1985—86 the parliament of the commonwealth of...

1985—86

THE PARLIAMENT OF THE COMMONWEALTHOF AUSTRALIA

HOUSEOF REPRESENTATIVES

TAXATION LAWS AMENDMENTBILL (NO. 3) 1986

BANK ACCOUNTDEBITS TAX AMENDMENTBILL 1986

EXPLANATORYMEMORANDUM

(Circulated by authority of the Treasurer,

the Hon. P.J. Keating, M.P.)

14654/86 Cat. No.86 5045 5

Printed by Authority by the commonwealth Government Printer

GENERALOUTLINE

Taxation Laws Amendment Bill (No. 3) 1986

This Bill will amend —

the Income Tax Assessment Act 1936 —

to allow income tax deductions for cashbids paid for certain off—shorepetroleum exploration permits (proposalannounced on 15 January 1986);

to provide for profit arising from thedeath or destruction of certain livestock to be offset, on a herd basis overup to 10 years, against the cost ofreplacement stock (proposal announced on15 April 1986);

to remove the requirement that, toqualify for an interest withholding tax(IWT) exemption for widely—spread issuesoverseas, relevant borrowings andinterest payments be in a currency otherthan Australian currency;

to withdraw the IWT exemption relatingto borrowings outside Australia by theStates and by Commonwealth and Stateauthorities (proposal announced on1 July 1986), but give those bodiesaccess to an alternative exemptionrelating to interest paid on certainpublic or widely—spread debenture issuesoutside Australia;

to make it clear that loan roll—oversand loan extensions cannot be used tocircumvent the 1983 withdrawal of IWTexemption for off—shore borrowings byso—called ‘Australian entities’(proposal announced on 1 July 1986), northe 1983 withdrawal of IWT exemption forthe Australian Industry DevelopmentCorporation (AIDC) or the withdrawal,proposed by this Bill, of the exemptionfor the States and Commonwealth andState authorities. IWT exemption willbe precluded in respect of interest paidafter the measures become law inrelation to a borrowing resulting fromsuch a roll—over or extension effectedafter the date of introduction of the

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Bill in the case of the IWT exemptionfor the AIDC and after 1 July 1986 forthe other amendments;

• . to require that service fees incurred inthe acquisition of horses by naturalincrease be taken into account in thetrading st,ock valuation of such horses(1986—87 Budget announcement);

• . to provide that the special tradingstock valuation option in respect ofbreeding horses is not available untilthe year in which horses reach 3 yearsof age (1986—87 Budget announcement);

• . to reinstate full tax exemption whichapplied prior to 1 December 1983 for thepay and allowances of members of theDefence Force Reserves and EmergencyReserves in respect of their part timeservice on or after 1 January 1987(1986—87 Budget announcement);

• . to provide the method of calculatingprovisional tax for the 1986—87 incomeyear;

to allow income tax deductions for giftsto the Australian Academy ofTechnological Sciences and theAustralian College of OccupationalMedicine (1986—87 Budget announcement);and

to enable the Secretary to theDepartment of Science to approve a bodyas “an approved research institute” forincome tax purposes;

the Income Tax Assessment Act 1936 and theIncome Tax Regulations to correct a technicaldeficiency in relation to the minimum costprices prescribed in respect of naturalincrease of certain classes of live stock;

the Income Tax (International Agreements) Act1953 to give the force of law in Australia —

to a second protocol amending theexisting agreement and protocol betweenAustralia and the Netherlands. Thesecond protocol was signed in Canberraon 30 June 1986; and

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• to a comprehensive taxation agreementbetween Australia and Austria coveringall forms of income flowing between thetwo countries. The agreement was signedin Vienna on 8 July 1986; and

the Administrative Decisions (JudicialReview) Act 1977 —

• to delete references to a now repealedAct and to the Taxation Boards of Reviewwhich have been abolished.

The Bill will also amend the burden of proofprovisions in the various taxation laws to ensure that, intaxation appeals under those laws to the Federal Court andHigh Court, the burden of proof that applied before, andwhich was unintentionally altered by, the Taxation Boardsof Review (Transfer of Jurisdiction) Act 1986 is restored.

Bank Account Debits Tax P~mendmentBill 1986

This Bill will increase the rates of tax on debitsmade to cheque accounts kept with banks outside theAustralian Capital Territory (1986—87 Budget announcement).

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FINANCIAL IMPACT


The amendments being made to provide income taxdeductibility in respect of cash bids for off—shorepetroleum exploration permits should have no effect onrevenue until the 1988—89 year. The estimated cost torevenue in that year is $lm, increasing to $1.5m in eachsubsequent year.

The amendments relating to profit on death ordestruction of certain live stock are not expected to haveany significant effect on revenue.

The amendments being made to the interestwithholding tax provisions of the income tax law areestimated to yield a net SlOm in the 1986—87 income year.The revenue gain is expected to increase in future years,dependent on the extent to which the States and Governmentauthorities have resort to public or other widely—spreadissues of securities overseas the interest on which isexempt from withholding tax under the amendments proposedto section 128F.

The estimated revenue gain from taking servicefees into account in the trading stock valuation of horsesacquired by natural increase is $7m in 1988—89, withnegligible gains in subsequent years.

The amendments relating to the special valuationoption in respect of breeding horses and to the prescribedminimum cost price of natural increase of certain classesof live stock should have no significant effect on revenue.

The reinstatement of full tax exemption of the payand allowances for part time service by members of theDefence Force Reserves and Emergency Reserves is estimatedto cost $5 million in 1986—87 and $12 million in a fullyear.

The revenue cost of extending the income tax giftprovisions to admit the Australian Academy of TechnologicalSciences and the Australian College of OccupationalMedicine is estimated at nil for 1986—87 and less than$60,000 for subsequent years.

The amendments relating to the burden of proofprovisions, the addition of the Secretary to the Departmentof Science as an authority to approve an approved researchinstitute and the deletion of redundant provisions from theAdministrative Decisions (Judicial Review) Act will have noeffect on revenue.

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Neither the protocol with the Netherlands nor thecomprehensive taxation agreement with Austria is expectedto have any significant effect on revenue.

Bank Account Debits Tax Amendment Bill 1986

The additional revenue from the increase in thegeneral rates of bank account debits tax is estimated at$45m in 1986—87 and $90m in a full year.

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MAIN FEATURES

The main features of the Bills are as follows:


Cash Bidding(Clauses 22 to 24 and 29)

This Bill will give effect to the proposalannounced on 15 January 1986 to allow income tax deductionsfor cash bids paid in respect of certain off—shorepetroleum exploration permits. The system of cash biddingis governed by the Petroleum (Submerged Lands) Act 1967and, broadly, requires the successful bidder to pay to theCommonwealth the amount specified by that bidder in anapplication for the award of the permit.

For income tax purposes, the amount of the cashbid will, in effect, be treated as development expenditurefor the purposes of the petroleum mining provisions(Division bAA) of the Income Tax Assessment Act 1936 —

that is, the bid will be deductible on a straight—linebasis over the lesser of 10 years and the life of theproducing field. Entitlement to the deduction will not beavailable, however, until the income year in which aproduction licence is granted in respect of the relevantpermit area.

In the event that, prior to the granting of aproduction licence, the original cash bidder sells all orpart of the interest acquired under the bid, the parties tothe sale will be entitled to lodge a written notice withthe Commissioner of Taxation stating the amount of theoriginal cash bid that they have agreed is to betransferred to the purchaser of the interest. The effectof the election will be to treat the nominated amount as acash bid incurred by the purchaser, thereby entitling thepurchaser to deductions of that amount over the lesser of10 years or the life of the producing field, commencing inthe income year in which a production licence is granted.The vendor’s entitlement to a deduction in respect of thecash bid will be correspondingly reduced.

The amendments will apply in respect of cash bidspaid on or after 15 January 1986.

Death or compulsory destruction of live stock(Clauses 18 and 19)

This Bill will implement the proposal, announcedin the Economic and Rural Policy Statement of 15 April

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1986, to amend section 36AAA of the Income Tax AssessmentAct 1936 to permit profit from the death or destruction oflive stock, after 30 June 1986 by reason of bovinebrucellosis or tuberculosis, to be offset against the costof replacement live stock on a herd basis over a period ofup to 10 years.

The existing law provides for 2 differentelections in relation to profit arising as a result of thedeath or destruction of live stock — being assets of aprimary production business carried on in Australia — wherethe death or destruction results from a disease (including,but not limited to, brucelbosis and tuberculosis) inrespect of which a Commonwealth, State or Territory lawmakes provision for the compulsory destruction of livestock. The effect of an election under section 36AA of theAssessment Act is to include one—fifth of the profit ondeath or destruction in assessable income of the year ofdeath or destruction and of each of the 4 succeeding yearsof income.

An alternative election is provided by sub—section36AAA(1A) of the Act. This has the general effect ofdeferring the assessment for income tax purposes of theprofit on death or destruction of the live stock until theyear of disposal of replacement stock. This is achieved byexcluding the profit from the taxpayer’s assessable incomeof the year of death or destruction and applying theaverage profit applicable to each animal that died or wasdestroyed to reduce the cost of each replacement animalpurchased during the year of death or destruction or any ofthe 5 succeeding years. Any profit not so applied orotherwise brought to account as at the end of that fiveyear period is included in the assessable income of thefifth succeeding year.

The amendments being made by the Bill will modifythe effect of the alternative election where the deathresulted from bovine brucellosis or tuberculosis or thedestruction was required by a Commonwealth, State orTerritory law relating to the compulsory destruction oflive stock to control or eradicate bovine brucellosis ortuberculosis (e.g., the Brucellosis and TuberculosisEradication Campaign). In such cases, the profit on deathor destruction will continue to be excluded from theassessable income of the year of death or destruction, butwill be applied to reduce the total cost of replacementlive stock purchased during that year or any of the 10succeeding years of income, instead of reducing (on anaverage basis) the cost of each replacement animal over the5 succeeding years. The amendments will not affect thesection 36AA election and the alternative election will be

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retained with its present effect in respect of live stockthat die or are destroyed as a result of a relevant diseaseother than bovine brucelbosis or tuberculosis.

Interest withholding tax (IWT) changes(Clauses 25 to 28 and 33)

The Bill will implement the proposal, announced on1 July 1986, to withdraw the section 128GA IWT exemptionrelating to interest payments on external borrowings by theStates and by Commonwealth and State authorities. Thismeasure is to have effect in relation to interest paid inrespect of borrowings or loans contracted for after 1 July1986 but, subject to safeguards against abuse, will notaffect payments made on or before the date on which theamendment becomes law.

The Bill will also ensure that particularfinancing techniques, namely, loan roll—overs and loanextensions, cannot be used to preserve IWT exemptions undersections 128EA and 128G which, by 1983 amendments of theincome tax law, were intended to be removed in relation toborrowings on or after 20 May 1983. The Bill will thusclose off avenues, revealed by a recent court decision, bywhich IWT exemptions under those sections could otherwisebe effectively preserved indefinitely in relation to loansraised under contractual obligations entered into before20 May 1983. The amendments being proposed by the Bill tov~ithdraw the section 128GA IWT exemption contain similarsafeguarding provisions. Those measures were alsoforeshadowed in relation to sections 128G and 128GA by the1 July 1986 announcement and will have effect in relationto relevant interest payments made, after the measuresbecome law, under loan drawdowns to which the borrower wasnot contractually committed on or before 1 July 1986 andloan roll—overs or extensions effected after that date.For section 128EA, the interest payments affected will bethose made, after the amendment becomes law, under relevantloan drawdowns, roll—overs or extensions effected after thedate of introduction of the Bill.

Whether the whole or a part of a loan had beenrolled—over, and so falls within the scope of this amendinglegislation, would ordinarily be clear from the facts ofthe particular case.

The exercise, after the introduction date, of anoption to renew the whole, or a part, of a loan would giverise to a new loan, the interest payments on which wouldnot be exempt from IWT after the amending Bill receives theRoyal Assent. On the other hand, the mere regularadjustment, during the term of a loan, of the loan interestrate would not necessarily result in the loss of an IWT

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exemption. For example, in the case of section 128G. theuse of an interest rate re—setting facility such asrevolving note issues, some of which occur after 1 July1986, to set a market interest rate would not, of itself,preclude from IWT exemption interest payments made afterthe date on which the Bill receives the Royal Assent,provided that the relevant borrowing was contracted forbefore 20 May 1983, it was for a specified amount and afixed term and the borrower was, before 2 July 1986,committed to that facility by reason of the underlying loancontract or a directly connected interest and/or currencyswap contract.

Although the Bill withdraws the section 128GA IWTexemption referred to earlier, it will provide for accessby the States and by Commonwealth and State authorities tothe IWT exemption contained in section 128F. Thatexemption presently applies to interest paid on certainloans raised overseas by public or widely spread debentureissues by Australian resident companies for use inAustralian businesses.

Amendments proposed by the Bill will treat theStates and authorities as if they were Australian residentcompanies thereby enabling them (subject to theirsatisfying the other requirements of the section) toqualify for the section b28F IWT exemption. Also, thatsection as it is proposed to be amended, will not requirethat overseas borrowings by the States and authorities befor use in an Australian business. If this latterrestriction were to be maintained, the States and manyState and Commonwealth bodies would be deprived of thebenefit of the section 128F exemption because theiractivities would not ordinarily be described as businesses.

These ch3nges will apply in relation to a loanraised by a State or a Commonwealth or State authoritypursuant to a contractual obligation entered into after1 July 1986. It will be possible, therefore, for a Stateor authority to obtain IWT exemption under section 128GA inrespect of interest paid under certain loans raised after1 July 1986, which exemption will be effective in relationto interest payments made before the withdrawal of thesection 128GA exemption has effect (upon enactment of thatamendment), and then to obtain continuation of IWTexemption for later interest payments under the loan undersection 128F.

The Bill also proposes an easing of the conditionson which the section 128F IWT exemption may be obtained, byremoving the requirement that relevant overseas borrowingsand interest payments be in non—Australian currencies.That amendment will apply in relation to interest paymentsmade after the date of enactment of the Bill.

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Service fees incurred in acquiring horses by naturalincrease(Clause 17)

The Bill will give effect to the proposal,announced in the 1986—87 Budget, that service fees incurredafter 19 August 1986 in the acquisition of horses bynatural increase be taken into account in the valuation ofsuch horses for trading stock purposes.

In the case of live stock generally, the incometax law provides that live stock on hand at the end of ayear of income may be valued at cost price, market sellingvalue or some other value that circumstances may justify.Where the cost price of natural increase of a particularclass of live stock has not previously been taken intoaccount by the taxpayer, the taxpayer may select a costprice per head in respect of natural increase of that classand the amount selected must continue to be used by thetaxpayer in subsequent years unless the Commissioner ofTaxation agrees to the adoption of another cost price. Theselected cost price may not be less than the amountprescribed in respect of the particular class of live stock— in the case of horses $5 — and, if the taxpayer does notselect a cost price, the prescribed amount is adopted.Thus, the cost price of a horse acquired by naturalincrease may be taken to be as little as $5.

The amendments being made by the Bill will havethe effect that a horse acquired by natural increase shallbe taken to have a cost price not less than any service fee(whether for physical service or service by artificialinsemination) incurred after 19 August 1986 in acquiringthe horse. Fees paid for the agistment of a mare while atstud, veterinary fees and other costs not forming part ofthe actual service fee will not be included in the costprice of natural increase . Safeguarding provisions will,however, operate to counter arrangements aimed atcircumventing the measure — for example, where costs thatare in reality service fees are inisdescribed in therelevant contract.

Where one service fee is incurred in acquiringmore than one horse — for example, where a single fee ispaid for the service of a number of mares or a serviceresults in a multiple birth — the service fee will beapportioned between the resultant foals on a basis that, inthe opinion of the Commissioner of Taxation, is reasonablein the circumstances. Although fees paid in respect of anunsuccessful service will not be taken into account in thetrading stock valuation of any horse, no apportionment of a

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service fee will be made in those cases where, for the onefee, a mare is serviced more than once and a live foalresults.

Limitation of special live stock valuation option for horsebreeders(Clause 16)

The Bill proposes amendments of the trading stockprovisions of the Income Tax Assessment Act 1936 to providethat the special live stock valuation option for horsebreeders is not available in respect of a horse acquiredafter b9 August 1986 until the year in which the horsereaches the age of 3 years. These amendments will giveeffect to a proposal announced in the 1986—87 Budget.

As with live stock generally, horses may be valuedon the basis of cost price, market selling value or someother value that circumstances may justify. A specialoption, introduced by the Taxation Laws Amendment Act(No. 3) 1985, provides horse breeders with an additionalbasis of valuing breeding stock. Under that option,breeding horses purchased after 20 August b985 may bevalued as follows—

Stallions . cost price reduced by up to 50% perannum on a diminishing value basis;

Mares . cost price reduced by 33 1/3% per annumon a diminishing value basis; or

cost price reduced by a minimum of 3annual amounts that will reduce thevalue of the horse to $1 by the time thehorse is aged 12 years or more.

By specifying that the option is available only inrespect of horses that have attained 3 years of age, theamendments being made by this Bill will broadly ensurethat, as intended, the special option is limited to horsesthat are capable of breeding. The full benefit of thevaluation option will, however, be available in the year ofincome in which an otherwise eligible horse attains the ageof 3 years

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Exemption of pay and allowances for part time service bymembers of the Defence Force Reserves and Emergency Reserves(Clause 15)

The amendment proposed by clause 15 will modifythe existing law which exempts half of the pay andallowances of members of the Defence Force Reserves andEmergency Reserves for part time service as members ofthose Reserves. The amendment will give effect to the1986—87 Budget announcement to reinstate full tax exemptionfor payments made in respect of service on or after1 January 1987. The proposed amendment will also apply toreinstate full tax exemption of any gratuity paid tomembers of the Emergency Reserves by reason of a callingout for continuous service on or after 1 January 1987. Ineach case the exemption had been limited since 1 December1983 to one—half of the relevant payments.

Provisional tax for 1986—87 year(Clause 32)

Provisional tax for the 1986—87 year of income isto be calculated, basically, by applying 1986—87 rates oftax and Medicare levy to 1985—86 taxable incomes asincreased by 11 per cent. Rebates and credits allowed in1985—86 income tax assessments will be taken into accountas appropriate in calculating the 1986—87 provisional tax.

In the case of the rebate of tax available toChristmas Island residents as part of the personal incometax phasing arrangements the amount be taken into accountin the provisional tax calculation will be two—thirds ofthe amount allowed in 1985—86 assessments. Arrangementsfor pro—rating the tax free threshold which may apply wherea person leaves full—time education in the 1986—87 year ofincome or is a resident of Australia for only part of thatyear will not be taken into account.

Gifts(Clause 21)

The Bill will give effect to a 1986—87 Budgetproposal by extending those provisions of the Income TaxAssessment Act 1936 that authorise deductions for gifts ofthe value of $2 or more made to specified organisations toinclude the Australian Academy of Technological Sciencesand the Australian College of Occupational Medicine. Giftsmade to those organisations after 19 August 1986 willqualify for deduction.

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Approved research institutes(Clause 20)

The Bill will add the Secretary to the Departmentof Science to the list of authorities who may approve auniversity, college, institute, association or organisationas an approved research institute for income tax purposes.Certain payments made to an approved research institute mayqualify as allowable income tax deductions. They are—

payments in respect of scientific researchrelated to the payer’s business;

payments in consideration for the approvedresearch institute performing research anddevelopment activities on behalf of the payercompany; and

gifts for the purposes of scientific research.

Prescribed minimum values of natural increase(Clauses 17 and 41)

Under the trading stock provisions of the IncomeTax Assessment Act 1936, a taxpayer who adopts the costprice basis of valuing live stock may select a cost priceper head in respect of natural increase of that livestock. The Income Tax Regulations prescribe minimum costprices per head for sheep, cattle, horses and pigs, withhigher minima applying to natural increase born after30 June 1984. Technically, however, it may be argued thatthose higher minima apply only where a cost price per headhas not previously been taken into account by the taxpayerfor natural increase of the particular class of livestock. If that argument was sustainable, it would mean,for example, that a taxpayer who, prior to 1 July 1984, hadselected 40~per head for natural increase of sheep couldcontinue to value such natural increase occurring after30 June 1984 at that price, instead of at $1 per head — theminimum intended to apply to post June 1984 naturalincrease of sheep. This Bill will amend the trading stockprovisions of the Assessment Act and the Income TaxRegulations to ensure that, as intended, the higherprescribed minimum cost prices apply to all naturalincrease of the specified classes of live stock born after30 June 1984.

Second protocol to the agreement with the Netherlands(Clauses 36, 37 and 39)

The second protocol will amend the existingagreement and protocol with the Netherlands (which wereboth signed on 17 March 1976) so that interest from debt

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claims secured by mortgage of real property or of any otherdirect interest in or over land is treated in the same wayas other interest income under the agreement.

By the terms of the existing agreement, suchincome is treated as income from real property and eachcountry is free to tax it with the country of residence ofthe recipient allowing credit against its tax for the othercountry’s tax. In practice, however, Netherlands tax doesnot generally apply to interest from Australia that istreated under the agreement as income from real propertyand such interest is subject only to Australian withholdingtax of 10 per cent. The amendments made by the secondNetherlands protocol will allow the Netherlands to tax suchinterest from Australia in full, subject to the allowanceof a credit for the Australian withholding tax paid inaccordance with the agreement on the interest.

The second protocol will not affect the treatmentin Australia of interest of this type flowing fromAustralia to the Netherlands. Such interest will continueto be subject to Australian withholding tax at the rate of10 per cent. Outgoing mortgage interest is subjected tofull income tax or corporation tax in the Netherlands and,where derived by an Australian resident, would generally beexempt from tax in Australia at present pursuant toparagraph 23(q) of the Income Tax Assessment Act. Theprotocol will have the effect of treating mortgage interestderived by a resident of Australia from the Netherlands inthe same way as other interest income derived by Australianresidents from the Netherlands — that is, it will besubject to Australian tax, subject to the allowance of acredit against that tax for the Netherlands tax which, inaccordance with the agreement, will be limited to a maximumof 10 per cent of the gross amount.

The protocol will enter into force on the firstday of the second month after the date on which bothcountries exchange notes through the diplomatic channelnotifying each other that the last of such things has beendone as is necessary to give the protocol the force of lawin Australia and in the Netherlands. Upon entering intoforce, the protocol will generally have effect in Australiafor years of income commencing on or after 1 July 1986 and,in the Netherlands, for taxable years or periods beginningon or after 1 January 1986.

However, transitional arrangements will ensurethat the protocol will not affect interest paid undercontractual obligations in existence prior to the date ofsignature on 30 June 1986 until Australian years of incomecommencing on or after 1 July 1988 and Netherlands taxableyears and periods beginning on or after 1 January 1988.

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Those transitional arrangements are subject to twosafeguarding anti—avoidance measures. The first will applyto interest derived in pursuance of a contract in existenceprior to 30 June 1986 if the term of the contract wasextended after that date. The other measure will apply toany prepayment of interest to the extent it is attributableto a period after the end of the transitional period.Interest to which these safeguarding measures apply willfall outside the transitional arrangements and, as aconsequence, the protocol will apply to such interest fromthe earlier dates of effect.

Comprehensive taxation agreement with Austria(Clauses 36, 38 and 39)

The comprehensive taxation agreement with Austriais designed to avoid double taxation of all forms of incomeflowing between Australia and Austria and to prevent fiscalevasion of taxes covered by it. Double taxation is avoidedby allocating taxing rights between the two countries inrelation to certain categories of income and by setting outhow relief from double taxation is to be provided whereincome may be taxed by both countries. The basis providedby the agreement for allocating taxing rights and providingdouble taxation relief is substantially similar to thatadopted in Australia’s other modern comprehensive taxationagreements.

The agreement provides that certain categories ofincome are to be taxed as follows

Income from real property (which includesnatural resources royalties) may be taxed infull by the country in which the property issituated.

Business profits are to be taxed only in thecountry of residence of the recipient unlessthey are derived by a resident of one countrythrough a branch or other “permanentestablishment” in the other country, in whichcase that other country may tax the profits.

Profits from international operations ofships and aircraft will be taxed only in thecountry of residence of the operator.

Dividends, interest and royalties may betaxed in the country of source, but there aregeneral limits on the tax that that countrymay charge on such income flowing toresidents of the other country. These limitsare 15 percent for dividends and 10 per centfor interest and royalties.

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Income from professional services or othersimilar independent activities will generallybe taxed only in the country of residence ofthe recipient unless the income isattributable to activities performed from afixed base of the recipient in the othercountry, in which case the income may betaxed in the other country.

Income from dependent personal services, thatis, employees’ remuneration, will generallybe taxable in the country where the servicesare performed.

However, it shall be taxable only by thecountry of residence of the employee wherethe services are performed during a shortvisit to the other country, and theremuneration is not an expense borne by aresident of, or a permanent establishment in,the country visited and provided it will besubject to tax in the country of residence ofthe recipient.

Directors’ fees may be taxed in the countryof residence of the paying company.

Income derived by public entertainers fromtheir activities as such may be taxed by thecountry in which the activities are performed.

Pensions and annuities will generally betaxed only in the country of residence of therecipient except for certain Governmentservice pensions, which are taxable only inthe other country.

Government officials will generally be taxedonly in their home country.

Students resident in one country who aretemporarily present in the other countrysolely for the purpose of their educationwill be exempt from tax in the countryvisited in respect of payments made fromabroad for the purposes of their maintenanceor education.

Double taxation relief to be allowed by thecountry of residence where it taxes incomewhich, under the agreement, may also be taxedin the other country will be

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— in Australia, by the allowance of acredit against its tax on the incomederived by a resident of Australia fromsources in Austria for the Austrian taxpaid in respect of the income. Thisreflects the position that willgenerally apply in Australia followingthe commencement of the general foreigntax credit system from the beginning ofthe 1987—1988 income year. In the caseof a dividend, the Agreement does notrequire Australia to give a credit forAustrian tax paid in respect of theprofits out of which the dividend ispaid. However, under the foreign taxcredit system an Australian residentcompany which receives dividends from anAustrian company or other foreigncompany will in fact be allowed creditfor foreign withholding taxes ondividends received and, where therecipient Australian company and theAustrian company or other foreigncompany are related, for the“underlying” Austrian or other foreigntax, as the case may be, on that portionof the profits from which the dividendsare paid.

Under the Australian domestic law,certain salary and wages earned by anAustralian resident while performingduties overseas, in Austria orelsewhere, will be exempt fromAustralian income tax if the income isnot exempt from tax in the country inwhich that income is derived.

— in Austria, by the exemption fromAustrian tax of income taxed byAustralia in accordance with theagreement, except as follows:

a credit will generally be givenagainst Austrian tax in respect ofthe limited Australian tax paid,(in accordance with the agreement)on dividends, interest, royaltiesand for Australian tax on certainincome from the alienation of realproperty or on income not otherwiseexpressly mentioned in theagreement to the extent to which

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that tax is attributable to itemsof income derived from sources inAustralia.

income which is exempt from tax inAustria by the operation of theagreement may nevertheless be usedto calculate the Austrian tax onthe remaining income of a residentof Austria.

The agreement also provides for such things as theexchange of information and for consultation between thetaxation authorities of the two countries.

The agreement will not enter into force until thefirst day of the third month after the month in whichAustralia and Austria exchange notes notifying each otherthat the last of the constitutional processes necessary togive the agreement the force of law in the respectivecountries has been completed.

Upon entering into force, the agreement will haveeffect in Australia for withholding tax purposes in respectof income derived by non—residents on or after 1 January inthe calendar year following that in which it enters intoforce. For all other Australian taxes covered by theAgreement, it will first have effect in respect of theincome year beginning on or after 1 July in the calendaryear after that in which it enters into force. It willhave effect in Austria for tax withheld at source onamounts paid on or after 1 January in the calendar yearnext following the year in which the agreement enters intoforce and for other Austrian tax for taxable years andperiods beginning on or after 1 January in the calendaryear next following the year in which the agreement entersinto force.

Burden of proof(Clauses 6, 8, 11, 13, 30 and 43)

The longstanding rule that, in a taxationreference to a Taxation Board of Review (now replaced bythe Taxation Appeals Division of the Administrative AppealsTribunal) or appeal to a Supreme Court, the Federal Courtor the High Court, the burden of proving that an assessmentis excessive or a decision is incorrect rests with thetaxpayer, was unintentionally altered by the enactment ofthe Taxation Boards of Review (Transfer of Jurisdiction)Act 1986. This Bill amends the various taxation lawsaffected to ensure that in taxation appeals to the FederalCourt and the High Court the burden of proving that anassessment is excessive or that a decision is incorrect

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rests with the person who took objection to the assessmentor decision. This is currently the position with taxationreferences to the Administrative Appeals Tribunal and theSupreme Court.

Bank Account Debits Tax Amendment Bill 1986

This Bill will give effect to the 1986—87 Budgetproposal to increase the highest rate of bank accountdebits tax from $1.50 to $2 and the lower rates by up toone—half, for cheque accounts other than those kept withbanks in the Australian Capital Territory (including JervisBay). Debits to ACT cheque accounts will continue to besubject to tax at double the existing general rates. Theproposed increased rates are to apply to debits made on orafter 1 December 1986.

A more detailed explanation of the provisions ofthe Bills is contained in the following notes.

TAXATION LAWS AMENDMENTBILL (NO.3) 1986

PART 1 - PRELIMINARY

Clause 1 : Short title

This clause provides for the amending Act to be

cited as the Taxation Laws Amendment Act (No.3) 1986.

Clause 2 : Commencement

By clause 2, the amending Act is to come intooperation on the day on which it receives the RoyalAssent. But for this clause, the amending Act would, byreason of sub—section 5(1A) of the Acts Interpretation Act1901, come into operation on the twenty—eighth day afterthe date of Assent.

PART II - AMENDMENTOF THE ADMINISTRATIVE

DECISIONS (JUDICIAL REVIEW) ACT 1977

Clause 3 : Principal Act

This clause facilitates reference to theAdministrative Decisions (Judicial Review) Act 1977 which,in Part II, is referred to as “the Principal Act”.

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Clause 4 : Schedule 1

Paragraphs (a) and (b) of sub—clause (1) areconsequential on the enactment of the Taxation Boards ofReview (Transfer of Jurisdiction) Act 1986. That Actrepealed the redundant States Receipts Duties(Administration) Act 1970 and transferred the jurisdictionof the Taxation Boards of Review to the AdministrativeAppeals Tribunal. The Taxation Boards of Review wereabolished. References to that Act and the Taxation Boardsof Review in Schedule 1 of the Principal Act no longerserve any purpose and are to be deleted. The amendmentmade by this clause will have no effect on the operation ofthe Principal Act.

Sub—clause (2) ensures that the provisions of thePrincipal Act being omitted continue to have application toa decision of a Taxation Board of Review made prior to thisamendment.

PART III - AMENDMENTOF THE BANK ACCOUNTDEBITSTAX ADMINISTRATION ACT 1982


This clause facilitates reference to the BankAccount Debits Tax Administration Act 1982 which, in PartIII, is referred to as “the Principal Act”.

Clause 6 : Procedure on review or appeal

This clause will amend the burden of proofprovisions of section 25D of the Principal Act to the sameeffect as the amendment to be made by clause 30 to theIncome Tax Assessment Act 1936 — see notes on that clause.

PART IV - AMENDMENTOF THE ESTATE DUTY

ASSESSMENTACT 1914


This clause facilitates reference to the EstateDuty Assessment Act 1914 which, in Part IV, is referred toas “the Principal Act”.

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PART V - AMENDMENTSOF THE FRINGE BENEFITS

TAX ASSESSMENTACT 1986


This clause facilitates references to the FringeBenefits Tax Assessment Act 1986 which, in Part V, isreferred to as “the Principal Act”.

Clause 10 : Consideration of applications for extension oftime for lodging requests for reference

Clause 10 corrects a minor printing error in theTaxation Boards of Review (Transfer of Jurisdiction) Act1986 by substituting “if” for “of” in paragraph 84(l)(b) ofthe Principal Act. The amendment will have no effect onthe application of section 84 of the Principal Act.


This clause will amend the burden of proofprovisions of section 86A of the Principal Act to the sameeffect as the amendment to be made by clause 30 to theIncome Tax Assessment Act 1936 — see notes on that clause.

PART VI - AMENDMENTOF THE GIFT DUTY

ASSESSMENTACT 1941


This clause facilitates reference to the Gift DutyAssessment Act 1941 which, in Part VI, is referred to as“the Principal Act”.



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PART VII - AMENDMENTSOF THE INCOME TAX

ASSESSMENTACT 1936Clause 14 : Principal Act

This clause facilitates references to the IncomeTax Assessment Act 1936 which, in Part VII, is referred toas “the Principal Act”.

Clause 15 : Exemptions

This clause proposes amendments to section 23 ofthe Principal Act under which certain types of income areexempt from income tax.

Existing paragraphs 23(s) and (sa) operate toexempt one—half of the pay and allowances received bymembers of the Defence Force Reserves and EmergencyReserves in respect of their part time service. Paragraph23(s) operates to exempt from tax one—half of the pay andallowances received (other than those received forcontinuous full time service — see notes below) as a memberof the Australian Naval Reserve, the Australian ArmyReserve or the Australian Air Force Reserve. Paragraph23(sa) exempts one—half of the pay and allowances received(other than those received for continuous full time service— see notes below) as a member of the Naval EmergencyReserve Forces, the Regular Army Emergency Reserve or theAir Force Emergency Force and one-half of any gratuity paidto such a member by reason of a calling out for continuousservice of, or as part of, such a Force.

Pay and allowances in respect of continuous fulltime service, that is, in respect of service that iscontinuous full time service for the purposes of the Actrelating to the relevant Defence Force, is not subject tothe exemption and is fully assessable income of thereservist.

Clause 15 will have the effect of reinstating thefull exemption to tax for pay and allowances for part timeservice of members of the Defence Force Reserves andEmergency Reserves and for any gratuity paid to a member ofan Emergency Reserve by reason of a calling out forcontinuous service.

Paragraph (a) of clause 15 will omit the words“one—half of” from paragraph 23(s) of the Principal Actand, in conjunction with sub—clause 34(1), will providefull exemption for pay and allowances received (other thanthose received for continuous full time service — seeearlier notes) by members of the Australian Naval Reserve,Australian Army Reserve or Australian Air Force Reserve inrespect of service on or after 1 January 1987.

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Paragraph (b) of clause 15 will omit the words“one—half of” (wherever occurring) from paragraph 23(sa) ofthe Principal Act and, in conjunction with sub—clause34(1), will provide full exemption for pay and allowancesreceived (other than those received for continuous fulltime service — see earlier notes) by members of theEmergency Defence Reserves in respect of service on orafter 1 January 1987, and to any gratuity paid to such amember by reason of a calling out on or after 1 January1987, for continuous service of, or as part of, theEmergency Reserve Force of which the taxpayer is a member.

Clause 16 : Value of live stock at end of year of income

This clause will amend section 32 of the PrincipalAct which specifies the bases that may be adopted indetermining the value, for trading stock purposes, of livestock that is on hand at the end of a year of income.Generally, live stock may be valued, at the taxpayer’soption, at either cost price or market selling value,although there is provision for some other value to beadopted if the Commissioner of Taxation is satisfied thatits adoption is justified. A further option is availablein respect of eligible horses (in broad terms, horses thatare capable of being used for breeding purposes and thatare acquired under contracts entered into after 20 August1985). That option permits a taxpayer to elect to valuestallions at cost price reduced by up to 50% per annum andmares at cost price reduced by either 33 1/3% per annum oran amount that will reduce the value of the mare to $1 bythe time she is aged 12 years or more.

New sub—section 32(lA), being inserted in thePrincipal Act by clause 16, provides that a horse is not tobe taken to be an eligible horse for the purposes ofsection 32 if the horse was acquired under a contractentered into after 19 August 1986 and had not attained theage of 3 years by the end of the year of income. Theeffect is that the special option for valuing horses willbe available only in respect of otherwise eligible horsesthat have attained the age of 3 years either during theyear of income or during an earlier year. This will, in ageneral way, ensure that, as intended, the option appliesonly to sires and brood—mares (that is, breeding horses).

Clause 17 : Cost price of natural increase

Section 34 of the Principal Act, which is beingamended by this clause, specifies the basis on which thecost price of natural increase of live stock is to bedetermined for trading stock purposes. Paragraph 34(l)(a)provides that, where a cost price per head of naturalincrease of a particular class of live stock has been

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previously taken into account by the taxpayer, that costprice is to continue to be adopted unless, with the leaveof the Commissioner of Taxation, the taxpayer selectsanother cost price. Where a cost price per head of naturalincrease of a particular class of live stock has notpreviously been taken into account by the taxpayer,paragraph 34(1)(b) permits the taxpayer to select a costprice, subject to the condition that the amount selected benot less than the minimum cost price prescribed in respectof live stock of that class. A taxpayer who does notselect a cost price in accordance with paragraph 34(l)(b)is deemed, by the operation of sub—section 34(2), to haveselected the prescribed minimum cost price.

With application to natural increase occurringafter 30 June 1984, Statutory Rule No.286 of 1984 amendedthe Income Tax Regulations to increase the prescribedminimum cost prices from 40~ to $1 for sheep, from $2 to $5for cattle and horses and from 5O~to $4 for pigs. It wasintended that these higher prescribed minima apply to allnatural increase of the specified classes of live stockborn after 30 June 1984 — that is, not only in situationswhere paragraph 34(1)(b) operates but also in those whereparagraph 34(1)(a) operates. Technically, however, itcould be argued that they apply only in paragraph 34(1)(b)situations, so that, if natural increase of a particularclass of live stock was previously taken into account at acost price lower than the relevant prescribed minimum, thatlower cost price should be maintained for post June 1984natural increase of that class. To overcome that argument,paragraph (a) of clause 17 will substitute a new paragraph34(1)(a). Clause 41 of the Bill proposes a consequentialamendment of the Income Tax Regulations (see notes on thatclause).

As with the existing paragraph, new paragraph34(1)(a) will apply where a cost price per head of naturalincrease of a particular class of live stock has previouslybeen taken into account for trading stock purposes. Insuch cases, the cost price of natural increase will, byreason of sub—paragraph (a)(i), be the greater of the costprice per head at which natural increase of that class waslast taken into account (sub—sub—paragraph (a)(i)(A)) andthe minimum cost price prescribed in respect of live stockof that class (sub—sub—paragraph (a)(i)(B)). Sub—paragraph(a)(ii) permits the taxpayer, with the leave of theCommissioner, to select another cost price provided theamount selected is not less than the relevant minimum costprice. By sub—clause 34(2), this amendment is to apply inrespect of natural increase born after 30 June 1984.

Paragraph (b) of clause 17 proposes the insertionof three new sub—sections in section 34 of the PrincipalAct to require that, for trading stock purposes, the costprice of a horse acquired by natural increase be not lessthan any service fee incurred in acquiring the horse.

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The cost price of a horse acquired by naturalincrease is to be calculated in accordance with newsub—section 34(3) if the conditions specified inparagraphs (a) and (b) of the sub—section are met. Thecondition specified by paragraph (3)(a) is that, after 19August 1986, a taxpayer has incurred a service fee (asdefined in new sub—section (5)), all or a part of which isattributable to the acquisition of a horse by naturalincrease. The service fee or the part of the service feethat is so attributable is referred to in sub—section (3)as the “attributable amount” (see also the notes on newsub—section (4)). Paragraph (3)(b) specifies the furthercondition that the attributable amount be greater than theamount that would otherwise (that is, under sub—section34(1) or (2)) be taken to be the cost price of the horsefor trading stock purposes. Where both these conditionsare met in respect of a horse acquired by natural increase,the cost price of the horse is to be taken to be theattributable amount.

Proposed new sub—section 34(4) complementssub—section (3) and will operate where, under an agreement(as defined in new sub—section (5)), a taxpayer incurs aloss or outgoing (sub—paragraph (a)(i)) and a mare isinseminated (sub—paragraph (a)(ii)), as a result of whichthe taxpayer acquires a horse by natural increase(paragraph (4)(b)). In such cases, the Commissioner ofTaxation may determine to what extent the loss or outgoingshould be treated as a service fee and as attributable tothe acquisition of the horse by natural increase (paragraph(4)(c) and (4)(d)).

New sub—section 34(4), in a case where paragraph(c) applies, covers a number of situations. It will applyas a safeguarding provision where expenditure is incurredin connection with the insemination of a mare and theresultant acquisition of a horse by natural increase butthe expenditure is not strictly a fee for the inseminationof the mare (that is, a service fee as defined). It is notintended that such expenditure include ordinary other costsassociated with the service of the mare (such as agistmentfees while the mare is at stud) or with the birth of thenatural increase (such as veterinary fees). However, insituations where, for example, associated costs wereinflated and offset by a lower than normal service fee,sub—section (4) would, in terms of paragraph (c), beapplied to treat an appropriate part of those costs as aservice fee.

Paragraph 34(4)(c) would also apply in situationswhere one fee is paid for the service of a number of maresor where a multiple birth results from the service of amare. In these cases, the service fee would be apportionedbetween the resultant progeny. Where there is a multiple

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birth by a mare, the service fee would ordinarily beapportioned equally between the progeny. However, equalapportionment may not be appropriate where a single fee ispaid for the service of a number of mares — regard wouldneed to be had to the fee that could be expected to be paidfor individual services of the mares by the sires concerned.

Another possible application of paragraph 34(4)(c)would be where one fee is paid for a number of services ofa particular mare. Depending on the circumstances, it maybe necessary to apportion the fee between services andresultant progeny (for example, where the fee is forservices over a number of stud seasons) or it may be thatthe fee should be attributed to the only resultant progeny(for example, where the fee is for a limited number ofservices in the one stud season). This latter situation issimilar to that provided for more specifically in paragraph34(4)(d) — that is, where a service fee is incurred inrespect of as many services as are necessary tosuccessfully inseminate the mare. The whole of the servicefee would be attributed to the resultant progeny in thesecircumstances, although generally any fees paid in respectof unsuccessful services are not to be included in the costprice of any horse.

While paragraph 34(4)(d) caters specifically forcases where there is one service fee paid irrespective ofthe number of services performed, it also applies, in thosegiven circumstances, in situations such as those notedabove in relation to paragraph 34(4)(c) — for example,where associated costs are inflated and offset by a lowerthan normal service fee.

Sub—section 34(5) contains the followingdefinitions of terms used in the new sub—sections (3) and(4).

“agreement” is defined in a manner common to thedefinition of the term in other provisions ofthe Principal Act and covers the variousforms of agreement, arrangement orunderstanding, whether formal or informal, orexpress or implied, and whether or notenforceable, or intended to be enforceable,by legal proceedings. The term is relevantto the application of sub—section 34(4).

“insemination” is defined to make it clear thatthe term as used in sub—section (4) and inthe following definition of “service fee”includes not only insemination by physicalmeans but also insemination by artificialmeans.

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“service fee” is defined to mean a fee for theinsemination of a female horse. In terms ofsub—section (3), subject to the operation ofsub—section (4), all or part of a service feeattributable to the acquisition of a horse bynatural increase is taken to be the costprice of that horse for trading stockpurposes where it exceeds the amount thatwould otherwise be the horse’s trading stockcost price.

Clause 18 : Alternative election in case of forceddisposal, death or compulsory destruction oflive stock

Clause 18 will amend section 36AAA of thePrincipal Act so that, broadly, any profit arising inrespect of live stock that are assets of a primaryproduction business carried on in Australia and that die orare destroyed because of bovine brucellosis or tuberculosiscan be offset against the cost of replacement stock on aherd basis over a period of up to 10 years after the yearof death or destruction. Section 36AAA presently provides(sub—section (lA)) for such profit to be offset against thecost of replacement stock on a per head basis over up to 5years after the year of death or destruction.

A new sub—section (2A) is to be inserted insection 36AAA to deal specifically with profit on the deathor destruction of live stock because of bovine brucellosisor tuberculosis. Existing sub—section 36AAA(lA) willcontinue to apply where the death or destruction resultsfrom another disease in respect of which a Commonwealth,State or Territory law makes provision for the compulsorydestruction of live stock. The election provided for ineach sub—section will continue to be an alternative to theelection provided for in section 36AA of the Principal Act,under which one—fifth of the profit on death or destructionis included in assessable income of the year in which thelive stock die or are destroyed and of each of the 4succeeding years of income.

New sub—section 36AAA(2A), to be inserted in thePrincipal Act by paragraph (a) of clause 18, specifies, inparagraphs (a) and (b), the conditions for application ofthe new basis of offsetting profits and, in paragraphs (c)to (h), the consequences where those conditions aresatisfied.

By paragraph (2A)(a), the new basis will applyonly where live stock that are assets of a business ofprimary production carried on in Australia die as a resultof bovine brucellosis or bovine tuberculosis (sub—paragraph

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(a)(i)) or are destroyed in pursuance of a Commonwealth,State or Territory law that provides for the compulsorydestruction of live stock for the purpose of controlling oreradicating either of those diseases (sub—paragraph(a)(ii)). Another condition, contained in paragraph(2A)(b), is that an election under existing sub—section36AAA(lA) be made in relation to the death or destructionof the live stock referred to in paragraph (2A)(a). Anelection under that sub—section may be made where thefollowing conditions are met —

live stock die or are destroyed as a resultof any disease in respect of which aCommonwealth, State or Territory law makesprovision for the compulsory destruction oflive stock;

the proceeds of the death of the live stock(that is, any resultant compensation receivedfrom the Commonwealth, a State, a Territoryor an authority thereof, and any amountreceived for the carcasses of the dead livestock) would otherwise be included inassessable income;

there is a profit on the death of the livestock — that is, the proceeds of the death ofthe live stock exceed their cost or tradingstock value;

no election has been made under section 36AAof the Principal Act (see earlier notes) inrelation to the profit; and

the Commissioner of Taxation is satisfiedthat the proceeds will be applied towardsacquiring replacement stock.

Paragraph (2A)(c) will ensure that sub—section36AAA(2) (which specifies the consequences of electionsmade under sub—sections 36AAA(1) and (1A)) does not applywhere the conditions specified in paragraphs (2A)(a) and(b) are satisfied. Paragraph (2A)(d) requires the whole ofthe proceeds of the death of the live stock concerned to beincluded in the assessable income of the year to which theelection relates — that is, the year in which theparticular live stock died or were destroyed. Theparagraph further provides that no part of the proceeds isto be included in the assessable income of any other yearof income. By the operation of paragraph (2A)(e), theassessable income of the year to which the election relatesis then reduced by the amount of the profit on the death ofthe live stock concerned.

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Paragraph (2A)(f) will operate to apply the profiton the death of the live stock to reduce, for the purposesof the Principal Act, the cost of replacement live stockpurchased during the year in which the original live stockdied or were destroyed or any of the 10 years succeedingthat year. The amount by which the actual cost of ananimal included in the replacement live stock is reduced isthe lesser of —

the amount calculated by dividing the amountof profit not previously applied by theoperation of paragraph (2A)(f) or included inassessable income by the operation ofparagraph (2A)(g) (see the notes in thefollowing paragraph) at the time of purchaseof the replacement live stock by the numberof the replacement live stock purchased atthat time (sub—paragraph (i)); or

the actual cost price of the animal(sub—paragraph (ii)).

Thus, for example, if 10 replacement animals were purchasedat a cost of $500 per head at a time within the specifiedperiod when $10,000 of profit on the death of the originalanimals had not previously been applied against the cost ofreplacement animals, the cost of each replacement animalwould be taken to be nil. If, however, the amount ofunapplied profit was $1,000, the cost of each replacementanimal would be taken to be $400 — that is, $500 lessone—tenth of $1000.

Where the live stock that die or are destroyed arereplaced by natural increase, paragraph (2A)(g) willinclude in assessable income the amount that is specifiedin an election under proposed new sub—section 36AAA(4A)(see the notes in the following paragraph). If, at the endof the last of the 10 years succeeding the year of death ordestruction, there is any profit that has not been appliedagainst the cost of replacement live stock in accordancewith paragraph (2A)(f) or included in assessable income inaccordance with paragraph (2A)(g), paragraph (2A)(h) willoperate to include the balance in the assessable income ofthat year.

New sub—section 36AAA(4A), being inserted byparagraph (b) of clause 18, is similar in effect toexisting sub—section (4), which will continue to apply inrespect of elections that are made under section 36AAAother than those relating to live stock that die or aredestroyed as a result of bovine brucellosis or bovinetuberculosis. Sub—section 36AAA(4A) will apply where livestock that die or are destroyed as a result of bovinebrucellosis or bovine tuberculosis (paragraph (a)), and in

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respect of which an election has been made under existingsub—section 36AAA(1A) (paragraph (b)), are replaced bynatural increase during the year of death or destruction orany of the 10 succeeding years (paragraph (c)). In thesecircumstances, paragraph (4A)(d) will ensure thatsub—section 36AAA(4) does not apply and paragraph (4A)(e)will permit an election that a specified amount be includedin the assessable income of the year of income in which thereplacement by natural increase occurs. The amount sospecified will, by virtue of paragraph 36AAA(16)(b), reducethe amount of the profit on the death of the original livestock that may be applied against the cost of purchasedreplacement live stock.

Paragraphs (c), (d) and (e) of clause 18 willamend existing sub—sections 36AAA(12) and (13) of thePrincipal Act, which provide for the consequences of anelection made under sub—section (1) or (lÀ) by a taxpayeror by a trustee of, or a beneficiary in, a trust estate tocarry over to a partnership in which the taxpayer or thetrustee is a partner, where the primary production businessof the taxpayer or trustee is taken over by the partnership.

Paragraph (c) of clause 18 will substitute a newparagraph (b) in sub—section (12) to reflect the fact thatlive stock that die or are destroyed as a result of bovinebrucellosis or bovine tuberculosis and in respect of whichan election has been made under sub—section 36AAA(lA) may,in terms of proposed new sub—section 36AAA(2A) (beinginserted by paragraph (a) of the clause), be replaced overa period of 10 years (sub—paragraph (b)(ii)). The existingapplication of sub—section (12) in a case where sub—section(2) applies is retained by sub—paragraph (b)(i).

The amendment of paragraph 36AAA(13)(a) byparagraph (d) of clause 18 — to insert a reference toparagraphs (d) and (e) of new sub—section (2A) — willensure that any proceeds previously included in theassessable income of the taxpayer or the trust estate bythe operation of paragraph (2A)(d) are not included in theassessable income of the partnership by virtue ofsub—section (13). Similarly, the amendment will ensurethat the partnership’s assessable income is not reduced bythe amount by which the taxpayer’s or the trust estate’sassessable income was reduced in accordance with paragraph(2A) (e)

The effect of paragraph 36AAA(l3)(d) is to limitthe operation of section 36AAA in relation to thepartnership to the same period as it would have operatedfor if the business had not been taken over by thepartnership. New paragraph (13)(da), being inserted byparagraph (e) of clause 18, is to the same effect asparagraph (d) but will apply only in relation to elections

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made under sub—section 36AAA(1A) in respect of live stockthat died or were destroyed as a result of bovinebrucellosis or bovine tuberculosis and reflects the factthat such live stock may be replaced over a period of10 years.

Sub—section 36AAA(14) of the Principal Actspecifies the conditions with which elections made undersection 36AAA must comply. The amendment of paragraph(14)(b) proposed by paragraph (f) of clause 18 will requirethat an election under new sub—section 36AAA(4A) be made onor before the date of lodgment of the return of the year ofincome to which the election relates or within such furthertime as the Commissioner of Taxation allows — the samerequirement as for an election under existing sub—section36AAA(4). In terms of sub—section (14), the election mustalso be made in writing and, where made by a partnership,must be signed by or on behalf of each of the partners.

Sub—section 36AAA(16) of the Principal Actprovides the basis of calculation of the reduced profit inrelation to the forced disposal or in relation to the deathor destruction of live stock. For existing purposes, thereduced profit is calculated as at a particular ~i and,broadly, means so much of the profit on disposal or ondeath or destruction as has not been applied on or beforethat day to reduce the cost of replacement live stock andhas not been included in the assessable income of aprevious year in consequence of an election undersub—section 36AAA(4) where the taxpayer replaces live stockby breeding.

New paragraph 36AAA(2A)(f), which specifies theamount of the reduced profit that is to be applied againstthe cost of live stock purchased to replace live stock thatdied or were destroyed as a result of bovine brucellosis orbovine tuberculosis and in respect of which an electionunder sub—section 36AAA(1A) has been made, requires thatthe reduced profit be known at a particular time and theamendments of sub—section 36AAA(16) proposed by paragraphs(g), (h) and (k) of clause 18 reflect this technicaldifference between the new provision and the existingprovisions. The amendment of paragraph 36AAA(l6)(a)proposed by paragraph (j) will ensure that amountspreviously applied against the cost of replacement livestock by virtue of new paragraph 36AAA(2A)(f) are takeninto account in calculating the reduced profit at aparticular time.

In terms of sub—clause 34(3) of the Bill, theamendments of section 36AAA of the Principal Act being madeby clause 18 are to apply in relation to the death ordestruction of live stock on or after 1 July 1986.

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Clause 19 : Divisible amounts of assessable income

This clause proposes technical amendments ofsection 50E, one of the “current year loss” provisions ofSubdivision B of Division 2A of Part III of the PrincipalAct. The amendments are consequential upon the proposedamendments of section 36AAA of the Principal Act (by clause18 of the Bill) to permit profit arising from the death ordestruction of live stock as a result of bovine brucellosisor bovine tuberculosis to be offset on a herd basis over aperiod of up to 10 years.

In broad terms, the current year loss provisionsdivide an income year into “relevant periods” that areseparated by a “disqualifying event” — for example, on theoccurrence of a 50% or greater change in shareholder’sdividend, capital or voting rights. A net loss incurred inone relevant period is not to be offset against net incomederived during another relevant period of the same yearunless the company satisfies a “continuing ownership” testor the alternative “same business” test.

For the purposes of these provisions, section 50Especifies amounts that are “divisible amounts” ofassessable income in relation to a company in relation to ayear of income. The section also specifies the basis ofapportionment of divisible amounts between relevant periodsfor the purposes of determining the net income or loss forthose periods.

Paragraph 50E(l)(e) specifies that amountsincluded in a taxpayer company’s assessable income byvirtue of paragraph 36AAA(2)(c) or paragraph 36AAA(2)(d)are divisible amounts. Broadly, paragraph 36AAA(2)(c)operates to include an amount in a taxpayer’s assessableincome where live stock in respect of which an election hasbeen made under section 36AAA are replaced by naturalincrease and the taxpayer elects to include a specifiedamount in his or her assessable income. Paragraph36AAA(2)(d) operates to include the amount of unappliedprofits at the end of a specified period in the taxpayer’sassessable income of the last year of that period incircumstances where profits arising from the forceddisposal or death or destruction of live stock in respectof which an election under section 36AAA has been made havenot been fully applied against the cost of replacement livestock or otherwise included in the taxpayer’s assessableincome. By paragraph 50E(2)(f), amounts included in ataxpayer company’s assessable income by reason of paragraph36AAA(2)(d) or (e) are apportioned between relevant periodson a time basis.

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New paragraphs 36AAA(2A)(g) and (h) (see notes onclause 18) apply where the section 36AAA election relatesonly to live stock that die or are destroyed as a result ofbovine brucellosis or bovine tuberculosis and are to thesame effect as paragraphs 36AAA(2)(c) and (d)respectively. The amendments of section 50E proposed byclause 19 will ensure that amounts included in a taxpayercompany’s assessable income by reason of paragraph36AAA(2A)(g) or (h) are treated, for the purposes of thecurrent year loss provisions, on the same basis as amountsincluded in a taxpayer’s assessable income by reason ofparagraph 36AAA(2)(c) or (d). Accordingly, such amountswill be divisible amounts and will be apportioned betweenrelevant periods on a time basis.

As with the amendments proposed by clause 18, theamendments of section 50E being made by this clause are, interms of sub—clause 34(3) of the Bill, to apply in relationto the death or destruction of live stock on or after1 July 1986.

Clause 20 : Expenditure on scientific research

This clause will amend sub—section 73A(6) of the

Principal Act to include the Secretary to the Department ofScience as an additional authority to approve a body as “anapproved research institute” for income tax purposes.

The concept of an approved research institute isrelevant for a number of purposes of the Principal Act.Section 73A of the Act authorises an income tax deductionfor payments made to an approved research institute inrespect of scientific research related to the taxpayer’sbusiness to the extent that those payments are nototherwise deductible. Section 73B of the Act authorises adeduction at the rate of 150 per cent for expenditureincurred by an eligible company during the period 1 July1985 to 30 June 1991 in having an approved researchinstitute perform research and development activities onbehalf of the company during that period. By sub-paragraph78(1)(a)(x) of the Act, a deduction is allowable in respectof a gift of the value of $2 or more made to an approvedresearch institute, where the gift is for the purposes ofscientific research.

In terms of the definition in sub—section 73A(6)of the Principal Act, in order to qualify as an approvedresearch institute, a body (other than the CommonwealthScientific and Industrial Research Organization) must be auniversity, college, institute, association or organisationapproved in writing by the CSIRO, by the Secretary to theDepartment of Health or by the Secretary to the Departmentof Employment and Industrial Relations, as an institution,

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association or organisation for undertaking scientificresearch (as defined in section 73A) which is or may proveto be of value to Australia. The amendment being made bythis clause will enable the Secretary to the Department ofScience to also so approve an approved research institute.The amendment will apply from the date of Royal Assent ofthis Bill.

Clause 21 : Gifts, pensions, &c.

This clause will amend the provisions of thePrincipal Act that authorise income tax deductions forgifts of the value of $2 and upwards of money — or ofcertain property other than money — made to the funds,authorities and institutions that are listed in theprovisions. The amendment proposed by clause 21 willinsert new sub—paragraphs 78(1)(a)(lxxxvi) and (lxxxvii) inthe Principal Act. Sub-paragraph (lxxxvi) will authorisedeductions for gifts to the Australian Academy ofTechnological Sciences, while sub—paragraph (lxxxvii) willauthorise deductions for gifts to the Australian College ofOccupational Medicine.

By the operation of sub—clause 34(4) of the Bill,gifts made to the Academy or to the College after 19 August1986 will qualify for deduction.

Clause 22 : Allowable capital expenditure

The amendment — of section 124AA of the PrincipalAct — proposed by this clause is complementary to thosebeing made by clauses 23 and 24 to provide for income taxdeductions to be allowed in respect of cash bids foroff—shore petroleum exploration permits.

Section 124AA specifically includes certain kindsof expenditure as allowable capital expenditure for thepurposes of Division 1OAA (petroleum mining). The Divisionauthorises the allowance of deductions in respect ofallowable capital expenditure incurred by a taxpayer incarrying on petroleum mining operations in Australia.Where that expenditure has been incurred after 19 July1982, the expenditure is deductible on a straight—linebasis over 10 years or the life of the producing field,whichever is the less.

Clause 22 will insert new paragraph 124AA(2)(ba),to bring within the range of allowable capital expenditure,expenditure of a capital nature that the taxpayeris takento have incurred by the operation of proposed newsub—section 124ABA(1) (see notes on clause 24). The broadeffect of that sub—section is to deem the taxpayer to have

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incurred capital expenditure of an amount equal to the“eligible cash bidding amount”, as determined underproposed new sub—section 124ABA(4) being inserted byclause 24).

In general terms, if the taxpayer is the originalsuccessful bidder, the eligible cash bidding amount will bethe amount of the cash bid paid by the taxpayer under theprovisions of the Petroleum (Submerged Lands) Act 1967 forthe granting of the exploration permit, reduced by anyamounts notified to the Commissioner of Taxation in theevent of disposal by the taxpayer of interests in thepermit. Where the taxpayer is a successor to the originalbidder, the amount will be the amount specified in a noticelodged with the Commissioner under proposed new sub—section124ABA(2) in relation to the acquisition by the taxpayer ofinterests in the permit. The amount of the bid or thespecified amount will only be included as allowable capitalexpenditure of the taxpayer in the year of income in whicha production licence is granted in respect of the permitarea.

Clause 23 : Purchase of prospecting or mining rights orinformation

This clause will amend section 124AB of thePrincipal Act consequent upon the amendments proposed byclause 24 which will provide income tax deductibility inrespect of cash bidding payments.

Section 124AB effectively enables the owner ofpetroleum mining rights or information to transfer to apurchaser of those rights or that information the benefitof deductions for undeducted capital expenditure incurredin relation to the petroleum field that is the subject ofthe transferred rights or information. Written notice ofthe transferred amount must be given jointly to theCommissioner of Taxation by the parties. As a result ofthe transfer, the purchaser becomes entitled, to the extentof the transferred amount notified to the Commissioner (butnot exceeding the vendor’s undeducted capital expenditure),to deductions under Division 1OAA of the Principal Act.There is a corresponding reduction in the relevant capitalexpenditure available for deduction to the vendor.

Sub—section 124AB(1) provides for the giving ofnotice to the Commissioner of the amount to be transferredto the purchaser. The amount may be the whole or a part ofthe expenditure incurred by the purchaser in acquiring therights or information. By the amendment of sub—section (1)proposed by this clause, the amount of the expenditure thatmay be specified in the notice will be further limited tothe expenditure so incurred reduced by any amount of a cashbid that has been specified, in relation to the acquisition

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by the purchaser of the rights or information, i.n a noticeunder proposed new sub—section 124ABA(2) — see notes onclause 24. Broadly, the effect of a sub—section 124ABA(2)notice is to transfer to the purchaser the whole or a partof an amount paid by the vendor by way of a cash bid inrespect of the acquisition of a permit area. The effect ofthe proposed amendment is to ensure that a purchaser cannotreceive a deduction, by the operation of section 124AB andsection 124ABA, for an amount in excess of the amountactually paid to acquire the right.

Clause 24 : Inclusion of amounts in allowable capitalexpenditure in respect of cash biddingpayments

Clause 24 will insert new section 124ABA inDivision 1OAA of Part III of the Principal Act. Section124ABA provides for the determination of the amount to beincluded as allowable capital expenditure of the taxpayerfor the purposes of the Division (see notes on clause 22).

Sub—section 124ABA(1) specifies the circumstancesin which a person’s expenditure in relation to a cashbidding permit area will be within the scope of DivisionbAA. Where these circumstances exist, the expenditurewill qualify as allowable capital expenditure in terms ofproposed new paragraph 124AA(2)(ba) — see notes onclause 22 — and as “allowable (post 19 July 1982) capitalexpenditure” for the purposes of section 124ADG of thePrincipal Act, and thus be able to be written off on astraight—line basis over the lesser of 10 years or the lifeof the producing field.

By sub—section 124ABA(l) expenditure of a capitalnature (for paragraph 124AA(2)(ba) purposes) is taken tohave been incurred where, immediately before the grant of aproduction licence (defined in new sub—section 124ABA(6) tomean a petroleum production licence or a first productionlicence under Part III of the Petroleum (Submerged Lands)Act 1967), a person who has a qualifying interest inrelation to an exploration permit also has an entitlementto an eligible cash bidding amount in relation to thepermit.

In general, a person will be taken to have aqualifying interest in relation to an exploration permit ifthe person is the holder of either the permit or aretention lease that is related to the permit (see notes onproposed new paragraph 124ABA(5)(d)). The terms“exploration permit” and “retention lease” are defined inproposed new sub—section 124ABA(6) (see notes on thatsub—section) to have the meanings they have in thePetroleum (Submerged Lands) Act 1967. In terms of proposed

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new sub—section 124ABA(4), a person will have anentitlement to an eligible cash bidding amount where,broadly,the person made the original successful cash bidfor the exploration permit or has purchased an interest inan exploration permit from a person with such anentitlement and the parties have lodged a notice with theCommissioner of Taxation under sub—section 124ABA(2).

Sub—section 124ABA(l) refers to the grant of “aproduction licence or a first production licence, as thecase may be” because, at the time a production licence isgranted, it may not be known whether that licence will bethe only one granted in the permit area or the first of anumber of such licences.

New sub—section 124ABA(2) will operate where aperson (“the vendor”) who has an entitlement to an eligiblecash bidding amount in relation to an exploration permitsells to another person (“the purchaser”) a qualifyinginterest in relation to that permit. In thosecircumstances, the vendor and purchaser may give notice tothe Commissioner of Taxation that they have agreed to thetransfer to the purchaser of so much of the vendor’sentitlement to the eligible cash bidding amount as isspecified in the notice. By transferring to the purchaseran entitlement to an eligible cash bidding amount, theeffect of such a notice will be, broadly, to entitle thepurchaser, upon the granting of a production licence, to anallowable capital expenditure amount equal to the specifiedsum and to correspondingly reduce the vendor’s entitlementto relevant deductions by that amount.

The requirements for a valid notice undersub—section 124ABA(2) are set out in sub—section124ABA(3). By paragraph (a), the notice is to be inwriting signed by or on behalf of both the vendor and thepurchaser.

Paragraph 124ABA(3)(b) will operate to limit theamount of the entitlement being transferred that can bespecified in a sub—section 124ABA(2) notice. By thatparagraph, the specified amount cannot exceed theexpenditure incurred by the purchaser in acquiring thequalifying interest, reduced by any amount of thatexpenditure specified in a notice under existing section124AB in relation to the acquisition (see the notes onclause 23). Paragraph (3)(b) thus ensures that theentitlement (or sum of the entitlements) to an eligiblecash bidding amount — determined in accordance withsub—section 124ABA(4) — cannot exceed the amount of theoriginal cash bid (the “qualifying cash bidding payment” asdefined in sub—section (6)).

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In terms of proposed paragraph 124ABA(3)(c), anotice under sub—section (2), as with a notice underexisting section 124AB, is to be lodged with theCommissioner of Taxation not later than 2 months after theend of the year of income of the purchaser in which theacquisition occurred. The Commissioner is, however,authorised to extend the time for lodgment.

A person’s entitlement to an eligible cash biddingamount will be determined in accordance with sub—section124ABA(4). The amount of that entitlement will affect theamount that may be specified in a sub—section 124ABA(2)notice. By virtue of paragraph (a), in order to have anentitlement to an eligible cash bidding amount, a personmust have a qualifying interest or interests (in terms ofnew paragraph 124ABA(5)(d)) in relation to a “cash biddingexploration permit” (as defined in new sub—section124ABA(6)). The amount of the entitlement is calculatedunder paragraph (b) and, in short, requires the person tohave paid the cash bid and to have been granted theexploration permit.

If the person was the original grantee, theentitlement is the excess of the sum of the cash bid paid(sub—paragraph (b))(i)) and all eligible cash biddingamounts (if any) specified in notices under sub—section124ABA(2) — see notes on that sub—section — that relate tothe acquisition ~y the person of qualifying interests inrelation to the exploration permit (sub—paragraph (b)(ii))over the sum of eligible cash bidding amounts specified insub—section 124ABA(2) notices that relate to theacquisition from the person of qualifying interests inrelation to the exploration permit.

Thus, for example, if A paid $bom as a cash bid inrelation to an exploration permit, and did not dispose ofor acquire any other qualifying interests in relation tothat permit, A would have an entitlc~ent to an eligiblecash bidding amount of $bom — i.e. the “qualifying cashbidding payment” (as defined in new sub—section 124ABA(6)).

In the event that A sold a qualifying interest inthe permit to B for $5m (and a sub—section 124ABA(2)notice specified that amount) and subsequently re—acquiredpart of that interest for $2m (and a sub—section (2) noticespecified that amount), A’s entitlement to an eligible cashbidding amount would be $7m ($bOm - $5m + $2m).

In determining the eligible cash bidding amountentitlement of a person other than the original grantee ofthe exploration permit, sub—section (4) provides that theamount is the excess of the sum of all eligible cashbidding amounts (if any) specified in sub—section (2)notices relating to the acquisition ~ that person of a

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qualifying interest in the permit (sub—paragraph (b)(ii))over the sum of all eligible cash bidding amounts (if any)specified in sub—section (2) notices in relation to theacquisition from the person of qualifying interests inrelation to the exploration permit.

Sub—section 124ABA(5) is an interpretativeprovision for the purposes of section 124ABA. Paragraph(5)(a) describes those situations in which a productionlicence will be taken to be related to an explorationpermit — this relationship is relevant for the purposes ofsub—sections (1) and (2) in determining the eligible cashbidding amount to be included as allowable capitalexpenditure of a person.

Under sub—paragraph (a)(i) a production licence(as defined in sub—section (6)) will be related to anexploration permit (also defined in sub—section (6)) if,because of the grant of the production licence, theexploration permit ceases to be in force in respect of theblock or blocks in respect of which the production licenceis granted. A production licence is granted under thePetroleum (Submerged Lands) Act 1967 and authorises theholder to produce petroleum offshore in certain areas wherepetroleum discoveries have been made within the boundariesof the exploration permit.

Sub—paragraph (a)(ii) is cast in similar terms tosub—paragraph (i) and relates a production licence to anexploration permit where a retention lease that is relatedto the exploration permit (see notes on paragraph (5)(b))ceases to be in force in respect of the block or blocks inrespect of which the production licence is granted.Broadly, retention leases allow explorers to retain tenureover currently non—commercial discoveries until they becomecommercial.

Paragraph 124ABA(5)(b) specifies, for the purposesof sub—paragraph (5)(a)(ii), the circumstances in which aretention lease will be taken to be related to anexploration permit. That relationship will exist where,because a retention lease is granted over a block or blocksunder the Petroleum (Submerged Lands) Act 1967, theexploration permit ceases to be in force in respect of thatblock or those blocks.

In the event that an exploration permit or aretention lease is renewed, paragraph (5)(c) provides thatthe renewed permit or lease is to be taken to be acontinuation of that permit (termed the “original permit”)or that lease (termed the “original lease”). That is to bethe case nowithstanding that the renewal is only in respectof part of the area over which the original permit or theoriginal lease was granted. The concept of the

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continuation of the original exploration permit orretention lease is relevant for the purposes of determiningwhether a production licence or a retention lease isrelated to an exploration permit (in terms of paragraphs(5)(a) and (5)(b)) and also whether a person has aqualifying interest in relation to an exploration permit.Whether a person has such a qualifying interest isdetermined by reference to proposed paragraph124ABA(5)(d). That paragraph provides that a person hasthat interest if the person is the holder of theexploration permit (or an interest in the permit) or is theholder of a retention lease (or an interest in such alease) that is related to the permit. This latterrelationship is governed by the provisions of proposedparagraph (5)(b).

The following definitions of terms used in section124ABA are contained in sub—section 124ABA(6)

“block” is given the same meaning as in the Petroleum(Submerged Lands) Act 1967, in which, broadly, theterm refers to areas of the Earth’s surfacedivided into graticular areas each measuring fiveminutes of latitude by five minutes of longitude.The definition is relevant for the purposes ofparagraphs (5)(a) and (5)(b) in determiningwhether a production licence or retention lease,respectively, is related to an exploration permit.

“cash bidding exploration permit” is defined to mean anexploration permit (also defined) in respect ofwhich a qualifying cash bidding payment (also adefined term) is or was made. A person acquiringan interest in a cash bidding exploration permitmay, by virtue of the operation of section 124ABA,be entitled to a deduction in relation toexpenditure on the acquisition;

“exploration permit” is defined to mean an explorationpermit for petroleum under Part III of thePetroleum (Submerged Lands) Act 1967. Such apermit authorises the holder to explore forpetroleum, and to carry on such operations andexecute such works as are necessry for thatpurpose, in the area covered by the permit.

“production licence” refers to. a production licence forpetroleum under Part III of the Petroleum(Submerged Lands) Act 1967. It is the granting ofa production licence which triggers thedeductibility of an eligible cash bidding amountunder Division 1OAA of the Principal Act. Inbroad terms, a production licence is granted inrespect of a block or blocks in a permit area in

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which petroleum has been discovered, andauthorises the holder to carry on operations forthe recovery of that petroleum.

“qualifying cash bidding payment” is a term also definedby reference to the Petroleum (Submerged Lands)Act 1967. Under that Act, a person, in applyingby way of cash bidding for the grant of anexploration permit, must specify the amount thatthe person is prepared to pay in a single paymentto the Commonwealth — i.e. the cash bid. In orderto obtain the exploration permit, the successfulapplicant must, in terms of paragraph 22B(5)(b) ofthe Act, pay the specified amount to theCommonwealth. An amount so paid on or after15 January 1986 (the date of announcement of theproposed tax treatment of cash biddingarrangements) is a qualifying cash biddingpayment, the amount of which will be relevant fordetermining a person’s entitlement to an eligiblecash bidding amount under sub-section 124ABA(4).

“retention lease”, as used in sub—section (5) indetermining when a production licence is to betaken to be related to an exploration permit,means a retention lease under Part III of thePetroleum (Submerged Lands) Act 1967. That Actprovides for the granting of a retention leaseover a currently non—commercial discovery withinan exploration permit area, thus allowingexplorers to retain tenure over discoveries untilthey become commercial. On the granting of such alease, the exploration permit in respect of thatleased area ceases to be in force.

In terms of sub—clause 34(5) of the Bill, theamendments being made by clause 24, as well as those beingmade by clauses 22 and 23, apply as if they had come intooperation on 15 January 1986 — being the date ofannouncement of the proposal to allow income tax deductionsin respect of petroleum cash bids.

Clause 25: Division not to apply to interest on borrowingsby Australian Industry Development Corporation

By this clause, section 128EA of the Principal Actis being amended so that certain interest payments by theAustralian Industry Development Corporation (AIDC), whichmight otherwise be eligible, technically, for the benefitof interest withholding tax (IWT) exemption, cannot attractthat benefit.

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The IWT exemption previously available to the AIDCfor its overseas borrowings was withdrawn in 1983 inrelation to interest on loans raised pursuant to acontractual obligation entered into after 19 May 1983.However, a recent court decision has revealed a technicaldeficiency in a provision (sub—section b28G(3))corresponding to that which terminated the AIDC exemption.The court held that, by extending the term of an existingpre—20 May 1983 loan, an IWT—exempt body could preserve itssection 128G exemption. Thus, long after it was intendedto have been withdrawn, the exemption might still exist.

Consistent, therefore, with the remedialamendment being made to section b28G (see notes onclause 27), section 128EA is being amended by the insertionof proposed sub—section 128EA(4) to preclude such anoutcome in relation to AIIJC borrowings.

The existing termination provision, sub—section128EA(3), denies an IWT exemption for relevant AIDC loaninterest in respect of loans contracted for after19 May 1983 but does not effectively address the issue ofpre—20 May 1983 loans being rolled—over or extended,perhaps indefinitely. It is also silent as to thetreatment of loan facilities contracted for before 20 May1983 and utilised (or ‘drawn down’) solely at the freechoice of the borrower after that date. The Bill willensure that interest paid on amounts subject to such loandraw—downs (being amounts that the borrower was notcontractually bound to borrow), loan roll—overs and loanextensions occurring after the introduction date of theBill do not benefit from an exemption in relation to theoriginal loan under section 128EA.

Accordingly, proposed new sub—section 128EA(4)withdraws, in three circumstances, the section 128EAexemption to the extent that the loan interest relates to aloan raised pursuant to a contractual obligation enteredinto before 20 May 1983 —

first, where the loan money was borrowedafter the date of introduction of this Bill(sub—paragraph (a)(i)) and, on or before thedate of introduction of the Bill, theborrower was not contractually bound toborrow the loan money (sub—paragraph (a)(ii));

secondly, where the loan interest relates toa loan resulting from a roll—over, after thatintroduction date, of the whole or a part ofa previous loan (paragraph (b)); and

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thirdly, where the interest is paid inrespect of a period extending beyond theoriginal period of a loan under an extensionof that original period occurring after theintroduction date (paragraph (c)).

In each instance, exemption is denied in relationto interest payments made after the date in which thesub—section becomes law to the extent to which thosepayments are a consequence of the occurrence of any ofthose specified events (viz, a borrowing or drawdown, or aloan roll—over or loan extension to which the borrower wasnot previously bound) after the date of introduction ofthis Bill.

By clause 2 of the Bill, the new sub—section andthe other amendments proposed by the Bill will come intooperation on the day on which the Bill receives the RoyalAssent. Accordingly, the use of the expression ‘after thedate of commencement’ in the first part of proposed newsub—section 128EA(4), means that the sub—section will haveapplication to loan interest payments made on or after theday succeeding the date of Royal Assent.

As a result of other changes proposed by this Billto be made to the IWT provisions of the income tax law, theAIDC’s interest payments in relation to future borrowingswill qualify for IWT exemption, if at all, only undersection 128F of the Principal Act.

Clause 26 : Division not to apply to certain interest ondebentures

This clause amends section 128F of the PrincipalAct to extend to State Governments and to all State andCommonwealth authorities the exemption from IWT available,broadly, to Australian resident companies for interest paidon certain public or widely spread debenture borrowingsoutside Australia where the loan funds are used in anAustralian business. Access to this exemption is todovetail with the withdrawal of the section 128GA exemption(see clause 28).

Clause 26 also proposes the removal from section128F of the requirement that, to attract an IWT exemption,both the relevant loan borrowings and the interest paymentson those borrowings be in a non-Australian currency. Thischange is to be effected (paragraph (a)) by the removal ofthe words ‘in a currency other than the currency ofAustralia’ from paragraphs b28F(1)(b) and (d). By clause 2and sub—clause 34(6) of the Bill, this amendment will haveeffect in relation to interest paid after the date on whichthe Bill receives the Royal Assent.

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One of the eligibility tests for the section b28Fexemption is that the interest payer be a company that is aresident of Australia. For State Governments and State andCommonwealth authorities, new sub—section (1A) to beinserted in section 128F by paragraph (b) of the clauseprovides that, in relation to relevant loans raised under apost—l July 1986 contract, States and their authorities areto be treated as if they were companies and residents ofAustralia (paragraph (a)).

In effect, the test in section 128F of whether therelevant loan monies have been used in an Australianbusiness is not to apply to the States and authorities. Inrelation only to those bodies, this result is to beachieved by treating paragraph 128F(4)(b) — the ‘Australianbusiness’ test — as if it were omitted (paragraph (b)).That is, the use to which eligible borrowings by the Statesand authorities are put will not be relevant to the issueby the Commissioner of an IWT exemption certificate undersection 128F for loans contracted for by the States andauthorities after 1 July 1986. Provided all of the othercriteria for eligibility set out in section l28F are met, aState or authority would be entitled, upon enactment of newsub—section 128F(1A), to apply to the Commissioner for theissue of a certificate under the section in relation tosuch loans.

By clause 2 of the Bill the commencement date ofproposed new sub—section 128F(lA) is to be the date ofRoyal Assent, i.e., the day preceding the effective date ofwithdrawal of the section 128GA exemption presentlyavailable to the States and authorities in specifiedcircumstances (see the notes to clause 28).

By paragraph (c) of this clause, the foreigncurrency requirement is to be removed from the tests setout in sub—section 128F(6) of the Principal Act, by whichthe exemption for interest on publicly or widely—offereddebentures issued overseas may apply to borrowings throughan overseas subsidiary of art Australian resident company.This complements the removal, proposed by paragraph (a) ofthis clause, of the same requirements from paragraphsl28F(b)(b) and (d) of the Principal Act. As with theamendments proposed by paragraph (a), this amendment willhave effect in relation to interest paid after the date onwhich the Bill receives the Royal Assent.

Clause 27 : Division not to apply to interest on certainloans

By this clause, section 128G of the Principal Actis to be amended by the addition of a new sub—section,sub—section (4), to make it clear that certain interest

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payments cannot qualify for the IWT exemption contained insection 128G. That exemption was intended, by a 1983amendment of the income tax law, to have been terminated inrespect of borrowings contracted for after 19 May 1983.However, as mentioned earlier in this memorandum, a courtdecision has demonstrated that the termination of thesection 128G exemption may not be effective in relation toan extension or roll—over after that date of a loan thatwas contracted for on or before that date (see the notes onclause 25).

Proposed new sub—section (4) will ensure that thisdeficiency is corrected in respect of interest payments onpost—i July 1986 loan roll—overs and extensions. It willalso deny IWT exemption for interest payments in respect ofpost—i July 1986 loan borrowings (including drawdowns)which the borrower was not, before 2 July 1986,contractually bound to borrow, notwithstanding that suchborrowings might occur under a loan facility contracted forprior to 20 May 1983.

Accordingly, proposed sub—section 128G(4)withdraws in three circumstances the IWT exemption insection 128G of the Principal Act for interest paid afterthe date on which the sub—section becomes law, to theextent that the loan interest relates to a loan raisedpursuant to a contractual obligation entered into before20 May 1983. Those circumstances, corresponding to thosedescribed in clause 25 in relation to sub—section 128EA,are —

first, where the loan money was borrowedafter 1 July 1986 (sub—paragraph (a)(i)) and,before 2 July 1986, the borrower was notcontractually bound to borrow the loan money(sub—paragraph (a) (ii));

• secondly, where the loan interest relates toa loan resulting from a roll—over, after1 July 1986, of the whole or a part of aprevious loan (paragraph (b)); and

• thirdly, where the interest is paid inrespect of a period extending beyond theoriginal period of a loan under an extensionof that original period occurring after 1July 1986 (paragraph (c)).

In each instance, exemption is denied in relationto interest payments made after the date on which thesub—section becomes law to the extent to which thosepayments are a consequence of the occurrence of any of

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those specified events (viz, a borrowing or drawdown, or aloan roll—over or loan extension to which the borrower wasnot previously bound) after 1 July 1986.

Clause 28 : Division not to apply to interest on certaingovernment loans and government authority loans

This clause effects withdrawal of the IWTexemption previously available for certain loans of Statesand State and Commonwealth authorities under section 128GAof the Principal Act (see notes on clause 26 for details ofan alternative exemption for States and authorities).

Proposed new sub—section (5A) of section 128GA ofthe Principal Act will withdraw the exemption in severalcircumstances.

First, by paragraph (5A)(a), interest on a loanraised under a contractual obligation entered into after1 July 1986 is denied exemption where it is paid after thedate of commencement of the section (i.e., after the Billreceives the Royal Assent).

Paragraph (5A)(b) sets out three furthercircumstances in which interest paid by the States andauthorities will no longer attract the section 128GAexemption. They are substantially the same circumstancesas those covered by proposed new sub—sections 128EA(4) andb28G(4) (see earlier notes on clauses 25 and 27). In eachcase, exemption is to be denied to that portion of loaninterest in respect of a loan raised pursuant to acontractual obligation entered into on or before 1 July1986 as flows from the happening of specified events after1 July 1986. Thus —

sub—paragraph b(i) denies exemption where,after 1 July 1986, loan money is borrowed andthe borrower was not contractually bound,before 2 July 1986, to borrow the loan money;

• sub-paragraph b(ii) denies exemption wherethe loan interest relates to a loan resultingfrom a roll—over, after 1 July 1986, of thewhole or a part of a previous loan; and

• by sub—paragraph b(iii), no exemption is tobe available for such part of loan interestas is paid in respect of a period extendingbeyond the original period of a loan under anextension of that original period occurringafter 1 July 1986.

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Withdrawal of the section 128GA IWT exemption tobe effected by paragraph (5A)(b) also applies only inrelation to loan interest payments that are made after thedate of commencement of the sub—section.

Clause 29 : Amendment of assessments

By this clause, it is proposed to amend section170 of the Principal Act, which governs the power of theCommissioner to amend income tax assessments. Sub—section170(10), which provides that nothing in the sectionprevents the amendment of an assessment at any time for thepurposes of giving effect to certain provisions specifiedin the sub—section, is to be amended to include a referenceto new sub—section 124ABA(4).

Sub—section 124ABA(4), being inserted in thePrincipal Act by clause 24, provides for the determinationof a person’s entitlement to an eligible cash biddingamount (see notes on clause 24). As that determination isdependent upon notices being lodged with the Commissioner,the inclusion of sub—section 124ABA(4) in sub—section170(10) will allow income tax assessments to be amended atany time to take account of notices which have been lodgedafter assessments have issued.

Clause 30 : Grounds of objection and burden of proof

This amendment to the burden of proof provisioncontained in section 190 of the Principal Act restores arule that was unintentionally altered by the TaxationBoards of Review (Transfer of Jurisidiction) Act 1986.Prior to the enactment of that Act, it was well settledthat, in every taxation reference to a Board of Review orappeal to a Supreme Court, the Federal Court or the HighCourt, the burden of proving that the assessment wasexcessive rested with the taxpayer, irrespective of theparty who brought the appeal.

However, the amendment of section 190 of thePrincipal Act made by the Taxation Boards of Review(Transfer of Jurisdiction) Act disturbed this well settledpolicy by specifically referring to “a review before theTribunal or an appeal to a Supreme Court”. This referenceto a Supreme Court had the unintended effect that section190 had no application to appeals to the Federal Court andthe High Court from decisions of the Administrative AppealsTribunal or a Supreme Court.

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The amendment to be made by this clause willreplace the reference to “a Supreme Court” with a referenceto “a court”, thus ensuring that section 190 will, as ithas in the past, apply to proceedings in a Supreme Court,the Federal Court and the High Court.

By clause 46 the amendment being made by thisclause will apply to hearings that commence in the FederalCourt and High Court after the date of Royal Assent to thisBill.

Clause 31 : Provisional tax on estimated income

Clause 31 will amend section 221YDA of thePrincipal Act that provides for the calculation ofprovisional tax where a taxpayer chooses to “self—assess”,that is, to have provisional tax varied on the basis of hisor her own estimate of taxable income, rebates of tax,prescribed payments and deductions from those payments andtax instalment deductions from his or her salary or wages.

By paragraph (a) the reference to section 46C ofthe Principal Act will be omitted from paragraph (1)(da)and sub—paragraph (2)(a)(ii) of section 221YDA. This is adrafting measure following the repeal of section 46C by theIncome Tax Assessment Amendment Act (No. 4) 1983. Byparagraph (b) references to section 16OACD of the PrincipalAct are to be inserted in paragraph (l)(da) andsub—paragraph (2)(a)(ii), thus enabling Christmas Islandresidents who are liable for provisional tax and who chooseto “self—assess”, to have the section 16OACD rebate takeninto account in the calculation of provisional tax undersection 221YDA. Section 16OACD gives effect to thepersonal income tax phasing arrangements that apply toChristmas Island residents, by allowing a rebate of taxcalculated having regard to the tax payable on income that,prior to 1 July 1985, was exempt from tax in Australia.

As a consequence of the operation of sub—clause34(7) of the Bill, the amendment made by paragraph (b) willapply in relation to the ascertainment of provisir’nal taxin respect of the 1986—87 income year and all subsequentyears

Clause 32 : Provisional tax for 1986—87 year

The purpose of this clause, which will not amendthe Principal Act, is to specify the basis for calculatingthe 1986—87 provisional tax to be notified in assessments

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based on 1985—86 income and payable by provisionaltaxpayers who do not “self—assess” (see notes on clause31). Broadly, the clause requires that the provisional taxis to be calculated by applying 1986—87 rates of tax(without regard to the arrangements for pro—rating of thetax—free threshold) and Medicare levy to 1985—86 taxableincomes as increased by ii per cent. With the exception ofthe rebate available to Christmas Island residents onIsland and ex—Australia source income and averagingrebates, which are discussed below, rebates are to be takeninto account as allowed in the taxpayer’s 1985—86 incometax assessment.

Where an amount of a net capital gain has beenincluded in a taxpayer’s 1985—86 assessable income byvirtue of Part lilA of the Principal Act, the provisionaltax for 1986—87 will be calculated by reference to theamount that would have been the taxable income for 1985—86if the net capital gain amount had not been included in thetaxpayer’s assessable income for that year.

Where a taxpayer chooses to “self—assess” theprovisional tax will be, basically, the amount calculatedby applying 1986—87 rates of tax and Medicare levy to thetaxpayer’s estimated taxable income and by deductingestimated 1986—87 rebates. By virtue of sub—section221YDA(1AA) of the Principal Act,an estimate of taxableincome for this purpose is to be made on the basis that theassessable income will not include the amount of any netcapital gain that may be included in the taxpayer’sassessable income by virtue of Part lIlA of the PrincipalAct.

For taxpayers deriving a notional income asspecified by section 59AB (depreciation recouped), section86 (lease premiums), or section l58D (abnormal income ofauthors or inventors) of the Principal Act, provisionaltax, before deduction of rebates, is to be calculated byapplying to their 1985—86 taxable income increased by 11per cent, the 1986—87 rate of tax applicable to their1985—86 notional income. That is, the rate of tax is notto be increased to reflect an 11 per cent increase innotional income.

Taxpayers who were under 18 years of age at30 June 1986 were liable for tax for 1985—86 under thespecial provisions applying to minors if, in the ~case of anon—resident, the minor had any eligible taxable income forthe purposes of Division 6AA of Part III of the PrincipalAct for that year or if, in the case of a resident, thateligible taxable income exceeded $416. For purposes of the1986—87 provisional tax calculation, the portion of aminor’s taxable income, as increased by 11 per cent, thatis to be taken as eligible taxable income is to be in the

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same proportion as that which the 1985—86 eligible taxableincome of the taxpayer bore to his or her taxable incomefor that year.

Where the 1985—86 eligible taxable income of ataxpayer to whom the provisions of Division 6AA of Part IIIof the Principal Act applied for that year includes a netcapital gains amount, the eligible taxable income for thatyear is, for purposes of the 1986—87 provisional taxcalculation, adjusted to the amount that would have beenthe taxpayer’s eligible taxable income if that net capitalgains amount had not been included in the taxpayer’s1985—86 assessable income.

For primary producers who do not “self—assess” theclause will require that, for provisional tax purposes, anyaveraging rebate to which the primary producer is entitledbe recalculated using 1985—86 taxable income (as adjustedfor any income equalization withdrawals, capitalexpenditure on a qualifying Australian film or subscriptionto shares in licensed management and investment companies)as increased by 11 per cent. 1986—87 rates of tax will beapplied in the calculation on the basis of the averageincome used for 1985—86 assessment purposes. Averageincome will not be recalculated to reflect the notional 11per cent increase in taxable income for provisional taxpurposes. A primary producer may qualify for a part onlyof the averaging benefit in 1985—86, that is, his or herincome other than from primary production in that year mayhave exceeded $5,000. In such a case the clause willensure, in effect, that the proportion of the averagingadjustment — equal to the proportion that income fromprimary production bears to total taxable income — to betaken into account in calculating 1986—87 provisional taxis the same as the 1985—86 proportion. That is, it is notto be reduced to reflect the notional lb per cent increasein income other than from primary production.

Where an amount of income tax or Medicare levy waspayable in 1985—86, an amount additional to the provisionaltax (if any) otherwise payable representing Medicare levyfor 1986—87 is to be incorporated in the 1986—87provisional tax calculation. In these situations theMedicare levy component of provisional tax will becalculated by applying the 1986—87-year Medicare levy rateof 1.145 per cent to 1985—86 taxable income as increased by11 per cent. The increased low income thresholds to applyfor levy purposes in 1986—87 will be taken into account.In addition, wherever a part or full exemption from levywas received by an individual in his or her 1985—86assessment, the same exemption will be provided in thecalculation of levy for 1986—87 provisional tax purposes.

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For Christmas Island residents entitled in 1985—86income tax assessments to a rebate of tax under section16OACD of the Principal Act, 1986—87 provisional tax willbe calculated by taking into account two—thirds of that1985—86 rebate entitlement reflecting the reduction in therate of rebate available for the 1986—87 year of income.

For a taxpayer whose 1985—86 taxable incomereflects a deduction allowed for capital moneys expended inproducing a qualifying Australian film or for subscriptionsto shares in licensed management and investment companies,1986—87 provisional tax will be calculated as if no suchdeduction had been allowed, with the taxable income soadjusted increased by 11 per cent.

Clause 33 : Transitional

This clause, which will not amend the PrincipalAct, relates to clauses 25, 27 and 28. Clauses 25 and 27will amend existing sections 128EA and 128G. respectively,of the Principal Act to correct a technical defect in 1983provisions withdrawing the exemptions from withholding taxthat had been available for interest paid by the AIDC andAustralian entities on certain external borrowings (seenotes on clauses 25 and 27). Clause 28 will amend existingsection 128GA of the Principal Act to withdraw exemptionsfrom withholding tax available for interest paid by theStates, and by Commonwealth and State authorities, oncertain external borrowings (see notes on clause 28).

This transitional provision is necessary becausethe interest payments to be affected are those made, afterthe date on which the amending Bill receives the RoyalAssent, on certain loan monies borrowed or rolled over, oron a loan the term of which has been extended, after thedate of introduction of this Bill in the case of clause 25or after 1 July 1986 in the cases of clauses 27 and 28.Interest payments made before the respective commencementdates may continue to qualify for IWT exemption under thesections concerned. Accordingly, the clause is designed asan anti—avoidance measure to guard against the ‘loading’ ofpayments made during the transitional period to includepayments related to later periods, being payments whichwould, by the amendments contained in clauses 25, 27 and28, not be eligible for IWT exemption if made in thoselater periods.

Sub—clause (1) will operate so that the exemptionotherwise available under section 128EA, 128G or 12SGA forinterest paid during the transitional period (‘thepre—commencement interest’) (paragraph (a)) will not beavailable in respect of so much of it as the Commissionerof Taxation is satisfied was paid on or before before the

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date of commencement of the sub—clause, rather than at alater time, for the purpose of obtaining the benefit ofthat exemption (paragraph (b)). In forming his opinion,the Commissioner of Taxation is to have regard to certainspecified matters, being the amount of the loan involved,the terms of any relevant contractual obligation and theamount of the interest.

Sub—clause (2) will apply so that, in a case where-~‘- sub—clause (1) operates to deny exemption from withholding

tax and the payer of the interest has failed to deduct thenecessary withholding tax, the payer will not be guilty ofan offence under the Income Tax Assessment Act 1936.

Clause 34 : Application of amendments

This clause, which will not amend the PrincipalAct, specifies the dates from which, or the years of incomein which, various amendments proposed in Part VII of theBill will first apply. An explanation of these applicationprovisions is contained in the notes on the clauses towhich each of the provisions applies.

PART VIII - AMENDMENTSOF THE INCOME TAX

(INTERNATIONAL AGREEMENTS) ACT 1953


Clause 35 formally provides that references to the“Principal Act” in Part VIII of this Bill relate to theIncome Tax (International Agreements) Act 1953.

Clause 36 : Interpretation

This clause will amend section 3 of the PrincipalAct which contains a number of definitions for the moreconvenient interpretation of the Act.

Paragraph (a) will insert in sub—section 3(1) ofthe Principal Act a definition of the term ‘the Austrianagreement’. This term is defined to mean the comprehensivetaxation agreement with Austria which is, by clause 39 ofthe Bill, to be incorporated as Schedule 27 of thePrincipal Act

Paragraph (b) will substitute a new definition ofthe term “the Netherlands agreement”. As the secondNetherlands protocol will amend the existing agreement andprotocol, the term “the Netherlands agreement” is beingre-defined to mean the agreement and protocol (a copy of

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each of which is set out in Schedule 10 to the PrincipalAct) as amended by “the second Netherlands protocol”.Paragraph (c) will add a definition of the term “the secondNetherlands protocol” which is, by clause 39 of the Bill,being incorporated as schedule 1OA to the Principal Act.

Clause 37 : Second Protocol with the Netherlands

This clause will insert section 11AA in thePrincipal Act, which will give the force of law inAustralia to the second protocol with the Netherlands witheffect from the dates set out in Article 3 of the protocol.

Paragraph (1)(a) of new section 11AA will givethe force of law in Australia to the transitional measuresspecified in sub—paragraph (1)(a) of Article 3 of theprotocol (see notes on that Article). Broadly, thosetransitional measures apply to interest secured by mortgageof real property or of any other direct interest in or overland in pursuance of a contractual obligation entered intobefore 30 June 1986. In such cases, the protocol will,upon entering into force, have effect for Australian taxpurposes in respect of income of the year of incomecommencing on 1 July 1988 and all subsequent income years.

Paragraph (l)(b), will give the force of law inAustralia to the protocol so that it will have effect inall cases not covered by the transitional measures forAustralian tax purposes in respect of income of the year ofincome commencing 1 July 1986 and all subsequent incomeyears.

Sub—section (2) provides for the date on which theprotocol enters into force to be notified in the Gazette assoon as practicable thereafter. This will provide areadily available and authoritative source from whichpersons may ascertain the fact and date of entry into forceof the agreement.

Clause 38: Agreement with the Republic of Austria

This clause will insert section bbR in thePrincipal Act, which will give the force of law inAustralia to the comprehensive taxation agreement withAustria from the dates set out in Article 27 of theagreement.

By sub—section bbR (1), the Austrian agreement,when it enters into force, will have effect in Australia,in relation to withholding tax in respect of dividends orinterest derived on or after 1 January in the calendar yearnext following that in which the agreement enters into

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force. In respect of tax other than withholding tax, theagreement shall have effect in respect of income of anyyear of income commencing on or after 1 July in thecalendar year next following that in which the agreemententers force.

In accordance with Article 27 of the agreement,sub—section hR (2) provides for the date on which theagreement enters into force to be notified in the Gazetteas soon as practicable thereafter. As mentioned inrelation to the Netherlands protocol, this will provide areadily available and authoritative source from whichpersons may ascertain the fact and date of entry into forceof the agreement.

Clause 39: Schedules 1OA and 27

This clause will add the second protocol with theNetherlands and the comprehensive agreement with Austria asschedules 1OA and 27 respectively to the Principal Act.

SECONDPROTOCOLTO THE AGREEMENTWITH THE NETHERLANDS

Under Australia’s existing comprehensive taxationagreement and protocol with the Netherlands (which weresigned and entered into force in 1976), interest from debtclaims secured by mortgage is treated as income from realproperty. The effect of the second protocol will be tomodify the treatment accorded under the agreement to suchinterest so it is treated in the same way as other interestunder the agreement.

Article 1 — Amendment of Article 6

This article proposes deleting the second sentenceof paragraph (2) of Article 6 of the agreement. Thatsentence requires that income from debt claims of everykind, other than bonds or debentures, secured by mortgageof real property or of any other direct interest in or overland be regarded as income from real property. The effectof the amendment proposed by Article 1 is that interestfrom debt claims secured by mortgage will no longerspecifically be treated as income from real property butwill be treated under the agreement as interest income.

Under its domestic law, Netherlands tax does notgenerally apply to interest from Australia that is treatedunder the agreement as income from real property. Theamendment made by this article will enable the Netherlandsto tax interest derived by a Netherlands resident from debtclaims secured by mortgage of real property or any other

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direct interest in or over land situated in Australia,subject to the allowance of a credit for the Australianwithholding tax paid, in accordance with the generaltreatment of interest income under the agreement.

The position for Australian tax purposes ofmortgage interest flowing from Australia to the Netherlandswill be unaffected by the amendment — such interest willremain subject to Australian interest withholding tax atthe rate of 10 per cent. However, mortgage interestderived from the Netherlands by a resident of Australiathat is presently exempt from Australian income tax (asincome from real property) where it is not exempt from taxin the Netherlands will be liable to Australian income taxand generally subject to Netherlands tax not exceeding 10per cent, with Australia allowing a credit for theNetherlands tax.

Article 2 — Amendment of Article lb

The amendment of Article 11 of the agreementproposed by this article is to give effect to a minordrafting measure which arises out of the amendment proposedby Article I of this Protocol. It will substitute inparagraph (3) of Article 11 of the agreement a newdefinition of the term interest, which will have the effectof modifying the existing definition of that term toexclude a reference to Article 6.

Under the existing definition of interest, incometo which Article 6 applies is specifically excluded, sothat when read in conjunction with Article 6, it is clearthat interest secured by mortgage of real property or ofany other interest in or over land would be regarded, forpurposes of the agreement, as income from real property andnot as interest income. As a consequence of the amendmentto the agreement proposed by Article 1 of this Protocol,Article 6 will cease to have any application to interestincome and all interest will thus fall to be treated inaccordance with Article 11 of the agreement.

Article 3 — Entry into force

By this article the Protocol will form an integralpart of the Netherlands agreement and will enter into forceon the first day of the second month after the date onwhich notes are exchanged through the diplomatic channelnotifying that the last of such things has been done inAustralia and the Netherlands as is necessary to give theforce of law to the protocol in each country. As mentionedearlier in this memorandum the protocol will be given the

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force of law in Australia by new section 11AA that is to beinserted in the Income Tax (International Agreements) Act1953, by clause 37 of the Bill (see notes on that clause).

Sub—paragraph (b)(b) of Article 3 provides that,upon entering into force, the protocol will generally haveeffect in Australia in respect of tax on income of any yearof Income beginning on or after 1 July 1986 and, in theNetherlands, in respect of taxes for taxable years andperiods beginning on or after 1 January 1986. However, bysub—paragraph (l)(a), transitional measures apply to incomefrom debt claims of every kind, excluding bonds ordebentures, secured by mortgage of real property or of anyother direct interest in or over land where the relevantincome is in pursuance of a contractual obligation enteredinto before 30 June 1986. The transitional arrangementswill operate so that, in Australia, the terms of theprotocol will not apply until years of income commencing onor after 1 July 1988 and, in the Netherlands, for taxableyears and periods beginning on or after 1 January 1988.

By paragraph (2), the transitional entry intoforce measures contained in sub—paragraph (1)(a) aresubject to two safeguarding measures of an anti—avoidancenature. Income to which the safeguarding measures apply isexcluded from the operation of the transitional entry intoforce measures and, as a consequence, the modificationsmade by the Protocol will apply in these cases from theearlier dates determined in accordance with sub—paragraph(b)(b). The safeguarding measures effectively apply —

• to a pre—payment of interest to the extent itis attributable to a period later than theperiod covered by the transitionalarrangements (sub—paragraph (2)(a)); and

• to interest derived pursuant to a contractualobligation entered into on or before 30 June1986 if the term of the loan is extendedafter that date (sub—paragraph (2)(b)).

AGREEMENTWITH AUSTRIA

Subject to some minor differences, the agreementaccords in substantial practical effect with othercomprehensive taxation agreements to which Australia is aparty. Like them, the agreement allocates the right to taxsome income to the country of source, sometimes at limitedrates, while the country of residence is given the soleright to tax other types of income. It contains provisionsto the effect that where income may be taxed in both

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countries, the country of residence, if it taxes, is toallow a credit against its own tax for the tax imposed bythe country of source.

Article 1 — Personal Scope

The agreement will apply to persons (which termincludes companies) who are residents of either Australiaor Austria or of both

The situation of persons who are dual residents(i.e. residents of both countries) is dealt with inArticle 4.

Article 2 — Taxes Covered

This article specifies the existing taxes to whichthe agreement applies. These are, in broad terms, theAustralian income tax (including the tax to be known as theresource rent tax, when it comes into law), and theAustrian income tax, specifically including corporationtax, tax on interest yields directors tax and the tax oncommercial and industrial enterprises, including tax leviedon the sum of wages. The article will automatically extendthe application of the agreement to any identical orsubstantially similar taxes which may subsequently beimposed by either country in addition to, or in place of,the existing taxes.

Article 3 — General Definitions

This article provides definitions for a number ofthe terms used in the agreement. Some other terms aredefined in the articles to which they relate and terms notdefined in the agreement are to have the meaning which theyhave under the taxation law of the country applying theagreement.

As with Australia’s other modern taxationagreements, “Australia” is defined as including externalterritories and areas of the continental shelf. By reasonof this definition, Australia retains taxing rights inrelation to mineral exploration and mining activities onits continental shelf The definition is also relevant tothe taxation by Australia of shipping and airline profitsin accordance with Article 8 of the agreement

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Article 4 — Residence

This article sets out the basis on which theresidential status of a person is to be determined for thepurposes of the agreement. Residential status is one ofthe criteria for determining each country’s taxing rightsand is a necessary condition for the provision of reliefunder the agreement. Residence according to each country’staxation law provides the basic test. The article alsoincludes rules for determining how residency is to beallocated to one or other of the countries for the purposesof the agreement where a taxpayer — whether an individual,a company or other entity — is regarded as a resident underthe domestic laws of both countries.

Article 5 — Permanent Establishment

Application of various provisions of the agreement(principally Article 7 relating to business profits) isdependent upon whether a resident of one country has a“permanent establishment” in the other, and if so, whetherincome derived by the person in the other country iseffectively connected with that “permanent establishment”.The definition of the term “permanent establishment” whichthis article embodies corresponds closely with definitionsof the term in Australia’s other double taxation agreements.

The primary meaning of the defined term isexpressed in paragraph (1) as being a fixed place ofbusiness through which the business of an enterprise iswholly or partly carried on. Other paragraphs of thearticle are concerned with elaborating on the meaning ofthe term by giving examples of what may constitute a“permanent establishment” — such as an office, a mine or anagricultural property — and by specifying the circumstancesin which a resident of one country shall, or shall not, bedeemed to have a “permanent establishment” in the othercountry.

Article 6 — Income from Real Property

By this article, income from real property,including income from the direct use, letting or use in anyother form of any land or interest therein, and royaltiesand other payments in respect of the operation of mines orquarries or of the exploitation of any natural resource,may be taxed in the country in which the real property,land, mine, quarry or natural resource is situated.

Income to which this article applies is excludedfrom the scope of Article 7 (by paragraph (6) of that

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article) and is therefore taxable in the country of sourceregardless of whether or not the recipient has a “permanentestablishment” in that country.

Article 7 — Business Profits

This article is concerned with the taxation ofbusiness profits derived by a resident of one country fromsources in the other country.

The taxing of these profits depends on whetherthey are attributable to a “permanent establishment” of thetaxpayer in that other country. If they are not, theprofits will be taxed only in the country of residence ofthe taxpayer. If, however, a resident of one countrycarries on business through a “permanent establishment” (asdefined in Article 5) in the other country, the country inwhich the “permanent establishment” is situated may taxprofits attributable to the establishment.

The article provides for profits of the “permanentestablishment” to be determined on the basis of arm’slength dealing. These provisions correspond in theirpractical effect with comparable provisions in Australia’sother double taxation agreements, and with Division 13 ofthe Income Tax Assessment Act.

Paragraph (5) of the article allows theapplication of provisions of the source country’s domesticlaw (e.g. Australia’s Division 13) where the correct amountof profits attributable to a “permanent establishment” isincapable of determination or the ascertainment thereofpresents exceptional difficulties, for example, where thereis insufficient information available to determine theprofits of the “permanent establishment” on the basis ofarm’s length dealing.

Paragraph (7) preserves to each country the rightto continue to apply any special provisions in its domesticlaw relating to the taxation of income from insurance withnon—residents.

Paragraph (8) makes it clear that this articleapplies to income derived by a sleeping partner fromparticipating in a sleeping partnership created underAustrian law.

Paragraph (9) is intended to clarify Australia’sright to tax a share of business profits, originallyderived by a trustee of a trust estate (other than acorporate unit trust) from the carrying on of a business inAustralia, to which a resident of Austria is beneficiallyentitled. It ensures that such distributions will be

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subject to tax in Australia where, in accordance with theprinciples set out in Article 5, the trustee of therelevant trust estate has a permanent establishment inAustralia in relation to that business. It is comparablein effect to sub—section 3(11) of the Income Tax(International Agreements) Act 1953, which has a similareffect where the beneficiary is a resident of a countrywith which Australia had signed a comprehensive taxationagreement on or before 19 August 1984.

Article 8 — Ships and Aircraft

Under this article the right to tax profits fromthe operation of ships or aircraft in internationaltraffic, including profits derived from participation in apool service, a joint transport operating organisation oran international operating agency, is generally reserved tothe country of residence of the operator.

Any profits derived by a resident of one countryfrom internal traffic in the other country may be taxed inthat other country. By reason of the definition of“Australia” contained in Article 3 and the terms ofparagraph (4) of this article, any shipments by air or seafrom a place in Australia to another place in Australia,its continental shelf or external territories are treatedas forming part of internal traffic.

Paragraph (5) ensures that income derived from thealienation of ships or aircraft operated internationallywhile owned by an enterprise of one country, or of personalproperty pertaining to the operation of those ships oraircraft, shall be taxed only by that country.

Article 9 — Associated Enterprises

This article authorises the re—allocation ofprofits between related enterprises in Australia andAustria on an arm’s length basis where the commercial orfinancial arrangements between the enterprises differ fromthose that might be expected to operate between independententerprises dealing at arm’s length with one another.

By virtue of paragraph (2) of the article, eachcountry retains the right to apply its domestic law (e.g.Australia’s Division 13) to its own enterprises providedthat such provisions are applied, so far as it ispracticable to do so, in accordance with the principles ofthis article.

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Where a re—allocation of profits is effected underthis article or, by virtue of paragraph (2), under domesticlaw, so that the profits of an enterprise of one countryare adjusted upwards, a form of double taxation would ariseif the profits so re—allocated continued to be subject totax in the hands of an associated enterprise in the othercountry. Paragraph (3) requires the other countryconcerned to make an appropriate adjustment to the amountof tax charged on the profits involved with a view torelieving any such double taxation.

Article 10 — Dividends

This article allows both countries to taxdividends flowing between them but in~general limits thetax that the country of source may impose on dividendspayable to beneficial owners resident in the othercountry. Under this article, Australia would be requiredto reduce its rate of withholding tax which presentlyapplies to dividends paid to residents of Austria from 30per cent to 15 per cent of the gross amount of thedividends. ( However, the limited taxing right given toAustralia by this article is unlikely to have any practicaleffect because of a decision by the Australian Government,announced subsequently to signature of the agreement, thatit will unilaterally abolish dividend withholding tax asfrom i July 1987).

Paragraph (4) provides that the limitation on thesource country’s tax will not apply to dividends derived bya resident of the other country who has a “permanentestablishment” or “fixed base” in the country from whichthe dividends are derived, if the holding giving rise tothe dividends is effectively connected with that “permanentestablishment” or “fixed base”. In those cases, thedividends will not be subject to the limited rate of taxprescribed by the article but will be treated as “businessprofits” or “income from independent personal services” andsubject to the source country’s tax in accordance with theprovisions of Article 7 or Article 14, as the case may be.

The purpose of paragraph (5) of this article is toensure, broadly, that one country will not tax dividendspaid by a company resident solely in the other countryunless the person deriving the dividends is a resident ofthe first country or the holding giving rise to thedividends is effectively connected with a “permanentestablishment” or “fixed base” in that country.

Paragraph (6) preserves the right of Australia toimpose the “branch profits” tax provided for in itsdomestic law. It also provides that, for the purpose ofcalculating undistributed profits tax, the branch profits

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tax will not be taken into account, but the company will bedeemed to have paid dividends of such amount that tax equalto the amount of the branch profits tax would have beenpayable under the article. (However, the AustralianGovernment has also announced that the “branch profits” taxwill be unilaterally abolished from 1 July 1987, so that,here again, the paragraph is unlikely to have practicaleffect).

Article lb — Interest

This article requires the country of sourcegenerally to limit its tax on interest derived by residentsof the other country to 10 per cent of the gross amount ofthe interest. As that rate is the same as the standardrate of interest withholding tax under the Australian law,that limitation will not affect the rate of Australian taxon interest derived by residents of Austria.

Interest derived by a resident of one countrywhich is effectively connected with a “permanentestablishment” or “fixed base” of that person in the othercountry will form part of the business profits of thatestablishment or “fixed base” and be subject to theprovisions of Article 7 or Article 14. Accordingly,paragraph (4) of Article lb requires that the 10 per centlimitation is not to apply to such interest.

The article also contains a general safeguard(paragraph (6)) against payments of excessive interest — incases where there is a special relationship between thepersons associated with a loan transaction — by restrictingthe 10 per cent limitation in such cases to an amount ofinterest which might be expected to have been agreed uponby persons dealing at arm’s length.

Article 12 — Royalties

This article in general limits to 10 per cent ofthe gross amount of the royalties the tax that the countryof source may impose on royalties paid to beneficial ownersresident in the other country.

The 10 per cent limitation is not to apply tonatural resource royalties, which, in accordance withArticle 6, are to remain taxable in the country of sourcewithout limitation of the tax that may be imposed.

In the absence of a double taxation agreement,Australia generally taxes royalties paid to non—residents(other than film and video tape royalties which are taxedat the rate of 10 per cent of the gross royalties), asreduced by allowable expenses, at ordinary rates of tax.

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As in the case of dividends and interest, it isspecified in paragraph (4) that the 10 per cent limitationof tax in the country of origin is not to apply toroyalties effectively connected with a “permanentestablishment” or “fixed base” in that country.

By paragraph (6), if royalties flow betweenrelated persons, the 10 per cent limitation will apply onlyto the extent that the royalties are not excessive.

Article 13 — Alienation of Property

Under this article, income from the alienation ofreal property may be taxed in the country in which thatproperty is situated.

Real property is defined for the purposes of thearticle as including —

a lease of land or other direct interest inor over land — in which case it is deemed tobe situated in the country in which the landis situated.

rights to exploit, or to explore for, naturalresources — in which case it is deemed to besituated in the country in which the naturalresources are situated or the exploration maytake place.

shares or comparable interests in a companythe assets of which consist wholly orprincipally of direct interests in or overland in one of the countries, or of rights toexploit or explore for natural resources inone of the countries — in which case it isdeemed to be situated in the country in whichthe assets or the principal assets of thecompany are situated.

Article 14 — Independent Personal Services

The purpose of this article is to ensure thatincome from professional services (as defined by paragraph2) or other independent personal services is taxable onlyin the country of residence except where the recipient hasa “fixed base” regularly available in the other country forthe purpose of performing his or her activites. If thereis a “fixed base”, income may be taxed in that othercountry, but only to the extent to which it is attributableto that “fixed base”

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Remuneration derived as an employee and incomederived by public entertainers are the subject of otherarticles of the agreement and are not covered by thisarticle.

Article 15 — Dependent Personal Services

Article 15 provides the basis upon which theremuneration of visiting employees is to be taxed.Generally, salaries, wages etc. derived by a resident ofone country from an employment exercised in the othercountry will be liable to tax in that other country.However, subject to specified conditions, there is aconventional provision for exemption from tax in thecountry being visited where only visits of a short—termnature are involved. The conditions for exemption are thatthe visit or visits not exceed, in the aggregate, 183 daysin the year of income of the country visited, that theremuneration is paid by, or on behalf of, an employer whois not a resident of the country being visited, that theremuneration is not deductible in determining taxableprofits of a “permanent establishment” or “fixed base”which the employer has in the country being visited andthat the remuneration will be subject to tax in the countryof residence. Where these conditions are met, theremuneration so derived will be liable to tax only in thecountry of residence.

By paragraph (3) of the article, income from anemployment exercised aboard a ship or aircraft operated ininternational traffic is to be taxed in the country ofresidence of the operator.

Article 16 — Directors’ Fees

Under this article, remuneration derived by aresident of one country in the capacity of a director of acompany which is a resident of the other country may betaxed in the country where the company is resident.

Article 17 — Entertainers

By this article, income derived by visitingentertainers (including athletes) from their personalactivities as such will continue to be taxed in the countryin which the activities are exercised, irrespective of theduration of the visit.

Paragraph (2) of this article is a safeguardingprovision designed to ensure that income in respect ofpersonal activities exercised by an entertainer, whether

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received by the entertainer or by another person, e.g., aseparate enterprise which formally provides theentertainer’s services, is taxed in the country in whichthe entertainer performs, whether or not that other personhas a “permanent establishment” or “fixed base” in thatcountry.

Article 18 — Pensions and Annuities

Under this article pensions and annuities (otherthan a government service pension referred to in paragraph2 of Article 19) are to be taxed only by the country ofresidence of the recipients.

Paragraph (3) ensures that any alimony or othermaintenance payment is taxable only in the country in whichthe payments arise.

Article 19 — Government Service

Paragraph (1) of this article provides thatremuneration, other than a pension or annuity, in respectof services rendered in the discharge of governmentalfunctions to a government (including a State or localgovernment) of one of the countries will be taxable only inthat country. However, such remuneration shall be taxableonly in the other country if the services are rendered inthat other country and the recipient is a citizen ornational of, or ordinarily resides in, that other country.

Paragraph (2) provides that any pension paid bythe government (including State and local government) ofone country in respect of services rendered to thatgovernment may be taxed only in that country, unless therecipient is a resident of, and a citizen or national of,the other country, in which case the pension is to be taxedonly in the other country.

By paragraph (3) the operation of paragraph (1) ofthis article is also extended to members of the Austrianpermanent delegation of foreign commerce in Australia.

Paragraph (4) provides, in effect, that paragraph(1) does not apply where the services are rendered inconnection with a trade or business carried on by agovernment. In such a case, the provisions of Articles 15or 16, as the case may be, apply.

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Article 20 — Students

This article applies to students temporarilypresent in a country solely for the purpose of theireducation who are, or immediately before the visit were,resident in the other country. In these circumstances, thestudents will be exempt from tax in the country visited inrespect of payments received from abroad for the purposesof their maintenance or education.

Article 21 — Income Not Expressly Mentioned

This article provides rules for the allocationbetween the two countries of taxing rights in relation toitems of income not expressly mentioned in the precedingarticles of the agreement.

Broadly, such income derived by a resident of onecountry is to be taxed only in his or her country ofresidence unless it is dervied from sources in the othercountry, in which case the income may also be taxed in thecountry of source.

However, the first—mentioned exclusive taxingright of the country of residence does not apply where theincome is effectively connected with a “permanentestablishment” or “fixed base” which a resident of onecountry has in the other. In such cases, the provisions ofArticle 7 or Article 14, as the case may be, will apply.

Article 22 — Sources of Income

Article 22 specifies the source of various classesof income, for the purposes of ensuring that each countryis empowered to exercise the taxing rights allocated to itby the agreement over residents of the other country andthat, as intended by the agreement, double taxation reliefwill be given by the country of residence in respect of taxlevied by the country of source in accordance with thetaxing rights allocated to it under the agreement. Theprovision resolves any conflict in domestic law sourcerules and obviates any question of income not having, bydomestic law rules, a source in the country that is, by theagreement, entitled to tax that income in the hands of aresident of the other country.

Broadly, classes of income which have a source inAustralia are outlined in paragraph (1), while classes ofincome, which for the purposes of Article 23 and Australiantax, have a source in Austria are outlined in paragraph (2.L

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Article 23 — Methods of Elimination of Double Taxation

Double taxation does not arise in respect ofincome flowing between the two countries where the terms ofthe agreement provide for the income to be taxed only inone country or the other, or where the domestic taxationlaw of one of the countries frees the income from its tax.It is necessary, however, to prescribe a method forrelieving double taxation in respect of other classes ofincome which are subject to tax in both countries.Australia’s other comprehensive taxation agreements providefor a credit basis for the relief of double taxation to beapplied by Australia and, usually, the other country. Inthese cases, the country of residence is required to givecredit against its tax for the tax of the country ofsource. This approach has generally been adopted in thisagreement.

Australia’s existing unilateral double taxationrelief arrangements will not apply to income in relation towhich the agreement will have effect. Those existingarrangements are to be replaced, with effect from thecommencement of the 1987—1988 year of income, with aworldwide general foreign tax credit system, the rules forwhich were contained in the Taxation Laws Amendment(Foreign Tax Credits) Act 1986, which received the RoyalAssent on 24 June 1986.

The general foreign tax credit system togetherwith the terms of this article and of the agreementgenerally, will form the basis of Australia’s arrangementsfor relieving a resident of Australia from double taxationon income from sources in Austria.

By paragraph (1) of the article, Australia willrelieve double taxation of income derived by its residentsfrom sources in Austria which, in accordance with theagreement, may be taxed by both countries, by allowing acredit, up to the amount of the Australian income taxreferable to the relevant Austrian income, for Austrian tax(including the tax on commercial and industrial enterpriseswhere it is levied on a basis other than capital or the sumof wages), paid by the Australian resident. -

Under the new general foreign tax credit system,in addition to a credit for Austrian tax on dividends, anAustralian resident company that has a controlling interestof at least 10 per cent in an Austrian subsidiary will beallowed a credit for “underlying” Austrian taxes paid byits subsidiary on the portion of the profits from which the -

dividends flowing to the Australian company were paid.Credit for underlying tax will be available for unlimitedtiers of related companies provided each company in thechain has a 10 per cent controlling interest in the company

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immediately below it, and the Australian parent directly orindirectly holds at least 5 per cent of the voting power ineach company.

Notwithstanding the credit form of relief providedfor by paragraph (1) of the article, salary and wagesearned and taxed in Austria in accordance with theagreement will be exempt from Australian income tax underthe the Australian domestic law where derived by anAustralian resident in performing relevant duties overseasfor a continuous period of 12 months or more. Aproportionate exemption will apply where the period ofservice is from 3 to 12 months. Exempted foreign earningswill be taken into account in calculating the rate ofAustralian tax on any other income, so that exemption ofthe foreign earnings will not also reduce the tax payableon the other income. This is commonly known as “exemptionwith progression”.

For its part, Austria will include in assessableincome of its residents certain income which, in accordancewith the provisions of the agreement, may be taxed inAustralia and allow a deduction from its tax for theAustralian tax paid up to but not exceeding the Austriantax on the income. This credit basis of relief is limitedto dividends, interest and royalties that are subject underthe agreement to limited Australian tax, certain incomefrom the alienation of real property and income notexpressly mentioned by the agreement that has a source inAustralia. Other income derived by an Austrian residentfrom Australia, which under the agreement may be taxed inAustralia, will be exempt from Austrian tax. However, anyincome derived by a resident of Austria which in accordancewith any article of the agreement is exempt from tax inAustria may be taken into account in determining the amountof tax on the remaining income of the Austrian resident,under the “exemption with progression” principle.

Paragraph (4) ensures that if Australia concludesa double taxation agreement with any other OECD membercountry on more favourable terms in relation to tax to bewithheld by Australia from dividends, interest or royaltiesthe Government of Australia shall immediately notify theGovernment of Austria in writing and shall enter intonegotiations with the Government of Austria to review therelevant provision or provisions in order to provide thesame treatment for Austria.

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Article 24 — Mutual Agreement Procedure

One of the purposes of this article is to providefor consultation between the taxation authorities of thetwo countries with a view to reaching a satisfactorysolution where a taxpayer is able to demonstrate actual orpotential subjection to taxation contrary to the provisionsof the agreement. A taxpayer wishing to use this proceduremust present a case within three years of the firstnotification of the action giving rise to the taxation notin accordance with the agreement and if, on consideration,a solution is reached, it may be implemented irrespectiveof any time limits imposed by domestic tax laws of therelevant country.

The article also authorises consultation betweenthe taxation authorities of the two countries for thepurpose of resolving any difficulties regarding theinterpretation or application of the agreement and to giveeffect to it.

Article 25 — Exchange of Information

This article authorises the two taxationauthorities to exchange information necessary for thecarrying out of the agreement or of domestic lawsconcerning the taxes to which the agreement applies. Thepurposes for which this information may be used and thepersons to whom it may be disclosed are restricted alongthe lines of Australia’s other comprehensive taxationagreements.

The exchange of information that would discloseany trade, business, industrial or professional secret ortrade process or which would be contrary to public policyis not permitted by the article.

Article 26 — Diplomatic and Consular Officials

The purpose of this article is to ensure that theprovisions of the agreement do not result in members ofdiplomatic and consular posts receiving less favourabletreatment than that to which they are entitled inaccordance with international laws.

Article 27 — Entry into Force

This article provides for the entry into force ofthe agreement. This will be on the first day of the thirdmonth next following the date on which notes are exchanged

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through the diplomatic channel notifying that the last ofthe constitutional processes has been completed to give theagreement the force of law in each country.

Once it enters into force, the agreement will haveeffect in Australia, for purposes of withholding tax, inrespect of income derived on or after 1 January in thecalendar year next following that in which the agreemententers into force and, in respect of tax other thanwithholding tax, in relation to income of any year ofincome beginning on or after 1 July in the calendar yearnext following that in which the agreement enters intoforce. Where a taxpayer has adopted an accounting periodending on a date other than 30 June, the beginning of theaccounting period that has been substituted for the yearbeginning on 1 July in the year in which the agreementfirst has effect will be the date from which the agreementwill take effect in respect of tax other than withholdingtax.

In Austria, the agreement will have effect inrelation to taxes withheld at source, on or after 1 Januaryin the calendar year next following that in which theAgreement enters into force, and in respect of otherAustrian tax, for taxable years beginning on or after1 January in the calendar year next following that in whichthe agreement enters into force.

Article 28 — Termination

By this article the agreement is to continue ineffect indefinitely. However, either country may givethrough the diplomatic channel written notice oftermination of the agreement on or before 30 June in anycalendar year beginning after the expiration of five yearsfrom the date of its entry into force. In that event, theagreement would cease to be effective in Australia, forwithholding tax purposes, in respect of income derived onor after 1 January in the calendar year next following thatin which the notice of termination is given and, for taxother than withholding tax, in relation to income of anyyear of income beginning on or after 1 July in the calendaryear next folowing that in which the notice of terminationis given. The agreement will cease to be effective inAustria in relation to tax withheld at source on amountspaid on or after 1 January in the calendar year nextfollowing that in which notice of termination is given andin respect of other Austrian taxes for taxable yearsbeginning on or after 1 January in the calendar year nextfollowing that in which the notice of termination is given.

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PART IX - AMENDMENTOFTHE INCOME TAX REGULATIONS

Clause 40 : Income Tax Regulations

This clause facilitates references to the IncomeTax Regulations which, in Part IX, are referred to as “theRegulations”.

Clause 41 : Live stock

The amendment of the Regulations being made bysub—clause (1) of this clause is consequential on theamendment of the Income Tax Assessment Act 1936 proposed byparagraph (a) of clause 17 of the Bill. That latteramendment (see earlier notes) will insert a new paragraph34(b)(a) in the Assessment Act which refers to the minimumcost prices prescribed in the Regulations in respect ofnatural increase of certain classes of live stock.Sub—regulation 5(3), which prescribes the relevant costprices, is therefore to be amended to reflect thatreference in paragraph 34(i)(a) of the Assessment Act.Presently the sub—regulation applies only for the purposesof paragraph 34(l)(b) of the Act. As proposed to beamended, the sub—regulation will apply for the purposes ofsection 34 of the Act. Consistent with the associatedamendment of section 34 of the Act, the amendment of theRegulations is, in terms of sub—clause 41(2), to apply inrespect of natural increase born after 30 June 1984.

Sub—clause 41(3) is a formal provision that makesit clear that the further amendment or the repeal, byregulation, of the Regulations as amended by Part IX of theBill is not in any way prevented.

PART X - AMENDMENTOF THE SALES TAX

ASSESSMENTACT (NO. 1) 1930


This clause facilitates reference to the Sales TaxAssessment Act (No. 1) 1930 which, in Part X, is referredto as “the Principal Act”.


This clause will amend the burden of proofprovisions of section 42E of the Principal Act to the sameeffect as the amendment to be made by clause 30 to theIncome Tax Assessment Act 1936 — see notes on that clause.

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PART XI - AMENDMENTOF THE TAXATION

ADMINISTRATION ACT 1953


This clause facilitates reference to the TaxationAdministration Act 1953 which, in Part XI, is referred toas “the Principal Act”.

Clause 45 : Application for review of certain decisions

This clause deletes the words “AdministrativeAppeals” from the expression the Administrative AppealsTribunal in section 14Y of the Principal Act. Followingupon the insertion by the Taxation Boards of Review(Transferof Jurisdiction) Act 1986 of a definition of“Tribunal” (to mean the Administrative Appeals Tribunal) insection 2 of the Principal Act these words are no longernecessary.

PART XII - MISCELLANEOUS

Clause 46 : Application

Clause 46 provides that amendments made by clauses6, 8, 11, 13, 30 and 43, which relate to matters dealingwith burden of proof, will apply to proceedings before theFederal Court or the High Court that commenced after thecommencement of this Act.

Clause 47 : Amendment of assessments

Clause 47, which will not amend the Principal Act,is a standard measure that will ensure that theCommissioner of Taxation has authority to re—open an incometax assessment made before the Bill becomes law, shouldthat be necessary to give effect to the various amendmentscontained in Parts VII and IX of the Bill.

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BANK ACCOUNTDEBITS TAX AMENDMENTBILL 1986

Clause 1 : Short title, &c.

By sub—clause (1) of this clause, the amending Actis to be cited as the Bank Account Debits Tax Amendment Act1986.

Sub—clause (2) facilitates references to the BankAccount Debits Tax Act 1982 which, in the Bill, is referredto as “the Principal Act”.

Clause 2 : Commencement

By this clause, the amending Act is to come intooperation on 1 December 1986 (see also notes onclause 4) But for this clause the amending Act would byreason of sub—section 5(lA) of the Acts Interpretation Act1901, come into operation on the twenty—eighth day afterthe date of Assent.

Clause 3 : Schedule

T-he rates of bank account debits tax imposed bysection 4 of the Principal Act are set out in the Scheduleto the Act. Broadly, section 4 imposes bank account debitstax in circumstances where —

• a taxable debit of $1 or more is made to a- taxable account (i.e., a debit is made to a

cheque account in Australia for which acertificate of exemption is not in force);

• an eligible debit of $1 or more is made to anexempt account (i.e., a debit is made to anaccount for which a certificate of exemptionis in force, but the debit is not of a kindcovered by the exemption certificate), or

an eligible debit of $1 or more is made to anaccount kept outside Australia by a residentof Australia for the purpose of avoiding thetax for which the account holder wouldotherwise be liable.

Tax imposed in respect of an eligible debit in thesecircumstances is payable by the account holder, while thatimposed in respect of a taxable debit is payable by thebank but is recoverable from the account holder.

In terms of section 5 of the Principal Act, thegeneral rates of bank account debits tax are as set out incolumn 2 of the Schedule, while the rates in respect of

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debits made to an account kept in the Australian CapitalTerritory (which is specified as including the Jervis BayTerritory) — or an account kept outside the ACT or outsideAustralia for the purpose of avoiding ACT rates of tax —

are as set out in column 3 of the Schedule. The rates oftax set out in column 3 are double those set out incolumn 2.

Clause 3 of this Bill will amend the Schedule tothe Principal Act by omitting the existing amounts of taxin column 2 of the Schedule and substituting new amounts.The effect is to increase the general rates of bankaccounts debits tax, while maintaining the existing ACTrates. The Schedule, as proposed to be amended, will be asfollows:

Column 1

Range of amounts of debits

Column 2

Amount oftax

Column

Amounttax

3

of

Not less than $1 but lessthan $100 15 cents 20 cents

Not less than $100 but lessthan $500 35 cents 50 cents

Not less than $500 but lessthan $5,000 75 cents $1

Not less than $5,000 but lessthan $10,000 $1.50 $2

$10,000 or more $2 $3

Clause 4 : Application of amendments

This clause, which will not amend the PrincipalAct, provides that the amendments being made by the Billare to first apply to debits made on or after 1 December1986.

1985—86 the parliament of the commonwealth of...

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