House of Representatives

Notes for the Minister's Second Reading Speech

It is proposed by this Bill to amend the Income Tax Assessment Act in three respects. One amendment will continue for another five years - but in a revised form - the incentive provided in the income tax law for the promotion of exports from Australia. The second amendment is designed to ensure that enterprises engaged in activities associated with petroleum exploration and mining on the continental shelf of Australia are treated in the same way for income tax purposes as enterprises carrying out these activities on the mainland. The third will terminate the operation of certain special provisions applying to residents of Nauru which are no longer appropriate now that Nauru is not an Australian territory.

The income tax incentive for export market development expenditure is one of two incentives provided for exporters through the taxation laws, the other being provided through the pay-roll tax law. These incentives, which were introduced in 1961, terminated on 30 June 1968. Honourable Members will recall that legislation was enacted during the Autumn Session to revise and extend the pay-roll tax incentive for a further period of five years from the end of the financial year 1967-68. Corresponding action regarding the income tax incentive is proposed by this Bill.

Up to 30 June 1968 the income tax incentive operated in the form of a special income tax deduction for specified expenditure incurred in promoting exports from Australia. The availability of the deduction was not in any way dependent upon the results achieved in export sales; the deduction was intended to encourage firms to incur promotion expenditure in advance of export sales and to build up methodical and regular selling arrangements so as to ensure the continuance of sales. The latter feature of the scheme will not be changed in the revision proposed by this Bill.

Under the scheme operative to 30 June 1968, the special deductin provided as an export market development allowance was in addition to the deductions ordinarily available in respect of the particular classes of expenditure under the general provisions of the income tax law. In effect, a double deduction was allowed for the expenditure, subject to a maximum tax saving of 80 cents for each dollar expended.

The main change proposed by the Bill will be the allowance of a rebate of income tax of 42.5 cents in the dollar for specified promotional expenditure instead of the allowance of a special deduction from income. There is provision in the Bill for the case where the rebate allowable for an income year exceeds the tax otherwise payable for that year. In such cases, the amount of unabsorbed rebate may be carried forward, in much the same way as losses are carried forward under the income tax law, and may be set off against the tax payable in any of the next seven years of income.

As under the previous scheme, a limit is proposed on the maximum tax saving which may be obtained from the deduction allowed under the general provisions of the income tax law and the rebate allowable for export promotion expenditure. This limit will, however, be increased from 80 cents for each dollar expended to 87 1/2 cents.

It is also proposed by the Bill to widen the scope of expenditures subject to the export market development allowance.

Under the previous scheme the costs of promoting export sales did not qualify for the allowance if the income derived from these sales was exempt from Australian tax because it was taxed by the country in which it had its source. It is proposed that, in the future, eligible expenditure incurred in promoting export sales shall be subject to the export market development allowance, notwithstanding the fact that it has been outlaid with the purpose of promoting sales the income from which would be exempt from Australian tax for the reason I have mentioned.

In addition, the allowance will be extended to the cost fd obtaining protection overseas for Australia-developed patents, copyright or trademarks and to expenses incurred in selecting or designing special export labels and packaging. Costs of promoting the sale overseas of certain "know-how" that has a meaningful Australian content will also be brought within the scope of the allowance. These costs will be eligible for the allowance even though they may be of a capital nature and thus not deductible under the general deduction provisions of the income tax law.

The final point I would mention in connection with the export market development allowance is that the Bill will empower the Commissioner of Taxation to communicate certain information to Ministers and to the Secretaries of the Treasury and of the Department of Trade and Industry. This will be information that the Treasurer considers necessary to enable Ministers and the Departments concerned with policy aspects to form a judgment of the operation and effects of the scheme. Officials receiving such information will be under the same obligations to maintain secrecy as apply to Taxation officers. In this connection I recall to Honourable Members that earlier this year a similar amendment was made to the Pay-roll Tax Assessment Act in connection with the export incentive provided under that Act.

The new export market development allowance scheme will have effect in respect of promotional expenditures incurred after 30 June 1968.

I turn now to the amendments proposed by the Bill which relate to enterprises engaged in activities connected with the exploitation of petroleum on Australia's continental shelf. These measures are complementary to the Petroleum (Submerged Lands) Act which was enacted last year.

A major objective of these amendments is to make it clear that Australia may tax income derived from, or in connection with, the exploration for, or the exploitation of, petroleum or natural gas deposits on its continental shelf when the income is derived by persons who are nt residents of Australia for income tax purposes. These persons are subject to Australian tax on income derived from a source in Australia and the Bill proposes, in effect, that for the purpose of determining the source of the relevant income the continental shelf is to be treated as if it were part of Australia.

Special deductions are authorised by the income tax law for capital expenditure incurred in prospecting or mining for petroleum, including natural gas. If certain conditions are fulfilled, deductions are also available for share capital subscriptions to petroleum exploration companies. These deductions expressly apply to prospecting and mining activities in Australia or the Territory of Papua and New Guinea. The amendments proposed by the Bill are designed to ensure that taxpayers, both resident and non-resident, are entitled to the same income tax deductions in relation to petroleum activities on the continental shelves of Australia and the Territory as they would be if the activities had been carried out on the respective mainlands.

These amendments will apply to income earned after today from activities associated with petroleum exploitation of the shelf and to past and future expenditures incurred by a petroleum exploration or mining company in searching for or exploiting petroleum or gas deposits in those areas.

As I have already indicated, the other measure proposed in the Bill is concerned with the taxation of residents of Nauru.

In the past special provisions of the income tax law have provided certain concessions for residents of Nauru. These were based on Nauru's status as a territory of Australia.

One result of the special provisions has been to exempt from Australian tax income earned in Nauru by Australians employed in that country. Under the general provisions of the income tax law, income earned overseas by Australian residents is taxed in Australia unless it is taxed by the country in which the income is earned. Another result of the special provisions has been to entitle Nauruan residents to deduct from their Australian income the same concessional allowances as residents of Australia are entitled to deduct from their income for the maintenance of dependants, medical expenses, education expenses and so on. These concessional allowances are not available generally to persons who are not residents of Australia.

As Nauru has, from the end of January 1968, become an independent country, it is proposed by the Bill that Nauruan residents be treated by the Australian income tax law in the same way as residents of any other independent country. The main effects of this change in the law will be that persons who remain residents of Australia, although employed in Nauru, will be subject to Australian tax on their Nauruan earnings and that Nauruan residents will not be eligible to deduct concessional allowances from income derived in this country. The amendments will apply as from the commencement of the current income year.

A memorandum giving more detailed explanations of the provisions of the Bill is being circulated to Honourable Members and I do not think that it is necessary for me to go into further detail at this stage.

I commend the Bill to the House.