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The Existing Law

14.62. Existing income tax law contains provisions that may be utilised by some classes of individuals to reduce their tax liability when income fluctuates. These provisions fall broadly under three headings: primary producer averaging; drought bonds; and measures to spread exceptional income (sometimes referred to as ‘anti-bunching’ provisions). On a wide interpretation, each of these could be described as averaging; but to avoid confusion the term ‘averaging’ will be confined to those procedures involving the calculation of tax liability by reference to the average of an individual's income over a number of years.

14.63. The system of primary producer averaging provides for taxable income of the current year to be assessed at the rate applicable to the average income of the five years up to and including the current year. (If, for example, a primary producer has


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an income stream as shown in Table 14.E, 1974–75 tax liability would be determined by applying to $5,600 the rate of 4.35 per cent referable to $2,068.) Where primary producers have average or taxable incomes over $16,000, the application of averaging is limited. Special rules exist for determining the first year to be taken into account in calculating average income, and there are also provisions to deal with producers whose income is permanently reduced. There are limitations on withdrawing from or re-entering the scheme. For the purpose of averaging, a primary producer is a taxpayer who carries on a business of primary production; but it does not have to be his principal activity or constitute his chief source of income. Averaging is available to beneficiaries presently entitled to a share of income in a trust estate deriving income from a business of primary production.

TABLE 14.E: ILLUSTRATION OF PRIMARY PRODUCER AVERAGING

                 
Income year   Taxable income  
1970–71  450 
1971–72  550 
1972–73  1,040 
1973–74  2,700 
1974–75  5,600 
10,340 
note note note note  

14.64. The drought bond scheme is a means by which certain primary producers can postpone tax payments and take steps to spread their incomes. Individuals who derive at least 90 per cent of their gross farm receipts from raising sheep or beef cattle are permitted to deduct from assessable income expenditure on the purchase of government securities issued under the Loan (Drought Bonds) Act of 1969. The deduction is limited to $50,000, and it may not exceed 20 per cent of sheep and beef cattle receipts for the year of income. If the bonds are redeemed due to drought, fire or flood, an amount equal to the deduction is included in assessable income in the redemption year. Redemption for any other reason results in a cancellation of the tax saving, but the individual may have derived a benefit from the deferred payment of tax.

14.65. In addition, the present legislation contains a variety of specific anti-bunching measures designed to reduce the extra tax burden on individuals receiving certain types of lumpy income. The provisions applicable to primary producers, discussed in Chapter 18, include the allowance of a tax rebate when an abnormal profit from the disposal of livestock in the course of putting an end to a business adversely affects the size of the average income calculated for averaging purposes; spreading of insurance recovery on livestock and trees; postponement of assessment of the proceeds of a second wool clip; spreading of income from the forced disposal of livestock; election to treat proceeds of a forced disposal of livestock as a reduction of outgoings otherwise allowable for the cost of replacement stock; and the spreading of compensation for death or compulsory destruction of livestock.

14.66. Other anti-bunching provisions allow the application of concessional rates of tax to specified kinds of income. Under certain circumstances the taxable income, including abnormal income, of authors and inventors is taxed at the rate appropriate


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to the individual's normal income plus one-third of abnormal income. The concessional rate is not available automatically but must be applied for by the taxpayer. A concessional rate of tax is also available to taxpayers who, upon ceasing business, receive abnormal income from the disposal of plant.

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