House of Representatives

Income Tax Assessment Bill (No. 2) 1967

Income Tax Assessment Act (No. 2) 1967

Treasurer's Second Reading Speech

It is proposed by this Bill to amend the Income Tax Assessment Act in three respects. One proposal is to extend for three years the period in which deductions are available for certain capital subscriptions to companies prospecting or mining for petroleum or other minerals. Another is to convert the withholding tax on dividends paid to non-residents to a final tax on the dividends. The third is to amend provisions applicable to United States contractors and personnel engaged on the North West Cape naval communication station project so that the provisions apply also to contractors and personnel engaged on other similar projects in Australia.

At present, income tax deductions are available in specified circumstances for share capital subscribed to petroleum exploration and mining companies or to other companies whose principal business is mining or prospecting for minerals other than gold, uranium or oil. These deductions are granted only to Australian residents. They are dependent upon the particular company lodging with the Commissioner of Taxation a declaration that the share capital received from the Australian investors is expended in mining or prospecting operations. It is, of course, also a condition of the deductions that the company actually spend the money in the way set out in its declaration.

The provisions that authorise these deductions are due to terminate on 30th June, 1967, having already been extended for three years from 30th June, 1964. It is proposed by this Bill to extend the operation of the provisions for a further period of three years to 30th June, 1970 so as to provide a continued incentive for Australian residents to invest in companies prospecting for petroleum and other minerals in Australia.

As I have said, the Bill also proposes amendments to the dividend withholding tax provisions of the income tax law. As imposed by other countries, a withholding tax on dividends or other income has three basic characteristics. These are that it is imposed at a flat rate, that it is deducted by the payer at the point of payment and that it is a final tax on the income.

The Australian dividend withholding tax system has two of these characteristics, but not the third. The tax is imposed at a general flat rate of 30 per cent of the gross dividend, but this is reduced to 15 per cent for residents of countries with which we have double taxation agreements, namely, the United Kingdom, the United States of America, Canada and New Zealand. The tax is, of course, deducted by the paying company at the point of payment. However, non-resident recipients of Australian dividends have the option of either accepting the withholding tax as a final tax or exercising a right of election to be assessed and pay tax on the dividends in the ordinary way. Where an election is made, Australian tax cannot be increased beyond the withholding tax rate but if the income from Australia is small the tax may be reduced below that rate or even eliminated altogether.

The main reason for the right of election was the situation that existed as regards some overseas investors in Australian companies when our withholding tax system was introduced in 1960. At that time, these investors were not subject to tax on dividends in their own country and imposition of withholding tax at the full rate on Australian dividends may have caused hardship for small investors in individual cases. This situation has greatly changed over the years in that dividends are now generally taxed in the country of residence and credit allowed for the Australian withholding tax against the home country tax.

Moreover, experience has shown that the right of election not only causes considerable administrative difficulties but also results in much inconvenience to overseas investors. While the right of election remains, many overseas investors find that they cannot finalise the credit for Australian withholding tax against their home country tax until they have satisfied the home taxation authorities that they have minimised the Australian tax by exercising their right of election. To these extents, the right of election surrenders tax on Australian income to foreign treasuries and tends to defeat two primary objectives of a withholding system, namely, simplicity of operation and certainty of liability for the overseas investor.

In all these circumstances, the Government has decided that the time is ripe to convert our withholding tax to a final tax and it proposes to do this by abolishing the right of election. I recall to Honourable Members that this change was recommended by the Commonwealth Committee on Taxation, of which Sir George Ligertwood was Chairman.

A further amendment to the dividend withholding tax provisions proposed will ensure that residents of all our external territories are treated as Australian residents for the purpose of taxing dividend income they derive from Australian companies.

At present, residents of the Territory of Papua and New Guinea are exempt from the withholding tax on dividends receivds from Australian companies and are liable to tax on an ordinary assessment basis. Residents of other territories are, however, liable to dividend withholding tax at the general rate of 30% on dividends received from Australian companies, subject to their right to elect that the dividends be assessed under the general provisions of the income tax law.

It is now proposed, with the withdrawal of the right of election, to exempt residents of all the external territories from dividend withholding tax. These taxpayers will then be taxed on the same basis in respect of their Australian income as are residents of Australia.

The amendments proposed to the dividend withholding tax will apply in respect of dividends derived on or after 1st July, 1967.

Finally I turn to amendments proposed by the Bill that will give effect to two agreements, so far as they relate to taxation, between the Australian and United States Governments concerning projects in Australia known as Sparta and the Joint Defence Space Research Facility.

Honourable Members may recall that, in 1963, the income tax law was amended to give effect to our agreements with the Government of the United States of America relating to the establishment of the naval communication station at North West Cape in Western Australia. As far as income tax is concerned, those agreements bound 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.

Similar taxation arrangements have been made in the agreements relating to the project Sparta and the Joint Defence Space Research Facility. It is therefore proposed by the Bill to extend the exemptions now authorised in respect of the North West Cape project to the two new projects I have mentioned.

As in the case of the North West Cape project, the exemptions will operate only so long as the United States Government taxes the income. No exemptions are proposed for people connected with the projects who are citizens of Australia or ordinarily resident here. Similarly, the income of a company incorporated in Australia and carrying out a contract in connection with the projects will not be exempt.

In general terms, the practical effect of the amendments is to reserve to the United States the taxation of American citizens and taxpayers on income that originates from expenditure by the United States Government on the two projects in Australia while these persons remain subject to the American tax laws. Australia's taxation rights in respect of other income derived from the projects are not disturbed.

An explanatory memorandum giving more detailed explanations of the technical provisions of the Bill is being made available for the information of Honourable Members and I do not propose to speak at greater length at this stage.

I commend the Bill to the House.