House of Representatives

Explanatory Memorandum

(Circulated by authority of the Acting Treasurer, the Rt. Hon. R. G. Menzies.)

INCOME TAX AND SOCIAL SERVICES CONTRIBUTION ASSESSMENT BILL (NO. 2) 1959

Introductory Note

The main features of this Bill are -

(1)

To exempt income derived by residents of Christmas Island from sources within the Island (clause 3);

(2)

To exempt pensions, annuities and allowances paid by the West German Government as restitution for Nazi persecution (clause 4);

(3)

to extend, in certain circumstances, the deductions allowed for capital contributed directly to companies engaged principally in exploring for petroleum in Australia or Papua-New Guinea, or to companies contributing capital directly to petroleum exploration companies (clauses 5, 13 and 16);

(4)

To allow deductions for gifts to certain organizations in Australia (clause 6);

(5)

To allow, within limits, deductions for capital contributed for shares in oil exploration companies when ascertaining the taxation position on the sale of those shares (clause 7);

(6)

To remove the limit upon deductions for medical expenses paid by a person over 65 years of age in respect of self or spouse who has attained the age of 65 years (clause 8);

(7)

To increase from Pd300 to Pd400 the maximum permissible deduction for life assurance premiums, superannuation contributions, etc. (clause 9);

(8)

To increase the retention allowance deductible in calculating the undistributed profits tax payable by private companies (clause 10);

(9)

To accelerate the deductions allowable to mining enterprises for expenditure on housing and amenities provided for employees and their dependants (clauses 11, 12 and 14);

(10)

To vary the calculation of provisional tax in order to give effect to the 5 per cent. reduction in the tax payable by individuals (clause 18).

Notes on Clauses

Clause 1: Short Title and Citation.

Sub-clauses (1.) to (3.) of this clause formally provide for the short title and citation of the Amending Act and the Principal Act as amended.

The amendments proposed by sub-clause (4.) are drafting adjustments. They are necessary because the Income Tax and Social Services Contribution Assessment Act 1959, although assented to on 23rd April, 1959, will not become operative until the day on which the Reserve Bank Act 1959, with which it is associated, comes into operation.

Clause 2: Commencement

Section 5(1A.) of the Acts Interpretation Act 1901-1957 provides that every Act shall come into operation on the twenty-eighth day after the day on which it receives the Royal Assent, unless the contrary intention appears in the Act.

It is proposed by this clause that the Income Tax and Social Services Contribution Assessment Act (No. 2) 1959 shall, with the exception of two provisions, come into operation on the day on which it receives the Royal Assent. This will enable immediate effect to be given to the expanded 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.

The first of the two excepted provisions is sub-clause (4.) of clause 1, which, as already indicated, is a drafting provision. It will not apply until the Income Tax and Social Services Contribution Assessment Act 1959 comes into operation.

The second provision is sub-clause (1.) of clause 3, which will exempt from tax income derived by residents of the Territory of Christmas Island from sources within that Territory. It is proposed in sub-clause (2.) of clause 3 to deem the exempting provision to have come into operation on the day on which the Island became a Territory of the Commonwealth in terms of the Christmas Island Act 1958, namely, 1st October, 1958.

Clause 3: Taxpayer Resident in Territories.

Sub-section (1.) of section 7 of the Principal Act exempts from Commonwealth income tax any income derived by a resident of the Territories of Papua, Norfolk Island, New Guinea and Cocos (Keeling) Islands from sources within those Territories.

By sub-clause (1.) of clause 3 of the Bill, it is proposed to extend the exemption to residents of the Territory of Christmas Island. Residents of the Island will thus be exempt from Commonwealth income tax in respect of income derived by them from sources within the Island or within any of the other Territories mentioned.

Sub-clause (2.) will give the exemption effect from the date on which Christmas Island became a Territory of the Commonwealth in terms of the Christmas Island Act 1958, namely, 1st October, 1958.

Prior to 1st January, 1958, Christmas Island was administered as part of the Colony of Singapore and income derived from sources within the Island was subject to Singapore income tax. As a consequence, Australian residents employed in the Island were exempt from Australian tax on remuneration for services rendered on the Island. From 1st January, 1958, administration of Christmas Island was carried on by the United Kingdom Government pending transfer to the Commonwealth and Singapore income tax ceased to apply to the Island. In order to preserve the conditions of employees engaged in the Island between that date and the taking over of the Island by Australia on 1st October, 1958, it is proposed by sub-clause (3.) to exempt income derived by residents of the Island during that period from sources within the Island.

Clause 4: Exemptions.

Under laws passed in 1953, the Federal Republic of Germany accepted responsibility for compensation in respect of personal injuries and losses suffered by residents of Germany under the Nazi regime. The causes for which compensation is payable include damage to body or health, loss of property and civil liberties, loss of employment and damage to professional or economic advancement.

The compensation payments are made partly as capital amounts and partly as pensions and similar allowances. Although the code for determining compensation claims is laid down in the Federal laws, the actual payments of compensation are effected by the respective States of the German Republic.

As they are of an income nature, compensation payments in the form of pensions, annuities and other periodical allowances being made to former German residents who are now residing in this country are at present subject to Australian income tax. The new paragraph (kc) proposed by this clause to be inserted in section 23 of the Principal Act will grant exemption in respect of those payments.

Payments received in the form of capital amounts do not constitute assessable income and are accordingly already free from Australian tax.

The proposed exemption will apply to payments received on or after 1st July, 1959.

Clause 5: Moneys paid on Shares for purposes of Petroleum Exploration.

Introductory Note

The principal purpose of this clause is to extend the scope of the deductions allowed to residents of Australia or Papua-New Guinea for capital contributed to companies for petroleum exploration purposes.

The existing deductions are allowable under section 77A of the Principal Act. Stated broadly, deductions are allowable only where the Commissioner of Taxation is satisfied that the money subscribed to a company on its shares will be expended on prospecting or mining for petroleum in Australia or Papua New Guinea or on plant necessary for the treatment of that petroleum.

The deductions are conditional upon the company furnishing a declaration that has the effect of reducing the allowances for capital expenditure to which the company would otherwise be entitled, if it discovered oil in commercial quantities. These allowances are provided in section 123A of the Principal Act. It is proposed by clause 13 to amend that section.

Enlargement of the field of deductions for capital contributions for petroleum exploration purposes necessitates substantial changes in the present section 77A. To effect these changes it is proposed by clause 5 to repeal the present provisions and to insert a new section 77A setting forth the circumstances in which deductions are to be available.

One important extension of the deductions relates to capital contributed by shareholders to certain companies that do not explore for petroleum but which invest capital in petroleum exploration companies. The original investor is not at present entitled to deduct capital that has been contributed to a company interposed between him and a petroleum exploration company until that interposed company itself subscribes the capital to a petroleum exploration company. It is proposed, in certain circumstances, to allow deductions for capital contributed to an interposed company where appropriate declarations are made and the Commissioner is satisfied that the money will be used for oil exploration. These deductions will be allowable even though the capital is not passed on to a petroleum exploration company until a subsequent year of income.

Two provisions of the existing section 77A have no counterpart in the proposed new section.

The first of these provisions is in the definition of "moneys paid on shares" in sub-section (1.) of the present section 77A. Its effect is to prohibit the deduction of capital paid on shares issued before the commencement of that section, that is, before 1st October, 1958.

It has been found that some shares issued by petroleum exploration companies before 1st October, 1958 were not fully paid by that date. It has now been accepted that deductions should not be denied for calls paid after that date merely because the original issue of the shares took place at some earlier time.

It is accordingly proposed to withdraw the test as to the date of issue of the shares. Deductions will, however, continue to be limited, as at present, to amounts paid on or after 1st October, 1958.

The second provision not proposed for re-enactment is the present sub-section (9.). The practical effect of this provision is that Australian subsidiaries of overseas companies are treated as non-residents of Australia for the purposes of section 77A. In consequence, they are not entitled to deductions for capital contributed by them to petroleum exploration companies.

When section 77A was introduced last year, the deductions for capital subscribed for petroleum exploration purposes were not made available to Australian companies in which non-residents have a controlling interest. From the information then available it appeared that tax allowances in the overseas countries would provide adequate tax incentive for these companies to invest in Australia.

This is not invariably the case and if these companies are to be encouraged by tax concessions to continue the search for oil in Australia or Papua-New Guinea, taxation allowances by Australia will be necessary. Repeal of the present sub-section (9.) will remove the differentiation in treatment that at present applies in relation to Australian companies in which non-residents hold a controlling interest. It is proposed that those companies will in future be accepted as residents of Australia for the purposes of section 77A, as they are for other purposes of the income tax law.

Where the tests prescribed in the proposed new section are satisfied, deductions will be allowed for capital contributed for petroleum exploration purposes up to 30th June, 1964.

The proposed new section 77A will come into effect on the day on which the amending Act receives the Royal Assent. It is, however, provided that declarations made under the present law shall have effect as though made under the new section. For practical purposes, the new section will apply as though it came into operation on the same day as the existing section, that is, 1st October, 1958.

Sub-clause (1.) of Clause 5

By this sub-clause, it is proposed to repeal the existing section 77A and to enact a new section 77A incorporating the features already mentioned.

Explanatory notes relating to the new section 77A follow.

Sub-section (1.)

This sub-section defines expressions used in the new section.

"Australia" will include the Territory of Papua and the Territory of New Guinea. Residents of those Territories may qualify for deductions and the practical effect of the definition is that petroleum exploration operations in those Territories will rank as operations conducted in Australia. In the following notes relating to section 77A, "Australia" will be used in the sense of including the both of those Territories.

"Moneys paid on shares": This definition specifies the classes of payments that may qualify for deductions under section 77A. Under the existing law, payments do not qualify as "moneys paid on shares" if they have been made -

(a)

before the commencement date of section 77A (1st October, 1958); or

(b)

after that date on shares allotted before that date.

The new definition omits the second of these tests and, as already indicated, calls paid after 1st October, 1958 on shares issued before that date will now be deductible, if other provisions of the section are satisfied.

The revised definition does not make specific reference to application and allotment moneys paid in respect of shares but sub-section (2.) ensures that those moneys, as well as calls, will continue to qualify as moneys paid on shares so long as other requirements are fulfilled.

As in the previous definition, moneys paid on shares will not extend to amounts paid by non-residents of Australia. It has been noted above that all Australian companies, including subsidiaries of overseas companies, will in future rank as residents of Australia.

"Petroleum": The definition of "petroleum" is unchanged. The word 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".

"Petroleum exploration company": This term, which is not used in the existing law, is defined in the new provision as meaning "a mining or prospecting company carrying on as its principal business mining or prospecting operations for petroleum in Australia." The words quoted are used in the present law and the definition is included as a drafting expediency to avoid repetition of the longer expression.

Sub-section (2.)

Sub-section (2.) is a drafting provision ensuring that the section operates only in relation to amounts that are applied by a company towards the paid-up value of shares issued by it. The money paid may be applied as application money, allotment money, calls or as other payment made to the company as part of the paid-up capital on the shares. Moneys not applied towards the paid-up value of shares, e.g. application money that is refunded, will not be covered by section 77A.

Sub-sections (3.), (4.) and (5.)

Sub-sections (3.), (4.) and (5.) of the proposed section 77A correspond to sub-sections (2.), (3.) and (6.) of the present section and cover cases where capital is contributed directly to a petroleum exploration company.

Sub-section (3.) allows a petroleum exploration company that has received moneys paid on shares to lodge with the Commissioner a written declaration that the company has spent, or proposes to spend, those moneys in mining or prospecting for petroleum in Australia or on plant necessary for the treatment of petroleum that the company has mined in Australia.

The lodgment of a declaration with the Commissioner will be a prerequisite to the allowance of deductions to the shareholders who have paid moneys in question. A complementary provision in section 123A of the Principal Act will result in a corresponding reduction in the allowances for capital expenditure to which the company would otherwise be entitled under that section should it derive income from the sale of petroleum mined by it in Australia.

A declaration, signed by the public officer of the company, may be lodged up to one month after the close of the income year of the company in which the capital was received. The Commissioner is empowered to extend the time for lodgment.

Sub-section (4.) provides for the allowance of deductions to the shareholders of a company that has made a declaration under sub-section (3.).

In the generality of cases, the deduction is likely to be the amount paid to the company on shares in the company and specified in the declaration by the company. The operation of sub-section (4.) will, however, be subject to the other provisions of section 77A.

Sub-section (5.) will apply where a declaration has been made under sub-section (3.) but the Commissioner is not satisfied that the moneys specified in the declarations have been, or will be, spent by the company in mining or prospecting for petroleum in Australia or in necessary treatment plant.

If no safeguards were provided, it would be open to a company to obtain for its shareholders deductions in respect of amounts not expended, and not likely to be expended, on oil exploration or associated activities.

Where a declaration under sub-section (3.) relates, wholly or partly, to moneys which the Commissioner is not satisfied will be used for oil exploration purposes, sub-section (5.) will require a proportionate reduction to be made in the deduction allowable to each of the shareholders who have contributed those moneys.

Where deductions are reduced in this way, the amount as to which the Commissioner is not satisfied will be deemed not to have been included in the declaration for the purposes of section 123A. The practical result is that the petroleum exploration company's potential rights to deductions under section 123A in the event of oil being discovered will be reduced only by the amount accepted by the Commissioner as available for deductions to the shareholders.

The Commissioner is required to inform the company if he is not satisfied that moneys specified in a declaration will be used for oil exploration purposes. Should a taxpayer be dissatisfied with the Commissioner's determination of the amount of the deduction allowable, 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.

Sub-sections (6.) to (13.)

These sub-sections are designed to allow deductions, in certain circumstances, for capital subscribed to companies whose activities have been restricted to oil exploration, the treatment of oil mined in Australia and the subscription of capital for petroleum exploration purposes. Some of these companies may not qualify as petroleum exploration companies for the purposes of sub-sections (3.) to (5.).

As mentioned in the introductory note to clause 5, deductions are, in some circumstances, allowed for capital contributed to those companies. The proposed sub-sections (6.) to (13.) will extend the scope of those deductions.

These companies are placed between the original subscriber of capital and the petroleum exploration company actually engaged in oil exploration and, for convenience, they will be referred to as interposed companies.

The plan of sub-sections (6.) to (13.) is to provide in sub-section (6.) for the making of declarations by interposed companies. It is, however, necessary to include further provisions to ensure the allowance of deductions only in appropriate circumstances and also to provide for the adjustment of deductions for capital expenditure allowable to companies under section 123A of the Principal Act.

Sub-section (7.) sets out provisions applying where a declaration is made by an interposed company in relation to moneys it has already expended when it makes the declaration. Sub-sections (8.) and (9.) govern the position where the declaration of an interposed company relates to moneys it has received and is holding for future use for petroleum exploration purposes.

Capital contributions to interposed companies will not be deductible if the provisions of those sub-sections are not satisfied. Correspondingly there will then be no adjustment of the deductions allowable to the company concerned.

Sub-section (10.) provides for the allowance of deductions for moneys prescribed in an effective declaration, but an adjustment of the amount deductible will be made where the Commissioner is not satisfied that the moneys will be expended for petroleum exploration purposes or if undertakings given by a company are not fulfilled.

The sub-sections are examined in the following notes.

Sub-section (6.) relates to a company that has not carried on any business apart from -

mining or prospecting for petroleum;

treatment of petroleum mined by it in Australia; or

providing capital for petroleum exploration companies.

If a company in this category has received "moneys paid on shares" it may lodge with the Commissioner of Taxation a declaration that it has expended, or proposes to expend, the whole or a specified part of those moneys -

in mining or prospecting for petroleum in Australia;

in necessary plant for the treatment of that petroleum; or

in subscribing capital to a petroleum exploration company for the purpose of enabling the moneys to be used for petroleum exploration in Australia or in plant to treat petroleum mined in Australia.

The lodging of this declaration is a preliminary to the allowance under sub-section (10.) of deductions to shareholders for capital subscribed by them to such an interposed company.

Clause 13 of the Bill proposes a complementary amendment of section 123A of the Principal Act to effect a reduction in the allowances to which the company using the money on oil exploration may otherwise be entitled in relation to its capital expenditure.

The procedures for lodging a declaration are similar to those explained in the notes on sub-section (3.).

Sub-section (7.) prescribes the circumstances in which an effective declaration may be made by an interposed company in respect of capital contributed on its shares and already invested in a petroleum exploration company at the time the declaration is made. A declaration made by an interposed company in relation to money that it has expended by way of capital contributions to a petroleum exploration company is effective only if -

the petroleum exploration company has itself made a declaration for the purposes of sub-section (3.) that it has expended, or proposes to expend, the money on petroleum mining or exploration or on necessary treatment plant;

the Commissioner has in writing informed the interposed company that he is satisfied that the money will be so used; and

the interposed company seeking deductions for its shareholders has not already been allowed a deduction for the money.

These tests accord with the principle of allowing deductions only if the capital subscribed is used for petroleum exploration purposes. They are also required to enable the appropriate adjustments to be made in the deductions for capital expenditure to which a company may be entitled in the event of it discovering petroleum in commercial quantities.

Sub-section (8.) applies where an interposed company has received moneys that it has not expended at the time it makes a declaration under sub-section (6.).

Sub-section (8.) governs the circumstances in which a declaration in respect of unexpended moneys will be effective. The plan of the sub-section is that the declaration be accompanied by an undertaking by the interposed company that it will not, without the approval of the Commissioner, subscribe the money declared to a petroleum exploration company unless that company has also made the appropriate declaration and the Commissioner is satisfied that the moneys will be used for petroleum exploration purposes. In conformity with the general plan of section 77A, the petroleum exploration company will declare its intention to use the money concerned in mining or prospecting for petroleum in Australia or in necessary treatment plant. The Commissioner, on being satisfied that the money will be so used, will advise the interposed company accordingly. Shareholders in that company will then be entitled to deductions for the capital subscribed by them and which has been specified in the declarations.

In some circumstances, it may not be convenient for a petroleum exploration company to lodge a declaration for each amount of capital subscribed by an interposed company. To meet this situation it is provided that the undertaking will leave the interposed company free to pay the capital to a petroleum exploration company without the appropriate declarations of that company being first obtained, if the Commissioner approves the payment. Approval of the Commissioner will, in effect, operate as an extension of the time in which declarations may be lodged by the petroleum exploration company. This arrangement should prove more convenient to the companies concerned than a rigid provision necessitating lodgment of declarations by the petroleum exploration company before any payment is made to it.

Sub-section (9.) permits the Commissioner, for the purposes of sub-section (8.), to approve the payment of moneys to a petroleum exploration company if he is satisfied that that company -

will expend the moneys in mining or prospecting for petroleum in Australia or in necessary treatment plant; and

will lodge the appropriate declaration for the purposes of sub-section (3.) not later than one month after the close of the year of income in which it receives the money.

Should there be a case in which a petroleum exploration company fails to make the declaration for the purposes of sub-section (3.), the Commissioner may advise the interposed company of the failure and the shareholders in the interposed company will cease to be entitled to deductions for capital specified in the relevant declaration.

Sub-section (10.) provides for the allowance of deductions for capital contributed by residents of Australia directly to interposed companies.

The amount of the deduction will generally be the amount paid on the shares in the interposed company and specified in the declaration made by that company. The operation of sub-section (10.) will, however, be subject to the other provisions of section 77A.

Sub-section (11.) is complementary to sub-section (10.). Its effect is that moneys deductible by shareholders under sub-section (10.) are not also deductible under section 77A or section 78(1.)(b) from the income of the interposed company.

Sub-section (12.) operates where an interposed company has made a declaration relating to capital received but not expended before the declaration is made. If the appropriate undertaking has been given under section (8.) and other steps have been completed to entitle resident shareholders in that company to deductions in respect of those moneys, then a petroleum exploration company to which those moneys are subsequently subscribed will not be entitled to lodge a declaration under sub-section (3.) relating to those moneys. The provision ensures that the interposed company will not itself be entitled to a deduction for the same moneys as have already been deductible by its shareholders.

Sub-section (12.) also ensures that those moneys will not qualify for deduction by the petroleum exploration company under section 123A.

Sub-section (13.) applies where the Commissioner is not satisfied that moneys specified in a declaration under sub-section (6.) will be used for oil exploration, or where he is of the opinion that a company has failed to comply with an undertaking given by it under sub-section (8.). If the Commissioner gives the company written advice to that effect, paragraph (c) of the sub-section reduces the deductions allowable to shareholders so as to bring them into line with the amount as to which the requirements of section 77A have been satisfied. Sub-section (13.) thus has a function in relation to capital subscribed to interposed companies which corresponds to that of sub-section (5.) where capital is subscribed direct to an exploration company.

Where an interposed company has given an undertaking for the purposes of sub-section (8.) in respect of money to which sub-section (13.) applies, paragraph (d) releases the company from its undertaking in relation to that money.

Paragraph (e) ensures that the allowances under section 123A of the Principal Act for capital expenditure incurred by companies in mining or prospecting for petroleum or in necessary treatment plant are not reduced by an amount to which sub-section (13.) applies. Paragraph (e) also provides that sub-section (11.), which has already been explained, shall not operate in relation to an amount to which sub-section (13.) applies.

A taxpayer whose assessment is affected by the operation of sub-section (13.) will have the usual rights of objection and appeal.

Sub-section (14.)

This sub-section applies only where a company, perhaps inadvertently, lodges declarations under both sub-sections (3.) and (6.) in respect of the same moneys. As either declaration may make deductions allowable to the company's shareholders, the Commissioner is authorized to accept, in relation to the moneys that are specified in both declarations, only the declaration which, in his opinion, is the more appropriate.

Sub-sections (15.) to (18.)

These sub-sections of the new section 77A will apply to both petroleum exploration companies and interposed companies.

Sub-section (15.) is a machinery provision that will have application only where it is necessary to trace moneys specified in a declaration and the manner in which the moneys have been dealt with cannot be readily ascertained from the records of the company that made the declaration. In these circumstances, the manner in which the money has been dealt may be determined by the Commissioner.

Without a provision of this nature it may, in some circumstances, be impracticable for the Commissioner to determine the use to which moneys specified in declarations have been put and the application of section 77A would then be impeded. Sub-clause (15.) is designed to provide a means of overcoming this difficulty.

A taxpayer whose assessment is affected by the Commissioner's determination will have the usual rights of objection and appeal. In the event of a reference to a Taxation Board of Review, the Board would have power to substitute its own opinion for that of the Commissioner.

Sub-section (16.) re-enacts the substance of sub-section (7.) of the existing section 77A. It provides that where a deduction is allowable under section 78(1.)(b) of the Principal Act for one-third of the calls paid to a petroleum exploration company, a corresponding reduction is to be made in allowances under the new section 77A.

Section 78(1.)(b) allows a deduction equal to one-third of the calls paid to certain companies, including 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 (16.) 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 that is already deductible under section 78(1.)(b).

It will be observed that the existing deduction under section 78(1.)(b) is not to be disturbed. If a company does not make a declaration under section 77A its shareholders may nevertheless qualify for the deduction of one-third of calls under section 78(1.)(b).

Sub-section (17.) is a machinery provision to ensure that a request made by a company will not be rendered invalid for the reason only that it specifies moneys in excess of those that actually qualify for deduction under section 77A. For example, the company may have erroneously included in its declaration moneys paid by a non-resident. The sub-section provides that, in such a case, the declaration will remain valid as to the moneys which do, in fact, fall within the section.

A similar provision is found in sub-section (8.) of the existing section 77A.

Sub-section (18.) places a time limit on the operation of section 77A.

A company will not be entitled to lodge a declaration under sub-section (3.) or (6.) in respect of moneys received by the company after 30th June, 1964. Accordingly, section 77A will not authorize deductions for capital contributed after that date.

Sub-clauses (2.), (3.) and (4.) of clause 5.

These sub-clauses, which will have effect in relation to capital contributed during the 1958-59 year, are designed to facilitate the coming into operation of the new section 77A.

Sub-clause (2.) provides that a declaration lodged under sub-section (2.) of the existing section 77A prior to the commencement of the amending Act will have effect as if it were a declaration lodged under the corresponding provision of the re-enacted section 77A, that is, under sub-section (3.) of that section.

Sub-clause (3.) provides that a declaration lodged by an interposed company under sub-section (4.) of the present section 77A will have effect as if it were a declaration lodged under sub-section (6.) of the new section 77A.

Sub-clause (4.) allows an automatic extension of time to companies wishing to make a declaration under the new section 77A in respect of the income year 1958-59. Declarations relating to that year may be made at any time up to 31st December, 1959, and the Commissioner is authorised to further extend the time for lodgment of declarations in appropriate cases.

Clause 6: Gifts.

Section 78(1.)(a) of the Principal Act authorizes the allowance of deductions for gifts of the value of Pd1 and upwards to specified funds and institutions in Australia.

It is proposed by this clause to extend the allowance to gifts to the following:-

The National Trust of Australia (W.A.) and the Northern Territory National Trust.

Public funds established and maintained for the purpose of financing marriage guidance by approved organizations.

The Australian National Committee for World Refugee Year.

The Council for Jewish Education in Schools.

The National Trusts in Western Australia and the Northern Territory are similar to those already established in New South Wales, Victoria and South Australia. Gifts to those Trusts are deductible under section 78(1.)(a). The objects of the National Trusts include the preservation, for the benefit of the community, of buildings and articles of historic, scientific, artistic or architectural interest, as well as places of natural beauty.

Deductions for gifts to public funds providing money for marriage guidance organizations will be conditional upon the organizations being approved by the Attorney-General. Approval may be granted by the Attorney-General where he is satisfied that an organization is willing and able to engage in marriage guidance and that marriage guidance will constitute the whole or the major part of its activities. Approval may also be given in relation to a branch or section of an organization.

The Australian National Committee for World Refugee Year has been formed to conduct the Australian appeal for the World Refugee Year promoted by the General Assembly of the United Nations as a means of securing increased assistance for refugees throughout the world.

The Council for Jewish Education in Schools is an organization corresponding with the Council for Christian Education in Schools, gifts to which are deductible under the existing law.

The amendments made by this clause will apply to gifts made during the current income year 1959-60 and subsequent years.

Clause 7: Double Deductions

The amendments of section 82 of the Principal Act proposed by this clause will ensure that, on the sale of shares in prospecting, mining or afforestation companies subscribed for by a share-dealer, the cost of the shares will be offset against the sale proceeds in order to arrive at the amount of profit or loss for income tax purposes.

In this connection, it is relevant that, subject to the conditions already outlined in relation to clause 5 of the Bill, the full amount of capital subscribed for petroleum exploration purposes may be deductible under section 77A of the Principal Act. In other cases, one-third of calls, but not application or allotment moneys, paid on shares in a company engaged principally in prospecting, mining or afforestation in Australia, is deductible under section 78(1.)(b).

A profit realised by an investor on the sale of shares 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 shares is not deductible. Whether the financial result be a profit or a loss, the cost of shares deductible under either section 77A or 78(1.)(b) is not written back as income when the shares are sold and the benefit of those deductions is accordingly retained by the investor when he sells the shares.

In contrast, a share-dealer who sells shares as part of a profit-making undertaking is required to pay tax on his profit. Moreover, because of the present provisions of section 82, the amounts covered by sections 77A and 78(1.)(b) are not offset in calculating the amount of the taxable profit. The benefit of the original deduction allowed when the shares were acquired is, in effect, withdrawn when the shares are sold.

The proposed amendment of sub-section (3.) of section 82 will adjust the position so that the benefit of the deductions allowed to those who risk their capital in subscribing to prospecting, mining and afforestation companies will not be lost to them when the shares for which the capital is subscribed are sold, whether or not the shares are the subject of a profit-making plan.

The same principle was adopted last year in relation to sales of land acquired and developed by a primary producer in carrying out a profit-making plan. The amendment of section 82 effected on that occasion was designed to preserve for the primary producer the benefit of deductions allowed under sections 75 and 76 of the Principal Act in respect of capital expended on the development of the land.

Isolated cases may arise in which it will be necessary to modify the benefit of allowances on this basis. It is accordingly proposed to include a new sub-section in section 82.

The new provision - sub-section (4.) - is designed to meet such cases and will ensure that the total tax saving which may accrue to a taxpayer in respect of expenditure incurred on the development of rural land or on capital contributions to prospecting, mining or afforestation companies or for petroleum exploration purposes, does not exceed the amount of that expenditure.

The amendment of section 82 effected last year commenced to apply to sales of rural land during the income year 1958-59 and the further amendments now proposed will apply similarly to sales of land or shares during 1958-59 and subsequent years.

Clause 8: Medical Expenses.

Section 82F of the Principal Act authorizes the allowance of a concessional deduction for medical expenses incurred by a taxpayer. The allowance applies to payments made by a taxpayer in relation to himself, his spouse, each of his children under the age of 21 years and other persons in respect of whom he is entitled to a dependant's allowance.

Under the present provisions, the deduction allowable in any year in relation to any one person is limited to a maximum of Pd150. By clause 8 of the Bill, it is proposed to modify this limitation where the taxpayer has attained the age of 65 years at the end of the year of income.

In such cases, the taxpayer will be permitted to deduct, without limit, recognised medical expenses paid by him in relation to himself and, where his spouse has also attained the age of 65 years at the end of the year of income, in relation to his spouse.

The maximum limit will continue to apply in all other cases.

The amendment will commence to have effect in assessments based on income of the current year 1959-60.

Clause 9: Life Insurance Premiums, etc.

Section 82H of the Principal Act authorizes the allowance of a concessional deduction in respect of life insurance premiums, superannuation contributions and like payments made by a taxpayer for the benefit of himself or members of his family.

By this clause, it is proposed to increase the maximum deduction allowable in respect of such payments for any one year from Pd300 to Pd400.

The amendment will commence to apply in assessments based on income of the current year 1959-60.

Clause 10: Retention Allowance

By clause 10, it is proposed to increase the minimum retention allowance that may be deducted from trading profits in arriving at the undistributed income tax payable by private companies.

The plan of private company taxation involves the payment, in the first instance, of tax, at primary rates, on the taxable income derived.

A private company is required to pay undistributed income tax for an income year if, during a twelve months' period commencing two months before the end of that year, it fails to make a sufficient distribution. The rate of undistributed income tax is 10/-in the Pd.

A private company may, however, retain a proportion of its distributable income without any liability to undistributed income tax in respect of the amount so retained. The amount that may be retained is the retention allowance.

For practical purposes, the distributable income of a private company is the residue of the taxable income after deducting therefrom the tax payable at primary rates on the taxable income. The reduced distributable income is the distributable income less any income from property included in the distributable income.

The present retention allowance in respect of income other than property income is -

The effect of the proposed amendment will be to increase the minimum retention allowance to 35 per cent. The new scale will thus be -

There is no retention allowance in respect of dividends from other private companies, but a retention allowance of 10 per cent. is provided in respect of distributable income from other property sources, such as rents, interest and dividends from public companies. This allowance will not be affected by the proposed amendment.

The increased retention allowance will apply in assessments based on income of the year 1958-59 and subsequent years.

Clauses 11, 12 and 14: Mining

Introductory Note

These clauses relate to capital expenditure incurred by taxpayers engaged in the mining industry on housing and welfare provided on or adjacent to the mining property for employees and their dependants.

Section 122 of the Principal Act sets out the conditions in which deductions for capital expenditure, including expenditure on housing and welfare, are available to mine-owners over the life of the mine. The amendments now proposed will permit mine-owners, as an alternative to the present basis of deduction, to deduct housing and welfare expenditure over a period of five years.

The alternative basis of deduction now proposed for housing and welfare expenditure will be available in respect of expenditure incurred during the income year 1958-59 and subsequent years. The alternative basis may also apply in relation to housing and welfare expenditure incurred during the income years 1955-56 to 1957-58 which is not deductible prior to the 1958-59 year.

Clause 11: Deduction of Expenditure

This clause proposes an amendment of section 122 of the Principal Act. That section authorizes annual deductions in respect of capital expenditure incurred by a mine-owner on development of the mining property, necessary plant or housing and welfare used in connection with mining operations carried on to produce assessable income.

The amount of the deductions is ascertained by dividing the residual capital expenditure by the estimated life of the mine as at the end of the income year. If, however, the life of the mine is estimated at more than 25 years, the period of 25 years is, in effect, adopted as the life of the mine. The deduction then allowed is one twenty-fifth of the residual capital expenditure.

Broadly stated, the residual capital expenditure is the total of the capital expenditure incurred on development of the mining property, necessary plant and housing and welfare up to the end of the year of income, less the amount of that expenditure previously deductible. Appropriate adjustments are made if property ceases to be used for mining purposes or as housing and welfare.

Where the mine-owner elects to deduct expenditure on housing and welfare over the five-year period under the proposed new section 122AB (see clause 12), it will be necessary, in order to avoid a double deduction, to exclude that expenditure from the residual capital expenditure for the purposes of the deduction under section 122. This will be effected by the new sub-section (7A.) proposed to be inserted in section 122 by clause 11.

Paragraph (a) will apply in each year in which a deduction is allowable in respect of the expenditure under section 122AB. The effect of the paragraph will be to exclude from the residual capital expenditure for each such year the balance of the expenditure still to be deducted under section 122AB in subsequent years, as well as the portion already deductible up to and including the current year.

Paragraph (b) will apply where deductions under section 122AB in respect of the expenditure cease to be allowable, either because of the completion of the deductions or because the relevant property has been disposed of, lost or destroyed, or has ceased to be used for the purposes of housing and welfare. In these circumstances, paragraph (b) will operate to exclude from the residual capital expenditure so much of the expenditure on the property as has been an allowable deduction prior to the year of income.

Clause 12: Alternative Deductions in respect of Housing and Welfare Expenditure

Clause 12 will insert in the Principal Act a new section - section 122AB - which sets out the conditions under which a mine-owner may elect to deduct expenditure on housing and welfare over a period of five years.

Under sub-section (1.) an election to deduct housing and welfare expenditure over a five-year period may be made in relation to capital expenditure incurred on housing and welfare during the income year 1955-56 and subsequent years. An election may relate only to expenditure incurred in connection with the carrying on of mining operations in Australia or Papua-New Guinea for the purpose of producing assessable income.

Sub-section (2.) provides that an election made under sub-section (1.) shall include all housing and welfare expenditure incurred by the mine-owner in the year to which the election relates. Housing and welfare expenditure of any one year will not be deductible, as to part, under the new section 122AB and, as to the balance, under the present section 122.

An election in respect of expenditure incurred during the years 1955-56 to 1957-58, inclusive, will apply to the total capital expenditure on housing and welfare for that period. A separate election may, however, be made in respect of each subsequent year, but an election once made in relation to expenditure of a year will continue to apply throughout the period that deductions are allowable in respect of that expenditure.

Sub-section (3.) specifies the deductions allowable when an election has been made under sub-section (1.).

Paragraph (a) applies where an election is made in respect of expenditure incurred during the income years 1955-56 to 1957-58. The amount to be allowed over a five-year period under section 122AB will be the balance of the expenditure remaining undeducted at the close of the income year 1957-58. One-fifth of that amount will be deductible from assessable income of the income year 1958-59 and the remaining four-fifths by equal instalments from the assessable income of each of the succeeding four years.

Paragraph (b) applies where an election is made in respect of the expenditure for any year subsequent to 1957-58. One-fifth of the total housing and welfare expenditure of a year for which an election is made under sub-section (1.) will be deductible in the year in which the expenditure is incurred. The remaining four-fifths of that expenditure will be deductible in equal instalments spread over the succeeding four years.

Sub-section (4.) will operate to terminate deductions under section 122AB where property, in relation to which an election has been made under sub-section (1.), is disposed of, lost or destroyed, or ceases to be used for the purposes of housing and welfare. Section 122(5.)(e) of the Principal Act will correspondingly exclude the undeducted balance of the expenditure in respect of the property from the residual capital expenditure for the purposes of section 122.

Where sub-section (4.) applies, no deduction will be allowable in respect of expenditure on the property concerned, under either section 122 or section 122AB, for the year in which the disposal, loss or destruction or cessation of use occurs or for any subsequent year. Any unrecouped expenditure on the property will, however, be taken to account in ascertaining the balancing adjustment under section 124.

Section 124 applies where deductions have been allowed to a mine-owner in respect of capital expenditure on property, including housing and welfare, which has been sold, lost or destroyed, or which has ceased to be used for the purpose of mining operations. Where the consideration receivable in respect of property disposed of, lost or destroyed, or the value of property on the date that it ceased to be used for the purposes of housing and welfare, is less than the written-down value of the property for taxation purposes, the deficiency is deductible as a balancing allowance. Where, on the other hand, the consideration or value exceeds the written-down value, the excess (to an extent not greater than the deductions allowed on the property) is included in assessable income as a balancing charge.

Sub-section (5.) will apply where property in relation to which an election was made under sub-section (1.), but which subsequently ceased to be used for the purposes of housing and welfare, again comes into use for those purposes.

Section 122(6.) of the Principal Act provides that, upon property being brought back into such use, the residual capital expenditure is deemed to be increased by an amount determined by the Commissioner. The practical effect is that deductions under section 122 may be resumed.

With the introduction of section 122AB a mine-owner may wish to claim deductions over a five-year period where use of property for the purposes of housing and welfare is resumed. In order that this course will be open to a mine-owner, sub-section (5.) will, for the purposes of section 122AB only, deem the amount by which the residual capital expenditure has been increased to have been incurred during the year in which the property again came into use for the purposes of housing and welfare. By this means, the mine-owner will be afforded an opportunity to make an election under sub-section (1.) of the new section 122AB including the amount restored to residual capital expenditure.

Sub-section (6.) defines certain expressions used in the section.

"Residual capital expenditure" has in the new section 122AB the same meaning as it has in section 122. The term has already been considered in the notes relating to clause 11.

"Housing and welfare" has the same meaning in section 122AB as it has in section 122. Section 122(8.) defines the expression to mean -

"(a)

residential accommodation for the use of employees of the taxpayer engaged in, or in connexion with, the mining operations of the taxpayer referred to in sub-section (1.) of this section, or for the use of dependants of those employees, being accommodation situated on or adjacent to the mining property; or

(b)

health, educational, recreational or other similar facilities, or facilities for the provision of meals, provided at, or at a place adjacent to, the mining property, being facilities which -

(i)

are provided principally for the welfare of those employees or of dependants of those employees; and

(ii)

are not conducted for the purpose of profit-making by the taxpayer or any other person".

In addition to the cost of residential accommodation for employees and their dependants, expenditure coming within the compass of the definition includes expenditure on hospitals, medical and dental clinics, child welfare centres, libraries, technical colleges, sports arenas, swimming pools and other amenities provided principally for the benefit of mine employees and their dependants. The definition does not extend, however, to expenditure on buildings or other improvements for use in profit-making enterprises, such as shops, cinemas, hotels, etc.

Clause 14: Elections

The amendments of section 124B of the Principal Act proposed by this clause specify the time within which elections under the new section 122AB may be made.

Section 124B provides for elections under the Division of the Act relating to mining to be made in writing signed by or on behalf of the taxpayer and delivered to the Commissioner of Taxation within the time specified in the section or within such further time as the Commissioner allows.

Under the proposed new sub-paragraphs (ii) and (iii) of paragraph (b), the specified times for the making of elections under section 122AB will be -

In respect of expenditure incurred in the period 1955-56 to 1957-58, inclusive, or in the year 1958-59 - on or before 31st December, 1959.

In respect of expenditure incurred in 1959-60 and subsequent years - on or before the last day for the furnishing of the return of income for that year.

The proposed new sub-paragraph (iv) is a re-statement of the former sub-paragraph (ii).

Clause 13: Deduction of Unrecouped Capital Expenditure on Prospecting or Mining for Petroleum.

This clause will apply to a company that has made a declaration under section 77A of the Principal Act. Explanatory notes relating to that provision, which allows deductions for capital contributed for petroleum exploration purposes, will be found on pages 6 to 15 of this memorandum.

A principle underlying section 77A is that amounts declared for the purposes of that section, and so available for deduction by shareholders, shall not also be deductible under section 123A of the Principal Act.

Section 123A allows a taxpayer who has incurred capital expenditure in prospecting or mining for petroleum in Australia or Papua-New Guinea or in plant necessary for the treatment of that petroleum to deduct that capital expenditure from the sale price of that petroleum.

The deductions under section 123A are ascertained by reference to the "unrecouped capital expenditure" which, until 1958, was, in broad terms, the total capital expenditure mentioned above less deductions, if any, already allowed under that section. When deductions under section 77A were introduced last year, the definition of unrecouped capital expenditure was amended so that the expression would not cover amounts declared under section 77A and available as deductions for shareholders.

The extended provisions of section 77A now proposed in clause 5 necessitate the inclusion in the definition of unrecouped capital expenditure in section 123A of the paragraphs (c) and (d) set out in clause 13. Those paragraphs are drafting amendments designed to maintain the existing principle.

Clause 15: Rebate in Case of Disposal of Assets of a Business of Primary Production

Section 160 of the Principal Act provides for the allowance of a rebate of tax where the whole of the assets of a business of primary production are disposed of for the purpose of putting an end to that business and the assets include livestock which is disposed of at a profit.

The provision was enacted in 1951 in conjunction with the modification of the averaging system applicable to primary producers and is designed to preserve the benefit of that system in relation to abnormal disposal sales of livestock.

The amendments proposed by this clause will enable the proposed 5 per cent. reduction in the tax payable by individuals for the current financial year to be reflected in the amount of the rebate to be allowed under section 160.

Clause 16: Amendment of Assessments.

By this clause an amendment of section 170 of the Principal Act is proposed. That section governs the powers of the Commissioner of Taxation to amend income tax assessments.

Sub-section (10.) of section 170, so far as relevant, provides that nothing in that section shall prevent the amendment, at any time, of an assessment for the purpose of allowing a deduction provided in section 77A (see clause 5). It is proposed to amend this sub-section so that nothing in section 170 shall prevent the amendment, at any time, of an assessment for the purpose of giving effect to the provisions of section 77A.

As explained in relation to clause 5, it is proposed to broaden the scope of section 77A. In order that deductions may be allowed in all the circumstances desired, the proposed section 77A places reliance on declarations and undertakings made by companies as to proposed courses of action. The amendment proposed in clause 16 will give the Commissioner power to amend assessments where a declaration or undertaking is not fulfilled.

Should it be necessary for the Commissioner to invoke that power, a person whose assessment is amended will have the usual rights of objection and appeal against his assessment.

Clause 17: Application of Amendments.

Amendments proposed by this Bill will commence to apply as indicated in this clause. The year to which each amendment will commence to apply or the date from which an amendment will commence to apply has been stated in the notes explaining the amendments.

Clause 18: Provisional Tax for the Year of Income Commencing 1st July, 1959.

Section 221YC of the Principal Act specifies the amount of provisional tax payable by an individual taxpayer in respect of income other than salary or wages.

Paragraph (a) of sub-section (1.) of that section applies where the taxpayer derived a full year's income from business or property sources in the year preceding that for which the provisional tax is payable. In such cases, the provisional tax payable for the current year is an amount equal to the tax assessed for the preceding year.

Paragraph (b) applies where the income of the preceding year was not a full year's income. In these cases, the provisional tax payable for the current year is an amount equal to the tax for the preceding year adjusted to a full year basis.

Clause 18 of the Bill, which will not amend the Principal Act, will enable the provisional tax payable for the current income year 1959-60 to be adjusted so as to reflect the proposed 5 per cent. reduction in the amount of tax payable by individuals for the 1959-60 year.