Revised Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 7 - Capital expenditure that is immediately deductible
Outline of chapter
7.1 Subdivision 40-H contains the rules that allow certain capital expenditure under the uniform capital allowance system to be immediately deductible.
Context of reform
7.2 The introduction of the uniform capital allowance system and the allowing of previously non-deductible capital expenditure are a key component of the New Business Tax System announced in Treasurers Press Release No. 74 of 11 November 1999 (refer to Attachment L).
7.3 However, certain expenditure that is now immediately deductible is to remain so.
Summary of new law
7.4 This Subdivision broadly replicates the treatment under the current law to allow an immediate deduction for expenditure on the following:
- exploration or prospecting;
- rehabilitation of mining or quarrying sites;
- petroleum rent resource tax; and
- environmental protection.
7.5 The cost of depreciating assets (including mining information) used in exploration or prospecting will continue to be immediately deductible, rather than being deductible over the effective life of the asset.
|New law||Current law|
|The cost of depreciating assets (expressly including mining information) used in exploration and prospecting activities is to be immediately deductible.||The cost of plant used for exploration and prospecting is immediately deductible.|
|A change for exploration and prospecting is that expenditure on acquiring mining or prospecting information from another person will be immediately deductible if incurred for the purpose of exploration or prospecting.||Currently, such expenditure is deductible over the shorter of either the life of mine/quarry or 10 years (20 in the case of quarrying).|
Detailed explanation of new law
7.6 This Subdivision deals with capital expenditure (other than certain expenditure incurred by primary producers on landcare operations) that is to be given immediate deductibility. The types of expenditure dealt within this Subdivision are:
- exploration and prospecting;
- expenditure on the rehabilitation of mining sites;
- payments of certain petroleum taxes; and
- expenditure on certain environmental protection activities.
Deduction for expenditure on exploration or prospecting
What is the current treatment of expenditure on exploration and prospecting activities?
7.7 Subject to a number of conditions, expenditure, whether capital or not, on exploration or prospecting for minerals (including petroleum) and quarry materials, is immediately deductible. Therefore, expenditure on things like salaries and wages, contract drilling, travel and accommodation, and consumables can qualify, irrespective of whether the expenditure is capital and so ordinarily not immediately deductible. Also, the cost of depreciating assets used directly in the activities can qualify for immediate deduction. In the case of plant, taxpayers can elect to deduct its cost over its effective life.
7.8 There are 2 conditions for the deduction. The first is that the minerals, petroleum or quarry materials are obtainable by eligible operations in respect of the resource. Broadly, that requires that the minerals, petroleum or quarry materials are in their natural site and any income derived as a result of their extraction would be assessable.
7.9 The second condition is essentially that the taxpayer carried on eligible operations, proposed to carry on such operations, or was carrying on a business of exploration or prospecting for minerals, petroleum or quarry materials obtainable by eligible operations in relation to the resource.
What is exploration or prospecting?
7.10 The meaning of exploration or prospecting is not defined exhaustively and so takes its ordinary meaning. However, it is defined to include a number of things that commonly are undertaken in performing activities, such as geological mapping, geophysical surveys, exploratory drilling, studies to evaluate the economic feasibility of mining or quarrying, and so on. It does not, however, include expenditure on developing or operating a mining or quarrying field or site. The point at which a decision to proceed to actual mining operations has been made, is the dividing line between exploration and prospecting on the one hand, and development and operation on the other.
What is to be the new treatment of exploration or prospecting?
7.11 The new law retains the full deduction in an income year for expenditure on exploration or prospecting for minerals, including petroleum, and quarry materials. However, the method of claiming deductions and the timing of those deductions has changed. As well, full deductions are now available for expenditure on acquiring mining, quarrying or prospecting rights and/or information for use in exploration or prospecting activities. Currently such expenditure either is deductible over time or is not deductible at all.
Full deduction for the cost of depreciating assets first used in exploration or prospecting
7.12 Subject to a number of conditions, the decline in value of a depreciating asset of a taxpayer is the assets cost if the taxpayer first uses the asset for exploration or prospecting for minerals, which includes petroleum, or quarry materials. [Schedule 1, item 1, paragraph 40-80(1)(a)]
7.13 The first condition is that the asset is not used for development drilling for petroleum, or operations in the course of working a mining property, petroleum field or quarrying property. [Schedule 1, item 1, paragraph 40-80(1)(b)]
7.14 The second is that the taxpayer satisfies at least one of the following:
- the taxpayer carries on mining operations;
- it would be reasonable to conclude that the taxpayer proposed to carry on mining operations; or
- the taxpayer carries on a business of exploration or prospecting for minerals or quarry materials obtainable by mining operations, and the expenditure on the asset was necessarily incurred in carrying on that business.
[Schedule 1, item 1, paragraph 40-80(1)(c)]
7.15 This new treatment represents 3 changes to the current law. Firstly, expenditure on depreciating assets, such as drilling rigs, can still qualify for full deduction in an income year but under the general provisions of Subdivision 40-B, attracting the general provisions of that Subdivision such as balancing adjustments and so on rather than having unique provisions.
7.16 To that end, the use of depreciating assets for exploration or prospecting will constitute a taxable use, ensuring that deductions are allowable in cases where the exploration or prospecting activities are not for the purpose of producing assessable income (e.g. because they are preliminary). [Schedule 1, item 1, paragraph 40-25(7)(b)]
7.17 Secondly, expenditure on acquiring mining, quarrying or prospecting information or mining, quarrying or prospecting rights will be fully deductible if the asset is first used in exploration or prospecting. Currently, such expenditure is either deductible over time (from when a decision is taken to extract) or not all.
7.18 The current requirement for the vendor and purchaser to agree on the amount that can be deductible to the purchaser of a mining, quarrying or prospecting information or right is removed. In principle, the purchase price is to be deductible, in full in the case where the asset is first used in exploration or prospecting, or over time where used in connection with the extractive process.
7.19 To those ends, mining, quarrying or prospecting information and rights are defined to be depreciating assets [Schedule 1, item 1, paragraphs 40-30(2)(a) and (b)] . As well, the current meaning of exploration or prospecting has been extended to include obtaining mining, quarrying or prospecting information associated with the search for, and evaluation of, areas containing minerals or quarry materials [Schedule 1, item 1, paragraph 40-730(4)(d)] .
7.20 Thirdly, section 40-60 which determines when a depreciating asset starts to decline in value applies equally to assets used for exploration or prospecting including mining, quarrying or prospecting rights and information. Section 40-60 states that the decline in value starts when the asset is first used or installed ready for use. This means for exploration or prospecting assets the full deduction is given when they are first used or installed ready for use. This is a departure from the current regime which allows immediate deductions for expenditure on exploration or prospecting at the time when the expenditure is incurred. For example, expenditure on the construction of plant that is to be first used for exploration or prospecting is deductible when the plant is first used, or installed ready for use, rather than when the expenditure is incurred.
7.21 Expenditure on creating mining, quarrying or prospecting information is considered to be a cost of the information. Accordingly, expenditure, such as salaries and wages, contractors fees, travel and accommodation, fuels and consumables, will be a cost of the information and will be deductible according to the use to which the information is put and at the time when the information is first used, as described in paragraph 7.17.
7.22 It is envisaged that much expenditure on exploration or prospecting will be a cost of a depreciating asset. The new law nevertheless retains the current method of deducting expenditure on exploration or prospecting in the event there are some expenditures that currently qualify for immediate deduction and that are not a cost of a depreciating asset. [Schedule 1, item 1, paragraphs 40-730(1)(b) and (c)]
What is the meaning of exploration or prospecting?
7.23 The definition of exploration or prospecting replicates the definition under the current law. [Schedule 1, item 1, subsection 40-730(4)]
7.24 This definition is intended to reflect the definition contained in the existing Division 330 of the ITAA 1997 under the current law.
What is the meaning of minerals, petroleum or quarry materials?
7.25 The meaning of these terms remain unchanged. Minerals takes its ordinary meaning and retains the inclusion of petroleum [Schedule 1, item 1, subsection 40-730(5)] . The new law retains the current meaning of petroleum [Schedule 1, item 1, subsection 40-730(6)] . Quarry materials remain undefined and so takes its ordinary meaning.
What is the meaning of mining operations?
7.26 This expression has the same meaning as the current law definition of eligible mining or quarrying operations. [Schedule 1, item 1, subsection 40-730(7)]
What is the meaning of mining, quarrying or prospecting information?
7.27 This expression retains its meaning under the current law. [Schedule 1, item 1, subsection 40-730(8)]
Deduction for expenditure on mining site rehabilitation
7.28 An immediate deduction is allowable for expenditure, whether capital or not, on rehabilitating mining or quarrying sites, sites of exploration or prospecting activities, and sites of ancillary activities [Schedule 1, item 1, subsection 40-735(1)] . In determining the availability of the immediate deduction, regard must be had to other provisions of the Act apart from Division 8 [Schedule 1, item 1, subsection 40-735(2)] .
7.29 Mining site rehabilitation means the restoration, in whole or in part, of the site to a reasonable approximation of its condition prior to the commencement of the mining, quarrying, exploration or prospecting activity [Schedule 1, item 1, subsections 40-735(4) and (5)] . There is a timing rule that states when ancillary activities were first started on a mining building site; this rule ensures that the objective is not taken to be restoration of the building, but of the site, before any building works began on it [Schedule 1, item 1, subsection 40-735(6)] .
7.30 The scope of those activities and the meaning of the site upon which those activities can be carried on remain unchanged from the existing law. [Schedule 1, item 1, section 40-740]
7.31 The immediate deduction is not available for depreciating assets used in rehabilitation [Schedule 1, item 1, subsection 40-735(3)] . However, the cost of such assets may be deductible over time under Subdivision 40-B or under Division 43 as appropriate. That is achieved by specifying that property used in rehabilitation is taken to be used for a taxable purpose, just like the purpose of producing assessable income [Schedule 1, item 1, paragraph 40-25(7)(c)] .
7.32 The immediate deduction is also not available for expenditure on acquiring land, an interest in the land, or any right, power or privilege to do with the land, a bond or security, or on housing and welfare. [Schedule 1, item 1, section 40-745]
7.33 The new law is intended to reflect the current law. The opportunity has been taken to somewhat simplify the legislation and make it more logical. As well, it has been necessary to adopt a number of new terms, such as depreciating asset, to reflect the new concepts under Division 40.
Deduction for payments of petroleum resource rent tax
7.34 An immediate deduction is allowable for petroleum resource rent tax, imposed by the Petroleum Resource Rent Tax Act 1987 other than under paragraph 99(c) of that Act (i.e. other than certain penalties) [Schedule 1, item 1, subsections 40-750(1) and (2)] . Included in assessable income are refunds, credits, amounts paid and applied of the tax [Schedule 1, item 1, subsection 40-750(3)] . Division 20 of the ITAA 1997 will be amended to include any recoupment of this deduction.
7.35 The provisions are intended to reflect the current law and have been largely reproduced, unchanged. The only change of particular note is the omission of current subsection 330-350(4), which deals with the various capacities in which taxpayers can act, because it is an unnecessary repetition of the effect of the law.
Expenditure on certain environmental protection activities
7.36 An immediate deduction is allowable for expenditure incurred for the sole or dominant purpose of carrying out environmental protection activities [Schedule 1, item 1, subsection 40-755(1)] . As to what constitutes those activities, the definition is the same as in the existing law [Schedule 1, item 1, subsections 40-755(2) to (4)] .
7.37 The exceptions to this immediate deduction are also the same as the existing law [Schedule 1, item 1, subsection 40-760(1)] . Further, an immediate deduction is also not available if the expenditure is deductible as part of a project pool (see Chapter 8) [Schedule 1, item 1, subsection 40-760(2)] . This ensures such expenditure is not deducted twice, and is consistent with the effect of the current law.
7.38 As a consequence of the introduction of the uniform capital allowance system, the rules for non-arms length transactions apply across the whole Subdivision. [Schedule 1, item 1, section 40-765]
7.39 The provisions are intended to follow the provisions contained in the existing Subdivision 400-B of the ITAA 1997 in the current law and have been largely reproduced unchanged.