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This Digest was prepared for debate. It reflects the legislation as
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CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details
Taxation Laws Amendment (Landcare and Water Facility Tax
Offset) Bill 1998
Date Introduced: 28 May 1998
House: House of Representatives
Portfolio: Treasury
Commencement: The amendments described in
this Digest commence on Royal Assent and apply from the 1997-98
income year.
To allow a tax
offset (rebate) for eligible expenditure by primary producers on
conserving or conveying water or on the prevention or treatment of
land degradation. The rebate applies to expenditure incurred before
the end of the 2000-2001 income year.
Water
Facilities
Currently, Division 387-B of the Income Tax
Assessment Act 1997 (the 1997 Act) allows a deduction over
three years for expenditure on conveying or conserving water,
including capital expenditure for such purposes. The three year
deduction period represents an accelerated rate of deduction
compared to the normal capital depreciation rules. One third of the
expenditure is deductible in each of the three years. To qualify
for the deduction a number of conditions must be met, the most
important being:
- that the expenditure relates to capital or recurrent
expenditure carried out by a taxpayer who is a primary producer in
Australia and is carrying out primary production on the land to
which the expenditure relates
- the expenditure relates to the acquisition, construction or
installation of plant or structural improvements related to the
conservation or conveyance of water and
- the expenditure must be incurred primarily or principally for
the conveyance or conservation of water.
Items covered by the accelerated deduction
include dams, water tanks, bores, wells, irrigation channels and
pipes.
The problems associated with water conservation
impose many ecological and economic difficulties for Australia. The
diversion of water for economic purposes such as irrigation has
resulted in severe ecological effects in rivers such as the Snowy,
where the river flow has been reduced to minimal levels. There are
also substantial salinity problems associated with the change in
flows of rivers and the diversion of water for irrigation, as
demonstrated in the Murray-Darling Basin. While irrigation is an
essential part of the production of a substantial portion of
Australia's primary produce, the use of open channels for
irrigation where evaporation and leakage are major problems. The
tax concessions available provide encouragement for the use of
piped irrigation water which can result in a higher effective use
of the available water.
Land
Degradation
The reduction in the quality of Australia's soil
is of major concern, with consequences such as reduced productivity
and soil erosion. It has been estimated that financial losses from
land and water degradation amount to approximately $1.4 billion per
year.(1) The Commonwealth became increasingly involved in funding
to prevent or combat land degradation in the 1980s, with tax
concessions introduced in 1980. Since then there have been a number
of other programs designed to assist in the prevention or combating
of land degradation, including:
- the National Soil Conservation Program introduced in 1983
- the removal of tax concessions for tree clearing
- the Commonwealth/State agreement on the Murray-Darling Basin
and
- the One Billion Tree program.
Since the early 1990s the principal focus has
been in the Landcare programs. Landcare Australia was incorporated
as a non-profit company in 1989 and includes representatives of the
Commonwealth, Australian Conservation Foundation and the National
Farmers' Federation. Landcare promotes public awareness and
encourages public participation in landcare activities. It supports
and liases with local landcare groups and distributes funds to
local landcare groups. Landcare Australia's principal means of
funding are Commonwealth grants and sponsorship, donations and
licence fees. In 1997, Landcare Australia received $1.11 million in
Commonwealth grants and $1.33 million in sponsorship, donations and
licence fees. The National Landcare Program is administered by the
Department of Primary Industries and Energy. In 1996-97 the
Government announced the establishment of National Heritage Trust
which is to provide $1.25 billion over 6 years to 2001-02 for
activities relating to conservation and sustainable management of
Australia's land, water and biodiversity.(2)
A deduction is allowed for capital expenditure
by a primary producer or a person carrying on a business to gain
assessable income from rural land where the expenditure is for:
- the eradication of animal or vegetable pests
- the destruction of weeds or plant growth detrimental to the
land
- preventing or combating land degradation other than by the
erection of fences (eg. to combat erosion)
- the erection of fences to keep out stock and vermin from areas
affected by land degradation for the purpose of combating or
preventing land degradation
- the erection of fences to divide the land into different
classes where this is done in accordance with a land management
plan
- the construction of levee banks or similar structures and
- the construction of land drainage works.
With the exception of the construction of levee
banks and similar structures, the expenditure must be primarily and
principally for one of the above purposes (section 387-55 of the
1997 Act).
Prior to the 1996 general election, the
Coalition announced that it proposed the introduction of a rebate
as an alternative to the deductions that can be claimed for water
facilities and landcare expenditure. The deduction is most useful
where the taxpayer's assessable income is sufficient to enable the
full value of the deduction to be accessed, ie. when the taxpayer
is on the highest marginal tax rate. As the taxpayer's assessable
income falls, so does the value of the deduction. In contrast, a
rebate reduces the amount of tax payable equally regardless of the
income of the taxpayer (assuming the amount of tax payable is at
least the amount of the rebate that can be claimed).
Further details of the proposed rebate were
announced by the Treasurer and the Minister for Primary Industries
and Energy in a Press Release dated 12 May 1998 and included:
- the rebate would be funded by $80 million from the National
Heritage Fund
- the rate of rebate would be 34 cents in the dollar
- the maximum expenditure subject to the rebate would be $5 000
for water facilities and $5 000 for Landcare projects
- the rebate would only be available to taxpayers with an income
up to $20 700 a year (ie. those on the lowest marginal tax rate)
and
- if a taxpayer could not use the full rebate in a year (which
will occur when the amount of tax they are liable for is less than
the rebate) the remainder will be carried forward to later
years.
The Press Release did not refer to the fact that
the rebate will only be available for expenditure before the end of
the 2000-2001 income year.
The rebate will be introduced by
proposed Division 388 which will be inserted into
the 1997 Act by item 13 of Schedule 1 of the Bill.
Proposed section 388-55 provides that if a
taxpayer could claim a deduction in relation to water facilities or
landcare, they will be able to claim a tax offset (ie. a rebate) of
a maximum of $5 000 in relation to each type of expenditure so long
as the taxpayer's taxable income is $20 700 or less and the
expenditure is incurred before the end of the 2000-2001 income
year.
The rate of rebate will be 34% for landcare
expenditure and 34% of one third of the expenditure on water
facilities in the income year and the succeeding 2 years
Proposed Division 65, which
will be inserted into the 1997 Act by item 8,
deals with the carrying forward of proposed Division
388 tax offsets. The priority order for tax offsets is
foreign tax credits, then landcare and water facilities and finally
any other tax offsets as listed in the Act. The amount carried
forward will be that not previously claimed, less:
- any amount used to offset a higher priority offset and
- if the taxpayer has taxable income during the year, 34% of any
net exempt income.
Tax offsets must be applied in the reverse of
the priority order, so that general tax offsets are to be applied
first, then the landcare and water facility offset and, finally,
foreign tax credits (proposed section 65-35).
Generally, a company will not be able to use a
tax offset if it would not be allowed as a deduction due to
subdivision 165-A of the 1997 Act (which prevents deductions where
there has been a change in ownership or control in the loss
year).
Application: For the 1997-98 and later income
years.
- Australian National Audit Office, Report No. 36, 3.
- Ibid., 4.
Chris Field
24 June 1998
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
© Commonwealth of Australia 1998
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