Explanatory Memorandum
(Circulated by authority of the Treasurer,the Hon. Peter Costello, MP)
Chapter 8 - Depreciation of plant
This chapter explains the rewritten provisions that allow a deduction for the depreciation of plant.
These provisions are contained in new Division 42 in Schedule 1 to the Tax Law Improvement Bill 1997.
Transitional and consequential amendments for the rewritten provisions are contained in Schedule 6 to the Bill.
This chapter covers:
- •
- the rewritten provisions in Division 42 in Schedule 1 to the Tax Law Improvement Bill 1997; and
- •
- the transitional provisions and consequential amendments for those rewritten provisions contained in Schedule 6 to the Bill.
Division 42 contains the rewritten provisions of the 1936 Act that allow a deduction for the depreciation of plant. The corresponding provisions of the 1936 Act are contained in sections 54 to 62AAV of that Act.
The rewritten provisions will be found in Division 42 of the 1997 Act and will be one of the capital allowances explained in Division 40 of that Act.
Part A of this chapter summarises the rewritten depreciation provisions.
Part B explains the changes proposed to the content of the current provisions.
Part C explains why some provisions of the 1936 Act have not been rewritten.
Part D explains the transitional provisions which set out how and when the rewritten provisions will apply. They are located in Part 1 of Schedule 6 to the Bill.
Part E explains the amendments that need to be made to the 1997 Act, the 1936 Act and other Commonwealth legislation, as a consequence of the rewriting of the provisions of the 1936 Act. They are located in Parts 2 to 4 of Schedule 6 to the Bill.
A. Summary of the new law
Guide to Division 42: What this Division is about
It will allow a deduction for the depreciation of plant.
If you already have plant, or acquire plant that has been previously depreciated, then you should also read the transitional provisions. [section 42-1]
The key concepts used in this Division, and their relevance, are set out in a diagram. [section 42-5]
Guide to Subdivision 42-A: Key operative provisions
This Subdivision contains the key operative provisions, including the main deduction provision. [section 42-10]
You deduct an amount for depreciation of plant if:
- •
- you are its owner or quasi-owner; and
- •
- you use it, or install it ready for use, for producing assessable income. [section 42-15]
Plant has its ordinary meaning and includes items specifically listed in the definition. [section 42-18]
Wherever plant is referred to in the Division, it means a unit of plant. [section 42-19]
Your deduction in each year is a portion of the plants cost. [section 42-25]
There is a ceiling on how much to deduct
Total deductions, over time, cannot exceed the cost of the plant to you. Where you use the plant otherwise than to produce assessable income, you will not be able to deduct all of its cost. [section 42-20]
There are 2 methods for calculating a deduction
They are the diminishing value and prime cost methods.
Diminishing value allows you to deduct each year a percentage of the balance of the cost you have left to deduct (ie. your undeducted cost). Prime cost allows you to deduct each year a percentage of your cost. [section 42-25]
Different rates of depreciation apply
Most rates are based on the effective life of the plant.
The rates for diminishing value and prime cost differ. Diminishing value rates are higher. Therefore, deductions using this method are also higher in the earlier years. [section 42-25]
Plant with the same depreciation rate can be allocated to a pool
A business can reduce the calculations it makes by allocating plant to a pool and making one calculation for that pool. [Subdivision 42-L]
You must calculate a balancing adjustment for plant you have been depreciating if:
- •
- you stop being its owner or quasi-owner;
- •
- its ownership or quasi-ownership varies; or
- •
- it is lost or destroyed. [section 42-30]
- These are known as balancing adjustment events.
The Common rules for capital allowances are:
- •
- Common rule 1 - roll-over relief for related entities;
- •
- Common rule 2 - non-arms length transactions; and
- •
- Common rule 3 - anti-avoidance (ownership).
[section 42-35]
They are located in Division 41 of the 1997 Act but Common rules 1 and 2 are modified for depreciation.
Any choice to be made under this Division (eg. which calculation method to use) must be made:
- •
- before lodging your return for the income year to which the choice relates; or
- •
- within a further time allowed by the Commissioner.
- Once made, a choice will apply for all future years.
[section 42-40]
Some expenditure is excluded from deduction depending on its availability for deduction under other provisions or on the use of the plant on which the expenditure is incurred. [section 42-45]
The debt forgiveness rules in Division 245 of Schedule 2C to the 1936 Act apply to this Division. The amount of a commercial debt that is forgiven can be offset against plant. If it is, the amount offset is treated as an amount that has been deducted for depreciation. [section 42-48]
What are other amounts deducted for depreciation?
Various provisions require you to ascertain amounts you have deducted for depreciation. There is guidance, in a non-operative section, on how to identify those amounts. [section 42-50]
Interaction with other parts of the Act
Other provisions of the Act which affect your rights and obligations under this Division are listed in a non-operative section. [section 42-55]
Guide to Subdivision 42-B: Cost of plant
This Subdivision specifies how to work out the cost of plant. [section 42-60]
Generally, the cost of plant is its cost to you.
However, there are more detailed rules if:
- •
- there is a partial change in ownership of the plant;
- •
- the plant is on land over which you hold certain ownership rights;
- •
- the plant was previously covered by the research and development or mining provisions; or
- •
- roll-over relief applies. [section 42-65]
- •
- a car, designed mainly for carrying passengers, is acquired by you at a discount due to the sale of other plant for less than its market value [section 42-70] ;
- •
- you acquire plant for more than its arms length value [section 42-75] ;
- •
- the cost of a car, designed mainly for carrying passengers, exceeds the car depreciation limit [section 42-80] ; or
- •
- the plants cost can be deducted under another provision [section 42-85] .
The plant has been previously depreciated. [section 42-90]
Guide to Subdivision 42-C: Effective life
This Subdivision tells you how to work out the effective life of plant. [section 42-95]
You may either:
- •
- work out the effective life of the plant yourself; or
- •
- adopt the effective life set by the Commissioner. [section 42-100]
To self-assess effective life you estimate how long the plant can be used for any income producing purpose on the basis of certain assumptions. You do this when you first use it, or have it installed ready for use, for producing assessable income.
The period you determine is shortened if you intend to scrap or abandon the plant within that time. [section 42-105]
The Commissioner can make a written determination of the effective life of plant. Determinations for many plant items are contained in Taxation Ruling IT 2685.
[subsection 42-110(1)]
Any conditions stipulated by the Commissioner must be satisfied at the time the plant is first used or installed ready for use for income producing purposes. [subsection 42-110(2)]
Guide to Subdivision 42-D: Depreciation rates
This Subdivision sets out the depreciation rates.
[section 42-115]
If more than one rate applies, you may choose the one you prefer. You can also choose a lower rate. [section 42-120]
You must choose a new rate if your use of the plant changes so that the rate previously chosen ceases to apply.
[section 42-123]
Most plant attracts the general depreciation rates.
[section 42-125]
The general rates are based on the effective life of plant. Other rates can apply in certain circumstances.
The rate is 100%. [section 42-130]
Cars, and motor cycles or similar vehicles
Special rates apply. [section 42-135]
Special rates apply. [section 42-140]
Plant acquired before 1/7/95 for scientific research
The rate is 50% (diminishing value) or 33% (prime cost). [section 42-145]
Plant used in providing employee amenities
The rate is 50% (diminishing value) or 33% (prime cost). [section 42-150]
Guide to Subdivision 42-E: Calculation of depreciation deductions
This Subdivision establishes how to work out the amount of your deduction. [section 42-155]
There are separate calculation formulas for the prime cost and diminishing value methods. Both are based on the number of days in the income year when you were the owner or quasi-owner of the plant. [sections 42-160 and 165]
The deduction is a percentage of the amount left undeducted at the start of the income year. [section 42-160]
The deduction is a percentage of your cost. [section 42-165]
The deduction is reduced for any period when the plant was not used, or installed ready for use, to produce assessable income. [section 42-170]
Total deductions cannot exceed the balance you have left to deduct. That amount is worked out by subtracting from the cost:
- •
- your previous deductions;
- •
- any deductions you could not claim because the plant was used otherwise than to produce assessable income; and
- •
- any deductions disallowed by another provision of the Act. [section 42-175]
Guide to Subdivision 42-F: Calculation of balancing adjustments
This Subdivision deals with how to calculate a balancing adjustment. [section 42-180]
Balancing adjustments for some cars and pooled plant are calculated elsewhere.
When do you calculate a balancing adjustment?
For the income year in which a balancing adjustment event occurs. [section 42-185]
Purpose of a balancing adjustment
It is a final accounting to ensure your total deductions correspond to your actual loss. You must include an amount in your assessable income if:
The termination value (usually the sale price) of plant exceeds its written down value . The amount you include is the lesser of:
- •
- your depreciation deductions; and
- •
- the excess. [section 42-190]
- The amount you have deducted for depreciation may be increased if the research and development provisions have previously applied to the plant. [section 42-220]
You deduct an additional amount if:
The termination value is less than the undeducted cost . The amount you deduct is the difference. [section 42-195]
You reduce this amount to the extent that you used the plant other than to produce assessable income.
[subsection 42-195(3)]
This is the cost of plant, less your depreciation deductions. [section 42-200]
Usually, the termination value of plant is its sale price (less expenses of sale). Other termination values apply where you stop being the owner for a reason other than sale. [section 42-205]
Adjustments are made in these cases:
- •
- you dispose of plant for less than its arms length value [section 42-210] ; or
- •
- you dispose of a car to which the car depreciation limit applied [section 42-215] .
Guide to Subdivision 42-G: Calculation of balancing adjustments for some cars
This Subdivision sets out how to calculate a balancing adjustment for a car if:
- •
- you have deducted depreciation; and
- •
- in another year, you have deducted car expenses using either the cents per kilometre or 12% of original value method for calculating car expenses. [sections 42-225, 230 and 235]
This ensures that the balancing adjustment reflects only the period during which you depreciated the car. [section 42-250]
You include an amount in assessable income if:
The termination value (usually the sale price) of the car exceeds its notional written down value. [sections 42-240, 255 and 260]
You deduct an additional amount if:
The termination value of the car is less than its undeducted cost. [section 42-245]
You reduce the deduction to the extent that you used the car other than to produce assessable income.
[subsection 42-245(3)]
Guide to Subdivision 42-H: Balancing adjustment relief
This Subdivision states when balancing adjustment relief is available. [section 42-265]
Balancing adjustment relief can:
- •
- defer a balancing adjustment; or
- •
- reduce the amount included in assessable income; or
- •
- reduce tax payable. [section 42-270]
This form of relief defers a balancing adjustment calculation where:
- •
- CGT roll-over relief applies eg. if plant is transferred between related companies or by an individual to a wholly owned company; or
- •
- there is a partial change of ownership and a joint election is made.
- It is contained in Common rule 1 in Division 41, but is modified for depreciation purposes. [section 42-275]
Roll-over relief has these effects:
- •
- the adjustment is deferred until there is a further disposal with no roll-over relief; and
- •
- transferees work out their deductions using the same cost, rate etc. as the transferor. [section 42-280]
Offsetting against other plant
Instead of including an amount in your assessable income because of a balancing adjustment, you may reduce the depreciable cost of other plant. [sections 42-285 and 290]
You can apply for a concessional basis of calculating your tax payable if, as a result of a balancing adjustment event, your business ceases. [sections 42-295 and 300]
Guide to Subdivision 42-I: Quasi-ownership
You will be the quasi-owner of plant if:
It is attached to land you hold under a quasi-ownership right granted by a government agency. [section 42-310]
Meaning of quasi-ownership right over land
A lease, easement or any other right, power or privilege over land. [subsection 995-1(1)]
Who can depreciate plant on land held under a quasi-ownership right?
The entity that attaches it to the land, and their assignees. [subsection 42-310(1)]
The grant of a new quasi-ownership right is taken as a continuation of your original right in certain circumstances. [section 42-315]
What if there is both an owner and a quasi-owner of plant?
Only the quasi-owner deducts depreciation. [section 42-320]
Guide to Subdivision 42-J: Partial change of ownership
A partial change of ownership will occur when:
- •
- There is some change in ownership of, or interests in, plant; but
- •
- there is a degree of continuity of ownership or interests. [section 42-330]
- •
- A balancing adjustment calculation is required, unless all entities elect for roll-over relief; and
- •
- the entities that are the owners of the plant after the change are taken to have acquired it from the previous owners. [section 42-335]
Guide to Subdivision 42-K: Car depreciation limit
What is the car depreciation limit?
It is a ceiling on the depreciable cost of cars designed mainly for carrying passengers.
It is indexed each year for inflation based on movements in the CPI. [section 42-345]
Guide to Subdivision 42-L: Pooling
What are the advantages of pooling?
Depreciation calculations can be reduced by pooling items of plant having the same depreciation rate. One calculation (using the diminishing value method) covers all plant in the pool.
By recording in writing the creation of a pool and the allocation of plant to it. [sections 42-355 and 360]
Only plant used, or installed ready for use, exclusively for producing assessable income can be pooled. Also, you cannot pool plant in the year you acquire it. [section 42-365]
Plant is removed from a pool if it ceases to be used, or installed, exclusively for producing assessable income. You can also choose to remove it at any time. [section 42-370]
The deduction is calculated by multiplying the amount left to deduct in the pool by the diminishing value rate for the class of items. [sections 42-375, 42-380 and 42- 385]
There are special rules for calculating balancing adjustments for pooled plant. The amount to be included in assessable income is the lesser of the termination value of the plant and its cost. [section 42-390]
For the purposes of calculating a capital loss on an item of pooled plant that is disposed of, you reconstruct the amount of depreciation for that item. [section 42-395]
B. Discussion of changes
Subdivision 42-A Key operative provisions
This Subdivision contains the key operative provisions, including the main deduction provision.
All the key operative provisions are being conveniently collocated.
In the existing law, the operative provisions are scattered and this is an obstacle to readers understanding of how the law operates.
To overcome this, all the main elements of the depreciation law have been reassembled:
- •
- the conditions for deductibility [section 42-15] ;
- •
- the meaning of plant [sections 42-18 and 19] ;
- •
- how much you deduct [section 42-20] ;
- •
- how to calculate your deduction [section 42-25] ;
- •
- when to calculate a balancing adjustment [section 42-30] ;
- •
- the capital allowance Common rules that apply [section 42-35] ;
- •
- the timing and effect of choices [section 42-40] ;
- •
- plant for which depreciation is not available [section 42-45] ; and
- •
- signposting of other relevant provisions [sections 42-50 and 55] .
Some of the key concepts will be given new labels.
The new terms and their old law equivalent are:
| New Term | Old law equivalent |
|---|---|
| quasi-owner | Crown lessee |
| termination value | consideration receivable |
| undeducted cost | (notional) depreciated value |
| written down value | (actual) depreciated value |
Wherever the term associate is used in this Division it will have a standardised meaning.
The term is used in the cost and termination value tables. In the depreciation provisions in the 1936 Act, it takes on the meaning in subsection 26AAB(14) of that Act. The rewrite uses a standardised definition that is explained in Part B of Chapter 4 dealing with leased cars.
The existing law extends the meaning of associate for depreciation purposes to include:
- •
- associated government authorities (subsection 54AA(6)); and
- •
- reconstituted partnerships (subsection 54AA(7)).
The first extension is preserved in the rewrite by the use of the new term associated government entity . The second is preserved by section 42-415 of the Income Tax (Transitional Provisions) Act 1997 .
Section 42-15 Deduction for depreciation
This section sets out the conditions you must satisfy to claim a depreciation deduction.
The application of the law to entities that do not own plant, but can claim depreciation, will be more directly expressed. The drafting device of deeming them to be owners will be discontinued.
The deeming device is unhelpful to readers.
The new law will deal expressly with entities that, although not owners of plant in a full sense, are able to claim depreciation. They are referred to as quasi-owners . Crown lessees are in this category.
Section 42-19 References to plant
References to plant will mean a unit of plant .
References to plant are to be read as if they were to a unit of plant .
The deduction is available for a unit of plant (and this is specifically stated).
The referencing technique used for the rest of the Division avoids having to use the cumbersome expression unit of plant throughout, but nonetheless makes it clear that the calculation and its components all relate to a unit.
Section 42-35 Application of Division 41 Common rules
This section sets out which Common rules apply to depreciation.
All of the Common rules for capital allowances will apply to this Division.
Common rules for capital allowances are a new feature of the law. Their purpose is to standardise, and avoid repetition of, provisions that apply to more than one capital allowance. There are 3 Common rules:
- •
- Common rule 1 deals with balancing adjustment roll-over relief where property is transferred between related entities;
- •
- Common rule 2 deals with the non-arm's length acquisition and disposal of property; and
- •
- Common rule 3 deals with certain anti-avoidance provisions that apply to the owner of property.
The Common rules are contained in Division 41 of the 1997 Act. Common rules 1 and 2 are modified to ensure they apply to depreciation consistently with the existing law (see discussion on sections 42-75, 42-210, 42-275 and 42-280 in this chapter).
This section states when choices, permitted or required under this Division, need to be made.
Broadly similar concepts to do with electing, nominating or giving notice that you have adopted a particular course of action will be standardised.
In the existing law, there are different provisions and terms covering what is essentially the same thing. Standardising these will make the law clearer.
The timing of choices will be standardised to the time you lodge your income tax return for the relevant year (or within further time allowed by the Commissioner).
Standardising will simplify the law and make compliance easier. To achieve this requires change to the existing time limits for:
- •
- electing to use the Commissioner's determination of effective life; and
- •
- giving notices that plant is being pooled.
The existing law requires those choices to be made within 6 months after the end of the income year to which they relate (or within further time allowed by the Commissioner). In practice, choices must be made by the time you lodge your return and are evidenced by the information contained in it.
You will be able to choose diminishing value and prime cost methods for different items of plant that become depreciable in the same year.
The existing law requires that you apply the same method to all units of plant that become depreciable in the income year. This is an unnecessary constraint.
The choice to self-assess the effective life of plant will be irrevocable.
See discussion on section 42-100 (change 2 in this chapter).
Section 42-48 Debt forgiveness: amounts deducted for depreciation
This section treats an amount applied against depreciable plant under the debt forgiveness rules as an amount deducted for depreciation.
An amount of debt forgiven, that is applied against depreciable plant under the debt forgiveness rules, will be accounted for as an amount deducted for depreciation for all relevant purposes.
Under the debt forgiveness rules, such an amount is taken to be an amount of depreciation for the purposes of calculating a deduction using the diminishing value method.
This change will ensure that the amount is taken into account in determining the amount available for deduction (ie. the undeducted cost) regardless of the calculation method used.
Subdivision 42-B Cost of plant
This Subdivision specifies how to determine the cost of plant.
This Subdivision will bring together all provisions which allocate a cost to plant in particular circumstances.
The amount you can deduct in an income year is based on your cost. Under the existing law, the various rules for determining cost are scattered. Bringing them together will be convenient for readers. It also identifies the order in which the rules are to be applied.
Section 42-65 How to work out your cost
This section sets out the rules for determining the cost of plant and the provisions that adjust them.
For plant you acquire with (or attached to) other assets without a specific value being allocated to it, the cost will be so much of the overall cost of all the assets as is reasonably attributable to it. [table: item 2]
The existing law does not give taxpayers guidance on the cost of plant they acquire with (or attached to) other assets without a specific value being allocated to it. However, where plant is sold in such circumstances, subsection 59(3) of the 1936 Act allows the Commissioner to fix its termination value. This discretion will be removed and replaced with an objective rule, see discussion on section 42-205. Section 42-65 will apply the same objective basis to an acquisition.
There will be a cost rule for plant you acquire as a result of the operation of the partial change of ownership rule in Subdivision 42-J. The cost will be the market value immediately before acquisition. [table: items 3 and 7]
A partial change in the ownership of plant, may require a balancing adjustment calculation to be made. The existing law sets a termination value for that purpose.
Also, the entities that are the owners of the plant after the change are taken to have acquired it from those that were its owner before. However, existing law is silent about the acquisition value. The acquisition value will be the same as the disposal value.
Clarify that the cost of plant attached to land held under a quasi-ownership right acquired by you, is so much of the consideration for acquiring the right as is reasonably attributable to the plant. [table: items 4 and 5]
Under the existing law, the cost in these circumstances is the amount of consideration that is 'attributable' to acquiring the right.
Stating specifically that the attribution must be 'reasonable' will give extra guidance to taxpayers in working out the cost of plant in these circumstances. It is also consistent with other cost and termination values which require a reasonable attribution.
There will be a specific cost for plant you acquire in circumstances where Common rule 1 applies. The cost will be the transferor's cost regardless of the calculation method previously used. [table: item 9]
Common rule 1 will provide roll-over relief for plant transferred between related entities. If Common rule 1 applies, the requirement to calculate a balancing adjustment is deferred until the plant is disposed of again in circumstances that do not attract roll-over relief.
The existing law requires a transferee to depreciate plant on the same basis as the transferor. If a transferor used the diminishing value method to calculate depreciation, the transferee's cost is the transferor's depreciated value.
As depreciated value is not used as a concept in the new law, the same result will be achieved by requiring the transferee to:
- •
- use the transferor's cost; and
- •
- reduce what would otherwise be the transferee's undeducted cost by amounts of depreciation claimed by the transferor and any further amounts the transferor could have claimed had the plant been used wholly for producing assessable income.
Section 42-75 Adjustment: non-arm's length transactions
This section modifies Common rule 2 in its application to this Division. Common rule 2 will adjust the cost of plant if the parties to the acquisition were not dealing at arm's-length.
Common rule 2 will apply only if the plant is actually acquired under the non-arm's length transaction.
Under the existing law, the arm's length rules for depreciation have a wider application. They apply if the cost of the plant is attributable, in any way, to any transaction to which the taxpayer was a party, even if that transaction is not the one under which the plant is acquired.
This change is a result of standardising through Common rule 2.
Common rule 2 will be modified so that it:
- •
- applies to cost rather than expenditure; and
- •
- substitutes the amount that would have been the cost had the parties been dealing at arm's length.
These modifications ensure that, in these respects, Common rule 2 applies to depreciation consistently with the existing law.
Section 42-85 Adjustment: double deduction
This section reduces depreciation deductions for plant to the extent that its cost has been deducted under another provision.
An unnecessary reference to the cost of extending a telephone line deducted under section 70 of the 1936 Act will be omitted.
A drafting device in subsection 56(3) of the 1936 Act ensures that, to the extent that the cost of telephone lines could be depreciated under section 54 or deducted under section 70, the cost is to be depreciated. This has been omitted because its presentation is confusing. The same result has been achieved by making this aspect clear in the rewritten telephone lines provisions. [paragraph 387-410(1)(b)]
Section 42-90 Adjustment: previously depreciated plant limit
This section will allow the Commissioner to limit the cost of plant that has been depreciated by someone else.
You will be able to depreciate such plant on the basis of its cost to you. The Commissioner will have a discretion to reduce that cost in certain circumstances.
The existing law expressly limits the cost of previously depreciated plant to the vendor's written down value plus any balancing adjustment included in their assessable income. The Commissioner has a discretion to allow the plant to be depreciated on the basis of its cost to the purchaser.
Most taxpayers base depreciation claims on their cost without seeking the exercise of the Commissioner's discretion (as it is only refused in limited circumstances). This change will reflect that practice.
You will be taken to have acquired previously depreciated plant at its cost to you, unless the Commissioner exercises a discretion to restrict your cost to the vendor's written down value plus balancing adjustment.
The Commissioner will be directed to take into account:
- •
- your relationship with the person from whom you acquired the plant;
- •
- the price paid; and
- •
- whether the person from whom you acquired the plant still has use and enjoyment of it.
Subdivision 42-C Effective life
This Subdivision explains how to work out the effective life of plant. Most depreciation rates are based on the plant's effective life. You can either work out the effective life yourself or adopt the Commissioner's determination of it.
Excessively detailed rules as to how the Commissioner is to specify the effective life of plant will be omitted. Those rules cover:
- •
- criteria that may be used in specifying an effective life;
- •
- conditions attaching to a specification;
- •
- adding a specification for particular plant; and
- •
- from when a determination may apply.
The same result can be achieved economically under the general administrative powers and obligations.
Section 42-100 Choice of method
There are two methods for determining the effective life of plant.
You can choose the method you prefer without the need to make a written election.
The existing law requires you to elect in writing to use the Commissioner's determination of effective life. In keeping with the self-assessment system, requirements to elect for certain courses of action will be omitted from the depreciation provisions. The new law will allow you to choose the method you prefer and the time for making that choice will be standardised.
[section 42-40]
Omitting the requirement to formally record this choice will reduce compliance costs. Your choice will be evidenced by the depreciation rate at which you calculate your deduction and the records you already keep under general record keeping provisions.
The choice to self-assess the effective life of plant will be binding.
This change flows from standardising the choice rules. In the existing law, your only choice is to use the Commissioner's determination. If you don't make this choice, you are taken to have self-assessed the plant's effective life. The new law gives you the option to make either choice. The choice is permanent. [section 42-40]
Subdivision 42-D Depreciation rates
This Subdivision sets out the rates that are available for calculating your depreciation deduction.
The depreciation rates for both diminishing value and prime cost will be included in the new law.
Depreciation rates differ depending on whether you calculate your deduction using the diminishing value or prime cost method. The existing law specifies only diminishing value rates. If you choose the prime cost method, you must make a calculation to convert from the diminishing value rate.
In the rewrite, each prime cost rate has been inserted next to its diminishing value equivalent.
The requirement to use the higher rate where more than one rate can apply has been omitted.
If more than one rate can apply, you will be able to choose whichever you prefer.
The requirement, in the special rate for artworks, to make calculations to two decimal places has been removed.
As the general rates are expressed in whole percentages the requirement to calculate to two decimal places is pedantic.
You can choose a rate lower than that which applies to your plant.
The existing law allows you to nominate a lower rate than that which is prescribed, but limits how low the rate can be. This is an unnecessary restriction.
Subdivision 42-E Calculation of depreciation deductions
This Subdivision sets out how to calculate your depreciation deduction.
The meaning of the term depreciated value will be clarified.
In the existing law, depreciated value has two meanings:
- •
- if plant is used wholly for income producing purposes, it means actual depreciated value;
- •
- otherwise, it means notional depreciated value.
It is a guiding principle for rewriting the law that words will not have different meanings in different contexts.
Therefore, the new law will use written down value for actual depreciated value and undeducted cost for notional depreciated value.
The rules that restrict your deduction to the period when you own the plant and use it for producing assessable income will be clearly spelt out.
The existing law reduces your deduction so that it reflects only the period in the income year when you own the plant and use it to produce assessable income. However, the provisions that achieve this are not collocated and their interaction is not expressed clearly.
These problems will be addressed by a two step approach:
- •
- First , you will calculate your deduction for the number of days you were the owner or quasi-owner of the plant; and
- •
- Second , you will reduce that amount to the extent that you did not use the plant, or install it ready for use, to produce assessable income.
Any amount denied under step 2 because the plant was used for a purpose other than producing assessable income will not be available for deduction in future income years (see change 3 below).
The cost of plant will be expressly reduced to reflect any period during which it is used or held for a purpose other than of producing assessable income. No depreciation deduction will be allowed for that period.
The existing law is applied in this manner.
The change will make the concept of undeducted cost central to the calculation process. It will be your cost, less:
- •
- the sum of amounts you have deducted;
- •
- any amounts you cannot deduct because you used the plant otherwise than to produce assessable income; and
- •
- any amounts you cannot deduct because another provision prevented a deduction (eg. plant used for leisure facilities). [section 42-175]
You will not be able to deduct more than the undeducted cost.
In working out the amounts referred to in the second and third points above, you apply the rate and method used in the income year in which depreciation first became allowable to you for the plant. If you acquired the plant before 27 February 1992, special transitional rules apply, see discussion in Part D of this chapter.
Subdivision 42-F Calculation of balancing adjustments
This Subdivision explains how you calculate a balancing adjustment if you cease to be the owner of plant or it is lost or destroyed.
All termination values used in calculating your balancing adjustment will be brought together in a single table.
These values are in a number of different places in the existing law. The table will link particular values to the circumstances in which you have ceased to be the owner. In addition, the table indicates adjustments that may substitute another value. Those adjustments are set out after the table.
Section 42-205 Meaning of termination value
This section sets out the various termination values to be used in calculating balancing adjustments.
There will be a termination value for plant that is sold attached to other assets without a specific value being allocated to it. [table: item 2]
The existing law allocates a value for plant
sold
with other assets. The Full Federal Court in
Pearce v Federal Commissioner of Taxation
85 ALR 359
said that this value extended to plant that was attached to the other assets it was sold with. However, the Court said the provision would be clearer if it read 'where property is sold with or
attached
to other assets'. This change will give effect to the Court's recommendation.
The Commissioner's discretion in setting a termination value for plant sold with (or attached to) other assets has been removed and replaced with objective criteria. [table: item 2]
Under the existing law, if plant is sold with other assets without a separate value allocated to it, its termination value is determined by the Commissioner. Consistent with a self-assessment regime, this discretion will be removed and replaced with objective criteria.
The amount generally determined by the Commissioner is that portion of the sale price reasonably attributable to the individual item of plant. This will be the termination value in the new law, consistent with similar termination value rules in the mining provisions and the capital gains tax provisions.
Clarify that the termination value for plant attached to land held under a quasi-ownership right that the holder assigns or which expires, is surrendered or is terminated, is so much of the consideration received for the right as is reasonably attributable to the plant. [table: items 6 and 8]
Under the existing law, the termination value in these circumstances is the amount of consideration that is 'attributable' to the right.
Stating specifically that the attribution must be 'reasonable' will give extra guidance to taxpayers in working out the termination value of plant in these circumstances. It is also consistent with other cost and termination values which require a reasonable attribution.
There will be a specific termination value for plant attached to land held under a quasi-ownership right that the holder assigns to an associate. The value will be the market value immediately before the assignment, worked out as if the holder had the freehold interest. [table: item 7]
Under the existing law, the rules for placing a termination value on plant attached to land are not identical in two similar cases. The first is where a quasi-owner assigns his or her right to an associate. The second is where a new quasi-ownership right is granted to the associate following expiry, surrender or termination of the previous holder's right.
As the same outcome is appropriate in each case, the rules are to be standardised. In each of these situations, the termination value will be the market value of the plant at the time of the event, the value being calculated as if the quasi-owner owned the land.
Section 42-210 Adjustment: non-arm's length transactions
This section modifies Common rule 2 for capital allowances in its application to this Division. Common rule 2 will adjust the termination value if parties to the disposal of plant were not dealing at arm's length.
Common rule 2 will be modified so that it only applies:
- •
- to disposals by sale; and
- •
- if the party disposing of the plant incurred a cost.
This ensures that Common rule 2 applies to depreciation consistently with the existing law.
Section 42-250 Reduction to take account of days when depreciation not claimed
This section ensures that the amount of your balancing adjustment for some cars relates only to the period you actually depreciate the car. This will be done by reducing your balancing adjustment for the period you used the cents per kilometre or 12% of original value methods for claiming car expenses.
Replace the Commissioner's discretion with objective criteria in the provision that reduces your balancing adjustment for some cars.
In the 1936 Act, this provision is in the form of a discretion contained in subsection 59AAA(5). Guidance on the exercise of the discretion is contained in subsection 59AAA(6). The objective criteria are based on that guidance. The removal of administrative discretions is one of the aims of the rewrite of the law.
Section 42-275 Modifications of Common rule 1
This section modifies Common rule 1 (roll-over relief for related entities) for depreciation.
Common rule 1 will be modified to:
- •
- exclude a section (41-40) that has been more fully explained in the depreciation provisions;
- •
- exclude a section that has no application to depreciation (section 41-45);
- •
- include a provision allowing pro-rating in the year of transfer; and
- •
- include further record-keeping provisions.
Common rules for capital allowances are a new feature of the law and are contained in Division 41. Common rule 1 has been modified to ensure that it applies to depreciation consistently with the existing law.
Section 42-280 Additional consequences
This section sets out consequences which will follow if roll-over relief is available under Common rule 1. Roll-over relief defers a balancing adjustment where plant is transferred to a related entity.
The manner in which a transferee is required to calculate a deduction will be better explained by adding details to the application of Common rule 1.
Common rules for capital allowances are a new feature of the law and are contained in Division 41 of the 1997 Act. These additions to the Common rules ensure that roll-over relief continues to apply to depreciation consistently with the existing law.
Section 42-285 Same year relief
Section 42-290 Later year relief
These sections deal with a form of balancing adjustment relief which allows amounts that would otherwise be included in assessable income to be offset against other plant.
Without altering the practical effect of the offset rules, ambiguity as to their operation is being removed.
In the existing law, if a taxpayer elects for this form of relief, there are two consequences. First, the amount otherwise to be included in assessable income is offset against the cost of replacement plant. This means deductions are not available for the amount of the offset. Second, the amount of the offset is treated as depreciation allowed for that unit of plant. This enables the amount of the offset to be recouped in appropriate cases.
The new law will more simply achieve the correct result by treating the offset as an amount of depreciation that has been deducted. For those who use the diminishing value method, that amount will be taken into account in working out opening undeducted cost (upon which the calculation is based). For those who use the prime cost method, cost will be reduced for the purposes of calculation only (see paragraph 42-165(3)(a)). When calculating undeducted cost or written down value to work out a balancing adjustment, the cost will be as determined under Subdivision 42-B, not the reduced cost.
Section 42-310 Meaning of quasi-owner
This section defines quasi-owner .
A person will be the quasi-owner of plant attached to land if that land is held under a quasi-ownership right granted by an exempt Australian or foreign government agency.
This new term will describe persons who do not own plant, but are entitled to depreciate it. The term avoids the drafting technique used in the existing law (in the Crown lease provisions) of deeming such persons to be owners.
Persons who hold a quasi-ownership right over land to which the plant is attached are currently referred to as 'Crown lessees'. This is not an entirely accurate term.
Section 42-320 Only one entity can deduct
This section ensures that a quasi-owner of plant, and not the owner, claims depreciation for it.
If there is both an owner and a quasi-owner of plant, only the quasi-owner will be able to depreciate it.
It is possible to have both an owner and a quasi-owner using plant to produce assessable income. Where this happens in the existing law, the Crown lease provisions make it clear that the Crown lessee is the person entitled to deduct.
Subdivision 42-J Partial change of ownership
This Subdivision sets out when a partial change in the ownership of plant will result in a requirement to make a balancing adjustment calculation.
The Subdivision will also apply where there is a partial change in the quasi-ownership of plant.
This change flows from using the term quasi-owner to refer to entities that may be entitled to claim depreciation of plant, even though they do not own it. The partial change rule will make specific reference to quasi-owners.
C. Provisions of the 1936 Act that have not been rewritten
Some provisions of the 1936 Act have not been included in the new law because they have little, or no, ongoing application. They are summarised in the following table:
| Provision | Subject | Reason for omission |
|---|---|---|
| Section 57AK | Accelerated depreciation of plant used in the production of some basic iron and steel products. | It only applies to plant installed before 1 July 1992. |
| Section 57AM | Accelerated depreciation of Australian trading ships. | It will only apply to ships registered and delivered before 1 July 1997. Deductions for these ships will continue to be made under the 1936 Act. |
| Section 62AAA | Reduces the cost of plant by the amount of any compensation received under the Decimal Currency Board Act 1963. | The Decimal Currency Board Act was repealed in 1981. |
Some other provisions have been omitted from the new law because they are either transitional or unnecessary. They are summarised in the following table:
| Provision | Reason for omission |
|---|---|
|
|
Transitional provisions with no further application. |
|
|
Unnecessary because sections 57AK and 57AM have been omitted. |
| Subsections 54(1A), 56(1AAA), 59(1A), 59AAA(1A), 62(1A), 62AAM(1A), 62AAN(2), 62AAP(1A), 62AAR(2) | Unnecessary because the depreciation provisions are subject to the debt forgiveness rules without the need for these specific application provisions. |
|
|
Unnecessary because the concept is implicit without the need for a specific provision. |
| Subsections 54A(3), (5), (6), (7), (8), (9), (10), (13), (14) | Unnecessary because they are covered by the Commissioners general administrative powers and obligations. |
| Subsection 262A (4AE) | Unnecessary because the new law does not require your choice about effective life method to be in writing (see discussion on section 42-100 in Part B of this chapter). |
|
|
Unnecessary because they contain a discretion allowing the Commissioner to determine an amount if there is insufficient evidence of market value. |
D. Transitional arrangements
Part 1 of Schedule 6 to the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this chapter. [Schedule 6, Part 1: item 2]
When explaining how a specific provision of the new law is to apply, the transitionals use the same section number as that provision.
Convenient labels will be given to the 1936 Act depreciation provisions (old depreciation provisions) and the rewritten provisions (new depreciation provisions) to make it easier to refer to them in these transitional provisions. [Schedule 6, Part 1: section 42-1, Transitional Provisions Act]
The rewritten provisions will apply to depreciation deductions for the 1997-98 and later income years, except for deductions for Australian trading ships which will continue to be claimed under section 57AM of the 1936 Act. [Schedule 6, Part 1: section 42-2, Transitional Provisions Act]
Plant being depreciated under existing law
The transitional provisions will explain how taxpayers who depreciate plant under the existing law can continue to depreciate it under the new law.
In broad terms, taxpayers will continue to depreciate plant under the new law on the same basis as they do under the existing provisions (that is, using the same calculation method, cost and rate of depreciation). [Schedule 6, Part 1: section 42-6, Transitional Provisions Act]
There is an exception where taxpayers acquired their plant under section 58 of the 1936 Act (roll-over relief). At present, the transferees cost would be the transferors written down value if the transferor was using the diminishing value method. This ensures that the transferee cannot deduct amounts already deducted by the transferor.
To achieve the same outcome, under the new law, the transferees cost will be the transferors cost, but their total deductions will be limited to the plants undeducted cost. Undeducted cost will include deductions claimed by the transferor. [Schedule 6, Part 1: subsection 42-6(4), Transitional Provisions Act]
Plant depreciated under the new law
The transitional provisions will also have rules for taxpayers who start depreciating plant under the new law, but either:
- •
- before the new law commences, used it but were not entitled to depreciate it; or
- •
- after the new law commences, acquire it in circumstances that attract roll-over relief in Common rule 1.
Plant used by you before the new law
This rule will apply if you owned and used plant only for non-depreciable purposes, but after the start of the new law, you used it for depreciable purposes. [Schedule 6, Part 1: subsection 42-7(1), Transitional Provisions Act]
In calculating your deduction under the new law you use the same cost and rate as you would have if you had depreciated it under the existing law. [Schedule 6, Part 1: subsections 42-7(3), (4) and (5), Transitional Provisions Act]
Also, if you acquired the plant under the roll-over relief contained in section 58 of the 1936 Act, you must use the same method, when you start depreciating it under the new law, as the transferor used. [Schedule 6, Part 1: subsection 42-7(2), Transitional Provisions Act]
These provisions will put taxpayers in the position they would have been in had they started to depreciate the plant under the existing law from when they first used it.
Plant used by transferor before the new law
This rule will apply if:
- •
- you acquire plant in circumstances where Common rule 1 (roll over relief for related entities) applies to the acquisition; and
- •
- the transferor (or an earlier transferor) owned and used the plant before the new law starts.
You depreciate the plant on the same basis as the transferor. Therefore, the option to self-assess effective life will not be available to you if it was not available to the transferor and in determining your rate, you assume that you acquired the plant when the transferor did. [Schedule 6, Part 1: section 42-8, Transitional Provisions Act]
As with the existing law, self-assessment of effective life is not available for plant acquired before 13 March 1991. [Schedule 6, Part 1: section 42-95, Transitional Provisions Act]
Whether you acquire plant before 27 February 1992 is usually a question of fact, but there are special rules in section 66 of the Taxation Laws Amendment Act (No. 2) 1992 which will continue to have effect under the new law in determining whether plant was acquired or constructed before that date. Section 66 will be relevant:
- •
- where the transitional provisions require you to use a rate worked out under the existing law; and
- •
- in ensuring that plant acquired or constructed before 27 February 1992 cannot be pooled with plant acquired after that date. [Schedule 6, Part 1: section 42-400, Transitional Provisions Act]
Actual amounts deducted under old law
Amounts deducted as depreciation under the existing law will be treated as deductions under the new law. [Schedule 6, Part 1: sections 42-9 and 175, Transitional Provisions Act]
If roll-over relief applied to your acquisition of the plant, then any amounts deducted by the transferor (and any earlier successive transferor), under the existing law, will be taken to have been deducted by you under the new law. [Schedule 6, Part 1: paragraphs 42-9(2)(c) and 175(1)(d), Transitional Provisions Act]
As a consequence:
- •
- balancing adjustments will apply where plant, written off under existing law, is disposed of after the new law starts; and
- •
- amounts deducted, under the existing law, will be taken into account in a balancing adjustment calculation required under the new law.
Also, plant depreciated under the existing law will be previously depreciated plant for the purposes of section 42-90 which will allow the Commissioner to set a cost for previously depreciated plant. [Schedule 6, Part 1: subsection 42-90(1), Transitional Provisions Act]
Notional amounts deducted under old law
For the purpose of working out your undeducted cost , you must take into account any further amounts you (and the transferor and any earlier transferor) could have deducted under the existing law had the plant been used wholly to produce assessable income. [Schedule 6, Part 1: section 42-175, Transitional Provisions Act]
In working out those amounts, you use the same method and rate you used when a depreciation deduction first became allowable for the plant. However, for plant acquired before 27 February 1992, the broadbanding rules in subsections 55(5) and (8) of the 1936 Act (as it applied immediately before the commencement of section 1 of the Taxation Laws Amendment Act (No. 2) 1992 ) are optional in working out a notional amount for any year for which you did not claim a depreciation deduction. In any income year for which a deduction is allowable and a notional write down is also required, the notional write down is calculated at the same rate as the deduction. [Schedule 6, Part 1: subsections 42-175(3) and (4), Transitional Provisions Act]
There is another notional amount under the existing law that will be treated as a notional amount under the new law (see discussion on quasi-owners, section 42-310). [Schedule 6, Part 1: subsection 42-175(2), Transitional Provisions Act]
Amounts included in assessable income under old law
The new law will allow the Commissioner to reduce the cost of previously depreciated plant that you acquire, to the vendors written down value plus balancing adjustment.
References to amounts included in the vendors assessable income as the result of a balancing adjustment will include:
- •
- amounts included under the 1936 Act; and
- •
- amounts that would have been included in the absence of balancing adjustment relief. [Schedule 6, Part 1: subsection 42-90(4), Transitional Provisions Act]
References to the new law include the old law
References in the new law to rewritten provisions include their old law equivalent. [Schedule 6, Part 1: sections 42-45, 220, 235, 255, 290 and subsections 42-90(2), (3), and 310(2), Transitional Provisions Act]
Common rule 1 (roll-over relief) and Common rule 2 (non-arms length transactions) will also apply to plant even though it has only been depreciated under the existing law. [Schedule 6, Part 1: sections 42-405 and 410, Transitional Provisions Act]
Also, if Common rule 1 applies, the transferee will use the same effective life as the transferor in determining their rate. [Schedule 6, Part 1: section 42-280, Transitional Provisions Act]
Any amount applied against plant expenditure under the debt forgiveness rules before the commencement of the new law will be treated as an amount deducted for depreciation under the old law. This ensures that these amounts are taken into account, under the new law, in working out how much you have left to deduct and the amount of any balancing adjustment. [Schedule 6, Part 1: section 42-48, Transitional Provisions Act]
The new law continues the system for the pooling of items of plant that carry the same depreciation rate. There is a series of transitional rules that preserve pools created under the existing law. Those rules are explained in the following table:
| Transitional section | About | Rule |
|---|---|---|
| 42-355 | Creating a pool | Pools created under the existing law are carried into the new law |
| 42-360 | Allocating plant to a pool | Plant allocated to a pool under the existing law will remain allocated to it for the new law. |
| 42-365 | Plant eligible for allocation | It will continue to be the case that plant acquired on or before 26 February 1992 cannot be pooled with plant acquired after that date. |
| 42-370 | Removal of plant from pool | Plant acquired on or before 26 February 1992 will be removed from a pool if its annual depreciation percentage under the existing law ceases to match the pool percentage. |
| 42-375 | Calculating deductions | For plant acquired on or before 26 February 1992, the pool percentage will be a prime cost rate. Those rates will be converted to diminishing value rates for the purpose of making the calculation under the new law. |
| 42-380 | Meaning of opening balance | In working out the opening pool balance for the first year of the new law, the starting point will be the closing balance for the preceding year worked out under the existing law. |
Plant will include structural improvements used in relation to forest and pearling operations only if they were completed after the dates specified in the definition of plant in subsection 54(2) of the 1936 Act. [Schedule 6, Part 1: section 42-18, Transitional Provisions Act]
Commissioner's determination of effective life
Taxation Ruling IT 2685 continues under the new law as a determination of the effective life of plant. [Schedule 6, Part 1: section 42-110, Transitional Provisions Act]
The new law introduces the term quasi-owner of plant. Quasi-owners are entitled to depreciate plant they do not actually own. These rules apply to Crown lessees under the existing law that become quasi-owners under the new law.
Persons ineligible to depreciate plant under the anti-avoidance tests in section 54AA of the 1936 Act, also do not qualify as a quasi-owner. This ensures that persons not entitled to a deduction under the existing law do not become entitled inappropriately under the new law. [Schedule 6, Part 1: subsection 42-310(1), Transitional Provisions Act]
One aspect of the anti-avoidance test requires you to compare the period for which an entity has been granted use of the plant with its effective life. The definition of effective life does not apply to plant acquired before 13 March 1991. Therefore, in applying the test, you will need to work out an effective life for the plant as if the new law applied. [Schedule 6, Part 1: subsection 42-310(3), Transitional Provisions Act]
There was a requirement that plant in existence at the start of the Crown lease provisions be notionally written down before a depreciation deduction could be claimed under those provisions. The amount of that notional write down was treated as an amount deducted for depreciation. It will also be treated as an amount deducted under the new law for the purpose of working out undeducted cost . [Schedule 6, Part 1: subsection 42-175(2), Transitional Provisions Act]
Also, the new law will reduce a deduction resulting from a balancing adjustment calculation if, while you were the owner or quasi-owner of the plant, you used it for a purpose other than for producing assessable income.
That reduction is extended to any period when you were deemed to be the owner of plant under section 54AA of the 1936 Act. [Schedule 6, Part 1: section 42-195, Transitional Provisions Act]
If you have a substituted accounting period and:
- •
- you acquire a car (designed mainly for carrying passengers) during your 1997-98 income year ;
- •
- but during the 1996-97 financial year ;
then your car depreciation limit is worked out under section 57AF of the 1936 Act. [Schedule 6, Part 1: sections 42-70 and 80, Transitional Provisions Act]
The new law will adjust the termination value of a car (for balancing adjustment purposes) if the car depreciation limit applies. A transitional provision will modify that adjustment if you first used the car before 1 July 1997. [Schedule 6, Part 1: section 42-215, Transitional Provisions Act]
The existing law extends the meaning of associate for depreciation purposes so that it includes reconstituted partnerships, see subsection 54AA(7) of the 1936 Act. This extension will be preserved in the new law. [Schedule 6, Part 1: section 42-415, Transitional Provisions Act]
E. Consequential amendments
The consequential amendments, made by Parts 2, 3 and 4 of Schedule 6, apply to assessments for the 1997-98 and later income years. [clause 4 Tax Law Improvement Bill] This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the depreciation provisions.
Amendments to the Income Tax Assessment Act 1997
Part 2 of Schedule 6 to the Bill will amend the 1997 Act to take account of the rewritten depreciation provisions by:
- •
- updating depreciation references in that Act;
- •
- amending Common rules;
- •
- inserting additional definitions in the Dictionary; and
- •
- ensuring that those definitions are adopted by provisions already in the 1997 Act.
Sections 10-5 and 12-5 of the 1997 Act contain lists of all income and deduction provisions in both the 1936 and 1997 Acts. Those references will be updated so that they now refer to the rewritten depreciation provisions. [Schedule 6, Part 2: items 3 to 5]
Divisions 40 and 41 of the 1997 Act contain tables giving information on the operation of the various capital allowances. The references to depreciation in those tables have been updated so they are now references to the rewritten depreciation provisions. [Schedule 6, Part 2: items 10 to 15]
References in Division 165 (company losses) and Division 330 (mining) of the 1997 Act will also be updated so they now refer to the rewritten depreciation provisions. [Schedule 6, Part 2: items 34, 42 and 43]
Common rule 1 , dealing with roll-over relief for related entities, is contained in Division 41 of the 1997 Act. Common rule 1 will be amended so that it can also apply to the rewritten depreciation provisions. The depreciation events that give rise to roll-over relief have been added to the rule and have been tagged roll-over events . [Schedule 6, Part 2: items 16 to 29]
Also, the record-keeping provisions in the existing law that relate to roll-over relief have been added to this Common rule. [Schedule 6, Part 2: item 30]
As a result of these changes to Common rule 1, consequential amendments have been made to the mining provisions which also adopt the rule. [Schedule 6, Part 2: items 37 to 41]
Common rule 2 , dealing with non-arms length transactions, will be amended to make it clear that it only applies to those capital allowances that specifically adopt it. [Schedule 6, Part 2: items 31 to 33]
Part 2 of Schedule 6 to the Bill will insert into the Dictionary (section 995-1 of the 1997 Act) new definitions of terms used in the rewritten provisions in Division 42 in Schedule 1.
In some cases, the label used and the meaning of the definition have not changed from the existing law. The following definitions fall into this category:
- abnormal income [Schedule 6, Part 2: item 45]
- closing balance [Schedule 6, Part 2: item 50]
- effective life [Schedule 6, Part 2: item 53]
- notional income [Schedule 6, Part 2: item 56]
- opening balance [Schedule 6, Part 2: item 58]
- pool [Schedule 6, Part 2: item 60]
Definitions that have changed from the existing law and new defined terms are explained below.
New Definition Artwork [Schedule 6, Part 2: item 46]
Commentary This is the new label for the term eligible artwork which is defined in subsection 55(9) of the 1936 Act. The concept is unchanged.
New Definition Associated government entity [Schedule 6, Part 2: item 47]
Commentary This is the new label for the concepts contained in subsection 54AA(6) of the 1936 Act. The concepts are unchanged.
New Definition Balancing adjustment event [Schedule 6, Part 2: item 48]
Commentary This new term describes all of the circumstances which give rise to the requirement to make a balancing adjustment calculation.
New Definition Car depreciation limit [Schedule 6, Part 2: item 49]
Commentary The car depreciation limit is a ceiling on the cost of passenger carrying cars for calculating depreciation. In the existing law, this ceiling is called the motor vehicle depreciation limit. In the new law, it will be called the car depreciation limit to complement the standardisation of those terms proposed by the 1997 Act.
New Definition Cost [Schedule 5, Part 2: item 26]
Commentary All of the provisions which affect the cost of plant for depreciation will be brought together in the table in section 42-65. Changes are discussed in Part B of this chapter.
New Definition Diminishing value method [Schedule 6, Part 2: item 51]
Commentary This new term applies a label to the method of calculating a depreciation deduction contained in paragraph 56(1)(a) of the 1936 Act.
New Definition Diminishing value rate [Schedule 6, Part 2: item 52]
Commentary This new term describes the rates which are used under the diminishing value method. In the existing law, they are referred to as annual depreciation percentages.
New Definition Installed ready for use [Schedule 6, Part 2: item 54]
Commentary This new term will mean installed ready for use and held in reserve and will save repeating this lengthy expression many times in the rewritten provisions. Plant that is installed ready for use can attract depreciation deductions.
New Definition Notional depreciation amount [Schedule 6, Part 2: item 55]
Commentary Your written down value is reduced by this amount for the purpose of calculating a balancing adjustment for certain cars. It refers to the amount that could have been deducted for depreciation of the car had you not been using the cents per kilometre or 12% of original value method for calculating your car expenses.
This concept is contained in the existing law but is not labelled.
New Definition Notional written down value [Schedule 6, Part 2: item 57]
Commentary This is what you have left after reducing your written down value by the notional depreciation amount. This amount is then compared with your termination value for the purpose of calculating balancing adjustments for some cars. In the existing law, this concept is referred to as the notional amount. The new law changes the label but not the concept.
New Definition Plant [Schedule 6, Part 2: item 59]
Commentary Plant is defined in the 1997 Act to mean plant or articles within the meaning of section 54 of the 1936 Act. This definition will be repealed and replaced with a definition that is very similar to section 54. There will be 2 changes:
- •
- plant will now include articles to save repeating the cumbersome expression plant or articles many times; and
- •
- 'implements and utensils" will be replaced by the expression 'tools'.
- •
- The inclusion of articles within the definition of plant is not intended in any way to limit the interpretation of the word 'articles'.
As a result of replacing the 1997 Act definition, the reference to plant in paragraph 330-95(1)(a) of that Act (expenditure that is not allowable capital expenditure for mining) has been updated to include a reference to plant within the meaning of Division 42. [Schedule 6, Part 2: item 36]
New Definition Prime cost method [Schedule 6, Part 2: item 61]
Commentary This new term applies a label to the straight line method of calculating a depreciation deduction contained in paragraph 56(1)(b) of the 1936 Act.
New Definition Prime cost rate [Schedule 6, Part 2: item 62]
Commentary This new term describes the rates which are used under the prime cost method. In the existing law, the rates are expressed as diminishing value percentages. If the prime cost method is used, a conversion is required. In the new law that conversion has been done and the prime cost rates have been inserted beside their diminishing value equivalent.
New Definition Quasi-owner [Schedule 6, Part 2: item 63]
Commentary This new term will describe persons who may be entitled to depreciate plant even though they do not actually own it. It has been used to avoid the device of deeming those persons to be owners.
Persons who hold certain rights over land to which plant is attached will be quasi-owners. They are referred to in the existing law as Crown lessees.
New Definition Roll-over event [Schedule 6, Part 2: item 64]
Commentary This new term will describe the events which will attract the roll-over relief contained in Common rule 1 in Division 41 of the 1997 Act. Roll-over relief will apply if:
- •
- there is a disposal that attracts one of the listed forms of CGT roll-over relief; or
- •
- the parties make a joint election for it under the partial change of ownership rules.
Roll-over relief removes the requirement to make a balancing adjustment calculation.
New Definition Termination value [Schedule 6, Part 2: item 65]
Commentary The existing law equivalent of this term is consideration receivable. It is the value of plant at the time of a balancing adjustment event and is the basis of the balancing adjustment calculation. All termination values will be brought together in a table in section 42-205. Changes are discussed in Part B of this chapter.
New Definition Undeducted cost [Schedule 6, Part 2: item 66]
Commentary The existing law equivalent of this term is the concept of notional depreciated value. Undeducted cost is the amount you have left to deduct. It is your cost less the sum of:
- •
- any amounts you have deducted;
- •
- any amounts you cannot deduct because you used the plant otherwise than to produce assessable income; and
- •
- any amounts you cannot deduct because another provision of the Act denied you a deduction (eg. plant used for leisure facilities).
This means that taxpayers must notionally write down their plant during any period it is used for a purpose other than producing assessable income.
New Definition Written down value [Schedule 6, Part 2: item 67]
Commentary The existing law equivalent of this term is the concept of actual depreciated value. It will mean your cost less any amounts you have deducted for depreciation. It is relevant to calculating balancing adjustments.
New Dictionary terms adopted by the 1997 Act
The new Dictionary definitions inserted as a result of the depreciation rewrite will also be adopted by any provisions of the 1997 Act that also use those terms.
References in Division 28 (car expenses) to the disposal, loss or destruction of a car will become references to the definition of balancing adjustment event inserted by this Act. [Schedule 6, Part 2: items 6 and 9]
The reference in Division 28 (car expenses) to the motor vehicle depreciation limit will become a reference to the definition of car depreciation limit inserted by this Act. [Schedule 6, Part 2: items 7 to 8]
References in Divisions 330 (mining) and 900 (substantiation) to installed ready for use and held in reserve will become references to the definition of installed ready for use inserted by this Act. [Schedule 6, Part 2: items 36 and 44]
Amendments to the Income Tax Assessment Act 1936
Part 3 of Schedule 6 to the Bill will amend the 1936 Act to:
- •
- close off the application of the provisions of the 1936 Act that have been rewritten in Division 42 in Schedule 1; and
- •
- insert references to those rewritten provisions where the 1936 Act currently refers to the existing provisions.
Closing off the old depreciation provisions
Part 3 of Schedule 6 will insert a provision into the 1936 Act that will close off the application of existing provisions that have been rewritten or are redundant. [Schedule 6, Part 3: item 69]
Because taxpayers will be required to depreciate plant using the rewritten law from the 1997-98 income year, the existing depreciation provisions will only apply to the 1996-97 and earlier income years.
There will be one exception. The old depreciation provisions will have continuing effect for Australian trading ships because the provisions dealing with those ships have not been rewritten due to their limited ongoing application (they will only apply to ships that are delivered before 1 July 1997).
Also, the provisions in the existing law about the giving of roll-over relief notices will cease to apply because they have been rewritten as part of Common rule 1. [Schedule 6, Part 3: item 123]
Inserting references to rewritten provisions
Part 3 of Schedule 6 will insert, in the 1936 Act, references to the rewritten provisions contained in Division 42 where the 1936 Act currently refers to the existing provisions. Amendments will only be made to provisions of the 1936 Act that have not been rewritten and closed off. There are two categories of amendment as discussed below.
The first category will add a reference to a rewritten provision, so that both the existing and rewritten provisions are referred to, in a section of the 1936 Act that currently only refers to the existing provisions. This will occur where the section of the 1936 Act that contains the reference:
- •
- applies to the continuing aspect of the existing provisions (to do with Australian trading ships); and/or
- •
- applies to amounts deducted for depreciation for income years occurring both before and after the commencement of the rewritten provisions. [Schedule 6, Part 3: items 68, 72 to 74, 83 to 99, 101 to 105, 119, 121 to 122, 124 to 127, 131 to 132]
In all other cases, the amendment will omit the reference to the existing provision in a section of the 1936 Act and replace it with the rewritten provision. [Schedule 6, Part 3: items 70 to 71,75 to 82, 100, 106 to 118, 120, 128 to 130]
Amendments of other Commonwealth legislation
Part 4 of Schedule 6 to the Bill will add references to the rewritten depreciation provisions in the following Commonwealth Acts:
| Commonwealth Act | Amended by |
|---|---|
| Bounty and Capitalisation Grants (Textile Yarns) Act 1981 | Schedule 6, Part 4: item 133 |
| Income Tax Rates Act 1986 | Schedule 6, Part 4: items 134 to 137 |
| Sales Tax Assessment Act 1992 | Schedule 6, Part 4: item 138 |
| Social Security Act 1991 | Schedule 6, Part 4: items 138 to 140 |
| Student and Youth Assistance Act 1973 | Schedule 6, Part 4: item 141 |
| Veterans Entitlements Act 1986 | Schedule 6, Part 4: items 142 to 143 |
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