Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 7 - Roll-over relief for partnerships that are simplified tax system taxpayers
Outline of chapter
7.1 Schedule 7 to this bill amends Division 328 of the ITAA 1997 to allow, under certain circumstances, optional roll-over relief for balancing adjustments arising from a partial change in ownership of a partnership operating under the STS.
Context of amendments
7.2 The STS, which commenced on 1 July 2001, was introduced as a result of recommendations in the Ralph Review of Business Taxation to reduce the disproportionate tax compliance burden that falls on small business. This is achieved by providing eligible small businesses with simpler depreciation rules as an alternative to the UCA regime, a cash basis for recognising income and deductible expenses, and easier trading stock rules.
7.3 The UCA regime, contained in Division 40 of the ITAA 1997, allows taxpayers deductions for the decline in value of a depreciating asset over that asset's effective life. The Division provides a set of general rules to calculate deductions for the decline in value of most depreciating assets. It also provides pooling mechanisms, under which small expenditures are pooled and deductions determined by reference to the decline in the pool.
7.4 Under the UCA provisions, when a BAE occurs, the taxpayer is usually required to make a balancing adjustment. This includes situations where there is a variation in the constitution of a partnership or in the interests of the partners in a partnership. Such changes can trigger taxable gains in relation to the depreciating assets held by the partnership. Under certain circumstances, however, this taxing point can be deferred, via roll-over relief, so that the taxing point arises at a later time, when the partnership ultimately disposes of the assets.
7.5 Roll-over relief is not currently available for reconstitutions of partnerships operating under the STS (i.e. STS partnerships), deterring some taxpayers from joining the STS. This measure will allow optional roll-over relief for STS partnerships subject to certain conditions.
7.6 These amendments were announced in the Minister for Revenue and Assistant Treasurer's Press Release C13/03 of 4 March 2003.
Summary of new law
7.7 Amendments to Subdivision 328-D, which deals with capital allowances for STS taxpayers, will be made to allow roll-over relief for depreciating assets when there is a partial ownership change of an STS partnership.
7.8 Under the new provisions, optional roll-over relief will be available if both the partnership immediately prior to the ownership change and the partnership immediately after the ownership change jointly elect for roll-over relief.
7.9 Roll-over relief will benefit STS partnerships by removing the balancing adjustment, or taxing point, that would otherwise arise in relation to depreciating assets at the time the ownership change occurs. This will ensure that a taxable gain or loss will only arise when the partnership ultimately disposes of its depreciating assets.
7.10 When roll-over relief is chosen, the capital allowance deductions for the decline in value of depreciating assets will be split equally amongst the partnerships involved.
| New law | Current law |
|---|---|
| When roll-over relief is elected, the termination value is not subtracted from the relevant depreciating asset pool balance, ensuring that the STS partnership immediately prior to the ownership change is not assessed on any taxable gain. The taxable gain (or loss) is only included in the assessable income (or allowed as a deduction) when the asset is ultimately disposed of by the partnership. | When a BAE occurs in relation to an ownership change of an STS partnership, the termination value is subtracted from the relevant depreciating asset pool balance. The partnership immediately before the ownership change includes an amount in its assessable income if, as a result of the deduction, the pool balance falls below zero. |
Detailed explanation of new law
Roll-over relief for partnership changes
7.11 The amendments will allow partnerships involved in the partial ownership change of an STS partnership the choice of roll-over relief. Roll-over relief will be available if:
- •
- a BAE occurs due to a change in the constitution of a partnership or in the interests of the partners on a day (i.e. the BAE day) and the partners or one of the partners that had an interest in the depreciating assets before the change has an interest in it after the change (i.e. there is only a partial change in the ownership of the partnership). All future references in this chapter to balancing adjustment events refer to events where there is a change in the constitution of a partnership or in the interests of the partners, unless otherwise stated;
- •
- capital allowance deductions for the assets are calculated under Subdivision 328-D, which deals with capital allowances for STS taxpayers;
- •
- the partnership before the BAE occurs (the transferor) and the partnership immediately after the BAE (the transferee) make a joint choice for roll-over relief; and
- •
- the transferee becomes an STS taxpayer for the BAE year and the depreciating assets allocated to the transferor's general STS pool or long life STS pool just before the BAE event occurs are held by the transferee immediately after the change. This will restrict the circumstances under which roll-over relief is available to STS partnerships.
[Schedule 7, item 8, subsection 328-240(1) and section 328-243]
Making the choice for roll-over relief
7.12 The choice for roll-over relief must be made in writing, contain sufficient information about the transferor's holding of the depreciating assets, and be made within six months after the end of the transferee's income year in which the BAE event occurs. However, the Commissioner may extend the period within which the choice must be made. [Schedule 7, item 8, subsection 328-240(2)]
7.13 In cases where a partner dies before the end of the time allowed for choosing roll-over relief, then the trustee of the partner's estate may be a party to the choice. [Schedule 7, item 8, subsection 328-240(3)]
7.14 The transferor and transferee must keep the choice or a copy of it for five years after the end of the income year in which the BAE occurs. A penalty of 30 units will be imposed if this requirement is not met. [Schedule 7, item 8, subsections 328-240(4) to (5)]
General consequences of roll-over relief
7.15 If roll-over relief is chosen then the transferor does not subtract an amount:
- •
- from its closing pool balance (under paragraph (a) of step 2 in the method statement in section 328-200) for the taxable purpose proportions of the termination values of depreciating assets allocated to either the general STS pool or the long life STS pool, due to the BAE event;
- •
- under subsection 328-210(2) (low pool values) for the sum of the taxable purpose proportions of the termination values of depreciating assets allocated to either the general STS pool or the long life STS pool, due to the BAE event.
[Schedule 7, item 8, subsection 328-245(1)]
7.16 The consequences of roll-over relief for STS partnerships will ensure that the transferor ignores the balancing adjustment amount at the time of the partnership change so that an amount is not included in its assessable income if the pool balance would otherwise have been less than zero.
7.17 In addition, the transferor will not include the taxable purpose proportion of a low cost asset in its assessable income due to the BAE event under subsection 328-215(4). [Schedule 7, item 8, subsection 328-245(2)]
7.18 If the transferor carries on a primary production business and makes a choice for a depreciating asset to be deducted under Subdivision 328-D (which deals with capital allowances for STS taxpayers), under Subdivision 40-F (about primary production depreciating assets) or 40-G (about capital expenditure of primary producers and other land holders) then the choice also applies to the transferee as if the choice had been made by the transferee. [Schedule 7, item 8, subsection 328-245(3)]
7.19 The capital allowance deductions for pooled assets that the transferor, transferee and the other partnerships are entitled to during the BAE year are calculated under new subsection 328-247(1). The amount that can be deducted from the transferor's general STS pool or life long STS pool for the BAE year will be split equally:
- •
- between the transferor and transferee where there is only one BAE for the BAE year and roll-over relief is chosen; or
- •
- among the partnerships concerned where there are two or more BAEs for the BAE year and roll-over is chosen for each BAE.
[Schedule 7, item 8, subsection 328-247(1)]
Example 7.1
Jill and Bob run a mixed farming business as a partnership (the transferor). They elected into the STS for the 2001-2002 income year. The partnership decides that on 1 December 2001 their son will become a partner, forming a new partnership (the transferee). The new partnership also elects into the STS for the 2001-2002 income year. There are no further variations in the constitution of the partnership or in the interests of the partners during the BAE year.
The opening balance of the transferor's general STS pool and long life STS pool at 1 July 2001 are $20,000 and $100,000 respectively. The Jill and Bob partnership would have been able to deduct an amount equal to $6,000 ($20,000 ? 30%) and $5,000 ($100,000 ? 5%) from its general STS pool and long life STS pool respectively under subsections 328-190(1) and 328-210(1) for the BAE year.
The deductions are split equally between the two partnerships and each receives a deduction of $5,500 ($3,000 ? $2,500).
7.20 For income years after the BAE year, the transferor will not be able to continue to deduct amounts from its general STS pool or long life STS pool. [Schedule 7, item 8, subsection 328-247(2)]
Deductions for low cost assets and assets to be pooled
7.21 The capital allowance deductions for low cost assets, and assets that will be pooled at the end of the BAE year that a partnership begins to use, or installs ready for taxable purpose during the BAE year are calculated under new section 328-250. Table 7.2 sets out how the capital allowance deductions will be split among the transferor, transferee and other partnerships under this section. [Schedule 7, item 8, subsections 328-250(1) to (3)]
| Only one BAE event for the BAE year and roll-over relief is chosen | Two or more BAE events for the BAE year and roll-over is chosen for each BAE event | |
|---|---|---|
| Asset first used by transferor | Split equally among the transferor and transferee. | Split equally among the partnerships concerned. |
| Asset first used by transferee | Transferor cannot deduct an amount for the asset for the BAE year and transferee is entitled to the full deduction. | Split equally among all the partnerships except those partnerships that did not use the asset or have it installed ready for a taxable purpose during the BAE year. |
Example 7.2
Continuing Example 7.1, during the 2001-2002 income year Jill and Bob purchase a $10,000 asset with an effective life of less than 10 years, and a $15,000 asset with an effective life of 30 years. Both of these assets are to be pooled at the end of the year. The partnership also purchases a $900 asset during the year.
The total capital allowance deductions that the partnerships are entitled to split for the BAE year are equal to
$7,500 ($20,000 * 30% + $10,000 * 15%)
for the general STS pool and
$5,375 ($100,000 * 5% + 15,000 * 2.5%)
for the long life STS pool. The partnerships are also entitled to split the immediate write off of $900 for the low cost asset.
The deductions are split equally between the two partnerships and each receives a deduction of $6,887.50 ($3,750 ? $2,687.50 ? $450).
7.22 If a transferor starts to use, or has installed ready for use, a low cost asset during the BAE year and a BAE occurs (other than a variation of the constitution of a partnership or interests in the partners - for example, the asset is sold) before the BAE day, then the transferee is not entitled to a deduction for this asset and the taxable purpose proportion of the asset's termination value is not included in the transferee's assessable income. In this case the transferor receives the full deduction. [Schedule 7, item 8, subsections 328-250(4) to (5)]
Deductions for cost addition amounts
7.23 The capital allowance deductions for expenditure incurred by the transferor and/or transferee during the BAE year that are included in the second element of cost of a depreciating asset are calculated under new section 328-253. Table 7.2 sets out how the capital allowance deductions will be split among the transferor, transferee and other partnerships under this section. [Schedule 7, item 8, subsections 328-253(1) to (3)]
| Only one BAE event occurs for the BAE year and roll-over relief is chosen | Two or more BAE events occur for the BAE year and roll-over is chosen for each BAE event | |
|---|---|---|
| Expenditure incurred by the transferor | Split equally between the transferor and transferee. | Split equally among the transferor, transferee and the other partnerships. |
| Expenditure incurred by the transferee | Transferor cannot deduct an amount for the expenditure for the BAE year and transferee is entitled to the full deduction. | Split equally among the partnership that incurred the expenditure and those partnerships after the expenditure was incurred during the BAE year. |
Example 7.3
Continuing Example 7.2, during the 2001-2002 income year, the transferor spends $5,000 on its $10,000 asset purchased during that year which will form part of its second element of cost. In addition, it spends $2,000 on its $15,000 asset purchased during that year.
The capital allowance deductions that the partnerships are entitled to split for the BAE year are
$8,250 ($20,000 * 30% + $10,000 * 15% + $5,000 * 15%)
for the general STS pool and
$5,425 ($100,000 * 5% + $15,000 * 2.5% + $2,000 * 2.5%)
for the long life STS pool.
The deductions are split equally between the two partnerships and each receives a deduction of $7287.50 ($4,125 ? $2,712.50 ? $450).
7.24 If a transferor incurs expenditure in relation to a low-cost asset and a BAE occurs (other than a variation of the constitution of a partnership or interests in the partners - e.g., the asset is sold) before the BAE day, the transferee cannot deduct an amount for the expenditure for the BAE year and the taxable purpose proportion of the asset's termination value is not included in the transferee's assessable income. In this case the transferor receives the full deduction. [Schedule 7, item 8, subsections 328-253(4) to (5)]
Closing pool balance below zero
7.25 If the transferor's pool balance, either for its general STS pool or long life pool, for the BAE year is less than zero, the amount included in assessable income under subsection 328-215(2) is:
- •
- where one BAE occurs during the BAE year, split equally between the transferor and transferee; or
- •
- where two or more BAEs occur during the BAE year, split equally among the transferor, transferee and the other partnerships.
[Schedule 7, item 8, section 328-255]
7.26 For a depreciating asset that is held by the transferor just before the BAE event, the transferee does not make a new estimate of the taxable purpose proportion for the depreciating asset for the BAE year but, instead, uses either:
- •
- the transferor's estimate of the taxable purpose proportion for the depreciating asset estimated under subsection 328-205(1) where only one estimate is made; or
- •
- the transferor's most recent estimate of the taxable purpose proportion for the depreciating asset where the transferor makes one or more estimates for the asset under subsection 328-225(1) that resulted in a change in business use under section 328-225.
[Schedule 7, item 8, subsections 328-257(1) and (2)]
7.27 For income years after the BAE year, section 328-225 operates as if the transferee had held the depreciating asset during the period that the transferor held it. Furthermore, estimates about the taxable proportion amount made by the transferor for the asset under that section are taken to have been made by the transferee. [Schedule 7, item 8, subsection 328-257(3)]
7.28 Various notes have been inserted to confirm that optional roll-over relief will be available in relation to depreciating assets where there is a variation in the constitution of an STS partnership or in the interests of the partners in an STS partnership. The notes also clarify the capital allowance deductions available to the transferor and transferee partnerships when roll-over relief is chosen. [Schedule 7, items 1 to 7]
Application and transitional provisions
7.29 The amendments made by this Schedule, which will benefit taxpayers, will apply for BAEs occurring on or after 1 July 2001, the start date for the STS provisions. [Schedule 7, item 9]