House of Representatives

Explanatory Memorandum

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

Crown lessees to be eligible lessees entitled to deductions for capital expenditure on buildings and structural improvements

Summary of proposed amendments

Purpose of amendment: To make deductions allowable to taxpayers for capital expenditure they incur on the construction of buildings and other structural improvements on land over which they hold a Crown lease as that expression is defined for the purposes of the plant depreciation provisions.

Date of Effect: Applies where construction commences after 26 February 1992.

Background to the legislation

Capital expenditure on the construction of buildings and other structural improvements, including alterations, additions or improvements to buildings and structural improvements, is evenly deductible over 40 years at the rate of 2.5 per cent per annum under Division 10D (a higher rate of 4 per cent per annum over 25 years applies to certain industrial buildings).

Entitlement to deductions rests with owners, including eligible lessees. An eligible lessee is a person who incurs capital expenditure on the construction of a building, or structural improvement, on land over which that person holds a lease. Subsequent holders of the lease would also be treated as eligible lessees in relation to the building or structural improvement.

Explanation of the proposed amendments

Structural improvements, such as roads, bridges and tunnels, may be constructed by taxpayers on land over which they hold an easement, right of way or some other interest in the land. Under the existing provisions, they would be denied deductions because they neither own, nor hold a lease over, the land.

To be consistent with the depreciation amendments described in Chapter 10 , the concept of eligible lessee is to be extended to include persons who hold a "Crown lease". Crown lease for depreciation purposes is to include easements and other rights, powers or privileges over land, or in connection with land, where granted by a government (including foreign governments) or by a tax-exempt authority of a government. [Definition of "Crown lease", "lease" and "lessee" to be inserted in subsection 124ZF(1)]

As this amendment is principally directed to structural improvements (though not so limited), it will apply from the time when the cost of income producing structural improvements that do not qualify as depreciable plant was made deductible on the same basis as income-producing buildings; that is, where construction commenced after 26 February 1992. [Application clause 38]