REPLACEMENT Explanatory Memorandum
(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE House of Representatives TO THE BILL AS INTRODUCEDChapter 5 General Investment Allowance
Summary of proposed amendment
Purpose of amendment: To provide an incentive for investment in new plant used wholly and exclusively in Australia in producing assessable income. The incentive (the "general investment allowance") consists of a deduction equal to 10% of the capital cost of qualifying plant. This allowance may be additional to both depreciation and the development allowance.
Date of effect: The amendment applies to qualifying plant acquired under a contract entered into after 8 February 1993 and before 1 July 1994, or if constructed by the taxpayer, where construction commenced during that period. The plant must be first used or installed ready for use before 1 July 1995.
Background to the legislation
The general investment allowance is modelled on the existing development allowance, itself a reactivation of the former investment allowance. [The development allowance is contained Subdivision B of Division 3 of Part III of the Income Tax Assessment Act 1936 , as was the former investment allowance].
Broadly, the development allowance provides a deduction for 10% of the capital cost of the plant component of projects costing not less than $50M and which meet certain other criteria specified in the Development Allowance Authority Act 1992 .
The principal differences between the development allowance and this new allowance are that the new allowance will be available for new plant costing not less than $3000 and the criteria specified in the Development Allowance Authority Act do not apply. The allowance will operate identically to the Development Allowance apart from certain other minor changes.
Reflecting that similarity, entitlement to the general investment allowance is to be mainly worked out by reference to the existing development allowance provisions with the necessary modifications to be contained in proposed new Subdivision BA.
The operation of the former investment allowance has been considered on a number of occasions both judicially and by the Commissioner of Taxation in Taxation Rulings. Because of the similarity of this new investment allowance with that former allowance, many of those decisions and Rulings will be relevant to the interpretation of the general investment allowance provisions.
The following explains how the general investment allowance is to operate.
Explanation of proposed amendment
The general investment allowance provides a deduction equal to 10% of the capital cost of acquiring or constructing a new unit of "eligible property" if the cost is not less than $3000 and the property was acquired under a contract entered into after 8 February 1993 and before 1 July 1994 or commenced to be constructed between those dates and was first used in producing assessable income, or installed ready for such use, before 1 July 1995. The deduction is allowable in the year of income in which the property is first so used, or is installed ready for such use. [new section 82AT]
To qualify for the allowance, property must be a unit of eligible property (broadly, plant or articles) for use wholly and exclusively both in Australia and for producing assessable income otherwise than from leasing the property, letting it on hire under a hire-purchase agreement or granting rights to use it to other persons. [existing subsection paragraph 82AA(1)(a)]
Eligible property may qualify when used for certain environmental purposes, as those purposes are to be taken to be for the purpose of producing assessable income. Evaluating the impact or likely impact of one's income-producing project or proposed project on the environment is such a purpose [existing section 82BG] ; so is preventing, combating or rectifying pollution, or treating, cleaning up, removing or storing waste, where the pollution or waste relate in certain ways to the income-producing activity of the taxpayer [existing section 82BR] ; and so is the purpose of rehabilitation or restoration of the site of the taxpayer's mining, quarrying or certain ancillary activities. [existing section 124BF]
"Eligible property" means property that qualifies as plant or articles under the plant depreciation provisions. [existing subsection 82AQ(1)]
The meaning of plant for depreciation purposes is extended to certain types of property that do not otherwise constitute plant including certain non-plant structural improvements on land used in a business of primary production [existing paragraph 54(2)(b)] . Such non-plant structural improvements are, with exceptions, excluded from the allowance. [existing section 82AE]
The exceptions - items which can qualify for the allowance - relate to fences used for conserving soil, for fencing off naturally salt-affected land or to subdivide the land; certain water conservation and transport facilities; and buildings and other structures for the storage of grain, hay or fodder. [existing paragraph 82AE(b)]
The following are also excluded from the allowance:
- •
- household appliances, such as TVs and fridges, unless for use, broadly, in the entertainment or tourist accommodation industries [existing paragraph 82AF(1)(a)];
- •
- furniture, fixtures, furnishings and similar items, unless for use, broadly, in the entertainment or tourist accommodation industries or for use principally as employees amenities [existing paragraph 82AF(1)(b)];
- •
- motor cars, station wagons and other derivatives, motor cycles, and other vehicles designed to carry less than either 1 tonne or nine people; works of art and their reproductions; books; films, tapes, discs etc. for the storage of images, sound or information; musical instruments and associated equipment; non-protective clothes and accessories; aircraft; and ships other than certain Australian ships operating within Australia and certain offshore industry vessels and mobile units. [existing subsection 82AF(2)]
Exclusion of property entitled to concessional basis of deduction
Generally, this new allowance is to be available in addition to other income tax deductions in respect of the same unit of property. That includes depreciation and the development allowance, if it is available. The application of the relevant legislative provision of the development allowance does not require special modification as it is applied here to a different Subdivision. [existing subsections 82AM(2) to (4)]
However, the allowance will not be available for otherwise eligible property if the property qualifies for deduction under any one of the following provisions providing a concessional basis of deduction: [existing section 82AM]
- •
- section 70A - 10 year write-off for capital expenditure on mains electricity connection;
- •
- section 73B - three year write-off for up to 150% of the cost of plant used in research and development activities;
- •
- section 75B - three year write-off for expenditure of primary producers on conserving or conveying water;
- •
- section 75D - immediate deduction for certain expenditure on prevention of rural land degradation;
- •
- sections 122J, 122JF & 124AH - immediate deduction for expenditure on exploration and prospecting for minerals, quarry materials, gas or petroleum;
- •
- sections 123B & 123BE - 10/20 year write-off for expenditure on transport facilities for minerals, quarry materials, gas or petroleum;
- •
- subsection 55(2) - 100% depreciation rate available for plant with an effective life of less than 3 years; and
- •
- section 57AM - 5 year write-off for Australian trading ships.
What constitutes a unit of property is important because of the $3000 threshold per unit. It is an undefined term that is, or has been, used in a number of areas of tax law such as plant depreciation, the development allowance and former investment allowances. The tests developed for working out what constitutes a unit under those provisions will be also relevant in applying the general investment allowance.
With three exceptions, the allowance is, in effect, only available to owners of property. The first exception relates to an option for lessors to pass on entitlements to lessees [discussed below]. The next relates to property on hire under a hire-purchase agreement. In that circumstance, the hirer is treated as acquiring the property even though the hirer is not necessarily the owner yet. [existing subsection 82AQ(3)]
Finally, persons who are treated as the owners of property installed on Crown leases for the purposes of the plant depreciation Crown lease provisions are also treated as the owners of the property for the purposes of the allowance. [existing subsections 82AQ(3A) & (3B)]
There are several exceptions to the rule that property not be for use for deriving income from leasing the property or granting rights to its use to other persons. One, relating to leasing companies, is discussed under the next heading. The other relates to the entertainment and tourism industries. It is an essential feature of those industries for operators to allow their customers to use the operators' property. Accordingly, taxpayers leasing, or granting rights, in the capacity of an "eligible entertainment/tourism operator" will not be denied the allowance. [existing subsection 82AA(2) and section 82APA]
Leasing companies to be entitled to allowance under long-term agreements
Property for lease to another person generally does not qualify for the allowance. An exception relates to otherwise eligible property leased by leasing companies under a long-term (ie. not less than 4 years) arm's length agreement, in the course of carrying on business in Australia, to a person who will use the property wholly and exclusively both in Australia and for assessable income-producing purposes. [existing paragraph 82AA(1)(b) as modified by new paragraph 82AU(3)(a); definition of "leasing company", "long-term lease" , "taking property on lease" and "providing finance" in existing subsections 82AQ(1), (2) & (3)]
The requirement that property be used, or be installed ready for use, before 1 July 1995 is modified in the case of leased property to mean used, or installed ready for use, by the lessee. [existing subsection 82AB(6)]
The lease must be entered into after 8 February 1993 [existing subsection 82AB(8) as modified by new paragraph 82AU(3)(c)] and before 1 July 1995. That latter date follows from the requirement that the lessee must use or install the property ready for use before 1 July 1995 and that leased property must, apart from certain sale-leaseback property, not have been used by any person, including the lessee, before the lease is given. [existing subsection 82AF(3)]
Provision is made for the allowance to be available to lessors of property that was initially acquired or constructed by the person who is to lease the property. Such "sale-leasebacks" need to occur with 6 months of the lessee first using the property or holding it ready for use and be in relation to property for which the lessee would have been entitled to the allowance but for the sale-leaseback. [existing subsection 82AB(7) & (8) as modified by new paragraphs 82AU(3)(b) & (3)(c)]
Partnerships with leasing company as partner
Generally, entitlement to the allowance for partnership property will be taken into account in calculating partnership net income (that follows from the usual tax treatment of partnerships as if a taxpayer). However, where one or more partners is a leasing company, any entitlement to the allowance in respect of property leased by the partnership to another person will instead be deductible to each partner on the basis of an agreed apportionment, or if there is no agreement, in proportion to each's interest in partnership net income or loss for the year in which the expenditure on the property was incurred. [existing subsection 82AJ(4)]
Leasing company may transfer entitlement to lessee
A leasing company may transfer some, or all, of its entitlement to the allowance for leased property to the lessee. That can be done by giving both a declaration and a statement to the lessee, signed by the company's public officer, specifying the amount that is transferred and certain other relevant information. The declaration and statement need to be given within 8 days of the end of the month in which the lease agreement is made or, if the agreement was made before date of introduction, before 8 June 1993. [existing section 82AD as modified by new section 82AW]
Lessees will need to retain the declaration and statement for five years under the general record keeping provisions. [existing section 262A]
This procedure for transferring an entitlement to a lessee is different from the corresponding arrangements under the development allowance in that the latter requires the declaration and statement to be given to the Commissioner of Taxation.
Maximum deduction allowable to lessors
The aggregate of deductions that lessors can claim for the general investment allowance from leasing business is to be limited to their net income for the year before deducting entitlements to the allowance; any excess entitlement is not available for carry-forward as a loss [existing section 82AC]. Lessors can avoid that limit by transferring entitlements to the allowance to lessees in the manner described under preceding heading.
The same limit also applies under the development allowance. In the case of lessors with entitlements under both allowances, the limit will apply in relation to the sum of entitlements under both measures. [New subsection 82AV and consequential amendment to existing paragraph 82AC(a)]
Circumstances under which allowance will be withdrawn
The purpose of the general investment allowance is to encourage taxpayers to invest in new plant and equipment between the relevant dates for use in their businesses. The following summarises specific safeguarding measures against access to the allowance where that purpose is not satisfied appropriately. Those specific measures are in addition to the potential application of the general anti-avoidance provision, Part IVA.
Entitlement to the allowance will be withdrawn if the unit of property to which the allowance relates, is - within 12 months of it first being used or installed ready for use - disposed of in whole or in part, recovered by a party from whom it was hire-purchased, lost or destroyed, leased (other than under a long-term lease by a leasing company) or otherwise allowed to be used by other persons or used either outside Australia or for purposes other than producing assessable income. [existing subsections 82AG(1) & (2) & section 82AI]
In the entertainment and tourism industries, property might be used in such a way as to require it to be leased, or be the subject of a grant of rights to use. Yet that lease, or that grant of rights to use, might be no more than an incident of a taxpayer's business of providing tourist or traveller accommodation, or of entertainment. Such a lease or grant of rights to use does not deny the investment allowance. [existing subsection 82AG(1A) and section 82APA]
This 12 month rule does not apply to disposals of property within a wholly owned listed public company group where there is no change in the underlying ownership of the property during that period. [existing section 82AJA]
Corresponding safeguards [existing subsections 82AG(3) and 3A)] also apply in relation to property leased by leasing companies if, within 12 months of it first being used or installed for use by the lessee:
- •
- the property is disposed of to anyone other than the lessee, is lost or destroyed or is recovered by a party from whom it was hire-purchased;
- •
- the lessee used the property either outside Australia or for non-assessable income-producing purposes;
- •
- the lease is terminated without the lessee acquiring the property;
- •
- while the lease was in force, the lessee granted rights to use the property to another person other than in the lessee's capacity as an eligible entertainment/tourism operator; or
- •
- the lessee acquired and either disposed of the property or granted rights to use the property to another person other than in the lessee's capacity as an eligible entertainment/tourism operator.
Entitlement to the allowance will be withdrawn if property of a person, other than property of a leasing company leased to another person, is - after 12 months of it first being used or installed ready for use - disposed of in whole or in part, recovered by a party from whom it was hire-purchased, leased or otherwise allowed to be used by other persons (other than by customers of eligible entertainment/tourism operators) or used either outside Australia or for non-assessable income-producing purposes if the Commissioner of Taxation is satisfied that the person, acquired or constructed property with the intention of doing any of those things. [existing subsections 82AH(1), (1A) & (2) & section 82AI]
Corresponding safeguards apply in relation to lessors' and lessees' deductions for leased property in the circumstances mentioned above in relation to the 12 month rule if the requisite intentions are present. [existing subsections 82AH(3) to (5)]
Where entitlement to the allowance rests with the partnership, partners who dispose of all or part of an interest in partnership property within 12 months of the first use or installation of property will be required to include an appropriate share of the partnership deduction for the allowance in assessable income as will those who dispose of all or part of an interest after the elapse of the 12 month period if they had the intention of disposing of all or part of the interest at the time the partnership acquired or constructed the property. [existing subsections 82AJ(1) to (3)]
Similar rules apply on the disposal of an interest in partnership property where the individual partners are entitled to the allowance for their share of partnership expenditure on property leased to another person (because one or more partners is a leasing company) except that partners' individual entitlements will be withdrawn in whole or in part as appropriate. [existing subsections 82AJ(5) & (6)]
Also, a partner's individual entitlement can be withdrawn if, before 12 months of the property first being used or installed ready for use, the partnership disposes of the property or any of the other events mentioned above were to occur. A corresponding rule applies for events occurring after the elapse of the 12 month period if the requisite intentions are present. [existing subsections 82AJ(7) to (9)]
Control of property by tax-exempt end-user
The allowance will not be available for otherwise eligible plant if it used to provide goods or services for a tax-exempt, or non-taxable, end-user that effectively controls the use of the property [existing section 82AHA as modified by new subsection 82AU(2)] . This measure prevents circumvention of the rule that property must not be used by other persons and that it be used wholly and exclusively in the production of assessable income.
The allowance will also not be available for otherwise eligible property acquired, leased or commenced to be constructed, so as to benefit from the allowance, in substitution for similar or identical property that was ordered, leased or commenced to be constructed before the 9 February 1993. [existing section 82AL as modified by new paragraph 82AU(3)(e)]
The use of property for private purposes would constitute the use of property otherwise than wholly and exclusively for assessable income-producing purposes and so cause the allowance to be unavailable or withdrawn. The use of property of a company by its employees and the like for private purposes might not necessarily constitute the use of property for non-income producing purposes.
To prevent the use of company structures to circumvent the rule against private usage, the private use of property of private companies by their employees, directors or members, and their relatives, will constitute the use of that property other than for income-producing purposes. [existing section 82AK]
In those instances where an unapportioned amount is paid for property comprising more than a single unit of eligible property, the Commissioner of Taxation may apportion the amount. [existing subsection 82AN(1)]
If the Commissioner of Taxation is satisfied that the cost of acquiring or constructing property is excessive, the market value of the property will be substituted in working out an entitlement to the allowance. [existing subsection 82AN(2)]
The general investment allowance is not available for that portion of the otherwise eligible cost of property that is recovered, or is recoverable, from any person. [existing section 82AO]
Consequential amendments
Sections 50A to 50N prevent losses incurred by a company in one part of an income year being offset against profits derived in another part of the year where there has been a disqualifying change in the degree of ownership or control of the company between the two periods. The effect of these "current year loss" measures is to deny a deduction for the relevant losses.
To calculate those losses, the year is broken into periods before and after the disqualifying change and the profit or loss for each period is calculated as if each period was a year of income. Generally, income and deductions are allocated according to the period to which they relate. Those amounts that relate to both periods, such as plant depreciation, are apportioned between the periods.
Some amounts are not attributed to a particular period and are instead taken into account in the final calculation of taxable income for the whole year. One such amount is a leasing company's entitlement to the development allowance from its leasing business. As leasing companies are to be similarly entitled to the general investment allowance from their leasing business, the current year loss measures are to be amended to include a reference to amounts so allowable to leasing companies. [Clauses 21 & 22]
Allowance in addition to depreciation
Income tax law contains a number of provisions to prevent double deductions in respect of the same expenditure. Subsection 56(3) prevents double deductions for expenditure on plant by reducing the depreciable cost of plant by the amount allowed as deductions under another provision.
The general investment allowance, like the development allowance, is to be generally available in addition to depreciation deductions. Accordingly, subsection 56(3) is being amended to ensure that the depreciable cost of plant is not reduced by any amount allowed as a general investment allowance deduction. [Clause 23]
Limit on leasing companies' entitlements
Section 82AC limits the amount that leasing companies can claim for the development allowance from their leasing business to the amount of net income. Where a leasing company is entitled to deductions for both the development allowance and the general investment allowance from leasing business, the limit is to apply in relation to the sum of deductions allowable under both provisions. [Clause 24]
Arrangements for the use of property
Division 16D (sections 159GE to 159GO) deals with arrangements that have the effect of transferring property related deductions from tax-exempt bodies and the like, who are unable to use those deductions, to taxable entities who can use the deductions. The effect of the measure is to deny the taxable entity the relevant property deductions such as plant depreciation and the development allowance and treat the arrangement as if it were a loan. This amendment ensures that the general investment allowance will not be available for plant used in such arrangements. [Clause 25]
Section 170 imposes time limits on making amendments to assessments, generally 4 years from the date tax became due and payable under the original assessment. However, there are circumstances where it might be necessary to amend returns outside that 4 year period. Subsection 170(10) enables assessments to be amended at any time in a number of specified circumstances.
The general investment allowance, like the development allowance and the former investment allowance, contemplates a number of circumstances where it might be necessary to amend an assessment outside the standard 4 year period and so subsection 170(10) is being amended to include a reference to the general allowance provisions. [Clause 26]