House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

General outline and financial impact

25 per cent entrepreneurs' tax offset

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 and the Taxation Administration Act 1953 by introducing a 25 per cent entrepreneurs' tax offset on the income tax liability attributable to business income for small businesses in the simplified tax system (STS) that have an annual turnover of $75,000 or less.

Where STS turnover is greater than $50,000 the offset will be phased out so that the offset ceases once STS turnover reaches $75,000.

The introduction of a 25 per cent entrepreneurs' tax offset on the income tax liability attributable to business income will provide an incentive for very small, micro and home-based businesses.

Date of effect: These amendments will apply to assessments for income years commencing on or after 1 July 2005.

Proposal announced: This measure was announced by the Government in its election statement Promoting an Enterprise Culture on 26 September 2004.

Financial impact: This measure will cost the revenue $400 million in 2006-07 and $390 million in 2007-08.

Compliance cost impact: Small businesses will be required to isolate their gross business income and their deductions incurred in gaining that income, and then calculate the net income after deductions.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure will have implications for small businesses with turnover less than $75,000 and who are in the STS.

Main points:

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Small businesses in the STS will need to calculate their turnover and their net income from business.

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People with other non-business income will need to isolate their business income from their total income.

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This measure will increase administrative costs for the Australian Taxation Office. Forms and systems changes will be required to capture the required data and undertake the calculation of the tax offset.

Extending the simplified tax system

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 and the Income Tax (Transitional Provisions) Act 1997 to remove the requirement that taxpayers in the simplified tax system (STS) must use the STS accounting method (generally referred to as a cash basis of accounting).

For many small businesses the cash accounting requirement is not appropriate for their business or financial circumstances. The requirement to use this method has been seen as a restriction which has prohibited many small businesses from accessing the benefits of the STS.

The removal of this restriction will permit more businesses, including many in the farming sector, to take advantage of the concessions associated with the STS. The removal of the cash accounting requirement will enable more businesses to access the benefits of the STS whilst calculating their taxable income using the most appropriate method applicable to their circumstances.

Date of effect: These amendments will apply to assessments for income years commencing on or after 1 July 2005.

Proposal announced: The proposals were announced by the Government in its election statement Promoting an Enterprise Culture on 26 September 2004.

Financial impact: This measure will cost the revenue as follows:

Compliance cost impact: Negligible.

Roll-over of income taxing point for shareholders in employee share schemes

Schedule 3 to this bill amends the Income Tax Assessment Act 1936 to allow taxpayers who have deferred the income tax liability on a discount received on shares or rights acquired under an employee share scheme (ESS), to roll-over a taxing point that would otherwise occur because of a corporate restructure.

Date of effect: This amendment applies to shares and rights that have been acquired as a result of corporate restructures that happen on or after 1 July 2004.

Proposal announced: This measure was announced jointly by the Treasurer and the Minister for Employment and Workplace Relations in Press Release No. 14 of 27 March 2003.

Financial impact: The cost to revenue of this proposal is unquantifiable but expected to be small.

Compliance cost impact: This measure is expected to have a minimal impact on compliance costs.

Summary of regulation impact statement

Regulation impact on business

Impact: The main impact will be on employees that hold shares or rights in ESS and their employers in the event of a corporate restructure.

Main points:

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This amendment does not introduce new compliance requirements for employers so their compliance costs from this measure are expected to be minimal.

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Employees and employers may incur some costs in determining whether the roll-over relief would apply. These costs are expected to be minor.

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The Australian Taxation Office may incur some implementation costs where employees and employers seek advice on whether the roll-over relief is available for participants.

Fringe benefits tax exemption thresholds for long service award benefits

Schedule 4 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 to increase the fringe benefits tax (FBT) exemption thresholds for long service award benefits.

Date of effect: This amendment applies for the FBT year beginning 1 April 2005.

Proposal announced: This measure was announced in the 2004-05 Budget and in the Treasurer's Press Release No. 34 of 11 May 2004.

Financial impact: Less than $1 million per year.

Compliance cost impact: Unquantifiable but expected to be insignificant.

Petroleum exploration incentive

Schedule 5 to this Bill introduces an amendment to the Petroleum Resource Rent Tax Assessment Act 1987 to allow petroleum exploration companies conducting exploration work in a designated frontier area to obtain an uplift on expenditure incurred. These amendments will:

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enable the Minister responsible for the Petroleum (Submerged Lands) Act 1967 to allocate up to 20 per cent of the annual offshore petroleum acreage release areas as designated frontier areas; and

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apply a 150 per cent uplift to certain exploration expenditure conducted in the first term of an exploration permit in a designated frontier area.

Date of effect: The uplift will apply to annual offshore petroleum acreage releases from 2004 to 2008.

Proposal announced: The Offshore Petroleum Exploration Incentive was announced by the Treasurer and the Minister for Industry, Tourism and Resources on 11 May 2004.

Financial impact: This measure is estimated to cost $17 million over the period 2004-05 to 2007-08.

Compliance cost impact: This measure is expected to have a minimal impact on compliance costs.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure is expected to impact favourably upon petroleum exploration companies willing to conduct exploration in a designated frontier area. It is estimated that around 60 petroleum exploration companies currently hold interests in exploration permits in Australian offshore areas.

Main points:

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To enable the Minister responsible for the Petroleum (Submerged Lands) Act 1967 to designate up to 20 per cent of the annual offshore petroleum acreage release areas as designated frontier areas.

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To apply a 150 per cent uplift to certain exploration expenditure conducted in the first term of an exploration permit in a designated frontier area.

Consolidation: providing greater flexibility

Schedule 6 to this Bill provides greater flexibility, clarifies certain aspects of the consolidation regime and ensures that the regime interacts appropriately with other aspects of the income tax law.

Date of effect: These amendments have retrospective effect to 1 July 2002, which is the date of commencement of the consolidation regime. These amendments clarify the operation of the regime and the interaction of the regime with other areas of the tax law and as such are beneficial to taxpayers.

Proposal announced: Three of the amendments were foreshadowed in the former Minister for Revenue and Assistant Treasurer's Press Release No. C116/03 of 4 December 2003. The amendment to ensure that there is 'no double reduction in working out step 3 of the allocable cost amount on entry' was not previously announced but addresses an anomaly that was detrimental to taxpayers.

Financial impact: These amendments are not expected to impact on the revenue.

Compliance cost impact: The amendments in this Bill will provide taxpayers with additional flexibility in the transition to consolidation and are not expected to impact on compliance costs.

Simplified tax system roll-over

Schedule 7 to this Bill amends Division 328 of the Income Tax Assessment Act 1997 to ensure that the roll-over relief available for partnerships under the uniform capital allowances regime is also available in relation to depreciating assets allocated to simplified tax system (STS) pools.

Date of effect: These amendments will apply to assessments for the income year following the income year in which this Bill receives Royal Assent.

Proposal announced: This measure was announced by the Treasurer and the Minister for Small Business in Press Release No. 36 of 11 May 2004.

Financial impact: This measure will have a cost to revenue as follows:

Compliance cost impact: Taxpayers will only incur a small increase in their compliance costs where they elect for roll-over relief.

Family trust and interposed entity elections

Schedule 8 to this Bill amends the Income Tax Assessment Act 1997 to provide greater flexibility, reduce compliance costs and ongoing uncertainty surrounding family trust elections and interposed entity elections.

These amendments will allow trustees to make family trust elections and interposed entity elections at any time, in relation to earlier years.

Date of effect: These amendments will apply from the date this Bill receives Royal Assent.

Proposal announced: This measure was foreshadowed in the former Minister for Revenue and Assistant Treasurer's Press Release No. 36 of 18 May 2004.

Financial impact: Nil.

Compliance cost impact: This measure will provide taxpayers with additional flexibility, remove ongoing uncertainty and is expected to reduce compliance costs.

Non-commercial loans

Part 1 in Schedule 9 to this Bill corrects a minor technical defect in Subdivision EA of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936). This will ensure that a loan from a trustee to a shareholder of a corporate beneficiary will not be treated as a deemed dividend if the loan is repaid before the earlier of the due date for lodgement or the date of lodgement of the trust's income tax return for the year in which the loan is made.

Part 2 in Schedule 9 to this Bill amends Division 7A of the ITAA 1936 to allow a loan from a private company to be repaid or put on a commercial footing before the earlier of the due date for lodgement and the date of lodgement of the private company's income tax return for the income year in which the loan is made in order to avoid the loan being treated as a deemed dividend.

Date of effect: The amendments in Part 1 in Schedule 9 will apply to loans made on or after 12 December 2002.

The amendments in Part 2 of Schedule 9 will apply to loans made in years of income that begin after this Bill receives Royal Assent.

Proposal announced: The changes included in Part 1 of Schedule 9 have not been previously announced as they correct a minor defect in Subdivision EA of Division 7A of the ITAA 1936.

The changes included in Part 2 of Schedule 9 were announced in the 2004-05 Budget.

Financial impact: Nil.

Compliance cost impact: Nil.

Technical corrections and amendments

Schedule 10 to this Bill makes minor corrections and amendments to the taxation laws. These corrections and amendments are part of the Government's ongoing commitment to improve the quality of the taxation laws. They fix errors such as duplications of definitions, missing asterisks from defined terms, incorrect numbering and referencing and outdated guide material.

Date of effect: These corrections and amendments generally commence on Royal Assent. However, some amendments will apply retrospectively for the reasons set out in Chapter 10.

Proposal announced: These corrections and amendments have not been announced.

Financial impact: Nil.

Compliance cost impact: Nil.

Minor amendment to the refundable film tax offset

Schedule 11 to this Bill amends the income tax law to allow revocation of unused provisional certificates issued under Division 10BA of the Income Tax Assessment Act 1936 in respect of certain film projects. This will enable those projects to then apply for the tax offset for large scale films contained in Division 376 of the Income Tax Assessment Act 1997 (ITAA 1997).

Date of effect: These amendments apply to any eligible expenditure incurred, whether before or after commencement of this Bill. Effectively, expenditure incurred on films completed on or after 4 September 2001 may be eligible under Division 376 of the ITAA 1997.

Proposal announced: This measure was announced in the former Minister for Revenue and Assistant Treasurer's Press Release No. C080/03 of 15 August 2003.

Financial impact: The financial impact of the amendment is expected to be negligible.

Compliance cost impact: This measure is expected to have a minimal impact on compliance costs.