House of Representatives

Explanatory Memorandum

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

Heritage conservation rebate

Overview

10.1 The Bill will provide a tax rebate for expenditure on certain conservation work on heritage listed properties.

Summary of proposed amendments

Purpose of amendments

10.2 To provide a rebate of 20 cents in the dollar for approved expenditure incurred on conservation work for buildings listed in Commonwealth, State or Territory heritage registers.

Date of Effect

10.3 Royal Assent

Background to the legislation

10.4 The introduction of the rebate for expenditure on heritage conservation work is to provide an incentive for the owners of heritage listed properties to invest in the conservation of those properties in the interests of the nation's heritage.

Explanation of amendments

10.5 The amendments will provide a rebate to taxpayers who have been issued with a final certificate that relates to a specified amount of heritage conservation expenditure. The rebate will be allowed in the taxpayer's assessment for the year of income in which the final certificate was applied for. The rebate will be allowable for approved expenditure of at least $10,000 on certain conservation work to buildings and structures listed on specified heritage registers.

Entitlement to the heritage conservation rebate

Heritage conservation rebate - individuals and companies

10.6 A taxpayer, other than a partnership or trustee, who has been issued with a final certificate will be entitled to a rebate for eligible heritage conservation works. The taxpayer will be entitled to a rebate of 20% of the amount of expenditure specified in the final certificate. The rebate will be allowable in the taxpayer's assessment for the year of income in which the final certificate was applied for, not the year of income in which the certificate was issued. Thus any delay in issuing certificates will not affect the year of income in which the rebate is allowable [Clause 53 - new section 159UQ] .

Heritage conservation rebate - partnerships

10.7 An association of persons (other than a company) carrying on business as partners or in receipt of income jointly is a partnership for income tax purposes (subsection 6(1)) and is treated as a taxpayer (section 90). A partnership will be eligible to apply for a provisional certificate and, provided that all the requirements are satisfied, to be issued a final certificate.

10.8 Each partner in a partnership will be entitled to the rebate for approved heritage conservation work done on a property owned by the partnership. The share of the rebate to which each partner will be entitled, will be determined on the basis of their share of the net income of the partnership for the year of income in which the rebate is allowable, that is the year of income in which the final certificate is applied for. If the partnership has no net income for the year in which the final certificate is applied for, no rebate will be allowable to the partners [Clause 53 - new section 159UR] .

Jointly owned property

10.9 In the case of a property that is jointly owned but the joint owners do not constitute a partnership for tax purposes, each joint owner of the property will be eligible to seek a provisional certificate for proposed heritage conservation work on the jointly owned property. A joint owner of a property (that is not partnership property) will qualify for entitlement to the rebate on the same basis as an individual or company taxpayer.

Heritage conservation rebate - trusts

10.10 Where a final certificate has been issued to a trustee of a trust estate, the rebate will be allowable to beneficiaries of the trust or, in certain circumstances, it will be the trustee who will be entitled to the rebate. To qualify for the rebate the trust must have a net income for the year of income in which the trustee applied for the final certificate [Clause 53 - new subsection 159US(1)] .

10.11 A beneficiary will be entitled to a rebate in its assessment for a year of income if :

•

the beneficiary is presently entitled to a share of the net income of the trust for that year of income; and

•

the share of the net income constitutes assessable income of the beneficiary (under section 97) [Clause 53 - new subsection 159US(2)] .

10.12 Circumstances under which the trustee will be entitled to the rebate are:

•

the trustee is assessable on the share of the net income of a beneficiary who is under a legal disability (under section 98) for the year of income in which the trustee applied for the final certificate. The beneficiary's share of the rebate will be allowable in the assessment to the trustee on account of the beneficiary for that year of income [Clause 53 - new subsection 159US(3)] ; or

•

the trustee is assessable on the income of a trust to which no person is presently entitled (under section 99 or 99A), for the year of income in which the trustee applied for the final certificate. The trustee will be entitled to the rebate in the assessment of the trust for that year of income [Clause 53 - new subsection 159US(4)] .

Heritage conservation rebate - corporate unit trusts and public trading trusts

10.13 Trustees of corporate unit trusts and public trading trusts are taxed as if they were companies (Division 6B and Division 6C). Accordingly, the trustee of a corporate unit trust or a public trading trust is a taxpayer and may apply for a provisional certificate in the same way as any other taxpayer. Such a trustee who has been issued with a final certificate will be entitled to a rebate for eligible heritage conservation works of 20% of the amount of expenditure specified in the final certificate, in the assessment of the trust for the year of income in which the final certificate was applied for [Clause 53 - new section 159UT].

Administration of the scheme

10.14 The scheme will be administered by the Department of the Arts and Administrative Services. Concepts central to the administration of the scheme are:

•

maximum approval limit;

•

closing date;

•

provisional certificate criteria and procedures;

•

provisional certificate;

•

final certificate.

Maximum approval limit

10.15 The maximum approval limit will be the total amount for which provisional certificates may be issued in the financial year. The Minister for the Arts and Administrative Services will specify in writing the amount of the limit for each financial year. Provisional certificates will not be able to be issued for a financial year until the maximum approval limit for the particular year has been specified [Clause 53 - new section 159UD] .

10.16 The instrument specifying the maximum approval limit will be a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901 [Clause 53 - new paragraph 159UY(b)] .

Closing date

10.17 Each financial year the Minister for the Arts and Administrative Services will nominate the closing date by which applications for provisional certificates are to be lodged. This date will be notified in the Gazette and will not be less than 21 days later than the date of notification. The Minister will have the option of considering applications received after the closing day. In practice, it is likely that late applications will be considered if they are received before the ranking process commences [Clause 53 - new section 159UE] .

Provisional certificate criteria and procedures

10.18 The Minister for the Arts and Administrative Services will be required to specify in writing the criteria that proposed heritage conservation works must satisfy to be eligibile for admission to the scheme. These criteria will be the provisional certificate criteria . Proposed works that satisfy the provisional certificate (eligibility) criteria will then be ranked according to the provisional certificate procedures [Clause 53 - new section 159UF] .

10.19 These provisional certificate criteria and procedures will be specified in writing and will be a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901 [Clause 53 - new paragraph 159UY(c)] .

Provisional certificates

10.20 A provisional certificate will be the first step in a two step process for approving proposed heritage conservation works as rebatable.

A taxpayer may apply for a provisional certificate if:

•

the taxpayer intends to incur expenditure on "heritage conservation works" (see below); and

•

the taxpayer has either a freehold interest or holds a Crown lease over the the land on which the building or structure is situated [Clause 53 - new section 159UG] .

10.21 Heritage conservation works are defined as works done for the purpose of conserving, maintaining, preserving, restoring, reconstructing or adapting a building or structure of cultural significance that is listed in a heritage register that the Minister for the Arts and Administrative Services has prescribed as a recognised heritage register [Clause 53 - new section 159UB] .

10.22 However, expenditure incurred on the acquisition of depreciable plant or articles will not qualify as heritage conservation works [Clause 53 - new section 159UC] .

10.23 The Minister for the Arts and Administrative Services will prescribe heritage registers maintained by the Commonwealth, the States and Territories as recognised heritage registers in an instrument which will be a disallowable instrument for the purposes section 46A of the Acts Interpretation Act 1901 [Clause 53 - new paragraph 159UY(a)] .

10.24 An application for a provisional certificate must be made on an approved form and must state the amount of expenditure the taxpayer proposes to incur on the works and any other required information. The completed form should then be lodged with the Department of the Arts and Administrative Services [Clause 53 - new section 159UH] .

10.25 The Minister will have the power to seek further information from a taxpayer for the purposes of determining whether to issue a provisional certificate. Further consideration of the application may be deferred pending receipt of the information requested [Clause 53 - new section 159UI] .

10.26 Applications received in the required form will be examined. Those that satisfy the eligibility criteria (that is, the heritage conservation and other provisional certificate criteria - see above notes) will be ranked. The factors that will be taken into account in ranking these applications will be specified in provisional certificate procedures (see above notes). The value of proposed works for which provisional certificates will be able to be issued is limited to the amount the Minister has specified as the maximum approval amount (see notes on new section 159UD). The amount to be specified for the 1993-94 financial year is $9.5 million.

10.27 Where an application satisfies the conditions for the issue of a provisional certificate and the ranking procedures allow the Minister to issue a provisional certificate to the taxpayer, the taxpayer will be notified [Clause 53 - new subsection 159UJ(1)] .

10.28 When the taxpayer:

•

pays any required fee; and

•

gives the Minister a statement that all the necessary building and other approvals that are required for the work to be lawfully carried out have been obtained and signs that statement;

the Minister will issue a provisional certificate to the taxpayer [New subsections 159UJ(2) and (3)].

10.29 If after the application of the provisional certificate criteria and procedures, the Minister decides not to issue a provisional certificate, the Minister must notify the taxpayer accordingly [Clause 53 - new subsection 159UJ(4)] .

10.30 A decision not to issue a provisional certificate is not reviewable by the Administrative Appeals Tribunal.

Contents of a provisional certificate

10.31 The provisional certificate will contain the following information:

•

the name of the taxpayer (this will be the only person to whom a final certificate will be issued in respect of the work);

•

a description of the works to be carried out;

•

the standard to which the works must be completed to qualify for a final certificate; and

•

the amount of the proposed expenditure that will qualify for the rebate (this amount must be at least $10,000) [Clause 53 - new section 159UK].

Provisional certificate in force

10.32 Only expenditure on the heritage conservation work described in the provisional certificate that is incurred while the certificate is in force will be eligible for the rebate. Any expenditure incurred before the provisional certificate has issued will not be eligible for the rebate.

10.33 A provisional certificate will cease to be in force when the final certificate is issued for the work. However, the provisional certificate will also cease to be in force if any of the following events occur before the final certificate is issued:

•

the taxpayer disposes of his or her interest in the property;

•

the taxpayer dies;

•

if the taxpayer is a partnership, a company or a trust, the partnership is dissolved or the company or the trust is wound up; or

•

a final certificate is not applied for within 24 months of the issue of the provisional certificate, or if an extension has been granted (under new subsection 159UL(2), within the extended period [Clause 53 - new subsection 159UL(1)] .

10.34 The Minister will have the power to grant a taxpayer a 3 month extension of the provisional certificate period. The taxpayer must apply for the extension no later than one month before the end of the 24 month provisional certificate period [Clause 53 - new subsection 159UL(2)].

Final certificate

10.35 The holder of a provisional certificate may apply for a final certificate when the taxpayer has:

(a)

completed the works to the standard specified in the provisional certificate during the provisional certificate period; and

(b)

incurred expenditure of at least $10,000 during the provisional certificate period, that is while the provisional certificate was in force [Clause 53 - new subsection 159UM(1)] .

10.36 The application for a final certificate must be lodged on the approved form and specify the amount of expenditure covered by the provisional certificate actually incurred on eligible heritage conservation works while the provisional certificate was in force. The application for a final certificate must be lodged before expiry of the provisional certificate [Clause 53 - new subsection 159UM(2)] .

10.37 Where an application is made for a final certificate in respect of expenditure of at least $10,000 on heritage conservation works completed to the standard specified in the relevant provisional certificate, a final certificate will be issued [Clause 53 - new section 159UO] .

Taxpayer dies before applying for a final certificate

10.38 If a taxpayer dies after completing the work but before applying for a final certificate, an application made within 3 months of the death of the taxpayer will be treated as having been made immediately before the taxpayer's death. If the final certificate is issued, the rebate for the heritage conservation work will be allowable in the taxpayer's assessment for the period from the beginning of the year of income to the date of death.

10.39 The following conditions must be satisfied for an application for a final certificate to be made after the death of the taxpayer to whom it was issued:

•

the provisional certificate must still be in force, either because the 24 month period has not expired or an extension of the period has been granted;

•

the works must be completed to the standard specified in the provisional certificate; and

•

the taxpayer must have incurred expenditure of at least $10,000 during the period the provisional certificate was in force [Clause 53 - new subsection 159UN(1)].

10.40 The application for a final certificate to be issued in respect of heritage conservation works covered by a provisional certifcate that were completed before the death of the taxpayer may be made by:

•

an executor, administrator or other personal representative of the taxpayer; or

•

if the deceased taxpayer was a partner in a partnership that is the holder of a provisional certificate, one of the surviving partners of the partnership [Clause 53 - new subsection 159UN(2)].

Taxpayer dies before works completed

10.41 If the works covered by the provisional certificate are not completed when the taxpayer to whom the provisional certificate was issued dies, the provisional certificate will lapse. Any expenditure on heritage conservation works covered by the certificate incurred while the provisional certificate was in force will not be rebatable. The effect of the death of the holder of the provisional certificate is that conditions for the issue of a final certificate will never be able to be satisfied [Clause 53 - new paragraph 159UL(1)(a) and new sections 159UM and 159UN] .

10.42 The case is the same where a provisional certificate has been issued to a partnership and one of the partners dies before the works have been completed to the standard specified in the provisional certificate. The partnership terminates on the death of the taxpayer. Unless the works have been completed to the standard specified in the provisional certificate and the expenditure incurred before the death of the partner, no rebate will be allowable for the expenditure that has been incurred.

Transactions not at arms length

10.43 Where:

•

a taxpayer incurs heritage conservation expenditure covered by a provisional certificate;

•

the taxpayer is not dealing at arm's length with the party to whom the expenditure was incurred;

•

the Minister for the Arts and Administrative Services considers that the expenditure is greater than the expenditure that would have been incurred if the parties were dealing at arm's length;

the Minister will disregard the excess expenditure in specifying the amount of qualifying expenditure in the final certificate [Clause 53 - new section 159UP].

Review of decisions

10.44 A taxpayer will be able to apply to the Admininstrative Appeals Tribunal for a review of:

(a)

a decision of the Minister to refuse to issue a final certificate; or

(b)

the amount shown on the final certificate as the amount of eligible heritage conservation expenditure incurred by the taxpayer during the period the provisional certificate was in force [Clause 53 - new subsection 159UV(1)] .

10.45 A taxpayer will be notified in writing of a decision of the Minister to refuse to issue a final certificate (subsection 159UO(2)). The amount of eligible heritage conservation expenditure will be shown on the final certificate which will also be in writing. These notices will contain advice that the taxpayer may make an application for review of the decision to the Administrative Appeals Tribunal. The notice will also advise the taxpayer that, unless the information has already been supplied in writing, the taxpayer may make a request (under section 28 of the Administrative Appeals Tribunal Act 1975) for a statement setting out:

•

the findings on material questions of fact referring to the evidence or other material on which those findings were based; and

•

the reasons for the decision.

10.46 The Minister or (where the decision is made by a delegate) the delegate is required to furnish a statement to the applicant within 28 days [Clause 53 - new subsection 159UV(2)] .

10.47 The validity of any reviewable decision is not affected by any failure of the Minister or delegate to comply with the notification requirements [Clause 53 - new subsection 159UV(3)] .

Disclosure of information to recognised heritage bodies

10.48 Officers are prohibited from disclosing any information concerning the income tax affairs of any person acquired in the course of their duties unless the disclosure is specifically authorised (section 16(2)). For these purposes a person is an "officer" if the person:

•

has been appointed or employed by the Commonwealth or a State;

•

acquires information furnished under the Income Tax Assessment Act 1936 about the taxation affairs of a person because, or in the course, of that employment. (Definition of "officer" - subsection 16(1)).

10.49 A person who performs services for the Commonwealth is taken to be employed by the Commonwealth (subsection 16(1A)).

10.50 The Minister will be permitted to seek advice from recognised heritage bodies. It will be necessary for members of these bodies to have access to information furnished in relation to provisional and final certificates in order to provide informed advice to the Minister. The Minister will be authorised to disclose to recognised heritage bodies information furnished in support of the application for a provisional certificate to enable these bodies to provide appropriate advice [Clause 53 - new subsection 159UW(1)] .

10.51 Similarly, the Minister will be authorised to disclose information contained in a provisional certificate and information furnished in an application for a final certificate to a recognised heritage body from whom the Minister is seeking advice on whether the conditions for the issue of a final certificate have been satisfied [Clause 53 - new subsection 159UW(2)].

10.52 Members of any recognised heritage body to whom information has been disclosed are performing services for the Commonwealth and will be under the same secrecy obligatons as if the person was an officer [Clause 53 - new subsection 159UW(3)].

Minister's power to delegate

10.53 The Minister for the Arts and Administrative Services will be permitted to delegate most of his powers under proposed Subdivision AAD to officers of the Minister's Department who hold an office that has a classification declared by the Public Service Commissioner to be a Senior Executive classification [Clause 53 - new section 159UX].

10.54 The Minister will not be permitted to delegate the power to:

•

declare a heritage register to be a recognised heritage register (for the purposes of the definition of "heritage conservation works" new section 159UB);

•

declare a body to be a "recognised heritage body" (new section 159UB);

•

specify the maximum approval limit for a financial year (new section 159UD);

•

specify the closing date for applications for provisional certificates for a financial year (new section 159UE);

•

determine provisional certificate criteria and procedures (new section 159UF).

Tax treatment of rebatable expenditure

10.55 No income tax deduction will be allowable for expenditure incurred on heritiage conservation works that are covered by a provisional certificate. For example, expenditure that represents rebatable heritage conservation expenditure will not be deductible under section 53, even if it constitutes a repair to income producing property.

10.56 In determining whether expenditure incurred on the works qualifies for the rebate or is deductible, the expenditure will be treated as being rebatable until it reaches the amount of qualifying expenditure specified on the provisional certificate. Any deductible expenditure incurred after the expenditure reaches the qualifying limit specified in the provisional certificate will be deductible in the normal way.

10.57 Where otherwise deductible expenditure covered by a provisional certificate is incurred, the amount, if any, of the expenditure that is deductible will be calculated by applying a formula. Under this formula a deduction will be allowable for so much of the expenditure that exceeds the greater of:

•

NIL; and

•

the amount worked out under the formula:

(Qualifying expenditure limit specified in the provisional certificate) - (Total expenditure previously incurred by the taxpayer in relation to the works while the certificate was in force)


[Clause 53 - new subsection 159UU(1)]

10.58 The following example illustrates the application of the formula to calculate the amount of the otherwise deductible heritage conservation works expenditure that is allowable as a deduction:

Example

10.59 On 30 April 1994 a taxpayer is issued with a provisional certificate that specifies $20,000 as the qualifying expenditure limit.

10.60 As at 30 September 1994 the taxpayer has incurred expenditure of $15,000 covered by the provisional certificate.

(1)

10.61 On 15 October 1994 the taxpayer incurs additional expenditure of $3,000 on the works which would be deductible if it was not covered by the provisional certificate.

10.62 Applying the formula to the $3,000:

Is $3,000 greater than

•

NIL and:

•

($20,000 - $15,000) = $5,000?


ANSWER: No. Therefore, no part of the expenditure of $3,000 is deductible.

(2)

10.63 On 30 October 1994 the taxpayer incurs further additional expenditure of $7,000 on the works which would be deductible if it was not covered by the provisional certificate.

10.64 Applying the formula to the $7,000:

Is $7,000 greater than

•

NIL and:

•

($20,000 - $18,000) = $2,000?


ANSWER: $7,000 is greater than $2,000 by $5,000. Therefore the taxpayer is entitled to a deduction of $5,000.

(3)

10.65 On 14 November 1994 the taxpayer incurs further additional expenditure of $6,000 on the works which would be deductible if it was not covered by the provisional certificate.

10.66 Applying the formula to the $6,000:

Is $6,000 greater than

•

NIL and:

•

($20,000 - $25,000) = -$5,000?
NIL is greater than -$5,000. Therefore, the taxpayer is entitled to a deduction for the amount of $6,000 (that is, the amount by which $6,000 exceeds NIL).

10.67 Where otherwise deductible expenditure is incurred on heritage conservation works, and a final certificate will not be issued for the work, the deductions that were not allowable because the expenditure was incurred on heritage conservation works will be allowable in the taxpayer's assessment for the year of income in which the provisional certificate ceases to be in force [Clause 53 - new paragraph 159UU(2)(c)] .

10.68 For example, a taxpayer incurs otherwise deductible expenditure covered by a provisional certificate of $8,000 in the 1994-95 year of income and $7,000 in the 1995-96 year of income. The provisional certificate expires in the 1995-96 year of income. The taxpayer will be entitled to a deduction of $15,000 in the assessment for the 1995-96 year of income.

10.69 If any otherwise deductible expenditure incurred while the provisional certificate is in force would have qualified for deduction in a later year, and a final certificate is not applied for while the provisional certificate is in force, the deduction will be allowable in the later year of income. It will not be allowable in the assessment for the year of income in which the provisional certificate ceased to be in force [Clause 53 - new paragraph 159UU(2)(d)] .

10.70 For example, if particular expenditure incurred in a year of income was to be deductible over four years of income, and the provisional certificate ceased to be in force in the second year of income, the deduction for the third and fourth years of income would be allowable in the taxpayer's assessments for those years of income and not the second year of income.

Capital allowances - Division 10C and 10D

10.71 Currently deductions are allowable for expenditure of a capital nature that is incurred on the construction of a building, or the construction of an extension, alteration or improvement to a building or part of a building where the building was used wholly or principally for the purpose of:

(a)

operating a hotel, motel, guest house or apartments used wholly or principally for the provision of short-term accommodation for travellers (Division 10C); and

(b)

income producing or research and development activities (Division 10D).

10.72 Expenditure on heritage conservation works may constitute qualifying expenditure for the purposes of Division 10C or 10D and entitle the owner to a deduction at the rate of 2.5% or 4% depending on the use of the building. Where heritage conservation work constitutes qualifying capital expenditure under Division 10C or 10D the expenditure will be specifically excluded from being qualifying expenditure for those purposes (section 124ZB and section 124ZG). [Clauses 54 and 55]

Capital gains and losses

10.73 In calculating a capital loss on the disposal of an asset, deductions which are allowable in respect of any element of the cost base of the asset are excluded from the cost base in determining the capital loss arising under Part IIIA of the Act (section 160ZK). Accordingly, if a capital loss is incurred on the disposal of a building for which deductions for capital expenditure on the building were allowed or are allowable under Division 10C or 10D, the cost base of the asset is reduced by the amount of the deduction allowed or allowable.

10.74 Capital expenditure on a building that is eligible heritage conservation works expenditure for the purposes of Subdivision AAD of Division 17 does not qualify for deductions under Division 10C or 10D (see above). However, if the building is disposed of at a capital loss, an adjustment will be made to the reduced cost base to exclude the amount of the deduction that would have been allowable under Division 10C or 10D if the capital expenditure had not been eligible heritage conservation works expenditure. [Clause 56]

Example

10.75 A taxpayer buys a house listed on a heritage register in January 1994 for $100,000. Renovations are done to convert the premises into a restaurant, which then becomes an income producing property. The restaurant opens for business on 1 July 1994.

10.76 The capital cost of the renovations of $80,000 is qualifying expenditure under section 124ZG of Division 10D. Expenditure of $20,000 is incurred on restoring the original veranda. A provisional certificate for the work on restoring the veranda issued on 15 April 1994. The qualifying expenditure specified for that work on the certificate is $20,000. The whole of the expenditure of $20,000 was incurred while the provisional certificate was in force.

10.77 The property was sold on 30 June 1997 for $160,000.

10.78 For the 3 years of income ended 30 June 1995, 1996 and 1997 the deductions that would be allowable at 2 1/2% under Division 10D are:

10.79 The reduced cost base of the building is calculated as follows.