TAXATION LAWS AMENDMENT BILL (NO. 5) 2002: Second Reading
Mr CADMAN (Mitchell) (4.50 p.m.) —I want to thank the previous speaker for a delightfully entertaining segment in his speech. It illustrated part of this legislation—that is, stock valuation—very effectively by examining the way in which that was done in the wine industry.
We are dealing with valuation in the oyster industry today. I guess one has to stretch one's mind to see how the process becomes a taxable matter. Oyster farmers put sticks in the water, to which spats attach themselves. Therefore, the oyster farmer gains a value by a natural process and that is then a tax accountable item. I do not know how far we are going to go; perhaps we will have to measure rainwater falling in a farm dam and say that it is a taxable item because it can be converted into a commodity for growing crops.
Mr Cox —Come on; they'd want a deduction for the evaporation! That's why we wouldn't do it.
Mr CADMAN —Of course; you would have to draw that logical conclusion. A calculation for seepage would have to be established by tables. I am indebted to my friend and colleague for his illustration in the early part of his speech.
The Taxation Laws Amendment Bill (No. 5) 2002 covers three basic matters. The oyster farmer issue is of interest but the area that I would like to spend most of my time on is capital valuations. I want to look at that area and the way in which depreciation is calculated in the changes that are proposed here. This bill has been a long time coming; it dates back to a time of implementation for many of the elements contained in it to 1 July 2001. That is most regrettable; this sort of process is one that raises great anxiety among small accountants. Anybody that goes to a small accountant knows how much stress they can be under at tax time—at year end—dealing with all of the changes that have been made to the tax system. One thing that really causes anxiety is making sure they go back and amend a previous year's taxation return, because the table in the front of the legislation clearly sets out the dates of the implementation for these measures and therefore is of concern.
On page 2 of the legislation, the date of commencement varies depending on which part of the legislation we are dealing with. But those which apply to capital allowances, transitional and consequential, relate in nearly every instance to the New Business Tax System (Capital Allowances) Act 2001. So these changes—some of them small, some of them maybe significant—are something that create additional anxiety and are a worry factor for accountants. I have heard some of my colleagues dismiss the profession. I have not had the benefit of being an accountant; I have always relied upon them, but I would have to say that, under circumstances of much change, they are most anxious to see the government complete its process of reform and leave them alone for a while.
With regard to this legislation, I have mentioned the transitional provisions for some oyster farmers and the way in which they assess their stock, and there are pages on that and the way in which it is to be undertaken. There are the work in progress factors which will allow a proper evaluation and taxing of large projects that are carried out over a period of time. That is an area that needed attention, and I think that is a very valuable change. The detailed explanation of amendments contained in the explanatory memorandum on the way in which capital allowances and depreciation work is a revelation. It contains a formula for using the prime cost method for working out the decline in value of a depreciating asset. That is a summary of the way in which this section works. It looks at the opening adjustable value; it does not refer any longer to the cost factor because this legislation is prepared to consider, at different points in the life of an asset, its valuation and how it may have declined or depreciated and whether or not that is tax deductible. A business that uses or depends on equipment or materials which are purchased by the business as part of its production process, are items that often decline in value. Plant and equipment is typical and so is machinery. An asset declines in value and that decline in value becomes a matter that is deducted from the return at the end of the year because that item can no longer be valued at its full price. [start page 8192]
The section of this legislation we are looking at deals with luxury cars, balancing adjustments, partners and partnerships. It deals with the rules governing the use of low-value pools to certain low-cost assets and how things can be pooled together at certain values. It deals with situations in which partners in a partnership decide to carry on their business through a company structure, thereby changing the value of the entity through which they operate. The expenditure that may be put out by somebody raising funds or raising equity in the business—having somebody come in and establish a working partnership by their bringing funds in and, in that way, changing the structure and the value of a business—is also a factor which is covered in detail by the legislation. The cost to stop carrying out your business—the process of winding up, the sales, the accountancy process and the notifications that are necessary—are also dealt with in the legislation. One area of particular interest that I note is that of the provisions which are intended to cover factors of last resort. It does not intend to encompass all so-called black hole expenditure. Subsection 40-880(3) is amended to add further exclusions from deductibility to ensure that the section operates as intended.
There are a number of rules in this black hole area, and if there is any area of controversy, it might be in regard to the black holes. What goes into this area is a matter that has been dealt with at length. In particular, I am indebted to the Parliamentary Library for the work that they have done in making an assessment of these black hole areas. With regard to the provision of last resort, expenditure should not be deductible under this section if it is not already recognised elsewhere in the income tax law, to the extent that it is not included in the cost of a depreciating asset held by the taxpayer, or included in the cost of land or deductible under other provisions of the income tax law apart from subsection 40-880(3).
The policy intentions of this area are broad and have raised some comment and criticism. The criticism that I heard from people heavily involved in the industry was that, whilst they were consulted by the ATO—and in a courteous manner—the time that they had to make a contribution to this area was not sufficient for their comments to be taken note of because, within a day or two, the explanatory memorandum was published. I just advise the tax office: actions like that arouse unnecessary criticism. Sometimes the criticism is not justified and sometimes it is. But I think every step should be taken to make sure that a basic grassroots consultation can take place. It is all right to consult the big firms, but it is the people in small practices who have to implement the legislation and they are the ones who have the most difficulty. It is all right to say that Australia should be comprised of only medium or larger businesses. That is not the way Australia works and that is not the government's intention. The role of small businesses in Australia is very significant. They are the breeding ground for entrepreneurial activity that finishes up in large companies. They are the breeding ground for innovation. They supply so much of Australia's employment. We just cannot walk away, for the sake of the convenience of the tax office or of any other process of administration, from the responsibilities that we should have to small businesses. I encourage the process of full and effective consultation.
I hope the Inspector-General, in his role, is able to work out the consultative process fully. I would like, over time, to have some of those findings of the Inspector-General made public so that people know that proper consultation has occurred, that the small end and the unusual are part of the process of consultation and that consultation has been effectively carried out. Those are important issues, and I think they are illustrated in this legislation. Whilst it is not retrospective in the proper sense of the word, because changes have been notified, the detail of the change is something that people were not aware of in full and so they now have to backtrack and make changes they did not expect to have to make.
The tests of the processes that are used to underline the capital allowances system in division 40 are set out in the explanatory memorandum not to this legislation but to the New Business Tax System (Capital Allowances) Bill 2001. Under that, a depreciating asset is defined. Land, trading stock and most intangible assets are not depreciating assets. Who is the holder of a depreciating asset is very important in the case of a business—whether the entity holds it, individuals hold it or some other organisation holds it. When the decline in the value starts is also important—at the point of purchase, at the point when it comes into operation or when it is first used or installed or ready for use. It may not be the day when the order is placed or when the exchange of contract is entered into. The calculations applied to a depreciating asset are pretty important, because assets, by commonsense one would realise, depreciate at a different rate, and so the formulas applied for different types of assets are also set out in the legislation.
How long an asset will last is pretty important too. Farm equipment has one set of depreciation life, computers have another, whereas sheds and equipment and plant that is contained in factories all have processes that have to be taken into account. The calculation of the value of an asset and what happens when you cease to hold that asset, the balancing and adjustment at the end of that period, also have to be considered. The pooling mechanism, which was an innovation of this government—and a very welcome one—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 that have declined in value below $1,000. That was an innovation for small businesses by this government—a very welcome one, a very simple one and one that has been greatly appreciated by the small business industry. It was a very good initiative for small business. There is a decline in value for certain primary production assets; the immediate deductibility for capital expenditure of some items that were allowed, particularly in the change in the tax system; and other capital items that are deductible over a period of time. The calculations by which these decisions are made are contained in that original legislation. [start page 8193]
I referred to my concerns about black hole expenditure. The black hole expenditure, as I have indicated, refers to business related expenditure which was not recognised in the income tax law prior to 2002 and which has been allowed as a deduction thereafter. There are seven categories: expenditure to establish a business; expenditure to convert the business structure to a different structure; expenditure to raise equity for a business; expenditure to defend a business against takeover; the cost to a business of unsuccessfully attempting a takeover; costs incurred by a shareholder in liquidating a company that carried on a business; and, finally, the cost to stop carrying on a business.
All of those factors are contained in the black hole provisions. The amount that can be deducted is 20 per cent of the expenditure for the income year in which the expenditure was incurred and for each of the next four income years. Other technical amendments contained in the legislation cover issues that relate to the interaction of capital allowances with the goods and services tax and with the other provisions of the tax act, including the capital gains tax and STS taxpayers. All of these factors are included, making the change a fairly complex one, because it moves across a large number of areas in the tax act.
I just want to, in the final moments, draw to the attention of the House the timetable for business tax reforms which the government has entered into. The consolidated taxation of corporate groups had a commencement date of 1 July 2002; the general value-shifting regime, July 2002; tax relief for demergers, July 2002; stage 1, stage 2 and stage 3 of taxation of financial arrangements have varying dates from 1 July 2001 to 1 July 2003; and stage 4, which is tax timing rules, disposal rules and synthetic arrangements, 1 July 2004. This timetable has generally been adhered to by the government. I would encourage those involved to press on and get this done—with consultation, but expeditiously. I think that people want to move ahead and be assured that they can have confidence in the Australian tax system.
I would encourage those working in the field to look at whether or not we can successfully benchmark against comparable nations to our own advantage, so that we can in fact say that we have a system that does work for the benefit of the Australian community at large but also is not an unnecessary impediment in time, effort or detail for those who are paying the taxation. So often we implement very complex legislation in order to prevent anybody avoiding taxation. There is a big cost to that, and a balance has to be struck for what is a reasonable amount of time that somebody who is an honest taxpayer should spend in making these calculations.
Author: Alan Cadman MP
Source: House Hansard - 23/10/02
Release Date: 24 Oct 2002