Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 3 - Entering and leaving the Simplified Tax System
Outline of chapter
3.1 This chapter explains the circumstances in which an entity:
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- enters the STS;
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- leaves the STS; and
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- re-enters the STS.
[Schedule 1, item 1, Subdivision 328-G]
Context of reform
3.2 Restrictions on re-entry are designed as an integrity measure to discourage entities from temporarily entering the STS regime to gain access to the benefits of the STS.
| New law | Current law |
|---|---|
| This Bill provides machinery provisions which deal with the requirements when an entity:
|
As the STS is a new system there are no corresponding provisions in the current law. |
Detailed explanation of new law
3.3 An entity may choose to enter the STS if they qualify as an STS taxpayer for an income year. If an entity chooses to enter the STS, they need to notify the Commissioner in the approved form. [Schedule 1, item 1, section 328-435]
3.4 Broadly, an entity is an STS taxpayer for an income year if it:
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- carries on a business during the year;
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- has an STS average turnover of less than $1 million; and
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- has depreciating assets with values totalling less than $3 million at the end of that year.
The eligibility rules that determine who can be in the STS regime are discussed in Chapter 2.
3.5 Once in the STS, the STS taxpayer will remain in the STS until they voluntarily leave or there is a substantial change to the business that requires the entity to leave the STS. An example of such a situation would be where an entity expands its operations and thus estimates that its STS average turnover for a year would be in excess of $1 million.
3.6 There are 2 ways in which an STS taxpayer leaves the STS:
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- they may voluntarily elect to leave; or
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- they cease to be eligible for the STS.
3.7 If an STS taxpayer leaves the STS they will need to notify the Commissioner of their decision. [Schedule 1, item 1, subsections 328-440(1) and (2)]
Restriction on re-entering the STS
3.8 Once an entity voluntarily leaves the STS they will be ineligible to re-enter the STS for a period of 5 years after the last income year that the entity was an STS taxpayer. This restriction is designed to stop entities from taking advantage of the benefits of the STS by entering and leaving the STS on a frequent basis [Schedule 1, item 1, subsection 328-440(3)] . If the entity wishes to re-enter after 5 years they will need to notify the Commissioner of their decision [Schedule 1, item 1, section 328-435] .
3.9 However, the 5 year limit does not apply if the entity is required to leave the STS because it is no longer eligible. In this situation the entity will be able to re-enter if it satisfies the eligibility criteria rules as specified in Subdivision 328-F. Again, the entity has to notify the Commissioner of its decision to re-enter. [Schedule 1, item 1, section 328-435]
Example 3.1
Thomas has a restaurant in the city. In the 2004-2005 income year he purchases equipment with a 4 year effective life. He qualifies for and chooses to enter the STS in that year. Once in the STS he can use the new simplified depreciation rules. Thomas decides to leave the system the following year.
The STS rules will allow Thomas to enjoy the ongoing benefits of the pooled depreciation at the rate of 30% after leaving the STS. Subsection 328-440(3) will not allow him to enter the STS until the 2010-2011 income year. This is because Thomas had voluntarily chosen to leave the STS.