House of Representatives

New Business Tax System (Miscellaneous) Bill 1999

New Business Tax System (Venture Capital Deficit Tax) Bill 1999

New Business Tax System (Venture Capital Deficit Tax) Act 2000

Explanatory Memorandum

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

Chapter 5 - Low-value pools

Outline of Chapter

5.1 This Chapter explains amendments made to the income tax law that will:

·
remove the immediate deduction for plant costing $300 or less;
·
provide an option for plant costing less than $1,000 to be pooled;
·
provide an option for plant that has been depreciated to less than $1,000 under the diminishing value method to be pooled; and
·
allow the pooled plant to be depreciated over an effective life of 4 years using the diminishing value method.

5.2 These measures will not apply to small business taxpayers. [Schedule 6 to this Bill]

Context of Reform

5.3 Division 42 of the ITAA 1997 (depreciation of plant) currently permits a taxpayer an immediate deduction for an item of plant costing $300 or less. This immediate deduction is to be replaced with a system that allows taxpayers, except small business taxpayers, an option to depreciate all items of plant costing less than $1,000 through a pooling mechanism. Providing such a mechanism will reduce compliance costs for taxpayers.

5.4 Maintaining the immediate deduction for plant costing $300 or less 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.

5.5 Taxpayers using the diminishing value method have to calculate their deduction based on an ever declining depreciable balance of the plant. This requires an ascertainment of this balance every year. Providing a pooling mechanism for these items when that balance is less than $1,000 will simplify the calculation process.

Summary of new law

5.6 The new law will replace the immediate deduction for plant costing $300 or less that is acquired on or after 1 July 2000. Instead, there will be an option to pool all plant costing less than $1,000. These items will then be depreciated over an effective life of 4 years using the diminishing value method. Where this option is not exercised, the depreciation rate for the plant will be determined only by its effective life, similar to other depreciable plant. The immediate deduction is to be retained for plant acquired by small business taxpayers.

5.7 The new law will also give taxpayers an option to pool plant that has been depreciated to less than $1,000 under the diminishing value method. These items will then be depreciated over an effective life of 4years using that method. This option will be available on an item by item basis and from the commencement of the 2000-2001 income year. This option will not be available to small business taxpayers.

Comparison of key features of new law and current law
New Law Current Law
All items of plant costing less than $1,000 may be pooled and depreciated over an effective life of 4 years using the diminishing value method. There is an immediate deduction for items of plant costing $300 or less.
Any items of plant which have been depreciated under the diminishing value method to less than $1,000 may be pooled and depreciated over an effective life of 4 years using that method. The current law has no equivalent provision.

Detailed explanation of new law

Removing the immediate deduction

5.8 Proposed section 42-167 in the Capital Allowances Bill will permit an immediate deduction for an item of plant costing $300 or less.

5.9 This Bill amends that proposed section so that the immediate deduction will not apply to plant:

·
acquired under a contract;
·
commenced to be constructed; or
·
acquired in some other way,

on or after 1 July 2000. [Item 6, subsection 42-167(1)]

5.10 However, the immediate deduction for plant will continue to be available to small business taxpayers. The rules that set out who qualifies as a small business taxpayer are contained in proposed Subdivision 960-Q in the Capital Allowances Bill. [Item 6, subsection 42-167(2)]

Low-value pools

5.11 New Subdivision 42-M is to be inserted into the ITAA 1997 to allow a depreciation deduction for certain plant through a pool [item 7, Subdivision 42-M] . This pool is to be defined as a low-value pool . It will include plant costing less than $1,000 and plant that has been depreciated below $1,000 under the diminishing value method.

5.12 A low-value pool is created in the first income year in which there is an allocation of plant to it. [Item 7, section 42-450 and item 10]

Option to pool plant costing less than $1,000

5.13 Taxpayers can choose to allocate an item of low-cost plant to the low-value pool in the income year they acquire it [item 7, subsection 42-455(1)] . An item of low-cost plant is plant costing less than $1,000 [item7, subsection 42-455(2) and item 9] . The $1,000 threshold is to be determined on an item by item basis.

5.14 Once a choice is made to allocate low-cost plant to this pool, all low-cost plant acquired in that income year and subsequent years must be allocated and remain allocated to the pool [item 7, subsections 42-460(1) and(3)] . Plant allocated to the pool will then be depreciated over an effective life of 4 years using the diminishing value method.

5.15 This choice will be available from 1 July 2000.

5.16 However, the choice will not be available to small business taxpayers. Instead, these taxpayers will generally be entitled to accelerated depreciation rates on that low-cost plant. These taxpayers will retain the immediate deduction where the cost is $300 or less. [Item 7, subsection 42-460(2)]

5.17 The choice to allocate low-cost plant to a low-value pool will also not be available where plant costing $300 or less is acquired before 1 July 2000 [item 7, subsection 42-460(4)] . This ensures taxpayers, with a substituted accounting period that ends after 30 June 2000, will not be able to avail themselves of both the immediate deduction and the deduction through the low-value pool for this plant.

5.18 This choice will also not be available where plant has already been allocated to a pool under the existing pooling provisions contained in Subdivision 42-L. These provisions allow taxpayers to pool items of plant which have the same depreciation rates. [Item 7, subsection 42-460(5)]

5.19 Taxpayers who do not choose to allocate low-cost plant to the low-value pool must depreciate that plant according to its effective life.

Option to pool plant that has been depreciated to less than $1,000 under the diminishing value method

5.20 A taxpayer can also choose to allocate an item of plant to the same pool mentioned above where:

·
the plants undeducted cost at the beginning of the income year is less than $1,000; and
·
the plants depreciation deductions have been calculated using the diminishing value method.

[Item 7, subsection 42-455(3)]

5.21 Once an item is allocated it must remain in the low-value pool [item 7, subsection 42-460(3)] . However, unlike the choice for low-cost plant, this choice can be made on a item by item basis. The availability of this choice on an item by item basis ensures that plant with an effective life of less than 4 years can continue to be depreciated in the usual way.

5.22 This choice will also not be available where plant has already been allocated to a pool under the existing pooling provisions contained in Subdivision 42-L. [Item 7, subsection 42-460(5)]

5.23 The option to allocate this plant to a low-value pool will be available from the beginning of the 2000-2001 income year. It will allow plant with a diminishing value balance of less than $1,000 to be pooled with low-cost plant and depreciated over an effective life of 4 years using the diminishing value method.

Private or exempt use of pooled plant

5.24 Taxpayers who allocate plant to the low-value pool are required to make an estimate of any future non-income producing use of the plant. Where there is to be some non-income producing use, the cost or undeducted cost of the plant allocated to the pool is reduced by the percentage that represents that use. [Item 7, section 42-465]

Example 5.1 Fred acquired a computer that costs $800 after 1 July 2000 and chose to allocate it to a pool. He estimated that 40% of the use of the computer would be for non-income producing purpose and 60% for income producing purposes.The amount that is allocated to the pool is $480 ($800 * 60%).

Depreciation deductions for pooled plant

5.25 The depreciation deductions for plant allocated to the pool is the sum of 2 amounts. The first amount is 18.75% of the total costs of low-cost plant allocated to the pool during the income year [item 7, paragraph 42-470(1)(a)] . This rate represents half of 37.5% which is the diminishing value rate based on an effective life of 4 years. Halving the rate is in recognition of plant being allocated to the pool throughout the income year.

5.26 The second amount is 37.5% of both the pool closing balance for the previous income year and the total of the undeducted costs of plant, other than low-cost plant, allocated to the pool during the year of income [item 7, paragraph 42-470(1)(b)] . This plant is that which has been depreciated under the diminishing value method to less than $1,000.

Example 5.2 ABC Cos pool closing balance for the year ended 30 June 2001 is $1,200. During the 2001-2002 income year ABC Co acquired an item of plant for $400. ABC Co also chose to allocate to the pool an item of plant which has an undeducted cost of $900.The depreciation deductions are calculated as follows:

Low-cost plant: $400 * 18.75% = $75
Pool closing balance from previous year ($1,200) and depreciated plant allocated to the pool ($900): $2,100 * 37.5% = $788
Total depreciation deduction: $863

5.27 The pool closing balance for a particular income year is the pools closing balance for the previous income year plus the total costs or undeducted costs, as the case may be, of plant allocated to the pool less the depreciation deductions for the pooled plant. [Item 7, subsection 42-470(2) and item 11]

Example 5.3 Assuming the facts in Example 5.2, the pool closing balance at the end of the 2001-2002 income year will be:

$1,200 + ($400 + $900) - $863 = $1,637

Disposal of pooled plant

5.28 Where there is a disposal of plant allocated to the pool, any disposal proceeds are to be used to reduce the pool closing balance [item 7, subsection 42-475(1)] . However, where on allocation of plant to a pool, there has been an estimate of some non-income producing use of that plant, the disposal proceeds are to be reduced by the percentage represented by that use, before any reduction in the pool closing balance [item 7, subsection 42-475(2)] .

Example 5.4 Fred sold the computer referred to in Example 5.1 for $400. The pool closing balance would be reduced by $240 ($400 * 60%).

5.29 If the sum of the proceeds from disposal of plant in the low-value pool exceeds the closing balance of the pool, the excess is to be included in assessable income. [Item 7, subsection 42-475(3)]

5.30 The reduction of the low-value pool for disposals of plant has 2consequences. First, the plant that is disposed of effectively attracts a full years depreciation in the income year of disposal. Second, there is a lesser amount available for depreciation of the plant allocated to the pool in the following income years. This is the equivalent of including an amount in assessable income.

Application and transitional provisions

5.31 The amendments in this Schedule apply to low-cost plant for assessments for the income year in which 1 July 2000 occurs. The amendments, to the extent they apply to plant allocated to a pool where the undeducted cost is less than $1,000, apply for the 2000-2001 income year and later income years. [Item 15]

Consequential amendments

5.32 This Bill makes consequential amendments to the ITAA 1997 and the ITAA 1936 to recognise the introduction of these new pooling arrangements. [Items 1 to 5, 8 and 12 to 14]


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