Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. Phillip Lynch, M.P.)
The purpose of this memorandum is to explain the provisions of the Income Tax Assessment Amendment Bill 1976 which is a Bill to amend the Income Tax Assessment Act in a number of important respects.
The main features of the Bill are:-
Securities issued after 12 April 1976 by banks constituted under Commonwealth, State or Territory legislation are to be excluded from the classes of securities that may be taken into account as Commonwealth securities or public securities in ascertaining whether a superannuation fund or a life assurance company has maintained the "30/20" ratio of public securities in the investment of its assets.
Commencing with the 1973-74 income year, manufacturers of wine and brandy have been required to bring into account for income tax purposes the closing values of trading stock determined according to one of the 3 bases available to taxpayers generally. This followed the withdrawal of the former concessional basis of valuation available for this industry under section 31A of the Principal Act. Special transitional provisions were enacted in 1973 to bring into assessable income over a five year period the accumulated amounts of income that had not been taken into account in winemakers' income tax assessments because of the artificially low values of wine and brandy stocks reported under the concessional basis of valuation. The Bill now proposes to extend to a minimum of eight years after the 1973-74 income year, the transitional period over which tax will be payable on the accumulated amounts of income. It is also proposed to ensure that no winemaker that is a private company will be called on to pay any greater amount of additional tax on undistributed profits than would have been the case had its taxable income in any of the remaining transitional years not been increased by the operation of the new transitional arrangements.
The Bill proposes to bring to an end the scheme of doubled depreciation for new plant that was introduced for 1974-75 and extended last year. Plant or equipment first used or installed ready for use before 1 July 1976 will not be affected by termination of the scheme, and, if otherwise eligible, will continue to be depreciable at double the rates that normally apply until its cost is fully written-off for income tax purposes. Ordinary rates of depreciation will apply in respect of plant and equipment that is first used, or installed ready for use after 30 June 1976.
It is proposed to enact a new Subdivision to provide for the new investment allowance that is to be available in respect of the capital cost of acquiring or constructing new plant and equipment for use wholly and exclusively in Australia for the production of assessable income. The allowance will be available in respect of most new plant that is ordered on or after 1 January 1976. The deduction will be available in the year of income in which the plant is first used or installed ready for use and will be available in addition to any depreciation allowances.
The new Subdivision provides for a 40 per cent allowance in respect of plant that is ordered on or after 1 January 1976 and before 1 July 1978 and is first used or installed ready for use by 30 June 1979. Provision is also made for a 20 per cent allowance in respect of plant that is ordered on or after 1 July 1978 and before 1 July 1983 and is first used or installed ready for use by 30 June 1984. If plant is ordered on or after 1 January 1976 and before 1 July 1978 but is not used or installed ready for use by 30 June 1979, the 20 per cent allowance will be available if it is first used or installed ready for use by 30 June 1984.
Special provisions are to apply in respect of new plant that is acquired under long term leasing arrangements so that the benefits of the new investment allowance can be available to the same extent as if the plant were purchased outright.
The existing provisions of the income tax law, under which income tax deductions are allowable, with certain qualifications, for interest paid by an individual taxpayer on a housing loan used to acquire or extend his or her principal residence, are to be amended to restrict the application of the deduction to interest paid during the first five years of occupation of the first residence owned by a taxpayer or his or her spouse. The amendment is to apply in respect of interest on a housing loan that becomes payable on or after 1 July 1976.
It is proposed to relax some of the tests that have to be satisfied for a company to get a tax deduction for interest paid on borrowed money convertible into share capital.
Following amendments made in 1960 to deal with then prevailing tax avoidance practices, deductions for interest on convertible notes were withdrawn in all cases. In 1970 this rule was relaxed to allow deductibility where specified tests were met. It is now proposed to effect a further relaxation by omitting some of the 1970 tests. For convertible notes issued in respect of loans raised on or after 1 January 1976 the Bill will -
- abolish the requirement that the loan be for at least 7 years;
- withdraw the requirement that the option to convert a debt into shares must remain open to the noteholder at at least 12 monthly intervals throughout a stated period from the date when it is first exercisable;
- allow companies to offer conversion terms designed to induce noteholders to convert earlier rather than later; and
- allow interest rates on convertible note loans raised in Australia to vary in line with prevailing Commonwealth loan interest rates.
The liability of a company to pay the third instalment of income tax during the current financial year in respect of 1974-75 income, and the three instalments that would otherwise be payable during the 1976-77 financial year in respect of 1975-76 income, is to be removed. In each case the amount of tax not collected by instalments is to be payable as part of the final assessment for the relevant year of income.
Notes on each clause of the Bill are set out on following pages.