Explanatory Memorandum(Circulated by authority of the Treasurer, the Rt. Hon. Harold Holt.)
The main purposes of this Bill are -
- To authorise a deduction from assessable income of 20% of capital expenditure on new manufacturing plant used in Australia for the purpose of producing assessable income or installed ready for use for that purpose. This allowance will be additional to normal depreciation allowances which will continue to be calculated in relation to the full cost of the plant (Clauses 5 and 7);
- To extend for a further five years from 1st July, 1962 the special depreciation allowance of 20% per annum of cost on plant and structural improvements used in primary industries. This special allowance is available on designated plant and structural improvements used in pastoral, agricultural and pearling operations and on plant used in fishing operations (Clause 6);
- To permit, in specified circumstances, a deduction for capital contributed directly to companies engaged principally in mining or prospecting in Australia or the Territory of Papua and New Guinea for minerals other than gold, uranium and oil (Clauses 4, 8 and 9);
- To repeal provisions of the income tax law relating to the issue of taxation clearances to persons about to leave Australia (Clause 11).
The clauses of the Bill are explained in the following notes.
Notes on Clauses
This clause formally provides for the short title and citation of the Amending Act and the Principal Act as amended.
By this clause it is proposed that the Income Tax and Social Services Contribution Assessment Act 1962 shall come into operation on the day on which it receives the Royal Assent.
Section 5(1A.) of the Acts Interpretation Act 1901-1957 provides that every Act shall come into operation on the twenty-eighth day after the day on which that Act receives the Royal Assent, unless the contrary intention appears in the Act.
Clause 2 will facilitate the abolition as soon as practicable of the system of tax clearances at present applying in relation to persons about to leave Australia.
Clause 3 proposes a drafting amendment to section 5 of the Principal Act which lists the Parts, Divisions etc. into which that Act is divided. Division 10 of the Principal Act relates to mining and comprises sections 122 to 124D. Consequent on the inclusion by clause 9 of this Bill of a new provision - section 124DA - relating to mining, an amendment to section 5 of the Principal Act is required in order to indicate that Division 10 will in future extend from section 122 to section 124DA.
By clause 4, it is proposed to insert a new sub-section in section 23A of the Principal Act. Section 23A exempts from tax 20% of the net income derived from carrying on mining operations for prescribed metals and minerals in Australia or the Territory of Papua and New Guinea.
The new sub-section is consequential on the enactment of the new sections 77AA and 124DA which it is proposed to insert by clauses 8 and 9.
These new sections, which relate to capital subscribed to certain prospecting and mining companies, are explained later in this memorandum. It is, however, convenient to mention at this stage that a company to which those sections apply will, if it chooses to make an appropriate declaration, entitle its shareholders to certain deductions while it will itself forgo a corresponding part of any deductions to which it would otherwise be entitled for capital expenditure.
The surrender of those deductions results in an increase for taxation purposes in the net income of the company concerned and, but for clause 4, there could be a consequential increase in the amount of income exempt under section 23A of the Principal Act.
It is not a purpose of the new sections 77AA and 124DA to vary the amount of income exempt under section 23A and the new sub-section to be inserted by clause 4 is designed to ensure that those new provisions do not disturb the operation of section 23A.
The purpose of this clause is to ensure that the depreciation allowances available in relation to manufacturing plant will not be affected by the introduction, as proposed by clause 7 of the Bill, of a special deduction of 20% of the cost of the plant.
Broadly stated, sub-section (3.) of section 56 of the Principal Act, which it is proposed by this clause to amend, provides that, for the purposes of depreciation allowances, the cost of plant is not to include any amount that has been allowed as an income tax deduction except by way of depreciation. As at present enacted, that provision would result in the cost on which depreciation allowances are based being reduced by the proposed special deduction of 20% of the cost of new manufacturing plant.
The effect of clause 5 will be to prevent a reduction being made for income tax purposes in the cost of plant in relation to which the special 20% deduction is allowable. Existing depreciation allowances will not, therefore, be disturbed in consequence of the special deduction.
The purpose of clause 6 is to extend for a period of five years the special 20% depreciation allowance available in relation to -
- plant used solely for the purposes of agricultural or pastoral pursuits or fishing (including pearling) operations; and
- structural improvements which are situated on land used for agricultural or pastoral pursuits, or which are used for pearling operations.
In the case of structural improvements used for agricultural or pastoral pursuits or for pearling operations, section 57AA of the Principal Act at present authorises the 20% depreciation allowances where the improvements are completed before 1st July, 1962, or are commenced by that date and completed before 1st July, 1963. In relation to other depreciable assets within the compass of the section, the 20% rate applies if the asset is first used by the taxpayer or is installed ready for use before 1st July, 1962.
Clause 6 will amend section 57AA by extending each of those dates by five years.
By this clause it is proposed to insert in the Principal Act a new section - section 62AA - authorising the allowance of a deduction of 20% of capital expenditure (including installation costs) incurred by a manufacturer on new manufacturing plant. It is a prerequisite of the allowance that the plant be owned by the manufacturer and used by him in Australia in the production of assessable income or installed ready for use for that purpose.
Plant used in manufacturing goods to be included as components of other goods may qualify for the allowance as may also plant used in operations ancillary to the production of manufactured goods.
It is proposed that the deduction be available in the first year in which the plant is used by the manufacturer for the purpose of producing assessable income or is installed ready for use for that purpose. Broadly stated, plant qualifying for the allowance will be new (but not secondhand or used) plant delivered to manufacturing premises on or after 7th February, 1962. Where plant is manufactured or constructed on manufacturing premises special provisions (which are explained later) will determine the date from which the 20% deduction will be available.
Special provisions included in the new section 62AA specify the scope of the plant in relation to which the deduction will apply. For example, the deduction may be available in relation to plant used in certain operations for the treatment of metals and minerals while, on the other hand, the deduction will not extend to road vehicles designed for the transport of persons or the delivery of goods.
Further explanations of the provisions of the proposed new section are given below.
Section 62AA - Special Deduction for Investment in Manufacturing Plant.
Sub-section (1.) of the proposed section 62AA comprises definitions of several expressions used in the section. These definitions are explained hereunder.
- "Concentration": As already explained, the special 20% deduction is to be available in relation to plant used in certain activities in the mining industries. In the case of metals and compounds of metals, the deduction will be authorised in relation to plant used in "concentration" and subsequent activities - see sub-section (4.) of the new section 62AA.
- Broadly stated, concentration will include any processes applied to the ore of a metal (which is defined as including a compound of a metal) by which the metal or its compound is separated from its ore. Such processes as, for example, flotation, leaching, crystallisation and precipitation will qualify as "concentration". The term will not, however, include any crushing, grinding, breaking, screening or sizing of the metal carried out in order that a process of concentration may be applied to an ore.
- "Goods": Sub-section (2.) of the proposed section makes the section applicable to plant used in operations by which manufactured goods are derived from other goods. The term "goods" is defined to include liquids, gases and substances as well as ships and aircraft. The purpose of the definition is to make it clear that plant used in the manufacture of items mentioned and in the building of ships and aircraft, which may not otherwise answer precisely to the description of goods, may be subject to the deduction. The term "goods" does not include, however, buildings, roads, and other structures. Plant used in the construction of these will not be eligible for the proposed deduction.
- "Manufactured goods": This expression is defined to ensure that plant used in making goods that are not of themselves finished products sold by the manufacturer, but are used as components in the making of other goods, may qualify for the deduction.
- "Manufacturing plant": This definition is a drafting measure providing a comprehensive description of plant that qualifies for the deduction under various subsequent provisions of the section.
- "Metal": It has been explained in dealing with the definition of "concentration" that compounds of metals will be treated as metals for the purpose of the deduction for plant used in the more advanced phases of mine activities. This definition is designed to ensure that plant used in the concentration of metal compounds from their ores will qualify for the deduction.
- "New": As explained in the introductory note, the special deduction is not to apply to secondhand or used plant. For the purpose of the definition the word "new" is to exclude from the scope of the allowance plant of this kind. The restriction of the allowance to new plant will ensure that the deduction is available only once in relation to any one item of plant no matter how frequently that plant changes hands.
Sub-section (2.) designates types of plant to which the deduction is primarily applicable. Stated in very broad terms, sub-section (2.) will enable the special 20% deduction to be available in relation to plant owned by the taxpayer and for use primarily, principally and directly in manufacturing processes, whether the processes are carried out by the taxpayer on his own behalf or on behalf of another taxpayer. The provisions of sub-section (2.) are, however, subject to certain exclusions specified in sub-section (3.).
By sub-paragraph (i) of paragraph (a) of sub-section (2.) the deduction is made applicable firstly to plant that the taxpayer owns and uses in any part of actual manufacturing processes carried out on his own behalf and, secondly, to such plant that a taxpayer uses in providing as a service a process that is necessary to the manufacture of goods carried out by another person. An example of the latter would be dyeing plant owned and used by a taxpayer to whom a manufacturer of cloth sends the cloth to be dyed as a process in the manufacture of the cloth. On the other hand, plant used merely in relation to goods already manufactured, e.g., plant used to pack manufactured goods not manufactured by the owner of the plant, will not qualify for the deduction (see note on paragraph (b) at the foot of this page).
It should be noted also that the allowance is to be confined to plant that provides part of a manufacturing process as a service. Accordingly, plant used merely in providing services such as dry cleaning and laundering, boot repairing, tyre retreading and in garages and service stations will not qualify for the deduction.
Sub-paragraph (ii) of paragraph (a) of sub-section (2.) is designed to extend the deduction to plant used in processes applied to manufactured goods to bring them into, or maintain them in, the condition in which they are used or sold. Excluded from this plant is plant used in the process of packing and labelling for which special provision is made by an ensuing paragraph - paragraph (b). Sub-paragraph (ii) ensures that plant used in such processes as the polishing or painting of goods that have been manufactured, and in the refrigeration of perishable products, qualifies for the deduction. Plant so used will qualify whether or not the goods to which the painting or polishing is applied were manufactured by the taxpayer who applies the processes, so long as the painting or polishing forms part of an original manufacturing process. Plant used for re-painting or re-polishing already manufactured goods in the course of repairing or improving worn goods will not qualify.
Paragraph (b) extends the deduction to plant used in the packing and labelling of manufactured products for marketing or further use. The deduction applies to plant used for packing and labelling only where the person owning and using the plant has applied some treatment qualifying as a manufacturing process to the goods packed or labelled. Where the primary function of plant owned and used by a taxpayer is to pack or label goods to which he has not himself applied a manufacturing process the special deduction will not be available.
Paragraph (c) is designed to bring within the scope of the allowance plant used in disposing of waste resulting from the application of manufacturing processes by the taxpayer. As with packing plant, the deduction is available only if the plant is used for waste disposal in relation to goods to which the taxpayer who owns and uses the plant has himself applied a manufacturing process.
Paragraph (d) provides for the deduction to be available in relation to the cleaning of bottles, vats and other containers in which the taxpayer stores either materials for use by him in the manufacture of goods or partly finished or finished goods.
The purpose of paragraph (e) is to bring within the scope of the deduction plant used in the conveyance of raw materials or other goods from one part of factory premises to another for the purposes of manufacture or further manufacture. It also covers the transportation of finished goods to or from the store room or to the final point of dispatch from the factory.
It is to be noted, however, that only plant used in transportation within the relevant manufacturing premises is to qualify for the deduction and that road vehicles, whether or not used for the purposes described in the preceding paragraph, are specifically excluded from the deduction by a subsequent provision - paragraph (b) of sub-section (3.). Vehicles used within the manufacturing premises that are not of a kind ordinarily used for the conveyance of persons or the delivery of goods, e.g., fork lift trucks, mobile cranes and the like may qualify for the deduction if used in the manner described.
Paragraph (f) may apply to allow the special deduction in relation to plant used in the storage of raw materials, unfinished goods or finished goods. The deduction will, however, be available only if the plant is located within the relevant manufacturing premises or premises contiguous thereto. Whether a store is contiguous to the manufacturing premises will be a question of fact to be determined in relation to each particular case but, generally speaking, a store in the same close neighbourhood as the manufacturing premises may be considered to be contiguous to those premises.
The deduction will not, however, be authorised in relation to plant used in actually conveying goods from the manufacturing premises to a contiguous store.
Paragraph (g) serves the two main purposes of including within the scope of the deduction -
- plant used by the manufacturer in the assembling of plant to be used by him in manufacturing processes; and
- plant used by the manufacturer in the maintenance and repair of plant used in manufacturing processes.
Sub-section (3.) specifies plant to which the deduction will not apply.
Paragraph (a) of sub-section (3.) ensures that, except to the extent provided by paragraphs (a) and (b) of sub-section (4.), plant used in mining or quarrying operations will not qualify for the special deduction. Paragraph (a) of sub-section (4.) covers plant used in the concentration of metals and subsequent activities in relation to metals, while paragraph (b) refers to plant used in the refining of petroleum.
Paragraph (b) excludes from the scope of the new provisions all conventional road vehicles irrespective of the use to which they are put. It also excludes road vehicles designed or adapted for the delivery of particular kinds of goods, e.g., ready-mixed concrete, chilled milk or oil.
The purpose of paragraph (c) is to exclude from the deduction certain plant used in the building and construction industry by a taxpayer engaged in that industry. A building or a road is not in itself goods, and construction of either of these would not fall within the scope of sub-section (2.) explained at page 6 of these notes.
However, certain of the components of a building or a road are frequently made by the taxpayer carrying on the business of building or road making, and to this extent the taxpayer may be engaged in manufacturing goods. For example, a builder may make concrete for use in the construction of a building, or a road maker may make the composition with which the road is sealed. By reason of paragraph (c), plant used by a taxpayer primarily and principally in making goods to be incorporated as part of buildings, roads, bridges etc., constructed by him will be excluded from the scope of the deduction.
Paragraph (d) applies to exclude plant used in the preparation of food or drink, or in the cooking of food, where the plant is used in such premises as hotels or restaurants, or in premises connected with such undertakings. The plant will be excluded whether the customer consumes the food or drink on the premises or elsewhere. The paragraph will not, however, apply to exclude from the scope of the deduction plant used in the manufacture of drinks or foodstuffs, e.g. plant used in the factory of a biscuit manufacturer or in a brewery or a soft drink factory.
Paragraph (e) excludes office machines and equipment whether or not owned and used by a manufacturer in connexion with his manufacturing business.
The purpose of paragraph (f) is to exclude from the deduction containers in which manufactured goods are delivered by the manufacturer, but which remain his property and are returned to him by the customer. Steel barrels or casks used for the delivery of beer and spools on which thread is wound for delivery are examples of plant to which the new section will not apply.
Paragraph (g) will exclude from the deduction plant used in the production of electric current, hydraulic power, steam, compressed air or gases where the power is not generated for sale by the producer or primarily and principally for use by him in manufacturing processes.
The paragraph will exclude machinery, implements and apparatus used in the production of electric current, steam, etc. in such businesses as laundries and dry cleaning establishments which neither sell the products nor use them in the course of manufacturing goods. It will not, however, exclude expenditure on plant used, for example, by cotton spinners to create atmospheric conditions suitable for the handling of the cotton.
The purpose of paragraph (h) is to eliminate from the area of the special deduction certain plant which may be broadly regarded as tools or tooling of a type which, in the generality of cases, is adapted to the manufacture of particular models of products.
Paragraph (i) serves a similar purpose to paragraph (h) in that it excludes from the scope of the section loose tools and hand tools. Many of these tools are named in the paragraph and the list given will indicate the nature of the items to which the new provisions will not apply.
Sub-section (4.) is designed to extend the special 20% deduction to certain plant used in business activities that may not qualify as manufacture judged by ordinarily accepted standards. The sub-section specifies these activities and ensures that the new provisions will apply to plant used primarily, principally and directly in those activities. The new section will also apply to plant used in those processes ancillary to the specified activities and which are referred to in paragraphs (b) to (g) of sub-section (2.) - see pages 6 and 7 for explanations relating to those paragraphs.
As the provisions of sub-section (4.) are subject to the operation of sub-section (3.), the new section 62AA will not apply to plant excluded from the special deduction by sub-section (3.) even though the plant is used in activities specified in sub-section (4.).
Paragraph (a) of sub-section (4.) provides that plant owned by a taxpayer and used by him primarily, principally and directly in the concentration of a metal or in the processing of the metal after its concentration shall qualify for the deduction. The meaning given to "concentration" for the purposes of this section has already been explained.
In some cases metals may not be subjected to a process of concentration before being smelted or subjected to other advanced treatment. In these circumstances the smelting and other processing are not applied after concentration and, in order to ensure that the section will apply to plant used in these cases for smelting etc., paragraph (a) has been specifically extended to processes which would have been applied after concentration, if concentration of the metal had been required.
Because of the operation of sub-section (10.), which is explained later in this memorandum, paragraph (a) will not apply to plant the full cost of which is deductible for the year of expenditure or the cost of which is met out of appropriations of assessable income that are deductible.
Paragraph (b) extends the section to plant used in the refining of petroleum, while paragraph (c) serves a similar purpose in relation to the processes of scouring or carbonising wool.
Paragraph (d) brings within the scope of the section plant used in the milling of timber. Only plant used in actual milling operations will qualify under this provision and plant used in felling and hauling to the mill will not be eligible for the deduction.
Paragraph (e) will extend the application of the section to plant used in the freezing of primary products, e.g. vegetables. The section will not, however, apply to plant used in establishments such as retail shops to maintain the products in their frozen condition. Plant used for the packing of frozen products by the taxpayer who applied the freezing processes will qualify under paragraph (b) of sub-section (2.).
Paragraph (f) makes the deduction available in relation to plant used in the operations of printing, publishing, lithography or engraving carried out in the course of conducting a business as a printer, publisher, lithographer or engraver. Plant used in the publishing of books and newspapers will be covered by this paragraph.
Paragraphs (g), (h), (i) and (j) are more or less homogeneous provisions that will apply to bring within the scope of the deduction plant used in the curing of meat and fish; the production of chilled and frozen meat; the pasteurising of milk, and the canning of foodstuffs. Expenditure on plant used in the bottling of pasteurised milk by the taxpayer who carried out the pasteurising process and similarly in the packing, refrigeration etc. of the other products covered by these four paragraphs will qualify for the deduction under the appropriate provisions of sub-section (2.).
Paragraph (k) is designed to bring within the scope of the deduction plant used for the production of electric current, hydraulic power, steam, compressed air or gases. However, as explained in relation to paragraph (g) of sub-section (3.), the deduction will be available only in relation to plant used to produce these commodities either for sale by the producer or for use in manufacturing processes by him. The deduction will not be available in relation to plant used in obtaining naturally occurring gases.
Sub-section (5.) is the operative provision and it provides that, subject to all the other provisions of the section, a manufacturer incurring expenditure of a capital nature on new manufacturing plant is entitled to a deduction of one-fifth (20%) of the expenditure in the first year of income that the plant is either used for producing assessable income or is installed ready for use for that purpose and held in reserve.
The year of income in which the expenditure is incurred will not necessarily coincide with the year in which the special 20% deduction is available. This is so because the availability of the special deduction is primarily dependent upon the use of the plant or its installation ready for use in producing assessable income.
The expenditure in relation to which the special 20% deduction is to be available will generally correspond with the cost of the plant for the purposes of depreciation allowances. It will, for example, include installation costs. The special deduction will also normally be available in the first income year that a depreciation allowance is available in relation to the relevant unit of plant.
Sub-section (6.) is designed to provide for the case where manufacturing plant that qualifies under the new section is used, or is for use, in producing exempt income as well as assessable income.
The general scheme of the Principal Act is that if expenditure is incurred in producing exempt income it is not an allowable deduction, and when expenditure is directed to the dual purpose of producing both exempt and assessable income, only the proportion applicable to the production of assessable income is an allowable deduction.
This sub-section will apply these principles in relation to the special 20% deduction. Broadly stated, the sub-section provides that if at any time during the year of income in which the deduction is available, the plant has been used or installed ready for use in producing exempt income, only so much of the deduction as the Commissioner of Taxation considers proper shall be an allowable deduction.
The opinion of the Commissioner will be open to the usual rights of objection and reference to a Board of Review. The Board of Review may, of course, substitute its own opinion for that of the Commissioner.
The purpose of sub-section (7.), which is subject to the provisions of the succeeding sub-section - sub-section (8.) - is broadly to specify a commencement date from which the new provisions will apply to various categories of plant.
Paragraph (a) of the sub-section relates to plant that is purchased by a manufacturer. It provides that the special deduction will not be available unless the plant is received by the manufacturer, at or taken into, the manufacturing premises at which he is to use it or install it ready for use, at a date not earlier than 7th February, 1962.
Paragraph (b) is designed to cover the case where plant is constructed by a manufacturer himself. Subject to the provisions of sub-section (8.) which are explained at a later stage of these notes, the special deduction will not be available on this class of plant unless the manufacturer commenced to construct it no earlier than 7th February, 1962.
Paragraph (c) covers a third category of plant - plant constructed for a manufacturer under a contract or contracts let to another person. Subject to the provisions of sub-section (8.), the special deduction will not apply if the contract or contracts for the construction of the plant were entered into at a date earlier than 7th February, 1962.
Sub-section (8.) qualifies the provisions of sub-section (7.). Its principal purpose is to make special provision in relation to plant that was in the course of construction either by the taxpayer himself, or by an independent contractor, at 7th February, 1962, and to provide that in certain specified circumstances the special deduction may be available in relation to part of the total capital expenditure on the plant.
Paragraph (a) of sub-section (8.) will apply to plant made by another person to the specifications of a manufacturer when the plant is not made on the manufacturing premises of the manufacturer.
The effect of this paragraph is to deem such plant to be plant that has been purchased by the taxpayer for the purposes of paragraph (a) of sub-section (7.). It will thus qualify for the special deduction if it was received by the manufacturer at, or is taken into, his manufacturing premises at a date not earlier than 7th February, 1962.
Paragraph (b) will apply only where a unit of plant is being constructed for a manufacturer on his premises by an independent contractor. It is designed to exclude from the operation of paragraph (a) of sub-section (7.) a unit of plant that is supplied to the taxpayer by another person in performance of a contract made before 7th February, 1962 whereby that unit will be incorporated as an integral part of a larger unit of plant being constructed under the contract. For example, an engine delivered to a manufacturer's premises after 7th February, 1962 to form part of a unit of plant being constructed there by an independent contractor under a contract made before 7th February, 1962 will not qualify for the deduction, but will be treated in the same way as plant which is covered by paragraph (c) of sub-section (7.).
Paragraph (c) of sub-section (8.) will apply only to plant constructed by the manufacturer himself which was in the process of construction at 7th February, 1962. By paragraph (b) of sub-section (7.), this plant would not, in the absence of this paragraph, qualify to any extent for the special deduction. By reason of this paragraph, capital expenditure representing the cost of goods delivered to the premises of the manufacturer on or after 7th February, 1962 for incorporation as part of the unit of plant may qualify for the special deduction to the extent that the goods are incorporated in the unit. Broadly stated, the effect of paragraph (c) is that the capital expenditure on the unit of plant for the purposes of the special deduction will be that part of the expenditure that represents the cost of purchasing and installing parts and materials delivered to the premises of the manufacturer on or after 7th February, 1962.
Paragraph (d) will apply only to plant constructed for a manufacturer on his premises by an independent contractor, and its purpose is to modify the effect of paragraph (c) of sub-section (7.).
As has been explained in relation to paragraph (c) of sub-section (7.), that sub-section operates to restrict the special deduction to plant in this particular category constructed under a contract or contracts entered into no earlier than 7th February, 1962. It is recognised in paragraph (d) of sub-section (8.) that a complex unit of plant may be constructed under a series of contracts, some of them entered into earlier than 7th February, 1962 and some of them on or after that date.
Paragraph (d) provides, in effect, that where a complex is constructed partly under contracts entered into on or after 7th February, 1962 and partly under earlier contracts, the capital expenditure in relation to which the special 20% deduction is to be determined is to be so much of the total expenditure as is attributable to the cost of work done and materials supplied under the contracts entered into on or after 7th February, 1962.
The purpose of sub-section (9.) is to provide a safeguard against re-arrangement of contracts to make it appear that plant has been constructed under a legal obligation entered into on or after 7th February, 1962 even though a contract in relation to the plant or substantially similar plant had been signed before that date.
Broadly stated, the operation of the sub-section is to be dependent upon the Commissioner of Taxation being satisfied that -
- a manufacturer had let a contract for construction of plant on his premises before 7th February, 1962;
- on or after that date, the manufacturer had substituted a different contract for the construction of identical or substantially similar plant with the intention that that plant should be constructed in lieu of the plant provided for by the earlier contract; and
- the later contract was made for the purpose of obtaining a deduction under the new section or a greater deduction under that section than the manufacturer would otherwise have been entitled to.
The sub-section gives the Commissioner a discretion, in any case where he is satisfied that the circumstances are as described, to disallow any part of the special deduction or to allow such part of that deduction as he considers fitting in the particular circumstances.
The exercise of the Commissioner's discretion will be subject to the usual rights of objection and reference to a Board of Review. The Board of Review may, of course, substitute its own opinion for that of the Commissioner.
Sub-section (10.) is designed to exclude from the allowance certain manufacturing plant which is already subject to special or accelerated taxation allowances.
Paragraph (a) of the sub-section refers to plant used in primary industries. Section 57AA of the Principal Act confers a special depreciation allowance of 20% of cost per annum on plant used wholly and exclusively for the purposes of agricultural or pastoral pursuits or fishing (including pearling) operations. Section 57AB of that Act provides for a similar allowance on plant used for the purposes of agricultural or pastoral pursuits in the Northern Territory. Depreciation allowances under these sections enable a taxpayer to depreciate the full cost of an item of plant over five years. Plant on which depreciation is allowable under sections 57AA or 57AB will not be eligible for the special 20% deduction.
Paragraphs (b) and (c) will have application to plant used in the mining industries. The Principal Act gives mine owners a number of choices as to the way in which they will receive taxation allowances for the cost of plant necessary for carrying on mining operations.
If a mine-owner does not elect otherwise, the cost of mining plant is, under section 122 of the Principal Act, deductible over the estimated life of the mine or twenty-five years, whichever is the less.
In lieu of deductions on the basis of the estimated life of the mine, a person carrying on mining operations may elect, under section 122A of the Principal Act, to deduct the expenditure on a unit or units of plant in full in the year in which the expenditure is incurred.
Section 122B of the Principal Act also has the effect of enabling the whole of the cost of mining plant to be deducted from the assessable income of one year in certain circumstances in which the plant has been purchased out of appropriations of assessable income.
Paragraph (b) will exclude from the proposed allowance plant the cost of which the mine-owner has chosen to deduct in one year under section 122A. Paragraph (c) will require a corresponding exclusion from the allowance where a deduction is allowable under section 122B for appropriated income used in the purchase of new plant.
Sub-section (11.) will ensure that the special deduction will be additional to the normal allowances for depreciation of manufacturing plant and to the deductions for capital expenditure on mining plant, where those deductions are allowable over the estimated life of a mine.
The provision is required because, in its absence, section 82 or section 124C of the Principal Act may operate to prohibit the allowance of both the special 20% deduction and the other deductions mentioned.
Sub-section (12.) will apply where a taxpayer has been recouped or is to be recouped by a Government, authority or person the whole or a part of his expenditure on new manufacturing plant. In this event, the proposed allowance will not be available in respect of so much of the cost of the plant which is, by reason of the recoupment, not actually borne by the taxpayer. Any recoupment which is included in the taxpayer's assessable income will not, however, operate to restrict the proposed allowance.
Introductory Note to Clauses 8 and 9.
By clauses 8 and 9 it is proposed to insert in the Principal Act two new provisions - sections 77AA and 124DA.
Under section 77AA residents of Australia or the Territory of Papua and New Guinea will, in certain circumstances, be entitled to deductions for moneys subscribed as paid-up capital on shares in companies whose principal business is prospecting or mining in Australia or the Territory of Papua and New Guinea for minerals with the exceptions of gold, uranium and oil. It will be recalled that the income tax law already contains special provisions relating to the minerals to which the section will not apply.
Entitlement to the proposed deduction will be conditional upon the company to which money is subscribed declaring that the money has been, or will be, used in prospecting or mining for a mineral to which the new provisions apply. Where a company elects to make such a declaration, the deductions to which it would otherwise be entitled for capital expenditure or depreciation will be correspondingly curtailed in accordance with section 124DA to be inserted by clause 9.
The proposed new deduction is, in effect, an extension of the existing deduction available under section 78(1.)(b) of the Principal Act. That provision authorises a deduction for one-third of calls (but not application or allotment moneys) paid by shareholders to a mining or prospecting company carrying on as its principal business mining or prospecting for gold, silver, base metals, rare minerals or oil in Australia or the Territory of Papua and New Guinea. Where the appropriate declaration is made, the deductions now proposed will be available in relation to the whole of the amounts subscribed as paid-up capital, whether by way of application or allotment moneys or as calls.
Clause 8: Moneys paid on shares for the purpose of certain mining and prospecting.
Section 77AA, which will be inserted in the Principal Act by clause 8 specifies the circumstances in which shareholders will be entitled to the proposed deductions for moneys subscribed as paid-up capital on shares in certain prospecting and mining companies.
Sub-section (1.) of the proposed new section defines certain expressions used in that section.
- "Australia" is defined as including the Territory of Papua and New Guinea. The definition will ensure that the provisions of the new section may operate in relation to prospecting and mining for the appropriate minerals in the Territory as well as in mainland Australia.
- "Mining company": This definition will facilitate reference in the legislation to companies entitled to make a declaration for the purposes of the section. "Mining company" will mean a company that carries on as its principal business mining or prospecting in Australia (as defined) for a prescribed mineral. The term will also include a company that the Commissioner of Taxation is satisfied will carry on such activities as its principal business. This latter provision will enable the new provisions to apply, for example, where a recently incorporated company raises capital before it has actually commenced business operations.
- The term "prescribed minerals" is defined later in the sub-section and its meaning is explained on page 17.
- "Mining or prospecting outgoings": This expression will mean expenditure by a company for the purposes of mining or prospecting in Australia for prescribed minerals. It will include capital expenditure referred to in sections 122(1.) and 123AA of the Principal Act, that is, capital expenditure on exploration and prospecting, development of the mining property, necessary plant and housing and welfare provided in the vicinity of the mine for the benefit of employees and their dependants.
- "Moneys paid on shares": This definition specifies the categories of payments that may qualify for deduction under the new section. Amounts qualifying will be moneys paid to a mining company by way of application money, allotment money or calls applied by the company towards the paid-up value of shares issued by it.
- The definition will not extend to moneys -
- paid on or before the day of introduction of the Bill into Parliament;
- paid in respect of shares which at the time of payment are beneficially owned by a non-resident or one or more of the beneficial owners of which is a non-resident;
- paid on application for shares to be issued if, on allotment of the shares, the beneficial owner or any one of the beneficial owners is a non-resident.
- "Prescribed minerals" will mean minerals other than gold, uranium and oil. As already mentioned, the income tax law includes special provisions relating to mining for gold (section 23(o) of the Principal Act), uranium (section 23D) and petroleum (sections 77A and 123A).
- "Resident": The word "resident" is defined so as to enable a resident of the Territory of Papua and New Guinea to qualify as a resident of Australia and so be entitled to deductions on the same basis as a resident of mainland Australia.
Sub-section (2.) will ensure that the new provisions apply only in relation to moneys paid to a company and applied towards the paid-up value of shares issued by it. Moneys not applied as part of the paid-up capital on the shares, e.g., application money that is refunded or premiums on shares, will not qualify for deduction under the section.
Sub-section (3.) will have application to a company whose principal business is mining or prospecting in Australia for prescribed minerals.
If the company has received moneys paid on shares, it may lodge with the Commissioner of Taxation a written declaration that it has expended, or proposes to expend, those moneys, or such part of those moneys as is specified in the declaration, in mining or prospecting in Australia for prescribed minerals. A declaration, signed by the public officer of the company and specifying the amount of the moneys expended, or to be expended, for purposes mentioned, may be lodged with the Commissioner of Taxation up to one month after the end of the income year of the company in which it received the moneys. The Commissioner is empowered to extend the time in which a declaration may be lodged.
The lodging of a declaration by the company is a prerequisite to the allowance to shareholders for capital subscribed to the company.
Sub-section (4.) is the operative provision authorising the allowance of deductions to the shareholders of a company that has made a declaration in accordance with sub-section (3.).
In the generality of cases, the deduction will be the amount of money paid on shares in the company and included in the declaration made by the company. The operation of sub-section (4.) will, however, be subject to the provisions of sub-sections (5.), (6.) and (7.).
As explained in relation to the definition of "moneys paid on shares", that expression does not include moneys paid on shares beneficially owned by a non-resident, and the section does not, therefore, entitle a non-resident shareholder to a deduction.
Sub-section (5.) relates to cases in which a declaration has been made and the Commissioner is not satisfied that the amounts specified in the declaration have been, or will be, expended by the company in mining or prospecting outgoings.
If no safeguards were provided, it would be open to a company to obtain for its shareholders a deduction in respect of amounts not expended, or likely to be expended, in mining or prospecting outgoings.
If, at any time, the Commissioner of Taxation is not satisfied that moneys have been, or will be used, in accordance with the declaration, he may inform the company, in writing, that he is not so satisfied. Where this course is followed the amount of the deduction allowable to a shareholder for moneys paid to the company will be reduced proportionately according to the amount of the moneys which the Commissioner is not satisfied will be appropriately expended.
Should a taxpayer be dissatisfied with the Commissioner's determination under this sub-section, he will have the usual rights of objection. On reference to a Board of Review, it will be open to the Board to substitute its determination for that of the Commissioner.
Sub-section (6.) is a machinery provision that will have application only where it is necessary to trace moneys specified in a declaration and the manner in which the moneys have been dealt with cannot be readily ascertained from the records of the company which made the declaration. In these circumstances, the manner in which the money has been dealt with may be determined by the Commissioner.
Without a provision of this nature, it may, in some circumstances, be impracticable for the Commissioner to determine the use to which moneys specified in a declaration have been put and the application of section 77AA would then be impeded. This sub-section is designed to provide a means of overcoming this difficulty.
A taxpayer whose assessment is affected by the Commissioner's determination will have the usual rights of objection and appeal. In the event of a reference to a Taxation Board of Review, the Board would have power to substitute its own opinion for that of the Commissioner.
Sub-section (7.) provides that, where a deduction is allowable under section 78(1.)(b) of the Principal Act for one-third of the calls paid to a mining company, an adjustment is to be made in the deduction allowable under the new section 77AA.
Section 78(1.)(b) allows a deduction for one-third of the calls paid to a company whose principal business is mining or prospecting for certain metals and minerals, including those defined in the new section 77AA as "prescribed minerals". Under that new section, however, the whole of such calls may qualify for deduction if the company concerned makes the appropriate declaration. It is accordingly necessary to include a provision adjusting the deduction so that a double deduction does not result.
Where an amount paid on shares satisfies the tests of both section 77AA and section 78(1.)(b), sub-section (7.), of the new section 77AA will ensure that the amount otherwise authorised as a deduction under section 77AA will be reduced by the amount deductible under section 78(1.)(b).
It will be observed that a reduction of the allowance under section 78(1.)(b) is not proposed. If a company does not make a declaration under the new provisions, there will be no disturbance of the present deductions allowed to shareholders or to the company.
Sub-section (8.) is a machinery provision to ensure that a declaration made by a company will not be rendered invalid for the reason only that it specifies moneys in excess of those actually qualifying under the section. For example, a company may erroneously include in its declaration moneys paid by a non-resident. The sub-section provides that, in such cases, the declaration will remain valid as to the moneys which do, in fact, fall within the scope of the section.
Sub-section (9.) places a time limit on the operation of section 77AA.
A company will not be entitled to lodge a declaration under sub-section (3.) in respect of moneys received by the company after 30th June, 1964. Accordingly, section 77AA will not authorize deductions for capital contributed after that date.
Clause 9: Reduction of Certain Allowable Deductions.
As mentioned in the Introductory Note to clauses 8 and 9, one effect of a declaration lodged under the new section 77AA will be a reduction in certain amounts otherwise deductible from the income of the company making the declaration.
The primary purpose of clause 9 is to insert in the Principal Act a new provision - section 124DA - authorising those reductions and providing a basis on which to calculate them.
Sub-section (1.) comprises definitions of several terms used in the new section 124DA.
- "Mining company": This term will have the same meaning in section 124DA as has been given to it by a definition in the proposed section 77AA (see clause 8). Explanations relating to the definition may be found on page 16 of these notes.
- "Net declared capital": Will be the amount which, from time to time, remains to be applied in reduction of the deductions of a company that has lodged a declaration under section 77AA.
- The first step in calculating the net declared capital will be to ascertain the sum of all amounts specified by a company in declarations made under that section, together with amounts to be included in the net declared capital by reason of sub-section (6.) of section 124DA. From the total of those amounts there will be deducted the amounts, if any, by which the company's deductions have been reduced in any previous year. In the generality of cases, the net result so ascertained will be the "net declared capital".
- There will, however, be isolated cases in which a further step may be necessary. This will be so where the Commissioner of Taxation is not satisfied that the amounts specified in declarations lodged under section 77AA will be expended on prospecting or mining in accordance with the declarations. If, in these cases, appropriate notice is given under section 77AA(5.) to the company, the deductions available to shareholders of the company will be reduced and there will be a corresponding restoration of the deductions available to the company.
- In other words, an amount concerning which such a notice has been given by the Commissioner will, in effect, be treated as though it had not been specified in a declaration. Paragraph (b) of the definition of "net declared capital" will then ensure that that term does not include amounts that the Commissioner is not satisfied have been, or will be, expended on prospecting or mining in accordance with the company's declaration.
- "Prescribed deductions": The definition of this term enumerates the categories of deductions that may be reduced consequent on a declaration made by a prospecting or mining company under the proposed section 77AA.
- Broadly, deductions encompassed by the definition will be those available under the mining provisions of the income tax law for capital expenditure on development of the mining property, necessary plant, housing and welfare for employees and their dependants or on exploration and prospecting. "Prescribed deductions" will also include depreciation on mining plant in those cases in which a mining company elects to be allowed deductions for depreciation in lieu of the deductions available under the special mining provisions for the cost of plant.
Sub-section (2.) states the circumstances in which the prescribed deductions of a mining company are to be reduced and quantifies the amount of the reductions. The sub-section will have application only when the three tests set out in paragraphs (a), (b) and (c) of the sub-section are satisfied.
These tests are -
- that the mining company concerned shall have lodged a declaration or declarations under section 77AA;
- that, in relation to the company, there is at the end of the income year an amount of net declared capital; and
- that the company is (or would be but for section 124DA) entitled for the income year to prescribed deductions.
If each of these tests is satisfied, the Commissioner of Taxation will be required to apply the amount of the net declared capital as at the end of the income year, or in appropriate circumstances a part thereof, in reduction of the prescribed deductions to which the company would otherwise be entitled.
Where the prescribed deductions exceed the net declared capital, paragraph (d) will require the whole of the net declared capital to be applied in reduction of the prescribed deductions. In these cases, there will be a full recoupment against the company's deductions of the deductions allowed to shareholders.
If the prescribed deductions do not exceed the net declared capital, the net declared capital will, up to the amount of the prescribed deductions, be set-off against those deductions. In a year in which these circumstances exist there will be no allowance for prescribed deductions. The balance, if any, of the net declared capital not applied in reduction of the prescribed deductions for that year will remain available for set-off against the prescribed deductions of subsequent years.
Sub-section (3.) will apply only in the isolated cases in which the Commissioner (under the proposed section 77AA(5.) to be enacted by clause 8) notifies a company that he is not satisfied that amounts specified in a declaration lodged by it have been, or will be, expended on prospecting or mining in accordance with the declaration. As already mentioned, the deductions to which shareholders would otherwise be entitled for amounts specified in the declaration will be reduced under section 77AA(5.). There will then be a consequential increase in the deductions available to the company and the purpose of sub-section (3.) is to prescribe in the law a basis for determining the amount of that increase.
Under paragraph (a), the first step will be for the Commissioner of Taxation to ascertain the sum of the amounts (if any) by which the prescribed deductions of a company are to be, or have been, reduced under sub-section (2.) in consequence of declarations made by the company.
Paragraph (b) will apply where the amount in respect of which the Commissioner has given notice under sub-section (5.) of section 77AA (that is, the amount that he is not satisfied will be expended in accordance with the declaration) does not exceed the amount determined under paragraph (a), that is, the amount by which the prescribed deductions are to be, or have been, reduced.
In these circumstances the deductions made available to shareholders under the new section 77AA will have been reduced up to the amount concerning which the Commissioner is not so satisfied and it is appropriate that a corresponding amount be restored to the deductions to which the company is entitled. Paragraph (b) accordingly provides that the former of the amounts referred to in that paragraph be allowed as a deduction.
Paragraph (c) is complementary to paragraph (b) and applies where the amount in respect of which the Commissioner has given notice under section 77AA(5.) exceeds the amount ascertained under paragraph (a). In these circumstances the company will be entitled to a deduction for the latter amount.
Paragraph (c) thus authorises a deduction equal to the amounts which the company has lost, or will lose in the current year, by way of reduction of its prescribed deductions. To the extent that this deduction falls short of the amounts that the Commissioner is not satisfied have been, or will be expended, in accordance with the company's declaration, sub-paragraph (ii) of paragraph (c) will authorise a reduction in the company's net declared capital. The paragraph is thus designed to ensure, as far as practicable, that reductions in the shareholders' deductions will be counterbalanced by increases in the prescribed deductions available to the company.
Paragraph (d) will apply where no reduction of prescribed deductions has been made in prior years or is to be made in the assessment of the year of income. In these circumstances there is no deduction that needs to be restored to the company. The paragraph will, however, ensure that the whole of the moneys concerning the expenditure of which the Commissioner is not satisfied go to reduce the amount of the net declared capital as at the end of any subsequent year of income.
Sub-sections (4.), (5.) and (6.) may apply where a mining company has been allowed, or is entitled to, a deduction under section 122B of the Principal Act for an amount of assessable income appropriated for capital expenditure on development of its mining property or on necessary plant. The deduction is allowable against the income of the year in which the company derived the appropriated income. If, however, the full amount appropriated has not been expended on mine development or necessary plant by the end of the succeeding income year, the amount unexpended at that time is included in the income of that succeeding year.
In these circumstances the deduction allowed in the first of the two years is, in effect, reversed in the second year. Should the prescribed deductions for the first year have been reduced in accordance with sub-section (2.) of section 124DA, there will be a corresponding need to reverse the effects of that action. Sub-sections (4.), (5.) and (6.) are designed to achieve this result.
Sub-section (4.) provides that, where an unexpended appropriation of income is to be included in assessable income, the amount that would otherwise be so included is to be reduced by the amount in respect of which sub-section (2.) of section 124DA has applied.
Sub-section (5.) is a drafting provision to facilitate the operation of sub-section (4.). It will enable the Commissioner of Taxation to determine the extend to which deductions under section 122B have been reduced in consequence of the operation of section 124DA(2.).
Sub-section (6.) will enable the "net declared capital" of a company to which sub-section (4.) applies to be determined after regard has been had to the operation of that sub-section. This result will be ensured by the operation of sub-section (6.) in conjunction with the definition of "net declared capital" that has already been explained.
Sub-section (7.) is a machinery provision to ensure that deductions available to a mining company for its capital expenditure on prospecting, development of the mining property etc. or by way of depreciation allowances are not disturbed beyond the extent necessary to give effect to the new provisions.
This result will be achieved by sub-section (7.) that, for the purposes of the provisions governing the deductions mentioned, deems those deductions to have been allowed in full even though they have been reduced consequent on deductions being available to shareholders in lieu of the company. As a result, the depreciated value of plant and the residual capital expenditure (which is the amount on which deductions over the estimated life of the mine for capital expended on development etc. are based) will remain the same as if the new provisions had not been enacted.
By this clause an amendment of section 170 of the Principal Act is proposed. That section governs the power of the Commissioner of Taxation to amend income tax assessments.
The purpose of the amendment is to enable the Commissioner to amend assessments where a declaration made by a company in relation to its expenditure of share capital in prospecting or mining is not fulfilled. If these circumstances arise, it may be appropriate to amend the assessments of shareholders of the company in order to reduce the deductions allowed and the alteration in the law proposed by clause 10 will enable this to be done. As a corollary, the company concerned would qualify for an increase in its prescribed deductions for capital expenditure or depreciation.
Should it be necessary for the Commissioner to amend the assessment of a shareholder the usual rights of objection and appeal will be available.
It is proposed by clause 11 that sections 210, 211, 212 and 212A of the Principal Act be repealed. These sections are concerned with the issue of income tax clearance certificates in relation to persons desiring to leave Australia.
Under section 210, a person about to leave Australia may request from the Commissioner of Taxation a certificate that for income tax purposes there is no objection to that person departing from Australia. A certificate may be issued by the Commissioner if he is satisfied that -
- the person has no liability for income tax;
- satisfactory arrangements have been made for the payment of income tax that is or may become payable by the person; or
- the income tax payable is irrecoverable.
Section 211 prohibits the owner or charterer of a ship or aircraft from allowing a person to travel from Australia until a certificate issued under section 210 has been presented to the office of the owner or charterer.
Section 212 places on owners or charterers of ships or aircraft an obligation to lodge with the Commissioner all certificates presented to them, together with a list showing the name and last-known Australian address of every person who travelled on the ship or aircraft.
Section 212A provides that the preceding sections are not to apply to a member of the Defence Force who is certified by an authorised person to be travelling in the course of his duty.
The repeal of the sections mentioned will dispense with the need for persons leaving Australia to obtain a clearance certificate from the Commissioner of Taxation. The obligation of owners and charterers of ships and aircraft to supply lists of the names and addresses of passengers will also be terminated.