The Senate

Income Tax Assessment Bill (No. 2) 1969

Income Tax Assessment Act (No. 2) 1969

Notes for the Minister's Second Reading Speech

This Bill proposes two amendments to provisions of the income tax law that relate to the investment of capital by Australian residents in companies engaged in mineral exploration and mining activities in Australia, Papua and New Guinea. The Bill also proposes an amendment to a provision of the income tax law that permits a primary producer to obtain a full deduction in the year of incurrence for certain capital expenditure.

In broad terms, it is proposed by the Bill to amend provisions of the income tax law - at present contained in sections 77A and 77AA of the Assessment Act - to remove difficulties which now exist for companies whose activities extend to general prospecting and mining as well as to petroleum prospecting and mining. In addition, the Bill proposes the elimination of a feature of the taxation law which, in the Government's view, is resulting in unwarranted taxation benefits being obtained by people who, in general, cannot rightly be regarded as providing long term capital for mining companies.

Under the present law, the incentive provisions relating to petroleum exploration and mining are quite separate from the similar provisions relating to general prospecting and mining. The petroleum provisions have operated since 1958 while the general mining provisions date from 1962.

Under each of the schemes a company is able to declare to the Commissioner of Taxation that it will expend, or has expended, on prospecting or mining operations, capital moneys raised from Australian residents. Subject to the Commissioner being satisfied on these points, the persons subscribing the capital are entitled to income tax deductions for the amounts subscribed, but the company forgoes any deductions to which it is otherwise entitled for its own expenditure of the declared moneys on prospecting or mining operations.

As I have already indicated, the two schemes are at present mutually exclusive. To take advantage of the petroleum scheme, a company's principal business must be prospecting or mining for petroleum. To take advantage of the general mining scheme, a company's principal business must be prospecting or mining for minerals other than petroleum. This means that an enterprise interested in both branches of the mining industry must conduct its petroleum operations and its general mining operations through separate companies if it is to enable subscribers of capital to receive the full benefit of taxation deductions available.

Until recently, this need to set up separate companies to take full advantage of the incentives has not caused any major difficulties. Of late, however, it has been found that an increasing number of enterprises wish to engage in the search for both petroleum and other minerals, without conducting the two activities through separate companies. For this reason, the government has decided to amalgamate the two schemes.

It is therefore proposed by this Bill that, for capital subscribed after 30 June 1969, a company will be able to make a declaration to the Commissioner in respect of moneys expended, or to be expended, by it on both petroleum and general mining activities. Declared moneys actually spent by the company on petroleum operations will be offset against deductions otherwise allowable to it for expenditure on those operations, and a corresponding adjustment will be made as regards declared moneys actually spent by the company on general mining activities. Whereas the existing provisions were due to expire on 30 June, 1970, the proposed provision will not have a specified limitation on the period for which it will apply.

The Bill also proposes that a declaration by a company shall not include moneys paid on redeemable shares, which are more in the nature of a repayable loan to the company than a contribution to its permanent capital. This is in harmony with the policy adopted last year when other provisions of the law authorising deductions for calls paid on mining shares were reviewed and amended.

The second major amendment proposed by the Bill is designed to eliminate a feature of the mining investment incentives which, in the light of experience, the Government judges to be unnecessary. Provisions for tax deductions are being availed of by persons classed as share dealers, who then sell out to others who, in effect, supply the funds to finance exploration and development, but who do not receive any tax concession on their original payment.

It is a general rule of the Income Tax Law that an amount of expenditure is deductible only once. There are, however, some exceptions. One of these relates to capital subscriptions to petroleum exploration companies, which are deductible in full, and another to calls paid to mining and afforestation companies, which are deductible to the extent of one-third of the amount paid.

A person who, under longstanding principles of the income tax law, is taxable on profits made on share transactions and receives deductions for losses made, is not only entitled to the special deductions for capital subscribed to mining companies, but the same amount is also deductible in determining a taxable profit, or deductible loss, made on a sale of the shares. For capital subscriptions to petroleum exploration and mining companies, the amount deductible can be as much as 200 per cent of the expenditure actually made. For calls to general mining or afforestation companies the amount deductible can be 133 1/3 per cent of the actual outlay.

As announced in the budget speech, the Government has decided to amend the law so that the deduction available to such persons cannot exceed the outlay actually made. The Government believes that one important result of this amendment will be a wider spread of new issues of mining shares among the Australian public.

It is proposed that the amended law will apply in respect of expenditure incurred by a dealer in shares after 12 August 1969, unless the shares on which the expenditure is made came into his ownership on or before that date, or after that date pursuant to an application lodged or an agreement made on or before that date.

The final amendment contained in the Bill will give effect to the proposal mentioned in the budget speech to assist primary producers to conserve water or fodder. It will also assist primary producers who find it necessary to construct storage facilities for grain or hay. It is proposed that the cost of on-farm structural improvements made for the purpose of conserving water or fodder, or for the purpose of storing grain or hay, will be deductible in full in the year in which the expenditure is incurred. At present, expenditure of this kind is deductible for income tax purposes by way of depreciation allowances over five years. This amendment will apply to expenditure incurred in the 1969-70 income year and subsequent years on improvements made for these purposes.

Explanations of technical aspects of the Bill are contained in a comprehensive memorandum being made available to Honourable Senators.

I commend the Bill to the Senate.