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CONTENTS

                                                                                                 


  ― ii ―
                                                                                               


  ― iii ―
                                                                                           


  ― iv ―
                                                                                           


  ― v ―
                                                                                               


  ― vi ―
                                                                                       


  ― vii ―
                                                                             


  ― viii ―
                                                                                                   


  ― ix ―
                                                                                         


  ― x ―
                                                                                                     


  ― xi ―
                                                                                                   


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  ― xiii ―
                                                               
Page 
List of Tables  xv 
Preface  xvii 
1. THE NEED FOR TAX REFORM 
I. Reasons for a Review 
II. Committee's Approach 
2. THE AUSTRALIAN TAX SYSTEM IN PERSPECTIVE 
I. Historical Perspective 
II. International Perspective 
3. CRITERIA FOR TAX SYSTEMS  11 
I. Terms of Reference and their Interpretation  11 
Fairness  12 
Simplicity  15 
Efficiency  16 
Other Objectives  17 
II. Appraisal of Particular Taxes  17 
Personal Income Tax  17 
Company Income Tax  18 
Capital Gains Taxes  18 
Estate and Gift Duties  19 
Wealth Taxes  19 
Taxes on Goods and Services  19 
Narrow Based Taxes  19 
Broad Based Taxes  19 
Grants  20 
III. Alternative Tax Systems  20 
4. THE POSITION OF PROGRESSIVITY  23 
I. The Statistical Situation  24 
II. Tax and Non-tax Policies in Redistribution  29 
III. The Distributional Objective  32 
5. THE GOALS OF TAX REFORM  35 
I. The Options  35 
II. Immediate and Long-term Perspectives  37 
6. INFLATION AND TAX REFORM  39 
I. Taxes and Inflation Control  40 
II. Effects of Inflation on Taxes  47 
Tax Payments  48 
Tax Drift  48 
Total Tax Receipts  48 
Tax Mix  48 
Income Tax Rates  49 
Concessional Allowances  53 
Estate and Gift Duty  55 
Tax Base  56 
Need for Further Investigation  58 
7. INCOME TAX: THE BASE  59 
I. Problems of Definition  59 
The Concept of Income  59 



  ― ii ―
Capital Gains 
60 
Bequests and Gifts Received  60 
Lottery and Casual Gambling Winnings  60 
Retirement Benefits and Compensation for loss of office  60 
Compensaton for physical injury to person received in a lump sum or for injury to reputation  61 
Non-money Income  61 
Deduction of Expenses  62 
Expenses Incurred in Deriving Income  62 
Other Deductible Expenses  62 
Exempt Income  63 
Annual Accounting  63 
Income of Particular Industries and Activities  63 
Income Moving Through Intermediaries  64 
International Aspects  64 
II. Specific Issues  64 
Compensation for Physical Injury to the Person  64 
Compensation for Injury to Reputation  66 
Imputed Rent of the Owner-Occupied Home  66 
Costs of Travel to and from Work  69 
Child-Minding Expenses  70 
Expenses of Income Earning Activities Carried on at Home  72 
Subscriptions to Trade and Professional Associations  74 
Income Protection Insurance Premiums  74 
Self Education Expenses  76 
Dissection and Apportionment of Composite Receipts and Outgoings  76 
8. INCOME TAX: ISSUES RELATING TO BUSINESS AND PROFESSIONAL INCOME  79 
I. Cash or Accruals Basis  81 
II. Accruals Tax Accounting and Financial Accounting  83 
Holding Charges  84 
Work in Progress  84 
Tax on Basis of Financial Accounting Principles  85 
III. Provisions and Accrued Expenses  86 
Long-service Leave and Holiday Pay  86 
Other Provisions for Liabilities  89 
Provision for Doubtful Debts  90 
IV. Depreciation and Amortisation of Fixed Assets  90 
Plant and Equipment  91 
Buildings  92 
Classes of Buildings which should qualify  95 
The inclusion of Existing Buildings  95 
Treatment on Change of Ownership  96 
Demolition and Damage  96 
Effect on Revenue  97 
Leasehold Improvements  97 
Other Assets and Costs of a Capital Nature  98 
V. Trading Stock  98 
Definition of Trading Stock  99 
Land Held for Resale  100 



  ― iii ―
Plant Spares and Consumable Stores 
100 
Shares, Debentures and Similar Assets  100 
Methods of Valuing Trading Stock  101 
Cost Price  101 
Market Selling Value  103 
Replacement Price  103 
Disposal of Trading Stock  103 
VI. Recoupment of Losses  106 
Carry-back of Losses  106 
Carry-forward of Losses  108 
Exempt Income  109 
Effect of Dividend Income  109 
VII. Implications of Inflation for Business Income  110 
VIII. Sundry Costs of Business Operation  113 
Lease Transactions  113 
Expenditure on Repairs to Income-producing Property  113 
Professional Libraries  114 
Travelling and Entertainment Expenses  115 
Anti-pollution and Ecological Expenditures  115 
IX. Conclusion  116 
9. INCOME TAX: ISSUES RELATED TO EMPLOYMENT AND INVESTMENT INCOME  117 
I. Employment Income  117 
Fringe Benefits  117 
Adequacy of Present Law  118 
Kinds of Benefits  119 
Housing  119 
Board and lodging  119 
Use of motor vehicle  120 
Goods and services supplied at discount  120 
Low interest loans  121 
Prizes and gifts  121 
Stock option and stock purchase schemes  121 
Goods and services supplied by others and paid for directly by the employer  122 
Allowances made available to employees for travel and entertainment expenses  123 
Tax Instalment Deductions  123 
Other Issues  124 
Salary and Wages Adjustments  124 
Travel and Removal Expenses  124 
Travel within employment for a temporary purpose  125 
Travel and removal expenses within an employment for a more permanent purpose  125 
Travel and removal expenses to take up a new employment  126 
Living away from home  126 
Study leave expenses  126 
Payments to obtain Release from Employment Contracts  127 
Standard Deduction  128 
II. Investment Income  128 



  ― iv ―
10. PERSONAL INCOME TAX: THE TAXPAYING UNIT 
131 
I. Overseas Experience  131 
United Kingdom  131 
United States  132 
South Africa  133 
France  134 
Canada  134 
II. Review of Possible Reform  134 
Questions Arising over the Taxation of Family Units  135 
Individual Taxation with an Election System  137 
Restrictions on Right of Election  137 
De Facto Relationship  138 
Separated or Divorced Spouses  138 
A Proposal for Public Examination  139 
Reservation by the Chairman  140 
11. INCOME-SPLITTING  143 
Income-splitting and Minor Children  145 
Income from Gifts of Capital  146 
Partnerships, Inter-Vivos Trusts and Arrangements Achieving Similar Income-sharing Results  148 
Excessive Payments for Services or Benefits  151 
Alienation of Income  152 
Family Companies  152 
Section 260  153 
Distributions of Income under a Legal Obligaton  154 
Distributions of Income under a Moral Obligation  155 
Retrospectivity  155 
Reservation by R. W. Parsons  157 
Reservation by K. Wood  161 
12. PERSONAL INCOME TAX: DEPENDANT ALLOWANCES AND OTHER CONCESSIONAL DEDUCTIONS  163 
I. Concessional Deductions: Dependants  163 
Dependent Spouse  163 
Other Adults  165 
Dependent Children  165 
Student  166 
II. Other Concessional Deductions: Issues of Principle  166 
III. Concessional Deductions for Education and Medical Expenses  169 
Education Expenses  170 
Medical Expenses  170 
Payments to Medical and Hospital Benefits Funds and Medical Expenses Generally  172 
Expenses of Blind Persons or Persons Confined to Bed or Invalid Chair  174 
Funeral Expenses  174 
IV. Zone Allowances  174 
Zone Boundaries  175 
Deduction or Rebate  175 
The Amount of the Concession  176 
Qualifying Period  176 



  ― v ―
13. PERSONAL INCOME TAX: SOCIAL SECURITY 
177 
I. Social Security Payments and the Tax System  177 
II. Social Security Contributions  180 
14. PERSONAL INCOME TAX: RATE STRUCTURE  183 
I. Complexity of Rate Scale  183 
II. Surcharge on Property Income  185 
III. Shape of Rate Scale  188 
Low Range  188 
High Range  190 
Intermediate Range  192 
IV. Frequency of Adjustment  193 
Purpose of Adjustment  194 
Statutory or Discretionary  194 
Adjustment Procedure  196 
V. Income Averaging  197 
The Existing Law  197 
Primary producer averaging  197 
Drought bond scheme  198 
Anti-bunching measures  198 
Alternatives to the Existing Law  199 
Averaging  199 
Cumulative averaging  200 
Block averaging  200 
Marginal adjustment scheme  200 
United States System  201 
Income Equalisation Scheme  204 
Anti-bunching Measures  205 
Appendix A: Tax payable under Alternative Systems: 1974–75 Rates  206 
15. INCOME TAXATION IN RELATION TO TRUSTS AND PARTNERSHIPS  207 
I. Trusts  207 
Present Entitlement  208 
Present Entitlement of a Beneficiary under a Disability  210 
Net Income of the Trust Estate and Trust Income  211 
Accumulating Income  213 
Losses of Previous Years  215 
II. Partnerships  216 
Net Income of a Partnership and Partnership Profits  216 
Treatment of Losses  217 
Payment by Surviving Partners to Retired Partner or to Estate of Deceased Partner  218 
III. International Aspects  218 
Trusts  218 
Partnerships  220 
16. COMPANY INCOME TAX  223 
I. Present System of Company Income Taxation  225 
Criticism of the Present System  225 
II. Unacceptable Alternatives to the Present System  228 
Tax the Allocation of Profits  228 
Tax Actual Distributions and Accruals in Value of Shares  228 



  ― vi ―
Require Distribution of All Profits and Tax these Distributions 
229 
Tax the Company and Exempt Dividends from Personal Income Tax  229 
III. Split-rate and Imputation Systems  229 
The Choice of an Imputation System  231 
IV. Proposed Imputation System  233 
Amount of Imputation  234 
Minimum Distributions by Companies  234 
International Implications of Proposed Imputation System  235 
Investment by Non-residents  236 
Investment by Australian Resident in Foreign Countries  237 
V. Imputation and Forward Shifting  238 
VI. Proposal to Allow Election to be Taxed as a Partnership  239 
Eligibility to Elect  239 
Amount and Nature of Company Profits  239 
Number and Nature of Shareholders  240 
Capital Structure of the Company  240 
Manner and Timing of Election and Manner of Termination of Election  240 
Consequences of Election and Termination of Election  241 
VII. Appropriateness of Special Provisions for Small Enterprises  241 
VIII. Aspects of Present Company Taxation  242 
Minimum Distribution Requirements  242 
Income of Private Investment Companies  245 
Assessment of Company Groups  246 
The Treatment of Company Groups in Other Countries  246 
United States  246 
New Zealand  247 
Canada  247 
United Kingdom  247 
The Choice of Method of Relief  247 
Holding and Subsidiary Companies  248 
Trading and Consortium Companies  248 
Restrictions on Carry-forward of Company Losses  249 
Loan Capital and Share Capital  250 
Convertible Notes  251 
High Gearing  251 
17. INTERNATIONAL ASPECTS OF INCOME TAXATION  253 
I. The Taxation of Foreign-source Income of Australian Residents  254 
Concept of Resident of Australia  254 
Foreign-source Income not Subject to Australian Tax  256 
Credit for Foreign Tax on Foreign-source Income subject to Australian Tax  256 
Exemption and Credit as Methods of Giving Relief Against Double Taxation  257 
Equity  257 
Efficiency  258 
Simplicity  259 



  ― vii ―
Committee's Proposals 
260 
II. Australian-origin Income of Non-residents  262 
Justification for Taxing Income of Non-residents on the Basis of Origin in Australia  263 
Taxation on the Basis of Source in Australia  264 
Tax on Australian-origin Income by Withholding  265 
Tests of Foreign Origin of Income  266 
Reconstruction of Australian-source Income of Non-residents  266 
Reconstruction of Income of Australian Residents from Transactions with Non-residents  268 
Taxation of Branch Operations in Australia  269 
III. Double Taxation Agreements  270 
Appendix A: Rules for Determining Source of Income of Non-residents  273 
Income from Sale of Goods Imported into Australia  273 
Income from Purchase and Sale of Goods that are at all times in Australia  273 
Income from Purchase of Goods in Australia and their Sale Abroad  273 
Income from Manufacturing Operations in Australia  274 
Income from Sale of Australian Real Property  274 
Income from Sale of Shares  274 
Income from Services Performed as an Employee  275 
Income from Services Performed Otherwise than as an Employee  275 
Income in the Form of Rentals in respect of Real Property  276 
Income in the Form of Rents of Chattels  276 
Income in the Form of Payments for the use of Commercial or Industrial Property  277 
Income Arising from Payments for Commercial or Industrial Property  277 
Income Arising from Payments for Scientific, Technical, Industrial or Commercial Knowledge or Information  277 
Income in the Form of Dividends  278 
Income in the Form of Interest  278 
18. INCOME TAXATION IN RELATION TO PARTICULAR INDUSTRIES: PRIMARY PRODUCTION  281 
The Definition Provisions  282 
Valuation of Livestock  282 
Spreading and Averaging Provisions  284 
Capital Expenditure and Depreciation  285 
Losses of Previous Years  286 
Restriction of Benefit of Primary Production Provisions  286 
19. INCOME TAXATION IN RELATION TO PARTICULAR INDUSTRIES: MINING  289 
I. General Mining  289 
Conduct of Mining Operations  290 
Determination of Net Income from Mining  292 
Provisions of the Act  293 
Exploration and Prospecting Expenditure  293 



  ― viii ―
Development of a Mine and Mining Infrastructure 
294 
Processing and Treatment of Minerals  296 
Overseas Exploration and Prospecting  297 
Anti-pollution and Ecological Expenditure  297 
Depletion Allowance  299 
Purchase of Mining or Prospecting Right or Information  300 
Proceeds of Sale of Mining Right or Information  302 
Section 23(o)  302 
II. Recent Amendments to the Act  303 
Exploration Expenditure by General Mining Companies  304 
Allowable Capital Expenditure: Costs of Company Formation and Capital Raising  305 
Immediate Write-off Provisions  305 
Housing and Welfare Expenditure  307 
Transportation Expenditure: Division 10AAA  308 
III. Petroleum Mining  308 
Overseas Exploration and Prospecting  309 
Exploration and Prospecting Expenditure  309 
Development Expenditure  311 
Depreciation Allowances  312 
Acquisition of Prospecting Information or Mining Right  312 
IV. Quarrying  312 
Nature of Quarrying Industry  313 
Expenditure Incurred in Quarrying  313 
Quarrying Plant Depreciation  314 
Exploration Expenditure  314 
Development Expenditure  315 
Anti-pollution and Ecological Expenditure  316 
Acquisition Costs and Proceeds of Sale of Quarry  316 
Appendix A: Mining Taxation: A Comparative Survey  319 
I. Exploration Costs  319 
Australia  319 
General Mining  319 
Petroleum  320 
Transfer to Purchaser of Benefit of Deduction  320 
United Kingdom  321 
Canada  322 
‘Principal Business Corporations’  322 
Taxpayers other than ‘Principal Business Corporations’  322 
United States  323 
South Africa  323 
New Zealand  324 
Mining Companies  324 
Loss Carry-forward  324 
Appropriations  324 
Mining Operators  325 
Non-resident Mining Operators  325 
II. Capital Expenditure on Plant and Development  325 
Australia  325 
General Mining  325 
Railways, Roads, Pipelines  326 



  ― ix ―
Petroleum 
327 
Sale of Prospecting or Mining Rights or Information  328 
Disposal of Mining and Petroleum Mining Assets  328 
United Kingdom  328 
Canada  330 
Depletion Allowances  330 
Additional Allowances  331 
Capital Cost Allowances  331 
United States  332 
Depletion Allowances  332 
Percentage Depletion  332 
Development Expenditure  333 
South Africa  333 
Computation of Deduction  333 
Closing Down of Mine  334 
Change of Ownership  334 
New Zealand  334 
III. Investment Incentives  335 
Australia  335 
Deductibility of Capital Subscription  335 
Exempt Income  336 
Losses Incurred in Gaining Exempt Income  336 
United States  337 
Canada  337 
New Zealand  337 
South Africa  338 
20. INCOME TAXATION IN RELATION TO PARTICULAR INDUSTRIES: GENERAL INSURANCE, EXEMPT ORGANISATIONS AND MUTUAL ASSOCIATIONS  339 
I. General Insurance  339 
Determination of Earned Premiums  339 
Claims Incurred but not Reported  340 
Catastrophe Fund  341 
Reinsurance with Non-residents  341 
II. Exempt Organisations and Mutual Associations  342 
Local Governing Bodies, Public Authorities and Institutions of a Charitable Kind  342 
Non-profit Associations and Societies Formed for Particular Purposes  342 
Co-operative Companies  344 
Friendly Society Dispensaries  346 
21. INCOME TAXATION IN RELATION TO SUPERANNUATION AND LIFE INSURANCE  349 
I. The Case for Special Treatment  349 
II. Superannuation, Retiring Allowances and Related Matters  350 
Background and Present Legislation  350 
Taxation of Lump Sum Payments on Retirement  351 
Deductibility of Retiring Allowances Paid by Employers  353 
Deductibility of Contributions to Superannuation Funds  354 
Taxation of Income of Superannuation Funds  355 



  ― x ―
Taxation of Benefits Received from Superannuation Funds 
358 
International Comparisons: A Brief Summary  360 
Proposals  361 
The First View  361 
The ultimate position  362 
Transitional provisions: lump-sum retirement benefits  365 
The income of superannuation funds  367 
Contributions to approved superannuation funds  369 
Provision for self-employed persons  369 
Transitional provisions for superannuation funds  370 
The 30/20 requirements  370 
The Second View  370 
The amount of tax-assisted saving  372 
Contributions to the fund  372 
Approved funds  372 
The taxing of receipts from an approved fund  372 
The phasing out of funds approved under the old law  373 
Comparison of the Two Views  373 
III. Life Insurance  375 
Background and Present Legislation  375 
Deductibility of Premiums  375 
Taxation of Life Insurance Companies  376 
The 30/20 Requirements  377 
Taxation of Policy Proceeds  377 
International Comparisons: A Brief Summary  378 
Conclusion  379 
22. INCOME TAX ADMINISTRATION  381 
I. Legislature, Appeals and Prosecutions  381 
The Commissioner's Discretion  381 
Amendment of an Assessment  383 
Objections to an Assessment  384 
Powers and Procedures of a Board of Review  385 
Appellate Powers and Procedures  388 
Costs of Objections, Reviews and Appeals  390 
Interest Upon Pre-paid Tax Liabilities  391 
Taxation Prosecution Procedures and Penalties  392 
Hardship Relief  394 
Public Interest in Taxation Legislation  396 
Independent Standing Committee  396 
II. Procedures and Compliance  397 
Adjustment Sheets  397 
Supply of Information  397 
Return Forms  397 
Information Bulletins  397 
Advance Rulings  398 
Non-taxable ‘Assessments’  398 
Taxpayer Compliance  399 
Registered Tax Agents  400 
III. Payment of Tax  401 
Tax Instalment Deduction System  401 
Excess Instalment Deductions  401 



  ― xi ―
Limited Effectiveness 
402 
Other Aspects  404 
Provisional Tax System  405 
Company Tax System  409 
Withholding Tax  411 
23. CAPITAL GAINS TAX  413 
I. The General Issue  414 
II. The Method of Taxing  416 
III. Specific Issues  419 
Transitional Provisions  419 
Bunching and Spreading  420 
Determination of Amount of Gain  421 
Treatment of Companies  422 
Treatment of Trusts  423 
Treatment of Gifts  424 
Treatment of Unrealised Gains at Death  425 
Exemption on Retirement, Death or Disablement  425 
Treatment of Taxpayer's Principal Residence  426 
Exemption of Small Gains  427 
Exemption of Certain Assets  427 
Life Assurance Policies  428 
Superannuation Rights  428 
Depreciable Assets  428 
Intangible Assets  428 
Roll-over for Certain Assets  428 
Treatment of Losses  429 
IV. The Distinction Between Capital and Income  430 
Section 26(a)  430 
Section 26AAA  431 
Replacement of Sections 26(a) and 26 AAA upon their Repeal  431 
V. Development Gains Tax  432 
VI. Conclusion  433 
Reservation by R. W. Parsons  435 
Reservation by K. Wood  438 
24. ESTATE AND GIFT DUTY  439 
I. The Form of a Death Tax  441 
II. Proposed Reforms  442 
The Tax Base  442 
Integration of Gift Duty with Estate Duty  443 
Deductions in Determining the Estate Duty Base  444 
Rate Structure  444 
Concessions for Dependants  445 
Other Concessions  447 
Adjustments for Inflation  447 
Advance Provision for Payment of Tax  448 
Quick-succession Relief  448 
Fall in Value of Assets after Death  450 
Valuation of Assets  451 
Jurisdiction of Integrated Estate and Gift Duty  451 
Incidence of Integrated Estate and Gift Duty  452 



  ― xii ―
Assessment Procedures 
453 
A National Estate and Gift Duty  453 
Appendix A: The Base of an Integrated Estate and Gift Duty  455 
I. Powers Over Property  445 
II. Options  457 
III. Settled Property  459 
Life Estates  460 
Estates for a Term of Years or for the Life of Another Person  462 
Discretionary Trusts  462 
Accumulating Income  463 
Special Cases  464 
IV. Annuities  465 
V. Gift of Services  466 
VI. Use of Property  467 
VII. Debts  468 
VIII. Partnerships  468 
IX. Companies  469 
Transfer of Assets to a Company  469 
Power or Control in Relation to Companies  469 
Benefits from a Company  470 
Gifts in Transactions Involving Companies  470 
Gift to a company  471 
Gift by a company  471 
Allotment of shares  472 
Variation in share rights  472 
Change in share rights without concurrent company action  472 
An obligation to sell shares to specified persons at a price specially determined  473 
Declaration of dividends  473 
Definition of a ‘Family’ or ‘Closely Controlled’ Company  474 
X. Involuntary Gifts  474 
XI. Insurance and Superannuation  475 
XII. Joint Ownership  475 
XIII. Exempt Transactions  475 
XIV. Interrelation of Income Tax and Gift Tax  476 
Appendix B: Rate Structure  479 
I. Present Duties and Grossing-up  479 
II. Illustration of a Scale of Integrated Duty  479 
III. Adjusting the Rate Scale  480 
IV. Quick-succession Relief  481 
Appendix C: Situs of Assets  483 
Reservation by R. W. Parsons  485 
Reservation by K. Wood  487 
25. CHARITIES  489 
I. Deductibility from Income of Gifts to Charities  489 
II. Income of Charities  490 
III. Charities in Relation to Gift and Estate Duties  491 
IV. Issues of Principle  492 
Subsidy by Deduction  492 
Subsidy by Exemption of Income  493 
V. Uniformity of Tax Treatment  495 



  ― xiii ―
Appendix A: Extract from Income Tax Assessment Act 
497 
Appendix B: Extract from Estate Duty Assessment Act  501 
Appendix C: Tax Treatment of Charities  503 
26. WEALTH TAX  505 
I. Overseas Experience  505 
II. Appraisal  506 
III. Conclusion  510 
27. TAXATION OF GOODS AND SERVICES  511 
I. Existing Taxes on Goods and Services  511 
II. Broad-based Taxes  515 
Turnover Tax  516 
Wholesale Sales Tax  517 
Retail Sales Tax  517 
Value-added Tax  518 
III. Level of VAT and Transitional Problems  520 
Appendix A: Sales Tax as a Continuing Tax  523 
I. Tax Base and Rates of Tax  523 
II. Structure and Administration of the Law  523 
Simplification of the Law  523 
Time for Lodgment of Returns  524 
Objections and Appeals  524 
Freight Charges  526 
Avoidance of Tax  526 
28. CONCLUSION  529 
Advertisement of Terms of Reference and Invitation to Submit  533 
List of Authors of Submissions  535 
List of Commissioned Studies  547 
Treasury Taxation Papers  549 
Members of the Professional Staff who assisted the Committee for varying periods  551 
Professional Firms, Universities and Organisations who made Professional Staff Available to the Committee  551 
Members of the General Services Staff  551 
Important Statutory Alterations to the Taxation Legislation since the Taxation Review Committee commenced its work  553 
Index  559 

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