The Senate

Notes for the Minister's Second Reading Speech.

A major purpose of this Bill is to revise, and continue for another five years, the special income tax allowance for expenditure incurred in promoting exports from Australia. Two other amendments to the income tax law are also proposed. The purpose of one is to ensure that enterprises engaged in activities associated with petroleum exploration and mining on Australia's continental shelf are treated in the same way under the income tax law as enterprises carrying out similar activities on the mainland. The other amendment will repeal special provisions relating to the taxation of residents of Nauru. These provisions are not appropriate now that Nauru has ceased to be an Australian territory.

Since 1961, two forms of export incentive have been available to Australian exporters throught the taxation laws. One is a special income tax deduction for certain kinds of export promotion expenditure and the other a pay-roll tax rebate for increases achieved in export sales. Both of these incentives terminated on 30 June 1968.

As Honourable Senators know, the pay-roll tax incentive was re-enacted earlier this year in a revised and extended form for a further period of five years from 1 July 1968. At the time, the Senate was assured of the Government's intention to introduce during the Budget Session proposals for a revised and extended income tax incentive scheme to operate for a corresponding period. This Bill will give effect to the new scheme.

Entitlement to the allowance for export market development expenditure under the scheme that operated up to 30 June 1968 did not depend upon results achieved by export activity. Rather, its design was to encourage taxpayers to incur promotional expenditure in advance of export sales and to build up methodical and regular selling arrangements so as to ensure the continuance of sales on foreign markets. No change in this important aspect of the export promotion allowance is to be made.

Under the terminated scheme, however, the allowance was provided in the form of a special income tax deduction for specified classes of expenditure incurred in promoting exports. The special deduction was additional to the deductions ordinarily available for the expenditure under the general provisions of the income tax law. In effect, a deduction of two dollars was allowable for each one dollar of eligible expenditure, subject to the proviso that the maximum saving in tax for the double deduction did not exceed 80 cents for each dollar expended.

One significant change proposed by the Bill is that the special deduction is to be replaced by a rebate of income tax of 42 1/2 cents for each dollar of eligible promotional expenditure. Provision is made for an excess rebate entitlement of any year to be carried forward for deduction in a subsequent year of income. This will apply where the tax otherwise payable for an income year is less than the rebate allowable for that year. The amount by which the rebate allowable exceeds the tax payable may be carried forward and set-off against the tax payable for any of the next seven years of income.

As I have already mentioned, the maximum saving in tax under the previous scheme from the double deduction for export promotion expenditure was limited to 80 cents for each dollar expended. It is proposed by the Bill to raise this limit. Under the new scheme, the maximum tax saving that may be achieved from the deduction allowed under the general provisions of the income tax law combined with the rebate allowable will be 87 1/2 cents for each dollar expended.

The Bill will also add to the classes of expenditure that may qualify for the export market development allowance. Under the old scheme, the allowance was not available for any outgoings incurred in promoting export sales if the income from those sales was exempt from Australian tax for the reason that it was being taxed in the country in which it had its source. For 1968/69 and subsequent income years, otherwise eligible expenditure will qualify for the allowance even though it is expended in promoting export sales which will produce exempt income of this kind.

Certain export promotion costs that may be of a capital nature and, for that reason, not deductible under the general provisions of the income tax law are also to be brought within the scope of the allowance. This extension of the scheme will cover the cost of obtaining protection outside Australia for Australian-developed patents, copyright or trademarks. Also to be added to the scope of eligible expenses are the costs of promoting disposals of certain classes of 'know-how' that have been developed to a substantial extent in Australia and costs of selecting or designing labels and packaging for exclusive use in the export of goods from Australia.

Honourable Senators will appreciate, I feel sure, that it is important for the Government to be in a position to under-take a review from time to time of the operation and practical effects of an incentive of this kind. For this to be done satisfactorily, it is necessary for relevant information to be available to Ministers and the Departments concerned with policy aspects of the scheme. The Bill makes provision, therefore, to authorise the Commissioner of Taxation to communicate to Ministers and to the Secretaries of the Treasury and the Department of Trade and Industry such information as the Treasurer considers necessary to form an opinion as to whether the purpose of the scheme is being achieved. Officials receiving this information will be subject to the same obligations to maintain secrecy as apply to taxation officers. It will be recalled that a similar amendment was made earlier this year in the Pay-roll Tax Assessment Act to facilitate review of the revised pay-roll tax incentive from time to time.

The proposed rebate for export market development expenditure will apply in respect of eligible outgoings incurred after 30 June 1968.

Another amendment proposed by the Bill will insert provisions in the income tax law that are complementary to the Petroleum (Submerged Lands) Act which was enacted last year. These provisions relate to enterprises engaged in petroleum exploration and mining on Australia's continental shelf, and activities associated therewith.

One purpose of these provisions is to ensure that income derived from, or in connection with, the exploration for, or the exploitation of, petroleum or natural gas deposits on Australia's continental shelf will be liable to Australian tax when that income is derived by persons who are not, for taxation purposes, residents of Australia. These persons are subject to Australian tax on income derived from a source in Australia. For the purpose of determining the source of this class of income, it is proposed that the continental shelf be treated as if it were part of Australia.

The continental shelf amendments are also designed to ensure that the same range of special deductions for capital expenditure are available in relation to off-shore production as apply to mainland production. The income tax law authorises special deductions for capital expenditure incurred in prospecting or mining for petroleum, including natural gas. Subject to certain conditions being satisfied, share capital subscriptions to petroleum exploration companies are also deductible. These deductions apply to prospecting and mining activities in Australia and the Territory of Papua and New Guinea. Amendments proposed by the Bill will ensure that both resident and non-resident taxpayers are entitled to the same income tax deductions in relation to petroleum activities on the continental shelves of Australia and Papua and New Guinea as they are when the activities are carried out on the respective mainlands.

These amendments will apply to income earned after the introduction of the Bill into Parliament and to past and future expenditures incurred by a petroleum exploration or mining company in searching for or exploiting petroleum or gas deposits in areas of the continental shelf.

I turn now to the third amendment proposed by the Bill.

Until recently Nauru was a Territory of the Commonwealth and special provisions of the income tax law provided certain concessions for Nauruan residents. These concessions derived from Nauru's status as a Territory.

One concession exempted from Australian tax income earned in Nauru by Australians employed there. Under the general provisions of the income tax law, income earned overseas by AustralinA residents is taxed in Australia unless it is taxed by the country in which the income is earned.

The concessional allowances Australia gives for the maintenance of dependants, medical expenses, education expenses and so on are not available generally to persons who are not residents of Australia. Under the special provisions I have mentioned, Nauruan residents have been entitled to deduct from their Australian income the same concessional allowances as residents of Australia are entitled to deduct from their income.

As Honourable Senators know, Nauru ceased to be an Australian territory from the end of January this year. It is proposed, therefore, that Nauruan residents be treated under the Australian income tax law in the same way as residents of any other independent country. Under the amendments contained in the Bill persons employed in Nauru who remain residents of Australia will be liable to tax in Australia on their Nauruan earnings, if they are not taxed in Nauru, and residents of Nauru will not be entitled to deduct concessional allowances from income derived in Australia. These amendments will apply from the commencement of the 1968/69 income year.

As a memorandum giving more detailed explanations of the provisions of the Bill is being circulated to Honourable Senators I do not think it is necessary for me to speak at any greater length at this stage.

I commend the Bill to the Senate.