Explanatory Memorandum(Circulated by authority of the Treasurer, the Rt. Hon. Phillip Lynch, M.P.)
The purpose of this memorandum is to explain the main features of two income tax Bills.
Income Tax Assessment Amendment Bill 1977
The first Bill - the Income Tax Assessment Amendment Bill 1977 - will effect a number of changes to the provisions of the Income Tax Assessment Act. The main proposals in the Bill are outlined below.
Commonwealth Rebate for Apprentice Full-Time Training (CRAFT) Scheme (Clauses 3 and 15)
Rebates payable to employers under the CRAFT scheme that came into operation on 15 January 1977 are to be exempt from income tax. Special allowances payable in certain circumstances to apprentices under the scheme are to be subject to pay-as-you-earn tax instalment deductions in the same way as are salary and wages or other similar periodical payments and allowances in the nature of income.
Exemption of certain pensions (Clause 4)
The long-standing subjection to tax of all pensions paid under the superannuation scheme for members of the Defence Force, which has been disturbed by a recent decision of the High Court, is being restored.
Purchase of trading stock not at arm's length (Clause 5)
Associated with the proposed trading stock valuation adjustment scheme referred to below, special safeguarding measures are to be introduced to counter possible avoidance of tax through non-arm's length purchases of trading stock at inflated prices. One purpose of the proposal is to prevent excessive benefits being drawn from the trading stock adjustment. At the same time it will ensure that deductions for the cost of trading stock under the general provisions of the income tax law are not enlarged by transfer pricing arrangements between associated persons.
Disposal on change of ownership or interests (Clause 6)
With the introduction of the trading stock valuation adjustment scheme proposed by clause 8 of the Bill, an amendment to section 36A of the Principal Act is proposed, to qualify the circumstances in which an election may be made to transfer trading stock at cost price or replacement price instead of market value where there has been a partial change in the ownership of the stock such as in consequence of the formation, dissolution or variation in the interests of a partnership. The right to make such an election will, in future, be available only if the market value of the trading stock at the time of the transfer is greater than the cost price to the former owner or owners or the price for which the stock could be replaced.
Gifts, calls on afforestation shares, etc. (Clause 7)
Gifts of $2 or more to the Queen Elizabeth II Silver Jubilee Trust for Young Australians will, by the amendment proposed, become allowable as deductions from assessable income.
Trading stock valuation adjustment (Clause 8)
A special income tax deduction, measured by reference to the annual increase in the index for the goods component of the Consumer Price Index, is to be allowed to firms and companies holding eligible trading stocks for business purposes. The range of trading stock to which the adjustment is to apply includes most goods and livestock held and properly accounted for as trading stock for income tax purposes. It does not include property, not being goods, such as land, buildings, construction work-in-progress, shares, securities and other legal rights or industrial property such as patents and copyrights. Animals used for sporting or domestic purposes are also outside the scope of the scheme.
The annual adjustment for a firm or company is to be made by way of a deduction calculated as a percentage of the value of its trading stock of goods on hand at the beginning of the year of income or at a relevant time. For these purposes the value of trading stock will be that adopted for income tax purposes or the cost price of the stock, whichever is the less.
Special provisions are proposed where, during a year of income, a business changes hands or there is a change in the interests of the proprietors. Broadly, the amount of any adjustment in these circumstances will be calculated on a time basis. The adjustment is generally not to be available to the proprietor of a business in the income year in which it is brought to an end but, where a business is terminated on the death of its proprietor, it will be treated as having been disposed of on the date of death and a part-year deduction allowed. The percentage to be applied in ascertaining the amount of the deduction will be one-half of the percentage increase, measured on a June quarter to June quarter basis, in the index for the goods component of the Consumer Price Index during the year of income.
The deduction by way of the trading stock valuation adjustment will be allowable for the 1976-77 income year, being based on the trading stock on hand at the commencement of that year, and calculated by reference to the increase in the relevant index from the June quarter of 1976 and the June quarter of 1977.
Income tax averaging (Clauses 9 to 11)
A technical amendment to the method of calculating average incomes for the purpose of determining the rates of tax payable on taxable incomes of primary producers for 1976-77 and subsequent years is proposed. The amendment will provide that if the taxable income of any year within the averaging period exceeds $16,000, the excess of the taxable income over that amount is to be disregarded for income tax rate purposes.
Instalments of company tax (Clauses 13 and 14)
An amendment of the Income Tax (Companies and Superannuation Funds) Act 1976, as proposed in the second Bill will bring back into operation in 1977-78 the system for collection of company tax by instalments. Associated amendments of the Income Tax Assessment Act will limit the number of instalments to be paid in that financial year to 2 and set the earliest due dates for payment at 15 November 1977 for the first instalment and 15 February 1978 for the second instalment. The balance of the tax assessed on the 1976-77 income of a company that has been called upon to pay one or both of those instalments will be payable by the due date of its assessment - ordinarily a date within the final quarter of the 1977-78 financial year. In the following financial year, 1978-79, the quarterly payments system will be in full operation, with the first of 3 instalments being due not earlier than 15 August 1978.
Cancellation of registration of tax agent (Clauses 16 and 17)
Since 1 July 1976, the Administrative Appeals Tribunal Act 1975 has provided that a tax agent whose registration has been cancelled by a Tax Agents Board may have the Board's decision reviewed by the Administrative Appeals Tribunal and not by the courts at present specified in section 251K of the Principal Act. Section 251K is being amended by clause 16 to reflect these changed appeal arrangements. A complementary amendment by clause 17 will remove the relevant appeal provisions from the Administrative Appeals Tribunal Act 1975.
Income Tax (Companies and Superannuation Funds) Bill 1977
The second Bill - the Income Tax (Companies and Superannuation Funds) Bill 1977 - will amend the Income Tax (Companies and Superannuation Funds) Act 1976 to facilitate re-introduction in 1977-78 of the system for collection of company tax by instalments. It will incorporate a new provision in that Act, which declared the rates of tax payable by companies and superannuation funds for the 1976-77 financial year, to provide that instalments of tax are payable by companies in respect of 1976-77 income in accordance with Division 1A of Part VI of the Income Tax Assessment Act 1936 (referred to in these notes as the "Principal Act").