Senate

Explanatory Memorandum

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

General outline and financial impact

Full balancing adjustments on disposal of plant

This Bill amends the ITAA 1997 to:

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remove plant and equipment from the CGT regime; and

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include in assessable income the excess of disposal proceeds over the cost base of the plant or equipment, indexed to 30September 1999.

Date of effect: The amendments apply to balancing adjustment events (such as the disposal of plant or equipment) occurring after 11.45 am AEST on 21 September 1999.

Proposal announced: The proposal was announced in Treasurer's Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment B to that Press Release).

Financial impact: The financial impact of this measure is part of the estimate for the balancing adjustment offset measures included in this Bill, but is not separately identifiable.

Compliance cost impact: This measure will reduce compliance costs, as it will reduce the need for calculations and record keeping.

Balancing adjustment offsetting

This Bill amends the ITAA 1997 to:

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remove the balancing charge offset for disposals of plant, other than for small business taxpayers; and

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provide for a balancing charge offset for involuntary disposals of plant to replace the current CGT roll-over relief for such disposals.

Date of effect: The amendments apply to balancing adjustment events (such as the disposal of plant or equipment) occurring after 11.45 am AEST on 21 September 1999.

Proposal announced: The proposal was announced in Treasurer's Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment B to that Press Release).

Financial impact: The financial impact of this measure is set out in the table below:

Compliance cost impact: This measure will reduce compliance costs, as it will reduce the need for calculations.

Small business taxpayers

This Bill amends the ITAA 1997 to provide a test to determine who is a small business taxpayer for the purposes of working out eligibility to accelerated depreciation, balancing adjustment offsets and immediate deductions for particular advance business expenditure.

Date of effect: The amendments apply to the income year in which 21September 1999 occurs and later income years.

Proposal announced: The proposal was announced in Treasurer's Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment I to that Press Release).

Financial impact: This measure does not have any financial impact by itself. However, to the extent that it provides an exemption for small business taxpayers from certain measures, the revenue impact is affected. The affected measures are:

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Balancing adjustment offsetting in this Bill;

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Accelerated depreciation in this Bill;

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Deducting prepayments in the New Business Tax System (Integrity and Other Measures) Bill 1999; and

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Replacing the $300 limit with a low-value pool for assets costing less than $1,000 (to be introduced at a later date).

The financial impact cited for the prepayments measure incorporates the effect of the small business exemption. The financial impact of the small business exemption for the depreciation measures is set out in the table below:

Compliance cost impact: This measure involves no additional compliance costs.

Accelerated depreciation

This Bill amends the income tax law to:

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remove accelerated depreciation of plant and equipment, other than for small business taxpayers satisfying certain conditions; and

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where accelerated depreciation is removed, replace it with a system under which depreciation rates are determined by reference to the effective life of the plant or equipment.

Date of effect: The amendments apply to plant:

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acquired under a contract entered into;

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the construction of which started; or

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acquired in some other way;

After 11.45 am AEST on 21September 1999.

Proposal announced: The proposal was announced in Treasurer's Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment B to that Press Release).

Financial impact: The financial impact of this measure is set out in the table below:

Compliance cost impact: This measure is expected to reduce compliance costs, as it will reduce the need for depreciation rate calculations.

Submarine cables and indefeasible rights to use them

This Bill amends the ITAA 1997 to:

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allow depreciation deductions for the cost of an indefeasible right to use capacity in an international telecommunications submarine cable system (IRU) over the effective life of the submarine cable; and

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treat the granting of an IRU as a disposal by the grantor of an ownership interest.

Date of effect: The amendments will apply to IRUs granted over cable systems which are used for telecommunication purposes after 11.45 am AEST on 21 September 1999. Depreciation deductions will be allowed for expenditure incurred after that time.

Proposal announced: The proposal was announced in Treasurer's Press Release No. 58 of 21 September 1999 (in particular, refer to AttachmentC of that Press Release).

Financial impact: The financial impact of this measure is set out in the table below:

Compliance cost impact: The compliance cost impact will be minimal.

Working out new effective life

This Bill amends the ITAA 1997 to provide for rules allowing taxpayers, other than small business taxpayers, to re-estimate the effective life of plant where market, technological or other factors associated with the use of the plant have impacted on the previous estimate of effective life.

Date of effect: The amendments apply to plant:

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acquired under a contract entered into;

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the construction of which started; or

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acquired in some other way,

After 11.45 am AEST on 21September 1999.

Proposal announced: The proposal was announced in Treasurer's Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment B of that Press Release).

Financial impact: The financial impact of this measure is part of the estimate for the measure dealing with accelerated depreciation in this Bill, but is not separately identifiable.

Compliance cost impact: Where taxpayers choose to take advantage of this measure, the compliance costs are expected to be minimal.

Summary of Regulation Impact Statement

Regulation impact on business

Impact: The measures contained in this Bill are part of the Government's broad ranging reforms which will give Australia a New Business Tax System. These reforms are based on the Recommendations of the Review that the Government established to consider reforms to Australia's business tax system.

The New Business Tax System will be a simpler and sounder tax system with lower compliance costs.

Main points:

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The potential compliance, administrative and economic impacts of the measures contained in this Bill have been carefully considered, both by the Review and the business sector. The business sector was involved in the substantial consultation process associated with the Review.

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The measures in this Bill impact on taxpayers that undertake a particular transaction. More specifically, most of the measures in this Bill impact on taxpayers that acquire plant and equipment after 11.45 am AEST on 21 September 1999.

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Ongoing compliance costs will fall as a result of the Government's business tax reforms (e.g. the measure removing depreciable assets from the CGT regime will significantly reduce the number of calculations taxpayers need to perform, as well as reduce record keeping requirements).

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Small business taxpayers will retain the benefits arising from accelerated depreciation and the balancing charge offset.

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The administrative costs of implementing the measures in this Bill are expected to be minimal.