Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 3 - Providing capital allowance deductions for certain telecommunications rights
Outline of chapter
3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide appropriate taxation treatment of expenditure incurred on acquiring certain telecommunications rights.
3.2 These amendments will provide capital allowance deductions for expenditure incurred on acquiring indefeasible rights to use domestic telecommunications cables (domestic IRUs). Additionally, the changes will provide capital allowance deductions for expenditure incurred, by telecommunications carriers licensed under the Telecommunications Act 1997, on acquiring telecommunications site access rights.
Context of amendments
3.3 The Government has given a commitment to provide appropriate tax recognition for blackhole expenditure and has also noted that it would review certain inappropriate taxation treatment of business expenditures on a case-by-case basis.
3.4 Under the uniform capital allowances regime, depreciation deductions are available for physical assets and a number of defined intangible assets. Indefeasible rights to use international telecommunications cables (international IRUs) are already defined within the uniform capital allowances as depreciating assets, and this measure extends capital allowance treatment to domestic IRUs. The measure therefore removes an anomaly in the taxation treatment of domestic IRUs and international IRUs.
3.5 The new law is intended to better match the taxation treatment of expenditure incurred on acquiring domestic IRUs and telecommunications site access rights with the economic characteristics of the underlying assets. It is also intended to better facilitate sharing of telecommunications equipment within the telecommunications industry, thereby encouraging more efficient use of that infrastructure.
Summary of new law
3.6 These amendments will allow capital allowance deductions for expenditure incurred on acquiring domestic IRUs and for expenditure incurred by licensed telecommunications carriers on acquiring telecommunications site access rights. Domestic IRUs will be written-off over the effective life of the underlying telecommunications cable. Telecommunications site access rights will be written-off over the term of the right.
3.7 The new treatment will only apply to expenditure incurred on or after 12 May 2004 and the law contains integrity measures to stop access to the new taxation treatment where existing arrangements are 'refreshed'. Refreshing describes the situation where an existing arrangement entered into prior to a date of effect is essentially terminated and an arrangement on similar terms is entered into to qualify the expenditure for more favourable taxation treatment.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| Capital allowance deductions will be available for the cost of purchasing telecommunications site access rights and domestic IRUs. | No deduction. The cost of purchasing a domestic IRU or telecommunications site access right may be allowable as a capital loss upon expiry of the right. |
Detailed explanation of new law
3.8 Indefeasible rights to use domestic and international telecommunications cables (IRUs) is a legal interest created by contractual agreement that confers a permanent indefeasible and exclusive right of access to some or all of the capacity in a telecommunications cable system to another party. The term IRU is widely used and accepted in the telecommunications industry. However described, an IRU must provide indefeasible permanent access to raw capacity in a cable system.
3.9 An IRU is broadly equivalent to ownership of the cable system in terms of cable operation. An IRU contract generally contains the following elements:
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- The IRU holder is generally required to contribute an upfront capital payment and to pay ongoing amounts for the operation and maintenance of the cable.
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- The IRU holder is not entitled to any compensation for the failure in or breakdown of the cable system or for any interruption of the use of the cable system.
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- The IRU holder is usually required to contribute to its proportional share of any costs which arise from the liquidation of the cable system or from claims by third parties. In addition, the IRU holder may also be entitled to any proportional share of proceeds which arise from the liquidation of the cable system or from claims against third parties in respect of it.
3.10 An IRU is specifically called 'indefeasible' as it cannot be defeated or terminated by the unilateral action of one party to the IRU agreement.
3.11 A telecommunications cable system comprises not only the cable itself but may also include the land-based portions of the cable system including plant, testing equipment, land and buildings.
3.12 Rights of use over cables that are not specifically IRUs may still fall for consideration under the provision for telecommunications site access rights.
3.13 The current provision applying to international IRUs will be amended to cover IRUs generally. This means that the reference to IRUs in subsection 40-30(2) will effectively be extended to cover both international IRUs and domestic IRUs. A minor amendment to the definition of IRU will achieve this. [Schedule 3, item 3, definition of an 'IRU']
3.14 To be eligible for capital allowance deductions, the expenditure on a domestic IRU must be incurred on or after 12 May 2004. [Schedule 3, subitem 5(1)]
3.15 The effective life for calculating capital allowance deductions will be the effective life of the underlying telecommunications cable. [Schedule 3, item 2]
3.16 It is now appropriate that transitional provisions currently in the ITAA 1997, that apply only to international IRUs, be moved to the Income Tax (Transitional Provisions) Act 1997. [Schedule 3, items 1 and 4]
3.17 Refreshing is the notion that an existing (pre-12 May 2004) IRU over a particular cable system is terminated and a new IRU acquired over the same cable system. Due to the permanent and indefeasible nature of IRU arrangements, where the IRU is simply the refreshing of an existing IRU no deduction will be allowed for expenditure on that part that is essentially the same IRU. [Schedule 3, subitem 5(3)]
Example 3.1
Before 12 May 2004, User Co. was granted an IRU under a contract to use 50 Mb/s of the capacity of a telecommunications cable in Australia. After 12 May 2004, the contract is terminated and a new contract is made granting User Co. an IRU over 60 Mb/s of the capacity of that cable for a payment of $6 million.
The amendments do not apply to $5 million of the expenditure by User Co. under the new contract assuming that, of the $6 million payment for the right to use 60 Mb/s of the capacity of the cable, it is reasonable to attribute $5 million to User Co. being allowed to use 50 Mb/s of that capacity.
3.18 Where an IRU is deemed to be acquired on or after 12 May 2004 merely due to a taxpayer taking advantage of the consolidations provisions, then the IRU is taken to have been acquired before 12 May 2004 for the purposes of this measure. [Schedule 3, subitem 5(2)]
3.19 A purchaser of an IRU will be able to commence claiming deductions for the year that the IRU commences to be used to produce assessable income. The deduction will be apportioned if the use commences other than on the first day of the year.
3.20 An IRU owner will not necessarily know what the cable owner has calculated as the effective life of the cable. Therefore the IRU holder must place itself in the position of the cable owner and calculate the cable's effective life.
Detailed explanation of new law
3.21 An existing list of intangible assets that are treated as depreciable assets will be amended to include a reference to telecommunications site access rights. [Schedule 3, items 6 to 8]
3.22 To be eligible for capital allowance deductions, the expenditure on a telecommunications site access right must be incurred on or after 12 May 2004. [Schedule 3, subitem 12(1)]
3.23 A telecommunications site access right will be written-off over the term of the right. [Schedule 3, item 10]
3.24 The prime cost (straight line) method is to be used to calculate the capital allowance deductions, and use of the diminishing value method will not be allowable. [Schedule 3, item 9]
3.25 A telecommunications site access right will be defined in the legislation as a right (except an IRU) of a carrier:
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- to share a facility (as defined in section 7 of the Telecommunications Act 1997 )
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- to install such a facility at a particular location or on a particular structure, or
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- to enter or cross premises for the purposes of installing or maintaining such a facility that is on the premises, or is at a location, or on a structure, that is accessible by way of the premises.
[Schedule 3, item 11]
Example 3.2
In July 2004 Telco Co. buys a right from a retail shopping company to install a telecommunications antenna on a retail shopping centre. The term of the right is five years. Capital allowance deductions are available over a five year period.
3.26 Facility, as defined under the Telecommunications Act 1997, means:
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- any part of the infrastructure of a telecommunication network, or
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- any line, equipment, apparatus, tower, mast, antenna, tunnel, duct, hole, pit, pole or other structure or thing used, or for use, in or in connection with a telecommunications network.
3.27 Carrier means a holder of a carrier licence granted under section 56 of the Telecommunications Act 1997.
3.28 A telecommunications site access right does not include an IRU but may include other types of rights over a telecommunications cable.
3.29 Similar to IRUs, a taxpayer will not be able to refresh telecommunications site access rights.
3.30 Where a party holds a telecommunications site access right prior to the application date, and that right ends at a time other than when it would ordinarily have ended, and a right of the same kind is entered into after that date, then no deduction is allowable in respect of the new right. [Schedule 3, subitem 12(3)]
Example 3.3
In July 1998 Tele Co. acquired a 10 year telecommunications site access right that is due to expire in July 2008. Tele Co. then buys a new right of the same kind over the same facility in July 2005 and terminates or sells the old right back to the site owner. In this case Tele Co. will not be able to access capital allowance deductions for the new access right.
Example 3.4
In January 2002 Smartuser Co. acquired a five year telecommunications site access right that is due to expire in January 2007. In January 2007 Smartuser Co. acquires a new access right which is essentially a renewal of the expired right over the same facility. Capital allowance deductions are available for expenditure on the new access right from January 2007.
3.31 Where a party is deemed to have acquired a site access right on or after 12 May 2004, merely because of the operation of the consolidations provisions, that right will be taken to have been acquired before 12 May 2004 for the purposes of this measure. [Schedule 3, subitem 12(2)]
3.32 A purchaser of a site access right will be able to commence claiming deductions for the year that the site access right commences to be used to produce assessable income. The deduction will be apportioned if the use commences other than on the first day of the year.