Second Reading SpeechBy the Treasurer, the Rt. Hon. Harold Holt, M.P., 17th November, 1959.
The main purpose of this Bill is to include in the income tax law provisions enabling non-resident investors to meet their liabilities for Australian tax on dividends by means of a withholding tax.
Oversea investors have, from time to time, pointed out that the present methods of collecting Australian tax on dividends lack the simplicity and certainty of liability that are features of withholding tax systems and in many instances result in confusion because of the necessity for them to comprehend the Australian law and comply with it.
The present Australian system, based upon annual returns of income and the making of formal assessments, applies to non-residents and residents alike. The system unavoidably results in doubt on the part of the absentee investor as to his responsibility to furnish returns to the Commissioner of Taxation in Australia and in a considerable lapse of time between the receipt of income and the forwarding to him of a notice of assessment notifying his liability for Australian tax. Finality is reached only with the subsequent payment of the tax.
Investors in other countries are familiar with a system that imposes a flat-rate withholding tax on dividends flowing from one country to another. The tax is withheld from the dividend at the time the dividend is payable and there is accordingly no delay in establishing the amount of tax payable or in obtaining finality of the taxation position. In the generality of cases, the system does away with the furnishing of annual returns accounting for the dividends.
The Government recognises the advantages that a withholding system has over the existing Australian procedures. The Bill accordingly provides for a withholding tax on dividends paid by Australian companies on or after 1st July, 1960, to non-residents of this countr.e
The availability of this basis for meeting Australian tax on dividends will obviate a position that has been viewed by oversea investors as a deterrent to investment in Australia.
There will, however, be circumstances in which the amount of withholding tax exceeds the tax assessed under the present law. For example, a non-resident individual whose Australian taxable income does not exceed Pd104 at present pays no tax in Australia, but a corresponding exemption is not available under a withholding tax system. In such circumstances a withholding tax that does not permit retention of the present assessment basis may discourage investment in Australia. This may be most noticeable where investors live in a country that does not allow against its tax a credit for Australian tax. 2.
To meet this situation, the Bill provides that non-resident investors may elect in relation to any year to have the assessment basis applied. Where this course is followed, a refund will be made of any excess of withholding tax over the tax ascertained on assessment. This will ensure that the ultimate liability of the investor will be no greater than it would be if withholding tax had not been introduced.
Regard has been had to exemptions from tax at present provided in respect of the income of various organizations and institutions such as religious and charitable organizations, superannuation funds for the benefit of employees etc. Dividends paid to these exempt bodies will not be subject to withholding tax and the present freedom from tax will not be disturbed. Correspondingly, withholding tax will not extend to certain dividends at present exempt under specific provisions of the law. For example, the existing exemption of dividends paid from exempt mining profits will be continued.
The rate of withholding tax proposed is 6/- in the Pd. Nevertheless, residents of the United Kingdom, the United States of America and Canada may be assured that effect will be given to the provisions of the reciprocal taxation agreements Australi f has made with those countries. Withholding tax at 3/- in the Pd will be payable by investors in those countries, where this is appropriate under the terms of an agreement.
In any consideration of the incidence of this tax on the person receiving the dividend it should be remembered that as a general rule the profits out of which they are paid have already borne company tax at the rate of 7/6 in the Pd.
Provision is made in the Bill for the withholding of tax by companies and other persons who may pay dividends to non-residents. The amounts withheld will be remitted to the Commissioner of Taxation and applied against liability for tax. If, for any reason, the amount withheld exceeds the amount of tax payable, a refund of the excess will be made.
The rate at which tax is to be withheld from dividends will, like instalments from salary or wages, be prescribed by regulation. It will not, however, be necessary to withhold deductions from dividends that are exempt from withholding tax.
Looking at the overall effects of the withholding tax proposals, it will be seen that a simple, but effective, basis of taxing dividends will be provided for investors in other countries. For those who favour present procedures, the assessment basis will remain available. The Government believes that its proposals to bring our taxation laws more closely into line with the systems in oversea countries will encourage the flow to Australia of capital to assist our national development.
I turn now to the taxation of earnings on the short-term Seasonal Securities to be issued by the Commonwealth. These securities carry no interest, as such. The difference between issue price and redemption value takes the place of interest and it is proposed that earnings on the securities be subject to income tax. 3.
An amendment to ensure this result is included in the Bill. It will apply to earnings on the Seasonal Securities whether they be taken up at the time of issue or acquired during thei e currency.
Amounts taxed as a result of the amendment will carry the usual taxation rebate of 2/- in the Pd available in respect of Commonwealth loan interest included in taxable income.
Special reference is also made to the premiums that will be payable on the redemption of Special Bonds held until dates specified. A provision has been included in the Bill to ensure that these premiums are not treated as income for the purposes of the income tax law. An exception to this general position will apply where Special Bonds are redeemed by a person whose business extends to trading or dealing in the Bonds.
The Bill includes other provisions of a relatively minor nature and I do not propose to comment on them. An explanatory memorandum relating to this Bill and to associated measures is, however, being made available to Honorable Members.