House of Representatives

Income Tax Assessment Bill 1975

Income Tax Assessment Act 1975

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. J.F. Cairns, M.P.)

Notes on Clauses

Clause 1: Short title and citation

This clause formally provides for the short title and citation of the amending Act and of the Principal Act, as amended.

Clause 2: Commencement

Sub-section 5(1A) of the Acts Interpretation Act 1901-1973 provides that, unless the contrary intention appears, every Act shall come into operation on the twenty-eighth day after the day on which it receives the Royal Assent. Some provisions of the Bill are to have effect in relation to income derived during the current year. Accordingly, it is proposed by this clause that the amending Act will come into operation on the day on which it receives Royal Assent.

Clause 3: Interpretation

This clause proposes several amendments to sub-section 6(1) of the Principal Act, which contains definitions of words and phrases used in that Act. The amendments are chiefly a consequence of Papua New Guinea's independence.

By paragraph (a) of clause 3, and a complementary provision in paragraph (c) of the clause, it is proposed to replace the existing definition of "the Income Tax Ordinances of Papua New Guinea" in sub-section 6(1) of the Principal Act with a definition of the "income tax laws of Papua New Guinea". The new definition will be apt to describe the present and future income tax enactments of Papua New Guinea. Consequential amendments to sections of the Principal Act where a reference is presently made to "the Income Tax Ordinances of Papua New Guinea" are proposed in other clauses of the Bill.

Paragraph (b) of clause 3 proposes the insertion in sub-section 6(1) of definitions of "Papua New Guinea" and "Papua New Guinea independence day", in order to clarify the meaning of those expressions as they will appear in the Principal Act following the amendments to be effected by the Bill. The definition of "Papua New Guinea" is necessary because section 10 of the Papua New Guinea Act 1949-1974 at present operates to require references to Papua New Guinea in the Principal Act to be read as references to the Territories of Papua New Guinea. The definition to be inserted will ensure that references to Papua New Guinea that remain in the Principal Act will be construed as references to the Territories of Papua New Guinea in relation to a time before independence day, and as a reference to independent Papua New Guinea in relation to a later time.

The term "Papua New Guinea independence day" is being defined as the day on which an independent sovereign state constituted by the present territories is established. This event will, of course, not occur until some time in the future and the definition is therefore necessary for the purposes of amendments that are to operate as from the date on which independence occurs.

Paragraph (c) of clause 3 will omit from sub-section 6(1) of the Principal Act the definition of "petroleum exploration company", which has now ceased to have any practical relevance since the repeal in 1969 of former section 77A of the Principal Act. The paragraph also proposes the omission from sub-section 6(1) of the definition of "the Income Tax Ordinances of Papua New Guinea" consequent upon the insertion in its place of a definition of "income tax laws of Papua New Guinea" (see note above on paragraph (a) of clause 3).

Paragraph (d) proposes amendments to section 6 of the Principal Act which are designed to render the definition of "foreign superannuation fund" in sub-section 6(1) of that Act capable of application, after independence, to retirement funds that were established in Papua New Guinea before independence. It will also clarify the extent to which the definition of "public securities" in the sub-section continues to encompass securities issued in Papua New Guinea.

The definition of "foreign superannuation fund" is relevant to section 23(jb) of the Principal Act, which provides for exemption of interest and dividend income of such a fund. A superannuation fund may be a "foreign superannuation fund" if it is established in a country outside Australia for the benefit of, and is controlled by, persons who are not residents of Australia or a Territory, and if contributions to the fund are not tax deductible in Australia. Territory funds are at present entitled to exemption under other provisions, that relate also to Australian funds, such as section 23(jaa) and section 23F.

In order that Territory funds receive the same tax exemption following independence as similar funds established in other countries outside Australia, paragraph (d) of clause 3 proposes the insertion in section 6 of the Principal Act of a new sub-section (7) which will ensure that the fact that a fund was established in Papua New Guinea before independence does not preclude it qualifying as a "foreign superannuation fund". The sub-section, which will first apply for the year of income in which independence occurs, will (by paragraph (b) of the sub-section) specify that membership of a fund prior to the date of independence by people, who at that prior time are residents of a "Territory", will not debar exemption in the transition year. Correspondingly, paragraph (c) of the sub-section will allow the exemption to apply for the transition year despite contributions, deductible for Australian tax purposes, having been made before independence day. See also clause 54(2) of the Bill.

It is also proposed by paragraph (d) of clause 3 to insert a new sub-section (8) in section 6 of the Principal Act to ensure that securities issued in Papua New Guinea before independence, and that qualify as "public securities" before then for the purposes of that Act, are to continue to be treated as public securities, while those issued after independence are not to be public securities.

The expression "public securities" is defined in sub-section 6(1) of the Principal Act as including securities issued by a Territory or a local government body or public authority constituted by or under a law of a Territory. This definition is relevant for the provisions of the Principal Act that deal with the "30/20" investment rules applicable to superannuation funds and life assurance companies. Exemption from tax of income of a superannuation fund and the granting of tax benefits to a life assurance company are dependent upon the fund or company maintaining sufficient investment in "public securities".

By sub-section (8), securities issued before independence by the Papua New Guinea Government or a Territory local governing body or public authority will not on independence lose their status as "public securities". Securities issued by the same authorities after independence will not fall within the definition of "public securities".

Clause 4: Continental shelf to be treated as part of Australia for certain purposes

This clause contains a number of amendments of a purely drafting nature to section 6AA of the Principal Act, arising from changes made in 1974 to the Petroleum (Submerged Lands) Act. Those changes were part of legislative rearrangements under which rules governing mineral exploration and exploitation on Papua New Guinea's continental shelf ceased to be set out in Australian legislation and were provided for by Papua New Guinea law. Clause 4 will maintain the present operation of section 6AA.

The amendments proposed by clause 4 of the Bill will not alter the substantial position that Australia has taxing rights in respect of areas of continental shelf over which it has sovereign rights but not in respect of areas over which Papua New Guinea has such rights. Nor will it change the situation that an Australian resident operating on the Papua New Guinea shelf is, for Australian tax purposes, regarded as carrying on operations in Papua New Guinea.

Clause 5: Extension of Act to Papua New Guinea

It is proposed by this clause to repeal section 7 of the Principal Act with effect from the time that Papua New Guinea attains independence.

Section 7 has three main functions -

(a)
it extends the machinery provisions of the Principal Act to Papua New Guinea;
(b)
it entitles residents of Papua New Guinea, who derive income from Australia, to the concessional deductions otherwise available only to Australian residents; and
(c)
it exempts a resident of Papua New Guinea from Australian tax on income with a Papua New Guinea source.

The general extension of the Principal Act to Papua New Guinea could obviously not continue after it becomes an independent country. So far as concerns the effect of section 7 in entitling Papua New Guinea residents to Australian concessional deductions, the emergence of Papua New Guinea as an independent country implies that its residents are to be treated for these purposes in the same way as residents of other countries.

The exemption from Australian tax conferred by section 7 on Papua New Guinea residents in respect of income with a Papua New Guinea source applies in practice only to persons who are also residents of Australia. This is because section 23(r) of the Principal Act applies to grant an exemption from Australian tax on income with a Papua New Guinea source that is derived by a person who is a resident of Papua New Guinea but not a resident of Australia for Australian tax purposes. Although it is proposed by the Bill to withdraw the special exemption conferred by section 7, an Australian resident who derives salary or wage income from Papua New Guinea that is subject to tax in that country will not be taxed on the income in Australia. This is to be achieved by an exemption, proposed by sub-clause (1)(e) of clause 7 of the Bill, that will provide, for people working in Papua New Guinea, a corresponding exemption to that available to Australian residents who derive salary or wages from a source in other places outside Australia.

Although, by sub-clause (2) of clause 5, the repeal of section 7 is to have effect from independence day, sub-clause (3)(a) of the clause will continue the exemption in relation to income derived before that date. Sub-clause (3)(b) will, for the transition year of income in which independence day falls, permit Papua New Guinea residents who derive Australian-source income to be allowed the concessional deductions otherwise allowable only to residents of Australia.

Clause 6: Officers to observe secrecy

The amendment proposed by this clause is relevant to the proposal to continue, after independence day, the present arrangement for the reciprocal exchange of information between the taxation authorities of Australia and Papua New Guinea.

Section 16 of the Principal Act places a general prohibition on the communication to any person of information concerning a taxpayer's affairs. This prohibition is subject to certain specified exceptions. One of these permits Australian authorities to communicate information to the Chief Collector of Taxes for Papua New Guinea. The income tax law of Papua New Guinea at present contains a comparable provision, which authorises the Chief Collector to communicate information to the Commissioner of Taxation. The provisions in both laws authorise the communication of information that is necessary for the proper administration of the Commissioner's and the Chief Collector's respective official functions.

The relevant exchange of information provisions were inserted in the Australian and Papua New Guinea laws following the introduction in the latter in 1959 of a local income tax. Continuation of the present arrangements will be of mutual assistance to Australia and Papua New Guinea in relation to the relief of double taxation, and also from the viewpoint of helping to combat tax avoidance and evasion.

The existing provision in section 16 of the Principal Act, which authorises the communication of information to the Chief Collector, is, accordingly, to be retained but clause 6 of the Bill proposes the addition of words which will specify that the provision is to apply only so long as the income tax law of Papua New Guinea contains a reciprocal provision.

Clause 7: Exemptions

This clause proposes a number of amendments to section 23 of the Principal Act designed to discontinue, in relation to Papua New Guinea, the application of paragraphs of the section which exempt from Australian tax certain categories of income. It is also proposed by the clause to insert additional paragraphs in the section to give effect to an arrangement made with Papua New Guinea for pensions to be taxed only by the country of residence of the recipient, and to provide for the exemption by Australia of employment income of residents of Australia that is derived in, and taxed by, Papua New Guinea. A separate subject - payments under the NEAT system - is also dealt with by clause 7.

Paragraph (a) of sub-clause (1) proposes to omit from section 23(h) the reference to Papua New Guinea. Section 23(h), which exempts income derived by non-profit societies and associations established to promote the development of the physical resources of Australia or Papua New Guinea, will accordingly cease to exempt from Australian tax the income of societies or associations established to promote the development of physical resources of Papua New Guinea. By reason of sub-clause (2), the amendment of section 23(h) will have effect in relation to income derived on or after Papua New Guinea independence day.

Paragraph (b) of sub-clause (1) will give effect in Australia to arrangements between Australia and Papua New Guinea under which pensions will be taxed only by the country of residence of the pensioner.

The paragraph proposes the insertion of a new paragraph in section 23 - paragraph (kd) - the effect of which will be to exempt from Australian tax pensions derived from Australia by residents of Papua New Guinea. The exemption from Australian tax will be available if Papua New Guinea reciprocates by providing a corresponding exemption in its income tax law for pensions derived from Papua New Guinea by residents of Australia. The proposed exemptions will not apply to people who are resident in both Australia and Papua New Guinea. If any such case should arise, each country may tax the pension, with the tax of the country from which the pension is paid being allowed as a credit against the tax levied by the other country.

Under sub-clause (3) of clause 7 the new exemption for pensions is to apply for the 1974-75 and subsequent years of income.

Paragraph (c) of sub-clause (1) proposes the repeal of section 23(n) which exempts from Australian tax income derived by residents of Territories and Islands in the Pacific Ocean (including Papua New Guinea) that are governed by a country within the Commonwealth of Nations, if the income comes from the sale in Australia or in Papua New Guinea of produce of the relevant Territory or Island. The specific exemption provided for by the paragraph has ceased to have practical significance.

The repeal of section 23(n) will, by sub-clause (2) of clause 7, have effect in relation to income derived on or after the day that Papua New Guinea achieves independence.

Paragraph (d) of sub-clause (1) will withdraw the exemption now provided for income derived by an Australian resident from gold mining in Papua New Guinea.

Section 23(o), which paragraph (d) will amend, provides an exemption from Australian tax for income, derived from the working of a mining property in Australia or in Papua New Guinea principally for the purpose of obtaining gold, or gold and copper. By deleting the reference to Papua New Guinea the amendment will terminate the exemption accorded by section 23(o) so far as it relates to income from the working of a mining property in Papua New Guinea. Under sub-clause (4) of clause 7 the termination of the application of section 23(o) to Papua New Guinea will have effect in relation to income derived from the working of a mine after Papua New Guinea independence day.

Another paragraph - paragraph (qa) - is proposed to be inserted in section 23 by paragraph (e) of sub-clause (1). New section 23(qa) will extend to salary and wages derived by Australian residents working in Papua New Guinea the exemption method of double tax relief that applies under section 23(q) in respect of salary and wage and certain other income that a resident of Australia derives from sources outside both Australia and Papua New Guinea.

Divisions 18 and 19 of Part III of the Principal Act at present authorize double tax relief for Australian residents deriving income from Papua New Guinea by means of a credit for Papua New Guinea tax against the Australian tax on the income. However, income derived by Australian residents employed in Papua New Guinea commonly qualifies for exemption from Australian tax under sub-section 7(1) of the Act, which exempts income derived from sources in Papua New Guinea by a resident of Papua New Guinea. Section 7 is to be repealed by clause 5 of the Bill and, but for the amendment now proposed, employment income of Australian residents from Papua New Guinea would be taxable by both countries, subject to Australia providing a tax credit for the Papua New Guinea tax.

New section 23(qa) will exempt from Australian tax salaries, wages and other similar remuneration derived from sources in Papua New Guinea by Australian residents, if the income is not exempt from Papua New Guinea tax and Papua New Guinea tax assessed on the income is paid. Accordingly, income derived by Australian public servants, members of the Australian Staffing Assistance Group and other Australian employees stationed in Papua New Guinea that is taxed by that country will continue to be exempt from Australian tax. By reason of sub-clause (2) of clause 7 the new section 23(qa) will have effect from independence day, which is also the day up to which the exemption under section 7 is to apply.

Divisions 18 and 19 of Part III of the Principal Act (as proposed to be amended by clauses 44 to 47 of the Bill) will preserve the tax credit method of double tax relief for other income from a Papua New Guinea source derived by Australian residents.

Paragraph (f) of sub-clause (1) of clause 7 is related to the introduction of the Australian Government's National Employment and Training (NEAT) System which provides financial help in the form of periodical allowances for persons attending approved courses of training. The allowances payable under the NEAT System are based on the average adult male award wage and are to be subject to income tax.

Section 23(z) of the Principal Act provides an exemption from tax for certain allowances paid to people receiving full-time education at a school, college or university. In terms of the amendment proposed by sub-clause (1)(f) persons in receipt of allowances under the NEAT System are to be expressly excluded from the scope of this exemption. This is to remove any doubt there may be that allowances payable under the NEAT System, including allowances payable to persons attending approved full-time courses at a school, college or university, are to be subject to tax.

By sub-clause (5) of clause 7, this amendment is to have effect in relation to income of the 1974-75 year and of subsequent years.

A complementary amendment - see notes on clause 50 - will remove any doubt that the allowances payable under the NEAT System are subject to tax instalment deductions.

Sub-clauses (2) to (5) of clause 7 set out the respective dates from which the proposed amendments to section 23 of the Principal Act are to apply. These have already been mentioned in these notes.

Clause 8: Exemption of certain payments to persons formerly employed in Papua New Guinea

This clause will insert in the Principal Act a new section - section 23AAA - which will provide an income tax exemption for compensation and certain other payments made to former overseas officers of the Papua New Guinea Public Service and members of the Australian Staffing Assistance Group on termination of their employment in Papua New Guinea.

The payments concerned are made pursuant to the employment security scheme designed for expatriate personnel of the Papua New Guinea Public Service. Those officers were made members of the Australian Staffing Assistance Group (ASAG) by the Papua New Guinea (Staffing Assistance) Act 1973. Sections 13 and 14 of that Act make provision for the termination of the officers' services and the Papua New Guinea (Staffing Assistance) (Termination of Employment) Regulations, which were made pursuant to section 19 of the Act, prescribe the various payments which an employee is entitled to receive in the event of termination of his or her services. The new section 23AAA will exempt from Australian tax a range of such payments, as well as similar payments received by eligible personnel before the establishment of ASAG.

Sub-clause (1) of clause 8 will insert in the Principal Act the proposed section 23AAA.

Sub-section (1) of section 23AAA will specify the payments received by a former member of ASAG (i.e., a person who was employed under Part II of the Papua New Guinea (Staffing Assistance) Act 1973) on the termination of his services in Papua New Guinea in respect of which exemption is to apply. These are amounts received since 1 December 1973 by way of compensation for loss of career or premature termination of contract of employment, or by way of contingencies allowance, resettlement grant, fares or removal expenses, as prescribed in the Papua New Guinea (Staffing Assistance) (Termination of Employment) Regulations.

Sub-section (2) of the section will limit the application of the exemption accorded by sub-section (1) to those payments that were prescribed when the Papua New Guinea (Staffing Assistance) (Termination of Employment) Regulations first took effect.

Sub-section (3) will extend exemption to payments of a like nature made to people who qualified for the payments under the employment security scheme as it existed prior to the Papua New Guinea (Staffing Assistance) Act 1973, and whose employment in Papua New Guinea was terminated before the date on which that Act took effect, i.e., 1 December 1973.

Sub-clause (2) of clause 8 provides for the new section 23AAA to apply in respect of income of the 1972/1973 year (which was the first year in which relevant payments were made) and in respect of income of subsequent years.

Sub-clause (3) will authorize the Commissioner of Taxation to amend an assessment in respect of the 1972/73 or 1973/74 income year, for the purpose of giving effect to the exemption conferred by section 23AAA.

Clause 9: Exemption of certain income from sale of gold

Section 23C of the Principal Act, which clause 9 will amend, applies to income derived by an approved company from the sale of gold, purchased from the Reserve Bank and produced in Australia or in Papua New Guinea, if all the shareholders of the company are engaged in gold mining operations in Australia or Papua New Guinea.

It is proposed by sub-clause (1) of clause 9 to omit the references in section 23C to Papua New Guinea. The section will, therefore, cease to provide exemption in relation to gold produced in Papua New Guinea. This is consistent with the amendment to section 23(o) of the Principal Act proposed by sub-clause (1)(d) of clause 7.

By sub-clause (2), section 23C will cease to apply in respect of income derived from the sale of gold produced in Papua New Guinea on or after the date of independence.

Clause 10: Assessable income to include net stand - by value of car made available to employee for private use

This clause proposes the repeal of section 26AAB of the Principal Act, which lays down methods of calculating, by reference to its cost to an employer, the "stand-by value" of a car made available to an employee for private use.

The section was designed to operate for 1974-75 and subsequent years of income so as to supplement section 26(e), the long-standing provision governing the taxation of "fringe" benefits in general.

The repeal of section 26AAB is to be effective in relation to assessments for 1974-75 and subsequent years of income, so that, as in previous years, the amount of benefit received by an employee in the form of an employer - provided car will be measured for income tax purposes as the value to the employee concerned, in terms of the general provision of section 26(e).

Clause 11: Insurance recoveries in respect of losses of live stock and trees

Section 26B of the Principal Act applies where a taxpayer carrying on primary production in Australia or in Papua New Guinea receives assessable income by way of an insurance recovery in respect of the loss of live stock or the loss by fire of trees. The taxpayer may elect to bring this income to account by instalments over a period of five years, instead of in the year of derivation.

Clause 11 will make the election under section 26B unavailable where an insurance recovery relates to a primary production venture in Papua New Guinea. This change will affect only those taxpayers carrying on primary production in Papua New Guinea who are residents of Australia for Australian tax purposes, the reason being that Papua New Guinea income of a person who is not a resident of Australia does not constitute assessable income in Australia.

By sub-clause (2), the change to section 26B will apply to amounts received in consequence of losses of live stock or trees occurring after Papua New Guinea's independence.

See also the notes on clauses 12, 13 and 14.

Clause 12: Disposal of trading stock

This clause will amend sub-section 36(3) of the Principal Act which applies to a taxpayer carrying on primary production in Australia or in Papua New Guinea who sells live stock because of compulsory acquisition of land or because of fire, drought or flood. The taxpayer may choose to bring any assessable profit on the disposal to account, for income tax purposes, by instalments over a period of five years. Where the taxpayer does not exercise this choice, which in relation to Papua New Guinea in practice is available only to taxpayers who are Australian residents, the profit is brought to account in the one income year.

Following the amendment proposed by sub-clause (1), an Australian resident taxpayer with a farming property in Papua New Guinea will no longer be eligible to exercise the option available under sub-section 36(3) if forced, for one of the specified reasons, to sell live stock. By sub-clause (2), sub-section 36(3) will cease to apply in relation to a disposal of live stock in consequence of a compulsory acquisition, fire, etc. that occurs in independent Papua New Guinea.

See also the notes on clauses 11, 13 and 14.

Clause 13: Alternative election in respect of income resulting from forced disposal of live stock

Section 36AAA of the Principal Act provides an alternative to the election available under sub-section 36(3) in respect of profit arising from a forced disposal of live stock in consequence of events specified in that sub-section (see earlier notes). Instead of electing under sub-section 36(3) to spread the profit over five years for income tax purposes, a taxpayer carrying on primary production in Australia or in Papua New Guinea may elect under section 36AAA to have the profit on the forced sale excluded from assessable income and applied to reduce the cost, for tax purposes, of replacement stock.

Sub-clause (1) of clause 13 proposes the termination of the right of election available under section 36AAA in relation to a primary production business carried on in Papua New Guinea by a resident of Australia. By sub-clause (2), the right of election will not be available in respect of a profit arising from a disposal of live stock in consequence of events that occur after Papua New Guinea's independence.

Clause 14: Compensation for death or compulsory destruction of live stock

This clause, which will amend section 36AA of the Principal Act, has a similar purpose to clauses 11, 12 and 13. Section 36AA provides that a taxpayer carrying on a business of primary production in Australia or in Papua New Guinea may elect that the assessable profit from compensation or other payments received as a consequence of the compulsory destruction of live stock pursuant to a disease-control law, or the death of live stock by reason of a prescribed disease, be brought to account, for tax purposes, by instalments over five years.

The amendment proposed by sub-clause (1) will terminate the application of section 36AA in relation to the death or destruction of live stock constituting assets of a business of primary production carried on in Papua New Guinea by a resident of Australia. By sub-clause (2) the amendment will apply in respect of a profit arising from death or destruction of live stock occurring on or after Papua New Guinea's independence day.

Clause 15: Dividends

This clause proposes an amendment of a drafting nature to section 44 of the Principal Act, which sets out the basic rules for inclusion of dividends in assessable income. The amendment is consequential on the proposed repeal by clause 16 of section 44A of the Principal Act which exempts from Australian tax certain dividends paid by Papua New Guinea companies that were also exempt from Papua New Guinea tax. Section 44 was made subject to the exempting provisions of section 44A and, as that section is to be repealed, section 44 need no longer be expressed as being subject to section 44A.

Clause 16: Certain dividends paid by companies incorporated in Papua New Guinea

Sub-clause (1) of this clause proposes the repeal of section 44A of the Principal Act. That section exempts from Australian tax dividends derived by people who are residents of Australia, and who are shareholders in Papua New Guinea companies, where the dividends are exempt from Papua New Guinea tax under "pioneer industries" legislation of that country.

As Papua New Guinea has discontinued its exemption for such dividends, with effect in relation to dividends paid on or after 24 September 1974, the Australian exemption is now inoperative. By sub-clause (2), the repeal of section 44A will not affect dividends paid before 24 September 1974.

Clause 17: Credit in respect of tax paid abroad on ex- Australian dividends

This clause proposes a drafting amendment to sub-section 45(9) of the Principal Act that is consequential on the replacement (see clause 3) of the references in the Principal Act to "the Income Tax Ordinances of Papua New Guinea" with references to "income tax laws of Papua New Guinea". Sub-section 45(9) specifies that the other provisions of section 45 (which provide for allowance of a tax credit for foreign tax paid by Australian residents on foreign dividends) do not apply in respect of dividends from Papua New Guinea. Division 18 of Part III contains provisions relevant to those dividends.

Clause 18: Rebate on dividends

This clause proposes to amend section 46 of the Principal Act by omitting sub-section (10) of that section. It is consequential on the repeal, by clause 5, of section 7 of the Principal Act.

Under section 46, a company that is a resident of Australia for purposes of Australian tax is entitled to a tax rebate with the effect that dividends included in the company's taxable income are free of Australian tax. However, sub-section (10) of the section, which was inserted in the Principal Act in 1973 as part of measures under which Papua New Guinea companies became liable to pay Australian tax on dividends from Australia, precludes a Papua New Guinea resident company that is treated by virtue of sub-section 7(2) as a resident of Australia (because it derives dividends from Australia) from being entitled to a rebate under section 46 in respect of dividends derived on or after 26 October 1973.

The repeal of section 7, with effect from the date of Papua New Guinea's independence, means that sub-section 46(10) will be unnecessary as from that date. It is accordingly being repealed with effect from that date. Sub-clauses (1) and (2) of clause 18 will do this.

Sub-clause (3) is framed against the background just outlined and in the light of sub-clause (3)(b) of clause 5 which, for the transition year in which independence day occurs, has an effect corresponding with that of sub-section 7(2). Sub-clause (3) re-enacts the substance of sub-section 46(10) in respect of dividends derived by Papua New Guinea companies between 26 October 1973 and independence. It has the effect that a Papua New Guinea company that would be treated as a resident of Australia by reason of sub-section 7(2) is not to be entitled to a rebate under section 46 in respect of those dividends.

Clause 19: Rebate on dividends paid as part of dividend stripping operation

This clause will amend section 46A of the Principal Act, which relates to a rebate of tax in respect of dividends paid to an Australian resident company as part of a dividend stripping operation. That rebate is comparable with, but on a more restricted basis than, the rebate provided by section 46. The amendments proposed in relation to section 46A correspond with, and have the same broad effect as, those proposed by clause 18 in relation to section 46.

Clause 20: Special depreciation on manufacturing plant and plant used in primary production

Introductory Note

This clause will insert in the Principal Act a new provision, section 57AC, that will authorise higher depreciation allowances in respect of certain plant or articles that are used by taxpayers in manufacturing or primary production. In effect, the section will enable taxpayers to claim deductions for depreciation on eligible plant at twice the rates of depreciation normally provided under the depreciation provisions of the income tax law for plant of the relevant class.

Sub-section (1) of section 57AC establishes the criteria of eligibility for the higher depreciation allowances.

Paragraph (a) of sub-section (1) lays down the initial requirement that the plant or articles be first used by the taxpayer for the purpose of producing assessable income, or be first installed ready for such use, on or after 1 July 1974 and before 1 July 1975 (the "prescribed period"). The effect of paragraph (a) is to restrict the concession to plant first used or brought into use during the prescribed period of 12 months ending on 30 June 1975. However, once eligibility for double depreciation is established, eligible plant will remain subject to the higher depreciation allowance in respect of its use in the production of assessable income in subsequent years until its cost has been fully written off for income tax purposes. (See notes below relating to proposed sub-section 57AC(2)).

Paragraph (b) of sub-section (1) will limit the application of the accelerated depreciation rates to plant used in manufacture or primary production. The paragraph brings within the concession plant the cost of which would have qualified for either of the investment allowances formerly provided under sections 62AA and 62AB of the Principal Act, if those allowances had not been withdrawn.

Both of the investment allowances have been terminated in respect of expenditure incurred after 21 August 1973, but subject to transitional provisions that have retained eligibility for the allowances for certain expenditures incurred after that date under pre-existing contracts.

Manufacturers' Investment Allowance - Section 62AA applied in relation to expenditure of a capital nature incurred by a manufacturer on specified new manufacturing plant for use by him in Australia for the purpose of producing assessable income. A special deduction equal to one-fifth of that expenditure was allowable to the manufacturer in the first year in which the plant was so used or installed ready for such use. The allowance was additional to and independent of the normal depreciation allowance for the plant.

The manufacturers' investment allowance applied to plant used in the actual process of manufacturing and to plant the use of which was inseparably associated with manufacture. Thus, plant used in the disposal of waste substances resulting from the application of a manufacturing process could qualify for the allowance (and hence may qualify for the double depreciation allowance if it otherwise satisfies the conditions of proposed section 57AC). Plant used in the mining industry in the concentration of a metal or in processing after concentration also qualified for the investment allowance. Such plant may accordingly qualify for the double depreciation allowance where the taxpayer elects not to claim deductions for the plant under the special provisions contained in Divisions 10 and 10AA of the Principal Act.

The investment allowance for manufacturing plant required that the subject plant be for use by the taxpayer primarily and principally, and directly, in the process of manufacture (or inseparably associated processes). Second-hand or previously used plant did not qualify for the allowance. It was also necessary that the relevant plant be owned by the taxpayer so that plant leased by a manufacturer was ineligible for the investment allowance. Sub-section 57AC(1) carries into the double depreciation allowance these same qualifications in relation to manufacturing plant as applied for the purpose of the investment allowance.

Certain classes of plant which were specifically excluded from the manufacturer's investment allowance and which, as a consequence, will be ineligible for the double depreciation allowance include -

·
road vehicles of a kind ordinarily used for the transport of persons or the delivery of goods;
·
office machines and equipment;
·
household furnishings and appliances; and
·
containers, spools or other articles in or on which goods are delivered.

Primary Producers' Investment Allowance - Section 62AB of the Principal Act authorised a broadly similar investment allowance of one-fifth of capital expenditure incurred on new plant owned by a taxpayer and used wholly and exclusively for the purpose of carrying on in Australia a business of primary production. "Primary production" is defined in section 6 of the Principal Act as production resulting directly from the cultivation of land; the maintenance of animals or poultry for the purpose of selling them or their bodily produce (including natural increase); fishing operations or forest operations and includes the manufacture of dairy products by the person who produced the raw materials used in that manufacture.

A deduction equal to one-fifth of the total cost (including installation expenses) of eligible plant was allowable from the assessable income of the year in which the plant was first used or installed ready for use. As in the case of the manufacturers' plant investment allowance under section 62AA, the investment allowance under section 62AB was allowable in addition to normal depreciation allowances.

The primary producers' investment allowance did not apply, and therefore the higher depreciation allowance will not apply, to certain specified classes of expenditure including the cost of -

·
farm buildings or structural improvements including underground piping;
·
plant used partly for private purposes or used partly in a business other than primary production;
·
road vehicles, including cars, trucks, utilities, station wagons, caravans, jinkers and road trains;
·
office machinery and equipment;
·
household furnishings and appliances including wireless and television equipment; and
·
plant used to prepare food and drink.

Paragraph (b) of section 57AC(1) provides that the section is to apply only to plant or articles the expenditure on which would have been deductible to the taxpayer under sections 62AA or 62AB but for the operation of sub-sections 62AA(14) or 62AB(10). This has two practical effects. First, it ensures that the new section can have application only to plant of a kind that satisfies the tests of eligibility that applied for the purposes of the manufacturer's investment allowance (section 62AA) or the primary producers' investment allowance (section 62AB). Secondly, it ensures that any plant that remains eligible to attract any investment allowance deduction under the transitional arrangements associated with the withdrawal of the investment allowances will not be entitled to depreciation at accelerated rates under section 57AC.

Sub-section 62AA(14) provides that an investment allowance deduction under that section is not allowable in respect of expenditure incurred after 21 August 1973 unless the expenditure was incurred under a contract made on or before that date for the acquisition by a taxpayer of new manufacturing plant or for the performance of work in relation to such plant. Sub-section 62AB(10) contains an identical provision in relation to the primary producers' investment allowance.

By virtue of these two provisions certain expenditure incurred after 21 August 1973, if incurred pursuant to a contract made on or before that date, in acquiring or installing plant will remain eligible for the investment allowances. Paragraph (1)(b) of section 57AC will ensure that such plant does not also qualify for double depreciation rates where the plant is or has been first used or installed ready for use in the prescribed period.

Sub-section (2) of section 57AC is the operative provision for the purpose of the accelerated depreciation allowance. In broad terms, it provides that eligible plant and equipment is to be subject to depreciation rates for income tax purposes that are double the rates that would otherwise be applicable to the plant.

Section 54 of the Principal Act authorises deductions for depreciation of plant or articles owned by a taxpayer and used during the year of income for the purpose of producing assessable income or installed ready for use for that purpose and held in reserve. To fix the basic rate of depreciation of a unit of plant the Commissioner of Taxation is required by section 55 to estimate the effective life of the unit concerned. (In practice, standard rates of depreciation for most recognised items of plant have been fixed by the Commissioner and are published in Income Tax Order No. 1217).

Statutory rates of depreciation are provided in the income tax law for some special classes of plant. For example, 33 1/3 per cent depreciation rates are set by sections 55(2) and 73A, respectively, of the Principal Act in relation to certain facilities provided by employers for employees and children of employees and for certain plant used for scientific research purposes. Annual rates of 20 per cent are set by sections 57AA and 57AB of the Principal Act in relation to plant used for primary production where the plant was acquired under contracts made on or before 21 August 1973.

Except where statutory rates have effect, a taxpayer is given an option under section 56(1) of the Principal Act to have deductions for depreciation determined under the prime cost method or by reference to the depreciated value of the plant. In the latter instance the rate allowed is one and one-half times the basic rate determined under section 55(1).

An option to adopt the prime cost method of depreciation, once made, will generally apply in assessments for all subsequent years unless the method of calculating the depreciation allowances is changed with the leave of the Commissioner given under section 57 of the Principal Act. A limited exception to this general rule is contained in section 56A of the Principal Act which permits a further option to adopt the diminishing value method for certain taxpayers who fall within the scope of that section.

Sub-section (2) of proposed section 57AC provides that, notwithstanding anything contained in sections 55, 56(2), 56A or 57, the rates of depreciation that would otherwise apply by reference to the estimated effective life of the plant are to be doubled in relation to manufacturing or primary production plant meeting the tests for eligibility under sub-section (1). The broad effect of sub-section (2) is to halve the effective life estimated for the purpose of fixing the depreciation rates.

Depreciation allowances in relation to plant subject to statutory rates of depreciation under sections 55(2), 57AA, 57AB and 73A referred to earlier will not be disturbed.

Sub-section (3) of section 57AC confers on taxpayers an option to forgo the double depreciation rates authorised by sub-section (2) and, instead, to be allowed deductions for depreciation on eligible plant at ordinary rates determined without reference to the new section.

An election to adopt ordinary depreciation rates instead of double rates may be made in respect of all plant that would otherwise be eligible for depreciation under section 57AC and which was first used or installed ready for use in the year of income specified in the election. A taxpayer is not permitted to elect in relation to some only of plant that was first used or installed in that year.

As already stated plant eligible for accelerated depreciation is limited to plant that is first used or installed ready for use within the prescribed period. This will mean that for most taxpayers who balance their books for income tax purposes at 30 June each year the only year of income in relation to which an election may be made under sub-section (3) is the 1974-75 income year. For taxpayers who have adopted substituted accounting periods (e.g., a taxpayer who balances on 31 December) the prescribed period will extend over two income years and a separate election under sub-section (3) may be made in relation to plant whose eligibility for the application of section 57AC arises for determination in each of those income years. A taxpayer who so elects to take normal depreciation allowances for plant that is first used or installed ready for use in the earlier of those income years will have a separate option in relation to plant acquired in the later of those two years.

Sub-section (4) prescribes the procedure to be adopted with regard to the exercise of an option conferred by sub-section (3). The notice of election is required to be in writing and must be lodged with the Commissioner of Taxation not later than the date of lodgment of the return to which the election relates or within such further time as the Commissioner allows.

Sub-clause (2) of clause 20 will provide authority for the Commissioner to amend assessments to allow claims for depreciation at accelerated rates on eligible plant where assessments have been issued allowing depreciation at ordinary rates prior to the coming into force of the proposed section 57AC. This authority is necessary in relation to certain taxpayers who adopt substituted accounting periods for income tax purposes.

Clause 21: Rates and Taxes

The purpose of this clause is to discontinue, in relation to land situated in Papua New Guinea, the deduction allowable under section 72 of the Principal Act in respect of annually assessed rates. Sub-section 72(1) authorises a deduction in respect of annually assessed rates levied on property in Australia or Papua New Guinea and in respect of land taxes on Australian land. The deduction applies to rates and taxes for which the taxpayer is personally liable and to the share of such payments that a person pays as a home unit owner or under some other "sub-divided residence scheme".

Sub-clause (1) will omit the references in section 72 to Papua New Guinea and accordingly limit the deduction allowable under the section to payments for both rates and land tax that are made in Australia.

Sub-clause (2) specifies that the discontinuance by sub-clause (1) of a deduction under section 72 for rates paid in Papua New Guinea will apply to assessments in respect of income years subsequent to the income year in which Papua New Guinea attains independence.

Clause 22: Expenditure on Scientific Research

This clause also relates to the independence of Papua New Guinea and concerns section 73A of the Principal Act which authorises a deduction where a person carrying on a business in Australia or Papua New Guinea for the purpose of producing assessable income incurs certain classes of expenditure on scientific research, either directly or by making payments to an approved research institute.

The full amount of the expenditure may be an allowable deduction where the expenditure is incurred in Australia, which, by a special definition contained in the section, includes Papua New Guinea. Where, however, the expenditure is incurred outside Australia and the business to which it relates is carried on partly in and partly out of Australia, sub-section 73A(3) provides for a partial deduction of the expenditure.

Sub-clause (1) of clause 22 will omit the definition of "Australia" that is contained in sub-section 73A(6), and which specifies that the references to Australia in section 73A are to be read as including Papua New Guinea. The reference to Australia will thereafter have its normal meaning.

Apart from the effect that this change will have on the operation of sub-section 73A(3), the amendment will also affect the definition of "an approved research institute" in sub-section 73A(6), which extends to institutes, associations or organisations that are approved for undertaking scientific research which is or may prove to be of value to Australia. The definition will no longer be capable of including institutes etc. undertaking scientific research which is or may prove to be of value to Papua New Guinea, but not Australia. However, sub-clause (2) of clause 22, which provides for the amendment made by sub-clause (1) to take effect on Papua New Guinea independence day, also has the result that an institute or other body that qualified as "an approved research institute" before that time is to continue to be so regarded for the purposes of section 73A.

Sub-clause (3) is a saving provision that will apply in respect of expenditure incurred in Papua New Guinea before the date of Papua New Guinea's independence, and expenditure incurred between that time and 1 July 1976 under a contract entered into before the date of introduction of the Bill. It will maintain the present operation of section 73A(3) in respect of such expenditure.

Clause 23: Certain expenditure on land used for primary production

Section 75 of the Principal Act is by this clause to be rendered inapplicable to expenditure incurred on or after 1 July 1976 on any land in Papua New Guinea. Section 75 formerly allowed an outright deduction, in the year of incurrence, for certain categories of capital expenditure relating to land in Australia or Papua New Guinea that was used by the taxpayer in carrying on primary production. The section is now limited in its application to expenditure incurred on or before 21 August 1973, or incurred after that date in pursuance of an earlier contract.

Following the amendments to be made by sub-clauses (1) and (2), section 75 will, in relation to any Papua New Guinea expenditure, remain applicable in respect of expenditure incurred after 21 August 1973 only where it is incurred pursuant to a pre-22 August 1973 contract and before 1 July 1976.

Clause 24: Deduction of certain expenditure on land used for primary production

This clause will amend section 75A of the Principal Act which, like section 75, relates to primary production expenditure in Australia or Papua New Guinea, but not in any other country.

Section 75A permits a deduction over a period of 10 years of categories of capital expenditure on land used for primary production in Australia or in Papua New Guinea that would have qualified under section 75 for an outright deduction in the year of incurrence. Sub-clause (1) will terminate the deduction allowable under section 75A in respect of expenditure incurred on land used by an Australian resident for primary production in Papua New Guinea.

By sub-clause (2), section 75A will cease to provide a deduction for such expenditure incurred from the time of Papua New Guinea's independence, except where the expenditure is incurred before 1 July 1976 under a contract made before the date of introduction of the Bill.

Clause 25: Loss in deriving exempt income

Section 77 of the Principal Act, which is to be amended by clause 25, allows a deduction to a taxpayer in respect of any loss incurred in carrying on in Australia or in Papua New Guinea a business the income from which, if any, would be exempt from tax. If the business subsequently becomes profitable, the profits are treated as assessable income until any losses allowed as deductions during the previous three years have been recouped.

The amendments proposed by clause 25 will preclude the continued application of section 77 to taxpayers carrying on exempt businesses in Papua New Guinea.

Sub-clause (1) of clause 25 proposes the substitution of two new sub-sections in place of existing sub-section 77(1), the effect of which will be to limit the application of section 77 to losses incurred in carrying on an exempt business in Australia. By sub-clause (2), the application of section 77 in relation to losses incurred in carrying on an exempt business in Papua New Guinea will be discontinued for losses of the year of income subsequent to that in which Papua New Guinea attains independence, and all subsequent years of income.

Clause 26: Gifts, calls on afforestation shares, pensions, etc.

The purpose of this clause is to amend section 78 of the Principal Act to terminate the allowance of deductions under the section for gifts to specified funds, authorities and institutions in Papua New Guinea, and for calls paid on shares in a company carrying on as its principal business afforestation in Papua New Guinea.

Section 78 at present authorises deductions for gifts of $2 or more to certain funds, authorities and institutions in Australia, which by sub-section 78(2) is defined to include Papua New Guinea. It also authorises a deduction for one-third of the amount of calls paid by a taxpayer on shares in a company carrying on as its principal business afforestation in Australia, as so defined.

Sub-clause (1) will omit the present sub-section 78(2) and substitute a new sub-section (2), resulting only in the omission of the definition of "Australia". This means that gifts to funds, authorities and institutions in Papua New Guinea and calls on shares in companies carrying on an afforestation business in Papua New Guinea will cease to be allowable deductions with effect, pursuant to sub-clause (2), in relation to gifts or calls made after Papua New Guinea's independence.

Clause 27: Deductions for members of Defence Force serving overseas

This clause proposes an amendment to section 79B of the Principal Act so that a locality in Papua New Guinea may no longer be ineligible to be declared an "overseas locality" to which the section applies.

Section 79B provides an allowance for members of the Defence Force serving in overseas localities, comparable with the zone allowance which section 79A grants to people living in Australia's external territories and in isolated areas of Australia. Under sub-section 79B(5) the Treasurer may declare an area outside Australia and Papua New Guinea to be an overseas locality.

Papua New Guinea is at present specified as an area to which the zone allowance under section 79A applies, but it is proposed by clause 53 of the Bill that Papua New Guinea will cease to be included in the zone allowance area. However, the amendment proposed by clause 27 will allow it to be declared a locality to which section 79B applies.

Clause 28: Losses of previous years

A drafting amendment is proposed by this clause in relation to the definition of "net exempt income" in sub- section 80(3) of the Principal Act. The amendment is associated with the independence of Papua New Guinea.

Section 80 allows losses incurred in any of the preceding seven years to be deducted from a taxpayer's assessable income and requires that the taxpayer's "net exempt income", as defined in sub-section 80(3), be taken into account in calculating the amount of a loss available for deduction in a later year. So far as is relevant, "net exempt income" is defined to mean the part of a resident taxpayer's net income that is exempt from Australian tax, less any taxes payable in respect of that income in a country outside Australia or under the Income Tax Ordinances of Papua New Guinea. The amendment will replace the latter words by words that have the same effect, but are apt in the circumstances of Papua New Guinea's independence.

Clause 29: Interpretation

This clause proposes an amendment to sub-section 82AAA(1) of the Principal Act to omit from the definition of "employee" in that sub-section the reference to a resident of Papua New Guinea.

Section 82AAA is the definition section for the group of sections that allow a deduction to employers for contributions to a superannuation fund for the benefit of employees. An employee for purposes of these sections is defined in sub-section 82AAA(1) as "a person who is employed by a taxpayer and

(a)
is engaged in producing assessable income of the taxpayer; or
(b)
is a resident of Australia or a resident of Papua New Guinea and is engaged in the business of the taxpayer."

Sub-clause (1) omits the words "or a resident of Papua New Guinea". In the main, a resident of Papua New Guinea could nevertheless be expected to continue to qualify as an "employee" of a taxpayer following Papua New Guinea's independence because he would normally be engaged in producing assessable income of the taxpayer. By sub-clause (2) the amendment will apply to assessments in respect of years of income subsequent to the year in which independence occurs.

Clause 30: Definition

The purpose of this clause is to discontinue the allowance of concessional deductions to taxpayers who are resident in Papua New Guinea and to discontinue certain of those deductions in respect of dependants who are so resident.

Under the existing sub-section 7(2) of the Principal Act, taxpayers resident in Papua New Guinea who derive Australian income are treated as residents of Australia for the purposes of assessment and payment of Australian tax. Consistently with this, Sub-division B of Part III of the Act, which allows concessional deductions only to resident taxpayers, includes a section - section 82AA - by which a resident of Papua New Guinea is treated as a resident of Australia for purposes of the Sub-division. This section also means that those concessional deductions - for medical and funeral expenses - that are conditional on the dependant concerned being a resident of Australia are allowable where the dependants are resident in Papua New Guinea.

In association with the proposed repeal of section 7 of the Principal Act, it is proposed by sub-clause (1) of clause 30 to repeal section 82AA. Taxpayers resident in Papua New Guinea who are not also residents of Australia for Australian tax purposes will thus not be entitled to concessional deductions. Medical and funeral expenses in respect of dependants living in Papua New Guinea who are not residents of Australia will cease to be allowable deductions. However, the concessional deductions allowable for the maintenance of dependants do not require that the dependant be a resident of Australia and the repeal of section 82AA will not disturb a resident taxpayer's entitlement to those concessional deductions for dependants living in Papua New Guinea.

By sub-clause (2), the repeal of section 82AA will apply to assessments in respect of years of income subsequent to the year in which Papua New Guinea attains independence.

Clause 31: Housekeeper

This amendment is complementary to that proposed by clause 30. Sub-clause (1) will bring to an end a taxpayer's entitlement under section 82D of the Principal Act to a concessional deduction for a housekeeper engaged in keeping house for the taxpayer in Papua New Guinea, and confine the section to those cases where the housekeeper keeps house in Australia. Sub-clause (2) specifies that the amendment will apply to assessments in respect of years of income following the year in which Papua New Guinea becomes independent.

Clause 32: Interpretation

The amendments proposed to section 103 of the Principal Act by this clause are purely technical in nature.

Section 103 is the definition section of Division 7 of Part III of the Principal Act, which contains the provisions governing a private company's liability for tax on undistributed income. Broadly, a private company is liable to pay the tax if the dividends it pays (other than special fund dividends and certain other dividends) are less than a specified proportion of its distributable income.

Dividends exempt from tax under section 44A have been "special fund dividends" but as that section is being repealed by clause 16, paragraph (a) of sub-clause (1) will omit from the definition of "special fund dividends" the reference to section 44A. That amendment will apply, pursuant to sub-clause (2), in respect of dividends paid on or after 24 September 1974.

Paragraph (b) of sub-clause (1) proposes an amendment of the definition of "the distributable income" in sub-section 103(1) similar to that proposed to the definition of "net exempt income" in sub-section 80(3) (see notes on clause 28). The definition of "the distributable income" calls for taxes paid in Papua New Guinea or another country to be deducted from a company's taxable income in determining the amount of its distributable income.

Clause 33: Prescribed dividends

This clause proposes the omission of sub-section 103AA(9) of the Principal Act as a consequence of the proposed repeal (by clause 5) of section 7 of the Act.

Section 103AA guards against the tax-free accumulation of dividends by Australian private company groups through the setting up of so-called "repository" companies in Papua New Guinea or other countries outside Australia. It provides, in effect, that a private company cannot take into account, for purposes of the tax on undistributed income, a dividend paid to a non-resident private company, except to the extent that the Commissioner of Taxation is satisfied that a number of conditions are met. The conditions are designed to establish that the dividend is paid for other than tax avoidance purposes.

Sub-section 103AA(9) deals with the technical problems arising from sub-section 7(2) and ensures that that sub-section does not result in a Papua New Guinea company being treated for purposes of sub-section 103AA(9) as a resident of Australia. The repeal of sub-section 103AA(9) follows from the repeal of sub-section 7(2), both changes taking effect from the date of Papua New Guinea's independence. Sub-clause (3) maintains the effect of the existing law, however, during the transitional period following independence.

Clause 34: Interpretation

Clause 34 proposes amendments to section 122 of the Principal Act to discontinue the allowance of deductions to Australian resident taxpayers for capital expenditure incurred from the time of Papua New Guinea's independence in relation to general mining activities in Papua New Guinea. This change will be subject to transitional arrangements that will preserve entitlements to deductions for eligible capital expenditure already contracted for. Clause 34 also has an effect in relation to Division 10AAA, as explained in the notes on the next clause.

Section 122 is included in Division 10 of Part III of the Principal Act. The general scheme of Division 10 is to authorise deductions for capital expenditure incurred by a mining enterprise in connection with the carrying on of mining operations (other than petroleum mining) upon a mining property in Australia, which is defined for the purposes of the Division to include Papua New Guinea. Expenditure on plant, development of a mining property and prospecting and exploration are within the scope of the expenditures covered. Because the allowance of deductions under Division 10 is dependent on the mining operations being carried on to gain assessable income, expenditure in Papua New Guinea by a company that is not a resident of Australia (e.g. a Papua New Guinea subsidiary of an Australian company) does not qualify for deduction in Australia.

By sub-clause (1) of clause 34, the definition of "Australia" is to be omitted from sub-section 122(1). "Australia" will thus revert to its ordinary meaning - which does not include Papua New Guinea - for the purposes of Division 10 and this will affect the key definition of "prescribed mining operations", under which the relevant mining property must be in Australia.

The effect of sub-clause (2) will be that capital expenditure incurred by taxpayers on mining operations in Papua New Guinea will not be allowable in Australian assessments if incurred on or after independence day, except where it is incurred before 1 July 1976 in pursuance of a contract made before the date of introduction of the Bill, being a contract under which property was to be acquired by, or work was to be performed for, the taxpayer. The existing rules for deductibility of expenditure will continue to apply in respect of any eligible capital expenditure incurred in Papua New Guinea before independence day. See also the notes on clause 36.

Clause 35: Application of Division

This clause, in association with clause 34, will terminate the application of Division 10AAA of Part III of the Principal Act in respect of future capital expenditure on transport facilities related to mining operations carried on in Papua New Guinea. In relation to such operations, the Division has application to Australian resident taxpayers, but not to non-resident taxpayers (e.g., the Papua New Guinea subsidiary of an Australian company) whose Papua New Guinea operations do not result in the receipt of income assessable to tax in Australia.

Under Division 10AAA certain capital expenditure incurred on a transport facility used primarily and principally to transport petroleum and other minerals may qualify for the special deductions authorised by the Division. Eligible capital expenditure is generally allowable over a twenty-year period.

For general mining (mining for minerals other than petroleum) expenditure on transport facilities may be deducted if the minerals are obtained from mining operations in Australia or Papua New Guinea. This result follows from the adoption, for purposes of Division 10AAA, of the meaning that "prescribed mining operations" has in Division 10. As has been explained in the notes on clause 34, the inclusion of Papua New Guinea in the definition in section 122 of "Australia" has meant that mining operations in Papua New Guinea have been regarded as operations in Australia. Accordingly, the repeal by clause 34 of the definition will have the result that expenditure on facilities for the transport of Papua New Guinea - produced minerals will no longer be deductible in Australian assessments under the special provisions, with effect as set out in that clause.

Where a transport facility is provided for the transport of petroleum, the authority for deduction of expendi- ture on facilities for the transport of petroleum produced in Papua New Guinea is found in sub-section 123A(1A). By that sub-section, Division 10AAA is made to apply also to facilities for the transport of petroleum obtained from mining operations in Australia or in Papua New Guinea.

Sub-clause (1) of clause 35 proposes to delete the reference in sub-section 123A(1A) to Papua New Guinea. As a result, the special deduction for expenditure on transport facilities used for transporting petroleum will no longer apply to expenditure on such facilities relating to petroleum produced in Papua New Guinea.

The effect of sub-clause (2) will be that the relevant expenditure will not be deductible if incurred on of after independence day in relation to mining operations in Papua New Guinea, except where the expenditure is incurred before 1 July 1976 in pursuance of a contract made before the date of introduction of the Bill.

Clause 36: Interpretation

The broad purpose of this clause, which has a purpose similar to that of clauses 34 and 35, is to render Division 10AA of Part III of the Principal Act inapplicable in relation to capital expenditure, incurred by an Australian resident taxpayer after Papua New Guinea's independence, where the expenditure is connected with petroleum activities in Papua New Guinea.

The general scheme of Division 10AA is to authorise special deductions for certain capital expenditure incurred in exploring or mining for petroleum. By reason of the definition of "Australia" in sub-section 124(1) the Division applies to expenditure related to petroleum activities in Australia or Papua New Guinea. Deductions allowable under the Division for petroleum exploration expenditure are available immediately against petroleum mining income, as it arises. Deductions under the Division for capital expenditure incurred in acquiring a prospecting or mining right, or in carrying on petroleum mining operations, were formerly allowable immediately against petroleum mining income but, except for expenditure incurred before 1 July 1976 in pursuance of contracts made prior to 18 September 1974, are now deductible over the estimated life of the petroleum field.

Sub-clause (1) of clause 36 proposes to omit from sub-section 124(1) the definition of "Australia". "Australia" will thereafter have its ordinary meaning and the Division will cease to apply in relation to expenditure incurred by an Australian resident taxpayer on petroleum activities in Papua New Guinea. By sub-clause (2), a taxpayer's entitlement to deductions under Division 10AA will be preserved in relation to such expenditure incurred before the date of Papua New Guinea's independence or incurred on or after that date but before 1 July 1976 in pursuance of a contract made before the date of introduction of the Bill.

The special deductions authorised by Division 10AA are allowable only against income from petroleum mining. Transitional provisions contained in clause 54(5) of the Bill set out the basis on which expenditure that remains deductible under the Division is to be applied against such income arising from a mine in Australia or from a mine in Papua New Guinea.

Clause 37: Division not to apply to certain interest

A company that pays interest on bearer debentures, whether to residents or non-residents, may in special circumstances be liable to pay tax on the interest under section 126 of the Principal Act. However, there is an exemption from any such liability if the interest paid to non-residents would be exempt from interest withholding tax under specified provisions.

Clause 37 applies this principal to any bearer debenture interest that is paid to non-residents by the Australian Industry Development Corporation and is exempt from interest withholding tax by the proposed new section 128EA proposed to be inserted in the Principal Act by clause 41. Clause 37 will free such interest from any liability to tax under section 126.

Clause 38: Interpretation

This clause proposes another amendment of a technical nature arising from the repeal by clause 5 of section 7 of the Principal Act.

Division 11A of Part III of the Act creates a liability to withholding tax for dividends and interest paid from Australia to non-residents. Since amendments contained in the Income Tax Assessment Act (No. 5) 1973 were made, the expression "non-resident" has had its normal meaning for the purposes of the Division and the liability to withholding tax extends, therefore, to residents of Papua New Guinea. Sub-section 128A(1A), which was inserted by that amending Act, avoids any possible impact on Division 11A of sub-section 7(2).

As a consequence of the repeal of sub-section 7(2), sub-clauses (1) and (2) of clause 38 will omit sub-section 128A(1A), with effect from the time that the repeal of sub-section 7(2) is to take effect. Sub-clause (3) maintains for a transitional period the present effect of sub-section 128A(1A).

Clauses 39 to 41 : Interest on borrowings by Australian Industry Development Corporation

The effect of these clauses will be to provide an exemption from Australian tax for interest paid to non-residents by the Australian Industry Development Corporation on overseas borrowings. The exemption will be provided by a new section - section 128EA - which it is proposed by clause 41 to insert in the Principal Act.

Liability to interest withholding tax on interest paid to non-residents arises under section 128B of the Principal Act. Exemptions from the liability are also conferred by section 128B and clause 39 will add to the exempt categories the interest that is specified in the proposed new section 128EA. Interest exempted from withholding tax is, by section 128D, excluded from the assessable income of the non-resident lender and clause 40 will apply this principle to exempt interest that is paid by the A.I.D.C. and to which section 128EA applies.

Section 128EA, to be inserted by clause 41, will make interest exempt from withholding tax where it is paid to a non-resident on or after 1 July 1973 by the A.I.D.C., and -

(a)
the relevant loan to the A.I.D.C. was raised outside Australia;
(b)
the payment of interest is made outside Australia;
(c)
if the loan was raised by bearer debentures, the debentures were issued outside Australia in respect of a loan in a foreign currency and payment of the interest is made in a foreign currency.

Clause 42: Income derived by non-resident insurer

This clause, which concerns premiums on general insurance policies derived by foreign insurers from Australian residents, is related to the emergence of Papua New Guinea as an independent country.

Section 142, which clause 42 will amend, is included in Division 15 of Part III of the Principal Act. The objective of the Division is to secure the imposition of tax on foreign insurance underwriters in respect of business (other than life assurance) undertaken by them in Australia in competition with companies established in Australia. Sub-section 142(2) brings to tax insurance premiums that are paid by Australian residents where an agent or representative in Australia of a non-resident insurer was in any way instrumental in securing the business. However, by sub-section 142(3), the tax is not to be levied on any premiums related to Papua New Guinea risks. There is no corresponding restriction in relation to any premiums secured in Australia in respect of risks connected with other countries.

Sub-clause (1) of clause 42 proposes the omission of sub-section 142(3). By sub-clause (2), the amendment will apply in respect of premiums paid or payable under an insurance contract made on or after Papua New Guinea's independence day.

Clause 43: Application of Division to primary producers

The amendment to section 157 of the Principal Act being made by this clause will have the result that an Australian resident carrying on primary production in Papua New Guinea but not in Australia, and who is not also resident in Papua New Guinea, will cease to be eligible to have his tax calculated under the averaging provisions of Division 16 of Part III of the Act.

Division 16 authorizes the application of the averaging provisions to "primary producers", that expression being defined in sub-section 157(2) as meaning a person who carries on in Australia a business of primary production or a person carrying on primary production in Papua New Guinea if, in the latter case, the person is a resident of Australia and not a resident of Papua New Guinea. (Persons who are residents of Papua New Guinea, or who are not residents of Australia, are not subject to Australian tax on any income derived from primary production in Papua New Guinea).

Sub-clauses (1) and (2) of clause 43 will confine the averaging provisions to people who carry on a primary production business in Australia. The change will have effect for years of income subsequent to the year of income in which Papua New Guinea independence day occurs.

Clause 44: Credits in respect of tax paid under the income tax laws of Papua New Guinea

Sub-clause (1) of clause 44 proposes the repeal of Division 18 of Part III of the Principal Act and the substitution of a revised Division 18 which will have effect, pursuant to sub-clause (2), in relation to years of income subsequent to the current income year, 1974-75.

Division 18 makes provision for the granting of a credit for Papua New Guinea tax against the Australian tax liability of an Australian resident who is in receipt of income from Papua New Guinea. This method of double tax relief is to be continued after independence, except that, under the amendment proposed by sub-clause (1)(e) of clause 7, double tax relief for salary and wage income that an Australian resident derives from Papua New Guinea will be conferred by means of an exemption from Australian tax.

Because of the need to alter a great number of references in Division 18 to Papua New Guinea, and to its income tax law, it has been found convenient to replace the existing Division by a Division that refers appropriately to independent Papua New Guinea and its income tax law. The only change of substance concerns the "single return" system under which Australian residents deriving income from Papua New Guinea may, in very limited circumstances, lodge the one tax return in respect of their Australian and Papua New Guinea income tax liabilities.

Under the "single return" arrangement (now provided for by sub-section 160AF(1A)) Australian taxpayers with income from a source in Papua New Guinea may be permitted to lodge only an Australian return of income and to pay to the Commissioner of Taxation a single amount of tax, covering both Australian and Papua New Guinea tax liabilities. The Commissioner is authorised to remit to the Chief Collector of Taxes for Papua New Guinea the appropriate amount of Territory tax. The "single return" system has applied in the past to people whose only assessable income from Papua New Guinea is dividends, interest or pensions. Because Papua New Guinea now taxes dividends by a system of withholding tax, and not by assessment, and has undertaken to exempt from its tax pensions derived by residents of Australia, the former system, if continued, would be limited in its application to some interest income derived from Papua New Guinea. The system is thus not of great practical benefit and, in the light of Papua New Guinea's independence, it is proposed not to make provision for it in the newly-expressed Division. In those cases where it does apply, the system will be retained for the 1974-75 year of income.

Sub-clause (3) is purely a drafting amendment.

Clause 45: Definitions

This clause proposes an amendment of a drafting nature to the definition of "non-Australian tax" in section 160AH of the Principal Act. Section 160AH contains definitions used in Division 19 of Part III of the Act, which contains machinery provisions governing the determination of tax credits under Division 18 and under Australia's double taxation agreements. The amendment proposed by this clause arises from Papua New Guinea's independence.

Clause 46: Determination of claims for credits

Sub-clause (1) of this clause proposes to omit sub-section 160AI(1) of the Principal Act and replace it by a new sub-section that will not contain presently-existing references to the "single return" arrangement mentioned in the notes dealing with clause 44.

By sub-clause (2), the amendment will apply in relation to the 1975-76 and subsequent years of income.

Sub-clause (3) is a drafting measure.

Clause 47: Application of credits

The amendments proposed by sub-clause (1) are also consequential upon the proposed termination of the "single return" arrangement referred to in the notes on clause 44. Sub-section 160AN(1A), which is to be omitted by this sub-clause, authorises the Commissioner of Taxation to pay amounts representing Papua New Guinea tax to the Chief Collector of Taxes for Papua New Guinea. Sub-clause (2) will operate so that the omission of sub-section 160AN(1A) has effect for future years of income only.

Sub-clauses (3) and (4) are drafting provisions to deal with transitional situations.

Clauses 48 and 49 : Collection by instalments of tax on companies

The terms of Division 1A of Part VI of the Principal Act, comprising sections 221AA to 221AJ, require a company to pay part of the tax on its 1973-74 income by two instalments, the first being payable not earlier than 15 November 1974 and the second not earlier than 15 February 1975, with the balance of the tax being left for payment by the due date shown on the company's notice of assessment.

On 9 December 1974 an announcement was made of the Government's intention to introduce legislation to delete the requirement to pay the second of the two instalments and thereby permit a company to defer, until the assessed tax on its 1973-74 income fell due on or after 30 April 1975, payment of the amount that it could otherwise have been called upon to pay by 15 February 1975. The changes in the law foreshadowed in this announcement will be effected by clauses 48 and 49 of the Bill.

Section 221AC of the Principal Act provides, with certain qualifications, that a company is liable to pay two instalments of tax in respect of income of the 1973-74 year of income. Clause 48 proposes that section 221AC be amended so as to provide for a company to be liable to pay only one instalment of tax in respect of income of that year.

Section 221AF of the Principal Act provides, among other things, that the due dates for payment of instalments of tax shall not be earlier than dates specified in sub-section (2). Paragraph (a) of that sub-section specifies 15 November 1974 and 15 February 1975 as the earliest permissible due dates for the two instalments of tax that a company is required to pay in respect of income of the 1973-74 year, under the law as it now stands.

Clause 49 proposes, by sub-clause (1), that sub-section (2) of section 221AF be amended to omit the existing paragraph (a) and replace it with a new paragraph that refers to only one instalment of tax in respect of income of the 1973-74 year and specifies 15 November 1974 as the earliest permissible due date for payment of that instalment. Sub-clause (2) of clause 49 deals with situations where companies have already been served, in accordance with sub-section (1) of section 221AF, with notices relating to the abandoned February 1975 instalments of tax. It provides for such notices to be disregarded.

Clause 50: Interpretation

This clause is related to the introduction of the National Employment and Training (NEAT) System. As indicated earlier in the notes on the associated amendment proposed by sub-clause (1)(f) of clause 7 of the Bill, allowances paid under the NEAT System are to be subject to tax and are to come under the pay-as-you-earn tax instalment system.

Clause 50 proposes the insertion in the definition of "salary or wages" contained in section 221A(1) of the Principal Act of a new paragraph - paragraph (g) - to extend the definition expressly to cover allowances paid under the NEAT System. The amendment will thus ensure that NEAT allowances are subject to tax instalment deductions under Division 2 of Part VI of the Principal Act in the same way as other similar periodical payments and allowances in the nature of income. The change in the definition has effect as from the 1974-75 year of income.

Clause 51: Interpretation

The amendment proposed by this clause to section 221YK of the Principal Act is yet another technical amendment consequential on the repeal, by clause 5, of section 7 of the Act. Section 221YK appears in Division 4 of Part VI of the Act, which governs the collection of withholding tax and the amendment proposed by this clause arises from the same technical considerations as have been mentioned in the notes dealing with clause 38.

Clause 52: Territories

This clause will amend section 251B of the Principal Act so that, after the independence of Papua New Guinea, the jurisdiction of the Tax Agents' Board in Queensland will not extend to the registration of Papua New Guinea tax agents.

Clause 53: Schedule 2

Sub-clause (1) will omit from Schedule 2 to the Principal Act the references to "The Territory of Papua" and "The Territory of New Guinea". Schedule 2 defines the areas that fall within Zone A for the purposes of the zone allowance provisions of section 79A of the Act. An Australian resident residing in the defined areas for more than one-half of a year of income is entitled to a deduction under section 79A of an amount equal to the sum of five hundred and forty dollars and one-half of the concessional deductions, if any, to which the resident is entitled for the maintenance of dependants, or in respect of a housekeeper.

By sub-clause (2) Papua New Guinea will continue to be regarded as falling within Zone A until the end of the year of income in which it attains independence.

Clause 54: Transitional provisions relating to Papua New Guinea

This clause, which will not amend the Principal Act, contains a number of transitional provisions, the need for which arises because of amendments to be effected by other clauses of the Bill, or because of the change in the constitutional status of Papua New Guinea when it becomes independent.

Sub-clause (1) relates to section 23(jaa) of the Principal Act, which exempts the income of certain retirement funds, including those established by an Ordinance of a Territory or by a local or public authority constituted by or under an Ordinance of a Territory. Section 23(jaa) is not to be amended by the Bill but the independence of Papua New Guinea will mean that funds subsequently established there cannot fall within the provision. Section 23(jaa) will continue to exempt income derived by existing funds prior to independence. However, sub-clause (1) of clause 54 will make it clear that the exemption under section 23(jaa) is not to apply to income derived after independence. Although exemption under section 23(jaa) will not be available after independence to existing funds that qualify under the provision, exemption would be available under provisions that apply to funds set up in other countries, such as section 23(jb) and sub-section 128B(3)(f).

Sub-clause (2) of clause 54 is a transitional provision that is related to sub-clause (1), and to the amendment of the Principal Act proposed by paragraph (d) of clause 3 of the Bill. As mentioned in the notes relating to that amendment, the new sub-section 6(7) it will insert in the Principal Act is designed to make it possible for Papua New Guinea retirement funds - that presently qualify for exemption under section 23(jaa) - to become eligible, after independence, for the exemption provided by section 23(jb) for a "foreign superannuation fund". Sub-clause (2) confines the operation of new sub-section 6(7) to income derived after independence day.

Sub-clause (3) relates to a provision of section 103A of the Principal Act which is concerned with establishing whether a company is a private or a public company for the purposes of the Act. Under section 103A a company is a private company in relation to a year of income if it is not a public company, and sub-paragraph 103A(2)(d)(iii) treats as a public company certain bodies constituted by a law of a Territory and established for public purposes. In order to clarify the post-independence position of any such Papua New Guinea bodies, sub-clause (3) will require that they continue to be treated as public companies under sub-paragraph 103A(2)(d)(iii) in relation to the year of income in which independence occurs, but not in relation to subsequent years of income. For subsequent years application of the ordinary tests of whether a company is a public or a private company would normally result in the Papua New Guinea bodies being classed as public companies.

Sub-clause (4) proposes a transitional provision relating to the application for the year of income in which independence occurs of Division 8 of Part III of the Principal Act. That Division governs the taxation of life assurance companies.

In determining the extent to which the special provisions of the Division are applicable to a life assurance company, a distinction is drawn between Australian policies and overseas policies, the former term embracing policies registered in a registry in a State or Territory. It is not proposed that Division 8 be amended by the Bill and if no special provision were made, policies registered in a registry in Papua New Guinea would cease to qualify as Australian policies from the time of Papua New Guinea's independence. However, since the provisions of the Division apply on a year of income basis, sub-clause (4) will require that the reference to a registry in a Territory be construed for the year of income in which independence occurs as including a reference to a registry in independent Papua New Guinea. Thereafter, policies registered in a registry in Papua New Guinea will be viewed for purposes of Division 8 in the same way as policies registered in a registry in any other country outside Australia.

Sub-clause (5) contains transitional provisions relating to Division 10AA of Part III of the Principal Act. That Division authorises the allowance of deductions for certain capital expenditure incurred by resident and non-resident taxpayers exploring or mining for petroleum in Australia and by Australian resident taxpayers exploring or mining for petroleum in Papua New Guinea. The broad purpose of these transitional provisions is to regulate the future application of the Division in respect of expenditure incurred in relation to petroleum activities in Australia on the one hand and petroleum activities in Papua New Guinea on the other.

The special deductions authorised by the Division are allowable only against assessable income from petroleum, which is defined in sub-section 6(1) of the Principal Act to mean assessable income derived by a taxpayer from the sale of petroleum obtained from mining operations carried on by the taxpayer in Australia or in Papua New Guinea, or the products of petroleum so obtained. This means that expenditure incurred either in Australia or in Papua New Guinea is deductible at present from petroleum income derived from either place. The excess in any income year of deductible expenditure over assessable income from petroleum remains available for deduction in a later year when further assessable income from petroleum is derived.

Subject to the continuing deductibility of expenditure incurred before 1 July 1976 under existing contracts, deductions will cease to be allowable (by clause 36 of the Bill) for expenditure in relation to petroleum activities in Papua New Guinea that is incurred from the time of Papua New Guinea's independence. Any entitlement a taxpayer may have to deductions under the existing law in respect of capital expenditure in Papua New Guinea incurred prior to independence day, or after that date and before 1 July 1976 under contracts made before the introduction of the Bill, will be preserved.

By sub-clause (5), deductions for capital expenditure incurred in Australia will only be allowable, in years subsequent to that in which independence day occurs, from assessable income derived by a taxpayer from the sale of petroleum produced by the taxpayer in Australia and products of that petroleum. Deductions for any past capital expenditure incurred in Papua New Guinea will be allowed against petroleum income from both Australia and Papua New Guinea, the allowance against Australian income being made after deductions for Australian expenditure have been allowed.

To achieve these results, sub-clause (5) will require that, for the purposes of determining the deductions allowable under Division 10AA for the years of income subsequent to that in which Papua New Guinea attains independence, the operative provisions of the Division are to be applied separately in relation to expenditure incurred in connection with petroleum activities in Australia, and in relation to expenditure in connection with such activities in Papua New Guinea. References in these provisions to assessable income from petroleum are to be construed for the purposes of the deduction of Australian expenditure as being limited to assessable income flowing from petroleum activities in Australia. Deductions allowable in a year of income for past expenditure in Papua New Guinea will be limited to the amount of assessable income from petroleum remaining after allowance of deductions for Australian expenditure, any excess that remains being available for deduction in a later year.

Paragraphs (a), (b) and (c) of sub-clause (5) will provide for these transitional arrangements to apply in relation to, respectively, sections 124AD, 124AF and 124AH of the Principal Act, which specify the bases for the allowance of deductions under Division 10AA of different categories of capital expenditure.


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