Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
General outline and financial impact
Amends Item 192 of the Sales Tax (Exemptions and Classifications) Act 1992 (ST(EC)A 1992) to ensure that sales tax exemption for goods incorporated into properties owned by, or leased to, always exempt persons (AEPs) or the government of a foreign country is only available for the purchase of goods principally for their own use or for use by organisations conducting the business of AEPs or the government of a foreign country.
The following types of property will also be ineligible for sales tax exemption:
- shops and shopping centres;
- apartment blocks.
Date of effect: The amendment applies to dealings after 2 April 1998, unless the goods concerned were acquired on or before 2 April 1998.
Proposal announced: The amendment was originally contained in Taxation Laws Amendment Bill (No. 4) 1998 which was introduced into the House of Representatives on 2 April 1998. That Bill lapsed when Parliament was prorogued.
Financial impact: Estimated gain in revenue of $10 million in 1997-98 and $50 million in 1998-99 and subsequent years.
Compliance cost impact: The Compliance Cost Impact Statement is incorporated into the Regulation Impact Statement which appears at the end of Chapter 2 of the Explanatory Memorandum.
- There is a deficiency in the sales tax law which allows a private entity who has a contract with an AEP or a government of a foreign country (foreign government) to obtain the benefit of a sales tax exemption for certain goods incorporated into properties owned by, or leased to, that AEP or foreign government. That deficiency can only be overcome by making an amendment to the ST(EC)A 1992.
- The amendment will have the effect that private entities who have contracts with AEPs or foreign governments will no longer be entitled to the sales tax exemption for goods attached to land owned by, or leased to, AEPs or foreign governments, where the land is not used by the AEP or foreign government but used by a private entity as, eg. a casino, shopping centre or other commercial development.
- The amendment facilitates competitive neutrality:
- between entities operating on properties owned by or leased to an AEP or foreign government and entities who conduct a similar business on other properties without access to sales tax free goods; and
- between functions performed directly by AEPs or foreign governments and functions carried out by a private entity on behalf of an AEP or foreign government.
- This measure will result in an estimated gain to revenue of $10 million in 1997-98 and $50 million in 1998-99. The compliance costs for this measure cannot be reliably quantified because it is uncertain how many people have structured their arrangements to gain the unintended access to the sales tax exemption. The administrative costs to the Australian Taxation Office (ATO) of this change relate mainly to advising clients on the application of the proposed amendments to various construction projects. The compliance costs to taxpayers (including contractors and subcontractors involved in the construction or repair of properties belonging to or leased by an AEP or a foreign government) due to this change involve:
- learning about the change to the law; and
- incurring costs in obtaining professional advice as to their tax status.
- The benefit of removing the unintended access to the exemption outweighs the costs of this measure. The ATO will monitor this measure as part of the whole taxation system on an ongoing basis, as well as obtaining feedback through consultation with professional, small business and other taxpayer consultation forums.
Amends the income tax law to:
- include an amount in the assessable income of a taxpayer where amounts are unpaid on the termination of a hire purchase or limited recourse debt arrangement. The adjustment will apply where capital expenditure has been financed by the hire purchase or limited recourse debt but, because amounts remain unpaid, deductions have been allowed that exceed deductions that would be allowable if based on actual outlays.
- treat taxpayers who acquire capital assets by hire purchase or installment sale as the owners of those assets for the purpose of determining eligibility for capital allowance deductions and relevant anti-avoidance provisions.
- treat a hire purchase or installment sale as though it were a loan transaction. If the asset is used for income producing purposes, the hire purchaser is able to deduct the finance charge component of the hire purchase payments, and the financier is taxed on that component of the payments, but not the payments themselves.
Date of effect: Adjustments to taxable income relating to unpaid amounts under hire purchase and limited recourse debt arrangements apply to such arrangements which terminate after 27 February 1998. The rules which treat hire purchasers as the owners of assets under hire purchase, and a hire purchase arrangement as a sale, loan and debt transaction, apply to relevant transactions entered into after 27 February 1998.
Proposal announced: 1997-98 Budget, 13 May 1997 and by Press Release No. 60 of 1997 and No. 21 of 1998.
Financial impact: The gain to revenue from this measure will be approximately $40 million in 1998-1999, $50 million in 1999-2000, $50 million in 2000-2001, $50 million in 2001-2002, $50 million in 2002-2003 and $50 million in 2003-2004.
Cost of compliance impact: The initial and recurrent compliance costs are estimated to be less than $1 million per annum.
To ensure that total deductions for allowable capital expenditure do not exceed the total amount actually expended by a taxpayer where the expenditure has been financed under hire purchase or limited recourse debt arrangements.
Option 1: Insert a capital expenditure adjustment rule to apply on termination of the financial arrangement. The adjustment amount is the difference between the total net capital allowance deductions obtained and deductions that would be allowable on the basis of the capital amount actually expended by the taxpayer under the financing arrangement. The adjustment amount would be included in the borrowers assessable income.
Option 2: Incorporate a capital expenditure adjustment rule into existing adjustment calculations which apply on the disposal of property. This option would amend existing rules that apply to various capital allowance provisions. The amendment would ensure that any unpaid principal under the financial arrangement was included in the calculation of any adjustment rule on disposal of the relevant property.
Regulation Impact on Business
- This measure affects taxpayers claiming capital allowances on property financed by hire purchase or limited recourse debt and who do not discharge their payment obligations.
- The number of private ruling requests will increase in the short term. This workload is expected to be dealt with within existing resources.
- To the extent that proposed rules which treat a hire purchaser as the owner of the property for capital allowances will formalise the existing administrative practice, no significant additional compliance costs to taxpayers are expected.
- Compliance costs are likely to be less under Option 1 because the adjustment rule would be common to all capital allowances.
- The initial and recurrent compliance costs of this proposal are estimated to be less than $1 million per annum on the expectation that only a small percentage of taxpayers will terminate their hire purchase or limited recourse debt transactions while amounts are unpaid.
Option 1 is preferred. It requires less complex legislative drafting and its application on the termination of the relevant financial transaction eliminates any additional adjustments that may be necessary if the capital expenditure adjustment were to apply on disposal of the underlying asset.
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