Proposed legislation to give effect to the measures which the Treasurer announced on 4 August 1997, in Press Release No.84, and 14 January 1998, in Press Release No.2, was contained in Schedule 10 of Taxation Laws Amendment Bill (No.4) 1998 (‘proposed Division 58"). This Bill lapsed when Parliament was prorogued.
These measures will limit the depreciation deductions that can be claimed by the purchasers of exempt entities, or of assets owned by exempt entities, to the higher of the depreciable asset’s notional written down value and its undeducted pre-existing audited book value. The measures are designed to ensure that exempt entity assets which become taxable are treated consistently irrespective of whether their entry into the tax net is structured as an entity sale or an asset sale.
As explained in the Treasurer’s Press Release No.9 on 10 February 1998, proposed Division 58 includes safeguard provisions (in the form of special rules for calculating balancing adjustments) for the on-sale of previously exempt assets to preserve the integrity of its measures.
Several potential anomalies and uncertainties have been identified with the wording of these safeguard provisions, and their interaction with the capital gains tax ("CGT") provisions, to include appropriate amounts in the assessable income of the first taxable owner to offset any increase in depreciation deductions that may be available to the subsequent purchaser.
I am, therefore, announcing today that the Government will make technical amendments to proposed Division 58 to correct these potential anomalies so that the safeguard provisions will clearly operate as originally intended to protect the integrity of the measures. Details of these technical amendments are attached. The measures will have the same date of effect as the original measures, that is 4 August 1997. The Government intends to reintroduce the amended Division 58 as soon as possible.
30 November 1998
Contact Officer:
Penny Farnsworth
Assistant Treasurer’s Office
(02) 6277 7360
Peter Costa
Australian Taxation Office
(03) 927 52969
Details of the technical corrections
- An inconsistency has been identified between the balancing adjustment calculation rules ("BACRs") for asset sales in proposed subsections 58-215(2) & 58-270(2) and the equivalent calculation rules for entity sales in proposed subsections 58-85(7) & 58-145(7). The asset sales rules require a comparison between the Division 58 opening value of the depreciable asset and its actual cost to the first taxable owner, whereas the entity sale rules compare the Division 58 opening value to the CGT cost base of the asset to the first taxable owner. As the entity sale rules produce the intended outcome, the asset sale rules will be amended to make them consistent with the entity sale rules.
- Some potential uncertainty has been identified concerning the interaction between the Division 58 BACRs and the rewritten CGT reduced cost base rules in section 110-55. An amendment will be made to make it clear that only that part of any assessable balancing adjustment that represents recoupment of depreciation deductions allowed to the first taxable owner in respect of a depreciable asset is included in that owner’s CGT reduced cost base of the asset.
- Some potential uncertainty has been identified concerning the interaction between the Division 58 BACRs and the old CGT anti-overlap provisions in section 160ZA. An amendment will be made to make it clear that the full amount of any assessable balancing adjustment (included in the assessable income of the first taxable owner) is excluded from the CGT relief provided for by section 160ZA.
- An anomaly has been identified with the operation of the BACRs in proposed subsections 58-85(6) & (7) in some circumstances where a transition entity makes capital improvements to a depreciable asset after the transition time. An amendment will be made to ensure that the BACRs correctly account for the cost of such capital improvements so that there is no unintended overstatement of the amount of any assessable balancing adjustment that is included in the assessable income of the transition entity.
- An anomaly has been identified with the operation of the Division 58 BACRs in some circumstances where the CGT cost base of a depreciable asset contains elements (e.g. incidental costs of disposal) that may not be included in the calculation of the written down value of the asset under section 42-200. An amendment will be made to ensure that there is no unintended overstatement of the amount of any assessable balancing adjustment that is included in the assessable income of the first taxable owner.
- Some potential uncertainty has been identified concerning the interaction between the modified meanings of undeducted cost in proposed subsections 58-30(1) & 58-145(5) and the CGT reduced cost base rules in sections 160ZK & 110-55. An amendment will be made to make it clear that a transition entity’s CGT reduced cost base of a depreciable asset is reduced on account of notional depreciation in respect of any non-assessable use of the asset by that entity after the transition time.