House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Development Allowance - Taxation Deduction

Summary of proposed legislation

10.1. The law will be amended to allow the development allowance. The allowance is a deduction, in addition to depreciation, of 10% of the amount of capital expenditure incurred by taxpayers on the acquisition of new units of plant and equipment to be used in Australia, to produce assessable income, within certain large projects which meet some other criteria.

10.2. Subdivision B of Division 3 of Part III of the Income Tax Assessment Act 1936 (referred to in this chapter as the "Tax Act") provided for the former investment allowance. It will be amended to permit the development allowance where the relevant criteria have been met. The development allowance will be available for actual expenditure on new units of property specified in a pre-qualifying certificate, and acquired and used wholly for producing assessable income and principally in carrying out the project.

10.3. The certificate is a pre-requisite of any income tax deduction. The amendments to the Tax Act will ensure the deduction is allowable if the plant is covered by a certificate, the expenditure has pre-qualified, and the other tax deductibility tests are met.

10.4. The types of projects which may qualify, and certain criteria which are administered by the Development Allowance Authority (for convenience referred to as the "DAA"), are to be determined in accordance with legislation proposed in the Development Allowance Authority Bill 1992 (referred to as the "DAA Bill", or the "DAA Act" after enactment), which is integral to the income tax amendments.

10.5. A detailed explanation on the types of projects, eligibility criteria, and tests required to satisfy the DAA, appears in an Explanatory Memorandum accompanying the DAA Bill. The DAA is required to issue a pre-qualifying certificate to entities (taxpayers) which meet all eligibility criteria required under the DAA Act. Such a certificate will specify several things. It will specify the taxpayer and the qualifying project. It will also specify the plant expected to form part of that project.

10.6. The Tax Act and the Taxation Administration Act 1953 (referred to as the "Administration Act") are also to be amended to assist the DAA to perform its functions, given the role of the DAA in pre-qualifying eligible taxpayers for the purpose of obtaining the development allowance deduction.

10.7. The deduction is available to the owners, lessors or lessees of qualifying projects, in much the same way as under the former investment allowance.

10.8. The development allowance will be available for expenditure on new plant acquired or built after 26 February 1992 and first used or installed ready for use before 1 July 2002.

Background to the legislation

10.9. The former investment allowance provisions (in Subdivision B of Division 3 of the Tax Act) allowed an income tax deduction, in addition to depreciation, in respect of certain units of plant acquired by a taxpayer, where the expenditure was incurred under contracts entered into, or in respect of construction commenced, before 1 July 1985 and where the plant was first used, or installed ready for use, before 1 January 1988. The Subdivision is therefore dormant, except in relation to unresolved claims under the former legislation.

10.10. The development allowance will adopt the existing investment allowance legislation, as the income tax concepts are similar, with appropriate amendments to reflect the specific variations from the former provisions. The variations include:

(a)

a requirement that expenditure must have pre-qualified under the DAA Act. [New paragraph 82AB(1)(b)]

(b)

a commencement date for availability of the new deduction. Construction must commence, or the contract to acquire the unit must be entered into, after 26 February 1992. [New paragraph 82AB(1)(c)]

(c)

the sunset date, for ultimate cessation of the deduction. The unit of property must be installed ready for use, or first used, before 1 July 2002. [New paragraph 82AB(1)(d)]

(d)

provisions so structural improvements, including wharves or jetties, may qualify for the deduction where they also qualify as "plant" for depreciation purposes. [New paragraph 82AE(aa) and repealed paragraph 82AF(2)(h)]

(e)

the exclusion of aircraft and ships from the deduction. [New paragraphs 82AF(2)(k) and (l)]

(f)

a provision to treat Australian satellites as being in Australia so that they may qualify for the deduction. [New subsection 82AQ(4)]

(g)

denial of the allowance:

•

where a special deduction is allowable under various provisions of the Tax Act (other than for depreciation). [Amended subsection 82AM(2)] or

•

where the cost can be allowed as a deduction in full by virtue of the 100% depreciation rate under the revised depreciation provisions. [New subsection 82AM(3)] or

•

where special depreciation rates are available under section 57AM. [New subsection 82AM(4)]

(h)

an expansion of the term "rights to use", for the benefit of the tourist, or traveller accommodation and entertainment business sectors, to ensure a deduction is not denied (on the basis of a disqualifying use) for taxpayers conducting business in such sectors, where property owned by the taxpayer is used by clients in the normal conduct of such a business. [Amended sections 82AA, 82AF, 82AG, 82AH, 82AJ, 82AJA and new section 82APA]

(i)

an amendment to extend the provisions which previously denied the deduction to a taxpayer who enters into a contract with another taxpayer after commencement date, effectively carrying out the same (or similar) contract as a previous contract entered into that other taxpayer prior to commencement of the new provisions - to include provisions to deny the claim where the original taxpayer has entered into such new contract with a purpose of obtaining a benefit relevant to the allowance. [Amended section 82AL]

Explanation of proposed amendments

Legislation to give effect to the development allowance

10.11. The former investment allowance provisions will be amended to enable a deduction for the new development allowance after all relevant criteria have been met. Under the amended Tax Act, the development allowance is a deduction of 10% of the expenditure incurred on certain new units of eligible plant and equipment acquired or constructed by certain taxpayers for use by that taxpayer (or by a lessee where the taxpayer is a leasing company), wholly and exclusively both in Australia and for the purpose of producing assessable income.

10.12. Only expenditure which has pre-qualified can be eligible for the development allowance. The expenditure must relate to eligible property. The essential requirements of deductibility must have been met, and the deduction must not be denied or limited by other specific provisions.

10.13. The development allowance can then give a deduction of 10% of the expenditure, in the first year of income in which the unit of property is used for producing assessable income or installed ready for use.

Pre-qualified expenditure

10.14. The development allowance is only allowable if expenditure has pre-qualified under the DAA Act. [New paragraph 82AB(1)(b)]

10.15. Expenditure is pre-qualified under that Act if the taxpayer holds a pre-qualifying certificate issued by the DAA. The taxpayer must also have incurred the expenditure in carrying out the project specified by the certificate, and the expenditure must be plant expenditure.

What is a pre-qualifying certificate?

10.16. A pre-qualifying certificate is issued by the DAA in certain circumstances specified in the DAA Act, and may be cancelled, varied or revoked by the DAA. The DAA is required to advise the Commissioner of Taxation of all such relevant matters. There are procedures to ensure that purchasers of incomplete projects can obtain certificates. The Commissioner considers the position in the light of any cancellation, revocation, variation or (effective) transfer of a certificate.

What is a project?

10.17. A project is specified by the pre-qualifying certificate. It is the establishment, expansion, improvement or upgrading of a productive facility, and must meet a number of tests administered by the DAA. Broadly, it must be a project commencing after 26 February 1992.

When is expenditure incurred in carrying out a project?

10.18. In general, expenditure is only incurred in carrying out a project if it is incurred wholly or principally in carrying out that project, under Division 10 of the DAA Act. Whether expenditure was incurred in that way, is a question the Commissioner of Taxation must determine in deciding whether expenditure is pre-qualified.

10.19. In the case of projects which are part of a joint venture project, the plant expenditure must be incurred wholly or principally in carrying out that part of the joint venture project. If projects are part of a company group scheme, the taxpayer incurring the expenditure must be a member of the company group.

Property

10.20. Property to which the development allowance relates is certain kinds of plant or articles. It must be for use in Australia, for particular purposes.

What property is eligible?

10.21. In general, plant or articles that are depreciable under section 54 may be property to which the development allowance applies, under the definitions in subsection 82AQ(1).

10.22. However, many structural improvements were excluded from the investment allowance by section 82AE. Only structural improvements specifically included in the allowance are eligible. These include the fixtures provided as employee amenities and depreciable under paragraph 54(2)(c), and a variety of particular structural improvements on land used for primary production business, including certain fences, dams, underground tanks and pipes, and buildings for storage of grain, hay or fodder, under paragraph 82AE(b).

10.23. These structural improvements will also be eligible for the development allowance.

10.24. The provisions will be extended to include structural improvements which also qualify as plant for depreciation purposes, apart from the special provisions of subsection 54(2). [New paragraph 82AE(aa)]

10.25. Structural improvements may not be eligible if a deduction is also allowable for such expenditure under other specific provisions. Amended subsection 82AM(2) operates to deny a double deduction in these circumstances.

10.26. Certain items of plant or articles were also excluded from the investment allowance under section 82AF. These included:

•

household appliances (except for use in certain circumstances for business or in certain premises associated with the provision of accommodation for tourists or travellers); [Paragraph 82AF(1)(a)]

•

furniture and fittings (except for use in certain circumstances for business or in certain premises associated with the provision of accommodation for tourists or travellers, or for use in the provision of certain facilities for employees or caring for children of employees); [Paragraph 82AF(1)(b)]

•

certain motor vehicles; [Paragraph 82AF(2)(a)] ;

•

paintings, sculptures, drawings, engravings, photographs and similar articles; [Paragraph 82AF(2)(b)]

•

books; [Paragraph 82AF(2)(c)]

•

films, tapes, discs, and similar devices used or designed for use for storage of images, sounds or information; [Paragraph 82AF(2)(d)]

•

musical instruments and equipment for use with such instruments; [Paragraph 82AF(2)(e)]

•

wharves and jetties; [Paragraph 82AF(2)(h)] and

•

wearing apparel (except if designed principally for protective purposes). [Paragraph 82AF(2)(j)]

10.27. The amended section 82AF will continue to exclude such items from the development allowance except for wharves and jetties. That specific provision for wharves and jetties will be repealed. Where such items qualify as plant, they may qualify as eligible property and so gain the benefit of the investment allowance.

10.28. Aircraft and certain ships will also be excluded from the deduction. Definitions of ships and aircraft are inserted in amended subsection 82AQ(1). Aircraft are excluded without exception, but do not include hovercraft. [New paragraph 82AF(2)(k)]

10.29. The provision to exclude ships [new paragraph 82AF(2)(l)] provides for certain Australian ships operating within Australia, inland waterway and harbour vessels, and offshore industry vessels and mobile units, to be eligible for the allowance.

10.30. Some of these vessels may not qualify for the allowance due to requirements of section 82AA, that property must be used wholly and exclusively for the purpose of producing assessable income. Others may be excluded where the ship qualifies for a higher rate of depreciation under section 57AM. [New subsection 82AM(4)]

10.31. The deduction will also not apply to items which may be eligible plant, where the taxpayer is entitled to a full deduction for depreciation, by application of the 100% rate of depreciation under the revised depreciation provisions [new subsection 82AM(3)] , or where a deduction is available for the expenditure under certain other provisions of the Tax Act. [Amended subsection 82AM(2)]

Provisions which deny or limit the deduction

10.32. Where the expenditure has pre-qualified, the expenditure may be eligible for the development allowance. The deduction may, however, be denied or limited, where other essential requirements of deductibility are not met or by other specific provisions of the legislation.

10.33. The expenditure must be of a "capital nature", "incurred" "after 26 February 1992", on the "acquisition or construction" of a "new" unit of eligible property.

10.34. The provisions require that the unit of property -

•

is to be used by the taxpayer wholly and exclusively in Australia for the purpose of producing assessable income, other than by leasing the property, letting the property on hire-purchase, or granting other persons rights to use the property; or

•

in the case of a leasing company, is for use wholly and exclusively in Australia by the lessee for the purpose of producing assessable income, and -

(i)

lease is entered into after 26 February 1992;

(ii)

the lease is for a long term;

(iii)

the leasing company (lessor) is carrying on business in Australia; and

(iv)

the lessor and lessee are at arm's length.

What is expenditure of a capital nature?

10.35. Although capital expenditure is not defined, the provision provides that expenditure which is of a revenue nature (generally deductible under the Act) does not qualify for the allowance.

What is the significance of 26 February 1992?

10.36. The deduction is only available in respect of expenditure incurred after 26 February 1992, [new paragraph 82AB(1)(a)] where the expenditure is in respect of a unit of property -

•

acquired under contracts entered into after 26 February 1992; [New subparagraph 82AB(1)(c)(i)] or

•

constructed by the taxpayer, where the construction commenced after 26 February 1992. [New subparagraph 82AB(1)(c)(ii)]

10.37. Section 82AL is a provision to guard against a possible re-organisation of contracts, where a contract is seen to have been entered into by a taxpayers for the acquisition, or taking on lease, of property, subsequent to the commencement date of the provision, in instances where a previous contract had been entered into by the taxpayer, prior to the commencement date of the provision, for the acquisition or lease of identical or substantially similar property. If the Commissioner is satisfied that a purpose of entering into the post commencement date contract was to obtain a deduction under the Subdivision, the Commissioner is empowered to deny the deduction. The section contains similar provisions to guard against arrangements relating to construction of property, where the taxpayer had commenced the construction of identical or substantially similar property prior to the commencement date. This provision did not apply where the taxpayer did not obtain the deduction, but received some related benefit, as the former legislation denied a deduction only where the purpose was to obtain the deduction under the Subdivision. Where the taxpayer is a lessee of property, the deduction is allowable to the lessor, therefore the provisions could not operate when a lessee entered into contracts or arrangements, which preserved the deduction for a lessor, where the lessee receive some related benefits such as reduced rent or some other incentive.

10.38. The provisions of section 82AL will be amended to ensure a taxpayer can not abuse the commencement date, by way of entering into a new contracts (after 26 February 1992) to achieve the effect of continuing a pre 27 February 1992 contract, where a purpose of the new contract is for the taxpayer to obtain the allowance or some other benefit relevant to the deduction. [Amended paragraphs 82AL(1)(c) and (2)(c)]

10.39. For example, a lessee might arrange after 26 February 1992 for a lessor to acquire a unit of property that the lessee was otherwise to acquire under a pre 27 February 1992 contract. Instead of seeking to have the lessor's investment allowance transferred to it, the lessee might seek the benefit in, say, reduced lease payments. That reduction would be a benefit related to the investment allowance, so section 82AL would apply.

10.40. As the DAA Act enables certificates to apply from an earlier date - but not prior to 27 February 1992, that Act also makes provision to ensure assessments can be amended, under section 170 of the Tax Act, at any time, to give effect to a certificate which may apply from some prior date.

What is the expenditure incurred?

10.41. For the purpose of the development allowance, the Commissioner would, generally, accept the actual cost of the unit of property. Circumstances may require the Commissioner to determine an amount:

•

where a contract which includes an eligible unit of property is for a total cost, including of that unit of property, and no separate allocation is given to the eligible property. In such instance, subsection 82AN(1) enables the Commissioner to make an allocation; or

•

where the Commissioner has reason to consider the amount of a contract is excessive. In such instance, the Commissioner can apply the market value. [Subsection 82AN(2)]

What is meant by acquisition and construction?

10.42. Property is considered to be acquired if the taxpayer becomes the owner of the property or takes the property on hire under a pre-purchase agreement [subparagraph 82AQ(3)(a)(i)] . Property is also acquired when another person constructs property on premises of the taxpayer. [Subparagraph 82AQ(3)(a(ii)]

10.43. Construction and constructed is defined to include manufactured. [Subsection 82AQ(1)]

What is "new" property?

10.44. New property is defined [subsection 82AQ(1)] to mean property which has not previously been used by another person or acquired or held by another person for use by that person. Reconditioned, or wholly or mainly reconstructed, property is not new for the purpose of the development allowance.

10.45. The DAA Act makes specific provisions to override the Tax Act, in certain circumstances, which permit property to be treated as "new" where there has been a change of ownership of the project to which the property relates. In these cases, the property is to be treated as new in the hands of the purchaser of the project, but never to have been new in the hands of the vendor. This operates to ensure the vendor is not entitled to the allowance in such circumstances and permits the Commissioner to amend claims to disallow any prior deduction allowed.

What is use in Australia?

10.46. The development allowance only applies on property used wholly and exclusively in Australia, either by the taxpayer or a lessee (where the taxpayer is a leasing company). The term, in Australia, adopts the standard meaning so that property used partly outside of Australia would not qualify. However, new subsection 82AQ(4) extends the term to include an Australian satellite. This is defined [amended subsection 82AQ(1)] to have the same meaning as in the Radio-communications Act 1983.

What is meant by "used wholly and exclusively"?

10.47. The development allowance is not available unless the property is used in such a manner. The provision for the expenditure to be pre-qualified requires the property to be used wholly or principally for the carrying out of the project. However, this requirement is extended under the tax provisions [paragraphs 82AA(1)(a) and (b) ] for the property to have to be used wholly and exclusively for the purpose of producing assessable income.

10.48. This provision operates to deny the deduction where the property is put to some disqualifying use, not producing assessable income. Disqualifying uses include private and domestic use or for producing exempt income.

What provisions apply to leasing companies?

10.49. A leasing company is defined [subsection 82AQ(1)] as a corporation carrying on in Australia as its sole or principal business - a business of banking, or a business of borrowing money and providing finance (except where the whole income is exempt).

10.50. The development allowance is available to a leasing company, provided the lessee uses the property under similar requirements to those for owners of other property, and provided there is a long-term lease over the eligible property. A long-term lease must be for a period of not less then 4 years [subsection 82AQ(1)] . In terms of the DAA Act, the lessee must be operating the project for a lessor to be considered to be carrying out a project.

10.51. Where the taxpayer is a leasing company, the deduction is limited in that it cannot create, or increase, a loss (section 82AC) . The legislation makes provision for determining the method of ascertaining whether any deduction, including a partial deduction, is allowable. The legislation also permits the lessor to pass the benefit of any, or all, or the allowance on to the lessee, provided a formal declaration is lodged with the Commissioner before a prescribed date after execution of the lease. [Amended section 82AD]

What is a disqualifying use?

10.52. A taxpayer may be disqualified from the development allowance where the property is put to a disqualifying use. Some uses are discussed above, where property is not used wholly and exclusively to produce assessable income. Other disqualifying uses are:

•

leasing (including hiring) of property (other than by a leasing company); [Subparagraph 82AA(1)(a)(ii)(A)]

•

letting property on hire under hire-purchase; [Subparagraph 82AA(1)(a)(ii)(B)]

•

granting other persons rights to use the property; [Subparagraph 82AA(1)(a)(ii)(C)]

•

disposal of the property, the use of the property by other persons, or the use of the property outside Australia, within 12 months of when the property was first used or installed ready for used; [Amended sections 82AG, 82AJ and 82AJA]

•

disposal of the property, the use of the property by other persons, or the use of the property outside Australia, after 12 months of when the property was first used or installed ready for use, if the Commissioner is satisfied it was the taxpayer's intention to dispose, or otherwise use the property in the disqualifying manner, at the time the property was first used or installed ready for use; [Amended sections 82AH, 82AJ and 82AJA]

•

use of the property to produce exempt goods or services; [Amended section 82AHA]

•

use of the property for private or domestic purposes by employees, directors, members, or relatives of any such persons, where the taxpayer is a private company. [section 82AK]

10.53. Generally the legislation provides that any such disqualifying use will operate to deny the deduction.

10.54. The former provisions denied the deduction where the taxpayer leases (eg. hires) out the property, or grants rights to other persons to use the property. This disqualifying use provision has been amended so that business operators in the tourist, traveller, or entertainment sectors, will not automatically be denied a deduction (on the basis of disqualifying use) where such hire or use has been granted on property used in the taxpayer's normal capacity as an operator of such businesses.

10.55. This is brought about by modifying the restriction on eligibility of property for the allowance. Now, the income producing purposes for which eligible property may be used will include the leasing of the property, or the grant of rights to use the property, in a tourist or traveller accommodation or entertainment business. [New subsection 82AA(2)]

10.56. A grant of rights to use within 12 months will not preclude the development allowance, if those rights are given in a tourist or traveller accommodation or entertainment business [new subsection 82AG(1A)] . Nor will the grant of limited rights to use require reduction in the development allowance in such a case [new subsection 82AG(3A)] , and a prior agreement in similar circumstances does not preclude the development allowance. [New subsection 82AG(5)]

10.57. Similarly, a grant of rights to use more than 12 months later, but intended when the unit was acquired or constructed by the taxpayer, will not preclude the development allowance, if those rights are given in a tourist or traveller accommodation or entertainment business. [New subsections 82AH(1A), (3A) and (5), covering taxpayers as principals, lessors or lessees respectively]

10.58. Where partnerships lease property, a grant of rights to use by a lessee will not preclude the investment allowance, if in the lessee's tourist or traveller accommodation or entertainment business. This is equally true whether the lessee gives rights to use within 12 months [new subsection 82AJ(7AA)] , or at a later time but in accordance with a preceding arrangement by the lessee. [New subsection 82AJ(7B)]

10.59. The provision giving relief for disposals within a company group is also modified in the same way. A group member may give rights to use property in the member's tourist or traveller accommodation or entertainment business, without forfeiting rollover relief. [New subsection 82AJA(1A)]

10.60. In each case, the amended provisions are drafted to refer to the grant of rights to use "in the entity's capacity as an eligible entertainment/tourism operator". This concept is defined in new subsection 82APA(1) , using a definition of "entity" in new subsection 82APA(2) . It applies where property is for use in the entity's entertainment business, tourist accommodation business or traveller accommodation business. It applies where the property is for use in a business which is substantially one of tourist or traveller accommodation. And it applies where the property is for use in premises for use principally to gain rent from tourist or traveller accommodation. [New paragraph 82APA(1)(b)]

10.61. A corresponding change to the property eligible for the allowance is made to section 82AF. Property of a household kind is generally excluded from the allowance. However, where it is for certain limited purposes - generally, tourist accommodation or employee amenities - it can qualify. Now such property may qualify if used in a business that principally consists of the provision of entertainment, or of tourist or traveller accommodation. [New subparagraphs 82AF(1)(a)(ia) and (b)(ia)]

Double Deduction

10.62. Section 82AM of the Tax Act operates to ensure double deductions are only available in certain circumstances. The development allowance deduction is to be allowed in addition to depreciation under section 54. If a deduction is allowable under any other provision, the development allowance is to be denied.

10.63. It is proposed that the deduction should not be allowed where the taxpayer is entitled to a full deduction for depreciation in the year the property is first used, or installed ready for use, [new section 82AM(3)] or where the taxpayer is entitled to special depreciation rates under section 57AM [new subsection 82AM(4)] . Section 57 AM gives special depreciation, including timing advantages for many taxpayers, for certain Australian ships.

10.64. Amendments to deny the allowance, in these instances, is included in the legislation. The investment allowance was not allowable where a deduction was also allowable for the property under a number of provisions (other than depreciation). The development allowance will also be denied if a deduction is available under the same provisions. The amended subsection 82AM(2) includes two additional provisions (section 73B and 75B) for which another deduction is available, and the development allowance is to be denied. Section 73B deals with research and development expenditure and section 75B relates to expenditure on conserving or conveying water. Both sections were introduced after 30 June 1985, the cut-off date by which contracts had to be entered into or construction commenced, for benefits to be allowed under the former investment allowance provisions.

Consequential Amendments

10.65. Many consequential amendments are directly associated with the exclusion of ships from the benefit of the allowance. This previously required specific definitions and the use of terms associated with two types of expenditure, "subsection 82AA(1) property" and "subsection 82AA(2) ship". The amended legislation will only refer to property, which is confined to property to which the Subdivision relates. This also requires a number of consequential amendments to remove all references to "subsection 82AA(1) property". Clause 79 provides for a number of specific amendments to provisions where the only amendment is to change the term "subsection 82AA(1) property" to the word "property". Provisions in the following sections have also been amended for these and other minor reasons:

10.66. Consequential amendments also arise from the new commencement date. Amendments for this reason are in the following sections of the Tax Act:

Legislation relevant to the DAA

10.67. The DAA will be carrying out the functions of that Office, principally for the purpose of making determinations as to whether a particular project of a taxpayer meets certain criteria to be considered eligible for the income tax deduction, and to provide pre-qualifying certificates to qualifying taxpayers, so the taxpayer can benefit from development allowance.

10.68. To perform these functions, the DAA will require a number of administrative powers similar to those contained in the Administration Act. Part III of the Administration Act contains offence and prosecution provisions which create a number of offences which are of general application to the various Commonwealth tax laws and makes provision for their prosecution.

10.69. It is proposed to amend the Administration Act to permit the DAA to utilise the prosecution provisions of the Act for the purpose of taking action in the event of breach of certain DAA Act requirements. The relevant requirements are those relating to the provision of false or misleading statements to the DAA. This approach has been adopted for purposes of simplicity since the legislation required to replicate the tax provisions in the DAA Act would have been substantial.

10.70. The amendments treat the DAA Act as a taxation law, and give the DAA the corresponding powers of the Commissioner [new section 8AB] . The amendments to the Administration Act are designed to afford the DAA certain powers to assist the DAA to discharge its responsibilities. The amendments give effect to all such requirements, will permit the DAA to take prosecution action in appropriate cases, and enable an exchange of information between the Commissioner and the DAA, otherwise denied by secrecy provisions in both the Tax Act and the Administration Act. [New subsection 3C(1AB)]

10.71. The mere production, or provision of copies, of documents under written notice from the DAA is not as such a statement made to a taxation officer [new paragraph 8J(2)(ga)] . Penalties, and payments in addition to penalties, will be calculated on the basis that decisions of the DAA form part of the making of an assessment; so payments, in addition to penalty, of up to twice (or, for certain offences, three times) the tax evaded may be ordered by a court. [New section 8W(1B)]

10.72. Information may be provided to, and obtained from, State authorities [new subsections 13J(8) and 13K(11)] . The DAA enjoys the procedural convenience of section 15 and 15A [new subsections 15(4) and 15A(11)] . The Commissioner is not responsible for the DAA's annual report. [New subsection 3B(1B)]

Commencement and termination dates

10.73. The amendments will permit a deduction in respect of eligible property acquired where the expenditure is incurred under contracts entered into, or in respect of construction which commenced, after 26 February 1992. Because of requirements under the DAA Act, all such expenditures and contracts must be in relation to projects which commenced after 26 February 1992.

10.74. The development allowance deduction ceases with effect from 1 July 2002. Expenditure on property which is not first used, or installed ready for use, before 1 July 2002, will not be eligible for the deduction. The former investment allowance provided for separate dates. By the earlier date, all eligible property must have been ordered, or its construction commenced; by the later, all eligible property must have been first used, or installed ready for use. The development allowance looks only to the later test.

Clauses involved in proposed legislation

The following clauses are relevant to the development allowance and amend provisions of the Income Tax Assessment Act 1936 other than in Subdivision B.

Clause 58: will amend section 16 (the secrecy provisions) by inserting new paragraph 16(4)(hba) to enable the Commissioner of Taxation to communicate information on the affairs of a taxpayer, obtained under provisions of the Act, to the DAA for the purposes of the administration of the DAA Act.

Clause 59: amends subsection 51AE(14) of the Act, which provides where property is used by a taxpayer, after 19 September 1985, for the purpose of providing non-deductible entertainment, the use of that property shall not be for the purpose of producing assessable income for the purposes of the Act, except for the purpose of Subdivision B. Section 51AE commenced in late 1985, after Subdivision B had already begun to be phased out, when deductions under Subdivision B were only available in respect of expenditure in relation to contracts entered into, or on property on which construction had commenced, prior to 1 July 1985. The exclusion of Subdivision B, from the operation of subsection 51AE(14), therefore preserved the former investment allowance in respect of expenditure on capital items which had been committed prior to 1 July 1985. Without the exclusion, the provisions of subsection 51AE(14) would have otherwise denied the deduction. The amendment denies the development allowance for property used to provide non-deductible entertainment.

Clause 60: amends section 57AM, which provides for special depreciation rates in respect of trading ships. Paragraph 57AM(33)(h), provided the same commissioning date, for investment allowance purposes, as under section 57AM. The reference to Subdivision B is to be deleted in this paragraph, as ships are excluded from the development allowance.

The amending provisions to give effect to the revised Subdivision B are reflected in the following clauses -

Clause 61: changes the heading of the Subdivision to "Development Allowance".

Clause 62: inserts new section 82AAAA, which outlines the Objects of the revised Subdivision. Clause 63: amends section 82AA, which establishes certain requirements for units of eligible property to be "property" for the purpose of the Subdivision.

Subclause (a): provides for the new commencement date.

Subclause (b):

•

omits subsections 82AA(2), (3) and (4), in consequence of the exclusion of special provisions for ship in Subdivision; and

•

inserts a new subsection 82AA(2) to ensure the provisions which operate to deny a deduction, as a result of "use" of property by other persons, are not automatically denied to taxpayers in the entertainment, tourist and traveller sectors.

Clause 64: Section 82AB is the main provision of the Subdivision.

Subclause (a):

•

provides for the omission of subsections 82AB(1) to (5B), inclusive; and

•

inserts new subsection (1).

New subsection 82AB(1) adopts similar concepts to the former provisions and consolidates some prior subsections into one provision. The subsection incorporates the effective dates of commencement and cessation of the deduction, the new 10% rate of deduction, and much of the essential criteria to be satisfied before a deduction is allowable. The main new criterion in the revised provision is for the expenditure to have been "pre-qualified under the Development Allowance Authority Act 1992". Part 9 of that Act details the criteria required for expenditure to be "pre-qualified".

The subsections to be deleted by this subclause are consequential amendments.

Subclauses (b), (c), (d), (e) and (f): are consequential amendments.

Clause 65: makes a number of minor amendments to section 82AD.

Section 82AD permits a leasing company, in certain circumstances, to transfer all, or part of the benefit of the allowance to the lessee. This provision requires formal notice of such transfer to be submitted to the Commissioner by a prescribed date. The former legislation set the prescribed date, for leases entered into between 1 January 1976 (the former commencement date) and 30 June 1976, at 8 July 1976, and thereafter at the 8th day after the end of the month the lease was entered into. The new legislation will adopt a similar time frame, although the initial period will extend up to 31 December 1992, with the first prescribed date being 8 January 1993.

Subclauses (a) and (b): are consequential to the exclusion of special provisions for ships.

Subclause (c): is both consequential to the exclusion of the provisions for ships and the requirement to establish the first new period and prescribed date.

Clause 66: amends section 82AE, which denies the allowance in respect of all structural improvements other than specified structural improvements. The new paragraph 82AE(aa) will allow the deduction for structural improvements which are plant within the meaning of section 54 (the depreciation provisions).

Clause 67: amends section 82AF which details specific items of plant for which a deduction is denied under the Subdivision.

Subclause (a): makes provision for the extension of the provisions to enable a deduction to be allowed on certain items of plant used in a business carried on principally in the entertainment/tourism sector.

Subclause (b): repeals the provision which specifically denied the allowance for wharves or jetties. Such items must still satisfy the requirement of being "plant" before they can be considered for a deduction.

Subclauses (c) and (d): insert ships and aircraft as specific items which will not qualify for the deduction.

Subclause (e): is consequential to the exclusion of special provisions for ships.

Subclause (f): is consequential to the new commencement date.

Clause 68: amends section 82AG, which makes special provisions to deny a deduction where the property is disposed of, used by another person, used outside Australia, or used for a purpose other than for the purpose of producing assessable income, before the end of 12 months from the date the property was first used or installed ready for use.

Subclauses (a), (b), (e), and the insertion of new subsection 82AG(3A) proposed in subclause (d): ensure the provisions relating to use of property by another person do not apply where the transaction was conducted by the taxpayer in their capacity as an eligible entertainment/tourism operator. New section 82APA provides the criteria to establish when a person's conduct is to be treated in such a capacity.

Subclause (c), and the omission of the former subsection 82AG(3A), proposed in subclause (d): are consequential to the exclusion of special provisions for ships.

Clause 69: amends section 82AH, which is a similar provision to section 82AG, but operates to deny a deduction in respect of property disposed of (or used in the same manner as applies to deny the deduction in section 82AG) where the disposal, (or disqualifying use) is beyond the 12 month period, and the Commissioner is satisfied that the taxpayer intended to dispose (or use in a disqualifying manner) the property at the time of acquisition or construction of the property.

Subclauses (a), (b), and the insertion of new subsections 82AH(3A) and (5) proposed in subclauses (d) and (e) , respectively: ensure the provisions relating to use of property by another person do not apply where the transaction was conducted by the taxpayer in their capacity as an eligible entertainment/tourism operator.

Subclause (c), and the omission of former subsections 82AH(3A) and (5) proposed in subclauses (d) and (e), respectively: are consequential to the exclusion of special provisions for ships.

Clause 70: amends section 82AHA consequential to the new commencement date.

Clause 71: amends section 82AI to delete the references to special provisions relating to ships and delete of the former reference to "subsection 82AA(1) property", which is to no longer necessary (there being no other property).

Clause 72: amends section 82AJ which makes special provisions to enable the benefits of the allowance for partners in partnerships.

Subclauses (a), (b), (c), and the omissions of subsections 82AJ(7AA) and (9) proposed in subclauses (d) and (f), respectively: are consequential to both the exclusion of special provisions relating to ships and the deletion of the former reference to "subsection 82AA(1) property".

Subclause (e), and the insertion of new subsections 82AJ(7AA) and (9) proposed in subclauses (d) and (f), respectively: ensure the provisions relating to use of property by another person do not apply where the transaction was conducted by the taxpayer in their capacity as an eligible entertainment/tourism operator.

Clause 73: amends section 82AJA which makes special provision for the treatment of the allowance where disposals of property are within a company group.

Subclause (a): is consequential to the exclusion of special provisions for ships.

Subclauses (b) and (d): ensure the provisions relating to use of property by another person do not apply where the transaction was conducted by the taxpayer in their capacity as an eligible entertainment/tourism operator.

Subclause (c): is consequential to the exclusion of the reference to "subsection 82AA(1) property".

Clause 74: proposes to amend section 82AL, which is a provision to guard against a possible re-organisation of contracts, where a contract is seen to have been entered into by a taxpayer for the acquisition, or taking on lease, of property, subsequent to the commencement date of the provision, in instances where a previous contract had been entered into by the taxpayer, prior to the commencement date of the provision, for the acquisition of lease of identical or substantially similar property. If the Commissioner is satisfied that a purpose of entering into the post commencement date contract was to obtain a deduction under the Subdivision, the Commissioner is empowered to deny the deduction. The section contains similar provisions to guard against arrangements relating to construction of property, where the taxpayer had commenced the construction of identical or substantially similar property prior to the commencement date.

Subclause (a): is consequential to the new commencement date;

Subclause (b): proposes to extend the operation of the section, to deny a deduction where a purpose of the contract or arrangement is to obtain a benefit related to the deduction.

Clause 75: amends section 82AM, which operates to ensure double deductions are only available in intended circumstances. The development allowance deduction is to be allowed in addition to depreciation under section 54 only. If a deduction is allowable under any other provision, the development allowance is to be denied. It is also intended that a deduction should not be allowed where the taxpayer is entitled to a full deduction in the year the property is first used or installed ready for use, or where the taxpayer is entitled to special depreciation rates under section 57AM.

Subclause (a): is a consequential amendment.

Subclause (b): inserts additional sections (sections 73B and 75B) to the sections under which another deduction may be available. The development allowance will not apply to expenditure deductible under these sections.

Subclause (c): inserts additional subsections 82AM(3) and (4) to deny the deduction in respect of eligible property :

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where a taxpayer is entitled to a full deduction for depreciation by applying the 100% rate of depreciation under the revised depreciation provisions; and

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where the taxpayer is entitled to the higher rates of depreciation provided for under the provisions of section 57AM.

Clause 76: repeals former section 82AP, which was a transitional provision required for the commencement of the investment allowance provisions;

Clause 77: inserts new section 82APA which provides for the tests required to determine if an entity's actions are carried out in their "capacity as an eligible entertainment/ tourist operator" - to enable the benefits of the expansion of the term "rights to use" to be afforded to such entity.

Clause 78: amends section 82AQ, the interpretation provisions.

Subclause (a) : omits definitions of terms not applicable to the new provisions.

Subclause (b): inserts definitions for terms introduced in the new provisions.

Subclause (c): inserts new subsection 82AQ(4) to treat an Australian satellite as being in Australia. This ensures a deduction in respect of a satellite cannot be denied solely on the grounds that it may not be for use in Australia. A definition of "Australian satellite" is included in the new definitions proposed to be inserted by subclause (b) . Clause 79: makes a number of consequential amendments, substituting the word "property" for the former term "subsection 82AA(1) property".

Clause 80: is a transitional provision to preserve the former legislation in relation to property to which the former provisions relate.

The following clauses amend the Taxation Administration Act 1953 :

Clause 92: facilitates references to the Taxation Administration Act 1953 which, in Part 5, is referred to as the "Principal Act".

Clause 93: will amend section 3B of the Administration Act by inserting new subsection 3B(1B) to ensure the Commissioner will not be required to prepare and furnish an annual report in relation to those matters arising under the Administration Act for which the responsibility will rest with the DAA, by virtue of the amendments contained in this Part.

Clause 94: will amend section 3C of the Administration Act by inserting new subsection 3C(1AB) to ensure that the DAA will not be bound by the secrecy requirements of the Administration Act in relation to any information, etc., concerning the affairs of taxpayers which the DAA may obtain by virtue of utilising the prosecution provisions of the Administration Act. The DAA Act contains its own secrecy provisions, which ensures there is no overlap.

Clause 95: will insert new section 8AB in Part III of the Administration Act. Section 8AB will ensure that Part III of the Administration Act, relating to prosecutions and offences, will apply in relation to the DAA Act as if that Act were a taxation law and references to the Commissioner of Taxation were references to the DAA. This will enable the DAA to utilise the prosecution provisions of the Administration Act to take action in certain circumstances.

Clause 96: will amend section 8J of the Administration Act by inserting new paragraph 8J(2)(ga) to ensure that a statement made in a document furnished to the DAA pursuant to paragraphs 79(1)(b) or (c) of the DAA Act does not give rise to an offence for the purposes of the prosecution provisions of the Administration Act in the event that such a statement is false or misleading in a material particular. This approach is consistent with that adopted under the various taxation statutes in relation to documents furnished under notice by taxpayers to the Commissioner of Taxation.

Section 8W of the Administration Act enables a court, where it is satisfied that a false or misleading statement or incorrectly kept records of account had resulted in a tax liability of a lesser amount, in addition to penalty imposed upon a person convicted of offences under Part III of the Administration Act, to order the convicted person to pay to the Commissioner of Taxation an additional amount.

Clause 97: will amend section 8W by inserting new subsection 8W(1B) to enable a court to have regard to a decision made under Parts 3, 4, 5 or 6 of the DAA Act as if that decision were part of the process of making an income tax assessment of a taxpayer.

Clause 98: amends section 13J in Part IIIA of the Administration Act by inserting new subsection 13J(8) to permit the DAA to communicate information which the DAA obtains on the affairs of a taxpayer pursuant to the administration of the DAA Act to State taxation authorities. Where such information is communicated, however, those State taxation authorities are subject to a burden of secrecy imposed under subsection 13J(2) of the Administration Act.

Clause 99: will amend section 13K of the Administration Act which empowers a State taxation officer to certify copies of documents (including extracts) obtained pursuant to a State tax law. The amendment proposed by inserting new subsection 13K(11) will allow the section to apply as if that Act were a taxation law and references to the Commissioner of Taxation were references to the DAA.

Clause 100: will amend section 15 in Part V of the Administration Act, which enables the Commissioner of Taxation (or a Second Commissioner of Taxation or a Deputy Commissioner) to appear personally or be represented by specified persons in any action arising out of a taxation law instituted by or on behalf of the Commissioner and to which the Commissioner is a party or seeks to intervene. The amendment proposed by inserting new subsection 15(4) will ensure that the section will apply in relation to the DAA Act as if that Act were a taxation law and references to the Commissioner of Taxation were references to the DAA. References to a Second Commissioner or Deputy Commissioner will be excluded for this purpose.

Clause 101: will amend section 15A of the Administration Act, which enables the Commissioner of Taxation to certify copies of documents (including extracts) obtained pursuant to taxation law. The amendment proposed by inserting new subsection 15A(11) will allow the section to apply in relation to the DAA Act as if that Act were a taxation law and references to the Commissioner of Taxation were references to the DAA.