Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Amendments to extend the meaning of Crown leases for the purposes of the depreciation provisions
Summary of proposed amendments
Purpose of amendment: To extend the meaning of Crown lease under the plant depreciation provisions to include commercial leases, easements and other interests in land that are granted by governments or tax-exempt government authorities.
Date of effect: The amendments apply from the same time as existing measures. That is, they apply to expenditure incurred after 26 February 1992 in installing plant on Crown leases. They also apply to expenditure incurred on or before that date, based on notional written down values on 27 February 1992.
The plant depreciation provisions enable taxpayers to obtain income tax deductions for the otherwise non-deductible capital cost of plant used in income producing activities.
Taxpayers must own plant [subsection 54(1)] if they are to obtain depreciation deductions for that plant. In some instances, taxpayers may not be treated at law as the owners of plant they install on land owned by others because, owing to the degree of the plant's attachment to the land, the law treats the plant as owned by the person who owns the land.
The "One Nation" economic statement of 26 February 1992 announced that the plant depreciation provisions would be amended so that plant installed by a lessee on leased Crown land would attract depreciation allowances in the hands of the lessee.
The purpose of the amendment was to allow depreciation deductions for private sector investment in public infrastructure projects which can involve private investors installing property on Crown leases. The law at that time could inappropriately deny depreciation deductions for such investments.
Those amendments were introduced in Taxation Laws Amendment Bill (No.3) 1992, and are contained in new section 54AA. Under 54AA, persons installing plant on land over which they hold a Crown lease, and subsequent holders of the lease, are treated as owners for depreciation purposes if the law would otherwise treat them as not being the owners.
Explanation of proposed amendments
The present meaning of Crown lease for depreciation purposes is the same as that under the capital gains tax provisions and means a lease of land granted by the Crown under a statutory law of the Commonwealth, a State or Territory or a similar lease granted under a statutory law of a foreign country.
This present meaning of Crown lease for depreciation purposes is unduly restrictive because some infrastructure projects involve taxpayers installing plant on land over which they hold an interest which is not a Crown lease. Those taxpayers may be inappropriately denied depreciation deductions for some or all of their investment in the plant.
There are three issues. The first relates to the requirement under the existing definition that the lease be granted under a statutory law of the Commonwealth, a State or Territory. Many authorities, such as those responsible for the provision of water and electricity supplies for the public, issue normal commercial leases of land, not statutory leases.
The second relates to the requirement that plant be installed on leased land. Some facilities necessarily involve the installation of plant on land where only an easement, right of way, permit, etc. is held by the plant installer and operator. For instance, water pipes and electricity transmission lines are commonly installed on easements over private lands.
The third relates to the meaning of the "Crown". That expression is not defined in income tax law and so takes its meaning from the ordinary useage and understanding of it. Some Government authorities may not, by the nature of their functions, constitute the Crown.
Against that background, a new definition of "Crown lease" is to be inserted in section 54AA [New definition of "Crown lease" to replace existing definition in subsection 54AA(8)].
This new definition does not require leases to be granted under a relevant statute and so ordinary commercial leases are now covered. Further, it extends beyond leases and now covers easements and other rights, powers or privileges over or in connection with land (such as licences and "rights of way").
Also covered are "sub-interests" in land such as sub-leases and licences in relation to easements. For instance, a Commonwealth authority may hold a lease of land granted by a State and a sub-lease of that land granted by the authority would constitute a Crown lease.
Similarly, a State authority may hold an easement over private lands for the purposes of installing water or gas pipes. A licence or other right in relation to that easement granted by the authority will again constitute a Crown lease.
Finally, the concept of the Crown has been removed and replaced by the more precise concept of "eligible government body" [New subsection 54AA(7A)].
The meaning of eligible government body covers the various governments of Australia (namely, the Commonwealth, the States and Territories) and their tax exempt authorities. It also includes foreign governments and their tax-exempt authorities.
Municipal corporations and other local governing bodies are also covered as they are considered to be an emanation or an authority of the relevant State or Territory government [The Municipal Council of Sydney and the Commonwealth (1904) 1 CLR 208].
The following complementary amendments are to be made.
The expression "Crown lease" and certain cognate expressions are stated to have an extended meaning for depreciation purposes [Clause 35(a) inserts new subsection 54AA(1A)].
The expression "the lease", where ever occurring, is to be replaced with the expression "the Crown lease", to reflect the position that the new definition of " Crown lease" extends to interests in land that are not leases [Clause 35(b)].
The purpose of paragraph 54AA(2)(a) and subsection 54AA(4) is to specify that, in the relevant circumstances, the holder of a Crown lease is to be treated for certain purposes as the owner of property affixed to land which the law treats as owned by the person who owns the land. The expression "the lessor" in that paragraph and subsection is to be replaced by the expression "any other person", reflecting the fact that a person other than the person granting a Crown lease may be the owner of the land and thus the legal owner of property affixed to the land [Clause 35(c)].
Ordinarily, the words lessor and lessee respectively denote a person who grants a lease of land and a person who holds a lease of land. On the basis that a Crown lease is to include other interests in land such as easements, licences and "rights of way", those words are to have the following extended meanings [Clause 35(f)].
"Lessee" will mean the person who is the holder of a Crown lease within the extended meaning of Crown lease in subsection 54AA(8).
"Lessor" will mean the eligible government body which granted the Crown lease. To cater for instances where ownership of the relevant land has changed after the Crown lease was granted, lessor will include the new owner of the land. In cases where a Crown lease is a sub interest in land and the grantor's interest in the land has been assigned to another person, "lessor" will also include the assignee of the grantor's interest in the land.
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