House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Amendments relating to certain prepayments and non-commercial losses

The purpose of this bill is to amend various parts of the ITAA 1936 and the ITAA 1997 which have particular impact on the plantation forestry sector.

The amendments contained in Part 1 of Schedule 1 to this bill introduce a new 12 month rule allowing an immediate deduction for certain prepaid expenditure when invested in a plantation forestry managed agreement.

The concession will apply to the component of the investment that relates to seasonally dependent agronomic activities that occur during the establishment period. The activities, expenditure for which is prepaid, will have to be completed within 12 months of the activity commencing and by the end of the following income year.

In order to maintain symmetry, managers of such agreements will include these amounts in assessable income in the year the deduction can be claimed by the investor, rather than when the work is done.

The amendments contained in Part 2 of Schedule 1 to this bill amend the non-commercial losses rules, specifically the Commissioners discretion. Previously the Commissioner could not exercise his discretion past a point in time at which a profit was made or one of the tests was passed, even if the profit was made or the test passed on a one-off basis even though the period that is commercially viable may still be in course. The amendments will allow the Commissioners discretion to be exercised for all relevant years where this is consistent with the nature of the business activity. This is of particular relevance to the plantation forestry sector where normal practices such as thinning may produce a one-off profit or passing of a test.

Date of effect: The amendments in Schedule 1, Part 1 will have effect from 2 October 2001. The amendments contained in Schedule 1, Part 2 will have effect from the 2000-2001 income year.

Proposal announced: 2 October 2001.

Financial impact: The cost to the revenue resulting from the prepayment measure is estimated to be $25 million in 2002-2003, $5 million in 2003-2004, nil in 2004-2005 and $25 million in 2005-2006 and each year thereafter. The amendments to the non-commercial losses rules will not have any revenue impact as they merely ensure the provision operates as intended.

Compliance cost impact: There will be no change in compliance costs for taxpayers in their capacity as investors. As the only change to be made by the managers of plantation forestry managed agreements is with respect to the year in which they include certain income, namely that attributable to seasonally dependent agronomic expenditure, it is expected that there will be little change to compliance costs.

Summary of regulation impact statement

Regulation impact on business

Impact: This bill will provide significant positive impacts for the forestry industry.

Main points:

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The measures contained in this bill will provide investors in plantation forestry agreements a concession in the form of an immediate deduction for certain prepaid amounts. Plantation forestry investment companies will need to account for income in the year amounts received from investors are able to be claimed as a deduction by the investor.

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There will be a significant initial impact and an ongoing impact on the ATO who will administer these changes. This will arise because of the initial need to review existing product rulings and rulings procedures in light of the change to the treatment of prepaid amounts. There will be an ongoing increase in the number and complexity of product rulings.

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The measures will have a relatively neutral effect on the ecologically sustainable development criteria.