Explanatory Memorandum
(Circulated by authority of the Treasurer,the Hon. Peter Costello, MP)Chapter 8 - Mining and quarrying
This chapter summarises the rewritten rules allowing special deductions for general mining, petroleum mining and quarrying and explains the changes that the Income Tax Assessment Bill 1996 will make to those rules.
Overview of this chapter
This chapter deals with deductions for capital expenditure on mining and quarrying operations.
The first part of the chapter summarises the law as it is proposed to be rewritten by the Division 330 of the Income Tax Assessment Bill 1996.
The second part explains the changes that the Bill proposes to the content of these provisions.
The existing law on mining and quarrying is contained in:
- •
- Division 10 (Mining and Quarrying);
- •
- Division 10AAA (Transport of Minerals and Quarry Materials);
- •
- Division 10AA (Prospecting and Mining for Petroleum);
- •
- Division 10AB (Rehabilitation and Restoration of Mining, Quarrying and Petroleum Sites);
of Part III of the Income Tax Assessment Act 1936.
This summary is to orient readers to how the new law is structured and expressed. As these provisions have been in the law for some time, there is no need for a detailed exposition. An explanation is given of changes proposed to the mining and quarrying provisions.
A. Summary of the new law
Deductions are allowed for expenditure, in general mining, petroleum mining and quarrying, on:
- •
- exploration and prospecting;
- •
- mining and quarrying operations;
- •
- transporting the product of those operations;
- •
- rehabilitating the mine or quarry site.
Exploration and Prospecting [Subdivision 330-A]
You can deduct expenditure on exploration or prospecting for minerals, or quarry materials, obtainable by eligible mining or quarrying operations.
You deduct the expenditure in the year you incur it.
- •
- carry on eligible mining or quarrying operations; or
- •
- propose to carry on such operations; or
- •
- carry on a business that includes exploration or prospecting for minerals or quarry materials.
Limitations on how much you can deduct
You cannot deduct, in a year:
- •
- more than the amount of assessable income left after all other deductions (unless you elect for the limit not to apply);
- •
- deductions you have transferred to the buyer of a mining right or information; or
- •
- expenditure in producing exempt income.
Exempt Income [ Subdivision 330-B]
Genuine prospectors are exempt from tax on income from the sale of rights to mine a particular area in Australia for gold and certain metals and minerals.
- •
- An individual who personally, or a company that itself' carries out most of the field work; or
- •
- An individual who contributes to a major part of the field work.
So much of that income, for a particular area, remaining after exploration or prospecting deductions.
Operation of the mine or quarry [Subdivision 330-C]
You can write-off allowable capital expenditure.
Your deduction for a year is worked out by dividing your undeducted expenditure, called unrecouped expenditure , by the years remaining for deduction.
You cannot deduct, in a year, more than the amount of assessable income left after all other deductions (except exploration deductions).
Allowable capital expenditure is expenditure incurred on
- (a)
- carrying out eligible mining or quarrying operations;
- (b)
- site preparation;
- (c)
- necessary buildings and improvements;
- (d)
- provision of water, light or power to the site of those operations;
- (e)
- buildings directly used to operate or maintain treatment plant;
- (f)
- buildings and improvements for storing minerals or quarry materials for treatment;
- (g)
- cash bidding payments for an authority to explore, prospect or mine;
- (h)
- acquiring mining, quarrying or prospecting rights or information to the extent specified in an agreement; or
- (i)
- housing and welfare.
Allowable capital expenditure does not cover
- •
- plant or articles;
- •
- facilities to transport minerals or quarry materials from the operations site;
- •
- ship facilities;
- •
- an office building not at or adjacent to the site.
The balance of your allowable capital expenditure, after allowing for:
- •
- deductions claimed in earlier years;
- •
- deductions transferred by an agreement for the sale of information or rights; or
- •
- property that has ceased to be used for mining etc.
The lesser of:
- •
- 10 years (for mining) or 20 years (for quarrying), reduced by the number of earlier years in which expenditure was deductible; and
- •
- the number of years in the estimated life of your petroleum field or of your longest mine, quarry or petroleum field (or proposed mine, quarry or petroleum field).
One where work preparatory to the extractive operations has started but not actual extractive operations.
Cash bidding [Subdivision 330-D]
Your allowable capital expenditure includes cash bidding payments for the grant of a mining authority or for the grant of an exploration or prospecting authority for a particular area.
You can transfer your deduction for an exploration or prospecting cash bidding payment if you sell an interest in the exploration or prospecting authority.
Limit on how much you can transfer
You cannot transfer more than the amount you specify in the agreement, which must be reduced by any amount you have already transferred.
Selling a right or agreement [Subdivision 330-E]
If you sell a mining, quarrying or prospecting right (or information), you can agree to transfer to the buyer's allowable capital expenditure an amount specified in the sale agreement.
You give up your own entitlement to deduct that amount.
Limits on amount transferred by agreement
The amount transferred cannot exceed the lesser of:
- •
- the amount paid by the buyer; and
- •
- the sum of:
- (a)
- the balance of allowable capital expenditure relating to the right or information, and exploration expenditure, that the seller has left to deduct; and
- (b)
- any assessable balancing adjustment from the sale.
Excess deductions [Subdivision 330-F]
You can only deduct, in a year, an amount for:
- •
- exploration or prospecting expenditure; and
- •
- allowable capital expenditure
up to your available assessable income .
Any excess can be deducted in a subsequent year up to the limit of available assessable income. Conditions met when exploration or prospecting expenditure was incurred must also be met when an excess amount is being claimed.
Available assessable income is
Your total assessable income less all your other kinds of deductions.
Electing that the limit not apply
You can choose not to have your deductions limited in this way. This means that the deductions can form part of a loss.
A formula reduces the amount of excess deductions carried forward from earlier years that can be deducted if the election is made.
Loss of right to deduct excess amounts
You lose any continuing entitlement to deductions for excess amounts attributable to property that you stop using for exploration or mining purposes.
Petroleum resource rent tax [Subdivision 330-G]
Payments of this tax are deductible whether you are liable to make them personally or liable to make them as agent or trustee.
Certain receipts included as assessable income
Refunds and amounts credited, paid or applied under the Petroleum Resource Rent Tax Assessment Act 1987 are included in your assessable income.
Transporting the product [Subdivision 330-H]
You can deduct capital expenditure on a facility you use principally for mining or quarrying transport .
The expenditure is deducted in equal instalments over 10 years (for mining transport) and 20 years (for quarrying).
Transport capital expenditure is
Capital expenditure on:
- •
- a railway, road, pipeline, port or other facility used principally for mining or quarrying transport;
- •
- obtaining a right to construct or install such a facility;
- •
- compensation for damage from constructing or installing such a facility;
- •
- earthworks, bridges, tunnels or cuttings.
The expenditure must be incurred in carrying on a business to produce assessable income.
Transport capital expenditure does not cover
Expenditure on:
- •
- road vehicles, ships, railway rolling stock;
- •
- providing housing and welfare, or water, light or power in connection with a facility for ships.
Mining or quarrying transport is
Transport, from the site of general mining, petroleum mining or quarrying operations, of:
- •
- minerals (including oil or gas) or quarry materials; or
- •
- materials processed from such minerals or quarry materials.
It does not include transport of refined petroleum, or a system of reticulation to consumers.
Rehabilitating the site [Subdivision 330-I]
You can deduct expenditure on rehabilitating a mining or quarrying operations site or a prospecting or exploration site.
Restoring, rehabilitating (or partly rehabilitating ) a site to a reasonable approximation of its condition before the mining or quarrying operations or prospecting or exploration.
Rehabilitation expenditure does not cover
- •
- acquiring an interest in land;
- •
- constructing buildings or other structures (except dams and levees essential for rehabilitation);
- •
- a bond or security for performing rehabilitation;
- •
- housing and welfare; or
- •
- depreciable items.
Balancing adjustments [Subdivision 330-J]
A balancing adjustment is needed if:
- •
- you have either deducted expenditure on property under the mining and quarrying provisions or were prevented from doing so because of the limitation rules; and
- •
- the property is disposed of, lost or destroyed, or you stop using the property for a purpose that qualifies for a deduction; and
- •
- roll-over relief is unavailable.
What is a balancing adjustment?
It is a final accounting worked out by comparing the property's termination and written down values:
- •
- if the termination value exceeds the written down value, you include the excess, up to the amount of deductions claimed, in your assessable income;
alternatively,
- •
- if the written down value exceeds the termination value, the excess is a deduction.
The termination value of property is
- •
- if the property is sold - the sale price (less expenses of sale);
- •
- if you owned it and disposed of it or no longer use it for a qualifying purpose - its market value;
- •
- if you did not own it and no longer use it for a qualifying purpose - a reasonable amount;
- •
- if it is lost or destroyed - the amount receivable as insurance.
The written down value of property is
The balance of your total deductible capital expenditure after allowing for previous or current deductions.
Partial change in ownership [Subdivision 330-K]
When a partnership interest in property changes, the change is treated as a disposal of the whole property by the partnership. This requires the partnership to make a balancing adjustment.
Is a balancing adjustment always required?
Not if all the parties to the disposal make a joint election for roll-over relief. The balancing charge is then deferred.
Common Rules [Subdivision 330-L]
The common rules contained in Division 41 are modified by this Subdivision.
This rule concerns roll-over relief (ie. when a balancing adjustment is deferred).
Presumed sale of a mining or prospecting right or information
Where property disposed of is a mining quarrying or prospecting right or information it is treated as though an agreement had been made for the sale of the right or information between a transferor and transferee.
The amount presumed transferred
The amount presumed transferred is the transferor's unrecouped expenditure in respect of the property.
The usual maximum limit on expenditure that can be transferred as part of an agreement does not apply.
Where property disposed of is a qualifying interest in relation to a cash bidding exploration permit the transfer is treated as though it were an agreement made for the sale of such an interest by the transferor and the transferee.
The amount taken as transferred is the whole of the transferor's entitlement to the eligible cash bidding amount.
This rule is about non-arm's length transactions.
What transactions does it apply to?
- •
- the purchase of property that is not a mining, quarrying or prospecting right;
- •
- transactions about expenditure on rehabilitation.
What adjustments are required?
Both parties to these transactions are required to adjust the price to reflect market value.
Special situations [Subdivision 330-M]
What this Subdivision is about
This Subdivision contains some miscellaneous rules.
Division 330 does not apply to expenditure for which you are entitled to be recouped, if the recoupment is not included in your assessable income.
2. Expenditure must be deducted under this Division
Capital expenditure deductible under Division 330 can only be deducted under that Division.
However, if plant is no longer used for qualifying purposes under Division 330, it may qualify for depreciation on the basis of another use.
3. Petroleum mining or prospecting - getting someone else to do the work
Holders of a prospecting or mining right who get someone else to carry out eligible mining operations or exploration or prospecting for petroleum, are taken to be doing the work themselves.
4. No deduction for petroleum income sharing
The rule applies if you derive income from selling petroleum obtained from eligible mining operations in an area, and:
- •
- you pay someone else a share of that income;
- •
- that person has mined, explored, or has a mining information or a prospecting right for, that area.
The rule is:
- •
- the share payment is treated as assessable income of the payee from selling petroleum; and
- •
- you cannot deduct your payment.
5. No deduction for paying transferees or sub-lessees of petroleum rights
This rule applies if:
- •
- an original licensee transfers or sub-lets, a petroleum right for an area to a contractor; and
- •
- the contractor mines or explores in that area or another area where the licensee has a mining right.
The rule is the licensee is taken not to have incurred deductible expenditure under Division 330.
B. Discussion of changes
Division 330 Mining and Quarrying
This Division will contain the rules specifying what deductions are available to the mining and quarrying industries.
The Division will bring together, in one place, the provisions dealing with general mining, petroleum mining and quarrying, mineral transport and site rehabilitation.
The existing law deals separately with these subjects, leading to unnecessary duplication.
Existing differences in the treatment of general and petroleum mining will be preserved (unless otherwise stated).
Replace a number of discretions given to the Commissioner under the existing law with an objective test, generally based on reasonableness.
One of the secondary aims of the rewrite of the law is to replace, where possible, discretions that the Commissioner has under the existing law which can affect tax liability. Such discretions do not fit well with the modern self-assessment system.
Where a discretion is being replaced with detailed criteria, the change will be explained in the notes on the particular clause. In many cases, however, the changes merely replace the test of what the Commissioner considers to be reasonable with an objective test of reasonableness. In these cases, the explanatory material simply identifies the clauses where such a change has occurred. In this Division, those are clauses 330-15, 330-100, 330-115, 330-120, 330-125, 330-270, 330-275, 330-405, 330-410, and 330-490.
Clause 330-15 What types of expenditure qualify?
This clause will explain:
- •
- what expenditures attract deductions; and
- •
- under what conditions.
It will be made clear that a deduction is allowable under this Division for expenditure on exploration or prospecting, even if the expenditure is in nature revenue expenditure.
The existing law intends to allow a deduction for exploration or prospecting expenditure, whether it is on capital or revenue account. This clause will make that explicit.
Clause 330-20 Meaning of exploration or prospecting
This clause sets out what the term exploration or prospecting means.
Exploration or prospecting will not be defined exhaustively but will have flexibility to take in over time comparable activities that evolve from technological and other changes.
The existing law is inconsistent in its treatment of activities that can be regarded as exploration and prospecting . For general mining and quarrying, the term is tightly confined to certain activities and no others. For petroleum mining, the term specifies the same kinds of activities while leaving it open for new activities to be included. In standardising this term, the more flexible approach is being adopted.
Exploration or prospecting will include feasibility studies into the economic viability of mining.
The Commissioner treats certain feasibility studies as exploration and prospecting . These are studies that evaluate the economic viability of the proposed extractive process or treatment process. Not all feasibility studies can be regarded this way. For example, feasibility studies into:
- •
- infrastructure costs for housing and welfare;
- •
- the provision of water, light or power;
- •
- the viability of facilities to transport minerals
are not treated as 'exploration or prospecting' (expenditure on these activities could qualify for a deduction under another provision ) - [see Subdivisions 330-C and 330-G].
The clause will align the law with the established practice.
Clause 330-35 No deduction for an amount transferred by a seller of a right or information
This clause will preclude sellers of mining, quarrying or prospecting rights or information from deducting exploration or prospecting expenditure that they have 'transferred' to a buyer.
This is a new clause, which will support the effect of the existing law.
When a person sells:
- •
- a mining, quarrying or prospecting right; or
- •
- mining, quarrying or prospecting information,
the seller and the buyer can agree, in effect, to transfer expenditure from the seller to the buyer [clause 330-235] . That expenditure is then deductible to the buyer.
This clause will express the intention that the expenditure does not remain deductible to the seller. That result, so far as exploration expenditure incurred by the seller in the year of transfer is concerned, is not explicit in the existing law, but it is the logical outcome and is administered that way.
Clause 330-60 Exempt income from the sale of rights to mine
This clause specifies the particular metals and minerals that are covered by the exemption.
The particular metals and minerals are being included in the Bill.
Under the existing law the specific metals and minerals are contained in the Income Tax Regulations. However, as the list of metals and minerals has not been added to since 1977 it is being incorporated in the Act.
Clause 330-90 Meaning of housing and welfare
This clause explains the meaning of housing and welfare .
Housing and welfare will be extended to facilities provided for employees of contractors and other parties provided they are engaged in the taxpayer's mining operations.
Under the existing law, housing and welfare only covers facilities for a taxpayer's own employees. The law predates what has now become a significant role of independent contractors, and their employees, in mining operations. Also, many mining operations are conducted by joint ventures where a management company provides the labour force but does not itself hold a proprietary interest in the operation.
Housing and welfare will include general community facilities to which a taxpayer has contributed, even if the facilities are provided by someone else (for example, a local government body.)
In the case of expenditure on residential accommodation it will still be necessary for the taxpayer to provide the accommodation to qualify as housing and welfare expenditure.
The existing law limits a deduction for welfare facilities to those the taxpayer provides. While historically that was industry practice, today these facilities are often provided by government (with industry contributing to their cost).
Housing and welfare will include facilities for meals, even where the facilities are run for profit.
Under the existing law, welfare facilities must be non-profit making. However, industry now often finds it more efficient and cost effective to contract out food services to professional caterers.
Clause 330-95 What expenditure is not allowable capital expenditure?
This clause will set out classes of expenditure that cannot be deducted under this Division.
The Bill will clarify that a deduction is not allowed under the mining provisions for expenditure on plant or articles used in mining operations.
The existing law is unclear about whether a deduction is allowable, under the mining provisions, for expenditure on plant or articles which cannot be deducted under the general depreciation provisions. The Bill makes it clear that expenditure on plant or articles cannot be allowable capital expenditure under the mining provisions.
In contrast, expenditure on something that doesn't qualify as plant or articles (eg. a dry development oil well) is not deductible under the depreciation provisions but could be deductible under the mining provisions as allowable capital expenditure.
The clause will clarify that a deduction is not allowable for expenditure on an office building unless it is at, or adjacent to, a site where the taxpayer carries on mining operations.
Under the existing law, the general mining rules specifically limit the deduction for expenditure on an office building. The building must be on, or adjacent to, one of the taxpayer's mining sites. The petroleum mining provisions in the existing law are silent on this point, but it is generally accepted that the law intends that an office building must be adjacent to the site before expenditure on it qualifies for deduction.
The clause will make clear that a deduction is not allowed for expenditure on housing and welfare facilities provided for persons carrying on quarrying operations.
Under the existing law, there is a specific deduction for expenditure on housing and welfare facilities provided for mining operations. This is because of the often remote locality of mine sites. There is no equivalent deduction for quarrying operations. This section makes clear that an entitlement to such expenditure is not extended by one of the more general expenditure headings in the new combined Mining and Quarrying Division.
Clause 330-110 Expenditure not related to a mining or quarrying property or to a petroleum field
This clause will allow you to deduct expenditure transferred to you under an agreement to purchase a mining right or information even though the right or information does not relate to a mine you own.
The clause clarifies that you can deduct allowable capital expenditure transferred to you as the buyer of a mining or prospecting right or information so long as you carry on extractive operations at some site. It won't be necessary for the acquired expenditure to relate to a mine, quarry or a petroleum field you operate.
The deduction will be allowable over 10 years for mining or petroleum operations and over 20 years for quarrying.
Under the existing law it is arguable that expenditure transferred to the buyer is only deductible if it relates to the buyer's mine, quarry or petroleum field. This would prevent deductions that, for example, were for expenditure on obtaining information that wasn't area specific.
In practice, the Commissioner administers the law to allow deductions for such expenditure transferred to you so long as you carry on mining or quarrying operations somewhere. This clause will align the law with that practice.
Clause 330-310 Excess amount deductible in the next income year
This clause, among other things, will ensure that a deduction is not allowed under this Division for excess amounts of exploration expenditure unless you are engaged in a business of exploration or mining at the time you claim these amounts.
The clause will clarify that excess amounts of exploration deductions can only be claimed by those in the exploration or mining industries.
The explorations provisions have always contained tests to ensure that deductions, regardless of when they are claimed, are restricted to taxpayers in the mining industry. This position was clear prior to 1984. Amendments introduced in that year restated the rule but not as clearly as before. There is some uncertainty about the operation of the law even though the Explanatory Memorandum which dealt with the 1984 amendments made no mention of a change in the operation of the same business test for the regime applying from that time. The rewrite puts the matter beyond doubt.
Clause 330-315 Election not to limit deductible amounts
This clause will allow you to choose not to limit your deductions for exploration or prospecting expenditure, or allowable capital expenditure, to the amount of your available assessable income for the year.
The clause reproduces the effect of the existing law but in a different way.
Under the existing law, you can elect not to be subject to the limit on the amount of your annual deduction for allowable capital expenditure or for expenditure on actual exploration or prospecting.
If you make that election, you can also claim a partial deduction for any amounts of excess allowable capital expenditure or exploration or prospecting expenditure carried forward from previous years when you didn't make such an election.
This clause allows you to make the election for all expenditure (including excess expenditure carried forward from previous years). It contains a formula the effect of which is to allow only a portion of the excess amounts to be converted into a revenue loss that can be carried forward or transferred within a company group.
The formula is a drafting device necessary to amalgamate 6 existing election provisions into one. It puts their operation beyond doubt and achieves the same result as the existing 6 elections. The complexity of the existing expression of the rule in the mining and quarrying provisions had led to some uncertainty about its operation.
Clause 330-320 Excess amount not deductible for certain property
If you don't make the election offered by clause 330-315, your deductions for exploration or prospecting expenditure, or for allowable capital expenditure, in excess of your available assessable income are deductible in the next income year [clause 330-310].
This clause disallows those carry-over deductions if the original expenditure was on property that is destroyed, disposed of, lost, or no longer used for exploration or prospecting or eligible mining or quarrying operations.
Excess deductions will be disallowed in these cases for both exploration or prospecting expenditure and allowable capital expenditure.
The existing law only disallows excess deductions for allowable capital expenditure. This change will simplify the law by aligning the treatment for the two kinds of expenditure. It will also make sure that an excess deduction for exploration or prospecting expenditure cannot be counted twice - once to reduce a balancing adjustment on disposal of the property [see Subdivision 330-J] and again as an excess deduction carried over against future income.
Clause 330-375 The meaning of transport capital expenditure
This section will explain what transport capital expenditure can be deducted under this Division.
The law will make clear that taxpayers can get a deduction for transport capital expenditure, even if they did not themselves supply the transport facility, as long as they are in business for the purpose of producing assessable income.
Transport capital expenditure is capital expenditure on a transport facility or on certain incidental costs of constructing a transport facility.
Under the existing law, it is not absolutely clear whether it is the taxpayer or the supplier of the facility who has to be in business for the purpose of producing assessable income. The law is administered as if it meant the taxpayer, and this clause is consistent with that.
Clause 330-450 No deduction for certain expenditure
This clause sets out classes of expenditure on site rehabilitation that are not deductible under this Division.
The present exclusion from deductibility of expenditure on levees and dams necessary for the rehabilitation of a mine site is being removed. Future expenditure on these kinds of levees and dams will be deductible under this Division.
Under the existing law, expenditure on enhancement or redevelopment of the site is not deductible as rehabilitation expenditure.
However, some dams are necessary for proper rehabilitation (eg. dams to secure a water supply for revegetation). They are an integral part of the rehabilitation process and have little or no residual value to the miner making the expenditure and so should not be treated as an enhancement or redevelopment. This is not true of all dams (eg. expenditure on tailings dams and dams for recreational purposes will not be deductible).
Clause 330-480 When a balancing adjustment is required.
A taxpayer must make a balancing adjustment for property that is disposed of, lost, destroyed or no longer used for qualifying purposes.
The clause will require a balancing adjustment when no amount has been deducted for the property in any year and will help prevent double deductions.
A balancing adjustment is commonly required in cases where deductions have been allowed over time for the cost of income producing property which is disposed of.
Subdivision 330-J makes balancing adjustments to do with deductions for:
- •
- capital expenditure on exploration or prospecting;
- •
- allowable capital expenditure;
- •
- transport capital expenditure.
This clause will require a balancing adjustment when:
- (a)
- property has been disposed of, is lost or destroyed, or ceases to be used for the relevant purposes; and
- (b)
- roll-over relief is not available; and
- (c)
- either:
- •
- the taxpayer has claimed, or is entitled to claim deductions in relation to the property; or
- •
- the taxpayer could not claim deductions because of the limitation rules [see Subdivision 330-F] .
The existing law is unclear as to whether a balancing adjustment is required in circumstances where no deductions have been made. The rewrite makes it clear that a balancing adjustment is required and this in turn helps prevent double deductions.
The change in this clause is part of a wider change, linking clauses 330-320 and 330-495. The effect of this wider change is that, when property is disposed of, lost or destroyed, or ceases to be used for the relevant purposes, the taxpayer will be able to claim an immediate deduction to the extent that the law specifies. It will also ensure that the same amount cannot be claimed as a deduction twice.
The clause will continue to treat a partial change in the ownership of property as a disposal, but only by those whose interests in the property have changed.
Under the existing law, if there is a partial change in the ownership of, or interests in, property:
- •
- that would be taken as a disposal of the property from the old owners to the new; and
- •
- a balancing adjustment would be required.
In the case of joint ventures, it would be unfair to treat a continuing joint venturer, who had not disposed of any interest as having done so. The Commissioner's practice, therefore, has been to apply the partial disposal provisions only to the joint venturer who disposed of an interest. Subclause 330-480(6) will give support to this practice.
Clause 330-490 Meaning of termination value
This clause will explain the meaning of the term termination value , which is one of the components in calculating a balancing charge.
The clause will specify the termination value of property in two circumstances where the existing law is silent. These are:
- •
- a disposal of property otherwise than by sale; and
- •
- property owned but no longer used for qualifying purposes or for transporting the product.
In these cases, the termination value will be the property's market value.
To work out a balancing adjustment, a taxpayer needs to know the value of the property when it is disposed of, lost, destroyed or no longer used for qualifying purposes. This is its termination value .
The existing legislation does not say what the value is if you dispose of property otherwise than by sale (eg. by gift) or if you simply stop using your property for relevant purposes. In these cases, the Commissioner applies market value.
Subclause 330-490(1) will give effect to this practice.
The clause will require a taxpayer that stops using property for a relevant purpose, and does not own the property, to include a reasonable amount as the termination value in working out the balancing adjustment.
A taxpayer can obtain deductions for capital expenditure on property it does not own. An example is a contribution to the capital cost of a transport facility such as a State rail network.
It would be inappropriate in such a case to bring the property's full market value to account for balancing adjustment purposes. Instead, the termination value will be measured as a reasonable amount in the prevailing circumstances.
For example, if a mining company paid $40 million towards a rail line, entitling it to 10 years use but ceased using it after 6 years, a reasonable value might be based on the remaining 40% of the term, ie. $16 million. Other factors may influence the value in that case or other cases.
Clause 330-495 Meaning of written down value
This clause will define written down value , another of the components of a balancing adjustment.
It will be made clear that a taxpayer's total capital expenditure on property, which is one of the components of its written down value, refers only to expenditure deductible under Division 330.
A balancing adjustment compares the termination value of property and the undeducted capital expenditure (called the written down value ) on the property. The written down value is the total capital expenditure on the property that qualifies for a deduction under the relevant Subdivision, reduced by amounts deducted for that expenditure.
It has been contended that the capital expenditure in respect of the property can include amounts that are otherwise not deductible. The rewrite makes the policy intention clear that only amounts that are deductible under the division are to be taken into account when calculating a balancing adjustment.
This clause will also clarify that the written down value is the total capital expenditure on the property if the taxpayer has been unable to claim any deductions because of the limitation rules [see Subdivision 330-F] .
This clause complements the first change discussed in the notes on clause 330-480. Making the written down value the same as total capital expenditure will ensure that the balancing adjustment is calculated correctly:
- •
- if the termination value exceeds the written down value, there will be no adjustment because a deduction has not been claimed;
- •
- if the termination value is less than the written down value, the difference will be deductible.
Clause 330-500 Partial disposals of interests in property
This clause specifies what proportion of your total capital expenditure will be taken into account if you dispose of only part of your property.
This clause is a new provision.
This clause also complements the first change discussed in the notes on clause 330-480. It reduces the written down value a taxpayer uses to calculate a balancing adjustment so as to reflect the proportion of the property being disposed of.
Clause 330-520 Partial change of ownership
This clause will require a balancing adjustment by all members of a partnership when there is a change in the ownership of partnership property, unless roll-over relief is obtained.
The clause will limit the existing law about partial changes of ownership of property to only cover changes to ownership of partnership property.
It is unclear whether the existing law applies to more than just changes in ownership of partnership property. In particular, it is not clear whether it also covers property owned by joint venturers who are not in partnership. The Commissioner's practice is not to apply the law to them.
This clause ensures that the rule only applies to changes in the ownership of partnership property. It further complements the second change discussed in the notes on clause 330-480. Changes in ownership of property owned by joint venturers are dealt with by subclause 330-480(6).
The clause will require a balancing adjustment where no amount has been deducted for the property in any year.
One of the changes brought about by clause 330-480 is the removal of an uncertainty as to whether a balancing adjustment is required when property is disposed of but no amount had been deducted. The Bill clearly requires a balancing adjustment in these circumstances. This clause complements that clarification when there is a partial change in the ownership of partnership property and similar circumstances exist.
Clause 330-547 Roll-over relief
This clause will set out further situations where roll-over relief is available in relation to disposals of property.
The clause will allow roll-over relief where no amount has been deducted for the property in any year.
Changes to clauses 330-480 and 330-520 have required balancing adjustments when property has been disposed of but no amount has been deducted for any year. Where the circumstances are the same but the conditions for roll-over relief are met, this clause will not require a balancing adjustment by a transferor.
C. Transitional arrangements
Pre-19 July 1982 mining capital expenditure [clause 330-1 of the Income Tax (Transitional Provisions) Bill 1996]
Undeducted amounts of pre-July 1982 mining capital expenditure will be treated as if they had been incurred in the 1996-97 income year. This will allow them to be written off under Subdivision 330-C over the lesser of 10 years or the life of the mine or petroleum field.
Post-19 July 1982 mining capital expenditure and post-15 August 1989 quarrying capital expenditure [clauses 330-5 and 330-60 of the Income Tax (Transitional Provisions) Bill 1996]
Any:
- •
- post-19 July 1982 mining capital expenditure;
- •
- post-15 August 1989 quarrying capital expenditure; or
- •
- pre-July 1996 transport capital expenditure;
that has not yet been deducted, will be treated as incurred in the 1996-97 income year. This will allow it to be written off under Subdivisions 330-C or H over 10 years (20 for quarrying). This period is reduced by the number of years over which a taxpayer has already been writing off these amounts.
Undeducted pre 1 July 1975 general mining exploration expenditure [clauses 330-10, 330-15 and 330-20 of the Income Tax (Transitional Provisions) Bill 1996]
Undeducted general mining exploration expenditure incurred before 1 July 1975 will be treated as exploration expenditure incurred in the 1996-97 income year [clause 330-10 of the Income Tax (Transitional Provisions) Bill 1996]
However if:
- •
- a mining right has been sold and some or all of the income from the sale is exempt from tax; and
- •
- there was pre-1 July 1975 exploration expenditure relating to the area subject to the mining right;
the undeducted exploration expenditure will be reduced by the amount of the exempt income [clauses 330-15 and 330-20 of the Income Tax (Transitional Provisions) Bill 1996].
Old mining capital expenditure on plant [clause 330-25 of the Income Tax (Transitional Provisions) Bill 1996]
Pre-July 1996 mining capital expenditure on plant cannot be transferred to a purchaser under an agreement for the sale of a mining or prospecting right or information.
Undeducted old exploration expenditure [clauses 330-30, 330-35 and 330-40 of the Income Tax (Transitional Provisions) Bill 1996]
These amounts of undeducted exploration expenditure incurred in earlier years will be treated as exploration expenditure incurred in the 1996-97 income year:
- •
- petroleum exploration expenditure incurred before the 1996-97 income year;
- •
- general mining exploration expenditure incurred from 1 July 1975 to 21 August 1984;
- •
- general mining exploration expenditure incurred after 21 August 1984; and
- •
- quarrying exploration expenditure incurred after 15 August 1989.
They will be deductible under clause 330-15 of the Income Tax Assessment Bill 1996 in the first income year in which the tests set out in the relevant transitional provision are met.
Undeducted expenditure relating to gold mining incurred from 20 May 1988 to 31 December 1990 will remain deductible for 7 income years from the time the expenditure was outlaid [subclause 330-40(4) of the Income Tax (Transitional Provisions) Bill 1996].
Old undeducted mining and quarrying amounts [clause 330-45 of the Income Tax (Transitional Provisions) Bill 1996]
Pre-July 1996 mining and quarrying amounts that have not been deducted because of the limitation rules will be treated as having been incurred in the 1996-97 income year. This means they will be deductible under Subdivision 330-C.
Preserving old election rules [clause 330-50 of the Income Tax (Transitional Provisions) Bill 1996]
Undeducted mining capital expenditure incurred after 1 July 1985 and before the 1996-97 income year will be treated as mining capital expenditure incurred in the 1996-97 income year [clauses 330-1, 330-5 and 330-45 of the Income Tax (Transitional Provisions) Bill 1996].
This will mean that the election permitted by clause 330-315 is available to the taxpayer for that expenditure. That election changes the rate of deduction that otherwise applies. Clause 330-50 of the Transitional Provisions Bill will ensure that the effect of that election is what it would have been under the existing law.
Elections for pre 1 July 1985 allowable capital expenditure [clause 330-55 of the Income Tax (Transitional Provisions) Bill 1996]
Under the existing law, you can make an election in relation to undeducted general mining capital expenditure incurred before 1 July 1985. That election changes the rate of deduction than would otherwise apply for that expenditure.
Clause 330-55 of the Income Tax (Transitional Provisions) Bill 1996 will enable you to make an election in respect of that expenditure even though clause 330-1 of the Income Tax Assessment Bill 1996 will treat that expenditure as being expenditure incurred in the 1996-97 income year. Because the expenditure cannot be transferred within a company group under the existing law, it will not be transferable under the new law.
Balancing adjustments where old roll-over relief [clause 330-65 of the Income Tax (Transitional Provisions) Bill 1996]
This clause will modify the balancing adjustment under the new law where property is disposed of that was eligible for roll-over relief under the existing law.
The balancing adjustment adjusts the taxable income of taxpayers when property is disposed of, lost, destroyed, or stops being used for qualifying purposes. It is explained in Part A of this chapter, under the heading Balancing adjustments .
If the property was eligible for roll-over relief when the taxpayer acquired the property under the existing law (eg. because the property passed in a marriage settlement), the balancing adjustment may have been postponed.
Consequently, on a subsequent disposal of that property, the balancing adjustment has to take into account the previous owner's capital expenditure and deductions. This clause ensures that the new law does that by treating:
- •
- amounts deductible to the prior owners as deductible to the present owner; and
- •
- capital expenditure of the prior owners as capital expenditure of the present owner.
Corresponding previous law [clause 330-70 of the Income Tax (Transitional Provisions) Bill 1996]
The balancing adjustment provisions and the modifications to the common rules refer to the 'corresponding previous law'. This clause spells out what the corresponding provisions are.
Modifying common rule 1 [clause 330-75 of the Income Tax (Transitional Provisions) Bill 1996]
If a disposal of property takes place in 1996-97 or a later income year, common rule 1 in Division 41 is modified so that it takes into account:
- •
- any rules contained in the existing law;
- •
- any references to recoupment provisions in the existing law; and
- •
- any roll-over relief obtained under the existing law.