Tax Incentives and Disincentives
Historically Australian Governments have provided a range of capital allowances via the taxation system to encourage or discourage various equipment investments. Over the years AELA has put forward the following principles to the series of business tax reviews; these focus specifically on international tax relativity:
– the rate of Australian company tax should be at a rate which is in line with that of our major trading partners and competitors;
– the Australian depreciation regime should not be any longer than that of our major trading partners and competitors; and
– the level of investment incentives in Australia should be kept similar to and not less than those applicable in our major trading partners and competitors.
AELA firmly believes that the above principles of business tax relativity should be kept under review, also taking into account the changing mix of other socio-economic variables (e.g. inflation, interest rates, wage growth, ‘regulatory burden’). To the extent that these get out of balance with those economies with which Australian business is expected to compete, investment incentive and capacity can be adversely affected, and the business taxation system should be ready to foster investment over consumption without disturbing the overall policy mix.
The 1999 Review of Business Taxation (RBT) recommendations and the Government’s response, came at a most positive point in the cycle of domestic economic and fiscal outcomes, with the consequence that the level of investment incentive was reduced. This trend was most obvious in the RBT recommendations on depreciation as well as in the Commissioner of Taxation’s changes to effective life determinations for a range of assets, which has resulted in a lengthening of safe-harbour effective lives and an associated reduction in annual depreciation allowances for those assets. In response, the Government has introduced statutory effective life caps (shorter than those re-assessed) for some asset classes and in the latest period increased the diminishing value depreciation rate to better reflect an asset’s actual decline in value.
It is noteworthy however that such outcomes, especially their international relativity to major trading partners and competitors, can and do change.
By way of background it is worth recording the series of incentives which have been operating in the market. In 1975/76 a ‘double’ depreciation acceleration (relative to the Tax Commissioner’s long standing safe-harbour rates) measure was introduced. From January 1976 this was replaced by a 40% General Investment Allowance and from August 1980 a 20% depreciation acceleration. In 1978 the Allowance dropped to 20% and in April 1981 both the Allowance and the depreciation acceleration dropped to 18%; the Allowance as scheduled phased-out on 30 June 1985.
In 1982 a simplified depreciation acceleration regime was introduced which wrote-off equipment over 3 or 5 years. In May 1988 the pre-existing Commissioner’s depreciation rates were restored with the prior acceleration increased from 18 to 20%. In March 1991 an ‘effective life’ self-assessed regime with a default 7-tier broad-banded safe-harbour schedule was introduced. In February 1992 the tiers were reduced to 6. In February 1993 a 10% Investment Allowance was introduced for items over $3,000 (phasing-out June 1994). As with the previous year’s 10% Development Allowance (for large scale projects of more than $50 million) the long-standing rules whereby the lessor or lessee could apportion the claim were applied.
In March 1995, a 10% Drought Investment Allowance was introduced, to run for 5 years with a cap of $5,000 per lessee taxpayer per year. Reflecting the Government’s recognition of the benefits of leasing’s tax benefit transfer capacity, the cap for lessors was $5,000 per item per year. Following adoption of the RBT recommendation, from September 1999 the acceleration implicit in the 6 tiers was abolished and the Commissioner’s pre-existing effective life schedule re-instated, and an on-going review of that schedule was commenced. Over the period from 1975 to the present, the company tax rate has been reduced from 49% to 30%.
In the 2006 Budget, the Treasurer announced the increase in the diminishing value (DV) rate of depreciation from 150% to 200% of the prime cost (PC) method. This measure applies to assets used for a taxable purpose acquired on or after 10 May 2006. It includes assets subject to leasing arrangements, and to that extent is tax-neutral as between leasing, hire purchase and chattel mortgage.
In December 2008, the Government announced a 10% Investment Allowance to apply to equipment acquisitions of over $10,000 contracted for before 30 June 2009. AELA is working with officials on the detailed operation of the measure.
As for tax incentives, so too for disincentives. In 1979 the Sn57AF Motor Vehicle Depreciation Limit was introduced as a disincentive to ‘luxury’ motor vehicle purchases. Initially set at $18,000 it has been annually indexed in line with the motor component of the Consumer Price Index to now (2007-08) stand at $57,180. In recent years AELA has sought review of the Limit both generally, given the range of other tax imposts on luxury vehicles (FBT, GST, Luxury Car Tax) and specifically for anomalies; in 1993 the provisions were amended to clarify that for lessors with substituted accounting periods the Limit applied to vehicles first used from July each year, and in 1997 changes were made to ensure that where the indexation factor was negative in a given year, the Limit does not change. AELA has also submitted that where the vehicle is used to produce assessable income (such as hire cars and limousines) it should be excluded from the Limit.
By limiting the depreciation claimed by the lessor, the disincentive measure worked to increase the rental paid by the lessee. This only operated however where the lessor was in a taxable position to claim the depreciation within the Commonwealth tax system and in a number of circumstances lease arrangements were such as to negate the price impact of the Limit. After several attempts to stabilise the market disruption which resulted, the Government in August 1996 introduced legislation to treat the lessees of such vehicles as if they were the owner for tax purposes, effectively treating the lease as a sale-and-loan for tax purposes. The measure has been implemented without major disruption to achieve the Government’s objective.
In the May 2008 Budget the Government announced an increase in the luxury car tax from 25% to 33%. Senate amendments to these proposals have resulted in two thresholds for the purpose of determining luxury car tax, a ‘general’ threshold and one for ‘fuel efficient’ vehicles.
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