income year is, broadly, to be determined in accordance with sub-sections (3A), (3B) and (3C) along the following lines -

•

first, by ascertaining the company's total loss for the year (including its primary production loss) in accordance with subsection (1A) of section 80 (see notes on clause 10); and

•

second, by ascertaining in accordance with paragraphs (a) and (b) of sub-section (3A) of section 80AA, as affected by sub-sections (3B) and (3C), a notional primary production loss by applying the same kind of calculation as in sub-section 80(1A), but by taking into account only assessable income from primary production and deductions allowable in respect of primary production activities.

Under paragraphs (c) and (d) of sub-section (3A), the loss deemed to have been incurred from primary production for the year, for purposes of section 80AA, will be the amount of the notional primary production loss ascertained under step 2, if it is equal to the section 80 loss determined under the first step calculation, or, in any other case, the lesser of that notional primary production loss or that section 80 loss.

Sub-section (3B) defines the meaning of a 'notional primary production loss'. It means -

(a)

in a case where the sum of the notional losses of a company exceeds the eligible notional loss of the company (see paragraph (a) of sub-section (3A)) but the 'deductible amount' does not exceed the 'income amount' (see paragraph (b) of that sub-section) - the amount of the excess;

(b)

in a case where the sum of the notional losses does not exceed the eligible notional loss but the 'deductible amount' exceeds the income amount - the amount of that excess; and

(c)

in any other case - the sum of the excesses calculated under paragraphs (a) and (b) of sub-section (3A), that is, the excess of the sum of the notional losses over the eligible notional loss of the company and the excess of the 'deductible amount' over the 'income amount' referred to in sub-section (2) of section 50C.

Sub-section (3C) will require that in applying the provisions of Subdivision B of Division 2A to calculate the loss incurred by a company in engaging in primary production in a year of income for the purposes of sub-section (3A), assessable income derived and allowable deductions incurred as a result of non-primary production activities are to be disregarded.

Clause 12: Additional period for distribution by liquidator

Introductory note

This amendment is designed to assist liquidators of private companies.

A private company that does not make a sufficient distribution by way of dividends of its after-tax income to its shareholders within a period of 12 months commencing 2 months before the end of the year of income is liable to pay a 50 per cent undistributed income tax on the shortfall in its dividend payments. Broadly stated, the amount on which the tax on undistributed income is payable is the amount remaining after deducting from the taxable income for an income year the sum of the primary tax payable in respect of that income, the retention allowance (60 per cent of business income, 10 per cent of property income other than private company dividends) and dividends paid during the prescribed period. A private company that is being liquidated is, like private companies generally, liable to the tax on the above basis.

Where a company is in liquidation and the liquidator in the course of that liquidation distributes money or other assets to shareholders, the distribution, to the extent to which it represents accumulated income, is deemed to be a dividend paid by the company to shareholders. Thus, a liquidator's distribution may, where a company has derived a taxable income in the year in which the liquidation occurs, be credited in whole or in part towards the sufficient distribution of that income that the company is required by the Principal Act to make.

Under the existing law, a liquidator of a private company that has derived a taxable income in the early part of an income year, and who wishes to make a final distribution to shareholders out of that income in order to wind up the company, must, if he is to avoid the payment of undistributed income tax on that income, wait until the last 2 months of the income year before doing so. This is because a distribution only qualifies to free the company from the tax on undistributed income of a year of income if, as explained earlier, it is made in the "prescribed period" of 12 months commencing 2 months before the end of that income year.

The amendment proposed by clause 12 is designed to overcome this difficulty. It is proposed to insert into the Principal Act a new section - section 105AB - that will enable a liquidator, who wishes to wind up the company at an early date, to make a final distribution prior to the commencement of the normal prescribed period for paying qualifying dividends.

The amendment is designed to enable a liquidator in such a case to apply for and be granted approval to make a qualifying distribution in relation to an income year during the first 10 months of the income year.

Paragraphs (a), (b) and (c) of sub-section (1) of new section 105AB describe the three conditions which will be present before a liquidator would wish to apply for an additional distribution period. These are, broadly, that the liquidator proposes, in the first 10 months of the year of income (i.e., before the commencement of the prescribed period) to make a distribution to shareholders; that the distribution, if made, would in whole or in part constitute a dividend paid to share-holders, and that the liquidator expects that the company will need to pay dividends in order to avoid a liability for undistributed income tax in respect of the year of income.

Where these conditions are met, the liquidator may apply to the Commissioner seeking the determination of an additional distribution period in which to pay qualifying dividends.

Sub-section (2) will mean that the Commissioner may, upon an application being lodged by the liquidator in accordance with sub-section (1), determine a period to be an additional distribution period during which the liquidator may make a qualifying distribution to the shareholders of the company, or he may refuse to grant the request. In deciding whether to grant or refuse an application for an additional distribution period, the Commissioner is to have regard to the matters specified in sub-section (3).

Paragraph (b) of sub-section (2) will require the Commissioner to act upon a liquidator's request for an additional distribution period when he considers that it is reasonable to assume that the company will have an "undistributed amount" in relation to the year of income. The undistributed amount is defined in the Principal Act as the amount remaining after deducting from the distributable income (taxable income less primary company tax), the sum of the retention allowance and the dividends paid by the company within the prescribed period. The granting of an additional period is, therefore, conditional upon the company being otherwise liable to undistributed income tax on its taxable income of the year of income.

Sub-section (3) will require the Commissioner to have regard to the matters specified in paragraphs (a) to (d) in deciding whether to grant or refuse a request made by the liquidator.

Under paragraph (a), the Commissioner is to have regard to whether the making of the distribution at a time prior to the commencement of the prescribed period would expedite the winding up of the company.

Paragraph (b) will require the Commissioner to have regard to whether - considerations of the additional tax aside - it would be unreasonable for the liquidator not to make the proposed distribution prior to the commencement of the pre-scribed period.

Paragraph (c) is a tax avoidance safeguard which will enable the Commissioner to have regard to any transaction, operation, undertaking, scheme or arrangement involving the proposed distribution which would have the effect of securing for any person a reduction in that person's liability to income tax in respect of a year of income.

Paragraph (d) will enable the Commissioner to have regard to any other relevant matters.

Under proposed sub-section (4), the Commissioner, having made a decision to either grant or refuse a request, is to notify the liquidator in writing of his decision. Where a decision to grant the request has been made, the notice will specify the period that the Commissioner has determined to be an additional distribution period, and is to be served upon the liquidator prior to the commencement of that period.

Sub-section (5) will apply where an additional distribution period has been granted and a distribution of money or property has been made during the period by the liquidator. To obtain the benefit of the distribution, the liquidator will need to advise the Commissioner within 30 days after the end of the additional distribution period, of the information set out in paragraphs (a) to (c).

Paragraph (a) will require the liquidator to advise whether a distribution of money or other property was made during the additional distribution period, paragraph (b) will require the liquidator to state the amount of the distribution and paragraph (c) will require the liquidator to state, where there has been a distribution otherwise than in money, the amount of the distribution and the nature of the property distributed.

Sub-section (6) is the operative provision, which will deem the distribution made by the liquidator, to the extent to which it would not be taken into account in determining the sufficient distribution in relation to the preceding year of income of the company, to be made in the prescribed period in relation to the current year of income. This provision is intended therefore to operate to apply the liquidator's distribution, firstly in reducing any liability for undistributed income tax for the preceding year of income and secondly to reduce the liability for undistributed income tax in respect of the current year of income.

Sub-section (7) will provide that the reference in sub-section (6) to an additional distribution period shall not include a period that is deemed by the safeguarding provisions of sub-section (8) or (9) to be an ineligible distribution period.

Sub-section (8) is a safeguarding measure which will enable the Commissioner, where he becomes satisfied at a time after the additional distribution has been made by the liquidator that the distribution was connected with a tax avoidance arrangement, to treat the distribution as ineligible for the purposes of the section.

Paragraphs (a) and (b) of proposed sub-section (9), which is also a safeguarding measure, will mean that where a liquidator has made a distribution during an additional distribution period, but the company is not dissolved within a period of 6 months from the end of that distribution period, or within such further time as the Commissioner allows, the additional distribution period will be an ineligible distribution period for the purposes of the section.

Sub-section (10) relates to the situation where a company, having been dissolved, is brought out of dissolution and is deemed to have continued in existence by order of a court or by the operation of any law. Where a company is restored to the register in these circumstances, the original dissolution will be disregarded for the purposes of paragraph (b) of sub-section (9) and this will mean that the additional distribution period will become an ineligible distribution period for the purposes of sub-section (6) unless a further dissolution occurs within 6 months of the end of the additional distribution period.

Sub-section (11) is a drafting measure which will ensure that the anti-tax avoidance provisions of sub-sections (3) and (8) will not have the unintended effect of applying to a reduction in the liability to undistributed income tax achieved by virtue of the proposed new section.

Clauses 13-27: Division 10B of Part III of the Principal Act

Introductory note

These clauses, which are concerned mainly with the proposal to allow a two year write-off of the cost of Australian film rights, will effect amendments to the provisions in Division 10B of Part III of the Principal Act which govern the allowance of income tax deductions for certain capital expenditure incurred by a taxpayer, either as an owner or a licensee, in acquiring rights in respect of a patent granted in Australia, a design registered in Australia, or a copyright subsisting in Australia. The Division does not apply to expenditure for which deductions are allowable under any other provision of the income tax law (e.g., expenditure that is fully deductible as a business expense in the year in which it is incurred or expenditure on plant subject to depreciation allowances).

The broad plan of Division 10B is to allow the owner or licensee of rights in respect of an Australian patent, design or copyright (referred to as a "unit of industrial property") to deduct the cost of the unit over the period (referred to as the "effective life" of the unit) during which the owner or licensee may exercise rights in respect of the unit. The first deduction year is the income year in which the unit is first used by the owner or licensee for the purpose of producing assessable income. Provision is made in Division 10B for balancing adjustments to apply where the unit is wholly or partially disposed of by the owner, or ceases to exist.

Where a taxpayer incurs capital expenditure (not otherwise deductible) in acquiring rights under a copyright in a film, the expenditure is presently deductible under Division 10B by way of equal annual deductions over 25 years or, in a case where the taxpayer's rights in respect of the film are exercisable over a specified period of less than 25 years, by way of equal annual deductions over the specified period. The main purpose of the amendments to Division 10B proposed by this Bill is to reduce to 2 income years the period over which deductions under Division 10B may be allowed for the capital cost of rights relating to a film that is classified as an "Australian film".

The key provisions to implement that purpose are to be incorporated into the law by clause 22, which ordinarily will have the effect of attributing to a unit of industrial property that relates to the copyright in an Australian film an effective life of 2 years commencing at the beginning of the year of income during which the owner first used the unit, or the film to which it relates, for the purpose of producing assessable income. If the unit was acquired for a specified period ending within that same year of income, an effective life of one year will be attributed to the unit.

In accordance with existing provisions that implement the broad plan of Division 10B, as already outlined, this will mean that taxpayers who incur capital expenditure (not otherwise deductible) to acquire units of industrial property comprising Australian film rights will ordinarily be entitled to have one-half of the cost deducted in the assessment for the year of income during which the unit is first used for the purpose of producing assessable income, and the other half deducted in the assessment for the following year of income. A taxpayer who acquires such a unit for a specified period ending within the first-mentioned year of income will be entitled to have the total cost deducted in the assessment that year.

As with units of industrial property in general, the deductions allowable on the quick write-off basis in respect of Australian film rights will be subject to adjustment if the owner disposes of those rights in whole or in part.

A film will be classified as an "Australian film" if it is certified by the Minister for Home Affairs to be a film that meets tests specified in a definition of that expression and a supporting provision to be incorporated in the law by paragraphs (a) and (b) of clause 13. The tests are explained in notes on those paragraphs.

The owner of rights in an Australian film who so wishes may, instead of having deductions allowed on the new basis that has just been explained, elect to have those costs deducted on the basis provided for by the existing provisions of Division 10B.

The quick write-off basis will not be available for the capital costs of Australian film rights where the rights, or the films to which they relate, were used by the taxpayer concerned or anyone else for the purpose of producing income, whether assessable or not, before 22 November 1977.

Another important purpose of the amendments to be effected by clauses within the 13-27 range is to close off avenues that otherwise might be used by owners of units of industrial property, with the co-operation of compliant parties, to secure benefits in excess of those that the provisions in Division 10B are intended to provide. These safeguarding measures, which are to apply in relation to transactions between parties not dealing with each other at arm's length entered into after the date on which they were foreshadowed, 27 April 1978, are to be incorporated into the law by clauses 18, 19, 20 and 24. The notes on those clauses explain the nature and effects of the amendments.

Other amendments to be effected by this group of clauses are of a drafting nature consequential upon the introduction of the 2 year write-off concession for Australian film rights, or necessary to clarify the operation of the existing provisions in certain respects.

The following notes explain the clauses in more precise terms.

Clause 13: Interpretation

Paragraph (a) of clause 13 will insert in sub-section 124K(1) of the Principal Act a definition of the key expression "Australian film" and also a definition of the ancillary expression "film". The definitions are relevant to the new section 124UA - the provision which will provide entitlements for quick write-off of the capital costs of Australian film rights - proposed to be inserted in the Principal Act by clause 22.

"Australian film" is to be defined as meaning a film that is certified by the Minister for Home Affairs to be either -

•

a film that has been, or is to be, made wholly or substantially in Australia or in an external Territory and that has, or will have, a "significant Australian content" having regard to matters covered by paragraph (b) of this clause; or

•

a film that has been, or is to be, made in pursuance of an agreement or arrangement entered into between the Australian Government or an authority of the Australian Government and the Government of another country or its authority.

"Film" is to be defined as meaning an aggregate of images, or of images and sounds, embodied in any material.

Paragraph (b) of clause 13 proposes the insertion in section 124K of a new sub-section - sub-section (1A) - to set out the matters to which the Minister for Home Affairs is to have regard in determining whether a film has a significant Australian content. Such matters include the subject-matter of the film, where the film is made, the nationalities and places of residence of the actors, script-writers, producers, directors and other people involved in the making of the film, the persons who beneficially own the shares in the capital of any company concerned in the making of the film, the persons who beneficially own the copyright in the film, the source of the moneys used to finance the production of the film, and any other relevant matters.

Paragraph (c) of clause 13 will insert two new sub-sections - sub-sections (3) and (4) - in section 124K of the Principal Act. These new provisions are technical measures, not concerned exclusively with rights related to Australian films, designed to make it clear that a unit of industrial property that is transmitted from the owner to another person by operation of law is to be treated for purposes of Division 10B as having been disposed of by the owner to the other person.

New sub-section (3) will formally provide for the provisions of Division 10B to have effect, in a case where a unit of industrial property is transmitted to a person by operation of law, as if the unit had been disposed of to that person by the last preceding owner at the time of the transmission.

New sub-section (4) will make it clear that a reference in Division 10B to "the transmission of a unit of industrial property by operation of law" extends to cases where a unit is transmitted by operation of law to a trustee on the death of the deceased owner or to a beneficiary of the estate of the deceased owner.

Clause 14: Application

This clause proposes a number of amendments to sub-section 124L(1) of the Principal Act which formally states the classes of "owners" of industrial property rights to whom Division 10B applies.

The amendments proposed by paragraphs (a), (b), (c), (d) and (f) of clause 13 are of a minor drafting or technical nature.

Paragraph (e) of the clause proposes the insertion in sub-section 124L(1) of the Principal Act of a new provision - paragraph (d) - specifically referring to cases where a person acquires a unit of industrial property by operation of law (e.g., as the trustee or a beneficiary of the estate of a deceased owner). Such owners are intended to be eligible for benefits under Division 10B and new paragraph (d) of sub-section 124L(1) is designed to remove any doubts about their position.

Clause 15: Annual deductions

Section 124M of the Principal Act authorises the allowance of annual deductions for amounts determined by dividing the "residual value" (the meaning of this expression is explained in notes on clause 19) of a unit of industrial property as at the end of each relevant year of income by the number of whole years in the effective life of the unit as at the beginning of that year.

This clause proposes to omit existing sub-section (3) of section 124M and insert new sub-sections (3) to (6) inclusive.

The new sub-section 124M(3) is directed to circumstances specifically referred to in sub-section 124S(2) of the Principal Act, which is designed, in conjunction with other technical provisions of Division 10B, to authorise deductions for capital expenditure incurred by an owner of a unit of industrial property in obtaining the surrender to him of a licence previously granted by him in respect of the unit.

The new sub-section (3) of section 124M will authorise the allowance of a deduction for the amount of such capital expenditure where it is incurred to obtain the surrender of the licence after the effective life of the unit in relation to the owner has expired. The present provisions are, technically, only capable of providing for a deduction where the surrender of the licence is obtained by the owner during the effective life of the unit.

The need for new sub-section (3) arises principally because of the move, as explained in the notes on clause 22 of this Bill, to deem a unit of industrial property that relates to a copyright in an Australian film to have an "effective life" of 2 years over which the cost of the unit is to be written off under Division 10B. The sub-section will permit an owner of such a unit who, after this 2 year period has expired, incurs capital expenditure in obtaining the surrender to him of a licence previously granted by him in respect of the unit to claim a deduction for the full amount of that expenditure in respect of the year of income in which it is incurred. If such expenditure is incurred by the owner during the effective life of the unit, that expenditure will form part of the cost of the unit and be available for deduction on the new 2 year write-off basis that is being introduced.

The new sub-section 124M(4) is a drafting measure having the same basic purpose as existing sub-section 124M(3). By formally providing, in relation to a year of income, for a deduction not to be allowable under section 124M in respect of a unit of industrial property - except in circumstances referred to in the notes below on new sub-section 124M(5) - where the owner ceases to be the owner of the unit during the year of income, sub-section (4) clears the way for the appropriate balancing adjustment to be made under section 124N or 124P of the Principal Act on the disposal or lapse of the unit.

The new sub-section 124M(5) makes it clear that the annual deduction otherwise allowable under section 124M in respect of a year of income to the owner of a unit of industrial property is not precluded, in terms of sub-section 124M(4), where -

•

the owner ceases to be the owner of the unit by virtue of the transmission of the unit to another person by operation of law (paragraph (5)(a)); or

•

the unit was purchased or otherwise acquired by the owner for a specified period and he ceases to be the owner by reason that the specified period terminates (paragraph (5)(b)).

In transmission cases of the kind to which paragraph (a) of sub-section (5) is directed, the principal effect of the sub-section will be that, in a case where the owner of the unit dies during the year of income, the full amount of the annual deduction authorised by section 124M will be allowable in the date-of-death assessment of the deceased owner, with the residual value of the unit then being deductible in accordance with the provisions of Division 10B in the assessments of the trustee or the beneficiary of the deceased owner's estate to whom the unit is transmitted by operation of law in consequence of the owner's death.

By virtue of paragraph (a), this will also be the position under Division 10B in any other cases where a unit of industrial property is transmitted from the owner to another person by operation of law.

In the circumstances referred to in paragraph (b) of sub-section (5), capital expenditure incurred by the owner in acquiring the unit for a specified period is, broadly, to be deductible by way of equal annual deductions in respect of each of the income years falling within the specified period, including the income year in which the specified period terminates. Paragraph (b) is a technical measure directed to that end.

The new sub-section 124M(6) is a technical measure directed to cases where the owner of a unit of industrial property ceases to be the owner of the unit by virtue of the transmission of the unit by operation of law to another person, for example, to a trustee or beneficiary in consequence of the death of the owner of the unit.

By providing in these cases for a reference, in sub-section (1) or (3) of section 124M of the Principal Act, to the residual value of a unit of industrial property as at the end of a year of income to be read as a reference to the residual value of the unit in relation to the taxpayer immediately before the time of the transmission of the unit, sub-section (6) will permit the annual deduction calculated under section 124M to be allowed in the relevant assessment of the taxpayer who owned the unit immediately before its transmission to the other person.

Deductions under Division 10B in the assessments of the new "owner" of the unit will continue, as at present, to be based on the residual value of the unit at the time of the transmission, after taking into account the deductions allowed or allowable in respect of the unit to the last preceding owner.

Clause 16: Deductions on the disposal or lapse of a unit of industrial property

This clause will effect amendments of a drafting or technical nature to sub-section (2) of section 124N of the Principal Act which provides that, where a unit of industrial property lapses by reason of the patent or copyright or the registration of the design to which the unit relates ceasing to be in force, or where a licence under a patent, copyright or design is surrendered by the licensee otherwise than in consideration of the payment of a lump sum, the residual value of the unit in relation to the owner at that time is an allowable deduction.

As presently expressed, sub-section 124N(2) does not cater for circumstances (of probably rare occurrence) where an owner of a unit of industrial property has incurred capital expenditure (of the kind intended to be deductible under Division 10B) in respect of the unit after its effective life has expired. The drafting amendment proposed by paragraph (a) of clause 16 will permit a deduction for the residual value of the unit to be available under sub-section 124N(2) in these circumstances.

The drafting amendment proposed by paragraph (b) of clause 16 is to make it clear that paragraph (b) of sub-section 124N(2) applies where no amount of "consideration receivable" (as defined in section 124T) is received by the licensee on surrendering his licence.

Paragraph (c) of clause 16 effects a drafting amendment to sub-section 124N(2) in consequence of the amendments to the sub-section proposed by paragraph (a) of the clause.

Clause 17: Amount to be included in assessable income on disposal of a unit of industrial property

Sub-section (1) of section 124P of the Principal Act applies in the case of an owner who disposes of a unit of industrial property, either wholly or in part, before its effective life has expired and who does so for an amount of consideration in excess of the residual value of the unit at the time of disposal. In this situation the sub-section provides for the inclusion of the amount of the excess in the owner's assessable income of the year of income in which the disposal occurs. Sub-section 124P(2) requires - in a case of a disposal of a unit after the expiration of its effective life - for the full amount of the consideration received by the owner to be treated as assessable income of the relevant year of income. In each case, the amount to be included as assessable income of the owner is, by reason of sub-section 124P(3), not to exceed the sum of the deductions allowed under Division 10B in prior assessments of the owner in respect of the unit as reduced by any amounts previously included in assessable income under section 124P.

Paragraph (a) of clause 17 proposes to omit sub-sections (1) and (2) of section 124P and insert a new combined provision - sub-section (1). The main purpose of this amendment is to effect drafting changes that will permit the adjustment provided for in existing sub-section 124P(1) to apply in appropriate circumstances where the disposal of the unit occurs after the expiration of its effective life.

Paragraph (b) of clause 17 will make a drafting change to sub-section (3) of section 124P of the Principal Act consequential on the amendment to the section proposed by paragraph (a) of the clause.

Clause 18: Cost of a unit of industrial property

This clause proposes to replace section 124R of the Principal Act with a new section 124R (comprising sub-sections (1) to (5) inclusive). The broad purpose of the new section is essentially the same as its predecessor - to define the amount that is to be taken as the cost of a unit of industrial property for purposes of calculating the deductions allowable to the owner under Division 10B.

The new sub-section (1) of section 124R is specifically directed - by way of paragraphs (a), (b), (c) and (d) - to the four broad sets of circumstances in which a taxpayer can become the owner of a unit of industrial property. The operation of the sub-section is subject to the operation of the new sub-section 124S(2), which provides for the cost of a unit of industrial property to be increased in the circumstances referred to in that sub-section (see notes on paragraph (b) of clause 19 of the Bill).

Paragraph (a) of sub-section 124R(1) applies where the taxpayer is the original owner of the patent, copyright or design to which the unit of industrial property relates. In these circumstances, the cost of the unit will, consistently with the present law in the general run of cases, be the amount of expenditure of a capital nature that has been directly incurred by the taxpayer in devising the invention or producing the design or work to which the copyright relates. An exception to this general rule will arise if that expenditure has been inflated by arrangements designed to enable the taxpayer to secure excessive benefits under Division 10B in respect of the unit (see notes below on new sub-section 124R(2)).

Paragraph (b) of the new sub-section 124R(1) applies where the taxpayer acquires a unit of industrial property by purchase. In a purchase between parties dealing at arm's length, the cost of the unit for Division 10B purposes will continue to be the amount paid by the taxpayer to acquire the unit. As explained in the notes relating to the new sub-section 124R(3), the cost of a unit that is transferred between parties not dealing with each other at arm's length will, in certain circumstances, not be taken as the price they have set on the unit for the purpose of the transfer, but rather the original cost of the unit to the vendor, or the value of the unit at the time of its transfer to the new owner, whichever is the less.

Paragraph (c) of the new sub-section 124R(1) applies where a taxpayer acquires a unit of industrial property as a gift from another person. The cost of the unit to the taxpayer (i.e., the donee) will in these cases be taken, consistently with the practical situation at present, as the residual value of the unit in relation to the donor immediately before the time of the disposal.

Paragraph (d) of the new sub-section 124R(1) applies where a taxpayer acquires a unit of industrial property by reason of the ownership of the unit being transmitted by operation of law. In these circumstances, the cost of the unit will be the residual value of the unit in relation to the preceding owner immediately before the time of the transmission. The most common example of cases to which the new paragraph (d) will apply is where a unit of industrial property is transmitted by operation of law to a trustee or beneficiary in consequence of the death of the owner. Any deductions allowed or allowable under Division 10B in respect of the unit in an assessment of the deceased owner in respect of income derived up to the time of death are, in terms of paragraph (d), to be taken into account in calculating the residual value of the unit immediately before the time of the transmission.

The new sub-section 124R(2) is designed to protect the deduction provisions of Division 10B against arrangements to inflate the "cost" of a unit of industrial property that could otherwise allow the owner of a patent, design or copyright to which the unit relates to secure excessive deductions under the Division. The safeguard applies where the owner and a supplier of goods or services act to attribute to goods or services involved in devising the invention, or in the production of the design or the work or subject-matter to which the unit relates, a "cost" in excess of the commercially realistic worth of those goods or services. In these circumstances, the Commissioner will have the power to base deductions under Division 10B on an amount that would have been the cost if the parties had dealt with each other at arm's length.

A taxpayer whose assessment is affected by the Commissioner applying this safeguard will have the usual rights of objection and reference to a Taxation Board of Review. In the event of the matter being referred to a Taxation Board of Review, it would be open for the Board to substitute its own opinion as to a realistic cost level for the opinion formed by the Commissioner.

By reason of sub-clause (3) of clause 31 of the Bill, sub-section (2) will apply only in relation to transactions entered into after 27 April 1978.

The new sub-section 124R(3) provides a safeguard where a unit of industrial property is purchased from the owner by an associated person or company. The safeguard is to apply where the transfer of the unit is effected for a purchase price that exceeds the cost of the unit to the transferor or the value of the unit at the time of the transfer, in which event that cost or that value, whichever is the less, is to be treated as the cost of the unit for purposes of calculating the deductions allowable under Division 10B to the new owner (i.e., the transferee).

Pursuant to sub-clause (3) of clause 31 of the Bill, sub-section (3) will apply only in relation to transactions entered into after 27 April 1978.

The new sub-section 124R(4) has the effect of extending the operation of the safeguard proposed by the new sub-section 124R(3) to cases in which the owner transfers a part of a unit of industrial property to an associated person or company.

The new sub-section 124R(5) refers to a case where the taxpayer purchases a unit of industrial property together with other property under an agreement which does not specify a separate price for the unit. In such a case, the capital expenditure incurred by the owner in acquiring the unit is, in effect, to be such part of the total price as the Commissioner determines is attributable to the unit.

Clause 19: Residual value

Paragraph (a) of clause 19 proposes to insert a new provision - sub-section (1A) - in section 124S of the Principal Act to correct a flaw in paragraph (a) of sub-section (1) of that section.

The function of sub-section 124S(1) is to set out the basis for determining the residual value of a unit of industrial property for purposes of applying the provisions of Division 10B. The residual value of a unit is the basis for calculating annual deductions under section 124M and also for calculating the balancing adjustment that applies under section 124N or 124P on the disposal of a unit.

Broadly, the residual value of a unit of industrial property at any particular time, is the cost of the unit to the owner less the sum of any deductions allowed or allowable in respect of the unit in assessments of the owner for prior income years, and any amounts of consideration received by the owner in respect of any part disposal by him of the unit prior to that time.

In a case where an invention, design or work to which a unit relates is used by the owner for the purpose of producing assessable income in Australia and also income in another country, the residual value of the unit as at the end of the relevant year of income needs to be determined, in order that the calculation to be made under section 124M will produce the appropriate level of annual deduction, by taking account of the annual deductions that would have been allowed to the owner in respect of the unit in prior years if the unit had been used wholly for the purpose of producing assessable income.

However, paragraph 124S(1)(a) of the present law allows for the taking into account of only such parts of the annual section 124M deductions as have actually been allowed after section 124Z has been applied. Section 124Z provides, in effect, for deductions that would otherwise be allowable in respect of a unit under Division 10B to be reduced by an amount that is appropriate having regard to the extent to which the use of the unit in another country generates income exempt from tax in Australia. The new sub-section (1A) of section 124S will enable the residual value, and thus the annual deductions under section 124M and balancing adjustments, to be determined in the appropriate manner in relation to cases involving the application of section 124Z.

By reason of sub-clause (2) of clause 31 of the Bill, sub-section (1A) will apply in assessments for 1978-79 and subsequent years of income.

Paragraph (b) of clause 19 will insert in section 124S of the Principal Act a new sub-section (2) in substitution for the existing one, which requires that the residual value of a unit of industrial property be increased by an amount equal to any expenditure of a capital nature incurred by the owner of the unit in obtaining the surrender of a licence previously granted by him in respect of the unit. Where the expenditure so incurred is excessive, having regard to the value of the licence at the time of the surrender, the Commissioner is presently empowered to increase the residual value of the unit, for the purposes of applying the provisions of Division 10B, by only such amount as he determines. The amount so determined would ordinarily equate with the value of the licence at the time of its surrender.

The new sub-section (2) will have the same basic operation as the present provision, but will provide a more effective safeguard than is presently available where the owner of the unit and the licensee are not dealing with each other at arm's length in relation to the surrender of the licence. In these non-arm's length cases, the new sub-section (2) will mean, in effect, that where the consideration for the surrender was greater than the value of the licence at the time of the surrender or the amount incurred by the licensee in originally obtaining the licence from the owner, the residual value of the unit in relation to the owner will be increased, for the purposes of applying the provisions of Division 10B in the owner's assessment for the relevant year, by the lesser of that value or that amount.

The new sub-section (2) will, pursuant to sub-clause (3) of clause 31 of the Bill, apply only in relation to transactions entered into after 27 April 1978.

Clause 20: Consideration receivable on disposal

This clause proposes to repeal section 124T of the Principal Act and insert a new section 124T in its stead.

The new section 124T has the same basic purpose as the existing section - namely, to define the amounts that are to be treated as "consideration receivable" in calculating the balancing adjustment that is to be made under section 124N or 124P on the disposal, by the owner of a unit of industrial property, of the unit or a part of the unit. In addition, the new section 124T incorporates a safeguard against arrangements between associated parties that could have the effect of avoiding or cutting down that balancing adjustment.

The new sub-section 124T(1) comprises three paragraphs - paragraphs (a), (b) and (c) - which broadly correspond with paragraphs (a), (b) and (c) of existing section 124T and similarly define "consideration receivable" in respect of the disposal in whole or in part of a unit of industrial property to mean, in effect -

•

where the unit is sold in whole or in part for a specified price - the net sale price (paragraph (a));

•

where the unit is sold in whole or in part together with other property and a specified price is not allocated to the unit or part unit - such part of the net sale price as is attributable to the sale of the unit or part unit (paragraph (b)); and

•

where the unit is transmitted in whole or in part by operation of law - an amount equal to the residual value of the unit or part unit immediately before the time of the transmission (paragraph (c)).

The new sub-section (2), a safeguarding measure, applies where a unit of industrial property is disposed of in whole or in part by the owner either for no consideration, or for a price less than the value of the unit or part unit at the time of its disposal and the Commissioner is satisfied that the parties were not dealing with each other at arm's length. In these circumstances, the sub-section provides for the value of the unit or part of the unit to be taken as the "consideration receivable" in respect of the disposal and, accordingly, used as the basis for calculating the balancing charge required to be made under section 124N or 124P in the assessment of the owner for the year of income in which the disposal is effected.

The new sub-section (2) will, pursuant to sub-clause (3) of clause 31 of the Bill, apply only in relation to transactions entered into after 27 April 1978.

The new sub-section (3) of section 124T is a drafting measure to make it clear that the term "consideration receivable", as defined by sub-section (1), does not include an amount receivable by the owner on the disposal of a unit or part of a unit that is to be treated as assessable income under the general provisions of the Principal Act outside of Division 10B. It would not be appropriate for such assessable income to be taken into account also as consideration receivable in calculating the balancing adjustment to be made under section 124N or 124P on the disposal of the unit or part unit.

Clause 21: Effective life

This clause will effect drafting changes to sub-section 124U(1) of the Principal Act that are consequential upon the insertion in Division 10B of a new section 124UA as proposed by the next clause of the Bill.

Clause 22: Effective life of certain units of industrial property

This clause proposes to insert a new section - section 124UA - in Division 10B of Part III of the Principal Act. The new section will have the general effect of permitting capital expenditure incurred in acquiring rights in or under the copyright relating to a film to be deductible over a basic 2 year write-off period if the film is an "Australian film" in the terms of the definition to be incorporated in the law by clause 13. The effects of the proposed amendments relating to Australian film rights have been outlined in the Introductory Note on clauses 13 to 27.

In line with the basic drafting concept followed in Division 10B, the 2 year write-off concession is to be implemented, under new sub-section 124UA(1), by deeming the effective life of a unit of industrial property that relates to a copyright subsisting in an Australian film to commence at the beginning of the year of income in which the owner first used the unit for the purpose of producing assessable income and to end -

•

where the unit was purchased or otherwise acquired for a specified period - at the end of the year of income next succeeding the year of income during which the unit was first so used or, if occurring earlier, at the end of the year of income during which the specified period will terminate (paragraph (a) of new sub-section 124UA(1)); or

•

in any other case - at the end of the year of income next succeeding the year of income during which the unit was first so used (paragraph (b) of that sub-section).

Accordingly, the effective life of a unit that relates to an Australian film will, for purposes of calculating the amount of the annual deduction allowable to the owner on the basis set out in section 124M of the Principal Act, generally be 2 income years, with provision being made for the effective life of such a unit to be taken as 1 income year where the rights are held for a specified period that expires within the year of income during which they are first used for the purpose of producing assessable income.

By sub-section (2) of section 124UA, an owner of a unit of industrial property that relates to an Australian film will be able, if he so wishes, to elect to have the effective life of the unit determined under section 124U, in which event the deductions allowable in respect of the cost to the owner of acquiring the unit will be determined on the basis presently provided for in Division 10B - that is, broadly, by way of annual deductions over 25 years or any shorter effective life given to the unit by existing section 124U.

Formal requirements concerning the making and lodgment of this election are set out in new sub-section 124UA(3).

Sub-section (4) of section 124UA will restrict the availability of the 2 year basic write-off period to cases where the rights, and the Australian films to which they relate, were first used for the purpose of producing income on or after 22 November 1977.

Clause 23: Interest by licence in patent etc.

It is proposed by this clause that the reference to "a lump sum" in paragraph (a) of existing sub-section 124V(2) of the Principal Act, which is concerned with certain consequences of a surrender of a licence, be replaced with a reference to simply "an amount". This is a drafting refinement that will not affect the general operation of the provision.

Clause 24: Disposal of unit of industrial property on change of partnership etc.

This clause will repeal existing section 124W of the Principal Act and substitute a new provision - section 124W, comprising sub-sections (1) to (5) inclusive.

The basic purpose of the new section 124W is, as is that of the existing provision, to set out the basis on which the relevant provisions of Division 10B are to apply in relation to arrangements that result in a change in the interests of persons in a unit of industrial property. Also consistently with the existing law, the new section 124W will apply only where one of the parties who owned the unit before the change retains part ownership of the unit after the change.

As an additional feature, the new section 124W will provide safeguarding provisions effective in relation to transactions entered into after 27 April 1978 - see notes below on the new sub-sections (3), (4) and (5) - that are complementary to the measures to counter tax avoidance arrangements proposed for insertion in Division 10B by clauses 18, 19(b) and 20 of the Bill.

Taken together, and consistently with the existing section 124W, the new sub-sections 124W(1) and (2) will have the effect of deeming changes in interests in units of industrial property to be disposals by the persons who owned the property prior to that change to the persons owning the property after the change, if one of the parties who owned the property before the change is one of the parties owning the property after the change.

These circumstances are generally associated with the formation, variation or dissolution of a partnership. Where there is a complete change in ownership or interests in a business or property - as, for example, where the partnership of A and B sells its business or property to the partnership of C and D - a disposal of the relevant assets clearly takes place. If, however, A had sold his share in the partnership to E, the resultant change of interests in the partnership property would not, but for sub-sections (1) and (2), represent a disposal by A and B to B and E. Rather, it would be a case of A disposing of his interest to E.

The approach proposed by these sub-sections is followed in the same circumstances in relation to transfers of interests in items of plant and other property that are the subject of depreciation allowances (cf., section 59AA of the Principal Act) and, in the context of Division 10B, will permit -

(a)

balancing adjustments to be made in the assessments of the transferors in consequence of the deemed disposal of the unit in accordance with section 124N or 124P, based on the amount that is to be regarded as the consideration receivable by the transferors in respect of the transfer of the unit - see notes below on new sub-sections (3), (4) and (5) for the meaning given to "consideration receivable" in these cases; and

(b)

deductions to be allowed in the assessments of the transferees in consequence of their acquisition of the unit in accordance with section 124M, based on the amount that is to be regarded as the cost to them of acquiring the unit - see notes below on new sub-sections (3), (4) and (5) for the meaning given to "cost" in these cases.

The new sub-sections (3), (4) and (5) of section 124W specify the amounts that, in the various circumstances that can arise in respect of transfers of interests in a unit of industrial property to which the section applies, are to be taken for the purposes of applying the provisions of Division 10B as, on one hand, the amount of the "consideration receivable" by the transferors on the disposal of the unit and, on the other, as the capital expenditure (i.e., the "cost") incurred by the transferees in acquiring the unit.

As already indicated, the safeguarding provisions of sub-sections (3), (4) and (5) are complementary to other measures directed against tax-avoidance arrangements that are proposed for general application in relation to transfers of industrial property between associated persons and are similarly to take effect only in relation to transactions entered into after 27 April 1978.

The new sub-section (3) refers to three situations, namely -

•

where the agreement in consequence of which the change in interests in a unit occurs specifies an amount as the value of the unit for the purposes of the agreement and that amount is equal to the value of the unit at the time of the change;

•

where there is no such agreement;

•

where there is such an agreement but no amount is specified as the value of the unit for the purposes of that agreement.

For the purposes of applying the relevant provisions of Division 10B in any of these situations, the transferors are to be deemed to have disposed of the unit for a consideration equal to the value of the unit at the time when the change occurred; and the transferees are to be deemed to have incurred expenditure of a capital nature on the purchase of the unit of an amount equal to that value or the cost of the unit to the transferors (after allowing for any increase to the cost of the unit authorised by sub-section 124S(2)), whichever is the less.

The new sub-section (4) refers to a situation where the agreement in consequence of which the change in the interests in a unit occurred specifies an amount as the value of the unit for the purposes of the agreement and that amount exceeds the value of the unit at the time of the change.

For the purposes of applying the relevant provisions of Division 10B to this case, the transferors are to be deemed to have disposed of the unit for a consideration equal to the amount specified in the agreement; and the transferees are to be deemed to have incurred expenditure of a capital nature on the purchase of the unit of an amount equal to the value of the unit at the time of the change or the cost of the unit to the transferors (as increased by any amount authorised by sub-section 124S(2)), whichever is the less.

The new sub-section (5) refers to cases where the agreement in consequence of which the change in the interests in a unit occurred specifies an amount as the value of the unit for the purposes of that agreement and that amount is less than the value of the unit at the time of the change.

For the purposes of applying the relevant provisions of Division 10B in these circumstances, the transferors are to be deemed to have disposed of the unit for a consideration equal to the value of the unit at the time of the change; and the transferees are to be deemed to have incurred capital expenditure on the purchase of the unit of an amount equal to the amount specified in the agreement or the cost of the unit to the transferors (as increased by any amount authorised by sub-section 124S(2)), whichever is the less.

Clause 25: Use of patent by Commonwealth or State

Clause 26: Damages for infringement

These clauses of the Bill are designed to effect amendments to sections 124X and 124Y of the Principal Act that, like the corresponding amendments proposed by clause 23, are of a minor nature. The amendments will not alter the present operation of those sections in any significant way.

Clause 27: Benefit from overseas rights

This clause will effect a drafting refinement to section 124Z of the Principal Act.

Clause 28: Income of non-resident companies.

This clause and the associated Income Tax (Non-resident Companies) Bill 1978, will introduce an additional "branch profits tax" on non-resident companies, of 5 per cent of taxable income as reduced by the exclusion of certain specified items of income. The tax will be levied for the 1977-78 and subsequent income years but will apply in relation to the 1977-78 income year only to that part of the company's reduced taxable income of that year proportionate to the part of the company's year of income from 4 November 1977 to the end of the year of income.

By the proposed amendment, a new Division 11B consisting of two sections - sections 128S and 128T - is to be inserted in Part III of the Principal Act. Section 128T establishes a liability upon non-resident companies to pay tax on their reduced taxable incomes while section 128S defines what is meant by "reduced taxable income".

Sub-section (1) of new section 128S determines the amount on which the "branch profits tax" will be levied. This amount is referred to as the "reduced taxable income", and is to mean the taxable income of the company less the sum of amounts specified in paragraphs (a) to (e) of the sub-section.

Paragraph (a) of sub-section 128S(1) will exclude from reduced taxable income dividends that are included in the taxable income of the company. The exclusion will be of the dividends that are included in assessable income, less allowable deductions directly related to the dividends (sub-paragraph (i)) and so much of any other allowable deductions as may appropriately be related to the dividends (sub-paragraph (ii)).

Paragraphs (b), (c) and (d) of sub-section 128S(1) will exclude from reduced taxable income income that is taxed under special provisions of the Principal Act.

Paragraph (b) excludes from reduced taxable income amounts included in taxable income of a company in accordance with Division 12 (Overseas Ships) and Division 14 (Film Business Controlled Abroad). Under Division 12, 5 per cent of amounts paid for the carriage, by a ship owner or charterer whose principal place of business is out of Australia, of passengers, livestock, mails or goods shipped in Australia is deemed to be taxable income derived by the ship owner or charterer in Australia. Division 14 was repealed by Act No. 126 of 1977 but continues to apply to income derived before 17 August 1977. It provided that, broadly, 10 per cent of the income derived by a non-resident from a foreign-controlled film business in Australia was to be included in the taxable income of the non-resident. On and from 17 August 1977 income concerned - film and video tape royalties - is taxed under Division 13A and is not included in the non-resident's assessable income. Accordingly, it is not necessary to specifically exclude from reduced taxable income income that is taxed under Division 13A.

Paragraph (c) of proposed sub-section 128S(1) concerns section 143 of the Principal Act under which 10 per cent of certain insurance premiums paid to a non-resident insurer are deemed to be taxable income of the non-resident. This amount will be excluded from reduced taxable income. Where the proviso to section 143 applies, however, and the premiums are therefore subject to primary tax on a normal assessment basis, they will not be excluded from the tax base.

Paragraph (d) has the effect of excluding from reduced taxable income any increase in taxable income resulting from the application of sub-section 148(1) of the Principal Act relating to re-insurance with non-residents. A non-resident insurance company may have its taxable income increased by sub-section 148(1) if it does not elect under sub-section 148(2) to (among other things) pay tax according to sub-sections 148(3) and 148(5) in respect of re-insurance premiums paid to non-residents. Specific mention of amounts taxed under sub-sections 148(3) and 148(5) is not necessary, as those sums are not technically taxable income in this context and so will not form part of the tax base.

Paragraph (e) will exclude from the reduced taxable income of a non-resident life assurance company, the proportion of the company's taxable income from its life assurance business, other than dividends, that is allocated to policy holders.

Sub-section 128S(2) is a technical amendment consequential on the inclusion in the Principal Act, by clause 9 of the Bill, of Subdivision B of Division 2A relating to current year company losses. Section 50N of that Subdivision sets out the basis for determining the composition of taxable income of a company to which the Subdivision applies. Sub-section 128S(2) specifies, in effect, that this basis will apply in determining the amount of the dividend income component of the taxable income of a non-resident company to which the new Subdivision applies, which is to be excluded from reduced taxable income under sub-section (1).

By sub-section (1) of section 128T a non-resident company will be liable for tax upon its reduced taxable income, as defined in section 128S, for the 1977-78 and subsequent income years, at the rate declared by Parliament.

By sub-section 128T(2), however, the tax will apply for the 1977-78 year of income, including any accounting period substituted for the normal 1977-78 year, on a proportionate basis. It will apply only in respect of the proportion of the reduced taxable income of the company for that year of income equal to the proportion of the company's year of income falling on and after the date - 4 November 1977 - on which it was announced that a branch profits tax would be introduced.

Sub-section (3) is a drafting measure to make it clear that the tax is additional to any other income tax, such as the primary company tax of (at present) 46 per cent of taxable income.

Sub-section (4) deems the tax to be an income tax for the purposes of other provisions of the Principal Act. This means, for example, that it will reduce the distributable income of a private company for the purposes of the undistributed profits tax provisions of Division 7 of that Act, and will be subject to the usual machinery and collection provisions.

Clause 29: Amendment of assessments

Clause 29 concerns the power of the Commissioner of Taxation to amend assessments in certain circumstances.

By paragraph (a) of clause 29, sub-section 170(10) of the Principal Act is to be amended so that, where the Commissioner grants an additional distribution period to a liquidator of a private company under the proposed section 105AB, an assessment which is affected by that decision will be capable of being amended at any time for the purposes of giving effect to that decision. The proposed amendment will also enable the Commissioner to amend such an assessment at any time if, having granted an additional distribution period, he becomes satisfied under sub-section 105AB(8) that the distribution arose out of a tax avoidance scheme. The power of amendment will further apply where a company in the course of liquidation is not dissolved within the period of 6 months or such longer period as is allowed after the end of the additional distribution period, or where such a company, having been dissolved, is restored to the register.

Paragraph (b) will insert into sub-section 170(13) a power to amend assessments within a period of 6 years after the date upon which the tax becomes due and payable under the assessment where the Commissioner becomes satisfied that an arrangement was entered into in relation to a company which had the effect of producing a disqualifying event during the year of income by reason of paragraphs (1)(d) to (h) of section 50H inclusive, or where, by reason of the operation of the proposed section 50K, an event occurs which affects the beneficial ownership of shares in the company and the person who beneficially owned the shares is to be treated as not being the beneficial owner of those shares for the purposes of the "current year losses" provisions. The amendment proposed by paragraph (b) is in line with other provisions of sub-section 170(13) which, in general, permit amendments to assessments within the period of 6 years referred to earlier, where a relevant tax avoidance arrangement is discovered to have occurred after the assessment has been issued.

Clause 30: Cancellation of registration of tax agents

This clause relates to reviews by the Administrative Appeals Tribunal of cancellations by Tax Agents' Boards of the registration of tax agents. At present, sub-section 251K(6) requires that in hearing such cases the Tribunal be constituted by a presidential member alone. The repeal of sub-section (6) by this clause will enable cases also to be heard by the Tribunal constituted by a senior non-presidential member.

Clause 31: Application of amendments relating to industrial property

This clause governs the application of the amendments to Division 10B of Part III of the Principal Act proposed by clauses 13 to 27 inclusive.

Sub-clause (1) of clause 31 provides for such amendments, with certain exceptions provided for by sub-clauses (2) and (3), to have effect in relation to assessments made after the date of assent to the Bill in respect of income of any year of income.

Under sub-clause (2) of clause 31, the new sub-section 124S(1A) - see notes on paragraph (a) of clause 19 of the Bill - is to apply to assessments in respect of income of the 1978-79 income year and all subsequent years of income.

Sub-clause (3) of clause 31 relates to the measures directed against tax-avoidance arrangements to be inserted in Division 10B by clause 18, paragraph (b) of clause 19, and clauses 20 and 24 of the Bill. These safeguarding provisions, namely sub-sections 124R(2) and (3), 124S(2), 124T(2) and 124W(3), (4) and (5) will have effect only in relation to transactions of the relevant kinds entered into after 27 April 1978.