Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 5 - Primary production depreciating assets

Outline of chapter

5.1 Subdivision 40-F contains the rules for calculating deductions for the decline in value of capital expenditure on depreciating assets that are water facilities, horticultural plants or grapevines. It explains when a taxpayer starts deducting amounts for these assets and provides the methods of calculation for each.

Context of reform

5.2 The introduction of the uniform capital allowance system and the allowing of previously non-deductible capital expenditure are key components of the New Business Tax System announced in Treasurers Press Release No. 74 of 11 November 1999 (refer to Attachment L).

5.3 That press release also mentioned that the uniform capital allowance system was not to apply to depreciating assets used in primary production. Instead, the existing rules that allow a write-off for expenditure on these assets are to be maintained, notwithstanding the introduction of a uniform regime.

Summary of new law

5.4 Division 387 of the ITAA 1997 currently contains the provisions for capital allowances for primary producers and some land holders. However, the rules dealing with the different expenditures are dealt with in different Subdivisions within Division 387. For example, grapevines are dealt with in Subdivision 387-D while horticultural plants are dealt with in Subdivision 387-C.

5.5 Subdivision 40-F groups together depreciating assets used in primary production business and standardises the method of calculating the decline in value each year for these assets whilst maintaining the existing rates of decline. It also recasts in a condensed form, and withminimal alteration, the concepts contained in Division 387 of the ITAA 1997. STS taxpayers have a choice of using this Subdivision or Division 328.

Detailed explanation of new law

5.6 This Subdivision allows taxpayers to deduct the decline in value from:

•

water facilities;

•

horticultural plants; and

•

grapevines,

provided that certain conditions are met [Schedule 1, item 1, subsections 40-515(1) and (2)] . These conditions vary depending upon the type of depreciating asset.

5.7 There are 2 general rules that apply to the deductions:

•

the deduction cannot exceed the total capital expenditure incurred [Schedule 1, item 1, subsection 40-515(3)] ; and

•

the amount of capital expenditure on which any of these deductions is based, cannot exceed the market value of what the expenditure was for if any of the parties to an arrangement under which the expenditure is incurred, are not dealing at arms length. The non-arms length provision will operate automatically without the need for the Commissioner to exercise any discretion [Schedule 1, item 1, section 40-560] .

Deduction for water facilities

What is a water facility?

5.8 A water facility is plant (as defined for the purposes of the ITAA 1997) or a structural improvement, or an alteration, addition or extension to plant or a structural improvement, that is primarily and principally for the purpose of conserving or conveying water. [Schedule 1, item 1, subsection 40-520(1)]

Conditions for the deduction of a water facility

5.9 In order to obtain this deduction, taxpayers must incur capital expenditure on the construction, manufacture, installation or acquisition of the water facility. Further, the capital expenditure must be incurred primarily and principally to conserve or convey water for use in a primary production business that you conduct on land in Australia. [Schedule 1, item 1, subsection 40-525(1)]

When does the decline in value for a water facility start?

5.10 A water facility starts to decline in value in the income year in which the capital expenditure is first incurred on the facility. [Schedule 1, item 1, section 40-530, item 1 in the table]

How to work out the decline in value of a water facility

5.11 The decline in value of a water facility is 33 1/3% of the capital expenditure incurred on the construction, manufacture, installation or acquisition of the water facility. The decline in value starts in the income year the expenditure was incurred and continues for the 2 following years. [Schedule 1, item 1, section 40-540]

Example 50

Horace is engaged full-time in the business of farming. He spends $100,000 on building a dam on his dairy cattle farm. In the income year in which he incurs the expenditure (and each of the subsequent 2 income years) Horace will be entitled to deduct $33,333.

Amounts you cannot deduct

5.12 Apart from the general rules that apply to deductions (discussed in paragraph 5.7), the following amounts cannot be deducted by a taxpayer as a decline in value:

•

the decline in value that is attributable to the period (if any) in the income year for usage other than for a primary production business on land in Australia or that was not wholly used for a taxable purpose [Schedule 1, item 1, subsection 40-515(4)] ; and

•

an amount for any income year for capital expenditure on the acquisition of a water facility, if any person has deducted or can deduct an amount under this Subdivision, for any income year for earlier capital expenditure on the construction or manufacture of the facility, or a previous acquisition of the facility [Schedule 1, item 1, subsection 40-555(1)] . A water facility and an alteration, addition or extension to that facility are not the same water facility for these purposes [Schedule 1, item 1, subsection 40-555(2)] .

Deductions for horticultural plant

What is a horticultural plant, horticulture and commercial horticulture?

5.13 A horticultural plant is a live plant or fungus that is cultivated or propagated for any of its products or parts. The definition differs from the ITAA 1997 by being generic in scope but does not alter the meaning. The definition of horticultural plant must take its meaning from the context of the conditions imposed upon horticultural plant within the Subdivision. [Schedule 1, item 1, subsection 40-520(2)]

5.14 Horticulture has the same meaning as the definition of that term in subsection 387-170(3) of the ITAA 1997. It is widely defined to include both the cultivation and the propagation of plants or fungi, and of seeds, bulbs, spores or the like in any environment whether that environment is natural or artificial. [Schedule 1, item 1, subsection 40-535(1)]

5.15 Horticulture encompasses an activity that can precede the planting of trees or plants. It includes the propagation or cultivation of plants and their products such as fruit, flowers and vegetables. Where trees are not planted for felling, then the activity for which they are planted will fall within the definition of horticulture; for example, planting and tending of tea-trees for the production of oil. The definition of horticulture is sufficiently wide to cover the growing of plants, etc. in pots or by hydroponic means and will allow other means of growing plants to come within the definition when those means are developed.

5.16 Commercial horticulture requires that the horticultural plant be used for income producing purposes in a business of horticulture. [Schedule 1, item 1, subsection 40-535(2)]

Conditions for the deduction of a horticultural plant

5.17 A taxpayer can deduct the decline in value of the horticultural plant if one of the following conditions is satisfied:

•

the taxpayer owns the horticultural plant. Where the taxpayer owns the plant, no holder of a lease, lesser interest or licence relating to the land of which the plant is a part can carry on a business of horticulture using the plant [Schedule 1, item 1, subsection 40-525(2), item 1 in the table] ;

•

the horticultural plant is attached to land that the taxpayer leases (from anyone), or holds under a quasi-ownership right granted by an exempt Australian government agency, and the lease or quasi-ownership right entitles the taxpayer to carry on a business of horticulture on the land. Further, if there is another entity that holds a lesser interest or licence relating to the land, that entity must not carry on a horticulture business on the land [Schedule 1, item 1, subsection 40-525(2), item 2 in the table] ; or

•

the taxpayer is the licensee relating to the land to which the horticultural plant is attached and carries on a business of horticulture on the land as a result of holding the licence [Schedule 1, item 1, subsection 40-525(2), item 3 in the table] .

Together, these rules ensure that the taxpayer who can claim is the taxpayer with the least interest in the land who carries on a business of horticulture using the plants.

When does the decline in value commence for horticultural plants?

The taxpayer is the first owner, etc.

5.18 If the taxpayer is the first owner, lessee, holder of a quasi-ownership right or licensee and satisfies one of the conditions relating to horticultural plant in subsection 40-525(2), the horticultural plant starts to decline in value in the income year in which its first commercial season starts. [Schedule 1, item 1, section 40-530, item 2 in the table, paragraph (a)]

Example 5.2

In February 2002, Astri plants 2,000 avocado trees on her farm which she plans to harvest for commercial use. Four years later the first avocados from these trees are able to be harvested and sold commercially. Therefore, the decline in value commences in 2006 when the avocados are ready for picking, this being when the first commercial season starts.

If the avocados are ready for picking, but Astri has not yet picked them, and a hail storm destroys all the avocados, Astri will still be entitled to deduct an amount that is the decline in value of the plants for that income year.

The taxpayer is not the first owner, etc.

5.19 Where the taxpayer is not the first entity to satisfy one of the conditions in subsection 40-525(2), a horticultural plant starts to decline in value in the income year when the taxpayer first satisfies the conditions mentioned in this subsection and the first commercial season has commenced. [Schedule 1, item 1, section 40-530, item 2 in the table, paragraph (b)]

How to work out the decline in value of a horticultural plant

5.20 The decline in value of a horticultural plant is worked out from its effective life. Because a horticultural plant is a depreciating asset, the effective life is determined in accordance with sections 40-70, 40-75 and 40-80. These rules are in keeping with the current income tax law.

Horticultural plants effective life is less than 3 years

5.21 All of the capital expenditure incurred in the establishment of a horticultural plant may be deducted for the income year in which the plant starts to decline if the effective life of the horticultural plant is less than 3 years. There are several kinds of horticultural plants with effective lives of one, 2 or 3 years, and for several of these there was an established practice of treating their establishment costs as immediately deductible before the first horticultural plant provisions were enacted. This concession is maintained by the provisions, rather than bringing such plants with short lives into line with other depreciating assets. [Schedule 1, item 1, subsection 40-545(1)]

Horticultural plants effective life is 3 years or more

5.22 If the effective life of the horticultural plant is 3 years or more, the deduction is worked out by reference to the write-off rate appropriate to its effective life, its establishment expenditure and period during which the plant is used in the horticulture business [Schedule 1, item 1, subsection 40-545(2)] . That is:

5.23 Establishment expenditure is capital expenditure attributable to the establishment of a horticultural plant, no matter by whom it was incurred [Schedule 1, item 1, subsection 40-545(2)] . It is analogous to the cost of plant and equipment or the original cost of building work or structural improvements.

5.24 The costs of establishing horticultural plants may include the following:

•

the cost of acquiring the plants or seeds;

•

the cost of planting the plants or seeds;

•

any costs incurred preparing to plant. These do not include the initial clearing of the land, but may in some cases include part of the costs of ploughing, contouring, top dressing, fertilising, stone removal, top soil enhancement and so on, that is attributable to the establishment of the plant;

•

the costs of pots and potting mixtures (for potted plants);

•

the costs incurred in grafting trees; and

•

the costs of replacing existing plants and trees, because of loss of fair economic return or because of declining popularity of a particular existing variety.

5.25 Establishment expenditure incurred on establishing horticultural plants does not include expenditure on other plants. However, where plants are used for associated purposes, such as demonstration purposes or for companion planting, in a business of horticulture, then expenditure incurred in establishing those plants will fall within the operation of this subsection. Plants used for the purpose of producing assessable income in a business of horticulture may be accepted as horticulture plants in their own right, rather than as establishment expenditure on other plants.

5.26 Establishment expenditure does not include expenditure incurred in draining swamp, low-lying land or on clearing land. [Schedule 1, item 1, subsection 40-555(3)]

5.27 The write-off days in income year are the number of days in the income year in which the taxpayer satisfied a condition of ownership in subsection 40-525(2) for the horticultural plant and used it either for commercial horticulture or held it ready for use. [Schedule 1, item 1, subsection 40-545(2)]

5.28 The write-off rate is a percentage worked out by reference to the effective life of the particular plant. The relevant rates are set out in the table that is contained in the definition of write-off rate in subsection 40-545(2).

Example 5.3

XYZ Pty Ltd grows lemons for the domestic market. On 1 March 2002, XYZ Pty Ltd spent $400,000 establishing a lemon farm by planting lemon trees. The first lemons are ready for picking on 1 March 2006. The plants have an effective life of 20 years.

The decline in value for these plants is:

2005-2006 income year

establishment expenditure * write-off days in income year/365 * write-off rate
$400,000 * 122/365 * 13% = $17,380.82


2006-2007 income year

establishment expenditure * write-off days in income year/365 * write-off rate

$400,000 * 365/365 * 13% = $52,000


Because the decline in value over the 20 year effective life of the lemon trees would exceed the $400,000 capital expenditure, section 40-515 provides a cap on the amount that can be deducted ensuring that a taxpayer cannot deduct more than the amount of capital expenditure incurred on the depreciating asset.

5.29 There is a special rule that limits the period of the horticultural plant deduction. This is achieved by imposing a limit on the write-off days. The limit ensures that a taxpayers write-off days in the income year can only include the period which starts when the horticultural plant can first be used for commercial horticulture and ends at the specified time as shown in the table in subsection 40-545(3) [Schedule 1, item 1, subsection 40-545(3)] . This is in keeping with the current income tax law and ensures that no more than the full amount of the establishment costs can be deducted, and that amounts which could not be deducted (e.g. because of periods in which the plants were not used for a horticultural business) cannot be carried forward and deducted later.

Example 5.4

Following on from Example 5.3, because it was decided that the lemon trees have an effective life of 20 years, XYZ Pty Ltd must deduct the capital expenditure in 7 years and 253 days (subsection 40-545(3), item 5 in the table). By deducting the capital expenditure over this period, XYZ Pty Ltd will not be able to deduct more than the amount of capital expenditure incurred on the depreciating asset.

It is important to note that the time periods in the table in subsection 40-545(3) cannot be extended. If XYZ Pty Ltd, for example, did not use the lemon trees for commercial horticulture and did not hold them ready for that use in the 2008-2009 income year, XYZ Pty Ltd will not be able to deduct an amount for the decline in value of the lemon trees for that income year. Thus, at the end of the 7 years and 253 days, XYZ Pty Ltd may still have an amount that could be deducted, but it will not be entitled to deduct this amount in the following income year because it is outside the 7 years and 253 days time frame.

Extra deduction for destruction of a horticultural plant

5.30 An additional deduction will be allowed if a horticultural plant, with an effective life of 3 years or more, is destroyed during the income year while it is owned and used for commercial horticulture [Schedule 1, item 1, paragraph 40-565(1)(a)] . This would cover plants destroyed by disease as well as healthy plants that are removed from the ground because the produce from the removed plants are no longer marketable.

5.31 The formula to use to work out the deduction is the same as that for grapevines. This is discussed in paragraphs 50 to 5.47.

Obtaining tax information after acquiring a horticultural plant or grapevine

5.32 The deduction for a horticultural plant or a grapevine can be transferred from one taxpayer to another. When a taxpayer acquires a horticultural plant or grapevine from another entity in circumstances that makes the taxpayer eligible to claim the deduction, section 40-575 assists with the implementation of these rules by ensuring sufficient information is given to a taxpayer who acquired a horticultural plant or a grapevine from the last entity in the chain who satisfied a condition in subsection 40-525(2) in relation to that horticultural plant or grapevine. [Schedule 1, item 1, subsection 40-575(1)]

5.33 The inclusion of amounts of establishment expenditure used by the entity in calculating the assets decline in value, as well as the period of effective life used in the calculations for horticultural plants, must continue to be applied by the taxpayer who acquired the horticultural plant or grapevine.

5.34 The taxpayer who acquired the horticultural plant or grapevine must, within 60 days of satisfying a condition in subsection 40-525(2), give a written notice to the other entity seeking certain information [Schedule 1, item 1, paragraph 40-575(2)(a)] . Only one notice can be served on the other entity [Schedule 1, item 1, subsection 40-575(6)] . The written notice must address the following matters:

•

a request that the other entity provide information as to the amount of establishment expenditure for the plant or grapevine, the effective life of the plant and the day on which the plant could first be used for commercial horticulture, the day on which the grapevine was established [Schedule 1, item 1, subsection 40-575(1)] ;

•

the other entity has at least 60 days in which to reply to the taxpayer who acquired the horticultural plant or grapevine [Schedule 1, item 1, paragraph 40-575(2)(b)] ; and

•

the notice must advise the other entity that failure to comply with the request will subject the entity to a penalty of 10 penalty units if the entity does not have a reasonable excuse and fails or intentionally refuses to comply with the notice [Schedule 1, item 1, subsection 40-575(3)] .

5.35 Where the other entity is a partnership, the notice is properly served where the taxpayer gives the notice to any one of the partners of the partnership. [Schedule 1, item 1, paragraph 40-575(4)(a)]

5.36 The obligation to provide the information requested by the taxpayer is imposed on each of the partners, not the partnership. In order to discharge the obligation any one of the partners may respond to the request. [Schedule 1, item 1, paragraph 40-575(4)(b)]

5.37 There is a penalty of 10 penalty units if a partner without reasonable excuse, fails or intentionally refuses to comply with the request for information from the taxpayer. [Schedule 1, item 1, subsection 40-575(5)]

Deductions for grapevine

Conditions for the deduction of grapevines

5.38 The decline in value for an income year of a grapevine can be deducted provided:

•

the taxpayer owns it [Schedule 1, item 1, subsection 40-525(3), item 1 in the table] ; or

•

it is attached to land that the taxpayer holds under a quasi-ownership right granted by an exempt government or exempt government agency and:

-

was planted by the taxpayer or a previous holder of the land under such a right; and

-

the grapevine is used in a primary production business [Schedule 1, item 1, subsection 40-525(3), item 2 in the table] .

When does the deduction for a grapevine start?

5.39 A grapevine starts to decline in value in the income year when it is first used in a primary production business for the purpose of producing assessable income. [Schedule 1, item 1, section 40-530, item 3 in the table]

How you work out the decline in value of grapevines?

5.40 Grapevines are written-off over a 4 year period at a rate of 25% per annum. The 4 years will be spread over 5 income years if the grapevine was not established on the first day of the income year [Schedule 1, item 1, subsection 40-550(2)] . This rule is in keeping with the current law. If the decline in value for a grapevine is worked out pursuant to section 40-545, that is, as a horticultural plant, a decline in value cannot be worked out under section 40-550 [Schedule 1, item 1, subsection 40-550(3)] .

5.41 The following formula must be used to work out the decline in value :

establishment expenditure * write-off days in income year/365 * write-off rate


[Schedule 1, item 1, subsection 40-550(1)]

5.42 The establishment expenditure of a grapevine is the capitalexpenditure attributable to the establishment of the grapevine [Schedule 1, item 1, subsection 40-550(1)] . It does not include expenditure that is incurred on draining swamp, low-lying land or on clearing land [Schedule 1, item 1, subsection 40-555(3)] .

5.43 The write-off days in income year are the number of days in the income year in which the taxpayer satisfied a condition of ownership in subsection 40-525(3) for the grapevine and used it in a primary production business for the purpose of producing assessable income. [Schedule 1, item 1, subsection 40-550(1)]

Example 5.5

In August 2002, Albert plants $200,000 worth of grapevines on a farm that he owns. The vines will be used for the purpose of producing assessable income as Albert intends to produce raisins.

Alberts decline in value of the grapevines is as follows:

2002-2003 income year

establishment expenditure * write-off days in income year/365 * 25%


2003-2004 income year (and the 2004-2005 and 2005-2006 income years)

$200,000 * 365/365 * 25% = $50,000


2005-2006 income year

$200,000 * 31/365 * 25% = $4,246.58


Deduction for destroyed grapevines

5.44 An additional deduction will be allowed for an income year if a grapevine is destroyed at any time up to 4 years after the day it was established. [Schedule 1, item 1, paragraph 40-565(1)(b)]

5.45 To work out the deduction, first calculate the total amounts the taxpayer could have deducted for the grapevine for the period that starts when the grapevine was established and ends when it was destroyed. Ignore any use of the grapevine for a purpose other than producing assessable income. [Schedule 1, item 1, subsection 40-565(2), paragraphs (a) and (b) of step 1]

5.46 Secondly, subtract from the capital expenditure attributable to the establishment of the grapevine, the result from step 1 as well as any amount received for the destruction (whether under an insurance policy or otherwise). The remaining amount is the deduction allowed for the destruction. [Schedule 1, item 1, subsection 40-565(2), step 2]

Example 5.6

Agnes grapevines are destroyed on 30 June 2005. The grapevines, established on her own farmland, were cultivated for selling as table grapes in her primary production business. The grapevines were established on 1 July 2003. Agnes recovered $75,000 from her insurance company.

The establishment capital expenditure was $250,000.

Agnes deduction is worked out as follows:

Step 1

2003-2004 income year: $250,000 * 365/365 * 25% = $62,500Z
2004-2005 income year: $250,000 * 365/365 * 25% = $62,500
Total amount that could have been deducted = $125,000


Step 2

5.47 This deduction for destruction is in addition to any other write-off for the grape vines for the income year under these provisions. [Schedule 1, item 1, subsection 40-565(3)]

Obtaining tax information after acquiring a grapevine

5.48 The mechanism to obtain information comes under the same provisions as for horticultural plants and is discussed in paragraphs 50 to 5.37. This maintains the effect of the current law for grapevines.

How Subdivision 40-F applies to partners and partnerships

5.49 Subdivision 40-F allocates expenditure incurred by a partnership to each of the partners of the partnership. That is, the deduction is available to the partner and is not a deduction against the partnership income. [Schedule 1, item 1, subsection 40-570(1)]

5.50 Each partner is taken to have incurred, during an income year:

•

the amount of the expenditure incurred by the partnership that the partners agree each partner should bear; or

•

if there was no such agreement, the proportion of the partnership expenditure equal to each partners individual interest in the partnership net income or partnership loss for that income year.

[Schedule 1, item 1, subsection 40-570(2)]

5.51 The partnership must disregard Subdivision 40-F when working out the net income or partnership loss of the partnership under section 90 of the ITAA 1936. (Otherwise there could be a double deduction effect, with expenditure being taken into account both at individual partner and at partnership level.) [Schedule 1, item 1, subsection 40-570(3)]