House of Representatives

Taxation Laws Amendment Bill (No. 3) 1986

Taxation Laws Amendment Act (No. 3) 1986

Bank Account Debits Tax Amendment Bill 1986

Bank Account Debits Tax Amendment Act 1986

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

Notes on Clauses

TAXATION LAWS AMENDMENT BILL (NO.3) 1986

PART 1 - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act (No.3) 1986.

Clause 2: Commencement

By clause 2, the amending Act is to come into operation on the day on which it receives the Royal Assent. But for this clause, 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.

PART II - AMENDMENT OF THE ADMINISTRATIVE DECISIONS (JUDICIAL REVIEW) ACT 1977

Clause 3: Principal Act

This clause facilitates reference to the Administrative Decisions (Judicial Review) Act 1977 which, in Part II, is referred to as "the Principal Act".

Clause 4: Schedule 1

Paragraphs (a) and (b) of sub-clause (1) are consequential on the enactment of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986. That Act repealed the redundant States Receipts Duties (Administration) Act 1970 and transferred the jurisdiction of the Taxation Boards of Review to the Administrative Appeals Tribunal. The Taxation Boards of Review were abolished. References to that Act and the Taxation Boards of Review in Schedule 1 of the Principal Act no longer serve any purpose and are to be deleted. The amendment made by this clause will have no effect on the operation of the Principal Act.

Sub-clause (2) ensures that the provisions of the Principal Act being omitted continue to have application to a decision of a Taxation Board of Review made prior to this amendment.

PART III - AMENDMENT OF THE BANK ACCOUNT DEBITS TAX ADMINISTRATION ACT 1982

Clause 5: Principal Act

This clause facilitates reference to the Bank Account Debits Tax Administration Act 1982 which, in Part III, is referred to as "the Principal Act".

Clause 6: Procedure on review or appeal

This clause will amend the burden of proof provisions of section 25D of the Principal Act to the same effect as the amendment to be made by clause 30 to the Income Tax Assessment Act 1936 - see notes on that clause.

PART IV - AMENDMENT OF THE ESTATE DUTY ASSESSMENT ACT 1914

Clause 7: Principal Act

This clause facilitates reference to the Estate Duty Assessment Act 1914 which, in Part IV, is referred to as "the Principal Act".

Clause 8: Procedure on review or appeal

This clause will amend the burden of proof provisions of section 27D of the Principal Act to the same effect as the amendment to be made by clause 30 to the Income Tax Assessment Act 1936 - see notes on that clause.

PART V - AMENDMENTS OF THE FRINGE BENEFITS TAX ASSESSMENT ACT 1986

Clause 9: Principal Act

This clause facilitates references to the Fringe Benefits Tax Assessment Act 1986 which, in Part V, is referred to as "the Principal Act".

Clause 10: Consideration of applications for extension of time for lodging requests for reference

Clause 10 corrects a minor printing error in the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 by substituting "if" for "of" in paragraph 84(1)(b) of the Principal Act. The amendment will have no effect on the application of section 84 of the Principal Act.

Clause 11: Procedure on review or appeal

This clause will amend the burden of proof provisions of section 86A of the Principal Act to the same effect as the amendment to be made by clause 30 to the Income Tax Assessment Act 1936 - see notes on that clause.

PART VI - AMENDMENT OF THE GIFT DUTY ASSESSMENT ACT 1941

Clause 12: Principal Act

This clause facilitates reference to the Gift Duty Assessment Act 1941 which, in Part VI, is referred to as "the Principal Act".

Clause 13: Procedure on review or appeal

This clause will amend the burden of proof provisions of section 34D of the Principal Act to the same effect as the amendment to be made by clause 30 to the Income Tax Assessment Act 1936 - see notes on that clause.

PART VII - AMENDMENTS OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 14: Principal Act

This clause facilitates references to the Income Tax Assessment Act 1936 which, in Part VII, is referred to as "the Principal Act".

Clause 15: Exemptions

This clause proposes amendments to section 23 of the Principal Act under which certain types of income are exempt from income tax.

Existing paragraphs 23(s) and (sa) operate to exempt one-half of the pay and allowances received by members of the Defence Force Reserves and Emergency Reserves in respect of their part time service. Paragraph 23(s) operates to exempt from tax one-half of the pay and allowances received (other than those received for continuous full time service - see notes below) as a member of the Australian Naval Reserve, the Australian Army Reserve or the Australian Air Force Reserve. Paragraph 23(sa) exempts one-half of the pay and allowances received (other than those received for continuous full time service - see notes below) as a member of the Naval Emergency Reserve Forces, the Regular Army Emergency Reserve or the Air Force Emergency Force and one-half of any gratuity paid to such a member by reason of a calling out for continuous service of, or as part of, such a Force.

Pay and allowances in respect of continuous full time service, that is, in respect of service that is continuous full time service for the purposes of the Act relating to the relevant Defence Force, is not subject to the exemption and is fully assessable income of the reservist.

Clause 15 will have the effect of reinstating the full exemption to tax for pay and allowances for part time service of members of the Defence Force Reserves and Emergency Reserves and for any gratuity paid to a member of an Emergency Reserve by reason of a calling out for continuous service.

Paragraph (a) of clause 15 will omit the words "one-half of" from paragraph 23(s) of the Principal Act and, in conjunction with sub-clause 34(1), will provide full exemption for pay and allowances received (other than those received for continuous full time Service - see earlier notes) by members of the Australian Naval Reserve, Australian Army Reserve or Australian Air Force Reserve in respect of service on or after 1 January 1987.

Paragraph (b) of clause 15 will omit the words "one-half of" (wherever occurring) from paragraph 23(sa) of the Principal Act and, in conjunction with sub-clause 34(1), will provide full exemption for pay and allowances received (other than those received for continuous full time service - see earlier notes) by members of the Emergency Defence Reserves in respect of service on or after 1 January 1987, and to any gratuity paid to such a member by reason of a calling out on or after 1 January 1987, for continuous service of, or as part of, the Emergency Reserve Force of which the taxpayer is a member.

Clause 16: Value of live stock at end of year of income

This clause will amend section 32 of the Principal Act which specifies the bases that may be adopted in determining the value, for trading stock purposes, of live stock that is on hand at the end of a year of income. Generally, live stock may be valued, at the taxpayer's option, at either cost price or market selling value, although there is provision for some other value to be adopted if the Commissioner of Taxation is satisfied that its adoption is justified. A further option is available in respect of eligible horses (in broad terms, horses that are capable of being used for breeding purposes and that are acquired under contracts entered into after 20 August 1985). That option permits a taxpayer to elect to value stallions at cost price reduced by up to 50% per annum and mares at cost price reduced by either 33 1/3% per annum or an amount that will reduce the value of the mare to $1 by the time she is aged 12 years or more.

New sub-section 32(1A), being inserted in the Principal Act by clause 16, provides that a horse is not to be taken to be an eligible horse for the purposes of section 32 if the horse was acquired under a contract entered into after 19 August 1986 and had not attained the age of 3 years by the end of the year of income. The effect is that the special option for valuing horses will be available only in respect of otherwise eligible horses that have attained the age of 3 years either during the year of income or during an earlier year. This will, in a general way, ensure that, as intended, the option applies only to sires and brood-mares (that is, breeding horses).

Clause 17: Cost price of natural increase

Section 34 of the Principal Act, which is being amended by this clause, specifies the basis on which the cost price of natural increase of live stock is to be determined for trading stock purposes. Paragraph 34(1)(a) provides that, where a cost price per head of natural increase of a particular class of live stock has been previously taken into account by the taxpayer, that cost price is to continue to be adopted unless, with the leave of the Commissioner of Taxation, the taxpayer selects another cost price. Where a cost price per head of natural increase of a particular class of live stock has not previously been taken into account by the taxpayer, paragraph 34(1)(b) permits the taxpayer to select a cost price, subject to the condition that the amount selected be not less than the minimum cost price prescribed in respect of live stock of that class. A taxpayer who does not select a cost price in accordance with paragraph 34(1)(b) is deemed, by the operation of sub-section 34(2), to have selected the prescribed minimum cost price.

With application to natural increase occurring after 30 June 1984, Statutory Rule No.286 of 1984 amended the Income Tax Regulations to increase the prescribed minimum cost prices from 40 cents to $1 for sheep, from $2 to $5 for cattle and horses and from 50 cents to $4 for pigs. It was intended that these higher prescribed minima apply to all natural increase of the specified classes of live stock born after 30 June 1984 - that is, not only in situations where paragraph 34(1)(b) operates but also in those where paragraph 34(1)(a) operates. Technically, however, it could be argued that they apply only in paragraph 34(1)(b) situations, so that, if natural increase of a particular class of live stock was previously taken into account at a cost price lower than the relevant prescribed minimum, that lower cost price should be maintained for post June 1984 natural increase of that class. To overcome that argument paragraph (a) of clause 17 will substitute a new paragraph 34(1)(a). Clause 41 of the Bill proposes a consequential amendment of the Income Tax Regulations (see notes on that clause).

As with the existing paragraph, new paragraph 34(1)(a) will apply where a cost price per head of natural increase of a particular class of live stock has previously been taken into account for trading stock purposes. In such cases, the cost price of natural increase will, by reason of sub-paragraph (a)(i), be the greater of the cost price per head at which natural increase of that class was last taken into account (sub-sub-paragraph (a)(i)(A)) and the minimum cost price prescribed in respect of live stock of that class (sub-sub-paragraph (a)(i)(B)). Sub-paragraph (a)(ii) permits the taxpayer, with the leave of the Commissioner, to select another cost price provided the amount selected is not less than the relevant minimum cost price. By sub-clause 34(2), this amendment is to apply in respect of natural increase born after 30 June 1984.

Paragraph (b) of clause 17 proposes the insertion of three new sub-sections in section 34 of the Principal Act to require that, for trading stock purposes, the cost price of a horse acquired by natural increase be not less than any service fee incurred in acquiring the horse.

The cost price of a horse acquired by natural increase is to be calculated in accordance with new sub-section 34(3) if the conditions specified in paragraphs (a) and (b) of the sub-section are met. The condition specified by paragraph (3)(a) is that, after 19 August 1986, a taxpayer has incurred a service fee (as defined in new sub-section (5)), all or a part of which is attributable to the acquisition of a horse by natural increase. The service fee or the part of the service fee that is so attributable is referred to in sub-section (3) as the "attributable amount" (see also the notes on new sub-section (4)). Paragraph (3)(b) specifies the further condition that the attributable amount be greater than the amount that would otherwise (that is, under sub-section 34(1) or (2)) be taken to be the cost price of the horse for trading stock purposes. Where both these conditions are met in respect of a horse acquired by natural increase, the cost price of the horse is to be taken to be the attributable amount.

Proposed new sub-section 34(4) complements sub-section (3) and will operate where, under an agreement (as defined in new sub-section (5)), a taxpayer incurs a loss or outgoing (sub-paragraph (a)(i)) and a mare is inseminated (sub-paragraph (a)(ii)), as a result of which the taxpayer acquires a horse by natural increase (paragraph (4)(b)). In such cases, the Commissioner of Taxation may determine to what extent the loss or outgoing should be treated as a service fee and as attributable to the acquisition of the horse by natural increase (paragraph (4)(c) and (4)(d)).

New sub-section 34(4), in a case where paragraph (c) applies, covers a number of situations. It will apply as a safeguarding provision where expenditure is incurred in connection with the insemination of a mare and the resultant acquisition of a horse by natural increase but the expenditure is not strictly a fee for the insemination of the mare (that is, a service fee as defined). It is not intended that such expenditure include ordinary other costs associated with the service of the mare (such as agistment fees while the mare is at stud) or with the birth of the natural increase (such as veterinary fees). However, in situations where, for example, associated costs were inflated and offset by a lower than normal service fee, sub-section (4) would, in terms of paragraph (c), be applied to treat an appropriate part of those costs as a service fee.

Paragraph 34(4)(c) would also apply in situations where one fee is paid for the service of a number of mares or where a multiple birth results from the service of a mare. In these cases, the service fee would be apportioned between the resultant progeny. Where there is a multiple birth by a mare, the service fee would ordinarily be apportioned equally between the progeny. However, equal apportionment may not be appropriate where a single fee is paid for the service of a number of mares - regard would need to be had to the fee that could be expected to be paid for individual services of the mares by the sires concerned.

Another possible application of paragraph 34(4)(c) would be where one fee is paid for a number of services of a particular mare. Depending on the circumstances, it may be necessary to apportion the fee between services and resultant progeny (for example, where the fee is for services over a number of stud seasons) or it may be that the fee should be attributed to the only resultant progeny (for example, where the fee is for a limited number of services in the one stud season). This latter situation is similar to that provided for more specifically in paragraph 34(4)(d) - that is, where a service fee is incurred in respect of as many services as are necessary to successfully inseminate the mare. The whole of the service fee would be attributed to the resultant progeny in these circumstances, although generally any fees paid in respect of unsuccessful services are not to be included in the cost price of any horse.

While paragraph 34(4)(d) caters specifically for cases where there is one service fee paid irrespective of the number of services performed, it also applies, in those given circumstances, in situations such as those noted above in relation to paragraph 34(4)(c) - for example, where associated costs are inflated and offset by a lower than normal service fee.

Sub-section 34(5) contains the following definitions of terms used in the new sub-sections (3) and (4).

"agreement" is defined in a manner common to the definition of the term in other provisions of the Principal Act and covers the various forms of agreement, arrangement or understanding, whether formal or informal, or express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings. The term is relevant to the application of sub-section 34(4).
"insemination" is defined to make it clear that the term as used in sub-section (4) and in the following definition of "service fee" includes not only insemination by physical means but also insemination by artificial means.
"service fee" is defined to mean a fee for the insemination of a female horse. In terms of sub-section (3), subject to the operation of sub-section (4), all or part of a service fee attributable to the acquisition of a horse by natural increase is taken to be the cost price of that horse for trading stock purposes where it exceeds the amount that would otherwise be the horse's trading stock cost price.

Clause 18: Alternative election in case of forced disposal, death or compulsory destruction of live stock

Clause 18 will amend section 36AAA of the Principal Act so that, broadly, any profit arising in respect of live stock that are assets of a primary production business carried on in Australia and that die or are destroyed because of bovine brucellosis or tuberculosis can be offset against the cost of replacement stock on a herd basis over a period of up to 10 years after the year of death or destruction. Section 36AAA presently provides (sub-section (1A)) for such profit to be offset against the cost of replacement stock on a per head basis over up to 5 years after the year of death or destruction.

A new sub-section (2A) is to be inserted in section 36AAA to deal specifically with profit on the death or destruction of live stock because of bovine brucellosis or tuberculosis. Existing sub-section 36AAA(1A) will continue to apply where the death or destruction results from another disease in respect of which a Commonwealth, State or Territory law makes provision for the compulsory destruction of live stock. The election provided for in each sub-section will continue to be an alternative to the election provided for in section 36AA of the Principal Act, under which one-fifth of the profit on death or destruction is included in assessable income of the year in which the live stock die or are destroyed and of each of the 4 succeeding years of income.

New sub-section 36AAA(2A), to be inserted in the Principal Act by paragraph (a) of clause 18, specifies, in paragraphs (a) and (b), the conditions for application of the new basis of offsetting profits and, in paragraphs (c) to (h), the consequences where those conditions are satisfied.

By paragraph (2A)(a), the new basis will apply only where live stock that are assets of a business of primary production carried on in Australia die as a result of bovine brucellosis or bovine tuberculosis (sub-paragraph (a)(i)) or are destroyed in pursuance of a Commonwealth, State or Territory law that provides for the compulsory destruction of live stock for the purpose of controlling or eradicating either of those diseases (sub-paragraph (a)(ii)). Another condition, contained in paragraph (2A)(b), is that an election under existing sub-section 36AAA(1A) be made in relation to the death or destruction of the live stock referred to in paragraph (2A)(a). An election under that sub-section may be made where the following conditions are met -

live stock die or are destroyed as a result of any disease in respect of which a Commonwealth, State or Territory law makes provision for the compulsory destruction of live stock;
the proceeds of the death of the live stock (that is, any resultant compensation received from the Commonwealth, a State, a Territory or an authority thereof, and any amount received for the carcasses of the dead live stock) would otherwise be included in assessable income;
there is a profit on the death of the live stock - that is, the proceeds of the death of the live stock exceed their cost or trading stock value;
no election has been made under section 36AA of the Principal Act (see earlier notes) in relation to the profit; and
the Commissioner of Taxation is satisfied that the proceeds will be applied towards acquiring replacement stock.

Paragraph (2A)(c) will ensure that sub-section 36AAA(2) (which specifies the consequences of elections made under sub-sections 36AAA(1) and (1A)) does not apply where the conditions specified in paragraphs (2A)(a) and (b) are satisfied. Paragraph (2A)(d) requires the whole of the proceeds of the death of the live stock concerned to be included in the assessable income of the year to which the election relates - that is, the year in which the particular live stock died or were destroyed. The paragraph further provides that no part of the proceeds is to be included in the assessable income of any other year of income. By the operation of paragraph (2A)(e), the assessable income of the year to which the election relates is then reduced by the amount of the profit on the death of the live stock concerned.

Paragraph (2A)(f) will operate to apply the profit on the death of the live stock to reduce, for the purposes of the Principal Act the cost of replacement live stock purchased during the year in which the original live stock died or were destroyed or any of the 10 years succeeding that year. The amount by which the actual cost of an animal included in the replacement live stock is reduced is the lesser of -

the amount calculated by dividing the amount of profit not previously applied by the operation of paragraph (2A)(f) or included in assessable income by the operation of paragraph (2A)(g) (see the notes in the following paragraph) at the time of purchase of the replacement live stock by the number of the replacement live stock purchased at that time (sub-paragraph (i)); or
the actual cost price of the animal (sub-paragraph (ii)).

Thus, for example, if 10 replacement animals were purchased at a cost of $500 per head at a time within the specified period when $10,000 of profit on the death of the original animals had not previously been applied against the cost of replacement animals, the cost of each replacement animal would be taken to be nil. If, however, the amount of unapplied profit was $1,000, the cost of each replacement animal would be taken to be $400 - that is, $500 less one-tenth of $1000.

Where the live stock that die or are destroyed are replaced by natural increase, paragraph (2A)(g) will include in assessable income the amount that is specified in an election under proposed new sub-section 36AAA(4A) (see the notes in the following paragraph). If, at the end of the last of the 10 years succeeding the year of death or destruction, there is any profit that has not been applied against the cost of replacement live stock in accordance with paragraph (2A)(f) or included in assessable income in accordance with paragraph (2A)(g), paragraph (2A)(h) will operate to include the balance in the assessable income of that year.

New sub-section 36AAA(4A) being inserted by paragraph (b) of clause 18, is similar in effect to existing sub-section (4), which will continue to apply in respect of elections that are made under section 36AAA other than those relating to live stock that die or are destroyed as a result of bovine brucellosis or bovine tuberculosis. Sub-section 36AAA(4A) will apply where live stock that die or are destroyed as a result of bovine brucellosis or bovine tuberculosis (paragraph (a)), and in respect of which an election has been made under existing sub-section 36AAA(1A) (paragraph (b)), are replaced by natural increase during the year of death or destruction or any of the 10 succeeding years (paragraph (c)). In these circumstances, paragraph (4A)(d) will ensure that sub-section 36AAA(4) does not apply and paragraph (4A)(e) will permit an election that a specified amount be included in the assessable income of the year of income in which the replacement by natural increase occurs. The amount so specified will, by virtue of paragraph 36AAA(16)(b), reduce the amount of the profit on the death of the original live stock that may be applied against the cost of purchased replacement live stock.

Paragraphs (c), (d) and (e) of clause 18 will amend existing sub-sections 36AAA(12) and (13) of the Principal Act, which provide for the consequences of an election made under sub-section (1) or (1A) by a taxpayer or by a trustee of, or a beneficiary in, a trust estate to carry over to a partnership in which the taxpayer or the trustee is a partner, where the primary production business of the taxpayer or trustee is taken over by the partnership.

Paragraph (c) of clause 18 will substitute a new paragraph (b) in sub-section (12) to reflect the fact that live stock that die or are destroyed as a result of bovine brucellosis or bovine tuberculosis and in respect of which an election has been made under sub-section 36AAA(1A) may, in terms of proposed new sub-section 36AAA(2A) (being inserted by paragraph (a) of the clause), be replaced over a period of 10 years (sub-paragraph (b)(ii)). The existing application of sub-section (12) in a case where sub-section (2) applies is retained by sub-paragraph (b)(i).

The amendment of paragraph 36AAA(13)(a) by paragraph (d) of clause 18 - to insert a reference to paragraphs (d) and (e) of new sub-section (2A) - will ensure that any proceeds previously included in the assessable income of the taxpayer or the trust estate by the operation of paragraph (2A)(d) are not included in the assessable income of the partnership by virtue of sub-section (13). Similarly, the amendment will ensure that the partnership's assessable income is not reduced by the amount by which the taxpayer's or the trust estate's assessable income was reduced in accordance with paragraph (2A)(e).

The effect of paragraph 36AAA(13)(d) is to limit the operation of section 36AAA in relation to the partnership to the same period as it would have operated for if the business had not been taken over by the partnership. New paragraph (13)(da), being inserted by paragraph (e) of clause 18, is to the same effect as paragraph (d) but will apply only in relation to elections made under sub-section 36AAA(1A) in respect of live stock that died or were destroyed as a result of bovine brucellosis or bovine tuberculosis and reflects the fact that such live stock may be replaced over a period of 10 years.

Sub-section 36AAA(14) of the Principal Act specifies the conditions with which elections made under section 36AAA must comply. The amendment of paragraph (14)(b) proposed by paragraph (f) of clause 18 will require that an election under new sub-section 36AAA(4A) be made on or before the date of lodgment of the return of the year of income to which the election relates or within such further time as the Commissioner of Taxation allows - the same requirement as for an election under existing sub-section 36AAA(4). In terms of sub-section (14), the election must also be made in writing and, where made by a partnership, must be signed by or on behalf of each of the partners.

Sub-section 36AAA(16) of the Principal Act provides the basis of calculation of the reduced profit in relation to the forced disposal or in relation to the death or destruction of live stock. For existing purposes, the reduced profit is calculated as at a particular day and, broadly, means so much of the profit on disposal or on death or destruction as has not been applied on or before that day to reduce the cost of replacement live stock and has not been included in the assessable income of a previous year in consequence of an election under sub-section 36AAA(4) where the taxpayer replaces live stock by breeding.

New paragraph 36AAA(2A)(f), which specifies the amount of the reduced profit that is to be applied against the cost of live stock purchased to replace live stock that died or were destroyed as a result of bovine brucellosis or bovine tuberculosis and in respect of which an election under sub-section 36AAA(1A) has been made, requires that the reduced profit be known at a particular time and the amendments of sub-section 36AAA(16) proposed by paragraphs (g), (h) and (k) of clause 18 reflect this technical difference between the new provision and the existing provisions. The amendment of paragraph 36AAA(16)(a) proposed by paragraph (j) will ensure that amounts previously applied against the cost of replacement live stock by virtue of new paragraph 36AAA(2A)(f) are taken into account in calculating the reduced profit at a particular time.

In terms of sub-clause 34(3) of the Bill, the amendments of section 36AAA of the Principal Act being made by clause 18 are to apply in relation to the death or destruction of live stock on or after 1 July 1986.

Clause 19: Divisible amounts of assessable income

This clause proposes technical amendments of section 50E, one of the "current year loss" provisions of Subdivision B of Division 2A of Part III of the Principal Act. The amendments are consequential upon the proposed amendments of section 36AAA of the Principal Act (by clause 18 of the Bill) to permit profit arising from the death or destruction of live stock as a result of bovine brucellosis or bovine tuberculosis to be offset on a herd basis over a period of up to 10 years.

In broad terms, the current year loss provisions divide an income year into "relevant periods" that are separated by a "disqualifying event" - for example, on the occurrence of a 50% or greater change in shareholder's 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.

For the purposes of these provisions, section 50E specifies amounts that are "divisible amounts" of assessable income in relation to a company in relation to a year of income. The section also specifies the basis of apportionment of divisible amounts between relevant periods for the purposes of determining the net income or loss for those periods.

Paragraph 50E(1)(e) specifies that amounts included in a taxpayer company's assessable income by virtue of paragraph 36AAA(2)(c) or paragraph 36AAA(2)(d) are divisible amounts. Broadly, paragraph 36AAA(2)(c) operates to include an amount in a taxpayer's assessable income where live stock in respect of which an election has been made under section 36AAA are replaced by natural increase and the taxpayer elects to include a specified amount in his or her assessable income. Paragraph 36AAA(2)(d) operates to include the amount of unapplied profits at the end of a specified period in the taxpayer's assessable income of the last year of that period in circumstances where profits arising from the forced disposal or death or destruction of live stock in respect of which an election under section 36AAA has been made have not been fully applied against the cost of replacement live stock or otherwise included in the taxpayer's assessable income. By paragraph 50E(2)(f), amounts included in a taxpayer company's assessable income by reason of paragraph 36AAA(2)(d) or (e) are apportioned between relevant periods on a time basis.

New paragraphs 36AAA(2A)(g) and (h) (see notes on clause 18) apply where the section 36AAA election relates only to live stock that die or are destroyed as a result of bovine brucellosis or bovine tuberculosis and are to the same effect as paragraphs 36AAA(2)(c) and (d) respectively. The amendments of section 50E proposed by clause 19 will ensure that amounts included in a taxpayer company's assessable income by reason of paragraph 36AAA(2A)(g) or (h) are treated, for the purposes of the current year loss provisions, on the same basis as amounts included in a taxpayer's assessable income by reason of paragraph 36AAA(2)(c) or (d). Accordingly, such amounts will be divisible amounts and will be apportioned between relevant periods on a time basis.

As with the amendments proposed by clause 18, the amendments of section 50E being made by this clause are, in terms of sub-clause 34(3) of the Bill, to apply in relation to the death or destruction of live stock on or after 1 July 1986.

Clause 20: Expenditure on scientific research

This clause will amend sub-section 73A(6) of the Principal Act to include the Secretary to the Department of Science as an additional authority to approve a body as "an approved research institute" for income tax purposes.

The concept of an approved research institute is relevant for a number of purposes of the Principal Act. Section 73A of the Act authorises an income tax deduction for payments made to an approved research institute in respect of scientific research related to the taxpayer's business to the extent that those payments are not otherwise deductible. Section 73B of the Act authorises a deduction at the rate of 150 per cent for expenditure incurred by an eligible company during the period 1 July 1985 to 30 June 1991 in having an approved research institute perform research and development activities on behalf of the company during that period. By sub-paragraph 78(1)(a)(x) of the Act, a deduction is allowable in respect of a gift of the value of $2 or more made to an approved research institute, where the gift is for the purposes of scientific research.

In terms of the definition in sub-section 73A(6) of the Principal Act, in order to qualify as an approved research institute, a body (other than the Commonwealth Scientific and Industrial Research Organisation) must be a university, college, institute, association or organization approved in writing by the CSIRO, by the Secretary to the Department of Health or by the Secretary to the Department of Employment and Industrial Relations, as an institution, association or organisation for undertaking scientific research (as defined in section 73A) which is or may prove to be of value to Australia. The amendment being made by this clause will enable the Secretary to the Department of Science to also so approve an approved research institute. The amendment will apply from the date of Royal Assent of this Bill.

Clause 21: Gifts, pensions & c.

This clause will amend the provisions of the Principal Act that authorise income tax deductions for gifts of the value of $2 and upwards of money - or of certain property other than money - made to the funds, authorities and institutions that are listed in the provisions. The amendment proposed by clause 21 will insert new sub-paragraphs 78(1)(a)(lxxxvi) and (lxxxvii) in the Principal Act. Sub-paragraph (lxxxvi) will authorise deductions for gifts to the Australian Academy of Technological Sciences, while sub-paragraph (lxxxvii) will authorise deductions for gifts to the Australian College of Occupational Medicine.

By the operation of sub-clause 34(4) of the Bill gifts made to the Academy or to the College after 19 August 1986 will qualify for deduction.

Clause 22: Allowable capital expenditure

The amendment - of section 124AA of the Principal Act - proposed by this clause is complementary to those being made by clauses 23 and 24 to provide for income tax deductions to be allowed in respect of cash bids for off-shore petroleum exploration permits.

Section 124AA specifically includes certain kinds of expenditure as allowable capital expenditure for the purposes of Division 10AA (petroleum mining). The Division authorises the allowance of deductions in respect of allowable capital expenditure incurred by a taxpayer in carrying on petroleum mining operations in Australia. Where that expenditure has been incurred after 19 July 1982, the expenditure is deductible on a straight-line basis over 10 years or the life of the producing field, whichever is the less.

Clause 22 will insert new paragraph 124AA(2)(ba), to bring within the range of allowable capital expenditure, expenditure of a capital nature that the taxpayer is taken to have incurred by the operation of proposed new sub-section 124ABA(1) (see notes on clause 24). The broad effect of that sub-section is to deem the taxpayer to have incurred capital expenditure of an amount equal to the "eligible cash bidding amount", as determined under proposed new sub-section 124ABA(4) being inserted by clause 24.

In general terms, if the taxpayer is the original successful bidder, the eligible cash bidding amount will be the amount of the cash bid paid by the taxpayer under the provisions of the Petroleum (Submerged Lands) Act 1967 for the granting of the exploration permit, reduced by any amounts notified to the Commissioner of Taxation in the event of disposal by the taxpayer of interests in the permit. Where the taxpayer is a successor to the original bidder, the amount will be the amount specified in a notice lodged with the Commissioner under proposed new sub-section 124ABA(2) in relation to the acquisition by the taxpayer of interests in the permit. The amount of the bid or the specified amount will only be included as allowable capital expenditure of the taxpayer in the year of income in which a production licence is granted in respect of the permit area.

Clause 23: Purchase of prospecting or mining rights or information

This clause will amend section 124AB of the Principal Act consequent upon the amendments proposed by clause 24 which will provide income tax deductibility in respect of cash bidding payments.

Section 124AB effectively enables the owner of petroleum mining rights or information to transfer to a purchaser of those rights or that information the benefit of deductions for undeducted capital expenditure incurred in relation to the petroleum field that is the subject of the transferred rights or information. Written notice of the transferred amount must be given jointly to the Commissioner of Taxation by the parties. As a result of the transfer, the purchaser becomes entitled, to the extent of the transferred amount notified to the Commissioner (but not exceeding the vendor's undeducted capital expenditure), to deductions under Division 10AA of the Principal Act. There is a corresponding reduction in the relevant capital expenditure available for deduction to the vendor.

Sub-section 124AB(1) provides for the giving of notice to the Commissioner of the amount to be transferred to the purchaser. The amount may be the whole or a part of the expenditure incurred by the purchaser in acquiring the rights or information. By the amendment of sub-section (1) proposed by this clause, the amount of the expenditure that may be specified in the notice will be further limited to the expenditure so incurred reduced by any amount of a cash bid that has been specified, in relation to the acquisition by the purchaser of the rights or information, in a notice under proposed new sub-section 124ABA(2) - see notes on clause 24. Broadly, the effect of a sub-section 124ABA(2) notice is to transfer to the purchaser the whole or a part of an amount paid by the vendor by way of a cash bid in respect of the acquisition of a permit area. The effect of the proposed amendment is to ensure that a purchaser cannot receive a deduction, by the operation of section 124AB and section 124ABA, for an amount in excess of the amount actually paid to acquire the right.

Clause 24: Inclusion of amounts in allowable capital expenditure in respect of cash bidding payments

Clause 24 will insert new section 124ABA in Division 10AA of Part III of the Principal Act. Section 124ABA provides for the determination of the amount to be included as allowable capital expenditure of the taxpayer for the purposes of the Division (see notes on clause 22).

Sub-section 124ABA(1) specifies the circumstances in which a person's expenditure in relation to a cash bidding permit area will be within the scope of Division 10AA. Where these circumstances exist, the expenditure will qualify as allowable capital expenditure in terms of proposed new paragraph 124AA(2)(ba) - see notes on clause 22 - and as "allowable (post 19 July 1982) capital expenditure" for the purposes of section 124ADG of the Principal Act, and thus be able to be written off on a straight-line basis over the lesser of 10 years or the life of the producing field.

By sub-section 124ABA(1) expenditure of a capital nature (for paragraph 124AA(2)(ba) purposes) is taken to have been incurred where, immediately before the grant of a production licence (defined in new sub-section 124ABA(6) to mean a petroleum production licence or a first production licence under Part III of the Petroleum (Submerged Lands) Act 1967), a person who has a qualifying interest in relation to an exploration permit also has an entitlement to an eligible cash bidding amount in relation to the permit.

In general, a person will be taken to have a qualifying interest in relation to an exploration permit if the person is the holder of either the permit or a retention lease that is related to the permit (see notes on proposed new paragraph 124ABA(5)(d)). The terms "exploration permit" and "retention lease" are defined in proposed new sub-section 124ABA(6) (see notes on that sub-section) to have the meanings they have in the Petroleum (Submerged Lands) Act 1967. In terms of proposed new sub-section 124ABA(4), a person will have an entitlement to an eligible cash bidding amount where, broadly, the person made the original successful cash bid for the exploration permit or has purchased an interest in an exploration permit from a person with such an entitlement and the parties have lodged a notice with the Commissioner of Taxation under sub-section 124ABA(2).

Sub-section 124ABA(1) refers to the grant of "a production licence or a first production licence, as the case may be" because, at the time a production licence is granted, it may not be known whether that licence will be the only one granted in the permit area or the first of a number of such licences.

New sub-section 124ABA(2) will operate where a person ("the vendor") who has an entitlement to an eligible cash bidding amount in relation to an exploration permit sells to another person ("the purchaser") a qualifying interest in relation to that permit. In those circumstances, the vendor and purchaser may give notice to the Commissioner of Taxation that they have agreed to the transfer to the purchaser of so much of the vendor's entitlement to the eligible cash bidding amount as is specified in the notice. By transferring to the purchaser an entitlement to an eligible cash bidding amount, the effect of such a notice will be, broadly, to entitle the purchaser, upon the granting of a production licence, to an allowable capital expenditure amount equal to the specified sum and to correspondingly reduce the vendor's entitlement to relevant deductions by that amount.

The requirements for a valid notice under sub-section 124ABA(2) are set out in sub-section 124ABA(3). By paragraph (a), the notice is to be in writing signed by or on behalf of both the vendor and the purchaser.

Paragraph 124ABA(3)(b) will operate to limit the amount of the entitlement being transferred that can be specified in a sub-section 124ABA(2) notice. By that paragraph, the specified amount cannot exceed the expenditure incurred by the purchaser in acquiring the qualifying interest, reduced by any amount of that expenditure specified in a notice under existing section 124AB in relation to the acquisition (see the notes on clause 23). Paragraph (3)(b) thus ensures that the entitlement (or sum of the entitlements) to an eligible cash bidding amount - determined in accordance with sub-section 124ABA(4) - cannot exceed the amount of the original cash bid (the "qualifying cash bidding payment" as defined in sub-section (6)).

In terms of proposed paragraph 124ABA(3)(c), a notice under sub-section (2), as with a notice under existing section 124AB, is to be lodged with the Commissioner of Taxation not later than 2 months after the end of the year of income of the purchaser in which the acquisition occurred. The Commissioner is, however, authorised to extend the time for lodgment.

A person's entitlement to an eligible cash bidding amount will be determined in accordance with sub-section 124ABA(4). The amount of that entitlement will affect the amount that may be specified in a sub-section 124ABA(2) notice. By virtue of paragraph (a), in order to have an entitlement to an eligible cash bidding amount, a person must have a qualifying interest or interests (in terms of new paragraph 124ABA(5)(d)) in relation to a "cash bidding exploration permit" (as defined in new sub-section 124ABA(6)). The amount of the entitlement is calculated under paragraph (b) and, in short, requires the person to have paid the cash bid and to have been granted the exploration permit.

If the person was the original grantee, the entitlement is the excess of the sum of the cash bid paid (sub-paragraph (b)(i)) and all eligible cash bidding amounts (if any) specified in notices under sub-section 124ABA(2) - see notes on that sub-section - that relate to the acquisition by the person of qualifying interests in relation to the exploration permit (sub-paragraph (b)(ii)) over the sum of eligible cash bidding amounts specified in sub-section 124ABA(2) notices that relate to the acquisition from the person of qualifying interests in relation to the exploration permit.

Thus, for example, if A paid $10m as a cash bid in relation to an exploration permit, and did not dispose of or acquire any other qualifying interests in relation to that permit, A would have an entitlement to an eligible cash bidding amount of $10m - i.e. the "qualifying cash bidding payment" (as defined in new sub-section 124ABA(6)).

In the event that A sold a qualifying interest in the permit to B for $5m (and a sub-section 124ABA(2) notice specified that amount) and subsequently re-acquired part of that interest for $2m (and a sub-section (2) notice specified that amount), A's entitlement to an eligible cash bidding amount would be $7m ($10m - $5m + $2m).

In determining the eligible cash bidding amount entitlement of a person other than the original grantee of the exploration permit, sub-section (4) provides that the amount is the excess of the sum of all eligible cash bidding amounts (if any) specified in sub-section (2) notices relating to the acquisition by that person of a qualifying interest in the permit (sub-paragraph (b)(ii)) over the sum of all eligible cash bidding amounts (if any) specified in sub-section (2) notices in relation to the acquisition from the person of qualifying interests in relation to the exploration permit.

Sub-section 124ABA(5) is an interpretative provision for the purposes of section 124ABA. Paragraph (5)(a) describes those situations in which a production licence will be taken to be related to an exploration permit - this relationship is relevant for the purposes of sub-sections (1) and (2) in determining the eligible cash bidding amount to be included as allowable capital expenditure of a person.

Under sub-paragraph (a)(i) a production licence (as defined in sub-section (6)) will be related to an exploration permit (also defined in sub-section (6)) if, because of the grant of the production licence, the exploration permit ceases to be in force in respect of the block or blocks in respect of which the production licence is granted. A production licence is granted under the Petroleum (Submerged Lands) Act 1967 and authorises the holder to produce petroleum offshore in certain areas where petroleum discoveries have been made within the boundaries of the exploration permit.

Sub-paragraph (a)(ii) is cast in similar terms to sub-paragraph (i) and relates a production licence to an exploration permit where a retention lease that is related to the exploration permit (see notes on paragraph (5)(b)) ceases to be in force in respect of the block or blocks in respect of which the production licence is granted. Broadly, retention leases allow explorers to retain tenure over currently non-commercial discoveries until they become commercial.

Paragraph 124ABA(5)(b) specifies, for the purposes of sub-paragraph (5)(a)(ii), the circumstances in which a retention lease will be taken to be related to an exploration permit. That relationship will exist where, because a retention lease is granted over a block or blocks under the Petroleum (Submerged Lands) Act 1967, the exploration permit ceases to be in force in respect of that block or those blocks.

In the event that an exploration permit or a retention lease is renewed, paragraph (5)(c) provides that the renewed permit or lease is to be taken to be a continuation of that permit (termed the "original permit") or that lease (termed the "original lease"). That is to be the case notwithstanding that the renewal is only in respect of part of the area over which the original permit or the original lease was granted. The concept of the continuation of the original exploration permit or retention lease is relevant for the purposes of determining whether a production licence or a retention lease is related to an exploration permit (in terms of paragraphs (5)(a) and (5)(b)) and also whether a person has a qualifying interest in relation to an exploration permit. Whether a person has such a qualifying interest is determined by reference to proposed paragraph 124ABA(5)(d). That paragraph provides that a person has that interest if the person is the holder of the exploration permit (or an interest in the permit) or is the holder of a retention lease (or an interest in such a lease) that is related to the permit. This latter relationship is governed by the provisions of proposed paragraph (5)(b).

The following definitions of terms used in section 124ABA are contained in sub-section 124ABA(6).

"block" is given the same meaning as in the Petroleum (Submerged Lands) Act 1967, in which, broadly, the term refers to areas of the Earth's surface divided into graticular areas each measuring five minutes of latitude by five minutes of longitude. The definition is relevant for the purposes of paragraphs (5)(a) and (5)(b) in determining whether a production licence or retention lease respectively, is related to an exploration permit.
"cash bidding exploration permit" is defined to mean an exploration permit (also defined) in respect of which a qualifying cash bidding payment (also a defined term) is or was made. A person acquiring an interest in a cash bidding exploration permit may, by virtue of the operation of section 124ABA, be entitled to a deduction in relation to expenditure on the acquisition;
"exploration permit" is defined to mean an exploration permit for petroleum under Part III of the Petroleum (Submerged Lands) Act 1967. Such a permit authorises the holder to explore for petroleum, and to carry on such operations and execute such works as are necessary for that purpose, in the area covered by the permit.
"production licence" refers to a production licence for petroleum under Part III of the Petroleum Submerged Lands) Act 1967. It is the granting of a production licence which triggers the deductibility of an eligible cash bidding amount under Division 10AA of the Principal Act. In broad terms, a production licence is granted in respect of a block or blocks in a permit area in which petroleum has been discovered, and authorises the holder to carry on operations for the recovery of that petroleum.
"qualifying cash bidding payment" is a term also defined by reference to the Petroleum (Submerged Lands) Act 1967. Under that Act, a person, in applying by way of cash bidding for the grant of an exploration permit, must specify the amount that the person is prepared to pay in a single payment to the Commonwealth - i.e. the cash bid. In order to obtain the exploration permit, the successful applicant must, in terms of paragraph 22B(5)(b) of the Act, pay the specified amount to the Commonwealth. An amount so paid on or after 15 January 1986 (the date of announcement of the proposed tax treatment of cash bidding arrangements) is a qualifying cash bidding payment, the amount of which will be relevant for determining a person's entitlement to an eligible cash bidding amount under sub-section 124ABA(4).
"retention lease", as used in sub-section (5) in determining when a production licence is to be taken to be related to an exploration permit, means a retention lease under Part III of the Petroleum (Submerged Lands Act 1967. That Act provides for the granting of a retention lease over a currently non-commercial discovery within an exploration permit area, thus allowing explorers to retain tenure over discoveries until they become commercial. On the granting of such a lease, the exploration permit in respect of that leased area ceases to be in force.

In terms of sub-clause 34(5) of the Bill, the amendments being made by clause 24, as well as those being made by clauses 22 and 23, apply as if they had come into operation on 15 January 1986 - being the date of announcement of the proposal to allow income tax deductions in respect of petroleum cash bids.

Clause 25: Division not to apply to interest on borrowings by Australian Industry Development Corporation

By this clause, section 128EA of the Principal Act is being amended so that certain interest payments by the Australian Industry Development Corporation (AIDC), which might otherwise be eligible, technically, for the benefit of interest withholding tax (IWT) exemption, cannot attract that benefit.

The IWT exemption previously available to the AIDC for its overseas borrowings was withdrawn in 1983 in relation to interest on loans raised pursuant to a contractual obligation entered into after 19 May 1983. However, a recent court decision has revealed a technical deficiency in a provision (sub-section 128G(3), corresponding to that which terminated the AIDC exemption. The court held that, by extending the term of an existing pre-20 May 1983 loan, an IWT-exempt body could preserve its section 128G exemption. Thus, long after it was intended to have been withdrawn, the exemption might still exist.

Consistent, therefore, with the remedial amendment being made to section 128G (see notes on clause 27), section 128EA is being amended by the insertion of proposed sub-section 128EA(4) to preclude such an outcome in relation to AIDC borrowings.

The existing termination provision, sub-section 128EA(3), denies an IWT exemption for relevant AIDC loan interest in respect of loans contracted for after 19 May 1983 but does not effectively address the issue of pre-20 May 1983 loans being rolled-over or extended, perhaps indefinitely. It is also silent as to the treatment of loan facilities contracted for before 20 May 1983 and utilised (or 'drawn down') solely at the free choice of the borrower after that date. The Bill will ensure that interest paid on amounts subject to such loan draw-downs (being amounts that the borrower was not contractually bound to borrow), loan roll-overs and loan extensions occurring after the introduction date of the Bill do not benefit from an exemption in relation to the original loan under section 128EA.

Accordingly, proposed new sub-section 128EA(4) withdraws, in three circumstances, the section 128EA exemption to the extent that the loan interest relates to a loan raised pursuant to a contractual obligation entered into before 20 May 1983 -

first, where the loan money was borrowed after the date of introduction of this Bill (sub-paragraph (a)(i)) and, on or before the date of introduction of the Bill, the borrower was not contractually bound to borrow the loan money (sub-paragraph (a)(ii));
secondly, where the loan interest relates to a loan resulting from a roll-over, after that introduction date, of the whole or a part of a previous loan (paragraph (b)); and
thirdly, where the interest is paid in respect of a period extending beyond the original period of a loan under an extension of that original period occurring after the introduction date (paragraph (c)).

In each instance, exemption is denied in relation to interest payments made after the date in which the sub-section becomes law to the extent to which those payments are a consequence of the occurrence of any of those specified events (viz, a borrowing or draw down, or a loan roll-over or loan extension to which the borrower was not previously bound) after the date of introduction of this Bill.

By clause 2 of the Bill, the new sub-section and the other amendments proposed by the Bill will come into operation on the day on which the Bill receives the Royal Assent. Accordingly, the use of the expression 'after the date of commencement' in the first part of proposed new sub-section 128EA(4), means that the sub-section will have application to loan interest payments made on or after the day succeeding the date of Royal Assent.

As a result of other changes proposed by this Bill to be made to the IWT provisions of the income tax law, the AIDC's interest payments in relation to future borrowings will qualify for IWT exemption, if at all, only under section 128F of the Principal Act.

Clause 26: Division not to apply to certain interest on debentures

This clause amends section 128F of the Principal Act to extend to State Governments and to all State and Commonwealth authorities the exemption from IWT available, broadly, to Australian resident companies for interest paid on certain public or widely spread debenture borrowings outside Australia where the loan funds are used in an Australian business. Access to this exemption is to dovetail with the withdrawal of the section 128GA exemption (see clause 28).

Clause 26 also proposes the removal from section 128F of the requirement that, to attract an IWT exemption, both the relevant loan borrowings and the interest payments on those borrowings be in a non-Australian currency. This change is to be effected (paragraph (a)) by the removal of the words 'in a currency other than the currency of Australia' from paragraphs 128F(1)(b) and (d). By clause 2 and sub-clause 34(6) of the Bill, this amendment will have effect in relation to interest paid after the date on which the Bill receives the Royal Assent.

One of the eligibility tests for the section 128F exemption is that the interest payer be a company that is a resident of Australia. For State Governments and State and Commonwealth authorities, new sub-section (1A) to be inserted in section 128F by paragraph (b) of the clause provides that, in relation to relevant loans raised under a post-1 July 1986 contract, States and their authorities are to be treated as if they were companies and residents of Australia (paragraph (a)).

In effect, the test in section 128F of whether the relevant loan monies have been used in an Australian business is not to apply to the States and authorities. In relation only to those bodies, this result is to be achieved by treating paragraph 128F(4)(b) - the 'Australian business' test - as if it were omitted (paragraph (b)). That is, the use to which eligible borrowings by the States and authorities are put will not be relevant to the issue by the Commissioner of an IWT exemption certificate under section 128F for loans contracted for by the States and authorities after 1 July 1986. Provided all of the other criteria for eligibility set out in section 128F are met, a State or authority would be entitled, upon enactment of new sub-section 128F(1A), to apply to the Commissioner for the issue of a certificate under the section in relation to such loans.

By clause 2 of the Bill the commencement date of proposed new sub-section 128F(1A) is to be the date of Royal Assent, i.e., the day preceding the effective date of withdrawal of the section 128GA exemption presently available to the States and authorities in specified circumstances (see the notes to clause 28).

By paragraph (c) of this clause, the foreign currency requirement is to be removed from the tests set out in sub-section 128F(6) of the Principal Act, by which the exemption for interest on publicly or widely-offered debentures issued overseas may apply to borrowings through an overseas subsidiary of an Australian resident company. This complements the removal, proposed by paragraph (a) of this clause, of the same requirements from paragraphs 128F(1)(b) and (d) of the Principal Act. As with the amendments proposed by paragraph (a), this amendment will have effect in relation to interest paid after the date on which the Bill receives the Royal Assent.

Clause 27: Division not to apply to interest on certain loans

By this clause, section 128G of the Principal Act is to be amended by the addition of a new sub-section, sub-section (4), to make it clear that certain interest payments cannot qualify for the IWT exemption contained in section 128G. That exemption was intended, by a 1983 amendment of the income tax law, to have been terminated in respect of borrowings contracted for after 19 May 1983. However, as mentioned earlier in this memorandum, a court decision has demonstrated that the termination of the section 128G exemption may not be effective in relation to an extension or roll-over after that date of a loan that was contracted for on or before that date (see the notes on clause 25).

Proposed new sub-section (4) will ensure that this deficiency is corrected in respect of interest payments on post-1 July 1986 loan roll-overs and extensions. It will also deny IWT exemption for interest payments in respect of post-1 July 1986 loan borrowings (including draw downs) which the borrower was not, before 2 July 1986, contractually bound to borrow, notwithstanding that such borrowings might occur under a loan facility contracted for prior to 20 May 1983.

Accordingly, proposed sub-section 128G(4) withdraws in three circumstances the IWT exemption in section 128G of the Principal Act for interest paid after the date on which the sub-section becomes law, to the extent that the loan interest relates to a loan raised pursuant to a contractual obligation entered into before 20 May 1983. Those circumstances, corresponding to those described in clause 25 in relation to sub-section 128EA, are -

first, where the loan money was borrowed after 1 July 1986 (sub-paragraph (a)(i)) and, before 2 July 1986, the borrower was not contractually bound to borrow the loan money (sub-paragraph (a)(ii));
secondly, where the loan interest relates to a loan resulting from a roll-over, after 1 July 1986, of the whole or a part of a previous loan (paragraph (b)); and
thirdly, where the interest is paid in respect of a period extending beyond the original period of a loan under an extension of that original period occurring after 1 July 1986 (paragraph (c)).

In each instance, exemption is denied in relation to interest payments made after the date on which the sub-section becomes law to the extent to which those payments are a consequence of the occurrence of any of those specified events (viz, a borrowing or draw down, or a loan roll-over or loan extension to which the borrower was not previously bound) after 1 July 1986.

Clause 28: Division not to apply to interest on certain government loans and government authority loans

This clause effects withdrawal of the IWT exemption previously available for certain loans of States and State and Commonwealth authorities under section 128GA of the Principal Act (see notes on clause 26 for details of an alternative exemption for States and authorities).

Proposed new sub-section (5A) of section 128GA of the Principal Act will withdraw the exemption in several circumstances.

First, by paragraph (5A)(a), interest on a loan raised under a contractual obligation entered into after 1 July 1986 is denied exemption where it is paid after the date of commencement of the section (i.e., after the Bill receives the Royal Assent).

Paragraph (5A)(b) sets out three further circumstances in which interest paid by the States and authorities will no longer attract the section 128GA exemption. They are substantially the same circumstances as those covered by proposed new sub-sections 128EA(4) and 128G(4) (see earlier notes on clauses 25 and 27). In each case, exemption is to be denied to that portion of loan interest in respect of a loan raised pursuant to a contractual obligation entered into on or before 1 July 1986 as flows from the happening of specified events after 1 July 1986. Thus -

sub-paragraph b(i) denies exemption where, after 1 July 1986, loan money is borrowed and the borrower was not contractually bound, before 2 July 1986, to borrow the loan money;
sub-paragraph b(ii) denies exemption where the loan interest relates to a loan resulting from a roll-over, after 1 July 1986, of the whole or a part of a previous loan; and
by sub-paragraph b(iii), no exemption is to be available for such part of loan interest as is paid in respect of a period extending beyond the original period of a loan under an extension of that original period occurring after 1 July 1986.

Withdrawal of the section 128GA IWT exemption to be effected by paragraph (5A)(b) also applies only in relation to loan interest payments that are made after the date of commencement of the sub-section.

Clause 29: Amendment of assessments

By this clause, it is proposed to amend section 170 of the Principal Act, which governs the power of the Commissioner to amend income tax assessments. Sub-section 170(10), which provides that nothing in the section prevents the amendment of an assessment at any time for the purposes of giving effect to certain provisions specified in the sub-section, is to be amended to include a reference to new sub-section 124ABA(4).

Sub-section 124ABA(4), being inserted in the Principal Act by clause 24, provides for the determination of a person's entitlement to an eligible cash bidding amount (see notes on clause 24). As that determination is dependent upon notices being lodged with the Commissioner, the inclusion of sub-section 124ABA(4) in sub-section 170(10) will allow income tax assessments to be amended at any time to take account of notices which have been lodged after assessments have issued.

Clause 30: Grounds of objection and burden of proof

This amendment to the burden of proof provision contained in section 190 of the Principal Act restores a rule that was unintentionally altered by the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986. Prior to the enactment of that Act, it was well settled that, in every taxation reference to a Board of Review or appeal to a Supreme Court, the Federal Court or the High Court, the burden of proving that the assessment was excessive rested with the taxpayer, irrespective of the party who brought the appeal.

However, the amendment of section 190 of the Principal Act made by the Taxation Boards of Review (Transfer of Jurisdiction) Act disturbed this well settled policy by specifically referring to "a review before the Tribunal or an appeal to a Supreme Court". This reference to a Supreme Court had the unintended effect that section 190 had no application to appeals to the Federal Court and the High Court from decisions of the Administrative Appeals Tribunal or a Supreme Court.

The amendment to be made by this clause will replace the reference to "a Supreme Court" with a reference to "a court", thus ensuring that section 190 will, as it has in the past, apply to proceedings in a Supreme Court, the Federal Court and the High Court.

By clause 46 the amendment being made by this clause will apply to hearings that commence in the Federal Court and High Court after the date of Royal Assent to this Bill.

Clause 31: Provisional tax on estimated income

Clause 31 will amend section 221YDA of the Principal Act that provides for the calculation of provisional tax where a taxpayer chooses to "self-assess", that is, to have provisional tax varied on the basis of his or her own estimate of taxable income, rebates of tax, prescribed payments and deductions from those payments and tax instalment deductions from his or her salary or wages.

By paragraph (a) the reference to section 46C of the Principal Act will be omitted from paragraph (1)(da) and sub-paragraph (2)(a)(ii) of section 221YDA. This is a drafting measure following the repeal of section 46C by the Income Tax Assessment Amendment Act (No. 4) 1983. By paragraph (b) references to section 160ACD of the Principal Act are to be inserted in paragraph (1)(da) and sub-paragraph (2)(a)(ii), thus enabling Christmas Island residents who are liable for provisional tax and who choose to "self-assess", to have the section 160ACD rebate taken into account in the calculation of provisional tax under section 221YDA. Section 160ACD gives effect to the personal income tax phasing arrangements that apply to Christmas Island residents, by allowing a rebate of tax calculated having regard to the tax payable on income that, prior to 1 July 1985, was exempt from tax in Australia.

As a consequence of the operation of sub-clause 34(7) of the Bill, the amendment made by paragraph (b) will apply in relation to the ascertainment of provisional tax in respect of the 1986-87 income year and all subsequent years.

Clause 32: Provisional tax for 1986-87 year

The purpose of this clause, which will not amend the Principal Act, is to specify the basis for calculating the 1986-87 provisional tax to be notified in assessments based on 1985-86 income and payable by provisional taxpayers who do not "self-assess" (see notes on clause 31). Broadly, the clause requires that the provisional tax is to be calculated by applying 1986-87 rates of tax (without regard to the arrangements for pro-rating of the tax-free threshold) and Medicare levy to 1985-86 taxable incomes as increased by 11 per cent. With the exception of the rebate available to Christmas Island residents on Island and ex-Australia source income and averaging rebates, which are discussed below, rebates are to be taken into account as allowed in the taxpayer's 1985-86 income tax assessment.

Where an amount of a net capital gain has been included in a taxpayer's 1985-86 assessable income by virtue of Part IIIA of the Principal Act, the provisional tax for 1986-87 will be calculated by reference to the amount that would have been the taxable income for 1985-86 if the net capital gain amount had not been included in the taxpayer's assessable income for that year.

Where a taxpayer chooses to "self-assess" the provisional tax will be, basically, the amount calculated by applying 1986-87 rates of tax and Medicare levy to the taxpayer's estimated taxable income and by deducting estimated 1986-87 rebates. By virtue of sub-section 221YDA(1AA) of the Principal Act, an estimate of taxable income for this purpose is to be made on the basis that the assessable income will not include the amount of any net capital gain that may be included in the taxpayer's assessable income by virtue of Part IIIA of the Principal Act.

For taxpayers deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premiums), or section 158D (abnormal income of authors or inventors) of the Principal Act, provisional tax, before deduction of rebates, is to be calculated by applying to their 1985-86 taxable income increased by 11 per cent, the 1986-87 rate of tax applicable to their 1985-86 notional income. That is, the rate of tax is not to be increased to reflect an 11 per cent increase in notional income.

Taxpayers who were under 18 years of age at 30 June 1986 were liable for tax for 1985-86 under the special provisions applying to minors if, in the case of a non-resident, the minor had any eligible taxable income for the purposes of Division 6AA of Part III of the Principal Act for that year or if, in the case of a resident, that eligible taxable income exceeded $416. For purposes of the 1986-87 provisional tax calculation, the portion of a minor's taxable income, as increased by 11 per cent, that is to be taken as eligible taxable income is to be in the same proportion as that which the 1985-86 eligible taxable income of the taxpayer bore to his or her taxable income for that year.

Where the 1985-86 eligible taxable income of a taxpayer to whom the provisions of Division 6AA of Part III of the Principal Act applied for that year includes a net capital gains amount, the eligible taxable income for that year is, for purposes of the 1986-87 provisional tax calculation, adjusted to the amount that would have been the taxpayer's eligible taxable income if that net capital gains amount had not been included in the taxpayer's 1985-86 assessable income.

For primary producers who do not "self-assess" the clause will require that, for provisional tax purposes, any averaging rebate to which the primary producer is entitled be recalculated using 1985-86 taxable income (as adjusted for any income equalisation withdrawals, capital expenditure on a qualifying Australian film or subscription to shares in licensed management and investment companies) as increased by 11 per cent. 1986-87 rates of tax will be applied in the calculation on the basis of the average income used for 1985-86 assessment purposes. Average income will not be recalculated to reflect the notional 11 per cent increase in taxable income for provisional tax purposes. A primary producer may qualify for a part only of the averaging benefit in 1985-86, that is, his or her income other than from primary production in that year may have exceeded $5,000. In such a case the clause will ensure, in effect, that the proportion of the averaging adjustment - equal to the proportion that income from primary production bears to total taxable income - to be taken into account in calculating 1986-87 provisional tax is the same as the 1985-86 proportion. That is, it is not to be reduced to reflect the notional 11 per cent increase in income other than from primary production.

Where an amount of income tax or Medicare levy was payable in 1985-86, an amount additional to the provisional tax (if any) otherwise payable representing Medicare levy for 1986-87 is to be incorporated in the 1986-87 provisional tax calculation. In these situations the Medicare levy component of provisional tax will be calculated by applying the 1986-87 year Medicare levy rate of 1.145 per cent to 1985-86 taxable income as increased by 11 per cent. The increased low income thresholds to apply for levy purposes in 1986-87 will be taken into account. In addition, wherever a part or full exemption from levy was received by an individual in his or her 1985-86 assessment, the same exemption will be provided in the calculation of levy for 1986-87 provisional tax purposes.

For Christmas Island residents entitled in 1985-86 income tax assessments to a rebate of tax under section 160ACD of the Principal Act, 1986-87 provisional tax will be calculated by taking into account two-thirds of that 1985-86 rebate entitlement reflecting the reduction in the rate of rebate available for the 1986-87 year of income.

For a taxpayer whose 1985-86 taxable income reflects a deduction allowed for capital moneys expended in producing a qualifying Australian film or for subscriptions to shares in licensed management and investment companies, 1986-87 provisional tax will be calculated as if no such deduction had been allowed, with the taxable income so adjusted increased by 11 per cent.

Clause 33: Transitional

This clause, which will not amend the Principal Act, relates to clauses 25, 27 and 28. Clauses 25 and 27 will amend existing sections 128EA and 128G, respectively, of the Principal Act to correct a technical defect in 1983 provisions withdrawing the exemptions from withholding tax that had been available for interest paid by the AIDC and Australian entities on certain external borrowings (see notes on clauses 25 and 27). Clause 28 will amend existing section 128GA of the Principal Act to withdraw exemptions from withholding tax available for interest paid by the States, and by Commonwealth and State authorities, on certain external borrowings (see notes on clause 28).

This transitional provision is necessary because the interest payments to be affected are those made, after the date on which the amending Bill receives the Royal Assent, on certain loan monies borrowed or rolled over, or on a loan the term of which has been extended, after the date of introduction of this Bill in the case of clause 25 or after 1 July 1986 in the cases of clauses 27 and 28. Interest payments made before the respective commencement dates may continue to qualify for IWT exemption under the sections concerned. Accordingly, the clause is designed as an anti-avoidance measure to guard against the 'loading' of payments made during the transitional period to include payments related to later periods, being payments which would, by the amendments contained in clauses 25, 27 and 28, not be eligible for IWT exemption if made in those later periods.

Sub-clause (1) will operate so that the exemption otherwise available under section 128EA, 128G or 128GA for interest paid during the transitional period ('the pre-commencement interest') (paragraph (a)) will not be available in respect of so much of it as the Commissioner of Taxation is satisfied was paid on or before the date of commencement of the sub-clause, rather than at a later time, for the purpose of obtaining the benefit of that exemption (paragraph (b)). In forming his opinion, the Commissioner of Taxation is to have regard to certain specified matters, being the amount of the loan involved, the terms of any relevant contractual obligation and the amount of the interest.

Sub-clause (2) will apply so that, in a case where sub-clause (1) operates to deny exemption from withholding tax and the payer of the interest has failed to deduct the necessary withholding tax, the payer will not be guilty of an offence under the Income Tax Assessment Act 1936.

Clause 34: Application of amendments

This clause, which will not amend the Principal Act, specifies the dates from which, or the years of income in which, various amendments proposed in Part VII of the Bill will first apply. An explanation of these application provisions is contained in the notes on the clauses to which each of the provisions applies.

PART VIII - AMENDMENTS OF THE INCOME TAX (INTERNATIONAL AGREEMENTS) ACT 1953

Clause 35: Principal Act

Clause 35 formally provides that references to the "Principal Act" in Part VIII of this Bill relate to the Income Tax (International Agreements) Act 1953.

Clause 36: Interpretation

This clause will amend section 3 of the Principal Act which contains a number of definitions for the more convenient interpretation of the Act.

Paragraph (a) will insert in sub-section 3(1) of the Principal Act a definition of the term 'the Austrian agreement'. This term is defined to mean the comprehensive taxation agreement with Austria which is, by clause 39 of the Bill, to be incorporated as Schedule 27 of the Principal Act.

Paragraph (b) will substitute a new definition of the term "the Netherlands agreement". As the second Netherlands protocol will amend the existing agreement and protocol, the term "the Netherlands agreement" is being re-defined to mean the agreement and protocol (a copy of each of which is set out in Schedule 10 to the Principal Act) as amended by "the second Netherlands protocol". Paragraph (c) will add a definition of the term "the second Netherlands protocol" which is, by clause 39 of the Bill, being incorporated as schedule 10A to the Principal Act.

Clause 37: Second Protocol with the Netherlands

This clause will insert section 11AA in the Principal Act, which will give the force of law in Australia to the second protocol with the Netherlands with effect from the dates set out in Article 3 of the protocol.

Paragraph (1)(a) of new section 11AA will give the force of law in Australia to the transitional measures specified in sub-paragraph (1)(a) of Article 3 of the protocol (see notes on that Article). Broadly, those transitional measures apply to interest secured by mortgage of real property or of any other direct interest in or over land in pursuance of a contractual obligation entered into before 30 June 1986. In such cases, the protocol will, upon entering into force, have effect for Australian tax purposes in respect of income of the year of income commencing on 1 July 1988 and all subsequent income years.

Paragraph (1)(b), will give the force of law in Australia to the protocol so that it will have effect in all cases not covered by the transitional measures for Australian tax purposes in respect of income of the year of income commencing 1 July 1986 and all subsequent income years.

Sub-section (2) provides for the date on which the protocol enters into force to be notified in the Gazette as soon as practicable thereafter. This will provide a readily available and authoritative source from which persons may ascertain the fact and date of entry into force of the agreement.

Clause 38: Agreement with the Republic of Austria

This clause will insert section 11R in the Principal Act, which will give the force of law in Australia to the comprehensive taxation agreement with Austria from the dates set out in Article 27 of the agreement.

By sub-section 11R(1), the Austrian agreement, when it enters into force, will have effect in Australia, in relation to withholding tax in respect of dividends or interest derived on or after 1 January in the calendar year next following that in which the agreement enters into force. In respect of tax other than withholding tax, the agreement shall have effect in respect of income of any year of income commencing on or after 1 July in the calendar year next following that in which the agreement enters force.

In accordance with Article 27 of the agreement, sub-section 11R(2) provides for the date on which the agreement enters into force to be notified in the Gazette as soon as practicable thereafter. As mentioned in relation to the Netherlands protocol, this will provide a readily available and authoritative source from which persons may ascertain the fact and date of entry into force of the agreement.

Clause 39: Schedules 10A and 27

This clause will add the second protocol with the Netherlands and the comprehensive agreement with Austria as schedules 10A and 27 respectively to the Principal Act.

SECOND PROTOCOL TO THE AGREEMENT WITH THE NETHERLANDS

Under Australia's existing comprehensive taxation agreement and protocol with the Netherlands (which were signed and entered into force in 1976), interest from debt claims secured by mortgage is treated as income from real property. The effect of the second protocol will be to modify the treatment accorded under the agreement to such interest so it is treated in the same way as other interest under the agreement.

Article 1 - Amendment of Article 6

This article proposes deleting the second sentence of paragraph (2) of Article 6 of the agreement. That sentence requires that income from debt claims of every kind, other than bonds or debentures, secured by mortgage of real property or of any other direct interest in or over land be regarded as income from real property. The effect of the amendment proposed by Article 1 is that interest from debt claims secured by mortgage will no longer specifically be treated as income from real property but will be treated under the agreement as interest income.

Under its domestic law, Netherlands tax does not generally apply to interest from Australia that is treated under the agreement as income from real property. The amendment made by this article will enable the Netherlands to tax interest derived by a Netherlands resident from debt claims secured by mortgage of real property or any other direct interest in or over land situated in Australia, subject to the allowance of a credit for the Australian withholding tax paid, in accordance with the general treatment of interest income under the agreement.

The position for Australian tax purposes of mortgage interest flowing from Australia to the Netherlands will be unaffected by the amendment - such interest will remain subject to Australian interest withholding tax at the rate of 10 per cent. However, mortgage interest derived from the Netherlands by a resident of Australia that is presently exempt from Australian income tax (as income from real property) where it is not exempt from tax in the Netherlands will be liable to Australian income tax and generally subject to Netherlands tax not exceeding 10 per cent, with Australia allowing a credit for the Netherlands tax.

Article 2 - Amendment of Article 11

The amendment of Article 11 of the agreement proposed by this article is to give effect to a minor drafting measure which arises out of the amendment proposed by Article 1 of this Protocol. It will substitute in paragraph (3) of Article 11 of the agreement a new definition of the term interest, which will have the effect of modifying the existing definition of that term to exclude a reference to Article 6.

Under the existing definition of interest, income to which Article 6 applies is specifically excluded, so that when read in conjunction with Article 6, it is clear that interest secured by mortgage of real property or of any other interest in or over land would be regarded, for purposes of the agreement, as income from real property and not as interest income. As a consequence of the amendment to the agreement proposed by Article 1 of this Protocol, Article 6 will cease to have any application to interest income and all interest will thus fall to be treated in accordance with Article 11 of the agreement.

Article 3 - Entry into force

By this article the Protocol will form an integral part of the Netherlands agreement and will enter into force on the first day of the second month after the date on which notes are exchanged through the diplomatic channel notifying that the last of such things has been done in Australia and the Netherlands as is necessary to give the force of law to the protocol in each country. As mentioned earlier in this memorandum, the protocol will be given the force of law in Australia by new section 11AA that is to be inserted in the Income Tax (International Agreements) Act 1953, by clause 37 of the Bill (see notes on that clause).

Sub-paragraph (1)(b) of Article 3 provides that, upon entering into force, the protocol will generally have effect in Australia in respect of tax on income of any year of income beginning on or after 1 July 1986 and, in the Netherlands, in respect of taxes for taxable years and periods beginning on or after 1 January 1986. However, by sub-paragraph (1)(a), transitional measures apply to income from debt claims of every kind, excluding bonds or debentures, secured by mortgage of real property or of any other direct interest in or over land where the relevant income is in pursuance of a contractual obligation entered into before 30 June 1986. The transitional arrangements will operate so that, in Australia, the terms of the protocol will not apply until years of income commencing on or after 1 July 1988 and, in the Netherlands, for taxable years and periods beginning, on or after 1 January 1988.

By paragraph (2), the transitional entry into force measures contained in sub-paragraph (1)(a) are subject to two safeguarding measures of an anti-avoidance nature. Income to which the safeguarding measures apply is excluded from the operation of the transitional entry into force measures and, as a consequence, the modifications made by the Protocol will apply in these cases from the earlier dates determined in accordance with sub-paragraph (1)(b). The safeguarding measures effectively apply -

to a pre-payment of interest to the extent it is attributable to a period later than the period covered by the transitional arrangements (sub-paragraph (2)(a)); and
to interest derived pursuant to a contractual obligation entered into on or before 30 June 1986 if the term of the loan is extended after that date (sub-paragraph (2)(b)).

AGREEMENT WITH AUSTRIA

Subject to some minor differences, the agreement accords in substantial practical effect with other comprehensive taxation agreements to which Australia is a party. Like them, the agreement allocates the right to tax some income to the country of source, sometimes at limited rates, while the country of residence is given the sole right to tax other types of income. It contains provisions to the effect that where income may be taxed in both countries, the country of residence, if it taxes, is to allow a credit against its own tax for the tax imposed by the country of source.

Article 1 - Personal Scope

The agreement will apply to persons (which term includes companies) who are residents of either Australia or Austria, or of both.

The situation of persons who are dual residents (i.e. residents of both countries) is dealt with in Article 4.

Article 2 - Taxes Covered

This article specifies the existing taxes to which the agreement applies. These are, in broad terms, the Australian income tax (including the tax to be known as the resource rent tax, when it comes into law), and the Austrian income tax, specifically including corporation tax, tax on interest yields, directors tax and the tax on commercial and industrial enterprises, including tax levied on the sum of wages. The article will automatically extend the application of the agreement to any identical or substantially similar taxes which may subsequently be imposed by either country in addition to, or in place of, the existing taxes.

Article 3 - General Definitions

This article provides definitions for a number of the terms used in the agreement. Some other terms are defined in the articles to which they relate and terms not defined in the agreement are to have the meaning which they have under the taxation law of the country applying the agreement.

As with Australia's other modern taxation agreements, "Australia" is defined as including external territories and areas of the continental shelf. By reason of this definition, Australia retains taxing rights in relation to mineral exploration and mining activities on its continental shelf. The definition is also relevant to the taxation by Australia of shipping and airline profits in accordance with Article 8 of the agreement.

Article 4 - Residence

This article sets out the basis on which the residential status of a person is to be determined for the purposes of the agreement. Residential status is one of the criteria for determining each country's taxing rights and is a necessary condition for the provision of relief under the agreement. Residence according to each country's taxation law provides the basic test. The article also includes rules for determining how residency is to be allocated to one or other of the countries for the purposes of the agreement where a taxpayer - whether an individual, a company or other entity - is regarded as a resident under the domestic laws of both countries.

Article 5 - Permanent Establishment

Application of various provisions of the agreement (principally Article 7 relating to business profits) is dependent upon whether a resident of one country has a "permanent establishment" in the other, and if so, whether income derived by the person in the other country is effectively connected with that "permanent establishment". The definition of the term "permanent establishment" which this article embodies corresponds closely with definitions of the term in Australia's other double taxation agreements.

The primary meaning of the defined term is expressed in paragraph (1) as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. Other paragraphs of the article are concerned with elaborating on the meaning of the term by giving examples of what may constitute a "permanent establishment" - such as an office, a mine or an agricultural property - and by specifying the circumstances in which a resident of one country shall, or shall not, be deemed to have a "permanent establishment" in the other country.

Article 6 - Income from Real Property

By this article, income from real property, including income from the direct use, letting or use in any other form of any land or interest therein, and royalties and other payments in respect of the operation of mines or quarries or of the exploitation of any natural resource, may be taxed in the country in which the real property, land, mine, quarry or natural resource is situated.

Income to which this article applies is excluded from the scope of Article 7 (by paragraph (6) of that article) and is therefore taxable in the country of source regardless of whether or not the recipient has a "permanent establishment" in that country.

Article 7 - Business Profits

This article is concerned with the taxation of business profits derived by a resident of one country from sources in the other country.

The taxing of these profits depends on whether they are attributable to a "permanent establishment" of the taxpayer in that other country. If they are not, the profits will be taxed only in the country of residence of the taxpayer. If, however, a resident of one country carries on business through a "permanent establishment" (as defined in Article 5) in the other country, the country in which the "permanent establishment" is situated may tax profits attributable to the establishment.

The article provides for profits of the "permanent establishment" to be determined on the basis of arm's length dealing. These provisions correspond in their practical effect with comparable provisions in Australia's other double taxation agreements, and with Division 13 of the Income Tax Assessment Act.

Paragraph (5) of the article allows the application of provisions of the source country's domestic law (e.g. Australia's Division 13) where the correct amount of profits attributable to a "permanent establishment" is incapable of determination or the ascertainment thereof presents exceptional difficulties, for example, where there is insufficient information available to determine the profits of the "permanent establishment" on the basis of arm's length dealing.

Paragraph (7) preserves to each country the right to continue to apply any special provisions in its domestic law relating to the taxation of income from insurance with non-residents.

Paragraph (8) makes it clear that this article applies to income derived by a sleeping partner from participating in a sleeping partnership created under Austrian law.

Paragraph (9) is intended to clarify Australia's right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a corporate unit trust) from the carrying on of a business in Australia, to which a resident of Austria is beneficially entitled. It ensures that such distributions will be subject to tax in Australia where, in accordance with the principles set out in Article 5, the trustee of the relevant trust estate has a permanent establishment in Australia in relation to that business. It is comparable in effect to sub-section 3(11) of the Income Tax (International Agreements) Act 1953, which has a similar effect where the beneficiary is a resident of a country with which Australia had signed a comprehensive taxation agreement on or before 19 August 1984.

Article 8 - Ships and Aircraft

Under this article the right to tax profits from the operation of ships or aircraft in international traffic, including profits derived from participation in a pool service, a joint transport operating organisation or an international operating agency, is generally reserved to the country of residence of the operator.

Any profits derived by a resident of one country from internal traffic in the other country may be taxed in that other country. By reason of the definition of "Australia" contained in Article 3 and the terms of paragraph (4) of this article, any shipments by air or sea from a place in Australia to another place in Australia, its continental shelf or external territories are treated as forming part of internal traffic.

Paragraph (5) ensures that income derived from the alienation of ships or aircraft operated internationally while owned by an enterprise of one country, or of personal property pertaining to the operation of those ships or aircraft, shall be taxed only by that country.

Article 9 - Associated Enterprises

This article authorises the re-allocation of profits between related enterprises in Australia and Austria on an arm's length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between independent enterprises dealing at arm's length with one another.

By virtue of paragraph (2) of the article, each country retains the right to apply its domestic law (e.g. Australia's Division 13) to its own enterprises provided that such provisions are applied, so far as it is practicable to do so, in accordance with the principles of this article.

Where a re-allocation of profits is effected under this article or, by virtue of paragraph (2), under domestic law, so that the profits of an enterprise of one country are adjusted upwards, a form of double taxation would arise if the profits so re-allocated continued to be subject to tax in the hands of an associated enterprise in the other country. Paragraph (3) requires the other country concerned to make an appropriate adjustment to the amount of tax charged on the profits involved with a view to relieving any such double taxation.

Article 10 - Dividends

This article allows both countries to tax dividends flowing between them but in general limits the tax that the country of source may impose on dividends payable to beneficial owners resident in the other country. Under this article, Australia would be required to reduce its rate of withholding tax which presently applies to dividends paid to residents of Austria from 30 per cent to 15 per cent of the gross amount of the dividends. (However, the limited taxing right given to Australia by this article is unlikely to have any practical effect because of a decision by the Australian Government, announced subsequently to signature of the agreement, that it will unilaterally abolish dividend withholding tax as from 1 July 1987).

Paragraph (4) provides that the limitation on the source country's tax will not apply to dividends derived by a resident of the other country who has a "permanent establishment" or "fixed base" in the country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that "permanent establishment" or "fixed base". In those cases, the dividends will not be subject to the limited rate of tax prescribed by the article but will be treated as "business profits" or "income from independent personal services" and subject to the source country's tax in accordance with the provisions of Article 7 or Article 14, as the case may be.

The purpose of paragraph (5) of this article is to ensure, broadly, that one country will not tax dividends paid by a company resident solely in the other country unless the person deriving the dividends is a resident of the first country or the holding giving rise to the dividends is effectively connected with a "permanent establishment" or "fixed base" in that country.

Paragraph (6) preserves the right of Australia to impose the "branch profits" tax provided for in its domestic law. It also provides that, for the purpose of calculating undistributed profits tax, the branch profits tax will not be taken into account, but the company will be deemed to have paid dividends of such amount that tax equal to the amount of the branch profits tax would have been payable under the article. (However, the Australian Government has also announced that the "branch profits" tax will be unilaterally abolished from 1 July 1987, so that, here again, the paragraph is unlikely to have practical effect).

Article 11 - Interest

This article requires the country of source generally to limit its tax on interest derived by residents of the other country to 10 per cent of the gross amount of the interest. As that rate is the same as the standard rate of interest withholding tax under the Australian law, that limitation will not affect the rate of Australian tax on interest derived by residents of Austria.

Interest derived by a resident of one country which is effectively connected with a "permanent establishment" or "fixed base" of that person in the other country will form part of the business profits of that establishment or "fixed base" and be subject to the provisions of Article 7 or Article 14. Accordingly, paragraph (4) of Article 11 requires that the 10 per cent limitation is not to apply to such interest.

The article also contains a general safeguard (paragraph (6)) against payments of excessive interest - in cases where there is a special relationship between the persons associated with a loan transaction - by restricting the 10 per cent limitation in such cases to an amount of interest which might be expected to have been agreed upon by persons dealing at arm's length.

Article 12 - Royalties

This article in general limits to 10 per cent of the gross amount of the royalties the tax that the country of source may impose on royalties paid to beneficial owners resident in the other country.

The 10 per cent limitation is not to apply to natural resource royalties, which, in accordance with Article 6, are to remain taxable in the country of source without limitation of the tax that may be imposed.

In the absence of a double taxation agreement, Australia generally taxes royalties paid to non-residents (other than film and video tape royalties which are taxed at the rate of 10 per cent of the gross royalties), as reduced by allowable expenses, at ordinary rates of tax.

As in the case of dividends and interest, it is specified in paragraph (4) that the 10 per cent limitation of tax in the country of origin is not to apply to royalties effectively connected with a "permanent establishment" or "fixed base" in that country.

By paragraph (6), if royalties flow between related persons, the 10 per cent limitation will apply only to the extent that the royalties are not excessive.

Article 13 - Alienation of Property

Under this article, income from the alienation of real property may be taxed in the country in which that property is situated.

Real property is defined for the purposes of the article as including -

a lease of land or other direct interest in or over land - in which case it is deemed to be situated in the country in which the land is situated.
rights to exploit, or to explore for, natural resources - in which case it is deemed to be situated in the country in which the natural resources are situated or the exploration may take place.
shares or comparable interests in a company the assets of which consist wholly or principally of direct interests in or over land in one of the countries, or of rights to exploit or explore for natural resources in one of the countries - in which case it is deemed to be situated in the country in which the assets or the principal assets of the company are situated.

Article 14 - Independent Personal Services

The purpose of this article is to ensure that income from professional services (as defined by paragraph 2) or other independent personal services is taxable only in the country of residence except where the recipient has a "fixed base" regularly available in the other country for the purpose of performing his or her activities. If there is a "fixed base", income may be taxed in that other country, but only to the extent to which it is attributable to that "fixed base".

Remuneration derived as an employee and income derived by public entertainers are the subject of other articles of the agreement and are not covered by this article.

Article 15 - Dependent Personal Services

Article 15 provides the basis upon which the remuneration of visiting employees is to be taxed. Generally, salaries, wages etc. derived by a resident of one country from an employment exercised in the other country will be liable to tax in that other country. However, subject to specified conditions, there is a conventional provision for exemption from tax in the country being visited where only visits of a short-term nature are involved. The conditions for exemption are that the visit or visits not exceed, in the aggregate, 183 days in the year of income of the country visited, that the remuneration is paid by, or on behalf of, an employer who is not a resident of the country being visited, that the remuneration is not deductible in determining taxable profits of a "permanent establishment" or "fixed base" which the employer has in the country being visited and that the remuneration will be subject to tax in the country of residence. Where these conditions are met, the remuneration so derived will be liable to tax only in the country of residence.

By paragraph (3) of the article, income from an employment exercised aboard a ship or aircraft operated in international traffic is to be taxed in the country of residence of the operator.

Article 16 - Directors' Fees

Under this article, remuneration derived by a resident of one country in the capacity of a director of a company which is a resident of the other country may be taxed in the country where the company is resident.

Article 17 - Entertainers

By this article, income derived by visiting entertainers (including athletes) from their personal activities as such will continue to be taxed in the country in which the activities are exercised, irrespective of the duration of the visit.

Paragraph (2) of this article is a safeguarding provision designed to ensure that income in respect of personal activities exercised by an entertainer, whether received by the entertainer or by another person, e.g., a separate enterprise which formally provides the entertainer's services, is taxed in the country in which the entertainer performs, whether or not that other person has a "permanent establishment" or "fixed base" in that country.

Article 18 - Pensions and Annuities

Under this article pensions and annuities (other than a government service pension referred to in paragraph 2 of Article 19) are to be taxed only by the country of residence of the recipients.

Paragraph (3) ensures that any alimony or other maintenance payment is taxable only in the country in which the payments arise.

Article 19 - Government Service

Paragraph (1) of this article provides that remuneration, other than a pension or annuity, in respect of services rendered in the discharge of governmental functions to a government (including a State or local government) of one of the countries will be taxable only in that country. However, such remuneration shall be taxable only in the other country if the services are rendered in that other country and the recipient is a citizen or national of, or ordinarily resides in, that other country.

Paragraph (2) provides that any pension paid by the government (including State and local government) of one country in respect of services rendered to that government may be taxed only in that country, unless the recipient is a resident of, and a citizen or national of, the other country, in which case the pension is to be taxed only in the other country.

By paragraph (3) the operation of paragraph (1) of this article is also extended to members of the Austrian permanent delegation of foreign commerce in Australia.

Paragraph (4) provides, in effect, that paragraph (1) does not apply where the services are rendered in connection with a trade or business carried on by a government. In such a case, the provisions of Articles 15 or 16, as the case may be, apply.

Article 20 - Students

This article applies to students temporarily present in a country solely for the purpose of their education who are, or immediately before the visit were, resident in the other country. In these circumstances, the students will be exempt from tax in the country visited in respect of payments received from abroad for the purposes of their maintenance or education.

Article 21 - Income Not Expressly Mentioned

This article provides rules for the allocation between the two countries of taxing rights in relation to items of income not expressly mentioned in the preceding articles of the agreement.

Broadly, such income derived by a resident of one country is to be taxed only in his or her country of residence unless it is derived from sources in the other country, in which case the income may also be taxed in the country of source.

However, the first-mentioned exclusive taxing right of the country of residence does not apply where the income is effectively connected with a "permanent establishment" or "fixed base" which a resident of one country has in the other. In such cases, the provisions of Article 7 or Article 14, as the case may be, will apply.

Article 22 - Sources of Income

Article 22 specifies the source of various classes of income, for the purposes of ensuring that each country is empowered to exercise the taxing rights allocated to it by the agreement over residents of the other country and that, as intended by the agreement, double taxation relief will be given by the country of residence in respect of tax levied by the country of source in accordance with the taxing rights allocated to it under the agreement. The provision resolves any conflict in domestic law source rules and obviates any question of income not having, by domestic law rules, a source in the country that is, by the agreement, entitled to tax that income in the hands of a resident of the other country.

Broadly, classes of income which have a source in Australia are outlined in paragraph (1), while classes of income, which for the purposes of Article 23 and Australian tax, have a source in Austria are outlined in paragraph (2).

Article 23 - Methods of Elimination of Double Taxation

Double taxation does not arise in respect of income flowing between the two countries where the terms of the agreement provide for the income to be taxed only in one country or the other, or where the domestic taxation law of one of the countries frees the income from its tax. It is necessary, however, to prescribe a method for relieving double taxation in respect of other classes of income which are subject to tax in both countries. Australia's other comprehensive taxation agreements provide for a credit basis for the relief of double taxation to be applied by Australia and, usually, the other country. In these cases, the country of residence is required to give credit against its tax for the tax of the country of source. This approach has generally been adopted in this agreement.

Australia's existing unilateral double taxation relief arrangements will not apply to income in relation to which the agreement will have effect. Those existing arrangements are to be replaced, with effect from the commencement of the 1987-1988 year of income, with a worldwide general foreign tax credit system, the rules for which were contained in the Taxation Laws Amendment (Foreign Tax Credits) Act 1986, which received the Royal Assent on 24 June 1986.

The general foreign tax credit system together with the terms of this article and of the agreement generally, will form the basis of Australia's arrangements for relieving a resident of Australia from double taxation on income from sources in Austria.

By paragraph (1) of the article, Australia will relieve double taxation of income derived by its residents from sources in Austria which, in accordance with the agreement, may be taxed by both countries, by allowing a credit, up to the amount of the Australian income tax referable to the relevant Austrian income, for Austrian tax (including the tax on commercial and industrial enterprises where it is levied on a basis other than capital or the sum of wages), paid by the Australian resident.

Under the new general foreign tax credit system, in addition to a credit for Austrian tax on dividends, an Australian resident company that has a controlling interest of at least 10 per cent in an Austrian subsidiary will be allowed a credit for "underlying" Austrian taxes paid by its subsidiary on the portion of the profits from which the dividends flowing to the Australian company were paid. Credit for underlying tax will be available for unlimited tiers of related companies provided each company in the chain has a 10 per cent controlling interest in the company immediately below it, and the Australian parent directly or indirectly holds at least 5 per cent of the voting power in each company.

Notwithstanding the credit form of relief provided for by paragraph (1) of the article, salary and wages earned and taxed in Austria in accordance with the agreement will be exempt from Australian income tax under the Australian domestic law where derived by an Australian resident in performing relevant duties overseas for a continuous period of 12 months or more. A proportionate exemption will apply where the period of service is from 3 to 12 months. Exempted foreign earnings will be taken into account in calculating the rate of Australian tax on any other income, so that exemption of the foreign earnings will not also reduce the tax payable on the other income. This is commonly known as "exemption with progression".

For its part, Austria will include in assessable income of its residents certain income which, in accordance with the provisions of the agreement, may be taxed in Australia and allow a deduction from its tax for the Australian tax paid up to but not exceeding the Austrian tax on the income. This credit basis of relief is limited to dividends, interest and royalties that are subject under the agreement to limited Australian tax, certain income from the alienation of real property and income not expressly mentioned by the agreement that has a source in Australia. Other income derived by an Austrian resident from Australia, which under the agreement may be taxed in Australia, will be exempt from Austrian tax. However, any income derived by a resident of Austria which in accordance with any article of the agreement is exempt from tax in Austria may be taken into account in determining the amount of tax on the remaining income of the Austrian resident, under the "exemption with progression" principle.

Paragraph (4) ensures that if Australia concludes a double taxation agreement with any other OECD member country on more favourable terms in relation to tax to be withheld by Australia from dividends, interest or royalties the Government of Australia shall immediately notify the Government of Austria in writing and shall enter into negotiations with the Government of Austria to review the relevant provision or provisions in order to provide the same treatment for Austria.

Article 24 - Mutual Agreement Procedure

One of the purposes of this article is to provide for consultation between the taxation authorities of the two countries with a view to reaching a satisfactory solution where a taxpayer is able to demonstrate actual or potential sub-section to taxation contrary to the provisions of the agreement. A taxpayer wishing to use this procedure must present a case within three years of the first notification of the action giving rise to the taxation not in accordance with the agreement and if, on consideration, a solution is reached, it may be implemented irrespective of any time limits imposed by domestic tax laws of the relevant country.

The article also authorises consultation between the taxation authorities of the two countries for the purpose of resolving any difficulties regarding the interpretation or application of the agreement and to give effect to it.

Article 25 - Exchange of Information

This article authorises the two taxation authorities to exchange information necessary for the carrying out of the agreement or of domestic laws concerning the taxes to which the agreement applies. The purposes for which this information may be used and the persons to whom it may be disclosed are restricted along the lines of Australia's other comprehensive taxation agreements.

The exchange of information that would disclose any trade, business, industrial or professional secret or trade process or which would be contrary to public policy is not permitted by the article.

Article 26 - Diplomatic and Consular Officials

The purpose of this article is to ensure that the provisions of the agreement do not result in members of diplomatic and consular posts receiving less favourable treatment than that to which they are entitled in accordance with international laws.

Article 27 - Entry into Force

This article provides for the entry into force of the agreement. This will be on the first day of the third month next following the date on which notes are exchanged through the diplomatic channel notifying that the last of the constitutional processes has been completed to give the agreement the force of law in each country.

Once it enters into force, the agreement will have effect in Australia, for purposes of withholding tax, in respect of income derived on or after 1 January in the calendar year next following that in which the agreement enters into force and, in respect of tax other than withholding tax, in relation to income of any year of income beginning on or after 1 July in the calendar year next following that in which the agreement enters into force. Where a taxpayer has adopted an accounting period ending on a date other than 30 June, the beginning of the accounting period that has been substituted for the year beginning on 1 July in the year in which the agreement first has effect will be the date from which the agreement will take effect in respect of tax other than withholding tax.

In Austria, the agreement will have effect in relation to taxes withheld at source, on or after 1 January in the calendar year next following that in which the Agreement enters into force, and in respect of other Austrian tax, for taxable years beginning on or after 1 January in the calendar year next following that in which the agreement enters into force.

Article 28 - Termination

By this article the agreement is to continue in effect indefinitely. However, either country may give through the diplomatic channel written notice of termination of the agreement on or before 30 June in any calendar year beginning after the expiration of five years from the date of its entry into force. In that event, the agreement would cease to be effective in Australia, for withholding tax purposes, in respect of income derived on or after 1 January in the calendar year next following that in which the notice of termination is given and, for tax other than withholding tax, in relation to income of any year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given. The agreement will cease to be effective in Austria in relation to tax withheld at source on amounts paid on or after 1 January in the calendar year next following that in which notice of termination is given and in respect of other Austrian taxes for taxable years beginning on or after 1 January in the calendar year next following that in which the notice of termination is given.

PART IX - AMENDMENT OF THE INCOME TAX REGULATIONS

Clause 40: Income Tax Regulations

This clause facilitates references to the Income Tax Regulations which, in Part IX, are referred to as "the Regulations".

Clause 41: Live stock

The amendment of the Regulations being made by sub-clause (1) of this clause is consequential on the amendment of the Income Tax Assessment Act 1936 proposed by paragraph (a) of clause 17 of the Bill. That latter amendment (see earlier notes) will insert a new paragraph 34(1)(a) in the Assessment Act which refers to the minimum cost prices prescribed in the Regulations in respect of natural increase of certain classes of live stock. Sub-regulation 5(3), which prescribes the relevant cost prices, is therefore to be amended to reflect that reference in paragraph 34(1)(a) of the Assessment Act. Presently the sub-regulation applies only for the purposes of paragraph 34(1)(b) of the Act. As proposed to be amended, the sub-regulation will apply for the purposes of section 34 of the Act. Consistent with the associated amendment of section 34 of the Act, the amendment of the Regulations is, in terms of sub-clause 41(2), to apply in respect of natural increase born after 30 June 1984.

Sub-clause 41(3) is a formal provision that makes it clear that the further amendment or the repeal, by regulation, of the Regulations as amended by Part IX of the Bill is not in any way prevented.

PART X - AMENDMENT OF THE SALES TAX ASSESSMENT ACT (NO. 1) 1930

Clause 42: Principal Act

This clause facilitates reference to the Sales Tax Assessment Act (No. 1) 1930 which, in Part X, is referred to as "the Principal Act".

Clause 43: Procedure on review or appeal

This clause will amend the burden of proof provisions of section 42E of the Principal Act to the same effect as the amendment to be made by clause 30 to the Income Tax Assessment Act 1936 - see notes on that clause.

PART XI - AMENDMENT OF THE TAXATION ADMINISTRATION ACT 1953

Clause 44: Principal Act

This clause facilitates reference to the Taxation Administration Act 1953 which, in Part XI, is referred to as "the Principal Act".

Clause 45: Application for review of certain decisions

This clause deletes the words "Administrative Appeals" from the expression the Administrative Appeals Tribunal in section 14Y of the Principal Act. Following upon the insertion by the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 of a definition of "Tribunal" (to mean the Administrative Appeals Tribunal) in section 2 of the Principal Act these words are no longer necessary.

PART XII - MISCELLANEOUS

Clause 46: Application

Clause 46 provides that amendments made by clauses 6, 8, 11, 13, 30 and 43, which relate to matters dealing with burden of proof, will apply to proceedings before the Federal Court or the High Court that commenced after the commencement of this Act.

Clause 47: Amendment of assessments

Clause 47, which will not amend the Principal Act, is a standard measure that will ensure that the Commissioner of Taxation has authority to re-open an income tax assessment made before the Bill becomes law, should that be necessary to give effect to the various amendments contained in Parts VII and IX of the Bill.

BANK ACCOUNT DEBITS TAX AMENDMENT BILL 1986

Clause 1: Short title & c.,

By sub-clause (1) of this clause, the amending Act is to be cited as the Bank Account Debits Tax Amendment Act 1986.

Sub-clause (2) facilitates references to the Bank Account Debits Tax Act 1982 which, in the Bill, is referred to as "the Principal Act".

Clause 2: Commencement

By this clause, the amending Act is to come into operation on 1 December 1986 (see also notes on clause 4). But for this clause, 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: Schedule

The rates of bank account debits tax imposed by section 4 of the Principal Act are set out in the Schedule to the Act. Broadly, section 4 imposes bank account debits tax in circumstances where -

a taxable debit of $1 or more is made to a taxable account (i.e., a debit is made to a cheque account in Australia for which a certificate of exemption is not in force);
an eligible debit of $1 or more is made to an exempt account (i.e., a debit is made to an account for which a certificate of exemption is in force, but the debit is not of a kind covered by the exemption certificate); or
an eligible debit of $1 or more is made to an account kept outside Australia by a resident of Australia for the purpose of avoiding the tax for which the account holder would otherwise be liable.

Tax imposed in respect of an eligible debit in these circumstances is payable by the account holder, while that imposed in respect of a taxable debit is payable by the bank but is recoverable from the account holder.

In terms of section 5 of the Principal Act, the general rates of bank account debits tax are as set out in column 2 of the Schedule, while the rates in respect of debits made to an account kept in the Australian Capital Territory (which is specified as including the Jervis Bay Territory) - or an account kept outside the ACT or outside Australia for the purpose of avoiding ACT rates of tax - are as set out in column 3 of the Schedule. The rates of tax set out in column 3 are double those set out in column 2.

Clause 3 of this Bill will amend the Schedule to the Principal Act by omitting the existing amounts of tax in column 2 of the Schedule and substituting new amounts. The effect is to increase the general rates of bank accounts debits tax, while maintaining the existing ACT rates. The Schedule, as proposed to be amended, will be as follows:

Column 1 Column 2 Column 3 Range of amounts of debits Amount of tax Amount of tax
Not less than $1 but less than $100 15 cents 20 cents
Not less than $100 but less than $500 35 cents 50 cents
Not less than $500 but less than $5,000 75 cents $1
Not less than $5,000 but less than $10,000 $1.50 $2
$10,000 or more $2 $3

Clause 4: Application of amendments

This clause, which will not amend the Principal Act, provides that the amendments being made by the Bill are to first apply to debits made on or after 1 December 1986.


View full documentView full documentBack to top