House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 4 Balancing adjustment and roll-over relief

Outline of chapter

4.1 Part 2 of Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to provide roll-over relief for holders of shipping vessels covered by a certificate issued in accordance with the Shipping Reform (Tax Incentives) Bill 2012 (SR(TI) Bill). The balancing adjustment incurred can be rolled over, if circumstances giving rise to it are satisfied.

Context of amendments

Operation of existing law

4.2 In Australia, shipping companies are currently taxed in line with companies in other industries.

4.3 Division 40 contains rules that provide deductions for the decline in value of a depreciating asset and certain other capital expenditure, provided the asset is held by the taxpayer or capital expenditure is incurred for the purpose of producing taxable income.

4.4 Subdivision 40-D contains provisions that require a taxpayer, in certain circumstances, to make an adjustment to their assessable income or deductions if a balancing adjustment event is triggered. For example, when the taxpayer sells an asset.

4.5 The adjustment is generally based on the difference between the termination value of the asset and its adjustable value. A balancing adjustment is included in calculating a taxpayer's assessable income for that year if the termination value is higher than the adjustable value (subsection 40-285(1)) or is tax deductible if the termination value is less than the adjustable value (subsection 40-285(2)), subject to the application of roll-over relief under section 40-340.

4.6 Under this current framework, a balancing adjustment arising from the disposal of a shipping vessel would be assessed in full in the income year in which the income from disposal is made.

Rationale for changes

4.7 The objective of the roll-over relief incentive is to encourage Australian ship owners to update their ageing fleet to more modern vessels. The benefits of having a younger fleet include improvements in vessel safety and efficiency. Furthermore, newer vessels would incorporate enhancements in technology and reductions in environmental impacts during operation.

4.8 This incentive supplements the Statutory Capped Life provisions set out in Part 1 of this Schedule, in achieving the objective.

Summary of new law

4.9 Part 2 of this Schedule provides roll-over relief for holders of vessels covered by a certificate under the SR(TI) Bill. If eligible, the balancing adjustment amount arising from the disposal of the original vessel is automatically deferred to the second income year after the income year in which the vessel is disposed of.

4.10 Where roll-over relief is chosen, only the amount of the balancing adjustment amount that exceeds the cost of acquiring another vessel is included in the taxpayer's assessable income.

Comparison of key features of new law and current law

Detailed explanation of new law

4.11 The amendments to Division 40 allow a company to defer a balancing adjustment amount that would otherwise be assessable in the income year upon which the disposal of a vessel occurs.

4.12 The amendments insert a new section to provide roll-over relief for holders of vessels covered by a certificate under the SR(TI) Bill [ Schedule 2, item 12, section 40-362 ]. Section 10 sets out the requirements for vessels. These are to be met in order for the taxpayer to be issued with a certificate by the relevant Minister in relation to that vessel.

4.13 Section 40-285 is amended to include a new paragraph that applies to a taxpayer, if the taxpayer stops holding a depreciating asset that is a vessel. The balancing adjustment amount in relation to that balancing adjustment event is not included in the taxpayer's assessable income in that income year, and is instead included in the second income year after the income year in which the balancing adjustment event occurs. [ Schedule 2, item 11, paragraph 40-285(5 )( a )]

4.14 In addition to the requirement of holding a depreciating asset that is a vessel, the taxpayer must also hold a certificate that applies to the day that the balancing adjustment event occurs. That certificate must apply to that day and it cannot be a shipping exempt income certificate. [ Schedule 2, item 11, paragraph 40-285(5 )( b )]

4.15 The meaning of 'balancing adjustment event' is set out in section 40-295.

Example 4.11

Transtar Corp is an Australian shipping company and owns BlueQueen. Assume that the entity holds a certificate under the SR(TI) Bill in respect of this vessel.

On 15 July 2012, Transtar Corp sells BlueQueen and incurs a balancing adjustment amount equal to $10 million. Because Transtar Corp holds a valid certificate, this balancing adjustment amount that would have been included in Transtar Corp's 2012-13 tax return can now be deferred and included in their 2014-15 tax return.

4.16 A note to subsection 40-285(5) is inserted stating that the amount under subsection 40-285(1) will not be included in the taxpayer's assessable income if roll-over relief under section 40-362 is chosen. [ Schedule 2, item 11, note to new subsection 40-285(5 )]

4.17 The amendments also specify the rules governing how the choice to apply roll-over relief must be made. These rules are largely consistent with the existing provisions governing choices to apply

roll-over relief in relation to other depreciating assets. The choice must:

•

be in writing; and

•

be made within six months after the end of the second income year after the income year in which the balancing adjustment event occurs.

[ Schedule 2, item 12, subsection 40-362(2 )]

4.18 The Commissioner of Taxation (Commissioner) may allow a longer period within which the taxpayer can make the choice to apply roll-over relief, and in this case the choice can be made within that longer period of time. [ Schedule 2, item 12, paragraph 40-362(2 )( b )]

4.19 This Schedule amends section 40-362 to provide that the taxpayer - the vessel owner is eligible for roll-over relief if the following circumstances are satisfied:

•

there is a balancing adjustment event under section 40-295 because the taxpayer ceases to hold the original vessel;

•

the taxpayer holds a certificate under the SR(TI) Bill that applies to the day that the balancing adjustment event occurs;

•

roll-over relief under section 40-340 does not apply in respect of the original vessel and the taxpayer chooses to apply roll-over relief under subsection 40-362(2);

•

on the day occurring two years after the day the taxpayer ceases to hold that original vessel, another depreciating asset that is a vessel (the other vessel) is held; and

•

the taxpayer holds a certificate under the SR(TI) Bill that is not a shipping exempt income certificate, that applies to the day of that choice for that other vessel.

[ Schedule 2, item 12, paragraphs 40-362(1 )( a ) to ( d )]

4.20 To accommodate commercial practices, the circumstances giving rise to roll-over relief under section 40-362 allows for timing discrepancies between when the original vessel ceases to be held and when the other vessel is held for taxable use. Provided the vessel owner is the holder of the other vessel either within one year before the day the original vessel ceases to be held, or within two years after the day the original vessel ceases to be held, then the vessel owner is eligible for roll-over relief under this section if all the above criteria are satisfied. [ Schedule 2, item 12, paragraph 40-362(1 )( e )]

Example 4.12

Transtar Corp is an Australian shipping company and owns BlueQueen. On 15 July 2012, Transtar Corp sells BlueQueen for $20 million. The adjustable value of the vessel at the time of sale is $10 million. Transtar Corp has purchased another vessel, the Titanic, after selling BlueQueen and the vessel is ready for taxable use on 25 September 2013.

On 1 December 2014, Transtar Corp chooses to obtain that roll-over relief. Assume that the entity holds a certificate under the SR(TI) Bill in respect of the vessels that applies to the day of the choice and on the day the vessel is sold.

All the criteria under section 40-362 are satisfied, therefore Transtar Corp is eligible to roll-over the balancing adjustment, equal to $10 million.

Example 4.13

Transtar Corp is an Australian shipping company and owns BlueQueen. On 30 July 2012, Transtar Corp purchases another vessel, the Titanic, with the intention that this vessel would replace BlueQueen from this date. On 15 January 2013, Transtar Corp sells BlueQueen for $20 million. The adjustable value of the vessel at the time of sale is $10 million.

•

Scenario 1: Assume on 15 September 2013, Transtar Corp sells Titanic, for commercial reasons.

In this scenario, despite the entity having held Titanic within a year before the BlueQueen was sold, the entity has failed to hold Titanic on 15 January 2015, which is the day occurring two years after the day BlueQueen ceased to be held. Therefore, Transtar Corp is not eligible to roll-over the balancing adjustment amount.

•

Scenario 2: Assume instead, Transtar Corp holds Titanic for 10 years.

In this scenario, the entity could make a choice in writing, either for its own record, or to the Commissioner stating that roll-over relief is chosen.

4.21 A certificate must apply to the day that the balancing adjustment event occurs and to the day the choice is made. [ Schedule 2, item 12, paragraphs 40-362(1 )( b ) and ( d )]

4.22 If a vessel owner makes a choice to apply roll-over relief under section 40-362, then subsection 40-285(1) no longer applies in relation to the original vessel. [ Schedule 2, item 12, paragraph 40-362(3 )( a )]

4.23 Despite subsection 40-285(1) no longer applying in certain circumstances, subsection 40-285(2), which deals with the tax treatment of a deductible balancing adjustment, will continue to apply.

4.24 However, an amount is still included in the vessel owner's assessable income, to the extent the balancing adjustment amount exceeds the cost of the other vessel that is acquired. [ Schedule 2, item 12, paragraph 40-362(3 )( b )]

4.25 That amount is included in the second income year after the income year in which the balancing adjustment event occurs. [ Schedule 2, item 12, subsection 40-362(4 )]

Example 4.14

Assume that the facts from Example 4.2 hold. Furthermore, assume the cost of Titanic - the other vessel - is $8 million.

Sale proceeds from BlueQueen (termination value) = $20m

The written down value of BlueQueen at the time it is sold (adjustable value) = $10m

Cost of Titanic at the time of purchase = $8m

Therefore, the amount included in Transtar Corp's assessable income is $2 million. It would be included in their 2014-15 tax return.

4.26 If the roll-over relief applies, then the cost of the other vessel is reduced by the amount of the balancing adjustment, which is the difference between the original vessel's termination value and its adjustable value at the point when the balancing adjustment event occurs, but only to the extent that that cost does not fall below zero. [ Schedule 2, item 12, paragraph 40-362(3 )( c )]

Example 4.15

Transtar Corp is an Australian shipping company and owns BlueQueen. On 15 July 2012, Transtar Corp sells BlueQueen for $20 million. The adjustable value of the vessel at the time of sale is $10 million. Transtar Corp has purchased another vessel, the Titanic, after selling BlueQueen.

•

If the purchase price of Titanic is $30 million, then Transtar Corp will be able to roll-over the full balancing adjustment, which equates to $10 million. The adjusted cost of Titanic is $20 million and no amount is included in their assessable income.

•

If the purchase price of Titanic is $8 million, then Transtar Corp will only be able to roll-over $8 million of the balancing adjustment. $2 million will be included in their assessable income and the adjusted cost of the vessel is zero.

4.27 The note in section 40-175 is amended to include new paragraph 40-362(3)(c) after subsection 40-90(2). The inclusion of paragraph 40-362(3)(c) acts to modify the first element of cost in relation to the other vessel. [ Schedule 2, item 10, note to section 40-175 ]

4.28 Provision is made to enable the Australian Taxation Office to share taxpayer information with the relevant Department in certain circumstances - refer to paragraphs 2.53 to 2.55 in Chapter 2 of this explanatory memorandum.

Capital gains tax and sale proceeds on selling a qualifying vessel

4.29 The uniform capital allowance regime in Subdivision 40-D may require a taxpayer to include an amount as assessable income or as an allowable deduction if a balancing adjustment event is triggered. For example, if a depreciating asset is sold for an amount (termination value) that is greater than the remaining depreciable value at that time (the adjustable value) that excess (the balancing adjustment) is included in the taxpayer's assessable income.

4.30 However, Subdivision 40-D only applies to the extent the depreciating asset was used for a taxable purpose, such as to produce assessable income. If the asset was used for both a taxable purpose and a non-taxable purpose, such as to produce exempt income, the excess would be subject to both Subdivision 40-D (to the extent the excess relates to the use of the asset for a taxable purpose) and the capital gains tax (CGT) regime (to the extent the excess relates to the use of the asset for a non-taxable purpose).

4.31 CGT will not apply when a taxpayer ceases to hold a qualifying vessel covered by a certificate in accordance with the SR(TI) Bill to the extent that vessel was used to produce exempt income under section 51-100. [ Schedule 2, item 13, subsection 104-235(1AA )]

4.32 However, a balancing adjustment calculation would still apply under Subdivision 40-D to the extent the vessel was used for a taxable purpose. This balancing adjustment may qualify for the roll-over relief in Division 40 if the conditions for a roll-over are satisfied.

4.33 This measure supports the policy of encouraging a taxpayer to use a vessel in accordance with the requirements in the SR(TI) Bill, such as management and training requirements set out in that Bill.