Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 1 - Special depreciation on trading ships
Overview
1.1 Part 1 of Schedule 1 will bring to an end the 20 per cent prime cost depreciation rate for trading ships. Section 57AM of the Income Tax Assessment Act 1936 (the Act) will be amended so that the special depreciation rate will no longer apply after 30 June 1996, except in relation to ships that already qualify and ships contracted for construction or purchase before 1 May 1996 that are delivered to the shipowner and registered in Australia before 1 July 1997. [Item 1]
Summary of the amendment
1.2 Eligibility for the tax concession under section 57AM of the Act is linked to the operation of the Ships (Capital Grants) Act 1987 (SCG Act). The SCG Act is being amended to deny capital grants in respect of ships commissioned and registered in Australia after 30 June 1996, except where the contract for the construction or purchase of the ship was signed by the shipowner before 1 May 1996 and the ship is delivered to the shipowner and registered in Australia before 1 July 1997.
1.3 The purpose of the amendment to section 57AM is to bring to an end the 20 per cent prime cost depreciation rate for trading ships except ships that remain eligible for capital grants under those transitional rules.
1.4 The amendment applies to ships for which construction or purchase contracts are signed on or after 1 May 1996 and which are delivered and registered in Australia on or after 1 July 1997.
Background to the legislation
1.5 Taxation Laws Amendment Act (No. 3) 1995 extended the application of the 20 per cent prime cost depreciation rate for trading ships until 30 June 2002. Eligible ships are depreciated over 5 years at 20 per cent per year beginning in the pre-commissioning year. Eligibility for the accelerated depreciation is conditional upon the ship continuing to meet the criteria laid down in the SCG Act, including appropriate manning levels by Australians. Once a ship no longer meets the criteria, it loses eligibility for the accelerated rate of depreciation.
Explanation of the amendment
1.6 Paragraph 57AM(4)(ba) requires that a ship which qualifies under the SCG Act, to be eligible for the special depreciation, must be delivered to the shipowner and registered under the Shipping Registration Act 1981 , before 1 July 2002.
1.7 The amendment changes the termination date from 1 July 2002 to 1 July 1997 in paragraph 57AM(4)(ba). That means that ships for which contracts for construction or purchase were signed before 1 May 1996 would need to be delivered to the shipowner and registered in Australia before 1 July 1997 to qualify for the accelerated depreciation.
1.8 The amendment does not affect ships which already qualify for the accelerated depreciation. Nor does it affect ships for which contracts for construction or purchase were signed before 1 May 1996 and which are delivered to the shipowner and registered before 1 July 1997, if they meet the criteria of the SCG Act. Such ships will continue to qualify for the accelerated rate of depreciation. Any new ship purchased, or for which a construction contract is signed, on or after 1 May 1996 will be subject to the application of normal depreciation rates.