Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)
The main amendments to the Income Tax Assessment Act 1936 are as follows:
The depreciation provisions of the Principal Act are to be amended to put beyond doubt the long-standing practice that only a pro-rata deduction for depreciation is allowable where plant is owned and used for business purposes for a part only of an income year. The Government's decision to propose this amendment was announced on 25 June 1979 and followed a decision by a Taxation Board of Review which overturned this long-standing practice. The amendment is to apply to plant acquired after 25 June 1979 or on which the taxpayer commenced construction after that date but will not apply to plant acquired under a contract entered into on or before that date.
The Principal Act is to be amended to counter schemes that misuse the depreciation provisions of the income tax law.
To counter schemes under which taxpayers acquire plant for an inflated cost price (the inflated part of the cost being returned to them in a non-taxable form), the proposed amendments will ensure that in situations where an existing limiting provision does not apply, the cost of a unit of plant acquired in a non-arm's length transaction cannot exceed the true value of the plant. To counter another type of scheme that exploits a special provision that deems a disposal of plant to occur on the formation or dissolution of a partnership or on a change in interests in a partnership, the proposed amendments will mean that where an agreement specifies a value for plant that is less than both the true value and the depreciated value of the plant, the lesser of these two values is to be adopted in calculating balancing adjustments applicable to the transferors. A variation of this second type of scheme which involves a partnership selling the plant for a nominal price in order to generate a large balancing deduction will be countered by proposed amendments under which, where depreciable plant is sold in a non-arm's length transaction at a price that is lower than both its true value and its depreciated value, the vendors will be treated as having sold the plant at the lower of those two values.
Corresponding safeguards are proposed in relation to similar partnership transfer provisions contained in the special mining provisions of the Principal Act.
The amendments are to apply to property acquired or disposed of, or in respect of which an interest is transferred, after 12 June 1979, other than acquisitions, disposals or transfers under contracts or agreements entered into on or before that date.
Losses generated under such depreciation schemes entered into in the 1977-78 or a prior year of income will not be available to reduce income derived in the 1978-79 income year or any subsequent income year. Where depreciation scheme losses of this kind have been generated in the 1978-79 income year, those losses will not be deductible against income of the 1979-80 or subsequent years.
Accelerated depreciation on facilities used for the storage of grain, hay or fodder (Clauses 5 and 7)
A special depreciation provision will authorise the writing-off, in equal instalments over five years, of the cost of on-farm structural improvements for use in the storage of grain, hay or fodder in carrying on a primary production business. The accelerated period of write-off will be available for eligible improvements acquired under a contract entered into after 21 August 1979, or which the taxpayer commenced to construct after that date.
Consequential amendments will provide for the appropriate treatment of the new deduction for the purposes of the "current year loss" provisions of the law.
This clause proposes to make tax deductible, gifts of the value of $2 or more made on or after 1 July 1979 to Roman Catholic archdiocesan or diocesan funds established exclusively for the purpose of providing religious instruction in Government schools in Australia.
The retention allowance in respect of trading or business income, available to private companies for undistributed income tax purposes, is to be increased from 60 to 70 per cent, the increase first applying in respect of the 1978-79 year of income .
The dependant rebates for 1979-80 are not to be indexed, and will be the same amounts as for 1978-79. For 1980-81 and subsequent years, the values are to be indexed when an Act declares that indexation will apply for the particular year.
Rebate in respect of payments received in lieu of annual leave or long service leave (Clauses 21 and 26)
The Assessment Act requires that certain lump sum payments for unused annual leave and lump sum payments for unused long service leave for qualifying service after 15 August 1978 be fully taxed, but at no more than the standard rate of tax. A rebate ensures this result. The relevant section, section 160AA, at present operates so that where the standard rate scale is indexed, the rebate is adjusted to maintain the result that these leave payments are not to bear more than the standard rate of tax. Clause 21 varies section 160AA so that it conforms with changed indexation arrangements for which provision is made by the second Bill.
For 1979-80 the rebate is, by clause 26, to be calculated by reference to the standard rate for that year of 33.07 per cent.
The present statutory penalty of the greater of double the amount of tax sought to be avoided, or $2, that applies where taxpayers omit income from their returns or where deductible or rebatable expenditure is over-stated will also apply in cases where false claims are made for certain rebates that are not related to expenditure incurred by taxpayers.
These rebates are those available for a spouse, daughter-housekeeper, housekeeper, parent or parent-in-law or invalid relative or as a sole parent as well as the zone rebate, the rebate for overseas service of members of the defence force or for service with a United Nations armed force. The false rebate claims affected are those in relation to which penalties may be applied under the present law only as a result of prosecution action.
A remission by the Commissioner of additional tax imposed under the new penalty provisions will be subject to the same power of review by a Taxation Board of Review as is the remission of penalties in omitted income and over-stated expenditure cases under the present law.
The amendment is to apply to false rebate claims made after 20 July 1979.
Reflecting the change in the standard tax rate for 1979- 80, the rate of rebate for general concessional expenditure (e.g., on medical and education expenses, life assurance and superannuation, municipal rates, etc.) in excess of $1,590 is to be changed to 33.07 per cent.
Provisional tax for 1979-80 is to be, basically, an amount equal to the tax payable for 1978-79 plus a loading of 2.57 percentage points - equivalent to a loading of 3 percentage points on 1979-80 rates - to be applied to that part of 1978-79 taxable income above the tax-free slice of income ($3,893 for an individual).
An adjustment is also to be made to eliminate, for provisional tax calculation purposes, any effect which the allowance of a trading stock valuation adjustment deduction had in respect of the 1978-79 taxable income.
A technical amendment will make it clear that if a State imposes an income tax surcharge under arrangements covered by this Act, appropriate State PAYE deductions will be able to be made from payments of salary or wages to employees of the Commonwealth or a Territory, or of their authorities.
The second Bill, the Income Tax (Rates) Amendment Bill 1979, will amend the Income Tax (Rates) Act 1976. Its main function is to fix the rates of income tax payable by individuals for the 1979-80 financial year.
To do so, the Bill will (by clause 12) implement the proposal that the standard rate of income tax applicable to the part of the taxable income of an individual for the 1979-80 year as a whole that is in excess of $3,893, is to be 33.07 per cent. As in the previous year, surcharges of 14 per cent and 28 per cent are to apply from taxable income levels of $16,608 and $33,216 respectively, to bring the effective marginal tax rates above those levels to 47.07 per cent and 61.07 per cent. For 1980-81 and subsequent years, the Bill provides for the standard rate of 32 per cent to apply, plus surcharges where relevant (clause 17).
The Bill will also (by clause 10) mean that indexation of the rate scale will not apply for 1979-80. For 1980-81 and subsequent years, rate scale indexation is to be implemented where an Act declares a particular year to be a year to which indexation applies.
The third Bill, the Income Tax (Individuals) Bill 1979, will formally impose the rates of tax payable for 1979- 80 by individuals and trustees.
The fourth Bill, the Income Tax (Companies and Superannuation Funds) Bill 1979, will declare and impose the rates of income tax payable for 1979-80 by companies and trustees of superannuation funds. These rates are the same as for 1978-79 (46 per cent on the taxable income of companies), except that the rate for one category of superannuation fund is reduced from 61.5 per cent to 61.07 per cent to reflect the reduction in the maximum rate of tax payable by an individual.
Detailed explanations of each clause of the Bills follow.