House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Capital Expenditure on Income-producing Structural Improvements

Summary of proposed amendment

9.1. The capital cost of income-producing structural improvements not presently written off under existing tax law is to be evenly deductible over 40 years at the rate of 2.5 per cent per annum.

9.2. The amendment applies to structures commenced to be constructed after 26 February 1992.

Background to the legislation

9.3. Structures constituting neither plant nor buildings generally do not qualify for deduction under existing tax law. However, they may qualify when used for certain purposes. For instance, fences are treated as plant when installed on land used in primary production but generally not when used for other purposes.

9.4. Similarly, improvements can qualify for deduction under a number of other provisions which permit deductions for the capital cost of income-producing property. The range of items that are deductible under those provisions varies from provision to provision.

9.5. For example, the general mining provisions provide deductions over no more than of 10 years for expenditure on improvements other than plant for use in carrying on prescribed mining operations; expenditure on buildings, roads and other infrastructure costs, on the mining site, qualify.

9.6. Other provisions may confer a specific concession: expenditure on buildings in timber milling operations is evenly deductible over no more than 25 years.

9.7. Those provisions provide write-offs for the capital cost of property over the period for which the property is likely to be used for income-producing purposes, or a fixed maximum period for long-lived property. This recognises that the property has a limited life.

9.8. However, there are a number of circumstances where the cost of income-producing property is not deductible under existing law despite the fact that it too has a limited life.

9.9. The purpose of these amendments is to permit deductions for the original cost of income-producing structural improvements not otherwise deductible under existing law. These amendments do not affect property covered by existing provisions, exampled above. Those provisions will continue to apply as appropriate.

Explanation of proposed amendment

Introduction

9.10. This new measure is to operate through existing Division 10D which provides deductions for the capital cost of income-producing buildings. That provision allows the original capital cost of income-producing buildings, or extensions, alterations or improvements to such buildings, to be evenly deductible over 40 years at the rate of 2.5 per cent per annum.

9.11. A more detailed summary of that provision is contained in Chapter 8 dealing with Capital Expenditure on Industrial Buildings.

9.12. Under the amendment, a structural improvement is treated as if a building so that the original capital cost of such property, or extensions, alterations or improvements to a structural improvement, will be deductible when the structure is used in producing assessable income. [New subsection 124ZFB(3)]

9.13. Under separate amendments contained in this Bill, a higher write-off rate of 4 per cent per annum will apply to buildings when used in certain industrial activities (see chapter 8) . That higher rate will not be available for structural improvements.

Meaning of structural improvement

9.14. The expression "structural improvement' is not defined. It is to take its meaning from the ordinary understanding of that expression. Broadly, it means property constructed on land out of material or related parts which improves the land.

9.15. The legislation gives examples of the kinds of structures to which the amendments will apply if not already covered by an existing provision: concrete and bitumen roads, driveways, carparks and airport runways; retaining walls; fences; bridges; lined tunnels; concrete or rock dams; pipelines; and artificial playing fields. [New subsection 124ZFB(2)]

9.16. Consistent with the existing capital allowances for depreciable plant and income-producing buildings, earthworks that are integral to the installation of a structure will be treated as part of the structure and so qualify for deduction.

9.17. For example, cuttings, culverts and embankments as part of a road would qualify, as would foundation excavations for a bridge. Such earthworks are unlikely to have any practical use other than to accommodate the structure. (That follows from existing law and no amendment is necessary).

9.18. By comparison, earthworks which affect the general usefulness of land are not be treated as integral to the construction of a structure. So, the cost of site clearing (tree removal, demolition of existing structures, etc) and site levelling would not qualify as part of the cost of constructing a carpark, whereas the cost of stone, gravel etc. underlay and concrete or bitumen surfacing would.

Excluded structures

9.19. Earthworks that are structures but not integral to another eligible structure will not qualify unless they can be seen to deteriorate over time, so as to require replacement and not just maintenance. [New paragraph 124ZFB(1)(b)]

9.20. Excavations such as marina basins, artificial lakes and earth tanks and dirt tracks and dirt carparks (if indeed they are structures) are therefore excluded. Similarly, artificial contouring of the earth as seen in golf courses, ski fields and other recreational facilities is excluded.

9.21. Those sorts of earthworks may be part of a larger facility (for instance, a resort) but are not integral to the installation of another structure and typically do not depreciate - they can be economically repaired indefinitely by dredging, grading etc. By comparison, the cost of excavating foundations for a seawall or similar structure as part of a marina or ornamental lake would qualify - the excavations are integral to the installation of the structure.

Also excluded are artificial landscapes such as grass golf fairways and greens, grass sports fields such as bowling greens, ovals, etc. and gardens. [New paragraph 124ZFB(1)(c)]

Qualifying expenditure

9.22. Deductions will be available for the capital cost of constructing a structural improvement. That is considered to include any engineering, architecture and similar costs necessary to the design and construction. Also included would be any costs associated with obtaining approval for the structure such as fees, permits etc, and legal fees and the like.

Commencement date

9.23. The amendment applies to structural improvements, including extensions, alteration or improvements to structural improvements, commenced to be constructed after 26 February 1992. [New subsection 124ZFA(4)]

9.24. The commencement of construction of a structure is considered to occur when physical construction commences. Generally speaking, that will be the day on which the excavation of foundations, or comparable activity, is started.

Clauses involved in proposed amendment

Clause 54: amends subsection 124ZF(1) so that the meaning of the word "building" includes a structural improvement to which these amendments relate.

Clause 55: inserts in subsection 124ZG(3) a reference to sections 75D and 124F, to prevent double deductions.

Clause 56: inserts new section 124ZFB which contains the rules for working out whether a structure qualifies for deduction under the amendments.

Clause 57: specifies that the amendment made by Clause 55 (no double deductions) applies to structural improvements commenced to be constructed after 26 February 1992.