House of Representatives

Income Tax Assessment Bill 1974

Income Tax Assessment Act 1974

Income Tax (Dividends and Interest Withholding Tax) Bill 1974

Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Frank Crean, M.P.)
The explanatory memoranda legislative body title '(29TH PARLIAMENT) AUSTRALIA HOUSE OF REPRESENTATIVES' to 'The Parliament of the Commonwealth of Australia HOUSE OF REPRESENTATIVES' for consistency.

Introductory Note

The first of these Bills proposes amendments to the Income Tax Assessment Act (the "Principal Act") in relation to the matters outlined below. Except that it contains additional provisions which relate to the collection of company tax by instalments (clauses 11 to 19) the Bill is identical in all material respects with an Income Tax Assessment Bill that was introduced into the House on 3 April 1974 but lapsed as a consequence of the dissolution of the Parliament soon afterwards.

The second Bill is identical with an Income Tax (Dividends and Interest Withholding Tax) Bill which lapsed in the same circumstances. It is of a purely drafting kind consequential upon the first of the matters outlined below.

MAIN FEATURES

Interest Withholding Tax (Clauses 8 to 10 and 20)

To give effect to a decision announced by the Treasurer on 2 July 1973 to eliminate an unintended effect of provisions for imposition of withholding tax of 10 per cent on interest paid to non-residents, two principal amendments are proposed. The amendments relate to the view that, as the law stands, withholding tax is technically not payable in circumstances where interest, which would be subject to tax if paid directly to the non-resident lender, is paid to a resident of Australia carrying on business through an overseas branch and the branch in turn pays interest to the non-resident lender. The two principal amendments are -

(a)
To counter this means of avoidance of the tax, while retaining the basic tests for liability to it, interest derived from Australia by a resident of Australia in the course of carrying on a business through an overseas branch ("permanent establishment") will be subject to withholding tax in circumstances in which it would have been subject to the tax if it had been derived by a non-resident.
(b)
Further amendments of a technical kind are designed to make clear that there is a basic liability to the withholding tax on non-residents in cases where the first amendment is not applicable to interest paid from Australia through an overseas branch of an Australian resident.

Source of other Interest and Royalty Payments (Clauses 3 and 5)

As provisions of the Principal Act dealing with the source of royalty income paid to non-residents, and the source (for purposes of legislation relating to Norfolk Island) of interest and royalty income generally, are modelled on the interest withholding tax provisions which are being amended by the Bill, technical amendments concerning these matters - of the same kind as referred to in sub-paragraph (b) above - are also proposed.

Allowances to Members of the Defence Force (Clauses 4 and 6)

Following the acceptance of recommendations of the Committee of Inquiry into Financial Terms and Conditions for Male and Female Members of the Regular Armed Forces (the "Woodward Committee"), the pay structure of the Defence Force has been changed. The new structure was framed on the broad basis that allowances should be taxable with the exception of those that reimburse servicemen for out-of-pocket expenses. The Bill contains provisions to bring the Principal Act, insofar as it relates to the taxation of Defence Force allowances, into harmony with the current pay structure and, in particular, to enable allowances to be treated for income tax purposes in the ways envisaged by the Woodward Committee.

To give effect to a decision of the Government announced in February 1973, provision is also being made in the Bill for the exemption from income tax of the $1,000 bounties payable to Defence Force personnel whose service is to continue for at least three years after the completion of a qualifying period of service.

Contributions under Defence Force and Parliamentary Retirement Benefits Schemes (Clause 7)

Subject to a maximum limit of $1,200, deductions are allowable for life insurance premiums and contributions to a superannuation fund. Following changes to the Defence Force and Parliamentary Retirement Benefits Schemes, members' contributions under those schemes are paid directly into consolidated revenue. The Bill provides for these contributions to be deductible on the same basis as contributions paid to a superannuation fund.

Collection of Company Tax by Instalments (Clauses 11-19)

Provisions incorporated into the Principal Act in 1973 authorise the collection from a company - at any time after 31 December in a financial year - of an instalment of income tax to be credited in due course against the amount payable by the company in respect of its income of the prior year. These provisions implemented the first stage of a system for collecting company tax by quarterly payments. To complete the phasing-in of the system, it is proposed to adapt the provisions to authorise the collection from a company of two instalments in 1974-75 and three instalments in 1975-76 and each subsequent year. The balance of tax payable by a company in respect of its income of any year, after crediting the instalments it pays in the ensuing financial year, will generally fall due for payment on assessment during the last quarter of the financial year. It is proposed that the instalments to be collected during 1974-75 be payable not earlier than 15 November 1974 and 15 February 1975 while, in 1975-76 and any subsequent financial year the earliest dates for payment will be 15 August, 15 November and 15 February.

More detailed notes on each clause of the Bills are set out below.

NOTES ON CLAUSES

INCOME TAX ASSESSMENT BILL 1974.

Clause 1: Short title and citation.

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

Clause 2: Commencement.

Section 5(1A) of the Acts Interpretation Act 1901-1973 provides that unless the contrary intention appears every Act shall come into operation on the twenty-eighth day after the day on which it receives the Royal Assent.

This clause provides that the Bill will come into operation on the day on which it receives the Royal Assent, thus facilitating the early application of provisions of the Bill from dates set out in its various clauses.

Clause 3: Source of royalty income derived by non-resident.

This clause proposes technical amendments to section 6C of the Principal Act which are designed to forestall possible avoidance of tax on royalties derived by non-residents. The proposals follow similar lines, and are based on similar considerations, to those in the Bill that relate to interest withholding tax. Details of the latter proposals are contained in the notes on clause 9 of this Bill, to which reference should be made. Clause 9 will amend section 128B of the Principal Act.

Sub-clause (1) of clause 3 proposes to add new sub-sections (5), (6) and (7) to section 6C of the Principal Act. Section 6C is intended to ascribe an Australian source to royalties paid to non-residents where, in broad terms, a payment is made by an Australian resident which is not an expense of a foreign business of the resident or a payment is made by a non-resident which is an expense of an Australian business. For reasons outlined in the notes on clause 9, which is concerned with a corresponding problem in relation to interest withholding tax, there is doubt whether section 6C, as now expressed, would technically give effect to this intention in some situations. New sub-section (6) (which corresponds with proposed sub-section (8) of section 128B) deals with royalty payments by Australian residents while proposed sub-section (7) (corresponding with new sub-section (9) of section 128B) deals with payments by non-residents. Proposed sub-section (5) is a drafting measure providing for an Australian resident to be referred to in sub-sections (6) and (7) as a "relevant person".

Sub-clause (2) of the clause proposes that the amendments to section 6C will commence to apply on 4 April 1974, the day after proposals to amend section 6C in this way were introduced into Parliament by a Bill which, as has already been mentioned, lapsed upon the dissolution of Parliament.

Clause 4: Exemptions.

Section 23 of the Principal Act specifies classes of income that are exempt from tax. Dependants' and exchange allowances paid to a member of the Defence Force are at present exempted under sub-paragraph (i) of paragraph (t) of the section. By clause 4 it is proposed to omit the reference to these allowances and to provide instead for the exemption of an allowance or bounty that is prescribed by regulation. An exemption is also proposed in respect of the value of rations and quarters provided free of charge to a member of the Defence Force.

Paragraph (a) of clause 4, by omitting sub-paragraph (i) of paragraph (t) of section 23, will have the effect of withdrawing existing exemptions for dependants' allowances and exchange allowances. By virtue of clause 21 this amendment will apply to assessments for 1972-73 and subsequent income years in the case of dependants' allowances and to assessments for 1973-74 and subsequent income years in the case of exchange allowances.

The exemption for dependants' allowances will not, however, be affected as regards allowances within its scope (marriage allowances, separation allowances and child education allowances) paid in respect of service prior to the date of commencement of the new Defence Force pay code, i.e., the code based on recommendations of the Woodward Committee. This date is 8 February 1973 for the Air Force and 9 February 1973 for the Army and the Navy.

After these dates the exemption for dependants' allowances under sub-paragraph (i) of paragraph (t) of section 23 would have applied only to child education allowances. Marriage allowances ceased to be payable and changes in the conditions for payment of separation allowances placed them outside the scope of the exemption. The exemption of child education allowances and separation allowances are, however, to be continued. They are among the allowances which it is proposed to prescribe by regulation under new sub-paragraph (iii) of section 23(t).

The exemption for exchange allowances was incorporated in the law in 1947 to provide freedom from tax on allowances that were then payable to Australians serving overseas as compensation for shortfalls in the purchasing power of pay drawn in foreign currencies. As these allowances have not been paid since 1965 the exemption has outlived its purpose.

Paragraph (b) of clause 4 will insert in paragraph (t) of section 23 of the Principal Act two additional sub-paragraphs authorising new income tax exemptions. A new sub-paragraph (iii) will operate to exempt any allowance or bounty that is prescribed in the income tax regulations and a new sub-paragraph (iv) will operate to exempt the value of rations and quarters in the limited range of circumstances in which they are supplied without charge, i.e., to married servicemen living in service accommodation while on duty away from their homes, to servicemen living on seagoing ships, and to servicemen on field exercises.

Under clause 21, these amendments apply to assessments for 1972-73 and subsequent years of income subject to the qualification, in relation to prescribed allowances and the value of free rations and quarters, that only allowances paid or rations and quarters supplied under the new pay code are covered.

It is proposed to prescribe, for the purposes of the new sub-paragraph (iii) of section 23(t), the re-engagement bounty of $1,000 now payable as an incentive for servicemen to undertake further service and those allowances which, being in the nature of reimbursements of out-of-pocket expenses, are of a kind which the Woodward Committee envisaged would be free of tax but which would not necessarily be protected from tax by the general operation of the income tax law.

The allowances involved are -

child education allowances (payable to servicemen posted to a new location, generally to cover extra costs associated with the continued education of a child at the former location);
separation allowances (payable to servicemen absent from their homes on duty for more than 14 days to cover extra expenses arising from the absence);
living out allowances (payable to unmarried servicemen to cover reasonable extra costs of commercial accommodation used, in most cases, because service accommodation is not available);
living-out-away-from-home allowances (payable to married servicemen on duty away from their homes to meet reasonable costs of commercial accommodation used because service accommodation, in which rations and quarters would be supplied free of charge, is not available); and
retention of lodgings allowances (payable to servicemen required to pay for the reservation of commercial accommodation during short absences arising from duty requirements).

Clause 5: Source of interest or royalty.

Like clause 3, clause 5 is a technical amendment occasioned by the need to amend the interest withholding tax provisions (as proposed in clause 9) to ensure that avoidance of tax does not result from the present expression of statutory rules governing the "source" of interest payments.

Clause 5 will amend section 24L of the Principal Act, which is one of a number of special provisions dealing with Norfolk Island, Cocos (Keeling) Islands and Christmas Island. The provisions were enacted in 1973 to prevent "tax haven" resort to those Territories, while retaining an exemption for local residents and their companies. Section 24L is one of the measures contained in these special provisions designed to prevent their exploitation. It sets out rules whereby, in effect, interest and royalties are to be taken for purposes of the special provisions as having a source in Australia.

These rules are modelled on those in section 6C (royalties paid to non-residents) and in section 128B (interest paid to non-residents). As it has been found necessary to amend these rules to ensure that they have their intended operation, corresponding amendments are proposed to section 24L. The technicalities of the basic amendments are explained in the notes on clause 9, which will amend section 128B.

Sub-clause (1) inserts new sub-sections (4A), (4B) and (4C) in section 24L. Sub-section (4A) is a drafting provision ("relevant person" to mean (broadly) an Australian resident), sub-section (4B) relates to payments by Australian residents and corresponds with proposed section 128B(8) while sub-section (4C) relates to payments by non-residents and corresponds with proposed section 128B(9).

Sub-clause (2) of clause 5 will make the amendments to section 24L applicable to payments made on and after 4 April 1974, the day following the date on which proposals to amend section 24L in this way were first introduced into Parliament.

Clause 6: Certain items of assessable income.

Section 26 of the Principal Act specifies various kinds of receipts and benefits that are to be included in the assessable incomes of the recipients. Paragraph (ea) of that section provides that the assessable income of a member of the Defence Force includes the value of the allowances he receives. Defence Force allowances in what might be described as the "food and shelter" category are deemed, by a proviso to paragraph (ea), to have an aggregate value for income tax purposes of $2 per week.

Clause 6 will omit the proviso which was added to the original terms of paragraph (ea) in 1947 following the adoption of a recommendation by a committee that submitted a report upon which the post-war pay code that came into operation in that year was based.

The committee recommended that the value of free rations and quarters provided by the Services for members should be assessed for taxation purposes at a standard amount of one pound ($2) per week and that this figure should also be adopted as the value of living out allowances and provision allowances for members living outside service establishments, irrespective of the amounts actually paid. Living out allowances were paid to single members and provision allowances to married members.

Under the pay code now in operation, married members of the Defence Force do not receive provision allowances, single members do not receive living out allowances of the kind payable from 1947 until early in February 1973 and, as a general rule, members who are supplied with rations and quarters are required to pay for them. By reason of the pay code changes that have operated from early in February 1973, the proviso to paragraph (ea) of section 26 has generally ceased to serve the purposes for which it was enacted.

If the proviso were retained in the law, recipients of free rations and quarters would continue to enjoy freedom from tax on so much of the value of that benefit as exceeds $2 per week. As indicated in the notes on paragraph (b) of clause 4, it is intended that the total value of rations and quarters supplied without charge will be exempted from tax under an amendment to section 23(t) of the Principal Act. Other allowances that would be covered by the proviso to section 26(ea) if it were retained in the law (a new type of living out allowance, living-out-away-from-home allowances and retention of lodgings allowances) will also be wholly exempted from tax under the proposals explained in the notes on paragraph (b) of clause 4.

The amendment made by clause 6, like the amendments authorising the exemptions just mentioned, is to have effect from the date of commencement of the current Defence Force pay code.

Clause 7: Life insurance premiums, etc.

Section 82H of the Principal Act authorises the allowance of concessional deductions, subject to a maximum limit of $1,200, for payments of various kinds, including payments to superannuation funds.

In past years, members of the Australian Parliament and members of the Defence Force have been entitled to deductions under the section for contributions made respectively to the Parliamentary Retiring Allowances Fund and the Defence Force Retirement Benefits Fund. Under new arrangements contributions are no longer paid to these funds but are paid into consolidated revenue.

Clause 7 of the Bill, in conjunction with clause 21, will ensure that contributors will not be deprived of the traditional taxation concessions simply because of the change in the destination of the contributions.

Paragraph (a) of clause 7 will insert in paragraph (b) of sub-section (1) of section 82H, a new sub-paragraph (ii) to cover members' contributions that are paid into consolidated revenue under the revised Parliamentary and Defence Force Retirement Benefits Schemes. By clause 21 of the Bill, the amendment applies so that no break occurs in the continuity of the contributors' entitlements to deductions.

Paragraph (b) of clause 7 will amend the definition of "benefits" in sub-section (1H) of section 82H. The definition gives the word "benefits", as used in that section in relation to life insurance policies, a restricted meaning that does not include sickness or accident benefits or bonuses. The amendment will ensure that the restricted meaning of the word will continue to apply as at present only in relation to benefits payable under life insurance policies. The word "benefits" as used in the new sub-paragraph will be given its ordinary meaning.

Clause 8: Heading to Division 11A of Part III.

The present heading of Division 11A refers to dividends and interest paid to non-residents. It is proposed to add the words 'and to certain other persons' to reflect the fact that under the proposed amendments, interest paid to residents could in some circumstances be covered by the Division.

Clause 9: Liability to withholding tax.

Introductory Note.

This clause proposes amendments to section 128B of the Principal Act to remedy a technical deficiency that appears to exist in the section where interest is paid from Australia through an overseas branch of a business conducted by an Australian resident.

Broadly, the purpose of section 128B as a whole is to create a liability to a withholding tax of 10 per cent of interest flowing to non-residents where the borrowed funds are in a real sense used in Australia. Accordingly, section 128B specifies that there is a liability to interest withholding tax -

(i)
under section 128B(2)(b)(i), on interest paid by an Australian resident that is not an outgoing wholly incurred in carrying on business outside Australia through a branch situated in an overseas country; and
(ii)
under section 128B(2)(b)(ii), on interest paid by a non-resident that is incurred in carrying on business through a branch in Australia.

Interest paid by a resident is the main taxable case, and section 128B(6) (which deals with interest that is partly incurred in carrying on an overseas business), when read with section 128B(2)(b)(i), means that the withholding tax falls on interest paid overseas by an Australian resident except to the extent that it is incurred in carrying on business through a foreign branch.

Where interest that is otherwise subject to withholding tax is paid on a loan used by a firm with a sufficient degree of Australian ownership and control, the interest may be exempt from the tax by reason of section 128G of the Principal Act. The view has been put that, as the law is now framed, if interest is paid from Australia in respect of a loan to a company that is not sufficiently Australian owned to attract this exemption, the interest may nevertheless be exempt from tax if it is paid from the Australian end user through another Australian resident that carries on business through a foreign branch. The arrangement designed to bring about this situation involves one loan from a non-resident lender to an Australian resident institution that carries on a foreign business and a further loan of the moneys by the institution to the end user in Australia. Interest on the latter loan, being interest paid by a resident to another resident, would not at present be subject to withholding tax, while the interest paid by the resident intermediary institution is claimed to be interest incurred by it in carrying on its foreign business. If paid directly by the resident end user of the funds to the non-resident lender the interest would, of course, be subject to withholding tax.

Two amendments are proposed in order to eliminate this avenue of avoidance of the tax. The principal of these will place a liability to withholding tax on interest derived from Australia by an Australian resident in carrying on business through a foreign branch in circumstances where the tax would have been payable if the interest had been paid directly to the non-resident lender. The other will clarify the circumstances in which interest can be said to be incurred in carrying on a foreign business.

More detailed explanations of the proposed amendments are provided below. New sub-section (2A) to be inserted in section 128B of the Principal Act is designed to carry out the first of the amendments, while proposed sub-sections (8) and (9) of section 128B will enact the second.

Paragraph (a) of sub-clause (1) of clause 9 is a drafting measure which inserts a new sub-section (1A) in section 128B. Its purpose is to save words and aid comprehension by defining the term 'person to whom the section applies' - a term used frequently throughout the section. The term embraces the Australian or a State Government, an authority of such a government and any person who is, or at least one of whom is, a resident of Australia. Withholding tax applies to interest paid to non-residents by institutions or persons within the definition.

Paragraph (b) is a drafting amendment needed as a consequence of changed numbering of sub-sections.

Paragraph (c) is a drafting simplification which does no more than use the definition in proposed sub-section (1A), to shorten the expression of section 128B(2)(b)(i). It does not affect in any way the substance of the present law.

Paragraph (d) of sub-clause (1) of clause 9 proposes that new sub-section (2A) be inserted in section 128B. In brief, the new sub-section will have the effect that a liability to interest withholding tax will arise where a resident derives interest in carrying on business through a foreign branch and the interest is paid either by a resident (otherwise than on funds used in the business of a branch outside Australia), or by a non-resident on funds used in a branch business in Australia. It is designed to remedy the deficiency on which the tax avoidance arrangement described in the introductory note on clause 9 is based. It will, in that kind of arrangement, create a liability to withholding tax on interest derived by a resident in carrying on a foreign business, to the same extent as a liability would exist if the interest were directly derived by the non-resident lender. Thus, it could not create any liability in respect of interest that is exempt from tax under section 128G because the loan moneys are used in an Australian-owned and controlled business.

Under paragraph (a) of sub-section (2A) the new provision may apply to interest derived after 2 July 1973 (as foreshadowed in a statement made on that day) by a resident in carrying on business through an overseas branch.

Paragraph (b) of sub-section (2A) sets out the circumstances in which such interest could be subject to withholding tax. By sub-paragraph (i) (which corresponds with section 128(2)(b)(i) in relation to interest derived by non-residents) a liability may arise where the interest is paid by an Australian resident and is not an expense of a foreign business. Under sub-paragraph (ii) (corresponding with section 128B(2)(b)(ii) in relation to interest derived by non-residents) liability could exist where the payer is a non-resident and the interest is paid as an expense of the payer's Australian business.

Where the tests of paragraphs (a) and (b) of sub-section (2A) are met the interest will be subject to tax to the extent provided by the general provisions of Division 11A, as it applies to interest derived by non-residents.

Paragraphs (e) and (f) of clause 9 are purely drafting simplifications which use the definition in proposed sub-section (1A). The substance of the present law is not affected.

Paragraph (g) of clause 9 proposes to add measures of substance that represent the second of the two amendments mentioned in the introductory note to the clause. These measures are proposed sub-sections (8) and (9) of section 128B.

Proposed sub-section (8) contains a rule to clarify (for the purposes of sections 128B(2)(b)(i), 128B(2A)(b)(i), and 128B(6)(b)) the geographic location of interest paid by a resident who carries on business outside Australia.

If the resident borrows funds overseas to use in the operation of a foreign branch, Australia does not seek to impose withholding tax on the interest paid to the non-resident lender (section 128B(2)(b)(i)). The proposed amendments will not change this.

The technical background to proposed sub-section (8) is that the present law, in referring to interest being an out-going wholly incurred in carrying on business outside Australia, may not be confined to interest that is a charge against income of that business, but could, for example, extend to cases where the general arrangements for the loan and payment of interest are made at an overseas branch, even though the interest is a charge against income of the Australian business.

The objective of sub-section (8) is to firmly link the location of the outgoing interest with the location of the income resulting from the use of the funds. If interest paid is not incurred in gaining income of an overseas branch (e.g., the funds are used in Australia), the effect of the sub-section will be to preclude any argument that the interest was an outgoing wholly incurred in carrying on the branch business outside Australia, and thus not subject to withholding tax.

The sub-section goes about achieving this objective by specifying that, for purposes of the relevant provisions, where interest is paid after 2 July 1973 to a resident carrying on business outside Australia (paragraph (a)), and the interest incurred by the recipient relates to income of the recipient derived otherwise than through a foreign branch (paragraph (b)), the interest paid is not to be regarded as incurred in carrying on the foreign business of the recipient. Corresponding amendments to other provisions of the Principal Act, and based on similar considerations, are proposed by clauses 3 and 5 of the Bill.

Proposed sub-section (9) is a similar linking provision to cover the case of a non-resident who carries on business in Australia. In such cases withholding tax is imposed on interest paid by a non-resident to another non-resident in circumstances where funds are borrowed by the former from the latter for use in the former's business in Australia (section 128B(2)(b)(ii)).

The intention of sub-section (9) is to guard against the argument (based on what is meant by words in the present law concerning the incurrence of interest) that the interest paid as an expense of an Australian business is not an outgoing incurred in carrying on a branch of that business in Australia. This sub-section will also take effect from 2 July 1973, and will apply for the purposes of section 128B(2)(b)(ii), section 128B(2A)(b)(ii) and section 128B(7)(b). (Amendments corresponding with sub-section (9) are also proposed by clauses 3 and 5 of the Bill.)

Proposed sub-section (10) of section 128B is existing sub-section (8) re-numbered as a result of the amendments.

Proposed sub-section (11) provides that withholding tax payable by a resident as a result of new sub-section 128B(2A) is in addition to any ordinary income tax that may be payable on that interest, and that the withholding tax so resulting is not to be deductible in calculating that other income tax. Without this provision there could be scope to use the new provisions for tax avoidance purposes.

Sub-clause (2) of clause 9, which will not amend the Principal Act, concerns the application of section 128C of that Act. Normally, interest withholding tax is due and payable at the expiration of twenty-one days after the end of the month in which the interest is derived. Sub-clause (2) relates to tax that becomes payable by reason of proposed section 128B(2A) in respect of interest paid between 2 July 1973 and the date of Assent to the Bill. That tax will become due and payable at the expiration of twenty-one days after the end of the month in which Assent is given.

Clause 10: Certain income not included in assessable income.

The amendment proposed by this clause is a companion measure to proposed section 128B(11) (see second-last paragraph above) and will ensure that a resident who is subject to withholding tax on interest derived through an overseas branch may also have that interest included in his assessable income if the normal provisions of the Principal Act would treat that interest as assessable income.

Clauses 11-19: Collection by Instalments of Tax on Companies.

Clause 11: Interpretation.

Section 221AA of the Principal Act sets out rules of interpretation applying to the associated provisions in Division 1A of Part VI (sections 221AB to 221AJ) that govern arrangements for the collection of company tax by instalments. By sub-section (3) of the section the general recovery provisions of the Principal Act apply to the additional tax payable in accordance with the existing sub-section (3) of section 221AG by a company that has obtained a reduction of an instalment of tax on the basis of an estimate of tax payable on assessment that proves to be less than the tax actually so payable.

By the amendments proposed by clause 17, a new section 221AG is to be enacted in place of the present provision. As a consequential change, clause 11 proposes to replace the reference to sub-section (3) of section 221AG with a reference to sub-sections (6) and (7), which are the relevant provisions of the proposed new section.

Clause 12: Companies to which Division applies.

Clause 12 of the Bill proposes the repeal of section 221AB of the Principal Act, which marked out the area of application of the provisions for the collection of company tax instalments in the first year of the instalment system.

Amendments being proposed by clauses 13 and 14 respectively to sections 221AC and 221AD of the Principal Act will effectively extend the area of application of the instalment system. The provisions of section 221AB will then cease to have any practical significance.

Clause 13: Liability to pay instalments of tax.

Sub-section (1) of section 221AC of the Principal Act authorises the collection of one instalment of tax in respect of the income of a company of the 1972-73 income year and each subsequent year of income if, as required by sub-section (2), an Act declaring rates of tax provides for the instalment to be payable in respect of income of the relevant year. Clause 13 proposes to replace sub-section (1) with a new sub-section authorising the collection of two instalments of tax in respect of 1973-74 income and three instalments in respect of income of subsequent years.

Clause 14: Amount of notional tax.

"Notional tax" is a term used to identify the figure by reference to which the amount of an instalment of tax payable by a company is determined. As a general rule, the amount of an instalment is fixed by section 221AE of the Principal Act as one-quarter of the amount that is the notional tax of a company on the date on which notification of its liability to pay the instalment is sent to the company. Section 221AD of the Principal Act contains the machinery by which the amount of notional tax of a company at any relevant time is to be determined.

As soon as a notice of assessment of the tax payable by a company in respect of its income of a year of income has been issued, the notional tax of the company in respect of that year of income is, under sub-section (3), an amount equal to the tax so payable. Until the issue of the relevant notice of assessment, however, the notional tax of a company in respect of a year of income is an amount equal to the tax assessed in respect of the previous year of income (sub-section (1)) unless, following a change in the rates of tax payable by companies, a regulation has been made authorising an increase or decrease in that amount (sub-section (2)).

Paragraphs (a) and (b) of clause 14 will make drafting changes to sub-sections (1) and (2) of section 221AD as a consequence of the inclusion of additional provisions in the section.

Paragraph (c) proposes to add three new provisions - sub-sections (2A) and (2C) - to section 221AD.

The new sub-section (2A) is concerned with a company that, under the existing terms of section 221AD, would not have a notional tax in respect of the relevant year of income at a time when the liability to pay an instalment of tax is being notified because, at that time, an assessment had not been made of any tax that might be payable on its income of the relevant year of income or of the previous year. It provides that, where the Commissioner of Taxation has reason to believe that income tax will become payable by such a company on its taxable income of the relevant year of income, the notional tax of the company in respect of that year is the amount of income tax that the Commissioner estimates will be so payable. In conjunction with an additional provision to be incorporated in section 221AE of the Principal Act by clause 15 of the Bill, the new sub-section (2A) of section 221AD will tend to discourage avoidance of a liability to pay instalments of tax by switching income year by year between associated companies.

Where a company has been called upon to pay an instalment of tax based on a notional tax fixed by sub-section (2A) as the Commissioner's estimate of the income tax that will be payable, it will have the general right under section 221AG to seek a variation of the notified amount on the basis of its own estimate of the tax that will be payable. If the right is exercised and the amount payable as the instalment of tax is in consequence altered, then any subsequent instalment of tax in respect of income of the same year that is notified to the company before an assessment has been made of the tax actually payable for that year will be based on a notional tax fixed by the new sub-section (2B). In any event, sub-section (2A) will cease to apply as soon as a notice of such an assessment for the relevant year has been issued. The tax payable under the assessment will then, as provided by the existing sub-section (3) of section 221AD, become the notional tax by reference to which instalments of tax are to be calculated.

The new sub-section (2B) of section 221AD will vary the notional tax of a company for a relevant year of income where the company has furnished, in accordance with section 221AG, an estimate of the income tax payable on its taxable income for that year and, as a consequence, the amount ultimately payable as the instalment in relation to which the estimate was furnished is different from the amount originally notified as being payable. In such a case, sub-section (2B) provides for the notional tax on and after the due date for payment of that instalment to be, subject to the operation of sub-section (3), an amount equal to the company's estimate of the tax payable or, where the Commissioner has substituted his own estimate, an amount equal to the Commissioner's estimate of the tax payable.

The sub-section will thus ensure that, once an instalment of tax in respect of the income of a particular year is varied in accordance with section 221AG on the basis of an estimate by the company or by the Commissioner of the tax that will become payable on that income, the amount payable as any subsequent instalment in respect of income of the same year will be calculated by reference to that estimate unless, of course, a notice of assessment of the tax actually payable has been issued by the date of notification of the subsequent instalment.

The new sub-section (2C) of section 221AD provides that, where the amount of an instalment of tax in respect of a year of income has been calculated by reference to the amount of notional tax arrived at by the Commissioner in accordance with sub-section (2A), the subsequent issue of a notice of assessment for the previous year will not affect the operation of the section. In calculating the amount of a later instalment, the notional tax determined by the Commissioner under sub-section (2A) will be the amount on which the instalment is based unless this has been changed by either an estimate accepted from the company or a variation by the Commissioner, or there has been an issue of a notice of assessment for the relevant year.

Clause 15: Amount of instalment of tax.

The amount that a company is to be called upon to pay as an instalment of tax (except an instalment in relation to which an application for variation of the notified amount is made by the company in accordance with section 221AG) is determined under section 221AE.

Sub-section (1) of that section at present provides that, subject to sub-section (2), the amount payable by a company as an instalment of tax in respect of its income of a year of income is to be one-quarter of the amount that is the notional tax of the company on the date of issue of a notice of liability to pay the instalment served on the company in accordance with section 221AF.

The existing sub-section (2) of section 221AE authorises the Commissioner, having regard to the purpose for which the provisions covering tax instalments of companies were enacted (i.e., the more expeditious collection of tax payable by companies) and the existence of particular circumstances in relation to a company, to determine that an amount otherwise payable by the company as an instalment of tax should be reduced or that an instalment should not be payable in respect of its income of a year of income.

Sub-section (3) states that the particular circumstances to which regard may be had under sub-section (2) include the operation of specified provisions of the Principal Act relating to credits in respect of ex-Australian tax on ex-Australian income, and the operation of the Income Tax (International Agreements) Act, which gives the force of law to double taxation agreements with other countries and contains measures to facilitate the implementation of those agreements.

Paragraph (a) of clause 15 proposes to substitute for the existing sub-section (1) of section 221AE a new provision which, while similar in form, will apply where one or more instalments of tax are to be payable. The operation of the new sub-section is subject also to new sub-section (4) which is a protective provision proposed by paragraph (c) of clause 15.

Paragraph (b) proposes a drafting change to the terms of sub-section (2) of section 221AE. The amendment will make it clear that the Commissioner is empowered to decide that a particular instalment in respect of a year of income should not be payable by a particular company. The practical effect of the provision is unaltered.

Paragraph (c) proposes to substitute four new provisions - sub-sections (4) to (7) - for the existing sub-section (4) of section 221AE.

The new sub-section (4) will apply where the Commissioner has reason to believe that the income tax payable for a year of income will be greater than the notional tax on which the amount payable as an instalment of tax for that year of income is to be calculated. In these circumstances it will authorise the Commissioner to determine, for the purpose of the initial notification to the company of its liability in respect of that instalment, that the amount that would otherwise be payable is to be increased by such amount as he thinks appropriate.

Where the amount payable as an instalment has been so increased and the company concerned considers that the notified amount is excessive, it will have a right, subject to the limitations in section 221AG, to seek a variation on the basis of the company's estimate of the income tax that will become payable on its taxable income of the year concerned.

As with an additional provision (sub-section (2A)) proposed to be incorporated in section 221AD of the Principal Act by clause 14 of the Bill, the new sub-section (4) of section 221AE is a protective provision to frustrate possible avoidance of a company's liability to pay instalments of tax by switching income to an associated company.

The new sub-section (5) of section 221AE is, with minor alterations, a re-enactment of the existing sub-section (4) and covers situations where the whole or a part of one instalment remains unpaid on the due date for payment of the income tax liability of a company of a year of income. It provides that the unpaid amount of the instalment, to the extent that it may exceed any outstanding income tax liability, ceases to be payable on the date on which the income tax becomes due and payable.

The new sub-section (6) of section 221AE deals with the situation where there are two or more instalments of tax in respect of income of the relevant year which have not been fully paid on the due date for payment of the income tax liability for the year. Paragraph (a) applies where the income tax liability of the company of the year of income has not been fully paid. It gives the Commissioner power to determine the extent to which any one instalment shall cease to be payable. Paragraph (b) applies where the whole of the income tax liability of the year of income has been paid. In this case each instalment, to the extent it is unpaid, ceases to be payable.

The new sub-section (7) of section 221AE directs the Commissioner, in making his determination under paragraph (a) of sub-section (6), to take into account the extent, if any, to which the sum of the unpaid instalments exceeds the amount of unpaid income tax.

Overall sub-sections (5), (6) and (7) will leave the way open for recovery of so much of any amount unpaid in respect of an instalment of tax as may need to be collected for application against an associated income tax liability, while ensuring that no part of any instalment of tax will remain payable indefinitely for no real purpose.

Clause 16: When instalment of tax payable.

Sub-section (1) of section 221AF of the Principal Act provides for a company to be served with a notice specifying the amount payable as the instalment of tax in respect of its income of the year of income and the date on which that amount is due and payable.

Sub-section (2) provides that the date to be specified in a notice under sub-section (1) as the due date for payment of the instalment of tax in respect of income of the company of a year of income is to be no earlier than 30 days after the date of service of the notice and not earlier than 31 December in the year of tax (the financial year immediately following the relevant year of income).

Paragraph (a) of clause 16 will amend sub-section (1) of section 221AF to refer to "an" instalment of tax rather than "the" instalment of tax as a consequence of the proposal that more than one instalment of tax be payable in respect of a company's income of 1973-74 or a subsequent year of income.

Paragraph (b) will replace sub-section (2) of section 221AF with a new provision which, while preserving the requirement that a company be given at least 30 days' notice of a liability to pay an instalment of tax, will specify an earliest due date for each of the two instalments to be paid by a company in respect of its 1973-74 income and each of the three instalments to be paid by a company in respect of its income of 1974-75 and each subsequent year of income.

The earliest due dates specified in the new sub-section (2) are -

for the first instalment of tax in respect of 1973-74 income - 15 November 1974
for the second instalment of tax in respect of 1973-74 income - 15 February 1975
for the first instalment of tax in respect of income of 1974-75 and each subsequent year of income - 15 August 1975 and so on.
for the second instalment of tax in respect of income of 1974-75 and each subsequent year of income - 15 November 1975 and so on.
for the third instalment of tax in respect of income of 1974-75 and each subsequent year of income - 15 February 1976 and so on.

The amount by which the income tax assessed in respect of the income of a particular year of income exceeds the sum of the instalments payable in respect of that income will be due for payment on the date specified in the relevant notice of assessment. In the general run of cases, the due date will fall within the last quarter of a financial year.

Clause 17: Estimated income tax.

Section 221AG of the Principal Act deals with the right of a company to have amounts otherwise payable as instalments of tax in respect of the income of a year of income, which would be based more often than not on tax assessed on the income of the previous year, altered on the basis of its own estimate of the income tax that it expects to pay on its taxable income of the year of income to which the instalment relates.

Clause 17 will repeal the existing section 221AG and replace it with a new section designed to cover the proposed situation in which two or more instalments of tax in respect of the income of each year will be payable by a company.

Sub-section (1) of the new section 221AG, which operates subject to sub-sections (2) and (3), is in similar terms to the existing sub-section (1). It provides that a company which is served with a notice under section 221AF specifying the amount payable as an instalment of tax in respect of its income of a year of income may make an estimate of the amount of income tax payable on its taxable income for that year of income and give a statement to the Commissioner showing the amount of the estimate and the basis on which it is made. This statement is to be furnished to the Commissioner not later than the due date for payment of the instalment.

Sub-section (2) will make it clear that a company may not seek to vary the amount of an instalment under sub-section (1) if the instalment is based on tax already assessed for the year in respect of which the instalment is payable. In the event of a dispute about the income tax assessed, a company that desires relief from the liability to pay the notified instalment can seek the Commissioner's approval to defer payment of an appropriate part of that liability.

Sub-section (3) will limit a company to one estimate of tax in relation to instalments payable in respect of the income of a particular year.

Sub-section (4) is substantially a re-enactment of the existing sub-section (2). It will fix the amount payable as an instalment of tax in relation to which an estimate has been furnished under sub-section (1) as one-quarter of the tax estimated by the company (the "adjusted instalment of tax") unless, under sub-section (5), the Commissioner substitutes his own estimate of the tax payable.

The new sub-section (5) is in closely similar terms to existing sub-section (4), which authorises the Commissioner to substitute his own estimate for a company's estimate of tax payable and provides for the amount payable as the relevant instalment in this event to be one-quarter of the Commissioner's estimate or the amount originally notified, whichever is the less.

As with the existing sub-section (4), the new sub-section (5) allows the Commissioner to substitute his own estimate for that of the company where he considers that the company's estimate is too low. It also authorises him to substitute his estimate where he considers that the company's estimate is too high. This change will open the way for the Commissioner to make downward adjustments of instalment liabilities where, for instance, a proposal to reduce company tax rates is announced after a company has furnished an estimate of tax payable for the relevant year.

The new sub-section (6) re-enacts, with some changes, the existing sub-section (3). It imposes additional tax where a company has applied for a variation of a notified instalment and has under-estimated the amount of tax payable. The additional tax is calculated, at the rate of 10 per cent per annum for the period between the due date for payment of the instalment in relation to which the estimate was furnished and the due date for payment of the assessed tax, by reference to the short-payment of that instalment arising from the under-estimation.

However, a qualification that appears at the beginning of the existing sub-section (3) is being dispensed with. This change will expose a company, in appropriate circumstances, to a liability for additional tax, although the Commissioner has substituted his own estimate for the company's estimate of tax payable. If a company's under-estimation is attributable to several factors, it may be inappropriate for it to avoid any risk of penalty simply because the Commissioner has detected and made an adjustment in respect of one of those factors.

Another change, consequential upon that described in the preceding paragraph, will ensure that additional tax is not payable in respect of any part of a short-payment that is attributable to an adjustment made by the Commissioner. If the amount finally payable as the instalment by reason of action taken by the Commissioner is less than the amount that would have been finally payable on the basis of the company's estimate, the latter amount is to be taken into account in arriving at the amount, if any, by reference to which additional tax is calculated.

As previously, the Commissioner is given authority to remit the whole or a part of any additional tax incurred by a company where he has sufficient reason for so doing.

Proposed new sub-section (7), like new sub-section (6), will impose a liability for additional tax where a company has applied for a variation of a notified instalment and has under-estimated the amount of tax payable. As already explained, the additional tax imposed by sub-section (6) is calculated by reference to any short-payment of the instalment of tax in relation to which the estimate was furnished. The additional tax to be imposed by the new sub-section (7) is to be calculated by reference to a short-payment of any subsequent instalment for the same year that occurs by reason of the under-estimation. It is to be calculated at the rate of 10 per cent per annum for the period between the due date for payment of that subsequent instalment and the due date for payment of the assessed tax. As is the case with sub-section (6), no part of a short-payment that is attributable to a re-estimation by the Commissioner will attract additional tax under sub-section (7). The Commissioner may remit additional tax payable under the sub-section if he considers that there are sufficient reasons for so doing.

The new sub-section (8) is a re-enactment without change of the existing sub-section (5). The sub-section makes it clear that estimates by a company or by the Commissioner for the purposes of section 221AG are to be estimates of net amounts remaining to be paid after credits have been set off against a company's income tax liability under provisions of the Income Tax Assessment Act and the Income Tax (International Agreements) Act in respect of ex-Australian tax on ex-Australian income.

The new sub-section (9) will ensure that, when establishing for the purposes of section 221AG the day on which an amount of income tax became due and payable, any extension of time for payment granted under section 206 will not be taken into account.

Clause 18: Notice of alteration of amount of instalment.

Section 221AH of the Principal Act provides for a company to be notified in the event of the alteration of an amount that it has been called upon to pay as an instalment of tax. Alterations may occur by reason of the operation of provisions in sections 221AE and 221AG which are referred to in section 221AH.

Clause 18 will amend section 221AH so that it will reflect the changes to sections 221AE and 221AG that are proposed by clauses 15 and 17 respectively.

Clause 19: Application of payments of instalments of tax.

Section 221AI of the Principal Act deals with the application of amounts paid by companies in respect of instalments of tax. Sub-section (1) relates to cases where the amount of an instalment originally notified to a company has been reduced and the company has paid more than the reduced amount.

The sub-section usually operates to allow an immediate refund to the company of the excess, with the balance of the payment being retained for application against the company's income tax liability when an assessment has been made of the income tax payable for the relevant year of income. If, however, that tax has become due for payment or any other income tax or withholding tax is unpaid at the time the excess payment of the instalment is being dealt with, the Commissioner is required to credit the whole or a part of the excess payment against the amount outstanding.

Clause 19 will amend sub-section (1) of section 221AI to require the whole or a part of an excess payment of a particular instalment to be credited, not only against any liabilities of the kinds just mentioned, but also against a liability for payment of any other instalment of tax in respect of the same year of income before any part of the excess payment is refunded.

Clause 20: Deductions from dividends and interest.

The purpose of this clause is to insert four new sub-sections in section 221YL of the Principal Act in order to ensure that withholding tax, imposed as a consequence of amendments proposed in this Bill, may be effectively collected.

Sub-section (2C) is a drafting provision which defines a 'relevant person' as including, principally, a resident of Australia.

Proposed sub-sections (2D), (2E) and (2F) (when read together) will have the effect that where interest is derived by a resident through an overseas branch, but is to be paid to that resident in Australia rather than at the overseas branch, the resident lender will be required to give appropriate notice to the borrower. The latter will then be required to deduct 10 per cent interest withholding tax from interest payments, and forward the amount deducted to the Taxation Office.

Sub-section (2D) identifies the circumstances in which these arrangements are to apply and sub-section (2E) requires the resident lender to notify the borrower and the Commissioner that sub-section (2E) applies. The borrower is then required by sub-section (2F) to deduct 10 per cent interest withholding tax, which is the amount specified by the regulations, from interest paid after 1 month from receipt of the notice.

Clause 21: Application of amendments.

This clause deals with the application of the amendments to be effected by clause 4 (exemption of Defence Force allowances), clause 6 (assessability of Defence Force allowances) and clause 7 (deductions for contributions under Parliamentary and Defence Force Retirement Benefits Schemes). Explanations of how the amendments are to apply have been included in the notes on those clauses.

INCOME TAX (DIVIDENDS AND INTEREST WITHHOLDING TAX) BILL 1974

This Bill, which declares rates of dividend and interest withholding tax, is a technical measure consequential on the proposed extension of interest withholding tax beyond payments to non-residents to include, in a limited range of circumstances, payments of interest to residents.

The Bill will repeal the Income Tax (Non-resident Dividends and Interest) Acts of 1967 and 1973, which up till now have declared the rates of withholding tax on payments to non-residents. The Bill, with a different title from the legislation being repealed, will declare the rates of withholding tax on payments to non-residents and on those payments of interest to residents that become subject to withholding tax as a consequence of sub-section (2A) of section 128B of the Assessment Act, being inserted by clause 9 of the Income Tax Assessment Bill 1974.

Apart from a saving provision which continues in force the previous legislation in relation to payments made before the date of Assent to the Bill, the Bill is in all substantive respects the same as the repealed measures. Clause 6 will impose the 10 per cent withholding tax on interest which comes within the Assessment Act as amended.


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