Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Hon Ralph Willis, M.P.)APPENDIX TO CHAPTER 3
Detailed Explanation of Balancing Adjustment Roll-over Relief
Depreciable property
Deductions are available for capital expenditure incurred in acquiring plant or articles used for income producing purposes. The standard rate of depreciation is based on the effective life of the property. Special accelerated rates of depreciation are available in specific cases, eg. expenditure on both employee amenities and plant used in scientific research is deductible over 3 years even though the effective life may be longer.
A taxpayer may elect to use either the diminishing value method or prime cost method to calculate annual deductions.
Under the prime cost method, the cost of the property is written off evenly over its effective life. Under the diminishing value method, deductions are calculated by reference to the depreciated value of the property, ie. cost less deductions allowed.
Generally speaking, deductions are pro rated where property is either partly used for income producing purposes, or used for part of the year only, eg. property purchased or sold part way through a year.
Further details of the operation of the depreciation provisions are set out in Chapter 1 on "Depreciation Amendments".
Consequences of balancing adjustment roll-over relief
The basic rule is that where roll-over relief is obtained in relation to a disposal of depreciable property the balancing adjustment provisions will not apply. [New Subsections 58(1)-(3)]
Consistent with the usual rules, pro rata depreciation deductions will be available for the period of the year of income up to the date of disposal. Pro rating will also apply to disposals of property to which pro rating would not usually apply, eg. the repealed concessions for certain property used in primary production which continue to have application. [New Subsection 58(6)]
However, if the depreciation percentage is 100%, pro rating will not be necessary because the cost would have been fully deductible to the transferor (see Chapter 1 ).
The transferee will be taken to have acquired the property for consideration equal to the cost of the property to the transferor where the prime cost method of depreciation had been adopted by the transferor, or the depreciated value of the property at the time of the transfer where the diminishing value method had applied.
The transferee will also "inherit" the basis of depreciation that applied to the property in the hands of the transferor. Thus, the transferee need not calculate a new effective life for the property under the new rules for calculating depreciation rates (explained in Chapter 1 ). [New Subsection 58(4)]
It will also mean that the transferee will be entitled to depreciation deductions at concessional rates to which the transferor was entitled, even though the concession may not have been otherwise available to the transferee, eg. it has been withdrawn, or applies to new property only. [New Subsection 58(5) and transitional clause 71]
The entitlement is subject to the transferee using the property for the same purposes as the transferor where that use is a condition for the entitlement, eg. plant used in primary production. If the transferee is not eligible for the same concessional rate, the transferee will adopt the depreciation rate that would have otherwise applied to the property in the hands of the transferor if the concessional rate had not applied.
The transferee will be entitled to claim a pro rata deduction for depreciation in the year of transfer. That rule will also apply where pro rating would not normally apply. [New subsection 58(6)]
The transferee will be deemed to have obtained depreciation deductions allowed to the transferor in relation to the property. This means that any balancing adjustment included in the transferee's assessable income on the disposal of the asset by the transferee will be calculated taking into account both the transferor's and the transferee's depreciation deduction entitlements. [New Subsection 58(7)]
The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.
A number of depreciation rules continue to have application despite their repeal, eg. the special depreciation rates for certain plant used in primary production (former sections 57AE and 57AH), and "5/3" depreciation (former section 57AL). Some threshold conditions under those provisions are that expenditure be incurred within certain periods of time or under specified contractual arrangements.
If any of those provisions apply to the transferor, then the transferee will be taken to have acquired the property under the same threshold conditions as the transferor. This will enable the transferee to "inherit" special depreciation rates if the property continues to be used in the circumstances required under those repealed rules. [Subclauses 71(3)-(6)]
Similarly, a number of existing depreciation rules are to be replaced by new provisions (see Chapter 1 ). They are 18%-20% loadings (section 57AG), and the "basis of depreciation" rules (section 55). Furthermore, owners of depreciable plant acquired after 12 March 1991 and before 1 July 1991 will be entitled to change the basis of depreciation to new "effective life" rules on 1 July 1991.
Transitional rules will ensure that those changes will affect a transferee in the same way they affected the transferor, or would have affected the transferor but for the disposal of the property, eg. if the transferor's property was acquired before 13 March 1991, then the transferee will be taken to have also acquired it before that date, with the consequence that the "old depreciation percentage" will continue to apply. [Subclauses 71(2),(7)-(12)]
Buildings used in scientific research
Broadly, capital expenditure in respect of a building, or part of a building, to be used solely in scientific research is deductible evenly over three income years. The expenditure must be either:
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- in respect of the construction of, or alteration or addition to, a building, which was commenced before 21 November 1987;
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- in respect of an acquisition of a building before 21 November 1987, or
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- incurred on the acquisition, construction etc. of a building under a contract entered in to before 21 November 1987.
Any consideration received for a disposal of a building, or part of a building, to which the provisions have applied, is assessable to the extent of the deductions allowed.
Consequences of balancing adjustment roll-over relief
The basic rule is that where roll-over relief is obtained in relation to a disposal of a building or part of a building to which the provisions have applied, the balancing adjustment provisions will not apply to the disposal. [New Subsections 73AA(1) & (2)]
The transferor will not be entitled to any deductions in respect of the building in the year of disposal; however, a full year's deduction will be available to the transferee in respect of any unclaimed capital expenditure of the transferor in respect of the building. [New Paragraphs 73AA(3)(b) & (c)]
The transferee will be taken to have acquired the building, or the part of the building, for consideration equal to its cost to the transferor. The transferee will be also taken to have "acquired" the building before 21 November 1987. [New Paragraph 73AA(3)(a) and new subsection 73AA(4)]
This gives the transferee entitlement to the deductions the transferor would have obtained if the building continues to be used solely for scientific research purposes.
The transferee will be deemed to have obtained the deductions allowed to the transferor. This means that any consideration received by the transferee on the disposal of the building or part of the building will be included in the transferee's assessable income to the extent of the deductions allowed to both the transferor and the transferee. [New Subsection 73AA(5)]
The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.
Mining (other than petroleum)
Concessions are available in respect of capital expenditure incurred in mining operations and exploration or prospecting activities.
Expenditure incurred in mining operations
Deductions are available for allowable capital expenditure (ACE) incurred in prescribed mining operations. Examples of ACE include capital expenditure on preparing a site for mining operations, buildings to be used in the mining operations, infrastructure costs, and employee housing and welfare facilities. Expenditure incurred on plant prior to 25 May 1988 also qualified for deduction, unless an election was made to claim deductions under the ordinary plant depreciation provisions.
Expenditure incurred in acquiring mining or prospecting rights or information is treated as ACE to the extent of the vendor's undeducted ACE and undeducted exploration and prospecting expenditure in respect of the property, plus any amounts included in assessable income as a result of the disposal, and which is specified in a notice given by both the vendor and purchaser.
The method of calculating annual deductions for ACE has varied over time. ACE incurred after 19 July 1982 is evenly deductible over the lesser of 10 years or the life of the mine. However, deductions are limited to the amount that does not exceed net income (broadly, the amount by which assessable income exceeds other allowable deductions). Excess amounts are deductible in the following year. If that year's income is insufficient to absorb all of the excess, the balance will be carried forward for successive deduction against the income of following years.
Alternatively, an election can be made that the limit not apply so that excess amounts are not carried forward to the next year, but are immediately deductible. Resultant losses are available for carry forward or, or in the case of a group company, for transfer to a profitable group company under the group loss transfer provisions.
Deductions for ACE incurred on or before 19 July 1982 are calculated by dividing the year end balance of undeducted ACE by a number being the lesser of the number of years in the estimated remaining life of the mine or a "statutory" number which has varied (between 5 and 25) over time.
Unless an election is made, deductions are limited to the amount that can be absorbed by net income. However, unlike post 19 July 1982 excess amounts, pre 20-July 1982 excess amounts are treated as undeducted ACE, ie. deductible over the life of mine etc.
The effect of an election is similar to that for post 19 July 1982 excess amounts, ie. they are treated as losses available for carry forward or transfer under the group loss transfer provisions.
Exploration and prospecting expenditure
Generally speaking, expenditure (including the cost of depreciable plant) incurred on exploration and prospecting activities is immediately deductible in the year it is incurred. However, an election is available to treat expenditure on plant as deductible under the plant depreciation provisions.
Deductions are conditional on the Commissioner being satisfied that either:
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- prescribed mining operations are carried on, or are proposed to be carried on, or
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- the expenditure was necessarily incurred in carrying on a business of mining exploration and prospecting.
Expenditure is deductible to the extent that it is absorbed by net income. The treatment of unabsorbed expenditure (excess amounts) varies according to when the expenditure to which the excess amounts relate was incurred.
Excess amounts in respect of expenditure incurred before the end of the 30 June 1974 income year are treated as allowable capital expenditure incurred in the first subsequent year in which prescribed mining operations are carried on.
Excess amounts in respect of expenditure incurred after the 30 June 1974 income year and before 22 August 1984 are deductible in the first subsequent year in which prescribed mining operations are carried on.
Excess amounts relating to expenditure incurred after 21 August 1984 are deductible in the first subsequent year in which assessable income is derived and:
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- prescribed mining operations are carried on or are proposed to be carried on, or
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- the expenditure was necessarily incurred in carrying on a business of mining exploration and prospecting.
Deductions for post 30 June 1974 excess amounts are limited to the amount of net income. Unabsorbed excess amounts are carried forward successively against the net income of following years. However, excess amounts applicable to deemed gold exploration and prospecting expenditure incurred before 1 January 1991 (the date exemption for gold mining income ceased) are subject to a seven year carry forward limit.
Since the end of the 30 June 1985 income year, an annual election has been available for exploration and prospecting expenditure incurred in a year of income. The effect of the election is that deductions for both the expenditure actually incurred in that year, and the relevant proportion of excess amounts attributable to post 21 August 1984 expenditure, are not limited to the amount of net income. Resultant losses are available for carry forward, or transfer under the group loss transfer provisions.
Consequences of balancing adjustment roll-over relief
Balancing adjustments will not be made to the transferor's taxable income where roll-over relief is obtained in relation to a disposal of property to which the mining provisions have applied. [New Subsections 122JAA(1)-(3)]
Consistent with the existing law, the transferor will not be entitled to any deductions in respect of the property in the year of disposal or any subsequent year except for any actual exploration and prospecting expenditure incurred during the disposal year.
The transferee will be taken to have acquired the property for an amount equal to the transferor's undeducted ACE in respect of the property at the time of the disposal, irrespective of the actual consideration paid. The characteristics of this undeducted ACE will pass to the transferee. This will mean that:
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- amounts attributable to the transferor's undeducted allowable (post 19 July 1982) capital expenditure will be deductible to the transferee over the remaining number of years (including the year of transfer) in the transferor's ten year period, unless the life of mine is shorter;
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- amounts relating to expenditure incurred by the transferor on or before 19 July 1982 will be deductible to the transferee under the rules that applied at the time the transferor incurred the expenditure. For example, deductions for an amount attributable to ACE incurred by the transferor between 17 August 1976 and 30 April 1981 will be calculated by dividing that amount by the lesser of the number years in the life of the mine, or 5;
As well, amounts in respect of property which qualified as ACE at the time of acquisition by the transferor, but which would no longer qualify (eg. plant) will continue to be treated as ACE to the transferor. [New Subsections 122JAA(4),(9),(10), & (15)]
The transferee will stand in the place of the transferor as regards any excess (exploration or ACE) amounts in respect of the property at the time of disposal. These amounts will be deductible on the same basis as for the transferor; for example, an excess amount attributable to expenditure incurred by the transferor between the end of the 30 June 1974 income year and 22 August 1984 would be deductible to the transferee in the first year, not being a year prior to the year of transfer, in which the transferee carries on prescribed mining operations. [New Subsections 122JAA(5)-(8),(11), & (12)]
However, excess amounts relating to gold exploration and prospecting expenditure incurred between 25 May 1988 and 1 January 1991 will not be deductible to the transferee after the transferor's original seven year carry forward deduction limit has expired. [New Subsections 122JAA(17) & (18)]
The transferee will be taken to have made any election made by the transferor regarding plant, ie. if the transferor had elected to deduct the cost of depreciable plant under the mining provisions, that basis of deduction will apply to the transferee, and vice versa. [New Subsections 122JAA(13) & (14)]
Balancing adjustments will apply on the subsequent disposal of property by the transferee where capital allowance roll-over relief is not available. Balancing adjustments will be calculated taking into account both the transferor's and the transferee's capital deduction entitlements. For that purpose, the transferee is taken to have acquired the property for an amount equal to the transferor's costs, rather than the transferee's actual or deemed consideration. [New Subsections 122JAA(20)-(22)]
The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.
Quarrying
Concessions are available in respect of capital expenditure incurred in exploring for quarry materials and carrying on quarrying operations.
Expenditure incurred in quarrying operations
Deductions are available for allowable capital expenditure (ACE) incurred in eligible quarrying operations. Examples of ACE include capital expenditure in preparing the quarrying site, buildings (excluding employee housing and welfare facilities), infrastructure costs, etc.
Expenditure incurred in acquiring quarrying or prospecting rights or information qualifies as ACE to the extent of the vendor's undeducted ACE and undeducted exploration and prospecting expenditure in respect of the property plus any amounts included in assessable income as a result of the disposal, and which has been specified in a notice given by both the vendor and purchaser.
ACE is deductible evenly over the lesser of 20 years or the estimated life of the quarry. Deductions are allowable to the extent they are absorbed by net income (broadly, the amount by which assessable income exceeds other allowable deductions). Unabsorbed amounts (excess amounts) are deductible in the following year. However, if that year's net income is insufficient to fully absorb the excess, the balance will be carried forward for successive deduction against the income of following years.
Alternatively, an election can be made that the limit not apply so that excess amounts are not carried forward to the next year, but are immediately deductible. Resultant losses are available for carry forward or, or in the case of a group company, for transfer to a profitable group company under the group loss transfer provisions.
Quarrying exploration expenditure
Expenditure, including expenditure on plant, incurred in exploring and prospecting for quarry materials is immediately deductible in the year it is incurred.
Deductions are conditional on the Commissioner being satisfied that either:
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- eligible quarrying operations are, or are proposed to be carried on, or
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- the expenditure was necessarily incurred in carrying on a business of quarrying exploration.
Unless an election is made, deductions are limited to the amount of net income available to absorb the deductions. Unabsorbed expenditure (excess amounts) is immediately deductible in the first subsequent year in which assessable income is derived, again subject to the limit and conditions mentioned above.
Alternatively, an annual election can be made for the limit not to apply to both expenditure incurred in the year and the relevant proportion of prior year excess amounts. Resultant losses are available either for carry forward, or, in the case of a group company, for transfer to a profitable group company under the group loss transfer provisions.
An election can be made for depreciable plant, which may otherwise be deductible as exploration and prospecting expenditure, to be depreciated under the ordinary plant depreciation provisions.
Consequences of balancing adjustment roll-over relief
Balancing adjustments will not be made to the transferor's taxable income where roll-over relief applies to a disposal of property to which the quarrying provisions have applied. [New Subsection 122JG(1)-(3)]
Consistent with the existing law, the transferor will be entitled to claim deductions for exploration/prospecting expenditure incurred on the property during the year of disposal, but deductions will not be available in respect of undeducted ACE and excess amounts that relate to the property.
The transferee will be deemed to have acquired the property for consideration equal to the transferor's undeducted ACE in respect of the property at the time of the disposal, irrespective of the actual consideration paid. The transferee will continue to deduct the expenditure on the same basis as the transferor, ie. over the lesser of the remaining number of years (including the year of transfer) in the transferor's twenty year period, or the life of the quarry. [New Subsection 122JG(4)]
The transferee will stand in the place of the transferor as regards any excess amounts in respect of the property at the time of disposal. Such amounts will be available for immediate deduction in the manner described above, eg. an excess amount in respect of exploration expenditure will be immediately deductible against the transferee's assessable income in the first year, not prior to the year of disposal, in which the Commissioner is satisfied that either:
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- eligible quarrying operations are, or are proposed to be carried on, or
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- the expenditure was necessarily incurred in carrying on a business of quarrying exploration.
The transferee will be taken to have made any election made by the transferor regarding plant, ie. if the transferor had elected to deduct the cost of depreciable plant under the mining provisions, that basis of deduction will apply to the transferee, and vice versa. [New Subsections 122JG(5)-(8)]
Balancing adjustments will apply on the subsequent disposal of property by the transferee where capital allowance roll-over relief is not available. Balancing adjustments will be calculated taking into account both the transferor's and the transferee's capital deduction entitlements. For that purpose, the transferee is taken to have acquired the property for an amount equal to the transferor's costs, rather than the transferee's actual or deemed consideration. [New Subsections 122JG(10)-(12)]
The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.
Transport of minerals
Capital expenditure incurred on facilities (such as railroads, pipelines and ports) used for the transport of minerals (including petroleum) from mining sites is generally evenly deductible over 10 years. However, expenditure incurred between 17 September 1974 and 17 August 1976 is deductible over 20 years.
An election can be made that expenditure otherwise deductible over 10 years be deducted over 20 years instead.
Consequences of balancing adjustment roll-over relief
Balancing adjustments on the disposal of property will not be made to the taxable income of the transferor where roll-over relief is obtained for a disposal of property. [New Subsections 123BBA(1)-(3)]
Consistent with the existing law, the transferor will not be entitled to deductions in respect of the property in the year of disposal, or in any subsequent year.
The transferee will be taken to have acquired the property for consideration equal to so much of the cost to the transferor as was deductible mining transport expenditure, and as having obtained the deductions allowed to the transferor in respect of that expenditure in the relevant years.
That cost will be deemed to have been incurred at the same time as the transferor, enabling the transferee to obtain deductions over the remaining number of years in the 10 or 20 year period applicable to the transferor's expenditure.
If the transferor had elected to deduct "10 year" expenditure over 20 years, the transferee will be deemed to have also made an election and will therefore be entitled to deductions over the remaining years in the 20 year period. [New Subsections 123BBA(4)-(11)]
Balancing adjustments will apply on the subsequent disposal of property by the transferee where capital allowance roll-over relief is not available. Balancing adjustments will be calculated taking into account both the transferor's and the transferee's capital deduction entitlements. For that purpose, the transferee is taken to have acquired the property for an amount equal to the transferor's costs, rather than the transferee's actual or deemed consideration. [New Subsections 123BBA(13)-(15)]
The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.
Transport of quarry materials
Capital expenditure incurred after 15 August 1989 on facilities (such as railroads, roads, pipelines and ports) used for the transport of quarrying materials from quarrying sites is evenly deductible over 20 years.
Consequences of balancing adjustment roll-over relief
Balancing adjustments will not be made to the taxable income of the transferor where capital allowance roll-over relief is obtained in respect of a disposal of property. [New Subsections 123BF(1)-(3)]
Consistent with the usual rules, the transferor will not be entitled to deductions in respect of the property in the year of disposal
The transferee will be treated as having acquired the property for consideration equal to so much of the transferor's cost as is deductible expenditure on facilities to transport quarry materials. This means that the transferee will be entitled to the same deductions that the transferor would have been entitled to if the disposal had not occurred. [Subsection 123BF(4)]
Balancing adjustments will apply on the subsequent disposal of property by the transferee where capital allowance roll-over relief is not available. Balancing adjustments will be calculated taking into account both the transferor's and the transferee's capital deduction entitlements. For that purpose, the transferee is taken to have acquired the property for an amount equal to the transferor's costs, rather than the transferee's actual or deemed consideration. [New Subsections 123BF(6)-(8)]
The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.
Petroleum mining
Concessions are provided for capital expenditure incurred in exploring or prospecting for petroleum and carrying on prescribed petroleum operations.
Expenditure incurred in petroleum mining operations
Deductions are available for allowable capital expenditure (ACE) incurred in prescribed petroleum operations. Examples of ACE include capital expenditure on infrastructure costs, employee housing and welfare facilities, and post 14 January 1986 cash bidding payments for exploration permits and production licences.
Expenditure incurred on plant prior to 25 May 1988 also qualified for deduction, unless an election was made to claim deductions under the ordinary plant depreciation provisions.
Expenditure incurred in acquiring mining and/or prospecting rights, or information, qualifies as ACE to the extent of the vendor's undeducted ACE and undeducted exploration and prospecting expenditure in respect of the property plus any amounts included in assessable income as the result of the disposal, and which has been specified in a notice given by both the vendor and purchaser.
Exploration permit and production licence cash bidding payments are deductible only after the production licence has been granted. Accordingly, there is provision for the transfer, by way of written notice, of such cash bidding payment entitlements to purchasers of exploration permits for which production licences have not been granted.
The treatment of ACE has varied over time. Under the present rules, applicable to expenditure incurred after 19 July 1982, ACE is deductible evenly over the lesser of 10 years or the life of the petroleum field. Deductions are limited to amounts which can be absorbed by net income (broadly, the amount by which assessable income exceeds other deductions). Excess amounts are deductible in the following year. If that year's income is insufficient to fully absorb the excess, the balance is carried forward for successive deduction against income of following years.
Deductions for ACE incurred before 20 July 1982 are calculated by dividing the balance of unclaimed expenditure at the end of the year by a number being the lesser of the number of years in the estimated remaining life of the field or a "statutory" number which has varied (between 5 and 25) over time. Deductions are limited to the amount that can be absorbed by net income. Unabsorbed excess amounts are treated as undeducted ACE, ie. deductible over the life of the field etc.
Alternatively, an election can be made that the deduction limit not apply. Resultant losses are available either for carry forward or transfer under the group loss provisions.
Exploration and prospecting expenditure
Generally speaking, expenditure incurred on exploration and prospecting activities is immediately deductible in the year it is incurred. However, an election can be made to treat expenditure in respect of plant as deductible under the plant depreciation provisions.
Expenditure is deductible to the extent that it is absorbed by net income. The treatment of undeducted expenditure (excess amounts) varies according to when the expenditure to which the excess amounts relate was incurred.
Excess amounts relating to expenditure incurred before 18 August 1976 is deductible in the first subsequent year in which assessable income is derived from petroleum.
Excess amounts attributable to expenditure incurred after 17 August 1976 are deductible in the first subsequent year that assessable income is derived.
Deductions for post 17 August 1976 expenditure is conditional on the Commissioner being satisfied that either:
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- prescribed petroleum operations are carried on or are proposed to be carried on; or
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- the expenditure was incurred in carrying on a business of exploration or prospecting for petroleum.
Deductions for excess amounts are also limited to the amount which can be absorbed by net income. Unabsorbed excess amounts are carried forward for successive deduction against following years' income.
Since the end of the 30 June 1985 income year, an annual election has been available to the effect that the net income limit does not apply either to expenditure incurred in the year to which the election relates or the relevant proportion of post 17 August 1976 excess amounts.
Consequences of balancing adjustment roll-over relief
Balancing adjustments will not be made to the transferor's taxable income where roll-over relief is obtained in relation to a disposal of property to which petroleum mining provisions have applied. [New Subsection 124AMAA(1)-(3)]
Consistent with the existing law, the transferor will be entitled to claim deductions for exploration/prospecting expenditure incurred in respect of the property during the year of the disposal. Deductions will not be available in respect of any undeducted ACE and any excess amounts that relate to the property.
The transferee will be taken to have acquired the property for consideration equal to the undeducted ACE in respect of the property at the time of the disposal, irrespective of the actual consideration paid. The characteristics of this undeducted ACE will pass to the transferee.
Thus, the deemed consideration for acquisition will be deductible over the same period (including the year of transfer) that it would have been deductible to the transferor if the disposal had not occurred, ie:
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- the portion of the undeducted ACE that relates to expenditure incurred by the transferor under the existing rules (ie. after 19 July 1982) will be deductible to the transferee over the lesser of the remaining number of years (including the year of transfer) in the ten year period, or the life of the mine.
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- the portion of undeducted ACE which is in respect of the transferor's expenditure incurred on or before 19 July 1982 will be deductible to the transferee under the rules that applied at the time the transferor incurred the expenditure.
As well, amounts in respect of property which qualified as ACE at the time of acquisition by the transferor, but would no longer qualify (eg. plant) will continue to be treated as ACE to the transferor.
If the property is a qualifying interest in relation to a cash bidding exploration permit, the transferee will "inherit" any of the transferor's eligible cash bidding amount entitlement in respect of the property. This entitlement will be treated as ACE incurred in the first year in which the production licence is granted to the transferee. [New Subsections 124AMAA(4),(8),(9) & (14)]
The transferee will stand in the place of the transferor as regards any excess amounts in respect of the property at the time of the disposal. Such amounts will be available as immediate deductions subject to the same rules that would have applied to the transferor. [New Subsections 124AMMA(5)-(7),(10) & (11)]
The transferee will be taken to have made any election made by the transferor regarding plant, ie. if the transferor had elected to deduct the cost of depreciable plant under the mining provisions, that basis of deduction will apply to the transferee, and vice versa. [New Subsections 124AMAA(12) & (13)]
Balancing adjustments will apply on the subsequent disposal of property by the transferee where capital allowance roll-over relief is not available. Balancing adjustments will be calculated taking into account both the transferor's and the transferee's capital deduction entitlements. For that purpose, the transferee is taken to have acquired the property for an amount equal to the transferor's costs, rather than the transferee's actual or deemed consideration. [New Subsections 124AMAA(16)-(18)]
The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.
Access roads used in timber operations
Deductions are available for capital expenditure incurred on access roads used in timber operations. Annual deductions are calculated by dividing the amount of residual capital expenditure (ie. eligible capital expenditure less deductions allowed) by a number being the lesser of the number of years in the estimated period of use of the road in timber operations, or 25.
Consequences of balancing adjustment roll-over relief
A balancing adjustment will not be made to the taxable income of the transferor on the disposal of property where capital allowance balancing adjustment roll-over relief is obtained for the disposal. [New Subsections 124GA(1) & (2)]
As occurs under the existing rules, the transferor will not be entitled to any deduction in respect of the property in the year of disposal.
The transferee will be deemed to have acquired the property for consideration equal to the transferor's residual capital expenditure in respect of the property immediately before the disposal. This will entitle the transferee to deductions on the same basis that would have been available to the transferor if the disposal had not occurred, ie. deductions will be calculated by dividing the transferor's undeducted expenditure by the lesser of the remaining number of years in the estimated period of use of the road in timber operations, or 25. [New Subsection 124GA(3)]
On a future disposal of the property by the transferee where roll-over relief is not available, balancing adjustments made to the transferee's taxable income will be calculated taking into account both the transferor's and the transferee's deductions. That is, for balancing adjustment purposes, the transferee is taken to have been allowed deductions that were allowed to the transferor. [New Subsection 124GA(4)]
The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.
Timber mill buildings
Deductions are available in respect of the cost of constructing or acquiring buildings used mainly in timber milling operations. Annual deductions are calculated by dividing the amount of residual capital expenditure (ie. the cost of the building less deductions allowed) by a number being the lesser of the number of years in the estimated period of use of the building for timber milling purposes, or 25.
Consequences of balancing adjustment roll-over relief
A balancing adjustment will not be made to the taxable income of the transferor on the disposal of property where capital allowance balancing adjustment roll-over relief is obtained for the disposal. [New Subsections 124JD(1) & (2)]
As occurs under the existing rules, the transferor will not be entitled to any deduction in respect of the property in the year of disposal.
The transferee will be deemed to have acquired the property for consideration equal to the transferor's residual capital expenditure in respect of the property immediately before the disposal. This will entitle the transferee to deductions on the basis that would have been available to the transferor if the disposal had not occurred, ie. deductions will be calculated by dividing the residual capital expenditure by the lesser of the remaining number of years in the estimated period of use of the building for timber milling purposes, or 25. [New Subsection 124JD(3)]
On a future disposal of the property by the transferee where roll-over relief is not available, balancing adjustments made to the transferee's taxable income will be calculated taking into account both the transferor's and the transferee's deductions. That is, for balancing adjustment purposes, the transferee is taken to have been allowed deductions that were allowed to the transferor. [New Subsection 124JD(4)]
The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.
Industrial property
Capital expenditure incurred in acquiring industrial property in the nature of patents, copyright, registered designs, and licences in respect of such property, is deductible over the effective life of the property.
Generally, effective life is the period of time over which owners' rights are protected by law, except that in the case of copyright, it is limited to a maximum period of 25 years. Copyright in Australian films is deductible over 2 years unless an election is made to adopt the 25 year write-off period. (Note that the amendments contained in this Bill do not apply to the provisions (Division 10BA) which confer an immediate deduction for investments in Australian films).
Annual deductions are calculated by dividing the residual value of a unit of property at the end of the year of income by the number of years remaining in its effective life. Broadly, residual value is the amount of capital expenditure incurred in respect of the unit of property, less deductions allowed.
A special feature of the industrial property capital deduction rules is that amounts received as compensation for the use of property by others, such as premiums received for the grant of a licence, are treated as a part disposal of the property. Assessable balancing adjustments will occur where the amount received for a part disposal exceeds the residual value of the property, to the extent that the aggregate of such assessable amounts does not exceed the sum of deductions allowed in respect of the property.
Consequences of balancing adjustment roll-over relief
Where balancing adjustment roll-over relief is obtained for a disposal of a unit of industrial property, no balancing adjustment will be made to the taxable income of the transferor. [New Subsections 124PA(1)-(3)]
As occurs under the existing law, the transferor will not be entitled to any deduction in respect of the property in the year of disposal. The transferee, however, will be entitled to a full year's deduction in the same year.
The transferee will be deemed to have acquired the property for consideration equal to its residual value immediately before disposal. The transferee will also "inherit" the remaining effective life of the property. This will enable the transferee to claim deductions on the same basis as the transferor. [New Subsection 124PA(4)]
On a future disposal or part disposal of the property by the transferee, the transferee will be deemed to have obtained deductions allowed to the transferor in respect of the property. This means that the amount of any balancing adjustment of the transferee's taxable income will take into account deductions allowed to both the transferor and the transferee.
Amounts previously assessed to the transferor as the result of the application of the balancing adjustment provisions to part disposals will also be taken into account to ensure that the aggregate amount assessable to both the transferor and transferee will not exceed the sum of deductions allowed to the transferor and transferee. [Subsection 124PA(5)]
The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.