TAX CHANGES CAUSE SERIOUS CONCERN

A review of the life of asset depreciation schedules for quarrying equipment currently being undertaken by the Australian Tax Office could have serious impact on the financial viability of independent operators in the industry, according to the CMPA.

The ATO is currently preparing significant changes to depreciation schedules “effective life of assets” which may see depreciation on assets such as crushers pushed out to 30 years.

According to the ATO the review is the “most detailed effective review of life of assets” ever undertaken.

In a meeting with the CMPA on October 24, the ATO’s ‘Effective Life, Centre of Expertise’, project officer, David Matheson, said current schedules reflected an average effective life of assets at about 10 years for quarrying equipment.

However, the Ralph Business Taxation Reform report findings, particularly concerning accelerated depreciation schedules identified need for a significant and far reaching review of existing schedules which had been drawn up as far back as 1936.

Mr Matheson told the CMPA that a report is currently being prepared and will be presented to a ATO review board on November 18. The CMPA had previously not been invited to make a submission to the investigation as the ATO had been unaware of the CMPA’s existence.

The ATO recognised that data, submissions and evidence collected so far in the investigation had primarily been supplied by the three major construction materials companies, and further engineering input from some equipment manufacturers.

Mr Matheson recognised that the inquiry to date “may have focused on the big end of town … and mostly from a Queensland perspective.” Recognising the representation of the CMPA and the impact the proposed changes may have on member companies, Mr Matheson attended the meeting at short notice. He also visited several members’ sites as part of his research before returning to Brisbane.

According to CMPA members a life of asset depreciation schedule involving terms up to 30 years for high cost, high wear items such as crushers would possibly increase tax payable and decrease the liquidity of small operations. Extended schedules may also compromise small to medium size businesses ability to replace obsolescent items in order to maintain conformance to environmental, OH&S and regulatory requirements that are becoming increasingly onerous.

While the time frame for the inquiry is now limited, the CMPA has undertaken to submit material and data to support claims that some of the proposed depreciation schedules may be damaging to small to medium sized independent operations.

As an indication of the proposed “recommended life” schedules, capital equipment items such as wheel loaders would go from eight to 10 years, screening assets to 15 years, cyclones from 10 to 15 years, but of most concern was the schedule for crushers being extended from 10 to 30 years.

Members attending the meeting were particularly concerned with the proposed life expectancy of crushers and conveyors moving to 30 years saying this sort of period did not reflect empirical data or distinguish between equipment working in all manner of applications and materials.

In response to the proposed life schedule for crushers it was pointed out that manufacture over the past decade has seen crusher weight reduced and power inputs increased due to increased manufacturer competition often causing an increase in component wear and machine fatigue.

However, this shortened life spans well below the previous expectancies of older heavier and slower crushers. As evidence the CMPA pointed out that it was unlikely any manufacturer would provide a warranty after five years for crushers and doubtful that any would even extend this far.

The impact of the proposed changes would be felt when assessing the viability of purchasing new equipment and “writing off” old assets. With some small operators only able to access finance to support the purchase of cheaper imported equipment, depreciation schedules of these items would pile up on the balance sheet as these machines often needed full replacement after only three to five years in some cases.

Consideration must also be given to environmental and OH&S impacts on effective life of equipment, the CMPA observed. As well, technology advances that may deliver commercial advantages may be rendered out of reach due to SME’s changed financial considerations.

Mr Matheson recognised the importance of the small operators’ input but acknowledged evaluations to date “had not previously been based on a high level of consultation” with SMEs.

While the option of self-assessment would remain in any new schedules allowing depreciation of assets over a shorter time frame, concerns were raised that this would involve expenditure in providing engineering or ‘expert’ reports to substantiate claims and may bring unwarranted attention from the ATO.

Responding to criticism that capital items such as loaders may be traded after only five years of harsh face excavation work, Mr Matheson said the proposed schedules recognised second life use and that it was expected traded loaders would continue to be operational. The Tax Act also “has an assumption of reasonable maintenance,” Mr Matheson said.

Regarding the working life distinctions between a small stockpile conveyor and a primary crusher discharge conveyor, Mr Matheson said it may be feasible for the ATO to analyse the distinction in use of items based on issues such as whether the conveyor in question utilised gravity take up or not.

Mr Matheson also told the CMPA that it was Treasury’s policy not to have asset life schedules formulated on weighted averages of asset components such as jaws, bearing housings or frames of crushers being considered individually in order to calculate an average or median life expectancy. Hence the life span of a crusher was being considered as the frame may last 30 years even though the machine may have been completely rebuilt many times over.

Mr Matheson told the CMPA the review was also taking in the mining industry and had already produced new schedules for the timber industry.

In closing, Mr Matheson said he appreciated the input of the CMPA and welcomed a submission that would be included in considerations. “I have a better understanding of private capital owners issues as a result of the visit”, he said.

The CMPA is currently preparing a submission to the ATO and invites urgent feedback from members by  Friday the 8th of November.

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