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Income tax investment allowance

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The Government has decided to amend the income tax

investment allowance legislation so that plant that has qualified

for the allowance m a y , subject to certain limitations, be

transferred between companies in a public company group without loss

of. the allowance= In addition, some deficiencies have been i

found in the rules which withdraw the allowance when plant is :

disposed of after being leased or the lessee permits another

person to use it. These are to be remedied.

The investment allowance is provided as an incentive

to investment in plant to be used on a long-term basis. Under

the present law, it is automatically forfeited if, within .

12 months of the first use of new plant, the plant is disposed .

of or another person is granted a right to use it. If such an

event occurs after the first 12 months, the allowance is

forfeited if the plant was acquired with the event in prospect.

This rule against disposal within the first 12 months ;

of use - which is necessary to prevent tax avoidance - presents

some problems for public company groups contemplating

re-organisation. The allowance would be forfeited if, before the

expiration of 12 months after its first use, eligible plant were

to be transferred from one company to another within the same

group as part of a commercially-motivated group re-organisation.

The Government considers that the rule should not

inhibit the re-organisation of public■company groups for genuine

business reasons. Accordingly, it has been decided to amend

the law so that transfers of plant that are made after today

between companies within a corporate group - in circumstances

in which there is no change in the underlying ownership of the

plant by the same listed public company or companies throughout x

will thus be permitted between a listed public company and its

wholly-owned subsidiaries - and between the subsidiaries - where

the wholly-owned relationship exists throughout the period. So

too will transfers from a listed public company, or from a

subsidiary that it wholly owns throughout the part of the

12 months period before the transfer to another subsidiary that

it wholly owns for the remainder of the period.

listed public companies, and remain so owned by these companies

throughout the 12 months period, transfers of plant will be

permitted, but only between the subsidiaries. A transfer will

also be permitted when it is between a company that is a wholly-

owned subsidiary of two or more listed public companies for the

part of the 12 months period before the transfer to another

company that is such a subsidiary of the same companies for the

balance of the period.

of plant by a listed public company will be treated as unchanged

when the shareholders in the company exchange their shares for

the shares in another listed public company formed to take over

the role of the first company.

the first 12 months of use - will

investment allowance.

Transfers of plant within the first 12 months of use

Where subsidiaries are wholly-owned by two or more

In applying these new rules, the underlying ownership

3 .

The technical deficiencies to be remedied are in the

rules that seek to preserve the policy of restricting the

availability of the allowance to long term users of plant.

They cause anomalies between lessees and outright purchasers.

The investment allowance is automatically lost if,

within 12 months of leased plant being first used, and while

the lease is in force, the lessee grants another person a ;

right to use the plant. The operation of this safeguard has

been avoided by lessees making arrangements, before commencement

of the lease, for use of the leased plant by another person.

The relevant provisions are to be amended so that

arrangements of this kind entered into after today will result

in the investment allowance for the leased plant being withdrawn.

A similar deficiency in the safeguarding provisions

permits a lessee, without forfeiting the investment allowance,

to acquire ownership of the leased plant within the first

12 months of use and grant rights to another person to use it.

Taxpayers who purchase eligible plant outright automatically

lose the investment allowance if, within 12 months of first use

of the plant, they grant rights to others to use it. If they

do so after that first 12 months, their entitlement is forfeited

if, at the time the plant was acquired, it was their intention to

allow another person to use it.

The law is to be amended so that the investment

allowance will be forfeited in any case in which a lessee

acquires ownership of leased plant and, during the first 12

months of use of the plant, grants to another person a right to

use it. Where the right to use is granted after the first

12 months of u s e , withdrawal of the allowance will occur if the

4 .

lessee had the intention to grant the right at the time that

the plant was taken on lease. This amendment will apply where

the arrangements made for use of the plant in this way are

entered into after today.


19 August 1979