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ENVIRONMENTAL IMPACT ASSESSMENT (EIA) DEDUCTIONS
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Submitted by: William Butcher
University of New South Wales
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Subdivision 400-A of the Australian Income Tax Assessment Act 1997 ("ITAA 97") specifically allows deductions for certain expenditure on environmental impact assessments ("EIA's"). EIA expenditure may also qualify for tax benefits under other provisions, most notably the general deduction provision (sec 8-1 of ITAA 97), the depreciation provisions (Div 42), the capital works provisions (Div 43), the mining and quarrying provisions (Div 330), the R&D provisions, or the provisions dealing with the expenditure on environmental protection activities (Subdivision 400-B). This report will focus on Subdivision 400-A).
Subdivision 400-A provides as follows:
Subdivision 400-A -- Deducting expenditure on environmental impact assessment
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TABLE OF SECTIONS
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400-15 |
Deducting your expenditure on environmental impact assessment of your project
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400-20 |
Limits on deductions
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SECTION 400-15 DEDUCTING YOUR EXPENDITURE ON ENVIRONMENTAL IMPACT ASEESSMENT OF YOUR PROGJECT
400-15(1) You can deduct amounts for expenditure to the extent that you incur it on carrying out an activity for the sole or dominant purpose of evaluating the impact on the environment (or the likely impact) of a project that is carried out, or is proposed to be carried out:
- for the purpose of producing your assessable income for an income year (except a ‘net capital gain); or
- for purposes that included that purpose.
400-15(2) However, you cannot deduct expenditure under this section to the extent that you incur it for the purpose of determining the economic feasibility of your project.
400-15(3) The table shows the amount and timing of your deductions.
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Amount and timing of deduction for expenditure |
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If at the end of the income year in which you incur the |
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Item |
expenditure… |
You can deduct… |
For… |
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1 |
It is estimated that your project will end more than 9 income years later |
10% of the expenditure |
The income year in which you incur the expenditure and each of the next 9 income years |
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2 |
It cannot readily be estimated when your project will end |
10% of the expenditure |
The income year in which you incur the expenditure and each of the next 9 income years |
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3 |
It is estimated that your project will end during one of the next 9 income years (the final year) |
The expenditure dividend by the number of income years from the income year you incur the expenditure to the final year (inclusive) |
The income year you incur the expenditure and each income year up to and including the final year |
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4 |
Your project has ended |
All the expenditure |
The income year in which you incur it |
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5 |
It has been decided to abandon your project |
All the expenditure |
The income year in which you incur it
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Note 1: Various provisions may reduce the amount you can deduct or stop you deducting. For example, see:
- section 400-20 of this Act (specifying amounts you cannot deduct under this Subdivison):
- Division 26 of this Act (limiting deductions generally):
- Division 245 of Schedule 2C to the Income Tax Assessment Act 1936 (which may affect your entitlement to a deduction if your debts are forgiven).
- Division 245 of Schedule 2C to the Income Tax Assessment Act 1936 (which may affect your entitlement to a deduction if your debts are forgiven).
Note 2: If an amount of the expenditure is recouped, the amount may be included in your assessable income: see Subdivision 20-A.
SECTION 400-20 LIMITS ON DEDUCTIONS
No deduction for expenditure deductible under other provisions
400-20(1) You cannot deduct an amount under this Subdivision for an income year for expenditure to the extent to which:
- you can deduct an amount for it under a provision of this Act outside this Subdivision for an income year; or
- it is taken into account in calculating an amount of depreciation that is deductible under Division 42.
Note: The fact that you can deduct an amount under section 82BB of the Income Tax Assessment Act 1936 for the expenditure does not prevent you from deducting under this Subdivision: see section 400-20 of the Income Tax (Transitional Provisions) Act 1997
Common rule 2 applies
400-20(2) Subdivision 41-B (which sets out Common rule 2 dealing with non-arm’s length transactions) applies to expenditure for which you can deduct amounts under this Subdivision, but with the modification in subsection (3) of this section.
400-20(3) If subsection 41-65(1) applies, it has a wider operation in 2 ways.
First, it also operates if the amount of the expenditure is less than the market value of what the expenditure is for.
Second, if the amount of the expenditure is greater than or less than that market value, the amount of the expenditure is taken, for the purposes of applying this Act to both parties, to be that market value.
No deduction for expenditure excluded from general deductions
400-20(4) You cannot deduct expenditure under section 400-15 to the extent that a provision of this Act (except section 8-1 itself) 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.
Subdivision 400-A allows a deduction for environment impact assessment expenditure that might have been precluded from deductibility under the general deduction provision (sec 8-1) on the basis that either the expenditure:
- was of a capital nature, or
- was incurred before an income-earning activity had commenced.
Neither of those limitations on sec 8-1 deductibility applies to sec 400-A.
There are, nonetheless, several limitations on the availability of the sec 400-A deduction.
Sec 400-15 requires that the expenditure must relate to the environmental impact of a project carried out, or proposed to be carried out, for the purpose of producing assessable income for the taxpayer who incurred the expenditure. This precludes deductions for anyone who does not stand to derive income from the project, such as a tax exempt entity; or a concerned citizen or business conducting a study into the environmental impact of someone else’s project.
Sec 400-20 precludes a Subdivision 400-A deduction if the expenditure can be claimed under any other provision, such as sec 8-1, Div 42, Div 43, Div 330, the R&D provisions, or Subdivision 400-B. In some cases a deduction under one of those provisions would in any event be preferable to a Subdivision 400-A deduction but in others, the preclusion of a Subdivision 400-A claim would be to the taxpayer’s disadvantage. For example, in the case of a project with an estimated life of 10 years, Subdivision 400-A would allow a deduction of 10% of the expenditure in each of 10 years while sec 8-1 would allow immediate expensing; but if Div 43 applied, instead of sec 8-1, the deduction would only be at the rate of either 2.5% or 4% per annum, over 25 and 40 years respectively.
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