House of Representatives

Income Tax Assessment Bill 1974

Income Tax Assessment Act 1974

Second Reading Speech

by the Treasurer, the Honourable Frank Crean, M.P.

This Bill has four main purposes, each of them quite different. One is to close off avenues for avoidance of withholding tax on interest on foreign loans. Another is concerned with the liability to tax of allowances and benefits received by members of the defence force under the new pay code. The third is related to deductions for contributions for retirement benefits by members of this Parliament and servicemen. The final purpose is to complete, in two stages, the phasing- in of arrangements for the collection of company tax by quarterly payments.

With the exception of provisions concerned with collection of company tax, the Bill is in all substantial respects identical with an Income Tax Assessment Bill introduced last April that lapsed when the Parliament was dissolved.

I announced on 2 July 1973 that the Government had decided to introduce amendments to the income tax law to correct an apparent deficiency in the interest withholding tax provisions. The broad effect of these provisions is to impose a moderate withholding tax of 10 per cent on interest paid to overseas lenders by Australian residents or by non-residents who use overseas borrowings in an Australian business. There are some exemptions from the tax. One relevant to this Bill is for interest on money borrowed for use in a business that is Australian-owned and controlled to an extent specified in the law.

Another exemption relevant to the Bill frees from withholding tax interest on foreign loans that are used overseas by Australian enterprises in conducting a business through a foreign branch. Some financial institutions with foreign branches have sought to use this latter provision to obtain exemption from withholding tax in respect of loans raised through the branches for use by any Australian clients at all, i.e., not only those that are Australian-owned and controlled to the required extent.

Not only could the loss of revenue from leaving the law as it stands be significant. That course could also lead to a complete frustration of the fundamental policy of the withholding tax that interest paid from Australia by firms that are not sufficiently Australian-owned is to bear Australian tax. The Government therefore considers that the changes provided in this Bill must be made.

The primary effect of the Bill is that withholding tax will be payable on interest paid from Australia to a foreign branch of an Australian institution where the institution concerned chooses to arrange its foreign borrowing transactions in such a way that the interest it receives from on-lending the borrowed funds in Australia is derived as income of a foreign branch. The Bill will make the interest subject to withholding tax in these circumstances only where it would have been subject to the tax if it had been received by a non-resident. As I announced on 2 July 1973, the amendments will apply to interest payments made after that day.

Complementary amendments of a technical kind are proposed to clarify the circumstances in which interest paid to non-residents can be said to be incurred in carrying on an overseas business, and thus not subject to withholding tax. As explained more fully in the explanatory memorandum being circulated to Honourable Members, a related series of technical amendments is also proposed to forestall tax avoidance in two other areas of the law which are modelled on the interest withholding tax provisions. One of these relates to the source of royalties paid to non-residents, and the other to the source - for the purpose of provisions designed to close down Norfolk Island as a tax haven - of both interest and royalties.

I should mention that none of the withholding tax amendments will affect the exemption for interest on ordinary savings bank or fixed deposit accounts kept by non-residents at overseas branches of Australian banks.

The amendments relating to defence force allowances are in the main the result of changes in the service pay structure based on recommendations in the final report of the committee of inquiry into services' pay - the "Woodward Committee".

One change of particular significance from the tax standpoint is the withdrawal of the general entitlement of members of the defence force to receive free rations and quarters when living in service establishments, or substituted benefits in the form of cash allowances when living elsewhere. This development, together with a proposal to provide a specific exemption for the value of rations and quarters that are still provided free of charge in a limited range of circumstances, has made unnecessary a provision that fixes the taxable value of defence force allowances in the "food and shelter" category at $2 a week. Accordingly, the Bill proposes that this provision be repealed.

Another provision of the income tax law governing the exemption of dependants' allowances and exchange allowances of defence force members is to be amended. One purpose of this is to ensure that, in the limited range of circumstances in which board and quarters are still available free of charge, their value will be exempt from tax. Another purpose is to facilitate the provision, or continuation, of exemptions for allowances paid in reimbursement of certain abnormal expenses incurred by defence force personnel in complying with duty requirements. The Woodward Committee contemplated that these allowances would not bear tax.

The amendments proposed will permit the allowances that are to be paid free of tax to be prescribed by regulations made under the income tax law. In the same way, it is proposed to prescribe, pursuant to this amendment, that a re-engagement bounty payable to a member of the defence force is to be exempt from tax. The Bill will also remove references in the exempting provisions to service "exchange" allowances. These allowances have long since ceased to be paid.

None of the amendments will affect the tax treatment of allowances payable in respect of service before the date of commencement of the new pay code.

The provision of the law that authorises the allowance of income tax deductions for contributions to superannuation funds needs to be amended because, under recent legislative changes, contributions for retirement benefits by members of this Parliament and by members of the defence force are paid directly into consolidated revenue. The amendment proposed by the Bill will ensure that tax deductions for these contributions continue to be available, notwithstanding that they are not paid into separate superannuation funds.

The last matter dealt with in the Bill is the scheme for the collection of company tax by quarterly instalments. As announced in my 1973-74 Budget Speech, the Government proposes that the scheme will be in full operation by 1975-76. When it is in full operation there will be three quarterly instalments payable in a financial year before the due date for payment of the assessment of company tax on income of the preceding year. The balance of the assessed tax - in effect, the fourth instalment - will be payable on the due date of the assessment, the other instalments being credited against the amount assessed.

As a first step in implementing this scheme, most companies were required to pay an instalment of tax in January 1974 for later crediting in the 1973-74 financial year against tax due on 1972-73 income. This Bill amends the provisions covering this first stage of the scheme so as to provide machinery for implementing the later two stages.

The Bill will provide for the collection of two instalments of company tax during the current financial year - 1974-75 - and three instalments during each subsequent year. Each instalment will be calculated so that it approximates as closely as possible one-quarter of the full tax liability against which it is to be credited.

Companies will receive a notice specifying the amount of instalment payable and the due date for its payment. The due date will be at least 30 days after the date of service of the notice. The Commissioner of Taxation will not be sending notices this year where the amount of an instalment would be less than $250. As a general rule, tax on the 1973-74 income of a company that for this reason remains outside the instalment scheme will be payable in full on a date falling somewhere between 14 February and 30 June 1975.

The earliest due dates for payment of instalments in 1974-75 will be 15 November 1974 for the first instalment and 15 February 1975 for the second. As already explained, the remainder of the tax to be collected on 1973-74 income will be payable on the due date for payment of the tax assessed as shown on the notice of assessment. Where a company has been called upon to pay at least one instalment, this date will not, in normal circumstances, be earlier than 30 April 1975.

A similar pattern of collection will be followed in 1975-76 and subsequent years except that an additional instalment of tax will be payable. This will be due for payment by a date not earlier than 15 August in the relevant year. Company tax collections will then be spread fairly evenly over all four quarters of each financial year thus reducing the size of the seasonal swings in tax payments. The strains on final-quarter cash resources of companies should be much less severe than they have been during the years in which the collections were concentrated within that quarter.

More detailed explanations of the proposed amendments are set out in an explanatory memorandum circulated in my name for the information of Honourable Members.

I commend the Bill to the House.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).