House of Representatives

Explanatory Memorandum

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

Chapter 5 - Mining and quarrying: balancing adjustments

Overview

5.1 Schedule 5 to this Bill will amend the disposal of mining property provisions in the Income Tax Assessment Act 1997 (ITAA 1997) to ensure that the tax treatment on disposal of mining property continues to operate as it applied before the Full Federal Court decision in Esso Australia Resources Ltd v FC of T
39 ATR 394 :
98 ATC 4 ,768 (Esso).

5.2 This measure will ensure that:

•

non-allowable capital expenditure that was not intended to be deductible does not become fully, outrightly deductible in the calculation of the balancing adjustment; and

•

should the mining property be sold at a loss, mining taxpayers will receive deductions for the full amount of capital expenditure that is allowable as a deduction under the mining provisions.

Summary of amendments

Purpose of the amendment

5.3 The purpose of the amendment is to ensure that in determining the balancing adjustment in the provisions dealing with disposal of mining property, capital expenditure is confined solely to capital expenditure that is deductible under the income tax law.

Date of effect

5.4 This measure will apply to disposals of mining property which occur from 4 pm Australian Eastern Standard Time on 3 December 1998. [Item 2]

Background to the legislation

5.5 Generally, capital expenditure is not deductible under the income tax legislation. However, there are various provisions within the income tax legislation which give certain types of capital expenditure special concessions or deductions for either particular enterprises or industries.

5.6 Division 330 of the ITAA 1997 provides for the treatment of certain types of capital expenditure in the mining (including petroleum mining and quarrying) industry. The following deductions for capital expenditure are available:

•

exploration and prospecting expenditure is fully deductible in the year it is incurred (Subdivisions 330-A);

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allowable capital expenditure (excluding certain types of capital expenditure) is deductible over the lesser of the life of the mine or a statutory period (Subdivisions 330-C);

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transport expenditure is deductible over a statutory period (Subdivisions 330-H).

5.7 Once the property in respect of which the expenditure was incurred is disposed of, lost or destroyed or the mining or quarrying operations cease, the law provides for a balancing adjustment to apply.

5.8 The balancing adjustment is basically the excess or deficiency of the consideration receivable on the disposal, loss or sale of an asset as compared with the depreciated (written-down) value of the asset. The balancing adjustment calculation for the disposal of mining property is contained in section 330-485 of Division 330. It broadly operates as follows:

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if the termination value of the mining property exceeds its written down value, the excess (up to the amount of allowable deductions) is included in assessable income (subsection 330-485(2);

•

if the termination value of the mining property is less than the written down value, the excess is deductible (subsection 330-485(3).

5.9 The terms termination value and written down value are defined in sections 330-490 and 330-495. Termination value includes the disposal price of the property less selling expenses. Written down valueis the total capital expenditure in respect of the property less any amounts already deducted or deductible from capital expenditure incurred. This rule does not apply if there are excess deductions ie deductions which cannot be used in an income year (because there is insufficient assessable income) but are carried forward for deduction in a later income year (subsections 330-295 to 330-330). In this case the written down value is the total capital expenditure in respect of the property .

5.10 The Full Federal Court in Esso on 22 July 1998 interpreted the term total capital expenditure to include allowable as well as non-allowable capital expenditure. This effectively means that capital expenditure that is not deductible under the capital allowance provisions can now become fully, outrightly, deductible under the balancing adjustment provisions in the year the mine is disposed of or the mining operations cease.

5.11 The Treasurer announced in Press Release No. 120 of 3 December 1998, that as from 4 pm Australian Eastern Standard Time on 3 December 1998 the Government would legislate to restore the tax treatment on disposal of mining property to that which applied prior to the Esso decision.

Explanation of the amendments

5.12 This Bill replaces section 330-495 which sets out the meaning of written down value [item 1] . The new provision contains 2 meanings for this term depending on whether or not a deduction has been allowed due to the application of the excess deduction rules.

First rule excess deduction rules not applicable

5.13 The written down value of the mining property is the capital expenditure that has not been deducted under Subdivisions 330-A, 330-C or 330-H of the ITAA 1997 but would have been deductible if the disposal etc. of the mining property that resulted in the balancing adjustment had not occurred. [New subsection 330-495(1)]

Second rule excess deduction rules preclude deduction

5.14 This rule will apply where an amount could be deducted under Subdivisions 330-A, 330-C or 330-H of the ITAA 1997 but it cannot be deducted because the amount is an excess deduction. In this case the written down value is the amount of expenditure that could be deducted under Subdivisions 330-A, 330-C or 330-H had the disposal etc. of the mining property that resulted in the balancing adjustment not occurred. [New subsection 330-495(2)]

REGULATION IMPACT STATEMENT

Policy objective

5.15 The policy objective is to amend the disposal of mining property provisions in the income tax law following the handing down of the Federal Court decision in Esso. The amendment will confine the amount of capital expenditure which is allowable as a deduction under the balancing adjustment calculation in the disposal of mining provisions to the amount of capital expenditure which is specifically allowable as a deduction under the mining provisions of the income tax law .

5.16 The Government announced the proposed amendment that ensures this treatment in the Treasurers Press Release No. 120 of 3 December 1998 and that the amendment is to take effect from 4 pm Australian Eastern Standard Time on 3 December 1998.

Background

5.17 Prior to the Esso decision on 22 July 1998, capital expenditure used in the balancing adjustment calculation under the disposal of mining property provisions was confined to capital expenditure which has been deducted or could be deducted under the mining provisions of the income tax law.

5.18 The Esso decision meant that deductions for capital expenditure, including that which was not specifically provided for in the legislation, will become fully deductible under the balancing adjustment provision in the year in which the propertys use in mining operations is terminated.

5.19 The effect of this decision is that the taxation law would be applied differently for mining balancing adjustments and other balancing adjustments.

Identification of implementation options

5.20 There is only one option whereby the stated policy objective can be achieved and that is to amend the balancing adjustment provisions in accordance with the Treasurers Press Release No. 120 of 3 December 1998.

Assessment of impacts (costs and benefits) of the implementation option

Impact group identification

5.21 The proposed amendment will impact on taxpayers in the mining industry who otherwise would have been able to benefit from the interpretation given by the Federal Court decision in Esso to the disposal of mining property.

Assessment of costs

Compliance costs

5.22 The amendment to the tax law restores the tax treatment on disposal of mining property to that which applied prior to the Full Federal Courts decision. The amendment will not increase taxpayers compliance costs beyond those incurred under the law as it existed prior to the Federal Court decision in Esso.

Administrative costs

5.23 There will be some administrative costs for the Australian Taxation Office if mining taxpayers seek to amend their prior year tax returns.

Assessment of benefits

Financial impact

5.24 If nothing were done a large amount of previously undeductible expenditure would be deductible. This cost to revenue would be in the order of $100 million for each of the next 5 years.

5.25 An additional cost of $300 million could result from the amendment of post assessments.

Consultation

5.26 The amendment is being made to prevent the law operating in an unintended manner. Consultation is therefore not required.