House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

Notes on Clauses

Clause 1: Short title, etc.

By sub-clause (1) of this clause the amending Act is to be cited as the Income Tax Assessment Amendment Act 1982.

Sub-clause (2) facilitates references to the Income Tax Assessment Act 1936 which, in the Bill, is referred to as "the Principal Act".

Clause 2: Commencement

So as not to delay the operation of the provisions of the amending Act, many of the provisions of which are to have effect from earlier dates specified in them, sub-clause (1) of clause 2 will cause the amending Act, with the exception of section 25, to come into operation on the date on which it receives the Royal Assent.

Sub-clause (2) will deem section 25 of the amending Act to have come into operation on 24 June 1981.

But for clause 2, the amending Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Income of certain persons serving with an armed force under the control of the United Nations

Clause 3, which is consequential on clause 10, proposes amendments to section 23AB of the Principal Act, sub-section (7) of which authorises a special rebate of tax for residents of Australia serving overseas, other than as members of the Defence Force, with an armed force under the control of the United Nations in circumstances where their salaries,wages and allowances are paid by Australia or by the United Nations on behalf of Australia. A full rebate equal in amount to the rebate allowable under section 79A of the Principal Act to a resident of Zone A is allowable where the total period of UN service during a year of income is more than half the year of income, while a proportionate rebate is allowed where the period of service is not more than half the year of income. Also reflecting the relationship between the rebate under this section and the rebate under section 79A, the total period of UN service of a taxpayer in a year of income includes any period during the year of income in which the taxpayer was in a zone area and, to avoid double counting, where a taxpayer is entitled to a rebate under this section, a rebate is not allowable under section 79A.

To maintain its relativity with the amount of the rebate under section 79A, the dependant component of the rebate under section 23AB is to be increased in line with the increase in the dependant component of the Zone A rebate under section 79A proposed by clause 10 (see notes on that clause), from 25 per cent of the relevant rebate amount to 50 per cent of that amount.

Paragraph (a) of sub-clause 3(1) is a drafting measure to ensure that the operation of sub-section 23AB(7) will be subject not only, as at present, to sub-section (8), which provides that a period of residence in a zone area is to be treated as United Nations service, but also to proposed new sub-section (9A) to be inserted by paragraph (c) of this sub-clause and proposed sub-section 79B(4) to be inserted by clause 11 (see notes on those provisions). This will eliminate the rebate otherwise allowable under this section where a greater rebate is allowable under section 79A (sub-section (9A)) or limit the rebate under this section where a rebate is also allowable under section 79B (sub-section 79B(4)). As explained in the notes dealing with clause 11, section 79B authorises a rebate, broadly equivalent to the rebate under section 79A, for members of the Defence Force serving at certain overseas localities.

Paragraph (b) will amend sub-paragraph (a)(ii) of sub-section 23AB(7) to increase from 25 per cent to 50 per cent the proportion of the rebates in respect of a taxpayer's dependants to be added to the basic rebate of $216 to determine the amount of the rebate to which a taxpayer is entitled under section 23AB.

Paragraph (c) proposes the omission of existing sub-section 23AB(9) - by which a rebate under section 79A is not allowable to a taxpayer who qualifies for a rebate under sub-section 23AB(7) - and the insertion of new sub-sections (9), (9A) and (9B) to provide for the new situation that a taxpayer who qualifies for the proposed new special basic rebate of $750 under section 79A (see notes on clause 10) may be entitled to a greater rebate under section 79A than that under section 23AB.

Under proposed sub-section 23AB(9), which corresponds in effect with existing sub-section 23AB(9), where the rebate to which a taxpayer is entitled under section 23AB is greater than the rebate to which he or she would be entitled under section 79A, the taxpayer is to be allowed only the greater rebate under sub-section 23AB(7).

New sub-section 23AB(9A) will deal with the situation where the rebate to which a taxpayer is entitled under section 79A is equal to or greater than the rebate calculated under sub-section 23AB(7). In this case, only the section 79A rebate is to be allowed in the taxpayer 's assessment.

New sub-section 23AB(9B) will ensure that the operation of new sub-section 79B(4) - under which the total of the rebates to be allowed under section 79B and either section 23AB or section 79A is to be limited to the basic rebate of $216 plus the dependant component of 50 per cent - has no impact on the determination of the rebates otherwise allowable under sub-section 23AB(7) or under section 79A for the purpose of determining, under sub-sections 23AB(9) and (9A), whether a taxpayer is to be allowed a rebate under section 23AB or section 79A.

Sub-clause (2) proposes that, subject to the transitional provisions of sub-clauses (3) and (4), the amendments proposed by sub-clause (1) are to apply in respect of the 1981-82 and subsequent years of income.

Sub-clause (3) is a transitional provision (applicable only for the 1981-82 income year) which sets out the basis for calculating the rebate allowable to a taxpayer whose total period of United Nations service is more than one half of the 1981-82 year of income but whose service as from 1 November 1981 - the date from which it was announced the increased rebates would apply - is not more than one half of that year of income. In such a case, the rebate to be allowed to the taxpayer under section 23AB in the 1981-82 income year will, subject to any limitations under sub-section 23AB(9A) or 79B(4), be a proportion of the higher dependant rebate component applicable from 1 November 1981 based on the number of days of UN service after 31 October 1981, and a proportion of the lower dependant rebate component applicable up to 31 October 1981 calculated having regard to that number of days of service prior to 1 November 1981 which, together with the number of days of service as from that date, total 183 days (that is, more than half the year of income) plus the basic rebate of $216.

Sub-clause (4) is a transitional provision for 1981-82 to deal with the situation where a taxpayer died whilst performing United Nations service during the period 1 July 1981 to 31 October 1981, that is, before the date from which the increased rebates commenced to apply. In such a case a full rebate, at the level applicable up to 31 October 1981, would be allowed. Where a taxpayer dies while performing UN service after 31 October, a full rebate at the level applicable as from 1 November 1981 will be allowable under sub-section 23AB(7).

Clause 4: Assessable income from certain short-term property transactions

Introductory note

This clause proposes amendments of a remedial kind to section 26AAA of the Principal Act.

Section 26AAA requires that the assessable income of a taxpayer include any profit arising from the sale of property, or an interest in property, within 12 months of the property or interest being purchased by the taxpayer. The intended effect of the section may be avoided in cases where property is arranged to be purchased by a company and, instead of the property being sold by the company after it has appreciated in value, controlling shares in the company are sold so as to effectively realize the profits. Provided the shares in the company so interposed have been held by the taxpayer for more than 12 months, section 26AAA may not operate to tax the profit on the effective disposal of the "underlying property".

The amendments will apply where a taxpayer sells shares in a company that he or she has owned for more than 12 months and where that company has within the previous 12 months purchased property the value of which is not less than 75 per cent of the company's net worth. In those circumstances, the effect of the amendments will be to include in the assessable income of the taxpayer so much of the sale price of the shares as is attributable to the difference between the value of the underlying property at the date of sale and its cost to the company, less an appropriate proportion of any further expenditure incurred in relation to the property.

An amount calculated on a similar basis will be included in the assessable income of a beneficiary in a trust estate who sells an interest in the trust to take advantage of an appreciation in the value of trust property purchased by the trustee within the previous 12 months.

The amendments will also apply where shares in a company, an interest in a partnership or an interest in a trust estate are sold and the company, partnership or trustee in turn has an interest, through one or more interposed companies, partnerships or trusts, in property that was purchased within the previous 12 months. As in the case of a direct sale of shares in a company or an interest in a trust estate that has purchased appreciated property, a necessary requirement for the application of the amendment in that case will be that the value of the underlying interest in property is not less than 75 per cent of the net worth of the company, trust estate or partnership in which the shares etc. are being sold by the taxpayer.

Under the proposed amendments, a taxpayer who sells property that was purchased in the previous 12 months by a company or trustee and received by the taxpayer as part of a distribution in specie by the company or trustee will be deemed to have purchased that property at the time when it was purchased by the company or trustee - and at the same price - if the property constituted not less than 75 per cent of the net worth of the company or trust at the time of distribution. As a consequence, any profit arising from the sale of the property by the taxpayer within 12 months of its purchase by the company or trustee will, by operation of the existing provisions of section 26AAA, be included in the taxpayer's assessable income.

The amendments will not apply to sales of shares in a company or units in a unit trust that are listed on a stock exchange or are ordinarily available for purchase or subscription by the public, nor to the sale of property distributed in specie by such a company or unit trust.

The amendments will apply in relation to underlying property purchased by a company, partnership or trustee of a trust estate after 10 September 1981 but generally not in relation to such property in the nature of trading stock or plant, or property purchased for resale at a profit. However, safeguarding provisions will prevent exploitation of the exclusion of trading stock and property purchased for resale at a profit.

More detailed notes on the provisions of clause 4 follow.

By paragraphs (a) and (b) of sub-clause 4(1), four additional paragraphs are to be inserted into sub-section 26AAA(1).

New paragraph (h) of sub-section (1) defines the term "net worth" in relation to a company, partnership or trust estate as being the total value of its assets less total liabilities. The term is used in proposed new sub-sections (2A) and (8) in relation to the condition that, for either of those sub-sections to apply, the value of underlying property that has been purchased less than 12 months prior to its effective disposal must be not less than 75 per cent of the net worth of the company, partnership or trust through which the property was effectively owned.

Paragraph (j) of sub-section (1) means that the amendments to section 26AAA will not apply to shares in, or property owned by, public listed companies. It stipulates that a reference within the section to a private company is to a company other than one the shares in which are listed for quotation on a stock exchange.

In similar fashion, proposed new paragraph (k) of sub-section (1) will exclude from the ambit of the amendments being made to section 26AAA an interest in, or property of, public unit trusts, i.e., those the units in which are listed for quotation on a stock exchange or are ordinarily available for public subscription or purchase.

Paragraph (m) of sub-section (1) is a drafting measure and defines the term "excepted property" for the purposes of the operation of proposed new sub-sections (2A) and (8) of section 26AAA. Subject to certain exceptions explained later in these notes, those sub-sections will not have application where property of a company, partnership or trust estate the ownership of which is being transferred by virtue of a sale of shares or interest is excepted property. For those purposes excepted property will be:

•

trading stock;

•

depreciable plant or articles purchased for use in producing assessable income; and

•

property acquired for resale at a profit or for the carrying out of a profit-making scheme or undertaking.

These exceptions are on the basis that other provisions of the Principal Act than section 26AAA are applicable to determine the income tax treatment of amounts received on the disposal of property in those classes.

Paragraph (c) of sub-clause 4(1) proposes to insert new sub-sections (2A) and (2B) into the existing section 26AAA.

Sub-section (2A) is to be the operative provision which will bring to account as assessable income that part of the sale price of shares in a company, an interest in a partnership or an interest in a trust estate that is attributable to an increase in the value of underlying property purchased within 12 months preceding the sale. It will apply in a case where either -

•

shares in a company or an interest in a trust estate are sold to realize a profit on underlying property owned by the company or the trustee of the trust estate (sub-paragraph (c)(i)); or

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shares in a company, an interest in a trust estate or an interest in a partnership are sold, and the company, partnership or trustee of the trust estate holds an interest, through one or more interposed companies, partnerships or trusts, in underlying property (sub-paragraph (c)(ii)).

Paragraph (2A)(a) specifies the 3 kinds of basic transactions to which the new provisions will apply, namely, the sale by a taxpayer of property, being -

•

shares in a private company;

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an interest in a partnership; or

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an interest in a private trust estate.

Paragraph (b) of new sub-section (2A) stipulates the further condition that the property being sold must have been acquired by the taxpayer more than 12 months before the date (the "date of sale") on which the taxpayer sold his shares or interest.

As mentioned previously, paragraph (c) of new sub-section (2A) is divided into 2 sub-paragraphs, the first of which (sub-paragraph (c)(i)) deals with the sale of shares in a private company or an interest in a private trust estate where, immediately before the date of sale, the assets of the company or trust include property ("underlying property") that -

(A)

was purchased by the company or trustee after 10 September 1981 and within the 12 months preceding the date of sale by the taxpayer of his shares or interest in the trust; and

(B)

was not "excepted property" (i.e., trading stock, depreciable plant or property purchased with a profit-making purpose, as explained previously in these notes in relation to new paragraph (m) being inserted in sub-section 26AAA(1)).

Sub-paragraph (c)(ii) deals with the case of the sale of shares in a private company, an interest in a private trust estate or an interest in a partnership where, immediately before the date of sale, the company, trustee or partnership in turn held an interest, through one or more interposed companies, partnerships or trusts, in underlying property that -

(A)

was purchased by another private company, partnership or trustee of a private trust estate after 10 September 1981 and within 12 months preceding the date of sale; and

(B)

was not excepted property (as defined).

It will be noted that sub-paragraph (c)(ii), but not sub-paragraph (c)(i), deals with the sale of an interest in a partnership. It is not necessary that such a sale be dealt with in sub-paragraph (c)(i), as the situation is dealt with in the existing section 26AAA, which covers the sale of an interest in property that was purchased within the preceding 12 months.

The final test necessary for the application of sub-section (2A) is contained in paragraph (d). It requires that, immediately before a relevant sale by a taxpayer of shares in a private company or an interest in a private trust estate, the value of underlying company or trust property being disposed of in that way was not less than 75 per cent of the net worth of the company or trust estate. In a case where an interest in underlying property is less directly held through interposed companies, partnerships or trusts and is being disposed of (i.e., in a case where sub-paragraph (c)(ii) applies), the value of the interest in the underlying property owned by the relevant company, partnership or trustee will be taken into account in the application of section 26AAA if it is not less than 75 per cent of the net worth of that company, partnership or trust estate.

Where all of the conditions contained in paragraphs (a) to (d) of new sub-section (2A) apply, the assessable income of the taxpayer in the year of income in which the shares or interest are sold is to include so much of the sale price as in the opinion of the Commissioner of Taxation may be attributed to, broadly, any appreciation in the value of the underlying property from the time it was purchased to the time immediately before the sale.

Paragraphs (e) and (f), read in conjunction with paragraph (d ), provide a formula for calculating the amount that is to be included in the taxpayer's assessable income. The amount will be the value of the underlying property immediately before the sale of the shares etc., as reduced by the consideration paid for the underlying property by the company, partnership or trustee and so much of any expenditure incurred in relation to the underlying property as the Commissioner considers appropriate.

In effect, the Commissioner is to be empowered to calculate a notional profit by deducting the cost of the underlying property and other appropriate expenses from its current value. The amount that is to be included in the taxpayer's assessable income by the operation of sub-section (2A) is the amount that represents the extent to which the sale price of the taxpayer's shares or interest in a trust estate or partnership, is attributable to that notional profit.

Proposed new sub-section (2B) is a safeguarding measure to prevent exploitation of the exclusion from the operation of sub-section (2A) of trading stock or property purchased by a company or trustee of a trust estate for resale at a profit or for the carrying out of a profit-making scheme.

It will enable the Commissioner of Taxation to not treat such property as excepted property if he is satisfied that the consideration received by a taxpayer for his shares in the company or his interest in the trust is substantially more than could be expected to have been received on the footing that the taxpayer and the purchaser had expected that the company or trustee would immediately sell the underlying property for a price equal to its market value with the consequence that an amount would be included in the assessable income of the company or the trust estate.

An example of the type of case to which sub-section (2B) would apply is one where a taxpayer, to otherwise avoid the operation of sub-section (2A), might arrange for a share trading company in which he owns a controlling interest to purchase shares which are expected to increase in value in the short-term. While any disposal by the taxpayer of his shares in the share trading company might well yield a gain that reflects an increase in the value of those underlying newly acquired trading shares, sub-section (2A) would not have been able to apply - without the aid of sub-section (2B) - because of the general exclusion of trading stock as excepted property.

Sub-section (2B) can be seen against the general background that, as a matter of ordinary business practice, a person buying shares in a company the assets of which predominantly comprise trading stock would not pay a price that ignored the contingent tax liability upon the company in respect of any future disposal of that trading stock.

Paragraph (d) of sub-clause 4(1) proposes to insert new sub-section (3A) into section 26AAA. Sub-section (3A) ensures that where a taxpayer has sold property in consequence of an option or agreement with the purchaser, the date of sale for the purposes of the operation of sub-section (2A) will be taken to be the date on which the option or agreement was entered into. This means that sub-section (2A) will apply to the sale of shares in a company, or an interest in a trust estate etc., made more than a year after the company or trustee concerned has purchased the underlying property if the sale was made under an option or agreement entered into within the 12 months period. This reflects existing sub-section 26AAA(3).

Paragraphs (e) and (f) of sub-clause 4(1) propose amendments to sub-section 26AAA(4) to the effect that sub-section (4) will apply in relation to transactions to which proposed new sub-section (2A) applies in the same way as it applies to transactions to which sub-section (2) applies. Sub-section (4) applies where parties to a transaction are not dealing at arm's length and property is transferred as a gift or is sold for less or for more than the amount which, in the opinion of the Commissioner of Taxation, is its true value. The sub-section provides that, for the purposes of applying section 26AAA, the donor or vendor is to be treated as having sold the property for a consideration equal to its true value while the donee or purchaser will be taken to have purchased it for a consideration equal to that value.

Where, in a case to which sub-section (4) applies, property is sold or transferred within 12 months of purchase the value is, by reason of paragraph (c), to be determined as at the date of sale or transfer. Where the sale or transfer takes place outside the 12 months period under an option granted or an agreement entered into during that period the valuation is to be made at the time when the option was granted or the agreement was entered into.

By the amendments to paragraph (c) of sub-section (4) being effected by paragraph (f), sub-section (4) will apply in like manner to the sale or transfer of property to which new sub-section ( 2A) applies.

By paragraph (g) of clause 4, it is proposed to add four new sub-sections to section 26AAA.

New sub-section (8) of section 26AAA will be, broadly, the counterpart to new sub-section (2A) in relation to cases where, instead of shares in a company or an interest in a trust estate being sold to take advantage of an increase in the value of underlying property that was purchased by the company or trustee within the preceding 12 months, the property is distributed in specie to shareholders or beneficiaries who may then sell the property. In those circumstances, sub-section (8) will operate so as to treat the shareholder or beneficiary as having purchased the property in lieu of the company or trustee, for the price paid by the company or trustee. This will mean that in the event of any sale of the property within 12 months for a price in excess of the price paid by the company or trustee, existing sub-section 26AAA(2) will operate so that the excess will be included in the assessable income of the shareholder or beneficiary.

Paragraphs (a) to (d) of new sub-section (8) contain the basic conditions for the application of the sub-section. The conditions are that:

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a distribution of property ("distributed property") of a private company or private trust estate has been made to a taxpayer in his capacity as a shareholder or beneficiary (paragraph (a));

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immediately before the distribution, the value of property ("underlying property") other than excepted property purchased by the company or trustee after 10 September 1981 and within the 12 months preceding the distribution was not less than 75 per cent of the net worth of the company or trust estate (paragraph (b));

•

the distributed property included the underlying property or part of the underlying property. (For this purpose, the underlying property or part thereof so distributed is referred to as the "prescribed property") (paragraph (c)); and

•

the taxpayer would not otherwise be taken to have purchased the prescribed property (paragraph (d)).

Where those conditions exist, the taxpayer will, by paragraphs (e) and (f), be deemed -

•

to have purchased the prescribed property on the date or dates on which it was purchased by the company or trustee and for an amount commensurate with the price paid by the company or trustee, having regard to the nature and extent of the taxpayer's shareholding in the company or interest in the trust estate; and

•

to have incurred expenditure in relation to the prescribed property commensurate with any such expenditure as was incurred by the company or trustee, again having regard to the nature and extent of the taxpayer's shareholding in the company or interest in the trust estate.

Proposed new sub-section (9) is designed to ensure that sub-section (8) applies where a distribution of property of a private company or a private trust estate has been made to a taxpayer in his capacity as a shareholder or beneficiary, but where the taxpayer held his shares or beneficial interest in the capacity of a trustee of another trust estate. In these circumstances, should the taxpayer/trustee in turn distribute the property to a beneficiary of the trust estate of which he is trustee, sub-section (9) will operate as if the initial distribution had been made to the latter beneficiary and as if that beneficiary had been a shareholder of the company or a beneficiary of the first trust estate respectively. In that way, where the relevant conditions of sub-section (8) otherwise apply, the latter beneficiary will be deemed by that sub-section to have purchased the property in lieu of the company or trustee.

Proposed new sub-section (10) is a safeguarding measure to prevent taxpayers from frustrating the intended operation of sub-sections (2A) and (8) by arranging to have the value of underlying property of a company, partnership or trust estate fall below 75 per cent of the net worth of the company, partnership or trust estate. In calculating net worth, the Commissioner of Taxation is to be empowered to disregard in value any discharge or release of liabilities, or any acquisition of assets, if he is satisfied that the liabilities were discharged or released, or the assets acquired, with a purpose of ensuring that sub-sections (2A) or (8) would not apply.

The purpose of proposed new sub-section (11) is to prevent income tax being imposed twice in relation to underlying property received by a taxpayer as part of a distribution in specie of a company or trust estate that is deemed, by operation of sub-section (8), to have been purchased by the taxpayer. Where an amount would be included in a taxpayer's assessable income by the application of sub-section (8), sub-section (11) requires that amount to be reduced by -

•

any amount that has been, or will be, included in the taxpayer's assessable income by reason of the distribution, e.g., in a case where a distribution by a company liquidator would be deemed to be a dividend under section 47 of the Principal Act; or

•

any amount which in the Commissioner's opinion is represented by the distributed underlying property and is included in the assessable income of the taxpayer in pursuance of section 97, or in respect of which the trustee of a trust estate is assessed and liable to pay tax in pursuance of section 98, 99 or 99A of the Act.

Sub-clause (2) of clause 4 is a transitional measure that affects the operation of new sub-section (2B) of section 26AAA to be inserted by sub-clause (1). As mentioned previously in these notes in relation to new sub-section 26AAA(2B), that sub-section is a safeguarding provision to prevent the operation of new sub-section (2A) being frustrated by taxpayers who would seek to exploit the general exclusion from sub-section (2A) of the transfer - by the sale of shares in a company or an interest in a trust estate - of an interest in trading stock or in property purchased for resale at a profit or for the carrying out of a profit-making scheme. By sub-clause 4(2) new sub-section (2B) will not apply to property of those kinds that was purchased by a company or trustee of a trust estate after 10 September 1981 and on or before the date on which the Bill was introduced into the Parliament.

Sub-clause 4(3) is also a transitional measure and affects the application of sub-paragraph (b)(ii) of new sub-section 26AAA(8). As mentioned previously in these notes, sub-paragraph (b)(ii) limits the application of sub-section (8) to cases where property of a private company or private trust estate that has been distributed to a shareholder or beneficiary is not excepted property in the nature of trading stock or depreciable plant. The third category of excepted property as defined in new paragraph (m) of sub-section 26AAA(1) - broadly, property acquired for profit-making purposes - will thus not generally be treated as excepted property for the purposes of the application of sub-section 26AAA(8). The effect of sub-clause (3) is that all three categories of excepted property purchased by a company or trustee after 10 September 1981 and on or before the date on which the Bill was introduced will be outside the ambit of sub-section 26AAA(8).

Clause 5: Divisible deductions

This clause proposes a technical amendment to section 50G, one of the "current year loss" provisions of Subdivision B of Division 2A of Part III of the Principal Act. The amendment is consequential upon the new section 57AK proposed by clause 8 to authorise accelerated rates of depreciation for plant used in the production of basic iron and steel products.

In broad terms, the current year loss provisions divide an income year into "relevant periods" that are separated by a "disqualifying event", e.g., on the occurrence of a 50 per cent or greater change in shareholders' dividend, capital or voting rights. A net loss incurred in one relevant period is not to be offset against net income derived during another relevant period of the same year unless the company satisfies a "continuing ownership" test, or the alternative "same business" test.

The effect of the amendment proposed by clause 5 will be to ensure that deductions authorised by new section 57AK will be apportioned between relevant periods, where necessary, on a pro-rata basis in the same way as depreciation allowances generally.

Clause 6: Deduction in respect of living-away-from-home allowance

This clause proposes a technical amendment of section 51A of the Principal Act. The section authorises the allowance of a deduction to a taxpayer who is an employee where his or her assessable income includes an allowance or benefit received as compensation for additional costs incurred in living away from his or her usual residence in order to perform his or her duties. The practical effect of section 51A is to expose to tax a maximum net amount of $2 per week of the allowance received.

Sub-clause (1) of clause 6 will amend the definition of "employee" in sub-section 51A(3) to remove the present exclusion from that definition of members of the Defence Force, thus bringing defence personnel within the scope of section 51A. The amendment will make it clear that the taxation treatment of relevant allowances and benefits received by members of the Defence Force while serving overseas is identical with the treatment given other living-away-from-home allowances, including similar overseas locality allowances, received by their civilian counterparts. At present, identity of treatment is achieved by the application of the general deduction provisions of the Principal Act.

Allowances brought within the scope of section 51A by this amendment and payable under naval, military and air force regulations include overseas living-out allowance, overseas living-in allowance, special overseas living allowance, child allowance and rental allowance.

By sub-clause (2) the amendment will apply in relation to allowances or benefits paid or granted on or after the date of Assent to the Bill.

Clause 7: Special depreciation on plant

This clause proposes a further amendment that is consequential upon the new section 57AK proposed by clause 8 to authorise accelerated rates of depreciation for plant used in the production of basic iron and steel products.

Clause 7 will amend section 57AG of the Principal Act so that plant that qualifies for either of the new accelerated rates authorised by section 57AK will not also be eligible under section 57AG for the 18 per cent loading applicable to general depreciation rates.

Clause 8: Special depreciation on property used for basic iron and steel production

This clause proposes to amend the Principal Act to insert new section 57AK to authorise special accelerated rates of depreciation for new and second-hand plant used primarily and principally in the production of basic iron and steel products.

Plant eligible under the new provisions will qualify for depreciation on a prime cost basis at a rate of 20 per cent or, where the plant is of a kind that presently qualifies for depreciation at a prime cost rate in excess of 20 per cent (including the special 18 per cent depreciation loading), at a rate of 331/3 per cent.

The accelerated rates will be available in respect of eligible plant that is acquired under a contract entered into after 18 August 1981 and before 1 July 1991 and is first used or installed ready for use by 30 June 1992. Eligible plant constructed by the taxpayer will qualify on the same basis where construction commenced within the 1981 to 1991 period.

For the purposes of the scheme "basic iron and steel" products are, broadly, those products included in the definition used for the purposes of the 1980 Report of the Industries Assistance Commission into the iron and steel industry. These include pig iron, ingots, blooms, billets and slabs, rerolling coils, universal plates, rails, bars and rods (excluding bright bars), angles and hot rolled strip, sheet and plate (unworked or simply polished). Similar forms of low alloy or high carbon steel will also be included among the products attracting the special depreciation rates, as will sponge iron.

Plant eligible for the accelerated rates will include direct production plant such as furnaces, continuous casting plant and hot rolling mills used to form the basic iron and steel products, together with associated pollution and quality control plant, maintenance plant and plant for trimming and packing the basic products.

Plant used by the producer in related activities within the basic iron and steel production premises will also qualify for the accelerated rates. Plant within the production premises that is used by the producer in the preparation or production of raw materials and other products consumed in the basic iron and steel production process will qualify on this basis. Eligible plant in this category will include coke ovens, sinter plant, lime kilns, materials blending plant and energy and gas production plant.

Also eligible on this basis will be plant, including wharves, used for materials storage and transport and plant used for the production of plant components, such as rolls, moulds and stools, that are necessary for the basic iron and steel production process. Plant used to train apprentices will similarly qualify. Road vehicles ordinarily used to transport persons or deliver goods will not qualify for the accelerated rates.

The ordinary income tax rules that apply to general depreciation allowances will remain applicable to eligible plant. Depreciation allowances at accelerated rates will thus become available in the year in which the plant is first used, or installed ready for use and held in reserve. Proportionate allowances will apply where these requirements are not satisfied until part way through the relevant year. Where applicable, the investment allowance or the special allowance for conversion of oil-fired plant will also be available.

Taxpayers will be entitled to elect to have normal rates of depreciation, including the 18 per cent loading, apply to individual plant items in lieu of the proposed accelerated rates.

Sub-section (1) of the new section 57AK sets out the general conditions under which the special accelerated rates will apply to a unit of property. Paragraph (a) of that sub-section requires that the relevant plant be a unit of property in respect of which the taxpayer is entitled in the year of income to a depreciation allowance under section 54 of the Principal Act. Depreciation is allowable under section 54 in respect of plant which is owned by the taxpayer and which, during the relevant income year, is either used by the taxpayer for the purpose of producing assessable income or is installed ready for use for that purpose and held in reserve.

Paragraph (b) of proposed sub-section 57AK(1) specifies that the special accelerated rates are to apply to a unit of property that is acquired by the taxpayer under a contract entered into on or after 19 August 1981 and before 1 July 1991, or, if the unit was constructed by the taxpayer, where the construction of the unit commenced on or after 19 August 1981 and before 1 July 1991.

By paragraph (c) of proposed sub-section 57AK(1), eligibility for the accelerated rates is further restricted to a unit of property that is first used, or installed ready for use and held in reserve, before 1 July 1992.

The remaining general condition of eligibility is specified in paragraph (d) of proposed sub-section 57AK(1) which applies to restrict eligibility to plant that is used primarily or principally in connection with the production of basic iron and steel products.

For this purpose, sub-paragraph (d)(i) applies to extend eligibility to a unit of property that is used, or installed ready for use, primarily or principally in basic iron or steel production or related activities carried on by a producer of basic iron and steel products. Sub-paragraph (d)(ii) further extends eligibility to a unit of property comprising a wharf that is situated within, or contiguous to, the production premises and is used or installed ready for use primarily and principally in connection with basic iron or steel production or related activities carried on by a producer of basic iron or steel products. Plant situated on such a wharf will similarly qualify.

Sub-section 57AK(2) establishes the time reference by which the test of being used or installed primarily and principally for the purposes required by sub-section (1) is to be satisfied. By virtue of sub-section (2), plant must satisfy the requirement of being used primarily and principally for qualifying purposes (i.e., use by a producer in basic iron and steel production or related activities) for that part of the relevant year of income during which the plant is both owned by the taxpayer and used, or installed ready for use, for the purpose of producing assessable income.

For the purposes of paragraph 57AK(1)(d), "basic iron and steel production" is defined in proposed sub-section 57AK(13) to include any part of the operations involved in the production of basic iron and steel products other than operations that take place before the iron-making (or steel-making) furnace is used. "Related activities" are also defined in that sub-section and, broadly, include processes involved prior to the iron-making (steel-making) furnace. These include the production or preparation of goods used in basic iron and steel production, the production or maintenance of plant or plant components used in the production processes, the preparation, transport or storage of basic products or goods used in the production processes, the removal of waste substances and the training of apprentices, where those activities are undertaken within the production premises. (A fuller explanation of these terms is contained in the notes on proposed sub-section 57AK(13).)

It is not required by sub-paragraph 57AK(1)(d) that the plant be owned by the basic iron and steel producer. Thus, the owner of plant that is leased to a producer and used for qualifying purposes will be entitled to the benefit of the accelerated rates.

Sub-section 57AK(3) operates to exclude from eligibility for the accelerated rates road vehicles of a kind ordinarily used for the transport of goods or persons, whether or not they are in fact used for those purposes (paragraph (a)).

The sub-section also makes it clear that vehicles or vessels used for the transport of persons or the delivery of goods between production premises will not qualify for the accelerated rates (paragraph (b)).

Sub-section 57AK(4) is a drafting measure that establishes that the new accelerated basis of depreciation applies (under section 54) in lieu of the basis applicable in accordance with sections 55, 56, 56A and 57 of the Principal Act.

Broadly, the depreciation deductions that are allowable in accordance with those sections are based on rates of depreciation fixed having regard to the estimated effective life of the plant. These rates are then generally increased by 18 per cent by the operation of section 57AG of the Principal Act.

Sub-section 57AK(4) will ensure that depreciation allowable in respect of qualifying basic iron and steel production plant will be available on the basis of the special accelerated rates proposed by sub-section (5).

Sub-section 57AK(5) authorises the accelerated basis of depreciation that is to apply to qualifying plant.

Eligible plant of a kind that would otherwise qualify for depreciation at a prime cost rate of 20 per cent or less (after taking into account the special 18 per cent loading) will be depreciable at a 20 per cent prime cost rate. Plant in the category that would otherwise be depreciable at a prime cost rate, inclusive of the loading, in excess of 20 per cent will qualify for a 331/3 per cent rate of depreciation.

The accelerated rates will apply on a prime cost basis only and, as explained in the notes on clause 7, will not be subject to further increase by the 18 per cent loading applicable to general depreciation rates under section 57AG.

Sub-section 57AK(6) will ensure that, as with general depreciation allowances, depreciation deductions are allowable under new section 57AK on a pro-rata basis in circumstances where the relevant plant is owned and used for the purpose of producing assessable income, or is owned and installed ready for use for that purpose, during a part only of the year of income.

A further effect of sub-section (6) will be to ensure that existing anti-avoidance provisions of sub-section 56(4) of the Principal Act apply similarly to depreciation deductions allowable under new section 56AK. Broadly those provisions operate to counter attempts to inflate the cost of depreciable property and, thus, of depreciation allowances.

Sub-section 57AK(7) is a drafting measure that will ensure that existing provisions of the law relating to the treatment of plant withdrawn from use in mining activities and used instead in other forms of income-producing activities will apply equally with respect to depreciation deductions authorised under section 57AK.

Broadly, sub-sections 122N(2), 123E(2) and 124AN(2) apply where plant that has been subject to deduction under the special deduction provisions of the Principal Act relating to allowable capital expenditure on general mining, transport of minerals and petroleum mining respectively is withdrawn for use in non-mining activities. Where such plant is subsequently used in circumstances that would entitle its owner to ordinary depreciation allowances, those sections ensure that depreciation is calculated by reference to the value of the plant at the time it is withdrawn from mining activities, rather than to its historic cost.

Sub-section 57AK(7) will ensure that the accelerated basis of depreciation authorised by section 57AK will be similarly applied to the value of any plant that is withdrawn from mining activities and comes into use in connection with basic iron or steel production.

By proposed sub-section 57AK(8) a taxpayer is to be entitled to elect not to have the accelerated rate of depreciation otherwise available under section 57AK apply to particular items of plant. Where such an election is made, ordinary rates of depreciation (including the 18 per cent loading) will apply instead.

Proposed sub-section 57AK(9) sets out the conditions under which an election authorised by sub-section (8) is to be made. Paragraph (a) requires an election to be made in writing to the Commissioner of Taxation. Such notice must, by virtue of paragraph (b) be lodged with the Commissioner by the date of lodgment of the taxpayer's return of income for the first year in which the accelerated rate would first be allowable in respect of the relevant unit. The Commissioner is, however, empowered to extend the time for lodgment of an election.

Sub-section 57AK(10) is modelled on provisions contained in other sections of the Principal Act. It is designed as a safeguard against the limitation of eligibility for the accelerated rates to plant acquired under contracts entered into on or after 19 August 1981 being overcome by any rearrangement of contracts to make it appear that property has been acquired under a legal obligation entered into on or after 19 August 1981 in circumstances where a contract for the acquisition of the property (or substantially similar property) had in fact been entered into by the taxpayer before that date. The sub-section is also expressed to apply in a case where a taxpayer commences construction of such a "substituted unit" on or after 19 August 1981.

Sub-section 57AK(11) is a drafting measure under which, in applying sub-section (10), a reference to a unit of property is to be taken to include a reference to a portion of a unit of property.

Sub-section 57AK(12) is also a drafting measure to ensure that a reference in the section to the acquisition of property by a taxpayer is to be taken to include a reference to the construction of the property for the taxpayer by someone else.

Sub-section 57AK(13) defines certain terms used in the section -

"basic iron and steel production":

This term is defined to include any part of the operations involved in the production of basic iron and steel products other than operations that take place before the iron-making furnace is used or, where an iron-making furnace is not used, before the steel-making furnace is used. An example of the latter kind of production would be where an electric steel-making furnace is charged with scrap.

As explained in the notes on paragraph 57AK(1)(d), the definition of basic iron and steel production is relevant to the determination of items of plant that are to qualify for the accelerated rates of depreciation. Examples of plant employed in basic iron and steel production would include blast furnaces, basic oxygen steel-making furnaces, open hearth and electric arc steel-making furnaces, continuous casting plant, primary slab and bloom mills and other hot rolling mills and related quality control equipment.

Plant used in processes that precede use of an iron-making furnace may qualify for the accelerated rates as a consequence of being used in "related activities"(see below).

"basic iron and steel products":

These products are defined by reference to Schedule 1 to the Customs Tariff Act 1966 as in force at 18 August 1981. The broad categories of goods included are:

•

pig iron, cast iron, ingots, blooms, billets, slabs, sheet bars, re-rolling coils, universal plates, angles, shapes, sections and rails (paragraph (a));

•

bars and rods, other than cold drawn or rolled, ground or turned bars and rods (paragraph (b));

•

hoop and strip, sheets and plate (hot rolled and unworked or simply polished) (paragraph (c));

•

low alloy or high carbon steel goods in similar forms to the preceding (paragraphs (d) to (f));

•

sponge iron (paragraph (g)).

"goods":

This term is defined widely for drafting purposes so as to include electric current, hydraulic power, steam, compressed air, liquids, gases and substances. The definition is designed to ensure that plant eligible for the accelerated rates by virtue of being used in "related activities" (see below) includes plant used in the production of electric current, etc., used in basic iron and steel production.

"iron-making furnace":

The definition of this term is designed to ensure that a reference to an iron-making furnace in the definition of basic iron and steel production includes a reference to a direct reduction furnace or kiln that is used in the production of sponge iron.

"plant"

: This term is defined to mean plant within the meaning of section 54 of the Principal Act.

"related activities"

: As explained in the notes on proposed new paragraph 57AK(1)(d), plant will qualify for the accelerated rates where, broadly, it is used primarily and principally by a producer in basic iron or steel production or in related activities. Related activities are defined as involving any of the following processes:-

•

The production, preparation or treatment of goods for use primarily and principally and directly in basic iron or steel production (paragraph (a)). Examples of plant that could qualify under this heading include plant used in the production of oxygen, coke, fluxes and other inputs to basic iron and steel production. Plant used to blend or prepare inputs to the production process could also qualify.

•

The production or maintenance of plant or plant components for use primarily and principally for qualifying processes (i.e., basic iron and steel production or related activities) (paragraph (b)). Maintenance plant and plant used to produce plant or plant components necessary for carrying on basic iron or steel production or related activities such as rolls, moulds and stools could qualify under this heading.

•

The trimming, cutting or packing of basic iron and steel products or goods or plant used in qualifying processes. Activities also brought within the scope of "related activities" under this heading include the transport or storage of basic iron or steel products or goods or plant used in qualifying processes (paragraph (c)). As explained in the notes on proposed sub-section 57AK(3), however, road vehicles of a kind ordinarily used to transport persons or deliver goods would not qualify for the accelerated rates.

•

The disposal of waste substances resulting from qualifying processes (paragraph (d)).

•

The training of apprentices in skills of a kind used in qualifying processes (paragraph (e)).

To qualify as a related activity under any of the above heads, the activity must be carried on by a basic iron and steel producer within premises in which basic iron and steel production is carried on.

Sub-section 57AK(14) is a drafting measure designed to ensure that "basic iron or steel products" are defined by reference to Schedule 1 of the Customs Tariff Act 1966 as in force on 18 August 1981 (see notes on the definition of that term in proposed sub-section 57AK(13)). Sub-section (14) will ensure that any amendments to that Act made after 18 August 1981 will be disregarded for this purpose, irrespective of whether any such amendments are for any other purpose designed to come into force before or after that date.

Clause 9: Gifts, calls on afforestation shares, pensions, etc.

Introductory note

The purpose of clause 9 is to authorise income tax deductions for gifts to the Royal Society for the Prevention of Cruelty to Animals in Australia and to three Polish relief appeals, and also to modify the operation of the Taxation Incentives for the Arts Scheme.

Under section 78 of the Principal Act, gifts of the value of $2 or more of money or of property purchased within the preceding 12 months are deductible when made to a fund, authority or institution listed in paragraph 78(1)(a). The amount of the deduction available in respect of gifts of property other than money is generally limited by sub-section (2) to the lesser of the value of the property at the time when the gift was made or the amount paid by the donor for the property.

Amendments proposed by clause 9 will extend the classes of eligible funds, authorities or institutions listed in paragraph 78(1)(a) to include the Federal and various State and Territory branches of the R.S.P.C.A.. Also to be included are the Help Poland Live Appeal that is being conducted by the Australian National Committee for Relief to Poland, the Australian Red Cross Poland Appeal and the World Vision of Australia Poland Emergency Appeal. Gifts to the named R.S.P.C.A. branches will qualify for deduction if made after 5 February 1982. Gifts to the Polish appeals will be deductible if made during the 1981-82 financial year.

Paragraph 78(1)(aa) authorises deductions, according to liberalised conditions, under the Taxation Incentives for the Arts Scheme for gifts of cultural property for inclusion in the collections maintained by the Australiana Fund, a public art gallery, library or museum or Artbank. Such gifts presently qualify for deduction irrespective of the time when, or the manner in which, the gifted property was acquired by the donor and the amount of the deduction is generally based on the value of the property at the time the gift was made. Determination of that value is required to be based on the average of two or more valuations obtained from approved valuers.

The first of the amendments proposed by clause 9 to the operation of the scheme will, in two circumstances, limit the amount of the deduction to the lesser of the value of the property at the time the gift was made or the amount paid by the donor for the property, namely -

•

where the property is donated within 12 months of its acquisition (otherwise than by inheritance) by the donor; or

•

where the property was acquired by the donor for the purpose of donating the property, or was acquired subject to an agreement or understanding that the property would be donated.

Further amendments will formalise arrangements for the appointment of valuers under the scheme by placing responsibility for such appointments with the Secretary to the Department of Home Affairs and Environment and by inserting in the law guidelines for the approval of valuers. These new arrangements will first apply in respect of valuations made 28 days after Royal Assent is given to the Bill.

Explanations of the individual provisions of clause 9 follow.

Paragraph (a) of sub-clause 9(1) will insert new sub-paragraphs (lxvi) to (lxix) in paragraph 78(1) of the Principal Act to extend the list of organisations to which the income tax gift deduction authorised by paragraph 78(1)(a) applies.

Proposed new sub-paragraph (lxvi) will extend the operation of paragraph 78(1)(a) to gifts made to the R.S.P.C.A. Australia Incorporated (which is the national co-ordinating council of the Royal Society for the Prevention of Cruelty to Animals) and to the various State co-ordinating branches, the A.C.T. branch of the Society and to equivalent State and Territory societies - in Queensland, the Royal Queensland Society for the Prevention of Cruelty and, in the Northern Territory, the Society for the Prevention of Cruelty to Animals.

By virtue of amendments proposed by sub-clause 9(2), gifts to the named branches of the Society will qualify for deduction where made after 5 February 1982.

The State branch of the R.S.P.C.A. in Tasmania is in the process of being set up. As a transitional measure, therefore, sub-clause 9(3) will ensure that gifts made to the various regional branches within Tasmania qualify for deduction. On formal incorporation of the State branch it is intended that gifts to the Society in Tasmania will be co-ordinated through that branch. The transitional arrangements will apply in respect of gifts made after 5 February 1982 and before 1 July 1982.

New sub-paragraph (lxvii) will specify the Help Poland Live Appeal that is being conducted by the Australian National Committee for Relief to Poland, the Australian Red Cross Poland Appeal and the World Vision of Australia Poland Emergency Appeal as funds to which the gift deduction authorised by paragraph 78(1)(a) applies. By the amendment proposed by paragraph (b) of sub-clause 9(1), gifts to these appeals will qualify if made during the financial year ending on 30 June 1982.

Paragraph (c) of sub-clause 9(1) will amend section 78 of the Principal Act to formalise arrangements for the approval of valuers under the Taxation Incentives for the Arts Scheme.

Under the scheme, the donor of a gift is required to furnish a minimum of two valuations in respect of the gifted property from valuers who, at the time the valuation is made, are approved for the purposes of valuing property of the class in which the gifted property is included. Under sub-section 78(6D) of the Principal Act, an approved valuer at a particular point in time in relation to a particular class of property is a valuer whose name is included at that time in a register of approved valuers maintained by the Department of Home Affairs and Environment as a valuer approved for the purpose of valuing property of that class. Inclusion of a valuer's name in the register is made on the recommendation of a special Committee established with the co-operation of the N.S.W. and Victorian Governments.

The amendments proposed by paragraph (c) will repeal the existing sub-section (6D) of section 78 and substitute new sub-sections (6D), (6DA) and (6DB).

Sub-section (6D) specifies that a person will be taken to be an approved valuer in relation to a particular class of property at a particular time only if an approval of that person as a valuer of that class of property is in force at that time.

By sub-section (6DA) the Secretary to the Department of Home Affairs and Environment is authorised to approve persons as valuers of a particular class of property. Such an approval is to be in writing and signed by the Secretary.

Sub-section (6DB) lays down guidelines to which the Secretary is to have regard in determining whether to approve a person as a valuer of a particular class of property. These are -

•

the qualifications, experience and knowledge of the person in relation to the valuation of property of that class;

•

the person's knowledge of current market values of such property;

•

the standing of the person in the professional community; and

•

any other matters considered by the Secretary to be relevant in relation to the person's application.

The special committee established for the purposes of the scheme will continue to play a part in the approval of valuers by making recommendations to the Secretary with respect to applications from persons seeking approval as valuers.

The revised arrangements for the approval of valuers will, by virtue of sub-clause 9(4), first apply in relation to valuations made 28 days after the Bill receives Royal Assent. As a consequence, valuations made thereafter must be made by a valuer approved under the new procedures.

Paragraphs (d), (e), (f) and (g) of sub-clause 9(1) will amend sub-section 78(6E) of the Principal Act to limit the amount of the deduction available under the Taxation Incentives for the Arts Scheme in specified circumstances.

Sub-section 78(6E) governs the basis of valuation for determining the amount deductible in the case of gifts qualifying under the scheme. Paragraph (a) of sub-section (6E) contains the general basis of valuation which is the value of the property at the time the gift is made. That value is determined as the average of the valuations obtained from approved valuers, subject to the Commissioner of Taxation being satisfied that the average fairly reflects the value of the property at the time the gift is made. An alternative basis of valuation applies under paragraph (b) in circumstances where sale of the gifted property by the donor would have resulted in assessable proceeds and where an amount is not included in assessable income of the donor as a consequence of the gift being made. In that case the deduction is based on the cost of the property.

The amendments proposed by paragraphs (d), (e) and (f) of sub-clause 9(1) will insert new paragraph (aa) in sub-section 78(6E) to qualify the operation of existing paragraph (a).

New paragraph (aa) of sub-section 78 (6E) of the Principal Act will apply in lieu of paragraph (a) in circumstances where either the gifted property is donated by the donor within 12 months of its acquisition or where the gifted property was acquired by the donor for the purpose of making the gift, or was acquired subject to an agreement that the property would be so gifted.

Where the conditions specified in proposed paragraph (aa) apply, the amount of the deduction available under the scheme is to be limited to the lesser of the value of the property as determined under paragraph (a) or the amount paid by the donor for the property. As in the case of gifts under the scheme generally, the amount of any deduction determined under new paragraph (aa) may be subject to an appropriate reduction under sub-section 78(6F) of the Principal Act where the gift is made subject to conditions to the effect that the fund, authority or institution does not obtain immediate and full custody of the property.

Gifts of property inherited by the donor will not be subject to the operation of proposed new paragraph (aa). Such gifts may continue to qualify for the "market value" basis of deduction authorised by existing paragraph (a), irrespective of when the property is donated.

The amendment proposed by paragraph (g) of sub-clause 9(1) will effect a technical amendment to sub-section 78(6G) of the Principal Act to ensure that in applying proposed new paragraph 78(6E)(aa), the term "agreement" is given the expanded meaning of any formal or informal arrangement or understanding.

The new basis of deduction applicable in the circumstances specified in new paragraph 78(6E)(aa) will, by virtue of sub-clause 9(5), apply in respect of gifts made after 14 October 1981.

Sub-clauses (2) to (5) of clause 9 prescribe the various commencement and transitional arrangements applicable to the amendments proposed in sub-clause (1) which have been explained in the notes on that sub-clause. Broadly -

•

sub-clause (2) specifies that gifts to the R.S.P.C.A. and equivalent bodies specified in proposed new sub-paragraph 78(1)(a)(lxvi) qualify for deduction if made after 5 February 1981;

•

sub-clause (3) ensures that, pending incorporation of the R.S.P.C.A. (Tasmania), gifts made to branches of the Society in Tasmania will qualify for deduction;

•

sub-clause (4) specifies that the new procedures for the approval of valuers have effect in relation to valuations made 28 days after the amending Act receives Royal Assent; and

•

sub-clause (5) ensures that the new basis of deduction applicable in the circumstances specified in proposed new paragraph 78(6E)(aa) will apply in respect of gifts made after 14 October 1981.

Clause 10: Rebates for residents of isolated areas

By this clause, it is proposed to amend section 79A of the Principal Act to increase the dependant component of the zone rebate from 25 per cent of the relevant rebate amount to 50 per cent of that amount in the case of Zone A, and from 4 per cent to 20 per cent in the case of Zone B.

Another key objective is to provide a new special basic zone rebate of $750, in lieu of the basic rebates of $216 and $36 for Zone A and Zone B respectively, for people living in particularly isolated areas in Zone A or Zone B. Yet another purpose is to modify the existing test for determining a person's eligibility for a zone rebate.

As the increased dependant component of the rebate and the new special rebate will apply from 1 November 1981, the clause also contains transitional provisions that will apply for the 1981-82 income year.

The amendment proposed by paragraph (a) of sub-clause 10(1) is a drafting measure which will insert in sub-section 79A(1) provisions included in sub-section 79A(4) which is to be omitted by paragraph (c) of this sub-clause, to the effect that a rebate is allowable under section 79A only to an individual taxpayer and not to a company or a taxpayer in the capacity of a trustee.

Paragraph (b) proposes the omission of existing sub-section 79A(2), which sets out the rebates allowable under the present zone allowance arrangements, and the substitution of a new sub-section 79A(2), which will set out the increased rebate amounts to be allowed under the proposed new arrangements. The revised sub-section will specify the rebates to be allowed to a resident (as defined in new sub-section 79A(3B) to be inserted by paragraph (c) of this sub-clause - see notes on that paragraph) of Zone A, Zone B or the special areas within either Zone.

Proposed paragraph 79A(2)(a) sets out the rebate to be allowed to a taxpayer who qualifies as a resident of the special area in Zone A. The rebate allowable will be the new special basic rebate of $750 plus 50 per cent of the "relevant rebate amount" as defined in new sub-section 79A(4) to be inserted by paragraph (c) of this sub-clause (see notes on that paragraph). Broadly, the term means the sum of rebates for a taxpayer's dependants, including any sole parent rebate and any rebate in respect of a housekeeper.

Similarly, paragraph 79A(2)(b) specifies the rebate to be allowed where a taxpayer is a resident of the special area in Zone B in a year of income and has not resided or actually been in Zone A during that year. In such a case, the rebate allowable will be the special basic rebate of $750 plus 20 per cent of the "relevant rebate amount".

Paragraph 79A(2)(c) will apply where, during a year of income, a taxpayer is a resident of Zone A and is also a resident of the special area in Zone B. This could occur where, e.g., a taxpayer resides in Zone A for more than half of the year of income and also qualifies as a resident of the special area of Zone B by spending more than 182 days in that area over two consecutive income years. In such a case it would be possible, depending on the taxpayer's dependants, for the Zone A rebate of $216 plus 50 per cent of the relevant rebate amount, to be greater than the basic rebate for the special area in Zone B - $750 - plus 20 per cent of the relevant rebate amount. This paragraph, therefore, provides for the allowance of the greater of the following rebates :

(i)

$750 plus the dependant component of 20 per cent; or

(ii)

$216 plus the dependant component of 50 per cent.

Paragraph 79A(2)(d) sets out the rebate allowable to a resident of Zone A who has not been in the special area in either Zone A or Zone B during the year of income. The rebate in this case will be the basic Zone A rebate of $216 plus 50 per cent of the relevant rebate amount.

Paragraph 79A(2)(e) will apply to allow a rebate to a taxpayer who is a resident of Zone B and has not been in Zone A (including the Zone A special area) or in the special area in Zone B during the year of income. The rebate allowable will be the basic Zone B rebate of $36 plus 20 per cent of the relevant rebate amount.

New paragraph 79A(2)(f), which corresponds with existing paragraph 79A(2)(c), sets out the basis on which the Commissioner of Taxation is to determine the rebate to be allowed to a taxpayer who has resided or been in zone areas for the required period of time during a year of income but to whom none of the preceding paragraphs of sub-section 79A(2) apply.

For example, a taxpayer without dependants may have spent 120 days in a year of income in the special area of Zone A and 90 days in Zone B, that is, more than half of the income year in total. In this case, paragraph 79A(2)(f) will apply and the Commissioner might find it appropriate to determine the rebate to be allowed by taking a proportion of the Zone A special area rebate equal to the proportion which the number of days spent in the special area bears to 183 and adding a proportion of the Zone B rebate equal to that which the number by which 183 exceeds the number of days spent in the special area in Zone A bears to 183, that is (in whole dollars)

(((120)/(183))*$750) = $492 plus (((183-120)/(183)) * 36) = $12


, a total of $504.

To guide the Commissioner, the paragraph sets out, as the upper and lower limits within which the rebate may be determined, the highest of the rebates - that allowable to a resident of the special area in Zone A - and the lowest rebate - that allowable to a resident of Zone B.

Paragraph (c) of sub-clause 10(1) proposes the omission of existing sub-section 79A(4), which contains definitions of a number of terms used in the section and the substitution of five new sub-sections in section 79A - sub-sections (3B), (3C), (3D), (3E) and (4).

The existing sub-section (4) defines, for the purposes of the section, the terms "resident", "the prescribed area", "Zone A" and "Zone B". The first of these terms is to be defined in the new sub-section 79A(3B), which provides also for two further circumstances in which a person who would not have qualified as a resident under the definition being omitted, may qualify as a resident of a zone area and thus be entitled to a zone rebate.

Under proposed sub-section 79A(3B), a taxpayer will qualify as a resident of a zone area in a year of income where he or she :

(a)

resided in a zone area for more than half the year of income;

(b)

has actually been in a zone area for more than half the year of income;

(c)

died during the year of income and resided in a zone area at the date of death;

(d)

resided or was actually in a zone area for less than half the year of income and for less than half the next preceding year of income, was not a resident of a zone area in that next preceding year of income, and, over the two years of income concerned has resided or actually been in a zone area for more than 182 days; or

(e)

resided in a zone area for a period of less than half the year of income and for a period of less than half a preceding year of income (being any of the next four preceding years of income other than the immediately preceding year), was not a resident of a zone area in the relevant preceding year, the number of days of residence in a zone in the year of income combined with the number of days of such residence in the relevant preceding year exceed 182, and both of those periods form part of one continuous period during which the taxpayer resided in a zone area.

For the purposes of (d) and (e) above, the number of days spent in a zone area in a preceding year of income is not to include any such days that have been taken into account in determining a taxpayer's entitlement to a rebate of tax in that preceding year under sub-section 23AB in respect of United Nations service or under section 79B in respect of service overseas with the Defence Force. (In calculating the rebates allowable under those sections the period of United Nations service during a year of income is deemed to include any period of time the taxpayer spent in a zone area in that year of income (sub-section 23AB(8)), and periods during which a Defence Force member served in a zone area in a year of income are included in the period of overseas service in that year of income (sub-section 79B(3)).) The exclusion of such days from the residency tests in paragraphs (d) and (e) above is necessary to avoid double counting, and the possibility of the allowance of double rebates in respect of those days.

Circumstances (a), (b) and (c) above, in which a taxpayer qualifies as a resident of a zone area, correspond with those in the definition of "resident" in sub-section 79A(4) now being omitted. Circumstances (d) and (e) are new tests by which a person who would not have been a resident under the definition now being omitted may qualify for a zone rebate.

The first modification (new paragraph 79A(3B)(d)) will provide a zone rebate for a taxpayer who resides or spends the required period of time in a zone area over a period of two consecutive income years but who, at present, does not qualify for a rebate in either of the two relevant income years. For example, a taxpayer who moved to a zone area on 1 February and stayed until the following 30 November would not presently qualify for any rebate - he or she would have been in a zone area for 5 months of the first income year and 5 months of the second, that is, not more than half of either income year - but, with the proposed modification, that taxpayer will qualify for a rebate in the second income year.

The second modification (new paragraph 79A(3B)(e)) will allow a person who has not resided in a zone area for more than half of a year of income to qualify as a resident of a zone area if the taxpayer resided in a zone area for less than half of an earlier income year, not more than four years before the year of income, providing he or she actually resided (as distinct from merely being present) in a zone area (not necessarily the same zone area) from the beginning of the period in the earlier year to the end of the period in the year of income .

This new test will provide for the situation where, for example, a taxpayer arrives in a zone area on 1 February in the 1981-82 income year and resides there continuously until 30 November in the 1983-84 income year. Under the present arrangements, the taxpayer would not be entitled to a rebate in either the 1981-82 or the 1983-84 income year, having resided in the area for only 5 months in each year, although he or she would, of course, be entitled to a rebate in the 1982-83 income year. Under the proposed new test, that taxpayer will also qualify for a rebate in the 1983-84 income year.

Proposed sub-section 79A(3C) will make it clear that where, for the purposes of new sub-section 79A(3B) (outlined above), reference is made to a taxpayer residing, or actually being, in a zone area for a period of more than half a year of income (paragraphs (a) and (b) of that new sub-section), or for a period of not more than half a year of income (sub-paragraphs (d)(i) and (d)(ii) of that new sub-section), it may be a reference to one continuous period or to two or more separate periods making up the relevant time. The periods referred to in sub-paragraph (3B)(e) must, of course, be continuous.

Sub-section 79A(3D) will define the special areas within Zone A and Zone B, residents of which will be entitled to the special $750 basic rebate.

In accordance with paragraph 79A(3D)(a) the special area is constituted by points within Zone A or Zone B that, as at 1 November 1981, were in excess of 250 kilometres by the shortest practicable surface route from the centre point of the nearest urban centre (whether or not within a zone) with a population of 2,500 or more. 1976 Census data is to be used to identify such centres.

Sub-paragraphs 79A(3D)(b)(i) and (ii) set out rules for determining distance between a point in Zone A or Zone B and an urban centre. Sub-paragraph (i) deals with the situation where there is only one location within the urban centre from which distances are usually measured - in this case, the distance is the shortest practicable surface route between the point in Zone A or Zone B and that one location. Sub-paragraph (ii) deals with the situation where there is more than one location in an urban centre from which distances are usually measured (e.g., where a centre is made up of two or more towns) - in this case, the location which is in the principal one of the parts of that urban area is to be the location from which the distance is measured.

Sub-section 79A(3E) will allow the Commissioner of Taxation, where circumstances warrant it, to treat a place in a zone area that is not in a special area but is adjacent to, or in close proximity to, a special area in that zone as being in the special area for the purposes of the section. This power is to meet situations where near neighbours in a zone area would otherwise be entitled to different basic rebates.

Sub-section 79A(4) will define the following new terms used in the proposed provisions :

"census population"

: In relation to an urban centre, this term is defined as the population of that urban centre as specified in the results of the Census of Population and Housing taken by the Australian Statistician on 30 June 1976 and published by the Australian Bureau of Statistics. The population of urban centres is relevant in determining the special zone areas.

"relevant preceding year of income"

: This is the term used in proposed new paragraph 79A(3B)(e) inserted by paragraph (c) of sub-clause 10(1) - see notes on that paragraph - to describe an earlier year of income to which regard can be had in determining whether a taxpayer is a resident of a zone area in a year of income. It is defined in relation to a year of income to mean any of the next 4 preceding years of income, other than the immediately preceding year of income. A case involving the immediately preceding year of income would fall for consideration under paragraph 79A(3B)(d).

"relevant rebate amount"

: This amount is, in relation to a taxpayer in relation to a year of income, the sum of any rebates to which the taxpayer is entitled in respect of the year of income in respect of certain dependants, (e.g., a dependant spouse), as a sole parent and in respect of a housekeeper, as well as any rebates to which he or she would be entitled if rebates were allowable in respect of dependent children and students. The appropriate percentage of this amount is the dependant component of the zone rebate.

"surface route"

: This is defined to mean a route other than an air route, and would include routes by road, rail or sea. The term is relevant to the determination of the special zone area.

"urban centre"

: This term means an area that is described as an urban centre or bounded locality in the published results of the 1976 Census.

The new sub-section 79A(4) will also restate the existing definitions of "the prescribed area", "Zone A" and "Zone B" in their present form. The prescribed area is made up of the areas in Zone A and Zone B, the boundaries of which are not being altered. The geographical boundaries of each of these zones will continue to be as described in Schedule 2 to the Principal Act.

Sub-clause (2) of clause 10 proposes that, subject to the following transitional provisions, the amendments as proposed by sub-clause (1) are to apply to assessments in respect of income of the 1981-82 and subsequent years of income.

Sub-clause (3) of clause 10 is a transitional provision (applicable only for the 1981-82 income year) necessary to give effect to the announced commencement date - 1 November 1981 - of the proposed zone arrangements. It will apply where a taxpayer has resided or actually been in a zone area for more than half the 1981-82 income year but has not been in the area after 31 October 1981 for more than half that year of income. Because it is not practicable to specify the precise rebate that would be allowable in the great number of combinations of circumstances that could have existed, the sub-clause authorises the Commissioner to determine the rebate under section 79A that would be reasonable in each circumstance, not being greater than the rebates applicable as from 1 November 1981 or less than those applicable before that date.

It may, for example, be appropriate to allow a rebate equal to the proportion of the new rebate levels that reflects the proportion which the number of days spent in a zone area after 31 October 1981 bears to 183, plus a proportion of the previous rebate levels equal to that which the number by which 183 exceeds the number of days spent in zone areas after 31 October 1981 bears to 183. For example, on that basis a taxpayer entitled to the dependent spouse rebate of $830 who lived in Zone A from 1 September 1981 or earlier (that is, for 61 days or more before 1 November 1981) until 2 March 1982 (that is for 122 days after 31 October 1981) could be entitled in his or her 1981-82 income tax assessment to one-third of the existing Zone A rebate and to two-thirds of the proposed new Zone A rebate, that is (in whole dollars) -

The amount determined under this sub-clause will, of course, be subject to any limitations that may be applicable under sub-section 23AB(9) or 79B(4) where a taxpayer is also entitled to a rebate under those sections.

Sub-clause (4) of clause 10 is also a transitional provision for 1981-82, to cover the situation where a taxpayer died during the period 1 July 1981 to 31 October 1981, that is, before the date from which the increased rebates commenced to apply, and resided in a zone area at the date of his or her death. In such cases a full rebate, at the level applicable to the relevant zone area up to 31 October 1981 will be allowed. Where a resident of a zone area dies after 31 October 1981, a full rebate at the rate applicable to the relevant area as from 1 November 1981 will be allowed by virtue of paragraph 79A(3B)(C).

Sub-clause (5) will, in effect, set 1 January 1981 as the date from which the modified residency tests proposed by new paragraphs 79A(3B)(d) and (e) (to be inserted by paragraph (c) of sub-clause 10(1) of this Bill) will apply. Therefore, when applying these modified tests, regard may be had only to periods of time spent in a zone area after 31 December 1980.

Sub-clause (6) is a further transitional provision applying for the 1981-82 income year. It sets out the basis for calculation of the rebate to be allowed under section 79A (subject to any limitation under sub-section 23AB(9) or 79B(4)) to a taxpayer who spent not more than half of the 1981-82 income year in a zone area but who qualifies as a resident of a zone area solely because of the modified residency test proposed by paragraph 79A(3B)(d), that is, a taxpayer who spends the required period of time (as from 1 January 1981) in a zone area over two consecutive income years.

Paragraph (a) of the sub-clause deals with the case where the taxpayer resided or actually was in a zone area after 31 October 1981. Because it is not practicable to specify the precise rebates that would be allowable in all of the possible combinations of periods and zones, the paragraph empowers the Commissioner to allow the rebate that is reasonable in each case. In these cases, as in those to which sub-clause 10(3) applies, the rebate could be an appropriate part of the proposed new rebate levels, together with an appropriate part at the previous rebate levels. Paragraph (b) of sub-clause (6) will apply where the taxpayer has not resided or been in a zone area after 31 October 1981. In such cases the rebate will be calculated at the rebate rates applicable up to 31 October 1981.

Clause 11: Rebates for members of Defence Force serving overseas

Clause 11 proposes certain amendments to section 79B of the Principal Act, which provides a rebate of tax for members of the Defence Force serving at certain overseas localities, in recognition of the uncongenial nature of service in, and the isolation of, the particular localities. A full rebate is allowable where the total period of service at the overseas localities is more than half the year of income, while a proportionate rebate is allowed where the period of service is not more than half the year of income. For this purpose, the total periods of overseas service of the taxpayer in the year of income includes any period in the year of income during which the taxpayer served as a Defence Force member in a zone area. Since its inception, the rebate authorised by section 79B has been comparable with that available to residents of Zone A under section 79A and, in line with the increase in the dependant component of the Zone A rebate, the dependant component of the rebate under section 79B is to be increased from 25 per cent to 50 per cent of the relevant rebate amount.

Paragraph (a) of sub-clause (1) will effect a drafting amendment to sub-section 79B(2), which sets out the rates at which rebates are allowable under the section, to make it clear that the section is to be read as a whole.

Paragraph (b) will amend sub-paragraph 79B(2)(a)(ii) to increase, from 25 to 50 per cent of the relevant rebates in respect of dependants, the dependant component of the rebate, which is added to the basic rebate amount of $216 to determine the amount of the rebate to be allowed.

Paragraph (c) proposes the omission of existing sub-section 79B(4), which limits the aggregate of the rebates allowable to a taxpayer in respect of a year of income under sections 79A and 79B to $216 plus the dependant component of 25 per cent, and the insertion of new sub-sections (4) and (4A).

Proposed new sub-section 79B(4), like the present sub-section (4), will limit the aggregate of the rebates allowable to a taxpayer in respect of a year of income under sections 79A and 79B, and will set a corresponding limit on the aggregate of rebates under sections 23AB and 79B. This will remedy an existing technical deficiency in the zone allowance and related provisions, which have included limits on the aggregate of rebates that may be allowed under sections 23AB and 79A, and under sections 79A and 79B, but not under sections 23AB and 79B. Reflecting the proposed increase in the dependant rebate component of the rebates allowable under sections 23AB and 79B, and to residents of Zone A under section 79A, the limit under new sub-section (4) will be the sum of $216 and an amount equal to 50 per cent of the relevant rebate amount.

Proposed sub-section 79B(4A) will provide for the new situation that a taxpayer, who qualifies for the proposed new special basic rebate of $750 under section 79A, may be entitled to a greater rebate under section 79A than that available under section 79B. In such a case, the taxpayer is to be allowed only the greater rebate under section 79A.

Sub-clause (2) proposes that, subject to the transitional provisions of sub-clauses (3) and (4), the amendments proposed by sub-clause (1) are to apply to assessments in respect of income of the 1981-82 and subsequent years of income.

Sub-clause (3) is a transitional provision (applicable only for the 1982 income year) which sets out the basis for the calculation of the rebate allowable to a taxpayer whose total period of service at overseas localities is more than one-half of the 1981-82 year of income, but whose service as from the commencement date of 1 November 1981 is not more than one-half of that year of income. In such a case, the rebate to be allowed under section 79B in the 1981-82 income year is to be calculated in accordance with the formula :

$216 + ((a*b)/(366)) + ((a*(183 - b))/(732))


where -

a is the sum of the rebates (if any) to which the taxpayer is entitled in respect of that year of income under sections 159J, 159K and 159L of the Principal Act or would be entitled in respect of that year of income under section 159J of that Act but for sub-section 159J(1A) of that Act; and

b is the number of whole days in the period of service of the taxpayer at overseas localities during that year of income and after 31 October 1981.

This will mean that a taxpayer in this situation will, subject to any limitation under sub-sections 79B(4) or (4A), be entitled to a proportion of the rebate at the higher level applicable as from 1 November 1981 based on the number of days of service at overseas localities after 31 October 1981, and a proportion of the lower rebate level applicable up to 31 October 1981, calculated having regard to that number of days of service prior to 1 November 1981 which, together with the number of days of service after 31 October 1981, total 183 days (that is, more than half the year of income).

Sub-clause (4) is a further transitional provision for 1981-82, to deal with the case where a taxpayer died while serving as a Defence Force member at an overseas locality during the period 1 July 1981 to 31 October 1981, that is, before the date from which the increased rebates commenced to apply. In such a case, a full rebate at the level applicable up to 31 October 1981 would be allowed. Where a taxpayer dies while serving as a Defence Force member at an overseas locality after 31 October, a full rebate at the level applicable as from 1 November 1981 will be allowable under paragraph 79B(2)(a) as amended by sub-clause (1) of this clause.

Clause 12: Certain beneficiaries deemed not to be under legal disability

This clause proposes to insert a new section - section 95B - in the Principal Act as a safeguarding measure to ensure that the intended operation of trust provisions of the Principal Act - in particular, sections 97 and 98 - as proposed to be modified by clauses 13 and 14, cannot be circumvented by the appointment as trustee of a person under a legal disability (e.g., an infant who cannot give a valid discharge).

The broad principle behind the provisions of the income tax law relating to the taxation of trust income is that trust income to which a beneficiary is presently entitled is either liable to tax in the hands of the beneficiary, or the trustee of the trust estate pays tax on such income at individual rates on behalf of the beneficiary. Trust income to which no beneficiary is presently entitled (broadly, accumulating income) is generally taxed in the hands of the trustee at higher rates.

The basic scheme of the existing income tax law is that the provisions in it that refer to a beneficiary under a legal disability do not include a beneficiary in the capacity of trustee of another trust estate. Rather the intention is that trust income to which a natural person who is under a legal disability is presently entitled is to be assessed to the trustee under section 98 of the Principal Act as if it were the income of an individual - that is, at personal rates of tax including the zero rate applying (in 1981-82) to the first $4,195 of income. If the beneficiary has other income then, under section 100 the individual beneficiary is to be taxed personally on both the trust income and the other income, credit being allowed for the tax paid by the trustee under section 98.

It appears possible that under some trust laws a person under a legal disability could hold office as trustee and, if the trust provisions of the income tax law were found not to accord with the intentions outlined above, that would open up possibilities for tax avoidance schemes of the kind that the amendments proposed by clauses 13 and 14 are directed against. Proposed section 95B is designed against this background, and seeks to remove any doubt that may exist as to the meaning of the relevant provisions of the income tax law.

Accordingly, sub-clause (1) of clause 12 will insert new section 95B which will expressly indicate that provisions in the Principal Act that refer to a beneficiary under a legal disability being presently entitled to income of a trust estate do not apply where the beneficiary concerned is beneficiary in the capacity of trustee of another trust estate.

The effect of section 95B will be to ensure that any income of a trust estate to which a beneficiary under a legal disability is presently entitled in the capacity of trustee of another trust estate will always be assessed by reference to the circumstances of that other trust estate. Section 98 will continue to apply to all other trust income to which an individual beneficiary under a legal disability is presently entitled.

By sub-clause (2) of clause 12, the new section 95B is, with one exception, formally to apply to assessments in respect of income of the 1982-83 and later income years. The exception is contained in sub-clause (3) of clause 12, the practical effect of which will be to limit any application of the new section 95B in the 1981-82 income year to cases where, on or after the date of introduction of the new section, a person under a legal disability becomes a beneficiary of a trust estate in the capacity of a trustee of another trust estate.

Clause 13: Beneficiary not under any legal disability

This clause proposes to amend section 97 of the Principal Act to extend its application to further categories of beneficiaries. These are beneficiaries who are deemed by sub-section 95A(2) of that Act to be presently entitled to income of a trust estate in which the beneficiary has a vested and indefeasible interest, but to which a present entitlement does not otherwise attach.

Sub-section 97(1) ordinarily requires that where a beneficiary who is not under a legal disability is presently entitled to a share of trust income, the beneficiary is to be directly liable for tax in respect of that share of the trust's net income. However, by virtue of sub-section 97(2) which was inserted in the law in 1980, sub-section 97(1) does not apply to trust income in which a beneficiary (other than a beneficiary who has made, or is deemed to have made, an income equalisation deposit) has a vested and indefeasible interest and in respect of which the beneficiary is deemed by sub-section 95A(2) to be presently entitled. The income so excluded from the application of sub-section 97(1) is instead taxed in the hands of the trustee - at individual rates of tax including the zero rate applying, for the 1981-82 income year, to the first $4,195 of income - under sub-section 98(2) of the Principal Act (see clause 14.)

A tax avoidance scheme has been developed, based on a view that the above provisions operate where the beneficiary deemed to be presently entitled is a beneficiary other than an individual, e.g., a company or a beneficiary in the capacity of a trustee of a further trust estate. More specifically, the scheme relies on the creation of a head trust with multiple beneficiaries that are trustees of trust estates each with an indefeasible vested interest in a share of the income of the head trust amounting to less than the tax threshold arising from the zero-rate, and thus claimed to be entirely tax-free. The amendment proposed by clause 13 is intended to ensure that this scheme does not have its intended efficacy.

Sub-clause (1) of clause 13 will give effect to this intention by substituting a new sub-section 97(2) in the Principal Act to restrict the categories of beneficiaries deemed by sub-section 95A(2) to be presently entitled to trust income, and who are excluded from taxation under section 97, to beneficiaries who satisfy each of the tests specified in the new sub-section. That is, they must be natural persons, must not, in respect of particular income be a beneficiary in the capacity of trustee of another trust estate, and must have not made or been deemed to have made an income equalisation deposit. Where any one of these tests is not satisfied, e.g., if the beneficiary is a company or is beneficiary in the capacity of trustee of another trust estate, the income to which the beneficiary is deemed to be presently entitled will be taxed to the beneficiary directly at rates appropriate to the beneficiary's status and circumstances and not to the trustee under section 98 as if it were the income of an individual.

By sub-clause (2) of clause 13, the amendments made by sub-clause (1) will apply, subject to sub-clause (3), in relation to income of a trust estate of the income year of the trust estate in which 28 August 1981 occurred and of all subsequent income years. However, proposed sub-clause 3 will, in effect, limit the operation of the amendments in relation to 1981-82 trust income, to income that, but for the amendment proposed by sub-clause (1), would not have been assessed under section 97. In broad terms, the amendments will apply to a proportion of such trust income of the 1981-82 income year equal to the proportion which the number of days from 27 August 1981 (the date on which the amendments proposed by clauses 13 and 14 were announced) to the end of that income year bears to 365.

Paragraph (a) of sub-clause (3) introduces the term "relevant amount", which refers to an amount of trust income to which a beneficiary who is not under a legal disability is, or is deemed to be, presently entitled and which will be included in the beneficiary's assessable income for the income year in which 28 August 1981 occurred - the transitional year - under section 97 as amended by sub-clause (1) in relation to that income year.

Paragraph (b), in effect, identifies that part of the "relevant amount", if any, to which the beneficiary has a deemed present entitlement by virtue of the operation of sub-section 95A(2) and in respect of which the trustee of a trust estate would have been assessed and liable to pay tax under sub-section 98(2) in the transitional year had it not been for the amendments being made by sub-clause (1) and clause 14.

Sub-paragraph (i) of paragraph (b) deals with the situation which arises where the "relevant amount" is comprised solely of trust income to which the beneficiary has a deemed present entitlement under sub-section 95A(2). Sub-paragraph (ii) of paragraph (b) is concerned with the situation where the "relevant amount" is comprised of trust income to which the beneficiary has a deemed present entitlement under sub-section 95A(2) together with other trust income to which he or she has a present entitlement. The former amount is referred to in sub-paragraph (b)(ii) as the "prescribed part".

Where there is an amount of trust income to which paragraph (b) applies an apportionment is to be made, in accordance with either paragraph (c) or paragraph (d) of sub-clause (3), to exclude part of that amount from the operation of sub-section 97(1). Where that amount is the "relevant amount" (i.e., sub-paragraph (b)(i) applies), then paragraph (c) operates to reduce the "relevant amount" by an amount which bears to the "relevant amount" the same proportion as the number of whole days in the period commencing on the first day of the particular income year and ending on 27 August 1981 bears to 365.

Where sub-paragraph (b)(ii) applies, the same basis of apportionment would apply to the "prescribed part" by virtue of paragraph (d) of sub-clause (3).

Clause 14: Beneficiary under legal disability or having indefeasible vested interest

Sub-clause (1) of clause 14 proposes amendments to section 98 which are necessary to complement the amendment proposed by clause 13 to include, under sub-section 97(1), in the assessable income of beneficiaries who are not natural persons or who are natural persons acting in the capacity of trustees of further trust estates, trust income to which they are deemed to be presently entitled by virtue of the operation of sub-section 95A(2).

As indicated previously, sub-section 98(1) operates to tax in a trustee's hands trust income to which a beneficiary who is under a legal disability is, or is deemed to be, presently entitled, while existing sub-section 98(2) extends the operation of the section to include income to which a beneficiary is deemed to be presently entitled under sub-section 95A(2), where that beneficiary is not under a legal disability.

Paragraph (a) of sub-clause (1) will make the substantive amendment required to sub-section 98(2) of the Principal Act - by inserting a new paragraph, paragraph (aa) - to limit the application of the sub-section to a beneficiary not under a legal disability who is a natural person and who, in relation to trust income to which he or she is deemed to be presently entitled under sub-section 95A(2), is not a beneficiary in the capacity of trustee of another trust estate.

In other words, new paragraph 98(2)(aa) will exclude from assessment under section 98 the income of a beneficiary that by reason of proposed new sub-section 97(2) is to be assessed under sub-section 97(1) (see notes on clause 13).

Paragraph (b) of sub-clause (1) will omit sub-sections 98(3) and (4) from the Principal Act. Existing sub-section 98(3) ensures that trust income in respect of which an exempt body, association, etc., has a vested and indefeasible interest and is deemed to carry present entitlement under sub-section 95A(2), is not taxed in the hands of the trustee under sub-section 98(2) as if it were the income of an individual. To ensure that such income is not exposed to tax under section 99A as trust income not liable to be assessed under either section 97 or 98, sub-section 98(4) provides that a trustee is to be regarded, in the application of other sections of the Act (e.g., section 99A), as if he or she had been liable to be assessed and to pay tax under section 98 on such income.

As proposed, new sub-section 97(2) will no longer operate to exclude from the operation of sub-section 97(1) trust income to which an exempt body is deemed to be presently entitled, such income will in future be dealt with under sub-section 97(1) in the same way as trust income to which such a body is, in fact, presently entitled, i.e., exempt from tax in the body's hands by virtue of the operation of the relevant exempting provisions such as those contained in section 23 of the Principal Act. Thus the need for sub-sections 98(3) and 98(4) will no longer exist.

By sub-clause (2) of clause 14 the amendments made by sub-clause (1) will, subject to sub-clause (3), apply in assessments for the income year in which 28 August 1982 occurs and all subsequent years of income.

But for sub-clause (3), the effect of sub-clause (2), in conjunction with sub-clause 13(2), could be that, for the income year in which 28 August 1981 occurred, sub-section 97(1) and existing sub-section 98(2) may both apply to the same share of the net income of a trust estate in which a beneficiary has a vested and indefeasible interest under sub-section 95A(2). This situation could arise if income in which a beneficiary other than a natural person, or a natural person acting as a trustee of a further trust estate, had a vested and indefeasible interest, would have been assessed in that year under sub-section 98(2).

Sub-clause (3) of clause 14 will, however, ensure that only that part of such trust income which is excluded from assessment under sub-section 97(1) in the 1981-82 income year - the transitional year - by virtue of the operation of sub-clause 13(3), will fall to be assessed under sub-section 98(2) in that income year.

By paragraphs (a) and (b), sub-clause (3) will apply to a beneficiary's share of the net income of a trust estate in respect of which the trustee of a trust estate would be liable to be assessed and to pay tax under existing sub-section 98(2) in the transitional year, but in respect of which the trustee would not have been so liable had the amendments to sub-section 98(2) applied in that year.

Where it applies, sub-clause (3) will operate to reduce the amount to be assessed under sub-section 98(2) in the transitional year by an amount which bears to that amount the same proportion as the number of whole days in the period commencing on 28 August 1981 and ending on the last day of that income year bears to 365. Accordingly, if the particular income year commences on 1 July 1981, the amount to be excluded from liability to tax under sub-section 98(2) will be that amount of trust income to which the sub-section has application in the transitional year but to which it would not apply if proposed paragraph 98(2)(aa) were in force in that year, multiplied by

(307)/(365)


. Conversely, the amount to which section 98(2) would have application in the transitional year is the abovementioned amount, multiplied by

(58)/(365)


.

Clause 15: Present entitlement arising from reimbursement agreement

This clause proposes an amendment to section 100A of the Principal Act which is consequential upon the amendment proposed by clause 13 to include, under sub-section 97(1) in the assessable income of a beneficiary who is not a natural person or who is a natural person acting as a trustee of a further trust estate, trust income to which the beneficiary is deemed presently entitled under sub-section 95A(2).

Broadly speaking, the anti-avoidance provisions of section 100A treat a beneficiary who becomes presently entitled to income of a trust estate under a reimbursement agreement as not having been presently entitled to that income. The effect of this is that the income is then taxed in the hands of the trustee under section 99A at the maximum rate of personal tax - 60 cents in the dollar in 1981-82.

Existing sub-paragraph 100A(4)(a)(i) ensures that whenever the circumstances for the application of section 99A are raised by the operation of sub-section 100A(1) or (2), section 99A will apply notwithstanding that sub-section 98(4) provides, in effect, that trust income of an exempt body, association, etc. to which section 98(3) refers is to be regarded as having been assessed and liable to tax under section 98 and thereby not subject to tax under section 99A.

Because it is proposed by clause 14 to omit sub-sections 98(3) and (4) with effect for the income year in which 28 August 1982 occurs, the operation of sub-paragraph 100A(4)(a)(i) will no longer be necessary from the commencement of that year. Accordingly, sub-clause (1) proposes to amend section 100A of the Principal Act by omitting paragraph 4(a) and substituting a revised paragraph that omits the reference to sub-section 98(4).

By sub-clause (2) of clause 15, the amendment proposed by sub-clause (1) will apply to assessments for the income year in which 28 August 1982 occurs, and subsequent income years.

Clause 16: Employment income and business income

Sub-clause (1) of clause 16 proposes to amend the definition of "business income" in sub-section 102AF(3) of the Principal Act to remedy a possible deficiency in one of the safeguards in the system that was introduced in 1980 for taxing income of minor children and under which, subject to important exceptions, income derived by a minor, either directly or through trusts, is taxed at the minimum rate of 46 per cent (in 1981-82), subject to a lower tax threshold of $1,040.

One category of income that is excepted from that system (and thereby subject to tax at the ordinary individual rates and tax threshold) is employment income derived by a minor from his or her own employment. It is claimed that, in certain circumstances, where income is derived by a trust estate from the provision of services by its employees and distributed to a minor beneficiary, that income is excepted employment income. The amendment proposed by clause 17 of the Bill will make it clear that this contention is no longer tenable.

While that amendment will clarify the situation regarding distributions of income from services rendered by a trust estate, it points up a corresponding question in relation to safeguarding provisions under which the Commissioner of Taxation may, for purposes of the legislation, review the amount of income derived by a minor from carrying on a business either alone or in partnership with others.

If it were the technical position that income from services rendered is always employment income, then, because the definitions of "business income" and "employment income" are mutually exclusive, provisions in sub-section 102AE(5) permitting scrutiny of the level of "business income" of a minor would not permit scrutiny of the level of income from carrying on a business of providing services.

To remove any doubts on this score, the amendment being made by sub-clause (1) of this clause will remove the exclusion of employment income from the definition of business income, so ensuring that income derived by a minor from carrying on a business of providing services will clearly be within the "business income" definition and so subject to the application of the safeguarding provisions.

By sub-clause (2) of clause 16, the amendment is to have effect in relation to income derived after the date of introduction of the Bill.

Clause 17: Trust income to which Division applies

Sub-clause (1) of clause 17 proposes to amend section 102AG of the Principal Act by inserting new sub-section (5A), to clarify the field of application of paragraph 102AG(2)(b).

Section 102AG extends the application of the special system for taxing certain income of minors to income that a minor derives through a trust. The section sets out the circumstances in which, and the extent to which, trust income is to be subject to tax under that system. Excluded from the operation of the system (and its higher tax rates) is "excepted trust income" and sub-section 102AG(2) specifies the various categories of assessable income which, subject to the other provisions of the section, may be treated as excepted trust income. One of those categories is listed at paragraph 102AG(2)(b) as employment income.

By paragraph (b) of the definition of employment income in sub-section 102AF(1) of the Principal Act, employment income includes payments made for services rendered or to be rendered. As indicated in the notes on clause 16, it is this part of the definition, which was intended to provide an exemption from the new system for income derived by a minor from his or her own employment or services, upon which claims have been based that income received by a minor from a trading trust, being payments for services rendered by the trust's employees, is excepted trust income. The amendments proposed will put beyond doubt the original intention of the legislation.

Proposed new sub-section (5A) will indicate expressly that the definition of employment income in paragraph 102AF(1)(b), as it applies for the purposes of paragraph 102AG(2)(b) in relation to a beneficiary of a trust estate, is confined to services rendered or to be rendered by the beneficiary.

By sub-clause (2) of clause 17, the amendment made by sub-clause (1) will apply for the purpose of determining the extent, if any, to which the system applies to a share of a beneficiary of trust income of the year of income of the trust estate in which 28 August 1981 - the date following that on which it was announced that this amendment would be made - occurred, and subsequent income years.

However, in accordance with the announcement that the proposed measures would apply to income derived after 27 August 1981, sub-clause (3) provides for the apportionment on a time basis of trust income to which the amendment applies during the 1981-82 transitional year.

Sub-clause (3) requires that an amount of trust income referred to as the "relevant amount", be determined. That is the amount included in the assessable income of a trust estate for the transitional year which would have been employment income (and therefore excepted trust income) for that year were it not for the amendment made by sub-clause (1), but which would not by virtue of that amendment, and apart from this sub-clause, be treated as excepted trust income for that year.

Sub-clause (3) then deems so much of the "relevant amount" as bears to the "relevant amount" the same proportion as the number of whole days in the period commencing on the first day of the year of income and ending on 27 August 1981 bears to 365 to be excepted trust income.

Thus, if the income year in which 28 August 1981 occurred commenced on 1 July 1981, the effect of sub-clause (3) would be to deem an amount equal to the "relevant amount", multiplied by

(58)/(365)


to be income that is to be treated as excepted trust income in that year.

Clause 18: Diverted income and diverted trust income

This clause proposes amendments to section 121G of the Principal Act which are also consequential on the amendment proposed by clause 13 to bring within the operation of section 97 trust income to which a beneficiary, who is not a natural person or who is a natural person acting as trustee of a further trust estate, is deemed presently entitled under sub-section 95A(2).

Section 121G is an anti-avoidance measure which deals with tax avoidance schemes that were devised to divert otherwise taxable income to an exempt body. If it is established that the income is "diverted income", the exempt body or, in the case of a trust estate, the trustee, is liable to tax at the top marginal rate of personal tax - 60 cents in the dollar in 1981-82 - on that income.

Sub-section 121G(7) includes as diverted income of a trust estate, income in which an exempt body has, under a tax avoidance agreement, a vested and indefeasible interest, and thus a deemed present entitlement under sub-section 95A(2), but on which the trustee is not liable to be assessed under sub-section 98(2) because of the effective exemption provided by sub-section 98(3).

As the measures proposed by clause 13 of the Bill will bring trust income in which an exempt body has a vested and indefeasible interest within the operation of section 97, the function performed by sub-section 121G(7) will no longer be necessary. Sub-section 121G(3), which deals with the acquisition of an interest in a trust estate by a beneficiary who is presently entitled to that interest will then cover those cases to which sub-section 121G(7) has hitherto applied.

Accordingly, paragraph (a) of sub-clause (1) proposes the omission of sub-section 121G(7) from the Principal Act, together with the omission of sub-section 121G(9) which applies solely in relation to sub-section 121G(7).

Paragraph (b) of sub-clause (1) proposes a minor technical amendment to sub-section 121G(10) consequent upon the proposed omission of sub-section 121G(9).

Because of the transitional measures proposed for the income year in which 28 August 1981 occurred under clauses 13 and 14, each of sub-sections 97(1) and 98(2) will apply to part of 1981-82 trust income to which an exempt body is deemed to be presently entitled. While sub-sections 121G(3) and (8) will apply to such income to which sub-section 97(1) applies, there will be a need for sub-section 121G(7) and 121G(9) also to remain in place for the 1981-82 income year.

By sub-clause (2) of clause 18, therefore, the amendments made by sub-clause (1) will apply in relation to income of a trust estate of the income year of the trust estate in which 28 August 1982 occurs, and subsequent income years.

Clause 19: International agreements and determination of source of certain income

Introductory note

Clause 19 proposes the repeal of Division 13 (section 136) of Part III of the Principal Act and the substitution of a revised Division 13, the purpose of which is to combat avoidance of Australian tax through international transfer pricing and other profit shifting arrangements. It will complement the operation of Part IVA of the Principal Act.

The revised measures are described in broad outline at the beginning of this memorandum under the heading "International tax avoidance". A brief outline of the structure of the proposed Division 13 is given below, in order to assist understanding of the subsequent detailed explanation of each proposed section:

Two major associated amendments are contained in clauses 21 and 23 of the Bill. These are:

The amendments proposed by clause 22 to section 193 of the Principal Act will ensure that any additional tax in these cases will be subject to review by an independent Taxation Board of Review.

Notes on the proposed provisions of the revised Division 13 being inserted by sub-clause 19(1) follow.

Section 136AA : Interpretation

This section contains a number of definitions and other interpretive provisions. Each term defined in these provisions will have the given meaning, unless the contrary intention appears.

By sub-section (1), "acquire" is defined widely to include various means by which something may be acquired. In this Division, the term is used in relation to acquisition of property which in turn is defined to include services. The definition is expanded in its operation by paragraph 136AA(3)(a).

The definition of "agreement" in sub-section (1) is drafted in a way that covers the various forms in which profit shifting arrangements between both related and unrelated parties may be found. It will include any agreement, arrangement, transaction, understanding or scheme, whether formal or informal, express or implied and whether or not legally enforceable or intended to be legally enforceable.

The term"'derive" is expressed to include gain or produce.

The term "expenditure" is defined to include losses and outgoings, so that the revised Division will be applicable to provisions of the Principal Act that are concerned with losses and outgoings, e.g., section 51.

"Income" as defined for purposes of the Division to include any amount that is, or may be, included in assessable income or taken into account in calculating an amount that is, or may be, included in assessable income.

"Permanent establishment" in relation to a taxpayer is to have the same meaning as that term is given in section 6 of the Principal Act. Its basic meaning there is a place through which a business is carried on by a taxpayer, e.g., a branch. The term will also include a place at which any property of a taxpayer is manufactured or processed for the taxpayer, whether by the taxpayer or some other person. A provision to this general effect is a standard part of the definition of "permanent establishment" contained in Australia's double taxation agreements.

"Property" is widely defined to cover the various legal forms of interest in property as well as any "right to receive income" and "services", which terms are also defined for purposes of the Division.

"Right to receive income" is defined, as in other anti-avoidance provisions, to mean not only a right of a person to have income that will or may be derived (from property or otherwise) paid to the person, but also a right to have the income applied or accumulated for the benefit of that person. Such rights are included in the definition of "property" for the purposes of Division 13.

The term "services" is defined to include any rights, benefits, privileges or facilities. The definition also expressly includes rights that are or are to be provided, granted or conferred under specified types of agreements including, broadly, agreements for the performance of work, the provision, use or enjoyment of entertainment facilities, the lending of moneys or provision of insurance or banking facilities, the conferring of rights, benefits or privileges for which consideration is payable in the form of royalties, and the carriage, storage or packaging of property.

"Supply" is defined in basically complementary terms to "acquire''. The definition is also expanded in its operation by paragraph 136AA(3)(a).

The term "taxpayer" has its ordinary meaning under the Principal Act and expressly includes a partnership or a taxpayer in a trustee capacity. By defining the term in this way, it is made clear that the new provisions are intended to be applied in calculating the net income of a partnership or trust estate, for purposes of determining income tax liabilities of partners, trustees and beneficiaries.

The object of proposed sub-section 136AA(2) is to indicate that the definition of "taxpayer" just referred to is not to carry implications for the interpretation of that expression when used elsewhere in the Act.

Proposed sub-section (3) is a provision of considerable importance as, among other things, it defines the meaning of "arm's length consideration", a concept central to the operation of the Division.

As noted above in relation to the definitions of "acquire" and "supply", paragraph (a) expands the scope of those terms to include situations where there is not a supply or acquisition of property but an agreement to supply or acquire property, thereby permitting the application of the Division at that stage if the other tests are satisfied, and the transactions have an effect on the taxpayer's taxable income.

The object of paragraph (b), in effect, is to make it clear that in situations where any consideration arising under an agreement is not in monetary terms, the amount of consideration to be taken into account for the purpose of application of the Division is an amount equal to the value of any property supplied or acquired as consideration under the agreement.

Paragraphs (c) and (d) define the meaning of the term "arm's length consideration", in relation to a supply or acquisition of property, for the purposes of sub-sections 136AD(1) to 136AD(3). In a case where the question at issue is the supply of property, the term will mean the consideration that might reasonably be expected to have been received or receivable in respect of the supply, if the property had been supplied under an agreement between independent parties dealing at arm's length with each other in relation to the supply. Where the case is one of the acquisition of property, the arm's length consideration will, correspondingly, be the consideration that might reasonably be expected to have been given or agreed to be given in respect of the acquisition if it had occurred under such an agreement. The "arm's length principle" is embodied in each of Australia's double taxation agreements with other countries.

In the application of the arm's length principle as it will apply in the Division to a supply or acquisition of property under an international agreement, there are two aspects to be examined. First - by reason of provisions in section 136AD (e.g., paragraph 136AD(1)(b)) - it will be necessary to establish whether the parties to the agreement were dealing with each other at arm's length in relation to the particular supply or acquisition. If they were dealing at arm's length, the Division will have no application to that supply or acquisition. However, if the parties were not dealing at arm's length, the second step will be to consider whether the consideration applicable to the particular supply or acquisition was the arm's length consideration. In these cases, the Division will only be capable of applying if the consideration involved is not the arm's length consideration. The practical application of the arm's length principle as it applies to the supply or acquisition of property is discussed in more detail in the notes on section 136AD.

There are a number of methods by which an arm's length consideration might be calculated. The more commonly accepted of these are what are called the "comparable uncontrolled price method", the "cost plus" method and the "resale" method. Which of these or other methods might appropriately be adopted in a particular case, and the way in which it is applied, will depend upon all the circumstances. For example, in relation to a transaction between related parties for the supply of a particular item of property that is traded exclusively within the group, no comparable uncontrolled price may be found. It would therefore be necessary to seek to establish the arm's length consideration for the particular property by some other method. (However, the Commissioner is to have, under sub-section 136AD(4), a residual power to determine an arm's length consideration where, for any reason, it is not possible or practicable to calculate an arm's length consideration under either paragraph (c) or (d).)

Paragraph (e) is a safeguarding measure to ensure that a supply or acquisition of property that is technically not made under an agreement, but nevertheless occurs in connection with the agreement, is to be brought within the scope of the Division.

Section 136AB : Operation of Division

The basic purpose of proposed section 136AB is to give to Division 13 an overriding operation in relation to the general provisions of the Principal Act, similar to that of Part IVA.

It is not proposed that Division 13 will override the Income Tax (International Agreements) Act 1953. The double taxation agreements which appear as Schedules to that Act contain their own provisions to deal with profit shifting arrangements which occur in an agreement context, and these provisions are based on application of the arm's length principle.

The revised Division will permit adjustments to the assessable income and allowable deductions of a taxpayer where the conditions outlined in sections 136AD or 136AE are satisfied. Sub-section 136AB(1) will mean that the ability to make these adjustments is not to be limited by anything contained in any other provision of the Principal Act.

Because section 31C of the Principal Act, which deals with cases in which trading stock is purchased for more than an arm's length consideration, is technically capable of application to some of the transactions proposed to be covered by the revised Division, sub-section (2) deals with the specific question of section 31C. Section 136AB will thus make it clear that, in any case where either section 31C or Division 13 otherwise could apply, the potential operation of section 31C is to be disregarded, thus leaving Division 13 to operate alone, so that it will apply comprehensively in the international area.

Section 136AC : International agreements

It is not the intention of the proposed Division that it should apply to purely domestic transactions, where both the supply and acquisition sides of a transaction affect Australian tax. For the Division to apply, there will need to be an international element, that is, a situation where, broadly, transfer pricing arrangements result in a shifting overseas of profits that would otherwise have been taxable in Australia.

Proposed section 136AC identifies those agreements that could result in a shifting of profits overseas. It will be in these cases only that the provisions of the Division authorising the substitution of arm's length prices may be applied.

Under paragraph (a) of section 136AC, an agreement will be an "international agreement" (in relation to a resident or a non-resident taxpayer) if a non-resident supplied or acquired property under the agreement otherwise than in connection with a business carried on in Australia by the non-resident at or through a permanent establishment, as defined in section 136AA, of the non-resident in Australia.

This will mean, for example, that it will not be an international agreement where a non-resident, in carrying on business in Australia through an Australian branch, acquires property or services in Australia from a resident of Australia, or from another non-resident who supplies the property in connection with a business which that non-resident carries on in Australia through an Australian branch. In such a case, both sides of the transaction would have equal, but offsetting, effects in the Australian taxation of the parties concerned, and the new Division would not, and does not need to, concern itself with it.

On the other hand it would be an international agreement if the non-resident in the above example had acquired the property from a non-resident who supplied it in connection with a business carried on by that latter non-resident outside Australia - in such a case an acquisition/supply of the property at an inflated price would have the effect of shifting profits out of Australia.

Paragraph 136AC(b) deals with a different situation and treats as an international agreement an agreement under which an Australian resident, who is carrying on business outside Australia, has in connection with that business supplied or acquired property. In such cases the supply or acquisition of property, whether to or from other residents of Australia, or non-residents carrying on business in Australia, at non-arm's length prices can be used to shift out of Australia profits that otherwise would be subject to Australian tax.

Section 136AD : Arm's length consideration deemed to be received or given

Section 136AD is the "reconstruction" provision of the revised Division. Where it applies, it will permit the Commissioner of Taxation to substitute an arm's length consideration in relation to a supply or acquisition of property for the consideration, (if any) disclosed in a return of income as being income derived or expenditure incurred by a taxpayer.

Sub-sections (1) and (2) deal with a non-arm's length supply of property, and sub-section (3) deals with a non-arm's length acquisition of property. Where the sub-sections are applied, the substituted arm's length prices will be used in calculating the taxpayer's taxable income under relevant provisions of the Principal Act. However, none of the sub-sections will have application unless specified pre-conditions are satisfied.

The first condition in each case (paragraph (a)) is that property, which for the purposes of the Division includes services, has been, or has been agreed to be supplied or acquired under an international agreement - see notes on section 136AC.

Another condition in each case (paragraph (b)) is that the Commissioner, having regard to any connection between any two or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties, or any two or more of the parties, to that agreement were not dealing at arm's length with each other in relation to the supply or acquisition of the property.

The reference to any connection between parties to the agreement means that it would be appropriate, for example where the parties concerned are companies, to take into account whether they were members of the one company group or had substantially the same persons as shareholders or directors, or had other links. However, the fact that parties to an agreement were related would not of itself require the Commissioner to conclude that the parties were not dealing at arm's length in relation to a particular supply or acquisition of property.

On the other hand, just as related parties to an agreement may deal with one another on an arm's length basis, there can be cases where formally unrelated parties to an agreement do not deal with one another on an arm's length basis, viewed simply in relation to a particular supply or acquisition of property. This could be the case where the particular transaction which reduces a taxpayer's Australian income is offset by benefits under another seemingly unrelated agreement, which may accrue abroad,and perhaps to an associate of the taxpayer.

A third condition (paragraph (c) in each case) is concerned with whether the consideration for the supply or acquisition accords with the arm's length consideration. This condition is formulated in varying ways, as appropriate, in each of sub-sections (1) to (3).

A fourth condition in each case (paragraph (d)) is that the Commissioner determine that the provisions should apply. Application is not mandatory and the intent of the condition is to enable the Commissioner to have regard to whether the use of non-arm's length prices has resulted in a shifting of taxable income from Australia.

Turning to each of the sub-sections, sub-section 136AD(1) will deal with the case where a taxpayer has supplied property under an international agreement, where the Commissioner is satisfied that 2 or more of the parties were not dealing at arm's length in relation to the supply and, while consideration was received or receivable in respect of the supply, it was less than the arm's length consideration, as defined.

Where these conditions of sub-section 136AD(1) are satisfied and the Commissioner determines that the sub-section is to apply, the arm's length consideration is to be deemed to have been the consideration received or receivable by the taxpayer, for all purposes of the application of the Principal Act in relation to the taxpayer. The substituted amount of consideration would be taken to be the amount of income derived by the taxpayer in relation to the particular supply and, under ordinarily-applicable provisions, included in the taxpayer's assessable income.

It could, however, be the case that the substituted consideration might not in its entirety appropriately constitute assessable income of the taxpayer. For example, if the taxpayer is a non-resident, the basic principle of the Principal Act, and one that is to be respected by the revised Division, is that only so much of a given amount of income as is derived from sources in Australia is to be included in the taxpayer's assessable income. (A related need to determine the Australian and ex-Australian source components of income derived by a taxpayer may arise if the taxpayer is a resident of Australia.)

For such cases, a link between the substituted consideration and the amount that is to be included in assessable income is to be provided by proposed section 136AE. It will enable the consideration to be allocated to its Australian-source and foreign-source components.

Any decision by the Commissioner of Taxation to apply this provision, or indeed any of the provisions of the revised Division, will of course be subject to the usual rights of objection and reference to an independent Taxation Board of Review. An aggrieved taxpayer will also have usual rights of appeal to the Courts.

Sub-section 136AD(2) will apply where the circumstances are the same as those described in relation to sub-section 136AD(1) above, except that no consideration at all was received or receivable by the taxpayer in respect of the supply. An example is a case where a resident company makes an interest-free loan to an associated company resident in another country, in circumstances where if the loan had been made in arm's length dealings interest would have been charged.

Where the Commissioner determines that sub-section 136AD(2) is to apply, consideration equal to the arm's length consideration in respect of the supply will be deemed to have been received and receivable by the taxpayer at the time when the property was supplied, or, as the case requires, any of the property was first supplied, or at such later time or times as is appropriate.

Again taking an interest-free loan as an example, these provisions could be applied to treat an arm's length amount of interest as having been received and receivable at the times when interest might reasonably be expected to be so received on an equivalent arm's length loan. Or, where property was supplied at different times under an agreement for no consideration, the arm's length consideration could be treated as having been received and receivable at the times when payment might be expected to have been received in respect of supplies at the same dates under an arm's length agreement.

Sub-section 136AD(3) is to the same broad effect, in relation to the acquisition of property, as is sub-section 136AD(1) in relation to supply.

In broad terms, the sub-section will apply where a taxpayer has acquired property under an international agreement, the Commissioner is satisfied that 2 or more of the parties to the agreement were not dealing at arm's length in relation to the acquisition, the consideration given or agreed to be given in respect of the acquisition exceeds the arm's length consideration, and the Commissioner determines that the section should apply.

An example of a situation where sub-section (3) would be relevant is one where profits have been shifted out of Australia through the technique of a person carrying on business in Australia purchasing trading stock from an overseas affiliate at an inflated price.

Where the sub-section is applied, consideration equal to the arm's length consideration will be deemed, for all purposes of the application of the Principal Act in relation to the taxpayer to have been the consideration given or agreed to be given by the taxpayer. Substitution of the lower arm's length price will have the broad effect of reducing the amount of deductions taken into account in calculating under the provisions of the Principal Act, the taxpayer's taxable income.

That is, instead of the taxpayer being assessed on the basis of the expenditure actually incurred, the assessment will proceed on the basis that only the arm's length consideration was incurred. If the case is one where that reduced consideration relates to income derived by the taxpayer partly from sources in Australia and partly from sources out of Australia, and in the application of general principles of the Principal Act only the amount that relates to Australian source (assessable) income is deductible, section 136AE will provide rules for determining the amount that is to be taken as so related.

Turning to another aspect of section 136AD, there will be circumstances in which it is not possible or not practicable for the Commissioner to ascertain the arm's length consideration in relation to a particular supply or acquisition of property in accordance with the defined meaning in paragraphs 136AA(3)(c) and (d). Such circumstances might arise where, for example, the industry is so controlled and structured that there are no comparable arm's length dealings in relation to property of the same kind, or there are no comparable dealings in the same quantities as that supplied or acquired under the agreement. They could also arise if, though there are comparable dealings, details of them are held back from or otherwise not available to the Commissioner.

To deal with situations of this kind, sub-section 136AD(4) provides that where, for any reason, including an insufficiency of information available to the Commissioner of Taxation, it is not possible or not practicable for the Commissioner to ascertain the arm's length consideration in respect of a supply or acquisition of property, the arm's length consideration shall be deemed to be such amount as the Commissioner determines.

This provision carries into the revised Division powers,to deal with such circumstances, that are conferred on the Commissioner by existing section 136. That section specifies that the Commissioner may levy tax on such amount of total receipts of the business as he determines. That provision has been interpreted as primarily requiring application of principles not materially different from the arm's length principle.

Each one of Australia's comprehensive double taxation agreements contains provisions that, against the background of a basic requirement to apply the arm's length principle, sanction application of Division 13 in cases where relevant information is not available to the Commissioner. For example, paragraph (3) of Article 7 of the Australia/U.K. agreement reads -

"(3) If the information available to the taxation authority concerned is inadequate to determine, for the purposes of paragraph (1) of this Article, the profits which might be expected to accrue to an enterprise, nothing in this Article shall affect the application of the law of either territory in relation to the liability of that enterprise to pay tax on an amount determined by the exercise of a discretion or the making of an estimate by the taxation authority of that territory. Provided that such discretion shall be exercised or such estimate shall be made, so far as the information available to the taxation authority permits, in accordance with the principle stated in that paragraph."

Section 136AE : Determination of source of income, etc.

This section has two basic functions in determining questions of source in relation to both income derived and expenditure incurred by a taxpayer. The first of them is to determine source questions which may arise following the application of section 136AD to substitute arm's length prices in respect of the supply or acquisition of property by a taxpayer. Where section 136AD has been so applied, a question may arise as to whether, and if so, as to the extent to which, income consisting of arm's length consideration deemed to have been received has a source in Australia or in another country, or whether consideration deemed to have been given was expenditure incurred in deriving income from sources in or out of Australia.

The section's second basic function is to deal with the situation of a taxpayer carrying on business in one country and, which as the same legal entity, has one or more branch offices (or "permanent establishments") in another country or countries through which the business is also carried on. The problem to which it provides a response is essentially the same as the problem of profit shifting between separate entities to which section 136AD is directed. Technically, section 136AD cannot apply because any profit shifting in this case is internal, between a head office and its branch or branches, or between branches.

The problem can be illustrated by the case of a non-resident taxpayer, carrying on business in Australia through a branch, which allocates an excessive part of its expenses to the conduct of the income earning activities in Australia. For example, if $100 of expenses were incurred at arm's length in the conduct of the business both abroad and in Australia, and the whole $100 was charged as a cost to the Australian branch of the business, there would be a shifting of profits from Australia, because part only of the $100 is appropriately related to the Australian activities. In such a case, section 136AE would permit an adjustment to be made to the expenses claimed, in accordance with the rules established in the section.

Each of the basic functions is within the scope of existing section 136 - it allows re-construction of taxable income (which, simply put, is the result of deducting from assessable income the part of expenditure that relates to that income) and, being related to a business carried on in Australia, permits re-construction of the taxable income of that business. Moreover, each of these functions is, in the situations with which those agreements deal, carried out by provisions in each of Australia's comprehensive double taxation agreements with other countries - see, for example, paragraph (3) of Article 5 and Article 7 of the Australia/U.K. agreement.

Sub-sections 136AE(1), (2) and (3) will deal with "source" questions in those cases where section 136AD has been applied by the Commissioner of Taxation following his determination of an arm's length consideration. The three sub-sections apply where the "taxpayer" is, respectively, a taxpayer other than a partnership or trustee (sub-section (1)), a partnership (sub-section (2)) or a trustee (sub-section (3)), and are all to the same general effect. In each case where questions as to source arise, the Commissioner is to have regard to the guidelines, pointing towards an arm's length result, specified in sub-section 136AE(7). On that basis, he is to determine from what source, or from what sources and in what proportions, income, or income in the derivation of which expenditure is incurred, is to be taken, for all purposes of the Principal Act, to have been derived or incurred.

It is necessary to provide separate sub-sections to deal with these different categories of "taxpayers" since varying questions about source may arise, depending on whether the taxpayer to which section 136AD has been applied is a taxpayer in the ordinary meaning of that term or in its extended meaning for the purposes of this Division, including a partnership and the trustee of a trust estate (as set out in sub-section 136AA(1)).

That is, where a partnership is involved, the source question may arise in calculating under section 90 of the Principal Act the net income of the partnership, e.g., where it is necessary for purposes of paragraph 23(q) of the Act to determine whether income that has been taxed in another country had a source in that country. On the other hand, while it is not relevant from the viewpoint of determining the net income of a partnership whether income that has not been taxed overseas has an overseas source, that question is relevant in determining under section 92 the amount of the individual interest of a non-resident partner in the net income of the partnership that is to be included in his assessable income.

Similarly, the extent to which an amount may be attributable to Australia or some other country may arise both in calculating the net income of a trust estate and the share of a beneficiary in that net income - see particularly sections 95 and 97 of the Principal Act.

Sub-sections 136AE(4), (5) and (6) are intended to deal with another set of circumstances (covered in the discussion above of the second of the two basic functions of section 136AE), that is, where a taxpayer carries on business in more than one country and, while transactions between the taxpayer and other entities are at arm's length prices (and, consequently, the Commissioner will not be applying section 136AD), tax in Australia is reduced by the use, in effect, of internal transfer prices - e.g., between head office and branch - that differ from arm's length prices.

As in the case of sub-sections 136AE(1), (2) and (3), these three sub-sections - which apply where the taxpayer is, respectively, a taxpayer other than a partnership or trustee (sub-section (4)), a partnership (sub-section (5)) or a trustee (sub-section (6)) - are all to the same general effect. The following explanation of the provisions of sub-section (4) will apply equally, subject to the differences indicated where the taxpayer is a partnership or trustee, to sub-sections (5) and (6).

By paragraph (a), sub-section (4) will apply where a taxpayer other than a partnership or trustee is a resident of Australia and carries on business in another country through a branch (permanent establishment), or is not a resident of Australia but carries on business in Australia through a branch. Since, in Divisions 5 and 6 of Part III of the Principal Act, the net income of a partnership or trust estate means, broadly, the assessable income of the partnership or trust estate calculated as if the partnership or trustee were a resident of Australia, it is necessary to modify the provisions of paragraph (a) in sub-sections (5) and (6). Thus, paragraph (a) of sub-section (5) provides for the sub-section to apply where a taxpayer -

(i)

is a partnership and carries on business in a country other than Australia through a branch; or

(ii)

carries on business in Australia through a branch and is a partnership in which any of the partners is a non-resident.

Paragraph (a) of sub-section (6) is to similar effect where the taxpayer is a trustee of a trust estate.

Next, as set out in paragraph (b) of each sub-section, with appropriate modifications reflecting the differing source questions that may arise in relation to partnerships and trusts, a question must have arisen as to whether, and if so, as to the extent to which, any income derived by the taxpayer is derived from sources in Australia or out of Australia, or whether any expenditure incurred by the taxpayer was incurred in deriving income from sources in or out of Australia. The condition in paragraph (c) that none of the preceding provisions of the section applies in determining the question establishes that the question has not arisen in a case where section 136AD applied to adjust non-arm's length "external" prices.

The condition in paragraph (d) is, broadly, that less tax would be payable by the taxpayer (or partner or beneficiary) if the question were determined on the basis of the return furnished by the taxpayer than would be payable if the question were determined under the sub-section. In effect, this condition is equivalent to the conditions, in relation to a transaction between separate entities, that are set out in paragraphs (c) and (d) of each of sub-sections (1), (2) and (3) of section 136AD.

Finally, paragraph (e) means that sub-section will apply only if the Commissioner forms the opinion that the derivation of the income or the incurring of the expenditure is wholly or partly attributable to activities carried on by the taxpayer at or through the branch.

Where these conditions are satisfied, the Commissioner is empowered to determine, on an equivalent basis to that in sub-sections 136AE(1), (2) and (3), the source of income derived or in the derivation of which the expenditure was incurred. In doing this, the Commissioner must have regard to the provisions of sub-section 136AE(7).

Sub-section 136AE(7) sets out the criteria to which the Commissioner is to have regard in determining the source or sources of any income or the extent to which any expenditure was incurred in deriving income from a particular source or sources. The Commissioner is to have regard firstly, to the nature and extent of any business activities of the taxpayer and the place or places at which the business was conducted - that is, to the taxpayer's actual circumstances including the degree to which it operates in one country or another. Secondly, and most importantly, in a case where business is carried on by a taxpayer at or through a permanent establishment, the Commissioner must postulate the circumstances that would have existed, or might reasonably be expected to have existed, if the permanent establishment were a distinct and separate entity dealing at arm's length with the taxpayer and other persons. This basic principle is in provisions included in each of Australia's double taxation agreements for determining the amount of profits of an enterprise that are to be attributed to a permanent establishment. Lastly, the Commissioner is to have regard to other relevant matters.

Sub-section 136AE(8) is a drafting measure which ensures that every reference in section 136AE to expenditure incurred by a taxpayer in deriving income will include a reference to expenditure incurred by the taxpayer in carrying on a business for the purpose of deriving income, that is, such references will cover any expenditure that may otherwise be an allowable deduction under sub-section 51(1) of the Principal Act.

Sub-section (9) deals with the relationship between section 136AE and Subdivision C of Division 2 of Part III of the Principal Act, which covers businesses carried on partly in and partly out of Australia. A question as to the source of particular profits could arise, and be dealt with, in Subdivision C. However, reflecting the independent status to be accorded the revised Division 13, this sub-section means in effect that section 136AE is not to be used in any application of Subdivision C. See also proposed section 136AG.

Section 136AF : Consequential adjustments to assessable income and allowable deductions

The broad function of this section is to complete the process, begun by section 136AD, of reconstruction of a taxpayer's affairs to what they would have been if the relevant profit shifting arrangement had not been effected.

Where section 136AD has been applied in relation to a supply or acquisition of property by a taxpayer that action will result in an increase in the taxpayer's taxable income, and this section will authorise the Commissioner of Taxation to make a compensating adjustment in favour of the taxpayer, or any other taxpayer, where an amount has been included in the relevant taxpayer's assessable income that would not have been included (or a deduction, or part deduction, not allowed that would have been allowed) if the parties to the agreement had been dealing with each other at arm's length in relation to the supply or acquisition of the property to which section 136AD has been applied. The Commissioner must first be satisfied that it would be fair and reasonable in the circumstances to make the compensating adjustment.

Section 136AD represents a similar approach to the matter of consequential adjustments to that incorporated, in relation to Part IVA of the Principal Act, in sub-section 177F(3).

Paragraph 136AF(1)(a) will permit a consequential adjustment where an amount is otherwise included in a taxpayer's assessable income that would not have been included if the non- arm's length profit shifting arrangement had not been entered into. The Commissioner is empowered, if it is fair and reasonable to do so, to determine that the amount, or part of it, should not be included in the assessable income of the taxpayer affected.

Correspondingly, under paragraph (b) the Commissioner may, if he considers it fair and reasonable to do so, determine that a deduction should be allowed, in whole or in part, where the deduction would have been allowed if the parties had been dealing at arm's length in relation to a particular supply or acquisition of property to which section 136AD has been applied.

In either case, the Commissioner is to take such action as he considers necessary to give effect to any such determination.

Where the Commissioner determines that he should allow a deduction under paragraph 136AF(1)(b), that deduction is, by sub-section (2) to be allowed under such provision of the Principal Act as the Commissioner determines.

Sub-section (3) will extend the consequential adjustment provisions to permit the remission of interest withholding tax in circumstances where, as a result of the application of section 136AD to a profit shifting arrangement, all or part of an amount of income that, under that arrangement, had been paid as interest on which withholding tax was paid, is effectively no longer treated as a payment of interest. This could occur, for example, in a case where section 136AD has been applied to an arrangement to reduce to an arm's length level the deduction for an amount of interest that had been paid between associates and had attracted interest withholding tax of 10 per cent. In such a case, sub-section (3) will authorise the Commissioner to determine that all or part of the withholding tax should not have been paid and to take appropriate action to give effect to that determination.

The next four sub-sections - sub-sections (4) to (7) - are designed to extend the benefit of the ordinary objection and appeal provisions to a taxpayer dissatisfied with any decision of the Commissioner not to make a consequential adjustment under sub-section (1) or (3) in favour of the taxpayer.

As background, any assessment action by the Commissioner in reliance on section 136AD will be subject to the usual rights of objection, review by an independent Taxation Board of Review and appeal to a Court. Those procedures include the power of a Board of Review to substitute its determinations and decisions for those of the Commissioner. However, these procedures may not be available to a taxpayer in a situation where the revised Division 13 has been applied, and the Commissioner considers that the case is not one calling for him to make a consequential adjustment under sub-section (1) or (3) in favour of the taxpayer, i.e., an adjustment which that taxpayer considers should be made.

Under proposed sub-section (4) such a taxpayer may at any time ask the Commissioner to make a determination under sub-section (1) or (3). By sub-section (5) the Commissioner is to consider the request and give written notice of his decision. If the taxpayer is dissatisfied with the decision he may, under sub-section (6), and within 60 days, lodge a formal objection with the Commissioner. By sub-section (7) the objection, review and appeal provisions of the Principal Act are to apply in relation to such an objection.

Section 136AG : Modified application of Subdivision C of Division 2

As noted earlier in relation to sub-section 136AE(9), the provisions of section 136AE for determining questions of source are not to apply for purposes of Subdivision C of Division 2 (sections 38 to 43) of the Principal Act. That Subdivision deals with businesses carried on partly in and partly out of Australia. Sub-section 136AE(9) would not, however, exclude the application of both Subdivision C and Division 13 to the same set of circumstances. Accordingly, section 136AG requires that where section 136AD or section 136AE has been applied in relation to any consideration, income or expenditure, that consideration, income or expenditure is not to be taken into account in the application of Subdivision C.

Turning to the provisions by which the operation of existing section 136 is terminated and the proposed Division 13 commences to apply, the repeal of the existing section effected by sub-clause (1) will, by sub-clause (2), apply to assessments in respect of income of the year of income of a taxpayer in which 28 May 1982 occurs and of all subsequent years of income. Hence, the existing Division 13 can have application in relation to any year of income up to and including the year of income of a taxpayer in which 28 May 1981 occurred.

Sub-clause (3) provides that the revised Division 13 will apply, subject to sub-clause (4), to assessments in respect of the year of income in which 28 May 1981 occurred and for all subsequent years. In other words, both the existing and the revised Division 13 may apply for the income year in which 28 May 1981 occurred.

However, sub-clause (4) will, in effect, limit the operation of the amendments by confining the application of the revised Division to income derived or allowable deductions incurred after 27 May 1981 - the date on which the measures were announced. This will technically be achieved by establishing, under paragraph (a), the income that would be included in assessable income or the deductions that would have been disallowed in the year of income in which 28 May 1981 occurred by application of the revised Division 13, and then by excluding from that income or those deductions, the income or deductions that, in accordance with paragraph (b) may appropriately be related to a period of time before 28 May 1981.

Sub-clauses (5) and (6) are further transitional provisions intended to clarify the relationship between the existing Division and the proposed Division for the year of income in which 28 May 1981 occurred. Because both provisions can apply for that year of income, sub-clause (5) requires that, where existing section 136 has been applied in relation to the year of income in which 28 May 1981 occurred, then the revised Division 13 will not apply in relation to that year of income. Conversely, sub-clause (6) means that, where the revised Division is applied in relation to that year of income - that is, to income derived or allowable deductions incurred on and after 28 May 1981 - the Commissioner is not empowered to make a determination under the existing section.

Clause 20: Medical expenses

Section 159N of the Principal Act authorises allowance to a taxpayer of a rebate in his or her assessment of an amount equal to 32 cents in the dollar for each dollar by which the sum of the taxpayer's rebatable amounts in the year of income exceeds $1,590.

By section 159P, payments of medical expenses made by a taxpayer on behalf of himself or herself, or his or her dependants, are rebatable amounts for the purposes of the calculation of any rebate to which the taxpayer may be entitled under section 159N. The term "medical expenses" is defined in sub-section 159P(4) to mean payments for a wide range of medical services and supplies including payments -

(a)

to a legally qualified medical practitioner, nurse or chemist, or a public or private hospital, in respect of an illness or operation;

(b)

to a legally qualified dentist for dental services or treatment or the supply, alteration or repair of artificial teeth;

(c)

to a person registered under a law of a State or Territory as a dental mechanic in respect of charges lawfully made by that person for the supply, alteration or repair of artificial teeth.

Sub-clause (1) of clause 20 will insert four new sub-sections - sub-sections (5) to (8) - in section 159P so that payments otherwise of the kinds described in paragraphs (a), (b) and (c) above as "medical expenses" will be rebatable amounts not only where made to professionally qualified persons but also where made to corporate or other non-qualified employers of professionally qualified persons who provide the relevant services.

New sub-section (5) will extend the practical operation of paragraph (a) of the definition so that a payment to an employer of a legally qualified medical practitioner, nurse or chemist for the provision of services or treatment or the supply of goods by the qualified person will be treated as payment made to that person for the relevant service. A payment will be a rebatable amount only if, as at present, it is in respect of an illness or operation.

New sub-section (6) is to similar effect in respect of paragraph (b) of the definition and will mean that a payment to the employer of a legally qualified dentist for dental services or treatment or the supply, alteration or repair of artificial teeth is to be taken to be a payment to the dentist for the relevant service.

Sub-section (7) effectively extends paragraph (c) of the definition so as to include a payment made to an employer of a person registered under a law of a State or Territory as a dental mechanic in respect of charges lawfully made by the employer for the supply, alteration or repair of artificial teeth by the dental mechanic.

Sub-section (8) is a drafting measure related to the operation of sub-sections (5), (6) and (7) and ensures that references in those sub-sections to an employer of a qualified person include references to persons having service contracts with qualified persons that are not technically contracts of employment.

By sub-clause (2) the amendment made by sub-clause (1) is to apply in respect of payments made on or after 1 July 1981.

Clause 21: Amendment of assessments

The general powers of amendment of income tax assessments contained in section 170 of the Principal Act mean that, if a full and true disclosure by a taxpayer of all material facts is made, an amendment increasing liability under the taxpayer's assessment may be made within 3 years of the date the tax became due, but only to correct an error in calculation or a mistake of fact or to correct an erroneous action by the Commissioner of Taxation in the application of a provision that expressly depends upon a determination, opinion or judgment of the Commissioner. If there is no such full and true disclosure, an amendment may be made within 6 years, or at any time if there has been fraud or evasion.

Under existing Division 13, there is no time limit on the making of an assessment under that Division by the Commissioner to overcome profit shifting arrangements. Clause 19 of the Bill will continue that policy in relation to the revised Division 13. However, the technical means by which this is achieved will be changed. Under existing section 136, necessary adjustments to taxable income are made by way of an original special assessment, even where an assessment has already been made under general provisions of the Act. In contrast, adjustments under the revised Division, in cases where an assessment has already been made under general provisions, will be by way of amendment of that assessment and thus subject to the rules for amendment of assessments contained in section 170. An amendment of section 170 is thus required for the effect of the present law to be maintained.

Paragraph (a) of sub-clause 21(1) will insert in section 170 of the Principal Act two new sub-sections - sub-sections 170(9B) and (9C) - dealing specifically with the Commissioner's powers to amend an assessment to deal with cases involving international profit shifting arrangements.

New sub-section 170(9B), which will apply subject to proposed sub-section (9C), will, in effect, preserve the power which the Commissioner has in relation to existing section 136, by authorising the amendment of an assessment at any time to apply the anti-profit shifting provisions of revised Division 13. The sub-section also contains a corresponding power of amendment where a matching provision of a double taxation agreement is applied instead of Division 13. These provisions are respectively designated as a "prescribed provision" or as a "relevant provision" and are defined in proposed new sub-section 170(14).

Proposed sub-section 170(9C) will limit the authority to amend an assessment contained in sub-section 170(9B). It is to the effect that, once the revised Division - or the corresponding provisions in a double taxation agreement - have been applied in relation to a particular subject matter - whether in an original or an amended assessment - no further amendment to apply those same provisions to the same subject matter can be made under the authority of sub-section 170(9B). In other words, once a prescribed provision or a relevant provision has been applied in relation to a particular subject matter, any further amendment of an assessment to apply that provision in relation to that subject matter can only be made in accordance with the general amendment powers of section 170 that are outlined above.

In their practical effect, proposed sub-sections 170(9B) and (9C) will clarify the powers of the Commissioner to amend an assessment where a provision of a double taxation agreement that deals with profit shifting may be applicable. Sub-section 4(2) of the Income Tax (International Agreements) Act 1953 provides that the provisions of that Act are to have effect notwithstanding anything inconsistent with those provisions contained in the Principal Act. Technically, therefore, the provisions of a double taxation agreement that deal with profit shifting, either under a "business profits" article (e.g., Article 5 of the Australia/U.K. agreement), or an "associated enterprises" article (e.g., Article 7 of that agreement), may have to be applied instead of Division 13. Where the profit shifting provisions of a double taxation agreement are to apply in these circumstances, sub-sections 170(9B) and (9C) confer the same specific powers of amendment of an assessment as are to be provided in relation to revised Division 13.

An amendment to reduce the income tax liability of a taxpayer can be made under section 170 within 3 years, but generally only to correct an error in calculation or a mistake of fact. Because of the special nature of the information gathering process in the case of international profit shifting arrangements and the length of time which this may involve, and to enable full justice to be done, paragraph (b) of sub-clause (1) will permit an amendment to be made at any time to give effect to a "consequential adjustment" determination made under section 136AF in favour of a taxpayer.

Paragraph (c) will insert new sub-section (14) into section 170 of the Principal Act. This sub-section defines terms relevant to the application of sub-sections 170(9B) and (9C), which have just been explained.

By sub-clause (2), the amendments to be made by clause 21 will apply to assessments for the year of income in which the revised Division 13 first has effect, i.e., the income year of a taxpayer in which 28 May 1981 occurred, and for all subsequent years.

Clause 22: Powers of Board

This clause proposes amendments to section 193 of the Principal Act to empower a Taxation Board of Review to review decisions of the Commissioner of Taxation concerning remission of the amount of additional tax imposed in profit shifting cases, regardless of the amount of that additional tax. The provisions are complementary to the amendment of section 226 proposed by clause 23, which will insert in that section new sub-sections (2B) and (2D) to statutorily impose additional tax by way of penalty on a taxpayer in relation to whom the revised Division 13 or a corresponding provision of a double taxation agreement has been applied to increase the tax assessable to the taxpayer.

In broad terms, section 193 provides for a Taxation Board of Review to have, for the purpose of reviewing a decision of the Commissioner, the powers and functions of the Commissioner in making assessments, determinations and decisions under the Principal Act. Under that Act the Commissioner has power to remit statutory additional tax imposed by section 226 and, under the existing law contained in sub-section 193(2), a Board has a power to review decisions relating to the remission of statutory additional tax imposed by sub-sections 226(1) and (2) and (2A) where the additional tax payable, after remission, exceeds an amount calculated at 10 per cent per annum of the tax in question.

In order that decisions by the Commissioner about remission of the additional tax to be imposed pursuant to the amendments proposed by clause 23 are fully reviewable by a Board, sub-clause (1) proposes amendment of section 193. Paragraph (a) and paragraph (c) of the sub-clause contain express authority for the Board to review all decisions of the Commissioner in relation to the remission of additional tax imposed as a result of the application of the revised Division 13 or of a corresponding double taxation agreement provision.

Paragraph (b) is a technical amendment to specifically identify those cases in which the limitations on a Board's power to review the amount of additional tax will continue unchanged.

Sub-clause (2) provides that the amendments made by this clause will apply to assessments in relation to the year of income in which revised Division 13 first has effect, and for all subsequent years of income.

Clause 23: Additional tax in certain cases

This clause proposes the amendment of section 226 of the Principal Act to insert new sub-sections (2B), (2C) and (2D) by which statutory additional tax at the rate of 10 per cent per annum will be imposed where, in calculating the tax assessable to a taxpayer, the revised Division 13 or a corresponding provision of a double taxation agreement has been taken into account and the application of the Division or agreement provision has resulted in an increase in the amount of tax assessable to the taxpayer.

This additional tax will, by reason of existing sub-section 226(3), be subject to remission by the Commissioner and his exercise of this power will by reason of amendments proposed by clause 22, be subject to review by an independent Taxation Board of Review. The relevant provisions will mean that the period for which the 10 per cent rate of additional tax will run will be from the normal or any extended date allowed for furnishing the taxpayer's return to the day on which the assessment - original or amended - in reliance on Division 13 is made.

In order to find the increase in tax attributable to the application of Division 13 or of a corresponding double taxation agreement provision, and on which the 10 per cent additional tax is based, it is necessary first to calculate a base amount of tax. The base amount of tax for this purpose will, broadly, be the tax that would otherwise be payable by the taxpayer if the taxpayer were to be assessed as having the taxable income revealed by the taxpayer's return. The tax payable as the result of the application of Division 13 or relevant agreement provision will of course be known, and the additional tax will be 10 per cent of the difference between that amount and the base amount, calculated for the appropriate period as indicated above.

Proposed sub-section 226(2B) will apply for the purpose of calculation of the additional tax where either section 136AD or 136AE (a "prescribed provision" as defined in proposed sub-section 226(2E)) has been applied. In such a case, additional tax as explained above will be payable by virtue of the sub-section.

By sub-section 226(2D), additional tax is to be imposed where a prescribed provision has not applied because of the Income Tax (International Agreements) Act 1953, that is, where by virtue of sub-section 4(2) of that Act (under which the provisions of that Act have effect notwithstanding anything inconsistent therewith in the Principal Act) the provisions of a double taxation agreement dealing with profit shifting have applied instead of a prescribed provision. (Paragraph (3) of Article 5 and paragraph (1) of Article 7 of the Australia/U.K. agreement and corresponding articles in other agreements are such agreement provisions.)

Sub-section 226(2C) applies for purposes of sub-section (2D) and provides for the calculation of additional tax on two bases. In effect, additional tax of 10 per cent per annum is to be calculated, on the basis set out in sub-section (2B), by reference to the tax that would have been assessed if Division 13 had been applied (paragraph (c)) and by reference to the tax that has been assessed upon the application of the provision of the double taxation agreement that has displaced the application of Division 13 (paragraph (d)).

Where the amount calculated under each of the two paragraphs is the same, the taxpayer will be liable, by sub-section 226(2D), to pay that amount as additional tax. In a case where different amounts are calculated under paragraphs 226(2C)(c) and (d), the taxpayer will be liable to pay the lesser of the two amounts.

Where additional tax is payable by reason of sub-section 226(2D) in relation to a year of income, the taxpayer will not be liable to pay additional tax under sub-section 226(2B) in relation to that year of income.

Sub-section 226(2E) is a drafting aid which will define the term "prescribed provision" used in sub-sections 226(2B) and (2C) as meaning section 136AD or 136AE of revised Division 13.

Sub-section 226(2F) will make it clear that, in calculating additional tax under sub-sections 226(2B) and (2C), the possibility that section 31C, Subdivision C of Division 2 or Part IVA would have applied in a particular case in which it did not apply is to be disregarded. That is, those provisions are not to be taken into account in calculating for purposes of paragraph 226(2B)(c), the tax that would have been payable if neither Division 13 nor a double taxation agreement had been applied.

Sub-clause (2) will mean that the amendments made by this clause will apply to assessments in relation to the year of income in which 28 May 1981 occurred, and for subsequent years of income.

The provisions of sub-clause (3) relate to the situation mentioned earlier that, for the year of income in which 28 May 1981 occurred, both the existing Division 13 and the revised Division 13 will be in force, the revised Division applying only in relation to assessable income and allowable deductions which relate to the period of time after 28 May 1981 and the existing Division 13 able to apply only to determine taxable income for a whole year of income. In a case where the existing Division 13 is applied in relation to the year of income in which 28 May 1981 occurred, sub-clause 19(5) will exclude application of the revised Division 13 and, but for sub-clause 23(3), the additional tax that would have been payable under sub-section 226(2B) if the revised Division 13 had applied, would not have been payable. By sub-clause 23(3), if, in effect, additional tax would have been payable under section 226(2B) in relation to the year of income in which 28 May 1981 occurred but for the application of the existing Division 13, the taxpayer is liable to pay that amount as additional tax in relation to that year of income. Correspondingly, additional tax will be payable by virtue of this sub-clause where the existing Division 13 was not applied in the year in which 28 May 1981 occurred because a double taxation agreement provision was applied.

For the purposes of the Principal Act, including provisions relating to remission of additional tax and review thereof by Taxation Boards of Review, additional tax payable by virtue of sub-clause (3) will be deemed by sub-clause 23(4), to have been imposed under sub-section 226(2B).

Clause 24: Amendment of assessments

Clause 24, which will not amend the Principal Act, will ensure that the Commissioner of Taxation has authority to re-open an income tax assessment made before this Bill becomes law if that should be necessary in order to give effect to the amendments - other than those in clause 19 - that it contains.

Authority to re-open assessments for the purposes of the application of clause 19, which inserts Division 13 of Part III of the Principal Act, is provided separately by clause 21.

Clause 25: Amendment of the Income Tax Laws Amendment Act 1981

A large number of formal amendments incorporating changes in drafting style to the Principal Act to bring its provisions into line with modern "forward referencing" style were included by the Schedule to the Income Tax Laws Amendment Act 1981 with effect from 24 June 1981.

This clause proposes amendments to that Schedule to correct, also with effect from that date, two technical deficiencies in it - one being an inconsistent use of drafting style in citing a date in sub-section 77D(1) of the Principal Act and the other being an inaccurate reference to sub-section 82AAAG(2). These corrections will not alter the Principal Act in any substantive way.