Explanatory Memorandum(Circulated by the Treasurer, the Honorable J. B. Chifley.)
Notes on Clauses
The amendment effected by this clause is a drafting amendment consequent upon the amendment proposed to be effected by Clause 11 of the Bill.
Section 2 of the Principal Act repealed certain Taxation Acts which were in force prior to the operation of the Principal Act. The repealed Acts are specified in the Schedule to the Principal Act.
By Clause 11 of the Bill it is proposed to allow a special deduction to residents of certain remote areas of Australia. These areas are being described in the form of a Schedule to the Act. This Schedule will become the Second Schedule thus necessitating the present Schedule being described as the First Schedule. The necessary amendment of the heading of the present Schedule is being effected by Clause 18 of this Bill.
The amendment effected by Clause 2 is consequential upon this alteration to the heading of the Schedule.
Section 17 of the Principal Act provides that individual taxpayers who derive a taxable income of more than Pd104 during the year of income shall be liable to income tax. A company is liable if its taxable income is Pd1 or more.
Taxable income is the amount of income remaining after deducting from the total assessable income of the taxpayer all allowable deductions.
Since the adoption of the Uniform Income Tax plan, concessional allowances for dependants, life assurance, & c., have taken the form of rebates of tax instead of deductions from assessable income as formerly. The effect is that in arriving at the taxable income, no allowance is made for dependent spouse, children, mother, & c.
The amount of the rebate allowable is arrived at by applying the rate of tax appropriate to a personal exertion income equal to the total taxable income of the taxpayer to certain specified amounts. The amounts specified for dependants are--
Spouse Pd100; mother Pd100; housekeeper or female relative of a widow or widower Pd100; first child under 16 years Pd75; each additional child under 16 years Pd30; invalid child over 16 years Pd75; student child between 16 and 18 years Pd75.
Notwithstanding the allowance of these concessional rebates, a taxpayer with spouse or other dependant may, under the existing law, be required to pay tax if his taxable income is Pd105 or more. This is because the rebate of tax in respect of the dependant is less than the amount of tax levied on a taxable income of Pd105. A taxpayer with a dependent wife and child under 16 years, however, is not required to pay tax unless his income from personal exertion exceeds Pd175. The reason for this is that he is entitled to deduct rebates of tax based on Pd175 and these rebates equal the amount of tax payable on an income from personal exertion of Pd175.
By Clause 3 of the Bill it is proposed that a taxpayer who is entitled to a rebate in respect of a dependant shall not be liable to pay tax unless his income exceeds Pd156. The new proposal will apply even though the taxpayer does not wholly maintain the dependant for the whole of the year of income.
A taxpayer without dependants will continue to be liable for tax if his income exceeds Pd104.
The proposed amendment will first apply to assessments based on income derived during the year ending 30th June, 1946.
This clause proposes to extend the exemption from income tax at present allowed in respect of pensions paid under the Australian Soldiers' Repatriation Act and the Seamen's Pensions and Allowances Act, to "act of grace" pensions paid to members of the Forces and their dependants and to incapacitated members of the mercantile marine and their dependants. These "act of grace" payments are approved where the circumstances surrounding the injury incapacity or death of the member, although not covered by the abovementioned Acts, are considered to warrant such a payment.
The payments are determined by reference to the principles of the Acts mentioned and the recipients fall into four categories, viz.:--
- Part-time members of the Defence Force, e.g., members of the Volunteer Defence Corps.
- Representatives of philanthropic organizations such as the Australian Red Cross and Commonwealth employees attached to and serving with the Forces.
- Civil air personnel who are nominally regarded as members of the R.A.A.F. Reserve.
- Full-time members of the Forces who are not eligible for a pension under the Australian Soldiers' Repatriation Act but by reason of the special circumstances have been granted "act of grace" pensions.
A pension is a receipt of an income nature so that these "act of grace" payments are assessable income in the hands of the recipients. As, however, they are not paid under the Australian Soldiers' Repatriation Act or the Seamen's Pensions and Allowances Act they do not come within the exempting provisions of the Principal Act.
There is no essential difference between these "act of grace" pensions and the pensions under the Acts mentioned and it is considered to be wrong in principle to subject the former to tax whilst exempting the latter.
Under the proposed clause both classes of pensions will, in future, be exempt from income tax.
This amendment will first apply to assessments based on income derived during the year ending 30th June, 1945.
The object of this clause is to afford some taxation relief to pastoralists whose properties are resumed for the purposes of soldier settlement and as a consequence thereof are obliged to dispose of the live stock running on the resumed properties.
In normal circumstances, pastoralists each year dispose of culls and a proportion of their young stock, retaining flocks and herds consistent with the carrying capacity of their properties. Where their grazing properties are resumed, however, they will generally be obliged to dispose of the whole of the live stock running on those properties in the year of resumption.
The effect on the income tax assessments of pastoralists whose properties are resumed is to include in the assessable income of one year the proceeds of live stock sales which, in ordinary circumstances, would have been spread over the assessable income of a number of years.
As income tax rates are graduated, the addition of an abnormal amount of income to the normal income of any year has the effect of not only increasing the rate of tax on the abnormal income, but also the rate of tax which would otherwise have been payable on the normal income of that year.
It has been represented that, in view of the present extremely high rates of income tax, a substantial part of the profits from sales made in the above circumstances would be absorbed in taxation, thus leaving to the taxpayer little for future investment or for replacement of the live stock sold.
It is accordingly considered equitable that some relief from taxation should be granted in the special circumstances where grazing properties are resumed for soldier settlement purposes.
The relief proposed is that the profit on the sale of live stock sold in the above circumstances will be spread, for purposes of taxation, over the year in which the sale was made, and the four succeeding years. As there may be instances where the taxpayer would prefer the whole of the profit to be included in his income in the year of sale rather than to have it spread over the period of five years, it is proposed that the provision to spread the profit will apply where an election is made by the taxpayer. It is also proposed to treat the portion of the profit carried forward to the four years succeeding the year of sale as being derived from a business of primary production so that the taxpayer will continue to be treated as a primary producer during those years and to be subject to the averaging provisions of the Act.
It is proposed by sub-clause (4.) that where the resumed property is owned by a partnership, each partner shall have a right to elect that his share of the profit from the sale of the live stock shall be spread over the five year period. As each individual partner (and not the partnership as such) is assessed on his share of the profit, it is considered to be proper that each individual should be given a separate right of election in respect of his share of the profit as it may suit one partner, in view of interests which he may hold outside the partnership, to have the whole of his share of the profit assessed to him in the year of sale, whilst another partner may prefer to have his share spread over the period of five years.
The right of each partner to make a separate election in respect of his share of the profit will not prevent the senior partner of a partnership making an election which will apply in the assessment of all the partners provided all the partners concur in the election.
Sub-clause (5.) is designed to apply the same principle to trustees and beneficiaries in trust estates, as is applied by sub-clause (4.) to partners in partnerships.
Where the resumed property is owned by the trustees of a trust estate, the question whether the trustees or the beneficiaries will be assessed in respect of the profit on the sale of the live stock will depend on the terms of the will of the testator. In some instances it may happen that the whole of the profit is assessable to the trustee. In other cases the whole of the profit may be assessable in the hands of the beneficiaries. In other cases part of the profit may be assessable to the trustees and part to the beneficiaries.
Paragraphs (a) and (b) of the sub-clause accordingly give to trustees and beneficiaries of trust estates respectively, the right to elect to have the share of the profit on the sale of the live stock in respect of which each is liable to be assessed, to be spread over the five years. Just as may happen in the case of a partner in a partnership, it may suit the trustee of a trust estate or a beneficiary in the estate, in view of his interests outside the particular property which has been resumed, to have his share of the whole of the profit assessed in the year in which the live stock is sold.
It is proposed by sub-clause (6.), that where, in any year, a taxpayer who has made an election to have the profit spread over the period of five years, is about to leave Australia, or dies, or becomes bankrupt, or, in the case of a company, commences to go into liquidation, the Commissioner of Taxation may include in the taxpayer's income of that year any part of the profit which has not already been assessed. Such a provision is necessary to ensure that the revenue is properly safeguarded. The proposed sub-clause will still permit the unassessed profit at the date of departure, death, bankruptcy or liquidation, to continue to be spread over the remainder of the five year period where the Commissioner considers the circumstances appropriate to permit such a continuance.
Sub-clause (7) provides that the election to have the profit spread over the period of five years is to be made on or before the date of lodgment of the taxpayer's return for the year in which the sale takes place. Power is given to the Commissioner of Taxation to extend the time for making the election where he considers the circumstances warrant an extension.
Paragraph (a) of sub-clause (8.) merely restates the existing sub-section (3.) of section 36 of the Principal Act which is to be replaced by the new sub-clause (3.).
Paragraph (b) of the sub-clause prescribes the method to be adopted in arriving at the profit on the sale of the live stock where an election is made to spread the profit.
The profit will be ascertained by deducting from the sale price of the live stock which were sold in consequence of the resumption-
- in the case of live stock which were on hand at the beginning of the year in which the sale took place - the value at which that stock would be taken into account in making the taxpayer's assessment in respect of that year;
- in the case of live stock which were purchased during the year-the purchase price of the live stock;
- in the case of live stock which were acquired otherwise than by purchase during the year, e.g. by way of gift-the amount which in such circumstances is deemed to be the purchase price of the stock.
No deduction will be made from the sale price of any natural increase bred by the taxpayer during the year which may have been sold. Neither will any part of the working expenses incurred by the taxpayer during the year up to the date of the sale be deducted. It is considered that these expenses would relate to the income derived from the operations carried on on the property up to the date of the sale of the live stock sold in consequence of the resumption, and not to the income derived as the result of that sale. These expenses will be allowed in full against the income of the year of the sale.
This amendment will first apply to assessments based on income derived during the year ending 30th June, 1945.
This clause is designed to provide a measure of taxation relief to employees in receipt of living-away-from-home allowances.
Various wage-fixing authorities have granted away-from- home allowances to employees whose places of employment are located away from their usual places of abode. The allowance is paid to compensate the employee for the additional expenditure he is obliged to incur in providing board and accommodation for himself at his place of employment while, at the same time, maintaining his home elsewhere. Some of the classes of employees in receipt of these allowances are members of the Defence Force and the Civil Constructional Corps, carpenters, railway employees, & c., engaged on jobs in country districts.
These allowances, in substance, represent additional remuneration paid to the employee to meet higher costs of living. They, therefore, form part of the assessable income of the employees. The income tax law, however, specifically prohibits the deduction of expenses of a private or domestic nature. The consequence is that the employees are not permitted to deduct the additional living expenses incurred by them, even though the allowance is granted specifically for the purpose of meeting such expenses. The amount of tax payable by the employees is accordingly increased, and a substantial part of the special allowance paid away in income tax.
Away-from-home allowances differ from travelling allowances in that the latter are paid to meet the out- of-pocket expenses incurred by employees who are required by their employer, temporarily, to carry out their duties at some place other than their permanent place of employment. Travelling allowances are really expense allowances paid to the employee to meet necessary expenses incurred by him while temporarily absent from his head-quarters in connexion with his employer's business. These allowances are assessable income to the employee but as they are paid to him for business purposes, he is entitled to a deduction of the expenditure incurred by him for the purpose for which the allowance is paid. In most cases, the employee is allowed, as a deduction, an amount equivalent to the allowance received.
Having regard to the purpose of the away-from-home allowance and to the fact that, generally speaking, it is actually expended by the employee in meeting additional necessary expenditure incurred by him, it is considered that some deduction should be allowed to the recipients.
The portion of the allowance that properly falls to be taxed is the amount of the saving in living expenses to the taxpayer because of his absence from his home. This is reckoned to be approximately fifteen shillings per week, the probable saving in the cost of food.
It is therefore proposed that where a living-away-from- home allowance at the rate of not more than Pd2 10s. per week is received pursuant to the terms of any law, or any award of an industrial tribunal, the amount by which the allowance exceeds 15s. per week shall be an allowable deduction.
Where, however, the amount of the allowance exceeds Pd2 10s. per week, or where it is not fixed by law or an industrial tribunal, e.g. where it is fixed by agreement between employer and employee, the amount of the deduction is to be such amount as the Commissioner of Taxation considers reasonable in the circumstances. The purpose of this provision is to ensure that the proposed new section is not used to obtain an unintended benefit. This provision will also result in payments of the nature indicated being closely examined by the Taxation Department. It is also provided that the deduction allowable in such cases shall not exceed the difference between the amount of the allowance and 15s. per week.
Decisions of the Commissioner of Taxation under the proposed new section will be subject to review by a Court or by the Income Tax Board of Review.
By sub-clause (3.), "employee" is given the same meaning in section 51A as it has in section 221A of the Principal Act. For the purpose of section 221A, "employee" means any person in receipt of salary or wages and includes Members of Parliament, Government employees, members of the Defence Force, company directors, pensioners, insurance canvassers and certain small contractors.
Sub-clause (3.) also defines a "living-away-from-home allowance" as any allowance or benefit in cash or kind which the Commissioner is satisfied is paid for the purpose of compensating the employee for additional expenses (not being expenses which would be allowable under section 51 of the Principal Act as travelling expenses) incurred by him through his having to live away from home in order to carry out his duties as an employee. The reason for excluding allowances paid for the purpose of meeting travelling expenses is, as already stated, that travelling expenses have always been an allowable deduction. It is possible, therefore, that unless such allowances were excluded from the new provision, taxpayers receiving travelling allowances might be able to claim a double deduction in respect of the travelling allowance, i.e. a deduction of travelling expenses under section 51 and another deduction under the proposed section 51A.
Clause 20 provides that the deduction allowable under this clause shall first apply in assessments based on income derived during the year ending 30th June, 1946.
Clause 15 will insert in Section 221 C of the Principal Act a new sub-section providing that, for the purpose of determining the tax instalment deductions to be made from the remuneration of employees in receipt of living-away- from-home allowances, that part of any such allowance which exceeds 15s. per week shall not be taken into account. This provision will apply as from 1st July, 1945.
This amendment is complementary to the amendment proposed by clause 8 of the Bill. The purpose of both amendments is more fully explained in the Note to clause 8.
Briefly, section 60 of the Principal Act is an essential part of the depreciation provisions of the Commonwealth income tax law. Its purpose is to ensure that where, notwithstanding any change in the legal ownership of the assets, the beneficial ownership is retained by the transferor (e.g. where plant is transferred from a partnership to a proprietary company, all the members of which were members of the partnership), the person acquiring the property shall not obtain a greater deduction for depreciation than the transferor would have received. The section, however, makes special provision to cover cases where the transferor is assessable, under section 59 of the Principal Act, on portion of the consideration received by him in respect of the transfer. Section 60 provides that, in such cases, the new owner shall be allowed depreciation calculated on the sum of the assessable portion of the consideration and the depreciated value of the property at the time of sale to him.
"Depreciated Value" is defined in section 62 of the Principal Act. It is now proposed by clause 8 to amend this definition so as to give clearer expression to the intention regarding the application of the depreciation provisions of the Principal Act.
A corresponding amendment of the proviso to section 60 (1.) is also necessary. This amendment is designed to show clearly that the "depreciated value" therein referred to, is the amount that would be calculated under the Act as the depreciated value in the hands of the vendor immediately prior to the time of the sale.
This amendment will first apply to assessments based on income derived during the year ending 30th June, 1945.
The purpose of the amendments proposed by clauses 7 and 8 is to ensure that the deductions allowed to taxpayers for depreciation of assets shall not exceed the cost of those assets.
A taxpayer who uses plant in the production of assessable income is allowed an annual deduction for depreciation of that plant. The annual deduction is an amount calculated to recoup to the taxpayer the cost of the plant over its estimated effective life.
Upon disposal of the plant, the taxpayer is allowed a deduction, under section 59 of the Principal Act, of the excess of the depreciated value over the amount received on disposal. Correspondingly, any excess of the consideration received on the disposal of the plant over the depreciated value is assessable income to the extent to which deductions for depreciation have been allowed in the assessments of the taxpayer.
It has been found necessary to safeguard the revenue in those cases where the legal ownership of plant is transferred but the beneficial ownership is retained by the transferror. For example, plant costing Pd1,500 and having a depreciated value of Pd1,000 may be transferred at a value of Pd5,000 to a company the shares of which are beneficially owned by the transferror. In such a case the transferror would be assessable under section 59 on Pd500, i.e., the amount of the depreciation allowed in the assessments of the transferror.
Under the provisions of section 60, the company would be allowed depreciation based on Pd1,500, i.e., depreciation based on Pd1,000 which would have been allowable to the transferror if he had retained the plant and the amount of Pd500 included in the assessable income of the transferror.
A recent decision of the Income Tax Board of Review is to the effect that, if the company disposes of the plant to a third party, the deduction allowable to the company under section 59 would include the amount of Pd3,500, i.e., the difference between the transfer value of Pd5,000 and the amount of Pd1,500 upon which the depreciation allowances were based.
As a result, the depreciation provisions of the Act are ineffective to limit the aggregate deductions in the manner that was intended.
In order to give full effect to the intention of the depreciation provisions in these cases, it is necessary to amend the proviso to section 60 (1.) and to restate the definition of "depreciated value" in section 62.
These amendments will first apply to assessments based on income derived during the year ending 30th June, 1945.
Section 72A of the Principal Act allows a deduction of ex-Australian income taxes paid on dividends included in the assessable income of the taxpayer.
The circumstances surrounding the enactment of section 72A are that, prior to 1941, Australian residents were exempt from Commonwealth income tax on dividends received from ex-Australian sources.
The effect of the amendment made by section 7 of the Income Tax Assessment Act 1941 was to bring into the assessable income of the Australian resident, the gross ex-Australian dividend without deduction of any ex- Australian income tax paid on the dividend. In 1942, the enactment of section 72A permitted the taxpayer to claim a deduction of ex-Australian income taxes paid on the ex- Australian dividends.
In the application of section 72A it has been found, however, that, not only does the provision allow the deduction of ex-Australian taxes paid on ex-Australian dividends, but it also allows a deduction of ex- Australian taxes paid on dividends derived from sources in Australia.
Thus, section 72A infringes the principle that the measure of Commonwealth tax on income derived from sources in Australia should not depend on the amount of taxation levied by an ex-Australian Government on income derived by its residents from Australian sources.
The effect of the existing provision is seen in the case of an ex-Australian holding company with a subsidiary company carrying on business in Australia. For Commonwealth income tax purposes, the Australian company is taxed on its Australian profits, and the ex-Australian company is taxed (without rebate) on dividends paid out of those profits. The Principal Act does not allow the ex-Australian company any rebate of tax in respect of the dividends included in its assessment.
In the case of American holding companies, the American income tax law grants an exemption from American Normal Tax and Sur-tax in respect of dividends derived from their Australian subsidiaries. In some of these cases, however, the American company would be required to pay, in America, a special or additional tax which is imposed on Personal Holding companies. As these American taxes are payable on dividends which are assessable for Commonwealth tax, they are, at present, allowable deductions under section 72A for Commonwealth purposes. The result is that the non-resident American company, in its Commonwealth income tax assessment, may receive a deduction of American income tax paid by it on income derived from sources in Australia. This was never intended.
It is, therefore, proposed that section 72A be amended to withdraw the deduction of ex-Australian taxes paid on dividends derived from sources in Australia by either a resident or a non-resident of Australia.
The amending provision has been so expressed that where the dividend, which is taxed abroad, is paid partly out of Australian and partly out of ex-Australian profits, the Australian shareholder-recipient will be allowed a deduction of the appropriate proportion of the ex- Australian income tax so paid. If, therefore, an Australian resident receives from an ex-Australian company a dividend which is taxed abroad and which, as to 1-3rd, is paid out of ex-Australian profits, the taxpayer will be allowed a deduction of 1-3rd of the income tax so paid outside Australia. It might be mentioned that non-residents of Australia are not liable for Commonwealth income tax in respect of that part of any dividend which is paid out of profits derived by the company from sources outside Australia; consequently, they will not be entitled to a deduction of ex-Australian income tax paid by them on any dividends, whether those dividends are derived from sources in Australia or sources out of Australia.
The amendment will apply to ex-Australian income taxes paid on and after the date on which the Amending Act receives the Royal Assent.
Section 78 of the Principal Act allows as a deduction (inter alia) pensions and retiring allowances paid by the taxpayer to certain of his employees and their dependants. In the case of companies, section 78 also allows a deduction in respect of certain gifts and contributions. Section 79 allows a deduction of voluntary contributions made by the taxpayer to employees' pension or superannuation funds.
The effect of sub-section (3.) of section 78 is that the aggregate of deductions allowable under sections 78 and 79 shall not exceed the amount of income remaining after deducting from the assessable income all other allowable deductions, except the deduction of losses of previous years.
By clause 11 of the Bill it is proposed to insert in the Principal Act a new section, section 79A, providing for the allowance of a special deduction to taxpayers residing in the remote areas of the Commonwealth. Residents of that part of the Commonwealth which will be described in the Second Schedule to the Principal Act as Zone A will be entitled to a special deduction of Pd40, while residents of that part of the Commonwealth which will be described as Zone B will be entitled to a special deduction of Pd20.
The purpose of clause 10 is to limit the aggregate of the deductions that may be allowable under the new section 79A and also under sections 78 and 79 of the Principal Act to the amount specified in section 78 (3.) of the Act, i.e. to the amount remaining after deducting from the assessable income all other allowable deductions except the losses of previous years.
As the deduction to be provided by section 79A will be in the nature of a concessional allowance, it is considered that such a limitation is justifiable. If this limitation were not specified it would be permissible for taxpayers whose allowable deductions exceeded their assessable income to carry forward and deduct from the income of future years the whole or part of the special deduction allowed to them under the new section 79A.
The new provision will first apply for purposes of assessments based on income derived during the year ending 30th June, 1946, i.e. under the pay-as-you-earn method of taxation, for purposes of assessment for the financial year 1945-1946 and all subsequent years.
It has long been recognized that people living in the remote areas of Australia suffer the disabilities of isolation, high costs of living and uncongenial climatic conditions. The existence of these disabilities is admitted by both employers and wage fixing authorities, and special allowances are often granted to employees located in these areas.
Allowances of this nature are assessable in full. No deduction is allowable for additional household expenditure incurred by the taxpayer because of the higher cost of living prevailing in these districts. In consequence a substantial part of such allowances received by the taxpayers is often absorbed in the payment of their income tax.
As the diminution in the value of such allowances through the payment of income tax may tend to dissuade persons from accepting employment in the remote areas, post war development plans may be seriously affected. On the other hand, the allowance of an income tax concession to all taxpayers residing in such areas would tend to encourage settlement in those areas and, at the same time, provide a form of compensation for the disabilities they are obliged to endure.
Clause 11 of the Bill will accordingly insert in the Principal Act a new section-section 79A-providing for the allowance of a special deduction to residents of that part of the Commonwealth which is referred to as "the prescribed area".
"The prescribed area" comprises the greater portion of the Commonwealth. The parts excluded are, broadly speaking, the eastern part of Queensland, south of Mackay, eastern and southern New South Wales, all Victoria and Tasmania, the southern part of South Australia and the south-west corner of Western Australia.
"The prescribed area" is divided into two zones viz. Zone A and Zone B.
Sub-clause (2.) provides that a taxpayer who is a resident of Zone A for more than one half of the year of income shall be entitled to a special deduction of Pd40 and a taxpayer similarly resident in Zone B to a special deduction of Pd20.
"Resident" is defined in sub-clause (5.) as any person who resides or has actually been in the prescribed area or in a particular zone for more than one half of the relevant year of income. Where however, a person dies during the year of income and at the date of his death, he was ordinarily resident in a zone, he will, if he has not otherwise qualified for the deduction, be regarded as having been a resident of that zone and entitled to the appropriate deduction.
It may happen that during the year of income, a person may reside in Zone A for five months and in Zone B for two months. Clause (2.) (c) provides that in such a case the taxpayer shall be allowed such deduction, not being more than Pd40 nor less than Pd20, as the Commissioner of Taxation considers reasonable in the circumstances. In practice the taxpayer would be allowed a deduction of Pd36 arrived at as follows:-
|5/6ths of Zone A deduction Pd40||=||Pd33|
|1/6th of Zone B deduction Pd20||=||Pd 3|
The geographical position of each of these zones will be described in the Second Schedule to the Act.
Zone A roughly comprises the north-western areas and the extreme north-eastern areas of Queensland, the northern part of the Northern Territory and the norther portion of Western Australia. It also includes the Territories of Papua, Norfolk Island and New Guinea.
Zone B broadly embraces north-eastern (but not including the northern extremity), central and south-western Queensland, western New South Wales, the north and west of South Australia, the Gold-fields area and the central and southern areas of Western Australia but excluding the south-west corner of that State.
The areas included in Zone A are north of the Tropic of Capricorn. It is because the residents of these areas are obliged to endure tropical conditions and also because, in these areas, the disabilities of isolation and higher living costs are, generally speaking, more intensive, that it is considered that the residents of Zone A should receive a higher deduction than the residents of Zone B.
Section 78 (3.) of the Principal Act, as proposed to be amended by clause 10 of the Bill, will provide, in effect, that the aggregate of the deductions allowable under section 78, 79 and 79A of the Principal Act, shall not exceed the amount of net income derived by the taxpayer. Section 78 allows as a deduction pensions and retiring allowances paid by the taxpayer to certain of his employees and their dependants. Section 79 allows a deduction of voluntary contributions made to employees' pension or superannuation funds. As the deduction to be provided is in the nature of a concessional allowance it is considered that such a limitation is justifiable. If this limitation were not specified, it would be permissible for taxpayers, whose allowable deductions exceeded their assessable income, to carry forward and deduct from the income of future years the whole or part of the special deduction allowed to them under the new section 79A.
The new provision will not apply to companies or to trust estates. It will come into operation for purposes of assessments based on income derived during the year ending 30th June, 1946, i.e. under the pay-as-you-earn method of taxation, for purposes of assessments for the financial year 1945-1946 and all subsequent years. The deduction will be taken into consideration in fixing the tax instalments payable as from 1st July, 1945, by employees resident in the respective zones.
This is a drafting amendment consequent upon the amendment proposed by Clause 5 of the Bill.
Section 83 (2.) of the Principal Act makes special provision for determining the amount of consideration attributable to the sale of a lease in cases where the lease is sold together with other assets. This provision is necessary in order to determine the part (if any) of that consideration which should be included in the assessable income of the vendor. It is also necessary for the purpose of determining the amount of the annual deduction allowable to the purchaser in respect of the premium (if any) paid by him for the lease.
In applying section 83 (2.), however, it is necessary to have regard to the provisions of sections 36 (3.) and 59 (3.) of the Principal Act.
Where a taxpayer disposes of several classes of assets (including trading stock or live stock) for a lump sum, section 36 requires that the value of that trading stock or live stock shall be included in the assessable income of the vendor. It also provides that the person acquiring the stock shall be deemed to have purchased it at the amount of that value. Sub-section (3.) further provides that the value of the stock shall be its market value on the date of the disposal or, if there is insufficient evidence of the market value, the value which, in the opinion of the Commissioner, is fair and reasonable.
The effect of section 59 of the Principal Act is explained in the Note to Clause 8 of the Bill.
Clause 5 of the Bill provides for the amendment of section 36 of the Principal Act for the purpose of affording taxation relief to those pastoralists, who, because of the acquisition of their properties by the Government, are obliged to dispose of the live stock running on those properties. The form of this amendment requires that the present sub-section (3.) of section 36 be repealed and that its provisions be restated in paragraph (a) of the proposed new sub-section (8.) of section 36. Because of these alterations it will now be necessary to refer, in section 83 (2.) of the Principal Act, to paragraph (a) of sub-section (8.) of section 36 of that Act. Clause 12 will effect the necessary alteration.
Section 102AA of the Principal Act was enacted in 1942 for application to funds established by the medical and other professions to provide payments and other benefits for members of those professions who are engaged on war service and their dependants. The general basis of the funds 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.
Section 102AA provides that payments made to these funds under agreement shall be allowable deductions and payments made by the trustees of the fund shall be assessable income of the recipient beneficiaries.
The trustees of these funds are not liable for income tax in respect of income derived by them in their capacity as trustees during the war years. If, however, at 30th June next succeeding the termination 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 and as if it were income derived on that date. In other words, the part of the fund undistributed at the end of the war would be liable for tax as if it were the income derived in one year by an individual taxpayer. If for example, a fund of Pd15,000 remained in the hands of the trustees on 30th June after the end of the war, at least Pd12,770 would be absorbed by taxation at current rates.
The funds that were considered when section 102AA was enacted were funds that were designed to augment the service pay of the practitioner so that the combined service pay and payment from the fund would approximate the income from his pre-war civilian practice. The amounts that would be received by the trustees would be disbursed within a month or so after receipt and, consequently, there would be only relatively small amounts (if any) undistributed at 30th June after the termination of the war.
One of the funds now brought under notice, however, differs from other funds that have been established. This Fund is not designed to afford immediate payment to members on war service but to accumulate the contributions received in order to assist those members in re-establishing themselves in civilian practices after the cessation of hostilities. It is anticipated that it will be from five to seven years after the cessation of hostilities before the fund is finally liquidated, having in mind the gradual assistance it is proposed to afford to the largest possible number of returning members.
In order to avoid the possible serious depletion of such a fund by taxation, it is considered that the time specified in paragraph (d) of section 102AA should be extended. It is, however, impracticable at this stage to specify any date before which a fund should not be taxed. In the circumstances it is proposed that power should be given to the Governor-General to extend the date by proclamation. This provision will serve to remove anxiety on the part of the trustees of the Fund and should enable the fullest assistance to be given by such funds to practitioners returning from war service.
Section 160 (2.) (a) of the Principal Act allows a concessional rebate in respect of the spouse of the taxpayer. A taxpayer who is a widow or widower is allowed a rebate in respect of a female relative having the care of any of his children under the age of sixteen years. The rebate is only allowable, however, if the spouse or relative is wholly maintained by the taxpayer.
Generally speaking, the amount on which the rebate is based is Pd100. If, however, the taxpayer's taxable income is between Pd200 and Pd300, the rebatable amount varies between Pd100 and Pd125 according to the amount of the taxable income.
The amount of the rebate allowable is arrived at by applying to the rebatable amount, a rate of tax appropriate to a personal exertion income equal to the total taxable income of the taxpayer.
The spouse or relative is deemed to be wholly maintained if the separate net income derived by her during the year of income does not exceed Pd50, and the taxpayer contributes to her maintenance. If her separate net income exceeds Pd50, no rebate is allowable. The effect of this provision is that if the separate net income of the spouse or relative is increased from Pd50 to Pd51, the taxpayer is deprived of a rebate of tax varying from Pd18 at the basic wage level, to Pd45 on the highest incomes.
To remove this anomaly it is proposed to amend the existing provision to enable a rebate on a reducing scale to be allowed in cases where the separate net income of the spouse or female relative exceeds Pd50, but is less than Pd100. If the net income of the spouse or female relative is Pd100 or over, no rebate will be allowable.
The allowance of the reduced rebate will be effected by paragraph (a) of clause 14 which provides that where the net income of the spouse or female relative exceeds Pd50, the amount on which the rebate would otherwise be calculated is to be reduced by a sum which bears the same proportion to that amount, as the excess of the net income of the spouse or female relative over Pd50 bears to Pd50. Expressed in other words, the prescribed amount on which the rebate would otherwise be calculated will be reduced by Pd2 for ever Pd1 by which the net income of the spouse or female relative exceeds Pd50.
If, for example, the taxpayer's taxable income were Pd500, and the separate net income of the spouse or female relative were Pd40, the rebate would be based on Pd100. If, however, the separate net income of the spouse or female relative were Pd70, the rebatable amount would be Pd60, arrived at as follows:-
(Excess of separate net income of spouse or female relative (Pd70)) over(Pd50)
- Maximum rebatable amount in respect of spouse or female relative in this case is Pd100.
- Proportion of Pd100 which the excess bears to Pd50 is:-
((20)/(50))*( of Pd100)
- The rebatable amount is therefore
(Pd100 - Pd40)
The amendment proposed by paragraph (b) is consequential upon the amendment proposed by paragraph (a) of this clause. Its purpose is to amend that part of section 160(2.) (a) of the Principal Act which provides that a spouse or female relative shall be deemed to be wholly maintained if her separate net income during the year of income does not exceed Pd50 and the taxpayer contributes to her maintenance. It will raise the income limit of the spouse to Pd100 and thus conform with the amendment effected by paragraph (a) of this clause.
Section 160 (2.) (aa) of the Principal Act allows a taxpayer who is a widow or widower, a rebate of tax in respect of a daughter who is wholly engaged in keeping house for the taxpayer. The allowance is conditioned upon the daughter being wholly maintained by the taxpayer. The daughter is deemed to be wholly maintained by the taxpayer if her separate net income does not exceed Pd50 and the taxpayer contributes to her maintenance. The amount on which the rebate is based is Pd100.
The existing provision has created anomalies similar to those referred to in the immediately preceding Note explaining the proposed amendments to section 160 (2.) (a) of the Principal Act. It is accordingly proposed to amend section 160 (2.) (aa) to allow a reduced rebate in cases where the separate net income of the daughter exceeds Pd50 but is less than Pd100. In such cases, the rebatable amount will be reduced according to a formula similar to that proposed in cases where the spouse of the taxpayer derives a separate net income in excess of Pd50.
This sub-clause will extend section 160 (2.) (d) of the Principal Act which allows a rebate for medical and dental expenses.
It is proposed to expand this provision to include optical expenses and amounts paid to a personal attendant by a blind or totally incapacitated person. The concession will apply to amounts paid by the taxpayer during the year of income in respect of himself or his spouse or any of his children under the age of 21 years. It is necessary, however, that the taxpayer and the member of his family in respect of whom the payment is made, be residents of Australia.
The rebate in respect of optical expenses will be limited to amounts paid to a legally qualified optician or to a person who supplies spectacles in accordance with the prescription of an oculist or a legally qualified optician.
The present law fixes the maximum amount on which a rebate may be allowed under section 160(2.)(d) at Pd50 each for the taxpayer, his spouse and each of his children under the age of 21 years. This maximum will be retained; consequently, the rebatable amount for the aggregate of medical, dental and optical expenses and payments to a personal attendant shall not exceed Pd50 in respect of each member of the taxpayer's family.
This amendment will enable taxpayers afflicted with deafness to claim a rebate in respect of amounts paid by them for hearing aids. The provision will extend to expenditure on the maintenance of such hearing aids. No limit is placed upon the amount on which a rebate may be allowed under this paragraph.
Paragraph (g) of clause 14 will insert in section 160 of the Principal Act a new sub-section, viz., sub-section (5.), which is designed to render it impracticable for a taxpayer to obtain both a concessional rebate and an allowable deduction in respect of the same amount, e.g., payments to a personal attendant by a blind person engaged in a trade or profession. The new provision will, in such cases, empower the Commissioner of Taxation to allow either the rebate or the deduction, whichever he considers appropriate.
The amendments proposed by clause 14 will first apply to assessments based on income derived during the year ending 30th June, 1946.
This clause is complementary to clause 6 of the Bill which provides, by the insertion of Section 51A, allowable deductions to employees who receive living- away-from-home allowances.
The object of clause 15 is to ensure that where an employee receives a living-away-from-home allowance or benefit, the rate or value of which exceeds Fifteen shillings per week, the employer shall, for the purpose of calculating the tax instalment deductions required to be made from the employee's earnings, exclude from those earnings so much of the amount or value of the allowance or benefit as exceeds Fifteen shillings per week.
The new sub-section will come into operation as from 1st July, 1945 and the employee will from that date receive a reduction in his instalments in anticipation of the deduction which will be allowed in his assessment in respect of the living-away-from-home allowance received by him.
Section 221KB empowers the Commissioner to enter into an arrangement with an Authority in Australia of the Government of another country under which tax instalment deductions are to be made from the salaries or wages of persons employed by that Authority.
Sub-section (3.) of the existing section requires that an employee who has been notified that such an arrangement is in force, shall authorize his employer to make tax deductions from his salary or wages.
Some employees have failed to authorize their employers to make the tax deductions as required.
Consideration was given to the question of instituting legal proceedings in these cases but it would have been difficult to establish that the offenders had, in fact, been notified of the arrangement for the making of deductions, as only oral notification of its existence had been given, and in some cases the oral notification was given outside Australia.
Under the amendment proposed in clause 16 it will not be necessary for an Authority to notify the employees that an arrangement providing for deductions is in force, and an employee will be required, within thirty days after the commencement of this provision, or after he becomes employed by the Authority, to authorize the Authority to make deductions.
This is a drafting amendment. Its purpose is to clarify the intention that the pay and allowances referred to in sub-section (1.) of section 265A are, as stated in sub- section (5.) of that section, pay and allowances earned by the deceased taxpayer as a member of the Defence Force.
This is also a drafting amendment. As clause 11 of the Bill requires the insertion of a second schedule in the Principal Act, it is now necessary to refer to the existing schedule as "The First Schedule". This amendment effects the necessary alteration to the heading of the schedule.
The insertion of the Second Schedule is necessary to give effect to the proposed new section 79A which is being inserted in the Principal Act by clause 11 of the Bill. That clause provides for the allowance of special deductions to residents of those portions of the Commonwealth which are referred to as Zone A and Zone B respectively. The Second Schedule describes the particular areas included in those zones.
The amendments proposed to be made by the Bill will commence to apply for the financial years as indicated in this clause.