Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 6 Co-operative companies
Overview
6.1 Part 6 of Schedule 1 of the Bill amends the Income Tax Assessment Act 1936 (the Act) to ensure that co-operative companies will no longer receive a deduction under paragraph 120(1)(c) for the repayment of new government loans.
Summary of the amendments
6.2 The purpose of the amendment is to remove the deduction that eligible co-operative companies have been entitled to in respect of certain government loans used to purchase assets. This will remove the preference the provision gives to co-operatives over other companies, as well as the preference it gives to borrowers (the effective double deduction is only available to the extent that assets are paid for from borrowings).
6.3 Subject to the transitional arrangements explained below in paragraphs 6.8 - 6.13, the amendment applies to loan repayments made pursuant to a contractual obligation entered into after 7.30pm Eastern Standard Time on 20 August 1996. Loans in existence before that time will retain entitlement to the deduction. However, if their terms are altered after that time they will be taken to be new loans. [Subitem 18(1) and subparagraph(b)(i) of subitem 18(4)]
6.4 Whether or not a loan exists at the relevant time is a question of fact. No loan exists unless the borrower and the lender have a legally binding and enforceable contract under which both parties are committed to the transaction.
6.5 A loan agreement in force at 7.30pm on 20 August will be treated as if it was entered into after that time if it is rolled over or extended after that time. A rollover will not be taken to have occurred solely because periodic interest rate adjustments are made in accordance with the original loan agreement. [Subparagraphs (b)(ii) and (iii) of subitem 18(4)]
6.6 The effect of subitem 18(5) is that, irrespective of the actual terms of the loan agreement, the loan amount will be taken to be equal to any principal outstanding at 7.30pm on 20 August 1996 and any further amounts which, at that time, the borrower was contractually obliged to borrow. As a result, any amounts borrowed after that time which are not part of that deemed loan amount will be treated as an alteration of the terms of the loan and therefore will result in there being a loan entered into after the relevant time by subparagraph (b)(i) of subitem 18(4) . Therefore, the only amounts still eligible for deduction under the former paragraph 120(1)(c) are repayments of principal outstanding at 7.30pm on 20 August 1996 and repayments of other principal borrowed after that time but which, at that time, the borrower was contractually obliged to borrow. [Subitem 18(5)]
6.7 A loan facility under which drawdowns can be made is merely an agreement to make loans in the future. It is not a contractual obligation to borrow money. It follows that a loan facility is not an existing loan - a new loan comes into existence as each drawdown is made.
6.8 Subitems 18(2) and 18(3) provide for the application of transitional provisions to certain co-operatives.
6.9 The transitional provision contained in subitem 18(2) ensures that certain loans to eligible co-operatives that were entered into after 7.30pm on 20 August 1996 but on or before 31 December 1996 will remain eligible for the paragraph 120(1)(c) tax deduction provided the company has, in the three years leading up to 20 August 1996, had a loan to which paragraph 120(1)(c) applies. This transitional provision applies if the loan was entered into for the sole purpose of acquiring a specified asset pursuant to:
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- a business plan approved by the directors where that approval is recorded in the company's minutes before 7.30pm on 20 August 1996; or
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- a contract which was entered into before 7.30pm on 20 August 1996.
To satisfy the first condition the asset for whose acquisition the loan was entered into must be identified in the co-operative's business plan as an asset which the co-operative plans to acquire. The business plan may identify several such assets and the transitional provision can apply to each one. Also, the specified asset must be plant or articles for the purposes of section 54 of the Act (other than a passenger motor vehicle), or an eligible building for the purposes of section 124ZF of the Act. It must be installed ready for use by 30 June 1998. [Subitem 18(2)]
6.10 In determining whether a loan is entered into on or before 31December1996 the tests in subitem 18(4) (explained above in paragraphs 6.3 - 6.5) apply. Therefore if a loan entered into before that time is rolled over, or its terms are altered (for instance, by borrowing additional money which the co-operative was not under a contractual obligation to borrow before that time - see subitem 18(5), explained above in paragraph 6.6) or the loan period is extended after that time, then the loan will be treated as having been entered into after that time and will therefore be ineligible for the deduction.
6.11 Subitem 18(3) contains a further transitional provision which applies where a co-operative has entered into a contract before 7.30pm on 20 August 1996 to acquire an asset and has an agreement for the provision of finance in place before that time. In such a case, any drawdowns of funds under that agreement after that time for the sole purpose of acquiring the asset will be eligible for the tax deduction. [Subitem 18(3)]
6.12 For the purposes of this measure, an agreement for the provision of finance exists if an offer of a loan has been accepted such that a contract has been entered into, or a loan facility agreement has been executed.
6.13 If a loan is entered into after 7.30pm on 20 August 1996 and satisfies the requirements of subitem 18(3) , the loan will nevertheless become ineligible for the paragraph 120(1)(c) tax deduction if the acquisition of the asset ceases to be the sole purpose of the loan. For example, an increase in the loan amount for a purpose other than the purchase of the specified asset will result in a change to the purpose of the loan. [Subitem18(3)]
Background to the legislation
6.14 Paragraph 120(1)(c) effectively allowed eligible co-operatives double deductions for the cost of assets. They received a tax deduction for repayment of money lent to the co-operative by the government, in addition to normal deductions for interest on money lent. They also received normal tax deductions for depreciation in relation to the cost of the assets. Therefore, the net effect of paragraph 120(1)(c) was that an eligible co-operative could claim an effective 200 per cent tax deduction for capital expenditure - full write-off of the cost of an asset and deductions for capital repayments.
Explanation of the amendments
6.15 Item 17 of Schedule 1 is the operative provision. It repeals subsection 120(1) of the Act and substitutes a new subsection without existing paragraph 120(1)(c). [Item 17 - substitutes subsection 120(1)]
6.16 Item 18 provides that, subject to certain transitional provisions, new subsection 120(1) applies to loans entered into after 7.30pm Eastern Standard Time on 20 August 1996, and to existing loans whose terms are changed after that time. This application provision is explained above under the heading 'Date of effect'. [Item 18]