The Senate

Income Tax Assessment Bill 1965.

Income Tax Assessment Act 1965.

Notes for the Minister's Second Reading Speech.

The purpose of this Bill is to amend the Income Tax and Social Services Contribution Assessment Act.

The Bill effects two amendments announced by the Treasurer in his Budget Speech. Both of these affect the income tax liabilities of members of the Defence Force. One will exempt from tax the pay and allowances of members of the Defence Forces Emergency Reserve for part-time duty and the other will grant an exemption to members of the Defence Force serving in Vietnam and Borneo. Both exemptions are to apply as from 1st July, 1965.

Another amendment proposed by the Bill will extend taxation relief to woolgrowers who have been forced by drought conditions to advance shearing dates and shear flocks twice during the income year 1964-65. In the absence of the amendment, these people would have to account for the proceeds of the two clips as income of the one year. In broad terms, the amendment will permit them to have the net proceeds of the second clip treated as income of the 1965-66 year.

The Bill also proposes an amendment consequential on legislation enacted in the Territory of Papua and New Guinea earlier this year. Under that legislation an exemption was granted from Territory tax on income derived by a company solely from carrying on a declared pioneer industry, and on dividends paid out of that income. It is proposed by the Bill that dividends paid to Australian investors by Territory companies out of income from conducting a pioneer industry be exempt from Australian income tax. There is, however, a reservation that we retain the right to make our own judgment as to whether it is appropriate for an industry to be treated as a pioneer industry for the purposes of the Australian exemption.

The Bill also contains some other measures affecting the taxation of distributions made by companies out of profits. The scheme of the income tax law is that, except where specifically exempt, dividends paid in cash are assessable income. On teF other hand, a dividend paid completely from certain capital profits of a company is exempt from tax if it is satisfied by the issue of shares in the company.

A practice has grown up of using exempt bonus issues as a means of getting profits of a company into the hands of shareholders in cash and free of income tax. One way is to make the bonus issue redeemable in cash. Another is to follow the bonus issue by a reduction of capital and, in effect, pay out profits to the recipients of the bonus issue or other shareholders in cash.

The proposed amendment will ensure that distributions of these kinds are not exempt under the provisions that exempt bonus issues made out of capital profits, but it will not affect any other exemption that may be available. The Treasurer announced this proposal on 10th June, 1965, and said then that, as to redeemable shares, the amendment would apply to dividends declared after 10th June, 1965. The Bill does this. As to issues of shares not redeemable in the strict sense but having a corresponding effect, the amendment will apply to dividends declared after 28th October, 1965, that is, after the day on which the Amending Bill was introduced.

A further purpose of the Bill is the withdrawal of the income tax rebate of 2/- at present allowed on each $1 of income from Treasury Notes included in a taxpayer's taxable income. I would emphasize that this amendment does not affect the allowance of the rebate in relation to Commonwealth securities generally. It applies only to Treasury Notes.

A purpose of Treasury Notes is to provide an instrument of monetary management in relation to short-term funds that - usually as a result of seasonal fluctuations in liquidity - become temporarily available for investment. The Government has had put to it the view, which it accepts, that the tax rebate on Treasury Notes has an uncertain incidence and makes difficult a direct comparison of the rates offered on these notes with ratss available on other short term securities. Such factors as whether a subscriber is taxable, and the rate of tax he pays if taxable, affect the value of the rebate.

The rebate is to be withdrawn only on Treasury Notes issued after a date to be proclaimed and an announcement of the date of withdrawal will be made at the appropriate time.

Other amendments proposed by the Bill affect taxpayers who incur expenditure in converting business machines for use with decimal currency. The expenditure is to be allowed as an income tax deduction in the assessment of the year of income in which it is incurred. Related amendments apply to taxpayers who receive compensation payments from the Commonwealth in respect of machines that require conversion. Where the machines are trading stock these payments will be included in assessable income. Where the machines are plant used in producing assessable income, the payments will, in broad terms, be applied so as to adjust income tax depreciation allowances available in relation to the machines.

The provisions of the income tax law applying to subscriptions to some kinds of associations are also to be amended by the Bill. The amendments will affect annual subscriptions in excess of 21Pd($42) to associations which incur expenditure on activities of a kind that, if the members carried out the activities and incurred the expenditure themselves, would be an income tax deduction for the members. As the provisions now stand, the deductions available can include outgoings of a capital character, such as the cost of an office building and, as amounts of this nature are not deductible if incurred by a taxpayer directly, an amendment is proposed to ensure that they are not deductible through the subscription provisions of the law.

The Bill proposes also that the tax on income be known in future simply as "income tax" and not as "income tax and social services contribution". The latter description is not only outmoded but is troublesome when it has to be repeated many times in leglo and official documents. This simplification, which is purely formal and portends no policy changes, was recommended to the Government by the Ligertwood Committee.

There remain amendments which arise out of the Government's review of representations received in connection with the major amendments to the income tax law in 1964 following the Government's consideration of the report of the Ligertwood Committee.

As to prior year losses of companies, Honorable Senators will recall that, under the 1964 legislation, the deduction for 1965-66 and subsequent years of a prior year loss of a company was made dependent upon a continuity of beneficial ownership in the company by the same shareholders of shares carrying specified rights. This continuity has to be maintained through both the income year in which the loss was incurred and the income year in which a deduction for it is sought. The rights specified are 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.

I need hardly remind Honorable Senators that the purpose of the provisions was to provide a counter to the purchase of shares in a virtually defunct company with accumulated tax losses, so that a profitable company could escape tax by diverting its income to the loss company.

This Bill does not alter the basic principles of the 1964 provisions but it does modify their application in several important ways.

First, the "percentage of shareholding" test will be maintained but an alternative, in the form of a "continuing business" test, will be introduced. If a company satisfies the "continuing business" test, the fact that there has been a greater than 60 per cent change in the voting, dividend or distribution rights, will not affect its deductions for past year losses. A company will meet the proposed test if, at all times during the year of income in which a deduction is sought, it carries on only the same business as to carried on immediately before the change in its shareholdings occurred.

This amendment is proposed to meet cases where a merger or takeover is not followed by termination of the business activities and does not have associated with it a transfer of profitable business from one company to another so that a profitable company can get the benefit of the losses incurred by an unprofitable company.

An amendment is also proposed which, in broad terms, will ensure that a company does not lose its right to a deduction for a prior year loss where there has been a change in its actual or direct shareholdings, but a corresponding change has not occurred in the persons who hold the indirect beneficial interests. For this purpose, provision is being made in the Bill that, in appropriate cases, the beneficial interests of persons in a company may be traced through one or more companies.

The balance of the major amendments proposed by the Bill relate to superannuation funds. Some of these are designed to remove limitations, which may have been imposed by the original provisions, on the right of a trustee of a superannuation fund to appeal to a Court against a decision of the Commissioner. Others are of a technical nature and have the purpose of eliminating possible ambiguities.

I have heard it said often enough as to superannuation funds, and it possibly will be said again in the course of the debate on this Bill, that the Government has done just what the Ligertwood Committee warned it against doing, that is, it has unduly interfered with the operation of the traditional funds. But anyone who has made a careful study of the Committee's report and the legislation will find two things. One is that, with one exception, the tests provided in the law are almost identical with those proposed by the Ligertwood Committee and which the Committee, in its wisdom and after a painstaking review of the situation, said it considered most bona fide funds could readily meet. Ther other is that the Committee saw no alternative to discretionary powers being vested in the Commissioner of Taxation if bona fide funds were to continue to be exempt on their income and other funds were not to continue to exploit the provisions to the tune of millions of pounds annually. If that exploitation is to be defeated, there must be tests for a superannuation fund to satisfy before it becomes entitled to tax exemption or a special deduction.

One amendment to the superannuation provisions which I would specifically mention deals with the application of benefits forgone by persons who cease to be members of a superannuation fund seeking exemption from tax or a special deduction equal to 5 per cent of the net cost of the assets of the fund.

At present, qualification for the exemption on the one hand, or the special deduction on the other, depends upon the amount of benefits forgone being applied for certain purposes within two months after the end of the year of income or within such further period as the Commissioner of Taxation allows.

In response to representations received, it is proposed that trustees may apply the relevant amounts within the period now specified in the law or progressively over a period in accordance with an undertaking approved by the Commissioner.

The Bill will also permit a director who is not, in the strict sense, an employee of a company, to be a member of the company's superannuation fund for its employees.

Modifications are also proposed of provisions that authorize deductions for employers for contributions to superannuation funds for their employees. Existing provisions require application of benefits forgone by ex-members to be made within appropriate limits not later than two months after the end of the year of income or within such further time as the Commissioner allows. If the relevant amounts are not so applied deductions allowable to the employer may be reduced.

Again, in response to representations received, it is proposed that, if the relevant amounts are applied by trustees in accordance with a scheme approved by the Commissioner, the rules for reducing the deductions allowable to the employer are not to apply.

Detailed explanations of the Bill are contained in explanatory notes being made available to Honorable Senators and I do not propose to speak at greater length on the Bill at this stage. I commend the Bill to Honorable Senators.