Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 7 cont'd - Regulation impact statement
Background
7.30 The UCA regime contains concessional rules that can apply in certain circumstances, such as where there is a change in ownership in a partnership. Broadly, these rules allow taxpayers to ignore any balancing adjustment amounts which are potentially assessable. Roll-over relief avoids taxation of the unrealised capital gains of partners not selling their interests.
7.31 The provisions allowing roll-over relief do not apply to assets held under the STS rules. Representations made to the Government raised the absence of roll-over relief in the STS as an issue.
Policy objective
7.32 The objective of the measure is to provide optional roll-over relief for balancing adjustments arising from the partial changeover of ownership of depreciating assets, for partnerships in the STS.
Implementation options
7.33 Roll-over relief could commence prospectively or retrospectively.
7.34 The advantages of retrospective commencement from 1 July 2001 (the commencement date of the STS) is that this would enable small business to access the maximum benefit of the STS.
7.35 The disadvantage of retrospective commencement is that the ATO would incur additional administrative costs in publicising the change and educating those affected by the change. It would also need to process amendment requests for taxpayers who have already lodged their income tax returns but who wish to enter the STS as a result of the change. The inability of taxpayers to do so would be the main disadvantage of prospective commencement.
Analysis of costs/benefits
7.36 Incorporating roll-over relief into the STS will remove a disincentive to entry to the STS. Also, the absence of roll-over relief has tax consequences for STS taxpayers where assets are transferred to, within or from the STS. STS partnership taxpayers may face an unexpected increase in their tax liability in a year when a variation in the partnership occurs. Partners who did not trigger the liability are taxed on unrealised capital gains, while other owners of assets are not taxed until realisation. This can cause cash flow problems. More importantly, roll-over relief is used to introduce the next generation into family businesses without adverse tax consequences. This is of particular significance to small businesses and primary producers.
7.37 As roll-over relief is optional, taxpayers will be required to elect for roll-over relief to apply. They will do so in writing, within six months of the end of the relevant income year. They will also be required to retain this election for five years.
7.38 There will also be a cost for taxpayers preparing amendment requests where they have already lodged their income tax returns but wish to enter the STS as a result of the change. As it is not known how many taxpayers will seek an amendment, this compliance cost is difficult to quantify.
7.39 The ATO will incur additional administrative costs in publicising the change and educating those affected.
7.40 The ATO will also face resource costs to process amendment requests for taxpayers who have already lodged their income tax returns but who wish to enter the STS as a result of the change. Again, as it is not known how many will seek an amendment, this administrative cost is difficult to quantify.
7.41 The current arrangements are inequitable as taxpayers carrying on a business through a partnership face different tax consequences under the UCA regime and the STS. Introducing roll-over relief to the STS will remove this inequity.
7.42 The STS is intended to reduce the disproportionate tax compliance burden that falls on small businesses. Removing a disincentive to entry to the STS will benefit those businesses. Also, STS partnership taxpayers will benefit from a reduction in their tax liability in a year when a variation in the partnership occurs.
Consultation
7.43 The National Tax and Accountant's Association and the National Farmers' Federation both sought the introduction of roll-over relief to the STS to allow changes in ownership in partnerships without adverse tax consequences. Taxpayers within and outside the STS also made representations to the Government seeking the introduction of roll-over relief.
Conclusion and recommended option
7.44 It is recommended that optional roll-over relief for partial changes in ownership of STS partnerships be provided from 1 July 2001, the start date of the STS. This will enable small business to access the maximum benefit of the STS.