Tax Expenditures Statement 2013
Business income
2.2 Tax expenditures (continued)
B. Business income
General features of the business income tax benchmark:
a tax base including all nominal income less expenses incurred in earning income;
a tax rate as the rate that applies to the entity;
the individual entity (or head entity of a consolidated group) as the tax unit;
the dividend imputation system, which ensures that company profits distributed to resident shareholders are taxed at the shareholders' marginal rate of tax; and
the financial year (or substituted accounting period) as the taxation period.
B1 Denial of deductions by businesses for political donations
General public services — Legislative and executive affairs ($m)
2009‑10
Tax expenditure type:
Denial of deduction 2012 TES code: B1
Estimate Reliability:
Not Applicable * Category 1-
Commencement date:
1 July 2008 Expiry date:
Legislative reference:
Sections 26-22 and 30-242 (3A) of the Income Tax Assessment Act 1997
Business taxpayers are prevented from claiming deductions for gifts or contributions to political parties, independent members and independent candidates.
B2 Exemption for certain payments made out of the National Guarantee Fund
General public services — Financial and fiscal affairs ($m)
Exemption 2012 TES code: B2
27 April 2011 Expiry date:
Taxation Laws (Clearing and Settlement Facility Support) Act 2004
No income tax consequences arise when certain payments are made out of the National Guarantee Fund.
Up until 31 March 2005 the National Guarantee Fund undertook the dual roles of investor protection and clearing support for the Australian Stock Exchange. The Corporations Act 2001 provides for the splitting of these functions by allowing the transfer of funds for clearing and settlement system support to another entity. A tax expenditure arises because these transfers are permitted free of tax consequences.
B3 Income tax exemption for Commonwealth, State and Territory public authorities, and State and Territory entities
Other purposes — General purpose inter-governmental transactions ($m)
Not Applicable * Category 4+
Introduced before 1985 Expiry date:
Part III Division 1AB of the Income Tax Assessment Act 1936 Items 5.2 and 5.3 in the table in section 50-25 of the Income Tax Assessment Act 1997
Generally, government bodies that perform a governmental or regulatory function are exempted from income tax, including public authorities of the Commonwealth, States and Territories, and State and Territory bodies. Companies wholly owned by States and Territories and constitutionally protected funds of States and Territories are also exempted from income tax.
While companies owned wholly by States and Territories are not subject to Commonwealth income tax, the operation of the National Tax Equivalent Regime (NTER), which is an administrative arrangement between the Commonwealth and the States and Territories, ensures that these entities do not gain a competitive advantage over non-Government providers.
B4 Income tax exemption for local government bodies
Item 5.1 in the table in section 50-25 of the Income Tax Assessment Act 1997
Local government bodies and municipal corporations are exempt from income tax. This exemption includes the local governing bodies in Norfolk, Cocos (Keeling) and Christmas Islands.
B5 Exemptions for prescribed international organi
sations
General public services — Foreign affairs and economic aid ($m)
1963 Expiry date:
Section 6 of the International Organisations (Privileges and Immunities) Act 1963
The income of certain international organisations is exempt from income tax. Interest and dividends received by such organisations are also exempt from withholding tax. Prescribed international organisations include the United Nations, the World Trade Organisation, the Organisation for Economic Cooperation and Development and various United Nations specialised agencies.
B6 Interest withholding tax and dividend withholding tax exemptions for overseas charitable institutions
Paragraph 128B(3)(aa) of the Income Tax Assessment Act 1936
Interest and dividends received by certain overseas charitable institutions are exempt from the interest and dividend withholding tax, respectively. This exemption only applies where the institutions are exempt from tax in their home country.
B7 Investment Manager Regime
Subdivision 842-I of the Income Tax Assessment Act 1997
The Investment Manager Regime (IMR) exempts certain investment income of widely held foreign managed funds from Australian tax in specified circumstances.
Certain income from both portfolio and non-portfolio investments will be exempt if the income is only taxed because the fund is taken to have a 'permanent establishment' because it has engaged an Australian agent or manager. Certain other investment income will be exempt only from portfolio investments.
B8 Reduced withholding tax under international tax treaties
Exemption, Concessional rate 2012 TES code: B8
International Tax Agreements Act 1953
Tax treaties reduce or eliminate double taxation caused by the exercise of source and residence country taxing rights on cross border income flows. Under Australia's tax treaties, certain dividends, interest and royalties attract reduced withholding tax rates. These include interest withholding tax exemptions for financial institutions and governments and reduced dividend withholding tax rates where dividends are paid to companies with controlling interests in the companies paying the dividends, provided that certain integrity measures are satisfied.
The reductions are bilateral, thereby ensuring that withholding taxes will not result in unrelieved double taxation either for those foreign enterprises investing in Australia from treaty partner countries, or for Australian enterprises investing abroad in treaty partner countries.
B9 Income tax exemption for persons connected with certain US Government projects in Australia
Defence ($m)
Section 23AA of the Income Tax Assessment Act 1936
The profit and remuneration of United States contractors, United States armed forces members and their associated employees, or other United States residents or foreign employees and their dependants in connection with certain approved United States Government projects in Australia are exempt from Australian income tax. The United States Government projects to which the exemption applies include the North West Cape Naval Communication Station, the Joint Defence Space Research Facility, the Sparta Project and the Joint Defence Space Communications Station programme. This exemption only applies where the income is subject to tax in the United States.
B10 Concessional tax treatment of offshore banking units
Other economic affairs — Other economic affairs, nec ($m)
Concessional rate 2012 TES code: B10
Part III, Division 9A, and Section 128GB of the Income Tax Assessment Act 1936
Income (other than capital gains) derived by an offshore banking unit (OBU) from offshore banking activities is taxed at a concessional rate of 10 per cent. Interest paid by an OBU on qualifying offshore borrowings, and gold fees paid by an OBU on certain offshore gold borrowings, are exempt from withholding tax.
B11 Deductibility of costs of setting up a regional headquarters
Deduction 2012 TES code: B11
Sections 82C to CE of the Income Tax Assessment Act 1936
Regional headquarter companies (RHQs), as determined by the Treasurer, are entitled to deductions in respect of specified set-up costs. These costs must be incurred within a two-year period commencing 12 months before and ending 12 months after the RHQ first derives assessable income from the provision of 'regional headquarters support'.
B12 Deemed tax credits under tax sparing provisions in Australia's tax treaties
Exemption 2012 TES code: B12
Date of effect depends on the date of effect of the tax treaty Expiry date:
Provided for in Australia's tax treaties
The tax sparing provisions in Australia's tax treaties apply to tax incentives (for example, tax holidays) offered by developing countries to foreign investors. The effect of these tax sparing provisions is that income earned by Australian taxpayers who invest in certain developing countries is effectively subject to a tax exemption. Under tax sparing, the tax forgone by the country providing the tax concession to Australian resident investors is deemed to have been paid for the purposes of Australia's foreign income tax offset system. This enables Australian residents to claim a tax offset in relation to their investments despite receiving a tax concession from the foreign country. Tax sparing arrangements in most tax treaties have now expired.
B13 Exemption for foreign branch profits from income tax
Section 23AH of the Income Tax Assessment Act 1936
In general, income from a business carried on by an Australian company through a permanent establishment (branch) in a foreign country is exempt from income tax. The exempt income broadly comprises operating profits and capital gains but does not include passive or other tainted income where the branch fails an active income test.
B14 Exemption from accrual taxation for certain transferor trusts
Sub subparagraph 102AAT(1)(a)(i)(F) and paragraph 102AAT(1)(c) of the Income Tax Assessment Act 1936
Under the transferor trust rules, accrual taxation would normally be applied to the transferor.
However, the rules do not apply in relation to:
transfers to certain family trusts;
certain arm's length transfers to discretionary or non-discretionary trusts;
certain transfers to discretionary trusts where the transferor has never controlled the trust; and
transfers made before the transferor commenced being a resident, provided the transferor became a resident after the original trust measures were announced and have not controlled the trust.
B15 Exemption from accrual taxation for controlled foreign companies
Sections 384, 385 and 432 of the Income Tax Assessment Act 1936
Most tainted income derived by controlled foreign companies (CFCs) in listed countries is exempt from accrual taxation (applied to the attributable taxpayer) as it is generally comparably taxed. An exemption also applies to CFCs that derive more than 95 per cent of their income from genuine business activities.
B16 Exemption from interest withholding tax on certain securities
Section 128F and 128FA of the Income Tax Assessment Act 1936
Certain publicly offered debentures and debt interests are eligible for exemption from interest withholding tax, where those debentures and debt interests are issued in Australia by a State or Territory, the Commonwealth, a resident Australian company, a non-resident company operating through a permanent establishment, or certain public unit trusts. The exemption is not available where it involves certain dealings between associated entities.
B17 Exemption of inbound non-portfolio dividends from income tax
Medium — Low
Section 23AJ of the Income Tax Assessment Act 1936
Non-portfolio dividends are exempt from income tax where they are paid to an Australian resident company by a company resident in a foreign country.
B18 Interest withholding tax concession on interest payments by financial institutions
Section 160ZZZJ of the Income Tax Assessment Act 1936
The notional interest paid by an Australian branch of a foreign bank (or of certain other financial entities) attracts a reduced effective rate of withholding tax of 5 per cent.
B19 International tax — concessional rate of final withholding tax on certain distributions by Clean Building managed investment trusts to foreign residents
Included in B105
Subdivision 12-H of Schedule 1 to the Taxation Administration Act 1953
Division 7 of the Taxation Administration Regulations 1976
Distributions of Australian source net income (other than dividends, interest and royalties) paid to foreign residents by Australian managed investment trusts that only hold energy efficient buildings that commenced construction on or after 1 July 2012 are subject to a final withholding tax. The general rate of 30 per cent is reduced to 10 per cent for residents of countries specified in the regulations as 'information exchange countries'.
B20 Threshold exemption for thin capitalisation
Sections 820-35 and 820-37 of the Income Tax Assessment Act 1997
A taxpayer will not be subject to the thin capitalisation regime (which can operate to limit debt deductions in certain circumstances) if their debt deductions and those of their associates do not exceed the threshold amount of $250,000 for income years commencing prior to 1 July 2014 and $2 million for later income years. Outward investing entities are also excluded from the thin capitalisation regime if at least 90 per cent of their assets are Australian assets.
B21 Exemption for certain transactions involving security agencies
Division 850 of Schedule 1 to the Taxation Administration Act 1953
The heads of the Australian Security Intelligence Organisation and the Australian Secret Intelligence Service have the power to declare that Commonwealth tax laws do not apply to a specified entity in relation to a specified transaction. This ensures that the tax authorities do not need to obtain information that should remain secret in the interests of national security.
B22 Income tax exemption for not-for-profit private health insurers
Health ($m)
Item 6.3 of the table in Section 50-30 of the Income Tax Assessment Act 1997
The income of private health insurers covered by the Private Health Insurance Act 2007 is exempt from income tax if the insurer
is not operated for the gain or profit of its individual members.
B23 Income tax exemption for public hospitals and not-for-profit hospitals
Items 6.1 and 6.2 in the table in section 50-30 of the Income Tax Assessment Act 1997
The income of public hospitals and hospitals operated by a society or association that is not operated for the gain or profit of its individual members is exempt from income tax.
For these hospitals to be eligible for the tax exemption they must incur their expenditure principally in Australia.
B24 Concessional taxation of life insurance investment income
Social security and welfare ($m)
Exemption, Offset, Concessional rate 2012 TES code: B24
Sections 26AH and 160AAB of the Income Tax Assessment Act 1936
Some life insurance investment policyholders receive a concessional rate of tax because the policyholders' undistributed income is taxed at the company rate.
When a life insurance policy matures, is forfeited, or is surrendered the income distributed is known as a reversionary bonus. Reversionary bonuses that are distributed to policyholders more than 10 years after the commencement of the policy are exempt from further tax. If the bonuses are distributed in the ninth or tenth year after commencement of the policy, then only a fraction (two thirds or one third respectively) of the bonuses are taxable. If the bonuses are distributed within eight years of the commencement of the policy, they are fully taxable. To the extent that reversionary bonuses are taxable, then policyholders are allowed a tax offset at the company rate of tax.
This tax expenditure ensures that reversionary bonuses, on which a life insurance company has paid tax, are not subject to a form of double taxation when paid to policyholders during the taxable period of a policy.
B25 Concessional taxation treatment of mining payments made in respect of mining and exploration activities on Aboriginal land
Section 59-15 of the Income Tax Assessment Act 1997
Certain mining payments to Aboriginal and Torres Strait Islander persons or certain distributing bodies are exempt from income tax where those payments have already been subject to mining withholding tax. Payments that are subject to the mining withholding tax of four per cent include royalties for mining on Aboriginal land and payments to Aboriginal Land Councils.
B26 Deductibility for entertainment provided without charge to those in need
16 December 1985 Expiry date:
Generally, the cost of entertainment, such as food and drink, provided in the course of carrying on a business is denied as a deduction. However, the cost of entertainment provided without charge to members of the public who are sick, disabled, poor or otherwise disadvantaged is exempted from the rules that generally deny deductions for entertainment expenses.
B27 Exemption of foreign currency gains and losses from certain low balance accounts
Not Applicable * Category 2+/-
Subdivision 775-D of the Income Tax Assessment Act 1997
Taxpayers with low balance bank accounts or credit card accounts denominated in a foreign currency may elect to disregard gains and losses attributable to changes in exchange rates (made in respect of the account). This option is available to all taxpayers other than authorised deposit-taking institutions (ADIs) and non-ADI financial institutions. Accounts with a combined credit or debit balance that does not exceed the foreign currency equivalent of A$250,000 will generally be eligible.
B28 Infrastructure — enhanced loss utilisation for designated projects
Section 272-100 of the Income Tax Assessment Act 1936; section 165-35 and Division 415 of the Income Tax Assessment Act 1997
Income tax losses of a designated infrastructure project are uplifted at the government bond rate and exempt from the loss recoupment tests: the continuity of ownership test and the same business test.
The responsible person is empowered to confer designated infrastructure project status on privately financed infrastructure of national significance based on a range of criteria, including a global capital expenditure cap of $25 billion over the period from Royal Assent of the enabling legislation to 30 June 2017.
B29 Off-market share buy-backs
Offset 2012 TES code: B29
Low * Category 4+
Division 16K of Part III and 177EA of the Income Tax Assessment Act 1936
The proceeds paid to shareholders who participate in an off-market share buy-back are split into a dividend component and a capital component. The dividend component of the buy-back proceeds may be fully franked. This allows companies that undertake off-market share buy-backs to distribute franking credits to participating shareholders beyond the level that would normally be available. Treating part of the proceeds as a dividend makes off-market share buy-backs more attractive to low marginal tax rate taxpayers. This facilitates streaming of franking credits to those shareholders that can obtain the most benefit. The tax expenditure is equal to the difference in tax payable, had those franking credits been distributed uniformly to all shareholders. The tax expenditure does not arise where the off-market buy-back is followed by an equivalent on-market buy-back to the remaining shareholders.
The tax expenditure from off-market share buy-backs may be partly offset by the anti-streaming provisions in the income tax law that operate to ensure that part of the buy-back proceeds are treated as capital (and therefore give rise to a capital gain or a capital loss rather than a franked dividend).
B30 Taxation assistance for victims of Australian natural disasters
Other purposes — Natural disaster relief ($m)
Various Expiry date:
Sections 11-55, 59-55 and 59-60 of the Income Tax Assessment Act 1997
Schedule 5 to the Tax Laws Amendment (2008 Measures No. 6) Act 2009
Certain payments to victims of Australian natural disasters are not taxable.
Without a specific provision, such grants would generally be treated as assessable income. Expenses related to the carrying on of a business (that is, those funded by using the grant) would generally be deductible.
B31 Exemption of Tobacco Growers Adjustment Assistance grants
Agriculture, forestry and fishing ($m)
2010‑1
Section 53-10, item 4C of the Income Tax Assessment Act 1997 and Paragraph 118-37(1)(g) of the Income Tax Assessment Act 1997
Tobacco growers who receive a Restructuring Grant of up to $150,000 under the Tobacco Growers Adjustment Assistance Program 2006 are exempt from income tax if they undertake to exit all agricultural enterprises for at least five years.
B32 Tax exemption for incentives provided by governments under the National Rental Affordability Scheme
Housing and community amenities ($m)
Division 380 of the Income Tax Assessment Act 1997
The National Rental Affordability Scheme provides tax and cash incentives to providers of new dwellings on the condition that they are rented to low and moderate income households at 20 per cent below market rates. In 2012‑13, the incentives were $7,486 from the Commonwealth Government and at least $2,495 from State and Territory governments. The (minimum) $2,495 contribution from the State and Territory governments may be paid as either a cash grant or in-kind assistance. The incentives are indexed over the life of the scheme.
The $7,486 contribution from the Commonwealth Government was paid as a refundable tax offset to taxable entities. Charities endorsed by the Australian Taxation Office are able to choose to receive the Commonwealth Government's contribution either as a refundable tax offset or cash payment.
In 2013‑14, the incentives are $7,763 from the Commonwealth Government and at least $2,587 from State and Territory governments.
This tax expenditure relates to the revenue forgone from exempting both parts of the incentive from income tax.
B33 Exemption for the International Cricket Council for the 2015 Cricket World Cup
Recreation and culture ($m)
Not Applicable * Category NA
1 July 2013 Expiry date: 30 June 2018
Regulation 50.50.03 of the Income Tax Assessment Regulations 1997
The International Cricket Council has been granted a five-year exemption from income tax to assist them in their role of organising and promoting the staging of the 2015 Cricket World Cup in Australia.
B34 Philanthropy — income tax exemption for recreation-type not-for-profit societies
Sections 50-10 and 50-45 of the Income Tax Assessment Act 1997
Subject to certain conditions, the income of recreation-type not-for-profit societies, associations or clubs established for the encouragement of sport or games, music, art, animal racing, literature, or for community service purposes is exempt from income tax.
For those not-for-profit societies, associations or clubs to which the mutuality principle applies, this tax expenditure exempts from income tax those amounts that are not already excluded by the mutuality principle, for instance income generated from non-member transactions. (For a brief explanation of the mutuality principle, refer to section B.2 of Appendix B.)
B35 Refundable Film Tax Offset payments
Exemption 2012
TES code: B35
Film production companies incurring expenditure on certain productions in Australia may be eligible for refundable tax offsets. The tax offsets are the location offset, the producer offset and the post, digital and visual effects (PDV) offset. The refundable tax offsets are paid directly to producers through the tax system. A production company can claim no more than one of the film tax offsets for each film.
Under the location offset, producers of qualifying large scale films which commenced principal photography or production of the animated image in Australia prior to 10 May 2011 are eligible to receive a refundable tax offset of 15 per cent of qualifying Australian production expenditure (QAPE). Producers of qualifying large scale films which commenced on or after 10 May 2011 are eligible to receive a refundable tax offset of 16.5 per cent of QAPE.
The producer offset enables producers of qualifying Australian films to receive a refundable tax offset of 40 per cent of QAPE incurred on a feature film, or 20 per cent of QAPE incurred on productions that are not feature films, for QAPE incurred on or after 1 July 2007.
Under the PDV offset, companies engaged in PDV work commencing in Australia prior to 1 July 2011 are eligible to receive a refundable tax offset of 15 per cent of QAPE. Companies engaged in PDV work on or after 1 July 2011 are eligible to receive a refundable tax offset of 30 per cent of QAPE.
B36 Exemption from the tax shelter prepayments measure for certain passive investments
Accelerated write-off 2012 TES code: B36
Section 82 KZME of the Income Tax Assessment Act 1936
A prepayment in relation to investments in infrastructure bonds, shares, units, rental property and arrangements entered into before 1 July 2000, to which product rulings apply, continues to be immediately deductible. This is conditional upon the prepayment expenditure meeting the requirements described in the tax expenditure Prepayment rule for small business taxpayers and non-business expenditure by individuals (B37). The benchmark treatment of prepayments is that they are deductible over the period of the expenditure. The tax expenditure allows deductions to be spread over a shorter period and consequently it allows greater deductions than the benchmark treatment.
From 1 July 2007, small businesses with aggregated annual turnover of less than $2 million have been able to access this concession under the Small Business Framework.
B37 Prepayment rule for small business taxpayers and non-business expenditure by individuals
Section 82 KZM of the Income Tax Assessment Act 1936
Prepayments by small businesses (including Simplified Tax System taxpayers prior to 1 July 2007) and non-business prepayments by individual taxpayers were immediately deductible. This was conditional upon the service being provided over a period not exceeding 12 months and ending at the end of the income year following the income year in which the prepayment expenditure is incurred.
From 1 July 2007, small businesses with an aggregate annual turnover of less than $2 million have been able to access this concession under the Small Business Framework.
B38 The 10-year rule for prepayments
Subsection 82 KZL(1) of the Income Tax Assessment Act 1936
A prepayment for services to be provided over a period of 10 years or more (for example, life membership) is evenly deducted over the first 10 years of that period. The benchmark treatment of prepayments is that they are deductible over the period of the expenditure. The tax expenditure allows deductions to be spread over a shorter period and consequently it allows greater deductions in the first 10 years than the benchmark treat
B39 Conservation tillage refundable tax offset
Subdivision 385-J of the Income Tax Assessment Act 1997; repeal not yet legislated.
Qualifying primary producers are able to claim a 15 per cent refundable tax offset on the cost of an eligible seeder where they have met the eligibility requirements including that they have been issued a Research Participation Certificate. This refundable tax offset is only available for eligible seeders installed ready for use between 1 July 2012 and 30 June 2014. The Government intends to repeal the refundable tax offset with effect from 1 July 2014, as part of its commitment to repeal the carbon tax and its associated spending programs.
B40 Deferral of income from double wool-clips
Deferral 2012 TES code: B41
Section 385-135 of the Income Tax Assessment Act 1997
As a consequence of drought, fire or flood, primary producers carrying on a sheep grazing business in Australia may conduct advanced shearing. In these circumstances, a woolgrower may elect to have the assessment of the profit from advanced shearing deferred to the succeeding income year.
B41 Deferral or spreading of income from the forced disposal or death of livestock
Sections 385-90 to 385-125 of the Income Tax Assessment Act 1997
Primary producers are eligible for a tax concession on the forced disposal or death of livestock resulting from certain events. These events include:
the compulsory acquisition or resumption of land;
destruction of pasture by drought, flood or fire;
compulsory destruction of livestock for disease control; or
notification of contamination of property or a cattle tick eradication campaign.
Primary producers who receive income from such disposals or deaths can elect to defer this income and use it to reduce the cost of replacement livestock in the disposal year or in any of the next five income years. Alternatively, primary producers can elect to spread profits between the income year of the disposal or death and the next four income years (or ten years if the forced disposal was in relation to the control of bovine tuberculosis).
B42 Farm Management Deposit scheme
Medium * Category 3+
The Farm Management Deposit (FMD) scheme allows primary producers (with a limited amount of non-primary production income) to defer their income tax liability. Primary producers are able to claim deductions for their FMD made in the year of deposit, with subsequent withdrawals being subject to assessment in the year of withdrawal. The FMD has a maximum limit on deposits of $400,000. Primary producers in exceptional circumstance areas are able to withdraw their deposits within 12 months while maintaining the concessional tax treatment of the scheme. From 1 July 2010, this will also apply to primary producers affected by natural disasters. The FMD scheme replaced the Income Equalisation Deposits and Farm Management Bonds schemes on 2 January 1999.
Projections beyond 2013‑14 are not reported as the tax expenditure is very sensitive to variations in the amounts deposited and withdrawn in any year, which are dependent on a number of external factors.
B43 Income tax averaging for primary producers
High * Category 3+
Primary producers can elect to pay tax at a tax rate based on their average income earned over the previous five income years. If the taxpayer has not been using this facility for five years, the tax rate is based on the income years in which averaging has applied, and the previous year. This provides a concession because, on balance, the saving from paying less tax in high income years outweighs additional tax paid in low income years.
Projections beyond 2011‑12 are not reported as the tax expenditure is very sensitive to variations in primary production income, which depends on a number of external factors.
B44 Spreading of income from insurance recoveries for loss of timber or livestock
Insurance recoveries may be received in relation to timber lost because of fire, or livestock lost due to disasters (for example, drought, fire, flood or disease). Primary producers who receive such insurance recoveries can elect to spread the income equally over five income years, resulting in a tax deferral. This concession only applies where the livestock are assets of a primary production business carried on in Australia.
B45 Tax exemption for farm help re-establishment grants
Medium — High
1 December 1997 Expiry date: 30 June 2009
Paragraph 118-37(1)(d) of the Income Tax Assessment Act 1997
Re-establishment grants of up to $75,000 provided to eligible farmers who choose to sell their farm and exit farming for at least five years are exempt from capital gains tax.
B46 Valuation of livestock from natural increase
Animals acquired by natural increase (that is, newborn animals) may be valued at cost, market selling value or replacement value. If valued at cost, the taxpayer can use actual cost or costs prescribed by the regulations. These prescribed costs may be lower than the actual cost of production, giving a concessional tax treatment.
B47 Infrastructure Bonds Scheme
Mining, manufacturing and construction ($m)
Exemption, Offset 2012 TES code: B48
1992 Expiry date: 1997
Division 16L of the Income Tax Assessment Act 1936
Interest income from loans to eligible infrastructure facilities is exempt from income tax and the interest paid by the borrower is not deductible. After 15 December 1994, the lender could elect to include the income in assessable income and receive an offset at the company tax rate. This scheme was closed to new projects from 14 February 1997, and replaced by the now repealed Land Transport Infrastructure Borrowings Tax Offset Scheme in 1998.
B48 Denial of depreciation deduction for car value above the luxury car tax threshold
Transport and communication ($m)
Denial of deduction 2012 TES code: B50
Section 40-230 of the Income Tax Assessment Act 1997
If the value of a car used for income-producing purposes exceeds a certain amount ('car limit'), the amount of depreciation deductions that can be claimed is capped at the 'car limit'. This represents a negative tax expenditure as the full value of the car should be depreciated under the benchmark.
The 'car limit' for the 2013‑14 financial year is $57,466. This amount is indexed annually to movements in the motor vehicle purchase sub-group of the CPI. The 'car limit' is not changed if the index has fallen for a particular year.
B49 Shipping — investment incentives
Exemption, Accelerated write-off, Deferral 2012 TES code: B51
Division 51-100 of the Income Tax Assessment Act 1997, Subsection 128B(3) of the Income Tax Assessment Act 1936, item 10 of the table to Subsection 40-102(4) of the Income Tax Assessment Act 1997, Subsection 40-285(5) of the Income Tax Assessment Act 1997
From 1 July 2012, the following incentives are provided to encourage investment in Australian shipping:
an income tax exemption on qualifying income for ship operators;
a royalty withholding tax exemption;
accelerated depreciation, under which Australian ship owners will be able to depreciate vessels over an effective life that is capped at 10 years; and
balancing adjustment roll-over relief for Australian ship owners if they cease to hold a vessel and purchase another eligible vessel within 2 years.
B50 Shipping — refundable tax offset for employers of qualifying Australian seafarers
Subdivision 61-N of the Income Tax Assessment Act 1997
A refundable tax offset is available to qualifying companies that employ qualifying Australian seafarers on overseas voyages for at least 91 days in the income year.
As the refundable tax offset is an expense item, it does not appear as a tax expenditure in its own right. However, a tax expenditure arises because payments made under this arrangement are exempt from tax.
B51 Deductions for boat expenditure
Other economic affairs — Tourism and area promotion ($m)
Former section 26-50 of the Income Tax Assessment Act 1997
For income years commencing on or after 1 July 2007, taxpayers can claim deductions for expenses incurred in boating activities that are not carried on as a business. However, these deductions can only offset income from the boating activities, and if the deductions are greater than the income for that income year, the excess is carried forward, for offset against futu
re income from boating activities.
For income years commencing prior to 1 July 2007, deductions are allowable only where the taxpayer can demonstrate that they were carrying on an active business using a boat.
B52 Income tax exemption for employee and employer organisations
Other economic affairs — Total labour and employment affairs ($m)
Subject to certain conditions, the income of trade unions and registered associations of employers and employees is exempt from income tax. This tax expenditure exempts from income tax those amounts that are not already excluded by the 'mutuality principle'. (For a brief explanation of the mutuality principle, refer to section B.2 in Appendix B.)
B53 25 per cent entrepreneurs' tax offset
2005 Expiry date: 30 June 2012
Subdivision 61-J of the Income Tax Assessment Act 1997
Prior to the introduction of simplified depreciation rules for small businesses from the 2012‑13 income year (B101), small businesses with an annual turnover of $50,000 or less were eligible for a tax offset of 25 per cent of the income tax liability attributable to their business income. The offset phased out for annual turnover between $50,001 and $75,000. From 1 July 2007, this concession applied to any small business entity, whereas before that time the concession only applied to taxpayers in the then Simplified Tax System.
From 1 July 2009, eligibility for the offset was subject to a means test. The offset phased out for singles with incomes over $70,000 and families with incomes over $120,000.
B54 Capital gains tax concession for carried interests paid to venture capital managers
Denial of deduction, Deferral of deduction 2012 TES code: B56
Sections 104-255 and 118-21 of the Income Tax Assessment Act 1997
Venture capital fund managers may be paid a performance-based share of partnership profits by investors. Such performance payments are 'carried interests'. Under the benchmark, these entitlements are taxable income of the fund managers as they accrue. Instead, under the law, an entitlement to receive a carried interest is a capital gains tax event in the hands of venture capital fund managers and is not treated as income. Consequently, taxation of the income is deferred until the gains are realised and individual managers are eligible for the 50 per cent discount on their carried interest.
B55 Capital protected borrowings
Deduction, Discounted valuation 2012 TES code: B57
16 April 2003 Expiry date: 30 June 2013
Taxpayers are able to claim a deduction for some or all of the cost of the capital protection associated with capital protected borrowings.
The interest cost of capital protected borrowings includes the cost of borrowing and the cost of capital protection. Under the benchmark, the cost of borrowing is deductible while the cost of capital protection, where it is considered capital in nature, is not deductible but instead included in the cost base of the asset.
The concessional treatment does not apply to capital protected borrowing arrangements entered into after 13 May 2008. Arrangements entered into
before that date will continue to receive the concessional treatment up to 30 June 2013.
B56 Certain term subordinated notes
Division 974 of the Income Tax Assessment Act 1997 Division 974 of the Income Tax Assessment Regulations 1997
'Solvency clauses' do not preclude certain term subordinated notes from being classified as debt for tax purposes. A solvency clause allows the issuer to defer payment if the payment would cause insolvency. The distributions on such notes may be treated as tax deductible interest payments rather than non-tax deductible dividend payments. Under the benchmark, term subordinated notes with solvency clauses would typically be classified as equity under the debt-equity rules.
B57 Concessions resulting from the clarification of the debt or equity treatment of perpetual subordinated debt
Under certain circumstances, 'profitability, insolvency or negative earnings conditions' do not preclude Upper Tier 2 perpetual subordinated debt and similar instruments from being classified as debt for tax purposes. This means that distributions on such instruments may be treated as tax deductible interest payments rather than non-tax deductible dividend payments. Perpetual subordinated debt issued by financial institutions to raise regulatory capital would typically be classified as equity under the benchmark debt-equity rules.
B58 Deduction for borrowing expenses
A taxpayer is able to claim a deduction (spread over the shorter of the term of the loan or five years) for borrowing expenses incurred for borrowing money that is used for the purpose of producing assessable income. Borrowing expenses incurred in these circumstances would otherwise be capital in nature and included in the cost base of the asset.
B59 Deduction for certain co-operative companies
Sections 117 and 120 of the Income Tax Assessment Act 1936
Co-operative companies whose primary object is the acquisition from their shareholders of commodities or animals for disposal or distribution can deduct amounts paid to repay Australian and State Government loans which are provided for the purchase of assets required for the purpose of carrying on their business. However, the deduction is allowed only if 90 per cent or more of the value of the company is held by shareholders who supply the company with the commodities or animals.
B60 Exemption for early stage venture capital limited partnerships and venture capital limited partnerships
Sections 26-68, 51-52, 51-54 and Subdivision 118-F of the Income Tax Assessment Act 1997
Resident and foreign partners are exempt from tax on revenue and capital gains derived in respect of their eligible investments in early stage venture capital limited partnerships.
An early stage venture capital limited partnership is a flow-through investment vehicle that is progressively replacing the Pooled Development Fund program.
To qualify as an early stage venture capital limited partnership, the size of the fund cannot exceed $100 million and the total assets of an investee company cannot exceed $50 million immediately prior to investment. The early stage venture capital limited partnership must divest itself of any holdings once the total assets of the investee company exceed $250 million.
B61 Income tax exemption for industry-specific not-for-profit societies and associations
An income tax exemption applies to the income of industry-specific not-for-profit societies or associations predominantly devoted to promoting the development of aviation or tourism, or of agricultural, pastoral, horticultural, viticultural, manufacturing or industrial resources of Australia. This expenditure includes the income tax exemption applying to not-for-profit societies or associations established for the purpose of promoting the development of Australian information and communication technology resources.
For those not-for-profit societies, associations or clubs to which the 'mutuality principle' applies, this tax expenditure exempts from income tax those amounts that are not already excluded by the 'mutuality principle'. (For a brief explanation of the mutuality principle, refer to section B.2 of Appendix B)
B62 Income tax exemptions for foreign superannuation funds
Section 128D and paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936
Interest income and dividends received by foreign superannuation funds are exempt from income tax. This income is also exempt from interest and dividend withholding taxes if it is exempt from income tax in the country in which the foreign superannuation fund resides.
B63 Managed investment trusts — election to allow capital gains tax to be the primary code for disposals of shares, units and real property
From the 2008-09 income year eligible managed investment trusts (MITs) can make an irrevocable election to apply the capital gains tax regime to gains and losses on disposals of certain assets (primarily shares, units and real property). If an eligible MIT does not make an irrevocable election to have capital account treatment, then gains and losses on disposals of shares and units will be treated on revenue account.
B64 New tax system for managed investment trusts
Exemption, Deferral 2012 TES code: B66
Not yet legislated
The new tax system for managed investment trusts (MITs) will commence from 1 July 2014. Under this system MITs will be able to carry forward 'unders' and 'overs' (up to a 5 per cent cap) into the next income year without adverse taxation consequences.
MITs in which unit holders have 'clearly defined rights' will be able to choose to use an attribution method of taxation, instead of the present entitlement to income method, and will be treated as fixed trusts for various taxation law purposes. Amendments to the taxation law will be introduced to prevent any income tax consequences that might arise from a resettlement where a MIT changes its trust deed (or other constituent documents) to meet the 'clearly defined rights' requirement under the new tax system for MITs.
B65 Philanthropy — Income tax exemption for certain non-charitable funds
Included in B66
Endorsed non-charitable Public Ancillary Funds and Private Ancillary Funds are exempt from income tax.
Public Ancillary Funds and Private Ancillary Funds must provide money, property and benefits solely to income tax exempt deductible gift recipients.
B66 Philanthropy — Income tax exemption for charitable funds
Sections 50-5, 50-52 and 50-60 Income Tax Assessment Act 1997
Note: estimates include tax expenditures B66 and B65
Endorsed charitable funds, including Public Ancillary Funds and Private Ancillary Funds, can claim an income tax exemption where they provide money, property and benefits solely to charities based in Australia, or solely to charitable deductible gift recipients, or to a combination of these.
These funds are prevented from undertaking charitable activities with their funds. They must distribute their funds to other entities that undertake charitable activities.
B67 Philanthropy — income tax exemption for charitable, religious, scientific, and community service entities
Sections 50-5 and 50-10 of the Income Tax Assessment Act 1997
The following entities are exempt from income tax:
religious, scientific, charitable and public educational institutions and funds;
funds established to enable scientific research to be conducted by or in conjunction with a public university or public hospital;
not-for-profit societies, associations or clubs established for the encouragement of science; and
societies, associations or clubs established for community service purposes.
Entities must satisfy various conditions to qualify for these exemptions.
B68 Philanthropy — income tax exemption for small not-for-profit companies
Subsection 23(6) of the Income Tax Rates Act 1986
The rate of income tax payable by a not-for-profit company that has a taxable income not exceeding $416 in a given income year is nil. Income tax is payable at a rate of 55 per cent on all income of not-for-profit companies that have a taxable income between $416 and $915.
This arrangement has the effect of providing an exemption from income tax for not-for-profit companies for the first $416 of income, and then phasing in the ordinary corporate income tax rate of 30 per cent on all income, including the first $416, when the company has income between $416 and $915. When a not-for-profit company has an income over $915, the company tax rate is applied from the first dollar.
B69 Philanthropy — refund of franking credits for certain income tax exempt philanthropic entities
Rebate 2012 TES code: B71
Subdivision 207-E of the Income Tax Assessment Act 1997
Note: estimates after 2012‑13 are unquantifiable because of the high degree of uncertainty in the amount of franking credits that might be refunded in the future.
Generally, entities that are not subject to Australian tax cannot benefit from franking credits on distributions from Australian companies. However, entities that are endorsed as income tax exempt charities or income tax exempt deductible gift recipients are able to claim a refund of franking credits on distributions from Australian companies.
B70 Pooled Development Funds
Exemption, Concessional rate 2012 TES code: B72
Section 118-13 of the Income Tax Assessment Act 1997
Division 10E of Part III of the Income Tax Assessment Act 1936 Subsections 23(4C) and (4D) of the Income Tax Rates Act 1986
Concessional taxation treatment is available to investment companies that are established and registered as Pooled Development Funds (PDFs). Income arising from investments in small to medium enterprises is taxed at 15 per cent and other income is taxed at 25 per cent. These concessional tax rates are designed to encourage PDFs to invest in small to medium enterprises. In addition, investors who invest in PDFs are not liable for tax either on dividends paid by the PDF or on capital gains made on the sale of their shares in the PDF. The unfranked portion of a dividend paid by a PDF to a shareholder is exempt from income tax, and if the shareholder is a foreign resident, from dividend withholding tax.
Australian superannuation funds and related entities that invest in venture capital through PDFs are eligible for a tax exemption on certain franked dividends. Capital gains and dividends paid to superannuation funds by PDFs are exempt from tax. Superannuation funds that invest in venture capital through PDFs are also entitled to a refundable imputation credit for the tax paid by the PDF.
The PDF program was closed to applications for registration on 21 June 2007 as a result of the introduction of the early stage venture capital limited partnership regime. The PDF program continues to operate for registered PDFs.
B71 Tax exemption for small and medium sized credit unions
Sections 6H and 23G of the Income Tax Assessment Act 1936 Section 23(7) of the Income Tax Rates Act 1986
Interest income derived from loans to members by recognised small credit unions is exempt from income tax. Small credit unions have a notional taxable income less than $50,000. This exemption does not extend to other income. A credit union that is treated in this way is not eligible for assessment as a co-operative company.
Recognised medium credit unions have a notional taxable income of less than $150,000. For recognised medium credit unions, the rate of tax payable on the first $49,999 is reduced to zero. The rate of taxation payable on income between $50,000 and $150,000 is 45 per cent. When the income of a credit union exceeds $150,000, it ceases to be a small or medium credit union and the corporate tax rate applies to income from the first dollar.
B72 Treatment of finance leases
Other economic affairs — Other econom
ic affairs, nec ($m)
Divisions 240 and 250 of the Income Tax Assessment Act 1997 Division 42A of the Income Tax Assessment Act 1936
A finance lease is, in substance, equivalent to a loan from the lessor to the lessee to finance the purchase of the leased asset. The lessor (financier) acquires the leased asset at the request of the lessee (borrower) and leases the asset to the lessee. On expiry of the lease, legal ownership of the asset is transferred to the lessee at minimal or no cost. During the term of the lease, while the lessor is the legal owner of the leased asset, the lessee has effective economic ownership through having control, use and enjoyment of the asset. Given their economic substance, finance leases should be taxed as a loan from the lessor to the lessee to acquire the leased asset under the benchmark. That is, the interest payments should be deductible to the lessee and assessable to the lessor, and the lessee be able to claim depreciation deductions for the user cost of the leased asset.
Except where specific provisions apply, for example, Divisions 240 and 250 of the Income Tax Assessment Act 1997, finance leases are taxed as leases rather than as loans. That is, lease payments (which comprise, in substance, interest and principal repayments) are deductible to the lessee and assessable to the lessor, and the lessor can claim depreciation deductions for the user cost of the leased asset. To the extent that the lease period is shorter than the effective life of the leased asset and the lease payments do not reflect the declining value of the leased asset, parties to finance leases are able to bring forward deductions for the cost of the leased asset. Additionally, if the lessor's effective marginal tax rate is greater than the lessee's, treating finance leases as leases rather than as loans allows the transfer of tax benefits to the lessor from the lessee.
B73 Trust loss rules — family trusts
9 May 1995 Expiry date:
Subdivision 272-D of Schedule 2F to the Income Tax Assessment Act 1936
The family trust rules provide a concession to the 'test individual' of a family trust, and their family group, by allowing the transfer of the benefit of losses and debt deductions to members of the family trust.
The trust loss rules — the benchmark — restrict trust losses and debt deductions from being transferred to persons who did not bear the economic burden. This is achieved by imposing tests on trusts to determine if any losses and debt deductions can be claimed. The tests examine whether there has been a change in underlying ownership or control of a trust and whether certain schemes have been entered into in order to take advantage of losses or debt deductions. Family trusts have to satisfy only the income injection test. The income injection test relates to schemes where persons outside the defined family group inject income into the trust to take advantage of trust losses and debt deductions. Distributions of trust income or capital made outside the family group will generally be subject to a family trust distribution tax.
Elements of the family trust rules are also used in the franking credit trading rules to facilitate the passing through of franking credits to beneficiaries of discretionary trusts and in the company loss recoupment rules as part of the alternative conditions for the continuity of ownership test.
B74 Tax incentives for film investment
Deduction, Accelerated write-off 2012 TES code: B76
15 November 1956 Expiry date: 1 July 2010
Former Divisions 10B and 10BA of the Income Tax Assessment Act 1936
Capital expenditure incurred in acquiring an interest in the initial copyright of a new Australian film can either be deducted immediately (for certain types of film) or written off over two years.
The initial deduction under Division 10B must be made in relation to the 2008-09 year of income or an earlier year of income. A deduction under Division 10BA is not allowable in relation to the 2009‑10 year of income or a later year of income.
B75 Accelerated depreciation for grapevine plantings
1993 Expiry date: Not available for grapevines planted after 1 October 2004
Subdivision 40-F of the Income Tax Assessment Act 1997
Prior to 1 October 2004, capital expenditure incurred in acquiring and establishing grapevines could be written off on a prime cost basis over four years, with the deductions being available from the time the vines were planted. Since 1 October 2004, new grapevine plantings are subject to the capital allowances regime applicable to horticultural plants. That is, the establishment costs of the grapevine may be written off at 13 per cent per annum (the write-off rate applicable to a plant with an effective life of 13 years to fewer than 30 years) with deductions available from the income year in which the grapevine's first commercial season starts.
B76 Deduction for horse breeding stock
Taxpayers can elect to write off horse breeding stock, acquired on or after 19 August 1992, at up to 25 per cent of the cost of sires per annum and up to 33⅓ per cent of the cost of mares per annum, on a prime cost basis.
B77 Deduction of the capital cost of telephone lines and electricity connections
24 June 1981 Expiry date:
Subdivision 40-G of the Income Tax Assessment Act 1997
Capital expenditure incurred in connecting a telephone line to a primary production property and capital expenditure incurred in connecting or upgrading mains electricity to a property on which a business is conducted can be deducted in equal instalments over ten years.
B78 Landcare and water facility offset
Former Subdivision 388 of the Income Tax Assessment Act 1997
Primary producers and users of rural land with taxable incomes of up to $20,000 a year were able to claim a 30 per cent tax offset for capital expenditure on soil conservation, prevention of land degradation and related measures incurred until the end of the 2000-01 income year. This concession was claimed as an alternative to the landcare deduction. The tax offset was based on one third of the eligible expenditure and was available in the year the expenditure was incurred and in each of the subsequent two years.
However, the offset will continue to apply after the 2000-01 income year to expenditure incurred in that or an earlier income year where the offset is apportioned over three years, or where taxpayers had insufficient tax payable to claim the entire offset in earlier income years.
B79 Landcare deduction for primary producers
Subdi
vision 40-G of the Income Tax Assessment Act 1997
Primary producers and users of rural land can claim a deduction for capital expenditure on a landcare operation in the year that it is incurred. Landcare operations may include soil conservation, prevention of land degradation or other related measures.
B80 Sustainable Rural Water Use and Infrastructure Program
1 April 2010 Expiry date:
From 1 April 2010, taxpayers may choose to make payments received under eligible Sustainable Rural Water Use and Infrastructure Program agreements free of income tax (including capital gains tax), with expenditures funded by such payments not being deductible.
B81 Tax write-off for horticultural plants
Capital expenditure incurred in establishing horticultural plants can be written off using an accelerated depreciation regime, with deductions available from the first commercial season. The cost of establishing plants with an effective life of less than three years can be written off in the first commercial year. Plants with an effective life of more than three years can be depreciated over a shorter period than their effective life using the maximum write-off periods set out in the legislation.
B82 Three year write-off for expenditure on water facilities for primary producers
23 May 1980 Expiry date:
Note: estimates include tax expenditures B82, B79 and B83
Primary producers can claim a deduction for capital expenditure on water facilities over three years. Water facilities include dams, earth tanks, underground tanks, concrete or metal tanks, tank stands, bores, wells, irrigation channels or similar improvements, pipes, pumps, water towers, and windmills. One-third of the expenditure is deductible in the income year in which it is incurred, and one-third is deductible in each of the following two years. The expenditure must be incurred primarily for conserving and conveying water for use in primary production.
B83 Water facilities and landcare concession for irrigation water providers
Subdivisions 40-F and 40-G of the Income Tax Assessment Act 1997
Certain irrigation water providers can claim an immediate deduction for capital expenditure on landcare activities and can claim a deduction for capital expenditure on water facilities over three years. The measure aligns the deductions available to primary producers and businesses using rural land with deductions available to irrigation water providers which supply those primary producers and businesses with water.
B84 Absence of depreciation recapture for certain assets
Division 43 and Section 110-45 of the Income Tax Assessment Act 1997
Certain buildings and structures receive deductions that are not recaptured by balancing adjustment on disposal of the asset. This tax expenditure is offset by reductions in the capital gains tax cost base of the assets concerned.
B85 Capital expenditure deduction for mining, quarrying and petroleum operations
Accelerated write-off 2012 TES code: B87 and B88
Former Subdivision 330-C and Subdivision 40-B of the Income Tax Assessment Act 1997 as adjusted by Sections 40-35, 40-40 and 40-75 of the Income Tax (Transitional Provisions) Act 1997
Certain capital expenditure incurred in carrying on a mining, petroleum or quarrying operation can be deducted over the lesser of the life of the project or 10 years (20 years for quarrying). The deduction is available for expenditure incurred before 1 July 2001 or expenditure relating to a depreciating asset acquired before 1 July 2001 (excluding plant and equipment).
Expenditure incurred on or after 1 July 2001 can be deducted over the life of the project.
B86 Deduction for environmental protection activities and environmental impact studies
Various Expiry date: 2001 (EIS)
Sections 40-755 and 40-760 of the Income Tax Assessment Act 1997, Subdivision 40-I of the Income Tax Assessment Act 1997 as adjusted by Section 40-55 of the Income Tax (Transitional Provisions) Act 1997
Expenditure of a capital nature used to control pollution or manage waste is immediately deductible if the pollution or waste is a result of the taxpayer's business or is on the site of the taxpayer's business. Expenditure to prevent pollution that is likely to occur is also immediately deductible.
Expenditure incurred on an eligible environmental impact study (EIS) can be deducted over the lesser of 10 years or the life of the project to which it relates. This deduction applies to expenditure incurred before 1 July 2001. Expenditure incurred on or after 1 July 2001 can be deducted over the life of the project.
B87 Exploration and prospecting deduction
Section 40-25, subsection 40-80(1) and section 40-730 of the Income Tax Assessment Act 1997
Expenditure on exploration or prospecting for the purpose of mining (including for petroleum) and quarrying is immediately deductible. In addition, the cost of a depreciating asset is immediately deductible if the taxpayer first uses the asset for exploration or prospecting for minerals (including petroleum) or quarry materials obtainable by mining operations, subject to certain conditions.
From 14 May 2013, the cost of mining, quarrying and prospecting rights and information first used for exploration will generally be deductible over their effective life or 15 years, whichever is shorter. In the years immediately following this change, deductions for exploration expenditure will be relatively small as expenditure from previous years has already been fully deducted. In contrast, the benchmark treatment includes deductions for the depreciation of assets purchased in earlier years which are still within their effective lives. As a result there is a negative tax expenditure starting in 2013‑14 which will decrease over time.
B88 Statutory effective life caps
'Statutory effective life caps' act to override the Commissioner of Taxation's determinations of the 'safe harbour' effective life of assets in certain cases. This provides a shorter write-off period for those assets subject to a statutory cap where the cap is below the effective life determined by the Commissioner.
Statutory caps exist for a range of assets, including:
aircraft and certain assets used in the oil and gas industries (effective from 1 July 2002);
trucks, truck trailers, buses and light commercial vehicles (effective from 1 January 2005); and
tractors and harvesters (effective from 1 July 2007).
B89 Accelerated depreciation for software
Subdivision 40-E of the Income Tax Assessment Act 1997
In-house software is essentially software that is used in-house, rather than as trading stock, and that is a capital asset, rather than fully deductible in the year of purchase. It includes software, or a right to use software, that the taxpayer has acquired, developed or has had another entity develop.
Expenditure on in-house software is depreciated over a statutory effective life, rather than an effective life that is self-assessed by the taxpayer or that is determined by the Commissioner of Taxation. Prior to 13 May 2008, the statutory effective life was two and a half years, which gave rise to a tax expenditure in relation to software which has an effective life greater than two and a half years. For expenditure in relation to software assets newly held after 13 May 2008 the statutory effective life is four years.
B90 Deduction for capital works expenditure
21 August 1979 Expiry date:
Division 43 of the Income Tax Assessment Act 1997
A taxpayer can claim a deduction for capital works expenditure incurred in constructing capital works, including buildings and structural improvements and environment protection earthworks, over a period that is generally shorter than the effective life of the asset.
Capital works can be deducted at either 2.5 per cent (over 40 years) or 4 per cent (over 25 years) of the construction expenditure, depending on when construction started and how the capital works are used.
B91 Depreciation balancing adjustment roll-over relief
'Balancing adjustments' arise when the disposal value of a depreciating asset varies from its depreciated value. The tax liability for such balancing adjustments can be deferred where the balancing adjustment arises from certain changes in ownership, such as disposal as a result of a marriage breakdown. The transferee is taken to acquire the asset at the written down value and must depreciate the asset in the same way as the transferor.
Prior to 21 September 1999, balancing adjustment offsets were also available when replacement items of plant and equipment were acquired. This treatment is available to businesses with turnover of less than $1 million for assets acquired before 1 July 2001.
B92 Depreciation pooling for low value assets
Assets costing less than $1,000 can be written off at the declining balance rate of 37.5 per cent through a low value asset pool. Once a taxpayer elects to create a low value pool, all assets that cost less than $1,000 are subject to the declining balance rate treatment. A low value asset pool is available to taxpayers who do not qualify for, or choose not to use the simplified depreciation rules.
A low value pool mechanism for the depreciation of assets was introduced to reduce taxpayers' compliance costs by removing the need to track individual items for depreciation purposes.
B93 Depreciation to nil value rather than estimated scrap value
Taxpayers are entitled to write-off the cost of depreciating assets to zero value, rather than to the estimated disposal value of the asset. Any gain on disposal of the asset is assessed as income at the time of disposal through a balancing adjustment. This results in a tax deferral.
B94 Establishment costs for carbon sink forests
The cost of establishing trees in carbon sink forests is immediately deductible in the 2007-08 to 2011‑12 income years inclusive. After this initial period, establishment costs will be deductible over 14 years and 105 days at a rate of 7 per cent per annum.
To be eligible for the deduction, the taxpayer must be carrying on a business and the carbon sink forest must meet Environmental and Natural Resource Management Guidelines.
B95 Research and development — exemption of refundable research and development tax offset payments (former scheme)
Exemption, Denial of deduction 2012 TES code: B98
Section 73I of the Income Tax Assessment Act 1936
The longstanding Research and Development (R&D) Tax Concession was replaced with the new R&D Tax Incentive with effect from 1 July 2011. Prior to 1 July 2011, companies with an annual turnover of less than $5 million that undertook up to $1 million of R&D ($2 million from 1 July 2009) were eligible to receive a refundable tax offset equivalent to the value of the R&D Tax Concession (which allowed a tax deduction on eligible expenditure at the rate of either 125 per cent or 175 per cent).
As the refundable R&D tax offset is an expense item, it does not appear as a tax expenditure in its own right. However, a tax expenditure arises because payments made under the refundable R&D tax offset are exempt from tax. In addition, companies that claim the refundable R&D tax offset are unable to claim deductions for the R&D expenditures concerned. The absence of these deductions constitutes a negative tax expenditure and explains why the estimates are negative.
B96 Research and development — exemption of research and development refundable tax offset (current scheme)
The research and development refundable tax offset is available to companies with a turnover of less than $20 million at a rate of 45 per cent of expenditure on eligible research and development (R&D) activities.
It takes the form of a 'refundable' tax offset, similar to the treatment under the former R&D Tax Offset. If a taxpayer's income tax liability is reduced to zero, the unused refundable tax offset amount can be applied to reduce other tax liabilities (such as GST). Any residual unused amounts can be refunded as cash to the company.
As the R&D refundable tax offset is an expense item, it does not appear as a tax expenditure in its own right. However, a tax expenditure arises because payments made under the R&D refundable tax offset are exempt from tax. In addition, companies that claim the R&D refundable tax offset are unable to claim deductions for the R&D expenditures concerned. The absence of these deductions constitutes a negative tax expenditure and explains why the estimates are negative.
B97 Research and development — immediate deduction for expenditure on core technology
Deduction 2012 TES code: B100
Sections 73B(12) to 73B(12C) of the Income Tax Assessment Act 1936
Prior to the 1 July 2011 commencement of the Research and Development Tax Incentive, expenditure on core technology, except where incurred by companies in partnerships, was deductible at a rate of 100 per cent over the period of related research and development (R&D) activities. This deduction was capped at one third of the firm's expenditure on related R&D for the income year in question, until the core technology amount has been fully deducted. The benchmark treatment for such expenditure is that it is deductible over its effective life and consequently the scope for the 100 per cent rate potentially allows a greater rate of deduction than the benchmark.
B98 Research and development — non-refundable tax offset
Offset 2012 TES code: B101
The Research and Development non-refundable tax offset is available at a rate of 40 per cent for eligible research and development (R&D) expenditure and can be carried forward where a company's income tax liability is zero.
The R&D non-refundable tax offset takes the form of a tax offset that can be carried forward to be applied against future income tax liabilities. Carried forward amounts will result in a similar outcome to a carry forward loss arising from a tax deduction under the former R&D Tax Concession. If a company's income tax liability is zero, unused offset amounts cannot be applied to reduce other tax liabilities (such as GST).
Companies with an aggregated assessable income of $20 billion or more are not eligible for the offset from 1 July 2013.
B99 Research and development — Premium tax concession for additional expenditure
Deduction, Accelerated write-off 2012 TES code: B102
Section 73Q to 73Z of the Income Tax Assessment Act 1936
Prior to the 1 July 2011 commencement of the Research and Development Tax Incentive, companies that increased expenditure on labour related components of research and development (R&D) which are Australian-owned were eligible to receive a 175 per cent tax concession for increases above the average of the previous three years' R&D expenditure. The 175 per cent premium covers all additional R&D expenditure excluding plant, pilot plant, contracted
plant, plant leases, core technology, R&D related interest and items excluded from the 125 per cent R&D tax concession.
The concession was available to the extent that total R&D expenditure has increased. Total R&D expenditure includes both the Australian-owned and foreign-owned components of the premium tax concession. This deduction was available to companies from the first income year starting after 30 June 2001.
Companies that undertake R&D on behalf of a grouped foreign company were eligible for a 175 per cent tax concession for increases in R&D expenditure above the average of the previous three years' of R&D expenditure. Expenditure on behalf of a grouped foreign company which contributes to the calculation of the 175 per cent tax concession must be labour related and will be subject to a specific deduction at the rate of 100 per cent.
The concession was only available to the extent that total R&D expenditure has increased. Total R&D expenditure includes both the Australian-owned and foreign-owned components of the premium tax concession. This deduction was available to the Australian subsidiaries of multinational enterprises from 1 July 2007.
B100 Research and development — Research and Development Tax Concession
Sections 73B and 73BA of the Income Tax Assessment Act 1936
Prior to the 1 July 2011 commencement of the Research and Development Tax Incentive, certain taxpayers were entitled to a deduction at the rate of 125 per cent of their eligible expenditure on research and development (R&D) activities. Until 29 January 2001, eligible expenditure on R&D plant was deductible at 125 per cent over three years. Expenditure on plant used in R&D activities after 29 January 2001 is deductible at 125 per cent over its effective life.
B101 Small business — simplified depreciation rules
Accelerated write-off 2012 TES code: B104
Small business entities with an aggregated annual turnover of less than $2 million are able to access concessional depreciation arrangements for business assets. Under the concessions, small business entities can immediately write-off (deduct) assets that cost less than the relevant threshold. Assets above the relevant threshold are depreciated through simplified pooling arrangements.
Prior to the 2012‑13 income year, small business entities could immediately write-off assets costing less than $1,000 and depreciate assets costing $1,000 or more at accelerated rates under two pools. Assets with an effective life of less than 25 years were depreciated in a general pool at a rate of 30 per cent (15 per cent in the first year), and assets with an effective life of 25 years or more are depreciated in a long life pool at a rate of 5 per cent (2.5 per cent in the first year).
From the 2012‑13 income year until 31 December 2013, small business entities could immediately write-off assets costing less than $6,500. Assets costing $6,500 or more were depreciated in a single pool (the general small business pool) at a 30 per cent rate (15 per cent in the first year). Small business entities could also immediately write off up to $5,000 for motor vehicles (new and used). The remainder of the value of a motor vehicle was then allocated to the general small business pool. The general small business pool could be immediately deducted at the end of the income year if its value was less than $6,500 (before deducting depreciation for the year).
Commencing 1 January 2014, small business entities can immediately write-off assets costing less than $1,000. Assets costing $1,000 or more can be depreciated the general small business pool at a 30 per cent rate (15 per cent in the first year). The general small business pool can be immediately deducted at the end of the income year if its value is less than $1,000 (before deducting depreciation for the year). The $5,000 accelerated motor vehicle deduction ceased from 1 January 2014.
The estimates become negative towards the end of the forecast period due in large part to volatility in asset purchases, particularly after the Global Financial Crisis, and policy changes associated with the instant asset write-off and motor vehicle depreciation.
B102 Small business — simplified trading stock rules
Deferral 2012 TES code: B105
Small businesses with annual turnover of less than $2 million may choose to use a simplified trading stock regime. Under this regime, in certain circumstances, changes in the value of trading stock do not have to be accounted for and stocktaking is not required at the end of the income year.
Before July 2007, this regime was available only to taxpayers that were part of the former Simplified Tax System. As part of aligning small business thresholds, the turnover eligibility threshold was raised from $1 million to $2 million.
B103 Small business and general business tax break
Businesses that acquired new tangible depreciating assets, for which a deduction was available under Subdivision 40-B of the Income Tax Assessment Act 1997, between 13 December 2008 and 31 December 2009 and started to use or had installed ready for use by 31 December 2010 could claim a bonus tax deduction in the income year that they used or installed the asset.
Small businesses could claim a bonus deduction of 50 per cent of the cost of an eligible asset. Other businesses could claim a 30 per cent deduction for assets acquired between 13 December 2008 and 30 June 2009 and installed by 30 June 2010. For assets acquired by other businesses between 1 July 2009 and 31 December 2009 and installed by 31 December 2010 the rate of bonus deduction was 10 per cent.
The bonus deduction did not affect the capital allowance deductions that would normally be claimed in relation to the asset.
B104 Exemption of tax offsets paid under the National Urban Water and Desalination Plan
General public services — General services ($m)
Exemption 2012 TES code: B107
Section 67-23 and Subdivision 402-W of the Income Tax Assessment Act 1997
The National Urban Water and Desalination Plan provides financial assistance to approved projects, such as desalination, water recycling and stormwater harvesting projects, which improve the security of water supplies to Australia's major cities. The financial assistance is provided as refundable tax offsets, unless the applicant receiving the assistance is outside the tax system, in which case they receive a grant. Payments made as refundable tax offsets under the plan are exempt from tax.
B105 International tax — concessional rate of final withholding tax on certain distributions by Australian managed investment trusts to foreign residents
Concessional rate 2012 TES code: B108
Note: estimates include tax expenditures B105 and B19
Distributions of Australian source net income (other than dividends, interest and royalties) by Australian managed investment trusts to foreign residents are subject to a final withholding tax. The general rate of 30 per cent is reduced to 7.5 per cent for 1 July 2010 to 30 June 2012, and to 15 per cent from 1 July 2012, for residents of countries specified in the regulations as 'information exchange countries'.
B106 Company loss carry-back
Reduction in taxable value 2012 TES code: B109
The company loss carry-back provisions provided tax relief for companies by allowing them to carry back tax losses so they receive a refund against tax previously paid. While this treatment is consistent with Schanz-Haig-Simons income tax, it departs from the benchmark treatment of losses which only allows losses to be carried forward to be deducted in a future year.
A one year loss carry-back was applied in 2012‑13, where tax losses incurred in that year can be carried back and offset against tax paid in 2011‑12. Companies could carry back up to $1 million of losses each year providing a cash benefit of up to $300,000.
Loss carry-back was available to companies and entities that are taxed like companies. It applied to their revenue losses only and is limited to a company's franking account balance.
The loss carry-back provisions ceased to apply commencing from the 2013‑14 income year. The estimates become negative from 2014‑15 as tax losses refunded in the 2013‑14 year are denied going forward.
B107 Forestry managed investment schemes — tax deductibility
Investors in forestry managed investment schemes (MIS) are able to claim immediate upfront deductions for their expenditure on such schemes, provided that, amongst other requirements, at least 70 per cent of the expenditure is directly related to developing forestry. The statutory deduction available to investors in forestry MIS allows investors to bring forward their deductions relative to the benchmark.
Interests in forestry MIS can be traded, subject to a four-year holding period rule and a market value pricing rule for initial investors. The proceeds on the sale or harvest of a forestry MIS interest by an initial investor are assessable income of the investor.
B108 Small business related party at call loans taken to be debt interests
A related party at call loan is typically a loan made to a company by a related entity, has no fixed term and is repayable on demand. Under the benchmark debt-equity rules, such a loan would generally give rise to an equity interest rather than a debt interest. This means that interest payable on the loan would be frankable (but not deductible by the company).
These loans are taken to be debt interests for companies that have an annual turnover of less than $20 million.
Appendix A: Experimental Estimates of Superannuation Tax Expenditures using an Expenditure Tax Benchmark
Appendix B: Tax expenditure benchmarks and methodologies
Appendix C: Changes to tax expenditures in 2013
Chapter 1: Tax expenditure framework
Chapter 2: Guide to tax expenditure descriptions
Commodity and other indirect taxes
Natural resources taxes
Goods and Services Tax
Carbon Pricing Mechanism
Chapter 3: Revenue gain estimates of tax expenditures