Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 3 - Regulation Impact Statement
Policy objective
The objectives of the New Business Tax System
3.1 The measures in this Bill are part of the Government's broad ranging reforms which will give Australia a New Business Tax System. The reforms are based on the Recommendations of the Review, instituted by the Government to consider reform of Australia's business tax system.
3.2 The Government instituted the Review to consult on its plan to comprehensively reform the business income tax system (as outlined in ANTS). The Review made 280 recommendations to the Government, designed to achieve a more simple, stable and durable business tax system.
3.3 The New Business Tax System is designed to provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings, as well as providing a sustainable revenue base so the Government can continue to deliver services to the community.
3.4 The New Business Tax System also seeks to provide a basis for more robust investment decisions. This is achieved by:
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- improving simplicity and transparency;
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- reducing the cost of compliance; and
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- providing fairer, more equitable outcomes.
3.5 This Bill is part of the legislative program implementing the New Business Tax System. Other Bills have been introduced and passed as listed in table 3.1.
| Legislation | Status |
|---|---|
|
New Business Tax System (Integrity and Other Measures) Act 1999 New Business Tax System (Capital Allowances) Act 1999 New Business Tax System (Income Tax Rates) Act (No. 1) 1999 New Business Tax System (Former Subsidiary Tax Imposition) Act 1999 |
Introduced into the Parliament on 21 October 1999.
Received Royal Assent on 10 December 1999. |
|
New Business Tax System (Capital Gains Tax) Act 1999 New Business Tax System (Income Tax Rates) Act (No. 2) 1999 |
Introduced into the Parliament on 25 November 1999.
Received Royal Assent on 10 December 1999. |
|
New Business Tax System (Miscellaneous) Bill 1999 New Business Tax System (Venture Capital Deficit Tax) Bill 1999 |
Introduced into the Parliament on 9 December 1999.
Introduced into the Senate on 6 March 2000. |
The objectives of measures in this Bill
3.6 The objective of the non-commercial losses measure is to specify the time when individual taxpayers can claim deductions for expenditure on certain business activities. A Tax System Redesigned described many of these activities as more like hobbies and/or lifestyle choices. Further, while these activities may have business-like characteristics (according to the law), experience shows they are often unlikely ever to make a profit and have little, if any particular commercial purpose.
Application of 13 month prepayment rule to tax shelters
3.7 The objective of this measure is to limit the tax advantages that are derived from participation in tax minimisation schemes, particularly end of year schemes.
Implementation options
3.8 The measures in this Bill arise from recommendations of the Review. Those Recommendations were the subject of extensive consultation. The implementation options for these measures can be found in A Tax System Redesigned . Table 3.2 shows where the measures (or the principles underlying them) are discussed in those publications.
| Measure | Recommendation |
|---|---|
| Non-commercial losses. | Recommendation 7.5(pp. 294-300). |
| 13 month prepayment rule tax shelters. | Recommendations 4.4(iii) (pp. 168-169) and 17.2(iv) (pp. 578-580). |
Assessment of impacts
3.9 The potential compliance, administrative and economic impacts of the measures in this Bill have been carefully considered, both by the Review and by the business sector. The Review focussed on the economy as a whole in assessing the impacts of its recommendations and concluded that there would be net gains to business, government and the community from business tax reform.
3.10 The groups affected by measures in this Bill are identified in Table 3.3.
| Measure | Taxpayer group affected |
|---|---|
| Non-commercial losses. | Individual taxpayers carrying on a business either alone or in partnership. |
| 13 month prepayment rule - tax shelters. | Investors in tax shelter arrangements. |
3.11 As is standard with new measures, groups affected by them will need to incur a small up-front cost in either familiarising themselves with the new law or having advisers familiarise themselves with the new law and, if necessary, communicating the necessary information to taxpayers affected.
3.12 However, overall, the measures in this Bill are expected to reduce compliance costs for business as it will provide a more consistent and easily understood business tax system.
3.13 The measures in this Bill may increase compliance costs for some taxpayers. However, these costs are considered to be outweighed by the improvement in the equity, fairness and integrity that the measures will introduce to the tax system. The compliance cost impact of each of the measures is discussed on a measure-by-measure basis in paragraphs 3.14 to 3.18.
3.14 The measure will have a compliance impact on individuals and individuals in partnership involved in business activities that may produce losses when, in an income year, deductions exceed assessable income.
3.15 Individual taxpayers claiming deductions arising from business activities against other income will need to become familiar with the new provisions. These taxpayers will need to determine whether the tests apply to them and if so whether they satisfy any one of the tests in order to be able to offset losses from the activity against their other income.
3.16 Individuals who fail to satisfy any of the tests for a particular business activity will need to maintain records of those loss amounts in order to defer them to a future year in which they pass any of the tests. The deferred loss can be claimed as a deduction in the year a test is passed. These records will need to separately identify the deductions from each activity which were not permitted to be claimed.
3.17 The tests are designed to allow taxpayers to use information that is already available to them, such as tax values of assets, assessable income and taxable income.
Application of 13 month prepayment rule to tax shelters
3.18 The main compliance cost implication arises for taxpayers, who make prepayments under tax shelter arrangements, and taxation professionals having to familiarise themselves with the new rules. The proposed measure will further align the deductibility of expenditure with the income year in which the expenditure was incurred.
3.19 The measures will be administered by the ATO using existing resources.
3.20 The measures raise revenue in the year of introduction and in subsequent years. The estimated increases in revenue are set out in the General Outline and Financial Impactsection of this Explanatory Memorandum.
3.21 The New Business Tax System will provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings. The economic benefits of these measures are explained in more detail in the publications of the Review, particularly A Platform for Consultation and A Tax System Redesigned .
3.22 The consultation process began with the release of ANTS in August 1998. The Government established the Review in that month. Since then, the Review has published 4 documents about business tax reform; in particular A Platform for Consultation and A Tax System Redesigned in which it canvassed options, discussed issues and sought public input.
3.23 Throughout that period, the Review held numerous public seminars and focus group meetings with key stakeholders in the tax system. It received and analysed 376 submissions from the public about reform options. Further details are contained in paragraphs 11 to 16 of the Overview of A Tax System Redesigned .
3.24 In analysing options, the Review was guided by, and frequently referred to, views expressed during the consultation process.
3.25 Consultation with professional associations, tax shelter arrangement promoters and industry representatives was undertaken following the announcement of the measures in this Bill.
Conclusion and recommended option
3.26 The recommended option should be adopted. The option will contribute significantly to the fairness, integrity and equity of the tax system by reducing the scope for minimisation and deferral of tax by taxpayers which arises from complexities and certain anomalies in the current taxation legislation.
3.27 These measures may increase compliance costs for business taxpayers but the overall changes to business taxation will provide business taxpayers with greater flexibility in managing their affairs and contribute to the integrity of the tax system.