Explanatory Memorandum
(Circulated by authority of the Minister for Finance, the Hon J.S. Dawkins, MP)Main features
Income Tax Assessment Amendment Bill 1983
Collection of tax at source from certain payments for work or services and associated amendments (Clauses 56-65)
The Bill provides for the introduction, with effect from 1 September 1983, of a new collection system involving the deduction of tax at source in respect of certain payments for work or services, that are not subject to the existing PAYE system. Initially, the system will apply in respect of certain payments that are to be prescribed in the regulations, in the building and construction, architectural, consultant engineering, surveying and other technical building services, joinery and cabinet making, road transport, motor vehicle repair and cleaning industries. The payments to be prescribed from 1 September 1983 will, with two exceptions, be confined to those made and received by persons and firms operating within these industries. The exceptions to this intra-industry basis will be in relation to limited categories of payments from sources outside the building and construction and road transport industries.
Associated with these measures will be requirements on householders to report payments made in connection with larger private building projects and consequential amendments in relation to the existing PAYE system.
The new system for deduction of tax at source will comprise a new Division - Division 3A - in Part VI of the Principal Act which, while not unlike the PAYE provisions in broad concept, imposes substantially different obligations on those who are subject to it.
Under the system, a person entitled to receive prescribed payments - a payee - will be required to complete, on a monthly basis, a deduction form setting out his name, address and taxation file number.
A person who makes prescribed payments - an eligible paying authority - will generally be required to deduct tax from those payments, complete the relevant details on the deduction forms, forward that tax and a copy of the completed deduction forms to the Taxation Office and issue a further copy of the forms to the payees concerned, also on a monthly basis. Householders will not be required to make deductions under the system, but will be required to report to the Taxation Office, on a monthly basis, all prescribed payments made in connection with any building project the cost of which exceeds $10,000.
Where deduction of tax is required the rate of tax - which will also be prescribed by regulation - will generally be 10 per cent. If, however, a payee fails to complete a deduction form, the rate of tax to be deducted is to be increased, by 15 percentage points, to 25 per cent of the gross payment.
The new measures provide that the Commissioner may issue a deduction exemption certificate on a application by a taxpayer who has carried on business from established premises for the immediately preceding 3 years and can demonstrate that he has, in all respects, maintained a satisfactory record of compliance with the tax laws during that period. Although prescribed payments made to the holder of a deduction exemption certificate will not be subject to deductions, the payer will still generally be required to report those payments to the Tax Office.
Provision has also been made for a payer and a payee who holds a deduction exemption certificate to apply, in a limited number of cases where special circumstances exist, for dispensation from the reporting requirement, e.g. where they enter into a long term contract under which clearly determinable prescribed payments will be made. In these limited cases, the Commissioner could exempt the payer and payee from the systems reporting requirements, if satisfied that both payer and payee will account for the payments in their returns.
In other cases where a payee can establish that, because of special circumstances it would not be appropriate to deduct tax at the 10 per cent basic rate, the Commissioner may issue to the payee a certificate varying the rate of deduction that will be required to be made in relation to prescribed payments received by the payee.
The Commissioner will be empowered to revoke any of the above mentioned certificates. All decisions by the Commissioner relating to the issue of certificates and their revocation will be subject to objection and review by an independant Taxation Board of Review.
Credit for tax deducted will be allowed in respect of deduction forms lodged with a taxpayer's annual income tax return and special provisions will apply to allocate credits to partners and trust estate beneficiaries where deduction forms are lodged with the returns of partnerships and trust estates.
Consequential amendments are to be made to the PAYE provisions to clarify their scope and to ensure that there is no overlap between those provisions and the new system for deduction of tax at source. The Bill also provides for amendments to correct technical deficiencies in the PAYE provisions revealed in 2 court decisions decided adversely to the Commissioner of Taxation.
Accelerated depreciation allowances (Clauses 9, 12, 14 and 15)
A new system of depreciation allowances will authorise a 20 per cent prime cost rate of depreciation for eligible new and second-hand plant where, under existing law, such plant would attract a prime cost rate of 20 per cent or less (after taking into account the special 18 per cent depreciation loading) or a 33 1/3 per cent prime cost rate for eligible plant where, under existing law, such plant would attract a prime cost rate of more than 20 per cent.
The accelerated rates will be available for eligible plant that is acquired under a contract entered into by the taxpayer after 19 July 1982. Eligible plant constructed by the taxpayer will qualify on the same basis where construction commenced after that date.
The accelerated rates will not apply to motor vehicles of a kind presently excluded from the 18 per cent loading (principally cars and station wagons), works of art, structural improvements, or plant of a kind presently qualifying for depreciation at a rate equal to or in excess of 33 1/3 per cent.
Normal safeguards will apply against substitution of contracts entered into before 20 July 1982 (and equivalent arrangements) in an attempt to gain eligibility for the accelerated rates. In addition, plant that is the subject of a sale and leaseback or similar arrangement will be excluded from eligibility where the lessee/real end-user would have otherwise been depreciating the plant under the existing depreciation arrangements.
Taxpayers will be able to elect to have normal rates of depreciation apply to individual plant items instead of the special 20 per cent or 33 1/3 per cent rate if they so wish. Such an election ordinarily will need to be made at the time of lodgment of the income tax return in which depreciation is first claimed for the plant or machinery. Once made, an election would be irrevocable.
Depreciation of certain primary production plant and structural improvements (Clauses 10 and 13)
The Bill will authorise an increase in the 20 per cent rate of depreciation presently allowable for new plant used wholly and exclusively for the purposes of agricultural or pastoral pursuits, forest operations or fishing operations; and for structural improvements used for the purpose of the storage of grain, hay or fodder in the course of carrying on a business of primary production.
The present 20 per cent prime cost rate available to eligible plant and structural improvements will be increased to 33 1/3 per cent. The increased rate will be available for eligible property that is acquired under a contract entered into after 19 July 1982. Eligible property constructed by the taxpayer will also qualify where construction commenced after that date.
Safeguards consistent with those proposed in relation to the introduction of the general accelerated depreciation arrangements will apply.
Deductions for capital expenditure incurred in the development of a mine or oil field (Clauses 7 and 20 to 40)
The Bill will amend the deduction arrangements for eligible capital expenditures incurred in developing a mining property or oil field. At present, deductions are available on a diminishing value basis calculated by reference to the lesser of 10 years or the estimated life of the mine or field.
For allowable capital expenditure incurred after 19 July 1982 (unless incurred under a contract entered into on or before that date or, in respect of property constructed by the taxpayer, where construction commenced on or before that date) the deductions will be allowable by reference to the same maximum statutory life of 10 years, but calculated instead on a straight line basis. Under these arrangements one-tenth of the eligible development expenditure incurred in a year of income will be deductible in that year and in each of the nine succeeding years of income. If the mine has a shorter life, the period of deduction will be based on that shorter life. Development expenditures which cannot be written-off on this basis because of an insufficiency of income will, consistent with the existing deduction arrangements, be carried forward indefinitely for write-off against income of future years.
Deductions for capital investment in qualifying Australian films (Clauses 3, 5, 9, 16, 41 to 53, 60 and 66)
Existing income tax concessions for investment in Australian films authorise the deduction of 150 per cent of capital expenditure in the production of a qualifying film where that expenditure results in the acquisition of the initial copyright, and the exemption from tax of an investor's net earnings from the film of up to 50 per cent of his or her qualifying investment. The 150 per cent deduction presently becomes available after the investor becomes the owner of an interest in the initial copyright and uses that interest for income producing purposes.
Under amendments proposed by the Bill, the 150 per cent deduction is to be available in the income year in which the eligible expenditure is made.
The deduction will be conditional on the investor becoming the first owner of an interest in the copyright in the completed film and using that interest for income producing purposes within two years from the close of the financial year in which moneys are first expended in, or contributed towards, the production of the film.
The availability of deductions in the year of expenditure for investors who expend capital moneys by way of contribution towards the production of the film will be subject to the additional requirements that -
- •
- a production agreement securing all funds necessary for the production of the film is entered into by the close of the financial year in which moneys are first expended in, or contributed towards, the production of the film;
- •
- moneys contributed towards the production are held in a non-interest bearing account opened in relation to the film in the Australian Film Industry Trust Fund that is to be administered by the Department of Home Affairs and Environment; and
- •
- a declaration - designed broadly to evidence compliance with the eligibility requirements - in relation to the film is lodged by an appropriate person (generally the producer) within 1 month after the end of the financial year in which capital moneys are first expended by way of contribution to the cost of producing the film.
Arrangements for the establishment of the Australian Film Industry Trust Fund are currently being made and the requirement that contributions be deposited in an account in the Fund opened in relation to the film will apply in relation to all contributions made on or after 1 July 1983. In addition, the unexpended portion of contributions qualifying for the extended completion and use time limit that are made before that date will be required to be transferred to that account by 1 July 1983.
Payments out of an account opened in the Trust Fund are to be made only for the purposes of expenditure in the production of the film to which the account relates or by way of refund to contributors. In the event of a refund being made, special withholding tax arrangements will apply. Under these, an amount equal to 90 per cent (69 per cent in the case of a corporate investor) of the amount of the refund is to be deducted upon withdrawal from the account and remitted to the Commissioner of Taxation with appropriate notification. Amounts withheld under these arrangements will be applied against tax due on the amended assessment withdrawing the 150 per cent deduction previously claimed in respect of the excess contribution. Special withholding tax arrangements will also apply in the event that amounts are expended from the film account for ineligible purposes. Procedural and penalty provisions will apply for the purposes of the operation of the withholding tax arrangements, consistent with existing withholding provisions of the income tax law.
The revised basis of deduction will apply with respect to eligible expenditure incurred by an investor under a contract entered into on or after 13 January 1983. Subject to the change in timing of deductions, the general eligibility requirements embodied in the present law will continue to apply.
Deductions for capital expenditure on certain income producing buildings (Clauses 9 and 54)
It is proposed to introduce a system of income tax deductions for capital expenditure on the construction of new non-residential buildings used for the purpose of producing assessable income, where construction of the building commenced after 19 July 1982. Capital expenditure on building extensions or alterations will qualify on a similar basis.
Buildings used for the provision of residential accommodation, including hotels, motels, guest houses and apartment buildings, etc., used for the provision of traveller accommodation will not be eligible under the new scheme. Traveller accommodation buildings may, however, qualify for deduction under the existing traveller accommodation depreciation arrangements where the general eligibility requirements of that scheme, including the requirement that at least ten guest rooms are provided, are met.
The deductions will be available on the same general basis as that presently applying for eligible traveller accommodation buildings. Fixed annual deductions of 2 1/2 per cent of the construction cost (i.e., amortized over 40 years) will be allowed to the extent to which the qualifying building, extension or alteration is used for eligible income producing purposes during that period.
The construction cost of a building, extension or alteration for the purposes of the scheme would include such preliminary expenses as architects fees and engineering fees and the cost of foundation excavation. (Costs of demolishing a building in order to build an eligible building on the site will not qualify.)
Buildings which, when constructed, qualify for deduction under existing provisions of the law (e.g., buildings that qualify as allowable capital expenditure under the special provisions applicable to mining infrastructure and scientific research buildings) will continue to qualify under the existing deduction arrangements. Similarly, the cost of plant contained in a building (e.g., lifts and air-conditioning plant) that is depreciable under the general depreciation provisions of the income tax law will continue to attract deductions under those provisions. Once a building qualifies for deduction under the new scheme it will continue to be depreciable on that basis for so long as it is used for eligible income-producing purposes.
The statutory 2 1/2 per cent deduction will generally be allowable in the first instance to the person who first owns the building, incurs the construction costs and uses the building for income-producing purposes. However, a lessee will be entitled to deductions where he or she incurs eligible construction costs. Where the ownership of, or a lease over, a building changes hands, entitlement to deductions will generally pass to the new owner from the person previously entitled to them. Deductions will also be allowable where parts of a building are owned or leased by different persons.
Where an eligible building is demolished or destroyed within the statutory 40 year period, a balancing deduction will be allowed in appropriate circumstances where the written down value (residual value) of the building exceeds any insurance or salvage recoveries.
Tax liability of the trustee of a trust estate with non-resident beneficiaries (Clauses 17, 18, 19 and 67)
The Bill will give effect to a proposal to facilitate the collection of tax payable by non-residents. The proposed amendments will operate so that, broadly, the trustee of a trust estate will be primarily responsible for payment of tax on trust income to which a non-resident beneficiary is presently entitled.
Under the existing law, the share of trust income to which a beneficiary who is not under a legal disability (e.g. infancy) is presently entitled is included in that beneficiary's assessable income and tax is assessed to and payable by the beneficiary. Where the beneficiary is under a legal disability, the trustee is assessed on the beneficiary's behalf.
With a view to overcoming problems that exist with the collection of tax payable by a beneficiary who does not reside in Australia, the amendments proposed will, where the beneficiary is a non-resident at the end of the year of income, transfer primary liability for payment of the tax to the trustee, acting on behalf of the beneficiary. However, the non-resident beneficiary may also be assessed in respect of the trust income, with a credit being allowed, against the tax payable by the beneficiary, for the tax paid by the trustee. If the tax paid by the trustee exceeds that payable by the beneficiary, the excess will be refunded.
The proposed amendments are only to apply to trust distributions that are made on or after 18 May 1983, the date of introduction of the Bill.
Interest on overpaid amounts of taxation (Clause 4)
An amendment to section 26 of the Principal Act is proposed to provide that interest paid by the Commissioner of Taxation in respect of certain refunds of tax made as a result of a successful objection or appeal by a taxpayer against an assessment or other decision of the Commissioner will be subject to income tax. Under the proposed Taxation (Interest on Overpayments) Act 1983 the Commissioner, as from 14 February 1983, will be authorised to pay interest on overpaid amounts of tax that are refunded to, or applied against any other tax liability of, a taxpayer in circumstances where the overpayment results from an objection or appeal decided in favour of a taxpayer. Interest received or applied in these circumstances will be subject to income tax in the year of income it is received or applied.
Income Tax (Rates) Amendment Bill 1983
The Income Tax (Rates) Act 1982, which is to be amended by this Bill, declares the rates of tax for individuals and trustees (who generally pay tax at individual rates) for the 1982-83 and subsequent financial years. The rate of tax payable by a trustee taxed on behalf of a non-resident company beneficiary under proposed amendments to the Income Tax Assessment Act 1936 is to be the general company rate of 46 per cent and is to be declared and imposed by the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1982, as proposed to be amended by the accompanying Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1983.
This Bill will therefore provide that the Income Tax (Rates) Act 1982 is not to apply where a trustee is taxed on behalf of a non-resident company beneficiary.
Income Tax (Individuals) Amendment Bill 1983
The amendment to the Income Tax (Individuals) Act 1982 proposed by this Bill is similar in effect to the amendment to the Income Tax (Rates) Act 1982 proposed by the accompanying Income Tax (Rates) Amendment Bill 1983.
The Income (Individuals) Act 1982 formally imposes tax payable for the 1982-83 financial year and, until the Parliament otherwise provides, for the next succeeding financial year by individuals, and trustees generally, at the rates declared by the Income Tax (Rates) Act 1982. The latter Act is to be amended to exclude from its scope a trustee taxed on behalf of a non-resident company and it is proposed that the Income Tax (Individuals) Act 1982 be similarly amended. The amendment proposed by this Bill will achieve that result.
Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1983
The Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1982 declares and imposes the rates of tax payable for the 1982-83 financial year and, until the Parliament otherwise provides, for the 1983-84 financial year by companies, trustees of corporate unit trusts and trustees of superannuation funds. The amendment proposed by this Bill will extend the operation of the Act so that it also declares and imposes the rate of tax payable by a trustee of a trust estate who is taxed on behalf of a non-resident company beneficiary under proposed amendments to the Income Tax Assessment Act 1936. That rate will be 46 per cent, the rate applicable to companies generally.
Income Tax (Payments for Work) (Consequential Amendments) Bill 1983
This Bill will amend the Bankruptcy Act 1966 and the Crown Debts (Priority) Act 1981 to provide that a debt payable to the Commissioner under proposed Division 3A of Part VI of the Income Tax Assessment Act 1936 (clause 65 of Income Tax Assessment Amendment Bill 1983) will have the same priority as tax instalment deductions under the PAYE provisions of the income tax law over other debts payable by a trustee of a bankrupt estate or the liquidator of a company.
More detailed explanations of each of the provisions of the Bills are contained in the notes that follow.