House of Representatives

Second Reading Speech

Mr. Spender (Warringah-Treasurer) (6.4).-by leave-I move-

That the bill be now read a second time.

The most important provisions in this bill relate to the proposed further tax on the undistributed income of public companies and give effect to the intention of the Government to secure a greater contribution of income tax from companies. The further tax will not apply to private companies, as they are already subject to additional tax where a sufficient distribution has not been made. Taxable income arrived at for purposes of the assessment of ordinary income tax will be taken as a commencing point. Commonwealth income tax, wartime company tax, and ex-Australian taxes assessed in respect of income of the company which is taxable under the Income Tax Assessment Act will be deducted from the taxable income of the year in which they are paid. A deduction will also be allowed of any net loss, other than a loss of a capital nature, incurred in the year of income in carrying on the business of the company out of Australia. That deduction shall not be made, however, in the case of a company the taxable income of which is assessed under divisions 12, 13, 14 or 15 of Part III. of the Income Tax Assessment Act. Those divisions relate to various classes of companies controlled abroad, in respect of which the taxable income is arrived at on an arbitrary basis.

The amount of taxable income remaining is regarded as the distributable income, and an exemption will be allowed of 25 per cent. of that amount. This exemption has been provided to meet the ordinary expansion of company businesses and to allow for expenditure which is not allowable under the Income Tax Assessment Act. The percentage is considered a reasonable one in meeting the legitimate requirements of companies for the retention of profits, and at the same time ensuring that companies pay some portion of the additional war burden of income taxation where an undue proportion of the profits is retained. Such profits would otherwise be subject only to the flat rate of income tax. A deduction will also be allowed of dividends paid out of the taxable income within six months after the close of the year of income. Six months is considered the shortest reasonable period which may be adopted in order to permit of the issue of assessments within the relevant financial year. The further tax will be levied on the balance of taxable income remaining after allowance of the deductions before-mentioned, and it is proposed to impose the tax at a flat rate of 1s. in the Pd1. In principle, therefore, the further tax on the undistributed income of public companies will conform with the additional tax imposed on private companies, with the important difference, however, that the tax on public companies will be at a flat rate, whereas the additional tax on private companies is calculated at the shareholders' individual rates.

The tax on the undistributed income of public companies will be payable 30 days after the issue of notice of assessment, and not 60 days as is the case with ordinary income tax. The purpose of limiting the period to 30 days is to permit of the collection of the tax within the financial year. As a period of six months after the close of the year of income must elapse before the extent of distribution of dividends can be ascertained, the tax cannot be assessed until the latter part of the financial year. A rebate will not be allowed to shareholders in their individual assessments in the event of the subsequent distribution of the income subject to the further tax. The Government is budgeting for a certain amount of additional income tax from the further tax on the undistributed income of public companies, and revenue requirements would need to be revised if the Government were faced with a latent liability for rebates in the event of the income subject to the further tax being later distributed. The rebates allowable to shareholders on dividend income under the present act, will, however, be continued.

In the private company provisions of the Income Tax Assessment Act the following alterations are proposed in the bill:-

(a)

the exemption where at present allowed is reduced from 33 1/3 per cent. to 25 per cent. of the distributable income;

(b)

the period allowed for the payment of dividends is reduced from nine months to six months after the close of the year of income;

(c)

the period for payment of the additional tax is reduced from 60 days to 30 days after the issue of notice of assessment;

(d)

War-time Company Tax is to allowed as a deduction from the taxable income of the year in which paid in arriving at the distributable income.

These alterations are being made in order to bring provisions relating to the undistributed income of private companies into line with comparable provisions relating to the undistributed income of public companies.

The bill deals with various other matters. Clause 3 provides for the exemption of the pay and allowances received by naval, military and air-force personnel enlisted for service outside Australia. The exemption does not extend to other income earned by them. The existing provisions relating to gifts to be allowed as a deduction in arriving at taxable income are extended by the bill to include gifts made to a public institution or fund established for the comfort of members of the naval, military or air forces of the Commonwealth; or to the Commonwealth for defence purposes.

The bill provides for the diminution of the statutory exemption by Pd1 for v every Pd1 by which the income exceeds Pd250 instead of by Pd1 for every Pd2 as at present. The exemption will now vanish at Pd500 instead of at Pd750 as at present. Where the income does not exceed Pd250 the existing statutory exemption of Pd250 will still apply.

The bill includes a drafting amendment designed to correct certain defects found to exist in section 123A, which was enacted last year, relating to companies prospecting or mining for petroleum in Australia or in the territory of New Guinea.

Provision is also made in the bill for the exemption from income tax of the dividends paid to shareholders by any such petroleum company until the capital expended by the company in searching and mining for petroleum has been recovered from income derived by the company. This exemption is the logical extension of the exemption granted in respect of the profits of the companies prospecting or mining for petroleum.

The amendments proposed by this bill will commence to apply in assessments for the next financial year, which will be based on the income of the year ended the 30th June, 1940. The introduction of the legislation at this early date will enable taxpayers to become fully aware of the provisions and to make their financial arrangements accordingly. This applies particularly to the proposals respecting the further tax on the undistributed income of public companies and the altered provisions relating to private companies.

Debate (on motion by Mr. Curtin) adjourned.