Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)CHANGE OF TITLE - TAX LAW IMPROVEMENT BILL (No. 1) 1998 - SENATE - Explanatory Memorandum.
Chapter 5 - Horticultural plants
Overview
This chapter covers the rules that allow deductions for capital expenditure on establishing horticultural plants. These rules are in Subdivision 387-C of Part 3-45 of the 1997 Act.
Part A summarises these rules.
Part B identifies the changes to the 1936 Act.
Part C explains the transitional provisions which set out how and when the rewritten provisions apply.
Part D explains the amendments that need to be made to the 1997 Act and the 1936 Act as a consequence of the rewriting of the 1936 Act.
A. Summary of the new law
Subdivision 387-C: Establishing horticultural plants
Subdivision 387-C allows a deduction for capital expenditure on the establishment of horticultural plants used in horticulture businesses. [sections 387-160, 387-162]
Capital expenditure on establishing a horticultural plant used for commercial horticulture is deductible.
[section 387-165]
The deduction is not available for capital expenditure that is:
- •
- on draining or clearing land;
- •
- otherwise deductible;
- •
- taken into account in working out a depreciation deduction; or
- •
- part of a pool of construction expenditure.
[section 387-195]
The deduction is not available for any period when the horticultural plant is not owned and used by the taxpayer for commercial horticulture. [section 387-165]
Deductions commence in the first year the horticultural plant is used or held ready for use for commercial horticulture. [section 387-165]
What period is the deduction available over?
The effective life of the horticultural plant determines the period over which the deduction is available.
[section 387-165]
Determination of effective life
The owner can either self assess the effective life or adopt the effective life determined by the Commissioner. This choice is made when the plant is first used (or held for use) in commercial horticulture. It can only be changed if a taxpayer chooses to adopt a later Commissioners determination. [section 387-175, 387-177]
Effective life of under three years
If the effective life of the horticultural plant is under three years the whole of its establishment expenditure is deductible in the year in which it is first used, or held ready for use, for commercial horticulture. [section 387-180]
Effective life of three years or more
If the effective life of the horticultural plant is 3 years or more, the deduction is worked out by applying specified write-off rates. [section 387-185]
Destruction of horticultural plant
If a horticultural plant with an effective life of three years or more is destroyed the balance of the capital expenditure less any amounts, such as insurance recoveries, received as a result of the destruction can be deducted in the year of destruction. [section 387-190]
The taxpayer owns a horticultural plant if:
- •
- it is on land held under lease or a quasi-ownership right granted by a government agency; and
- •
- it was planted by the holder of such a lease or right.
[section 387-210]
Notice requiring information upon transfer of ownership
If ownership of a horticultural plant is transferred, the transferee can give the transferor a written notice requesting relevant information. [section 387-205]
B. Discussion of changes
Section 387- 170 Meaning of horticultural plant, horticulture business, horticulture and commercial horticulture
The term horticultural plant is defined in this section.
The 1936 Act does not define this term. It relies on the definition of horticulture. The new definition provides greater clarity.
The term commercial horticulture is defined.
The term commercial horticulture has been adopted to provide a shorthand reference for the requirement that the horticultural plant be used for income producing purposes.
The term horticulture business is defined.
The business use requirement contained in the existing definition of horticulture has been removed and this term defined to make it clear that a deduction is only available when the horticultural plant is used in a business.
Section 387-175 Meaning of effective life
The owner of a horticultural plant must choose its effective life at the time when it is first used, or held ready for use, for commercial horticulture.
Under the 1936 Act, the owner of a plant works out its effective life at the time when it could first be used for commercial horticulture. This is so irrespective of whether the plant is in fact used for commercial horticulture at that time. It is more appropriate that the taxpayer who first uses a horticultural plant for income producing purposes should decide the effective life when it is first so used, on the basis of circumstances at that time.
Section 387-177 Choosing to adopt a retrospective determination
Specify a time when the choice to adopt a retrospective determination must be made.
The 1936 Act does not nominate the period within which taxpayers can adopt a Commissioners subsequent determination. The rewritten law sets out that such a choice can be made at any time prior to lodgement of the first return after the determination is issued. The Commissioner can extend this time.
Section 387-195 Expenditure you cannot deduct
Modify the operation of the provision that ensures double deductions are not available for the same expenditure.
Under the 1936 Act, the horticultural plants write-off comes behind other deductions. This is achieved by excluding from the write-off expenditure deductible under another provision of that Act. By oversight, the 1936 Act also excludes expenditure that is specifically made deductible under another provision of the horticultural plants write-off. The rewrite corrects this error.
Section 387-205 Requirement to comply with notice
Delete the element of recklessness from an offence provision.
Under the 1936 Act, the transferee of a horticultural plant is entitled to serve a notice requiring the transferor to provide certain information about the plant. It is an offence to intentionally or recklessly refuse or fail to comply with such a notice. The rewrite omits the element of recklessness to bring the law into line with the current approach to penalty provisions taken by the Commonwealth.
C. Transitional arrangements
The purpose of the transitional provisions is to explain how taxpayers who write off capital expenditure on establishing horticultural plants under the 1936 Act can continue to write it off under the 1997 Act. The transitional provisions also preserve determinations made by the Commissioner under the 1936 Act.
The rewritten provisions apply to assessments for the 1998-99 or later income years.
| Transitional section | Purpose of the provision |
|---|---|
| 387-160 | Ensures that deductions for the balance of a taxpayers capital expenditure incurred under the 1936 Act are available under the 1997 Act. |
| Provides that the effective life of a horticultural plant set under the 1936 Act is its effective life under the 1997 Act. [Schedule 5 Part 2 item 2] | |
| 387-175 | Preserves the Commissioners determinations of effective life made under the 1936 Act. [Schedule 5 Part 2 item 2] |
| 387-190 | Ensures that capital expenditure on the establishment of a horticultural plant which is deductible under the 1936 Act is taken into account in determining the deduction allowable under the 1997 Act on destruction of that horticultural plant. [Schedule 5 Part 2 item 2] |
| 387-195 | Ensures that the rule preventing double deductions for capital expenditure on establishing horticultural plants does not deny deductions under the 1997 Act for the balance of the expenditure where an entity is entitled to claim a deduction under Division 10F of Part III of the 1936 Act. [Schedule 5 Part 2 item 2] |
| 387-205 | Ensures that the rewritten provision requiring the owner of a horticultural plant to provide information to its acquirer applies to changes in ownership occurring after 1 July 1998. [Schedule 5 Part 2 item 2] |
D. Consequential amendments
| Act | Provision Amended | Proposed Change |
|---|---|---|
| 1997 Act | 12-5 | Substitutes a reference to Subdivision 387-C for the existing reference to sections 124ZZD to 124ZZR in the entry for primary production. [Schedule 5 Part 2 item 3] |
| 20-30(1) | Inserts a reference in the table to Subdivision 387-C. [Schedule 5 Part 2 item 4] | |
| 40-30 | Substitutes a reference to Subdivision 387-C for the existing reference to Division 10F of Part III in the entry for Horticultural Plants. [Schedule 5 Part 2 item 5] | |
| 995-1 | Updates the definition of effective life to include a reference to subsection 387-185(1). [Schedule 10 item 59] | |
| 245-140(1) of Schedule 2C | Substitutes a reference to Subdivision 387-C for the existing references to sections 124ZZF and 124ZZG and subsection 124ZZM(2). [Schedule 5 Part 3 item 9] | |
| 1936 Act | 124ZZEA | Inserts a provision stating that no deduction is allowable in the 1998-99 or subsequent years. [Schedule 5 Part 3 item 6] |
| 124ZZO(6) | Inserts a reference to the fact that the section only applies to transfers occurring before 1 July 1998. [Schedule 5 Part 3 item 7] |
The consequential amendments apply to assessments for the 1998-99 and later income years. This ensures that the consequential amendments take effect at the same time as the rewritten provisions relating to capital expenditure on establishing horticultural plants.