House of Representatives

Explanatory Memorandum

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

Chaopter 3 - Sustainable Rural Water Use and Infrastructure Program

Outline of chapter

3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 to allow participants in the Sustainable Rural Water Use and Infrastructure Program (SRWUIP) to choose to make payments they derive under the program free of income tax (including capital gains tax (CGT)), with expenditure related to infrastructure improvements required under the program then being non-deductible.

3.2 References in this Chapter are to the Income Tax Assessment Act 1997 unless otherwise specified.

Context of amendments

3.3 SRWUIP is a major component of the Commonwealth's Water for the Future program. SRWUIP payments from the Commonwealth are used to upgrade irrigation and other rural infrastructure in order to improve the efficiency and productivity of rural water use, to deliver substantial and lasting returns of water to the environment and to help secure a long-term sustainable future for irrigated agriculture.

3.4 SRWUIP consists of a broad suite of programs, often delivered in partnership with state/territory governments, who may provide supplementary funding.

3.5 SRWUIP payments are made under agreements between the Commonwealth and other parties, which may include state governments, irrigation infrastructure operators (IIOs) and individual irrigators. Project participants, who are the ultimate recipients of the payments, use that money to undertake specified works.

3.6 Where the increase in water use efficiency from those SRWUIP-funded projects means that less water needs to be used to achieve the existing amount of irrigated production, water entitlements can be transferred to the Commonwealth without causing a reduction in irrigated production. The Commonwealth can then use the transferred entitlements for environmental activities.

3.7 In the absence of these amendments, payments under SRWUIP would generally be taxable in the year they are derived, either as a subsidy or, to the extent that a payment is consideration for the transfer of water rights, as a capital gain. However, expenditure under the program would usually be recognised over a longer period:

•

some of it might be deductible in the year it is incurred;

•

some might be deductible over several years under the capital allowance provisions (three years in the case of primary production water facilities); and

•

some might reduce a capital gain (or increase a capital loss) when a CGT asset is disposed of.

3.8 This difference in timing can mean that recipients of SRWUIP payments need to fund the gap between incurring tax liabilities and expenditure obligations and fully realising the tax effect of the expenditure that corresponds to the payments.

3.9 The Government announced on 18 February 2011 that it would amend the taxation law to eliminate the timing mismatch between when the SRWUIP payments are taxed and when deductions are available, and that a CGT exemption would form a part of the measure.

Summary of new law

3.10 This Schedule allows taxpayers to choose to make the water infrastructure improvement payments non-assessable non-exempt (NANE) income, and to disregard any capital gain or loss from transferring the water rights. If they do, expenditure that is made because of the payments is not deductible and does not form part of the cost of any asset it is spent on.

3.11 In effect, making the choice eliminates the need to fund the gap because removing the tax liability means that the remaining required outgoings (on improving water infrastructure) will equal the SRWUIP payments.

3.12 However, some taxpayers might not make this choice if their net tax outcome under the current law is better for them than the net outcome under the new approach. This might be because, while all of the expenditure will eventually reduce a tax liability under the current law, not all of the SRWUIP payments need be taxable (for example, the transfer of pre-CGT water rights will not produce a taxable capital gain).

Comparison of key features of new law and current law

Detailed explanation of new law

3.13 The Sustainable Rural Water Use and Infrastructure Program (SRWUIP) is a Commonwealth program designed to increase the efficiency of water use in rural Australia. In return for Commonwealth payments, participants agree to undertake improvements to their water infrastructure to reduce their water consumption and generally to transfer a set part of the water saved to the Commonwealth. The Commonwealth uses the water it acquires to improve environmental outcomes.

3.14 The Commonwealth payments are directed at infrastructure improvements which improve the efficiency of water use. The payment arrangements may include agreed values for the water rights transferred to the Commonwealth, which would usually give rise to a capital gain or loss for the entity transferring the rights. The other component of the payments is a subsidy for improving water infrastructure that would usually be assessable to the entity, either as ordinary income under section 6-5 or as statutory income under section 15-10.

3.15 Expenditure on the water infrastructure improvements would usually be deductible. Some of the expenditure could be deductible in the year it is incurred under section 8-1. Expenditure on a depreciating asset would be deductible under the capital allowance provisions of Division 40 over the life of the asset (or over three years in the case of water facilities). Expenditure on a CGT asset would be recognised when the asset is subject to a CGT event, such as disposal.

3.16 For some taxpayers, the current law provides an adequate treatment. In particular, the amount included in their assessable income could be less than their deductions for expenditure on infrastructure improvements because they can access a CGT concession for the transfer of their water rights (for example, the rights might be a pre-CGT asset that is exempt from CGT or there might be a reduction in any capital gain on disposal of the rights, such as the 50 per cent discount available to individuals and trusts).

3.17 Other taxpayers could find themselves being taxed on the payments they receive in a year before they can deduct all the related expenditure. Because they are required to spend an amount equal to the Commonwealth payment on infrastructure improvements, having to pay the tax could create a financial gap that is only made good when the deductions are eventually available.

3.18 To help such taxpayers, the amendments allow them to choose to make the payments they derive NANE income and the expenditure they incur non-deductible.

Payments become NANE income

3.19 If a participant in a SRWUIP program makes that choice, the SRWUIP payments it derives from the Commonwealth, and the payments it derives that are reasonably attributable to Commonwealth SRWUIP payments, are NANE income so long as the program is on the Commonwealth's published list of SRWUIP programs for the day the particular payment is made. [Schedule 3, item 8, subsections 59-65(1) and 59-67(5)]

3.20 NANE income is the same as exempt income, except that it does not reduce tax losses (see sections 6-23 and 36-10).

What is a SRWUIP program?

3.21 A SRWUIP program is a program under the umbrella of the Commonwealth's program known as the Sustainable Rural Water Use and Infrastructure Program . [Schedule 3, item 8, subsection 59-67(1)]

3.22 Each of the programs eligible for the special tax treatment is listed on the website of the Department of Sustainability, Environment, Water, Population and Communities. [Schedule 3, item 8, subsections 59-67(5) and 59-70(1)]

3.23 A SRWUIP program could involve an arrangement between the Commonwealth and an individual irrigator. But most programs involve arrangements between the Commonwealth and a regional irrigation water provider or IIO. In a few cases, the Commonwealth enters into an arrangement with a State instead of with an IIO. The IIO or the State enters into agreements with the relevant irrigators. Those agreements are all entered into under a particular SRWUIP program.

Example 3.9 : These are the more common SRWUIP arrangements:

Example 3.10 : These are less common arrangements:

Who is a participant in a SRWUIP program?

3.24 The entity that enters into an agreement with the Commonwealth under a SRWUIP program is a participant in the program.

3.25 Entities that enter into agreements that will involve them improving their assets, or transferring their water rights, in order to satisfy an obligation under the head agreement with the Commonwealth are also participants because their involvement is necessary to achieve the program's objectives.

3.26 Mere agents of a participant are not themselves participants even though they might be performing work directed to achieving the program's objectives. For example, an irrigator's employees might actually make the improvements required under the program but they are not participants in the program because their actions are legally those of their employer.

3.27 Other entities performing work for a participant (such as a contractor who does the work or a lawyer who draws up the water transfer agreement) could be said to be participants because they perform work in their own capacity to achieve the program's objectives. However, even if they made a choice, it would not convert their payment into NANE income because they do not derive the payment as the owner of an asset to which the program relates. [Schedule 3, item 8, paragraph 59-65(1)(b)]

What payments are covered?

3.28 An entity's choice to treat SRWUIP payments it derives as NANE income applies to all amounts paid by the Commonwealth to the entity under the particular SRWUIP program. These are called direct SRWUIP payments . [Schedule 3, item 8, subsections 59-65(1) and 59-67(2) and (3)]

3.29 The choice also applies to payments that are reasonably attributable to amounts paid by the Commonwealth under the program. These reasonably attributable payments are called indirect SRWUIP payments . [Schedule 3, item 8, subsections 59-65(1) and 59-67(2) and (4)]

3.30 However, a choice only applies to an indirect SRWUIP payment if the entity receives it because it owns an asset to which the program relates. That means that the entity must own water rights that will be transferred under the program or own land or other assets that are to be improved because of an obligation under the program. This could extend to assets that are merely rights to use things that are to be improved. [Schedule 3, item 8, paragraph 59-65(1)(b)]

Example 3.11 : Leaseholder makes a choice; contractor cannot

Beale Avocados leases land and related water rights for its irrigation activities. It agrees to upgrade the channels on the land in return for a payment from the landlord, who has received a payment from the Commonwealth. It engages Kevin to do the work.

Both Beale and Kevin have received indirect SRWUIP payments because they can be traced to a payment from the Commonwealth under a SRWUIP program. However, only Beale can make the choice because Kevin does not derive his payment as an owner of an asset to which the program relates. Beale's leasehold right to use the channels and the water rights is such an asset.

3.31 An entity that derives an indirect SRWUIP payment because it owns an asset to which the SRWUIP program relates cannot make that payment NANE income if it only owns that asset as part of a financial arrangement. This ensures that banks and other financiers cannot treat their interest earnings under the financial arrangement as NANE income simply because they might own a relevant asset for the purposes of securing a loan. [Schedule 3, item 8, paragraph 59-65(1)(b)]

3.32 In some cases, Commonwealth payments will be topped up by a State. In those cases, only the part of the payment that is from the Commonwealth, or attributable to the payment from the Commonwealth, is covered by the choice. [Schedule 3, item 8, subsections 59-65(1) and 59-67(2) to (4)]

Example 3.12 : Payment from the State and the Commonwealth

The Blackwater Irrigation Alliance (an IIO) enters into agreements with the State Government and with the Commonwealth under which each will provide Blackwater with a payment to pass on to those of its members who have agreed to make water infrastructure improvements and transfer water entitlements to the Commonwealth.

Douglas Orchards has undertaken to spend $40,000 on making water infrastructure improvements and to transfer some of its water entitlements to the Commonwealth. It receives $40,000 from Blackwater, made up of $35,000 from the Commonwealth and $5,000 from the State.

Douglas chooses for the payment to be NANE income. $35,000 becomes NANE income because that part of the $40,000 is attributable to the Commonwealth payment to Blackwater. The remaining $5,000 is assessable income. A corresponding proportion of Douglas' $40,000 expenditure will be non-deductible.

When is a payment reasonably attributable to a Commonwealth SRWUIP payment?

3.33 In most cases, an irrigator does not receive a payment directly from the Commonwealth but receives it from an IIO or other delivery partner.

3.34 In those cases, the payment the irrigator derives is reasonably attributable to the payment the IIO has derived from the Commonwealth because the irrigator derives it as a consequence of the Commonwealth payment to the IIO. Further, the Commonwealth usually pays a particular amount to the IIO because the IIO and the irrigators under the program have agreed to spend that total amount on infrastructure improvements. The Commonwealth's payment will be divided up and passed on to the irrigators to match the expenditure each has committed to making. So, the payments they receive are usually mathematically, as well as consequentially, attributable to the payment the IIO derives from the Commonwealth.

3.35 Sometimes, an IIO receives payments from both the Commonwealth and a State Government to pass on to the irrigators. In such instances, only a portion of an amount the IIO pays to an irrigator is reasonably attributable to the Commonwealth's payment. How that portion is determined depends on the facts. In most cases, it would be done using a simple proportion for all the irrigators covered by the program. However, it could differ from one irrigator to another if the State has only agreed to subsidise the improvements of some of them.

Integrity rule for choices

3.36 In a few cases, a choice will only make a SRWUIP payment NANE income if certain associated entities also make the choice. This is an integrity rule to deal with cases where the associate that derives the SRWUIP payment wants to choose to treat it as NANE income and the associate that incurs the expenditure wants to retain the right to deduct it. If the SRWUIP payment does not flow between them (which is plausible because they are associates), these choices would not 'wash out' and the revenue could be disadvantaged.

3.37 For that reason, the amendments can prevent an amount being NANE income for a taxpayer, despite the taxpayer having made the choice, if its obligations under the SRWUIP program are satisfied because an associate incurred the required expenditure for it, rather than because it incurred the expenditure itself. In that case, the choice will only apply if the associate also makes the choice. [Schedule 3, item 8, subsection 59-65(4)]

3.38 The integrity rule will not be relevant where the total amount the taxpayer receives is matched by the amount it expends on satisfying its SRWUIP obligations. It is not necessary for the total expenditure at each point in time to be matched by the SRWUIP payments it has derived to that time (indeed, that will seldom be the case because amounts will often only be paid after particular work has been undertaken). It is only necessary that the taxpayer's eventual SRWUIP expenditure will be matched by its eventual SRWUIP payments. [Schedule 3, item 8, subsection 59-65(4)]

Example 3.13 : Applying the integrity rule

Tom operates a market garden. The land, and the water rights that attach to it, are owned by the LDP trust, the beneficiaries of which are Tom and the members of his family. That means that Tom and the trust are associates.

The trust has entered into an agreement with its area water provider, under which it will receive a $100,000 SRWUIP payment and will spend $100,000 on making water infrastructure improvements. The trust does not make the improvements but arranges for Tom to do so. It lends Tom $100,000 to make the improvements. The trust makes the choice to treat its payment as NANE income.

The improvements resulting from Tom's expenditure will satisfy the trust's SRWUIP obligation but the trust will not incur the required $100,000 expenditure itself. The $100,000 loan Tom receives from the trust is not expenditure of the trust because it has to be repaid, so does not count. Accordingly, the trust's choice will only make its SRWUIP payment NANE income if Tom makes the choice too, in which case he will not be able to deduct the expenditure he makes.

Recovering Commonwealth SRWUIP payments

3.39 A payment is taken never to have been made under a SRWUIP program to the extent that the Commonwealth seeks to recover it. Payments that were reasonably attributable to the payment are therefore no longer attributable to a payment made under the program and so would no longer be an indirect SRWUIP payment. The result is that, when the Commonwealth seeks to recover a payment made under a SRWUIP program, neither that payment nor any of the payments reasonably attributable to it is NANE income. [Schedule 3, item 8, subsection 59-67(6)]

3.40 If the Commonwealth seeks to recover part of a payment, the law applies as if the Commonwealth had never made that part of the payment under a SRWUIP program. [Schedule 3, item 8, subsection 59-67(6)]

3.41 The provision refers to the Commonwealth seeking to recover an amount to deal with cases where the amount cannot actually be recovered (perhaps because the IIO has become insolvent).

3.42 If the Commonwealth voluntarily ceases its attempt to recover the amount, the payment would again be eligible to be covered by the irrigator's choice to treat it as NANE income.

3.43 If the Commonwealth does seek to recover a payment, an affected assessment can be amended at any time within two years after it does so, even if that would otherwise be outside the normal period for amending the assessment. [Schedule 3, item 8, paragraph 59-80(c)]

3.44 The Secretary of the 'Water Department' (which is currently the Department of Sustainability, Environment, Water, Population and Communities) must keep the Commissioner of Taxation (Commissioner) informed about the Commonwealth's attempts to recover payments so that the Commissioner is able to properly determine the tax treatment of the payments and expenditure. [Schedule 3, item 8, section 59-75]

Capital gains and losses are disregarded

3.45 Any capital gain or loss arising from a CGT event (whether from the transfer of the water right or otherwise) is disregarded if it relates to a Commonwealth payment that is NANE income because it is covered by a choice the taxpayer makes. [Schedule 3, item 11, paragraphs 118-37(1)(ga) and (gb)]

3.46 That ensures that, as well as there being no tax consequences for the part of a Commonwealth payment that subsidises water infrastructure improvements, there are also no tax consequences for the part of a Commonwealth payment that relates to the transfer of water rights. [Schedule 3, item 11, paragraph 118-37(1)(ga)]

3.47 To the extent that the payment is the capital proceeds for the disposal of a right to get the payment, there are also no tax consequences for the disposal of that right. [Schedule 3, item 11, paragraph 118-37(1)(gb)]

SRWUIP expenditure not deductible

3.48 As well as making SRWUIP payments NANE income and disregarding capital gains and losses that arise in relation to those payments, making a choice also means that the taxpayer's expenditure in respect of a SRWUIP program is not deductible.

3.49 Making the choice means that expenditure a taxpayer incurs that satisfies an obligation under a SRWUIP program is not deductible if it is matched by a SRWUIP payment or if it is reasonable to expect that it will be matched by a SRWUIP payment. Such expenditure is called SRWUIP expenditure . [Schedule 3, item 3, section 26-100]

3.50 The 'reasonable expectation' element deals with cases where the expenditure precedes the SRWUIP payment. This could even include cases where the taxpayer incurs expenditure in anticipation of entering into an arrangement under a SRWUIP program, so long as that expenditure is eventually covered by such an arrangement.

3.51 If the expectation that the expenditure will be matched by a SRWUIP payment ceases to be reasonable, the expenditure is treated as if it had never been SRWUIP expenditure. So, if that expenditure was not deductible because the taxpayer had made a choice to treat the SRWUIP payment as NANE income, treating the expenditure as never having been SRWUIP expenditure means that it can be deducted. [Schedule 3, item 3, subsection 26-100(3)]

3.52 Obligations under a SRWUIP program include making infrastructure improvements, but the affected expenditure is not limited to such obligations. It extends to all obligations under the relevant SRWUIP arrangement. For example, it could also apply to expenditure incurred to satisfy an obligation to transfer a water right.

3.53 Nor is the affected expenditure limited to direct expenditure to satisfy an obligation. Deductions are also not available for things like legal fees to effect a transfer of water rights and interest on money borrowed to undertake improvements, if that expenditure is matched by a SRWUIP payment included in the agreement.

3.54 Expenditure is only affected to the extent that it is matched by a SRWUIP payment. Expenditure in excess of the payment (for example, expenditure attributable to a supplementary State payment) can still be deducted. [Schedule 3, item 3, paragraph 26-100(2)(b)]

Example 3.14 : Expenditure exceeds Commonwealth payment

McMahon Orange Farms receives $120,000 from its area water provider to reduce leakage from its pumping and irrigation systems. $100,000 is attributable to a payment the water provider received from the Commonwealth. The other $20,000 is attributable to a supplementary payment from the State.

McMahon spends $150,000 making improvements to its systems. Since only $100,000 of its expenditure is matched by a Commonwealth payment, it is able to deduct the remaining $50,000.

3.55 Arrangements often include agreed values for the water rights that are to be transferred, and a portion of the total SRWUIP payments would normally be treated for income tax purposes as capital proceeds for the transfer rather than as a subsidy for infrastructure improvements. However, expenditure made by a participant in a SRWUIP program on making infrastructure improvements would still be 'matched' by its SRWUIP payments if it was obliged under the arrangement to spend the full amount of the payments on making those improvements.

Cost and cost base reduced

3.46 Some expenditure is deductible over time rather than for the year it is first incurred. This is the concept of a capital allowance (or depreciation), which recognises that wealth spent on an asset is not lost but is merely converted into another form. The loss actually arises over time and is recognised for tax purposes accordingly.

3.57 The amendments deal with most capital allowances by preventing the expenditure being included in the cost of the asset for tax purposes. Because tax depreciation is based on the cost of the asset, amounts excluded from its cost will never be deducted. [Schedule 3, items 4 and 7, section 40-222 and paragraph 43-70(2)(i)]

3.58 Expenditure on water facilities is not recognised for income tax purposes in quite the same way as other depreciating assets. Instead of deducting a portion of the asset's cost (or an amount based on the asset's cost) a third of the capital expenditure on a water facility is recognised in the year it was incurred and in each of the following two years (see section 40-540). The amendments prevent SRWUIP expenditure covered by a choice from being counted as relevant capital expenditure in relation to a water facility. [Schedule 3, items 5 and 6, subsection 40-515(3) and section 40-540]

Example 3.15 : Expenditure not included in cost of assets

Byron Bay Tuber Products receives $125,000 to replace its water ejectors with vacuum pumps, to upgrade the machine that de-silts its irrigation channels and to reline its irrigation channels. It spends $10,000 replacing the water ejectors with vacuum pumps, $25,000 upgrading the de-silting machine and $90,000 relining its channels.

The vacuum pumps would normally be depreciated from their cost of $10,000 but, because Byron Bay has chosen to treat the payment as NANE income, they are treated as having a zero cost and so generate no capital allowance deductions.

Normally, the $25,000 would be added to the de-silting machine's base value as an improvement but, because of the choice, the $25,000 cannot be included in the second element of the cost of the machine and so is not added to its base value.

The $90,000 would normally be deductible over three years in equal instalments. However, because the of the choice, the capital expenditure on relining the channels (a water facility) is not counted for purposes of the capital allowance provisions and so is not deducted.

3.59 Some expenditure forms part of the cost base of a CGT asset and is not strictly deducted at all. Instead, it is taken into account in working out the amount of the capital gain (essentially, the excess of the proceeds from a CGT event (such as a disposal) over the asset's cost base). In effect, expenditure on a CGT asset is 'deducted' when a CGT event happens to that asset.

3.60 The amendments ensure that expenditure on a CGT asset is not taken into account in working out the asset's cost base (or its reduced cost base, which is used in working out capital losses). The effect is that expenditure on the asset is not 'deducted' when a CGT event occurs and any capital gain will therefore be larger and any capital loss smaller. [Schedule 3, items 9 and 10, subsections 110-38(7) and 110-55(9G)]

Example 3.16 : Expenditure not included in cost base of assets

Casey Station spends $10,000 of an amount it has received that is attributable to a Commonwealth SRWUIP payment to acquire some land on which to build a small water recycling plant. It supplements the purchase price with $35,000 from another source.

Casey Station makes the choice to treat its SRWUIP payments as NANE income. Therefore, the $10,000 of SRWUIP money is not included in the cost base (or reduced cost base) of the land. The extra $35,000 would still be included.

How to make the choice

3.61 An entity can only make the choice by the time it has to lodge its income tax return for the year that it:

•

derives the first SRWUIP payment under a particular SRWUIP program; or

•

incurs the first expense that satisfies an obligation under an arrangement entered into under the SRWUIP program.

[Schedule 3, item 8, subsection 59-65(2) and subparagraph 59-65(3)(b)(i)]

3.62 If the entity is assessed before it lodges its income tax return for that year, it has to make the choice before the assessment is made. This deals with the rare case where the Commissioner makes an assessment without a return having been lodged. [Schedule 3, item 8, subsection 59-65(2) and subparagraph 59-65(3)(b)(ii)]

3.63 The Commissioner can always allow more time to make the choice. This discretion would usually be exercised where the taxpayer has a reasonable explanation for not making the choice by the standard time. One such case would be where it had to lodge its return before the relevant program was included on the list of SRWUIP programs. In such a case, it would usually be permitted to make the choice even though it was after its return was lodged. It would then seek to amend its assessment to give effect to the choice. [Schedule 3, item 8, subparagraph 59-65(3)(b)(iii)]

3.64 A transitional rule provides for choices to be made that would otherwise have had to be made before the amendments commence. This rule is explained later.

3.65 Choices must be made in the form approved by the Commissioner. That ensures that the choice covers all necessary matters. [Schedule 3, item 8, paragraph 59-65(3)(a)]

3.66 The choice does not have to be sent to the Commissioner - how the taxpayer's return is prepared will usually be sufficient evidence of the choice made. However, taxpayers will need to retain the document on which their choice is recorded to substantiate the choice they made if necessary. Such records would usually have to be retained for five years (see section 262A of the Income Tax Assessment Act 1936 ).

3.67 A choice once made cannot be revoked. That ensures that a consistent approach is applied to all SRWUIP payments the entity derives, and all SRWUIP expenditure it incurs, under the same program. [Schedule 3, item 8, subsection 59-65(3)]

Eligible SRWUIP programs

3.68 Whether or not taxpayers can make a choice affecting the tax treatment of amounts derived and expenditure incurred for a particular program depends on whether the program is a SRWUIP program listed as such on the 'Water Department's' website. [Schedule 3, item 8, subsections 59-67(5) and 59-70(1)]

3.69 A program is entered on the Department's list when the Secretary of the Department is jointly directed to do so by the Treasurer and the 'Water Minister' (who is currently the Minister for Sustainability, Environment, Water, Population and Communities). They can so direct the Secretary if the Water Minister has previously notified the Treasurer that the program is a SRWUIP program that will generate efficiencies in water use through infrastructure improvements. [Schedule 3, item 8, subsections 59-70(2) and (3)]

3.70 The Ministers' direction must be in writing and specify the period for which the program should be on the list (that period must also appear on the Department's website). The period can start at a time before the direction is given. [Schedule 3, item 8, subsections 59-70(1) and (4)]

3.71 The Ministers can also jointly direct the Secretary in writing to extend the period for which a program is to be on the list (which can include a retrospective period) or to specify the last day for which a program is to be on the list (which must be a day after the direction is given). The Secretary must change the list accordingly. [Schedule 3, item 8, subsections 59-70(5) and (6)]

3.72 In deciding whether to direct the Secretary to add a program to the list, or to change the relevant period for a program on the list, the Ministers must consider the policy and budgetary priorities of the government. [Schedule 3, item 8, subsection 59-70(7)]

Amended assessments

3.73 Changes that affect the treatment of SRWUIP payments can occur after a relevant assessment is made. For example, a program might become a SRWUIP program with a retrospective operation, or the Commonwealth might seek to recover a payment it has made.

3.74 In such cases, the affected assessment can be amended at any time within two years after the change occurs, even if that is outside the normal period for amending the assessment. [Schedule 3, item 8, section 59-80]

Application and transitional provisions

Application provision

3.75 The amendments commence on Royal Assent but apply in relation to payments made by the Commonwealth on or after 1 April 2010 under a SRWUIP program. [Schedule 3, item 18]

3.76 The amendments do not apply to an indirect SRWUIP payment that is reasonably attributable to a Commonwealth payment made under a SRWUIP program before 1 April 2010, even if the indirect SRWUIP payment itself is made on or after that date.

3.77 The amendments also do not apply to expenditure incurred on or after 1 April 2010 if the expenditure relates to a Commonwealth payment made under a SRWUIP program before that date.

3.78 On the other hand, they do apply to expenditure incurred before 1 April 2010 if that expenditure relates to a Commonwealth payment made under a SRWUIP program on or after that date.

3.79 1 April 2010 reflects the date on which the Commonwealth signed the first contracts under the NSW Private Irrigation Infrastructure Operators Program, a major element of the SRWUIP Program.

Transitional provision

3.80 Because the amendments apply to Commonwealth payments made from 1 April 2010, there will be some cases where payments have been derived and expenditure incurred for income years that ended before the amendments commence. Taxpayers will have already had to lodge returns for some of those years.

3.81 To ensure that taxpayers are able to make a choice for those years, a transitional provision allows taxpayers to make a choice that would otherwise need to have been made on or before the day of Royal Assent within two years after that day. The Commissioner can allow further time in appropriate cases. [Schedule 3, item 19]

3.82 Unlike normal choices, these 'retrospective' choices must be provided to the Commissioner so he or she is in a position to make any amended assessments that may be necessary to give effect to the choice. [Schedule 3, subitem 19(2)]

Consequential amendments

3.83 The dictionary for the Income Tax Assessment Act 1997 is amended to include the defined terms 'direct SRWUIP payment', 'indirect SRWUIP payment', 'SRWUIP expenditure', 'SRWUIP payment', 'SRWUIP program' and 'Water Secretary'. [Schedule 3, items 12 to 17, subsection 995-1(1 ) ( definitions of 'direct SRWUIP payment', 'indirect SRWUIP payment', 'SRWUIP expenditure', 'SRWUIP payment', 'SRWUIP program' and 'Water Secretary')]

3.84 Amendments are made to the non-operative lists of provisions about NANE income and deductions to reflect the SRWUIP amendments. [Schedule 3, items 1 and 2, sections 11-55 and 12-5]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Tax and Superannuation Laws Amendment (2013 Measures No. 1) Bill 2013

3.85 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

3.86 The Commonwealth provides amounts to irrigators under the Sustainable Rural Water Use and Infrastructure Program (SRWUIP) to help with upgrading their water infrastructure. The upgrades produce improvements in the efficiency of rural water use and some of the resulting water savings are transferred to the Commonwealth for use in environmental activities.

3.87 This Schedule amends the income tax law to provide irrigators with a choice between a new, and the existing, income tax treatment of the payments they derive under a SRWUIP program and the corresponding expenditure they make on upgrading their water infrastructure.

3.88 Under the new treatment, the SRWUIP payments are non-assessable non-exempt income (and so transparent to the income tax law) and the corresponding expenditure is not recognised by the law (either as a deduction or as part of the cost of any asset).

3.89 The new treatment ensures that irrigators do not have to fund the gap between the time the payments would be assessed to them and the time the income tax law would fully recognise the corresponding expenditure.

Human rights implications

3.90 This Schedule engages and promotes the right to health in Article 12 of the International Covenant on Economic, Social and Cultural Rights. The UN Committee on Economic, Social and Cultural Rights has interpreted Article 12 as extending to the underlying determinants of health, including a healthy environment.

3.91 This Schedule encourages irrigators to enter into a SRWUIP program and so improve the efficiency of their water use. That will free up more water for use in environmental activities, providing benefits that will secure the future of irrigation communities and protect or restore our environmental assets, such as wetlands and streams. Wetlands protect our shores from wave action, reduce the impacts of floods, absorb pollutants and provide critical habitat for animals and plants. River health is a crucial component of the sustainable management of our rivers, wetlands and groundwater basins.

3.92 Because irrigators enter into a SRWUIP program voluntarily and have the right to choose the new income tax treatment or to continue with the existing treatment, they suffer no disadvantage from this measure.

Conclusion

3.93 This Schedule is compatible with human rights. It promotes the right to health.

Assistant Treasurer, the Hon David Bradbury