Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2004-2005-2006-2007
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TAX LAWS AMENDMENT (2007 MEASURES No. 6) BILL 2007
EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon Peter Costello MP)
Table of contents
Glossary ....................................................................................... 1
General outline and financial impact ....................................................... 3
Chapter 1 Capital expenditure for the establishment of
trees in carbon sink forests............................................ 7
Chapter 2 Tax-free grants for certain tobacco growers ................ 25
Chapter 3 Deductible gift recipients.............................................. 27
Chapter 4 Farm management deposits ........................................ 29
Index ..................................................................................... 33
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
CGT capital gains tax
Commissioner Commissioner of Taxation
DGR deductible gift recipient
Environment Minister Minister for the Environment and Water
Resources
Environment Secretary Secretary to the Department of the
Environment and Water Resources
FMD farm management deposit
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
1
General outline and financial impact
Capital expenditure for the establishment of trees in carbon
sink forests
Schedule 1 to this Bill amends Division 40 of the Income Tax Assessment
Act 1997 to provide a deduction for capital expenditure for the
establishment of trees in carbon sink forests.
Expenditure incurred on establishing trees in a carbon sink forest will be
immediately deductible in the period 2007-08 to 2011-12. After this
initial period, establishment costs will be deductible under a write-off rate
of 7 per cent per annum.
During both the initial period and after, the conditions for the deduction
will be analogous with the horticultural plant provisions.
Date of effect: Amendments provided for the income years 2007-08 to
2011-12 (inclusive) apply to the 2007-08 income year and later income
years.
Amendments provided for income year 2012-13 and later years apply to
the 2012-13 income year and later income years.
Proposal announced: This measure was announced in the Treasurer's
Press Release No. 39 of 8 May 2007.
Financial impact:
2007-08 2008-09 2009-10 2010-11
- -$4.65m -$8.53m -$11.13m
Compliance cost impact: Low.
Tax-free grants for certain tobacco growers
Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to
provide tax-free grants under the Tobacco Growers Adjustment
Assistance Programme 2006, to tobacco growers who undertake to exit all
agricultural enterprises for at least five years.
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Tax Laws Amendment (2007 Measures No. 6) Bill 2007
Date of effect: This measure will apply to all relevant payments made in
the 2006-07 and later income years.
Proposal announced: This measure was announced in the
2007-08 Budget.
Financial impact: This measure will have a cost to revenue of
$1.3 million in each of the 2007-08 and 2008-09 income years.
Compliance cost impact: Negligible.
Deductible gift recipients
Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 to
update the list of deductible gift recipients (DGRs).
Date of effect: Deductions for gifts to the Council for Jewish Community
Security, which is listed as a DGR under this Schedule, apply from
10 August 2007.
In addition, this Schedule extends the DGR listing of Australia for
UNHCR until 27 June 2012.
Proposal announced: The deductibility of gifts to the Council for Jewish
Community Security was announced in the Minister for Revenue and
Assistant Treasurer's Press Release No. 098 of 10 August 2007.
The extension for the deductibility of gifts to Australia for UNHCR
(United Nations High Commissioner for Refugees) was announced in the
Minister for Revenue and Assistant Treasurer's Press Release No. 102 of
17 August 2007.
Financial impact: This measure will have these revenue implications:
2007-08 2008-09 2009-10
-$0.02m -$4.64m -$5.30m
Compliance cost impact: Nil.
Farm management deposits
Schedule 4 to this Bill amends the farm management deposit scheme in
the Income Tax Assessment Act 1936 to align the tax law with the
4
General outline and financial impact
guidelines for declaring either all primary producers in a geographical
area, or specified classes of primary producers within a geographical area,
to be in exceptional circumstances.
Date of effect: This measure will commence from 1 July 2002.
Proposal announced: This amendment has not previously been
announced.
Financial impact: The revenue cost of this measure is expected to be nil.
However, there may be a small cost to revenue if taxpayers need to amend
their prior tax assessments.
Compliance cost impact: Nil.
5
Chapter 1
Capital expenditure for the establishment
of trees in carbon sink forests
Outline of chapter
1.1 Schedule 1 to this Bill amends Division 40 of the Income Tax
Assessment Act 1997 (ITAA 1997) to provide a deduction for capital
expenditure for the establishment of trees in carbon sink forests.
Context of amendments
1.2 Carbon sink forests are forests which are established for the
primary and principal purpose of sequestering carbon from the
atmosphere. The carbon stored in the growing forest can then be used for
greenhouse gas abatement purposes.
1.3 The costs of establishing trees in a carbon sink forest are capital
in nature and income may be generated from exploiting rights over the
carbon sequestered in the trees. Currently the costs of establishing trees in
carbon sink forests are not deductible.
1.4 Capital expenditure for the establishment of trees in carbon sink
forests will be inserted as a separate Subdivision in Division 40 of the
ITAA 1997. Division 40 provides for a uniform capital allowances
system. That system provides general rules that allow deductions for the
decline in value of depreciating assets based on their effective lives. As
well, Division 40 provides write-offs for certain other capital
expenditures, which do not result in a taxpayer holding a depreciating
asset, if that expenditure satisfies certain specific conditions.
1.5 Proposed Subdivision 40-J will be inserted to allow a deduction
for capital expenditure for the establishment of trees in carbon sink
forests.
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Tax Laws Amendment (2007 Measures No. 6) Bill 2007
Summary of new law
1.6 Establishment costs will be immediately deductible for trees
established in carbon sink forests in the 2007-08 to 2011-12 income years
(inclusive). After this initial period, establishment costs will be
deductible over 14 years and 105 days at a rate of 7 per cent per annum.
Comparison of key features of new law and current law
New law Current law
Establishment expenditure will be Establishment expenditure incurred
immediately deductible for trees in on trees in carbon sink forests is
carbon sink forests established in the currently not deductible on revenue
2007-08 to 2011-12 income years account, but may form part of the
(inclusive). After this initial period, cost base for the relevant interest in
establishment costs will be land.
deductible over 14 years and
105 days at a rate of 7 per cent
per annum.
Detailed explanation of new law
1.7 Proposed Subdivision 40-J will be inserted into Division 40 of
the ITAA 1997 to allow deductions for the establishment of trees in
carbon sink forests.
Income years 2007-08 to 2011-12 (inclusive)
Who is entitled to the deduction?
1.8 Taxpayers carrying on a business can deduct capital expenditure
incurred on establishing trees in a carbon sink forest. The requirement
that taxpayers must be carrying on a business is sufficiently broad to
allow those businesses who wish to abate their own greenhouse gas
emissions via a carbon sink forest to be eligible for the deduction.
[Schedule 1, item 6, paragraphs 40-1010(1)(a) to (c)]
1.9 The primary and principal purpose of establishing the trees must
be for carbon sequestration and can not include the purposes of felling the
trees or for using them in commercial horticulture. This deduction will
only apply to those taxpayers who establish trees as part of a carbon sink
forest. [Schedule 1, item 6, paragraphs 40-1010(1)(d) and (e)]
8
Capital expenditure for the establishment of trees in carbon sink forests
Example 1.1
A company acquires land and plants trees for the primary and principal
purpose of carbon sequestration. The landholder also runs a tourism
business, taking advantage of the spectacular location to run a bed and
breakfast and accompanying hiking tours. The hiking routes run
through the carbon sink forest to the edge of the property which takes
in the panoramic views.
The company will be entitled to deductions for expenditure on
establishing the carbon sink forest, as the primary and principal
purpose is one of carbon sequestration and the secondary purpose of
tourism is not an excluded purpose.
Example 1.2
A company specialises in the propagation of new species of trees for
the purpose of commercial horticulture. The company acquires land
and conducts 0.2 hectare test planting of a new species of waterless
trees. They plan to tend the test planting for a number of years before
the species will be ready for commercial sale. The trees in the test
planting sequester carbon and the company decides to trade in carbon
credits to supplement the tending costs.
The company will not be entitled to any deduction under the carbon
sink forest provisions for establishing the trees as their primary
and principal purpose was not one of carbon sequestration
(see paragraph 40-1010(1)(d)). In addition, the purpose of commercial
horticulture is excluded under subparagraph 40-1010(1)(e)(ii).
1.10 The deduction is not available for expenditure on establishing
trees in a carbon sink forest incurred by a managed investment scheme or
a forestry managed investment scheme. [Schedule 1, item 6,
paragraph 40-1010(1)(f)]
1.11 This does not exclude a forestry manager entity from operating a
separate business of trading in carbon offsets generated from an adjacent
carbon sink forest.
1.12 A taxpayer can deduct the capital expenditure incurred on
establishing trees for the primary and principal purpose of carbon
sequestration if one of the following is satisfied:
· the taxpayer owns the trees and any holder of a lease, lesser
interest or licence relating to the land occupied by the trees
does not use the land for carbon sequestration purposes
[Schedule 1, item 6, subsection 40-1005(5), item 1 in the table];
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Tax Laws Amendment (2007 Measures No. 6) Bill 2007
· the trees are attached to land that the taxpayer leases (from
anyone), or holds under a quasi-ownership right granted by
an exempt Australian or exempt foreign government agency,
and the lease or quasi-ownership right entitles the taxpayer to
use the land for carbon sequestration. Further, if there is
another entity that holds a lesser interest or licence relating to
the land, that entity must not use the land for carbon
sequestration [Schedule 1, item 6, subsection 40-1005(5), item 2 in the
table]; or
· the taxpayer is the licensee relating to the land occupied by
the trees and uses the land for carbon sequestration purposes
as a result of that licence [Schedule 1, item 6, subsection 40-1005(5),
item 3 in the table].
1.13 Together, these rules ensure that the taxpayer who can claim the
deduction is the taxpayer with the least interest in the land who is using
the land for the primary and principal purpose of carbon sequestration.
This will ensure that only one taxpayer is entitled to a deduction under
section 40-1005 in respect of capital expenditure in establishing trees in a
carbon sink forest on a given area of land.
Example 1.3
A company enters into a lease agreement with a landowner so that the
company can establish trees for the purpose of carbon sequestration.
The company then incurs expenditure to establish trees which satisfy
subsection 40-1010(2). There is no other taxpayer that has a lesser
interest in that land who is using the land for the primary and principal
purpose of carbon sequestration. The company is therefore eligible to
claim a deduction for the trees established on that land.
Example 1.4
Company A enters into a lease arrangement over 25 hectares of land
with a landholder. The lease enables company A to use the land for the
primary and principal purpose of carbon sequestration. Company A
also incurs capital expenditure on the establishment of trees on
15 hectares of the land for the primary and principal purpose of carbon
sequestration.
Company A subsequently enters into an agreement with company B to
establish trees in a carbon sink forest on the other 10 hectares of land.
Under the agreement company B is granted a licence over those 10
hectares allowing it to use the land and the trees for the primary and
principal purpose of carbon sequestration.
10
Capital expenditure for the establishment of trees in carbon sink forests
As company B is using the land and the trees for the primary and
principal purpose of carbon sequestration and it has the least interest in
the 10 hectares of land, company B satisfies the conditions in the table
in subsection 40-1005(5).
Company B pays company A to establish the trees on the 10 hectares
for which company B has the licence. The expenditure incurred by
company B is capital in nature. The expenditure in relation to the trees
is also covered under section 40-1010. As company B has the least
interest in that land and is using the land for the primary and principal
purpose of carbon sequestration, it satisfies the condition in the table in
subsection 40-1005(5) for the trees, and company B is able to claim the
deduction for the expenditure it incurred. Even if the expenditure
incurred by company A on establishing trees in the carbon sink forest
on the 10 hectares of land is capital in nature, company A is not
eligible for the deduction under section 40-1005 for the establishment
expenditure as company B has a lesser interest in the 10 hectares of
land and uses that land for the principal and primary purpose of carbon
sequestration by the trees.
The expenditure incurred by company A in relation to the trees on the
15 hectares is covered under section 40-1010. As company A has a
lease over the land on which it has established the trees that enables it
to use the land for the primary and principal purpose of carbon
sequestration and there is no holder of a lesser interest in the land
company A satisfies a condition in the table in subsection 40-1005(5).
Company A is therefore able to claim the deduction for the expenditure
it has incurred.
1.14 The amount of the deduction for an income year is the amount
of the expenditure incurred on establishing the trees. [Schedule 1, item 6,
subsection 40-1005(2)]
Condition for deduction
1.15 The deduction is only available for expenditure incurred on
establishing trees in a forest that can achieve the characteristics of a
carbon forest sink forest. [Schedule 1, item 6, paragraph 40-1010(1)(g)]
1.16 The trees, when established, must satisfy the following
conditions:
· at the end of the income year, the trees occupy a continuous
land area in Australia of 0.2 hectares or more;
· at the time the trees are established, it is more likely than not
that they will:
- attain a crown cover of 20 per cent or more; and
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Tax Laws Amendment (2007 Measures No. 6) Bill 2007
- reach a height of at least two metres; and
· on 1 January 1990, the area occupied by the trees was clear
of other trees that:
- attained, or were more likely than not to attain, a crown
cover of 20 per cent or more; and
- reached, or were more likely than not to attain, a height
of two metres or more.
[Schedule 1, item 6, subsection 40-1010(2)]
Example 1.5
A company acquires 0.5 hectares of land suitable for growing trees for
the purpose of establishing carbon sink forests in the 2008-09 income
year. The company establishes a plot of trees covering a
geographically connected 0.3 hectare land area and another
geographically separated plot of trees covering a 0.1 hectare land area
in the 2008-09 income year.
The plot of trees covering the 0.1 hectare land area does not
satisfy the condition in paragraph 40-1010(2)(a). The plot of trees
covering the 0.3 hectare land area does satisfy the condition in
paragraph 40-1010(2)(a).
As a result, the company will be able to claim a deduction for the
capital expenditure incurred on establishing the 0.3 hectares of trees
(as long as the trees will satisfy the remaining conditions in
subsection 40-1010(2)), but will not be able to claim a deduction for
the second plot (the 0.1 hectares).
Example 1.6
Continuing Example 1.5, the company established the remaining
0.1 hectare of land in the 2009-10 income year. This planting will be
geographically connected to the planting that occurred in the 2008-09
income year (the other 0.1 hectare of land referred to in Example 1.5).
As a result, the 0.2 hectare of trees satisfy the condition in
paragraph 40-1010(2)(a) and will be considered a carbon sink forest,
assuming all other conditions in subsection 40-1010(2) are met, for the
carbon sink forest.
The company will be entitled to a deduction under
subsection 40-1005(1) for capital expenditure the company incurred on
establishing the second plot (regardless of what year the costs were
incurred).
12
Capital expenditure for the establishment of trees in carbon sink forests
The deduction for capital expenditure on establishing a carbon sink
forest will not be available until subsection 40-1010(2) is satisfied.
1.17 The Australian Government has committed to its target of
108 per cent of 1990 levels of emissions over the period 2008 to 2012,
and follows internationally agreed rules in accounting for progress
towards this target. The conditions in paragraphs 40-1010(2)(a) to (c)
align with the criteria for carbon sink forest activities that can contribute
to Australia's greenhouse gas target. This ensures that the tax deduction
encourages the establishment of forests that can contribute to Australia's
target.
1.18 The establishment of the trees must meet the requirement of the
Environmental and Natural Resource Management Guidelines issued by
legislative instrument, by the Minister for the Environment and Water
Resources (Environment Minister). [Schedule 1, item 6,
paragraph 40-1010(2)(d) and subsection 40-1010(3)]
When the deduction is available
1.19 For trees established wholly within an income year, the
deduction is available in the income year the trees are established and if
subsection 40-1010(2) is met. [Schedule 1, item 6, paragraphs 40-1010(1)(a)
to (g)]
1.20 Where some or all of the trees are established after the end of the
income year, but within the first four months of the following income
year, expenditure incurred in the previous income year is immediately
deductible. [Schedule 1, item 6, subsection 40-1005(3)]
1.21 Expenditure incurred in the four months from the end of the
income year will be deductible in the year it is incurred. [Schedule 1, item 6,
subsection 40-1005(1)]
1.22 Deductions for any prepayment of expenditure that would be
incurred in the four months from the end of the income year is still subject
to Subdivision H of Division 3 of the Income Tax Assessment Act 1936.
Example 1.7
A company acquires 0.5 hectares of land suitable for growing trees for
the purpose of establishing carbon sink forests in the 2008-09 income
year. The company establishes a plot of trees covering a
geographically connected 0.3 hectare land area and another
geographically separated plot of trees covering a 0.1 hectare land area
in the 2008-09 income year.
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Tax Laws Amendment (2007 Measures No. 6) Bill 2007
The plot of trees covering the 0.1 hectare land area does not satisfy the
condition in paragraph 40-1010(2)(a), at the end of the income year.
The plot of trees covering the 0.3 hectare land area does satisfy the
condition in paragraph 40-1010(2)(a).
However, in the four months after the 2008-09 income year, the
company completes the 0.1 hectares that connects both the first
0.1 hectare and the 0.3 hectare plantings, resulting in a total of the
0.5 hectares as one planting. As such, all costs incurred until the end
of the 2008-09 income year are deductible in the 2008-09 income year.
The costs incurred in the four months after the end of the income year
are deductible at the end of the 2009-10 year.
Example 1.8
A company acquires 0.5 hectares of land suitable for growing trees for
the purpose of establishing carbon sink forests in the 2008-09 income
year. The company establishes a plot of trees covering a
geographically connected 0.3 hectare land area and another
geographically separated plot of trees covering a 0.1 hectare land area
in the 2008-09 income year.
The plot of trees covering the 0.1 hectare land area does not satisfy
the condition in paragraph 40-1010(2)(a). The plot of trees covering
the 0.3 hectare land area does satisfy the condition in
paragraph 40-1010(2)(a).
The remaining 0.1 hectare is established after the four-month period at
the end of the 2008-09 income year (ie, late in the 2009-10 income
year) and therefore not satisfying the four-month rule. This leads to
the 0.1 hectare established up until the 2008-09 income year and the
new 0.1 hectare just planted, satisfying subsection 40-1010(2) at the
end of the 2009-10 income year.
The costs incurred in the 2008-09 income year on the 0.1 hectares as
well as the additional 0.1 hectares established in the 2009-10 income
year, will be deductible at the end of the 2009-10 income year.
1.23 Where trees are established in the first four months of a new
income year and further trees are established before the end of that same
income year, the initial planting must be ignored for the purposes of
calculating whether the trees occupy the size requirement in
paragraph 40-1010(2)(a). [Schedule 1, item 6, subsection 40-1005(4)]
Example 1.9
A company acquires three hectares of land suitable for growing trees
for the purpose of establishing carbon sink forests in the 2008-09
income year. The company establishes a plot of trees covering a
14
Capital expenditure for the establishment of trees in carbon sink forests
geographically connected 0.1 hectare land area in the 2008-09 income
year.
However, in the four months after the 2008-09 income year, the
taxpayer completes a further 0.1 hectares that connects the 0.2 hectares
as one planting. As such, all costs incurred until the end of the
2008-09 income year are deductible in the 2008-09 income year. The
costs incurred in the four months after the end of the income year are
deductible at the end of the 2009-10 income year.
Over the remaining months in the income year, the company
establishes the remaining 2.8 hectares. The costs of the final
2.8 hectares are deductible in the 2009-10 income year. This final
2.8 hectares is considered to be a separate planting for the purposes of
the 0.2 hectare requirement in paragraph 40-1010(2)(a).
Notice of establishment
1.24 The owner of the trees must give a notice to the Commissioner
of Taxation (Commissioner) providing all information necessary to
determine whether all conditions in subsection 40-1010(2) are met.
[Schedule 1, item 6, paragraph 40-1010(1)(h)]
1.25 The notice must be given to the Commissioner no later than the
earlier of:
· the lodgment of the taxpayer's income tax return; or
· five months after the end of the income year.
[Schedule 1, item 6, subsection 40-1010(4)]
1.26 The notice may include, but is not limited to:
· the Australian Business Number of the entity that gives the
form to the Commissioner;
· the latitude and longitude of a central point within the area
occupied by the trees, as determined by reference to the
Geocentric Datum of Australia;
· the species of trees established;
· the estimated number of trees established per hectare of the
area occupied by the trees;
· the rationale for the probability of meeting
subsection 40-1010(2); and
15
Tax Laws Amendment (2007 Measures No. 6) Bill 2007
· the amount of expenditure incurred in establishing the trees
on the woodlot.
1.27 This notice will allow the Commissioner to seek confirmation
from the Secretary to the Department of the Environment and Water
Resources (Environment Secretary) that the trees established will be able
to achieve the characteristics of a carbon sink forest. [Schedule 1, item 6,
subsection 40-1010(8)]
1.28 However, the Environment Secretary must give the
Commissioner a notice if the Environment Secretary is satisfied that one
or more characteristics of a carbon sink forest has not been met or may not
be met [Schedule 1, item 6, subsection 40-1010(5)]. The characteristics of a
`carbon sink forest' are defined in paragraphs 1.15 to 1.18.
1.29 No deduction can be claimed if the Environment Secretary is not
satisfied that subsection 40-1010(2) has been, or will be, met and has
given the Commissioner a notice stating this. [Schedule 1, item 6,
subsections 40-1010(5) and (6)]
1.30 A taxpayer may apply to the Administrative Appeals Tribunal
for a review of a decision taken by the Environment Secretary in relation
to the notice provided to the Commissioner. [Schedule 1, item 6,
subsection 40-1010(7)]
1.31 The Environment Secretary is required to provide the taxpayer a
copy of the notice under section 27A of the Administrative Appeals
Tribunal Act 1975.
1.32 This notice will ensure that a deduction is only available in
respect of trees that can achieve the characteristics of a carbon sink forest.
Establishment expenditure
1.33 Establishment expenditure is expenditure incurred on
establishing trees for the purpose of carbon sequestration. [Schedule 1,
item 6, paragraph 40-1010(1)(d)]
1.34 Establishment occurs when the trees are planted, grown from
seed or deliberately regenerated from natural seed sources in their
long-term growing medium, in the ground, in a permanent way.
1.35 Carbon sequestration by a tree or forest means the process by
which the tree or forest absorbs carbon dioxide from the atmosphere
[Schedule 1, item 6, section 40-1015]. An amendment to subsection 995-1(1) is
also made to include this definition [Schedule 1, item 8, definition of `carbon
sequestration' in subsection 995-1(1) of the ITAA 1997].
16
Capital expenditure for the establishment of trees in carbon sink forests
1.36 The costs of establishing trees for the purpose of carbon
sequestration may include the following:
· the costs of acquiring the trees or seeds;
· the costs of planting the trees or seeds;
· the costs of pots and potting mixtures where the potted plants
are being nurtured prior to being established in their
long-term growing medium, in the ground, in a permanent
way;
· the costs incurred in grafting trees and germinating seedlings;
· the costs of allowing seeds to germinate (whether by
broadcasting, deliberate regeneration or planting seeds
directly);
· any costs incurred on preparing to plant which may, in some
cases, include that part of the costs of ploughing, scarifying,
contouring, top dressing, fertilising, weed spraying, stone
removal, and top soil enhancement that is for the purpose of
establishing trees for carbon sequestration; and
· the costs of surveying the planted area.
1.37 Establishment expenditure incurred on establishing trees for the
purpose of carbon sequestration does not include expenditure on other
plants (eg, trees for felling, horticultural plants). However where trees are
used for associated purposes, for example, companion planting for the
purpose of carbon sequestration, then expenditure incurred in establishing
those trees will fall within the operation of this Subdivision.
1.38 Establishment expenditure does not include expenditure incurred
in draining swamps or low-lying land or on clearing land. [Schedule 1,
item 6, section 40-1020]
1.39 Expenditure on assets separate from the trees is not considered
to be establishment expenditure. Examples of this include:
· fencing;
· water facilities for the trees in the carbon sink forest;
· roads within the forest; and
· fire breaks.
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Tax Laws Amendment (2007 Measures No. 6) Bill 2007
1.40 Expenditure incurred on rights that allow access to land or for
carbon credits to be traded in the future is not considered to be
establishment expenditure. Even though this expenditure may be incurred
at the time of establishment, it is not considered to have a sufficient nexus
for a direct expense to be incurred on establishing the trees. Examples of
these costs include the costs of acquiring a right to enter land and establish
the forest (commonly known as forestry rights) and the costs of acquiring
the right to create a carbon credit (commonly known as carbon
sequestration rights).
1.41 Nothing in this measure denies a taxpayer access to other
provisions in the tax law that may provide deductions for expenditure on
failed projects.
Non-arm's length transactions
1.42 The amount of capital expenditure on which a deduction is
based cannot exceed the market value of what the expenditure was for, if
any of the parties to an arrangement under which the expenditure is
incurred are not dealing at arm's length. [Schedule 1, item 6, section 40-1025]
Income year 2012-13 and later income years
Who is entitled to the deduction?
1.43 Taxpayers carrying on a business and who satisfy the conditions
outlined in paragraph 1.12 can deduct capital expenditure incurred by
them or another establishing entity on the establishment of trees for the
purpose of carbon sequestration. [Schedule 1, item 10, subsection 40-1005(1)]
1.44 The primary and principal purpose of establishing the trees must
be for carbon sequestration and can not include felling the trees or using
the trees in commercial horticulture. This deduction will only apply to
trees planted as part of a carbon sink forest. [Schedule 1, item 10,
paragraphs 40-1010(1)(d) and (e)]
1.45 The deduction is not available for expenditure incurred on trees
in a carbon sink forest by a managed investment scheme or a forestry
managed investment scheme. [Schedule 1, item 10, paragraph 40-1010(1)(f)]
1.46 A forestry manager entity may operate a separate business of
carbon trading by establishing a qualifying carbon sink forest.
1.47 The trees must meet the conditions for deduction as outlined in
paragraphs 1.15, 1.16 and 1.18.
18
Capital expenditure for the establishment of trees in carbon sink forests
How is the deduction calculated?
1.48 The deduction is worked out using the following formula:
Establishment × Write-off days in income year × Write-off rate
expenditure 365
[Schedule 1, item 10, subsection 40-1005(2)]
1.49 The types of expenditure included in establishment expenditure
are as set out in paragraphs 1.33 to 1.41.
1.50 The write-off days in income year is the number of days in the
income year starting on the first day of the income year in which the trees
are established and ending 14 years and 105 days later. The first day of
the income year is 1 July unless the taxpayer has, or is transiting into or
out of, a substituted accounting period. [Schedule 1, item 10,
subsection 40-1005(2)]
1.51 The number of write-off days does not include days in the
income year on which the taxpayer did not use the land for the purpose of
carbon sequestration by the trees, or did not meet the conditions for the
deduction as set out in paragraph 1.12. Therefore, if the taxpayer sells
their trees during the income year, the number of write-off days in the
income year does not include the days after the sale of the trees.
[Schedule 1, item 10, paragraph 40-1005(2)(a)]
1.52 The write-off rate is constant at 7 per cent per annum.
[Schedule 1, item 10, subsection 40-1005(2)]
1.53 This deduction will allow a straight line write-off of 7 per cent
per income year over 14 years and 105 days. However, the taxpayer is
not able to deduct more than the total amount incurred on establishing the
trees. [Schedule 1, item 10, subsection 40-1005(3)]
19
Tax Laws Amendment (2007 Measures No. 6) Bill 2007
Example 1.10
Matthews Carbon Sinks Services Ltd establishes trees for the purpose
of carbon sequestration on 1 September 2012. Matthews Carbon Sinks
Services Ltd incurred establishment expenditure of $400,000.
The allowable deduction for these trees is:
2012-13 income year
Establishment × Write-off days in income year × Write-off rate
expenditure 365
365
$400, 000 × × 7% = $28, 000
365
2013-14 income year
365
$400, 000 × × 7% = $28, 000
365
2026-27 income year
As the write-off period is 14 years 105 days after the first day of the
income year in which the trees were established, 105 days are
remaining in the 2027-28 income year.
Establishment × Write-off days in income year × Write-off rate
expenditure 365
105
$400, 000 × × 7% = $8054.79
365
That is, $8,000 as subsection 40-1005(3) limits the deduction to the
amount of capital expenditure incurred.
Notice of establishment
1.54 At the time the trees are established, the owner of the trees must
give a notice to the Commissioner. Further details are provided in
paragraphs 1.24 to 1.32.
20
Capital expenditure for the establishment of trees in carbon sink forests
Non-arm's length transaction
1.55 The amount of capital expenditure on which a deduction is
based cannot exceed the market value of what the expenditure was for, if
any of the parties to an arrangement under which the expenditure is
incurred are not dealing at arm's length. [Schedule 1, item 6, section 40-1025]
Destruction of trees in a carbon sink forest
1.56 A taxpayer cannot claim the deduction for trees in a carbon sink
forest if the trees are destroyed. The number of write-off days used in the
formula in paragraph 1.50 will not include the days in the income year
after which the trees were destroyed.
1.57 However, an extra deduction for any undeducted establishment
expenditure will be allowed for an income year if the trees are destroyed
in an income year after they are established and the write-off period has
not ceased. [Schedule 1, item 18, section 40-1030]
1.58 To work out the deduction, the first step is to calculate the total
amounts the taxpayer could have deducted for the trees for the period that
starts when the trees were established and ends when they were destroyed.
[Schedule 1, item 18, subsection 40-1030(2), paragraphs (a) and (b) of step 1]
1.59 Secondly, subtract from the capital expenditure incurred for
establishing the trees, the result from step 1 as well as any amount
received for the destruction (such as the proceeds of an insurance policy).
The remaining amount is the deduction allowed for the destruction.
[Schedule 1, item 18, subsection 40-1030(2), paragraphs (a) and (b) of step 2]
1.60 This deduction for destruction is in addition to any other
deduction for the trees for the income year under these provisions.
[Schedule 1, item 18, subsection 40-1030(3)]
Example 1.11
Matthews Carbon Sinks Services Ltd establishes trees for the purpose
of carbon sequestration on 1 September 2012. Matthews Carbon Sinks
Services Ltd incurred establishment expenditure of $400,000.
On 8 February 2015, the trees are destroyed due to fire. An insurance
payout of $200,000 is received.
21
Tax Laws Amendment (2007 Measures No. 6) Bill 2007
The deduction is worked out as follows:
Step 1
365
2012-13 income year: $400, 000 × × 7% = $28, 000
365
365
2013-14 income year: $400, 000 × × 7% = $28, 000
365
The trees are destroyed on 8 February. The number of days in the
2014-15 income year that the expenditure can be written-off is
223 days:
223
$400, 000 × × 7% = $17,107
365
Total amount that could have been deducted = $73,107
Step 2
Establishment costs: $400,000
Less result from step 1: $73,107
Less any insurance moneys received: $200,000
Total deduction available for destruction of trees: $126,893
This is in addition to the deduction of $17,107 the taxpayer would have
claimed for the trees for that income year.
1.61 If trees in a carbon sink forest, which received an immediate
deduction, are destroyed, no extra deduction can be obtained. This is
because the total amount of the establishment expenditure is deducted in
the income year in which it is incurred and there is no undeducted
establishment expenditure. Therefore, this extra deduction for destruction
is not available for trees established in carbon sink forests that receive an
immediate deduction in the 2007-08 to 2011-12 income years (inclusive).
Obtaining information for the acquisition of trees in a carbon sink
forest
1.62 When a taxpayer acquires trees in a carbon sink forest from
another entity in circumstances that makes the taxpayer eligible to claim
the deduction, section 40-1035 will ensure sufficient information is given
22
Capital expenditure for the establishment of trees in carbon sink forests
to a taxpayer who acquired the trees in a carbon sink forest from the last
taxpayer who deducted an amount for this capital expenditure. [Schedule 1,
item 18, subsection 40-1035(1)]
1.63 The inclusion of amounts of establishment expenditure used by
the entity in calculating the deduction, as well as the period when the
deductions started in the calculations for the trees, must continue to be
applied by the taxpayer who acquired the trees.
1.64 The taxpayer who acquired the trees may, within 60 days of
satisfying a condition in subsection 40-1005(5), give a written notice to
the other entity seeking certain information [Schedule 1, item 18,
subsections 40-1035(2) and (3)]. Only one notice can be served on the other
entity [Schedule 1, item 18, subsection 40-1035(8)]. The written notice must
address the following matters:
· a request that the other entity provide information as to the
amount of establishment expenditure for the trees, and the
first day of the income year in which the trees were
established [Schedule 1, item 18, subsection 40-1035(2)];
· the other entity has at least 60 days in which to reply to the
taxpayer who acquired the trees [Schedule 1, item 18,
paragraph 40-1035(3)(b)]; and
· the notice must advise the other entity that failure to comply
with the request will subject the entity to a penalty of
10 penalty units if the entity does not have a reasonable
excuse and fails or intentionally refuses to comply with the
notice [Schedule 1, item 18, subsection 40-1035(4)].
1.65 Where the other entity is a partnership, the notice is properly
served where the taxpayer gives the notice to any one of the partners of
the partnership. [Schedule 1, item 18, paragraph 40-1035(5)(a)]
1.66 The obligation to provide the information requested by the
taxpayer is imposed on each of the partners, not the partnership. In order
to discharge the obligation, any one of the partners may respond to the
request. [Schedule 1, item 18, paragraph 40-1035(5)(b)]
1.67 There is a penalty of 10 penalty units if a partner fails, or
intentionally refuses, to comply with the request for information from the
taxpayer. [Schedule 1, item 18, subsection 40-1035(6)]
23
Tax Laws Amendment (2007 Measures No. 6) Bill 2007
Application and transitional provisions
1.68 Amendments provided for the income years 2007-08 to 2011-12
(inclusive) apply to the 2007-08 income year and later income years.
[Schedule 1, item 9]
1.69 Amendments provided for the income year 2012-13 and later
years apply to the 2012-13 income year and later income years.
[Schedule 1, item 19]
Consequential amendments
1.70 An amendment is made to subsection 40-50(1) to ensure that
expenditure for the establishment of trees in carbon sink forests cannot be
written off under Subdivision 40-B of the uniform capital allowances
provisions. [Schedule 1, item 4, subsection 40-50(1)]
1.71 An amendment is made to section 40-630 to ensure that trees in
carbon sink forests cannot be deducted under Subdivision 40-G of the
uniform capital allowances provisions. [Schedule 1, item 5,
subsection 40-630(2B)]
1.72 An amendment is made to section 70-120 to ensure that a
taxpayer cannot claim a deduction under the trading stock provisions for
felling a carbon sink forest. [Schedule 1, item 7, subsection 40-120(5)]
1.73 Consequential amendments are made to
paragraphs 40-1010(1)(b) to (f), (h) and (4)(a) for changes
to the write-off rate to 7 per cent for the income year 2012-13
and later income years. [Schedule 1, items 11 to 17]
1.74 Consequential amendments are made to the guide material in
section 12-5 to reflect the introduction of this measure. [Schedule 1, items 1
and 2, section 12-5, item in the table headed `capital allowances' and after the item in
the table headed `travel expenses']
1.75 A consequential amendment is made to the simplified outline of
Division 40 to reflect the introduction of this measure. [Schedule 1, item 3,
section 40-10, at the end of the table]
24
Chapter 2
Tax-free grants for certain tobacco
growers
Outline of chapter
2.1 Schedule 2 to this Bill amends the Income Tax Assessment
Act 1997 (ITAA 1997) to provide tax-free grants under the Tobacco
Growers Adjustment Assistance Programme 2006, to tobacco growers
who undertake to exit all agricultural enterprises for at least five years.
Context of amendments
2.2 On 26 October 2006, the Minister for Agriculture, Fisheries and
Forestry announced that tobacco growers will receive up to $150,000
from the Australian Government to assist them to move into alternative
business activities.
2.3 Generally, government grants paid to assist businesses to exit an
industry are assessable under the capital gains tax (CGT) provisions,
rather than as ordinary or statutory income.
2.4 The Government decided to make the grants tax-free for those
tobacco growers who undertake to exit all agricultural enterprises for at
least five years.
Summary of new law
2.5 This measure amends:
· section 53-10 of the ITAA 1997 to list the Tobacco Growers
Adjustment Assistance Programme 2006 grant as exempt
income; and
· subsection 118-37(1) of the ITAA 1997 to exempt the
Tobacco Growers Adjustment Assistance Programme 2006
grant from CGT for Tobacco Growers Adjustment
Assistance Programme 2006 grant recipients who fulfil
certain conditions.
25
Tax Laws Amendment (2007 Measures No. 6) Bill 2007
Detailed explanation of new law
The tobacco Growers Adjustment Assistance Programme 2006 grant as
exempt income
2.6 Section 53-10 of the ITAA 1997 lists various payments which
are wholly or partly exempt from income tax. The exemptions may be
subject to certain conditions as listed within the section.
2.7 The amendment to section 53-10 of the ITAA 1997 ensures that
the Tobacco Growers Adjustment Assistance Programme 2006 grant is
exempt from income tax. [Schedule 2, item 3, section 53-10]
2.8 This exemption only applies to those recipients who undertake
to exit all agricultural enterprises for at least five years. This provides
certainty for those grant recipients who qualify for the exemption.
The tobacco Growers Adjustment Assistance Programme 2006 grant is
exempt from CGT
2.9 Subsection 118-37(1) of the ITAA 1997 lists various payments
for which capital gains and losses are disregarded for tax purposes.
2.10 The amendment to subsection 118-37(1) of the ITAA 1997
ensures that the Tobacco Growers Adjustment Assistance Programme
2006 is exempt from CGT. [Schedule 2, item 4, subsection 118-37(1)]
2.11 This exemption only applies to those recipients who undertake
to exit all agricultural enterprises for at least five years.
Application and transitional provisions
2.12 This measure applies to the 2006-07 and later income years.
[Schedule 2, item 5]
Consequential amendments
2.13 A reference to the Tobacco Growers Adjustment Assistance
Programme 2006 grant is added to the table in section 11-15 of the
ITAA 1997. [Schedule 2, item 2]
2.14 The reference to `sugar industry exit grants' is shifted from
section 11-10 to section 11-15 of the ITAA 1997. [Schedule 2, items 1 and 2]
26
Chapter 3
Deductible gift recipients
Outline of chapter
3.1 Schedule 3 to this Bill amends the Income Tax Assessment
Act 1997 (ITAA 1997) to update the list of deductible gift recipients
(DGRs) to include one new entity and to extend the time period of DGR
status for one entity.
Context of amendments
3.2 The income tax law allows taxpayers who make gifts of $2 or
more to DGRs to claim income tax deductions. To be a DGR, an
organisation must fall within a category of organisations set out in
Division 30 of the ITAA 1997, or be listed by name under that Division.
3.3 DGR status assists relevant funds and organisations to attract
public support for their activities.
Summary of new law
3.4 These amendments add the Council for Jewish Community
Security to the list of specifically listed DGRs and extend the time period
for which deductions are allowed for gifts to Australia for UNHCR
(United Nations High Commissioner for Refugees). Gifts of $2 or more,
made to these entities within each entity's eligible time period, are tax
deductible.
Detailed explanation of new law
3.5 Schedule 3 lists the organisation in Table 3.1 as a DGR.
[Schedule 3, items 3 and 4]
27
Tax Laws Amendment (2007 Measures No. 6) Bill 2007
Table 3.1
Name of fund Date of effect Special conditions
the Council for Jewish 10 August 2007 The gift must be made after
Community Security 9 August 2007.
3.6 The Council for Jewish Community Security was established to
assist in the provision of security and protection for members and
institutions of the Australian Jewish community. [Schedule 3, items 3 and 4]
Extending periods for which gifts are deductible
3.7 Schedule 3 extends the period for which deductions are allowed
for gifts to the organisation listed in Table 3.2. [Schedule 3, items 1, 2 and 5]
Table 3.2
Name of fund New special conditions Current special conditions
Australia for UNHCR The gift must be made The gift must be made after
after 27 June 2001 and 27 June 2001 and before
before 28 June 2012. 28 June 2007.
3.8 Australia for UNHCR was established to raise funds to conduct
education, promotion, and fundraising activities in Australia to support the
work of the United Nations High Commissioner for Refugees, which
safeguards the rights and wellbeing of refugees worldwide. [Schedule 3,
items 1, 2 and 5]
Application and transitional provisions
3.9 The amendments to list the organisations in Table 3.1 and
Table 3.2 apply from the dates of effect shown in those tables.
[Schedule 3, items 1 to 3]
28
Chapter 4
Farm management deposits
Outline of chapter
4.1 Schedule 4 to this Bill amends the farm management deposit
(FMD) scheme in the Income Tax Assessment Act 1936 (ITAA 1936) to
align the tax law with the guidelines for declaring either all primary
producers in a geographical area, or specified classes of primary
producers within a geographical area, to be in exceptional circumstances.
Context of amendments
4.2 Schedule 2G to the ITAA 1936 contains the provisions for
FMDs. An FMD is a tax-linked, financial risk management tool for
eligible primary producers. It is designed to allow eligible primary
producers to set aside income in profitable years for subsequent
withdrawal in low-income years. This reduces the risk to eligible primary
producers of income variability owing to factors such as drought.
4.3 FMDs cannot be withdrawn within 12 months of the deposit
other than because the owner dies, becomes bankrupt, ceases to be an
eligible primary producer, or transfers their deposit to another financial
institution. Failure to comply with this rule may result in the deposit not
being treated as an FMD from the time the deposit was made.
4.4 The FMD scheme provides an exception to the 12-month rule
for primary producers who conduct their primary production business
wholly or partly in exceptional circumstance areas. These persons are
able to withdraw deposits early and still retain the tax benefit in the year
of income in which the deposit was made. This is subject to the
exceptional circumstances declaration not being in force when the deposit
was made.
4.5 An exceptional circumstances declaration allows eligible
primary producers, who have an exceptional circumstances certificate,
access to their FMD within 12 months of deposit and the retention of their
tax benefits.
29
Tax Laws Amendment (2007 Measures No. 6) Bill 2007
4.6 To confirm their exceptional circumstances status at the time
of the relevant withdrawal, the owner of the FMD will have until
three months after the end of the year of income, in which the withdrawal
was made, to obtain an exceptional circumstances certificate from the
Secretary of the Department of Human Services. This ensures that
primary producers will be able to take advantage of the exceptional
circumstances concession prior to the certificate actually being issued.
4.7 A minor inconsistency exists under the current law, which
denies eligible primary producers the tax benefits of an FMD as a
consequence of withdrawing their FMD early. This inconsistency exists
because certain classes of primary producers are in an area that has
previously been declared in exceptional circumstances, even though the
exceptional circumstances declaration did not apply to them because of
their producer class.
Summary of new law
4.8 This amendment will remove a minor inconsistency where an
eligible primary producer is denied the tax benefits as a consequence of
withdrawing their FMD early when they are in an area that has previously
been declared in exceptional circumstances, even though the exceptional
circumstances declaration did not apply to them because of their producer
class.
Comparison of key features of new law and current law
New law Current law
Eligible primary producers can retain Eligible primary producers can retain
the tax benefit when withdrawing the tax benefit when withdrawing
from their FMD within 12 months if, from their FMD within 12 months if,
at the time of the withdrawal, they: at the time of the withdrawal, they:
· are eligible to be issued an · are conducting a primary
exceptional circumstances production business in the
certificate; and geographical area that is
· made the FMD before the declared to be in exceptional
exceptional circumstances circumstances; and
declaration applied to them. · made the FMD before the
exceptional circumstances
declaration applied to their
geographical area.
30
Farm management deposits
Detailed explanation of new law
4.9 Eligible primary producers can retain the tax benefit in the year
the FMD is made, despite the withdrawal of all or part of their FMD
within 12 months if:
· the withdrawal is made in the year of income following the
year of income in which the deposit occurs;
· at the time of the withdrawal, the owner of the FMD is
eligible to be issued an exceptional circumstances certificate
in relation to their primary production business;
· the owner of the FMD obtains an exceptional circumstances
certificate no later than three months after the year of income
of the withdrawal; and
· the owner made the deposit before the exceptional
circumstances declaration relating to that primary production
business was in force.
[Schedule 4, item 1, paragraphs 393-37(3)(b) to (d) in Schedule 2G to the ITAA 1936]
31
Tax Laws Amendment (2007 Measures No. 6) Bill 2007
Diagram 4.1:
If part of the deposit is withdrawn
within 12 months after the end of the
applicable depositing day; and the
owner of the FMD has been issued an
EC certificate and this deposit was
made before the EC declaration
relating to that primary production is
in force, then the FMD owner can
retain their tax benefit.
The primary producer must
be issued with an
EC certificate no later than
three months after the year
of income in which the
EC declaration withdrawal is made to
retain the tax benefit.
Deposit Withdrawal
(1 January 2008) (1 October 2008)
1 July 2007 1 July 2008 1 July 2009 30 September 2009
Year 1 Year 2
EC -- exceptional circumstance
Application and transitional provisions
4.10 This measure will commence retrospectively from 1 July 2002.
This will ensure that those taxpayers that were previously disadvantaged
by this inconsistency get the opportunity to receive the tax benefit, despite
the early withdrawal of their FMD. [Schedule 4, item 2]
32
Index
Schedule 1: Capital expenditure for the establishment of
trees in carbon sink forests
Bill reference Paragraph number
Items 1 and 2, section 12-5, item in the table headed `capital 1.74
allowances', and after the item in the table headed `travel expenses'
Item 3, section 40-10, at the end of the table 1.75
Item 4, subsection 40-50(1) 1.70
Item 5, subsection 40-630(2B) 1.71
Item 6, subsection 40-1005(1) 1.21
Item 6, subsection 40-1005(2) 1.14
Item 6, subsection 40-1005(3) 1.20
Item 6, subsection 40-1005(4) 1.23
Item 6, subsection 40-1005(5), item 1 in the table 1.12
Item 6, subsection 40-1005(5), item 2 in the table 1.12
Item 6, subsection 40-1005(5), item 3 in the table 1.12
Item 6, paragraphs 40-1010(1)(a) to (c) 1.8
Item 6, paragraphs 40-1010(1)(a) to (g) 1.19
Item 6, paragraph 40-1010(1)(d) 1.33
Item 6, paragraphs 40-1010(1)(d) and (e) 1.9
Item 6, paragraph 40-1010(1)(f) 1.10
Item 6, paragraph 40-1010(1)(g) 1.15
Item 6, paragraph 40-1010(1)(h) 1.24
Item 6, subsection 40-1010(2) 1.16
Item 6, paragraph 40-1010(2)(d) and subsection 40-1010(3) 1.18
Item 6, subsection 40-1010(4) 1.25
Item 6, subsection 40-1010(5) 1.28
Item 6, subsections 40-1010(5) and (6) 1.29
Item 6, subsection 40-1010(7) 1.30
Item 6, subsection 40-1010(8) 1.27
Item 6, section 40-1015 1.35
Item 6, section 40-1020 1.38
33
Tax Laws Amendment (2007 Measures No. 6) Bill 2007
Bill reference Paragraph number
Item 6, section 40-1025 1.42, 1.55
Item 7, subsection 40-120(5) 1.72
Item 8, definition of `carbon sequestration' in subsection 995-1(1) 1.35
of the ITAA 1997
Item 9 1.68
Item 10, subsection 40-1005(1) 1.43
Item 10, subsection 40-1005(2) 1.48, 1.50, 1.52
Item 10, paragraph 40-1005(2)(a) 1.51
Item 10, subsection 40-1005(3) 1.53
Item 10, paragraphs 40-1010(1)(d) and (e) 1.44
Item 10, paragraph 40-1010(1)(f) 1.45
Items 11 to 17 1.73
Item 18, section 40-1030 1.57
Item 18, subsection 40-1030(2), paragraphs (a) and (b) of step 1 1.58
Item 18, subsection 40-1030(2), paragraphs (a) and (b) of step 2 1.59
Item 18, subsection 40-1030(3) 1.60
Item 18, subsection 40-1035(1) 1.62
Item 18, subsection 40-1035(2) 1.64
Item 18, subsections 40-1035(2) and (3) 1.64
Item 18, paragraph 40-1035(3)(b) 1.64
Item 18, subsection 40-1035(4) 1.64
Item 18, paragraph 40-1035(5)(a) 1.65
Item 18, paragraph 40-1035(5)(b) 1.66
Item 18, subsection 40-1035(6) 1.67
Item 18, subsection 40-1035(8) 1.64
Item 19 1.69
Schedule 2: Tobacco industry exit grants
Bill reference Paragraph number
Items 1 and 2 2.14
Item 2 2.13
Item 3, section 53-10 2.7
Item 4, subsection 118-37(1) 2.10
Item 5 2.12
34
Index
Schedule 3: Deductible gift recipients
Bill reference Paragraph number
Items 1, 2 and 5 3.7, 3.8
Items 1 to 3 3.9
Items 3 and 4 3.5, 3.6
Schedule 4: Farm management deposits
Bill reference Paragraph number
Item 1, paragraphs 393-37(3)(b) to (d) in Schedule 2G to the 4.9
ITAA 1936
Item 2 4.10
35
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