Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. Frank Crean, M.P.)
The purpose of this memorandum is to explain the provisions of three income tax Bills.
The first Bill - the Income Tax Assessment Bill (No. 5) 1973 - will give effect to proposals announced in the Budget Speech as well as proposals relating to withholding tax on dividends and interest paid to Papua New Guinea residents, the tax status of subsidiary companies, the private company retention allowance, rebates in relation to meat exports, payment of dividends to private companies in foreign tax havens and deduction of tax instalments from workers' compensation payments.
The proposals in the Bill are outlined below.
Casual profits arising from the sale of real or personal property purchased after 21 August 1973 and sold within twelve months of acquisition are to be treated as assessable income. An important exception concerns the sale of a taxpayer's sole or principal residence as a consequence of his changing his place of employment or business. Where disposals of property are made outside the twelve month period the general provisions of the law will apply. Section 6D of the Principal Act is to be terminated. That section provides, broadly, that profits made by a person other than a company on the sale of shares listed on a stock exchange and held for more than eighteen months are not to be taken into account for income tax purposes. It is proposed by the Bill that this provision will not be available for shares acquired after 21 August 1973.
Provisions of the Principal Act under which certain profits earned from mining operations carried on in Australia or Papua New Guinea are exempt from income tax are to be withdrawn. Briefly, the provisions are those authorising the exemption from tax of profits from mining gold or of income derived from the sale, transfer or assignment of rights to mine a particular area for gold or a prescribed metal or mineral and the exemption of one-fifth of the profits earned from mining prescribed metals or minerals.
The exemptions of income derived from gold mining or from mining prescribed metals or minerals will not be available from the commencement of the 1973-74 income year. Income from the sale, transfer or assignment of mining rights that is derived after 21 August 1973 will generally be subject to tax, but special provisions will apply to preserve an entitlement to exemption for such income derived under a contract made on or before that date. Other transitional provisions will permit certain past capital expenditures made by gold mining enterprises on prospecting and mine development, to the extent that they exceed income exempted from tax over a specified period, to be available for deduction against assessable income derived from future mining operations. For the 1973-74 and future income years gold mining activities will otherwise be subject to the same basis of assessment as other mining activities.
As part of a package of pension and taxation measures, associated with the phased abolition of the means test for people aged 65 years of age and over, this Bill will withdraw the exemption of pension payments made to persons of age pension age and to wives of such aged persons. Effect has already been given to the pension side of the new arrangements in the relevant pensions legislation. The Income Tax Bill 1973 (the second Bill) will give effect to other parts of the new arrangements by authorising a tax rebate of $156 for aged persons and by discontinuing the age allowance. War pensions will remain exempt as will pensions, other than a wife's pension paid to the wife of a man aged 65 or over, paid to persons below age pension age. Certain elements of otherwise taxable pension payments to aged people, such as amounts representing allowances for the payment of rent or for the support of children, will continue to be exempt.
A special provision which permits manufacturers of wine and brandy to value stock on a concessional basis for income tax purposes is to be repealed. It is proposed that, commencing with the 1973-74 income year, these manufacturers will be required to value stock on one of the three bases available to taxpayers generally, i.e. at cost price, market selling value or replacement price. Special transitional provisions will phase in over a five year period an under-valuation of wine and brandy stock that would have occurred as at the end of the 1973-74 income year if the concessional basis of valuation had been retained.
Provisions of section 44 of the Principal Act exempt a number of classes of dividends from income tax in shareholders' hands. It is proposed to discontinue the provisions that exempt dividends paid wholly and exclusively out of exempt profits from gold mining, out of the exempt portion of income from the mining of prescribed metals and minerals or from the exempt income derived by an exploration or prospecting company from the sale of mining rights. It is also proposed to bring to an end the exemption of dividends paid out of profits from sales of locally produced petroleum or products of the petroleum.
With one exception, dividends declared out of any of these sources after 21 August 1973 will be liable to tax. The exception is a dividend declared after 21 August by a public listed company where its payment was, before that date, recommended by the directors.
The withholding tax on dividends and interest paid to non-residents is not, at present, payable in respect of dividends and interest paid to residents of Papua New Guinea. The dividends and interest are, instead, dealt with by assessment processes. It is proposed by this Bill that, as from the date of introduction of the Bill, dividends and interest paid to residents of Papua New Guinea will be subject to withholding tax. As a consequence Papua New Guinea companies will no longer be entitled to have dividends from Australia freed from Australian tax by the rebate on inter-corporate dividends to which Australian companies are entitled. (Papua New Guinea recently withdrew a corresponding rebate on the introduction there of a dividend withholding tax.)
Provisions for an accelerated income tax rate of depreciation of primary production plant and structural improvements are to be terminated. Expenditure that is incurred after 21 August 1973, other than in pursuance of a contract made on or before that date, will not qualify for the concessions but will be deductible for income tax purposes by way of general depreciation.
The special income tax deduction known as the investment allowance, which permits a deduction from assessable income of 20 per cent of capital expenditure on specified new plant for use in manufacturing or in primary production, is to be brought to an end.
Expenditure incurred on and after 22 August 1973 will not qualify for the allowance unless it is incurred under a contract entered into before that date and, in the case of manufacturing plant is incurred no later than 30 June 1975.
Commencing with the 1973-74 income year, the deduction in respect of private rates is to be available only for rates paid in respect of a taxpayer's sole or principal residence, the deduction being subject to a limit of $300 in any year. Private rates paid in respect of holiday homes and vacant residential land are no longer to be deductible.
Sections 75 and 76 of the Principal Act which provide immediate deductions for the cost of certain capital expenditure on land used for primary production are to be terminated. Expenditures previously covered by these sections will be deductible either over 10 years or by way of general depreciation where the expenditure is in respect of a depreciable structure. The proposal is to apply to expenditure incurred after 21 August 1973 unless it is incurred in pursuance of a contract entered into on or before that date with suppliers of labour or materials.
Gifts to public war memorial funds established after 21 August 1973 will not be deductible under the gift provisions. Gifts to funds established on or before that date will be deductible only if made before 1 July 1974.
Under section 103A of the Principal Act, which lays down criteria for determining whether a company is to have public or private status for income tax purposes, a company that would not otherwise qualify as a public company may be treated as such by the exercise of a discretionary power vested in the Commissioner of Taxation. A decision given by the High Court in the case Stocks and Holdings (Constructors) Pty Ltd means this discretionary power can be invoked in only a limited range of circumstances.
An amendment is proposed so that companies which fail in some insignificant way to qualify as public companies under specific tests in section 103A, but which are essentially public in character, can, through the exercise of the discretionary power, be treated as public companies for income tax purposes.
Provisions in the Income Tax Assessment Bill (No. 4) 1973, which was recently introduced, are designed to prevent avoidance of Australian tax through private companies paying dividends to a private "repository" company owned by Australians but set up in Papua New Guinea. It is proposed by the present Bill to extend these safeguarding provisions to dividends paid by private companies to private "repository" companies set up in any country outside Australia, e.g. in a tax haven.
The retention allowance in relation to trading income - which allows companies to retain profits without becoming liable to pay undistributed profits tax - is to be increased to a flat rate of 50 per cent for the 1972-73 and subsequent income years.
The special deduction allowable to life assurance companies under section 115 of the Principal Act of, very broadly, 3 per cent of calculated liabilities, is to be reduced to 2 per cent of calculated liabilities.
The amount of dividends in respect of which a life assurance company is allowed a rebate of tax under section 46 of the Principal Act is to be reduced by an appropriate part of the deductions allowable to the company for expenses of general management and in relation to calculated liabilities.
The special income tax rebate allowable in respect of expenditure on the development of export markets will not be available for expenditure made after 10 September 1973 in developing export markets for fresh, chilled or frozen meat unless it is made under a contract entered into on or before that date.
The tax payable on a company's taxable income for a year of income is ordinarily assessed and payable in the following financial year, the earliest due date normally being 15 February in that financial year. The Commissioner of Taxation is to be authorised to collect an instalment of the tax payable by a company in respect of a year of income ahead of the time that the tax would ordinarily fall due for payment. In the current financial year, the instalment will be payable not earlier than 31 December 1973. The proposal is the first step in a series intended to collect company income tax by four quarterly payments in the financial year following the year in which the income is derived.
Income in the form of periodical payments of workers' compensation, sickness pay and accident pay made to an employee in respect of his incapacity for work, are to be subject to tax instalment deductions under the pay-as-you-earn system.
The second Bill - the Income Tax Bill 1973 - will declare the rates of income tax payable by individuals and companies for the current financial year 1973-74. This Bill also provides for instalments of tax to be payable by companies in respect of the 1972-73 and 1973-74 income years in accordance with the provisions of the first Bill.
The main features of this Bill are:
The rates of tax payable by individuals for the 1973-74 financial year, in respect of income of the 1973-74 income year, are to be the same as those payable for the 1972-73 financial year.
As part of a package of pension and taxation measures the age allowance is not to be continued but a tax rebate will be allowed to residents of Australia who are of age pension age or are women under 60 years of age married to men aged 65 or over. The rebate is to be $156, reducing by 25 cents for each $1 of taxable income above $3,224, reducing to nil at a taxable income of $3,848. Persons who qualify by age and residence for part only of the income year will receive a proportion of the rebate allowable to people who qualify throughout the year.
The rates of tax payable for the 1972-73 financial year by a private company - 37.5 per cent on the first $10,000 of taxable income and 42.5 per cent on the balance - are to be increased for the 1973-74 financial year (i.e., in respect of income of the 1972-73 income year) to a flat rate of 45 per cent on the whole of the taxable income. The general rate of tax payable by public companies will remain at 47.5 per cent. The rates previously payable in respect of certain categories of public company income - the mutual income of life assurance companies and the dividend income of non-resident companies - will be raised to 47.5 per cent for the 1973-74 financial year. The rates of tax payable by co-operative companies, non-profit companies and friendly society dispensaries will remain unchanged.
The rate of tax payable in respect of investment income by a superannuation fund that does not invest a sufficient proportion of its assets in public securities is to be increased in line with the increased rate of tax payable by mutual life assurance companies. The rate payable for the 1973-74 financial year, in respect of investment income of the 1973-74 income year, is to be 47.5 per cent.
A provision of the Bill will formally declare that instalments of company tax, under the proposed quarterly payment scheme, will be payable in respect of company tax on income of the 1972-73 and 1973-74 years of income.
The third Bill - the Income Tax (Non-resident Dividends and Interest) Bill 1973 - amends the Income Tax (Non-resident Dividend and Interest) Act 1967 to declare rates of withholding tax, of 15 per cent and 10 per cent respectively, on dividends and interest paid to residents of Papua New Guinea.