Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)General outline and financial impact
Landcare and water facility rebate (tax offset)
Amends the income tax law to provide a rebate (tax offset) as an alternative to deductions for expenditure on landcare works and water conserving and conveying facilities. These expenditures are incurred by primary producers or certain rural landholders.
Date of effect: These measures will apply in relation to expenditure incurred on landcare or water facilities from the start of the 1997-98 income year.
Proposal announced: First announced in the Government's election document Reviving the Heartland'. Subsequently announced by the Minister for Primary Industries and Energy by press release on 1 July 1997 and the Treasurer and the Minister for Primary Industries and Energy in their joint announcement on 12 May 1998.
Financial impact: The cost of the rebate (tax offset) is capped at $80 million in total over four years. It is funded from the Natural Heritage Trust Fund.
Compliance cost impact: A Regulation Impact Statement is contained at the end of Chapter 1.
Chapter 1 - Rebates (tax offsets) for expenditures on landcare and on water facilities
Overview
1.1 Part 1 of Schedule 1 of the Bill will insert new Division 388 into the Income Tax Assessment Act 1997 (the 1997 Act). Division 388 will allow you in certain circumstances to claim a rebate (tax offset) for up to $5,000 of the expenditure that you incur on each of landcare operations and on facilities to conserve or convey water. The rebate (tax offset) is available as an alternative to claiming the income tax deductions for expenditure of this kind available under subdivisions 387-A and 387-B. The Part also contains technical amendments to the 1997 Act that are consequential upon the enactment of Division 388 .
1.2 Part 2 of Schedule 1 contains technical amendments to the Income Tax Assessment Act 1936 (the 1936 Act) that are consequential upon the enactment of Division 388 . Part 3 of Schedule 1 contains the application provision for the Schedule.
Summary of the amendments
1.3 The amendments have the following broad features:
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- they permit certain taxpayers who can claim an income tax deduction for capital expenditure in a particular year under subdivision 387-A or 387-B to claim instead a rebate (tax offset) for up to $5,000 for the expenditure under each subdivision
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- those taxpayers who are eligible to claim the rebate must have a taxable income $20,700 or below
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- if you do not have sufficient tax liability to absorb the offset, you may carry forward the excess
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- the relevant expenditure must be incurred after the start of the 1997-98 income year and before the end of the 2000-01 income year
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- if you choose the rebate for your expenditure you cannot also deduct that expenditure under subdivision 387-A or 387-B of the 1997 Act.
Background to the legislation
1.4 The Bill implements the Government's election commitment, outlined in the document, Reviving the Heartland, to give farmers a choice between accelerated deductions for Landcare works under subdivisions 387-A and 387-B of the Act or a tax rebate/credit set at the marginal tax rate of 34 cents in the dollar for qualifying expenditure.
1.5 On 1 July 1997, the Minister for Primary Industries and Energy announced that there would be a tax incentive for landcare in the form of a tax rebate (tax offset) for capital expenditure incurred under subdivisions 387-A and 387-B of the Act. The rebate (tax offset) would be calculated at 34 cents in the dollar and would be able to be carried forward into subsequent income years. The Treasurer and the Minister for Primary Industries and Energy provided further details in their 12 May 1998 announcement.
1.6 These measures are designed to encourage low income farmers and rural land-holders to incur expenditure on landcare operations and on facilities for the conserving or conveying of water.
1.7 Under subdivision 387-A, eligible capital expenditure on landcare operations for your primary production land or for rural land used for your income production from business is tax deductible in the year in which the expenditure is incurred. Under subdivision 387-B, eligible capital expenditure on the conveying or conserving of water for your Australian primary production land is tax deductible over a three year period. The tax deductions produce only a small tax benefit to taxpayers whose low income produces a low effective tax rate; so those taxpayers have relatively little incentive to incur such expenditure.
Explanation of the amendments
PART 1 REBATES (TAX OFFSETS) FOR EXPENDITURES ON LANDCARE AND ON WATER FACILITIES
Division 388 - Landcare and water facility rebate (tax offset)
1.8 Proposed section 388-50 explains the broad taxation effects of the new Subdivision 388-A in relation to the rebate (tax offset) you can claim for expenditure you incur on landcare operations or on facilities to conserve or convey water. You can only choose a rebate in place of a deduction, where you could have claimed deductions under Subdivision 387-A or 387-B of the 1997 Act. The rebate can be claimed in relation to up to $5,000 of your expenditure in a year which could be a tax deduction under either of those subdivisions, provided your taxable income is $20,700 or less.
1.9 If you can claim a deduction under Subdivision 387-A or Subdivision 387-B, proposed section 388-55 enables you to claim a rebate for your capital expenditure of an income year if you wish. The amount of the rebate that you can claim is limited to a maximum of $5,000 of eligible expenditure in that year under each of the two subdivisions (ie. a rebate up to $10,000 of eligible expenditure can be claimed by a taxpayer in a year.). You must incur this expenditure after the start of the 1997-98 income year and before the end of the 2000-01 income year.
1.10 You cannot claim the rebate if your taxable income for the year in which the eligible expenditure is incurred exceeds $20,700, after any deduction that would have been available had you not chosen the rebate.
1.11 If you do choose to take the rebate for your capital expenditure, you are precluded from claiming a deduction for the expenditure to which the rebate relates.
1.12 Under proposed subsection 388-60(1) , the amount of the rebate that you can claim for expenditure incurred under subdivision 387-A is 34% of up to $5,000 of the expenditure that you could have deducted. For expenditure incurred under Subdivision 378-B you can claim 34% of $5,000 of eligible expenditure equally spread over 3 years, beginning with the year of the expenditure. This means you can claim the rebate in the same way, and over the same period, as the deductions available under Subdivisions 387-A and 387-B.
1.13 Under proposed subsection 388-60(2) , any rebate that you have not fully utilised in the year it arises will be subject to the rebate carry forward rules in proposed Division 65 .
Division 65: Rebate (tax offset) carry forward rules
1.14 Proposed Division 65 applies to those rebates (tax offsets) which are not completely absorbed by your tax liability in the year of income for which they arise. The excess is subject to the carry forward rules, and so is carried forward into the taxpayer's next income year. [Proposed section 65-20]
1.15 Proposed section 65-25 sets the tests you must pass before you can carry forward unused portions of your rebate. The amount of rebate that you can carry forward is that amount of your rebate that exceeds the income tax you would have to pay if you had not received the rebate and you did not have any rebates that are of a higher priority than that rebate that is, rebates that are used only after the particular rebate. Proposed subsection 65-25(2) tabulates the order of priority of rebates. Landcare and water facility rebates are used before foreign tax credits, but after all other tax offsets (listed in section 13-1 of the 1997 Act).
1.16 The amount of rebate which you can carry forward is the excess of rebate over your tax liability in the previous income year minus the rebate rate applied to any unused exempt income that you may have derived that year. So the rebate carried forward from a year in which there was net exempt income is only the excess remaining after it is applied against that income. [Proposed section 65-30]
1.17 In a later income year, where you have an amount which you have carried forward, this amount of rebate will decrease the amount of income tax that you would have to pay but for the rebate [proposed subsection 65-35(1)] . If you have more than one type of rebate, you must apply them according to their priority as set out in the table in proposed subsection 65-25(2) , lowest priority first, and within any priority you must first use the rebate to which you first became entitled. [Proposed subsection 65-35(2)].
1.18 Before you can apply the amount of carried forward rebate against your income tax liability of a later year, you must first offset it against any amount of exempt income that you derived in that later income year. Any rebate remaining can then be applied against your tax liability for the year. [Proposed subsection 65-35(3)]
1.19 If you are a company carrying forward unused rebates to a later income year, you must also apply the carried forward rebate against any exempt income you may have derived in that later income year.
1.20 Under proposed subsection 65-40(1) , companies cannot apply a rebate where they could not have deducted a loss of the same year as the rebate. This means that before a company can apply a carried forward rebate, it must first satisfy the continuity of ownership test or the same business test. The continuity of ownership test requires that shares carrying more than 50% of all voting, dividend and capital rights be beneficially owned by the same natural persons at all times from the year the rebate was first claimed to the year the rebate is applied. The continuity of business test requires that the company carries on the same business from the year the rebate is first claimed to the year the rebate is applied. A company which satisfies the same business test may apply a rebate even if it fails the continuity of ownership test.
1.21 If a company lost continuity of ownership and of business during a year, it may still be appropriate for it to apply a rebate arising before the change in relation to the part of the year before the change, or to apply a rebate arising after the change in relation to a year after the change. It can do so, to the extent that had the part of the year of the change been the whole year the rebate could have been applied. [Proposed subsection 65-40(2)] .
Consequential amendments of the 1997 Act
1.22 Item 1 of Schedule 1 adds a new note to subsection 4-10(3) the subsection which sets out the method for calculating how much income tax you have to pay so that you will be aware of the rebates (tax offsets) for landcare operations and for water conserving and conveying facilities.
1.23 Item 2 of Schedule 1 adds a reference to Division 65 so that the list of examples in Note 1 to subsection 4-10(3) will be complete.
1.24 Items 3 and 4 of Schedule 1 make additions to the table at section 13-1 which lists the various rebates (tax offsets) in both the 1997 Act and the 1936 Act. The two items add individual references to the rebate (tax offset) for expenditure on landcare operations and the rebate (tax offset) for expenditure on facilities for water conserving and conveying.
1.25 Item 5 repeals section 40-10, re-enacts it as proposed subsections 40-10(1) and 40-10(3) and inserts proposed subsection 40-10(2) which refers to rebates (tax offsets) as being a capital allowance. The existing provision referred to writing off capital expenditure as a deduction, whether immediately or over a period of years, as a capital allowance, and referred to Subdivision 40-B as a comprehensive list of capital expenditures for which there are capital allowances.
1.26 Items 6 and 7 make changes to the table in subsection 40-30(2) so that it will include references to proposed subdivision 388-A as an alternative to subdivisions 387-A and 387-B.
1.27 Item 8 of Schedule 1 inserts proposed Division 65 which contains the rebate (tax offset) carry forward rules.
1.28 Items 9 and 10 of Schedule 1 insert two new notes into subdivision 387-A to alert the reader that in some circumstances a rebate (tax offset) may be an alternative to the income tax deduction described there for landcare expenditure.
1.29 Items 11 and 12 of Schedule 1 insert two new notes into subdivision 387-B to alert the reader that in some circumstances a rebate (tax offset) may be an alternative to the water conserving and conveying facilities income tax deduction.
1.30 Item 13 of Schedule 1 inserts proposed Division 388 providing rebates (tax offsets) for primary producers and some land-holders.
1.31 Part 2 of Schedule 1 contains amendments to the 1936 Act. The provisions which are being amended are contained in Taxation Laws Amendment Act (No.2) 1998 and give effect to the 1997 Budget announcement which made changes to the cost base rules for the capital gains tax provisions. These new cost base rules ensure that taxpayers will reduce the cost base or indexed cost base of an asset to the extent that they have been entitled to capital allowances in the form of revenue deductions for capital expenditure on the asset.
1.32 The cost base rules in Taxation Laws Amendment Act (No.2) 1998 do not take account of capital allowances in the form of rebates (tax offsets) given for capital expenditure; they only account for the deductions to which these rebates are an alternative. To maintain the policy objective of the Budget announcement, which is to give a rebate alternative to an income tax deduction with generally the same tax effects, amendments to the new cost base rules are needed.
1.33 Items 14 and 15 insert new subsections into section 160ZJA so that, where a rebate (tax offset) is given for the capital expenditure, the cost base of an asset is reduced by the amount that would have been claimed as a deduction but for the taking of the rebate. [Proposed paragraph 160ZJA(1)(ca)] This adjustment also applies to the cost base of a partner's asset and the determinant of the adjustment amount is the amount of deduction the partner would be allowed under either subdivision 387-A or 387-B. [Proposed paragraph 160ZJA(3)(ca)]
1.34 Items 16 and 17 introduce parallel new subsections [proposed paragraphs 160ZJB(1)(ca) and 160ZJB(3)(ca)] into section 160ZJB for the adjustment of the indexed cost base of an asset of an individual and a partner in a partnership respectively.
1.35 Item 18 inserts a new paragraph into subsection 160ZK(1A) to reduce the reduced cost base of an asset by the amount that would have been taken as a deduction if the taxpayer had not chosen to take the rebate (tax offset). [Proposed paragraph 160ZK(1A)(c)]
1.36 Part 3 of Schedule 1 contains the application provision which has the amendments contained in Schedule 1, and so the rebate (tax offset) alternative, applying to assessments for the 1997-98 income year and later income years. Proposed paragraph 388-55(2)(b), discussed above, ensures that expenditure for which the rebate alternative is available must be incurred before the end of the 2000-01 income year. Where that expenditure is on water facilities, related rebates may therefore be first claimed as late as the 2002-03 income year.
REGULATION IMPACT STATEMENT LANDCARE REBATE (TAX OFFSET): AMENDMENT TO THE INCOME TAX ASSESSMENT ACT 1997 (THE ACT)
1. Specification of policy objective
The Government's policy objective in implementing the landcare and water conserving and conveying facility rebate (tax offset) is to assist low income farmers who cannot effectively use the income tax deductions provided under subdivisions 387-A and 387-B to invest in landcare works so as to encourage on-farm conservation works.
The Government's election statement, Reviving the Heartland, announced a commitment to give farmers a choice between accelerated deductions for Landcare works under subdivisions 387-A and 387-B of the Act or a tax rebate/credit set at the marginal tax rate of 34 cents in the dollar for qualifying expenditure.
2. Identification of implementation option
Subdivisions 387-A and 387-B of the Act contain provisions which allow certain taxpayers to claim deductions for landcare expenditure and for expenditure on conserving and conveying of water respectively. A carry forward is available for these tax deductions in the form of carry forward losses.
On 1 July 1997, the Government announced that there would be a tax incentive for landcare in the form of a carry forward rebate (tax offset) for capital expenditure incurred under subdivisions 387-A and 387-B of the Act. The rebate would be set at 34 cents in the dollar. The Treasurer and the Minister for Primary Industries and Energy provided further details in their 12 May 1998 announcement.
For those farmers in receipt of incomes of less than $20,700 the rebate of 34 cents in the dollar may be more attractive than an income tax deduction given that their marginal tax rate (20 cents in the dollar in most cases). If they use income averaging, lower income farmers might still prefer the income tax deduction. The proposed rebate will cover eligible capital expenditure under either of subdivision 387-A or 387-B so that the rebate can be claimed for up to $5,000 of eligible expenditure under each subdivision in a year . The Natural Heritage Trust Fund will finance rebate claims up to $80 million where the expenditure is incurred in the income years of 1997-98 to 2000-2001.
Given the Government's election promise and the announcements made in July 1997 and in May 1998, there is effectively only one implementation option.
This option is to amend the Income Tax Assessment Act 1997 to provide primary producers with taxable incomes of up to $20,700 a year are provided with the option of a tax rebate for eligible expenditure incurred from the start of the 1997-98 income year. The maximum claim limit is $1,700 (requiring expenditure of $5,000) for expenditure in a particular year that would otherwise be tax deductible under either subdivision 387-A or 387-B. This means the rebate can be claimed for up to a total of $10,000 of eligible expenditure in any year if there is expenditure of $5,000 under each subdivision. The rebate can be carried forward for an indefinite period.
If the taxpayer claims the rebate, they cannot also claim an income tax deduction under subdivision 387-A or subdivision 387-B for the same expenditure.
3. Analysis of the costs and benefits associated with the implementation option
The proposed measure will only impact on those taxpayers who incur expenditure that would be tax deductible under subdivisions 387-A or 387-B of the Act. Affected taxpayers will also have to satisfy the income ceilings imposed which are designed to target the rebate (tax offset) at those farmers who because of their low income are most in need of assistance to invest in landcare works. In substance, the impact group is those taxpayers whose tax benefit from claiming deductions under subdivisions 387-A or 387-B of the Act is likely to be low because their income tax rate is low. Those in a tax loss position who incur the expenditure will not receive the tax benefit immediately but will carry it forward because a rebate will only reduce tax liability. Those whose income exceeds the ceiling will still be able to claim the tax deductions under subdivisions 387-A and 387-B.
No taxpayers will be adversely affected by this measure. The proposed rebate (tax offset) provides additional assistance to those taxpayers who have low taxable incomes to undertake new landcare and water conserving and conveying works. As indicated above there will be some taxpayers who presently claim the income tax deductions under subdivisions 387-A and 387-B and they will now have the alternative of claiming the rebate if they choose.
It is not possible to estimates of the number of taxpayers who will choose to take the rebate.
The overall cost of the rebate has been capped at $80 million over four years and funding will come from the Natural Heritage Trust Fund. The cost is made up of two factors; firstly some taxpayers who would otherwise claim a 20 cents in the dollar income tax deduction under subdivisions 387-A or 387-B will instead claim the rebate at 34 cents in the dollar; secondly the rebate will provide incentives for taxpayers to undertake new eligible expenditure.
There will be no additional compliance costs imposed on those taxpayers who wish to claim the rebate instead of the deductions. They will simply have to maintain records of expenditure in the same manner as for other aspects of their tax affairs.
The Australian Taxation Office will incur significant costs in the first two years of the rebate's operation of $1.6 million per year to ensure that taxpayers are aware of entitlements to the rebate. The Department of Primary Industries and Energy will be assist in targeting relevant taxpayers.
A number of features of this policy proposal have been discussed with representatives of the National Farmers Federation.
The implementation option achieves the Government's policy objectives. It does not impose any additional compliance costs on affected taxpayers. No taxpayer will be adversely affected by this measure.