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The unanswered questions

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Peter Reith


The Prime Minister's much heralded industry statement is riddled with qualifications.

In just about every area of reform, the Prime Minister's statement has raised just as many questions as it has answered.

Our examination of the statement is still in its early stages, but we've already identified complications on all the key initiatives.

Here is a list, in precis form, of some of the issues that have been identified so far.


The issues appear to be these:

. The Government refers to 18 different depreciation bands. Most taxpayers do not use the 18. They use the 7, which is the so-called "new" reduced rate class. Those 7 should be capable of being reduced to 5 or 4 without

significant budgetary impact.

. The pooling of assets within the same class will, over time, introduce simplicity. But given that the rates will only apply from 1 July 1991, there will continue to be a 3/5 accelerated depreciation pool - the post 3/5 to

1 July 1991 pool and the post July 1991 pool.

. Delaying the introduction until 1 July 1991 is likely to delay investment into plant until after that date.

. Page 2.7 of Keating's statement says the Commissioner of Taxation will continue to provide guidance on rates of depreciation through private and public rulings. It goes on to say "taxpayers exercising the option to self assess depreciation rates will be required to annotate their tax returns to that effect". This is not compatible with taxpayer self assessment and anyone annotating may well be subject to tax audit.





To gain the advantage of the so-called new rates, the taxpayer must - before first using the item of plant - be able to predict obsolescence associated with its use. In practice, taxpayers will find it difficult to predict and their prediction will be subject to dispute by ATO auditors. According to page 5.23, there will be no opportunity for a taxpayer to re-assess predictable obsolescence post actual experience of asset utilisation.


. Pages 5.27 and 5.28 are not clear enough to identify what will constitute an environmental impact study by comparison with a feasibility study. In practice, the two are blurred.

. The expenditure is deductible over 10 years or the life of the project, if lesser. For projects that do not proceed, deduction is over 10 years - which appears inconsistent with the life of the project concept.

. The write-off for EIS, both for projects that proceed and do not proceed, is less concessional than most OECD competitor countries and particularly where it does not proceed. Eg, the USA allows immediate write-off if the project is abandoned.

. The Government needs to announce a strategy concerning all environmental protection expenditure - specifically including rectification, demolition and compensation costs - so that industry can better plan for the remainder of the 1990s.


. As an overall comment, there will be considerable discrimination between manufacturers/producers by comparison with wholesalers or other middle men. The former will qualify for the extended exemptions whereas the latter will not. Thus, no level playing field will exist so that the manufacturer supplying directly to retailers will be in a better position to compete.

. The concessions only apply after royal assent. Therefore, delayed ordering may occur.


Much of the commentary extending exemption to pre production, production related and post production activities would, from a taxpayer's stand-point, already exist. The major areas of concession appear to be ordering of goods; some environment aspects, eg lighting under production related; and storing, handling and dispatch in warehouses controlled by the goods producer away from the main manufacturing site.

Thus, most pre production activities are already exempt - at least, that is what taxpayers would claim - but the legislation will be expected to make it clearer, although some definitional problems are likely to continue.

Most transportation of goods by rail, pipeline and conveyor would already qualify (again, from a taxpayer's viewpoint) but some goods which do not pass the primarily and principally test, such as weigh-bridges, should now qualify.

Goods used in the rehabilitation of mine sites are currently already viewed by taxpayers as being exempt.

Exemption for manufacturers' training schools is unlikely to give rise to a significant concession but would do so if it was extended to non-manufacturing schools.

The exemption relating to storage and handling facilities for freight at sea ports is a potentially substantial concession which should not give rise to significant definitional problems. There will, however, be some transportation equipment which is used for the dual purpose of freight and baggage handling.

Restrictive tests are intended to apply to subĀ­ contractors and motor vehicles on production premises. The aids to manufacturer definition was extended in 1989 to include sub-contractors who are undertaking production activities on behalf of the producer. It appears that

for them and the road vehicles tight tests of exclusivity are likely to apply. Therefore, a sub-contractor will not be able to have any non-manufacturers as clients. Similarly, road vehicles used on the "premises" will have to pass the exclusive test not the primarily and principally test.

12 March 1991 Canberra

Contact: David Turnbull (06) 2774277 D29/91