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Taxation Laws Amendment (Landcare and Water Facility Tax Offset) Bill 1998
Bills Digest No. 235 1997-98
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does n ot have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Taxation Laws Amendment (Landcare and Water Facility Tax Offset) Bill 1998
To allow a tax offset (rebate) for eligible expenditure by primary producers on conserving or conveying water or on the prevention or treatment of land degradation. Th e rebate applies to expenditure incurred before the end of the 2000-2001 income year.
Currently, Division 387-B of the Income Tax Assessment Act 1997 (the 1997 Act) allows a deduction over three years for expenditure on conveying or conserving water, including capital expenditure for such purposes. The three year deduction period represents an accelerated rate of deduction compared to the normal capital depreciation rules. One third of the expenditure is deductible in each of the three years. To qualify for the deduction a number of conditions must be met, the most important being:
â¢ that the expenditure relates to capital or recurrent expenditure carried out by a taxpayer who is a primary producer in Australia and is carrying out primary production on the land to which the expenditure relates
â¢ the expenditure relates to the acquisition, construction or installation of plant or structural improvements related to the conservation or conveyance of water and
â¢ the expenditure must be incurred primarily or principally for the conveyance or conservation of water.
Items covered by the accelerated deduction include dams, water tanks, bores, wells, irrigation channels and pipes.
The problems associated with water conservation impose many e cological and economic difficulties for Australia. The diversion of water for economic purposes such as irrigation has resulted in severe ecological effects in rivers such as the Snowy, where the river flow has been reduced to minimal levels. There are also substantial salinity problems associated with the change in flows of rivers and the diversion of water for irrigation, as demonstrated in the Murray-Darling Basin. While irrigation is an essential part of the production of a substantial portion of Australia’s primary produce, the use of open channels for irrigation where evaporation and leakage are major problems. The tax concessions available provide encouragement for the use of piped irrigation water which can result in a higher effective use of the available water.
The reduction in the quality of Australia’s soil is of major concern, with consequences such as reduced productivity and soil erosion. It has been estimated that financial losses from land and water degradation amount to appr oximately $1.4 billion per year.(1) The Commonwealth became increasingly involved in funding to prevent or combat land degradation in the 1980s, with tax concessions introduced in 1980. Since then there have been a number of other programs designed to assist in the prevention or combating of land degradation, including:
â¢ the National Soil Conservation Program introduced in 1983
â¢ the removal of tax concessions for tree clearing
â¢ the Commonwealth/State agreement on the Murray-Darling Basin and
â¢ the One Billion Tree program.
Since the early 1990s the principal focus has been in the Landcare programs. Landcare Australia was incorporated as a non-profit company in 1989 and includes representatives of the Commonwealth, Australian Conservation Foundation and the National Farmers’ Federation. Landcare promotes public awareness and encourages public participation in landcare activities. It supports and liases with local landcare groups and distributes funds to local landcare groups. Landcare Australia’s principal means of funding are Commonwealth grants and sponsorship, donations and licence fees. In 1997, Landcare Australia received $1.11 million in Commonwealth grants and $1.33 million in sponsorship, donations and licence fees. The National Landcare Program is administered by the Department of Primary Industries and Energy. In 1996-97 the Government announced the establishment of National Heritage Trust which is to provide $1.25 billion over 6 years to 2001-02 for activities relating to conservation and sustainable management of Australia’s land, water and biodiversity.(2)
A deduction is allowed for capital expenditure by a primary producer or a person carrying on a business to gain assessable income from rural land where the expenditure is for:
â¢ the eradication of animal or vegetable pests
â¢ the destruction of weeds or plant growth detrimental to the land
â¢ preventing or combating land degradation other than by the erection of fences (eg. to combat erosion)
â¢ the erection of fences to keep out stock and vermin from areas affected by land degradation for the purpose of combatin g or preventing land degradation
â¢ the erection of fences to divide the land into different classes where this is done in accordance with a land management plan
â¢ the construction of levee banks or similar structures and
â¢ the construction of land drainage works.
With the exception of the construction of levee banks and similar structures, the expenditure must be primarily and principally for one of the above purposes (section 387-55 of the 1997 Act).
Prior to the 1996 general election, the Coalition announced that it proposed the introduction of a rebate as an alternative to the deductions that can be claimed for water facilities and landcare expenditure. The deduction is most useful where the taxpayer’s assessable income is sufficient to enable the full value of the deduction to be accessed, ie. when the taxpayer is on the highest marginal tax rate. As the taxpayer’s assessable income falls, so does the value of the deduction. In contrast, a rebate reduces the amount of tax payable equally regardless of the income of the taxpayer (assuming the amount of tax payable is at least the amount of the rebate that can be claimed).
Further details of the proposed rebate were announced by the Treasurer and the Minister for Primary Industries and Energy in a Press Release dated 12 May 1998 and included:
â¢ the rebate would be funded by $80 million from the National Heritage Fund
â¢ the rate of rebate would be 34 cents in the dollar
â¢ the maximum expenditure subject to the rebate would be $5 000 for water facilities and $5 000 for Landcare projects
â¢ the rebate would only be available to taxpayers with an income up to $20 700 a year (ie. those on the lowest marginal tax rate) and
â¢ if a taxpayer could not use the full rebate in a year (which will occur when the amount of tax they are liable for is less than the rebate) the remainder will be carried forward to later years.
The Press Release did not refer to the fact that the rebate will only be available for expenditure before the end of the 2000-2001 income year.
The rebate will be introduced by proposed Division 388 which will be inserted into the 1997 Act by item 13 of Schedule 1 of the Bill. Proposed section 388-55 provides that if a taxpayer could claim a deduction in relation to water facilities or landcare, they will be able to claim a tax offset (ie. a rebate) of a maximum of $5 000 in relation to each type of expenditure so long as the taxpayer’s taxable income is $20 700 or less and the expenditure is incurred before the end of the 2000-2001 income year.
The rate of rebate will be 34% for landcare expenditure and 34% of one third of the expenditure on water facilities in the income year and the succeeding 2 years
Proposed Division 65 , which will be inserted into the 1997 Act by item 8 , deals with the carrying forward of proposed Division 388 tax offsets. The priority order for tax offsets is foreign tax credits, then landcare and water facilities and finally any other tax offsets as listed in the Act. The amount carried forward will be that not previously claimed, less:
â¢ any amount used to offset a higher priority offset and
â¢ if the taxpayer has taxable income during the year, 34% of any net exempt income.
Tax offsets must be applied in the reverse of the priority order, so that general tax offsets are to be applied first, then the landcare and water facility offset and, finally, foreign tax credits ( proposed section 65-35 ).
Generally, a company will not be able to use a tax offset if it would not be allowed as a deduction due to subdivision 165-A of the 1997 Act (which prevents deductions where there has been a change in ownership or control in the loss year).
Application: For the 1997-98 and later income years.
1. Australian National Audit Office, Report No. 36, 3.
2. Ibid., 4.
24 June 1998
Bills Digest Service
Information and Research Services
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