House of Representatives

Taxation Laws Amendment Bill (No. 4) 2002

Explanatory Memorandum

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

Chapter 4 - Effective life of depreciating assets

Outline of chapter

4.1 This chapter explains the amendments to the ITAA 1997 to insert statutory caps (referred to as capped lives) for certain depreciating assets. These caps will be the effective lives for those assets where certain conditions are met.

4.2 This chapter also explains the amendments consequential upon this measure.

Context of amendments

4.3 The capital allowances system allows a taxpayer a deduction equal to the decline in value of a depreciating asset during an income year. That decline in value is worked out with reference to the effective life of the asset. Broadly, the effective life of an asset is the length of time over which an entity could reasonably be expected to use the particular asset for taxable purposes or for the purpose of producing exempt income. Currently, a taxpayer may choose to use a safeharbour effective life determined by the Commissioner for an asset where there is one in force. However, where a taxpayer chooses not to use a safeharbour effective life, or there is none in force, the taxpayer must self-assess the effective life of the asset.

4.4 Under the current capital allowances system, the Commissioner progressively reviews, and makes updated determinations under section 40-100 of the ITAA 1997 of the safeharbour effective lives used to calculate deductions for depreciating assets. The Commissioners Determinations must be based on an estimate of the period the asset can be used by any entity for a taxable purpose or for the purpose of producing exempt income. The Commissioner cannot take into account national economic implications and the impact on affected industries.

Summary of new law

4.5 Under the new law, the Commissioner will continue to review the effective lives of depreciating assets and make determinations based on the period that the asset could be used by any entity for a taxable purpose or for the purpose of producing exempt income. Taxpayers will continue either to use the safeharbour effective life that the Commissioner has determined for an asset or to self-assess the assets effective life. Where the taxpayer has chosen to use an effective life determined by the Commissioner, that effective life may be affected by a capped life. If a capped life applies to an asset and is shorter than the effective life determined by the Commissioner, the effective life of the asset will be the capped life.

4.6 Diagram 4.1 illustrates the method of working out if capped life applies to an asset.

Diagram 4.1: Working out if a capped life applies to an asset

Comparison of key features of new law and current law
New law Current law

To determine the effective life of an asset, a taxpayer may choose either to self-assess the effective life or to use an effective life determined by the Commissioner, if there is one in force for the asset.

A taxpayer who chooses to use the Commissioners determined effective life must work out whether a capped life applies to that asset.

Where there is a capped life and it is shorter than the Commissioners determined effective life, the effective life of the asset will be the capped life.

Where there is no capped life or the capped life is greater than the Commissioners determined effective life, the taxpayer will use the Commissioners determined effective life.

To determine the effective life of an asset, a taxpayer may choose either to self-assess the effective life or to use an effective life determined by the Commissioner, if there is one in force for the asset.

Detailed explanation of new law

Capped life of certain depreciating assets

4.7 The effective life of a depreciating asset will be the capped life that applies to the asset if the conditions set out in paragraphs 4.9 to 4.13 are satisfied. As a consequence, the decline in value of the depreciating asset will be worked out over a shorter period of time. This will give the taxpayer a greater deduction in any one income year than would otherwise have been the case. [Schedule 4, item 5, subsection 40-102(1)]

When the capped life applies

4.8 Four conditions must be met if the effective life of a particular depreciating asset is to be the capped life. [Schedule 4, item 5, subsection 40-102(2)]

4.9 First, the taxpayer must choose, under existing paragraph 40-95(1)(a) of the ITAA 1997, to use an effective life determined by the Commissioner for the asset. [Schedule 4, item 5, paragraph 40-102(2)(a)]

4.10 The capped life will not apply where the taxpayer has chosen to self-assess the effective life of an asset. This ensures that a taxpayer is still able to self-assess the assets effective life if this provides them with an effective life more appropriate to their circumstances of use.

4.11 Secondly, the taxpayers choice to use an effective life determined by the Commissioner must have been limited to a determination that was in force at the time mentioned in paragraph 40-95(2)(a) or (c) of the ITAA 1997. Effectively, this means that a capped life cannot apply where a taxpayer entered into a contract to acquire an item of plant, otherwise acquired the plant or started to construct it before 21 September 1999. This is because accelerated depreciation rates apply to these items of plant and they are not affected by any upward revision of effective lives determined by the Commissioner. For such an item of plant, the choice to use a Commissioner determined effective life is limited to one in force at the time specified in paragraph 40-95(2)(b). [Schedule 4, item 5, paragraph 40-102(2)(b)]

4.12 Thirdly, there must be a capped life that applies to the depreciating asset which is in force at the relevant time. The meaning of capped life and relevant time is discussed in paragraphs 4.15 to 4.22. [Schedule 4, item 5, paragraph 40-102(2)(c)]

4.13 Fourthly, the capped life must be shorter than the Commissioners determined effective life chosen by the taxpayer that is referred to in the first condition and discussed in paragraph 4.9. If the capped life is not shorter than the effective life determined by the Commissioner, the taxpayer will use the effective life determined by the Commissioner. [Schedule 4, item 5, paragraph 40-102(2)(d)]

Third condition - capped life and relevant time

4.14 Under the third condition outlined in paragraph 4.12, there must be a capped life and it must be in force at the relevant time. Paragraphs 4.15 to 4.22 explain the meaning of these terms.

Working out the capped life

4.15 Certain depreciating assets will have a capped life regardless of the industry in which they are used. These assets are set out in the table in subsection 40-102(4). Where the asset corresponds exactly to the description in column 2 of that table, the capped life is the period specified in column 3. It should be noted that the capped life of an asset may vary depending on the use to which it is put. For example, an aeroplane predominantly used for agricultural spraying or dusting will have a capped life of 8 years, whereas an aeroplane used for general aviation will have a capped life of 10 years. [Schedule 4, item 5, subsection 40-102(4)]

4.16 Taxpayers using a capped life set out in the table in subsection 40-102(4) will have identified the effective life determined by the Commissioner using Table B of the relevant Commissioners Determination. That table sets out the effective lives of generic assets that may be used in more than one industry.

4.17 Other assets will have a capped life only if they are of a particular kind and used in a particular industry. These assets are set out in the table in subsection 40-102(5). Where the asset is of a kind described in column 2 and, is used in the industry specified in column 3, the capped life is the period specified in column 4 of the table. For example, an asset that is a gas transmission asset and used in the gas supply industry will have a capped life of 20 years. [Schedule 4, item 5, subsection 40-102(5)]

4.18 It should be noted that not all assets within an industry mentioned in the table in subsection 40-102(5) will have a capped life. Further, not all depreciating assets within a class of asset to which a capped life applies will necessarily have an effective life determined by the Commissioner that is greater than the capped life. The effective lives determined by the Commissioner for assets within a class, may vary both above and below the capped life. However, for those assets where the capped life is shorter than the effective life determined by the Commissioner, the capped life will be the effective life where the other conditions set out in subsection 40-102(2) are met. See discussion at paragraphs 4.9 to 4.13.

4.19 Taxpayers using a capped life set out in the table in subsection 40-102(5) will have identified the effective life determined by the Commissioner using Table A of the relevant Commissioners Determination. That table sets out the effective lives of assets specific to a particular industry or for which a special effective life applies because of the use to which those assets are put by the industry.

4.20 A new definition of capped life will be inserted into the Dictionary so that it has the meaning given by new section 40-102. [Schedule 4, item 13, definition of capped life in subsection 995-1(1)]

Working out the relevant time

4.21 Once a taxpayer has worked out that there is a capped life for an asset, it is necessary for them to establish that it is in force at the relevant time. The relevant time is generally the assets start time (i.e. when the asset is first used or installed ready for use for any purpose). However, the relevant time will be the time specified in existing paragraph 40-95(2)(a) if paragraph 40-95(2)(a) applied to the taxpayers circumstances and either:

·
the capped life in force at the time specified in paragraph 40-95(2)(a) is both different from and shorter than the capped life in force at the assets start time; or
·
there is no capped life in force at the assets start time but there is a capped life in force at the time specified in paragraph 40-95(2)(a).

[Schedule 4, item 5, subsection 40-102(3)]

4.22 Paragraph 40-95(2)(a) is often referred to as the 5 year rule. The paragraph applies when a taxpayer enters into a contract to acquire a depreciating asset, otherwise acquired it or started to construct it if the assets start time occurs within 5 years of that time. It ensures that a taxpayer is not disadvantaged if the effective life determined by the Commissioner is revised between the time they contract for the asset and the time they start to use the asset, provided that they start to use it within 5 years.

Application and transitional provisions

4.23 The amendments to give effect to the statutory caps will apply to a depreciating asset if the start time for that asset occurs on or after 1 July 2002. [Schedule 4, subitem 15(1)]

4.24 This means, for example, that section 40-102 may apply a capped life where:

·
paragraph 40-95(2)(a) applies to a taxpayers circumstances;
·
the time specified in paragraph 40-95(2)(a) is before 1 July 2002 but the start time of the asset is after 1 July 2002; and
·
the capped life at the assets start time is less than the effective life determined by the Commissioner that applies at the time specified in paragraph 40-95(2)(a) (i.e. the capped life is to the benefit of the taxpayer).

However, section 40-102 has no application where the assets start time occurs before 1 July 2002.

4.25 The consequential amendments to Division 58 of the ITAA 1997 discussed at paragraphs 4.40 to 4.46 will apply to a privatised asset held on or after 1 July 2002. [Schedule 4, subitem 15(2)]

Consequential amendments to the ITAA 1997

Division 40 and Dictionary definitions

4.26 Existing subsection 40-95(1) is the provision under which a taxpayer can choose an effective life either by self-assessing that life or by choosing the effective life determined by the Commissioner. A note will be inserted after that subsection to alert the reader to the fact that a capped life may apply where a taxpayer chooses to use an effective life determined by the Commissioner. [Schedule 4, item 1, note to subsection 40-95(1)]

Associate rules

4.27 Under the existing law certain integrity rules apply when a taxpayer acquires an asset from:

·
an associate; or
·
an entity (former holder) who continues to be the user of the asset after the taxpayer becomes the holder of it.

Amendments to these rules will ensure that a taxpayer cannot access a capped life that is not appropriate to the use of the asset when that taxpayer starts to hold it.

4.28 In particular, the amendments require a taxpayer, who acquires a depreciating asset from an associate or former holder to whom a capped life applied, to decide whether the use of the asset when they start to hold it satisfies the appropriate use requirements, (if any), for that capped life.

4.29 The possible outcomes that can arise in those circumstances are set out in Table 4.1. Table 4.1: Outcomes of associate rules

When the taxpayer starts to hold the asset the use of the asset The following provision applies If the diminishing value method applies the taxpayer must use If the prime cost method applies the taxpayer must use
Satisfies the requirements of the capped life that applied to the asset while it was held by the associate or former holder. 40-95(4) or (5) The same effective life as the associate or former holder was using.

An effective life equal to any period of the assets effective life that:

·
the associate or former holder was using; and
·
is yet to elapse at the time the taxpayer started to hold the asset.

Does not satisfy the requirements of the capped life that applied to the asset while it was held by the associate or former holder but does satisfy a different capped life that was in force at the relevant time for the associate or former holder. 40-95(4B) or (5B) An effective life equal to the different capped life that would have applied to the asset at the relevant time for the associate or former holder had the associate or former holder used the asset in the same way that the taxpayer is using the asset.

An effective life equal to any period of the different capped life that:

·
would have applied to the asset at the relevant time for the associate or former holder had the associate or former holder used the asset in the same way that the taxpayer is using the asset; and
·
is yet to elapse at the time the taxpayer started to hold the asset.

Does not satisfy:

·
the requirements of the capped life that applied to the asset while it was held by the associate or former holder; or
·
the requirements of any other capped life that was in force at the relevant time for the associate or former holder.

40-95(4C) or (5C) The effective life determined by the Commissioner for the asset that the associate or former holder would have used but for a capped life applying to the depreciating asset while they held it.

An effective life equal to any period of the effective life determined by the Commissioner for the asset that:

·
the associate or former holder would have used but for a capped life applying to the depreciating asset; and
·
is yet to elapse at the time the taxpayer started to hold the asset.

[Schedule 4, items 2 and 3, subsections 40-95(4B), (4C), (5B) and (5C)]

Example 4.1

A taxpayer acquires a helicopter from an associate on 1 July 2003 and uses it for general purposes (e.g. visiting cattle properties). The associate from whom they acquired it used the helicopter predominantly for mustering and held it for one year. The relevant time for the associate was the helicopters start time which was 1 July 2002.

The effective life used by the associate was the 8 year capped life that applies to helicopters used predominantly for mustering. The associate used the prime cost method to work out the decline in value of the helicopter for the 2002-2003 income year.

At the relevant time for the associate (i.e. the helicopters start time) there was another capped life in force of 10 years for helicopters used for general purposes.

Subsection 40-95(4B) will require the taxpayer to use an effective life of 9 years (i.e. 10 years less the one year that it was held by the associate).

Example 4.2

A taxpayer acquires a gas transmission asset from an associate on 1 July 2007 and does not use it within the gas supply industry. However, the associate from whom they acquired that asset had held it for 5 years and used it in the gas supply industry. The relevant time for the associate was the gas transmission assets start time which was 1 July 2002.

The effective life used by the associate was the 20 year capped life that applies to gas transmission assets used in the gas supply industry. The associate used the prime cost method to work out its decline in value.

The taxpayer does not satisfy the same capped life satisfied by the associate and, at the relevant time for the associate (i.e. the gas transmission assets start time):

·
there is no other capped life that applies to the asset; and
·
the effective life determined by the Commissioner that the associate would otherwise have used is 30 years.

Subsection 40-95(4C) will require the taxpayer to use an effective life of 25 years (i.e. 30 years less the 5 years that it was held by the associate).

Example 4.3

The facts are as per Example 4.2. However, there is a capped life that could apply to the use of the asset in the hands of the taxpayer when it was acquired from the associate but it was not in force at the relevant time for the associate.

Subsection 40-95(4C) will require the taxpayer to use an effective life of 25 years (i.e. 30 years less the 5 years that it was held by the associate).

4.30 If the asset has passed through the hands of more than one associate or former holder, the provisions apply having regard to the relevant time of the first associate or former holder.

4.31 There is a series of amendments that arise consequentially upon the amendments discussed in paragraphs 4.27 to 4.30.

4.32 First, 2 new subsections make it clear that subsections 40-95(4) and (5) do not apply if subsection 40-95(4B), (4C), (5B) or (5C) respectively apply. [Schedule 4, items 2 and 3, subsections 40-95(4A) and (5A)]

4.33 Secondly, subsection 40-95(6) will be amended. That subsection currently operates as an exception to subsection 40-95(5). It requires a taxpayer to use an effective life determined by the Commissioner if:

·
the taxpayer cannot readily find out which effective life the former holder was using; or
·
the former holder did not use an effective life.

4.34 Subsection 40-95(6), as amended, will also require the taxpayer to use an effective life determined by the Commissioner where a capped life applied to the former holder and the taxpayer cannot readily find out:

·
the effective life the former holder would have used if a capped life had not applied to the asset; or
·
the relevant time that applied to the former holder.

[Schedule 4, item 4, paragraph 40-95(6)(a)]

4.35 Thirdly, subsection 40-140(1) will be amended. That section requires an associate to pass on certain information to a taxpayer where the taxpayer has acquired an asset from the associate. The information that must be passed on relates to the method used to calculate the decline in value of the asset and the effective life used by the associate.

4.36 Subsection 40-140(1), as amended, provides that the taxpayer can require an associate to tell them the following information where a capped life applied to an asset held by the associate:

·
the effective life the associate would have used if the capped life had not applied to the asset; and
·
the relevant time that applied to the associate as worked out under new subsection 40-102(3). See explanation of relevant time at paragraphs 4.21 and 4.22.

[Schedule 4, item 9, paragraph 40-140(1)(c)]

Recalculation of effective life

4.37 Section 40-110 of the existing law sets out when a taxpayer may, or is required to, recalculate the effective life of an asset. Subsection 40-110(2) requires a recalculation of the effective life in certain circumstances where the taxpayer has chosen to use an effective life determined by the Commissioner for a particular asset or the effective life of an asset has been determined under the existing associate rules. That subsection will be amended to provide that the taxpayer is also required to recalculate an effective life in an income year where:

·
the taxpayer is using an effective life worked out under new subsection 40-95(4B), (4C), (5B) or (5C) or new section 40-102; and
·
the cost of the depreciating asset is increased by at least 10% in the relevant year.

[Schedule 4, items 6 to 8, subparagraphs 40-110(2)(a)(ii) and (iii) and paragraph 40 - 110(3)(a)]

Effective life definition

4.38 The current definition of effective life refers the reader to provisions under which the effective life of an asset is worked out - namely sections 40-95, 40-100, 40-105 and 40-110 of the ITAA 1997.

4.39 The definition will be amended to add a reference to section 40-102 to ensure that it also deals with the case where the effective life of an asset is the capped life. [Schedule 4, item 14, definition of effective life in subsection 995-1(1)]

Division 58

4.40 Division 58 sets out special rules that apply in calculating deductions for the decline in value of depreciating assets and balancing adjustments for assets which were held by an exempt entity and are subsequently held by a taxable entity. The consequential amendments to the Division will provide that a capped life cannot apply to reduce the first element of cost (i.e. the amount used to work out the decline in value) for a privatised asset of a transition entity (i.e. the entity in an entity sale situation that was exempt from income tax and subsequently becomes taxable) unless:

·
the capped life could have applied had the transition entity always been taxable; and
·
the transition entity chooses to apply the capped life for the purposes of working out both their notional depreciation deductions and their actual depreciation deductions.

4.41 In particular, a capped life will not apply to a privatised asset unless all of the following conditions are met:

·
it is an entity sale situation;
·
a capped life applies to the asset at both the assets start time and the transition time (i.e. the time when the transition entitys ordinary income or statutory income becomes to any extent assessable income); and
·
the transition entity chooses to apply the capped life for the purposes of working out the notional written down value.

[Schedule 4, item 10, paragraphs 58-75(5A)(a), (b) and (c)]

4.42 Where the transition entity chooses to apply the capped life, they must apply section 40-102 using certain assumptions and modifications. First, the transition entity disregards paragraphs 40-102(2)(a) and (b). (This means that it is not necessary for the transition entity to have chosen an effective life determined by the Commissioner or for that choice to have been limited to a Commissioner Determined effective life in force at a particular time.) Secondly, the transition entity must use the capped life in force at the transition time. The effective life of the asset will then be the capped life if it is shorter than the effective life determined by the Commissioner. [Schedule 4, item 10, subsection 58-75(5A)]

4.43 A capped life cannot apply for the purposes of Division 58 when:

·
it is an asset sale situation;
·
it is an entity sale situation and the assets start time was prior to the day on which the capped life took effect;
·
it is an entity sale situation and the assets start time is on or after the day on which the capped life took effect but the transition entity chooses not to apply the capped life; or
·
it is an entity sale situation but the effective life determined by the Commissioner is shorter than the capped life.

However, a capped life can apply to work out actual depreciation deductions in an asset sale situation where the requirements in section 40-102 are met by the purchaser of the asset.

4.44 Where the capped life applied in working out the notional written down value of the asset, they will also apply the capped life that is in force at the transition time in working out the decline in value of the asset for their actual deduction. [Schedule 4, item 12, paragraph 58-90(2)(a)]

4.45 However, where the capped life did not apply in working out the notional written down value of the asset or they choose to use the undeducted pre-existing audited book value of the asset, they cannot apply the capped life in working out the decline in value of the asset for their actual deduction. [Schedule 4, item 12, paragraph 58-90(2)(b)]

4.46 It should be noted that a capped life will not apply to an asset where the pre-existing audited book value method is used in working out notional depreciation deductions. This is because the effect of existing paragraph 58-85(1)(b) is that the assets start time will be before 1 July 2002. Consequently, a capped life cannot apply as the taxpayer is unable to satisfy the conditions set out in subsection 40-102(2). That is, they will not satisfy paragraphs 40-102(2)(a) or (b) because of the existing assumptions in subsection 58-80(6). A note will be added to subsection 58-80(6) to alert the reader to the fact that a capped life will not apply where section 58-80 applies. [Schedule 4, item 11, note to subsection 58-80(6)]

REGULATION IMPACT STATEMENT

Policy objective

4.47 The establishment of statutory effective life caps aims to address the broader national interest where large increases in safeharbour effective lives resulting from the review of the existing effective life determination would have a significant effect on investment in industries with national economic implications.

Background

4.48 The Commissioner is progressively revising the safeharbour effective life schedule so that it better reflects the income producing (or effective) lives of depreciable assets. This is in accordance with the Review of Business Taxations recommendation to update the existing effective life schedule.

4.49 The Commissioners reviews are based solely on the consideration of factors relating to an assets effective life and do not take into account wider policy implications. Therefore, the Commissioners Determinations of effective lives do not address issues such as the impact on investment decisions or broader economic impacts.

4.50 It is therefore possible, even likely, that the Commissioner may determine significant increases in the safeharbour life of assets where those increases could have significant adverse impacts on the affected industries with flow on implications to other sectors of the economy.

4.51 To date, over 20 revisions to the existing effective life schedule have been implemented. Most determinations have either provided safeharbour effective lives for the first time, or made relatively minor amendments to existing safeharbour determinations.

4.52 However, there are a number of current reviews where it is expected that the Commissioner will shortly determine significant increases in safeharbour lives which would have wider national economic implications. The Commissioner is expected to make determinations in relation to these reviews by 1 July 2002.

Identification of implementation options

4.53 The policy measure that was announced in the Governments 2002-2003 Federal budget establishes a statutory cap on the safeharbour effective lives for particular asset classes. Under this approach, the safeharbour lives that the Commissioner sets for taxpayers to use to calculate the decline in value of depreciating assets within the relevant asset classes can not exceed the statutory cap. For those assets where the revised effective life is less than the statutory cap, the Commissioners effective life will continue to apply. In addition, the introduction of the statutory caps does not negate the ability of taxpayers to self-assess an appropriate effective life for their assets based on their own circumstances.

4.54 The Government considered cases where significant increases in revised safeharbour effective life determinations would have a significant effect on forthcoming investment projects with significant economic impacts, particularly in large capital intensive industries.

4.55 Following consideration of the broader national interest in this context, the Government decided to establish effective life statutory caps to ensure appropriate capital allowances deductions remain available for aeroplanes, helicopters, gas transmission and distribution assets, oil and gas production assets and assets used to manufacture condensate, crude oil, domestic gas, LNG or LPG.

4.56 Table 4.2 shows the current safeharbour effective lives for these asset classes, together with the effective lives likely to be determined by the Commissioner and the statutory effective life caps under the measure announced by the Government.

Table 4.2: Effective lives for the major sensitive asset classes under review

Asset class Current effective life or range (years) ATOs proposed new effective life or range (years) Statutory cap on effective life (years)
Aeroplanes:
General use 8 20 10
Used predominantly for agricultural spraying or dusting 4 10 8
Helicopters:
General use 8 20 10
Used predominantly for mustering, or agricultural spraying or dusting 4 10 8
Gas transmission and distribution assets 20 5-50 20
Oil and gas production assets except electricity generation assets and offshore platforms 10-20 5-30 15
Offshore oil or gas platforms 20 5-30 20
Assets (except electricity generation assets) used to manufacture condensate, crude oil, domestic gas, LNG or LPG, otherwise than at an oil refinery 13.3 10-30 15

Alternative options

4.57 A number of alternative options were considered, but were determined to be either inferior or unworkable. The option of applying statutory caps as a transitional arrangement while moving to the Commissioners Determinations in the longer term was considered, as it might have better retained the integrity of the effective life review process. This option, however, would have continued to provide considerable medium and long term uncertainty to industry about the effective life that would apply to projects, particularly if the statutory cap was phased up to the Commissioners Determination. A fixed time for removing the cap would have also risked sub-optimal investment resulting from the incentive to ensure that a taxpayers capital allowances deduction is based on the statutory cap. In addition, such a transitional measure would not only have limited the benefits of the policy measure, but would have also introduced further complexity and uncertainty to the administration of tax law in relation to capital allowances. Transitional arrangements were therefore considered to be inappropriate.

4.58 The option of establishing a mechanical process that considers changes in effective lives and applies detailed prescribed criteria accounting for specific increases in effective lives was thought to be inflexible and complex to administer. A number of rigorous tests would have been needed under this approach and it was considered to be unworkable.

4.59 The use of a purely statutory write-off, rather than statutory caps, was also considered, but it would have undermined the integrity of the effective life based capital allowance system. For this reason, such a process was considered to be unwise.

Assessment of impacts (costs/benefits)

Impact group identification

4.60 The primary impact of establishing statutory effective life caps is the provision of support for taxpayers who would otherwise be adversely affected by substantial increases in the effective lives used for calculating the decline in value of their assets. Firms operating in the airline, gas transmission and distribution, and oil and gas production industries, as well as industries that manufacture condensate, crude oil, domestic gas, LNG and LPG, will be the primary beneficiaries of the measure.

4.61 The main impact of the measure will therefore be to provide significant benefits to the affected industries, estimated at $1.9 billion over 10 years, compared to the Commissioners expected revised determinations of safeharbour effective lives (see Table 4.2).

4.62 Indirect beneficiaries of this measure will be consumers of goods and services produced by the affected industries. This will occur because the affected industries costs will be lower than had the higher effective lives applied, but only to the extent that these lower costs are passed on through lower prices. This is dependent, to some extent, on the specific competition regulation applying to each of the industries.

4.63 To the extent that the statutory caps maintain the existing value of the capital allowances deductions for the affected industries, there could be competitive pressure felt by those industries that produce similar goods and services without the benefit of a statutory cap. A major competitor to the industries covered by the measure is considered to be the electricity generation industry, which competes with some sectors of the gas transmission and distribution industry.

Compliance costs

4.64 The affected industries will not incur additional compliance costs because the statutory effective life caps will simply be used in place of the safeharbour lives that are expected to be determined by the Commissioner.

4.65 The safeharbour lives are provided to assist taxpayers in determining the appropriate capital allowances deductions to claim for their assets. Although taxpayers have the option to self-assess an appropriate effective life for their assets based on their own circumstances, in general they prefer to use safeharbour lives because of the compliance cost savings and the certainty they provide.

Administrative costs

4.66 Government agencies such as the Department of the Treasury, the Department of Industry, Tourism and Resources and the ATO will not incur significant additional costs implementing the proposed measure.

4.67 The Governments willingness to consider statutory caps, where national economic considerations require, may entail unquantifiable costs incurred in public administration and by private representations to bring to the Governments attention all of the factors that may be relevant.

Revenue impact

4.68 The effect of this measure, as announced in the 2002-2003 Federal budget, is to limit the revenue gain arising from the Commissioners revised determinations in excess of the statutory cap to around $150 million over the forward estimates period.

4.69 Had the statutory caps not been implemented the Commissioners likely determinations would have raised an estimated $465 million over the forward estimates and $2.5 billion over the next 10 years.

4.70 The statutory cap will, in a number of cases, shorten the effective life that taxpayers can use to calculate the decline in value of an asset relative to the Commissioners likely effective life determinations for those assets.

4.71 These estimates are based on the statutory caps presented in Table 4.1, and the likely level of investment in the airline, gas transmission and distribution, and oil, gas and LNG production industries over the next decade.

4.72 The estimated revenue impacts are based on the assumption that these higher effective lives will not detract from the investment assumed to occur under the Governments measure. To the extent that investment is discouraged, revenue collections could be lower.

Tax savings to industry

4.73 The Governments statutory caps provide subsidies to the relevant industries by allowing faster depreciation of their assets than that which would have been available under the longer Commissioner determined effective lives that are expected to apply from 1 July 2002. That said, the statutory caps will provide a slightly slower decline in value (or lower effective lives) than available, in some cases, under the existing Commissioner determined safeharbour effective lives. As noted in the revenue impact section, the increased tax that industry would have paid under the likely Commissioners determined effective lives amounts to $465 million over 4 years and $2.5 billion over 10 years. The additional tax that industry will pay under the proposed caps is estimated at $150 million over 4 years and $675 million over 10 years. This represents approximately only 30% of the increased tax payable under the likely Commissioners determined effective lives. The statutory caps will result in savings to industry of around $315 million over 4 years and $1.9 billion over 10 years, compared to the effects of the Commissioners expected safeharbour effective lives.

Impact on investment

4.74 Currently, $48 billion of planned investment is expected in these industries over the next 10 years. The statutory cap will, relative to the Commissioners likely effective life changes, allow businesses to claim an additional $1.9 billion in capital allowances deductions on this investment. This impact could be sufficient to ensure that the relevant industries commit to this level of investment.

4.75 If the Commissioners likely effective life changes were implemented, it is likely that some of these planned investments would not proceed. However, it is difficult to assess the extent to which investment in these projects will occur at the expense of other investment projects throughout the rest of the economy.

Benefits to the economy

4.76 The economy wide impacts of the measure depend on the extent to which investment projects that would not have proceeded under the Commissioners likely effective life changes will proceed under the statutory caps. The impacts then depend on the extent to which other investment projects in the economy do not proceed as a result of this additional investment (as well as the relative rates of return of these investments). To the extent that the recommended statutory caps on effective lives have a net positive impact on investment, there will be flow-on effects in the economy through employment and national production. Some of the investment will also impact on trade flows, particularly those projects that are export-oriented.

Consultation

4.77 The ATO has undertaken extensive consultation with industry during the review of the safeharbour effective life schedule. These consultations are on technical aspects of the effective life project. However, the ATO has kept the Department of the Treasury constantly informed regarding any broader issues relating to the effective life project and any industry views on the impacts of revisions to the safeharbour effective life schedule.

4.78 There have been a number of submissions from industry to Government, and a number of meetings between industry and Government, regarding revisions to the safeharbour effective life schedule.

Conclusion and recommended option

4.79 It was concluded that the measure to cap statutory effective lives for certain depreciating assets is the most efficient and transparent method of achieving the desired policy outcome. The measure provides for the most appropriate balance of interests between meeting the needs of the specific industries and maintaining the integrity of the Governments effective life capital allowances system.

4.80 The measure involves minimal compliance costs, as the new statutory caps will simply replace the existing safeharbour effective lives, and provide significant benefits to those industries concerned.


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