Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)General Outline and Financial Impact
The Taxation Laws Amendment Bill (No.3) 1992 will amend the Income Tax Assessment Act 1936 and the Occupational Superannuation Standards Act 1987 by making the following changes:
- •
- Expands the definition of "primary production" so as to include horticulture, including the propagation or cultivation of plants and their products.
- •
- Proposal announced: Not previously announced.
- •
- Financial impact: The estimated cost to revenue is $0.5 million per year from 1992-93
Expenditure on research and development activities
- •
- Confirms that prospecting, exploring or drilling for minerals, petroleum or natural gas is not as such research and development (R&D) for the purpose of the special R&D deduction of up to 150% of expenditure.
- •
- Proposal announced: Not previously announced.
- •
- Financial impact: This amendment, being clarifying in nature, will have no effect on revenue.
- •
- Provides for the taxation treatment of pooled development funds.
- •
- Provides for the taxation treatment of shareholders in pooled development funds.
- •
- Proposal announced: Economic Statement of 26 February 1992
- •
- Financial impact: No estimated revenue cost for the first two years. The estimated cost for 1994-95 and 1995-96 is $5 m in each year.
- •
- Confirms that taxpayers are entitled to deductions in respect of losses incurred in writing off a bad portion of a debt.
- •
- Authorises deductions for losses incurred by taxpayers where certain debts owed to a taxpayer are swapped for less valuable equity in the debtor.
- •
- Ensures that subsequent profits on disposal of equity acquired in debt/equity swaps are included in assessable income, or losses allowed as deductions.
- •
- Applies to debt/equity swaps where the debt is extinguished on or after 27 February 1992.
- •
- Proposal announced: The proposal was announced by the Prime Minister in the "One Nation" Statement on 26 February 1992.
- •
- Financial impact: The amendments will have no long term cost to the revenue. Some deductions from debt/equity swaps could be brought forward at a small but unquantifiable cost to the revenue.
Tax exempt infrastructure borrowings
- •
- provides that infrastructure borrowings will be borrowings for a maximum period of 10 years raised by:
- -
- eligible companies and unit trusts to finance the construction of specified infrastructure facilities they intend to own, use and control for a period of 25 years from the time the facility becomes income producing; and
- -
- companies whose sole purpose is to acquire infrastructure borrowings; and
- •
- provides also that infrastructure borrowings will be accorded the following tax treatment:
- -
- investors will not be assessable on the interest;
- -
- the interest paid by the borrower will not be tax deductible;
- -
- costs incurred by investors in deriving interest on infrastructure borrowings will be tax deductible;
- -
- profits or gains arising on the disposal of securities that are infrastructure borrowings will be exempt from tax;
- -
- losses incurred on the disposal of securities that are infrastructure borrowings will not be allowable deductions;
- -
- the tax benefits will be available for a maximum period of ten years, including rollovers of the initial borrowing.
- •
- Proposal announced: "One Nation" Statement of 26 February 1992
- •
- Financial impact: The estimated revenue cost of this measure for the 1993-94, 1994-95 and 1995-96 years is $M10, $M35 and $M100, respectively.
Depreciation on property on leased land
- •
- Allows depreciation to holders of Crown leases who were denied depreciation deductions for property they install on the leased land by reason only that they are not owners at law.
- •
- Proposal announced: "One Nation" Statement of 26 February 1992.
- •
- Financial impact: The amendments are likely to have some cost to on revenue. That cost is not expected to be significant, but cannot be reliably estimated.
- •
- Increases the rate of deduction for buildings used in the provision of short-term traveller accomodation from 2.5 percent per annum to 4 percent per annum.
- •
- Proposal announced: "One Nation" Statement of 26 February 1992.
- •
-
Financial impact:
The following is the estimated cost to revenue:
1991-92 1992-93 1993-94 1994-95 1995-96 $M $M $M $M $M - - 2 6 12
- •
- Increases the rate of deduction for industrial buildings from 2.5 per cent per annum to 4 per cent per annum.
- •
- Proposal announced: "One Nation" Statement of 26 February 1992.
- •
-
Financial impact:
The following is the estimated cost to revenue:
1991-92 1992-93 1993-94 1994-95 1995-96 $M $M $M $M $M - - 3 9 18
Income-producing structural improvements
- •
- Allows the capital cost of income-producing structural improvements to be evenly deductible over 40 years at the rate of 2.5 per cent per annum.
- •
- Proposal announced: "One Nation" Statement of 26 February 1992.
- •
- Financial impact: The amendments will have some revenue cost; however, it has not been possible to make a reliable estimate of the revenue impact.
Development Allowance - taxation deduction
- •
- Re-activates and amends the former investment allowance provisions to allow the development allowance. The allowance gives a tax deduction, for a restricted period, of 10% of capital expenditure on plant and equipment acquired by taxpayers for conducting certain Australian projects, costing $50 million or more, which meet some other criteria.
- •
- The Development Allowance Authority Bill 1992 is integral to the operation of the taxation provisions. The Authority will determine whether certain criteria have been met. A certificate issued by the Authority is a pre-requisite to claiming a deduction under the tax provisions.
- •
- Proposal announced: in "One Nation" Statement, by the Prime Minister, on 26 February 1992. Further criteria were announced by the Treasurer in a Press statement on 5 April 1992.
- •
- Financial impact: The cost is expected to be about $40 million in 1994/95 and $70 million in 1995/96.
Occupational Superannuation Standards Act amendments
Notification of RBL Determinations
- •
- requires that only excessive determinations be notified to taxpayers by the ISC;
- •
- allows for non excessive determinations to be notified to taxpayers, upon the initiative of the ISC or upon request;
- •
- adjusts the existing scheme of the Act in consequence of these changes, by ensuring review rights in respect of non excessive determinations and by allowing for improved ISC communication of determination information to the Commissioner of Taxation for tax assessment purposes.
- •
- Proposal announced: Treasurer's Press Release of May 1992
- •
- Financial impact: It is estimated that the combined cost of implementing the proposed measures (including associated measures involving amendment of the Regulations) for the 1991/92 financial year will be $70,000 and $0.3m for the 1992/93 year. Savings for the 1993/94 and following years are estimated at $0.1m per annum.
Primary Production Definition
Summary of proposed amendment
1.1. The Bill proposes an amendment which will expand the definition of "primary production" to include "horticulture". The change is effective from (date of introduction).
Background to the legislation
1.2. "Primary Production" is defined for taxation purposes in section 6 of the Act. One limb of the definition provides that primary production means "production resulting directly from the cultivation of land". In this respect this limb of the definition is limited to conferring the status of primary producer (for taxation purposes) only on those taxpayers undertaking activities which involve the use of soil.
1.3. Whilst the cultivation of plants in pots using soil is accepted as being the "cultivation of land" for these purposes, some taxpayers believe that the phrase merely contemplates the cultivation of land which is real property. This could have the consequence that a nursery growing seedlings in a plot of earth would be carrying on primary production, while another nursery growing identical seedlings in potted soil would not. The proposed amendment removes any fear of such an inequity.
1.4. Due to the use of new growing techniques, many taxpayers engaged in the propagation or cultivation of plants do not use soil as a growing medium. Such taxpayers do not qualify as primary producers under the present definition. This situation is seen as inequitable. For example, a market gardener may use a hydroponic system so as to better control disease and nutrient supply. This taxpayer would not satisfy the present definition of "primary production", whereas another grower, producing the same product but using soil as a growing medium, would. The proposed amendment ensures that such growers are all treated as engaged in primary production.
1.5. The proposed amendment also clarifies other areas of uncertainty. It includes in primary production the growing of things that may not necessarily come within the meaning of plants, includes propagation as well as cultivation and includes the propagation or cultivation of parts of plants as well as plants themselves.
Explanation of proposed amendment
1.6. The Bill proposes an amendment to subsection 6(1) of the Act to extend the definition of "primary production" to include "horticulture". [Clause 4]
1.7. For this purpose, the term "horticulture" is itself defined. The definition of "horticulture" proposes a wide interpretation which is intended to add, where required, to the natural meaning of the term. That meaning includes the propagation or cultivation of plants and their products such as fruit, flowers and vegetables. [Clause 4]
1.8. The intention of the proposed statutory definition is to allow flexibility, especially in regard to future advances in plant technology.
1.9. What the proposed definition does is to:
- •
- ensure that "horticulture" describes taxpayers who may be engaged in cultivation, propagation or both.
- •
- ensure that the definition will apply to organisms that are vegetation, but may not necessarily come within the meaning of plants. Therefore the proposed definition expressly includes (but is not limited to) the propagation or cultivation of fungi. Things such as trees, shrubs and vines already fall within the definition.
- •
- cover not only the propagation or cultivation of plants (and similar things) themselves, but also the propagation or cultivation of other parts of plants. Some examples of the parts of plants which may be cultivated or propagated are seeds, bulbs, spores, flowers, berries and nuts.
- •
- expressly include propagation or cultivation in environments other than soil. This is intended to allow the growing of plants under intensive conditions, and to include the use of artificial media and environments. Examples of the sorts of artificial techniques that are already used are hydroponics and the use of rockwool or tissue culture.
1.10. Horticulture includes any combination of the things listed in the definition, whether with one another or with the ordinary meaning of the term. In this respect the definition will, in effect, be cumulative. For example, a taxpayer engaged in both propagation and cultivation of plants for both themselves and their commercially useful parts in an environment other than soil would fall within its scope.
1.11. The definition expressly excludes activity other than in the course of, or for the purposes of, a business. So, home gardeners are not as such engaged in horticulture, or primary production.
Commencement date
1.12. The amendment to the definition of "primary production" in subsection 6(1) will take effect from (date of introduction). [Clause 5]
Clauses involved in proposed amendment
Clause 4(b): adds "horticulture" to the matters included in the definition of "primary production" in subsection 6(1) of the Act.
Clause 4(c): adds a definition of "horticulture" to subsection 6(1) of the Act, including propagation as well as cultivation, in other environments as well as soil, of parts as well as whole plants or fungi, but excluding any activities that are not for the purpose of a business or in the course of a business.
Expenditure on Research and Development Activities
Summary of proposed amendment
2.1. This Bill will amend the Income Tax Assessment Act 1936 (ITAA) to confirm that prospecting, exploring or drilling for minerals, petroleum or natural gas is not as such research and development (R&D) for the purpose of the special R&D deduction of up to 150% of expenditure.
2.2. This will make it clear that ordinary exploration, prospecting or drilling expenditure does not qualify for more than full deductions, but will not affect the treatment of R&D activities relevant to the exploration, prospecting, mining or quarrying industries.
2.3. The measure applies from 1 July 1985, the date of effect of the R&D tax concession.
Background to the legislation
2.4. Section 73B of the ITAA was enacted in 1986 to provide a concession in the form of a tax deduction of up to 150% (125% after 30 June 1993) for expenditure incurred by eligible companies on R&D activities in Australia.
2.5. R&D activities are defined in subsection 73B(1) as systematic, investigative or experimental activities that involve innovation or technical risk, and are carried on in Australia for the purpose of acquiring new knowledge, or creating new or improved materials, products, devices, processes or services, or activities that are carried on for directly related purposes.
2.6. Some activities are specifically excluded from being systematic, investigative or experimental activities, so they cannot be R&D activities even if they could meet the general definition. Among the activities specifically excluded, by paragraph 73B(2)(c), are "prospecting, exploring or drilling for minerals, petroleum or natural gas for the purpose of determining the size or quality of any deposits". The existing provision was drafted to exclude prospecting, exploring or drilling as such but to include R&D activities related to prospecting, exploring or drilling.
2.7. If prospecting, exploring or drilling merely seeks to find minerals (whether for mining or for quarrying purposes), or petroleum or natural gas, it is not R&D as such. Looking for minerals and so on does not involve innovation or technical risk; there is nothing innovative in looking for what you want, and the risk of not finding what you look for is real, but not technical (just a matter of fact). So that sort of activity is not within the definition in subsection 73B(1).
2.8. As well, prospecting, exploring or drilling that merely seek minerals and so on are excluded from being systematic, investigative or experimental activities. Looking for minerals has the purpose of "determining the size or quality of any deposits" and is excluded by paragraph 73B(2)(c).
2.9. However, some taxpayers have questioned the exclusion of prospecting, exploring or drilling as such from R&D. They suggest that looking for minerals and so on could be seen as separate from determining the size or quality of any deposits found, and that the great uncertainty about finding deposits amounts to technical risk.
2.10. The original announcement of the R&D concession made it clear that prospecting, exploring or drilling were as such excluded. The Press Release of 29 May 1985 by Senator Button, the Minister for Industry, Technology and Commerce, stated that among activities "specifically excluded are...prospecting, exploring or drilling for or producing minerals, petroleum or natural gas, or extent and quality determinations of deposits". And the Industry Research and Development Board, which determines whether activities are in the nature of R&D activities, has consistently decided that prospecting, exploring or drilling are not as such R&D activities.
Explanation of proposed amendment
2.11. The law will therefore be amended to confirm that prospecting, exploring or drilling for minerals, petroleum or natural gas is not as such R&D for the purpose of the special R&D deduction, and never has been. [Clause 6]
2.12. This is done by amending paragraph 73B(2)(c). Prospecting, exploring and drilling will be expressly excluded from being systematic, investigative or experimental activities where carried on for any of three purposes. These are:
- •
- discovering deposits. These could be of any minerals, petroleum or natural gas. So this exclusion is not limited to prescribed minerals under regulation 4, and includes prospecting, exploring or drilling for quarry materials (for instance, work that might give rise to deductions under section 122JF).
- •
- determining more precisely the location of deposits. With modern methods of exploration, prospecting or drilling, a deposit may be known to exist before work is undertaken to locate it precisely. The exclusion now explicitly extends to this later phase of the work.
- •
- determining the size or quality of deposits. This has a wide scope, including discovering and locating deposits, but that scope has been questioned. On any view, the phrase includes assaying, proving reserves and other work directed to establishing the prospective character of a deposit. All such activity is expressly excluded.
2.13. Every part of the work of prospecting, exploring or drilling for minerals, petroleum or natural gas is as such expressly excluded from being an R&D activity. [Amended paragraph 73B(2)(c)]
2.14. This does not exclude R&D activities in which prospecting, exploring or drilling are carried out for other purposes. For example, investigation of a new drilling technique might be carried out (at least in part) by actually drilling. Similarly, a modified exploration technique might need field trials. Such work need not be carried out for the excluded purposes. And R&D activities associated with prospecting, exploring or drilling will continue to qualify for the concession.
2.15. The amendment is effective from 1 July 1985, the date from which the special R&D deduction took effect. [Clause 7]
Commencement date
2.16. The amendment is to take effect from 1 July 1985.
Clauses involved in proposed amendment
Clause 6: amends paragraph 73B(2)(c) of ITAA to confirm that prospecting, exploring or drilling for minerals, petroleum or natural gas are not as such systematic, investigative or experimental activities and so are not R&D activities for the purpose of the special R&D deduction.
Pooled Development Funds
Summary of proposed amendments
3.1. This Bill will amend the Income Tax Assessment Act 1936 (the Act) to provide for the taxation treatment of Pooled Development Funds (PDF) and the holders of PDF shares.
3.2. PDFs will be taxed on their taxable income, which will be calculated under the existing income tax laws in the same way as that of companies. The taxable income of a PDF will be taxed at the rate of 30 per cent. PDFs will derive franking credits on the payment of company tax and the receipt of franked dividends and will be able to frank its dividends.
3.3. Shareholders will be exempt from tax on unfranked dividends. In the case of franked dividends (including the franked amount of a dividend), the dividend will also be exempt from tax unless the shareholder makes an election that such dividends derived in a year of income are to be taxed as dividends paid by an ordinary company. PDF dividends paid to non-resident shareholders will be exempt from withholding tax. Gains on the disposal of shares in PDFs will also be exempt from income tax, but losses on disposal will not be deductable.
Background to the legislation
3.4. A PDF will be a company registered as such under the Pooled Development Funds Bill 1992, which, when enacted, provide development capital to small and medium companies.
3.5. This Bill deals with the taxation treatment of a company that has been registered as a PDF and provides special treatment for:
- •
- dividends paid on PDF shares; and
- •
- the tax consequence of disposing of PDF shares.
Explanation of proposed amendments
3.6. A PDF will be a company that is registered under the Pooled Development Funds Act 1992 (the PDF Act) throughout the whole of the year of income. A company acting in the capacity of trustee will not be taxed as a PDF.
3.7. Although the general company tax rate is 39 per cent, PDFs will be taxed on their taxable income at the concessional rate of 30 per cent. This rate will be imposed by the proposed amendment to Part III of the Income Tax Rates Act 1986 . [Clause 84 - new subsection 23(4D)] .
3.8. A company will be taxed as a PDF for a year of income if it is registered as a PDF for the whole of the last day of that year of income. The proposed PDF Act will treat a company as being registered as a PDF for the whole of the day registration is effected. Therefore, if a company is registered as a PDF for the whole of a year of income it will be registered for the whole of the last day of that year.
How a PDF is taxed in the first year
3.9. Special rules will apply to calculate the taxable income for the year of income where a company is registered as a PDF part-way through that year. (See also the notes on a company becoming a PDF.)
3.10. If a company becomes registered as a PDF part-way through a year of income, the company will be taxed as a PDF for the period from the day of its registration to the end of the year of income as if that period (the PDF period) was a year of income.
3.11. For the period from the beginning of the year of income to the day before it is registered as a PDF, the company will be taxed as an ordinary company. This period (the non-PDF period) will be treated as a separate year of income.
3.12. In the year a company becomes a PDF it will be required to lodge two returns of income - one for the non-PDF period and another for the PDF period.
3.13. The taxable income of the company for the first year it is a PDF will be calculated using the proposed definition of "PDF component" and the amended definition of "taxable income" (subsection 6(1)). If the PDF incurs a loss in the PDF period, the "PDF component" is taken to be nil. [Clause 8]
3.14. If the PDF derives a taxable income in its first year, the taxable income for the two periods of that first year are calculated in the normal way because, as the PDF component is not nil, proposed new paragraph (c) of the definition of "taxable income" is not applicable.
3.15. If a company derives a taxable income in both the non-PDF and PDF periods of the first year a separate taxable income is calculated for the non-PDF period (using the existing definition of "taxable income") and for the PDF period (using the definition of "PDF component").
How the company is taxed in its last year as a PDF
3.16. A company will cease to be a PDF on the day it is deregistered. A company that loses its PDF status during a year of income will be taxed as an ordinary company for the whole of that year of income. The test for whether a company will be taxed as a PDF is that it is a PDF for the whole of the last day of the year of income. [Paragraph 8(b)]
3.17. The dividends paid by a PDF will be frankable. Therefore, the PDF will be required to provide its shareholders with a statement setting out the franked and unfranked amounts of the dividend and the amount of any imputation credit attached.
3.18. A PDF will derive franking credits on the same basis as other companies for the payment of company tax and when it receives franked dividends.
3.19. In the same way as any other company, dividends paid by a PDF will be "frankable dividends" (section 160APA). A PDF will be required to frank the dividends it pays to the extent of the surplus in its franking account on the day the dividend is paid (section 160AQE). Similarly, a PDF that overfranks a dividend will become liable to franking deficit tax (section 160AQJ).
3.20. The company tax rate to be used in calculating the franking credit that arises on the payment of tax will be the general company tax rate of 39%. The definition of "general company tax rate" will be amended to exclude the tax rate applicable to PDFs. [Clause 13]
3.21. A PDF will be a company within the meaning of the definition of the term for the purposes of the Act. It will therefore be entitled to a rebate under section 46 or 46A on the dividends it receives.
3.22. A loss incurred by a PDF in a year of income that it is taxed as a PDF will only be deductible against income derived in a year of income in which it is taxed as a PDF. Except for the year of income during which a company is first registered as a PDF (when special rules apply - see notes below) and subject to the quarantining rules, losses incurred by PDFs will be deductible on the same basis as losses incurred by other taxpayers.
3.23. A PDF will incur a loss in a year of income if its allowable deductions, excluding any deductions allowable for losses of earlier years, exceed the sum of its assessable income and net exempt income for that year.
3.24. The deduction allowable to a PDF for losses incurred in an earlier year of income will be:
- •
- if the PDF has not derived exempt income in the particular year of income, the amount of losses of earlier years that have not been allowed as a deduction; or
- •
- if the PDF has derived exempt income in the particular year of income, the amount of losses of earlier years that have not been allowed as a deduction less the amount of the net exempt income derived by the PDF in that year.
3.25. The net exempt income of a PDF will be the amount by which the PDF's exempt income for the year exceeds the sum of the expenses (not being expenses of a capital nature) incurred in deriving that income.
3.26. If a company is registered as a PDF during a year of income, the company will be treated as having two years of income. These deemed years of income are:
- •
- the period from the beginning of the year of income to the day before the company is registered as a PDF (the non-PDF period); and
- •
- the period from the day the PDF is registered as such and the end of the year of income (the PDF period).
3.27. If a PDF incurs a loss in the PDF period , new paragraph (c) of the definition of "taxable income" will apply because the "PDF component" for that (actual) year of income will be taken to be nil. If a company has a taxable income in the non-PDF period and a loss in the PDF period, the amount of the PDF loss will be the amount by which the loss for the PDF period exceeds the taxable income for the non-PDF period. This overall loss is calculated under section 79E. [Clause 9 - new section 79EA]
3.28. If a PDF has a taxable income in the PDF period of the year of income in which it was registered, but in the period before the company became a PDF it incurred a loss, the amount of the loss will be allowable against the taxable income of the PDF period.
3.29. A loss incurred by a PDF in a year of income that it is taxed as a PDF will only be deductible in any year of income in which it is taxed as a PDF. [Clause 9 - new subsection 79EB(1)]
3.30. However, if a company incurred a loss in the non-PDF period of the year in which it became a PDF, deductions for that loss will not be restricted to PDF income. If any such losses have not been recouped by the time the company ceases to be a PDF, such unrecouped losses will continue to be allowable (section 79E) after the company ceases to be a PDF. So that companies are not disadvantaged PDF losses will be recouped ahead of non-PDF losses. [Clause 9-new section 79EB(2)]
Group companies - section 80G losses
3.31. Losses incurred by a PDF that is a "group company" (section 80G) will not be able to be transferred to other companies, including those that are PDFs, in the group. However, losses incurred by the company in any year it is not a PDF and that have not been deducted from PDF income, will be transferable. [Clause 10 - new subsections 80G(9A) and (9B)]
3.32. Capital losses incurred in a year of income or in a preceding year of income can be deducted from capital gains accruing to a taxpayer in a year of income (section 160ZC). However, capital losses incurred by a company in a year of income in which it is taxed as a PDF will not be deductible from capital gains accruing to the company after it has ceased to be a PDF. [Clause 17 - new subsection 160ZC(6)]
3.33. However, capital losses incurred in the non-PDF period of the year of income in which the company was registered as a PDF and the immediately preceding year of income (provided the company was not a PDF in that year), will be able to be deducted from any capital gains derived in the non-PDF period. [Clause 17 - new subsection 160ZC(7)]
Group companies - capital losses
3.34. Capital losses incurred by a group company that is a PDF will not be able to be transferred to other companies in the group. However, capital losses incurred by the company in any year that it was not a PDF will be able to be transferred to other companies in the group, unless the loss was offset against capital gains derived by the company while it was a PDF. [Clause 19 - new subsections 160ZP(9B) and(9C)]
How the holders of PDF shares will be taxed
3.35. The Bill will insert new Division 10E into the Act to provide for the taxing of shares in PDFs. [Clause 11]
3.36. Dividends paid by a PDF will be exempt if they are unfranked. If the dividends are franked, taxpayers will have the option of including the PDF income in their assessable income in the normal manner.
3.37. Distributions made by a liquidator on the winding up of a company that are not a return of paid-up capital are deemed to be dividends (subsection 47(1)). These deemed dividends will be taxed in the same way as dividends.
3.38. An unfranked dividend, or the unfranked part of a franked dividend, paid by a PDF will be exempt from income tax. [New subsection 124ZM(1)]
Franked dividends / flow-on franking amount
3.39. If a taxpayer is a beneficiary in a trust or a partner in a partnership that derives a franked dividend, and the share of the net income of the trust or partnership distributed to the taxpayer includes an amount attributable to the franked dividend, the share of the net income that is attributable to the franked dividend is the "flow-on franking amount". [New subsection 124ZM(9)]
Elections for franked PDF dividends
3.40. A shareholder, or a taxpayer receiving income through a partnership or trust, will be able to elect to have the franked PDF dividend (or the flow-on franking amount attributable to franked PDF dividends) taxed as if they were not PDF dividends.
3.41. The election will be made simply by disclosing the dividends as assessable income in the return of income of the year of income in which the dividends were derived by the taxpayer. The election will apply to the franked amount of all PDF dividends paid during the particular year of income.
3.42. Franked PDF dividends received by a taxpayer, or a taxpayer's share of trust or partnership income that is attributable to franked PDF dividends, will be exempt from tax. [New subsection 124ZM(2)]
3.43. However, if a taxpayer who would be assessed on the franked dividends if the income was assessable, includes the dividends in his, her or its assessable income the PDF dividends or the flow-on franking amount attributable to the PDF dividends will constitute assessable income of the taxpayer . [New subsection 124ZM(3)]
3.44. If a taxpayer is a partner in a partnership that incurs a loss, the flow-on franking amount will not be an allowable deduction unless the taxpayer chooses to be assessed on the franked PDF dividends. [New subsections 124ZM(4) and (5)]
3.45. The trustee of a trust estate is assessable on income derived by the trust as if the trust were an individual where:
- •
- the beneficiary is under a legal disability (eg. a minor) (section 98);
- •
- no person is presently entitled to the income of the trust and the trust income is not to be taxed at a special rate (section 99); and
- •
- no person is presently entitled to the income of the trust and the trust income is taxed at a special rate (section 99A).
3.46. Franked PDF dividends derived by trustees liable to be taxed as an individual on the net income of the trust will be exempt from tax. The exemption will apply whether the trustee receives the dividends directly as a shareholder or indirectly through a partnership or trust. [New subsection 124ZM(6)]
3.47. However, the trustee may elect to include the franked PDF dividends or the flow-on franking amount in the assessable income. [New subsection 124ZM(7)]
3.48. The trustee will make an election to include the PDF income derived in a particular year of income in the assessable income of that year by including the amount in its assessable income for the relevant year of income. [New subsection 124ZM(8)]
3.49. The franked dividends that a company receives from a PDF will give rise to a franking credit because the dividends will not be treated as being as exempt. [Clause 14 - new subsection 160APP(3A)]
3.50. If a taxpayer (that is not a company) elects to treat PDF dividends received directly or indirectly through a partnership or trust as assessable income, the taxpayer will be entitled to the imputation credits attached to those dividends. The income will not be taken to be exempt. [Clause 15 - new subsection 160AQT(5)]
3.51. The imputation credits attached to PDF shares sold cum-dividend will be able to be transferred to the purchaser of the shares. Also, franked PDF dividends will be able to be passed on to a lender under a securities lending arrangement (section 26BC). [Clause 16]
Dividends paid after PDF status lost
3.52. When a company ceases to be a PDF on a particular day in a year of income, dividends paid by the PDF up to the date of deregistration will be PDF dividends and exempt from tax, unless the dividend is franked and the shareholder elects to be taxed on the dividend in the same way as if it had been paid by an ordinary company. (See later notes) [New section 124ZM]
3.53. PDF shares will not be trading stock of a share trader for the purposes of the existing section 28. Therefore, profits from the disposal of PDF shares as trading stock will not be assessable and losses will not be deductible. [New section 124ZO]
Gains and losses on disposal of shares
3.54. Capital gains derived on the disposal of PDF shares will not be subject to tax. Similarly, capital losses incurred on the disposal of PDF shares will not be deductible. [New section 124ZP]
3.55. A company that comes into existence on or after 1 July 1992, and whose activities since coming into existence, or since it was acquired if it was a shelf company, have all been directed towards obtaining registration as a PDF will be able to be registered as a PDF under the PDF Act.
3.56. A company that came into existence before 1 July 1992 and whose only activities prior to that day related to raising funds for investing in development funds, may also be registered as a PDF.
3.57. A shareholder who continues to hold shares in a company after it becomes registered as a PDF will be taken to have held PDF shares from the time the shareholder acquired the shares.
3.58. As the shares will be treated as having been PDF shares since they were acquired by the shareholder:
- •
- no deductions will be allowable for the costs of acquiring or holding the shares before they became PDF shares;
- •
- the shares will never have been trading stock; and
- •
- no amounts will be assessable or deductible as a result of the company being registered as a PDF. [New section 124ZQ]
When shares cease to be PDF shares
3.59. On the day a company ceases to be a PDF the shares will cease to be PDF shares and the holders of such shares will be deemed to have disposed of the PDF shares and to have immediately reacquired non-PDF shares for their market value on that day. This will apply where the shares would have been trading stock of a share trader or held on revenue account. It will also apply where the capital or gain arising on disposal would have been taxed under Part IIIA (capital gains and capital losses). [New section 124ZR]
3.60. Where PDF shares are acquired on revenue account, any income (or loss) derived (or incurred) on the disposal of the shares will not be assessable income (or an allowable deduction). [New section 124ZN]
3.61. Where exempt income is generated by a unit trust and is distributed to investors, the cost base of the units is reduced for capital gains tax purposes. Unitholders of a unit trust that derive exempt dividends from PDF shares will be exempt from any notional capital gains derived under the present section 160ZM when the trust distributes an amount that is not assessable. [Clause 18 - new subsection 160ZM(3A)]
3.62. Unless a PDF shareholder elects that the franked amount of a PDF dividend is to be treated as assessable income PDF dividends will be tax exempt. Expenditure incurred in a year of income will not be tax deductible to the extent that it is incurred in deriving exempt income (subsection 51(1)).
3.63. However, where the shareholder has elected that the franked amount of PDF dividends paid during a particular year of income are to be assessable, the income will not be exempt and borrowing costs incurred in the particular year of income will be an allowable deduction.
3.64. PDF dividends paid to non-residents of Australia, whether franked or unfranked, will be exempt from withholding tax. [Clause 12 - new paragraph 128B(3)(ba)]
Commencement date
3.65. The amendments will commence from the day the Bill receives Royal Assent. They will also apply in respect of losses incurred, dividends paid or profits derived before that time, if needed for the purposes of determining the taxable income of a PDF.
Clauses involved in proposed amendments
Income Tax Assessment Act 1936
Clause 8: amends the definition of "taxable income" and inserts the definitions of "PDF" and "PDF component" in subsection 6(1).
Clause 9: inserts new sections 79EA and 79EB which deal with losses incurred by a company in the year it becomes a PDF and prevents deductions for losses that were incurred by a PDF that has since ceased to be a PDF.
Clause 10: amends section 80G by inserting new sections (9A) and (9B) to deny the transfer of PDF losses within a company group.
Clause 11: inserts new Division 10E (which contains new sections 124ZM to 124ZR) to deal with shares in a PDF.
Clause 12: amends subsection 128B(3) to exempt PDF income from withholding tax.
Clause 13: amends the definition of "general company tax rate" in section 160APA to exclude the PDF tax rate.
Clause 14: inserts new subsection 160APP(3A) to provide that franked PDF dividends received by companies will not be treated as exempt income for imputation purposes.
Clause 15: inserts new subsection 160AQT(5) to provide that franked PDF dividends included in assessable income will not be treated as exempt income for imputation purposes.
Clause 16: amends section 160AQUA to allow the transfer of franked PDF dividends paid on PDF shares sold cum-dividend or transferred to lenders under securities lending arrangements.
Clause 17: amends section 160ZC to deal with net capital losses incurred while a company is a PDF.
Clause 18: amends section 160ZM to prevent the exempt income arising from PDF shares affecting the cost base of units in a unit trust.
Clause 19: amends section 160ZP to prevent the transfer of net capital losses of a PDF to other companies in the group.
Clause 20: provides for the application of the amendments to deal with PDFs.
Clause 82: facilitates reference to the Income Tax Rates Act 1986.
Clause 83: amends subsection 3(1) to insert a definition of PDF.
Clause 84: amends section 23 to impose tax at the rate of 30 per cent on PDFs.
Clause 85: provides for the application of the amendments to deal with PDFs.
Bad Debts
Summary of proposed amendments
4.1. The Income Tax Assessment Act 1936 (the Act) will be amended so that taxpayers who are owed a debt are entitled to a deduction when only a portion, rather than the whole, of the debt is bad and is written off. This change puts beyond doubt the application of the present law in relation to partial debt write-offs.
4.2. Other amendments will give deductions for losses incurred where a debt is extinguished on or after 27 February 1992 as part of a debt/equity swap. A debt/equity swap occurs when a taxpayer discharges, releases or otherwise extinguishes a debt in return for equity in the form of shares or units in the debtor. The deductible loss will be the difference between the book value of the debt extinguished and the value of the equity received in return for extinguishing the debt. The value of the equity will be the market value, or the value recorded in the books of the creditor, whichever is greater. The loss deduction will be reduced to the extent that it has previously been allowed as a deduction under the Act.
4.3. Profits or losses subsequently realised on the disposal, cancellation or redemption of the equity will be included as assessable income or allowed as deductions, as the case requires.
Background to the legislation
4.4. Section 63 of the Act allows a deduction for bad debts written off in relation to interest, trade debts and other charges, which have been brought to account as assessable income. For taxpayers who carry on a business of money lending, the writing-off of bad debts on loans made in the ordinary course of business is deductible whether or not the amounts written off have been included in assessable income.
4.5. A partial bad debt is not just a debt that is merely doubtful. It is a portion of a debt that may be written off as bad on the basis that that portion is not collectable even if there is still some reasonable expectation that the remaining part of the debt may be recovered.
4.6. The amendment will make it clear that the bad debt rules apply to partial bad debt write-offs.
4.7. A debt/equity swap occurs when a creditor agrees with a debtor to swap a debt for equity in the debtor. Debt/equity swaps take place more commonly in respect of borrowings although it is possible for trade creditors and debtors to enter into such arrangements.
4.8. The mechanics of a debt/equity swap are that the creditor releases the debtor from the debt (or part of a debt) in exchange for the debtor issuing equity (usually shares) to the creditor. The equity is not mere security for the debt; the creditor acquires ownership of the equity and the debt is discharged. The debt is thus 'swapped' into equity. The creditor is most likely to enter into such an arrangement where, if the debt remained on foot, the debtor would be technically insolvent and required to cease trading and liquidate assets. In generally depressed economic conditions, it may be a better option for the creditor to participate in equity than to foreclose against the debtor. The judgment may be that the only real prospect of recovering the amount owed is by way of equity participation in the debtor's business over a longer period.
4.9. To ascertain the deductible loss from a debt/equity swap, it is necessary to determine the value of the equity received in exchange for debt; the loss deductible is the extent to which the value of the equity falls short of the value of the debt. For that purpose, the greater of the market value of the equity or the value recorded in the books of the creditor at the time it is issued is to be adopted as the value of the equity.
4.10. In debt/equity swaps, a debtor may enter into a swap arrangement under which a debt is forgiven or otherwise discharged even though the debt may not at that time be bad. Where the relevant conditions are satisfied, a deduction will be allowable in respect of a loss incurred under a debt/equity swap notwithstanding that the debt, or the part of the debt, technically is not a bad debt.
Explanation of proposed amendments
4.11.
New subsection 63(4) has the effect that the writing-off of a bad portion of a debt is an allowable deduction where the existing conditions for deduction under section 63 ( i.e. that a debt has become bad and is written off) are satisfied. In effect, existing section 63 is to apply, where only part of a debt is bad, as if the bad portion is an entire debt. This is consistent with the dicta of the High Court implicit in
G.E. Crane Sales Pty. Ltd. v. Federal Commissioner of Taxation
(1971)
126 CLR 177;
71 ATC 4268.
[Subclause 22(b)]
4.12. There are two elements to these amendments.
4.13. First, a loss incurred under a debt/equity swap is an allowable deduction where the relevant debt is extinguished on or after 27 February 1992* . The swap loss under section 63E is not limited to the bad part, if there is one, of the debt swapped. So these amendments give deductions that would not have been available under section 63. [Clause 27]
4.14. Second, profits realised or losses incurred on subsequent disposal, cancellation or redemption of the equity are included in assessable income or allowed as deductions as the case requires. The equity was received in exchange for a revenue item, and so dealing with that equity is a revenue matter. [Clause 27]
4.15. Subsection 63E(3) authorises deductions for losses incurred under debt/equity swaps. The deduction is allowable in the year of income in which shares or units are issued in return for the debt being extinguished. [Paragraph 63E(3)(a)]
4.16. Where a deduction is allowable under section 63E, the debt or partial debt extinguished may not be treated as a bad debt deduction allowable under section 51 or 63. This prevents double deductions from being claimed. [Paragraph 63E(3)(b)]
4.17. When a taxpayer receives shares or units under a debt/equity swap and the taxpayer is required to include an amount in assessable income under subsection 63(3) to recoup section 51 or 63 deductions being previously allowed in relation to the debt, the amount to be assessed under subsection 63(3) is equal to the equity value as defined in paragraph 63E(2)(a). [Paragraph 63E(3)(c)]
4.18. The following conditions need to be satisfied for a debt/equity swap to occur: [Subsection 63E(1)]
- (a)
- there is an agreement under which the taxpayer extinguishes a debt or part of a debt owed to the taxpayer in return for the debtor issuing shares (other than redeemable preference shares) or units in the debtor;
- (b)
- the extinguishment of the debt occurs at or about the same time as the issue of the shares or units. That is, these two events should occur contemporaneously;
- (c)
- the debtor in question is a company, a trading trust (within the meaning of section 102N) or a public unit trust (within the meaning of section 102P). These are treated as companies for tax purposes; and
- (d)
- either the debt has been included in the taxpayer's assessable income or is in respect of money lent by the taxpayer in the ordinary course of a money lending business. Where a creditor, other than a money lender, extinguishes a debt which includes a part relating to an amount that has previously been included in the assessable income (e.g. accumulated interest) and the other part relating to a non-assessable principal, the part of the debt that has been included in the assessable income is a debt subject to section 63E. The rest of the debt is not a debt subject to section 63E.
Meaning of 'equity value' and 'swap loss'
4.19. The term 'equity value' is a necessary component in calculating the amount of a deductible loss incurred under a debt/equity swap. Simply, the equity value for that purpose is the greater of the market value of the shares or units acquired under the swap and their value shown in the taxpayer's accounts at the time they are issued to the taxpayer. [Paragraph 63E(2)(a)]
4.20. If the amount of debt that is extinguished is greater than the equity value, the difference is a deductible 'swap loss'. [Paragraph 63E(2)(b)]
4.21. This is the loss that becomes definite on the swap even if there was no bad debt beforehand. It is not too indefinite or uncertain to be allowed; for the creditor and debtor have now fixed a definite loss by the terms of the swap arrangement.
4.22. An allowable swap loss deduction under section 63E is subject to the limit determined under section 63F. Explanations on section 63F will follow under the heading of 'Limit on swap loss deductions' .
4.23. Under subsection 63E(4), profits or losses realised on a subsequent disposal, cancellation or redemption of equity acquired in a debt/equity swap should be recognised as assessable income or allowable deductions, as the case requires.
4.24. Where that occurs, such profits or losses are not affected by the operation of other provisions of the Act (e.g. capital gains tax). [Paragraph 63E(4)(a)]
4.25. If the consideration received or receivable is more than the equity value (as defined in paragraph 63E(2)(a)), the excess is a profit which is to be included in the assessable income of the taxpayer in the year the shares or units are disposed of, cancelled or redeemed. [Subparagraph 63E(4)(b)(i)]
4.26. If the consideration received or receivable is less than the equity value, the difference is a deductible loss. [Subparagraph 63E(4)(b)(ii)]
4.27. No consideration is treated as a consideration of a nil value. [Subsection 63E(5)]
Example
1,000 shares in a debtor company are issued to a creditor in exchange for the creditor extinguishing a debt. The shares have an equity value of $100.
The creditor later sells 600 shares for $40. At that time, the creditor incurs a loss of $20, which is an allowable deduction.
Some time later, the debtor company's business has recovered and the creditor sells the remaining 400 shares for $430. The resultant profit of $390 is included in the assessable income of the creditor.
The amount of the original swap loss does not limit this profit. Any net profit is still a return that should be treated as having a revenue character, like the debt swapped.
Equity value of 1,000 shares = $100 Equity value of each share = 10 cents Equity value of 600 shares $ 60 Sold for $ 40 Net deductible loss is $ 20 Equity value of 400 shares $ 40 Sold for $430 Net assessable profit is $390
4.28. The swap loss under section 63E is limited by section 63F. The purpose of section 63F is to reduce an allowable swap loss deduction to the extent that it has been previously allowed under other provisions of the Act (namely, under section 51 or section 63) or under section 63E itself. [Clause 27]
4.29. Effectively, what is attempted under section 63F is that at the end of discharging the whole debt (either through one single debt/equity swap, or a combination of debt/equity swaps, partial debt write-offs and repayments, etc.), the net deduction allowed (i.e. the total amount of deductions allowed under section 51, 63 or 63E less any amount recovered and assessed under subsection 63(3) or section 25* should be equal to the initial amount of debt owing less the total sum of equity value or any other payments received in discharging the debt.
4.30. This is illustrated below:
Sum of Net Deduction = (Initial Amount of Debt Owing - (Sum of Equity Value plus Any Other Payments))
Sum of Net Deduction = Sum of all deductions allowed under section 51, 63 or 63E less Sum of all recovery assessed under subsection 63(3) or section 25
4.31. Subsection 63F(1) limits current deductions to the extent that they do not exceed the limit worked out under subsection 63F(2). The current deductions refer to bad debts allowable under section 51 or 63 as well as allowable swap losses under paragraph 63E(3). [Paragraph 63F(1)(a)]
4.32. Section 63F applies if: [Subsection 63F(1)]
- (a)
- there is a deduction (current deduction) that is allowable under section 51, 63 or 63E for the whole or part of a debt;
- (b)
- there has been a deduction (previous deduction) previously allowed or allowable under section 51, 63 for the whole or part of a debt, or under section 63E for a part of a debt [the 'whole' cannot have been swapped if (a) applies]; and
- (c)
- the current deduction allowable or at least one previous deduction allowed relates to swap loss deductions under section 63E.
4.33. Subsection 63F(2) illustrates a step by step procedure to determine the limit. In effect, the limit is reduced by deductions already given and by repayments or other reductions in the debt.
4.34. These steps are applied in the following detailed examples, which contain two representative scenarios of debt/equity swaps. The examples will also show the combined operation of subsection 63(3), sections 63E and 63F.
| Facts | Situation 1 | Situation 2 | Situation 2A | Situation 3 |
| Original Debt | 1,000 | 1,000 | 1,000 | 1,000 |
| Repayment of Debt | 400 | 400 | 400 | 400 |
| Amount of Debt Owing | 600 | 600 | 600 | 600 |
| Bad Debt Deductions Allowed (s.63/s.51) | Nil | 200 | 350 | 600 |
| Undeducted Debt (s.63F(2) Limit) | 600 | 400 | 250 | Nil |
4.35. The original debt was $1,000. $400 has been paid off to date when the first debt/equity swap is entered into. The amount of debt owing at that time, therefore, is $600.
4.36. Based on the above facts, two examples will be looked at:
Example A
Example A is a straight forward debt/equity swap for the whole debt outstanding.Example B
Example B illustrates more complex and unusual circumstances, combining an initial swap of only part of the debt, a further debt repayment, a write-off of the bad part of the remaining debt, and a swap of the balance of the debt remaining.
4.37. Each example has 3 different situations:
In Situation 1, no previous bad debt deduction has been allowed under section 51 or 63 before the first debt/equity swap.
Situations 2 and 2A examine cases where a part of the debt has been written off and allowed as bad debt deductions under section 51 or 63 before the first debt/equity swap.
In Situation 3, the whole debt has been written off as bad and the full deduction has been allowed under section 51 or 63 before the first debt/equity swap.Example A
Situation 1
Situation 1 Situation 2 Situation 2A Situation 3 D/E Swap for the Whole Debt (A) 600 600 600 600 Equity Value (B) 200 200 200 200 Bad Debt Ded Allowed Nil 200 350 600 s.63(3) Income Nil 200 200 200 Swap Loss (A)-(B) 400 400 400 400 s.63F(2) Limit n/a 400 250 Nil s.63E(3) Deduction 400 400 250 Nil [D/E = Debt/Equity; n/a = not applicable; Ded = deduction]
Situation 1 of this Example is where the limit under subsection 63F(2) does not apply as no previous deduction has been allowed before this debt/equity swap. [Paragraph 63F(1)(b)]
The swap loss calculated under paragraph 63E(2)(b) for the purpose of subsection 63E(3) will never exceed the debt owing when entering into the debt/equity swap. The swap loss of $400 is fully allowable under subsection 63E(3).
The equity value of $200 is not assessed under subsection 63(3) because no deductions for bad debts have been allowed previously.Situations 2 and 2A
In Situation 2 and 2A, partial debts of $200 and $350 have been written off before the swap. When the equity value of $200 is received under a debt/equity swap, the equity value is clawed back under subsection 63(3) in both cases. At the same time, the swap loss is calculated as $400.
The limit under subsection 63F(2) is the amount of debt owing (i.e. $600) less any previous deduction ($200 in Situation 2 and $350 in Situation 2A). The limit, therefore, is $400 for Situation 2 and $250 for Situation 2A. The relevant swap loss allowable under subsection 63E(3) is $400 for Situation 2. However, the allowable swap loss in Situation 2A is limited to $250.Situation 3
Situation 3 is where all of the debt owing has been allowed as bad debt deductions before the swap. In that situation, the limit under subsection 63F(2) is nil and no swap loss is allowable under subsection 63E(3). [Subsection 63F(1)]
The equity value of $200 is assessable under subsection 63(3).Example B
Situation 1
Situation 1 Situation 2 Situation 2A Situation3 1st D/E Swap for Part of Debt 300 300 300 300 Equity Value 100 100 100 100 Bad Debt Ded Allowed Nil 200 350 600 s.63(3) Income Nil 100 100 100 Swap Loss 200 200 200 200 s.63F(2) Limit n/a 400 250 Nil s.63E(3) Deduction 200 200 200 Nil Net Bad Debt Ded Allowed Nil 100 250 500 Balance of s.63F(2) Limit 300 200 50 Nil Balance of Debt Owing 300 300 300 300 Repayment of Debt 100 100 100 100 Bad Debt Ded Allowed Nil 100 250 500 s.63(3) Income Nil 100 100 100 Net Bad Debt Ded Allowed Nil Nil 150 400 Balance of s.63F(2) Limit 200 200 50 Nil Balance of Debt Owing 200 200 200 200 Bad Debt Write-off for Part of Debt 100 100 100 n/a s. 63F(2) Limit 200 200 50 n/a s. 51(1)/s.63(1) Deduction 100 100 50 n/a Net Bad Debt Ded Allowed 100 100 200 400 Balance of s.63F(2) Limit 100 100 Nil Nil Balance of Debt Owing 200 200 200 200 2nd D/E Swap for Remaining Debt 200 200 200 200 Equity Value 50 50 50 50 Bad Debt Ded Allowed 100 100 200 400 s. 63(3) Income 50 50 50 50 Swap Loss 150 150 150 150 s. 63F(2) Limit 100 100 Nil Nil s. 63E(3) Deduction 100 100 Nil Nil Net Bad Debt Ded Allowed 50 50 200 350 Balance of s. 63F(2) Limit Nil Nil Nil Nil Balance of Debt Owing Nil Nil Nil Nil [D/E = Debt/Equity; n/a = not applicable; Ded = deduction]
The position of 1st D/E swap in this Situation is similar to that of Situation 1 in Example A except that a partial debt, rather than the whole, is swapped in this scenario.
After the first swap, the balance of the limit under subsection 63F(2) is $300, not $400. The steps in arriving at that amount are as follows: [Subsection 63F(2)]
- Step 1 - the amount is $600;
- Step 2 - $600 is reduced by the previous swap loss of $200 (=$400);
- Step 3 - the debt owing after the first swap is $300. Since the amount of debt owing is less than the amount ascertained in Step 2, the limit is reduced to the amount of debt owing (i.e. $300).
The next event is the repayment of $100. Again no income is assessable under subsection 63(3). The repayment of the debt has, however, an effect on the amount of the limit under subsection 63F(2). Since the amount of debt owing is now reduced to $200 after repayment, so is the limit reduced to $200. [Step 3]
The next event is a partial debt write-off under section 51 or 63. This event does not reduce the balance of the debt owing. However, it entitles the taxpayer to the deduction and that deduction increases the net bad debt deductions allowed to $100 from nil. It also reduces the limit under subsection 63F(2) to $100 from $200 for the following event. [Step 3]
The final event is the second swap for the remaining debt of $200. Because there has now been a bad debt deduction allowed under section 51 or 63 (i.e. $100) in the previous event, the equity value of $50 must be assessed under subsection 63(3). The swap loss is $150, however, due to subsection 63F(2) limit of $100, only $100 is deductible under subsection 63E(3).Situation 2
In the first swap, because a partial bad debt deduction of $200 has been allowed before, the equity value of $100 is assessed under subsection 63(3) leaving the net bad debt deductions allowed as $100. The swap loss is $200, and since the limit under subsection 63F(2) is $400 the full swap loss is allowable under subsection 63E(3). As a result of this swap the balance of debt owing now is $300, and the limit is reduced to $200 (i.e. previous limit of $400 less the swap loss allowed of $200). As the limit is less than the debt owing, the limit remains as $200.
The remaining events run in similar steps as in Situation 1 except that any equity value or repayment received is assessed under subsection 63(3) to the extent of the 'net bad debt deductions allowed'.Situation 2A
Situation 2A runs in the same way as in Situation 2. However, when a partial bad debt of $100 is written off after repayment, a deduction allowable under section 51 or 63 is limited to $50 only instead of $100. The reason for this is that a partial debt deduction under section 51 or 63 is also subject to subsection 63F(2) limit because the writing-off event in this Situation satisfies paragraphs (a) to (c) of subsection 63F(1). As a result, where there has been a previous debt/equity swap, subsequent bad debt deductions under section 51 or 63 are only allowable to the extent that they do not exceed the subsection 63F(2) limit. [Subsection 63F(1)]
Once the subsection 63F(2) limit becomes nil, no further deduction is allowable in respect of the debt. Any equity value or repayment received is assessed under subsection 63(3).Situation 3
As in Example A, the full amount of debt owing has been allowed as bad debt deductions before in Situation 3. Consequently, no deductions under section 51, 63 or 63E are available during the whole course of events. Instead, all equity value and repayments received are assessable under subsection 63(3).
Consequential amendments
4.38. Subsection 63(3) is amended to include a reference to section 51 to ensure that any bad debts recovered in relation to debts previously allowed under section 51 is assessed under this subsection [subclause 22(a)] . The purpose of this amendment is to maintain consistency in the operation of this subsection and new section 63E. This ensures that where a bad debt or bad part of a debt for which a deduction has been given under section 51 or 63 is recovered, the deduction is recouped as assessable income under subsection 63(3). The recoupment is the lesser of the deduction previously allowed as reduced by any amount previously included under this subsection (i.e. the 'net bad debt deductions allowed' in Example B above), or the amount recovered on the debt for which a deduction has been allowed.
4.39. Sections 50B, 63A-63D, 80F, 82KH and 399A are amended to reflect explicitly the principle clarified in new subsection 63(4), where part of a debt is bad and is written off, a deduction for that part is allowable under section 51 or 63 on the same basis as a whole debt that is written off. [Clauses 21, 23-26, 28-30]
4.40. Sections 50B, 63A-63D, 80F, 82KH and 399A operate to limit bad debt deductions allowable under section 51 or 63 in certain circumstances. These sections are also amended to insert relevant subsections to ensure that limits under the sections apply also to allowable losses available under section 63E. [Clauses 21, 23-26, 28-30]
Commencement date
4.41. Amendments being made to sections 50B, 63 to 63D, 80F, 82KH and 399A to facilitate deductions for bad part of debts are expressed to apply to write-offs that occur after 26 February 1992. In practice, though, the amendments confirm the existing law.
4.42. Amendments giving effect to deductions for losses etc. under debt/equity swaps will apply where the relevant debt is extinguished after 26 February 1992.
Clauses involved in proposed amendments
Clause 21: inserts new subsections 50B(13) and 50B(14).
- •
- subsection 50B(13) ensures that for the purposes of Subdivision B of Division 2A a part of a debt is treated as if it were an entire debt.
- •
- subsection 50B(14) ensures that the limit under Subdivision B applies to a swap loss deduction allowable under section 63E also.
Clause 22: amends section 63.
Subclause 22(a): amends subsection 63(3) to add a reference to section 51.
Subclause 22(b): inserts a new subsection 63(4) to confirm that a partial bad debt write-off is an allowable deduction under section 63.
Clause 23: inserts new subsections 63A(13) and 63A(14).
- •
- subsection 63A(13) ensures that for the purposes of section 63A a part of a debt is treated as if it were an entire debt.
- •
- subsection 63A(14) ensures that the limit under section 63A also applies to an allowable deduction under section 63E.
Clause 24: inserts new subsections 63B(10) and 63B(11).
- •
- subsection 63B(10) ensures that for the purposes of section 63B a part of a debt is treated as if it were an entire debt.
- •
- subsection 63B(11) ensures that the limit under section 63B also applies to an allowable deduction under section 63E.
Clause 25: inserts new subsections 63C(3) and 63C(4).
- •
- subsection 63C(3) ensures that for the purposes of section 63C a part of a debt is treated as if it were an entire debt.
- •
- subsection 63C(4) ensures that the limit under section 63C also applies to an allowable deduction under section 63E.
Clause 26: amends section 63D.
- Subclause 26(a): amends subsection 63D(1) to ensure that the limit under section 63D applies also to allowable deduction under section 63E.
- Subclause 26(b): amends subsection 63D(2) to add a reference to a debt/equity swap within the meaning of section 63E.
- Subclause 26(c): inserts subsection 63D(3) to ensure that for the purposes of section 63D, a part of a debt is treated as if it were an entire debt.
Clause 27: inserts section 63E that will deal with debt/equity swaps and allow swap losses as a deduction. Section 63E will also include as assessable income or allowable deduction any profits or losses realised from the future sale, redemption or cancellation of the equity taken in exchange for the debt. This clause also inserts section 63F which limits a deduction allowable under section 63E.
Clause 28: inserts new subsections 80F(2) and 80F(3).
- •
- subsection80F(2) ensures for the purposes of section 80F that a part of a debt is treated as if it were an entire debt.
- •
- subsection 80F(3) ensures that the limit under section 80F also applies to an allowable deduction under section 63E.
Clause 29: amends section 82KH
- Subclause 29(a): amends subsection 82KH(1AA) to include a partial debt.
- Subclause 29(b): inserts a new subsection 82KH(ABA) to ensure that the limit imposed under section 82KH applies also to deductions allowable under section 63E.
Clause 30: inserts new subsections 399A(4) and 399A(5)
- •
- subsection 399A(4) ensures that for the purposes of section 399A a part of a debt is treated as if it were an entire debt.
- •
- subsection 399A(5) ensures that the limit under section 399A also applies to an allowable deduction under section 63E.
Clause 31: provides that the amendments made by sections 50B, 63 to 63D, 80F, 82KH and 399A regarding partial debt write-off deductions apply after 26 February 1992. It also provides that the amendments made by section 63E apply where the debt swapped is extinguished after 26 February 1992.
Tax Exempt Infrastructure Borrowings
Summary of proposed amendments
5.1. The Bill will amend the Income Tax Assessment Act 1936 (the Act) to establish a category of loan to be known as "infrastructure borrowings" and to provide for the tax treatment to be accorded such borrowings. These amendments give effect to a measure announced by the Government in the "One Nation" Statement on 26 February 1992.
5.2. "Infrastructure borrowings" will be borrowings by:
- •
- companies, and unit trusts that are taxed as companies under the Act, which intend to spend the funds borrowed on financing the construction of specified infrastructure facilities they intend to own, use and control for a period of 25 years from the time the facility becomes income producing; or
- •
- companies whose sole purpose is to invest in infrastructure borrowings.
5.3. However, infrastructure borrowings will not include borrowings by companies which are:
- •
- borrowing in partnership with another person; and
- •
- government bodies, unless they have been excluded from the Loan Council borrowing restrictions.
5.4. Infrastructure borrowings will be for a maximum period of 10 years. There will be three kinds of infrastructure borrowing:
- •
- direct infrastructure borrowing - this will be a borrowing by a company or relevant unit trust to spend on constructing an infrastructure facility that it intends to own, use and control for the purpose of deriving assessable income for a period of at least 25 years;
- •
- indirect infrastructure borrowing - this will be a borrowing by a company to lend to another person for whom the borrowing will be a direct infrastructure borrowing;
- •
- refinancing infrastructure borrowing - this will be a borrowing to refinance a direct or indirect infrastructure borrowing or a previous refinancing infrastructure borrowing.
5.5. An infrastructure facility will be a:
- •
- land transport;
- •
- seaport; or
- •
- electricity generating
facility in Australia used by the public at a charge.
5.6. The tax effects of infrastructure borrowings on borrowers and investors will be:
- •
- interest derived under infrastructure borrowings will not be assessable to investors;
- •
- interest paid on infrastructure borrowings will not be an allowable deduction to borrowers;
- •
- any profit of a trading, revenue or capital nature derived on disposal or redemption of any debt instrument that constitutes an infrastructure borrowing will be tax exempt;
- •
- any loss of a trading, revenue or capital nature incurred on the disposal or redemption of any debt instrument that constitutes an infrastructure borrowing will not be tax deductible;
- •
- expenditure incurred in borrowing to invest in infrastructure borrowings will be tax deductible.
Background to the legislation
5.7. Taxpayers who borrow funds to finance construction projects which will not be revenue productive for some years may not be able to obtain a tax deduction for the interest costs incurred on those borrowings in the year of income in which those costs are incurred. This would occur when the taxpayer has tax losses in those years of income.
5.8. In order to encourage private investment in the construction of certain public infrastructure projects, the Government has decided to allow companies borrowing to finance the construction of such infrastructure projects that they own and, when completed, will operate and use, to effectively transfer the interest deduction incurred on those borrowings to the providers of the finance.
Explanation of proposed amendments
5.9. The proposed amendments to the Act relating to infrastructure borrowings will:
- •
- set out the conditions a borrowing must satisfy to qualify as a tax exempt infrastructure borrowing [Subdivision A] ; and
- •
- provide for the tax effects on investors and borrowers of an infrastructure borrowing. [Subdivision B] . [Clause 34 - Division 16L]
5.10. An infrastructure borrowing will be a borrowing by a borrower (see later notes) to finance:
- •
- the construction of one or more specified public infrastructure facilities in Australia which the company intends to own, use and effectively control for at least 30 years; or
- •
- the construction of one or more related facilities (see later notes).
5.11. The term "borrowing" is defined broadly and includes bonds, debentures discounted securities and any other form of indebtedness. A borrowing may be secured or unsecured. [New subsection 159GZZZU]
5.12. There will be three kinds of infrastructure borrowing:
- •
- direct infrastructure borrowing - a borrowing raised by a company or unit trust to spend on constructing infrastructure facilities or on constructing or acquiring related facilities (paragraph (a));
- •
- indirect infrastructure borrowing - a borrowing raised by a company to lend under a direct infrastructure borrowing; (paragraph (b));
- •
- refinancing infrastructure borrowing - a borrowing to refinance a direct or indirect infrastructure borrowing or a previous refinancing infrastructure borrowing (paragraph (c)). [New section 159GZZZZV]
5.13. A company, or a corporate unit trust or a public unit trust that is taxed as a company (under Division 6B or 6C, respectively) will be able to be a borrower under a direct infrastructure borrowing or a refinancing infrastructure borrowing that is related to a direct infrastructure borrowing. [New subparagraph 159GZZZZ(2)(a)(i)]
5.14. However, only a company will be able to be a borrower of an indirect infrastructure borrowing or a refinancing infrastructure borrowing that is related to an indirect infrastructure borrowing. [New subparagraph 159 GZZZZ(2)(a)(ii)]
5.15. A borrower must intend to retain the same structure, ie. company or unit trust, as the case may be, for the period from the borrowing until 25 years after the infrastructure facility commences to produce assessable income. [New paragraphs 159GZZZZ(2)(b) and (c)]
5.16. A borrower must also intend that there be no change in the majority ownership of the company or unit trust from the time of the borrowing until 25 years after the infrastructure facility commences to produce assessable income.
5.17. If the borrower is a company listed on a stock exchange and one person controls more than 50% of the voting power in the company, that person must intend not to dispose of his, her or its majority interest in the company until the 25 year assessable period has expired. [New subsection 159GZZZZ(6)]
5.18. If the borrower is an unlisted company, the person, or a group of persons, holding more than 50% of the voting power in the company must intend not to dispose of the majority ownership until the 25 year assessable period has expired. [New subsection 159GZZZZ(7)]
5.19. Companies borrowing in partnership with another person will not be able to use infrastructure borrowings. This provision does not preclude a joint venture that is not a partnership from raising funds under an infrastructure borrowing. (Partnership has its general law meaning) [New paragraph 159GZZZZ(2)(d)]
5.20. Bodies that are government owned will be excluded from raising funds under infrastructure borrowings unless the Loan Council has declared them to be exempt from the global borrowing limits. The Treasurer will publish the names of bodies excluded from the global borrowing limits in the Gazette. [New paragraph 159GZZZZ(2)(e) and new subsection 159GZZZZ(4) and (5)]
5.21. A company will be government owned if a government body defined as the Commonwealth, a State, a Territory or a public authority that is exempt from tax under paragraph 23(d) is beneficially entitled to more than 50% of the dividend, voting or return of capital rights. Similarly, a trust is government owned if a government has more than a 50% interest in the income or corpus of the trust. [New subsection 159GZZZZ(3)]
Direct infrastructure borrowing
5.22. To qualify as a direct infrastructure borrowing, the borrowed funds must, at the time of borrowing, be intended to be spent on the construction of facilities for land transport, seaports and electricity generation (principal facilities) or facilities without which the principal facility could not operate effectively (related facilities). [New section 159GZZZZA]
5.23. The borrower must also intend to own, use and effectively control the use of the facility financed by these borrowings for at least 25 years from the time the facility starts to produce assessable income. If section 51AD or Division 16D of the Act will apply to any property in either the main or related facility, infrastructure borrowings will not be able to be used. [New section 159GZZZZB]
5.24. A company must own the principal facility (and any related facility) that is to be constructed using infrastructure borrowings. If the land on which a company is constructing a facility is the subject of a Crown lease, the company will be treated as the owning the facility provided that:
- •
- the lease does not expire for at least 25 years from the day the facility is expected to become income producing; or
- •
- if the lease is due to expire before that time, that the company expects, because of law, custom or otherwise, that the lease will be renewed or extended, and that the renewed or extended lease will not expire until a time at least 25 years from the day the facility is expected to become income producing. [New subsection 159GZZZZB(2)]
5.25. Crown lease is defined to mean a lease of land granted by the Crown under a statutory law of the Commonwealth, a State or a Territory. The effect of limiting Crown leases to those granted under statutory law is that only leases granted by the Crown under a specific law which relate to the leasing of Crown lands will constitute ownership. Thus, a lease granted by the Crown under an ordinary commercial contract would not fall within the definition of "Crown lease". [New section 159ZZZU]
Using and controlling the facility
5.26. In addition to owning the facility and intending to derive assessable income from public use of the facility for at least 25 years, the company must also intend, in the course of deriving the assessable income, to effectively control the use of the facility. A company that intends to derive assessable income by leasing the facility cannot use infrastructure borrowings to finance the facility.
Owner to have effective control
5.27. It is not enough that the company constructing the facility intends to own and use the facility. It must also effectively control use of the facility. A company will be considered to effectively control a facility if it either operates the facility on a day-to-day basis through its employees or agents, or has such an immediate supervisory role that enables it to direct others in that day-to-day operation.
Spending on related facilities
5.28. Borrowings will be able to be spent on a related facility if the borrower:
- •
- will be spending some of the money on an infrastructure facility;
- •
- owns, uses and effectively controls, or intends to own, use, effectively control and derive assessable income from the principal facility for 25 years; and
- •
- intends to begin constructing or acquiring the related facility no later than 10 years after:
- -
- construction commenced on the principal facility; or
- -
- the principal facility was acquired. [New subsection 159GZZZZA(2)]
5.29. An infrastructure borrowing will not be able to be spent on:
- •
- leasing;
- •
- acquiring a partly constructed facility; or
- •
- on refinancing a loan that is not an infrastructure borrowing. [New subsection 159GZZZZA(3)]
5.30. However, the funds will be able to be spent on acquiring the land on which the facility is to be constructed.
Indirect infrastructure borrowing
5.31. A company that is established for the special purpose of acquiring infrastructure borrowing securities will be able to undertake infrastructure borrowings to finance the acquisition of such securities. These special purpose companies will be able to pool funds for investing in infrastructure borrowings in eligible facilities being constructed by different bodies. [New section 159GZZZX]
5.32. The whole of the monies raised by a borrower in an indirect infrastructure borrowing must be invested in direct or refinancing infrastructure borrowings.
Refinancing infrastructure borrowing
5.33. Infrastructure borrowings will not be able to be used to repay existing debt other than as specifically permitted. The funds are to be used to finance new work on constructing the facility. However, a borrowing to repay the debt due under an existing infrastructure borrowing, ie. a direct, indirect or refinancing borrowing, within 10 years of the initial borrowings will qualify as an infrastructure borrowing. [New section 159GZZZY]
5.34. An infrastructure facility is a land transport, seaport or electricity generation facility in Australia that the public will be charged a fee to use. Facilities that are functionally related to these facilities will be treated as being part of the facility. [New subsection 159GZZZZC]
5.35. There are three basic kinds of infrastructure facilities. These are:
- •
- land transport;
- •
- seaport;
- •
- electricity generation.
5.36. A further kind of facility is a related facility. This is a facility in Australia which is reasonably necessary for the infrastructure facility to be able to operate in the intended manner. (See earlier notes on "related facilities".) [New section 159GZZZZD]
5.37. Land transport facilities will be roads, railways, tunnels and bridges in Australia that are used by the public for a fee for the transport of persons or goods. [New subsection 159GZZZZC(2)]
5.38. Facilities related to a land transport facility will include plant, buildings and other equipment needed to operate and maintain the road or railway, such as rolling stock, buildings from which staff carry out their duties and storage facilities and railway stations.
5.39. A seaport facility will be a wharf or dock in Australia used by the public to carry or transfer sea cargo or passengers for a fee. Related facilities would include cranes and passenger terminals. [New subsection 159GZZZZC(3)]
5.40. A seaport that services a specific project, such as a mine, is not used for the public carriage of sea cargo and passengers and will not be able to be financed by infrastructure borrowings. This will be the case whether the taxpayer operates the specific project or provides the seaport facilities to another person for a fee.
5.41. Expenditure on the upgrading of a facility, including a facility that is not new, such as to increase its capacity, and on the upgrading of any of the above items will be eligible.
5.42. Ships, barges, tugs and similar vessels or facilities designed for their construction or repair and maintenance (dry docks) will not be related facilities.
Electricity generating facilities
5.43. An electricity generating facility will be one that generates electricity for supply to the public electricity grid. The electricity generated by the facility must be sold to the public through the public grid. [New subsection 159GZZZZC(4)]
5.44. The construction costs of the power station and those buildings directly related and essential to the operation of the generating facility are eligible.
5.45. The energy source of the power station, such a dam or coal mine, and the cost of transporting the fuel for generating the electricity will not be a related facility. Also, the transmission of electricity, including the cost of connecting the generating facility to the grid, will not be a related facility.
5.46. Those facilities which generate electricity for a specific project, such as a mine, will not be eligible. This will be the case whether the borrower operates the specific facility or supplies the electricity to another person for a fee. In these cases the electricity is not supplied to a public electricity grid. A facility is also not eligible where it generates electricity primarily for a specific purpose and merely sells excess production to the public grid.
5.47. Expenditure on the upgrading of a facility, including a facility that is not new, so as to increase its capacity, would be eligible. The costs of repairs and maintenance are not eligible.
5.48. If other facilities are necessary for an infrastructure facility to function properly, eg a railway station or a crane to unload cargo at a seaport, the borrowings will also be able to be used to finance the construction or acquisition of these related facilities. The test is whether the facility is related to the principal facility. Facilities that are related to the "related facility" will not be able to be financed by the infrastructure borrowing. [Subsections 159GZZZZD(1) and (2)]
5.49. An access road will not be a land transport or related facility. However, a road that is part of a facility will not be an access road. For example, if a road is part of a port facility it would not be an access road. [Subsection 159GZZZZD(3)]
Public to pay to use the facility
5.50. The owner is to derive income from the public being charged a fee to use the facility. If an arrangement is entered into between the owner of a facility and a person who is to be the sole or major user, or purchaser of the output, of a facility, under which the user (or purchaser) pays a fixed amount that is not based on actual usage or output of the facility, the facility would not be a public infrastructure facility. Similarly, if it is likely that the public will be a minor user of the facility, it will not be an infrastructure facility.
Tax effects of infrastructure borrowings
5.51. A borrowing will only qualify as an infrastructure borrowing for a period of 10 years from the day the first tranche of the borrowing is drawn down or debt instruments, such as bonds, are issued. This 10 year period is referred to as the "exemption period". [New section 159GZZZU]
5.52. If the loan is for a period in excess of 10 years, it will only be an infrastructure borrowing (and qualify for the concessional treatment) until the tenth anniversary of the borrowing. After that it will be taxed on the same basis as an ordinary fund raising.
5.53. Investors in infrastructure borrowings will be exempt from income tax on interest and amounts in the nature of interest derived from that investment. [New subsection 159GZZZZE(1)]
5.54. If the infrastructure borrowing is a "security" within the definition of the term in section 159GP, and the security is issued for more than 10 years, the security will be an infrastructure borrowing for the first 10 years and the interest accrued during that period will be exempt from tax and not tax deductible. Once the tenth anniversary of the issue of the security has passed, Division 16E will apply to determine the assessable return on the security. [New subsection 159ZZZZE(2)]
5.55. Where the infrastructure borrowing is in the form of a security, any gains or losses arising on the disposal of the security, whether the gain or loss is in the nature of a capital, trading or revenue nature will be exempt from tax (gains) and not tax deductible (losses). Similarly, any profit (or loss) on the redemption of an security (by the issuer) while it is an infrastructure borrowing will be exempt from tax (and not deductible).
5.56. If the infrastructure borrowing is a security that has not been redeemed within 10 years of being issued, it will be deemed to be disposed of for its market value immediately before the 10 year period expires, and to be acquired for the same price immediately the 10 year period expires. [New subsection 159GZZZZE(3)]
5.57. Companies paying interest on bearer debentures have a tax liability in respect of that interest (Division 11 of Part III). Companies paying interest on infrastructure borrowings that are in the form of bearer bonds will however, be exempt from tax on that interest (section 125). [Clause 32]
5.58. Non-residents deriving interest from Australian investments may be liable for withholding tax on that interest (section 128B). Interest paid to non-residents on infrastructure borrowings will, however, be exempt from withholding tax. [Clause 33]
5.59. Where exempt income is generated by a unit trust and is distributed to investors, the cost base of the units is normally reduced for capital gains tax purposes. The exempt income in respect of infrastructure borrowings will, however, not reduce the cost of the units in the unit trust. [Clause 35: paragraph160ZM(3A)(d)]
5.60. Under the existing law expenditure incurred in deriving exempt income is not tax deductible (section 51(1)). However, expenditure incurred by investors in investing in infrastructure borrowings will be allowable as a deduction as if the investment was income producing. [New section 159GZZZZF]
5.61. This concession is limited to deductions allowable under subsection 51(1), eg. borrowing costs. Thus, deductions will not be allowable for the cost of infrastructure borrowings acquired as trading stock or on revenue account or for interest or borrowings written-off as bad debts. [New paragraph 159GZZZZF(1)(d)]
Commencement date
5.62. The amendments will apply to borrowings undertaken on or after 1 July 1992 to spend on the:
- •
- constructing infrastructure facilities; or
- •
- constructing or acquiring of related facilities;
on or after that day, provided that no contract for the expenditure was entered into before 27 February 1992. [Clause 36]
5.63. However, for technical drafting reasons, the amendments relating to infrastructure borrowings will commence one day after the Bill receives Royal Assent. [Subclause 2(2)]
Clauses involved in proposed amendments
Clause 32: amends section 125 to exempt interest on infrastructure borrowings from being taxable to companies as interest paid on bearer debentures.
Clause 33: amends subsection 128B(3) to exclude income on infrastructure borrowings from being subject to withholding tax.
Clause 34: inserts new Division 16L (containing section 169GZZZU to 159ZZZZF) to create infrastructure borrowings and to provide for their tax treatment.
Clause 35: amends section 160ZM to exclude the exempt income arising from infrastructure borrowings from reducing the cost base of units in a unit trust.
Clause 36: contains the application provisions for the amendments relating to infrastructure borrowings.
Depreciation of Property Installed on Leased Crown Land
Summary of proposed amendments
6.1. Income tax law is to be amended to extend depreciation deductions to taxpayers who are currently denied deductions for plant installed on Crown leases.
6.2. Under existing law, taxpayers who install property on Crown leases can be denied depreciation deductions where, owing to the degree of attachment of the plant to the land, the law treats the Crown as the owner, and not the taxpayer who actually incurred the expenditure on the plant. A precondition for depreciation deductions is that the taxpayer owns the property for which deductions are sought.
6.3. Taxpayers in those circumstances are now to be treated as owners of the property for depreciation purposes, so enabling them to obtain deductions.
6.4. The amendment applies from 27 February 1992. It applies to expenditure incurred on or after 27 February 1992 in installing property on Crown leases. It also applies to expenditure on property incurred before that date based on a notional written down value of the property on 27 February 1992.
Background to the legislation
6.5. Under income tax law, the cost of plant used in income-producing activities is a capital expense and therefore not a deductible outgoing. Depreciation is a means by which the capital cost of plant used in producing assessable income can be written off as tax deductions over a period of time. It recognises that plant will gradually wear out as it is used.
6.6. Taxpayers must own the property for which they seek depreciation deductions. This is because subsection 54(1) of the Income Tax Assessment Act gives depreciation only for property "owned" by the taxpayer.
6.7. Under existing law, taxpayers who incur capital expenditure in installing property on leased land can be denied depreciation deductions where, owing to the degree of attachment of the property to the land, the law treats the lessor as the owner, and not the taxpayer who actually incurred the expenditure.
6.8. Taxpayers in those circumstances are not always denied deductions.
6.9. For example, a lessee is entitled to claim depreciation deductions on the cost to the lessee of depreciable structural improvements and fixtures on land used in primary production because of special rights conferred under various state property laws. The lessee may have a statutory proprietary right, a right to remove property or a right to compensation from the lessor for the value of the property. Those rights are seen to confer sufficient rights to make the lessee the owner for depreciation purposes, even if not the owner in the fullest sense.
6.10. However, there are instances where holders of Crown leases cannot be viewed as the owners of depreciable property installed on the land because they have no real ownership rights. Under existing law, they would not obtain depreciation deductions.
6.11. Example of that are taxpayers who construct facilities such as power stations, roads or tollbridges on Crown land where there is no special right to compensation or removal (if that was possible) on the expiry of the lease. The intention in those cases is that the taxpayers have a fixed period during which they operate the facility; on the expiry of the lease, the property passes to the Crown for no consideration.
6.12. Because taxpayers in those situations do not have sufficient ownership rights, existing tax law denies them depreciation deductions in relation to any part of the facility which constitutes depreciable property.
6.13. The amendments apply to those sorts of situation; that is, where property is attached to Crown leases for which lessees are denied depreciation deductions under the existing law only by reason of its attachment to the land.
6.14. For convenience, a reference in the following notes to "leasehold depreciable property" will be a reference to such property.
Explanation of proposed amendments
6.15. The effect of the amendments is to treat holders of Crown leases as owners of property on the land so that the existing depreciation rules can generally apply. There are some necessary modifications. The following explains the amendments and how they will interact with existing depreciation provisions.
6.16. The amendments apply to holders of Crown leases. "Crown lease" is a term already defined in subsection 160K(1) of the Act and means either a lease of land granted by the Crown under a statutory law of the Commonwealth, a State or Territory or a similar lease granted under a statutory law of a foreign government. [New paragraph 54AA(1)(a) and subsection 54AA(8)]
6.17. Taxpayers who acquire or construct property and install it on Crown leases held by them will, if the existing law does not treat them as owners for depreciation purposes, generally be treated as the owners of that property for depreciation purposes, as will subsequent holders of the leases. [New subsection 54AA(1) and new paragraph 54AA(2)(a)]
6.18. That will then enable those lessees of Crown land to obtain depreciation deductions for the capital cost to them of leasehold depreciable property.
Lessees not owners of plant in certain situations
6.19. Taxpayers will be not treated as owners of property on Crown leases if they are involved in arrangements to obtain depreciation deductions instead of the person who is to obtain the real benefits of ownership of the property. [New subparagraphs 54AA(1)(d)(ii) and 54AA(1)(e)(iii)]
6.20. For instance, a finance company which acquired a Crown lease and installed depreciable property on the land under an arrangement where another taxpayer could acquire the lease at a later time would not be treated as the owner of that property for depreciation purposes. Such an arrangement is equivalent to a "hire purchase" agreement under which the other person effectively acquires ownership of the lease.
6.21. Similarly, a finance company would be not treated as the owner of property on a Crown lease owned by it if, in the ordinary course of business, it had granted an exclusive right to another person to use that property for the whole or a substantial portion of its effective life. The effect of such an arrangement is to pass the benefits of ownership of the property to the other person.
Cost of leasehold depreciable property
6.22. If the taxpayer installed the property on the land, the taxpayer's costs in acquiring or constructing that property will be the amount available for depreciation. (That follows under existing law and no amendment is required).
6.23. If the depreciable property was on the land at the time a taxpayer acquired a Crown lease from the earlier lessee, the taxpayer would be taken to have acquired the property for an amount equal to that portion of the purchase price of the lease that related to the property. [New paragraph 54AA(2)(b)]
Consequence of termination of leases
6.24. An expiry or surrender of a Crown lease, or termination of a Crown lease by the lessor, not followed by the grant of either a fresh lease or freehold title over the land to the lessee or an associate, will be treated as a disposal by the lessee to the lessor of any leasehold depreciable property.
6.25. The consideration for disposal will be the amount, if any, received by the lessee in respect of the expiry, termination or surrender of the Crown lease so far as that relates to leasehold depreciable property. [New paragraphs 54AA(2)(c) and (2)(e)]
6.26. The existing balancing adjustment rules governing disposals of depreciable property will then determine whether the lessee has derived an assessable recoupment of previously allowed deductions or incurred a deductible loss.
6.27. If the consideration for disposal exceeds the depreciated value of the property (broadly, cost less deductions allowed), the lessee will be assessable on the excess to the extent that it does not exceed the sum of depreciation deductions allowed.
6.28. Similarly, if the consideration for disposal is less than depreciated value, a deduction will be available for the difference.
Terminated lease followed by grant of fresh lease or freehold title
6.29. It would be inappropriate to treat an expiry, surrender or termination of a Crown lease as disposal of property on the land if followed by the grant of a fresh lease of the land to the lessee - the lessee would still have use of the property. Instead, the lessee will be taken to continue to own the property. That is achieved by specifying that the fresh lease is a continuation of the terminated lease. [New subsection 54AA(5)]
6.30. Similarly, if a termination, expiry or surrender of a lease is followed by the grant of freehold ownership of the land to the lessee, the lessee will be taken to continue to own the property. (That is considered to follow from having treated the lessee as the owner under the lease, and no further amendment is necessary).
Terminated lease followed by grant of fresh lease or freehold title to associate of lessee
6.31. If, in the above circumstances, a fresh lease or freehold title was granted to an "associate" of the lessee, the lessee would similarly be taken to have disposed of any depreciable leasehold property to the lessor.
6.32. However, that disposal will be taken to occur for consideration equal to what would have been the market value of the leasehold depreciable property immediately before the termination as if the lessee had held freehold title to the land. [New paragraphs 54AA(2)(d) and (2)(f)]
6.33. That is a measure to prevent abuses of the new arrangements. Otherwise, deductible balancing losses could arise in circumstances where there was no real change in ownership or use of property.
6.34. "Associate" has the same meaning as in existing section 26AAA [new subsection 54AA(8)] . That meaning is quite extensive and broadly applies to relatives and partners of a taxpayer or trusts or companies which a taxpayer controls.
6.35. The meaning of associate is extended to ensure that a reconstituted partnership is an associate of the former partnership [New subsection 54AA(7)] . It also ensures that authorities of the Commonwealth are treated as associates of the Commonwealth and of each other, as are authorities of a State or Territory. [New subsection 54AA(6)]
6.36. This ensures that there will not be balancing losses when, for instance, a statutory authority leasing Crown land on which plant is installed is replaced with another authority of the same government using the same Crown land and the same plant.
6.37. An assignment of a Crown lease will constitute a disposal of any leasehold depreciable property by the lessee to the assignee. The consideration is the part of the amount paid by the assignee for the lease that relates to that property. [New paragraph 54AA(2)(g)]
6.38. Under existing law, non-arm's length disposals of depreciable property are taken to occur at market value (paragraph 59(3)(d) or subsection 59(4)). In the case of non-arm's length disposals of Crown leases, market value of leasehold depreciable property will be assessed as if the lessee had a freehold interest in the land. [New paragraphs 54AA(3)(a) and (3)(b)]
Partial changes in ownership of property
6.39. A partial change in ownership of depreciable property, as can occur on the reconstitution of a partnership, is taken for depreciation purposes to constitute a disposal of the whole of the property by all of the persons who owned the property before the change to all of the persons who owned the property after the change. The consideration for disposal is deemed to be the market value of the property immediately before the partial change in ownership.
6.40. That rule will also apply on a partial change in ownership of leasehold depreciable property on Crown leases. The only modification is that the market value of the property immediately before the partial change in ownership will be worked out as if the owners had a freehold interest in the land. [New paragraph 54AA(3)(c)]
Destruction of depreciable property
6.41. Under the existing law, the destruction of depreciable property is treated as if there had been a disposal of that property for consideration equal to any amount of compensation received [subsections 59(1) and (2) and paragraph 59(3)(b)] . Assessable/deductible balancing adjustments may arise as described above at (paragraphs 6.26 to 6.28).
6.42. The same rules will apply on the destruction of depreciable property installed on Crown leases. That follows from having deemed lessees to be owners and therefore entitled to depreciation deductions, and no modification to the law is required.
6.43. As explained above (paragraph 6.41) , recoupments of deductions which accrue on the disposal of leasehold depreciable property are assessable. Recoupments arise if the consideration for disposal exceeds depreciated value.
6.44. Under existing law, taxpayers can obtain several forms of rollover relief in relation to disposals of depreciable property. Where relief is taken, assessable recoupments are offset or deferred. Those forms of relief are:
- •
- an option to set assessable recoupments successively against the depreciable cost of replacement property, other property acquired during the year and the depreciated values of property on hand at the beginning of the year (subsections 59(2A) and (2D)) ;
- •
- balancing adjustment rollover relief, which permits a deferral of balancing adjustments in a number of situations where there is no change the real ownership of property or there is there is only a partial change in ownership of property (section 58)
6.45. By the nature of these amendments, those forms of rollover relief will also be available for disposals of leasehold depreciable property in the same circumstances.
Consequential amendments to capital gains tax
6.46. A number of the changes made by these amendments to the treatment of leasehold depreciable property mean that the depreciation and capital gains tax provisions would not treat such property in a consistent manner.
6.47. For example, capital gains tax treats the termination of a lease as a disposal of the lease, including any leasehold depreciable property, irrespective of whether the lease is followed by the grant of a fresh lease or freehold title over the land.
6.48. That would be inappropriate now that the depreciation rules treat the lessee in those circumstances as continuing to the own any property on the leased land.
6.49. Accordingly, the capital gains tax provisions are to be amended so that they treat crown leases in a manner consistent with the new depreciation rules. It is expected that those amendments will be introduced during the Budget session of Parliament, and will apply from the same time as these depreciation amendments.
Commencement date
6.50. Commencing on 27 February 1992, holders of Crown leases are to be treated as owners of depreciable property installed on the land. [Subclause 38(2)]
Depreciable property installed after 26 February 1992
6.51. That means that holders of Crown leases who incur capital expenditure after 26 February 1992 in installing income-producing depreciable property on the land will be entitled to depreciation deductions. Similarly, taxpayers who acquire Crown leases from earlier holders after that date will be entitled to depreciate the cost to them of any leasehold depreciable property on the land.
Pre-27 February 1992 leasehold depreciable property
6.52. Taxpayers holding Crown leases on 27 February 1992 who were denied depreciation deductions for the cost of leasehold depreciable property because they were not the owners, will become entitled to depreciation deductions in respect of income-producing use of that property on or after that date. That follows from having treated Crown lessees to be owners of leasehold depreciable property, commencing 27 February 1992.
6.53. Deductions will be calculated under the diminishing value method unless an election is made under existing subsection 56(1AA) to adopt the prime cost method for all property, including leasehold depreciable property, first becoming depreciable in the same year.
6.54. If the prime cost method is adopted, deductions will be calculated by applying the appropriate rate of depreciation to the original cost of the property. However, deductions will not be available for so much of that cost that would have been allowable as depreciation deductions before 27 February 1992 if holders of Crown leases had always been treated as owners.
6.55. In calculating the amount of deductions notionally allowed before 27 February 1992, Crown lessees will use the relevant standard rate of depreciation applicable to their property increased by the former section 57AG loading of either 20 percent or 18 percent if that section would have applied.
6.56. Special rates of depreciation that may have otherwise applied (for example "5/3") are ignored. Also ignored is the effect of "broadbanding"; that is, taxpayers will not be required to increase standard depreciation rates to the next highest of the seven broadbanding rates that first applied for the 1991/92 income year for all property acquired before 27 February 1992. [Transitional paragraph 38(3)(e)]
6.57. However, broadbanding of depreciation rates will be available in calculating claims for deductions after 26 February 1992 if taxpayers so choose. (That follows from existing law).
6.58. If the diminishing value method applies to pre-27 February 1992 leasehold depreciable property, the cost for calculating future depreciation deductions will be equal to the notional depreciated value of the property immediately before 27 February 1992; that is, the original cost of the property less the deductions notionally allowable before 27 February.
The rules for calculating those notionally allowed deductions are the same as described above in relation to the prime cost method. [Transitional paragraph 38(3)(d) and transitional subclause 38(4)]
Clauses involved in proposed amendments
Clause 37: inserts new section 54AA.
Subsection 54AA(1): specifies the circumstances under which a lessee of Crown land is to be treated as the owner of property on the land.
Subsection 54AA(2): specifies what transactions will be treated as acquisitions and disposals of property on Crown leases for the purposes of the depreciation provisions, and the consideration taken into account for the purposes of those provisions.
Subsection 54AA(3): specifies the meaning of market value in relation to certain disposals of property on Crown leases.
The effect of subsection 54AA(4) : is to treat lessees of Crown land who are treated as owners of property for depreciation purposes as owners under section 51AD and Division 10D.
Those provisions apply to certain arrangements involving the use of property by tax exempt bodies and the like. One of their purposes is to deny depreciation deductions to owners of property used in proscribed transactions.
Subsection 54AA(4): ensures that the intended application of those provisions is not frustrated by reason that Crown lessees are not, at law, the real owners of property on the leased land.
Subsection 54AA(5): treats a renewal of a Crown lease as the continuation of the former lease.
Subsections 54AA(6) to (8): define a number of terms used in the amendments. One term defined in subsection (8) is "associate"; subsection (6) gives this an extended meaning in relation to government authorities, while subsection (7) gives it an extended application to certain partnerships.
Clause 38: contains the transitional rules.
Subsection 38(1): contains a number of definitions relevant to the transitional rules.
Subsection 38(2): specifies that taxpayers to whom these amendments apply are to be entitled to depreciation deductions for any income-producing use of their leasehold depreciable property that occurs after 26 February 1992.
Subsections 38(3) and (4): contain the rules for working out the amount of deductions to be available after 26 February 1992 in respect of property installed on Crown leases before 27 February 1992.
Capital Expenditure on Traveller Accommodation
Summary of proposed amendment
7.1. The write-off rate for capital expenditure on constructing buildings used to provide short-term accommodation for travellers is to increase to 4 per cent per annum (formerly 2.5 per cent per annum).
7.2. The higher rate will apply to buildings commenced to be constructed after 26 February 1992.
Background to the legislation
7.3. At present, capital expenditure incurred in constructing income-producing buildings, or extensions, alterations or improvements to buildings, is eligible for write-off over 40 years at the rate of 2.5 per cent per annum under Division 10D of the Act.
7.4. Short-term traveller accommodation describes buildings covered by Division 10C. That Division applied to buildings constructed after 21 August 1979 and before 18 July 1985 which were for use in the provision of short-term traveller accommodation. During that period, residential buildings only qualified for deduction when used for that purpose.
7.5. Division 10C ceased to apply to buildings commenced to be constructed after 17 July 1985, the date from which all new income-producing buildings were eligible for deduction under Division 10D, whatever their use.
Explanation of proposed amendment
7.6. The higher rate of deduction is to apply to buildings covered by Division 10C. The broad effect of the amendment is to "resurrect" that Division which will operate similarly as before.
7.7. As mentioned earlier, Division 10C formerly applied at a time when residential buildings did not qualify for deduction unless used as short-term traveller accommodation; there were no deductions at all while a building was used for other purposes. Similarly, a change in use of part of a building could terminate entitlement to deductions in relation to that part of the building.
7.8. However, as residential income-producing buildings now qualify for deduction, it is no longer appropriate that Division 10C should deny deductions when short-term traveller accommodation buildings are used for other income-producing purposes; for instance, converted for use in the provision of long-term accommodation, or partly converted as shops or offices.
7.9. Accordingly, Division 10C is to be changed so that deductions will be available at the lower rate of 2.5 per cent per annum for any part of a traveller accommodation building not used as short-term traveller accommodation but nevertheless used in producing assessable income.
7.10. The following explains how the Division will operate after the amendments.
7.11. Deductions will be available to owners (including certain lessees) of buildings, or of parts of buildings, in respect of which there is an amount of qualifying expenditure.
7.12. Qualifying expenditure is essentially the capital cost of the building work. That is so much of the capital expenditure incurred on the construction of a building (including a complex of buildings), or extension, alteration or improvement to a building, as is attributable to the relevant part of the building.
7.13. The relevant building, or part of a building, must have at least 10 bedrooms or units for use wholly or principally for traveller accommodation. More precisely, the building or part must be:
- •
- for use wholly or principally for the purpose of operating a hotel, motel or guest house containing at least 10 bedrooms wholly or principally for use as short-term accommodation for travellers ("qualifying hotel expenditure"); or
- •
- containing at least 10 apartments, units or flats, for use wholly or principally as short-term accommodation for travellers, and any principally associated facilities ("qualifying apartment expenditure").
7.14. Three kinds of facilities are specifically excluded. First, expenditure on facilities not for use wholly or principally in operating a hotel, motel or guest house, or apartments, units or flats would not qualify; for example, that part of a hotel development used as a shopping mall or commercial offices.
7.15. Also, expenditure on facilities not commonly provided in Australia in a hotel, motel or guest house will also not qualify. For example, a casino, cinema or amusement park operated in conjunction with a hotel or tourist resort are not facilities commonly provided in hotels, motels or guest houses in Australia.
7.16. Also excluded is expenditure on accommodation for private use of owners or shareholders, beneficiaries or partners of owners.
7.17. However, expenditure on those excluded facilities would qualify for deduction at the lower rate of 2.5 percent per annum under Division 10D where used for income-producing purposes.
7.18. Expenditure for which an owner is entitled to deductions under the plant depreciation provision is also excluded.
7.19. The cost of a building includes certain preliminary expenditures, including architects fees, engineering fees, buildings permits, etc. and the cost of excavating foundations. It does not include the cost of land and site clearing and levelling, nor landscaping.
7.20. Associated facilities such as carparks, driveways, fencing, retaining walls and recreational facilities such as tennis courts are not part of the building. However, their cost may qualify for deduction at the rate of 2.5 per cent annum under separate amendments relating to structural improvements, contained in this Bill. (see chapter 9)
7.21. An important change is that the concession will extend to buildings constructed outside Australia. Formerly, only buildings constructed in Australia could qualify. This change is consistent with an earlier removal of a similar restriction under Division 10D, brought about by the termination of the general tax exemption of foreign sourced income.
[Amended paragraphs 124ZB(1)(a) and (2)(a)]
7.22. Entitlement to deductions commences once the relevant construction is completed and is used in producing assessable income. Deductions are available for each day that the part of a building in respect of which there is either an amount of qualifying hotel expenditure (a "hotel part") or an amount of qualifying apartment expenditure (an "apartment part") is used in producing assessable income.
7.23. The amount of the deduction will depend on the income-producing use of the hotel or apartment part. [New subsections 124ZC(2A) and 124ZC(4A)]
7.24. For periods during which the whole of a hotel or apartment part is used in the prescribed manner, whether by the owner or another person, deductions will be at an annual rate of 4 per cent of the amount of qualifying expenditure. Broadly, use in the prescribed manner means use in the manner required for there to be an amount of qualifying expenditure as described above.
7.25. During periods in which the whole of a hotel or apartment part is not used in the prescribed manner, but is used to produce assessable income, deductions will be at an annual rate of 2.5 per cent of the amount of qualifying expenditure.
7.26. In instances where a hotel or apartment part is only partly used in the prescribed manner at a particular time, the portion of the qualifying expenditure that relates to the part of the part used in the prescribed manner will be deductible at 4 per cent and the balance that is used in producing assessable income will be deductible at 2.5 percent.
7.27. If two or more persons own separate parts of the same building, the amount of qualifying expenditure in relation to the building is apportioned between each part. The rules for calculating deductions then work in the same manner, as described above, for each owner's separate part.
7.28. The following examples illustrates how the new rules for calculating deductions will operate.
Example
A taxpayer owns a motel comprising 20 units and associated facilities in a country town. The taxpayer usually makes the whole of the motel available for use by travellers. Qualifying expenditure in relation to the motel is $500,000.
One year, a mining company commmences exploration activities in the area and the taxpayer grants a 12 month lease of 15 of the units to the company as accommodation for its employees. The lease commences on 1 January.
The taxpayer's claim for that year would be calculated as follows:
During the period 1 July to 31 December, the whole of the motel was used in the prescribed manner. The number of days in that period is 184. So the deduction for that would be calculated as follows:
$500,000 x 0.04 x 184/365 = $10,082
For the period 1 January to 30 June, only 5 units were used in the prescribed manner. This is less than the required minimum of ten, so the rate of deduction will reduce to 2.5 per cent. The deduction for the period 1 January to 30 June, a period of 181 days, would be calculated as:
$500,000 x 0.025 x 181/365 =$6,199
Summary of deductions allowable: $ Period 1 July to 31 December 10,082 Period 1 January to 30 June 6,199 Total 16,281
Deductions at the higher rate of 4 per cent per annum would become available once at least ten of the units were used in the provision of short-term traveller accommodation.
7.29. The total amount of deductions allowable cannot exceed the amount of qualifying expenditure in relation to that building. That is achieved by specifying that a deduction in a year in relation to an amount of qualifying expenditure must not exceed the amount of residual capital expenditure in relation to the amount of qualifying expenditure at the beginning of the year or, if the building was acquired during the year, immediately after the time of acquisition. [New subsections 124ZC(5A)and (5B)]
7.30. The meaning of residual capital expenditure is described later in detail; broadly, it means the amount of qualifying expenditure less deductions allowed or allowable; that is, the amount of qualifying expenditure remaining for deduction.
7.31. That method of setting the limit on deductions is a change from the existing rules which specify a fixed period for which deductions are available; for example 25 years at 4 per cent per annum. That is not appropriate now that the rate of deduction can vary according to circumstances of use and so vary the time over which deductions ought to be available.
7.32. A deduction is available on the destruction, or part destruction, of a hotel or apartment part to the extent that the amount of any residual capital expenditure at the time of destruction attributable to the destroyed part exceeds any compensation received.
7.33. Under the existing rules, a requirement for deduction is that the hotel or apartment part be used in the prescribed manner (that is, as short-term traveller accommodation) immediately before the destruction, or if not so used, that the last use was in that manner. So, a deduction would not be available where the destroyed part was being used for other purposes.
7.34. That would not be appropriate now that residential buildings are eligible for deduction where used for any income-producing purpose. Accordingly, the requirement will now be that the last use of a post-26 February 1992 building before it is destroyed not be other than for producing assessable income. [New paragraph 124ZE(7)(b)]
7.35. The existing requirement that the last use be in the provision of short-term traveller accommodation will continue to apply to buildings commenced to be constructed before 18 July 1985.
7.36. As described above, residual capital expenditure is relevant for determining the total amount of available deductions and calculating any deductible loss on the destruction of a building.
7.37. In essence, the amount of residual capital expenditure in relation to an amount of qualifying expenditure at a particular point in time is the excess of the amount of qualifying expenditure over the sum of deductions allowed or that would have been otherwise allowable during periods when the relevant building was not used for income-producing purposes.
7.38. Reflecting that the rate of deduction may vary according to the circumstances of use of a building, the calculation of residual capital expenditure requires a determination of the periods of time during which a hotel or apartment part was used in the prescribed manner and periods when not so used, commencing from the time when the building was first used for any purpose. [New subsections 124ZA(16A) and (16B)]
7.39. For periods during which the whole of a hotel or apartment part was used in the prescribed manner, the relevant amount of qualifying expenditure is reduced at the rate of 4 per cent per annum of that amount, reflecting that deductions have been allowed at that rate.
7.40. During periods in which the whole of a hotel or apartment part is not used in the prescribed manner, perhaps because it is used for another income-producing purpose or for no income-producing purpose, the relevant amount of qualifying expenditure will be reduced at the rate of 2.5 per cent per annum of the amount of qualifying expenditure.
7.41. If a hotel or apartment part is only partly used in the prescribed manner at a particular time, the portion of the qualifying expenditure that relates to the part of the part used in the prescribed manner will be reduced at the rate of at 4 per cent and the balance at 2.5 per cent.
7.42. In instances where different parts of a building are owned by different taxpayers, a separate calculation will be made of the amount of residual capital expenditure applicable to each part. The reason for that is that each owner may use their part in a different manner and so obtain different rates of deductions. In those circumstances, the time period for deductions should reflect each owner's circumstances.
7.43. A person selling a building, or a lease of a building, to which this amendment applies is to be required to pass on sufficient information to the purchaser to enable the purchaser to know how Division 10C will apply to the purchaser's holding of the building. The same rule applies to disposals of a part of a building.
7.44. That requirement would be satisfied by specifying the amount of qualifying expenditure and residual capital expenditure in relation to the building or part of the building. Without that information, a purchaser would not know what deductions were available.
7.45. That information must be given within 6 months of the end of the year of income in which the disposal occurs. The purchaser must retain that information for 5 years after the earlier of the purchaser ceasing to be the owner of the building or the destruction of the building. So the purchaser will be able to give the information if they, in turn, sell the building or lease. [New subsections 262A(4AF) and (4AG)]
Commencement date
7.46. The amendment applies to buildings, or extensions, alterations or improvements to a building, commenced to be constructed after 26 February 1992.
7.47. Construction of a new building or an extension is taken to commence at the time of commencement of work on the foundations; for example, the excavation of foundations or sinking of pilings.
Clauses involved in proposed amendment
Clause 39(a): inserts a number of new definitions into subsection 124ZA(1) regarding the time of construction of buildings. Those definitions facilitate a number of amendments relating to residual capital expenditure, the method of calculating deductions and deduction limits.
Clause 39(b): specifies that the existing definition of residual capital expenditure (subsection 124ZA(16)) applies only where construction commenced before 18 July 1985.
Clause 39(c): inserts new subsections 124ZA(16A) and (16B) which specify how residual capital expenditure is to be calculated where construction commences after 26 February 1992.
Clause 40(a): removes the present restriction of the concession to buildings constructed in Australia.
Clause 40(b) & (c): amend the existing definitions of qualifying expenditure (section 124ZB) to include a reference to buildings, extensions, etc. commenced to be constructed after 26 February 1992.
Clause 41(a): amends the existing rules for calculating deductions (section 124ZC) so that they apply only where construction commenced before 18 July 1985.
Clause 41(b) & (c): insert new subsections 124ZC(2A) and (4A) which specify how deductions are to be calculated where construction commences after 26 February 1992.
Clause 41(d): amends subsection 124ZC(5) which governs the period during which deductions are available so that it applies only where construction commenced before 18 July 1985.
Clause 41(e): inserts new subsection 124ZC(5A) and (5B) which specify the limits on deductions where construction commenced after 26 February 1992.
Clause 42(a) & (b): amend paragraph 124ZD(5)(a) (dealing with reductions of deductions on destruction of buildings) to reflect the new requirement that residual capital expenditure is to be calculated separately in respect of each part of a building that is owned by different persons. The amendment does not change the effect of that provision.
Clause 43(a) & (e): amend paragraphs 124ZE(1)(e), (2) (e), (3)(e) and (4)(e) and insert new subsection 124ZE(7) to change the present requirement that the last use of a destroyed, or partly destroyed, building, be in the provision of short-term traveller accommodation to a requirement that the last use be in producing assessable income, where construction commenced after 26 February 1992.
Clause 43(b) to (d): make minor consequential amendments to section 124ZE (which deals with deductions on the destruction of buildings) to reflect the new method of calculating residual capital expenditure. The effect of that provision is not affected by the amendments.
Clause 44: inserts new subsection 124ZG(2C) (Division 10D income-producing buildings) to prevent double deductions for expenditure to which these amendments relate.
Clause 45: inserts new subsections 262A(4AF) and (4AG) containing the record keeping requirements.
Clause 46: removes the restriction that construction be in Australia where construction commenced after 26 February 1992.
Capital Expenditure on Industrial Buildings
Summary of proposed amendments
8.1. The capital cost of buildings, or extensions, alterations or improvements to buildings, used in industrial activities is to be deductible at the rate of 4 per cent per annum.
8.2. The amendment will apply where construction commenced after 26 February 1992.
Background to the legislation
8.3. The effect of the amendment is to modify Division 10D to allow deductions at the higher rate of 4 per cent per annum when a building is used for certain industrial purposes. The following summarises how Division 10D operated before the changes made by this amendment.
8.4. Capital expenditure on constructing buildings, or extensions, alterations or improvements to buildings, for use in producing assessable income, is evenly deductible over 40 years at the rate of 2.5 per cent per annum under Division 10D of the Act. The concession also applies to income-producing residential buildings and buildings for use in research and development activities.
8.5. Division 10D first applied to non-residential buildings commenced to be constructed after 19 July 1982. The concession was subsequently extended to residential buildings commenced to be constructed after 17 July 1985 and then to buildings for use in research and development activities commenced to be constructed after 21 November 1987.
8.6. The present rate of deduction is 2.5 per cent per annum.
8.7. However certain buildings commenced to be constructed after 21 August 1984 and before 15 September 1987 are deductible at the rate of 4 per cent per annum.
8.8. Entitlement to deductions rests with owners, including certain lessees, of buildings, or parts of buildings, for which there is an amount of qualifying expenditure. Qualifying expenditure represents the capital cost of constructing a building, or extension, alteration or improvement to a building, but does not include the cost of property for which deductions are available under another provision of the Act (for example, plant depreciation).
8.9. The cost of a building includes certain preliminary costs such as architects fees, engineering fees, buildings permits, etc. and the cost of excavating foundations. It does not include the cost of land and site clearing and levelling, nor landscaping.
8.10. Associated facilities such as carparks, driveways, fences, etc. do not qualify as they are not part of a building. However, they may qualify for deduction at the rate of 2.5 per cent per annum if constructed after 26 February 1992. [See chapter 9 on amendments relating to structural improvements, contained in this Bill].
8.11. An entitlement to deductions commences on the date of first use of the building for any purpose after completion of construction and terminates 40 years later. On a change in ownership of a building, the residual entitlement passes to the new owner.
8.12. Deductions are only available for periods during which the building is used in the prescribed manner (that is, used in either producing assessable income or research and development activities) and are calculated as 2.5 per cent per annum of the amount of qualifying expenditure. Deductions may be reduced when only part of a building is used in the prescribed manner.
8.13. In the event of the destruction of a building, a deduction is available to the extent that any compensation received for the destruction is less than the amount of qualifying expenditure remaining for deduction. A precondition for a deduction is that, if the building was not used in producing assessable income at the time of destruction, its last use was in that manner. Similar rules apply on a partial destruction of a building.
Explanation of proposed amendments
8.14. As mentioned above, the effect of the amendment is to modify Division 10D so that the higher rate of 4 per cent per annum will be available to the extent that buildings are used in eligible industrial activities. Generally speaking, the existing rules under Division 10D will continue to apply. The following explains how those rules are to be modified to give effect to the measure.
Eligible industrial activities
8.15. The higher rate will apply to the extent that the income-producing use of a building, whether by the owner or another person, is in an eligible industrial manner. [New section 124ZFA]
8.16. Use in an eligible industrial manner means use that is wholly or principally for eligible industrial activities and in the provision of certain facilities for use by persons wholly or principally employed in such activities. [New subsection 124ZFA(2)]
8.17. Eligible industrial activities encompass manufacturing operations and a number of other activities which might not otherwise be considered manufacturing. [New subsection 124ZFA(3)]
8.18. The concept of eligible industrial activities begins with manufacturing processes. These are processes involving the manufacture of goods including processes necessary to the manufacture of goods provided as a service to a manufacturer by another person. For example, an upholsterer who receives car seats from a vehicle manufacturer for upholstering and return would be involved in eligible industrial activities. [New sub-subparagraph 124ZFA(3)(a)(i)(A)]
8.19. Similarly, processes involved in finishing or maintaining manufactured goods for sale, whether by the person who manufactured those goods or another person, are eligible. So a taxpayer who receives manufactured goods for painting or some other finishing process would be involved in eligible industrial activities, as would a taxpayer providing cold storage for perishable products. [New sub-subparagraph 124ZFA(3)(a)(i)(B)]
8.20. The meaning of eligible industrial activities extends to operations involving the processing of primary products, such as metals, petroleum, wool, timber, meat and fish, milk and other foodstuffs. Printing and similar activities are also included as is the production of energy either for sale or for use in manufacturing and related activities. [New subparagraphs 124ZFA(3)(a)(ii) to (xiii)]
8.21. A number of other activities also qualify when conducted by taxpayers in connection with their eligible industrial activities: packing, placing in containers, or labelling of goods; disposal of waste substances from operations; cleansing or sterilising storage facilities for raw materials and processed goods; assembly, maintenance, cleansing, sterilising or repair of property used in operations; and storage of raw materials, work-in-progress and finished goods at or next to the place of manufacture. [New paragraph 124ZFA(3)(b)]
8.22. Excluded is the preparation of food and drink in hotels, restaurants, and similar retail outlets [New paragraphs 124ZFA(3)(c) to (h)]. However food and drink preparation in factories and breweries, respectively, will qualify.
8.23. The higher rate will apply to the extent to which a building is used in an eligible industrial manner. If a building is only partly used in the prescribed manner at a particular time, the higher rate will only apply in relation to the portion of the qualifying expenditure in respect of the building that is attributable to the part used in the prescribed manner. [New subsection 124ZH(2A)]
8.24. For example, a taxpayer conducting both manufacturing and retailing activities in a single building would be entitled to the higher rate in respect of the part used in manufacturing. That would require an apportionment of the qualifying expenditure in relation the building between the two uses. No deduction is available for any part of a building that is not used in producing assessable income.
8.25. In instances where eligible industrial activities and other activities are conducted in the same area, the dominant activity will determine whether the higher rate will apply. For example, an upholstery business may be involved in both finishing off manufactured goods (which is an eligible industrial activity) and repair work (which is not). Unless those activities were performed in discrete areas of the workshop, the use of the workshop as a whole would be determined by the dominant activity. [New paragraph 124ZFA(2)(b)]
8.26. If there are two or more owners of separate parts of a building, any qualifying expenditure in relation to the building is apportioned to the various parts. Deductions in respect of each share are separately calculated according the respective circumstances of use, in the manner described above.
8.27. The total amount of deductions allowable cannot exceed the amount of qualifying expenditure in relation to that building. That is achieved by specifying that a deduction in a year in relation to an amount of qualifying expenditure must not exceed the amount of residual capital expenditure in relation to the amount of qualifying expenditure at the beginning of the year or, if the building was acquired during the year, immediately after the time of acquisition. [New subsection 124ZH(3A)]
8.28. That method of setting the limit on deductions is a change from the existing rules which specify a fixed period for which deductions are available; for example 40 years at 2.5 per cent per annum. That is not appropriate now that the rate of deduction can vary according to circumstances of use and so vary the time over which deductions ought to be available.
8.29. As described above, residual capital expenditure is relevant for determining the total amount of available deductions. It is also relevant for calculating any deductible loss on the destruction of a building - see paragraph 8.13 above.
8.30. In essence, the amount of residual capital expenditure in relation to an amount of qualifying expenditure at a particular point in time is the excess of the amount of qualifying expenditure over the sum of deductions allowed or that would have been otherwise allowable during periods when the relevant building was not used for income-producing purposes [New subsection 124ZF(11A)].
8.31. Reflecting that the rate of deduction may vary according to the circumstances of use of a building, the calculation of residual capital expenditure requires a determination of the periods of time during which a building was used in an eligible industrial manner and periods when not so used, commencing from the time when the building was first used for any purpose.
8.32. For periods during which a building is used in an eligible industrial manner, the relevant amount of qualifying expenditure is reduced at the rate of 4 per cent per annum of that amount, reflecting that deductions have been allowed at that rate.
8.33. During periods in which a building is not used in an eligible industrial manner, whether it is used for another income-producing purpose or not, the relevant amount of qualifying expenditure will be reduced at the rate of 2.5 per cent per annum of the amount of qualifying expenditure.
8.34. Where a building is only partly used in an eligible industrial manner at a particular time, the portion of the qualifying expenditure that relates to the part of the part used in the prescribed manner will be reduced at the rate of at 4 per cent per annum and the balance at 2.5 per cent per annum.
8.35. In instances where different parts of a building are owned by different taxpayers, a separate calculation is to be made of the amount of residual capital expenditure applicable to each part. That is to be done by apportioning the amount of qualifying expenditure in relation to the building between the various parts and then applying the above rules.
8.36. A person selling a building, or a lease of a building, to which this amendment applies needs to pass on sufficient information to the purchaser which will enable the purchaser to know how Division 10D will apply to the purchaser's holding of the building. The same rule applies to disposals of a part of a building.
8.37. That requirement would be satisfied by specifying the amount of qualifying expenditure and residual capital expenditure in relation to the building or part of the building. Without that information, a purchaser would not know what deductions were available.
8.38. That information must be given within 6 months of the end of the year of income in which the disposal occurs. The purchaser must retain that information for 5 years after the earlier of the purchaser ceasing to be the owner of the building or the destruction of the building. So a purchaser will be able to pass on the necessary information if they in turn dispose of the building. [New subsections 262A(4AH) and (4AJ)]
Commencement date
8.39. The amendment applies to buildings, or extensions, alterations or improvements to a building, commenced to be constructed after 26 February 1992.
Construction of a new building or an extension is taken to commence at the time of commencement of work on the foundations; for example, the excavation of foundations or sinking of pilings.
Clauses involved in proposed amendment
Clause 47(a): inserts a number of definitions into subsection 124ZF(1) which facilitate the principal amendments to be made.
Clause 47(b): amends the existing definition of residual capital expenditure, subsection 124ZF(11), so that it only applies where construction commenced before 27 February 1992.
Clause 47(c): inserts new subsection 124ZF(11A) which specifies how residual capital expenditure is to be calculated where construction commenced after 26 February 1992.
Clause 48: inserts new section 124ZFA which defines the meaning of "eligible industrial manner" and "eligible industrial activities".
Clause 49(a): amends subsections 124ZH(1) and (2) so that the existing method of calculating deductions applies only where construction commenced before 27 February 1992.
Clause 49(b): inserts new subsection 124ZH(2A) which specifies how deductions are to be calculated where construction commences after 26 February 1992.
Clause 49(c): amends subsection 124ZH(3) so that the existing rules for limits on deductions only apply where construction commenced before 27 February 1992.
Clause 49(d): inserts new subsection 124ZH(3A) containing the new rule regarding limits on deductions.
Clause 50(a) & (b): amend paragraph 124ZJ(2)(a) (dealing with reductions of deductions on destruction of buildings) to reflect the new requirement that residual capital expenditure is to be calculated separately in respect of each part of a building that is owned by different persons. The amendment does not change the effect of that provision.
Clause 51(a) & (b): make minor consequential amendments to section 124ZK (which deals with deductions on the destruction of buildings) to reflect the new method of calculating residual capital expenditure. The effect of that provision is not changed by the amendments.
Clause 52: inserts new subsections 262A(4AH) and (4AJ) containing the record keeping requirements.
Capital Expenditure on Income-producing Structural Improvements
Summary of proposed amendment
9.1. The capital cost of income-producing structural improvements not presently written off under existing tax law is to be evenly deductible over 40 years at the rate of 2.5 per cent per annum.
9.2. The amendment applies to structures commenced to be constructed after 26 February 1992.
Background to the legislation
9.3. Structures constituting neither plant nor buildings generally do not qualify for deduction under existing tax law. However, they may qualify when used for certain purposes. For instance, fences are treated as plant when installed on land used in primary production but generally not when used for other purposes.
9.4. Similarly, improvements can qualify for deduction under a number of other provisions which permit deductions for the capital cost of income-producing property. The range of items that are deductible under those provisions varies from provision to provision.
9.5. For example, the general mining provisions provide deductions over no more than of 10 years for expenditure on improvements other than plant for use in carrying on prescribed mining operations; expenditure on buildings, roads and other infrastructure costs, on the mining site, qualify.
9.6. Other provisions may confer a specific concession: expenditure on buildings in timber milling operations is evenly deductible over no more than 25 years.
9.7. Those provisions provide write-offs for the capital cost of property over the period for which the property is likely to be used for income-producing purposes, or a fixed maximum period for long-lived property. This recognises that the property has a limited life.
9.8. However, there are a number of circumstances where the cost of income-producing property is not deductible under existing law despite the fact that it too has a limited life.
9.9. The purpose of these amendments is to permit deductions for the original cost of income-producing structural improvements not otherwise deductible under existing law. These amendments do not affect property covered by existing provisions, exampled above. Those provisions will continue to apply as appropriate.
Explanation of proposed amendment
9.10. This new measure is to operate through existing Division 10D which provides deductions for the capital cost of income-producing buildings. That provision allows the original capital cost of income-producing buildings, or extensions, alterations or improvements to such buildings, to be evenly deductible over 40 years at the rate of 2.5 per cent per annum.
9.11. A more detailed summary of that provision is contained in Chapter 8 dealing with Capital Expenditure on Industrial Buildings.
9.12. Under the amendment, a structural improvement is treated as if a building so that the original capital cost of such property, or extensions, alterations or improvements to a structural improvement, will be deductible when the structure is used in producing assessable income. [New subsection 124ZFB(3)]
9.13. Under separate amendments contained in this Bill, a higher write-off rate of 4 per cent per annum will apply to buildings when used in certain industrial activities (see chapter 8) . That higher rate will not be available for structural improvements.
Meaning of structural improvement
9.14. The expression "structural improvement' is not defined. It is to take its meaning from the ordinary understanding of that expression. Broadly, it means property constructed on land out of material or related parts which improves the land.
9.15. The legislation gives examples of the kinds of structures to which the amendments will apply if not already covered by an existing provision: concrete and bitumen roads, driveways, carparks and airport runways; retaining walls; fences; bridges; lined tunnels; concrete or rock dams; pipelines; and artificial playing fields. [New subsection 124ZFB(2)]
9.16. Consistent with the existing capital allowances for depreciable plant and income-producing buildings, earthworks that are integral to the installation of a structure will be treated as part of the structure and so qualify for deduction.
9.17. For example, cuttings, culverts and embankments as part of a road would qualify, as would foundation excavations for a bridge. Such earthworks are unlikely to have any practical use other than to accommodate the structure. (That follows from existing law and no amendment is necessary).
9.18. By comparison, earthworks which affect the general usefulness of land are not be treated as integral to the construction of a structure. So, the cost of site clearing (tree removal, demolition of existing structures, etc) and site levelling would not qualify as part of the cost of constructing a carpark, whereas the cost of stone, gravel etc. underlay and concrete or bitumen surfacing would.
9.19. Earthworks that are structures but not integral to another eligible structure will not qualify unless they can be seen to deteriorate over time, so as to require replacement and not just maintenance. [New paragraph 124ZFB(1)(b)]
9.20. Excavations such as marina basins, artificial lakes and earth tanks and dirt tracks and dirt carparks (if indeed they are structures) are therefore excluded. Similarly, artificial contouring of the earth as seen in golf courses, ski fields and other recreational facilities is excluded.
9.21. Those sorts of earthworks may be part of a larger facility (for instance, a resort) but are not integral to the installation of another structure and typically do not depreciate - they can be economically repaired indefinitely by dredging, grading etc. By comparison, the cost of excavating foundations for a seawall or similar structure as part of a marina or ornamental lake would qualify - the excavations are integral to the installation of the structure.
Also excluded are artificial landscapes such as grass golf fairways and greens, grass sports fields such as bowling greens, ovals, etc. and gardens. [New paragraph 124ZFB(1)(c)]
9.22. Deductions will be available for the capital cost of constructing a structural improvement. That is considered to include any engineering, architecture and similar costs necessary to the design and construction. Also included would be any costs associated with obtaining approval for the structure such as fees, permits etc, and legal fees and the like.
Commencement date
9.23. The amendment applies to structural improvements, including extensions, alteration or improvements to structural improvements, commenced to be constructed after 26 February 1992. [New subsection 124ZFA(4)]
9.24. The commencement of construction of a structure is considered to occur when physical construction commences. Generally speaking, that will be the day on which the excavation of foundations, or comparable activity, is started.
Clauses involved in proposed amendment
Clause 54: amends subsection 124ZF(1) so that the meaning of the word "building" includes a structural improvement to which these amendments relate.
Clause 55: inserts in subsection 124ZG(3) a reference to sections 75D and 124F, to prevent double deductions.
Clause 56: inserts new section 124ZFB which contains the rules for working out whether a structure qualifies for deduction under the amendments.
Clause 57: specifies that the amendment made by Clause 55 (no double deductions) applies to structural improvements commenced to be constructed after 26 February 1992.
Development Allowance - Taxation Deduction
Summary of proposed legislation
10.1. The law will be amended to allow the development allowance. The allowance is a deduction, in addition to depreciation, of 10% of the amount of capital expenditure incurred by taxpayers on the acquisition of new units of plant and equipment to be used in Australia, to produce assessable income, within certain large projects which meet some other criteria.
10.2. Subdivision B of Division 3 of Part III of the Income Tax Assessment Act 1936 (referred to in this chapter as the "Tax Act") provided for the former investment allowance. It will be amended to permit the development allowance where the relevant criteria have been met. The development allowance will be available for actual expenditure on new units of property specified in a pre-qualifying certificate, and acquired and used wholly for producing assessable income and principally in carrying out the project.
10.3. The certificate is a pre-requisite of any income tax deduction. The amendments to the Tax Act will ensure the deduction is allowable if the plant is covered by a certificate, the expenditure has pre-qualified, and the other tax deductibility tests are met.
10.4. The types of projects which may qualify, and certain criteria which are administered by the Development Allowance Authority (for convenience referred to as the "DAA"), are to be determined in accordance with legislation proposed in the Development Allowance Authority Bill 1992 (referred to as the "DAA Bill", or the "DAA Act" after enactment), which is integral to the income tax amendments.
10.5. A detailed explanation on the types of projects, eligibility criteria, and tests required to satisfy the DAA, appears in an Explanatory Memorandum accompanying the DAA Bill. The DAA is required to issue a pre-qualifying certificate to entities (taxpayers) which meet all eligibility criteria required under the DAA Act. Such a certificate will specify several things. It will specify the taxpayer and the qualifying project. It will also specify the plant expected to form part of that project.
10.6. The Tax Act and the Taxation Administration Act 1953 (referred to as the "Administration Act") are also to be amended to assist the DAA to perform its functions, given the role of the DAA in pre-qualifying eligible taxpayers for the purpose of obtaining the development allowance deduction.
10.7. The deduction is available to the owners, lessors or lessees of qualifying projects, in much the same way as under the former investment allowance.
10.8. The development allowance will be available for expenditure on new plant acquired or built after 26 February 1992 and first used or installed ready for use before 1 July 2002.
Background to the legislation
10.9. The former investment allowance provisions (in Subdivision B of Division 3 of the Tax Act) allowed an income tax deduction, in addition to depreciation, in respect of certain units of plant acquired by a taxpayer, where the expenditure was incurred under contracts entered into, or in respect of construction commenced, before 1 July 1985 and where the plant was first used, or installed ready for use, before 1 January 1988. The Subdivision is therefore dormant, except in relation to unresolved claims under the former legislation.
10.10. The development allowance will adopt the existing investment allowance legislation, as the income tax concepts are similar, with appropriate amendments to reflect the specific variations from the former provisions. The variations include:
- (a)
- a requirement that expenditure must have pre-qualified under the DAA Act. [New paragraph 82AB(1)(b)]
- (b)
- a commencement date for availability of the new deduction. Construction must commence, or the contract to acquire the unit must be entered into, after 26 February 1992. [New paragraph 82AB(1)(c)]
- (c)
- the sunset date, for ultimate cessation of the deduction. The unit of property must be installed ready for use, or first used, before 1 July 2002. [New paragraph 82AB(1)(d)]
- (d)
- provisions so structural improvements, including wharves or jetties, may qualify for the deduction where they also qualify as "plant" for depreciation purposes. [New paragraph 82AE(aa) and repealed paragraph 82AF(2)(h)]
- (e)
- the exclusion of aircraft and ships from the deduction. [New paragraphs 82AF(2)(k) and (l)]
- (f)
- a provision to treat Australian satellites as being in Australia so that they may qualify for the deduction. [New subsection 82AQ(4)]
- (g)
- denial of the allowance:
- •
- where a special deduction is allowable under various provisions of the Tax Act (other than for depreciation). [Amended subsection 82AM(2)] or
- •
- where the cost can be allowed as a deduction in full by virtue of the 100% depreciation rate under the revised depreciation provisions. [New subsection 82AM(3)] or
- •
- where special depreciation rates are available under section 57AM. [New subsection 82AM(4)]
- (h)
- an expansion of the term "rights to use", for the benefit of the tourist, or traveller accommodation and entertainment business sectors, to ensure a deduction is not denied (on the basis of a disqualifying use) for taxpayers conducting business in such sectors, where property owned by the taxpayer is used by clients in the normal conduct of such a business. [Amended sections 82AA, 82AF, 82AG, 82AH, 82AJ, 82AJA and new section 82APA]
- (i)
- an amendment to extend the provisions which previously denied the deduction to a taxpayer who enters into a contract with another taxpayer after commencement date, effectively carrying out the same (or similar) contract as a previous contract entered into that other taxpayer prior to commencement of the new provisions - to include provisions to deny the claim where the original taxpayer has entered into such new contract with a purpose of obtaining a benefit relevant to the allowance. [Amended section 82AL]
Explanation of proposed amendments
Legislation to give effect to the development allowance
10.11. The former investment allowance provisions will be amended to enable a deduction for the new development allowance after all relevant criteria have been met. Under the amended Tax Act, the development allowance is a deduction of 10% of the expenditure incurred on certain new units of eligible plant and equipment acquired or constructed by certain taxpayers for use by that taxpayer (or by a lessee where the taxpayer is a leasing company), wholly and exclusively both in Australia and for the purpose of producing assessable income.
10.12. Only expenditure which has pre-qualified can be eligible for the development allowance. The expenditure must relate to eligible property. The essential requirements of deductibility must have been met, and the deduction must not be denied or limited by other specific provisions.
10.13. The development allowance can then give a deduction of 10% of the expenditure, in the first year of income in which the unit of property is used for producing assessable income or installed ready for use.
10.14. The development allowance is only allowable if expenditure has pre-qualified under the DAA Act. [New paragraph 82AB(1)(b)]
10.15. Expenditure is pre-qualified under that Act if the taxpayer holds a pre-qualifying certificate issued by the DAA. The taxpayer must also have incurred the expenditure in carrying out the project specified by the certificate, and the expenditure must be plant expenditure.
What is a pre-qualifying certificate?
10.16. A pre-qualifying certificate is issued by the DAA in certain circumstances specified in the DAA Act, and may be cancelled, varied or revoked by the DAA. The DAA is required to advise the Commissioner of Taxation of all such relevant matters. There are procedures to ensure that purchasers of incomplete projects can obtain certificates. The Commissioner considers the position in the light of any cancellation, revocation, variation or (effective) transfer of a certificate.
10.17. A project is specified by the pre-qualifying certificate. It is the establishment, expansion, improvement or upgrading of a productive facility, and must meet a number of tests administered by the DAA. Broadly, it must be a project commencing after 26 February 1992.
When is expenditure incurred in carrying out a project?
10.18. In general, expenditure is only incurred in carrying out a project if it is incurred wholly or principally in carrying out that project, under Division 10 of the DAA Act. Whether expenditure was incurred in that way, is a question the Commissioner of Taxation must determine in deciding whether expenditure is pre-qualified.
10.19. In the case of projects which are part of a joint venture project, the plant expenditure must be incurred wholly or principally in carrying out that part of the joint venture project. If projects are part of a company group scheme, the taxpayer incurring the expenditure must be a member of the company group.
10.20. Property to which the development allowance relates is certain kinds of plant or articles. It must be for use in Australia, for particular purposes.
10.21. In general, plant or articles that are depreciable under section 54 may be property to which the development allowance applies, under the definitions in subsection 82AQ(1).
10.22. However, many structural improvements were excluded from the investment allowance by section 82AE. Only structural improvements specifically included in the allowance are eligible. These include the fixtures provided as employee amenities and depreciable under paragraph 54(2)(c), and a variety of particular structural improvements on land used for primary production business, including certain fences, dams, underground tanks and pipes, and buildings for storage of grain, hay or fodder, under paragraph 82AE(b).
10.23. These structural improvements will also be eligible for the development allowance.
10.24. The provisions will be extended to include structural improvements which also qualify as plant for depreciation purposes, apart from the special provisions of subsection 54(2). [New paragraph 82AE(aa)]
10.25. Structural improvements may not be eligible if a deduction is also allowable for such expenditure under other specific provisions. Amended subsection 82AM(2) operates to deny a double deduction in these circumstances.
10.26. Certain items of plant or articles were also excluded from the investment allowance under section 82AF. These included:
- •
- household appliances (except for use in certain circumstances for business or in certain premises associated with the provision of accommodation for tourists or travellers); [Paragraph 82AF(1)(a)]
- •
- furniture and fittings (except for use in certain circumstances for business or in certain premises associated with the provision of accommodation for tourists or travellers, or for use in the provision of certain facilities for employees or caring for children of employees); [Paragraph 82AF(1)(b)]
- •
- certain motor vehicles; [Paragraph 82AF(2)(a)] ;
- •
- paintings, sculptures, drawings, engravings, photographs and similar articles; [Paragraph 82AF(2)(b)]
- •
- books; [Paragraph 82AF(2)(c)]
- •
- films, tapes, discs, and similar devices used or designed for use for storage of images, sounds or information; [Paragraph 82AF(2)(d)]
- •
- musical instruments and equipment for use with such instruments; [Paragraph 82AF(2)(e)]
- •
- wharves and jetties; [Paragraph 82AF(2)(h)] and
- •
- wearing apparel (except if designed principally for protective purposes). [Paragraph 82AF(2)(j)]
10.27. The amended section 82AF will continue to exclude such items from the development allowance except for wharves and jetties. That specific provision for wharves and jetties will be repealed. Where such items qualify as plant, they may qualify as eligible property and so gain the benefit of the investment allowance.
10.28. Aircraft and certain ships will also be excluded from the deduction. Definitions of ships and aircraft are inserted in amended subsection 82AQ(1). Aircraft are excluded without exception, but do not include hovercraft. [New paragraph 82AF(2)(k)]
10.29. The provision to exclude ships [new paragraph 82AF(2)(l)] provides for certain Australian ships operating within Australia, inland waterway and harbour vessels, and offshore industry vessels and mobile units, to be eligible for the allowance.
10.30. Some of these vessels may not qualify for the allowance due to requirements of section 82AA, that property must be used wholly and exclusively for the purpose of producing assessable income. Others may be excluded where the ship qualifies for a higher rate of depreciation under section 57AM. [New subsection 82AM(4)]
10.31. The deduction will also not apply to items which may be eligible plant, where the taxpayer is entitled to a full deduction for depreciation, by application of the 100% rate of depreciation under the revised depreciation provisions [new subsection 82AM(3)] , or where a deduction is available for the expenditure under certain other provisions of the Tax Act. [Amended subsection 82AM(2)]
Provisions which deny or limit the deduction
10.32. Where the expenditure has pre-qualified, the expenditure may be eligible for the development allowance. The deduction may, however, be denied or limited, where other essential requirements of deductibility are not met or by other specific provisions of the legislation.
10.33. The expenditure must be of a "capital nature", "incurred" "after 26 February 1992", on the "acquisition or construction" of a "new" unit of eligible property.
10.34. The provisions require that the unit of property -
- •
- is to be used by the taxpayer wholly and exclusively in Australia for the purpose of producing assessable income, other than by leasing the property, letting the property on hire-purchase, or granting other persons rights to use the property; or
- •
- in the case of a leasing company, is for use wholly and exclusively in Australia by the lessee for the purpose of producing assessable income, and -
- (i)
- lease is entered into after 26 February 1992;
- (ii)
- the lease is for a long term;
- (iii)
- the leasing company (lessor) is carrying on business in Australia; and
- (iv)
- the lessor and lessee are at arm's length.
What is expenditure of a capital nature?
10.35. Although capital expenditure is not defined, the provision provides that expenditure which is of a revenue nature (generally deductible under the Act) does not qualify for the allowance.
What is the significance of 26 February 1992?
10.36. The deduction is only available in respect of expenditure incurred after 26 February 1992, [new paragraph 82AB(1)(a)] where the expenditure is in respect of a unit of property -
- •
- acquired under contracts entered into after 26 February 1992; [New subparagraph 82AB(1)(c)(i)] or
- •
- constructed by the taxpayer, where the construction commenced after 26 February 1992. [New subparagraph 82AB(1)(c)(ii)]
10.37. Section 82AL is a provision to guard against a possible re-organisation of contracts, where a contract is seen to have been entered into by a taxpayers for the acquisition, or taking on lease, of property, subsequent to the commencement date of the provision, in instances where a previous contract had been entered into by the taxpayer, prior to the commencement date of the provision, for the acquisition or lease of identical or substantially similar property. If the Commissioner is satisfied that a purpose of entering into the post commencement date contract was to obtain a deduction under the Subdivision, the Commissioner is empowered to deny the deduction. The section contains similar provisions to guard against arrangements relating to construction of property, where the taxpayer had commenced the construction of identical or substantially similar property prior to the commencement date. This provision did not apply where the taxpayer did not obtain the deduction, but received some related benefit, as the former legislation denied a deduction only where the purpose was to obtain the deduction under the Subdivision. Where the taxpayer is a lessee of property, the deduction is allowable to the lessor, therefore the provisions could not operate when a lessee entered into contracts or arrangements, which preserved the deduction for a lessor, where the lessee receive some related benefits such as reduced rent or some other incentive.
10.38. The provisions of section 82AL will be amended to ensure a taxpayer can not abuse the commencement date, by way of entering into a new contracts (after 26 February 1992) to achieve the effect of continuing a pre 27 February 1992 contract, where a purpose of the new contract is for the taxpayer to obtain the allowance or some other benefit relevant to the deduction. [Amended paragraphs 82AL(1)(c) and (2)(c)]
10.39. For example, a lessee might arrange after 26 February 1992 for a lessor to acquire a unit of property that the lessee was otherwise to acquire under a pre 27 February 1992 contract. Instead of seeking to have the lessor's investment allowance transferred to it, the lessee might seek the benefit in, say, reduced lease payments. That reduction would be a benefit related to the investment allowance, so section 82AL would apply.
10.40. As the DAA Act enables certificates to apply from an earlier date - but not prior to 27 February 1992, that Act also makes provision to ensure assessments can be amended, under section 170 of the Tax Act, at any time, to give effect to a certificate which may apply from some prior date.
What is the expenditure incurred?
10.41. For the purpose of the development allowance, the Commissioner would, generally, accept the actual cost of the unit of property. Circumstances may require the Commissioner to determine an amount:
- •
- where a contract which includes an eligible unit of property is for a total cost, including of that unit of property, and no separate allocation is given to the eligible property. In such instance, subsection 82AN(1) enables the Commissioner to make an allocation; or
- •
- where the Commissioner has reason to consider the amount of a contract is excessive. In such instance, the Commissioner can apply the market value. [Subsection 82AN(2)]
What is meant by acquisition and construction?
10.42. Property is considered to be acquired if the taxpayer becomes the owner of the property or takes the property on hire under a pre-purchase agreement [subparagraph 82AQ(3)(a)(i)] . Property is also acquired when another person constructs property on premises of the taxpayer. [Subparagraph 82AQ(3)(a(ii)]
10.43. Construction and constructed is defined to include manufactured. [Subsection 82AQ(1)]
10.44. New property is defined [subsection 82AQ(1)] to mean property which has not previously been used by another person or acquired or held by another person for use by that person. Reconditioned, or wholly or mainly reconstructed, property is not new for the purpose of the development allowance.
10.45. The DAA Act makes specific provisions to override the Tax Act, in certain circumstances, which permit property to be treated as "new" where there has been a change of ownership of the project to which the property relates. In these cases, the property is to be treated as new in the hands of the purchaser of the project, but never to have been new in the hands of the vendor. This operates to ensure the vendor is not entitled to the allowance in such circumstances and permits the Commissioner to amend claims to disallow any prior deduction allowed.
10.46. The development allowance only applies on property used wholly and exclusively in Australia, either by the taxpayer or a lessee (where the taxpayer is a leasing company). The term, in Australia, adopts the standard meaning so that property used partly outside of Australia would not qualify. However, new subsection 82AQ(4) extends the term to include an Australian satellite. This is defined [amended subsection 82AQ(1)] to have the same meaning as in the Radio-communications Act 1983.
What is meant by "used wholly and exclusively"?
10.47. The development allowance is not available unless the property is used in such a manner. The provision for the expenditure to be pre-qualified requires the property to be used wholly or principally for the carrying out of the project. However, this requirement is extended under the tax provisions [paragraphs 82AA(1)(a) and (b) ] for the property to have to be used wholly and exclusively for the purpose of producing assessable income.
10.48. This provision operates to deny the deduction where the property is put to some disqualifying use, not producing assessable income. Disqualifying uses include private and domestic use or for producing exempt income.
What provisions apply to leasing companies?
10.49. A leasing company is defined [subsection 82AQ(1)] as a corporation carrying on in Australia as its sole or principal business - a business of banking, or a business of borrowing money and providing finance (except where the whole income is exempt).
10.50. The development allowance is available to a leasing company, provided the lessee uses the property under similar requirements to those for owners of other property, and provided there is a long-term lease over the eligible property. A long-term lease must be for a period of not less then 4 years [subsection 82AQ(1)] . In terms of the DAA Act, the lessee must be operating the project for a lessor to be considered to be carrying out a project.
10.51. Where the taxpayer is a leasing company, the deduction is limited in that it cannot create, or increase, a loss (section 82AC) . The legislation makes provision for determining the method of ascertaining whether any deduction, including a partial deduction, is allowable. The legislation also permits the lessor to pass the benefit of any, or all, or the allowance on to the lessee, provided a formal declaration is lodged with the Commissioner before a prescribed date after execution of the lease. [Amended section 82AD]
10.52. A taxpayer may be disqualified from the development allowance where the property is put to a disqualifying use. Some uses are discussed above, where property is not used wholly and exclusively to produce assessable income. Other disqualifying uses are:
- •
- leasing (including hiring) of property (other than by a leasing company); [Subparagraph 82AA(1)(a)(ii)(A)]
- •
- letting property on hire under hire-purchase; [Subparagraph 82AA(1)(a)(ii)(B)]
- •
- granting other persons rights to use the property; [Subparagraph 82AA(1)(a)(ii)(C)]
- •
- disposal of the property, the use of the property by other persons, or the use of the property outside Australia, within 12 months of when the property was first used or installed ready for used; [Amended sections 82AG, 82AJ and 82AJA]
- •
- disposal of the property, the use of the property by other persons, or the use of the property outside Australia, after 12 months of when the property was first used or installed ready for use, if the Commissioner is satisfied it was the taxpayer's intention to dispose, or otherwise use the property in the disqualifying manner, at the time the property was first used or installed ready for use; [Amended sections 82AH, 82AJ and 82AJA]
- •
- use of the property to produce exempt goods or services; [Amended section 82AHA]
- •
- use of the property for private or domestic purposes by employees, directors, members, or relatives of any such persons, where the taxpayer is a private company. [section 82AK]
10.53. Generally the legislation provides that any such disqualifying use will operate to deny the deduction.
10.54. The former provisions denied the deduction where the taxpayer leases (eg. hires) out the property, or grants rights to other persons to use the property. This disqualifying use provision has been amended so that business operators in the tourist, traveller, or entertainment sectors, will not automatically be denied a deduction (on the basis of disqualifying use) where such hire or use has been granted on property used in the taxpayer's normal capacity as an operator of such businesses.
10.55. This is brought about by modifying the restriction on eligibility of property for the allowance. Now, the income producing purposes for which eligible property may be used will include the leasing of the property, or the grant of rights to use the property, in a tourist or traveller accommodation or entertainment business. [New subsection 82AA(2)]
10.56. A grant of rights to use within 12 months will not preclude the development allowance, if those rights are given in a tourist or traveller accommodation or entertainment business [new subsection 82AG(1A)] . Nor will the grant of limited rights to use require reduction in the development allowance in such a case [new subsection 82AG(3A)] , and a prior agreement in similar circumstances does not preclude the development allowance. [New subsection 82AG(5)]
10.57. Similarly, a grant of rights to use more than 12 months later, but intended when the unit was acquired or constructed by the taxpayer, will not preclude the development allowance, if those rights are given in a tourist or traveller accommodation or entertainment business. [New subsections 82AH(1A), (3A) and (5), covering taxpayers as principals, lessors or lessees respectively]
10.58. Where partnerships lease property, a grant of rights to use by a lessee will not preclude the investment allowance, if in the lessee's tourist or traveller accommodation or entertainment business. This is equally true whether the lessee gives rights to use within 12 months [new subsection 82AJ(7AA)] , or at a later time but in accordance with a preceding arrangement by the lessee. [New subsection 82AJ(7B)]
10.59. The provision giving relief for disposals within a company group is also modified in the same way. A group member may give rights to use property in the member's tourist or traveller accommodation or entertainment business, without forfeiting rollover relief. [New subsection 82AJA(1A)]
10.60. In each case, the amended provisions are drafted to refer to the grant of rights to use "in the entity's capacity as an eligible entertainment/tourism operator". This concept is defined in new subsection 82APA(1) , using a definition of "entity" in new subsection 82APA(2) . It applies where property is for use in the entity's entertainment business, tourist accommodation business or traveller accommodation business. It applies where the property is for use in a business which is substantially one of tourist or traveller accommodation. And it applies where the property is for use in premises for use principally to gain rent from tourist or traveller accommodation. [New paragraph 82APA(1)(b)]
10.61. A corresponding change to the property eligible for the allowance is made to section 82AF. Property of a household kind is generally excluded from the allowance. However, where it is for certain limited purposes - generally, tourist accommodation or employee amenities - it can qualify. Now such property may qualify if used in a business that principally consists of the provision of entertainment, or of tourist or traveller accommodation. [New subparagraphs 82AF(1)(a)(ia) and (b)(ia)]
10.62. Section 82AM of the Tax Act operates to ensure double deductions are only available in certain circumstances. The development allowance deduction is to be allowed in addition to depreciation under section 54. If a deduction is allowable under any other provision, the development allowance is to be denied.
10.63. It is proposed that the deduction should not be allowed where the taxpayer is entitled to a full deduction for depreciation in the year the property is first used, or installed ready for use, [new section 82AM(3)] or where the taxpayer is entitled to special depreciation rates under section 57AM [new subsection 82AM(4)] . Section 57 AM gives special depreciation, including timing advantages for many taxpayers, for certain Australian ships.
10.64. Amendments to deny the allowance, in these instances, is included in the legislation. The investment allowance was not allowable where a deduction was also allowable for the property under a number of provisions (other than depreciation). The development allowance will also be denied if a deduction is available under the same provisions. The amended subsection 82AM(2) includes two additional provisions (section 73B and 75B) for which another deduction is available, and the development allowance is to be denied. Section 73B deals with research and development expenditure and section 75B relates to expenditure on conserving or conveying water. Both sections were introduced after 30 June 1985, the cut-off date by which contracts had to be entered into or construction commenced, for benefits to be allowed under the former investment allowance provisions.
10.65. Many consequential amendments are directly associated with the exclusion of ships from the benefit of the allowance. This previously required specific definitions and the use of terms associated with two types of expenditure, "subsection 82AA(1) property" and "subsection 82AA(2) ship". The amended legislation will only refer to property, which is confined to property to which the Subdivision relates. This also requires a number of consequential amendments to remove all references to "subsection 82AA(1) property". Clause 79 provides for a number of specific amendments to provisions where the only amendment is to change the term "subsection 82AA(1) property" to the word "property". Provisions in the following sections have also been amended for these and other minor reasons:
| section 82AB | section 82AC |
| section 82AD | section 82AF |
| section 82AG | section 82AH |
| section 82AI | section 82AJ |
| section 82AJA | section 82AM |
| section 82AQ |
10.66. Consequential amendments also arise from the new commencement date. Amendments for this reason are in the following sections of the Tax Act:
| section 82AA | section 82AB |
| section 82AD | section 82AF |
| section 82AHA | section 82AL |
Legislation relevant to the DAA
10.67. The DAA will be carrying out the functions of that Office, principally for the purpose of making determinations as to whether a particular project of a taxpayer meets certain criteria to be considered eligible for the income tax deduction, and to provide pre-qualifying certificates to qualifying taxpayers, so the taxpayer can benefit from development allowance.
10.68. To perform these functions, the DAA will require a number of administrative powers similar to those contained in the Administration Act. Part III of the Administration Act contains offence and prosecution provisions which create a number of offences which are of general application to the various Commonwealth tax laws and makes provision for their prosecution.
10.69. It is proposed to amend the Administration Act to permit the DAA to utilise the prosecution provisions of the Act for the purpose of taking action in the event of breach of certain DAA Act requirements. The relevant requirements are those relating to the provision of false or misleading statements to the DAA. This approach has been adopted for purposes of simplicity since the legislation required to replicate the tax provisions in the DAA Act would have been substantial.
10.70. The amendments treat the DAA Act as a taxation law, and give the DAA the corresponding powers of the Commissioner [new section 8AB] . The amendments to the Administration Act are designed to afford the DAA certain powers to assist the DAA to discharge its responsibilities. The amendments give effect to all such requirements, will permit the DAA to take prosecution action in appropriate cases, and enable an exchange of information between the Commissioner and the DAA, otherwise denied by secrecy provisions in both the Tax Act and the Administration Act. [New subsection 3C(1AB)]
10.71. The mere production, or provision of copies, of documents under written notice from the DAA is not as such a statement made to a taxation officer [new paragraph 8J(2)(ga)] . Penalties, and payments in addition to penalties, will be calculated on the basis that decisions of the DAA form part of the making of an assessment; so payments, in addition to penalty, of up to twice (or, for certain offences, three times) the tax evaded may be ordered by a court. [New section 8W(1B)]
10.72. Information may be provided to, and obtained from, State authorities [new subsections 13J(8) and 13K(11)] . The DAA enjoys the procedural convenience of section 15 and 15A [new subsections 15(4) and 15A(11)] . The Commissioner is not responsible for the DAA's annual report. [New subsection 3B(1B)]
Commencement and termination dates
10.73. The amendments will permit a deduction in respect of eligible property acquired where the expenditure is incurred under contracts entered into, or in respect of construction which commenced, after 26 February 1992. Because of requirements under the DAA Act, all such expenditures and contracts must be in relation to projects which commenced after 26 February 1992.
10.74. The development allowance deduction ceases with effect from 1 July 2002. Expenditure on property which is not first used, or installed ready for use, before 1 July 2002, will not be eligible for the deduction. The former investment allowance provided for separate dates. By the earlier date, all eligible property must have been ordered, or its construction commenced; by the later, all eligible property must have been first used, or installed ready for use. The development allowance looks only to the later test.
Clauses involved in proposed legislation
The following clauses are relevant to the development allowance and amend provisions of the Income Tax Assessment Act 1936 other than in Subdivision B.
Clause 58: will amend section 16 (the secrecy provisions) by inserting new paragraph 16(4)(hba) to enable the Commissioner of Taxation to communicate information on the affairs of a taxpayer, obtained under provisions of the Act, to the DAA for the purposes of the administration of the DAA Act.
Clause 59: amends subsection 51AE(14) of the Act, which provides where property is used by a taxpayer, after 19 September 1985, for the purpose of providing non-deductible entertainment, the use of that property shall not be for the purpose of producing assessable income for the purposes of the Act, except for the purpose of Subdivision B. Section 51AE commenced in late 1985, after Subdivision B had already begun to be phased out, when deductions under Subdivision B were only available in respect of expenditure in relation to contracts entered into, or on property on which construction had commenced, prior to 1 July 1985. The exclusion of Subdivision B, from the operation of subsection 51AE(14), therefore preserved the former investment allowance in respect of expenditure on capital items which had been committed prior to 1 July 1985. Without the exclusion, the provisions of subsection 51AE(14) would have otherwise denied the deduction. The amendment denies the development allowance for property used to provide non-deductible entertainment.
Clause 60: amends section 57AM, which provides for special depreciation rates in respect of trading ships. Paragraph 57AM(33)(h), provided the same commissioning date, for investment allowance purposes, as under section 57AM. The reference to Subdivision B is to be deleted in this paragraph, as ships are excluded from the development allowance.
The amending provisions to give effect to the revised Subdivision B are reflected in the following clauses -
Clause 61: changes the heading of the Subdivision to "Development Allowance".
Clause 62: inserts new section 82AAAA, which outlines the Objects of the revised Subdivision. Clause 63: amends section 82AA, which establishes certain requirements for units of eligible property to be "property" for the purpose of the Subdivision.
Subclause (a): provides for the new commencement date.
Subclause (b):
- •
- omits subsections 82AA(2), (3) and (4), in consequence of the exclusion of special provisions for ship in Subdivision; and
- •
- inserts a new subsection 82AA(2) to ensure the provisions which operate to deny a deduction, as a result of "use" of property by other persons, are not automatically denied to taxpayers in the entertainment, tourist and traveller sectors.
Clause 64: Section 82AB is the main provision of the Subdivision.
- •
- provides for the omission of subsections 82AB(1) to (5B), inclusive; and
- •
- inserts new subsection (1).
New subsection 82AB(1) adopts similar concepts to the former provisions and consolidates some prior subsections into one provision. The subsection incorporates the effective dates of commencement and cessation of the deduction, the new 10% rate of deduction, and much of the essential criteria to be satisfied before a deduction is allowable. The main new criterion in the revised provision is for the expenditure to have been "pre-qualified under the Development Allowance Authority Act 1992". Part 9 of that Act details the criteria required for expenditure to be "pre-qualified".
The subsections to be deleted by this subclause are consequential amendments.
Subclauses (b), (c), (d), (e) and (f): are consequential amendments.
Clause 65: makes a number of minor amendments to section 82AD.
Section 82AD permits a leasing company, in certain circumstances, to transfer all, or part of the benefit of the allowance to the lessee. This provision requires formal notice of such transfer to be submitted to the Commissioner by a prescribed date. The former legislation set the prescribed date, for leases entered into between 1 January 1976 (the former commencement date) and 30 June 1976, at 8 July 1976, and thereafter at the 8th day after the end of the month the lease was entered into. The new legislation will adopt a similar time frame, although the initial period will extend up to 31 December 1992, with the first prescribed date being 8 January 1993.
Subclauses (a) and (b): are consequential to the exclusion of special provisions for ships.
Subclause (c): is both consequential to the exclusion of the provisions for ships and the requirement to establish the first new period and prescribed date.
Clause 66: amends section 82AE, which denies the allowance in respect of all structural improvements other than specified structural improvements. The new paragraph 82AE(aa) will allow the deduction for structural improvements which are plant within the meaning of section 54 (the depreciation provisions).
Clause 67: amends section 82AF which details specific items of plant for which a deduction is denied under the Subdivision.
- Subclause (a): makes provision for the extension of the provisions to enable a deduction to be allowed on certain items of plant used in a business carried on principally in the entertainment/tourism sector.
- Subclause (b): repeals the provision which specifically denied the allowance for wharves or jetties. Such items must still satisfy the requirement of being "plant" before they can be considered for a deduction.
- Subclauses (c) and (d): insert ships and aircraft as specific items which will not qualify for the deduction.
- Subclause (e): is consequential to the exclusion of special provisions for ships.
- Subclause (f): is consequential to the new commencement date.
Clause 68: amends section 82AG, which makes special provisions to deny a deduction where the property is disposed of, used by another person, used outside Australia, or used for a purpose other than for the purpose of producing assessable income, before the end of 12 months from the date the property was first used or installed ready for use.
- Subclauses (a), (b), (e), and the insertion of new subsection 82AG(3A) proposed in subclause (d): ensure the provisions relating to use of property by another person do not apply where the transaction was conducted by the taxpayer in their capacity as an eligible entertainment/tourism operator. New section 82APA provides the criteria to establish when a person's conduct is to be treated in such a capacity.
- Subclause (c), and the omission of the former subsection 82AG(3A), proposed in subclause (d): are consequential to the exclusion of special provisions for ships.
Clause 69: amends section 82AH, which is a similar provision to section 82AG, but operates to deny a deduction in respect of property disposed of (or used in the same manner as applies to deny the deduction in section 82AG) where the disposal, (or disqualifying use) is beyond the 12 month period, and the Commissioner is satisfied that the taxpayer intended to dispose (or use in a disqualifying manner) the property at the time of acquisition or construction of the property.
- Subclauses (a), (b), and the insertion of new subsections 82AH(3A) and (5) proposed in subclauses (d) and (e) , respectively: ensure the provisions relating to use of property by another person do not apply where the transaction was conducted by the taxpayer in their capacity as an eligible entertainment/tourism operator.
- Subclause (c), and the omission of former subsections 82AH(3A) and (5) proposed in subclauses (d) and (e), respectively: are consequential to the exclusion of special provisions for ships.
Clause 70: amends section 82AHA consequential to the new commencement date.
Clause 71: amends section 82AI to delete the references to special provisions relating to ships and delete of the former reference to "subsection 82AA(1) property", which is to no longer necessary (there being no other property).
Clause 72: amends section 82AJ which makes special provisions to enable the benefits of the allowance for partners in partnerships.
- Subclauses (a), (b), (c), and the omissions of subsections 82AJ(7AA) and (9) proposed in subclauses (d) and (f), respectively: are consequential to both the exclusion of special provisions relating to ships and the deletion of the former reference to "subsection 82AA(1) property".
- Subclause (e), and the insertion of new subsections 82AJ(7AA) and (9) proposed in subclauses (d) and (f), respectively: ensure the provisions relating to use of property by another person do not apply where the transaction was conducted by the taxpayer in their capacity as an eligible entertainment/tourism operator.
Clause 73: amends section 82AJA which makes special provision for the treatment of the allowance where disposals of property are within a company group.
- Subclause (a): is consequential to the exclusion of special provisions for ships.
- Subclauses (b) and (d): ensure the provisions relating to use of property by another person do not apply where the transaction was conducted by the taxpayer in their capacity as an eligible entertainment/tourism operator.
- Subclause (c): is consequential to the exclusion of the reference to "subsection 82AA(1) property".
Clause 74: proposes to amend section 82AL, which is a provision to guard against a possible re-organisation of contracts, where a contract is seen to have been entered into by a taxpayer for the acquisition, or taking on lease, of property, subsequent to the commencement date of the provision, in instances where a previous contract had been entered into by the taxpayer, prior to the commencement date of the provision, for the acquisition of lease of identical or substantially similar property. If the Commissioner is satisfied that a purpose of entering into the post commencement date contract was to obtain a deduction under the Subdivision, the Commissioner is empowered to deny the deduction. The section contains similar provisions to guard against arrangements relating to construction of property, where the taxpayer had commenced the construction of identical or substantially similar property prior to the commencement date.
- Subclause (a): is consequential to the new commencement date;
- Subclause (b): proposes to extend the operation of the section, to deny a deduction where a purpose of the contract or arrangement is to obtain a benefit related to the deduction.
Clause 75: amends section 82AM, which operates to ensure double deductions are only available in intended circumstances. The development allowance deduction is to be allowed in addition to depreciation under section 54 only. If a deduction is allowable under any other provision, the development allowance is to be denied. It is also intended that a deduction should not be allowed where the taxpayer is entitled to a full deduction in the year the property is first used or installed ready for use, or where the taxpayer is entitled to special depreciation rates under section 57AM.
- Subclause (a): is a consequential amendment.
- Subclause (b): inserts additional sections (sections 73B and 75B) to the sections under which another deduction may be available. The development allowance will not apply to expenditure deductible under these sections.
-
Subclause (c):
inserts additional subsections 82AM(3) and (4) to deny the deduction in respect of eligible property :
- •
- where a taxpayer is entitled to a full deduction for depreciation by applying the 100% rate of depreciation under the revised depreciation provisions; and
- •
- where the taxpayer is entitled to the higher rates of depreciation provided for under the provisions of section 57AM.
Clause 76: repeals former section 82AP, which was a transitional provision required for the commencement of the investment allowance provisions;
Clause 77: inserts new section 82APA which provides for the tests required to determine if an entity's actions are carried out in their "capacity as an eligible entertainment/ tourist operator" - to enable the benefits of the expansion of the term "rights to use" to be afforded to such entity.
Clause 78: amends section 82AQ, the interpretation provisions.
- Subclause (a) : omits definitions of terms not applicable to the new provisions.
- Subclause (b): inserts definitions for terms introduced in the new provisions.
- Subclause (c): inserts new subsection 82AQ(4) to treat an Australian satellite as being in Australia. This ensures a deduction in respect of a satellite cannot be denied solely on the grounds that it may not be for use in Australia. A definition of "Australian satellite" is included in the new definitions proposed to be inserted by subclause (b) . Clause 79: makes a number of consequential amendments, substituting the word "property" for the former term "subsection 82AA(1) property".
Clause 80: is a transitional provision to preserve the former legislation in relation to property to which the former provisions relate.
The following clauses amend the Taxation Administration Act 1953 :
Clause 92: facilitates references to the Taxation Administration Act 1953 which, in Part 5, is referred to as the "Principal Act".
Clause 93: will amend section 3B of the Administration Act by inserting new subsection 3B(1B) to ensure the Commissioner will not be required to prepare and furnish an annual report in relation to those matters arising under the Administration Act for which the responsibility will rest with the DAA, by virtue of the amendments contained in this Part.
Clause 94: will amend section 3C of the Administration Act by inserting new subsection 3C(1AB) to ensure that the DAA will not be bound by the secrecy requirements of the Administration Act in relation to any information, etc., concerning the affairs of taxpayers which the DAA may obtain by virtue of utilising the prosecution provisions of the Administration Act. The DAA Act contains its own secrecy provisions, which ensures there is no overlap.
Clause 95: will insert new section 8AB in Part III of the Administration Act. Section 8AB will ensure that Part III of the Administration Act, relating to prosecutions and offences, will apply in relation to the DAA Act as if that Act were a taxation law and references to the Commissioner of Taxation were references to the DAA. This will enable the DAA to utilise the prosecution provisions of the Administration Act to take action in certain circumstances.
Clause 96: will amend section 8J of the Administration Act by inserting new paragraph 8J(2)(ga) to ensure that a statement made in a document furnished to the DAA pursuant to paragraphs 79(1)(b) or (c) of the DAA Act does not give rise to an offence for the purposes of the prosecution provisions of the Administration Act in the event that such a statement is false or misleading in a material particular. This approach is consistent with that adopted under the various taxation statutes in relation to documents furnished under notice by taxpayers to the Commissioner of Taxation.
Section 8W of the Administration Act enables a court, where it is satisfied that a false or misleading statement or incorrectly kept records of account had resulted in a tax liability of a lesser amount, in addition to penalty imposed upon a person convicted of offences under Part III of the Administration Act, to order the convicted person to pay to the Commissioner of Taxation an additional amount.
Clause 97: will amend section 8W by inserting new subsection 8W(1B) to enable a court to have regard to a decision made under Parts 3, 4, 5 or 6 of the DAA Act as if that decision were part of the process of making an income tax assessment of a taxpayer.
Clause 98: amends section 13J in Part IIIA of the Administration Act by inserting new subsection 13J(8) to permit the DAA to communicate information which the DAA obtains on the affairs of a taxpayer pursuant to the administration of the DAA Act to State taxation authorities. Where such information is communicated, however, those State taxation authorities are subject to a burden of secrecy imposed under subsection 13J(2) of the Administration Act.
Clause 99: will amend section 13K of the Administration Act which empowers a State taxation officer to certify copies of documents (including extracts) obtained pursuant to a State tax law. The amendment proposed by inserting new subsection 13K(11) will allow the section to apply as if that Act were a taxation law and references to the Commissioner of Taxation were references to the DAA.
Clause 100: will amend section 15 in Part V of the Administration Act, which enables the Commissioner of Taxation (or a Second Commissioner of Taxation or a Deputy Commissioner) to appear personally or be represented by specified persons in any action arising out of a taxation law instituted by or on behalf of the Commissioner and to which the Commissioner is a party or seeks to intervene. The amendment proposed by inserting new subsection 15(4) will ensure that the section will apply in relation to the DAA Act as if that Act were a taxation law and references to the Commissioner of Taxation were references to the DAA. References to a Second Commissioner or Deputy Commissioner will be excluded for this purpose.
Clause 101: will amend section 15A of the Administration Act, which enables the Commissioner of Taxation to certify copies of documents (including extracts) obtained pursuant to taxation law. The amendment proposed by inserting new subsection 15A(11) will allow the section to apply in relation to the DAA Act as if that Act were a taxation law and references to the Commissioner of Taxation were references to the DAA.
Notification of Reasonable Benefit Limits Determinations
Summary of proposed amendments
11.1. The Bill will make changes to the arrangements for the administration of the reasonable benefit limits as set out in the Occupational Superannuation Standards Act 1987.
11.2. Abbreviations Used in this Chapter
| The Act: | the Occupational Superannuation Standards Act 1987. |
| RBL: | the reasonable benefit limits. |
| Excessive determinations: | decisions made under the Act that benefits have been paid in excess of the RBL. |
| Non excessive determinations: decisions made under the Act that benefits paid are within the RBL. | |
| ISC: | the Insurance and Superannuation Commissioner. |
11.3. This Bill amends the Act by
- •
- requiring that only excessive determinations be notified to taxpayers by the ISC;
- •
- allowing for non excessive determinations to be notified to taxpayers, upon the initiative of the ISC or upon request;
- •
- adjusting the existing scheme of the Act in consequence of these changes, by ensuring review rights in respect of non excessive determinations and by allowing for improved ISC communication of determination information to the Commissioner of Taxation for tax assessment purposes.
11.4. The RBL are limits on the total amount of retirement benefits receivable on a concessionally taxed basis. The limits are prescribed for the purpose of confining and distributing equitably the revenue cost of taxation incentives for provision in retirement. The payment of amounts in excess of the RBL are identified by the ISC and communicated to the Commissioner of Taxation for tax assessment purposes.
11.5. An excess determination involves calculating the amount paid in excess of the RBL, and making necessary adjustments to any other components of an eligible termination payment. These components are required to be declared for annual income tax return purposes. An excessive component is taxed at marginal rates rather than the concessional rates that apply to the other components. The tax payable on an excessive component is assessed at the time of assessment of the taxpayer's return for the year in which the benefit was paid.
11.6. A taxpayer has two benefit limits, one that applies to pensions (and annuities) that meet certain standards - the pension RBL, and another that applies to other benefits, including lump sum payments - the lump sum RBL. The pension RBL is greater than the lump sum RBL, to encourage the taking of retirement benefits as a genuine income stream for the duration of retirement.
11.7. The RBL that apply to a taxpayer are calculated according to the circumstances of a taxpayer, including the income of the taxpayer and entitlements that predated the consolidation of the administration of the RBL in the Act.
11.8. The current arrangements for the administration of the RBL came into effect on 1 July 1990. Briefly, those arrangements are:
- •
- payers of superannuation and similar benefits are required to notify the ISC of benefits paid to individual taxpayers and to also notify the taxpayer of the information given to the ISC;
- •
- the ISC keeps a record of notified benefits paid to individuals after 15 February 1990 and determines whether a benefit received after 1 July 1990, when totalled with benefits previously paid and notified, is within or in excess of the person's RBL;
- •
- the ISC sends a copy of the determination to the taxpayer concerned; and
- •
- the taxpayer has 21 days from receipt of the copy in which to exercise rights of review.
11.9. The ISC is unable to make a Final Determination when:
- •
- the payer has not provided the taxpayer's Tax File Number;
- •
- the payer does not provide all relevant information. (The Regulations make the provision of some information optional.)
11.10. In these cases, the ISC is required to make an Interim Determination based on certain assumptions set out in the Regulations and to send a copy of the determination to the taxpayer. A final determination is made and sent out once the taxpayer provides the missing information.
11.11. A separate determination is made for each payment notified. Under current arrangements, a copy of each determination made is forwarded by the ISC to the relevant taxpayer.
Explanation of proposed amendments
11.12. The Bill proposes amendments to s.15M and s.15N to restrict the determinations required to be notified to taxpayers to those having direct taxation consequences, ie excessive determinations.
11.13. The proposed amendments to s.15M and s.15N also allow for non excessive determinations to be issued on the initiative of the ISC. For example, the ISC can consider that all Interim Determinations should be notified to taxpayers to give them the opportunity to correct any assumptions made. [Subclauses 87(1) and 88(1)]
11.14. Taxpayers already have and will continue to have the right to request a copy of a determination under s.15Q. Where a taxpayer first learns of a determination in this way, the existing time limit for exercising rights of review should commence from that time. However, a taxpayer should not be able to extend these rights indefinitely by declining from requesting notice of a determination. Section 16 of the Act is proposed to be amended to accomplish this by confirming the rights to review but limiting their exercise to the period of one year after the financial year of the making of the payment the subject of determination. [Clauses 89 and 90]
11.15. By way of enhancing the reliability of taxpayer declaration of excessive determinations, and in particular to assist Tax Office auditing, the Bill provides for extended and improved communication of RBL information by the ISC to the Commissioner of Taxation by the addition of new subsections 15M(2)(b) and 15N(5)(c)(ii) and a new section 18A. [Subclauses 87(1) and 88(1), Clause 91]
Commencement date
11.16. The Bill proposes that the amendments take effect upon commencement. This will permit the new scheme to apply in respect of payments made during the 1991/92 financial year. [Clause 2]
Clauses involved in proposed amendments
Clause 2: commencement date.
Clause 87: amends section 15M of the Act by altering subsection (1) and inserting new subsections (2), (3) and (4). The amendment to subsection (1) will effect the requirement that excessive determinations must be notified to taxpayers.
The proposed subsection (2): apart from subsection (2)(b), and subsection (3), mirrors the existing provisions of subsections (1)(c) and (2), and provide for the notification of determinations to the Commissioner of Taxation. Proposed subsection (2)(b) extends the information that can be provided to the Commissioner of Taxation to cover all information upon which a determination is made.
Proposed subsection (4): authorises the ISC to notify non excessive determinations.
Subclauses (2) and (3): allow the amended s.15M to apply in respect of payments made during the 1991/92 financial year, and maintains decisions made on the basis of the existing section 15M.
Clause 88: will amend section 15N(5) to effect the same changes in relation to the notification of interim determinations as are proposed by clause 87 in relation to notification of final determinations.
Clause 89: inserts a new subsection (3) to provide review rights to taxpayers in relation to non excessive determinations that are first notified after a taxpayer's request under section 15Q for a copy of a determination. The rights are identical to those conferred on persons who are notified of determinations under sections 15M and 15N.
Clause 90: limits the exercise of rights of review confirmed by clause 5 to the period of one year after the financial year of the making of the payment which has been the subject of a determination. As is the case for existing review rights, the period for exercise of these review rights can be extended by the ISC.
Clause 91: adds a new section 18A to permit transmission to the Commissioner of authorised information, including RBL determination information, by means of a data processing device. A data processing device is presently defined in subsection (3)(1) of the Act in connection with the transmission of information to the ISC. The proposed section will facilitate the assessment of amounts determined to be in excess of the RBL by allowing for the transmission of information in a computerised format.
Miscellaneous Amendment
Depreciation rollover relief
12.1. This amendment corrects a clerical error in transitional rules applicable to the rollover relief provisions for certain disposals of depreciable property.
12.2. It replaces the word "transferee" as it appears in transitional sub-subparagraphs 71(4)(b)(ii)(A), 71(5)(b)(ii)(A) and 71(6)(b)(ii)(A) with the word "transferor". [Clause 103]
12.3. The amendment applies from the same time as the original amendments; that is, in respect of disposals that occur after 19 December 1991. [Clause 104]