Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. Frank Crean, M.P.)
To give effect to a decision announced by the Treasurer on 2 July 1973 to eliminate an unintended effect of provisions for imposition of withholding tax of 10 per cent on interest paid to non-residents, two principal amendments are proposed. The amendments relate to the view that, as the law stands, withholding tax is technically not payable in circumstances where interest, which would be subject to tax if paid directly to the non-resident lender, is paid to a resident of Australia carrying on business through an overseas branch and the branch in turn pays interest to the non-resident lender. The two principal amendments are -
- To counter this means of avoidance of the tax, while retaining the basic tests for liability to it, interest derived from Australia by a resident of Australia in the course of carrying on a business through an overseas branch ("permanent establishment") will be subject to withholding tax in circumstances in which it would have been subject to the tax if it had been derived by a non-resident.
- Further amendments of a technical kind are designed to make clear that there is a basic liability to the withholding tax on non-residents in cases where the first amendment is not applicable to interest paid from Australia through an overseas branch of an Australian resident.
As provisions of the Principal Act dealing with the source of royalty income paid to non-residents, and the source (for purposes of legislation relating to Norfolk Island) of interest and royalty income generally, are modelled on the interest withholding tax provisions which are being amended by the Bill, technical amendments concerning these matters - of the same kind as referred to in sub-paragraph (b) above - are also proposed.
Following the acceptance of recommendations of the Committee of Inquiry into Financial Terms and Conditions for Male and Female Members of the Regular Armed Forces (the "Woodward Committee"), the pay structure of the Defence Force has been changed. The new structure was framed on the broad basis that allowances should be taxable with the exception of those that reimburse servicemen for out-of-pocket expenses. The Bill contains provisions to bring the Principal Act, insofar as it relates to the taxation of Defence Force allowances, into harmony with the current pay structure and, in particular, to enable allowances to be treated for income tax purposes in the ways envisaged by the Woodward Committee.
To give effect to a decision of the Government announced in February 1973, provision is also being made in the Bill for the exemption from income tax of the $1,000 bounties payable to Defence Force personnel whose service is to continue for at least three years after the completion of a qualifying period of service.
Subject to a maximum limit of $1,200, deductions are allowable for life insurance premiums and contributions to a superannuation fund. Following changes to the Defence Force and Parliamentary Retirement Benefits Schemes, members' contributions under those schemes are paid directly into consolidated revenue. The Bill provides for these contributions to be deductible on the same basis as contributions paid to a superannuation fund.
Provisions incorporated into the Principal Act in 1973 authorise the collection from a company - at any time after 31 December in a financial year - of an instalment of income tax to be credited in due course against the amount payable by the company in respect of its income of the prior year. These provisions implemented the first stage of a system for collecting company tax by quarterly payments. To complete the phasing-in of the system, it is proposed to adapt the provisions to authorise the collection from a company of two instalments in 1974-75 and three instalments in 1975-76 and each subsequent year. The balance of tax payable by a company in respect of its income of any year, after crediting the instalments it pays in the ensuing financial year, will generally fall due for payment on assessment during the last quarter of the financial year. It is proposed that the instalments to be collected during 1974-75 be payable not earlier than 15 November 1974 and 15 February 1975 while, in 1975-76 and any subsequent financial year the earliest dates for payment will be 15 August, 15 November and 15 February.
More detailed notes on each clause of the Bills are set out below.