House of Representatives

Explanatory Memorandum

(Circulated by the Treasurer, the Rt. Hon. B.M. Snedden, Q.C., M.P.)

Introductory Note

The purpose of this memorandum is to explain the provisions of two income tax Bills.

INCOME TAX BILL 1972

The first Bill - the Income Tax Bill 1972 - will declare the rates of income tax payable by individuals and companies for the current financial year 1972-73. The main features of the Bill in so far as changes in the practical effect of the law are involved are:-

•

Minimum taxable income (clauses 5(3.) and 7). The minimum amount of taxable income of an individual taxpayer that is subject to tax will be increased from $417 to $1,041, with related changes in the "shading-in" arrangements which limit the tax payable on the minimum taxable income and incomes marginally above it.

•

Rates of tax, individuals (clause 6). The rates of tax are to be revised for the 1972-73 financial year so that reduced tax will be payable by individuals and by trustees who are taxed on income taxed at individual rates of tax. The additional tax imposed at the rate of 5 per cent for the first nine months of the 1971-72 financial year and reduced to 2 1/2 per cent for the last three months of that year is not to be imposed for the 1972-73 financial year.

INCOME TAX ASSESSMENT BILL (NO. 4) 1972

The second Bill - the Income Tax Assessment Bill (No. 4) 1972 - will give effect to proposals announced in the Budget Speech to increase the maximum amounts of the concessional deductions allowable in respect of the maintenance of dependants and to provide an income tax deduction in respect of certain expenses paid by a taxpayer in obtaining educational qualifications related to his employment or career, where the expenses are not deductible under the present law.

The amendments to the dependants' allowances will have the effect of increasing the deductions available for each dependant and for a housekeeper by $52. A list of the present allowances and the new allowances proposed is given in the notes on the second Bill.

The new concession for expenses of self-education will, in broad terms, be available for expenditure incurred by a taxpayer on fees, books and equipment for a course of education undertaken to gain qualifications for use in his employment or career (to the extent that the expenditure is not recouped by an employer or under a Commonwealth secondary or technical scholarship).

Unlike the concession provided by section 82J of the Principal Act for payments made by a person in respect of the full-time education of a student under 25 years of age, the new concession will not be subject to an age qualification and will be available in respect of a course undertaken by the taxpayer on a full-time or part-time basis or by correspondence.

The maximum deduction allowable in respect of a year of income will be $400. Where a deduction has been allowed under section 82J to any person, in respect of expenses incurred for the taxpayer's education, the maximum allowance of $400 will be reduced by the amount of the section 82J deduction allowed to the other person.

The increased deductions for the maintenance of dependants and the special deduction for expenses of self-education are to apply in assessments based on income of the 1972-73 income year and subsequent income years.

Provisional tax for 1972-73 will be calculated on the basis of the rates of tax proposed for 1972-73. No provisional tax will be imposed where the provisional income of an individual is less than $1,041.

NOTES ON CLAUSES

INCOME TAX BILL 1972

Introductory Note

The following notes are restricted to provisions of the Bill that differ in practical effect from legislation that declared the rates of tax for the 1971-72 financial year (the Income Tax Act 1971-1972).

Clause 5: Imposition of income tax.

This clause will impose income tax for the current year at rates declared elsewhere in the Bill. Apart from sub-clause (3.), the clause is the same as the corresponding provision in the Income Tax Act 1971-1972.

Sub-clause (3.) - the "minimum taxable income" provision - provides that, with certain exceptions, no tax is payable by specified classes of taxpayers - individuals, trustees assessed under sections 98 or 99 of the Assessment Act, and non-profit companies - whose incomes are below the minimum taxable amount. In 1971-72 the minimum taxable amount for each of the specified classes was $417.

For individuals and for trustees assessed under section 98 of the Assessment Act, paragraph (a) of sub-clause (3.) provides that for the 1972-73 financial year the minimum taxable amount is to be increased to $1,041. Section 98 applies to trust income to which a beneficiary is presently entitled but under a legal disability, e.g., where he is a minor. By paragraph (b) the minimum taxable amount for non-profit companies and for trustees assessed under section 99 of the Assessment Act remains at $417. Section 99 applies to income of a trust estate to which no beneficiary is presently entitled.

Clause 6: Rates of tax payable by persons other than companies.

This clause declares the rates of tax payable by persons other than companies for the 1972-73 financial year. The rates of tax for the various classes of taxpayers are set out in sub-clauses (1.) to (9.) and in the Schedules to the Bill.

The general rates of tax, which are directly applicable to most individuals, are declared by sub-clause (1.) of clause 6 and are set out in the First Schedule to the Bill. The Schedule sets out rates of tax all of which are lower than the corresponding rates specified for the 1971-72 year. The maximum rate of tax, 66.7 per cent, is to apply to the part of taxable income that is in excess of $40,000. In 1971-72 the maximum rate applied to taxable income in excess of $20,000.

Sub-clauses (2.), (3.) and (4.) and the associated Second, Third and Fourth Schedules to the Bill fully reflect the new rates in the cases to which each Schedule applies.

Primary producers to whom the averaging provisions of the Assessment Act apply are liable for tax at the rates declared by sub-clause (2.), as set out in the Second Schedule. The effect of the Second Schedule is to tax the first $16,000 of taxable income at either the average of the general rates applicable to the person's average income or the average of the general rates applicable to an income of $16,000, whichever is the less. In consequence of the reductions in the general rates, the new Second Schedule differs from that for 1971-72 by specifying the new average rate of tax applicable to an income of $16,000 (37.729375 cents in the dollar) and the reduced amount of tax on an income of $16,000 ($6,036.70).

Sub-clause (3.) declares the rate of tax applicable to a taxpayer deriving a notional income as specified by sections 59AB, 86 or 158D of the Assessment Act. This is set out in the Third Schedule to the Bill, As the Third Schedule applies by reference to the rates in the First Schedule, the reductions in the general rates will automatically apply in these cases.

Sub-clause (4.) declares that the rate of tax payable by a trustee in pursuance of section 98 or section 99 of the Assessment Act is determined by the Fourth Schedule, Although this Schedule has not been varied, the proposed reductions in tax will flow through to these cases, since the Fourth Schedule specifies that the rates of tax fixed by the earlier schedules are applicable in assessments under section 98 or section 99.

The tax payable in cases where sub-clauses (5.) to (9.) apply will remain unchanged from the 1971-72 financial year.

Clause 7: Limitation of tax payable on certain incomes.

Clause 7 imposes a limit on the amount of tax payable by a person, other than a company, on incomes marginally above the amounts set out in sub-clauses (a) and (b) of clause 5(3.) as the amounts of income up to which no tax will be payable. The purpose is to cushion the movement from complete exemption into tax at ordinary rates. In 1971-72 tax at ordinary rates was limited to nine-twentieths of the amount by which the income exceeded $416, tax at general rates being reached at an income above $428. The "shading-in" arrangements for 1972-73 are being varied in consequence of the changes to the minimum taxable income levels, and of the reductions in the general rates of tax.

Sub-clause (1.) of clause 7 refers to an individual and provides that where the taxable income does not exceed $1,120 the tax payable under the First, Second and Third Schedules to the Bill is limited to two-thirds of the amount by which the taxable income exceeds $1,040.

Sub-clause (2.) refers to net income of a trust estate that is assessable to the trustee under section 98 of the Assessment Act, i.e., where the beneficiary presently entitled to the income is under a legal disability. Where the net income does not exceed $1,120 the tax payable by reference to the Fourth Schedule to the Bill will be limited to two-thirds of the net income in excess of $1,040.

Sub-clause (3.) refers to the net income of a trust estate to which no beneficiary is presently entitled that is assessable to the trustee under section 99 of the Assessment Act. If the net income does not exceed $426 the tax payable will be limited to nine-twentieths of the excess of that income over $416. The upper limit of the "shading-in" range will become $426 since, at the reduced rates of tax proposed for 1972-73, the tax under the "shading-in" provisions will coincide with normal tax at income above $426.

Clause 8: Limitation of tax payable by aged persons.

Clause 8 authorises tax relief - usually referred to as the age allowance - for qualified aged persons, that is, residents of Australia who, if men, are 65 years or more or, if women, 60 years or more.

In 1971-72, the age allowance exempted from tax an aged person whose own taxable income did not exceed $1,326. A married aged person contributing to the maintenance of his or her spouse who also met the residential qualification was exempt if the combined taxable income of husband and wife did not exceed $2,314. Special "shading-in" rates applied to taxable incomes (or combined taxable incomes) in excess of these exemption levels until the tax at these "shading-in" rates reached the tax payable at ordinary rates.

The exemption levels and "shading-in" rates of the age allowance proposed for 1972-73 are the same as those that applied for 1971-72. However, because of the proposed decrease in the rates of tax payable by individuals the tax at the "shading-in" rates will now reach the tax payable at ordinary rates when the taxable income exceeds $2,202 or, in the case of a married aged person, $3,871. Accordingly, clause 8 adjusts the upper limits of the "shading-in" ranges of the age allowance to $2,202 and $3,871 respectively. (Because of clauses 8(2.)(b) and (3.)(b) of the Bill, aged taxpayers whose taxable incomes do not exceed these upper limits will not be called upon to pay further tax, in respect of certain partnership income, under section 94 of the Assessment Act.)

INCOME TAX ASSESSMENT BILL (NO. 4) 1972.

The principal features of this Bill have already been mentioned in the introductory paragraphs of this memorandum. The following notes relate to each clause of the Bill.

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 1901-1966 provides that an Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act.

By clause 2, it is proposed that the Amending Act will come into operation on the day on which it receives the Royal Assent.

Clauses 3 and 4 : Deductions for dependants.

The amendments proposed by these clauses are designed:-

(a)

to increase by $52 each of the amounts specified in sub-section (2.) of section 82B of the Principal Act as the maximum deductions allowable to a tax-payer in respect of the maintenance by him of various classes of dependants (clause 3); and

(b)

to increase by $52 the amount specified in section 82D of the Principal Act as the maximum deduction allowable to a taxpayer in respect of a housekeeper (clause 4).

The increased allowances will apply in assessments based upon income of the 1972-73 income year and subsequent years.

Increase in Deductions

The maximum deductions provided in the present law for each class of dependant and for a housekeeper are compared with the proposed maximum deductions in the following summary:-

Clause 5: Expenses of self-education.

This clause proposes the introduction into the Principal Act of a new section - section 82JAA - which will authorise the allowance of a concessional deduction for certain types of expenses incurred by a taxpayer in respect of his own education. The allowance will be available for expenditure which does not qualify for deduction under any other provision of the income tax law.

In explaining the main provisions of the new section, reference will be made to terms which are defined in sub-section (5.) of the proposed section 82JAA. The terms are:-

"expenses of self-education" : This term is defined to mean expenses necessarily incurred by the taxpayer for fees, books and equipment in connexion with a "prescribed course of education" (also a defined term - see explanation following). Expenses in respect of which a deduction is allowed or allowable to the taxpayer under another provision of the Principal Act are expressly excluded from the definition.

"prescribed course of education" : This expression denotes a course of education provided by a school, college, university or other place of education undertaken by the taxpayer for the purpose of gaining qualifications for use in carrying on a profession, business or trade, or in the course of employment. If a course satisfies these criteria, it will be immaterial whether it is attended by the taxpayer on a full-time or part-time basis or is carried on by correspondence. A course of training or instruction undertaken by the taxpayer otherwise than for the purpose of gaining qualifications connected with his career, e.g., for the purpose of developing a hobby or for recreation, will not satisfy the definition.

"scholarship benefits" : This term is to have the same meaning as in section 82J of the Principal Act which authorises a special deduction for education expenses necessarily incurred by a taxpayer on the full-time education of a child or other dependant under the age of 25 years. The term refers to amounts (other than amounts for maintenance or accommodation) payable under a scheme for the provision by the Commonwealth of secondary or technical scholarships. Benefits of this description are taken into account in determining the amount of any deduction allowable under section 82J for education expenses. To the extent that any benefits of this description are not taken into account in fixing the amount of a deduction allowable under section 82J, they will be offset against the expenses of self-education incurred by a taxpayer in determining the amount allowable under the new section.

Sub-section (1.) of the proposed section 82JAA provides for the allowance of a deduction for expenses of self-education incurred by a taxpayer in a year of income where he is not reimbursed or entitled to be reimbursed for any part of the expenses, either by an employer or other person or by the receipt of scholarship benefits. Paragraphs (a), (b) and (c) of sub-section (1.) state the requirements for the operation of the sub-section.

In terms of paragraph (a) the first requirement is that the taxpayer must have paid expenses of self-education in the year of income.

Paragraph (b) states, as the second requirement for the operation of the sub-section, that no scholarship benefits may be claimable in the year of income by the taxpayer or by any other person in respect of the taxpayer. Scholarship benefits that were capable of being claimed in an earlier income year are disregarded for purposes of paragraph (b) as they would have been taken into account for deduction purposes in the earlier year. In the same way, a payment of scholarship benefits taken into account in calculating the amount of a deduction allowable to any other person under section 82J for expenses incurred for the taxpayer's education is also to be disregarded.

The deduction available for expenses of self-education is to be limited - by virtue of sub-section (3.) - to the difference between $400 and the amount (if any) allowed under section 82J in respect of the education expenses of the student. Paragraph (b) of sub-section (1.) makes it clear that where a payment of scholarship benefits has been wholly taken into account in determining a deduction allowable under section 82J to a person who has incurred expenses in relation to the education of the student, the payment will not again be taken into account in measuring the deduction allowable to the student himself as expenses of self-education.

Paragraph (c) states a further requirement for the operation of sub-section (1.), i.e., that in the year of income the taxpayer has not been reimbursed or been entitled to be reimbursed for his expenses of self-education by his employer or any other person. Reimbursements that fall to be treated as assessable income of the taxpayer are disregarded for purposes of paragraph (c).

Any reimbursements that relate to expenses of self-education paid by the taxpayer in the 1971-72 income year or a prior year are also disregarded for purposes of paragraph (c). This will ensure that the deduction available for expenses of self-education paid by the taxpayer in the 1972-73 income year (or in a subsequent income year) is not reduced by any amount reimbursed to the taxpayer for expenses paid by him in an earlier year when a concessional deduction for expenses of self-education was not available.

Where the tests in paragraphs (a), (b) and (c) of sub-section (1.) are met, the taxpayer is to be entitled to a deduction of the total amount of expenses of self-education paid by him in a year of income. As mentioned above, however, a ceiling of $400, reduced by any deduction allowed under section 82J to a parent or another person, is placed on the deduction allowable in respect of a year of income by sub-section (3.) of the new section.

Sub-section (2.) of the proposed section 82JAA will apply in situations where a taxpayer who has incurred expenses of self-education during the year of income is the holder of a Commonwealth secondary or technical scholarship which gives him or some other person an entitlement to claim "scholarship benefits" (as defined) in the year of income.

The sub-section is also designed to apply where the taxpayer has, in the year of income, expended amounts by way of expenses of self-education but has been reimbursed, or is entitled to be reimbursed, by his employer or some other person for all or part of those expenses in circumstances where the reimbursement will not form part of his assessable income.

Broadly stated, the sub-section provides that, in the situations outlined, only the "net" amount of the expenses is to be available for deduction. As with sub-section (1.), the deduction otherwise available under sub-section (2.) is subject to the ceiling imposed by sub-section (3.) - see notes on that sub-section.

Paragraph (a) of sub-section (2.) will apply where the taxpayer has, in the year of income, paid expenses of self-education and a payment of scholarship benefits is claimable by any person in respect of the taxpayer. If, in the year of income, scholarship benefits may be claimed which could also have been claimed in an earlier income year, such benefits are to be disregarded in applying paragraph (a). In cases of this kind the benefits would, of course, generally be taken into account for the earlier income year in which they were first claimable.

Another class of scholarship benefits payment that is to be disregarded in terms of paragraph (a) is a payment that has been, or is to be, taken into account in calculating the amount of a deduction allowed or allowable to any person under section 82J in respect of the year of income. As mentioned in the notes on sub-section (1.) above, the objective is to ensure that a payment of scholarship benefits that has been, or is to be, taken into account in determining the deduction available under section 82J for education expenses does not adversely affect the calculation of the amount of the deduction under sub-section (2.) in respect of self-education expenses.

Paragraph (b) of sub-section (2.) relates to a case where the taxpayer has paid expenses of self-education in the year of income but has received, or is entitled to receive, in that year a reimbursement of expenses from his employer or some other person. Reimbursements from an employer in respect of expenses of self-education that were paid by the taxpayer prior to the 1972-73 year or reimbursements forming part of the taxpayer's assessable income are to be disregarded in terms of paragraph (b).

Where the requirements of paragraphs (a) and (b) are satisfied, the deduction allowable to a taxpayer in respect of expenses of self-education is the total amount of those expenses as reduced by the sum of any payments referred to in either paragraph. As with the deduction authorised by sub-section (1.), the net amount determined under sub-section (2.) is limited by sub-section (3.) to an amount of $400 less any amount allowed under section 82J in relation to the taxpayer.

Sub-section (3.) places a limit on the maximum deduction available for expenses of self-education paid by a taxpayer in the year of income. It provides that the amount allowable under new section 82JAA is to be not greater than:-

•

where no deduction is allowable to any person under section 82J in respect of the year of income in relation to the education of the taxpayer - the amount of $400.

•

where such a deduction is allowable under section 82J - the amount of $400 as reduced by the section 82J deduction allowable.

Sub-section (4.) may apply in an unusual situation where a parent or other person has paid education expenses in respect of the taxpayer and the scholarship benefits payable are greater than the deduction allowable under section 82J. In this kind of situation the "excess" scholarship benefits are deemed, by sub-section (4.), not to have been taken into account in calculating the section 82J deduction and, accordingly, are to be treated as payments of the kind referred to in paragraph (a) of sub-section (2.). In terms of that provision, the amount of the expenses of self-education paid by the taxpayer will be reduced by the amount of the "excess" scholarship benefits in determining the amount deductible under section 82JAA.

Sub-section (5.) defines three terms used in the new section 82JAA. Explanations of those terms have been given at the commencement of the notes on the section.

Clause 6: Amounts paid by trustee after death of a taxpayer.

Section 82K of the Principal Act authorises deductions for medical expenses, funeral expenses, education expenses or adoption expenses paid by a trustee as the legal representative of a deceased person who had incurred those expenses at the time of his death and who would have been entitled to deductions if he had paid them during his lifetime.

Under the section, an amount as described above is, when paid by the trustee of the deceased person's estate, deductible in the assessment based upon income derived by the deceased during the year in which he died to the extent that it would have been allowable if it had been paid by the deceased.

By clause 6 it is proposed to extend the operation of section 82K to expenses of self-education.

Clause 7: Amount of provisional tax.

This clause proposes amendments to sub-section (4.) of section 221YC which are consequential on the proposed increase in minimum taxable income from $417 to $1,041. Sub-section (4.) provides for the lodgment with the Commissioner of Taxation of an estimate of income subject to provisional tax in cases where the amount of that income in the preceding year was not enough to attract tax. The clause will replace the references in sub-section (4.) to the existing level of income above which tax commences to be payable - $416 - by references to the proposed level - $1,040.

Clause 8: Provisional tax for year of income commencing 1 July 1972.

This clause will vary the operation of section 221YC of the Principal Act which fixes the amount of provisional tax payable by an individual taxpayer in respect of income other than salary or wages. If there is no change in tax rates the provisional tax for a year of income is normally based on the amount of tax assessed for the preceding year of income. Section 221YC is to this effect. As the tax assessed on 1971-72 income will be greater than the tax that would have to be payable if the Income Tax Bill 1972 had applied for that year (i.e., because of the increased minimum taxable income and reduction in general rates of tax) it is necessary to vary the operation of section 221YC in order to calculate provisional tax for 1972-73.

Paragraph (a) of sub-section (1.) of section 221YC applies where the taxpayer derived a full year's income from business or property sources in the year preceding that for which the provisional tax is payable. In such cases, the provisional tax payable for the current year is normally an amount equal to the tax assessed for the preceding year.

Paragraph (b) of the sub-section applies where the income of the preceding year was not a full year's income. In these cases the provisional tax payable for the current year is an amount equal to the tax for the preceding year, adjusted to a full year basis.

Clause 8 of the Bill, which will not amend the Principal Act, will make paragraphs (a) and (b) apply as they would have applied if the Income Tax Bill 1972 had been in force for the 1971-72 income year.

Clause 9: Application of amendments.

By this clause, the amendments made by the Bill are to apply to assessments in respect of the 1972-73 income year and subsequent years.