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 7 - Environment protection
Overview
This chapter covers the rules for deducting expenditure incurred on environmental impact assessment and environmental protection. These rules are in Division 400 of Part 3-45 of the 1997 Act.
Part A of this chapter summarises these rules.
Part B explains 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 rewriting the 1936 Act.
A. Summary of the new law
Division 400: Environmental impact assessment and environmental protection
Deducting expenditure on environmental impact assessment [Subdivision 400-A]
Division 400 contains two capital allowances for most expenditure (whether capital or otherwise) incurred on:
- •
- determining the impact of an income earning project on the environment [Subdivision 400-A]; or
- •
- preventing or treating waste or pollution of the environment as a result of an income earning project [Subdivision 400-B].
Division 400 also provides that property used for environmental impact assessment or environmental protection activities is taken to be used to produce assessable income for the purposes of either the 1936 Act or the 1997 Act. This may result in expenditure on that property being deductible under other provisions of those Acts rather than Division 400. [section 400-1]
Expenditure can be deducted in an income year to the extent to which it is incurred for the sole or dominant purpose of evaluating the impact, or likely impact, on the environment of a project that is carried out for the purpose of producing assessable income. Expenditure on activities to investigate the impact of the project and activities to record or report on the project's impact is deductible.
[subsection 400-15(1)]
Amount and timing of deduction
Where:
- •
- the project is estimated to last 10 years or more; or
- •
- it cannot reasonably be estimated when the project will end,
the amount deducted is one-tenth of the expenditure in the year in which it is incurred and one-tenth in each of the following nine income years. [items 1 and 2 of the table in subsection 400-15(3)]
The deduction period may be less than 10 years. [items 3, 4 and 5 of the table in subsection 400-15(3)]
The project's life is estimated at the end of the income year in which the expenditure is incurred. That estimate has regard to the period over which the project is expected to earn assessable income for any person. [table in subsection 400-15(3)]
Deductions are not taken under this provision if the expenditure attracts a deduction elsewhere under either the 1936 or 1997 Act. [paragraph 400-20(1)(a)]
The cost of plant is excluded from the deduction. [paragraph 400-20(1)(b)]
Common rule 2 (Non-arm's length transactions) of Division 41 (Common rules for capital allowances) applies with modifications. [subsections 400-20(2) and (3)]
If a provision of either the 1997 Act or the 1936 Act limits the operation of the main deduction provision, it also limits the deduction allowable under this Subdivision. [subsection 400-20(4)]
Deducting expenditure on environmental protection activities
[Subdivision 400-B]
Expenditure is immediately deductible to the extent to which it is incurred for the sole or dominant purpose of carrying on environmental protection activities. [section 400-55]
What are environmental protection activities?
Environmental protection activities are activities to:
- •
- prevent, fight or remedy pollution of the environment; or
- •
- treat, clean up, remove or store waste.
The pollution or waste must:
- •
- result, or be likely to result, from your earning activity ; or
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- be on or from the site of your earning activity ; or
- •
- be on or from a site where an entity carried on a business that you acquired and carry on substantially unchanged as your earning activity .
[subsection 400-60(1)]
What is your earning activity?
Your earning activity is one that will, or is proposed to, produce assessable income. It includes an investment activity; but not an activity to produce a capital gain. [subsection 400-60(2)]
Certain expenditure not deductible
Expenditure is not deductible under this Subdivision if it is on:
- •
- acquiring land; or
- •
- constructing, extending, altering or improving a building, structure or structural improvement which is of a capital nature; or
- •
- a bond or security for the performance of environmental protection activities.
[paragraphs 400-65(1)(a), (c), (d) and (e)]
The Subdivision otherwise contains the same kinds of limits as Subdivision 400-A. [balance of section 400-65]
Property taken to be used for producing assessable income
[Subdivision 400-C]
B. Discussion of changes
Division 400 Environmental impact assessment and environmental protection
Division 400 sets out the conditions under which a deduction is allowable for expenditure on environmental impact assessment and environmental protection.
The word environment is not defined in Division 400.
The definitions of environment in sections 82BA and 82BJ of the 1936 Act do not clarify or extend the ordinary meaning of the word. Consequently, in restating the old law, the word has not been defined.
Section 400-15 Deducting expenditure on environmental impact assessment of your project
This section explains when expenditure on environmental impact assessment can be deducted.
This section replaces the 1936 Act definitions of allowable environmental impact expenditure, eligible environmental impact activities and income-producing project by combining their effect.
This section replaces sections 82BC and 82BD and the definition of income-producing project in section 82BA of the 1936 Act by merging them. The new section does not restate paragraphs (a), (b) and (c) of the definition of eligible environmental impact activity in section 82BD, because it is arguable that they could apply the deduction more narrowly than is intended.
To be deductible, expenditure must still be incurred on activities which are for the sole or dominant purpose of evaluating the impact or likely impact on the environment of an income earning project. Expenditure on activities to measure the economic feasibility of a project is not deductible.
For example, suppose the Hardwood Milling Company carries out an environmental impact study of proposed native forest logging as required by a local authority. It details the impact of its operations on the forest and sets out the economic benefits of its project, including an estimate of the jobs to be created. Expenditure on these activities would be deductible. But if the expenditure also related to activities Hardwood carried out to determine the economic feasibility of the project, say measuring the likely profit and the period for which profitable operations can be sustained, the expenditure would have to be apportioned.
Section 400-60 Meaning of environmental protection activities
This section defines the key concept environmental protection activities .
Subdivision 400-B does not restate the definition of site in the 1936 Act.
Section 82BJ of the 1936 Act defined site to include part of a site. The definition of site is unnecessary in Subdivision 400-B because the key concept environmental protection activities refers to pollution of or from a site of an income earning activity.
C. Transitional arrangements
Part 1 of Schedule 7 of this Bill contains the amendments to the Income Tax (Transitional Provisions) Act 1997 (the Transitional Provisions Act) to provide the transitional provisions required to give effect to the rewritten sections.
These transitional measures will be located in Division 400 in Part3-45 of the Transitional Provisions Act. New Division 400 sets out how and when the rewritten sections apply.
| Provision | About | Outcome |
|---|---|---|
| 400-10(1) | Application of Subdivision 400-A | Subdivision 400-A applies to assessments for the 1998-99 and later income years, ie. it applies to:
|
| 400-10(2) | Applying Subdivision 400-A to expenditure incurred before 1998-99 | When claiming a deduction under Subdivision 400-A for expenditure incurred prior to the 1998-99 income year, use the amount of expenditure deductible under section82BB of the 1936 Act. |
| The note to subsection 400-10(2) points out that the deduction cannot be claimed for expenditure that was recouped before the 1997-98 income year. A recoupment in the 1997-98, or a later, income year will be included in assessable income under Subdivision 20-A of the 1997 Act. [Schedule 7 Part 1 item 1] | ||
| 400-20(1) | Effect of last deduction rule | Deductions allowed under section 82BB of the 1936 Act are disregarded in applying paragraph 400-20(1)(a). [Schedule 7 Part 1 item 1] |
| 400-20(2) | Deductions under the 1936 Act saved | Subdivision 400-A of the 1997 Act does not affect a deduction under section 82BB of the 1936 Act for the 1997-98 income year or an earlier income year. [Schedule 7 Part 1 item 1] |
| 400-50 | Application of Subdivision 400-B | Subdivision 400-B applies to expenditure incurred in the 1998-99, and later, income years. [Schedule 7 Part 1 item 1] |
| 400-100 | Application of Subdivision 400-C | Subdivision 400-C applies to the use of property in the 1998-99, and later, income years. [Schedule 7 Part 1 item 1] |
E. Consequential amendments
Amendments of the Income Tax Assessment Act 1997
Part 2 of Schedule 7 of this Bill contains amendments to the 1997 Act to insert references to Division 400 in provisions that refer to the equivalent provisions of the 1936 Act. Updated references
| Provision | Changes |
|---|---|
| Section 12-5 (List of provisions about deductions) | Substitute the table item headed environment to update the entry for environmental impact assessment in Subdivision 400-A and environmental protection activities in Subdivision 400-B. [Schedule 7, Part 2: item2] |
| Section 20-30 (Tables of deductions for which recoupments are assessable) | Add the deductions allowable for expenditure on environmental impact assessment and environmental protection activities to table 1 (the table of deductions for which recoupments are assessable). [Schedule 7, Part 2: item 3] |
| Section 40-30 (Table of capital allowances) | Substitute the table items headed environmental impact studies and environment protection activities with references to environmental impact assessment and environmental protection activities respectively. The new entries will refer to Subdivisions400-A and 400-B. [Schedule 7, Part 2: item 4] |
| Section 41-5 (Summary and finding table of common rules for capital allowances) | Insert in the table entries for environmental impact assessment and environmental protection activities. [Schedule 7, Part 2: item 5] |
| Section 42-55 (Signposting to other parts of the Act) | Repeal subsections 42-55(1) and (2) which are redundant. The notes to the definition of purpose of producing assessable income now restate the effect of those subsections. [Schedule 7, Part 2: items 6 and 7] |
| Paragraph 43-20(5)(a) (Environmental protection activity earthworks) and the note to subsection 43-20(5) | Substitute the reference in paragraph 43-20(5)(a) to earthworks constructed as a result of carrying out eligible environment protection activity within the meaning of section 82BM with a reference to the equivalent rewritten provision. A similar amendment is made to the note in subsection 43-20(5). [Schedule 7, Part 2: items8 and 9] |
| Section 43-50 (Links and signposts to other parts of the Act) | Repeal subsections 43-50(4) and (5) which are redundant. The notes to the definition of purpose of producing assessable income now restate the effect of those subsections. [Schedule 7, Part 2: items 10 and 11] |
The consequential amendments to the 1997 Act apply to assessments for the 1998-99 and later income years. [clause 4 of the Bill] This ensures they take effect at the same time as Division 400.
Amendments of the Income Tax Assessment Act 1936
Amendments to the 1936 Act:
- •
- close off provisions rewritten in Division 400, so that they apply only to the 1997-98 and earlier income years; and
- •
- substitute references to Division 400 for references to corresponding provisions of the 1936 Act.
Closing off the application of the existing provisions
Provisions inserted into the 1936 Act close off its application of provisions rewritten in Division 400 so that they only apply to the 1997-98 and earlier income years. [Schedule 7, Part 3: items 12-17] This complements the transitional provisions which ensure that the rewritten provisions apply to the 1998-99 and later income years.
Inserting references to rewritten provisions
References in the 1936 Act to provisions rewritten in Division 400 are replaced by references to the new provisions. [Schedule 7, Part 3: items 18 and 19]
The consequential amendments to the 1936 Act apply to assessments for the 1998-99 and later income years. [clause 4 of the Bill] This ensures they take effect at the same time as Division 400.