Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 2 - Effective life of assets declining in value
Outline of chapter
2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to insert statutory caps for the decline in value of transport assets such as buses, light commercial vehicles, trucks and truck trailers. These caps will be the effective lives for those assets where certain conditions are met.
Context of amendments
2.2 The capital allowances provisions in the income tax law allow a taxpayer a deduction equal to the decline in value of an asset during an income year. That decline in value is worked out with reference to the 'effective life' of the asset. Broadly, the effective life of an asset is the length of time over which an entity could reasonably be expected to use the particular asset for taxable purposes or for the purpose of producing exempt income. A taxpayer may choose to use a 'safeharbour' effective life determined by the Commissioner of Taxation (Commissioner) for an asset (where there is one in force). Where a taxpayer chooses not to use a 'safeharbour' effective life, or there is none in force, the taxpayer must self assess the effective life of the asset.
2.3 Under the current capital allowances system, the Commissioner progressively reviews, and makes updated determinations under section 40-100 of the ITAA 1997 of the 'safeharbour' effective lives used to calculate deductions for the decline in value of assets. The Commissioner's determinations must be based on an estimate of the period the asset can be used by any entity for a taxable purpose or for the purpose of producing exempt income. The Commissioner is not able to take into account national economic implications and the impact on affected industries.
2.4 A taxpayer who chooses to use the Commissioner's determined effective life must work out whether a capped life applies to that asset. If there is a capped life and it is shorter than the Commissioner's determined effective life, the effective life of the asset will be the capped life. Where there is no capped life, or the capped life is greater than the Commissioner's determined effective life, the taxpayer will use the Commissioner's determined effective life.
Summary of new law
2.5 The new law inserts statutory caps for buses, light commercial vehicles, trucks and truck trailers to the table of assets that currently attract a capped effective life.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| To determine the effective life of a bus, a light commercial vehicle, a truck and a truck trailer, the taxpayer may choose either to self assess the effective life or capped life of the asset (as detailed in Table 2.1). | To determine the effective life of a bus, a light commercial vehicle, a truck and a truck trailer, as described in Table 2.1, the taxpayer may choose to self assess the effective life of the asset or to use the effective life as determined by the Commissioner. |
Detailed explanation of new law
2.6 The effective life of buses, light commercial vehicles, trucks and truck trailers are as follows:
| Kind of transport asset | Period (caps) |
|---|---|
| Bus with a gross vehicle mass of more than 3.5 tonnes. | 7.5 years |
| Light commercial vehicle with a gross vehicle mass of 3.5 tonnes or less and designed to carry a load of one tonne or more. | 7.5 years |
| Minibus with a gross vehicle mass of 3.5 tonnes or less and designed to carry nine or more passengers. | 7.5 years |
| Trailer with a gross vehicle mass of more than 4.5 tonnes. | 10 years |
| Truck with a gross vehicle mass of more than 3.5 tonnes (other than a truck that is used in mining operations and that could not be lawfully driven on a public road in the place in which the truck is operated). | 7.5 years |
2.7 Table 2.1 above is added to the existing table for the capped life of certain depreciating assets in subsection 40-102(4). [Schedule 2, item 1, subsection 40-102(4)]
2.8 The caps in Table 2.1 coincide with the Commissioner's Determination that applies to these assets and that commenced on 1 January 2005. The Commissioner's Determination includes a 10 year effective life for garbage compactor trucks and a 15 year effective life for other trucks with a gross vehicle mass of over 3.5 tonnes. As garbage compactor trucks exceed 3.5 tonnes they are included in the 7.5 year effective life cap.
2.9 Table 2.1 excludes trucks used in mining operations because these trucks are excluded from the above mentioned determination. They are covered under a separate Commissioner's determination.
Application and transitional provisions
2.10 The amendments apply to an asset described above if the start time for the asset occurs on or after 1 January 2005. [Schedule 2, item 3]
Consequential amendment
2.11 A definition for 'gross vehicle mass' is inserted into the Dictionary definitions in subsection 995-1(1) of the ITAA 1997. Gross vehicle mass is defined as the road weight specified by the manufacturer of the vehicle as the maximum design weight capacity of the vehicle. If there is no such specification, the 'gross vehicle mass' is the sum of the weight of the vehicle and the weight of the maximum load for which the vehicle was designed including, if applicable, the weight of the driver and a full tank of fuel. [Schedule 2, item 2, subsection 995-1(1), definition of 'gross vehicle mass']
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