Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)PART 1 REBATES (TAX OFFSETS) FOR EXPENDITURES ON LANDCARE AND ON WATER FACILITIES
Division 388 - Landcare and water facility rebate (tax offset)
1.8 Proposed section 388-50 explains the broad taxation effects of the new Subdivision 388-A in relation to the rebate (tax offset) you can claim for expenditure you incur on landcare operations or on facilities to conserve or convey water. You can only choose a rebate in place of a deduction, where you could have claimed deductions under Subdivision 387-A or 387-B of the 1997 Act. The rebate can be claimed in relation to up to $5,000 of your expenditure in a year which could be a tax deduction under either of those subdivisions, provided your taxable income is $20,700 or less.
1.9 If you can claim a deduction under Subdivision 387-A or Subdivision 387-B, proposed section 388-55 enables you to claim a rebate for your capital expenditure of an income year if you wish. The amount of the rebate that you can claim is limited to a maximum of $5,000 of eligible expenditure in that year under each of the two subdivisions (ie. a rebate up to $10,000 of eligible expenditure can be claimed by a taxpayer in a year.). You must incur this expenditure after the start of the 1997-98 income year and before the end of the 2000-01 income year.
1.10 You cannot claim the rebate if your taxable income for the year in which the eligible expenditure is incurred exceeds $20,700, after any deduction that would have been available had you not chosen the rebate.
1.11 If you do choose to take the rebate for your capital expenditure, you are precluded from claiming a deduction for the expenditure to which the rebate relates.
1.12 Under proposed subsection 388-60(1) , the amount of the rebate that you can claim for expenditure incurred under subdivision 387-A is 34% of up to $5,000 of the expenditure that you could have deducted. For expenditure incurred under Subdivision 378-B you can claim 34% of $5,000 of eligible expenditure equally spread over 3 years, beginning with the year of the expenditure. This means you can claim the rebate in the same way, and over the same period, as the deductions available under Subdivisions 387-A and 387-B.
1.13 Under proposed subsection 388-60(2) , any rebate that you have not fully utilised in the year it arises will be subject to the rebate carry forward rules in proposed Division 65 .
Division 65: Rebate (tax offset) carry forward rules
1.14 Proposed Division 65 applies to those rebates (tax offsets) which are not completely absorbed by your tax liability in the year of income for which they arise. The excess is subject to the carry forward rules, and so is carried forward into the taxpayer's next income year. [Proposed section 65-20]
1.15 Proposed section 65-25 sets the tests you must pass before you can carry forward unused portions of your rebate. The amount of rebate that you can carry forward is that amount of your rebate that exceeds the income tax you would have to pay if you had not received the rebate and you did not have any rebates that are of a higher priority than that rebate that is, rebates that are used only after the particular rebate. Proposed subsection 65-25(2) tabulates the order of priority of rebates. Landcare and water facility rebates are used before foreign tax credits, but after all other tax offsets (listed in section 13-1 of the 1997 Act).
1.16 The amount of rebate which you can carry forward is the excess of rebate over your tax liability in the previous income year minus the rebate rate applied to any unused exempt income that you may have derived that year. So the rebate carried forward from a year in which there was net exempt income is only the excess remaining after it is applied against that income. [Proposed section 65-30]
1.17 In a later income year, where you have an amount which you have carried forward, this amount of rebate will decrease the amount of income tax that you would have to pay but for the rebate [proposed subsection 65-35(1)] . If you have more than one type of rebate, you must apply them according to their priority as set out in the table in proposed subsection 65-25(2) , lowest priority first, and within any priority you must first use the rebate to which you first became entitled. [Proposed subsection 65-35(2)].
1.18 Before you can apply the amount of carried forward rebate against your income tax liability of a later year, you must first offset it against any amount of exempt income that you derived in that later income year. Any rebate remaining can then be applied against your tax liability for the year. [Proposed subsection 65-35(3)]
1.19 If you are a company carrying forward unused rebates to a later income year, you must also apply the carried forward rebate against any exempt income you may have derived in that later income year.
1.20 Under proposed subsection 65-40(1) , companies cannot apply a rebate where they could not have deducted a loss of the same year as the rebate. This means that before a company can apply a carried forward rebate, it must first satisfy the continuity of ownership test or the same business test. The continuity of ownership test requires that shares carrying more than 50% of all voting, dividend and capital rights be beneficially owned by the same natural persons at all times from the year the rebate was first claimed to the year the rebate is applied. The continuity of business test requires that the company carries on the same business from the year the rebate is first claimed to the year the rebate is applied. A company which satisfies the same business test may apply a rebate even if it fails the continuity of ownership test.
1.21 If a company lost continuity of ownership and of business during a year, it may still be appropriate for it to apply a rebate arising before the change in relation to the part of the year before the change, or to apply a rebate arising after the change in relation to a year after the change. It can do so, to the extent that had the part of the year of the change been the whole year the rebate could have been applied. [Proposed subsection 65-40(2)] .
Consequential amendments of the 1997 Act
1.22 Item 1 of Schedule 1 adds a new note to subsection 4-10(3) the subsection which sets out the method for calculating how much income tax you have to pay so that you will be aware of the rebates (tax offsets) for landcare operations and for water conserving and conveying facilities.
1.23 Item 2 of Schedule 1 adds a reference to Division 65 so that the list of examples in Note 1 to subsection 4-10(3) will be complete.
1.24 Items 3 and 4 of Schedule 1 make additions to the table at section 13-1 which lists the various rebates (tax offsets) in both the 1997 Act and the 1936 Act. The two items add individual references to the rebate (tax offset) for expenditure on landcare operations and the rebate (tax offset) for expenditure on facilities for water conserving and conveying.
1.25 Item 5 repeals section 40-10, re-enacts it as proposed subsections 40-10(1) and 40-10(3) and inserts proposed subsection 40-10(2) which refers to rebates (tax offsets) as being a capital allowance. The existing provision referred to writing off capital expenditure as a deduction, whether immediately or over a period of years, as a capital allowance, and referred to Subdivision 40-B as a comprehensive list of capital expenditures for which there are capital allowances.
1.26 Items 6 and 7 make changes to the table in subsection 40-30(2) so that it will include references to proposed subdivision 388-A as an alternative to subdivisions 387-A and 387-B.
1.27 Item 8 of Schedule 1 inserts proposed Division 65 which contains the rebate (tax offset) carry forward rules.
1.28 Items 9 and 10 of Schedule 1 insert two new notes into subdivision 387-A to alert the reader that in some circumstances a rebate (tax offset) may be an alternative to the income tax deduction described there for landcare expenditure.
1.29 Items 11 and 12 of Schedule 1 insert two new notes into subdivision 387-B to alert the reader that in some circumstances a rebate (tax offset) may be an alternative to the water conserving and conveying facilities income tax deduction.
1.30 Item 13 of Schedule 1 inserts proposed Division 388 providing rebates (tax offsets) for primary producers and some land-holders.
1.31 Part 2 of Schedule 1 contains amendments to the 1936 Act. The provisions which are being amended are contained in Taxation Laws Amendment Act (No.2) 1998 and give effect to the 1997 Budget announcement which made changes to the cost base rules for the capital gains tax provisions. These new cost base rules ensure that taxpayers will reduce the cost base or indexed cost base of an asset to the extent that they have been entitled to capital allowances in the form of revenue deductions for capital expenditure on the asset.
1.32 The cost base rules in Taxation Laws Amendment Act (No.2) 1998 do not take account of capital allowances in the form of rebates (tax offsets) given for capital expenditure; they only account for the deductions to which these rebates are an alternative. To maintain the policy objective of the Budget announcement, which is to give a rebate alternative to an income tax deduction with generally the same tax effects, amendments to the new cost base rules are needed.
1.33 Items 14 and 15 insert new subsections into section 160ZJA so that, where a rebate (tax offset) is given for the capital expenditure, the cost base of an asset is reduced by the amount that would have been claimed as a deduction but for the taking of the rebate. [Proposed paragraph 160ZJA(1)(ca)] This adjustment also applies to the cost base of a partner's asset and the determinant of the adjustment amount is the amount of deduction the partner would be allowed under either subdivision 387-A or 387-B. [Proposed paragraph 160ZJA(3)(ca)]
1.34 Items 16 and 17 introduce parallel new subsections [proposed paragraphs 160ZJB(1)(ca) and 160ZJB(3)(ca)] into section 160ZJB for the adjustment of the indexed cost base of an asset of an individual and a partner in a partnership respectively.
1.35 Item 18 inserts a new paragraph into subsection 160ZK(1A) to reduce the reduced cost base of an asset by the amount that would have been taken as a deduction if the taxpayer had not chosen to take the rebate (tax offset). [Proposed paragraph 160ZK(1A)(c)]
1.36 Part 3 of Schedule 1 contains the application provision which has the amendments contained in Schedule 1, and so the rebate (tax offset) alternative, applying to assessments for the 1997-98 income year and later income years. Proposed paragraph 388-55(2)(b), discussed above, ensures that expenditure for which the rebate alternative is available must be incurred before the end of the 2000-01 income year. Where that expenditure is on water facilities, related rebates may therefore be first claimed as late as the 2002-03 income year.