Explanatory Memorandum(Circulated by the Treasurer, the Honourable J. B. Chifley.)
Notes On Clauses
CLAUSE 1.-SHORT TITLE AND CITATION.
CLAUSE 3.-AMENDMENT OF INCOME TAX ASSESSMENT ACT 1940.
This is a drafting correction. The amendment referred to is section 3(1) of the Income Tax Assessment Act 1940 (No. 17 of 1940). That amendment inserted paragraph (s) in section 23 of the Income Tax Assessment Act 1936-1940 which provided for the exemption from income tax, under specified conditions, of the service pay and allowances earned by members enlisted in or appointed to the Forces for service outside Australia.
The sub-section which it is now proposed to repeal provided that the exemption should apply until twelve months after the cessation of the present war between His Majesty the King and Germany.
Paragraph (s) of section 23 of the Income Tax Assessment Act 1936-1940 was found to contain several anomalies and by section 4(d) of the Income Tax Assessment Act 1941 (No. 58 of 1941) the paragraph was repealed and a new paragraph was inserted in the Act which removed the anomalies.
When the paragraph was repealed, however, the repeal of the sub-section which limited the period of its operation was overlooked. It is accordingly proposed now to repeal the sub-section.
It is not considered necessary to enact a similar provision limiting the period in which the present exempting provision is to apply, for the reason that the present paragraph contains its own limitation.
These amendments insert two new definitions in section 6 of the Principal Act, viz., the definition of "Board of Referees" and of "present war" respectively.
The Board of Referees constituted under the War-time (Company) Tax Assessment Act has been established with powers to remove certain inequities that may arise in the application of that tax.
It is proposed by the Income Tax Assessment Bill to enlarge the functions of the Board to determine, in those cases which may be referred to the Board--
- whether the percentage of mining profits which it is proposed by clause 6 of the Bill to exempt is adequate; and
- whether the special deductions for depreciation of plant and buildings used in connexion with the present war proposed by Clause 9 of the Bill should be allowed.
For the purposes of these two provisions, the definition of Board of Referees is being included in the Income Tax Assessment Act.
In these two provisions, and in other provisions of the Principal Act, references are made to the present war. For the purposes of interpretation, it is proposed that the "present war" shall be given a defined meaning.
CLAUSE 5.-EXEMPTION OF PENSIONS.
The additional sub-paragraphs (ii) and (iii) will provide for the exemption from income tax of old-age, invalid and widows' pensions and allowances.
An exempting provision of this nature was not necessary while the general exemption from the tax was Pd200 or more as only in very isolated cases would the annual income of the recipient of these pensions reach the statutory taxable minimum.
In 1941, a war tax was imposed on taxable incomes in excess of Pd156 and, in June of this year, the Income Tax Assessment Act was amended to cause income tax to be payable on taxable incomes in excess of Pd156.
In some cases, the recipients of the pensions derive income from other sources, e.g., a totally blind pensioner may earn an amount equal to the basic wage. The combination of earnings and pension has brought a number of the pensioners within the taxable field.
It is considered inappropriate that these pensions should be subject to diminution by the Commonwealth in the form of income tax.
It is also proposed, by clause 31 of the Bill, that the exemption of invalid and old-age pensions should apply retrospectively so as to relieve those pensions from the payment of the war tax that applied to income of the year ended 30th June, 1941.
CLAUSE 6.-PARTIAL EXEMPTION OF INCOME FROM CERTAIN MINING OPERATIONS.
This clause is inserted in the Bill to provide a partial exemption from income tax of profits derived from mining operations in Australia for the purpose of producing base metals and rare minerals required for use in, or in connexion with, the present war. By clause 7 of the Bill, it is proposed to extend the exemption to dividends paid by companies out of the exempt profits.
These exemptions are warranted by the special circumstances of the mining industries and the prevailing high rates of income taxation.
Since the outbreak of war, the Commonwealth Government has from time to time urged the necessity for maximum production of metals and minerals essential to the manufacture of war materials. The increased demand has greatly accelerated the rate of exhaustion of metal and mineral deposits.
The effect of the present high rates of income tax is to take in taxation a substantial part of the profits derived from the mining operations, absorbing as much as 18s. in the Pd1. As a result, the greater the rate of exhaustion of the deposits during the war, the less is the benefit accruing to the owners of those deposits.
It is accordingly considered equitable that some relief from taxation should be granted in the special circumstances in which metals and minerals are being produced for war purposes.
It is proposed that the exemption to be allowed to the person or company carrying on the mining operations shall be twenty per centum of the net amount remaining after deducting from the mining income the deductions attributable to that income.
In any case where the taxpayer considers that the exemption to be provided is inadequate, having regard to the production of the mine, he may apply for an increase in the amount of the exemption. The application will be considered by the War-time (Company) Tax Board of Referees, which will be empowered to increase the exemption to the extent that it considers to be just.
The exemption will commence to apply to income of the year ended 30th June, 1942, and will cease after the income year in which the present war is terminated.
The object of this clause is to extend the exemption to be provided by the preceding clause to dividends paid to shareholders by mining companies out of the exempt income.
It will be a condition of the exemption of the dividends in the hands of the shareholders that the mining companies pay the dividends wholly and exclusively out of the exempt income.
As companies which paid dividends during the year ended 30th June, 1942, were unaware of the exemption, special provision is being made in sub-section (3.) in respect of those dividends. The requirement that the dividends shall be paid wholly and exclusively out of the exempt income will not apply to those dividends. By paragraph (a) of the proposed sub-section one-fifth of the dividends paid by the mining companies during the year ended 30th June, 1942, will be exempt from income tax. This exemption will confer on the general body of shareholders in mining companies entitled to the special concession provided by clause 7 of the Bill substantially the same advantage in the aggregate that they would have derived if the companies had declared dividends wholly and exclusively out of the exempt income.
The effect of paragraph (b) of the proposed sub-section will be that the exempt fund of income in the hands of the mining company for the income year 1941-1942 will be treated as being diminished to the extent of the exemptions granted to shareholders on dividends paid during the year ended 30th June, 1942.
CLAUSE 8.-DISPOSAL, LOSS OR DESTRUCTION OF DEPRECIATED PROPERTY.
The effect of sections 59 and 62 of the Principal Act is that, where plant or other property, in respect of which depreciation has been allowed, is lost or destroyed during the year of income, the excess of any insurance monies received or receivable over the depreciated value of the plant or other property shall be included in the assessable income. The amount which may be so included is limited to the aggregate of the amounts of depreciation which have been allowed as depreciation in assessments for years prior to the year in which the property is lost or destroyed. The object of the provision is to recoup to the revenue the tax lost by the allowance of excess depreciation deductions.
The provisions did not operate inequitably in pre-war years when rates of income tax did not vary to any considerable degree from year to year. However, the war-time rates of tax have caused the provision to apply inequitably since tax is being imposed at high rates as compared with the relatively low rates prevailing in the years in which the excess amounts of depreciation were allowed.
It is accordingly proposed to adopt a recommendation of the Taxation Advisory Committee that the effect of section 59(2) should be modified during the present war.
The general purpose of clause 8 of the Bill is to discontinue the application of section 59(2) to insurance recoveries on plant or other property lost or destroyed during the war and to reduce the amount on which the depreciation allowances are based by the amount excluded from the assessable income. The practical effect of the proposal is that, instead of taxing a part of the insurance recoveries in the year in which they are received, the depreciation allowances to the taxpayer will be reduced by a corresponding amount, but the reduction will be spread over the life of the plant which replaces the plant lost or destroyed, or over the life of other assets of the taxpayer which are subject to depreciation allowances.
Sub-section (2A.) which it is proposed to add to section 59 of the Principal Act will provide that, where the plant is replaced during the year of loss, the portion of the insurance monies excluded from the assessable income will be deducted from the cost of the new plant and the depreciation allowance on the new plant will be based on the reduced amount. If the amount excluded from the assessable income exceeds the cost price of the new plant, the excess will be deducted from the depreciated value of any other assets of the taxpayer which are subject to depreciation allowances, and the depreciation to be allowed to the taxpayer will be based on the reduced amount.
If the plant is not replaced during the year of loss, the portion of the insurance monies excluded from the assessable income will be deducted from the depreciated value of any other assets of the taxpayer which are subject to depreciation allowances, and the depreciation to be allowed to the taxpayer will be based on the reduced amount.
If the plant is not replaced during the year of loss, and the portion of the insurance monies excluded from the assessable income exceeds the depreciated value of any other assets of the taxpayer, which are subject to depreciation allowances, the excess, or the whole amount, as the case may be, will be included as assessable income. If, however, the plant is replaced prior to, or within two years after the termination of the war, the taxpayer may, if he so desires, have the assessment amended by the exclusion of the amount so included in his assessable income, and the cost price of the new plant reduced by a corresponding sum.
It is also provided that where, in accordance with these provisions, any amount is deducted from the depreciated value of an asset, future depreciation allowances will be calculated by reference to its depreciated value as so reduced.
The insertion of the words "or value" in sub-section (3.) is designed to ensure that the value of any consideration received or receivable otherwise than in cash shall be brought to account for the purpose of ascertaining the amount of the deduction (if any) allowable, or the amount to be included in assessable income, as the case may be.
The provision will cover such cases as the replacement of plant by insurance companies instead of the payment of the insurance moneys to the taxpayer.
The amending provisions will commence to apply in assessments for the financial year 1942-1943, i.e., on incomes derived during the year ended 30th June, 1942.
CLAUSE 9. DEPRECIATION OF PLANT, ETC., IN CONSEQUENCE OF USE IN CONNEXION WITH WAR.
This clause proposes that a series of new sections-- sections 59A, 59B, 59C, 59D and 59E--relating to depreciation of plant, machinery and buildings erected or acquired especially for war purposes, be inserted in the Principal Act.
Under section 54 of the Principal Act, a deduction is allowable in respect of the depreciation of plant or articles owned and used by the taxpayer for the purpose of producing assessable income. The rate of depreciation is determined by the Commissioner of Taxation who, by section 55, is required to estimate the effective life of the asset and fix the annual depreciation per centum accordingly.
The proposed section 59A provides that, if a taxpayer considers the amount allowed for depreciation of war plant and machinery insufficient to cover all wear and tear and diminution in value, he may apply to the Commissioner to have the depreciation allowed during the war years reviewed by a Board of Referees constituted under the War-time (Company) Tax Assessment Act 1936-1941.
Each application must be accompanied by a certificate from the Department of Munitions, Department of Supply and Development, Department of Commerce, or other prescribed authority certifying that the plant or machinery was acquired or installed for use, primarily and principally, in, or in connexion with, the prosecution of the war. Applications may be lodged at any time prior to, or within two years after, the termination of the present war, but the certificates must be obtained within six months of the commencement of the Act, or, if the property is acquired or installed after the commencement of the Act, within six months of the acquisition or installation of the property.
If the Board of Referees is of the opinion that the effective life of the asset is shorter than that estimated by the Commissioner, or that the actual value of the asset at the end of the war is less than its depreciated value, or if the taxpayer establishes that either prior to, or within two years after the end of the war, the asset was scrapped, sold or otherwise disposed of, the Board may determine the amount of depreciation allowable for each of the war years concerned.
DEPRECIATION OF BUILDINGS IN CONSEQUENCE OF USE IN CONNEXION WITH WAR.
BOARD OF REFEREES MAY ASSIGN VALUE.
EXPERT ADVISERS TO ASSIST BOARD OF REFEREES.
DECISION OF BOARD OF REFEREES TO BE FINAL.
The existing law provides for the allowance of depreciation on buildings only to the extent that they form integral parts of plant and machinery. It is proposed by this clause, however, that a new provision--section 59B--be inserted in the Principal Act allowing a deduction in respect of the loss on sale, or the loss in value, of buildings erected or acquired, or alterations, additions or extensions made, after 30th June, 1938, for war purposes.
If the taxpayer satisfies a Board of Referees that the value of the buildings or alterations, etc., as the case may be, at the end of the war, is less than their net cost (as defined), or that before the 1st July next succeeding the termination of the war, they were sold for less than their net cost, the Board may determine the amount of the loss or deficiency which is wholly or mainly due to conditions arising as a consequence of the war. The amount of the loss or deficiency thus determined will be distributed proportionately over the years the buildings are used for war purposes and the amount allocated to each year will be allowed as a deduction in the assessment for that year.
Applications for this deduction are required to be lodged within one year after the termination of the war and to be accompanied by a certificate obtained from the appropriate departmental authority within six months of the commencement of the Act, or, if the building is constructed or acquired after the commencement of the Act, within six months of the construction or acquisition of the building.
Decisions of the Board of Referees, under sections 59A and 59B, are to be final and conclusive and the Board may be assisted by such expert and technical advisers as the Treasurer upon the recommendation of the Board may appoint. However, any expert and technical advisers so appointed shall act in an advisory capacity only.
In a subsequent clause--clause 23--it is further proposed that the Commissioner may re-open any assessment at any time in order to give effect to any decision of the Board under the sections proposed to be inserted by clauses 6 and 9 respectively.
CLAUSE 10.-DEFINITION OF DEPRECIATED VALUE.
The amendment proposed to be made to section 62 is complementary to the amendment proposed to be made by clause 8 of the Bill to section 59 of the Principal Act.
Under section 62, the depreciated value of plant or other property is the cost of the asset less the amounts of depreciation allowed on the asset.
As explained in the note to clause 8 of the Bill, the application of that provision will involve the reduction of the depreciated value of plant or other property subject to depreciation allowances by the amount of insurance recoveries excluded from assessable income.
The amendment proposed to be made to section 62 will alter the definition of "depreciated value" to conform with the amendment proposed to be made to section 59.
CLAUSE 11(a).-RATES AND TAXES.
This clause is designed to effect drafting adjustments to sub-sections (1A.) and (2.) of section 72 of the Principal Act.
As part of the single uniform income tax plan the deduction for State and Territorial income taxes paid by taxpayers was discontinued.
Special provision was made in section 72(1A.), however, that amounts of State and Territorial income taxes paid after 30th June, 1941, and before 1st July, 1944, on incomes derived by taxpayers during the years ended 30th June, 1938, 1939 and 1940 (or the accounting periods substituted for those years) should be allowable deductions from income of the year ended 30th June, 1941.
Sub-section (1A.) was enacted to provide the deduction in those cases where the liability for the taxes for the years mentioned had not been determined prior to 1st July, 1941. The object of the provision was to accord equitable treatment of these taxpayers as compared with those taxpayers who had received deductions of amounts of State and Territorial income taxes paid before 1st July, 1941.
It has been found upon examination, however, that section 72(1A.) is defective in cases where accounting periods ending on a date other than 30th June have been substituted for the years ended 30th June, 1938, 1939 and 1940.
|Financial year.||Ordinary year of income.||Substituted Accounting period.|
|1938-1939||Year ended 30.6.1938||31.12.1937|
|1939-1940||Year ended 30.6.1939||31.12.1938|
|1940-1941||Year ended 30.6.1940||31.12.1939|
|1941-1942||Year ended 30.6.1941||31.12.1940|
State and Territorial income taxes paid on the 1939 calendar year income during the 1940 calendar year will have been allowed as deductions from the income of that year. If, however, the taxes were paid between 1st January, 1941, and 30th June, 1941, no deduction would be allowable under section 72(1A.) as the taxes were not paid after 30th June, 1941.
The amendment proposed to be made to section 72(1A.) will correct this anomaly by providing that where a taxpayer has adopted an accounting period in lieu of the year ended 30th June, he may be allowed, in his assessment for the financial year 1941-1942, a deduction in respect of State and Territorial income taxes paid after the end of the accounting period adopted in lieu of the year ended 30th June, 1941, and on or before the end of the accounting period adopted in lieu of the year ending on the 30th June, 1944.
CLAUSE 11(b).-REFUNDS OF RATES AND TAXES.
The amendment proposed by this sub-clause is a drafting adjustment.
Prior to the amending Income Tax Assessment Act of 1942, section 72(1.) authorized the deduction of municipal and water rates and land tax irrespective of whether the property was held by the taxpayer for the purpose of producing assessable income or otherwise.
Correspondingly, section 72(2.) included in the assessable income any refunds of these rates and taxes which were allowed as deductions.
By the amending Income Tax Assessment Act of 1942, the deduction allowed by section 72(1.) was limited to rates and land tax charged or levied on property held for the purpose of producing assessable income.
The municipal and water rates and land tax that are now non-allowable deductions are mainly those rates and land taxes paid by taxpayers on their private residences. In respect of these rates and taxes, section 160 allows to the taxpayer a concessional rebate of tax calculated by applying to the non-allowable rates and land tax the rate of tax appropriate to a taxable income from personal exertion equal to the total taxable income of the taxpayer.
The amount on which the rebate of tax is allowable is reduced by any refund that the taxpayer may receive of rates and taxes paid on non-income producing property, including refunds of rates and taxes which have been allowed as deductions from the assessable income of the taxpayer in prior years.
The combined effect of section 72(2.) and section 160 is to bring these refunds into assessable income and also to reduce the amount on which the rebate of tax is allowable.
It is proposed by the sub-clause to eliminate this duplication by providing that the refunds of rates and taxes that reduce the amount on which the rebate of tax is allowable shall not be included in the assessable income.
The proposed amendment will commence to apply in assessments for the financial year 1942-1943, i.e., on incomes derived during the year ended 30th June, 1942.
CLAUSE 12.-INCOME TAX PAID ABROAD ON EX-AUSTRALIAN DIVIDENDS.
Section 7 of the Income Tax Assessment Act 1941 brought into the taxable field dividends paid to a resident of Australia by a company that does not derive income from Australia, and also dividends paid wholly and exclusively out of ex-Australian profits.
As such dividends will, in many instances, have borne tax outside Australia, it is proposed by this clause to insert in the Principal Act a new section--section 72A--providing that a deduction be allowed in respect of income tax which the taxpayer was personally liable to pay outside Australia in respect of any dividends that are included in assessable income.
The new provision, however, is not to apply to dividends in respect of which the taxpayer is entitled to a rebate under section 159. That section provides for the allowance by the Commonwealth of a rebate of tax where income which is derived from sources in Australia is subject to tax in the United Kingdom and in Australia. The deduction of ex-Australian taxes paid on the dividends is not justified in such cases, as the taxpayer already receives a rebate of Commonwealth income tax because of the fact that he pays income tax outside Australia.
It is further proposed that any refunds of amounts allowed as deductions under the proposed new section shall be included as assessable income in the year of receipt.
EXPENDITURE FOR ENEMY RAIDS PRECAUTIONS.
The object of this clause is to provide for the allowance of deductions to taxpayers of expenditure incurred in precautionary measures against enemy raids.
The deduction is limited to expenditure incurred in providing protection for employees engaged or property used for the purpose of producing assessable income.
In some cases, the expenditure, while being directed towards the immediate protection from enemy raids has been incurred with the further object of providing to the taxpayer an asset of enduring post-war value, e.g., construction of a basement which may be used as an air-raid shelter and later as a store-room. It is proposed by sub-section (2.) that expenditure that creates an enduring benefit, other than the benefit of protection from enemy raids, shall not be allowed as a deduction.
The effect of the proposed sub-section (3.) will be that any recoupment to the taxpayer of expenditure he incurs on the enemy raids precautions will be excluded from the amount of the deduction allowable.
The proposed sub-section (4.) will apply where the property on which the enemy raids precautions expenditure is made is disposed of or lost or destroyed. The effect of the provision will be to bring into assessable income so much of the consideration received by the taxpayer in respect of any asset which has been created by the expenditure that has been allowed as a deduction.
The proposed sub-section (5.) defines consideration for the purpose of the section.
The deduction to be provided by the section will be allowable in assessments commencing with the financial year 1942-1943, i.e., from income of the year ended 30th June, 1942.
CLAUSE 13.-DEDUCTION FOR MEMBER OF DEFENCE FORCE.
Under the proposed provision, a member of the Defence Force whose income does not exceed Pd250 will not be liable to income tax.
The liability to income tax will commence where the net income of the member of the Defence Force is Pd251. On net incomes of Pd251 to Pd261, a deduction of Pd94 will be allowed. After the allowance of this deduction, the liability of members of the Defence Force having incomes of Pd251 to Pd261 will be the same as the liability of civilian taxpayers whose taxable incomes range from Pd157 to Pd167.
Where the net income of the member of the Defence Force exceeds Pd261, the deduction of Pd94 will be diminished by Pd1 for every Pd1 by which the net income exceeds Pd261. Thus a deduction of Pd93 will be allowed from a net income of Pd262 and the deduction will be progressively reduced until Pd1 only will be allowable from a net income of Pd354. A member of the Defence Force whose taxable income is in excess of Pd354 will pay income tax on the same basis as civilian taxpayers.
The deduction will be allowable irrespective of whether the income is comprised solely of service pay and allowances or of civilian income and service pay and allowances.
The proposed special deduction will be allowable from assessable income derived during the year ended 30th June, 1942, and subsequent years.
CLAUSE 14.-PAYMENTS TO FUND PROVIDING BENEFITS TO PERSONS ON WAR SERVICE.
This clause relates to funds which have been established to provide payments and other benefits for persons who are engaged on war service and their dependants.
The general basis of the funds, which have been inaugurated in some of the professions, is that those members of the profession who continue in civil practice undertake to contribute a portion of their professional earnings to a fund from which disbursements are made to members of the profession on war service or to their dependants.
It is proposed by the clause that payments made under written agreement to these funds shall be allowable deductions and that payments made by the trustees of the fund shall be assessable income of the recipient beneficiaries.
The trustees of these funds will not be liable for income tax in respect of income derived by them in their capacity as trustees during the war years. If, however, at the 30th June next succeeding the end of the war, any part of the fund remains undistributed, the trustees will be assessable on the amount so remaining as if it were the net income of a trust estate to which no person is presently entitled.
The proposed provision is modelled on section 132 of the New South Wales Income Tax Management Act 1941.
It is proposed that the new section shall commence to apply to payments made to and received from the fund during the year ended 30th June, 1942.
CLAUSE 15.-DEFINITIONS (IN RELATION TO PRIVATE COMPANIES).
This clause relates to the assessment of private companies and is designed to remedy a defect in the proviso to paragraph (f) of section 103(2.).
The effect of sections 103 and 104 in conjunction with other sections in Division 7 of Part III. of the Principal Act is that a private company which does not, within six months (nine months in the case of a non-resident private company) distribute the whole of its distributable income shall be liable to pay the additional tax which the shareholders would have had to pay, if the amount of the insufficient distribution had been distributed to the shareholders.
For Private Company Tax purposes, the distributable income of a private company is its taxable income less certain allowances. The amount of the insufficient distribution is calculated after deducting the amount of dividends paid out of the taxable income.
Paragraph (f) of section 103(2.) applies where the private company derives profits which are partly liable to and partly exempt from Commonwealth income tax. In those cases, dividends paid by the company are deemed to have been distributed proportionately out of the taxable and exempt profits.
The intention of the present proviso to paragraph (f) was to exclude from the apportionment any dividend paid wholly or exclusively out of the exempt profits. Its effect, however, is that if a company pays a dividend, however small in amount, wholly and exclusively out of the exempt profits specified in the proviso, the whole of those profits are excluded from the apportionment provided for in the sub-section, where the dividend is paid out of a mixed fund of profits. The result is that any such dividend (i.e., a dividend out of mixed fund of profits) then paid by the company must be regarded wholly as a distribution of taxable income.
The proposed proviso will ensure that there shall be excluded from the apportionment only the actual amount of exempt income which has been used for the purposes of the dividend paid out of that income.
The proposed amendment conforms to the amendment made by Act No. 58 of 1941 to the corresponding provision in section 160C relating to the assessment of the undistributed income of public companies.
CLAUSE 16.-TAXABLE INCOME OF FILM BUSINESS CONTROLLED ABROAD.
Sections 137 and 138 of the Principal Act provide for the taxation of the income derived by overseas film producers from the exhibiting of their films in Australia by, in the first place, treating 30 per cent. of the gross amounts credited to (or remitted to) the producers under their contracts with their subsidiary distributing companies in Australia as being the taxable income derived in Australia.
The proviso to section 138, however, gives the non-resident a right to have the assessment reduced if he proves to the satisfaction of the Commissioner that the profit derived under the contract represented less than 30 per cent of such gross income.
As the satisfactory application of these provisions has proved impracticable, the question of the taxation of overseas film companies was referred for the consideration of the Taxation Advisory Committee. The recommendation of the Committee was that the percentage of gross income specified in the section should be considerably less than 30 per cent. In the opinion of the Committee such a reduction in the specified percentage would obviate the necessity for the retention of the proviso to the section.
It is therefore proposed to reduce the percentage specified from 30 per cent. to 10 per cent. and to repeal the proviso to the section. The effect of this proposal will be that the taxable income derived by overseas film companies from the distribution, exhibition or exploitation of films in Australia, will be fixed at 10 per cent. of the gross income derived from such business.
The proposed amending provisions will commence to apply in assessments for the financial year 1942-1943, i.e., on income derived during the year ended 30th June, 1942.
CLAUSE 17.-AVERAGING OF INCOMES OF PRIMARY PRODUCERS.
The proposed amendment is required to overcome an unintended effect of the averaging provisions of the Principal Act.
The intention of the law in regard to averaging was that, after the year ended 30th June, 1937, the averaging provisions were to apply only to income derived by primary producers. If, after that date, say, during the year ended 30th June, 1940, a person became a primary producer for the first time, or a former primary producer re-engaged in primary production, it was intended that the averaging provisions should apply to the income of the year ended 30th June, 1940, as if he had never been a taxpayer before. It was not intended that a taxpayer whose income was averaged before the year ended 30th June, 1938, and who after 30th June, 1937, became a primary producer for the first time, should pay tax at the rate applicable to his average income for the five years ending with the year in which he commenced primary production. This, however, is the effect of the averaging provisions.
The defect in the existing law is illustrated in the following example:--
Two taxpayers, A and B are engaged in a brokerage business as partners. During the year ended 30th June, 1942, because of declining business, they decided to invest in a pastoral property upon which they also carry on business in partnership. Both partners had been subject to the averaging provisions of the previous Act and one of them, A, some years ago had been engaged in primary production.
The existing provisions of section 157(4.) require the rate of tax to be applied to the income derived by A during the year ended 30th June, 1942 (in which both partners derived income from the pastoral property) to be ascertained with reference only to the income of that year. B's rate of tax, however, must be ascertained on the basis of his average income for the five years ended 30th June, 1942.
These circumstances may produce the following result:--
|Year ended 30th June, 1938||7,000||7,000|
|Year ended 30th June, 1939||5,000||5,000|
|Year ended 30th June, 1940||9,000||9,000|
|Year ended 30th June, 1941||4,000||4,000|
|Year ended 30th June, 1942||1,000||1,000|
Average income = Pd5,200.
A for the reasons stated above, pays tax upon Pd1,000 at the rate applicable to Pd1,000, viz., 61.44d. in the Pd1 the tax payable being Pd256. B, however, pays tax upon Pd1,000 at the rate applicable to Pd5,200, viz., 164.03d. in the Pd1, tax payable being Pd683.
The proposed amendment is designed to overcome this defect and to require tax for the financial year 1942-1943 to be assessed in both instances without reference to the taxable incomes of past years which were not derived from primary production. In the case of a taxpayer who becomes a primary producer for the first time, the new sub-section will also have the effect of excluding from the average those years in which he was not a primary producer.
CLAUSE 18.-REBATE OF TAX IN RESPECT OF CALLS TO COMPANIES.
Section 160AA of the Principal Act which was inserted by Act No. 58 of 1941 substituted for the deduction previously allowed in respect of calls paid to specified mining companies, a rebate of tax calculated at one-third of the rate of tax payable by the taxpayer. The amount of the calls is limited to the amount of the taxpayer's taxable income, but otherwise the rebate is allowed to all taxpayers.
Dealers in shares, however, are allowed a deduction. of all outgoings incurred in connexion with their speculative transactions. They thus may deduct calls paid by them on shares purchased with a view to profit making by sale. It is possible, therefore, for share dealers to get both a deduction and a rebate in respect of calls paid to the classes of companies specified in section 160AA of the Principal Act.
The proposed amendment is designed to limit the rebate concession provided in section 160AA to those calls which have not been allowed or are not allowable as deductions under the Act.
The repeal of sub-section (2.) of section 160AA is a drafting adjustment. The provisions of the sub-section are now unnecessary as they are contained in paragraph (b) of section 160AE which apply to section 160AA in common with the other sections comprising Division 17 of Part III. of the Principal Act.
CLAUSE 19.-WHERE REBATABLE AMOUNTS EXCEED TAXABLE INCOME.
Paragraph (g) of sub-section (2.) of section 160 of the Principal Act provides for a rebate of tax in respect of gifts made to the various institutions and funds specified therein. It is further provided that the aggregate of the gifts in respect of which a rebate may be allowed shall not exceed the taxable income of the taxpayer.
Section 160AA of the Principal Act, which allows a rebate of calls paid to the various mining companies specified therein, also limits the amount on which the rebate is to be based, to the taxable income of the taxpayer.
Section 160AC, however, provides that if the sum of the amounts in respect of which rebates for gifts and calls are allowable, exceeds the taxable income, each such rebateable amount should abate proportionately. An unintended effect of this provision is to deprive a taxpayer of portion of the rebate it was intended to allow in respect of the gifts, as the rebate in respect of gifts is at the full rate of tax whereas the rebate on calls is at one-third of the rate of tax.
By clause 19, therefore, it is proposed to provide that where the aggregate of the rebateable amounts for gifts and calls exceeds the taxable income, the rebate in respect of gifts shall be calculated first and the rebate for calls then based upon an amount equal to the difference between the rebateable amount for gifts and the taxpayer's taxable income.
This clause will not become fully operative until the financial year 1943-1944 as it is proposed by clause 30 to allow gifts and donations as a deduction from income in assessments for the financial year 1942-1943.
CLAUSE 20.-RATE OF TAX FOR REBATE PURPOSES.
This clause is inserted in the Bill for the purpose of effecting drafting adjustments.
The Division referred to in section 160AE is Division 17 of Part III. of the Principal Act which provides for the allowance of rebates of tax in respect of--
- income which is subject to tax in the United Kingdom and in the Commonwealth.
- dependants of the taxpayer.
- medical and funeral expenses.
- payments made for life assurance and superannuation benefits.
- gifts to public institutions and funds.
- rates and taxes paid on non-income producing property.
- calls paid to mining and afforestation companies.
The rebate of tax allowable under (2) to (6) is ascertained by applying to the concessional allowances the rate of tax appropriate to a taxable income from personal exertion equal to the taxable income of the taxpayer. The rebate of tax allowable under (7) is calculated at one-third of that rate.
The general purpose of the re-expression of paragraph (a) is to define more clearly the rate that shall be applied in calculating the rebates of tax.
Paragraph (b) of section 160AE is designed to ensure that the rebate of tax allowable to companies shall be based on the rate of ordinary income tax. For the purposes of the rebate, super tax and the tax imposed on the undistributed profits are not taken into the calculation. The further tax referred to in sub-paragraph (ii) is the tax imposed on the undistributed profits of non-private companies. For purposes of clarity it is proposed to include in sub-paragraph (ii) the additional amount of tax assessed under Division 7 of Part III. of the Principal Act, i.e., the tax assessed on the undistributed profits of private companies.
CLAUSE 21.-UNDISTRIBUTED INCOME OF COMPANY.
Under the uniform income tax legislation, it was provided that the tax on the undistributed incomes of companies should not be applied to the "mutual income" of partly mutual life assurance companies. It was also provided that the amount of "mutual income" should be ascertained by comparing the amount of life assurance profits divided, for the year of income, among policy holders, with the total amount of such profits derived by the company during the same year of income.
As a result of representations made by the Life Offices' Association, it is proposed by this amendment that the amount of "mutual income" shall be ascertained by comparing the amount of life assurance profits divided, for the year of income, among policy holders, with the total life assurance profits divided for the same year of income among both shareholders and policy holders.
The amendment also proposes that, if no profits of the company's life assurance business are divided for the year of income, and the company's memorandum or articles of association specify that in any distribution of such profits a certain proportion must be divided among the policy holders of the company, the "mutual income" of the company shall be deemed to be that same proportion of the taxable income derived by the company from its life assurance business.
The amendment will provide that a life assurance company, which by its memorandum or articles of association specifies that a certain proportion of the profits shall be distributed to policy holders, does not lose its partly-mutual character by refraining from declaring a bonus to policy holders so long as it refrains at the same time from declaring any dividend or benefit to shareholders.
CLAUSE 22.-PART NOT TO APPLY TO CERTAIN COMPANIES.
This is purely a drafting amendment. In section 160C of the Principal Act, "mutual life assurance company" is defined, for the purposes of paragraph (iv) of that section, to mean a life assurance company the profits of which are divisible only among the policy holders. It is proposed by the amendment that this definition should be employed for the purpose of specifying the companies to which the provisions relating to the further tax on the undistributed profits of non-private companies should not apply.
CLAUSE 23.-AMENDMENT OF ASSESSMENTS.
This amendment is complementary to the amendments proposed to be made in the Principal Act by clauses 6, 8 and 9 of the Bill. Its object is to authorize, without limitation as to time, the amendment of any assessment for the purpose of giving effect to any determination made by the War-time (Company) Tax Board of Referees under the proposed sections 23A, 59A and 59B.
CLAUSE 24.-DEDUCTIONS BY EMPLOYER FROM SALARIES AND WAGES.
This amendment proposed to be made to section 221C will authorize the deduction of income tax instalments from weekly salaries and wages in excess of Pd3. The amount of Pd3 17s. applied when the Statutory Exemption was Pd200. As income tax is now payable when the taxable income is in excess of Pd156, it is necessary to reduce the amount specified in section 221C to Pd3.
By sub-clause (2.), which will not be inserted in the Principal Act, it is proposed that the amendment to section 221C shall be deemed to have come into operation on 28th July, 1942. The purpose of this provision is to validate Statutory Rules 1942, No. 339, which were made on 29th July, 1942. Those regulations prescribed rates of income tax instalment deductions to be made from salaries and wages in excess of Pd3 weekly.
CLAUSE 25.-VARIATION OF DEDUCTIONS.
The proposed amendment is a drafting amendment expressing more clearly the power given to the Commissioner of Taxation to vary tax instalment deductions for the purpose of facilitating the carrying out of any arrangement for a Group Scheme.
CLAUSE 26.-GROUP SCHEMES.
The proposed amendment provides the Commissioner with express power to enter into an arrangement with the appropriate authority of the Commonwealth or any State or Territory of the Commonwealth in order that tax instalment deductions may be made from the salaries or wages of employees of the Public Service of the Commonwealth or of the State. Such deduction will be made in accordance with the terms of the arrangement.
CLAUSE 27.-PERSON IN RECEIPT OR CONTROL OF MONEY FOR NON-RESIDENT.
These amendments to section 255 of the Principal Act are drafting amendments consequent upon the amendment of section 256 as proposed by clause 28.
CLAUSE 28.-PERSON PAYING ROYALTY TO A NON-RESIDENT TAXPAYER.
Under section 256 of the Principal Act every person who is liable under any contract to pay royalty monies to a non-resident is required to furnish to the Commissioner a statement of the royalties due to the non-resident and to retain the amount of income tax due by the non-resident in respect of those monies.
As the use of patents for war purposes may be authorized notwithstanding the terms of the patent laws or any relevant contracts, patents may now be used in Australia otherwise than under contract. As it is customary in such cases to require the user to pay to the patent owner any royalties due under the patent, cases will arise where royalty monies will be payable to non-residents otherwise than under contract. The proposed amendment is designed to bring these patent users within the terms of section 256.
CLAUSE 29.-RELEASE OF TAXPAYERS IN CASE OF HARDSHIP.
Under sub-section (3.) of section 265 of the Principal Act where an application for relief from payment of income tax is made in respect of an amount of tax which is not less than Pd500, the Relief Board constituted under that section is required to refer the application to a member of the Income Tax Board of Review for the purpose of investigating the financial position of the applicant. If the amount, in respect of which relief from payment is sought, is less than Pd500, the application may, at the discretion of the Relief Board, be referred to a member of the Board of Review.
Because of the increase in the number of relief applications and because also of the increase in the number of cases of disputed assessments referred to the Board of Review since the commencement of the war, the Income Tax Board of Review is finding difficulty in giving the desired consideration to all the cases referred to it by the Chairman of the Relief Board.
This clause, therefore, proposes that the Chairman of the Relief Board be given a discretionary power enabling him, where necessary or desirable, to refer applications for relief from payment of income tax to the Chairman of the Land Tax Valuation Board instead of to a member of the Board of Review.
Under sub-section (11.) which it is proposed to add to section 265 the Commissioner of Taxation will be authorized to exercise the powers of the Relief Board in those cases where the tax liability does not exceed Pd20.
CLAUSE 30.-GIFTS AND CONTRIBUTIONS.
The amendments effected by the Income Tax Assessment Act of 1942 provided, inter alia, that there be substituted for the concessional deduction from assessable income previously allowed in respect of gifts, a rebate of tax calculated, in the case of individuals, at the taxpayer's personal exertion rate and, in the case of companies, at the rate of ordinary tax payable by the taxpayer.
As a result of representations received, it is proposed by this clause that the rebate provisions, so far as they relate to gifts, should not apply until the financial year 1943-1944. The effect of sub-clause (1.) of this clause, therefore, will be to allow gifts and contributions as a deduction from assessable income in assessments for the financial year 1942-1943, i.e., from assessable income derived during the year ended 30th June, 1942.
The amending Income Tax Assessment Act of 1942 extended the concessional allowances to include gifts to--
- a public fund in Australia for the construction of a public memorial relating to the present war; and
- funds in Australia for the welfare of any allied force serving in association with the armed forces of His Majesty.
The effect of sub-clause (2.) of this clause will be that gifts to these funds will be allowable deductions from assessable income of the year ended 30th June, 1942.
CLAUSE 31.-APPLICATION OF ACT.
The amendments proposed to be made by the Bill will commence to apply in the financial years as indicated in this clause.