Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. Frank Crean, M.P.)
Norfolk Island, Cocos (Keeling) Islands, Christmas Island (Clauses 5, 6, 7, 8, 9, 10, 16, 17, 19 to 22)
Under the Principal Act, income from a "source" on Norfolk Island, or the other Territories, derived by an individual or a company technically resident on the Island, is specifically exempt from Australian tax. The Territories are not part of Australia for tax purposes.
It is proposed by the Bill to make the income tax law apply to the Territories as if they were part of Australia but to continue, by new provisions to exempt Island and other ex-Australian source income of people genuinely living on the Island, and of companies wholly owned and controlled by such people. Safeguards against exploitation of the exemptions are proposed and there are to be some special transitional provisions.
Private companies are liable to undistributed profits tax at a rate of 50 per cent if they do not distribute sufficient of their profits each year as dividends. If they do pay dividends to individual shareholders, the latter pay their normal tax on the dividends. In an endeavour to avoid these consequences some private companies have paid dividends to a special "repository" company set up in Papua New Guinea where undistributed profits tax is not levied on private companies.
In order to prevent avoidance of Australian tax by this means, amendments are proposed which will have the effect that a dividend paid by an Australian private company to a private "repository" company resident in Papua New Guinea will not be counted as a dividend for the purpose of calculating whether the Australian company has a liability for undistributed profits tax. The amendments will not affect dividends paid to a Papua New Guinea company in circumstances, defined in the Bill, that do not involve tax avoidance.
An understanding of the Bill may be facilitated by the following outline of the general arrangement of the proposed measures as they relate to these Islands:-
- As a first step, existing provisions that confer tax benefits on Island residents (the main one being section 7 of the Principal Act) are to be repealed or made inapplicable - clauses 5, 6, 9 and 10.
- The Principal Act is to be made to apply as if the Islands were part of Australia by the insertion of new section 7A(2) (clause 5). The basic result of this is to treat residents of the Islands as residents of Australia and give Island-source income a source in Australia, thus making Island residents and foreign residents subject to Australian tax on their Island source income. It also basically exposes Island residents to tax on foreign-source income. However, special exemption provisions are to be inserted by clause 7. These exemptions are to be conferred on Island individuals and other Island entities. The persons to be eligible for exemption are:
- A Territory resident, that is, an individual who resides, and has his or her ordinary place of residence, in one of the Territories and is not otherwise resident in Australia - new section 24C.
- A Territory company, that is, a company incorporated in one of the Territories and wholly owned and controlled by people who are Territory residents - new section 24D.
- A trustee of a Territory trust, that is, the estate of a deceased Territory resident during the period of administration, and a deceased estate or a trust created by instrument where the accumulating income of the estate or trust will pass only to Territory residents - new section 24E.
- The three specified classes of persons - Territory residents, Territory companies and Territory trusts - may qualify for three main exemptions:
- For a Territory resident and a Territory company there will be exemption of income from sources outside the Territories and outside Australia - new section 24F. (The general law has the same effect in relation to Territory trusts.)
- For a Territory resident, a Territory company and a Territory trust, new section 24G will exempt Island-source income.
- An individual who does not qualify as a Territory resident, but who goes to one of the Territories for 6 months or more is to be exempt on income from an office or employment the duties of which are performed there - new section 24G(1)(e).
- The exemptions are not to be available where income is diverted to a person entitled to exemption, but has been or may be applied (whether in the form of income or capital) for the benefit of persons not intended to enjoy exemption - new sections 24F(3) and (4), 24G(2) and (3) and 24H.
- There are to be rules dealing with the source to be ascribed to income for purposes of the new provisions:
- Dividends are to have a Territory-source only when paid out of exempted Territory income - new section 24J.
- Income from an office or employment is to have a Territory-source only when the duties concerned are wholly or mainly performed in the Territory - new section 24K.
- Interest and royalties that are paid as an expense of an Australian business are not to be treated as having a Territory-source - new section 24L.
- Income that technically has a Territory or foreign source but arises out of a tax avoidance arrangement designed to conceal or suppress its real source in Australia is not to be treated as having that technical source - new section 24M.
- The various changes are to apply to income derived on or after 20 July 1972, the date after which the proposed amendments were announced.
- As a transitional measure, a company that becomes wholly Island owned and controlled for the last 6 months of 1973-74, but had not qualified as a Territory company before then, may be exempted on the part of its income derived after 19 July 1972 that is referable to the interest in the company of Territory residents - new section 24N.
- There are to be transitional provisions relating to valuation of trading stock and concerning depreciable assets - clauses 19 and 20.
More detailed explanations of the above provisions, and of other parts of the Bill, are provided in subsequent notes.