House of Representatives

Income Tax Assessment Amendment Bill (No. 3) 1976

Income Tax Assessment Amendment Act (No. 3) 1976

Second Reading Speech

by the Treasurer, the Hon. Phillip Lynch, M.P.

The major purpose of this and associated Bills I shall shortly introduce is to give effect to the Government's income tax initiatives announced in my budget speech.

The Bill also contains provisions relating to other aspects of the income tax law.

One of the budget proposals dealt with in this Bill, and in two of the associated Bills, is the scheme of income equalization deposits being established for the benefit of primary producers.

The scheme will provide valuable assistance to companies and individuals who carry on business as primary producers and whose incomes can, because of seasonal and market conditions, vary considerably from one year to the next.

The income equalization deposits scheme will encourage primary producers to make deposits in years in which their incomes are high and thus provide funds to draw on when incomes fall.

In this way the scheme will have a stabilising effect on the levels of rural incomes and expenditures.

Provisions governing the financial aspects of the scheme are embodied in an associated Bill entitled the Loan (Income Equalization Deposits) Bill 1976.

As those provisions, together with the amendments being made by this Bill to the Income Tax Assessment Act, are explained in detail in a memorandum I have arranged to be circulated, I think I need do no more for the present than refer to some general features of the scheme.

The incentive for primary producers to make financial provision under the scheme is to be found mainly in the income tax deductions that will be allowable for moneys deposited.

Conversely, proceeds received on the withdrawal of deposits for which tax deductions have been allowed are to be treated as assessable income for taxation purposes.

The scheme will be available for companies and individuals who, in income tax parlance, are engaged in a business of primary production.

This includes farming, grazing and other rural activities and the carrying on of fishing or forest operations.

Moneys deposited under the scheme will be borrowings by the Commonwealth and Loan Council approval has been obtained for this.

Deposits will be accepted by the Commissioner of Taxation, to whom applications to withdraw moneys are also to be made.

Interest, initially at the rate of 5 per cent per annum, will be payable on deposits.

The interest rate will be variable by regulation.

Following enactment of this legislation, deposits that are lodged with the Commissioner not later than 31 January 1977 will, within the limits provided in the legislation, be allowable as tax deductions against income of the 1975-76 income year.

Deposits lodged after 31 January 1977 and not later than 31 August 1977 will be deductible in respect of income of the year ending 30 June 1977.

Thereafter, deposits made in the period of 12 months ending 31 August of each year will be deductible against income of the year ending on the preceding 30 June.

For a taxpayer whose accounting period for income tax purposes ends on a date other than 30 June, the 12 months period will end two months after the close of the particular accounting period.

Deposits may be made by any individual or company but income tax deductions will be available only to depositors who carry on a business of primary production in Australia, or are partners or beneficiaries entitled to share in income from such a business carried on by a partnership or trust estate.

An infant beneficiary who is presently entitled to a share in primary production income of a deceased estate may qualify for deductions for deposits made by the trustee of the estate out of the beneficiary's share of the estate's income.

Deposits relating to any particular income year will be allowable as tax deductions up to an amount equal to 40 per cent of the depositor's gross income receipts for the year from primary production activities.

The deduction allowable in any assessment, however, will be no greater than the depositor's taxable income from sources other than property.

The total accumulated deductions at any one time, allowable to a depositor in respect of amounts lodged under the scheme or as drought bonds, will be subject to an upper limit of $100,000.

As a general rule an amount for which a tax deduction is allowable under the scheme must remain on deposit for at least 12 months.

A deposit may, however, be withdrawn within 12 months if the taxpayer is experiencing serious financial difficulties caused by circumstances not in existence when the deposit was made.

A depositor seeking to withdraw an amount within 12 months of lodgement will be required to satisfy the Commissioner of the grounds on which the application is based.

If the Commissioner is not satisfied, the matter is, on the taxpayer's request, to be referred to a Taxation Board of Review for consideration.

Amounts deposited in respect of the 1975-76 income year, that is, not later than 31 January 1977, can be withdrawn at any time if the taxpayer is experiencing serious financial difficulties, whether or not the difficulties are due to conditions that existed at the time that the deposits were made.

These special arrangements recognise that drought conditions may have been experienced by primary producers since 31 August 1976, which would have been the last day for making deposits in respect of the 1975-76 income year if the scheme had then been in operation.

An amount deposited and withdrawn by a primary producer before the end of the period in which a deposit may be made in respect of a particular year will not be allowable as a tax deduction.

So, for example, if a primary producer places an amount on deposit on 5 January 1977 and, on or before 31 January 1977, lodges an application to withdraw it on grounds of serious financial difficulty, a deduction will not be allowable against 1975-76 income if the deposit is returned.

Where an application to withdraw deposits is lodged, or where a depositor dies, becomes bankrupt or, being a company, begins to be wound up, the relevant amounts - to the extent of the income tax deductions that have been allowed - are to be included as assessable income.

Generally speaking, the amounts will be treated as income derived in the year in which the application to withdraw is lodged.

In cases involving death, bankruptcy or winding up proceedings, however, the amounts will be treated as assessable income of the tax period ending on the date of the relevant event.

Amounts allowable as deductions in respect of deposits, or amounts included in assessable income as a consequence of withdrawals, will not be taken into account in ascertaining provisional tax payable.

Primary producers will, of course, continue to be able to apply for recalculation of provisional tax on the basis of estimated taxable income.

With the introduction of the new income equalization deposits scheme, there will be no need to continue the earlier drought bond scheme and it is to be wound up.

Present holders of drought bonds for which tax deductions have been allowed will be permitted to convert their holdings to income equalization deposits, without any immediate tax consequences.

I turn now to other extensive provisions of the Bill which propose to change very significantly the basis on which deductions are allowable for the major capital expenditures of general mining and petroleum mining enterprises.

I indicated in my budget speech that the Government intends to promote a healthy and efficient minerals sector and at the same time ensure that a fair balance is struck between the levels of income tax payable by the mining industry and by other industries.

In reaching the decisions affecting mining enterprises that are to be implemented by the Bill, the Government gave close consideration to the report of the Industries Assistance Commission that dealt with the income tax arrangements for the mining industry.

Deductions available for capital expenditure on the development of a mine or oil field, on the provision of community facilities adjacent to a mine or field, or on the purchase of mining rights or information, that currently are allowable over the estimated life of the mine or field will, for new expenditures, be allowable on reducing balances, by reference to a maximum life of five years instead of 25 years.

This will increase the minimum annual rate of deduction from 4 per cent to 20 per cent.

New exploration and prospecting expenditure incurred in searching for petroleum, and the life-of-field deductions for allowable capital expenditure on the development of a petroleum field, will henceforth be deductible against assessable income derived from any source by the person incurring the expenditure.

New capital expenditures on facilities for the transport of minerals, including oil and natural gas, that are now deductible over 20 years will, at the option of the taxpayer, be deductible over either 10 years or 20 years.

In addition, the classes of eligible expenditure on transport facilities for this purpose will be expanded to include certain capital expenditures of a non-plant character that are incurred in providing port facilities in relation to the transport of minerals, including petroleum.

Each of the amendments proposed in relation to the taxation of the mining sector is to apply in respect of new expenditures incurred after Budget Day - 17 August 1976.

The Bill also gives effect to two budget proposals relating to the dividend distribution requirements of the income tax law.

With the needs of small businesses particularly in mind, it is proposed to lower the minimum distribution required to be made by private companies to avoid tax on undistributed income, by increasing - from 50 per cent to 60 per cent - the proportion of after-tax business income that a company may retain.

It is not proposed to vary the 10 per cent retention allowance for property income or to provide a retention allowance for dividends that one private company receives from another.

Private companies will benefit from the increased retention allowance in their undistributed income tax assessments in respect of income of the 1975-76 income year.

The Bill also proposes to terminate the excess distribution provisions that enable a private company that has paid more in dividends than the undistributed income tax formula requires for an income year to take credit for the excess incalculating the minimum distribution that it is required to make in respect of its income of a later year.

The Government has received representations urging that, on one view or another, it should not proceed with this proposal but, after careful consideration we remain of the view that the case for terminating the excess distribution provisions is a compelling one.

To a substantial degree, the dividend policies of private companies are in conformity with the dividend distribution requirements of the income tax law so that no more is paid in dividends than is needed to avoid a liability for undistributed income tax.

Most of the existing excess distributions are the products of various kinds of tax minimization arrangements and the continued availability of the amounts would benefit relatively few private companies not associated with arrangements made to exploit the distribution provisions.

Sophisticated arrangements of shareholdings within private company groups have been devised to circumvent the very complex measures that have been enacted to reduce tax avoidance by private company interests.

There can be no certainty that further changes in the excess distribution provisions would, given the nature of the situations to be dealt with and the quite bewildering complexity of this area of the law, hold out any greater assurance of success than the amendments made as recently as 1973.

But in any event, the situation created by the increase now proposed in the retention allowance - when considered in conjunction with the effects of other income tax initiatives that have been taken by the Government or are proposed - provides a strong case for terminating the excess distribution provisions.

With the retention allowance for business income raised to 60 per cent, a level of 40 per cent of taxable income less tax is about the limit to which a private company's sufficient distribution could be reduced without adversely affecting the role of the provisions of the tax law designed to ensure that private companies distribute some reasonable amount of after-tax profits as dividends to shareholders.

Continued availability of excess distribution credits would adversely affect revenue in the same way as an increase in private company retention allowance levels, but with the benefits accruing almost exclusively to persons who had devised ways of circumventing basic distribution requirements of the law.

Being satisfied that the need for the excess distribution concepts no longer exists, the Government is taking the only practical course open to it.

The provisions are, accordingly, to be terminated so that excess distributions will not be available in determining whether private companies have paid sufficient amounts by way of dividends in respect of income derived during the income year ending 30 June 1977.

For a company which ends its financial year on June 30, the effect of the termination arrangement will be to permit any available excess distribution to be taken into account in measuring the sufficient distribution required to be made by 30 April 1977.

No excess distribution will, however, be reflected in the calculation of the distribution required to be made during the 12 months period ending 30 April 1978, or in any subsequent distribution period.

Another provision of the Bill will give effect to the announcement I made last month of the Government's decision to exempt from tax the income derived by the Thalidomide Foundation as trustee for Thalidomide afflicted children.

As a consequence of the exemption each of the children will be exempt from tax on his or her share in the income of the Foundation.

Mineral exploration expenditure in Papua New Guinea is another subject dealt with by the Bill.

Subject to some transitional rules, the right to deduct such expenditure was withdrawn in 1975 when that country became independent.

We have since agreed, as had the previous Government, to a request by Papua New Guinea that the life of the transitional provisions be extended.

The extension will permit deductions for exploration expenditure incurred up to 30 June 1978 in pursuance of exploration rights held at the time of Papua New Guinea's independence.

A technical amendment is also being made to the definition of "resident of Australia" for income tax purposes.

One part of this definition has long treated as an Australian resident a person who is, or is a designated dependant of, a contributor to the Commonwealth Superannuation Fund.

Because the recent change in superannuation arrangements for Commonwealth Officers has led to the constitution of a new fund, it is necessary to bring up to date the references in the definition to people who are contributors to the superannuation fund.

Another measure in the Bill terminates as from 1 July last the residual application of the tax concessions for visiting industrial experts that, subject to some phasing-out rules, had been withdrawn in 1973.

This final termination was announced in June and follows the decision to abolish a grants scheme that had in 1973 been substituted for the former tax concessions.

As mentioned earlier, an explanatory memorandum relating to the Bill is available to Honourable Members providing detailed explanations of the provisions of this and three related Bills and makes it unnecessary for me to dwell on the provisions at the present time.

I commend the Bill to the House.