Notes for Treasurer's Second Reading Speech
In the course of my Budget Speech, I announced several income tax proposals, including increases in allowances for dependants, widening the scope of deductions for gifts and relaxation of the depreciation provisions of the Assessment Act.
This Bill is presented to the House to give effect to those proposals.
In 1953, this Government increased the income tax deductions for the maintenance of a spouse from Pd104 to Pd130. A similar increase was applied where a daughter-housekeeper or a parent was maintained by a taxpayer. These deductions are being raised by Pd13, that is, from Pd130 to Pd143. Where the allowance for a housekeeper having the care of children under the age of 16 years applies, the deduction will also be increased from Pd130 to Pd143.
Increases of Pd13 are also being made in the allowances for the first child under sixteen years, a student child under twenty-one years and an invalid relative maintained by the taxpayer. In the case of these dependants, the deductions are being raised from Pd78 to Pd91. Where a child under 16 years other than the first is maintained by the taxpayer, the increased allowance will be Pd65 instead of Pd52 as at present.
The income tax dependants' allowances are also being widened by extending the present deduction for dependent parents to those taxpayers who maintain parents-in-law. Where a parent- in-law is wholly maintained by the taxpayer, the deduction allowable will be Pd143.
In conjunction with similar action being taken for gift duty and estate duty purposes, a provision is included in the Bill to ensure that adopted children and other children towards whom a taxpayer has all the legal obligations of parenthood will be accorded the same treatment, so far as income tax is concerned, as the taxpayer's own children. Most of the income tax concessionlo allowances already extend to such cases, but the allowance for insurance premiums and like payments is at present limited to payments made in respect of the taxpayer's own children. The proposed provision will also make this allowance available in the cases concerned, up to the maximum deduction of Pd300 allowable for payments of this nature.
The adjustments I have mentioned will commence to apply in the current income year 1957-58.
It is proposed that the allowance for gifts of Pd1 and upwards to specified funds and institutions in Australia shall be extended to gifts to the following:
The National Trust in each of the States of New South Wales, Victoria and South Australia.
Public libraries, museums and art galleries.
The Sydney Opera House Appeal Fund.
The Sidney Myer Music Bowl Trust.
The Industrial Design Council of Australia.
Deductions will be allowed for gifts made to these funds and institutions on and after 1st July, 1957.
Provision is made in the Bill to exempt from tax and contribution income derived on and from 1st July, 1956, by residents of the Island of Nauru from sources within that Island. An exemption of this nature has applied for many years to income derived by residents of the Territories of Papua, New Guinea and Norfolk Island from sources in those Territories.
Of far reaching importance are those provisions of the Bill relating to the income tax allowances for depreciation on assets used in the production of assessable income.
Honourable Members will recall that these allowances were reviewed by the Commonwealth Committee on Rates of Depreciation, under the Chairmanship of my colleague, the Honourable Member for Petrie.
Last year, certain of the recommendations made by the Committee were adopted and it is now proposed that effect be given to several more of those recommendations.
One of the major recommendations of the Committee related to the rates of depreciation to be applied in calculating the annual deductions allowable. These deductions may be calculated either under what is known as the diminishing value method, or, at the option of the taxpayer, under the prime cost method.
Under the diminishing value method, the depreciation for each year is calculated on the written down value of the asset at the beginning of that year, that is, the original cost less depreciation already allowed. Thus, a lower deduction is allowable in each successive year and the cost of the asset is not entirely written off until it is disposed of or scrapped. Under the prime cost method, on the other hand, the depreciation for each year is calculated on the original cost of the asset, the effect being thte the cost is written off by equal instalments over its estimated effective life.
At present, the same percentage rate of depreciation is applied under both the diminishing value and prime cost methods. The result is that, whilst the cost of an asset is wholly written off over the period of its effective life under the prime cost method, only about two-thirds is written off over the same period under the diminishing value method.
In order that the two methods may be brought into reasonable equality, the Committee recommended that the rates of annual depreciation to be applied under the diminishing value method be increased by 50% and the Bill contains a provision to give effect to this recommendation.
The increased rates will apply to assets on hand at 1st July, 1957, as well as to future purchases.
Concurrently with this increase in the rates of depreciation to be applied under the diminishing value method, taxpayers at present using the prime cost method will be afforded an opportunity to change to the diminishing value method, in regard either to the whole of their depreciable assets or to future purchases only. Taxpayers at present using the diminishing value method may change to the prime cost method for future purchases only, or may have the prime cost method applied to the whole of the plant at present being used as well as plant that may be acquired in the future.
A further aspect of the depreciation allowances which was examined by the Committee was the system of balancing adjustments where a depreciable asset is disposed of, lost or destroyed.
In such cases, where the consideration receivable exceeds the written down value of the asset, the excess, to an extent not greater than the depreciation allowed on the asset, is included as a balancing charge in the assessable income of the year in which the disposal, loss or destruction occurs. By this means, the total deductions allowed in respect of the asset over the period of its use are equated to the actual cost of the asset after taking into account any amount received on disposal, loss or destruction.
Because of the effect of the graduated rates of tax on individual incomes, this method of adjustment in one year of amounts previously allowed as deductions over a number of years tends to diminish the value of those deductions in many instances. For individuals and companies alike, the adjustment reduces the funds available for replacement of the asset at a time when they are most needed for that purpose.
In order to afford taxpayers some relief in such circumstances, the Committee recommended that an alternative basis of adjustment of the balancing charge be provided. Broadly, the proposal was that the taxpayer should be given an option, in lieu of being assessed on the balancing charge, to set off an equivalent amount against the cost of the replacement asset or against tec value of any other assets subject to depreciation.
This principle was adopted last year in relation to insurance and other recoveries on the loss or destruction of depreciable assets and it is proposed in this Bill to extent those provisions to amounts received in relation to disposals of assets by sale or otherwise.
A complementary provision is also included in the Bill to meet cases in which the loss or disposal of depreciable assets results in the cessation of an individual taxpayer's business. In such cases the assets of the business would no longer be available to set off the balancing charge. It is proposed that taxpayers in such a position should be afforded an opportunity to seek a rate of tax on the balancing charge and other income somewhat lower than the rate at which tax would otherwise be payable. This adjustment is being effected by the calculation of a notional income along the already established lines applying where lease premiums are received, or abnormal income is derived by an author or inventor.
The amendments proposed in relation to depreciation will apply in respect of the current income year 1957-58 and subsequent years.
Honourable Members will appreciate that a measure of this nature unavoidably contains very technical provisions. Mainly for this reason, I have arranged for the preparation of a memorandum explaining in detail each of the clauses of the Bill. This memorandum will be circulated for the information of Honourable Members.