Explanatory Memorandum(Circulated by authority of the Acting Treasurer, the Hon. Eric L. Robinson, M.P.)
The first Bill, the Income Tax Assessment Amendment Bill (No. 2) 1980 will give effect to four 1979-80 Budget announcements. These are the proposals for depreciation allowances for new traveller accommodation buildings; for special concessions for capital expenditure on the conversion or replacement of oil-fired industrial equipment to enable the use of alternative fuels; for a depreciation cost limit for cars and station wagons of $18,000; and for lessees to be taxed on profits from disposals of leased cars or station wagons.
Also being given effect are the proposals announced by the Treasurer on 6 March 1980 for increased rebates for dependants.
The Bill will also give effect to the proposals, announced on 8 April 1980, to take conversions of equipment after that date to liquefied petroleum gas (LPG) fuelling outside the scope of the special concessions for conversion of oil-fired equipment, and to extend those concessions to capital expenditure on the conversion or replacement after that date of equipment fuelled by LPG to enable the use of alternative fuels other than oil. Further amendments will mean that disposals of property within wholly-owned listed public company groups after 19 August 1979 (the date of announcement) will not disturb entitlements to the investment allowance. Deductions for gifts to the Australian College of Obstetricians and Gynaecologists are also being authorised.
The second Bill, the Income Tax (Rates) Amendment Bill (No. 2) 1980 will declare that indexation is to apply for the 1980-81 income year, with income ranges of the rates scale being adjusted for 1980-81 by one-half of the indexation factor for that year.
An outline of each of the main features of the Income Tax Assessment Amendment Bill (No. 2) 1980 is given below.
It is proposed to introduce a system of income tax deductions for capital expenditure on certain new income producing buildings, and extensions and conversions to buildings, used to provide short-term accommodation for travellers.
Fixed annual deductions of 2 1/2 per cent of the construction cost, i.e., spread over 40 years, will be allowed where construction of the eligible building commenced after 21 August 1979.
The construction cost of buildings in Australia, to the extent that they are to be used for the purpose of operating a hotel, motel or guest house containing at least 10 bedrooms wholly or principally to accommodate travellers will qualify for the purpose of deductions under the scheme.
Also eligible will be the construction cost of so much of a building as consists of not less than 10 apartments, units or flats that are wholly or principally to provide short-term accommodation in Australia to travellers. The construction cost of facilities provided in the building principally to service the eligible accommodation will also qualify.
Capital expenditure on extensions or alterations to a hotel, motel or guest house or to a building of apartments, units or flats will qualify to be allowed as deductions at the annual rate of 2 1/2 per cent where construction of the extension or alteration commenced after 21 August 1979 if, as extended or altered, the building meets the generally applicable rules for eligibility.
Deductions will be calculated by reference to the capital cost of constructing an eligible building, or of eligible extensions or alterations, including such preliminary expenses as architects fees, engineering fees and the cost of foundation excavations. (Costs of demolishing a building in order to build an eligible building on the site will not qualify.) The cost of plant contained in a building, e.g., lifts and air-conditioning plant, that is depreciable under the general depreciation provisions of the law will continue to attract deductions under those provisions only. Facilities of a kind that in Australia do not commonly form part of a hotel, motel or guest house will not be within the scheme.
The statutory 2 1/2 per cent deductions will generally be allowable in the first instance to the person who first owns the building, incurs the construction costs and uses the building for income-producing purposes. However, a lessee will be entitled to deductions where he or she incurs eligible construction costs. Where the ownership of, or a lease over, a building changes hands, entitlement to deductions will pass from the person previously entitled to the new owner.
Deductions will be allowable where parts of a building are owned or leased by different persons. In the case of a building containing apartments, units or flats, however, eligibility will be confined to persons who own or lease at least 10 of those apartments, units or flats.
Where an eligible traveller accommodation building is demolished or destroyed within the statutory 40 year period, a balancing deduction will be allowed in appropriate circumstances where the written down value (residual value) of the building exceeds any insurance or salvage recoveries.
The Bill also includes safeguards against tax exempt bodies attempting to benefit from the scheme under arrangements, made after the date of introduction of the Bill, that would enable a taxable entity to obtain deductions on terms that a substantial part of the resulting tax benefit is to be enjoyed by the exempt body.
It is proposed to enact a new section and Subdivision to provide special deductions, based on the existing investment allowance scheme, for the conversion or replacement of certain non-mobile oil-fired industrial equipment to enable the use of alternative energy sources.
In broad terms, these concessions are to apply to conversions or replacements to alternative energy sources, including natural gas, contracted for after 21 August 1979. The concessions are also to apply to the conversion or replacement of such oil-fired equipment to use LPG, where contracted for by 8 April 1980, and to the conversion or replacement of LPG fuelled equipment that is contracted for after 8 April 1980.
One such concession (clause 19) will be a conversion allowance deduction of 40 per cent of the cost of replacing oil-fired plant in use in Australia as at 21 August 1979 for producing assessable income. The deduction will be available, for replacement plant in use by 30 June 1984, in the year in which it is first used or installed ready for use, and will be in addition to depreciation allowances. Like the investment allowance, the replacement allowance will be available in respect of equipment held under long-term leasing arrangements.
A conversion deduction will also be available for expenditure incurred after 21 August 1979 and on or before 30 June 1984 on converting oil-fired equipment in use in Australia as at 21 August 1979 for producing assessable income.
As the expenditure will be deductible in the year of incurrence, the special conversion deduction will take the place of depreciation allowances otherwise available for the conversion costs.
Where leasing charges for a motor car or station wagon (including a four wheel drive vehicle) have been allowable as income tax deductions and the leased vehicle is acquired from the lessor after 21 August 1979 by the lessee (or a relative or other associate) and later disposed of, any profit arising from the disposal is to be included in whole or in part in the assessable income of the person deriving the profit, to the extent to which it is not otherwise taxable.
The amount to be so included will be limited by reference to certain factors including the amount of depreciation that is treated as having been allowed to the lessee over the period of the lease agreement on the prime cost basis. The legislation is structured to cover a sequence of disposals by a lessee and his or her associates, and in that event the maximum amount assessable in relation to any disposal after the first will be determined by reference to each of the limits, as reduced by any amounts included in any such person's assessable income by reason of any previous disposal of the vehicle. Once a vehicle has been disposed of by the lessee or an associate for a consideration that is not less than market value, the new measure will not apply in relation to any subsequent disposal.
For the year of income ending 30 June 1980 a limit of $18,000 will be applied to the cost price for depreciation purposes of a new or second-hand motor vehicle which is a motor car or station wagon (including a leased vehicle and a four wheel drive vehicle) and which is acquired after 21 August 1979 and first used during that year of income.
For vehicles first used during the 1980-81 income year the limit will be $18,000 indexed in accordance with the average level of increase in the motor vehicle purchase sub-group of the Consumer Price Index between the four quarters ended March 1980 and the four quarters ended March 1979. Similar indexation adjustments will apply in later years.
As a transitional measure, the limit will not apply to a vehicle acquired by a taxpayer after 21 August 1979 if it is acquired from a dealer or importer who had the vehicle in stock or on order under an irrevocable contract as at that date. This exception is to apply to the first user only of such a vehicle.
The concessional rebates that are allowed to taxpayers maintaining dependants and for a housekeeper, and that allowed to sole parents, are to be increased for 1980-81 and subsequent years. The rebate for a dependent spouse is to be increased from $597 to $800 and the rebates for a daughter-housekeeper, invalid relative, parent and a housekeeper, and that allowed to a sole parent, as well as the "notional" rebates for children under the zone allowance, are to be increased by an equivalent percentage.
The level of separate net income that a dependant may have before the relevant maximum rebate that would otherwise be allowable in respect of the dependant begins to "shade-out", is also to be increased by an equivalent percentage, from $203 to $272.
Gifts of the value of $2 or more made to the Australian College of Obstetricians and Gynaecologists are, like gifts to its predecessor body (the Australian Regional Council of the Royal College of Obstetricians and Gynaecologists), to be made tax deductible.
It is proposed to relax existing limitations on eligibility for the investment allowance that apply where plant is disposed of within the first twelve months of its use. Disposals within a wholly-owned listed public company group where there is no change in the underlying ownership of the plant by the group within that twelve months period will be taken outside the limitations.
It is also proposed that the investment allowance provisions be amended to overcome some technical deficiencies in safeguards against ineligible use of plant by lessees.
In outline, the Income Tax (Rates) Amendment Bill (No. 2) 1980 will declare the 1980-81 income year to be a prescribed year, that is, a year in which personal tax indexation is to apply. The Bill also amends the indexation provisions in the Principal Act so that the multiplier to be used in indexing the steps of the rates scale for 1980-81 will be one-half of the indexation factor established for that year. Further, it extends the matters affecting the Consumer Price Index to which regard is to be had in making regulations prescribing the indexation factor for a year, to include two additional criteria. The first concerns price increases resulting from specified changes affecting the costs of health and hospital insurance and services and the second the impact of steps towards import-parity pricing of crude oil already taken and of subsequent increases of a similar nature.
In the notes below, each Bill is explained in detail.