The Senate

Income Tax and Social Services Contribution Assessment Bill 1951

Income Tax and Social Services Contribution Assessment Act 1951

Notes for Minister's Second Reading Speech.

The more important income tax proposals of the Government have already been discussed in this Chamber, in connection with the Income Tax and Social Services Contribution Bill which passed the Second Reading stage a couple of weeks ago. That Bill imposed the rates of tax and determined the general level of taxation for the current financial year 1951-52.

The Bill which I now present also deals with income tax, but is concerned with the basis of assessing the amount of income subject to tax rather than with the amount of tax payable on that income. Many of the provisions in this Bill are complementary to the Rates Bill previously considered. Other provisions affect the basis of taxation of income derived from certain industries.

One important series of of amendments is concerned with the basis of taxation of the mining industries in this country, particularly coal-mining.

For many years, mining industries have been allowed deductions for capital expended on necessary mining plant and the development of mining properties. These allowances are justified by the special circumstances surrounding the industries.

The broad objective of this arrangement is to levy taxation, in the ultimate, on those profits only which are earned over and above the capital invested and working expenses.

Although this objective has always been accepted as sound, in principle, it has been found, in actual practice, that, in many cases, the taxation machinery has not achieved the desired ends.

In order that a fair and equitable basis of taxation of the mining industries might be designed, this subject was referred for examination by the Commonwealth Committee on Taxation.

In a valuable report which the Committee has submitted and which was recently tabled in the House of Representatives, the Committee has recommended several adjustments to the basis of taxation of these industries.

I do not propose, at this stage, to deal with all of the Committee's recommendations but there are two or three of them that I should specially mention.

Perhaps, the most important of the Committee's recommendations is that the coal-mining industry should be entitled to the same deductions for capital expenditure as other branches of the mining industries.

It is an unexplained feature of our income tax law that capital invested in coal-mining has not been accorded the same treatment as capital invested in other forms of mining activity in this country.

Until the last year or so, coal owners have not pressed for this allowance but, in more recent times, projects for modernisation of methods and for expansion of production, involving heavy expenditure of capital, have stressed the need for an appropriate income tax deduction.

Honorable Senators will appreciate, on reading the reports, that the Commonwealth Committee on Taxation has exhaustively examined this matter before coming to the conclusion that there should be no discriminatory taxation treatment between coal-mining and other forms of mining.

These amendments will implement a recommendation made by the Committee that the income tax deductions should be extended to capital expended on necessary plant and on development of coal-mining properties.

This deduction will not apply to past expenditure of capital in coal-mining. The deduction will commence to apply to capital expended in the current income year 1951-52.

Another important recommendation made by the Committee relates to capital expended on housing and welfare for employees in the mining industries, and for their dependants.

The Committee has recognised, and I am sure that Honorable Senators will agree, that, as a general rule, capital expenditure on housing and amenities on or adjacent to mining areas is lost when the mineral deposit is exhausted.

For the most part, these mining areas are remote from the cities and major towns, and, if labour is to be attracted to and retained in the mining industries, adequate accommodation and amenities must be provided for employees and their families.

On modern standards, expenditure of this nature is as inescapable commitment, if the mining industries, including the coal-mining industry, are to be conducted efficiently and production expanded.

The deduction for this type of capital expenditure will be allowed in annual instalments over the estimated life of the mine. If, however, the estimated life of a mine is longer than twenty-five years, the expenditure deduction will be based on a maximum life of twenty-five years.

There are several other adjustments that are being made to the basis of taxation of the mining industries, but these are essentially of a technical character and involve no alterations in taxation principles.

Associated with the provisions relating to the taxation of the mining industry is a proposal to exempt from taxation income derived by Australian gold producers from sales of gold on overseas markets for industrial purposes.

This decision follows an announcement by the International Monetary Fund of a new policy which in effect gave members freedom to determine their own policy in relation to these sales. Since the announcement a number of countries which had not previously permitted such sales have announced that their producers will in future be permitted to sell gold for industrial use on markets where premium prices are obtainable. The countries concerned include Canada, South Rhodesia and the gold-producing British Colonies. South African gold producers had for some time previously been selling a portion of their output on premium markets.

Under the existing provisions of the income tax law, income derived from the working of a mining property in Australia or the Territory of New Guinea principally for the purpose of obtaining gold is exempt from income tax and social services contribution. The exemption also applies in some circumstances where both gold and copper are produced. A taxpayer entitled to this exemption would not be liable to taxation on income derived from sales of gold made on a premium market.

However, the amount of gold which will be saleable at a premium on overseas markets during any given period cannot be accurately foreseen, and the proposal of the industry, which the Government has approved, is to form an association open to all producers for the purpose of arranging sales of gold overseas. The procedure proposed is that individual producers should as at present sell their output to the Commonwealth Bank at the official price. The Producers' Association will then purchase gold from the Bank from time to time and arrange for its sale abroad in an approved form. The income derived from these premium sales will be distributed periodically among the association members in such a way as to ensure that all producers receive an equitable share of the proceeds.

As the association would not itself be engaged in the working of a mining property the income derived from premium sales would, under the existing law, be liable to taxation.

It is considered appropriate to grant to gold producers deriving income as a result of sales made by the association on premium markets, the same exemption as they would have enjoyed if the gold had been sold directly by them on those markets.

The amendment now proposed will give effect to this principle and will also extend to shareholders of gold mining companies the exemption which would have applied in respect of dividends received by them had the gold mining companies sold the gold on a premium market. No extension of the principle underlying the existing exemptions is proposed.

These amendments will apply for the income year ending on the 30th June, 1952 and subsequent years.

I wish now to refer to amendments which are complementary to the modification of the averaging system applicable to the assessments of primary producers. The operation of that system and of the proposed modifications has already been explained in connection with the Rates Bill, and need not be repeated here.

It is proposed, in the first place, to grant primary producers the right to withdraw from the averaging system. Any primary producer, by making an election to this effect, may ensure that he will pay no more income tax, in a year of reduced income, than any other taxpayer in receipt of an equivalent income.

In proposing this amendment, the Government has given consideration to representations by some primary producers' organisations that the averaging system should not apply in periods of declining incomes.

The right to withdraw from the averaging system may be exercised in regard to income derived during the current income year which commenced on 1st July, 1951, or in regard to the income of any later year. Once such an election is made, it will be irrevocable.

The other amendment associated with the modification of the averaging provisions relates to the taxation of the proceeds of the sale of live stock disposed of at walk-in-walk-out or clearing sales when a primary producer is going out of business.

When these sales are made, the primary producer is faced with an income tax liability not only on the normal income of the year but also on the additional profit from the clearing sale. This combined normal income and realization profit falling into one income year attracts an abnormally high rate to the whole of the taxable income.

Particularly in cases where the primary producer has valued the natural increase of his live stock at cost price and has selected the minimum price per head permitted for such valuation, the income which is subject to tax in consequence of such abnormal sales may be very high.

Up to the present time, the averaging provisions have cushioned the taxation burden of a primary producer who disposes of his business. However, under the modified averaging provisions, the benefits derived by some primary producers from the averaging system will be wholly or partly withdrawn.

By the amendment, it is proposed to preserve the benefits of the former averaging provisions, in so far as income from walk-in-walk-out or clearing sales of live stock is concerned. The proposed relief takes the form of a rebate of tax, equal in amount to the difference between the tax calculated on a concessional basis and the tax which would otherwise be payable.

In effect, the net tax payable by a primary producer who received abnormal income from the disposal sale of live stock will be the sum of the following amounts:-

Tax on the abnormal income, calculated by applying to that income the rate ascertained by reference to the taxpayer's actual average income, according to the procedure adopted prior to the modified averaging provisions; and
Tax on the normal income, calculated on the basis that that income is the taxpayer's only taxable income, and that the rate of tax is ascertained (subject to the modified averaging provisions) by reference to his actual average income.

I would remind Honorable Senators that, where the primary producer's taxable income and average income are both below Pd4,000, the averaging provisions will continue to apply to his income unless he exercises the right I have mentioned, to withdraw permanently from averaging.

In the cases under Pd4,000, therefore, there is no necessity to make special provision for the continuance of averaging in the event of a clearing sale.

In other cases, the rebate of tax will apply where the clearing sale took place during the year ended 30th June, 1951, and will continue to apply to those sales in future years, thus coinciding with the application of the modified averaging provisions.

Another group of amendments in the present Bill relates to the taxation of private companies. These amendments give effect to recommendations of the Commonwealth Committee on Taxation in regard to this particularly complicated part of our taxation laws.

The amendments concerning private companies have the immediate objective of preventing schemes for tax avoidance. Honorable Senators will find a detailed explanation of these proposals and of other provisions in the Bill, in the memorandum which has been supplied by the Treasurer. For the present it is sufficient to indicate that the private company amendments are designed to defeat efforts which have been made in recent years to avoid an equitable measure of taxation of such companies and their shareholders.

The Bill contains provisions of lesser importance than those to which I have already referred. I suggest that these provisions may be more appropriately explained and discussed in Committee.

I would invite attention, however, to those provisions which confer complete freedom from taxation upon certain classes of income. I refer particularly to the proposed exemption of the pay and allowances of servicemen in and around Korea and Malaya. Another provision will exempt, as from 1st July, 1951, scholarships received by full-time students.

I commend the Bill to Honorable Senators.