Supplementary Memorandum(Circulated by the Treasurer, the Honourable R. G. Casey.)
Notes on Clauses
Consequent upon the Government's decision to remove the special property tax, the references in the Act to that tax are being deleted. Other references to the special property tax appear in sections 46, 81 and 253 of the Act.
Section 23 (s) of the Principal Act provides for the exemption of the income of a company which was formed and is carried on for the sole purpose of insuring property belonging to a religious institution.
As drafted the exemption would not apply if a company, although not formed for the purpose mentioned, has in fact carried on business in accordance with the conditions therein set out. It is proposed under clause 3 of the Bill to delete paragraph (s) of section 23, leaving the exemption to be determined in accordance with the usual practice of the Taxation Department that where the income belongs in effect to a religious institution the exemption will be granted under section 23 (e).
This amendment gives effect to the adoption of a recommendation by Sir David Ferguson, Chairman of the Royal Commission on Taxation.
The proposed amendment to the lease provisions to exclude wholly or partly from assessable income the consideration received for the sale or surrender of leases of Crown land would, if the amendment to section 36 (3.) were not made, provide a means for the evasion of tax.
Section 36 (3.) as it stands, without the proposed amendment, binds the Commissioner on a walk-in walk-out sale to the allocation by the parties of the purchase money. As the consideration for the lease will be either wholly or partly non-assessable income, there would be a strong temptation to allocate in the contract a high price for the lease, thereby reducing the assessable proceeds from the sale of live-stock. The proposed amendment to section 36 (3.) will obviate this risk of loss of revenue.
This amendment is consequential upon that made to section 36(3.) above.
This amendment removes one of the special property tax provisions from the Act.
This amendment is designed primarily to extend the deduction of State income and land taxes to taxes of a similar nature imposed by a Territory of the Commonwealth.
The opportunity has been taken to improve the structure of the sub-section by the use of paragraphs.
This is a drafting amendment intended to clarify the intention of the sub-section.
This amendment removes one of the special property tax provisions from the Act.
Sub-section 2 of section 84 was inserted in the Act as a special provision relating to Crown leases of land used for primary production.
At the time of the insertion of this provision in the Act it was decided that the general question of the taxation of the proceeds from the sale of Crown leases should be referred to Sir David Ferguson, Chairman of the Royal Commission on Taxation.
Sir David Ferguson's report was tabled in the House in September last.
Arising from the adoption of the recommendations made in that report the Government has decided to exclude Crown leases from the application of the general leasehold provisions and to deal with them separately in a new section which is Clause 14 of this Bill.
The amendment made to section 84 is necessary to give effect to the proposal to embrace all matters relating to taxation of Crown leaseholds in a separate section.
The amendments to section eighty-five are consequential upon the amendment made to section eighty-four.
Section 87 (1.) of the Act provides that a lessor of land on which improvements have been effected by the lessee shall be assessed on an annual instalment of the estimated value of the improvements at the date of expiration of the lease.
The proviso to Section 87 (1.) was designed to apply in the year in which a sale of the lease was made. In the year of sale the annual instalment was assessable pro rate to the vendor and the purchaser.
It has been found upon examination that the proviso in its present form applies also in a manner in which it was not intended to apply, viz., in a year in which sale was not made but the lease existed for part of the year only.
It is only in rare instances that leases expire on 30th June in any year, so that in most cases in the first and last years of the lease, the lessor would be lessor for part only of the income year. In those cases the intention of section 87(1.)(a) was that the lessor be assessed on a full annual instalment (calculated on the number of income years affected) to complete the assessment to him of the total amount of assessable income contemplated by the section. Under the proviso to section 87(1.), however, portion only of the annual instalment may be assessed to the lessor in the first and last years of the lease.
Clause 12 not only corrects this flaw in the proviso but also simplifies its application. By providing that in any year in which two or more persons have been lessors the instalment shall be assessed to the last of the lessors, the liability for assessment in the year of a sale of the lease is definitely fixed upon the purchaser. In so fixing the liability the apportionment of the instalment as between vendor and purchaser is avoided.
Generally speaking, the purchaser may not be regarded as being unfairly treated as, in the great majority of cases, the vendor in the first year of the lease will have borne in a somewhat similar way an additional liability to assessment.
Moreover, the purchaser will be aware of his liability when arranging the terms and conditions of his contract and will have the opportunity of taking the liability into account.
It is considered further that, as the reversion rests with the purchaser, liability to assessment in respect of the improvements on the leasehold land should also rest with him.
Section 88 (2.) of the Principal Act provides for a deduction to a lessee of the cost of improvements effected by him under the provisions of the lease. Section. 88(3.) provides that the deduction shall not be granted in certain specific types of cases where, in effect, the lessor is in substantial control of the operations of the lessee. Paragraph (b) of the sub-section specifies the case where the lessor is a trustee of the land for the lessee or the lessee is a trustee of the land for the lessor.
The limitation specified in paragraph (b) of the sub-section will prevent the allowance of a deduction in future assessments in those cases in which the deduction has been enjoyed in the past by a beneficiary who entered into his lease and building covenant with the trustee in a perfectly bona fide manner and without intent to gain any particular taxation advantage.
Where a beneficiary, who takes a lease from the trustee and makes the improvements, is a life tenant in the trust estate, he should not be deprived of the deduction. The only case which requires serious consideration is the case where the lessor and lessee are in effect the same person under the cloak of a trust which, in most instances, would be found to be a device to evade taxation.
Such a case is, to some extent, met by paragraph (c) of sub-section (3.) of section 88 which has the effect of excluding from the right to the deduction the case "where the Commissioner is of opinion that in consequence of the terms and conditions of the lease or any other circumstances the lessor is in substantial control of the operations of the lessee".
It is considered that if there were added the words "or the lessee is in substantial control of the operations of the lessor", the paragraph would sufficiently guard against all the mischief of any real importance that was aimed at by paragraph (b) of the sub-section which could then safely be omitted. An amendment to this effect is contained in clause 13 of the Bill.
The amendment as drafted gives effect to a recommendation by Sir David Ferguson who inquired into this matter.
The general question of the taxation of Crown leaseholds has been previously referred to in the explanatory note to Clause 10 of the Bill.
In his report on this question Sir David Ferguson recommended, in effect, that Crown leases of land occupied for purposes of primary production should be treated in the same manner as freeholds. As a consequence of the acceptance of this recommendation the proceeds from the sale of a Crown lease would be treated as a receipt of capital and not as income assessable to income tax. Similarly, the purchase price of a Crown lease would not be allowable as a deduction in arriving at the taxable income of the purchaser of the lease.
A further conclusion reached by Sir David Ferguson was that where the vendor of a lease had received deductions in respect of any premium paid by him for the lease, so much of the proceeds as represents the aggregate amount of the deductions should be brought into his assessable income.
Sub-clause (1.). This is a drafting clause.
Sub-clause (2.). The proposed provisions will not be applicable to Crown leases assigned prior to 1st July, 1935. With regard to transactions entered into prior to that date any instalments of a premium received by the assignor of a lease will be assessable income and the premium paid by the assignee will be an allowable deduction.
Sub-clause (3.). This provision is designed to meet the case of a taxpayer who, subsequently to 1st July, 1935, sells a Crown lease of land used for primary production. As the taxpayer will have been allowed deductions in respect of any premium paid by him, it is proposed that he be assessed on the premium received by him, but to no greater extent that the deductions allowed to him.
If the consideration for the sale of the lease is received in one year, the assessable amount will be included in the assessable income of that year. If, however, the assessable amount is received in instalments in two or more years, such amount will be included pro rata in the assessable income of the years in which the instalments are received.
Sub-clauses (4.) and (5.). The object of these two sub-clauses is to provide for the taxpayer who, prior to 1st January, 1937, purchases a lease or incurs expenditure on improvements, not subject to tenant rights, on leasehold land. Under the two sub-clauses a proportionate deduction will be allowed annually to the taxpayer in respect of the expenditure incurred by him either in purchasing the lease or in effecting the improvements on the leasehold land.
The 1st January, 1937, has been selected as the date after which these two sub-clauses will become inapplicable to leasehold transactions. The time allowed will provide sufficient opportunity to taxpayers and their agents to acquaint themselves with the amended provisions of the law.
Sub-clause (6.).-In this sub-clause provision is made to meet the case of the person or persons who succeed to a leasehold estate upon the death of another person. The effect of the sub-clause is that the beneficiary will be assessed on the same amount and allowed the same deductions as the deceased person would have been had he lived.
Section 159 of the principal Act provides for a rebate to a non-resident taxpayer in respect of income taxed both in the Commonwealth and in the United Kingdom. It has come under notice that a taxpayer, under the Income Tax laws of the Commonwealth and the United Kingdom, may be deemed to be a resident of both countries in respect of the same year; for example, a resident of Australia visiting England and residing there more than six-months. In that event he would be liable for income tax on his Australian income both in the Commonwealth and the United Kingdom.
It is considered that the resident of Australia should be placed in as advantageous a position as the non-resident in regard to relief from double taxation, and under clause fifteen of the Bill the limitation of relief to non-residents is removed.
This is a drafting amendment to delete the first of the two references to the opinion of the Commissioner.
Section 218 of the Principal Act repeats the provisions of section 65 of the 1922-34 Assessment Act. It has been found, however, that the section does not give full power to the Commissioner to accept or require payment of tax by instalments. As this method of payment of tax is, in some cases, to the advantage both of the taxpayer and the Taxation Department, provision is made in clause 17 of the Bill empowering the Commissioner to collect tax by instalments from a person owing money to the taxpayer.
This amendment removes one of the Special Property Tax provisions from the Act.
Clause 19 provides that the amendments shall apply to assessments for the current financial year, which is the year to which the principal Act first applies.