House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon Ralph Willis, M.P.)

Chapter 3 Balancing Adjustment Roll-over Relief

Clauses: 21,23,27,34,35,36,37,38,39,40,41,45,46,47,48,56,63,71 and 72

Overview

Makes available optional balancing adjustment roll-over relief to be available for intra group company transfers of property (to which the capital allowance provisions have applied) occurring after 6 December 1990 and before [day after date of introduction]. Announced by former Treasurer on 8 December 1990.

Applies balancing adjustment roll-over relief for disposals of assets (to which the capital allowance provisions have applied) to other persons if capital gains tax roll-over relief is obtained for the disposal.

Makes available optional balancing adjustment roll-over relief for disposals of property (to which the capital allowance provisions have applied) that are taken to occur as the result of part changes in the ownership of that property.

Balancing Adjustment Roll-over Relief

Balancing Adjustment Roll-over Relief

References in this chapter to "capital allowance provisions" are references to the following provisions under which deductions are available in respect of the capital costs relating to property used in income producing activities:

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depreciation of plant (sections 54 - 62);

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buildings used in scientific research (section 73A);

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mining and quarrying (Division 10);

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transport of minerals and quarry materials (Division 10AAA):

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petroleum mining (Division 10AA);

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timber industry access roads and buildings(Division 10A); and

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industrial property (10B).

Summary of the proposed amendments

3.1 This Bill will amend the Income Tax Assessment Act 1936 to provide for a deferral (ie. roll-over) of balancing adjustments that could otherwise arise from disposals of property to which the various capital allowance provisions have applied. This balancing adjustment roll-over relief will apply where either:

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capital gains tax roll-over relief is obtained for a disposal of property to another person; or

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an election is made in respect of a disposal of property that is taken to occur as the result of a part change in ownership of property (eg. where the membership of a partnership is varied).

Background to the legislation

3.2 Under capital gains tax (CGT), taxpayers can obtain roll-over relief for disposals of assets (including property to which capital allowance provisions have applied) in a number of circumstances where there is no real change in the underlying ownership of property, eg. as occurs when property is transferred within a wholly-owned company group.

3.3 The effect of CGT roll-over relief is that the exempt status of assets acquired before 20 September 1985 (the commencement date of CGT) is retained, and accrued capital gains and losses in respect of assets acquired after that date are deferred for taxation purposes until the assets are ultimately disposed of in circumstances where roll-over relief is not obtained, eg. an asset is disposed of outside a wholly-owned company group.

3.4 The broad effect of CGT roll-over relief is to treat the disposal as if it had not occurred and treat the transferee as if the transferee had been the original owner of the asset.

3.5 A common feature of the various capital allowance provisions is that balancing adjustments may be required on the disposal of property for which deductions have been allowed under those provisions. This means that disposals of such property can result in assessable recoupments of deductions. Under the plant depreciation provisions, for example, that happens when the consideration for disposal is more than the asset's depreciated value (ie. cost less deductions allowed). Similarly, deductions are available for losses on disposal (ie. where the consideration for disposal is less than depreciated value).

3.6 A disposal of property also terminates the basis of deduction applicable to that property. That is, the transferee may not claim deductions on the same basis as the transferor. For example, the transferor may have obtained a concessional rate of depreciation on transferred plant which either no longer applies, or is available for new property only.

Explanation of the proposed amendments

CGT derived balancing adjustment roll-over relief

3.7 Capital allowance balancing adjustment roll-over relief is to apply to disposals of property in the following circumstances:

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a disposal of an asset to a wholly-owned company where CGT roll-over relief is obtained under section 160ZZN;

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a disposal of partnership property to a company which is wholly-owned by the partners where CGT roll-over relief is obtained under section 160ZZNA;

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a disposal of an asset within a wholly-owned company group where CGT roll-over relief is obtained under section 160ZZO;

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a transfer of an asset between spouses as the result of a marriage breakdown where CGT roll-over is obtained under section 160ZZM; and

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a transfer of an asset from a company or trust to a spouse as the result of a marriage breakdown where CGT roll-over relief is obtained under section 160ZZMA.

3.8 The main consequence of capital allowance balancing adjustment roll-over relief is that the balancing adjustment provisions will not apply to the disposal. However, to ensure that the balancing adjustment provisions operate properly at the time the transferee eventually disposes of the property, the transferee will be taxable on recoupments of capital allowances calculated as if the transferor had continued to own the property, ie. by reference to deductions allowed to both the transferor and the transferee.

3.9 Successive roll-overs will be available, so that the transferee first disposing of the property in "non-roll-over" circumstances will be required to account for deductions allowed to both the transferee and earlier transferors.

3.10 Another outcome of roll-over relief is that the transferee will "inherit" the transferor's basis of claiming deductions. In the case of depreciable plant, for example, this will mean that the transferee will adopt the same rate of depreciation as the transferor (eg. there will be no need for the transferee to recalculate the effective life of the property).

3.11 It will also mean that the transferee will be taken to have made any choices made by the transferor that affect the relevant capital deduction. For example, if the transferor of depreciable property had opted to claim depreciation under the prime cost method, the transferee's depreciation entitlement will be on a similar basis. If the transferor had instead chosen the diminishing value method, the transferee will be taken to have acquired the relevant plant at its depreciated value for the purpose of ongoing depreciation entitlements.

3.12 This "inheritance" mechanism will be available for successive roll-overs where CGT roll-over relief is obtained on the disposal of the property.

3.13 Certain motor vehicles are not treated as assets for CGT purposes, so that disposals of those vehicles are not subject to CGT. Nevertheless, unnecessary balancing adjustments can occur in circumstances where CGT roll-over would otherwise be available, eg. on the transfer of a vehicle within a wholly-owned company group.

3.14 Accordingly, balancing adjustment roll-over relief is to apply on the disposal of a motor vehicle in the same circumstances that it would be available if motor vehicles themselves were treated as assets for CGT purposes.

Elected balancing adjustment roll-over relief on part change of ownership of property

3.15 Optional balancing adjustment roll-over relief is to be available on certain disposals of property where there is some continuity of ownership of the property. Under most of the capital allowance provisions, a part change in the ownership of property (eg. as occurs where the membership of a partnership is varied) is taken to be a disposal of the whole of the property by all of the persons who owned the property before the change, to all of the persons who owned the property after the change (eg. the old partnership is deemed to have disposed of the whole of the property to the new partnership).

3.16 Under anti-avoidance measures introduced by this Bill (see Chapter 2 ), such deemed disposals will be taken to occur at market value. Under the various balancing adjustment rules, this could lead to continuing partners being taxed on amounts that relate to a share of partnership property which they continue to own.

3.17 To alleviate this difficulty, it will be open to all of the transferors and transferees to elect to take balancing adjustment roll-over relief where there is some continuity of ownership of the property. This is broadly similar to the rules that apply to disposals of trading stock that are taken to occur at market value where there is a part change in ownership of the trading stock.

3.18 The consequences of such elected balancing adjustment roll-over relief are the same as for CGT derived roll-over relief, ie. the capital allowance balancing adjustment provisions will not apply to the deemed disposal, and the transferee taxpayer will "inherit" the transferor's basis of deduction; however, the transferee will be subject to tax on recoupments of deductions calculated as if the transferor had retained ownership, ie. by reference to capital allowance deductions allowed to both the transferor and the transferee.

Record keeping

3.19 Written elections will need to be made where balancing adjustment roll-over relief is sought for disposals of property that are taken to occur as the result of part changes in ownership of the property. They must be made within six months after the end of year in which the disposal occurred by all of the persons who owned the property both before and after the change in ownership. Parties to an election must retain the election, or a copy, for five years after they dispose of the property.

3.20 Elections will generally not be necessary where CGT roll-over relief applies to the disposal, as balancing adjustment roll-over relief will automatically apply in such cases. An exception will be where CGT roll-over relief is obtained for a disposal of an interest in property which is taken to be a disposal of the whole of the property under a capital allowance provision, eg. where a partner obtains CGT roll-over relief for the disposal of an interest in an asset to a wholly-owned company of the partner. An election by all of the persons who owned the property before and after the disposal would be required in order to obtain balancing adjustment roll-over relief.

3.21 Transferors will need to provide transferees with such information as is necessary for transferees to ascertain how the roll-over provisions will apply to them. For example, a transferor of depreciable plant will need to provide details of the property's cost, date of acquisition, and effective life, and of elections made, and deductions obtained, in respect of the property.

Commencement date

3.22 The amendments apply to disposals of property occurring after [date of introduction].

3.23 It was previously announced (Treasurer's press release of 8 December 1990) that optional balancing adjustment roll-over relief would be available for intra group company asset disposals occurring after 6 December 1990, ie. roll-over relief would be available irrespective of whether CGT roll-over relief was obtained under section 160ZZO. Optional roll-over relief will not be available for disposals taking place [ after date of introduction ], but will apply automatically if CGT roll-over relief applies to the disposal.

3.24 Optional balancing adjustment roll-over relief will apply to intra group company disposals occurring after 6 December 1990 and before [ day after date of introduction ] if an election is made within 6 months of the later of the end of the transferor's income year in which the disposal occurred, or [ date of introduction ].

Clauses involved in the proposed amendments

3.25 The following clauses insert new sections that set out rules for capital allowance balancing adjustment roll-over relief on the disposal of property.

3.26 The following clauses insert complementary new provisions to enable elections to be made for balancing adjustment roll-over relief on disposals of property that are taken to occur as the result of part changes in ownership.

3.27 The following clauses are also involved in the amendments.

Clause 56: Inserts subsection 262A(4AA) which deals with requirements for keeping notices of elections. It also inserts subsections 262A(4AC) & (4AD) which deal with the giving and keeping of information about assets for which balancing adjustment roll-over relief is obtained.

Subclause 63(6): Provides for balancing adjustment roll-over relief to be available for disposals of property after [date of introduction].

Clause 71: Provides transitional arrangements for repealed depreciation provisions applicable to property immediately before the disposal for which roll-over relief is obtained. Broadly, the effect is to enable transferees of property to continue to apply a repealed basis of depreciation that applied to the property immediately before the disposal, eg. the "5/3" depreciation write-off in repealed section 57AL.

Clause 72: Enables balancing adjustment roll-over relief to be obtained for intra group company asset disposals occurring after 6 December 1990 and before [day after date of introduction].