House of Representatives

Income Tax and Social Services Contribution Assessment Bill 1951

Income Tax and Social Services Contribution Assessment Act 1951

Notes for the Treasurer's Second Reading Speech

The main income tax proposals of the Government are contained in the Resolution which I have introduced and explained. The Assessment Bill which I now present is, to some extent, a complementary measure.

One of the more important of the amendments is Clause 15. Under this Clause, it is proposed to grant primary producers the right to withdraw from the system of averaging of incomes. The operation of that system has already been fully described and need not be repeated here.

By exercising this right to withdraw from the averaging system any primary producer may ensure that, in a year of reduced income, he will pay no more income tax than any other taxpayer deriving an equivalent income.

This provision accedes, in effect, to the claims made by some primary producers' organisations that their members should be safeguarded against the operation of the averaging system in periods of declining incomes.

The right to withdraw from the averaging system will commence to apply to incomes derived during the current income year ending 30th June, 1952 and, once exercised, will be irrevocable.

I turn now to the important and controversial subject of taxation of private companies. The provisions of the Assessment Act relating to these companies represent, perhaps, the most complicated sections of our taxation laws. These complications have their origin, firstly, in an endeavour to afford equitable taxation treatment to private companies and, secondly, in the legislative action that must be taken to defeat efforts that are constantly being made to avoid a just measure of taxation of the companies and their shareholders.

The simplification of the plan of private company taxation is by no means an easy task if equitable treatment of the companies is to be preserved and, at the same time, schemes for tax avoidance are to be defeated.

Nevertheless, the Commonwealth Committee on Taxation has undertaken this task and I am hopeful that, in due course, I will be in a position to bring down legislation to implement recommendations of the Committee to overcome complications and deficiencies of the present legislation.

At this juncture, however, I submit for your approval a new definition of private company to distinguish those companies from public companies.

The distinction is important as, in the first instance, the rates of primary tax on public companies amount to 9/- in the Pd as compared with the private company primary rate of 5/- in the Pd on the first Pd5,000 of taxable income and 7/- in the Pd on the balance of taxable income.

In the second instance, public companies will no longer be subject to an undistributed income tax. On the other hand, private companies which do not make a sufficient distribution of their incomes to their shareholders will continue to be liable to undistributed income tax.

Basically, the plan of private company taxation is designed to ensure that the mere act of incorporation shall not lessen or increase the income tax obligations of an individual or of a small group of individuals.

The present definition, broadly, classifies a company comprised of twenty or less shareholders as a private company. It also provides that a company which is capable of being controlled by seven or less persons shall be treated as a private company. In determining the number of persons who are capable of controlling a company, the definition places full dependence on the voting rights attached to shares.

Some companies, which are essentially private companies in character, have placed themselves technically outside the scope of the present definition, thereby avoiding the incidence of private company taxation. This result has been achieved by the expedient of increasing the number of shareholders to twentyone or slightly more and arranging the voting power so that, ostensibly, it will be exercisable by eight or more persons. Meanwhile, the real ownership and control of the company continues to be vested in seven or less persons.

The definition, which I now propose, continues, in substance, the provisions of the present definition. It goes further, however, and classifies as private companies those companies which are beneficially owned by or in the interests of relatively few individuals. The new definition gives effect to a recommendation made by the committee.

If, for example, more than one-half of the share capital is held by or on behalf of seven or less persons, the company is to be classified as a private company.

Another provision in the proposed definition relates to the ownership of company share capital by members of family groups. For this purpose, a person and his near relatives and his nominees and the nominees of relatives are being regarded as one person. If three quarters or more of the share capital of such a company is held by seven or less persons the company will be regarded as a private company for income tax purposes.

The new definition also provides that a company that is capable of being controlled, by any means whatsoever, by seven or less persons, shall be classified as a private company.

At the same time, companies in which the public are substantially interested, including subsidiaries of public companies will continue to be excluded from the definition of private company.

It is recognised that there may be special circumstances in some cases where it would be unreasonable to tax a company as a private company. Where such circumstances exist, a company ss entitled to state its case to the Commissioner of Taxation and, if dissatisfied with the Commissioner's decision the company may take its claim to a Taxation Board of Review for further adjudication.

The definition which I propose represents a fair and effective basis for distinguishing private companies from public companies. It will bring within the scope of private company taxation all those companies which, by various devices, have technically avoided that form of taxation.

I recognise, however, that there are non-private companies which are bona fide constituted and which may come within the compass of the new definition. I am giving companies full notice of the altered definition as I propose that it shall not become effective until the end of the current income year, i.e. at 30th June, 1952.

There is another aspect of private company taxation which merits immediate attention. I refer to the proportion of distributable income which a private company may retain free from undistributed income tax. The amount which may be so retained is calculated according to a graduated scale commencing at 50% of the first Pd1,000 of distributable income and ending at 10% of the excess of distributable income over Pd10,000.

The purpose of this graduated scale is to ensure, as far as practicable, that private companies and their shareholders will not be required to pay more income tax than partners deriving equivalent incomes.

Experience has shown, however, that some private companies have been sub-divided into two or more smaller companies in order to take undue advantage of this allowance. By this practice of sub-division, these private companies have gained a greater freedom from undistributed income tax than they would have been entitled to if the sub-division had not been arranged.

This practice has been examined by the Commonwealth Committee on Taxation which has recommended remedial action.

The remedy proposed will apply to all those private companies which are comprised substantially of the same shareholders. In these cases of inter-related private companies, the distributable incomes of all of the companies will be totalled to determine the appropriate amount which will be free from undistributed income tax. The amount so determined will be allocated proportionately to the inter-related companies.

The provisions to achieve this end are complicated, both in the legislation and in practical application. Nevertheless those provisions are necessary if this method of tax avoidance is to be defeated.

The new provisions will commence to apply to distributable incomes derived during the current income year ending 30th June, 1952.

The Bill also contains several other amendments to which I will briefly refer.

It is proposed to exempt the pay and allowances of members of the navy, army, air and auxiliary forces serving in operational areas in and around Korea and Malaya. This exemption will apply to pay and allowances earned since the commencement of operations in those areas in June,1950. The annual cost to revenue of this exemption is estimated at Pd200,000.

This Bill also gives effect to several other recommendations made by the Commonwealth Committee on Taxation.

Amongst these is the exemption as from 1st July, 1951, of income from scholarships, bursaries and similar educational allowances. The exemption will apply where students are receiving full-time education at a university, school or college.

This exemption will bring Australia substantially into line with the United Kingdom and New Zealand. It will also ensure that the whole of the amounts paid by way of scholarships will be available for the purpose for which these scholarships are provided.

It is also proposed to allow deductions for gifts to community hospitals. These are hospitals which are usually conducted by religious and philanthropic organisations and are not carried on for the profit or personal gain of individuals.

Gifts to public hospitals have been allowed as income tax concessions for many years. The view taken by the Committee is that community hospitals are essentially institutions established and conducted for the benefit of the public. It is anomalous to allow gifts to public hospitals and, at the same time, to deny the deduction where gifts are made to community hospitals. The extension of the concession will remove this anomaly. Deductions will be allowed for gifts made to community hospitals as from 1st July, 1951. The concession will apply also to gifts to public funds for the establishment or maintenance of these hospitals.

The Committee has also recommended that the standard deduction allowed to employers for the cost of food provided for their employees should be increased from fifteen shillings to twenty shillings per week for each employee. This recommendation will be implemented by administrative action, and will not require legislative approval. For the current year of income which commenced on 1st July, 1951, the Commissioner of Taxation will allow twenty shillings as the standard deduction.

I should mention, however, that it is quite competent for a taxpayer to demonstrate to the Commissioner that the allowance of twenty shillings per week is inadequate in his particular case. Where an employer keeps records of the actual cost of keep provided for his employees, a deduction of that actual cost will be allowed as a deduction.

Whilst, as I have said, the deduction allowed to employers for the cost of their employees' keep can be increased administratively, amendments of the income tax law will be necessary to provide a corresponding increase of five shillings per week for the purpose of deducting tax instalments from the employees' earnings. This increase will not apply, however, where the award under which the employee is working specifies the value of board provided for him.

Another recommendation of the Committee affects primary producers who have adopted cost price as the basis for valuing live stock on hand. The present income tax law prescribes maximum and minimum values at which the natural increase of live stock may be brought to account. In the case of lambs, for example the primary producer may select a cost price not less than four shillings and not more than twenty shillings per head.

The Committee considers that these maximum values (which were prescribed in 1936) fall short of present values, and the abolition of the ceiling is recommended. It is proposed to adopt this recommendation, and, as from 1st July, 1951, primary producers will be afforded the opportunity to bring the cost price of natural increase more in line with prevailing levels of costs.

Before concluding, I should mention that provision is being made for the exchange of official information between the Commonwealth Commissioner of Taxation and the Land Tax authorities in the States. This arrangement will obviate duplication of enquiries and effect general savings in administration. I would emphasise that all officials to whom information is communicated are under strict obligation to preserve secrecy regarding the affairs of taxpayers.

There are other provisions in the Bill but these are of a technical nature and it is not necessary to refer to those provisions now. They may be left for consideration in the Committee stages.

An amendment has not been included in this Bill to give effect to the Government's decision to discontinue the special initial depreciation allowance on plant on and from 1st July, 1951. That amendment is not essential at this stage as it does not affect the general budgetary proposals for this financial year. Industrialists have been given notice, however, of the Government's attitude towards this special concession.

As is customary with income tax measures, a memorandum explaining all of the provisions in detail is being prepared. I hope to be in a position to make this memorandum available to Honourable Members during next week.