House of Representatives

Income Tax and Social Services Contribution Assessment Bill (No. 2) 1963

Income Tax and Social Services Contribution Assessment Act (No. 2) 1963

Treasurer's Second Reading Speech

In my Budget Speech for 1963-64 I outlined proposals the Government had for amending the income tax law to give effect to a considerable number of recommendations made by the Commonwealth Committee on Taxation, and for introducing other important measures providing tax relief that the Government had decided on in the course of preparing the Budget.

The primary purpose of this Bill is to give effect to these Budget proposals. Another important matter dealt with in the Bill arises from the Government's review of the deductions to be available for the cost of oil exploration and other taxation questions associated with the production of petroleum in Australia. On 12th June last I made a statement outlining the Government's proposals on these matters. Formal provisions associated with our agreements with the Government of the United States of America concerning the status of the Armed Forces of that Government in Australia and its establishment of a naval communication station at North West Cape are also contained in the Bill.

Foremost amongst the measures announced in the Budget Speech I would place the investment allowance on new primary production plant. I made a press statement on this measure on 12th September 1963 and I think it necessary to refer to it now only briefly.

The investment allowance for primary producers is a companion measure to the allowance introduced by this Government last year for manufacturers and it has the same broad purpose, namely, to encourage capital investment that will increase operating efficiency in an important sector of Australian industry.

As I have explained on previous occasions, the allowance is designed to give an impetus to capital investment in up-to-date primary production plant additional to that already provided by the special depreciation provisions for primary producers introduced by this Government in 1952. Where plate qualifies for the allowance, the result will be that 40% of its cost - 20% as depreciation and 20% as an investment allowance - will be an income tax deduction in the year in which the plant is first used or installed ready for use in producing assessable income. A deduction of 20% of the cost will continue to be available as depreciation in each of the four succeeding years, so that the total amount deductible over five income years will be 120% of the cost of the plant.

It is proposed that the allowance will apply over the whole broad range of primary production as defined in our income tax law. All agricultural and pastoral pursuits, including such activities as poultry farming, qualify as primary production for income tax purposes. So do fishing, pearling and forest operations. I shall be referring at greater length to forest operations later in this speech.

As is the case with the existing allowance for manufacturers it is proposed that some categories of plant used in primary production be excluded from the scope of the allowance for primary producers. Plant that will not qualify for the allowance includes road vehicles of the kinds ordinarily used for the transport of persons or goods, secondhand or used plant, loose tools, hand tools and equipment and plant not acquired wholly and exclusively for use in primary production. Structural improvements such as buildings, fences and wharves will also be ineligible.

The allowance will be available in respect of expenditure on new primary production plant incurred in consequence of a contract entered into on or after the 14th August 1963.

Before leaving primary production I should mention two other proposals which, while not of so far-reaching application or importance as the investment allowance, will nevertheless, I am sure, be welcomed by many primary producers, particularly those living in more remote areas. The first of these is a decision to allow the cost of extending telephone services to a property used in a business of primary production. The cost of the extension lines will be allowed in ten equal instalments over ten years commencing in the year in which the expenditure on constructing the lines is incurred.

The other proposal affecting primary producers is to allow an outright deduction in the year of expenditure for the full cost of constructing or altering fences to protect land from the ravages of animal pests, or to control the adverse effects of naturally occurring mineral salt.

The Bill also gives effect to a proposal which will be of benefit to private companies and which the Government expects will bear importantly on the rate of expansion of the wide range of businesses conducted under this convenient form of organization.

The proposal is that a private company will be allowed to retain free of undistributed income tax 50% of the first Pd5,000 of its distributable income (other than income from property), 4%r of the next Pd5,000 of that income and 40% of the balance. In broad terms, the distributable income of a private company is its taxable income less the primary company tax on that income. At present a private company may plough its profits back free of undistributed income tax only to the extent of 50% of the first Pd1,000 of distributable income (other than property income), 40% of the next Pd1,000 and 35% of the balance. The increase in the permitted retention of profits is therefore quite substantial.

The increased retention allowance will be available to private companies in relation to their distributable income of the income year 1962-63.

Another proposal included in the Bill and affecting private companies provides, in effect, for an extension, at the discretion of the Commissioner of Taxation, of the period during which a private company may make a sufficient distribution of its distributable income in order to avoid undistributed income tax. Broadly speaking, the Commissioner will be permitted to grant a further period for the making of distributions where a company has made a full disclosure of the facts necessary for assessment, and the issue of an original primary tax assessment is delayed or an amended primary tax assessment is issued increasing the taxable income previously calculated.

The Bill also gives effect to a number of proposals to increase concessional deductions in respect of a taxpayer and his dependants. The maximum deduction for education expenses of a dependent child is to be raised from Pd100 to Pd150, and the ceiling of Pd150 per person on deductions for medical expenses is to be removed altogether.

Other proposals in the concessional deduction field will remove anomalies and inconsistencies that the Commonwealth Committee noted in its examination of our income tax law. These proposals are broadly outlined in an addendum to Statement No. 3 attached to the Budget Speech which was tabled on 13th August, 1963 along with other budget papers, and are explained in an explanatory memorandum prepared for the information of honorable members. However, I would like to refer to some of them now.

Mention has already been made of the proposed increase in the deduction for education expenses. Another proposal based on the Government's policy of assisting education generally is the adoption of the recommendation of the Commonwealth Committee that Government assistance granted for the purposes of educating a child, and taking the form of payments for the child's school or University fees or similar expenses, should not be taken into account in determining the deduction available for the maintenance of a student child or of any other dependent child who, because he has not reached the age of sixteen years, is not classed as a student child.

The Bill also provides that other Government assistance, such as living allowances, will in future be regarded as separate net income of a child, and will not, as happens at present, be subtracted in full from the maintenance deduction otherwise available to a parent in the case of a student child. Following the proposed adoption of another Commonwealth Committee recommendation, separate net income may be as much as Pd65 in a year before it affects the deduction available for the maintenance of any class of dependant. Where the separate net income ofai dependant exceeds Pd65 the maintenance deduction otherwise allowable will be reduced by Pd1 for every Pd1 by which the separate net income exceeds Pd65.

Among the remaining proposals concerning concessional deductions are those that will increase the maximum allowable deduction for funeral expenses to Pd50 in respect of each bereavement, and make provision for the deduction of medical expenses of a deceased taxpayer paid by his trustee or executor. The latter will now be deductible against the taxpayer's income of the year in which he dies.

I turn now to forest operations to which I made a reference earlier in this speech. Plant for use in timber milling was brought within the scope of the investment allowance for manufacturers introduced last year, but up to now persons engaged in a business of extracting timber from a plantation or forest for milling have not generally been regarded as primary producers for the purposes of, among other things, the accelerated depreciation allowances available to that class of taxpayer.

Following a recommendation of the Commonwealth Committee it is proposed by this Bill that persons engaged in the planting or tending of trees for felling or in felling trees for milling or other processing be regarded as primary producers. It is further proposed, again following a recommendation of the Commonwealth Committee, that expenditure on certain mill buildings and housing for employees be deductible on the same basis as expenditure on timber access roads. Broadly speaking, this means that the cost of eligible buildings and housing may be deducted over the period of years they are used for the purposes for which they were constructed or purchased. In the calculation of the deductions a maximum usage period of 25 years will be applied.

Other recommendations of the Commonwealth Committee proposed to be implemented by the Bill mainly affect businessmen and investors. They are all outlined in the Budget papers and explained in the explanatory memorandum prepared for honorable members.

One of these that will be of particular interest to businessmen is a measure that will permit the Commissioner of Taxation to approve an additional basis of valuing certain trading stock, bringing the number of methods of valuation available to taxpayers up to four.

Both businessmen and investors will approve, I feel sure, measures contained in the Bill which will exempt from income tax dividends distributed out of realized capital profits and satisfied by the issue of bonus shares, and also exclude these dividends, together with bonus issues made out of unrealised capital profits, from exempt income for the purposes of calculating losses that a taxpayer is permitted to carry forward for deduction against the income of succeeding years.

A number of the Committee's other recommendations given effect to by the Bill will permit taxpayers to deduct business expenses, generally speaking of a minor nature, which might not otherwise be deductible because they are of a capital nature.

Two other matters I would mention are rates paid by the owners of own-your-own flats and gifts. In the past, due to various own-your-own flat company arrangements, some flat owners have not been able to obtain a deduction for rates effectively paid by them because they are not personally liable for those rates. A provision of this Bill will remedy this situation.

It is also proposed that income tax deductions be allowed for gifts of Pd1 and upwards to three institutions. These are the Australian Institute of International Affairs, the Nationlu Safety Council of Australia and the Australian National Travel Association. As honorable members will be aware, the last-mentioned of these is a national agency working in association with the Government in the promotion of overseas tourism, to the benefit of the balance of payments position. A deduction will also be authorised for gifts to certain funds that provide money or other benefits for institutions referred to in the provisions permitting deductions for gifts.

It remains for me now only to mention the provisions of the Bill associated with the Government's review of the oil search taxation provisions and with our agreements with the Government of the United States of America relating to the establishment of the Naval Communication Station in Western Australia.

It is convenient to discuss the agreements with the United States first. Honorable members will recall that these agreements were tabled on 9th May 1963 and have already been debated in this House. Speaking in a general way, as far as income tax is concerned, the agreements bind us to exempt from our income tax the income of American civilians and military personnel derived here solely as a result of their connection with the establishment or maintenance of the communication station.

The exemptions will operate only so long as the United States Government imposes tax on the income. The essence of the agreements in the income tax sphere is that the relative position of each country to American personnel will not be altered, for income tax purposes, by the presence of these people in Australia in connection with the establishment of the communication station. No exemptions are proposed for people connected with the establishment or maintenance of the station who are citizens of Australia or ordinarily resident here. Similarly, the income of a company incorporated in Australia and carrying out a contract for the construction or maintenance of the station will not be exempt.

Finally I would like to outline, in broad terms, the more important of the amendments contained in the Bill that are consequential upon the Government's review of the oil search taxation provisions.

As honorable members are aware, the Commonwealth has been paying subsidies for oil search operations in Australia since 1957. The Government has been advised that the probable effect of the existing provisions of the income tax law is that the subsidies are liable to taxation in the hands of the recipients. This result was not intended and it is proposed by this Bill to ensure that oil search subsidies, both past and future, are not taxable. As a corollary, it is also being provided that deductions will not be available for capital expenditure incurred in prospecting for petroleum where such expenditure is reimbursed by the payment of the Commonwealth subsidies.

The income tax law at present authorises deductions from income derived from the production of petroleum in Australia or the Territory of Papua and New Guinea for capital expenditure incurred in petroleum prospecting and mining operations. It is proposed to extend these deductions to expenses associated with the raising of capital for petroleum prospecting and mining operations and to expenditure on residential accommodation and amenities provided for mining employees or their dependants at or near tee mining site. Subject to limitations specified in the amending legislation, expenditure on the purchase of rights to prospect or mine for petroleum and of technical information relating to a particular area will also be brought within the scope of the capital expenditure that may qualify for deduction.

It is also proposed that pipe lines used to transport petroleum from a well in Australia or the Territory to a refinery or a terminal will be eligible for special depreciation allowances. The cost of constructing the pipe line will be deductible in equal annual instalments over a period of five years unless the owner elects that the cost be allowed as deductions over a longer period. The special depreciation allowances will be available in respect of a pipe line the construction of which is commenced on or before 30th June 1968 and completed not later than 31st December 1969. Ancillary plant for use primarily, principally and directly in operating such a pipe line will also be eligible for the special depreciation deductions if completed on or before 31st December 1969.

Provision is also being made in relation to income earned by petroleum mining enterprises under "farm-out" or joint venture type of arrangements; disposals of property that has been used in petroleum prospecting or mining operations; property that ceases to be used in these operations, and other matters of a technical nature associated with the search for oil.

Honorable members will find each clause of the Bill explained in the explanatory memorandum I have already mentioned, and I do not propose to go into further detail of the Bill at this stage.

I commend the Bill to honorable members.