Commonwealth: Tax Law Improvement Act 1997 (Cth)

Tax Law Improvement Act 1997 Act No. 121 of 1997 as amended This compilation was prepared on 19 August 2003 [This Act was amended by Act No. 57 of 2002] Amendments from Act No. 57 of 2002 [Schedule 12 (item 65) amended Heading to Item 69 of Schedule 6 Schedule 12 (item 83) repealed Item 15 of Schedule 4 Schedule 12 (item 65) commenced on 1 July 1997 Schedule 12 (item 83) commenced on 3 July 2002] Prepared by the Office of Legislative Drafting, Attorney‑General's Department, Canberra Contents 1 Short title 2 Commencement 3 Schedule(s) 4 Application of amendments Schedule 1—Amendment of the Income Tax Assessment Act 1997 Schedule 2—Assessable income Part 1—Amendment of the Income Tax (Transitional Provisions) Act 1997 Part 2—Consequential amendment of the Income Tax Assessment Act 1997 Part 3—Consequential amendment of the Income Tax Assessment Act 1936 Part 4—Consequential amendments of other Acts Financial Corporations (Transfer of Assets and Liabilities) Act 1993 Schedule 3—Exempt income Part 1—Amendment of the Income Tax (Transitional Provisions) Act 1997 Part 2—Consequential amendment of the Income Tax Assessment Act 1997 Part 3—Consequential amendment of the Income Tax Assessment Act 1936 Part 4—Consequential amendments of other Acts Australian Industry Development Corporation Act 1970 Australian National Railways Commission Act 1983 Australian Postal Corporation Act 1989 Australian Trade Commission Act 1985 Development Allowance Authority Act 1992 Export Finance and Insurance Corporation Act 1991 Federal Airports Corporation Act 1986 Health Insurance Commission Act 1973 Legislative Instruments Act 1997 National Rail Corporation Agreement Act 1992 Social Security Act 1991 Superannuation Guarantee (Administration) Act 1992 Schedule 4—Deductions Part 1—Amendment of the Income Tax (Transitional Provisions) Act 1997 Part 2—Consequential amendment of the Income Tax Assessment Act 1997 Part 3—Consequential amendment of the Income Tax Assessment Act 1936 Part 4—Consequential amendments of other Acts Fringe Benefits Tax Assessment Act 1986 Schedule 5—Trading stock (and some related matters) Part 1—Amendment of the Income Tax (Transitional Provisions) Act 1997 Part 2—Consequential amendment of the Income Tax Assessment Act 1997 Part 3—Consequential amendment of the Income Tax Assessment Act 1936 Part 4—Consequential amendments of other Acts Cattle Transaction Levy Act 1995 Financial Corporations (Transfer of Assets and Liabilities) Act 1993 Schedule 6—Depreciation Part 1—Amendment of the Income Tax (Transitional Provisions) Act 1997 Part 2—Consequential amendment of the Income Tax Assessment Act 1997 Part 3—Consequential amendment of the Income Tax Assessment Act 1936 Part 4—Consequential amendments of other Acts Bounty and Capitalisation Grants (Textile Yarns) Act 1981 Income Tax Rates Act 1986 Sales Tax Assessment Act 1992 Social Security Act 1991 Student and Youth Assistance Act 1973 Veterans' Entitlements Act 1986 Schedule 7—Leased cars Part 1—Amendment of the Income Tax (Transitional Provisions) Act 1997 Part 2—Consequential amendment of the Income Tax Assessment Act 1997 Part 3—Consequential amendment of the Income Tax Assessment Act 1936 Schedule 8—Recoupment Part 1—Amendment of the Income Tax (Transitional Provisions) Act 1997 Part 2—Consequential amendment of the Income Tax Assessment Act 1997 Part 3—Consequential amendment of the Income Tax Assessment Act 1936 Part 4—Consequential amendments of other Acts Financial Corporations (Transfer of Assets and Liabilities) Act 1993 Schedule 9—Gifts or contributions Part 1—Amendment of the Income Tax (Transitional Provisions) Act 1997 Part 2—Consequential amendment of the Income Tax Assessment Act 1997 Part 3—Consequential amendment of the Income Tax Assessment Act 1936 Part 4—Consequential amendments of other Acts Customs Tariff Act 1995 Sales Tax (Exemptions and Classifications) Act 1992 Schedule 10—Entertainment expenses Part 1—Amendment of the Income Tax (Transitional Provisions) Act 1997 Part 2—Consequential amendment of the Income Tax Assessment Act 1997 Part 3—Consequential amendment of the Income Tax Assessment Act 1936 Part 4—Consequential amendments of other Acts Fringe Benefits Tax Assessment Act 1986 Schedule 11—Capital allowances for primary producers and some land‑holders Part 1—Amendment of the Income Tax (Transitional Provisions) Act 1997 Part 2—Consequential amendment of the Income Tax Assessment Act 1997 Part 3—Consequential amendment of the Income Tax Assessment Act 1936 Schedule 12—Miscellaneous Part 1—Amendment of the Income Tax Assessment Act 1997 Part 2—Amendment of the Income Tax Assessment Act 1936 Part 3—Amendment of the Income Tax (Consequential Amendments) Act 1997 Part 4—Consequential amendments of other Acts Airports (Transitional) Act 1996 Legislative Instruments Act 1997 Social Security Act 1991 Student and Youth Assistance Act 1973 Veterans' Entitlements Act 1986 An Act to amend the law about income tax, and for related purposes [Assented to 8 July 1997] The Parliament of Australia enacts: 1 Short title This Act may be cited as the Tax Law Improvement Act 1997. 2 Commencement (1) Subject to this section, this Act commences on the day on which it receives the Royal Assent. (2) Schedule 1 commences on 1 July 1997 immediately after the commencement of the Income Tax Assessment Act 1997. (3) Each of the other Schedules (except Schedule 12) commences immediately after the commencement of the immediately preceding Schedule. (4) If a note specifies the commencement of an item in Schedule 12, the item commences as specified in the note. (5) If there is no note specifying the commencement of an item in Schedule 12, the item commences on 1 July 1997 immediately after the commencement of the Income Tax Assessment Act 1997. 3 Schedule(s) Subject to section 2, each Act specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned. Any other item in a Schedule to this Act has effect according to its terms. 4 Application of amendments An amendment made by an item in a Schedule (except Schedule 1) applies to assessments for the 1997-98 income year and later income years, unless otherwise indicated in that Schedule. Schedule 1—Amendment of the Income Tax Assessment Act 1997 1 Chapter 2 (link note after heading) Repeal the link note. 2 Before Part 2‑5 Insert: Part 2-1—Assessable income [The next Division is Division 15.] Division 15—Some items of assessable income Guide to Division 15 15-1 What this Division is about This Division sets out some items that are included in your assessable income. Remember that the general rules about assessable income in Division 6 apply to these items. Table of sections Operative provisions 15-3 Return to work payments 15-5 Accrued leave transfer payments 15-10 Bounties and subsidies 15-15 Profit-making undertaking or plan 15-20 Royalties 15-25 Amount received for lease obligation to repair 15-30 Insurance or indemnity for loss of assessable income 15-35 Interest on overpayments and early payments of tax Operative provisions 15-3 Return to work payments Your assessable income includes an amount you receive under an *arrangement that an entity enters into for a purpose of inducing you to resume working for, or providing services to, any entity. 15-5 Accrued leave transfer payments Your assessable income includes an *accrued leave transfer payment that you receive. To find out if the payment is deductible to the payer, see section 26-10. 15-10 Bounties and subsidies Your assessable income includes a bounty or subsidy that: (a) you receive in relation to carrying on a *business; and (b) is not assessable as *ordinary income under section 6‑5. 15-15 Profit-making undertaking or plan (1) Your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. (2) This section does not apply to a profit that: (a) is assessable as *ordinary income under section 6‑5; or (b) arises in respect of the sale of property acquired on or after 20 September 1985. Note: If you sell property you acquired before 20 September 1985 for profit-making by sale, your assessable income includes the profit: see section 25A of the Income Tax Assessment Act 1936. 15-20 Royalties Your assessable income includes an amount that you receive as or by way of royalty within the ordinary meaning of "royalty" (disregarding the definition of royalty in subsection 995-1(1)) if the amount is not assessable as *ordinary income under section 6‑5. 15-25 Amount received for lease obligation to repair Your assessable income includes an amount you receive from an entity if: (a) you receive it as a lessor or former lessor of premises; and (b) the entity pays you the amount for failing to comply with a lease obligation to make repairs to the premises; and (c) the entity uses or has used the premises for the *purpose of producing assessable income; and (d) the amount is not assessable as *ordinary income under section 6‑5. Note: The entity can deduct the amount: see section 25-15. 15-30 Insurance or indemnity for loss of assessable income Your assessable income includes an amount you receive by way of insurance or indemnity for the loss of an amount (the lost amount) if: (a) the lost amount would have been included in your assessable income; and (b) the amount you receive is not assessable as *ordinary income under section 6‑5. 15-35 Interest on overpayments and early payments of tax Your assessable income includes interest payable to you under the Taxation (Interest on Overpayments and Early Payments) Act 1983. The interest becomes assessable when it is paid to you or applied to discharge a liability you have to the Commonwealth. [The next Division is Division 20.] Division 20—Amounts included to reverse the effect of past deductions Table of Subdivisions Guide to Division 20 20-A Insurance, indemnity or other recoupment for deductible expenses 20-B Disposal of a car for which lease payments have been deducted Guide to Division 20 20-1 What this Division is about This Division includes amounts in your assessable income to reverse the effect of certain kinds of deductions. Table of sections 20-5 Other provisions that reverse the effect of deductions 20-5 Other provisions that reverse the effect of deductions The table lists other provisions that reverse the effect of certain kinds of deductions. Provisions of the Income Tax Assessment Act 1997 are identified in normal text. The other provisions, in bold, are provisions of the Income Tax Assessment Act 1936. Provisions that adjust your tax position in respect of deductions Item In this situation: See: 1 A balancing charge for property on which you incurred expenditure deductible under a capital allowance is included in your assessable income. 40-25 and 40‑30 2 An amount you receive by way of insurance or indemnity for a loss of trading stock is included in your assessable income. 70-115 3 Because of: 330-350(3) • petroleum resource rent tax; or • an instalment of petroleum resource rent tax; that you have deducted or can deduct, an amount is refunded, credited, paid or applied: the amount is included in your assessable income. 4 You receive a fringe benefit by way of reimbursement or payment of a loss or outgoing you incurred: your deduction for the loss or outgoing is reduced. 51AH 5 A company receives (or becomes entitled to) an amount: 73B(27A) • in respect of the results of research and development activities on which it incurred deductible expenditure; or • attributable to it having incurred deductible expenditure on research and development activities. The amount is included in its assessable income. 6 You receive an amount as recoupment of expenditure on research and development activities that you have deducted at the rate of 150%: the rate of deduction is reduced to 100%. 73C 7 You receive an amount as recoupment for your local governing body election expenses: an amount is included in your assessable income. 74A(4) 8 You receive superannuation benefits as a result of someone's deductible contributions: the benefits are included in your assessable income. 82AAQ Subdivision 20-A—Insurance, indemnity or other recoupment for deductible expenses Guide to Subdivision 20-A 20-10 What this Subdivision is about Your assessable income may include an amount that you receive by way of insurance, indemnity or other recoupment if:  it is for a deductible expense; and  it is not otherwise assessable income. Table of sections 20-15 How to use this Subdivision What is an assessable recoupment? 20-20 Assessable recoupments 20-25 What is recoupment? 20-30 Tables of deductions for which recoupments are assessable How much is included in your assessable income? 20-35 If the expense is deductible in a single income year 20-40 If the expense is deductible over 2 or more income years 20-45 Effect of balancing charge 20-50 If the expense is only partially deductible 20-55 Meaning of previous recoupment law 20-15 How to use this Subdivision (1) First, read sections 20-20 to 20-30 to work out whether you have received an assessable recoupment. If not, you do not need to read the rest of the Subdivision. (2) If you have received one or more assessable recoupments, sections 20-35 to 20-55 tell you how much is included in your assessable income for an income year. What is an assessable recoupment? 20-20 Assessable recoupments Exclusion (1) An amount is not an assessable recoupment to the extent that it is *ordinary income, or it is *statutory income because of a provision outside this Subdivision. Insurance or indemnity (2) An amount you receive as *recoupment of a loss or outgoing is an assessable recoupment if: (a) you receive the amount by way of insurance or indemnity; and (b) you can deduct an amount for the loss or outgoing for the *current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act. Other recoupment (3) An amount you receive as *recoupment of a loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if: (a) you can deduct an amount for the loss or outgoing for the *current year; or (b) you have deducted or can deduct an amount for the loss or outgoing for an earlier income year; under a provision listed in section 20-30. 20-25 What is recoupment? General (1) Recoupment of a loss or outgoing includes: (a) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and (b) a grant in respect of the loss or outgoing. Amount paid for you (2) If some other entity pays an amount for you in respect of a loss or outgoing that you incur, you are taken to receive the amount as recoupment of the loss or outgoing. Amount for disposing of right to recoupment (3) If you dispose of your right to receive an amount as *recoupment of a loss or outgoing you are taken to receive as recoupment of the loss or outgoing any amount you receive for disposing of that right. (The disposal need not be to another entity.) Amount received that is recoupment to an unspecified extent (4) If you receive an amount that is, to an unspecified extent, *recoupment of a loss or outgoing, the amount is taken to be recoupment of the loss or outgoing to whatever extent is reasonable. Balancing adjustments not covered (5) If a balancing adjustment is required for property on which you incurred a loss or outgoing, no part of the *termination value of the property is an amount you receive as recoupment of the loss or outgoing. Note: The termination value is usually the amount you receive because of disposal, loss or destruction of the property. 20-30 Tables of deductions for which recoupments are assessable (1) This table shows the deductions under the Income Tax Assessment Act 1997 for which recoupments are assessable. Note: References are to section numbers except where otherwise indicated. Provisions of the Income Tax Assessment Act 1997 Item Provision Description of expense 1.1 8-1 (so far as it allows you to deduct a bad debt, or part of a debt that is bad) bad debts 1.2 8-1 (so far as it allows you to deduct rates or taxes) rates or taxes 1.3 25-5 tax-related expenses 1.4 25-35 bad debts 1.5 25-45 embezzlement or larceny by an employee 1.6 25-60 election expenses, Commonwealth and State elections 1.7 25-75 rates and land taxes on premises used to produce mutual receipts 1.8 330-15 exploration or prospecting expenditure 1.9 330-80 allowable capital expenditure relating to mining or quarrying 1.10 330-370 transport capital expenditure relating to mining or quarrying 1.11 330-435 rehabilitation expenditure relating to mining or quarrying 1.12 330-485 balancing adjustment deduction for expenditure relating to mining or quarrying 1.13 Subdivision 387‑A landcare operations expenditure 1.14 Subdivision 387‑B expenditure on facilities to conserve or convey water 1.15 Subdivision 387‑D grapevine establishment expenditure 1.16 Subdivision 387‑E mains electricity connection expenditure (2) This table shows the deductions under the Income Tax Assessment Act 1936 for which recoupments are assessable. Note: References are to section numbers except where otherwise indicated. Provisions of the Income Tax Assessment Act 1936 Item Provision Description of expense 2.1 51(1) (so far as it allows you to deduct a bad debt, or part of a debt that is bad) bad debts 2.2 51(1) (so far as it allows you to deduct rates or taxes) rates or taxes 2.3 63 bad debts 2.4 69 tax-related expenses 2.5 70A(3) mains electricity connection expenditure 2.6 71 embezzlement or larceny by an employee 2.7 72 rates and land tax 2.8 73B research and development activity expenditure 2.9 74 election expenses, Commonwealth and State elections 2.10 75AA(1) or (6) grape vine establishment expenditure 2.11 75B(2) or (3A) water conservation or conveyance expenditure 2.12 75D(2) land degradation prevention expenditure 2.13 82AB development allowance expenditure 2.14 82BB environmental impact study expenditure 2.15 82BK environmental protection expenditure 2.16 82Z(1) currency exchange loss 2.17 Division 10 of mining and quarrying expenditure Part III 2.18 Division 10AAA of Part III expenditure on transport of minerals and quarry materials 2.19 Division 10AA of Part III expenditure on prospecting and mining for petroleum 2.20 124BA expenditure on rehabilitating mining, quarrying and petroleum sites 2.21 124ZZF horticultural plant establishment expenditure (effective life of the plant less than 3 years) 2.22 124ZZG horticultural plant establishment expenditure (effective life of the plant more than 3 years) 2.23 628 drought mitigation property expenditure by a primary producer 2.24 636 drought mitigation property expenditure by a leasing company How much is included in your assessable income? 20-35 If the expense is deductible in a single income year (1) Your assessable income includes an *assessable recoupment of a loss or outgoing if: (a) you can deduct the whole of the loss or outgoing for the *current year; or (b) you have deducted or can deduct the whole of the loss or outgoing for an earlier income year. Note 1: The operation of this section may be affected if a balancing charge has been included in your assessable income because of a deduction for the loss or outgoing: see section 20-45. Note 2: Recoupment of a loss or outgoing for which you can deduct amounts over more than one income year is covered by section 20-40. Note 3: Recoupment of a loss or outgoing that is only partially deductible is covered by section 20-50. Total assessed not to exceed the loss or outgoing (2) The total of all amounts that subsection (1) includes in your assessable income for one or more income years in respect of a loss or outgoing cannot exceed the amount of the loss or outgoing. Recoupment received before income year of the deduction (3) If: (a) you can deduct the whole of a loss or outgoing for the *current year; and (b) before the current year you received an *assessable recoupment of the loss or outgoing; your assessable income for the current year includes so much of the recoupment as subsection (1) would have included if you had instead received the recoupment at the start of the current year. 20-40 If the expense is deductible over 2 or more income years (1) This section includes an amount in your assessable income if: (a) you receive in the *current year an *assessable recoupment of a loss or outgoing for which you can deduct amounts over 2 or more income years; or (b) you received in an earlier income year an *assessable recoupment of a loss or outgoing of that kind (unless all of the recoupment has already been included in your assessable income for one or more earlier income years by this section or a *previous recoupment law). (This section applies even if the recoupment was received before the first of those income years.) Note: Recoupment of a loss or outgoing that is only partially deductible is covered by section 20-50. (2) Work out as follows how much is included in your assessable income for the *current year because of one or more *assessable recoupments of the loss or outgoing. Note: The method statement ensures that assessable recoupments are included: *  only so far as they have not already been included for an earlier income year; and *  only to the extent of your total deductions to date for the loss or outgoing. Method statement Step 1. Add up all the *assessable recoupments of the loss or outgoing that you have received (in the *current year or earlier). The result is the total assessable recoupment. Step 2. Add up the amounts (if any) included in your assessable income for earlier income years, in respect of the loss or outgoing, by this section or a *previous recoupment law. The result is the recoupment already assessed. (If no amount was included, the recoupment already assessed is nil.) Step 3. Subtract the recoupment already assessed from the total assessable recoupment. The result is the unassessed recoupment. Step 4. Add up each amount that you can deduct for the loss or outgoing for the *current year, or you have deducted or can deduct for the loss or outgoing for an earlier income year. The result is the total deductions for the loss or outgoing. Note: The total deductions may be reduced if an amount has been included in your assessable income because of a balancing adjustment: see section 20-45. Step 5. Subtract the recoupment already assessed from the total deductions for the loss or outgoing. The result is the outstanding deductions. Step 6. The unassessed recoupment is included in your assessable income, unless it is greater than the outstanding deductions. In that case, the amount of the outstanding deductions is included instead. Example: At the start of the 1997-98 income year, a mining company incurs $100,000 of expenditure on mining operations. $10,000 is deductible for the 1997-98 income year and for each of the following 9 income years under section 330-80. In the 1997-98 income year, the company receives $20,000 as recoupment. How much is assessable for the 1997-1998 income year? Applying the method statement: After Step 1: the total assessable recoupment is $20,000. After Step 2: the recoupment already assessed is nil. After Step 3: the unassessed recoupment is: total assessable recoupment – recoupment already assessed, ie $20,000 – 0 = $20,000. After Step 4: the total deductions for the loss or outgoing are $10,000. After Step 5: the outstanding deductions are: total deductions for the loss or outgoing – recoupment already assessed, ie $10,000 – 0 = $10,000. After Step 6: the unassessed recoupment (Step 3) is greater than outstanding deductions (Step 5), so the amount of the outstanding deductions is included in assessable income, ie $10,000. Applying the method statement to the 1998-99 income year: a further $10,000 is included in the company's assessable income. 20-45 Effect of balancing charge (1) This section may affect the operation of section 20-35 or 20-40 (as appropriate) if: (a) a balancing adjustment is required for the *current year (or for an earlier income year) because you have deducted or can deduct an amount for an income year for the loss or outgoing; and (b) an amount (the balancing charge) is included in your assessable income for the *current year (or for the earlier income year) because of the balancing adjustment. To find out about balancing adjustments, see section 40-25. Effect on section 20-35 (2) In applying section 20-35, treat each of the following as reduced by the balancing charge: (a) the amount of the loss or outgoing; (b) the total of what you can deduct for the loss or outgoing for the *current year, or have deducted or can deduct for an earlier income year. Effect on section 20-40 (3) In applying the method statement in subsection 20-40(3), reduce the total deductions for the loss or outgoing by the balancing charge. Example: Continuing the example in subsection 20-40(3): during the 2000-2001 income year, the mining company: *  receives a further $10,000 as recoupment of the original expenditure; and *  sells its mining operations for $75,000. As a result of the sale, a balancing charge of $5,000 is included under section 330-485 in the company's assessable income for that income year. How much of the recoupment amount received in the 2000-2001 income year is assessable for that income year? Applying the method statement in subsection 20-40(3): After Step 1: the total assessable recoupment is $30,000 (received during 1997‑98 and 2000-2001). After Step 2: the recoupment already assessed is $20,000 (for 1997‑98 and 1998-99). After Step 3: the unassessed recoupment is: total assessable recoupment – recoupment already assessed, ie $30,000 – $20,000 = $10,000. After Step 4: the total deductions for the loss or outgoing are $30,000 ($10,000 for each of 1997-98, 1998-99 and 1999-2000), reduced by $5,000 (the amount included in assessable income for the balancing adjustment), ie $25,000. After Step 5: the outstanding deductions are: total deductions for the loss or outgoing – recoupment already assessed, ie $25,000 – $20,000 = $5,000. After Step 6: the unassessed recoupment (Step 3) is greater than outstanding deductions (Step 5), so the amount of the outstanding deductions is included in assessable income, ie $5,000. 20-50 If the expense is only partially deductible (1) This section extends the operation of section 20-35 or 20-40 (as appropriate) to a case where the total of what you can deduct under a provision (the deduction provision) for a loss or outgoing is limited to a proportion of the loss or outgoing. (2) If you receive an *assessable recoupment of the loss or outgoing, section 20-35 or 20-40 applies as if: (a) you had incurred only that proportion of the loss or outgoing, but could deduct the whole of that proportion under the deduction provision; and (b) you had received only that proportion of the recoupment. Example: You incur expenditure of $500. A provision listed in section 20-30 entitles you to deduct 10% of the expenditure ($50) over 5 years. This means you can deduct $10 in each of the 5 years. You recoup $300 of the expenditure. This section treats you as receiving only 10% of the recoupment. Therefore, $30 is dealt with by section 20-40. 20-55 Meaning of previous recoupment law Previous recoupment law means a provision of the Income Tax Assessment Act 1936 listed in this table. Previous recoupment law What kind of expense the provision relates to: Item Provision 1 26(j) (so far as it relates to an amount received for or in respect of a loss or outgoing that is an allowable deduction) a loss or outgoing that is an allowable deduction 2 26(k) embezzlement or larceny by an employee 3 63(3) bad debts 4 69(8) tax-related expenses 5 70A(5) mains electricity connection expenditure 6 72(2) (so far as it relates to a refund of an amount allowed or allowable as a deduction) rates or taxes 7 74(2) election expenses, Commonwealth and State elections Subdivision 20-B—Disposal of a car for which lease payments have been deducted Guide to Subdivision 20-B 20-100 What this Subdivision is about This Subdivision reverses the effect of deductions for lease payments for a car leased to you (or to your associate), but only if you make a profit by disposing of the car after acquiring it from the lessor. The smallest of these amounts is included in your assessable income:  your profit on the disposal;  the total deductible lease payments for the period of the lease;  the total amounts you could have deducted for depreciation of the car if, instead of leasing it, you had owned it and used it solely for the purpose of producing assessable income. Table of sections 20-105 Map of this Subdivision The usual case 20-110 Disposal of a leased car for profit 20-115 Working out the profit on the disposal 20-120 Meaning of notional depreciation The associate case 20-125 Disposal of a leased car for profit Successive leases 20-130 Successive leases Previous disposals of the car 20-135 No amount included if earlier disposal for market value 20-140 Reducing the amount to be included if there has been an earlier disposal Miscellaneous rules 20-145 No amount included if you inherited the car 20-150 Reducing the amount to be included if another provision requires you to include an amount for the disposal 20-155 Exception for particular cars taken on hire Disposals of interests in a car: special rules apply 20-160 Disposal of an interest in a car 20-105 Map of this Subdivision The usual case 20-110 Disposal of a leased car for profit (1) Your assessable income includes the *profit you make on disposing of a *car if: (a) the car was designed mainly for carrying passengers; and (b) the car was leased to you and has been leased to no-one else; and (c) you or another entity can deduct for the income year any of the lease payments paid or payable by you, or have deducted or can deduct any of them for an earlier income year, under this Act; and (d) you acquired the car from the lessor. Note 1: Even if subsection (1) does not apply, an amount may still be included in your assessable income: *  under section 20-125 (which deals with more complicated cases that may involve your associate); or *  if you disposed of an interest in a car (rather than the car itself): see section 20-160. Note 2: In some cases you do not include an amount in your assessable income: *  if there has been an earlier disposal of the car for market value: see section 20-135; or *  if you inherited the car: see section 20-145; or *  if the car was let on hire in the circumstances set out in section 20‑155. (2) However, the amount included cannot exceed the smaller of these limits: (a) the total lease payments for the lease that you or another entity have deducted or can deduct under this Act for an income year; (b) the amount of *notional depreciation for the lease period. Note 1: If, because of more than one lease of the car, there is more than one way to work out the amount to be included, you only include the largest amount: see section 20-130. Note 2: In some cases you reduce the amount to be included: *  if there has been an earlier disposal of the car, or of an interest in it: see section 20-140; or *  if another provision requires you to include an amount because of the disposal: see section 20-150. (3) You increase those limits if you have previously leased the *car from the same lessor, or from an *associate of that lessor. You increase the first limit by the total lease payments for each previous lease of that kind that you or another entity have deducted or can deduct under this Act for an income year. You increase the second limit by the amount of *notional depreciation for the period of each previous lease of that kind. 20-115 Working out the profit on the disposal (1) The profit on the disposal is the amount by which the *consideration receivable for the disposal exceeds:  the amount it cost you to acquire the *car; plus:  any capital expenditure you incurred on the car after acquiring it. (2) The consideration receivable is worked out using this table: Consideration receivable for the disposal of the car Item In this situation: the consideration receivable is: 1 you sell the *car for a price specific to it that price, less the expenses of the sale 2 you sell the *car with other property without a specific price being allocated to it the part of the total sale price that is reasonably attributable to the car less the part of the reasonably attributable expenses of the sale 3 you trade the *car in and buy another car the value of the trade-in, plus any other consideration you receive 4 you sell the *car and another entity buys another car the amount by which the cost of the other car is reduced by the sale, plus any other consideration you receive 5 you dispose of the *car to an insurer because it is lost or destroyed the amount or value received or receivable under the insurance policy 20-120 Meaning of notional depreciation This is how to work out the notional depreciation for a lease period: Method statement Step 1. Compare: • the *car's *cost to the lessor for the purposes of Subdivision 42-B (which is about working out the cost of *plant for the purposes of depreciation); with: • the car's *termination value for the purposes of section 42-205 when the lessor disposed of it. Step 2. If the car's cost exceeds the car's termination value, multiply the excess by: • the number of days in the lease period; divided by: • the number of days the lessor owned the car. Step 3. The result is the notional depreciation for the lease period. Step 4. If the car's cost does not exceed the car's termination value, the notional depreciation for the lease period is zero. Note 1: The notional depreciation for the lease period represents: *  the amount you could have deducted for depreciation of the car if, instead of leasing it, you had owned it and used it solely for the purpose of producing assessable income for that period; adjusted by: *  the balancing adjustment you would have made if you had disposed of the car at the end of that period. Note 2: The car's cost to the lessor is worked out differently if the lessor acquired it in the 1996-97 income year or an earlier income year: see section 20-105 of the Income Tax (Transitional Provisions) Act 1997. Note 3: The car's termination value is worked out differently if the lessor disposed of it in the 1996-97 income year or an earlier income year: see section 20-110 of the Income Tax (Transitional Provisions) Act 1997. The associate case 20-125 Disposal of a leased car for profit (1) Your assessable income includes the *profit you make on disposing of a *car if: (a) section 20-110 does not include an amount in your assessable income because of the disposal; and (b) the car was designed mainly for carrying passengers; and (c) the car was leased to you or your *associate; and (d) you, your associate or another entity can deduct for the income year any of the lease payments paid or payable by the lessee, or have deducted or can deduct any of them for an earlier income year, under this Act; and (e) either: (i) you, your associate, or entities including you or your associate, acquired the car from the lessor; or (ii) another entity acquired the car from the lessor under an *arrangement that enabled you or your associate to acquire the car. Note 1: Even if subsection (1) does not apply, an amount may be included in your assessable income if you disposed of an interest in a car (rather than the car itself): see section 20-160. Note 2: In some cases you do not include an amount in your assessable income: *  if there has been an earlier disposal of the car for market value: see section 20-135; or *  if you inherited the car: see section 20-145; or *  if the car was let on hire in the circumstances set out in section 20‑155. (2) However, the amount included cannot exceed the smallest of these limits: (a) the total lease payments for the lease that you, your *associate or another entity have deducted or can deduct under this Act for an income year; (b) the amount of *notional depreciation for the lease period; (c) if an entity other than you, or if entities including you, acquired the *car from the lessor—the amount by which the *consideration receivable for the disposal of the car by you exceeds the total of: (i) the car's cost to that entity, or those entities; and (ii) any capital expenditure that entity, or any of those entities, incurred on the car after that acquisition and before you acquired it. Note 1: If, because of more than one lease of the car, there is more than one way to work out the amount to be included, you only include the largest amount: see section 20-130. Note 2: In some cases you reduce the amount to be included: *  if there has been an earlier disposal of the car, or of an interest in it: see section 20-140; or *  if another provision requires you to include an amount because of the disposal: see section 20-150. Example: Your associate leases a car for 5 years and then acquires it from the lessor for $4,000. Your associate sells it to you for $3,000. You sell it for $10,000. Your profit is $10,000 (the consideration receivable) less $3,000 (the car's cost to you) = $7,000. The first 2 limits on the amount to be included in your assessable income are $9,000 (total deductible lease payments for the lease) and $8,000 (notional depreciation for the lease period). Since your associate acquired the car from the lessor, the third limit is $10,000 (the consideration receivable by you) less $4,000 (the car's cost to the associate) = $6,000. The amount you include in your assessable income cannot exceed the smallest of the limits. So, you do not include your profit of $7,000. Instead, you include $6,000 (the smallest of the limits). (3) You increase the first 2 limits if you, or your associate, have previously leased the *car from the same lessor, or from an associate of that lessor. You increase the first limit by the total lease payments for each previous lease of that kind that you, your *associate or another entity have deducted or can deduct under this Act for an income year. You increase the second limit by the amount of *notional depreciation for the period of each previous lease of that kind. Successive leases 20-130 Successive leases If, because of 2 or more leases of the *car, there are different amounts that could be included in your assessable income because of the disposal, only the largest of those amounts is included. Previous disposals of the car 20-135 No amount included if earlier disposal for market value You do not include an amount in your assessable income because of the disposal if, after the lessor disposed of the *car and before you disposed of it, an entity other than you disposed of the car and: (a) the *consideration receivable for that disposal was at least the market value of the car at the time of that disposal; or (b) because of that disposal, that market value was included, or an amount worked out using that market value was included, in the entity's assessable income under this Act. 20-140 Reducing the amount to be included if there has been an earlier disposal Each limit on the amount to be included in your assessable income because of your disposal of the *car is reduced if, after the lease period began and before your disposal, the car, or an interest in it, was disposed of in one of these situations: Reducing each limit on the amount to be included Item In this situation: reduce each limit by: 1 Section 20-110 or 20-125 included an amount in your assessable income in respect of such an earlier disposal by you that amount 2 Section 20-110 or 20-125 included an amount in another entity's assessable income in respect of such an earlier disposal by the other entity that amount 3 Section 20-110 or 20-125 would have included an amount in your assessable income in respect of such an earlier disposal by you but for the operation of section 20-145 that amount 4 Section 20-110 or 20-125 would have included an amount in another entity's assessable income in respect of such an earlier disposal by the other entity but for the operation of section 20‑145 that amount 5 Section 20-150 reduced the amount to be included in your assessable income in respect of such an earlier disposal by you the amount of the reduction 6 Section 20-150 reduced the amount to be included in another entity's assessable income in respect of such an earlier disposal by the other entity the amount of the reduction Examples: Your associate leases a car for 5 years and then acquires it. Your associate disposes of it to you and section 20-110 includes $500 in your associate's assessable income. You later dispose of the car. In working out the amount to include in your assessable income for your disposal, you can reduce each limit in subsection 20-125(2) by $500 because the disposal by your associate occurred after the lease period began. Contrast this case: You lease a car for 5 years and then acquire it. You dispose of it to another entity and section 20-110 includes $1,000 in your assessable income. You lease the car from that entity for 2 years and then acquire it. You later dispose of it. In working out the amount to include in your assessable income in respect of the second lease, you cannot reduce each limit in subsection 20‑110(2) by $1,000 because the first disposal did not occur after the start of that lease. Note: If the earlier disposal occurred in the 1996-97 income year or an earlier income year, each limit may be able to be reduced by a further amount: see section 20-115 of the Income Tax (Transitional Provisions) Act 1997. Miscellaneous rules 20-145 No amount included if you inherited the car You do not include an amount in your assessable income because of the disposal if you inherited the *car. 20-150 Reducing the amount to be included if another provision requires you to include an amount for the disposal The amount to be included in your assessable income because of the disposal is reduced by any amount that another provision of this Act (except sections 42-190 and 42-240) requires you to include in your assessable income because of the disposal. Note: Sections 42-190 and 42-240 are about including an amount after making a balancing adjustment on the disposal of a car. 20-155 Exception for particular cars taken on hire This Subdivision does not apply to these kinds of leases: (a) letting a *car on hire under a hire purchase agreement; or (b) letting a *car on hire under an agreement of a kind ordinarily entered into by people who take cars on hire intermittently on an hourly, daily, weekly or monthly basis. Disposals of interests in a car: special rules apply 20-160 Disposal of an interest in a car (1) This Subdivision applies to the disposal of an interest in a *car in almost the same way as it does to the disposal of the car itself. The differences are set out below. (2) Your assessable income includes so much of your *profit on the disposal as is reasonable. The limits in subsections 20-110(2) and 20-125(2) do not apply. (3) The cost of the interest to you is taken to be a reasonable amount. (4) Sections 20-135 and 20-140 do not apply to the disposal. Note 1: Section 20-135 says that you do not include an amount if there has been an earlier disposal of the car for market value. Note 2: Section 20-140 allows you to reduce the amount to be included if there has been an earlier disposal of the car. (5) Section 20-145 applies to the disposal if you inherited either the interest or the *car itself. Note: Section 20-145 says that you do not include an amount if you inherited the car. [The next Part is Part 2-5.] 3 Part 2-5 (link note after heading) Omit "Division 26", substitute "Division 25". 4 Before Division 26 Insert: Division 25—Some amounts you can deduct Guide to Division 25 25-1 What this Division is about This Division sets out some amounts you can deduct. Remember that the general rules about deductions in Division 8 (which is about general deductions) apply to this Division. Table of sections Operative provisions 25-5 Tax-related expenses 25-10 Repairs 25-15 Amount paid for lease obligation to repair 25-20 Lease document expenses 25-25 Borrowing expenses 25-30 Expenses of discharging a mortgage 25-35 Bad debts 25-40 Loss from profit-making undertaking or plan 25-45 Loss by theft etc. 25-50 Payments of pensions, gratuities or retiring allowances 25-55 Payments to associations 25-60 Parliament election expenses 25-70 Deduction for election expenses does not extend to entertainment 25-75 Rates and land taxes on premises used to produce mutual receipts Operative provisions 25-5 Tax-related expenses (1) You can deduct expenditure you incur to the extent that it is for: (a) managing your *tax affairs; or (b) complying with an obligation imposed on you by a *Commonwealth law, insofar as that obligation relates to the *tax affairs of an entity; or (c) interest under section 170AA (Underpayment of tax) or 207A (Late payment of tax) of the Income Tax Assessment Act 1936. Note: To find out whether a trustee of a deceased estate can deduct expenditure under this section, see subsection 69(7) of the Income Tax Assessment Act 1936. No deduction for certain expenditure (2) You cannot deduct under subsection (1): (a) *tax; or (b) an amount payable under Part VI (Collection and recovery of tax) of the Income Tax Assessment Act 1936; or (c) expenditure for borrowing money (including payments of interest) to pay an amount covered by paragraph (a) or (b); or (d) expenditure for a matter relating to the commission (or possible commission) of an offence against an *Australian law or a *foreign law; or (e) a fee or commission for advice about the operation of a *Commonwealth law relating to taxation, unless that advice is provided by a *recognised tax adviser. No deduction for expenditure excluded from general deductions (3) You cannot deduct expenditure under subsection (1) to the extent that a provision of this Act (except section 8-1) expressly prevents or limits your deducting it under section 8-1 (about general deductions). It does not matter whether the provision specifically refers to section 8-1. No deduction for capital expenditure (4) You cannot deduct capital expenditure under subsection (1). However, for this purpose, expenditure is not capital expenditure merely because the *tax affairs concerned relate to matters of a capital nature. Example: Under this section, you can deduct expenditure you incur in applying for a private ruling on whether you can depreciate an item of property. Use of property taken to be for income producing purpose (5) Under some provisions of this Act it is important to decide whether you used property for the *purpose of producing assessable income. For provisions of that kind, your use of property is taken to be for that purpose insofar as you use the property for: (a) managing your *tax affairs; or (b) complying with an obligation imposed on you by a *Commonwealth law, insofar as that obligation relates to the *tax affairs of another entity. Example: You buy a computer to prepare your tax returns. The expenditure you incur in buying the computer is capital expenditure and cannot be deducted under this section. However, to the extent that you use the computer in preparing your income tax return, you will be able to depreciate your computer and deduct an amount under section 54 (Depreciation) of the Income Tax Assessment Act 1936. That is because, under this subsection, the computer is property that you are taken to use for the purpose of producing assessable income. (6) If another provision of this Act expressly provides that a particular use of property is not taken to be for the *purpose of producing assessable income, that provision overrides subsection (5). 25-10 Repairs (1) You can deduct expenditure you incur for repairs to premises (or part of premises), *plant, machinery, tools or articles that you held or used solely for the *purpose of producing assessable income. Property held or used partly for that purpose (2) If you held or used the property only partly for that purpose, you can deduct so much of the expenditure as is reasonable in the circumstances. No deduction for capital expenditure (3) You cannot deduct capital expenditure under this section. 25-15 Amount paid for lease obligation to repair You can deduct an amount that you pay for failing to comply with a lease obligation to make repairs to premises if you use or have used the premises for the *purpose of producing assessable income. Note: The amount is assessable income of the entity to which you pay it: either as ordinary income under section 6-5 or because it is included by section 15-25. 25-20 Lease document expenses (1) You can deduct expenditure you incur for preparing, registering or stamping: (a) a lease of property; or (b) an assignment or surrender of a lease of property; if you have used or will use the property solely for the *purpose of producing assessable income. Property used partly for that purpose (2) If you have used, or will use, the leased property only partly for that purpose, you can deduct the expenditure to the extent that you have used, or will use, the leased property for that purpose. 25-25 Borrowing expenses (1) You can deduct expenditure you incur for borrowing money, to the extent that you use the money for the *purpose of producing assessable income. In most cases the deduction is spread over the *period of the loan. For the cases where the deduction is not spread, see subsection (6). Note: Your deductions under this section may be reduced if any of your commercial debts have been forgiven in the income year: see Subdivision 245-E of Schedule 2C to the Income Tax Assessment Act 1936. Income year when money used solely for the purpose of producing assessable income (2) You can deduct for an income year the maximum amount worked out under subsection (4) if you use the borrowed money during that income year solely for the *purpose of producing assessable income. Example: In 1997-98 you borrow $100,000 and incur expenditure of $1,500 for the borrowing. You use the money to buy a house. Throughout 1998‑99 you rent the house to a tenant. You can deduct for the expenditure for 1998‑99 the maximum amount worked out under subsection (4). Income year when borrowed money used partly for that purpose (3) If you use the money only partly for that purpose during that income year, you can deduct the proportion of that maximum amount that is appropriate having regard to the extent that you used the borrowed money for that purpose. Note: You cannot deduct anything for that income year if you do not use the money for that purpose at all during that income year. Maximum deduction for an income year (4) You work out as follows the maximum amount that you can deduct for the expenditure for an income year: Method statement Step 1. Work out the remaining expenditure as follows: • For the income year in which the *period of the loan begins, it is the amount of the expenditure. • For a later income year, it is the amount of the expenditure reduced by the the maximum amount that you can deduct for the expenditure for each earlier income year. Step 2. Work out the remaining loan period as follows: • For the income year in which the *period of the loan begins, it is the period of the loan (as determined at the end of the income year). • For a later income year, it is the period from the start of the income year until the end of the period of the loan (as determined at the end of the income year). Step 3. Divide the remaining expenditure by the number of days in the remaining loan period. Step 4. Multiply the result from Step 3 by the number of days in the remaining loan period that are in the income year. Example: To continue the example in subsection (2): suppose the original period of the loan is 4 years starting on 1 September 1997. What is the maximum amount you can deduct for the expenditure for 1997‑98? Applying the method statement: After Step 1: the remaining expenditure is $1,500 (the amount of the expenditure). After Step 2: the remaining loan period is 4 years from 1 September 1997 (1,461 days). After Step 3: the result is $1,500 divided by 1,461 = $1.03. After Step 4: the result is $1.03 multiplied by 302 days = $310.06. Suppose you repay the loan early, on 31 December 1998. What is the maximum amount you can deduct for the expenditure for 1998-99? Applying the method statement: After Step 1: the remaining expenditure is $1,500 (the amount of the expenditure) reduced by $310.06 (the maximum amount you can deduct for 1997-98) = $1,189.94. After Step 2: the remaining loan period is the period from 1 July 1998 to 31 December 1998 (183 days). After Step 3: the result is $1,189.94 divided by 183 days = $6.50. After Step 4: the result is $6.50 multiplied by 183 days = $1,189.94. Meaning of period of the loan (5) The period of the loan is the shortest of these periods: (a) the period of the loan as specified in the original loan contract; (b) the period starting on the first day on which the money was borrowed and ending on the day the loan is repaid; (c) 5 years starting on the first day on which the money was borrowed. When deduction not spread (6) If the total of the following is $100 or less: (a) each amount of expenditure you incur in an income year for borrowing money you use during that income year solely for the *purpose of producing assessable income; (b) for each amount of expenditure you incur in that income year for borrowing money you use during that income year only partly for that purpose—the proportion of that amount that is appropriate having regard to the extent that you use the money during that income year for that purpose; you can deduct for the income year: (c) each amount covered by paragraph (a); and (d) each proportion covered by paragraph (b). 25-30 Expenses of discharging a mortgage Mortgage for borrowed money (1) You can deduct expenditure you incur to discharge a mortgage that you gave as security for the repayment of money that you borrowed if you used the money solely for the *purpose of producing assessable income. Mortgage for property bought (2) You can deduct expenditure you incur to discharge a mortgage that you gave as security for the payment of the whole or part of the purchase price of property that you bought if you used the property solely for the *purpose of producing assessable income. Money or property used partly for that purpose (3) If you used the money you borrowed, or the property you bought, only partly for the *purpose of producing assessable income, you can deduct the expenditure to the extent that you use