Senate

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 3 - Depreciation of plant previously owned by an exempt entity

Overview

3.1 Schedule 3 to the Bill will insert a new Division 58 into the Income Tax Assessment Act 1997 (ITAA 1997) to change the way that depreciation is to be calculated on plant previously owned by an exempt entity when that plant enters the tax net. Consequential amendments will also be made to the ITAA 1997, the Income Tax Assessment Act 1936 (ITAA 1936) and to the Income Tax (Transitional Provisions) Act 1997 . These amendments will integrate the new measures into the income tax law.

3.2 The measures contained in new Division 58 were announced in the Treasurer's Press Release No. 84 dated 4 August 1997. This announcement was the subject of further clarification in the Treasurer's Press Release No. 2 dated 14 January 1998. Draft legislation and an accompanying explanatory statement were released on 10 February 1998, as announced by the Treasurer's Press Release No. 9 on that day.

3.3 New Division 58 sets out special rules that apply in calculating depreciation deductions and balancing adjustments in respect of plant previously owned or quasi-owned by an exempt entity if the plant:

•

continues to be owned or quasi-owned by that entity after the entity becomes taxable (entity sale); or

•

is acquired, or quasi-ownership of it is acquired, from that entity, in connection with the acquisition of a business, by a purchaser that is a taxable entity (asset sale).

Quasi-ownership under Subdivision 42-I extends the availability of depreciation deductions.

Background to the legislation

3.4 The term entity sale , for the purposes of new Subdivision 58-B , pertains to any transition entity with a transition time on or after 4August1997. The obvious example of such a transition is where a Government Business Enterprise (GBE) (either State or Commonwealth owned) ceases to be exempt when it is wholly or partially transferred to private beneficial ownership. Further examples of an entity transition would include:

•

the circumstance of a Commonwealth GBE becoming taxable as a result of Commonwealth transitional legislation as distinct from a change of ownership; and

•

an entity that is exempt pursuant to sections 50-1 and 50-45 of the ITAA 1997 as having been established for the promotion of sport, losing its exempt status by commencing to be carried on for other, non exempt purposes.

3.5 The long standing view of the Commissioner of Taxation (the Commissioner) is that when an entity changes from exempt to taxable status, its transitional plant is brought into the tax system for the purposes of the depreciation provisions, at its notional written down value (NWDV). The Commissioner has consistently administered section 61 of the ITAA 1936 on this basis and on the assumption that the transitional plant was always used by the entity wholly for the purposes of producing assessable income. The High Court decision in FCT v Anderson (1956)
11 ATD 115 provides strong support for this conceptual approach. This approach is also reflected in the provisions of Division 57 of the ITAA 1936, Division 42 of the ITAA 1997 and the proposed section 61A of the ITAA 1936 contained in Schedule 10 to the Taxation Laws Amendment Bill (No. 2) 1998.

3.6 Certain transition entities may have acquired transitional plant from a predecessor exempt Government entity or from a succession of such entities. In such circumstances, the unit's NWDV at the transition time is determined by applying a 'look back' concept in that the transition entity is assumed to have acquired the unit at the time and for the cost at which it was acquired or constructed by the first exempt Government entity. The transition entity is assumed to have been allowed notional depreciation on this assumed cost from the assumed acquisition date.

3.7 The term asset sale for the purposes of new Subdivision 58-C relates to a purchaser of plant from a tax exempt vendor (TEV) with an acquisition time on or after 4 August 1997 in connection with the acquisition of a business. By contrast with the entity sale (NWDV approach), section 42-65 of the ITAA 1997 provides for such plant to be brought into the tax system as follows:

•

for plant generally, the cost is its cost to the purchaser;

•

for plant the purchaser acquires with, or attached to, other assets without a specific value being allocated to it, the cost is so much of the overall cost as is reasonably attributable to the plant.

3.8 The following example demonstrates how, in the absence of the proposed measures, a taxpayer who acquires the depreciable assets of an exempt entity can generate starkly different taxation treatments based on the manner in which the acquisition is structured.

Example

A State Government department is responsible for distribution of an energy product to consumers throughout the State. On 1 July 1996, the net assets of the energy distribution business (comprising depreciable assets and non-depreciable assets including intangibles) are transferred by the State into a corporatised State GBE. The company is XYZ Ltd and its shares are held by the Minister responsible for the State Government department on behalf of the State.

For ease of explanation, assume the depreciable assets were all acquired by the Government department for a total sum of $1 billion. Also assume that at the transfer date the depreciable assets have a NWDV of $400 million. On 1 January 1998 the NWDV is $250 million. The corporatised entity, XYZ Ltd, is exempt under Division 1AB of the ITAA 1936.

Entity Sale

On 1 January 1998, ABC Pty Ltd (a private company which is a taxable entity) acquires the shares in XYZ Ltd for $2 billion. XYZ Ltd ceased to be exempt upon the transfer of its shares to private beneficial ownership. XYZ Ltd is now a transition entity whose opening value of depreciable plant is its NWDV of $250 million.

Asset Sale

The purchaser could, by arrangement with the vendor, choose not to acquire the shares in the exempt entity but instead acquire the net assets of the energy distribution business. The net assets, comprised of the depreciable assets and non-depreciable assets including intangibles, are acquired for a sum of $2.2 billion on 1 January 1998. As part of this arrangement, the vendor will license the new owner to conduct the energy distribution business as the original licence is statutorily allocated to XYZ Ltd.

The cost of the depreciable assets would not be based on the NWDV but on so much of the $2.2 billion as is reasonably attributable to the plant. The attribution would typically be based on the advice of a valuer engaged by the purchaser and the application of a valuation methodology which in the valuer's opinion was appropriate for the relevant assets.

For the purposes of the example, assume the valuation attributed to the depreciable assets is $900 million.

In any attribution process of this magnitude and complexity, there exists some potential or opportunity for shifting value from the non-depreciable assets including intangibles into the depreciable assets. This risk may be increased where the vendor is, from a taxation perspective, disinterested in the proportion of the total business price which is attributed to the cost or termination value of the depreciable assets as it is of no taxation consequence for the exempt vendor in terms of a balancing adjustment or capital gains tax.

3.9 The acquisition structures referred to in the example effectively reflect the same underlying economic transaction. The same business and depreciable assets have entered the tax net but with a $650 million differential in the opening values for depreciation.

3.10 The proposed measures ensure that where depreciable assets of an exempt entity enter the tax net and that transfer is in connection with the acquisition of a business, the purchaser should obtain the same opening value for depreciation purposes irrespective of whether the transition of the assets into the tax net occurs by way of entity sale or asset sale.

3.11 The proposed measures set out rules which provide consistency of treatment between entity sales and asset sales and provide a choice of opening values for each individual depreciable asset based on NWDV or pre-existing audited book value (PABV). This choice is provided to entity sales under new Subdivision 58-B and asset sales under new Subdivision 58-C .

3.12 New subsection 58-10(1) provides that if:

(a)

a balance sheet, as at the end of an annual accounting period (the balance date), that was prepared as part of an *exempt entity's final accounts for that period showed a unit of *plant (the unit) as an asset of the exempt entity and specified a value of the unit; and

(b)

a qualified independent auditor who was engaged, or was required by law, to undertake an audit of those accounts had prepared and signed, before 4 August 1997, a final audit report on those accounts; and

(c)

the report did not state that the auditor was not satisfied that the specified value fairly represented the value of the unit;

the unit is taken to have had a pre-existing audited book value at the balance date of an amount equal to the specified value.

3.13 The concept of PABV may be better understood by reference to the example in paragraph 3.8.

Assume that the balance sheet of XYZ Ltd. as at 30 June 1997, which was prepared as part of XYZ Ltd's final accounts for the year ended 30 June 1997, disclosed a total value for the depreciable assets of $650 million. A qualified independent auditor, who was required by law to undertake an audit of those accounts, prepared and signed on 28 July 1997, before 4August 1997 on which these measures were announced, a final audit report on those accounts without qualification.

In this circumstance, under both the entity sale and asset sale approach, the purchaser would have the choice of opening value for each individual asset based on NWDV or PABV. For ease of explanation, assume the purchaser wants to apply the same NWDV or PABV choice to all the depreciable assets, and that there have been no further acquisitions of depreciable plant in the period 1 July 1997 to 1 January 1998. On this basis, the purchaser would have the same choice of $250 million NWDV or $650 million PABV as the opening value of depreciable assets for taxation purposes under an entity sale or asset sale approach.

3.14 The adoption of PABV as an alternative to NWDV provides a balance between a vendor obtaining a fair price for the assets and the objectives of certainty, ease of administration and consistency of treatment of exempt entity assets that become depreciable for taxation purposes. PABV is considered to be an independent, verifiable valuation of depreciable assets, as it is based on values verified by independent audit before these measures were announced.

3.15 New Division 58 deals with the depreciation of plant previously owned or quasi-owned by an exempt entity. The proposed measures are not intended to be confined in their operation to depreciable plant under Division 42 of the ITAA 1997. Certain units of plant that would ordinarily constitute depreciable plant under Division 42 of the ITAA 1997 may instead qualify for amortisation under the transport capital expenditure provisions in Subdivision 330-H of the ITAA 1997. The deductions available under that Subdivision to a purchaser of such plant under an asset sale structure could be argued to be based on the purchase price and as a consequence undermine the policy intent of the proposed measures. Accordingly, the proposed measures include an amendment to Subdivision 330-H to provide that transport capital expenditure does not include expenditure on a unit of plant to which new Subdivision 58-B or 58-C applies.

3.16 The new measures provide a safeguard for circumstances where the unit is sold to any subsequent owner. This safeguard ensures that the first taxable owner will face deductible or assessable balancing adjustments on a sale to any subsequent owner in such circumstances which can exceed the opening value at which the unit initially entered the tax net under new Subdivision 58-B or 58-C . The assessable balancing adjustment can, in effect, recover both any depreciation deductions allowed to the first taxable owner and the difference between the opening value of the plant for depreciation purposes and its opening CTG cost base.

3.17 The safeguard is necessary as a means to protect the policy intent of the measures in circumstances of subsequent transfers of ownership. Otherwise the measures would be ineffective in prescribing an opening value that is uniform for asset and entity sales, as assets could be immediately on-sold to a purchaser whose opening depreciation value is not affected by the rule.

Date of effect

3.18 The amendments will apply where:

•

an entity becomes taxable on or after 4 August 1997; or

•

on or after 4 August 1997 a purchaser that is a taxable entity acquires ownership or quasi-ownership of depreciable plant from an exempt entity in connection with the acquisition of a business from the exempt entity.

Explanation of the amendments

Interpretation

3.19 New section 58-5 makes it clear that the new Division applies to plant which is quasi-owned. A quasi-owner of plant has the meaning given by sections 42-310 and 42-312 of the ITAA 1997. Those provisions relate to plant which is a fixture on land. Section 42-310 treats the holder of land, under certain rights granted by exempt government agencies as its owner, as the owner of such fixtures. Section 42-312 treats lessors as the owners of plant they lease which is a fixture on someone else's land, essentially as if the lessor of the plant would have been its owner had the plant continued to be a chattel. The new section 58-5 provides that the Division applies to plant of which an entity has been or is, or becomes a quasi-owner in the same way as it applies in relation to a unit of plant that has been or is owned by, or is acquired by an entity.

3.20 Therefore, all references in the Division to ownership, or assumed ownership, of a unit of plant include quasi-ownership of a unit of plant within the meaning of sections 42-310 and 42-312 of the ITAA 1997. For example, the reference in the new subsection 58-20(1) to every unit of plant that was owned by a transition entity at the transition time includes units of plant that the transition entity was a quasi-owner of at the transition time.

3.21 Similarly, all references to the acquisition, or assumed acquisition of a unit of plant include becoming a quasi-owner of a unit of plant as a result of the acquisition of a quasi-ownership right within the meaning of subsection 995-1(1) of the ITAA 1997. For example, the reference in the new paragraph 58-150(1)(a) to an entity that acquires a unit of plant from an exempt entity includes the entity becoming a quasi-owner of a unit of plant as a result of acquiring a quasi-ownership right from the exempt entity.

3.22 New section 58-10 contains the meaning of the term PABV .

3.23 In broad terms, the PABV of a unit of plant is a specified audited value given in respect of the unit in a balance sheet as at the end of an annual accounting period which was prepared as part of the final accounts of an exempt entity. Over a period of time it is reasonable to expect that a unit would have a range of PABVs.

3.24 The last day of the annual accounting period to which the balance sheet relates is termed the balance date . The unit of plant is termed the unit . [new paragraph 58-10(1)(a)]

3.25 A unit of plant is taken to have a PABV equal to its value specified in the balance sheet of an exempt entity as at the balance date where:

•

a qualified independent auditor prepared and signed a final audit report required by law on the exempt entity's final accounts before 4 August 1997; and

•

the report did not state that the auditor was not satisfied that the specified value fairly represented the value of the unit.

[new subsection 58-10(1)]

3.26 New subsection 58-10(2) allows a reasonable attribution of the value of the unit where the balance sheet only specifies a combined value for two or more units.

3.27 Under new subsection 58-10(3) , the latest possible time at which the unit is taken to have had a PABV is termed the test time .

Example:

A State Government Department owns a number of power stations. The annual accounts of the Department included an audited book value of the depreciable plant in those power stations. The audited book value would satisfy the conditions set out in new subsection 58-10(1) . In order to privatise the power stations, the Government Department transfers those power stations to 3 corporatised State Government GBEs. The GBEs are sold to the private sector one month later, before audited accounts are prepared. In this case, the privatised entity may adopt the latest PABV (providing it is before 4 August 1997) of the State Government Department.

Entity Sales: Subdivision 58-B

A. Overview

3.28 New Subdivision 58-B applies to entity sales. It gives the transition entity the choice, on an individual asset by asset basis, to calculate depreciation deductions and balancing adjustments by reference to:

(i)

the NWDV of the unit; or

(ii)

the undeducted PABV (if any) of the unit.

New sections 58-25 and 58-90 provide that Subdivision 57-I of the ITAA1936 (dealing with depreciation deductions) and Subdivision 57-K of that Act (in so far as it deals with depreciation balancing adjustments) do not apply in respect of the unit in relation to a transition entity.

B. Transition Entities

3.29 An entity sale occurs where an entity changes from exempt to taxable status on or after 4 August 1997. [New section 58-15] This will be the case whether the entity was a private or government owned entity. For example:

•

a privately owned entity that is exempt pursuant to sections 50-1 and 50-45 of the ITAA 1997 as having been established for the promotion of sport, might lose its exempt status if it starts to be carried on for other, non-exempt purposes;

•

a GBE (either State or Commonwealth owned) will cease to be exempt when it is wholly or partially transferred to private beneficial ownership.

3.30 An entity whose income becomes to any extent assessable is termed the transition entity . [New paragraph 58-15(c)] The time at which its income becomes to any extent assessable is the transition time . [New paragraph 58-15(d)] . The year of income in which the transition time occurs is called the transition year . [New paragraph 58-15(e)]

3.31 New subsection 58-20(1) provides that the transition entity must choose, for all units of plant owned or quasi-owned by it at the transition time, to calculate depreciation deductions and balancing adjustments by reference to either:

(i)

the NWDV of the unit; or

(ii)

the undeducted PABV (if any) of the unit.

3.32 This choice is made on an individual asset by asset basis. It must be made by the day on which the transition entity lodges its income tax return for the transition year, or within any further period allowed by the Commissioner. [New subsection 58-20(2)]

3.33 Once made, the choice applies to the transition year and all later income years. [New subsection 58-20(3)]

C. Depreciation calculated by reference to NWDV

3.34 New subsections 58-25 to 58-85 operate where the transition entity chooses to calculate depreciation deductions and balancing adjustments in respect of a particular unit of plant owned or quasi-owned by it at the transition time by reference to NWDV.

NWDV equals undeducted cost

3.35 New subsection 58-30(1) provides that the undeducted cost of the unit of plant used in calculating further depreciation is the NWDV of the unit. The undeducted cost limits the actual depreciation deductions allowable to the entity.

3.36 The NWDV of the unit of plant is defined in new section 58-80 as the:

Original cost to the transition entity (or assumed cost where the plant was previously owned or quasi-owned by an exempt Australian government agency (EAGA));

less the sum of :

notional depreciation for the period of ownership or assumed ownership prior to transition time;

actual depreciation deductions allowable to the transition entity after transition time; and

notional depreciation for any period after the transition time when the transition entity used the plant other than for the purpose of producing assessable income.

Original or Assumed cost of the unit of plant

3.37 New section 58-40 provides for two different cost rules: one for plant acquired by a transition entity from a predecessor EAGA and one for all other plant. The cost of the plant is determined in accordance with the ordinary rules of Subdivision 42-B, unless there is a predecessor EAGA, in which case the cost of the plant is its cost to the first such EAGA.

3.38 These costs apply in determining both notional depreciation in respect of the period prior to the transition time and actual depreciation in respect of the period after the transition time.

Cost where transitional plant is not acquired from a predecessor EAGA

3.39 New subsection 58-40(1) ensures that the cost of a unit of plant owned or quasi-owned by the transition entity at the transition time is determined under the ordinary depreciation provisions in Subdivision 42-B of the ITAA 1997. Generally this will mean original cost of the unit to the transition entity.

Cost where transitional plant is acquired from a predecessor EAGA

3.40 In some circumstances a transition entity (that was an EAGA immediately before the transition time) may have acquired transitional plant from a predecessor EAGA. For instance, an item may have been originally constructed or acquired by a Commonwealth Government department and later transferred to a corporatised Commonwealth GBE which is made taxable by Commonwealth legislation at the transition time. In such circumstances, new subsection 58-40(2) requires the transition entity to 'look back' to, and adopt the cost applicable to the first EAGA that owned, or quasi-owned, or constructed the plant.

Notional depreciation for the period prior to transition time

Notional depreciation amount

3.41 New section 58-55 ensures that the cost of transitional plant is notionally written down to reflect the fact that it has been used by the transition entity in the period before the transition time.

3.42 Depreciation for the period prior to the transition time is treated as having been allowed to the transition entity as though it had used the unit wholly for the purposes of producing assessable income. This notional depreciation applies from the date of ownership or assumed ownership of the unit until the transition time.

Date of acquisition

3.43 New section 58-35 determines the date of acquisition for the purposes of new section 58-55 .

3.44 The date will be either an assumed date or the actual date.

3.45 The period of assumed ownership is explained in new subsection 58-35(1) . It applies where the transition entity is an EAGA immediately before the transition time and acquired the unit from another EAGA (or through a chain of earlier predecessor EAGAs). The transition entity is taken to have owned or quasi-owned the unit from the date on which it was constructed or acquired by the first EAGA that owned, or quasi-owned, or constructed the unit.

3.46 The period of actual ownership is explained in new subsection 58-35(2) . It provides that where new subsection 58-35(1) does not apply, the date of acquisition is the date on which the transition entity acquired or constructed the unit of plant.

Effective life

3.47 New sections 58-45 and 58-50 provide for the calculation of effective life. Effective life is used to determine the rate of depreciation at which the transition entity notionally writes down the cost of the unit of plant.

3.48 New section 58-45 provides that the effective life is the period that would have been calculated to be its effective life at the time when it was acquired or constructed or assumed to have been acquired or constructed under new section 58-35 by the transition entity. The transition entity is assumed to have made any choice that had to be made under subsection 42-100(1) of the ITAA 1997, or any election that could have been made under subsection 54A(1) of the ITAA 1936 to adopt any determination by the Commissioner of the unit's effective life. [New section 58-50]

Method of depreciation

3.49 A transition entity can choose either the prime cost or diminishing value method of depreciation. The new section 58-60 ensures that the same method of depreciation is used for the purposes of both notional depreciation and actual depreciation.

Rate of depreciation

Loadings and accelerated rates

3.50 In determining the rate of depreciation for notional depreciation purposes in respect of a year of income, any applicable loadings under the former section 57AG and subsection 55(6) of the ITAA 1936 are taken into account [new paragraphs 58-65(a) and 58-65(b)] , but any applicable accelerated rates under the former section 57AL of the ITAA 1936 are disregarded. [New paragraph 58-65(c)]

Choice of rate

3.51 For plant acquired in the 1998 year of income or later years, subsection 42-120(1) of the ITAA 1997 allows you to choose a lower rate of depreciation than the applicable general prime cost rate or diminishing value rate.

3.52 New subsection 58-70 allows a transition entity to make this choice for notional depreciation purposes. However it limits the choice to a minimum rate equal to the pure effective life rate.

Example:

A unit of depreciable plant is acquired in the 1998 income year with an effective life of 10 years. The prime cost rate is 17% and the diminishing value rate is 23% under section 42-125 of the ITAA 1997. Without the operation of new section 58-70 , the transition entity could adopt any rate lower than those prescribed. However new section 58-70 will ensure that any lower rate of depreciation adopted must not be less than the pure effective life rate. The diminishing value rate chosen must not be less than 15%, and the prime cost rate chosen must not be less than 10%.

3.53 In respect of plant acquired prior to the 1998 year of income, the various forms of subsection 55(8) of the ITAA 1936 provide a taxpayer with similar choices to nominate or elect for lower depreciation rates. New subsection 58-75(1) allows the transition entity to make that nomination or election in respect of such plant for the purposes of calculating notional depreciation before the transition time.

3.54 The current subsection 55(8) of the ITAA 1936 allows a taxpayer to nominate a lower depreciation rate than the general rates providing that rate is equal to or greater than the pure effective life rate. Section 55(8A) of the ITAA 1936 ensures that the nomination, once made, applies to all later income years. New subsection 58-75(1) maintains a transition entity's ability to make this nomination if applicable.

3.55 Subsection 55(8) of the ITAA 1936, as in force immediately before the commencement of section 23 of the Taxation Laws Amendment Act 1993 , allowed a taxpayer to nominate a lower depreciation rate for a specified year of income, but did not provide for a minimum rate. New subsection 58-75(2) allows the transition entity to make that nomination providing the rate so nominated is not below the pure effective life rate. The rate nominated will apply to the income year in which it is made and all later income years.

3.56 Subsection 55(8) of the ITAA 1936, as originally enacted, allowed a taxpayer to elect to waive broadbanded rates for a particular year of income. Where this election was made, a pure effective life rate with 20% loadings under the then subsection 55(6) would apply. New subsection 58-75(3) maintains the transition entity's ability to make this election if applicable, but provides that the election, once made, applies for all later income years.

Actual depreciation deductions claimed by the transition entity after transition time

3.57 Actual depreciation deductions and balancing adjustments under this regime are affected by the amended definition of undeducted cost in new section 58-30 . [See new subsection 58-85(1)] .

3.58 New section 58-85 contains the rules applicable for the purposes of calculating actual depreciation deductions. The rules applicable for the purposes of working out notional depreciation before the transition time also apply for the purposes of working out actual depreciation. [New subsection 58-85(2)] Actual depreciation deductions will be calculated using the same depreciation rate as was used for the purposes of the latest calculation of notional depreciation. [New subsection 58-85(3)] .

3.59 Otherwise, the rules contained in Division 42 (except for the pooling provisions in Subdivision 42-L of the ITAA 1997 and sections 62AAB to 62AAV of the ITAA 1936 [new subsection 58-85(4)] ) will have application for the purposes of working out actual depreciation deductions. However, balancing adjustment deductions under section 42-195 will not be apportioned by reference to the period for which the asset was used or held ready before the transition time. [New subsection 58-85(5)]

Balancing Adjustment Assessable Amounts

3.60 Where the unit is subject to a balancing adjustment event, the ordinary calculation of assessable balancing adjustments is modified. New subsection 58-85(7) operates where the old CTG law applies to the balancing adjustment event. New subsection 58-85(8) operates where the new CTG law applies to the balancing adjustment event.

3.61 In calculating balancing adjustment assessable amounts, the cost of the unit for the purposes of determining its written down value under section 42-200 of the ITAA 1997 will be the NWDV at the transition time plus the amount of any subsequent capital improvements. [New subsection 58-85(6)] . The assessable balancing adjustment under section 42-190 of the ITAA 1997 will be any excess of the termination value of the plant over its written down value, up to the excess of the higher of the CTG cost base (with some modifications) of the plant or its cost under new subsection 58-85(6) over its written down value. [New subsections 58-85(7) and (8)] . Together, these provisions ensure that, in effect, assessable balancing adjustments can recover both any depreciation since the transition time and the difference between the plant's opening value for depreciation purposes and its opening CTG cost base.

3.62 For the purposes of these calculations, the CTG cost base of the plant is modified to exclude any amounts of expenditure incurred after the transition time that are included in its CTG cost base but not in its cost for depreciation purposes (for example, the transition entity's incidental costs of disposal of the plant). Where the new CTG law applies, the CTG cost base is further modified to exclude any indexation of its elements.

Example where transition entity chooses to calculate by reference to NWDV

3.63 On 1 July 1989, a Commonwealth Government department acquires a unit of plant at a cost of $100,000. If the Commissioner had made an estimate of the unit's effective life at 1 July 1989, he would have estimated it to be 25 years. On 1 July 1994 the unit is transferred to a corporatised Commonwealth GBE. The Commonwealth disposes of all the shares in the GBE to the private sector on 1 July 1998. The GBE uses the unit wholly for the purposes of producing assessable income in the 1999 year of income. The GBE disposes of the unit on 30 June 1999 to an unrelated party for consideration of $40,000.

3.64 The GBE is a transition entity. [New section 58-15] The GBE is assumed to have acquired the unit on 1 July 1989 [new paragraph 58-35(1)(a)] at an assumed cost of $100,000 [new subsection 58-40(2)] . It is assumed to have been allowed notional depreciation for the period 1July 1989 to 30 June 1998. [New section 58-55] The GBE selects the prime cost method of depreciation for actual depreciation and elects under the former subsection 55(8) to waive broadbanding for notional depreciation purposes. For notional depreciation purposes, the rate of depreciation is:

(a)

4.8% in income years 1990 and 1991 (base rate of 4% + s57AG loadings of 20% of base rate) [new paragraph 58-65(a)] using prime cost method [new section 58-60] and based on an effective life estimate of 25 years [new section 58-45] ;

(b)

4.8% in income years 1992 to 1998 inclusive (election under s55(8) to waive broadbanding rates (of 6% = 5% + 20% loading), applicable to all years [new subsection 58-75(3)] , giving base rate of 4% + s55(6) loadings of 20% of base rate [new paragraph 58-65(b)] );

applied to the assumed cost of $100,000.

The same rate of depreciation that applied in the last year of notional depreciation (1998) is also used by the GBE for actual depreciation purposes for the 1999 year. [New subsection 58-85(3)] The method of depreciation used for notional depreciation purposes will be the method selected for actual depreciation. [New section 58-60]

On disposal of the unit by the GBE, the undeducted cost for the purposes of Subdivision 42-F will be the NWDV. [New sections 58-30 and 58-80] The balancing adjustment deduction is not required to be reduced to reflect the 9 years of non-assessable use in the period the unit was assumed to have been owned by the GBE prior to transition time. [New subsection 58-85(5)]

D. Depreciation calculated by reference to Undeducted PABV

3.65 New subsections 58-90 to 58-145 operate where the transition entity chooses to calculate depreciation deductions and balancing adjustments in respect of a particular unit of plant owned or quasi-owned by it at the transition time by reference to undeducted PABV.

Cost of unit for purposes of calculating actual depreciation

3.66 New section 58-95 provides that the cost of the unit of plant for actual depreciation purposes is taken to be the undeducted PABV.

3.67 The undeducted PABV is defined in new section 58-140 . It will be either:

(i)

where the PABV date is less than one year before the transition time, the actual PABV of the unit plus any capital expenditure incurred in respect of improving the unit after the PABV date but before the transition time; or

(ii)

where the PABV date is one year or more before the transition time, the actual PABV of the unit plus any capital expenditure incurred in respect of improving the unit after the PABV date but before transition time, less notional depreciation. [New sections 58-140 and 58-105]

PABV notional depreciation

3.68 New section 58-120 ensures that the PABV of the transitional plant is notionally written down from the PABV date until the transition time if appropriate. Depreciation for that period is treated as having been allowed to the transition entity as though it had used the unit wholly for the purposes of producing assessable income (PABV notional depreciation).

Date of acquisition for purposes of calculating PABV notional depreciation

3.69 New section 58-100 determines the date of acquisition for the purposes of calculating PABV notional depreciation.

3.70 The date will be either an assumed date or the actual date.

3.71 The assumed acquisition date is explained in new subsection 58-100(1) . It applies where the transition entity is an EAGA immediately before the transition time and acquired the unit from another EAGA (or through a chain of earlier predecessor EAGAs). The transition entity is taken to have owned or quasi-owned the unit from the date on which it was constructed or acquired by the first EAGA that owned, or quasi-owned, or constructed the unit.

3.72 The actual acquisition date is explained in new subsection 58-100(2) . It provides that where new subsection 58-100(1) does not apply, the acquisition date is the date on which the transition entity acquired or constructed the unit of plant.

Cost for purposes of calculating PABV notional depreciation

3.73 New section 58-105 provides that the cost for the purposes of calculating notional depreciation of the PABV will be the sum of:

(i)

the latest PABV for the unit of plant; and

(ii)

any capital expenditure incurred in respect of improving the unit after the PABV date but before the transition time.

Effective life for purposes of calculating PABV notional depreciation

3.74 New sections 58-110 and 58-115 provide for the calculation of effective life. Effective life is used to determine the rate of depreciation for the purposes of calculating PABV notional depreciation of a particular unit of plant.

3.75 New section 58-110 provides that the effective life is the period that would have been calculated to be its effective life at the transition entity's actual or assumed acquisition date under new section 58-100 . The transition entity is assumed to have made any election that could have been available under subsection 54A(1) of the ITAA 1936 to adopt any determination by the Commissioner of the unit's effective life. [New section 58-115]

Method of depreciation for purposes of calculating PABV notional depreciation

3.76 A transition entity can choose either the prime cost or diminishing value method of depreciation. The new section 58-125 ensures that the same method of depreciation is used for the purposes of both PABV notional depreciation and actual depreciation.

Rate of depreciation for purposes of calculating PABV notional depreciation

Loadings and accelerated rates

3.77 In determining the rate of depreciation for PABV notional depreciation in respect of a year of income, any applicable loadings under the former section 57AG and subsection 55(6) of the ITAA 1936 are taken into account [new paragraphs 58-130(a) and 58-130(b)] but any applicable accelerated rates under the former section 57AL of the ITAA 1936 are disregarded. [New paragraph 58-130(c)]

Choice of rate

3.78 The various forms of subsection 55(8) of the ITAA 1936 provide a taxpayer with choices to nominate or elect for lower depreciation rates. New subsection 58-135(1) allows the transition entity to make that nomination or election in respect of such plant for the purposes of calculating the PABV notional depreciation.

3.79 The current subsection 55(8) of the ITAA 1936 allows a taxpayer to nominate a lower depreciation rate than the general rates providing that rate is equal to or greater than the pure effective life rate. Section 55(8A) of the ITAA 1936 ensures that the nomination, once made, applies to all later income years. New subsection 58-135(1) maintains a transition entity's ability to make this nomination if applicable.

3.80 Subsection 55(8) of the ITAA 1936, as in force immediately before the commencement of section 23 of the Taxation Laws Amendment Act 1993, allowed the taxpayer to nominate a lower depreciation rate for a specified year of income, but did not provide for a minimum rate. New subsection 58-135(2) allows the transition entity to make that nomination providing the rate so nominated is not below the pure effective life rate. The rate nominated will apply to the income year in which it is made and all later income years.

3.81 Subsection 55(8) of the ITAA 1936, as originally enacted, allowed a taxpayer to elect to waive broadbanded rates for a particular year of income. Where this election was made, a pure effective life rate with 20% loadings under the then subsection 55(6) would apply. New subsection 58-135(3) maintains the transition entity's ability to make this election if applicable, but provides that the election, once made, applies for all later income years.

Actual depreciation deductions claimed by the transition entity after transition time

3.82 Actual depreciation deductions and balancing adjustments under this regime are calculated by reference to the amended definition of cost in new section 58-95 [see new subsection 58-145(1)] .

3.83 The ownership and effective life rules applicable for the purposes of working out PABV notional depreciation will have the same application for the purposes of working out actual depreciation [new subsection 58-145(2)] . This will be the case irrespective of whether the PABV is notionally written down or not. That is, the ownership and effective life rules in new sections 58-100, 58-110 and 58-115 will apply for actual depreciation purposes even where the PABV used is less than 12 months old.

3.84 The rate used for actual depreciation will depend on whether the PABV is notionally written down or not:

(i)

if the PABV is notionally written down (12 months or older) the rate used in the last income year of PABV notional depreciation applies for the purposes of actual depreciation [new subsection 58-145(6)] ; or

(ii)

if the PABV is not notionally written down (less than 12 months old) the rate used for actual depreciation will be determined by reference to the depreciation regime that was in force at the time when the unit was acquired or assumed to have been acquired by the transition entity.

3.85 In calculating a balancing adjustment deduction, new subsection 58-145(4) provides that the transition entity will not have to reduce any deduction to take account of the use of the unit in any period prior to transition time.

3.84 New subsection 58-145(5) modifies the meaning of undeducted cost for the purposes of determining the total amount of actual depreciation that can be claimed and for calculating any balancing adjustment deduction. It provides that undeducted cost is the undeducted PABV less the sum of:

(a)

actual depreciation deductions allowable to the transition entity after the transition time; and

(b)

notional depreciation for any period after the transition time when the transition entity used the plant other than for the purpose of producing assessable income.

3.86 Otherwise, the rules contained in Division 42 (except for the pooling provisions in Subdivision 42-L of the ITAA 1997 [new subsection 58-145(3)] ) will have application for the purposes of working out actual depreciation deductions.

Balancing adjustment assessable amounts

Where the unit is subject to a balancing adjustment event, the ordinary calculation of assessable balancing adjustments is modified. New subsection 58-145(7) operates where the old CTG law applies to the balancing adjustment event. New subsection 58-145(8) operates where the new CTG law applies to the balancing adjustment event.

In such cases, assessable balancing adjustments under section 42-190 of the ITAA 1997 will recover any excess of the termination value of the plant over its written down value, up to the excess of the higher of the CTG cost base (with some modifications) of the plant or its cost for Division 42 purposes over its written down value. [New subsections 58-145(7) and (8)] . These provisions ensure that, in effect, assessable balancing adjustments can recover both any depreciation since the transition time and the difference between the plant's opening value for depreciation purposes and its opening CTG cost base.

For the purposes of these calculations, the CTG cost base of the plant is modified to exclude any amounts of expenditure incurred after the transition time that are included in its CTG cost base but not in its cost for depreciation purposes (for example the transition entity's incidental costs of disposal of the plant). Where the new CTG law applies, the CTG cost base is further modified to exclude any indexation of its elements.

Example where transition entity chooses to calculate by reference to PABV

On 1 July 1993, a corporatised Commonwealth GBE acquires a unit of plant at a cost of $100,000. The Commissioner has in Taxation Ruling IT 2685 specified the unit's effective life to be 25 years. The Commonwealth disposes of all the shares in the GBE to the private sector on 1 July 1998. The GBE uses the unit wholly for the purposes of producing assessable income in the 1999 and 2000 income years. The GBE disposes of the unit on 30 June 2000 to an unrelated party for consideration of $50,000. The unit has a PABV of $90,000 at the test time, which is 30 June 1996.

The GBE is a transition entity [new section 58-15] and chooses to calculate depreciation and balancing adjustments by reference to the undeducted PABV of the unit [new paragraph 58-20(1)(b)] .

Since the transition time (1 July 1998) is more than one year after the test time (30 June 1996), the PABV of the unit must be notionally depreciated to arrive at the undeducted PABV. [New paragraph 58-140(b)] For the purposes of PABV notional depreciation, the GBE is taken to have acquired the unit on 1 July 1993 [new subsection 58-100(2)] at an assumed cost of $90,000. [New section 58-105] It is assumed to have been allowed PABV notional depreciation for the period 1 July 1996 to 30June 1998. [New section 58-120] The GBE selects the prime cost method of depreciation for actual depreciation which also applies for PABV notional depreciation. [New section 58-125] The GBE is assumed to have elected to adopt the effective life of 25 years specified by the Commissioner. [New section 58-115] The GBE can nominate, under s55(8) of the ITAA 1936, a rate of depreciation for PABV notional depreciation that is less than the general rates (13% prime cost), but not lower than the pure effective life rate (which would be 4%). [New subsection 58-135(1)] The GBE nominates the rate of depreciation of 10%.

For the purposes of actual depreciation, the cost of the unit to the GBE is taken to be its undeducted PABV. [New section 58-95] The same rate of depreciation that applied in the last year of notional depreciation (1998) is also used for actual depreciation purposes for the 1999 and 2000 income years. [New subsection 58-145(6)]

On disposal of the unit by the GBE, the undeducted cost for the purposes of Subdivision 42-F will be the undeducted PABV less actual depreciation allowable in the 1999 and 2000 income years. [New subsection 58-145(5)] The balancing adjustment deduction is not required to be reduced to reflect the 5 years of non-assessable use by the GBE in the period before the transition time. [New subsection 42-145(4)]

Asset Sales: Subdivision 58-C

A. Overview

3.87 New Subdivision 58-C applies to asset sales. It gives the purchaser who acquires ownership or quasi-ownership of plant from an exempt entity the choice, on an individual asset by asset basis, to calculate depreciation deductions and balancing adjustments by reference to:

(i)

the NWDV of the unit; or

(ii)

the undeducted PABV (if any) of the unit.

B. Purchase of unit of plant from tax exempt vendor in connection with acquisition of business

3.88 New subsection 58-150(1) provides a test to work out if new Subdivision 58-C applies to a unit of plant.

3.89 New subsection 58-150(1) applies if at a particular time on or after 4 August 1997 a taxable entity acquires ownership or quasi-ownership of a unit of plant from an exempt entity and the acquisition is connected with the acquisition of a business from the exempt entity [new paragraphs 58-150(1)(a) and (b)] .

3.90 The taxable entity which acquired ownership or quasi-ownership of the unit of plant from an exempt entity is termed the purchaser [new paragraph 58-150(f)] . The exempt entity is the TEV and the time of acquisition of the unit of plant by the purchaser is the acquisition time . [New paragraphs 58-150(1)(c) and (d)]

3.91 Under new paragraph 58-150(1)(e) , the year of income in which the acquisition time occurs is termed the acquisition year .

Meaning of acquisition of unit in connection with the acquisition of a business

3.92 New subsection 58-150(2) outlines a range of circumstances in which the acquisition of ownership or quasi-ownership of a unit of plant from an exempt entity is taken to be acquired in connection with the acquisition of a business from an exempt entity for the purposes of new paragraph 58-150(1)(b) .

3.93 New paragraph 58-150(2)(a) covers situations where the unit was used by the exempt entity in the course of carrying on a business and the unit is then used by the purchaser or other person in the business acquired from the exempt entity.

Example

A private company purchases a printing business operated by an exempt government agency. The sale included the acquisition of units of plant such as printing presses. The company uses the printing presses in carrying on the printing business. The units would be taken to be acquired in connection with the acquisition of a business.

3.94 New paragraph 58-150(2)(b) covers situations where the exempt entity does not carry on a business but performs functions in a business like way and the purchaser or another person continues to perform those functions in a carrying on a business.

Example

A hospital owned and operated by an exempt Government body is sold to a privately owned company. The sale includes units of plant. The company then operates the hospital as a business using the units of plant. Units of plant acquired by the company would be taken to be acquired in connection with the acquisition of a business.

3.95 New paragraph 58-150(2)(c) applies in situations where the acquisition of the unit by the purchaser is connected with the acquisition of another asset by the purchaser or another person, in the nature of a collateral advantage. Such an advantage or right would normally come within the definition of asset under Part IIIA of the ITAA 1936.

3.96 For new paragraph 58-150(2)(c) to apply, the other asset must also give the purchaser or other person rights or impose an obligation to perform functions or engage in activities as part of carrying on a business or confer a commercial advantage or opportunity in connection with performing functions or engaging in activities as part of carrying on a business [new subparagraph 58-150(2)(c)(ii)] .

3.97 Under new subparagraph 58-150(2)(c)(iii) it is also necessary that the unit be used by the purchaser or other person in performing particular functions or business activities flowing from the ownership of the other asset.

Example

An exempt State Government body operates a bus service in an inner city area. It sells off 100 buses surplus to its requirements to a taxable purchaser on terms including that the purchaser will be issued with a licence by that State Government to exclusively operate a bus service in a defined outer suburban area. The State Government issues the exclusive licence to the purchaser.

In terms of new paragraph 58-150(2)(c) , the purchase of the plant (buses) is connected with the acquisition of another asset, being an exclusive licence to run a particular bus service. That other asset enables the purchaser to engage in activities as part of carrying on a business.

The particular units of plant (buses) are used by the purchaser in carrying out those business activities. The units of plant would be taken to be acquired in connection with the acquisition of a business.

3.98 New paragraph 58-150(2)(d) would apply in circumstances where there is no direct connection between the acquisition of a unit and the obtaining of an immediate collateral advantage or other 'CTG asset' but there is an arrangement under which the purchaser or other person will obtain another unit of plant or other 'CTG asset' in such a way that the acquisition of the other asset falls within new paragraph 58-150(2)(a), (b) or (c) .

Example

Under an arrangement between an exempt entity and a purchaser, the assets (including plant) of a business conducted by the exempt entity are sold to a purchaser by way of separate sale agreements staggered over a 4year period. At the end of the 4 year period, the purchaser has effectively acquired the whole of the business previously carried on by the exempt entity.

Choice by Purchaser

3.99 New subsection 58-155(1) provides that the purchaser must choose, for all units of plant, to calculate depreciation deductions and balancing adjustments by reference to either:

(i)

the NWDV of the unit in relation to the TEV; or

(ii)

the undeducted PABV of the unit (if any) in relation to the TEV.

3.100 This choice is made on an individual asset by asset basis. It must be made by the day on which the purchaser lodges its income tax return for the year of acquisition of the unit or within any further period allowed by the Commissioner [new subsection 58-155(2)] . Once made, the choice applies to the acquisition year and all later income years. [New subsection 58-155(3)]

C. Depreciation calculated by reference to NWDV

3.101 New subsections 58-160 to 58-215 operate where the purchaser chooses to calculate depreciation deductions and balancing adjustments in respect of a particular unit of plant by reference to the NWDV of the unit in relation to the TEV. The main effect of these provisions is to limit the total actual depreciation deductions that a purchaser can deduct after the acquisition time in respect of the unit by modifying the cost of the unit to the purchaser for the purposes of Division 42 of the ITAA 1997.

Cost of unit to purchaser

3.102 New subsection 58-160(1) provides that the cost of the unit of plant to the purchaser for actual depreciation purposes is the sum of :

(i)

the NWDV of the unit in relation to the TEV at the acquisition time; and

(ii)

any incidental costs of the purchaser in acquiring the unit.

3.103 The elements of the NWDV in relation to the TEV are contained in new sections 58-165 to 58-205 . [New subsection 58-160(2)]

Calculation of the NWDV of the TEV at acquisition time

NWDV of TEV Defined

3.104 New section 58-210 defines the NWDV in relation to the TEV to mean:

(i)

the cost or assumed cost of the unit to the TEV under new section 58-170 ;

less

(ii)

notional depreciation deductions assumed to have been allowed to the TEV under new section 58-185 .

Cost or assumed cost of the unit to the TEV

3.105 New section 58-170 applies two different cost rules, one for plant acquired from a predecessor EAGA and one for all other plant.

3.106 These cost rules apply in determining the notional depreciation assumed to have been allowed to the TEV in the period prior to acquisition time.

Cost where plant is not acquired from a predecessor EAGA

3.107 New subsection 58-170(1) ensures that the cost of a unit of plant acquired by the TEV is determined under the ordinary depreciation provisions in Subdivision 42-B of the ITAA 1997. Generally this will mean the cost is the original cost of the unit to the TEV.

Cost where plant is acquired by TEV (which is an EAGA) from a predecessor EAGA

3.110 In some circumstances a TEV (that was an EAGA immediately before the acquisition time) may have acquired plant from a predecessor EAGA. For instance, an item may have been originally constructed by a Commonwealth Government department and later transferred to another Commonwealth Government agency . In such circumstances, new subsection 58-170(2) requires the TEV to 'look back' to, and adopt the cost applicable to the first EAGA that owned, or quasi-owned, or constructed the plant.

Notional Depreciation of the TEV

3.111 New section 58-185 ensures that the plant is notionally written down to reflect the fact that it has been used by the TEV in the period before the acquisition date. Notional depreciation is assumed to have been allowed to the TEV on the assumption that the unit was used wholly for the purposes of producing assessable income by the TEV from the date of the unit's ownership or assumed ownership by the TEV until the acquisition time.

Actual or assumed date of ownership of unit of plant for TEV

3.112 New section 58-165 determines the ownership period for the purposes of new section 58-185 .

3.113 The ownership period will be either the assumed ownership period or the actual ownership period.

3.114 The period of assumed ownership is explained in new subsection 58-165(1). It applies where the TEV is an EAGA immediately before the acquisition time and acquired the unit from another EAGA (or earlier predecessor EAGA). The TEV is taken to have owned or quasi owned the unit from the date on which it was constructed or acquired by the first EAGA.

3.115 The period of actual ownership is explained in new subsection 58-165(2). It provides that where new subsection 58-165(1) does not apply the date of ownership is the date on which the TEV acquired or constructed the unit of plant.

Effective life

3.116 New sections 58-175 and 58-180 set out the rules for determining effective life. Effective life is used to calculate the depreciation rate at which the TEV notionally writes down the cost of the unit.

3.117 New section 58-175 provides that the effective life is the period that would have been calculated at the time when it was acquired or assumed to have been acquired under new section 58-165 by the TEV. In making this notional estimate, the TEV is assumed to have made any choice that had to be made under subsection 42-100(1) of the ITAA 1997, or any election that could have been made under subsection 54A(1) of the ITAA 1936 to adopt any determination by the Commissioner of the unit's effective life [new section 58-180] .

Method of Depreciation

3.118 In calculating notional depreciation of the TEV, either the prime cost or diminishing value method of depreciation may be used. The purchaser must select the method of depreciation to be used [new section 58-190] .

Rate of depreciation

Loadings and accelerated rates

3.119 In determining the rate of depreciation for notional depreciation purposes for a year of income, any applicable loadings under the former section 57AG and subsection 55(6) of the ITAA 1936 are taken into account [new paragraphs 58-195(a) and (b)] ,but any applicable accelerated rates under the former section 57AL of the ITAA 1936 are disregarded [new paragraph 58-195(c)] .

Choice of rate

3.120 In determining the rate of depreciation for notional depreciation calculations, special rules apply where the TEV could have made a choice or an election at a particular time before the acquisition time for a lower rate to apply.

3.121 If the TEV could have made a choice under subsection 42-120(1) of the ITAA 1997 (for plant acquired in the 1998 year of income or later year) for a lower rate of depreciation before the acquisition time, the purchaser may make the choice and where the choice is made it is taken to have been made by the TEV [new subsection 58-200(1)]. However, the rate of depreciation chosen must not be less than the pure effective life rate under new section 58-200 .

Example

An asset acquired by the TEV in the 1998 year of income has an effective life of 10 years. The prime cost rate is 17% and the diminishing value rate is 23% under section 42-125. Without the operation of new section 58-200 , the TEV could adopt any rate lower that those prescribed. However new section 58-200 will ensure that any lower rate of depreciation adopted must not be less than the pure effective life rate. The diminishing value rate chosen by the purchaser for the TEV must not be less than 15%, and the prime cost rate must not be less than 10%.

3.122 In respect of plant acquired before the 1998 year of income, the various forms of subsection 55(8) of the ITAA 1936 provide a taxpayer with similar choices to nominate or elect for lower depreciation rates. New subsection 58-205(1) allows the purchaser to make that nomination or election on behalf of the TEV in respect of plant acquired from the TEV for the purposes of calculating notional depreciation to the TEV before the acquisition time.

3.123 If the purchaser makes the nomination or election under subsection 55(8) of the ITAA 1936, it is taken to have been made by the TEV [new subsection 58-205(1)] .

3.124 The current subsection 55(8) of the ITAA 1936 allows a taxpayer to nominate a lower depreciation rate than the general rates providing that rate is equal to or greater than the pure effective life rate. Section 55(8A) of the ITAA 1936 ensures that the nomination, once made, applies to all later income years. New subsection 58-205(1) allows the purchaser to make this nomination under subsection 55(8) if applicable.

3.125 If the purchaser makes a nomination under subsection 55(8) of the ITAA 1936 (as in force immediately before the commencement of section 23 of the Taxation Laws Amendment Act 1993 ) for a lower depreciation rate to apply for a specified year of income, then the nomination applies for the income in which it is taken to have been made and all later income years in the period to the acquisition time. However, any rate of depreciation nominated by the purchaser, must not be less that the appropriate depreciation rate based purely on the assumed effective life of the unit under new section 58-175 [new subsection 58-205(2)] .

3.126 If the purchaser makes an election under subsection 55(8) of the ITAA 1936 as originally enacted, for broadbanded rates of depreciation to be waived for the particular year of income (viz. normal deprecation rates based on pure effective life with 20 % loadings under the then subsection 55(6) apply), then the election applies for the income year in which it is taken to have been made and for all later income years in the period to the acquisition time [new subsection 58-205(3)] .

Actual depreciation deductions claimed by the purchaser after the acquisition time

3.127 Actual depreciation deductions and balancing adjustments under this regime are calculated by reference to the amended definition of cost in new section 58-160 [see new subsection 58-215] .

3.128 Otherwise, the rules contained in Division 42 of the ITAA 1997 will have application for the purposes of working out actual depreciation deductions.

Balancing adjustment assessable amounts

Where the unit is subject to a balancing adjustment event, the ordinary calculation of assessable balancing adjustments is modified. New subsection 58-215(2) operates where the old CTG law applies to the balancing adjustment event. New subsection 58-215(3) operates where the new CTG law applies to the balancing adjustment event.

In such cases, assessable balancing adjustments under section 42-190 of the ITAA 1997 will recapture the excess of the termination value of the plant over its written down value, up to the excess of the higher of the CTG cost base (with some modifications) of the plant to the purchaser or its cost for Division 42 purposes over its written down value [new subsections 58-215(2) and (3)] . These provisions ensure that, in effect, assessable balancing adjustments can recover both any depreciation since the acquisition time and the difference between the plant's opening value for depreciation purposes and its opening CTG cost base.

3.131 For the purposes of these calculations, the CTG cost base of the plant is modified to exclude any amounts of expenditure incurred after the acquisition time that are included in its CTG cost base but not in its cost for depreciation purposes (for example, the purchaser's incidental costs of disposal of the plant). Where the new CTG law applies, the CTG cost base is further modified to exclude any indexation of its elements.

Example where purchaser chooses to calculate by reference to NWDV

On 1 July 1998, a Commonwealth Government Department acquires a unit of plant at a cost of $100,000. The Commissioner has, in Taxation Ruling IT 2685, specified the unit's effective life to be 25 years. On 1July2001, a private company acquires the unit from the Government Department in connection with the acquisition of a business from the Government Department for consideration of $85,000. The private company uses the unit wholly for the purposes of producing assessable income in the 2002 and 2003 income years. It disposes of the unit on 30June 2003 to an unrelated party for consideration of $70,000.

The Government department is the TEV [new paragraph 58-150(1)(c)] . The private company is the purchaser [new paragraph 58-150(1)(f)] and chooses to calculate depreciation and balancing adjustments by reference to the NWDV of the unit [new paragraph 58-155(1)(a)] . The cost of the unit to the private company for actual depreciation purposes will be the NWDV of the unit in relation to the Government Department [new section 58-160] .

For the purposes of working out the NWDV of the unit, the Government department is taken to have acquired the unit on 1 July 1998 [new subsection 58-165(2)] at cost of $100,000 [new subsection 58-170(1)] . It is assumed to have been allowed notional depreciation for the period 1July 1998 to 30 June 2001 [new section 58-185] . The private company selects the prime cost method of depreciation for the Government to use for notional depreciation [new subsection 58-190(1)] . It is assumed to have chosen the effective life of 25 years specified by the Commissioner [paragraph 58-180(a)] . The private company chooses for the Government Department to use a lower rate of depreciation under subsection 42-120(1). [New subsection 58-200(1)] It chooses a prime cost rate of 4%, the minimum rate permitted by new subsection 58-200(3) .

For the purposes of actual depreciation, Division 42 applies, subject to new section 58-160 which provides that the cost of the unit to the private company is taken to the NWDV of the unit in relation to the Government Department [new section 58-215] . The company assesses the effective life of the plant to be 28 years [Subdivision 42-C], chooses the diminishing value method of depreciation [subsection 42-25(3)], and uses the general diminishing value rate of 20% based on that effective life [Subdivision42-D].

On disposal of the unit by the private company, the assessable balancing adjustment will be the termination value ($70,000) less the written down value ($56,320) of the unit [paragraph 42-190(2)(b)].

D. Depreciation calculated by reference to undeducted PABV

3.132 New subsections 58-220 to 58-270 operate where the purchaser chooses to calculate depreciation deductions and balancing adjustments in respect of a particular unit of plant by reference to the undeducted PABV in relation to the TEV. The main effect of these provisions is to limit the total actual depreciation deductions that a purchaser can deduct after the acquisition time of the unit by modifying the cost of the unit to the purchaser for the purposes of the application of Division 42 of the ITAA 1997.

Cost of unit for purposes of calculating actual depreciation

3.133 New section 58-220 provides that the cost of the unit of plant to the purchaser for depreciation purposes is taken to be the sum of:

(i)

the undeducted PABV in relation to the TEV; and

(ii)

any incidental costs of the purchaser in acquiring the unit.

3.134 The undeducted PABV in relation to the TEV is defined in new section 58-265 . It will be either:

(i)

where the PABV date is less than one year before the acquisition time the actual PABV of the unit plus any capital expenditure incurred in respect of improving the unit after the PABV date but before the acquisition time; or

(ii)

where the PABV date is one year or more before the acquisition time the actual PABV of the unit plus any capital expenditure incurred in respect of improving the unit after the PABV date but before the acquisition time, less notional depreciation [new sections 58-265 and 58-230] .

PABV notional depreciation of the TEV

3.135 New section 58-245 ensures that the PABV of the unit is notionally written down from the PABV date until the acquisition time, where appropriate. Depreciation for that period is treated as having been allowed to the TEV as though it had used the unit wholly for the purposes of producing assessable income (PABV notional depreciation of the TEV).

Date of ownership for purposes of calculating the PABV notional depreciation of the TEV

3.136 New section 58-225 determines the date of acquisition by the TEV for the purposes of calculating PABV notional depreciation of the TEV.

3.137 The date will be either an assumed date or the actual date.

3.138 The assumed acquisition date is explained in new subsection 58-225(1) . It applies where the TEV is an EAGA immediately before the acquisition time and acquired the unit from another EAGA (or through a chain of earlier predecessor EAGAs). The TEV is taken to have owned or quasi-owned the unit from the date on which it was constructed or acquired by the first EAGA that owned, or quasi-owned, or constructed the unit.

3.139 The actual acquisition date is explained in new subsection 58-225(2) . It provides that where new subsection 58-225(1) does not apply, the date of ownership is the date on which the TEV acquired or constructed the unit of plant.

Cost to TEV for purposes of calculating PABV notional depreciation of the TEV

3.140 New section 58-230 provides that the assumed cost of the unit to the TEV for the purposes of calculating PABV notional depreciation of the TEV will be the sum of:

(i)

the latest PABV for the unit of plant; and

(ii)

any capital expenditure incurred in respect of improving the unit after the PABV date but before the acquisition time.

Effective life for purposes of calculating PABV notional depreciation of the TEV

3.141 New sections 58-235 and 58-240 set out the rules for determining effective life. Effective life is used to determine the rate at which the TEV notionally writes down the PABV (or assumed cost) of the unit of plant.

3.142 New section 58-235 provides that the effective life is the period that would have been calculated to be its effective life at the time when it was acquired or assumed to have been acquired under new section 58-225 by the TEV. In making this notional estimate, the TEV is assumed to have made any election that would have been available under subsection 54A(1) of the ITAA 1936 to adopt any determination by the Commissioner of the unit's effective life [new section 58-240] .

Method of depreciation for purposes of calculating PABV notional depreciation of the TEV

3.143 In calculating PABV notional depreciation of the TEV, either the prime cost or diminishing value method of depreciation may be used. The purchaser must select the method of depreciation to be used. [New section 58-250]

Rate of depreciation for purposes of calculating PABV notional depreciation of the TEV

Loadings and accelerated rates

3.144 In determining the depreciation rate for PABV notional depreciation of the TEV in respect of a year of income, any applicable loadings under the former section 57AG and subsection 55(6) of the ITAA1936 are taken into account [new paragraphs 58-255(a) and (b)] but any applicable accelerated rates under the former section 57AL of the ITAA 1936 are disregarded [new paragraph 58-255(c)] .

Choice of rate

3.145 The various forms of subsection 55(8) of the ITAA 1936 provide a taxpayer with choices to nominate or elect for lower depreciation rates than the rates prevailing at that time. New subsection 58-260(1) allows the purchaser to make that nomination or election on behalf of the TEV in respect of plant acquired from the TEV for the purposes of calculating PABV notional depreciation of the TEV.

3.146 The current subsection 55(8) of the ITAA 1936 allows a taxpayer to nominate a lower depreciation rate than the general rates providing that rate is equal to or greater than the pure effective life rate. Section 55(8A) of the ITAA 1936 ensures that the nomination, once made, applies to all later income years. New subsection 58-260(1) maintains this ability to make this nomination if applicable.

3.147 Subsection 55(8) of the ITAA 1936, as in force immediately before the commencement of section 23 of the Taxation Laws Amendment Act 1993, allowed a taxpayer to nominate a lower depreciation rate for a specified year of income, but did not provide for a minimum rate. New subsection 58-260(2) allows the purchaser to make that nomination providing the rate so nominated is not below the pure effective life rate. The rate nominated will apply to the TEV for the income year in which it is made and all later income years up until the acquisition time.

3.148 Subsection 55(8) of the ITAA 1936, originally enacted, allowed a taxpayer to elect to waive broadbanded rates for a particular year of income. Where this election was made, a pure effective life rate with 20% loadings under the then subsection 55(6) would apply. New subsection 58-260(3) allows the purchaser to make that election if applicable, but provides that the election, once made, applies to the TEV for all later income years up until the acquisition time.

Actual depreciation deductions claimed by the purchaser after acquisition time

3.149 Actual depreciation deductions and balancing adjustments under this regime are calculated by reference to the amended definition of cost in new section 58-220 .(See new subsection 58-270(1) ).

3.150 Otherwise, the rules contained in Division 42 of the ITAA 1997 will have application for the purposes of working out actual depreciation deductions.

Balancing adjustment assessable amounts

Where the unit is subject to a balancing adjustment event, the ordinary calculation of assessable balancing adjustments is modified. New subsection 58-270(2) operates where the old CTG law applies to the balancing adjustment event. New subsection 58-270(3) operates where the new CTG law applies to the balancing adjustment event.

In such cases, assessable balancing adjustments under section 42-190 of the ITAA 1997 will recover the excess of the termination value over the written down value, up to the excess of the higher of the CTG cost base (with some modifications) of the plant to the purchaser or its cost for Division 42 purposes over its written down value [new subsections 58-270(2) and (3)] . These provisions ensure that, in effect, assessable balancing adjustments can recover both any depreciation since the acquisition time and the difference between the plant's opening value for depreciation purposes and its opening CTG cost base.

For the purposes of these calculations, the CTG cost base of the plant is modified to exclude any amounts of expenditure incurred after the acquisition time that are included in its CTG cost base but not in its cost for depreciation purposes (for example, the purchaser's incidental costs of disposal of the plant). Where the new CTG law applies, the CTG cost base is further modified to exclude any indexation of its elements.

Examples where purchaser chooses to calculate by reference to PABV

Example 1:

On 1 July 1989, a Commonwealth Government department acquires a unit of plant at a cost of $100,000. If the Commissioner of Taxation had made an estimate of the unit's effective life at 1 July 1989, he would have estimated it to be 30 years. On 1 July 1994 the unit is transferred to a corporatised Commonwealth GBE for consideration of $92,000. On 1July 1998, a private company acquires the unit from the GBE in connection with the acquisition of a business from the GBE for consideration of $85,000. The private company uses the unit wholly for the purposes of producing assessable income in the 1999 and 2000 income years. It disposes of the unit on 30 June 2000 to an unrelated party for consideration of $84,000. The unit has a PABV of $90,000 at the test time, which is 30 June 1996.

The GBE is the TEV [new paragraph 58-150(1)(c)] . The private company is the purchaser [new paragraph 58-150(1)(f)] and chooses to calculate depreciation and balancing adjustments by reference to the undeducted PABV of the unit [new paragraph 58-155(1)(b)] .

Since the acquisition time (1 July 1998) is more than one year after the test time (30 June 1996), the PABV of the unit must be notionally depreciated to arrive at the undeducted PABV in relation to the TEV [new paragraph 58-265(b)] . For the purposes of PABV notional depreciation of the TEV, the GBE is assumed to have acquired the unit on 1 July 1989 [new paragraph 58-225(1)(a)] at an assumed cost of $90, 000 [new section 58-230] . It is assumed to have been allowed PABV notional depreciation for the period 1 July 1996 to 30 June 1998 [new section 58-245]. The GBE is assumed to have elected to adopt the Commissioner's determination of effective life under subsection 54A(1) of the ITAA 1936 [new section 58-240] . The private company selects the prime cost method of depreciation for the GBE to use for PABV notional depreciation [new section 58-250] . The private company elects that the GBE will, under section 55(8) of the ITAA 1936 waive the broadbanded rate of depreciation (6% = prime cost rate of 5% + 20% loading) for PABV notional depreciation. Therefore, the GBE adopts the prime cost rate of 4% (pure effective life rate of 3.33% under s55(1) plus 20% loading under s55(6)). [New paragraph 58-255(b) and subsection 58-260(3)]

For the purposes of actual depreciation, Division 42 of the ITAA 1997 applies, subject to new section 58-220 which provides that the cost of the unit to the private company is taken to be its undeducted PABV in relation to the TEV [new section 58-270] . The company assesses the effective life of the plant to be 28 years [Subdivision 42-C], chooses the diminishing value method of depreciation [subsection 42-25(3)], and uses the general diminishing value rate of 20% based on that effective life [Subdivision 42D].

On disposal of the unit by the private company, the assessable balancing adjustment will be the termination value ($84,000) less the written down value ($52,992) of the unit [paragraph 42-190(2)(b)].

Example 2:

On 1 July 1998 a private company (Company X) acquires a unit of plant from an exempt GBE in connection with the acquisition of a business for consideration of $140,000. At that time the unit has an undeducted PABV of $100,000.

Company X uses the unit wholly for the purposes of producing assessable income in the 1999 and 2000 income years. On 1 July 1999 Company X makes capital improvements to the unit costing $50,000. It disposes of the unit on 30 June 2000 to an unrelated party for consideration of $200,000, and incurs incidental disposal costs of $2,000.

Assume Company X chooses a prime cost depreciation rate of 10% to apply to the unit. Assume also that indexation of the elements of the CTG cost base for the unit amounts to $3,000.

Company X chooses to calculate depreciation deductions and balancing adjustments by reference to the undeducted PABV of the unit [new paragraph 58-155(1)(b)] .

Calculation of depreciation deductions allowable

Calculation of Balancing Adjustment

Modifications to Division 42

3.154 Part 1 of the Schedule makes amendments to Division 42 (which relates to depreciation of plant) of the ITAA 1997 which are necessary to complement the changes made by new Division 58 .

3.155 Item 1 amends section 42-65 to add new Item 15 to the cost table. The amendment ensures that the cost for plant to which new Division 58 applies is calculated under new section 58-40 , 58-95 , 58-160 or 58-220 .

3.156 Item 2 repeals existing paragraph 42-175(d) and substitutes new paragraphs 42-175(d) and (e) and new subsection 42-175(2) .

3.157 New paragraph 42-175(d) applies to units of plant acquired from a transition entity to which new Subdivision 58-B applies in circumstances where Common Rule 1 applies to the acquisition.

3.158 In such circumstances, new paragraph 42-175(d) provides that the amounts to be deducted from the cost of the unit in ascertaining the undeducted cost of plant for the transferee include:

•

the amounts deducted under new paragraphs 58-80(a),(b) and (c) in calculating the NWDV for the transition entity; or

•

the amounts deducted under new paragraphs 58-145(5)(a) and (b) in calculating the undeducted cost for the transition entity

as is appropriate.

3.159 New paragraph 42-175(e) operates in a similar manner to former paragraph 42-175(d) in that it imputes to the transferee the various components deducted in ascertaining the undeducted cost of the unit for the transferor and earlier successive transferors. The new paragraph 42-175(e) includes amounts under the new paragraph 42-175(d) as one of these components.

3.160 New subsection 42-175(2) provides that section 42-175 has effect subject to new Subdivision 58-B for plant that comes within that Subdivision.

3.161 Item 3 inserts new subsections 42-190(4) and (5) . The new subsection 42-190(4) provides that subsection 42-190(2) has effect subject to new subsections 58-85(7) & (8), 58-145(7) & (8), 58-215(2) & (3) and 58-270(2) & (3) - the safeguard provisions which modify the rules for calculating balancing adjustment assessable amounts.

3.162 New subsection 42-190(5) applies where plant to which Division 58 applies is disposed of by a transition entity or purchaser from a TEV in circumstances where Common rule 1 applies to the acquisition by the transferee, or each acquisition by successive transferees. The new subsection 42-190(5) ensures that the special rules for calculating assessable balancing adjustment amounts provided for by new subsections 58-85(7) & (8), 58-145(7) & (8), 58-215(2) & (3) and 58-270(2) & (3) will apply to such transferees in the same way as they would have applied to the transition entity or purchaser from the TEV, as the case may be.

3.163 Item 4 inserts new subsection 42-195(4) .

3.164 New subsection 42-195(4) ensures that subsection 42-195(3) has effect subject to the new subsections 58-85(5) and 58-145(4) in reducing the balancing adjustment deduction allowable to a transition entity.

3.165 Item 5 inserts new subsections 42-200(2) and 42-200(3) .

3.166 New subsection 42-200(2) provides that subsection 42-200(1) has effect subject to new subsection 58-85(6) in calculating the written down value of plant for the purpose of determining whether and what balancing adjustment is to be included in a transition entity's assessable income.

3.167 New subsection 42-200(3) applies where plant to which the new section 58-85 applies is disposed of by a transition entity in circumstances where Common rule 1 applies to the acquisition by the transferee, or each acquisition by successive transferees. The new subsection 42-200(3) ensures that the special rule for determining the written down value of the plant provided for by the new subsection 58-85(6) will apply to such transferees. Under this special rule, the cost of the unit for the purposes of determining its written down value is taken to be its NWDV at the transition time in relation to the transition entity plus the amount of any subsequent capital improvements.

Other matters

A. Amendments to Subdivision 110-B

Items 8 to 11 clarify aspects of the operation of the rules about reduced cost base of a CTG asset contained in Subdivision 110-B in circumstances where new Division 58 applies to the asset.

Item 8 substitutes new paragraph 110-55(3)(a) for the existing paragraph 110-55(3)(a). New subparagraph 110-55(3)(a)(ii) applies in circumstances where an amount is included in assessable income as a result of the operation of the special rules for calculating assessable balancing adjustments provided for by the new subsections 58-85(7) & (8), 58-145(7) & (8), 58-215(2) & (3) and 58-270(2) & (3). New subparagraph 110-55(3)(a)(ii) makes it clear that, in these circumstances, the reduced cost base of the CTG asset includes only that part of the assessable balancing adjustment that is attributable to depreciation deductions that have been allowed in respect of the asset after the transition time or the acquisition time, as the case may be.

Item 10 provides similar clarification in respect of amounts included in the reduced cost base of an entity's interest in a CTG asset of a partnership under section 110-60.

Item 9 inserts references to new paragraphs 58-80(c) and 58-145(5)(b) into existing subsection 110-55(5). This makes it clear that the reduced cost base of a CTG asset does not include amounts of notional depreciation on account of any use of the asset after the transition time which is not wholly for the purposes of producing assessable income.

Item 11 provides similar clarification in respect of amounts not included in the reduced cost base of an entity's interest in a CTG asset of a partnership under section 110-60.

B. Modifications to Subdivision 330-H

3.173 Item 12 inserts new subsections 330-375(4) and (5) .

3.174 New subsections 330-375(4) and (5) alter the meaning of transport capital expenditure for the purposes of Subdivision 330-H. New subsection 330-375(4) excludes any expenditure on a unit of plant to which new Subdivision 58-B or 58-C applies. New subsection 330-375(5) also excludes any expenditure by an entity who has acquired such plant from a transition entity or a purchaser from a TEV in circumstances where Common rule 1 applies to the acquisition by the transferee, or each acquisition by successive transferees. The new subsections 330-375(4) and (5) ensure that, in respect of expenditure on such plant, entities to which Division 58 applies and any later successive Common rule 1 transferees are to claim deductions under the depreciation provisions of Division 42 rather than under the capital allowance provisions of Subdivision 330-H.

C. Dictionary

3.175 Items 13 to 24 of Part 1 of the Schedule incorporate changes arising from the new Division 58 to existing definitions and also includes new definitions in the Dictionary at subsection 995-1(1).

D. Income Tax (Transitional) Provisions Act 1997

3.176 Part 2 of the Schedule inserts a note at the end of existing section 42-175 of the Income Tax (Transitional Provisions) Act 1997 to the effect that those provisions are replaced by other provisions in relation to a transition entity in respect of plant owned or quasi-owned by it.

E. Amendments to Division 3 of Part IIIA of the ITAA 1936

Items 26 to 31 of the Schedule clarify aspects of the operation of the CTG anti-overlap provisions and reduced cost base provisions contained in sections 160ZA and 160ZK of the ITAA 1936 in circumstances where new Division 58 applies to an asset.

Item 26 makes it clear that the full amount of any assessable balancing adjustment included in assessable income as a result of the operation of the special calculation rules provided for by the new subsections 58-85(7) & (8), 58-145(7) & (8), 58-215(2) & (3) and 58-270(2) & (3) is excluded from the CTG relief provided for by subsection 160ZA(4). Such assessable balancing adjustments will not be 'included amounts' for the purposes of paragraph 160ZA(4)(b).

Item 27 provides similar clarification in respect of amounts excluded from the CTG relief provided for by subsection 160ZA(5) in respect of the disposal of an interest in a partnership asset.

Items 28 and 29 add references to new paragraphs 58-80(c) and 58-145(5)(b) into existing paragraph 160ZK(1)(a). This makes it clear that the reduced cost base of a CTG asset does not include amounts of notional depreciation on account of any use of the asset after the transition time which is not wholly for the purposes of producing assessable income.

Items 30 and 31 provide similar clarification in respect of amounts not included in the reduced cost base of a taxpayer's interest in a CTG asset of a partnership under subsection 160ZK(3).

F. Amendment to Division 57 of the ITAA 1936

3.182 Item 32 of the Schedule inserts new Subdivision 57-N of the ITAA 1936 which ensure that existing Subdivision 57-I, and existing Subdivision 57-K in so far as it relates to depreciation balancing adjustments, do not apply to plant covered by new Subdivision 58-B .

Application

3.183 The amendments will apply where:

•

an entity first becomes taxable on or after 4 August 1997; or

•

on or after 4 August 1997 a purchaser that is a taxable entity acquires ownership or quasi-ownership of depreciable plant from an exempt entity in connection with the acquisition of a business from the exempt entity.

Regulation Impact Statement

Policy objectives

The objective is to align the depreciation treatment of exempt entity asset sales with the treatment of sales of shares in the entity in a way that will provide the best balance of certainty, ease of administration and consistency of treatment of exempt entity assets that become depreciable with taxation purposes while ensuring that vendors of exempt entities or their assets realise a fair price on privatisation.

A measure to address this objective was announced by the Treasurer in Press Release No. 84 of 4 August 1997. Further clarification of the measure was made in Treasurer's Press Release No. 2 of 14 January 1998. The Bill was exposed to the public in Treasurer's Press Release No.9 of 10 February 1998.

The measure represents a new treatment giving a common depreciation base for assets following both exempt entity asset sales and sales of shares in exempt entities owning the assets.

Identification of implementation options

Background

In December 1996 the ITAA 1936 was amended to clarify, inter alia , the treatment of depreciable assets of businesses operating through tax exempt entities that entered the Commonwealth tax net after the sale of shares in the entities. The legislation provided that depreciation claims are to be based on the notional written down value (NWDV) of the assets. The provisions did not apply where the business assets of the entities were sold (asset sale) rather than the shares in the entities themselves (entity sale).

Subsequent to that legislation being announced the asset sale technique has been used. This resulted in depreciation claims being based on the purchase consideration attributable to the depreciable assets, rather than the NWDV of the assets. These circumstances provided scope for parties to the Sales to Structure arrangements to gain taxation advantages at a cost to Commonwealth revenue.

Implementation options

Option 1 is to allow the depreciation deductions available for assets following either sale of the exempt owner, or sale of the assets themselves, to a taxpayer to be based on a choice between the NWDV of the plant at the time it enters the tax net and its undeducted pre-existing audited book value at that time. This option would include a safeguard measure designed to ensure that, where such plant is on-sold to a subsequent owner, balancing adjustments are included in the assessable income of the first purchaser of the asset should the first purchaser on-sell the asset for more than its WDV. This will ensure that any increase in depreciation available to the subsequent purchaser, which increases the price the subsequent purchaser is prepared to pay, is off set by an amount taxable to the first purchaser. This prevents on-sales being used to circumvent the measure and preserve its integrity. Subsequent transactions in respect of the asset would be accorded the same treatment as transactions relating to any other asset sales between or by taxpayers (ie. depreciation is available on the basis of purchase price).

An alternative implementation option for achieving the policy objective would be to limit the depreciation deductions that can be claimed by all purchasers (the first and all subsequent purchasers) of the asset to the opening NWDV given to the first purchaser. However this option was not considered acceptable as it would have meant a different taxation treatment would have applied to an asset that was once owned by an exempt entity compared with the taxation treatment that would apply to an identical asset had it always been owned by private taxpayers.

Assessment of impacts (costs and benefits) of implementation option

Impact group identification

The group affected by these measures are purchasers of assets (eg. power stations) formerly owned by tax exempts such as State governments where that purchase is associated with the acquisition of a business; and purchasers of exempt entities. The measures also have implications for Commonwealth revenues.

Assessment of costs

Administration cost to Government

The Australian Taxation Office (ATO) has the responsibility of administering this legislation. It has already allocated resources to deal with privatisation issues and it is not expected that there will be additional staff required as a result of these measures.

Compliance costs to business

The ATO is routinely approached by taxpayers undertaking a transition from exempt to taxable status and by prospective purchasers of assets owned by exempt entities. To date there have been no approaches by small business taxpayers so it is assumed that the impact on small business will be negligible. There may be a minimal increase in compliance costs for affected entities. Some entities will have already undertaken share transactions and will be familiar with the methods being introduced. Others will need to familiarise themselves with the method.

Assessment of benefits

Failure to implement this measure would pose a significant threat to the revenue due to larger potential depreciation deductions available to purchasers of exempt entity assets. Implementation of this measure will ensure a near identical tax treatment is given to exempt entity asset sales and sales of those entities via the sale of shares in the entity owning the asset.

Consultation

The ATO has undertaken extensive consultation with State Governments. It is largely their assets and entities that will be affected by this measure.

Conclusion

The proposed implementation measure achieves the government's policy objective and involves minimal additional compliance costs for those affected. The ATO and Treasury will monitor this legislation to evaluate its effectiveness.