Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Hon Ralph Willis, M.P.)Chapter 2 Anti-avoidance Measures - Deduction Recoupment
Clauses: 22,23,26,36,39,41,46,48 and 63
Overview
Amends a number of the capital allowance provisions to correct a technical deficiency which permits avoidance of tax on recoupments of deductions allowed under those provisions.
Anti-avoidance Measures - Deduction Recoupment
Anti-avoidance Measures - Deduction Recoupment
Summary of the proposed amendments
2.1 This chapter deals with amendments to the income tax law which will correct a technical deficiency in various capital allowance provisions. The amendments will prevent avoidance of tax on recoupments of previously allowed deductions.
Background to the legislation
2.2 Deductions are available in respect of certain capital expenditure incurred in income producing activities; examples include plant depreciation allowances, various capital mining expenditure concessions, scientific research buildings, and timber industry access roads and buildings. A common feature of these capital allowance provisions is that balancing adjustments may be required for disposals of property to which the provisions have applied.
2.3 For example, the plant depreciation provisions require a reconciliation to be made between the consideration for a disposal of depreciated property with its depreciated value (ie. the cost of the property less the amount of deductions allowed).
2.4 Any excess of the consideration for disposal over depreciated value (depreciation recoupment) is assessable to the extent of deductions allowed to the taxpayer disposing of the property. (Any consideration for disposal which is in excess of the cost of the property will fall for consideration under the capital gains tax provisions).
2.5 Similarly, if the consideration for disposal is less than depreciated value, the deficiency is deductible.
2.6 To prevent tax avoidance where property is transferred at less than true value between persons who are not dealing with each other at arm's length, some of the capital allowance provisions require balancing adjustments calculated as if the disposal was at market value. However, others (most notably, plant depreciation allowances) treat such non-arm's length disposals as made for consideration equal to the lesser of market value or depreciated value.
2.7 This has resulted in tax avoidance. For example, an asset that has a low depreciated value, but a substantial market value, might be sold for its depreciated value by the original owner to a related entity, eg. a company of which the original owner is the principal shareholder. That transaction would not result in any recoupment of the vendor's depreciation. The related company could then sell the asset for its true market value without being taxed on recoupment of depreciation allowed to the original owner.
2.8 Similar avoidance can arise under the provisions dealing with partial changes in ownership of property.
2.9 Under those provisions, a part change in the ownership of property (as can occur where a partnership is varied) is taken to be a disposal of the whole of the property by the persons who owned the property before the change, to the persons who owned the property after the change. For example, an old partnership would be deemed to have disposed of the whole of the property to the new partnership. This measure was a response to the High Court's decision in Rose's case [(1951)
84 CLR 118
] which said that the depreciation balancing adjustment provisions could only apply to disposals of the whole of the ownership of property, not part changes of ownership.
2.10 Most of the capital allowance provisions permit the parties to a partial change in ownership of property to specify the value of the property for purposes of applying the balancing adjustment rules to the disposal that is taken to have occurred. The specified amount must not be less than the lesser of the property's market value or written down value (cost less deductions allowed). This rule ensures that deductible balancing adjustments are not generated artificially.
2.11 However, in cases where the true value of property exceeds its written down value, undesirable outcomes could occur if the parties were to specify an amount less than market value, eg. the depreciated value. If that occurred on the transfer of depreciated partnership plant to a differently constituted partnership, there would be no taxable recoupment of the old partnership's depreciation deductions. Nor would any depreciation recoupment on a future sale of the property by the new partnership include recoupment of depreciation deductions allowed to the old partnership.
Explanation of the proposed amendments
2.12 The avoidance possibilities described above arise under various capital allowance provisions which do not treat all non-arm's length disposals, or disposals taken to occur on a part change in ownership, as occurring at market value. Accordingly, those provisions are being amended to ensure that such disposals are deemed to occur at market value.
2.13 Disposals of property between parties who are not dealing with each other at arm's length will be taken to be made for consideration equal to the market value of the property. The provisions affected by this amendment are:
- •
- depreciation of plant (section 59);
- •
- expenditure on buildings used for scientific research (section 73A); and
- •
- timber industry access roads and buildings (Division 10A).
2.14 Similarly, disposals of property which are deemed to occur on a part change in ownership of that property will be treated as being made for consideration equal to the market value of the property. The provisions to be amended are:
- •
- depreciation of plant (section 59AA);
- •
- mining and quarrying (section 122R);
- •
- transport of minerals and quarrying materials; (section 123F); and
- •
- petroleum mining (section 124AO).
The amendments will make those provisions consistent with other capital allowance provisions which already treat non-arm's length and deemed disposals as occurring at market value.
Commencement date
2.15 The amendments apply to disposals of property occurring after [date of introduction].
Clauses involved in the proposed amendments
Clause 22: Amends subsection 59(4) so that non arm's length disposals of depreciable plant will be taken to occur at market value. It also repeals subsection 59(4A) which, by the amendment, becomes redundant.
Clause 23: Amends subsection 59AA(1) and replaces subsection 59AA(2) with a new subsection 59AA(2). The effect is that part changes in ownership of plant which under section 59AA are taken to be disposals of the whole of the property are treated as occurring at market value, unless an election for balancing adjustment roll-over relief is made (see Chapter 3 ).
Subclause 26(1): Inserts subsection 73(4A) which will treat non arm's length disposals, or part disposals, of scientific research buildings as occurring at market value.
Clause 36: Amends subsections 122R(1) and 122R(3), and replaces subsection 122R(2) with new subsections 122R(2) and 122R(2A). The effect is that disposals of mining or quarrying property that section 122R deems to occur as the result of a part change in ownership are taken to occur at market value, unless an election is made for balancing adjustment roll-over relief (see Chapter 3 ).
Clause 39: Amends subsections 123F(1) and 123F(3), and substitutes new subsections 123F(2) and 123F(2A) for subsection 123F(2). The effect is that part changes in ownership of mining or quarrying transport property which are taken under section 123F to be disposals of the whole of the property are treated as made for consideration equal to market value, unless an election for balancing adjustment roll-over relief is made (see Chapter 3 ).
Clause 41: Amends subsection 124AO(1) and substitutes subsection 124AO(2) with new subsection 124AO(2). This ensures that disposals of petroleum mining property that are deemed under section 124AO to occur as the result of a part change in ownership of the property are taken to occur at market value, unless an election for balancing adjustment roll-over relief is made (see Chapter 3 ).
Clause 46: Inserts new section 124JE so that non arm's length disposals of property for which deductions are allowable under the timber industry access roads and buildings provisions are treated as occurring at market value.
Clause 48: Amends subsection 124W(2), and replaces subsections 124W(3), (4), and (5) with new subsection 124W(3). This means that part changes in ownership of industrial property that are taken under section 124W to be disposals of the whole of the property are treated as made at market value, unless an election for balancing adjustment roll-over relief is made ( Chapter 3 ).
Subclauses 63(6) & (7) specify that these amendments will apply to disposals after [date of introduction].