Explanatory Memorandum
(Circulated by the Treasurer, the Honourable J. B. Chifley.)Ed. Note
Notes on Clauses
CLAUSE 1.-SHORT TITLE AND CITATION.
CLAUSE 2.-PARTS.
This amendment is complementary to Clause 17 of the Bill which provides for the assessment of a taxpayer where his or her spouse derives a taxable income.
CLAUSE 3.-OFFICERS TO OBSERVE SECRECY.
Section 16 of the Principal Act is designed to ensure that officers will maintain secrecy regarding the affairs of taxpayers.
The section provides, however, that information may be communicated by the Taxation authorities to the several other authorities stated in the section. It is proposed to extend the authorization of communication of information to the Director-General of Health to include the purpose of the administration of any law of the Northern Territory which is administered by the Minister of State for Health. The proposed extension of the section is necessary for the purposes of the Northern Territory Medical Benefits Tax Ordinance 1941. Commonwealth income tax returns will be used in assessing amounts of tax payable under that Ordinance.
The amendment also corrects the description of the Territory for the Seat of Government.
The inclusion of the Commonwealth Prices Commissioner amongst those to whom taxation information may be communicated will implement a recommendation of the Joint Parliamentary Committee on Profits. The Committee expressed the opinion that information in the possession of the Commissioner of Taxation might at times prove useful to the Commonwealth Prices Commissioner in carrying out his investigations.
The Director-General of Health and the Commonwealth Prices Commissioner and their officers, in common with other authorities to whom taxation information may be communicated, are subject to the same obligation to maintain secrecy as are taxation officers.
CLAUSE 4
CLAUSE 4 (a).-EXEMPTIONS OF PENSIONS AND OTHER PAYMENTS.
The Seamen's War Pensions and Allowances Act 1940 provides for the payment by the Commonwealth of pensions to Australian mariners or their dependants where the mariner becomes incapacitated or dies as a result of having sustained a war injury in the course of his employment. The Act also provides for payment by the Commonwealth of allowances to Australian mariners who suffer detention by reason of their employment.
It is inappropriate that these pensions and detention allowances should be subject to diminution by the Commonwealth in the form of income tax and it is proposed by this amendment that the pensions and detention allowances be exempt from the tax.
CLAUSE 4 (b).-EXEMPTION OF CHILD ENDOWMENT.
As the child endowment benefit is required to be applied in the maintenance, training and advancement of the child in respect of whom it is granted, it is considered that the endowment payments should not be diminished by income tax.
CLAUSE 4 (c).-EXEMPTION OF INCOME DERIVED FROM EX-AUSTRALIAN SOURCES BY AUSTRALIAN RESIDENTS.
Section 25(1) of the Income Tax Assessment ACT 1936-1940 provides that the assessable income of a taxpayer shall include, where the taxpayer is a resident, the gross income derived by him directly or indirectly from all sources whether in or out of Australia, which is not exempt income.
Section 23(q) of the Act exempts income derived by a resident from sources out of Australia where that income is not exempt from tax in the country where it is derived.
In practice, it has been found in a number of cases that owing to the ineffectiveness of the revenue laws of some ex-Australian countries, the Australian resident escapes payment of income tax on income derived in those countries although, technically, the income is not exempt from the ex-Australian income tax. In these circumstances, the Australian resident enjoys freedom from the payment of tax either to the Commonwealth or to the Government of the country where the income is derived.
The proposed amendment will remove this anomaly in the law by providing that the exemption from Commonwealth income tax shall apply to those cases only where the income is not exempt from income tax outside Australia and the Commissioner of Taxation is satisfied that tax has been or will be paid by the Australian resident to the Revenue Authority of the country where the income is derived.
CLAUSE 5.-DISPOSAL OF ASSETS OF A BUSINESS.
Section 36 in its present form is not sufficiently comprehensive to include in assessable income sales of growing timber which has been afforested for commercial purposes. There is no essential difference in principle between profits derived from the sale of growing crops and crop-stools, and profits arising from the sale of growing timber which has been afforested as a commercial proposition. It is proposed accordingly that Section 36 be extended to include in assessable income the proceeds from the sale of growing timber which has been commercially afforested. The proposed amendment will not have the effect of bringing within assessable income sales of other growing timber.
CLAUSE 6.-DIVIDENDS.
It is proposed by this amendment to discontinue the exemption of resident shareholders in companies in respect of dividends paid out of exempt ex-Australian profits of companies. The amendment will also withdraw the exemption of dividends paid out of profits derived by companies from the disposal of capital assets.
CLAUSE 7.-EXTENT OF LIABILITY TO TAX ON CERTAIN DIVIDENDS.
The effect of Section 45 is to provide that any portion of Commonwealth Loan Interest contained in a dividend shall be free of income tax to the same extent as that interest itself is free in the hands of the recipient company. The concession is an extension of an undertaking given in 1931 that the interest on converted loans which, by the terms of the prospectus, had been issued free of tax, should continue to be free of tax during the balance of the period for which they were issued, and that in respect of loans converted, the rate of tax payable in any subsequent year should not exceed the rate of tax payable in 1930. This undertaking was not given in respect of dividends paid out of such interest.
The Royal Commission on Taxation 1932-1934 recommended the withdrawal of the concession as part of a plan for the simplification of the assessment of dividends and it is proposed by the amendment to adopt that recommendation.
CLAUSE 8.-REBATE OF DIVIDENDS.
This amendment is consequential on the repeal of Section 45. The rate of sixteen pence referred to in Section 46 (1) (a) (ii) is the rate of tax payable by a company on interest to which section twenty of the Commonwealth Debt Conversion Act 1931 applies. As it is proposed to withdraw the concession in respect of Commonwealth Loan Interest included in dividends, the provision for the allowance, to resident companies, of the rebate of tax at the rate of sixteen pence will be unnecessary. In common with other dividends included in the taxable income of a resident company, dividends which are received by a company and which have been paid out of Commonwealth Loan Interest will be subject to a rebate of tax at the rate of tax payable by companies for the year of tax.
CLAUSE 9.-DISTRIBUTIONS BY LIQUIDATOR.
Section 47 (1) excepts from dividends deemed to be paid to the shareholders the income derived by the company which has been properly applied to replace a loss of paid up capital. The object of this provision is to remove any income tax liability on so much of the liquidator's distribution as represents the return to the shareholders of the capital subscribed to the company.
In its present form, the section enables the shareholders to escape income tax in those cases where the capital of the company has been increased, and the increase in capital is represented by bonus shares issued out of profits arising from the revaluation of capital assets of the company. Bonus shares when so issued are not taxable in the hands of the recipient shareholders.
For the purposes of this section, the capital represented by the bonus shares is paid up capital which, in a liquidation, absorbs trading profits that would otherwise be assessable income to the shareholders. Accordingly, the freedom from tax afforded to shareholders by the section goes beyond the restoration to them of the capital actually subscribed. The proposed amendment will exclude these bonus shares from paid up capital.
Another effect of the section is that paid up capital does not include capital that has been cancelled owing to causes such as losses made during the life of the company.
The proposed amendment will ensure that a liability for income tax on distributions by liquidators will not arise income tax on distributions by liquidators will not arise until the capital actually subscribed by the shareholders has been replaced.
CLAUSE 10.-LOSS ON PROPERTY ACQUIRED FOR PROFIT MAKING.
Section 26 (a) of the Income Tax Assessment Act 1936-1940 provides that the assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by him for the purposes of profit making by sale or from the carrying on or carrying out of any profit making undertaking or scheme.
Correspondingly, Section 52 of the Act allows the deduction of losses sustained on these speculative transactions.
The question whether losses made by taxpayers are capital losses on investments and so not deductible or whether those losses are deductible under Section 52 is a source of frequent contest between taxpayers and the Taxation Department. It is considered that these contests will be minimised by requiring that the deduction of speculative losses will be conditional on the taxpayer disclosing in the first income tax return lodged by him after the acquisition of the property that the property was acquired for resale at a profit.
Failure by the taxpayer to so declare will not be conclusive against him as the Commissioner of Taxation will be empowered to direct that the loss be allowed, if he is satisfied that the property was acquired by the taxpayer for the purpose of profit making by sale or for the carrying on or carrying out of any profit making undertaking or scheme.
The proviso will apply only to property acquired after the commencement date of this enactment.
CLAUSE 11.-CONTRIBUTIONS TO PENSION FUNDS.
The object of the proposed sub-section (2.) is to prevent advantage being taken of the section to obtain deductions of amounts which, in form, are payments to a fund for the benefit of employees or directors but which, in substance, are appropriations of profits of the private company for the benefit of its shareholders.
It is not proposed that there shall be any disallowance of the deduction of contributions made by private companies to bona fide funds for employees or directors who are also shareholders in private companies. With this object in view, it is proposed that the disallowance of any contribution to employees' provident funds established by private companies shall be made dependent on the opinion of the Commissioner of Taxation.
Sub-section (3.) will provide that an employer, having obtained deductions of the amounts contributed by him to the fund, shall be assessed on the value of any benefits derived by him from the fund.
With regard to the proposed sub-section (3.), the rules governing many of the funds, to which Section 66 applies, provide that, in certain circumstances, e.g., the resignation or dismissal of an employee, the employee's interest in the fund, or so much of the employee's interest as is attributable to the contributions made by the employer to the fund in respect of that employee, shall be forfeited to the employer. It is proposed by sub-section (3.) that the value of the benefit received by the employer in consequence of such forfeitures should be included in his assessable income.
CLAUSE 12
CLAUSE 12 (a) AND (c).-CONTRIBUTIONS TO PENSION FUNDS.
These amendments are being made for the same reasons as those given in the Explanatory Note to Clause 11, regarding the substantially similar amendment to Section 66.
CLAUSE 12(b).-CALLS TO MINING AND AFFORESTATION COMPANIES.
The proposed amendment will discontinue the deduction of calls paid to the companies and syndicates described in paragraph (d). This provision will apply to calls paid on or after 1st July, 1940.
CLAUSE 13.-CONCESSIONAL DEDUCTIONS IN RESPECT OF CHILDREN.
The proposed second proviso to paragraph (b) and the proposed paragraph (baa) will apply to those cases where child endowment may be granted in respect of any child or children maintained by the taxpayer.
The second proviso will limit the deduction in those cases to the allowance for one child.
Sub-paragraph (i) of paragraph (baa) will apply where a child attains the age of sixteen years during the period from 1st July, 1940, to 30th June, 1941. In that case, a deduction will be allowed of the part of Pd50 which is proportionate to the part of the period during which the child was under sixteen years of age. The reason for this allowance is that child endowment will not have been paid in respect of that child.
Sub-paragraph (ii) of paragraph (baa) will apply where a child attains the age of sixteen years during the period from 1st July, 1941, to 30th June, 1942. In that case, a deduction will be allowed of the part of Pd50 which is proportionate to the part of the period during which the child was over sixteen years. The reason for this allowance is that child endowment will not be payable for the full period of twelve months and the allowance will be proportionate to the period during which the child endowment is not payable.
The deductions provided for under paragraph (baa) will be allowable from assessable income of the year ended 30th June, 1941, only.
CLAUSE 14.-LEASES-NOTIONAL INCOME OF A TAXPAYER DERIVING A PREMIUM.
The purpose of Section 86 is to provide a concessional rate of tax to be applied to premiums for leases for periods greater than twenty-five months. This provision is designed to obviate any inequity that might arise by requiring the payment of income tax on the assessment in one year of a premium for a lease extending over several years. The concession takes the form of replacing, for rating purposes, the net premium (i.e., the gross premium less allowable deductions relating thereto) by a notional income arrived at by dividing the net premium by one-half of the number of years in the lease term. Any taxable income which may be derived by the taxpayer in addition to the lease premium is aggregated with the lease notional income to determine the rate of tax payable on his total taxable income.
Paragraph (a) of Section 86(1) provides for the case where the taxable income exceeds the net premium and paragraph (b) provides for the case where the taxable income is less than the net premium. Provision has not been made, however, for the case where the taxable income and the net premium are equal. Paragraph (b) is accordingly being amended to apply to those cases where the taxable income is not more than the net premium.
The concession provided by Section 86(1) applies to premiums received in instalments as well as those received in one sum. Where the premium is received in instalments extending over the term of the lease or over a period greater than three years, the justification for the concessional rate does not exist. The effect of the concession in those cases is to cause an inordinately low rate of tax to be payable by the recipient of the premium instalments.
The inclusion of paragraph (ab) in sub-section (2) will have the effect of making Section 86(1) inapplicable to any case where the lease premium or premiums are payable in each of three or more years of the lease term.
CLAUSE 15.-TRUSTEES-INCOME OF DECEASED RECEIVED AFTER DEATH.
Under the present law, the assessable income of an administrator of an estate does not include any amount of income received by him which accrued due prior to the death of the deceased person who earned the income.
The cases to which the exemption from tax applies are principally those of professional men, businesses conducted by individuals for the purpose of effecting sub-divisional sales of land on the instalment principle and those persons engaged in the sale of goods on the hire purchase system. In the cases of professional men, the exemption relates to amounts of fees for services rendered prior to death which are collected by the administrator. With regard to the other classes of businesses, profits contained in instalments received by the administrator in respect of transactions entered into prior to death are likewise exempt from Commonwealth income tax.
The proposed amendment, which is designed to bring this income into the assessable field, will cause the Commonwealth law to be uniform in this regard with the law of all the States except Victoria and South Australia.
CLAUSE 16.-TRUSTS FOR THE BENEFIT OF CHILDREN WHO ARE MINORS AND UNMARRIED.
For drafting purposes, present provisions of Section 102 (1) have been incorporated in the proposed paragraph (a).
Paragraph (b) relates to trusts for the benefit of children who are minors and unmarried. The inclusion of paragraph (b) in Section 102(1.) is designed to prevent the evasion of tax that occurs when taxpayers create trusts or settlements for the benefit of their children who are minors and unmarried.
Such trusts or settlements are usually made by the taxpayer to provide income to be expended in the maintenance of his children. Expenditure of this nature, if directly incurred by the parent, would not be an allowable deduction for income tax purposes.
The amendment will place the Commonwealth law on a comparable basis with that of the States, all of which have adopted the principle of aggregating the trust or settlement income and the income of the settlor.
Under sub-section (2.), the amount of tax which the trustee will be liable to pay will be the additional tax that the settlor would have been liable to pay if he had retained the settled property.
CLAUSE 17.-HUSBAND AND WIFE. Division 6A.-Husband and Wife.
The inclusion of Division 6A in the Principal Act will have the effect of requiring a Taxpayer to pay income tax on his or her taxable income at the rate of tax appropriate to a taxable income equal to the aggregation of the taxable income of the taxpayer and the taxable income of his or her spouse.
For example, if a taxpayer's taxable income is Pd500 and his wife's taxable income is Pd300, the taxpayer will pay tax on Pd500 at the rate appropriate to Pd800 and his wife will pay income tax on Pd300 at the rate appropriate to Pd800.
The new provision will have no application where the spouse of the taxpayer lives apart from the taxpayer in pursuance of a decree, judgment, order or deed of separation or in circumstances which, in the opinion of the Commissioner, are analogous thereto.
CLAUSES 18, 19 AND 20.-PRIVATE COMPANIES.
The effect of Sections 103 and 104, in conjunction with other sections in Division 7 of the Principal Act, is that a private company which does not, within six months after the close of the year of income, 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 its shareholders.
It is proposed by the amendments to Sections 103 and 104 that in the case of a non-resident private company the period of six months shall be extended to nine months. This extension is necessary, particularly in the case of private companies in the United Kingdom which, owing to the present disturbed conditions, are unable within the statutory period of six months to comply with the formalities associated with the distribution of company profits.
By the insertion of section 109A in the Principal Act, it is proposed to exclude from the operation of the private company provisions those non-resident companies which do not carry on business in Australia by means either of a principal office or a branch.
As the Commonwealth does not collect income tax on dividends distributed by non-resident companies to non-resident shareholders, the principle underlying the imposition on companies of income tax on undistributed profits has no application in the case of a non-resident company which does not carry on business in Australia by means either of a principal office or a branch.
It is proposed to continue the application of the Division to non-resident private companies carrying on business in Australia by means either of a principal office or a branch. The affairs of these companies are closely related to Australia and they enjoy protection of their assets in this country. Moreover, competitive anomalies would be created if this class of non-resident private company were exempted from a tax which resident Australian companies are required to pay.
CLAUSE 21.-REBATE OF TAX ON INCOME TAXED IN THE UNITED KINGDOM AND IN AUSTRALIA.
Section 159 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.
Prior to the incorporation in the Principal Act of sub-section (6.) of Section 159, there was no limitation as to the time in which an application for the allowance of the rebate of tax might be made. On the enactment of sub-section (6.) in 1940, it was necessary that applications for the rebate lodged after 28th November, 1940, should be made within six years after the date on which the tax, in respect of which the rebate was sought, became due and payable.
In the absence of a time limitation in Section 159, many taxpayers had deferred lodgment of their applications until they had received from the United Kingdom the particulars necessary for the calculation of their rebates. Those taxpayers who had failed to apply for the rebate before 28th November, 1940, were deprived, by the operation of sub-section (6.), of their right to the rebate for years outside the six year period.
As the provision has operated harshly in many instances, it is proposed to extend the period for applications for the rebate to 30th June, 1942. Applications lodged after that date will be effective only if lodged within the six-year period.
CLAUSE 22.-REBATE IN RESPECT OF BUSINESS INCOME.
The object of the above provision was to give to the individual taxpayer a concession of a similar nature to that formerly allowed to private companies, other than investment companies, which enjoyed immunity from the additional tax on undistributed income in respect of a proportion of that undistributed income.
As the concession to private companies was withdrawn last year it is now proposed that the rebate of tax provided by Section 160 be discontinued.
CLAUSES 23 AND 24.-FURTHER TAX ON UNDISTRIBUTED INCOME OF COMPANY.
The proposed proviso to Section 160C (4.) is designed to remedy a defect discovered in the present proviso. As it stands, its effect 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 a 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 insertion of Section 160E is being made for the same reasons as those stated under Clause 20, in relation to non-resident private companies.
CLAUSE 25.-LIQUIDATORS.
Under the present law, in the case of a company in liquidation, the payment of income tax payable by the company takes precedence over costs, charges and expenses incurred by the liquidator in winding-up the company, including the liquidator's own remuneration.
Cases have been encountered where no amount is available to the liquidator to discharge the expenses of liquidation as the whole of the assets of the company have been absorbed in the payment of income tax. This state of affairs, if permitted to continue, would seriously interfere with the operation of the law relating to the liquidation of companies, as persons of the type required would be reluctant to assume the responsibilities of liquidators.
The proposed amendment provides that the Commissioner of Taxation may permit liquidator's expenses and remuneration to be paid in priority to income tax that may be payable by the company, if other creditors of the company whose debts rank in priority to the liquidators' expenses do likewise.
The amendment will have effect as from 13th October, 1939, since which date the existing priority of income tax has, in practice, been abandoned by the Commonwealth in such circumstances.
CLAUSE 26.-EXEMPTION OF INCOME DERIVED BY A DECEASED PERSON PRIOR TO DEATH.
The effect of Section 221 is to exempt from income tax the income derived by a person during the period from the commencement of the year of income in which he dies to the date of his death, if his estate is liable to Commonwealth Estate Duty.
The above exemption is based on the view that the income can be presumed to have been included in the net dutiable value of the estate and that the exemption therefore prevents double taxation.
It is considered, however, that the liability to estate duty does not alter the original character of the revenue at the time it accrued as income to the benefit of the deceased person. It is proposed accordingly that the exemption be removed.
The amendment will contribute to uniformity in the income tax laws of the Commonwealth and the States as none of the States allows the exemption.
CLAUSE 27.-COLLECTION OF INCOME TAX BY INSTALMENTS.
The object of paragraph (a), which it is proposed to repeal, was to provide by regulation that contracts which are wholly or substantially for labour should come within the scope of the system of collection of income tax by instalments. These contractors are virtually in the position of employees.
Since the enactment of paragraph (a), it has been found that the formulation of a regulation prescribing the classes of contracts would prove to be of inordinate length and would, most probably, not be sufficiently comprehensive to cover all classes of contracts.
The effect of the proposed amendment will be--
- (a)
- to remove the requirement that classes of contracts shall be prescribed; and
- (b)
- to provide that the payments in question shall be brought within the scope of the instalment system by the extension of the definition of "salary and wages" to include those payments.
CLAUSE 28.-APPLICATION OF ACT.
This clause provides that the amendments proposed by the Bill, with some exceptions, shall apply to assessments for the current financial year.
Amongst the excepted clauses are clause twenty and twenty-four which provide respectively that the Private Company provisions of the Act and the Further Tax on Undistributed Income of Companies shall not apply to non-resident companies which do not carry on business in Australia by means either of a principal office or a branch. These clauses will apply to assessments for the financial year 1940-1941 and subsequent years.