Notes for the Minister's Second Reading Speech
Some important amendments to the Income Tax Assessment Act are proposed by this Bill.
It is mainly concerned with our methods of taxing income going out of Australia to non-residents and income derived by our own residents from investments overseas. It also makes some important revisions of the basis of taxing distributions made by companies.
On 4th May last, it was announced in this House that the Government proposed a withholding tax on interest paid to persons who are not residents of Australia. This Bill will implement the proposals then announced.
I do not think it is necessary to go over again in detail the reasons that prompted the Government to introduce a withholding tax. I would, however, recall to honourable members two of the principal factors in the decision. One is that, unless steps are taken to avoid it, interest paid by companies to non-residents is, at present, subject to Australian tax at a rate of 42.5 per cent of the gross amount. I stress the word gross; no allowance is made for expenses incurred in gaining the interest. This rate is high in itself and generally much higher than other countries see fit to impose. No doubt, its relative severity induces overseas lenders to avoid it if they can. This leads to the second factor, which is that the Australian income tax law contains provisions which clearly permit arrangements to be made to avoid the tax. I emphasise that these provisions are quite explicit and people who have taken advantage of them had a perfect right to do so.
Nevertheless, the present position is far from satisfactory. The Government's aims in introducing a withholding tax are to ensure that a reasonable contribution to Australian tax revenue is made by overseas lenders in relation to interest drawn from Australia, and to provide a relatively simple method of collection of the tax. At the same time, full regard has been had to the effects a withholding tax might have on the availability and cost of overseas capital to Australian borrowers.
It is proposed that the withholding tax will be imposed at the rate of 10 per cent of gross interest, and that it will be a final tax. Interest subject to it will not, in any circumstances, be taxed on the ordinary assessment basis. The tax will come into operation in respect of interest paid on or after 1st January 1968. It will usually apply to interest paid by Australian residents to non-residents, except to the extent that the interest is attributable to a business carried on by the Australian resident outside Australia. It will apply to interest paid by a non-resident to another non-resident to the extent that the interest is attributable to a business carried on in Australia by the non-resident who pays it. Interest paid by the Commonwealth or a State will generally be within its scope.
Three classes of interest received by non-residents will be outside the scope of the withholding tax and will continue to be taxed on the ordinary assessment basis at the appropriate general rate. The first of these is interest paid by a resident to a non-resident carrying on business in Australia through a branch, e.g., a non-resident bank. The second is government loan interest in respect of which a rebate of 10 per cent of the interest is allowed against tax payable. The third is interest received by residents of the external territories.
Some interest will be exempt from the tax and will not be taxed on any other basis. Probably the most significant cases are those where a resident company had negotiated, or was negotiating, a loan before 4th May, 1967 on terms which bind it to pay interest free of any deduction. No Australian tax would be payable under the present law in these circumstances and it is not proposed to disturb the basis of these contracts now by imposing a liability not envisaged by the parties in their negotiations.
Also to be exempt from the tax are foreign superannuation funds, charities and similar bodies if the income is exempt from tax in their own countries. The exemption of interest paid by Australian Governments on external loans will not be affected by the legislation.
Dividends paid to non-residents have, of course, been subject to a withholding tax since 1960. For consistency with the scheme of the interest withholding tax it is proposed that, as from 1st January 1968, Australian dividends received by foreign superannuation funds, charities and similar bodies will be exempt from dividend withholding tax only if the dividends are also exempt from tax in the country where the organisation is a resident for tax purposes.
A further proposal in the Bill is designed to clarify the taxation position of an Australian resident who receives a dividend from an overseas company, but is not actually a shareholder in the company. He may, for example, beneficially own shares which ae registered in the name of a trustee or some other person.
In general, Australian taxpayers are relieved from double tax on foreign dividends by means of a credit system. If a resident shareholder derives dividends from a foreign source and is personally liable for tax on the dividends in the country of source, he is also subject to Australian tax on the dividends but receives a credit for the foreign tax against his Australian tax. On the other hand, other types of foreign income derived by a resident are exempt from Australian tax if they are subject to tax in the country where the income has its source.
The purpose of the amendment is to declare in explicit terms that Australian residents who beneficially derive foreign dividends, but are not themselves shareholders in the foreign company, are to be treated for Australian tax purposes in the same way as Australians who have direct holdings in foreign companies.
The remaining major proposals in the Bill are related to distributions by companies. One deals with distributions made in association with a reduction in paid-up capital, another with distributions in the course of what I shall call an informal liquidation.
As to distributions in association with a reduction of capital, I mention that for more than a quarter of a century our taxation law has, in broad terms, treated as dividends, and therefore as income subject to tax in shareholders' hands, any distribution made by a company as a going concern, other than a return of paid-up capital. A majority decision of the High Court has in recent years, however, ruled that the law is not effective to tax amounts - greatly in excess of actual paid-up capital returned - that are paid to shareholders when a company reduces its capital. This means that a company can, by reducing its capital, pay profits out to shareholders free of tax which would be subject to tax in the shareholders' hands if distributed by way of a conventional dividend.
The Government considers that this situation constitutes a real threat to revenue and to the general principles on which the taxation law is based. It also considers it gives an unwarranted advantage to shareholders in companies in a position to execute this type of plan as against companies not so fortunately placed. It has, therefore, decided to remedy this deficiency in the law.
In broad terms, what is proposed by the Bill is that a distribution made in a reduction of paid-up capital will be subject to tax to the extent that it exceeds the sum of the reduction in nominal paid-up capital and any distribution out of share premium account.
As to liquidations, the position is that distributions made by a liquidator in the course of a formal liquidation are taxable in the hands of shareholders to the extent that they are made out of income. Some companies are not, however, formally liquidated. Shareholders wishing to wind up a company sometimes merely take possession of the company's tangible assets, colletr and retain debts due to it and discharge debts due by it and then treat the company as wound up. Where these informal procedures are followed, distributions made out of income of the company are not taxable although they would be if made in the course of a formal liquidation.
The Bill proposes that distributions made in these informal liquidations will in future be taxed in the same way as distributions in an orthodox liquidation.
The amendments relating to distributions by companies will apply to distributions made after today.
The balance of the amendments proposed by the Bill are of a relatively minor nature. At present, grants made by the United States Educational Foundation in Australia are specifically exempt from tax. This organisation has been superseded by the Australian-American Educational Foundation. The Bill will ensure that grants made by the new body will be exempt from tax, as was the case with grants made by the body it has superseded.
The final amendment is a matter of machinery. Since 1922 the Income Tax Assessment Act has placed a limit on the amount to be appropriated for salaries and allowances of members of the statutory bodies known as Taxation Boards of Review. This has occasioned frequent amendments to the Act and is out of line with more modern legislation on statutory bodies. It is therefore proposed by the Bill to omit the limitation. This action will not, of course, affect the administrative procedure for determining salaries of members of the Boards. These will continue to be determined by the Governor-General on recommendations by Cabinet.
Each clause of the Bill is explained in an explanatory memorandum to be circulated to honourable members and I do not propose to go into any further detail at this stage.
I commend the Bill to the House.