House of Representatives

Explanatory Memorandum

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

Chapter 5 Effective life of tractors and harvesters

Outline of chapter

5.1 Schedule 5 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to insert statutory 'caps' (referred to as 'capped lives') of 6? years for tractors and harvesters used in the primary production sector.

Context of amendments

5.2 Under the uniform capital allowance provisions of the income tax law, taxpayers can deduct amounts for the decline in value of their depreciating assets. That decline in value is generally worked out using the 'effective life' of the asset. Broadly, the effective life of the asset is the period over which any taxpayer is able to use the asset for a taxable purpose or for the purpose of producing exempt or non-assessable non-exempt income.

5.3 A taxpayer can self assess their own effective life or alternatively use the 'safe harbour' effective life, which is one determined by the Commissioner of Taxation (Commissioner), if there is one in force at the time. Currently, for tractors and harvesters, the Commissioner has in place a safe harbour effective life determination of 6? years. This has remained unchanged since 1956.

5.4 Since 2000, the Commissioner has been reviewing the effective life of depreciating assets, to ensure that they reflect the period over which assets can be used for the purpose of producing assessable income or for the purpose of producing exempt income or non-assessable non-exempt income. The review process was one of the outcomes from the 1999 Review of Business Taxation - A Tax System Redesigned (the Ralph Report).

5.5 The Commissioner has been reviewing the effective life of assets used in the primary production sector. As a consequence of the review process the Commissioner may increase the current safe harbour effective life of 6? years for tractors and harvesters.

5.6 Under the uniform capital allowances system, capped, or shorter, effective lives apply to certain depreciating assets, and in some cases, to those used in specified industries, under section 40-102 of the ITAA 1997. The capped lives override the Commissioner-determined effective lives where the capped lives are shorter than the effective lives as determined by the Commissioner.

5.7 By prescribing a statutory cap for tractors and harvesters used in the primary production sector, taxpayers who choose to use the effective life determined by the Commissioner will be limited to an effective life of 6? years or the effective life determined by the Commissioner, whichever is the shorter.

Summary of new law

5.8 This Schedule adds a new statutory cap of 6? years to the uniform capital allowances regime for tractors and harvesters used in the primary production sector.

Comparison of key features of new law and current law

Detailed explanation of new law

5.9 Under the uniform capital allowance provisions of the income tax law, taxpayers can deduct amounts for the decline in value of their depreciating assets. That decline in value is generally worked out using the effective life of the asset.

5.10 A taxpayer may choose either to self assess the effective life of an asset or use an effective life, determined by the Commissioner for an asset, where there is one in force at the relevant time.

5.11 If a taxpayer chooses to use the effective life determined by the Commissioner, the taxpayer can access a capped life if one applies to that asset under section 40-102 of the ITAA 1997. If a capped life applies, and it is shorter than the effective life determined by the Commissioner, the taxpayer must use the capped life.

5.12 A capped effective life of 6? years applies to tractors and harvesters used in the primary production sector. [ Schedule 5, item 1, subsection 40-102(5 ), items 7 and 8 in the table ]

5.13 The term 'primary production sector' covers primary production industries and those providing services to primary production. Therefore it includes contractor suppliers of tractor and harvesting services as well as taxpayers carrying on a primary production business. [ Schedule 5, item 1, subsection 40-102(5 )]

Application and transitional provisions

5.14 This measure applies to a depreciating asset if the start time for the asset (broadly, when the asset is first installed or used) occurs on or after 1 July 2007. [ Schedule 5, item 2 ]