Senate

Revised Explanatory Memorandum

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

Chapter 1 - Spectrum licences

Overview

1.1 New Division 380 will be inserted into the Income Tax Assessment Act 1997 (ITAA 1997). New Division 380 will:

•

allow taxpayers to write off expenditure incurred in acquiring a domestic spectrum licence that is to be used for the purpose of producing assessable income over the effective life of the licence (up to 15 years); and

•

the write off will only be available to taxpayers who have acquired the spectrum licence pursuant to the Radiocommunications Act 1992 (RCA).

Summary of the amendments

Purpose of the amendments

1.2 New Subdivision 380-A will contain rules to enable taxpayers to:

•

calculate the amount of expenditure incurred in the acquisition of a spectrum licence;

•

calculate the amount of the unrecouped expenditure on which any deduction is based; and

•

determine when a deduction for the expenditure is available and calculate the amount of that deduction.

1.3 New Subdivision 380-B will allow taxpayers who partially realise a spectrum licence to calculate the amount by which the unrecouped expenditure and future deductions are to be reduced.

1.4 New Subdivision 380-C will contain rules to deal with situations where all or part of a taxpayers old spectrum licence is replaced by another spectrum licence. The rules will allow taxpayers to calculate:

•

the amount to be deducted in respect of the old spectrum licence; or

•

the amount that is to be included in assessable income.

In addition, new Subdivision 380-C will allow taxpayers to determine the amount of any unrecouped expenditure referable to the old licence.

1.5 New Subdivision 380-D will contain rules to enable taxpayers to:

•

determine the circumstances when a balancing adjustment is required;

•

calculate the termination value of a spectrum licence; and

•

effect any required balancing adjustment.

1.6 New Subdivision 380-E will provide guidance to taxpayers regarding the application of the Common rules to expenditure incurred in acquiring a spectrum licence.

1.7 New Subdivision 380-F will contain rules to enable taxpayers to determine:

•

the new unrecouped expenditure amount as a result of a current spectrum licence being varied to increase the spectrum available under the licence;

•

the adjusted amount of expenditure incurred in a non-arms length acquisition of a spectrum licence; and

•

the amount of expenditure applicable to the acquisition of part of a spectrum licence as the result of an assignment for no consideration.

1.8 Part 2 of Schedule 1 contains technical amendments to the ITAA 1997 and the Income Tax Assessment Act 1936 (ITAA 1936) that are consequential upon the enactment of new Division 380 .

1.9 Part 3 of Schedule 1 contains amendments to the International Tax Agreements Act 1953 toensure that Australia is able to collect tax on non-residents using spectrum.

Date of effect

1.10 The proposed amendments to create a capital allowance for expenditure incurred in acquiring a domestic spectrum licence will apply to all spectrum licences obtained from 11 March 1998. [Item 36]

Background to the legislation

1.11 A spectrum licence is issued by the Australian Communication Authority (ACA) pursuant to the RCA for a period of up to 15 years. Spectrum licences allow a greater degree of flexibility for the licence holder than apparatus licences, which are issued specific to the particular device which uses the transmission frequency.

1.12 Spectrum licences allow the licence holder access to specified parts of the radio frequency spectrum in order to provide telecommunications services such as mobile telephone services. Since the Governments announcement there have been spectrum auctions which have resulted in a number of licences being issued in the 800 MHz and 1.8GHz bandwidths. Auctions in other bandwidths are either underway or planned.

1.13 Expenditure incurred in the acquisition of a spectrum licence is viewed as generally being on capital account. As the law stood prior to these amendments, no taxation relief was available by way of amortisation or as an outright deduction under the income tax law. The only relief available to spectrum licence holders would have been under the capital gains tax provisions, by way of the realisation of a capital loss at the time of expiration, or disposal, of the licence. The capital loss would have been available to be offset against capital gains of that year or subsequent years.

1.14 The Government announced on 11 March 1998 that expenditure incurred in the acquisition of a domestic spectrum licence should be written off over the effective life of that licence (Treasurers Press Release No. 26 of 11 March 1998).

Explanation of the amendments

1.15 This Bill will introduce new Division 380 into the ITAA 1997 and make other consequential amendments to the ITAA 1997, ITAA 1936 and the International Tax Agreements Act 1953 .

1.16 New Division 380 has the following Subdivisions:

•

New Subdivision 380-A Deductions for capital expenditure on spectrum licences.

•

New Subdivision 380-B Partial realisation of spectrum licences.

•

New Subdivision 380-C Replacement of spectrum licences.

•

New Subdivision 380-D Balancing adjustments.

•

New Subdivision 380-E Application of the Common rules.

•

New Subdivision 380-F Adjustments affecting your deductions under this Division.

Deductions for capital expenditure on spectrum licences (Subdivision 380-A)

Expenditure incurred in the acquisition of a spectrum licence

1.17 New section 380-25 contains a table which sets out ways in which a spectrum licence can be acquired and the basis upon which the cost of acquisition is to be calculated. The section also ensures that no double deduction is available for an amount that has been deducted or can be deducted in respect of another spectrum licence (new paragraph 380-25(2)(a)) or under another Division of the ITAA 1997. [New paragraph 380-25(2)(b)]

1.18 The rules relating to trading in spectrum licences, contained in section 85 of the RCA, allow the licencee of a spectrum licence to assign, or otherwise deal with, the whole or part of the licence. However, the transfer of a licence, or part of a licence, under the RCA can only be effected by assignment. In this context assignment is considered to encompass the transfer of ownership of a licence by sale, swap or by any other means.

1.19 Expenditure incurred in acquiring a spectrum licence would include costs of acquisition such as the spectrum access charge but would not include costs incurred on spectrum auction application fees and withdrawal penalties. It is considered that expenditure incurred on the auction application fees and withdrawal penalties is referable to the auction process rather than the acquisition of a spectrum licence.

What is unrecouped expenditure and how is the unrecouped expenditure amount to be calculated?

1.20 Broadly, the unrecouped expenditure for a spectrum licence is the expenditure incurred in obtaining the licence (new section 380-25) reduced by the sum of any amounts that the taxpayer has been allowed to write off in respect of the licence.

1.21 However, unrecouped expenditure does not only reduce in value, it may also increase in value in certain circumstances. For example, if additional spectrum is acquired and added to an existing spectrum licence the cost of acquiring that additional spectrum would be reflected in an increased unrecouped expenditure value for the existing licence.

1.22 A table in new subsection 380-20(3) lists events, such as a partial realisation of the licence or the replacement of a licence, that impact upon the calculation of the unrecouped expenditure. For example, the RCA (section 85) provides for trading in spectrum licences. Where part of a spectrum licence is assigned to another party, the ACA may issue a new licence which reflects the reduced spectrum. This may have the effect of reducing unrecouped expenditure ( new Subdivision 380-C deals with all replacement cases).

When is a deduction available under the Subdivision?

1.23 The general rule for determining when a deduction for expenditure incurred in acquiring a spectrum licence is available is that if at the end of the year of income a spectrum licence was held and had been used in that year for the purpose of producing assessable income a deduction will be available. [New section 380-10]

1.24 However, a deduction will not be available under new section 380-10 in circumstances where the spectrum licence is no longer held because it has been replaced by another licence or if a balancing event occurred. [New subsection 380-10(2)]

1.25 New section 380-10 contains notes which direct taxpayers to other Subdivisions which may have to be considered when calculating a deduction under the section.

How to calculate the amount of the deduction

1.26 New section 380-15 contains a table detailing the steps necessary to calculate the amount of the deduction that will be available in the current year.

Example 1

On 1 January 1999 GHDC Pty Ltd obtains an original spectrum licence over three geographical areas for $800, being the spectrum access charge, through an ACA auction process. It is able to use it immediately from date of issue for the purpose of producing assessable income. Other costs such as the application fee and withdrawal penalties incurred in participating in the auction process are not be considered expenditure in obtaining a licence. GHDC Pty Ltd holds the licence for its full effective life and it expires 7 years from date of issue.

The licence looks like this:

1

2

3

4

(each segment representing a discrete, tradeable, part of the licence)

How to calculate the deductible amount in any given year:

1. Calculate deductions in Years 1 to 7

Go to new Subdivision 380-A

GHDC Pty Ltd can claim an annual deduction under new subsection 380-10(1) until disqualified under new subsection 380-10(2) . To work out the amount GHDC Pty Ltd can deduct, it must first work out its expenditure in obtaining the licence under new section 380-25 . In this instance, the last applicable case in the table is Case 1 which specifies that the expenditure is the capital expenditure GHDC Pty Ltd incurred in obtaining the licence, in this case $800.

GHDC Pty Ltd then ascertains its unrecouped expenditure on its spectrum licence under new section 380-20 . GHDC Pty Ltd can then use this amount in the formula specified under new section 380-15 . The unrecouped expenditure is also $800 as there is no reduction applicable.

The following table calculates the annual deductions for this example. The amount deductible each year is shown in the column under Step 4 .

Note: the expiration of the licence is a balancing adjustment event under new subsection 380-85(3) which triggers the disqualification in new subsection 380-10(2). Whilst no deduction is available in the year of the balancing adjustment event under new section 380-10 , an amount may be deductible under new Subdivision 380-D .

2. Calculate deduction in Year 8

Go to new Subdivision 380-D

A balancing adjustment is required if GHDC Pty Ltd has incurred expenditure on a spectrum licence and has used it to produce assessable income and a balancing adjustment event occurs in the current year at a time when it holds the licence (see new subsection 380-80(1) ). Referring to the table in new subsection 380-80(3) , the expiration of the licence is a balancing adjustment event ( Item 2 ). To calculate whether a deduction may be available under this Subdivision the following steps are to be followed:

Compare the spectrum licence's termination value and the unrecouped expenditure on the licence just before the balancing adjustment event (refer new subsection 380-85(1) ).

A spectrum licence's termination value is worked out by reference to the case table in new subsection 380-90(1). In this instance, the expiration of the licence is Case 5 which says that the termination value is a nil amount.

In this instance, the unrecouped expenditure on the licence just before the balancing adjustment event is $107.22 (refer Table 1).

Does the termination value exceed the unrecouped expenditure on the licence?

In this instance, the answer is no because termination value = 0 and unrecouped expenditure = $107.22.

Where termination value does not exceed the unrecouped expenditure and the licence was used for the purpose of producing assessable income during the current income year, then you can deduct the amount worked out by multiplying:

•

the unrecouped expenditure; and

•

the proportion of the total number of days in the current year before the balancing adjustment event on which the spectrum licence was used for the purpose of producing assessable income (new subsection 380-85(3)).

The unrecouped expenditure is $107.22.

The total days in the current year before the balancing adjustment event is 184 days.

The total days the licence was used for the purpose of producing assessable income is 184 days.

Thus, the proportion is calculated as 184/184 = 1

In this instance, multiplying the unrecouped expenditure by the proportion = $107.22 x 1 = $107.22

The amount that GHDC Pty Ltd can deduct under this Subdivision in the final year is $107.22.

Note: The expenditure incurred in obtaining the licence is fully recouped over its 7 year period but over 8 income years in this instance.

End of Example 1

Partial realisation of spectrum licences (Subdivision 380-B)

1.26 An objective of the ACAs spectrum licencing process is to allow the market to play a part in the allocation of spectrum between users, not only in the auction process, but also by a legislative environment that allows for a secondary market in spectrum licences . It is envisaged that licensees will be able to trade licences, or parts of licences, provided that they follow the rules about trading which are found in sections 85 to 88 of the RCA. The RCA defines part of a licence to include both geographic area and radiofrequency (section 5, RCA).

1.27 Taxpayers are able to acquire licences or parts of licences from each other in the market place and aggregate them to form licences covering, for example, a larger area or more bandwidth. Licencees are also capable of dividing their licences into smaller parts and disposing of any or all of these parts.

1.28 It is the segmentation of a spectrum licence into smaller parts and the disposal of the resultant surplus spectrum which gives rise to a partial realisation for the purposes of this Subdivision.

What is the amount arising from a partial realisation?

1.29 The rules relating to the calculation of the amountarising from a partial realisation of the spectrum licence are contained in new section 380-35. The amount arising may be calculated differently depending on how the partial realisation was effected.

1.30 The table in new section 380-35 details those events that represent a partial realisation and specifies the basis of calculation of the amount arising from each of the events.

1.31 When part of the spectrum in a licence is sold, the ACA may vary the existing licence to reflect only part of the remaining spectrum and issue a new licence to represent the remaining portion of the spectrum that had been included in the original licence. For example, a taxpayer may hold a licence which represents the spectrum specified for Areas 1, 2 and 3 and it assigns the spectrum in Area 2. The ACA varies the original licence to reflect only Area 1 and issues a new licence to the taxpayer to reflect Area 3. In such a situation, the new licence is not dealt with under this Subdivision, but rather under new Subdivision 380-C (which deals exclusively with replacement cases). [New subsection 380-35(2)]

1.32 If a partial realisation results in amounts being treated as ordinary income, the amount arising from the partial realisation would not include any of these amounts. [New subsection 380-35(4)] Ordinary income may arise in circumstances where, for example, an entity traded in spectrum in the ordinary course of its business.

The effect of a partial realisation

1.33 The effect of a partial realisation of a spectrum licence is determined by the comparison of the amount arising from the partial realisation with the unrecouped expenditure on the spectrum licence just before the partial realisation occurred. [New section 380-40]

1.34 If the amount arising does not exceed the unrecouped expenditure for the spectrum licence, then the unrecouped expenditure is reduced by the amount arising from the partial realisation of the licence. [New subsection 380-40(2)]

1.35 If the amount arising from the partial realisation exceeds the unrecouped expenditure for the spectrum licence, the excess amount is included in assessable income in the year of income that the partial realisation occurred. This necessarily means that the unrecouped expenditure is reduced to nil. [New subsection 380-40(3)]

1.36 The amount to be included in assessable income cannot exceed the total amount deducted for the spectrum licence in current and prior years under this Division less any amounts that have previously been included in assessable income in respect of the spectrum licence. [New subsection 380-40(4)]

1.37 However, some amount of this excess may need to be included in assessable income through the operation of the capital gains provisions.

Example 2

In Year 2 GHDC Pty Ltd determines that it no longer requires part of the spectrum in its existing licence area. It sells the spectrum for Area 1 in the secondary market for $300 and its existing licence is varied by the ACA to reflect the new holding. The part was sold on 10 April 2000. There were no other costs associated with this acquisition or licence variation.

The licence now looks like this:

2

3

4

How to take this realisation into account when calculating the deductible amount for this and subsequent years:

Go to new Subdivision 380-A

To ascertain the amount that GHDC Pty Ltd can deduct for Income year 2, it must first work out its unrecouped expenditure immediately after the end of Income year 1 but before the transaction: see new subsection 380-20(2). By referring to the table in Example 1 it is calculated to be $750.42.

It is then necessary to check the table in new subsection 380-20(3) to determine the effect of the realisation. Item 1 of the table applies as there has been a partial realisation of the licence to reduce the spectrum holding. The table refers GHDC Pty Ltd to new Subdivision 380-B to work out the effect of the realisation.

Go to new Subdivision 380-B

GHDC Pty Ltd is referred to the table in new section 380-35 to ascertain the last applicable event. In this case it is Item 1 that applies to GHDC Pty Ltd's transaction. The table also determines that the amount arising for this type of event is the amount paid to GHDC Pty Ltd for that part sold, that is, $300.

Having ascertained that the amount arising from the transaction is $300 and that the unrecouped expenditure is $750.42, the Subdivision requires GHDC Pty Ltd to compare the two amounts. [New subsection 380-40(1)]

Does the amount arising exceed the unrecouped expenditure?

As it does not, the unrecouped expenditure is reduced by the amount arising at the time of the partial realisation. The new unrecouped expenditure balance for the purpose of new Subdivision 380-A is now $450.42.

Go to new Subdivision 380-A

Using the new unrecouped expenditure balance in Table 2 below, the amount that GHDC Pty Ltd can deduct for Income year 2 is now $64.35.

End of Example 2

Replacement of spectrum licences (Subdivision 380-C)

1.38 The ACA has the authority to vary existing spectrum licences, or to issue one or more new licences, to give effect to an assignment of part of a licence, under Division 5 of Part 3.2 of the RCA, or the partial resumption of a licence under Division 6 of Part 3.2 of that RCA.

1.39 Where part of the spectrum covered by a licence is assigned to a third party, the ACA may:

•

vary the original licence by reducing the spectrum specified in the licence; or

•

vary the original licence to reflect part of the remaining spectrum and issue one or more new licences (to the same entity) to reflect the remaining spectrum; or

•

issue a completely new licence which reflects all of the reduced spectrum.

What constitutes a replacement in this Subdivision?

1.40 A spectrum licence is considered to have been replaced for the purposes of this Subdivision when some or all of an existing licence is replaced in the year of income by another licence and all the requirements of new subsection 380-55(2) are met .

1.41 The first requirement is satisfied if a spectrum licence is partly assigned or resumed under the RCA. [New paragraph 380-55(2)(a)] For example, a licence may specify several geographic areas of spectrum and one of those areas is assigned to a third party.

1.42 The second requirement is satisfied if at least some of the remaining areas of spectrum are the subject of a new licence held by the taxpayer who held the original licence. [New paragraph 380-55(2)(b)]

1.43 The third requirement is that, in the interim between the assignment and the issue of the new licence, the spectrum specified in the new licence has not been the subject of another licence. [New paragraph 380-55(2)(c)] For example, a taxpayer may hold Licence A which represents the spectrum specified for Areas 1, 2 and 3, and Licence B which specifies Areas 4 and 5. It assigns the spectrum for Area 2. The ACA varies Licence A to reflect only Area 1 and varies Licence B to incorporate Area 3. The taxpayer then sells the Area 4 spectrum and the ACA issues a varied Licence B to reflect only Area 5 and a new licence to reflect spectrum Area 3. In this instance the new licence to reflect spectrum Area 3 would be a replacement licence for Licence B and not Licence A.

1.44 The fourth requirement is that the old licence must have been used at some stage for producing assessable income. [New paragraph 380-55(2)(d)]

How is the amount arising from a replacement to be calculated?

1.45 The rules relating to the calculation of the amount arising from a replacement of a spectrum licence are contained within new section 380-60. The amount arising may be calculated differently depending on how the replacement was affected.

1.46 In the case of an assignment under Division 5 of Part 3.2 of the RCA, the table included in new section 380-60 provides guidance to taxpayers in calculating the amount arising in various circumstances.

1.47 However, in the situation where part of a licence is resumed, under Division 6 of Part 3.2 of the RCA, the amount arising is the amount of compensation paid under section 93 of the RCA. [New subsection 380-60(1)]

1.48 To avoid double taxation, the amount arising in either case is not to include any amount that represents ordinary income. [New subsection 380-60(3)]

What is the effect if the amount arising does not exceed the unrecouped expenditure on the licence?

1.49 Firstly, the unrecouped expenditure on the old spectrum licence is reduced by the amount arising from the resumption or assignment of some or all of the old licence. [New subsection 380-65(2)]

1.50 The ACA may vary an original licence and issue a new licence to the same licencee with the remaining spectrum split between the original and the new licences. In these circumstances the remaining unrecouped expenditure on the original licence must be apportioned between the various licences. This apportionment must be done on a reasonable basis. [New subsection 380-65(3)]

1.51 Where the old spectrum licence is retained, its remaining unrecouped expenditure must be further reduced by the amount of the unrecouped expenditure that is attributable to the new licence. [New subsection 380-65(4)]

1.52 Regardless of whether or not a taxpayer retains the old spectrum licence subsequent to the replacement taking effect, and providing that the old licence was used for the purpose of producing assessable income prior to the replacement, a deduction will still be available. New section 380-65 contains a table which details the steps necessary to calculate the amount of any deduction.

1.53 If, however, the taxpayer did not continue to hold the old licence after the replacement was effected the unrecouped expenditure of the old licence is reduced to nil ensuring that no further deductions will be allowed for the old licence. [New subsection 380-65(5)]

What happens if the amount arising exceeds the unrecouped expenditure on the licence?

1.54 If the amount arising from the replacement exceeds the unrecouped expenditure on the old spectrum licence, the unrecouped expenditure is reduced to nil. The excess of the amount arising over the unrecouped expenditure is to be included in assessable income in the year that the replacement occurred.

1.55 The amount to be included in assessable income cannot exceed the total amount deducted in respect of the spectrum licence in the current and prior years under this Division less any amounts already included in assessable income in respect of the old spectrum licence. [New subsection 380-70(3)]

1.56 However, some amount of this excess may need to be included in assessable income through the operation of the capital gains provisions.

Example 3

In year 3 the ACA makes a decision to resume part of GHDC Pty Ltd's spectrum in its existing licence area. In particular, it resumes the part represented by Area 3 in the licence. By way of compensation for the resumed part, the ACA pay an amount of $265 comprising compensation ($250) and interest ($15). As the remaining spectrum held by GHDC Pty Ltd are no longer adjacent parts, the ACA decides to vary the existing licence to reflect Area 2 and issues a new licence for Area 4. The resumption took place on 1 February 2001. There were no other costs associated with this acquisition or licence variation.

The old and new licences held look like this:

2

4

How to take this resumption into account when calculating the deductible amount for this and subsequent years for both licences:

Go to new Subdivision 380-A

GHDC Pty Ltd can claim an annual deduction under new subsection 380-10(1) until disqualified under new subsection 380-10(2). To ascertain the amount GHDC Pty Ltd can deduct, it must first work out its expenditure in obtaining the licence under new section 380-25. GHDC Pty Ltd then ascertains its unrecouped expenditure on its spectrum licence under new section 380-20 .

GHDC Pty Ltd can then use this amount to use in the formula specified under new section 380-15. GHDC Pty Ltd was issued with a new spectrum licence that replaces part of the old spectrum licence area at the time of the resumption. Item 3 of the table in new section 380-25 specifies that the expenditure in this instance is the sum of the capital expenditure (if any) incurred by GHDC Pty Ltd in obtaining the new spectrum licence together with any amount worked out under new subsection 380-65(3) less any amount deductible under new subsection 380-65(6) in respect of the area of the old licence now covered by the new licence.

To work out this amount it is necessary to first determine the effect of the resumption on the old licence. An annual deduction may also be available in respect of the old licence that is still retained.

To ascertain the amount that GHDC Pty Ltd can deduct for Income year 3, it must first work out its unrecouped expenditure immediately after the end of Income year 2 but before the transaction: see new subsection 380-20(2). By referring to the table in Example 2, this is calculated to be $386.07. It is then necessary to check the table in new subsection 380-20(3) to determine the effect of the resumption. Item 2 of the table applies as there has been a replacement of some part of the licence with a new licence. The table refers GHDC Pty Ltd to new Subdivision 380-C to work out the effect of the resumption.

Go to new Subdivision 380-C

New section 380-55 confirms that the Subdivision is to apply to the transaction. As the transaction is a resumption by the ACA of part of the old licence, new subsection 380-60(1) says that the amount arising from the transaction is the amount of compensation paid by it under Section 93 of the Radiocommunications Act 1992. In this case GHDC Pty Ltd received an amount of $265 from the ACA in respect of the resumption. As the amount received by GHDC Pty Ltd includes an interest component that would be considered ordinary income, new subsection 380-60(3) excludes this amount from the amount arising.

GHDC Pty Ltd is then required to compare the amount arising with the unrecouped expenditure just prior to the resumption. In this case the amount arising is $250 and the unrecouped expenditure is $386.07. As the amount arising does not exceed the unrecouped expenditure, then the unrecouped expenditure is reduced by the amount arising. [New subsection 380-65(2)] The unrecouped expenditure on the old licence is now $136.07 ($386.07 - $250).

GHDC Pty Ltd is then required to apportion this result between the old licence and the new licence on a reasonably attributable basis under new subsection 380-65(3) . In this instance, GHDC Pty Ltd determines that all parts of the original licence had an equal value. Accordingly, the unrecouped expenditure is attributable to the new licence is $68.03 (ie, $136.07 divided by 2 = $68.03). GHDC Pty Ltd is then directed to Subdivision 380-A in order to calculate the deduction in respect of the new licence.

The unrecouped expenditure in respect of the old licence is reduced by the amount attributed to the new licence (ie. $136.07 - $68.03 = $68.04): new subsection 380-65(4) . Therefore the unrecouped expenditure amount to be used for the purpose of calculating a deduction in respect of the old licence for the current year is now $68.04.

As the old licence is still on hand at the end of the income year, GHDC Pty Ltd can claim a deduction for the days used in the period immediately before the replacement event in respect of that part of the licence replaced by the new licence. [New subsection 380-65(6)]

Using the formula therein:

Step 1 : $68.03 divided by 6 = $11.34

Step 2 : 216 days being the period 1/07/2000 to 1/02/2001

Step 3 : 216 days divided by 365 days = 0.59

Step 4 : $11.34 x 0.59 = $6.68

This amount can be deducted by GHDC Pty Ltd in addition to the amounts it can deduct under new Subdivision 380-A .

Go to new Subdivision 380-A

Using the new unrecouped expenditure balance in Table 3(a) below, the amount that GHDC Pty Ltd can deduct for the old licence for Income year 3 is now $11.34.

In respect of the new licence, Table 3(b) below calculates the annual deductions using the reasonably attributed amount determined earlier for that amount representing the expenditure on the new licence. The expenditure on the new licence according to Case 3 in the table at new section 380-25 will be $61.35 (ie. $0 + $68.03 - $6.68). Therefore, the amount that GHDC Pty Ltd can deduct for the new licence for Income year 3 is now $4.19.

End of Example 3

Balancing adjustments (Subdivision 380-D)

1.57 Generally, a balancing adjustment event occurs when an item is either disposed of, ceases to exist or is subject to a partial change of ownership. This is the situation with spectrum licences and a table has been provided in new subsection 380-80(3) detailing three circumstances that represent balancing adjustment events for spectrum licences.

When is a balancing adjustment required?

1.58 A balancing adjustment is required if expenditure has been incurred in acquiring a spectrum licence which has been used for the purpose of producing assessable income and a balancing adjustment event occurs at a time when the taxpayer still retains the spectrum licence.

1.59 However, balancing adjustments are not required in all circumstances. For example, a balancing adjustment is not required where some or all of a spectrum licence is replaced by another licence which is held by the same taxpayer immediately after its replacement. [New subsection 380-80(2)] New Subdivision 380-C applies in these circumstances and deals with all replacement cases.

1.60 Also, a balancing adjustment is not required if roll-over relief is available under Common rule 1. [New subsection 380-80(2)]

How is the termination value to be determined?

1.61 Generally the termination value of an item is its sale price less the expenses attributable to the sale. However, other termination values may be applied if an item is disposed of other than by sale.

1.62 The rules relating to the calculation of the termination value of a spectrum licence are contained in new section 380-90 .

1.63 The termination value is to be calculated differently depending upon the particular situation. For example, if a spectrum licence is assigned, its termination value is the consideration received less any expenses reasonably attributable to its disposal. However, where a spectrum licence is resumed under the RCA (Division 6 of Part 3.2) compensation is payable under section 93 of that Act, it is the amount of that compensation that forms the termination value in those circumstances.

1.64 The table in new section 380-90 details a number of different situations and explains the basis of calculation of the termination value in each of those situations.

1.65 If the balancing adjustment event is an assignment or resumption of the spectrum licence, the termination value is to be reduced by the amount of any ordinary income received. [New subsection 380-90(2)]

How is the balancing adjustment to be calculated?

1.66 The amount of the balancing adjustment is ascertained by the comparison of the spectrum licences termination value and its unrecouped expenditure immediately before the balancing adjustment event. [New subsection 380-85(1)]

1.67 In the event that the termination value of the spectrum licence exceeds its unrecouped expenditure, the excess amount is to be included in assessable income in the year that the balancing adjustment event occurred.

1.68 The amount to be included in assessable income cannot exceed:

•

the total amount deducted in respect of the spectrum licence in the current and prior years under this Division;

less

•

any amounts already included in assessable income in respect of the spectrum licence.

[New subsection 380-85(2)]

1.69 However, some amount of the excess of the termination value over the amounts deducted for the spectrum licence may need to be included in assessable income through the operation of the capital gains provisions.

1.70 If the termination value is less than the unrecouped expenditure for the spectrum licence, the unrecouped expenditure is to be reduced by the amount of the termination value and the amount of the current year deduction is to be calculated as follows:

Remaining unrecouped expenditure * Total number of days in the current year used for the purpose of producing assessable income/Total number of days in the current year up to the date of balancing event


1.71 The unrecouped expenditure should have been reduced to nil at this point. [New subsection 380-85(4)]

Example 4

In year 4 GHDC Pty Ltd makes a decision to assign its licence in respect of Area 4 to a non-arms length entity for nil consideration. The non-arms length entity is not a related entity. The assignment took place with effect from the 8 June 2002. The market value of the licence as at this date was $45. The old licence continued to be used for income producing purposes.

The licence held at 30 June 2002 looks like this :

2

How to take this assignment into account when calculating the deductible amount for this and subsequent years for both licences:

Go to new Subdivision 380-A

To ascertain whether GHDC Pty Ltd can claim an annual deduction in respect of either licence it must satisfy the conditions in new section 380-10. At the end of the income year GHDC Pty Ltd still holds the old licence but has disposed of the new licence. Therefore, in respect of the old licence it can continue to claim a deduction under new section 380-10 subject to the calculation in new section 380-15 . The amount of this deduction is calculated in Table 4 as $11.34 for the current year.

Note: the assignment of the new licence has no impact on the calculation for the old licence.

However, in respect of the new licence GHDC Pty Ltd is disqualified under new subsection 380-10(2) from claiming a deduction because a balancing adjustment event happened at a time when it held the licence. Nevertheless, a deduction may still be available because of the balancing adjustment that GHDC Pty Ltd must make under new Subdivision 380-D .

Go to new Subdivision 380-D

The assignment of the new licence is a balancing adjustment event as described in the table of new subsection 380-80(3) . GHDC Pty Ltd will not be required to make a balancing adjustment if it determines that roll-over relief is available under Common rule 1: see new subsection 380-80(4) . The party to whom the new licence was assigned by GHDC Pty Ltd is not a related entity for the purposes of subsection 41-20(1), therefore roll-over relief is not available. A balancing adjustment is therefore required.

Note: If the non-arms length party was a related entity and Common rule 1 applied, then GHDC Pty Ltd would need to consider new Subdivision 380-E .

To effect the balancing adjustment it is necessary to determine the termination value of the assignment. In this instance, Case 4 in the table at new subsection 380-90(1) is the last applicable case to the transaction. The table specifies that for a Case 4 event, the termination value is the greater of GHDC Pty Ltd's unrecouped expenditure on the licence just before the balancing adjustment event and its market value at that time. The unrecouped expenditure is calculated to be $57.16 (refer to Table 3(b) in Example 3) and the market value is given as $45.

The termination value is therefore $57.16 (the unrecouped expenditure being greater than market value).

The termination value is then compared to the unrecouped expenditure on the licence just before the balancing adjustment event: see new subsection 380-85(1) . In this case they equal each other.

As the termination value neither exceeds (see new subsection 380-85(2) ) nor is less than (see new subsection 380-85(3) ) the unrecouped expenditure, it is reduced to nil at the time of the balancing adjustment event: see new subsection 380-85(4) .

The effect of this is that GHDC Pty Ltd will not get a deduction for the use of the new licence even though it held the licence up until the 8 June 2002.

End of Example 4

1.72 Also see Step 2 of Example 1, earlier in the chapter, which outlines a balancing adjustment scenario when a licence expires.

Application of the Common rules (Subdivision 380-E)

1.73 The rules relating to the application of Common rules are contained within the new section 380-95.

1.74 Common rule 1 (roll-over relief for related entities) is modified in certain respects for this capital allowance. The most important of the modifications is that the transferees expenditure on the spectrum licence is to be dealt with in new section 380-100 and is to be based on the transferors unrecouped expenditure immediately before the roll-over event. [New subsection 380-100(3)]

Adjustments affecting deductions (Subdivision 380-F)

Variation of a spectrum licence to increase the available spectrum how does it impact on unrecouped expenditure?

1.75 If a spectrum licence is varied to increase the amount of spectrum available under the licence the unrecouped expenditure is to be increased by the amount of the expenditure incurred in obtaining the additional spectrum. [New section 380-105]

1.76 However, where the additional spectrum is obtained in a non-arms length transaction and the consideration is greater than the market value of that additional spectrum, the unrecouped expenditure is to be increased by the market value of the extra spectrum. [New subsection 380-105(3)]

Example 5

In Year 5 GHDC Pty Ltd determines that it requires additional spectrum adjacent to its existing licence area. It purchases a part of the spectrum (Area 5) in the secondary market for $200 and its existing licence is varied by the ACA to reflect the new holding. The additional part was obtained and registered with the ACA on 27 March 2003. There were no other costs associated with this acquisition or licence variation.

The licence now looks like this:

How to take this additional expenditure into account when calculating the deductible amount for this and subsequent years:

Go to new Subdivision 380-A

To ascertain the amount that GHDC Pty Ltd can deduct for Income year 5, it must first work out its unrecouped expenditure immediately after the end of Income year 4 but before the transaction: see new subsection 380-20(2) . By referring to the table in Example 4 it is calculated to be $45.36. It is then necessary to check the table in new subsection 380-20(3) to determine the effect of the transaction. Item 4 of the table applies as the ACA has varied the licence to increase the spectrum holding.

Go to new Section 380-105 in new Subdivision 380-F

The unrecouped expenditure on the varied spectrum licence is increased at the time of the variation by the amount of the capital expenditure incurred in obtaining the additional part of the spectrum:see new subsection 380-105(2) .

GHDC Pty Ltd's capital expenditure on the additional part was $200. Accordingly, on the 27 March 2003 the unrecouped expenditure, determined to be $45.36, is increased by $200. The new unrecouped expenditure balance for the purpose of new Subdivision 380-A is now $245.36.

Go to new Subdivision 380-A

Using the new unrecouped expenditure balance in Table 5 below, the amount that GHDC Pty Ltd can deduct for Income year 5 is now $61.34.

End of Example 5

Spectrum licences acquired in a non-arms length transaction

1.77 Where a taxpayer obtains a spectrum licence in a non-arms length transaction, either separately or together with other property and no separate consideration has been allocated to the spectrum licence, then the rules contained in new section 380-110 apply.

1.78 In a non-arms length situation the cost of acquiring the licence, or part of the licence, is ascertained by a comparison of a taxpayers expenditure incurred in obtaining the licence with the previous licenceholders unrecouped expenditure (for part of a licence it is the unrecouped expenditure that is reasonably attributable to that part of the licence) and the spectrum licences (or part of licence) market value at the time the licence was transferred. [New subsections 380-110(2) and 380-110(3)]

1.79 If the expenditure incurred in obtaining the spectrum licence does not exceed the unrecouped expenditure or market value, the cost of acquiring the spectrum licence would be the actual expenditure incurred by the taxpayer or so much as can be reasonably attributed to the licence. However, in a situation where the expenditure actually incurred in the acquisition of the spectrum licence exceeds either the previous licenceholders unrecouped expenditure or the market value of the licence, the cost of acquiring the spectrum licence is taken to be the lesser of that unrecouped expenditure or the market value.

Assignment of part of a spectrum licence for no consideration

1.80 New section 380-115 applies where part of a spectrum licence is assigned to a taxpayer for no consideration. In these circumstances the expenditure incurred in acquiring the spectrum licence is the other partys unrecouped expenditure on the original licence that is reasonably attributable to the part of the licence that was assigned.

Amendments to ensure Australia asserts its taxing rights over income from the use of spectrum licences

Definition of royalty

1.81 The definition of royalty contained in subsection 6(1) of ITAA 1936 is amended to include amounts paid or credited for the use of or right to use spectrum specified in a spectrum licence.

1.82 This amendment ensures that royalty withholding tax is collected from payments made in relation to the use of the spectrum specified in a spectrum licence to a resident of a country with which Australia does not have a Double Tax Agreement. [Items 2, 3 and 4]

Permanent Establishment Condition

1.83 Item 34 proposes to insert new subsection (11A) in section 3 of the International Tax Agreements Act 1953 . The purpose of new subsection (11A) is to ensure that where a non-resident fails to derive the relevant spectrum income through an Australian permanent establishment, (in breach of its licensing conditions under the RCA), the income will be treated as if in fact it had so been derived. In this way, the Commissioner of Taxation will be able to use his existing powers under the law to ensure that the relevant tax on the use of spectrum is collected.

Consequential Amendments to the Income Tax Assessment Act 1936

1.84 Because a new capital allowance provision is being added to the ITAA 1997, there are a number of amendments that have to be effected to the ITAA 1936.

Arrangements relating to the use of property

1.85 Division 16D of the ITAA 1936 deals with certain non-leveraged finance leases and similar arrangements where the risks and benefits of ownership of the property are transferred by the owner to the lessee or user. The consequential amendments to subsection 159GE(1), section 159GF and section 159GJ will ensure that Division 16D has application to situations where a spectrum licence has been acquired in like circumstances. [Items 5 to 10]

Forgiveness of commercial debts

1.86 Division 245 of the ITAA 1936 provides rules to remedy the effective duplication of tax deductions which would otherwise arise from the forgiveness of commercial debt. It does this by reducing deductions otherwise available by the amount of debt forgiven. To ensure that deductions available for the purchase of a spectrum licence are included in this regime, expenditure in obtaining spectrum licences is included in the table of deductible expenditure at subsection 245-140(1). [Item 11]

Tax exempt bodies that become taxable

1.87 Division 57 of the ITAA 1936 provides for transitional issues of tax exempt entities that become taxable. To ensure that such entities which have incurred expenditure on obtaining spectrum licences are able to obtain deductions when they become taxable, amendments are required to tables in subsections 57-85(3) and 57-110(2). [Items 12 and 13]

REGULATION IMPACT STATEMENT

Policy objective

1.88 The Government announced on 11 March 1998 its intention to amend the Income Tax Assessment Act 1997 to allow for the amortisation of the acquisition cost of domestic spectrum, for which a licence has been issued pursuant to the Radiocommunications Act 1992 (RCA), over the licences effective life.

1.89 In addition, the Government also proposed three other measures to ensure that Australia is able to assert its taxing rights over income from the use of spectrum where a spectrum licence is owned by a non-resident. They were

•

an amendment of the domestic law definition of royalties to specifically include spectrum payments,

•

a desire to renegotiate Australias double taxation agreements (DTAs) with a view to including such payments in the DTA definition of royalties, and

•

an amendment to the RCA to impose a permanent establishment condition on spectrum licences so that all payments made in relation to such licences to persons who are residents of countries with which Australia has DTAs will be subject to tax in Australia.

1.90 The amendments will improve the equity of the taxation system by matching the cost of the right to use the spectrum to the income it generates and by introducing consistency with the taxation treatment of spectrum licences in overseas jurisdictions.

1.91 According to the Governments announcements, the amortisation deduction will only be available to taxpayers who have acquired spectrum licences pursuant to the RCA after the date of announcement (11 March 1998 -see Treasurers Press Release No. 26). All new licences issued from that date are also to be subject to the new permanent establishment condition.

Implementation option

1.92 Only one option was considered for the implementation of these measures. This option involves introducing an amortisation regime similar to existing regimes in the tax laws and introducing three separate tax measures to deal with preserving Australian taxing rights where a spectrum licence is owned by a non-resident.

Amortisation

1.93 Under the new amortisation provisions an amount in respect of the acquisition cost of the spectrum will be deductible to the taxpayer in the income years that the spectrum licence is used by the taxpayer for the purpose of producing assessable income.

1.94 The new amortisation provisions will cover the following features of a spectrum licence:

•

acquiring additional spectrum where a spectrum licence is already held by the taxpayer;

•

replacement of part of a spectrum licence;

•

partial sale of a spectrum licence; and

•

balancing adjustment events to cover a variety of situations that may arise resulting in a disposal of a spectrum licence.

Preserving Australias Taxing Rights

1.95 Two of the three measures being introduced in order to ensure that Australia is able to assert its taxing rights over income from the use of spectrum where a spectrum licence is held by a non-resident require amendment to the income tax law.

•

First, the domestic law definition of royalty is to be amended to specifically include spectrum licence payments. This will allow royalty withholding tax to be collected from payments made in relation to the use of the spectrum specified in a spectrum licences (including rights to use such spectrum) to a resident of a country with which Australia does not have a double taxation agreement.

•

The Government has also foreshadowed its intention to renegotiate Australias existing DTAs with a view to including such payments in the various DTA definitions of royalties. This will, as those treaties are renegotiated, allow Australia to impose Royalty Withholding Tax on spectrum licence payments made to those DTA countries.

•

Until this can be achieved, the Government has decided to amend the RCA to impose a condition on all spectrum licences (or authorised spectrum users) that income, profits or gains derived from payments made to spectrum licensees are attributable, for the purposes of taxation law, to a permanent establishment in Australia. Consequential amendments are required to the Income Tax International Agreements Act 1953 to give effect to the Governments announcement. This condition may be removed in future should all of Australias existing DTAs be renegotiated.

Assessment of Impacts (costs and benefits) of each implementation option

Impact Group Identification

1.96 The proposed measures will impact on those taxpayers acquiring spectrum for which licences have been issued pursuant to the RCA after the date of announcement (11 March 1998). It is envisaged that the majority of spectrum licence holders will be telecommunication entities. The measures will cover not only licences issued pursuant to the spectrum auction processes but also licences issued pursuant to secondary trading of spectrum.

1.97 The Australian Taxation Office (ATO) in conjunction with the Australian Communications Authority (ACA) will be responsible for administering these measures.

Assessment of costs

Compliance costs

1.98 The amortisation measure will increase taxpayers compliance costs marginally as taxpayers will need to keep records of the acquisition costs of spectrum as well as deductions claimed in respect of their licences until at least five years after the licence is disposed of. As with other assets they will also need to keep track of the licences cost base and relevant adjustments when there are partial disposals of the original spectrum licence.

1.99 The royalty measure will increase taxpayers compliance costs marginally and will be limited to resident taxpayers withholding tax on royalties paid to non-residents holding spectrum for which licences have been issued pursuant to the RCA. In addition, these taxpayers will also need to become familiar with the new legislation.

1.100 The imposition of the permanent establishment condition would affect those foreign residents who may have wished to purchase or use spectrum without a permanent establishment in Australia. Only those companies that breach the condition of their licence under the RCA will trigger the tax penalty regime.

Administrative costs

1.101 The additional administrative costs to both the ATO and the ACA will be minimal.

Estimated costs

1.102 The cost to revenue of introducing an amortisation regime for the acquisition cost of domestic spectrum licences is estimated to be $8 million per annum.

1.103 The cost to revenue of amending the domestic law definition of royalty is believed to be insignificant (at present) due to the majority of buyers of the spectrum licences at the recent auction being resident taxpayers. However, recently purchased licences may be onsold, or rights to use sold and further spectrum licences may be auctioned resulting in a change in the revenue impact which is currently unquantifiable.

1.104 The financial impact of the imposition of a permanent establishment condition on spectrum licences is dependent on the precise outcome of the spectrum auctions, and in particular, whether any non-resident companies are successful bidders. Accordingly, the precise financial impact of this measure cannot be determined at this stage.

Benefits

1.105 No taxpayer will be adversely affected by the amortisation measure. The proposed amortisation regime will allow taxpayers to claim deductions against their assessable income over the life of the licence. The deduction will be based on the acquisition cost of the spectrum to the taxpayer.

1.106 A major benefit of this measure is that it enhances the integrity of the taxation system by allowing taxpayers to write an intangible asset off over its useful life.

1.107 The imposition of the royalty measure and the permanent establishment condition will protect the revenue base by eliminating the need for Australian resident taxpayers to conduct their affairs through offshore entities in order to successfully compete with foreign enterprises bidding for spectrum licences.

Consultation

1.108 Prior to the measures being announced in Treasurers Press Release No. 26 there had been consultation with members of the telecommunications industry regarding the desirability of some form of write-off being made available for the cost of acquiring a spectrum licence. There has been no consultation regarding the contents of the Bill.

Treasurers Press Release

1.109 The measures are being implemented as announced in Treasurers Press Release No. 26.

1.110 Since the announcement of these measures there has been extensive consultation with the ACA who are responsible for administering the RCA. Consultation is expected to be ongoing.

Conclusion

1.111 The Treasury and the ATO will monitor these taxation measures on an ongoing basis consulting with the ACA as required.