House of Representatives

Explanatory Memorandum.

(Circulated by authority of the Treasurer, the Rt. Hon. Harold Holt.)

General Outline

In this memorandum, explanations are given of the three Bills mentioned above.

The major Bill is the Income Tax and Social Services Contribution Assessment Bill (No. 3) 1964. By this Bill it is proposed to amend the Income Tax and Social Services Contribution Assessment Act 1936-1964, which will be referred to as "the Principal Act".

Stated very briefly, the main proposals relate to companies, leases, trusts, partnerships, superannuation funds and alienation of income. Each of these matters has been the subject of recommendations by the Ligertwood Committee, which was a Commonwealth Committee on Taxation set up under the chairmanship of Sir George Ligertwood.

The second Bill - the Income Tax and Social Services Contribution Bill (No. 2) 1964 - will amend the law declaring the rates of tax for the 1964-65 financial year. The principal purpose of the amendment will be to declare the rate of tax payable for that year on certain income of superannuation funds. The need to declare that rate of tax arises from provisions of the major Bill relating to those funds.

The remaining Bill will amend the Income Tax (International Agreements) Act 1953-1963. The amendments are of a technical nature and are consequential on provisions of the major Bill.

INCOME TAX AND SOCIAL SERVICES CONTRIBUTION ASSESSMENT BILL (NO. 3) 1964

Main Features

Expressed briefly and in broad terms, the principal proposals in this Bill may be summarised as follows:

Taxation of Companies

The rebate available to a resident company in respect of dividends included in its taxable income is to be reduced to one-half of its present level in relation to dividends received by a private company from another private company. The Commissioner of Taxation is to be granted a discretionary power under which he may, in appropriate circumstances, allow a rebate in full (clause 10).

The definition of "private company" for the purposes of undistributed income tax is to be repealed. Provisions defining "public company" are to be enacted. For the purposes of the income tax law, a company not qualifying as a public company will be regarded as a private company (clauses 29 and 30).

Provisions authorising a deduction for losses incurred prior to the year of income are to be modified in relation to companies. A company, whether a public company or a private company, will be entitled to a deduction for a loss incurred prior to the year of income only if shares carrying rights to 40% of -

the voting power in the company;

dividends that may be paid by the company;

distributions of capital in the event of the winding-up of the company or a reduction in the capital of the company,

are beneficially owned throughout the year for which the loss is claimed by the same persons as, at all times during the year when the loss was incurred, beneficially owned shares carrying such rights (clause 17).

Leases

Except in respect of certain leases for primary production or mining purposes, the existing provisions relating to lease premiums and expenditure on improvements on leasehold land are not to apply in relation to leases entered into in the future or to future assignments or surrenders of current leases (new sections 83AA(1.) and 83AA(5.) to be inserted by clause 20).

Special provisions will ensure that an existing entitlement to deductions arising from past transactions is not disturbed when a current lease is, in the future, surrendered or assigned by the present holder (new section 83AA(3.) to be inserted by clause 20).

A future assignment or surrender of a lease will not, however, secure an entitlement to a deduction in respect of expenditure on improvements for which deductions are not available over the term of the lease (new section 83AA(3.) to be inserted by clause 20).

A premium paid in respect of a future lease of property not intended by the lessee for use in the production of assessable income will be taxed in the hands of the person who receives the premium (clause 9).

Trusts

Income derived by a trust estate and to which no beneficiary is presently entitled is to be taxed in the hands of the trustee under special provisions (new section 99A to be inserted by clause 25).

The special basis of taxation is not to apply to a trust estate -

created by will or resulting from an intestacy or a court order varying or modifying the distribution of the assets of a deceased person's estate (new section 99A(1.) to be inserted by clause 25); or

where the Commissioner of Taxation, having regard to certain criteria, forms the opinion that it would not be reasonable to apply the special basis of assessment (new section 99A(2.) and (3.) to be inserted by clause 25).

Income to which the special provisions apply will be taxed at a rate to be declared.

The special basis of assessment is not to apply to income of a trust estate to the extent that an indefeasibly vested interest in the income is held by a charitable or religious institution or other organization whose income is exempt from tax under specified provisions (new section 99A(5.) to be inserted by clause 25).

The rate of tax proposed in relation to income taxed on the special basis is 10/- in the Pd. However, it will not be necessary to enact that rate until the rates of income tax for the 1965-66 financial year are being declared in 1965.

Partnerships

Special provisions are to apply to that part of the share of a partner in the net income of a partnership over which the partner does not have the real and effective control (new section 94(1.) to be inserted by clause 24).

The special provisions will apply to the share in the net income of a partner under 16 years of age, except to the extent that it constitutes reasonable remuneration for services rendered to the partnership in the production of its assessable income (new section 94(3.) to be inserted by clause 24).

A special basis of assessment will also apply if a trust is interposed between a partnership and the person ultimately entitled to a share of partnership income (new section 94(2.) and (4.) to be inserted by clause 24).

The special provisions are not to apply to any income if, in the opinion of the Commissioner of Taxation, it would not be reasonable for the section to apply (new section 94(8.) to be inserted by clause 24).

Income to which the special provisions apply will be taxed at a rate of tax to be declared or at the taxpayer's rate of tax, whichever is the greater. In this connection, it is proposed to declare a rate of 10/- in the Pd when the rates of income tax for the 1965-66 financial year are being declared in 1965. The tax liability under the special provisions will fall on the partner or, in appropriate circumstances, upon the beneficiary of a trust which is a partner.

Payments to Relatives

It is proposed to re-express section 65(1.) of the Principal Act which limits to reasonable amounts the deduction available to a taxpayer for payments to relatives. The revised provision will apply to payments made directly by a taxpayer to a relative and to payments made by a partnership to relatives of a partner (section 65(1.) and (1D.) to be inserted by clause 12).

The new provisions will also apply where a private company is a member of a partnership and payments are made by the partnership to, or to a relative of, a director or shareholder of the private company (new section 65(1.) and (1D.) to be inserted by clause 12).

The present law will also be revised to ensure that an amount disallowed as a deduction under the new provisions will not be taxed in the hands of the person who receives it (new section 65(1A.) to be inserted by clause 12), unless a private company is affected by the new provisions. The principle to be followed in that event is explained later in connection with the new section 65(1B.) to be inserted by clause 12.

Alienation of Income

It is proposed that a person who transfers a right to income, but retains ownership of his interest in the assets from which the income arises, shall be taxed on the income transferred. This procedure will, however, be followed only where the period of the transfer is, or may be, for less than seven years (clause 27).

Special provisions designed to achieve an equitable result will apply where income is transferred for income-producing purposes or to an organisation gifts to which are allowable deductions (new section 102C to be inserted by clause 27).

Contributions to Superannuation Funds

The Bill provides for repeal of existing provisions of the Principal Act (sections 66 and 79) relating to deductions for amounts contributed by employers and other persons to superannuation funds for employees. New provisions will be enacted by clause 18 of the Bill.

The new provisions will relate to contributions to provide benefits for an employee (or his dependants) engaged in producing the assessable income of his employer. It may also extend to contributions on behalf of any employee who is a resident of Australia or the Territory of Papua and New Guinea and is engaged in the business of his employer (new section 82AAA to be inserted by clause 18). There will, however, be limits upon persons entitled to deductions, e.g., contributions by a person who is not the employer of the employee to benefit will be deductible only in circumstances to be explained in detail later in this memorandum.

In relation to any one employee, the maximum amount deductible for any one year in respect of contributions from all sources, other than the employee himself, will generally be Pd200 or 5% of the remuneration for that year, whichever is the greater (new section 82AAE to be inserted by clause 18). The present provision granting the Commissioner of Taxation a discretionary power to allow a greater amount in special circumstances will be retained. There will be restrictions upon the amount deductible for contributions made by a relative of an employee or by a private company in respect of benefits for directors and shareholders, or their relatives (new section 82AAD to be inserted by clause 18).

In the event of an employee losing or forfeiting rights to an amount that has been an allowable deduction, subsequent deductions available to the contributor will be reduced unless the amount lost or forfeited is applied in a way consistent with the general tests of the new provisions (new section 82AAG and succeeding provisions to be inserted by clause 18).

Income of Superannuation Funds

It is proposed to include in the Principal Act a new provision - section 23F - that will exempt from tax most income derived by the traditional type of superannuation fund set up to provide benefits for employees and their dependants (clause 6).

The exemption will extend to dividends received by a superannuation fund from a private company only if the Commissioner exercises a discretion to treat those dividends as exempt income (new section 23F(8.) to be inserted by clause 6). Income derived by a superannuation fund from transactions not entered into on an arm's length basis will be excluded from the exemption (new section 23F(10.) to be inserted by clause 6).

In order to qualify for exemption, a superannuation fund will need to satisfy tests that are set out in the proposed new section 23F(2.) and which are explained at pages 10 to 12 of this memorandum.

Income of the two classes mentioned will be taxed in the hands of all superannuation funds. However, a measure of relief from tax on other categories of income will be provided for superannuation funds not satisfying the tests of the proposed section 23F, but which meet certain requirements. These requirements are prescribed in a new section 79(2.) to be enacted by clause 14 and are explained at pages 32 to 34 of this memorandum.

The relief proposed is in the form of a deduction equal to 5% of the cost of the net assets of the fund (new section 79(3.) to be inserted by clause 14). In effect, these funds will, except in relation to certain dividends from private companies and income from transactions not made on an arm's length basis, be exempt from tax on earnings of up to 5% on their net capital. For this purpose, certain capital items not producing assessable income will be excluded (section 79(4.) and succeeding provisions to be inserted by clause 14).

Schedule of clauses

A schedule of the clauses relating to each of the subjects listed above is provided at the end of this memorandum.

The various clauses of the Amending Bill are explained in the notes that follow.

Notes on Clauses

Clause 1: Short Title and Citation.

This clause formally provides for the short title and citation of the Amending Act and of the Principal Act as amended.

Clause 2: Commencement

Section 5(1A.) of the Acts Interpretation Act 1901-1964 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 a contrary intention appears in the Act.

Provisions of some clauses of the Bill are to apply to income derived, or to agreements, assignments etc. made after a specified day. Clause 2 accordingly proposes that these clauses shall come into operation on the day specified in sub-clause (2.) of that clause. The provisions in question are included in clauses three (b), nine, nineteen, twenty, twenty-one, twenty-seven, thirty-five, thirty-six and thirty-seven of the Bill and are explained later in this memorandum. It is proposed that the remaining clauses of the Bill will come into force on the day that the Bill receives the Royal Assent.

Clause 3: Synopsis of Act.

Section 5 of the Principal Act lists the Parts and Divisions into which that Act is divided. Clause 3 is a drafting amendment which will bring the list of Parts and Divisions into line with other amendments explained later in this memorandum.

Clause 4: Definitions.

By this clause, it is proposed to insert in section 6 of the Principal Act several new definitions of terms used in the amending provisions to be included in the Principal Act.

The terms defined are -

"apportionable deductions" : This term is at present defined in section 160AE. It is now to be used in proposed new provisions of the Principal Act and the definition is being transferred to section 6 of that Act so that the defined meaning will have effect in all provisions, unless the contrary intention appears. The definition will be omitted from section 160AE by clause 41 of the Bill.

The term "apportionable deductions" means deductions of a concessional nature, e.g., concessional deductions relating to dependants, medical and education expenses, life assurance premiums, superannuation contributions etc. and also special deductions for capital paid on certain shares, zone allowances and rates or land tax on land not producing assessable income.

The new definition will be extended to include deductions allowable for capital paid on mining shares, the special deduction to be allowed to certain superannuation funds under a new section 79(3.) to be enacted by clause 14 and the deductions (comparable with those allowed to members of the Defence Force stationed in prescribed trouble areas) available to certain civilian members of an armed force controlled by the United Nations. These deductions, like those previously within the definition, are allowances of a concessional nature.

"constituent document" : A definition of this term has been included for several years in the Acts imposing rates of tax. The term is now to be used in provisions to be inserted by clauses 17 and 29 of the Bill and the definition is being transferred to section 6 of the Principal Act which will make it effective wherever used in that Act or in a future Act imposing rates of tax.

Stated broadly, "constituent document" will, as in the past, mean the memorandum and articles of association of a company or the rules or other document under which a company is established or its activities governed.

"private company" : This term will mean a company that is a private company for the purposes of the provisions relating to the undistributed income tax payable by private companies that make an insufficient distribution of their incomes. By clause 29 of the Bill it is proposed to set out in those provisions the circumstances in which a company may qualify as a public company - see explanations at pages 93 to 97 of this memorandum. A company not satisfying the tests prescribed will be treated as a private company.

"shares" : The proposed definition will provide that, in relation to a company, "shares" shall mean either shares or stock in the capital of the company. The term will not include debentures, notes etc. that a company may issue in relation to moneys borrowed by it.

The new definitions will apply in relation to income of the 1965-66 income year and subsequent years.

Clause 5: Exemptions.

By paragraph (a) of this clause it is proposed to omit from section 23 of the Principal Act a provision (section 23(j)(i)) which at present exempts from tax the income of a provident, benefit or superannuation fund established for the benefit of employees.

The income tax position in relation to superannuation funds (other than a fund for self-employed persons at present exempt under section 23(ja) of the Principal Act) will be determined by new provisions.

Paragraph (b) of clause 5 is the first of these new provisions. It will insert in section 23 of the Principal Act a new provision - paragraph (jaa) - which is designed to exempt the income of a provident, benefit, superannuation or retirement fund established under a law of the Commonwealth, a State or a Territory or established by a local governing body or public authority constituted under such a law.

Exemptions and special deductions proposed in relation to other categories of funds will be authorised by new provisions to be inserted in the Principal Act by clauses 6 and 14 of the Bill. These provisions are explained later in this memorandum.

The amendments proposed by clause 5 will commence to apply for the 1965-66 income year.

Clause 6: Exemption of Income of Certain Superannuation Funds Established for Benefit of Employees.

Introductory Note :

By this clause it is proposed to enact section 23F of the Principal Act, concerning the income of a provident, benefit, superannuation or retirement fund established for the benefit of employees.

The new section will apply to funds which receive from an employer contributions to provide personal benefits for each employee-member of the fund, or his dependants - that is, funds of an orthodox or traditional type.

In the generality of cases, the income of a fund qualifying under the section will be exempt from tax. The exemption will not, however, extend to income from transactions not entered into by the fund on an arm's length basis or to dividends received from a private company, unless the Commissioner of Taxation exercises a discretionary power not to treat the dividends as assessable income. These exclusions will, broadly, accord in principle with a recommendation by the Ligertwood Committee.

In order to qualify under section 23F, a fund will need to satisfy a number of tests, which are explained in succeeding paragraphs of this memorandum. These tests are basically similar to those recommended by the Ligertwood Committee although some departures from the recommendations of that Committee are proposed so as to render the tests more effective.

It is proposed in the new section 23F to grant to the Commissioner of Taxation some discretionary powers. In each case, there will be the usual right of appeal to an independent Taxation Board of Review against the Commissioner's exercise of a discretion.

Provisions relating to the investment of a proportion of the assets of a fund in public securities - that is, the provisions concerning what is widely known as the 30/20 rule - will continue to apply to funds qualifying under section 23F.

Special provisions that may operate in the case of funds to which section 23F does not apply are contained in clause 14 and are explained at pages 31 to 36 of this memorandum.

The provisions of section 23F are to apply as from the commencement of the 1965-66 income year. However, clause 46 of the Bill proposes that a superannuation fund formerly exempt shall be taxed on any income derived as from the present time and which is of a class not exempted by section 23F.

Further explanations of the provisions of the proposed section 23F are given in the notes that follow.

Sub-section (1.) of section 23F contains the following definitions of terms designed to facilitate drafting and interpretation.

"person" : This word is defined so as to ensure that the exemption from tax of a superannuation fund receiving contributions for the benefit of employees of a partnership is determined on the same basis as when contributions are received from other taxpayers, e.g., sole traders or companies.

"superannuation benefits" : This term will mean individual personal benefits, pensions and allowances. Its use will remove the need for repeated reference to each of those benefits.

"superannuation fund" : This definition will ensure that a reference to a superannuation fund will include a reference to each of the various types of fund from which benefits are paid to persons, usually when their employment ceases. The term will include a provident fund, a benefit fund, a superannuation fund or a retirement fund.

"transaction" : This term, which is used in sub-section (10.) of the new section 23F, will include not only one transaction but also a series of transactions.

Sub-section (2.) specifies the tests that are to be satisfied in order that a superannuation fund for the benefit of employees or their dependants may qualify for exemption under section 23F. It is proposed, however, that the Commissioner of Taxation shall have a discretion to disregard a failure by a fund to comply with all of the tests specified in special circumstances - see notes on sub-section (6.).

Paragraph (a) requires, firstly, that the fund shall be indefinitely continuing. It also requires that the fund be established solely for the purpose of providing individual personal benefits, pensions or allowances on the retirement or death of employees or in other circumstances approved by the Commissioner.

Paragraph (b) states the test that, for a fund to qualify under section 23F for a year of income, an employer of each employee entitled to benefits from the fund (or whose dependants are so entitled) shall contribute to the fund in that year on behalf of each of those employees. This test, as well as other tests, may be read in conjunction with the discretionary power it is proposed to grant to the Commissioner of Taxation under sub-section (6.).

Paragraph (c) sets out the classes of persons from which a fund may accept contributions on behalf of employees and remain eligible for exemption. The persons who may contribute to the fund are -

(i)

the employee;

(ii)

an employer of the employee;

(iii)

a company in which an employer has a controlling interest;

(iv)

if an employer is a company - a person who is associated with the employer.

The circumstances in which a person is associated with an employer are set out in sub-section (3.) which is explained at page 12 of this memorandum.

Paragraph (d) requires that the rights of employees and dependants of employees to receive benefits from the fund be fully secured. By way of example, an employee's rights would not be fully secured if, having fulfilled the conditions of the fund, his rights could be withdrawn or reduced under a discretionary power granted to the employer, the trustees of the fund or any other person.

Under paragraph (e) it will be necessary for the rights of an employee and his dependants to receive benefits from the fund to be defined by the terms and conditions governing the fund. It is also necessary that the employee should be notified in writing of his rights before or when contributions are first made to the fund on his behalf or before such later date as the Commissioner of Taxation determines.

Paragraph (f) applies where the rights of employees or of dependants of employees to receive benefits from the fund are lost or forfeited in the year of income and specified amounts were appropriated for the provision of those benefits. If the fund desires to qualify for exemption it will be necessary for the lost or forfeited benefits to be applied in the manner prescribed in this paragraph during the income year in which the loss or forfeiture occurred, within two months after the end of that year, or within such further period as the Commissioner of Taxation allows.

The manner in which lost or forfeited benefits may be applied within the terms of paragraph (f) are -

(i)

to provide the benefits to which other employees or their dependants are entitled;

(ii)

to provide additional benefits for other employees or their dependants on a basis that, in the opinion of the Commissioner of Taxation, is reasonable; or

(iii)

for other purposes approved by the Commissioner of Taxation.

Paragraph (g) of sub-section (2.) applies where the rights of employees or of dependants of employees to receive benefits from the fund are lost or forfeited in the year of income and specified amounts were not appropriated for the provision of those benefits. This situation may arise in the case of funds providing benefits in the form of pensions and in other cases where amounts in the fund are not segregated to satisfy entitlements of particular employees to benefits.

In this class of case the amounts of forfeited benefits are not, in the generality of cases, re-applied by the trustees for the benefit of other employees. Those amounts remain in the fund and may be used to provide the benefits to which other employees are entitled from the fund or for the purpose of providing additional benefits for all or some employees.

Paragraph (g) will not disturb any exemption of income if the Commissioner is satisfied that the basis on which the additional benefits are provided for employees is reasonable.

The test proposed by paragraph (h) is that excessive benefits for employees are not provided by the fund. In determining whether benefits are excessive the Commissioner of Taxation is to have regard to the remuneration paid to the employee, the period of his service with his employer and any past, present or future benefits paid, or that may be paid to the employee or his dependants by another fund. As other circumstances may also call for consideration, the Commissioner will be authorised to consider other matters that he considers relevant.

The purpose of paragraph (i) is to limit the exemption provided by section 23F to funds which do not accumulate capital that is substantially in excess of the amount necessary to provide the benefits to which employees and their dependants are entitled. In determining whether the capital is excessive the Commissioner of Taxation is to have regard to the contributions that are expected to be made to the fund in succeeding years on behalf of the employees and their dependants who are entitled to benefits. He is also to have regard to the income that is expected to be derived by the fund in succeeding years.

Sub-sections (3.) and (4.) involve questions of detail that need to be provided for in the legislation in order to facilitate the operation of paragraph (c) of sub-section (2.).

That paragraph specifies the classes of person that may contribute to a fund without that fund losing the exemption otherwise provided by section 23F. The intention is that section 23F should not apply to a fund that receives contributions for the benefit of employees if the contributor is not the employee himself, the employer or a company in which the employer of the employee has a controlling interest. The only exception is where the contributor is associated with the employer company. A contributor will be so associated if he has a controlling interest in the employer-company or if both the employer-company and the contributing company are under the control of one person. A contributor may also be so associated if he is a shareholder, but does not have a controlling interest in the employer-company provided that he is not connected with the employee for whom he contributes to the fund. It is not, for example, intended that an exemption should be available to a fund that accepts contributions to provide benefits for the wife of a person who merely holds a small number of shares in a company for which his wife works. If, however, a minority shareholder in the employer-company is not connected with the employee for whom he contributes to a fund, his contribution would not be an obstacle to exemption of income of the fund.

The purpose of sub-sections (3.) and (4.) is to write into the law in some detail the circumstances in which a person may be regarded as being associated with a company that employs the employee for whose benefit the person makes a contribution.

Under paragraph (a) of sub-section (3.) a person who has a controlling interest in the employer-company will be a person associated with the company. For example, a parent company contributing to a fund for the benefit of employees of its subsidiary company will qualify as a person associated with the subsidiary company. Contributions by the parent company would not prejudice the fund's entitlement to exemption under the new section 23F.

Paragraph (b) is designed to meet the case where a person has a controlling interest in the employer-company and in the contributing company, e.g., two subsidiary companies with a common parent company. In these circumstances, contributions made to a fund by one of the subsidiary companies for the benefit of employees of the other subsidiary would not be an obstacle to exemption of the fund under section 23F.

Paragraph (c) of sub-section (3.) will ensure that exemption of a fund is not lost by reason of contributions made by the beneficial owner of shares in an employer-company so long as the contributor is not connected with the employee for whose benefit he makes contributions. The paragraph necessitates a provision stating the circumstances in which a person who contributes to a fund is to be regarded as connected with an employee for whose benefit the contribution is made.

The purpose of sub-section (4.) is to set out the circumstances in which a contributor to a fund is to be regarded as connected with an employee.

Paragraph (a) of sub-section (4.) provides that a person is connected with an employee if he is a relative of the employee. For income tax purposes a relative includes a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the taxpayer or of his or her spouse. It also includes the spouse of the taxpayer or of any of the other persons mentioned.

In view of paragraph (a) it will not be open to a fund to obtain exemption under section 23F if it accepts a contribution from a person to provide benefits for an employee who is the child, wife or other relative of the contributor, if the contributor holds only a minority of the shares in the employer-company.

Paragraph (b) will establish in relation to a partnership a position corresponding with that explained in relation to paragraphs (a) and (c). A partnership will be treated as being connected with a person if any one or more of its partners is so connected.

Paragraph (c) of sub-section (4.) is a technical provision designed to cover cases in which contributions are made to a fund by a private company that is a minority shareholder in the employer-company and there is a relationship between an employee who is to benefit and a director or beneficial shareholder of the private company or an interconnected private company.

A fund that accepts contributions in any of the circumstances covered by paragraph (c) will not qualify for exemption under the new section 23F unless a controlling interest exists between the private company making the contributions and the employer-company. Comments on the circumstances set out in paragraph (c) can now be given.

By sub-paragraph (i) of paragraph (c), a private company and an employee on whose behalf the company contributes to a fund will be connected if the employee or one of his relatives was a director of the company at any time during the income year.

Under sub-paragraph (ii) a private company and an employee will be connected if, at any time during the income year, the employee or a relative of the employee owned shares in the company or shares in the company were held indirectly for the employee or one of his relatives. Sub-section (5.), which is explained later, sets out circumstances in which shares are deemed to be held indirectly for an employee or one of his relatives.

Sub-paragraph (iii) will apply where, at any time during the income year, an employee for whom a private company contributes to a fund or a relative was a director of another private company and, at any time during that year, the latter company owned shares or had indirect interests in the first private company. In these circumstances, the contributing company will be connected with the employee.

Under sub-paragraph (iv) of paragraph (c), a private company that makes contributions for the benefit of an employee will be connected with the employee if, at any time during the income year, the employee or a relative was a director of, or owned shares in another private company in which the contributing company, at any time during that year, owned shares or had indirect interests.

By sub-paragraph (v) an employee will be connected with a private company contributing to a fund for his benefit if at any time during the income year -

(a)

the employee or a relative of the employee beneficially owned shares in, or was a director of, another private company; and

(b)

shares in that other company were beneficially owned by, or were indirectly held for, a person who beneficially owned, or for whom shares were beneficially held, in the private company that makes the contribution.

This provision, which would apply infrequently, is the final test proposed for the purpose of determining whether a contribution to a fund for an employee by a minority shareholder in the employer-company is made on an arm's length basis.

Sub-section (5.) relates to sub-section (4.) and is designed to enable an indirect interest of a person in a private company to be traced through any interposed private companies, trusts or partnerships. For this purpose shares in a private company are deemed to be held indirectly by, or on behalf of, a person if that person would receive a dividend paid by the company in the event of that dividend being distributed successively through any interposed private companies, trusts or partnerships.

Sub-section (6.) grants to the Commissioner of Taxation a discretion which, if exercised, will enable a superannuation fund to obtain an exemption under section 23F even though it has not satisfied all the tests prescribed in sub-section (2.).

Before the Commissioner may exercise the discretion, it will be necessary for the trustee of the fund to satisfy the Commissioner that special circumstances existed in relation to the year of income, which make it reasonable for the Commissioner to disregard the failure of the fund to satisfy a particular test or tests.

If the Commissioner does not exercise the discretion, his decision will be subject to the usual rights of objection and reference to an independent Taxation Board of Review.

Sub-section (7.) is the operative provision which authorises the exemption of the income of a superannuation fund which satisfies the tests prescribed in sub-section (2.) or in respect of which the Commissioner has exercised his discretion under sub-section (6.). The exemption is, however, subject to the provisions of sub-sections (8.), (9.) and (10.) which are explained below.

Sub-section (8.) provides that the exemption authorised by sub-section (7.) will not apply in relation to dividends paid to a superannuation fund by a private company. The Commissioner is, however, granted a discretion to exempt such dividends if he is of the opinion that it would be reasonable to do so.

In exercising his discretion the Commissioner is directed to have regard to certain matters listed in the sub-section. These matters relate to the paid-up value of shares held by the fund, the cost of the shares, the rate of dividend on the shares and on other shares in the company, the circumstances in which bonus shares have been issued to the fund and other matters that the Commissioner regards as relevant.

Sub-section (9.) is designed as a safeguard to ensure that the provisions of sub-section (8.) are not rendered ineffective by the interposition of trusts or partnerships between a private company paying dividends and a superannuation fund. A fund will, in these circumstances, be deemed to have been paid a dividend by a private company if, in the opinion of the Commissioner of Taxation, income derived by the fund is derived indirectly from such a dividend.

Sub-section (10.) provides that income (other than a dividend paid by a private company) derived by a superannuation fund from a transaction is not exempt under section 23F if the Commissioner of Taxation is satisfied that parties to the transaction were not dealing at arm's length and the income is greater than might have been expected if the parties had dealt at arm's length. As already explained in relation to the definition in sub-section (1.), "transaction" includes a series of transactions.

The provisions of the new section 23F will apply for the 1965-66 income year and subsequent years. However, clause 46 of the Bill contains provisions that will require tax to be paid by a superannuation fund on income of the classes mentioned in sub-sections (8.), (9.) and (10.) of section 23F and which is derived in the period from the present time until the end of the 1964-65 income year.

Clause 7: Commonwealth Trading Bank of Australia.

This clause is consequential on other amendments and does not change the effect of the law.

The clause will repeal section 24A of the Principal Act which at present declares the Commonwealth Trading Bank not to be a public authority for the purposes of section 23(d) of that Act. This part of the present section 24A is being re-enacted in a new section 24A and ensures that the Bank is not granted exemption from tax under section 23(d).

The second purpose of the present section 24A is to prevent the Bank from being treated as a private company. This provision is not included in the new section 24A because the same effect will be obtained by paragraph (d)(iii) of a new section 103A(2.) to be inserted in the Principal Act by clause 29 of this Bill.

Clause 8: Certain Items of Assessable Income.

This clause effects a drafting amendment to paragraph (d) of section 26 of the Principal Act. This amendment is consequential on the amendments to section 65 of the Principal Act that are proposed by clause 12 of the Bill.

In broad terms, section 26(d) provides that five per cent only of a retiring allowance is to be included in the assessable income of the recipient. The section does not apply to any amount deemed to be a dividend paid by a private company, i.e., where section 109 of the Principal Act is applied in relation to a retiring allowance paid by a private company to a director or shareholder. The amount treated as a dividend may be wholly included in assessable income.

In consequence of amendments to section 65 of the Principal Act proposed by clause 12 of the Bill, an amount of a retiring allowance paid by a partnership of which a private company is a member may be deemed to be a dividend. The purpose of the amendment to section 26(d) is to ensure that such an amount is excluded from the special basis of assessment provided by the section. This is being achieved by excluding from the operation of section 26(d) any amount deemed to be a dividend, whether it is paid directly by a private company or by a partnership in which a private company is a member.

Clause 9: Assessable Income - Premium for Lease.

Introductory Note :

By this clause it is proposed to insert a new section - section 26AB - in the Principal Act. The new section 26AB sets out the circumstances in which amounts received as premiums for certain types of leases may be included in the assessable income of persons who receive the benefit of the premiums.

As mentioned in the summary of proposals at the beginning of this memorandum it is proposed by the Bill to discontinue the general operation of the lease provisions contained in Division 4 of Part III of the Principal Act. These provisions will, however, continue to apply in relation to lease transactions entered into on or before the date of introduction of the Bill. The provisions of Division 4 will also continue to operate in their present manner in relation to Crown leases of land used for primary production and certain mining leases. The continuation of the provisions in these respects is provided in the proposed section 83AA to be inserted in the Principal Act by clause 20 of the Bill (see notes at pages 59 to 64 of this memorandum).

It has also been mentioned in the summary of proposals that premiums paid for the grant or assignment of a lease of property that is not intended by the grantee or assignee to be used for producing assessable income will continue to be taxed in the hands of the payee. The new section 26AB will give effect to this proposal. Section 26AB will apply to transactions involving grants and assignments of leases that take place after the date of introduction of the Bill.

The broad classes of premium proposed to be included in assessable income under the new section 26AB have hitherto been so included in accordance with Division 4 of Part III of the Principal Act. Section 84, which is part of that Division, provides that the assessable income of a taxpayer shall include, in addition to rent, a premium received by him in the year of income.

The new section 26AB will not substantially alter the effect of the present law in this respect although, as explained later in relation to sub-section (3.) of the proposed section 26AB, in some cases a part only of an amount of a premium may in future be included in assessable income whereas the whole of the amount may have been so included if Division 4 had continued in general operation.

Sub-section (1.) of the proposed section 26AB contains a definition of the word "premium" for the purposes of the section. Only amounts which fall within this definition may be treated as assessable income in accordance with the section.

The term is defined as embracing specified amounts of consideration payable in relation to the grant or assignment of a lease. It does not include amounts payable in relation to the surrender of a lease or in respect of goodwill or a licence. Except as provided in the new section 83AA capital payments in relation to the surrender of a lease, or a transaction in licence or goodwill, will not in future have any income tax consequences.

Where a consideration falls within the definition of "premium", and the other provisions of the section apply, it will be included in assessable income whether it is paid in one lump sum or in instalments over a period. Where paid in one sum, it will be included in the assessable income of the year of income in which it is received. If paid in instalments each instalment will be included in the assessable income of the year of income in which it is received.

An amount may be a premium within the terms of sub-section (1.) whether paid to the grantor or assignor of the lease or to some other person. This is necessary because, otherwise, it could be arranged by the assignor for the premium to be paid to some other person nominated by him, e.g. his wife, thus avoiding the inclusion of the amount of the premium in the assessable income of any person.

Paragraph (a) of sub-section (1.) makes the section applicable in respect of an amount of consideration that is in the nature of a premium for or in connexion with the grant or assignment of a lease. Amounts in the nature of a fine or foregift for or in connexion with the grant or assignment are also within the scope of the paragraph. These two classes of amount are included in the present definition of premium for the purposes of Division 4 of Part III of the Principal Act.

Paragraph (b) of sub-section (1.) brings within the scope of a premium for the purposes of the section amounts of consideration payable for or in connexion with an assent to the grant or assignment of a lease. Amounts of this kind are also included in the present definition contained in Division 4.

Sub-section (2.) states the circumstances in which the whole amount of a consideration that is a premium for the purposes of the section will be included in the assessable income of the taxpayer who receives it. As mentioned above, premiums included in assessable income by virtue of this sub-section have hitherto been so included in accordance with sections 83 and 84 contained in Division 4 of Part III of the Principal Act.

The sub-section operates to include in the assessable income of the recipient a premium that is paid for or in connexion with the grant or assignment of a lease of property, or an assent to the grant or assignment, in circumstances where the grantee or assignee does not intend the property subject of the lease to be used by himself or another person to any extent for the purpose of gaining or producing assessable income, e.g., where the premium is paid by a person who is acquiring the lease so as to use the property for private residential purposes.

The time at which the existence of the intention is to be ascertained is the date on which the grantor or assignor agreed to the grant or assignment or, in the case where the premium relates to an assent to a grant or assignment, the date on which the assent was given.

Sub-section (3.) states the circumstances in which part of the amount of a consideration that is a premium for the purposes of the section will be included in the assessable income of the taxpayer who receives it.

These circumstances are where the grantee or assignee of the lease intends use of the property subject of the lease by himself or some other person partly for the purposes of gaining or producing assessable income and partly for other purposes. As in sub-section (2.), the relevant date for determination of the intention is the date of the agreement for the grant or assignment, or the date of the assent to the grant or assignment, as the case may be.

In a case to which sub-section (3.) applies, the assessable income of a taxpayer will include only such part of a premium as the Commissioner considers may reasonably be attributed to the intended use of the property for purposes other than gaining or producing assessable income. It is to be noted that under the present provisions of Division 4, the full amount of such a premium may constitute assessable income.

A determination of the Commissioner under sub-section (3.) will be subject to the usual rights of objection and reference to an independent Taxation Board of Review.

Sub-section (4.) authorises the Commissioner of Taxation to apply the section in accordance with the belief of the taxpayer who receives a premium, as to the assignee's or grantee's intended use of the property the subject of the lease for which the premium was paid.

Where the Commissioner is satisfied that the taxpayer believed on reasonable grounds that the grantee or assignee intended a particular use of the property, the sub-section will provide authority for the Commissioner to apply the section on the basis that that intention existed, even though it may not be carried out.

If the Commissioner is satisfied that, on reasonable grounds, a taxpayer believed that the property subject of a lease which he granted or assigned, or to the grant or assignment of which he gave his assent, was intended by the grantee or assignee to be used wholly in the production of assessable income, he will not be taxed on a premium received in relation to the grant or assignment, even though the grantee or assignee does not carry out his intention in full or in part. Similarly, if the Commissioner is satisfied that the taxpayer believed, on reasonable grounds, that the grantee or assignee intended the property to be used partly in producing assessable income and partly for other purposes, he will be taxed on only the appropriate part of the premium, as determined in accordance with sub-section (3.), even though the property is used wholly for the other purposes.

The time at which it is to be shown that the taxpayer believed the grantee or assignee intended a particular use of the property is the date on which the agreement for the grant or assignment is made, or the assent to it given, as the case may be. It is to be noted that the application of the sub-section is dependent on a belief of the taxpayer formed on reasonable grounds. The sub-section would, therefore, not be applicable in a case where the taxpayer failed to take reasonable steps to form a belief as to the intention of the grantee or assignee.

An opinion of the Commissioner formed under the sub-section will be open to the usual rights of objection and reference to a Taxation Board of Review. A Board of Review may substitute its own opinion for that of the Commissioner.

Sub-section (5.) specifies premiums to which the sub-section does not apply.

Paragraph (a) excludes from the scope of the section any premium to which Division 4 of Part III of the Principal Act applies.

By sub-clause (2.) of clause 2 of the Bill the new section 26AB will be deemed to come into operation immediately and will thus apply in relation to premiums received in the future. It is possible that some such premiums may still be assessable income in accordance with Division 4 of Part III of the Principal Act e.g., a premium paid in the future in relation to the assignment or surrender of an existing lease that is made in pursuance of an agreement entered into before the new section came into operation. Sub-section (5.) ensures that the new section 26AB does not apply in relation to any premium to which Division 4 applies.

Paragraph (b) excludes from the operation of the section a premium received in connection with the assignment of a mining lease. The term "mining lease" has the same meaning for the purposes of the paragraph as it has in sub-section (7.) of section 88B of the Principal Act, i.e., a lease of land granted under the law of a State or Territory of the Commonwealth relating to mining.

In broad terms, a premium for the assignment of a mining lease is not at present included in assessable income unless the parties to the assignment take certain action described in section 88B, which is contained in Division 4 of Part III of the Principal Act. Section 88B and associated provisions are to continue in operation and the purpose of paragraph (b) is to ensure that a premium for the assignment of a mining lease is not included in assessable income under the new section 26AB.

Paragraph (c) has a purpose corresponding to that of paragraph (b) in relation to premiums for the grant or assignment of a lease which, while not a mining lease, is a lease granted or assigned for mining purposes and to which section 88B and associated provisions apply in common with mining leases.

The paragraph will ensure that any such premium is not assessable income under the new section 26AB.

Paragraph (d) excludes from the scope of the section premiums which are not, by reason of the special nature of the leases to which they attach, at present included in assessable income. These premiums are ones received in connection with the assignment of a lease referred to in section 89 of the Principal Act, which is contained in Division 4 of Part III of that Act.

Section 89 has the effect of excluding certain Crown leases from the application of existing provisions relating to leases. The leases excluded are leases from the Commonwealth or a State that are of a term not less than 99 years or that carry a right of purchase, or that are granted exclusively for residential purposes. A premium for the assignment of any such lease will not be included in assessable income under the new section 26AB.

Clause 10: Rebate on Dividends.

Introductory Note :

By this clause it is proposed to repeal section 46 of the Principal Act and insert in its stead a new section. Section 46 provides for the allowance of a rebate of the primary tax where a company resident in Australia receives dividends. The rebate is based on the amount of dividend included in the taxable income and is calculated at the average rate of primary tax payable by the company.

The Ligertwood Committee drew attention to means by which private companies have, in the course of avoiding undistributed income tax, exploited the rebate on dividends received from associated private companies.

Undistributed income tax is not payable by a private company which makes a sufficient distribution of its income during "the prescribed period", that is, a period of 12 months ending ten months after the close of the income year in which the income is derived. Where a distribution is made, the dividends paid are generally subject to income tax in the hands of individual shareholders at graduated rates. If a sufficient distribution of income is not made by a private company during the prescribed period, the company may be liable for undistributed income tax at the rate of 10/- in the Pd on the undistributed amount.

One class of arrangement entered into by private companies is for a private company that has derived income to pay a dividend within the prescribed period to an associated private company. The first company is thereby relieved of undistributed income tax. The second obtains a rebate under section 46 and pays no primary tax on the dividend received. In the succeeding year, the second company makes a distribution to a third associated private company. The second company thereby avoids undistributed income tax. In due course, the third company repeats the process of distributing a dividend. This procedure may be continued indefinitely and defeats the intention of the income tax law that, in relation to the income of private companies, there be a liability for either undistributed income tax or for tax on dividends paid.

To deter tax avoidance arrangements of this nature, the Ligertwood Committee recommended that the rebate of primary tax in respect of dividends received by any resident company from a private company be reduced by 15 per cent.

That reduction would have applied in respect of dividends received by public companies from private companies and in cases where dividends received by a private company were passed on to individual shareholders or subjected to undistributed income tax.

The course proposed in the new section 46 includes the following features:-

(a)

the rebate on dividends received by a private company from another private company to be reduced to 50% of its present level, but the Commissioner of Taxation to have discretionary power to allow the rebate in full in appropriate circumstances;

(b)

in the case of dividends received by public companies, the present level of the rebate to be unchanged; and

(c)

the full rebate to be available in respect of dividends paid by a non-resident private company out of profits derived from sources outside Australia.

Sub-section (1.) of the proposed section 46 defines the term "private company dividends".

With one exception mentioned in the next paragraph, the term will mean dividends paid by one private company to another private company. It will not include dividends paid to public companies, which have no liability for undistributed income tax and have no incentive to enter into arrangements of the nature mentioned in the introductory note on this clause.

The exception mentioned is that the term will not include a dividend paid by a non-resident company out of profits having their source outside Australia. No Australian tax is payable by a non-resident company on income derived from ex-Australian sources and such a company could obtain no advantage in respect of Australian tax by making the arrangements described in relation to dividends distributed out of its overseas profits. For this reason, the rebate on such dividends is not to be disturbed.

Sub-section (2.) provides for the allowance to a resident company of a rebate of tax in respect of dividends included in its taxable income. If the recipient company is not a private company, the amount of the rebate will, as in the past, be calculated by applying the average rate of tax payable by the company to so much of any dividends as is included in its taxable income.

In the case of a private company, the rebate on dividends received from a public company will be calculated on the basis just mentioned. In relation to a private company dividend, the rebate will be ascertained by applying the average rate of tax to only one-half of the private company dividends included in the taxable income of the recipient private company.

Sub-section (3.) provides for the Commissioner of Taxation a discretion under which he may allow a further rebate in respect of private company dividends. The further rebate would have the effect of restoring the rebate to its present level - that is, the aggregate amount of the rebates on private company dividends would equal the amount ascertained by applying the average rate of tax to the whole of those dividends included in the taxable income. The discretion may be exercised by the Commissioner only if he is satisfied in respect of matters stated in paragraph (a), (b) or (c) of the sub-section.

Paragraph (a) is designed to enable the further rebate to be allowed to a private company which does not pay any dividends to another private company, e.g., where all of the shareholders of the company are individuals.

A company will qualify for the further rebate if the Commissioner is satisfied that the company has not paid and will not pay a dividend to another private company either during the income year in which it received private company dividends or during the period of 10 months after the end of that year.

As has already been mentioned, undistributed income tax is not payable by a private company if it makes a sufficient distribution of its profits during a period of 12 months ending 10 months after the end of the year of income. It is accordingly appropriate that the Commissioner take into account, when deciding whether to exercise the discretionary power, dividends that may be paid by a private company during that period of 10 months after the end of the income year.

By way of example, a private company that has received a dividend from a subsidiary company may qualify for the further rebate under paragraph (a) in respect of dividends received from the subsidiary if none of its own shareholders is a private company.

Paragraph (b) will, broadly stated, have effect where a company in receipt of private company dividends pays dividends to another private company and the latter company does not pass on those dividends to any private companies. This situation would, for example, arise where two private companies are interposed as holding companies between individual shareholders and operating subsidiaries from which dividends originate.

In such circumstances, the Commissioner will be authorised to allow the further rebate to the first private company if he is satisfied that the company to which it has paid, or may pay, dividends will not, in turn, pass on those dividends to another private company during the period specified. That period comprises the income year in which the dividends were received by the second private company and 10 months after the end of that year.

Paragraph (c) will authorise the Commissioner to allow the further rebate to a private company if he is satisfied that it would be reasonable to do so, even though the requirements of paragraphs (a) and (b) are not met. This provision will enable the Commissioner to have regard to special circumstances which it is not practicable to visualise fully in advance of the facts being established.

A company which has not been allowed a further rebate in its assessment will have the usual rights of objection and reference to a Taxation Board of Review.

Sub-section (4.) applies where a further rebate has been allowed in the assessment of a company, possibly on understandings that are not supported by facts established at a later date. If the Commissioner, after allowing the further rebate, becomes satisfied that, having regard to all the circumstances, the rebate ought not to have been allowed, the private company that received the dividend will be deemed not to have been entitled to the further rebate.

Sub-section (5.) will ensure that the Commissioner has the necessary authority to amend an assessment of a private company if, after making the assessment, he becomes satisfied that the further rebate should have been allowed on private company dividends received by the company. It will also ensure that he may amend an assessment in which he has allowed the further rebate if, on the basis of later established facts or other grounds, he is satisfied that the rebate should not have been allowed to a private company.

An amendment under this provision may be made within three years after the date upon which tax became due and payable under the assessment. The authority granted under sub-section (5.) will not be affected by the provisions of section 170 of the Principal Act which specifies the general time limits and circumstances in which an assessment may be amended.

Sub-section (6.) specifies the basis upon which the average rate of tax payable by a company for a year of tax is to be determined. The provision, with minor drafting amendments, corresponds to sub-section (2.) of the existing section 46 and will not vary the existing basis of determining the average rate of tax. In broad terms, the average rate of tax is ascertained by dividing the tax that would be payable by a company if no rebates or credits were allowed in its assessment by the amount of the taxable income.

Sub-section (7.) sets out the basis for ascertaining the part of any private company dividends and other dividends which is included in the taxable income of a company. The rebate or the further rebate allowable under section 46 is calculated by applying the average rate of tax to the appropriate part of those dividends.

Paragraph (a) specifies the manner in which the part of any dividends that is included in the taxable income of a private or non-private company should be ascertained. The provision corresponds, in substance, to sub-section (3.) of the existing section 46. The part of the dividends included in the taxable income is calculated by deducting from the total amount of dividends included in the assessable income the deductions allowable from income from dividends.

Paragraph (b) is a new provision which is necessary to enable the part of any private company dividends that is included in the taxable income of a private company to be ascertained for the purposes of calculating the rebate or further rebate allowable in the assessment of a private company. That part of private company dividends will be the amount remaining after deducting from the private company dividends included in the assessable income of the company deductions that relate directly to the private company dividends and so much of any other deductions allowable from dividends as, in the opinion of the Commissioner, may appropriately be related to the private company dividends.

Sub-section (8.) corresponds, with minor drafting amendments, to sub-section (4.) of the existing section 46. The effect, which is unchanged, is that no rebate is allowed on dividends paid by a co-operative company as defined in Division 9 of Part III of the Principal Act. Unlike other companies, co-operative companies are allowed a deduction from assessable income of profits distributed as dividends to shareholders and tax is not, therefore, paid by co-operative companies on profits so distributed. It would accordingly be inappropriate to allow a section 46 rebate in relation to those dividends.

Sub-section (9.) is identical with a provision in the former section 46. The sub-section is a drafting expedient to ensure that section 46 does not disturb existing provisions of the Principal Act relating specifically to life insurance companies.

The amendment effected by clause 10 will commence to apply in assessments based on income derived during the income year 1965-66.

Clause 11: Notional Income where Assessable Income includes Consideration Receivable on Disposal, Loss or Destruction of Depreciated Property.

This clause, which is a drafting measure consequential on the new section 99A proposed to be inserted in the Principal Act by clause 25 of the Bill, will amend section 59AB of the Principal Act.

In broad terms, section 59AB applies where a taxpayer disposes of assets of a business and, in consequence of the disposal, the business ceases to be carried on. Its purpose is to ameliorate the effect of a higher rate of tax caused in such a case through the inclusion in assessable income of depreciation adjustments in relation to the assets. For this purpose a notional rate is, in effect, determined under the section.

Where tax is imposed at a flat rate, as is proposed in relation to cases within the scope of the new section 99A, there is no need for the application of a notional rate. Accordingly, it is proposed by this clause to exclude from the operation of section 59AB cases where a trustee is taxed at a flat rate under the proposed section 99A on income to which no person is presently entitled.

Clause 12: Payments to Associated Persons and Relatives.

Introductory Note :

By this clause it is proposed to amend section 65 of the Principal Act, which authorises the Commissioner of Taxation to disallow a deduction for an amount paid by a taxpayer to a relative if the amount is excessive. It is proposed to retain the basic principles of the section and to ensure their application in relation to certain payments made by or to partnerships.

The amendment will also ensure that, with one exception which will be explained later, when the section is applied to disallow a deduction for an amount, the amount so disallowed is not treated as income of the person who receives it.

In its present form, section 65 applies where a payment becomes due in the year of income by a taxpayer to a relative. It provides that the payment is to be an allowable deduction to the taxpayer only to the extent to which the Commissioner considers it to be reasonable in amount and bona fide made in the production of assessable income. For the purposes of the section the term "relative", in relation to a taxpayer, has the defined meaning given to it in sub-section (1.) of section 6 of the Principal Act and has been explained in relation to clause 6 of the Bill. This definition of relative will also apply under the proposed new provisions of section 65.

The existing section 65 does not contain any specific reference to payments by a partnership to a person who is a relative of one of the partners. (In this regard, it is to be noted that section 109 of the Principal Act authorises the disallowance of deductions for certain payments paid by a private company to a person who is a past or present shareholder or director of the company, or to a relative of such a person, to the extent that these payments are excessive in amount.)

The existing section 65 does not specifically refer, either, to payments by a sole trader to a partnership in which a relative of the trader is a partner.

In broad terms, it is proposed by clause 12 to amend section 65 so that the same basic principles are specifically applied to excessive payments by a partnership as are applied to such payments by a sole trader. It is also proposed to extend the scope of the section specifically to payments by a sole trader to a partnership in which a relative of the trader is a partner.

The section as amended will, broadly stated, apply in relation to an amount paid or payable by a partnership where the amount is paid or payable to -

(a)

a person who is a relative of a partner in the partnership;

(b)

another partnership where a member of one firm is related to a member of the other firm;

(c)

a person who is, or is a relative of, a shareholder or a director of a private company that is a partner; or

(d)

a person who is, or is a relative of, a beneficiary in a trust estate the trustee of which is a partner.

The section will not apply to amounts paid by a partnership to a member of the partnership. The new section 94 proposed to be inserted in the Principal Act by clause 24 of the Bill may, however, apply to such payments in certain circumstances.

As mentioned earlier, the proposed new section 65 also deals with the tax liability of the recipient of an amount that is, through the application of the section, not allowed as a deduction to the taxpayer who pays it. At present there is no requirement in the law to exclude such an amount from the assessable income of the recipient.

The basic principle of the new law will be that amounts which are not deductible because of the application of the section are not to be treated as income of the recipient. This principle will, however, be varied where the deduction is not allowed to a partnership in which a private company is a partner. Broadly, in that case, so much of the non-deductible amount as is attributable to the company is to be treated as a dividend paid by it and received by the recipient. (This follows the principle that is applied under section 109 of the Principal Act to certain excessive payments by private companies.) So much of the amount as is attributable to partners that are not private companies will, however, not be treated as income of the recipient.

Sub-section (1.) of the new section 65 is the substantive provision replacing sub-section (1.) of the existing section.

The sub-section will be capable of application in relation to an amount paid or payable to an associated person where the amount, or part of it, would, if the sub-section did not operate, be an allowable deduction under a provision of the Principal Act. The term "associated person" is defined in the proposed sub-section (1D.) of section 65 and is explained in the notes on that provision.

Where it is found that a payment made, or a liability incurred, to an associated person would be wholly or partly allowable as a deduction under a provision of the Principal Act, the sub-section authorises the Commissioner to reduce the deduction for the relevant amount of the payment or the liability. The payment or liability will be deductible only to the extent that the Commissioner considers it to be reasonable.

The Commissioner's determination of what is a reasonable amount will, of course, be subject to the usual rights of objection and reference to a Taxation Board of Review. A Board of Review may substitute its own determination for that of the Commissioner.

Sub-section (1A.) has no counterpart in the present section 65. Subject to other provisions of the new section, sub-section (1A.) provides that where, by the application of sub-section (1.), an amount is not an allowable deduction, that amount is not to be treated as income of the recipient for any purposes of the Principal Act.

One consequence of this provision is that the recipient will not be taxed on an amount disallowed in accordance with sub-section (1.) of section 65. Another consequence is that the amount will not be income of the recipient for any other purpose of the Act, for example, in determining his separate net income for the purposes of concessional deductions. As the amount is deemed not to be income at all, it will not be treated as exempt income to be set off against a loss of a previous year carried forward for deduction in accordance with section 80 of the Principal Act.

The sub-section will not apply in relation to so much of any amount disallowed to a partnership in which a private company is a partner as is attributable to the private company. Sub-section (1B.), which is explained in immediately succeeding paragraphs of this memorandum, will apply to this part of the disallowed amount.

Sub-section (1B.), as stated above, relates to so much of a disallowed amount as is attributable to a private company partner.

The sub-section will apply in the case where, in calculating the net income, or a loss, of a partnership in which a private company is a partner, an amount is disallowed in accordance with the proposed sub-section (1.) of section 65.

Paragraph (a) of sub-section (1B.) provides that in such a case the private company partner shall be deemed to have paid, on the last day of the income year in the assessment for which its share in the partnership income or loss is taken into account, a dividend of an amount ascertained in accordance with the proposed sub-section (1C.). Sub-section (1C.) is the next sub-section explained in this memorandum. Broadly stated, it provides that the amount to be treated as a dividend is the company's share of the disallowed amount.

The principal effect of treating the company's share of the disallowed amount as a dividend is that the amount will be allowed as a deduction to the company for the purposes of the tax on undistributed income payable by a private company that does not make a sufficient distribution of its income. This follows the principle embodied in section 109 of the Principal Act. That section permits the Commissioner to refuse a private company a deduction for excessive remuneration paid by it to its shareholders or directors or their relatives, and to treat the disallowed amount as a dividend.

Also following the principle on which section 109 is based, the amount treated as a dividend by sub-section (1B.) of section 65 will not be regarded as a dividend for dividend withholding tax purposes.

Paragraph (b) of sub-section (1B.) is designed to ensure that where a portion of an excessive payment is treated as a dividend in accordance with paragraph (a), that portion is not to be excluded from the income of the recipient of the payment. The paragraph will not affect the exclusion from assessable income of the part of the amount that is not attributable to the private company partner.

Sub-section (1C.) is designed to quantify the amount to be treated as a dividend for the purposes of sub-section (1B.). The amount which, in varying circumstances, is to be regarded as a dividend is set out in paragraphs (a) to (e) and, as explained above, is broadly the company's share of the disallowed amount. The amount determined under each paragraph in relation to an amount disallowed under sub-section (1.) is as follows:-

Paragraph (a). Where the net income of the partnership is increased by the disallowance - the amount by which the company's share of the net income is increased.

Paragraph (b). Where a partnership loss is decreased by the disallowance - the amount by which the company's share in the loss is decreased.

Paragraph (c). Where, but for the disallowance, there would have been no net income of the partnership and no loss, and following the disallowance there is a net income - the amount of the company's share of the net income.

Paragraph (d). Where the disallowance converts a partnership loss into a net income - the sum of the amount of the company's share in the net income and the amount that would have been the company's share in the loss if the amount had been allowed as a deduction.

Paragraph (e). Where a partnership loss is reduced to nil by the disallowance - the amount that would have been the company's share in the loss if the amount had been allowed as a deduction.

Sub-section (1D.) defines the meaning to be given to the term "associated person" for the purposes of sub-sections (1.) and (1A.) of section 65. As explained in relation to that sub-section, the Commissioner will be authorised to form an opinion under the section only in respect of a payment made, or a liability incurred, to an associated person as defined for the purposes of the section.

Paragraph (a) of sub-section (1D.) specifies who is an associated person for the purposes of the application of the section in the case of an individual taxpayer.

Sub-paragraph (i) of paragraph (a) states that a relative (as defined in sub-section (1.) of section 6 of the Principal Act and see notes on clause 6 of the Bill) of the taxpayer is an associated person for the purposes of the section. This provision does not effect any change in the present law in this respect. The present section 65(1.) is applicable to excessive payments by a taxpayer to a relative.

Sub-paragraph (ii) of paragraph (a) will specifically extend the operation of section 65 to amounts paid or payable by an individual taxpayer to a partnership a partner in which is a relative of the taxpayer.

Paragraph (b) of sub-section (1D.) defines the meaning to be given to "associated person" in the application of the section to payments made or liabilities incurred by partnerships.

Sub-paragraph (i) of paragraph (b) provides that a relative of a partner in a partnership is an associated person in respect of that partnership. A partner in the partnership who is a relative of another partner is not, however, an associated person for the purposes of the section.

Sub-paragraph (ii) provides for the case where amounts to which the section may apply are paid or payable by one partnership to another. In this case, the second partnership is, by virtue of the sub-paragraph, an associated person in respect of the first partnership if a partner in the second partnership is a relative of a partner in the first partnership.

Sub-paragraph (iii) will apply in the case where amounts to which the section may apply are paid or payable by a partnership in which a private company is a partner. In such a case a person who is a present or past shareholder or director of the company, or a relative of such a person, is an associated person in respect of the partnership. The sub-paragraph does not, however, apply in respect of a person who is actually a partner in the partnership.

Sub-paragraph (iv) relates to the case where the trustee of a trust estate is, in his capacity as trustee of the trust estate, a partner in the partnership.

In such a case a person who is a beneficiary in the trust estate, or a relative of a beneficiary, is an associated person in relation to the partnership. However, no person who is actually a member of the partnership is an associated person within the terms of the sub-paragraph.

The provisions of sub-paragraph (iv) are necessary because, in their absence, the application of the section could be avoided in relation to amounts paid or payable by a partnership where a taxpayer, instead of being a direct member of the partnership, holds his interest in the partnership per medium of a trust. If the trustee for such a taxpayer is not related to a person to whom amounts are paid or payable by the partnership, the section would not be applicable, in the absence of sub-paragraph (iv), even though this person is a relative of the taxpayer.

Sub-sections (1E.) and (1F.) are designed to authorise the amendment of assessments in certain specified circumstances.

The sub-sections do not alter the powers of the Commissioner of Taxation to amend an assessment of a taxpayer to vary the amount allowed as a deduction in respect of a payment to an associated person. The Commissioner's powers to amend for this purpose will continue to be governed by section 170 of the Principal Act.

The object of sub-sections (1E.) and (1F.) is to authorise the amendment of an assessment of the recipient of a payment, in relation to the payment, to ensure that the amount excluded from the income of the recipient accords with the amount not allowed as a deduction to the payer.

Sub-section (1E.) will permit the amendment, at any time, of an assessment of a person for the purpose of excluding from his assessable income so much of a payment as is, by the application of section 65, not allowed as a deduction to the payer. Sub-section (1F.) deals with the converse case. It will enable the Commissioner to include in the assessable income of a person an amount that had previously been excluded from that income because it had been regarded as unreasonable in amount, and hence not an allowable deduction to the payer. This power to amend will apply only where the Commissioner is empowered to adjust the assessment of the payer to allow the amount which had previously been disallowed.

The amendments made by this clause will apply in assessments for the income year 1965-66 and subsequent years.

Clauses 13 and 14.

1. Contributions to Funds for Benefit of Employees

2. Deduction of 5 per cent of Cost of Assets of Superannuation Fund for Benefit of Employees and Other Persons.

Contributions to funds.

It is proposed by clauses 13 and 14 to repeal sections 66 and 79 of the Principal Act. The repeal will apply from the beginning of the 1965-66 income year.

Those sections authorise the allowance of deductions in respect of contributions by taxpayers to funds for the purpose of providing individual personal benefits, pensions or retiring allowances for employees or their dependants.

Under section 66 a deduction is allowable for contributions by an employer for the benefit of his own employees who are engaged in producing his assessable income. Section 79 authorises a deduction in respect of contributions by a taxpayer for the benefit of employees of another person if the employees are residents of Australia or the Territory of Papua and New Guinea and are engaged in the business of their employer.

By clause 18, it is proposed to insert in the Principal Act new provisions governing the deductibility, for income tax purposes, of contributions to superannuation funds for the benefits of employees.

Deduction of 5 per cent of cost of assets

Introductory Note :

In addition to repealing the existing section 79 of the Principal Act, clause 14 will enact a new section 79.

Under this new section 79 it is proposed to authorise a special deduction from the income of a superannuation fund which satisfies the tests set out in sub-section (2.) of the new section, if the terms and conditions applicable to the fund have been approved by the Commissioner. In broad terms, the deduction will be equal to 5 per cent of the cost of the net assets of the fund as at the end of the year of income.

The deduction will not be allowable from two classes of income derived by a fund to which section 79 applies. Those classes of income are -

(a)

dividends received by a superannuation fund from a private company, unless the Commissioner is of the opinion that it would be reasonable for the deduction to be allowed against the dividends; and

(b)

income derived by a superannuation fund from a transaction if the Commissioner is satisfied that the parties to the transaction were not dealing with each other at arm's length and the income derived by the fund is greater than the income which could be expected to be derived if the parties had been dealing with each other at arm's length.

The cost of assets producing either of those classes of income will be excluded from the calculation of the special deduction.

A trustee of a superannuation fund to which section 79 applies will, broadly stated, pay tax on the net amount of the two classes of income described above and on so much of the balance of the net income as remains after allowance of the special deduction of 5 per cent of the cost of assets. The bases for ascertaining those amounts are set out in sections 121BA and 121CB which it is proposed to insert in the Principal Act by clauses 32 and 34.

The "30/20 rule" for the investment of assets of superannuation funds at present applies only to funds that are granted an exemption from tax and it is not proposed to extend the rule to funds entitled to the special deduction only.

It is proposed that the rate of tax payable by funds to which the new section 79 applies be 10/- in the Pd but legislation to declare that rate will not be required until the rates of tax for the 1965-66 financial year are being declared.

The following explanations relate to the various provisions of the proposed section 79.

Sub-section (1.) of section 79 contains definitions of terms which are designed to facilitate drafting and interpretation.

"asset" : A policy as defined by sub-section (1.) of section four of the Life Insurance Act 1945-1961 is excluded from the meaning of this term. Life insurance policies will not, therefore, be taken into account in the calculation of the deduction based on 5 per cent of the cost of the net assets of a superannuation fund. The proceeds of such a policy are not, of course, to be treated as income.

"superannuation benefits" : This term will mean individual personal benefits, pensions and retiring allowances. Its use will remove the need for repeated reference to each of those benefits.

"superannuation fund" : This definition will ensure that a reference to a superannuation fund will include a reference to a provident, benefit, superannuation or retirement fund. It will, however, have the effect of excluding from the scope of the proposed section 79 any superannuation funds which qualify for exemption under section 23(ja) of the Principal Act, that is, approved funds to provide benefits for self-employed persons. Funds covered by the new provisions section 23(jaa) and section 23F, which clauses 5 and 6 propose to insert in the Principal Act, will also be excluded and will, in consequence, be unaffected by the proposed new section 79.

Sub-section (2.) specifies the tests to be satisfied before a superannuation fund may qualify for the special deduction authorised by section 79.

Paragraph (a) provides, in effect, that the provisions of section 79 shall not apply to a fund unless it is an indefinitely continuing fund. A second test is that the fund be established and maintained solely for the purpose of providing individual personal benefits, pensions or allowances -

(a)

in the event of the retirement of a member from a business, trade, profession, vocation, calling or occupation in which he is engaged; and

(b)

in the event of the death of the member.

The Commissioner has a discretion to approve the payment of benefits etc. for other purposes, but only if they are purposes that are incidental and ancillary to the main purposes described.

Paragraph (b) prescribes a test identical with one imposed by the new section 23F to be inserted in the Principal Act by clause 6. The test is that the rights of members of the fund and their dependants to receive benefits from the fund be fully secured. As explained in relation to clause 6 this test would not be satisfied if, after fulfilling the conditions of the fund, the benefits to which an employee is entitled could be withheld or reduced at the discretion of the trustee, the employer or some other person.

Paragraph (c) is complementary to paragraph (b). In order to qualify under the new section 79 it will be necessary for the right of each member of the fund to receive benefits from the fund to be defined by the terms and conditions applicable to the fund. In addition, each member will need to be advised in writing of the rights to which he and his dependants are entitled before or when the first contribution is made to the fund for his benefit and for the benefit of his dependants or before such later date that the Commissioner allows.

Paragraph (d) will have effect where the rights of a member or his dependants to receive benefits from the fund are lost or forfeited and specified amounts were appropriated for the provision of those benefits. If a fund is to qualify for the special deduction, the lost or forfeited benefits will need to be applied, in the manner prescribed in this paragraph, not later than two months after the end of the income year in which the loss or forfeiture occurred, or within such further period as the Commissioner allows.

The bases on which the lost or forfeited benefits may be applied are similar to those prescribed in a corresponding provision included in the new section 23F and explained at page 11 of this memorandum.

Paragraph (e) applies where specified amounts have not been appropriated in a fund to provide benefits for a member whose rights to receive benefits have been lost or forfeited. This situation may arise where the benefits to be provided are in the form of pensions and in other cases where amounts to meet the entitlements of the various members have not been segregated.

In this class of case, the amounts lost or forfeited by a member generally remain in the fund and may be used to provide the benefits to which other members are entitled from the fund or for the purpose of providing additional benefits for all or some of those members.

If additional benefits have been or may be provided, the application of the new section 79 to the fund will not be affected so long as the Commissioner is satisfied that the basis on which the additional benefits have been, or will, or may be, provided for employees is reasonable.

Paragraph (f) restricts the circumstances in which a fund may allow members to withdraw benefits from the fund and remain eligible for the special deduction.

The first restriction prescribed in sub-paragraph (i) reflects the nature of the fund, that is, it is a fund to provide benefits upon retirement. It is accordingly provided that the terms and conditions are not to permit a member to receive benefits from the fund, until he has attained 60 years of age, except in the event of sickness, permanent incapacity or other circumstances approved by the Commissioner of Taxation. It is also to be prescribed in the terms and conditions of that fund that a member is to withdraw his benefits not later than the date on which he attains 70 years of age.

Under sub-paragraph (ii) the dependants of a member are not to be permitted to receive any benefits from the fund except in the event of the death of the member.

The terms and conditions applicable to a fund are to be approved by the Commissioner of Taxation before the fund may qualify for the special deduction under section 79.

In approving those terms and conditions, the Commissioner is required, by paragraphs (g), (h) and (i) to have regard to such matters as the reasonableness of benefits, the amount of the fund bearing in mind the benefits to be provided and other matters the Commissioner thinks it fit to consider.

Sub-section (3.) is the operative provision. It will authorise the allowance of a special deduction to a superannuation fund which satisfies the tests specified in sub-section (2.). Subject to the limitation prescribed in section 79C of the Principal Act, the deduction will be equal to 5 per cent of the cost of the net assets of the fund as at the end of the year of income. The limitation prescribed in section 79C is explained in relation to clause 15.

In determining the cost of the assets on which the deduction is to be calculated, it is necessary to have regard to the provisions of succeeding sub-sections of section 79.

Very broadly, those provisions provide that the cost of assets is not to include the cost of assets producing exempt income or other income that is not taken into account in calculating the net income of the fund. Amounts owing on assets and borrowings of the fund not repaid as at the end of the year of income are to be deducted from the cost of the assets on which the special deduction is calculated. As already mentioned, life insurance policies are excluded from the assets of the fund for that purpose.

Sub-section (4.) applies where no part of any income derived in the income year by a fund from an asset is taken into account in calculating the net income of the fund. The net income is to be calculated in accordance with section 121BA which it is proposed by clause 32 to insert in the Principal Act.

Exempt income derived by a fund will not be taken into account in calculating its net income nor will the classes of income specified in sub-sections (2.) and (4.) of section 121BA be taken into account for that purpose. (The classes of income specified in those provisions have already been described in the introductory note relating to this clause). Accordingly, where only those classes of income or exempt income have been derived during the income year from an asset owned by the fund as at the end of the year of income, the cost of the asset producing that income will be excluded from the cost of the assets on which the special deduction is calculated.

Sub-section (5.) is complementary to sub-section (4.) and applies where only a part of the income derived by a fund from an asset in the income year is taken into account in calculating the net income of the fund.

In those circumstances, if the asset is an asset of the fund as at the end of the income year, only a part of the cost of that asset will be included in the cost of the assets on which the special deduction is calculated. The part of the cost of that asset to be so included will be ascertained by the formula -

(Cost of the asset) * (Part of income from that asset derived in the income year taken into account in calculating the net income of the fund)/(Total income from that asset derived in the income year)


Sub-section (6.) applies where -

(a)

no income is derived by the fund in the income year from an asset; and

(b)

during the last preceding income year in which income was derived by the fund from the asset, no part of the income was taken into account in calculating the net income of the fund or would have been so taken into account if the new section 79 had been in force when the income was so derived.

The cost of an asset owned by the fund as at the end of the income year from which such income was derived is to be excluded from the cost of the assets on which the special deduction is calculated.

Sub-section (7.) is complementary to sub-section (6.) and applies where -

(a)

no income is derived by the fund in the income year from an asset; and

(b)

during the last preceding year of income in which income was derived by the fund from the asset, only a part of the income was taken into account in calculating the net income of the fund or would have been so taken into account if the new section 79 had been in force when the income was so derived.

Only a part of the cost of an asset owned by the fund as at the end of the income year from which such income was so derived is to be included in the cost of the assets on which the special deduction is calculated. The part of the cost of that asset to be so included will be ascertained by the formula -

(Cost of the asset) * (Part of income from that asset derived in the preceding income year taken into account in calculating the net income of the fund)/(Total income from that asset derived in the preceding income year.)


Sub-section (8.) is designed to ensure that the special deduction is calculated by reference to a net cost of assets ascertained by making certain deductions from the cost of assets that would otherwise qualify.

Paragraph (a) will exclude from the cost of assets of the fund as at the end of the income year so much of the cost of any asset that has not been paid before the end of that year. The assets of the fund will necessarily be reduced when the full cost of the asset is paid and without the adjustment required by this paragraph a fund could inflate the amount of the special deduction by delaying until after the end of the income year payment of the amount due on assets acquired.

Paragraph (b) will exclude any amount borrowed by the fund and not repaid before the end of the year of income. Apart from this provision, it would be open to a fund to use borrowed money to purchase assets and so increase unduly the amount of the special deduction.

Sub-section (9.) is designed as a safeguard where assets are acquired by a fund for a consideration which, in the opinion of the Commissioner of Taxation, is excessive. It will also enable a cost to be ascribed to assets acquired by a fund for a consideration not consisting of money. In either event, the amount to be taken into account as the cost of the asset will be the amount that the Commissioner determines as being reasonable in the circumstances.

If this provision is invoked, the trustee will be entitled to object against the Commissioner's decision and to have the decision reviewed by a Taxation Board of Review.

Sub-section (10.) makes provision for the case where bonus shares are received by a superannuation fund. In these circumstances the cost of the shares will be deemed to be equal to the amount of the dividend satisfied by the issue of the shares for the purposes of calculating the special deduction. Except in unusual circumstances, this amount will equal the face value of the shares.

The amendment made by clause 14 will apply in assessments for the 1965-66 income year and subsequent years.

Clause 15: Limitation on Certain Deductions.

This clause will effect a drafting amendment to section 79C of the Principal Act. The application of that section is to be subject to the provisions of the new section 121BA it is proposed to insert in the Principal Act by clause 32.

Section 79C provides that the aggregate of the deductions allowable under certain sections of the Principal Act shall not exceed the amount of income that remains after deducting from assessable income all other allowable deductions, except losses of previous years and certain deductions for capital expenditure allowable in relation to prospecting and mining operations.

The special deduction of 5 per cent of cost of assets to be allowed to superannuation funds under section 79 is to be included in the aggregate of the deductions subject to that limitation. The effect of the amendment proposed by clause 15 will be that the aggregate deduction permitted will be calculated without regard to income excluded by the proposed new section 121BA from the net income of the fund - see pages 99 and 100 of this memorandum for notes on section 121BA.

The amendments made by this clause will apply in assessments for the 1965-66 income year and subsequent years.

Clause 16: Losses of Previous Years to be Allowable Deductions.

Clause 17: Losses of Previous Years Not to be Taken into Account unless Substantial Continuity of Shareholding.

Introductory Note :

Clauses 16 and 17 relate to deductions for losses incurred by a taxpayer prior to the year of income for which tax is being assessed.

Section 80 provides for the deduction in the year of income of losses incurred in any of the seven preceding years which have not already been recouped from assessable income or from exempt income. The purpose of sub-sections (5.) and (6.) of section 80 of the Principal Act is to ensure that a loss incurred prior to the year of income will not be an allowable deduction unless the company establishes to the Commissioner's satisfaction that, on the last day of the year of income, shares of the company carrying not less than 25% of the voting power were beneficially held by persons who held shares carrying not less than 25% of the voting power on the last day of the year in which the loss was incurred.

These provisions were enacted in 1944 to inhibit a practice under which shareholders in a private company with accumulated losses sold their shares in that "loss" company to a successful company. The purchasing company then re-arranged its affairs so that part of its business was channelled through the "loss" company. The accumulated losses thus became an allowable deduction from the income derived by the "loss" company from the business activities transferred. Income from the transferred activities accordingly remained free of tax until the losses were fully recouped out of the income. At the same time the company that purchased the shares in the "loss" company paid a reduced amount of tax because it had parted with part of its income to the "loss" company.

One consequence of such arrangements was that losses incurred by a private company at a time when it was owned by various individual shareholders became deductible from income derived by that company after the shares in the "loss" company had been transferred to the purchasing company.

A second result was that the Commonwealth lost tax on an amount of income equal to the losses accumulated at the time the shares were sold. The price at which the shares were sold was arranged so that the tax saving was, in effect, shared between the original shareholders of the "loss" company and the purchasing company.

Since the legislation to remedy the position was introduced, private companies have devised transactions which do not fall within the scope of sub-sections (5.) and (6.) of section 80. Those provisions are now largely ineffective and, in any event, they have no application in relation to public companies.

A further defect in the provisions is that in a few isolated cases they have operated with undue severity.

Broadly, the legislation now proposed is designed to remove the weaknesses in the law, extend it to public companies and correct anomalies that have come under notice.

The proposed amendments are to apply in assessments for the income year 1965-66 and subsequent years.

Clause 16:

By this clause it is proposed to omit from the Principal Act sub-sections (5.) and (6.) of section 80. This amendment will clear the way for new provisions that it is proposed to enact by clause 17.

Clause 17:

It is proposed by clause 17, to insert in the Principal Act four new sections - sections 80A, 80B, 80C and 80D. The purpose of these provisions is to modify the effect of the remaining provisions of section 80 authorising deductions in the year of income for losses incurred in previous years.

Section 80A : Losses of Previous Years Not to be Taken into Account unless there is a Substantial Continuity of Shareholding in Company.

Under sub-section (1.) a company will not be entitled to a deduction for a year of income in respect of a loss incurred in an earlier year unless the Commissioner of Taxation is satisfied that shares in the company carrying specified rights are beneficially owned throughout the year of income by the same persons as owned, throughout the year in which the loss was incurred, shares carrying rights of the same kind.

In the case of a public company a deduction for a loss may be allowed if the Commissioner is satisfied that it is reasonable to assume that shares carrying the rights were owned by the same persons throughout the year of income and the year in which the loss was incurred. This provision recognises that in the case of public companies with many shareholders, very numerous sales of shares may make it virtually impracticable for the company to establish with accuracy whether shares carrying the appropriate rights have, in the two years concerned, been beneficially owned by the same persons.

The difficulties in establishing that position are increased by the fact that many shares are registered in the names of trustees of deceased estates, unit trusts etc. and the company concerned may be without means for determining the beneficial owners. The Commissioner will, of course, be free to obtain such information as is available to the company and he will then be able to consider the position in the light of any other records in his possession.

The rights that need to be attached to the relevant shares are -

(a)

a right to exercise not less than 40% of the voting power in the company;

(b)

a right to at least 40% of any dividends paid by the company;

(c)

in the event of the company being wound up - a right to 40% of any distributions of capital (which would include accumulations of profits of a company being wound up); and

(d)

in the event of a reduction in the capital of the company - a right to 40% of any distributions of the capital in the company.

It will not be necessary for each of the shares held in the two relevant years by the same persons to carry each of those rights. It will be sufficient if the same persons owned, throughout the year of income and the year when the loss was incurred shares which between them carry rights of the kind mentioned.

Sub-section (2.) is designed as a safeguard to companies where a change in beneficial ownership of shares occurs during the year of income in which a loss is incurred ("the loss year").

In these circumstances the Commissioner will be authorised, where other conditions are satisfied, to allow as a deduction in a later year of income a part of the loss incurred during the loss year. The part which may be allowed is such amount as the Commissioner considers to be the loss incurred after the change in beneficial ownership of the shares.

As in the case of other discretions provided for the Commissioner, a taxpayer affected by the Commissioner's decision will have the usual rights of reference to a Taxation Board of Review, which will be entitled to substitute its opinion for that of the Commissioner.

Section 80B : Special Provisions Relating to Beneficial Ownership of, or Rights Attached to, Shares.

Sub-section (1.) is a drafting provision providing formal authorisation for taking into account the succeeding provisions of the section.

Sub-section (2.) provides for the allowance in specified circumstances of a deduction under section 80 in the case of a newly incorporated company. The proposed sub-section applies where shares have been allotted by a company in the year of income in which the company was incorporated or within a period of two years after the end of that year of income. The Commissioner has a discretion to extend the period for one or more years.

The effect of the proposed sub-section is that shares allotted by a company within the specified period or extended period shall be deemed to have been beneficially owned, by the persons to whom those shares were allotted, at all times from the beginning of the income year in which a loss was incurred to the date of allotment.

If the other requirements of section 80 are satisfied, a loss will not be prohibited merely because shares carrying the appropriate rights were not, in fact, owned by the same persons throughout the loss year and the year of allotment.

The provision is designed to meet cases in which a newly incorporated company incurs a loss during a period of early establishment when the promoters of the company were the only shareholders.

When the company commences active operations, additional shares may be issued to other persons in accordance with an original intention of the promoters. In consequence, the promoters may not, in the year of income, own shares carrying the appropriate rights. But for sub-section (2.), the loss incurred in the early establishment period would not be an allowable deduction, even though the company had been incorporated on the understanding that the additional shares would be allotted as soon as circumstances permitted.

Sub-section (3.) will apply where a person who beneficially owned shares in the loss year has died at a later date. In these circumstances, it will be deemed, for the purposes of the section, that no change of beneficial ownership occurred by reason of the death of that person. The section is a counterpart of provisions in the existing section 80(6.).

Sub-section (4.) is in substitution for other provisions of the existing section 80(6.), which is being repealed. Stated briefly, the existing provisions deem a change of ownership of shares not to have taken place where shares are transferred to a company, the majority of the shares in which are held by the transferor or, if he is deceased, his heirs.

The sub-section (4.) now proposed will have substantially the same effect as the provisions to be repealed. However, under the new provisions, it will be necessary for shares in the transferee company carrying between them more than 50% of voting rights, dividend rights and rights to receive capital distributions in the event of winding up or a reduction of capital to be beneficially owned by the transferor, or, if he is deceased, his heirs.

In order to ensure that the sub-section (4.) may not be used in a manner that renders the new provisions ineffective, the Commissioner may apply the sub-section only if he considers it reasonable to do so. A Taxation Board of Review would be entitled, upon the matter coming before it for review, to substitute its discretion for that of the Commissioner.

Sub-section (5.) is designed to prevent the application of the new provisions of the law being avoided by the device of allowing persons who owned shares in the loss year to retain ownership but grant to the company who is ultimately to become the beneficial owner an option to buy the shares at some later date when the accumulated losses have been allowed as a deduction.

To prevent the provisions being rendered ineffective by such a course of action, sub-section (5.) provides that the Commissioner may treat the shares subject to such an option as being beneficially owned by a person (other than the owner of the shares in the loss year) for, or by whom the option may be exercised.

Sub-section (6.) will apply where the Commissioner is satisfied that, by reason of the memorandum and articles of association of the company or an agreement or arrangement entered into before the end of the year of income, shares in a company have ceased, or will or may cease, at any time after a year of income to carry rights which they carried in the year of income.

In these circumstances the shares in question will be deemed not to have carried, during the year of income, the rights that have or will or may cease to be carried by the shares at the later date. The provision will have application only in very isolated cases and is designed as a safeguard against special arrangements aimed at reducing the effectiveness of the new provisions.

Sub-section (7.) applies where the Commissioner is satisfied that by virtue of the memorandum or articles of association of a company or an agreement or arrangement entered into before the end of the year of income, shares in a company have commenced, or will or may commence, to carry new rights after the end of that year.

Where these circumstances apply, the particular shares will or may be deemed to have carried the new rights throughout the year of income. As in the case of preceding sub-sections, the provision is necessary in order to ensure that the application of the new provisions cannot be avoided by action along the lines set out in the sub-section.

A taxpayer dissatisfied with the exercise of the Commissioner's discretion will have the usual rights of objection and reference to a Board of Review.

Sub-section (8.) is a further provision designed to ensure that the effectiveness of the new provisions is not impaired by the existence of shares allotted in the loss year or subsequently and which may be redeemed. The sub-section requires such shares to be disregarded in the application of tests relating to the beneficial ownership of shares.

Section 80C : Losses of Previous Years Not to be Taken into Account Unless there is a Substantial Continuity of Shareholding in Holding Company.

This section will enable the principles of the preceding two sections to apply where a loss company is, by reason of holdings of its shares, directly or indirectly under the control of another company.

In the absence of the proposed section 80C, a loss incurred by a subsidiary company would remain an allowable deduction despite a complete change in the beneficial ownership of shares in the parent company.

A transaction of that nature would not vary the beneficial ownership of shares in the loss company even though the persons to benefit from the allowance of a deduction for the loss (that is, persons holding shares in the parent company) were not the same persons as owned shares in the parent company at the time the loss was incurred.

Sub-section (1.) provides that, for the purposes of section 80C, a "holding company" is a company which had a controlling interest in another company (referred to as "the subsidiary company") at any time during a year in which a loss was incurred by the subsidiary company. The sub-section further provides that a loss incurred by the subsidiary company shall not be deductible in a later year unless the Commissioner is satisfied that shares in the holding company carrying specified rights were beneficially owned at all times during the year of income by persons who beneficially owned shares in that company carrying such rights at all times during the year in which the loss was incurred.

The rights specified in the sub-section are of the same nature as those already described in relation to section 80A. Very broadly stated, that section refers to rights to 40% of the voting power, 40% of dividends paid and 40% of any distributions of capital in the event of the company being wound up or reducing its capital.

The sub-section is designed to ensure that, with the assistance of other provisions, the purposes of sections 80A and 80B are not defeated where a parent company is interposed between a loss company and the ultimate individual shareholders.

Sub-section (2.) will apply where a further subsidiary company is interposed between the loss company and the ultimate parent company. The purpose of the sub-section is to permit the test in respect of rights carried by shares to be applied to any such subsidiary company interposed between the parent company and the loss company.

Sub-section (3.) is a drafting provision providing that, in the application of sub-sections (1.) and (2.), the special provisions in proposed section 80B relating to ownership and rights attached to shares shall apply.

Section 80D : Amendment of Assessments.

In some cases the application of the three preceding sections may be delayed because relevant particulars are not available to the Commissioner of Taxation when an assessment is made. Section 80D will authorise the Commissioner to amend an assessment in order to give effect to specified provisions of section 80B and 80C within 6 years of tax becoming due and payable under an assessment. This is the period in which assessments generally may be amended where there has not been a full and true disclosure of all relevant facts.

Section 80D will not limit the general power of the Commissioner to amend an assessment in accordance with any other provisions of the Principal Act.

Clause 18: Contributions to Superannuation Funds for Benefit of Employees.

Introductory Note :

By clause 18 it is proposed to insert - as Subdivision AA of Division 3 of the Principal Act - new provisions governing the deductibility of contributions to a superannuation fund for the benefit of employees. The provisions of that Act at present authorising deductions for such contributions, i.e., sections 66 and 79, will be repealed by clauses 13 and 14.

The provisions of the proposed new Subdivision will implement in principle a recommendation of the Ligertwood Committee designed to remove weaknesses in the present law that have enabled taxpayers to exploit the provisions of sections 66 and 79.

Stated broadly, the principal features of the new Subdivision are:-

1.

Deductions will continue to be available in respect of contributions to a fund for the benefit of -

(a)

employees engaged in providing assessable income of their employer; and

(b)

employees resident in Australia or the Territory of Papua and New Guinea engaged in the business of their employer.

As under the present law, contributions to a superannuation fund for the benefit of employees will be deductible only if the rights of the employees and their dependants to receive the benefits to be provided by the fund are fully secured.

2.

Contributions to a superannuation fund will be deductible only if they are made for the benefit of an employee or his dependants by -

(a)

the employer of the employee;

(b)

a contributor who owns a controlling interest in the employer;

(c)

a company in which a controlling interest is owned by the employer;

(d)

a company in which a controlling interest is owned by a person who owns a controlling interest in the employer;

(e)

a partner in a partnership which is the employer; or

(f)

a contributor who owns shares in a company employing the employee, if the Commissioner of Taxation is satisfied that the employee and the contributor are not, either directly or indirectly, associated, or have not entered into arrangements to make contributions for the benefit of each other or for relatives of each other.

This limitation on the classes of person who may contribute to a superannuation fund for the benefit of an employee is designed to remove the opportunity that exists under the present law for a person to obtain deductions in respect of such contributions for the benefit of an employee with whom he has no business relationship.

3.

The maximum annual deduction available to any one contributor in respect of any one employee, will, as under the present law, be Pd200 or 5 per cent of the employee's remuneration unless the Commissioner of Taxation, under a discretionary power, approves a greater deduction. The provisions of the Subdivision are, however, designed to ensure that the aggregate of the deductions available to different persons in respect of contributions to funds for the benefit of any one employee is limited to that statutory maximum. This will remove a weakness in the present law which places no limit upon the number of persons who may be entitled to deductions up to the statutory maximum in respect of contributions for the benefit of one employee.

4.

Where two or more persons contribute to a fund for the benefit of one employee, and the contributions exceed the statutory maximum deduction permitted, each contributor will be entitled to a deduction up to 5 per cent of the remuneration paid by him to the employee during the income year. The remaining part of the statutory maximum deduction will be apportioned between the contributors on the basis of the contributions made by them for the benefit of the employee.

5.

The existing power of the Commissioner of Taxation to limit deductions in respect of excessive contributions by a private company for the benefit of shareholder employees will be continued and made more effective. The power will be extended so that it may be exercised by the Commissioner in respect of excessive contributions by a contributor for an employee who is a relative, and by a private company for employees who are directors of the company, relatives of directors or relatives of shareholders. The Commissioner will also be authorised to exercise that power notwithstanding the interposition of trusts, partnerships or other private companies between the contributor and the employee for whose benefit the contributions are made.

6.

Provision is made in relation to benefits provided for employees in a fund that are lost or forfeited by the employees. In the absence of provisions of this nature, the existing provisions that were intended to limit the maximum deductible amount that could be appropriate to provide benefits for any one employee have been avoided. This result has been achieved by appropriating for the benefit of selected employees the benefits lost or forfeited on the resignation or dismissal of other employees. Where entitlements of employees to receive benefits from a fund are lost or forfeited, it is proposed that deductions for contributions to the fund shall be reduced by -

(a)

the amount of forfeited benefits that have not been applied to provide benefits for any other employee during the year of forfeiture, or the two months after the end of that year or such further period as the Commissioner of Taxation allows; and

(b)

the amount by which the sum of the forfeited benefits that have been applied to provide benefits for another employee and contributions made for the benefit of that employee exceed the maximum deduction stipulated in the law in respect of contributions for the benefit of that employee.

In order to meet special circumstances, it is also proposed that no reduction in the deductions allowable for contributions shall be made if the forfeited benefits are applied in a manner approved by the Commissioner of Taxation.

The provisions of the new Subdivision AA will apply in assessments based on income derived during the 1965-66 income year and subsequent years. More detailed explanations of those provisions follow.

Section 82AAA : Interpretation.

Sub-section (1.) of section 82AAA contains definitions of terms used in the section to facilitate drafting and interpretation.

"eligible employee" : Contributions to a superannuation fund by a taxpayer for the benefit of an employee will be deductible only if they are made for the benefit of an employee (see next definition) who satisfies the tests of this definition.

Paragraph (a) applies whether the taxpayer making the contribution is a company or a person other than a company.

Under sub-paragraph (i) of paragraph (a) an employee of the taxpayer making the contribution will qualify as an eligible employee. A taxpayer may, therefore, be eligible for deductions in respect of contributions made to a fund for the benefit of his own employees.

By sub-paragraph (ii) an employee of a company in which the taxpayer making a contribution for the benefit of the employee has a controlling interest will qualify for the purposes of the definition. Deductions will, accordingly, be available to a parent company which contributes to a fund for employees of a subsidiary company and to an individual contributor who has a controlling interest in the company which employs the employees for whom he contributes.

Sub-paragraph (iii) makes provision for the case where a taxpayer owns shares but does not have a controlling interest in a company which employs an employee for whose benefit the taxpayer makes contributions to a fund. However, the employee will not qualify as an "eligible employee" under this provision if he is a relative of the taxpayer or is otherwise associated with the taxpayer by virtue of section 82AAB. Similarly, an employee will not qualify if he, or a relative, has entered into a contract, agreement or arrangement under which he contributes to a fund for the benefit of the taxpayer or a relative of the taxpayer. In effect, therefore, an employee may qualify as an "eligible employee" under sub-paragraph (iii) only if he and the taxpayer are at arm's length in relation to the contribution made to a fund for his benefit.

Paragraph (b) applies where the taxpayer contributing to a fund for the benefit of an employee is a company.

By sub-paragraph (i) an employee will qualify as an "eligible employee" if he is employed by a person having a controlling interest in the company contributing to a fund for his benefit. This provision will, for example, enable deductions to be available to a subsidiary company which contributes to a fund for the benefit of employees of its parent company.

Sub-paragraph (ii) has effect where a company contributes for the benefit of employees of another company and the same person has a controlling interest in both of the companies.

An employee may, for example, be employed by one subsidiary company of a parent company and the company making a contribution to a fund for the benefit of the employee may be another subsidiary of that parent company. The employee concerned will, in these circumstances, qualify as an "eligible employee" thus entitling the company contributing for his benefit to a deduction in respect of the contributions, if other requirements of the law are satisfied.

"employee" : This term will mean an employee, whether a resident or a non-resident of Australia, who is engaged in the production of his employer's assessable income. If an employee is engaged in a business of his employer producing only exempt income, he will qualify as an employee within the meaning of the definition if he is a resident of Australia or the Territory of Papua and New Guinea.

"superannuation benefits" : The benefits falling within this term are individual personal benefits, pensions or retiring allowances provided by a fund for employees or their dependants.

Sub-section (2.) is a drafting measure which is designed to facilitate the operation of the section in relation to a director of a company and indirect interests of a person in a private company.

Paragraph (a) will ensure that, as under the present law, a director of a company qualifies as an employee for the purposes of deductions in respect of contributions to a superannuation fund for his benefit.

Paragraph (b) relates to section 82AAB and is designed to enable the indirect interest of a person in a private company to be traced through any private companies, trusts or partnerships interposed between that person and the private company concerned. For this purpose a person will be deemed to indirectly hold shares in a private company if he would receive a part of any dividend paid by the company and passed through any interposed private companies, trusts or partnerships.

Example : X owns one-half of the shares in private company A Pty. Ltd.

A Pty. Ltd. owns all of the shares in private company B Pty. Ltd.

B Pty. Ltd. owns all of the shares in private company C Pty. Ltd.

Although X is not a shareholder in private company C Pty. Ltd., he will be deemed to indirectly hold shares in that company as he would, if there were successive distributions of a dividend paid by that company, receive one-half of that dividend.

Sub-section (3.) is also a drafting measure and, for the purpose of calculating the net income or the net loss of a partnership in accordance with section 90 of the Principal Act, sets out the meaning to be given to certain terms used in the section. In broad terms, section 90 provides that the net partnership income or the net loss of a partnership shall be calculated as if the partnership were a taxpayer. Allowable deductions (other than concessional deductions and prior year losses) are deducted from assessable income. The individual partners are then taxed on their respective share of the net income of the partnership or entitled to a deduction of their respective share of the net loss of the partnership.

Paragraph (a) provides that a reference in the Subdivision to a relative of a taxpayer is to be read as a reference to a relative of a partner in a partnership. A partnership which contributes to a fund for the benefit of an employee who is a relative of a partner in the partnership will, accordingly, be subject to the same limitations in respect of a deduction for that contribution as an individual employer who contributes for an employee who is a relative.

Paragraph (b) is designed to ensure that the provisions of paragraph (b) of section 82AAB have effect where a private company is a partner in a partnership. Those provisions set out the circumstances when an employee is to be treated as being associated with a private company and are explained a little later in this memorandum. If a partnership in which a private company is a partner contributes to a fund for the benefit of an employee who is associated with the private company, the deductions allowable to the partnership will be determined on the same basis as if the contributions had been made by the company.

Sub-section (4.) will apply where a partner in a partnership contributes to a fund for the benefit of employees of the partnership. The provisions of this sub-section will entitle the partner to deductions in respect of the contributions on the same basis as if the employees of the partnership were employed by him.

Sub-section (5.) is intended to provide a safeguard against deductions for contributions being determined by reference to excessive remuneration paid by a taxpayer to an employee who is associated with the taxpayer. As mentioned in the introductory note, the maximum deduction in respect of contributions for the benefit of any one employee will be Pd200 or 5 per cent of the total remuneration paid to the employee during the year of income unless the Commissioner of Taxation allows a higher amount.

It is proposed that the Commissioner shall be authorised to take into account, for the purpose of determining the maximum deduction, only so much of the remuneration paid by a taxpayer to an associated employee as, in his opinion, is reasonable in amount.

The circumstances in which an employer and an employee are associated with each other are set out in section 82AAB, which will now be explained.

Section 82AAB : Associated Persons.

This section specifies the circumstances in which an employee is associated with another person. It is proposed that the Commissioner of Taxation shall be empowered to limit the deductions available in respect of contributions by a taxpayer for the benefit of employees with whom the taxpayer is associated. That power will be exercisable only when the taxpayer and the employee are associated within the meaning of this section.

By paragraph (a), an employee will be associated with another person if he is a relative of that person. The meaning of a relative, as defined in section 6 of the Principal Act, is set out at page 13 of this memorandum. If contributions for the benefit of an employee are made by a partnership and the employee is a relative of a partner, the employee will, by virtue of sub-section (3.)(a) of section 82AAA, be associated with the partnership - see page 47 of this memorandum.

Paragraph (b) will apply where the person contributing to a fund for the benefit of an employee is a private company. In broad terms, an employee will be associated with a private company contributing to a fund for his benefit if he, or a relative, is a shareholder in or a director of the company or a related private company at any time during the income year. The provision will also have effect where the contributions to a fund are made by a partnership for the benefit of an employee who is associated with a private company which is a partner in a partnership - see explanation of sub-section (3.)(b) of section 82AAA at page 48 of this memorandum.

By sub-paragraph (i) an employee will be associated with a private company contributing to a fund for his benefit if he or a relative was a director of the company at any time during the income year.

Sub-paragraph (ii) will have effect where, at any time during the income year, an employee, or a relative of the employee, owned shares in a private company or had an indirect interest in the company if the company contributes to a fund for his benefit. Sub-section (2.)(b) of section 82AAA, explained at page 47 of this memorandum, will enable an indirect interest to be traced through any other private companies, trusts or partnerships interposed between the employee or his relative and the company making the contribution for the benefit of the employee.

The effect of sub-paragraph (iii) is that an employee will be associated with a private company contributing for his benefit if, at any time during the income year, he, or a relative, was a director of a private company which, at any time during that year, owned shares or had indirect interests in the company making the contributions.

Sub-paragraph (iv) is designed to apply to the case where an employee, or a relative, at any time during the income year, owned shares in, or was a director of, a private company in which the company making contributions to a fund for the employee's benefit owned shares or had indirect interests at any time during that year. The employee will be associated with the contributing company in those circumstances.

By sub-paragraph (v) an employee will be associated with a private company contributing to a fund for his benefit if, at any time during the income year -

(a)

the employee, or a relative, owned shares in, or was a director of, a private company; and

(b)

a person owned shares, or had an indirect interest, in both the company contributing to a fund for the employee's benefit and the private company in which the employee, or a relative, owned shares or of which he was a director.

Section 82AAC : Deductions for Contributions to Fund for Employees.

Section 82AAC is the operative provision which authorises a deduction of a contribution to a fund for the benefit of an eligible employee (as defined). The deduction will be available where the contribution is for the purpose of making provision for individual personal benefits, pensions or allowances for the employee or his dependants and the rights of the employee or his dependants to receive the benefits are fully secured. The rights of an employee would not, for example, be fully secured if, having fulfilled the conditions of the fund, his benefits could be withheld or reduced at the discretion of the trustee of the fund, his employer or some other person.

Section 82AAD : Deduction to be Reduced where Employee is Associated with Taxpayer.

This section is designed as a safeguard against deductions being allowed in respect of excessive contributions by a taxpayer for the benefit of an employee with whom he is associated.

The circumstances in which a taxpayer is associated with an employee for the purposes of the Subdivision are specified in section 82AAB which has already been explained. Where those circumstances exist, the Commissioner of Taxation will be empowered under section 82AAD to limit the deduction allowable to the amount of the contribution which, in his opinion, would have been made by the taxpayer for the benefit of the employee if the employee had not been associated with the taxpayer.

An opinion formed by the Commissioner pursuant to this section will be subject to the usual rights of objection and reference to a Taxation Board of Review. A Board may, of course, substitute its own opinion for that of the Commissioner.

Section 82AAE : Maximum Deduction Allowable for All Taxpayers in respect of the One Employee.

Section 82AAE will place a limit on the sum of the deductions available for a year of income in respect of contributions to all funds for the benefit of any one employee.

The limit imposed by paragraph (a) is Pd200 or 5 per cent of the total remuneration paid to the employee from all sources during the income year of the employee, whichever is the greater. If the taxpayer has adopted a substituted accounting period ending on a date other than 30th June, the Commissioner of Taxation will be authorised to select the income year of the employee which, in his opinion, corresponds with the income year of the taxpayer.

The limit imposed by that paragraph will have effect irrespective of the number of taxpayers who contribute to funds for the benefit of the employee. In any case where remuneration is paid to the employee by an employer who is, by virtue of section 82AAB, associated with the employee, the remuneration taken into account will be the amount determined by the Commissioner as being reasonable under sub-section (5.) of section 82AAA.

Paragraph (b) will continue the authority given to the Commissioner of Taxation under the present law to exercise his discretion, where special circumstances exist, and allow a deduction higher than Pd200 or (if greater) 5 per cent of the employee's total remuneration for the income year.

Section 82AAF : Ascertainment of Deduction Allowable When Two or More Taxpayers Contribute for One Employee.

This section will apply where two or more taxpayers contribute to funds for the benefit of one employee and the sum of the contributions exceed the maximum deduction permitted under section 82AAE.

In these circumstances, it is proposed that the maximum deduction permitted will be apportioned between the taxpayers concerned. The basis on which the apportionment is to be made is specified in paragraphs (a) and (b) of sub-section (1.) and the deduction available to each taxpayer will be the sum of the amounts calculated in accordance with those paragraphs.

The amount to be ascertained under paragraph (a) of sub-section (1.) is 5 per cent of the remuneration paid by the taxpayer to the employee during the income year of the employee or (if lesser) the amount of the contribution paid by the taxpayer to a fund for the employee's benefit. If the employee is associated with the taxpayer within the meaning of section 82AAB, the amount of the remuneration to be taken into account will, by virtue of sub-section (5.) of section 82AAA, be the amount which, in the Commissioner's opinion, is reasonable. Similarly, the amount of the contribution to be taken into account will be the amount deductible in pursuance of section 82AAD where the contribution is made for the benefit of an employee who is associated with the taxpayer.

Paragraph (b) will have restricted application since it will apply only in those cases in which two or more persons have contributed on behalf of one employee. The paragraph provides the basis on which the excess of the sum of the contributions paid by all the contributing taxpayers for the benefit of an employee over the sum of the amounts ascertained in accordance with paragraph (a) in relation to each of those taxpayers concerned is to be apportioned between the taxpayers. The apportionment is made on the basis of the formula -

((a - b)(c - d))/((e - b))


The values of the symbols in the formula are summarised, in broad terms, as follows -

a

is the maximum deduction permitted in respect of contributions from all sources for any one employee, i.e., Pd200 or (if greater) 5 per cent of total remuneration or, in special circumstances, a larger amount allowed by the Commissioner;

b

is the sum of the amounts ascertained under paragraph (a) in relation to each taxpayer who has made a contribution for the benefit of the employee;

c

is, in effect, the contribution made by the taxpayer for the benefit of the employee (reduced in pursuance of section 82AAD if the employee is associated with the taxpayer);

d

is 5 per cent of the remuneration paid by the taxpayer to the employee during the income year of the employee or (if lesser) the amount of the contribution;

e

is the sum of the contributions (reduced in pursuance of section 82AAD in any case where the taxpayer is associated with the employee) made by all of the taxpayers for the benefit of the employee during the income year.

Maximum deduction permitted upon exercise of Commissioner's discretion Pd450.

Sub-section (2.) is a drafting measure and will enable the calculation under sub-section (1.) of the amount of the deduction available to a taxpayer in respect of contributions to a fund to be made without taking into account adjustments proposed in succeeding provisions in certain circumstances where rights to benefits are lost or forfeited by an employee. Explanations in relation to those provisions follow.

Section 82AAG : Deductions to be Reduced by Value of Previous Deductions Allowed in Respect of Lost or Forfeited Benefits.

Section 82AAG will have effect where deductions have been allowed or are allowable to a taxpayer in respect of contributions to a fund for the benefit of an employee and the rights of the employee to receive benefits from the fund are lost or forfeited.

In these circumstances, deductions for contributions in the year of loss or forfeiture, or a later year, may be reduced. Expressed in broad terms, the deductions will be reduced by so much of the lost or forfeited benefits as is not applied to provide benefits for other employees or for a purpose approved by the Commissioner. If the benefits lost or forfeited are applied in a way that results in the total amount set apart in the income year for any employee exceeding the permitted maximum (e.g., Pd200 or 5% of remuneration) the excess will be applied in reduction of the amount that would otherwise have been deductible for contributions to the fund. Where, for any reason, it is not practicable for the deductions for contributions to be appropriately reduced in the year the loss or forfeiture occurs, the reduction will be made in a subsequent year.

In order to give effect to this principle, section 82AAG provides that the total deductions otherwise allowable for contributions made to a fund in a year of income shall be reduced by "the value of the previous deductions" allowed in respect of rights lost or forfeited. The provisions will not apply to benefits lost or forfeited before the 1965-66 income year.

"The value of the previous deductions" is to be ascertained in accordance with the proposed section 82AAH, as modified by subsequent provisions. At this stage it may be noted that "the value of the previous deductions" will by virtue of those subsequent provisions, generally be part only of the amount ascertained under section 82AAH.

Section 82AAH : Ascertainment of Value of Previous Deductions.

Section 82AAH sets out the method to be adopted in calculating "the value of the previous deductions" allowed or allowable to a taxpayer in respect of contributions for the benefit of an employee whose right to receive the benefits provided have been lost or forfeited.

That value will, subject to the modifying effects of sections 82AAI and 82AAK, be the sum of -

(a)

the amount of the deductions allowed or allowable to the taxpayer in respect of those contributions; and

(b)

so much of the income of the fund as, in the opinion of the Commissioner, is attributable to contributions for which deductions have been allowed or are allowable.

Section 82AAI : Value of Previous Deductions to be Reduced Where Amount of Lost or Forfeited Benefits Applied for Other Employees.

Section 82AAI is a further provision that will apply where an amount is included in a fund to provide benefits that have been lost or forfeited. The first step is to ascertain whether, within two months after the end of the income year in which the loss or forfeiture occurred (or within such further period as the Commissioner may allow) the amount included in the fund in relation to the benefits lost or forfeited has been applied for the purpose of providing benefits for an eligible employee. If such an application has been made, an amount (ascertained in accordance with paragraph (a) or (b) of sub-section (1.) of the section) will be excluded from "the value of the previous deductions" allowed or allowable to the taxpayer in relation to the amount so included in the fund. The exclusion from "the value of the previous deductions" will be favourable to the taxpayer since that value is applied to reduce the deductions otherwise allowable.

Paragraph (a) of sub-section (1.) prescribes the method of ascertaining the amount of the exclusion from "the value of the previous deductions" in those cases in which the taxpayer alone has been a contributor to the fund. The amount to be excluded will be ascertained in accordance with the formula -

(Amount of lost or forfeited benefits applied for the benefit of an eligible employee) * ("The value of the previous deductions" allowed or allowable to the taxpayer calculated in accordance with section 82AAH)/(Amount included in the fund to provide benefits for the employee whose rights to the benefits are lost or forfeited)


.

Paragraph (b) will apply where more than one taxpayer has contributed to a fund for the employee whose rights to receive benefits have been lost or forfeited or for the employee who will receive the benefit of the application of the amount of benefits so lost or forfeited. In such a case, widely-differing circumstances may require consideration and paragraph (b) provides that "the value of the previous deductions" allowed or allowable to the taxpayer is to be reduced by an amount which the Commissioner considers reasonable in the circumstances.

The determination to be made by the Commissioner under this paragraph and other provisions will be subject to the usual rights of objection and reference to a Taxation Board of Review.

Sub-section (2.) will place an upper limit on the amount by which "the value of the previous deductions" allowed or allowable to a taxpayer may be reduced by sub-section (1.).

The statutory maximum deduction permitted in respect of an employee for whose benefit the lost or forfeited benefits are applied is Pd200 or, if greater, 5 per cent of the employee's remuneration. The upper limit mentioned will be the excess of that maximum deduction over the contribution made to the fund by the taxpayer during the income year on behalf of that employee. Where, for example, the statutory maximum deduction is Pd200 and the contribution is only Pd150, there remains an amount of Pd50 that could have been deductible if the contribution had been Pd200 or more. In those circumstances, the reduction in "the value of the previous deductions" in relation to the employee would, in accordance with sub-section (2.), be limited to Pd50.

Sub-section (3.) is complementary to sub-section (2.) and will apply where the Commissioner has exercised his discretion under paragraph (b) of section 82AAE to allow in relation to an employee for whose benefit the lost or forfeited benefits are applied, a deduction greater than the statutory maximum deduction of Pd200 or 5% of the total remuneration of that employee.

In these circumstances, the statutory maximum deduction would, in no case, exceed the amount contributed on behalf of that employee. It is accordingly provided by sub-section (3.) that, in such a case, "the value of the previous deductions" allowed or allowable to the taxpayer will not be reduced by any part of an amount of lost or forfeited benefits applied for the benefit of that employee.

Section 82AAJ : Amount by which Value of Previous Deductions Reduced to be Deemed to be a Deduction.

This section will apply where "the value of the previous deductions" allowed or allowable to a taxpayer (as calculated in accordance with section 82AAH) has been reduced by an amount ascertained in accordance with section 82AAI.

In a subsequent year of income, the employee for whom an amount of benefits lost or forfeited by another employee was applied, may, in turn, lose or forfeit his right to benefits. It will then be necessary to calculate, under section 82AAH, "the value of the previous deductions" in respect of that employee.

In these circumstances it is intended that the amount by which "the value of the previous deductions" has been reduced under section 82AAI in respect of an amount of lost or forfeited benefits applied for the benefit of that employee, shall be treated in the same manner as if deductions had been allowed or allowable to the taxpayer for that amount.

For that purpose, paragraph (a) of section 82AAJ will deem that amount to have been contributed to a fund by the taxpayer and paragraph (b) will deem the amount to have been allowed to the taxpayer as a deduction.

Section 82AAK : Value of Previous Deductions to be Reduced Where Amount of Lost or Forfeited Benefits Applied for Other Approved Purposes.

Section 82AAK will operate where an amount included in a fund to provide benefits for an employee who has lost or forfeited his rights to those benefits is applied in a manner that has been approved by the Commissioner. For the purposes of this provision the application of that amount may be made in the year in which the rights to benefits were lost or forfeited, within two months after the end of that year, or within such further period as the Commissioner allows.

The effect of this section will be to reduce "the value of the previous deductions" allowed or allowable to the taxpayer calculated in accordance with section 82AAH by an amount ascertained in accordance with paragraph (a) or paragraph (b).

Paragraph (a) will apply where only the taxpayer has contributed to a fund on behalf of the employee whose rights to receive benefits have been lost or forfeited. In these circumstances "the value of the previous deductions" allowed or allowable to the taxpayer in respect of contributions for that employee will be reduced by an amount ascertained as follows :-

(Amount of lost or forfeited benefits applied in manner approved by Commissioner) * ("The value of the previous deductions" allowed or allowable to the taxpayer calculated in accordance with section 82AAH)/(Amount included in the fund to provide benefits for the employee whose rights to the benefits are lost or forfeited)


.

Paragraph (b) will apply where more than one taxpayer has contributed to a fund on behalf of the employee whose rights to receive benefits have been lost or forfeited. In these circumstances the amount by which "the value of the previous deductions" allowed or allowable to the taxpayer is to be reduced will be the amount which the Commissioner considers reasonable in the circumstances.

Section 82AAL : Where Total Deductions Reduced by Value of Previous Deductions, Each Deduction to be Deemed to be Reduced Accordingly.

Section 82AAL is a machinery provision. It will apply for a year of income in which "the value of the previous deductions" has been applied in reduction of the amounts that would otherwise have been allowed as a deduction for contributions to a fund. The purpose of the section is to ensure that the reductions in the deductible amounts are deemed to have been made ratably from the amounts set apart or paid for the benefit of each employee in respect of whom contributions have been made in the year of income.

The provision is necessary in order to provide a solution to problems that would otherwise arise if benefits subsequently lost or forfeited were applied to provide benefits for other employees.

Section 82AAM : Ascertainment of Contribution for Each Employee When Lump Sum Contributed for Two or More Employees.

This section is designed to meet the case where a taxpayer makes a lump sum contribution to a fund for the benefit of employees but does not specify the amount contributed on behalf of each employee.

In such a case the Commissioner will be authorised to determine the part of the contribution that relates to each of the employees concerned for the purposes of Subdivision AA. This action will be necessary to ensure that the limitation of the deduction available in respect of contributions for individual employees is not exceeded. It will also be necessary for the purpose of ascertaining the value of the deductions previously allowed or allowable to the taxpayer in respect of contributions on behalf of an employee whose rights to receive benefits are subsequently lost or forfeited.

A determination by the Commissioner under this section will be subject to the usual rights of objection and reference to a Taxation Board of Review.

Section 82AAN : Ascertainment of Deduction Attributable to Contribution to Fund Where Contributions are Made to More than One Fund.

This section will apply in only a relatively few cases in which a taxpayer has contributed to more than one fund on behalf of an employee whose rights to receive benefits have been lost or forfeited. In these circumstances, it will be necessary for "the value of the previous deductions" allowed to the taxpayer in respect of contributions to each fund to be ascertained for the purposes of section 82AAH.

It is proposed that the Commissioner shall be authorised, for the purpose of that section, to determine the parts of the contributions made to each fund that have been allowed to the taxpayer as deductions.

Section 82AAO : Special Provisions Relating to Fund Where a Specified Part of the Amount Included in the Fund is Not Appropriated for Each Employee.

The purpose of this section is to facilitate the application of sections 82AAI, 82AAJ and 82AAK which may require various calculations to be made when an amount included in a fund to provide benefits for an employee is applied for other purposes because the employee loses or forfeits his rights to the benefits.

As already explained, sections 82AAI and 82AAJ apply where an amount included in a fund in respect of lost or forfeited benefits is applied to provide benefits for another employee. Section 82AAK applies where such an amount is applied for purposes approved by the Commissioner. The whole or a part of the amount so applied may, in pursuance of those sections, be excluded from "the value of the previous deductions" allowed or allowable to the taxpayer in respect of contributions to provide the benefits lost or forfeited. The amount so excluded from that value does not then reduce the deductions to which the taxpayer is entitled in respect of contributions he is currently making to the fund - see notes on section 82AAG at page 53 of this memorandum.

Those provisions are designed for application where specific amounts have been appropriated to provide benefits for each employee. In some funds, however, there is no appropriation of specific amounts for the benefit of each employee. The purpose of section 82AAO is to provide rules under which the Commissioner of Taxation will, where necessary, make determinations of amounts that will be deemed to have been included in the fund for a particular purpose.

Paragraph (a) of section 82AAO will, in any case where a specified amount is not appropriated for the purpose of providing the benefits to which an employee is entitled, authorise the Commissioner of Taxation to determine an amount as being included in the fund for that purpose.

Paragraph (b) is a machinery provision that will have effect in relation to section 82AAK where a payment is made from a fund and the Commissioner is of the opinion that the payment resulted from the loss or forfeiture of benefits by an employee in respect of whom he has made a determination under paragraph (a). So much of the amount determined under that paragraph as is equal to the payment will be deemed to have been applied at the time and for the purpose for which the payment was made. If the purpose was approved by the Commissioner in relation to section 82AAK, the whole or a part of the payment may be excluded from "the value of the previous deductions" allowed or allowable to the taxpayer in respect of contributions to provide the benefits lost or forfeited by the employee. The deductions available to the taxpayer in respect of contributions he made in the year of income for the benefit of employees will not then be reduced under section 82AAG by the amount so excluded from the value of the previous deductions.

Paragraph (c) relates to the part of the amount determined by the Commissioner under paragraph (a) in respect of the amount included in the fund to provide benefits that are lost or forfeited by an employee that remains after taking into account a payment referred to in paragraph (b). If the amount so remaining in the fund is not applied by the trustee for the benefit of any particular employees it may be available for the provision of benefits to which other employees are entitled to receive from the fund. The Commissioner will, in these circumstances, be authorised to determine the extent to which that amount will be used to provide benefits for eligible employees (as defined). The amount so determined will be deemed to have been applied for those employees. Section 82AAP will then enable the Commissioner to determine, for the purposes of sections 82AAI and 82AAJ, the part of that amount that has been applied to provide benefits for individual employees - see notes on section 82AAP.

Section 82AAP : Ascertainment of Part of Amount in Fund Applied for Each Employee Where Lump Sum Applied for Two or More Employees.

Section 82AAP is designed to facilitate the practical application of the law where an amount included in a fund is applied to provide benefits for two or more employees but the amount so applied in respect of each of those employees is not specified.

It will be necessary for the amount of lost or forfeited benefits so applied for each of those employees to be ascertained for the purposes of sections 82AAI and 82AAJ. For that purpose, it is proposed that the Commissioner be authorised to determine the amount included in the fund that is applied for the purpose of providing benefits for each of the employees concerned.

Section 82AAQ : Amount Paid from Fund to Taxpayer to be Included in his Assessable Income.

Section 82AAQ will re-enact, in substance, the existing provisions of sub-section (10.) of section 66 of the Principal Act. The provision requires a taxpayer who has obtained deductions in respect of contributions to a fund on behalf of employees to be taxed on any amounts that are repaid to him by the fund. A contributor to a fund may, for example, be entitled to receive from the fund the amount of any benefits lost or forfeited by employees in respect of whom he has paid contributions. Any amount so received would, in consequence of section 82AAQ, be included in the assessable income of the contributor.

Section 82AAR : Deductions for Contributions to Funds for Employees not Allowable under other Provisions of the Act.

This section will substantially re-enact existing provisions of section 66(9.) of the Principal Act. It is proposed that an amount set apart or paid to a superannuation fund for employees may not qualify as a deduction except under the special provisions of Subdivision AA explained in the foregoing paragraphs. This provision will not, however, affect a concessional deduction in respect of life assurance premiums, contributions to superannuation funds, etc.

Clause 19: Interpretation.

This is a drafting measure arising from the proposed insertion of a new section by clause 20.

Clause 20: Application of the Division

By this clause it is proposed to limit the application of the special provisions pertaining to leases that are contained in Division 4 of Part III of the Principal Act. In broad terms, the application of these provisions will be limited to leases current at the date specified in the Bill for the purposes of the limitation, and leases coming into existence after that date in pursuance of an agreement entered into on or before that date.

One result of the proposed discontinuance of the general operation of the lease provisions will be that future capital sums related to the grant, assignment or surrender of a lease or to improvements on leasehold land will not generally be assessable income. A further result will be that future capital expenditure to obtain a lease or to erect improvements on leased land will not generally be allowable as a deduction.

Special provisions will, however, ensure that deductions to which a taxpayer has become entitled in consequence of a past transaction will not be disturbed. As explained in relation to clause 9 of the Bill premiums received for the grant or assignment of a lease of property not intended by the grantee or assignee to be used for the purpose of producing assessable income will continue to be assessable income. Amounts which have become assessable income in accordance with Division 4 as a result of transactions made on or before the date specified in the Bill will also continue to be assessable income.

It is proposed that provisions contained in Division 4 that relate to mining leases and Crown leases of land used for primary production will continue to apply.

Where the provisions of Division 4 continue to apply in relation to current leases they will, with two exceptions, apply in the same manner as they do at present.

The first exception relates to the case where a lease of land is surrendered and a new lease of the land is granted running from the day of surrender. Hitherto, the amount of deductions to which a taxpayer was entitled over the period of the original lease, but which had not been allowed in full at the time of surrender, has been spread for deduction purposes over the period of the new lease. In future, the amount will be allowed in full in the year of income in which the surrender takes place (see notes on clause 21 of the Bill).

The second exception relates to the cost of improvements on leasehold land that have not been made with the lessor's written consent or under a covenant with the lessor. In the past, no deduction has been available to a lessee for the cost of such improvements if the lease of the land on which he made them ran its full course. A deduction became available, however, if he assigned or surrendered the lease. This deduction will not be available in relation to an assignment or surrender made after the date specified in the Bill, except where the assignment or surrender is made in pursuance of an agreement entered into on or before that date.

A new section - section 83AA - is being inserted in Division 4 for the purpose of limiting the application of that Division. The broad explanation set out above should be read subject to the more detailed notes on the new section 83AA that follow.

Sub-section (1.) provides that, subject to other provisions of the section, the Division may not apply in relation to a lease, unless it is a lease that was granted on or before the date specified in the sub-section or in pursuance of an agreement entered into on or before that date. It is convenient, for the purposes of this memorandum, to refer to a lease so granted as a "current lease".

One effect of sub-section (1.) is that provisions of Division 4 which provide that premiums and other capital sums are assessable income will have no force except in relation to a current lease. The other effect is that provisions of the Division that authorise deductions for capital expenditure in relation to a lease will also not operate in relation to a lease that is not a current lease.

It is to be noted, however, that the effect of sub-section (5.) is to continue the operation of these provisions, in the same limited area in which they may at present apply, in relation to mining leases and Crown leases of land used for primary production (see notes on sub-section (5.) later in this memorandum).

Sub-section (2.), in effect, states the circumstances in which the provisions of Division 4, other than section 85, will continue to apply in relation to the assignment or surrender of a current lease.

The sub-section limits the application of the Division, firstly, to an assignment or surrender of a current lease that took effect prior to the date specified in the sub-section and, secondly, to an assignment or surrender of such a lease that takes effect after that date under an agreement entered into on or before that date.

One effect of sub-section (2.) is that in relation to such an assignment or surrender all the provisions of Division 4 continue to apply. Thus any amount received for such an assignment or surrender that is a premium for the purposes of the Division will, as at present, constitute assessable income. Similarly, any amount which is an allowable deduction under the Division in consequence of the assignment or surrender will remain an allowable deduction.

The other effect of sub-section (2.) is that none of the provisions of the Division, except section 85, will apply in relation to an assignment or surrender that represents a transaction which was agreed to after the date specified in the sub-section. The basis of application of section 85 in relation to such a transaction is explained in notes on sub-section (3.) that follow.

Sub-section (3.) is designed to continue, in specified circumstances, the operation of section 85 of the Principal Act in relation to an assignment or surrender of a current lease that is made after the date specified in the sub-section.

Section 85 is a provision of Division 4 that, broadly stated, provides for certain deductions to be allowed in a year of income in which a lease is assigned or surrendered. On such an event the taxpayer is allowed a deduction for any amount which has been paid by him to acquire the lease, or in making improvements upon land subject of the lease, or to obtain the assent of the lessor to the assignment or surrender, that has not already been allowed as a deduction to him under other provisions of Division 4.

The general scheme of Division 4 is for capital expenditure on a lease to be proportionately spread for deduction purposes over the period of the lease. The deduction available under section 85 is limited to the amount of expenditure which has not been allowed as deductions in this way at the time of an assignment or a surrender of a lease. The section contains machinery provisions to enable its general purpose to be carried out. One of these ensures that where a taxpayer, on the death of another, succeeds to a lease he is deemed to have paid any amount to which the section applies that was paid by the deceased taxpayer.

As already stated, sub-section (3.) will continue the operation of section 85, with, however, some amendments to the section applying in particular cases, to an assignment or surrender of a current lease made after the date specified in the sub-section. This will be so, even though a premium received for the assignment or surrender is not included in assessable income.

It is provided by sub-section (3.) that section 85 does not apply in relation to an assignment or a surrender of a current lease that is made after the date specified in the sub-section unless the assignment or surrender is made by a person who held the lease at that date, or obtained it under an agreement entered into on or before that date.

For section 85 to apply, therefore, the person assigning or surrendering a current lease must have either held the lease at the date specified in the sub-section or, on or before that date, committed himself to take it. This limitation is necessary because the broad purpose of sub-section (3.) is to preserve to a taxpayer his rights to any deduction arising from a past transaction relating to a current lease. Without the limitation, a person who takes an assignment of a current lease in the future could receive a deduction for any premium paid by him for the assignment if he in turn assigns the lease, although any premium received by him for the assignment he makes would not be assessable income.

The sub-section also ensures that section 85 may apply where the person assigning or surrendering a lease succeeded to the lease on the death of a taxpayer who held the lease at the date specified in the sub-section or agreed to take it on or before that date.

Paragraph (a) of sub-section (3.) places some limitation on the deduction allowable in future under section 85(1.)(b).

Section 85(1.)(b) provides that, on the assignment or surrender of a lease, the person assigning or surrendering is entitled to a deduction in relation to any amount paid by him to effect improvements on land subject of the lease. Paragraph (a) of sub-section (3.) ensures that, on an assignment or surrender of a current lease made after the date specified in the sub-section, the deduction under this provision of section 85 is to be limited to amounts paid to effect improvements with the written consent of the lessor, or under a covenant in the lease or in consideration of the grant of the lease. Expenditure on improvements made without any agreement with the lessor will thus be excluded from deduction. The limitation will not apply, however, where the assignment or surrender is made after the date specified in the sub-section under an agreement entered into on or before that date.

Paragraph (b) of sub-section (3.) refers to a provision of section 85 - paragraph (c) of sub-section (1.) of that section - that provides a deduction on an assignment or surrender in relation to an amount paid to obtain the assent of the lessor to the assignment or surrender.

These payments are, in general, either precisely contemporaneous with the assignment or surrender or proximate to it. Since the purpose of the paragraph is to preserve to a taxpayer deductions in respect of a transaction into which he entered, or to which he was committed, on or before the date specified in the sub-section, paragraph (b) of sub-section (3.) precludes a deduction of such an amount on the assignment or surrender of a current lease, unless the amount was paid on or before that date or in pursuance of an agreement entered into on or before that date.

Sub-section (4.) refers to improvements made by a lessee on land subject of a current lease with the written consent of the lessor. It provides that certain provisions of Division 4, viz., sections 85, 87 and 88, are not to apply in relation to such improvements except in specified circumstances.

Paragraph (a) ensures that the sections mentioned will continue to apply in relation to such improvements if they are, or were, made with a written consent given by the lessor on or before the date specified in the sub-section.

Paragraph (b) provides that the sections may also continue to apply where the Commissioner is satisfied that the lessor had agreed, on or before the date specified in the sub-section, to give his written consent to the making of the improvements. It will not matter for this purpose whether the lessor had agreed absolutely to give his written consent or had agreed to do so subject to conditions. An example of a conditional agreement would be where the lessor had agreed to give his written consent subject to his being satisfied with plans and specifications relating to the proposed improvements.

The provisions of sections 85, 87 and 88 may not apply, however, in the circumstances described, unless the lessor and lessee make a joint application to the Commissioner in writing to be allowed a further period after the date specified in the sub-section for the consent to be given, and the Commissioner approves. The Commissioner is authorised to approve such further period as he considers reasonable.

The paragraph requires that the joint application of the lessor and lessee be made within sixty days after the date specified in the sub-section. The Commissioner will, however, be authorised to grant further time for the making of the application where he considers the circumstances warrant this course.

The effects of sub-section (4.), in relation to improvements on a current lease made with a written consent to which paragraph (a) or paragraph (b) of that sub-section applies, are that -

(a)

expenditure on the improvements will, subject to the provisions of section 88, be allowed as deductions to the lessee over the appropriate period of the lease in accordance with that section;

(b)

in the event of the assignment or surrender of the lease by a person who acquired it before the date specified in the sub-section, or in pursuance of an agreement made before that date, any balance of the expenditure allowable in accordance with section 88, but which has not been allowed under that section, will be allowable in accordance with section 85; and

(c)

there will be included in the assessable income of the lessor, in accordance with section 87, instalments of the estimated value of the improvements as at the end of the period for which the lease was granted.

Sub-section (4.) will not affect the operation of the relevant provisions of Division 4 in relation to improvements effected by a lessee on land subject of a current lease that he was required to make under a provision of the lease or as consideration for the grant to him of the lease. Section 85 (as amended by clause 21), section 87 and section 88 will continue to apply in relation to such improvements, whether made before or after the date specified in the Bill for the discontinuance of the general operation of Division 4.

Sub-section (5.) is designed to ensure that sub-section (1.), which limits the application of Division 4 to leases either existing at the date specified in the sub-section or granted under an agreement entered into on or before that date, does not operate to restrict the application of two sections contained in the Division, namely, sections 88A and 88B.

Under these sections the Division has a limited scope of application to leases from the Crown of land used for primary production and mining leases. The Division will continue to apply in relation to such leases in the same manner, and under the same conditions, as it may at present.

Clause 21: Deductions upon Disposal of Lease, Goodwill or Licence.

By this clause it is proposed to amend section 85 of the Principal Act, which is part of Division 4 of Part III of the Principal Act. The purpose of the amendment is to bring deductions allowable under that section to a taxpayer who surrenders a lease and obtains a new one running from the same date into line with the deductions so allowable to a taxpayer who surrenders a lease but does not obtain a new one.

The clause will omit sub-section (7.) of section 85. That sub-section provides that where a taxpayer surrenders a lease of land, and is granted a new lease of the land running from the date on which the surrender takes effect, the deduction otherwise allowable in full under section 85 in the year of surrender is, instead, to be spread for deduction purposes proportionately over the period of the new lease.

The effect of the omission of sub-section (7.) is that, in future, in any case to which section 85 applies, deductions under that section will be allowable in full in the year of surrender of a lease of land, whether or not the taxpayer making the surrender receives a new lease running from the surrender date.

Clause 22: Notional Income of a Taxpayer Deriving a Premium.

This clause will effect a drafting amendment to section 86 of the Principal Act that is consequential on the proposed insertion of section 99A into the Principal Act.

Section 86 relates to taxpayers who receive a lease premium in a year of income. It applies to reduce the higher rate of tax which would otherwise arise from the inclusion of the premium in assessable income. The section will continue to apply in relation to certain premiums but, as the rate of tax under the new section 99A is proposed to be a flat rate, there is no need for section 86 to apply in any case in which an assessment under section 99A includes a lease premium. This clause accordingly provides that section 86 does not apply in any assessment under section 99A.

Clause 23: Liability of Partnerships.

By this clause it is proposed to effect a drafting amendment in section 91 of the Principal Act. The amendment is consequential on the proposed changes in section 94 of the Principal Act.

Section 91 states the general policy of the Principal Act that a partnership is not itself liable to pay tax on the income it derives. The present section has an exception to this rule which arises from the provisions of the present section 94 under which a partnership may be liable to pay tax on partnership income over which a partner does not have real and effective control.

It is proposed by clause 24 of the Bill that, where the new section 94 to be inserted in the Principal Act by that clause applies, the special tax under that section will be levied on the partner who lacks control of his share and not on the partnership. In these circumstances, there will no longer be any need for an exception to the principle that a partnership is not itself liable to pay tax and the amendment to be made by this clause will delete the present exception.

The amendment made by this clause applies in assessments for the income year 1965-66 and subsequent years of income.

Clause 24: Partner not having Control and Disposal of Share in Partnership Income.

Introductory Note :

This clause relates to the taxation of a share of income of a partnership over which a partner does not have the real and effective control and disposal. The existing provision is to be repealed and a new section inserted in its place. These changes arise out of the report of the Ligertwood Committee.

The general approach of the income tax law to the taxation of income derived by a partnership is to include in the assessable income of each partner his individual interest (or share) in the net income of the partnership. In broad terms, the net income of the partnership is ascertained by deducting from the assessable income of the partnership, calculated as if the partnership were a taxpayer, losses and outgoings incurred by the partnership in gaining or producing that income. If a partnership incurs a loss in a year of income, i.e., if the allowable deductions exceed the assessable income, each partner's interest in that loss is an allowable deduction to the partner.

In its present form, section 94 is an exception to the general principle that a partnership is not itself liable to pay income tax. Broadly stated, the purpose of section 94, as at present enacted, is to impose tax on a partnership at a special rate in relation to the share of partnership income of a partner over which the partner lacks real and effective control and disposal. (The term "real control" is used hereafter in this memorandum to refer to "real and effective control and disposal".)

For the present section 94 to apply it is necessary for it to be found that a partnership is so constituted or controlled, or its operations are so conducted, that a partner does not have the real control of his share of partnership income.

The amount of tax that the partnership is liable to pay under the present section is the additional amount of tax that would have been payable if the share of the partner who lacks control of his share had been received by the partner or partners who have the real control of that share. Where the section applies the share of net income is not included in any partner's assessable income.

This method of ascertaining the rate of special tax means that, for the present section 94 to be applicable, the whole control of the whole share of a partner who lacks control must be found to be in the hands of one or more other partners. Although it may be established that a partner does not have real control of his share, the section is inoperable unless another partner or partners can be identified as having the whole control of the whole share of that partner.

The broad approach of the proposed new section 94 (which will apply to partnerships whenever created) is to retain the test that makes the section applicable where a partner does not have the real control of his share of partnership income. The test that another person be definitely identified as having control of that share will not apply. Partners under 16 years of age are to be deemed to lack the requisite control.

In broad terms, it is proposed that the new section will apply in the following circumstances -

(a)

where a partner, other than a partner under 16 years of age, lacks the real control of any part of his share of partnership income, the section is to apply to that part;

(b)

where a partner is under 16 years of age on the last day of the year of income, the section is to apply to so much of his share of partnership income as exceeds a reasonable reward for services, if any, rendered by him in producing assessable income of the partnership;

(c)

where a beneficiary in a trust (other than a trust arising from a will or intestacy) is under 16 years of age on the last day of the year of income and is presently entitled to income which comes to the trust from a share in the net income of a partnership, the section is to apply to so much of that income as exceeds a reasonable reward for services, if any, rendered by the beneficiary in producing assessable income of the partnership; and

(d)

where a trustee, as a partner in a partnership, lacks the real control of any part of the trust's share of partnership income, the section is, in cases not referred to in (c), to apply to that part in an assessment of a trustee or a beneficiary in respect of that income.

Persons in receipt of income jointly are, for income tax purposes, treated as a partnership. As a broad statement of principle, however, it is not proposed that section 94 will apply to income from joint ownerships of property. It is also proposed that the section will not apply to a company's share of partnership income. The general provisions of the income tax law relating to companies ensure that appropriate tax is paid by a company that lacks control of a share of partnership income.

Where the new section would otherwise apply, the Commissioner of Taxation will be authorised not to apply it to the extent that, in special circumstances, he considers it would be unreasonable for it to apply.

It is not proposed to include income to which the new section 94 applies in an assessment of a partnership. The person liable will be the person who would be taxed on the income under the relevant provisions of the Principal Act if the section did not exist. The rate of tax proposed to be levied on the income is 10/- in the Pd, or the personal rate of the taxpayer, whichever is higher.

To effect the imposition of a rate of at least 10/- in the Pd on income to which the new section applies, it is proposed that ordinary rates of tax will be imposed, as now, on the whole of the taxable income. Where the average rate of "ordinary" tax is less than 10/- in the Pd, a further tax will be imposed on the income to which section 94 applies that is included in the taxable income at a rate sufficient to bring the aggregate rate of tax on the section 94 income up to 10/- in the Pd.

A person deriving income to which the new section 94 applies will be taxed at the special rate on the whole of that income included in his taxable income. It is not proposed that income below any specified minimum level be exempt from the further tax.

The Bill also proposes (by Clause 44) that provisional tax will not be levied in respect of any further tax, but this will not result in the ultimate liability for tax being affected. A person who derives income to which section 94 applies will, however, continue to pay provisional tax at ordinary individual rates of tax on the same basis as applies under the existing law.

More detailed explanations of the provisions of the revised section are given below.

Sub-section (1.) is the first of four sub-sections that specifies the circumstances in which the section applies. Each of these sub-sections independently makes the section applicable in a different set of circumstances.

For sub-section (1.) to be applicable in a particular case the conditions set out in paragraphs (a) and (b) must be satisfied.

Under paragraph (a) the section may apply where a share of partnership income is included in the assessable income of a partner and that partner is not a company, a person under the age of 16 on the last day of the partnership's year of income, or a person in the capacity of a trustee. As already explained, companies do not fall within the section at all. Persons under the age of 16 years and partners who are trustees are covered by other sub-sections.

Paragraph (b) states a further condition for the application of the section in relation to a partner covered by sub-section (1.). This further condition is that the partnership is so constituted or controlled, or its operations are so conducted, that the partner does not have the real control of the share, or of a part of the share, of the partnership income that is included in his assessable income.

If both these tests are satisfied, the section applies to so much of the partner's share over which he lacks real control.

Sub-section (2.) deals with cases where a trustee of a trust estate, as a partner in a partnership, lacks real control of the whole or part of the trust estate's share of partnership income. It is necessary for technical reasons to have provisions relating to trustee partners. In the absence of such provisions, the operation of the section could be avoided by arranging for a person to hold his interest in the partnership through a trust, or a succession of trusts, in lieu of admitting him to membership of the partnership.

The sub-section is designed so that the section applies, in varying circumstances, in accordance with paragraphs (c), (d) and (e) of the sub-section, when two primary conditions described in paragraphs (a) and (b) of the sub-section are satisfied. Its broad purpose is to make the section applicable where uncontrolled partnership income is included in the assessable income of a trust estate and a trustee, or a beneficiary, is liable to be assessed and pay tax on some or all of the net income of the trust estate.

Paragraph (a) of sub-section (2.) corresponds with paragraph (b) of sub-section (1.). Like the latter paragraph, it requires that the partnership in which the trustee is a partner be so constituted or controlled, or its operations so conducted, that the trustee does not have real control of his share of partnership income, or of a part of that share. The amount over which the trustee lacks control is referred to in the sub-section as "uncontrolled partnership income".

Paragraph (b) states a further condition for the sub-section to be applicable. This is that uncontrolled partnership income be included in the assessable income of a trust estate.

If the trustee of any trust estate is, as trustee of that trust estate, a partner in the partnership, the uncontrolled partnership income is included directly in the assessable income of the trust estate in accordance with sections 92 and 95 of the Principal Act. If, however, income from a partnership is derived by a trust estate through one or more other trust estates and, in relation to the trust estate that is a partner in the partnership there is uncontrolled partnership income, the effect of paragraph (a) of sub-section (5.) of the proposed section 94 (see notes on that sub-section at a later stage of this memorandum) is that the first-mentioned trust and the interposed trusts are each deemed also to derive uncontrolled partnership income.

The amount of such income that each trust estate is deemed to derive is to be determined in accordance with paragraph (a) of sub-section (5.) or, in some cases, sub-section (6.). (Notes on these sub-sections are set out later in this memorandum).

Once it has been determined that the assessable income of a trust estate includes an amount of uncontrolled partnership income, succeeding paragraphs of sub-section (2.) - paragraphs (c), (d) and (e) - specify the various bases on which the section is to apply to that income. Before explaining those paragraphs, it is desirable to outline briefly the various procedures provided by Division 6 of Part III of the Principal Act for taxation of income derived by trustees of trust estates.

In broad terms, the first step in relation to any of the procedures is to calculate the net income of the trust estate by deducting from the assessable income of the trust estate all losses and outgoings incurred in gaining or producing that income (section 95 of the Principal Act).

Where a beneficiary is presently entitled to a share of trust income, and is not under a legal disability, his assessable income includes that share of the net income of the trust estate (section 97 of the Principal Act). If a beneficiary is presently entitled to a share of the income of a trust estate but is under a legal disability (e.g., if he is a minor), the trustee is liable to pay tax in respect of the beneficiary's share of the net income of the trust estate as if it were the income of an individual (section 98 of the Principal Act).

If a beneficiary, who is presently entitled to a share of the income of a trust estate and under a legal disability, is a beneficiary in more than one trust estate, or derives income from another source, his assessable income includes the share of the net income of the trust estate to which he is presently entitled. In that event, however, the tax paid or payable by the trustee under section 98 in respect of the beneficiary's share is deducted from the tax payable by the beneficiary (section 100 of the Principal Act).

Where a trustee has a discretion to pay or apply income for the benefit of a beneficiary, a beneficiary in whose favour the trustee exercises his discretion is deemed to be presently entitled to the amount paid to him or applied for his benefit in the exercise of the discretion (section 101 of the Principal Act), and this amount is, according to the circumstances, included in the assessable income of the beneficiary in accordance with section 97 or section 100, or is assessed to the trustee under section 98.

So much of the net income of a trust estate to which no beneficiary is presently entitled (or deemed to be presently entitled) is included in an assessment to the trustee who is liable to pay tax on it as if it were the income of an individual (section 99 of the Principal Act).

Returning to the provisions of sub-section (2.) of the proposed section 94, paragraph (c) of that sub-section deals with cases where the whole of the net income of a trust estate is to be included in the one assessment, whether an assessment of the trustee or of a beneficiary.

Sub-paragraph (i) of paragraph (c) applies where a beneficiary in a trust estate is presently entitled to the whole of the income of the trust estate. In these circumstances, the net income of the trust estate is either, in pursuance of section 97 of the Principal Act, included in the assessable income of the beneficiary or, in pursuance of section 98 of the Act, assessed to the trustee.

The sub-paragraph does not apply where the beneficiary who is presently entitled is a company. Nor does it apply where the beneficiary is a person under the age of 16 years in relation to whose share in the income of the trust estate a later sub-section - sub-section (4.) - applies. Sub-section (4.) (notes on which are set out later in this memorandum) applies in relation to a person under 16 years of age who is a beneficiary in a trust estate that is not the estate of a deceased person.

It is to be noted that the sub-paragraph is expressed not to apply where the beneficiary who is presently entitled is himself a trustee of a trust estate. This does not mean, however, that the income to which such a beneficiary is presently entitled escapes the application of the sub-paragraph. As already indicated, other provisions contained in sub-section (5.) will render the sub-paragraph applicable to income that is outside the control of a trustee as a beneficiary, by making it, in relation to his trust estate, income which is outside his control as trustee of the trust estate.

In a case that falls within sub-paragraph (i) of paragraph (c) the section applies to the portion of the net income of the trust estate included in an assessment under section 97 or section 98 of the Principal Act that was derived from uncontrolled partnership income. Paragraph (b) of sub-section (5.), which is explained later in this memorandum, contains provisions for determining the portion of a trust's net income that was derived from uncontrolled partnership income.

Sub-paragraph (ii) of paragraph (c) deals with the case where no beneficiary is presently entitled to any of the income of the trust estate and the net income of the trust estate is included in an assessment to the trustee in accordance with section 99 of the Principal Act. In such a case the section applies to the portion of the net income of the trust estate that was derived from uncontrolled partnership income.

Paragraph (d) and paragraph (e) of sub-section (2.) apply the principles of sub-paragraphs (i) and (ii) of paragraph (c) to cases in which a share or part of the net income of a trust estate is being included in a particular assessment.

Paragraph (d) relates to the case where a beneficiary, who is neither a company nor a beneficiary under the age of 16 years in relation to whose share of the income of the trust estate sub-section (4.) applies, is presently entitled, otherwise than as a trustee, to a share of the income of the trust estate. In such a case the section is basically to apply to the part of the beneficiary's share of the net income of the trust estate that is determined, by application of the formula contained in the paragraph, to be uncontrolled partnership income.

The basic formula for determining this amount may be expressed as follows -

(The beneficiary's share of the net income of the trust estate) * (Uncontrolled partnership income included in net income of trust estate)/(Net income of trust estate)


.

As in sub-paragraph (i) of paragraph (c), paragraph (d) is expressed not to apply where the beneficiary is a trustee of a trust estate. An explanation of this has been given in relation to sub-paragraph (i) of paragraph (c).

Paragraph (e) applies where there is a part of the net income of the trust estate in respect of which no beneficiary is presently entitled, and which is included in an assessment of the trustee in accordance with section 99 of the Principal Act. The section is basically to apply in such a case to the proportion of the amount so included that represents uncontrolled partnership income.

The basic formula for determining this proportion may be stated as follows -

(Part of net income of trust estate included in assessment to the trustee.) * (Uncontrolled partnership income included in net income of trust estate)/(Net income of trust estate)


In the generality of cases, the amount of a share or part of the net income of a trust estate that is to be regarded for the purposes of paragraph (d) or (e) as including uncontrolled partnership income is, as already explained, to be determined in accordance with the relevant formula set out above. Also, as already noted, the portion of the net income of a trust estate that is derived from such income is to be determined in accordance with paragraph (b) of sub-section (5.).

It is anticipated, however, that there will be cases in which it would be inappropriate to apply the relevant formula. To meet these cases it is proposed by sub-section (6.) - see notes later in this memorandum - to authorise the Commissioner of Taxation to vary the fixed apportionment, on a basis that he considers reasonable in the circumstances, in any case where he deems this course warranted.

Sub-section (3.) applies in the case of a partner who is under the age of 16 on the last day of the year of income of the partnership.

The effect of the sub-section is to render the section applicable to such a partner's share in the net income of the partnership. The sub-section provides, however, that the amount of the share to which the section applies may be reduced in certain circumstances. These circumstances are where the partner has rendered services during the relevant year of income in producing the assessable income of the partnership.

Where this has occurred, the section will apply to the partner's share as reduced by the amount which the Commissioner considers would constitute reasonable salary or wages for the services if they had been performed by an employee of the partnership.

Where such a reduction is made in the income to which the section applies, the amount treated as reasonable salary or wages will be taxed in the hands of the partner without imposition of the further tax under section 94.

A taxpayer who is dissatisfied with the Commissioner's determination of reasonable salary or wages for this purpose will, of course, have the usual rights of objection and reference to a Taxation Board of Review.

Sub-section (4.) is primarily designed to ensure that the principles applied by sub-section (3.) in respect of partners under 16 years of age also apply in circumstances where, in lieu of the person under 16 being a partner in the partnership, a trustee for that person is the partner. In the absence of such a provision the application of the section could be avoided by the relatively simple device of making a trustee for a person under 16 years of age a partner in the partnership in lieu of admitting the person himself to the partnership.

The sub-section will also apply if there are one or more trust estates interposed between the trust estate the trustee of which is a partner and a beneficiary who is a person under 16 years of age at the end of the year of income of the partnership.

The sub-section will not apply where the beneficiary's interest in the income of the partnership is secured to him as a beneficiary in a testamentary trust or a trust resulting from an intestacy (referred to as a "prescribed trust"). However, it is to be noted that sub-section (2.) applies where income of such a trust estate is, or includes, uncontrolled partnership income.

Where sub-section (4.) applies it will, like sub-section (3.), apply to the beneficiary's share of partnership income coming to him through a trust estate (other than a "prescribed trust") as reduced by the amount which the Commissioner considers would be a reasonable reward by way of salary and wages for services rendered by him in the relevant year of income in the production of assessable income of the partnership. This reduction in relation to services will be made only if the beneficiary does not receive remuneration from the partnership for his services to it.

The sub-section will thus be capable of applying where the assessable income of a trust estate, other than a "prescribed trust", includes a share in the net income of a partnership. Where a trust estate derives its share of partnership income through one or more other trust estates, the proposed sub-section (5.) will determine the amount of partnership income which the final trust estate derives.

Where the assessable income of a trust estate (other than a trust estate of a deceased person) includes a share of partnership income, and a beneficiary under the age of 16 years on the last day of the year of income of the partnership is presently entitled to the net income of the trust estate or a share of that net income, the section applies in accordance with the succeeding provisions of sub-section (4.).

Under paragraph (a) of sub-section (4.) the section may, where a beneficiary under 16 is presently entitled to the whole of the trust's income, apply to the portion of the net income of the trust estate that was derived from the trust's share in the net income of a partnership. Sub-section (5.)(a) will determine the portion of the net income of a trust estate that is derived from its share in the net income of a partnership.

Paragraph (b) relates to the case where a beneficiary under 16 is presently entitled to only a share of the trust estate's income. In that case the section may apply in relation to so much of the beneficiary's share of the trust's net income as is derived from partnership income. In the generality of cases the amount of the beneficiary's share that is derived from partnership income will be determined in accordance with a formula contained in the paragraph.

The basis of ascertaining this amount may be broadly expressed in the following terms -

(The beneficiary's share of the net income of the trust estate) * (Portion of net income of trust estate derived from the partnership)/(Net income of trust estate)


. This basis may be varied, where it is appropriate to do so, by the operation of the proposed sub-section (6.).

Where either paragraph (a) or paragraph (b) apply, the amount determined in accordance with those paragraphs or sub-section (6.), as the case may be, is to be reduced if, in the year of income of the partnership to the income of which the section relates, the beneficiary rendered any services, without remuneration, in the production of assessable income of the partnership. The amount of the reduction is to be the amount that, in the opinion of the Commissioner of Taxation, would constitute reasonable remuneration by way of salary or wages for those services.

The Commissioner's opinion will be subject to the usual rights of objection and reference to a Taxation Board of Review.

Sub-section (5.) is designed to facilitate the operation of sub-sections (2.) and (4.) of the new section 94.

One of the purposes of the sub-section may be broadly stated as the provision of a basis for tracing income from a partnership in respect of which the section may operate, and which is initially income of a trust estate, through the trust estate or one or more other trust estates in succession. The tracing of the income is necessary so that sub-section (2.) or sub-section (4.) of the section, whichever is appropriate, may operate in relation to such income. The other purpose of the sub-section is to provide a basis for ascertaining the appropriate portion of the net income of a trust estate in respect of which the section may operate.

It is to be noted that the sub-section refers, for its purposes, to "income of a particular class". What may be such income for the purposes of the sub-section varies according to whether the sub-section is to be applied in relation to sub-section (2.) or sub-section (4.), which, as already explained, have somewhat different purposes.

For the purposes of sub-section (2.), sub-section (5.) applies in relation to uncontrolled partnership income, i.e., the share or part of the share of net income of a partnership that is outside the control of a trustee of a trust estate who, as trustee of the trust estate, is a partner in the partnership. This uncontrolled partnership income is income of a particular class for the purposes of sub-section (5.) in its operation in relation to sub-section (2.).

For the purposes of sub-section (4.), sub-section (5.) applies in relation to a share in the net income of a partnership that is included in the assessable income of a trust estate, the trustee of which is a partner in the partnership and the person who, either directly or through a succession of trust estates, has a beneficial interest in the partnership income of the trust estate, is under 16 years of age. A share in the net income of a partnership is in these circumstances income of a particular class for the purposes of sub-section (5.) in its operation in relation to sub-section (4.).

Paragraph (a) of the sub-section will apply where partnership income is, in whole or in part, of either of the particular classes of income referred to above. The purpose of the sub-section is to ensure that, where income has a particular character in the hands of a trustee who is a partner, the same character also attaches to the income in relation to any further trust estate that has a direct or indirect interest in the income.

Sub-paragraph (i) of paragraph (a) states a primary condition for the application of the paragraph. This is that the assessable income of a trust estate includes the net income or a share of the net income of another trust estate.

Sub-paragraph (ii) renders the paragraph applicable when it is found that the circumstances referred to in sub-paragraph (i) exist and, further, that the assessable income of the other trust estate includes partnership income of a particular class. Where the further circumstance is found also to exist, the assessable income of the trust estate that includes all, or a share, of the net income of the other trust estate is deemed also to include income from the partnership of that particular class, of an amount determined in accordance with the provisions of paragraph (a).

The amount that is, by virtue of paragraph (a), to be deemed to be income from the partnership is, in general, a proportion of the part of the net income of the other trust estate that is derived from income from the partnership.

Where the paragraph is to be applied for the purposes of sub-section (2.), the proportion is -

(Amount of net income of the other trust estate included in the assessable income of the trust estate) * (Portion of net income of the other trust estate derived from uncontrolled partnership income)/(Net income of the other trust estate)


Where the paragraph is to be applied for the purposes of sub-section (4.) in relation to a beneficiary in the trust estate who is under 16 years of age the proportion may be expressed as follows -

(Amount of net income of the other trust estate included in the assessable income of the trust estate) * (Portion of net income of the other trust estate derived from a share in the net income of the partnership)/(Net income of the other trust estate)


Where, however, income from a partnership that is included in the net income of a trust estate cannot appropriately be related proportionately to each share or part of that net income, sub-section (6.) authorises the Commissioner of Taxation to substitute an altered basis of apportionment.

Paragraph (b) of sub-section (5.) provides a basis for determining, for the purposes of sub-section (4.), the portion of the net income of a trust estate that is derived from a share of the trust estate in the net income of a partnership. As noted above, it also applies to determine, for the purposes of sub-section (2.), the portion of the net income of a trust estate that is derived from uncontrolled partnership income.

Broadly stated, the paragraph provides that the portion of the net income of a trust estate that is derived from such partnership income is the amount remaining after deducting from the trust's share of that income -

(a)

any deductions taken into account in determining the trust's net income that relate exclusively to the partnership income (referred to in the paragraph as "prescribed deduction");

(b)

so much of any other deductions so taken into account (other than "apportionable deductions") as may appropriately be related to the partnership income; and

(c)

an appropriate proportion of the apportionable deductions taken into account in determining the trust's net income.

A definition of the term "apportionable deductions" is being inserted in section 6 of the Principal Act and is explained at page 7 of this memorandum.

As already noted, the purpose of sub-section (6.) is to provide, where appropriate, for a variation of specified bases of apportionment of partnership income derived by a trust estate between each share or part of the net income of the trust estate, in respect of which parts or shares there are, for example, different beneficiaries. These bases are specified in earlier provisions of the new section 94 (paragraphs (d) and (e) of sub-section (2.), paragraph (b) of sub-section (4.) and paragraph (a) of sub-section (5.)).

Cases could arise in which partnership income derived by a trustee does not relate proportionately to each share or part of the net income of the trust estate, e.g., where one beneficiary has the interest in uncontrolled partnership income and another the interest in other income of the estate. In any such case, sub-section (6.) authorises the Commissioner of Taxation, in applying section 94, to treat each share or part of the net income of the trust estate as including such amount of partnership income as he considers reasonable in the circumstances.

Sub-section (7.) is designed to ensure that section 94 is not applied in respect of a person's share of income from certain joint ownerships of property.

For income tax purposes, "partnership" is given a broader meaning than it has under the general law. Under section 6 of the Principal Act "partnership" means, in addition to an association of persons carrying on business as partners, an association of persons in receipt of income jointly. Joint owners of income-producing property may thus constitute a partnership for income tax purposes.

It has been held that joint ownership of property such as a building that is let to tenants confers on each of the joint owners a real control of his share of the joint income from the property.

As to joint-owners of such property who are over 16 years of age, the section will, when each joint-owner has real control of his share, not, of course, have any application. However, the effect of sub-sections (3.) and (4.) of the new section 94 is to deem a person who has an interest in any partnership, and who is under 16 years of age, not to have real control of his share of the partnership income, so that the section automatically applies to the amount of his share.

In these circumstances, it is necessary to ensure that the relevant sub-sections do not apply in relation to a person under 16 years who has a joint interest in certain income-producing property.

Sub-section (7.) is designed to serve this purpose. It provides that sub-sections (3.) and (4.) will not apply to a share in the net income of a partnership -

(a)

that is not carrying on a business;

(b)

whose only income is from interest, dividends, rent or royalties; and

(c)

in which all the partners own jointly or in common the property from which the partnership income is derived.

Sub-section (8.) is an important provision under which it is proposed to authorise the Commissioner of Taxation not to apply the section to any income to the extent that he considers, by reason of the existence of special circumstances, it would be unreasonable for the section to apply. He will thus be authorised not to apply the section to the whole or part of income to which it would otherwise apply.

A decision of the Commissioner under this section will be subject to the usual rights of objection and reference to a Taxation Board of Review. A Board of Review may substitute its own opinion for that of the Commissioner.

Sub-section (9.) has the purpose of establishing a liability for further tax under section 94 in relation to a taxpayer, other than a taxpayer in the capacity of a trustee. The liability of a trustee to the further tax is established by later sub-sections - sub-sections (11.) and (12.).

Sub-section (9.) applies where the assessable income of such a taxpayer includes income to which the section applies. It will thus operate where the assessable income of a partner includes partnership income over which he lacks, or is treated as lacking, real control. It will also operate in the case of a beneficiary whose assessable income includes a share of the net income of a trust estate, all or part of which is treated by earlier provisions of the section as income to which the section applies.

A taxpayer whose assessable income includes income to which the section applies is to be liable to pay further tax, at the rate to be declared by the Parliament for the purposes of the section, upon the portion of his taxable income that is derived from income to which section 94 applies.

Broadly speaking, the portion of a person's taxable income that is derived from section 94 income will be the net amount of the section 94 income. Sub-section (10.) states the basis on which this net amount is to be ascertained (see notes on that sub-section later in this memorandum).

The new section 94 is proposed to apply for the first time in relation to income of the 1965-66 income year. The rate of further tax under the section will not need to be declared before the Act declaring the rates of income tax for the 1965-66 financial year is considered by the Parliament.

It is intended that the effective rate of tax on the portion of a taxpayer's taxable income to which section 94 applies will be the greater of 10s. in the Pd1 or the taxpayer's "average basic rate of tax". The whole of the taxable income, including income to which section 94 applies, will be subject to tax at the rate prescribed for a taxable income of the relevant amount or, where the averaging provisions apply in the case of a primary producer, for an average income of the relevant amount.

The "average basic rate of tax" will be ascertained by dividing the tax on the taxable income by the amount of the taxable income. Where the "average basic rate of tax" is less than 10s. in the Pd1 a further rate will be imposed on the portion of the taxable income to which section 94 applies to bring the effective rate applied to that portion up to 10s. in the Pd1. If the "average basic rate of tax" is 10s. or more, no further tax under section 94 will be imposed.

Following an amendment to section 221YA of the Principal Act proposed by clause 44 of the Bill, provisional tax will not be payable in relation to further tax imposed in accordance with section 94. This course will not, of course, affect the amount of the ultimate liability for tax.

Sub-section (10.), as already noted, sets out the method of determining the portion of the taxable income of a taxpayer that is derived from income to which section 94 applies.

That portion is, broadly stated, the amount remaining after deducting from the income to which section 94 applies that is included in the taxpayer's assessable income -

(a)

any deductions allowable to the taxpayer that relate exclusively to the section 94 income;

(b)

so much of any other deductions (other than apportionable deductions) allowable to the taxpayer as may appropriately be related to the section 94 income; and

(c)

an appropriate proportion of the taxpayer's apportionable deductions. (The term "apportionable deductions" is to be defined in section 6 of the Principal Act (see page 7 of this memorandum) and broadly means concessional and other deductions to which a taxpayer may be entitled and which cannot appropriately be taken as relating to any particular income.)

Sub-section (11.) and sub-section (12.) establish a liability for further tax in assessments of trustees in respect of income that includes income to which section 94 applies.

Sub-section (11.) applies where a trustee is assessed under section 98 of the Principal Act, i.e., where he is assessed in respect of trust income to which a beneficiary who is under a legal disability is presently entitled.

Where a trustee is assessable under section 98 the amount of income on which he is so assessable is the beneficiary's share of the net income of the trust estate reduced by certain concessional deductions. Those deductions are, broadly stated, the concessional deductions that the beneficiary would be entitled to if he, and not the trustee, were assessed in respect of the share. Also included are medical expenses of the beneficiary paid by the trustee.

If a trustee is assessable under section 98 in respect of the net income of a trust estate, or a share of that net income, and section 94 applies to a portion of that net income or share, the trustee is to be liable to pay further tax upon that portion as reduced by a proportion of any concessional deductions allowable in the assessment. Earlier provisions, namely, paragraphs (c) and (d) of sub-section (2.), sub-section (4.), paragraph (b) of sub-section (5.) and sub-section (6.) determine, in varying circumstances, the portion of net income, or of a share of net income, that is income to which section 94 applies.

The further tax payable by the trustee will be calculated on a basis corresponding to that proposed under sub-section (9.) in relation to individual taxpayers.

Where a trustee pays further tax in accordance with sections 94 and 98 in respect of a beneficiary's share, and the beneficiary is himself assessed in respect of that share because he derives other income or is a beneficiary in another trust estate, the tax and further tax paid or payable by the trustee will be deducted from the tax and further tax payable by the beneficiary.

Sub-section (12.) deals with cases where a trustee is assessable under section 99 of the Principal Act on net income of the trust estate to which no beneficiary is presently entitled. If a portion of that income is income to which section 94 applies the trustee is to be liable to pay further tax thereon on the same basis as provided in sub-section (9.) for taxpayers who are not trustees. The portion of the net income in respect of which, in varying circumstances, a liability to further tax may exist is specified in paragraphs (c) and (e) of sub-section (2.), paragraph (b) of sub-section (5.), and sub-section (6.).

If a trustee is, under the proposed new section 99A, required to pay tax at a rate of 10/- in the Pd, in respect of income to which no beneficiary is presently entitled, there will not be any further tax liability in relation to that income under section 94.

Sub-section (13.) defines three expressions used in section 94.

Notes on the three definitions are:-

"prescribed deductions": This term, which is used in paragraph (b) of sub-section (5.), means the deductions that are allowable in calculating the net income of a trust estate in accordance with section 95 of the Principal Act. Those deductions are, broadly, all allowable deductions other than concessional deductions and certain losses of previous years.

"prescribed trust" : This definition is used in sub-section (4.) for the purpose of excluding from the operation of the sub-section partnership income of a person under the age of 16 years that comes to him as a beneficiary in a trust resulting from the will or intestacy of a deceased person. The term is defined to mean a trust that resulted from -

(a)

a will or codicil or an order of a court varying or modifying a will or codicil; or

(b)

an intestacy or a court order varying the application of the rules for distribution of the estate of a person who died intestate.

"share in the net income of a partnership" : This expression is defined as meaning the individual interest of a partner in the net income of the partnership. For the purposes of the section, it also includes any income derived from the partnership by the partner otherwise than as a partner. This extended meaning is necessary in order to prevent the section's application being circumvented by the allocation to a partner of amounts that may not be said to be derived by him as part of his individual interest in the partnership.

The amendments proposed by clause 24 are to apply in assessments for the income year 1965-66 and subsequent years.

Clause 25: Trust Income to which No Person is Presently Entitled.

Introductory Note :

By this clause it is proposed to repeal section 99 of the Principal Act and insert in its stead two new sections - a redrafted section 99 and section 99A.

The redrafting of section 99 has enabled consistency to be achieved between certain wording in that section and the new section 99A. The new section 99A will provide the basis for imposing a special rate of tax on the accumulated income of certain trust estates.

Section 99 as at present enacted makes the trustee of a trust estate liable to be taxed on income of a trust estate to which no beneficiary has a present entitlement, i.e., in broad terms, income in respect of which a beneficiary does not have a presently existing right to demand payment. An example of a case in which a beneficiary is not presently entitled to income of a trust estate is where the trustee is required by the instrument of trust to accumulate the income and pay it to the beneficiary if and when the beneficiary reaches a specified age.

The broad purpose of section 99 is to ensure that tax is paid on income of a trust estate that is not included in the assessable income of a beneficiary under section 97 (where the beneficiary is presently entitled to the income and not under a legal disability) or in respect of which the trustee is not liable to be assessed under section 98 (where a beneficiary is presently entitled to the income but is under a legal disability).

Where the present section 99 applies in relation to income, the trustee is taxed on the income as if it were the income of an individual. If the net income of a year of income is Pd208 or less, therefore, the trustee is not liable to tax. Where it is Pd209 or more, tax is payable by the trustee at the appropriate rate prescribed for an individual taxpayer. When income to which section 99 applies eventually reaches a beneficiary, it is not taxed in the hands of the beneficiary.

The proposed new section 99 will operate in the same way as the section it replaces. The proposed section 99A will, however, apply in relation to some trust estates to which section 99 would otherwise apply. Where section 99A applies, it is proposed that tax at the flat rate of 10s. in the Pd1 will be imposed on income being accumulated in the trust, irrespective of the amount of the income of the year of income.

The proposed section 99A will not, in any circumstances, apply to the income of the estates of deceased persons, or a trust estate constituted by will. Nor will it apply in relation to income of other trust estates if the Commissioner of Taxation, having regard to certain criteria, considers it would be unreasonable for the section to apply.

Notes on the new sections are set out hereunder.

Section 99 : Certain Trust Income to be Taxed as Income of an Individual.

The new section 99 will not effect any change in the practical application of the law in relation to cases that fall within its scope.

As redrafted, the section will operate subject to section 99A. That section may apply to the same type of case as section 99, but certain cases are specifically excluded from its operation. Section 99 will apply to the cases excluded from the operation of section 99A. As already noted, the estates of deceased persons are excluded from the scope of section 99A and section 99 will continue to apply in relation to such trust estates. Also excluded from section 99A are cases involving circumstances which the Commissioner of Taxation considers warrant the application of section 99 rather than section 99A.

Sub-section (1.) of the new section 99 is a drafting measure. Its purpose is to ensure that section 99 applies to income of a trust estate of a year of income only if the proposed section 99A does not apply to that income.

Sub-section (2.) re-expresses the existing provisions of section 99.

Paragraph (a) of sub-section (2.) makes the section applicable in the case where there is no part of the net income of a trust estate that is included in the assessable income of a beneficiary under section 97 of the Principal Act or in respect of which the trustee is liable to be assessed under section 98 of that Act.

In other words, the paragraph brings within the scope of the section the case where no beneficiary is presently entitled to any part of the income of a trust estate.

Paragraph (b) of sub-section (2.) renders the section applicable in the case where there is some part of the income of a trust estate that is not included in the assessable income of a beneficiary under section 97 and in respect of which the trustee is not liable to be assessed under section 98, i.e., to the case where there is a part only of the income of a trust estate to which no person is presently entitled.

In a case to which either paragraph (a) or paragraph (b) refers, and to which the new section 99A does not apply, the trustee of the trust estate will, by virtue of sub-section (2.) of the new section 99, be liable to be assessed and pay tax on the relevant amount of income as if it were the income of an individual not subject to any deduction. This is the same as would occur under the existing section 99.

It may be noted that the amendment does not operate to bring within the scope of section 99 any income which is not effectively taxed under section 97 or section 98 for the reason only that it is less than the minimum taxable amount (at present Pd209).

Section 99A : Certain Trust Income to be Taxed at Special Rate.

As stated in the introductory note to this clause, it is proposed that certain trust income to which section 99 would otherwise apply will be taxed at a special rate of tax. The new section 99A provides the basis for the imposition of the special rate. The rate proposed, and to be formally declared in separate legislation to be introduced at a later date, is 10s. in the Pd1.

Sub-section (1.) of the new section 99A is the first of two sub-sections that specify categories of trust estates that are excluded from the operation of the section. Sub-section (1.) provides that the section is not to apply to the income of the estate of a deceased person of any year of income.

Paragraph (a) of the sub-section excludes from the scope of the section any trust estate that resulted from a will or a codicil to a will. It also excludes a trust that resulted from an order of a court that varied or modified the provisions of a will or codicil.

Paragraph (b) excludes any trust that resulted from an intestacy. A trust that resulted from a court order that varied or modified the operation of the general law in relation to the distribution of the estates of persons who died intestate is also excluded by the paragraph.

It may be observed at this point that the effect of section 101A of the Principal Act is to treat as assessable income of the trustee of a deceased person's estate any amount received by the trustee after the person's death that would, if it had been received by the person in his lifetime, have been included in that person's assessable income. These amounts are deemed by section 101A to be income to which no person is presently entitled and thus are assessed to the trustee in accordance with section 99.

Sub-section (1.) of the new section 99A will ensure that this position is not disturbed. These amounts will accordingly continue to fall for assessment under section 99.

So will any income of the estate of a deceased person to which no beneficiary has a present entitlement because of the state of administration of the estate or other factors.

Sub-section (2.) authorises the Commissioner of Taxation to exclude certain other trust estates from the operation of section 99A.

The sub-section provides that the section is not to apply in relation to the income of a trust estate of a year of income if the Commissioner of Taxation is of the opinion that it would be unreasonable for the section to apply.

A subsequent provision - sub-section (3.) - directs the Commissioner to consider certain specified matters in determining whether it would be unreasonable for the section to apply. He is also to be authorised, in forming his opinion, to have regard to any other matters that he thinks should be considered.

The Commissioner's opinion under the sub-section is required to be formed in relation to each year of income. If the Commissioner decides that it would not be unreasonable for the section to apply to the income of a particular year, he will not be precluded from changing this view in relation to another year, e.g., where he considers that a change in circumstances warrants that course. Conversely, if the Commissioner decides that the section should not apply in relation to a particular year he may, having reviewed the relevant circumstances, form an opinion that results in its application in another year.

Where the Commissioner, having considered the various matters he is bound or authorised to consider, determines that it would be unreasonable for the section to apply to income of a year, the relevant income of the trust estate of that year will fall for assessment to the trustee under section 99 in lieu of section 99A. In any case where the Commissioner does not exercise his authority to apply section 99, rather than section 99A, to income of a trust estate, the trustee will have the usual rights of objection and reference to a Taxation Board of Review. The Board, may, of course, substitute its opinion for that of the Commissioner.

Sub-section (3.), as already noted, requires the Commissioner to have regard to certain matters in forming an opinion for the purposes of sub-section (2.).

Paragraph (a) of the sub-section directs the Commissioner to consider the circumstances and conditions in which property (which includes money) was acquired by the trust estate or lent to it. He is also to consider the circumstances and conditions in which income was derived by the trust estate. He is, in addition, to have regard to the circumstances and conditions in which any benefits have been conferred on the trust estate, or any special rights or privileges have been conferred on, or attached to, property of the trust estate, e.g., the circumstances in which special dividend rights have been attached to private company shares included in the property of the trust. The Commissioner is not, however, obliged to consider whether any special rights or privileges conferred on, or attached to, property of the trust have been exercised.

Paragraph (b) sets out a further matter which the Commissioner is obliged to consider in forming his opinion as to whether it would be unreasonable for section 99A to apply in relation to a particular trust estate.

In effect, the paragraph directs the Commissioner to consider specified actions of a person in connection with a particular trust estate in association with any actions of the same type by the same person in connection with any other trust estate except the trust estate of a deceased person. If the Commissioner finds it to be a fact that a person who has acted in any of the specified ways in relation to the particular trust has not also acted in any of those ways in relation to another trust, he is to take account of that fact in forming his opinion for the purposes of the section.

Sub-paragraph (i) and sub-paragraph (ii) of paragraph (b) specify actions by a person in connection with the particular trust estate to which the Commissioner is required to have regard in determining the factual situation referred to above.

Sub-paragraph (i) refers to the transfer or loan of property to, or the conferring of benefits on, the particular trust estate by the person, whether done in a direct or an indirect manner.

Sub-paragraph (ii) refers to the conferring or attaching of any special rights or privileges in any way on the property of the particular trust estate by the person, whether alone or in association with other persons.

Sub-paragraph (iii) and sub-paragraph (iv) specify actions by the same person in connection with another trust estate (except an estate of a deceased person) to which the Commissioner is required to have regard in determining the relevant factual situation. These actions are of the same nature as those specified in sub-paragraphs (i) and (ii).

The effect of the paragraph may be summarised, in broad terms, by saying that if a person who has, at any time and in any way, done any of the things specified in sub-paragraphs (i) and (ii) in relation to the particular estate has not also, at any time and in any way, so acted in relation to another trust estate (other than a trust estate of a deceased person), the Commissioner is to have regard to the fact for the purpose of forming his opinion for the purposes of sub-section (2.).

Paragraph (c) of sub-section (3.) authorises the Commissioner to consider for the purposes of the sub-section any other matters that he thinks fit, in addition to those set out in paragraphs (a) and (b).

Sub-section (4.) of the new section 99A specifies the income of a trust estate to which the section may apply.

Paragraph (a) and paragraph (b) of sub-section (4.) are expressed in the same terms as paragraph (a) and paragraph (b) of sub-section (2.) of section 99. The effect of this has already been explained. Briefly, it is that section 99A may be applied to any income of a trust estate that is not included in the assessable income of a beneficiary or in respect of which the trustee is not otherwise liable to be assessed, i.e., income to which no beneficiary is presently entitled.

Sub-section (4.) provides that where the section applies to income of a trust estate, the trustee shall be assessed and is liable to pay tax on the income at the rate declared by the Parliament for the purposes of the section.

As already noted, the rate will be declared in separate legislation, and is intended to be 10s. on each Pd1 of income.

Unlike section 99, section 99A does not provide that the trustee shall be assessed and liable as if the income were the income of an individual. It is intended that tax will be payable under section 99A even though the income for a year of income to which the section applies is Pd208 or less. It is to be noted, however, that if income of a trust estate to which section 97 or section 98 of the Principal Act applies is not effectively taxed under one of those sections, for the reason only that it is less than the minimum amount taxable in the hands of an individual, section 99A does not have the effect of imposing tax on that income.

Sub-section (5.) of section 99A provides that the section is not to apply to so much of the income of a trust estate as is being accumulated for the benefit of certain funds, organisations and institutions, the income of which is specifically exempt from tax under various provisions of section 23 of the Principal Act. These include religious, scientific, charitable and public educational institutions, public hospitals, etc.

The sub-section applies to exclude from the operation of section 99A the portion of income to which the section would otherwise apply and in which the institution or body has an indefeasibly vested interest. The sub-section authorises the Commissioner to determine the amount to be excluded from the operation of the section on this basis. The determination of the Commissioner will be open to the usual rights of objection and reference to a Board of Review.

It may be noted that, by virtue of the new section 121DB proposed to be inserted in the Principal Act by clause 34 of the Bill, section 99A does not apply in relation to income derived by a trustee of a superannuation fund that is not exempt from tax.

An amendment to section 221YA of the Principal Act proposed by clause 44 of the Bill will ensure that provisional tax is not imposed in relation to income to which the new section 99A applies. The non-imposition of provisional tax will not, of course, affect the ultimate liability for tax under the section. The application of the provisional tax provisions of the Principal Act in relation to income to which section 99 applies is not to be altered.

The amendments made by clause 25 will apply to the income of trust estates of the income year 1965-66 and subsequent years. The new section 99A will operate for that year and subsequent years irrespective of when a trust to which it applies was created.

Clause 26: Discretionary Trusts.

This clause makes a drafting change in section 101 of the Principal Act. That section relates to discretionary payments of trust income by a trustee to or for the benefit of a beneficiary in the trust.

Where a trustee exercises a discretion to pay or apply income to or for the benefit of a beneficiary, the beneficiary is deemed by section 101 to be presently entitled to the amount so paid to him or applied for his benefit.

The section as at present enacted is expressed to apply only for the purposes of Division 6 of Part III of the Principal Act. That Division relates to the taxation of income derived by trustees. To remove any doubts that the expression "presently entitled", when used in other provisions of the Act such as the new section 94, refers to amounts subject of the deeming provisions of section 101, it is proposed by this clause that section 101 should apply for the purposes of the Act as a whole, and not only Division 6.

The amendment first applies to assessments in respect of the 1965-66 income year.

Clause 27: Alienation of Income for Short Periods.

Introductory Note :

By this clause it is proposed to insert a new Division - Division 6A - in the Principal Act. The broad effect of the new Division will be to deem certain income transferred by a person to another person to remain the income of the transferor for income tax purposes. There are no strictly comparable provisions in the present income tax law.

Once income has been derived by a person, any disposal of it to another cannot relieve the person who derived it of liability to be taxed on the income. But if a person effectively transfers (whether or not for valuable consideration) his right to derive certain income, the income is thenceforth derived by the transferee even though the transferor retains the income-producing property.

Some classes of income cannot be effectively alienated. Salaries and professional fees are two examples. Judicial dicta indicate that a shareholder cannot effectively assign, for Australian income tax purposes, his right to receive dividends on shares.

The new Division will apply only when there is a legally effective transfer. If there is not a legally effective transfer, the income subject of the purported transfer remains the income of the transferor for income tax purposes without the aid of the new Division. The new legislation will not, of course, make any assignment that is ineffective under the general law effective for income tax purposes.

An example of the type of case to which the Division may apply is where a taxpayer, who wishes to make a gift that would not be deductible for income tax purposes, transfers part of his income to the person or organization he intends to benefit. The effect upon his tax liability is the same as if a deduction had been allowed for an amount equal to the amount of income transferred.

In broad terms, the proposed new provisions will operate in the manner described in the next four paragraphs of this memorandum.

The new provisions will apply in relation to a valid transfer of a right to receive income made by any person (including a company) after the date specified in the Bill, whether or not the transfer is made for valuable consideration. They will not apply if the transferor of a right to receive income also transfers his interest in the property that produces the income. They will not apply, either, unless the transfer is, or may be, for a period of less than seven years. The possible termination of the transfer before the end of seven years because of the death of some person or the legal incapacity (e.g., bankruptcy) of the transferee will not be regarded as making a transfer one for less than seven years.

Where the provisions apply, the transferred income will in all cases be deemed to be the income of the transferor for income tax purposes. Generally, the income will not also be treated as income of the transferee for income tax purposes.

Where, however, the transferred income would, if received by the transferee independently of the transfer, be assessable income of the transferee, it will continue to be such income although also included in the assessable income of the transferor. An example of this situation is where a person transfers income to meet a liability to the transferee which, if paid independently of the transfer, would be assessable income of the transferee. If the liability so discharged was incurred by the transferor in producing assessable income the amount of it will be an allowable deduction to him. In these respects, the tax position of both parties to the transfer will be the same as if, in lieu of the transfer, a direct payment had passed between transferor and transferee.

The new provisions will also ensure that where income is transferred by way of gift for the benefit of a fund or organization, gifts to which are deductible for income tax purposes, the transferor will be in the same position as if he had made a direct gift of an equal amount to the fund or organization.

The new provisions will not disturb the present operation of the income tax law in relation to transfers made to provide alimony or maintenance for a wife or former wife.

Explanations of each of the sections in the proposed new Division 6A follow.

Section 102A : Interpretation.

This section is a drafting provision defining the meanings to be given to certain words and expressions used in Division 6A.

Sub-section (1.) contains four definitions. They are:-

"interest" : This word is defined to mean, in relation to property, any legal or equitable estate or interest in the property. A person who has a life interest in property will thus be regarded, for the purposes of Division 6A, as having an interest in property.

"property" : This word is given its usual interpretation, i.e., any property whether real or personal.

"right to receive income from property" : This expression specifies the type of right a transfer of which may be subject to the Division. The term means a right to have income that will or may be derived from property paid to, or applied or accumulated for the benefit of, the person owning the right. (Sub-section (3.) of section 102A further defines what is meant in certain cases by "income that will or may be derived from property".)

"the prescribed date" : This term is used to declare the date up to which a transfer of a right to receive income must subsist if the legislation is not to apply to the income transferred. It means the day preceding the seventh anniversary of the date on which income from property is first paid to, or applied or accumulated for the benefit of, the transferee by reason of the transfer. Transfers for a full seven years or longer will thus not be affected by the new Division.

Sub-section (2.) is a drafting measure the purpose of which is to ensure that all transfers of a right to receive income from property, whether made for valuable consideration or not, fall within the general scope of the Division.

For it to be effective, it is necessary for the Division to apply in relation to transfers for valuable consideration. The consideration for a transfer may often be not greatly less than the quantum of income transferred and it may be paid to the transferor by the transferee out of the income received. In this way, the transferor may receive, in the form of capital sums, amounts which would have been received as income if he had not made the transfer.

Sub-section (3.) is designed to eliminate a doubt that might otherwise exist as to whether a beneficiary in a trust estate carrying on a business, who transfers his right to income from the trust estate, thus transfers a right to receive income from property. For this purpose the sub-section deems any income that will, or may be, derived by a trust estate from a business carried on by the trustee of the trust estate to be income that will, or may be, derived from property.

Sub-section (4.) is a further interpretation provision.

Under paragraph (a) of sub-section (4.) a person who declares that he holds a right to receive income from property upon trust for another person, or transfers such a right to a trustee to be held on trust for another person, is deemed to have transferred the right to the other person.

Paragraph (b) deals with cases where a transfer of a right to income is for the benefit of two or more persons in succession. If a person declares that he holds a right to receive income from property upon trust for two or more other persons in succession or transfers such a right to, or to a trustee to be held on trust for, two or more other persons in succession, the right is to be deemed to be separately transferred to each of those other persons. The period for which the right is to be regarded as separately transferred to each person is to be the period for which the right is held upon trust for, or transferred to, each person.

The effect of this provision will be that if the transfer for the benefit of any of the persons may be for less than the specified time, the Division may apply in relation to the income which that person derives by virtue of the transfer.

Sub-section (5.) relates to transfers by two or more persons jointly.

If an interest in property or a right to receive income from property is transferred by two or more persons jointly, each of those persons is to be regarded, for the purposes of the Division, as having transferred an interest in the property or a right to receive income from the property.

Section 102B : Certain Income Transferred for Short Periods to be Included in Assessable Income of Transferor.

Section 102B is the operative provision which requires income transferred to be treated as assessable income of the transferor.

Sub-section (1.), which is subject to other provisions of the section (particularly sub-section (2.)), specifies the circumstances in which the section is to apply.

The sub-section provides that the section may apply where a right to receive income from property (as defined in section 102A) is transferred by a person to another person after the date specified in the sub-section. The section will not apply where the transfer is made before that date or by a will or codicil. It may, as already explained, apply whether or not consideration is given for the transfer.

For the section to apply, sub-section (1.) requires that the period for which a right to receive income from property is transferred will terminate before "the prescribed date" (as defined in section 102A(1.)) or may, for any reason, other than the death of a person or the legal disability of the transferee, terminate before that date. Accordingly, a provision in an instrument of transfer for a period of seven years or more that the transfer is to determine if the transferee dies, or becomes bankrupt or of unsound mind, would not render the section applicable in relation to the transfer.

A further condition for the application of the Division provided by sub-section (1.) is that the income the right to which is transferred would, but for the transfer, have been included in the assessable income of the transferor. The section will, accordingly, not apply to a transfer of a right to receive exempt income.

Where the Division applies in relation to a transfer of a right to receive income from property, any income derived from the property that is paid to, or applied or accumulated for the benefit of, the transferee by reason of the transfer is to be treated for income tax purposes as if the transfer had not been made. Accordingly, it will be included in the assessable income of the transferor and, conversely, the transferred income will not be treated as the income of the transferee or any other person (but see in this respect the notes on paragraph (d) of the proposed sub-section 102C later in this memorandum).

Sub-section (2.) excludes from the operation of the Division any transfer of a right to receive income from property where the right was not a right that arose from the ownership by the transferor of an interest in the property. It also excludes the transfer of a right arising from the ownership by the transferor of an interest in property where the transferor has transferred that interest to the transferee or another person.

Sub-section (3.) has the purpose of terminating the operation of the Division in relation to transferred income on the happening of specified events. The Division ceases to apply in relation to income derived after the date of death of the transferor. Where the transferor is a company, the Division does not apply in relation to income derived after the date on which the company ceases to exist. The Division may, however, apply while a company is in liquidation.

The purpose of sub-section (4.) is to exclude from the new legislation certain transfers made to provide alimony or maintenance.

Under section 23(1) of the Principal Act, income received by way of periodical payments in the nature of alimony or maintenance, by a woman from her husband or former husband, is exempt from income tax in the hands of the woman, provided that for the purpose of making such payments, the husband or former husband has not, among other things, diverted from himself income upon which he would otherwise have been liable to tax.

If the husband or former husband has so diverted income from himself, his wife or former wife is assessable on the income. The effect of sub-section (4.) will be to continue the operation of the present law in these cases.

Sub-sections (5.) and (6.) provide authority for the amendment of an assessment of a transferee in certain specified circumstances.

The sub-sections do not affect the powers of the Commissioner of Taxation to amend an assessment of a transferor to include or exclude transferred income from his assessable income. The Commissioner's powers to amend in such cases will be governed by the present provisions of section 170 of the Principal Act.

The object of sub-sections (5.) and (6.) is to authorise amendment of the assessment of a transferee to ensure that his liability, if any, to be taxed on the income accords with the transferor's liability to be taxed under the Division in respect of that income.

Sub-section (5.) authorizes the amendment, at any time, of the assessment of a transferee to exclude from his income an amount that, by virtue of sub-section (1.), is deemed to be assessable income of the transferor. Sub-section (6.) applies in the converse case. If an amount has been excluded from the assessable income of a transferee on the basis that it is to be treated as income of the transferor, but it subsequently becomes necessary to exclude the income from an assessment of the transferor, sub-section (6.) will permit the Commissioner of Taxation to amend an assessment of the transferee to include the amount in the assessable income of the transferee, if he has excluded it from the assessable income of the transferor.

Section 102C : Effect of Certain Transfers of Rights to Receive Income from Property.

This section is designed to ensure that where the new section 102B applies to deem income to be that of a transferor, the income tax position of the parties to the transfer is to be restored to what it would have been if an equivalent amount had been paid by the transferor to the transferee for the purpose for which the transfer was made.

For section 102C to apply, the tests in paragraphs (a) and (b) of the section must be satisfied.

Under paragraph (a) it is necessary that income be paid to, or applied or accumulated for the benefit of, a transferee by reason of the transfer to him of a right to receive income from property.

The further test in paragraph (b) is that the income be, by virtue of section 102B, included in the assessable income of the transferor.

Where the tests in paragraphs (a) and (b) are met, the section states the effect of its application on the transferor and the transferee.

Paragraph (c) applies in relation to the transferor. It provides that for the purposes of the Principal Act the income shall be deemed to have been paid by the transferor to the transferee at the time at which it was paid to, or applied or accumulated for the benefit of, the transferee by reason of the transfer, and to have been paid for the purpose for which the right was transferred.

Accordingly, if income is transferred, as a gift, to a fund or organization listed in the gift provisions of the income tax law (section 78(1.)(a) of the Principal Act), the transferor will be treated as having made a gift to the fund or organization and, subject to the general provisions of the income tax law, will qualify for a deduction in respect of the amount.

Correspondingly, if income is transferred for an income-producing purpose the transferor will qualify for a deduction in respect of the income transferred to the transferee, to the same extent as he would have so qualified if he had made a direct payment to the transferee for that purpose.

Paragraph (d) applies section 102C in relation to the transferee where the transferred income is deemed by section 102B to be income of the transferor.

The paragraph requires a determination as to whether, if the right to income had not been transferred but the transferor had paid to the transferee for the purpose for which the transfer was made, an amount equal to the transferred income, that amount, or a part of it, would have been included in the assessable income of the transferee.

Where it is determined that the amount (or part of it) would have been included in the assessable income of the transferee, an equivalent amount is to be included in the assessable income of the transferee.

An example of the application of the paragraph is a case in which income is transferred to meet interest due under a loan. Paragraph (d) will ensure that the transferee is not relieved of his liability to be taxed on the amount that he receives as interest in pursuance of the transfer.

The new Division 6A will first apply in relation to income that is, by virtue of the Division, deemed to be income of a transferor for the income year 1965-66.

Clauses 28, 29 and 30 : Taxation of Private Companies.

Introductory Note :

For the purposes of the undistributed income tax payable by private companies that fail to make a sufficient distribution of their income, the income tax law has for many years included provisions defining "private company".

The Ligertwood Committee drew attention to practices adopted by which companies, essentially private in their nature, placed themselves outside the scope of the definition and thus avoided liability for the undistributed income tax.

Stated briefly, the Committee recommended that, instead of endeavouring to amend the provisions defining "private company", there should be included in the law a definition of "public company". Companies not falling within the scope of that definition would be treated as private companies.

The Committee also recommended a number of tests for inclusion in the proposed definition of "public company".

By clauses 28, 29 and 30, it is proposed to implement the Committee's recommendation that "public company" be defined.

The various tests now proposed for identifying public companies follow, broadly, the principal recommendations of the Committee.

Clause 28: Interpretation.

This clause will effect drafting changes made necessary by the proposal to define "public company".

Paragraph (a) of the clause omits from the private company provisions of the income tax law the existing definition of "private company", thereby opening the way for adoption of the plan recommended by the Ligertwood Committee.

Paragraph (b) will insert in section 103 of the Principal Act a provision that, in substance, now appears as section 105(4.)(c) of that Act. The purpose of the provision is to enable a person to be treated as the holder of shares in a company if he would be entitled to receive dividends paid by the company in the event of successive distributions being made by any trusts, partnerships or other companies interposed between that person and the company from which the dividends originated.

The provision is designed to ensure that the provisions governing the meaning of "public company" cannot be defeated by interposing a trust, partnership or company between a company and the person who ultimately is entitled to receive dividends from that latter company.

The amendments made by this clause will commence to apply for the 1965-66 income year.

Clause 29: Private Companies.

By this clause it is proposed to insert in the Principal Act a new provision - section 103A.

Sub-section (1.) of the new section will provide that a company is a private company for the purposes of the provisions relating to undistributed income tax, if it is not a public company. The remaining provisions of the new section specify the circumstances in which a company will be regarded as a public company.

Sub-section (2.) specifies a number of basic tests to be applied in order to ascertain whether, for a particular year of income, a company is a public company. These tests are, however, subject to succeeding provisions of the section and are to be read as qualified by the provisions that follow. Particular regard needs to be had to the tests proposed in sub-section (3.).

Under paragraph (a), a company is a public company for a year of income if ordinary shares issued by the company were, at the end of that year, listed for quotation in the official list of any stock exchange. It is appropriate, however, to emphasise that this test is modified by subsequent provisions.

Paragraph (b) provides that a company is a public company if it is, at all times during the year of income, a co-operative company as defined for income tax purposes. These companies generally have a considerable number of members with shares carrying full voting rights. If, however, this should not be so in any case, failure to satisfy the tests of sub-section (3.) may result in the company being treated as a private company.

Under paragraph (c) a "non-profit company" will be classified as a public company. A company will fit this description only if it has not at any time been carried on for the purposes of profit or gain to its individual members. A further test is that throughout the year of income it was prohibited by its constituent document (e.g. its memorandum or articles of association, rules etc.) from making any distribution to its members or to relatives of its members.

Paragraph (d) lists a number of other classes of companies that may qualify as public companies without the necessity of satisfying the test of stock exchange listing.

They are -

(i)

a mutual life assurance company;

(ii)

a friendly society dispensary;

(iii)

a body constituted by a law of the Commonwealth, a State or a Territory of the Commonwealth and established for public purposes (not being a company within the meaning of a law relating to companies);

(iv)

a company in which a Government or a body established for public purposes has a controlling interest;

(v)

a subsidiary of a public company.

A "mutual life assurance company" is defined in section 110 of the Principal Act as meaning a life assurance company the profits of which are divisible only among the policy holders.

A "friendly society dispensary" within the meaning of section 121A of the Principal Act is a friendly society dispensary as defined in section 91 of the National Health Act which is an approved pharmaceutical chemist for the purposes of that Act.

Sub-paragraph (iii) of paragraph (d) is largely self-explanatory. Briefly, it brings within the scope of the term "public company" various bodies constituted under special laws and established for public purposes. The Commonwealth Trading Bank of Australia may be regarded as an example.

Sub-paragraph (iv) will require a company to be treated as a public company if a Government or a body referred to in sub-paragraph (iii) has a controlling interest in the company.

Under sub-paragraph (v) of paragraph (d), a company is a public company in relation to a year of income if it is a subsidiary of a public company in relation to that year of income. The meaning of "subsidiary of a public company" is explained in relation to sub-section (4.).

Sub-section (3.) of section 103A prescribes a number of important tests to be fulfilled before a company, which would otherwise be a public company under the terms of paragraph (a) or (b) of sub-section (2.) of the section, may be accepted as a public company. Expressed in very broad terms, these tests are designed to exclude such a company from public company status if 20 or fewer people have, or have a right to obtain, a 75 per cent or greater interest in the ordinary shares, voting rights or dividends of the company. These tests accord with the recommendations of the Ligertwood Committee, except that the 75 per cent specified in the present law has been retained in place of the Committee's recommendation for a two-thirds test. Expressed with more precision, the tests are that 20 or fewer persons -

(a)

did not at any time during the year of income hold, or have a right to acquire ownership of, 75 per cent or more of the paid-up capital of the company (other than preference capital entitled to a fixed rate of dividend only);

(b)

were not at any time during the year of income capable of exercising 75 per cent or more of the voting power in the company;

(c)

were not paid 75 per cent or more of any dividend, or the total amount of all dividends, paid by the company during the year of income; or

(d)

would not, in the case of a company that did not pay a dividend, have been entitled, in the opinion of the Commissioner, to be paid 75 per cent or more of a dividend if one had been paid by the company during the year of income.

In interpreting each of the abovementioned tests it is necessary to have regard to the operation of sub-section (7.) of the proposed section. That sub-section, in effect, deems a person, his relatives, his nominees and the nominees of any of his relatives to be one person for the purpose of section 103A.

Sub-section (4.) specifies the circumstances in which a company is a subsidiary of a public company. As already mentioned, a subsidiary of a public company falls within the definition of "public company".

The Ligertwood Committee recommended that, as provided by the present law, a subsidiary of a public company be treated as a public company.

In terms of the proposed sub-section (4.), a company is a subsidiary of a public company if, at the end of the year of income, a public company (not being a non-profit company) or more than one such company -

(a)

beneficially owns more than 50 per cent of the paid-up capital of the subsidiary;

(b)

is, or are, capable of controlling or of obtaining control of more than 50 per cent of the voting power in the subsidiary;

(c)

would be beneficially entitled to receive more than 50 per cent of any dividends paid by the subsidiary; or

(d)

would be beneficially entitled to receive more than 50 per cent of capital distributions in the event of the winding up, or of a reduction in the capital, of the subsidiary.

Sub-section (5.) gives the Commissioner power, in certain circumstances, to treat a company as a public company, even though it does not satisfy all the prescribed tests. The Ligertwood Committee recommended that this discretionary power, which has a counterpart in the present law, be available.

When forming his opinion whether it is reasonable to treat a company as a public company, the Commissioner is to have regard to such matters as the number of persons capable of controlling the company and whether any of them is a public company, the paid up capital of the company and the number of shareholders beneficially owing shares. The Commissioner may also have regard to other relevant matters of which he has knowledge.

The purpose of sub-section (6.) is to prevent arrangements which could render the tests prescribed in sub-section (3.) ineffective in relation to some companies that qualify as co-operative companies or which have obtained stock exchange listing either in Australia or abroad. It is proposed that the Commissioner of Taxation be authorised, in circumstances explained in succeeding paragraphs, not to regard companies having the power to vary the rights attaching to some classes of shares, as public companies, even though, technically, they satisfy tests prescribed in sub-section (3.).

Expressed in broad terms, the Commissioner will be authorised to exercise the discretion if he is of the opinion that the voting or dividend rights attached to any shares in the company may be changed or cancelled under -

(a)

the memorandum and articles of association, rules etc. of the company;

(b)

a contract, agreement, option etc. giving a person a right to acquire shares in the company; or

(c)

a power relating to voting or dividend rights in the company.

Where, by any of the means mentioned, voting or dividend rights can be changed or cancelled, the sub-section will apply if the change or cancellation could result in 20 or fewer persons controlling 75 per cent or more of the voting power in the company or obtaining entitlement to 75 per cent or more of any dividends paid by the company. It will be only in these circumstances that the Commissioner will be permitted by the sub-section to treat such a company as though it is not a public company.

Sub-section (7.) will deem a person, his relatives, his nominees and the nominees of any of his relatives to be one person for the purposes of the proposed section 103A. The sub-section corresponds to a similar provision in sub-section (3.) of the existing section 105 and operates when it is necessary to determine whether 20 or fewer persons meet any of the tests set out elsewhere in the proposed section.

The new provisions inserted by clause 29 will apply for the income year 1965-66 and subsequent years.

Clause 30: Companies which are private companies.

It is proposed by clause 30 to repeal section 105 of the Principal Act. This section, which specifies the circumstances in which a company may at present be treated as a private company, will become redundant as from the end of the 1964-65 income year. The repeal will apply as from the beginning of the 1965-66 year of income.

Clause 31: Definitions.

This clause will effect a drafting amendment to section 110 of the Principal Act which relates to the taxation of life insurance companies. The amendment, which will revise the definition of "exempt superannuation fund", is consequential on proposed changes in the income tax position of superannuation funds and is not designed to effect any change of principle in the basis of taxing life insurance companies.

The term "exempt superannuation fund" is an expression used to define the classes of superannuation fund in relation to which a life assurance company may issue policies and, if certain conditions are satisfied, obtain freedom from tax on any income earned in connection with those policies.

The existing definition refers to section 23(j)(i) of the Principal Act and the reference will now be deleted because of the proposed repeal of section 23(j)(i). So as to maintain the substantive effect of the definition, it is necessary to include in it references to the new provisions - section 23(jaa), section 23F and section 79 - relating to superannuation funds. These adjustments are being made by re-expressing paragraph (a) of the definition and adding to the definition a new paragraph (c).

The amendments made by clause 31 will apply in assessments for the 1965-66 income year and subsequent years.

Clauses 32, 33 and 34 : Imposition of Tax on Income of Certain Superannuation Funds.

It will be seen from explanations of clauses 6 and 14 of the Bill that superannuation funds may become liable to pay tax on certain income that they derive. The new provisions inserted by those clauses prescribe exemptions or special deductions but do not declare what is to be taxable income or go to the stage of imposing tax.

By clauses 32, 33 and 34 it is proposed to insert in the Principal Act a number of new sections necessary in order to determine the taxable incomes of these funds and also to impose tax.

The new sections, which will commence to apply for the 1965-66 income year, will be included in Division 9B of the Principal Act. That Division now contains provisions governing the "30/20 rule" relating to the investment by superannuation funds of a proportion of their assets in Commonwealth and other public securities. Clauses 32, 33 and 34 will each effect, in the existing provisions of Division 9B, a change that is consequential on amendments to the Principal Act being inserted by clauses 5, 6 and 14.

Before commencing, in detail the notes on clauses 32, 33 and 34, it may assist to recall, in the briefest terms, proposed amendments relating to superannuation funds.

Clause 5 will omit section 23(j)(i) of the Principal Act which exempts the income of superannuation funds established for the benefit of employees and will insert a new section 23(jaa) exempting the income of funds established by Commonwealth or State laws, a municipal corporation, other local governing body or public authority.

Clause 6 will insert a new section 23F governing the exemption of private superannuation funds established for employees and which satisfy prescribed tests. Tax will, however, be payable on some classes of income derived by these funds.

Clause 14 will, broadly stated, authorise a deduction of 5 per cent of the cost of the net assets of other private superannuation funds.

Clause 32: Definitions.

Clause 32 will repeal the existing section 121B of the Principal Act comprising two definitions which will become inappropriate in the light of other amendments. The clause will also insert two new sections - sections 121B and 121BA.

Section 121B : Definitions

The new section 121B will comprise four definitions of terms used in the revised Division 9B. These are -

"investment income" : This term, which is used in relation to superannuation funds not complying with the "30/20 rule" for the investment of assets, is being re-defined consequent on the various amendments to the Principal Act proposed in connection with the income of superannuation funds. The revised definition incorporates drafting changes made necessary by changes in the numbers of the sections relating to superannuation funds but, in this respect, it does not result in any change in the practical effects of the law.

The definition is, however, worded so that "investment income" will include income which, but for the new section 23F (see clause 6), would be assessable income. In the case of a fund to which section 23F applies, any income of the fund that is not exempt from tax under that section will not qualify as investment income. That income will not, therefore, be taxed both as investment income and as taxable income upon which tax is to be payable under a proposed new section 121CA to be inserted in the Principal Act by clause 34.

"losses and outgoings" : This definition is a drafting expedient. The term is defined for the purposes of sections 121BA (to be enacted by clause 32) and 121CB (to be enacted by clause 34). For the purpose of those provisions, losses and outgoings will not include any deductions in respect of benefits paid by the fund or concessional deductions.

"superannuation fund" : For the purposes of Division 9B, the term will mean a provident, benefit, superannuation or retirement fund except where the contrary intention appears. It may be noted, at this stage, that a contrary intention will appear in section 121C which is to be amended by clause 33.

"transaction": This is a drafting measure and relates to sub-section (4.) of section 121BA. That provision provides that, in certain circumstances, income derived by a superannuation fund from a transaction is not to be taken into account in the calculation of the net income of the fund. The definition of transaction will ensure that the provision also applies where income is not derived from a single transaction but is derived from a series of transactions.

Section 121BA : Net Income.

This section prescribes the basis for determining the "net income" of a superannuation fund to which section 79 applies. The net income of such a fund will be included in the taxable income upon which it will be liable to pay tax under section 121CB (see clause 34). Broadly, the net income will be the income arising from assets taken into account in calculating the deduction of 5% of cost of assets (see section 79(3.) to be inserted by clause 14) less non-capital expenses incurred in gaining that income.

Sub-section (1.) provides that the net income means, broadly speaking, the amount ascertained by deducting from assessable income allowable deductions including a special deduction under the proposed section 79(3.) equal to 5% of the cost of the net assets of the fund as at the end of the income year - see pages 31 to 36 of this memorandum for particulars of the special deduction.

Contributions to the fund are excluded from the assessable income and, conversely, benefits paid by the fund are excluded from the deductions allowable. Also excluded from the allowable deductions in ascertaining the net income are concessional deductions and deductions in respect of losses and outgoings incurred by the fund to the extent that they are incurred in producing the classes of income referred to in sub-sections (2.) and (4.), explanations of which follow.

Under sub-section (2.) a dividend paid to a superannuation fund by a private company is not to be taken into account in calculating the net income of the fund. The Commissioner of Taxation may, however, permit such a dividend to be so taken into account if he is of the opinion that this would be reasonable. In exercising his discretion the Commissioner is to have regard to the paid-up value and cost of the shares on which the dividends were paid, the rate of dividend paid by the company on those and other shares and the circumstances in which the company has issued any bonus shares to the fund. He is also to have regard to any other matters he considers relevant.

Sub-section (3.) is designed to ensure that the provisions of sub-section (2.) are effective where a trust or partnership is interposed between a superannuation fund and a private company paying a dividend. For this purpose, income derived by the fund will be deemed to be a dividend paid by a private company if the Commissioner of Taxation is satisfied that the income was derived by the fund indirectly from a dividend paid by a private company.

Sub-section (4.) applies where income (other than a dividend paid by a private company) is derived by a superannuation fund from a transaction if the Commissioner of Taxation is satisfied that -

(a)

the parties to the transaction were not dealing with each other at arm's length in relation to the transaction; and

(b)

the income derived by the fund was greater than the income which might have been expected to be derived by the fund from the transaction if the parties were dealing with each other at arm's length.

In these circumstances, the income concerned will not be taken into account in calculating the net income of the fund but will, under the proposed section 121CB, enter into the calculation of the taxable income. As already mentioned in relation to section 121B, income derived from a series of transactions may fall within the scope of this provision.

A decision of the Commissioner for the purposes of sub-sections (2.), (3.) or (4.) will be subject to the usual rights of objection and reference to an independent Taxation Board of Review.

Sub-section (5.) will modify the operation of section 79C of the Principal Act to ensure that a deduction is not allowable under section 79 from the classes of income referred to in sub-sections (2.) and (4.).

The operation of section 79C has been explained in relation to clause 15 at pages 36 and 37 of this memorandum.

By paragraph (a) those classes of income will be excluded from assessable income of the fund for the purposes of section 79C. Conversely, paragraph (b) excludes from allowable deductions, for the purposes of section 79C, the losses and outgoings incurred by the fund to the extent that they were incurred in producing those classes of income.

The general effect of sub-section (5.) is that the limitation of the deduction allowable under section 79 is to be determined under section 79C by reference only to the net income of the fund. If the deduction under section 79 should exceed the amount of the net income of the fund remaining after deducting other allowable deductions, the excess will not be allowable against the classes of income referred to in sub-sections (2.) and (4.), nor may the excess be carried forward as a loss deductible from income derived by the fund in subsequent years.

The amendments made by clause 32 will apply in assessments for the 1965-66 income year and subsequent years.

Clause 33: Limitation of Exemption from Tax of Income of Certain Superannuation Funds.

Clause 33 will amend the provisions of section 121C of the Principal Act. That section sets out the circumstances in which exemptions may be available under section 23(j) and section 23(ja) of that Act to superannuation funds that do not hold specified proportions of Commonwealth and other public securities. As the amendments proposed are consequential on other amendments and are of a drafting nature only the practical operation of the section will not be affected.

Paragraph (a) will insert in section 121C of the Principal Act a new sub-section - sub-section (1A.) - which will define "superannuation fund" for the purposes of that section only.

The term "superannuation fund" is defined in the new section 121B to be inserted in Division 9B by clause 32 as meaning a provident, benefit, superannuation or retirement fund. That definition is of a general nature and will have the effect of bringing all classes of superannuation funds within the extended provisions of Division 9B.

Section 121C, however, will apply only to funds the income of which is exempt under section 23(ja) of the Principal Act or the new section 23F to be inserted by clause 6.

The definition of "superannuation fund" to be inserted in section 121C is designed to limit the operation of that section to those classes of funds. It will also ensure that, as at present, the section does not apply to a fund that is primarily and principally a hospital benefits fund, medical benefits fund, sickness benefits fund, dental benefits fund or funeral benefits fund.

Paragraph (b) is a drafting measure made necessary by the repeal of some provisions of the Principal Act and the insertion of other provisions relating to superannuation funds but with different numbers from the provisions in the present law. The paragraph will not alter the existing effect of the law.

The amendments made by this clause will apply in assessments for the 1965-66 income year and subsequent years.

Clause 34: Assessment of Income of Superannuation Funds.

This clause will repeal section 121D of the Principal Act.

The primary purpose of the existing section 121D is to impose tax on the investment income of certain classes of superannuation funds which do not satisfy the "30/20 rule" in relation to investments in Commonwealth and public securities.

The clause will insert several new sections. One of these, a new section 121D, will replace the repealed provision while the others will provide for the assessment and imposition of tax on other categories of superannuation funds not qualifying for complete exemption from tax.

Section 121CA : Assessment of Income of Superannuation Funds to which Section 23F Applies.

Section 121CA provides that the trustee of a superannuation fund to which section 23F applies is to be assessed and liable to pay tax on any non-exempt income derived by the fund. Income so taxed will not also be taxed as investment income of a fund that fails to comply with the "30/20 rule" relating to the investment of assets. The section provides that tax will be assessed at the rates declared by Parliament.

The new section 23F to be inserted in the Principal Act by clause 6 will exempt the income of superannuation funds established for the benefit of employees if specified tests are satisfied. Sub-sections (8.) and (10.) of that section, however, exclude certain classes of income from that exemption - see page 15 of this memorandum. It is in respect of the net amount of those classes of income that section 121CA will have effect.

The rate of tax proposed in relation to that income is 10/- in the Pd, but legislation declaring that rate for the purposes of section 121CA will not be necessary until rates for the 1965-66 financial year are being declared.

Section 121CB : Assessment of Income of Superannuation Funds Established for Benefit of Employees and Other Persons.

Section 121CB provides that the trustee of a superannuation fund to which section 79 applies is to be assessed and pay tax in respect of income derived by the fund at the rates declared by Parliament.

As previously explained in relation to clause 14, a fund to which section 79 applies is entitled to a special deduction that, broadly stated, equals 5 per cent of the cost of net assets of the fund as at the end of the year of income.

The effect of the proposed section 121CB will be to require these funds to pay tax on the sum of their net income (as already described in relation to clause 32) and other assessable income after deducting therefrom the expenses, not of a private or capital nature, incurred in gaining that assessable income. The other assessable income (against which no deduction for 5 per cent of cost of assets will be permitted) comprises dividends from private companies (unless the Commissioner determines otherwise) and certain income from transactions not on an arm's length basis. The nature of this income is set out more fully in relation to sections 121BA(2.) and (4.) to be inserted by clause 32.

The rate of tax proposed in respect of the income taxable under section 121CB is 10/- in the Pd. Legislative action to declare that rate will not be necessary until the rates of tax for the 1965-66 financial year are being declared.

Section 121D : Assessment of Income of Superannuation Funds of a Kind Referred to in Paragraph (ja) of Section 23 or to which Section 23F Applies.

This section re-enacts the provisions of sub-section (1.) of the existing section 121D with only minor drafting changes. It relates only to trustees of superannuation funds which, because of failure to comply with the "30/20 rule" on investment of assets, do not qualify for exemption from tax.

Tax is payable by such a fund on investment income not exempt from tax, the rate of tax being 5/6d. in the Pd on the first Pd5,000 of that income and 7/6d. in the Pd on the balance. Income taxed under other provisions will not be taxed under section 121D.

Section 121DA : Assessment of Income of Other Superannuation Funds.

Section 121DA will apply in respect of superannuation funds other than funds referred to in the three preceding sections or in the new section 23(jaa) to be inserted in the Principal Act by clause 5.

At present, the income of superannuation funds which do not qualify for exemption is subject to tax on the same basis as the income of a trust. If the taxable income does not exceed Pd208 in the year of income no tax is payable.

It is proposed that the income of those classes of funds shall, in future, be taxed under section 121DA. For this purpose the trustee of such a fund is designated as the person who is to be assessed and liable to pay tax on income of the fund at the rates declared by Parliament.

The income on which the tax will be imposed is the assessable income of the fund (other than contributions received) less all allowable deductions except concessional deductions and deductions in respect of benefits provided by the fund.

The rate of tax proposed in respect of the income of this class of fund is 10/- in the Pd. It will apply to income derived from the commencement of the 1965-66 income year and will not need to be declared until the rates of tax for the 1965-66 financial year are declared.

Section 121DB : Income of Superannuation Funds to be Taxed Exclusively under this Division.

Section 121DB is a drafting measure designed to ensure that the income of a superannuation fund is not taxed otherwise than under Division 9B. The provision is necessary in order to make it clear that provisions relating to trustees generally do not apply to trustees of superannuation funds.

An exception will be withholding tax payable under Division 11A of the Principal Act in respect of dividends paid to non-resident superannuation funds that do not qualify for exemption. The imposition of withholding tax in those cases will not be disturbed by this provision.

Section 121DC : Taxable Income.

This section is also a drafting measure and provides that the amount upon which a trustee of a superannuation fund is liable to be assessed and pay tax under sections 121CA, 121CB or 121DA shall be deemed to be taxable income of the fund.

Section 6 of the Principal Act provides that, unless the contrary intention appears, "taxable income" means "the amount remaining after deducting from the assessable income all allowable deductions". Because of the special bases provided for determining the amounts on which a trustee of different classes of superannuation funds is to be assessed, there is doubt whether, but for this section, the amounts to be assessed would qualify as "taxable income". The section removes that doubt and facilitates reference in other provisions of the law to amounts on which superannuation funds are to pay tax.

Section 121DD : Rebates and Provisional Tax.

This section relates to the rebates available to a trustee in an assessment of income of a superannuation fund and to provisional tax.

Paragraph (a) will ensure that the rebate of 2/- in the Pd for each pound of Commonwealth loan interest included in taxable income, as provided by section 160AB of the Principal Act, will be allowed if a superannuation fund is subjected to tax on taxable income that includes Commonwealth loan interest.

Paragraph (b) will ensure that, if any dividends are included in the income of a fund that is liable to tax, no rebate will be allowed in respect of those dividends under section 46 of the Principal Act.

Section 46 of the Principal Act provides for the allowance of a rebate of tax, where dividends are included in the income of a resident company, of the amount of tax attributable to dividends included in taxable income. The broad effect of this rebate is that dividends assessable to such a shareholder do not bear tax.

The provisions of paragraph (b) of the proposed section 121DD are designed to avoid any possibility that dividends included in the non-exempt income of a superannuation fund will be effectively free of tax because of the fortuitous fact that the trustee assessable in respect of such income, and who holds the shares from which the dividends are derived, happens to be a company resident in Australia.

Paragraph (c) provides that provisional tax is not to be payable in respect of income of a superannuation fund. This position will accord with that in relation to funds not complying with the "30/20 rule". The non-imposition of provisional tax will not, of course, alter the amount of tax ultimately payable by a superannuation fund.

Section 121DE : Reduction of Investment Income and Cost of Assets in Certain Circumstances.

Section 121DE will have effect only where the trustee of a superannuation fund has been assessed and is liable to pay tax under the new section 121CA which is to be inserted in the Principal Act.

As already explained, section 121CA provides for tax to be assessed and paid on certain classes of income derived by a fund to which section 23F applies.

Such a fund may also be liable to tax in respect of the whole or a part of its investment income if it does not invest specified proportions of its assets in Commonwealth and public securities. In these circumstances, the investment income so taxed for a year of income will not include the classes of income that are not exempt under section 23F.

Where that situation arises, it is proposed that appropriate adjustments should be made in relation to the assets of the fund from which the non-exempt classes of income are derived. Those assets will be excluded from the assets that are taken into account for the purpose of ascertaining whether the assets of the fund include the specified proportions of commonwealth and public securities. An appropriate adjustment will also be made, where necessary, in relation to the investment income earned by the fund in the 1960-61 income year.

Paragraph (a) will exclude from the cost of assets of the fund at any time during the year of income the cost of the assets from which the non-exempt classes of income were derived. The effect of this provision will be to reduce the proportion of the fund's assets that need to be invested in Commonwealth and public securities in order for the fund to comply with the "30/20 rule" on investment of assets.

Paragraph (b) will authorise a corresponding adjustment in relation to the assets of the fund as at 1st March, 1961, and is necessary because of the application of section 121C(2.) of the Principal Act to superannuation funds established on or before 1st March, 1961.

That provision provides that so much of the investment income of a superannuation fund as exceeds the investment income derived by the fund during the 1960-61 income year is not exempt from tax unless the Commissioner of Taxation is satisfied that, at all times, during the year of income -

(a)

specified proportions of its assets were invested in Commonwealth and public securities; or

(b)

the fund maintained the level of its investments in Commonwealth and public securities on 1st March, 1961, and specified proportions of any increase in the cost of its assets since that date are invested in Commonwealth and public securities.

For the purpose of determining any increase in the assets, the cost of the assets of the fund as at 1st March, 1961, will be reduced by the cost of the assets from which non-exempt classes of income were derived during the 1960-61 income year. That action will be necessary only if the Commissioner of Taxation is of the opinion that those classes of income would not have been exempt if the new sections 23F and 121CA had been in force in respect of that income year.

Paragraph (c) is complementary to paragraph (b) and relates to investment income derived by a superannuation fund during the 1960-61 income year. If the Commissioner is of the opinion that the fund derived income that would not have been exempt if the new sections 23F and 121CA had been in force during the 1960-61 income year, that income will be excluded from the investment income derived during that year. The amount so excluded will then not be taken into account in ascertaining any increase in the investment income derived by the fund since the 1960-61 income year.

The amendments made by this clause will commence to apply in relation to assessments on income of the 1965-66 income year.

Clauses 35, 36 and 37 : Disposal, Loss, Destruction or Termination of Use of Property.

These three clauses effect drafting amendments to sections of the Principal Act - sections 124, 124G and 124JB - which provide for adjustments to be made to the assessable income of a taxpayer on the disposal, loss, destruction, or termination of use of certain assets, the capital cost of which has been or is an allowable deduction. No amount received in relation to any of these events that is included in the taxpayer's assessable income as a lease premium under Division 4 of the Principal Act may be taken into account under any of the sections for the purposes of the adjustments. The amendments proposed by this clause will ensure that any amount of a lease premium that is included in the taxpayer's assessable income in accordance with the new section 26AB (proposed to be inserted in the Principal Act by Clause 9 of the Bill) is similarly excluded.

Clause 38: Liability to Dividend (Withholding) Tax.

This clause will make drafting amendments in section 128B of the Principal Act which establishes a liability for dividend (withholding) tax. The amendments will not change the practical effect of the existing provisions.

Paragraph (a) will ensure that, as at present, dividend (withholding) tax is not imposed on dividends paid to non-resident superannuation funds the income of which is exempt from Australian tax. That exemption will, from the commencement of the 1965-66 income year, be authorised by the proposed section 23F (see clause 6 of the Bill). It is, accordingly, necessary that a reference to section 23F be included in the list of provisions specified in paragraph (c) of section 128B(1.) and this is done by paragraph (a) of clause 38.

Paragraph (b) will effect a drafting amendment to paragraph (e) of sub-section (1.) of section 128B. The amendment is consequential on the new section 99A proposed to be inserted in the Principal Act by clause 25 of the Bill.

Under section 128B (1.)(e) a liability for dividend (withholding) tax does not arise in relation to a dividend that is included in income on which a trustee is liable to be assessed under section 99 of the Principal Act. As some assessments which are now made under section 99 will, in future, be made under section 99A, the amendment proposed by this paragraph adds a reference to section 99A in section 128B(1.)(e).

Paragraph (c) will omit from the Principal Act the present sub-section (1A.) of section 128B and insert a new sub-section in its stead. The existing sub-section was inserted in the Principal Act so that the exemption from dividend (withholding) tax provided for superannuation funds would not be affected by the "30/20 rule" concerning the investment by superannuation funds of assets in Commonwealth and public securities. The new sub-section (1A.) will maintain that position in relation to superannuation funds to which the new section 23F (see clause 6) applies.

The amendments made by this clause will apply from the commencement of the 1965-66 income year.

Clause 39: Application of Division.

By this clause it is proposed to amend section 158 of the Principal Act to ensure that, where a flat rate of tax is applicable to income of a trust estate derived from primary production, the average provisions of the law do not apply to vary that rate.

The average provisions, which apply in assessments of primary producers only, operate to determine an average income by reference to which the rate of tax on a taxpayer's taxable income is calculated. The provisions do not apply to companies taxed at flat rates of tax.

As explained in the notes on clause 25 of the Bill it is proposed that income assessed to a trustee in accordance with the new section 99A will be taxed at a flat rate of tax. The amendment to section 158 proposed by clause 39 will ensure that the average provisions will not apply in respect of assessments under section 99A. It will not alter the operation of the average provisions in any way.

Clause 40: Rebate in Case of Disposal of Assets of a Business of Primary Production.

Section 160 of the Principal Act, which it is proposed by this clause to amend, provides for the allowance of a rebate in certain cases where the whole of the assets of a business of primary production are disposed of for the purpose of putting an end to the business and those assets include live stock which is disposed of at a profit. The section may apply in the assessment of a partner whose share of partnership income includes part of the profit on the disposal of the live stock.

The object of the amendment is to ensure that section 160 does not operate to reduce the amount of any further tax under the new section 94 that is payable by a partner whose share of partnership income includes profit from a disposal of live stock to which section 160 applies. The amendment achieves this object by inserting in section 160(5.) a provision that a reference in the section to tax does not include further tax payable in accordance with section 94.

The amendment will not affect any entitlement which, now or in the future, a person may have under the terms of section 160 to a rebate of tax against the ordinary tax on his taxable income.

Clause 41: Interpretation.

This clause omits from section 160AE of the Principal Act, which relates to credits against Australian tax for tax paid in the Territory of Papua and New Guinea, definitions of "apportionable deductions" and "private company". Definitions of these expressions are, by paragraphs(a) and (c) of clause 4 of the Bill, being inserted in the general interpretation section - section 6 - of the Principal Act. The definitions so inserted will apply for the purposes of section 160AE and other provisions being inserted in the Principal Act. They will not change the basis on which credit for Territory tax is given.

The amendments made by this clause first apply in relation to income of the 1965-66 income year.

Clause 42: Credit in Respect of Tax Paid in Territory of Papua and New Guinea.

Section 160AF of the Principal Act, which it is proposed by this clause to amend, authorises the granting of credits to Australian residents in respect of tax paid in the Territory of Papua and New Guinea and lays down the procedure for ascertaining the amount of the credit that is to be allowed.

Broadly stated, the amount of the credit is the lesser of the Territory tax and the Australian tax payable in respect of the Territory income. The purpose of sub-section (5.) of section 160AF is to make special provision for the determination of the amount of Australian tax on Territory income where tax is at present payable by a partnership under section 94 of the Principal Act or by a trustee under section 102 of the Principal Act in respect of Territory income.

Clause 42 repeals sub-section (5.) and inserts a new sub-section (5.) in its place. The revised sub-section will continue to apply in relation to income assessed under section 102 in exactly the same way as does the existing sub-section. As regards partnerships, however, it is proposed by clause 24 of the Bill that the special tax under section 94 will in future not be levied on the partnership but on the person deriving a share of partnership income.

In these circumstances, sub-section (5.) as it applies in relation to section 94 cases, is being re-stated to accord with the altered basis of taxing income to which section 94 applies. In broad terms, where a person who is liable to pay further tax under section 94 has derived Territory income, the amount of Australian tax payable that is attributable to the Territory income is to be such amount as the Commissioner of Taxation considers is reasonably attributable to the Territory income.

The amendment made by this clause applies in relation to income of the 1965-66 and subsequent years of income.

Clause 43: Amendment of Assessments.

This clause proposes an extension of the authority of the Commissioner of Taxation to amend an assessment in favour of a taxpayer in certain cases. It inserts a new sub-section in section 170 of the Principal Act.

Under the proposed section 94 of the Principal Act the Commissioner has certain discretions which, if exercised, will reduce a taxpayer's liability to further tax in respect of certain partnership income. Those discretions are contained in sub-sections (3.), (4.) and (8.) of the section. Under sub-section (2.) of the proposed section 99A the Commissioner has another discretionary power the exercise of which will cause trust income to which no beneficiary is presently entitled to be taxed at individual rates of tax rather than at the special rate under section 99A.

An existing provision of section 170 of the Principal Act authorises the Commissioner of Taxation to amend an assessment, within three years from the date on which the original assessment became payable, if the purpose of the amendment is to correct an exercise of any discretionary power which affected the original assessment. That provision is, however, dependent on the Commissioner's having formed an opinion that affected the original assessment.

The object of the provision being inserted in section 170 by this clause is to give a power of amendment where, in making the original assessment, the Commissioner did not consider the exercise of his discretion under the provisions of sections 94 and 99A referred to above. If the Commissioner later decides that it would be appropriate for the discretion to be exercised, the new sub-section (10A.) will authorise him to amend an assessment for this purpose and reduce the taxpayer's liability under the assessment. The sub-section will authorise the making of such an amendment within three years after the date upon which tax became payable under the original assessment.

An example of circumstances in which the extended power of amendment may apply is a case in which a trustee is taxed on trust income in accordance with the special basis provided by section 99A, because he has not, when lodging the trust's return, made a claim for the trust income to be taxed at the rates of tax applicable to an individual taxpayer. If the trustee subsequently satisfies the Commissioner that it would be unreasonable to apply the special basis of assessment, sub-section (10A.) will authorise the Commissioner to amend the trustee's assessment accordingly.

Clause 44: Interpretation.

The purpose of this clause is to ensure that provisional tax is not payable in respect of further tax which is to be imposed in accordance with the proposed new section 94 or the special tax to be imposed under the new section 99A. For this purpose it is proposed to insert a new sub-section - sub-section (1A.) - in section 221YA of the Principal Act.

Under the proposed new section 94 a person may be liable to pay further tax on the portion of his taxable income that is derived from partnership income outside, or deemed to be outside, his control. The further tax liability, if any, will be in addition to the taxpayer's ordinary liability for tax on the whole of his taxable income.

Under the proposed section 99A a trustee may be taxable on trust income to which no beneficiary is presently entitled at a special flat rate of tax in lieu of at the individual rates of tax that would otherwise apply.

In the absence of the amendment proposed by this clause, a person liable to pay further tax under section 94 or tax under section 99A, in respect of income of a year of income, would be called on to pay, in addition, an equivalent amount as provisional tax in respect of the succeeding year's income.

In relation to a person who in a year of income derives partnership income to which section 94 is applied, the effect of the proposed sub-section (1A.) of section 221YA will be that the person's liability to further tax will be disregarded in calculating his liability for provisional tax in respect of income of the subsequent year. His provisional tax will be calculated, in the same way as it is under the existing law, by reference only to the ordinary rates of tax on the whole of his taxable income.

Where a trustee is assessed under section 99A on income of a trust estate of a year of income, the effect of sub-section (1A.) will be that he will not be liable to pay provisional tax in respect of the trust's income of the following year to which there may be no person presently entitled. Income which falls to be assessed under section 99 of the Principal Act will, however, continue to be subject to provisional tax.

Sub-section (1A.) achieves the results outlined above by providing that, except in sections 221YE and 221YG of the Principal Act, a reference in the provisional tax provisions of the law to "income tax" or "tax" does not include a reference to further tax assessed under section 94 or tax assessed under section 99A. The exception of sections 221YE and 221YG enables provisional tax paid to be credited against any further tax under section 94 or any tax levied under section 99A.

The amendments will not alter the ultimate tax liability of the persons concerned.

Clause 45: Application of Amendments.

This clause specifies, where necessary, the dates from which the amendments proposed by the Bill are to apply. Those dates have been stated in the notes on the various clauses.

Clause 46: Transitional Provisions Relating To Income of Certain Superannuation Funds.

By this clause it is provided that tax is payable on two classes of income derived by certain superannuation funds during the balance of the present year of income.

The two classes of income are -

(a)

dividends received by a superannuation fund from a private company except where the Commissioner of Taxation is of the opinion that it would be reasonable for the dividends to be exempt; and

(b)

income derived by a superannuation fund from a transaction if the Commissioner is satisfied that the parties to the transaction were not dealing with each other at arm's length and the income derived by the fund is greater than the income which could be expected to have been derived if the parties had been dealing with each other at arm's length.

As previously mentioned, the general provisions of the proposed new section 23F (see clause 6) are to apply as from the beginning of the 1965-66 income year. A deferment of this nature in relation to the classes of income described would, however, leave open opportunities for tax saving arrangements which could be made with advance knowledge of the future operation of the law and which could have continuing effects even after section 23F becomes operative. For example a private company could, before 30th June next, credit a large amount of dividend out of current year and earlier profits to a superannuation fund knowing that -

(a)

the dividend would be exempt from tax;

(b)

the dividend would be deductible by the company for undistributed income tax purposes and, to the extent that the income of the company was insufficient to permit an effective deduction for 1965-66, the excess would be carried forward as a deduction in subsequent years.

Clause 46 accordingly proposes provisions to cover the balance of the present income year. The clause will not apply to income derived before the date specified in the clause.

The proposed taxation of the two classes of income described will apply where a superannuation fund for employees would otherwise be exempt from tax. The basis of the tax will be the same as has already been explained - see clauses 6 and 34 of the Bill. The explanations are not being repeated at this stage. However, it is mentioned that sub-clause (6.) provides that the provisions of clause 46 shall not apply to income derived by a superannuation fund from a business if the Commissioner is of the opinion that it is not practicable to determine the amount of income derived in the remaining part of the current income year. This is a circumstance that is likely to arise only in very isolated cases. It could occur if the accounts of a business carried on by a superannuation fund are not balanced as at the date from which the provisions apply.

The rate of tax proposed in relation to income taxed in pursuance of clause 46 is 10/- in the Pd. That rate is to be declared in a separate Bill which is explained in the following section of this memorandum.

INCOME TAX AND SOCIAL SERVICES CONTRIBUTION BILL (No.2) 1964.

Introductory Note:

This Bill is consequential on the amendments relating to superannuation funds proposed in the Income Tax and Social Services Contribution Assessment Bill (No.3) 1964.

The purpose of this Bill is to declare the rate of tax payable for the current financial year 1964-65 on income derived after the date specified in the Assessment Bill by a superannuation fund upon which tax is to be assessed under clause 46 of the Income Tax and Social Services Contribution Assessment Bill (No.3) 1964. This is being done by way of an amendment to the Income Tax and Social Services Contribution Act 1964 (the Principal Act which declares the general rates of tax for the 1964-65 financial year).

The classes of income upon which tax is to be payable under clause 46 are shown at page 110 of this memorandum.

The rate of tax proposed to be payable for the 1964-65 financial year is 10/- in the Pd for each Pd1 of the taxable income in respect of which a trustee of a superannuation fund is, under clause 46, assessed and liable to pay tax.

Notes on Clauses

Clause 1: Short Title and Citation.

Clause 1 formally provides the short title and citation of the Amending Act and the Principal Act as amended.

Clause 2: Commencement.

By this clause, it is proposed that the Bill shall, in order to achieve consistency with the associated Bills, come into force on the day that it receives the Royal Assent.

Clause 3: Imposition of Income Tax and Social Services Contribution.

This clause will amend section 5 of the Principal Act which imposes income tax for the current financial year 1964-65 at rates declared elsewhere in that Act.

Sub-section (3.) of section 5 provides that no tax is payable where the taxable income derived by an individual, a person in the capacity of a trustee or a non-profit company does not exceed Pd208.

The amendment proposed by clause 3 is designed to exclude from the application of that sub-section income of a superannuation fund that is to be taxed at the rate of 10/- in the Pd.

Clause 4: Rates of Tax Payable by Persons Other Than Companies.

By this clause, section 6 of the Principal Act will be amended by omitting sub-sections (4.) and (5.) and inserting three new sub-sections in their stead.

The existing sub-section (4.) provides that the rate of tax payable by a trustee, other than a trustee of a superannuation fund, is as set out in the Fourth Schedule to the Principal Act. The proposed new sub-section (4.) does not vary the substance of the provision but merely provides that the rates set out in the Fourth Schedule shall apply to all trustees except as provided by the two succeeding sub-sections, each of which refers to a trustee of a superannuation fund.

The present sub-section (5.) states that the rates of tax payable by a trustee of a superannuation fund are as set out in the Fifth Schedule. The rates declared in that Schedule are applied to investment income of a superannuation fund that does not comply with the "30/20 rule" for the investment of assets in Commonwealth and public securities. Because of the amendments to be made by the Income Tax and Social Services Contribution Assessment Bill (No. 3) 1964, it will be necessary to declare also the rate of tax payable on the taxable income of a superannuation fund.

In order to meet this situation the proposed sub-section (5.) provides that the rates of tax payable by the trustee of a superannuation fund on investment income are as set out in Part I of the Fifth Schedule.

The proposed sub-section (5A.) provides that the rate of tax payable by a trustee of a provident, benefit, superannuation or retirement fund in respect of taxable income is as set out in Part II of the Fifth Schedule.

Clause 5: Schedules.

This clause proposes the repeal of the existing Fourth and Fifth Schedules and, in their place, will insert two new schedules.

The proposed new Fourth Schedule declares the rate of tax payable by a trustee, other than a trustee of a superannuation fund. No change will be made from the present rate which, stated broadly, is the same as would be payable by an individual upon an amount of taxable income equal to the taxable income of the trustee.

The new Fifth Schedule is divided into two Parts. Part I re-enacts the existing rates of tax payable on the investment income of a trustee of a superannuation fund that does not comply with the "30/20 rule". The rates are 5/6 in the Pd on the first Pd5,000 of investment income on which tax is to be assessed and 7/6 in the Pd on the balance of that investment income.

Part II of the Fifth Schedule declares a new rate. It is a rate of 10/- in the Pd and will be payable on the taxable income of a provident, benefit, superannuation or retirement fund. The rate is, of course, required because, as explained in the Introductory Note to this Bill, tax is to be payable on certain income derived by these funds as from the date specified in clause 46.

INCOME TAX (INTERNATIONAL AGREEMENTS) BILL 1964.

This is the third taxation Bill referred to in the introductory part of the memorandum.

The amendments proposed by this Bill are technical ones that are consequential on amendments to the Income Tax and Social Services Contribution Assessment Act proposed by the Bill to amend that Act, i.e., the first of the Bills explained in this memorandum.

Notes on Clauses

Clause 1: Short Title and Citation.

This clause formally provides for the short title and citation of the Amending Act and of the Income Tax (International Agreements) Act 1953-1963 as amended.

Clause 2: Commencement

By reason of section 5 (1A.) of the Acts Interpretation Act 1901-1964, every Act, unless the contrary intention appears, is deemed to come into operation on the 28th day after it has received the Royal Assent.

By this clause it is proposed that the Amending Act shall come into operation on the day on which it receives the Royal Assent. The provisions of the Income Tax and Social Services Contribution Assessment Bill (No.3) 1964, upon which the amendments proposed by this Bill are consequential, will, as explained at page 7 of this memorandum, come into operation on the day it receives the Royal Assent. It is, therefore, appropriate to include a corresponding provision in this Bill.

Clause 3: Ascertainment of Australian tax on Dividend.

This clause proposes two amendments to section 16 of the Income Tax (International Agreements) Act.

Section 16 of that Act states a formula for ascertaining the amount of Australian tax that is attributable to a dividend from an ex-Australian source. It is necessary to ascertain that amount of tax because it is the maximum amount that may be allowed as a credit against Australian tax in respect of foreign tax paid on a dividend received by a resident of Australia from ex-Australian sources.

Paragraph (a) of clause (3.) proposes the substitution in section 16 of a revised sub-section (5.).

The present sub-section (5.) applies to determine the amount of Australian tax attributable to an ex-Australian dividend where a trustee has paid, or is liable to pay, tax assessed under section 102 of the Income Tax and Social Services Contribution Assessment Act. The revised sub-section will not alter the application of the section in this respect.

The present sub-section (5.) also applies, however, to determine the amount of Australian tax attributable to an ex-Australian dividend where a partnership is assessed under section 94 of the Income Tax and Social Services Contribution Assessment Act in respect of a share of partnership income over which a partner lacks real and effective control. As explained in the notes in this memorandum on clause 24 of the Bill to amend the Income Tax and Social Services Contribution Assessment Act, it is proposed that in future the special liability under section 94 of that Act will fall on the partner lacking control of his share and not on the partnership.

In these circumstances, it is necessary to re-express sub-section (5.) in relation to cases to which section 94 applies so as to accord with the altered basis of assessment under that section. Broadly, where a person has paid or is liable to pay further tax under section 94 in respect of the income of a year, the amount of Australian tax attributable to a dividend derived by him in that year is to be such amount as the Commissioner of Taxation considers is reasonably attributable to the dividend.

In the absence of the proposed amendment, the further tax under section 94, which relates exclusively to income from a partnership, could inappropriately be reflected in the amount of Australian tax determined to relate to a dividend from ex-Australian sources.

Paragraph (b) of clause (3.) will omit from sub-section (8.) of section 16 of the Income Tax (International Agreements) Act a definition of "apportionable deduction".

That definition describes a number of deductions of a concessional nature which are not, strictly speaking, directly related to income-producing activities, for example, the deductions for gifts and for the maintenance of dependants. In ascertaining the amount of Australian tax attributable to a dividend, a proportion of the taxpayer's apportionable deductions are applied against the dividend.

It is necessary to extend the scope of the definition to the special deduction to be allowed to certain superannuation funds under sub-section (3.) of the new section 79 proposed to be inserted in the Income Tax and Social Services Contribution Assessment Act by clause 14 of the Bill to amend that Act. A new definition of "apportionable deductions" (which will include the deduction under the new section 79(3.)) is being inserted in section 6(1.) of the Income Tax and Social Services Contribution Assessment Act. The definition will, as a consequence of the omission of the present definition from section 16 of the Income Tax (International Agreements) Act, also apply for the purposes of that Act.

Clause 4: Application of Amendments.

By this clause the amendments to be made by clause 3 will first apply in relation to income of the 1965/66 income year.

INCOME TAX AND SOCIAL SERVICES CONTRIBUTION ASSESSMENT BILL (NO.3) 1964.