House of Representatives

Income Tax Assessment Bill 1996

Income Tax Assessment Act 1997

Income Tax (Consequential Amendments) Bill 1996

Income Tax (Transitional Provisions) Bill 1996

Income tax (Transitional Provisions) Act 1997

Explanatory Memorandum

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

Chapter 5 - Capital Allowances

This chapter summarises the different kinds of capital allowances, and their main features, and explains common rules that the Income Tax Assessment Bill 1996 will apply to some capital allowances.

Overview of this chapter

This chapter deals with the general rules for deductions for capital allowances.

The first part of the chapter summarises the rules for capital allowances as it is proposed they will appear in Divisions 40 and 41 of the Income Tax Assessment Bill 1996.

The second part explains the changes that the Bill proposes to make to the content of the law.

These Divisions bring together provisions on capital allowances which are scattered throughout the present Act.

A. Summary of the new law

Guide to Divisions 40 and 41

What does the Division do?

Division 40 will explain what a capital allowance is and will summarise the key features of all capital allowances.

Common rules

Division 41 will set out three common rules that apply to all capital allowances, unless specifically excluded:

·
Common Rule 1 - Roll-over relief for related entities
·
Common Rule 2 - Non-arm's length transactions
·
Common Rule 3 - Anti-avoidance provision relating to the ownership of property.

What a capital allowance is [Subdivision 40-A]

A capital allowance is

A deduction for certain types of capital expenditure that you can write off, either immediately or over a period of years.

Who can deduct?

Some allowances are available to taxpayers generally. Others are available to specific industries or for specific activities.

How much can you deduct?

Divide your expenditure by the number of years over which you can write it off.

Balancing adjustments

Some capital allowances require you to do a balancing adjustment if property is disposed of, lost, destroyed or no longer used for a qualifying purpose.

What is a balancing adjustment?

A balancing adjustment is a means of ensuring that the total amount you write off for property corresponds to your actual capital loss over the same period.

The adjustment is worked out by comparing the value of the property at the time of the disposal, loss or destruction with the written down value of the allowance. The written down value is the remaining expenditure in relation to the property which you are yet to claim.

If you get more for it than the written down value, the difference (up to what you have received in deductions) is included in your assessable income. If you get less, the difference is deductible.

Summary and finding table [Subdivision 40-B]

Summary Table

A table in this Subdivision summarises the key features of all capital allowances. It tells you:

·
what expenditure qualifies
·
who may claim it
·
how long the write off period is
·
what happens on disposal of the property.

It shows where the operative provisions are in the law.

Common Rules for Capital Allowances [Division 41]

Common rules

There are rules which are common to some capital allowances.

They also apply in a modified form to other capital allowances - see Chapter 8 of this Explanatory Memorandum.

Summary Table

A table in the Guide to this Division identifies which common rules apply to capital allowances that have been rewritten and included in this Bill. It also identifies when the rules apply in a modified form.

Common Rule 1 - Roll-over relief for related entities [Subdivision 41-A]

The rule is

If property is disposed of, a balancing adjustment can be deferred in certain circumstances. This is called roll-over relief .

Roll-over relief is available if

·
Under the capital gains provisions where property is disposed of in the following circumstances:

-
on marriage breakdown
-
by an individual to a wholly owned company
-
from a partnership to a wholly owned company of the partners
-
between related companies.

·
There is a change in the ownership due to change of partnership interests.

What is the effect of roll-over relief?

·
No balancing adjustment is required for that disposal.
·
The transferor loses any deduction entitlement for expenditure on the property.
·
The transferee gains the deduction entitlement (subject to satisfying any rules of deductibility).

What happens if there is a subsequent disposal and roll-over relief does not apply?

In calculating the balancing adjustment, the transferee will be treated as:

·
acquiring the property for an amount equal to the expenditure incurred by the transferor;
·
having been allowed the deductions the transferor has already been allowed.

Common Rule 2 - Non-arm's length transactions [Subdivision 41-B]

The rule is

If parties to a transaction do not deal with each other at arm's length and, as a result:

·
expenditure claimed as a deduction is greater than the market value of what that expenditure is for, or
·
the amount received on disposal of property for which a capital allowance has been claimed is less than the market value of what that amount is for;

then the expenditure or the amount received is adjusted to the market value.

Common Rule 3 - Anti-avoidance provisions relating to the ownership of property [Subdivision 41-C]

The rule is

Persons entitled to a capital allowance for property they do not own are treated as the owners for the purposes of applying anti-avoidance tests in section 51AD and Division 16D of the Income Tax Assessment Act 1936 .

B. Discussion of changes

Division 40 Overview of capital allowances

Change

This Division explains what a capital allowance is and summarises the main features of each capital allowance in the law.

Explanation

The existing law contains many kinds of capital allowances, all of which are dealt with separately. This Division will readily identify all the available capital allowances for the convenience of readers. It will also summarise the key features of each capital allowance, for easier understanding.

Division 41 Common rules for capital allowances

Change

Some common rules that can apply to a range of capital allowances are being brought together.

Explanation

Under the existing law, some rules apply in substantially the same way to various capital allowances. This causes unnecessary duplication and length. Adopting common rules will eliminate that duplication and make the law easier to understand.

New rules applying to roll-over relief for related entities

Clause 41-30 What is the effect of the roll-over on the transferor's and transferee's entitlement to a deduction?

This clause will explain the effect of roll-over relief on transferors and transferees of mining property.

Change

This clause streamlines the present detailed rules which apply for roll-overs about capital allowances for the mining and quarrying industries.

Explanation

This will be the operative section for roll-over relief for capital allowances. For the moment the change applies only to the mining and quarrying industries but in future it is expected to apply more broadly to other capital allowances.

The effect of this section is to transfer entitlements to deductions from transferors to transferees. Transferors give up deductions in the year of the transfer and subsequent years.

Transferees are treated as if they had incurred the original expenditure. They must also satisfy the capital allowance rules when seeking deductions.


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