Senate

Revised Explanatory Memorandum

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

General outline and financial impact

Uniform capital allowance system

There are currently over 37 separate capital allowance regimes in the income tax law that are not consistent. The Capital Allowances Bill proposes to remedy this by introducing a uniform capital allowance system that will offer significant simplification benefits as well as improve neutrality. The uniform capital allowance system is based on the following principles:

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a set of general rules to calculate the deduction for the notional decline in value of most depreciating assets;

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a pooling mechanism under which some expenditures are pooled and given deductions for the decline in the pool; and

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deductions, immediate or over a period of time, for certain capital expenditure used in the primary production and the mining industries.

Certain types of depreciating assets are to be excluded from the uniform capital allowance system. These are assets that are:

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used in R & D activities;

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associated with investments in Australian films;

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capital works under Division 43 of the ITAA 1997;

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associated with certain IRUs; and

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cars where the deductions on these cars have been substantiated using certain methods.

Transitional and consequential amendments

The New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001 will ensure that assets and expenditures subject to the current law move into the uniform capital allowance system smoothly. This is required as existing regimes may use differing terms and concepts. Further, various provisions of the income tax law as well as other Commonwealth legislation require amending so as to align the terminology used in the generalised regime with that used in these Acts.

Date of effect : 1 July 2001 for the uniform capital allowance system. In relation to the transitional and consequential amendments, they generally apply from 1 July 2001. Proposal announced : The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 and No. 74 of 11 November 1999. In particular, refer to Attachment L of Treasurers Press Release No. 74.

Financial impact : These Bills are based on the recommendations of the Review of Business Taxation. Section 24 of A Tax System Redesigned provides a comprehensive assessment of the revenue impact of all measures recommended by the Review of Business Taxation. However, because some recommendations have already been adopted, for example the removal of accelerated depreciation, while other recommendations in relation to capital allowances have not been included in these Bills, the financial impact cannot be accurately ascertained.

Compliance cost impact : Because the uniform capital allowance system is based on interdependent topics, the compliance costs for these Bills have been considered collectively. The compliance costs for businesses affected by the uniform capital allowance system are expected to be reduced due to:

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a uniform treatment of depreciation for capital items rather than the current taxation treatments. This will lead to a reduction in record keeping and administration expenses; and

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recurrent savings over the life of the system relative to the previous system due to simplification.

However, these compliance cost savings may be offset initially by:

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training and education costs associated with taxpayers and agents gaining an understanding of the new legislation; and

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expenses associated with updating record keeping systems.

Summary of regulation impact statement

Regulation impact on business

Impact : Low.

Main points :

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The uniform capital allowance system will collapse at least 27 of the capital allowance regimes that currently exist in the income tax law into a single system that generates deductions based on the effective life of assets.

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A taxpayer who incurs the loss in value of a depreciating asset will be entitled to deduct their cost of the asset. This may not be the legal owner of the asset.

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Taxpayers can choose to use the Commissioners effective life schedule or self-assess the effective life of their assets. Further, they can recalculate the effective life of the asset if the circumstances surrounding the use of the asset change.

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Project development costs will be eligible for depreciation through pooling arrangements.

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Some blackhole expenditure including the costs of establishing an entity and all forms of capital raising expenses can be written-off over a 5-year period.