Senate

Tax Law Improvement Bill 1997

Explanatory Memorandum

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

THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE House of Representatives TO THE BILL AS INTRODUCED

General Outline & Financial Impact

A. General Outline

This Bill is the second instalment of the rewrite of the income tax law by the Tax Law Improvement Project. The first instalment is contained in the Income Tax Assessment Act 1997

Background

The Tax Law Improvement Project (TLIP) was established in December 1993 to restructure, renumber and rewrite in plain language Australia's income tax law. This was in response to a recommendation of the Joint Committee of Public Accounts that a task force be set up to rewrite the income tax law. An aim of the project is to reduce compliance costs, and improve compliance, by making the law easier to use and understand.

Tax Law Improvement Bill 1997

The Income Tax Assessment Act 1997 (the 1997 Act) established a structure and framework for a new Income Tax Assessment Act, to progressively replace the Income Tax Assessment Act 1936 (the 1936 Act).

Building on that platform, this Bill contains rewrites of further areas of the 1936 Act and continues to adopt features designed to make it easier for readers to read, use and apply the new law and, as a result, lower costs of compliance.

Content of the Bill

The Bill includes rewrites of provisions of the 1936 Act that deal with:

·
including various miscellaneous amounts in assessable income;
·
exempt income;
·
deductions for various miscellaneous amounts;
·
trading stock;
·
profits from the sale of previously leased cars;
·
deductions for depreciation of plant;
·
deductions for capital expenditure of primary producers and some land-holders using land for business purposes;
·
entertainment expenses;
·
deductions for gifts; and
·
the treatment of amounts that recoup deductible expenses.

The rewritten rules also include approximately 30 enhancements in the operation of the rewritten provisions which will make the law simpler, clearer and less burdensome for taxpayers. They do this by:

·
replacing impractical rules with ones which facilitate taxpayer compliance;
·
simplifying rules which are too complex;
·
deleting unnecessary rules;
·
removing anomalies; and
·
clarifying ambiguities.

About half of these changes pick up existing administrative practices which are largely to the benefit of taxpayers.

As well, the Bill will contain transitional and consequential amendments that support the rewritten rules. Among other things, these will:

·
amend Commonwealth Acts, including the 1936 Act and the 1997 Act, that contain references to the existing law, to ensure that they reflect the rewritten provisions; and
·
make amendments closing off the application of provisions in the existing law rewritten in the Bill.

As a general rule, the rewritten law will first apply for the 1997-98 income year.

Structure of the Bill

The content of the Bill is arranged in schedules.

All of the rewritten provisions of the 1936 Act are in Schedule 1, in the order in which they will appear in the 1997 Act. These provisions are in one schedule to keep all of the rewritten provisions together in the Bill.

After Schedule 1, the Bill contains a number of other schedules. Each of those schedules contains all the transitional and consequential amendments needed for one subject in the rewritten provisions. For example, the transitional and consequential amendments for the assessable income rewrite are in Schedule 2, for exempt income in Schedule 3, and so on.

The following table is a quick reference guide to the structure of the Bill:

TLIB Schedule 1- Division EM Chapter No. Consequential and Transitional Schedule No.
Division 15 - Assessable Income 2 2
Division 20 - Recoupment of 3 8
Deductible Expenses 4 7
Leased Cars
Divisions 25, 26 & 34 - 5 4
Deductions: particular items
Division 30 - 6 9
Gifts
Division 32 - 7 10
Entertainment
Division 42 - 8 6
Depreciation of Plant
Divisions 50-53, 55 - 9 3
Exempt Income
Divisions 70 & 385 - 10 5
Trading Stock
Division 387 - 11 11
Capital Allowances for Primary Producers and some Land-holders
Miscellaneous Amendments 12 12

B. Summary of Main Changes

In addition to the general improvements in structure, presentation and readability of the areas being rewritten, the Bill will make a number of specific changes to the operation of the law. These will mainly facilitate simpler and clearer expression and less arduous compliance requirements.

Assessable Income

The rewritten provisions which include particular amounts in assessable income will also contain the following specific change.

Income from lease premiums overlapping CGT provisions

Change: Omit a provision which includes in assessable income premiums received for the grant of a lease of property that is not for use for income producing purposes. The result will be to deal with these under the capital gains tax provisions.

Existing law: Assesses the premium a lessor receives for granting a lease where the lessee did not intend the property to be used in gaining or producing assessable income. The capital gains tax provisions also apply to the grant of a lease and although there is no double taxation, the overlap causes confusion and unnecessary cost.

Deductions

As well as rewriting provisions that allow deductions for various amounts, the Bill will make the following specific changes.

1. Rates and mutual receipts

Change: Align the law with administrative practice by confirming that deductions for rates and land tax are allowable on premises used to produce mutual income.

Existing Law: Under the principle of mutuality, an entity cannot derive income from itself. This technically precludes clubs, professional associations and similar organisations from deducting land tax and rates.

Bad debts

Change: Confirm the administrative practice of allowing a money lender to deduct bad debts on a purchased loan when the debt is written off.

Existing law: If a money lender purchases a debt, the law is not completely clear on when a bad debt can be deducted. Administrative practice allows a deduction when the debt is written-off.

Borrowing expenses

Changes:

·
allow a deduction for any remaining undeducted borrowing expenses if the loan is repaid early; and
·
clarify that a deduction is only allowed for borrowing expenses to the extent that the money is used to produce assessable income in the year in which the deduction is claimed.

Existing Law: Expenses of borrowing money for use in producing assessable income are normally deducted over the period of the loan or over five years. The first change provides a new benefit for taxpayers. The second change clarifies an area of uncertainty.

Capital legal expenses

Change: Omit the provision which specifically allows a deduction for $50 in capital legal expenses.

Existing law: Allows a deduction of up to $50 of legal expenses incurred in carrying on a business to produce assessable income, even if the expenses are of a capital nature. The deduction must be reduced by any legal expenses that can be deducted under the general deduction provision.

Trading Stock

The Bill will enhance the structure of the law on trading stock by moving the provisions for deferring profit on forced disposal of live stock from the general trading stock rules to the primary production provisions in the new law. By concentrating specialist rules together they do not complicate the general parts of the law, and are more easily found by specialists.

The Bill will also make the following specific changes.

1. Bovine tuberculosis

Change: Bring the formula for reducing the tax cost of replacement stock on the disposal of tubercular cattle into line with the formula used for disposals due to other diseases.

Existing Law: If diseased cattle are disposed of, a primary producer can elect to spread the assessment of any profits over five years or to reduce the tax cost of replacement stock acquired in those five years. The formula for reducing the tax cost of purchased replacement stock is different if the disease is bovine tuberculosis than it is for other diseases.

2. Change in ownership

Change: Clarify the law by replacing rules that apply to disposals of part interests in trading stock with rules that apply to a change in the taxpayer who accounts for the trading stock.

Existing Law: A partial disposal of trading stock outside the ordinary course of business is treated as a sale of the trading stock at market value from the old owners to the new owners, even if they are the same entities and only their proportionate interests have changed.

3. Tree plantation deduction: disposal on death of taxpayer

Change : Remove an anomaly by extending the deduction allowed for the cost of plantation trees on their disposal outside the ordinary course of business to cases where the trees are disposed of because of the owner's death.

Existing Law: Allows a deduction for the cost of plantation trees acquired with land when they are disposed of outside the normal course of business but not for disposals caused by the death of the owner. In the latter cases, the full value of the trees is assessed without deduction.

4. Cost of natural increase

Change: Simplify the valuation of the natural increase of live stock, by standardising the choices of valuation to actual cost or a prescribed minimum value.

Existing Law: Choices for working out the cost of natural increase of live stock are excessively complicated and have inconsistent conditional requirements.

5. Standardise partnership and trust election rules

Change: Allow partnerships and trusts to make a single election to defer assessing income from:

·
certain abnormal disposals of live stock;
·
insurance recoveries for losses of live stock or trees;
·
the sale of double wool clips; and
·
the devolution of trading stock on death by allowing each partnership and trust estate to make a single election.

Existing law: There are a number of different systems requiring either elections by individual beneficiaries and partners, at the partnership or trust level or a combination of these.

6. Valuing live stock

Change: Standardise the valuation of live stock and other kinds of trading stock by allowing:

·
the choice of replacement price as a valuation method;
·
different items of live stock to be valued on different bases; and
·
valuation methods to be changed yearly without approaching the Commissioner.

Existing Law: In valuing closing stock a general trader can choose between different values for each item of stock (cost, replacement price, or market selling value). In contrast, for live stock the choice of replacement price is unavailable; the same method is required for all live stock and the Commissioner's permission is required in order to use another basis in a later year.

7. Live stock elections and abnormal disposals

Change: Standardise the forms of elections to defer the assessment of profits from abnormal disposals of live stock.

Existing Law: Taxpayers may elect to defer the taxing point for profits on disposal of live stock outside the ordinary course of their business rather than return the market value of that stock as assessable income. The forms of the elections are complex, confusing and inconsistent.

8. Opening stock values

Change: Ensure that the value of stock on hand at the start of a year is always the same as the value used for it at the end of the previous year.

Existing Law: The value of trading stock at the start of a year may be able to be amended if it is wrong. Time limits may mean that the previous years closing figure (which should be the same) can not also be amended.

Depreciation

The Bill will improve the structure of the depreciation provisions by:

·
placing the main operative provisions up front; and
·
arranging the other provisions into Subdivisions each dealing with a component of the deduction calculation.

Areas of uncertainty have been clarified and unnecessary rules removed. The following notes discuss the most important of those changes. There are also a number of miscellaneous changes. All changes are discussed in detail in Part B of Chapter 8.

1. Cost of previously depreciated plant

Change: Allow taxpayers who acquire previously depreciated plant to depreciate it on the basis of its cost to them without having to approach the Commissioner for approval. However the Commissioner will have a discretion to reduce its cost in certain circumstances.

Existing Law: The amount a taxpayer can deduct for previously depreciated plant is automatically limited to the vendor's written down value and any assessable balancing charge, unless the Commissioner exercises a discretion to allow depreciation on the basis of its cost.

2. Cost of plant acquired with other assets

Change: Provide a cost for plant acquired with other assets without a specific price being allocated to it.

Existing Law: There is no guidance on what the cost should be for plant acquired in these circumstances (although the law contains the basis for calculating a termination value for plant sold in such cases.)

3. Notional write down of plant

Change: Clarify that plant is to be notionally written down for any period when it is used for a purpose other than producing assessable income.

Existing Law: While the law is applied in this manner, it is not expressly stated.

4. Prime cost election

Change: Allow a taxpayer, when choosing a method of calculation, to elect to use the prime cost method for any unit of depreciable plant.

Existing Law: The election to use prime cost is irrevocable and must be made at the commencement of depreciation for all units of depreciable property that have been acquired during the income year.

5. Using a lower rate

Change: There will be no restriction against adopting a lower depreciation rate.

Existing law: Plant cannot be written off over a period that is longer than its effective life.

Leased Cars

The Bill will create new Subdivision 20-B which improves on the structure of the provision it replaces by separating the usual treatment of profits on the sale of leased cars from the special rules for disposals by associates. Consequently, most affected taxpayers will not have to deal with the more specialised parts of the Subdivision.

The Bill will also make the following specific change.

1. Disposal of previously leased cars

Change: Standardise the treatment of the profit from the disposal of previously leased cars to include insurance payments in assessable income where property passes to an insurance company.

Existing Law: The existing law includes in assessable income any profit on the disposal of a car by a taxpayer who had previously leased it for income producing purposes but is unclear on the treatment when property passes to an insurance company.

Primary Production

The Bill will make structural improvements to the capital allowance provisions for primary production and some land-holders by:

·
collocating seven of the capital allowances in one division because of their common theme of the use of land for business; and
·
merging the timber access road and timber mill building subdivisions into one subdivision thereby reducing duplication.

The Bill will also make the following specific changes.

1. Capital expenditure on forestry roads and timber mill buildings.

Change: Align the law with administrative practice by allowing taxpayers acting in good faith to deduct capital expenditure on a forestry road or timber mill building on the basis of its cost to them, if they acquire it from someone who has previously claimed deductions for it.

Existing Law: The current law limits the amount a taxpayer can deduct to the sum of the vendor's written down value and any assessable balancing charge. The Commissioner has a discretion which is usually exercised to allow deductions to be based on actual expenditure.

2. Capital expenditure on telephone lines

Change: Remove an anomaly by allowing a deduction for capital expenditure incurred on a telephone line where a deduction for it has also been allowed to the entity which installed it for the taxpayer.

Existing Law: A deduction is denied for any part of the line for which another taxpayer has been allowed a deduction.

Entertainment

The Bill will incorporate structural improvements in rewriting the entertainment provisions by:

·
bringing together at the beginning of the Division the two operative provisions in the entertainment area that do not allow a deduction for expenditure incurred in providing entertainment and not allow a deduction in relation to property;
·
including to the extent possible the relationship between the entertainment provisions and the FBT provisions in the first exception; and
·
incorporating the rest of the exceptions into tables that group related exceptions and are easy to read, bringing together the assessing provision previously contained in section 26AAC with related deduction provisions about in-house dining facilities.

The Bill will also make the following specific change.

1. Self entertainment

Change: Remove the exception for 'self entertainment' to the general rule that entertainment expenses are non deductible, as it has little or no application.

Existing Law: Provides a taxpayer with an exception to the general rule that entertainment expenses are not deductible under the general deduction provision, where the expenditure is on the entertainment of a recipient who could have deducted the expenditure if they had incurred it themselves. The type of expenditure envisaged by the exception is now not considered to be entertainment.

Recoupment of deductible expenses

The Bill improves on the structure of the existing 23 provisions dealing with recoupment of deductible expenses by consolidating these provisions in one place. This will make the law simpler, shorter and easier to find.

1. Standardise treatment of recoupment of deductible expenses

Change: Standardise the treatment of recoupment of certain deductible expenses so that these recoupment amounts will be assessable when received, but only to the extent that they do not exceed the amount of deductions already allowed.

Existing Law: There are 23 provisions in the existing law dealing with recoupment received for amounts that are allowable as deductions. These provisions either disallow deductions or treat the recoupment as assessable income when received.

C. Finding Tables

This Explanatory Memorandum contains finding tables which cross-reference the existing and rewritten provisions to make it easier to find your way from the existing law to the new law, and vice versa (see Chapter 14).

Editor's Note: The Finding Table for this Explanatory Memorandum has been incorporated into the Tax Technical Database for your ease of use

D. Revenue Impact

The Bill will have a broadly neutral impact on revenue. All but two of its measures will have no measurable effect.

A proposal to allow a deduction for rates and land tax on premises used to produce mutual receipts will have an annual cost of less than $10 million.

A change to bring the valuation methods for live stock closer into line with those for other kinds of trading stock will cost up to $10 million in most years. In an occasional year where there is a large fall in stock prices the cost could exceed $25 million.

E. Compliance Impact

The Bill should achieve a noticeable reduction in compliance costs for those using the parts of the income law it deals with. That reduction will not occur because of any single change but from the accumulation and combined impact of many small improvements.

The law will be shorter, clearer and simpler. Together, through provision after provision, these will produce a significant effect. There are particular measures aimed at reducing compliance costs by which:

·
unnecessary requirements of the existing law will be removed;
·
the number of complex calculations will be cut back;
·
rules that have essentially the same effect will be standardised;
·
record keeping obligations will be reduced; and
·
the law will be brought into line with practical administrative positions.

A more significant reduction in compliance costs will arise as a result of the following changes:

·
allowing partnerships and trust estates to make a single election to defer assessable income from various sources. This change will reduce the number of elections required, simplify calculations and save text; and
·
including compensation amounts for certain deductible expenses in assessable income rather than disallowing the deduction. This eliminates the need to seek amended assessments for an earlier year when an amount of compensation is received.

F. Date of Effect

All measures in the Bill will apply from the beginning of the 1997-98 income year. For some measures, special transitional arrangements will apply. These are explained in the notes describing those measures.

Chapter 1 - About the Tax Law Improvement Project

This chapter provides background information on the Tax Law Improvement Project.

Overview of this chapter

·
This chapter discusses briefly:
·
the role of the Tax Law Improvement Project in redressing problems with the structure and expression of the existing law; and
·
how this instalment builds on the resulting improvements developed in the 1997 Act.

About the Tax Law Improvement Project

In November 1993, the Joint Committee of Public Accounts published a report recommending the setting up of a broadly based task force to rewrite the income tax law. In the following month, the Tax Law Improvement Project was established.

This is a project to restructure, renumber and rewrite in plain language Australia's income tax law. It aims to improve taxpayer compliance and reduce compliance costs by making the law easier to use and understand.

In the course of the rewrite, opportunities are being taken to make minor content changes to improve the law. These aim to reduce or eliminate unnecessary complexity and bring the law more into alignment with administrative and commercial practice.

Problems with the existing law

For many years, the income tax law has been criticised as being too difficult to read and understand. When the 1936 Act was introduced, it was under 100 pages long. Now, it is some forty times longer. Sixty years of constant change has produced a body of law that no longer meets the needs of its users. It is hard to understand the framework of the law and to assimilate the detail. The law is far from being reader friendly.

Structure

Originally, the structure of the existing law was a logical arrangement of the sections however the volume of material added in later years has obscured the original structure so that it is no longer readily discernible.

The 1997 Act establishes a new structure, one which reintroduces a logical arrangement of material and provides readers with a framework which will be easier to follow and use. As well, the new structure is designed to be flexible enough to continue to meet its readers' needs well into the future.

This Bill continues the process of progressively rewriting the 1936 Act and placing this material within the structure of the Income Tax Assessment Act 1997.

Numbering

The Bill adopts the versatile numbering system established in the 1997 Act to overcome problems of over-crowding in the existing law and accommodates expansion.

Language

As well as changes to the structure of the law, the Bill continues to improve the expression of the law by concentrating on the needs of those who read and apply it. The existing law is so complex that even many professional advisers have come to rely on secondary source materials to inform themselves; largely ignoring the statutory expression.

This Bill adopts a style which has been designed for the widest professional audience. Individual taxpayers do not necessarily read the law, but provisions which affect them must be capable of being readily communicated by their advisers.

In order to assist in that task, rewritten provisions that apply to individual taxpayers address the reader directly.

Using a familiar style to most people will make the law less intimidating, more directly engaging and accessible by a wider audience. This helps people make personal sense of the law.

Direct address simplifies the text. It supports proven methods of improving a reader's ability to understand documents (eg. by using active rather than passive voice and using action verbs). Tax advisers and educators should be able to use the words of the law directly when explaining people's rights and obligations.

Layout

The way in which the law is presented is as important to comprehension as its text and structure. Important advances in this area made in the 1997 Act are continued in this Bill.

Chapter 2 - Assessable Income

This chapter explains the rewritten provisions that include particular amounts in a taxpayer's assessable income.

These provisions are contained in new Division 15 in Schedule 1 to the Tax Law Improvement Bill 1997.

Transitional and consequential amendments for the rewritten provisions are contained in Schedule 2 to the Bill.

Overview of this chapter

This chapter covers:

·
the rewritten provisions in Division 15 (Assessable Income) in Schedule 1 to the Tax Law Improvement Bill 1997; and
·
the transitional provisions and consequential amendments for those rewritten provisions in Schedule 2 to the Bill.

Division 15 contains the rewritten provisions of the 1936 Act that include particular amounts in a taxpayers assessable income. The corresponding provisions of the 1936 Act are mainly in section 26 of that Act.

The rewritten provisions will complement the core provisions about assessable income contained in Division 6 of the 1997 Act.

Part A of this chapter summarises new Division 15.

Part B explains the changes proposed to the content of the current provisions.

Part C explains why some provisions of the 1936 Act have not been rewritten.

Part D explains the transitional provisions which set out how and when the rewritten provisions will apply.

Part E explains the amendments that need to be made to the 1997 Act, the 1936 Act and other Commonwealth legislation, because of the rewriting of the provisions of the 1936 Assessment Act.

A. Summary of the new law

Guide to Division 15: Some items of assessable income

What the division will do Division 15, which will apply to taxpayers generally, will include the following amounts in assessable income.
Return to work payments Amounts received under an arrangement to induce you to resume working for, or providing services to, an entity. [section 15-3]
Accrued leave transfer payments Amounts you receive from an entity for leave accrued by someone who previously worked for that entity, but now works for you. [section 15-5]
Bounties and subsidies Bounties or subsidies received in carrying on a business (which are not already ordinary income). [section 15-10]
Profits arising from a profit-making undertaking Profits from carrying on a profit-making undertaking (that are not ordinary income or do not arise from the sale of property acquired on or after 20 September 1985). [section 15-15]
Royalties Amounts received as royalties in the ordinary sense (that are not ordinary income). [section 15-20]
Amounts for a lease obligation to repair Amounts received as a lessor or former lessor from an entity for failing to comply with a lease obligation to repair premises where the entity uses or has used the premises to produce assessable income. [section 15-25]
Insurance or indemnity amounts for the loss of assessable income Amounts received by way of insurance or indemnity for a loss of an amount that would have been included in your assessable income (where the insurance or indemnity amount is not ordinary income). [section 15-30]
Interest on overpayment or early payments of tax Interest you receive under the Taxation (Interest on Overpayments and Early Payments) Act 1983 will be assessed when it is paid to you or applied to discharge a liability you have to the Commonwealth. [section 15-35]

B. Discussion of changes

Section 15-3 Return to work payments

This section will include in your assessable income an amount you receive under an arrangement entered into to induce you to resume working for, or providing services to, someone else.

Change

The section will only apply to an amount received under an arrangement (as defined in section 995-1 of the 1997 Act).

Explanation

The existing law (paragraph 26(eb)) applies to an agreement, arrangement or understanding (whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable by legal proceedings).

The standardised definition of arrangement in section 995-1 of the 1997 Act is identical to the existing wording, except that it includes a reference to a promise or undertaking. However, in section 15-3 any promise or undertaking of the kind described would be covered by the existing reference to agreement, arrangement or understanding.

Section 15-10 Bounties and subsidies

This section will include in assessable income a bounty or subsidy received in carrying on a business, unless it is ordinary income.

1. Change

Omit from the rewritten section the existing exemption for petroleum search subsidies.

Explanation

The exemption in the existing provision (paragraph 26(g)) is redundant, as it was inserted to cover payments made under the Petroleum Search Subsidy Act 1957, which was repealed in 1972.

2. Change

Omit from the rewritten section the words that deem a bounty or subsidy to be part of the proceeds of a business.

Explanation

These words are redundant. They were inserted to ensure that bounties and subsidies were treated as income from personal exertion for the purposes of the 1936 Act. That Act makes a distinction between income from personal exertion and income from property that no longer has any practical effect.

3. Change

The rewritten section will only apply to bounties and subsidies that are not ordinary income.

Explanation

Most bounties or subsidies in relation to business activities will be assessed as ordinary income. However any bounties or subsidies of a capital nature related to carrying on of business will be assessable under this provision. The exclusion of ordinary income makes it clear that the section does not modify the treatment of bounties or subsidies that are ordinary income where returnable on an accruals basis. Nor does it modify the treatment of any bounties and subsidies that are ordinary income where properly returnable on a cash receipts basis.

Section 15-15 Profit-making undertakings

This section will include in assessable income a profit that arises from carrying out a profit-making undertaking or plan, provided that the profit:

·
is not ordinary income; or
·
does not arise from the sale of property acquired on or after 20 September 1985.

1. Change

The rewritten section will not include in assessable income profits from the sale of property acquired for the purpose of profit-making by sale.

Explanation

The existing law (section 25A) includes in assessable income:

·
profits from a sale of property acquired for profit-making by sale; and
·
profits from carrying on any profit-making undertaking or plan.

Capital gains tax (CGT), introduced in 1985, provided for a new treatment of profits from the sale of property. As a consequence, section 25A only applies to a sale of property if the property was acquired before CGT was introduced. Because the ongoing operation of these rules is minimal, they will for the time being continue to operate in the existing law without being rewritten.

That part of the existing law that applies to profits from carrying on any profit-making undertaking or scheme has been rewritten in section 15-15.

2. Change

The rewritten section will use the word plan instead of the defined term scheme.

Explanation

The existing law uses the phrase profit-making undertaking or scheme.

Scheme has been defined in the 1997 Act. It is intended to be used in anti-avoidance contexts. As section 15-15 is not an anti-avoidance provision, plan will be used instead. There is no change from the meaning of the existing law.

3. Change

The rewritten section will only assess amounts that are not ordinary income.

Explanation

This wording change reflects the courts view of the existing law - that you only need to consider the specific rules about profit-making transactions if a profit is not assessable as ordinary income.

Profits arising from the carrying on of a profit-making undertaking or plan will generally be assessed as ordinary income. However, if there are any capital profits which satisfy the section, they will be assessable under this provision.

Section 15-20 Royalties

This section will include in assessable income an amount which is a royalty in the ordinary sense of that term (an ordinary royalty), unless it is ordinary income.

Change

This rewritten section will only assess ordinary royalties that are not ordinary income.

Explanation

The existing provision (paragraph 26(f)) assesses all royalties (as defined), except those amounts which are royalties only because of the definition, and are not ordinary income.

This treatment of royalties is demonstrated in the following table:

  Amount is an ordinary royalty Amount is a royalty only under statutory definition
Amount is ordinary income Assessable Assessable
Amount is not ordinary income Assessable Not assessable

The existing provision applies to every scenario in this table.

The rewritten section will allow the general income provision (section 6-5 of the 1997 Act) to assess amounts which are ordinary income. The only other type of payment that the rewritten section will cover is an ordinary royalty that is not ordinary income.

This will make the law easier to understand.

The exclusion of ordinary income also makes it clear that the section does not modify the treatment of royalties that are ordinary income where accounted for on an accruals basis. Nor does it modify the treatment of any royalties that are ordinary income where properly returnable on a cash receipts basis.

Section 15-25 Amount received for a lease obligation to repair

This section will include in assessable income an amount received by a lessor or former lessor from an entity for failing to comply with a lease obligation to repair premises where that entity uses or has used the premises to produce assessable income.

Change

The rewritten section will only assess amounts that are not ordinary income.

Explanation

The exclusion of ordinary income makes it clear that the section does not modify the treatment of amounts that are ordinary income where returnable on an accruals basis. Nor does it modify the treatment of amounts that are ordinary income where properly returnable on a cash basis.

Section 15-30 Insurance and indemnity amounts for the loss of assessable income

This section will include in assessable income an insurance and indemnity amount if:

·
it is for the loss of an amount that would have been included in assessable income; and
·
it is not ordinary income.

Change

The rewritten section will only assess amounts that are not ordinary income.

Explanation

Insurance and indemnity amounts for the loss of an amount that would have been assessable income will generally be assessed as ordinary income. Any amounts that are not ordinary income will be assessable under this provision.

The exclusion of ordinary income makes it clear that the section does not modify the treatment of insurance and indemnity amounts that are ordinary income where returnable on an accruals basis. Nor does it modify the treatment of insurance and indemnity amounts that are ordinary income where properly returnable on a cash basis.

C. Provisions of the old law that have not been rewritten

Redundant provisions

Some provisions of the existing law are redundant and have not been included in the new law. They are summarised in the following table:

Provision Subject Reason for omission
Section 22 Income received from a pre-1936 transaction is assessable under the 1936 Act if it would also have been assessable under the Income Tax Assessment Act 1922. It is unlikely that any income of this kind is still being received.
Paragraph 26(h) Fees and commissions received for procuring a loan. These amounts, being rewards for service, are ordinary income, and do not need to be specifically included.
Paragraph 26(ja) Amounts received for trading stock under the Decimal Currency Board Act 1963. The Decimal Currency Board Act was repealed in 1981.

Unnecessary duplication

Provision not to be rewritten

The existing law (section 26AB) assesses any premium that:

·
a lessor receives for granting a lease if, when granted, the lessee did not intend the leased property to be used to produce assessable income; or
·
a lessee receives for assigning a lease if, when assigned, the assignee did not intend the leased property to be used to produce assessable income.

Reason for omission

Section 26AB largely duplicates the work done by the capital gains tax (CGT) provisions, which deal more comprehensively with lease premiums.

In particular, section 160ZS provides that the grant of a lease is treated as a disposal of the lease by the lessor for the premium. Any excess of the premium over the cost base is a capital gain, the cost base being the expenses incurred by the lessor in respect of granting the lease.

The CGT treatment of lease assignments is similar.

Section 26AB, and the CGT provisions, often both apply to a grant or assignment of a lease for a premium. However, the premium is not taxed twice as the amount of a capital gain is reduced to the extent that the lease premium is assessable (section 160ZA).

The proposed omission of section 26AB will result in lease premiums that are not ordinary income being dealt with exclusively under the CGT regime. This change, which can give a slightly better outcome for taxpayers than if the premiums were excluded from the CGT provisions, will result in some changes in treatment:

·
a smaller amount may be brought to account. For example, expenses incurred in granting the lease would not normally be deductible but would reduce the capital gain;
·
a taxpayer may reduce a capital gain by unused capital losses of previous years; and
·
the taxpayers capital gains may be notionally averaged, reducing the tax on the premium.

D. Transitional arrangements

Part 1 of Schedule 2 of the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this chapter.

Part 1 will insert in the Income Tax (Transitional Provisions) Act 1997 new Division 15. New Division 15 will set out how and when the rewritten sections will apply.

The rewritten provisions will generally apply to assessments for the 1997-98 or later income years. [Schedule 2, Part 1: subsection 15-1(1), Transitional Provisions Act]

In some cases, however, it is necessary to have different rules for the application of the rewritten provisions [Schedule 2, Part 1: subsection 15-1(2), Transitional Provisions Act] . The reasons for this are to ensure:

·
some rewritten provisions apply in the 1997-98 or later income years even though certain key events may have happened before that time;
·
a smooth transition between the existing provisions and the rewritten provisions where the rewritten provisions both assess amounts when received and exclude amounts that are assessable as ordinary income; and
·
a reference to assessable income in the rewritten provision covers amounts assessable under the 1936 Act and the 1997 Act.

Rewritten provisions that will apply from the 1997-98 income year, even though key events happened before that time

The transitional provisions that give effect to this purpose are explained in the table below. In each case, the transitional section number corresponds to the section number of the rewritten provisions.

Transitional section Nature of amount and section references in the rewrite Description of event that can happen before the 1997-98 income year
15-15 Profits from a profit-making undertaking The undertaking was entered into or began to be carried on.
15-30 Insurance or indemnity amounts for a loss of assessable income The loss to which the insurance or indemnity amount relates.
15-35 Interest on overpayments or early payments of tax Accrual of all or part of the interest.

Rewritten provisions that will assess amounts when received and exclude amounts of ordinary income.

Sections 15-10 (bounties and subsidies), 15-20 (royalties), 15-25 (amounts for a lease obligation to repair) and 15-30 (amounts for a loss of assessable income) will all assess amounts when received while excluding amounts of ordinary income. These provisions will apply to amounts received in the 1997-98 income year and later income years [Schedule 2, Part 1: sections 15-10, 15-20, 15-25 and 15-30, Transitional Provisions Act] , rather than to assessments for the 1997-98 income year or later income years.

This will ensure that amounts of ordinary income that would otherwise fall within the existing provisions are assessed if they are derived in the 1996-97 or earlier income years, but are received in the 1997-98 or later income years.

A reference to assessable income covers amounts assessable under both the 1936 Act and the 1997 Act

Section 15-30 will assess insurance or indemnity amounts received for the loss of an amount of assessable income. The transitional section for this rewritten provision [Schedule 2, Part 1: section 15-30, Transitional Provisions Act] ensures that it applies to losses of amounts that are assessable income, regardless of whether the amounts are assessable under the 1936 Act or the 1997 Act.

E. Consequential amendments

Amendments of the Income Tax Assessment Act 1997

Part 2 of Schedule 2 to the Bill will amend the 1997 Act to:

·
update references to provisions of the 1936 Act that have been rewritten in Division 15; and
·
insert additional definitions in the Dictionary in section 995-1 of terms that are used in the rewritten provisions contained in Division 15 in Schedule 1.

Updated references

Section 10-5 of the 1997 Act contains a list of all the provisions of both the existing and rewritten laws that deal with particular kinds of assessable income. Part 2 of Schedule 2 will update those references to existing provisions that have been rewritten in Division 15, so that the lists refer to the rewritten provisions. [Schedule 2, Part 2: items 3 to 16]

References in section 10-5 to existing provisions (section 26AB and parts of section 25A) that will have some limited ongoing operation have been changed to take account of this operation. [Schedule 2, Part 2: items 11 and 14]

New Dictionary terms

Part 2 of Schedule 2 will insert a new definition of a term used in the rewritten provisions in Division 15 in.

New Definition: Royalty [Schedule 2, Part 2: item 17]
Commentary: For the time being, royalty will have the meaning given by the definition in subsection 6(1) of the 1936 Act.

Application of amendments

The amendments made by Part 2 of Schedule 2 apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the assessable income provisions.

Amendments of the Income Tax Assessment Act 1936

Part 3 of Schedule 2 to the Bill will amend the 1936 Act to:

·
insert references to the rewritten provisions contained in Division 15 where the 1936 Act currently refers to the existing provisions; and
·
close off the application of provisions of the 1936 Act that have been rewritten in Division 15, so that the existing provisions apply only to the 1996-97 and earlier income years; and
·
preserve the operation of an existing Income Tax Regulation made for the purposes of paragraph 26(eb) of the 1936 Act, which has been rewritten in Division 15.

Inserting references to rewritten provisions

Part 3 of Schedule 2 will insert in the 1936 Act references to the rewritten provisions contained in Division 15 where the 1936 Act currently refers to the existing provisions. There are two categories of these amendments as discussed below.

The first category will add a reference to a rewritten provision in a section of the 1936 Act where a reference to the existing provision currently appears, so that both existing and rewritten provisions are cited.

This is necessary for references to section 25A of the 1936 Act, which has been partly rewritten (section 15-15). The part of section 25A that has not been rewritten will continue to apply in the 1997-98 and later income years. This makes it necessary to refer to both the existing and rewritten provisions. [Schedule 2, Part 3: items 18, 23 to 28 and 35 to 37]

This approach is also necessary where the provision being consequentially amended (as opposed to the rewritten provision):

·
has not yet been rewritten and closed off; and
·
can apply to amounts relating to more than one income year (including an income year before the 1997-98 income year). [Schedule 2, Part 3, item 29]

The second category will omit the reference to the existing provision in a section of the 1936 Act and replace it with the rewritten provision. This is necessary for those sections of the 1936 Act that:

·
have not yet been rewritten and closed off; and
·
can apply to amounts that relate to only one income year at a time, being the 1997-98 or a later income year. [Schedule 2, Part 3: items 30 to 32 and 34]

Closing off the application of existing provisions

Part 3 of Schedule 2 will insert new provisions into the 1936 Act that will close off the application of existing provisions to the extent they have been rewritten or are redundant. [Schedule 2, Part 3: item 19 to 22]

In these cases, the existing provisions need to be closed off so that they only apply to the 1996-97 and earlier income years. This complements the transitional provisions in Part 1 of Schedule 2 which ensure that the corresponding rewritten provisions apply to the 1997-98 and later income years.

As with the transitional provisions, it is necessary to specify in some of the closing off provisions that the existing provisions do not apply to amounts received in the 1997-98 or later income years even though certain events may have happened before that time. They are the events set out in the table in the explanation of the transitional provisions.

New section 25B of the 1936 Act is a table that closes off the various paragraphs of section 26 of that Act [Schedule 2, Part 3: item 20] . Some of those paragraphs (parts of paragraph 26(j) and paragraph 26(k)) have been rewritten in the recoupment and trading stock rewrites in this Bill. However, all paragraphs in section 26 have been closed off by this Schedule for ease of drafting.

Preserving an existing Income Tax Regulation

Part 3 will also preserve, in particular cases, the operation of an Income Tax Regulation affected by the rewrite of paragraph 26(eb) of the 1936 Act [Schedule 2, Part 3: item 33] . Paragraph 26(eb) deals with return to work payments, and is rewritten at section 15-3.

Section 221C of the 1936 Act allows for regulations to prescribe rates of deductions of tax instalments by an employer from an employees salary or wages. Subsection (1AC) allows for the regulations to prescribe special rates for return to work payments paid to an employee. Income Tax Regulation 80 sets out the special rates.

Item 32 of Part 3 will substitute, in subsection 221C(1AC), a reference to section 15-3 of the 1997 Act for the existing reference to paragraph 26(eb). The amendment will apply to the 1997-98 and later income years.

Item 33 has been inserted as a consequence of the change made by item 32. It will ensure that paragraph (a) of Income Tax Regulation 80 continues to apply in the 1997-98 and later income years, to paragraph 26(eb) amounts received in the 1996-97 income year or an earlier income year. It does not give paragraph (a) of Regulation 80 general ongoing operation.

Application of amendments

The amendments made by Part 3 of Schedule 2 apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the assessable income provisions.

Amendments of other Commonwealth legislation

Part 4 of Schedule 2 to the Bill will amend the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 to add references to rewritten provisions contained in Division 15 where that Act currently refers to the existing provisions. [Schedule 2, Part 4: items 38 and 39]

Application of amendments

The amendments made by Part 4 of Schedule 2 apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the assessable income provisions.

Chapter 3 - Recoupment of deductible expenses

This chapter explains the rewritten provisions that deal with recoupment of deductible expenses.

These are contained in new Subdivision 20-A in Schedule 1 to the Tax Law Improvement Bill 1997.

Transitional and consequential amendments for the rewritten provisions are contained in Schedule 8 to the Bill.

Overview of this chapter

This chapter covers:

·
the rewritten provisions in Subdivision 20-A (Insurance, indemnity or other recoupment for deductible expenses) in Schedule 1 to the Tax Law Improvement Bill 1997; and
·
the transitional provisions and consequential amendments for those provisions in Schedule 8 to the Bill.

Subdivision 20-A contains the rewritten provisions of the 1936 Act that deal with recoupment of (or compensation for) deductible amounts. The rewritten provisions will treat certain recoupment amounts as assessable income on a consistent basis. The corresponding provisions of the 1936 Act are dispersed throughout that Act. Those rules either treat recoupment as assessable income, or claw back deductions allowable as a result of incurring deductible expenses.

The rewritten provisions complement the general provision that includes ordinary income in assessable income. Part A of this chapter summarises new Subdivision 20-A. Part B explains changes proposed to the content of the current provisions. Part C explains why some provisions of the 1936 Act have not been rewritten. Part D explains the transitional provisions which set out how and when the rewritten provisions will apply. Part E explains the amendments being made to the 1997 Act, the 1936 Act and other Commonwealth legislation, because of the rewrite of the provisions of the 1936 Act.

A. Summary of the new law

Guide to Subdivision 20-A: Insurance, indemnity or other recoupment for deductible expenses

What the Subdivision will do

Subdivision 20-A will include in assessable income an amount received by way of insurance, indemnity or other recoupment if:

·
it is for deductible expense; and
·
it is not otherwise assessable income.

How to use the Subdivision

The Subdivision has two groups of provisions. When using the Subdivision, these groups should be considered separately. [section 20-15]

The first group determines what recoupment amounts are assessed under Subdivision 20-A. [sections 20-20 to 20-30] These recoupments will be known as assessable recoupments. The second group of provisions does not have to be read if an assessable recoupment has not been received.

The second group determines how much of an assessable recoupment is assessable under Subdivision 20-A. [sections 20-35 to 20-55]

Assessable recoupments - the amounts Subdivision 20-A will assess

The General Rule

Only assessable recoupments will be assessable under Subdivision 20-A. There is a three-step process involved in determining whether an amount is an assessable recoupment. [Section 20-20]

Step 1: Ignore amounts that are otherwise assessable

Amounts that are ordinary income, or are statutory income, because of a provision outside Subdivision 20-A are not assessable recoupments. [subsection 20-20(1)]

Step 2: Insurance and indemnity amounts

Insurance and indemnity amounts received for any deductible loss or outgoing are assessable recoupments. [subsection 20-20(2)]

Step 3: Other recoupment amounts

Recoupment amounts (except an insurance or indemnity) received for a deductible loss or outgoing are also assessable recoupments, but only if the loss or outgoing is deductible under a provision listed in section 20-30. [subsection 20-20(3)]

What is recoupment?

The rule is

The ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing. Nevertheless, to make it clear that the term includes certain common types of compensation, it will be defined to include any kind of recoupment, reimbursement, recovery, refund, insurance or indemnity. [paragraph 20-25(1)(a)]

The following amounts will also be within the definition:

·
a grant in respect of a loss or outgoing [paragraph 20-25(1)(b)] ;
·
amounts paid on the taxpayers behalf for a loss or outgoing [subsection 20-25(2)] ; and
·
an amount received for disposing of a right to recoupment [subsection 20-25(3)] .

Balancing charge amounts are not recoupment.

Recoupment does not extend to an amount received on disposal, loss or destruction of property to which the loss or outgoing relates. A balancing charge on disposal, loss or destruction of such property is expressly excluded. [subsection 20-25(5)]

What if the amount you receive is recoupment of a loss or outgoing to an unspecified extent?

The amount is taken to be recoupment to the extent that is reasonable. [subsection 20-25(4)]

Deductions for which recoupments (except insurance and indemnity amounts) are assessed under Subdivision 20-A

The rule is

Recoupment amounts (except insurance or indemnity amounts) are only assessed by Subdivision 20-A if the amount is received for certain deductible losses or outgoings, [subsection 20-20(3)]

These deductions [listed in section 20-30] currently have specific recoupment rules.

On the other hand, Subdivision 20-A will assess insurance and indemnity amounts received for any deductible loss or outgoing, including those listed in section 20-30. [subsection 20-20(2)]

Recoupment amounts will generally be assessable income

The general rule is

Any assessable recoupment received for a loss or outgoing will be included in assessable income. [subsection 20-20(2)

How much of the recoupment is assessable?

The rule is

There is a limit on the total of assessable recoupments to be included in assessable income at any given time. the limit is the total amount of the loss or outgoing that can be or has been deducted at that time. [subsections 20-35(1) and 20-40(1)]

What if the loss or outgoing is deductible over 2 or more income years?

These cases are dealt with separately [section 20-40] to distinguish them from the more common single year deduction case. [section 20-35]

The limit on how much is assessable is particularly important for losses or outgoings deductible over 2 or more income years. Any part of an assessable recoupment that is not included in assessable income in the year of receipt because of this limit will be assessed when further amounts are deducted for the expense.

The limit takes into account amounts included in your assessable income under a previous recoupment law. This defined term refers to provisions in the existing law that assess recoupment amounts. [section 20-55]

What if a recoupment is received before the income year in which the loss or outgoing can be deducted?

If the amount is deductible in a single income year, the assessable recoupment is included in assessable income in the year the loss or outgoing is deducted. [subsection 20-35(3)]

If the amount is deductible over more than one year, an amount will be assessed in the first year a deduction is allowed for the loss or outgoing. The most that will be included in assessable income in that year is the amount you claimed as a deduction for the year. [section 20-40]

What is the effect of a balancing charge?

If an amount is assessable under a balancing adjustment provision, the limit on how much can be assessed is reduced by that balancing charge. [section 20-45]

This prevents the double recovery of deductions.

What if the recoupment is for a loss or outgoing of which only a proportion is deductible?

You are treated as only receiving that proportion as recoupment in working out how much of the recoupment is assessable under the recoupment clauses. [section 20-50]

Discussion of changes

Subdivision 20-A Insurance, indemnity or other recoupment for deductible expenses

Change

This Subdivision will consolidate 23 recoupment provisions in the existing law in one place.

Explanation

The provisions in the 1936 Act which specifically deal with recoupment of deductible expenses are spread throughout that Act. These provisions take one of two main approaches:

·
assessing the compensation in the year in which it is received (the assessing approach); or
·
reducing or denying the deductions allowed for the recouped expense (the reduction of deductions approach).

The disadvantages of this are:

·
the scattering of the compensation provisions throughout the Act makes them hard to find;
·
the repetition of the two basic approaches takes up unnecessary text; and
·
the approach taken is not consistent.

These provisions have been consolidated in Subdivision 20-A, where a uniform assessing approach will treat recoupment amounts.

This will produce a significant reduction in compliance and administration costs because:

·
there will no longer be a need to amend assessments of previous years, as is the case with the reduction of deductions approach; and
·
the new law is simpler, easier to find, and much shorter than the existing provisions.

The consolidation of differing rules has necessitated some changes. The rest of this Part explains the consolidated rules and how they differ from the existing law.

Structure of the Subdivision

The Subdivision is structured in two parts. The first tells the reader whether they have an assessable recoupment. [sections 20-20 to 20-30] The second determines how much of an assessable recoupment is assessed. [section 20-35 to 20-55]

Section 20-20 Assessable recoupment

This section explains what amounts will be assessed by Subdivision 20-A.

Change

The section will clarify the law by establishing a three step process for determining whether a recoupment of a deductible expense is assessable.

Explanation

In the existing law:

·
a recoupment is assessable income under the general income provision if it is ordinary income (subsection 25(1));
·
an insurance recovery or indemnity for any deductible loss or outgoing is assessable income (paragraph 26(j)); and
·
there are specific recoupment provisions applying to particular deductions.

The relationship between these rules is unclear. The Bill will establish a three-step process to clarify the linkages.

The three-step process is:

1.
Is the amount assessable income outside Subdivision 20-A? If so, the amount is assessed under the provision which includes the amount in assessable income and will not be an assessable recoupment under Subdivision 20-A. For example, if the amount is ordinary income, it will be assessed under section 6-5 of the 1997 Act.
2.
Is the amount an insurance recovery or indemnity for any deductible loss or outgoing? If so, it is an assessable recoupment under Subdivision 20-A.
3.
Is the amount a recoupment (except an insurance or indemnity) of a loss or outgoing that is deductible under a provision listed in section 20-30? If so, it will also be an assessable recoupment.

Section 20-25 What is recoupment?

The section establishes that the following amounts are recoupment:

·
any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described;
·
a grant in respect of a loss or outgoing;
·
amounts paid on the taxpayers behalf for a loss or outgoing; and
·
an amount received for disposing of a right to recoupment.

Amounts received on the disposal, loss, destruction or termination of use of property to which a loss or outgoing relates are not recoupment of that loss or outgoing.

1. Change

This section makes clear the main types of compensation that are within the defined term.

Explanation

In the existing law, the recoupment provisions vary widely in describing the types of compensation covered.

The new definition of recoupment gives a consistent approach by expressly covering recoupments, reimbursements, refunds, insurance recoveries, indemnities, amounts recovered and grants in respect of a loss or outgoing.

2. Change

There will be a standard rule that amounts received for disposing of a right to recoupment will be treated as recoupment.

Explanation

Disposal of a right to recoupment is covered in only one recoupment rule in the existing law (subsection 70A(6) dealing with mains electricity connection expenditure) but is subject to the capital gains and losses provisions (Part IIIA).

This change will ensure that all amounts which take the place of recoupment are treated in the same way. This is important to ensure equitable treatment and to prevent avoidance.

The disposal of a right to be recouped need not be to another entity. Therefore, the new section includes any method of giving up such a right, eg. surrender, forfeiture, release, abandonment or expiry.

So far as the amount received for disposing of the right is assessable, subsection 160ZA(4) of the existing law will prevent double taxation by reducing the amount of any capital gain. If the amount received is assessable in full, there will be no capital gain.

3. Change

There will be a standard apportionment rule for amounts that are recoupments to an unspecified extent. They will be taken to be recoupments of a loss or outgoing to the extent reasonable.

Explanation

In the existing law, most specific recoupment provisions (e.g. subsections 70A(8) and 75AA(9)) contain an apportionment rule. In many of these, an amount received is taken to be a recoupment to the extent the Commissioner decides.

The standard rule will apply to all assessable recoupments under Subdivision 20-A and will use a reasonableness test.

4. Change

The section will clarify that, if a balancing adjustment is required for property on which a loss or outgoing was incurred, no part of any balancing charge is a recoupment.

Explanation

Any amount received due to the disposal, loss, destruction or termination of use of property effectively recovers losses or outgoings incurred on the property. However, generally they are not truly compensation for the loss or outgoing on the property, but relate to the current value of the property.

These amounts are not to be treated as recoupment under Subdivision 20-A. In certain cases balancing adjustment provisions specifically deal with the disposal, loss, destruction or termination of use of the property.

Section 20-35 Recoupment of expenses fully deductible in a single income year

Section 20-40 Recoupment of expenses fully deductible over more than one income year

These sections uniformly assess amounts that are assessable recoupments, ie. insurance and indemnity amounts for any deductible expense; and other recoupment amounts for expenses deductible under a provision listed in section 20-30.

Change

There are separate sections dealing with expenses deductible in a single income year and for expenses deductible over more than one income year.

Explanation

The rules in the single year case are more simply expressed than in the multiple year case. Therefore, for most who recoup an expense deductible in a single year, the more complex rules for multiple year deductions can be ignored.

2. Change

The new provisions adopt a uniform approach of assessing recoupment, generally in the year the amount is received.

Explanation

The effect of this change is discussed at the start of this Part of this chapter.

Adopting a uniform assessing approach can have some effect on taxpayers liabilities.

Where a recoupment provision currently uses the reduction of deductions approach, the net effect will depend on marginal tax rates from year to year.

If the marginal tax rate is lower in the year an amount is assessed compared to the year the deduction is allowed, a benefit will accrue under the new law. If the marginal tax rate is higher in the year an amount is assessed compared to the year the deduction is allowed, there will be a cost.

The change to an assessing approach from the reduction of deductions approach may also see some amounts brought to account earlier where a loss or outgoing deductible over two or more years is partially recouped.

However, in most cases there will be no effect, as the amount of the recoupment is usually received in the same year the deduction is allowed. Even if the recoupment is received in a year after the deduction year, the marginal rate will often be the same.

3. Change

Recoupment amounts will be assessed up to the amount that can be or has been deducted for the loss or outgoing up to the current year.

Explanation

This will mean that at the end of any income year, the sum of recoupments assessed for a particular loss or outgoing will not exceed the total amount that can be or has been deducted for that loss or outgoing. The total sum of recoupments assessed includes amounts assessed under provisions of the existing law that used the assessing approach. These provisions are covered by the new defined term previous recoupment law.

This approach has been adopted because the object of the Division is to recover only the benefit of the deductions for which no net detriment has been suffered.

Example

See example at subsection 20-40(2).

4. Change

Recoupment amounts will be assessed for amounts that can be deducted in an earlier income year.

Explanation

Provided the amendment period has not expired, a taxpayer can deduct an amount in an earlier income year even if the taxpayer has not yet claimed the deduction. Where an assessable recoupment is received in these circumstances, it will still be assessable - the taxpayer can amend their prior assessment to claim the deduction.

On expiration of the amendment period, the taxpayer can no longer deduct the amount. In these circumstances, an amount that would otherwise be an assessable recoupment will not be assessable, as the taxpayer cannot deduct an amount in the earlier income year.

The words you can deduct for the loss or outgoing for the current year, or you have deducted or can deduct for the loss or outgoing for an earlier income year used in Subdivision 20-A will have the above result. They are comparable to the words [a deduction] has been allowed or is allowable that are used in the majority of provisions that use the assessing approach in the existing law.

5. Change

Recoupment amounts received before the income year of deduction will be assessable in the income year the deduction arises.

Explanation

Under the existing law, this result is achieved in provisions that use the reduction of deductions approach. Where the recoupment is received before the income year of deduction, the deduction is reduced to the extent of the recoupment in the year the deduction arises. The treatment under the assessing approach is unclear.

This change adopts a standard approach where recoupment is received before the income year of deduction. The approach will be that the amount is assessable in the income year the deduction arises.

Section 20-45 Effect of a balancing charge

Under the recoupment provisions (sections 20-35 and 20-40), the total amount of deductions allowed for an outgoing is reduced by any amount assessed under a balancing adjustment.

Change

This section provides a standard treatment for amounts assessed as a balancing charge, preventing double recovery of deductions.

Explanation

This change was required as a result of the change to a uniform assessing approach for recoupment amounts.

The assessment of an amount under a balancing adjustment provision recoups the deductions allowed for that amount. In each case in the existing law where a balancing charge may interact with a recoupment, the reduction of deductions approach applies to the recoupment. No treatment of balancing charges is required under this approach.

This is taken into account under section 20-45 by reducing the total deductions that are eligible to be recouped under the recoupment provisions by the amount assessable under the balancing adjustment provision.

Section 20-45 applies if there is a balancing charge for the income year a recoupment is assessable, or for an earlier income year.

Example

See example at section 20-45.

Section 20-50 Recoupment of partially deductible losses or outgoings

The section applies where the total amount that can be deducted for a loss or outgoing cannot exceed a proportion of the loss or outgoing. In this case, only that proportion of a recoupment is treated as being received for the purposes of determining how much of the recoupment is assessable.

Change

This rule will apply in all cases where the total amount that can be deducted for a loss or outgoing is a proportion of that loss or outgoing.

Explanation

Where the reduction of deductions approach applies to the recoupment of proportionate deductions in the existing law (eg. development allowance and drought investment allowance), the same result is achieved.

Section 20-50 will ensure that all proportional deductions are recouped in a proportional way. The section will apply in all cases where the deduction that can be claimed cannot exceed the amount of the expense that gives rise to the deduction. Without this rule, taxpayers could be treated as recouping the deductible part of the expenditure first.

Example

See example at section 20-50.

C. Provisions of the old law that have not been rewritten

Redundant provisions

Provisions not to be rewritten

Subsections 75AA(10), 82BE(3), 82BP(3), 124BD(3) and 124ZZN(3) will not be rewritten. These all provide for an unlimited amendment period for recoupment provisions that use the reduction of deductions approach.

Reason for omission

Section 170 of the 1936 Act generally prescribes a four year limit on amending previous assessments. However, recoupment amounts could be received many years after the initial expenditure. This meant that this limit had to be specifically overridden in each case where a recoupment provision used the reduction of deductions approach. In some cases this was done in subsection 170(10). In the cases listed above, a subsection was added to the particular recoupment provision.

There is no need to amend previous assessments under the assessing approach adopted in Subdivision 20-A. This makes all the specific subsections listed above redundant.

D. Transitional arrangements

Part 1 of Schedule 8 of the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this chapter.

Part 1 will insert in the Income Tax (Transitional Provisions) Act 1997 new Subdivision 20-A. New Subdivision 20-A will set out how and when the rewritten sections will apply.

The rewritten provisions will apply to recoupment amounts received in the 1997-98 or later income years [Schedule 8, Part 1: subsection 20-1(1), Transitional Provisions Act] . They will also apply to amounts that are deemed by the existing law to be recouped in the 1997-98 income year [Schedule 8, Part 1: subsection 20-1(2), Transitional Provisions Act] .

In some cases, however, it is necessary that some recoupment provisions of the 1936 Act apply to assessments for the 1997-98 and later income years when those provisions deal with recoupments that were received before the 1997-98 income year [Schedule 8, Part 1: section 20-5, Transitional Provisions Act] . These provisions are reduction of deductions recoupment provisions that apply to expenditure deductible over more than one year. Under these provisions, a recoupment may still affect a deduction in the 1997-98 income year or a later income year, even if the initial expenditure was incurred, and the recoupment was received, before the 1997-98 income year.

E. Consequential amendments

Amendments of the Income Tax Assessment Act 1997

Part 2 of Schedule 8 to the Bill will amend the 1997 Act to:

·
update references to provisions of the 1936 Act that have been rewritten in Subdivision 20-A;
·
repeal sections of the 1997 Act that deal with recoupment;
·
take amounts assessed under Subdivision 20-A into account in calculating amounts assessable under a balancing adjustment; and
·
insert additional definitions in the Dictionary in section 995-1 of terms used in the rewritten provisions.

Updated references

There are currently a number of references in the 1997 Act to existing recoupment provisions. Most of these are in section 10-5, which contains a list of all the provisions of both the existing and rewritten law that deal with particular kinds of assessable income.

Part 2 of Schedule 8 will bring the list in section 10-5 up to date by taking into account the new approach to recoupment in Subdivision 20-A. [Schedule 8, Part 2: items 2 to 23]

Part 2 of Schedule 8 will also update other references in the 1997 Act to existing recoupment provisions that have been rewritten in Subdivision 20-A, so that the reference is to the rewritten provisions. [Schedule 8, Part 2, item 25]

Repeal sections dealing with recoupment

Sections 41-45 and 330-585 of the 1997 Act deal with recoupment. These provisions have been consolidated in, or have been made redundant by, Subdivision 20-A. Therefore Part 2 of Schedule 8 will repeal these provisions. [Schedule 8, Part 2, items 24 and 27]

Take account of Subdivision 20-A in a balancing adjustment provision

Under subsection 330-485(2) of the 1997 Act, an amount to be included in assessable income under a balancing adjustment provision for mining and quarrying expenditure is limited to amounts covered by paragraph 330-480(1)(a) of the 1997 Act. That paragraph broadly covers amounts deductible under Subdivision 330-A, 330-C, 330-H or a corresponding previous law.

Part 2 of Schedule 8 will amend subsection 330-485(2) to reduce the limit by any recoupment amount included in assessable income by Subdivision 20-A [Schedule 8, Part 2, item 26] . This will apply if a recoupment amount is assessed in an income year before the balancing adjustment is required.

Subdivision 20-A will assess amounts of recoupment for a deductible loss or outgoing. As this will nullify deductions allowed to that extent, it is necessary to reduce the limit in subsection 330-485(2).

New Dictionary terms

Part 2 of Schedule 8 will insert new definitions of terms used in the rewritten provisions.

New Definition: Assessable recoupment [Schedule 8, Part 2, item 28]

Commentary: An explanation of this term is provided in this chapter, at Part A (Assessable recoupments - the amounts Subdivision 20-A will assess), and at Part B, section 20-20 (Assessable recoupment).

New Definition: Current year [Schedule 8, Part 2: item 29]

Commentary: This term is used in sections 159S, 159ZR and 221AZH of the existing law. In these provisions, it means either the year of income for which rebates are being calculated or the year of income for which instalments are being calculated.

In the new law, the term will refer to the income year for which assessable income and deductions are being worked out. This term makes clear the distinction between that year, earlier income years and future income years.

New Definition: Previous recoupment law [Schedule 8, Part 2: item 30]

Commentary: This is a new term which performs a transitional function. It refers to provisions in the existing law that assess recoupment amounts. The definition is necessary because of Subdivision 20-As approach of limiting the total recoupments assessed for a particular expense to the deductions allowed so far for that expense. This defined term takes account of amounts assessed under recoupment provisions in the 1936 Act.

New Definition: Recoupment [Schedule 8, Part 2: item 31]

Commentary: An explanation of this term is provided in this chapter, at Part A (What is recoupment?), and at Part B, section 20-25 (What is recoupment?).

Application of amendments

The amendments made by Part 2 of Schedule 8 apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill] . This ensures that these consequential amendments take effect at the same time as other amendments relating to the recoupment provisions.

Amendments of the Income Tax Assessment Act 1936

Part 3 of Schedule 8 to the Bill will amend the. 1936 Act to:

·
add references to Subdivision 20-A where the 1936 Act currently refers to the existing provisions; and
·
close off the application of provisions of the 1936 Act that have been rewritten in Subdivision 20-A, so that the existing provisions apply only to recoupments received in the 1996-97 and earlier income years.

Adding references to rewritten provisions

Part 3 of Schedule 8 will add in the 1936 Act references to Subdivision 20-A where the 1936 Act currently refers to the existing provisions [Schedule 8, Part 3: items 33 and 37 to 39] . References to Subdivision 20-A are being added because the provisions being consequentially amended can apply to amounts relating to more than one income year (including an income year before the 1997-98 income year).

Closing off the application of existing provisions

Part 3 of Schedule 8 will insert new provisions into the 1936 Act to close off the application of existing provisions rewritten or made redundant [Schedule 8, Part 3: items 32, 34 to 36 and 40 to 51] . Part 3 of Schedule 2 will also close off the application of paragraphs 26(j) and 26(k), to the extent they deal with recoupment [Schedule 2, Part 3: item 20] .

In these cases, the existing provisions are being closed off so that they only apply to recoupments received in the 1996-97 and earlier income years. This complements the transitional provisions in Part 1 of Schedule 8 which ensure that the corresponding rewritten provisions apply to recoupments received in the 1997-98 and later income years.

Application of amendments

The amendments made by Part 3 of Schedule 8 apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill] . This ensures that these consequential amendments take effect at the same time as other amendments relating to the recoupment provisions.

Amendments of other Commonwealth legislation

Part 4 of Schedule 8 to the Bill will amend the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 to add a reference to Subdivision 20-A, where the Act currently refers to the existing provisions. [Schedule 8, Part 4: item 52]

Application of amendments

The amendments made by Part 4 of Schedule 8 apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill] . This ensures that these consequential amendments take effect at the same time as other amendments relating to the recoupment provisions.

Chapter 4 - Leased Cars

This chapter explains the rewritten provisions about the income tax treatment of profits made on the sale of previously leased cars.

Those provisions are contained in new Subdivision 20-B in Schedule 1 to the Tax Law Improvement Bill 1997.

Transitional and consequential amendments for the rewritten provisions are contained in Schedule 7 to the Bill.

Overview of this chapter

This chapter covers:

·
the rewritten provisions in Subdivision 20-B in Schedule 1 to the Tax Law Improvement Bill 1997. These will constitute Subdivision 20-B of the 1997 Act; and
·
the related transitional provisions and consequential amendments in Schedule 7.

Subdivision 20-B deals with profits on the sale of previously leased cars. The corresponding provision of the 1936 Act is section 26AAB.

Part A of this chapter summarises new Subdivision 20-B of the 1997 Act.

Part B explains changes proposed to the content of the current provisions.

Part C explains why some provisions of the 1936 Act have not been rewritten.

Part D explains the transitional provisions in Part 1 of Schedule 7 which set out how, and from when, the rewritten provisions will apply.

Part E explains amendments that need to be made to the 1936 Act and the 1997 Act because of the rewriting of the 1936 Act provisions. These amendments are in Parts 2 and 3 of Schedule 7.

A. Summary of the new law

Guide to Subdivision 20-B

Subdivision 20-B explains how an amount can be included in assessable income if it is a recoupment of deductible lease payments for a car that has been sold.

Purpose of the Subdivision

Normally, a profit on a car sale is a non-assessable capital gain.

However, if the car has been leased, a portion of the profit may be a recoupment of deductible lease payments and therefore will be assessed as income.

Subdivision 20-B deals separately with common situations in which it can apply (the usual case) and with less common situations of transactions where associated parties are involved.

The more common case

This is where

·
a car is leased to a taxpayer
·
the lease payments are paid or payable by that taxpayer and deductible to anyone; and
·
that taxpayer buys the car from the lessor and disposes of it for a profit.

In this case:

The profit is included in that taxpayers assessable income. [section 20-110]

What is a profit?

It is the consideration for the disposal, less:

·
the acquisition cost to you; and
·
any capital expenditure you incurred. [section 20-115]

There is a limit on how much profit is included

The limit is the smaller of:

·
the deductible lease payments for the lease; and
·
the notional depreciation for the lease period. [subsection 20-110(2)]

If there is more than one lease:

The limit is increased to take account of deductible lease payments and notional depreciation under all leases from the same lessor. [subsections 20-110(3) and20-125(3)]

Successive leases of the same car can produce separate limits on the profit to be included in assessable income. Only the largest of those amounts is included. [section 20-130]

What is notional depreciation?

It is the car's cost to the lessor, less the consideration the lessor obtained from disposing of it, multiplied by:

days in the lease period/days the lessor owned the car

[section 20-120]

Less common cases

These involve associates

·
the car was leased to an associate of the taxpayer; or
·
the associate (whether alone or not) acquired the car from the lessor; or
·
someone else acquired the car under an arrangement which enabled the taxpayer or an associate to acquire it. [section 20-125]

In these cases, there is another limit on how much profit is included in assessable income

This is the difference between:

·
the consideration for disposing of the car; and
·
the cost of the car to the entity to whom the lessor disposed of it plus any capital expenditure that entity incurred on the car. [paragraph 20-125(2)(c)]

Exceptions and reductions

In some cases, none of the profit is included in assessable income

These are where:

·
you inherited the care [section 20-145] or
·
the lease was:

(a)
a hire purchase agreement; or
(b)
a normal short term hire; [section 20-155] or

·
after the lessor disposed of it and before you did, there as an intervening disposal by someone else which:

(a)
was for market value or more; or
(b)
caused an amount, based on market value to be included in that persons assessable income. [section 20-135]

In some cases, the amount to be included in assessable income is reduced

These include where:

·
an intervening disposal by the taxpayer or anyone else has already resulted in an amount being assessed [section 20-140] ; or
·
another provision includes an amount in the taxpayers assessable income because of the current disposal [section 20-150] .

Disposals of interests in cars

There are special rules for the disposal of an interest in a car

Subdivision 20-B applies as it would to a disposal of the car but with these modifications:

·
there are no fixed limits on how much profit is included - a reasonable proportion is included;
·
the cost is also a reasonable amount; and
·
disregard any previous disposal of the car. [section 20-160]

B. Discussion of changes

Removing discretions

The administrative discretions in section 26AAB use the term an amount determined by the Commissioner. These are being replaced by objective tests based on reasonableness, eg. the inclusion of a reasonable amount. This material does not comment further on those changes.

Structure

Subdivision 20-B will deal first with the usual case, which should cover most disposals of leased cars. Consequently, most readers will not need to consider the more complex parts of the Subdivision.

There are some special rules dealing with multiple disposals and multiple leases of the same car and with disposals of interests in a car.

Terminology

Cars- The Subdivision will apply to a disposal of a car instead of a motor car or station wagon, which is the expression used in section 26AAB. Car is a defined term in the new law and its meaning may be a little different from motor car or station wagon. Therefore, the Subdivision is limited so that it only applies to cars designed mainly for carrying passengers [paragraphs 20-110(1)(aa) and 20-125(1)(ba)] . This is the interpretation the Administrative Appeals Tribunal has given to the words in the existing law, so the scope of the rewrite will be the same as section 26AAB.

Associates- The term associate is used frequently in this Subdivision and throughout the 1936 Act. Instead of using many different definitions of the word, the new law will use a standard definition.

The differences between the new definition and that in section 26AAB are:

·
in the new definition, a company is an associate of another entity if it might reasonably be expected to act in accordance with the wishes of the other entity, even if the company is not accustomed, or obliged, to so act (including where those wishes are communicated through interposed companies, partnerships or trusts);
·
a spouse living separately and apart from the taxpayer on a permanent basis is not an associate under the new definition; and
·
the rules for identifying who public unit trusts are associated with under the new definition are more like those used for companies than for trustees.

These differences are minor and have no significant effect on the treatment of leased cars.

Section 20-115 Working out the profit on the disposal

This section states how to work out the profit on a disposal of a car. It is the consideration receivable on disposal, less the cost of the car and any capital expenditure on the car after it was acquired.

Change

Subsection 20-115(2) will add, to the list of things that are consideration receivable, an amount receivable under an insurance policy if the car is lost or destroyed.

Explanation

This change will ensure consistency in the treatment of insurance proceeds and sales proceeds. This accords with the way the law is administered.

Section 20-120 Notional depreciation

This section sets out how to work out the notional depreciation for a car. Notional depreciation is one of the elements in establishing how much of the profit is assessable on disposal of the car.

Commentary

Section 26AAB works out the notional depreciation by first taking how much the lessee could have deducted for depreciation if the lessee had owned the car instead of leasing it. That amount is the difference between its original cost to the lessor and what its written down value would have been when the lessor disposed of it.

Then, an adjustment is made to reflect the difference between the written down value and the lessor's disposal price. If the disposal price is above the written down value, the balancing adjustment reduces the depreciation. If the disposal price is less than the written down value, the balancing adjustment increases the depreciation.

In either case, to obtain the notional depreciation, pro-rate the depreciation amount to reflect the period the lessee leased the car.

The rewrite will simply subtract the disposal price from the lessor's original cost before pro-rating the result. This produces the same mathematical outcome as section 26AAB, but more simply.

This relies on the premise that notional depreciation under section 26AAB is calculated as if the lessee had used the car only for income producing purposes. That is the generally held view of how section 26AAB works and is how the Commissioner administers it.

C. Provisions of the old law that have not been rewritten

Redundant provisions

The Bill will not rewrite sub-section 26AAB(18), which defines market value to mean what the Commissioner thinks is reasonable if there is insufficient evidence of market value.

The courts have been able to find a market value, even for items in which there are no current dealings, by assuming that there are willing buyers and sellers.

D. Transitional arrangements

Part 1 of Schedule 7 to the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert Sub-division 20-B, containing the transitional provisions for the rewritten provisions discussed earlier in this chapter. That Subdivision will set out how, and when, the rewritten provisions will apply.

The rewritten provisions in Subdivision 20-B of the 1997 Act will apply to assessments for the 1997-98 and later income years [Schedule 7, Part 1: section 20-100, Transitional Provisions Act] .

In some cases, it is necessary to specify in the transitional provisions how the rewritten provisions apply in the 1997-98, or a later, income year if certain events happen before that time. Those events are set out in this table:

Transitional section Event that can happen before the 1997-98 income year Treatment
20-105 Lessor acquires the car. The cost of the car is worked out under the 1936 Act.
20-110 Lessor disposes of the car. The cars termination value is what was the lessors consideration receivable under the 1936 Act.
20-115 A previous disposal of the car or an interest in it. The limits on the assessable profit are reduced by the same reductions as would have been made under the 1936 Act.

E. Consequential amendments

Amendment of the Income Tax Assessment Act 1997

Part 2 of Schedule 7 to the Bill will amend the 1997 Act to:

·
update a reference to section 26AAB that has been rewritten in Subdivision 20-B; and
·
insert additional definitions in the Dictionary in section 995-1 of terms that are used in the rewritten provisions.

Updated reference

Section 10-5 of the 1997 Act lists all the provisions of both the 1936 and 1997 Acts that deal with particular kinds of assessable income. Part 2 of Schedule 7 to the Bill will replace the reference to section 26AAB in that list with a reference to Sub-division 20-B. [Schedule 7, Part 2: item 2]

New Dictionary terms

Part 2 of Schedule 7 will also insert new definitions of terms used in the rewritten provisions in Subdivision 20-B.

New Definition: Notional depreciation for a lease period [Schedule 7, Part 2: item 3]

Commentary: A new label for the existing term the amount of depreciation that is deemed in accordance with subsection (6) to have been allowable to the lessee in respect of the unit of property. How the definition has been simplified is discussed under section 20-120, notional depreciation in Part B of this chapter.

New Definition: Profit on the disposal of a leased car [Schedule 7, Part 2: item 4]

Commentary: A label for an idea already in the 1936 Act.

Part 2 of Schedule 5 will insert a new definition of consideration receivable, a term also used in the rewritten provisions in Subdivision 20-B. A change to that term is discussed under section 20-115, working out the profit on the disposal in Part B of this chapter.

Application of amendments

The consequential amendments made by Part 2 of Schedule 7 generally apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill 1997] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to disposals of leased cars.

Amendment of the Income Tax Assessment Act 1936

Part 3 of Schedule 7 to the Bill will amend the 1936 Act to:

·
insert a reference to Subdivision 20-B where the 1936 Act currently refers to section 26AAB; and
·
close off the application of section 26AAB of the 1936 Act, now rewritten in Subdivision 20-B, so that section 26AAB applies only to the 1996-97 and earlier income years.

Inserting references to rewritten provisions

Part 3 of Schedule 7 will add a reference to Subdivision 20-B of the 1997 Act in section 170 of the 1936 Act. Section 170 currently refers to section 26AAB. [Schedule 7, Part 3: item 7]

This dual reference to the existing and the rewritten provision is required because section 170:

·
has not yet been rewritten and closed off; and
·
can apply to assessments for income years both before and after the 1997-98 income year.

Closing off the application of existing provisions

Part 3 of Schedule 7 will amend the 1936 Act to close off the application of section 26AAB so that it only applies to disposals in the 1996-97 and earlier income years. [Schedule 7, Part 3: items 5, 6]

Application of amendments

The consequential amendments made by Part 3 of Schedule 7 generally apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill 1997] . This ensures that they take effect at the same time as the substantive amendments relating to disposals of leased cars.

Chapter 5 - Deductions: particular items

This chapter explains the rewritten provisions that allow or disallow particular deductions from a taxpayer's assessable income.

These provisions are contained in new Divisions 25, 26 and 34 in Schedule 1 to the Tax Law Improvement Bill 1997.

Transitional and consequential amendments for the rewritten provisions are contained in Schedule 4 to the Bill.

Overview of this chapter

This chapter covers:

·
the rewritten provisions in Divisions 25, 26 and 34 in Schedule 1 (some amounts you can deduct; some amounts you cannot deduct; or cannot deduct in full, and non-compulsory uniforms) to the Tax Law Improvement Bill 1997; and
·
the transitional provisions and consequential amendments for those rewritten provisions contained in Schedule 4 to the Bill.

Divisions 25, 26 and 34 contain the rewritten provisions of the 1936 Act which set out the rules about deductions that apply to taxpayers generally. The rules are of two kinds:

·
rules which allow deductions for various expenses; and
·
rules that prevent or limit deductions for some amounts. The corresponding provisions of the 1936 Act are sections 6G, 51AB, 51AG, 51AL, 52, 53, 53AA, 63, 64, 64A, 65, 67, 67A, 68, 69, 71, 72, 73, 74, 74B and subsections 51(3) to (6A), and 78(11). These rules operate in the framework established by the core provisions about deductions contained in Division 8 of the 1997 Act.

Part A of this chapter summarises new Divisions 25, 26 and 34.

Part B explains the changes proposed to the content of the current provisions.

Part C explains why some provisions of the 1936 Act have not been rewritten.

Part D explains the transitional provisions which set out how and when the rewritten provisions will apply. These provisions are located in Part 1 of Schedule 4 to the Bill.

Part E explains the amendments that need to be made to the 1997 Act, the 1936 Act and other Commonwealth legislation, as a consequence of the rewriting of the provisions of the 1936 Assessment Act. These provisions are located in Parts 2 to 4 of Schedule 4 to the Bill.

A. Summary of the new law

Guide to Division 25: Some amounts you can deduct

What the Division will do

Division 25, which will apply to taxpayers generally, will allow deductions for the following amounts.

Tax-related expenses

Expenditure incurred for managing tax affairs or interest paid for the underpayment or late payment of tax. [section 25-5]

Repairs

Expenditure incurred on repairs. [section 25-10]

Amounts for a lease obligation to repair

Amounts paid for failing to comply with a lease obligation to repair premises. [section 25-15]

Lease document expenses

Expenditure incurred for preparing, registering or stamping a lease or an assignment or surrender of a lease. [section 25-20]

Borrowing expenses

Expenditure incurred for borrowing money. These amounts normally will only be able to be deducted over 5 years. [section 25-25]

Expenses of discharging a mortgage

Expenditure incurred in discharging a mortgage. [section 25-30]

Bad debts

Debts written off as bad if the debt was included in assessable income or was lent in the ordinary course of a business of lending money. [section 25-35]

Losses from a profit-making undertaking

A loss arising from a profit-making undertaking if any profit from an undertaking or plan would have been included in assessable income, and the loss does not arise from the sale of property acquired on or after 20 September 1985. [section 25-40]

Loss by theft etc.

A loss in respect of money caused by theft or embezzlement by an employee or agent. [section 25-45]

Pensions, gratuities and retiring allowances

Payments of a pension, gratuity or retiring allowance to an employee or former employee. [section 25-50]

Payments to associations

Amounts of up to $42 for membership of a trade, business or professional association. [section 25-55] This provision does not affect the amount that can be deducted under the general deduction provision.

Parliament election expenses

Amounts incurred in contesting an election for membership of any Australian Parliament [section 25-60] , other than, with two exceptions, entertainment expenditure [section 25-70] .

Rates and land taxes on premises used to produce mutual income

Clubs and other entities receiving amounts from members can deduct rates and land taxes as if those receipts were assessable income. [section 25-75]

Guide to Division 26: Some amounts you cannot deduct, or cannot deduct in full

What the Division will do

Division 26, which will apply to taxpayers generally, sts out some amounts that taxpayers will not be able to deduct, or not be able to deduct in full. This will be the case even if such amounts could otherwise be deducted under the general deduction provision in section 8-1 of the 1997 Act or a specific deduction provision.

Penalties

Amounts payable by way of penalty or on conviction for an offence. [section 26-5]

Leave payments

A loss or outgoing for leave unless the amount has been paid to the individual concerned or it is an accrued leave transfer payment. [section 26-10]

HECS and student assistance payments

Specific payments under the Higher Education Funding Act 1988 or the Student Assistance Act 1973. [section 26-20]

Relative's travel expenses

Amounts incurred for a relative's travel expenses in some circumstances. [section 26-30]

Amounts paid to related entities

If an amount is paid to a relative, or a partnership in which a relative is a partner, only so much of the payment as the Commissioner considers reasonable can be deducted. [section 26-35]

Maintaining a family

Expenditure incurred for maintaining a taxpayers family. [section 26-40]

Club expenses

A loss or outgoing incurred for membership of a club. [section 26-45]

Leisure facilities and boats

With some exceptions, expenses for acquiring or using leisure facilities and boats cannot be deducted. [section 26-50]

Guide to Division 34: Non-compulsory uniforms

What the Division will do

Division 34 will provide that expenses for a non-compulsory uniform cannot be deducted unless the design of the uniform is registered. The Division will not apply to occupation specific clothing or protective clothing subsection 34-10(3)]. The Division will set out how a uniform can be registered.

B. Discussion of changes

Commissioner's discretions to be replaced with objective tests

Change

Rules which rely on Commissioner's discretions will be replaced with clear objective tests.

Explanation

As rewriting of the income tax law proceeds, many of the discretions that the Commissioner of Taxation may exercise are being removed or replaced with objective tests. This allows the new law to more fully reflect the principles of the self assessment system.

The following changes are being made in the context of reviewing the deduction provisions (references are to the 1936 Act):

Provision Subject How replaced
51AB(1) Leisure facilities and boats. Subparagraph (b)(iii) of the definition of excepted facility requires the taxpayer to satisfy the Commissioner that the use of a boat was essential to the efficient conduct of the business. Replaced with an objective test. [paragraph 26-50(5)(d)] .
51AB(5) Leisure facilities and boats. Subsection 51AB(5) requires the Commissioner to determine a reasonable amount that can be deducted if the leisure facility or boat is used partly for purposes covered by an exception to the provision. Replaced with a reasonable test. [subsection 26-50(6)]
53(3) Repairs. Subsection 53(3) provides that so much only of the expenditure as, in the opinion of the Commissioner, is reasonable can be deducted if the expenditure is incurred in repairing property that is only partly held or used for the purpose of producing assessable income. Replaced with a reasonable test. [subsection 25-10]
67(4) Borrowing expenses. Subsection 67(4) provides that the taxpayer is deemed to have incurred so much only of the expenditure as, in the opinion of the Commissioner, is reasonable if expenditure is incurred only partly for the purpose of producing assessable income. Replaced with a to the extent rule. [section 25-25]
67A(b) Expense of discharging mortgages. Paragraph 67A(b) provides that only such amount as the Commissioner determines can be deducted if money or property is only partly used for the purpose of producing assessable income. Replaced with a to the extent rule. [subsection 25-30(3)]
68(b) Lease document expenses. Paragraph 68(b) provides that only such an amount as, in the opinion of the Commissioner is reasonable can be deducted if property is to be, or has been, held by the taxpayer only partly for the purpose of producing assessable income. Replaced with a to the extent rule. [subsection 25-20(2)]
72(1C) Rates and land taxes. Subsection 72(1C) provides that only such amount as, in the opinion of the Commissioner, is reasonable can be deducted if the land or premises are only partly used for the purpose of producing income. The provision for rates and land taxes incurred in producing mutual income will replace the reasonable test with a to the extent rule. [subsection 25-75(3)]

Consolidation of recoupment provisions

Change

There are several provisions that require amounts to be included in assessable income if a reimbursement is received for an expense that can be deducted or has been deducted. The majority of these provisions will be replaced by a consolidated recoupment provision [Subdivision 20-A] which will eliminate unnecessary duplication.

Explanation

These are only changes of a drafting nature and will not affect the current application of these provisions.

Reimbursement provisions are contained in the deduction provisions dealing with bad debts, tax related expenses, rates and land taxes and Parliament election expenses (subsections 63(3), 69(8), 72(2), and 74(2) of the 1936 Act). Subdivision 20-A is discussed in further detail in Chapter 3.

Standardisation of provisions denying and limiting deductions

Change

The provisions that deny or limit a deduction will be drafted in a uniform way, by stating that some amounts cannot be deducted under the 1997 Act.

Explanation

This is only a drafting change which will not modify the application of the law. The change will make the structure of the law simpler and more consistent. Provisions that deny or limit a deduction are expressed in several different ways, which have no practical distinction.

Some provisions say that deductions cannot be claimed under the general deduction provision. For example, subsection 51(6) says that payments made in respect of higher education contributions cannot be deducted under the general deduction provision. Yet this type of expense would only be deductible under the general deduction provision. To state that the expense cannot be deducted under any provision of the 1997 Act will not change the operation of the law.

Other provisions disallow deductions under all provisions. Section 51AL, which denies deductions for unregistered non-compulsory uniform expenses, is an example of this.

Omission of unnecessary words about when an amount is deductible.

Change

Usually, the deduction provisions will state specifically that an expense can be deducted in the year that it is incurred.

Explanation

It is implicit that an expense can be deducted in the year that it is incurred.

Section 25-5 Tax-related expenses

The provision allows a deduction for expenditure incurred for managing tax affairs and interest paid for the underpayment or late payment of tax.

Commentary

The provision that allows a deduction for interest on underpayments or late payments of tax (subsection 51(5) of the 1936 Act) has been incorporated into this section [paragraph (1)(c)] .

Section 25-25 Borrowing expenses

The provision allows a deduction for borrowing expenses. In most cases, the deduction is spread over the period of the loan or 5 years.

1. Change

Clarify that a deduction is only allowed for borrowing expenses to the extent that the money is used to produce assessable income in the year in which the deduction is claimed.

Explanation

The existing law is unclear when there is a change in the use of borrowed money eg., if money is used to purchase a house which is used privately for several years, but later rented out (or vice versa).

There is Board of Review support for determining entitlement on a yearly basis. Under this approach, a deduction is allowed only in years when the money is used for income producing purposes.

This change will provide greater certainty for taxpayers.

2. Change

Allow a deduction for any remaining undeducted borrowing expenses if the loan is repaid early.

Explanation

This change provides a new benefit to taxpayers. If a loan is repaid early, the current law does not allow any undeducted borrowing expenses to be brought forward.

Section 25-35 Bad debts

The provision allows a deduction for bad debts written off in the income year.

1. Change

The provision will provide specifically that a moneylender who acquires a debt from another moneylender may write off an amount up to the cost of the debt under the bad debt provision.

Explanation

This change will give legislative authority to current practice, which allows a moneylender to claim a loss for a bad debt under the general deduction provision at the same time as a bad debt would have been recognised under the existing bad debt provision.

This change will provide greater certainty for taxpayers. For example, a money lender A lent $100 to C. Moneylender B purchases the rights under the loan for $80. The loan goes bad, and B is paid nothing on the loan. Under current practice, B cannot deduct the bad debt under paragraph 63(1)(b) of the existing bad debt provision, as B did not lend the money. However, B would be able to deduct the $80 loss under the general deduction provision at the same time as the debt would be recognised as bad.

The proposed change will enable B to deduct an amount up to the cost of the debt to B, namely $80, if the debt is written off as bad.

If only a part of the debt is written off as bad, the maximum that can be deducted for one or more income years is the amount by which the expenditure incurred in buying the debt exceeds so much of the debt as has not yet been written off as bad.

Example B bought a debt of $100 for $80. In 1997-98 B writes off $30 of the debt as bad. B can deduct $10, which is the amount by which the expenditure B incurred in buying the debt ($80) exceeds so much of the debt as has not yet been written off as bad ($100 - $30 = $70).If B writes off the rest of the debt in 1998-99, how much can B deduct?The maximum B can deduct is $80, which is the amount by which the expenditure B incurred in buying the debt ($80) exceeds so much of the debt as has not yet been written off as bad ($100 - $100 = $0). Because B deducted $10 for 1997-98, Bs deduction for 1998-99 is $80 - $10 = $70.

2. Change

Remove the redundant aspect of the existing bad debt provision, which deems a debt to be bad where a debtor becomes a bankrupt.

Explanation

A debt can be treated as a bad debt regardless of whether, or when, the debtor becomes bankrupt. Therefore, a provision that deems a debt to be bad upon bankruptcy is not necessary. As long as a commercial judgment points towards the debt being bad for the time being, the debt is bad for the purposes of the bad debt provision.

Section 25-40 Loss from profit making undertaking

This provision allows a deduction for a loss arising from a profit making undertaking or plan provided that:

·
the loss does not arise from the sale of property acquired after 20 September 1985; and
·
the Commissioner is notified that the property was acquired for the purpose of carrying out the undertaking or plan. Under the current law, the taxpayer must notify the Commissioner no later than the date upon which the taxpayer lodged their first return after having acquired the property.

Change

The provision will be amended to extend the time for lodgement of the notice to the date on which the taxpayer lodges their return for the year in which the property was acquired.

If a taxpayer is not required to lodge a return for that income year, the notice must be provided no later than when the next return is lodged for an income year after the income year in which the property was acquired.

Explanation

If after acquiring property, a taxpayer lodges a return for a year before the year in which the property was acquired, under the existing law the notice must be provided no later than the time of lodgement of that return. Taxpayers might not be aware of this requirement, assuming that the notice was required in the return for the year in which the property was acquired. The proposed change is a logical adjustment that will make it easier to comply with the law.

Commentary

Various aspects of section 52 of the 1936 Act have not been rewritten as they are no longer relevant, because the provision does not apply in respect of the sale of property acquired on or after 20 September 1985.

Section 25-45 Loss by theft etc.

The provision allows a deduction for a loss incurred through embezzlement, larceny, defalcation or misappropriation by an employee or agent.

Change

The Bill will extend the provision so that losses incurred through theft or stealing by an employee or agent can be deducted.

Explanation

Over the years, State legislation relating to criminal offences has been changed to introduce new terminology, or additional offences, to those listed in the existing legislation. This change will update the offences listed in this provision to include the offences of theft and stealing.

Section 25-55 Payments to associations

The provision allows a deduction for amounts paid for membership of a trade, business or professional association. If the amount is not deductible under the general deduction provision, the maximum amount that can be deducted is $42 per income year per association.

Change

One aspect of the provision will not be rewritten as it is of limited value, if not redundant. That aspect is set out in subsection 73(2) of the 1936 Act, and allows a deduction if an amount is paid to an association and the association carries on any activity of a nature that would be deductible if it was carried out by the taxpayer. The amount that can be deducted is limited to the amount of the subscription, levy or contribution that is applied by the association to meet losses or outgoings incurred in carrying out that activity.

Explanation

It is difficult in practice to comply with this subsection as it requires the taxpayer to know about the expenditure pattern and activities of the association. Such levies will generally be deductible under the general deduction provision.

Commentary

Another aspect of section 73 of the 1936 Act that will not be rewritten is subsection (1), under which a deduction is allowed for a periodical subscription to an association if the carrying on of a business was conditional on membership of that association. That aspect is unnecessary, as taxpayers could deduct such an expense under the general deduction provision.

Section 25-55 will relate to situations where membership of trade, business or professional associations would not be deductible under the general deduction provision. For example, if a taxpayer is retired but wishes to continue to be a member of such an association, in that case, section 25-55 will allow a deduction of up to $42 per association.

Section 25-75 Rates, land taxes and mutual receipts

The provision allows a deduction for rates and land taxes paid to the extent that property is used for the purpose of producing assessable income.

1. Change

The provision will specifically provide that an entity that receives mutual income can deduct rates and taxes to the extent that it uses the property for the purpose of producing mutual receipts or assessable income.

Explanation

This change will give legislative authority to current practice. It is relevant for clubs and professional associations that derive mutual receipts.

Under the principle of mutuality, an organisation cannot derive income from itself. Thus a club or professional association would not be receiving income, or assessable income, from its members. Strictly, such an entity could not deduct expenses to the extent that it derived amounts, known as mutual receipts, from its members. However, current practice allows such entities to deduct rates and land taxes as if the mutual receipts were assessable income.

A taxpayer who does not derive mutual receipts will be able to deduct rates and land taxes, to the extent that the property is used to produce assessable income, under the general deduction provision.

2. Change

The Bill will remove the redundant provision that allowed taxpayers not deriving mutual receipts to deduct rates and land taxes paid in producing their assessable income. These taxpayers will be able to deduct such expenses under the general deduction provision.

Explanation

In practical terms, there is little difference in what is allowed as a deduction under the existing section 72 compared with what is allowed under the general deduction provision. There are some minor differences, in that under section 72:

·
the taxpayer must be personally liable for the expenditure;
·
the rates must be annually assessed;
·
the amount must be paid in Australia; and
·
under current practice, clubs and associations can deduct an amount that could not be deducted under the general deduction provision, or, strictly speaking, under section 72.

The first three minor differences do not warrant the retention of this provision. The situation of clubs and associations has been specifically addressed by the change listed above.

Section 26-30 Relatives travel expenses

This provision limits the amount that can be deducted for a relatives travel expenses.

Commentary

This section will identify more clearly the situations when deductions can be claimed for a relative's travel expenses, rather than, as in section 51AG of the 1936 Act, setting out when such expenses cannot be deducted.

The section will also adopt a different approach to the use of the terms 'employee' and 'employer'. In various areas of the tax law, the 1936 Act uses the term 'employee' but defines it to include people other than common law employees by reference to the definition of an employee in section 221A of the 1936 Act. In contrast, in other areas of the tax law the term 'employee' is undefined and retains only its common law meaning. Section 26-30 will specifically alert readers to the point that the provision will apply to individuals other than common law employees. It introduces the new term PAYE earner, which is defined in the Dictionary (section 995-1 of the 1997 Act) to mean an employee as defined in section 221A of the 1936 Act.

Division 34 Non-compulsory uniforms

This Division provides that expenses for a non-compulsory uniform cannot be deducted unless the design of the uniform is registered and sets out how a uniform can be registered.

1. Change

The standardised definition of the term 'associate' will apply instead of the definition contained in section 26AAB of the 1936 Act.

Explanation

The use of a slightly different definition of the term 'associate' will have no impact in this context.

The term 'associate' only appears in sections 34-15 and 34-55. Section 34-15 defines a uniform as clothing which distinctively identifies the wearer as someone associated with the wearer's employer or a group consisting of the employer and one or more of the employer's associates. Even if the term 'associate' included a wider range of entities, as the group can be limited to the employer plus some but not all of the employer's associates, the use of a slightly wider definition of 'associate' will have no impact on the application of the law. Section 34-55 operates in a similar manner.

2. Change

Subsection 51AL(10) will not be rewritten. That provision stated that an instrument formulating approved occupational clothing guidelines was a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.

Explanation

The Legislative Instruments Bill 1996 (currently before the Parliament) will ensure that these guidelines are legislative instruments, and that they are subject to Parliamentary review. That Bill will also remove the current section 46A of the Acts Interpretation Act 1901. Accordingly, it is no longer necessary to specifically state that these guidelines and determinations are disallowable instruments.

Commentary

The rewritten provision will separate out those aspects that are only relevant for an employee, and the more detailed aspects in relation to registration of a uniform that are only relevant for an employer. More important points, such as that the Division will not apply to occupation specific or protective clothing, are made earlier.

As with section 26-30, the Division will also adopt a different approach to the use of the terms 'employee' and 'employer'. In various areas of the tax law, the 1936 Act uses the term 'employee' but defines it to include people other than common law employees by reference to the definition of an employee in section 221A of the 1936 Act. In contrast, in other areas of the tax law the term 'employee' is undefined and retains only its common law meaning. Section 34-5 will alert readers specifically to the point that the provision will apply to individuals other than common law employees. It introduces the new term PAYE earner, which is defined in the Dictionary (section 995-1 of the 1997 Act) to mean an employee as defined in section 221A of the 1936 Act.

C. Provisions of the old law that have not been rewritten

Redundant provisions

The rewrite will remove a redundant provision, section 64, which allows a deduction for commissions incurred in collecting assessable income. This section is superfluous because these expenses are deductible under the general deduction provision (section 8-1 of the 1997 Act).

Provision with minimal practical benefit

Change

The rewrite will remove a provision, of minimal practical benefit to taxpayers, which allowed a deduction of up to $50 for capital legal expenses.

Explanation

Section 64A of the 1936 Act allows a deduction of up to $50 for legal expenses of a capital nature if the expenses were incurred in carrying on a business to produce assessable income. The deduction must be reduced by any legal expenses that can be deducted under the general deduction provision (section 8-1 of the 1997 Act).

This provision is of limited value because the amount involved is only $50 and even that amount must be reduced by any legal expenses that can be deducted under the general deduction provision. In other words, if a taxpayer can claim legal expenses of $50 or more under the general deduction provision, this provision has no application.

D. Transitional arrangements

Part 1 of Schedule 4 of the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this chapter.

Part 1 will insert in Part 2-5 of Chapter 2 of the Income Tax (Transitional Provisions) Act 1997 new Divisions 25, 26 and 34. These Divisions will set out how and when the rewritten sections will apply.

The rewritten provisions will usually apply to assessments for the 1997-98 or later income years. [Schedule 4, Part 2-5, sections 25-1, 26-1 and 34-1, Transitional Provisions Act]

In some cases, however, it is necessary in the transitional provisions that the rewritten provisions apply in different circumstances or specify additional points. These differences are explained in the following table:

Transitional section Nature of deduction Differences
25-40 Loss from profit-making undertaking or plan Applies to a loss arising in the 1997-98 income year or a later income year, even if the undertaking or plan was entered into, or began to be carried out, before that time.
25-45 Loss by theft etc Applies to a loss discovered in the 1997-98 income year or a later income year.
26-30 Relatives travel expenses Applies to travel on or after 1 July 1997.
Section 34-5 will ensure that the Register of Approved Occupation Clothing, the approved occupational clothing guidelines and any delegations made under section 51AL of the 1936 Act will continue to operate for the purposes of the 1997 Act.

E. Consequential amendments

Amendments of the Income Tax Assessment Act 1997

Part 2 of Schedule 4 to the Bill will amend the 1997 Act to:

·
update references to provisions of the 1997 Act that have been rewritten in Divisions 25, 26 and 34 in Schedule 1; and
·
insert additional definitions in the Dictionary (section 995-1) of terms that are used in the rewritten provisions contained in Division 25, 26 and 34 in Schedule 1.

Updated references

Section 12-5 of the 1997 Act lists all the provisions of both the 1936 and the 1997 Acts that contain rules about specific types of deductions. Part 2 of Schedule 4 to the Bill will update references to provisions in the 1936 Act that have been rewritten in Divisions 25, 26 and 34 in Schedule 1, so that the lists refer to the rewritten provisions. Some listings have been moved to a more appropriate location to reflect the change in terminology in the rewritten provisions. For example, the listing for the embezzlement provision is now under the heading theft, as the provision has been renamed loss by theft etc. [Schedule 4, Part 2: items 5 to 34]

Part 2 of Schedule 4 will also update other references to the 1936 Act deduction provisions that appear in other provisions that have already been rewritten. These references occur in sections 165-55, 165-70 and 900-30 of the 1997 Act. [Schedule 4, Part 2: items 35 to 38]

Dictionary terms

Part 2 of Schedule 4 to the Bill will insert definitions of terms used in the rewritten provisions in Divisions 25, 26 and 34 in Schedule 1.

In some cases, the label used and the meaning of the definition have not changed from the existing law. The following definitions fall into this category:

Accrued leave transfer payment. The definition is the same as that in section 6G of the 1936 Act. [Schedule 4, Part 2: item 40]

Agent. The definition is the same as that in subsection 6(1) of the 1936 Act. [Schedule 4, Part 2: item 41]

Approved occupational clothing guidelines. The definition is the same as that in subsection 51AL(7) of the 1936 Act. [Schedule 4, Part 2: item 42]

Child. The definition is the same as that in section 6(1) of the 1936 Act. [Schedule 4, Part 2: item 43]

Design. The definition is the same as that in subsection 51AL(26) of the 1936 Act. [Schedule 4, Part 2: item 45]

Disease. The definition is the same as that in subsection 51AL(26) of the 1936 Act. [Schedule 4, Part 2: item 46]

Industry Secretary. The definition is the same as that in subsection 51AL(26) of the 1936 Act. [Schedule 4, Part 2: item 48]

Occupation specific clothing. The definition is the same as that in subsection 51AL(26) of the 1936 Act. [Schedule 4, Part 2: item 52]

Protective clothing. The definition is the same as that in subsection 51AL(26) of the 1936 Act. [Schedule 4, Part 2: item 54]

Registered tax agent. The definition is the same as that in section 251A of the 1936 Act. [Schedule 4, Part 2: item 58]

Senior Executive Service office. The definition is the same as that in subsection 51AL(26) of the 1936 Act. [Schedule 4, Part 2: item 60]

Definitions that have changed from the existing law and the new defined terms are explained below.

New definition: AAT [Schedule 4, Part 2: item 39]

Commentary : New label, previously Tribunal as defined in subsection 6(1).

New definition : Fringe benefit [Schedule 4, Part 2: item 47]

Commentary: New term. It will be used for brevity, along with the new term providing a fringe benefit, when discussing links to the Fringe Benefits Tax Assessment Act 1986. In the deductions provisions covered by Schedule 4, the definition will be used when rewriting references to the provider of a fringe benefit (within the meaning of the Fringe Benefits Tax Assessment Act 1986). For example, see subsection 51(6A). This results in no change to the law.

New definition : Legal practitioner [Schedule 4, Part 2: item 49]

Commentary: New term. It will be used for brevity to replace the phrase a person who is enrolled as a barrister, a solicitor or a barrister and solicitor of a federal court or a court of a State or Territory as used in section 69 of the 1936 Act, and similar phrases used elsewhere. There is no change to the law.

New definition : Leisure facility [Schedule 4, Part 2: item 50]

Commentary: The definition is based on the definition in subsection 51AB(1) of the 1936 Act. It is drafted differently in that, rather than define excepted facilities which are excluded specifically from the definition of a leisure facility, section 26-50 says that, in the same circumstances, the provision does not apply to a leisure facility. This provides a more direct result with no change to the law.

New definition : Non-compulsory [Schedule 4, Part 2: item 51]

Commentary : This is a new term picking up the concepts set out in 51AL(4)(b) of the 1936 Act. This results in no change to the law.

New definition: Period of the loan [Schedule 4, Part 2: item 53]

Commentary : This is a new term that contains some of the rules in section 67 of the 1936 Act. It also includes a policy change that enables a taxpayer to deduct borrowing expenses earlier if the loan is repaid early. See the commentary on section 25-25.

New definition: Provide a fringe benefit [Schedule 4, Part 2: item 55]

Commentary: New term. It will be used for brevity, along with the new term fringe benefit, when discussing links to the Fringe Benefits Tax Assessment Act 1986. As noted in the item, the definition is based on the definition of provide in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986. In the deductions provisions covered by Schedule 4, the definition will be used when rewriting references to the provider of a fringe benefit (within the meaning of the Fringe Benefits Tax Assessment Act 1986). For example, see subsection 51(6A). This results in no change to the law.

New definition: Recognised tax adviser [Schedule 4, Part 2: item 56]

Commentary : New label, previously recognised professional tax adviser in subsection 69(11) of the 1936 Act.

New definition: Recreational club [Schedule 4, Part 2: item 57]

Commentary: New label, previously club as defined in subsection 51AB(1) of the 1936 Act. There is no change to the law.

New definition: Related entity [Schedule 4, Part 2: item 59]

Commentary : New label, previously associated person in subsection 65(1D) of the 1936 Act.

New definition: Uniform [Schedule 4, Part 2: item 62]

Commentary : New label, previously a component of non-compulsory uniform/wardrobe in subsection 51AL(4). The definition is the same as that in subsection 51AL(26) of the 1936 Act. There is no change to the law.

Items 44 and 61 repeal the previous meaning of the term club, as contained in the 1997 Act. This term is not required, and conflicts with the use of the term without definition in other places in the legislation. The term club, in the context of the definition of sporting club, will now rely on the normal meaning of that term. There is no change to the law.

Application of amendments

The amendments made by Part 2 of Schedule 4 apply to assessments for the 1997-98 and later income years. [clause 4, Tax Law Improvement Bill 1997] This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the deduction provisions.

Amendments of the Income Tax Assessment Act 1936

Part 3 of Schedule 4 to the Bill will amend the 1936 Act to:

·
insert references to the rewritten provisions (contained in Divisions 25, 26 and 34 in Schedule 1) where the 1936 Act refers to the existing provisions; and
·
close off the application of provisions of the 1936 Act that have been rewritten in Divisions 25, 26 and 34 in Schedule 1, so that the existing provisions apply only to the 1996-97 and earlier income years.

Inserting references to rewritten provisions

Part 3 of Schedule 4 will insert in the 1936 Act references to the rewritten provisions contained in Divisions 25, 26 and 34 where the 1936 Act refers to the existing provisions. There are four categories of these amendments:

The first category will add a reference to a provision in the 1997 Act in a section of the 1936 Act where a reference to the provisions in the 1936 Act currently appears, so that provisions of both the 1936 and the 1997 Acts are referred to. This is necessary for the references in subsections 51AD(17), 51AD(18), 63CA(3) and sections 82KH, 304 and 396. [Schedule 4, Part 3: items 72, 73, 75, 91, 99, 117 to 123, 132 and 133]

The second category will omit the reference to the existing provision in a section of the 1936 Act and replace it with the rewritten provision. This is necessary for those sections of the 1936 Act that:

·
have not yet been rewritten and closed off; and
·
can apply to amounts that relate to only one income year at a time, being the 1997-98 or a later income year. [Schedule 4, Part 3: items 70, 84 to 90, 92, 96, 97, 104, 106, 111, 112, 124, 131 and 134 to 138]

The third category will add references to rewritten provisions additional to those contained in Divisions 25, 26 and 34. This is the case for amendments to section 51AAA, which refers to deductions allowed under all of Subdivision A of Division 3 of the 1936 Act. Items 63 and 64 will substitute references to section 8-1, Divisions 25, 30, 34, 36 and 165 and Subdivision 170-A.

The fourth category contains minor wording changes. Some of these changes are required to take account of the co-existence of the 1936 Act and the 1997 Act. For example, item 93 adds the words of this Act to subparagraph 63D(1)(a)(ii), to make clear that the reference is to the 1936 Act rather than the 1997 Act. [Schedule 4, Part 3: items 93, 94, 95, 98, 100 and 105] Other changes are required because of the addition of references to other sections in a provision. For example, item 71 adds the words of this section to paragraph 51AD(16)(b), to make clear that the subsection referred to is in section 51AD. [Schedule 4, Part 3: items 71, 74 and 76]

Closing off the application of existing provisions

Part 3 of Schedule 4 will insert new provisions into the 1936 Act that will close off the application of provisions in the 1936 Act that have been rewritten. [Schedule 4, Part 3: items 65 to 69, 77, 79 to 83, 101 to 103, 107 to 110 and 113 to 116]

In these cases, the existing provisions need to be closed off so that they only apply to the 1996-97 and earlier income years. This complements the transitional provisions in Part 1 of Schedule 4 which ensure that the corresponding rewritten provisions apply to the 1997-98 and later income years.

Application of amendments

The amendments made by Part 3 of Schedule 4 apply to assessments for the 1997-98 and later income years. [clause 4, Tax Law Improvement Bill 1997] This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the gift provisions.

Amendments of other Commonwealth legislation

Part 4 of Schedule 4 to the Bill will amend the Fringe Benefits Tax Assessment Act 1986 to substitute references to a rewritten provision contained in subsection 26-30 in Schedule 1, where that Act currently refers to the existing provision. [Schedule 4, Part 4: items 139 and 140]

Chapter 6 - Gifts

This chapter explains the rewritten provisions under which income tax deductions are allowed for gifts.

These provisions are contained in new Division 30 in Schedule 1 to the Tax Law Improvement Bill 1997.

Transitional and consequential amendments for the rewritten provisions are contained in Schedule 9 to the Bill.

Overview of this chapter

This chapter covers:

·
the rewritten provisions in Division 30 (Gifts or contributions) in Schedule 1 to the Tax Law Improvement Bill 1997; and
·
the transitional provisions and consequential amendments for those rewritten provisions, which are in Schedule 9 to the Bill.

Division 30 rewrites the provisions of the 1936 Act that allow deductions for gifts and contributions. The corresponding provisions of the 1936 Act are sections 78, 78AA and 78AB.

The rewritten provisions will be in Division 30 of the 1997 Act.

Part A of this chapter summarises new Division 30.

Part B explains the changes proposed to the content of Division 30.

Part C explains why some provisions of the 1936 Act have not been rewritten.

Part D explains the transitional provisions which set out how and when the rewritten provisions will apply. These provisions are located in Part 1 of Schedule 9 to the Bill.

Part E explains the amendments that need to be made to the 1997 Act, the 1936 Act and other Commonwealth legislation, as a consequence of the rewriting of the provisions of the 1936 Assessment Act. These provisions are located in Parts 2 to 4 of Schedule 9 to the Bill.

A. Summary of the new law

Guide to Division 30: Gifts or contributions

What the Division will do

This division sets out the rules for working out deductions for certain gifts or contributions

Guide to Subdivision 30-A: Deductions for gifts or contributions

What the Subdivision will do

Subdivision 30-A allows deductions of a non-testamentary gift or contribution to a recipient listed in the following table, subject to any conditions and valuation rules [section 30-15]

Recipient Type of gift or contribution Conditions
A fund, authority or institution in Australia that is listed:

(a)
by name (for example, the Nursing Mothers' Association); or
(b)
by type (for example, a public hospital). [Subdivisions 30-A and 30-B]

Money;
Property purchased in the year before making the gift.
Trading stock disposed of outside the ordinary course of business if the market value is included in assessable income.

Gifts of $2 or more.
Other conditions may be relevant to particular recipients.
These conditions are listed in Subdivision 30-B.
Subdivision 30-A explains how much can be deducted.

A public fund established and maintained solely for:

(a)
providing benefits to an entity listed in Subdivision 30-B and for any purposes set out for that entity; or
(b)
the establishment of such an entity.

As above.

Gifts of $2 or more.
The will or trust requires the gift proceeds to be invested only in a way that an Australian law allows trust money to be invested.
Subdivision 30-A explains how much can be deducted.

A registered political party.

Money
Property purchased in the year before making the contribution.

Contributions of more than $2 but not more than $100.
The donor cannot be a company.
Subdivision 30-A explains how much can be deducted.

A public library, museum or art gallery in Australia.
An institution consisting of any 2 of the above.
The Australiana Fund.

Money
Property (except land or a building) accepted by the recipient for inclusion in a collection it is maintaining or establishing.

Gifts of $2 or more.
Subdivisions 30-A and 30-C explain how much can be deducted.

Artbank Property (except land or a building) accepted by the Commonwealth for inclusion in an Artbank collection. Subdivisions 30-A and 30-C explain how much can be deducted.
A National Trust body. A place on the Register of the National Estate, accepted by the National Trust body for preserving for the public. Gifts of $2 or more. Subdivisions 30-A and 30-C explain how much can be deducted.

Guide to Subdivision 30-B: Tables of recipients for deductible gifts

What the Subdivision will do

It contains lists of potential recipients of a deductible gift and any special conditions that may need to be satisfied. The lists are grouped as follows:

·
Health [section 30-20]
·
Education [sections 30-25 to 30-35]
·
Research [section 30-40]
·
Welfare and rights [section 30-45]
·
Defence [section 30-50]
·
Environment [sections 30-55 and 30-60]
·
Industry, trade and design [section 30-65]
·
The family [sections 30-70 and 30-75]
·
International affairs [sections 30-80 and 30-85]
·
Sports and recreation [section 30-90]
·
Philanthropic trusts [section 30-95]
·
Cultural organisations [sections 30-100 and 30-110] .

Guide to Subdivision 30-C: Rules applying to particular gifts of property

What the Subdivision will do

It contains special rules for working out how much can be deducted for a gift of property to a public library, museum or art gallery, the Australiana Fund, Artbank or a National Trust body [items 4, 5 and 6 in the table in section 30-15] .

The general rule is

The deduction is the average of the market values specified in the written valuations from approved valuers.

Subdivision 30-C sets out:

(a)
how a person becomes an approved valuer; and
(b)
the exceptions to the general rule; and
(c)
the situations when you must reduce the amount you can deduct, for example if the recipient did not receive immediate and unconditional control of the property; and
(d)
how much can be deducted if the property is jointly owned.

Guide to Subdivision 30-D: Testamentary gifts under the Cultural Bequests Program

What the Subdivision will do

It allows a deduction for a testamentary gift of property under the Cultural Bequests Program.

Guide to Subdivision 30-E: Register of environmental organisations

What the Subdivision will do

It requires the establishment of a register of environment organisations. It sets out certain conditions that such organisations must meet. Section 30-15 allows you to deduct a gift that you make to a fund that is on the register.

Guide to Subdivision 30-F: Register of cultural organisations

What the Subdivision will do

Requires the establishment of a register of cultural organisations. It sets out certain conditions that such organisations must meet. Section 30-15 allows you to deduct a gift that you make to a fund that is on the register.

Guide to Subdivision 30-G: Index to this Division

What the Subdivision will do

Contains an index of all potential recipients of deductible gifts.

B. Discussion of changes

Removal of discretions

Change

Omit Commissioner's discretions which are inconsistent with self-assessment principles.

Explanation

As rewriting of the income tax law proceeds, many of the discretions that the Commissioner of Taxation may exercise are being removed. This allows the new law to more fully reflect the principles of the self assessment system.

The following changes are being made in the context of reviewing the gift provisions (references are to the 1936 Act):

Provision Change
78(5)(b) Remove the phrase 'the Commissioner is satisfied that'.
78(11) Remove the phrase 'in the Commissioner's opinion'.
78(14)(c)(i) Remove the phrase 'the Commissioner is of the opinion that'.
78(14)(c)(ii) Replace 'the value of the gift is the amount that the Commissioner considers was the value of the property as at the time when the gift was made' with 'the value of the gift is the amount that fairly represents the value of the property as at the time when the gift was made'.
78(15) Remove the phrase ' the Commissioner is satisfied that' in (b). Replace 'reduced by such amount as the Commissioner considers reasonable' with 'reduced by such amount as is reasonable'.
78(16) Replace 'as the Commissioner considers reasonable' with 'as is reasonable'.

Section 30-15 Deductions for gifts or contributions

The provision sets out the rules for working out deductions for certain gifts.

Change

Simplify the rules for deductions for gifts of trading stock outside the ordinary course of business.

Explanation

This will remove a minor anomaly and allow the law to be more simply expressed.

The current law allows a deduction for a gift of trading stock to which subsection 36(1) of the 1936 Act applies. That subsection requires the value of trading stock to be included in assessable income if it is disposed of outside the ordinary course of business (because the cost of acquiring an item of trading stock is normally a deduction).

However, a deduction is not allowable if the donor elects to take advantage of certain provisions that allow a reduction in the amount included in assessable income. This applies to elections under subsection 36(3) and section 36AAA, but not to a similar election under section 36AA:

·
subsection 36(3) allows a reduction in the amount included in assessable income if live stock is disposed of because of a natural disaster, the expropriation of land, or tick control;
·
section 36AAA is a similar concession for the disposal, death or compulsory destruction of live stock by reason of fire, drought or flood; and
·
section 36AA allows a reduction in the amount to be included in assessable income in certain cases of compensation resulting from death, disposal or compulsory destruction of live stock.

Section 30-15 will apply to all the elections, thus ensuring a consistent and simple rule. In practice a gift of trading stock would rarely arise in the circumstances covered by section 36AA.

Section 30-200 Getting written valuations

This provision requires valuations of some gifts of property. The valuations are required to work out how much can be deducted for a gift of property to a public library, museum or art gallery, the Australiana Fund, Artbank or a National Trust body.

Change

Remove the requirement that the valuations must be given to the Commissioner.

Explanation

This requirement is no longer enforced. This allows the new law to more fully reflect the principles of the self assessment system.

C. Provisions of the old law that have not been rewritten

Subsection 78(25A) of the 1936 Act provides that guidelines and determinations made in relation to a testamentary gift under the Cultural Bequests Program are disallowable instruments for the purposes of section 46A of the Acts Interpretation Act 1901. The Legislative Instruments Bill 1996 (currently before Parliament) will ensure that these guidelines and determinations are legislative instruments. They will be subject to review under the Legislative Instruments Bill 1996. The Bill will also remove the former section 46A of the Acts Interpretation Act. Accordingly, it is no longer necessary to specifically state that these guidelines and determinations are disallowable instruments.

D. Transitional arrangements

Part 1 of Schedule 9 of the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this chapter.

Part 1 will insert in Chapter 2 of the Income Tax (Transitional Provisions) Act 1997 new Part 2-5, Divisions 25 and 30. New Divisions 25 and 30 will set out how and when the rewritten sections will apply.

The rewritten provisions will apply to assessments for the 1997-98 or later income years. [Schedule 9, Part 1: section 30-1, Transitional Provisions Act]

Transitional provisions will ensure that any declarations, instruments, certificates, guidelines and gift registers in force under the Income Tax Assessment Act 1936 will continue to remain in force for the purposes of the Income Tax Assessment Act 1997. [Schedule 9, Part 1: sections 30-5, 30-15, 30-20 and 30-25, Transitional Provisions Act]

Section 30-10 will ensure that any applications for the approval of a testamentary gift that have not yet been decided will be treated as an application under the rewritten provisions. [Schedule 9, Part 1: section 30-10, Transitional Provisions Act]

E. Consequential amendments

Amendments of the Income Tax Assessment Act 1997

Part 2 of Schedule 9 to the Bill will amend the 1997 Act to:

·
update references to provisions of the 1997 Act that have been rewritten in Division 30 and section 25-50 in Schedule 1; and
·
insert additional definitions in the Dictionary (section 995-1) of terms that are used in the rewritten provisions in Division 30 in Schedule 1.

Updated references

Section 12-5 of the 1997 Act lists all the provisions of both the 1936 and the 1997 Acts that contain rules about specific types of deductions. Part 2 of Schedule 9 to the Bill will update references to provisions in the 1936 Act that have been rewritten in Division 30 and section 25-50 in Schedule 1, so that the lists refer to the rewritten provisions. [Schedule 9, Part 2, items 3 to 5]

Part 2 of Schedule 9 will also update references to the 1936 Act gift provisions that appear in other provisions that have already been rewritten. These references occur in sections 26-55 and 165-55 of the 1997 Act. [Schedule 9, Part 2: items 6 to 13]

Dictionary terms

Part 2 of Schedule 9 to the Bill will insert definitions of terms used in the rewritten provisions in Division 30 in Schedule 1.

In one case, the label used and the meaning of the definition have not changed from the existing law. This is the case for the following definition:

Cultural organisation. The definition is the same as that in subsection 78AA(1) of the 1936 Act. [Schedule 2, Part 2: item 14]

There is one new defined term.

New definition: Environmental organisation [Schedule 2, Part 2: item 15]

Commentary: The definition is based on the requirements set out in subsections 78AB(2) and (7). This results in no change to the law.

Application of amendments

The amendments made by Part 2 of Schedule 9 apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill 1997] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the gift provisions.

Amendments of the Income Tax Assessment Act 1936

Part 3 of Schedule 9 to the Bill will amend the 1936 Act to:

·
insert references to the rewritten provisions (contained in Division 30 in Schedule 1) where the 1936 Act refers to the existing provisions; and
·
close off the application of provisions of the 1936 Act that have been rewritten in Division 30 and section 25-50 in Schedule 1, so that the existing provisions apply only to the 1996-97 and earlier income years.

Inserting references to rewritten provisions

Part 3 of Schedule 9 will insert in the 1936 Act references to the rewritten provisions contained in Division 30 where the 1936 Act refers to the existing provisions. There are two categories of these amendments as discussed below.

The first category will add a reference to a rewritten provision in a section of the 1936 Act where a reference to a provision in the 1936 Act currently appears, so that provisions in both the 1936 and 1997 Acts are referred to. This is necessary for the reference to subsections 78(4) and (5) in paragraph (aa) of the definition of apportionable deductions in subsection 6(1) of the 1936 Act. This definition has not yet been rewritten and closed off, and can apply to amounts relating to more than one income year (including an income year before the 1997-98 income year). This makes it necessary to refer to both the existing and rewritten provisions in the 1936 and the 1997 Acts. [Schedule 9, Part 3: items 16]

The second category will omit the reference to an existing provision in a section of the 1936 Act and replace it with the rewritten provision. This is necessary for those sections of the 1936 Act that:

·
have not yet been rewritten and closed off; and
·
can apply to amounts that relate to only one income year at a time, being the 1997-98 or a later income year. [Schedule 9, Part 3: items 33 to 40]

Closing off the application of existing provisions

Part 3 of Schedule 9 will insert new provisions into the 1936 Act that will close off the application of existing provisions that have been rewritten. [Schedule 9, Part 3: items 17 to 32]

In these cases, the existing provisions need to be closed off so that they only apply to the 1996-97 and earlier income years. This complements the transitional provisions in Part 1 of Schedule 9 which ensure that the corresponding rewritten provisions apply to the 1997-98 and later income years.

Application of amendments

The amendments made by Part 3 of Schedule 9 apply to assessments for the 1997-98 and later income years. [clause 4, Tax Law Improvement Bill 1997] This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the gift provisions.

Amendments of other Commonwealth legislation

Part 4 of Schedule 9 to the Bill will add or substitute references to the rewritten gift provisions in the following Commonwealth Acts:

Commonwealth Act Amended by
Customs Tariff Act 1995 Schedule 9, Part 4: item 41
Sales Tax (Exemptions and Classifications) Act 1992 Schedule 9, Part 4: item 42

Chapter 7 - Entertainment

This chapter explains the rewritten provisions about the income tax treatment of entertainment expenses.

These provisions are contained in the new Division 32 in Schedule 1 to the Tax Law Improvement Bill 1997.

Transitional and consequential amendments for the rewritten provisions are contained in Schedule 10 to the Bill.

Overview of this chapter

This chapter covers:

·
the rewritten provisions in Division 32 (Entertainment) in Schedule 1 to the Tax Law Improvement Bill 1997; and
·
the transitional provisions and consequential amendments for those rewritten provisions contained in Schedule 10 to the Bill.

Division 32 contains the rewritten provisions of section 51AE and section 26AAAC of the 1936 Act which deal with the rules about entertainment.

Part A of this chapter summarises the entertainment rules contained in the new Division 32 of the 1997 Act. These provisions are located in Schedule 1 to the Bill.

Part B - there are no changes proposed to the content of the current provisions.

Part C explains why some provisions of the 1936 Act have not been rewritten.

Part D explains the transitional provisions which set out how and when the rewritten provisions will apply. These provisions are located in Part 1 of Schedule 10 to the Bill.

Part E explains the amendments that need to be made to the 1997 Act, the 1936 Act and other Commonwealth legislation, as a consequence of rewriting the provisions of the 1936 Assessment Act. These provisions are located in Parts 2 to 4 of Schedule 10 to the Bill.

A. Summary of the new law

Guide to Division 32: Entertainment

What the Division will do

It will explain the income tax treatment of entertainment.

The general rule is

A loss or outgoing is not deductible under section 8-1, of the 1997 Act, to the extent it is incurred in providing entertainment. [section 32-5]

What entertainment?

Entertainment by way of:

·
food, drink or recreation; or
·
accommodation or travel to do with providing entertainment by way of food, drink or recreation. [section 32-10]

Property used in providing entertainment

To the extent that property is used for providing non-deductible entertainment, that use is taken not to be for the purpose of producing assessable income. [section 32-15]

The general rule will not apply for these items of entertainment:

Employer expenses

Meals in an in-house dining facility

Food and drink provided to an employee in an in-house dining facility. [section 32-30, item 1.1]

Food and drink supplied in an in-house dining facility to individuals who are not employees can be claimed if $30 for each meal is included in the taxpayers assessable income. [section 32-30, item 1.2, subsection 32-70(1)]

However, taxpayers can choose not to claim the deduction and not to have the $30 included in their assessable income. [section 32-30 item 1.2, subsection 32-70(2)]

Meals in a dining facility

Food or drink employees receive in a dining facility, if they work in that dining facility or in a facility for accommodation, recreation or travel (such as a motel or resort) that contains the dining facility. A dining facility is a canteen, dining room, cafe, restaurant or something similar. [section 32-30, item 1.3, section 32-60]

In-house recreation facilities

A recreation facility on property occupied by the taxpayer and mainly for use by its employees. [section 32-30, item 1.5]

Certain exempt fringe benefits

Food, drink or meals that are exempt benefits under the Fringe Benefits Tax Assessment Act 1986 (FBTAA). [section 32-30, items 1.6, 1.7]

Overtime meals

Some food or drink supplied to employees under an industrial instrument relating to overtime. [section 32-30, item 1.4]

Entertainment allowances

Entertainment allowances paid to employees, if they are included in their assessable income. [section 32-30, item 1.8]

Seminar expenses

Incidental costs

Entertainment that is reasonably incidental to a persons attendance at a seminar that goes for at least 4 hours (certain qualifications apply). [section 32-35, item 2.1, section 32-65]

Entertainment industry

Expenses of an entertainment business

Entertainment supplied for payment in the ordinary course of a business (such as meals by a restaurateur or the catering for in flight meals by an airline). [section 32-40, item 3.1]

Expenses of employees in the entertainment industry

Entertainment paid for and provided as an employee of a business that charges for that entertainment. For example stage make-up purchased by an actress. [section 32-40, item 3.2]

Promotion and advertising expenses

Entertainment provided to publicly promote a business' goods or services if certain conditions are met. [section 32-45, items 4.1, 4.2, and 4.3]

Overtime meals of employees

Food and drink during overtime work and for which an allowance is paid under an industrial instrument. [section 32-50, item 5.1]

Charitable entertainment

Free entertainment provided to disadvantaged members of the public. [section 32-50 item 5.2]

Anti-avoidance

Arrangements where you pay for something such as advertising and you receive entertainment for less than it would otherwise cost can be affected by an anti-avoidance provision. The Commissioner can apportion a reasonable part of the amount paid to the entertainment provided. [section 32-75]

Special rules for companies and partnerships

Company directors [section 32-80] and partners [section 32-90] are treated as employees in some provisions. Employees, directors and property of a company in some provisions mean employees, directors and property of any company in the same wholly owned group [section 32-85] .

B. Discussion of changes

The exception in paragraph 51AE(5)(g) has not been rewritten. This does not change the existing law because it has very little or no operation (see Limited application below in Part C).

C. Provisions of the old law that have not been rewritten

Redundant provisions

Some provisions of the existing law are redundant and have not been included in the new law. They are summarised in the following table:

Provision Provision Reason for omission
Subsection 51AE(5A) Overrides the general rule that denies deductibility of entertainment expenses for:

(a)
meals which constitute a board fringe benefit within the FBTAA;
(c)
a living-away-from-home food fringe benefit within the FBTAA;
(e)
a fringe benefit whose taxable value is reduced by section 61D (temporary accommodation meals) or section 65A (education of children of overseas employees) of the FBTAA;
(f)
a remote area holiday fringe benefit within the FBTAA; and
(g)
a fringe benefit in respect of overseas employment holiday transport.

Since the introduction of subsection 51AE(5AA) [section 32-20] in 1994, there has been a general exception for the cost of providing a fringe benefit.
Subsection 51AE(5B) Extends the exceptions in subsection 51AE(5A) back to the commencement date of the general prohibition on deductions for entertainment expenses. A transitional provision has no ongoing effect.
Subsection 51AE(11) Defines deductible travel used in subsection 51AE(10). That term is used only in subsection 51AE(10) which is not being rewritten.
Subsection 51AE(15) Defines non-deductible entertainment used in subsections 51AE(13) and (14). That term is no longer used.

Limited application

Provision not to be rewritten

The exception in paragraph 51AE(5)(g) of the 1936 Act has not been rewritten. The exception excludes from non-deductibility expenditure:

·
that only involves the entertainment of the recipient; and
·
that would be deductible under the general deduction provision if the recipient had incurred it.

Reason for omission

This provision has very limited if any application. Meals while travelling overnight on business are not excluded from deduction under section 32-5 because they are not entertainment. Similarly the meal of a restaurant reviewer or the ticket of a theatre critic would not constitute entertainment.

A note has been added at the end of the definition of entertainment to put beyond doubt that expenditure envisaged by paragraph 51AE(5)(g) is not entertainment.

Provision not to be rewritten

Subsection 51AE(10) which prevents the existing exceptions in paragraphs 51AE(5)(g) self entertainment, and (h) employee of an entertainment business, from applying to an employee's overtime meals and most seminars, has not been reproduced in the rewritten law.

Reason for omission

The limitations imposed by subsection 51AE(10) have very limited scope. Removal of this provision greatly simplifies the legislation.

Unnecessary duplication

Provisions not to be rewritten

The definitions of related companies [subsection 51AE(16)] , subsidiary companies [subsection 51AE(17)] , subsidiary of a subsidiary [subsection 51AE(18)] and person in a position to affect the rights of a company [subsection 51AE(19)] have not been rewritten.

Reason for omission

These terms and concepts are dealt with in Division 975. Related company is covered by the concept of a member of the same wholly owned group of companies contained in section 975-500. Subsidiary and subsidiary of a subsidiary and holding company are covered within the concept of 100% subsidiary in section 975-505. A person in a position to affect the rights of a company is covered in section 975-150.

Abundance of caution

Provision not to be rewritten

Subsection 51AE(6) is a safeguarding provision that allows the Commissioner of Taxation to ignore attempts to restructure business arrangements to bring them within the ambit of two exceptions:

·
charging for entertainment that it is reasonable to expect to be provided free of charge [paragraph 51AE(5)(b)] ; or
·
providing entertainment under a contract for the supply of goods or services in order to promote your business to the public that it is reasonable to expect to be provided separately from such a contract [paragraph 51AE(5)(b)] .

Reason for omission

Cases that involve blatant arrangements would be caught by the general anti-avoidance provisions. In other cases the expenditure would not qualify for deduction under general principles.

Provision not to be rewritten

Subsection 51AE(12) states that the classes of losses or outgoings that are deductible under the general deduction provision are not extended by any of the exceptions in subsection 51AE(5).

Reason for omission

Subsection 51AE(12) has no practical effect other than to put beyond doubt what is already clear - that what is deductible under subsection 51(1) is not expanded by any of the exceptions in subsection 51AE(5).

D. Transitional arrangements

Part 1 of Schedule 10 of the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this chapter.

Part 1 comprises only item 1, which will insert in Part 2-5 of Chapter 2 of the Income Tax (Transitional Provisions) Act 1997 the new Division 32. The new Division 32 will set out how and when the rewritten sections will apply.

The rewritten provisions will apply to assessments for the 1997-98 or later income years. [Schedule 10, Part 1: section 32-1, Income Tax( Transitional Provisions) Act 1997]

E. Consequential amendments

Amendments of the Income Tax Assessment Act 1997

Part 2 of Schedule 10 to the Bill will amend the 1997 Act to:

·
update references to provisions of the 1936 Act that have been rewritten in Division 32 in Schedule 1; and
·
insert additional definitions in the Dictionary in section 995-1 of terms that are used in the rewritten provisions contained in Division 32 in Schedule 1.

Updated references

Section 10-5 of the 1997 Act lists all the provisions of both the 1936 and the 1997 Acts that deal with particular kinds of assessable income. Part 2 of Schedule 10 to the Bill will update the reference to the existing provision (26AAAC) that has been rewritten in Division 32 in Schedule 1, so that the lists refer to the rewritten provision. [Schedule 10, Part 2: item 2]

Section 12-5 of the 1997 Act lists all the provisions of both the 1936 and the 1997 Acts that deal with specific types of deductions. Part 2 of Schedule 10 to the Bill will update the reference to the existing provision (51AE) that has been rewritten in Division 32 in Schedule 1, so that the lists refer to the rewritten provision. [Schedule 10, Part 2: item 3]

The reference in the signpost in subsection 43-50(4) of the 1997 Act to subsection 51AE(14) has been replaced with a reference to section 32-15. [Schedule 10, Part 2: item 4]

Two notes have been added to the end of the definition of purpose of producing assessable income in subsection 995-1(1) to signpost provisions that affect whether use of property is for the purpose of producing assessable income. [Schedule 10, Part 2: item 10]

New Dictionary terms

Part 2 of Schedule 1 to the Bill will insert into the Dictionary (section 995-1 of the 1997 Act) new definitions of terms used in the rewritten provisions in Division 32 in Schedule 1.

In some cases, the label used and the meaning of the definition have not changed from the existing law. The following definitions fall into this category:

·
In-house dining facility [Schedule 1, Part 2: item 9]
·
Seminar [Schedule 1, Part 2: item 11] .

The label used for some concepts has changed without any change in meaning from the existing law, and some rearrangement of concepts has resulted in new defined terms. These are explained below.

New Definition: Business meeting [Schedule 10, Part 2: item 5]

Commentary: This is the equivalent of paragraph (a) of the definition of eligible seminar in subsection 51AE(1). It covers the ordinary business meetings that relate to a particular business. It excludes from its meaning those items that were covered by the definition of exempt training seminar in subsection 51AE(1). This is merely a rearrangement and relabelling of the previous provisions.

New Definition: Dining facility [Schedule 10, Part 2: item 6]

Commentary: The new definition of dining facility is the same as the old definition of eligible dining facility in subsection 51AE(1) of the 1936 Act.

New Definition: Entertainment [Schedule 10, Part 2: item 7]

Commentary: The new definition of entertainment together with provide has the same effect as the old definition of provision of entertainment in subsection 51AE(3) of the 1936 Act. The word provide continues to take its ordinary meaning. The scope of the definition is the same, despite the omission of paragraphs 51AE(3)(d), (e) and (f). The omissions have no substantive effect on the definition, they were clearly within the definition's ordinary scope. Business lunches still constitute entertainment.

New Definition: Goes for at least 4 hours [Schedule 10, Part 2: item 8]

Commentary: This definition picks up the concepts in subsection 51AE(2), the continuity of an eligible seminar and the time period from the definition of eligible seminar. This is merely a rearrangement of the previous provisions.

Application of amendments

The amendments made by Part 2 of Schedule 10 apply to assessments for the 1997-98 and later income years [clause 4 Tax Law Improvement Bill 1997] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the entertainment provisions.

Amendments of the Income Tax Assessment Act 1936

Part 3 of Schedule 10 to the Bill will amend the 1936 Act to:

·
insert references to the rewritten provisions contained in Division 32 in Schedule 1, where the 1936 Act currently refers to the existing provisions; and
·
close off the application of provisions of the 1936 Act that have been rewritten in Division 32 in Schedule 1, so that the existing provisions apply only to the 1996-97 and earlier income years.

Inserting references to rewritten provisions

Part 3 of Schedule 10 will insert in the 1936 Act a reference to the rewritten provision section 32-5 where the 1936 Act currently refers to the existing provision section 51AE(4). The reference to section 51AE(4) will be omitted. This is necessary because section 21A has not yet been rewritten and closed off; and can apply to amounts that relate to only one income year at a time, being the 1997-98 or a later income year. [Schedule 10, Part 3: items 12, 13]

Closing off the application of existing provisions

Part 3 of Schedule 10 will insert new provisions into the 1936 Act that will close off the application of existing provisions that have been rewritten. [Schedule 10, Part 3: items 14, 15]

Sections 51AE and 26AAAC need to be closed off so that they only apply to the 1996-97 and earlier income years.

Application of amendments

The amendments made by Part 3 of Schedule 10 apply to assessments for the 1997-98 and later income years The rewritten provisions will apply to assessments for the 1997-98 or later income years [clause 4 Tax Law Improvement Bill 1997] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the entertainment provisions.

Amendments of other Commonwealth legislation

Part 4 of Schedule 10 to the Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to add references to rewritten provisions contained in Division 32 in Schedule 1, where the Act currently refers to the existing provisions. [Schedule 10, Part 4: items 17,19, 20 and 21]

Inserting references to rewritten provisions

Part 4 of Schedule 10 will insert into paragraph 37CE(1)(f) of the FBTAA a reference to the rewritten definition of in-house dining facility in section 32-55 of Schedule 1, where the FBTAA currently refers to the existing provision of section 51AE(1). The reference to section 51AE(1) will be omitted. [Schedule 10, Part 4: item 16]

Part 4 of Schedule 10 will insert into the definition of deductible expense in subsection 136(1) of the FBTAA a reference to Division 32. [Schedule 10, Part 4: item 19]

Part 4 of Schedule 10 will replace the definition of non-deductible entertainment expenditure in subsection 136(1) of the FBTAA with a rewritten definition which incorporates a reference to section 32-5 contained in Schedule 1 as well as a reference to the existing provision of subsection 51AE(4). [Schedule 10, Part 4: item 21]

Part 4 of Schedule 10 will insert a definition of entertainment into subsection 136(1). [Schedule 10, Part 4: item 20] This will replace the definition of providing entertainment in section 152 which has been deleted. [Schedule 10, Part 4: item 22] This also results in amendments to paragraph 63A(1)(b) and to the definition of business premises in subsection 136(1) to remove the reference to the definition of provision of entertainment in section 51AE of the 1936 Act. [Schedule 10, Part 4: item 17 and item 18]

Application of amendments

The amendments made by Part 4 of Schedule 10 apply to the providing of entertainment on or after 1 July 1997. [Schedule 10, Part 4: item 23]

Chapter 8 - Depreciation of plant

This chapter explains the rewritten provisions that allow a deduction for the depreciation of plant.

These provisions are contained in new Division 42 in Schedule 1 to the Tax Law Improvement Bill 1997.

Transitional and consequential amendments for the rewritten provisions are contained in Schedule 6 to the Bill.

Overview of this chapter

This chapter covers:

·
the rewritten provisions in Division 42 in Schedule 1 to the Tax Law Improvement Bill 1997; and
·
the transitional provisions and consequential amendments for those rewritten provisions contained in Schedule 6 to the Bill.

Division 42 contains the rewritten provisions of the 1936 Act that allow a deduction for the depreciation of plant. The corresponding provisions of the 1936 Act are contained in sections 54 to 62AAV of that Act.

The rewritten provisions will be found in Division 42 of the 1997 Act and will be one of the capital allowances explained in Division 40 of that Act.

Part A of this chapter summarises the rewritten depreciation provisions.

Part B explains the changes proposed to the content of the current provisions.

Part C explains why some provisions of the 1936 Act have not been rewritten.

Part D explains the transitional provisions which set out how and when the rewritten provisions will apply. They are located in Part 1 of Schedule 6 to the Bill.

Part E explains the amendments that need to be made to the 1997 Act, the 1936 Act and other Commonwealth legislation, as a consequence of the rewriting of the provisions of the 1936 Act. They are located in Parts 2 to 4 of Schedule 6 to the Bill.

A. Summary of the new law

Guide to Division 42: What this Division is about

What the Division will do

It will allow a deduction for the depreciation of plant.

Transitionals

If you already have plant, or acquire plant that has been previously depreciated, then you should also read the transitional provisions. [section 42-1]

Key concepts

The key concepts used in this Division, and their relevance, are set out in a diagram. [section 42-5]

Guide to Subdivision 42-A: Key operative provisions

What the Subdivision will do

This Subdivision contains the key operative provisions, including the main deduction provision. [section 42-10]

The general rule

You deduct an amount for depreciation of plant if:

·
you are its owner or quasi-owner; and
·
you use it, or install it ready for use, for producing assessable income. [section 42-15]

Meaning of plant

Plant has its ordinary meaning and includes items specifically listed in the definition. [section 42-18]

References to plant

Wherever plant is referred to in the Division, it means a unit of plant. [section 42-19]

Amount deducted

Your deduction in each year is a portion of the plants cost. [section 42-25]

There is a ceiling on how much to deduct

Total deductions, over time, cannot exceed the cost of the plant to you. Where you use the plant otherwise than to produce assessable income, you will not be able to deduct all of its cost. [section 42-20]

There are 2 methods for calculating a deduction

They are the diminishing value and prime cost methods.

Diminishing value allows you to deduct each year a percentage of the balance of the cost you have left to deduct (ie. your undeducted cost). Prime cost allows you to deduct each year a percentage of your cost. [section 42-25]

Different rates of depreciation apply

Most rates are based on the effective life of the plant.

The rates for diminishing value and prime cost differ. Diminishing value rates are higher. Therefore, deductions using this method are also higher in the earlier years. [section 42-25]

Plant with the same depreciation rate can be allocated to a pool

A business can reduce the calculations it makes by allocating plant to a pool and making one calculation for that pool. [Subdivision 42-L]

Balancing adjustments

You must calculate a balancing adjustment for plant you have been depreciating if:

·
you stop being its owner or quasi-owner;
·
its ownership or quasi-ownership varies; or
·
it is lost or destroyed. [section 42-30]
These are known as balancing adjustment events.

All of the Common rules apply

The Common rules for capital allowances are:

·
Common rule 1 - roll-over relief for related entities;
·
Common rule 2 - non-arms length transactions; and
·
Common rule 3 - anti-avoidance (ownership).

[section 42-35]

They are located in Division 41 of the 1997 Act but Common rules 1 and 2 are modified for depreciation.

Choices

Any choice to be made under this Division (eg. which calculation method to use) must be made:

·
before lodging your return for the income year to which the choice relates; or
·
within a further time allowed by the Commissioner.
Once made, a choice will apply for all future years.

[section 42-40]

Exclusions

Some expenditure is excluded from deduction depending on its availability for deduction under other provisions or on the use of the plant on which the expenditure is incurred. [section 42-45]

Debt forgiveness

The debt forgiveness rules in Division 245 of Schedule 2C to the 1936 Act apply to this Division. The amount of a commercial debt that is forgiven can be offset against plant. If it is, the amount offset is treated as an amount that has been deducted for depreciation. [section 42-48]

What are other amounts deducted for depreciation?

Various provisions require you to ascertain amounts you have deducted for depreciation. There is guidance, in a non-operative section, on how to identify those amounts. [section 42-50]

Interaction with other parts of the Act

Other provisions of the Act which affect your rights and obligations under this Division are listed in a non-operative section. [section 42-55]

Guide to Subdivision 42-B: Cost of plant

What the Subdivision will do

This Subdivision specifies how to work out the cost of plant. [section 42-60]

The general rule

Generally, the cost of plant is its cost to you.

However, there are more detailed rules if:

·
there is a partial change in ownership of the plant;
·
the plant is on land over which you hold certain ownership rights;
·
the plant was previously covered by the research and development or mining provisions; or
·
roll-over relief applies. [section 42-65]

Adjustments are made when:

·
a car, designed mainly for carrying passengers, is acquired by you at a discount due to the sale of other plant for less than its market value [section 42-70] ;
·
you acquire plant for more than its arms length value [section 42-75] ;
·
the cost of a car, designed mainly for carrying passengers, exceeds the car depreciation limit [section 42-80] ; or
·
the plants cost can be deducted under another provision [section 42-85] .

Adjustments may be made if:

The plant has been previously depreciated. [section 42-90]

Guide to Subdivision 42-C: Effective life

What the Subdivision will do

This Subdivision tells you how to work out the effective life of plant. [section 42-95]

You have a choice

You may either:

·
work out the effective life of the plant yourself; or
·
adopt the effective life set by the Commissioner. [section 42-100]

Self-assessment

To self-assess effective life you estimate how long the plant can be used for any income producing purpose on the basis of certain assumptions. You do this when you first use it, or have it installed ready for use, for producing assessable income.

The period you determine is shortened if you intend to scrap or abandon the plant within that time. [section 42-105]

Commissioners determination

The Commissioner can make a written determination of the effective life of plant. Determinations for many plant items are contained in Taxation Ruling IT 2685.

[subsection 42-110(1)]

Any conditions stipulated by the Commissioner must be satisfied at the time the plant is first used or installed ready for use for income producing purposes. [subsection 42-110(2)]

Guide to Subdivision 42-D: Depreciation rates

What the Subdivision will do

This Subdivision sets out the depreciation rates.

[section 42-115]

You have a choice

If more than one rate applies, you may choose the one you prefer. You can also choose a lower rate. [section 42-120]

Changing your choice

You must choose a new rate if your use of the plant changes so that the rate previously chosen ceases to apply.

[section 42-123]

The general rates

Most plant attracts the general depreciation rates.

[section 42-125]

The general rates are based on the effective life of plant. Other rates can apply in certain circumstances.

Plant costing $300 or less

The rate is 100%. [section 42-130]

Cars, and motor cycles or similar vehicles

Special rates apply. [section 42-135]

Artworks

Special rates apply. [section 42-140]

Plant acquired before 1/7/95 for scientific research

The rate is 50% (diminishing value) or 33% (prime cost). [section 42-145]

Plant used in providing employee amenities

The rate is 50% (diminishing value) or 33% (prime cost). [section 42-150]

Guide to Subdivision 42-E: Calculation of depreciation deductions

What the Subdivision will do

This Subdivision establishes how to work out the amount of your deduction. [section 42-155]

Calculation formulas

There are separate calculation formulas for the prime cost and diminishing value methods. Both are based on the number of days in the income year when you were the owner or quasi-owner of the plant. [sections 42-160 and 165]

Diminishing value

The deduction is a percentage of the amount left undeducted at the start of the income year. [section 42-160]

Prime cost

The deduction is a percentage of your cost. [section 42-165]

Deduction reduced

The deduction is reduced for any period when the plant was not used, or installed ready for use, to produce assessable income. [section 42-170]

Undeducted cost

Total deductions cannot exceed the balance you have left to deduct. That amount is worked out by subtracting from the cost:

·
your previous deductions;
·
any deductions you could not claim because the plant was used otherwise than to produce assessable income; and
·
any deductions disallowed by another provision of the Act. [section 42-175]

Guide to Subdivision 42-F: Calculation of balancing adjustments

What the Subdivision will do

This Subdivision deals with how to calculate a balancing adjustment. [section 42-180]

Balancing adjustments for some cars and pooled plant are calculated elsewhere.

When do you calculate a balancing adjustment?

For the income year in which a balancing adjustment event occurs. [section 42-185]

Purpose of a balancing adjustment

It is a final accounting to ensure your total deductions correspond to your actual loss. You must include an amount in your assessable income if:

The termination value (usually the sale price) of plant exceeds its written down value. The amount you include is the lesser of:

·
your depreciation deductions; and
·
the excess. [section 42-190]
The amount you have deducted for depreciation may be increased if the research and development provisions have previously applied to the plant. [section 42-220]

You deduct an additional amount if:

The termination value is less than the undeducted cost. The amount you deduct is the difference. [section 42-195]

Deduction reduced

You reduce this amount to the extent that you used the plant other than to produce assessable income.

[subsection 42-195(3)]

Written down value

This is the cost of plant, less your depreciation deductions. [section 42-200]

Termination value

Usually, the termination value of plant is its sale price (less expenses of sale). Other termination values apply where you stop being the owner for a reason other than sale. [section 42-205]

Adjustments are made in these cases:

·
you dispose of plant for less than its arms length value [section 42-210] ; or
·
you dispose of a car to which the car depreciation limit applied [section 42-215] .

Guide to Subdivision 42-G: Calculation of balancing adjustments for some cars

What the Subdivision will do

This Subdivision sets out how to calculate a balancing adjustment for a car if:

·
you have deducted depreciation; and
·
in another year, you have deducted car expenses using either the cents per kilometre or 12% of original value method for calculating car expenses. [sections 42-225, 230 and 235]

Effect

This ensures that the balancing adjustment reflects only the period during which you depreciated the car. [section 42-250]

You include an amount in assessable income if:

The termination value (usually the sale price) of the car exceeds its notional written down value. [sections 42-240, 255 and 260]

You deduct an additional amount if:

The termination value of the car is less than its undeducted cost. [section 42-245]

Deduction reduced

You reduce the deduction to the extent that you used the car other than to produce assessable income.

[subsection 42-245(3)]

Guide to Subdivision 42-H: Balancing adjustment relief

What the Subdivision will do

This Subdivision states when balancing adjustment relief is available. [section 42-265]

Balancing adjustment relief can:

·
defer a balancing adjustment; or
·
reduce the amount included in assessable income; or
·
reduce tax payable. [section 42-270]

Roll-over relief

This form of relief defers a balancing adjustment calculation where:

·
CGT roll-over relief applies eg. if plant is transferred between related companies or by an individual to a wholly owned company; or
·
there is a partial change of ownership and a joint election is made.
It is contained in Common rule 1 in Division 41, but is modified for depreciation purposes. [section 42-275]

Roll-over relief has these effects:

·
the adjustment is deferred until there is a further disposal with no roll-over relief; and
·
transferees work out their deductions using the same cost, rate etc. as the transferor. [section 42-280]

Offsetting against other plant

Instead of including an amount in your assessable income because of a balancing adjustment, you may reduce the depreciable cost of other plant. [sections 42-285 and 290]

Concessional rate

You can apply for a concessional basis of calculating your tax payable if, as a result of a balancing adjustment event, your business ceases. [sections 42-295 and 300]

Guide to Subdivision 42-I: Quasi-ownership

You will be the quasi-owner of plant if:

It is attached to land you hold under a quasi-ownership right granted by a government agency. [section 42-310]

Meaning of quasi-ownership right over land

A lease, easement or any other right, power or privilege over land. [subsection 995-1(1)]

Who can depreciate plant on land held under a quasi-ownership right?

The entity that attaches it to the land, and their assignees. [subsection 42-310(1)]

New quasi-ownership right

The grant of a new quasi-ownership right is taken as a continuation of your original right in certain circumstances. [section 42-315]

What if there is both an owner and a quasi-owner of plant?

Only the quasi-owner deducts depreciation. [section 42-320]

Guide to Subdivision 42-J: Partial change of ownership

A partial change of ownership will occur when:

·
There is some change in ownership of, or interests in, plant; but
·
there is a degree of continuity of ownership or interests. [section 42-330]

Effects of a partial change:

·
A balancing adjustment calculation is required, unless all entities elect for roll-over relief; and
·
the entities that are the owners of the plant after the change are taken to have acquired it from the previous owners. [section 42-335]

Guide to Subdivision 42-K: Car depreciation limit

What is the car depreciation limit?

It is a ceiling on the depreciable cost of cars designed mainly for carrying passengers.

How is it calculated?

It is indexed each year for inflation based on movements in the CPI. [section 42-345]

Guide to Subdivision 42-L: Pooling

What are the advantages of pooling?

Depreciation calculations can be reduced by pooling items of plant having the same depreciation rate. One calculation (using the diminishing value method) covers all plant in the pool.

How is plant pooled?

By recording in writing the creation of a pool and the allocation of plant to it. [sections 42-355 and 360]

What plant can be pooled?

Only plant used, or installed ready for use, exclusively for producing assessable income can be pooled. Also, you cannot pool plant in the year you acquire it. [section 42-365]

Removing plant from a pool

Plant is removed from a pool if it ceases to be used, or installed, exclusively for producing assessable income. You can also choose to remove it at any time. [section 42-370]

Calculating the deduction

The deduction is calculated by multiplying the amount left to deduct in the pool by the diminishing value rate for the class of items. [sections 42-375, 42-380 and 42- 385]

Balancing adjustments

There are special rules for calculating balancing adjustments for pooled plant. The amount to be included in assessable income is the lesser of the termination value of the plant and its cost. [section 42-390]

Application of CGT

For the purposes of calculating a capital loss on an item of pooled plant that is disposed of, you reconstruct the amount of depreciation for that item. [section 42-395]

B. Discussion of changes

Subdivision 42-A Key operative provisions

This Subdivision contains the key operative provisions, including the main deduction provision.

1. Change

All the key operative provisions are being conveniently collocated.

Explanation

In the existing law, the operative provisions are scattered and this is an obstacle to readers understanding of how the law operates.

To overcome this, all the main elements of the depreciation law have been reassembled:

·
the conditions for deductibility [section 42-15] ;
·
the meaning of plant [sections 42-18 and 19] ;
·
how much you deduct [section 42-20] ;
·
how to calculate your deduction [section 42-25] ;
·
when to calculate a balancing adjustment [section 42-30] ;
·
the capital allowance Common rules that apply [section 42-35] ;
·
the timing and effect of choices [section 42-40] ;
·
plant for which depreciation is not available [section 42-45] ; and
·
signposting of other relevant provisions [sections 42-50 and 55] .

2. Change

Some of the key concepts will be given new labels.

Explanation

The new terms and their old law equivalent are:

New Term Old law equivalent
quasi-owner Crown lessee
termination value consideration receivable
undeducted cost (notional) depreciated value
written down value (actual) depreciated value

3. Change

Wherever the term associate is used in this Division it will have a standardised meaning.

Explanation

The term is used in the cost and termination value tables. In the depreciation provisions in the 1936 Act, it takes on the meaning in subsection 26AAB(14) of that Act. The rewrite uses a standardised definition that is explained in Part B of Chapter 4 dealing with leased cars.

The existing law extends the meaning of associate for depreciation purposes to include:

·
associated government authorities (subsection 54AA(6)); and
·
reconstituted partnerships (subsection 54AA(7)).

The first extension is preserved in the rewrite by the use of the new term associated government entity. The second is preserved by section 42-415 of the Income Tax (Transitional Provisions) Act 1997.

Section 42-15 Deduction for depreciation

This section sets out the conditions you must satisfy to claim a depreciation deduction.

Change

The application of the law to entities that do not own plant, but can claim depreciation, will be more directly expressed. The drafting device of deeming them to be owners will be discontinued.

Explanation

The deeming device is unhelpful to readers.

The new law will deal expressly with entities that, although not owners of plant in a full sense, are able to claim depreciation. They are referred to as quasi-owners. Crown lessees are in this category.

Section 42-19 References to plant

References to plant will mean a unit of plant.

Change

References to plant are to be read as if they were to a unit of plant.

Explanation

The deduction is available for a unit of plant (and this is specifically stated).

The referencing technique used for the rest of the Division avoids having to use the cumbersome expression unit of plant throughout, but nonetheless makes it clear that the calculation and its components all relate to a unit.

Section 42-35 Application of Division 41 Common rules

This section sets out which Common rules apply to depreciation.

Change

All of the Common rules for capital allowances will apply to this Division.

Explanation

Common rules for capital allowances are a new feature of the law. Their purpose is to standardise, and avoid repetition of, provisions that apply to more than one capital allowance. There are 3 Common rules:

·
Common rule 1 deals with balancing adjustment roll-over relief where property is transferred between related entities;
·
Common rule 2 deals with the non-arm's length acquisition and disposal of property; and
·
Common rule 3 deals with certain anti-avoidance provisions that apply to the owner of property.

The Common rules are contained in Division 41 of the 1997 Act. Common rules 1 and 2 are modified to ensure they apply to depreciation consistently with the existing law (see discussion on sections 42-75, 42-210, 42-275 and 42-280 in this chapter).

Section 42-40 Choices

This section states when choices, permitted or required under this Division, need to be made.

1. Change

Broadly similar concepts to do with electing, nominating or giving notice that you have adopted a particular course of action will be standardised.

Explanation

In the existing law, there are different provisions and terms covering what is essentially the same thing. Standardising these will make the law clearer.

2. Change

The timing of choices will be standardised to the time you lodge your income tax return for the relevant year (or within further time allowed by the Commissioner).

Explanation

Standardising will simplify the law and make compliance easier. To achieve this requires change to the existing time limits for:

·
electing to use the Commissioner's determination of effective life; and
·
giving notices that plant is being pooled.

The existing law requires those choices to be made within 6 months after the end of the income year to which they relate (or within further time allowed by the Commissioner). In practice, choices must be made by the time you lodge your return and are evidenced by the information contained in it.

3. Change

You will be able to choose diminishing value and prime cost methods for different items of plant that become depreciable in the same year.

Explanation

The existing law requires that you apply the same method to all units of plant that become depreciable in the income year. This is an unnecessary constraint.

4. Change

The choice to self-assess the effective life of plant will be irrevocable.

Explanation

See discussion on section 42-100 (change 2 in this chapter).

Section 42-48 Debt forgiveness: amounts deducted for depreciation

This section treats an amount applied against depreciable plant under the debt forgiveness rules as an amount deducted for depreciation.

Change

An amount of debt forgiven, that is applied against depreciable plant under the debt forgiveness rules, will be accounted for as an amount deducted for depreciation for all relevant purposes.

Explanation

Under the debt forgiveness rules, such an amount is taken to be an amount of depreciation for the purposes of calculating a deduction using the diminishing value method.

This change will ensure that the amount is taken into account in determining the amount available for deduction (ie. the undeducted cost) regardless of the calculation method used.

Subdivision 42-B Cost of plant

This Subdivision specifies how to determine the cost of plant.

Change

This Subdivision will bring together all provisions which allocate a cost to plant in particular circumstances.

Explanation

The amount you can deduct in an income year is based on your cost. Under the existing law, the various rules for determining cost are scattered. Bringing them together will be convenient for readers. It also identifies the order in which the rules are to be applied.

Section 42-65 How to work out your cost

This section sets out the rules for determining the cost of plant and the provisions that adjust them.

1. Change

For plant you acquire with (or attached to) other assets without a specific value being allocated to it, the cost will be so much of the overall cost of all the assets as is reasonably attributable to it. [table: item 2]

Explanation

The existing law does not give taxpayers guidance on the cost of plant they acquire with (or attached to) other assets without a specific value being allocated to it. However, where plant is sold in such circumstances, subsection 59(3) of the 1936 Act allows the Commissioner to fix its termination value. This discretion will be removed and replaced with an objective rule, see discussion on section 42-205. Section 42-65 will apply the same objective basis to an acquisition.

2. Change

There will be a cost rule for plant you acquire as a result of the operation of the partial change of ownership rule in Subdivision 42-J. The cost will be the market value immediately before acquisition. [table: items 3 and 7]

Explanation

A partial change in the ownership of plant, may require a balancing adjustment calculation to be made. The existing law sets a termination value for that purpose.

Also, the entities that are the owners of the plant after the change are taken to have acquired it from those that were its owner before. However, existing law is silent about the acquisition value. The acquisition value will be the same as the disposal value.

3. Change

Clarify that the cost of plant attached to land held under a quasi-ownership right acquired by you, is so much of the consideration for acquiring the right as is reasonably attributable to the plant. [table: items 4 and 5]

Explanation

Under the existing law, the cost in these circumstances is the amount of consideration that is 'attributable' to acquiring the right.

Stating specifically that the attribution must be 'reasonable' will give extra guidance to taxpayers in working out the cost of plant in these circumstances. It is also consistent with other cost and termination values which require a reasonable attribution.

4. Change

There will be a specific cost for plant you acquire in circumstances where Common rule 1 applies. The cost will be the transferor's cost regardless of the calculation method previously used. [table: item 9]

Explanation

Common rule 1 will provide roll-over relief for plant transferred between related entities. If Common rule 1 applies, the requirement to calculate a balancing adjustment is deferred until the plant is disposed of again in circumstances that do not attract roll-over relief.

The existing law requires a transferee to depreciate plant on the same basis as the transferor. If a transferor used the diminishing value method to calculate depreciation, the transferee's cost is the transferor's depreciated value.

As depreciated value is not used as a concept in the new law, the same result will be achieved by requiring the transferee to:

·
use the transferor's cost; and
·
reduce what would otherwise be the transferee's undeducted cost by amounts of depreciation claimed by the transferor and any further amounts the transferor could have claimed had the plant been used wholly for producing assessable income.

Section 42-75 Adjustment: non-arm's length transactions

This section modifies Common rule 2 in its application to this Division. Common rule 2 will adjust the cost of plant if the parties to the acquisition were not dealing at arm's-length.

1. Change

Common rule 2 will apply only if the plant is actually acquired under the non-arm's length transaction.

Explanation

Under the existing law, the arm's length rules for depreciation have a wider application. They apply if the cost of the plant is attributable, in any way, to any transaction to which the taxpayer was a party, even if that transaction is not the one under which the plant is acquired.

This change is a result of standardising through Common rule 2.

2. Change

Common rule 2 will be modified so that it:

·
applies to cost rather than expenditure; and
·
substitutes the amount that would have been the cost had the parties been dealing at arm's length.

Explanation

These modifications ensure that, in these respects, Common rule 2 applies to depreciation consistently with the existing law.

Section 42-85 Adjustment: double deduction

This section reduces depreciation deductions for plant to the extent that its cost has been deducted under another provision.

Change

An unnecessary reference to the cost of extending a telephone line deducted under section 70 of the 1936 Act will be omitted.

Explanation

A drafting device in subsection 56(3) of the 1936 Act ensures that, to the extent that the cost of telephone lines could be depreciated under section 54 or deducted under section 70, the cost is to be depreciated. This has been omitted because its presentation is confusing. The same result has been achieved by making this aspect clear in the rewritten telephone lines provisions. [paragraph 387-410(1)(b)]

Section 42-90 Adjustment: previously depreciated plant limit

This section will allow the Commissioner to limit the cost of plant that has been depreciated by someone else.

Change

You will be able to depreciate such plant on the basis of its cost to you. The Commissioner will have a discretion to reduce that cost in certain circumstances.

Explanation

The existing law expressly limits the cost of previously depreciated plant to the vendor's written down value plus any balancing adjustment included in their assessable income. The Commissioner has a discretion to allow the plant to be depreciated on the basis of its cost to the purchaser.

Most taxpayers base depreciation claims on their cost without seeking the exercise of the Commissioner's discretion (as it is only refused in limited circumstances). This change will reflect that practice.

You will be taken to have acquired previously depreciated plant at its cost to you, unless the Commissioner exercises a discretion to restrict your cost to the vendor's written down value plus balancing adjustment.

The Commissioner will be directed to take into account:

·
your relationship with the person from whom you acquired the plant;
·
the price paid; and
·
whether the person from whom you acquired the plant still has use and enjoyment of it.

Subdivision 42-C Effective life

This Subdivision explains how to work out the effective life of plant. Most depreciation rates are based on the plant's effective life. You can either work out the effective life yourself or adopt the Commissioner's determination of it.

Change

Excessively detailed rules as to how the Commissioner is to specify the effective life of plant will be omitted. Those rules cover:

·
criteria that may be used in specifying an effective life;
·
conditions attaching to a specification;
·
adding a specification for particular plant; and
·
from when a determination may apply.

Explanation

The same result can be achieved economically under the general administrative powers and obligations.

Section 42-100 Choice of method

There are two methods for determining the effective life of plant.

1. Change

You can choose the method you prefer without the need to make a written election.

Explanation

The existing law requires you to elect in writing to use the Commissioner's determination of effective life. In keeping with the self-assessment system, requirements to elect for certain courses of action will be omitted from the depreciation provisions. The new law will allow you to choose the method you prefer and the time for making that choice will be standardised.

[section 42-40]

Omitting the requirement to formally record this choice will reduce compliance costs. Your choice will be evidenced by the depreciation rate at which you calculate your deduction and the records you already keep under general record keeping provisions.

2. Change

The choice to self-assess the effective life of plant will be binding.

Explanation

This change flows from standardising the choice rules. In the existing law, your only choice is to use the Commissioner's determination. If you don't make this choice, you are taken to have self-assessed the plant's effective life. The new law gives you the option to make either choice. The choice is permanent. [section 42-40]

Subdivision 42-D Depreciation rates

This Subdivision sets out the rates that are available for calculating your depreciation deduction.

1. Change

The depreciation rates for both diminishing value and prime cost will be included in the new law.

Explanation

Depreciation rates differ depending on whether you calculate your deduction using the diminishing value or prime cost method. The existing law specifies only diminishing value rates. If you choose the prime cost method, you must make a calculation to convert from the diminishing value rate.

In the rewrite, each prime cost rate has been inserted next to its diminishing value equivalent.

2. Change

The requirement to use the higher rate where more than one rate can apply has been omitted.

Explanation

If more than one rate can apply, you will be able to choose whichever you prefer.

3. Change

The requirement, in the special rate for artworks, to make calculations to two decimal places has been removed.

Explanation

As the general rates are expressed in whole percentages the requirement to calculate to two decimal places is pedantic.

4. Change

You can choose a rate lower than that which applies to your plant.

Explanation

The existing law allows you to nominate a lower rate than that which is prescribed, but limits how low the rate can be. This is an unnecessary restriction.

Subdivision 42-E Calculation of depreciation deductions

This Subdivision sets out how to calculate your depreciation deduction.

1. Change

The meaning of the term depreciated value will be clarified.

Explanation

In the existing law, depreciated value has two meanings:

·
if plant is used wholly for income producing purposes, it means actual depreciated value;
·
otherwise, it means notional depreciated value.

It is a guiding principle for rewriting the law that words will not have different meanings in different contexts.

Therefore, the new law will use written down value for actual depreciated value and undeducted cost for notional depreciated value.

2. Change

The rules that restrict your deduction to the period when you own the plant and use it for producing assessable income will be clearly spelt out.

Explanation

The existing law reduces your deduction so that it reflects only the period in the income year when you own the plant and use it to produce assessable income. However, the provisions that achieve this are not collocated and their interaction is not expressed clearly.

These problems will be addressed by a two step approach:

·
First, you will calculate your deduction for the number of days you were the owner or quasi-owner of the plant; and
·
Second, you will reduce that amount to the extent that you did not use the plant, or install it ready for use, to produce assessable income.

Any amount denied under step 2 because the plant was used for a purpose other than producing assessable income will not be available for deduction in future income years (see change 3 below).

3. Change

The cost of plant will be expressly reduced to reflect any period during which it is used or held for a purpose other than of producing assessable income. No depreciation deduction will be allowed for that period.

Explanation

The existing law is applied in this manner.

The change will make the concept of undeducted cost central to the calculation process. It will be your cost, less:

·
the sum of amounts you have deducted;
·
any amounts you cannot deduct because you used the plant otherwise than to produce assessable income; and
·
any amounts you cannot deduct because another provision prevented a deduction (eg. plant used for leisure facilities). [section 42-175]

You will not be able to deduct more than the undeducted cost.

In working out the amounts referred to in the second and third points above, you apply the rate and method used in the income year in which depreciation first became allowable to you for the plant. If you acquired the plant before 27 February 1992, special transitional rules apply, see discussion in Part D of this chapter.

Subdivision 42-F Calculation of balancing adjustments

This Subdivision explains how you calculate a balancing adjustment if you cease to be the owner of plant or it is lost or destroyed.

Change

All termination values used in calculating your balancing adjustment will be brought together in a single table.

Explanation

These values are in a number of different places in the existing law. The table will link particular values to the circumstances in which you have ceased to be the owner. In addition, the table indicates adjustments that may substitute another value. Those adjustments are set out after the table.

Section 42-205 Meaning of termination value

This section sets out the various termination values to be used in calculating balancing adjustments.

1. Change

There will be a termination value for plant that is sold attached to other assets without a specific value being allocated to it. [table: item 2]

Explanation

The existing law allocates a value for plant sold with other assets. The Full Federal Court in Pearce v Federal Commissioner of Taxation
85 ALR 359 said that this value extended to plant that was attached to the other assets it was sold with. However, the Court said the provision would be clearer if it read 'where property is sold with or attached to other assets'. This change will give effect to the Court's recommendation.

2. Change

The Commissioner's discretion in setting a termination value for plant sold with (or attached to) other assets has been removed and replaced with objective criteria. [table: item 2]

Explanation

Under the existing law, if plant is sold with other assets without a separate value allocated to it, its termination value is determined by the Commissioner. Consistent with a self-assessment regime, this discretion will be removed and replaced with objective criteria.

The amount generally determined by the Commissioner is that portion of the sale price reasonably attributable to the individual item of plant. This will be the termination value in the new law, consistent with similar termination value rules in the mining provisions and the capital gains tax provisions.

3. Change

Clarify that the termination value for plant attached to land held under a quasi-ownership right that the holder assigns or which expires, is surrendered or is terminated, is so much of the consideration received for the right as is reasonably attributable to the plant. [table: items 6 and 8]

Explanation

Under the existing law, the termination value in these circumstances is the amount of consideration that is 'attributable' to the right.

Stating specifically that the attribution must be 'reasonable' will give extra guidance to taxpayers in working out the termination value of plant in these circumstances. It is also consistent with other cost and termination values which require a reasonable attribution.

4. Change

There will be a specific termination value for plant attached to land held under a quasi-ownership right that the holder assigns to an associate. The value will be the market value immediately before the assignment, worked out as if the holder had the freehold interest. [table: item 7]

Explanation

Under the existing law, the rules for placing a termination value on plant attached to land are not identical in two similar cases. The first is where a quasi-owner assigns his or her right to an associate. The second is where a new quasi-ownership right is granted to the associate following expiry, surrender or termination of the previous holder's right.

As the same outcome is appropriate in each case, the rules are to be standardised. In each of these situations, the termination value will be the market value of the plant at the time of the event, the value being calculated as if the quasi-owner owned the land.

Section 42-210 Adjustment: non-arm's length transactions

This section modifies Common rule 2 for capital allowances in its application to this Division. Common rule 2 will adjust the termination value if parties to the disposal of plant were not dealing at arm's length.

Change

Common rule 2 will be modified so that it only applies:

·
to disposals by sale; and
·
if the party disposing of the plant incurred a cost.

Explanation

This ensures that Common rule 2 applies to depreciation consistently with the existing law.

Section 42-250 Reduction to take account of days when depreciation not claimed

This section ensures that the amount of your balancing adjustment for some cars relates only to the period you actually depreciate the car. This will be done by reducing your balancing adjustment for the period you used the cents per kilometre or 12% of original value methods for claiming car expenses.

Change

Replace the Commissioner's discretion with objective criteria in the provision that reduces your balancing adjustment for some cars.

Explanation

In the 1936 Act, this provision is in the form of a discretion contained in subsection 59AAA(5). Guidance on the exercise of the discretion is contained in subsection 59AAA(6). The objective criteria are based on that guidance. The removal of administrative discretions is one of the aims of the rewrite of the law.

Section 42-275 Modifications of Common rule 1

This section modifies Common rule 1 (roll-over relief for related entities) for depreciation.

Change

Common rule 1 will be modified to:

·
exclude a section (41-40) that has been more fully explained in the depreciation provisions;
·
exclude a section that has no application to depreciation (section 41-45);
·
include a provision allowing pro-rating in the year of transfer; and
·
include further record-keeping provisions.

Explanation

Common rules for capital allowances are a new feature of the law and are contained in Division 41. Common rule 1 has been modified to ensure that it applies to depreciation consistently with the existing law.

Section 42-280 Additional consequences

This section sets out consequences which will follow if roll-over relief is available under Common rule 1. Roll-over relief defers a balancing adjustment where plant is transferred to a related entity.

Change

The manner in which a transferee is required to calculate a deduction will be better explained by adding details to the application of Common rule 1.

Explanation

Common rules for capital allowances are a new feature of the law and are contained in Division 41 of the 1997 Act. These additions to the Common rules ensure that roll-over relief continues to apply to depreciation consistently with the existing law.

Section 42-285 Same year relief

Section 42-290 Later year relief

These sections deal with a form of balancing adjustment relief which allows amounts that would otherwise be included in assessable income to be offset against other plant.

Change

Without altering the practical effect of the offset rules, ambiguity as to their operation is being removed.

Explanation

In the existing law, if a taxpayer elects for this form of relief, there are two consequences. First, the amount otherwise to be included in assessable income is offset against the cost of replacement plant. This means deductions are not available for the amount of the offset. Second, the amount of the offset is treated as depreciation allowed for that unit of plant. This enables the amount of the offset to be recouped in appropriate cases.

The new law will more simply achieve the correct result by treating the offset as an amount of depreciation that has been deducted. For those who use the diminishing value method, that amount will be taken into account in working out opening undeducted cost (upon which the calculation is based). For those who use the prime cost method, cost will be reduced for the purposes of calculation only (see paragraph 42-165(3)(a)). When calculating undeducted cost or written down value to work out a balancing adjustment, the cost will be as determined under Subdivision 42-B, not the reduced cost.

Section 42-310 Meaning of quasi-owner

This section defines quasi-owner.

Change

A person will be the quasi-owner of plant attached to land if that land is held under a quasi-ownership right granted by an exempt Australian or foreign government agency.

Explanation

This new term will describe persons who do not own plant, but are entitled to depreciate it. The term avoids the drafting technique used in the existing law (in the Crown lease provisions) of deeming such persons to be owners.

Persons who hold a quasi-ownership right over land to which the plant is attached are currently referred to as 'Crown lessees'. This is not an entirely accurate term.

Section 42-320 Only one entity can deduct

This section ensures that a quasi-owner of plant, and not the owner, claims depreciation for it.

Change

If there is both an owner and a quasi-owner of plant, only the quasi-owner will be able to depreciate it.

Explanation

It is possible to have both an owner and a quasi-owner using plant to produce assessable income. Where this happens in the existing law, the Crown lease provisions make it clear that the Crown lessee is the person entitled to deduct.

Subdivision 42-J Partial change of ownership

This Subdivision sets out when a partial change in the ownership of plant will result in a requirement to make a balancing adjustment calculation.

Change

The Subdivision will also apply where there is a partial change in the quasi-ownership of plant.

Explanation

This change flows from using the term quasi-owner to refer to entities that may be entitled to claim depreciation of plant, even though they do not own it. The partial change rule will make specific reference to quasi-owners.

C. Provisions of the 1936 Act that have not been rewritten

Some provisions of the 1936 Act have not been included in the new law because they have little, or no, ongoing application. They are summarised in the following table:

Provision Subject Reason for omission
Section 57AK Accelerated depreciation of plant used in the production of some basic iron and steel products. It only applies to plant installed before 1 July 1992.
Section 57AM Accelerated depreciation of Australian trading ships. It will only apply to ships registered and delivered before 1 July 1997. Deductions for these ships will continue to be made under the 1936 Act.
Section 62AAA Reduces the cost of plant by the amount of any compensation received under the Decimal Currency Board Act 1963. The Decimal Currency Board Act was repealed in 1981.

Some other provisions have been omitted from the new law because they are either transitional or unnecessary. They are summarised in the following table:

Provision Reason for omission

Subsections 54(6), (10);
paragraphs 57AF(12)(a), (b), (c)

Transitional provisions with no further application.

Subsection 58(5);
Section 62AAJ

Unnecessary because sections 57AK and 57AM have been omitted.
Subsections 54(1A), 56(1AAA), 59(1A), 59AAA(1A), 62(1A), 62AAM(1A), 62AAN(2), 62AAP(1A), 62AAR(2) Unnecessary because the depreciation provisions are subject to the debt forgiveness rules without the need for these specific application provisions.

Subsections 54(2A), 57AF(9);
Section 62AAV

Unnecessary because the concept is implicit without the need for a specific provision.
Subsections 54A(3), (5), (6), (7), (8), (9), (10), (13), (14) Unnecessary because they are covered by the Commissioners general administrative powers and obligations.
Subsection 262A (4AE) Unnecessary because the new law does not require your choice about effective life method to be in writing (see discussion on section 42-100 in Part B of this chapter).

Subsections 57AF(11), 59AA(3);
paragraph 59(5)(b)

Unnecessary because they contain a discretion allowing the Commissioner to determine an amount if there is insufficient evidence of market value.

D. Transitional arrangements

Part 1 of Schedule 6 to the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this chapter. [Schedule 6, Part 1: item 2]

When explaining how a specific provision of the new law is to apply, the transitionals use the same section number as that provision.

Convenient labels will be given to the 1936 Act depreciation provisions (old depreciation provisions) and the rewritten provisions (new depreciation provisions) to make it easier to refer to them in these transitional provisions. [Schedule 6, Part 1: section 42-1, Transitional Provisions Act]

Application

The rewritten provisions will apply to depreciation deductions for the 1997-98 and later income years, except for deductions for Australian trading ships which will continue to be claimed under section 57AM of the 1936 Act. [Schedule 6, Part 1: section 42-2, Transitional Provisions Act]

Plant being depreciated under existing law

The transitional provisions will explain how taxpayers who depreciate plant under the existing law can continue to depreciate it under the new law.

In broad terms, taxpayers will continue to depreciate plant under the new law on the same basis as they do under the existing provisions (that is, using the same calculation method, cost and rate of depreciation). [Schedule 6, Part 1: section 42-6, Transitional Provisions Act]

There is an exception where taxpayers acquired their plant under section 58 of the 1936 Act (roll-over relief). At present, the transferees cost would be the transferors written down value if the transferor was using the diminishing value method. This ensures that the transferee cannot deduct amounts already deducted by the transferor.

To achieve the same outcome, under the new law, the transferees cost will be the transferors cost, but their total deductions will be limited to the plants undeducted cost. Undeducted cost will include deductions claimed by the transferor. [Schedule 6, Part 1: subsection 42-6(4), Transitional Provisions Act]

Plant depreciated under the new law

The transitional provisions will also have rules for taxpayers who start depreciating plant under the new law, but either:

·
before the new law commences, used it but were not entitled to depreciate it; or
·
after the new law commences, acquire it in circumstances that attract roll-over relief in Common rule 1.

Plant used by you before the new law

This rule will apply if you owned and used plant only for non-depreciable purposes, but after the start of the new law, you used it for depreciable purposes. [Schedule 6, Part 1: subsection 42-7(1), Transitional Provisions Act]

In calculating your deduction under the new law you use the same cost and rate as you would have if you had depreciated it under the existing law. [Schedule 6, Part 1: subsections 42-7(3), (4) and (5), Transitional Provisions Act]

Also, if you acquired the plant under the roll-over relief contained in section 58 of the 1936 Act, you must use the same method, when you start depreciating it under the new law, as the transferor used. [Schedule 6, Part 1: subsection 42-7(2), Transitional Provisions Act]

These provisions will put taxpayers in the position they would have been in had they started to depreciate the plant under the existing law from when they first used it.

Plant used by transferor before the new law

This rule will apply if:

·
you acquire plant in circumstances where Common rule 1 (roll over relief for related entities) applies to the acquisition; and
·
the transferor (or an earlier transferor) owned and used the plant before the new law starts.

You depreciate the plant on the same basis as the transferor. Therefore, the option to self-assess effective life will not be available to you if it was not available to the transferor and in determining your rate, you assume that you acquired the plant when the transferor did. [Schedule 6, Part 1: section 42-8, Transitional Provisions Act]

Effective life

As with the existing law, self-assessment of effective life is not available for plant acquired before 13 March 1991. [Schedule 6, Part 1: section 42-95, Transitional Provisions Act]

Rate

Whether you acquire plant before 27 February 1992 is usually a question of fact, but there are special rules in section 66 of the Taxation Laws Amendment Act (No. 2) 1992 which will continue to have effect under the new law in determining whether plant was acquired or constructed before that date. Section 66 will be relevant:

·
where the transitional provisions require you to use a rate worked out under the existing law; and
·
in ensuring that plant acquired or constructed before 27 February 1992 cannot be pooled with plant acquired after that date. [Schedule 6, Part 1: section 42-400, Transitional Provisions Act]

Also, there is a special transitional provision which ensures the continued operation of section 66 for plant acquired after the commencement of the new law. [Schedule 6, Part 1: section 42-120, Transitional Provisions Act]

Actual amounts deducted under old law

Amounts deducted as depreciation under the existing law will be treated as deductions under the new law. [Schedule 6, Part 1: sections 42-9 and 175, Transitional Provisions Act]

If roll-over relief applied to your acquisition of the plant, then any amounts deducted by the transferor (and any earlier successive transferor), under the existing law, will be taken to have been deducted by you under the new law. [Schedule 6, Part 1: paragraphs 42-9(2)(c) and 175(1)(d), Transitional Provisions Act]

As a consequence:

·
balancing adjustments will apply where plant, written off under existing law, is disposed of after the new law starts; and
·
amounts deducted, under the existing law, will be taken into account in a balancing adjustment calculation required under the new law.

Also, plant depreciated under the existing law will be previously depreciated plant for the purposes of section 42-90 which will allow the Commissioner to set a cost for previously depreciated plant. [Schedule 6, Part 1: subsection 42-90(1), Transitional Provisions Act]

Notional amounts deducted under old law

For the purpose of working out your undeducted cost, you must take into account any further amounts you (and the transferor and any earlier transferor) could have deducted under the existing law had the plant been used wholly to produce assessable income. [Schedule 6, Part 1: section 42-175, Transitional Provisions Act]

In working out those amounts, you use the same method and rate you used when a depreciation deduction first became allowable for the plant. However, for plant acquired before 27 February 1992, the broadbanding rules in subsections 55(5) and (8) of the 1936 Act (as it applied immediately before the commencement of section 1 of the Taxation Laws Amendment Act (No. 2) 1992) are optional in working out a notional amount for any year for which you did not claim a depreciation deduction. In any income year for which a deduction is allowable and a notional write down is also required, the notional write down is calculated at the same rate as the deduction. [Schedule 6, Part 1: subsections 42-175(3) and (4), Transitional Provisions Act]

There is another notional amount under the existing law that will be treated as a notional amount under the new law (see discussion on quasi-owners, section 42-310). [Schedule 6, Part 1: subsection 42-175(2), Transitional Provisions Act]

Amounts included in assessable income under old law

The new law will allow the Commissioner to reduce the cost of previously depreciated plant that you acquire, to the vendors written down value plus balancing adjustment.

References to amounts included in the vendors assessable income as the result of a balancing adjustment will include:

·
amounts included under the 1936 Act; and
·
amounts that would have been included in the absence of balancing adjustment relief. [Schedule 6, Part 1: subsection 42-90(4), Transitional Provisions Act]

References to the new law include the old law

References in the new law to rewritten provisions include their old law equivalent. [Schedule 6, Part 1: sections 42-45, 220, 235, 255, 290 and subsections 42-90(2), (3), and 310(2), Transitional Provisions Act]

Common rules

Common rule 1 (roll-over relief) and Common rule 2 (non-arms length transactions) will also apply to plant even though it has only been depreciated under the existing law. [Schedule 6, Part 1: sections 42-405 and 410, Transitional Provisions Act]

Also, if Common rule 1 applies, the transferee will use the same effective life as the transferor in determining their rate. [Schedule 6, Part 1: section 42-280, Transitional Provisions Act]

Debt forgiveness

Any amount applied against plant expenditure under the debt forgiveness rules before the commencement of the new law will be treated as an amount deducted for depreciation under the old law. This ensures that these amounts are taken into account, under the new law, in working out how much you have left to deduct and the amount of any balancing adjustment. [Schedule 6, Part 1: section 42-48, Transitional Provisions Act]

Pooling

The new law continues the system for the pooling of items of plant that carry the same depreciation rate. There is a series of transitional rules that preserve pools created under the existing law. Those rules are explained in the following table:

Transitional section About Rule
42-355 Creating a pool Pools created under the existing law are carried into the new law
42-360 Allocating plant to a pool Plant allocated to a pool under the existing law will remain allocated to it for the new law.
42-365 Plant eligible for allocation It will continue to be the case that plant acquired on or before 26 February 1992 cannot be pooled with plant acquired after that date.
42-370 Removal of plant from pool Plant acquired on or before 26 February 1992 will be removed from a pool if its annual depreciation percentage under the existing law ceases to match the pool percentage.
42-375 Calculating deductions For plant acquired on or before 26 February 1992, the pool percentage will be a prime cost rate. Those rates will be converted to diminishing value rates for the purpose of making the calculation under the new law.
42-380 Meaning of opening balance In working out the opening pool balance for the first year of the new law, the starting point will be the closing balance for the preceding year worked out under the existing law.

Plant

Plant will include structural improvements used in relation to forest and pearling operations only if they were completed after the dates specified in the definition of plant in subsection 54(2) of the 1936 Act. [Schedule 6, Part 1: section 42-18, Transitional Provisions Act]

Commissioner's determination of effective life

Taxation Ruling IT 2685 continues under the new law as a determination of the effective life of plant. [Schedule 6, Part 1: section 42-110, Transitional Provisions Act]

Quasi-owners

The new law introduces the term quasi-owner of plant. Quasi-owners are entitled to depreciate plant they do not actually own. These rules apply to Crown lessees under the existing law that become quasi-owners under the new law.

Persons ineligible to depreciate plant under the anti-avoidance tests in section 54AA of the 1936 Act, also do not qualify as a quasi-owner. This ensures that persons not entitled to a deduction under the existing law do not become entitled inappropriately under the new law. [Schedule 6, Part 1: subsection 42-310(1), Transitional Provisions Act]

One aspect of the anti-avoidance test requires you to compare the period for which an entity has been granted use of the plant with its effective life. The definition of effective life does not apply to plant acquired before 13 March 1991. Therefore, in applying the test, you will need to work out an effective life for the plant as if the new law applied. [Schedule 6, Part 1: subsection 42-310(3), Transitional Provisions Act]

There was a requirement that plant in existence at the start of the Crown lease provisions be notionally written down before a depreciation deduction could be claimed under those provisions. The amount of that notional write down was treated as an amount deducted for depreciation. It will also be treated as an amount deducted under the new law for the purpose of working out undeducted cost. [Schedule 6, Part 1: subsection 42-175(2), Transitional Provisions Act]

Also, the new law will reduce a deduction resulting from a balancing adjustment calculation if, while you were the owner or quasi-owner of the plant, you used it for a purpose other than for producing assessable income.

That reduction is extended to any period when you were deemed to be the owner of plant under section 54AA of the 1936 Act. [Schedule 6, Part 1: section 42-195, Transitional Provisions Act]

Car depreciation limit

If you have a substituted accounting period and:

·
you acquire a car (designed mainly for carrying passengers) during your 1997-98 income year;
·
but during the 1996-97 financial year;

then your car depreciation limit is worked out under section 57AF of the 1936 Act. [Schedule 6, Part 1: sections 42-70 and 80, Transitional Provisions Act]

The new law will adjust the termination value of a car (for balancing adjustment purposes) if the car depreciation limit applies. A transitional provision will modify that adjustment if you first used the car before 1 July 1997. [Schedule 6, Part 1: section 42-215, Transitional Provisions Act]

Associate

The existing law extends the meaning of associate for depreciation purposes so that it includes reconstituted partnerships, see subsection 54AA(7) of the 1936 Act. This extension will be preserved in the new law. [Schedule 6, Part 1: section 42-415, Transitional Provisions Act]

E. Consequential amendments

The consequential amendments, made by Parts 2, 3 and 4 of Schedule 6, apply to assessments for the 1997-98 and later income years. [clause 4 Tax Law Improvement Bill] This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the depreciation provisions.

Amendments to the Income Tax Assessment Act 1997

Part 2 of Schedule 6 to the Bill will amend the 1997 Act to take account of the rewritten depreciation provisions by:

·
updating depreciation references in that Act;
·
amending Common rules;
·
inserting additional definitions in the Dictionary; and
·
ensuring that those definitions are adopted by provisions already in the 1997 Act.

Updated references

Sections 10-5 and 12-5 of the 1997 Act contain lists of all income and deduction provisions in both the 1936 and 1997 Acts. Those references will be updated so that they now refer to the rewritten depreciation provisions. [Schedule 6, Part 2: items 3 to 5]

Divisions 40 and 41 of the 1997 Act contain tables giving information on the operation of the various capital allowances. The references to depreciation in those tables have been updated so they are now references to the rewritten depreciation provisions. [Schedule 6, Part 2: items 10 to 15]

References in Division 165 (company losses) and Division 330 (mining) of the 1997 Act will also be updated so they now refer to the rewritten depreciation provisions. [Schedule 6, Part 2: items 34, 42 and 43]

Common rules

Common rule 1, dealing with roll-over relief for related entities, is contained in Division 41 of the 1997 Act. Common rule 1 will be amended so that it can also apply to the rewritten depreciation provisions. The depreciation events that give rise to roll-over relief have been added to the rule and have been tagged roll-over events. [Schedule 6, Part 2: items 16 to 29]

Also, the record-keeping provisions in the existing law that relate to roll-over relief have been added to this Common rule. [Schedule 6, Part 2: item 30]

As a result of these changes to Common rule 1, consequential amendments have been made to the mining provisions which also adopt the rule. [Schedule 6, Part 2: items 37 to 41]

Common rule 2, dealing with non-arms length transactions, will be amended to make it clear that it only applies to those capital allowances that specifically adopt it. [Schedule 6, Part 2: items 31 to 33]

New Dictionary terms

Part 2 of Schedule 6 to the Bill will insert into the Dictionary (section 995-1 of the 1997 Act) new definitions of terms used in the rewritten provisions in Division 42 in Schedule 1.

In some cases, the label used and the meaning of the definition have not changed from the existing law. The following definitions fall into this category:

abnormal income [Schedule 6, Part 2: item 45]
closing balance [Schedule 6, Part 2: item 50]
effective life [Schedule 6, Part 2: item 53]
notional income [Schedule 6, Part 2: item 56]
opening balance [Schedule 6, Part 2: item 58]
pool [Schedule 6, Part 2: item 60]

Definitions that have changed from the existing law and new defined terms are explained below.

New Definition Artwork [Schedule 6, Part 2: item 46]

Commentary This is the new label for the term eligible artwork which is defined in subsection 55(9) of the 1936 Act. The concept is unchanged.

New Definition Associated government entity [Schedule 6, Part 2: item 47]

Commentary This is the new label for the concepts contained in subsection 54AA(6) of the 1936 Act. The concepts are unchanged.

New Definition Balancing adjustment event [Schedule 6, Part 2: item 48]

Commentary This new term describes all of the circumstances which give rise to the requirement to make a balancing adjustment calculation.

New Definition Car depreciation limit [Schedule 6, Part 2: item 49]

Commentary The car depreciation limit is a ceiling on the cost of passenger carrying cars for calculating depreciation. In the existing law, this ceiling is called the motor vehicle depreciation limit. In the new law, it will be called the car depreciation limit to complement the standardisation of those terms proposed by the 1997 Act.

New Definition Cost [Schedule 5, Part 2: item 26]

Commentary All of the provisions which affect the cost of plant for depreciation will be brought together in the table in section 42-65. Changes are discussed in Part B of this chapter.

New Definition Diminishing value method [Schedule 6, Part 2: item 51]

Commentary This new term applies a label to the method of calculating a depreciation deduction contained in paragraph 56(1)(a) of the 1936 Act.

New Definition Diminishing value rate [Schedule 6, Part 2: item 52]

Commentary This new term describes the rates which are used under the diminishing value method. In the existing law, they are referred to as annual depreciation percentages.

New Definition Installed ready for use [Schedule 6, Part 2: item 54]

Commentary This new term will mean installed ready for use and held in reserve and will save repeating this lengthy expression many times in the rewritten provisions. Plant that is installed ready for use can attract depreciation deductions.

New Definition Notional depreciation amount [Schedule 6, Part 2: item 55]

Commentary Your written down value is reduced by this amount for the purpose of calculating a balancing adjustment for certain cars. It refers to the amount that could have been deducted for depreciation of the car had you not been using the cents per kilometre or 12% of original value method for calculating your car expenses.

This concept is contained in the existing law but is not labelled.

New Definition Notional written down value [Schedule 6, Part 2: item 57]

Commentary This is what you have left after reducing your written down value by the notional depreciation amount. This amount is then compared with your termination value for the purpose of calculating balancing adjustments for some cars. In the existing law, this concept is referred to as the notional amount. The new law changes the label but not the concept.

New Definition Plant [Schedule 6, Part 2: item 59]

Commentary Plant is defined in the 1997 Act to mean plant or articles within the meaning of section 54 of the 1936 Act. This definition will be repealed and replaced with a definition that is very similar to section 54. There will be 2 changes:

·
plant will now include articles to save repeating the cumbersome expression plant or articles many times; and
·
'implements and utensils" will be replaced by the expression 'tools'.
·
The inclusion of articles within the definition of plant is not intended in any way to limit the interpretation of the word 'articles'.

As a result of replacing the 1997 Act definition, the reference to plant in paragraph 330-95(1)(a) of that Act (expenditure that is not allowable capital expenditure for mining) has been updated to include a reference to plant within the meaning of Division 42. [Schedule 6, Part 2: item 36]

New Definition Prime cost method [Schedule 6, Part 2: item 61]

Commentary This new term applies a label to the straight line method of calculating a depreciation deduction contained in paragraph 56(1)(b) of the 1936 Act.

New Definition Prime cost rate [Schedule 6, Part 2: item 62]

Commentary This new term describes the rates which are used under the prime cost method. In the existing law, the rates are expressed as diminishing value percentages. If the prime cost method is used, a conversion is required. In the new law that conversion has been done and the prime cost rates have been inserted beside their diminishing value equivalent.

New Definition Quasi-owner [Schedule 6, Part 2: item 63]

Commentary This new term will describe persons who may be entitled to depreciate plant even though they do not actually own it. It has been used to avoid the device of deeming those persons to be owners.

Persons who hold certain rights over land to which plant is attached will be quasi-owners. They are referred to in the existing law as Crown lessees.

New Definition Roll-over event [Schedule 6, Part 2: item 64]

Commentary This new term will describe the events which will attract the roll-over relief contained in Common rule 1 in Division 41 of the 1997 Act. Roll-over relief will apply if:

·
there is a disposal that attracts one of the listed forms of CGT roll-over relief; or
·
the parties make a joint election for it under the partial change of ownership rules.

Roll-over relief removes the requirement to make a balancing adjustment calculation.

New Definition Termination value [Schedule 6, Part 2: item 65]

Commentary The existing law equivalent of this term is consideration receivable. It is the value of plant at the time of a balancing adjustment event and is the basis of the balancing adjustment calculation. All termination values will be brought together in a table in section 42-205. Changes are discussed in Part B of this chapter.

New Definition Undeducted cost [Schedule 6, Part 2: item 66]

Commentary The existing law equivalent of this term is the concept of notional depreciated value. Undeducted cost is the amount you have left to deduct. It is your cost less the sum of:

·
any amounts you have deducted;
·
any amounts you cannot deduct because you used the plant otherwise than to produce assessable income; and
·
any amounts you cannot deduct because another provision of the Act denied you a deduction (eg. plant used for leisure facilities).

This means that taxpayers must notionally write down their plant during any period it is used for a purpose other than producing assessable income.

New Definition Written down value [Schedule 6, Part 2: item 67]

Commentary The existing law equivalent of this term is the concept of actual depreciated value. It will mean your cost less any amounts you have deducted for depreciation. It is relevant to calculating balancing adjustments.

New Dictionary terms adopted by the 1997 Act

The new Dictionary definitions inserted as a result of the depreciation rewrite will also be adopted by any provisions of the 1997 Act that also use those terms.

References in Division 28 (car expenses) to the disposal, loss or destruction of a car will become references to the definition of balancing adjustment event inserted by this Act. [Schedule 6, Part 2: items 6 and 9]

The reference in Division 28 (car expenses) to the motor vehicle depreciation limit will become a reference to the definition of car depreciation limit inserted by this Act. [Schedule 6, Part 2: items 7 to 8]

References in Divisions 330 (mining) and 900 (substantiation) to installed ready for use and held in reserve will become references to the definition of installed ready for use inserted by this Act. [Schedule 6, Part 2: items 36 and 44]

Amendments to the Income Tax Assessment Act 1936

Part 3 of Schedule 6 to the Bill will amend the 1936 Act to:

·
close off the application of the provisions of the 1936 Act that have been rewritten in Division 42 in Schedule 1; and
·
insert references to those rewritten provisions where the 1936 Act currently refers to the existing provisions.

Closing off the old depreciation provisions

Part 3 of Schedule 6 will insert a provision into the 1936 Act that will close off the application of existing provisions that have been rewritten or are redundant. [Schedule 6, Part 3: item 69]

Because taxpayers will be required to depreciate plant using the rewritten law from the 1997-98 income year, the existing depreciation provisions will only apply to the 1996-97 and earlier income years.

There will be one exception. The old depreciation provisions will have continuing effect for Australian trading ships because the provisions dealing with those ships have not been rewritten due to their limited ongoing application (they will only apply to ships that are delivered before 1 July 1997).

Also, the provisions in the existing law about the giving of roll-over relief notices will cease to apply because they have been rewritten as part of Common rule 1. [Schedule 6, Part 3: item 123]

Inserting references to rewritten provisions

Part 3 of Schedule 6 will insert, in the 1936 Act, references to the rewritten provisions contained in Division 42 where the 1936 Act currently refers to the existing provisions. Amendments will only be made to provisions of the 1936 Act that have not been rewritten and closed off. There are two categories of amendment as discussed below.

The first category will add a reference to a rewritten provision, so that both the existing and rewritten provisions are referred to, in a section of the 1936 Act that currently only refers to the existing provisions. This will occur where the section of the 1936 Act that contains the reference:

·
applies to the continuing aspect of the existing provisions (to do with Australian trading ships); and/or
·
applies to amounts deducted for depreciation for income years occurring both before and after the commencement of the rewritten provisions. [Schedule 6, Part 3: items 68, 72 to 74, 83 to 99, 101 to 105, 119, 121 to 122, 124 to 127, 131 to 132]

In all other cases, the amendment will omit the reference to the existing provision in a section of the 1936 Act and replace it with the rewritten provision. [Schedule 6, Part 3: items 70 to 71,75 to 82, 100, 106 to 118, 120, 128 to 130]

Amendments of other Commonwealth legislation

Part 4 of Schedule 6 to the Bill will add references to the rewritten depreciation provisions in the following Commonwealth Acts:

Commonwealth Act Amended by
Bounty and Capitalisation Grants (Textile Yarns) Act 1981 Schedule 6, Part 4: item 133
Income Tax Rates Act 1986 Schedule 6, Part 4: items 134 to 137
Sales Tax Assessment Act 1992 Schedule 6, Part 4: item 138
Social Security Act 1991 Schedule 6, Part 4: items 138 to 140
Student and Youth Assistance Act 1973 Schedule 6, Part 4: item 141
Veterans Entitlements Act 1986 Schedule 6, Part 4: items 142 to 143

Chapter 9 - Exempt Income

This chapter summarises the rewritten exempt income provisions. This Bill will not make any changes to the legal effect of those provisions.

These provisions are contained in Divisions 50 to 53 and 55 in Schedule 1 to the Tax Law Improvement Bill 1997.

Transitional and consequential amendments for the rewritten provisions are contained in Schedule 3 to the Bill.

Overview of this chapter

This chapter covers:

·
the rewritten provisions in Divisions 50 to 53 and 55 in Schedule 1 (Exempt Income) to the Tax Law Improvement Bill 1997. These provisions will be in Divisions 50 to 53 and 55 of the 1997 Act; and
·
the transitional provisions and consequential amendments for those rewritten provisions contained in Schedule 3 to the Bill.

Divisions 50 to 53 and 55 in Schedule 1 contain the rewritten provisions of the 1936 Act that:

·
identify amounts of income that are exempt from income tax; or
·
identify those entities that are exempt from paying income tax.

The corresponding provisions of the 1936 Act are mainly contained in:

·
section 23 (types of exempt income and exempt entities); and
·
Division 1AA (exempt pensions, benefits and similar payments).

Part A of this chapter summarises Divisions 50 to 53 and 55 of the 1997 Act. They are in Schedule 1 to the Bill.

Part B explains that this Bill will not make any changes to the legal effect of the exempt income rules.

Part C explains why some provisions of the 1936 Act have not been rewritten.

Part D explains the transitional provisions that set out how and when the new Divisions will apply. They are in Part 1 of Schedule 3 to the Bill.

Part E explains the amendments that need to be made to the 1997 Act, the 1936 Act and other Commonwealth legislation, as a consequence of rewriting the provisions of the 1936 Act. These consequential amendments are in Parts 2 to 4 of Schedule 3 to the Bill.

A. Summary of the new law

Background

There are several important consequences of an amount being exempt income:

·
it is not assessable income and is, therefore, tax free;
·
it may reduce the deduction allowable for a tax loss;
·
a loss or outgoing incurred in deriving the exempt income is not allowable as a general deduction;
·
the disposal of an asset used only to produce exempt income does not produce a capital gain or loss;
·
the disposal of an asset owned by an entity whose total income is exempt from income tax does not produce a capital gain or loss; and
·
exempt income is taken into account in working out the income tax payable on income from an approved overseas project, or on income earned in overseas employment.

Not every consequence applies to every amount of exempt income. For example, most fringe benefits are exempt income but do not reduce a deduction for a tax loss.

Guide to Division 50: What this Division is about

What the Division will do

It will exempt from income tax the income of entities that are listed in the Division in these areas:

section 50-5 Charity, education, science and religion

section 50-10 Community service

section 50-15 Employers and employees

section 50-20 Finance

section 50-25 Government

section 50-30 Health

section 50-35 Mining

section 50-40 Primary and secondary resources, and tourism

section 50-45 Sports, culture, film and recreation.

Some entities must satisfy special conditions

Broadly, these are:

Societies, clubs and associations

Must not be carried on for the profit or gain of members.

Funds

Must be applied for their established purpose.

Guide to Division 51: What this Division is about

What the Division will do

It will exempt from income tax certain income of entities that are listed in the Division in these areas:

section 51-5 Defence

section 51-10 Education and training

section 51-15 Vice-regal representatives

section 51-20 Mining

section 51-25 Welfare.

Some amounts must satisfy special conditions

Broadly, these are:

Allowances of a Reserve Force member

Must not be for continuous full time service.

Educational assistance to a student

Educational assistance is not paid by the Commonwealth, or by a person on the condition of rendering services.

Mining payment to an Aboriginal or distributing body

The mining payment was made to or on the behalf of one or more Aboriginals.

Maintenance payment

The maintenance payment must be made to the spouse or child of the person making the payment.

Guide to Division 52: What this Division is about

What the Division will do

It will exempt from income tax certain pensions, benefits and allowances:

Subdivision 52A Various social security payments

Subdivisions 52B & 52C Various veterans' affairs payments

Special circumstances that determine whether the payment is wholly or partly exempt

Broadly, these are:

Ordinary payment

If the recipient is under pension age, the payment is wholly exempt.

If the recipient is pension age or over, the payment is exempt up to the tax-free amount.

However, a youth training allowance is always only partly exempt.

Bereavement payment

If the recipient receives a non-lump sum bereavement payment, the payment is wholly exempt.

If the recipient receives a lump sum bereavement payment, the payment is exempt up to the tax-free amount.

However, a veterans affairs bereavement payment is always wholly exempt.

Supplementary amount

Supplementary amounts are always wholly exempt.

Guide to Division 53: What this Division is about

What the Division will do

It will identify various types of exempt payments, together with any special circumstances that must be satisfied for the payment to be exempt. The exempt payments it deals with are:

section 53-10 table

Disability services payment

Domiciliary nursing care benefit

Drought relief payment

Wounds and disability pension

section 53-20

Payments that are similar to Australian and United Kingdom veterans payments.

Some amounts must satisfy special conditions

Broadly, these are:

Drought relief payment

If the payment is made other than because of a persons death, only the supplementary amount is exempt.

If the payment is made because of a persons death, the payment is wholly exempt.

Wounds and disability pension

If the payment is similar in nature to another exempt payment in Division 52 or 53, the payment is wholly exempt.

Payments made by the Australian or United Kingdom Governments

If the payment is similar in nature to another exempt payment in subdivision 52-B and subdivision 52-C, the amount is wholly exempt.

Guide to Division 55: What this Division is about

What the Division will do

It will identify some payments that are not exempt from income tax even though they are similar in nature to payments that are wholly or partly exempt in Divisions 50 to 53:

section 55-5 Occupational superannuation payments

section 55-10 Education entry payments.

B. Discussion of changes

The exempt income provisions in this Bill will not change the legal effect of the corresponding provisions in the 1936 Act.

C. Provisions of the old law that have not been rewritten

Redundant provisions

Some provisions of the 1936 Act are redundant and have been repealed, or have not been carried across to the 1997 Act. They are summarised in the following tables:

Repealed provisions

Provisions to be repealed Subject Reason for repealing
Paragraph 23(ec) Thalidomide Foundation There are no longer persons under the age of 25 years that benefit from the Thalidomide Foundation. The provision is now redundant.
Subsection 24(1) Limitation on exemptions This rule does not change what the law would otherwise be and therefore serves no useful purpose.

Provisions not carried across to the new law

Provisions to be left behind in the 1936 Act Subject Reason for omission
Paragraph 23(kb) Exempt allowances and expenses paid under Parts IV and VI of the Re-establishment and Employment Act 1945 Parts IV and VI of the Re-establishment and Employment Act 1945 have been repealed
Paragraph 23(o) and section 23C Exemption of gold mining income The exemption does not apply to income derived after 31 December 1990.
Section 23AAA Exemption of certain payments to persons formerly employed in Papua New Guinea This exemption applies to payments made to former employees of Papua New Guinea whose employment ended before 31 December 1973. It is unlikely that income of this kind is still being received.
Section 23D Exemption for income from mining and treating uranium This section applies to certain income derived before 1 July 1968.
Section 23J Exemption of proceeds from sale of securities purchased at a discount This provision applies to securities purchased on or before 30 June 1982. It is unlikely that income of this kind is still being received.

D. Transitional arrangements

Part 1 of Schedule 3 of the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this chapter.

The rewritten provisions will apply to assessments for the 1997-98 income year and later income years. [Schedule 3, Part 1, item 2]

Part 1 of Schedule 3 will preserve the operation of an existing Income Tax Regulation made for the purposes of a provision affected by the rewrite in Division 51 of Schedule 1. The provision is paragraph 23(t) of the 1936 Act (exempt bounties and allowances of a prescribed kind payable to a Defence Force member). [Schedule 3, Part 1, item 2]

E. Consequential amendments

Amendments of the Income Tax Assessment Act 1997

Part 2 of Schedule 3 to the Bill will amend the 1997 Act to:

·
update references to provisions of the 1997 Act that have been rewritten in Divisions 50 to 53 and 55 in Schedule 1;
·
insert additional definitions in the Dictionary in section 995-1 of terms that are used in the rewritten provisions contained Divisions 50 to 53 and 55 in Schedule 1; and
·
revise a definition in the 1997 Act.

Updated references

Sections 11-5, 11-10 and 11-15 of the 1997 Act contain lists of provisions of both the 1936 and the 1997 Acts that deal with particular kinds of exempt income. Part 2 of Schedule 3 to the Bill will update those references to old provisions that have been rewritten in Divisions 50 to 53 and 55 in Schedule 1, so that the lists refer to the rewritten provisions. [Schedule 3, Part 2, items 3 to 11]

New Dictionary terms

Part 2 of Schedule 3 to the Bill will insert into the Dictionary (section 995-1 of the 1997 Act) new definitions of terms used in the rewritten provisions in Divisions 50 to 53 and 55 in Schedule 1.

In some cases, the label used and the meaning of the definition have not changed from the 1936 Act. The following definitions fall into this category:

Aboriginal [Schedule 3, Part 2, item 17]

bereavement Subdivision [Schedule 3, Part 2, item 19]

distributing body [Schedule 3, Part 2, item 20]

exempt Australian government agency [Schedule 3, Part 2, item 21]

friendly society [Schedule 3, Part 2, item 22]

friendly society dispensary [Schedule 3, Part 2, item 23]

mining payment [Schedule 3, Part 2, item 25]

supplementary amount of a drought relief payment [Schedule 3, Part 2, item 29]

supplementary amount of a payment made because of the Veterans Entitlements (Transitional Provisions and Consequential Amendments) Act 1986 [Schedule 3, Part 2, item 29]

supplementary amount of a social security payment [Schedule 3, Part 2, item 29]

supplementary amount of a student and youth assistance payment [Schedule 3, Part 2, item 29]

supplementary amount of a veterans affairs payment [Schedule 3, Part 2, item 29]

tax-free amount of a social security payment [Schedule 3, Part 2, item 30]

tax-free amount of a student and youth assistance payment [Schedule 3, Part 2, item 30] .

Definitions that have changed from the 1936 Act, and new defined terms, that Part 2 of Schedule 3 to the Bill will insert into the Dictionary are explained below.

Part 2 of Schedule 3 to the Bill will insert new definitions of terms used in the rewritten provisions.

New Definition: Australian government agency [Schedule 3, Part 2, item 18]

Commentary: Australian government agency is a new term that does not appear in the 1936 Act. It will cover the Commonwealth, States and Territories together with any authority constituted under an Australian law. It will replace the existing term government body as well as phrases in operative provisions that repeat the definition in full. This will cause no change to the law.

New Definition: Member of the Forces [Schedule 3, Part 2, item 24]

Commentary: Member of the Forces has the meaning given by section 52-105. This is a sign post to the meaning given to member of the Forces in the Acts referred to in section 52-105 in Schedule 1.

New Definition: Ordinary payment [Schedule 3, Part 2, item 26]

Commentary: Ordinary payment has the meaning given by sections 52-10, 52-65 and 52-150. This is a new term developed for the purpose of separating those pensions, benefits and allowances that are paid for reasons other than because of another persons death, from those that are paid because of another persons death. By separating these two types of payments the tables, used in sections 52-10, 52-65 and 52-150, can easily apply the different types of tax treatment for these payments according to whether the payment was paid because of another persons death or not.

New Definition: Pension age [Schedule 3, Part 2, item 27]

Commentary: Pension age is defined in section 24ACC of the 1936 Act and covered in subsection 24ABB(1) of the same Act. These two provisions are sign posts to the definition of pension age as defined in the Social Security Act 1991. The new definition has combined section 24ACC and subsection 24ABB(1) of the 1936 Act so as to have a single sign post to the definition in the Social Security Act 1991.

Application of amendments

The amendments made by Part 2 of Schedule 3 apply to assessments for the 1997-98 income year and later income years. [clause 4, Tax Law Improvement Bill 1997] This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the exempt income provisions.

Amendments of the Income Tax Assessment Act 1936

Part 3 of Schedule 3 to the Bill will amend the 1936 Act to:

·
insert references to the rewritten provisions contained in Divisions 50 to 53 and 55 in Schedule 1 where the 1936 Act currently refers to the provisions in the 1936 Act; and
·
close off the application of provisions of the 1936 Act that have been rewritten in Divisions 50 to 53 and 55 in Schedule 1 so that the provisions in the 1936 Act apply only to the 1996-97 income year and earlier income years.

Inserting references to rewritten provisions

Part 3 of Schedule 3 will insert in the 1936 Act references to the rewritten provisions contained in Divisions 50 to 53 and 55 where the 1936 Act currently refers to the provisions in the 1936 Act. There are two categories of these amendments.

The first category will add a reference to a rewritten provision in a section of the 1936 Act where a reference to the 1936 Act provision currently appears so that both 1936 Act and 1997 Act provisions are referred to. [Schedule 3, Part 3, items 39, 40, 60]

The second category will omit the reference to the 1936 Act provision in a section of the 1936 Act and replace it with the rewritten provision. This is necessary for those sections of the 1936 Act that:

·
have not yet been rewritten and closed off; and
·
can apply to amounts that relate to only one income year at a time, being the 1997-98 income year or a later income year. [Schedule 3, Part 3, items 37, 38, 41 to 46, 48 to 51, 53 to 55, 57, 58, 61]

Closing off the application of provisions in the 1936 Act

Part 3 of Schedule 3 will insert new provisions into the 1936 Act that will close off the application of provisions in the 1936 Act that have been rewritten or are redundant. [Schedule 3, Part 3, items 31, 34]

In these cases, the provisions in the 1936 Act need to be closed off so that they only apply to the 1996-97 income year and earlier income years. This complements the transitional provisions in Part 1 of Schedule 3 that ensure that the corresponding rewritten provisions apply to the 1997-98 income year and later income years.

Application of amendments

The amendments made by Part 3 of Schedule 3 apply generally to assessments for the 1997-98 income year and later income years. [clause 4, Tax Law Improvement Bill 1997] This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the exempt income provisions.

Amendments of other Commonwealth legislation

Part 4 of Schedule 3 to the Bill will amend other Acts that currently refer to provisions in the 1936 Act that have been rewritten and are contained in Divisions 50 to 53 and 55 in Schedule 1. [Schedule 3, Part 4] They are:

Commonwealth Act Amended by
Australian Industry Development Corporation Act 1970 Schedule 3, Part 4: item 62
Australian National Railways Commission Act 1983 Schedule 3, Part 4: item 63
Australian Postal Corporation Act 1989 Schedule 3, Part 4: item 64
Australian Trade Commission Act 1985 Schedule 3, Part 4: item 65
Development Allowance Authority Act 1992 Schedule 3, Part 4: items 66 and item 67
Export Finance and Insurance Corporation Act 1991 Schedule 3, Part 4: item 68
Federal Airports Corporation Act 1986 Schedule 3, Part 4: item 69
Health Insurance Commission Act 1973 Schedule 3, Part 4: item 70
Legislative Instruments Act 1996 Schedule 3, Part 4: item 71
National Rail Corporation Agreement Act 1992 Schedule 3, Part 4: item 72
Social Security Act 1991 Schedule 3, Part 4: items 73 and 74
Superannuation Guarantee (Administration) Act 1992. Schedule 3, Part 4: item 75

Chapter 10 - Trading Stock

This chapter explains the rewritten provisions about the income tax treatment of trading stock.

These provisions are contained in new Divisions 70 and 385 in Schedule 1 to the Tax Law Improvement Bill 1997.

Transitional provisions and consequential amendments are contained in Schedule 5 to the Bill.

Overview of this chapter

This chapter covers:

·
the rewritten provisions in Divisions 70 (trading stock) and 385 (primary production) in Schedule 1 to the Tax Law Improvement Bill 1997, and
·
the transitional provisions and consequential amendments required because of those rewritten provisions. They are in Schedule 5 to the Bill.

Divisions 70 and 385 replace provisions of the 1936 Act that deal with trading stock and some similar assets. The 1936 Act provisions are in sections 26B, 26BA, and 28 to 37.

Part A of this chapter summarises new Divisions 70 and 385 in Schedule 1.

Part B explains the changes proposed to the content of the current provisions.

Part C explains why certain provisions of the 1936 Act are not being rewritten.

Part D explains the transitional provisions in Part 1 of Schedule 5 which set out how, and from when, the rewritten provisions will apply.

Part E explains consequential amendments to be made to the 1936 Act, the 1997 Act and other Commonwealth legislation. These are located in Parts 2 to 4 of Schedule 5 to the Bill.

A. Summary of the new law

Guide to Division 70: Tax accounting for trading stock

What is trading stock?

Trading stock is the things (eg. goods, land, intangible property) in which a business trades. Trading stock includes the raw materials and partially finished products that a manufacturer will convert into finished goods for trading. It also includes live stock. [section 70-10]

How is trading stock accounted for?

A business trading in assets generally deducts the cost of acquiring trading stock and includes in assessable income the proceeds of sales made in the ordinary course of the business.

Also, the difference between the values of the stock on hand at the start and end of each year is taken into account.

Deductions for trading stock

What deductions can you get?

Losses or outgoings in acquiring trading stock are general deductions under section 8-1 of the pending 1996 Act.

The law does not treat expenditure in acquiring trading stock as non-deductible capital expenditure [section 70-25] .

When are those deductions available?

Expenditure in acquiring trading stock will generally be deductible in the income year you incur it. However, if the stock has not come on hand by the end of the year, the expenditure is deductible in the first year when:

·
the item becomes stock on hand; or
·
an amount is included in assessable income due to disposal of the item. [section 70-15]

What if the value is inflated?

If trading stock is bought for more than its market value, it is treated as having been bought for its market value. [section 70-20]

Market value

This expression has a generally well understood meaning but has also been the object of judicial consideration.

In working out the market value, the courts will make appropriate assumptions about the market in question. These can be affected by the actual transaction under consideration. For example, the market value of a solitary item would usually be higher than the market value of such an item disposed of in the sale of the entire stock of a business.

If there is no identifiable market for a particular item, the courts have been willing to assume that there are willing buyers and sellers.

Taking into account trading stock on hand

How is stock on hand brought to account?

The difference between the value of stock on hand at the start of each year (opening stock), and the value of stock on hand at the end of the year (closing stock) is taken into account. [section 70-35]

The Act does this, in effect, by assessing as income the value of closing stock and allowing a deduction for the value of opening stock.

The overall effect is that a profit on sale of stock is assessable and a loss on sale is deductible.

The value of opening stock

An item of stock is given the value it had as closing stock at the end of the preceding income year. [section 70-40]

There is a choice of valuing an item at:

·
cost;
·
market selling value; or
·
replacement price. [section 70-45]

If an item of stock is obsolete, or if other special circumstances warrant it, any reasonable lower value can be chosen instead. [section 70-50]

Horse breeding stock has a special value option. [sections 70-60 and 70-65]

There are other conditions if a closing stock item is an interest in a foreign investment fund. [section 70-70]

Natural increase of live stock

What is the 'cost' of live stock acquired by natural increase?

You can choose either:

·
The actual cost (ie. the full cost of bringing the animal into its current state and location, including veterinary fees, pasture improvement expenses, etc.); or
·
the prescribed cost set by the Regulations for different types of animal. [section 70-55]

Unusual disposals

What if you dispose of stock outside the ordinary course of business?

The disposal is treated as having occurred at market value and this amount is included in your assessable income [sections 70-90 and 70-95]. This treatment also applies to disposals of certain trees and growing crops. [section 70-85]

Special deduction for standing timber

Normally, a deduction is allowed when you acquire trading stock. As standing timber is not trading stock, the law instead allows a deduction for its cost:

·
on disposal of the land;
·
on the death of the owner;
·
when the trees are felled for sale or manufacture; or
·
when someone other than the owner fells the trees under a right granted in return for a royalty. [section 70-120]

What if there is a change in interests?

If the interests in an item of stock change (eg. a partnership takes in a new partner), then the law may treat it as being a disposal outside the ordinary course of business [section 70-100] .

This happens when there is not a complete change in interests but the item ceases to be trading stock of the original entity.

This disposal outside the ordinary course of business would normally be treated as occurring at market value. However, if the item is an asset of the new owners business, and all the owners agree, they can elect to roll it over for the value at which the original entity would have taken it into account at the end of the year. A 25% continuity of interests is required for this election to be available.

What if the owner of trading stock dies?

The owner is treated as having sold it to the legal personal representative for its market value. The representative can elect to roll it over for the value it would have had in the owners hands at the end of the year if the business continues after the death [section 70-105] .

What happens if the stock is lost?

Insurance payments are normally assessed as ordinary income under section 6-5. If any such payments are not ordinary income, they will be assessed on receipt [section 70-115] .

Guide to Division 385

Deferring assessable income from live stock disposals

What special treatment is there for a forced disposal of live stock?

If an unusual disposal of live stock was caused by a specified event (eg. a notifiable disease; loss of pasture due to fire, flood or drought; government resumption of land; contamination), you can elect to spread assessment of any profit over 5 years. [section 385-105]

Alternatively, the profit can be applied over the next 5 years to reduce the tax cost of replacement live stock [sections 385-110 and 385-120] . Another choice is to include in assessable income a nominated amount for animals bred as replacements [section 385-115] . Any profit not accounted for in these ways by the end of the 5 years is assessable in the last year [paragraph 385-110(1)(c)] .

If the disposal is because of bovine tuberculosis

The alternative choice is available over 10 years. [section 385-125]

Deferring other amounts

What is the treatment of insurance recoveries?

A similar election is available for insurance for loss of live stock or loss of trees by fire - assessment can be spread over 5 years. [section 385-130]

What is the treatment for a forced early wool clip?

Another election is available to defer for one year assessment of profit on disposal of a second wool clip in a year, shorn early because of fire, drought or flood. [section 385-135]

Election rules

What election rules are there?

The election rules are in Subdivision 385-H. The election must be made before lodging the tax return for the year the amount is deferred (or the last of them, if more than one). [section 385-150] The election can't be made after a disentitling event happens. [section 385-160]

Disentitling events

These include death, bankruptcy, leaving Australia permanently, or ceasing to carry on the business. [section 385-163]

Who makes elections for partnerships or trusts?

An election for a partnership or trust is made by the partnership or the trustee. [section 385-145]

What is the status of amounts deferred by election?

They are treated as assessable income from carrying on a primary production business when returned as assessable income. [section 385-155]

Partnership transfer rules

If a partnership takes over the business of another partnership, it can elect to be treated as a continuation of the old partnership if there is at least a 25% continuity of rights to income. [section 385-165] This means that a partnership can avoid the effects of, say, a new partner being introduced.

Similarly, if an entity puts its business into a partnership with others, the partnership can adopt an election made by that entity. [section 385-170]

B. Discussion of changes

Removing discretions

In rewriting the income tax law, many administrative discretions affecting the calculation of tax liability are being replaced with objective tests or specific criteria. This better supports the self assessment system. Discretions in anti-avoidance provisions are being retained where this is necessary to protect the revenue.

Where a discretion is being replaced with more specific criteria, the change is explained in this Explanatory Memorandum. Most changes simply remove references to the Commissioner to make the law objective (eg. what the Commissioner considers reasonable becomes what is reasonable). This material doesn't comment further on those changes.

Section 70-20 Non-arms length purchases

This anti-avoidance section treats an item of trading stock as having been bought for its market value if it is bought in a non-arms length transaction for more than its market value.

1. Change

Simplifies the law by replacing the precondition that:

·
either the purchase price of stock was inflated above an arms length price or the purchase price and delivery costs were above the purchase price and delivery costs for an identical article,
with the precondition that:
·
expenditure on buying, or obtaining delivery of, trading stock was greater than the market value of what the expenditure is for.

Explanation

The new sections formulation focuses on whether the expenditure (either for buying or obtaining delivery of the stock) is above market value. This is simpler and easier to understand than the complicated and overlapping preconditions in the 1936 Act. It covers the same ground as the original, ie. non-arms length transactions inflating prices above market value.

2. Change

Simplifies the rules by treating the amount of expenditure on acquiring or obtaining delivery of the stock as being equal to the market value.

Explanation

The 1936 Act has a complex matrix which depends on whether the Commissioner considers that only the first, only the second, or both preconditions, were satisfied. The new section replaces that matrix with just one outcome- the inflated expenditure is reduced to the market value. This maintains the policy of the original provision but simplifies its expression.

3. Change

Replaces arms length price with market value.

Explanation

The rewritten law restricts the use of different terms to express the same idea. For this reason arms length price will be replaced in the new law by market value. Market value is already used in many places in the existing law (including the trading stock provisions) and is largely synonymous with arms length price.

Section 70-40 Value of opening stock

This section specifies that the value of stock on hand at the start of a year (the opening stock) is the same amount that was taken into account as the previous years closing stock.

Change

This ensures that the opening value of each item of stock is always the same as the closing value it had in the previous year. If not taken into account at the end of a year, its opening value at the start of the next year will be nil.

Explanation

Section 29 of the 1936 Act says that an items opening value is the value ascertained under the Act at the end of the previous year. There are some Board of Review decisions concluding that those words mean that the opening value must be what the previous years closing value should have been. If the previous years assessment cannot be amended because of time limits, its closing value will be different from the next years opening value. This will produce either a windfall gain or an unexpected loss for the taxpayer.

The rewrite avoids the possible problem. If one years closing value is amended, then the next years opening value will change to reflect that amendment. If the closing value cannot be amended, the next years opening value will still be what was recorded as the closing value. Subsection 70-40(2) supports this by ensuring that an items opening value is nil if the items closing value in the previous year was not taken into account at all.

Section 70-45 Value of closing stock

This section explains that a taxpayer can elect to value each item of trading stock on hand at the end of an income year (closing stock) at a choice of cost, market selling value and replacement price.

Comment

The rewrite adopts the expression cost instead of cost price and replacement price instead of the price at which it can be replaced.

These are simpler terms. The ideas behind them are unchanged.

The rewrite also uses the word item instead of the word article in the existing law. This does not change the law.

For commodities like petrol and wheat, item means an appropriate unit of measurement.

Where a taxpayer has made a number of purchases of identical items of trading stock at different prices but only disposed of some of that stock, it may be impossible to determine the actual cost of each item of trading stock on hand. This commonly occurs if a taxpayer has a quantity of items which cannot be distinguished from each other. Some accounting methods can be used to determine the cost of stock in these cases provided they produce a true approximation of actual cost and, therefore, of taxable income.

Change

The rules for valuing live stock are being brought in line with those for valuing other trading stock.

Explanation

The present rules for valuing live stock differ from those for valuing other trading stock in these ways:

·
live stock generally can only be valued at cost price or market selling value;
·
that choice must be made uniformly for all live stock;
·
the method cannot be changed from year to year except with the Commissioners permission;
·
the Commissioner has a discretion to allow another value to be used if satisfied that there are circumstances that justify it; and
·
if no choice is made, cost price applies.

The Bill will remove those differences. This will allow taxpayers greater flexibility in valuing live stock.

Special rules for working out the cost of natural increase [section 70-55] , and the present extra valuation option for horse breeding stock [sections 70-60 and 70-65] , will remain.

In accordance with self assessment principles, the alternative value that depends on the Commissioners discretion will be replaced by an alternative value that depends on objective tests [section 70-50] . These are the same tests used for all trading stock- obsolescence or other special circumstances. Under the existing discretion, the Commissioner effectively allows stud animals to be depreciated at 20% a year so long as their market selling value is actually declining. Taxpayers will be able to achieve the same result under this proposal by valuing their animals at market selling value.

Section 70-50 Obsolescent stock and special circumstances

This section allows the value of an item of stock to be reduced if it is obsolescent or if other special circumstances warrant.

Change

Under the present law, this reduced value is available if:

·
a written request is lodged with the Commissioner;
·
the Commissioner is satisfied that the prerequisites are met; and
·
the Commissioner sets a value, taking into account 3 listed factors and any other relevant factors.

Under the rewrite, it is a matter of objective fact whether the preconditions exist. If they do, you can set a reasonable value below the standard values, without having to notify the Commissioner.

Explanation

Consistent with the principles of self assessment, taxpayers will not have to approach the Commissioner to set a different value but will be able to decide if the prerequisites are satisfied and then set a reasonable value.

The listed factors are not needed because they are covered by the requirement that the taxpayers decision be reasonable.

Section 70-55 Cost of natural increase

This section explains how to work out the cost of an animal acquired by natural increase.

Change

The present rules about how to work out the cost price of natural increase are replaced by a simple choice between actual cost and the value prescribed in the Regulations.

Explanation

The 1936 Act uses a more involved process to work out the cost price of natural increase. It depends on whether there is a prescribed value for the particular type of stock and whether the taxpayer has previously valued that stock at cost price:

Taxpayer's situation How to calculate cost price
If a value is prescribed for the class of live stock and the taxpayer has previously valued that class at cost price Taxpayer chooses one of:

·
The greater of-

(a)
the cost price valuation the taxpayer used last time; and
(b)
the prescribed value for the class;

·
The prescribed value, or any greater amount acceptable to the Commissioner; or
·
The actual cost* price, if that is less than the prescribed value.

If a value is prescribed for the class of live stock but the taxpayer has not previously valued that class at cost price Taxpayer chooses one of:

·
The prescribed value for the class;
·
Any amount above the prescribed value; or
·
The actual cost* price, if that is less than the prescribed value.

If there is no prescribed value for the class of live stock Actual cost*
* Actual cost means the full cost of producing the animal, including both fixed and variable costs. These will include expenses like veterinary fees, fencing, feed, etc.

This section will replace that with the taxpayer's choice between actual cost and the prescribed value.

Section 70-100 Items becoming trading stock of a different entity

This section provides for what happens if a partial change of interests in trading stock causes that stock to be held by a different entity (eg. if there is a change in the membership of a partnership that has trading stock).

Change

Replaces the present rule, which:

·
treats any change in interests in trading stock as a disposal from the old owners to the new owners,
with a rule that:
·
treats a change of interests as a disposal only if the item stops being trading stock on hand of the owners.

Explanation

The present rule can cause taxpayers needless trouble by deeming a sale to occur even if there is no change in the taxpayers (eg. if there is a variation in partnership interests but no change in the partners themselves).

This section will only treat the stock as sold by the old owners if there is a new taxpayer.

Section 70-105 Death of an owner of plantation trees

This section provides for the treatment of disposals of trading stock on the owner's death. It applies the same treatment to disposals of trees planted and tended for sale and of crops on the owner's death.

1. Change

If the owner of a plantation disposes of trees, the 1936 Act allows a deduction for their cost to balance the assessment of their market value (subsection 36(7A)). This section extends that treatment to disposals on the owner's death as long as the deceased's representative does not elect for a nil value.

Explanation

This section treats the death of the owner as causing a disposal of trees for their market value. However, the personal representative can choose to value them at the value they would have been accounted for at the end of the year if the owner had not died.

If the representative does not make the election, this section will provide the same deduction as would have been available if the owner had disposed of the trees while alive.

2. Change

The election to value trading stock held at death at other than market value will be made by the legal personal representative instead of by agreement of the trustee of the estate and those beneficiaries liable to be assessed on the income of the business.

Explanation

This is part of a change to standardise election rules in this part of the law. It is discussed more fully under 'subdivision 385-H and section 70-105, standardised elections', later in this chapter.

Section 70-115 Compensation for lost trading stock

This section will include in assessable income an insurance or indemnity amount if:

·
it is for the loss of trading stock; and
·
it is not ordinary income.

Change

The rewritten provision will only assess amounts that are not ordinary income.

Explanation

Insurance and indemnity amounts for the loss of trading stock will generally, and perhaps always, be assessed as ordinary income. If there are any amounts that are not ordinary income, they will be assessable under this provision.

The exclusion of ordinary income makes it clear that the section does not modify the ordinary tax accounting treatment of insurance and indemnity amounts for a loss of trading stock.

Subdivision 385-E Live stock elections and abnormal disposals

This subdivision sets out the elections available to primary producers who are forced to sell some of their live stock (eg. because of a notifiable disease or a loss of pasture to fire or flood). These elections provide concessional treatments for assessment of any profit made on the sale of that live stock.

1. Change

One election available to primary producers who have to sell some of their live stock because of certain listed circumstances is to spread the assessment of any profit they make over 5 years. This Sub-division will replace the present rules about that election with a simpler set of rules.

The present rules about when primary producers can make an election and the effects of doing so are in the following table:

Death or disposal caused by Within ordinary course of business Is election allowed If the election is made...
What is assessable? What amount is spread?
Yes No N/A N/A
government resuming land No Yes market value excess over opening value/ purchase price of either:

·
return on disposal; or
·
market value (if not sold, or if sold with other assets)

Yes No N/A N/A
State leasing land for cattle tick eradication No Yes market value excess over opening value/ purchase price of either:

·
return on disposal; or
·
market value (if not sold, or if sold with other assets)

Yes No N/A N/A
losing pasture or fodder to fire, flood or drought No Yes market value excess over opening value/ purchase price of either:

·
return on disposal; or
·
market value (if not sold, or if sold with other assets)

certain stock Yes Yes
diseases No Yes return on disposal excess over opening value/
contamination Yes Yes + compensation purchase price of (return on disposal
notice No Yes + compensation)

Under the new Subdivision, the rules about when the election can be made and the effects of making it will be:

Death or disposal caused by Within ordinary course of business Is election allowed If the election is made...
What is assessable? What amount is spread?
any of the listed causes Yes Yes return on disposal + compensation excess of assessable amount over:

·
opening value; or

No Yes market value + compensation

·
purchase price (if purchased during year)

Explanation

The present law provides for these concessions in two separate provisions (sections 36 and 36AA) which have a very similar operation but with slight differences. The Subdivision standardises the prerequisites and the effects so that the two provisions can be combined [sections 385-100 and 385-105] .

2. Change

The alternative election will be available in all these cases instead of just in some of them as at present.

Explanation

In most cases in which taxpayers can elect to spread the profit on a forced disposal of live stock under the existing law, they can defer assessment of the whole profit for up to 5 years. If they do, the profit is effectively taxed by reducing the tax cost of replacement live stock or by including an amount in assessable income for replacement stock they breed.

This election is not currently available for a disposal made because of:

·
a resumption of land; or
·
a State leasing land under a cattle tick eradication program.

The proposal extends the election to those cases [sections 385-100 and 385-110] .

3. Change

Will extend both:

·
the election to spread profit on a forced disposal; and
·
the alternative to defer the whole of the profit for up to 5 years,

to leases of land for cattle tick eradication programs by Territories as well as by States.

Explanation

Under the present law, primary producers can make these elections if they have to sell live stock because a State leases land for a cattle tick eradication campaign. The law does not allow them to make the elections if a Territory leases the land for the same purpose.

4. Change

This change will remove an exception for bovine brucellosis that presently exists if a taxpayer makes the alternative election and will vary the formula for accounting for the deferred profit where an election is made in the context of bovine tuberculosis.

Explanation

An election usually requires the deferred profit to be accounted for within 5 years. However, in the case of 2 diseases - bovine brucellosis and tuberculosis - the period is 10 years. Further, the formula the law uses to reduce the cost price of replacement stock in those 2 cases is different from that for other diseases.

Australia is free of bovine brucellosis, so there is no need for it to be accorded a preferred treatment.

If a taxpayer makes the alternative election, the law provides a formula for reducing the tax cost of purchased replacement live stock. In the remaining exceptional case - bovine tuberculosis - the formula will be the same as for other diseases:

tuberculosis formula now proposed
unused profit on the disposal/ no. of animals in purchase profit on disposal/ no. of animals lost

This will make the law simpler.

Subdivision 385-H and section 70-105 Standardised elections

Subdivision 385-H and section 70-105 set out the rules for making elections under:

·
section 70-105 (death of the owner);
·
Subdivision 385-E (forced disposals of live stock);
·
Subdivision 385-F (insurance recoveries for losses of live stock or trees); and
·
Subdivision 385-G (profit on the sale of a second wool clip).

1. Change

Rules about who makes elections in partnership and trust cases will be standardised with a rule that these elections are always made by the partnership or the trustee [sections 70-105 and 385-145] .

Explanation

At present, there are 3 election systems for partnerships and trusts. These apply to:

·
forced disposal of live stock [sections 36, 36AAA and 36AA] ;
·
elections to spread insurance payments for losses of live stock or trees [section 26B] ;
·
elections to spread the profit on the sale of a second wool clip forced by fire, flood or drought [section 26BA] ; and
·
elections to value trading stock that becomes part of a deceased estate at other than market value [section 37] .

Sometimes each partner and beneficiary can make a separate election. At other times the relevant partners must make a unanimous election. In section 36AAA, only the partnership or the trustee can elect.

Standardising these elections at the partnership and trustee level has these important advantages:

·
it simplifies and greatly shortens the election provisions;
·
it substantially lowers compliance costs by reducing the number of elections that need to be made; and
·
it overcomes confusion about which beneficiaries need to agree that the value of trading stock under a deceased estate should be rolled over.

2. Change

This change extends to Subdivisions 385-E, F and G the election - available to partnerships that take over the business of another taxpayer - to be treated as a continuation of that other taxpayer [sections 385-165 and 385-170] .

Explanation

Under section 36AAA, a partnership that takes over the business of another taxpayer can elect to be treated as a continuation of that other taxpayer if there is at least a 25% continuity of interest. This means that an election made by the other taxpayer to defer assessment of the profit on a forced disposal is treated as if it were made by the partnership.

A consequence of standardising elections is that this choice will be available for partnerships for all the various elections under Subdivisions 385-E, 385-F and 385-G.

3. Change

There will be standard rules for cancelling the effect of an election on the happening of certain events [sections 385-160 and 385-163] .

Explanation

On the happening of certain events (eg. death or bankruptcy), most of the relevant provisions in the 1936 Act require outstanding amounts of deferred assessable income to be assessed in the income year in which the event happens.

One case out of step is section 26BA. That section also allows the trustee of a deceased estate to make an election to defer for 1 year the profit on the sale of a second wool clip in the year of death, so including that amount in the estate's income of the next year. A consequence of standardising the election rules is that this election could not be made after the death. The profit will be assessable in that year.

C. Provisions of the old law that have not been rewritten

Redundant provisions

Subsection 26BA(10) allows the Commissioner to amend an assessment at any time to give effect to an election under the section. It was intended to ensure that, if the election to defer assessable income was made after the assessment for the relevant year, it would be possible to amend the assessment to give effect to the election. Now that there is a general power to amend an assessment within 4 years, the provision is unnecessary.

The rewrite will remove a redundant anti-avoidance provision, subsection 36(9), which addresses schemes designed to deem the purchase price of trading stock to be more than its real value. This is now covered by the general anti-avoidance provision, Part IVA, which was not part of the law when sub-section 36(9) was enacted. Sub-section 36(10), which defines a term used in sub-section 36(9), has also not been rewritten.

Subsection 36AAA(19) provides that the last day of a year of income includes the last day of an assessment period of less than a full income year. This provision has not been rewritten because the same effect is achieved by the normal substituted accounting period rules in section 18 of the 1936 Act and by the rules for special assessments in section 168 of that Act.

Subsections 36AAA(25) and 36AA(11) define the term official notification. Those definitions have not been rewritten because the terms ordinary meaning covers the same ground.

Rules that are unnecessary because of standardisation

Subsection 26BA(7), which allows the trustee of a deceased estate to elect to defer for one year the profit on the sale of a double wool clip, has not been rewritten. This change is explained in Part B of this chapter under subdivision 385-H and section 70-105, standardised elections.

Sections 32 and 33, which deal with the valuation of live stock on hand at the end of an income year, have not been rewritten because the valuation of live stock is being brought broadly into line with that for other trading stock. This change is explained in Part B of this chapter under section 70-45, value of closing stock.

D. Transitional arrangements

Part 1 of Schedule 5 of the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this Chapter.

Part 1 comprises 2 items which will insert in Chapter 2 of the Income Tax (Transitional Provisions) Act 1997 new Part 2-25, Division 70 and add new Division 385 to Part 3-45. These Divisions set out how and when the rewritten sections apply.

The rewritten provisions in Divisions 70 and 385 of the 1997 Act will generally apply to assessments for the 1997-98 or later income years. [Schedule 5, Part 1: sub-sections 70-1(1) and 385-135(1) and section 385-130, Transitional Provisions Act]

However, there are some provisions that will apply to transactions occurring on or after 1 July 1997. There are 2 categories of such provisions. The first is provisions that affect 2 or more parties to a transaction. Because either of those parties may have a substituted accounting period, the transaction may be in a different income year for each of them. The second category is provisions that link with provisions in the first category.

The provisions in Schedule 1 that will apply to events on or after 1 July 1997 are:

·
section 70-20 (non-arms length purchase of trading stock);
·
sections 70-90 and 70-95 (disposal of trading stock outside the ordinary course of business);
·
section 70-100 (partial change of ownership of trading stock);
·
section 70-105 (death of the owner of trading stock); and
·
Sub-division 385-E (spreading or deferring profit on a forced disposal of live stock).

In many cases, it is necessary to specify in the transitional provisions how the rewritten provisions apply if certain events have happened before the 1997-98 income year of at least one of the parties involved.

This table explains those events and how the transitional provisions apply to them:

Transitional sections Event that can happen before the 1997-98 income year Treatment
70-40 Value of closing stock in 1996-97. The 1997-98 opening stock has the value of the 1996-97 closing stock, worked out under the 1936 Act.
70-55 Natural increase of live stock born before 1997-98. Their cost is worked out under section 34 of the 1936 Act.
70-70 Interest in a FIF was trading stock at the start of 1991-92. That interest always has the value it had then unless the market value election applies.
Taxpayer elects to use market value for all interest in FIFs Applies as if the election were made under the 1997 Act.
70-100 Deemed disposal and purchase because of a change in ownership of trading stock. If either party is in its 1996-97 income year, an election to treat the stock as disposed of at its trading stock value, instead of its market value, would use the trading stock values under the 1936 Act.
70-105 Deemed disposal and purchase because of the death of the owner of trading stock. If the entity on whom the stock devolves is in its 1996-97 income year, an election to treat the stock as disposed of at its trading stock value, instead of its market value, would use the trading stock values under the 1936 Act.
70-115 Loss of insured trading stock. The 1997 Act applies to amounts received in the 1997-98 or a later income year.
Insurance or indemnity amount for a loss of trading stock is assessable. The 1997 Act does not apply to an amount assessable in the 1996-97 or an earlier income year.
385-130 Loss of insured live stock or trees. The 1997 Act applies if the insurance recovery would be assessable in the 1997-98 or a later income year.
385-135 Election in 1996-97 to defer assessing the profit on the sale of an earlier than normal wool clip. The 1997 Act applies if the proceeds of selling 2 wool clips would be assessable in the 1997-98 or a later income year.
Deferral elections made under the 1936 Act are treated as made under the 1997 Act.

E. Consequential amendments

Amendment of the Income Tax Assessment Act 1997

Part 2 of Schedule 5 to the Bill will amend the 1997 Act to:

·
update references to provisions in the 1936 Act that have been rewritten in Divisions 70 and 385 in Schedule 1; and
·
insert additional definitions in the Dictionary in section 995-1 of terms that are used in the rewritten provisions.

Updated references

Section 10-5 of the 1997 Act lists all the provisions of the current law (in both the 1936 and 1997 Acts) that deal with particular kinds of assessable income. Section 12-5 lists all the provisions that deal with particular types of deduction. Part 2 of Schedule 5 to the Bill will update references to existing provisions that have been rewritten in Divisions 70 and 385 in Schedule 1, so that those lists refer to the rewritten provisions [Schedule 5, Part 2: items 3 to 12, 15 to 19] .

Part 2 of Schedule 5 will also add further references to timber to those lists to accommodate changes to the law [Schedule 5, Part 2: items 13, 14, 20] .

Part 2 of Schedule 5 will update other references to 1936 Act provisions rewritten in Divisions 70 and 385. Two of these will add a reference to a rewritten provision where a reference to the 1936 Act provision currently appears [Schedule 5, Part 2: items 21, 22] .

References to both existing and rewritten provisions are needed where the provision of the 1936 Act has some continuing operation.

A reference to a provision of the 1936 Act is being replaced with a reference to the rewritten provision [Schedule 5, Part 2: item 23] .

New Dictionary terms

Part 2 of Schedule 5 to the Bill will include in the Dictionary (section 995-1 of the 1997 Act) new definitions of terms used in Divisions 70 and 385.

In some cases terms used and their meaning have not changed. The following definitions fall into this category:

FIF [Schedule 5, Part 2: item 29] ;

Foreign investment fund [Schedule 5, Part 2: item 30] ;

Live stock [Schedule 5, Part 2: item 33] ; and

Notional accounting period [Schedule 5, Part 2: item 34] .

Definitions that have changed and new defined terms that Part 2 of Schedule 5 will add to the Dictionary are explained below:

New Definition: Consideration receivable [Schedule 5, Part 2: item 25]

Commentary: In the context of trading stock changing hands, the meaning is the same as the existing law.

The meaning to do with disposals of leased cars is changed slightly. This is discussed under section 20-115, working out the profit on the disposal in Part B of Chapter 4 of this Explanatory Memorandum.

New Definition: Cost [Schedule 5, Part 2: item 26] .

Commentary: For trading stock, this term has the same meaning as cost price in the existing law except for a difference relating to natural increase of live stock (see discussion under section 70-55, cost of natural increase in Part B of this chapter).

The meaning of cost for depreciation purposes is discussed under sub-division 42-B, cost of plant and section 42-65, how to work out your cost in Part B of Chapter 8 of this Explanatory Memorandum.

New Definition: Disentitling event [Schedule 5, Part 2: item 27] .

Commentary: This expression covers the existing events (eg. bankruptcy) that bring an end to the period for which some provisions defer assessable amounts.

New Definition: Disposal year [Schedule 5, Part 2: item 28] .

Commentary: A new label used in the provisions allowing primary producers to defer the assessment of profits on forced disposals or death of live stock. It replaces the existing terms the year to which the election relates, the year of income in which the live stock were disposed of and the year of income in which the live stock died or was destroyed or disposed of.

New Definition: Horse opening value [Schedule 5, Part 2: item 31] .

Commentary: A new label replacing the existing term opening value in the trading stock valuation rules for horses.

New Definition: Horse reduction amount [Schedule 5, Part 2: item 32] .

Commentary: A new label replacing the existing term reduction amount in the trading stock valuation rules for horses.

New Definition: Primary production business [Schedule 5, Part 2: item 35]

Commentary: A new term that will replace the existing definition of primary production.

The concept of a business has been added to the definition because, in all the rewritten parts of the 1936 Act, primary production is only used in the wider concept business of primary production.

Other than that addition, there is no difference in meaning between the existing definition of primary production and the new definition of primary production business.

However, there have been some changes in structure and wording to bring the definition up to date and to make it more user friendly:

Defined terms within the definition have been removed

The defined terms fishing operations (incorporating pearling operations), forest operations and horticulture have been removed from the definition

These concepts will be fully incorporated into the definition:

·
fishing operations is covered by paragraph (d);
·
pearling operations is covered by paragraphs (d) and (e);
·
forest operations is covered by paragraphs (f), (g) and (h); and
·
horticulture is covered by paragraph (a).

The defined term horticulture has been removed to make it possible to combine, in paragraph (a), the existing paragraphs dealing with the similar concepts, 'cultivation of land' and 'horticulture.'

The other defined terms have been removed because they will not be used in the new law.

The language has been simplified

'Crustaceans and aquatic molluscs' in paragraph (d) of the definition replaces crustacean or oysters or other shellfish. 'Shellfish' is an outdated term, which broadly refers to aquatic crustaceans and molluscs.

'Aquatic molluscs' also covers the existing expressions 'trochus' and 'green snails'.

Unnecessary parts of the definition have been removed

The existing reference to 'poultry' is now covered by 'animals' in paragraph (b) of the definition.

The present exclusion of whaling does not appear in the definition. This does not change the law, however, because whales are not fish, turtles, dugong, beche-de-mer, crustaceans or aquatic molluscs. Therefore, there is nothing in the inclusive part of the definition that could make whaling a primary production business.

New Definition: Proceeds of the disposal or death [Schedule 5, Part 2: item 36] .

Commentary: A label for a combined definition of the following terms from the 1936 Act: proceeds of the sale of the live stock, proceeds of the disposal of the live stock and proceeds of the death of the live stock. There are some minor changes in coverage (see discussion under sub-division 385-E, live stock elections and abnormal disposals in Part B of this Chapter).

New Definition: Proceeds of the sale of 2 wool clips [Schedule 5, Part 2: item 37] .

Commentary: A new term for an undefined idea already in the 1936 Act.

New Definition: Reduction amount [Schedule 5, Part 2: item 38] .

Commentary: A new label for the existing term the amount applicable in relation to the animal used in the provisions allowing primary producers to elect to defer assessment of the profit on a forced disposal or death of live stock.

New Definition: Tax profit on the disposal or death [Schedule 5, Part 2: item 39] .

Commentary: A new label used in the provisions allowing primary producers to defer the assessment of profits on forced disposals or deaths of live stock. It replaces these terms in the 1936 Act: profit on the disposal of the live stock, profit on the death of the live stock, profit arising in respect of the death of the live stock and profit arising in respect of the disposal of the live stock.

New Definition: Trading stock [Schedule 5, Part 2: item 40] .

Commentary: An expression from the 1936 Act. One minor change was to replace the expression acquired or purchased with the single word acquired on the basis that it covers the same ground as the longer expression.

New Definition: Unused tax profit on the disposal or death [Schedule 5, Part 2: item 41] .

Commentary: A new label for reduced profit on the disposal or death of the live stock.

New Definition: Value (of an item of trading stock) [Schedule 5, Part 2: item 42] .

Commentary: A label for an undefined idea already in the 1936 Act.

Application of amendments

The consequential amendments made by Part 2 of Schedule 5 generally apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill 1997] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to trading stock.

The application of the amendment which replaces the reference to section 26BA in subsection 165-60(4) with a reference to section 385-135 [Schedule 5, Part 2: item 23] does not apply until assessments for the 1998-99 and later income years [Schedule 5, Part 2: item 24] . This is because subsection 165-60(4) refers to an amount being included in assessable income by section 26BA. Section 26BA will still do that in 1997-98. Section 385-135 will only begin including amounts in assessable income in 1998-99.

Amendment of the Income Tax Assessment Act 1936

Part 3 of Schedule 5 to the Bill will amend the 1936 Act to:

·
insert references to the provisions rewritten by Divisions 70 and 385 in Schedule 1 where the 1936 Act currently refers to the existing provisions;
·
close off the application of provisions of the 1936 Act that have been rewritten in those Divisions, so that the existing provisions generally apply only to the 1996-97 and earlier income years;
·
replace the 1936 Act definition of trading stock with the 1997 Act definition; and
·
modify the application of the capital gains provisions to disposals of trading stock.

Inserting references to rewritten provisions

Part 3 of Schedule 5 will insert in the 1936 Act references to the rewritten provisions contained in Divisions 70 and 385 where the 1936 Act currently refers to the existing provisions. There are two categories of these amendments as discussed below.

The first will add a reference to a rewritten provision where a reference to the equivalent 1936 Act provision currently appears [Schedule 5, Part 3: items 71 to 73, 76 to 78, 80, 82, 83, 86] .

A similar reference to rewritten provisions in Divisions 70 and 385 is being made by Schedule 9 to the Bill [Schedule 9, Part 3: item 16] .

Dual references to existing and rewritten provisions are required where the provisions being consequentially amended:

·
have not yet been rewritten and closed off; and
·
can apply to amounts relating to more than one income year (including an income year before the 1997-98 income year).

The second category will replace a reference to an existing provision in a section of the 1936 Act with a reference to the rewritten provision [Schedule 5, Part 3: items 44, 63, 68, 69, 74, 75, 79, 81, 84, 85, 87, 88] .

This is necessary where the section of the 1936 Act:

·
has not yet been rewritten and closed off; and
·
can apply to amounts that relate to only one income year at a time, being the 1997-98 or a later income year.

Closing off the application of existing provisions

Part 3 of Schedule 5 will insert new provisions into the 1936 Act that will close off the application of existing provisions that have been rewritten or are redundant [Schedule 5, Part 3: items 45 to 62, 64] .

Part 3 of Schedule 2 will also close off the application of an existing provision rewritten in Division 70 [Schedule 2, Part 3: item 20] .

In these cases, the existing provisions need to be closed off so that they only apply to the 1996-97 and earlier income years. In some cases, they are closed off so that they only apply to transactions occurring on 30 June 1997 or earlier. This complements the transitional provisions in Part 1 of Schedule 5, which ensure that the corresponding rewritten provisions apply to the 1997-98 and later income years or to transactions occurring on 1 July 1997 or later.

Part 3 of Schedule 2 will also make some further minor changes to the 1936 Act to reflect changes made by closing off other provisions [Schedule 5, Part 3, items: 65, 66, 67, 70] .

Miscellaneous

Part 3 of Schedule 5 will replace the definition of trading stock in the 1936 Act with a definition adopting the definition in the 1997 Act [Schedule 5, Part 3: item 43] .

Application of amendments

The consequential amendments made by Part 3 of Schedule 5 generally apply to assessments for the 1997-98 and later income years [Clause 4, Tax Law Improvement Bill 1997] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to trading stock.

Amendment of other Commonwealth legislation

Part 4 of Schedule 5 to the Bill will add references to rewritten provisions contained in Division 70 in Schedule 1, to these Commonwealth Acts:

Commonwealth Act Amended by
Cattle Transaction Levy Act 1995 Schedule 5, Part 4: item 89
Financial Corporations (Transfer of Assets and Liabilities) Act 1993 Schedule 5, Part 4: items 90 to 93

Application of amendments

The consequential amendment made to the Cattle Transaction Levy Act 1995 by Part 4 of Schedule 5 applies to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill 1997] .

The consequential amendments made to the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 by Part 4 of Schedule 5 apply to the 1997-98 and later years of income. Two of the amendments also apply to the 1996-97 income year. This is because they insert references to provisions that apply on or after 1 July 1997, which could be in the 1996-97 income year for some taxpayers. [Schedule 5, Part 4: item 94]

Chapter 11 - Capital allowances for primary producers and some land-holders

This part explains the rewritten capital allowances that are available to primary producers and some land-holders who use land for business purposes.

These provisions are contained in Division 387 in Schedule 1 to the Tax Law Improvement Bill 1997.

Transitional and consequential amendments for the rewritten provisions are contained in Schedule 11 to the Bill.

Overview of this chapter

This chapter covers

·
the rewritten provisions in Division 387 in Schedule 1 to the Tax Law Improvement Bill 1997; and
·
the transitional provisions and consequential amendments for those provisions in Schedule 11.

Division 387 restates provisions of the 1936 Act that allow deductions for particular capital expenditures incurred by primary producers and some land-holders.

Part A summarises Division 387.

Part B explains proposed changes to the content of the current provisions.

Part C explains why some provisions of the 1936 Act have not been rewritten.

Part D explains the transitional provisions which set out how and when the rewritten provisions will apply.

Part E explains the amendments that need to be made to the 1997 Act and the 1936 Act as a consequence of the rewriting of the 1936 Act. These provisions are located in Parts 2 and 3 of Schedule 11.

A. Summary of the new law

Guide to Division 387: Capital allowances for primary producers and some land-holders

What the Division will do

Division 387 allows deductions for capital expenditure on landcare operations, water conservation or conveyance, establishment of grapevines, mains electricity supply, telephone lines and forestry roads and timber mill buildings by taxpayers who use land in primary production and some other types of businesses. [section 387-1]

Landcare operations [Subdivision 387-A]

What the subdivision will do

Subdivision 387-A, which applies to primary production businesses and businesses that derive income from rural land, will allow a deduction for capital expenditure on landcare operations. [section 387-50]

The general rule

Capital expenditure incurred in a landcare operation on Australian land is deductible if the land is used:

·
in a primary production business; or
·
in a business carried on to produce assessable income from rural land. [subsection 387-55(1)]

Exception

This does not include mining or quarrying. [paragraph 387-55(1)(b)]

When is the deduction available?

In the year in which you incur the expenditure. [subsection 387-55(2)]

What is a landcare operation?

The following are landcare operations:

·
fencing to separate different land classes under an approved management plan;
·
fencing to exclude livestock or vermin from degraded areas, to limit the degradation, and to help reclaim those areas;
·
constructing a levee, or similar improvement;
·
constructing drainage works;
·
operations for eradicating, exterminating, or destroying animal pests, or destroying plant or weed growth; and
·
operations for preventing or fighting land degradation. [section 387-60]

What is an approved management plan for land?

A plan that shows:

·
the land classes;
·
the location of fences necessary to separate land classes to prevent land degradation; and
·
the kind of fencing and how it would prevent land degradation.

It need not relate to the whole of the land used for business purposes.

The plan must have been prepared or approved by an authorised officer of a State or Territory government department or authority responsible for land conservation; or by an approved farm consultant. [sections 387-80, 387-85, 387-90]

Limit on deductions for plant

Plant deductible under this Subdivision is:

·
a fence covered by the definition of landcare operation; or
·
specified dams and structural improvements. [subsection 387-65(1)]

Changed use of land

A deduction may be reduced if, during the income year in which you incur the capital expenditure, the land is used other than in the relevant business. [section 387-70]

Partnerships and partners

If a partnership incurs expenditure on a landcare operation, partners claim a deduction of the proportion agreed among them or in proportion to their share of the partnership net income or loss. [section 387-75]

Common rules

Common rules are rules that apply to more than one kind of capital allowance. They are contained in Division 41 of the Income Tax Assessment Act 1997. Common rule 2, as modified, will apply to landcare. [subsection 387-65(2)]

Recoupments

Recoupment of deductible expenditure is generally treated as assessable income of the income year in which the recoupment is received. [Subdivision 20-A]

Facilities to conserve or convey water [Subdivision 387-B]

What the subdivision will do

Subdivision 387-B, will allow a deduction for facilities to conserve or convey water. [section 387-120]

The general rule

You can deduct capital expenditure on a water facility that is primarily and principally for conserving or conveying water for use in a primary production business in Australia. [section 387-125(1)]

When is the deduction available?

The deduction is spread over 3 years. [subsection 387-125(2)]

What is a 'water facility'?

A water facility is plant or a structural improvement for conserving or conveying water. [section 387-130]

Partial business use

You deduct a reasonable proportion if the water facility is not wholly for use in a business of primary production or for producing assessable income. [section 387-135]

Partnerships and partners

Partners claim a deduction of the proportion agreed among them or in proportion to their share of the partnership net income or loss. [section 387-150]

Common rules

Common rule 2, as modified, will apply. [section 387-145]

Recoupments

The recoupment provisions will apply. [Subdivision 20-A]

Establishing grapevines [Subdivision 387-D]

What the subdivision will do

Subdivision 387-D will allow a deduction for capital expenditure on grapevines used in primary production businesses. [section 387-300]

The general rule

You can deduct capital expenditure in establishing a grapevine that you own in Australia and use in a primary production business. [section 387-305(1)]

Exception

The deduction is not available for expenditure on draining or clearing land. [section 387-310]

When is the deduction available?

The deduction is spread over four years commencing when the grapevine is established. [subsections 387-305(2), (3)] Limit on deductions

The deduction is not available for any period when the grapevine is not:

·
owned by you; and/or
·
used by you in a primary production business. [subsection 387-305(2)]

Destruction of grapevine

If the grapevine is destroyed, you can deduct the balance of the capital expenditure less any amounts, such as insurance recoveries, received as a result of the destruction. [section 387-315]

Extended meaning of owner

You will be taken to own a grapevine if:

·
it is on land that you hold under a quasi-ownership right granted to you by a government agency; and
·
it was planted by you or a former holder of such a right. [section 387-320]

Recoupments

The recoupment provisions will apply. [Subdivision 20-A]

Mains electricity supply [Subdivision 387-E]

What the subdivision will do

Subdivision 387-E will allow a deduction for expenditure on mains electricity connections to land on which businesses are carried on. [sections 387-350 and 387-370]

The general rule

If you have an interest in land in Australia, or are a share farmer carrying on business on land in Australia, you can deduct capital expenditure on connecting power to land or upgrading the connection.

You or another person must intend to use the electricity in a business producing assessable income. [subsection 387-355(1)]

When is the deduction available?

Deductions are spread over 10 years. [subsection 387-355(2)]

What is connecting power to land or upgrading the connection?

Broadly, it is:

·
connecting mains electricity cable to the metering point;
·
installation of metering equipment;
·
installation of equipment for use in the supply of mains electricity to the metering point; and/or
·
work done to increase capacity. [section 387-360]

Time limit

You have 12 months from when the resulting electricity is first supplied to begin to use the electricity in a business. [section 387-365]

Limit on other deductions

If you have deducted an amount for expenditure on mains electricity supply neither you nor any other entity can deduct an amount under any other provision of the 1997 Act. [section 387-375]

Partnerships and partners

Partners claim a deduction of the proportion agreed among them or in proportion to their share of the partnership net income or loss. [section 387-380]

Recoupments

The recoupment provisions will apply. [Subdivision 20-A]

Telephone lines [Subdivision 387-F]

What the subdivision will do

Subdivision 387-F will allow a deduction for the cost of connecting telephone lines to land on which a primary production business is conducted. [section 387-400]

The general rule

If you have an interest in land in Australia, or are sharefarming it, you can deduct capital expenditure on a telephone line on, or extending to, that land.

You or another entity must be carrying on primary production on the land when the expenditure is incurred. [subsection 387-405(1)]

When is the deduction available?

Deductions are spread over 10 years. [subsection 387-405(2)]

Limit on deductions

Broadly, a deduction for telephone lines is only available to the entity which incurred the cost of its initial installation. [sections 387-410, 387-415]

Limit on other deductions

If you have deducted an amount for expenditure on a telephone line neither you nor any other entity can deduct an amount under any other provision of the 1997 Act. [section 387-415]

Partnerships and partners

Partners claim a deduction of the proportion agreed among them or in proportion to their share of the partnership net income or loss. [section 387-420]

Forestry roads and timber mill buildings [Subdivision 387-G]

What the subdivision will do

Subdivision 387-G will allow deductions for forestry roads and timber mill buildings. [section 387-450]

The general rule

You can deduct an amount for capital expenditure on construction or acquisition of:

·
a forestry road used in a timber operation; and/or
·
a timber mill building used by you in carrying on a business of milling timber. [sections 387-460 and 387-465]

How much can you deduct?

Your deduction in any income year is a portion of your total capital expenditure worked out by:

·
subtracting your previous deductions; and
·
dividing the result by the remaining life of the forestry road or timber mill building. [section 387-470]

The remaining life

This is the lesser of:

·
your estimate of how long the forestry road or timber mill building will be used for the purpose for which it was constructed or acquired; and
·
25 years. [section 387-470]

Limits on when you can deduct

Deductions are discontinued once you sell or stop using the forestry road or timber mill building or it is destroyed. A balancing adjustment is required if this happens. [sections 387-480, 387-485]

Limit on your capital expenditure on acquisition from another entity

Usually, if you acquire a forestry road or timber mill building from another entity, your capital expenditure will be the price you paid for it. In some circumstances it may be a lesser amount. [section 387-475]

Exception

No balancing adjustment is required if Common rule 1 (roll-over relief for related entities) applies. [Subdivision 41-A, subsection 387-505(1)]

Common rules

Common rules 1, 2 and 3 will apply. [Division 41 and section 387-505]

B. Discussion of changes

Commissioners discretions to be replaced with objective tests

Change

Objective tests will replace some administrative discretions.

Explanation

To bring the rewritten law more in line with the self assessment system, the following discretions in the 1936 Act will be replaced by objective tests:

Provisions Subject How replaced
70A(1)(d) Mains electricity supply Replaced with an objective test. [subparagraph 387-355(1)(b)(ii)]
75B(7) Facilities to conserve or convey water Replaced with a test of reasonableness. [section 387-135]
75B(14) Facilities to conserve or convey water Replaced with a test of reasonableness. [sections 41-65 and 387-145]
75D(7) Landcare operations Replaced with a test of reasonableness. [section 387-70]
75D(9) Landcare operations Replaced with a test of reasonableness. [section 41-65 and subsection 387-65(2)]
124F(4) Forestry roads and timber mill buildings Replaced with a test of reasonableness. [section 387-500]
124G(4), 124JB(4) Forestry roads and timber mill buildings Replaced with a test of reasonableness. [section 387-490]
124JE Forestry roads and timber mill buildings Replaced with a test of reasonableness. [section 41-65, subsection 387-505(2)]

Consolidation of recoupment provisions

Change

As explained, various provisions requiring recoupment of deductible expenditure have been standardised and consolidated. [Subdivision 20-A]

Explanation

The consolidated recoupment provisions standardise and avoid repetition of provisions that apply to more than one deductible expense.

The provisions covered by this Division that are affected by this change are subsections 70A(8), 75AA(9), 75B(5) and 75D(9) of the 1936 Act.

Application of Division 41 Common rules

Change

The Common rules will apply to this Division, as follows:

Subdivision Common Rule 1 Common Rule 2 Common Rule 3
387-A Does not apply Applies as modified by section 387-65 Does not apply
387-B Does not apply Applies as modified by section 387-145 Does not apply
387-D Does not apply Does not apply Does not apply
387-E Does not apply Does not apply Does not apply
387-F Does not apply Does not apply Does not apply
387-G Applies without modification Applies without modification Applies without modification
[Section 387-505(1)] Section 387-505(1) [Section 387-505(2)] [Section 387-505(3)]

Explanation

Common rules for capital allowances are a new feature of the rewritten law. Where it is appropriate to do so they standardise and avoid repetition of provisions that apply to more than one capital allowance.

Subdivision 387-A Landcare operations

Section 387-60 Definition of landcare operation.

Change

The term landcare operation is defined in this section.

Explanation

The existing law allows deductions for various operations that relate to preventing or fighting land degradation. In the rewritten law these operations are referred to collectively as landcare operations. Landcare is a widely used and understood term.

Section 387-65 No deduction for most plant

Change

This section takes account of the rewrite of Section 54 of the 1936 Act and states clearly the existing rule that no deduction is allowable for plant other than some types of fences, dams and structural improvements.

Explanation

Under the existing law the deduction for capital expenditure on landcare is not available for expenditure on plant or articles, except for:

·
fences erected for a purpose now described in paragraphs 387-60(1)(a) or (b); or
·
a dam or structural improvement (except a fence) now covered by paragraph (c), (d), (e) or (f) of the definition of plant in section 42-18.

Section 387-65 Adjustment: non-arm's length transactions

Change

This section modifies the application of Common rule 2.

Explanation

Common rule 2, as modified by this section, will apply to capital expenditure on landcare operations. It will apply where you acquire property and you pay an amount that is greater than the market value of the property. This is consistent with the existing law.

Subdivision 387-B Facilities to conserve or convey water

Section 387-130 Definition of water facility

Change

The term water facility is defined in this section.

Explanation

The term water facility has been defined to make clear what capital expenditure is deductible under Subdivision 387-B.

Section 387-145 Adjustment: non-arm's length transactions

Change

This section modifies the application of Common rule 2.

Explanation

Common rule 2, as modified by this section, will apply to capital expenditure on a water facility. It will apply where you acquire property and you pay an amount that is greater than the market value of the property. This is consistent with the existing law.

Subdivision 387-E Mains electricity supply

Section 387-360 Definition of connecting power to land or upgrading the connection

Change

The term connecting power to land or upgrading the connection has been defined in this section.

Explanation

Under the existing law it is not readily apparent that the deduction for mains electricity supply extends to expenditure on upgrading supply. The new definition makes this clear.

Subdivision 387-F Telephone lines

Subsection 387-410 (1) (b) No deduction for expenditure which qualifies for depreciation deductions

Change

Clarifies the extent to which the telephone lines and depreciation provisions apply to the cost of a telephone line.

Explanation

A drafting device in subsection 56(3) of the 1936 Act ensures that, to the extent that the cost of telephone lines could be depreciated under section 54 or deducted under section 70, the cost is to be depreciated. This has been omitted because its presentation is confusing. The same result has been achieved by making this aspect clear in this provision.

Subsections 387-410 (2) &(3) Deduction where the installer of the telephone line has claimed deductions

Change

Allows a deduction for capital expenditure on a telephone line where a deduction for it has also been allowed to the entity which installed it for the taxpayer.

Explanation

The existing law allows a deduction to the taxpayer who paid for the initial installation of a telephone line. The rewrite ensures that a deduction is still available to a taxpayer when a contracted installer has claimed deductions for their costs of installing the telephone line.

Subsection 387-410(2) applies when the installer has claimed a deduction for any amount relating to the telephone line. An example of this would be where the installer has claimed a deduction for the cost of cabling. The taxpayer who paid to have the telephone line installed will still be entitled to a deduction.

Subsection 387-410(3) applies similarly when the contracted installer has taken the cost of an item into account in working out a deduction under another provision of the Act. An example would be a depreciable machine used to lay the telephone line.

Subdivision 387-G Forestry roads and timber mill buildings

Section 387-460 Merging of deductions for expenditure on forestry roads and timber mill buildings

Change

The provisions for forestry roads and timber mill buildings have been merged into one Subdivision.

Explanation

The rewritten law merges two similar capital allowances which allow the write-off of capital expenditure on forestry roads and timber mill buildings. The only substantive difference between the existing subdivisions is their commencement dates and the merging has no practical impact.

Section 387-475 The write-off of previously deductible forestry roads or timber mill buildings

Change

You will be able to write off a road or building on the basis of the price you paid for it, unless the Commissioner exercises a discretion to restrict your capital expenditure.

Explanation

The existing law expressly limits your capital expenditure to the vendor's residual capital expenditure plus any balancing adjustment included in their assessable income. The Commissioner has a discretion to allow the road or building to be written off on the basis of your purchase price.

Under the rewritten law, if you acquire a forestry road or timber mill building from another taxpayer who was entitled to claim deductions for it, you will be able to calculate your deductions on the basis of the price you paid for it. The Commissioner will have an anti-avoidance discretion to reduce that purchase price.

In exercising the discretion, the Commissioner will take into account:

·
the relationship between the parties;
·
the market value of the road or mill building;
·
how the price paid was calculated; and
·
how the purchase was financed.

Section 387-500 Capital expenditure on re-use of a timber mill building

Change

When a taxpayer resumes using a timber mill building after a period of non-use, deductions will be allowed on a reasonable basis.

Explanation

Under the existing law, if you stop using a forestry road or timber mill building, a balancing adjustment is made. This has the effect of reducing the balance of your capital expenditure to nil. The existing law explicitly provides that, where you recommence use of a forestry road after a period of non-use, the Commissioner may determine an amount of capital expenditure on which deductions may be based. There is no equivalent provision for timber mill buildings.

This change aligns them.

Section 387-505 Application of Common rules

Change

This section applies Common rules 1, 2 and 3 to this subdivision.

Explanation

As explained earlier, there are 3 Common rules and they will all apply to capital expenditure on forestry roads and timber mill buildings.

C. Provisions of the old law that have not been rewritten

Some provisions of the existing law have not been included in the rewritten law because they are redundant or have no ongoing application. They are summarised in the following table:

Provision Subject Reason for omission
subsections 70(1A), 70A(1A), 75AA(1A), 75B(1A), sections 124EA, 124JAA Application of debt forgiveness provisions Provisions are unnecessary. The debt forgiveness provisions apply without the need for these provisions.
paragraphs 70A(11)(c), (d) Meaning of certain terms. The provisions are drafting measures not needed in the rewritten provisions.
section 75A Deduction for certain expenditure on land used for primary production incurred before 24/8/83. It has no current or ongoing application.
subsection 75AA(10) Assessment can be amended at any time to reduce deduction where expenditure recouped. It is redundant in view of the recoupment provisions in Subdivision 20-A.
subsections 75B(2), (3) Deduction for capital expenditure on conserving or conveying water incurred on or before 19/9/85. It has no current or ongoing application.
subsection 75B(3C) Pre 20/9/85 contracts for construction or installation. It has no current or ongoing application.
subsection 75B(6) Pre 14/4/80 contracts for construction or installation. It has no current or ongoing application.
subsections 75B(11)-(13) Pre 14/4/80 contracts for acquisition of plant or structural improvements It has no current or ongoing application.
subsection 75B(15) Meaning of certain terms. It is unnecessary because of the definition of water facility.
subsection 75D(6) Expenditure prior to 1/10/80 It has no current or ongoing application.
subsections 75D(10)-(13) Rearrangement of pre 1/10/80 contracts It has no current or ongoing application.
subsection 124F(5) Expenditure prior to 1/7/56 It has no current or ongoing application.
subsection 124JA(4) Expenditure prior to 1/7/63 It has no current or ongoing application.

D. Transitional arrangements

Part 1 of Schedule 11 to the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this chapter.

Part 1 comprises only one item, which will insert in Chapter 3 of the Income Tax (Transitional Provisions) Act 1997 new Part 3-45, Division 387. Division 387 will set out how and when those rewritten sections will apply.

The rewritten provisions will apply to assessments for the 1997-98 or later income years. The transitional provisions allow capital expenditure not fully written off under the old law to be written off under the new provisions. [sections 387-50, 387-120, 387-300, 387-350, 387-400 and 387-450, Transitional Provisions Act]

In some cases, it is necessary to specify that the rewritten provisions apply to deductions claimed in the 1997-98 or later income years even though certain key events may have happened before that time.

Those events are explained in the following table:

Transitional section Subdivision Purpose of provision
387-80 Subdivision 387-A Treats a management plan that was approved before the commencement of Subdivision 387-A as also having effect under that subdivision, and a plan approved under Subdivision 387-A as also having effect under section 75D of the existing law.
387-85 Subdivision 387-A Provides that approvals and authorities in force immediately before the commencement of Subdivision 387-A also have effect after that commencement, and that approvals and authorities under Subdivision 387-A are also effective for the purpose of applying section 75D of the existing law.
387-140 Subdivision 387-B Ensures that, where the old law disallows a deduction to a taxpayer who acquires a water facility for which the previous owner could claim deductions, this is maintained in the rewritten law.
387-315 Subdivision 387-D Ensures that capital expenditure on the establishment of a grapevine that has been deducted under the old law is taken into account in determining the deduction allowable on destruction of the grapevine.
387-375 Subdivision 387-E Ensures that taxpayers can claim deductions to which they are entitled under the old law if they have not claimed them before the commencement of Subdivision 387-E.
387-410 Subdivision 387-F Ensures that deductions for the balance of a taxpayer's capital expenditure on a telephone line incurred under the old law are available under Subdivision 387-F.
387-415 Subdivision 387-F Ensures that taxpayers can claim deductions to which they are entitled under the old law if they have not claimed them before the commencement of Subdivision 387-F.
387-470 Subdivision 387-G Treats a taxpayers residual capital expenditure on an access road used in a timber operation or a timber mill building under the old law as capital expenditure on a forestry road or timber mill building immediately after the commencement of Subdivision 387-G.
Where a taxpayer ceased tax deductible use of a forestry road or timber mill building before the commencement of Subdivision 387-G but recommences that use after it, the taxpayers capital expenditure under the rewritten law will be the same as under the old law.
387-472 Subdivision 387-G Deductions a taxpayer claimed in prior years for forestry roads or timber mill buildings are taken into account in calculating deductions and balancing adjustments under the rewritten law.
387-485 Subdivision 387-G Deals with situations where the prior owner of a forestry road or timber mill building was eligible for roll-over relief under the old law when the taxpayer acquired it from them. If the prior owner was eligible for relief, the balancing adjustment will have been postponed. This section ensures that the rewritten law takes account of the prior owner's capital expenditure and deductions by treating:

·
amounts deductible to the prior owner as deductible to the taxpayer; and
·
capital expenditure of the prior owner as the taxpayers capital expenditure.

387-505 Subdivision 387-G Modifies Common rule 1 so that it takes into account:

·
rules contained in the old law; and
·
roll-over relief obtained under the old law

if a disposal of a forestry road or timber mill building takes place after the commencement of Subdivision 387-G.
387-507 Subdivision 387-G Where the forestry road or timber mill building was acquired before the 1997-98 income year, capital expenditure incurred under the old law will be counted in determining whether the test in the non-arm's length transaction rule is satisfied.

E. Consequential amendments

Amendments of the Income Tax Assessment Act 1997

Part 2 of Schedule 11 will amend the 1997 Act to update references to provisions rewritten in Division 387.

Updated references

Section 10-5 of the 1997 Act contains a list of all the provisions of both the 1936 and 1997 Acts that deal with particular kinds of income. Section 12-5 of the 1997 Act contains a similar table that deals with deductions. Part 2 of Schedule 11 will update references to provisions rewritten in Division 387. [Schedule 11, Part 2: items 2 to 11]

Section 40-30 of the 1997 Act contains a table of all the capital allowances. Part 2 of Schedule 11 will update references to existing provisions that have been rewritten in Division 387. [Schedule 11, Part 2: items 12 to 23]

Section 41-5 of the 1997 Act has a table of how the Common rules in Division 41 apply to various capital allowances. Part 2 of Schedule 11 also updates those references for provisions rewritten in Division 387. [Schedule 11, Part 2: items 24, 25]

Section 43-70 refers to items that are not included in construction expenditure. Part 2 of Schedule 11 updates references to the provisions as rewritten in Division 387. [Schedule 11, Part 2: item 26]

Section 995-1(1) of the 1997 Act contains tables for calculating the termination value and written down value of property for particular capital allowances. Part 2 of Schedule 11 updates the tables adding references to forestry roads and timber mill buildings. [Schedule 11, Part 2: items 32 and 36]

New Dictionary terms

Part 2 of Schedule 11 will add to the Dictionary (section 995-1 of the 1997 Act) new definitions of terms used in the rewritten provisions in Division 387 and a definition of timber operation in the existing law which is inserted without change. [Schedule 11, Part 2: item 34]

Definitions that are new or changed are explained below.

New Definition : Approved management plan [Schedule 11, Part 2: item 27]

Commentary : Approved land management plan is defined in subsection 75D(14) of the 1936 Act. The definition incorporates the definitions of approved land management plan and land management plan in subsections 75D(14) and 75D(19) of the existing law.

New Definition : Connecting power to land or upgrading the connection [Schedule 11, Part 2: item 28]

Commentary : Under the existing law it is not readily apparent that the deduction for mains electricity supply extends to expenditure on upgrading supply. To indicate more clearly what expenditure is deductible the term connecting power to land or upgrading the connection has been defined.

New Definition : Forestry road [Schedule 11, Part 2: item 29]

Commentary : The term forestry road has been adopted to more clearly indicate what activity a road must be used for if expenditure is to be deductible.

New Definition : Landcare operation [Schedule 11, Part 2: item 30]

Commentary : The existing law allows deductions for various operations that relate to preventing or limiting land degradation. In the rewritten law these operations have been collectively referred to as landcare operations.

New Definition : Metering point [Schedule 11, Part 2: item 31]

Commentary : The deduction for connecting mains electricity supply is only available for connections to the point where consumption of electricity supplied to the land through a mains electricity cable is measured. The term metering point has been used in Subdivision 387-E to indicate this.

New Definition : Timber mill building [Schedule 11, Part 2: item 33]

Commentary : The existing law allows deductions for buildings used as part of timber milling businesses. The new term timber mill building, in subdivision 387-G, encapsulates this requirement.

New Definition : Water facility [Schedule 11, Part 2: item 35]

Commentary : The term water facility has been defined to make clear what capital expenditure is deductible under Subdivision 387-B.

Application of amendments

The amendments made by Part 2 of Schedule 11 apply to assessments for the 1997-98 and later income years. [clause 4 Tax Law Improvement Bill] This ensures that consequential amendments take effect at the same time as substantive amendments relating to capital allowances for primary producers and land-holders.

Amendments of the Income Tax Assessment Act 1936

Part 3 of Schedule 11 will amend the 1936 Act to:

·
insert references to the rewritten provisions contained in Division 387 where the 1936 Act currently refers to the existing provisions; and
·
close off the application of provisions of the 1936 Act that have been rewritten in Division 387, so that the existing provisions apply only to the 1996-97 and earlier income years.

Inserting references to rewritten provisions

Part 3 of Schedule 11 will insert in the 1936 Act updated references to the rewritten provisions of Division 387. There are two categories of these amendments as discussed below.

The first will add a reference where a provision being consequentially amended:

·
has not yet been rewritten and closed off; and
·
can apply to amounts relating to more than one income year (including an income year earlier than 1997-98).

A reference to a rewritten provision will also be added in cases referring to a Division or Subdivision of the 1936 Act which is only partially rewritten. [Schedule 11, Part 2: items 45 to 50]

The second category will replace references to existing provisions in sections of the 1936 Act that:

·
have not yet been rewritten and closed off; and
·
apply to amounts that relate to only one income year at a time, being the 1997-98 or a later income year. [Schedule 11, Part 2: items 43, 51 to 57]

Closing off the application of existing provisions

Part 3 of Schedule 11 will insert new provisions into the 1936 Act to close off the application of existing provisions that have been rewritten or are redundant. [Schedule 11, Part 2: items 38 to 42, 44]

The existing provisions closed off will only apply to the 1996-97 and earlier income years. This complements the transitional provisions in Part 1 of Schedule 11 which ensure that the corresponding rewritten provisions apply to the 1997-98 and later income years.

Chapter 12 - Miscellaneous Amendments

This chapter explains amendments to the following legislation:

·
the Income Tax Assessment Act 1997;
·
the Income Tax Assessment Act 1936;
·
the Income Tax (Consequential Amendments) Act 1997; and
·
other Commonwealth legislation.

These amendments make minor consequential amendments to these Acts to take account of changes to the 1936 Act not discussed in earlier chapters.

Overview of this chapter

This chapter covers the provisions in Schedule 12 to the Tax Law Improvement Bill 1997. It explains the amendments that need to be made to the 1997 Act, the 1936 Act, the Income Tax (Consequential Amendments) Act 1997 and other Commonwealth legislation, because of changes to the 1936 Act.

Amendments of the Income Tax Assessment Act 1997

Part 1 of Schedule 12 will amend the 1997 Act to:

·
adjust very minor technical issues of drafting and expression [Schedule 12, Part 1: items 1, 2, 3, 5, 6, 8, 9 and 13] ; and
·
account for the passage of rules for commercial debt forgiveness as enacted by the Taxation Laws Amendment Act (No. 2) 1996. [Schedule 12, Part 1: items 4, 7, 10 to 12]

Amendments of the Income Tax Assessment Act 1936

Part 2 of Schedule 12 will amend the 1936 Act to:

·
substitute a new subsection 124ZZJ(5) to ensure that expenditure that is either qualifying expenditure within the meaning of Division 10D of the 1936 Act or is part of a pool of construction expenditure within the meaning of Division 43 of the 1997 Act is taken not to be establishment expenditure of a horticultural plant. [Schedule 12, Part 2: item 14]
·
account for the passage of rules for commercial debt forgiveness as enacted by the Taxation Laws Amendment Act (No. 2) 1996. [Schedule 12, Part 2: items 15 to 22]

Amendments of the Income Tax (Consequential Amendments) Act 1997

Part 3 of Schedule 12 will amend the Income Tax (Consequential Amendments) Act 1997 to accord with amendments of the 1936 Act.

The Income Tax (Consequential Amendments) Act 1997 will amend some provisions now being rewritten by the Tax Law Improvement Bill 1997. For provisions that, as a result, will have no ongoing operation after the Bill is passed, the amendments are to be repealed. [Schedule 12, Part 3: items 23, 24, 25, 26, 27, 28]

Sub-section 51(7) of the 1936 Act prevents deductions for payments of training guarantee charge. The Income Tax (Consequential Amendments) Act 1997 amends the sub-section to refer to deductions under section 8-1 of the 1997 Act. Because the Training Guarantee legislation has been repealed, such a deduction could not now arise under the 1997 Act. Therefore, the amendment will be omitted [Schedule 12, Part 3: item 26] .

The Income Tax (Consequential Amendments) Act 1997 will also amend provisions in other Commonwealth legislation that refer to provisions of the 1936 Act that have been rewritten. In some cases, those provisions in the other legislation have been repealed, so that the related amendments are now not required [Schedule 12, Part 3: item 29] .

Amendments of other Commonwealth legislation

Part 4 of Schedule 12 will amend Commonwealth legislation to:

·
insert a new provision, clause 54A, in the Airports (Transitional) Act 1996 to ensure that deductions allowable to the Federal Airports Corporation under Division43 of the Income Tax Assessment Act 1997 are transferred to the new operators of Australia's federal airports [Schedule 12, Part 4: item 30] ; and
·
adjust the Legislative Instruments Act 1996, the Social Security Act 1991, the Student and Youth Assistance Act 1973 and the Veterans Entitlements Act 1986 to correct minor errors and update references due to the Income Tax Assessment Act 1997. [Schedule 12 Part 4: items 31 to 35]

Chapter 13 - Dictionary

This chapter summarises how the proposed new law deals with definitions and the changes this Bill will make to the Dictionary of defined terms contained in the 1997 Act.

Overview of this chapter

This chapter covers the definitions that the Tax Law Improvement Bill 1997 will add to the 1997 Act.

Part A of this chapter summarises how you can locate the definitions in the new law.

Part B explains how the Bill will incorporate definitions in the law.

Part C lists the new definitions and explains any changes from the definitions in the existing law.

A. Summary of how the definitions can be located

The Dictionary, located at the end of the 1997 Act (in Chapter 6), is the central reference point for locating the meaning of defined terms used in the new law.

All defined terms are listed in section 995-1. Each entry in that section either:

·
sets out a defined term and its definition; or
·
directs the reader to where the term is defined.

The detail of the definitions is signposted in many cases. These are where it is more convenient and helpful to readers to place the definition where it is most relevant.

All defined terms (except a small number of common terms) will be identified by the symbol *, which will precede the term the first time it is used in each subsection.

Chapter 12 of the Explanatory Memorandum to the 1997 Act has a more detailed explanation of how the new law deals with definitions.

B. How this Bill incorporates new definitions in the law

The rewritten provisions that this Bill will insert into the 1997 Act, use many terms that are not yet defined in that Act.

Definitions of those terms will be included in the Dictionary by consequential amendments to subsection 995-1(1). The consequential amendments are contained in Part 2 of Schedules 2 to 12 of this Bill.

C. Discussion of the definitions

This Part of the chapter lists all the definitions that the Bill will add to the 1997 Act.

If there is a change in the use of a term, or a new term has been used, the list directs readers to the subject chapter that explains the change or new term. The explanations are included in Part E (consequential amendments) of each subject chapter.

Part B of each subject chapter also discusses any changes to the law caused by adopting a definition already in the 1997 Act (eg. using a standard definition instead of a slightly different one in the old law).

In the following explanations:

No change means that the term and its meaning from the 1936 Act are unchanged, although the words may have been changed to use a clearer or simpler style.

New label , previously ' [word or expression] ' means that a concept called ' [word or expression] ' in the 1936 Act has been given a new label in the 1997 Act.

New term means that the term is not defined in the 1936 Act.

Revised definition means that there has been substantive change in the meaning of the term appearing in the 1997 Act compared with the 1936 Act.

abnormal income No change.
Aboriginal No change.
accrued leave transfer payment No change.
approved management plan New term, explained in Chapter 11 of this Explanatory Memorandum.
approved occupational clothing guidelines No change.
artwork New label, previously eligible artwork.
assessable recoupment New term, explained in Chapter 3 of this Explanatory Memorandum.
associated government entity New term, explained in Chapter 8 of this Explanatory Memorandum.
Australian government agency New term, explained in Chapter 9 of this Explanatory Memorandum.
balancing adjustment event New term, explained in Chapter 8 of this Explanatory Memorandum.
bereavement subdivision No change.
business meeting New term, explained in Chapter 7 of this Explanatory Memorandum.
car depreciation limit New label, previously motor vehicle depreciation limit.
child No change.
closing balance No change.
connecting power to land or upgrading the connection New term, explained in Chapter 11 of this Explanatory Memorandum.
consideration receivable on the disposal of a leased car. The amount receivable under an insurance policy if a leased car is lost or destroyed is added to the list of things that are consideration receivable. Explained in Chapter 4 of this Explanatory Memorandum.
consideration receivable for trading stock changing hands. No change.
cost of a unit of plant for depreciation purposes. There is no change to the general concept of cost. However the rules are clarified and some new rules added. The changes are explained in Chapter 8 of this Explanatory Memorandum.
cost of an item of trading stock New label, previously cost price. A minor difference for live stock acquired by natural increase is explained in Chapter 10 of this Explanatory Memorandum.
cultural organisation No change.
current year Revised definition, explained in Chapter 3 of this Explanatory Memorandum.
design No change.
diminishing value method New term, explained in Chapter 8 of this Explanatory Memorandum.
diminishing value rate New label, previously annual depreciation percentage.
dining facility New label, previously eligible dining facility.
disease No change.
disentitling event New term, explained in Chapter 10 of this Explanatory Memorandum.
disposal year New label, previously the terms the year to which the election relates, the year of income in which the live stock were disposed of and the year of income in which the live stock died or was destroyed or disposed of.
distributing body No change.
effective life No change.
entertainment New label, previously provision of entertainment.
environmental organisation New term, explained in Chapter 6 of this Explanatory Memorandum.
exempt Australian government agency Revised definition. It covers those Australian government agencies that are exempt from income tax. The term was introduced by the 1997 Act and defined by reference to provisions in the 1936 Act. Some of those provisions have been rewritten in this Bill. The revised definition refers directly to rewritten provisions contained in this Bill. This will cause no change to the law. Explained in Chapter 9 of this Explanatory Memorandum.
FIF No change.
foreign investment fund No change.
forestry road New label, previously access road.
friendly society No change.
friendly society dispensary No change.
fringe benefit In the 1936 Act where the term fringe benefit appears, it is stated to have the meaning it has in the Fringe Benefits Tax Assessment Act 1986. Here, it is formally defined to have the same meaning.
goes for at least 4 hours New term, explained in Chapter 7 of this Explanatory Memorandum.
horse opening value New label, previously opening value.
horse reduction amount New label, previously reduction amount.
Industry Secretary No change.
in-house dining facility No change.
installed ready for use New term, explained in Chapter 8 of this Explanatory Memorandum.
landcare operation New term, explained in Chapter 11 of this Explanatory Memorandum.
legal practitioner New term, explained in Chapter 5 of this Explanatory Memorandum.
leisure facility Revised definition. Explained in Chapter 5 of this Explanatory Memorandum.
live stock No change.
member of the Forces New term, explained in Chapter 9 of this Explanatory Memorandum.
metering point New term, explained in Chapter 11 of this Explanatory Memorandum.
mining payment No change.
non-compulsory New term, explained in Chapter 5 of this Explanatory Memorandum.
non-compulsory uniform No change.
notional depreciation amount New term, explained in Chapter 8 of this Explanatory Memorandum.
notional depreciation for a lease period New label, previously the amount of depreciation that is deemed in accordance with subsection 26AAB(6) to have been allowable to the lessee in respect of the unit of property, in respect of the period of the relevant lease agreement.
notional income No change.
notional written down value New label, previously notional amount.
occupation specific clothing No change.
opening balance No change.
ordinary payment New term, explained in Chapter 9 of this Explanatory Memorandum.
pension age No change.
period of the loan New term, explained in Chapter 5 of this Explanatory Memorandum.
plant The 1997 Act currently refers to the definition in section 54 of the 1936 Act. The Bill replaces the section 54 definition with a new definition in the 1997 Act. Explained in Chapter 8 of this Explanatory Memorandum.
pool No change.
previous recoupment law New term, explained in Chapter 3 of this Explanatory Memorandum.
primary production business New label, previously business of primary production, explained in Chapter 10 of this Explanatory Memorandum.
prime cost method New term, explained in Chapter 8 of this Explanatory Memorandum.
prime cost rate New term, explained in Chapter 8 of this Explanatory Memorandum.
proceeds of the disposal or death New label, previously three separate terms: proceeds of the sale of the live stock, proceeds of the disposal of the live stock and proceeds of the death of the live stock.
proceeds of the sale of 2 wool clips New term, explained in Chapter 10 of this Explanatory Memorandum.
profit on the disposal of a leased car New term, explained in Chapter 4 of this Explanatory Memorandum.
protective clothing No change.
provide a fringe benefit New label. In the 1936 Act the terms provide and fringe benefit are defined by reference to section 136(1) of the Fringe Benefits Tax Assessment Act 1986. The new label results in no change to the law.
quasi-owner New term, explained in Chapter 8 of this Explanatory Memorandum.
recognised tax adviser New label, previously recognised professional tax adviser.
recoupment New term, explained in Chapter 3 of this Explanatory Memorandum.
recreational club New label, previously club as defined in subsection 51AB(1) of the 1936 Act. The defined term club in the 1997 Act will be repealed. That word will now take its ordinary meaning. This results in no change to the law.
reduction amount New label, previously the amount applicable in relation to the animal.
registered tax agent No change.
related entity New label, previously associated person.
roll-over event New term, explained in Chapter 8 of this Explanatory Memorandum.
royalty No change.
seminar No change.
Senior Executive Service office No change.
supplementary amount No change.
tax free amount No change.
tax profit on the disposal or death New label, previously four separate terms: profit on the disposal of the live stock, profit on the death of the live stock, profit arising in respect of the death of the live stock and profit arising in respect of the disposal of the live stock.
termination value The Bill adds to the table of termination values contained in section 995-1 of the 1997 Act. Explained in Chapters 8 and 11 of this Explanatory Memorandum.
timber mill building New definition, explained in Chapter 11 of this Explanatory Memorandum.
timber operation No change.
trading stock No change.
undeducted cost New term, explained in Chapter 8 of this Explanatory Memorandum.
uniform New label, previously a component of non-compulsory uniform/wardrobe.
unused tax profit on the disposal or death New label, previously reduced profit on the disposal or death of the live stock.
value of an item of trading stock New term, explained in Chapter 10 of this Explanatory Memorandum.
water facility New term, explained in Chapter 11 of this Explanatory Memorandum.
written down value An addition to the table of written down values contained in section 995-1 of the 1997 Act. Explained in Chapter 8 of this Explanatory Memorandum.


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