Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 2 - Balancing adjustment offsetting
2.1 This Chapter explains amendments that will:
- remove the option to offset any assessable balancing adjustment amount against replacement plant for balancing adjustment events occurring after 11.45 am AEST on 21September 1999 for all taxpayers, with the exception of small business taxpayers; and
- provide a new balancing adjustment offset which is to be made available for certain involuntary disposals of plant occurring after 11.45 am AEST on 21 September 1999, broadly where CGT roll-over relief for involuntary disposals is currently available.
[Schedule 2 to this Bill]
2.2 Division 42 of the ITAA 1997 (depreciation of plant) currently permits a taxpayer who has disposed of depreciable plant for an amount that exceeds its depreciated value to elect to offset any assessable balancing adjustment amount against the cost or written down value of replacement or other plant.
2.3 The balancing adjustment offset applies unevenly because it gives greatest benefit to taxpayers holding plant for which depreciation allowances are significantly accelerated, and for which there is an active second-hand market. Such taxpayers can obtain a significant benefit from the further tax deferral inherent in the offset mechanism. Taxpayers with assets where there is less acceleration of depreciation or no ready second-hand market obtain little advantage comparatively.
2.4 Maintaining the balancing adjustment offset for small business taxpayers is an interim measure pending the introduction of a Simplified Tax System for these taxpayers with effect from 1 July 2001.
2.5 The new balancing adjustment offset for involuntary disposals ensures taxpayers who are forced to dispose of plant will not be disadvantaged. This is in line with the Review recommendation that a general no-detriment approach be adopted for involuntary receipts.
2.6 Other than for involuntary disposals (refer to paragraph 2.7) the new law will remove the option that allows an assessable balancing adjustment to be offset against replacement or other plant. It is to be removed for balancing adjustment events (such as the disposal of plant) occurring after 11.45 am AEST on 21 September 1999. However, small business taxpayers whose average turnover is less than $1 million, will retain full access to the balancing adjustment offset.
2.7 The new law will allow an assessable balancing adjustment to be offset against replacement plant for certain involuntary disposals of plant occurring after 11.45 am AEST on 21 September 1999. It replaces the current CGT roll-over relief for involuntary disposals.
|New Law||Current Law|
|Other than for involuntary disposals, a balancing adjustment offset is only available for:
|A balancing adjustment offset is available for all taxpayers.|
|A balancing adjustment offset will be available under the depreciation provisions for plant compulsorily acquired, lost or destroyed after 11.45 am AEST on 21 September 1999.||Roll-over relief is available under the CGT provisions for assets compulsorily acquired, lost or destroyed.|
|Roll-over relief under the CGT provisions will cease.|
2.8 Section 42-285 of the ITAA 1997 currently permits an otherwise taxable balancing adjustment to instead reduce the cost or written down value of replacement or other plant. Section 42-290 currently provides for a balancing adjustment which has been included in taxable income to be excluded (by amended assessment) and instead applied to reduce the cost of replacement plant acquired subsequently.
2.9 This Bill removes the balancing adjustment offset for plant except for small business taxpayers and for certain involuntary disposals of plant.
2.10 This Bill amends section 42-285 so that balancing adjustment offset is not available in respect of a balancing adjustment event that occurs after 11.45 am AEST on 21 September 1999. Effectively, the offset will not apply to plant disposals after that time. [Item 7, subsection 42-285(5)]
2.11 However, the offset will continue to apply to plant disposals after that time where the taxpayer is a small business taxpayer for the income year in which the balancing adjustment event occurred. [Item 7, subsection 42-285(6)]
2.12 The rules that set out who qualifies as a small business taxpayer are to be contained in the new Subdivision 960-Q, which is to be inserted by this Bill (refer to Chapter 3 of this Explanatory Memorandum).
2.13 Broadly, a taxpayer will qualify as a small business taxpayer for an income year if they carry on a business and their average turnover from that business is less than $1 million in that income year.
2.14 This Bill amends section 42-290 in the same way to remove the offset option relating to replacement plant acquired within 2years after a balancing adjustment has been included in assessable income [item 9, subsection 42-290(4)] . Again, this offset will continue to be available for small business taxpayers [item 9, subsection 42-290(5)] .
2.15 This Bill allows a new balancing adjustment offset provision for certain involuntary disposals of plant. The effect of the amendment is to allow any assessable balancing adjustment that might arise from the disposal to be offset against the cost of replacement plant. This means a lesser amount is available as a deduction for the replacement plant. [Item 10, subsection 42-293(1)]
2.16 The offset will only be available for balancing adjustment events occurring after 11.45 am AEST on 21 September 1999. These balancing adjustment events must arise because the plant is lost or destroyed, or an Australian government acquires it compulsorily or by forced negotiation. [Item 10, subsection 42-293(2)]
2.17 There are time limits imposed on when the replacement plant must be obtained. It can be obtained no earlier than one year before the time of the balancing adjustment event and no later than one year after the end of the income year in which the event occurred. The Commissioner can agree to extend the time limit. [Item 10, subsection 42-293(3)]
2.18 The existing balancing adjustment offset provisions require replacement plant to be used wholly for assessable purposes. That condition is also to apply for this type of offset. Small business taxpayers can only opt for the relief provided by this measure if they have not chosen from one of the alternatives contained in the existing law for offset relief that is, under sections 42-285 or 42-290. [Item 10, subsection 42-293(4)]
2.19 The requirement to treat the offset amount as if it were a deduction for depreciation purposes on the first day of the income year in which the replacement plant is acquired, ensures that:
- under the diminishing value method that amount will be taken into account in working out opening undeducted cost which is the basis of the depreciation calculation; and
- the offset amount can be recouped when there is a disposal of the replacement plant.
[Item 10, subsection 42-293(5)]
2.20 Where there are 2 or more items of replacement plant, the offset amounts are to be apportioned between those items on the basis of their cost for depreciation purposes. [Item 10, subsection 42-293(6)]
2.21 Most of the amendments apply to assessments for the income year in which 21 September 1999 occurred and later income years. [Subitem 23(1)] .
2.22 Two consequential amendments (items 17 and 18) deal with proposed provisions in the ITAA 1997 that apply to:
- certain hire purchase arrangements entered into after 27 February 1998, which are to be treated as sale and loan transactions [subitem 23(2)] ; and
- limited recourse debt arrangements that are terminated after that date [subitem 23(3)] .
2.23 These provisions refer to an assessable balancing adjustment amount that has been offset against replacement or other plant. The consequential amendments to the provisions require a different application because they rely on the Taxation Laws Amendment Bill (No.5) 1999 receiving Royal Assent, which had not occurred before the date of introduction of this Bill.
2.24 This Bill also makes other consequential amendments to the ITAA 1997 as a result of the introduction of the new balancing adjustment offset for involuntary disposals. [Items 1 to 6, 8 and 11 to 20]