House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

General outline and financial impact

Schedule 1 - Accelerating the Personal Income Tax Plan

Schedule 1 to the Bill amends the income tax law to reduce the tax payable by individuals in the 2020-21 income year and later income years by bringing forward to 2020-21 the changes to income tax thresholds that were to commence in the 2022-23 income year.

Schedule 1 to the Bill also amends the income tax law to:

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bring forward the increase in the amount of the low income tax offset to $700 (from $445) by two years to the 2020-21 income year and later income years (instead of the 2022-23 income year and later income years); and

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retain the low and middle income tax offset for the 2020-21 income year, with the offset now ceasing to be available from the 2021-22 income year onwards.

Date of effect: The changes to the income tax thresholds and low income tax offset apply to the 2020-21 income year and later years.

The changes to the low and middle income offset apply to the 2021-22 income year and later years.

Proposal announced: Schedule 1 to the Bill fully implements the measure 'JobMaker Plan - Bringing forward the Personal Income Tax Plan and retaining the low and middle income tax offset' from the 2020-21 Budget.

Financial impact: This measure is estimated to have the following impact on revenue over the forward estimates period ($m):

Human rights implications: Schedule 1 to the Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 9.

Compliance cost impact: This measure is expected to only have a minor regulatory impact.

Schedule 2 - Temporary loss carry back

Schedule 2 to the Bill amends the income tax law to allow corporate tax entities with an aggregated turnover of less than $5 billion to carry back a tax loss for the 2019-20, 2020-21 or 2021-22 income year and apply it against tax paid in a previous income year as far back as the 2018-19 income year.

Date of effect: The measure will apply to assessments made in the 2020-21 income year and in the 2021-22 income year.

Proposal announced: Schedule 2 to the Bill fully implements the measure JobMaker Plan - temporary loss carry back to support cash flow from the 2020-21 Budget.

Financial impact: This measure is estimated to have the following receipts impact over the forward estimates period ($m):

Human rights implications: Schedule 2 to the Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 9.

Compliance cost impact: Low.

Summary of regulation impact statement

Regulation impact on business

Impact: This proposal is expected to result in a low overall compliance cost impact, comprising a low implementation impact and low impact in ongoing compliance costs.

Main points:

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The Government has introduced a number of initiatives (including temporary full expensing) to support businesses withstand and recover from the economic effects of the Coronavirus. However, the current tax treatment of company losses will limit the effectiveness of some of those initiatives. Furthermore, for companies that suffer tax losses due to the economic effects of the Coronavirus, the requirement to carry those losses forward will delay access to the loss's tax value.

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Temporary loss carry back allows companies that paid tax in previous years to utilise their current losses rather than carry them forward. Conceptually, the loss is carried back to reduce the earlier profit and the corresponding reduction in tax is refunded to the company.

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Past reviews and stakeholder consultations have established that there is justification and support for introduction of a loss carry back.

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The gross benefits provided by temporary loss carry back are due to the reduction in company tax paid. These amounts are orders of magnitude larger than the direct regulatory costs. The revenue implications associated with temporary loss carry back generate economic benefits that will support the economic recovery from the effects of the Coronavirus.

Schedule 3 - Increasing the small business entity turnover threshold for certain concessions

Schedule 3 to the Bill amends the A New Tax System (Goods and Services Tax) Act 1999, Customs Act 1901, Excise Act 1901, Fringe Benefits Tax Assessment Act 1986, Income Tax Assessment Act 1936, Income Tax Assessment Act 1997 and Taxation Administration Act 1953 to enable eligible entities with an aggregated turnover of $10 million or more and less than $50 million to access the following small business entity tax concessions:

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a simplified accounting method for the purposes of GST, if determined by the Commissioner;

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the ability to defer excise-equivalent customs duty to a monthly reporting cycle;

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the ability to defer excise duty to a monthly reporting cycle;

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a fringe benefits tax exemption in relation to small business car parking;

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a fringe benefits tax exemption in relation to the provision of multiple work-related portable electronic devices;

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an immediate deduction for certain prepaid expenses;

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a two year amendment period in respect of amendments to income tax assessments;

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an immediate deduction for certain start-up expenses;

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the simplified trading stock rules; and

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the ability to calculate their PAYG instalments based on GDP-adjusted notional tax.

Date of effect: Schedule 3 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October after the day the Bill receives Royal Assent. Eligible entities will be able to access these concessions in phases from 1 July 2020.

Proposal announced: Schedule 3 to the Bill implements the measure 'Increase the small business entity threshold' from the 2020-21 Budget.

Financial impact: These amendments are estimated to have the following receipts impact over the forward estimates period ($m):

Human rights implications: Schedule 3 does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 9.

Compliance cost impact: Schedule 3 to the Bill will result in a low compliance cost saving.

Schedules 4, 5 and 6 - Enhancing the R & D Tax Incentive

Schedule 4 to the Bill reforms the R & D Tax Incentive to help businesses that invest in R & D manage the economic impacts of the Coronavirus pandemic while providing incentives to undertake additional investments in R & D.

Schedule 5 to the Bill enhances the integrity of the R & D Tax Incentive by ensuring that R & D entities cannot obtain inappropriate tax benefits and by clawing back the benefit of the R & D Tax Incentive to the extent an entity has received another benefit in connection with an R & D activity.

Schedule 6 to the Bill improves the administrative framework supporting the R & D Tax Incentive by making information about R & D expenditure claims transparent, enhancing the guidance framework to provide certainty to applicants and streamlining administrative processes.

Date of effect: All of the amendments made by Schedules 4, 5 and 6 to the Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives the Royal Assent. The amendments in the schedules generally apply to income years commencing on or after 1 July 2021. Some administrative amendments in Schedule 6 apply from commencement.

Proposal announced: The Bill fully implements the 2020-21 Budget measure JobMaker Plan - Research and Development Tax Incentive - supporting Australia's economic recovery, which makes a number of changes to the 2019-20 Mid-Year Economic and Fiscal Outlook (MYEFO) measure, Better targeting the Research and Development Tax Incentive - refinements.

The 2020-21 Budget measure is estimated to have a cost to the budget of $2 billion over the current forward estimates period in underlying cash balance terms. This reflects the impact of the policy changes since the 2019-20 MYEFO.

Financial impact: Schedules 4 and 5 to the Bill are estimated to increase the cost of the R & D Tax Incentive by $240 million over two years in underlying cash balance terms ($m):

Human rights implications: Schedules 4, 5 and 6 to the Bill do not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 9.

Compliance cost impact: The measure is estimated to result in a total average annual regulatory cost for businesses of $24.7 million.

Summary of regulation impact statement

Regulation impact on business

Impact: The measure is estimated to result in a total average annual regulatory cost for businesses of $24.7 million.

Main points:

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The Government is implementing reforms to the R & D Tax Incentive. The reforms help businesses that invest in R & D manage the economic impacts of the Coronavirus pandemic while providing incentives for business to undertake additional investments in R & D.

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The Coronavirus pandemic has led to a period of domestic and global economic downturn and it is likely that it will take a number of years for the Australian economy to recover. In this environment, businesses are facing a range of pressures which are likely to constrain their ability to invest in R & D.

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The reforms are expected to result in an overall compliance cost, arising from minor changes to the registration and claims processes, as well as the initial adjustment to the new program. This cost represents a small reduction compared to the 2019-20 MYEFO measure.

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As the Bill implements aspects of the 2019-20 MYEFO measure outlined in the 2019 Bill, Chapter 7 of this Explanatory Memorandum includes the regulation impact statement prepared for that former Bill.

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The Bill also makes a number of refinements to Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019. A supplementary regulation impact analysis of the 2020-21 Budget measure has also been provided outlining the estimated impact of these changes. These changes did not require a formal regulation impact statement or formal assessment by the Office of Best Practice Regulation.

Schedule 7 - Temporary full expensing of depreciating assets

Schedule 7 to the Bill amends the income tax law to allow businesses with an aggregated turnover of less than $5 billion to deduct the full cost of eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between the 2020 budget time and 30 June 2022. Businesses are also able to deduct the full cost of improvements to these assets and to existing eligible depreciating assets made during this period.

Schedule 7 to the Bill also amends the income tax law to extend the time by which assets that qualify for the enhanced instant asset write-off must be first used or installed ready for use for a taxable purpose until 30 June 2021.

Date of effect: The measure applies to depreciating assets that are first held, and first used or installed ready for use for a taxable purpose at or after the 2020 budget time.

Proposal announced: Schedule 7 to the Bill fully implements the measure JobMaker Plan - Temporary full expensing to support investment and jobs from the 2020-21 Budget.

Financial impact: This measure is estimated to have the following receipts impact over the forward estimates period ($m):

Human rights implications: Schedule 7 to the Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 9.

Compliance cost impact: An exemption from the Regulation Impact Statement requirements applies because this measure is covered by the Prime Minister's exemption for Coronavirus related measures.