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Thursday, 19 November 1936

Senator Sir GEORGE PEARCE (Western Australia) (Minister for External Affairs) [10.13].- I move-

That the bill be now read a second time.

This is the bill which is introduced each year for the imposition of the rates of tax to be charged in income tax assessments for the current financial year. In its provisions, the bill implements the remissions of income tax forecast by the Treasurer in his budget speech, in that the rates of normal income tax on income from personal exertion and property in the case of individuals have been reduced by 10 per cent., and the provisions relating to the imposition of the special tax on property income are not being re-enacted. As honorable senators are aware, the special property tax was imposed at the beginning of the depression and in the first . year of its operation, namely, 1930-31, the rate of tax was 1\ per cent, of the taxable income. For the next two years, viz., 1931-32 and 1932-33 the rate was increased to 10 per cent. In 1933-34 it was reduced to 6 per cent, and last year a further reduction to 5 per cent, was made. This particular tax has been universally regarded as one of the most severe forms of the emergency taxation which was imposed to ensure budgetary stability, and it has been the target of severe criticism right from the time of its commencement. As I have mentioned, reductions have taken place until the rate now stands at 5 per cent, of the taxable income from property. The Government is extremely pleased to be able to announce the complete withdrawal of this tax, thus relieving taxpayers in receipt of property income of an extremely onerous burden under which they have laboured during the last six years. The reduction of 10 per cent, of the rates of normal income tax on income from personal exertion and property will benefit all individuals whether their income be in the form of wages, salaries, or from a business, or from investments.

The Government feels satisfied that the reductions of taxation which are embodied in this bill will assist in the restoration of prosperous economic conditions and will conduce to the benefit of the whole of the community. The rates of taxes are fixed in accordance with the schedules included in the bill. The first schedule sets out the manner in which the rate of income tax- on personal exertion incomes is to be ascertained. In 1931-32, Professor Giblin, who was the Acting Commonwealth Statistician, revised the existing formula for arriving at the rate of tax. This revision was an adaptation of the rate applied in the previous year subject to an all-round increase of approximately 5 per cent. In 1933-34, the rate of tax on personal exertion income was reduced by 15 per cent., and the rate for that year was accordingly ascertained by taking 85 per cent, of the rate provided by the 1931-32 formula. The further reduction of 10 per cent, on last year's rates provided for in this bill means that the rate will be 76.5 per cent, of the rate originally prescribed. The rate of tax increases evenly with each £1 of taxable income until the taxable income reaches £6,900. A flat' rate of 68.85d. is imposed on each £1 of taxable income in excess of £6,900. Originally this flat rate was fixed at 90d., but the reduction of 15 per cent, in 1933-34 combined with the present reduction of 10 per cent, reduces the rate to 68.85 as set out in the schedule.

The second schedule relates to income from property. As no reduction of the rates of tax on property income has been made since the present formula was introduced in 1931-32, the rate for this year is ascertained by taking 90 per cent, of the rate as originally prescribed. I wish to make it clear that the reductions of the special property tax which were made in 1933-34 and 1935-36 have no relation to this formula which determines how the rate of normal income tax on property income is to be ascertained. The special property tax was superimposed on the normal income tax, and was a straight-out percentage of the taxable property income. Under the for- mula the rate of taxincreases with each £1 of taxable income until a taxable income of £3,700 is reached, thereafter a flat rate of 81d. is charged. Aswith personal exertion incomes, the flat rate was originally 90d. The 10 per cent. reduction explains the difference. The graduation of the rate of tax on property income as the income increases is much steeper than in the case of personal exertion income, and although the rates of tax on the two classes of income commence at almost identical points, they diverge until at about £1,200 the rate of tax on property income is double that on the same amount of personal exertion income. This relation is generally maintained upon incomes up to approximately £5,000. Thereafter the differentiation against property income begins to diminish. The third schedule applies in the case of the taxpayer whose total income is derived partly from personal exertion and partly from property. The taxpayer's rate of tax on the separate amounts of personal exertion and property income is ascertained as if the taxpayer's total income were derived exclusively from personal exertion and property respectively. The result of applying the provisions of the schedule is that the taxpayer pays tax on his taxable incomes from personal exertion and property at the rate attributable to. his total taxable income subject, of course, to the averaging provisions. The fourth schedule, which relates to averaging, is a provision which is new to the rates bill. Previously, the substance of this schedule was incorporated in section 13 (2) of the Income Tax Assessment Act 1922-1934, but at the suggestion of the royal commission on taxation the relevant provisions were not embodied in the Income Tax Assessment Bill which was passed by this chamber earlier in the year, the intention being to incorporate them in this bill. Under the averaging scheme a taxpayer's income is averaged over a period of five years, and the rate of tax which is applied to his taxable income is the rate which is attributable to his average income over that period. For example, if a taxpayer's actual taxable income for the year ended the 30th June, 1936, were, say, £1,000, and his average taxable income over the five years, 1932 to 1936 were, say, £900, he would pay tax on his actual taxable income of £1,000 at the rate attributable to £900. Similarly, if his average taxable income were, say, £1,100 he would pay tax on his actual taxable income of £1,000 at the rate attributable to £1,100.

The schedule has been adapted from a draft prepared by the Royal Commission on Taxation, and is simpler in form than that which was used in the assessment act to achieve the same result. The fifth schedule is also a new provision. It arises from the adoption, in substance, of a recommendation of the royal commission relating to assessment of premiums received in connexion with the sale or assignment of leases. The premium is taxed on the principle that it is nothing more than commuted rent. However, when several years' rent is commuted into one single premium, the recipient pays tax on the premium in the year of receipt. Owing to the graduation of the rate of tax, the recipient pays a greater amount of tax on the amount of that premium than he would have paid if he had received the same amount as rent over the term of the lease. This result was considered to he. inequitable, and the means by which some relief should be given was the subject of wide discussion at conferences between the Commissioners of Taxation and the members of the royal commission. It was finally decided that the recipient of the premium should pay tax on the premium, but at a rate of tax on a notional income ascertained by dividing the amount' of the premium by one-half of the number of years of the term of the lease. For example, if during a year a taxpayer receives £10,000 for the sale of a ten year lease, and that is his only income for the year, the notional income would be £2,000 ascertained in the following manner : -

Lease premium received £10,000.

Term of lease ten years.

One-half of term of lease five years, £10,000/ 5 = £2,000.

The taxpayer would thus pay on £10,000 at the rate of tax attributable to £2,000. If the taxpayer derived other income during the year, this other income would of course be added to the notional amount to determine the rate of tax to be paid on his total taxable income for the year.

The schedule is based on the draft prepared by the royal commission.

It is to be noted that the proposal is in effect a modification of the averaging system already in existence, and on that account it has been provided in the Assessment Act that the principle embodied in the schedule shall not apply in the assessments of any taxpayer to whom the existing averaging provisions apply. It is necessary, however, to provide for the possible case arising where the recipient of a lease premium is not subject to the averaging provisions.

The sixth schedule is designed for the purpose of providing for a rate of tax to be paid by trustees in respect of income of the trust estate on which they are liable to be assessed under the provisions of sections 98 and 99 of the Income Tax Assessment Act 1936, and simply repeats substantially the similar provision in the acts for previous years.

The seventh schedule provides for the rates of tax payable by a company and does not call for any explanation. No reduction has been made of the rate of tax to be paid by companies.

Under sub-section (6) of section 4 provision is made for the imposition of a minimum tax of an amount of ten shillings. This provision is similar to that incorporated in the rates acts of previous years.

Sub-section (2) of section 5 is framed so as to enable assessments to be made for financial years subsequent to the current financial year before the rates bill for those financial years is passed by the Parliament. The taxpayers concerned, speaking generally, are theatrical artists and others who visit Australia and earn income here and who are required to pay income tax on their earnings prior to their departure. Other taxpayers who are concerned are tourists leaving Australia and wishing to pay their tax before leaving.

As the special property tax is being abolished, the provisions relating thereto in last year's act are not being re-enacted.

The schedules which have been incorporated in the rates act since 1930, providing for rates of tax to he paid by individually owned partnerships and severally owned partnerships have not been re-enacted in this year's bill. It was necessary to incorporate these schedules in the rates act in previous years, because the relevant Assessment Act provided that the income tax payable by such partnerships shall be at such rates as are declared by the Parliament. Sections 94 and 102 of the Income Tax Assessment Act 1936, which deal with family partnerships and trusts specify therein how the income tax payable by the partnership or the trustee is to be calculated in cases coming within their operation, and a declaration of a rate of tax for these cases is now unnecessary.

Debate (on motion by Senator Collings) adjourned.

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