House of Representatives

Income Tax Assessment Amendment Bill (No. 2) 1980

Income Tax Assessment Amendment Act (No. 2) 1980

Second Reading Speech

by the Acting Treasurer, the Hon. Eric Robinson, M.P.

The major purpose of this Bill is to give effect to four important taxation proposals announced in the 1979-80 budget speech.

Important for the tourist industry is a scheme of tax deductions for depreciation of new buildings for the accommodation of travellers. Important in the context of the need to conserve scarce energy resources are measures to ease the cost of converting or replacing oil-fired equipment.

The imposition of a maximum of $18,000 as the basis of depreciation allowances for cars and station wagons costing more than that is also to be provided by the Bill. The remaining budget measure will provide a means of taxing lessees of cars and station wagons on profits made on disposal of these vehicles.

The personal tax reliefs announced on 6 March 1980 are also contained in this Bill and in the related Income Tax (Rates) Amendment Bill (No. 2) 1980 that I will introduce shortly.

Other amendments in the Bill will give effect to the Treasurer's statement of 19 August 1979 that a disposal of plant during the first 12 months of its use - when made within public company groups - will not, in defined circumstances, cause the vendor company to lose its entitlement to the investment allowance. As foreshadowed, some technical deficiencies in the relevant provisions are also being remedied.

There are also one or two other items in the Bill. I will speak about these later but first I will give the House an account of the major subjects of the Bill.

Buildings for Traveller Accommodation

Following the announcement of this initiative in the 1979-80 budget speech, the Treasurer issued a very detailed statement about it on 23 December 1979. Except for some variations of the scheme to meet representations that have been made, the amendments proposed by the Bill are in accordance with the Treasurer's statement. I think therefore that I can now confine myself to key points.

The new allowance will authorise fixed annual deductions of 2 1/2 per cent of the construction cost of new buildings used in Australia to produce income by providing short-term accommodation for travellers. Eligible buildings will comprise hotels, motels, guest houses and apartment buildings, the construction of which started after 21 August 1979. To be eligible, a hotel, motel or guest house must contain at least 10 bedrooms wholly or principally to accommodate travellers. An apartment building must contain at least 10 apartments, flats or units available wholly or principally for short-term accommodation.

The allowance will also apply to some extensions or alterations to buildings if the extensions or alterations are started after 21 August 1979. For this work to be eligible the building, as extended or altered, must be a hotel, motel or guest house that contains at least 10 bedrooms for travellers or an apartment building that comprises at least 10 apartments, flats or units for short-term use by travellers.

It is desirable to note two changes that, as a result of representations received since then, have been made to the plan the Treasurer announced on 23 December.

The Treasurer indicated then that apartments, units or flats would be eligible for the new allowance only if the whole building consists of traveller accommodation units and associated facilities. On the other hand, he stated that, if a building comprises a hotel and, say, a major shopping centre, so much of the cost of the building as is referable to the hotel would qualify for the new allowance. The Government has now decided that this should apply also to buildings that include apartments, units or flats. Accordingly, where such a building consists of apartments, units or flats as well as shops, provision is to be made for the cost of the accommodation part of the building to be eligible for the proposed deductions.

The second change in the announced plan concerns the ownership of buildings that include apartments, units or flats. It had been indicated that buildings in this category would qualify only if the entire building is owned or leased by the taxpayer claiming the allowance. It has been decided to ease this requirement. This is being done in recognition of the fact that - in order to facilitate financing - such buildings may be owned by more than one person, for example, through separate strata titles.

At the same time, the Government considers that it ought not to depart from the basic "10 unit" test for the allowance. Accordingly, where there is more than one owner of a building containing apartments, units or flats for traveller accommodation, the allowance will be limited to taxpayers who own or lease at least 10 such suites in the building. While the Government accepts that this extension can be fitted within the scope of the scheme, I must say that it has added significantly to the complexity and length of the legislation.

In general, entitlement to the allowance will first vest in the owner of a building who uses it for purposes of producing assessable income and who incurs the cost of constructing or extending the building. The deduction will continue to be available in subsequent years, as long as the building continues to be used wholly or principally for the accommodation of travellers. Entitlement to the allowance will generally follow the ownership of the building over the 40 year period and balancing adjustments will not be made where a building is sold for an amount greater or less than its written down value for tax purposes at the time of the sale.

Where a person constructs a building on leasehold land, or otherwise incurs building costs as a lessee, that person will, subject o other requirements being met, qualify for the allowance while remaining the lessee. If the lease is assigned, entitlement to the deduction will pass to the assignee. If the lease terminates, any residual entitlement will pass to the owner to whom the building reverts.

Although there are to be no balancing adjustments on sale of an eligible building, such adjustments will be available when a building is destroyed. In this case, the owner or lessee will be allowed a deduction where the written down value (or undeducted cost) of the building exceeds the amount of any salvage or insurance recoveries accruing as a result of the destruction.

Deductions are, of course, to be available only where an eligible building is used for the production of assessable income.

It follows that, if a tax-exempt body incurs construction costs on a building that it owns, a deduction will not be available to the body. Moreover, there is to be a safeguard against tax exempt bodies attempting to benefit from the allowance under arrangements, made after today, that seek to confer entitlement to deductions on a taxable entity on terms ensuring that a substantial part of the resulting tax benefit is to be enjoyed by the exempt body.

I turn now to another subject.

Converting or Replacing Oil-Fired Plant

The Bill implements the proposal to provide special concessions to encourage the conversion or replacement of certain oil-fired business plant so that alternative energy sources will be used. The Treasurer gave comprehensive details of these concessions in a statement issued on 12 December 1979 and I think that, in this introductory speech, I can be relatively brief.

The amendments to give effect to this proposal also take into account the LPG taxation initiative announced by the Minister for National Development and Energy on 8 April 1980. That announcement varied the earlier statement by the Treasurer insofar as conversions or replacements involve LPG-powered plant.

The incentives take two forms. Where existing plant is converted, the cost of the conversion will be fully deductible in the year in which it is incurred. Where existing plant is replaced, the cost of the replacement plant is to qualify for a 40 per cent conversion allowance in addition to normal depreciation allowances. The conversion allowance - which, I think, all will acknowledge is a generous incentive - will be available in the year in which the replacement plant is first used or installed ready for use and held in reserve. It will take the place of any 20 per cent investment allowance that might otherwise have applied.

To qualify for either concession, the converted or replacement plant must be for use by an end user - who might be the owner or a lessee - wholly and exclusively in Australia and wholly and exclusively for the purpose of producing assessable income. Oil-fired plant being replaced or converted to other appropriate energy sources must have been in use - in Australia and in the production of assessable income - on the particular premises as at 21 August 1979, or be equipment for such use that an owner had by that date contracted to acquire or started to construct.

The concessions will be available in respect of both new and second-hand plant and there will be no qualifying monetary limit as there is for the investment allowance. It will not be relevant that the converted or replacement plant is of greater capacity than the plant that is being replaced or converted. Nor will the concessions be forfeited if the replaced plant is retained in an operational condition as back-up or booster plant, or where it would be uneconomic to remove it.

The concessions will also be available in respect of the cost of converting or replacing ancillary plant that is used primarily and directly in association with the main plant.

The concessions will not be available in respect of mobile plant or installations associated with such plant. Thus, road vehicles, ships, earthmoving equipment and forklift trucks will not be within the scope of the new concessions.

Like the investment allowance, the 40 per cent conversion allowance will be available in respect of leased plant. The primary entitlemeta to the allowance will rest with the owner - the leasing company - which will be able to transfer all or part of the allowance to the lessee-user. Conversion costs that are deductible to a leasing company will, however, not be transferable to a lessee.

I will not detain the House with a lengthy account of the various tests of a timing character. They are fully explained in the explanatory memorandum and it is enough to observe here that the concessions will apply to conversion or replacement, after budget day but before 1 July 1984, of plant held or contracted for at budget day. Expressed very broadly, conversions or replacements from oil-fired plant to LPG-fired plant made after budget day and on or before 8 April 1980 - but not after - will qualify. Correspondingly, conversions or replacements from LPG use after 8 April 1980 will be eligible.

$18,000 Depreciation Limit

Under this 1979-80 budget proposal there is to be a limit on the cost base for calculating depreciation allowances on new and second-hand cars and station wagons, including those that have four wheel drive. Such vehicles leased out by the owners or used to provide general services to the public will be included in the limitation.

A limit of $18,000 is to apply in respect of the 1979-80 income year while the limit for future years will be indexed by movements in the motor vehicle purchase sub-group of the Consumer Price Index. The movement to the end of the March 1980 quarter will, for example, provide the basis for the 1980-81 limit.

The limit fixed for a particular year will be applicable to a vehicle for the whole of the period of its ownership by a person. On its sale to another person, the then ruling limit will become applicable, again for all of the years that the new owner uses it and seeks depreciation allowances.

Honourable members will recall that there have been some transitional modifications of the original proposal that the $18,000 limit was to apply to vehicles acquired under contracts entered into after 21 August 1979. These modifications were announced by the Treasurer on 16 October 1979, and mean that vehicles that dealers and importess had on hand at, or had ordered by, 21 August 1979 may be excluded from the depreciation limit.

I should stress that these transitional arrangements will apply only in respect of the first owner-user of a vehicle covered by the transitional arrangements. Any subsequent owner-user of that vehicle will be subject to the limit that applies for the year in which he or she acquires and first uses the vehicle.

As reflected in the terms of the Bill, this will mean that the $18,000 limit will apply to a vehicle ordered by a taxpayer after 21 August 1979 unless the vehicle was on hand as trading stock of a dealer or importer at that date or was part of a firm order placed by such a person as at that date.

For cars and station wagons that are leased the limit will apply to the owner-lessor of the vehicle and will, of course, affect lessors regardless of the particular method they use to draw up their accounts.

Because of this adjustment to a lessor's depreciation allowances, there will be no restriction on a lessee's deduction for lease rentals.

Before leaving this proposal, I should mention that the Government has received further representations seeking either its complete withdrawal or its further modification. However, the Government remains convinced that there is sound justification for the limit.

Assessability of profits on sale of leased vehicles

The remaining 1979-80 budget announcement dealt with in the Bill is the proposed amendment to ensure that, where a car or station wagon has been held under a lease agreement and the charges payable under the agreement have been allowable as income tax deductions, any profit made by the lessee through an acquisition and subsequent sale of the vehicle will bear tax to an appropriate extent.

Provisions incorporated in the Bill for this purpose will apply to any profits on disposals of cars or station wagons, including four wheel drive vehicles, acquired from lessors after 21 August 1979. So that the intended effects of the provisions may not be circumvented, they are not to be limited to profits made by lesses only. They will necessarily extend also to a profit made on disposal of a vehicle by a relative or other associate of its lessee. Other safeguards against attempts to avoid the intended effects have also been included.

Under the new provisions, profit arising from the purchase and later disposal of a vehicle by a lessee or an associate is to be included in the assessable income of the person deriving the profit, to the extent to which it is not otherwise taxable in the hands of that person. The amount to be so assessed is, however, not to exceed an amount calculated to represent depreciation of the vehicle during the period it was under lease. There are also, I might add, provisions of an anti-avoidance nature dealing with a series of disposals of a vehicle.

Concessional Rebates

I turn now to non-budget measures contained in the Bill and it seems appropriate that I speak first about the substantial increases in concessional rebates that were announced by the treasurer on 6 March 1980 and which will have effect from the commencement of the 1980-81 income year.

The maximum rebate for a dependent spouse, a daughter housekeeper, and a housekeeper will be increased from $597 to $800. The rebate for a parent will rise from $539 to $722. Maintenance of an invalid relative will attract a maximum rebate of $362 rather than $270 and the sole parent rebate will be enlarged from $417 to $559. Notional rebates for children under the zone allowance provisions will be increased by an equivalent percentage.

The level of separate net income that a dependant may earn before the relevant maximum rebate is reduced will also be increased - from $203 to $272.

As indicated by the Treasurer when he announced them, these increases are greater than would have resulted from indexation and are a response to what the Government believes to be a relative disadvantage of single income families - particularly those on low incomes - under present taxation arrangements. The increased rebates will be reflected, together with the tax reductions resulting from indexation of the rates scale, in reduced paye deductions made from salaries and wages from 1 July 1980.

Investment Allowance

On 19 August 1979 the Treasurer foreshadowed amendments to the investment allowance provisions.

Under the present law, the investment allowance is automatically forfeited if, within 12 months of the first use of plant, the plant is disposed of or another person is granted a right to use it. The Government considers that, although this rule is necessary as a safeguarding measure, it should not operate to inhibit the re-organisation of public company groups for genuine business reasons.

Accordingly, the Bill modifies the "12 months" rule in the way outlined in the Treasurer's statement.

The Treasurer's statement also foreshadowed amendments to remedy some technical deficiencies in the rules for withdrawal of the investment allowance where plant is disposed of after being leased or where the lessee permits another person to use it. The Bill contains these amendments.


An amendment to the gift provisions will authorise deductions for donations of $2 or more to the Australian College of Obstetricians and Gynaecologists. This body has been set up in Australia to take over the functions of the Australian Regional Council of the Royal College of Obstetricians and Gynaecologists, donations to which have been tax deductible since 1956.


Finally, the Bill deals briefly with the matter of royalties derived from sources in Australia by residents of other countries. The recent Income Tax Assessment Amendment Bill 1980 contained measures arising from a court decision and, in part, amended the definition of "Royalty" so that it will include not only designated payments but also amounts credited but not actually paid over. Those amendments should have correspondingly changed the provisions that set out when royalties have a source in Australia but they omitted to take that further step. This purely technical deficiency is now being overcome, with effect from today.

Mr Speaker, I have spoken at some length about a number of matters that are of considerable complexity. Honourable members who want to do so will be able to find a more extensive explanation of the various measures in the explanatory memorandum that is being circulated.

I therefore commend the Bill to The House.