House of Representatives

Taxation Laws Amendment Bill (No. 4) 2003

Explanatory Memorandum

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

Chapter 2 Uniform capital allowance system

Outline of chapter

2.1 This chapter explains technical corrections and amendments made to:

·
various provisions of the ITAA 1997 to ensure that the uniform capital allowance system operates as intended and ensure that the other capital allowances and CGT provisions interact appropriately with the capital allowances system; and
·
various provisions in the IT(TP) Act 1997 that relate to the capital allowances system or to depreciating assets, to ensure that they apply as intended.

Context of amendments

2.2 The uniform capital allowance system was enacted with effect from 1 July 2001 and allows deductions for the cost of a depreciating asset over a period that reflects the effective life of the asset.

2.3 The technical corrections and amendments explained in this chapter ensure that the uniform capital allowance system operates as intended and interacts appropriately with other related provisions.

Detailed explanation of the amendments

Uniform capital allowance system - Division 40 of the ITAA 1997

Conversion of a mining, quarrying or prospecting right

2.4 Conversions of a mining, quarrying or prospecting right will be taken to be a continuation of that right if the right ends and the new right relates to the same area (or the difference in area is insignificant). This provision is related to the effective life rule that a mining, quarrying or prospecting right will have the same effective life as the life of the mine, petroleum field or quarry to which that right relates (see paragraphs 2.9 to 2.12 for discussion of that rule). [Schedule 2, item 1, subsection 40-30(6)]

Deduction for expenditure on exploration or prospecting

2.5 Expenditure, whether capital or not, on exploration or prospecting for minerals (including petroleum) and quarry materials, is generally immediately deductible.

2.6 Subject to a number of conditions specified in section 40-80 of the ITAA 1997, the decline in value of a depreciating asset of a taxpayer (i.e. the amount deductible) is the asset's cost if the taxpayer first uses the asset for exploration or prospecting for minerals, which includes petroleum, or quarry materials.

2.7 The first condition is that the immediate deduction is available only if the asset is not used for development drilling for petroleum, or operations in the course of working a mining property, petroleum field or quarrying property. This bill amends the first condition so that it only needs to be met when the taxpayer first uses the asset. [Schedule 2, item 2]

What is the meaning of mining operations?

2.8 Subsection 40-730(7) defines 'mining operations'. This bill amends this subsection by replacing the words 'for a taxable purpose' with 'for the purpose of producing assessable income'. To satisfy the definition of taxable purpose, it is sufficient that there is a purpose of exploration or prospecting. It is not necessary that there be a purpose of producing assessable income. Therefore, deductions can be claimed even if the income derived from exploration and prospecting is exempt. Under the former provisions for exploration, deductions were unable to be claimed in these circumstances. Replacing 'for a taxable purpose' with 'for the purpose of producing assessable income' will ensure that exploration expenses are not claimed where the income from the activity is exempt. [Schedule 2, item 5]

Effective life of a mining, quarrying or prospecting right

2.9 Paragraph 40-95(8) states that for intangible assets that qualify for write-off under Division 40, but are neither contained in the table in paragraph 40-95(7) nor IRUs, the effective life cannot be longer than the term of that intangible asset as extended by any reasonably assured extension or renewal of that term. This bill amends this subsection by removing the reference to mining, quarrying and prospecting rights. These rights will now be covered by specific references in the table in paragraph 40-95(7) of the ITAA 1997. [Schedule 2, item 3]

2.10 For a mining, quarrying or prospecting right that relates to a mine (excluding petroleum fields or quarries), the effective life of that right is the life of the mine, proposed mine, or if there is more than one mine, the life of the mine that has the longest estimated life to which the right relates. [Schedule 2, item 3, subsection 40-95(7)]

2.11 For a mining, quarrying or prospecting right that relates to a petroleum field, the effective life of that right is the life of the petroleum field or proposed petroleum field to which the right relates. [Schedule 2, item 3, subsection 40-95(7)]

2.12 For a mining, quarrying or prospecting right that relates to a quarry, the effective life of that right is the life of the quarry, proposed quarry, or if there is more than one quarry, the life of the quarry that has the longest estimated life to which the right relates. [Schedule 2, item 3, subsection 40-95(7)]

Example 2.1 Global Resources Limited obtains a right to extract a mineral for an initial term of 21 years. The right can be renewed, extended indefinitely on a 21 year basis while mining continues. Global estimates that, based on its anticipated level of production, the resource will be fully exhausted after 30 years. It could be concluded that the right, together with any reasonably assured extensions or renewals, will exist for 42 years. However, based on Global's plans, Global or any other person is likely to use the right for 30 years only. Accordingly, Global could reasonably adopt an effective life of 30 years for the right.

Uniform capital allowance system - Division 40 of the IT(TP) Act 1997

2.13 Division 40 of the IT(TP) Act 1997 facilitates the transition of depreciating assets into the uniform capital allowance system from the various separate capital allowance regimes that operated before it. Broadly, the transitional provisions allow taxpayers to apply the new uniform capital allowance system to existing depreciating assets and certain capital expenditures. Effectively, Division 40 of the ITAA 1997 generally applies to depreciating assets after 30 June 2001.

2.14 Expenditure incurred before 1 July 2001 that was deductible under the special provisions for mining and quarrying (the former Division 330) generally retains the former treatment. This has been achieved by bringing such expenditure into Division 40 and modifying the ordinary application of the Division to ensure that the expenditure retains its concessional treatment. Accordingly, the former provisions ceased to apply from 1 July 2001.

Mining unrecouped expenditure

2.15 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 that remains to be deducted is unrecouped expenditure.

2.16 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.

Disposal of property to which capital expenditure that has been completely recouped relates

2.17 A note is added to subsection 40-35(1) to ensure that it is clear that subsection 40-35(6) applies, as per subsection 40-35(8), where the taxpayer does not have unrecouped expenditure at 30 June 2001. [Schedule 2, item 6]

2.18 A further subsection is inserted (subsection 40-35(8)) to ensure that it is clear that there is an additional decline in value of the notional asset if the underlying property is not a depreciating asset where the taxpayer:

·
had completely recouped capital expenditure by 30 June 2001;
·
the expenditure related to property that is not a depreciating asset; and
·
the property is disposed of, lost or destroyed, or stopped being used for a taxable purpose.

[Schedule 2, item 7, subsection 40-35(8)]

2.19 This will allow a decline in the value of the notional asset where the underlying property is not a depreciating asset and the amount of unrecouped capital expenditure at 30 June 2001 is zero. For example, a balancing adjustment will occur for the notional asset where the taxpayer disposes of underlying property that is not a depreciating asset and where the mining capital expenditure related to that property has been fully deducted before 30 June 2001 under Division 330.

Merge or split of depreciating asset to which unrecouped expenditure relates

2.20 Subsection 40-35(5) applies to ensure that where the underlying property to which the unrecouped mining expenditure relates is disposed of, lost or destroyed, or ceases to be used for a taxable purpose, there is an additional decline in value of the notional asset that includes this expenditure. The amount of unrecouped expenditure that is taken to be an asset is taken to be an asset for all purposes of Division 40.

2.21 If the underlying depreciating asset or property is split, section 40-115 of the ITAA 1997 deems that the asset has stopped being held. Subsection 40-295(3) of the ITAA 1997 ensures that when a depreciating asset stops being held because it is split, a balancing adjustment event does not occur. However, under subsection 40-35(5) there is an additional decline in value for the whole of the adjustable value of the notional asset.

2.22 Paragraph 40-35(7)(a) will be inserted into the IT(TP) Act 1997 to ensure that if the underlying property is split into 2 or more depreciating assets, and the taxpayer stops holding one or more of these assets, then subsection 40-35(5) does not apply to the asset that they continue to hold. Subsection 40-35(5) does apply to the asset disposed of and an additional decline in value is available for the adjustable value of the related notional asset. [Schedule 2, item 7, paragraph 40-35(7)(a)]

2.23 Where a real asset is merged into another depreciating asset, paragraph 40-35(7)(b) will apply to ensure that section 40-125 of the ITAA 1997 does not apply while the taxpayer continues to hold both the real and depreciating assets. In this case, the original asset is not deemed to have been stopped being held, no balancing adjustment occurs under section 40-295(3) of the ITAA 1997 and there is no additional decline in value for the notional asset under subsection 40-35(5). [Schedule 2, item 7, paragraph 40-37(7)(b)]

Post 30 June 2001 mining expenditure

2.24 Capital expenditure other than on plant incurred after 30 June 2001 on developing and operating a mine site, petroleum field or quarry (allowable capital expenditure) under a contract entered into before that day is deductible over the shorter of 10 years (20 years for quarrying) and the life of the project. [Schedule 2, item 8, subsection 40-37(1)]

2.25 The taxpayer will work out the decline in 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 expenditure that is taken to be an asset is taken to be an asset for all purposes of Division 40, including balancing adjustments. [Schedule 2, item 8, section 40-37]

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

·
the asset has a cost at the time the expenditure is incurred equal to the amount of the expenditure [Schedule 2, item 8, paragraph 40-37(2)(a)]
·
the decline under the prime cost formula is calculated using the adjustments to the formula found in the ITAA 1997 for the year in which the expenditure is incurred. The basis for calculating the decline in the year in which the expenditure was incurred will be on the effective life and cost (to ensure that deductions are calculated in the same manner as under the former Division 330) [Schedule 2, item 8, paragraph 40-37(2)(b)]
·
the asset was used for a taxable purpose when the expenditure was incurred [Schedule 2, item 8, paragraph 40-37(2)(c)]
·
the asset had an effective life equal to the shorter of the number of years in the 10 year period for deduction (20 years for quarrying) and the life of the project [Schedule 2, item 8, paragraph 40-37(2) d) and subsections 40-37(3) and (4)]

Disposal of, lost, destroyed or you stop using for a taxable purpose property to which the expenditure relates

2.27 If the underlying property, which is not a depreciating asset, to which the 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. [Schedule 2, item 8, subsection 40-37(5)]

2.28 Where the taxpayer disposes of the asset by sale, those sale proceeds are to be included in the taxpayer's 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 previous 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 of income). In effect, the deductions given indirectly for the underlying property that is not a depreciating asset are reconciled to the actual loss in value of the property. [Schedule 2, item 8, subsection 40-37(6)]

Mining cash bidding payments

2.29 If a taxpayer has an amount of expenditure that would have been a mining cash bidding payment under the former Division 330 and:

·
the expenditure was incurred before 30 June 2001, but the mining authority was granted after 30 June 2001; or
·
the expenditure was incurred after 30 June 2001, but the mining authority was granted before 30 June 2001,

the taxpayer will work out the decline in 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 the mining cash bidding payment that is taken to be an asset is taken to be an asset for all purposes of Division 40, including balancing adjustments. [Schedule 2, item 8, section 40-38]

2.30 The former Division 330 provided that a mining cash bidding payment was to be treated as deductible capital expenditure incurred for the purposes of Division 330. Under Division 330, the amount was deemed to be incurred at the time of payment or the grant of the mining right, whichever happened later.

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

·
the asset comprising the mining cash bidding payment had a cost equal to the amount of the expenditure [Schedule 2, item 8, paragraph 40-38(2)(a)]
·
the decline under the prime cost formula is calculated using the adjustments to the formula found in the ITAA 1997 for the year in which the mining authority is granted. The basis for calculating the decline in the year in which the mining authority is granted or the mining cash bidding payment is made (whichever is later) will be on the effective life and cost [Schedule 2, item 8, paragraph 40-38(2)(b)]
·
the asset was used for a taxable purpose at the time which the mining authority was granted or the mining cash bidding payment is made (whichever is later) [Schedule 2, item 8, paragraph 40-38(2)(c)]
·
the asset had an effective life equal to the shorter of 10 years or the life of the project [Schedule 2, item 8, paragraph 40-38(2)(d) and subsections 40-38(3) and (4)]

Disposal of, lost, destroyed or you stop using for a taxable purpose property to which the mining cash bidding payment relates

2.32 If the underlying property, the depreciating asset, to which the mining cash bidding payment 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. The additional decline in value is that part of the notional asset's 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 2, item 8, subsection 40-38(5)]

Merge or split of depreciating asset to which unrecouped expenditure relates

2.33 If the underlying property is split into 2 or more depreciating assets, and the taxpayer stops holding one or more of these assets, then subsection 40-38(5) does not apply to the asset that they continue to hold. Subsection 40-38(5) does apply to the asset disposed of and an additional decline in value is available for the adjustable value of the related notional asset. [Schedule 2, item 8 inserts paragraph 40-38(6)(a)]

2.34 Where a real asset is merged into another depreciating asset, paragraph 40-38(6)(b) applies to ensure that section 40-125 of the ITAA 1997 (merging depreciating assets) does not apply while the taxpayer continues to hold both the real and depreciating assets. In this case, the original asset is not deemed to have been stopped being held, no balancing adjustment occurs under section 40-295(3) of the ITAA 1997 and there is no additional decline in value for the notional asset under subsection 40-38(5). [Schedule 2, item 8, paragraph 40-38(6)(b)]

Transport capital expenditure

2.35 Broadly under former Subdivision 330-H, 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.

2.36 A taxpayer who deducted or was entitled to deduct an amount for transport capital expenditure in respect of a transport facility before 30 June 2001 can continue to deduct that expenditure under Division 40 of the ITAA 1997.

Merge or split of depreciating asset to which unrecouped expenditure relates

2.37 Subsection 40-40(4) applies to ensure that where the underlying property to which the unrecouped mining expenditure relates is disposed of, lost or destroyed, or ceases to be used for a taxable purpose, there is an additional decline in value of the notional asset that includes this expenditure.

2.38 If the underlying depreciating asset or property is split, section 40-115 of the ITAA 1997 deems that the asset has stopped being held. Subsection 40-295(3) of the ITAA 1997 ensures that when a depreciating asset stops being held because it is split a balancing adjustment event does not occur, however, under subsection 40-40(4) there is an additional decline in value for the whole of the adjustable value of the notional asset.

2.39 If the underlying property is split into 2 or more depreciating assets, and the taxpayer stops holding one or more of these assets, then subsection 40-40(4) does not apply to the asset that they continue to hold. Subsection 40-40(4) does apply to the asset disposed of and an additional decline in value is available for the adjustable value of the related notional asset. [Schedule 2, item 9 will insert paragraph 40-40(6)(a)]

2.40 Where a real asset is merged into another depreciating asset, paragraph 40-40(6)(b) will apply to ensure that section 40-125 of the ITAA 1997 does not apply while the taxpayer continues to hold both the real and depreciating assets. In this case, the original asset is not deemed to have been stopped being held, no balancing adjustment occurs under section 40-295(3) of the ITAA 1997 and there is no additional decline in value for the notional asset under subsection 40-40(4). [Schedule 2, item 9, paragraph 40-40(6)(b)]

Post 30 June 2001 transport expenditure

2.41 A taxpayer who incurs expenditure after 30 June 2001 under a contract entered into before that day where that expenditure would have been transport capital expenditure in respect of a transport facility under the former Division 330, can deduct that expenditure under Division 40 of the ITAA 1997. [Schedule 2, item 10, subsection 40-43(1)]

2.42 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 cost of this asset is equal to the amount of the expenditure incurred [Schedule 2, item 10, paragraph 40-43(2)(a)]
·
the decline under the prime cost formula is calculated using the adjustments to the formula found in Division 40 of the ITAA 1997 for the year in which the expenditure is incurred. The basis for calculating the decline in the year in which the expenditure is incurred will be on the effective life and cost (to ensure that deductions are calculated in the same manner as under the former Division 330) [Schedule 2, item 10, paragraph 40-43(2)(b)]
·
the asset was used for a taxable purpose at the time the expenditure was incurred [Schedule 2, item 10, paragraph 40-43(2)(c)]
·
the asset had an effective life equal to the years remaining in the 10 year period for deduction (20 years for quarrying) [Schedule 2, item 10, paragraph 40-43(2)(d) and subsection 40-43(3)]

Disposal of, lost, destroyed or you stop using for a taxable purpose property to which transport capital expenditure relates

2.43 If the underlying property, which is not a depreciating asset, 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 asset's adjustable value that relates to the underlying property that was not taken into account in working out the balancing adjustment for the disposal of the underlying property. [Schedule 2, item 10, subsection 40-43(4)]

No additional decline in certain cases

2.44 Section 40-340 of the ITAA 1997 provides roll-over relief where depreciating assets are transferred between companies in the same wholly-owned group or where there are variations in the interests of partners or joint venturers. The roll-over relief prevents an amount from being included in the transferor's assessable income. Under subsection 40-340(1) roll-over relief is automatic if there is a transfer and where CGT roll-over relief is available. If there is a variation in the interests of a partnership, roll-over relief under subsection 40-340(3) is elective. [F1]

2.45 Where a taxpayer transfers a depreciating asset to another company in the same wholly-owned group and roll-over relief under subsection 40-340(3) is chosen, subsection 40-44(1) ensures that there is no additional decline in the value of the related notional asset. [Schedule 2, item 10, subsection 40-44(1)]

2.46 The cost to the transferee of the depreciating asset on disposal is the sum of the adjustable value of the real asset and the adjustable value of the notional asset just prior to the disposal. [Schedule 2, item 10, subsection 40-44(2)]

Mining, quarrying or prospecting rights

Extension, renewal or conversion of mining, quarrying or prospecting rights

2.47 The IT(TP) Act 1997 provides 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 adjustment rules of the uniform capital allowance system. The uniform capital allowance system does not apply to a mining, quarrying or prospecting right that the taxpayer held before 1 July 2001. Costs incurred on those rights on or after 1 July 2001 can only be used in the calculation of the taxpayer's capital gain or loss under the CGT provisions.

2.48 Subsection 40-77(1A) ensures that the renewal or extension of a mining, quarrying or prospecting right on or after 1 July 2001 will be taken to be a continuation of that right and therefore Division 40 of the ITAA 1997 will continue not to apply. Instead, the renewed or extended right will remain subject to the CGT provisions. [Schedule 2, item 11, subsection 40-77(1A)]

2.49 In addition, if a taxpayer acquired a mining, quarrying or prospecting right before 1 July 2001 and that right ends on or after 1 July 2001 and is replaced by a new right that relates to the same area (or the difference in area is insignificant), then Division 40 of the ITAA 1997 will continue not to apply and the new right remains subject to the CGT provisions contained in the ITAA 1997 instead of being subject to the balancing adjustment rules of the uniform capital allowance system. [Schedule 2, item 11, subsection 40-77(1B)]

Transfer of mining, quarrying or prospecting right to a member of the same wholly owned group

2.50 If a taxpayer acquired a mining, quarrying or prospecting right before 1 July 2001 and that right is transferred on or after 1 July 2001 to another member of the same wholly-owned group, Division 40 of the ITAA 1997 does not apply and the right remains subject to the CGT provisions contained in the ITAA 1997 instead of being subject to the balancing adjustment rules of the uniform capital allowance system. [Schedule 2, item 11, subsection 40-77(1C)]

2.51 Where a taxpayer disposes of a mining, quarrying or prospecting right that they held before 1 July 2001 to an associate (except where the associate is also a member of the same wholly-owned group), 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 former Division 330. [Schedule 2, item 12, paragraph 40-77(2)(a)]

Disposal of, lost, destroyed or you stop using for a taxable purpose mining, quarrying and prospecting rights

2.52 Under the IT(TP) Act 1997, mining, quarrying and prospecting rights held before 1 July 2001 are subject to the CGT provisions contained in the ITAA 1997. The rights are not subject to the balancing adjustment rules of the uniform capital allowance system. In effect, there is no balancing adjustment to include in assessable income amounts deducted under the former Division 330.

2.53 If a taxpayer held a mining, quarrying or prospecting right before 1 July 2001 and disposes of (or otherwise stops holding) that right after 1 July 2001 and they have deducted an amount for it under the former Division 330, then an amount equal to the amount the taxpayer has deducted or can deduct must be included in assessable income. [Schedule 2, item 13, subsection 40-77(4)]

2.54 Similarly, if a taxpayer disposes (or otherwise stops holding) a mining, quarrying or prospecting right after 1 July 2001 that they started to hold before 1 July 2001 and they were entitled to deduct an amount for a notional asset under subsection 40-35(5), then the amount the taxpayer has deducted or can deduct must be included in assessable income. [Schedule 2, item 13, subsection 40-77(5)]

2.55 A new subsection is inserted (subsection 40-77(6)) to ensure that amounts included in assessable income under subsections 40-77(4) and (5) are included in the CGT cost base of the asset. [Schedule 2, item 13, subsection 40-77(6)]

Mining, quarrying or prospecting rights acquired from an associate

2.56 Where a taxpayer disposes (or otherwise stops holding) a mining, quarrying or prospecting right that they acquired from an associate (except where the associate is also a member of the same wholly-owned group) after 1 July 2001, and the associate started to hold the right before 1 July 2001, then the taxpayer must reduce the amount that would be included in assessable income under subsection 40-285(1) of the ITAA 1997. [Schedule 2, item 13, subsection 40-77(7)]

2.57 The amount included in assessable income under subsection 40-285(1) of the ITAA 1997 is reduced (but not below zero) by the difference between the cost incurred in acquiring the asset and the amount to which the cost is limited under subsection 40-77(2) of the IT(TP) Act 1997. [Schedule 2, item 13, subsection 40-77(8)]

Example 2.2 Able Resources Ltd (Able Resources) acquired a mining right on 15 June 2000 for $10 million. The amount of $3 million was deductible under the former Division 330.In August 2001 the right is transferred to Brad Resources Ltd (Brad Resources) for its market value of $10 million. Able Resources and Brad Resources are members of the same wholly-owned group. The mining right is now subject to Division 40 and its cost (for CGT purposes) is capped at $3 million by subsection 40-77(2) IT(TP) Act 1997. Brad Resources claims deductions of $1 million for the decline in value of the right and then disposes of the mining right to Cain Resources Ltd (Cain Resources) for $30 million. Cain Resources is neither a member of the same wholly-owned group nor an associate of Brad Resources.Brad Resource's disposal of the mining right is a balancing adjustment event under section 40-285 of the ITAA 1997. The termination value of the right is $30 million. The adjustable value of the mining right is $2 million ($3 million - $1 million). Brad Resources must include the difference between the termination value and the adjustable value ($28 million) in its assessable income.In addition, Brad Resources must reduce its assessable income by $7 million, which is the difference between the capital cost of the right ($10 million) and the amount to which the cost of the right was limited under subsection 40-77(2) ($3 million). In effect, Brad Resources will include $21 million in assessable income.

Accelerated depreciation for split or merged plant

2.58 If a taxpayer splits plant into one or more depreciating assets on or after 1 July 2001 where the plant was:

·
acquired, entered into a contract to acquire, or started to construct plant before 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 [Schedule 2, item 14, paragraph 40-95(1)(a)]
·
held the plant at the end of 30 June 2001 [Schedule 2, item 14, paragraph 40-95(1)(b)]

while the taxpayer continues to hold the assets, section 40-115 of the ITAA 1997 applies as if the taxpayer had acquired the assets before 11.45am on 21 September 1999 [Schedule 2, item 14, subsection 40-95(2)] .xe "[Schedule 3, item 14, subsection 40-95(2)]"

2.59 Similarly, if a taxpayer on or after 1 July 2001 merges plant with another depreciating asset, section 40-125 of the ITAA 1997 does not apply to the asset, or to the taxpayer's interest in the asset, into which it is merged while the taxpayer continue to hold it. [Schedule 2, item 14, subsection 40-95(3)]

Disposal of pre-1 July 2001 mining depreciating asset to associate

2.60 If a taxpayer started holding a depreciating asset before 1 July 2001 and transfers that asset to a company that is a member of the same linked group and the amount included in assessable income for the real asset is greater than the amount the taxpayer can deduct for the related notional asset then subsections 40-35(5), 40-38(5) or 40-40(4) do not apply. 'Linked group' is defined in section 170-260 of the ITAA 1997. [Schedule 2, item 15, subsections 40-287(1) and (2)]

2.61 Instead, the amount that the taxpayer would have been able to deduct for the related notional asset under subsection 40-35(5), 40-38(5) or 40-40(4) reduces the amount included in assessable income for the real asset under subsection 40-285(1). [Schedule 2, item 15, subsection 40-287(3)]

Disposal of pre-1July 2001 mining non-depreciating asset to associate

2.62 If a taxpayer started holding property that is not a depreciating asset before 1 July 2001 and transfers that property to a company that is a member of the same linked group and the amount received in respect of the disposal is greater than the amount the taxpayer can deduct for the related notional asset then there is no additional decline in value of the notional asset under subsections 40-35(5), 40-37(5), 40-40(4) or 40-43(4). 'Linked group' is defined in section 170-260 of the ITAA 1997. [Schedule 2, item 15, subsections 40-288(1) and (2)]

2.63 Instead, the amount that the taxpayer would have been able to deduct for the related notional asset under subsection 40-35(5), 40-37(5), 40-40(4) or 40-43(4) reduces the amount included in assessable income for the property under subsection 40-35(6), 40-37(6), 40-38(6), 40-40(5) or 40-43(5) of the IT(TP) Act 1997, or subsections 40-830(6) of the ITAA 1997. [Schedule 2, item 15, subsection 40-288(3)]

Involuntary disposals

2.64 Under section 40-365 of the ITAA 1997, where the taxpayer involuntarily disposes of a depreciating asset they can choose whether or not to include a balancing adjustment in assessable income. The taxpayer may instead decide to use some or all of the amount that would otherwise be a balancing adjustment as a reduction in the cost, or in the base value, or one or more replacement assets.

2.65 Section 40-365 of the IT(TP) Act 1997 will ensure that section 40-365 of the ITAA 1997 applies when the taxpayer:

·
ceases holding a depreciating asset because the asset is lost or destroyed; compulsorily acquired by an Australian government agency; or disposed of to an Australian government agency after compulsory negotiations before 1 July 2001 [Schedule 2, item 16, paragraph 40-365(a)]
·
commences holding a replacement asset after 1 July 2001 [Schedule 2, item 16, paragraph 40-365(b)]
·
satisfies the conditions in subsections 40-365(3) and (4) of the ITAA 1997 [Schedule 2, item 16, paragraph 40-365(c)]

Application provision

2.66 The amendments made by Schedule 2 to the bill apply to assessments for the income year in which 1 July 2001 occurred and later income years. [Schedule 2, item 17]

2.67 The majority of these amendments are beneficial to taxpayers. The remaining amendments are required to maintain the integrity of the tax system.


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