Senate

New Business Tax System (Capital Allowances) Bill 2001

New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001

Revised Explanatory Memorandum

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

THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED

Chapter 11 - Transitional provisions

Outline of chapter

11.1 This chapter explains the amendments to the Income Tax (Transitional Provisions) Act 1997 to facilitate the transition from the various separate existing capital allowance regimes into the uniform capital allowance system.

11.2 The application of the uniform capital allowance system (contained in the Capital Allowances Bill) is to depreciating assets:

·
that taxpayers start to hold under a contract entered into after 30 June 2001;
·
that are constructed where construction started after that day; or
·
that start to be held in some other way after that day.

The transitional provisions will allow taxpayers to apply the new system to existing depreciating assets and certain capital expenditures. That is, these provisions generally apply the new law to assets and capital expenditures that are not directly subject to the new law but are or would be subject to the existing law if it had continued to have application. Effectively, Division 40 will apply to the depreciating assets created, acquired, etc. after 30 June and depreciating assets subject to the transitional provisions that are created, acquired, etc. before that date. Division 40 will also apply to pools of unrecouped mining related expenditure that are deemed to be depreciating assets.

Context of reform

11.3 The introduction of the uniform capital allowance system for depreciating assets and its general application, giving deductions for some previously non-deductible capital expenditure, are key components of the New Business Tax System announced in Treasurers Press Release No. 74 of 11 November 1999 (refer to Attachment L).

11.4 Because it is based on a common set of principles the uniform capital allowance system will offer significant simplification benefits. The existing capital allowance regimes are complex, inconsistent and involve significant replication of parallel but not identical provisions and concepts. Therefore, transitional provisions will be needed so that the assets and expenditures currently subject to the separate system can be transferred to the general regime.

Summary of new law

11.5 These provisions will provide for the transition from the following regimes into the uniform capital allowance system:

·
Division 42 - Plant;
·
Division 44 - IRUs;
·
Division 46 - Software;
·
Division 330 - Mining and quarrying;
·
Division 373 - Intellectual property;
·
Division 380 - Spectrum licences;
·
Division 387 - Capital allowances for primary production;
·
Division 388 - Landcare and water facilities; and
·
Division 400 - Environmental assessments and protection.

11.6 The purpose of the transitional provisions is to ensure that taxpayers who are currently deducting amounts under the existing law can continue their deductions under the uniform capital allowance system. Broadly, taxpayers will continue to deduct the same amount under the uniform capital allowance system as they would under the existing law.

Detailed explanation of new law

11.7 The transitional provisions transfer existing assets into the uniform capital allowance system whilst preserving a taxpayers existing entitlements to deductions in relation to their capital expenditure.

11.8 Explained in paragraphs 110 to 110 are how the provisions that allow for the transition of assets and capital expenditures under the existing Divisions (that are to be repealed) are to be dealt with under the new law. Taxpayers with a substituted accounting period have special rules for their transition into the unified regime.

Actual amounts deducted under old law

11.9 Amounts deducted as a capital allowance relating to an asset under the existing law will be treated as deductions taken for the decline in value of a depreciating asset under the uniform capital allowance system. [Schedule 1, item 1, subsection 40-70(1)]

11.10 The purpose of subsection 40-70(1) of the New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001, amongst other things, is to ensure that:

·
balancing adjustments under the uniform capital allowance system will apply where plant for which there have been deductions under existing law is disposed of after the new law starts. Amounts deducted under the existing law will be taken into account in a balancing adjustment calculation required under the uniform capital allowance system;

-
balancing adjustments under the new law will also take into account non-taxable use under the existing law [Schedule 1, item 1, section 40-290] ;

·
plant as well as other assets held before the commencement of the uniform capital allowance system will be eligible to be allocated to the low-value pool if they meet the relevant criteria, without requiring a further year of diminishing value decline under the uniform capital allowance system; and
·
the anti-avoidance rules in respect of transfers to associates and the purchase of assets under certain finance contracts apply to assets transferred into the uniform capital allowance system from the existing law.

Division 42 - Depreciation of plant

11.11 The transitional provisions will explain how taxpayers, who are eligible to depreciate plant under the existing law, can continue to depreciate it under the uniform capital allowance system. The provisions will ensure that taxpayers who are eligible and claiming depreciation deductions at a certain rate under the current law, will maintain that level of depreciation (to be known as the decline in value of their depreciating asset) provided no change in circumstances occurs in relation to that asset.

11.12 In broad terms, taxpayers will continue to depreciate existing plant under the new law on the same basis as they do under the existing provisions (i.e. using the same calculation method, cost and effective life). [Schedule 1, item 1, paragraph 40-10(2)(b)]

11.13 A taxpayer may be claiming depreciation deductions as an owner or quasi-owner under Division 42 but may not be a holder under the uniform capital allowance system. For instance, a taxpayer may be a lessee of an item of plant for the entire effective life of the plant and be claiming depreciation deductions as an owner or quasi-owner in reliance upon a binding ruling. The transitional provisions will not prevent that taxpayer from continuing to rely upon that binding ruling and, consequently, claiming deductions for decline under the uniform capital allowance system [Schedule 1, item 1, paragraph 40-10(1)(b)] . Nor will the transitional provisions protect that taxpayer if that reliance was later found to be ill-founded. Any risk associated with a position taken before the commencement of the uniform capital allowance system will neither be increased nor decreased for the taxpayer.

11.14 However, taxpayers will continue to be able to claim deductions for decline only while the circumstances under which they claimed depreciation deductions continue to exist [Schedule 1, item 1, paragraph 40-10(2)(d)] . If those circumstances change they will cease to be a holder under the uniform capital allowance system.

11.15 Generally, plant that has had its depreciation calculated under the existing law will have its decline in value calculated under the uniform capital allowance system. The transitional provisions will substitute the adjustable value of the plant (as calculated under the uniform capital allowance system) for the undeducted cost of the item of plant (calculated under the old law) as at the end of the 2000-2001 income year. The uniform capital allowance system would then apply to that asset (in its entirety) from the end of the 2001-2002 income year onwards [Schedule 1, item 1, section 40-10] . Further, taxpayers may have entered into a contract before 1 July 2001 to acquire plant but the actual acquisition of that plant may occur on or after 1 July 2001. That plant will also have its decline in value calculated under the uniform capital allowance system and the taxpayer will retain accelerated depreciation on that item of plant where applicable [Schedule 1, item 1, section 40-12] .

Example 11.1 Kristen bought a helicopter on 16 April 2000 for use in her protective services business. As at 1 July 2001 she continues to hold and use this property in her business. The cost of the helicopter is $100,000 and it has an effective life of 8 years. Kristen has chosen to depreciate the item using the diminishing value method. The item of plant is depreciable under the existing law and has an undeducted cost as at 30 June 2001 of $78,162.From 1 July 2001, Kristen must use the uniform capital allowance system to calculate the decline in value of her deprecating asset (the helicopter). The opening adjustable value of the helicopter is $78,162 and its cost is $100,000. Kristen must use the diminishing value method to calculate the decline in value of the asset and must also use an effective life of 8 years.If the circumstances surrounding the use of the helicopter have not changed between income years 2000-2001 and 2001-2002, the depreciation deduction under the new law will be equivalent to the deduction she would have received if the existing law continued to apply.

11.16 There is an exception where either a taxpayer became the owner or quasi-owner of the items of plant under a contract entered into before 110 am, by legal time in the Australian Capital Territory, on 21 September 1999, or the taxpayer is a small business taxpayer. If this exception applies then a modification is required to certain components of the diminishing value and prime cost formulas under the new law. This ensures that the taxpayer retains accelerated depreciation on that item of plant. [Schedule 1, item 1, subsections 40-10(3) and 40-12(3)]

Example 11.2 Millie's Farmhouse Pty Ltd (Millies Farmhouse) bought a tractor on 10 March 1998. The tractor has a cost of $75,000 and an effective life of 62/3 years. Because the tractor was acquired before 110 am, by legal time in the Australian Capital Territory, on 21 September 1999 accelerated deprecation still applies to this asset.Millie's Farmhouse decided to use the prime cost method to depreciate this tractor. As at 1 July 2001, the undeducted cost of the tractor is $25,357. In order to maintain the accelerated depreciation on the tractor, Millies Farmhouse must modify the prime cost formula in section 40-75 of the Capital Allowances Bill. Millies Farmhouse will do this by replacing the effective life component of the formula with the prime cost rate used under the existing law (i.e. 20%).

11.17 Where the exception applies (i.e. plant was subject to accelerated depreciation) taxpayers are unable to recalculate the effective lives of those items of plant. This is because recalculation would provide an opportunity to extend the benefits of the grandfathered accelerated depreciation regime which would be inconsistent with the uniform capital allowance system. Also, the intention of this grandfathering provision is to preserve a treatment already being received. [Schedule 1, item 1, section 40-15]

Car limit

11.18 The reference to car limit in the uniform capital allowance system is equivalent to the car depreciation limit as used in the old law. The concept of car limit will incorporate the concept of car depreciation limit for cars currently depreciable under existing law. [Schedule 1, item 1, subsection 40-230(1)]

11.19 Taxpayers with a substituted accounting period must use the car limit provisions in the uniform capital allowance system for their 2001-2002 income year. However, if their 2001-2002 income year begins before 1 July 2001, the car depreciation limit in the existing law must be used. [Schedule 1, item 1, subsection 40-230(2)]

Pooling under Subdivision 42-L

11.20 Taxpayers who have allocated items of plant to the general elective pools under Subdivision 42-L of the ITAA 1997 will be entitled to continue to claim deductions under the new law as if the pool was a single depreciating asset. [Schedule 1, item 1, subsection 40-60(1)]

11.21 The pool is treated as a depreciating asset and the decline in value of that asset is calculated on the following basis:

·
the taxpayer must use the diminishing value method for calculating the decline in value of the asset;
·
the opening adjustable value and cost of the asset upon entering into the new regime will be equal to the closing value of the pool under the existing law as at the end of the 2000-2001 income year; and
·
the component of the formula under the uniform capital allowance system that contains the effective life must be replaced with the pool percentage used in the existing law. The base value in the income year for which the uniform capital allowance system is effective is equal to the opening adjustable value.

[Schedule 1, item 1, subsection 40-60(2)]

11.22 If a balancing adjustment event occurs to an item of plant that was allocated to the pool (despite the depreciating asset being the pool and not the item of plant) the depreciating asset (the pool) is treated as having been split under the new law (into the item of plant and the remaining pooled items). The newly created asset (item of plant) will be subject to the balancing adjustment rules under the uniform capital allowance system when it is disposed of. [Schedule 1, item 1, paragraph 40-60(2)(e)]

Example 11.3 John created a general elective pool on 29 November 1998 that contained assets relating to the operation of his video rental business. As the video recorders that are hired out are depreciated using the same diminishing value rate, John has pooled these items and now depreciates the balance of the pool. At 30 June 2001 the closing value of the pool is $12,570 and the pool percentage is 25%.As at 1 July 2001, John moves into the new uniform system for capital allowances. The transitional rules state that the pool created by John is now treated as a depreciating asset and the pool closing balance of $12,570 becomes the depreciating assets adjustable value and the effective life component of the diminishing value method is replaced with the pool percentage (i.e. 25%).If John subsequently sells a video recorder that has been allocated to the pool to Julia and Paul on 7 December 2002, John must split his asset into the asset being disposed of and the remaining pool. John reasonably apportions the adjustable value of the original asset into its split components and calculates the balancing adjustment on the asset disposed of. John continues to calculate the decline on value of the remaining asset based on the previous pool percentage.

11.23 If the taxpayer incurs an amount that would have been in the second element of cost for a single asset that had been allocated to the pool, the amount will be included as the second element of cost of the created depreciating asset (i.e. the pool). [Schedule 1, item 1, paragraph 40-60(2)(f)]

Later year relief

Non-small business taxpayers

11.24 This provision applies to a taxpayer who has had a balancing adjustment event occur to an item of plant before 110 am, by legal time in the Australian Capital Territory, on 21 September 1999 and the taxpayer has chosen to exclude an amount from their assessable income and instead reduces the allowable deductions from an item of replacement plant.

11.25 Where the replacement plant started to be held in the 2000-2001 income year, the replacement asset is taken to have declined in value by the amount excluded from assessable income under the existing law. [Schedule 1, item 1, section 40-295]

Example 11.4 HND Mining Ltd disposed of an ore truck on 20 September 1999 and the balancing adjustment event that resulted required HND Mining Ltd to include $10,000 in its assessable income.On 14 July 2001, HND Mining Ltd purchased a replacement asset for $150,000. It opted for later year relief pursuant to section 42-290 of the existing law. Consequently, the $10,000 will be excluded from HND Mining Ltds assessable income for the 1999-2000 income year (assuming it does not use a substituted accounting period). Therefore, HND Mining Ltd is required to base the decline in value of the replacement asset on $140,000 and not $150,000.

Small business taxpayers

11.26 This provision applies to a taxpayer who has had a balancing adjustment event occur to an item of plant before the commencement of the uniform capital allowance system and the taxpayer has chosen to exclude an amount from their assessable income and to instead reduce the allowable deductions from an item of replacement plant.

11.27 Where the replacement plant started to be held in the 2000-2001 income year, the replacement asset is taken to have declined in value by the amount excluded from assessable income under the existing law. [Schedule 1, item 1, section 40-295]

Rollovers

11.28 If the taxpayer has rolled over a depreciating asset under the rollover provisions of the uniform capital allowance system and the asset being rolled over was subject to accelerated depreciation, the taxpayer acquiring that asset will continue to be able to access accelerated deductions provided that either the:

·
plant was acquired before 110 am, by legal time in the Australian Capital Territory, on 21 September 1999 by the transferor; or
·
the taxpayer receiving the asset is a small business taxpayer (subject to meeting certain requirements).

11.29 If the taxpayer is entitled to accelerated depreciation then the formulas that work out decline in value of the asset require modification (see paragraphs 110 and 11.16). [Schedule 1, item 1, section 40-340]

Plant acquired before 21 September 1999

11.30 Where a balancing adjustment event occurs to an item of plant on or after 1 July 2001 and that plant was acquired before 110 am, by legal time in the Australian Capital Territory, on 21 September 1999, an amount is to be included in assessable income as a capital gain (CGT event K7). This will only occur where the plant was used partly for income producing purposes. However, the capital gain is reduced by an amount calculated under subsection 42-192(2) of the existing law. This ensures that the benefits of indexation of cost base for CGT purposes is maintained for plant acquired before 21 September 1999. This indexation is also maintained where there has been a rollover of a depreciating asset under the rollover provisions of the uniform capital allowance system. [Schedule 1, item 1, section 40-345]

Low-value pools

11.31 If a taxpayer has created a low-value pool under the existing law and the pool has a closing balance at the end of the 2000-2001 income year, the taxpayer can work out the decline in the value of this pool under the uniform capital allowance system. In working out the decline in value for the 2001-2002 income year, the taxpayer must use the closing balance (worked out under the existing law) as at the end of the 2000-2001 income year for the purposes of step 3 of the method statement in subsection 40-440(1) of the Capital Allowances Bill. [Schedule 1, item 1, section 40-420]

11.32 A taxpayer can allocate an item of plant (held before the commencement of the new law) to the low-value pool under that new law if they were eligible to allocate that item of plant to the low-value pool under the existing law. [Schedule 1, item 1, section 40-425]

Division 44 - IRUs

11.33 A taxpayer who is currently claiming a deduction under the current law for an IRU they own, can continue to claim a deduction for the decline in value of the IRU under the uniform capital allowance system.

11.34 The taxpayer must use the same method to calculate the decline in value of their IRU as that used to calculate the rate of depreciation under the existing law. The taxpayer must also substitute the adjustable value under the new law with the undeducted cost from the current law as at the end of the 2000-2001 income year. The new law will then apply (in its entirety) to IRUs depreciable under the existing law from the 2002-2003 income year. [Schedule 1, item 1, section 40-20]

Division 46 - Software

11.35 Expenditure on software that was allocated to a software pool under the existing law will continue to be deductible under the existing legislation. While the existing provisions will be repealed the transitional provisions will maintain the existing provisions operation for this expenditure. [Schedule 1, item 1, subsection 40-25(1)]

11.36 Software that has been depreciated as if it was plant will become subject to the new law on the following basis:

·
the taxpayer must use the prime cost method for calculating the decline in value of the software;
·
the opening adjustable value of the software upon entering into the new regime will be equal to the undeducted cost of the software under the existing law as at the end of the 2000-2001 income year;
·
the taxpayer must use the same effective life under the new law as they had been using under the existing law; and
·
the cost is equal to the amount of expenditure incurred by the taxpayer in relation to that unit of plant.

[Schedule 1, item 1, subsection 40-25(2)]

Software development pools

11.37 If a taxpayer had a software development pool created under the existing law and incurs expenditure on software development after 1 July 2001, the taxpayer must allocate that expenditure to a software development pool under the uniform capital allowance system. The taxpayers choice to pool that expenditure under the existing law is taken to be a choice made under the new law. [Schedule 1, item 1, section 40-450]

Example 11.5 Carmen, the proprietor of a bed and breakfast chain, commenced developing a computerised booking system. Carmen created a software development pool under the existing law to which she allocated expenditure on developing this system.As at 1 July 2001, the software is still in its developmental stages. The existing law will continue to apply to expenditure already allocated to the pool. On 5 October 2001 Carmen incurs further expenditure in relation to the development of software. Carmen is required to create a software development pool under the uniform capital allowance system and allocate any further expenditure to that pool. This requirement comes about because Carmen had previously decided to pool this expenditure under the existing law.

Division 330 - Mining and quarrying

11.38 Expenditure incurred before 1 July 2001 that is deductible under the special provisions for mining and quarrying is generally to retain its current treatment. That is to be achieved by bringing such expenditure into Division 40 and modifying the ordinary application of the Division to ensure that the expenditure retains its current treatment. Accordingly, the current provisions will cease to apply from 1 July 2001.

11.39 There are 3 categories of expenditure covered by these transitional rules:

·
mining unrecouped expenditure;
·
transport expenditure; and
·
mining expenditure incurred after 1 July 2001 in respect of assets acquired, etc. before that day.

Mining unrecouped expenditure

11.40 Broadly, capital expenditure other than on plant incurred on developing and operating a mine site, petroleum field or quarry (allowable capital expenditure) is deductible over the shorter of 10 years (20 years for quarrying) and the life of the project. The amount of such expenditure remaining to be deducted is unrecouped expenditure.

11.41 If a taxpayer has an amount of unrecouped expenditure at the end of 30 June 2001, the taxpayer will work out the decline in the value of that amount under Division 40 using the prime cost method, and as if it were a depreciating asset held by the taxpayer. The amount of unrecouped expenditure that is taken to be an asset is taken to be an asset for all purposes of Division 40, including balancing adjustments. [Schedule 1, item 1, section 40-35]

11.42 The decline in value of that asset is calculated on the following basis:

·
the adjustable value of the expenditure upon entering into the new regime will be equal to the amount of unrecouped expenditure at the end of 30 June 2001 (i.e. after taking into account any deductions up to the end of that day) [Schedule 1, item 1, paragraph 40-35(2)(a)] ;
·
the asset comprising the unrecouped expenditure had a cost equal to the total amount of allowable capital expenditure under Division 330 [Schedule 1, item 1, paragraph 40-35(2)(b)] ;
·
the decline under the prime cost formula is calculated using the adjustments to the formula found in the new law for the year in which the transition occurs. The basis for calculating the decline in the transition year will be on remaining effective life and adjustable value (to ensure that deductions are calculated in the same manner as under the current law) [Schedule 1, item 1, paragraph 40-35(2)(c)] ;
·
the asset was used for a taxable purpose at the start of the 2001-2002 income year (to reflect that unrecouped expenditure literally cannot have a start time and that deductions under the current law are allowable before the underlying asset is used) [Schedule 1, item 1, paragraph 40-35(2)(d)] ; and
·
the asset had a remaining effective life equal to the shorter of the remaining number of years in the 10 year period for deduction (20 years for quarrying) and the life of the project [Schedule 1, item 1, paragraph 40-35(2)(e) and subsections 40-35(3) and (4)] .

Disposal, etc. of property to which unrecouped expenditure relates

11.43 If underlying property to which the unrecouped expenditure relates is disposed of, lost or destroyed, or it ceases to be used for a taxable purpose, there is an additional decline in value of the notional asset that includes this expenditure. If the underlying property is a depreciating asset, that additional decline in value is that part of the notional assets adjustable value that relates to the underlying property and that was not taken into account in working out the balancing adjustment for the disposal of the depreciating asset. [Schedule 1, item 1, subsection 40-35(5)]

11.44 A similar additional decline in value of the notional asset occurs if the underlying property is not a depreciating asset. Further, where that underlying property is not a depreciating asset and the taxpayer disposes of the asset by sale, those sale proceeds are to be included in the taxpayers assessable income. If the disposal is otherwise than by sale and the taxpayer owns the asset, an amount equivalent to the market value of the asset is included in the assessable income of the taxpayer. If the taxpayer does not own the asset, the amount included in assessable income is a reasonable amount (see the former Division 330 for the comparable existing rule). However, in each case, the amount to be included in assessable income is to be reduced so far as it is already included in assessable income under the rules that relate to a project pool (to avoid double-counting the income). In effect, therefore, the deductions given indirectly for underlying property that is not a depreciating asset, through the expenditure previously deducted or included in mining unrecouped expenditure, are reconciled to the actual loss in value of the property. [Schedule 1, item 1, subsection 40-35(6)]

Transport capital expenditure

11.45 Broadly, capital expenditure on certain facilities used primarily and principally in the transport of minerals, including petroleum, and quarry materials, away from the place of extraction, is evenly deductible over 10 years (20 years for quarry materials). The deduction commences in the year the facility is so used.

11.46 A taxpayer who has deducted or is entitled to deduct an amount for transport capital expenditure in respect of a transport facility can continue to deduct that expenditure under the new law. [Schedule 1, item 1, subsection 40-40(1)]

11.47 The capital expenditure is treated as a depreciating asset and the decline in value of that asset is calculated using the prime cost method on the following basis:

·
the opening adjustable value of the expenditure upon entering into the new regime will be equal to the total amount of transport capital expenditure determined under the existing law (less amounts deducted or able to be deducted) as at the end of the 2000-2001 income year;
·
the cost of this asset is equal to the total amount of transport capital expenditure calculated under the existing law;
·
the decline under the prime cost formula is calculated using the adjustments to the formula found in the new law for the year in which the transition occurs. The basis for calculating the decline in the transition year will be on remaining effective life and adjustable value (to ensure that deductions are calculated in the same manner as under the current law); and
·
the asset had an opening effective life equal to the years remaining in the 10 year period for deduction (20 years for quarrying).

[Schedule 1, item 1, subsection 40-40(2)]

Disposal, etc. of property to which transport expenditure relates

11.48 If the underlying property to which the transport expenditure relates is disposed of, lost or destroyed, or it ceases to be used for a taxable purpose, there is an additional decline in value of the notional asset that represents this expenditure. That decline in value is that part of the notional assets adjustable value that relates to the underlying property and was not taken into account in working out the balancing adjustment for the disposal of the depreciating asset, if the property happens to be a depreciating asset. [Schedule 1, item 1, subsection 40-40(4)]

11.49 A similar additional decline in value of the notional asset occurs if the underlying property is not a depreciating asset. Further, where that underlying property is not a depreciating asset and the taxpayer disposes of the asset by sale, those sale proceeds are to be included in the taxpayers assessable income. If the disposal is otherwise than by sale and the taxpayer owns the asset, an amount equivalent to the market value of the asset is included in the assessable income of the taxpayer. If the taxpayer does not own the asset, the amount included in assessable income is a reasonable amount (see the former Division 330). However, in each case, the amount to be included in assessable income is to be reduced so far as it is already included in assessable income by the rules that relate to a project pool. In effect, therefore, the deductions given indirectly for underlying property that is not a depreciating asset, through the expenditure previously deducted or included in transport expenditure, are reconciled to the actual loss in value of the property. [Schedule 1, item 1, subsection 40-40(5)]

Mining expenditure incurred after 1 July 2001 in respect of assets acquired, etc. before that day

11.50 Division 40 does not apply to depreciating assets started to be held under contracts entered into, or commenced to be constructed, or started to be held in some other way, on or before 30 June 2001. Expenditure incurred after that day that is a cost of such an asset and that would have been covered by the special provisions for mining and quarrying under the former law will be deductible under the new law. [Schedule 1, item 1, subsection 40-75(1)]

11.51 The expenditure is immediately deductible if it is expenditure on exploration or prospecting. [Schedule 1, item 1, subsection 40-75(2)]

11.52 Otherwise, the expenditure is treated as a cost of the depreciating asset to which Division 40 applies on the basis that it has a cost, and adjustable value, of zero at the start of the 2001-2002 income year [Schedule 1, item 1, subsection 40-75(3)] . The effect is that such expenditure will be deductible over time based on the effective life of the asset, in the same way as if the asset were one to which Division 40 had always applied. If that effective life is longer than the period over which the taxpayer would have deducted the expenditure under Division 330, then the effective life is the shorter period [Schedule 1, item 1, subsection 40-75(4)] .

11.53 Division 40 will apply to all mining, quarrying and prospecting depreciating assets that are held before 1 July 2001 on the basis that they have a cost, and adjustable value, of zero at the start of the 2001-2002 income year unless another transitional rule provides for a different outcome. This is to ensure that these assets will be subject to the balancing adjustment rules under Division 40 on an appropriate basis. [Schedule 1, item 1, subsections 40-75(1) and (3)]

Mining, quarrying or prospecting rights or information held before 1 July 2001

11.54 The transitional rules provide for mining, quarrying and prospecting rights that the taxpayer held before 1 July 2001 to remain subject to the CGT provisions contained in the ITAA 1997 instead of being subject to the balancing adjustments in the uniform capital allowance system. This change will mean that the uniform capital allowance system will not apply to a mining, quarrying and prospecting right that the taxpayer held before 1 July 2001 and the taxpayer will not be able to claim deductions for costs incurred on those rights after the introduction of the new system. These amounts can only be used in the calculation of the taxpayers capital gain or loss under the CGT provisions. [Schedule 1, item 1, paragraph 40-75(1)(b) and subsection 40-77(1)]

11.55 The transitional rules also allow for non-deductible costs (which cannot have been included in allowable capital expenditure under the former law) associated with mining, quarrying and prospecting information the taxpayer started to hold before 1 July 2001 to reduce amounts included in assessable income from the realisation of such information. [Schedule 1, item 1, subsection 40-77(3)]

11.56 If a taxpayer disposes of the mining, quarrying and prospecting right that they held before 1 July 2001 to an associate, or enters into arrangements where in-substance ownership or use is retained, the cost of the asset to the purchaser is capped at the amount that would have been deductible under the repealed Division 330 of the ITAA 1997. [Schedule 1, item 1, subsection 40-77(2)]

Example 11.6 Melissa Iron Ore Pty Ltd (Melissa Iron Ore) holds a mining right and mining information relating to their iron ore mining operation as at 30 June 2001. Melissa Iron Ore has $100,000 of undeductible costs associated with the mining right and $1,000 worth of undeductible costs associated with the mining information.On 12 August 2001, Melissa Iron Ore incurred further costs ($5,000) in relation to the mining right that it holds. Those costs will form part of the cost base of the mining right and cannot be subject to a deduction under the uniform capital allowance system.Further on 4 September 2001, Melissa Iron Ore received $10,000 for the sale of mining information that it holds. Melissa Iron Ore continues to hold that information after the sale so generally, the entire $10,000 would be included in assessable income. However, Melissa Iron Ore held mining information before 1 July 2001 and has undeductible cost associated with that information. Therefore, Melissa Iron Ore can reduce the $10,000 included in assessable income by $1,000 (amount included in assessable income is now $9,000). The $1,000 cannot be used to reduce any further amounts included in assessable income from the further realisation of Melissa Iron Ores mining information.On 15 January 2002, Melissa Iron Ore disposes of its iron ore operation including the associated mining right and mining information. The reasonable consideration allocated to the mining right is $150,000 and the mining information is $5,000.Melissa Iron Ore would have the $5,000 included in its assessable income from the disposal of the mining information. There is no reduction of this amount as all undeductible cost associated with this mining information has been previously utilised. There would be a capital gain of $45,000 ($150,000 - ($100,000 + $5,000)) from the disposal of the mining right.

Excess deductions

11.57 Excess deductions under the mining provisions in subsections 122J(4) and 124AH(4) of the ITAA 1936 are to be immediately deductible in the 2001-2002 income year. [Schedule 1, item 1, section 40-85]

Genuine prospectors

11.58 The exemption provided for ordinary income derived from the sale, transfer or assignment of your rights to mine for certain specified metals and minerals will continue to apply until 20 August 2001. This is despite the repealing of the relevant provisions. [Schedule 1, item 1, section 40-825]

Division 373 - Intellectual property

11.59 A taxpayer who holds the following intellectual property:

·
standard patent;
·
petty patent;
·
innovation patent;
·
registered design;
·
copyright; or
·
a licence to an item listed above,

and can claim or has claimed a deduction under the existing law for amortisation of that item, will be entitled to a deduction for the decline in value of that property under the uniform capital allowance system. [Schedule 1, item 1, subsection 40-45(1)]

11.60 An item of intellectual property that has been amortised under the existing law will become subject to the new law on the following basis:

·
the taxpayer must use the prime cost method for calculating the decline in value of the intellectual property;
·
the opening adjustable value of the property upon entering into the new regime will be equal to the unrecouped expenditure of the property under the existing law as at the end of the 2000-2001 income year;
·
the taxpayer must use the same effective life under the new law as they had been using under the existing law; and
·
the cost of the property is equal to the expenditure that the taxpayer incurred in obtaining that property.

[Schedule 1, item 1, subsection 40-45(2)]

Division 380 - Spectrum licences

11.61 A taxpayer who currently is entitled to claim deductions for the amortisation of a spectrum licence under the existing law will be entitled to a deduction for the decline in value of the licence under the uniform capital allowance system if there is expenditure yet undeducted. [Schedule 1, item 1, subsection 40-30(1)]

11.62 A spectrum licence that has been amortised under the existing law will become subject to the new law on the following basis:

·
the taxpayer must use the prime cost method for calculating the decline in value of the licence;
·
the opening adjustable value of the licence upon entering into the new regime will be equal to the unrecouped expenditure of the licence under the existing law as at the end of the 2000-2001 income year;
·
the taxpayer must use the same effective life under the new law as they had been using under the existing law; and
·
the cost of the licence is equal to the expenditure that the taxpayer has incurred in obtaining the licence.

[Schedule 1, item 1, subsection 40-30(2)]

Division 387 - Capital allowances for primary production

11.63 In line with recommendations made by A Tax System Redesigned, specific primary production concessions continue to apply where they depart from the uniform capital allowance system. As such, these provisions provide rules for the smooth transition into the new regime for these assets and capital expenditures.

11.64 The new law provides equivalent treatment for those primary production capital expenditures. These provisions ensure that those capital expenditures currently subject to existing primary production concessions will have that treatment maintained under the uniform capital allowance system.

Water facilities, grapevines and horticultural plants

11.65 A taxpayer who is entitled to deductions or has made deductions under the existing law in relation to:

·
a water facility;
·
horticultural plants; or
·
grapevines (under the special grapevine rules),

and continues to hold these assets at the commencement of the new system, will be entitled to continue to receive these deductions under the new law. [Schedule 1, item 1, subsection 40-515(1)]

11.66 The transitional provisions provide that the taxpayer must set the expenditure or establishment expenditure (as calculated under the new law) as equal to the capital expenditure incurred in construction or establishment of these assets. [Schedule 1, item 1, paragraph 40-515(2)(a)]

11.67 A taxpayer, when calculating the decline in value of a horticultural plant under the uniform capital allowance system, must use the effective life that the taxpayer was using under the existing law. [Schedule 1, item 1, paragraph 40-515(2)(b)]

11.68 Deductions that a taxpayer has claimed for primary production assets under the existing law are taken to have been deducted under the uniform capital allowance system (i.e. the asset is taken to have declined in value by the amount of the deductions taken or eligible to be taken under the existing law). [Schedule 1, item 1, paragraph 40-515(2)(c) and section 40-525]

Example 11.7 Jan currently receives deductions for the capital expenditure on the establishment of mango trees in her fruit export business. The establishment expenditure incurred was $20,000. If the existing law had continued to apply, Jan would still be entitled to deductions in relation to the establishment of her mango trees.In calculating her deduction as from 1 July 2001, Jan must substitute the establishment expenditure in the new law with the establishment expenditure calculated under the existing law (i.e. the establishment expenditure to be used is $20,000).Jan must also carry over the write-off rate calculated under the existing law. The new law will then apply to Jan as if it had always applied, so the time restrictions for claiming deductions continue into the new law. Jan cannot claim more than the total establishment expenditure incurred.

Special rule for water facilities

11.69 A taxpayer who no longer holds a water facility at the commencement of the uniform capital allowance system and who is nevertheless entitled to a deduction for that facility under the existing law, can continue to claim that deduction under the new law on the basis specified in paragraphs 110 to 11.68. No other taxpayer is eligible to claim a deduction for that water facility under the new law. [Schedule 1, item 1, section 40-520]

Electricity and telephone lines

11.70 If a taxpayer is currently deducting or is entitled to deduct an amount for the capital expenditure on connecting or upgrading the supply of mains electricity or a telephone line on land the taxpayer holds, the taxpayer can continue to deduct that amount under the new law. [Schedule 1, item 1, subsections 40-645(1) and (2)]

Special rule where a taxpayer no longer holds the land

11.71 At the commencement of the uniform capital allowance system, taxpayers who no longer hold land to which the expenditure relates and who are nevertheless entitled to a deduction for that expenditure under the existing law, can continue to claim that deduction under the uniform capital allowance system. No other taxpayer is eligible to claim a deduction for that expenditure under the new law. [Schedule 1, item 1, section 40-650]

11.72 Deductions taken under the existing law, or the law that proceeded the existing law, are taken to be deductions that have been made under the appropriate Subdivision of the new law. [Schedule 1, item 1, subsection 40-645(3)]

Forestry roads and timber mill buildings

11.73 Taxpayers who currently deduct or are entitled to deduct an amount for the capital expenditure on a forestry road or building can continue to deduct that amount under the uniform capital allowance system in accordance with the transitional rules. [Schedule 1, item 1, subsection 40-50(1)]

11.74 A forestry road or building that has been depreciated under the existing law will become subject to the uniform capital allowance system on the following basis:

·
the taxpayer must use the prime cost formula for calculating the decline in value of the road or building;
·
the opening adjustable value and cost of the road or building upon entering into the new regime will be equal to the expenditure incurred on the forestry road or building (less amounts deducted or able to be deducted) under the existing law as at the end of the 2000-2001 income year;
·
the taxpayer must use the remaining effective life under the new law as they had last estimated under the existing law; and
·
the taxpayer must apply the adjustments to the prime cost formula contained in the new law for the year in which the transition occurs.

[Schedule 1, item 1, subsection 40-50(2)]

11.75 Upon having moved into the uniform capital allowance system a taxpayer is entitled to recalculate the effective life of the road or building if he or she believes their estimate is no longer accurate because of changed circumstances. The recalculated effective life cannot exceed 25 years. [Schedule 1, item 1, paragraph 40-50(2)(e)]

Farm consultant

11.76 If a person was approved to be a farm consultant under the existing law, they will continue to be a farm consultant under the new law. [Schedule 1, item 1, section 40-670]

Division 400 - Environmental impact assessment

11.77 A taxpayer who is currently claiming a deduction or is entitled to claim a deduction for expenditure incurred on evaluating the impact on the environment of a project under the existing law can continue to claim a deduction for that expenditure under the new law as if that expenditure was incurred in relation to a depreciating asset the taxpayer holds. [Schedule 1, item 1, section 40-55]

11.78 The capital expenditure is treated as a depreciating asset on the following basis:

·
the taxpayer must use the prime cost method for calculating the decline in value of the expenditure;
·
the opening adjustable value of the environmental expenditure upon entering into the new regime will be equal to the expenditure incurred on evaluating the impact on the environment of a project under the existing law (less amounts deducted or able to be deducted) as at the end of the 2000-2001 income year;
·
the taxpayer must use an effective life equal to the period the expenditure was to be deducted over under the existing law; and
·
the cost of this asset is equal to the expenditure incurred on evaluating the impact on the environment of a project calculated under the existing law.

[Schedule 1, item 1, subsection 40-55(2)]

Substituted accounting periods

11.79 Special transitional rules will allow taxpayers with a substituted accounting period to work out the decline in value of either a depreciating asset or for capital expenditure that is to be treated as a depreciating asset. [Schedule 1, item 1, subsection 40-65(1)]

11.80 A taxpayer with a substituted accounting period must work out their deductions from the beginning of their income year until 30 June 2001 under the existing law. As from 1 July 2001, the taxpayer must work out their deduction using the uniform capital allowance system provisions [Schedule 1, item 1, subsection 40-65(2)] . Use of the diminishing value method in both of these periods can result in an amount of depreciation that is less than that which would have been calculated if the diminishing value method had been used for the entire substituted accounting period. Therefore, in those circumstances a taxpayer can increase the deduction by the difference between the 2 amounts [Schedule 1, item 1, subsection 40-65(10)] .

Table 11.1
Existing Divisions and their assets or expenditures to become subject to the new law: Assets opening adjustable value for the first income year after commencement of the new law is:
Division 42 - Unit of plant Its undeducted cost for the unit as at 30 June 2001.
Division 42 - Pooled plant For the low-value and general elective pools - the closing value of the pool as at 30 June 2001.
Division 44 - IRUs Its undeducted cost for the unit as at 30 June 2001.
Division 46 - Software Its undeducted cost for the unit as at 30 June 2001.
Division 330 - Mining and quarrying operations The amount of unrecouped expenditure as at 30 June 2001 reduced by any amounts deductible in the 2000-2001 income year that has not already been taken into account in calculating unrecouped expenditure.
Division 330 - Transport capital expenditure The amount of transport capital expenditure as at 30 June 2001 less amounts deducted or that can be deducted in relation to that expenditure.
Division 373 - Intellectual property The amount of unrecouped expenditure as at 30 June 2001.
Division 380 - Spectrum licences The amount of unrecouped expenditure as at 30 June 2001.
Division 387 - Horticultural plants, grapevines, timber mill buildings and forestry roads The amount of expenditure as at 30 June 2001 less amounts deducted or that can be deducted in relation to that expenditure.
Division 400 - Environmental impact assessments The amount of expenditure incurred in evaluating the impact on the environment of a project.

[Schedule 1, item 1, subsection 40-65(3)]

11.81 Taxpayers using the diminishing value method under the existing law must continue to use that method under the uniform capital allowance system. In doing so, they must alter the base value component of that formula under that method so that it is equal to the opening adjustable value set out in Table 11.1. [Schedule 1, item 1, subsection 40-65(4)]

11.82 Taxpayers using the prime cost method under the existing law must continue to use that method under the uniform capital allowance system. In doing so, adjustment rules to the prime cost method in subsection 40-75(3) of the Capital Allowances Bill will apply to some depreciating assets upon transition into the uniform capital allowance system. The transitional rules that apply to taxpayers that do not have a substituted accounting period will indicate whether those adjustment rules are applicable to the depreciating asset. [Schedule 1, item 1, subsections 40-65(5) and (6)]

11.83 These adjustment rules require that taxpayers substitute the cost component of the prime cost formula with the amount that is the adjustable value of the asset. Further, the effective life component becomes the remaining effective life component. The adjustable values that are to be substituted for a taxpayer with a substituted accounting period are listed in Table 11.1.

11.84 Taxpayers that have expenditure treated as a depreciating asset under the uniform capital allowance system, will need to refer to the general transitional rules to determine whether these adjustment rules will apply to that depreciating asset upon transition into the uniform capital allowance system.

11.85 If the special rules for taxpayers using a substituted accounting period do not contain all the necessary rules required for that taxpayer to move the assets and expenditures into the uniform capital allowance system, then the general rules for taxpayers that do not have a substituted accounting period apply to provide the remaining information. The transitional rules for taxpayers with a substituted accounting period only apply to override the general transitional rules where and to the extent that those rules are inconsistent.

Example 11.8 Shirley Fashions Pty Ltd (Shirley Fashions) is the subsidiary of an American fashion design company operating in Australia and has a substituted accounting period. Shirley Fashions has numerous industrial sewing machines for which it claims deductions for depreciation under the existing law.Shirley Fashions purchased a new industrial sewing machine on 29 February 2000 at a cost of $2,000. The machine has an effective life of 10 years and the diminishing value method is to be used to work out the machines depreciation deductions. The undeducted cost of the asset at 31 March 2001 is $1,678.Shirley Fashions must make 2 calculations for the 2001-2002 income year:

·
first, it must calculate the portion that is subject to the current law (i.e. the period between 1 April 2001 and 30 June 2001) as follows:

depreciation = 1678 * 91/365 * 150 & /10 = 63

The undeducted cost at 30 June 2001 for the sewing machine is $1,615 (i.e. $1,678 - $63). This amount will also be the opening adjustable value that is subject to the uniform capital allowance system.

·
second, it must calculate the portion that is subject to the uniform capital allowance system (i.e. the period between 1 July 2001 and 31 March 2002) as follows:

decline in value = 1615 * 274/365 * 150%/10 =182

Shirley Fashions must continue to use the diminishing value method and effective life of 10 years. Also it must now use the uniform capital allowance system for future income years.

Other deductions

11.86 A taxpayer must apportion their deduction in relation to:

·
a water facility;
·
expenditure on connecting power to land;
·
expenditure on a telephone;
·
transport capital expenditure; or
·
allowable capital expenditure,

to the days of the 2001-2002 income year where the existing law was used and to the days where the uniform capital allowance system has application.

11.87 This is done by calculating the number of days from the beginning of the taxpayers income year until and including 30 June 2001 (the deduction will be calculated under the existing law) and for the number of days from 1 July 2001 until the end of their income year (the deduction will be worked out by using the provisions in the uniform capital allowance system). These days calculated should be divided by 365 and multiplied against the deductions calculated under the respective laws. [Schedule 1, item 1, subsection 40-65(6)]

Example 11.9 Stephanie Pty Ltd owns a mineral quarrying business that has incurred expenditure on establishing a railway line between its mine site and the nearest port (transport capital expenditure). It has a substituted accounting period that begins on 1 June and ends on 31 May.Stephanie Pty Ltd must calculate its deduction as allowed under the existing law. In doing this, the deduction must be reduced so that the deduction only reflects the portion of its income year between 1 June 2001 and 30 June 2001. This is despite the fact that the existing law does not provide for apportioning this type of deduction.Stephanie Pty Ltd must then calculate the remaining deduction for this income year under the uniform capital allowance system from 1 July 2001. That expenditure is treated as if it was a depreciating asset with an adjustable value equal to the amount of the transport capital expenditure incurred less amounts that it had deducted under the existing law. It must also use the prime cost method as if as at 1 July 2001 the adjustment rules applied replacing the effective life component with a remaining effective life and cost with adjustable value. Remaining effective life is equal to the period for which it would continue to have received deductions under the existing law.

Miscellaneous

Expenditure incurred from 1 July 2001 on assets acquired before that day

01 A taxpayer may incur expenditure from 1 July 2001 that is the cost of an asset which they started to hold before that day or for which deductions had not yet commenced. Where that expenditure would have been deductible under the repealed law if it had satisfied the relevant deductibility requirements, it can be deducted under Division 40. The relevant repealed law is Division 44 (IRUs), Subdivision 46-B (software), Division 373 (intellectual property), Division 380 (spectrum licences) and Subdivision 387-G (forestry roads and timber mill buildings). However, no cost or adjustable value will carry into that year from previous years. [Schedule 1, item 1, section 40-80]

Balancing adjustments

11.89 Depreciating assets held on 1 July 2001 will be subject to the balancing adjustment provisions under the uniform capital allowance system. [Schedule 1, item 1, subsections 40-285(1) and (4)]

11.90 Taxpayers who would have been entitled to a deduction under section 42-197 of the ITAA 1997, will retain the entitlement to that deduction providing that the depreciating assets were brought into the tax system from exempt usage under Division 58 of the ITAA 1997 or under either section 61A of the ITAA 1936 or Division 57 of Schedule 2D of the ITAA 1936. [Schedule 1, item 1, subsections 40-285(2) and (3)]

11.91 A taxpayer may have a balancing adjustment event occur to an item of plant acquired at or before 110 am, by legal time in the Australian Capital Territory, on 21 September 1999 or to another depreciating asset held before 1 July 2001. Where the balancing adjustment includes an amount in assessable income the amount must be reduced to preserve the benefit of indexation, various CGT exemptions and applicable pre-CGT asset rules [Schedule 1, item 1, subsections 40-285(5) and (6) and section 40-345] . The relevant CGT exemptions are for cars, collectables, personal use assets and plant used to produce exempt income.

11.92 Further, a taxpayer may have a CGT disposal occur to an item of plant before 21 September 1999 or to another depreciating asset before 1 July 2001 but there is no change in ownership of that asset until on or after those relevant times. In these circumstances, the capital gain or loss will be disregarded to prevent the potential for a disposal occurring after the uniform capital allowance system commences to be dealt with, both under the uniform capital allowance system and as a CGT event under the CGT provisions. This ensures the same amount cannot be assessed under both the uniform capital allowance system and the former CGT provisions. [Schedule 1, item 1, subsection 40-285(7)]


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