House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 3 - Effect of bankruptcy on carrying forward tax offsets

Overview

Purpose of the amendments

3.1 The proposed amendments seek to achieve greater consistency of taxation treatment between those taxpayers who claim tax offset and those who claim a deduction for capital expenditure in cases of bankruptcy.

Background to the legislation

3.2 The Bill implements the Governments commitment outlined in the document, Reviving the Heartland , to 'give farmers a choice between accelerated deductions for Landcare works under Subdivisions 387-A and 387-B of the 1997 Act or a tax rebate/credit set at the marginal tax rate of 34 cents in the dollar for qualifying expenditure'.

3.3 On 1 July 1997, the Minister for Primary Industries and Energy announced that there would be a tax incentive for landcare in the form a carry forward rebate for capital expenditure incurred under Subdivisions 387-A and 387-B of the 1997 Act. The Treasurer and the Minister for Primary Industries and Energy provided further details in their 12 May 1998 announcement.

3.4 If you claim a deduction under either Subdivision 387-A or 387-B and do not have sufficient income with which to absorb those deductions, the amounts of any unabsorbed deduction will be carried forward as a loss. However, if you are declared bankrupt and you have carry forward losses from income years prior to your bankruptcy declaration, you cannot apply those carry forward losses in an income year in which your bankruptcy was annulled. The proposed amendments seek to put taxpayers who claim the landcare and water facility tax offset and become bankrupt in the same position as those who claim the deductions and become bankrupt.

Explanation of the amendments

Bankruptcy

3.5 Item 1 proposes to insert new sections 65-50 and 65-55 . The first of these sections prevents a taxpayer who has been declared a bankrupt from applying any carry forward rebate amounts from an earlier income year. You cannot apply your unused rebate amounts even if your bankruptcy is annulled.

3.6 If, in the current year, you pay an amount for a debt incurred in an earlier income year, you can claim as a deduction for that amount so much of the amount that was taken into account in calculating the rebate. The amount that you can deduct cannot exceed the amount of your deductions for earlier debts and the expenditure that was taken into account in calculating the rebate and would have been applied in reducing your net exempt income for the current year or earlier year. [New section 65-55]

3.7 These provisions are comparable with those that would apply had you claimed the alternative deductions. Then any unused deductions would produce carry forward losses, which are subject to the same restrictions in the event of your bankruptcy.

Application provision

3.8 Item 2 seeks to insert the application provision for the amendments contained in Item 1 of Schedule 4. The tax offset alternative will apply to assessments for the 1997-98 income year and later income years. Paragraph 388-55(2)(b) of the Income Tax Assessment Act 1997 ensures that expenditure for which the tax offset alternative is available must be incurred before the end of the 2000-01 income year. Where that expenditure is on water facilities, related tax offsets may therefore be first claimed as late as the 2002-03 income year.