Senate

Explanatory Memorandum

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

Chapter 15 - Development allowance and general investment allowance.

Overview

15.1 Two amendments are to be made to general investment and development allowances and one to the development allowance only.

15.2 The amendments relating to both allowances will:

•

allow a wholly-owned company group to share the use of property without losing entitlement to either of the allowances; and

•

extend both of the allowances to property used in the transport of minerals or quarry materials.

15.3 The third amendment will require leasing companies to give notices of transfer of entitlement to the development allowance in respect of leased property to lessees instead of to the Commissioner of Taxation.

Summary of proposed amendments

1. Property used within wholly-owned company groups

Purpose of amendment

15.4 Presently, a taxpayer is not entitled to the general investment allowance or the development allowance in respect of property if the taxpayer grants another person the right to use that property. This restriction can inhibit the efficient use of property within wholly-owned company groups. Accordingly, the restriction is to be removed where the use of property is granted to another company within the same wholly-owned company group [Clause 84].

Date of effect

15.5 Applies from the time when the allowances commenced; that is, 27 February 1992 in the case of the development allowance, and 9 February 1993 in the case of the general investment allowance [Subclause 2(5)].

2. Property used in the transport of minerals and quarry materials.

Purpose of amendment

15.6 Currently, expenditure on the acquisition or construction of otherwise eligible property cannot qualify for either of the allowances if it qualifies for write-off under the provisions relating to the transport of minerals or quarry materials. Such expenditure will now be able to qualify for the allowances [Clause 91].

Date of effect

15.7 Applies from the time when the allowances commenced; that is, 27 February 1992 in the case of the development allowance, and 9 February 1993 in the case of the general investment allowance [Subclause 2(5)].

3. Transfer of entitlements to development allowance by leasing companies.

Purpose of amendment

15.8 Currently, a leasing company that wishes to transfer to a lessee, some or all of its entitlement to the development allowance in respect of leased property, must give a written notice of the transfer to the Commissioner of Taxation. This requirement is to be replaced with a requirement that the leasing company give the notice to the lessee [Clause 80].

Date of effect

15.9 The amendment will apply to leasing arrangements entered into after the date of Royal Assent [Clause 83].

Introduction

15.10 The general investment allowance and the development allowance are incentives for taxpayers to invest in new items of plant for use solely in Australia for the production of assessable income. Both allowances constitute a deduction equal to 10% of the capital cost of eligible property. The deduction is allowable in the year the property is first used for the purposes of producing assessable income, or held in reserve for that purpose. The allowances are in addition to other deductions that may be available in respect of the cost of the property, such as plant depreciation. Taxpayers can access both allowances in respect of the same property if they meet the respective conditions of each allowance.

15.11 The general investment allowance applies to items of plant costing $3000 or more. To qualify, the item must be acquired under a contract entered into after 8 February 1993 and before 1 July 1994. If constructed by the taxpayer, construction must commence during that period. As well, the property must be first used, or held in reserve, before 1 July 1995 for the purpose of producing assessable income.

15.12 The development allowance applies to expenditure on plant that has pre-qualified under the Development Allowance Authority Act 1992. Broadly, that Act relates to projects costing $50m or more that were registered with the Authority on or before 31 December 1992 and which meet certain other specified criteria (relating to improved labour relations and pricing of manufacturing etc. inputs). To qualify, the expenditure must be in respect of an item plant acquired under a contract entered into after 26 February 1992, or if constructed by the taxpayer, that was commenced to be constructed after that date. As well, the item must be first used for the purpose of producing assessable income before 1 July 2002, or be installed ready for such use before that date.

1. Property used within wholly-owned company groups

Background to the legislation

15.13 A taxpayer, other than a leasing company, is not entitled to the allowances in respect of property that they acquire for the purpose of leasing or of granting of rights to use to another person. As well, an entitlement can be withdrawn if a taxpayer acquires or leases property without such a purpose but subsequently leases the property or grant rights to another person to use the property, within 12 months of the property being first used or installed ready for use.

15.14 These restrictions can operate harshly in relation to wholly-owned company groups. The use of property of a company by another company within the same group would be a disqualifying use of the property and would cause entitlement to the allowances to be withdrawn. This can inhibit the efficient use of property within wholly-owned company groups. Accordingly, the restrictions are to be eased in relation to wholly-owned company groups.

Explanation of the amendment

15.15 Entitlement to the general investment allowance is mainly worked out using the development allowance provisions. Accordingly, the necessary amendments only need to be made to the development allowance provisions.

Meaning of related company

15.16 The term "related company" is relevant for working out whether two companies are within the same wholly-owned company group. The term has the same meaning as in section 51AE, which deals with entertainment expenses. [Clause 90 inserts definition of "related company"]

15.17 A company is a related to another company if one of the companies is a subsidiary of the other or both are subsidiaries of the same company. Broadly, a company is a subsidiary of another company if all of the shares in the company are beneficially owned by the other company. [Existing subsections 51AE(16) to (19)]

Leasing etc property to related company

15.18 A taxpayer, other than a leasing company, is not entitled to either of the allowances if the taxpayer acquires the property for the purpose of leasing the property or of granting rights to use the property to other person [existing sub-subparagraphs 82AA(1)(a)(ii)(A) & (C)].

15.19 This rule will not apply where property is acquired for either of these purposes if the property is to be leased to, or the rights are to be granted to, a related company. [Clause 85 inserts new subsection 82AA(3)]

15.20 There are a number of conditions:

1.

the related company must intend using the property wholly and exclusively both in Australia and for the purpose of producing assessable income other than by leasing the property or granting rights to another person to use the property; and

2.

it is intended that the related company, or related companies, will remain as such during the term of the lease or the use.

Lease etc of property within 12 months

15.21 Entitlement to the allowances is withdrawn in respect of property owned by a taxpayer, other than a leasing company, if the taxpayer leases the property, or grants rights to use the property to another person, within 12 months of the property being first used, or installed ready for use [existing subsection 82AG(1)].

15.22 Similarly, a lessee of property that has qualified for the allowances must not enter into a contract or arrangement for the use of the property by another person, within the 12 month period [existing subsection 83AG(3)]. A corresponding rule applies to property leased from a partnership [existing subsection 82AJ(7)].

15.23 These rules will not apply where the lease, or the grant of rights to use, is to a related company. [Clauses 86(a) & (b) insert new subsections 82AG(1B) & (3B); clause 88(a) inserts new subsection 82AJ(7AB)]

15.24 A number of conditions apply:

1.

the related company must remain a related company for whole of the period ending at the earlier of the end of the term of the lease, grant, contract, or arrangement and the end of the 12 month period; and

2.

the related company must use the property wholly and exclusively both in Australia and for the purpose of producing assessable income other than by leasing the property or granting rights to use the property to another person.

Agreement for use made before lease entered into

15.25 Neither allowance is available for property leased by a taxpayer from a leasing company if, before entering into the lease, the taxpayer entered into a contract or arrangement with another person for the use of the property by that other person [existing subsection 82AG(4)]. A similar rule applies in relation to property leased from a partnership [existing subsection 82AJ(7A)].

15.26 This provision will not apply where the contract or arrangement is with a related company. [Clause 86(c) inserts new subsection 82AG(6); clause 88(b) inserts new subsection 82AJ(7C) ] The following are the conditions that apply:

1.

the related company must intend to, and actually, use the property wholly and exclusively both in Australia and for the purpose of producing assessable income other than by leasing the property or granting rights to another to use the property; and

2.

the related company must remain a related company during the whole of the period ending at the earlier of end of the term of the contract or arrangement or 12 months after the property was first used.

Lease etc of property after 12 months

15.27 Entitlement to the allowances can be withdrawn if a taxpayer leases property, or grants rights to use property, after 12 months, if the Commissioner of Taxation is satisfied that the taxpayer acquired or leased the property with the intention of granting the lease or the right to use [existing subsections 82AH(1), (3) & (4)]. A corresponding rule applies to property leased from a partnership [existing subsection 82AJ(8)].

15.28 These provisions will not apply if it was intended that the lease or the grant was to be made to a related company. [Clause 87 inserts new subsections 82AH(1B), (3B) & (6); Clause 88(c) inserts new paragraph 82AJ(10)]

15.29 These conditions apply:

1.

the related company must have intended to use the property wholly and exclusively both in Australia and for the purpose of producing assessable income other than by leasing the property or granting rights to another to use the property; and

2.

it was intended that the related company would remain a related company during the subsistence of the lease, grant, contract or arrangement.

Disposals within wholly-owned public company groups

15.30 The disposal of property within 12 months of it being first used, or installed ready for use, would ordinarily result in a loss of entitlement to the allowances. This does not occur if the disposal is between companies within a wholly-owned public company group [existing section 82AJA]. There are a number of conditions for this rollover. The principal condition is that the property remain in the group during the whole of the 12 month period [paragraph 82AJA(1)(b)].

15.31 Another condition is that the owner of the property neither leases the property nor grants rights to another person to use the property [subparagraphs 82AJA(1)(d)(i) & (ib)]. This other condition will not apply where the lease or rights are granted to a public company that is related to the owner. [Clause 89 inserts new subsections 82AJA(1B) & (1C)]

15.32 The following are the conditions that apply:

1.

the company must remain a public company that is related to the owner for whole of the period ending at the earlier of the end of the term of the lease or grant and the end of the 12 month period; and

2.

the company must use the property wholly and exclusively both in Australia and for the purpose of producing assessable income other than by leasing the property or granting rights to another to use the property.

Application

15.33 The amendments are to apply from the commencement of the allowances; that is, from 26 February 1992 under the development allowance and from 8 February 1993 under the general investment allowance. Because of the way the two allowances interact, specifying that the amendments are to apply to the development allowance from the commencement of that allowance means that the amendments automatically apply to the general investment allowance from its commencement time [Subclause 2(5)].

2. Property used in the transport of minerals and quarry materials.

Background to the legislation

15.34 The development allowance and the general investment allowance do not apply to expenditure on plant that attracts special treatment under other provisions such as: 100% depreciation; 3 year write-off for 150% of cost under the R & D provisions; immediate deduction under the mining/quarrying exploration and prospecting provisions [section 82AM].

15.35 Also excluded from both allowances is expenditure eligible for write-off under the mineral and quarry materials transport provisions [Division 10AAA]. They allow expenditure on facilities principally for use in the transport of minerals and quarry materials from the mine-site or quarry to be deducted over 10 years in the case of mineral transport and over 20 years in the case of quarry materials. The sort of property covered includes railways, roads, pipelines and port facilities. It also covers contributions to capital expenditure of others (usually public authorities and the like) on such facilities.

15.36 This exclusion applied under the former investment allowance. At that time, depreciation rates for the sort of property covered by these transport provisions were less concessional (providing a 15 to 40 year write-off depending on effective life). However, the current depreciation rates system is more generous. This sort of property now qualifies for a minimum 13 year write-off when used in other circumstances.

15.37 If expenditure on the plant component of mineral and quarry materials transport facilities was deductible under the plant depreciation provisions, the investment allowance would then be available even though depreciation might also allow higher deductions. However, taxpayers who incur expenditure covered by both the transport provisions and the depreciation provisions must use the former and so cannot qualify for the allowances under the existing rules.

Explanation of the amendment

15.38 The current exclusion of expenditure on plant for use in transporting mineral and quarry materials is to be removed for plant that would qualify for the allowances but for the current exclusion. This is to be achieved by removing the reference to sections 123B & 123BE from subsection 82AM(2) [Clause 92].

15.39 As mentioned earlier, the minerals and quarry materials transport provisions also cover contributions to expenditure of others. This amendment does not extend the allowances to such expenditure. It only applies to plant that is either owned by the taxpayer or is deemed by subsection 82AQ(3A) to be owned by the taxpayer because it is installed on a Crown lease.

Application

15.40 The amendment is to apply from the commencement of the allowances; that is, from 26 February 1992 under the development allowance and from 8 February 1993 under the general investment allowance. Because of the way the two allowances interact, specifying that the amendments apply to the development allowance from the commencement of that allowance means that the amendments automatically apply to the general investment allowance from its commencement time [subclause 2(4)].

3. Transfer of entitlements to development allowance by leasing companies.

Background to the legislation

15.41 As mentioned earlier, the allowances are generally not available where the owner of otherwise eligible plant grants rights to use the plant to another person. An exception to this relates to the leasing business of leasing companies. Leasing companies are entitled to the allowances if the lessee contracts to lease plant for not less than four years.

15.42 There is an option for a leasing company to transfer some or all of its entitlement to the allowances from a leasing transaction to the lessee [section 82AD]. To do this under general investment allowance, the company must give a declaration and statement to the lessee [section 82AW]. However, the development allowance requires that the declaration and statement must be given to the Commissioner of Taxation [subsection 82AD(1)].

Explanation of the amendment

15.43 This requirement under the development allowance for leasing companies to lodge such declarations and statements with the Commissioner is not consistent with recent "self-assessment" changes to income tax law. The general trend under self-assessment is to minimise the amount of information that taxpayers must give to the Commissioner. Rather, taxpayers need to retain sufficient information to verify their income tax affairs upon enquiry from the Commissioner, generally for not less than five years.

15.44 Accordingly, this requirement is to be changed to a requirement that the leasing company give the declaration and statement to the lessee [Clause 81 amends subsection 82AD(1)]. Lessees will need to retain these documents for five years, to justify their claims for the allowance [existing section 262A].

15.45 Because the general investment allowance provisions adopt the development allowance provisions subject to any necessary changes, a special provision provides for the documents to be given to lessees rather than the Commissioner. In consequence of the change to the development allowance, that special provision is no longer needed and is repealed [Clause 82 repeals section 82AW].

Application

15.46 The amendment applies to leasing agreements entered into after the date on which this Bill receives Royal Assent [Clause 83].