senate

Explanatory Memorandum

(Circulated by the authority of the Treasurerthe Hon John Dawkins, M.P.)This Memorandum takes account of amendments made by the House of Representatives to the Bill as introduced.

Chapter 9 TAX CONCESSIONS FOR GRAPE GROWING

Summary of proposed amendments

9.1 The capital cost of establishing grape vines in Australia for use in a business of primary production is to be evenly deductible over four years. The deductions will be available once a vine is planted in the land [Clause 115] .

9.2 The amendments will apply to expenditure incurred on or after 1 July 1993.

Explanation of the proposed amendments

Background

9.3 The Income Tax Assessment Act 1936 provides a number of measures under which the otherwise non-deductible capital cost of property may be written-off, such as depreciation for plant and articles and the capital allowance for income-producing buildings.

9.4 Generally, there is no write-off available for the capital cost of establishing or acquiring live plants. Whether expenditure on establishing a live plant is revenue - and so deductible at the time incurred - or is capital, is generally determined by the length of the useful life of the plant. Broadly, the longer that life, the more likely is the expenditure to be capital. So the cost of planting annual crops, such as wheat and barley, is deductible at the time incurred. By comparison, expenditure on planting trees, shrubs, grape vines and similar long-lived plants is generally capital and not deductible.

9.5 This is not to say that all capital costs associated with the establishment of long-lived plants are not deductible. For instance, the capital cost of irrigating or trellising a vineyard may be written-off under the depreciation provisions for plant and articles. Rather, it is the cost of preparing the land and the cost of the plants themselves that is not deductible if those costs are capital.

9.6 There are some exceptions to this general unavailability of deductions for capital expenditure on live plants. For instance: expenditure on establishing trees for the prevention of rural land degradation can qualify for immediate deduction [section 75D]; capital expenditure on acquiring standing timber is deductible to the extent it relates to the felling of the timber for certain income-producing purposes [section 124J].

9.7 Expenditure incurred on or after 1 July 1993 on establishing grape vines in Australia for use in a business of primary production is now to be evenly deductible over four years. Deductions will be available from the time the vines are planted in the land.

9.8 The deductions will be allowable to whoever is the owner of the vines during the four year deduction period. If ownership of the vines changes within the four year deduction period, entitlement to deductions in the year of change will be pro-rated between purchaser and vendor.

9.9 The deductible cost of establishing a vine is to comprise the capital cost of preparing the land (excluding land draining and clearing), the cost of planting and the cost of the vine itself.

9.10 The provisions that will authorise these deductions for the capital cost of establishing grape vines are contained in proposed section 75AA. The following provides a more detailed explanation of these new provisions.

The amendments

Deduction for qualifying expenditure

9.11 Deductions are to be available to the owner of a grape vine if there is an amount of qualifying expenditure in respect of the establishment of the vine. The vine must be used in a business of primary production for the purpose of gaining or producing assessable income [new subsection 75AA(1)] .

Meaning of qualifying expenditure

9.12 "Qualifying expenditure in respect of the establishment of a grape vine" is capital expenditure incurred by a person on or after 1 July 1993 on the establishment of a grape vine in Australia for use in a business of primary production [new subsection 75AA(4)] .

9.13 What constitutes the capital cost of establishing a grape vine is not defined - it is something that is to be determined in each case. Broadly, the capital cost of establishing a vine is considered to comprise all the costs incurred up to the time the vine is established in the land. Generally, costs of maintaining plants once they are established are revenue in nature even though it may be some time before the plants become productive.

9.14 Costs of establishing a grape vine in the land that are capital in nature would include:

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the cost of preparing the land such as ploughing, topsoil enhancement, etc that is attributable to the vine;

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the cost of planting the vine in the land; and

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the cost of the vine.

9.15 The cost of land clearing and drainage of swamp and low-lying land will not qualify for deduction [new subsection 75AA(5)] . Such improvements are not considered to "depreciate" in the sense that the benefit of clearing and drainage is considered to be permanent. As well, it is Government policy not to provide tax concessions for what could be seen to be an environmentally inappropriate activity (this was a reason for terminating section 75A which formerly provided deductions for, among other things, the cost of clearing and draining land).

9.16 The legislation operates in relation to individual grape vines as a matter of convenience - it overcomes difficulties that might otherwise arise in identifying the relevant unit of property for which deductions are allowable. In practical terms, taxpayers will not be required to separately calculate deductions for a number of vines where the cost of each could be expected to be the same. This would commonly be the case where a taxpayer establishes a number of vines at the same time.

Calculation of deductions

9.17 Qualifying expenditure (ie. the capital cost of establishing a vine in the land) is to be evenly deductible over four years commencing at the time the vine is first used for income producing purposes [new subsection 75AA(2)] . A vine is considered to be used for income-producing purposes from the time it is established (ie. planted) in the land - even though it may not become productive for some time - if it is being maintained for the purpose of harvesting the grapes for income-producing purposes, such as for sale or for use in the making of wine.

9.18 Deductions are to be pro rated, between vendor and purchaser, if vines are sold part way through a year of income before the end of the four year deduction period.

Time limit on deductions

9.19 Deductions are to be available only during the four year period commencing at the time a grape vine was established (in effect, the time it was first used for income-producing purposes). This is achieved by specifying that a grape vine is taken not to be used for assessable income-producing purposes after the end of four years from the time the vine was established [new subsection 75AA(3)] .

Loss on destruction

9.20 A deduction will be available on the destruction of a grape vine to the extent that any amount of undeducted qualifying expenditure in relation to the vine is greater than any amount received or receivable in respect of the destruction [new subsections 75AA(6) & (7)] .

Recoupment of expenditure

9.21 A deduction will not be allowable for so much of the qualifying expenditure on establishing a grape vine as is reimbursed to the taxpayer who incurred the expenditure if the amount of the reimbursement is not assessable income in the hands of the taxpayer [new subsections 75AA(8),(9) & (10)] .

Extended meaning of owner

9.22 As mentioned earlier, entitlement to deductions for qualifying expenditure in respect of grape vines rests with the owner of the vines. It is a general legal principle that property that is affixed to land in a permanent manner becomes part of the land. Accordingly, taxpayers who establish grape vines on land that they do not own might not be considered at law to be the owners of the vines.

9.23 Taxpayers who establish grape vines on land over which they hold a "Crown lease" will be treated as the owners of the vines for the purposes of these provisions, as will subsequent holders of the leases, if the law would otherwise treat them as not the owner. "Crown lease" has the same meaning as for the plant depreciation provisions and, broadly, means a lease of land, easement over land, or other right over or in connection with land, that is granted by the Crown [new subsection 75AA(11)] .

Extended meaning of person

9.24 The word "person" appears in the provisions on a number of occasions; for instance, proposed subsection 75AA(4). Under income tax law, the meaning of "person" includes a company (existing subsection 6(1) definition of "person"). This meaning is to be extended for the purposes of these provisions to include a partnership or a person in the capacity of a trustee [new subsection 75AA(12)] .