Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)REGULATION IMPACT STATEMENT LANDCARE REBATE (TAX OFFSET): AMENDMENT TO THE INCOME TAX ASSESSMENT ACT 1997 (THE ACT)
1. Specification of policy objective
The Government's policy objective in implementing the landcare and water conserving and conveying facility rebate (tax offset) is to assist low income farmers who cannot effectively use the income tax deductions provided under subdivisions 387-A and 387-B to invest in landcare works so as to encourage on-farm conservation works.
The Government's election statement, Reviving the Heartland, announced a commitment to give farmers a choice between accelerated deductions for Landcare works under subdivisions 387-A and 387-B of the Act or a tax rebate/credit set at the marginal tax rate of 34 cents in the dollar for qualifying expenditure.
2. Identification of implementation option
Subdivisions 387-A and 387-B of the Act contain provisions which allow certain taxpayers to claim deductions for landcare expenditure and for expenditure on conserving and conveying of water respectively. A carry forward is available for these tax deductions in the form of carry forward losses.
On 1 July 1997, the Government announced that there would be a tax incentive for landcare in the form of a carry forward rebate (tax offset) for capital expenditure incurred under subdivisions 387-A and 387-B of the Act. The rebate would be set at 34 cents in the dollar. The Treasurer and the Minister for Primary Industries and Energy provided further details in their 12 May 1998 announcement.
For those farmers in receipt of incomes of less than $20,700 the rebate of 34 cents in the dollar may be more attractive than an income tax deduction given that their marginal tax rate (20 cents in the dollar in most cases). If they use income averaging, lower income farmers might still prefer the income tax deduction. The proposed rebate will cover eligible capital expenditure under either of subdivision 387-A or 387-B so that the rebate can be claimed for up to $5,000 of eligible expenditure under each subdivision in a year . The Natural Heritage Trust Fund will finance rebate claims up to $80 million where the expenditure is incurred in the income years of 1997-98 to 2000-2001.
Given the Government's election promise and the announcements made in July 1997 and in May 1998, there is effectively only one implementation option.
This option is to amend the Income Tax Assessment Act 1997 to provide primary producers with taxable incomes of up to $20,700 a year are provided with the option of a tax rebate for eligible expenditure incurred from the start of the 1997-98 income year. The maximum claim limit is $1,700 (requiring expenditure of $5,000) for expenditure in a particular year that would otherwise be tax deductible under either subdivision 387-A or 387-B. This means the rebate can be claimed for up to a total of $10,000 of eligible expenditure in any year if there is expenditure of $5,000 under each subdivision. The rebate can be carried forward for an indefinite period.
If the taxpayer claims the rebate, they cannot also claim an income tax deduction under subdivision 387-A or subdivision 387-B for the same expenditure.
3. Analysis of the costs and benefits associated with the implementation option
The proposed measure will only impact on those taxpayers who incur expenditure that would be tax deductible under subdivisions 387-A or 387-B of the Act. Affected taxpayers will also have to satisfy the income ceilings imposed which are designed to target the rebate (tax offset) at those farmers who because of their low income are most in need of assistance to invest in landcare works. In substance, the impact group is those taxpayers whose tax benefit from claiming deductions under subdivisions 387-A or 387-B of the Act is likely to be low because their income tax rate is low. Those in a tax loss position who incur the expenditure will not receive the tax benefit immediately but will carry it forward because a rebate will only reduce tax liability. Those whose income exceeds the ceiling will still be able to claim the tax deductions under subdivisions 387-A and 387-B.
No taxpayers will be adversely affected by this measure. The proposed rebate (tax offset) provides additional assistance to those taxpayers who have low taxable incomes to undertake new landcare and water conserving and conveying works. As indicated above there will be some taxpayers who presently claim the income tax deductions under subdivisions 387-A and 387-B and they will now have the alternative of claiming the rebate if they choose.
It is not possible to estimates of the number of taxpayers who will choose to take the rebate.
The overall cost of the rebate has been capped at $80 million over four years and funding will come from the Natural Heritage Trust Fund. The cost is made up of two factors; firstly some taxpayers who would otherwise claim a 20 cents in the dollar income tax deduction under subdivisions 387-A or 387-B will instead claim the rebate at 34 cents in the dollar; secondly the rebate will provide incentives for taxpayers to undertake new eligible expenditure.
There will be no additional compliance costs imposed on those taxpayers who wish to claim the rebate instead of the deductions. They will simply have to maintain records of expenditure in the same manner as for other aspects of their tax affairs.
The Australian Taxation Office will incur significant costs in the first two years of the rebate's operation of $1.6 million per year to ensure that taxpayers are aware of entitlements to the rebate. The Department of Primary Industries and Energy will be assist in targeting relevant taxpayers.
A number of features of this policy proposal have been discussed with representatives of the National Farmers Federation.
The implementation option achieves the Government's policy objectives. It does not impose any additional compliance costs on affected taxpayers. No taxpayer will be adversely affected by this measure.