Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 2 - Regulation impact statement
2.1 The policy objective of this measure is to stimulate investment in plantation forestry managed investment arrangements to meet the Governments 2020 Vision target initiative to have 3 million hectares under plantation by the year 2020. Without stimulating investment in these arrangements it is unlikely that the Governments 2020 Vision target initiative will be reached.
2.2 Prior to 21 September 1999, the original 13 month rule allowed expenditure incurred on deductible goods or services that were wholly applied within 13 months to be deducted in the year of expenditure. Changes arising from recommendations in A Tax System Redesigned sought to limit, for certain taxpayers and arrangements, the tax advantages associated with immediate deductibility by requiring the deduction to be spread over the period when goods or services were provided. The forestry industry has submitted that the seasonally dependent nature of their operations requires them to raise funds in one income year for activities that will span more than one income year.
2.3 Industry sources estimate collected funds in managed investment companies in 2000 and 2001 were sufficient to support the establishment of 30,000 to 35,000 hectares of plantation, compared with 90,000 hectares in 1998 and 1999.
2.4 The measure in this bill arises from direct consultation with representatives from the plantation forestry managed agreement industry. It involves introducing a 12 month rule for certain expenditure, allowing an immediate deduction for some expenditure by taxpayers who invest in plantation forestry managed investment agreements (similar to that currently available to STS and non-business taxpayers). Expenditure in relation to a seasonally dependent agronomic activity, which is deductible under section 8-1 of ITAA 1997 and is undertaken in the establishment period of the plantation will be immediately deductible provided the services are provided within a period not exceeding 12 months and by the end of the next income year.
2.5 In order to maintain symmetry in the tax treatment of deductions compared to the treatment as income of the service provider, managers of such arrangements will include these amounts in assessable income in the year in which the investor is first able to claim a deduction for the prepayment, rather than when the work is done. Transitional treatment is provided for in the first year to alleviate any cashflow impacts on these managers. Rather than being required to bring forward the entire relevant income in the first year in which the concession is applied to a particular agreement, the manager can choose to defer half the relevant income to the following year. The manager only has this option if the first time they use the concession is in the 2002-2003 or 2003-2004 income year. Note that the option can not be exercised in both of these years.
2.6 The measure will take effect from 2 October 2001, which is the date it was announced by the then Minister for Forestry and Conservation.
2.7 The measure will apply to all investors in the same way, whether they be individuals, STS taxpayers or medium or large business taxpayers. There will be no compliance cost to taxpayers in their capacity as investors.
2.8 The ATO will be required to administer the new arrangements.
2.9 There will be no compliance cost to taxpayers in their capacity as investors. Investors will receive a benefit in that they will be able to claim certain deductions in the year the expenditure is incurred rather than having to apportion the deduction over the income years in which the goods or services are applied.
2.10 Investors will receive a benefit from the change because they will now be able to claim deductions earlier than would have been the case under the existing provisions. Therefore, investors will receive a cash flow benefit with less tax to be paid. This cash flow benefit is approximately double the negative cash flow incurred by the management companies.
2.11 Investment in plantation forestry managed agreements is expected to increase as taxpayers seek access to the tax concession. Managers will need to adjust their operations to account for income from seasonally dependent agronomic expenditure in the year the deduction is able to claimed, as opposed to the year in which services are provided. Representatives of the forestry industry have indicated that the industry is willing to make these adjustments in order to secure the concession.
2.12 Management companies will face a negative cash flow impact with the bring-forward of income tax payments but this is not likely to be significant. However, the cash flow effect could be significant for start-up companies that enter the market after the transitional years.
2.13 The cash flow impact of the transitional treatment, to allow half of the first year bring-forward amount to be delayed by one year is estimated to be $15 million. Therefore, this provides a benefit to the management companies equal to the cost of funds for that amount. For example, if the cost of funds was 5%, the benefit would be of the order of $0.75 million.
2.14 There will be a significant initial increase in administrative workload resulting from the need to interpret the new law, then review and amend all existing product rulings to reflect the changed taxation treatment of these items of expenditure. This needs to be done in a timely manner and in consultation with managers of these arrangements. After this initial stage, there is likely to be an ongoing increase in the number of product ruling applications and the complexity of the information to be considered. This is because managers of these agreements seek product rulings to rely on information that can be placed in the prospectus on the application of the various tax laws. This proposal will not require any new systems support.
2.15 The cost to the revenue resulting from the prepayment measure is estimated to be $25 million in 2002-2003, $5 million in 2003-2004, nil in 2004-2005 and $25 million in 2005-2006 and each year thereafter. The fluctuation in revenue loss is due to transitional treatment of the bring-forward of income received by the manager of the investment arrangement.
2.16 Investors in plantation forestry managed agreements receive immediate, that is same year, deductions for certain amounts invested. As the new prepayments measure applies only to the plantation forestry managed agreement sector, there may be a shift in investment capital towards this area. This could result in a less than optimal allocation of capital, with investor decisions being influenced by offers of up-front tax deductions rather than by the commercial returns of an arrangement.
2.17 The measure supports the 2020 Vision target to treble the plantation estate to 3 million hectares by 2020. The 2020 Vision reflects a working partnership between Commonwealth, State and Territory governments and the plantation growing and processing industries. Non-market benefits of the 2020 Vision include reduction of the net of greenhouse gas emission (as growing trees take up CO2) and landcare benefits including reduced salinity and soil erosion.
2.18 The 2020 Vision is based on one of the national goals of the National Forestry Policy Statement of 1992, to expand Australias commercial plantations of softwoods and hardwoods so as to provide an additional, economical, reliable and high quality wood resource for industry. The National Forestry Policy Statement of 1992 is a strategy for the ecologically sustainable development of Australian forests in order to achieve the full range of benefits that forests can provide current and future generations.
2.19 The prepayment rule plays a vital role in the success or otherwise of the 2020 Vision. Industry and independent estimates place the presence or absence of the prepayment rule at 50,000 to 60,000 hectares per annum - sufficient to the achievement or non-achievement of the 2020 Vision target of trebling plantations in Australia.
2.20 Independent estimates by the Bureau of Rural Sciences in 2001 place the value of the prepayment rule at about 50,000 hectares per annum of new plantations. Bureau of Rural Sciences estimated the total area of plantations established in Australia at about 139,000 hectares per annum with the prepayment rule and 89,000 without the prepayment rule.
2.21 Consultation was undertaken with industry representatives prior to and following the announcement of this measure. The changes were initiated by industry, in response to a significant downturn in plantation sector investment in 2000 and 2001. Industry representatives were consulted in formulating the measure, developing the press release and drafting the legislation. The industry representatives fully support the measure in its current form.
2.22 Members of the Australian Forest Growers and National Association of Forest Industries participated in the consultative process, as well as representatives from Great Southern Plantations Ltd, Timbercorp Ltd and Willmott Forests Ltd.
2.23 This proposal will address the declining investment in forestry plantation managed agreements, by allowing certain deductions to be claimed in the year of expenditure to all investors in such arrangements. This will facilitate achievement of the Governments 2020 Vision target. By creating an environment which supports the achievement of the vision target this measure also has a positive influence on national environmental goals contained within the National Forestry Policy Statement of 1992.