Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Glossary
The following abbreviations and acronyms are used throughout this explanatory memoranda.
| Abbreviation | Definition |
|---|---|
| A Tax System Redesigned | Review of Business Taxation: A Tax System Redesigned |
| ABARE | Australian Bureau of Agriculture Resource Economics |
| ABN | Australian Business Number |
| ABS | Australian Bureau of Statistics |
| ANTS | Governments Tax Reform Document: Tax Reform: not a new tax, a new tax system |
| ATO | Australian Taxation Office |
| Commissioner | Commissioner of Taxation |
| GST | goods and services tax |
| GST Act | A New Tax System (Goods and Services Tax) Act 1999 |
| ITAA 1936 | Income Tax Assessment Act 1936 |
| ITAA 1997 | Income Tax Assessment Act 1997 |
| small business taxpayer | as defined in the Income Tax Assessment Act 1997 |
| STS | Simplified Tax System |
| STS affiliate | an entity that is somehow related to the STS taxpayer |
| STS taxpayer | an entity who is eligible and who chooses to enter the STS |
General outline and financial impact
Simplified tax system
This Bill amends the ITAA 1997 to introduce a simplified tax system for certain small businesses and the ITAA 1936 to introduce a new 12-month rule for prepayments of deductible expenses made by STS taxpayers and individuals incurring non-business expenditure.
Schedules 1 and 2to this Bill amend the income tax law to introduce the STS which is an alternative method of determining taxable income for certain businesses with straightforward, uncomplicated financial affairs who choose to enter the STS. The STS modifies the current method of determining taxable income.
The STS has 3 main elements:
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- new accounting arrangements for STS taxpayers which recognise most business income and deductions only when they are received and paid;
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- a simplified trading stock regime where STS taxpayers do not have to account for changes in the value of trading stock or do stocktakes at the end of the income year in certain circumstances; and
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- a simplified depreciation regime under which depreciating assets costing less than $1,000 are written off immediately. Most other depreciating assets will be pooled and enjoy an accelerated rate of depreciation.
Schedule 3 to this Bill amends the ITAA 1936 to replace the current 13-month prepayment rule with a new 12-month rule allowing immediate deduction for prepayments where:
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- the payment is incurred in respect of a period of service not exceeding 12 months; and
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- the period of service ends no later than the last day of the income year following that in which the payment was incurred.
The new 12-month rule applies to prepayments of deductible expenses made by:
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- STS taxpayers; and
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- individual taxpayers incurring non-business expenditure.
Date of effect : These amendments will apply to assessments for income years commencing after 30 June 2001.
Proposal announced : The proposals were announced in Treasurers Press Release Nos. 58 and 59 of 21 September 1999. In particular, refer to Attachments I and J of Treasurers Press Release No. 58.
Financial impact: The financial impact of the STS is set out in the following table:
| 2001-2002 | 2002-2003 | 2003-2004 | 2004-2005 |
| - $280m | - $547m | - $236m | - $337m |
The financial impact of allowing individual taxpayers incurring non-business expenditure to have access to the new 12-month rule for prepayments is expected to be:
| 2000-2001 | 2001-2002 | 2002-2003 | 2003-2004 | 2004-2005 |
| - $20m | - $20m | - | - | - |
The other elements of the measure have a negligible positive effect on revenue.
Summary of regulation impact statement
Impact : Low.
Main points :
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- The impact group of the STS are businesses which have an annual turnover of less than $1 million and choose to enter the STS.
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- The STS is designed to minimise the compliance costs that certain businesses face in meeting their income tax obligations.
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- The prepayments changes made by this Bill are also expected to reduce compliance costs for STS taxpayers.