Explanatory Notes(Circulated by authority of the Acting Treasurer, the Rt. Hon. R. G. Menzies)
Notes on Clauses
This clause formally provides for the short title and citation of the Amending Act and the Principal Act as amended.
Section 5(1A.) of the Acts Interpretation Act 1901-1957 provides that every Act shall come into operation on the twenty- eight day after the day on which it receives the Royal Assent, unless the contrary intention appears in the Act.
By this clause, it is proposed that the Income Tax and Social Services Contribution Assessment Act 1958 shall come into operation on the day on which it receives the Royal Assent.
This will enable immediate effect to be given to the provisions relating to capital subscriptions to petroleum exploration companies. It will also facilitate the preparation and issue of assessments involving provisional tax for the current financial year.
As indicated in the introductory note to this memorandum, allowances to the fishing and pearling industries are proposed.
In this connection, clause 3 will insert in section 6 of the Principal Act definitions of "fishing operations" and "pearling operations".
It is also proposed by clause 3 to amend the existing definition of "primary production". The purpose of the amendment is to bring fishing and pearling operations within the scope of primary production. The "averaging provisions" of the income tax law will then apply to the income of individuals who conduct fishing or pearling operations as a business.
This term will cover activities for business purposes and which relate directly to the taking or catching of fish, as well as turtles, dugong, crustacea, oysters and other shellfish. Pearling operations will also fall within the meaning of "fishing operations". On the other hand, whaling is not included.
Only activities relating directly to the taking or catching of fish, pearl shell, etc., may qualify as fishing operations. Accordingly, the treatment and marketing of fish will not satisfy the tests provided in the definition. If, for example, an enterprise should undertake both the catching and the canning of fish, plant associated with the canning activities would not be accepted, for the purposes of the special depreciation provisions, as plant used wholly and exclusively for fishing operations.
For many years, "oyster farming" has been covered by the definition of "primary production", while pearling operations have been outside the scope of that expression. So far as the past is concerned, this position will not be disturbed by the reference to oyster farming in the definition of "fishing operations". However, that definition specifically includes both oyster farming and pearling operations. Activities of both classes will now qualify as "primary production".
This expression will cover business operations relating directly to the taking of pearl shell, or to the culture of pearls or pearl shell. In addition, it will extend to operations that relate directly to the taking or catching of trochus, beche-de-mer or green snails.
Activities for the treatment or marketing of the products will not rank as pearling operations.
This term has been defined in the law for many years. The only change is the addition of production resulting directly from fishing operations (including pearling operations).
Averaging of Incomes of Primary Producers.
An individual taxpayer carrying on a business of primary production in Australia may, within limits, have the rate of tax payable on his taxable income determined by reference to the average amount of taxable income derived by him over a period of years, usually five years.
As fishing operations will now be regarded as primary production, the averaging provisions will become applicable to the incomes of a person carrying on, either as a partner or alone, a business of fishing operations (including pearling operations).
A primary producer may elect irrevocably that those provisions shall not apply. A person carrying on a business of fishing operations may make this election. Until he does exercise this right, the averaging provisions will apply.
In relation to fishing operations, the 1958/59 income year will be the first year which may be taken into account in calculating an average income. As at least two income years are necessary to enable an average to be struck, the actual effect of averaging will commence in assessments for the income year 1959/60.
There are, however, circumstances in which it may be to the advantage of a taxpayer to defer the commencement of averaging. For example, if averaging were commenced in a period when a taxpayer's income was falling, the average income would be higher than the actual taxable income. A rate of tax determined by the average income would give a higher rate of tax than if averaging were not applicable.
In these circumstances, the existing law defers the commencement of averaging until the first application of averaging is beneficial to the taxpayer. This principle will be preserved.
The purpose of clause 4 is to enable the allowance of deductions for depreciation of structural improvements used wholly and exclusively for the purposes of pearling operations.
This result will be achieved by repealing the present paragraph (b) of section 54(2.) of the Principal Act and inserting a new paragraph in its stead.
Section 54 is the general provision authorising depreciation allowances for income tax purposes. It provides for deductions for depreciation of plant or articles owned by a taxpayer and used, or installed ready for use, by him in the production of his assessable income.
Fences, dams and other structural improvements used for agricultural or pastoral pursuits are specifically classified by section 54(2.)(b) as plant to which the depreciation provisions apply. Residential accommodation is excluded, except where it is provided for employees, tenants or sharefarmers engaged in, or in connexion with, the agricultural or pastoral pursuits.
The proposed re-statement of paragraph (b) will permit the allowance, on a substantially similar basis, of deductions for depreciation of structural improvements owned by the taxpayer claiming the deduction and used wholly and exclusively for the purposes of pearling operations.
The proposed deductions will apply in relation to buildings erected at, or in the vicinity of, the port or harbour from which the pearling operations are conducted.
The types of improvements on which depreciation is to be allowed will include buildings used as workshops, for the storage of equipment or as shelter for construction and repair work. Jetties, wharves and slipways will be included as will residential accommodation provided for employees and tenants engaged in pearling operations or in connexion with those operations. In each case depreciation will be allowable only where the improvement is used wholly and exclusively for the purposes of pearling operations.
The new provision will authorize depreciation deductions where the improvements are completed after 30th June, 1958, and will apply for the 1958/59 income year and subsequent years.
The purposes of clause 5 are twofold.
Firstly, the clause will extend for a period of three years the special depreciation rate of 20% allowed on plant and structural improvements used for the purposes of agricultural or pastoral pursuits.
Secondly, plant used for the purposes of fishing operations (including pearling operations) and structural improvements used for the purposes of pearling operations will be brought within the ambit of the special 20% depreciation provisions.
These provisions are found in section 57AA of the Principal Act. In the case of structural improvements used for agricultural or pastoral pursuits, the 20% rate at present applies to improvements completed before 1st July, 1959, or commenced by that date and completed before 1st July, 1960. In relation to other depreciable assets covered by the section, the 20% rate applies if the asset is first used by the taxpayer or is installed ready for use before 1st July, 1959. In each case, a three years extension is proposed.
To achieve this end and also to extend the 20% rate of depreciation to the fishing and pearling industries, paragraph (a) of clause 5 proposes the repeal of the existing sub-sections (2.) and (3.) of section 57AA. In their place, two new sub-sections will be inserted.
The new provisions will grant to primary producers already entitled to the 20% rate of depreciation the three year extension mentioned. Those provisions will not otherwise affect the deductions that may be claimed by primary producers now entitled to the allowances provided by section 57AA.
Extension of 20% Depreciation to Fishing and Pearling Industries.
Under the proposed sub-section (2.) of section 57AA, plant (not being structural improvements) covered by the general depreciation provisions will be depreciable at the special 20% rate if it is used wholly and exclusively for fishing operations, including pearling operations. As in the case of agricultural and pastoral industries, the special rate will not apply to motor vehicles designed primarily and principally for the transport of persons.
Plant to which the 20% rate will apply includes boats, nets, divers' equipment and other plant used on boats and also plant used ashore for the repair and maintenance of boats and equipment employed directly in the fishing operations. Plant used in a boat construction business will carry depreciation at normal rates.
The special 20% rate of depreciation is to be extended to structural improvements used for the purposes of pearling operations. The application of the 20% rate is, however, dependent in all cases upon the asset being one to which the general depreciation provision (section 54 of the Principal Act) applies. Structural improvements used in pearling operations will carry the 20% rate if they satisfy the tests of the new paragraph (b) of section 54(2.) of the Principal Act. That paragraph is discussed above in the notes on clause 4 of this Bill.
The new sub-section (3.) that it is proposed to insert in section 57AA provides the three years extension of the section. That extension will apply to depreciable assets used in the fishing and pearling industries as well as to those used for agricultural or pastoral pursuits.
Under the proposed sub-section (3.), the 20% rate will apply to plant (other than structural improvements) used wholly and exclusively in fishing or pearling operations if the plant was first used or installed ready for use after 30th June, 1958, and before 1st July, 1962.
The special 20% depreciation rate will apply to structural improvements used wholly and exclusively for the purposes of pearling operations where the improvements are completed after 30th June, 1958, and before 30th June, 1962. Structural improvements commenced by 30th June, 1962, and completed not later than 30th June, 1963, will also qualify.
Value of Residential Accommodation.
Where residential accommodation is provided for employees or tenants engaged in, or in connexion with, pearling operations, paragraph (b) of clause 5 will limit the amount upon which the special 20% depreciation may be claimed.
A corresponding limitation already applies in relation to residential accommodation provided for employees, tenants and sharefarmers engaged in agricultural or pastoral pursuits.
Briefly stated, the limitation is that the 20% rate shall apply on an amount not exceeding Pd2,750 for each employee, tenant or sharefarmer. If the cost of the accommodation exceeds that amount depreciation at normal rates is applied to the excess. A similar limitation will apply to residential accommodation provided for employees and tenants engaged in the pearling industry.
Sub-clause (a) of clause 6 will extend to primary producers developing rural land in the Territory of New Guinea, deductions similar to those already granted to persons engaged in primary production on land in Australia and the Territory of Papua.
The existing deductions, which are authorized by section 75 of the Principal Act, relate to capital expended in clearing, draining and otherwise preparing land in Australia for agriculture or pasture. The deductions extend to expenditure for such purposes as the prevention of soil erosion, conservation of water, construction of levee banks, eradication of pests, etc.
For income tax purposes, "Australia" includes the Territory of Papua. The deductions mentioned are accordingly allowed where expenditure of the classes mentioned is incurred on rural land in the Territory of Papua. On the other hand, the Territory of New Guinea is not, for the purposes of the income tax law, defined to be part of Australia. Accordingly, the allowance has not applied in the past to expenditure on land in that Territory.
The proposed extension of the deductions will remove the existing discrimination against developmental expenditure on land in the Territory of New Guinea as compared with similar expenditure on land in the Territory of Papua.
Sub-clause (b) proposes a consequential amendment of sub-section (2.) of section 75. That sub-section applies where a taxpayer has been recouped, wholly or in part, his expenditure on developing the land. In these circumstances, the amount of the deduction is reduced by the amount recouped by the Commonwealth or a State, by a public authority of the Commonwealth or a State or by any other person. This principle will in future apply where a taxpayer is recouped an amount by the Administration of a Commonwealth Territory or by a public authority constituted under a law of such a Territory.
The amendment will apply for the 1958/59 income year and for subsequent years.
Clause 7 needs to be considered in conjunction with clause 11 of this Bill.
By clause 7 it is proposed that taxpayers who are residents of Australia, Papua or New Guinea may become entitled to deduct from assessable income capital subscribed to those companies which are engaged solely or principally in mining or prospecting for petroleum in Australia, Papua or New Guinea.
By clause 11 it is proposed that, in the event of the discovery of petroleum in commercial quantities, there shall be a corresponding curtailment of the deduction of capital expenditure that otherwise would be allowable to the company under section 123A of the Principal Act.
At present, section 78(1.)(b) of the Principal Act authorises a deduction of one-third of calls, but not application or subscription moneys, paid to such companies.
It is proposed by clause 7 to allow, in circumstances discussed below, a deduction for the full amount of capital subscribed for oil exploration to companies whose principal business is prospecting or mining for petroleum in Australia or Papua New Guinea. The proposed deductions will extend to application and allotment moneys, as well as to calls.
It would not, however, be appropriate to allow the shareholders a deduction for the full amount of capital subscribed and at the same time allow the company, if it finds petroleum, to deduct capital outgoings met from the amounts previously deductible by the shareholders.
It is accordingly proposed that the shareholders' entitlement to a full deduction for the capital subscribed be contingent upon the company agreeing to forego a like amount of the deduction to which it would otherwise be entitled in the event of it discovering petroleum.
Clause 7 which inserts a new section 77A in the Principal Act, and clause 11, which amends the existing section 123A, are designed to give effect to the proposals broadly outlined above.
Deductions Allowable to Shareholders.
The new section 77A sets out the basis upon which tax-payers may obtain the proposed deductions.
Sub-section (1.) defines certain expressions used throughout the section.
"Australia" is already defined by section 6 of the Principal Act to include the Territory of Papua. Section 123A will become applicable where capital expenditure is incurred in the Territory of New Guinea and it is appropriate that section 77A should be applicable to capital subscribed for oil search in that Territory as well as in Australia and Papua. The drafting of the provision so as to achieve that result is facilitated by declaring in the definition that, for the purposes of section 77A, "Australia" includes the Territory of New Guinea.
"Moneys paid on shares": This definition specifies the classes of payments which may qualify for deduction under the new section. These comprise amounts paid by way of application and allotment moneys and calls which are applied by the company towards the paid-up value of shares. Application moneys paid by an applicant for shares but subsequently refunded to him would not qualify for deduction.
The section will not apply to moneys paid before the new section comes into operation, or to moneys relating to shares allotted before that date, that is, the date on which this Bill receives the Royal Assent.
Moneys paid on shares not beneficially owned by persons resident in Australia at the time of the payment will be outside the scope of the new provision. A similar exclusion will apply to application moneys paid in relation to shares which, upon allotment, are beneficially owned, wholly or in part, by a person not then a resident of Australia.
In relation to the question whether a company is to be regarded as a resident of Australia, it will be appropriate to refer to sub-section (9.) and to the comments below in relation to that provision.
"Petroleum": It is provided that this term shall have the same meaning in the new section 77A as it has in the existing section 123A. That section contains the following definition:-
"'petroleum' means naturally occurring solid, liquid, or gaseous hydrocarbons in a free state but does not include any substance which may be extracted from rocks or minerals by any process of destructive distillation."
Sub-section (2.) will have application to a company whose principal business is prospecting or mining for petroleum in Australia.
If the company has received moneys paid on shares it may lodge with the Commissioner of Taxation a written declaration that it has expended, or proposes to expend, those moneys wholly or in part in mining or prospecting for petroleum in Australia or in plant necessary for the treatment of that petroleum. The declarant is required to specify the moneys that the company has expended, or proposes to expend, for those purposes.
The lodgment of a declaration with the Commissioner will be a necessary step before the new section 77A authorises the allowance of a deduction for capital subscribed by shareholders of that company. In addition, the declaration will have application for the purposes of section 123A.
The procedure is that a declaration is to be signed by the public officer of the company and furnished to the Commissioner not more than one month after the end of the year of income of the company in which the moneys paid on shares were received by the company. The Commissioner is empowered, however, to extend the period in which the declaration may be made.
Sub-section (3.) provides for the allowance of deductions to the shareholders of a company that has made a declaration in accordance with sub-section (2.).
In the generality of cases the deduction will be the amount paid on shares in the company and specified in the declaration made by the company. The operation of sub-section (3.) will, however, be subject to the provisions of sub-sections (5.), (6.) and (7.).
Sub-sections (4.) and (5.) will extend the proposed deductions to shareholders who invest capital in an oil exploration company indirectly through an interposed company.
In these cases, the interposed company may not be deriving income from which an effective deduction could be allowed. To meet such circumstances, it is accordingly proposed to permit deductions to be transferred from the interposed company to its Australian shareholders. In effect, the individual shareholders may be placed in the same position as if they had contributed capital directly to a company whose principal business is mining or prospecting for petroleum in Australia.
Under sub-section (4.), a company may qualify as an interposed company if its sole business has been mining or prospecting for petroleum or providing capital to companies whose principal businesses are mining or prospecting for petroleum in Australia.
Where such a company is entitled to a deduction under section 77A, it may lodge with the Commissioner of Taxation a declaration that the capital subscribed by it to the mining or prospecting company and which is the subject of the deduction comprises or includes moneys paid on shares issued to its shareholders. The lodging of the declaration will bring into operation sub-section (5.) which, in effect, transfers the deduction under section 77A from the interposed company to its shareholders.
The procedure will be similar to that explained in relation to sub-section (2.). The declaration is to be signed by the public officer of the company and furnished to the Commissioner by the interposed company not more than one month after the time at which it became entitled to a deduction. The Commissioner may, however, extend the time in which a declaration may be made.
A declaration may relate to capital subscribed to the interposed company during an income year and passed on during that year as capital subscribed to a mining or prospecting company. If the interposed company does not subscribe money to a mining or prospecting company in the year in which it received the money, the Commissioner will be empowered to extend the period in which a declaration may be lodged.
Should the interposed company itself be allowed a deduction in relation to the capital subscribed by it to a mining or prospecting company, it will not then be permitted to make a declaration resulting in a deduction being allowed to its shareholders also. Where a deduction is allowable it will be within the power of an interposed company to determine whether it is allowed a deduction or whether deductions should be allowed to its shareholders.
Sub-section (5.) is complementary to sub-section (4.) and is designed to replace deductions otherwise allowable to an interposed company with the allowance of deductions to shareholders of that company.
Where the appropriate declaration has been made under sub-section (4.) by an interposed company, paragraph (a) withdraws any deduction in respect of moneys specified in the declaration and which that company might otherwise claim under the new section 77A or under section 78(1.)(b). As already mentioned, section 78(1.)(b) allows a deduction of one-third of calls paid to a company whose principal business is mining or prospecting for oil in Australia.
Paragraph (b) then operates to allow resident shareholders in the interposed company, deductions for capital subscribed to the company and specified in the declaration.
Sub-section (6.) relates to cases in which a declaration has been made and the Commissioner is not satisfied that the amounts specified in that declaration have been, or will be, expended by the company on mining or prospecting for petroleum in Australia or in necessary plant for the treatment of that petroleum.
If no safeguard were provided, it would be open to a company to obtain for its shareholders a deduction in respect of amounts not expended, or likely to be expended, on oil exploration or associated activities.
Paragraph (a) of sub-section (6.) will restrict the amount of the deduction allowable to shareholders where the Commissioner is not satisfied that the moneys paid on shares in a company has been, or will be, expended by the company for the purposes mentioned. In such a case the amount of the deduction allowable to a shareholder for moneys paid to the company will be reduced proportionately according to the amount of the moneys which the Commissioner is not satisfied will be appropriately expended.
Should a taxpayer be dissatisfied with the Commissioner's determination under paragraph (a), he will have the usual right of objection. On reference to a Taxation Board of Review, it will be open to the Board to substitute its determination for that of the Commissioner.
If paragraph (a) of the sub-section (6.) becomes operative, the deductions allowed to the shareholders will be reduced, but a corresponding increase will be reflected in the amount of the deductions which the company may claim under section 123A from income it may derive from the sale of petroleum mined in Australia. Accordingly, paragraph (b) operates, for the purposes of section 123A, to deem a declaration not to have been made in respect of moneys which the Commissioner is not satisfied will be expended on oil exploration or associated companies.
Paragraph (c) also applies where the Commissioner is not satisfied that an amount will be so expended. It requires the Commissioner to give the company notice that he is not so satisfied.
Sub-section (7.) provides, where a deduction has been allowed under section 78(1.)(b) of the Principal Act for one-third of the calls paid to a petroleum exploration company, that an adjustment be made in the deduction allowable under the new section 77A.
Section 78(1.)(b) allows a deduction for one-third of the calls paid to a company whose principal business is mining or prospecting for petroleum. The whole of such calls may, however, qualify for deduction under the new section 77A if the company concerned makes the appropriate declaration.
Where an amount paid on shares satisfies the tests of both section 77A and section 78(1.)(b), sub-section (7.) of the new section 77A will ensure that the amount otherwise deductible under that section will be reduced by one-third, that is, by the amount deductible under section 78(1.)(b).
It will be observed that a reduction of the allowance under section 78(1.)(b) is not proposed. If a company does not make a declaration under the new provisions, there will be no disturbance of the present deductions allowed to shareholders or to the company.
Sub-section (8.) is a machinery provision to ensure that a request made by a company will not be rendered invalid for the reason only that is specifies moneys in excess of those actually qualifying under the section. For example, a company may erroneously include in its declaration moneys paid by a non-resident. The sub-section provides that, in such cases, the declaration will remain valid as to the moneys which do, in fact, fall within the section.
Sub-section (9.) is designed to treat as a non-resident of Australia a company which, although incorporated in Australia, is controlled by non-residents or in which more than 50% of the share capital is beneficially owned by non-residents.
In these cases, the individuals ultimately receiving the major part of the dividends paid by the company will almost certainly be non-residents. Many countries, including the United Kingdom, Canada and the United States of America allow their residents credits in order to avoid double taxation.
If Australia grants tax relief in these cases, the amount of the credit is reduced. A major part of the tax surrendered by Australia may then accrue for the benefit of the overseas Treasury which allows the smaller credit. There may be little or no benefit provided for the ultimate individual investor. In these circumstances it was not considered appropriate to extend the provisions of section 77A to non-residents of Australia or to companies that may pay dividends likely to flow, wholly or to a major extent, to non-residents of Australia.
By this clause it is proposed to increase the existing zone allowances granted to individuals residing in isolated areas. The deductions are granted in recognition of the disadvantages to which those persons are subject because of uncongenial climatic conditions, isolation and high cost of living in the areas concerned.
At present, residents of Zone A are allowed a special deduction of Pd180. In the less remote Zone B, the present deduction is Pd30.
It is proposed in the case of residents of Zone A to increase the deduction from Pd180 to the sum of Pd270 and an amount equal to one-half of the concessional deductions which that resident may be allowed in relation to the maintenance of dependants. For example, a married man residing in Zone A and entitled to the full deduction of Pd143 in respect of his wife and Pd91 in respect of a child will, in addition to those deductions, be granted a zone allowance of Pd387, that is, Pd270 plus one-half of the total of Pd143 and Pd91.
It will not be necessary, for the purposes of the zone allowance, that dependants reside in the zone. They will, of course, need to be residents of Australia since the test must be satisfied before any deduction is allowable for the maintenance of a dependant.
The value of the zone allowance to a resident of Zone A may be illustrated by the example of a person who derives an income of Pd1,000 and maintains his wife and three children under 16 years of age. If the only deductions allowable were in respect of dependants, the tax payable would be Pd44.14. 0. The tax after allowance of the revised zone allowance will be Pd2. 1. 0.
Residents of Zone B will be granted an increase which maintains the present ratio between the existing Zone A allowance of Pd180 and the allowance of Pd30 now granted to residents of Zone B.
The new Zone B allowance will accordingly be Pd45 plus one-twelfth of the deductions allowable to the taxpayer concerned for the maintenance of dependants. The allowance in the case of a taxpayer wholly maintaining a spouse and one child under 16 years of age will be Pd65, that is, Pd45 plus one-twelfth of the deduction of Pd143 allowance for spouse and one-twelfth of the Pd91 allowance for the child. The allowance of Pd65 will, of course, be additional to the normal deductions allowable in relation to the maintenance of dependants.
The revised allowances will apply in assessments on income of the 1958/59 income year and subsequent years.
This clause proposes an increase in the amount of the special deduction allowed to members of the Defence Force serving in declared localities outside Australia.
If the period served at a declared locality is more than one-half of the income year, the present deduction is Pd180, the same as that allowed to a resident of Zone A.
Should the serviceman be stationed at a declared locality for a period not exceeding one-half of the income year, a deduction apportioned on a time basis is allowed.
The revised maximum deduction will be Pd270 plus one-half of the sum of the deductions allowed to the serviceman for dependants maintained by him during the year of income. The present equality of the deduction with that allowed to residents of Zone A will thus be retained.
The increased deduction will commence to apply in assessments on income of the 1958/59 income year.
Clause 10 will ensure that, on the sale of rural land acquired by a primary producer in carrying out a profit-making plan, capital expended on the development of the land will be offset against the sale proceeds in order to arrive at the amount of profit on which tax is payable.
In this connection, section 75 of the Principal Act allows a primary producer a deduction for expenses incurred in developing his land. The nature of the deductible expenditure has been outlined earlier in relation to clause 6. In addition, a deduction is allowed under section 76 for the cost of wire and wire netting used to prevent the ravages of animal pests on land used for agricultural or pastoral pursuits.
A profit realised by a primary producer on the sale of land not acquired as part of a profit-making plan is not a gain of an income nature. For that reason it does not fall within the taxable field. Correspondingly, a loss on the sale of the land is not deductible. Whether the financial result be a profit or a loss, the expenses deductible under section 75 or 76 are not written back as income when the land is sold, even though the improvements effected on the land have enhanced the sale price received by the vendor. The benefit of the deductions allowed in relation to the development of the land is retained by the primary producer when he sells his land.
In contrast, a primary producer who sells land as part of a profit-making undertaking is required to pay tax on his profit. Moreover, the amounts covered by sections 75 and 76 are not offset in calculating the amount of the taxable profit. The benefits of the original deduction allowed when the developmental expenditure was incurred are, in effect, withdrawn when the land is sold.
The proposed amendment will adjust the position so that the benefit of the deductions allowed to those who risk their capital in the development of rural land will not be lost to them when the land is sold, whether or not the land is the subject of a profit-making plan.
The proposed basis of determining the profit or loss on the sale of land will apply in relation to sales made during the 1958/59 income year and subsequently.
This clause will apply to an oil search company that has made a declaration under the new section 77A to be inserted by clause 7 of this Bill.
The purpose of the clause is to adjust the amount of the deductions allowable under section 123A of the Principal Act. That section allows deductions for capital expended on prospecting or mining for petroleum in Australia or Papua-New Guinea or in plant necessary for the treatment of that petroleum.
The deductions are allowed from the sale price of the petroleum. Accordingly, an enterprise which discovers commercial quantities of petroleum in Australia or Papua-New Guinea will be exempt from tax until it has recouped the whole of the capital expended by it on prospecting or mining for that petroleum or in plant necessary for its treatment.
The amount deductible under section 123A is known as the "unrecouped capital expenditure". By clause 11 it is proposed to amend the definition of that expression so as to reduce the amount of the deductions under section 123A by the sum of the amounts specified by the company in declarations it has made under the new section 77A.
The proposed amendment will have no effect upon the application of section 123A to a company that has not made a declaration under section 77A.
A minor drafting amendment of the definition of "unrecouped capital expenditure" is also proposed. Under the present law, the unrecouped capital expenditure takes into account the capital expenditure incurred "prior to the year of tax". This expression has been inappropriate in the case of an individual since the introduction of "pay-as-you-earn" taxation and the opportunity has been taken of replacing the expression with the words "prior to and during the year of income". This latter expression is consistent with other provisions of section 123A and is appropriate in relation to both individuals and companies.
The amended definition will apply as from the date of Royal Assent to the amending Act. It will not, however, have practical application until income has been derived from the sale of petroleum mined in Australia or Papua-New Guinea.
Section 170 of the Principal Act provides authority for and prohibitions against amendment of assessments.
The amendment of sub-section (10.) proposed by this clause refers to the proposed new section 77A under which deductions will be provided for capital subscribed by shareholders to companies engaged in oil exploration - see notes on clause 7.
Sub-sections (4.) and (5.) of section 77A provide for the deduction to be transferred, in certain circumstances, from an interposed company primarily entitled to the deduction to the individual shareholders of that company.
It is possible that, in these cases, some time may elapse in the passing of the capital from the interposed company to the exploration company and that in the meantime the assessments of the individual shareholders for the year in which the capital was originally subscribed by them to the interposed company will have been issued.
In such circumstances, sub-section (10.), as amended, will enable the assessments of the individual shareholders to be adjusted to allow the appropriate deduction.
The amendments proposed by the Bill will commence to apply as indicated in this clause. The commencing date for application of each amendment has been stated in the note to the relevant clause.