House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Finance, the Hon. J.S. Dawkins, M.P.)

Main Features

Deduction for costs of converting oil-fired plant (Clause 3)

The Bill proposes to terminate the deduction presently available in equal instalments over 2 years for capital costs incurred by a taxpayer in converting oil-fired plant to use alternative energy sources. The deductions will cease to be available in respect of conversion costs incurred under a contract entered into after 19 May 1983 or incurred in connection with a conversion that the taxpayer commenced to carry out after that date.

Depreciation of certain primary production plant and structural improvements (Clauses 4 and 5)

The Bill will, for the future, authorize a reduction in the 33 1/3 per cent rate of depreciation that is proposed, by amendments contained in clauses 10 and 13 of the Income Tax Assessment Amendment Bill 1983, to apply to new plant used wholly and exclusively for the purpose of agricultural or pastoral pursuits, forest operations or fishing operations and to structural improvements used for the storage of grain, hay or fodder in the course of carrying on a business of primary production. The 33 1/3 per cent rate is, by that Bill, to apply to plant and structural improvements that are acquired under a contract entered into by a taxpayer after 19 July 1982 or commenced to be constructed by a taxpayer after that date.

Under amendments proposed by this Bill, the 33 1/3 per cent prime cost rate is to revert to the previous 20 per cent rate that applies until 19 July 1982. The reduced rate will, however, apply only in respect of eligible plant and improvements acquired under a contract entered into after 19 May 1983 or which the taxpayer commenced to construct after that date.

Consistent with safeguards proposed in the Income Tax Assessment Amendment Bill 1983, the 20 per cent rate will not be available in respect of eligible structural improvements that are the subject of a sale and leaseback or similar arrangements where the lessee/real end-user would have otherwise been depreciating the improvements on the basis of pre-accelerated rates of depreciation (i.e., under general depreciation rates applying in relation to improvements acquired under a contract, or commenced to be constructed, before 22 August 1979). Similar safeguards are not proposed in relation to primary production plant generally as eligibility for the accelerated rate is, in these cases, restricted to new plant.

Special depreciation on storage facilities for petroleum fuel (Clause 6)

The Bill will terminate the special depreciation allowance at the rate of 100 per cent that is authorised by section 57AJ of the Principal Act for storage facilities - and ancillary plant necessary for the functioning of such facilities - used wholly and exclusively for the storage of liquid or gaseous petroleum fuel that is held for use in a business as fuel or as trading stock for disposal. The special depreciation allowance will cease to be available in respect of eligible facilities acquired under a contract entered into after 19 May 1983 or that the taxpayer commenced to construct after that date.

Further amendments proposed by the Bill will confine eligibility to plant that is first used or installed ready for use for the purpose of producing assessable income before 1 July 1984.

Conversion allowance for the replacement of oil-fired plant (Clause 7)

The Bill will terminate the special 40 per cent conversion allowance presently available in respect of capital expenditure incurred by a taxpayer on the acquisition or construction of a unit of non-oil-fired plant to replace oil-fired plant.

The conversion allowance will cease to be available in respect of the cost of replacement plant acquired by a taxpayer under a contract entered into after 19 May 1983 or in respect of plant that the taxpayer commenced to construct after that date.

Interest Withholding Tax (Clauses 8 to 13 and 16)

These clauses give effect to a proposal to withdraw the general exemptions from withholding tax in respect of interest on overseas borrowings by "Australian entities" and the Australian Industry Development Corporation (AIDC), and to substitute a new exemption for borrowings by public sector authorities.

The existing exemption for interest on external borrowings of Australian resident companies, by way of certain publicly or otherwise widely distributed debentures issued overseas is to be preserved. In addition, interest on external borrowings by the Commonwealth will continue to be exempt under section 6B of the Loans Securities Act 1919 where an undertaking is given by the Commonwealth that the interest payable to a non-resident will be exempt.

On withdrawal of the general exemption for interest paid by "Australian entities" (broadly, Australian owned and controlled bodies and Australian Governments and their authorities) exemptions in respect of external borrowings by the States and by Commonwealth and State authorities will be maintained under a new provision in the Principal Act where the Treasurer certifies the interest to be tax- exempt. A certificate will not, however, be given where funds from the borrowing will be used by an authority in direct competition with private sector enterprises.

The general exemption is to be withdrawn for interest paid on or after the date on which the legislation is enacted in respect of loans raised in pursuance of contractual obligations entered into after 19 May 1983. The exemptions will thus continue to be available in respect of interest paid on loans raised in pursuance of contractual obligations entered into on or before that date.

Transitional provisions will provide that interest paid during the period between 19 May 1983 and the date on which the legislation is enacted, on loans raised in pursuance of contractual obligations entered into after 19 May 1983, may still qualify for exemption from withholding tax unless the Commissioner of Taxation is satisfied that the interest was paid at that time, rather than at a later time, for the purpose of obtaining the benefit of the exemption.

Premiums paid for basic health insurance (Clause 14)

The Bill will amend the provisions of the income tax law which allow a rebate of tax for contributions paid by a taxpayer to a registered hospital or medical benefits fund for the purpose of securing entitlement to basic hospital benefits or basic medical benefits. By the amendments proposed by this clause the rebate is to be abolished in respect of all contributions paid after 30 June 1983 and in respect of contributions paid on or before 30 June 1983 to the extent that those contributions secure basic health cover in respect of any period after that date.

Rebate of tax in respect of home loan interest (Clause 15)

The Bill also discontinues the income tax rebate allowed to an individual resident taxpayer for certain home loan interest payments in respect of a dwelling in Australia occupied by the taxpayer as his or her sole or principal residence. The particular rebate is now available in respect of such part of the qualifying interest on the first $60,000 of the loan or loans on the home as is attributable to the portion of the interest rate which exceeds 10 per cent per annum. The rebate is at the standard rate of tax of 30.67 per cent.

By the amendments proposed by this clause the rebate will not be available for interest payments that are made after 30 June 1983 or, if made on or before 30 June 1983, that accrue after that date.

A more detailed explanation of the Bill is contained in the following notes.