Senate

Revised Explanatory Memorandum

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

Chapter 4 - Capital allowances for grapevines

Outline of chapter

4.1 Schedule 3 to this bill makes amendments to:

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delete provisions of the Income Tax Assessment Act 1997 (ITAA 1997) which provide special rules for determining the decline in value of grapevines; and

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ensure, with effect from 1 October 2004, that new grapevine plantings will fall for consideration under the treatment provided for horticultural plants.

Context of amendments

4.2 The general principles of the uniform capital allowance regime apply to most depreciating assets used in primary production. However, there are special rules for determining the decline in value of water facilities, horticultural plants and grapevines. As part of a package of changes to the taxation treatment of the wine industry (outlined in this explanatory memorandum), the Government has decided to align the treatment of grapevines with the general treatment provided for horticultural plants.

Summary of new law

4.3 From 1 October 2004:

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the existing provisions relating to grapevines will be repealed;

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new grapevines established on or after that date will fall within the normal provisions applying to horticultural plants; and

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provided the relevant conditions are satisfied, taxpayers can either calculate their own estimate of the effective life of the grapevine, or rely on the 'safe harbour' determination by the Commissioner of Taxation (Commissioner).

Detailed explanation of new law

4.4 Schedule 3 to this bill repeals the specific rules which allow for accelerated depreciation of grape vines. The effect of the repeal will be that the capital allowance provisions relating to horticultural plants will apply to grapevines.

4.5 This measure was announced in the Treasurer's Press Release No. 030 of 11 May 2004, and in the 2004-2005 Budget (Budget Paper No. 2).

Grapevines

4.6 Under the current provisions, the decline in value of a grapevine for an income year can be deducted provided the relevant conditions in subsection 40-525(3) are satisfied. A grapevine starts to decline in value in the income year in which it is first used in a primary production business for the purpose of producing assessable income. Grapevines are written off over a period of four years at a rate of 25% per annum.

Horticultural plants

4.7 A taxpayer can deduct the decline in value of a horticultural plant if the conditions in subsection 40-525(2) are satisfied. The plant starts to decline in value in the income year in which its first commercial season starts.

4.8 The write-off rate depends on the effective life of the horticultural plant. For example, where the effective life of the plant is 13 years, the write-off rate is 13%.

Deletion of existing provisions

4.9 Schedule 3 deletes all references to 'grapevines' as a separate category of depreciable asset, with effect from 1 October 2004. Grapevines which were established prior to 1 October 2004 will continue to be deductible under the old rules subject to meeting all of the requirements under those rules before 1 October 2004.

4.10 Most of the items simply repeal redundant provisions or references to grapevines. In some cases, it has been more efficient to replace an old provision with a new provision to facilitate the omission of references to grapevines. Items 3, 18, 19 and 22 are significant examples.

Application of horticultural plant provisions to grapevines

4.11 Following the deletions, grapevines will be treated as horticultural plants for the purposes of Subdivision 40-F as they fall within the definition of 'horticultural plant' in subsection 40-520(2).

4.12 Accordingly, new grapevine plantings will be subject to the normal rules applying to horticultural plants. As envisaged in section 40-545, taxpayers will either calculate their own estimate of the effective life of their grapevines or rely on the Commissioner's 'safe harbour' determination of effective life.

Obtaining tax information after acquiring a grapevine

4.13 The deduction for a grapevine which started to decline in value before 1 October 2004 can still transfer from one taxpayer to another following the amendments. The mechanism to obtain information will continue to operate to enable this to occur.

4.14 Where a taxpayer acquires a grapevine from another entity, and the other entity used the (repealed) grapevine provisions to deduct the decline in value of the grapevine, the subsequent owner will, subject to satisfying the relevant conditions, be entitled to the remaining write-off. The subsequent owner will be able to calculate the decline in value under the former provisions using details obtained from the previous owner under section 40-575.

Application and transitional provisions

4.15 The amendments to the ITAA 1997 do not apply to a grapevine:

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for which an entity has satisfied a condition in subsection 40-525(3) of the ITAA 1997 (as in force immediately before the commencement of the repeal) before 1 October 2004;

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that the entity first used in a primary production business for the purpose of producing assessable income before 1 October 2004; and

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for which the entity has deducted or can deduct an amount worked out under section 40-550 of the Act.

[Schedule 3, item 25]

Consequential amendments

4.16 References to grapevines in other parts of the ITAA 1997 have been deleted as they have been made redundant by the changes to Subdivision 40-F. [Schedule 3, items 1 and 2]