Income Tax Assessment Bill 1948
(Circulated by the Treasurer, the Right Honourable J. B. Chifley)
Ed. Note
The original document included both the explanatory notes and the text of the related legislation. In the electronic copy, only the explanatory notes and headings of the related legislation have been retained.
Notes on Clauses
CLAUSE 1.-SHORT TITLE AND CITATION
CLAUSE 2.-DEFINITIONS.
This definition was inserted in the Act mainly for the purposes of the special provisions (Division 7) under which the social services contribution and income tax on the undistributed income of private companies are assessed.
"Private company" is defined in section 103(1.) to mean a company which is under the control of not more than seven persons, and which is not a company in which the public are substantially interested or a subsidiary of a public company.
Section 103(2.)(c) provides that a company shall be deemed to be under the control of any persons where the major portion of the voting power or the majority of the shares is held by those persons or nominees of those persons or where the control is, by any other means whatever, in the hands of those persons.
"Nominee" of any person is defined in section 103(1.) to mean one who may be required to exercise his voting power at the direction of, or holds shares directly or indirectly on behalf of, that person and includes a relative of that person.
The purpose of defining nominee of any person as including a relative of that person was to regard relatives as a unified body holding shares in a company and exercising its voting power as one person.
As explained in the judgment of the Full High Court in Adelaide Motors Ltd. v. Federal Commissioner of Taxation (1942), 66 C.L.R. 436, the definition of "relative" is lacking in the precision necessary to its effectiveness in the Income Tax Assessment Act.
It is accordingly proposed to omit the present definition of "relative" and to insert a new definition precisely specifying the limits within which the relationship of one person to another should be recognised for the purposes of the Act.
Apart from the provisions for the taxation of private companies, the term "relative" is used in the Principal Act in section 65 and section 160.
Section 65(1.) was enacted to provide that deductions should be allowable to a taxpayer in respect of payments becoming due by him to relatives, to the extent that such payments were reasonable in amount and bona fide made in the production of the taxpayer's income. The revised definition of "relative" will not interfere with the effective operation of the section.
Section 160(2.)(a) provides for the allowance of a concessional rebate of tax where a female relative of a taxpayer has the care of his children or step-children, who are under the age of 16 years. The new definition of "relative" will not affect the concessional rebate allowed by section 160(2.)(a).
The amendment will commence to apply to assessments for the current financial year, i.e., assessments based on income derived by companies during the year ended 30th June, 1948, and assessments based on income derived by individual taxpayers during the year ending 30th June, 1949.
CLAUSE 3.-OFFICERS TO OBSERVE SECRECY.
Section 16 of the Principal Act is designed to ensure that officers of the Taxation Department and other officials who acquire information in the course of their official duties respecting the affairs of taxpayers shall maintain secrecy in regard thereto.
In the interests of governmental administration, the section provides that the Commissioner of Taxation may communicate such information to specified authorities, including-
the Commissioner of Pensions for the purpose of the administration of any law of the Commonwealth relating to pensions; and
the Commissioner for Maternity Allowances for the purpose of any law relating to maternity allowances.
Under the Social Services Consolidation Act enacted last year, the administration of age and invalid pensions, maternity allowances, child endowment and other social services benefits was vested in the Director-General of Social Services. That Act provides for the payment of child endowment to persons who are temporarily absent from Australia, on condition that the claimant or her husband is a resident of Australia as defined by the Income Tax Assessment Act.
In order that this provision of the Social Services Consolidation Act may be effectively administered, it is essential that the Commissioner of Taxation be empowered to advise the Director-General of Social Services whether or not a particular claimant or her husband is a resident of Australia for the purposes of income tax.
Clause 3 of the Bill accordingly amends section 16 of the Principal Act, to provide that information may be communicated by the Commissioner of Taxation to the Director-General of Social Services for the purpose of the administration of any law relating to pensions, allowances, endowments or benefits. The Director-General of Social Services is substituted for the Commissioner of Pensions and the Commissioner for Maternity Allowances, to conform to the altered provisions of the Social Services Consolidation Act.
It is proposed further that the Commissioner of Taxation shall be authorized to communicate information to the Universities Commission established under the Education Act 1945. The Universities Commission (Financial Assistance) Regulations (No. 187 of 1946) made under that Act provide for the payment, under certain circumstances, of financial assistance by the Universities Commission to students.
The scheme for financial assistance to University students was originally introduced by the National Security (Universities Commission) Regulations 1943, as part of the general plan for the war organization of industry. By the Education Act 1945, the provision of financial assistance was made one of the permanent functions of the Universities Commission.
In deciding whether financial assistance should be granted to any student, and in determining the amount of the assistance, the Universities Commission is required to take into account "the adjusted family income of the student". This expression is defined in the Regulations to mean the income received by the student and his parents during the year ended 30th June next preceding the date of application for assistance, less an amount of Pd50 for every child, other than the student, dependent upon the parents. The Regulations further provide that "income" means taxable income as defined in the Income Tax Assessment Act.
It is an essential feature of the scheme for financial assistance to students that the Universities Commission should have accurate information concerning the taxable incomes, of the student and his parents, as assessed by the Commissioner of Taxation. In order to facilitate the determination of claims for financial assistance, the Commissioner of Taxation has furnished the Universities Commission with information as to the amount of taxable income derived by each student seeking assistance and by his parents. These particulars were supplied in accordance with a direction of the Commonwealth Treasurer to the Commissioner of Taxation in terms of Regulation No. 71 of the National Security (General) Regulations, whereby a Minister could, in certain circumstances, require any person to furnish information in the latter's possession to any other specified person.
Regulation No. 71 of the National Security (General) Regulations ceased to have effect after 31st December, 1946. Consequently, it is necessary that a further authority be given for the furnishing by the Commissioner of Taxation to the Universities Commission of essential information regarding the income of applicants and their parents.
Paragraph (d) of clause 3 of this Bill inserts in the Principal Act a new paragraph (i) to authorize the Commissioner of Taxation to communicate information to the Universities Commission for the purpose of the administration of any law relating to financial assistance to students.
The Director-General of Social Services, the members of the Universities Commission, and their officers, to whom it is proposed to communicate confidential taxation information, will also be subject to the same obligations of secrecy as are taxation officers.
The information communicated by the Commissioner of Taxation will be limited to such particulars as are essential for the proper administration of the functions vested in the Director-General of Social Services and the Universities Commission, respectively.
CLAUSE 4.-EXEMPTION OF REMUNERATION DERIVED BY CERTAIN OFFICIALS OF INTERNATIONAL ORGANISATIONS.
By this clause, it is proposed to authorize an extension of the exemptions in respect of the salaries and emoluments of officials of the United Nations. The amendment will enable the Commonwealth of Australia to conform with certain provisions of the Convention on the Privileges and Immunities of the United Nations.
So far as relevant, the Convention provides that the United Nations, its assets, income and other property shall be exempt from all direct taxes. The Convention also provides that specified officials of the United Nations shall be exempt from taxation on the salaries and emoluments paid to them by the United Nations. The categories of officials to which the exemption shall apply are to be specified by the Secretary-General of the United Nations and submitted to the General Assembly.
Paragraph (x) of section 23 of the Principal Act exempts the income of any prescribed organization of which Australia and one or more other countries are members. The organisations which have been brought within this exemption by regulation 4AB of the Income Tax Regulations are:-
the United Nations (but not including associated specialised agencies); and
the United Nations Relief and Rehabilitation Administration.
So far as the salaries and emoluments of officials are concerned, exemption is at present provided in respect of the salaries and emoluments of the officials of the United Nations and the United Nations Relief and Rehabilitation Administration where the salaries and emoluments are derived from sources-
in Australia by a non-resident; or
out of Australia by a resident who is appointed for service with either of those organisations outside Australia.
The present exemption does not extend to the salary and emoluments of a resident of Australia who is appointed for service in Australia or who, being appointed for service outside Australia, renders some services to the organization in Australia.
The clause proposes the extension of the exemption to salary and emoluments in these cases where the Convention requires that such exemption be given. The existing exemptions will be retained.
The extension of the exemption will commence to apply to official salaries and emoluments derived during the year in which the terms of an international agreement requiring Australia to exempt official salary and emoluments become operative.
CLAUSE 5.-CREDIT IN RESPECT OF TAX PAID ABROAD ON EX-AUSTRALIAN DIVIDENDS.
This is a drafting amendment.
Section 44(1.)(a) of the Principal Act includes in the assessable income of shareholders who are residents of Australia the dividends paid to them by companies out of profits derived by those companies from any source, whether in Australia or elsewhere.
Section 45 allows to resident taxpayers who receive a dividend paid by a company resident outside Australia out of its profits derived from sources out of Australia a credit in respect of income tax imposed on that dividend by a country outside Australia.
Sub-section (5.) of section 45 applies to modify the provisions of the definitions of "distributable income" in sub-section (1.) of section 103 and in sub-section (1.) of section 160C, in cases in which a tax credit, under section 45, is allowed to a company taxpayer in respect of ex-Australian dividends received by it.
The definitions of "distributable income" are used for the purposes of calculating the undistributed profits tax liabilities of companies and each provides that the taxable income of a company of a year of income is taken as a basis from which specified taxation liabilities are deducted.
The effect of the modification provided by sub-section (5.) of section 45 is to cause the tax that is to be deducted in calculating the "distributable income" of a company, to be the net amount payable after allowing the credit under section 45.
By clause 9 of the Bill, it is proposed to repeal section 103 of the Principal Act and to insert a new section in which the taxes deductible in calculating the distributable income of a private company will be specified in paragraphs (a), (b) and (c) of the definition of "distributable income". Correspondingly, section 160C of the Principal Act is being amended and in the amended section the taxes deductible in calculating the distributable income of a non-private company will be specified in paragraphs (a) and (b) of sub-section (1.) of section 160C. These amendments have necessitated the amendment proposed to be made to section 45 of the Principal Act.
This amendment will commence to apply in assessments for the current financial year 1948-49, i.e., in assessments based on income derived by companies during the year ended 30th June, 1948.
CLAUSE 6.-REBATE ON DIVIDENDS.
The effect of section 46(1.) of the Principal Act is to allow a rebate in respect of dividends received by resident companies from other companies. The rebate is calculated by applying the company primary rate of tax to the part of the dividend included in the taxable income of the company. The section was designed for application when only one rate of primary tax was applicable to the taxable incomes of companies.
By the Income Tax Resolution, it is proposed that, for so much of the taxable income of a company as does not exceed Pd5,000, the rate of tax shall be 5s. in the Pd1 and that the rate of tax on the balance of the taxable income shall be 6s. in the Pd1.
As a consequence of this proposed alteration in the company rate of tax, it is necessary to adjust the rate at which the rebate of tax shall be allowed in respect of dividends included in the taxable income of a company. By clause 6 of the Bill, it is proposed that the average rate of tax payable by a company shall be the rate at which the rebate of tax shall be calculated. This average rate will be ascertained by dividing by the taxable income the tax payable by the company for the relevant year of tax excluding any rebate to which the company is entitled and any undistributed profits tax or super tax that the company may be liable to pay.
The amendment will commence to apply in assessments for the current financial year 1948-49, i.e., in assessments based on income derived by companies during the year ended 30th June, 1948.
CLAUSE 7.-DEDUCTION IN RESPECT OF LIVING-AWAY-FROM-HOME ALLOWANCE.
The purpose of the amendments proposed by this clause is to remedy an anomaly that has arisen in connexion with the taxation of living-away-from-home allowances paid to employees in cash.
Various wage-fixing authorities have granted living-away-from-home allowances to employees to compensate the employee for the additional expenditure he is obliged to incur through having to live away from his usual place of abode in order to perform his duties as an employee. In most cases, the allowance is paid in cash, but in some instances, it is granted by way of the actual provision of accommodation and food.
These allowances, in substance, represent additional remuneration paid to the employee and therefore form part of his assessable income. Having regard to the purpose of the allowance and as, generally speaking, it is actually expended by the employee in meeting additional necessary expenditure incurred by him, section 51A was enacted in 1945 to provide a measure of taxation relief to employees in receipt of living-away-from-home allowances.
Broadly speaking, the effect of section 51A is that only 15s. per week of such an allowance is subject to income tax. Where the rate of the allowance does not exceed 15s. per week, the whole of the allowance is taxed.
The principle underlying section 51A is that the portion of a living-away-from-home allowance that properly falls to be taxed is the amount of the saving in living expenses to the taxpayer in consequence of his absence from his home. This is estimated to be approximately 15s. per week, the probable saving in the cost of food.
The assessment of a living-away-from-home allowance to the extent of 15s. per week is not in consonance with those awards made by industrial tribunals which, in determining the rate of the allowance, have taken into consideration the probable saving in living expenses to the employee because of his absence from his home. In such cases, the allowance granted by the tribunal represents compensation only for the additional expenses over and above those which would have been incurred by the employee had he been living at home. It is considered that, as the amount of the allowance which would otherwise have been granted by the tribunal has, in effect, been reduced by the amount of the saving to the employee, no part of that allowance should be subject to income tax or social services contribution, except in cases where the weekly rate of the allowance is substantial.
Accordingly, it is proposed by paragraph (b) of this clause that where a living-away-from-home allowance, the weekly rate of which does not exceed Pd2 10s., is received in cash pursuant to any law or any award, order or determination of an industrial tribunal, or an industrial agreement, the full amount of the allowance shall be deductible. In effect, no part of the allowance will be subject to income tax or social services contribution.
In cases in which the weekly rate of the cash living-away-from-home allowance exceeds Pd2 10s., it is considered that some part of the allowance should continue to bear income tax. Where, as in these cases, the weekly rate of the allowance is substantial, it is considered that there is not the same justification for total freedom from income tax and social services contribution as in the case of less substantial cash allowances paid under awards.
In respect of such allowances ranging between Pd2 10s. and Pd3 5s. per week, granted by an industrial tribunal and paid in cash, it is, therefore, proposed to allow a deduction calculated at the rate of Pd2 10s. per week so that only the excess of the allowance over Pd2 10s. per week will be included in the taxable income of the recipient.
In cases in which the allowance exceeds Pd3 5s. per week, it is proposed that an amount determined by the Commissioner, but not less than 15s. per week, will be included in the taxable income.
The principles that govern the determination of the taxable amount of cash living-away-from-home allowances do not have equal application to cases where accommodation and food are supplied to the employee. It is considered reasonable, in these cases, that the saving in living expenses to the employee in consequence of his absence from his home, estimated to amount to 15s. per week, should continue to be subject to income tax. It is not proposed, therefore, to vary the operation of section 51A so far as living-away-from-home allowances received otherwise than in cash, are concerned.
The proposed amendment to Section 51A will commence to apply in respect of assessments based on income derived during the year ended 30th June, 1949.
CLAUSE 8.-GIFTS AND CONTRIBUTIONS.
Section 78(1.)(a) of the Principal Act provides for the deduction, in the case of a company, of gifts to certain institutions and funds in Australia.
It is proposed by this clause to extend the deductions so as to include gifts made to the United Nations Appeal for Children. It is also proposed that the deduction shall be extended to gifts made to New Guinea institutions and funds of the classes specified in the section.
The amendment will apply in assessments for the current financial year 1948-1949, i.e., in assessments based on income derived by companies during the year ended 30th June, 1948.
CLAUSES 9 TO 13.
DIVISION 7.-PRIVATE COMPANIES.
INTRODUCTORY NOTE:-
Income tax on the undistributed profits of private companies is assessed under Division 7 of the Principal Act.
Under section 16(2.) of the Social Services Contribution Assessment Act 1945-1947, Division 7 of the Income Tax Assessment Act is adapted and applied for the purpose of assessing also social services contribution on the undistributed profits of private companies.
For the purposes of these explanatory notes, the term "undistributed profits tax", in relation to private companies includes both the income tax and the social services contribution payable by private companies in respect of their undistributed profits.
Under section 103(1.) of the Principal Act "private company" is defined to mean a company which is under the control of not more than seven persons and which is not a company in which the public are substantially interested or a subsidiary of a public company.
In common with public companies, private companies are required to pay a primary tax on their taxable incomes.
Shareholders do not pay tax on incomes derived by companies until that income is distributed to them as dividends. These dividends are included in the total incomes of the shareholders and taxed at the appropriate graduated property rates applicable to individuals. The dividends are subject also to social services contribution.
A private company is required to pay the undistributed profits tax on so much of its distributable income as has not been distributed as dividends to its shareholders within six months of the close of the income year. In the case of non-resident companies, the period of six months is extended to nine months.
For practical purposes, the distributable income of a private company is the residue of its taxable income after deducting therefrom-
the ordinary income tax assessed at the primary rate payable in respect of that taxable income; and
the undistributed profits tax paid during the income year in respect of some prior year or years.
The undistributed profits tax that a private company is required to pay is the additional income tax and social services contribution that the shareholders would have paid if the undistributed income had, in fact, been distributed as dividends to the shareholders on the last day of the year of income.
Dividends paid by a private company wholly and exclusively out of income on which undistributed profits tax has been paid are free from income tax and social services contribution in the hands of the shareholders.
CLAUSE 9.
Section 103.-Interpretation.
Section 103 of the Principal Act contains several definitions by reference to which the provisions of Division 7 are interpreted.
It is proposed to repeal section 103 and to insert a new section redefining the terms "distributable income", "nominee", "private company" and "undistributed amount" and adding a definition of "prescribed period".
Sub-section (1.).-Definitions.
Distributable Income.
The distributable income of a private company is calculated by taking the taxable income as a basis and deducting therefrom specified taxation liabilities and any ex-Australian loss (other than a loss of capital) incurred by the company.
Paragraph (a) of the proposed definition provides for the deduction of the primary tax payable on the taxable income of the relevant year. This deduction corresponds with the deduction at present provided under section 103(3.).
Section 103(3.) was inserted in the Principal Act in 1941 and permitted a private company to exercise an option to deduct the primary tax payable in respect of income of a year of income in lieu of primary tax paid in that year.
This option was granted to private companies on the principle that before the real distributable income of a company might be determined, it was necessary that an allowance be made of the amount by which the company's taxable income was diminished by the tax payable on that taxable income.
Since 1941, most private companies have exercised the option which, for practical purposes, is irrevocable. Accordingly, paragraph (a) of the proposed definition is in conformity with the basis on which the distributable incomes of the majority of private companies are calculated.
Paragraph (b) of the proposed definition specifies other taxes which are deductible in calculating a private company's distributable income of the year ended 30th June, 1948, and subsequent years. These deductions, which are allowable in the year in which the taxes are paid, are as follows:-
Sub-paragraphs-
income tax paid in respect of undistributed profits of the year ended 30th June, 1936 to 30th June, 1947 (both inclusive), i.e., the tax paid under Division 7 of the Act;
income tax paid in respect of undistributed profits of the year ended 30th June, 1935, and prior years. This income tax is assessed under section 21 and Division 2 of Part III. of the previous Act, i.e., the law in force prior to the enactment of the Income Tax Assessment Acts 1936;
State and Territorial income taxes paid in respect of incomes derived during the year ended 30th June, 1941, and prior years;
ex-Australian taxes paid on income which is assessable for Commonwealth income tax purposes also.
The substantial effect of sub-paragraph (i) of paragraph (b) is to limit the deduction of income tax paid by a private company on its undistributed profits to those payments that are made in respect of undistributed profits of the year ended 30th June, 1947, and prior years.
Sub-paragraphs (ii), (iii) and (iv) of paragraph (b) of the proposed definition will continue the deduction of payments of taxes which are allowable deductions under the present definition in ascertaining the distributable income of a private company.
Paragraph (c) is complementary to sub-paragraph (i) of paragraph (b) of the proposed definition. The deduction of social services contribution will be limited to those payments that are made in respect of undistributed profits of the years ended 30th June, 1946 and 30th June, 1947. These are the only years in respect of which social services contribution on undistributed profits of private companies has been applied.
Paragraph (d) of the proposed definition repeats paragraph (b) of the present definition and provides for the deduction of the net loss (other than a loss of a capital nature) incurred by a private company in carrying on its business out of Australia.
Nominee.
The proposed definition of "nominee", which substantially retains the meaning of the existing definition, is to be read in conjunction with the proposed definition of "private company" and with the proposed paragraphs (c) and (d) of sub-section (2.) of section 103.
For the purposes of paragraph (c) of the proposed definition of "private company" a person and his relatives and his nominees and the nominees of those relatives shall be deemed to be one person. The effect of this provision is to regard a person and his relatives and their nominees as one unified body capable of exercising its voting power as one individual in matters affecting the control of the company. In view of the altered definition of "private company" it is unnecessary to provide in the definition of "nominee" that the nominee of any person shall include a relative of that person.
The proposed section 103(2.)(c) provides, in effect, that interests in a private company may be traced through interposed companies, trusts and partnerships to the persons who would ultimately benefit from a distribution of the profits of the company. The ultimate recipient of such a distribution is being regarded as the person for whose benefit the shares of the company are held and the person who holds those shares is being regarded as his nominee. The proposed definition accordingly expands the present definition by including as the nominee of any person one who holds shares for the benefit of that person.
Private Company.
The proposed definition is being substituted for the present definition which has been found to be only partly effective for the purpose for which it was enacted.
The present definition may be divided into two parts, viz.:-
A company which is under the control of not more than seven persons is a private company; and
A company in which the public are substantially interested is not a private company.
The purpose of the first part of the definition was to primarily classify as a private company any company which was controlled or capable of being controlled by seven or less persons. The persons who held the major portion of the voting power or the majority of the shares of the company were regarded as controlling or capable of controlling the company.
This construction of the definition was successfully challenged before the Full High Court in Adelaide Motors Ltd. v. Federal Commissioner of Taxation (1942) 66 C.L.R. 436, and in Federal Commissioner of Taxation v. West Australian Tanners and Fellmongers Ltd. (1945) 70 C.L.R. 623.
These decisions of the Court have clearly established that, where the shareholders of a company are more than seven in number, that company is not a private company unless control of the company is actually exercised by seven or less persons. If this actual control is not demonstrable, the company is not a private company as at present defined.
In most of these cases, it is impracticable for the Commissioner of Taxation to obtain the evidence necessary to prove that control of a company is actually exercised by any person or persons to the exclusion of others who hold voting rights in matters affecting the control of the company. As a consequence, the special provisions of the Act for the assessment of income tax and social services contribution on the undistributed profits of private companies do not apply to many companies which, in character, are essentially private companies. It is accordingly proposed to re-state the definition to place these companies within the compass of Division 7 of the Act while excluding companies in which the public are substantially interested and subsidiaries of public companies.
Under paragraph (a) of the proposed definition, companies the shareholders of which are twenty or less in number are to be classified as private companies. These companies, to a large extent, represent the incorporation of businesses formerly carried on by sole traders or partnerships. The companies are managed and controlled in exactly the same manner and by the same persons as the businesses were managed and controlled prior to incorporation. The businesses of these companies could still be carried on by partnerships (the partners being identical with the shareholders) as under the laws of the States, incorporation is not obligatory, except in immaterial cases, until the persons seeking to carry on business in common exceed twenty in number.
Although the majority of private companies will fall within the compass of paragraph (a), it is necessary to include within the definition those companies the shareholders of which are more than twenty in number but which are controlled by or in the interests of relatively few persons. These companies are included by either paragraph (b) or (c) of the definition.
In paragraph (b), the principle underlying the present definition is preserved. If the major portion of the voting power is vested in seven or less persons, the company is to be classified as a private company. It will be noted that capacity to control a company has been substituted for actual control which, as previously explained, is generally impracticable of proof by the Commissioner of Taxation.
Paragraph (c) extends paragraph (b) and is designed mainly for application in those cases where shares of a company are held by nominees and relatives, e.g. family groups. By the application of the proposed paragraph (d) of sub-section (2.) of section 103, in determining the number of persons who are capable of controlling a company, the shares held by a person and the shares held by his nominees and his relatives and their nominees are regarded as being held by one person. If seventy-five per centum of the voting power is capable of being exercised by seven or less persons, the company is to be classified as a private company.
The definition excludes, however, those companies in which the public are substantially interested and subsidiaries of public companies.
The Prescribed Period.
This definition is being inserted for the more convenient drafting of the amendments that are being made to the sections contained in Division 7 of the Principal Act. The definition is used in the proposed definition of "undistributed amount", in the proposed paragraph (e) of sub-section (2.) of section 103, in the proposed section 104 and in the proposed paragraph (a) of sub-section (5.) of section 105A.
Undistributed Amount.
The proposed definition, while substantially repeating the terms of the present definition, has been expanded to state clearly that dividends paid and dividends deemed to have been paid within the prescribed period shall be taken into account in calculating the undistributed amount. This is implied in the present definition.
Sub-section (2.).
Paragraph (a).
The proposed definition of private company has necessitated a re-statement of this paragraph to specify the conditions under which a company shall be regarded as one in which the public are substantially interested.
The primary condition specified in the proposed paragraph retains one of the conditions of the present paragraph that shares of the company (other than preference shares) shall have been quoted during the relevant income year in the official list of a Stock Exchange.
If the shares are so quoted, the company will not be regarded as a private company unless twenty or less persons are, at the end of the year of income, by means of direct or indirect interests in the shares of the company, capable of exercising, to the extent of at least seventy-five per centum, the voting power in the company.
Paragraph (b).
This paragraph is also ancillary to the definition of private company and is being retained in its present form to specify the conditions under which a company qualifies to be regarded as a subsidiary of a public company.
Paragraphs (c) and (d).
The proposed paragraph (c) is to be read in conjunction with the definition of "nominee". The purpose of the paragraph is to trace the beneficial ownership of shares of a private company through other companies, trustees and partnerships, to ascertain the individuals who would be the ultimate recipients of distributions of profits by the private company. In effect, the legal owner of the shares is to be regarded as the "nominee" of any person who would be the ultimate recipient of any part of the distribution, to the extent of that person's beneficial interest in the shares.
The present paragraphs (c) and (d) are being omitted as other amendments have rendered their retention unnecessary. The principle of the present paragraph (c) has been incorporated in the proposed definition of private company. The principle of the present paragraph (d) has been re-expressed in the definition of private company when read in conjunction with the definition of "nominee" and the proposed paragraphs (c) and (d) of section 103(2.).
Paragraph (e).
The purpose of the proposed paragraph is to enable a private company to retain portion of its distributable income without incurring a liability to undistributed profits tax on the amount so retained. At present, liability to undistributed profits tax arises if, within a stipulated time, the private company does not distribute the whole of its distributable income as dividends to its shareholders.
The amounts (other than dividends from other private companies) which may be retained free from undistributed profits tax are indicated in the following table:-
Distributable Income
Amount of exemption from undistributed profits tax
Effective percentage of exemption
4,000 1,100 27.5
6,000 1,500 25
10,000 2,000 20
30,000 4,000 13.33
40,000 5,000 12.5
The present paragraph (e) of section 103(2.) includes a proviso enabling the Commissioner to extend the time within which a company may make a sufficient distribution of its distributable income in cases where, owing to enemy action in the present war, a company has been unable to make a sufficient distribution within the prescribed period. Due to the conclusion of hostilities in connexion with the war, it is no longer necessary to retain this proviso in the Act, and it has, accordingly, been omitted from the proposed new paragraph (e).
Paragraph (f).
The proposed paragraph repeats the provisions of the present paragraph (f) of sub-section (2.) of section 103. The paragraph applies where the private company derives profits which are partly liable to, and partly exempt from, Commonwealth income tax. In those cases, dividends paid by the company are deemed, for undistributed profits tax purposes, to have been distributed proportionately out of the taxable and exempt profits.
Paragraph (g).
Paragraph (g) of section 103(2.) applies to provide a basis for the assessment of undistributed profits tax in the case of a private company carrying on the business of insurance in Australia.
So far as is material, section 148 of the Principal Act provides that, unless an Australian insurance company otherwise elects, premiums paid by the Australian company to non-resident re-insurers shall not be deductible from the income of the company and recoveries from the re-insurer, in respect of losses on the risks re-insured, shall not be assessable income. The practical effect of the provision is that the profit or loss made by the non-resident re-insurer is merged with the income of the company which pays the premiums.
If a profit is derived by the re-insurer, the company carrying on business in Australia bears the tax on that profit. If a loss is incurred, the Australian company obtains a deduction from its own income of the amount of the loss.
Although any profit on the overseas re-insurance business forms part of the taxable income of the Australian insurance company, it is, in fact, not profit derived by, or available for distribution as dividends by, the Australian company.
The general object of paragraph (g) of section 103(2.) is to place outside the scope of the tax on the undistributed profits of Australian insurance companies, the profits derived by overseas re-insurance companies from re-insurance business effected with them by the Australian company.
Corresponding to the exclusion of these profits from distributable income, any loss arising from overseas re-insurance business is added to the taxable income of the Australian company in ascertaining its distributable income.
As the Australian company is allowed a deduction of the Australian income tax paid or payable in respect of the full profit arising from the risk insured, the amount of any re-imbursement of that tax by the overseas re-insurer is included in the Australian company's distributable income of the year of re-imbursement.
Paragraph (g) of section 103(2.), as amended, will commence to apply in assessments for the current financial year 1948-1949, i.e., in assessments based on income derived during the year ended 30th June, 1948, by Australian private companies engaged in the business of insurance.
Sub-sections (3.), (4.) and (5.).
The proposed sub-sections (3.), (4.) and (5.) are complementary to paragraph (a) of the proposed definition of "distributable income."
The proposed definition of "distributable income" provides for the deduction of the primary tax payable by a private company in respect of its taxable income of the relevant year. This deduction is at present allowed if the private company has exercised the election authorized by section 103(3.) to deduct the primary tax payable in respect of income of a year of income in lieu of the primary tax paid in that year.
It is accordingly necessary to omit sub-section (3.) and also the subsidiary sub-sections (4.), (5.) and (6.) which are dependent for their application on sub-section (3.).
The sub-sections that are being omitted are being replaced by new sub-sections which will apply to those relatively few companies which were incorporated prior to 1st July, 1947, and which did not exercise the option described above.
It is possible that some of these companies may, for a year or two, be adversely affected by the altered basis of deduction of the primary tax in calculating the distributable income. It is, accordingly, proposed by the new sub-section (3.) to permit these companies to continue on the basis that, in calculating the distributable income, the primary tax paid in an income year shall be deducted in lieu of the primary tax payable in respect of that year. It will be essential, however, that each company shall annually exercise an election to that effect.
It is unnecessary to provide a similar right of election to private companies which have been incorporated since 30th June, 1947, or which will be incorporated in the future. In calculating the distributable income from the time of incorporation, these companies will be allowed deductions of the primary taxes payable in respect of the incomes of each year.
The proposed sub-section (4.) provides for written notification to the Commissioner of Taxation of an election under sub-section (3.). Notification of the election in respect of the year ended 30th June, 1948, is required to be given on or before 31st December, 1948. In respect of later years, notification is required to be given on or before the date of lodgment of the return of the company for the relevant year. The Commissioner is empowered to extend the time in which the election may be notified.
The practical effect of the proposed sub-section (5.) will be to regard any company which is eligible to exercise the election under sub-section (3.), and which refrains, in any year, from so doing, as having chosen for that year to deduct the primary tax payable. In that event, the deduction of primary tax payable in respect of each year of income will be continued in all subsequent years.
The proposed section 103 will commence to apply to assessments for the current financial year 1948-1949, i.e., to assessments based on income derived by companies during the year ended 30th June, 1948.
Section 104.-Assessment of Additional Tax.
The proposed section, read in conjunction with the definition of "prescribed period" in sub-section (1.) of section 103, repeats in substance the provisions of the present section.
The undistributed profits tax which a private company is liable to pay under section 104 is the additional amount that would have been payable by the individual shareholders if the undistributed amount has been paid to them as a dividend.
Under the proposed section, the assessment of undistributed profits tax will be governed by the provisions of section 105B. Those provisions are being inserted in the Act to simplify the method of assessment.
The proviso to sub-section (1.) of section 104 has not been repeated as it has ceased to apply. The proviso was enacted in 1943 for application where private companies were unable, owing to enemy action, to make a sufficient distribution of profits within the period specified in the section.
Sub-section (2.) is being omitted from section 104, but the provisions of the sub-section are being substantially repeated in the proposed sub-section (5.) of section 105B.
The section as now proposed will commence to apply to assessments for the current financial year 1948-1949, i.e., to assessments based on income derived by private companies during the year ended 30th June, 1948.
CLAUSE 10.-INTERPOSITION OF COMPANIES, TRUSTEES AND PARTNERSHIPS.
Section 105, which is complementary to section 104, applies where the shareholders of a private company are companies, trustees, or partnerships. In these cases, the undistributed profits tax is assessed on the basis that there would be successive distributions of the private company's income by the interposed companies, trustees and partnerships to the individuals who would ultimately be the recipients of the distribution.
Sub-section (1.) of the proposed section substantially repeats the provisions of sub-section (1.) of the present section. The application of the section will, however, be governed by the provisions of section 105B, which are designed to simplify the method of assessment.
The proposed sub-section (2.) of section 105 contains provisions modifying the assessment of undistributed profits tax where shares of an Australian private company are held by a company which is not a resident of Australia.
In these cases, the Australian company is liable, under section 104 to pay the undistributed profits tax at the company primary rate on the non-resident company's share of the Australian company's undistributed amount.
Under section 105(1.), a further liability for undistributed profits tax is placed on the Australian private company. That further liability is the additional amount that the ultimate individual recipients would have paid if a distribution had been carried through the ex-Australian company to its individual shareholders.
By the paragraph (a) of sub-section (2.), it is proposed to modify the undistributed profits tax as assessed on the basis prescribed by sub-section (1.). If the present provisions of the Act were strictly applied, undistributed profits tax would be calculated on the basis that the non-resident company would be capable of distributing to its shareholders the whole of the amount of the dividend which is assumed to be distributed to it by the Australian company. In reality, however, the maximum amount that could be distributed by the ex-Australian company would be the residue of the Australian dividend after deducting the tax payable on that dividend.
The proposed paragraph (a) provides that the undistributed profits tax shall be calculated on the basis that the assumed distribution shall be the amount remaining after deducting from the distribution which the non-resident company is assumed to receive from the Australian company, the tax payable in respect of that assumed distribution.
The proposed paragraph (b) repeats in substance the provisions of the present sub-section (2.) of section 105. Sub-section (1.) of the section is capable of practical operation where the Commissioner of Taxation is able to ascertain to whom the profits of the Australian company would ultimately flow and the share of those profits which each individual would receive.
Where, however, the Commissioner of Taxation is unable to obtain the data essential for an assessment of undistributed profits tax under section 105(1.), it is necessary in the interests of the protection of the revenue, that the undistributed profits tax be assessed on the arbitrary basis that a distribution would flow to one individual shareholder.
By paragraph (c) of the proposed sub-section (2.) of section 105, a further modification of the undistributed profits tax is being effected. If profits of an Australian private company were actually distributed through a non-resident company to a non-resident individual, the Commissioner of Taxation would be unable to collect tax on that dividend unless the non-resident individual held property in Australia or derived income directly from Australian sources. The inability of the Commissioner to collect tax is due to the fact that both the non-resident individual and his property are beyond the jurisdiction of the Commonwealth.
Paragraph (c) provides, in effect, that the Commissioner should not assess any more in undistributed profits tax in these cases than he would be able to collect upon an actual distribution by both companies. The result will be that the undistributed profits tax will be limited to the tax at the company primary rate on the distribution assumed to be made by the Australian company to the non-resident company.
Section 105 as amended will commence to apply to assessments for the current financial year 1948-49, i.e., to assessments based on income derived by private companies during the year ended 30th June, 1948.
CLAUSE 11.
New Section 105A.-Further Additional Tax.
The proposed section 105A, which is complementary to sections 104 and 105, is designed for application where one person, either directly or indirectly, would be entitled to receive the whole or a part of the undistributed amount of each of two or more private companies.
The undistributed profits tax payable by each private company is assessed without regard to the undistributed amount of any other private company. There is no provision in the present law for the aggregation of any person's interests in the undistributed amounts of two or more private companies.
In these circumstances, the principle of the progressive graduated rate applicable to the total income of an individual is not fully effective. As a result, the aggregate of the undistributed profits tax assessed under sections 104 and 105 in respect of a person having an interest in two or more undistributed amounts is less than the total additional tax that would have been payable by that person if all of the undistributed amounts had been paid by the companies as dividends and the relevant parts received by him as income.
Under paragraph (a) of sub-section (1.) of section 105A, the Commissioner will be authorized to ascertain the additional amount of tax that would be payable by the person concerned if the total of all of his interests in the undistributed amounts of the private companies had been received by him as a consolidated sum of income from property.
Under paragraph (b), the total of the amounts of undistributed profits tax assessed under sections 104 and 105 to each of the companies in respect of that person will be offset against the additional tax ascertained under paragraph (a) and each company will be liable to pay a part of the balance of the additional tax.
Paragraph (c) authorises the Commissioner to assess the amount of additional tax payable by each company.
Under sub-section (2.) of section 105A, the amount payable by each company will be determined proportionately to its part of the consolidated sum of income from property attributed to the shareholder or person concerned.
Section 105A will commence to apply to assessments for the current financial year 1948-49, i.e., to assessments based on income derived by private companies during the year ended 30th June, 1948.
New Section 105B.-Calculation of Tax.
The proposed section 105B will apply for the purposes of assessments of undistributed profits tax under sections 104, 105 and 105A and is designed to simplify the calculation of the amounts of tax payable by private companies.
Under sub-section (2.), it is proposed that each shareholder and each other person by reference to whose income undistributed profits tax is calculated shall be regarded as a taxpayer whose income is derived wholly from property and who is not entitled to any of the concessional rebates of tax in respect of dependants, life assurance premiums, medical expenses, &c., provided by section 160, or the rebates in respect of calls paid to mining companies, &c., allowed by section 160AA.
The practical application of the sub-section will result in the ascertainment of-
an amount equal to the tax at the property rate on the taxable income of the person concerned; and
an amount equal to the tax at the property rate on the total of the taxable income of the person and his interest in any undistributed amount or amounts.
The undistributed profits tax attributable to that person's interest in the undistributed amount will be the excess of (b) over (a).
The elimination of the personal exertion rate and the rebates to which shareholders and others are entitled in their personal assessments will facilitate the assessment of the undistributed profits tax without materially affecting the amount of tax payable by private companies.
Sub-section (3.) will apply where a company has adopted an accounting period ending on a date later than 30th June of the income year for which the accounting period is substituted.
Under the sub-section, any reference to a distribution by the company on the last day of the year of income will mean a reference to a distribution on 30th June of the relevant income year.
For the purposes of the assessment of the further tax under section 105A, where a person is interested in the undistributed amounts of two or more companies, it is necessary to establish a date common to all companies on which the amounts are assumed to be distributed.
The provision will also facilitate the early assessments of undistributed profits tax assessments under sections 104 and 105. If the distribution were assumed to be made on the last day of the accounting period, assessments would be delayed until after the subsequent 30th June when the shareholders' returns would be lodged and assessed.
Sub-section (4.) is complementary to sub-section (3.) and applies where a person interested in an undistributed amount has adopted an accounting period ending on a date earlier than 30th June of the income year for which the accounting period is substituted.
Under the sub-section the interest of that person in an assumed distribution of a private company's undistributed income will be regarded as having been received by him on the last day of the accounting period adopted in lieu of the relevant year of income.
If the distribution were regarded as being received on the last day of the company's year of income, assessments would, as in the cases referred to under sub-section (3.), be delayed until after the end of the subsequent accounting period when the person's return would be lodged and assessed.
Sub-section (5.) will apply where there is more than one class of shareholders of a company, e.g. preference and ordinary shareholders.
For the purpose of determining which shareholders would have been entitled to an undistributed amount, paragraph (a) of the sub-section provides, in effect, that dividends paid after the close of the income year but within the prescribed period shall be regarded as having been paid before the last day of the income year.
Paragraph (a) repeats, in substance, the present provisions of sub-section (2.) of section 104 of the Principal Act. It is necessary for application where dividends on preference shares are paid in the period intervening between the close of the year of income and the end of the prescribed period.
If a provision of this nature were not included in the Division, it would be necessary to assume that the undistributed amount would, at the close of the income year, be first applied in satisfaction of the preference dividends even although the dividends on those shares had actually been paid before the expiration of the prescribed period.
Paragraph (b) is being inserted in the section in order to remedy a defect existing in the present legislation. This defect usually arises in respect of cumulative preference dividends of a private company which are permanently in arrears. In determining who would be entitled to receive the undistributed amount of a private company upon its distribution, the Commissioner of Taxation is, of course, bound to recognise that the holders of preference dividends would be the first class of shareholders entitled to receive the undistributed amount on distribution, to the extent that their preference dividends are in arrears.
Unless the company concerned makes a payment of the arrears of preference dividends, the Commissioner is required, in succeeding years, to similarly assume that the undistributed amounts in subsequent years would also be applied in the payment of arrears of cumulative preference dividends. The result is that the Commissioner may, in each of several years, assume that the preference shareholders are entitled to receive an amount out of the undistributed amounts of the company for those years, although, in fact, a single payment would satisfy the arrears of preference dividends. The effect on the undistributed profits tax of the private company concerned, is that the undistributed profits tax is calculated by reference to the additional tax that would have been paid by shareholders who would not actually receive as dividends out of the undistributed amounts of the company, the amounts which they must be assumed to receive in the terms of the present law.
It is accordingly proposed that dividends which, for the purposes of the undistributed profits tax on private companies, have been regarded as having been paid out of the undistributed amount of a private company, shall in all subsequent years be assumed to have actually been paid.
In determining the persons who are entitled to receive the undistributed amount of a private company on its distribution, therefore, the Commissioner will be authorized to reduce the apparent arrears of cumulative preference dividends by the amount of undistributed profits already attributed towards their satisfaction.
Section 150B will commence to apply to assessments for the current financial year 1948-1949, i.e., to assessments based on income derived by private companies during the year ended 30th June, 1948.
CLAUSE 12.-EXCESS DISTRIBUTIONS OF PREVIOUS YEARS.
Section 106 was enacted for application where a private company had not made a sufficient distribution of its income of a year but had made more than a sufficient distribution of its taxable income of one or more of the four preceding years. The section provided, in effect, that there should be an allowance in respect of the excess distribution of the four preceding years to offset the insufficiency of the distribution of the later year. For this purpose, the excess distribution of the four preceding years was regarded as a dividend paid out of the taxable income of the later year. By this method, the undistributed amount of the later year was reduced by the excess distribution of the four preceding years and the undistributed profits tax was calculated on the reduced undistributed amount.
In its present form, however, the section does not become operative until a company has been incorporated for at least "the period of four years next preceding the year of income" as specified in the section. Accordingly private companies are excluded from the application of the section in the second, third and fourth years of incorporation.
Sub-sections (1.) and (2.) of the proposed section 106 substantially re-enact the provisions of the present section.
Sub-section (3.) is being inserted for application where the period of incorporation of a private company is less than four years prior to the relevant income year. In these cases, any excess distributions of the years preceding the income year will offset any insufficiency of distribution of the income year.
CLAUSE 13.-REBATES.
Section 107 provides that a person shall be entitled to a rebate of the amount by which his income is increased by the inclusion in his assessable income of dividends paid by a private company wholly and exclusively out of any amount on which the company has paid undistributed profits tax. The practical effect of the rebate is that the dividends are free from tax in the hands of the shareholders.
The proposed section 107 re-enacts, in substance, the present provisions for application to dividends paid by private companies out of profits of the year ended 30th June, 1947, and prior years. Provision to this effect is contained in paragraphs (c) and (d) of sub-section (1.).
Under paragraph (c), an amount in respect of which tax has been paid under section 21 or under Division 2 of Part III. of the previous Act, is an amount which was subjected to undistributed profits tax for the year ended 30th June, 1935, or any prior year. The previous Act referred to in the paragraph was the Act in force prior to the enactment of the Income Tax Assessment Act 1936.
Under paragraph (d), the undistributed amount means the amount on which the private company has paid or is liable to pay undistributed profits tax on income of any of the years ended 30th June, 1936 to 30th June, 1947 (inclusive).
Paragraph (e) applies to dividends paid out of income of the year ended 30th June, 1948, and subsequent years. The effect of this paragraph is that the maximum amount that will be capable of distribution subject to the rebate shall be the residue of the undistributed amount of any income year after deducting the undistributed profits tax (including social services contribution) payable on that undistributed amount.
Paragraph (e) conforms to the principle that a fund of profits of a company should first be applied to the payment of tax imposed on the profits-the balance being available for distribution as dividends to the shareholders or for such other purpose as the company may decide.
Sub-section (2.) prohibits the allowance of the rebate in respect of a dividend paid out of an amount specified in paragraph (e) of sub-section (1.) if the shares in respect of which the dividend is paid are not the shares in respect of which the distribution was assumed to have been made for the purposes of assessment of the undistributed profits tax.
Sub-section (2.) is being enacted to counteract the avoidance of tax that occurs where private companies are incorporated and the shares and shareholders so arranged that dividends involving large rebates of tax are distributed out of profits on which relatively low amounts of undistributed profits tax have been paid.
This method of tax avoidance may be illustrated by the example of a taxpayer who receives a large income from investment and who conducts a business yielding an annual net profit of Pd10,000. The business may be transferred to a private company, the shares of which are divided in "A" and "B" class shares. The "A" class shares are issued to, say, ten members of the taxpayer's family and other relatives who receive no income, and the "B" class shares are issued to the taxpayer. The "A" class shares carry a condition that the only dividend payable on those shares shall be payable within six months after the close of the income year. The "B" class shares carry a condition that dividends on those shares shall not be payable until, at least, six months after the close of the income year. For purposes of calculating the undistributed profits tax the Commissioner is obliged to assume, under the Act as it stands at present, that the profits of the company are distributed on the last day of the income year and that the holders of the "A" class shares would be entitled to the dividends if the profits were distributed. The undistributed profits tax is accordingly calculated at the low rates of tax appropriate to the holders of "A" class shares. In reality, however, the dividends are not paid on the "A" class shares but the profits are applied to the payment of a tax free dividend to the holder of the "B" class shares.
Applying current rates of tax, business profits of Pd10,000 derived by an individual would bear no less than Pd6,088 17s. in tax, leaving Pd3,911 3s. for the proprietor of the business. By incorporating the company the tax payable is Pd2,750 primary tax and Pd766 10s. undistributed profits tax-a total of Pd3,516 10s. leaving profits of Pd6,483 available for distribution to the holder of the "B" class shares, of which Pd4,796 would be tax free. If, however, tax were payable on the dividend the additional amount of tax would be Pd2,553 17s. The incorporation of the company and the issue of "A" and "B" class shares enables the holder of the "B" class shares to obtain a rebate of Pd2,553 17s. on a dividend paid out of profits on which undistributed profits tax of Pd766 10s. has been paid.
Sub-section (2.) of the proposed section 107 will overcome devices of this nature and apply to dividends paid out of profits of the year ended 30th June, 1948, and subsequent years.
CLAUSE 14.-CONCESSIONAL REBATES.
Under paragraph (e) of sub-section (2.) of section 160 Pd20 is the maximum amount on which the rebate to which a taxpayer is entitled in respect of funeral and burial or cremation expenses is based. It is proposed that the maximum amount be raised to Pd30.
Paragraph (g) of sub-section (2.) of section 160 provides for the allowance to individual taxpayers of rebates of tax in respect of gifts to specified institutions, authorities and funds. In consonance with the amendment to section 78(1.)(a) of the Principal Act it is proposed to extend the paragraph to include gifts to the United Nations Appeal for Children.
The above amendments will commence to apply in assessments for the current financial year ended 30th June, 1949.
Under the proposed sub-section (6.) of section 160, a rebate of tax shall not be allowed in respect of any social services contribution paid by a taxpayer.
The sub-section is being enacted to remove any ground for a contention that a rebate of tax is allowable in respect of social services contribution as being-
a payment to a fund established by an Act relating to insurance for the personal benefit of the taxpayer or of his spouse or children - section 160(2.)(f)(iii); or
a rate which is annually assessed - section 160(2.)(h)(i).
The sub-section will apply in assessments based on income derived during the year ended 30th June, 1946, and subsequent years.
CLAUSE 15.-REBATE OF TAX PAYABLE BY VISITING INDUSTRIAL EXPERTS.
This section is complementary to section 23(c)(vii) of the Principal Act.
These sections grant special concessions, for a period of two years, in respect of remuneration earned by a non-resident during a visit to Australia during which he acts as a director, manager or other administrative officer of, or is employed as a consultant, technician or operative in, a manufacturing, mercantile or mining business, or a business of primary production.
Section 23(c)(vii) exempts the remuneration from Australian tax if that remuneration is liable to income tax by the country in which the visitor is ordinarily resident.
Section 160ABA allows a rebate of Commonwealth tax in those cases where the remuneration is not liable to income tax in the country in which the visitor is ordinarily resident. The effect of the rebate is that the visitor is required to pay to the Commonwealth the equivalent of the tax he would have paid if he had been taxed by his own country.
Under the proposed section 160ABA, the period of application of the section is being extended from two to four years. In the third and fourth years, however, the visitor will be required to pay Australian taxation irrespective of whether he is liable to or free from taxation by his own country in respect of his Australian remuneration. He will be entitled to a rebate of any excess of the Australian tax over the tax payable to his own country or the tax that would be payable to his own country if that country had levied tax on his Australian remuneration.
The allowance of the concession in the second, third and fourth years of the visit is conditional upon the Treasurer, on the certification of the Secondary Industries Commission, being satisfied, in regard to each of those years, that the retention of the taxpayer's services in Australia has assisted, or will assist, in the development of Australian industry.
The extension of the concession will commence to apply in assessments for the current year ending 30th June, 1949.
CLAUSE 16.-RATE OF TAX FOR REBATE PURPOSES.
Section 160AE contains provisions which govern the interpretation of the terms used in Division 17. That Division provides that individual taxpayers shall be allowed certain rebates of tax, including rebates in respect of gifts to institutions and funds of specified classes in Australia.
It is proposed by clause 16 that the rebate of tax shall apply to gifts to institutions and funds of the specified classes in New Guinea.
The amendment will commence to apply in assessments for the current year ending 30th June, 1949.
CLAUSE 17.-APPLICATION OF TAX CREDIT.
This is a drafting amendment consequent on the altered basis on which deductions in respect of a company's liabilities for taxation are to be allowed in ascertaining its distributable income.
Section 160AR is included in Division 19 of the Principal Act which provides for a tax credit in relation to certain plant and machinery use in connexion with the war. The section makes provision for the application of a credit under the Division towards the liquidation of any tax assessed and owing by the taxpayer, or to any tax assessed concurrently with the ascertainment of the credit under the Division.
In arriving at the distributable income of a company, a deduction will be allowed from the taxable income of the primary tax payable in respect of the income of the year, or, alternatively, of the primary tax paid during the year of income.
This deduction will be allowed in the calculation of "distributable income" prescribed in section 103 in the case of a private company and in section 160C in the case of a company other than a private company.
It is necessary, in these cases, to ensure that the deduction otherwise allowable in respect of the taxes payable or paid shall be reduced by the amount of the credit to which the company becomes entitled under Division 19.
In view of the redrafting of sections 103 and 160C, the references previously included in sub-section (4.) of section 160AR are replaced by references appropriate to the altered provisions of those sections.
Section 160AR, as amended, will commence to apply in assessments for the financial year 1948-49, i.e., in assessments based on income derived by companies for the year ended 30th June, 1948.
PART IIIA.-FURTHER TAX ON UNDISTRIBUTED INCOME OF COMPANY.
CLAUSE 18.-INTERPRETATION.
Section 160A is the interpretative section to Part IIIA. of the Principal Act under which a further tax is imposed on the undistributed income of companies, other than private companies.
Paragraph (b) of section 160A applies to companies carrying on the business of insurance in Australia. The paragraph is being restated in conjunction with the amendments proposed to be made to section 160C of the Principal Act.
So far as is material, section 148 of the Principal Act provides that, unless the Australian insurance company otherwise elects, premiums paid by the Australian company to non-resident re-insurers shall not be deductible from the income of the company paying premiums and that recoveries from the re-insurer in respect of losses on the risks re-insured shall not be assessable income. The practical effect of the provision is that the profit or loss made by the non-resident re-insurer is merged with the income of the company which paid the premiums. If a profit is derived by the re-insurer, the company carrying on business in Australia bears the tax on that profit. If a loss is incurred, the Australian company obtains a deduction from its own income of the amount of the loss.
The general object of section 160A(b) is to place outside the scope of the further tax on the undistributed income of Australian insurance companies, the profits derived by overseas re-insurance companies from re-insurance business effected with them by the Australian companies.
Corresponding to the exclusion of this profit from distributable income, any loss arising from overseas re-insurance business is added to the taxable income of the Australian company in ascertaining its distributable income.
Section 160A, as amended, will commence to apply in assessments for the current financial year 1948-1949, i.e., in assessments based on income derived by Australian insurance companies during the year ended 30th June, 1948.
CLAUSE 19.-UNDISTRIBUTED INCOME OF COMPANY.
The distributable income of a company is calculated by taking the taxable income as a basis and deducting therefrom specified taxation liabilities and any ex-Australian loss (other than a loss of capital) incurred by the company.
Paragraph (a) of sub-section (1.) of the proposed section 160C provides for the deduction of the primary tax payable on the taxable income of the relevant year. This deduction corresponds with the deduction at present provided by sub-section (5.) of section 160C.
Section 160C(5.) was inserted in the Principal Act in 1942 and permitted a company to exercise an option to deduct the primary tax payable in respect of the income of a year of income in lieu of the primary tax paid in that year.
This option was granted to companies on the principle that before the real distributable income of a company might be determined, it was necessary that an allowance be made of the amount by which the company's taxable income was diminished by the tax payable on that taxable income.
Since 1942, most companies have exercised the option which, for practical purposes, is irrevocable. Accordingly, paragraph (a) of sub-section (1.) of section 160C is in conformity with the basis on which the distributable incomes of the majority of companies are calculated.
Paragraph (b) of sub-section (1.) of section 160C specifies other taxes which are deductible in calculating the distributable income of a company. These deductions, which are allowable in the year in which the taxes are paid, are as follows:-
the income tax payable in respect of undistributed profits of some prior year or years;
The deductions in respect of taxes are reduced by any refunds received in the year of income of taxes which have been deducted or are deductible in ascertaining the distributable income of any year.
It is now unnecessary to include war-time (company) tax as a deduction in calculating the distributable income of a company. The War-time (Company) Tax Assessment Act ceased to operate as from the close of the financial year which ended on 30th June, 1947, i.e., the last year of company profits which were subject to the tax was the year ended 30th June, 1946, or the accounting period substituted for that year.
Most companies have already obtained the full deduction of war-time (company) tax, either as an allowance from the income of the year in respect of which the tax was payable or as an allowance from the income of the year in which it was paid. Any company which has not already obtained the full deductions of war-time (company) tax payable from income of the year in respect of which it was payable will be entitled to a deduction of war-time (company) tax paid after 30th June, 1947, by exercising the election under the proposed sub-section (5.) of section 160C.
Paragraphs (c), (d) and (e) of the proposed section 160C substantially repeat the provisions of paragraphs (ii), (iii) and (iv) of the present section. It is unnecessary to repeat the proviso to paragraph (iii) as the circumstances in which that paragraph operated have ceased to apply.
The proposed sub-section (5.), (6.) and (7.) are complementary to the paragraph (a) of sub-section (1.).
Under the proposed basis of ascertainment of the distributable income, a deduction will be allowable of the primary tax payable by a company in respect of its income of the relevant year. This deduction is at present allowed if the company has exercised the election authorized by section 160C(5.) to deduct the primary tax payable in respect of income of a year of income in lieu of the primary tax paid in that year. Correspondingly, on the election of the company, war-time (company) tax payable in respect of income of a year of income was deductible in lieu of war-time (company) tax paid in that year.
It is accordingly necessary to omit the present sub-section (5.) and also the subsidiary sub-sections (6.), (7.) and (8.) which are dependent for their application on sub-section (5.).
The sub-sections that are being omitted are being replaced by new sub-sections which will apply to those relatively few companies which were incorporated prior to 1st July, 1947, and which did not exercise the election described above.
It is possible that some of these companies may, for a year or two, be adversely affected by the altered basis of deduction of primary tax in calculating the distributable income. It is accordingly proposed by the new sub-section (5.) to permit these companies to continue on the basis that, in calculating the distributable income, the primary tax paid in an income year shall be deducted in lieu of the primary tax payable in respect of the income of that year. It will be essential, however, that each company shall annually exercise an election to that effect.
An election under the proposed sub-section (5.) would also qualify the company for deduction of any war-time (company) tax paid after 30th June, 1947.
It is unnecessary to provide a similar right of election to companies which have been incorporated since 30th June, 1947. In calculating the distributable income from the time of incorporation, these companies will be allowed deductions of primary taxes payable in respect of the incomes of each year.
Section 160C, as amended, will commence to apply to assessments for the current financial year i.e., to assessments based on incomes derived by companies during the year ended 30th June, 1948.
CLAUSES 20 AND 21.-RELIEF FROM DOUBLE TAXATION.
Section 160K.-Ascertainment of Australian Tax on Dividend.
Section 160Q.-Application of Credit.
The legislation enacted last year for the purpose of implementing the Agreement for the avoidance of double taxation of incomes concluded with the United Kingdom contained, in section 160K, a detailed formula for arriving at the quantum of Australian tax payable in respect of a dividend by each of the various classes of taxpayers. This formula was necessary in order to ensure that Australia received the one-half Australian tax on dividends derived from sources in Australia by United Kingdom residents who are subject to United Kingdom tax in respect thereof and not engaged in trade or business through a permanent establishment such as a branch or other fixed place of business situated in Australia. In respect of dividends derived from United Kingdom sources by Australian residents, the formula also operates to ensure that Australia will not be required to allow a greater credit than the Australian tax payable in respect of the subject dividends.
In determining the quantum of Australian tax applicable to a dividend, the plan of section 160K is firstly to arrive at the gross tax payable in respect of a dividend. In the case of a company, whether a private or non-private company, the gross ordinary tax was arrived at by reference to the flat rate tax of 6s. in the Pd1 payable by companies prior to the current financial year 1948-1949. The quantum of gross tax attributable to the dividend, including super-tax and undistributed profits tax where appropriate, is then diminished by rebates directly applicable to the dividend and by an appropriate proportion of any rebate which does not relate directly to any particular class of income. This results in the ascertainment of a net amount of Australian tax attributable to the dividend.
By the Income Tax Resolution, it is proposed to reduce by 1s. in the Pd1 the rate of ordinary tax payable by companies on the first Pd5,000 of the taxable income. Thus, a private or non-private company deriving a taxable income in excess of Pd5,000 will be subject to tax at two different rates and not at a flat rate of 6s. in the Pd1 as at present. The first Pd5,000 of income will be taxed at the rate of 5s. in the Pd1 and the excess over Pd5,000 at the rate of 6s. in the Pd1. A dividend included in the taxable income will thus bear tax at an average rate of between 5s. and 6s. in the Pd1.
The present formula set out in section 160K provides for ascertainment of the gross ordinary tax by reference to the rate of 6s. in the Pd1. A reduction of this rate to 5s. in the Pd1 on the first Pd5,000 of the taxable income makes it necessary to amend section 160K. Accordingly, paragraph (a) of Clause 20 proposes an amendment of section 160K to provide for ascertainment of gross ordinary tax by reference to the average rate payable by the taxpayer company.
Paragraphs (b) and (c) are drafting amendments to section 160K and are designed to preserve the method laid down in the formula for reducing the gross tax to its appropriate net figure. The necessity for the amendments proposed by paragraphs (b) and (c) arises from the restatement of certain non-private company provisions proposed by Clause 19. A similar drafting amendment has not been found necessary to preserve the present formula so far as it relates to private companies.
Clause 21 is also a drafting amendment made necessary by the amendments proposed to the private and non-private company provisions. The clause is designed to preserve the existing structure and ensures that the deduction for taxes otherwise allowable to a company in arriving at the undistributed income of the year is reduced by the amount of any credit for United Kingdom tax allowable in that year in terms of the Double Taxation Agreement.
Sections 160K and 160Q as amended will commence to apply in assessments for the financial year 1948-1949, i.e., in assessments based on income derived by companies for the year ended 30th June, 1948.
CLAUSE 22.-DEDUCTIONS BY EMPLOYER FROM SALARY OR WAGES.
The instalment deductions required to be made by an employer from the weekly earnings of an employee are, as far as is possible, related to the amount which the employee will, at the end of the year of income, be liable to pay in respect of his weekly earnings. It is necessary, therefore, that a living-away-from-home allowance received by an employee should be treated for instalment purposes in accordance with the principles applied under Section 51A in the taxing of the allowance.
The amendment of Section 221C proposed by this clause is designed to vary the basis of instalment deductions in respect of living-away-from-home allowances to accord with the amendment of Section 51A proposed by clause 7.
CLAUSE 23.-APPLICATION OF AMENDMENTS.
The amendments proposed by the Bill will commence to apply as indicated in this clause. The application of each amendment has been stated in the explanatory note to each clause.