Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)
Chapter 6 - Establishment costs of horticultural plants
6.1 The proposed amendments contained in Part 1 of Schedule 4 of the Bill will introduce new Division 10F into the Income Tax Assessment Act 1936 (the Act) to allow capital expenditure incurred in establishing horticultural plants to be written off where the plants are used in a business of horticulture. [Item 1]
6.2 The purpose of these amendments is to give horticultural plantations and perennial crops comparable tax treatment to other industries. Business is able to depreciate the capital cost of the plant and equipment with which it produces, or is ready to produce, its assessable income. Similarly, the original capital cost of buildings and structural improvements is written off over time, once they begin to be used to produce income.
6.3 Accordingly, this Bill inserts new Division 10F into the Act to allow for the write-off of the original capital expenditure incurred in establishing horticultural plants used in a business of primary production. The write-off begins when the plants begin to produce assessable income. The period over which the cost is written off is based on the effective life of the plants, and gives the same rate of deduction as prime cost (or 'straight line') depreciation on plant and equipment.
6.4 The amendments will apply to expenditure incurred after 9 May 1995 on establishing horticultural plants.
6.5 The Act contains a number of measures under which otherwise non-deductible capital costs may be written off, such as the depreciation of plant and articles and the capital allowance for income-producing buildings and structural improvements.
6.6 Generally, there is no write-off available for the capital cost of establishing or acquiring live plants which crop more than once in the plant's life. However, the cost of planting annual crops, such as wheat and barley, is deductible at the time the expenditure is incurred, because their production cycle is annual and the expenditure on grain for planting is considered recurrent.
6.7 In its report on Horticulture (released in May 1993), the Industry Commission concluded that the taxation treatment of horticultural plantations is anomalous and discriminates against investment in perennial crops relative to other industries. The Horticultural Task Force was established to review the Industry Commission's recommendations; the Task Force recommended the taxation treatment of horticultural plantations should be reviewed in the light of the concessional treatment afforded to grape vines. On 28 November 1994, the Government announced that it would provide a taxation write-off for new expenditure incurred in establishing horticultural plantations.
6.8 Item 1 will introduce new Division 10F into the Act. These amendments will provide for a write-off of the original establishment costs of horticultural plants which are used in a business of horticulture in Australia. The proposed write-off allows the taxpayer to commence writing off the expenditure once the plants are used, or are held ready to use, to produce assessable income in a business of horticulture.
6.9 The deduction goes to the taxpayer who owns and uses the plants, or holds them ready for use, to produce assessable income in a business of horticulture from time to time.
6.10 A lessee or licensee of land who carries on a business of horticulture will be taken to own plants in the land and so will get the deduction in preference to the lessor or licensor.
6.11 The period over which the establishment expenditure of horticultural plants is written off is based on their effective lives, and is accelerated in exactly the same way as the rates of prime-cost (straight line) depreciation of plant and equipment for tax purposes.
6.12 The new Division contains a simplified outline and index [new Subdivision A, new section 124ZZE] . The simplified outline provides a summary of the provisions and framework to assist the reader in understanding them. The index helps the reader to locate relevant provisions.
6.13 The simplified outline sets out the major criteria which must be satisfied for eligibility for the write off.
6.14 The expenditure for which deductions may be given must be capital in nature and incurred in establishing a horticultural plant. The expenditure should be incurred on or after 10 May 1995 and should not be otherwise deductible.
6.15 The taxpayer must own the plant, which must be used for the purpose of producing assessable income from a business of horticulture. The taxpayer can get the deduction whoever incurred the relevant expenditure.
6.16 Where the effective life of a plant is less than 3 years, the first taxpayer to use the plant for the purpose of producing assessable income in a business of horticulture can then write-off the establishment expenditure in full.
6.17 Where the effective life of the plant is 3 years or more, the taxpayer can write-off the establishment expenditure on a prime cost basis during the maximum write-off period for the plant. The write-off period and the rate of write-off are the same as for prime cost depreciation of plant and equipment with the same effective life.
6.18 If a plant with an effective life of 3 years or more is destroyed before the end of its maximum write-off period, there is a special deduction for the balance of the establishment expenditure after allowing for the part of the maximum write-off period already gone. There is no deduction for recouped establishment expenditure.
6.19 The Index of the Division enables the reader to locate the provisions which are of immediate relevance and alerts the reader to any other provisions which may also be of use. [New section 124ZZE]
6.20 Primary production is defined for taxation purposes as being any of several distinct kinds of production. Each of those kinds of production is distinct from the others.
6.21 Horticulture is defined in subsection 6(1) of the Act in terms which show that it includes both the cultivation and the propagation of plants, of fungi, and of their seeds, bulbs, spores or the like. Horticulture is apt to include cultivation for such produce as fruits, flowers, foliage or fruiting bodies. It is apt to include propagation, producing like growing plants and fungi or their seeds, bulbs, or spores. However, it is commonly distinguished from operations such as grain growing involving the cropping of annual plants.
6.22 Horticulture does not encompass forestry operations as defined in subsection 6(1) which, broadly, includes the planting and tending of trees in a forest or a plantation where the trees are intended for felling, as well as the felling of trees and their transport by the feller to the place where they will be first milled.
6.23 The definition of horticulture encompasses an activity which can precede the planting of trees or plant. It includes the propagation or cultivation of plants and their products such as fruit, flowers and vegetables. Where trees are not planted for felling, then the activity for which they are planted will fall within the definition of horticulture; for example, planting and tending of tea-trees for the production of oil. The definition of horticulture is sufficiently wide to cover the growing of plants etc in pots or by hydroponic means and will allow other means of growing plants to come within the definition when those means are developed.
6.24 Horticulture also includes the growing of fungi such as truffles and mushrooms. The growing of these falls within this legislation.
6.25 The term 'horticulture' as used in this Division has the meaning prescribed in subsection 6(1) of the Act.
6.26 The term 'plant' is specifically defined in this Division to mean 'any live member of the plant kingdom, and includes fungi'. [New subsection 124ZZR]
6.27 The provisions apply to each horticultural plant. Such a plant includes any plant, fungus, seed, bulb, spore or the like capable of use in horticulture.
6.28 In practice, horticultural plants are rarely established individually, and their establishment expenditure is likely to be aggregated too. The provisions can accommodate this readily, as plants established together will generally begin to be used for the purpose of producing assessable income (or be held for that use) together.
6.29 The provisions provide simple legislation for the case where, say, an orchard or plantation is later divided between different horticultural businesses. Because the provisions apply plant by plant, deductions follow the divisions accordingly. This is no more complicated for horticulturists than the much more complex legislative option of defining the deduction in terms of plantations, orchards or the like and seeking to provide complex rules governing their division.
6.30 A taxpayer who owns horticultural plants is eligible for a deduction for the capital expenditure in establishing those plants provided the taxpayer uses them for the purpose of producing assessable income while carrying on a business of horticulture. [New section 124ZZF]
6.31 However, the expenditure must not already be deductible under other provisions of the ACT and must be incurred after 9 May 1995. [New paragraph 124ZZJ(1)(b) and subsection 124ZZJ(3)]
6.32 To own horticultural plants, the taxpayer may be the owner of the land on which the plants are established, the lessee of that land (under a Crown lease as defined in section 54AA of the ACT or otherwise) or a licensee in relation to the land. A lease can include a sublease. [New section 124ZZQ]
6.33 Where the taxpayer who originally established the plants no longer carries on (or never carried on) the business of horticulture using the plants, and another taxpayer has succeeded the original taxpayer in using the plants in carrying on their own business of horticulture then the second taxpayer can claim the deduction provided all the eligibility criteria are met.
6.34 If a landowner leases land on which the lessee establishes horticultural plants which are fixtures in the land and which the lessee uses for producing assessable income in a business of horticulture and the lease comes to an end, any further deductions will be available only to the next taxpayer to use the plants for the producing assessable income in a business of horticulture. That could be the landowner.
6.35 If the landowner grants another lease over the land to another tenant who then uses the plants for producing assessable income from a business of horticulture then that tenant may claim any outstanding amounts of the write-off expenditure provided all the eligibility criteria are met.
6.36 At any one time only one taxpayer may claim the write-off amount. The taxpayer who can claim this amount must be the owner or deemed owner of the plant. A lessee or licensee will be deemed to be the only owner of the plant if the plant is a fixture on the land, the lease or licence enables the lessee or licensee to carry on a business of horticulture on the land, and there is no holder of an inferior lease or licence in the land whose lease or licence enables them to carry on a business of horticulture on the land. In effect, the only owner of a plant that is a fixture on land is the holder of the most inferior interest in the relation to the land that entitles its holder to carry on a business of horticulture.
6.37 Establishment expenditure in respect of a horticultural plant is capital expenditure incurred by a person after 9 May 1995 on the establishment of horticultural plants for use in a business of primary production.
6.38 There is no definition of what constitutes the cost of establishing a horticultural plantation, however, costs of establishing horticultural plants may include the following:
- the cost of acquiring the plants or the seeds;
- the cost of planting the plants or seeds;
- any costs incurred preparing to plant. These do not include the initial clearing of the land, but may in some cases include part of the costs of ploughing, contouring, top dressing, fertilising, stone removal, top soil enhancement, and so on that is attributable to the establishment of the plant;
- the costs of pots and potting mixtures (for potted plants);
- the costs incurred in grafting trees;
- the costs of replacing existing plants and trees, because of loss of fair economic return or because of declining popularity of a particular existing variety.
6.39 Establishment expenditure is limited to capital expenditure, because it is capital expenditure that needs to be written off by analogy with the cost of plant and equipment or the original cost of building work or structural improvements. Revenue expenditure will be dealt with like other revenue expenditure, and will be a matter for the taxpayer who incurs it. So taxpayers for whom expenses that might otherwise be establishment expenditure are matters of revenue must look to the revenue deductibility of these expenses.
6.40 Some costs of replacing plants in an existing plantation, because of disease or damage, are likely to be revenue expenditure. Similarly, a nursery may incur revenue expenditure in planting seeds in beds or punnets to produce stock for sale.
6.41 Establishment expenditure expressly excludes expenditure incurred on draining swamp or low-lying land or the clearing of land. This resolves any possible doubt that such expenditures might be taken to be attributable to the later establishing of horticultural plants on the land [new subsection 124ZZJ(2)] . Establishment expenditure incurred on establishing horticultural plants does not include expenditure on other plants. However, where plants are used for associated purposes, such as demonstration purposes or for companion planting, in a business of horticulture, then expenditure incurred in establishing those plants will fall within the operation of this Division. Plants used for the purpose of producing assessable income in a business of horticulture may be accepted as horticulture plants in other own right, rather than as establishment expenditure on other plants.
6.42 The establishment expenditure provisions are to be treated as provisions of last resort. If expenditure is allowable either totally or partially as a deduction under another provision of the ACT not within this Division, then that provision will operate before the provisions of this Division and so will exclude the expenditure to that extent from establishment expenditure deductible under this Division. [New subsection 124ZZJ(3)]
6.43 Where depreciation is allowable as a deduction in relation to expenditure, it cannot be included as part of the establishment expenditure of a plant [new subsection 124ZZJ(4)] . Also, if expenditure is for buildings or structural improvements (and is qualifying expenditure under Division 10D), then that expenditure is also excluded from establishment expenditure. This resolves any possible doubt that such expenditures, including the costs of constructing greenhouses, dams or retaining structures, might be taken to be attributable to the later establishing of horticultural plants [new subsection 124ZZJ(5)] .
6.44 Where the taxpayer replaces a diseased or dead plant with a new one, then the expenditure incurred in establishing the plant will be immediately deductible under section 51(1) and so will not be part of establishment expenditure.
6.45 Establishment expenditure begins to be written off once the plants begin to be used, or held ready for use, to produce assessable income in a business of horticulture.
6.46 If for any reason, plants are never used or held ready for use, their establishment expenditure will not begin to be written off. This does not mean that dead plants represent dead deductions. Take the case where many seedlings are planted, so that there will be survivors to cull to form a productive orchard. The establishment expenditure of the plants in the orchard includes the costs of all the original seedlings.
6.47 As a general rule, plants may be said to be so used or held ready for use from the beginning of what is expected to be their first commercial season or period.
6.48 This is comparable to the treatment of plant and equipment, for which depreciation begins with first use or installation ready for use and holding in reserve. Some horticultural plants may take time, perhaps several growing seasons, to be ready for use in a business of horticulture. Similarly, some plant and equipment takes time, perhaps several years, before it is ready for use (after a period of manufacture and installation, say). Other horticultural plants, like plant and equipment, may be more quickly ready for use. [New paragraphs 124ZZF(c) and 124ZZG(c)]
6.49 The Commissioner may issue a Taxation Ruling setting out 'safe harbour' effective life rates for a variety of horticultural plants; if the original taxpayer elects to adopt this rate, that election is irrevocable. The beginning of the effective life of the plant will be measured from the time that it became capable of being used in a business of horticulture for the purpose of producing assessable income. The original taxpayer is the one who owns the plant at that time. [New subsection 124ZZK(2)]
6.50 Such an election is irrevocable. This ensures that complex provisions adjusting the maximum write-off period and related calculations are not needed where different effective life estimates are made by horticulturists using the same plants. Instead, other provisions ensure that a purchaser is entitled to know the expenditure and basis to the deduction of a purchaser. [New subsection 124ZZK(4)]
6.51 Where the original taxpayer does not elect to adopt the effective life period specified by the Commissioner, the effective life of a plant will be measured by its capacity to produce assessable income whilst being used in a business of horticulture as from the time it was first capable of that use. This measure of effective life is an objective one, and takes account of all relevant commercial and other circumstances. It measures the period for which it is reasonable to expect that the plant could be used. The measure of effective life will take account of commerciality and practicality, not just of some theroretical botanical possibility. [New subsection 124ZZK(3)]
6.52 Where the Commissioner has made a determination on the effective life of horticultural plants, the Commissioner must make this determination in writing and it must be available to the public. If the determination is to be revoked or varied, the revocation or variation must also be made in writing. [New section 124ZZL]
6.53 Where a determination has been made by the Commissioner, that determination may be made conditionally or unconditionally. Where the Commissioner does specify conditions, plants may have more than one effective life prescribed depending on the different conditions that apply when the plant first becomes capable of horticultural use. [New subsections 124ZZL(2) and (3)]
6.54 In practice, the Commissioner is likely to make such "safe harbour' determinations in consultation with the members of the horticultural industry concerned or their representatives. Because the Commissioner may well set 'safe harbour' rates based on the shortest likely effective lives in the range of possible effective lives for a particular kind of horticultural plant, taxpayers may seek retrospective application. A determination on the period of effective life may be made retrospectively when the determination works to the advantage of taxpayers. [New subsection 124ZZL(5)]
6.55 Where a plant has an effective life of less than 3 years, the taxpayer who owns the plant when it is first used or held ready for use for the purpose of producing assessable income from a business of horticulture will have an amount that can be written off immediately. This may be later than the first time the plant was capable of being used for such a purpose. [New section 124ZZF]
6.56 Where someone has incurred establishment expenditure on a horticultural plant and the effective life of the plant is 3 years or more, there may be an annual amount to be written off in each year that includes part of the maximum write-off period for the plant.
6.57 The amount that can be written off is calculated by using the effective life and multiplying that by the proportion of a particular year that was eligible for deductions. The available deduction will be that percentage of the establishment expenditure.
6.58 A taxpayer determines the number of days for which establishment expenditure of a plant can be written off - the write-off days in the year - by determining how many days in a year of income the taxpayer used the plant or held it in readiness for use for the purpose of producing assessable income in a business of horticulture, owned the plant (or is deemed to have owned it), and was within the maximum write-off period. [New section 124ZZH]
6.59 The effect of this provision is that establishment expenditure is written-off only once, over the maximum write-off period of the relevant plant. Deductions lost during that period, say to a taxpayer who does not use the plants in a business of horticulture, are not carried forward for later taxpayers to claim. A taxpayer who buys plants and uses them in a business of horticulture during the maximum write-off period is entitled to the same deductions, whatever use the vendor or some predecessor made of the plants. This is similar to the effect of Divisions 10C and 10D.
6.60 New section 124ZZI sets out the appropriate prime cost rate for the different lengths of effective lives.
|Years of effective life||Prime cost rate||Maximum write-off period|
|3 to fewer than 5||0.40||2 years and 183 days|
|5 to fewer than 6 2/3||0.27||3 years and 257 days|
|6 2/3 to fewer than 10||0.20||5 years|
|10 to fewer than 13||0.17||5 years and 323 days|
|13 to fewer than 30||0.13||7 years and 253 days|
|30 or more||0.07||14 years and 105 days|
6.61 Because accelerated depreciation rates are being used, the period of time over which a taxpayer can write off the establishment expenditure is shorter than the effective life of the plant. See column 3 in the above table.
6.62 If a horticultural plantation is sold part way through a year of income before the end of its maximum write-off period, each taxpayer will be able to qualify for deductions based on their write-off days in the year.
6.63 Where an eligible taxpayer's horticultural plants are destroyed and there is some part of the maximum write-off period remaining, the taxpayer can claim an outstanding amount as a deduction. The amount of the deduction is determined by deducting, from the establishment expenditure, a proportion based on the proportion of the maximum write-off period expiring before the destruction, and then deducting from the balance any amount recovered or recoverable in respect of the destruction. If there is any excess of establishment expenditure, this amount is deductible. These provisions will apply whether the destruction is either voluntary or involuntary. [New section 124ZZM]
6.64 Amounts recovered or recoverable in respect of the destruction include insurance payments, but are not limited to them. If these amounts exceed the remaining establishment expenditure, there is no additional deductions, but these provisions do not make the excess taxable. [New subsection 124ZZM(2)]
6.65 Where a taxpayer receives or is entitled to receive reimbursement for any establishment expenditure a deduction will not be allowable for so much of the expenditure that is reimbursed as is not assessable income in the hands of the taxpayer. [New subsection 124ZZN(1)]
6.66 Taxpayers can opportion a reasonable amount out from the reimbursed sum where only part of the reimbursed sum relates to the establishment expenditure, but the extent to which it does so is unspecified. [New subsection 124ZZN(2)]
6.67 Where a taxpayer transfers ownership in horticultural plants to another entity and there is some part of the maximum write-off period remaining, then the transferee can write off part of the establishment expenditure too provided the eligibility criteria are met. When a transfer occurs, if the transferee does not get the information from the transferor to know what deduction to claim for the establishment expenditure the transferee may give the transferor a written request for that information. [New subsection 124ZZO(1)]
6.68 The written notice may seek information on:
- the amount of establishment expenditure;
- the effective life;
- whether the transferor made an election to use the Commissioner's safe harbour rate of write-off; and
- when the maximum write-off period began. [New subsection 124ZZO(2)]
6.69 Where a request for information is made, it must be given within 60 days of the transfer, or within 60 days after the commencement of the section, which ever comes last. The transferee must give not less than 60 days for reply. [New subsection 124ZZO(2)]
6.70 If a transferor will not give the information sought, this is an offence with a penalty of 10 penalty units under the penalty unit system, in relation to a natural person. [New section 124ZZO(4)]
6.71 The transferee may only give one notice per transfer. [New subsection 124ZZO(3)]
6.72 This section applies to transfers that occur on or after 10 May 1995. [New subsection 124ZZO(6)]
6.73 Since early 1993 Commonwealth legislation has adopted the term penalty unit when imposing pecuniary penalties or fines. A penalty unit is currently worth $100. The transferee's notice must warn the transferor of this possible offence. A body corporate may have up to 5 times the penalty imposed on it as a natural person. [Crimes Act 1914, sections 4AA and 4B]
6.74 For the purposes of supplying establishment expenditure information to a transferee, where the transferor is a partnership the obligations imposed on it by proposed section 124ZZO can be discharged by any of the partners even though the obligations are imposed on all partners. [New subsection 124ZZP(1)]
6.75 Where a notice is given to a partner of a partnership, then the document is taken to be given to the partnership. [New subsection 124ZZP(2)]
6.76 New section 124ZZR contains a number of definitions of words and terms used in the new Division 10F. Several definitions provide cross references to other sections. More substantial definitions are given for 'entity', 'plant', and 'producing assessable income'.