Revised Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 9 - Effective life and low-cost plant
9.1 This chapter explains 3 amendments that are being made to Division 42 of the ITAA 1997. These are in consequence of the introduction of the uniform capital allowance system.
9.2 Firstly, the effective life specified by the Commissioner that is to be available for plant will be made certain.
9.3 Secondly, an immediate deduction for plant costing $300 or less to certain taxpayers will be reintroduced as from 1 July 2000.
9.4 Thirdly, the effective life and the method of calculating deductions will be stipulated in certain circumstances.
9.5 In order to provide certainty to taxpayers, the effective life specified by the Commissioner that is to be available for plant, will be made certain.
9.6 The reintroduction of the immediate deduction for plant costing $300 or less to certain taxpayers will simplify the tax consequences of such assets, as well as reduce compliance costs to these taxpayers. Further, because the immediate deduction of plant costing $300 or less is currently available to small business taxpayers only, it will provide greater equity between taxpayers.
9.7 The stipulation of effective life and method in certain circumstances is an integrity measure.
9.8 Three major amendments will be made to Division 42 of the ITAA 1997 in Schedules 2 and 3 to this Bill:
- what effective life specified by the Commissioner is to be available for plant;
- the reintroduction of the immediate deduction for plant costing $300 or less to certain taxpayers as from 1 July 2000; and
- what effective life and calculation method is to be used in certain circumstances.
9.9 The Commissioner can determine the effective life of plant pursuant to section 42-110 of the ITAA 1997. However, due to a number of reasons including technological advances, the effective life of plant may periodically change. As a consequence the Commissioner may need to change the determination of the effective life of plant.
9.10 In order to ensure taxpayers can conduct their affairs with certainty, section 42-100 of the ITAA 1997 will be amended so that they will know what effective life determination made by the Commissioner will apply to their specific circumstances. This is achieved by using the effective life specified by the Commissioner for plant that is in force as at:
- the time when the taxpayer entered into a contract to acquire the plant, or otherwise acquired it, or started to construct the plant, so long as it was first used or installed ready for use for the purpose of producing assessable income within 5 years of that time;
- the time that the taxpayer entered into a contract to acquire or otherwise acquired the plant, or construction of the plant, commenced before 110 am, by legal time in the Australian Capital Territory, on 21 September 1999; or
- when the taxpayer first used the plant or had it installed ready for use for the purpose of producing assessable income.
[Schedule 2, item 1]
Example 9.1 Oilco Ltd signs a contract on 21 February 2000 for the building of 3 new oilrigs for the extraction of oil in the Timor gap. The rigs take 2 years to build, construction commencing 1 April 2000. Although Oilco Ltd know that there may be an effective life review for oilrigs, it currently uses the safe harbour rate of 10 years. Oilco Ltds analysis has shown that the project will be viable at this level of investment and at the rate of deduction based on this effective life. Without further information it continues to factor this safe harbour rate into its financial analysis. At the end of year one, the Commissioner completes a review of effective lives and releases a new Determination showing a life of 30 years for oilrigs.Under the proposed law the safe harbour effective life that Oilco Ltd can choose is the one that applied when it signs the contract to commence construction. This is because the criteria in paragraph 42-100(2)(a) have been satisfied as Oilco Ltd will start to use the asset within a 5-year period.
9.11 Currently, except for small business taxpayers, there is no immediate deduction for plant costing $300 or less. The immediate deduction was removed by the New Business Tax System (Miscellaneous) Act (No. 1) 2000 as from 1 July 2000. Instead, items of plant costing less than $300 are now pooled and depreciated over an effective life of 4 years using the diminishing value method.
9.12 In order to bring the current law in line with the uniform capital allowance system, an immediate deduction for plant costing $300 or less will be available to the owners or quasi-owners of such plant who are either small business taxpayers or taxpayers who:
- use the plant predominantly for the purpose of producing assessable income that is not from carrying on a business;
- do not acquire a set of assets on an item by item basis rather than as a set; and
- do not acquire one or more items of plant that are either identical or substantially identical in an income year where the total cost of these acquisitions is more than $300.
9.13 The second criterion ensures that taxpayers cannot disaggregate a set of assets by buying individual items from the set (each costing $300 or less) rather than buying the set itself (which costs more than $300) and claiming the immediate deduction. In addition, the third criterion ensures that taxpayers cannot claim immediate deduction for identical (or substantially identical) items of plant acquired in an income year where the individual item costs $300 or less but collectively they cost more than $300. For example, a landlord with a rental house cannot claim the immediate deduction in an income year for buying 2 identical lamps which individually cost $280. [Schedule 2, item 2]
9.14 This deduction has been made retrospective, with effect as from 1 July 2000. [Schedule 2, item 4]
9.15 Taxpayers who satisfy the criteria in paragraphs 90 and 90 cannot allocate this plant to a low-value pool. [Schedule 2, item 3]
9.16 For each unit of plant, a taxpayer must decide whether to apply the prime cost or diminishing value method for working out their deduction.
9.17 However, taxpayers must use the same method that their associate was using when they acquire plant from that associate.
9.18 Also, taxpayers must use the same method that the previous owner or quasi-owner of the plant was using where the end-user of the plant does not change. Examples of where this could occur are under sale and leaseback arrangements and by a lessee purchasing plant after the lease of the plant has ended.
9.19 Where taxpayers cannot readily ascertain the method that the former owner or quasi-owner was using, they must use the diminishing value method. This overcomes any difficulties in obtaining the necessary information to ascertain the method. [Schedule 3, item 1]
9.20 Taxpayers have a choice of using the Commissioners determination of effective life or self-assessing. However the choice is not available in 2 situations. First, where the taxpayer acquired the plant from an associate. In this case the effective life is the effective life of the plant that the associate was using if the taxpayer is using the diminishing value method. If the taxpayer is using the prime cost method then they must use the remaining effective life.
9.21 Second, where the end-user of the plant does not change. In this case the effective life is the effective life of the plant that was used by the previous owner or quasi-owner of the plant, if the taxpayer is using the diminishing value method. If the taxpayer is using the prime cost method then they must use the remaining effective life. Examples of where this could occur are under sale and leaseback arrangements and by a lessee purchasing the plant after the lease has ended. If the Commissioner later finds that the previous holder was using an incorrect effective life and amends the previous holders tax returns to reflect the use of a correct effective life, the effective life as reset by the Commissioner applicable to the previous holder will apply to the new holder.
9.22 Where taxpayers cannot readily ascertain the effective life that the former owner or quasi-owner was using, they must use the effective life of the asset as determined by the Commissioner. [Schedule 3, item 2]
9.23 The changes made by Schedule 3 apply to plant:
- acquired under a contract;
- commenced to be constructed by a taxpayer; or
- acquired in some other way,
on or after 100 am, by legal time in the Australian Capital Territory, on 9 May 2001. The changes apply to owners as well as quasi-owners.
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