Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. Frank Crean, M.P.)
Explanations are given in this memorandum of the provisions of the abovementioned Bill which proposes a number of amendments to the Income Tax Assessment Act 1936-1972 (the "Principal Act"). Briefly stated the proposals contained in the amending Bill are -
Under the Principal Act, a company's entitlement to a deduction for a loss incurred in an earlier year is subject to the condition that shares carrying at least 40 per cent of the voting rights and rights to dividend and capital distributions are beneficially owned by the same persons in the year of income and the year in which the loss was incurred. This condition is referred to in this memorandum as the "continuing ownership test". A company which, because of changes in ownership of more than 60 per cent of its shares, fails to satisfy the "continuing ownership test" may still claim the deduction for loss of an earlier year if it carries on in the year of income the same business as it carried on before the change in its shareholdings occurred. This is referred to as the "same business test".
It is proposed to strengthen the "continuing ownership test" and to enact safeguarding provisions against devices designed to avoid the operation of the test. The proposed amendments will -
- require a continuing ownership of shares carrying more than one-half (in lieu of the present 40 per cent) of the voting, dividend and capital rights;
- extend the area of application of provisions under which the ownership of direct and indirect interests in a "loss" company can be traced through interposed companies, trusts and partnerships to individual persons; and
- enable regard to be had to the subordination of the rights, powers and interests of continuing shareholders in a "loss" company to those of other persons who had little or no beneficial interest in the company in the year in which the loss was incurred.
The operation of the "same business test" will not be affected by these proposals.
The amendments proposed by this clause are designed to remove opportunities companies now have to obtain tax advantages through buying up the shells of other companies to which substantial amounts are owed by way of debts which are bad but have not been written off as such. It is proposed that deductions otherwise allowable to a company for debts owed to it and written off as bad are not to be available unless the company satisfies tests substantially the same as those governing the allowance of deductions for company losses - i.e., the "continuing ownership test" or the "same business test".
Very broadly, a company will be entitled to a deduction for a bad debt only if it satisfies the "continuing ownership test", having regard to the year in which the debt came into existence and the year in which it is written off as bad, and provided that persons other than the continuing shareholders will not obtain the real benefits of the deduction for the debts, A company unable to meet the "continuing ownership test" may be allowed a deduction for its bad debts if it satisfies the alternative "same business test".
Clauses 18 and 19 are designed to eliminate the tax benefits now being obtained by private companies through buying up the shells of other private companies which have paid dividends in excess of the amount required to avoid the imposition of additional tax on undistributed income. The tests proposed for this purpose follow the general lines of the provisions that are to govern the allowance of deductions for company losses and bad debts.
Broadly speaking, a private company will be required to satisfy the "continuing ownership test" or, alternatively, the "same business test", as a condition of its being able to take into account for the purposes of tax on undistributed income any amount which may have been paid in excess of a sufficient distribution of its income of a previous year. In applying the "continuing ownership test", regard will be had to the persons who were the beneficial owners of shares in the company in the respective "prescribed periods". A "prescribed period" is the period of twelve months that commences two months before the end of a year of income and is the period during which a company may make a sufficient distribution for tax purposes of its income of the year. As with deductions for bad debts and losses of earlier years, an excess distribution will not be taken into account if persons other than the continuing shareholders are the real beneficiaries of its deduction in determining the company's liability to tax on undistributed income.
The new tests could be circumvented to some extent if income were channelled into a private company in the last two months of an income year and matched against dividends that had been paid earlier in those two months. Clauses 15 to 17, which include tests corresponding with those that are to apply in relation to excess distributions, will have application in determining whether such dividends are to be taken into account for the purposes of tax on undistributed income.
It is proposed that the concessional deduction of up to $1,200 for life insurance premiums and payments to superannuation funds be made subject to certain conditions. For premiums paid on a life insurance policy taken out on or after 1 January 1973, it is proposed that the premiums be deductible only if benefits, other than death benefits, are not payable under the policy within a period of 10 years after its commencement. Where a policy taken out since that date is forfeited or surrendered before it has been in force for 10 years, provisions are proposed under which some or all of the deductions allowed may be withdrawn.
For contributions to a superannuation fund on or after 1 January 1973, it is proposed that the allowance of deductions be conditional upon the fund itself being eligible for tax exemption or other concessional tax treatment.
It is proposed by this clause to extend to 30 June 1974 the operation of the provisions under which a rebate of tax is allowable in respect of certain expenditure to promote exports.
It is proposed to clarify the scope and operation of provisions of the Principal Act designed to exempt from income tax dividends paid out of profits from gold mining carried on in Australia or Papua New Guinea.
It is proposed that expenditure on converting plant for use under the metric system of measurement be allowable as an outright deduction for income tax purposes in the year in which it is incurred.
The secrecy provisions of the Principal Act are to be amended to bring a citation of an Act up to date and to authorize the Commissioner to communicate information to the Secretary to the Department of Education in connection with the provision by the Commonwealth of financial assistance to students.
It is proposed to amend transitional provisions of the Income Tax Assessment Act (No. 2) 1968 so that they also apply in respect of an agreement entered into between a mining company and a government where the agreement has been assigned with the consent of the government.
A number of drafting amendments are proposed to be made to provisions of the Principal Act, in line with drafting practices that are now being followed. The operation of the provisions that are to be amended will not be affected.
The various proposals contained in the Bill are explained in the notes that follow relating to each of the clauses of the Bill.