House of Representatives

New Business Tax System (Integrity and Other Measures) Bill 1999

New Business Tax System (Former Subsidiary Tax Imposition) Bill 1999

New Business Tax System (Former Subsidiary Tax Imposition) Act 1999

Explanatory Memorandum

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

Chapter 3 - Excess deductions

Outline of Chapter

3.1 Unless an election is made to take immediate deductions, existing Division 330 of the ITAA 1997 (mining and quarrying) limits deductions for exploration and prospecting expenditure and allowable capital expenditure on mine development to the amount of available income. The excess deductions are carried forward for successive deduction in later years until fully absorbed.

3.2 This Chapter explains amendments that will end the quarantining arrangements for these excess deductions.

Context of Reform

3.3 The excess deductions rules were in place before the 1990 removal of the 7 year limit on the carry forward of non-primary production losses. The rules recognised that the mining sector might not be able to use early year losses fully within the 7 years.

3.4 In accordance with the Recommendations of the Review, the full cost of acquiring mining or quarrying rights and information will be available for write-off under new Division 40. The removal of deduction limits on the cost of acquiring mining or quarrying rights and information, the absence of limits on the deductibility of prior year losses, mean that there is no reason to retain the special excess deduction rules.

Detailed explanation of new law

3.5 Existing Subdivision 330-F of the ITAA 1997 contains the rules about how excess deductions arise in an income year and how they can be deducted in later income years. The basic rule is that, unless a contrary election is made, a taxpayer can only deduct an amount for exploration or prospecting expenditure and allowable capital expenditure up to the amount of available income. In later income years those excess amounts can be used to absorb surplus income provided that particular conditions are met.

3.6 Item 4 of Schedule 3 to this Bill inserts new section 330-335 which ensures that the deduction limits contained in sections 330-300 and 330-305 will not operate to restrict the amount of the allowable deduction in the 1999-2000 income year for expenditure on exploration and prospecting or allowable capital expenditure.

3.7 Item 4 of Schedule 3 also inserts new section 330-340. Subsection 330-340(1) is concerned with those taxpayers whose balancing date for the 1998-1999 income year has occurred before 21September1999. It ensures that excess amounts available to a taxpayer at 11.45 am AEST on 21September 1999 will be treated as an allowable deduction at that time for either exploration or prospecting expenditure or allowable capital expenditure. This will mean that those previously quarantined amounts are deductible in calculating taxable income for the 1999-2000 income year and may, in relevant circumstances, contribute to a tax loss for that year.

3.8 Subsection 330-340(2) is concerned with taxpayers whose balancing date for the 1998-1999 income year occurs after 21September1999. Those taxpayers will apply the existing rules for calculating excess deductions for the 1998-1999 income year. Their excess deductions will not be converted on 21 September 1999. Instead, the excess amounts calculated at the end of their 1998-1999 income year will be converted into deductions on the first day of their 1999-2000 income year.

3.9 Items 1 to 3 of Schedule 3 make consequential amendments to the ITAA 1997 to remove provisions that refer to the excess deduction rules for mining operations. These provisions will be redundant from the 1999-2000 income year onwards. Items 5 and 6 make similar consequential amendments to the ITAA 1936.

3.10 Item 7 of Schedule 3 applies the above changes to assessments for the 1999-2000 income year and later income years.


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