Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)
This memorandum explains the provisions of the above-mentioned two Bills.
The main purpose of the first Bill, the Income Tax Assessment Amendment Bill 1980, is to give effect to the 1979-80 Budget announcement of an extension of the present scheme of tax rebates for share capital subscribed for off-shore petroleum exploration and development, so that it will also apply to subscriptions for on-shore petroleum exploration and development.
The Bill also proposes amendments to allow deductions for expenditure incurred in contesting an election for membership of the Legislative Assembly of the Northern Territory; to allow deductions for gifts to the Child Accident Prevention Foundation of Australia; to extend the period for valuing property donated under the Taxation Incentives for the Arts Scheme; and to remedy technical deficiencies revealed by a Court decision in the law governing taxation of royalties derived by non-residents.
The second Bill, the Income Tax (International Agreements) Amendment Bill 1980, will give the force of law in Australia to recently signed comprehensive double taxation arrangements with the Philippines and Switzerland and to a Protocol to amend the existing double taxation agreement with the United Kingdom.
The main features of the Income Tax Assessment Amendment Bill 1980 are as follows:
Definition of royalty (Clause 3)
The definition of "royalty" in the Income Tax Assessment Act, and which applies for purposes of taxing Australian-source royalty income of residents of other countries, is to be amended to remedy technical deficiencies exposed by a Victorian Supreme Court decision. The definition is to be revised in 2 respects.
Firstly, the term is to be expressed to apply to amounts which are credited, in the same way that it applies to those which are actually paid.
Secondly, the amendments will bring within the definition, amounts paid or credited by a person in return for a forbearance to grant to third persons rights to use property covered by the royalty definition. This is designed to prevent Australian tax being escaped by arrangements under which, instead of amounts being payable for the exclusive right to use property, it is agreed that payments will be made for an undertaking that rights to use the property will not be granted to anyone else.
Election expenses (Clause 4)
Expenditure incurred in the 1979-80 and subsequent income years in seeking election as a member of the Legislative Assembly of the Northern Territory is to be made tax deductible.
Gifts (Clause 5)
Gifts of the value of $2 or more made to the Child Accident Prevention Foundation of Australia are to be made tax deductible.
It is also proposed to extend, from 30 to 90 days, the period before and after the making of a gift in which a valuation must be made of property donated, under the Taxation Incentives for the Arts Scheme, to a public library, museum or art gallery or to the Australiana Fund.
Shareholder rebates for capital subscriptions to eligible petroleum companies (Clauses 6 to 10)
It is proposed that the present scheme of tax rebates for share capital subscribed for off-shore petroleum exploration and development be extended to include on-shore petroleum exploration and development.
The proposed extension of the scheme will operate in a similar manner to the existing off-shore shareholder rebate scheme that was introduced in respect of capital subscribed after 24 August 1977. Under the extended scheme income tax rebates will be available in respect of moneys subscribed after 21 August 1979 as paid-up share capital to companies holding licences or permits (or recognised interests therein) to prospect, explore or mine for petroleum in off-shore or on-shore areas of Australia.
Those companies will be able to lodge declarations with the Commissioner of Taxation forgoing the right to deductions to which they would become entitled under Division 10AA of the Principal Act for eligible petroleum outgoings, i.e., capital expenditure incurred after 21 August 1979 on off-shore or on-shore petroleum exploration or development operations.
By lodging such a declaration, a company will be able to confer an income tax rebate on both corporate and non-corporate shareholders in respect of their share capital subscribed that is spent on eligible petroleum outgoings. The tax rebate will be allowable in the subscriber's income tax assessment for the year of income in which the moneys are subscribed, and will be an amount of 30 cents for each dollar subscribed.
The concession will be available where moneys are subscribed directly to a petroleum exploration or mining company or to a company interposed between the shareholder and the operating company, provided there is an appropriate connection between the interposed company and the operating company.
Companies which have lodged declarations under the existing off-shore rebate scheme in respect of capital subscribed on or before 21 August 1979 will continue to be required to expend those moneys on off-shore petroleum exploration and development operations before the expiration of the second year of income following the year in which the moneys were received.
However, the period for expending capital subscribed after 21 August 1979 under the extended rebate scheme for both off-shore and on-shore petroleum exploration and development is to be two years longer than under the existing off-shore scheme. The extended period is to terminate at the end of the fourth year of income following the income year in which the relevant moneys are received.
All of the safeguards against exploitation of the concession applying to the existing off-shore scheme are to apply in the operation of that scheme as extended on-shore. In addition, there will be a further safeguard to counter "rebate stripping" practices.
A present safeguard operates to withdraw rebate entitlements in respect of shares that are sold in circumstances where the cost of those shares is taken into account in calculating the assessable profit or deductible loss on sale. This safeguard is to be complemented by a further safeguard which will apply to shares acquired after 2 October 1979 and will operate to withdraw any entitlement to a rebate for capital subscribed in respect of shares that are disposed of within twelve months of acquisition in circumstances that would not invoke the existing safeguard.
The main purpose of the Income Tax (International Agreements) Amendment Bill 1980 is to give the force of law in Australia to:
- a comprehensive double taxation agreement between Australia and the Philippines that was signed in Manila on 11 May 1979 (clause 5);
- a protocol, to amend the double taxation agreement between Australia and the United Kingdom, that was signed in Canberra on 29 January 1980 (clause 4);
- a comprehensive double taxation agreement between Australia and Switzerland that was signed in Canberra on 28 February 1980 (clause 5).
There are also consequential provisions in the Bill:
- Interest and royalties derived from the Philippines and Switzerland by residents of Australia, and in respect of which, under the agreements, the country of source limits the rate of its tax, will not, by reason of the payment of that limited tax, be exempt from Australian tax but will, like interest and royalties derived from other treaty countries, be subject to Australian tax with credit being allowed for the source country tax.
- Australian residents deriving interest or royalties from Switzerland will not be disadvantaged by the changed arrangements in relation to such income derived up to and including the date of signature of the Swiss agreement. This provision is necessary because the Swiss agreement is expressed to have effect from a date prior to its signature - a similar provision is not necessary in relation to the Philippine agreement since it first takes effect subsequent to the date of its signature.
- Australian residents deriving dividends from the United Kingdom will not be disadvantaged by the new arrangements in relation to such dividends derived up to and including the date of signature of the United Kingdom protocol. This is necessary because the relevant provisions of the protocol are expressed to have effect as from a date prior to the date of signature.
More detailed explanations of the clauses of each Bill are contained in the following notes.