House of Representatives

Second Reading

Mr. Spender (Warringah-Assistant Treasurer) (10.0).

The most important amendment which it is proposed by this bill to make to the income tax law is the amendment which will withdraw from absentee holding companies the rebate of tax at present allowed on dividends paid to them by Australian operating companies out of profits derived in this country.

The other two amendments-the one extending the definition of resident and the other granting a limited exemption from tax to any concern undertaking the search for petroleum deposits in Australia and New Guinea-are comparatively minor in character.

Clause 3 of the bill gives effect to the decision of the Government to obtain in respect of profits passing to absentee holding companies some greater contribution to the revenue than the flat company rate of tax paid by the Australian operating company on its profits. There are many absentee holding companies, some of which receive very substantial dividends paid out of profits made in Australia by Australian companies. These dividends are assessable income in the hands of the holding company, but no amount of Commonwealth income tax is payable for the reason that the Commonwealth scheme of taxation allows to a company a rebate of tax at the same rate as that at which the dividends are assessed. The Government considers that it is not unreasonable to require these companies to contribute to the cost of defending this country wherein their investments are located.

The opinion of the Government is strengthened by the fact that, under existing conditions, absentee individual shareholders in absentee holding companies are in a favoured position in comparison with individual shareholders in resident companies and resident holding companies.

Where dividends are paid by an Australian operating company through an absentee holding company into the hands of absentee individual shareholders, it is not possible for the Commonwealth to collect any tax from these individuals because the dividends are paid outside Australia, and the shareholders, although theoretically liable to tax, have no assets in Australia which could be levied upon for payment of the tax. Where, however, dividends are paid by an Australian operating company through a resident holding company into the hands of absentee individual shareholders, payment of the tax assessed on those dividends is enforceable because the dividends are payable in Australia and recourse may be had for payment of the tax to subsequent dividends payable to the shareholder. 963.

The consequence of the absence of Commonwealth jurisdiction in the enforcement of the tax on dividends paid to shareholders in absentee holding companies is that, owing to the graduated rates of tax payable by individuals, shareholders deriving their dividends from resident holding companies, and whose rates of tax exceed the company rate, are obliged to pay large amounts of tax, while no tax is enforceable against absentee shareholders of absentee holding companies similarly deriving income from an Australian source.

The withdrawal of the rebate in the case of absentee holding companies will be a step towards the equitable spreading of the burden of income tax between shareholders generally. Although the absentee individual shareholders in the absentee holding company continue to enjoy immunity from a direct payment of Commonwealth tax, they will, indirectly, pay some tax through the absentee holding company, in that the funds available for distribution to them will be diminished by the amount of tax the absentee holding company will be obliged to pay.

I am indebted to the honorable member for Watson (Mr. Jennings) for the questions he raised in the course of his speech on the budget which are very pertinent to this subject. The first question raised by the honorable member was: Who would pay the tax? In general, I have already dealt with this question, but I add now that the machinery of the income tax law provides that the tax should be paid by the absentee holding company. If, however, the absentee holding company defaults in payment of its liability, the tax will be collected from the Australian company out of dividends payable by it to the absentee holding company.

The honorable member also raised the issue of double taxation. The Commonwealth income tax law has recognized the principle that when tax is paid by a company on its profits, the shareholder is entitled to a rebate in his assessment at the rate of tax paid by the company or at his own rate, whichever is the less.

The argument that the withdrawal of the rebate from absentee holding companies will result in double taxation is sound only if it is agreed that the only amount of tax which the profits passing out of Australia through the medium of these absentee holding companies should bear is the flat rate of tax imposed on the Australian operating company in respect of these profits. Honorable members will agree that the tax payable by absentee shareholders in absentee holding companies deriving income from Australia should be on the same basis as the tax payable by absentee shareholders in resident holding companies, and the Government considers that the proposed amendment is a step in this direction.

The suggestion that double taxation is involved raises the question of what constitutes double taxation. In this connexion the House of Lords has recently expressed valuable observations. To quote Lord Wright in the case of Barnes v. Hely Hutchinson-

The English company is taxed on the balance of its profits or gains-that is, on its income. The shareholder is never taxed on the company's fund of profits, but only on the dividend which comes to him in payment of the debt which is created when the company declares the dividend. The tax is in every case on the individual's income not on a fund possessed by another person, the company, even though it is the fund of profits of that company, from which the individual's s income or part of it will be paid. . . . The fund which is taxed in the hands of the company and the dividend which is declared by the company and paid to the shareholders are separate items for taxation law. It is only the latter which is the shareholder's income.

And, later on in his judgment, Lord Wright observes that-

Whatever the precise scope of the rule against double taxation, it must at least involve that it is the same income, that it is the same person in respect of the same piece of income that is being double-taxed, whether directly or indirectly, and that the double taxation is by British assessment.

Honorable members will accordingly appreciate that if this correctly states what constitutes double taxation, the proposed legislation cannot be regarded as offending against this principle.

Clause 4 of the bill is designed to encourage the search for and the production of crude petroleum in Australia, Papua and New Guinea. This encouragement is being afforded to these enterprises by exempting from income tax any profits that may be derived by the concern until such time as the capital expended in 964. searching and mining operations has been fully recouped by profits. In granting this concession, the Commonwealth is following in the steps of Canada and New Zealand, which offered encouragement through income tax concessions to companies engaged in searching and mining for oil in those countries.

The necessity for locating and developing nearer sources of oil supply than those at present available is of paramount importance to the Commonwealth, and the Government desires to encourage the investigation of regions within Australia or its territories to determine whether those regions are capable of yielding oil in commercial quantities.

The Government recognizes that searching for oil is an exceedingly speculative and hazardous enterprise, and it also recognizes that profits cannot be said to have been paid until the total capital expenditure on searching and mining for oil has been recovered. The concession which it is proposed to grant does not infringe the general principles lond admitted in Commonwealth income tax law-that there should be a recoupment of capital expended in mining operations in determining the amount of profits to be subject to income tax. The concession is limited to enterprises engaged in searching and mining for crude petroleum in a free state and does not apply to operations carried on for the extraction of substances by distillation processes such as those in operation at Newnes.

The purpose of the remaining amendment is to bring within the Australian taxable field the salaries paid to those officials at Australia House who are recruited in London. Most of these officials have had extended to them in recent times the benefits of the Commonwealth Superannuation Act, and there is now no essential difference between them and those officials at Australia House who have been sent there from Australia and who preserve the status of residents of the Commonwealth. Federal income tax is payable by residents of Australia on income derived from sources outside Australia if it is exempt from tax in the country in which it is derived. Arrangements are being made by the High Commissioner with the United Kingdom Inland Revenue authorities whereby the salaries of these officials will be exempt from English income tax. The effect of the amendment will be to the advantage of the Commonwealth, in that it will cause the salaries of the officials to become liable to Commonwealth income tax. I might inform honorable members that this amendment has been made as the result of representations made by the officials themselves.

Clause 5 of the bill provides that the amendments effected by the act shall apply to assessments for the current financial year and all subsequent years. I commend the bill to the House.