Senate

Revised Explanatory Memorandum

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

Chapter 6 - Capital expenditure of primary producers and other landholders

Outline of chapter

6.1 Subdivision 40-G contains the rules for writing-off capital expenditure incurred by primary producers or rural businesses on landcare operations and on electricity connections or telephone lines.

Context of reform

6.2 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 the Treasurers Press Release No. 74 of 11 November 1999 (refer to Attachment L).

6.3 However, the uniform capital allowance system is not to apply to change the effect of the special primary producer provisions.

Summary of new law

6.4 Subdivision 40-G maintains the write-off for capital expenditure incurred on landcare operations, electricity connections or telephone lines, currently provided for in Division 387 of the ITAA 1997.

Comparison of key features of new law and current law

Detailed explanation of new law

6.5 Subdivision 40-G will allow taxpayers to deduct capital expenditure incurred on:

•

landcare operations;

•

connection of a mains electricity cable to a metering point or the upgrading of a connection, provided the electricity is used for a taxable purpose; and

•

a telephone line brought onto land the taxpayer uses in a primary production business.

6.6 A taxpayer does not work out a decline in value of these assets. This is not because, in general, these assets are not depreciating assets. For example, fences or drainage works for landcare are depreciating assets. The connection of power or telephone is generally accomplished by installing or constructing depreciating assets, too, although this can also involve contribution to assets being jointly installed or constructed. These deductions could have been dealt with under the general immediate deduction provisions, but instead, have been dealt with under Subdivision 40-G, as part of the treatment of depreciating assets generally, to which they most closely relate. This is also because it was considered that landcare operations, electricity and telephone connection are the concern of rural and primary producers only and as such should be dealt with in a provision that deals with them specifically.

What cannot be deducted

6.7 Capital expenditure on plant is not generally deducted immediately under this Subdivision. However, plant that can be deducted under this Subdivision are:

•

certain fences erected for the purpose of:

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separating different land classes; or

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excluding animals from an area affected by land degradation [Schedule 1, item 1, paragraph 40-630(2)(a)] ; or

•

dams or structural improvements, including drains, covered by paragraphs (1)(c) to (f) of the definition of plant in section 45-40 of the ITAA 1997 [Schedule 1, item 1, paragraph 40-630(2)(b)] .

6.8 The deduction must be reduced by a reasonable amount if the land upon which the operations are carried on is used for other things as well as for a primary production business or a business for the purpose of producing assessable income from the use of rural land (that is not a business of mining operations). [Schedule 1, item 1, subsection 40-630(3)]

Expenditure on landcare operations

6.9 Capital expenditure on a landcare operationis deducted in the income year it is incurred provided that operation is either for:

•

Australian land used in a primary production business; or

•

rural Australian land used in a business to produce assessable income, except a business of mining operations.

[Schedule 1, item 1, subsection 40-630(1)]

What is a landcare operation?

6.10 Landcare operation has the same meaning as the former section 387-60 of the ITAA 1997 and means:

•

erecting fences (including any extension, alteration or addition to a fence) to separate different land classes in accordance with an approved management plan for the land [Schedule 1, item 1, paragraph 40-635(1)(a)] . An approved management plan is a plan prepared or approved in writing by an officer of an Australian government agency that is responsible for land conservation or an approved farm consultant that shows the different classes within the land, the location of and the type of fence required, to separate these classes [Schedule 1, item 1, section 40-640] . This term has the same meanings as former section 387-80 of the ITAA 1997;

•

erecting fences (including any extension, alteration or addition to a fence) to stop animals coming onto the land so that land degradation will be prevented or limited as well as to help reclaim the area [Schedule 1, item 1, paragraph 40-635(1)(b)] ;

•

constructing a levee or similar improvement to the land [Schedule 1, item 1, paragraph 40-635(1)(c)] ;

•

constructing drainage works on the land primarily and principally to control salinity or to assist in drainage control [Schedule 1, item 1, paragraph 40-635(1)(d)] ,so long as the works are not an operation draining swamp or low-lying land [Schedule 1, item 1, subsection 40-635(2)] ;

•

operations to eradicate animal pests, to eradicate detrimental plant growth or to prevent or fight land degradation (other than by fencing the land) [Schedule 1, item 1, paragraph 40-635(1)(e)] ; or

•

a change to such an asset or an extension to such an operation [Schedule 1, item 1, paragraph 40-635(1)(f)] .

Farm consultants

6.11 This Bill recognises the approval of persons as farm consultants for the purposes of the preparation of approved management plans in similar terms to Division 387 of the ITAA 1997 [Schedule 1, item 1, sections 40-640 and 40-670 ] . The Secretary to the Department of Agriculture, Fisheries and Forestry as well as authorised officers from that Department can approve people to act as farm consultants. Revocation of this approval by the Department of Agriculture, Fisheries and Forestry is implied pursuant to subsection 33(3) of the Acts Interpretation Act 1901 [Schedule 1, item 1, subsection 40-670(1), note] .

6.12 As in Division 387 of the ITAA 1997, provision is made in this Bill for a person to apply to the Administrative Appeals Tribunal for review of a decision to refuse to approve the person as a farm consultant or to revoke the approval of the person as a farm consultant. [Schedule 1, item 1, section 40-675]

Expenditure on electricity and telephone lines

Electricity lines

6.13 Taxpayers can deduct amounts for capital expenditure they incur on connecting power to land or upgrading the connection if, when they incur the expenditure:

•

they have an interest in the land or are a share-farmer carrying on a business on the land; and

•

they or another entity intends to use some or all of the electricity to be supplied as a result of the expenditure in carrying on a business on the land for a taxable purpose at a time when they have an interest in the land or are a share-farmer carrying on a business on the land.

[Schedule 1, item 1, subsection 40-645(1)]

Meaning of connecting power to the land or upgrading the connection

6.14 Connecting power to the land or upgrading the connection is defined as any of the following:

•

connecting a mains electricity cable to a metering point on the land (whether or not the point from which the cable is connected is on the land);

•

providing or installing equipment designed to measure the amount of electricity supplied through a mains electricity cable to a metering point on the land;

•

providing or installing equipment for use directly in connection with the supply of electricity through a mains electricity cable to a metering point on the land;

•

work to increase the amount of electricity that can be supplied through a mains electricity cable to a metering point on the land;

•

work to modify or replace equipment designed to measure the amount of electricity supplied through a mains electricity cable to a metering point on the land, if the modification or replacement results from increasing the amount of electricity to the land;

•

work to modify or replace equipment for use directly in connection with the supply of electricity through a mains electricity cable to the land, if the modification or replacement results from increasing the amount of electricity supplied to the land; or

•

work carried out as a result of a contribution to the cost of a project consisting of the connection of mains electricity facilities to that land and other land.

[Schedule 1, item 1, subsection 40-655(1)]

6.15 However, an operation described in subsection 40-655(1) done in the course of replacing or relocating mains electricity cable or equipment is connecting power to the land or upgrading the connectiononly if done to increase the amount of electricity that can be supplied to a metering point on the land. [Schedule 1, item 1, subsection 40-655(2)]

6.16 A metering point on land is a point where consumption of electricity supplied to the land through a mains electricity cable is measured. [Schedule 1, item 1, subsection 40-655(3)]

Telephone lines

6.17 Taxpayers can deduct amounts for capital expenditure they incur on a telephone line on, or extending to, land if, when they incurred the expenditure:

•

a primary production business was carried out on the land; and

•

they had an interest in the land or they were a share-farmer carrying on a primary production business on the land.

[Schedule 1, item 1, subsection 40-645(2)]

Amounts that cannot be deducted for electricity connections and telephone lines

Electricity connections

6.18 Taxpayers cannot deduct amounts for capital expenditure they incur on connecting power to land or upgrading the connection if, during the 12 months after electricity is first supplied to the land as a result of the expenditure, no electricity supplied as a result of the expenditure is used in carrying on a business on the land for a taxable purpose. [Schedule 1, item 1, subsection 40-650(1)]

6.19 If taxpayers deducted an amount for any income year under Subdivision 40-G for the expenditure, their assessment for that income year may be amended under section 170 of the ITAA 1936 to disallow the deduction. [Schedule 1, item 1, subsection 40-650(2)]

6.20 Taxpayers cannot deduct an amount they incur on connecting power to land or upgrading the connection for:

•

capital expenditure in providing water, light or power for use on, access to or communication with the site of mining operations; or

•

a contribution to the cost of providing water, light or power for those operations.

[Schedule 1, item 1, subsection 40-650(3)]

Telephone lines

6.21 Taxpayers cannot deduct an amount for any income year for their capital expenditure on a part of a telephone line if:

•

any entity has deducted, or can deduct, an amount for any income year for the cost of that part under a provision of the ITAA 1936 or the ITAA 1997 except Subdivision 40-G; or

•

the cost of that part has been, or must be, taken into account in working out:

-

the amount of any entitys deduction (including a deduction for a depreciating asset) for any income year under a provision of the ITAA 1936 or the ITAA 1997 except Subdivision 40-G; or

-

the net income, or partnership loss, of a partnership under section 90 of the ITAA 1936.

[Schedule 1, item 1, subsection 40-650(4)]

6.22 However, taxpayers can deduct an amount under Subdivision 40-G for their expenditure on a part of a telephone line even if:

•

an entity that worked on installing that part has deducted, or can deduct, an amount relating to that part for any income year under the ITAA 1936 or the ITAA 1997 except Subdivision 40-G; or

•

the cost of that part has been, or must be, taken into account:

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in working out the amount of such an entitys deduction for any income year under a provision of the ITAA 1936 or the ITAA 1997 except Subdivision 40-G; or

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under section 90 of the ITAA 1936 in working out the net income, or partnership loss, of a partnership that worked on installing that part.

[Schedule 1, item 1, subsection 40-650(5)]

6.23 That rule has effect whether the entity did the work itself or through one or more employees or agents. [Schedule 1, item 1, subsection 40-650(6)]

Both electricity connections and telephone lines

6.24 If a taxpayer can deduct, or has deducted, an amount for any income year under section 40-645 for their expenditure on electricity connections or telephone lines:

•

another entity cannot deduct an amount for the expenditure for any income year under a provision of the ITAA 1936 or the ITAA 1997, except Subdivision 40-G; and

•

the expenditure cannot be taken into account to work out the amount of an entitys deduction for any income year under a provision of the ITAA 1936 or the ITAA 1997, except Subdivision 40-G.

[Schedule 1, item 1, subsection 40-650(7)]

6.25 That rule also applies in working out the net income, or partnership loss, of a partnership under section 90 of the ITAA 1936 . [Schedule 1, item 1, subsection 40-650(8)]

How much can be deducted?

6.26 The amount taxpayers can deduct is 10% of the expenditure:

•

for the income year in which they incur it; and

•

for each of the next 9 income years.

[Schedule 1, item 1, subsection 40-645(3)]

6.27 Various provisions may reduce the amount taxpayers can deduct or stop them deducting, for example:

•

Division 26 of the ITAA 1997 (limiting deductions generally);

•

section 40-650 of the ITAA 1997 (specifying expenditure taxpayers cannot deduct under this Subdivision); and

•

Division 245 of Schedule 2C to the ITAA 1936 (which may affect taxpayers entitlement to a deduction if their debts are forgiven).

[Schedule 1, item 1, subsection 40-645(3), note 1]

Recoupment of expenditure

6.28 If taxpayers recoup an amount of the expenditure incurred on electricity or telephone lines, the amount will be included in their assessable income in accordance with Subdivision 20-A of the ITAA 1997. [Schedule 1, item 1, subsection 40-645(3), note 2]

Non-arms length transactions

6.29 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 40-660]

Partners and partnerships

6.30 Subdivision 40-G allocates expenditure incurred by a partnership to 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 40-665(1)]

6.31 Each partner is taken to have incurred, during the 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 of the partnership for that income year.

[Schedule 1, item 1, subsection 40-665(2)]

6.32 The partnership must disregard Subdivision 40-G when working out the net income or partnership loss of the partnership under section 90 of the ITAA 1936. [Schedule 1, item 1, subsection 40-665(3)