House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Small Business, the Bruce Billson MP)

General outline and financial impact

Tax discount for unincorporated small businesses

Schedule 1 to this Bill amends the income tax laws to provide a tax offset (the small business income tax offset) to individuals who run small businesses (businesses with an aggregate annual turnover of less than $2 million), or who pay income tax on a share of the income of a small business.

The amount of the tax offset is 5 per cent of the income tax payable on the portion of an individual's income that is small business income. In addition to calculating the offset in this way, the maximum amount of the tax offset available to an individual in an income year is capped at $1,000.

Date of effect: This measure applies from the 2015-16 income year.

Proposal announced: This measure was announced by the Treasurer on 12 May 2015 as part of the 2015-16 Budget.

Financial impact: This measure has these revenue implications:

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.88 to 1.92.

Compliance cost impact: This measure has a small compliance cost impact of $15.6 million each year. This cost has been fully offset within the portfolio.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure has a small compliance cost impact of $15.6 million each year. This cost has been fully offset within the portfolio.

Main points:

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Small businesses play a significant role in the Australian economy, they also face a unique set of operational challenges, and as a consequence typically have higher failure rates than those for larger companies.

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The Government committed to introducing a 1.5 percentage point small business tax cut from 1 July 2015 in the Coalition's Policy for Small Business. On 2 February the Prime Minister announced that a jobs and small business package would form part of the 2015-16 Budget with a cut in the company tax rate of 1.5 per cent for small business.

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70 per cent of small businesses are not companies and would not benefit from a company tax cut.

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Providing a tax discount for unincorporated small businesses, which broadly mirrors the small company tax cut, will help to improve the cash flow of small businesses by reducing the amount of tax payable in the financial year, and help to alleviate the problem of higher regulatory costs.

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The tax discount will result in unincorporated small business owners having higher after-tax earnings which they can reinvest in their businesses. To the extent this occurs, it will tend to increase growth and productivity in the small business sector.

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Overall the proposal is assessed as having a low overall compliance cost impact, comprising a low implementation impact, and a low increase in ongoing compliance costs relative to the status quo.

Immediate deductibility for small business start-up expenses

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to allow small businesses and individuals to immediately deduct certain costs incurred when starting up a business, including government fees and charges as well as costs associated with raising capital, that are presently only deductible over five years.

Date of effect: These amendments will apply to expenditure incurred in the 2015-16 income year and later income years.

Proposal announced: This measure was announced on 12 May 2015 as part of the 2015-16 Budget.

Financial impact: These amendments will have a cost to the Budget of $30m over the forward estimates period comprising:

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights -paragraphs 2.34 to 2.39.

Compliance cost impact: This measure is expected to result in a small reduction in compliance costs as qualifying expenses are deducted in a single income year. In contrast, under the current taxation treatment these expenses need to be tracked and deducted over five income years.

Fringe benefits tax exemption - portable electronic devices for small businesses

Schedule 3 to this Bill extends the fringe benefits tax (FBT) exemption that applies to employers that provide employees with work-related portable electronic devices, such as mobile phones, laptops and tablets.

The amendments extend the exemption to small businesses that provide employees with more than one work-related portable electronic device, even where the devices have substantially identical functions.

Date of effect: The amendments apply for the 2016-17 FBT year and later FBT years.

Proposal announced: The amendments were announced on 12 May 2015 as part of the 2015-16 Budget.

Financial impact: The amendments are estimated to have a small but unquantifiable cost to revenue over the forward estimates period.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.45 to 3.49.

Compliance cost impact: Low.

Summary of regulation impact statement

Regulation impact on business

Impact: This proposal will simplify FBT for small businesses by reducing complexity in complying with current rules and improving access for employers to work related benefit exemptions.

This proposal will allow FBT exemptions for more than one qualifying work related item in an FBT year where the items have substantially similar functions.

Main points:

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This proposal will provide a benefit to all taxpayers who incur FBT and qualify as a small business under the aggregated turnover test (currently $2 million or less).

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Small businesses will be able to access the improved exemption from 1 April 2016.

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There have been many examples of business seeking clarification from the ATO regarding whether various items can both be exempt in the same FBT year. This proposal will remove this confusion and provide small business employers with greater flexibility.

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Small businesses tend to face proportionately higher regulatory costs than larger businesses, because of their inability to take advantage of economies of scale in understanding and complying with regulation.