Supplementary Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Glossary
The following abbreviations and acronyms are used throughout this explanatory memorandum.
| Abbreviation | Definition |
|---|---|
| CGT | capital gains tax |
| Commissioner | Commissioner of Taxation |
| GST Act | A New Tax System (Goods and Services) Act 1999 |
| ITAA 1936 | Income Tax Assessment Act 1936 |
| ITAA 1997 | Income Tax Assessment Act 1997 |
| STS | Simplified Tax System |
General outline and financial impact
Amendments to the New Business Tax System (Capital Allowances) Bill 2001 and the New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001
The amendments to the New Business Tax System (Capital Allowances) Bill 2001 and the New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001 will ensure the uniform capital allowance system operates as intended. There are a number of amendments as a result of the consideration of submissions received after the further exposure draft on these Bills was released in May 2001. Other amendments are of a technical and clarifying nature.
Date of effect: 1 July 2001 for amendments to the New Business Tax System (Capital Allowances) Bill 2001. In relation to the New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001, the amendments generally apply from 1 July 2001.
Proposal announced: Not previously announced.
Financial impact: The financial impact cannot be readily ascertained.
Compliance cost impact: The amendments will involve no additional compliance costs.
Chapter 1 - Amendments to the New Business Tax System (Capital Allowances) Bill 2001
Outline of chapter
1.1 The New Business Tax System (Capital Allowances) Bill 2001 introduces a uniform capital allowance system. This system will consolidate within a single Division of the ITAA 1997 (Division 40) most of the different capital allowances in the current law.
Explanation of amendments
1.2 This amendment will ensure that where a taxpayer acquires a copyright, a licence relating to a copyright, or an item of in-house software from a previous holder, the taxpayer must write it off over the periods stated in the statutory effective life table, applied as from the time they acquire the asset. The amendment ensures that, for example, a taxpayer receives a write-off where they have purchased the asset after the statutory period has elapsed for the previous holder.
1.3 The amendments ensure that in circumstances when a balancing adjustment event occurs and the taxpayer continues to hold the depreciating asset, the cost and adjustable value of that asset are reset to termination value. That is the value to which the balancing adjustment rules reconciled the adjustable value when the balancing adjustment event occurred. This will allow any further gain or loss to be recognised when the asset is subsequently disposed of, lost or destroyed. It will also ensure that any second element costs incurred after that balancing adjustment event occurs will be recognised.
1.4 Together these amendments will clarify that the 25 year write-off period for a copyright, or a licence relating to a copyright, commences from when the taxpayer acquires the copyright or becomes the licensee. This is because the 25 year period applies only where it is shorter than the actual period until the copyright ends. The comparison with the actual period is made freshly for each acquirer, or licencee, of the copyright.
1.5 These technical amendments ensure that the balancing adjustment events apply as intended and that the termination value table terminology is consistent with those balancing adjustment provisions.
1.6 This change will allow STS taxpayers who are excluded from claiming capital allowances under the STS provisions for certain assets, to access the general low-value pool for those assets so long as they meet the relevant requirements to allocate the asset to the pool.
Correction to explanatory memorandum
1.7 Delete the following sentence from the date of effect in the general outline and financial impact of the explanatory memorandum to the Bill:
"The amendments may be applicable to a taxpayer before this date if they commence their 2001-2002 income year before 1 July 2001."
1.8 At the end of paragraph 1.110 of the explanatory memorandum to the Bill, add the following sentence.
"If the Commissioner later finds that the previous holder was using an incorrect effective life and amends the previous holders tax returns to reflect the use of a correct effective life, the effective life as reset by the Commissioner applicable to the previous holder will apply to the new holder."
1.9 After paragraph 3.111 of the explanatory memorandum to the Bill, add the following paragraph.
"Where the taxpayer begins to reuse the asset after a balancing adjustment event occurs in which they continue to hold the depreciating asset, they must continue to use the same method to work out the decline in value of their asset as they had used before the balancing adjustment event occurred. The taxpayer is however entitled to re-exercise their choice in determining the effective life of the asset."
1.10 At the end of paragraph 9.21 of the explanatory memorandum to the Bill, add the following sentence.
"If the Commissioner later finds that the previous holder was using an incorrect effective life and amends the previous holders tax returns to reflect the use of a correct effective life, the effective life as reset by the Commissioner applicable to the previous holder will apply to the new holder."
Chapter 2 - Amendments to the New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001
Outline of chapter
2.1 The New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001:
- •
- facilitates the transition from the various separate existing capital allowance regimes into the uniform capital allowance system; and
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- amends various provisions of the ITAA 1997, the ITAA 1936 and other Commonwealth legislation as a consequence of the introduction of the uniform capital allowance system.
Explanation of amendments
2.2 Taxpayers may have entered into a contract before 1 July 2001 to acquire a depreciating asset but the actual acquisition of that asset may occur on or after 1 July 2001. These amendments will ensure that taxpayers in these circumstances will be entitled to work out the decline in value of that asset. Further, where that taxpayer became the owner or quasi-owner of plant (the test for eligibility for depreciation under the then law) under a contract entered into before 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999, that taxpayer will retain accelerated depreciation on that item of plant. The position of the taxpayer will rollover in the same way as for depreciating assets a taxpayer acquired before 1 July 2001 and held afterward.
2.3 These technical amendments ensure that the internal tags in these provisions are used consistently. The twin concepts of the notional asset, for mining unrecouped expenditure and transport capital expenditure as at the end of 30 June 2001, and the real asset, for assets in relation to which that expenditure was incurred, are essential to the working of the transitional provisions in relation to such expenditure.
2.4 These amendments are of a technical nature to ensure that the amount of mining unrecouped expenditure moved into the uniform capital allowance system is reduced by the amount of that expenditure that was allowable as a deduction for the 2000-2001 income year under the existing law. Without these amendments, taxpayers would be able to deduct this amount twice.
2.5 These amendments ensure balancing adjustments apply in the intended manner for mining unrecouped expenditure and transport expenditure that are treated as a depreciating asset for purposes of Division 40 of the ITAA 1997. In particular, where there is a disposal of an actual depreciating asset to which this expenditure relates, there is an additional decline in value of the asset that represents this expenditure. That decline in value is that part of the assets adjustable value that relates to the actual asset and was not taken into account in working out the balancing adjustment for the disposal of depreciating asset.
2.6 The amendments further allow that where there is a disposal of property to which the expenditure relates but that is not a depreciating asset, there will be an additional decline in value of the expenditure treated as an asset for the purposes of Division 40. The rules for property that is not a depreciating asset also provide for the value of such an asset, or (if the taxpayer doesnt own it) a reasonable amount, to be included in assessable income. The rules under the uniform capital allowance system may not otherwise assess these amounts (relating to transitional assets) in certain circumstances. Where the uniform capital allowance system assesses these amounts they will not be assessed by these amendments. In effect, therefore, the deductions given indirectly for such property through the expenditure previously deducted or included in mining unrecouped expenditure or in transport expenditure are reconciled to the actual loss in value of the property.
2.7 Taxpayers may have incurred transport capital expenditure on a transport facility before 1 July 2001 but did not use that facility in the prescribed manner before that date. These taxpayers would not yet have begun to obtain a deduction under the existing law. Without this technical amendment, such expenditure would not be brought into the uniform capital allowance system and taxpayers would not be entitled to deduct the expenditure at the appropriate write-off rates under the existing law. The expenditure is brought in by finding that deductions under the existing law could have commenced had the taxpayer begun to use the transport facility appropriately, and by then applying Division 40 to the resulting notional asset as though the asset were used for a taxable purpose.
2.8 Together these amendments ensure that all existing mining-related depreciating assets that are not plant are brought within the new system, for purposes including the operation of balancing adjustments and to provide for the decline in value of the asset to take account of further costs incurred on that asset.
2.9 This amendment will ensure that if the asset has yet to commence to be used, the general start time rules in the uniform capital allowance system will apply to that asset, otherwise start time is deemed to have commenced on 1 July 2001. The amendment also ensures the appropriate effective life is worked out as at 1 July 2001 or, if later, the start time of the asset.
2.10 Together these amendments ensure that mineral transport expenditure incurred after 30 June 2001 but in respect of depreciating assets constructed, or acquired under contracts entered into, on or before that day, is also able to be deductible over the lesser of the life of the project and 10 years (20 years in the case of quarrying), as is the case for mining capital expenditure. The substituted words in relation to mining, petroleum mining or quarrying operations, cover alike expenditures on such operations and on transport facilities for the products of such operations.
2.11 These amendments provide for mining, quarrying and prospecting rights that the taxpayer held before 1 July 2001 to remain subject to the CGT provisions contained in the ITAA 1997 instead of being subject to the balancing adjustments in the uniform capital allowance system. This change will mean that the uniform capital allowance system will not apply to a mining, quarrying and prospecting right that the taxpayer held before 1 July 2001 and the taxpayer will not be able to claim deductions for costs incurred on those rights after the introduction of the new system. These amounts can only be used in the calculation of the taxpayers capital gain or loss under the CGT provisions.
2.12 The amendments also allow for non-deductible costs (which cannot have been included in allowable capital expenditure under the former law) associated with mining, quarrying and prospecting information the taxpayer started to hold before 1 July 2001 to reduce amounts included in assessable income from the realisation of information.
2.13 If a taxpayer disposes of the mining, quarrying and prospecting right that they held before 1 July 2001 to an associate, or enters into arrangements where in-substance ownership or use is retained, the cost of the asset to the purchaser is capped at the amount that would have been deductible under the repealed Division 330 of the ITAA 1997.
Example 2.1
Melissa Iron Ore Pty Ltd (Melissa Iron Ore) holds a mining right and mining information relating to their iron ore mining operation as at 30 June 2001. Melissa Iron Ore has $100,000 of undeductible costs associated with the mining right and $1,000 worth of undeductible costs associated with the mining information.
On 12 August 2001, Melissa Iron Ore incurred further costs ($5,000) in relation to the mining right that it holds. Those costs will form part of the cost base of the mining right and cannot be subject to a deduction under the uniform capital allowance system.
Further on 4 September 2001, Melissa Iron Ore received $10,000 for the sale of mining information that it holds. Melissa Iron Ore continues to hold that information after the sale so generally, the entire $10,000 would be included in assessable income. However, Melissa Iron Ore held mining information before 1 July 2001 and has undeductible cost associated with that information. Therefore, Melissa Iron Ore can reduce the $10,000 included in assessable income by $1,000 (amount included in assessable income is now $9,000). The $1,000 cannot be used to reduce any further amounts included in assessable income from the further realisation of Melissa Iron Ores mining information.
On 15 January 2002, Melissa Iron Ore disposes of its iron ore operation including the associated mining right and mining information. The reasonable consideration allocated to the mining right is $150,000 and the mining information is $5,000.
Melissa Iron Ore would have the $5,000 included in its assessable income from the disposal of the mining information. There is no reduction of this amount as all undeductible cost associated with this mining information has been previously utilised. There would be a capital gain of $45,000 ($150,000 - ($100,000 + $5,000)) from the disposal of the mining right.
2.14 With the introduction of new section 40-12 into this Bill (see amendment 1), there is now some unintended overlap between sections 40-10, 40-12 and 40-80 of the Income Tax (Transitional Provisions) Act 1997. Removing the reference to Division 42 from section 40-80 will remove this overlap. This means that sections 40-10 and 40-12 will contain the necessary rules for moving Division 42 plant into the uniform capital allowance system.
2.15 This technical amendment ensures the wording of subsection 40-80(2) is consistent with the wording of subsection 40-75(3).
2.16 This further transitional provision will allow taxpayers who have carry-forward excess mining or petroleum deductions (that have been previously covered by the Income Tax (Transitional Provisions) Act 1997 to claim these amounts as an immediate deduction in their 2001-2002 income year. Where taxpayers do not have sufficient income to offset these deductions, these amounts will then be carried-forward as tax losses.
2.17 This amendment ensures that assets covered by section 61A of the ITAA 1936 and Division 57 of Schedule 2D of the ITAA 1936 obtain the same transitional treatment under subsection 40-285(2) of the transitional provisions as assets to which Division 58 of the ITAA 1997 applies.
2.18 The provisions in this Bill ensure that any capital gain or loss on a depreciating asset is disregarded for CGT purposes where there is both a CGT event and a balancing adjustment event. However, there is potential for a disposal occurring after the uniform capital allowance system commences to be dealt with, both under the uniform capital allowance system and as a CGT event under the CGT provisions of the former law happening before the new system commences, thereby resulting in double taxation. For example, there may be a disposal of an asset for CGT purposes under a contract entered into before 1 July 2001 but there is no change in ownership of that asset until on or after 1 July 2001.
2.19 Disregarding the capital gain or loss, on the disposal of a depreciating asset on or after 1 July 2001 under a contract entered into before 1 July 2001, ensures the same amount cannot be assessed under both the uniform capital allowance system and the former CGT provisions.
2.20 For plant acquired before 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 and for other depreciating assets acquired before 1 July 2001, the transitional provisions preserve the benefit of indexation of the assets cost base. Effectively, this indexation slice reduces the assessable balancing adjustment amount where the termination value exceeded the assets cost. The provisions are silent, however, on retention of that indexation in the event of a balancing adjustment rollover. This amendment ensures that the transferee (in the event of a rollover) retains the benefit of any indexation that was available to the transferor.
2.21 This technical amendment improves the grammatical clarity of the provision.
2.22 The insertion of the equivalent of the ITAA 1997 and new Division 40 references to depreciating assets that are a water facility or a timber mill road or building into subsection 73B(30) of the ITAA 1936 ensures that this subsection operates as intended.
2.23 This consequential amendment is a result of the implementation of the Taxation Laws Amendment (Research and Development) Bill 2001. That Bill takes effect from an earlier date than this Bill, and so the replacement by this Bill of an item relating to research and development expenditure must be changed to reflect the amendments to be made by that Bill.
2.24 These changes ensure the correct operation of Division 27 of the ITAA 1997. They retain the operation of some of the existing provisions relating to GST groups and GST joint ventures that should apply to depreciating assets but which would otherwise be inadvertently excluded from applying to those assets.
Amendments 35 to 38, 41, 46 and 48
2.25 These amendments ensure that the adjustments to cost and adjustable value of assets associated with entitlements to input tax credits, and which are low cost assets of an STS taxpayer, are given treatment consistent to that of general depreciating assets subject to the uniform capital allowances system. The amendments insert reference to the appropriate STS pooling provisions.
Amendments 39, 40, 43, 44, 48, 49 and 51
2.26 These technical changes ensure that the exception, that excludes assets and expenditures allocated to pools from the general Subdivision 27-B of the ITAA 1997 rules, applies as intended.
Amendments 42, 45, 47, 50, 59 to 62
2.27 These amendments ensure that adjustments under Divisions 129 or 132 of the GST Act continue to be treated only as potential deductions or assessable income in the year that they occur. Essentially, these are adjustments that relate to the use of assets rather than their cost.
2.28 These changes ensure that instead of the pools previous years closing balance being reduced by the input tax credits to which a taxpayer is entitled, the actual cost of the assets allocated to the low-value or STS pool is reduced by the credits. These reductions will only take place where the year of allocation coincides with the year the credit arises. In all other cases, the pools previous years closing balance will be reduced in accordance with the provisions as currently drafted. These changes also apply to additional expenditure - that is, to second element costs - incurred on assets allocated to those pools.
2.29 Division 388 of the ITAA 1997 is expressed to apply until the end of the 2000-2001 income year. That may be after 1 July 2001 for taxpayers with substituted accounting periods. Because of the current application clause for Division 40, Division 388 has unintentionally ceased to apply on 30 June 2001 even if that is before the end of the 2000-2001 income year for a particular taxpayer. This amendment ensures that Division 388 continues to apply until the end of the 2000-2001 income year for taxpayers with substituted accounting periods, as would have been the case under the former law.