The Senate

Income Tax Assessment Bill (No. 2) 1967

Income Tax Assessment Act (No. 2) 1967

Minister's Second Reading Speech

This Bill proposes amendments to the Income Tax Assessment Act.

Very broadly stated, the amendments will convert the withholding tax on dividends to a final tax, extend for three years the period in which capital subscriptions to prospecting or mining companies may qualify as an allowable income tax deduction, and grant an exemption from Australian income tax on certain income earned in Australia by United States contractors and personnel from work connected with two defence projects here.

Honourable Senators will be aware that a withholding tax is imposed on dividends derived by non-residents from Australian companies. The tax is at a general flat rate of 30% of the gross dividend and it is deducted by the paying company at the point of payment. The rate is reduced to 15% for residents of countries with which we have double taxation agreements. At present, these countries are the United Kingdom, the United States of America, Canada and New Zealand.

A feature of the Australian withholding tax system not found in the systems of other countries, however, in that non-resident recipients of Australian dividends have an option to elect to be taxed on the dividends on an ordinary assessment basis instead of accepting the withholding tax as a final liability. If this election is made, Australian tax cannot be increased beyond the withholding tax rate but, dependent upon the amount of income derived from Australian sources, it may be reduced to something below that rate or even to nil.

The option of assessment was made a feature of our withholding tax system mainly because, when the system was introduced in 1960, some overseas investors in Australian companies were not subject to tax on dividends in their home country. In these circumstances imposition of Australian withholding tax would have introduced a new liability which could have caused some degree of hardship in individual cases. There have, howeve, been significant changes in the intervening years and overseas investors are now generally taxed in their home countries on foreign dividends and allowed a credit for foreign tax against the home country tax.

The existence of the option to be assessed means that the Australian withholding tax, unlike similar taxes imposed by other countries, is not a final tax on the dividends. It has been our experience that this adds considerably to administrative costs and also causes a good deal of inconvenience to overseas investors. The inconvenience to overseas investors arises because, while the right of election remains, many of them are involved in difficulties in obtaining credit for Australian withholding tax against their home country tax, the home country taxation authorities insisting that they take steps to ensure that Australian tax has been reduced to a minimum by exercise of the option to be assessed. The existence of the option, therefore, not only involves a surrender of tax on Australian income to foreign treasuries but also tends to defeat basic objectives of a withholding tax which are simplicity of operation and certainty of liability for the overseas investor.

Having carefully examined all these factors, the Government has decided our withholding tax ought now to be converted to a final tax. It is proposed to do this by withdrawing the option of overseas investors to be taxed on dividends on an assessment basis. I mention that this change in the law accords with a recommendation of the Commonwealth Committee on Taxation of which Sir George Ligertwood was Chairman.

The amendments proposed will also exclude residents of all our external territories from the scope of the dividend withholding tax.

At present, residents of the Territory of Papua and New Guinea are exempt from the withholding tax on dividends received 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 exercise of the option that the dividends be assessed under the general provisions of the income tax law.

With the general withdrawal of the option to be assessed, it is proposed to exempt residents of all our territories from the withholding tax. Those taxpayers will then be taxed on the same basis in respect of their Australian income as are residents of Australia.

The amendments to the dividend withholding tax system that I have outlined will apply in respect of dividends derived on or after 1st July, 1967.

Other amendments proposed by the Bill will extend the operation of certain provisions of the income tax law for a further period of three years to 30th June, 1970. These are provisions which authorise deductions, in specified circumstances, for share capital subscribed to petroleum exploration and minige companies or to other companies whose principal business is mining or prospecting for minerals other than gold, uranium or oil.

The deductions, which are available only to Australian residents, are dependent upon the company concerned lodging with the Commissioner of Taxation a declaration that the share capital subscribed by Australian investors has been or will be expended on appropriate mining or prospecting operations. The provisions authorising these deductions are due to terminate on 30th June, 1967, having already been extended for three years from 30th June, 1964. They provide an incentive for Australian residents to invest in companies prospecting for petroleum and other minerals in Australia and the Government has decided that their operation should be extended for another three years.

The remaining amendments proposed by the Bill will give effect to taxation aspects of agreements between the Australian and United States Governments concerning undertakings in Australian known as Project Sparta and the Joint Defence Space Research Facility.

The undertaking known as Sparta is a project concerned with the firing of certain re-entry vehicles from the test range at Woomera. The Joint Defence Space Research Facility, which is situated in the vicinity of Alice Springs, is concerned with joint Australian-American general defence research in the space field.

The relevant agreements bind Australia to exempt from our income tax the income of United States contractors and employees of the United States Government derived here solely as a result of their connection with the establishment, operation or maintenance of either of the two projects mentioned. The amendments proposed by the Bill will authorise the exemptions to be provided.

Honourable Senators may recall that, in 1963, the income tax law was amended to provide certain exemptions in accordance with 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. The amendments now proposed are consistent with the principles of the law providing those exemptions.

As in the case of the North West Cape project, the exemptions will operate only so long as the income is subject to United States tax. The exemptions do not apply to income derived from the projects by persons 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 qualify for exemption.

The general practical effect of the amendments proposed is to reserve to the United States Government the taxation of American citizens and taxpayers on income that has its origin in expenditure by the United States Government on the two projecs 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.

More detailed explanations of the technical provisions of the Bill are provided in an explanatory memorandum which is being made available for the information of Honourable Senators. I do not, therefore, propose to speak at greater length at this stage.

I commend the Bill to the Senate.