Remedial matters

DEDUCTIBILITY OF DEPRECIABLE INTANGIBLE PROPERTY LISTED IN SCHEDULE 14

(Clauses 31B and 105B)

Summary of proposed amendment

Supplementary Order Paper No. 167 amends section EE 7 of the Income Tax Act 2007 and the Income Tax Act 2004 to clarify that depreciable intangible property listed in schedules 14 and 17 of the Acts (respectively) is deductible under the depreciation rules.

Application date

The amendment to section EE 7 of the Income Tax Act 2007 will apply from 1 April 2008.

The amendment to section EE 7 of the Income Tax Act 2004 will apply from 1 April 2005.

Key features

The exclusions for land and excepted financial arrangements from the definition of “depreciable property” in section EE 7 are to be amended. The purpose is to clarify that depreciable intangible property listed in schedule 14 of the 2007 Act and schedule 17 of the 2004 Act remains deductible under the depreciation rules.

Background

There is currently some uncertainty over whether certain depreciable intangible property listed in schedule 14 of the 2007 Act and schedule 17 of the 2004 Act is deductible under the depreciation rules. This is a result of a series of changes to the tax legislation since 1993, which is when certain intangible property such as “the right to use land” became deductible under the depreciation rules.

In particular, the uncertainty arises from the exclusion of excepted financial arrangements from the definition of “depreciable property” in section EE 7(e). This exclusion was introduced by the 2004 Act.

Leases are excepted financial arrangements under section EW 5(9) of the 2007 Act and the term “lease” is widely defined in the financial arrangements rules to include leases or licences of land, and licences to use intangible property. Consequentially, most depreciable intangible property listed in schedules 14 and 17 of the 2007 and 2004 Acts (respectively) would be excepted financial arrangements and could be excluded from being depreciable property for deduction purposes.

Also, the specific exclusion of land from the definition of “depreciable property” in section EE 7(a) of the 2007 Act creates uncertainty over whether the “right to use land” listed in schedule 14 is deductible under the depreciation rules. This is a result of adopting a generic definition of “land”, which includes leases and licences of land, as part of the rewrite of the Income Tax Act 2004.

MINOR TECHNICAL AMENDMENTS

Supplementary Order Paper No. 167 proposes a number of drafting remedial changes. Many of them are minor changes to cross-references and readers’ aids, but the majority are amendments to remove redundant references to loss-attributing qualifying companies (LAQCs). The LAQC rules have been replaced by look-through company rules.