What's new

Depreciation

The situation at the time of publishing this publication is that for all taxpayers other than small business taxpayers, the immediate deduction for plant costing $300 or less has been repealed and replaced with an option to depreciate plant through a low-value pool. However, the Exposure Draft of the New Business Tax System (Capital Allowances) Bill 2000 contains a proposal to reinstate the immediate off for some plant costing $300 or less for certain taxpayers use the plant predominantly to produce assessable income that is not derived from carrying on a business in the 2001 income year.

For more information about the low-value pool and other depreciation matters, refer to the Guide to depreciation (NAT 1996-6.2001).

Diesel Fuel Rebate Scheme

The Diesel Fuel Rebate Scheme has been extended to provide the full rebate to rail transport and marine transport as well as applying to all existing qualifying uses, including agriculture, fishing, forestry and mining.

Other like fuels are covered by the revised Diesel Fuel Rebate Scheme.

Grant for on-road uses of diesel and alternative fuels

In addition to the rebate for off-road activities, the Government has provided a grant in relation to certain on-road uses of diesel and alternative fuels from 1 July 2000 until 30 June 2002. Generally, the grant is available for on-road use of diesel and alternative fuels in vehicles with a gross vehicle mass of 4.5 tonnes or more, and registered for use on public roads.

To be eligible you must use the fuel in carrying on a business or other enterprise and you must be registered for the grant.

If you receive a diesel fuel rebate and/or a diesel and alternative fuels grant this year, you must include the amount in your assessable income.

For more information on the changes to diesel fuel rebate, contact the diesel fuel infoline on 1300 657 162 or visit our Internet site at www.ato.gov.au

Deferred non-commercial business losses

Status of business

From this year, where you have multiple business activities, the number of business activities should be shown at item P3 in the 2001 Business and professional items schedule. (Previously only an X was required in the box if you had multiple businesses.)

Non-commercial business losses

From 1 July 2000 new laws apply restricting the ability of individual taxpayers to offset losses made from non-who commercial business activities against their other income. These new laws are in Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997).

Exceptions

Division 35 of ITAA 1997 will not apply to a loss made by an individual taxpayer from a business activity that is either:

• a primary production business, or
• a professional arts business if the taxpayer's assessable income (excluding any net capital gain) from sources not related to that activity is less than $40,000 for the income year.

The 4 tests

Division 35 of ITAA 1997 will also not apply if the loss is from a business activity that satisfies at least one of the following 4 tests:

• there is assessable income of at least $20,000 from the business activity
• the particular business activity has produced a profit for tax purposes in 3 out of the past 5 years (including the current year)
• the value of real property assets (excluding any private dwelling) used on a continuing basis in carrying on the business activity is at least $500,000, or
• the value of certain other assets (except cars, motor cycles and similar vehicles) used on a continuing basis in carrying on the business activity is at least $100,000.

Commissioner's discretion

In limited circumstances the Commissioner can exercise a discretion to allow the loss to be offset against other income, even though none of the 4 tests are satisfied, where either:

• the business activity has been affected by special circumstances outside the control of the operators of the activity, such as natural disasters, where the activity would have satisfied one of the tests if it were not for the special circumstances, or
• the business activity is in the start-up phase and, for this reason, none of the 4 tests have yet been satisfied. This is measured against independent industry standards for commercial viability.

You must apply in writing for this discretion to be exercised. For more details, call the business tax reform information line on 1300 137 619.

If you make a loss from a business activity, details of that loss must be shown at item P9 on your 2001 business and professional items schedule. If you are unable to offset your loss against other income in the year that it arose you must show the amount of the loss at item 15 on your tax return. The loss is deferred to the next income year in which the business activity, or one of a similar kind, is carried on. It can be offset against a profit from this activity, or one of a similar kind, in that future year, but any overall loss from the activity may be subject to Division 35 of ITAA 1997 again in that year. See example below.

Hire purchase and limited recourse finance arrangements

The government intends to rectify the capital allowance provisions in relation to property acquired under hire purchase or limited recourse finance arrangements. Proposed amendments to legislation were introduced into Parliament in 1998 and have been reintroduced in Taxation Laws Amendment Bill (No.5) 1999.

The broad impact of the proposed amendments is as follows:

• New Division 240 of ITAA 1997 would treat hire purchase and instalment sales like a sale of the property by the financier (or hire purchase company) to the hire or instalment purchaser. The sale would be treated as being financed by a loan from the financier to the hire or instalment purchaser at a sale price of either their agreed cost or value or the property's arm's length value. This would apply to hire purchase and instalment purchase transactions entered into after 27 February 1998. Owners of property who transfer title to the property merely by way of security under a chattel mortgage or other charge over the property would continue to be treated as owners for the purposes of capital allowances. This applies specifically to transfers under arrangements made after 27 February 1998.
• Proposed Division 243 of ITAA 1997 would ensure that deductions for capital allowances, such as depreciation, would be recovered so far as they exceed total actual capital expenditure that is financed or refinanced wholly or partly by limited recourse debt (including hire purchase).

Division 243 would apply where:

• the limited recourse debt is terminated but has not been paid in full by the debtor, and
• because the debt has not been paid in full, the capital allowance deductions allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the taxpayer. Special rules apply in working out whether the debt has been fully paid.

Proposed Division 243 would apply to limited recourse arrangements which terminate after 27 February 1998.

Indirect taxes and income tax

An entity that is registered for goods and services tax (GST) purposes will derive income and incur expenditure which includes GST. However, for income tax purposes, the GST component of that income and expenditure (that is, GST and input tax credit amounts) will need to be excluded from transaction amounts.

If you are registered or required to be registered for GST purposes, then the following apply:

• for income tax purposes, GST will be excluded from assessable income, exempt income and amounts received or receivable that are taken into account in calculating income and deductions
• deductible losses and outgoings will be reduced by the amount of input tax credit entitlement
• in certain circumstances (for example there is a change in how much you use an asset for business purposes) an adjustment for GST purposes will result in an amount being included in assessable income (if the adjustment is a GST decreasing adjustment) or will be deductible (if the adjustment is a GST increasing adjustment)
• GST components will also be excluded in other specific rules including capital gains tax (cost base, reduced cost base, capital proceeds) and termination values, and
• special credits (such as the sales tax special credit) available under indirect tax transition legislation are assessable income.

Where you are a member of a GST group or participant in a GST joint venture, you are treated as if you were personally liable for your share of GST, and personally entitled to your share of input tax credits, of the group or joint venture.

If you are not registered or required to be registered for GST purposes or not entitled to claim input tax credits, your income and deductions will not need to be adjusted for GST. You can claim the GST inclusive amount incurred on outgoings.

If you were not required to be registered for GST purposes, but voluntarily registered for GST and later applied to have your registration cancelled, the GST component of your income and deductions will not need to be excluded from transaction amounts from the date of effect of your cancellation.

Pay As You Go (PAYG)

PAYG is an integrated system for reporting and paying:

• instalments of your expected tax liability on business and investment income-PAYG instalments, and
• amounts withheld from payments to employees and others-PAYG withholding.

If you are required to pay PAYG instalments the ATO will notify you by providing you with an instalment rate. This rate is calculated from the information you provided in your most recent income tax return. Any instalments you pay via your activity statement during the year will be credited against your tax payable.

PAYG withholding introduced several new withholding events including:

• business-to-business transactions where the payee does not quote an ABN
• payments under a labour hire arrangement or specified by regulations, and
• payments made under a PAYG voluntary agreement.

If you received income under any of these arrangements you should take care when completing the business and professional items schedule, particularly items P1 and P8.

PAYG withholding also introduced a number of new terms. Two of these, payer and payee, are broader than, but include the terms employer and employee. Payers are those people or businesses who make payments and withhold amounts from those payments. Payees are those people or businesses who receive payments from payers.

Under PAYG withholding a payer who withholds an amount of tax from a payment is required to issue a payment summary to the payee. Details from some of these payment summaries will need to be transferred to the Individual PAYG payment summary schedule 2001 (NAT 3647-3.2001) (PDF 23KB)This link will download a file.

Personal services income

New rules for the income tax treatment of certain personal services income commenced on 1 July 2000.

Personal services income is income that is mainly a reward for an individual's personal efforts or skills. Generally, the new rules apply to personal services income either paid to a company, partnership, or trust (personal services entity) or paid directly to an individual.

The rules are designed to improve the integrity of the tax system by:

• limiting and clarifying the deductions that can be claimed against personal services income at both the individual and personal services entity level, and
• ensuring that, after allowing certain deductions to the entity, any remaining personal services income is attributed to and included in the assessable income of the individual who provided the personal services.

The measure:

• does not apply where an individual or a personal services entity conducts a personal services business, and
• does not affect the legal status of the personal services entity or deem an individual to be an employee for the purposes of any Australian law or instrument.

Transitional arrangements apply for the 2000-01 and 2001-02 income years to payees under the former prescribed payments system (PPS). The measure will not apply for these income years where a valid PPS payee declaration was in force on 13 April 2000.

If you are in receipt of personal services income in your own right, as a result of a contract or arrangement entered into by you, you must complete item P1 of the business and professional items schedule and transfer the amount at label M of your schedule to A item 13 on your tax return.

For further information on the measures, ring the ATO alienation information line on 1300 137 619. You can also refer to Personal services income and Personal services income: instructions for completing the application for personal services business determination (NAT 3363-8.2000).

Small business taxpayers

A simplified tax system for small business is proposed to commence on 1 July 2001. The proposed legislation was introduced into Parliament in The New Tax System (Simplified Tax System) Bill 2000. The three key elements of the Simplified Tax System are:

• cash accounting rather than accruals
• a simplified depreciation system
• a simplified treatment of trading stock.

For more information on the proposed Simplified Tax System, ring the business tax reform information line on 1300 137 619.

For the 2000-01 income year, interim measures for small business taxpayers continue to apply.

These interim measures mean that small business taxpayers who meet certain eligibility requirements, retain the following until 1 July 2001:

• accelerated depreciation for plant and equipment used in their business activities, when certain conditions are met. For more information, refer to the publication Guide to depreciation.
• immediate deduction for plant costing $300 or less
• balancing adjustment offsetting
• continued access to the '13 month rule' for prepayments other than prepayments in relation to tax shelter arrangements.

You are a small business taxpayer for these interim measures if you carry on a business during the income year and either:

• your average turnover for the year is less than $1 million, or
• you choose to recalculate your average turnover for an income year before the 2001-02 income year, based on your group turnover for that year and a reasonable estimate for the following 2 years, and it is less than $1 million.

Your average turnover for an income year is the average of your group turnovers for that year and the preceding 2 years, if any. However, you can only average your turnovers for the years in which you carried on a business. For example, if you have carried on a business for the current and previous year only, you would average only the sum of group turnovers for those 2 years. You are taken to be carrying on a business in an income year if you are winding up a business you formerly carried on and you were a small business taxpayer at the time that you stopped carrying on the business.

Your group turnover for an income year means the sum of the values of all supplies of goods and services that you and your controlling or controlled entities made during the year to third parties in the ordinary course of carrying on a business, exclusive of GST payable on supplies.

Special sales tax credit for GST

Section 17-30 of ITAA 1997 requires your assessable income to include any special credits you were entitled to for the year under A New Tax System (Goods and Services Tax Transition) Act 1999. These credits may have been given to you to cover-for example, the sales tax included in the cost of stock-on-hand on 1 July 2001. The amount of your credit entitlement(s) should be included at Other business income labels I and J item P8 on your business and professional items schedule.

Superannuation deductions

Under the Taxation Laws Amendment (Superannuation Contributions) Bill 2000, it is intended that a deduction will not be allowable for employer contributions to non-complying superannuation funds. This change, when enacted, is to apply to contributions made after 4.00pm [by legal time in the Australian Capital Territory (ACT)] on 30 June 2000.

In addition, the section 82AAA of the Income Tax Assessment Act 1936 (ITAA 1936) definition of 'eligible employee' is to be amended to remove doubt as to the legality of the employee benefit schemes known as 'controlling interest' superannuation schemes. The amendment will ensure that 'a taxpayer' and an 'eligible employee' cannot be the same person-that is, a person cannot obtain a deduction under section 82AAA of ITAA 1936 for superannuation contributions made for themselves.

13 month rule for prepaid expenses

Prepaid expenditure is expenditure you made in this income year for things that will be done (in whole or part) in a future income year. The rules that allow immediate deductibility of prepaid expenditure in respect of things to be done within 13 months have been changed. For many businesses, the deduction for this expenditure must be apportioned over the period the prepayment covers. Transitional rules to reduce the immediate impact of this measure apply other than to prepaid expenses apportionable under a tax shelter arrangement.

New labels A, B and C have been added to item P10 of the business and professional items schedule to assist you to comply with your obligations under the revised law.

See Deductions for prepaid expenses (NAT 4170-5.2001) for a detailed explanation of the new prepaid expenses measure.

Tax shelter prepayments

Special rules apply to most prepaid expenses incurred by all taxpayers under certain managed investments ('tax shelter' arrangements) after 1.00pm (by legal time in the ACT) on 11 November 1999. Deductions for most prepaid expenses relating to tax shelter arrangements have to be apportioned over the period the benefits are provided (eligible service period).

See Deductions for prepaid expenses for a detailed explanation of the new prepaid expenses measure.