Senate

Revised Explanatory Memorandum

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

Chapter 12 - General consequential amendments

Outline of chapter

12.1 This chapter explains amendments to various provisions of the ITAA 1997, the ITAA 1936 and other Commonwealth legislation as a consequence of the introduction of a uniform capital allowance system.

12.2 The amendments are necessary to facilitate the introduction of the uniform capital allowance system.

Context of reform

12.3 The introduction of the uniform capital allowance system for depreciating assets and its general application, giving deductions for some previously non-deductible capital expenditure, are key components of the New Business Tax System announced in Treasurers Press Release No. 74 of 11 November 1999 (refer to Attachment L).

12.4 Because it is based on a common set of principles the general capital allowance regime will offer significant simplification benefits. The existing capital allowance regimes are complex, inconsistent and involve significant replication of parallel but not identical provisions and concepts in the current law. Consequently, consolidating these regimes into a single regime will require a number of amendments to the ITAA 1997, the ITAA 1936 and other Commonwealth statutes.

Summary of new law

12.5 The more significant of these amendments will:

•

amend some Commonwealth statutes;

•

repeal those Divisions that are being consolidated into the single regime;

•

ensure the interaction between the GST and the capital allowance provisions operates as intended;

•

ensure the interaction between the capital works provisions and the capital allowance provisions operates as intended;

•

ensure the interaction between the CGT provisions and the capital allowance provisions operates as intended;

•

streamline the existing Division 58 of the ITAA 1997;

•

relocate definitions;

•

repeal redundant definitions;

•

give new labels to existing definitions that will remain unchanged;

•

insert additional definitions; and

•

update references.

Detailed explanation of new law

Amending the Airports (Transitional) Act 1996

12.6 Amendments to the Airports (Transitional) Act 1996 have been made so that the terms used in this Act are aligned with the uniform capital allowance system.

Amendment to section 48A definitions

12.7 The definition of depreciating asset has been added to section 48A of the Airports (Transitional) Act 1996 and has the meaning given by subsection 995-1(1) of the ITAA 1997 [Schedule 2, item 1] . Likewise, the term hold has also been defined in section 48A and has the meaning given by subsection 995-1(1) of the ITAA 1997 [Schedule 2, item 2] .

12.8 The Capital Allowances Bill provides for the term quasi-owner as defined in section 42-310 of the ITAA 1997 to be repealed. However, the term is still required in the Airports (Transitional) Act 1996 and cannot be replaced with the Division 40 term holder. Consequently, the definition of quasi-owner in section 48A of the Airports (Transitional) Act 1996 will be amended so it will retain its current definition in section 42-310 of the ITAA 1997. [Schedule 2, item 3]

Section 49B - special rules for fixtures that are depreciating assets - ITAA 1997

12.9 It is proposed that section 49B be inserted after section 49A of the Airports (Transitional) Act 1996 [Schedule 2, item 4] . The new section is to have the same effect as section 49A but will be based on the rules in Division 40 of the Capital Allowances Bill. This course is recommended because sections 49 and 49A of the Airports (Transitional) Act 1996 deem the depreciation provisions to apply to some entities.

12.10 Subsection 49B (1) of the Airports (Transitional) Act 1996 provides that section 49B applies if a company obtains a lease relating to particular land under section 21, 22 or 23 and at the time the lease was obtained, a depreciating asset is attached to the land.

12.11 Subsection 49B(2) provides that if, just before the land vested in the Commonwealth under Part 2 of the Airports (Transitional) Act 1996 , the part of the land to which the depreciating asset was attached was held by another entity under a quasi-ownership right over land granted by an exempt Australian government agency, and the other entity was the holder of the asset and on the grant of the lease referred to in subsection 49B(1) the other entity became a sub-lessee of the company, then, so long as the other entity continues to hold the sub-lease of that part of the land from the company or a successor, the other entity is taken to hold the asset.

12.12 Subsection 49B(3) provides that if subsection 49B(2) does not apply to the depreciating asset and the FAC was the owner of the depreciating asset for the purposes of Division 40 of the ITAA 1997 immediately before the land vested in the Commonwealth under Part 2, Division 40 applies to the depreciating asset as if the company held the asset and the amount paid by the company for the grant of the lease were an amount paid for the acquisition of the right.

12.13 Subsection 49B(4) provides that the Minister for Finance may make a written determination of the cost of the depreciating asset referred to in subsection 49B(3) for the purposes of Division 40 of the ITAA 1997. The note to subsection 49B(4) points out that if a determination is made, the cost of the asset will be determined under item 10 in the table in section 40-180 of the ITAA 1997 .

12.14 Subsection 49B(5) provides that the FAC must give the Minister for Finance such information as the Minister for Finance requires about the application of Subdivision 40-D of the ITAA 1997 to the asset and to the FAC.

12.15 Subsection 49B(6) provides that section 49B does not affect the operation of section 19 of the Civil Aviation Legislation Amendment Act 1995 .

12.16 Subsection 49B(7) provides that in section 49B entity has the same meaning as in section 49A of the Airports (Transitional) Act 1996 . [Schedule 2, item 4]

Section 50B - Acquisition of depreciating asset from the Commonwealth - Division 40 of the ITAA 1997

12.17 It is proposed that a section 50B be inserted after section 50A of the Airports (Transitional) Act 1996 [Schedule 2, item 5] . The section is to have the same effect as section 50A but will be based on the rules in Division 40 of the Capital Allowances Bill. The same reasoning as discussed in paragraph 120 in relation to sections 49 and 49A applies to sections 50 and 50A.

12.18 Subsection 50B(1) of the Airports (Transitional) Act 1996 provides that section 50B applies to a depreciating asset that was transferred from the Commonwealth to a company under section 23 of the Airports (Transitional) Act 1996 and, at the time of transfer, was not attached to land.

12.19 Subsection 50B(2) of the Airports (Transitional) Act 1996 provides that the Minister for Finance may make a written determination of the cost of the depreciating asset for the purposes of Division 40 of the ITAA 1997. The note to subsection 50B(2) states that if a determination is made, the cost of the depreciating asset will be determined under item 10 in the table in section 40-180 of the ITAA 1997.

12.20 Subsection 50B(3) provides that the FAC must give the Minister for Finance such information as the Minister for Finance requires about the application of Subdivision 40-D of the ITAA 1997 to the asset and to the FAC. [Schedule 2, item 5]

Section 51B - Acquisition of depreciating asset from the FAC - Division 40 of the ITAA 1997

12.21 It is proposed that section 51B be inserted after section 51A of the Airports (Transitional) Act 1996 . The new section is to have the same effect as section 51A but will be based on the rules in the proposed Division 40 of the ITAA 1997. The same reasoning as discussed in paragraph 120 in relation to sections 49 and 49A applies to sections 51 and 51A.

12.22 Subsection 51B(1) applies to a depreciating asset that was transferred from the FAC to a company under section 30 of the Airports (Transitional) Act 1996 .

12.23 Subsection 51B(2) provides that the Minister for Finance may make a written determination of the cost of the asset for the purposes of Division 40 of the ITAA 1997. The note to subsection 51B(2) provides that if a determination is made, the cost of the depreciating asset will be determined under item 10 in the table in section 40-180 of the ITAA 1997.

12.24 Subsection 51B(3) provides that the FAC must give the Minister for Finance such information as the Minister for Finance requires about the application of Subdivision 40-D of the ITAA 1997 to the asset and to the FAC. [Schedule 2, item 6]

Amendments to section 52A

12.25 The note to subsection 52A(2) of the Airports (Transitional) Act 1996 states that if such a determination is relevant to working out a balancing adjustment, the termination value of the plant will be determined under item 13 or 14 in the table in former section 42-205 of the ITAA 1997 or item 11 in the table in subsection 40-300(2) of that Act. [Schedule 2, item 7]

12.26 Subsection 52A(3) provides that the FAC must give the Minister for Finance such information as the Minister for Finance requires about the application of Subdivision 42-F of the ITAA 1997, or Subdivision 40-D of that Act, to the asset and to the FAC. [Schedule 2, item 8]

Amendment to section 55 - Modification of capital allowances and CGT provisions

12.27 It is proposed that paragraph 55(2)(a) of the Airports (Transitional) Act 1996 be amended by inserting after the word depreciation the words or capital allowances. The heading to the section is correspondingly altered. [Schedule 2, item 9]

Interaction with the A New Tax System (Goods and Services Tax) Act 1999

12.28 The references to car depreciation limit in the GST Act will be replaced with the new term car limit which has exactly the same meaning. Consequently, there is no effect on the operation of the law [Schedule 2, items 10 to 13] . The definition of minerals will have an updated reference. Again, there is no effect on the operation of the law [Schedule 2, item 14] .

Interaction with the A New Tax System (Luxury Car Tax) Act 1999

12.28 Subsection 25-1(3) of A New Tax System (Luxury Car Tax) Act 1999 is to have updated references to refer to the new term car limit which has the same meaning as car depreciation limit. There is no effect on the operation of the law. [Schedule 2, item 15]

Interaction with the Bounty and Capitalisation Grants (Textile Yarns) Act 1981

12.30 It is proposed that paragraph 3(3)(p) of the Bounty and Capitalisation Grants (Textile Yarns) Act 1981 be repealed and replaced with a new paragraph 3(3)(p) that reflects the income tax law relating to claiming deductions for the decline in value of depreciating assets under Division 40 of the ITAA 1997.

12.31 Subparagraph 3(3)(p)(i) replicates the current provisions found in paragraph 3(3)(p) while subparagraph 3(3)(p)(ii) ensures that the decline in value of machinery, plant or equipment for which the producer can deduct amounts under Division 40 of the ITAA 1997 cannot be included in the factory costs incurred by a producer of bountiable yarn in connection with processes in the production of that yarn. [Schedule 2, item 16]

Interaction with the Bounty (Computers) Act 1984

12.32 It is proposed that paragraph 6(5)(t) of the Bounty (Computers) Act 1984 be repealed and replaced with a new paragraph 6(5)(t) that more clearly reflects the income tax law relating to the uniform capital allowance system.

12.33 Subparagraph 6(5)(t)(i) replicates the current provisions found in paragraph 6(5)(t), while subparagraph 6(5)(t)(ii) provides that the factory cost incurred by a manufacturer in connection with processes in the manufacture of bountiable equipment does not include any amount being the decline in value depreciation of machinery, plant or equipment, other than depreciation of machinery, plant or equipment owned by the manufacturer that is depreciation for which the producer can deduct amounts under Division 40 of the ITAA 1997. [Schedule 2, item 17]

Interaction with the Bounty (Machine Tools and Robots) Act 1985

12.34 It is proposed that paragraph 12(6)(p) of the Bounty (Machine Tools and Robots) Act 1985 be repealed and replaced with a new paragraph 12(6)(p) that reflects the income tax law relating to the uniform capital allowance system.

12.35 Paragraph 12(6)(p) will provide that the factory cost incurred by a producer in connection with processes in the manufacture of bountiable equipment A or in the modification of bountiable equipment B does not include depreciation of machinery, plant or equipment, other than depreciation of machinery, plant or equipment owned by the producer that is depreciation allowed by the Commissioner for the purposes of a law of the Commonwealth relating to taxation or depreciation for which the producer can deduct amounts under Division 40 of the ITAA 1997. [Schedule 2, item 18]

Interaction with the Defence Act 1903

12.36 It is proposed that a new subsection 122AA(4) of the Defence Act 1903 be inserted that reflects the income tax law relating to the uniform capital allowance system.

12.37 Subsection 122AA(4) will provide that, in calculating the deductions (if any) allowable to Australian Defence Industries Pty Ltd or to Aerospace Technologies of Australia Pty Ltd (the companies referred to in subsection 122AA(1)) under Subdivision 40-B of the ITAA 1997 in respect of the asset referred to in subsection 122AA(1), the adjustable value of the asset to the company at the time of the acquisition of the asset is the amount that would have been its adjustable value to the Commonwealth just before that time if the Commonwealth had been a taxpayer and the asset had been used by the Commonwealth exclusively for the purpose of producing assessable income. [Schedule 2, item 19]

Amendments to the ITAA 1936

Inserting the definition of depreciating asset

12.38 The definition of depreciating asset will be inserted into subsection 6(1) of the ITAA 1936. This is to facilitate amendments to other provisions of the ITAA 1936 that will refer to this term. [Schedule 2, item 20]

Exemption of foreign branch profits

12.39 Section 23AH of the ITAA 1936 exempts certain foreign branch profits. To ensure these provisions continue to operate correctly with the introduction of Division 40, various amendments have been made to the section. [Schedule 2, items 21 to 24]

References to table in section 51AAA

12.40 The references in the table in subsection 51AAA(2) of the ITAA 1936 have been updated as a result of the introduction of Division 40. For convenience, the revised table has been substituted. [Schedule 2, item 25]

Anti-avoidance provisions

12.41 Amendments are required to both section 51AD and Division 16D of the ITAA 1936 to ensure they continue to operate effectively with the introduction of Division 40. [Schedule 2, items 26, 27 and 63 to 89]

Research and development provisions

12.42 The existing R & D provisions that interact with the various capital allowance provisions have been amended to reflect the incorporation of those provisions into Division 40. [Schedule 2, items 28 to 42]

Development allowance

12.43 In order for taxpayers to continue to be entitled to the development allowance, various amendments have been made to these provisions. [Schedule 2, items 43 to 51]

Updating references

12.44 Various references have been updated with the equivalent reference or term used in Division 40. [Schedule 2, items 52, 53, 58, 62, 90 to 96, 106 to 141 and 145 to 148]

Anti-avoidance schemes

12.45 The provisions which apply to losses and outgoings incurred under certain tax avoidance schemes have also been amended as a result of the introduction of Division 40. [Schedule 2, items 54 to 57]

Foreign income measures

12.46 The foreign income measures that interact with some capital allowances have been updated with the corresponding references in Division 40. [Schedule 2, items 59 to 61 and 97 to 103]

Debt forgiveness provisions

12.47 In order that the debt forgiveness provisions can apply to the cost of a depreciating asset under Division 40, amendments have been made to ensure that they can apply. [Schedule 2, items 104 and 105]

Leases of luxury cars

12.48 The rules regarding leases of luxury cars use many depreciation concepts contained in the former Division 42 of the ITAA 1997. Amendments are required to maintain the equivalent concepts that are now contained in Division 40. [Schedule 2, items 142 to 144]

Amendments to the ITAA 1997

Updating table lists

12.49 The tables in sections 10-5, 11-15, 12-5 and 13-1 have been updated because of the repeal of the various capital allowance provisions and the introduction of Division 40. [Schedule 2, items 149 to 193]

Assessing mining information

12.50 Division 15 of the ITAA 1997 is to be amended to ensure an amount taxpayers receive for providing mining quarrying or prospecting information to another entity will be assessable income providing they continue to hold that information. [Schedule 2, item 194]

Recoupment provisions

12.51 The recoupment provisions in Subdivision 20-A will be amended to ensure they can apply to capital allowances allowed under Division 40. [Schedule 2, items 196 to 205]

Updating references

12.52 Various references have been updated with the equivalent reference or term used in Division 40. [Schedule 2, items 206 to 213, 217 to 222, 229 to 242, 245 to 254, 303 to 318, 322, 325, 326, 328 to 336]

Interaction with GST

12.53 Subdivision 27-B of the ITAA 1997 predominantly deals with the interrelationship between Divisions 40 and 328 and the GST Act [Schedule 2, item 195, section 17-35 and item 216, section 27-35] . This Subdivision will ensure that where necessary, the effect of GST is taken into account when calculating a deduction under Division 40 or Division 328.

Acquiring or importing a depreciating asset

12.54 When a taxpayer makes a creditable acquisition of a depreciating asset, the cost of the asset is reduced by any input tax credit the taxpayer is entitled to (or becomes entitled to) claim in relation to this acquisition [Schedule 2, item 216, subsection 27-80(1)] . A creditable acquisition is a GST concept and is defined in section 11-5 of the GST Act. In effect it means an acquisition by a taxpayer of a taxable supply that is used either partly or solely for a creditable purpose. Further, the taxpayer must have paid consideration for the acquisition and must be registered or required to be registered for GST.

Example 12.1

Usha registers for GST on 31 December 2001. This registration has been made retrospective, effective 1 July 2001. On 1 August 2001 Usha buys a ladder for $550 that will be used for 80% of the time in her plumbing business. The remaining 20% usage is for non-taxable purposes. Consequently, the cost of this asset will be $510 (i.e. $550 - [(1/11 $550) 80%] = $510).

12.55 The same principle applies to creditable importations. When a taxpayer makes a creditable importation of a depreciating asset, the cost of the importation is reduced by any input tax credit the taxpayer is entitled or becomes entitled to claim in relation to this importation [Schedule 2, item 216, subsection 27-80(1)] . A creditable importation has the meaning provided in section 15-5 of the GST Act and covers the situation where a taxpayer, who is registered or required to be registered for GST, makes a taxable importation of goods that are to be used solely or partly for a creditable purpose [Schedule 2, item 370, subsection 995-1(1)] .

12.56 Where a taxpayer incurs second element costs in relation to a depreciating asset that are the creditable acquisition or creditable importation in the income year the asset is first held, the assets cost is reduced by any input tax credit the taxpayer is entitled or becomes entitled to claim [Schedule 2, item 216, subsection 27-80(2)] . Where the second element costs are incurred in an income year after the one in which the assets start time occurs, the assets opening adjustable value in the income year in which the second element costs are incurred is reduced by the input tax credits claimed [Schedule 2, item 216, subsection 27-80(4)] . If, however, either of these reductions is greater than the depreciating assets cost for the first income year or opening adjustable value in a later income year, the excess is included in the taxpayers assessable income (unless the taxpayer is an exempt entity) [Schedule 2, item 216, subsection 27-80(5)] .

12.57 Where the cost of the depreciating asset is its market value no reduction for GST payable is required [Schedule 2, item 216, subsection 27-80(3)] . This is because the term market value as defined in section 995-1 of the ITAA 1997 is its GST-exclusive price. However, where the term is not preceded by an asterisk it may mean that the market value is the GST-inclusive price.

12.58 These provisions do not apply to a depreciating asset that has been allocated to a low-value pool, an STS pool (see Division 328), to expenditure allocated to a software development pool or to a project pool [Schedule 2, item 216, subsection 27-80(6)] . This is because these pools are dealt with specifically under section 27-100 of the ITAA 1997 and are discussed in paragraphs 120 to 12.84.

Decreasing adjustments

12.59 Under the GST Act adjustments can be made for any GST paid or input tax credits claimed. These adjustments can occur for a number of reasons including change of creditable purpose and change of consideration. These situations will affect the amount of GST that a taxpayer is required to remit to the ATO or can claim as an input tax credit.

12.60 Where too much GST has been paid by a taxpayer or where they have claimed too few input tax credits, the taxpayer can make a decreasing adjustment.

12.61 Where the decreasing adjustment arises under Divisions 129 or 132 of the GST Act as a result of a change in creditable purpose, the amount of the adjustment is included in the taxpayers assessable income for the income year the adjustment arose [Schedule 2, item 216, subsection 27-85(1A) and section 27-87] . The treatment of all other decreasing adjustments under the GST Act are discussed in paragraphs 120 to 12.65.

12.62 Where a taxpayer holds a depreciating asset and a decreasing adjustment (other than one mentioned in paragraph 12.61) that relates either directly or indirectly to that asset occurs in the income year in which the assets start time commences, the taxpayer must reduce the assets cost by an amount equal to the decreasing adjustment [Schedule 2, item 216, subsections 27-85(1) and (2)] . However, if the decreasing adjustment occurs in an income year that is after the one in which the assets start time commenced, the assets opening adjustable value is reduced by an amount equal to the decreasing adjustment [Schedule 2, item 216, subsection 27-85(3)] .

12.63 In order to make an adjustment to the depreciating assets cost or opening adjustable value, the decreasing adjustment must relate either directly or indirectly to the depreciating asset. The use of the words directly or indirectly ensures that, irrespective of the type of decreasing adjustment that has occurred, there is a sufficient nexus with the adjustment and the depreciating asset. All decreasing adjustments, except for those under Divisions 129 or 132 of the GST Act, to the extent that they relate to the depreciating asset whether it be a change in consideration or the cancellation of a contract for the asset, must be accounted for.

Example 12.2

Joan buys a depreciating asset for $110,000. If the depreciating asset is to be used 60% for taxable purposes and 40% for non-taxable purposes, the input tax credit Joan can claim is $6,000. Consequently, the cost of the depreciating asset at acquisition is $104,000 (i.e. $110,000 - $6,000 (input tax credit)).

If the decline in value of the depreciating asset is $24,000 over 2 years, the opening adjustable value at the commencement of year 3 will be $80,000 (i.e. $104,000 - $24,000). If the taxable purpose changes at the commencement of year 3 to a 100% taxable purpose, the input tax credit that was claimed by Joan will need to be adjusted because of the change in usage. As the actual application of the asset since purchase is now around 74%, Joan will have a Division 129 decreasing adjustment of around $1,400 (as too few input tax credits have been claimed in relation to this creditable acquisition). This decreasing adjustment does not effect the cost or the opening adjustable value of the depreciating asset but instead will be included in Joans assessable income for that income year.

12.64 If the reduction for a decreasing adjustment is greater than the depreciating assets cost or opening adjustable value the excess must be included in the taxpayers assessable income (unless the taxpayer is an exempt entity). [Schedule 2, item 216, subsection 27-85(4)]

12.65 These provisions do not apply to a depreciating asset that has been allocated to a low-value pool or to expenditure allocated to a software development pool or to a project pool [Schedule 2, item 216, subsection 27-85(5)] . This is because these pools are dealt with specifically under section 27-100 of the ITAA 1997 and are discussed in paragraphs 120 to 12.84.

Increasing adjustments

12.66 Where the increasing adjustment arises under Divisions 129 or 132 of the GST Act as a result of a change in creditable purpose, the taxpayer can deduct the amount of the adjustment in the income year the adjustment arose. However, taxpayers cannot deduct the amount to the extent the adjustment arises from an increase of activity of a private or domestic nature [Schedule 2, item 216, subsection 27-90(1A) and section 27-92] . The treatment of all other decreasing adjustments under the GST Act are discussed in paragraphs 120 and 12.68.

12.67 Where a taxpayer has paid too little GST to the ATO or claimed too many input tax credits, an increasing adjustment must be made by the taxpayer. If an increasing adjustment (other than one mentioned in paragraph 12.66) that relates either directly or indirectly to that asset occurs in the income year in which the assets start time commences, the taxpayer must increase the assets cost by an amount equal to the increasing adjustment [Schedule 2, item 216, subsections 27-90(1) and (2)] . However, if the increasing adjustment occurs in an income year that is after the one in which the assets start time commences the assets opening adjustable value must be increased by an amount equal to the increasing adjustment [Schedule 2, item 216, subsection 27-90(3)] . Like decreasing adjustments mentioned in paragraph 12.62, all increasing adjustments, except for those under Division 129 or 132 of the GST Act, that relate directly or indirectly to the depreciating asset must be accounted for.

Example 12.3

Egil buys a depreciating asset for $110,000. As the asset is used 100% for taxable purposes, Egil can claim an input tax credit of $10,000. Thus, the cost of the asset is $100,000. If the asset declines in value by $20,000 over 2 years, the opening adjustable value of the depreciating asset will be $80,000 at the commencement of the third year.

If at the commencement of the third year the usage of the depreciating asset alters from a 100% taxable purpose to a 80% taxable purpose and a 20% non-taxable purpose, an increasing adjustment will need to be made under Division 129 of the GST Act since too many input tax credits have been claimed. As the actual application of the asset since purchase is now around 94%, Egil will have an increasing adjustment for the asset of about $600. This increasing adjustment does not effect the cost or the opening adjustable value of the depreciating asset. Since the increasing adjustment arises from an increase in the extent to which the asset is used for a private or domestic purpose, Egil is unable to deduct the amount of the increasing adjustment.

12.68 These provisions do not apply to a depreciating asset that has been allocated to a low-value pool or to expenditure allocated to a software development pool or to a project pool [Schedule 2, item 216, subsection 27-90(4)] . This is because these pools are dealt with specifically under section 27-100 of the ITAA 1997 and are discussed in paragraphs 120 to 12.84.

Balancing adjustment events

12.69 When a balancing adjustment event occurs in relation to a depreciating asset, its termination value will be reduced if the relevant balancing adjustment event is a taxable supply. The reduction is an amount equal to the GST payable on the supply [Schedule 2, item 216, subsection 27-95(1)] . However where the termination value of the depreciating asset is its market value no reduction for GST payable is required [Schedule 2, item 216, subsection 27-95(2)] .

Example 12.4

Astri sells a depreciating asset for $88. Assuming she is making a taxable supply, she is required to remit $8 as GST to the ATO. If the adjustable value of the depreciating asset just before the asset was sold was $90, the balancing adjustment for the purposes of section 40-285 of the Capital Allowances Bill is $10 (i.e. $90 - $80 = $10, as the termination value of the asset is $80 and not $88).

12.70 If an increasing or a decreasing adjustment that either directly or indirectly relates to a depreciating asset occurs after a balancing adjustment event, the income tax consequences will depend on when the increasing or decreasing adjustment occurred. The consequences are shown in Table 12.1.

Example 12.5

In August 2002 Max makes a taxable supply by selling a depreciating asset for $99. Of this $99, $9 is remitted to the ATO as GST. In October 2002 it is discovered that the purchaser of the asset was entitled to a discount of $10. This means that after taking into account the discount, Max only received $88 for the asset. Therefore the termination value of the asset is $80 (i.e. $88 - $8 GST).

However, if Max only discovers in the next income year that the buyer of Maxs asset was entitled to a discount, Max must include an amount equal to the decreasing adjustment (i.e. $1) in his assessable income in the 2003-2004 income year.

Pooled depreciating assets

12.71 Special provisions are required to deal with the following types of pooled assets:

•

low-value pools;

•

STS pools (i.e. assets that are pooled under Division 328 of the ITAA 1997);

•

software development pools; and

•

project pools.

[Schedule 2, item 216, subsection 27-100(1)]

Input tax credits and low value pools

12.72 Where a taxpayer makes a creditable acquisition or a creditable importation of a depreciating asset and that asset is put into a low-value pool, and the income year in which the taxpayer becomes entitled to the input tax credit is the same as the income year in which the acquisition or importation occurred, the cost of the asset is reduced by any input tax credit the taxpayer is entitled (or becomes entitled) to claim in relation to this acquisition or importation. [Schedule 2, item 216, subsection 27-100(2B)]

12.73 Where a taxpayer makes a creditable acquisition or a creditable importation of a depreciating asset and that asset is put into a low-value pool, and the income year in which the taxpayer becomes entitled to the input tax credit occurs after the income year in which the acquisition or importation occurred, the closing pool balance will be reduced as follows:

•

in the first income year in which the assets are allocated to the low-value pool, the closing pool balance at the end of that income year. The reduction is an amount equal to any input tax credit that the taxpayer can claim or is entitled to claim;

•

in a later income year, the prior years closing pool balance. The reduction is an amount equal to any input tax credit that the taxpayer can claim or is entitled to claim.

[Schedule 2, item 216, subsections 27-100(2) and (3)]

12.74 If a taxpayer incurs second element costs in relation to a depreciating asset that has been put into a low-value pool and the income year in which the taxpayer becomes entitled to the input tax credit in relation to those costs occurs is the same in which the acquisition or importation occurred, the expenditure included in the assets second element of cost is reduced by any input tax credit the taxpayer is entitled or becomes entitled to claim. [Schedule 2, item 216, subsection 27-100(7A)]

12.75 If a taxpayer incurs second element costs in relation to a depreciating asset that has been put into a low-value pool and the income year in which the taxpayer becomes entitled to the input tax credit in relation to those costs occurs after the income year in which the acquisition or importation occurred, an amount equal to the input tax credit is reduced from the low-value pool (and not the depreciating asset in question) as follows:

•

in the first income year in which the assets are allocated to the low-value pool, the closing pool balance at the end of that income year. The reduction is an amount equal to any input tax credit that the taxpayer can claim or is entitled to claim; and

•

in a later income year, the prior years closing pool balance. The reduction is an amount equal to any input tax credit that the taxpayer can claim or is entitled to claim.

[Schedule 2, item 216, subsection 27-100(6) and paragraph 27-100(7)(a)]

12.76 Where the cost of the depreciating asset is its market value, no reduction for GST payable is required [Schedule 2, item 216, subsection 27-100(5A)] . This is because the term market value as defined in section 995-1 of the ITAA 1997, is its GST-exclusive price. However, where the term is not preceded by an asterisk it may mean that the market value is the GST-inclusive price.

Input tax credits and STS pools

12.77 Where a taxpayer makes a creditable acquisition or a creditable importation of a depreciating asset and that asset is put into an STS pool under Division 328 of the ITAA 1997, and the income year in which the taxpayer becomes entitled to the input tax credit is the same as the income year in which the acquisition or importation occurred, the cost of the asset is reduced by any input tax credit the taxpayer is entitled (or becomes entitled) to claim in relation to this acquisition or importation. [Schedule 2, item 216, subsection 27-100(2B)]

12.78 Where a taxpayer makes a creditable acquisition or a creditable importation of a depreciating asset and that asset is put into an STS pool under Division 328 of the ITAA 1997, and the income year in which the taxpayer becomes entitled to the input tax credit occurs after the income year in which the acquisition or importation occurred, the opening pool balance is reduced by the amount equal to the input tax credit. [Schedule 2, item 216, subsections 27-100(2) and (5)]

12.79 If a taxpayer incurs second element costs on a depreciating asset in an STS pool, and the income year in which the taxpayer becomes entitled to the input tax credit for those costs is the same in which the acquisition or importation occurred, the expenditure included in the assets second element of cost is reduced by any input tax credit the taxpayer is entitled or becomes entitled to claim. [Schedule 2, item 216, subsection 27-100(7A)]

12.80 If a taxpayer incurs second element costs on a depreciating asset in an STS pool, and the income year in which the taxpayer becomes entitled to the input tax credit for those costs occurs after the income year in which the acquisition or importation occurred, the opening pool balance will be reduced by an amount equal to the input tax credit the taxpayer is entitled to claim. [Schedule 2, item 216, subsection 27-100(6) and paragraph 27-100(7)(b)]

12.81 Where the cost of the depreciating asset is its market value, no reduction for GST payable is required [Schedule 2, item 216, subsection 27-100(5A)] . This is because the term market value as defined in section 995-1 of the ITAA 1997 is its GST-exclusive price. However, where the term is not preceded by an asterisk it may mean that the market value is the GST-inclusive price.

Software and project pools

12.82 If a taxpayer incurs expenditure that has been allocated to either a software development pool or a project pool on a creditable acquisition or a creditable importation and is entitled to claim an input tax credit for that acquisition or importation, the taxpayer must reduce the pool value in the income year in which the taxpayer is or becomes entitled to the input tax credit by an amount equal to that input tax credit. [Schedule 2, item 216, subsections 27-100(2A) and (4)]

Increasing and decreasing adjustments

12.83 If an increasing adjustment, except an adjustment arising under Division 129 or 132 of the GST Act, occurs that relates directly or indirectly to a creditable acquisition or a creditable importation to which the pooled expenditure relates, an amount equal to the increasing adjustment must be added to, as the case may be:

•

the closing pool balance at the end of the first income year, if it is the first year depreciating assets are allocated to the low-value pool;

•

the prior years closing pool balance of a low-value pool if it is not the first income year in which depreciating assets have been put into the low-value pool;

•

the opening pool balance of the pool of the adjustment year if the pool is an STS pool;

•

the amount of the expenditure that has been allocated to the software development pool for the adjustment year; or

•

the pool value for the adjustment year if the expenditure has been allocated to a project pool.

[Schedule 2, item 216, subsections 27-100(8) and (9)]

12.84 Likewise, decreasing adjustments, except an adjustment arising under Division 129 or 132 of the GST Act, are treated in a similar manner. [Schedule 2, item 216, subsections 27-100(10) to (12)]

12.85 Increasing and decreasing adjustments that arise under Divisions 129 or 132 of the GST Act are discussed in paragraphs 120 and 120 respectively.

Other Division 40 expenditure

12.86 Certain expenditure incurred by a taxpayer can be deducted pursuant to Division 40. For example expenditure incurred on the construction, manufacture, installation or acquisition of water facilities, expenditure incurred on landcare operation or expenditure incurred on connecting power to land is deductible. However, the effect of GST must be taken into account when calculating any deduction for such expenditure. The following provisions do not, however, apply to exempt entities. [Schedule 2, item 216, subsection 27-105(6)]

12.87 The amount of the expenditure is reduced when a taxpayer is or becomes entitled to an input tax credit for a creditable acquisition or creditable importation to which the expenditure relates either indirectly or directly. The reduction is the amount of the input tax credit that relates to that expenditure. [Schedule 2, item 216, subsection 27-105(2)]

12.88 If a taxpayer has a decreasing adjustment in an income year that relates indirectly or directly to the expenditure, he or she can include in his or her assessable income an amount equal to the decreasing adjustment that relates to the expenditure [Schedule 2, item 216, subsection 27-105(3)] . Likewise where a taxpayer has an increasing adjustment in an income year that relates indirectly or directly to the expenditure, he or she can deduct an amount equal to the increasing adjustment that relates to the expenditure [Schedule 2, item 216, subsection 27-105(4)] . However, neither of these provisions apply to an exempt entity [Schedule 2, item 216, subsection 27-105(6)] .

Input tax credit, etc. relating to 2 or more things

12.89 Where an input tax credit can be claimed by a taxpayer or where an increasing or decreasing adjustment occurs and these relate directly or indirectly to 2 or more things, one of which is a depreciating asset, the taxpayer must reasonably apportion the input tax credit or the increasing or decreasing adjustment to each of the assets and each of the things. [Schedule 2, item 216, section 27-110]

Example 12.6

Owen buys 20 power saws for his employees and pays $2,000 for an expert to give his employees instructions on workplace health and safety issues regarding the use of these saws. Three months later Owen receives a discount from the supplier of the saws and instructor for the above creditable acquisitions. Because the increasing adjustment relates to both the depreciating assets and the service (the thing), Owen must apportion the increasing adjustment to each depreciating asset as well as the service on a reasonable basis.

Interaction with Division 43

12.90 Division 43 will continue to allow deductions for those capital works as specified in section 43-20. Capital works that are currently written-off under other specific existing capital allowance provisions (e.g. Divisions 42, 330 and 387) are excluded from Division 43. Amendments will be made to Division 43 to ensure that the effect of those exclusions is maintained. Capital works that come within those exclusions will be written-off under Division 40 rather than under Division 43. [Schedule 2, items 223 to 227]

12.91 Division 43 will exclude buildings and structures that are plant (the concept of plant still exists for the purposes of other provisions of the ITAA 1997 and so the definition has been retained). It will also exclude from its operations, buildings and structures that fall within the definition of mining capital expenditure and transport capital expenditure. All of these buildings and structures are treated as depreciating assets under Division 40.

Repealing redundant Divisions

12.92 The single regime will replace many of the existing capital allowances in the ITAA 1997. This replacement requires the repeal of the following Divisions under the ITAA 1997:

•

Division 40 - Overview of capital allowances;

•

Division 41 - Common rules for capital allowances;

•

Division 42 - Plant depreciation;

•

Division 44 - IRUs and submarine cable systems;

•

Division 46 - Software depreciation;

•

Division 330 - Mining and quarrying;

•

Division 373 - Intellectual property;

•

Division 380 - Spectrum licences;

•

Division 387 - Capital allowances for primary producers;

•

Division 388 - Landcare and water facility tax offset; and

•

Division 400 - Environmental assessments and protection.

[Schedule 2, items 228, 243, 331 to 333, 335, 336 and 339]

12.93 As a result of the repeal of these Divisions, transitional provisions will allow taxpayers who are currently deducting amounts under the existing law to continue their deductions under the uniform capital allowance system. Broadly, taxpayers will continue to deduct on the same basis under the uniform capital allowance system as they would under the existing law. These rules are discussed in Chapter 1.

Streamlining Division 58

12.94 The existing Division 58 will be repealed and replaced with a new Division 58. The new Division 58 sets out special rules that will affect the way Division 40 applies to depreciating assets previously owned by an exempt entity in much the same way as the existing Division 58 affects the way Division 42 applies to plant entering the tax net.

12.95 However, the calculation rules in the new Division 58 have been streamlined to make them simpler and easier to comply with than the current rules in existing Division 58.

12.96 Many of the current calculation rules require taxpayers to look back and notionally apply various old depreciation regimes that have existed in the past, based on the assumed acquisition date of each unit of privatised plant to the exempt entity, for example, the calculation of notional depreciation under both the notional written-down value method and the undeducted pre-existing audited book value method.

12.97 Under the new Division 58 calculation rules, taxpayers will simply use the ordinary Division 40 rules with some minor modifications for all privatised depreciating assets. (This is favourable to taxpayers, as the Division 40 rules are not accelerated, and so the largest possible amount will remain as the notional written-down value available as the basis of further deductions.) Taxpayers will no longer be required to apply rules contained in superseded depreciation regimes. Transition entities will now work out actual deductions for decline in value (after the transition time) of a privatised depreciating asset in the same way as a purchaser does in an asset sale situation, but subject to the requirement that a transition entity cannot change methods of depreciation for an asset. [Schedule 2, item 244]

Interaction with the CGT provisions

12.98 When a balancing adjustment event happens to a depreciating asset, a balancing adjustment calculation and/or a capital gain or loss calculation must be made. This is in contrast to the current position under Division 42 where only a balancing adjustment calculation is made when a balancing adjustment event happens to an item of plant.

12.99 A capital gain or loss from a depreciating asset may now arise if new CGT event K7 happens to the asset [Schedule 2, item 259, section 104-235] . That event can only happen if a balancing adjustment event has happened to a depreciating asset that has been used either wholly or partly for non-taxable (generally for private) purposes. A capital gain from CGT event K7 happening may qualify for the CGT discount if the conditions in Division 115 of the ITAA 1997 are satisfied.

12.100 Broadly, the calculations that are required to be made can be summarised in Table 12.2.

12.101 A capital gain or loss under CGT event K7 is calculated by reference to Division 40 concepts (e.g. cost and termination value), and not those found in the CGT provisions (e.g. cost base and capital proceeds) [Schedule 2, item 255, section 100-15 and items 269 to 279] . The use of Division 40 concepts is consistent with the Governments original decision to remove plant from the CGT regime to reduce record keeping costs.

12.102 A capital gain or loss from CGT event K7 happening to a depreciating asset arises in the same income year as any balancing adjustment calculated under Subdivision 40-D. This is in contrast to the treatment that existed prior to the removal of plant from the CGT regime. Because capital gains or losses generally arise in the year a contract is entered into, it was sometimes the case that a capital gain or loss from plant was included in an earlier year of income than a related balancing adjustment.

12.103 A capital gain from a depreciating asset will be disregarded if the asset was acquired prior to 20 September 1985. If the depreciating asset is a personal use asset (i.e. one used or kept mainly for personal use and enjoyment) any capital loss from it is disregarded under section 108-20 of the ITAA 1997. Similarly, a capital gain from a collectable that cost $500 or less or a personal use asset that cost $10,000 or less may be disregarded under section 118-10 of the ITAA 1997.

12.104 Subsections 118-10(1) and (3) of the ITAA 1997 have been amended so it is now clear that Division 40 concepts are being used consistently when dealing with depreciating assets.

Depreciating asset used 100% for taxable purposes

12.105 If a balancing adjustment event happens to a depreciating asset that has been used 100% for taxable purposes, the taxpayer will not make any capital gain or loss. The relevant gain or loss will be accounted for under section 40-285 of the Capital Allowances Bill as either assessable income or as a deduction.

Example 12.7

Anna buys a depreciating asset that cost $100. The effective life of this asset is 5 years and the prime cost method of calculating the decline in value is used. Two years after its acquisition Anna sells the asset. The adjustable value of this asset at this time is $60 while its termination value is $130. Anna has used the asset 100% for taxable purposes.

The amount that will be included in Annas assessable income under subsection 40-285(1) of the Capital Allowances Bill is:

termination value - adjustable value
= $130 - $60
= $70


The $70 represents a recoupment of the $40 Anna has deducted for the decline in value of the asset and the $30 profit.

There will not be any capital gain or loss.

Depreciating asset used partly for taxable purposes and partly for non-taxable purposes

12.106 The tax consequences will depend on the termination value of the depreciating asset, its cost and its adjustable value. The consequences are outlined in Table 12.3.

Example 12.8

Fiona buys a depreciating asset for $1,000. Its effective life is 5 years and the decline in value is worked out using the prime cost method. Two years later Fiona sells the asset for $700. Its adjustable value at this time is $600. Fiona has used the asset 30% for non-taxable purposes. The amount included in Fionas assessable income will be worked out according to the requirements of subsection 40-285(1) and section 40-290 of the Capital Allowances Bill, that is:

amount included in assessable income

= (termination value - adjustable value) - non-taxable use amount


= ($700 - $600) - [30% * (termination value - adjustable value)]


= $100 - ($100 * 30%)


= $100 - $30


= $70


The capital loss is worked out using the following formula:

capital loss = (cost - termination value) * sum of reductions/total decline


= ($1,000 - $700) * $120 (30% * $400)/$400


= $300 * 0.3


= $90 capital loss.


Depreciating asset used 100% for non-taxable purposes

12.107 If a balancing adjustment event happens to a depreciating asset that was used 100% for non-taxable purposes, there will not be any balancing adjustment. Section 40-290 of the Capital Allowances Bill provides that a balancing adjustment amount must be reduced to the extent that (in this case 100%) it is attributable to any non-taxable use of the depreciating asset.

12.108 Instead, the difference between the assets termination value and its cost will be a capital gain or loss [Schedule 2, item 259, section 104-240] . As mentioned in paragraph 12.103, the capital gain or loss may be disregarded.

Section 118-24

12.109 Section 118-24 will ensure that no capital gain or capital loss will arise from any CGT event happening to a depreciating asset that is the equivalent of a balancing adjustment event except as provided by CGT event K7 (also see paragraph 11.92).

12.110 Thus, for example, if a trust is created over an asset that is used 100% for taxable purposes, a balancing adjustment event happens to the asset because it ceases to be held by the first owner. Section 118-24 will ensure that any capital gain or capital loss that may otherwise arise under CGT event E1 is disregarded. [Schedule 2, item 292, section 118-24]

12.111 Section 118-24 will not exempt capital gains and losses from CGT events that are not equivalent to balancing adjustment events. For example if rights are created over a depreciating asset any gain from CGT event D1 will not be disregarded.

Partnership assets

12.112 Subsection 106-5(1) of the ITAA 1997 provides that any capital gain or loss from a CGT event happening to a partnership asset is made by the partners individually and not the partnership. However, this rule will not apply where a CGT event happens to a depreciating asset. [Schedule 2, item 260, subsection 106-5(5)]

12.113 The existing rule would not operate appropriately in context of partnership depreciating assets because Division 40 treats the partnership as owning the asset.

Pooling of assets

12.114 Separate rules are required for depreciating assets that have been allocated to a low-value pool.

12.115 When a balancing adjustment event happens in relation to a depreciating asset in a low-value pool, the taxable use portion of the assets termination value is taken into account in working out the pools closing balance for the income year.

12.116 Whether a capital gain or loss is made will depend on, amongst other things, the assets termination value, its cost and the estimated non-taxable use of the asset at the time it was allocated to the pool. Section 40-435 of the Capital Allowances Bill makes it clear that when a depreciating asset is allocated to a low-value pool regard must be had to its past as well as anticipated future use in determining its estimated taxable/non-taxable use.

12.117 The consequences are summarised in Table 12.4.

12.118 No capital gain or loss will arise in respect of depreciating assets in a software development pool because these assets must be used only for a taxable purpose. Similarly no capital gain or loss will arise in respect of project pools as only expenditure (and not depreciating assets) can be allocated to them.

Partial realisation of intellectual property

12.119 Intellectual property is a depreciating asset for the purposes of the Capital Allowances Bill.

12.120 The introduction of a uniform capital allowance system means that it is no longer appropriate to continue the special treatment for partial realisations of intellectual property that exists in the ITAA 1997 (Division 373 and section 104-205). [Schedule 2, item 256, section 104-5; item 258, section 104-205; item 280, section 112-45; item 285, section 116-25 and item 287, subsection 116-30(4)]

12.121 If a part interest in an item of intellectual property is disposed of, the splitting rule in subsection 40-115(2) of the Capital Allowances Bill will apply. This means that an appropriate share of the cost (or acquired value) is attributed to that part of the asset for the purposes of making any balancing adjustment or CGT calculation.

12.122 The granting of a licence over an item of intellectual property will also be treated as a part disposal of that item of intellectual property. Subsection 40-115(3) of the Capital Allowances Bill will apply to allocate a portion of the cost base of the item of intellectual property for the purposes of making any balancing adjustment or CGT calculation from the grant of the licence.

Small business CGT concessions

12.123 None of the small business CGT concessions in Division 152 of the ITAA 1997 will apply to a capital gain that arises from CGT event K7 happening. Essentially those concessions relate to the use of an asset in a small business. A capital gain from CGT event K7 on the other hand arises only from the private use of an asset. To the extent that an asset is used in small business, CGT event K7 never applies and so the small business concessions cannot apply to that event. [Schedule 2, item 314, subsection 152-10(1)]

Discount capital gains

12.124 Where a taxpayer makes a capital gain as a result of CGT event K7, that taxpayer, where eligible, can choose to use the CGT discount provisions available in Division 115 of the ITAA 1997.

Minor technical corrections

12.125 Depreciating assets will be treated as precluded assets for the purposes of rollover under Division 122. [Schedule 2, item 294, subsection 122-25(3)]

12.126 When an asset is compulsorily acquired, lost or destroyed, CGT rollover under Subdivision 124-B will not be available if the replacement asset is a depreciating asset. This is consistent with the treatment that applies if a replacement asset is trading stock and ensures that a capital gain from the original asset is appropriately taxed [Schedule 2, items 295 to 298] . Because of the different way in which the small business rollover in Subdivision 152-E operates, it is not necessary to deny rollover where a depreciating asset is acquired to replace another small business asset. Amendments have also been made to the value shifting rules in Division 138 to ensure that they continue to operate with the introduction of the uniform capital allowance system [Schedule 2, items 305 to 313] .

Amendments to the dictionary

12.127 There are several amendments to the dictionary contained in subsection 995-1(1) of the ITAA 1997 due to the following:

•

relocating definitions;

•

repealing some redundant definitions;

•

giving a new label to some definitions;

•

inserting new definitions; and

•

updating references to existing definitions.

[Schedule 2, items 242, 349 to 476]

Interaction with the Income Tax Rates Act 1986

12.130 Due to the repeal of sections 42-295 and 42-300 of the ITAA 1997 as a result of the introduction of the uniform capital allowance system, there will no longer be the concept of abnormal income. As a result, the provisions of the Income Tax Rates Act 1986 that refer to the concept of abnormal income have been amended accordingly. [Schedule 2, items 477 to 479]

Interaction with the Social Security Act 1991

12.129 Paragraph 1075(1)(b), sub-paragraph 1185K(3)(d)(ii), paragraph 1208B(1)(b) and paragraph 1209C(1)(b) of the Social Security Act 1991 all require amendment in similar terms. Under these provisions income is reduced by depreciation that relates to the business, farming, investment or primary production enterprise where the depreciation is an allowable deduction under subsection 54(1) of the ITAA 1936 or Division 42 of the ITAA 1997.

12.130 Paragraph 1075(1)(ba), subparagraph 1185K(3)(d)(iia), paragraph 1208B(1)(ba) and paragraph 1209C(1)(ba) of the Social Security Act 1991 refer to amounts that relate to the business, relevant farm asset, business or investment or primary production enterprise, respectively. Under these provisions the decline in value of the depreciating assets in question can be deducted under Subdivision 40-B of the ITAA 1997. This will allow that where applicable, the relevant income of the entity can be reduced by these amounts. [Schedule 2, items 480 to 483]

Interaction with the Veterans Entitlements Act 1986

12.131 Paragraph 46C(1)(b), subparagraph 49J(3)(f)(ii), paragraph 52ZZO(1)(b) and paragraph 52ZZZO(1)(b) of the Veterans Entitlements Act 1986 all require amendment in similar terms. Under these provisions income is reduced by depreciation that relates to the business, farming, investment or primary production enterprise where the depreciation is an allowable deduction for the purposes of subsection 54(1) of the ITAA 1936 or Division 42 of the ITAA 1997.

12.132 Paragraph 46C(1)(ba), subparagraph 49J(3)(f)(iia), paragraph 52ZZO(1)(ba) and paragraph 52ZZZ0(1)(ba) of the Veterans Entitlements Act 1986 refer to amounts that relate to the business, relevant farm asset, business or investment or primary production enterprise, respectively, and that can be deducted for the decline in value of the depreciating assets under Subdivision 40-B of the ITAA 1997. [Schedule 2, items 484 to 487]

Interaction with the proposed Divisions 240 and 243

12.133 Amendments are to be made to proposed Divisions 240 and 243 contained in Taxation Laws Amendment Act (No. 1) 2001 to ensure that these proposed Divisions will interact in the appropriate manner with the uniform capital allowance system. [Schedule 3, items 1 to 6]