House of Representatives

Supplementary Explanatory Memorandum and correction

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

Glossary

The following abbreviations and acronyms are used throughout this Explanatory Memorandum.

General outline and financial impact

Full balancing adjustments on disposal of plant

These amendments:

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include in assessable income the excess of disposal proceeds over the cost base of plant, indexed to 30 September 1999, where no depreciation deductions have been allowed on that plant; and

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allow a deduction for such plant for the difference between those proceeds and the reduced cost base where those proceeds are less than the reduced cost base.

Financial and compliance cost impact: remain unchanged from costs provided in the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 1999.

Submarine cables and indefeasible rights to use them

These amendments:

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alter the date of effect in order to allow depreciation deductions to be claimed by taxpayers who incur expenditure on IRUs over new cables after 11.45 am AEST on 21 September 1999. Formerly, taxpayers had to acquire the IRUs under contracts entered into after that time;

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ensure that disposals and part disposals of IRUs are dealt with as balancing adjustments under the depreciation provisions, rather than as capital gains tax events; and

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ensure that the disposal and partial disposal rules operate before the IRU has begun to be depreciated.

Financial and compliance cost impact: remain unchanged from costs provided in the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 1999.

Chapter 1 - Full balancing adjustment on disposal of plant

Overview

1.1 These amendments ensure that the measures in this Bill which treat any gains or losses on the disposal of plant under the CGT provisions as an additional form of balancing adjustment, will also apply to plant where no depreciation deductions have been claimed or the plant has not yet been fully completed or constructed. They will apply to balancing adjustment events for plant which occur after 11.45 am AEST on 21 September 1999.

1.2 For disposals of plant after 11.45 am AEST on 21 September 1999, this Bill will exempt any capital gains and losses from the CGT provisions and will instead treat those amounts as an additional balancing adjustment under the depreciation provisions contained in Division 42 of the ITAA 1997. However, those additional balancing adjustments will only apply to plant where depreciation deductions have been claimed and where there is a complete item of plant.

1.3 These amendments will ensure additional balancing adjustments can also apply where no depreciation has been claimed or where there is an incomplete unit of plant. In these situations, the balancing adjustments will include as income or allow as a deduction those amounts that would have been a capital gain or loss under the CGT provisions.

Explanation of amendments

1.4 Amendment 2 provides for the balancing adjustment calculation to include the additional balancing adjustment made under new Subdivision 42-GA.

1.5 Amendment 7 inserts new Subdivision 42-GA into Division 42 to calculate an additional balancing adjustment where no depreciation deductions have been claimed or where there is a disposal of an incomplete item of plant.

1.6 This additional balancing calculation could arise where an item of plant is completed and disposed of before it is used in the income producing process. It could arise where the plant is destroyed before completion.

1.7 The additional balancing adjustment calculation must be made in the year in which the balancing adjustment event occurs. [Section 42-222]

1.8 The amount to be included in assessable income under this Subdivision will be the excess of a plant's termination value (effectively, its sale proceeds) over its cost. For plant purchased before 11.45 am on 21 September 1999, the benefit of cost base indexation is to be preserved. The inclusion of this amount ensures the existing CGT treatment is preserved. [Item 8A, section 42-223]

1.9 A deduction will be allowed under this Subdivision where the plant's termination value is less than the reduced cost base. The deduction will equal the difference between the 2 amounts. This deduction equates to any capital loss that would have arisen under the CGT provisions ensuring that the existing CGT treatment is being preserved. [Item 8A, section 42-224]

1.10 Amendments 3 to 6 ensure the additional balancing adjustment will not apply to cars, collectables, personal use assets and plant used to produce exempt income and plant acquired before 20 September 1985, if any capital gain or loss arising upon their disposal is disregarded for CGT purposes. It will also not apply where the gain is assessable under another provision of the ITAA 1997.

1.11 Amendment 1 makes a consequential amendment to a note referring to balancing adjustments

Chapter 2 - Submarine cables and indefeasible rights to use them

Overview

2.1 These amendments will ensure that expenditure on IRUs after 11.45 am AEST on 21 September 1999 will be able to be written off over the life of the cable, regardless of when the contract to purchase the IRU was entered into, but provided the cable has not previously been used for communication purposes.

2.2 The provisions implementing the new depreciation arrangements were not intended to exclude IRUs from the general plant exemption from capital gains tax. Consistent with other plant, disposals and partial disposals of IRUs were intended to be dealt with under the full balancing adjustment provisions inserted by Schedule 1 to this Bill. This amendment will clarify that capital gains tax does not apply to disposals and part disposals of IRUs but rather that such disposals are dealt with solely under the depreciation balancing adjustment provisions.

2.3 An IRU is not eligible for depreciation until it is used for the purpose of producing assessable income. This will not occur until the relevant cable is completed and capable of being used for telecommunications purposes. The rules for partial disposal of IRUs, like balancing adjustment rules for depreciation generally, do not operate until depreciation has commenced. Where the holder of an IRU partially disposes of its IRU before the cable has been completed, the partial disposal rules cannot apply. This amendment will ensure that those partial disposal rules apply before the relevant cable begins to be used for telecommunications purposes.

Explanation of amendments

2.4 Amendments 8 and 9 ensure that the capital gains tax provisions apply to IRUs as if they were units of plant. This does not mean that a disposal or partial disposal of an IRU will be subject to CGT. On the contrary, because of the operation of new section 118-24 (contained in Schedule 1 to this Bill) a capital gain or capital loss is disregarded if the asset disposed of is plant. This amendment ensures that disposals and part disposals of IRUs are dealt with exclusively under the balancing adjustment provisions.

2.5 Amendment 10 ensures that partial disposals of IRUs are dealt with under new sections 44-20 and 44-25 where the disposal occurs before the IRU begins to be depreciated as well as after that time. It does this by removing the requirement that the section have effect only when the taxpayer has deducted or can deduct an amount for depreciation.

2.6 Amendment 11 ensures that the part of the IRU that is disposed of will have both a cost for depreciation purposes and a cost base for CGT purposes. Both of these amounts will be that part of the cost and cost base of the original plant just before the split into 2 assets, as is reasonably attributable to the part the taxpayer disposed of.

2.7 Amendment 12 ensures that depreciation deductions can be taken by taxpayers that have incurred expenditure on IRUs over new cables after the time of the Government's announcement (i.e. 11.45 am AEST on 21 September 1999).

Chapter 3 - Small business taxpayers

Omit paragraph 3.12.

Insert the following:

3.12 Turnover does not include things that are not supplies, such as dividend receipts, and non-business supplies as is usually the case for interest and rent received by an individual.

Omit paragraph 3.25.

Insert the following:

3.25 Group turnover does not include:

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supplies not made in the ordinary course of carrying on a business for example, the proceeds of sale of a capital asset, goods taken for own use and rental and interest receipts (unless the rental or lending activities constitute business activities); and

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things that do not constitute the making of a supply for example, dividend receipts.