House of Representatives

Income Tax Assessment Bill 1965

Income Tax Assessment Act 1965

Notes for the Treasurer's Second Reading Speech

This Bill will amend the Income Tax and Social Services Contribution Assessment Act in a number of respects. It is rather a large Bill and no doubt looks quite formidable. Like most taxation measures, it is in some respects unavoidably complex, but I would point out now that much of its volume is explained by the repeal and re-enactment of a number of rather lengthy sections. This has been found expedient in the drafting of amendments to the particular sections. So, while there is an appreciable amount of new material in the Bill, it is not as formidable as it looks in that it reproduces without significant change quite a number of passages that are already in the law. It also contains quite a number of purely formal and machinery provisions.

One of the purposes of the Bill is to give effect to the decisions reached by the Government after its review of representations it received on legislation adopted last year following consideration of the Report of the Commonwealth Committee on Taxation under the chairmanship of Sir George Ligertwood. The amendments arising out of this review affect superannuation funds and company losses. I shall return to these later.

The Bill will effect two amendments foreshadowed in my Budget Speech. One of these will exempt from tax the pay and allowances of members of the Defence Force serving in Vietnam and Borneo. The exemption will apply as from 1st July 1965.

The other Budget proposal also relates to the Defence Force. It is proposed that, as from 1st July 1965, pay and allowances of members of the Defence Forces Emergency Reserve for part-time duty will, like the pay and allowances of members of the Citizen Forces for such duty, be exempt from income tax.

Honorable Members will recall the statement on the drought situation made by the Prime Minister in the House on 26th August last. The Prime Minister referred to a taxation problem that has arisen in respect of woolgrowers who, because of the drought, haeT had to advance shearing dates so that the proceeds of two wool clips fall to be taxed in the income year 1964-65. He foreshadowed an amendment to the income tax law to permit a woolgrower in this situation to elect to reduce his 1964-65 income by the amount of the net proceeds of wool from the advanced shearing, and to carry that amount forward as assessable income of the 1965-66 income year. The Bill gives effect to this proposal.

In May of this year I announced that our income tax law would be amended following the introduction in the Territory of Papua and New Guinea of legislation which grants an exemption from Territory income tax for income derived by a company solely from the carrying on in the Territory of an industry declared to be a "pioneer" industry under the Territory legislation. The exemption extends to dividends paid by a company out of income derived from this source and applies in respect of income derived from an approved "pioneer" industry for a period of five years from the start of commercial production. The exemption was introduced in the Territory after consideration of recommendations by the International Bank Mission.

In order that the effect of the Territory exemption will not be nullified - so far as dividends derived by Australian residents from companies incorporated in the Territory are concerned - by the imposition of Australian income tax, it is proposed by the Bill to amend the Income Tax Assessment Act to exempt from Australian tax dividends paid to Australian resident investors, both companies and individuals, out of the "pioneer" industry income of Territory companies. As I said in my earlier statement on the matter, however, we are reserving the right to make our own independent judgment as to whether a particular industry declared to be a "pioneer" industry for Territory purposes should be accepted as one to which Australian exemption ought to apply.

I turn now to a proposed amendment of a different natue, in respect of which the Government's intentions were announced on 10th June last. The amendment is designed to counter devices whereby companies may, by the use of bonus share issues, arrange for their shareholders to secure an exemption from tax on what, in effect, are cash dividends.

Apart from specific exemptions authorised by the income tax law, cash dividends received by shareholders are assessable income whether paid out of a company's trading profits or its capital profits. However, if a dividend is paid wholly and exclusively out of certain capital profits of a company and is satisfied by the issue of shares in the company, the dividend is exempt from tax. These shares are not regarded as adding to the income of a shareholder.

The exemption of these bonus issues has, unfortunately, encouraged devices whereby an exempt issue of shares is made with the intention that the shares be redeemed by making cash payments to shareholders which, because they are received in the guise of capital are not taxable. In effect, the share issue is just a step in paying what amounts to a cash dividend to the shareholders free of tax. The proposed amendment will ensure that the issue of redeemable shares, rather than the payment of a cash dividend, will not result in freedom from tax under the provision that exempts bonus shares out of capital profits.

The amendment will extend to other arrangements which do not involve the issue of redeemable shares but achieve a corresponding result. An example of such an arrangement is where bonus shares are issued and, following the issue, the capital of the company is reduced so as to enable its profits to be distributed to shareholders in cash in such a way that the shareholders do not pay tax on the distribution.

If devices of these kinds became widespread, the cost to revenue would be very serious indeed and I feel there will be general support for the proposed amendments. I would add that the amendments will not effect the position of anyone fortunate enouhr to receive exempt bonus shares in an orthodox issue and to sell them at a capital profit.

As I have already announced, the amendment will apply in relation to dividends declared after 10th June 1965.

Another purpose of the Bill is to withdraw the income tax rebate of 2/- at present allowed on each Pd1 of income from Treasury Notes included in a taxpayer's taxable income.

Treasury Notes are designed to serve as an instrument of monetary management in relation to short-term funds becoming temporarily available for investment, primarily as a result of seasonal fluctuations in liquidity. In view of this, there could be obvious advantages if the rates they offer can be directly compared with rates available on the market on other short-term securities. However, it has been pointed out to me on a number of occasions that the tax rebate on Treasury Notes makes such comparisons difficult as its value depends on whether or not the subscriber is liable to taxation, the rate of tax he pays if a taxpayer, and whether his taxable income is sufficient to enable him to receive the rebate on the whole or only part of his income from Treasury Notes.

Withdrawal of the rebate should result in some increase in income tax collections, but there may be a need to offer an increase in interest rates to offset to some extent the value of the rebate. The rebate will only be withdrawn on Treasury Notes issued after a date to be proclaimed. Due warning of this will be given at the appropriate time.

A technical amendment proposed by the Bill is related to the cost of converting business machines for use with decimal currency and to compensation payments by the Commonwealth in respect of machines that require conversion. In many cases the conversion cost will be borne completely by the Commonwealth. In other cases a new machine will be supplied by the Commonwealth at no expense to the machine-owner. No income tax consequences arise in these cases as the taxpayers concerned will receive no payments and will not e involved in any expenditure.

The Commonwealth will, however, be paying compensation in respect of some classes of machine. Where the machines are trading stock of a taxpayer, deductions will be available under the general provisions of the income tax law for conversion costs, and payments received from the Commonwealth will be included in assessable income. The situation is different, however, where the machines are plant used by a taxpayer in producing assessable income. In broad terms, it is proposed by the Bill that, in these circumstances, income tax depreciation allowances in respect of the machines will be adjusted in relation to the net cost of conversion, i.e., the actual cost less any payments received from the Commonwealth.

Another technical amendment proposed by the Bill relates to subscriptions of more than Pd21 to certain kinds of associations. The associations concerned are those which incur expenditure on activities that would, if the members carried out the activities and incurred the expenditure themselves, be deductible by the members for income tax purposes. Due to a weakness in the present law, non-deductible capital expenditure can be reflected in deductions allowed for subscriptions to these associations and it is proposed by this Bill to remove the weakness that permits this.

Ths Bill also provides for the tax on incomes to be known in future simply as "income tax" instead of its present out- dated and cumbersome title of "income tax and social services contribution". I am sure that there are few of us who describe the assessment of tax we get after the end of the financial year, or the tax deductions that are made from our salaries, as "income tax and social services contribution". It is a tax on our incomes and we call it "income tax".

The Ligertwood Committee recognised this situation and it also received complaints that the titles of the Assessment and other taxing Acts are cumbersome and troublesome, particularyr where, in documents relating to the Acts, the titles and descriptions have to be repeated many times. The Committee recommended that the references to "social services contribution" be deleted and the Government has decided to follow this recommendation.

At one stage the Social Services Contribution was a separate levy and the proceeds of it were paid into the National Welfare Fund. In 1950, however, Income Tax and Social Services Contribution were merged into a single levy and the proceeds of this levy were thereafter paid into the Consolidated Revenue Fund. Subsequently it was provided that the amount expended in any year from the National Welfare Fund on benefits chargeable to that Fund should be appropriated from the Consolidated Revenue Fund. Hence there is no point in continuing a title which expresses a distinction long since discontinued. The change proposed in purely formal and does not, of course, reflect any change in the Government's policies regarding social services or taxation.

I turn now to the amendments proposed by the Bill that have arisen out of the Government's review of representations it received in connection with the major amendments to the income tax law made in 1964.

I shall deal first with superannuation funds. The Government received a considerable volume of representations concerning the provisions that govern the exemption of income of superannuation funds for employees. Most of these, in one way or another, referred to the discretionary powers that the provisions give to the Commissioner of Taxation. The Government considered this aspect of the representations very carefully but found no satisfactory alternative to the discretions and authorities that are vested in the Commissioner.

The provisions in question follow very closely the recommendations that the Government received from the Ligertwood Committee. It is, I think, important to bear in mind that that Committee appreciated that the devising of a satisfactory scheme for the exemption of income of superannuation funds posed some very serious problems. In paragraph 742 of its report the Committee said :-

"We propose that certain authorities and discretions should be vested in the hands of the Commissioner because of the difficulty of providing precise legislation in some other form to ensure that bona fide superannuation funds enjoy exemption whilst preventing exploitation of the exemption by other superannuation funds."

Although much careful thought has been given to the provisions, both prior to their introduction in 1964 and during the Government's review of representations received, it has not been found possible to diminish the area of discretionary powers given to the Commissioner.

It is, however, proposed by the Bill to amend the existing provisions governing the exemption of income of superannuation funds for employees. Amendments are also proposed to the provisions which grant a special deduction equal to 5 per cent of the net cost of assets of a fund that may provide superannuation benefits not only for employees but also for persons who are self-employed.

At present a requirement for the exemption or the special deduction, as the case may be, is that the trustees of a superannuation fund apply any amount of benefits forgone by persons who cease to be members of the fund in accordance with certain rules. As the law now stands, this application has to be made within two months after the end of the year of income in which the amounts become available for application or within such further period as the Commissioner of Taxation allows.

The Government is responding to representations that this requirement should be modified so as to permit trustees to apply the amounts within the period now specified in the law or progressively over a reasonable period in accordance with an undertaking approved by the Commissioner. The Bill will give effect to this decision.

Another effect of the Bill is that a superannuation fund for employees of a company will not be denied exemption of its income by reason of the fact that it includes amongst its members a director of the company who is not, in the strict sense, an employee of the company.

The Bill also proposes some modifications of provisions relating to deductions allowable to employers for contributions to superannuation funds for employees. The modifications are in respect of the treatment of amounts of benefits forgone by employees who cease to be members of the fund.

The concept of the existing provisions has been generally conceded to achieve equitable results, but the Government has received strong representations that the provisions could impose too great an administrative burden on the trustees of some large superannuation funds. The Government has accepted these representations and proposes to adopt a course that I think will be acceptable to organisers of superannuation funds.

Briefly, where benefits are forgone, the present law requires a reduction to be made in the amount otherwise deductible by the employer for contributions made to a superannuation fund, unless the amounts of the benefits forgone are applied, within certain limits, to provide benefits for other employees or for other approved purposes. In the generality of cases the upper limit of the amounts that could be contributed or applied for an employee in any year is Pd200 or 5 per cent of the employee's remuneration, whichever is the higher.

The existing provisions require application of benefits forgone to be made within the appropriate limits not later than two months after the end of the relevant income year or within such further time as the Commissioner allows.

Speaking in general terms, the law is to be amended so that if amounts of benefits forgone are dealt with by the trustees of a fund in accordance with a scheme approved by the Commissioner, the rules for reducing the deductions allowable to the employer are not to apply. It is also proposed to alter and simplify to soel extent the procedures to be followed where an approved scheme is not in operation.

The final matter covered by the Bill is income tax deductions for company losses. Honorable Members will recall that in October last year, the income tax law was amended to provide a counter to the buying-up of shares in companies with accumulated losses deductible for income tax purposes so that the purchasing company could divert its income to the loss company. The diversion of the income in this way resulted in the purchasing company escaping tax on income up to an amount equal to the unrecouped losses incurred by the loss company in the seven years prior to the year of income.

Under the legislation introduced last October, losses of a previous year are not, for 1965-66 and subsequent years, allowable as deductions against the income of a year of income of any company unless there is found to be, during both years, a beneficial ownership by the same shareholders of shares in the company that carry at least 40 per cent of the voting and dividend rights and 40 per cent of entitlements to distributions of capital in the event of the company being wound up.

It is proposed to retain this basic principle but to modify its application in a number of ways.

One amendment proposed will ensure that a major, or even a total, change in the shareholdings of a company will not operate to disturb a deduction for a prior year loss incurred by the company if, at all times in the year of income in which the deduction may be claimed, the company is carrying on the same business as it carried on immediately prior to the change in its shareholdings. For this purpose, a company is not to be treated as qualifying for the deduction if, after the change in its shareholdings occurred, it begins to carry on a business, or enters into transactions, of a kind that it did not carry on or enter into before the change occurred.

The Government considers that this amendment will satisfactorily meet cases of mergers and takeovers of companies thtw are carried out for sound economic purposes and with which there is not associated any transfer of profitable business from one company to another so that income which would otherwise be taxed is derived free of tax.

Another amendment related to company losses is designed to apply in cases which do not frequently occur, but could be treated inequitably if the law remained in its present form. As the law stands at present, a company may lose its entitlement to deductions for losses of prior years in circumstances where there is a change in the actual or direct shareholdings, but this change has not occurred in the persons who have the ultimate beneficial interests in the company.

To meet this type of situation it is proposed that, in the application of the broad basic test requiring at least a 40 per cent continuity of shareholdings, regard may be had to both direct and indirect beneficial interests of persons during the year in which the loss was incurred and during the year of income. For this purpose, provision is being made by the Bill for the interests of persons in the voting power, dividends and capital of a loss company to be traced through one or more companies interposed between them and the loss company.

It is not possible to achieve this in simple terms and adoption of the principle has complicated what previously were relatively straight-forward provisions. However, the Government received strong representations on the matter and appreciates the force of the view that in applying the shareholding test it may sometimes be appropriate to ascertain at the relevant times where the ultimate beneficial interests lie.

The final amendment proposed as regards company losses will apply in relation to companies that have adopted a substituted accounting period in lieu of the income year that ended on 30th June 1965. It will apply only where the substituted period ended before 30th June 1965.

The provisions affecting the deduction of company losssd introduced last year apply for the first time in assessments based on income of the year ending 30th June 1966. A company that lodges returns on the orthodox accounting period basis could thus - despite any change in its shareholdings - deduct losses of prior years against income derived up to 30th June 1965. On the other hand, in cases where a substituted accounting period ended at a date earlier than 30th June 1965, the deductions are, as the laXX stands at present, available only against income up to the earlier date. The amendment proposed by the Bill will, in broad terms, ensure that in these cases losses may be deducted against income derived up to 30th June 1965.

More detailed explanations of the Bill are to be found in an Explanatory Memorandum being made available to Honorable Members and in these circumstances I do not propose at this stage to speak at any greater length on the Bill, which I now commend to the House.