House of Representatives

Supplementary Explanatory Memorandum and correction

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

Chapter 1 - Full balancing adjustment on disposal of plant

Overview

1.1 These amendments ensure that the measures in this Bill which treat any gains or losses on the disposal of plant under the CGT provisions as an additional form of balancing adjustment, will also apply to plant where no depreciation deductions have been claimed or the plant has not yet been fully completed or constructed. They will apply to balancing adjustment events for plant which occur after 11.45 am AEST on 21 September 1999.

1.2 For disposals of plant after 11.45 am AEST on 21 September 1999, this Bill will exempt any capital gains and losses from the CGT provisions and will instead treat those amounts as an additional balancing adjustment under the depreciation provisions contained in Division 42 of the ITAA 1997. However, those additional balancing adjustments will only apply to plant where depreciation deductions have been claimed and where there is a complete item of plant.

1.3 These amendments will ensure additional balancing adjustments can also apply where no depreciation has been claimed or where there is an incomplete unit of plant. In these situations, the balancing adjustments will include as income or allow as a deduction those amounts that would have been a capital gain or loss under the CGT provisions.

Explanation of amendments

1.4 Amendment 2 provides for the balancing adjustment calculation to include the additional balancing adjustment made under new Subdivision 42-GA.

1.5 Amendment 7 inserts new Subdivision 42-GA into Division 42 to calculate an additional balancing adjustment where no depreciation deductions have been claimed or where there is a disposal of an incomplete item of plant.

1.6 This additional balancing calculation could arise where an item of plant is completed and disposed of before it is used in the income producing process. It could arise where the plant is destroyed before completion.

1.7 The additional balancing adjustment calculation must be made in the year in which the balancing adjustment event occurs. [Section 42-222]

1.8 The amount to be included in assessable income under this Subdivision will be the excess of a plant's termination value (effectively, its sale proceeds) over its cost. For plant purchased before 11.45 am on 21 September 1999, the benefit of cost base indexation is to be preserved. The inclusion of this amount ensures the existing CGT treatment is preserved. [Item 8A, section 42-223]

1.9 A deduction will be allowed under this Subdivision where the plant's termination value is less than the reduced cost base . The deduction will equal the difference between the 2 amounts. This deduction equates to any capital loss that would have arisen under the CGT provisions ensuring that the existing CGT treatment is being preserved. [Item 8A, section 42-224]

1.10 Amendments 3 to 6 ensure the additional balancing adjustment will not apply to cars, collectables, personal use assets and plant used to produce exempt income and plant acquired before 20 September 1985, if any capital gain or loss arising upon their disposal is disregarded for CGT purposes. It will also not apply where the gain is assessable under another provision of the ITAA 1997.

1.11 Amendment 1 makes a consequential amendment to a note referring to balancing adjustments