Senate

Explanatory Memorandum

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

Chapter 7 - Regulation Impact Statement

Policy objective

7.1 The measures contained in this Bill are part of the Government's broad ranging reforms which will give Australia a New Business Tax System. These reforms are based on the Recommendations of the Review that the Government established to consider reforms to Australia's business tax system.

7.2 The Government established the Review to consult on its plan to comprehensively reform the business income tax system (as outlined in ANTS). The Review made 280 recommendations to Government towards achieving a more simple, stable and durable business tax system (as set out in the Recommendations).

7.3 The New Business Tax System is designed to provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs, and improved savings as well as providing a sustainable revenue base so the Government can continue to deliver services for the community.

7.4 The New Business Tax System promotes that end by providing a basis for more robust investment decisions. This is achieved by:

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using consistent and clearly articulated principles, for example;

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taxing business entities and investments on the basis of their economic substance or equivalence rather than their legal form; and

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aligning the tax value of business investments more closely with their commercial value, using accounting principles where appropriate;

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improving simplicity and transparency;

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reducing the costs of compliance through principled tax laws that are easier to understand and comply with; and

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providing fairer, more equitable outcomes, and less scope for tax avoidance.

7.5 Each of the measures in this Bill is consistent with the objectives and approaches set out above. For example:

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depreciating indefeasible rights to use is consistent with the tax treatment that tangible depreciating assets receive;

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replacing accelerated depreciation with effective life is consistent with the move to more closely align the tax value of assets with their commercial value; and

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allowing taxpayers to reassess the effective life of plant and equipment is consistent with the use of accounting principles.

Implementation options

7.6 The Review's recommendations, including those on which the measures of this Bill are based, have been the subject of extensive consultation. Discussion of each measure, including the options for implementation, are to be found in the Review's A Platform for Consultation (APFC) and A Tax System Redesigned (ATSR). Table 7.1 shows where each of the measures in this Bill (or the principles underlying the measure) is discussed.

Assessment of impacts

Impact group identification

7.7 The Review has considered the impacts of the recommended New Business Tax System in A Tax System Redesigned (refer to pages 28-34). There the focus was on the economy as a whole, business, small business and investors. The Review concluded that there would be net gains to business, Government and the community generally.

7.8 Most of the measures in this Bill specifically impact on a taxpayer that conducts a type of transaction or event as shown in Table7.2.

Analysis of costs and benefits

Compliance costs

7.9 The New Business Tax System will reduce compliance costs as it will provide a more consistent and easily understood business tax system:

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Removing depreciable assets from the CGT regime will reduce the calculations that taxpayers need to perform, to one (i.e. working out any balancing charge); currently, taxpayers also need to work out if disposing the asset has resulted in a capital gain or loss, with a capital gain involving the calculation of an indexed cost base.

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Replacing accelerated depreciation with effective life depreciation means the taxpayers can generally use their accounting depreciation without any adjustments.

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Removing the option to offset a balancing charge involves less tax calculations.

Administration costs

7.10 The costs of implementing the measures in this Bill are not expected to give rise to any significant increase in administration costs.

Government revenue

7.11 The revenue impact of each measure is dealt with in the general outline for this Explanatory Memorandum.

Economic benefits

7.12 The New Business Tax System will provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings.

Consultation

7.13 The consultation process commenced with the release of the ANTS in August 1998. The Government established the Review in August 1998 and since that time the Review has published 4 documents on business tax reform, in particular A Platform for Consultation and A Tax System Redesigned in which the Review canvassed options and issues and sought public comment.

7.14 Also during this period, the Review has held numerous public seminars and focus group meetings with stakeholders in the taxation system. It received and analysed 376 submissions from the public on reform options. Further details are contained in paragraphs 12 to 16 of the Overview of A Tax System Redesigned .

7.15 In analysing options, the published documents frequently referred to, and often were guided by, views expressed during the consultation process.

Conclusion and recommended option

7.16 The measures contained in this Bill should be adopted to support a more efficient, innovative and internationally competitive Australian business sector, ensure a sound revenue base, reduce compliance costs and establish a simpler and sounder tax system.