Revised Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 9 - Income tax deductions for GST-related expenditure
9.1 Schedule 5 will amend Divisions 25, 42 and 46 of the ITAA 1997 to allow an immediate income tax deduction for the cost of GST-related plant or software acquired or upgraded by small and medium sized businesses during the period 1 July 1999 to 30 June 2000.
9.2 The amendments will make the necessary changes to the rules about:
- the depreciation of plant in Division 42 of the ITAA 1997;
- software depreciation in Division 46 of the ITAA 1997; and
- the deductibility of particular amounts in Division 25 of the ITAA 1997,
so that eligible businesses will be able to claim an immediate income tax deduction for the cost of acquiring or upgrading plant or software for the purpose of meeting their obligations or exercising their entitlements under the GST law.
9.3 To qualify for the deduction, the business must acquire or upgrade the plant during the period from 1 July 1999 to 30 June 2000.
9.4 In addition, a business will only be eligible for the deduction if:
- it has a pre-GST annual turnover as defined in new Subdivision 960-R of the ITAA 1997 which does not exceed $10 million;
- one of the reasons the plant was acquired or upgraded was to meet the business's obligations or exercise its entitlements under the GST law; and
- it is registered for the GST immediately before 1 July 2000.
9.5 This measure forms part of the Government's commitment to assisting small and medium sized businesses in gearing up for the GST.
9.6 The amendments will commence on Royal Assent of this Bill (see Clause 2 of this Bill). They will apply to plant or software that a business acquires or upgrades during the period 1 July 1999 to 30 June 2000. [New paragraphs 25-80(1)(a) and 42-168(1)(a)]
9.7 On 19 August 1999 the Treasurer announced that the Government would legislate to allow an immediate income tax deduction to small and medium sized businesses for expenditure on acquiring new plant or software (including upgrades) for the purposes of implementing the GST. The amendments give effect to that announcement.
9.8 Without the benefit of this immediate deduction, businesses would gradually depreciate items of plant (such as computers or cash registers) acquired in readiness for the GST in accordance with the rules in Division 42 of the ITAA 1997. In the case of computers this would be over 3.7 years. Businesses would also depreciate any expenditure on software acquired to meet GST obligations over 2.5 years under the software depreciation rules in Division 46 of the ITAA 1997.
9.9 Other GST-related expenditure may be fully deductible in the year of income in which it is incurred because it is revenue in nature. For example, expenditure on GST-related training or stationery. Taxation Ruling TR 1999/12 provides further discussion on this point.
9.10 This special tax concession for GST-related plant and software is in addition to the $500 million being provided in 1999-2000 to assist small and medium businesses, charities and educational bodies prepare for the introduction of the GST.
9.11 New section 42-168 will be inserted into Subdivision 42-E of the ITAA 1997 to provide that the deduction a business will be entitled to under Division 42 (Depreciation of plant) for expenditure on acquiring GST-related plant will be the cost of the plant. Thus, the business will be able to deduct the whole of the cost of the plant in the income year in which it was acquired, provided the other depreciation rules are met.
9.12 It will not be necessary for the business to work out the effective life of the plant or the applicable rate of depreciation. This reflects the fact that this is intended to be an immediate deduction claimed in full for the income year in which the plant is acquired. The general rules about deductions for depreciation in Division 42 will apply to this immediate deduction. For example, the amount of the depreciation will be reduced to the extent that the plant is used for private purposes (section 42-170).
9.13 Similarly, new section 25-80 allows a business to claim an immediate deduction for the full cost of upgrading an existing unit of plant for the purpose of meeting its obligations or exercising its entitlements under the GST law.
9.14 In cases where a business makes a GST-related upgrade to an item of plant that is currently being depreciated under Division 42, the business will claim an immediate deduction under new section 25-80 for the cost of the upgrade. It will then continue to depreciate the existing item of plant separately under the Division 42 rules without taking into account the cost of the upgrade or other matters such as its effect on the effective life of the plant. If the business disposes of the item of plant, the cost of the upgrade will not be taken into account when calculating any balancing adjustment.
9.15 Section 46-25 sets out the broad principle that the rules about the depreciation of plant in Division 42 of the ITAA 1997 apply to software on which the taxpayer incurs expenditure as if that software was plant owned by the taxpayer .
9.16 This rule will enable a business to work out its deduction for the cost of acquiring GST-related software under new section 42-168 as the software will be treated, for the purposes of that section, as plant owned by the business. This will ensure the business is able to claim an immediate deduction for the full cost of the software rather than a deduction over 2.5 years under Subdivision 46-B. Thus, section 46-25 enables a business to use new section 42-168 to work out its deduction for expenditure incurred on acquiring both GST-related software (including software upgrades) and other GST-related items of plant.
9.17 A business will also be able to deduct in full the cost of making GST-related upgrades to existing software under new section 42-168 .
9.18 In applying new section 42-168 , the business will ignore the special rules about depreciation of software in sections 46-35 to 46-50 of the ITAA 1997. [New section 46-62, item 6]
9.19 New paragraph 46-85(d) excludes expenditure on GST-related software from the kinds of expenditure which can be included in a software pool under Subdivision 46-D of the ITAA 1997. [Item 7]
9.20 To be eligible to claim an immediate deduction for the cost of acquiring new plant or software (including software upgrades) under new section 42-168 , the tests set out in new subsection 42-168(1) must be satisfied. To claim a deduction for the cost of upgrading existing items of plant under new section 25-80 , the tests set out in new subsection 25-80(1) must be satisfied. These tests are explained below. If the tests are not satisfied, the business may be able to depreciate the cost of the plant under the general depreciation rules in Division 42 or, in the case of expenditure on software, under the rules in Division 46.
9.21 In addition to satisfying the tests in new section 42-168 , the general conditions for claiming a deduction for depreciation of plant under Division 42 will need to be satisfied by a business wishing to claim an immediate deduction for the cost of acquiring new plant or software. For example, the business will need satisfy the conditions in section 42-15, namely that the business:
- is the owner or quasi-owner of the plant; and
- uses the plant or has it installed ready for use for the purpose of producing assessable income.
9.22 The general recoupment rules in Division 20 of the ITAA 1997 will also apply to reverse the effect of the immediate deduction to the extent that a business recoups all or part of the cost of the software or upgrading the plant. [New item 1.7AA and item 1.7A in the table in section 20-30]
9.23 To qualify for the immediate deduction, the business must become the owner or quasi-owner of the plant or software, or incur the cost of upgrading it, during the period 1 July 1999 to 30 June 2000 [new paragraphs 42-168(1)(a) and 25-80(1)(a)] . This reflects the Government's intention to assist small and medium sized businesses in gearing up for the commencement of the GST on 1 July 2000.
9.24 In order to obtain an immediate deduction under new section 25-80 for the cost of upgrading plant, the business must use the upgraded item of plant or have it installed ready for use for the purpose of producing assessable income immediately before 1 July 2000. This rule will ensure that only upgrades that assist the business with the commencement of the GST on 1 July 2000 will qualify for the immediate deduction. [New paragraph 25-80(1)(d)]
9.25 To claim the immediate deduction, a business must also acquire or upgrade the item of plant for the purpose of, or for purposes that include the purpose of:
- meeting its existing or future obligations under the GST law; or
- exercising its existing or future entitlements under the GST law.
9.26 Under this test, the purpose of meeting its obligations or exercising its entitlements under the GST law will not need to be the sole or dominant purpose of the business in acquiring the plant. However, the business will need to be able to demonstrate that the purpose of satisfying its obligations or exercising its entitlements under the GST law was a significant reason for acquiring or upgrading the plant.
9.27 This test recognises that a business may acquire or upgrade plant to assist it in meeting a range of obligations under the new tax system from 1 July 2000. For example, a business may need to acquire new software which will enable it to meet its obligations under the GST law together with its obligations under the PAYG and fringe benefits tax arrangements. For this reason, the cost of acquiring bundled software which can support a range of compliance obligations including those under the GST law will qualify for the deduction, as may the cost of a new computer capable of supporting such software.
9.28 Some examples of expenditure on plant or software which will qualify for the deduction are set out below.
Example 9.1 A business has cash registers that cannot comply with the GST requirements. The business acquires new cash registers on 30 April 2000 so that it can provide to its customers the information required for GST purposes. The cost of the new cash registers would be immediately deductible under new section 42-168 .
Example 9.2 A business operating a manual accounting system decides that it should change to a computerised system because of the additional work required to comply with its GST obligations. During 1999-2000 the business also acquires the computerised system because it will help the business to manage its quarterly obligations under the PAYG instalments arrangements. The business would be entitled to an immediate deduction for the cost of the computer and the software under new section 42-168 . Meeting its obligations under the GST law was a significant purpose in its decision to acquire the new plant.
Example 9.3 A business, that already has a computerised system, buys new software and upgrades its existing software during 1999-2000, so that it can comply with its GST and PAYG obligations. The business's existing computer hardware is not capable of operating the new software in an efficient way and decides to buy a new computer that can. The cost of the new software (and the upgraded software) and the computer would be immediately deductible under new section 42-168 .
9.29 To be able to deduct the cost of acquiring plant or software to prepare for the GST, a business must become the owner or quasi-owner of the plant (section 42-15).
9.30 New paragraph 25-80(1)(c) provides that a business will only be entitled to an immediate deduction for the cost of upgrading an item of plant if the business is the owner or quasi-owner of the plant when the upgrade is made.
9.31 An immediate deduction for acquiring or upgrading plant will only be available to businesses satisfying the 'pre-GST annual turnover' test. To satisfy this test, the business must have a 'group turnover' of not more than $10 million for the income year in which it acquires or upgrades the plant. [New paragraphs 42-168(1)(c) and 25-80(1)(e) , new subsection 960-370(1)]
9.32 A business's group turnover for an income year will be the sum of the 'value of the business supplies' made by the business and its connected entities during that year. [Item 9]
9.33 The value of the business supplies an entity makes in an income year will be the sum of:
- the value of all 'taxable supplies' (as defined by section 9-75 of the GST Act) made during the year in the ordinary course of carrying on the business; and
- the 'prices' (as defined by section 9-75 of the GST Act) of other supplies made during the year in the ordinary course of carrying on the business.
9.34 A supply will only be a taxable supply if it is made on or after 1 July 2000, therefore paragraph (a) above will only be relevant to supplies made on or after that date and will not apply for the purposes of this measure to businesses with a standard income year [section 7 of the GST Transition Act] . These businesses will calculate the value of their business supplies on the basis of the rule in paragraph (b) above.
9.35 The 'value of the business supplies' made by the business will exclude the value of:
- supplies not made in the ordinary course of carrying on a business for example, the proceeds of sale of a capital asset, goods taken for own use and rental receipts (unless the rental activity constitutes or forms part of a business activity); and
- things that do not constitute the making of a supply for example, dividend receipts.
9.36 In calculating its 'group turnover', a business will be required to include the 'value of the business supplies' made by any entity connected with it during the income year. This is to ensure that the immediate deduction is only available to genuinely small and medium sized businesses. [Item 9]
9.37 However, in calculating the 'value of the business supplies' made by it and its connected entities, the business will ignore the value of supplies made:
- by the business to entities connected with it during the income year;
- to the business by entities connected with it; and
- by one connected entity to another connected entity.
9.38 The concept of 'connected with' used in the amendments draws on the existing concept of 'connected with' contained in the CGT roll-over relief provisions for small business taxpayers. These CGT provisions are contained in Division 123 of the ITAA 1997. This concept of 'connected with' has also recently been used in the small business taxpayer test contained in Schedule 2 to the New Business Tax System (Capital Allowances) Bill 1999. A detailed explanation of the concept of 'connected with' is provided in Chapter 3 of the Explanatory Memorandum to that Bill.
9.39 If a business or an entity connected with it starts to carry on business after the beginning of the income year, the business will be required to make a reasonable estimate of its 'group turnover' had it or the connected entity carried on business for the whole year. If the estimate is not more than $10 million the business will satisfy the 'pre-GST annual turnover' test. [New subsection 960-370(2), item 8]
9.40 To qualify for an immediate deduction under new section 42-168 or new section 25-80 , the business must be registered for the GST under Part 2-5 of the GST Act immediately before 1 July 2000. [New paragraphs 42-168(1)(d) and 25-80(1)(f)].
9.41 This rule is aimed at ensuring that only businesses within the GST system, and which anticipate having GST obligations as of 1 July 2000, will benefit from the concession.
9.42 New subsection 42-168(2) contains a special rule for taxpayers with income years that do not end on the standard date of 30 June. The subsection provides that if the income year in which a business acquires GST-related plant, including software, ends before 30 June 2000, the business will be taken to have satisfied the registration requirement if:
- the business is registered for GST when it lodges its income tax return for the income year; or
- the business has applied for registration and has not been refused registration when it lodges its income tax return for the income year.
9.43 However, a business covered by new subsection 42-168(2) cannot deduct the cost of GST-related plant, including software, if immediately before 1 July 2000 it is not registered for GST. In these cases the Commissioner can amend the business's income tax return to disallow the deduction if it has been claimed by the business. [New subsection 42-168(3)]
9.44 New subsections 25-80(2) and 25-80(3) have the same effect in relation to claiming an immediate deduction for GST-related upgrades under new section 25-80 .