House of Representatives

Income Tax Assessment Amendment Bill (No. 2) 1980

Income Tax Assessment Amendment Act (No. 2) 1980

Income Tax (Rates) Amendment Bill (No. 2) 1980

Income Tax (Rates) Amendment Act (No. 2) 1980

Explanatory Memorandum

(Circulated by authority of the Acting Treasurer, the Hon. Eric L. Robinson, M.P.)

Notes on Clauses

INCOME TAX ASSESSMENT AMENDMENT BILL (NO. 2) 1980

Clause 1: Short title etc.

This clause contains formal provisions for the citation of the amending Act and the Principal Act.

Clause 2: Commencement

Against the background that section 5(1A) of the Acts Interpretation Act 1901 causes an amending Act to come into operation on the twenty-eighth day after Royal Assent, unless contrary provision is made, this clause will mean that the present amending Act comes into operation on the date of Assent. Provisions in the Bill affect the current income year, 1979-80, and early commencement will facilitate such matters as the preparation of income tax returns and procedures for assessment of income of that year.

Clause 3: Source of royalty income derived by a non-resident

This clause proposes a technical amendment to section 6C of the Principal Act, consequential on an amendment to the definition of "royalty" being effected by clause 3 of the Income Tax Assessment Amendment Bill 1980 to include within the definition designated amounts that are credited as well as those that are paid.

Section 6C applies to royalty income derived by residents of other countries and has the broad effect that a royalty derived by a non-resident that is an expense of an Australian business is to be treated as having a source in Australia, and so to be assessable income for Australian tax purposes. The amendment proposed by sub-clause (1) will ensure that a royalty will, on this basis, have a source in Australia whether it is paid or credited to the non-resident.

By sub-clause (2) the amendment will have effect in relation to income derived after the date of introduction of this Bill.

Clause 4: Assessable income from sale of leased motor vehicle

The purpose of this clause is to insert a new section - section 26AAB - in the Principal Act to bring within assessable income certain profits made on the disposal of a previously leased car or station wagon where the vehicle is purchased from the lessor by the lessee, or an associate of the lessee, and where the lease charges in respect of the vehicle have been wholly or partly deductible from the assessable income of the person paying them.

The new section is to apply where the formerly leased vehicle is disposed of by the lessor after 21 August 1979 otherwise than under a contract entered into on or before that date.

The amount to be assessable under the new section is to be so much of the profit on sale as does not exceed the least of 3 limits - the amount of depreciation deemed to have been allowed over the period of the lease agreement calculated on a prime cost basis, the amount of deductible lease charges in respect of the vehicle and the amount by which the consideration receivable by the relevant taxpayer exceeds the cost of the vehicle to the person who acquired it from the lessor.

In the event of a sequence of disposals by the lessee and associates, the maximum amount assessable in respect of any disposal after the first will be determined by reference to each of the abovementioned limits as reduced by any amount or amounts included (or which would have been included but for a relieving provision) in assessable income from any previous disposal of the vehicle. Once a vehicle is disposed of by a lessee or an associate for a consideration that is not less than market value, the new section will not apply in relation to any subsequent disposal.

Disposals of an interest in a vehicle will be assessable on a corresponding basis.

Sub-section (1) of the proposed new section lists the conditions to be met for the section to apply. There is first the overriding condition that the section applies only to a vehicle, including a four-wheel drive vehicle, that is a car or station wagon.

Paragraph (a) of sub-section (1) requires the unit of property to have been leased under a lease agreement. The term "leased" is defined in sub-section (14) as meaning let on hire under an agreement other than a hire-purchase agreement or a casual hiring agreement.

Paragraph (b) stipulates that the charges payable by the lessee under the lease agreement must have been allowed or be allowable in whole or in part as deductions from assessable income of the lessee or any other person. If the vehicle had been used by a lessee wholly for private purposes, the lease charges would not be allowable as deductions and accordingly the section would not apply to a disposal of the relevant vehicle.

Paragraph (c) sets the commencement date for the operation of the section. It will operate in respect of a disposal of a unit of property (being a car or station wagon) by the lessor to the lessee or an associate of the lessee where the disposal is made on or after 22 August 1979 otherwise than under a contract between those parties that was entered into before that date.

The section will not operate where the property is disposed of to a person who is not the lessee or an associate of the lessee. However, "associate" is given a wide meaning by sub-section (14) and that meaning is as an anti-avoidance measure extended by sub-section (15) to include a person, not otherwise an associate, if that person acquires the property from the lessor with the intention of disposing of it to the lessee or an associate of the lessee.

Paragraph (d) is the final condition that will bring the section into operation, namely, that the car or station wagon is disposed of by the lessee or an associate at a profit. A profit arises where the consideration receivable by the taxpayer exceeds the cost to the taxpayer.

The terms "consideration receivable" and "cost of a unit of property" are defined in sub-sections (14) and (16) respectively. The cost of the property will include any additional capital expenditure incurred by the relevant person on the property prior to disposal (sub-section (17)).

In the case of a disposal of an interest in a unit of property, the cost of that interest is to be an amount as determined by the Commissioner of Taxation. This will meet the situation where no specific cost is allocated to a person who acquires a part interest in a unit of property.

Under paragraph (d), the section will apply to the initial disposal by the person (being the lessee or an associate) who purchases the car from the lessor and also to any subsequent disposal at a profit by the lessee or an associate. However, as explained in the notes on sub-sections (2) and (5) the sum of the profits assessable in a sequence of disposals to which the section applies is not to exceed the lesser of the deemed depreciation and the deductible lease charges in respect of the relevant vehicle.

Sub-section (2) identifies the factors to be taken into account in determining the amount of profit on the sale of a vehicle that will be assessable under the section. Under the sub-section, the amount of profit actually realised on the sale of a leased vehicle that will be assessable, where it is the first disposal after acquisition from the lessor, is to be so much of that profit as does not exceed the lesser of the two amounts determined under paragraphs (a) and (b) of the sub-section.

The amount determined under paragraph (a) is the amount of depreciation that is deemed, in accordance with sub-section (6), to have been allowable to the lessee in respect of the vehicle during the period of the lease.

The amount determined under paragraph (b) is the amount, or sum of amounts, of the lease charges under the relevant lease agreement that have been allowed or are allowable as deductions from assessable income of the lessee or of any other person.

Where only 50 per cent of the lease charges are deductible because, say, the car is used 50 per cent for business purposes and 50 per cent for private purposes, only 50 per cent of the total lease charges will be taken into account under paragraph (b).

Paragraph (c) sets a further limitation on the amount of assessable profit that will apply only in respect of any relevant disposals that follow the initial disposal by the person who acquires the vehicle from the lessor.

The amount calculated in terms of paragraph (c) is the amount by which the consideration receivable in a second or subsequent sale of the vehicle exceeds the cost of the unit to the person who acquired it from the lessor. This cost is to include any capital expenditure incurred in respect of the vehicle by the original or any subsequent purchaser, other than an amount that is directly attributable to the acquisition of the vehicle.

Sub-section (3) will apply in a case where a taxpayer disposes of an interest in a vehicle. In such a case, the Commissioner of Taxation will be authorised to determine how much of the excess referred to in paragraph (d) of sub-section (1) is to be included in assessable income.

Sub-section (4) requires the Commissioner, in making a determination under sub-section (3), to take into account the way in which the section would apply in respect of a disposal of a unit of property rather than an interest in a unit of property.

Sub-section (5) establishes the basis for determining the amount to be included in the assessable income of a tax-payer on the disposal of a vehicle in a case where the section has operated to include amounts in assessable income as a result of earlier disposals of that vehicle.

The basis established under the sub-section also applies in a case where amounts would have been assessable under the section in respect of prior disposals but for the operation of proposed sub-sections (9), (10) or (12). The operation of these sub-sections is explained later in these notes.

Where an amount of excess is to be included in the assessable income of a taxpayer under this section and there has been a previous disposal of the same vehicle then the amounts determined under paragraphs (a), (b) and (c) of sub-section (2) are to be reduced by the amount previously assessed under the section, or that would have been assessed but for the operation of sub-sections (9), (10) or (12).

This will mean that where an amount is assessed (or would have been assessed) to a taxpayer under the section and that amount is equal to the lesser of the two amounts determined under paragraphs (a) and (b) of sub-section (2), then any subsequent disposal of that vehicle the subject of the same lease agreement will not give rise to any assessable income under the section.

Sub-section (6) will operate in association with sub-sections (7) and (8) to calculate the amount of depreciation that is deemed to have been allowed to the lessee during the period of the lease in respect of a particular vehicle. The amount so calculated is the amount to be taken into account under paragraph (a) of sub-section (2) as one of the limits on the amount of profit to be assessable under the section.

The amount of depreciation is to be calculated in respect of the period commencing when the lessor first used the relevant vehicle, whether to produce assessable income or not, and ending when the lessor disposes of the vehicle. In making this calculation, the cost of the vehicle to the lessor is deemed to be the cost to the lessee and the lessee is also deemed to have used the prime cost basis of depreciation.

The depreciation so calculated, after allowing for any balancing adjustment brought in by sub-section (7) or (8), is to be pro-rated in the proportion that the number of whole days in the period of the lease agreement bears to the lessor's period of ownership to arrive at the amount of depreciation deemed allowable to the lessee during the period of the lease agreement. It is expected that in many cases the depreciation for the lessor's period of ownership will equal the depreciation for the period of the relevant lease agreement with the result that no pro-rating will be necessary.

Where the proposed new section 57AF (clause 9) applies to impose a depreciation cost limit in respect of a leased vehicle, the depreciation calculation under sub-section (6) will have regard to that limit.

Sub-sections (7) and (8) will operate to vary the amount of deemed depreciation to the lessee calculated under sub-section (6) in a case where the lessor disposes of a vehicle for an amount that is greater or less than the notional depreciated value.

Sub-section (7) will apply where an amount would be included in the assessable income of the lessee as a depreciation balancing adjustment under section 59 if the lessee had sold the vehicle at the time when the lessor sold the vehicle for the price received by the lessor and the depreciated value at time of sale had been the difference between the cost of the vehicle for the purposes of sub-section (6) and the depreciation calculated in accordance with that sub-section.

In such a case, the amount determined under sub-section (7) is to be applied in reduction of the depreciation deemed to have been allowed to the lessee under sub-section (6).

Sub-section (8) will apply where in the contrary case to that covered by sub-section (7), a deduction would have been allowable to a lessee as a depreciation balancing adjustment under section 59 if the lessee had sold the vehicle at the time it was sold by the lessor for the price received by the lessor and the depreciated value at the time of sale had been the difference between the cost of the vehicle for purposes of sub-section (6) and the depreciation calculated in accordance with that sub-section.

In such a case, the amount determined under sub-section (8) is to be applied to increase the depreciation deemed to have been allowed to the lessee under sub-section (6).

The consideration receivable on disposal of a vehicle that is subject to the $18,000 cost base, is to be adjusted under the amendment proposed by clause 10 of the Bill. This adjustment will be made for the purpose of calculating the amount under sub-section (7) or (8).

Sub-section (9) will operate to reduce the amount otherwise assessable under this section by any amount that is assessable to the taxpayer under another provision of the Principal Act, other than the depreciation balancing adjustment provisions of section 59.

This will mean, for example, that if a lessee is assessable in respect of a profit on sale of a vehicle under section 26AAA (sale within 12 months) the amount so assessable will be applied to reduce the amount otherwise assessable under proposed section 26AAB.

Sub-section (10) relates to a situation where the section could operate to include more than one amount in the assessable income of a taxpayer in respect of the one disposal of a particular vehicle. This could occur where a particular vehicle is leased out under successive lease agreements and the lessee who disposes of the vehicle is the lessee of the vehicle under one lease agreement and an associate of another lessee under another lease agreement.

Sub-section (10) will operate in these circumstances to include only the greater or greatest of the amounts other-wise assessable to a taxpayer under the section. However, sub-section (10) is to be read in association with sub-section (13) which meets the situation of a vehicle being the subject of more than one lease agreement between the same lessor (or associate) and lessee (or associate).

Sub-section (11) is designed to ensure that the section will not apply to a disposal of a vehicle by a lessee or associate where there has been a previous disposal of that vehicle by the lessee or an associate for an amount that is not less than the market value of the vehicle at the time of that earlier disposal or where on account of that previous disposal an amount is included in assessable income calculated by reference to the market value of the vehicle.

Sub-section (11) will apply irrespective of whether that earlier disposal has given rise to an amount of assessable income under this section or under another section of the Principal Act.

Sub-section (12) will prevent the section from operating to include an amount in assessable income where a person acquires a vehicle under a will, a codicil or by intestacy or under an order of a Court that varies such a distribution.

Sub-section (13) is designed to ensure equity as between taxpayers and also as an anti-avoidance measure to prevent taxpayers circumventing the intended application of the section by entering into a new lease agreement in respect of a vehicle.

The sub-section will apply where -

(a)
the lease agreement as a consequence of which an amount is required to be included in the assessable income of the person was entered into on or after 22 August 1979;
(b)
at any time before the lease agreement in (a) came into operation another lease agreement in respect of that unit of property had been in operation, being an agreement that came into operation before 22 August 1979 and was in operation on that date or which came into operation on or after that date; and
(c)
the lessor under the lease agreement referred to in (a), or an associate of that lessor, is the lessor under the agreement in (b) and the lessee under the agreement in (a), or an associate of that lessee, was the lessee under the agreement in (b).

Where these conditions are satisfied and an amount is to be included in the assessable income of a taxpayer as a result of the application of the section to the later lease agreement, then the limits on the amount to be assessed under paragraphs (a) and (b) of sub-section (2) are to be increased by the depreciation deemed to be allowed during the term of the earlier lease agreement and the lease charges that have been deductible in respect of that earlier agreement. In effect, there is an aggregation of the relevant amounts of deemed depreciation and lease charges under both lease agreements.

Sub-section (14) defines various terms used in the section:

"associate", in relation to a person (referred to as the "taxpayer" whether the relevant person is the lessee or the lessor) is defined to mean -

(a)
in relation to a taxpayer other than a trustee or partnership -

·
a relative of the taxpayer
·
a partner of the taxpayer or a partnership in which the taxpayer is a partner
·
a spouse or child of a partner of the taxpayer
·
a trustee of a trust estate where the taxpayer or a person who is, by reason of this definition, an associate of the taxpayer benefits or is capable of benefiting under the trust either directly or through any interposed companies, partnerships or trusts
·
a company that is effectively controlled (either individually or collectively) by the taxpayer or by persons who are, by reason of this definition, associates of the taxpayer - including any companies that are controlled by that company;

and, in addition, where the taxpayer is a company -

·
a person who, either alone or together with persons who are, in the terms of this definition, associates of that person, is able effectively to control the taxpayer company, and
·
persons who are, in the terms of this definition, associates of a person who controls the taxpayer company;

(b)
in relation to a taxpayer in the capacity of a trustee -

·
any person who benefits or is capable of benefiting under the trust estate either directly or through any interposed companies, partnerships or trusts
·
persons who are, in the terms of this definition, associates of a person who benefits or is capable of benefiting under the trust;

(c)
in relation to a taxpayer being a partnership -

·
a partner in the partnership
·
persons who are, in the terms of this definition, associates of a partner in the partnership.

"casual hiring agreement" is defined as an agreement for taking a unit of property on hire where the agreement is of a kind ordinarily entered into for short-term intermittent use of property as the occasion requires on an hourly, daily, weekly or monthly basis.
"consideration receivable" is defined as -

(a)
in the case of a sale of the unit of property, or an interest in a unit of property - the consideration for the sale less the expenses of the sale;
(b)
in the case of a trade-in of property, or of an interest - the amount of the allowance received, by reason of the disposal, in respect of the acquisition of another unit of property or the sum of that amount and the amount of any other consideration received as a consequence of the disposal;
(c)
in a case where the unit of property or the interest, is sold with other assets and no separate value is allocated to the unit of property, or the interest - the amount determined by the Commissioner;

"leased" is defined as let on hire, including a letting on hire described as a lease, under an agreement other than a hire-purchase agreement or a casual hiring agreement.

Sub-section (15) provides for the extension of the definition of an associate of a lessee to include a person who acquires a vehicle from a lessor under an agreement, arrangement or understanding entered into for the purpose of securing that the vehicle will, directly or indirectly, be acquired by the lessee or an associate of the lessee.

Where this sub-section applies, the person who acquires the vehicle from the lessor will be subject to the section in respect of any disposal of the vehicle. The lessee or an associate of the lessee would also be assessable in respect of any subsequent disposal of the vehicle that results in an excess under the section.

Sub-section (16) gives meaning to a number of terms used in the section -

·
a reference to the cost of a unit of property to a person is to be read as a reference to expenditure incurred by the person that is directly attributable to his acquiring ownership of the unit of property;
·
a reference to a person is to be read as including a reference to a partnership;
·
the period of a lease agreement is to include any period or periods for which the term of the agreement is extended;
·
a reference to a lessee under a lease agreement is to be read as including a reference to a person who had been the lessee under an expired agreement;
·
if two or more persons constitute the lessee under a lease agreement the reference to the lessee is to be read as a reference to those persons or to either of them;
·
a reference to an associate of a person is to be read as a reference to a person who is such an associate at any relevant time.

Sub-section (17) is related to the reference in paragraph (a) of sub-section (16) dealing with the cost of a unit of property to a person. This sub-section expands the meaning of the term as expressed in sub-section (16) and includes within that meaning expenditure of a capital nature incurred by the person after the time of acquisition. Accordingly, in calculating, for the purposes of the section, the excess of the consideration receivable by a person over the cost of a vehicle, the cost is to include expenditure incurred that is directly attributable to acquiring ownership of the property and any capital expenditure incurred on the property after acquisition.

Sub-section (18) provides a basis for determining the market value of property at any time where there is insufficient evidence of such value at that time. In these circumstances the market value is to be the amount that the Commissioner of Taxation considers to be fair and reasonable.

Examples of the operation of the proposed section 26AAB are given below -

Example 1

It is assumed that a car is leased for 3 years to a lessee who acquires it at the end of the term for the residual value, uses it as depreciable property for a short period and sells it later for market value.

Facts -
. cost price of car to lessor $32,300
. monthly lease payments $ 910
. total lease payment made over 3 years = $32,760 of which 60% attributable to business use $19,656
. residual value in lease agreement, which is also sale price by lessor and cost price to lessee $16,200
. sale price by lessee $28,000
A. Sub-section (1) of section 26AAB requires the car to have been acquired by the lessee from the lessor and disposed of for a consideration receivable in excess of the cost:

$28,000 - $16,200

$11,800
B. Under sub-section (2) the excess calculated under sub-section (1) is to be assessable to the extent it does not exceed the lower of the two amounts set out in paragraphs (a) and (b).
Paragraph (a) - deemed depreciation (calculation set out below in D) $ 8,973
Paragraph (b) - lease charges allowed as a deduction $19,656
C. The amount to be assessed to the lessee is $8,973. The profit on disposal by the lessee is $11,800 but it is assessable only to the extent that it does not exceed the lower of the two tests, viz., $8,973 in paragraph (a).
D. The amount of deemed depreciation for the test in paragraph (a) of sub-section (2) is calculated under sub-section (6) as affected by sub-sections (7) or (8).
Facts -
. it is assumed that the "lessor's period of ownership" and the period of the lease agreement are the same, viz., 3 years or 1,095 days.
. that the car was acquired by the lessor after 21 August 1979 and is subject to the $18,000 depreciation limit in proposed section 57AF.
Component A of formula:
. cost of car to lessor ($32,300) $18,000
. deductions under paragraph (b) of sub-section (1) of section 56 - prime cost depreciation

$18,000 * 15% * (3 years)

$ 8,100
written down value $ 9,900
. operation of sub-section (8) -
consideration of $16,200 received by lessor pro-rated in accordance with proposed section 59(6) =

$16,200 * (($18,000)/($32,300)) = $9,027

Therefore the depreciation of $8,100 calculated above is to be increased by

((WDV) $9,900 - (S.P.) $9,027)

$873 =
$ 8,973
Components B and C = 1,095 days

Therefore calculation under sub-section (6) is -

$8,973 * ((1,095)/(1,095)) = $8,973

Deemed depreciation for the test in paragraph (a) of sub-section (2) of section 26AAB is $8,973.

Example 2

If the lessee had incurred capital expenditure of $3,000 and then sold the car for $24,000 to an associate who, after using it as depreciable property for a short period, sold it later for $28,000, section 26AAB would operate as follows -

Lessee
Consideration receivable exceeds cost by

$24,000 - $19,200

($16,200 + $3,000)

=
$ 4,800
Limits as outlined above:
paragraph (a) - deemed depreciation $ 8,973
paragraph (b) - lease charges allowed as a deduction $19,656
paragraph (c) - excess of consideration receivable over cost (including additional capital expenditure)

$24,000 - $19,200

$ 4,800
Amount assessable to lessee $ 4,800

Associate
Consideration receivable exceeds cost by

$28,000 - $24,000

$ 4,000
Limits as adjusted by sub-section (5) -
paragraph (a) =

$8,973 - $4,800

=
$ 4,173
paragraph (b) =

$19,656 - $4,800

=
$14,856
paragraph (c) =

$28,000 - ($19,200 + $4,800)

=
$ 4,000
Amount assessable to associate $ 4,000

Clause 5: Dividends

This clause proposes an amendment to section 44 that is consequential on the amendment proposed by clause 4 to include in the assessable income of a lessee or an associate any profit realised on the sale of a previously leased car or station wagon.

Section 44 contains provisions relating to the taxation of dividends. Sub-section (2) of section 44 specifies that dividends paid wholly and exclusively out of profits arising from the sale or revaluation of assets not acquired for the purpose of resale at a profit are exempt from tax if the dividends are satisfied by the issue of shares.

Profits that are included in the assessable income of a company by the operation of section 26AAA (dealing with disposal of assets within 12 months of purchase) are specifically excluded from the operation of section 44(2) and it is proposed by this clause that there be a similar exclusion of amounts assessable under the new section 26AAB in respect of the sale of previously leased motor vehicles.

Clause 5(2) will cause the amendment proposed by sub-clause (1) to apply to dividends declared and paid on or after the commencement of the amending Act, i.e., the date of Royal Assent.

Clause 6: Divisible deductions

This clause proposes amendments to section 50G, one of the provisions of Subdivision B of Division 2A of the Principal Act which, in the special circumstances in which that Subdivision applies, governs the deduction of losses or out-goings ("current year losses") incurred by a company during a year of income. These amendments are consequential upon the amendments proposed by clause 20 to introduce a system of income tax deductions for capital expenditure on traveller accommodation buildings.

In broad terms the current year loss provisions divide an income year into "relevant periods" that are separated by a "disqualifying event". A disqualifying event occurs during an income year on the occurrence of a 50 per cent or greater change in shareholders' dividend, voting or capital rights (the "continuing ownership" test), or of one of a number of circumstances that might occur under arrangements designed to avoid the continuing ownership test. A net loss incurred in one relevant period is not to be offset against a net income derived during another relevant period of the same year unless the company satisfies the continuing ownership test or, where there has been a disqualifying change in ownership, the alternative "same business" test.

Section 50G(1) of the Principal Act specifies the allowable deductions that are treated as "divisible deductions" for the purposes of the current year loss provisions. Broadly, divisible deductions are those allowable deductions of a year of income which are to be allocated to the relevant periods comprising a company's year of income for the purpose of determining the "notional taxable income" (net income) or the "notional loss" (net loss), as the case may be, of a company in relation to each of those relevant periods. Section 50G(2) specifies the manner in which those divisible deductions are to be allocated into one or more of the relevant periods of a year of income.

Paragraph (a) of clause 6(1) will amend section 50G(1) of the Principal Act to extend its operation to include among the divisible deductions specified therein, the deduction being provided for capital expenditure on traveller accommodation buildings by the insertion of Division 10C in the Principal Act by clause 20.

The deduction that may be available under the new Division 10C in respect of the destruction of a traveller accommodation building (new section 124ZE) is not to be included among divisible deductions for the purposes of the current year loss provisions. Unlike the annual deduction for depreciation to be allowed for traveller accommodation buildings, the entitlement to which accrues throughout an income year, the entitlement to the deduction to be available under section 124ZE arises at a particular time in a year (on destruction of the building). Accordingly, for the purposes of the current year loss provisions, the section 124ZE deduction will fall into the relevant period in which the destruction occurs.

Paragraphs (b) and (c) of sub-clause 6(1) will amend section 50G(2) of the Principal Act to insert a new paragraph - paragraph (y) - in that sub-section that will specify the manner in which the new depreciation deduction for traveller accommodation buildings is to be related to a relevant period for purposes of the current year loss provisions.

Under the new paragraph (y), so much of the deduction for depreciation in respect of a traveller accommodation building as the Commissioner of Taxation considers appropriate shall be related to a particular relevant period.

Sub-clause (2) of clause 6 provides for the amendments proposed by sub-clause (1) to apply to assessments in respect of the year of income in which 22 August 1979 (date of commencement of depreciation on traveller accommodation buildings) occurred, and for subsequent years of income.

Clause 7: Deduction for cost of converting oil-fired plant

This clause proposes the insertion of a new section - section 53H - in the Principal Act to provide an income tax deduction for expenditure incurred on or after 22 August 1979 and before 1 July 1984 in converting or adapting oil-fired plant to operate on alternative energy sources. A deduction is also to be available under the section for expenditure incurred in converting or adapting plant to support the operation of converted oil-fired plant or of plant that qualifies for the special 40 per cent conversion allowance for non-oil-fired plant that is to be provided under the proposed new Subdivision BB of Division 3 of Part III of the Principal Act (clause 19). That 40 per cent conversion allowance is a companion measure to the conversion deduction to be allowable under section 53H.

The deduction under section 53H for conversion costs will be available in the year of income in which those costs are incurred. It will be a condition of the deduction that the plant being converted be used solely in Australia and only for the purpose of producing assessable income by the end user.

Plant that is fuelled by liquid petroleum gas (LPG) is generally to be treated as being oil-fired, so that a deduction will be available for the cost of converting LPG plant to use alternative non-oil fuel. The treatment of LPG plant as oil-fired plant, however, will only apply to conversions made after 8 April 1980 where the LPG plant was in use on that date or was acquired under a contract entered into by that date. Where oil-fired plant that was in use on 21 August 1979 has been converted to operate on LPG, a deduction for conversion costs will be available only if those costs were incurred before 9 April 1980 or under a contract entered into before that date or where the conversion by the taxpayer was commenced before that date.

A detailed explanation of the proposed new section 53H is provided in the following notes.

Sub-section (1) is the substantive provision of section 53H and authorises a deduction for conversion costs (which are defined in sub-section (30)) incurred by a taxpayer on or after 22 August 1979 and before 1 July 1984, the deduction being allowable in the income year in which the costs are incurred.

Sub-section (2) of section 53H sets out the conditions necessary for conversion costs to be deductible in respect of plant according to whether, before the conversion, the plant in question was or was not an LPG unit.

Paragraph (a) of sub-section (2) requires, in the case of the conversion of plant that was not an LPG unit, that the unit have been in use by the taxpayer as at 21 August 1979 or installed ready for use on that date, or have been -

·
acquired by the taxpayer under a contract entered into on or before 21 August 1979; or
·
constructed by the taxpayer, construction having commenced on or before that date.

Whether actually in use, installed ready for use, or subject to contracts or arrangements made on or before 21 August 1979, paragraph (a) stipulates that the relevant unit must have been used, or be intended for use, by the taxpayer in the prescribed manner. (See the notes in relation to sub-section (3) of section 53H for an explanation of the meaning of references to the use of plant in the prescribed manner.)

Paragraph (b) of sub-section (2) requires, in the case of the conversion of plant that was an LPG unit or was used in connection with an LPG unit, that the unit have been in use by the taxpayer as at 8 April 1980 or installed ready for use on that date, or have been -

·
acquired by the taxpayer under a contract entered into on or before 8 April 1980; or
·
constructed by the taxpayer, construction having commenced on or before that date.

Whether actually in use, installed ready for use, or subject to contracts or arrangements made on or before 8 April 1980, paragraph (b) stipulates that the relevant unit must have been used, or be intended for use, by the taxpayer in the prescribed manner (as explained in notes on sub-section (3)).

Sub-section (3) of section 53H sets out the circumstances under which plant will be treated as being used, or for use, in the prescribed manner as required by sub-section (2). The circumstances are similar to those required under the investment allowance provisions.

Paragraph (a) of sub-section (3) covers the case of a taxpayer using plant that he owns or is acquiring on hire-purchase. Use of such plant in the prescribed manner means use by the taxpayer wholly and exclusively in Australia and solely for the purpose of producing assessable income, other than assessable income derived from leasing or hiring the property, letting it on hire under a hire-purchase agreement, or from granting to other persons rights to use the property.

Paragraph (b) of sub-section (3) covers the case of plant owned by a taxpayer that is a leasing company (see sub-section (30)). Use of such plant in the prescribed manner means use wholly and exclusively in Australia and solely for the purpose of producing assessable income by a lessee to whom the leasing company has leased the property under a long-term lease (sub-section (30)). Such a lease must have been entered into by the leasing company in the course of carrying on business in Australia and entered into by the leasing company and the lessee at arm's length.

Sub-section (4) of section 53H requires that, subject to sub-section (27), conversion costs incurred by a taxpayer are not to be deductible under any provision other than section 53H, or be taken into account in calculating a deduction under any other section. Thus, it will not be possible to obtain a double deduction, e.g., by way of depreciation allowances and under section 53H, in respect of conversion costs deductible under the section. The qualification relating to sub-section (27) refers to cases where in certain circumstances a deduction for conversion costs is withdrawn or deemed not to be allowable.

Sub-section (5) of section 53H deems conversion costs not to be capital expenditure or expenditure of a capital nature for the purposes of the Principal Act. The effect of this sub-section will be that conversion costs will not form part of the cost of plant for purposes of calculating balancing adjustments on the disposal of the plant under either the depreciation provisions or special provisions such as the mining provisions.

Sub-sections (6) to (24) inclusive of section 53H provide safeguards against the disposal or ineligible use of plant which has been converted or adapted from oil-firing to an alternative fuel source and in respect of which a deduction for conversion costs has been allowed or would be allowable. These safeguards are the equivalent of those that apply to plant that qualifies for the investment allowance, and also reflect amendments to those provisions as proposed by clauses 14, 15, 16 and 17.

Sub-section (6) provides for the loss of a deduction under the section where, after a taxpayer has become entitled to a deduction for conversion costs incurred in respect of property (not being leased property), any of the following events occurs within 12 months of the converted property being first used or installed ready for use -

·
it is disposed of, lost or destroyed (paragraph (a));
·
it is used by another person as a result of a lease or other right granted by the taxpayer, or sold under a hire-purchase agreement (paragraph (b));
·
it is used outside Australia, or for a purpose other than the purpose of producing assessable income (paragraph (c)).

Sub-section (7) has effect in a situation where, within 12 months of converted property (not being leased property) being first used or installed ready for use, the taxpayer disposes of part of an interest in the property. The sub-section will cause the withdrawal of so much of the conversion costs deduction as the Commissioner of Taxation considers appropriate - generally the appropriate proportion of the deduction based on the part-interest disposed of.

Sub-section (8) applies in the case of leased plant that has been converted. The deduction available to a leasing company in respect of conversion costs will be withdrawn if any of the following events occurs within the first 12 months after the converted property is first used, or installed ready for use, by the lessee and before the expiration of the term of the lease -

·
the property is disposed of by the leasing company other than to the lessee, or is lost or destroyed (paragraph (a));
·
the lessee uses the property outside Australia or for a purpose other than the purpose of producing assessable income (paragraph (b));
·
the lease is terminated otherwise than by the acquisition of the property by the lessee;
·
the lessee enters into a contract or arrangement with another person for the use of the property by that other person;
·
the lessee acquires the property and disposes of it; or
·
the lessee acquires the property and enters into a contract or arrangement with another person for the use of the property by that other person.

The qualification in sub-section (8) - which is also contained in other safeguarding provisions relating to converted leased plant - that the sub-section only applies where any of the various events occurs before the expiration of the term of the lease, recognises that leased plant may be converted in the last 12 months of the lease.

By sub-section (9), section 53H is not to apply in relation to conversion costs in respect of leased property if, before the property was leased to the lessee by the taxpayer, the lessee arranged for another person to have the use of the property. This sub-section reflects the amendments to the investment allowance proposed by clauses 14 and 16 to prevent lessees of eligible plant from avoiding existing safe-guarding measures by arranging, before a lease commences, to allow another person to use the plant.

Sub-sections (10), (11) and (12) of section 53H will operate to deny a deduction or part of a deduction in respect of conversion costs, or to withdraw a deduction or part of a deduction already allowed, where any of those events enumerated in sub-sections (6), (7) and (8) respectively occur after the expiration of 12 months after converted property is first used, or installed ready for use, by a taxpayer or by a lessee. Before any deduction may be withdrawn under sub-sections (10), (11) or (12), however, the Commissioner must be satisfied that the taxpayer or the lessee, as the case may be, intended to dispose of the property, use it for ineligible purposes or grant rights to others to use the property at the time when the converted property was first used, or installed ready for use, after conversion.

Sub-section (13) of section 53H applies for the purposes of the safeguarding provisions relating to the disposal of converted property contained in sub-sections (6), (8), (10) and (12). For the purposes of those sub-sections, a taxpayer acquiring by hire-purchase plant in respect of which he has incurred conversion costs will be deemed to have disposed of that plant if it is repossessed. The disposal will be deemed to have occurred at the time possession reverts to the owner.

Sub-sections (14) to (22) of section 53H provide safeguards against the disposal or ineligible use of converted plant in cases where a deduction in respect of conversion costs has been allowed, or is allowable, to a partnership. The safe-guards contained in sub-sections (14) to (20) apply in similar circumstances, and have broadly the same effect, as those contained in sub-sections (6), (7) and (8) (in relation to events within 12 months of first use after conversion) and sub-sections (10), (11) and (12) (in relation to events after the expiration of 12 months after first use after conversion) in respect of converted plant owned by taxpayers in their own right. The effect of sub-sections (14) to (22) is that, where converted plant owned by a partnership is disposed of or used for ineligible purposes or where one of the partners disposes of his interest in the partnership or in the property, an appropriate "share" of the relevant conversion costs deduction is added to the assessable income of each partner affected. That appropriate "share" is based on the partner's interest in the partnership profit or loss or, where applicable, so much of the conversion costs as have been borne by him.

Sub-section (17) is a special provision to cover the case where a partnership, one or more of the partners in which is a leasing company, incurs conversion costs in respect of property that is leased by the partnership to another person. In these circumstances, the conversion costs deduction is not to be allowable to the partnership in calculating the partnership's net income (or the partnership loss), but each partner is deemed to have incurred so much of the conversion costs incurred by the partnership as, by agreement between the partners, has been borne by each partner. Where the partners have not agreed as to the amounts of the expenditure to be borne by the partners, the conversion costs are deemed to have been incurred by each partner in proportion to the individual interest of each in the net income (or the partnership loss) of the partnership of the year of income in which the conversion costs were incurred.

Sub-section (21) means that section 53H will not apply in relation to conversion costs incurred by a partnership in respect of property leased by the partnership to another person if, before the property was leased, the lessee arranged for another person to have the use of the property. (Sub-section (9) contains a similar condition in relation to converted plant leased out by a person other than a partnership.)

Sub-sections (23) and (24) of section 53H ensure that paragraph (a) of sub-section (6) does not apply to withdraw a deduction for conversion costs in respect of converted property that is disposed of by the taxpayer within 12 months of first use after conversion, if the taxpayer is a member of a wholly-owned listed public company group, and the disposal is to another member of the same group and, if throughout the 12 months period, the converted property continues to be owned by a member of that group. Sub-sections (23) and (24) will have the same effect in relation to the disposal of converted plant as the new section 82AJA that is proposed by clause 17 will have in relation to the disposal of eligible investment allowance plant (see notes on clause 17). Sub-section (23) is the equivalent of sub-section (1) of proposed section 82AJA, while sub-section (24) provides for sub-sections (2) to (8) of section 82AJA to apply for the purposes of sub-section (23) in like manner as they are to apply for the purposes of sub-section (1) of section 82AJA.

Sub-section (25) of section 53H requires that a deduction in respect of conversion costs will not be available if the relevant converted unit is replaced by an oil-fired unit or is converted or adapted to operate as an oil-fired unit before 1 July 1984. Such an oil-fired unit is referred to as a "petroleum unit".

For the purposes of applying sub-section (25), sub-section (26) defines the term "petroleum unit". It will apply according to whether, after the relevant conversion, the converted unit was, or was not, an LPG unit (as defined in sub-section (30)).

Where the converted unit was an LPG unit, it may not be replaced by, or converted to, a unit that obtains its operating energy from the combustion of petroleum or a product obtained by refining petroleum other than petroleum of a kind that is in a gaseous state at a temperature of 15 degrees Celsius and a pressure of 1 atmosphere. As explained later in these notes (in relation to sub-section (32)) that definition of petroleum product is intended to cover all petroleum or oil-based fuels apart from liquid petroleum gas (LPG) and natural gas. Accordingly, sub-section (25) will not affect a case where an LPG unit (the converted unit) is replaced by another LPG unit or one that uses natural gas as a fuel, or is converted or adapted to use natural gas.

Where the converted unit was not an LPG unit, it may not, without loss of the deduction, be replaced by, or converted to, a unit that obtains its operating energy from petroleum or a product obtained by refining petroleum, but not including -

(i)
petroleum of a kind of which not less than 80 per cent by volume is methane; or
(ii)
a product derived from petroleum of that kind.

As explained later in these notes (in relation to sub-section (31)) that kind of petroleum product is intended to cover all petroleum or oil-based fuels, including LPG, other than natural gas. Accordingly, sub-section (25) will apply in any case where a converted unit (other than an LPG unit) is replaced by, or converted to, a unit that uses any petroleum product other than natural gas.

Sub-section (27) of section 53H affects the application of sub-sections (4) and (5) in cases where a deduction or part of a deduction in respect of conversion costs is withdrawn or deemed not to be allowable by reason of any of the provisions of section 53H. As previously explained, sub-section (4) requires that conversion costs not be allowable as a deduction under any section of the Principal Act other than section 53H, and sub-section (5) deems conversion costs not to be capital expenditure. Against that background, sub-section (27) will have the effect that sub-sections (4) and (5) will not apply in respect of so much of any conversion costs as is not allow-able as a deduction under section 53H. This opens the way for amounts not deductible under section 53H to be treated, in appropriate cases, as capital expenditure, or to be taken into account for deduction purposes under other sections of the Principal Act.

Sub-section (28) will apply for the purposes of the various safeguarding provisions relating to converted plant. It is designed to reinforce the general rule that converted property must, if conversion costs are to qualify for deduction, be used wholly and exclusively in the production of assessable income. It is modelled on an investment allowance provision, section 82AK.

Sub-section (28) may apply to a private company otherwise entitled to a deduction for conversion costs in respect of converted plant that is used wholly or partly for private or domestic purposes by directors, shareholders or employees of the private company, or relatives of such persons. Converted plant held by a private company that is so used would be deemed to be used by the company otherwise than for the purpose of producing assessable income. The company, in these circumstances, would cease to be entitled to a deduction for conversion costs in respect of the property.

Sub-section (29) of section 53H will ensure that expenditure for which the taxpayer has been recouped, or is entitled to be recouped, will not qualify as deductible conversion costs. In a case where a taxpayer is reimbursed an amount, part of which relates to conversion costs but the amount of that part is not specified, the Commissioner of Taxation may determine the extent to which the total amount constitutes a reimbursement of the conversion costs.

Sub-section (30) of section 53H ascribes particular meanings to a number of terms and expressions that are used in the section. The defined terms are as follows -

"conversion costs": This term is defined to mean expenditure incurred by a taxpayer in converting or adapting an oil-fired unit (as defined in sub-section (33)) to operate as a non-oil-fired unit (as defined in this sub-section). It also includes the cost of converting non-mobile plant to be used principally and directly in connexion with the operation of plant that has been so converted or of plant that qualifies for the special 40 per cent conversion allowance to be provided by the new Subdivision BB of Division 3 of Part III of the Principal Act (clause 19). For conversion costs in relation to plant that supports the operation of such replacement plant, the deduction will be available to the taxpayer whether he is the lessee or the lessor of the replacement plant. To be eligible for deduction, the conversion costs must have been incurred under a contract entered into on or after 22 August 1979 or, if the taxpayer effected the conversion, the conversion work must have commenced on or after that date.
"lease": This term is to have the same meaning it has in the investment allowance provisions, i.e., it will mean to grant a lease of property or let property on hire, otherwise than under a hire-purchase agreement.
"leasing company": This term also is to have the same meaning it has in the investment allowance provisions. A leasing company means a corporation that carries on in Australia as its sole or principal business -

·
banking; or
·
borrowing money and providing finance.

A bank or finance company, the income of which is exempt from Australian tax, is not to be treated as a leasing company for the purposes of section 53H.
"liquid petroleum gas": This term is defined in connection with the definition of "LPG unit", conversion costs in respect of which will be deductible only if the unit was in use by the taxpayer on 8 April 1980 or the unit was contracted for by that date or the construction of the unit had commenced by that date. In this connection, liquid petroleum gas means petroleum (as defined in section 6 of the Principal Act) or a product obtained by refining petroleum that -

·
consists principally of propane or butane or of a mixture of propane and butane; and
·
is in a gaseous state at a temperature of 15 degrees Celsius and a pressure of 1 atmosphere (normal atmospheric pressure measured at sea level).

"LPG unit": Conversion costs incurred in respect of such a unit of plant will be deductible under section 53H only if the unit was in use, or contracted for, etc., by 8 April 1980. An LPG unit is to mean plant within the meaning of section 54 of the Principal Act (i.e., for general depreciation purposes) that requires energy for the performance of its functions, and which is designed to obtain, and customarily obtains, that energy directly, and solely or principally, from the combustion of liquid petroleum gas. Thus a unit that is designed to operate principally on liquid petroleum gas will not qualify as an LPG unit unless its customary and principal source of energy has been liquid petroleum gas.
"long-term lease agreement": This term is to have the same meaning it has in the investment allowance provisions, i.e., a lease for a period of not less than 4 years.
"mobile property": The deduction under section 53H is not to be available in respect of the conversion or adaptation of oil-fired mobile plant such as road vehicles, ships, earthmoving equipment and fork lift trucks, but may apply to transportable plant, such as a compressor or concrete mixer, that is stationary in operation, or to moveable units forming part of fixed plant installations, e.g., a travelling overhead crane that runs along permanently affixed rails.
The exclusion of mobile plant results from application of the definitions of "conversion costs" and "non-oil-fired unit" and of sub-section (33). The definition of mobile property refers to an item that during the performance of any of its functions is not stationary with respect to its points of contact with its supporting surface. However, an item that is part of a fixed plant installation is not to be treated as mobile property.
"non-oil-fired unit": This term is used in the definition of "conversion costs" to denote that a deduction under section 53H will be available for the cost of converting or adapting oil-fired-plant to operate on non-oil fuels. A non-oil-fired unit is defined as a unit (other than mobile property) that requires energy for the performance of its functions, and which is designed to obtain, and customarily obtains, that energy directly, and solely or principally, from a source other than the combustion of a petroleum product. Thus, a deduction will not be available in respect of conversion costs unless the customary and principal source of power for the converted unit of plant is other than a petroleum product (see notes on sub-sections (31) and (32)).
"unit of property": This term is used in the definitions of "conversion costs" and of "non-oil-fired unit" and will mean that conversion costs will only be deductible if they are in respect of items that are plant within the meaning of section 54 of the Principal Act, i.e., for general depreciation purposes. Items of a taxpayer's trading stock will not qualify for the deduction.

Sub-section (31) of section 53H defines the term "petroleum product" as it is to apply generally to determine whether or not an item of plant was, before being converted or adapted, oil-fired. For that purpose, "petroleum product" means petroleum (as defined in section 6 of the Principal Act) or a product obtained by refining petroleum, but excluding petroleum of a kind of which not less than 80 per cent (by volume) is methane or is derived from petroleum of a kind of which not less than 80 per cent (by volume) is methane. The definition is intended to cover all petroleum or oil-based fuels apart from natural gas (which has been excluded, via the references to products comprising or derived from methane).

Sub-section (32) of section 53H defines the meaning of "petroleum product" as it is to apply in relation to conversion costs that were incurred before 9 April 1980 or were incurred under a contract entered into by the taxpayer before that date, or where the conversion was commenced by the tax-payer before that date. Where those conditions apply, "petroleum product" means petroleum (as defined in section 6 of the Principal Act) or a product obtained by refining petroleum, but not including such a product that is in a gaseous state at a temperature of 15 degrees Celsius and a pressure of 1 atmosphere. This definition ensures that, for arrangements entered into before 9 April 1980, the cost of converting an oil-fired item of plant to operate on LPG may qualify as deductible conversion costs. The definition is similar to that contained in sub-section (31), but effectively excludes LPG as well as natural gas, both being gaseous at normal temperatures measured at sea level.

Sub-section (33) of section 53H sets out the conditions whereby an item of plant will be treated as an oil-fired unit that is capable of being converted or adapted to an alternative energy source so as to attract the deduction under section 53H. A unit will be an oil-fired unit if, not being mobile property, it requires energy for the performance of its functions and is designed to obtain that energy directly and solely or principally, from the combustion of a petroleum product (see notes on sub-sections (31) and (32)) and -

·
where the converted plant is not leased plant, the Commissioner of Taxation is satisfied that when in use by the taxpayer before the conversion commenced, the plant item actually obtained its energy principally from the combustion of a petroleum product; or
·
where the converted plant is leased plant, the Commissioner is satisfied that when in use by the lessee before the conversion commenced, the plant item actually obtained its energy principally from the combustion of a petroleum product.

An item of plant that is not designed to obtain its operating energy principally from the combustion of a petroleum product may be treated as an oil-fired unit if -

·
where the converted plant is not leased plant, the Commissioner is satisfied that the plant was used by the taxpayer before the conversion commenced and that, at all times when it was so used, the plant item actually obtained its energy principally from the combustion of a petroleum product; or
·
where the converted plant is leased plant, the Commissioner is satisfied that the plant was used by the lessee before the conversion commenced and that, at all times when it was so used, the plant item actually obtained its energy principally from the combustion of a petroleum product.

Sub-section (34) will mean that, for the purposes of section 53H, a person holding property on hire under a hire- purchase agreement will be taken to be the owner of the property. A reference in section 53H to the acquisition of property by a person is also to be read as a reference to the person becoming the owner of the property. The sub-section ensures that a taxpayer who incurs expenditure in converting or adapting an oil-fired unit of plant that he is acquiring on hire-purchase will be able to obtain a deduction under section 53H in respect of the conversion costs.

Sub-section (35) provides that a reference in section 53H to property being installed ready for use connotes that the property is installed ready for use and held in reserve. The expression is used in relation to events that occur after converted property is first used or installed ready for use after being converted (see notes regarding sub-section (36)), and which may result in the conversion costs deduction being withdrawn. It is also used in sub-section (2) which requires that oil-fired property being converted must have been in use or installed ready for use on 21 August 1979.

Sub-section (36) of section 53H stipulates that, wherever there is a reference in the section to converted property being first used or installed ready for use, that will be taken as meaning the first use or installation ready for use of the property after the completion of the conversion or adaptation in respect of which the conversion costs were incurred. The sub-section is relevant to the various safe-guarding measures relating to the disposal or ineligible use of converted plant.

Sub-section (37) of section 53H is a technical measure relating to the definition of "conversion costs" in sub-section (30), which includes the cost of converting or adapting a unit of property to use in connexion with plant that has qualified for the special 40 per cent conversion allowance to be made available by the new Sub-division BB of Division 3 of Part III of the Principal Act (clause 19). Sub-section (37) makes it clear that a reference in sub-section (30) to a deduction being allowed or allowable to a taxpayer under Sub-division BB will include a case where a deduction has been allowed to a partner in a partnership. In cases where one or more of the partners in a partnership is a leasing company, Subdivision BB provides that any 40 per cent conversion allowance available in respect of partnership plant is deductible against the individual assessable incomes of the partners, rather than as an offset from the income of the partnership.

Clause 8: Calculation of depreciation

This clause proposes amendments to sub-section (4) of section 56 of the Principal Act that are consequential upon the amendment proposed by clause 9 to include in the Act a new provision, section 57AF, that will impose a "motor vehicle depreciation limit", initially $18,000, in respect of cars and station wagons.

Sub-section (4) of section 56 was enacted in 1979 as one of a group of measures to counter schemes based on misuse of the depreciation provisions and is designed to prevent excessive depreciation allowances on units of property depreciable under the prime cost method - the method involving a deduction for each full year of a fixed percentage of the cost of the unit of property. The sub-section is directed against cases where transactions associated with the acquisition of a unit of property by a taxpayer involve parties that are not dealing with each other at arm's length and where the actual cost is greater than the amount that would have been the cost if they had been dealing with each other at arm's length.

Where the Commissioner of Taxation is satisfied that these circumstances exist, sub-section (4) deems the arm's length amount (the true value of the unit at the time of acquisition) to be the cost of the unit for the purpose of calculating depreciation under the prime cost method in accordance with paragraph (b) of sub-section (1).

The amendments to sub-section (4) of section 56 that are proposed by clause 8 are designed to ensure that, in making his judgment for the purposes of that sub-section in a case involving a motor vehicle deemed by the new section 57AF to have a cost for depreciation purposes equal to the motor vehicle depreciation limit set by that section, the Commissioner will be able to consider whether the actual cost of the vehicle, rather than that deemed cost, exceeds the arm's length amount or true value.

The amendments are designed to ensure also that, if sub-section (4) applies to deem the true value to be the cost and the true value exceeds the motor vehicle depreciation limit, the deemed cost is subject to the motor vehicle depreciation limit under the new section 57AF.

Clause 9: Limit on cost price for depreciation of motor vehicle

The purpose of sub-clause (1) of clause 9 is to insert a new section - section 57AF - in the Principal Act which will limit to $18,000 for the year of income ending 30 June 1980 the cost for depreciation purposes (to be known as the motor vehicle depreciation limit) of a motor car or station wagon, including such a vehicle which is a four wheel drive vehicle, acquired by a taxpayer after 21 August 1979 and first used by the taxpayer during that year of income. If a vehicle is first used by a taxpayer during the 1980- 81 income year the limit for the purpose of calculating depreciation allowances of that taxpayer will be $18,000 indexed in accordance with the average level of change in the motor vehicle purchase sub-group of the Consumer Price Index for the four quarters ended March 1980 over the four quarters ended March 1979. Corresponding adjustments will be made for subsequent income years although the depreciation limit will never be less than $18,000.

Under transitional arrangements associated with the introduction of the motor vehicle depreciation limit, the limit will not apply to a vehicle acquired by a taxpayer after 21 August 1979 if the previous owner or owners had held it only as trading stock and the previous owner or one of the previous owners held the vehicle in stock on that date or acquired it subsequently under a contract then in force. This exception of a vehicle from the depreciation limit will apply only to the first user of the motor vehicle.

Sub-section (1) of section 57AF specifies the vehicles to which section 57AF will apply to limit depreciation allowances. The section will apply to a motor vehicle in respect of which depreciation is allowable under the Principal Act and which is a motor car or station wagon (including a vehicle known as a four wheel drive vehicle). It will not apply to a vehicle, referred to as an excluded unit of property, which is acquired by the taxpayer on or before 21 August 1979, or under a contract entered into on or before that date, or which is the subject of the transitional provisions just mentioned. The term "excluded unit of property" is defined in sub-section (15).

Sub-section (2) is the main operative provision in the new section. Where a taxpayer who owns a motor vehicle to which section 57AF applies would otherwise be entitled to depreciation allowances based on a cost in excess of the motor vehicle depreciation limit applicable to the year of income during which he first used it, whether for the purpose of producing assessable income or otherwise, the sub-section provides for that limit to be treated as being the cost of the vehicle for the purpose of calculating the depreciation allowable to the tax-payer for any year of income. The sub-section deems the cost of the vehicle to be the amount of the motor vehicle depreciation limit that applies in relation to the income year in which the vehicle is first used.

The motor vehicle depreciation limit will apply for the purpose of section 56(1)(b) of the Principal Act in calculating depreciation under the prime cost method. It will apply also for the purposes of section 62(1) of the Principal Act in calculating the "depreciated value" of property. The "depreciated value" of property is used in the calculation of depreciation under the diminishing value method of depreciation and for the purpose of calculating any balancing adjustments on disposal, loss or destruction of the property in accordance with section 59.

The limit will apply in relation to all cars and station wagons which are not "excluded units of property" and in respect of which depreciation is allowable. It will thus apply to vehicles owned and let out on lease by finance companies or other lessors. Where finance companies use a financial or actuarial method of calculating the amount of taxable income - in which case an allowance for depreciation is reflected in the calculations - an appropriate adjustment will be made in calculating the taxable income of the finance company to reflect the depreciation cost limit that applies to the vehicles concerned.

Sub-section (3) sets the motor vehicle depreciation limit basically at $18,000 but allows sub-section (4), as affected by sub-section (5), to operate so as to substitute a different amount as the limit in relation to any year of income subsequent to the 1979-80 year.

Sub-section (4) lays down a basis of indexation to determine the amount of the motor vehicle depreciation limit that is to apply for the year of income ending 30 June 1981 or any subsequent year of income. To ascertain the depreciation limit for the 1980-81 year of income, the amount of $18,000 is to be multiplied by a factor ascertained in accordance with sub-section (6). For each subsequent income year, the amount of the depreciation limit for the previous income year calculated in accordance with sub-section (4), or the amount that would have been the previous year's limit but for the operation of sub-section (5), is to be multiplied by the factor for that subsequent year calculated under sub-section (6).

Sub-section (5) specifies that, if the depreciation limit for a particular year of income calculated in accordance with sub-section (4) does not exceed $18,000, then that sub-section does not have effect. In relation to that year of income, the depreciation limit will be $18,000.

Sub-section (6) prescribes the method of determining the indexation factor referred to in sub-section (4), which is to be ascertained for any year of income as at the date on which the index number is first published for the March quarter preceding that year. The factor is, in effect, to be the number ascertained by dividing the sum of the motor vehicle purchase sub-group numbers of the Consumer Price Index (as defined in sub-section (15)) for each quarter of the twelve months ended 31 March that precedes the commencement of the relevant year of income by the sum of the corresponding numbers for each quarter of the twelve months ending on the previous 31 March.

Under sub-section (7) an index number first published for the quarter of any year is to be used in the calculation in sub-section (6). Any index number published in substitution for a previously published index number is to be disregarded for the purposes of the section.

Sub-section (8) requires that, if at any time the Australian Statistician changes the reference base for the motor vehicle purchase sub-group of the Consumer Price Index, the indexation factor calculated after that time is to be determined by reference only to index numbers published in terms of the new base.

Sub-section (9) specifies a basis for rounding to three decimal places the factor calculated in accordance with sub-section (6).

Sub-section (10) requires the Treasurer to have published in the Gazette before the start of the income year commencing 1 July 1980 and each subsequent income year the factor calculated in accordance with sub-section (6) and the motor vehicle depreciation limit for that income year.

Sub-sections (11) and (12) provide for the rounding to the nearest whole dollar of an amount determined by application of the indexation factor that contains a fraction of a dollar. This would ordinarily be the depreciation limit actually applicable for an income year.

Sub-section (13) is designed to counter any attempt that might be made to avoid or cut down the effects of the $18,000 depreciation limit where a person, at or about the time of the purchase of a motor vehicle which is exposed to the limit, sells or trades-in another unit of property.

Such a person would be tempted to dispose of the property which is being sold or traded-in for less than its market value and to recover that loss as a discount on the purchase by himself or another person of a motor vehicle the cost of which is, or otherwise would be, in excess of the motor vehicle depreciation limit for the year of income. The advantage that would be contemplated would be an elimination or reduction of any balancing adjustment to be included in the assessable income of the person on the disposal of the first vehicle. Provided the discounted purchase price of the second vehicle is not below the motor vehicle depreciation limit, there would be no offsetting disadvantage by way of lost depreciation on that vehicle because depreciation would not have been available anyway on any excess of the cost over the limit.

The purpose of sub-section (13), which is to operate only where the pre-discount price of the vehicle purchased would exceed the motor vehicle depreciation limit, is to deal with any such situations by treating the amount of the discount which is attributable to the disposal of the first vehicle for less than market value as an addition to the cost price of the vehicle acquired, and as an addition to the sale price of the vehicle traded in.

Sub-section (14) caters for situations where it is necessary to determine the market value at a particular time of a vehicle in relation to which the section, and in particular sub-section (13), will apply and where there is insufficient evidence of the market value at that time. In these situations, that market value is to be taken to be such amount as the Commissioner of Taxation considers is fair and reasonable.

Sub-section (15) defines various terms used in section 57AF.

The term "discount", which is used in sub-section (13), is defined in relation to the acquisition of a unit of property as including any allowance that has the effect of reducing the price payable for the acquisition of the unit.

"Excluded unit of property" is an expression used in sub-section (1) to identify motor vehicles to which section 57AF does not apply. Accordingly, a motor vehicle which, in relation to a particular taxpayer, is within the defined meaning of the expression is not subject to the operation of the section.

Paragraph (a) of the definition refers to a unit of property that was acquired by the taxpayer on or before 21 August 1979 or under a contract entered into on or before that date. Paragraph (b) refers to a unit of property that was constructed by the taxpayer where the construction commenced on or before 21 August 1979. Paragraph (c) relates to a unit of property that was acquired by the taxpayer after 21 August 1979 where the unit had been acquired by some other person on or before that date or under a contract entered into on or before that date and where that person, and any other person who owned the property before it was acquired by the taxpayer, held the property as trading stock.

The last-mentioned paragraph gives effect to the transitional arrangements explained in the introductory notes. It means that a vehicle held in stock by a dealer as at 21 August 1979, a vehicle acquired by a dealer or importer under a contract entered into on or before that date, or a vehicle which was to be traded-in under such a contract but which did not come into the dealer's or importer's possession for sale until after 21 August 1979, will not be subject to the operation of section 57AF in the hands of the first owner.

The term "index number" is defined for the purposes of the calculation of the indexation factor under sub-section (6), as is the term "relevant year of income".

Sub-clause (2) of clause 9 will have effect in relation to the operation of sub-section (6) of proposed section 57AF. Sub-section (6) sets out the basis of calculation of the indexation factor which is to be ascertained for any relevant year of income as at the date on which the index number for the March quarter preceding that year was first published. Sub-clause (2) recognises that the index number for the March quarter of 1980 will have been published before the Bill is enacted and allows the Commissioner to determine the date on which to ascertain the indexation factor for the income year commencing 1 July 1980.

Clause 10: Disposal, loss or destruction of depreciated property

This clause proposes amendments to section 59 of the Principal Act that are consequential upon the amendment proposed by clause 9 to include in the Act a new provision, section 57AF, to limit for depreciation purposes the cost prices of certain motor vehicles.

Section 59 provides for an appropriate depreciation adjustment on disposal, loss or destruction of depreciable property. The depreciated value of a unit of property, ascertained under section 62 of the Act, is its cost price less the depreciation allowed or allowable. Where the "consideration receivable" on the disposal, loss or destruction of a unit of depreciable property exceeds its depreciated value, section 59 requires the amount of the excess to be included as a balancing adjustment in the assessable income of the taxpayer, but only to the extent of the depreciation deductions that have been allowed to the taxpayer. Where the depreciated value exceeds the consideration receivable, a further deduction is available to the taxpayer as a balancing adjustment.

An important purpose of the amendments proposed by clause 10 is to vary the meaning of "consideration receivable" for the purposes of the operation of section 59 in relation to the disposal, loss or destruction of a motor vehicle where depreciation in respect of the vehicle has, in accordance with the new section 57AF, been calculated by reference to a deemed cost equal to the motor vehicle depreciation limit, rather than the actual cost. In such a case, it is proposed that the balancing adjustment on disposal of the vehicle will be calculated by reference to a proportionate part of the amount that otherwise would be the consideration receivable for the purposes of section 59. The basis of apportionment is explained in the notes on paragraph (c) of this clause.

Paragraph (a) of clause 10 is a drafting measure by which the definition of "consideration receivable" in section 59(3) of the Principal Act is to be made subject to the operation of the proposed new section 59(6).

Paragraph (b) proposes to include in section 59 a new provision - sub-section (4A) - which is designed to allow sub-section (4) to have a proper operation in relation to disposals of motor vehicles that have been subject to depreciation on the basis of the cost limit set by the new section 57AF.

Sub-section (4) of section 59 was enacted in 1979 as one of a group of measures to counter schemes based on misuse of the depreciation provisions and is designed to counter arrangements whereby a taxpayer might sell plant for a nominal amount so as to create a large balancing adjustment based on that actual (but nominal) sale price. The sub-section provides that, if depreciable property is sold at a price lower than its depreciated value and its market value, in a situation where the parties are not dealing at arm's length, the vendor will be treated as having sold the plant at the lower of depreciated value or market value.

The new sub-section (4A) of section 59 to be included by paragraph (b) will mean that any reference to depreciated value in sub-section (4) is to be taken as a reference to what would have been the depreciated value of the property (the motor vehicle) if the cost of the property for the purposes of calculating depreciation had been the amount that would have been the cost if section 57AF, with the exception of sub-section 57AF(13), had not applied and depreciation had been allowable on the basis of that amount.

Paragraph (c) of clause 10 proposes to include a new provision, sub-section (6), in section 59 of the Principal Act. The sub-section will implement the proposal, as explained in the introductory notes to this clause, that the balancing adjustment on disposal of a motor vehicle will be determined by reference to a proportionate part of the amount that otherwise would be the consideration receivable where, for the purposes of allowing depreciation, the cost of the vehicle is affected by the operation of proposed section 57AF. The amount deemed to be the consideration receivable in such a case is to be calculated in accordance with the formula

(A * B)/(C)

where -

A is the amount which would otherwise be the consideration receivable for the purposes of section 59 if this new sub-section had no effect. It may be an amount calculated in the terms of section 59(3), as adjusted because of the operation of section 57AF(13), or an amount treated by section 59(4) or section 59AA as being the consideration receivable.
B is the motor vehicle depreciation limit which applied in the year of income in which the unit of property was first used for producing assessable income or otherwise.
C is the amount which would have been the cost of the unit of property for the purposes of calculating depreciation under the Principal Act if section 57AF had not applied, although any adjustment which is made to the cost because of the operation of section 57AF(13) is to be included as part of the cost.

An example showing the application of the new sub-section (6) is at the end of the notes on clause 4.

Clause 11: Disposal of depreciated property on change of ownership or interest

This clause proposes amendments to section 59AA of the Principal Act, which applies where there are changes in the ownership of depreciable property or of interests therein for any reason, including the formation or dissolution of a partnership or a variation in the partnership's constitution or in the interests of the partners, and one or more of the persons who owned the property before the change has or have an interest in the property after the change.

In these circumstances, the depreciation provisions of the Principal Act apply as if the person or persons who owned the property before the change had disposed of the whole of the property to the person, or to all of the persons, by whom the property is owned after the change for a consideration equal to the amount specified in the relevant agreement between the parties concerned as being the transfer value of that depreciable property. This consideration must (subject to sub-section (2)) be accepted by the Commissioner for the purposes of any balancing adjustment in accordance with section 59 relating to the disposal of that unit of depreciable property. If there is no agreement or no amount is specified in the agreement the consideration is to be determined by the Commissioner.

Paragraph (a) of clause 11 will amend sub-section (2) of section 59AA. That sub-section was enacted in 1979 as one of a group of measures to counter schemes based upon misuse of the depreciation provisions and is designed to thwart efforts to obtain an excess balancing adjustment by specifying in an agreement for the change in ownership or interests in partnership property a value for depreciable property that is less than both the market value and the depreciated value of the plant. Should parties reach an agreement and specify a value for depreciable property that is less than both the market value and the depreciated value of the plant, the effect of sub-section (2) is that the lower of those two values applies for the purposes of calculating depreciation balancing adjustments applicable to the transfers.

The amendments to sub-section (2) of section 59AA proposed by paragraph (a) of this clause are designed to allow the sub-section to have a proper operation where it applies to a change of ownership of or interests in a motor vehicle that has been subject to the depreciation limit set by the new section 57AF. In such a case, the amendments will have the effect that any reference to depreciated value in the sub-section is to be taken as a reference to what would have been the depreciated value of the property (the vehicle) if the cost of the property for the purpose of calculating depreciation had been the amount that would have been the cost if section 57AF had not applied and depreciation had been allowable on the basis of that amount.

Sub-section (2) of section 59AA operates so that the transferees of the property as a consequence of the agreement are to be allowed depreciation calculated with regard to the amount specified in the agreement. Paragraph (b) of clause 11 proposes to include a new sub-section - sub-section (4) - in section 59AA so that the operation of the section in attributing a cost price to plant is subject to the motor vehicle depreciation limit to be imposed by clause 9 of this Bill.

Clause 12: Definition of depreciated value

This clause proposes amendments to section 62 of the Principal Act that are consequential on the amendment proposed by clause 9 to impose a depreciation limit in respect of certain motor vehicles.

Section 62 of the Principal Act defines the term "depreciated value", a term used throughout the depreciation provisions, as the cost of a unit of property to the owner, less the total amount of depreciation allowed or allowable in respect of that unit to that person. The "depreciated value" of a unit of property established by section 62 is used in the calculation of balancing adjustments on disposal of the unit. It is also used in determining annual depreciation allowances for property in respect of which depreciation is being claimed under the diminishing value method.

Sub-section 62(3) was enacted in 1979 as one of several measures to counter schemes based on misuse of the depreciation provisions. The sub-section is directed against schemes under which the cost of plant is inflated in order to "manufacture" deductions by way of depreciation, generally as balancing deductions on disposal of the plant for its true value. Where the parties to such a transaction are not dealing at arm's length, sub-section 62(3) operates to treat the arm's length cost of the plant as the cost of the plant for purposes of section 62.

The amendments to sub-section 62(3) that are proposed by clause 12 are designed to ensure that in making his judgment for the purposes of that sub-section, the Commissioner of Taxation will compare the actual cost and the true value without regard to any motor vehicle depreciation limit that may apply under the proposed new section 57AF.

The amendments are designed to ensure also that, if sub-section (3) applies to deem the cost to be the true value and that deemed cost exceeds the motor vehicle depreciation limit, the deemed cost is also subject to the motor vehicle depreciation limit under section 57AF.

Clause 13: Gifts, calls on afforestation shares, pensions, etc.

The purpose of this clause is to provide an income tax deduction for gifts made to The Australian College of Obstetricians and Gynaecologists. Gifts made to its predecessor - the Australian Regional Council of the Royal College of Obstetricians and Gynaecologists - are at present deductible under section 78(1)(a)(xxii).

Section 78 of the Principal Act authorises an income tax deduction for gifts of the value of $2 and upwards of money, or of property other than money that was purchased by the taxpayer within the twelve months preceding the making of the gift, to a fund, authority or institution specified in paragraph (a) of section 78(1). The deduction in respect of gifts of property other than money is limited to the lesser of the value of the property at the time the gift was made and the amount paid by the donor for the property.

Sub-clause (1) of clause 13 will insert a new sub-paragraph - sub-paragraph (1iii) - in section 78(1)(a) of the Principal Act to specify The Australian College of Obstetricians and Gynaecologists as a fund to which the gift deduction authorised by section 78(1)(a) applies.

Sub-clause (2) will ensure that gifts made to The Australian College of Obstetricians and Gynaecologists both before and after the enabling legislation becomes law will be eligible for the deduction proposed by sub-clause (1).

The Australian College of Obstetricians and Gynaecologists was incorporated on 29 August 1978. Sub-clause (3) will ensure that the Commissioner of Taxation has authority to reopen an income tax assessment made before the enabling legislation becomes law if this should be necessary to allow a deduction for a gift made to the College before that time.

Clauses 14 to 16: Investment allowance

Clauses 14 to 16 will amend safeguarding provisions contained in sections 82AG, 82AH and 82AJ of the Principal Act, which provide for the investment allowance otherwise allowable to be forfeited when the relevant plant is dealt with in a manner set out in those sections. The amendments are concerned with certain technical deficiencies in those safeguards that have resulted in anomalies as between lessees and outright purchasers of plant that attracts the investment allowance.

The proposed amendments were announced by the Treasurer on 19 August 1979 and will apply to contracts or arrangements entered into after that date.

Clause 14: Disposal, etc., of property within 12 months after installation

Clause 14 will amend section 82AG(3) of the Principal Act and add a new sub-section - sub-section (4) - to that section.

By section 82AG of the Principal Act the investment allowance is not to be available if, before the expiration of 12 months after the plant was first used or installed ready for use by the taxpayer who acquired it, the plant is, broadly, disposed of, leased out or used outside Australia.

Sub-section (3) of section 82AG deals with plant that is leased and provides that the investment allowance is not available if, within 12 months of first use by the lessee, the lease is terminated otherwise than by the acquisition of the property by the lessee or if, while the lease was in force, the lessee entered into a contract or arrangement with another person for the use of the property by that other person. Both of these latter disqualifying tests have been shown to contain technical deficiencies.

Paragraph (a) of sub-clause (1) of clause 14 is a drafting amendment that is consequential upon the addition of a new paragraph (f) to section 82AG(3).

Paragraph (b) of sub-clause (1) will add the new paragraph (f) to section 82AG(3). It will withdraw the investment allowance deduction where, within 12 months of its first use or installation ready for use by the lessee, the lessee acquires the leased plant and enters into a contract or arrangement for it to be used by another person. That will put the lessee in an equivalent position to an owner who within the first 12 months grants rights to use it to another person.

Paragraph (c) will add a new sub-section - sub-section (4) - to section 82AG of the Principal Act to withdraw an investment allowance deduction where, before the commencement of the lease, the lessee contracted or arranged for the use of the property by another person. This will supplement the existing rule dealing with such arrangements made while the lease was in force.

Under sub-clause (2) the amendments made by sub-clause (1) will apply to contracts or arrangements entered into on or after 20 August 1979 - the day following the date on which the amendments were foreshadowed.

Clause 15: Disposal, etc., of property after 12 months after installation

Clause 15 will amend sub-sections (3) and (4) of section 82AH of the Principal Act by adding a new sub-paragraph - sub-paragraph (vi) - to sub-section (3)(b) and a new sub-paragraph - sub-paragraph (v) - to sub-section (4)(b).

Section 82AH complements section 82AG (see clause 14) and enables the investment allowance to be withdrawn if, after the expiration of 12 months after the plant was first used or installed ready for use by the taxpayer, the plant is dealt with by the taxpayer in one of the ways indicated in it (and which match the disqualifying events in section 82AG) and the Commissioner of Taxation is satisfied that at the time the plant was acquired by the taxpayer, the taxpayer intended to deal with the plant in such a way.

Sub-section (3) of section 82AH deals with plant that is leased and provides that the investment allowance is not available if, after the expiration of 12 months after the plant was first used, or installed ready for use, by the lessee and before the expiration of the lease, the lessee dealt with the plant in one of the disqualifying ways mentioned in the sub-section and the Commissioner is satisfied that the lessee intended to so deal with the plant when he took it on lease.

Paragraphs (a), (b), (d) and (e) of sub-clause (1) of clause 15 are drafting amendments that are consequential upon the proposed addition of new sub-paragraph (vi) to section 82AH(3)(b).

Paragraph (c) of sub-clause (1) will add a new sub-paragraph - sub-paragraph (vi) - to section 82AH(3)(b) to withdraw an investment allowance deduction otherwise allowable to the lessor where, after the expiration of 12 months from the time the plant was first used or installed ready for use by the lessee and before the expiration of the lease, the lessee acquired ownership of the leased plant and entered into a contract or arrangement for it to be used by another person. The proposed new paragraph will apply only if the lessee had the intention of dealing with the leased plant in that way at the time of entering into the lease. It will be seen that this amendment parallels the amendment proposed by clause 14(1)(b).

Paragraphs (f), (g) and (j) of sub-clause (1) are drafting amendments that are consequential upon the addition of the proposed sub-paragraph (v) to section 82AH(4)(b) of the Principal Act.

Paragraph (h) will add a new sub-paragraph - sub-paragraph (v) - to section 82AH(4)(b) to withdraw the investment allowance deduction of a lessee where, after the expiration of 12 months from the time the leased plant was first used or installed ready for use by the lessee, the lessee acquired ownership of the plant and entered into a contract or arrangement for that plant to be used by another person. Like the new sub-paragraph (vi) of section 82AH(3)(b), the new sub-paragraph (v) of section 82AH(4)(b) will apply only if the lessee had the intention of dealing with the leased plant in that way at the time of entering into the lease.

Under sub-clause (2) of clause 15 the amendments made by sub-clause (1) are also to apply to contracts or arrangements entered into on or after 20 August 1979.

Clause 16: Special provisions relating to partnerships

Clause 16 will amend section 82AJ of the Principal Act to include a new paragraph (f) in sub-section (7), to insert a new sub-section (7A) and to include a new sub-paragraph (vi) in paragraph (b) of sub-section (8). The amendments are on all fours with those proposed by clauses 14 and 15, but are necessary because the special provisions relating to partnerships in section 82AJ proceed on corresponding lines to sections 82AG and 82AH.

Section 82AJ of the Principal Act provides for the situation where the investment allowance deduction is allowable in calculating the net income of a partnership or, in the case of leased plant owned by a partnership of leasing companies, to the partners.

By sub-section (7) of section 82AJ, the investment allowance is not available in respect of plant leased by a partnership if before the expiration of 12 months after the property was first used, or installed ready for use, by the lessee, the plant is dealt with in one of the disqualifying ways mentioned in the sub-section. To overcome technical deficiencies in the present disqualifications, two more are to be added.

Paragraph (a) of sub-clause (1) of clause 16 is a drafting amendment that is consequential upon the proposed addition of new paragraph (f) to section 82AJ(7).

Paragraph (b) of sub-clause (1) will add a new paragraph - paragraph (f) - to section 82AJ(7) to withdraw an investment allowance deduction where, within 12 months of plant leased by a partnership lessor being first used, or installed ready for use, by a lessee, the lessee acquires ownership of the plant and enters into a contract or arrangement for another person to use the plant.

Paragraph (c) will insert a new sub-section - sub-section (7A) - in section 82AJ of the Principal Act to withdraw an investment allowance deduction in respect of plant leased by a partnership lessor where, before the commencement of the lease, the lessee contracted or arranged for the use of the plant by another person. This will supplement the existing rule which denies the investment allowance if such arrangements are made while the lease was in force.

Paragraphs (d), (e), (g) and (h) are amendments that are consequential upon the proposed addition of new sub-paragraph (vi) in paragraph (b) of section 82AJ(8) of the Principal Act by paragraph (f) of this sub-clause.

Paragraph (f) of sub-clause (1) will add a new sub-paragraph - sub-paragraph (vi) - to section 82AJ(8)(b) to withdraw the investment allowance deduction of a leasing company partner in a lessor partnership where, after the expiration of 12 months from the time the leased plant was first used or installed ready for use by the lessee and before the expiration of the lease, the lessee acquired ownership of the plant and entered into a contract or arrangement for the use of that plant by another person. The proposed sub-paragraph (vi) will apply only if the Commissioner is satisfied that the lessee had the intention of entering into such an arrangement at the time of entering into the lease.

By sub-clause (2), the amendments proposed by sub-clause (1) are to apply to contracts or arrangements entered into on or after 20 August 1979, the day following the date on which the amendments were foreshadowed.

Clause 17: Disposals within company group

Clause 17 proposes the insertion of a new section - section 82AJA - that will override paragraph (a) of sub-section (1) of section 82AG by permitting the transfer of property within 12 months of first use of that property without loss of the investment allowance, where the transfer is between companies within a wholly-owned listed public company group and there is, throughout the 12 months period, no change in the underlying ownership of the property by the same listed public company or companies.

The new section provides for two kinds of company group within which plant may be transferred within the first 12 months without loss of the investment allowance.

The first group is one that comprises one listed public company parent (the "holding company" referred to in section 82AJA(4)) and wholly-owned subsidiary companies (the "wholly-owned subsidiaries" referred to in section 82AJA(5)). In this kind of group, transfers of property are to be permitted between the holding company and its wholly-owned subsidiaries and between the wholly-owned subsidiaries.

The second group is one that comprises two or more listed public companies (the "parent companies" referred to in section 82AJA(6)) and wholly-owned subsidiary companies (the "wholly-owned subsidiary" companies referred to in sub-section 82AJA(6)) that are wholly-owned, either directly or indirectly, by the listed public companies. Transfers of property within this group will be permitted only where they are made between the wholly-owned subsidiary companies.

It will be necessary for the holding company in the first group and each of the parent companies in the second group to be an "eligible public company", i.e., a listed public company for income tax purposes under section 103A(2)(a) of the Principal Act.

It will be necessary also for each wholly-owned subsidiary company in a group to be an "eligible subsidiary", i.e., a subsidiary of a public company for income tax purposes under section 103A(4) of the Principal Act.

Where a 12 months period straddles two income years, it will be necessary for the holding company in the first group and the parent companies in the second group to be eligible public companies in relation to each of those income years. In the same circumstances a wholly-owned subsidiary will be required to be an eligible subsidiary in relation to each of those income years.

The relaxation of the 12 months rule for investment allowance purposes will apply to transfers of property made after 19 August 1979, it having been foreshadowed in a statement by the Treasurer on that date. It will not apply to leased plant or to private company groups.

Notes on the proposed section 82AJA follow.

Sub-section (1) of the new section 82AJA is the operative provision designed to ensure that paragraph (a) of sub-section (1) of section 82AG will not apply to cause a loss of the investment allowance in relation to a disposal of property by a company (its original owner) after 19 August 1979 but within 12 months of the first use of that property if the conditions in paragraphs (a) to (d) of the sub-section are satisfied.

Paragraph (a) requires that the disposal be to another company that is related to the vendor company at the time of disposal (see sub-section (3)).

Paragraph (b) requires that the property was not at any time during the 12 months period commencing on first use, owned by a company other than the original owner and an eligible transferee company. Sub-paragraphs (i) to (iv) in effect set out which group companies are for this purpose to be treated as eligible transferee companies.

Sub-paragraph (i) refers to a transfer to a holding company by its wholly-owned subsidiary company and means that the property must be owned at all times during the 12 months period by the holding company and a wholly-owned subsidiary of that holding company.

Sub-paragraph (ii) refers to a transfer of property by a holding company to its wholly-owned subsidiary company. Here the property must be owned at all times during the 12 months period by the holding company and by a wholly-owned subsidiary of that holding company.

Sub-paragraph (iii) refers to a transfer of property from one wholly-owned subsidiary of a holding company to another wholly-owned subsidiary of the same holding company. In this situation the property must be owned at all times during the 12 months period by the holding company and one or more of its wholly-owned subsidiary companies.

Sub-paragraph (iv) applies where the eligible transferee companies in the group are wholly-owned subsidiary companies of two or more eligible public companies (the parent companies) and the property is transferred from one wholly-owned subsidiary to another wholly-owned subsidiary. In these circumstances, sub-paragraph (iv) requires that the property must not be owned at any time during the 12 months period by a person other than a wholly-owned subsidiary of those parent companies.

Paragraph (c) will supplement the tests in paragraph (b) by requiring, in relation to any time during the 12 months period when the property is owned by a holding company (i.e., by the company identified as "the transferee" in sub-paragraph (i) of paragraph (c), as "the taxpayer" in sub-paragraph (ii), and as "that other company" in sub-paragraph (iii), that the holding company will be an eligible public company - as defined in section 82AJA(8) - for the year of income in which that particular time occurs.

This safeguard could have application where the holding company acquires ownership of the property from its wholly-owned subsidiary during the 12 months period. Where the 12 months period straddles two income years of the holding company, and provided the holding company acquires the property not later than the end of the first of those two income years and is an eligible public company in relation to that first income year, the holding company could, apart from the operation of paragraph (c), retain ownership of the property to the end of the 12 months period without qualifying as an eligible public company in relation to the second of those income years (and thus in relation to a part of the 12 months period) and also without disturbing the operation of the relaxed 12 months rule.

Paragraph (c) will therefore require the holding company to be an eligible public company in relation to any income year of the holding company that overlaps the 12 months period.

The general safeguards of the investment allowance scheme apply by reference to ineligible use being made of property by the taxpayer, i.e., by its original owner or by a lessee. Those safeguards would not operate to withdraw an investment allowance entitlement if ineligible use of that kind were made of property by a company to which that property has been transferred under the relaxed 12 months rule.

To meet this situation, paragraph (d) of sub-section (1) requires that, at no time during the 12 months period, did a person who owned the transferred property use it in ineligible ways, i.e., lease it, let it on hire-purchase, otherwise grant rights to another person to use it, use it outside Australia or otherwise than to produce assessable income. If such use is made of the property during the 12 months period, section 82AJA will not operate to relax the 12 months rule.

Sub-section (2) of section 82AJA will apply where, in pursuance of a court order concerning an arrangement under company law, the whole of the undertaking of the holding company, or of one of the parent companies, of a listed public company group (company A) is vested in another company (company B), the shareholders in company A become the shareholders in company B with interests equivalent to those held in company A and company A is dissolved (paragraph (a) of sub-section (2)).

Paragraph (b) identifies such a dissolved company as the holding company identified in sub-paragraphs (i), (ii) or (iii) of section 82AJA(1)(b) or as one of the parent companies referred to in sub-paragraph (iv) of that paragraph.

In these circumstances sub-section (2) requires that, in applying paragraphs (b) and (c) of section 82AJA(1) in relation to any time after the occurrence of the events specified in paragraph (a), company B is to be treated as if it were company A. This will have the effect that the substitution of company B for company A in the company group is treated as in no way disturbing the underlying ownership of the transferred property throughout the 12 months period by the same listed public company or companies.

Sub-section (3) specifies the circumstances under which one company is to be treated as related to another at a particular time. Companies are so related if, at that time, there is between them the relationship described in paragraphs (a) to (d).

Paragraphs (a), (b) and (c) identify the necessary relationship for the companies in a company group comprised of the holding company (defined in sub-section (4)) and its wholly-owned subsidiary companies (defined in sub-section (5)).

Under paragraph (a), the holding company - the first company - is related to its wholly-owned subsidiary - the second company.

Under paragraph (b), a wholly-owned subsidiary - the first company - is related to its holding company - the second company.

Under paragraph (c), a wholly-owned subsidiary - the first company - of a holding company is related to another wholly-owned subsidiary - the second company - of that holding company.

Paragraph (d) identifies the necessary relationship between companies (defined as "wholly-owned subsidiaries" in sub-section (6)) that are wholly-owned by two or more eligible public companies - the parent companies.

Under paragraph (d), a wholly-owned subsidiary - the first company - of the parent companies is related to another wholly-owned subsidiary - the second company - of the same parent companies.

Sub-section (4) specifies the conditions under which one company is to be taken at a particular time (the "relevant time") to be the holding company of another (the "relevant subsidiary"). The first condition under paragraph (a) is that the holding company be an eligible public company (as defined in sub-section (8)). The second condition under paragraph (b) is that the relevant subsidiary be an eligible subsidiary (as defined in sub-section (7)).

Paragraph (c) specifies further conditions to be satisfied as at the relevant time for the holding company to establish a direct or indirect ownership of the relevant subsidiary for purposes of the relaxed 12 months rule.

Sub-paragraph (i) of paragraph (c) identifies the direct relationship situation - all of the shares in the relevant subsidiary are to be beneficially owned by the holding company at the relevant time.

Sub-paragraphs (ii) and (iii) provide for other possible wholly-owned relationships between the holding company and the relevant subsidiary. Corporate structures under which all of the shares in the relevant subsidiary are beneficially owned by one or more companies that are interposed between the holding company and the relevant subsidiary company would be one example. These are interposed companies that are eligible subsidiary companies as defined in sub-section (7) in relation to the year in which the relevant time occurs. Possibly, in some such corporate structures, some shares in the relevant subsidiary might be beneficially owned directly by the holding company. The ownership of these interposed companies by the holding company is identified in paragraph (d).

Sub-paragraph (ii) of paragraph (c) is satisfied where there is an indirect 100 per cent ownership of the relevant subsidiary company (company X) by the holding company at the relevant time through all of the shares in company X being beneficially owned at that time by a company (company A) that is an eligible subsidiary company for the income year in which the relevant time occurred. The wholly-owned relationship between company A and the holding company (whether direct or indirect) which is necessary to complete the chain through all interposed companies for 100 per cent ownership of company X by the holding company is established under paragraph (d). (Paragraph (d) requires that, if a dividend were paid at the relevant time and successively distributed through all companies and trustees interposed between the holding company and the relevant subsidiary (company X), the whole of the dividend would flow through to the holding company.)

Sub-paragraph (ii) of sub-section (4)(c) would cover also corporate structures in which other eligible subsidiary companies are interposed between company A and the holding company. Provided, however, that the whole of any dividend paid at the relevant time by company X would flow on to the holding company, if successively distributed through all interposed companies and trustees, the relevant subsidiary (company X) would be treated as wholly-owned by the holding company and the requirements of sub-paragraph (ii) would be satisfied.

Sub-paragraph (iii) establishes an indirect ownership of the relevant subsidiary company (company X) by the holding company at the relevant time through all of the shares in company X being beneficially owned at the relevant time by two or more eligible subsidiary companies, e.g., the shares in company X are beneficially owned as to 40 per cent by company A and 60 per cent by company B.

As in sub-paragraph (ii) cases, the holding company will be treated as the holding company of the relevant subsidiary at the relevant time if, in each such case under sub-paragraph (iii), the operation of paragraph (d) in relation to any dividend declared by the relevant subsidiary at the relevant time would result in the whole of the dividend being received beneficially by the holding company.

Where, by the operation of sub-section (4), a company is to be taken to be the holding company of another company at a particular time, that other company is, under sub-section (5), to be taken to be a wholly-owned subsidiary of that holding company at that particular time. "Wholly-owned subsidiary" and "the holding company" are terms used throughout sub-sections (1), (2) and (3).

Sub-section (6) applies in a similar way to sub-section (4) in establishing a company to be, at a particular time, a wholly-owned subsidiary of two or more eligible public companies as defined in sub-section (8) through it being owned at that time, either directly, indirectly, or directly and indirectly, by those two or more eligible public companies (the parent companies).

Sub-section (7) defines an "eligible subsidiary" in relation to a year of income as a company that is a subsidiary of a public company for income tax purposes in relation to that income year by virtue of section 103A(4) of the Principal Act. The term is used throughout sub-sections (4) and (6) of section 82AJA.

Sub-section (8) defines an eligible public company in relation to a year of income as a company that is a "listed" public company for income tax purposes in relation to that year of income by virtue of section 103A(2)(a) of the Principal Act. The term is used in sub-section 82AJA(1), and throughout sub-sections (4) and (6).

Broadly stated, section 103A(2)(a) requires the company to be listed on a stock exchange as at the last day of the year of income and to comply with certain conditions in sub-sections (3), (6) and (7) of section 103A concerning capital, voting and dividend rights.

Clause 18: Deduction under Subdivision B to be in addition to other deductions

This clause proposes an amendment to section 82AM of the Principal Act that is consequential upon the insertion by clause 19 of the new Subdivision BB of Division 3 of Part III to authorise a 40 per cent conversion allowance for the cost of plant and equipment installed to replace oil-fired plant. Subject to certain specified exceptions, section 82AM operates so that investment allowance deductions under Subdivision B of Division 3 of Part III are available in addition to any other deduction allowable (e.g., by way of depreciation allowances) in respect of eligible investment allowance property.

By clause 18, a new sub-section (3) is to be added to section 82AM to preclude investment allowance deductions being available in respect of non-oil-fired plant that qualifies for the 40 per cent conversion allowance under the new Subdivision BB. The non-availability of investment allowance deductions for such plant will be maintained where the 40 per cent conversion allowance is not allowable, or is withdrawn, because of the operation of section 82EF of Subdivision BB which, as explained later, imports a number of investment allowance safeguards.

Clause 19: Deductions in respect of non-oil-fired plant

This clause proposes the insertion of a new Sub-division - Subdivision BB - in Division 3 of Part III of the Principal Act to provide an income tax deduction of 40 per cent of capital expenditure incurred by a taxpayer on the acquisition or construction on or after 22 August 1979 of a unit of non-oil-fired plant to replace oil-fired plant that was in use on 21 August 1979. This 40 per cent conversion allowance is also to be available for units of property installed to support the operation of such replacement plant or to support the operation of converted plant that qualifies for the 100 per cent conversion deduction proposed by clause 7 of the Bill.

A detailed explanation of these Budget concessions was given in a statement by the Treasurer on 12 December 1979. Changes to the Budget announcement affecting plant fuelled by LPG (liquid petroleum gas) were announced by the Minister for National Development and Energy on 8 April 1980.

Broadly, the 40 per cent conversion allowance will be available as a deduction in the year of income in which an eligible unit of replacement property is first used, or installed ready for use and held in reserve. It is a condition of the allowance that the replacement plant be acquired or constructed for use wholly and exclusively in Australia and solely for the production of assessable income by the taxpayer. The deduction will not be available unless the replacement property is in use, or is installed ready for use, by 30 June 1984.

For purposes of the 40 per cent conversion allowance, LPG-fired plant is generally to be treated as oil-fired so that a deduction is to be available for the replacement of LPG plant by non-oil-fired plant. This treatment of LPG plant as oil-fired, however, is to apply only to replacements made after 8 April 1980 where the LPG plant was in use on that date or was acquired under a contract entered into by that date. Where oil-fired plant that was in use on 21 August 1979 has been replaced with LPG plant, the 40 per cent conversion allowance is to be available but only if the replacement plant was ordered, or its construction by the taxpayer commenced, on or before 8 April 1980.

The 40 per cent conversion allowance is modelled on the income tax investment allowance and is to be available subject to similar safeguards against disposal of the replacement property, the granting to other persons of rights to use it, etc.

Detailed notes follow dealing with the various sections comprising the new Subdivision BB of Division 3 of Part III.

Section 82EA: Property to which Subdivision applies

Section 82EA specifies certain conditions that must be satisfied in respect of a unit of eligible property (defined in proposed section 82EM(1)) that qualifies for the 40 per cent conversion allowance being conferred by section 82EB. Broadly stated, section 82EA requires that the eligible property be acquired or constructed by the taxpayer for use, wholly and exclusively in Australia and wholly and exclusively for the purpose of producing assessable income, as a replacement or substitute for oil-fired plant.

Paragraph (a) of sub-section (1) of section 82EA applies Subdivision BB to what can be expected to be the majority of cases - that of taxpayers who acquire or construct a unit of eligible property for the taxpayer's own use, wholly and exclusively in Australia and solely for the purpose of producing assessable income. It is also necessary that the property be for use for a prescribed purpose as defined in sub-section (2), (i.e., that it be in replacement of or substitution for an oil-fired unit (defined in section 82EM(3)) or in support of such a replacement unit or of a converted unit) and that the replacement or supporting unit is used to produce assessable income otherwise than by leasing it, letting it on hire-purchase or by granting a right to use the property to another person.

A taxpayer who acquires eligible property under hire-purchase is (section 82EM(6)) to be treated as the owner of the property for purposes of the 40 per cent conversion allowance and will be entitled to any deduction relating to the property as a replacement or substitute for oil-fired plant.

Paragraph (b) of sub-section (1) applies Subdivision BB to eligible property acquired or constructed by a leasing company and leased under a long-term (minimum of 4 years) lease agreement for use by the lessee, wholly and exclusively in Australia and solely for the purpose of producing assessable income. It is also necessary that the lessee and lessor be at arm's length and that the property be for use by the lessee for a prescribed purpose.

Sub-section (2) of section 82EA specifies the conditions under which eligible property is to be taken to be for use for a prescribed purpose, i.e., that it be for use as a replacement or substitute for an oil-fired unit or for an LPG unit (defined in section 82EM(1)).

Sub-paragraph (i) of paragraph (a) of sub-section (2) requires that the unit of eligible property be for use as a replacement or substitute for a non-mobile, oil-fired unit that was in use, or was installed ready for use, on 21 August 1979 and was either -

(a)
acquired by the taxpayer under a contract entered into on or before 21 August 1979; or
(b)
constructed by the taxpayer, construction having commenced on or before 21 August 1979.

Sub-paragraph (ii) of paragraph (a) applies Sub-division BB to eligible property that is to be used as a replacement or substitute for a non-mobile LPG unit. The sub-paragraph requires that the LPG unit being replaced was in use, or was installed ready for use, for business purposes, on 8 April 1980, was contracted for by that date or its construction by the taxpayer had commenced by that date.

Sub-paragraph (i) of paragraph (b) applies Sub-division BB to units of property installed in support of other units of property for which either the 40 per cent conversion allowance under section 82EB, or the 100 per cent conversion deduction under proposed section 53H, is available. A supporting unit must be for use principally and directly in connection with the operation of the replacement unit of property, a converted unit, or a unit supporting a replacement or converted unit.

Under sub-paragraph (ii) of paragraph (b), a supporting unit of property in the form of a road or an extension or improvement to a road may qualify for the 40 per cent conversion allowance, but to do so must be located on the premises of the taxpayer - user or the lessee, as the case may be, of the replacement or converted unit of property it supports.

Section 82EB: Deduction in respect of plant installed on or after 22 August 1979

Section 82EB is the substantive provision of the new Subdivision. It authorises the proposed 40 per cent conversion allowance for eligible capital expenditure incurred by a tax-payer in acquiring or constructing a replacement or supporting unit of eligible property.

Sub-section (1) of section 82EB authorises the allowance of the deduction against the assessable income of the tax-payer for the year of income during which the eligible property is first used for the purpose of producing assessable income, or is installed ready for use for that purpose. To be deductible, the expenditure must be incurred on or after 22 August 1979 in respect of a unit of property acquired under a contract entered into on or after that date or in respect of which construction by the taxpayer commenced on or after that date. The eligible property must be in use, or installed ready for use, before 1 July 1984.

Sub-section (2) is a drafting measure that will mean that, in relation to leased property the reference in sub-section (1) to a unit of property being first used, or installed ready for use, is to be read as first use, or installation ready for use, by the lessee.

Sub-section (3) provides, subject to certain exceptions specified in sub-section (4), that the 40 per cent conversion allowance is not allowable unless the replaced oil-fired or LPG unit ceased to be in the possession of the tax-payer or the lessee before or at the time the eligible replacement unit is first used, or installed ready for use, by the taxpayer or lessee.

Sub-section (4) sets out conditions under which a replaced oil-fired unit or LPG unit may remain in the possession of the taxpayer or lessee after the eligible replacement unit is first used, or installed ready for use. The availability of the allowance will be unaffected if the Commissioner of Taxation is satisfied that the replaced unit ceased to be in the possession of the taxpayer or lessee as soon as practicable, after first use, or installation ready for use, or was retained as standby or booster plant for the non-oil-fired, or non-LPG replacement or supporting unit, or because it was not economical to dispose of it.

Where the Commissioner has been satisfied that an oil-fired unit or LPG unit was retained because it was not economical to dispose of it, sub-section (5) of section 82EB will mean that a deduction nevertheless will not be available if that unit is later used by the taxpayer or the lessee.

By sub-section (6) a deduction under Subdivision BB is not to be available in respect of plant acquired by a leasing company on or after 22 August 1979 if, before that date, the leasing company had entered into a contract or arrangement to lease the plant either to the person to whom the plant is leased or to another person. The purpose of sub-section (6) is to place leasing companies and purchasers of plant for their own use on the same footing. In both cases, plant acquired in pursuance of contracts made before 22 August 1979 is to be excluded from eligibility for the 40 per cent allowance.

Sub-section (7) applies to property for use in support of other plant that has been converted from oil-fired to non-oil-fired use and in respect of which the conversion costs are deductible, or would be deductible, under the proposed section 53H. Sub-section (7) will mean that, where the section 53H conversion deduction, or part thereof, is withdrawn or deemed not to be allowable by reason of a breach of the safe-guarding provisions embodied in that section, the 40 per cent conversion allowance under Subdivision BB in respect of the supporting plant is to be similarly withdrawn or reduced.

Section 82EC: Limitation of deduction in case of ease property

Section 82EC is designed to restrict the amount of the allowance, or the aggregate of the allowances allowable under Subdivision BB in respect of a year of income, to a leasing company in respect of eligible property that the company has leased out during the year of income. Section 82EC does not affect the amount of the deduction allowable to the company in respect of eligible property that it acquires and retains for a qualifying use in the conduct of its business. Nor does the section affect the amount of the deduction that may be allowable to the lessee-user of property leased from a leasing company.

In terms of section 82EC (which matches investment allowance section 82AC), a leasing company will not be entitled, in respect of a year of income, to a deduction in respect of eligible property that it leases to another person in excess of the amount (if any) that remains after deducting from its assessable income of the year of income all allowable deductions other than -

(a)
the deductions available under Subdivision BB to the leasing company in respect of property leased to other persons (paragraph (a)); or
(b)
deductions allowable by way of tax-deductible business losses under section 80 or 80AA of the Principal Act (paragraph (b)).

In effect, a leasing company is not to be permitted to carry-forward for deduction in a later year of income, any part of the 40 per cent conversion allowance that would otherwise give rise to a tax loss in respect of the relevant year of income.

Section 82ED: Lessor may transfer benefit of deduction to lessee

Sub-section (1) of section 82ED will, in like manner to section 82AD which applies for purposes of the investment allowance, provide a declaration system whereby a bank or other approved finance company that is a "leasing company" (as defined in section 82EM) will be able to forgo, in favour of the lessee-user of a unit of eligible property, its right to all or part of the 40 per cent conversion allowance in respect of the capital expenditure incurred by the leasing company in acquiring or constructing the property.

The declaration system is, in terms of paragraph (a) of sub-section (1), based on the leasing company lodging with the Commissioner a declaration, signed by its public officer, to the effect that the company transfers to the relevant lessee either -

·
the benefit of the full allowance;
·
the benefit of a specified fraction of the allowance; or
·
the benefit of so much of the allowance as does not exceed an amount specified in the declaration.

The declaration is to be lodged with the Commissioner before the "prescribed date" (see notes on sub-section (2)).

Paragraph (b) of sub-section (1) sets out the details that are to be furnished for the purposes of a declaration lodged by a leasing company under section 82ED. Where a declaration and supporting details have been lodged by a leasing company for the purpose of transferring a deduction to a lessee, the sub-section provides for the allowance to be deductible to the lessee to the extent of the amount so transferred.

Paragraphs (c), (d) and (e) of sub-section (1) provide for the amounts that are to be allowable deductions to the lessee depending on whether the leasing company has transferred the whole of the relevant allowance (paragraph (c)), a specified fraction of that allowance (paragraph (d)) or a particular amount (paragraph (e)).

The deduction to the lessee will be allowable from assessable income of the year of income in which the eligible property is first used, or installed ready for use, by the lessee.

Sub-section (2) of section 82ED sets out the prescribed date before which a declaration made by a leasing company under section 82ED is required to be lodged with the Taxation Office.

In the case of a lease agreement entered into by 1 July 1980, the prescribed date for section 82ED declarations is 8 July 1980, (paragraph (a)). In the case of lease agreements made on or after 1 July 1980, the prescribed date is the eighth day after the end of the month in which the lease agreement is entered into (paragraph (b)).

Sub-section (2) also empowers the Commissioner to grant a leasing company an extension of the prescribed date for the purpose of lodging a declaration.

Sub-section (3) will ensure that, where a leasing company makes a declaration under sub-section (1) that transfers to a lessee all or part of the allowance to which it would otherwise be entitled in respect of the relevant leased property, the amount of allowance forgone will not also be an allowable deduction in the assessment of the leasing company.

Sub-section (4) of section 82ED requires that, in looking to the amount of allowance available to a leasing company for transfer to a lessee, the restriction on a leasing company's deduction through the operation of section 82EC is to be disregarded. This will make it clear that the full benefit of the 40 per cent conversion allowance can be conferred on a lessee-user of plant, even though the lessor could not, by virtue of the limits under section 82EC, have availed itself of a deduction for the full amount of the allowance.

Section 82EE: Replacement, etc., of eligible property

Under sub-section (1) of section 82EE, the 40 per cent conversion allowance in respect of a replacement unit of eligible property is to be withdrawn if, before 1 July 1984, the replacement unit is replaced by an oil-fired unit or is converted to operate as an oil-fired unit. For drafting purposes, such an oil-fired unit is referred to as a petroleum unit.

Sub-section (2) of section 82EE defines the disqualifying "petroleum unit" according to whether the eligible unit of property being replaced or converted back to oil is, on the one hand, an LPG unit (paragraph (a)) and, on the other hand, not an LPG unit (paragraph (b)).

Under paragraph (a), where the eligible property is an LPG unit, it may not be replaced by, or converted to, a petroleum unit that obtains its operating energy from the combustion of petroleum or a product obtained by refining petroleum, other than petroleum of a kind that is in a gaseous state at a temperature of 15 degrees Celsius and a pressure of 1 atmosphere.

As explained later in these notes, that kind of petroleum product which may not be so used does not include LPG or natural gas, so that section 82EE will not operate to deny a deduction where an LPG unit is replaced by another LPG unit or by one that uses natural gas as a fuel, or is converted or adapted to use natural gas.

Under paragraph (b), where the eligible unit of property is not an LPG unit, it may not be replaced by, or converted to, a petroleum unit that obtains its operating energy from the combustion of petroleum or a product obtained by refining petroleum but not including -

(i)
petroleum of a kind of which not less than 80 per cent by volume is methane; or
(ii)
a product derived from petroleum of that kind.

As explained later in these notes, that kind of petroleum product which may not be so used includes LPG but not natural gas, so that section 82EE will operate to deny a deduction where an eligible unit that is not fired by LPG is replaced by, or converted to, a unit that uses any petroleum product other than natural gas.

Section 82EF: Disposal, etc., of eligible property and special provisions relating to partnerships

Section 82EF is a measure that will apply the various safeguarding provisions of Subdivision B of Division 3 of Part III of the Principal Act - the investment allowance provisions - to this Subdivision. Those provisions are contained in sections 82AG, 82AH, 82AI and 82AJ. In addition, the new section 82AJA being inserted in the investment allowance provisions of the Principal Act by clause 17 of this Bill is to apply in Subdivision BB in the same way as it will apply in Subdivision B.

Section 82AG applies to withdraw an investment allowance deduction where, within 12 months of eligible property being first used, or installed ready for use, it is disposed of by the taxpayer, leased or allowed by the taxpayer to be used by another person, or used outside Australia or for a purpose other than the purpose of producing assessable income. In the case of leased plant, section 82AG operates in the first 12 months to deny an investment allowance deduction if the leasing company disposes of the eligible property to a person other than the lessee, if the lessee acquires the property and disposes of it, or allows another person to use it or uses it outside Australia or for a purpose other than the purpose of producing assessable income. In a case where a taxpayer disposes of part only of his interest in eligible property, section 82AG operates to withdraw an appropriate proportion of the investment allowance in respect of that property.

Section 82AH is complementary to section 82AG and provides the same kind of sanction where any of the specified events mentioned in the previous paragraph occurs in respect of eligible property after the expiration of 12 months from the time the property is first used or installed ready for use. Before any deduction may be withdrawn under section 82AH, however, the Commissioner of Taxation must first be satisfied that the taxpayer-owner, the taxpayer-lessor or the lessee-user, as the case may be, intended to dispose of the property or use it for ineligible purposes at the time the property was first acquired or constructed or taken on lease.

Section 82AI applies for the purposes of sections 82AG and 82AH in a case where eligible property that a taxpayer is acquiring on hire-purchase is repossessed. The taxpayer is deemed to have disposed of the property at the time possession reverts to the owner.

Section 82AJ provides safeguards against disposal or ineligible use of property in cases where an investment allowance deduction has been allowed to a partnership. The safe-guards apply in similar circumstances, and have broadly the same effect, as those contained in sections 82AG and 82AH in relation to eligible property owned by taxpayers in their own right. The effect of the section 82AJ safeguards is that, where eligible property owned by a partnership is disposed of or used for ineligible purposes or where one of the partners disposes of his interest in the partnership or in the property, an appropriate "share" of the relevant investment allowance deduction is added to the assessable income of each partner affected. That appropriate "share" is based on the partner's interest in partnership profit or loss or, where applicable, the amount actually borne by the partner in acquiring or constructing the eligible property.

Section 82AJ also contains a special provision to cover the case where a partnership, one or more of the partners of which is a leasing company, incurs capital expenditure in respect of property that is eligible for the investment allowance and that is leased to another person. In these circumstances, the allowance is not to be allowable to the partnership in the calculation of the partnership's net income (or the partnership loss), but each partner is deemed to have incurred so much of the eligible expenditure incurred by the partnership as, by agreement between the partners, has been borne by each partner. Where the partners have not agreed as to the amounts of the expenditure to be borne by the partners, the eligible expenditure is deemed to have been incurred by each partner in proportion to the individual interest of each in the net income (or partnership loss) of the partnership of the year of income in which the relevant expenditure was incurred.

The new section 82AJA being inserted in the investment allowance provisions by clause 17 will permit disposals of eligible property throughout the first 12 months of use of that property within wholly-owned listed public company groups without the vendor company losing entitlements under the investment allowance provisions.

Section 82EF will have the effect that each of those safeguarding measures that apply for purposes of the investment allowance provisions - sections 82AG, 82AH, 82AI and 82AJ - and section 82AJA will apply with equal force for purposes of the 40 per cent conversion allowance to be provided under Subdivision BB.

Section 82EG: Private use of property by employees, etc., of private company

Section 82EG is another measure that will apply, for the purposes of the 40 per cent conversion allowance, investment allowance provisions of the Principal Act, in this case, section 82AK.

Section 82AK is designed to reinforce the general restriction of the investment allowance to eligible property used wholly and exclusively in the production of assessable income.

The section may apply to a private company otherwise entitled to claim the investment allowance in respect of eligible property that is used wholly or partly for the private or domestic purposes of directors, shareholders or employees of the private company, or relatives of such persons.

Property held by a private company that is used for private or domestic purposes by directors, etc., is deemed, in terms of section 82AK, to be use of the property by the company otherwise than for the purpose of producing assessable income. The company may, in these circumstances, cease to be entitled to an investment allowance deduction in respect of the property.

Section 82EG will have the effect that section 82AK will apply with equal force for purposes of both the investment allowance and the 40 per cent conversion allowance to be provided under Subdivision BB.

Section 82EH: Property acquired, in substitution for other property

This section is designed, broadly, as a check on a re-arrangement of contracts to make it appear that property has been acquired or taken on lease by a taxpayer under a legal obligation entered into on or after 22 August 1979 in circum-stances where a contract for the acquisition or leasing of the property or substantially similar property (in these notes referred to as the "substituted unit"), had, in fact, been entered into by the taxpayer before 22 August 1979. The safe-guard is also expressed to apply in a case where the taxpayer commenced the construction of a "substituted unit" on or after 22 August 1979.

For this safeguard to operate, sub-section (1) of section 82EH will require the Commissioner of Taxation to be satisfied that -

·
the taxpayer entered into a pre-22 August 1979 contract to acquire or take on lease a non-oil-fired unit of property (paragraph (a));
·
on or after 22 August 1979, the taxpayer had substituted a different contract for the acquisition or taking on lease by the taxpayer of the same unit of non-oil-fired property or of an identical or substantially similar unit of property or commenced construction of an identical or substantially similar unit of property with the intention that the substituted unit should be acquired, taken on lease, or constructed, as the case may be, in lieu of the unit contracted for before 22 August 1979 (paragraph (b)); and
·
a purpose of the contract entered into on or after 22 August 1979 was to obtain a 40 per cent conversion allowance that would not otherwise be available (paragraph (c)).

Sub-section (1) empowers the Commissioner, in any case where he is satisfied that the circumstances are as specified, to disallow a deduction for the 40 per cent conversion allowance in respect of any such unit of property.

The exercise by the Commissioner of this power will, like the exercise of other powers conferred on the Commissioner by the new provisions, be subject to the usual rights of objection and reference to an independent Taxation Board of Review.

Sub-section (2) of section 82EH provides a safeguard, similar to that proposed by sub-section (1), that is designed to apply where a taxpayer, having commenced the construction of a unit of property before 22 August 1979 seeks to re-negotiate or re-arrange matters so that the 22 August 1979 commencing date will not preclude a deduction for the 40 per cent conversion allowance.

Broadly, the operation of sub-section (2) will depend upon the Commissioner being satisfied that -

·
the taxpayer commenced the construction of a unit of property before 22 August 1979 (paragraph (a)); and
·
on or after 22 August 1979 the taxpayer commenced the construction of an identical unit of property or a substantially similar unit (in these notes referred to as the "substituted unit") intended to be used by the taxpayer in lieu of the original unit (paragraph (b)(i)); or
·
on or after 22 August 1979 the taxpayer contracted for the acquisition or taking on lease of the original unit, or of another substantially similar unit (also referred to as the "substituted unit") intended to be used by the taxpayer in lieu of the original unit (paragraph (b)(ii)); and
·
on or after 22 August 1979, the taxpayer commenced the construction of the substituted unit or contracted for the acquisition or leasing of the original or substituted unit, as the case may be, for a purpose of obtaining a deduction of the 40 per cent conversion allowance (paragraph (c)).

Sub-section (2) empowers the Commissioner, in any case where he is satisfied that the circumstances are as specified, not to allow the 40 per cent conversion allowance in respect of any such unit of property.

Sub-section (3) of section 82EH is a drafting measure under which, in applying sub-sections (1) and (2), reference to a unit of property is to be taken to include a reference to a portion of a unit of property.

Section 82EJ: Deduction under Subdivision to be in addition to other deductions

Sub-section (1) of section 82EJ makes it clear that, subject to the exceptions explained in the notes below dealing with sub-section (2), the 40 per cent conversion allowance is to be available in addition to any other deduction allowable (e.g., depreciation allowances) in respect of the relevant property under other provisions of the Principal Act. However, as explained in the earlier notes on clause 18, eligible property that qualifies for the 40 per cent conversion allowance will not also qualify for an investment allowance deduction.

Sub-section (2) of section 82EJ specifies certain exceptions to the operation of sub-section (1). It has the effect of denying the 40 per cent conversion allowance in respect of property that qualifies for any of the special deductions authorised by sections 122J, 123B and 124AH of the Principal Act.

Under section 122J of the Principal Act, the capital cost of certain plant used by a taxpayer in exploration or prospecting for minerals (other than petroleum) may be claimed as an outright deduction against mining income in the year in which the expenditure is incurred. Such plant is not to be eligible for the 40 per cent conversion allowance as well. Under section 122H of the Principal Act, the taxpayer may, as an alternative to the special outright deduction, elect to have the cost of the exploration plant deducted for tax purposes by way of depreciation allowances under the general depreciation provisions. A taxpayer who chooses this method for deducting the cost of the exploration plant will be able to qualify for the 40 per cent conversion allowance in respect of the plant.

Broadly stated, section 123B of the Principal Act provides a special deduction which enables a taxpayer who has incurred certain capital expenditure on a railway, road, pipe- line or other transport facility to deduct the total amount of the capital expenditure over a period of 20 years unless the taxpayer opts for a period of 10 years. In terms of sub-section (2) of section 82EJ, the 40 per cent conversion allowance will not be available in respect of capital expenditure that attracts the section 123B deduction.

Section 124AH of the Principal Act operates in respect of capital expenditure on plant used in exploration for petroleum in a similar way to section 122J in relation to plant used in exploration for minerals other than petroleum (see notes above). It is proposed that capital expenditure that qualifies for an outright deduction under section 124AH will similarly be ineligible for the 40 per cent conversion allowance. However, if the taxpayer chooses to deduct the expenditure under the general depreciation provisions, the 40 per cent conversion allowance will be available provided, of course, the basic conditions for the allowance are satisfied.

Section 82EK: Ascertainment of amount of eligible expenditure

This section contains measures to enable the appropriate 40 per cent conversion allowance to be ascertained and allowed as a deduction where, under a contract for the acquisition or construction of property that includes a unit of eligible property, no separate amount is allocated as the cost of the unit of eligible property.

In these circumstances, sub-section (1) empowers the Commissioner of Taxation, for the purpose of applying the 40 per cent conversion allowance provisions, to determine how much of the total expenditure involved in the contract is properly attributable to the acquisition or construction of the unit of eligible property.

Sub-section (2) of section 82EK applies where the Commissioner is satisfied that an amount expressed to be payable under a contract for the construction or acquisition of eligible property exceeds -

·
in the case of a contract for the construction of property for the taxpayer by another person on premises of the taxpayer - the market value of the property at the time of completion of the construction (paragraph (a)); or
·
in any other case - the market value of the property or materials at the date of the contract (paragraph (b)).

Where the Commissioner is satisfied as to a matter specified in sub-section (2), the Commissioner may determine that the amount payable in respect of the construction or acquisition of the property shall be taken to be the market value at the time of the construction or at the date of the contract, as the case may be.

Sub-section (2) will thus be available as a counter to arrangements that might otherwise result in excessive replacement allowances being available to a taxpayer where an inflated figure is attributed to the relevant expenditure.

The taxpayer will have the usual rights of objection and reference to a Taxation Board of Review in respect of any determination made by the Commissioner under section 82EK.

Section 82EL: Recoupment of expenditure

Sub-section (1) of section 82EL ensures that capital expenditure for which the taxpayer has been recouped, or is entitled to be recouped, will not qualify as capital expenditure eligible for the 40 per cent conversion allowance.

Where, for example, the 40 per cent conversion allowance is allowed to a taxpayer in respect of eligible expenditure incurred to acquire a unit of property, and the tax-payer is subsequently reimbursed for some of that expenditure, sub-section (1) will have the effect of withdrawing so much of the special deduction as is attributable to the amount of the reimbursement.

Where the reimbursement is received in a year of income subsequent to that in which the deduction is allowed, an amendment being made to section 170 of the Principal Act by clause 26 of the Bill will authorise the Commissioner to appropriately amend the taxpayer's earlier assessment.

Sub-section (2) of section 82EL is necessary to ensure that sub-section (1) may operate in a case where a taxpayer is reimbursed a single amount in respect of expenditure on property that qualifies for the 40 per cent conversion allowance and also on property that does not so qualify, and the amounts reimbursed in respect of the eligible property and the other property are not specified separately.

In these circumstances, the Commissioner is to be empowered, by sub-section (2), to determine the extent to which the total amount reimbursed constitutes a reimbursement of capital expenditure otherwise eligible for the 40 per cent conversion allowance and this is the amount that becomes subject to withdrawal of the allowance by the operation of sub-section (1).

Section 82EM: Interpretation

To facilitate drafting, section 82EM ascribes particular meanings to a number of terms and expressions that are used in the Subdivision BB. Sub-section (1) of section 82EM defines certain terms as follows -

"construction": The meaning of the word "construction" is extended to include "manufacture". The term is used in this wider sense in provisions contained in the Subdivision that are thus to apply to eligible property whether purchased by the taxpayer, or manufactured or constructed by or for the taxpayer.
"eligible property": For purposes of the 40 per cent conversion allowance, the term encompasses property being plant or articles within the meaning of section 54 of the Principal Act, being a non-oil-fired unit (as defined in this section) but not being mobile property (also defined in this section). As well, a road or an extension or an improvement to a road, or a structural improvement (not being a building or an extension to a building) may qualify as eligible property where they are for use for a "prescribed purpose" as explained earlier in the notes on section 82EA(2). By section 82EM(2), an extension or improvement to a road is a unit of property for the purposes of Subdivision BB.
"hire-purchase agreement": This term is to have the same meaning it has in the investment allowance provisions. The need to use and define the term arises because the 40 per cent conversion allowance is to be available in respect of eligible property acquired by the taxpayer-user under a hire-purchase agreement. As is the case for depreciation purposes a taxpayer who acquires a unit of eligible property under a hire-purchase agreement will be treated as the owner and, accordingly, may qualify for the 40 per cent conversion allowance in respect of the property.
"lease": This term is to have the same meaning it has in the investment allowance provisions, i.e., it means grant a lease of property or let property on hire otherwise than under a hire-purchase agreement.
"leasing company": This term also is to have the same meaning as in the investment allowance provisions. By definition in section 82AQ(1) of the Principal Act, a leasing company means a corporation that carries on in Australia as its sole or principal business -

·
banking; or
·
borrowing money and providing finance.

A bank or finance company whose income is exempt from Australian tax is not to be treated as a leasing company for purposes of Subdivision BB.
By section 82AQ(2) of the Principal Act, a reference in that definition to a leasing company providing finance is a reference to the company -

(a)
lending money with or without security;
(b)
letting property on hire under a hire-purchase agreement; or
(c)
leasing property.

"liquid petroleum gas": This term is defined in connection with the definition of "LPG unit" which, in relation to contracts or arrangements entered into on or after 9 April 1980, may be replaced by a non-oil-fired unit (as defined) and so attract the 40 per cent conversion allowance. Liquid petroleum gas means petroleum (as defined in section 6 of the Principal Act) or a product obtained by refining petroleum that -

·
consists principally of propane or butane or of a mixture of propane and butane; and
·
is in a gaseous state at a temperature of 15 degrees Celsius and a pressure of 1 atmosphere.

Essentially, liquid petroleum gas will consist principally of either propane or butane (or a mixture thereof) and be gaseous at normal atmospheric pressure measured at sea level.
"LPG unit": Such a unit will form the basis for eligibility for the 40 per cent conversion allowance if replaced or substituted on or after 9 April 1980 by a non-oil-fired unit. An LPG unit means plant within the meaning of section 54 of the Principal Act (i.e., plant of a kind for which income tax depreciation allowances are available) that requires energy for the performance of its functions, and which is designed to obtain, and customarily obtains, that energy directly, and solely or principally, from the combustion of liquid petroleum gas.
"long-term lease agreement": This term is to have the same meaning it has in the investment allowance provisions, i.e., a lease for a period of not less than 4 years.
"mobile property": The 40 per cent conversion allowance is not to apply to mobile plant such as road vehicles, ships, earthmoving equipment, fork lift trucks, etc., but may apply to transportable plant, such as a compressor or concrete mixer, that is stationary in operation, or to moveable units forming part of fixed plant installations, e.g., a travelling overhead crane that runs along permanently affixed rails.
The exclusion of mobile plant results from application of the definitions in this sub-section of "eligible property" and "non-oil-fired unit", of sub-section (3), the definition of "petroleum unit" in sub-section 82EE(2), and of paragraph (a) of sub-section 82EA(2). The definition of mobile property refers to an item that during the performance of its functions is not stationary with respect to its points of contact with its supporting surface. However, an item that is part of a fixed plant installation is not to be treated as mobile property.
"non-oil-fired unit": This term is used in the definition of "eligible property" to denote that the 40 per cent conversion allowance will only be available in respect of replacement plant that is not oil-fired. A non-oil-fired unit is one that requires energy for the performance of its functions, and which is designed to obtain, and customarily obtains, that energy directly, and solely or principally, from a source other than the combustion of a petroleum product. Thus, a replacement unit will not qualify for the 40 per cent conversion allowance unless its customary and principal source of power is other than a petroleum product (see notes later on sub-sections (4) and (5) of section 82EM).
"road": As explained earlier in relation to the definition of "eligible property", capital expenditure on a road or an extension or an improvement to a road may, in certain circumstances, qualify for the 40 per cent conversion allowance. This definition makes it clear that, for the purposes of Subdivision BB, a road is to be taken as including a bridge, culvert or similar work forming part of a road.

Under sub-section (2) of section 82EM, an extension or improvement to a road is to be taken to be a unit of property for purposes of the 40 per cent conversion allowance. The purpose of the sub-section is to ensure that an eligible extension or improvement to a road, which may not of itself form a separate, identifiable unit, will qualify for the allowance in terms of section 82EA which is expressed to apply in relation to a unit of eligible property.

Sub-section (3) of section 82EM sets out the conditions under which a unit of property (the replaced unit) that is being replaced by a non-oil-fired unit will be treated as an oil-fired unit. The replaced unit will be an oil-fired unit if, not being mobile property as defined, it requires energy for the performance of its functions and is designed to obtain that energy directly, and solely or principally, from the combustion of a petroleum product (see notes on sub-sections (4) and (5)) and -

·
where the eligible replacement property is not leased plant, the Commissioner is satisfied that, when in use by the taxpayer, the replaced unit actually obtained its energy directly, and solely or principally, from the combustion of a petroleum product (paragraph (a)(i) of sub-section (3)); or
·
where the eligible replacement property is leased plant, the Commissioner is satisfied that, when in use by the lessee, the replaced unit actually obtained its energy directly and solely or principally, from the combustion of a petroleum product (paragraph (a)(ii) of sub-section (3)).

A replaced unit may also be treated as an oil-fired unit if it is not designed to obtain its operating energy directly, and solely or principally, from the combustion of a petroleum product if -

·
where the eligible replacement property is not leased plant, the Commissioner is satisfied that, when in use by the taxpayer, the replaced unit actually obtained its energy directly, and solely or principally, from a petroleum product (paragraph (b) of sub-section (3)); or
·
where the eligible replacement property is leased plant, the Commissioner is satisfied that, when in use by the lessee, the replaced unit actually obtained its energy directly, and solely or principally, from a petroleum product (paragraph (c)).

Sub-section (4) of section 82EM defines for the purposes of the 40 per cent conversion allowance the term "petroleum product" as it is to apply generally to determine whether or not plant that has been replaced by non-oil-fired plant was oil-fired. For that purpose, "petroleum product" means petroleum (as defined in section 6 of the Principal Act) or a product obtained by refining petroleum, but excluding petroleum of a kind of which not less than 80 per cent (by volume) is methane or is derived from petroleum of a kind of which not less than 80 per cent (by volume) is methane.

The definition is designed to cover all petroleum or oil-based fuels apart from natural gas, which has been excluded by reference to products comprising or derived from methane. This facilitates the intended result that plant fired by an acceptable alternative energy source, including natural gas, is to qualify for the 40 per cent conversion allowance where it is installed as a replacement or substitute for (oil-fired) plant fired by such a petroleum product, including LPG.

Sub-section (5) of section 82EM defines "petroleum product" as it is to be used to identify replaced plant items where the non-oil-fired replacement plant (including plant fired by LPG and natural gas) was acquired or constructed by the taxpayer before 9 April 1980, or was acquired under a contract entered into before that date, or the construction of the plant commenced before that date.

For replacements effected under such arrangements before 9 April 1980, "petroleum product" means petroleum (as defined in section 6 of the Principal Act) or a product obtained by refining petroleum, but not including such a product that is in a gaseous state at a temperature of 15 degrees Celsius and a pressure of 1 atmosphere. This definition of an ineligible petroleum product does not include LPG and natural gas. Its use to identify the energy source of plant that may be converted under arrangements entered into before 9 April 1980 ensures that LPG-fired plant as well as plant fired by other acceptable energy sources, including natural gas, may qualify for the 40 per cent conversion allowance where it was installed to replace (oil-fired) plant fired by such a petroleum product.

Sub-section (6) of section 82EM defines what is meant in Subdivision BB where references are made to the "acquisition of property", to property being "installed ready for use" and to "taking property on lease".

By paragraph (a) of sub-section (6), property is regarded as being acquired by a taxpayer if it becomes owned by the taxpayer or is taken under a hire-purchase agreement. The term also includes the acquisition of property by the taxpayer as a result of an independent contractor constructing the property on the taxpayer's premises.

By paragraph (b) of sub-section (6), a reference to property being installed ready for use connotes that the property is installed ready for use and held in reserve.

By paragraph (c) of sub-section (6), taking property on lease covers the taking of property on lease or hire, other than under a hire-purchase agreement.

Clause 20: Deductions for capital expenditure on traveller accommodation

Introductory note

Clause 20 will insert new Division 10C in Part III of the Principal Act to introduce a system of income tax deductions for capital expenditure on certain new income producing buildings, and extensions to and conversions of buildings, used to provide short-term accommodation for travellers.

Capital expenditure that qualifies for deduction under the new scheme will be written off over a 40 year period at the rate of 2 1/2 per cent per annum.

Qualifying for deduction under the scheme will be the cost of construction of buildings constructed in Australia after 21 August 1979 to the extent that they are for use for the purpose of operating a hotel, motel or guest house containing at least 10 bedrooms wholly or principally to accommodate travellers.

Also eligible will be the construction costs of buildings constructed after 21 August 1979, to the extent that they have at least 10 apartments, units or flats and associated facilities for use wholly or principally for the provision of short-term accommodation for travellers.

Capital expenditure on extensions or alterations to a hotel, motel or guest house or to a building of apartments, units or flats will qualify to be written off as deductions at the annual rate of 2 1/2 per cent where construction of the extension or alteration commenced after 21 August 1979 if, as extended or altered, the building meets the generally applicable rules for eligibility.

Where a building is not solely for use as an eligible traveller accommodation building, i.e., where the building does not consist solely of a hotel, motel or guest house or apartments, units or flats and associated traveller accommodation facilities, the cost of constructing or of extending or altering the building will qualify only to the extent that the expenditure is attributable to that part of the building used for eligible purposes.

Deductions will commence to be available on the date, after completion of construction, on which the building or extension is first used. Subject to a proportionate part-year deduction being allowed in the income year in which the building or extension begins to be used, the new allowance will be available by way of fixed annual deductions of 2 1/2 per cent of the construction cost.

Where a complex of buildings is constructed for the purpose of operating a hotel, motel or guest house (e.g., a hotel with detached guest units) or for the provision of short-term accommodation for travellers in apartments, units or flats, the scheme will apply in relation to that complex as if it were a single building.

The cost of constructing an eligible building or of eligible extensions or alterations, will be taken to include such preliminary expenses as architects fees, engineering fees and the cost of foundation excavations. Capital expenditure on land, including clearing and demolition costs, will not qualify for deduction purposes. Nor will the cost of plant contained in a building, e.g., lifts and air-conditioning plant, but which will continue to be depreciable under the general plant depreciation provisions of the law. Facilities of a kind that in Australia do not commonly form part of a hotel, motel or guest house will be outside the scheme as will buildings owned by a company, unit trust or partnership where occupancy rights to particular apartments, etc., are conferred on shareholders, beneficiaries or partners.

Entitlement to the statutory allowance will generally vest in the owner of the eligible building who uses it for the purpose of producing assessable income. However, where a lessee incurs the qualifying capital expenditure or obtains the lease by assignment from a lessee who incurred the expenditure, the lessee will be entitled to the allowance in respect of so much of the building as he continues to lease, whether under the original or a renewed lease. On final surrender or termination of a lease any entitlement of the lessee to deductions will revert to the owner.

Where parts of an eligible building are owned (or leased) by different persons the allowance in respect of any qualifying capital expenditure will correspondingly vest in the owner (or lessee) of each part. In the case of apartments, units or flats, entitlement to the allowance will be restricted to a person who owns or leases at least 10 apartments, units or flats used wholly or principally for traveller accommodation. Correspondingly, the owner (or lessee) of any associated facilities, e.g., dining facilities, will qualify for the allowance only to the extent that the facilities are for use principally in association with the provision of accommodation in qualifying apartments, etc.

Entitlement to the allowance will be dependent on the building continuing to be used for eligible purposes and reduced deductions will be available should part only of the building be used for eligible purposes. However, deductions will continue during a period of temporary cessation of use while alterations or repairs are effected to the building or by reason of seasonal or climatic factors (e.g., closure of the whole or a part of a hotel in a winter resort during the summer period).

Where an eligible traveller accommodation building is demolished or destroyed within the statutory 40 year period, a balancing deduction will be allowed to the extent that the remaining entitlement to deductions exceeds any insurance or salvage recoveries. Partial demolition or destruction will attract corresponding adjustments.

A fuller explanation of the operation of the scheme is contained in the following outline of the operation of the proposed new Division 10C.

General plan of amendments

The amendments proposed to give effect to this scheme are contained in proposed new sections 124ZA to 124ZE of proposed new Division 10C.

The first step in determining whether a deduction is allowable under the scheme is to identify that there is an amount of qualifying capital expenditure. This is identified under section 124ZB as so much of any expenditure of a capital nature incurred by an owner or lessee in constructing, extending or altering a building (or complex of buildings - sections 124ZA(12) and (13)) after 21 August 1979 as is attributable to that part of the building, extension or alteration as -

·
is used for the purpose of operating a hotel, motel or guest house ("hotel" for short) containing 10 or more bedrooms or suites (section 124ZA(9)) for use wholly or principally for the provision of short-term accommodation for travellers (section 124ZB(1)); or
·
consists of a minimum of 10 apartments, units or flats ("apartments" for short) each of which are for use wholly or principally for the provision of short-term accommodation for travellers and any complementary facilities principally associated with the provision of accommodation in those apartments, etc., (section 124ZB(2)).

By virtue of sections 124ZA(10) and (11), 124ZB(3) and 124ZA(17) respectively, capital expenditure on facilities of a kind not commonly provided in a hotel, motel or guest house in Australia, on depreciable plant and on buildings owned under company share arrangements which confer occupancy rights on shareholders or under equivalent trust or partnership arrangements will not qualify for the allowance.

For the purposes of determining a person's entitlement to a deduction, that part of an eligible hotel or apartment building to which a particular amount of qualifying capital expenditure is attributable is identified as the "hotel part" (section 124ZA(2)) or the "apartment part" (section 124ZA(3)).

It is important to note that these two expressions will be used extensively in the explanations of new Division 10C that follow. Towards a more ready comprehension of those subsequent explanations it may be of assistance to keep in mind that a particular hotel, motel, guest house or apartment building may, at any time, contain several "hotel parts" or "apartment parts" as defined. This is because the terms "hotel part" or "apartment part" may relate to amounts of qualifying capital expenditure incurred at different times or by more than one person, e.g., an original hotel building may constitute one "hotel part", and a later extension of the building may constitute another.

Entitlement to deductions under the scheme in respect of an amount of qualifying capital expenditure is conferred on the owner (or owners), or an eligible lessee, of the hotel part or apartment part by section 124ZC, in respect of the period that he or she uses that part in the prescribed manner.

The owner of the whole or a part of a hotel part will be taken to have used the part he or she owns in the prescribed manner when he or she used that part for the purpose of producing assessable income and that part was also used (whether by the owner or by another person) for the purpose of operating a hotel, motel or guest house containing 10 bedrooms for the provision of short-term accommodation for travellers (section 124ZA(4)). For this purpose, a period of non-traveller accommodation use of a particular bedroom will be disregarded where the bedroom is used principally for traveller accommodation (section 124ZA(19)).

The owner (or eligible lessee) of the whole or a part of an apartment part will be taken to have used his or her part in the prescribed manner at any time when he or she used that part for the purpose of producing assessable income and it comprised, related to or contained -

·
an apartment, unit or flat used for the provision of short-term accommodation for travellers being one of 10 such apartments, etc., contained in the building that were owned or leased by the taxpayer (section 124ZA(5)(a)); or
·
a facility wholly or principally for use in association with the provision of short-term accommodation in apartments, units or flats contained in the building and in respect of which deductions are allowable to a person or would, but for the expiration of the 40 year write-off period, be allowable (section 124ZA(5)(b) and (6)).

Again, a period of non-traveller accommodation use of an apartment, unit or flat will be disregarded where the particular apartment unit or flat is used principally for traveller accommodation (section 124ZA(20)).

By section 124ZA(7), accommodation or facilities will not be taken not to have been used for prescribed purposes by reason only of a temporary cessation of use that is consequential on the construction of an extension, alteration or improvement to a building for the making of repairs, or that arises from seasonal or climatic factors.

In a case where a taxpayer owns (or as an eligible lessee, leases) the whole hotel part or apartment part and uses it in the prescribed manner, during the whole of a year of income, the owner (or lessee) will be entitled to a deduction equal to 2 1/2 per cent of the amount of the qualifying apartment expenditure (section 124ZC(1)(c) and (3)(c)). A taxpayer who owns part only of a hotel part or apartment part, and uses that part in the prescribed manner during the whole of a year of income, will be entitled to a proportion of the full 2 1/2 per cent allowance determined by reference to the extent to which the qualifying capital expenditure is attributable to the part owned by the taxpayer (section 124ZC(1)(d) and (3)(d)).

Where a taxpayer owns the hotel part or apartment part, and uses it for prescribed purposes during part only of a year of income, the 2 1/2 per cent deduction entitlement will be reduced proportionately by reference to the number of days in that part of the year of income (section 124ZC(2)(c) and (4)(c)). A taxpayer who owns and uses in the prescribed manner a part only of the hotel part or apartment part during part only of a year of income will be entitled to a pro rata deduction determined by reference to the number of days in that part of the year of income and the extent to which the qualifying capital expenditure is attributable to the part owned by the taxpayer (section 124ZC(2)(d) and (4)(d)).

Sub-sections (8), (21) and (22) of section 124ZA will confer entitlement to deductions on a lessee who incurs qualifying capital expenditure (or on an assignee of a lessee who so incurred the expenditure) by treating the lessee as the owner of so much of the hotel part or apartment part as he or she continues to lease.

A taxpayer's entitlement to a deduction in respect of an amount of qualifying hotel expenditure is to be subject to reduction if, while the whole or a part of the hotel part is owned by the taxpayer, it is used only partly for the purpose of producing assessable income or only partly for the purpose of operating a hotel, motel or guest house (section 124ZD(1)).

Similarly, a person's entitlement to a deduction in respect of an amount of qualifying apartment expenditure is to be subject to reduction if his or her part of the apartment part is used only partly for the purpose of producing assessable income or only partly for the provision of eligible short-term accommodation for travellers during an income year (section 124ZD(2), (3) and (4)).

For these purposes a bedroom or apartment, unit or flat that is occupied by, or held in reserve for, an owner will be taken not to have been used for the purpose of producing assessable income (section 124ZA(18)) and any part of a building used for the purpose of providing a facility of a kind not commonly provided in a hotel, motel or guest house in Australia will be taken not to be used for the purpose of operating a hotel, motel or guest house or in the provision of accommodation for travellers in apartments, units or flats (section 124ZA(10) and (11)).

Entitlement to a deduction in respect of the total or partial destruction of an eligible building is established under section 124ZE. By virtue of section 124ZE(1) and (3), where a hotel part or apartment part is destroyed, an owner will be entitled to a deduction. This will be equal to the amount by which the amount of the residual capital expenditure (i.e., the remaining entitlement to deductions in respect of the qualifying capital expenditure - section 124ZA(16)) attributable to that part of the hotel part or apartment part owned by the taxpayer exceeds the amount received in respect of the destruction (including salvage recoveries net of demolition costs - section 124ZE(5)) that is attributable to that part (section 124ZE(6)).

A taxpayer's entitlement to a deduction in respect of destruction of a hotel part or apartment part is limited to cases where, either immediately before the destruction the part owned by the taxpayer was being used by the taxpayer for prescribed purposes or where the last use of that part by the taxpayer was for prescribed purposes (section 124ZE(1)(d) and (e) and (3)(d) and (e)). Corresponding pro rata balancing deductions will be available where there is a partial destruction of a hotel part or apartment part owned by a taxpayer (section 124ZE(2) and (4)).

A taxpayer's entitlement to a deduction in respect of the destruction of accommodation or facilities owned by him will be subject to reduction having regard to any previous ineligible use of the accommodation or facilities (section 124ZD(5)).

Notes on the individual provisions of proposed new Division 10C follow.

Section 124ZA: Interpretation

Section 124ZA contains a number of definitions and interpretational provisions necessary for the operation of proposed new Division 10C.

Sub-section (1) of section 124ZA defines certain terms used in the Division -

"construct" is defined as including make, e.g., references to the construction of an alteration or improvement will be taken to include the making of an alteration or improvement.
"eligible apartment building" is defined to mean a building in respect of which qualifying capital expenditure on apartments, etc., has been incurred, i.e., qualifying apartment expenditure.
"eligible building" is a generic term used to refer to a building that is an eligible apartment building or an eligible hotel building.
"eligible hotel building" is defined as a building in respect of which qualifying hotel expenditure, i.e., qualifying capital expenditure on constructing, extending or altering a hotel, motel or guest house, has been incurred.
"exempt body" is defined as a body, association or fund, the income of which is exempt from tax by virtue of the application of section 23F or paragraphs (d), (e), (ea), (eb), (ec), (f), (g), (h), (i), (j), (jaa) or (ja) of section 23.
"qualifying expenditure" is a further generic expression used to refer either to qualifying hotel expenditure or qualifying apartment expenditure.

As explained in the general notes on the operation of Division 10C, entitlement to deductions in respect of an amount of qualifying expenditure is determined by reference to a person's ownership and use of that part of the building to which the qualifying expenditure is attributable. For this purpose sub-section (2) describes that part of the building in respect of which an amount of qualifying hotel expenditure is attributable as the "hotel part". Thus, where the amount of qualifying hotel expenditure is the cost of construction of a building used solely for the purpose of operating a hotel, motel or guest house, that building will be taken to be the hotel part in relation to that expenditure. Where the amount of qualifying hotel expenditure is the cost of construction of an extension or alteration to a hotel, motel or guest house, that extension or alteration will constitute the hotel part in relation to that expenditure.

Sub-section (3) performs a similar function in relation to an amount of qualifying apartment expenditure by defining the building or that part of the building to which the expenditure is attributable as the "apartment part".

A person who owns the whole or a part of the hotel part, as defined, during any part of a year of income will be entitled to a deduction in respect of such period of the year of income as he both owns that part and deals with it in the prescribed manner. By sub-section (4) the owner of any part of a hotel part will be taken to have dealt with his or her part in the prescribed manner at a particular time if, at that time, the person used it for the purpose of producing assessable income and it was also used (whether by the owner or not), or part of it was used, wholly or principally for the purpose of operating a hotel, motel or guest house containing 10 bedrooms that were used or available for use for the provision of short-term accommodation for travellers.

As explained in the notes on sub-section (9), a suite of rooms including a bedroom or bedrooms will be counted as one bedroom for these purposes. As further explained in the notes on sub-section (19), in determining whether, at a particular time, a hotel, motel or guest house contains at least 10 bed-rooms that are used or available for use for the accommodation of travellers, a bedroom that is, throughout the period that the taxpayer owns the hotel part, used principally for the accommodation of travellers will be taken to satisfy the "traveller accommodation use" test at all times during that period.

The effect of this "principal use" rule in conjunction with sub-section (4) is that if, for example, a taxpayer owns the hotel part throughout a whole year of income and during that year 9 bedrooms were used wholly for the accommodation of travellers and one bedroom was used for 9 months only for the accommodation of travellers, all 10 rooms would be taken to be used throughout the income year wholly for the accommodation of travellers. As a consequence, the taxpayer would be taken to have dealt with the hotel part in the prescribed manner during the whole year of income and would be entitled to a full 2 1/2% deduction in respect of the amount of qualifying hotel expenditure under section 124ZC(1).

If, on the other hand, the tenth bedroom in the previous example was used for only three months for the accommodation of travellers, or all ten bedrooms were used for the accommodation of travellers for three months only (e.g., if after the first three months of the year the hotel commenced to be used for long-term residential accommodation) the tax-payer would be taken to have dealt with the hotel part in the prescribed manner for 3 months only. The taxpayer would in these circumstances be entitled to a deduction of one-quarter of the 2 1/2% allowance under section 124ZC(2) in respect of the amount of qualifying hotel expenditure.

Any deduction entitlement under section 124ZC is, of course, subject to reduction under section 124ZD, e.g., where the hotel part is used only partly in the operation of the hotel, motel or guest house.

Sub-section (5) performs a function equivalent to that of sub-section (4) in determining a person's entitlement to deductions in respect of an amount of qualifying apartment expenditure.

By sub-section (5) the owner of the whole or a part of the relevant apartment part will be taken to have dealt with that part in the prescribed manner at a particular time if, at that time, the owner used that part for the purpose of producing assessable income and that part was, was part of or contained -

(a)
an apartment, unit or flat, used for the provision of short-term accommodation for travellers, which was one of 10 or more contained in the building that were owned or leased by the taxpayer and used for the provision of short-term accommodation for travellers (paragraph (a) of sub-section (5)); or
(b)
a facility wholly or principally for use in association with the provision of traveller accommodation in eligible apartments, units or flats within the building (paragraph (b) of sub-section (5)).

For the purposes of paragraph (a) of sub-section (5), and as will be further explained in the notes on sub-section (20), sub-section (20) applies a "principal use" test that parallels that placed on the operation of sub-section (4) by sub-section (19) in respect of a hotel, motel or guest house. Thus, an apartment, unit or flat owned or leased by a taxpayer that is used principally to accommodate travellers during the part of the year of income in which the taxpayer owned the apartment part will be treated, for the purposes of sub-section (5)(a), as if it were used to accommodate travellers throughout the whole of that period.

Sub-section (6) will define for the purposes of sub-section (5)(b) what is an eligible apartment, unit or flat. In effect, an eligible apartment, unit or flat is to be one in respect of which a deduction is available or in respect of which a deduction would be available if there were not a 40 year limit on the availability of deductions.

To this end, sub-section (6) provides that an apartment, unit or flat will be taken to be an eligible apartment, unit or flat at a particular time if an amount of qualifying capital expenditure has been incurred in respect of that apartment, unit or flat and the owner would, at that time, be taken to have dealt with that apartment, unit or flat in the prescribed manner, i.e., that the apartment, unit or flat was being used by its owner for the purpose of producing assessable income and was one of at least 10 apartments, units or flats in the building owned or leased by that person and used for the provision of short-term traveller accommodation at that time.

The test embodied in sub-section (6) may be satisfied in relation to an amount of qualifying expenditure that is attributable either to the construction cost of the particular apartment, unit or flat or to the cost of an alteration or improvement to it. In addition, in applying the test of eligibility in relation to an apartment, etc., the effect of section 124ZC(5) (the 40 year deduction limit) is to be put aside. This will ensure that, in respect of, say, a guests' dining room that is added to a building some years after the stage when eligible apartments, units or flats were constructed, deductions will continue to be available after deductions in respect of those apartments, etc., have ceased to be available by virtue of the expiration of the 40 year write-off period.

To satisfy the "prescribed use" test under sub-section (5)(b), a facility must be one that is for use principally in association with the provision of shortterm accommodation in eligible apartments, units or flats contained in the building. Thus, a guests' dining room situated in a building consisting of, say, 40 apartments would, in broad terms, satisfy the test only at a time when the majority of those apartments were providing short-term traveller accommodation.

A person who, during a year of income, owns the whole or a part of an apartment part in relation to an amount of qualifying capital expenditure, will be entitled to a deduction under section 124ZC in respect of any period in which he or she both owns that part and satisfies the tests embodied in sub-section (5).

Any deduction entitlement so established will, however, be subject to reduction under section 124ZD if, during that period, any apartment, unit or flat contained in the apartment part is not used (or used principally) for the accommodation of travellers or if any facilities contained in that part are not for use principally in association with eligible apartments, units or flats.

Sub-section (7) of section 124ZA will ensure that deductions continue to be available during any period of temporary cessation of use of a hotel or apartment building that is a result only of the construction of an extension or the making of repairs or improvements to the building, or of seasonal or climatic factors. Thus, for example, the cost of constructing a building used solely as a hotel in a winter resort area will attract full annual deductions despite the fact that the whole or a part of the hotel may be closed during the summer period.

Sub-section (8) operates in conjunction with sub-sections (21) and (22) to confer eligibility to deductions on lessees who incur qualifying expenditure or who obtain their lease on assignment from a lessee who has incurred qualifying expenditure. The availability of deductions will, of course, be subject to the lessee dealing with the relevant premises in the prescribed manner.

The effect of these sub-sections will be to confer entitlement to annual deductions on a lessee who incurs qualifying expenditure for so long as he or she continues to lease the building or the part of the building to which the expenditure is attributable. Should the eligible lessee assign the lease, the right to deductions will pass to the assignee.

Where a lessee who is entitled to deductions surrenders the lease or the lease is terminated, and the lessee does not immediately secure another lease, the entitlement to deductions will pass to the owner of the building. Should an eligible lessee surrender part only of the lease, he or she will remain entitled to deductions but only with respect to that part of the building that he or she continues to lease.

For these purposes, sub-section (8) defines an "eligible lessee" in relation to an amount of qualifying expenditure. Thus, a lessee who has incurred an amount of qualifying expenditure will be taken to be an eligible lessee in relation to that expenditure for as long as he or she continues to lease the whole or any part of the building to which the expenditure is attributable. Alternatively, a lessee will be taken to be an eligible lessee in relation to an amount of qualifying expenditure incurred by a previous eligible lessee if he or she is assigned the lease in respect of the whole or part of the building to which qualifying expenditure incurred by the previous eligible lessee is attributable.

Sub-section (21) effectively confers entitlements to deductions on an eligible lessee in respect of an amount of qualifying expenditure by deeming an eligible lessee to be the owner of that part of the building to which the expenditure is attributable, and which is leased by the eligible lessee at a particular time, so long as, at all times since the relevant construction was completed, the eligible lessee or a previous eligible lessee had a lease over that part of the building. Sub-section (22) is a complementary provision that ensures that where an eligible lessee is taken to be the owner of part of a building, no other person can be taken to be the owner of that part for the purposes of determining any entitlement to deductions in respect of the particular amount of qualifying capital expenditure.

Sub-section (9) means that, in applying the 10 bedroom test of eligibility in relation to a hotel, motel or guest house, a suite of rooms that includes one or more bedrooms is to be taken to be a single bedroom.

Sub-section (10) is to ensure that any part of a building that is used in the provision of a facility of a kind not commonly provided in Australia in hotels, motels or guest houses is taken for the purpose of the new Division not to be for use in the operation of a hotel, motel or guest house. As an example, a casino operated in conjunction with a hotel is a facility not commonly provided in a hotel in this country.

The effect of sub-section (10) is to exclude capital expenditure incurred in respect of the provision of such a non-qualifying facility from being taken to be qualifying expenditure in respect of which deductions are available under the Division.

A further effect of sub-section (10) will be that in determining whether a deduction is allowable in respect of the use of the hotel part of a building, any part of the building that has been converted for use in the operation of a facility of a kind excluded by the application of the sub-section will not be taken to have been used for the purpose of operating a hotel, motel or guest house. Deductions will not be available, therefore, in respect of so much of the hotel part as is converted to that use.

Sub-section (11) performs an equivalent function in relation to apartment buildings by ensuring that any facility of a kind not commonly provided in Australia in a hotel, motel or guest house will be taken not to be a facility for use in association with the provision of short-term accommodation in apartments, units or flats.

Sub-section (12) will treat a complex of buildings as a single building for the purposes of the scheme. The effect will thus be to ensure that a hotel or hotel-motel that, for example, provides accommodation in detached guest room wings or that provides dining or other associated facilities in physically separate buildings, will be treated on an equal footing with a hotel contained within a single building. By virtue of sub-section (12) the 10 room test and other eligibility tests under the scheme will apply in these circumstances to the complex of buildings, taken as a whole.

Sub-section (13) is consequential on the concept adopted by sub-section (12) and ensures that where a building is added to a complex of buildings, that addition is to be treated as the construction of an extension to a building.

Sub-section (14) is a drafting measure by which a reference in the Division to a person is to be taken to include a reference to a partnership or a person in the capacity of a trustee. Thus, for example, a reference to capital expenditure incurred by a person on the construction of a building includes a reference to the cost of construction of a building by a partnership or a trustee.

As mentioned in the introductory note, deductions in respect of an amount of qualifying expenditure are to be available commencing from the date, after completion of the relevant construction, on which the accommodation building or the particular extension, alteration or improvement is first used. To this end, sub-section (15) ensures that the owner of the whole or a part of a hotel part or apartment part in relation to an amount of qualifying expenditure will not be taken to have dealt with that part in the prescribed manner at any time prior to the completion of the relevant construction. Thus, if one wing of a new accommodation building was opened to guests before other wings were completed, deductions would not commence until those other wings were also completed.

Sub-section (16) defines the term "residual capital expenditure" in relation to an amount of qualifying capital expenditure. Determination of this amount at a particular time will be necessary in ascertaining the amount of any deduction allowable to a taxpayer under proposed section 124ZE in respect of the destruction of the whole or any part of a hotel part or apartment part owned by the taxpayer. As explained in the notes on that section, a deduction is to be available to the owner (or eligible lessee) of a hotel or apartment part that is destroyed if the residual capital expenditure in relation to the hotel or apartment part exceeds any insurance or salvage recoveries received in respect of that destruction.

In essence, the residual capital expenditure in relation to an amount of qualifying expenditure at a particular time is the amount prospectively remaining as eligible to be written off as deductions in respect of that expenditure. Thus, sub-section (16) identifies the amount of residual capital expenditure at a particular time as the amount by which the amount of the expenditure exceeds the sum of the deductions that would have been available to a taxpayer had he been fully entitled to deductions up to that time, i.e., as if he had owned and used the relevant premises in the prescribed manner throughout and deductions allowable had not been subject to any reduction under section 124ZD.

Sub-section (17) will operate to exclude from the allowance accommodation contained in buildings owned by a company in which the ownership of shares confers occupancy rights in respect of a particular bedroom or apartment, unit or flat. Equivalent arrangements involving the use of trusts or partnerships to confer occupancy rights on beneficiaries or partners are also to be subject to the operation of sub-section (17).

By virtue of sub-section (17), a bedroom, apartment, unit or flat in respect of which occupancy rights are vested in a person at a particular time by reason of that person being a shareholder in a company, a beneficiary in a trust estate or a partner in a partnership is taken not to have been for use for any purpose at that time.

The effect of deeming such a unit not to have been for use for any purpose will be, firstly, to exclude capital expenditure incurred by the company, trustee or partnership in respect of the unit from being taken to be an amount of qualifying expenditure. In addition, sub-section (17) will have the effect of preventing the transfer of entitlement to deductions in respect of any building or part of a building to a company, partnership or trustee to the extent that shareholders, partners or beneficiaries acquire rights under such an arrangement. This will follow because the effect of the sub-section will be to treat the relevant part of the building as not having been dealt with in the prescribed manner.

Sub-section (18) will specifically prevent any deduction being available in respect of a bedroom (suite) or apartment, unit or flat during any period that it is used or held in reserve for the use of its owner, by deeming that bedroom, etc., not to have been used by its owner during that period for the purpose of producing assessable income.

In a case where the owner is a partnership, sub-section (18) will apply to use or reservation by a partner in the partnership. Where a deduction would otherwise be available to an eligible lessee, sub-section (18) will, by virtue of the lessee being deemed to be the owner by the operation of sub-section (21) or (22), apply in relation to any period of occupation or reservation by the lessee.

Deductions to the owner of a hotel part are to be available in respect of any period that the hotel part is used in the operation of a hotel, motel or guest house containing 10 or more bedrooms used for short-term traveller accommodation. For this purpose, a bedroom that is used principally for traveller accommodation during that period is to be taken to satisfy the traveller accommodation use requirement, i.e., a limited period of non-traveller accommodation use of a bedroom will be disregarded provided the bedroom is used principally for that purpose.

Sub-section (19) therefore sets out that, in determining whether a taxpayer who is the owner of a hotel part during the whole or part of a year of income is entitled to any deduction in respect of that period, a bedroom that is used or made available for use principally for the provision of short-term accommodation for travellers throughout that period will be treated as if it had been used at all times during that whole or part year for the accommodation of travellers.

Thus, for example, where a taxpayer is the owner of a hotel part for the full year of income, a bedroom that is used principally for traveller accommodation throughout the year of income will be taken to have been for use wholly for the provision of traveller accommodation during that year of income in determining any deduction entitlement of the taxpayer. Should the bedroom (e.g., part of an extension) be part of the hotel for six months only of the year of income, the bedroom would be taken to have been used wholly for traveller accommodation during that six months. Sub-section (19) will operate similarly in relation to periods of ownership of a hotel part of less than a full year.

Sub-section (19) has effect for the purpose of determining whether a hotel part has been dealt with by its owner in the prescribed manner, as discussed in the notes on sub-section (4), and also to ensure that any limited period of non-traveller accommodation use will not cause a reduction under section 124ZD of any deduction otherwise available in respect of the use of the hotel part. (This is subject, of course, to the bedroom being used in that period for income-producing purposes.)

Sub-section (20) operates in an equivalent manner in relation to periods of non-traveller accommodation use of apartments, units or flats.

Deductions available to the owner of an apartment, unit or flat are to be determined by reference to the use of apartments, units or flats owned or leased by the taxpayer in the apartment building. Similarly, deductions in respect of associated facilities are to be determined by reference to the availability of deductions to the owners or lessees of apartments, units or flats serviced by those facilities.

Thus, in the application of the principal use test to apartment buildings, sub-section (20) ensures that in determining whether a taxpayer who is the owner or eligible lessee of an apartment part during the whole or part of a year of income is entitled to any deduction in respect of that period, an apartment, unit or flat that, during that period, is owned or leased by the taxpayer and used principally for traveller accommodation will be treated as if it had been used at all times during that period for the provision of short-term traveller accommodation. Sub-section (20) will in similar circumstances treat an apartment, unit or flat that is owned during a part only of that period as being used wholly for traveller accommodation during that part of the period.

As with sub-section (19), sub-section (20) applies both for the purpose of determining whether an apartment part has been dealt with by its owner (owners) in the prescribed manner, and in determining whether a deduction otherwise available to an owner is to be subject to reduction under section 124ZD.

As explained more fully in the notes on sub-section (8), sub-section (21) operates to confer entitlement to deductions on eligible lessees in respect of amounts of qualifying expenditure that they or preceding lessees have incurred, by deeming the lessee to be the owner of that part of the building to which the expenditure is attributable if, at all times since completion of the construction to which the expenditure relates, the relevant part of the building has been leased by an eligible lessee.

Sub-section (22) complements the operation of sub-section (21) by ensuring that where an eligible lessee is taken to be the owner of any part of a building, no other person is taken to be the owner of that part for the purposes of determining any entitlement to deductions in respect of the particular amount of qualifying expenditure.

The operation of sub-section (22) is, however, restricted so as not to apply for the purposes of paragraph (a) of section 124ZA(5). As explained in the notes on that sub-section, a taxpayer will be taken to have dealt with an apartment part of an eligible building in the prescribed manner under paragraph (a) if, put broadly, the apartment part contains an apartment, unit or flat that was used for the provision of traveller accommodation and the taxpayer owns or leases at least 9 other apartments, etc., used for traveller accommodation.

This restriction on the operation of sub-section (21) will ensure that apartments, etc., owned by a taxpayer but leased by an eligible lessee will be capable of being taken into account in determining the total number of apartments, etc., owned by the taxpayer and used for traveller accommodation.

Sub-section (23) is a drafting measure by which a reference in relation to an amount of qualifying expenditure, to "the relevant construction" is used as a short-hand reference to the construction of the building or the extension, alteration or improvement to which the expenditure is attributable.

Sub-section (24) operates to prevent the overlapping of deduction entitlements by defining the hotel part or apartment part owned by a taxpayer in circumstances where the extent of a taxpayer's ownership of a particular hotel part or apartment part in relation to an eligible building varies during the year of income. This would occur, for example, where a taxpayer who owns several apartments in an apartment building acquires a further apartment that is contained in the relevant apartment part of the building, or disposes of an apartment, during the course of a year.

By virtue of sub-section (24), where a taxpayer's ownership changes in this way, the part owned by the taxpayer prior to the variation is treated as separate from the part owned after the variation. Thus, for example, where a taxpayer owns one-half of a hotel part (part A) throughout the year of income and acquires ownership of the remaining half (part B) for the last six months of the year of income, sub-section (24) means that the taxpayer will be treated as owning one part (A) for the first 6 months and another part (constituted by A and B) for the second 6 months.

In the absence of sub-section (24), a taxpayer in the example outlined might technically be in the position of satisfying the requirements for deductions both in respect of part A for 12 months and for part A again within the extended part constituted by parts A and B for six months.

Section 124ZB: Qualifying expenditure

Section 124ZB identifies when an amount of expenditure is an amount of qualifying expenditure for the purposes of the Division.

By virtue of sub-section (1) an amount of capital expenditure incurred by a person on the construction of a building in Australia or on an extension, alteration or improvement to a building in Australia will be taken to be an amount of qualifying hotel expenditure if, on completion of construction of the building or the extension, alteration or improvement, the building is to be used for the purpose of operating a hotel, motel or guest house containing ten or more bedrooms (suites) that are for use wholly or principally for the provision of short-term accommodation for travellers.

Where the building is not solely for use for the operation of an eligible hotel, motel or guest house so much only of the expenditure as is attributable to the hotel, motel or guest house will be taken to be qualifying hotel expenditure. In addition, only expenditure incurred by a person who, when the expenditure was incurred, was to be the owner or lessee of the relevant premises will be taken into account in determining the amount of qualifying hotel expenditure.

Sub-section (2) of section 124ZB applies similarly to identify an amount of qualifying apartment expenditure.

By virtue of sub-section (2), an amount of capital expenditure incurred by a person on the construction of a building in Australia or on the construction of an extension, alteration or improvement to a building in Australia will be taken to be an amount of qualifying apartment expenditure if, on completion of the construction, the building contains ten or more apartments, units or flats, each of which is for use wholly or principally for the provision of short-term accommodation for travellers.

Where the building does not consist solely of such apartments, units or flats, and any facilities for use wholly or principally in association with the provision of accommodation in those apartments, units or flats, so much only of the expenditure as is attributable to the provision of eligible apartments or facilities will be taken to be qualifying apartment expenditure. Again, only expenditure that is attributable to a part of the relevant building that, when the expenditure was incurred, was to be owned or leased by the person who incurred it will be taken into account in determining the amount of qualifying expenditure.

Further, by virtue of sub-section (3), in determining the amount of any qualifying hotel expenditure or qualifying apartment expenditure, expenditure incurred on plant or articles that is depreciable property, such as lifts and air-conditioning plant, is to be disregarded. The costs of such property will continue to be depreciable under the general depreciation provisions of section 54 of the Principal Act.

Section 124ZC: Deductions in respect of capital expenditure

A primary entitlement to deductions is established under section 124ZC for the owner (or eligible lessee) of the whole or a part of a hotel part or apartment part in respect of the period that he or she deals with that part in the prescribed manner (as explained in the notes on section 124ZA(4)).

Under sub-section (1) of section 124ZC, a taxpayer who, during the whole of a year of income, is the owner of a hotel part of a building and deals with that part in the prescribed manner will be entitled, by virtue of paragraph (c), to a deduction of an amount equal to 2 1/2 per cent of the amount of qualifying hotel expenditure related to the hotel part.

A person who is the owner of a part of a hotel part during the whole of a year of income and deals with that part throughout the year of income in the prescribed manner will be entitled, under paragraph (d), to a proportion of the full 2 1/2 per cent deduction determined by reference to the extent to which the qualifying hotel expenditure is attributable to the part that he or she owns. For example, the owner of a part of the hotel part to which fifty per cent of the expenditure relates would be entitled to a deduction equal to one half of the full 2 1/2 per cent deduction.

Sub-section (2) will apply where, during part only of a year of income, a taxpayer owns the whole or part of a hotel part and deals with it in the prescribed manner. Sub-section (2) could apply, for example where a taxpayer is the owner of a hotel part during the whole of a year of income but makes it available for short-term travellers for 4 months only. Sub-section (2) would also apply where a taxpayer was the owner of a hotel part for a period of 4 months only and dealt with it in the prescribed manner for all of that period.

By paragraph (c) a taxpayer who, during a part only of a year of income, was the owner of an entire hotel part and dealt with it in the prescribed manner is to be entitled to a proportion of the full annual deduction of 2 1/2 per cent of the qualifying expenditure, the proportion to be determined by reference to the number of days in that part of the year of income. Thus, a person who owns and uses a hotel part in the prescribed manner for a period of six months would be entitled to one-half of the full 2 1/2 per cent deduction.

Again, a taxpayer who, for part of a year of income, is the owner of a part of a hotel part of an eligible building and deals with it in the prescribed manner is, by virtue of paragraph (d), to be entitled to a pro-rata deduction deter-mined by reference to the number of days in that period and also to the extent to which the qualifying hotel expenditure is attributable to the part owned by the taxpayer. For example, where one-half of an amount of qualifying hotel expenditure of $200,000 is attributable to that part of the hotel part owned by a taxpayer who deals with the part in the prescribed manner for 6 months, the taxpayer would be entitled to a deduction for that year of one-half of 2 1/2 per cent of $100,000, i.e., $1,250.

Sub-sections (3) and (4) will apply in similar circumstances to confer entitlement to deductions in respect of amounts of qualifying apartment expenditure.

Thus, by virtue of paragraph (c) of sub-section (3), a taxpayer who, during the whole of a year of income both owned and dealt with an apartment part in the prescribed manner (see section 124ZA(5)), would be entitled to a deduction of an amount equal to 2 1/2 per cent of the amount of qualifying apartment expenditure to which the apartment part relates. A full-year owner of part only of an apartment part who dealt with that part in the prescribed manner throughout the year of income would be entitled under paragraph (d) to a proportion of the full 2 1/2% per cent annual deduction, the proportion again to be determined by the extent to which the amount of qualifying apartment expenditure is attributable to the part owned by the taxpayer.

By paragraph (c) of sub-section (4), an owner of an apartment part who, during part only of a year of income, deals with it in the prescribed manner, would be entitled to a proportion of the full 2 1/2 per cent deduction determined by reference to the number of days in that part of the year of income. Similarly, under paragraph (d) a taxpayer who owns and uses in the prescribed manner a part only of an apartment part during part only of the year of income is to be entitled to a proportionate deduction based on the number of days in that period and the extent to which the qualifying apartment expenditure is attributable to the part owned by him.

Deductions in respect of an amount of qualifying capital expenditure are to be available at the rate of 2 1/2 per cent per annum over a period of 40 years commencing from the date, after completion of construction, on which the particular building or extension, alteration or improvement to which the expenditure relates is first used. Sub-section (5) will operate to ensure that deductions cease to be available in respect of an amount of qualifying expenditure after the 40 year period elapses by providing that the particular hotel part or apartment part to which the qualifying expenditure relates is not to be taken to have been dealt with in the prescribed manner at any time after the expiration of the 40 year period commencing on the day on which that part was first used after completion of the relevant construction.

Deductions are to be available under this Division only where an eligible building is used for the production of assessable income. It follows that, where an eligible traveller accommodation building is owned by a body whose income is exempt from income tax, a deduction will not be available to that body.

Sub-section (6) is a safeguard against tax exempt bodies attempting to benefit in an indirect way from the allowance of deductions under the Division under arrangements that seek to confer entitlement to deductions on a taxable entity on terms that the whole or a substantial part of the resulting tax benefit to that entity is to be enjoyed, in practical effect, by the tax exempt body.

By sub-section (6), a deduction otherwise available to a taxpayer for a year of income in respect of an amount of qualifying expenditure is not to be allowable where the Commissioner of Taxation is satisfied that -

·
the taxpayer entered into an arrangement with an exempt body to pay an amount, or transfer property, the amount or value of which was to be determined by reference to any deduction available in that income year in respect of the qualifying expenditure (paragraph (b) of sub-section (6)); and
·
the arrangement was entered into to enable the exempt body to secure a substantial part of any tax benefit obtained by the taxpayer in respect of the qualifying expenditure (paragraph (c) of sub-section (6)).

Sub-section (6) applies to arrangements entered into after the date of introduction of the Bill both where the taxable entity's prima facie entitlement to deductions arose by reason of it incurring qualifying expenditure or by having acquired an eligible building, and thus the right to deductions, from a previous owner. Arrangements entered into with a merely incidental purpose of securing that a tax benefit is passed on to an exempt body are to be excluded from the operation of sub-section (6).

Section 124ZD: Reduction of deductions

As explained in the notes on section 124ZC, a primary entitlement to deductions in respect of an amount of qualifying expenditure is conferred on the owner (owners) of the relevant hotel part or apartment part in respect of the period that he or she uses that part in the prescribed manner. That primary entitlement to deductions is made subject to reduction, in defined circumstances, by the operation of section 124ZD.

Sub-section (1) of section 124ZD will have application in relation to the use of a hotel, motel or guest house. As explained in the notes on section 124ZA(4), the owner of the whole or a part of a hotel part of a hotel, motel or guest house will be taken to have dealt with that part in the prescribed manner during any period when he or she uses that part for the purpose of producing assessable income and when some or all of that part is also used wholly or principally for the purposes of operating an eligible hotel, motel or guest house.

On that basis a taxpayer may be taken to have dealt with a hotel part in the prescribed manner, and therefore be entitled to a deduction under section 124ZC, in relation to a period when the hotel part was used by the taxpayer only partly for the purpose of producing assessable income.

This could occur, for example, where a section of the building was not used during that period or where, by the operation of section 124ZA(18), a particular bedroom is to be taken not to have been used for income-producing purposes. Alternatively, the hotel part may be owned and used by a person whose income is partly exempt from income tax.

By section 124ZD(1)(b)(ii), a reduction in the deduction otherwise available to an owner of a hotel part is authorised where, at any time during a period when that part is taken to have been dealt with in the prescribed manner, the owner used it only partly for the purpose of producing assessable income.

A further possible reason for reduction of a deduction otherwise available could arise where, during a period when a hotel part was dealt with in the prescribed manner, a portion of the hotel part was not used wholly or principally in the operation of an eligible hotel, motel or guest house.

This could occur, for example, where part of a hotel is converted for use as a shopping arcade or as offices or in the provision of a facility of a kind which, by virtue of section 124ZA(10), is to be taken not to have been used in the operation of a hotel, motel or guest house.

In these circumstances, section 124ZD(1)(b)(i) authorises the appropriate reduction.

In determining the amount of any reduction that he is authorised to make under section 124ZD, the Commissioner of Taxation will be able to have regard to the period for which the part of the building concerned was not used for income-producing purposes or was not used in the operation of a hotel, motel or guest house, and to the extent to which the amount of qualifying expenditure is attributable to that part.

Sub-section (2) of section 124ZD will meet similar situations where it will be necessary to reduce entitlements to deductions conferred under section 124ZC in respect of amounts of qualifying apartment expenditure.

As explained in the notes on section 124ZA(5), the owner of the whole or a part of an apartment part will be taken to have dealt with that part in the prescribed manner, and therefore to be entitled to a deduction under section 124ZC, during any period when he or she used that part for income-producing purposes and where that part comprised, related to or contained -

·
an apartment, unit or flat used (or used principally) for the provision of short-term traveller accommodation, being one of 10 such suites contained in the eligible building that were owned or leased by the taxpayer;
or
·
a facility wholly or principally for use in association with the provision of short-term accommodation in eligible apartments, units or flats.

It is possible therefore that, while satisfying these tests, the apartment part could, for example, also contain an apartment, unit or flat that is not used for short-term traveller accommodation or a facility not used wholly or principally in association with accommodation in eligible apartments, units or flats.

Paragraph (a) of sub-section (2) therefore authorises a reduction in the deduction otherwise available to an owner of an apartment part where, at any time during the period of the year of income when the part he owns was dealt with in the prescribed manner, some of the apartment part was not used for, or in association with, the provision of short-term traveller accommodation. (By virtue of sub-sections (3) and (4), a facility will be taken to be used in association with the provision of traveller accommodation only if it is used wholly or principally in association with the provision of accommodation in eligible apartments, units or flats.)

Consistent with the operation of section 124ZD(1)(b)(ii) in relation to hotels, motels or guest houses, section 124ZD(2)(b) authorises a reduction of a deduction in circumstances where an apartment part of an eligible apartment building is used only partly for the purpose of producing assessable income.

As mentioned earlier, sub-sections (3) and (4) apply to restrict deductions in respect of facilities contained in an apartment building to those used wholly or principally in association with eligible apartments, units or flats. This term has the same meaning as in section 124ZA(6) and, broadly, means apartments, units or flats in respect of which a deduction is available under section 124ZC or would be available but for the expiration of the 40 year limit on the availability of deductions.

Sub-section (5) operates, in certain circumstances, to reduce a taxpayer's entitlement to a deduction as established under section 124ZE when there occurs during a year of income a total or partial destruction of an eligible building. As will be explained more fully in the notes on that section, a balancing deduction is to be available to the owner (or eligible lessee) of a hotel or apartment part that is destroyed, if the residual capital expenditure in relation to that part exceeds any insurance or salvage recoveries received in respect of that destruction.

By sub-section (5), the deduction otherwise available in respect of the destruction of a hotel part or apartment part is to be reduced appropriately where, at any time prior to the destruction, that part was being used in circumstances that either precluded the allowance of a deduction in respect of the relevant amount of qualifying expenditure or resulted in a reduced deduction being available.

Section 124ZE: Deduction in respect of destruction of building

Section 124ZE, the last of the new sections to be inserted by clause 20, will authorise deductions in respect of the total destruction of a hotel part or apartment part (sub-sections (1) and (3)) and in respect of the partial destruction of a hotel part or apartment part (sub-sections (2) and (4)). The section will apply both to voluntary destruction (demolition) and involuntary destruction (e.g., loss by fire) of the premises concerned.

By sub-section (1), broadly stated, the owner of a hotel part that is destroyed is to be entitled to a deduction of the amount by which the residual capital expenditure at the time of destruction exceeds the amount, if any, received or receivable by the taxpayer (under a policy of insurance or otherwise) in respect of the destruction.

As explained in the notes on section 124ZA(16) the residual capital expenditure at a particular time is, broadly, the amount of the qualifying expenditure remaining to be written off at that time. By virtue of section 124ZE(5), the amount received or receivable in respect of the destruction of a hotel part will include the amount of any salvage recoveries (net of demolition costs).

A deduction is to be available in respect of the destruction of a hotel part only where the hotel part was, immediately before the destruction, being used by its owner in the prescribed manner or, where it was not being so used, where the last use of the hotel part by the owner was in the prescribed manner. In the latter case, where, at the time when the hotel part was last used in the prescribed manner, some of the hotel part was also being used for purposes other than in the operation of a hotel, motel or guest house and continued to be used for those other purposes, that fact will not preclude the owner from being entitled to a balancing deduction in respect of the destruction of the hotel part.

Where parts of a hotel part that is destroyed were owned by different taxpayers, each taxpayer will, subject to the general tests for deductibility, be entitled to a deduction of the amount by which the residual capital expenditure attributable to his or her part exceeds any amounts received or receivable in respect of the destruction of that part.

Sub-section (2) will authorise deductions in respect of the destruction of a part of a hotel part, referred to in the sub-section as the destroyed part.

Subject to satisfying requirements equivalent to those outlined in sub-section (1), i.e., broadly, that the last use of the destroyed part was for prescribed purposes, the owner of the destroyed part is to be entitled to a deduction of the amount by which the residual capital expenditure attributable to the destroyed part exceeds the amount received or receivable by the owner in respect of the destruction.

The owner of a part of the destroyed part will be similarly entitled to a deduction of the amount by which the residual capital expenditure attributable to his or her share of the destroyed part exceeds any amount received or receivable in respect of its destruction.

By sub-section (3) the owner of an apartment part that is destroyed is to be entitled to a deduction of the amount by which the residual capital expenditure at the time of destruction exceeds any amount received or receivable in respect of the destruction.

Again, according to rules consistent with those to apply where destruction occurs to a hotel, motel or guest house, a deduction is to be available in respect of an apartment building only where the apartment part was, immediately before the destruction, being used by its owner in the prescribed manner or, where it was not being so used, where the last use by the taxpayer was in the prescribed manner.

Appropriate balancing deductions will be allowed to the individual owners of parts of a destroyed apartment part that was owned by more than one person subject, of course, to broadly the same qualifications as applicable under the sub-section for sole owners of a destroyed part.

Sub-section (4) authorises deductions in respect of the destruction of a part of an apartment part, referred to as the destroyed part.

Subject to satisfying requirements equivalent to those outlined in relation to sub-section (3), i.e., broadly, that the last use of the destroyed part was in the prescribed manner, the owner of the destroyed part is to be entitled to a deduction of the amount by which the residual capital expenditure attributable to the destroyed part exceeds the amount received or receivable by the owner in respect of the destruction.

Where there is more than one owner of the destroyed part, each will similarly be entitled to a deduction of the amount by which the residual capital expenditure attributable to his or her interest in the destroyed part exceeds any amount received or receivable in respect of the destruction.

As mentioned in the notes on sub-section (1), the amount received or receivable in respect of the destruction of the whole or part of a building is to include any amounts received or receivable in respect of the disposal of any property salvaged from the destruction. For this purpose, sub-section (5) deems any amount received by a person on the disposal of property that formed part of a building that, prior to destruction, was owned by the person to be an amount received or receivable in respect of the destruction. Where demolition costs are incurred, the amount received will be taken to be the amount net of those costs.

Where the whole or a part of an eligible building is destroyed, separate deductions in respect of that destruction are to be calculated under section 124ZE in relation to each hotel part or apartment part as may have been contained in the destroyed part of the building. Where an amount received or receivable in respect of the destruction of a building is attributable to more than one hotel part or apartment part, the Commissioner of Taxation is to be empowered by sub-section (6) to allocate that amount for the purposes of determining the amount received in respect of the destruction of each of those hotel parts or apartment parts.

Clause 21: Rebates for dependants

This clause proposes the amendment of section 159J of the Principal Act to increase the maximum amounts of concessional rebates which may be allowed to taxpayers who maintain dependants. Clauses 22 and 23 are related.

Paragraphs (a) to (d) of sub-clause (1) will insert the proposed maximum amounts of concessional rebates in respect of the classes of dependants specified in the table in section 159J(2). A comparison of the existing amounts (as increased by indexation, in accordance with section 159Z, above the levels formally specified in the table) with those proposed, is as follows:

  Present Proposed   $ $
Spouse 597 800
Daughter-housekeeper 597 800
Child under 16 (not being a student)
- 1 child 270* 362*
- other children 203* 272*
Student 270* 362*
Invalid relative 270 362
Parent of the taxpayer or of his or her spouse 539 722
* Rebates for children and students are not allowable, but these dependants are included in the table in section 159J(2) for the purposes of the zone and equivalent rebates and to establish entitlement to the rebates for a sole parent, a housekeeper, and certain concessional expenditure.

Paragraph (e) of sub-clause (1) will increase the level of separate net income that may be derived by a dependant of a taxpayer before any reduction is made in the amount of the rebate that would otherwise be allowable in respect of the dependant. At present, the rebate otherwise allowable in respect of a dependant is not reduced unless the dependant's separate net income exceeds $203 (that is, $170 as specified in section 159J(4) as increased by indexation in accordance with section 159Z). Where the dependant's separate net income exceeds $203 the rebate is reduced by $1 for each $4 by which the dependant's income exceeds that amount. The "free" level of separate net income is to be increased to $272. This increase is equivalent to the percentage increase that is being proposed for the rebates themselves.

The new separate net income level will also apply in determining the "notional" rebates for children for the purposes of the zone and allied rebates and the rebates for sole parents, housekeeper, and certain concessional expenditure.

By sub-clause (2) the increased values proposed by sub-clause (1) will be applied in assessments in respect of the 1980-81 year of income and all subsequent income years. However, clause 24 of the Bill will have the effect that in years subsequent to 1980-81 the new values will be automatically increased by indexation when an Act declares that indexation is to apply for the particular year.

Clause 22: Sole parent rebate

Section 159K of the Principal Act, which will be amended by this clause, provides, subject to certain conditions, for the allowance of a maximum rebate of $417 (that is, $350 as specified in section 159K, indexed in accordance with section 159Z) for a taxpayer who has the sole care of a dependent child under 16 years of age or full-time student (up to 25 years of age).

By sub-clause (1) of clause 22 the amount of the sole parent rebate will be increased to $559. This is an equivalent percentage increase to that which is proposed by clause 21 for rebates for dependants.

At present, to qualify as a dependent student or dependent child for the purposes of the rebate, the separate net income of the student or child must be below a particular level. This level is now $1,283 but, in consequence of the amendments that are being made to section 159J of the Principal Act by clause 21 it is to become $1,720.

By sub-clause (2), the increased maximum amount of the sole parent rebate of $559 will apply for assessments in respect of the 1980-81 year of income, and all subsequent years of income. However, the amount of the rebate, and the amount that a child or student may earn before he or she ceases to be a dependant for purposes of the rebate, will automatically be increased by indexation in accordance with section 159Z of the Principal Act (see notes on clause 24) for years subsequent to the 1980-81 income year where an Act declares that indexation is to apply for the particular year.

Clause 23: Housekeeper

Sub-clause (1) of this clause will amend section 159L of the Principal Act, to increase the maximum rebate allowable for a housekeeper from $597 (the present indexed value of the $500 rebate specified in the section) to $800. This increase is the same as that proposed by clause 21(1) for the rebates for a dependent spouse or daughter-housekeeper.

By sub-clause (2), the amendments made by sub-clause (1) will apply to assessments in respect of the 1980-81 year of income and all subsequent years of income. The increased value of the rebate of $800 will be automatically indexed in years subsequent to 1980-81, where an Act declares that indexation is to apply for that particular year. (See notes on clause 24.)

Clause 24: Indexation

This clause will amend section 159Z of the Principal Act, which is the section by which the concessional rebates and related amounts that are covered by the three preceding clauses are indexed. The amendments will enable indexation of the dependant and related rebates, at their new levels.

Paragraph (a) of sub-clause (1) will amend the definition of "relevant amount" in section 159Z(1) in which are set out the base amounts specified at present in sections 159J, 159K and 159L of the Principal Act. These are the amounts of the rebates for dependants, to a sole parent, and for a housekeeper, and of the separate net income that a dependant of a taxpayer may derive without affecting the rebate allowed to the taxpayer. By this amendment these amounts will be increased in consequence of the increases in the amounts specified in those sections, as proposed by clauses 21, 22 and 23.

Paragraph (b) of sub-clause (1) will amend the definition of "relevant year of income" in section 159Z(1) to delete the reference to the year of income commencing on 1 July 1977 - the year following that in which the base amounts set out in the existing definition of "relevant amount" applied - and substitute a reference to the year of income commencing on 1 July 1981. This later year is, of course, the year following that in which the base amounts being substituted in the definition of "relevant amount" by paragraph (a) will first apply.

Paragraph (c) of sub-clause (1) omits from section 159Z of the principal Act existing sub-sections (2), (2A), (2B), (2C) and (2D) and substitutes new sub-sections (2), (2A) and (2B).

Existing sections 159Z(2) and (2A) provide the rules for indexation of the present relevant amounts (see notes on paragraph (a) above) for the 1977-78, 1978-79 and 1979-80 income years. These provisions will no longer be necessary in consequence of the proposed substitution in the definition of "relevant amount" of the 1980-81 rebate values, and they are, accordingly, being omitted.

Existing sections 159Z(2B), (2C) and (2D) of the Principal Act set out rules for establishing the indexed rebate etc. values for the 1980-81 and subsequent income years, on the basis of the existing relevant amounts.

Restatement of these provisions is necessary in consequence of the substitution of 1980-81 rebate values in the definition of "relevant amount" and of the 1981-82 income year as the first relevant year in the definition of the term "relevant year of income" proposed by paragraphs (a) and (b).

New section 159Z(2), like omitted section 159Z(2C) which it replaces, applies in relation to a relevant year of income that is declared to be a prescribed year, that is, a year to which indexation applies, and in relation to which the indexation factor is greater than 1. It will operate in the same way as the omitted section 159Z(2C), that is, following the declaration of a relevant year as a prescribed year, the relevant amounts, or those amounts as adjusted by indexation up to and including the year preceding that relevant year, will, after adjustment by the indexation factor for the relevant year, become the rebate and related values for the relevant year.

New section 159Z(2A) replaces omitted section 159Z(2B) and will have the same practical operation, in the context of the amended definitions of the terms "relevant amount" and "relevant year of income", as the omitted sub-section.

Broadly the sub-section will have the effect that, once sub-section (2) has operated to increase the relevant rebate amounts, those increased amounts will continue to apply until such time as a subsequent year of income is declared to be a prescribed year and the indexation factor in relation to that year is greater than 1.

New section 159Z(2B) replaces and is to the same effect as omitted section 159Z(2D). It deals with the situation where the year preceding the current income year was not declared to be a prescribed year until after its commencement. In those circumstances, up until such time as the preceding year was declared to be a prescribed year, the rebates for that year would have been determined in accordance with new section 159Z(2A) - that is, they would have been the same as those of the next preceding year. Following the year being declared to be a prescribed year, new section 159Z(2) would have operated to index the rebates for that year to higher amounts. Where that situation occurs two rebate amounts would have applied in the preceding year and new section 159Z(2B) makes it clear that the references in sections 159Z(2) and 159Z(2A) to the rebates that applied in the preceding year are to be taken as being a reference to the higher indexed rebates that applied in that year.

By sub-clause (2) the amendments made by sub-clause (1) will apply to assessments in respect of the 1980-81 income year and subsequent years. However, for the 1980- 81 income year, the amendments made by sub-clause (1) will only have effect in relation to the omission of existing sections 159Z(2B), (2C) and (2D), as the new indexation provisions cannot apply to increase the new rebate and related amounts in sections 159J, 159K or 159L before 1981-82, the first relevant year.

Clause 25: Rebate in respect of payments received in lieu of annual leave or long service leave

This clause will effect a technical amendment of section 160AA of the Principal Act, which provides for a rebate of tax where tax at more than the standard rate would otherwise be payable on any amount included in assessable income under section 26AC of the Principal Act (payments in respect of unused annual leave) or sub-sections (2), (3) or (4) of section 26AD (payments in respect of unused long service leave attributable to eligible service after 15 August 1978).

For this purpose section 160AA contains references to the 32 per cent standard rate of tax and to the current income levels of $3,893 and $16,608 above, and up to which, respectively, the standard rate applies. Existing section 160AA(3) provides for these relevant amounts to be adjusted in line with indexation adjustments to the rates scale and is now being amended to reflect variations in indexation arrangements that are proposed by the Income Tax (Rates) Amendment Bill (No. 2) 1980. The effect will be that the income levels of $3,893 and $16,608 referred to in the section will be adjusted by the same multiplier, that is, one half of the indexation factor - by which, in accordance with sub-section 9(2) of the Income Tax (Rates) Act 1976, the income ranges of the general rates scale are to be adjusted.

Clause 26: Amendment of assessments

The general rules governing the amendment of income tax assessments are laid down in section 170 of the Principal Act, which contains general limits on the power to amend assessments. Sub-section (10) of the section authorises the re-opening of assessments at any time, either to increase or reduce liability, where this is necessary to give effect to specified provisions of the Principal Act.

Clause 26 of the Bill will insert in section 170(10) references to new provisions that are to be included in the Principal Act by the Bill. These relate to the assessment of amounts received on the sale of leased motor cars (section 26AAB), deductions that are to be available for the cost of converting or adapting oil-fired plant to alternative energy sources (section 53H) and the 40 per cent conversion allowance for plant installed to replace oil-fired plant (Subdivision BB of Division 3 of Part III).

The operation of section 26AAB in determining the amount that is to be included in the assessable income of a person as a consequence of the disposal of a car or station wagon previously leased will, where there is a sequence of disposals, be dependent on the amount assessed or assessable to other persons in respect of the earlier disposals. The section will also not operate in respect of a disposal where the vehicle was disposed of previously by the lessee or associate for an amount being not less than the market value.

The insertion of the reference to section 26AAB in section 170(10) will give the necessary authority to the Commissioner of Taxation to amend at any time an assessment of a taxpayer to make an adjustment on account of a previous disposal of a vehicle.

A 40 per cent conversion allowance deduction allowable under new Subdivision BB of Division 3, Part III may cease to be allowable to a taxpayer in certain circumstances, as where the property is disposed of prematurely or ceases to be used for the purpose of producing assessable income. A deduction under the new section 53H in respect of conversion costs may likewise cease to be allowable where converted plant is disposed of or used for certain ineligible purposes.

Circumstances in which amendments to assessments may be necessary to give effect to the provisions governing the 40 per cent conversion allowance and the conversion costs deduction are described in the explanatory notes relating to the new Subdivision and to section 53H. The references to the Subdivision and to section 53H that are now to be inserted in section 170(10) will enable assessments to be amended in such circumstances.

INCOME TAX (RATES) AMENDMENT BILL (NO. 2) 1980

This Bill will amend the Income Tax (Rates) Act 1976 (in this section of these notes referred to as "the Principal Act"), which declares the rates of tax in respect of the income of individuals and trustees, and includes provision for the indexation of the rates of personal income tax by reference to increases in the Consumer Price Index.

The Bill will give effect to two proposals. The first is that the income ranges of the general rates scale be adjusted for 1980-81 by one-half of the indexation factor that, on the basis of movements in the Consumer Price Index, is applicable for that year.

The second proposal given effect by the Bill is that the effect on the Consumer Price Index of the health insurance changes that were announced on 24 May 1979 and of Government decisions for import parity pricing of crude oil are to be added to the factors to which regard is to be had in fixing the tax indexation factor.

Clause 1: Short title, etc.

This clause provides formally for the amending Act to be cited as the Income Tax (Rates) Amendment Act (No. 2) 1980 and for the Income Tax (Rates) Act 1976 as previously amended to be referred to in the amending Act as the Principal Act.

Clause 2: Commencement

By section 5(1A) of the Acts Interpretation Act 1901 every Act is to come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears. Because regulations prescribing the tax indexation factor for 1980-81, and tax instalment deductions to be made from salary and wages paid on or after 1 July 1980, will have to be made in the light of the measures proposed by this Bill it is proposed by this clause that the amending Act shall come into operation on the day on which it receives the Royal Assent.

Clause 3: Indexation

This clause will amend section 9 of the Principal Act, which, in broad terms, provides for indexation of the income ranges in the general personal income tax rate scale for any year which an Act declares to be a year to which indexation is to apply. By reason of section 159Z of the Income Tax Assessment Act 1936 (as amended by the first Bill) the indexation factor determined for the purposes of section 9 is correspondingly to be used to index the amounts of concessional rebates for the maintenance of dependants and related amounts for a year subsequent to 1980-81.

The basic indexation factor is calculated, in accordance with section 9(3) as being equal to the increase in the average level of the Consumer Price Index for the 12 months to the end of March preceding the relevant year of income over its average level in the next preceding 12 months. The factor so calculated will be the tax indexation factor for the purpose of section 9(2) unless a lesser factor is prescribed by regulations made under section 9(4). Where an indexation factor is prescribed by regulations, regard is to be had to a number of matters specified in section 9(5).

Paragraph (a) of clause 3 proposes the addition of further matters to those to which regard is to be had in the making of regulations under section 9(4). It will omit existing section 9(5)(c)(iii) and substitute four new sub-paragraphs, one of which, sub-paragraph (c)(i) is a restatement of existing sub-paragraph (c)(iii). That sub-paragraph requires that regard be had to the effects on the Consumer Price Index of the first two steps towards import parity pricing of locally produced crude oil that were taken on 17 August 1977 and 1 July 1978.

New sub-paragraphs (c)(ii) to (c)(iv) specify the further matters to which regard is to be had in making the relevant regulations. These are the effects on the Consumer Price Index of -

·
increases in the price paid for locally produced crude oil on or after 16 August 1978 attributable to increases in the import parity price of crude oil - sub-paragraph (c)(ii);
·
increases on or after 1 September 1979 in the cost of health insurance and the net cost of health services which resulted from a reduction in the amount of the benefit paid by the Commonwealth towards the cost of medical services - sub-paragraph (c)(iii); and
·
increases on or after 1 September 1979 in public hospital in-patient charges and in the cost of health insurance resulting from such increases - sub-paragraph (c)(iv).

Paragraph (b) of clause 3 proposes the insertion of two new sub-sections - sub-sections (8) and (9) - in section 9 of the Principal Act. The effect of these sub-sections will be to reduce by half the indexation factor that would otherwise be used, for the purposes of sub-section 9(2), to adjust the rates scale for 1980-81. These sub-sections are expressed to apply only for the 1980-81 income year.

By proposed sub-section (8) the 1980-81 indexation multiplier to be used for the purposes of sub-section (2) is to be half of the indexation factor for that year.

Paragraph (a) would apply if an indexation factor were not prescribed by regulations. In that event, the factor ascertained under section 9(3) (that is, the factor flowing directly from the movement in the average level of the Consumer Price Index) would be increased by one and divided by two.

Paragraph (b) will operate in the same manner to reduce by half the tax indexation factor prescribed by regulations.

Proposed sub-section (9) is a machinery provision to give effect to the requirement in proposed sub-sections 8(a) and 8(b) that the multiplier be calculated to 3 decimal places. Where the basic multiplier includes 4 decimal places, it is to be rounded to 3 decimal places.

Clause 4: Prescribed year

This clause will result in indexation of the personal tax rate scale to apply for 1980-81.

The steps of the personal income tax rates scale are, under existing law, to be adjusted for indexation only in a year that is declared in an Act to be a prescribed year for the purposes of section 9 of the Income Tax (Rates) Act 1976. By clause 4, the 1980-81 year of income will be declared to be a prescribed year of income for the purposes of section 9.

Clause 5: Publication of indexation factor

Under the indexation arrangements, where a year is declared in an Act to be a prescribed year, the income ranges of the rates scale are adjusted for that year by the factor ascertained in accordance with section 9(3) of the Principal Act (that is, the factor flowing directly from the movement in the average level of the Consumer price Index in the period concerned) unless a lesser factor is prescribed by regulation.

Against this background, section 9(6) of the Principal Act requires that where the provision of an Act that declares an income year to be a prescribed year of income comes into operation and a regulation has not been made prescribing a factor for the year before that provision comes into operation (that is the situation where, if the income year has commenced, the factor ascertained in accordance with section 9(3) of the Principal Act would apply) the Treasurer shall have the indexation factor ascertained in accordance with section 9(3) published in the Gazette.

As paragraph (a) of clause 3, which provides for further matters to be taken into account in making regulations prescribing the indexation factor for a year, will come into operation at the same time as the provision which declares 1980-81 to be a prescribed year (clause 4), it will not be practicable for a regulation to be made prescribing the indexation factor for 1980-81 before the provision declaring the year to be a prescribed year of income comes into operation. In these circumstances, clause 5 proposes to extend, until a date as soon as practicable after 15 June 1980, the time by which, if a regulation has not been made prescribing a lesser indexation factor for 1980-81, the Treasurer is required to have the factor published in the Gazette.


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