Bills Digest No. 42 2002-03
Taxation Laws Amendment Bill (No. 5) 2002
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Contact Officer & Copyright Details
Taxation Laws Amendment Bill (No. 5)
27 June 2002
House: House of Representatives
Various dates as indicated in the
section on Main Provisions.
following abbreviations and acronyms are used throughout this Bills
Commissioner of Taxation
Income Tax Assessment Act
Income Tax Assessment Act
Income Tax (Transitional
Provisions) Act 1997
There are four Schedules to
this Bill with measures for the following purposes:
- Schedule 1 provides special transitional
arrangements for oyster farmers capturing oyster spat by the
traditional stick farming method. Oyster farmers using the
traditional stick farming method will be able to value certain
stock at the start of the 2001-2002 income year based on an amount
per stick used to capture the spat
- Schedule 2 prevents the possibility of double
taxation where an amount is paid in respect of work in progress
(partially completed work for which a recoverable debt has not yet
- Schedule 3 makes a number of technical
corrections and amendments to the capital allowances system,
- Schedule 4 enables the Commissioner to recover
all outstanding PAYG withholding amounts by making an estimate of
the debt. The taxpayer is allowed to have the estimate reduced or
revoked by giving the Commissioner a statutory declaration.
In view of the diverse nature of the measures
dealt with in this Bill, the background to the various measures is
considered under the Main Provisions.
Oyster farmers using the traditional stick
farming method have not included in trading stock the oysters they
hold and which are growing in the water. There would be a large
one-off excess in the value of their closing stock over their
opening stock (zero) if oyster farmers included the growing oysters
in stock in the 2001-2002 income year. The inclusion of this excess
in assessable income could cause severe financial hardship for some
farmers in the industry.
The amendments in Schedule 1
insert proposed section 70-41 into the IT(TP) Act
1997 and have the effect of giving growing oysters a special value
at the start of the 2000-2001 income year by a method proposed in
proposed subsection 70-41(6) which would relieve
the hardship which oyster farmers using the traditional stick
method would otherwise experience.
Reference is invited to paragraphs 1.27 to 1.33
Explanatory Memorandum(1) which sets out succinctly
the proposed method of valuation of opening stock.
As a result of various court decisions, the
taxation treatment of amounts paid or received in respect of work
in progress has given rise to the potential for the taxation of the
same amount twice, albeit in the hands of different taxpayers.
The amendments in Schedule 2
clarify the taxation treatment of payments and receipts in respect
of work in progress. Proposed section 25-95 to the
ITAA 1997 provides a deduction for work in progress amounts paid
and proposed section 15-50 to the ITAA 1997
includes in assessable income work in progress amounts
Proposed subsection 25-95(3)
gives a definition of work in progress amount. For an amount to be
work in progress amount it must satisfy the criteria in
proposed paragraphs 25-95(3)(a) and
(b). These criteria are that an entity agrees to
pay the amount to another entity, and that the amount can be
identified as being in respect of work (but not goods) that has
been partially performed by the recipient for a third entity, but
not yet completed to the stage where a recoverable debt has arisen
in respect of the work.
These amendments will remove any potential for
The amendments do not cover partly completed
goods (e.g. of manufacturers) which are normally brought to account
as trading stock.
These amendments apply to amounts paid on or
after 23 September 1998.
Paragraphs 2.2 to 2.7 of the Explanatory
Memorandum cover the cases that have led to the anomaly which these
amendments seek to rectify.
The introduction of the uniform capital
allowance system for depreciating assets and its general
application, giving deductions for some previously non-deductible
capital expenditure (referred to as 'black hole expenditure') were
key components of the New Business Tax System announced in
Attachment B of the Treasurer's Press Release of 21 September
The New Business Tax System (Capital
Allowances) Act 2001 introduced a new capital allowances
system to allow deductions for the cost of a depreciating asset
over a period that reflects the effective life of the asset. The
capital allowances rules are in Division 40 of the ITAA 1997.
Prior to the introduction of the new capital
allowances system in Division 40 of the
ITAA 1997 there were over 37 separate capital allowance regimes in
the income tax law that were not consistent. The uniform capital
allowance system is based on the following principles:
- a set of general rules to calculate the deduction for the
notional decline in the value of most depreciating assets
- a pooling mechanism under which some expenditures are pooled
and given deductions for the decline in the pool, and
- deductions, immediate or over a period of time, for certain
capital expenditure used in the primary production and the mining
Some of the key concepts that underline the
capital allowances system in Division 40 are set out below as they
would assist in appreciating the technical amendments. These are as
stated in the
Explanatory Memorandum to the New Business Tax System (Capital
Allowances) Bill 2001(3)
What the Division does
Division 40 provides a set of general rules (in
Subdivision 40-B) to calculate the deduction to taxpayers for the
notional decline in value of most depreciating assets they hold. It
also provides pooling mechanisms, under which some expenditures are
pooled and taxpayers are given deductions for the decline of the
pool. Further, it allows immediate deductions for certain other
What is a depreciating asset?
A depreciating asset
is an asset with a limited effective life that loses value over
that life because it is effectively used up.
What is not a depreciating asset?
Land, trading stock and most intangible assets
are not 'depreciating assets'.
Who is the holder of a depreciating asset?
Generally, this will be its legal owner. In
specific circumstances, entities other than legal owners will hold
When does the decline in value start?
Usually, once you first use the depreciating
asset or install it ready for use for any purpose. The deduction
for the decline will be adjusted if the asset is not used for a
taxable purpose (e.g. if the asset is for private use).
How is the decline in value calculated?
You choose between one of 2 formulas. Both
rely on the effective life of the asset, and generate a decline
writing the asset off regardless of changes to the actual market
value of the asset. Both produce an adjustable value, that is, the
amount remaining after the decline.
What is the asset's effective life?
It is the period that the asset can be used by
you or anybody else for income producing purposes, assuming it will
be subject to wear and tear at a reasonable rate and that it will
be maintained in reasonably good order and condition. You choose
between your reasonable assessment of the effective life and any
applicable 'safe harbour' determination of effective life by the
What is the asset's cost?
Generally, it is the amount you paid for it.
Special rules adjust this cost in certain cases, for example,
non-arm's length transactions. The cost rules are detailed in
What happens when you cease to hold
the asset? The balancing adjustment
You calculate a balancing adjustment. This
results in a further amount being included in assessable income (if
adjustable value is lower than termination value) or allowed as a
further deduction (if adjustable value is higher than termination
value). This calculation is set out in Subdivision 40-D.
Pooling for certain assets
A pooling mechanism can be used as an
alternative to calculating the decline in value using the general
formula. There is a pool for in-house software development
expenditure as well as for assets costing less than $1,000 or that
have declined in value below $1,000. This mechanism is set out in
The decline in value for certain primary
production assets and deductions for certain expenditure are
calculated separately. These separate rules are set out in
Subdivisions 40-F and 40-G.
Immediately deductible capital
You can calculate the decline in value of
certain capital expenditure that is immediately deductible. These
types of expenditure are set out in Subdivision 40-H.
Other capital expenditure deductible
over a period of time
You can calculate the deduction for the decline
in value of certain other deductible capital expenditure. The rules
for this calculation are set out in Subdivision 40-I.
A taxpayer has a choice of two methods to work
out the decline in value of a depreciating asset. The choice is
between the 'diminishing value method' and the 'prime cost
Diminishing value method
The decline in value using the diminishing value
method for an income year is worked out using the following formula
set out in section 40-70 of the ITAA 1997.
The base value is generally the cost of the
asset for the income year when the asset is acquired or in a
subsequent year the cost less the decline in value accounted for
that asset in previous income years.
Prime cost method
The decline in value using the prime cost method
for an income year is worked out using the following formula set
out in section 40-75:
It will thus be seen that the effective life of
an asset is a key determinant in ascertaining the decline in value
or depreciation in an income year.
When you stop holding a depreciating asset you
may have to include an amount in your assessable income, or deduct
an amount under a balancing adjustment.
The adjustment reconciles the decline with the actual change in
refers to seven categories of business related expenditure which
were not recognised in the income tax law prior to 1 July 2001 and
which were allowed as a deduction thereafter following the
acceptance of the recommendations in the Ralph Review. Deductions
for such expenditure are now provided in section 40-880 of the ITAA
- expenditure to establish a business
- expenditure to convert the business structure to a different
- expenditure to raise equity for a business
- expenditure to defend a business against a takeover
- costs to a business of unsuccessfully attempting a takeover
- costs incurred by a shareholder in liquidating a company that
carried on a business, and
- costs to stop carrying on a business.
The amount that can be deducted is 20 percent of
the expenditure for the income year in which it is incurred and for
each of the next four income years.
The technical amendments are intended to ensure
that the capital allowances system operates in the manner
envisaged. Some significant amendments are discussed below. The
Explanatory Memorandum to the Bill gives a comprehensive coverage
of the technical amendments and reference will be made to its
paragraphs for further information.
Prime cost method
The concept of cost is only relevant for
calculating the decline in value at the start or first year. Where
any adjustment has been made under any paragraph of subsection
40-75(2), the 'cost' in the formula for calculating the decline in
value needs to be replaced by the 'opening adjustable value'. The
amendments proposed by Items 17,
18 and 19 clarify the application
of the formula in the second and subsequent years in various
(Paragraphs 3.4 to 3.5 of the Explanatory
The amendments proposed by item
22 will define the 'remaining effective life' for
roll-over relief purposes as the period of an asset's effective
life that is yet to elapse at the time the transferor transfers the
asset to the transferee.
(Paragraphs 3.9 to 3.11 of the Explanatory
Item 23 repeals the existing
note to section 40-85(2) which defines 'opening adjustable value'.
It also introduces a new note which directs the reader to other
provisions which must be taken into account when working out the
opening adjustable value of an asset.
(Paragraphs 3.12 of the Explanatory
Subdivision 40-C indicates how the cost of a
depreciating asset is worked out. The cost of a depreciating asset
consists of two elements; the first and second elements. Section
40-180 deals with the first element and subsection 40-180(2) sets
out a table as to how it is to be worked out in seven different
situations listed as table items 1 to 7. It also provides that if
more than one item in the table covers the asset, it is necessary
to apply the last item that covers it. Item 25
reverses table items 5 and 6 to ensure that where roll-over relief
applies on the variation in the constitution of a partnership, the
cost of a depreciating asset is determined by reference to the
roll-over relief item.
(Paragraphs 3.13 to 3.19 of the Explanatory
The amendments in item 29 are
intended to ensure that where a luxury car is held by one or more
entities, the car limit is applied to the cost of the car and not
to each entity's interest in the car.
(Paragraphs 3.20 to 3.22 of the Explanatory
A balancing adjustment occurs for a depreciating
asset under paragraph 40-295(2)(b) when you stop 'holding' that
asset. This adjustment occurs in the case of a partnership which
undergoes a variation, as the variation has the effect of creating
a new partnership with the effect that the old partnership stops
'holding' the relevant partnership assets.
The amendment proposed by item
32 ensure that the adjustment occurs when you stop
'holding an interest' in the asset. Also the amendment proposed by
item 37 replaces the word 'held' in paragraph
40-340(3)(b) with the words 'had an interest in' [the asset]. '
This is intended to cover a situation where one
or more partners have an interest in a partnership asset prior to a
variation and continue to have an interest after the variation. In
this case, the partners, and the partnership, are not affected by a
(Paragraphs 3.23 to 3.25 of the Explanatory
The amendment in Item 33 will
ensure that the termination value can be worked out when an asset
is allocated to a low-value pool and when a person who held that
asset dies. In this case the termination value will be so much of
the closing pool balance for the income year in which the person
died as is reasonably attributable to that asset.
(Paragraphs 3.26 to 3.28 of the Explanatory
- Expenditure to establish a business structure
It was intended that only capital expenditure
incurred in establishing a business structure should be allowed as
a deduction under paragraph 40-880(a). Item 40
amends this paragraph by substituting 'business structure' for
business. Item 41 inserts an example at the end of
paragraph 40-880(1)(a) so as to clarify that it is the capital
expenditure in incorporating a company, partnership or trust or
some other structure that is the subject of the deduction under
- Expenditure to convert a business structure to a different
Item 42 inserts an example at
the end of paragraph 40-880(1)(b) to clarify that the cost of
conversion will include the costs of transferring the assets from
the previous structure such as a partnership to a new structure
such as a company.
- Expenditure to raise equity for the business
Item 43 inserts an example at
the end of paragraph 40-880(1)(c) to clarify that the expenditure
to raise equity for the business will also include expenditure such
as preparing a prospectus to raise capital for business
- Expenditure to defend a business against a takeover
Item 44 inserts an example at
the end of paragraph 40-880(1)(d) which illustrates that
expenditure incurred in complying with subsection 633(1) or 635(1)
of the Corporations Act 2001 would be expenditure incurred
to defend a business against a takeover.
Subsection 633(1) of the Corporations Act
2001 sets out the steps to be taken in an off-market bid and
subsection 635(1) sets out the steps in a market bid. In
consequence the expenditure incurred in taking those steps will be
covered by paragraph 40-880(1)(d).
- Costs of a business of unsuccessfully attempting a
Item 45 inserts an example at
the end of paragraph 40-880(1)(e) which illustrates that
expenditure incurred in complying with subsection 633(1) or 635(1)
of the Corporations Act 2001 would be expenditure incurred
in attempting a takeover albeit unsuccessfully.
- Costs to stop carrying on your business
Items 46 and
47 amend paragraph 40-880(1)(g) to make it clear
that it is the costs to stop carrying on your business that comes
within this paragraph. Further, an example is inserted at the end
of that paragraph which shows that the legal costs in terminating
the services of employees is covered by this paragraph.
(Paragraphs 3.37 to 3.71 of the Explanatory
Generally the amendments take effect from 1 July
2001. The amendments that relate to provisions that were inserted
as part of the capital allowances system will apply in accordance
with the application provision to the capital allowances system
(i.e. from 1 July 2001) [Schedule 3, subitem 100(1), (2)
Proposed section 222AGA to the
ITAA 1936 specifies the circumstances when the Commissioner may
make an estimate for the recovery of amounts not paid to the
Commissioner and the things that the Commissioner may
have regard to in making the estimate.
The Commissioner may make an estimate under
proposed subsection 222AGA(2) when a person has
become liable under a provision to pay an amount to the
Commissioner and the liability to pay that amount remains
undischarged after the due date.
The factors to be taken into account when the
Commissioner makes an estimate are:
- amounts deducted; or
- amounts withheld from payments; or
- payments received; or
- non-cash benefits provided;
during a period earlier than the period when the
Proposed paragraph 222AGB(2)(e)
provides that if the person or the person's trustee gives the
Commissioner a statutory declaration substantiating the actual
unpaid amount of the liability to which the estimate made by the
Commissioner relates, the estimate will be reduced accordingly.
These amendments will apply to PAYG withholding
amounts that are due and payable in the year ended 30 June
2002 and in subsequent years.
The tax system has undergone a massive change
since 1 July 2000 and it is to be expected that there will be
ongoing refinements to the legislation which gave effect to these
changes. This Bill is an example of the technical amendments that
have became necessary to give expression to the intent of the
reform measures. Further, the need to contain aggressive tax
planning to protect the community's revenue system makes it
necessary for the Australian Taxation Office (ATO) to seek amending
legislation of the type proposed in this Bill from time to time.
There are compliance costs associated with such changes but that is
a price that is inevitable in the interests of maintaining the
integrity of the tax system. The Commissioner of Taxation has
reiterated that every effort is being made by the ATO to assist the
community to reduce compliance costs wherever possible:
There are inevitably compliance costs associated
with any tax system. Given the magnitude of the changes to our tax
system, it is unrealistic to think that we could get everything
operating at its most efficient from day one.
Our challenge and a priority of equal importance
to improving the integrity of the tax system is to work with the
community to reduce compliance costs wherever possible.
We have already taken a number of steps in this
- Explanatory Memorandum to the Taxation Laws Amendment Bill (No.
- The Hon. Peter Costello MP, 'Small Business and Primary
Producers to Benefit from the New Business Tax System', Press
Release, 21 September 1999
- Explanatory Memorandum to the New Business Tax System (Capital
Allowances) Bill 2001.
Tax Reform implementation and the way forward Address by the
Commissioner of Taxation, Mr Michael Carmody (22 August 2001).
2 October 2002
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