House of Representatives

Explanatory Memorandum

(Circulated by the Treasurer, the Rt. Hon. J. B. Chifley.)

INCOME TAX RESOLUTION 1946.

INTRODUCTORY NOTE:-

The purpose of this Resolution is to declare the rates of income tax payable for the financial year 1946-1947. It will also effect a reduction in the income tax rates payable by individuals.

In the case of companies, the rates will be applied in assessments based on income derived during the year of income ended the 30th June, 1946. In the case of other persons, however, they will be applied in assessments based on income derived during the year of income ending on the 30th June, 1947.

The Resolution to amend the rates of social services contribution, although intended primarily to simplify the method of calculation of the contribution, will also have the effect of reducing the rate of contribution payable on the lowest incomes.

Compared with peak war-time rates of income tax, the new rates of tax and contribution represent an overall reduction of approximately 22 per cent. The reduction will be more than 47 per cent. on the lowest incomes, and will taper off to something under 20 per cent. on incomes of Pd1,500 and over. Compared with existing rates, the new rates of tax and contribution will represent an overall reduction of about 11 per cent.

The new income tax rates will have the effect of raising the limits of income which may be derived by persons with dependants without incurring any liability to income tax. These persons, however, will be liable for social services contribution. By way of comparison with the limits under the income tax scale adopted last year, the position will be as follows:-

Except for a few minor alterations, the provisions of the Income Tax Resolution, other than Divisions A and B of paragraph 1, correspond to those contained in the Income Tax Rating measure which is introduced annually to Parliament.

Notes explanatory of the provisions of the Income Tax Resolution are set out hereunder:-

PARAGRAPH 1.-RATES OF INCOME TAX.

Division A.-Rate of tax in Respect of a Taxable Income Derived from Personal Exertion.

This Division prescribes the rate of tax payable in respect of a taxable income derived from personal exertion by a person other than a company.

As income tax will not be levied on taxable incomes of Pd200 and less, no rate of income tax is specified for such amounts. Where the taxable income does not exceed Pd300 the rate of tax is prescribed only for the amount in excess of Pd200. The rate on the excess commences at 3s. in the Pd1 and increases gradually to 3s. 6d. in the Pd1 at Pd300. Spread over the whole of the taxable income, the tax payable represents an average rate of a fraction of a penny in the Pd1 on an income of Pd201 and 14d. in the Pd1 on an income of Pd300. The rate then increases progressively until a maximum of 123.32 pence is reached at Pd5,000. Where the taxable income exceeds Pd5,000 the rate will be 123.32 pence in the Pd1 on the first Pd5,000 and 14s. 6d. on every Pd1 in excess of Pd5,000.

Income taxpayers will also be liable to social services contribution. The maximum rate of contribution is 1s. 6d. in the Pd1.

Division B.-Rate of Tax in Respect of a Taxable Income Derived from Property

This Division prescribes the rate of tax to be applied to a taxable income derived from property by a person other than a company.

The rate of tax applicable to a taxable income of Pd201 from property is slightly in excess of the rate applicable to a taxable income of Pd201 from personal exertion. Taking into account the combined rates of income tax and social services contribution, the excess of the rates on property income over the rates on personal exertion income rises to approximately 25 per cent. on incomes of Pd1,000. The difference in the rates then gradually diminishes until the rate of tax on that part of the taxable income in excess of Pd5,000 is the same for both property income and personal exertion income, i.e., 1s. 6d. in the Pd1. In addition, 1s. 6d. in the Pd1 social services contribution is payable.

Division C.-Rates of Tax in Respect of a Taxable Income Derived Partly from Personal Exertion and Partly from Property.

This Division prescribes the rates to be applied in those cases where taxpayers derive taxable income from personal exertion and from property.

In these cases of composite income from personal exertion and from property, the rate of tax on the separate amounts of each class of taxable income is ascertained as if the total income were derived wholly from personal exertion and wholly from property, respectively. The effect of the application of Division C is that the taxpayer pays tax on his taxable income from personal exertion and property at the rate attributable to his total taxable income. For example, if the total composite income were Pd5,000 made up of Pd3,000 personal exertion income and Pd2,000 property income, the rate to be applied to both the Pd3,000 and the Pd2,000 is the rate applicable to Pd5,000.

Division D.-Rates of Tax by Reference to an Average Income.

This Division is operative where the averaging provisions of Division 16 of Part III. of the Income Tax Assessment Act are applied in the assessments of taxpayers. The application of the averaging provisions is limited to the assessments of primary producers. The rate of tax on the primary producer's taxable income is ascertained by averaging his taxable income over the year of income and the preceding four years. The rate that is attributable to the amount of the taxpayer's average income over the five-year period is the rate of tax prescribed by Division D. This rate is to be applied to the taxpayer's taxable income of the year of income.

Division E.-Rates of Tax by Reference to a Notional Income.

By this Division, a special basis is provided for the calculation of the tax payable by a taxpayer who receives a premium upon the grant or assignment of a lease. These lease premiums have the income character of commuted rent and, accordingly, the premiums are included in assessable income under the provisions of Division 4 of Part III. of the Income Tax Assessment Act. As the net premium, i.e., the total premium less expenses, is included in the taxable income of the year in which the premium is received, the graduated rate of tax would cause a taxpayer to pay a greater amount of tax than he would be required to pay if he received the amount of the lease premium in the form of rent spread over the years of the lease term.

Sub-section (1.) of section 86 of the Income Tax Assessment Act provides that, in these cases, the net premium shall be divided by one-half of the number of years of the lease term in order to ascertain what is described as a notional income for rating purposes. Any taxable income which may be derived by the taxpayer in addition to the lease premium is aggregated with the lease notional income to determine the rate of tax payable on the total taxable income. The application of a rate in accordance with this formula is authorized by Division E.

Division F. - Rates of Tax Payable by a Trustee.

This Division, which prescribes the basis upon which a trustee shall pay income tax, will operate only in isolated cases. Ordinarily, a beneficiary will be required to pay income tax on his share of the trust income. In those cases, however, where there is no person presently entitled to the trust income, or part thereof, the trustee will be required to pay income tax as if the share of the income to which no person is presently entitled were the income of one individual. Liability to pay income tax will also rest on the trustee in respect of a beneficiary's share where the beneficiary is under some legal disability.

Division G. - Rates of Tax Payable by a Company other than a Company in the Capacity of Trustee.

This Division prescribes the rates of tax to be payable by companies for the financial year 1946-1947. The proposed rates are the same as those payable for the last financial year.

Paragraph (a) provides that the rate of normal tax for companies other than life assurance companies shall be 6s. in the Pd1.

For mutual life assurance companies the rate, however, is only 5s. in the Pd1. A mutual life assurance company is a life assurance company, the profits of which are divisible only among its policy holders. It might be mentioned that in the assessment of a mutual life assurance company, premiums on life assurance policies and expenditure related thereto are excluded. The company, generally speaking, is taxed only on its new income from investments. It is this income which is taxed at the rate of 5s. in the Pd1. A non-mutual life assurance company is also exempt from income tax in respect of premiums on life assurance policies. The taxable income of such a company is divided into (a) mutual income and (b) other income. The mutual income represents the same proportion of the taxable income derived by the company from its life assurance business, eg., investment income, as the profits divided among life assurance policy holders bear to the total life assurance profits divided among shareholders and policy holders. The mutual income derived by such companies is taxed at the concessional rate of 5s. in the Pd1. The balance of taxable income, however, bears tax at the ordinary company rate of 6s. in the Pd1.

Paragraph (b) specifies the rate of further tax payable on the undistributed income of public companies. The amount of undistributed income is arrived at by deducting from taxable income, the dividends paid out of that taxable income, certain ex-Australian losses incurred during the year of income, and Commonwealth income taxes paid during, or payable in respect of the income of the year of income. The rate of further tax specified is 2s. for each Pd1 of undistributed income. The mutual income of a life assurance company is not subject to the further tax.

Division H. - Tax Payable where Amount would otherwise include Odd Pence.

The purpose of this Division is to authorize the elimination of pence in determining the amount of tax. Amounts of sixpence and less are disregarded and pence in excess of sixpence are regarded as one shilling.

PARAGRAPH 2. - SUPER TAX ON COMPANIES.

As already stated, this paragraph imposes a super tax of 1s. in the Pd1 on certain companies. The tax is imposed only on amount of taxable income in excess of Pd5,000.

The imposition of super tax is complementary to the imposition of war-time (company) tax. It is payable only by companies which come within the provisions of the War-time (Company) Tax Assessment Act 1940-1946. It accordingly does not apply to private companies, mutual life assurance companies, co-operative companies, small public companies, and certain commission, etc., companies in which little or no capital is required.

Where a company is assessed to war-time (company) tax, the amount of war-time (company) tax otherwise payable is reduced by the amount of super tax charged in the company's income tax assessment. The result, therefore, is that in addition to ordinary company tax the company, in effect, pays super tax or war-time (company) tax, whichever is the higher amount.

Super tax is not levied on the mutual income of a non-mutual life assurance company.

PARAGRAPH 3. - LEVY OF INCOME TAX.

This paragraph provides that income tax rates proposed in the Resolution shall be levied and paid for the financial year 1946-1947. They will apply to the assessments of both companies and individuals. as already indicated, these assessments, in the case of companies, will be based on taxable income derived during the year ended 30th June, 1946, or the accounting period adopted in lieu thereof. In the case of individuals, however, under the pay-as-you-earn system of taxation, they will be based on taxable income derived during the year ending 30th June, 1947, or the accounting period adopted in lieu thereof.

PARAGRAPH 4. - APPLICATION OF RATES OF TAX IN SUBSEQUENT ASSESSMENTS.

This paragraph will provide authority for the application of rates of tax in assessments for the next financial year commencing 1st July, 1947, until the rates imposed for that financial year are enacted. A provision of this nature is necessary in order that assessments may be made in special cases, e.g., a taxpayer leaving Australia before the rates applicable for the next financial year are enacted. The rates that will be applied in these assessments will be the rates shown in the scales set out in Divisions A. and B. of paragraph 1 of this Resolution.

PARAGRAPH 5. - PROVISIONAL TAX.

Under section 221YB (3.) of the Income Tax Assessment Act, provisional tax is not payable unless its imposition is specifically authorized by a provision in the Act imposing the rates of tax on income of the particular financial year.

Paragraph 5 of the Resolution corresponds to the provision included in the Annual Income Tax Rating Measure authorising the imposition of provisional tax in respect of income of the relevant year of income. It will accordingly authorize the imposition of provisional tax in respect of income derived during the year of income ending on the 30th June, 1947.

The amounts of provisional tax payable in the financial year 1946-1947 will be determined on the basis of the taxable income derived during the year ended 30th June, 1946. The rates that will be applied to the taxable income of that year for provisional tax purposes, will take into account the reductions already explained. The Social Services Contribution Resolution proposes that provisional contribution be separately determined.